Arcam (NASDAQOTH: AMAVF) released its second-quarter 2014 earnings on July 18. While the Swedish industrial metal 3-D printing specialist posted weak earnings, there was some good news that hasn't yet shown up in its results: Very early indications are that Arcam's new Q20 3-D printer, based on the company's proprietary electron beam melting technology, is garnering solid interest from the aerospace industry. Arcam has received eight orders since the Q20 was launched in December.
Naturally, any company would love for its new product to meet with early acceptance by its target market. What makes things particularly exciting here, however, is that the $630 billion aerospace industry is just now beginning to move beyond using 3-D printing technology for prototyping and small-run production of noncritical components to the production of highly critical components. General Electric's (GE +2.24%) well-publicized plans to use 3-D printing to produce fuel nozzles for its new Leap jet engine is a case in point. So we're talking about a market that appears to be poised for takeoff (pun intended).
It's not just the potential size of the market that's attractive, but its the nature. There are usually considerably fatter profit margins involved in the production of components that have critical end uses because of the high quality-assurance hurdles companies must jump in order to be included in such endeavors.
Source: Arcam.
The Q20
Arcam's Q20 3-D printing system is based on the company's third-generation technology. This system was specifically designed for series production of a wide range of aerospace components, such as turbine blades and structural airframe components. The Q20 is derived from the Arcam Q10 technology platform, with the same electron beam gun for higher productivity and improved resolution, but with a larger build envelope of 350 by 380 millimeters (about 13.8 by 15 inches). The Q10 was launched early last year and is targeted toward the medical implants, which are Arcam's other primary market.
The Q20 also has two other features that are meant to make it efficient for use in a production environment. It's equipped with a powder recovery system, which allows for the automatic recycling of unused metal powder. Additionally, it includes the Arcam LayerQam, a camera-based monitoring system to verify part quality by recording every layer as it is built.
Eight orders for a new high-end product in a six-month period is quite solid for a small company like Arcam. The company sold just 25 of its EBM systems in 2013, and 11 in the first half of 2014. CEO Magnus Rene said during Arcam's second-quarter conference call, "We decided to delay the shipments of the Q20 systems for a few weeks to finalize quality assurance before we ship the first systems out.
In other words, Arcam produced at least several Q20s during the second quarter, though it didn't book any sales from them, as the company held up shipments for QA reasons. Certainly, taking extra time on the quality-assurance end is a smart thing to do before shipping out the first new products of any kind, especially very high-end items. The fact that several -- we don't know exactly how many -- Q20s were nearly completed at the end of June should bode well for Arcam's revenue in the next quarter.
Additionally, there's the General Electric 3-D printing capacity ramp-up wild card. GE announced last week that it is investing $50 million in a high-volume 3-D printing operation at its Auburn, Ala., facility. That's where the fuel nozzles for the Leap jet engine will be produced. Greg Morris, general manager of additive technologies, told Reuters, "We're in the final stages of selecting the equipment manufacturers." So investors in Arcam -- as well as 3D Systems -- should soon learn whether their company will be involved in GE's plans.
Foolish final thoughts
Of course, the rubber will meet the road -- or the takeoff strip -- once the first several Q20 systems are shipped and put t use by customers. However, given that this is a third-generation technology product, and Arcam used input from aerospace companies during the design phase, it seems likely that the Q20's takeoff will be smooth.
