3D Systems (DDD +11.57%) reported poor second-quarter 2020 results after the market close on Wednesday. These were the first quarterly results released under the 3D printing company's new CEO, Jeffrey Graves, and interim CFO, Wayne Pensky.
Shares closed down 7.4% in Wednesday's after-hours trading session. We can attribute the market's displeasure in large part to revenue and earnings coming in lighter than what Wall Street was expecting. Some investors are also surely concerned about the company's cash-burn rate.
Image source: Getty Images.
3D Systems' key numbers
| Metric | Q2 2020 | Q2 2019 |
Change |
|---|---|---|---|
| Revenue | $112.1 million | $157.3 million | (29%) |
| GAAP operating income | ($33.9 million) | ($19.2 million) | Loss widened 77% |
| GAAP net income | ($38.0 million) | ($23.9 million) | Loss widened 59% |
| Adjusted net income | ($15.1 million) | ($600,000) | Loss widened 2,417% |
| GAAP earnings per share (EPS) | ($0.33) | ($0.21) | Loss widened 57% |
| Adjusted EPS | ($0.13) | $0.00 | Result flipped to negative from breakeven |
Data source: 3D Systems. GAAP = generally accepted accounting principles.
Revenue decreased 17% from the first quarter, driven by the coronavirus pandemic hurting demand for the company's products and services -- particularly among industrial customers -- in the entire second quarter versus just the last month of the first quarter. For context, in the first quarter, revenue declined 11% year over year to $134.7 million.
Wall Street was looking for an adjusted loss per share of $0.10 on revenue of $117.9 million. So 3D Systems missed analysts' expectations on both counts.
GAAP gross margin was 31.4%, down from 46.6% in the year-ago period. Adjusted gross margin landed at 41.3%, down from 47.4% in the year-ago quarter.
Segment quarterly results
| Segment | Q2 2020 Revenue | Change YOY (Decline) |
|---|---|---|
| Product | $61.5 million | (34%) |
| Service | $50.6 million | (20%) |
| Total | $112.1 million | (29%) |
Data source: 3D Systems. YOY = year over year.
Liquidity concerns and reorganization
As outlined in my earnings preview, investors need to monitor 3D Systems' cash-burn rate. The company's liquidity worsened in the quarter, as we'd expect since the pandemic more negatively affected results in Q2 relative to Q1. At the end of Q2, the company had cash of $63.9 million (and total debt of $21.5 million). It burned through $69.7 million in cash in the first half of 2020, which means that its cash would be exhausted in just short of a half year at the current burn rate.
As to sources of additional cash, the company has approximately $24 million available on its revolving credit facility. That's something, but $24 million wouldn't go very far at the current cash-burn rate.
This liquidity crunch forced management's hand, with drastic measures needed. So it's not surprising that management announced an aggressive restructuring plan aimed at reducing operating costs by $100 million per year by the end of 2021.
The key components of the plan:
- Reducing the workforce by nearly 20%, with the majority of the layoffs completed by year-end.
- Reducing the number of facilities.
- Reorganization to focus on two market verticals: healthcare and industrial.
- Possible divestitures of parts of the business that do not align with its new strategic focus.
The company said it will incur a cash charge in the range of $25 million to $30 million for severance, facility closing, and other costs, primarily in the second half of this year. Moreover, it noted that it "may incur additional charges in 2021."
And what if 3D Systems needs more cash as it completes the reorganization? The company said that its board "approved an at-the-market equity program that allows the company from time to time to issue up to a total of $150 million of shares of the company's common stock to the public."
Again, this is something. But selling shares of a stock whose price has been steadily moving downward isn't an attractive option for raising cash and would likely be a last resort.
Looking ahead
3D Systems had an ugly quarter. The primary reason was the pandemic; however, the company was struggling to grow revenue and turn a profit before the global crisis started. Unfortunately for investors, it's not possible to tease out what its results would look like absent the pandemic.
Liquidity is a near-to-intermediate-term concern for the company. Most investors will want to steer clear of 3D Systems stock at this time, in my opinion. Proto Labs stock remains the much better way to bet on the future of 3D printing.
