3D Systems (NYSE:DDD) reported third-quarter 2021 results after the market close on Monday that didn't satisfy market participants in the after-hours trading session. They drove shares down 11.8%.

The 3D printing company turned in solid quarterly results, with both revenue and earnings coming in higher than Wall Street's expectations. However, the culprit behind the sell-off was likely management's full-year guidance for adjusted gross margin. It implies that the fourth-quarter result for this metric (and hence, adjusted earnings) could be weaker than analysts anticipated.

This sell-off seems overdone, in my view. It seems likely that management issued a conservative outlook for this metric due to the uncertainties surrounding its supply chain and hiring employees in a tight labor market. These are macroeconomic issues nearly all companies are facing. Investors will learn more during the analyst earnings call, scheduled for Tuesday at 8:30 a.m. EST.

Now, let's get to the numbers.

A 3D printer creates an angular shape in red plastic.

Image source: Getty Images.

3D Systems' key metrics

Metric

Q3 2021

Q3 2020

Change

Revenue

$156.1 million

$136.2 million

15% (36%, excluding the impact of divested businesses)

GAAP operating income

($17.2 million)

($67.6 million)

N/A. Loss narrowed by 75%.

Adjusted operating income

$10.6 million

--

N/A. Result flipped to positive from breakeven.

GAAP net income

$292.7 million

($72.9 million)

N/A. Result flipped to positive from negative.

Adjusted net income

$10.0 million

($4.1 million)

N/A. Result flipped to positive from negative.

GAAP earnings per share (EPS)

$2.34

($0.61)

N/A. Result flipped to positive from negative

Adjusted EPS

$0.08

($0.03)

N/A. Result flipped to positive from negative.

Data source: 3D Systems. GAAP = generally accepted accounting principles.

The net income and GAAP EPS results include gains from divestitures. Therefore, investors should focus on the metrics that are adjusted for one-time items.

Wall Street was looking for adjusted EPS of $0.05 on revenue of $144.5 million, as outlined in my earnings preview. So, the company easily exceeded both expectations.

As was the case last quarter, 3D Systems had easy comparables because the COVID-19 pandemic significantly hurt its results in the year-ago period. In that quarter, many companies in the industrial sector were still cautious with their ordering. So, investors should also consider the comparison with the same quarter two years ago, or before the pandemic. Adjusted for divestitures, third-quarter revenue was 21% higher than in Q3 2019, which is a solid result. 

The company generated cash from operations of $20.7 million, representing the fourth consecutive quarter of positive operating cash flow. As expected, it closed on its previously announced divestitures of noncore assets, which helped boost its cash position to $502.8 million at the end of the quarter. With cash of a half-billion dollars and no debt, 3D Systems sports a pristine balance sheet.

GAAP gross margin was 41.2%, down from 43.1% in the year-ago period. Adjusted gross margin landed at 41.5%, down from 43.2% in the third quarter of last year. These declines are primarily the result of businesses divested in 2020 and 2021, the company said in the earnings release.

For context, in the second quarter, 3D Systems' revenue surged 44% year over year (and 59% excluding the impact of divestitures) to $162.6 million, crushing the $143.3 million the Street expected. Adjusted EPS was $0.12, up from a loss of $0.13 in the year-ago period, and more than double the $0.05 that analysts were looking for.

Segment results

Segment

Q3 2021 Revenue

Change (YOY)

Healthcare

$76.4 million

28% (45%, adjusted for divestitures)

Industrial

$79.7 million

4% (28%, adjusted for divestitures)

Total

$156.1 million

15% (36%, adjusted for divestitures)

Data source: 3D Systems. YOY = year over year.

In healthcare, 3D Systems experienced a particularly strong demand for dental products, both 3D printers and materials. The pandemic caused many people to put off non-emergency dental services, so the company is probably benefiting from pent-up demand.

What management had to say

Here's part of CEO Jeffrey Graves' (very lengthy) statement in the earnings release.

We still see continued challenges with COVID-19, and new challenges around supply chains, but thanks to the great work by our team here at 3D Systems, we are pleased to report another strong quarter of double-digit growth as compared to the same period in both 2020 and pre-pandemic 2019, adjusted for divestitures. ... [W]e also completed our divestitures of non-core assets and began the transition to a strategic growth phase.

Our focus during this phase is investing in significant opportunities that we believe will drive high-margin recurring revenue, as evidenced by our acquisition in the software space of Oqton, and the hiring of a new Chief Scientist to further advance our technology development [in the realm of bioprinting and regenerative medicine].

More recently we made two announcements in the exciting area of regenerative medicine: the acquisition of Volumetric Biotechnologies and the expansion of our development agreement with United Therapeutics to include two additional human organs.

2021 adjusted gross margin outlook

Management has not been providing full-year guidance for revenue or earnings, just for adjusted gross margin. It now expects this metric to be between 41% and 43%. Its prior guidance was 40% to 44%. In other words, it tightened its prior outlook around the midpoint, which remains at 42%.

So why did participants in Monday's after-hours trading session view this move as a negative? They were probably expecting a better number since the company's adjusted gross margin for the first nine months of the year is 42.6%. So, management's guidance suggests the fourth-quarter result for this metric could be weaker than the average for the first nine months of the year. This metric impacts the bottom line, suggesting adjusted earnings might also come in lighter than analysts had been expecting.

On that note, going into the report, Wall Street had been modeling for Q4 adjusted EPS to decline 33% year over year to $0.06 and revenue to fall 20% to $138.8 million.

Generally, short-term traders are those who are trading during after-hours sessions. Investors focused on the long (or even medium) term shouldn't give much heed to any single quarter's results, let alone the outlook for any particular metric in one quarter.

Another solid quarter

3D Systems turned in another solid quarter. Investors should be pleased, as the company's turnaround is making steady progress. But keep in mind the company remains unprofitable from a GAAP operating basis.

Investors will learn more on Tuesday when the company holds its analyst earnings call at 8:30 a.m. EST. Management should expound on its full-year adjusted gross margin guidance.

 
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