The results are in, and investors have jumped on 3D Systems' (DDD) bandwagon again after the 3D-printing leader produced third-quarter earnings that were largely in line with Wall Street's expectations. A 4% rise in 3D Systems' stock price today may simply reflect widespread relief that the company, unlike its chief rival Stratasys, did not issue reduced forecasts for its full year. However, 3D Systems only bettered one of Wall Street's two key targets for the third quarter -- its $166.9 million top line came in slightly below the $167.7 million analysts had expected, but $0.18 in adjusted earnings per share was a penny better than the analyst consensus.
3D Systems held fast on its full-year guidance, which still calls for revenue to range from $650 million to $690 million, and for adjusted EPS to range from $0.70 to $0.80. With three quarters now in the tank, we can use the midpoints of these full-year ranges to estimate 3D Systems' expectations for its fourth quarter. Let's take a look at the results from this quarter and the expectations for the next, to see how they compare to 3D Systems' recent financial history:
Sources: 3D Systems earnings reports.
Sources: 3D Systems earnings reports.
The third quarter continued an unwelcome trend of declining growth, but it appears that investors are willing to overlook the recent past in the hope that 3D Systems can live up to its promises in the final quarter of 2014. The third quarter was the fourth consecutive quarter of lower sequential year-over-year revenue growth, and it was the seventh of the company's eight most recent quarters in which adjusted EPS was lower than it was the year before. However, both top and bottom lines look likely to reverse their trends in the fourth quarter, as 3D Systems expects revenue to rise 31.6% year over year, and also expects adjusted EPS to be higher year over year for the first time since the third quarter of 2013. The midpoints of both 3D Systems' top- and bottom-line guidance ranges also narrowly surpass what analysts had expected for the fourth quarter -- Wall Street had been looking for $203.7 million on the top line and $0.25 in adjusted EPS, but 3D Systems is effectively anticipating $203.4 million in revenue and $0.26 in adjusted EPS.
3D Systems continues to blame production issues for its declining margins, as the company's earnings report cites CEO Avi Reichental as saying that "while growing pains led to our revenue shortfall and pressured our gross profit margin, the fundamentals of our business are intact and our gross profit margins are poised to resume their expansion." Gross and net margins were both higher sequentially, but substantially weaker year over year -- gross margins fell from 52.6% in the year-ago quarter to 47.8% in the current quarter, and 3D Systems' adjusted net margin dropped from 19.3% all the way to 11.8%.
This is the third consecutive quarter in which 3D Systems has blamed shrinking margins on "growing pains," only now it's starting to blame its lower-than-expected revenue on these growing pains as well, as Reichental also pointed out that "[3D Systems] failed to fully capitalize on the robust demand for our direct metal and consumer products." The company's inability to serve this demand resulted in organic revenue growth of just 12% for the quarter, the second-lowest organic growth rate reported since 3D Systems began offering this metric in its reports in mid-2012:
Sources: 3D Systems earnings reports.
The company's major segment growth rates do support the assertion that it's having difficulty servicing demand for its machines, as revenue from services grew 28.9% from the year-ago quarter, compared to 20.3% growth in product sales. This is the second consecutive quarter in which product sales have grown at a slower rate than services revenue, which has not happened since the end of 2011.
3D Systems now claims a $46 million backlog, which has increased rapidly as the year progresses. The company reported just $28.8 million in backlog at the end of the first quarter. 3D Systems has already spent far more on capital expenditures this year than it ever has before -- $16.8 million for the first three quarters of 2014 against just $5.7 million in capex by this point last year -- to service its growing demand, and meeting more of it in the fourth quarter should help meet its rising growth expectations.
Investors need to keep a close eye on 3D Systems' organic growth rate and its EPS growth going forward. The company now has a well-established history of making excuses for disappointing growth, but investors have decided to give 3D Systems the benefit of the doubt today. Its ability to make good on its promises and finally deliver on its swelling backlog in the fourth quarter will be critical to regaining the trust it's lost in a year in which its shares have lost more than half of their value.
