3D Systems (DDD +0.41%) investors were left shaking their heads as their stock fell by as much as 10% during intraday trading Tuesday, following the company's disappointing second-quarter earnings report.
One one hand, revenue grew 45% year over year to $120.8 million, thanks to an impressive 108% increase in sales from printers and other products, and 30% overall organic growth. For those of you keeping track, that handily beat analysts' estimates that called for sales of $114.6 million.
GAAP net income, on the other hand, came in at $9.3 million, good for GAAP earnings of just $0.10 per share. Unfortunately, that fell short of consensus earnings estimates of $0.16 per share.
So what happened?
While those earnings did fall from $0.11 per share in the same year-ago period, the $9.3 million net income represented 12% growth from $8.3 million in the second quarter of 2012.
Why the discrepancy?
In a word: dilution.
Remember, back in May, 3D Systems hit up the market ATM with the goal of raising around $250 million by floating a new stock issue, with the majority of the funds intended for making new acquisitions -- a promise fulfilled in part when it announced the purchase of metal-printing specialist Phenix Systems in June.
Of course, considering that purchase should have cost 3D Systems less than $20 million when all was said and done, its balance sheet still boasted more than $349 million when at the end of last quarter.
In addition, some expressed concern that 3D Systems' operating expenses skyrocketed 58% year over year to almost $45.8 million last quarter, including a 50% jump in selling, general, and administrative expenses, and a 95% increase in research and development costs.
Here's why you shouldn't be worried
The thing is, while you can't fault investors for frowning on the dilution, which effectively reduces everybody's slice of the pie, this quarterly report holds zero indication of a faltering business. To the contrary, it looks like 3D Systems is firing on all cylinders, and nothing has happened to negatively affect its long-term growth story.
In addition, I think that big jump in expenses is actually a great thing.
After all, management did state in the earnings release that it "made the affirmative decision to step up certain discretionary expenses to accelerate the adoption of [the company's] products and services," primarily in response to a "significant increase of inbound interest."
In fact, considering 3D Systems operates in the ever-changing, fast-growing additive manufacturing industry, I'd be downright worried if R&D spending didn't increase ,as the company faces fierce competition from fellow 3-D printing companies -- among them Stratasys (SSYS +1.72%), which was unsurprisingly dubbed guilty by association Tuesday and is down more than 4% as of this writing.
Remember, Stratasys last month announced that it will merge with up-and-coming 3-D printing company MakerBot in a $400 million deal, putting 3D Systems' own affordable, consumer-centric Cube line of printers squarely in its crosshairs.
Of course, that merger also resulted in added dilution for Stratasys investors, as the company issued 4.76 million new shares in exchange for 100% of MakerBot's outstanding capital stock. In addition, Stratasys could end up creating another 2.38 million shares by the end of 2014, resulting from potential "performance-based earn-outs" for MakerBot executives. As a result, Stratasys shareholders could be in for a similar negative surprise when their company reports earnings on Aug. 8.
Even so, as with 3D Systems' pullback today, something tells me Stratasys' report will once again prove that the 3-D printing industry remains alive and well.
In the end, that's why I think today's pullback is no reason to panic and represents a fantastic buying opportunity in both companies for patient, long-term investors.
