ExOne Co. Whiffs Big on Q1 Earnings; Where To From Here?

Shares of  ExOne Co. (XONE) plummeted 17% on Thursday after the company reported a huge miss on first-quarter 2014 revenue and earnings and lowered its 2014 gross margin guidance when it released results after the market closed Wednesday. Shares rebounded 4% to close at $26.52 on Friday.  

The industrial-focused 3-D printing company has now missed estimates in all five quarters it has been a public company, so surely investors are wondering if ExOne is a slow starter with great potential or going to turn out to be a perennial underachiever. Before we get to that topic and more, here are the earnings' highlights:

• Revenue fell 7.6% to $7.3 million, missing estimates of $9.9 million.
• Earnings per share were negative $0.38, down from a negative $0.20 in the year-ago period, and falling short of the consensus of negative $0.12.
• Gross profit margin was 22.2%, down from 35.8% in the previous year's period.
• Printer revenue fell 43% to $2.4 million, as fewer 3-D printers were sold. Three printers were sold (one S-Max, one M-Flex, and one S-15), compared to five machine sales (four printers and one laser machine) in the year-ago period.
• PSC revenue increased 32% to $4.9 million. Production service center revenue includes revenue from on-demand 3-D printing services and material sales.
• Guidance for 2014 revenue was reaffirmed in the range of $55 million-$60 million, while guidance for adjusted gross margin was lowered to between 40%-43%, down from 43%-46%.

Stock price: fault to go around
ExOne's share price is now about where it was when the company went public in February 2013. The stock traded in the $23.50-$26.52 range on the first day of trading, peaked at $75 last August, struggled throughout the rest of the year, and has dropped considerably in 2014, along with all 3-D printing stocks.

There seems to be fault to go around with respect to ExOne's stock price. It wasn't management's fault that the market bid up the stock to an extremely high valuation -- even relative to other 3-D printing companies that had much better results -- when this small and largely untested company went public last February. 

From the start, Wall Street analysts have likely expected too much of this tiny and relatively new company. ExOne doesn't provide earnings guidance, which is fairly common among smaller companies new to the public markets. So, the earnings' misses ExOne has wracked up are not misses of its own guidance, but solely misses of analysts' estimates. Analysts are surely now scrambling to lower their 2014 estimates, which should provide ExOne a bit of breathing room.

Finally, we get to management. ExOne is small and sells pricey machines that cost up to $1 million and more, so it's to be expected that not only would quarterly revenue be quite unpredictable and lumpy for a while, but that initial annual revenue might be, too. Management should have guided extremely conservatively from the get-go.

Printer sales and PSC revenue
ExOne sold three printers in the quarter versus five machines, four of which were printers, in Q1 2013. Here's the bigger picture:  

While only three 3-D printer sales is a low number in and of itself, my primary concern when I saw the number related to what transpired during the last quarter. A main reason cited for the company's revenue and earnings misses in Q4 2013 was the delay of approvals for sales of four printers to foreign customers. ExOne said at that time that it expected these sales to be booked in the first half of 2014. My concern was that some or all of the three printers sold in Q1 were those systems that were already produced in Q4. This topic was covered in the conference call; all three printers sold were new orders, and all or all but one of the printers delayed in Q4 should be booked in Q2.

ExOne recently had its largest single order ever -- in excess of $2 million. The company expected this order to be booked in Q1, but it has shifted to Q2. There is a third party involved in this order from a Russian customer, and ExOne is awaiting payment from the third party. Had the order been booked in Q1, ExOne would have come close to revenue estimates. 

A bright spot in the company's performance was its production service center business. However, the 32% revenue increase could be overstating how well this segment performed. That's because PSC revenue decreased 3% in the fourth quarter of 2013, which the company partially attributed to capacity used to work on two sizable castings orders that wouldn't be delivered until the first half of 2014. So, we could be seeing some benefit in the first quarter's number of this work done in Q4 2013. If that's not the case, then we should be seeing this benefit next quarter. Either way, PSC revenue for the first half of 2014 will almost surely be overstating how well this segment performed. Even with this caveat, however, ExOne's PSC business still had a sold quarter.

ExCast strategy
It's important to understand this strategy, as the company's long-term success will likely hinge on ExCast's success.

It became clear to ExOne's management over the last few quarters that the company needed to change its strategy. Originally, ExOne had been targeting foundries as customers for service work in its PSCs and sales of its 3-D printers that print in sand. That seemed a natural fit since foundries produce metal castings for industrial customers using molds, and ExOne's printers can print sand molds.

ExOne found that foundries weren't generally interested because they viewed its products and services as potential threats, which could cut them out of the supply chain. So, ExOne's management needed to revamp its strategy. The ExCast strategy involves targeting the original equipment manufacturers, or OEMs, as customers. However, it entails more than just a change in target customer, but also a change in the scope of work provided. It's a vertically integrated strategy, which involves ExOne assisting the customer from design through to production of final component. So pre- and post-3-D printing services are included here.

This is huge undertaking, as there are 16 steps in the typical design-to-final component process, according to information shared on the call. Thus, it's going to take much time and money to implement. ExOne invested considerable time and financial resources into this strategy during Q1, which was a primary reason for the company's poor results on the bottom line. It's been doing development work with Sikorsky Aircraft, which sounds promising, but it's too early to tell if actual sales will result from this work.  

Foolish final thoughts
ExOne posted very weak quarterly results. 

There's no doubt that the industrial 3-D printing space is an attractive one. However, it's too early to glean if the company's strategy will pan out, and if its printers will gain considerable favor in the marketplace.

Over the coming quarters, investors should monitor ExOne's progress in its ExCast strategy, which appears critical to its long-term growth. Additionally, I'd be looking for the company to hit its current revenue and gross margin targets in 2014, and for it to come at least close to its goal of tripling M-Flex sales. 

While there was some promising information shared during the call (which I'll be covering in a separate article), it would seem wise for most investors to wait until they saw tangible reasons to believe in the company's long-term success before jumping in.