During 3D Systems' (NYSE:DDD) second-quarter earnings call, it came to light how management has developed the ability to purchase a business within a multiyear sales decline and then is able to engineer a return to positive growth shortly thereafter. 3D Systems CFO Damon Gregoire took time during the call to remind investors of this operational strength, a strength that I believe could be an asset underappreciated by investors because it gets little attention:
I want to remind everyone that when we acquired Phenix [Systems] last July , its revenue was in a multiyear decline. And under our leadership, Phenix revenue more than doubled during the first six months of this year and increased sequentially by 55% from the March quarter.
The purchase of Phenix Systems has been instrumental in giving 3D Systems a jump-start in the currently booming metal 3D printing industry, fueled by robust demand from the medical, aerospace, and overall manufacturing industries. Last quarter, 3D Systems reported that it cannot keep up with the pace of demand for its metal 3D printers, but it still managed to drive 55% sequential revenue growth in the vertical. In other words, 3D Systems' metal 3D printing portfolio, which is primarily based on Phenix Systems' metal 3D printing technology, is arguably being well received in the marketplace, and it's possible that Phenix may have had an underlying operational or visibility issue.
Good business sense
Buying a business that's experienced multiyear revenue declines would almost certainly be a cheaper prospect than buying a business with a history of consistent revenue growth. Not only could this approach give 3D Systems an opportunity to earn a strong return on investment, assuming it could effectively leverage its existing distribution and sales channels to drive revenue growth, but it could also lower the company's risk of overpaying for an investment. During the earnings call, 3D Systems' management went a step further and highlighted that it's going to continue investing in developing its metal 3D printing platform through research and development, as well as pursue FDA approval for personalized medical devices. In my opinion, 3D Systems will also continue to make complementary acquisitions that build out its metal 3D printing expertise, and together, all these growth initiatives should help drive continued strength from its metal 3D printing portfolio.
This isn't the first time that 3D Systems has shown savvy when it comes to making acquisitions that easily leverage its existing business model. In two other instances, 3D Systems turned what were effectively mom-and-pop businesses into entirely new product segments by adapting its material jetting technology to work with new materials. The Sugar Lab, a 3D printing confections company, became the basis of the upcoming ChefJet and ChefJet Pro sugar-based 3D printers, and Figulo, a 3D printing ceramics company, became the inspiration behind the CeraJet ceramic 3D printer, which is expected to be available later this year.
3D Systems is often criticized for being a serial acquirer, because it's made about 50 acquisitions in the last three years alone. Undoubtedly, this strategy and all its moving parts carry a high degree of operational risk in terms of mismanagement and underperformance. At the same time, 3D Systems' acquisition strategy has given it invaluable experience in identifying businesses that are not only great candidates for integration into its platform but also ones that may offer the potential to earn a strong return on investment.
At the end of the day, I think investors should continue to have faith in management's ability to make good acquisitions, despite recent concerns surrounding the company's organic growth rate. And although these qualitative factors are extremely difficult for investors to measure with concrete certainty, it seems as though 3D Systems is sitting on an easily forgotten asset that may positively return value to shareholders in the long run.
Steve Heller owns shares of 3D Systems and Apple. The Motley Fool recommends and owns shares of 3D Systems and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.