3D Systems (NYSE:DDD) is slated to report its second-quarter 2014 earnings before the market opens on Thursday, July 31. The leading 3-D printing company's report will surely be among one of the most anticipated this season. It's likely the stock will react more strongly than usual to a miss or beat, given 2014 hasn't been kind to the sector's stocks, and many investors remain jittery.

If you know what analysts expect and what to focus on in a report before earnings are announced, you'll be better prepared to make good decisions, especially if thrown a curveball. So, let's take a look at analysts' expectations.

Analysts' Q2 EPS Estimate


Change From Year-Ago EPS


Q2 Revenue Estimate

$162.3 million

Change From Year-Ago Revenue


2014 Revenue Estimate

$713.8 million (representing 39% growth)

2014 EPS Estimate

$0.81 (a 4.7% decrease from 2013)

Source: Yahoo! Finance 

The consensus earnings per share estimates for both Q2 and full-year 2014 earnings are lower than the company's earnings for those respective periods last year. That's because 3D Systems' game plan is to sacrifice short-term profits for spending on activities aimed at fueling long-term growth and capturing market share.

With that said, other than the usual headliner numbers of revenue and earnings, here's what investors should focus on in the report:

Organic growth
Organic growth (growth in businesses owned for at least one year) is a key metric for all companies, but it's an especially important one for 3D Systems. That's because the company has largely fueled its growth with many acquisitions.

  • Organic growth Q2 2013: 30%

Ideally, we'd like to see organic growth come in at or above 30%. That said, I don't think investors need to be concerned if it dips slightly, as quarterly metrics can vary for all kinds of good reasons. 

Gross margin
Last quarter marked the first time 3D Systems gross profit margin fell from the year-ago period, so there's little doubt that investors will be keying in on this metric.

  • Gross margin Q2 2013: 52.1%

It's a no-brainer that we'd like to see a gross margin of 52.1% or higher. However, again, it's important to not place too much emphasis on any single quarter, but to take a longer-term view. Additionally, it's critical to look at the "whys" behind the numbers.

As to last quarter, 3D Systems' gross margin was 51.1%, down from the year-ago period's 52.4%, and also less than the trailing-12-month average of 52.1%. However, there was good reason for this slight dip: Printer sales grew faster than sales of print materials, and materials have the highest profit margins. That fact should bode well for future material sales – the more printers sold now, the more materials customers will need in the future. 

Disparity between operating income and operating cash flow
In my analysis after 3D Systems released its Q4 2013 and Q1 2014 results, I mentioned the same concern: a considerable disparity between reported operating income and cash flow generated from operations. Ideally, we'd like to see operating cash flow equal or exceed operating income. However, for the past two quarters, 3D Systems' operating cash flow has considerably lagged its reported operating income. In other words, its "books" showed a bigger profit than its in-and-out cash position.

Quarterly fluctuations in cash flows, largely attributed to inventory, are to be expected when we're dealing with a company that has 3D Systems' growth dynamics. So, one or two quarters of this disparity might not be a concern. However, this situation does need to be monitored, as there could be cause for concern if it persists.

Project Ara update

Source: 3D Systems.

Project Ara involves a teaming with Google to produce customizable, open-source, modular smartphones. Given Ara's set to launch in 2015, investors can likely expect a continuous stream of information on the status of this project throughout the rest of this year. Last month, 3D Systems said that it expects the high-speed, continuous fabrication-grade 3-D printing platform that it's developing for Ara to be 50 times as fast as current systems and released a video of its platform. 

Growth in the metal 3-D printing business – and any General Electric news
Investors could be getting some good news on the sales of metal printers, as 3D Systems has been beefing up capacity in order to meet demand. Its backlog at the end of the first quarter included $17.9 million of metal printer orders. The company has sold out of its systems that can print in metals in every quarter since it acquired Phenix Systems last summer.

3D Systems generated $14.3 million of revenue from its direct metal printing systems in 2013. During the company's fourth-quarter 2013 conference call, CEO Avi Reichental forecasted a turbocharged ramp-up in revenue from this business:

Metals is in the beginning stages of what we believe is a very exciting journey. ... [W]e expect that this year it could generate some place between $25 million and $50 million in revenue and it's just the beginning.

Investors should also key in on any indication that 3D Systems could win multiple systems orders from General Electric. The industrial giant was testing 3D Systems' printers last year for possible inclusion in its planned capacity ramp-up, and is now "in the final stages of selecting the equipment manufacturers." Any such indication could mean the metals business will perform even better than 3D Systems is forecasting.

2014 guidance
Last quarter, 3D Systems reaffirmed its previous guidance, which analysts consider low on the earnings side. If the company does bump up guidance, it will likely only be due to its recent acquisitions, in my opinion.

Currently, 3D Systems expects 2014 revenue in the range of $680 million-$720 million, adjusted EPS between $0.73 and $0.85, and GAAP EPS between $0.44 and $0.56. The analysts' consensus for revenue of $701.1 million falls right at the mid-point of the company's revenue range, while analysts are expecting adjusted EPS of $0.81, closer to the high end of the range.