Swedish industrial metals 3D printing specialist Arcam AB (OTC:AMAVF) delivered strong fourth-quarter 2014 results on Feb. 5. Arcam sells its proprietary electron beam melting, or EBM, systems to the aerospace and orthopedic implant markets. 

Arcam's results were just what the doctor ordered for the battered 3D printing space. That's especially true after industry leader Stratasys shocked the market when it announced preliminary Q4 earnings and 2015 earnings guidance considerably below what analysts were expecting.

Source: Arcam.

Arcam's Q4 results

  • Total revenue jumped 105% to 137.1 million Swedish krona (MSEK), or about $17.5 million. (Arcam acquired two companies in 2014, though its financials don't allow for a quarterly organic revenue growth calculation, just a full-year one.)
  • Operating income increased 91% to 13.2 MSEK, or $1.7 million.
  • Net income rose 97% to 15.0 MSEK, or $1.9 million.
  • Earnings per share were 0.80 SEK, or $0.10.
  • 15 EBM systems were delivered, versus nine in the year-ago period.
  • 21 orders for EBM systems were received, versus 10 in the year-ago period. Five additional orders were received in 2015 through the date of the earnings release.
  • 19 systems were on backlog at the end of the period, versus 12 in the year-ago period.
  • 24 systems were on backlog on the date of the earnings release.

(The Federal Reserve's exchange rate on Dec. 31 of 1 U.S. dollar = 7.824 Swedish krona was used for the currency conversions.)

Arcam's full-year 2014 results
It's critical to view Arcam's performance through a wider time lens than just one quarter. This is a small company that sells relatively few pricey 3D printers each quarter. So, quarterly results can be very "lumpy," as a shifting of just one or two printer sales from one quarter to the next can make a big difference in year-over-year comparisons.

  • Total revenue rose 70% to 339 MSEK, or $40.2 million.
  • Organic revenue grew 40% to 277.8 MSEK.
  • Operating income increased 35% to 19.6 MSEK. Excluding nonrecurring costs of approximately 9.3 MSEK, operating income was 28.9 MSEK, an increase of 48% over adjusted operating income of 19.5 MSEK in 2013.
  • Net income increased to 57.1 MSEK from 15.4 MSEK in 2013. Excluding a tax benefit of about 15.8 MSEK and the non-recurring costs, net income was 50.6 MSEK, a 148% increase over adjusted net income of 20.4 MSEK in 2013.
  • Earnings per share soared to 3.09 SEK, or $0.37, up from 0.95 SEK. On an adjusted basis, EPS rose about 120%.
  • 35 EBM systems were delivered, versus 25 in 2013.
  • 42 orders for EBM systems were received, versus 27 in 2013.

(The dollar figures -- for revenue and EPS -- are slightly lower than what one would calculate using the year-end exchange rate. That's because of the exchange rate fluctuations over the four-quarter period. The krona weakened considerably against the dollar in 2014.)  

Investors should monitor product average selling prices, especially in increasingly competitive spaces such as 3D printing. Arcam's ASPs appear to be holding up. Arcam sold 40% more systems in 2014 than in 2013, and its organic revenue rose by the same percentage. The organic revenue for both years includes materials sold to EBM customers, but those numbers should be in line with the number of systems sold.

Revenue contribution and profit margin by business:

Data source: Arcam's 2014 results. 

Arcam's overall profit margin was 16.8%. (There's a small difference between the group profit margin and the profit margin one gets by combining the profit margins of the three businesses. That's because of a currency translation issue.)

The overall profit margin is inflated because of the parent's profit margin being boosted by the big tax benefit. If we exclude the effects of the tax benefit and the nonrecurring costs associated with the acquisitions, the overall profit margin is 14.9%.

AP&C (a metal powder manufacturer acquired in 2014) didn't have much of an effect on the overall profit margin, though DiSanto Technologies (a contract manufacturer of medical implants acquired in 2014) considerably negatively affected it. That isn't surprising at this point, given DiSanto is significantly investing for future growth. However, we'll want to keep our eye on DiSanto's results going forward. 

Arcam's two acquisitions have good synergy with the main business. AP&C guarantees that Arcam will have a supply of high-quality titanium powder to provide to those buying EBM systems. If all goes as planned, DiSanto should help Arcam expand the market for its 3D printers. The more business DiSanto generates, the more systems it will need to acquire from its parent company.

2014 highlights

  • Won business from General Electric (NYSE:GE).
  • Acquired AP&C, based in Canada.
  • Bought out strategic partner DiSanto, based in Connecticut.
  • Received an order for five Q10 systems, its largest single order ever, from Lima Corporate. Lima is a large Italian manufacturer of orthopedic implants. 
  • Launched Inconel 718 as a qualified material for use in its 3D printers. Along with titanium, Inconel makes up the "big two" of aerospace metals.

As I've previously reported, General Electric was exploring using EBM technology to 3D-print low-pressure turbine blades out of titanium aluminide for its new GE9X jet engine. Arcam CEO Magnus René confirmed on the conference call that GE will be using Arcam's systems to produce the LPT blades. The unknowns: when GE will start production (2017 or 2018 is probable, according to René) and how many systems it will need. 

2015 and beyond highlights 
Items of note:

  • Capacity expansion: Arcam is now expanding its space in Sweden. Once completed, its annual manufacturing capacity will ramp up from about 50 to 150 printers.
  • Long-term development work: Arcam is working on incorporating the knowledge learned from two EU-financed projects into its future EBM systems. These projects were Fast EBM (to increase productivity of systems) and HiRes EBM (to increase resolution).

The future appears electron-beam bright, but there are risk factors  
I recently named Arcam one of the two best 3D printing stocks -- and its Q4 and full-year 2014 results strengthen that opinion. Total annual revenue growth of 70%, organic revenue growth of 40%, and adjusted EPS growth of about 120% are darn good numbers. The company does not provide forward guidance. However, the immediate future looks bright, based on the year-over-year printer backlog increase of 58%, plus the GE business that will be coming its way.

In Arcam's favor, EBM is a proprietary technology, so anyone who wants a new EBM system has to buy from Arcam. Another plus is the company's strong balance. It has zero debt and a cash stash of $35.3 million, or about $1.80 per share. Additionally, while its valuation is high on an absolute basis, it seems reasonable given its growth dynamics. Arcam's trailing P/E is 57 as of Feb. 11. However, that P/E is understated because of the big tax benefit that overstates Arcam's 2014 net income. Excluding that tax benefit, the P/E is 63. 

The biggest risk factor remains that EBM is the company's sole technology. Arcam's results show that immediate demand for EBM systems is strengthening. However, if EBM falls out of favor with one or both of Arcam's target markets, the company would experience major trouble. 

Potential investors should keep in mind that 3D printing stocks are highly volatile. Specifically, Arcam's stock is extremely thinly traded, making it especially volatile and easily manipulated. Also, be aware that the stock, which trades over the counter in the United States, is not as easy to follow as one listed on a major U.S. exchange. 

That said, this is a promising stock to put on your watchlist if you have a high risk tolerance and a long-term investing horizon -- and are willing to do your homework.