Last week, specialty 3D printing company ExOne (NASDAQ:XONE) reported its third-quarter earnings, and the results were much to the disappointment of investors. The emerging growth company reported that revenues fell 17% year over year to $9.6 million, translating to a net loss of $4.5 million, or $0.31 per share. Analysts had been expecting that ExOne would generate $15.3 million in revenue and only lose $0.13 per share. While the headline report makes it seem like ExOne has lost its footing in the highly competitive 3D printing industry, the earnings conference call did reveal some deeper insights that suggest ExOne isn't merely flaming out. Below are the most important takeaways from ExOne's earnings call.
The Russian sanctions have held up orders and are delaying revenue recognition.
The recent Russian sanctions imposed by the U.S. and EU have been making life difficult for ExOne, because it now has to prove to regulatory authorities that the Russian customers it's already taken orders from won't use its industrial 3D printers for military purposes. Unless ExOne can gain clearance to ship these pending sales, which is unknown at this time, ExOne unfortunately won't be able to recognize the revenue associated with these transactions.
CEO Steven Kent Rockwell explained:
[W]e're still evaluating as the Russian sanctions have slowed down. The sanctions are both coming from the EU and from the United States.
We have a clear obligation to meet all the standards of those sanctions and we are doing that. In the process of that we will be able, we believe, to sell to most of our customers in Russia and we have quite a few there, but we have to get through the sanctions to prove that the applications used by these machines [are] not for military purposes. It's put a definite delay on some of the things. Our guidance would be higher for the year, but we know we're sitting right now on orders for delivery in Russia and we don't know when or if they will ever be released until this sanction issue is audibly rectified.
ExOne wants to be judged on a full-year basis.
Given the long sales cycle for one of ExOne's industrial 3D printers, which can take anywhere from six months to two years, ExOne's management would prefer if investors measured the company's full-year performance over quarterly performance. The thinking here is that a year's worth of performance will paint a more accurate picture of ExOne's operating results, because it smoothes out some of the "lumpiness" that often plagues a company that only sells a handful of units in a given quarter.
COO David Burns reiterated:
I think for all the reasons that we have said in the past, with some regularity, that we feel that we can't give quarterly guidance and we want to be judged on a full year-basis. We're asking for you to understand that we still feel positive about how we're going to emerge from 2014.
Despite ExOne missing third-quarter earnings expectations, analysts still expect its 2014 full-year revenues will grow by about 22% over 2013 results.
Certain materials are uniquely suited for ExOne's 3D printing technology and could give it an advantage over the competition in specific applications.
ExOne's patented binder jetting technology is uniquely suited to handle a range of materials that aren't well suited to competing selective laser sintering 3D printers. In the last 12 to 18 months, ExOne has tested "at least" 25 new material candidates for binder jetting, and if ExOne can successfully introduce new materials that aren't well suited to competing 3D printing technologies but are demanded from customers, it could give the company more of a durable advantage in certain areas.
There are groups of materials that are either highly thermally conductive or they are very low in terms of thermal conductivity that are almost uniquely suited for binder jetting and the technology for industrial 3D printing. Because thermal conductivity is a big issue when you're dealing with [selective] laser sintering and it's not a big issue when you're dealing with binder jetting, we have focused fairly recently on a set of materials that are either very highly thermally conductive or have low thermal conductivity.
I would put carbon in that category, I would put graphite in that category, I would put ceramics in that category. In all cases, these are materials that are well suited for the oil and gas industry as well as the aerospace industry and we are making significant progress in both of those arenas.
The company is not interested in making acquisitions outside its circle of competence.
ExOne's management is only interested in making acquisitions that enhance its existing capabilities, and believes that if they are the smartest guys in the room when it comes to binder jetting, it'll improve the company's odds of becoming a leader in the space -- which could ultimately represent a multibillion-dollar opportunity as the technology matures.
In terms of strategic growth opportunities, acquisitions, we've focused on just little pieces in the past here that have supplemented our base of core business. I'm not interested in stepping outside of the core business. The binder jetting opportunity is a multibillion-dollar opportunity as it matures itself over the coming years. It's big enough for us to say, 'Let's stay where we're the smartest, where we're the best, and where we're making our best penetration,' and so we may consider other things that complement our existing strategy.
ExOne is trying to earn investors' trust back.
Since its IPO, ExOne has been a serial disappointment compared to investor expectations. During the Q&A session, an analyst remarked that the company's 2015 organic growth rate forecast of 25% to 35% "seems a little bit low," which Rockwell addressed head-on:
First, we're trying to become credible so I think a 35% growth rate is an admirable growth rate for a company and given that we've historically been chastised for missing our forecasts, we've [chosen] to be a little bit more conservative in order to please the market rather than be accused of nonperformance.