3D Systems (DDD 3.08%) reported third-quarter 2020 results after the market close on Thursday, Nov. 5. Shares closed down 4.6% on Friday but recouped that entire decline (plus some) on Monday, when they rose 10.1%. On Tuesday, shares tacked on another 6.4%, though edged down 1% on Thursday.
Why the three sizable recent moves?
Don't read too much into the ones on Friday and Monday, as they seem more market-driven than earnings-related. However, Tuesday's move does stem from the earnings report. William Blair analyst Brian Drab saw enough positive in the report to upgrade his rating on 3D Systems stock from underperform (which usually equates to "sell" in Wall Street lingo) to market perform (or "hold"). Long-term investors shouldn't pay much attention to such ratings as Wall Street focuses on the short term.
Image source: Getty Images.
3D Systems' key numbers
| Metric | Q3 2020 | Q3 2019 |
Change |
|---|---|---|---|
| Revenue | $135.1 million | $155.3 million | (13%) |
| GAAP operating income | ($67.6 million) | ($11.9 million) | Loss widened 468% |
| Adjusted operating income | -- | ($300,000) | N/A |
| GAAP net income | ($72.9 million) | ($16.8 million) | Loss widened 334% |
| Adjusted net income | ($4.1 million) | ($4.5 million) | Loss narrowed 9% |
| GAAP earnings per share (EPS) | ($0.61) | ($0.15) | Loss widened 307% |
| Adjusted EPS | ($0.03) | ($0.04) | Loss narrowed 25% |
Data source: 3D Systems. GAAP = generally accepted accounting principles.
The adjusted net income and EPS exclude a $48.3 million, or $0.41 per share, pre-tax noncash goodwill impairment charge, among other one-time items.
Wall Street was looking for an adjusted loss per share of $0.08 on revenue of $114 million. So 3D Systems easily beat both consensus estimates, though analysts' expectations were low.
Gross margins held up well. GAAP gross margin was 43.4%, down slightly from 43.3% in the year-ago period, but up considerably from 31.4% in the second quarter. Adjusted gross margin landed at 43.5%, down from 44.4% in the year-ago quarter, but up from 41.3% last quarter.
For context, in the second quarter, revenue decreased 29% year over year to $112.1 million. The company's year-over-year revenue performance improved in the third quarter, as the decline wasn't as large. Sequentially, revenue grew nearly 21%, which is a promising sign. Still, investors should remain cautious, as one quarter doesn't make a trend. If Q4 revenue is greater than Q2 revenue, however, we can probably feel fairly secure that the pandemic-driven revenue trough is behind the company.
That said, keep in mind that 3D Systems had been struggling to grow revenue before the pandemic started. An end to the crisis doesn't mean that meaningful revenue growth is assured or even probable.
Segment results: Healthcare is carrying the load
| Segment | Q3 2020 Revenue | Change YOY |
|---|---|---|
| Healthcare | $59.8 million | 6.1% |
| Industrial | $75.3 million | (24%) |
| Total | $135.1 million | (13%) |
Data source: 3D Systems. YOY = year over year.
The healthcare vertical's year-over-year revenue growth was driven by stronger sales to the dental market. The industrial sales decline was broad-based and still largely driven by the pandemic.
Still gobbling up cash in operations, but liquidity should soon notably improve
In Q3, 3D Systems used $11.6 million in cash running its operations. That's a worse result than in Q3 2019, when it generated $6.5 million of cash from operations, but an improvement from the second quarter, when it used $18.7 million of cash in operations.
The company ended the period with cash on hand of $75.3 million, up from $63.9 million last quarter. That additional cash was generated by the issuance of $25 million of common stock and the sale of noncore assets. The company has total debt of $21.7 million and a $100 million revolving credit facility with approximately $30.6 million of availability.
The good news is that liquidity -- which has been a major concern, as outlined in my earnings preview -- should soon improve more significantly. 3D Systems recently announced the sale of its Cimatron and GibbsCAM software businesses. Management said on the earnings call that it expects to net $45 million to $50 million in cash from the deal, which it anticipates will close in the fourth quarter. These businesses are focused on traditional (or "subtractive") manufacturing -- not 3D printing, which is considered additive manufacturing. They were purchased in 2015 when the company, then under different top management, was in hyper-acquisitive mode.
What management had to say
Here's part of what CEO Jeffrey Graves said in the earnings release:
While the challenges of the pandemic persist, we were pleased to deliver strong sequential quarterly growth in [our combined] healthcare and industrial businesses of approximately 20%, as markets incrementally opened around the world. While volatility continues, we anticipate these trends continuing as we move forward through our fourth quarter. With our restructuring efforts on track to deliver our targeted $60 million in savings on a run-rate basis by year-end, we are pleased with our progress in the quarter and believe we will exit the year a much more efficient, highly focused additive manufacturing company that is well positioned as a market leader in this exciting industry.
Some progress, but caution is still warranted
3D Systems made some progress in the third quarter in its turnaround efforts. Revenue increased notably from the second quarter, and its liquidity situation is on track to improve significantly once the sales of its Cimatron and GibbsCAM businesses close.
That said, it's still early in the turnaround, and year-over-year revenue is still declining. Moreover, the pandemic makes it impossible to determine if the company's underlying revenue performance is improving.
Management did not provide guidance.
When can investors feel less cautious about 3D Systems stock? When we start to see year-over-year revenue growth (beyond just from the trough of the pandemic, as the company will have easy comparables next year) with a corresponding increase -- even if just slight -- in profitability.
