3D Systems (NYSE:DDD) is slated to report its second-quarter earnings before the market opens on Thursday, Aug. 6.
Investors are no doubt braced for continued rough seas. That's because when fellow 3D printing bigwig Stratasys reported its quarterly results last week, it withdrew its full-year 2015 guidance, citing lack of visibility into customer demand, and issued a third-quarter outlook that fell significantly short of what analysts were forecasting.
Here's what analysts are expecting from triple-D for the quarter and year:
|Analysts' Q2 revenue estimate||$173.2 million (14.3% YOY growth)|
Analysts' Q2 adjusted earnings estimate
|$0.09% (44% YOY decrease)|
|Analysts' 2015 revenue estimate||$746.4 million (14.2% YOY growth)|
|Analysts' 2015 adjusted earnings estimate||$0.52 (26% YOY decrease)|
What to focus on in the report?
There are a handful of things to focus on when 3D Systems reports. The key metrics include the usual: organic growth and gross profit margins. A piece of information that's critically important is the capital spending environment and outlook among enterprise customers, as both 3D Systems and Stratasys have encountered weak demand for their 3D printers in 2015. They've largely attributed this to temporary overcapacity -- industrial customers currently having more than enough printers for their needs.
That said, there's one metric that's arguably the most important gauge of how well 3D Systems' business is currently performing, in my opinion: consumables (materials) revenue growth. Before we dig into 3D Systems' consumables growth stats, here's a quick look at the business model it's using.
Razor-and-blades business model
3D Systems -- as well as Stratasys -- uses a razor-and-blades business model to some degree. (This model reportedly owes its name to Gillette's introduction of improved safety razors with disposable blades in the early 1900s.) The model involves a company selling the "razor" at a low cost, sometimes even giving it away, while selling the disposable "blades" at a high markup. When the model is functioning as planned, companies make their profits from the recurring income stream generated from sales of the higher-profit-margin "blades" over the life of the "razor."
In the case of 3D Systems, its 3D printers are the razors, while the consumable print materials are the blades. Of course, both 3D Systems and Stratasys have service bureaus, too, which is the primary reason their business models aren't "pure" razor-and-blades types.
3D Systems' consumables revenue growth
While the more recent quarters' results have been adversely affected by strength in the U.S. dollar, it's still easy to see the big picture here -- and it's not a pretty one.
Most concerning was last quarter's dip into negative territory. Granted, there are industrywide forces at play; however, a weak demand for new 3D printers among enterprise customers -- at least some of them -- can't be blamed for all of 3D Systems' woes on the consumables front. Stratasys, which sports a quite similar business model and business breakdown, posted consumables revenue growth of 18% in the first quarter -- a whopping 26 percentage points greater than 3D Systems. These numbers suggests that Stratasys' customers are making solid use of their Stratasys' printers, while those with 3D Systems' printers are underutilizing them, or at least a fair number of them. Questions related to customer satisfaction and obsolescence come to mind.
As for the second quarter, Stratasys' consumables revenue growth clocked in at 6%. (It's worth noting, however, that CEO David Reis stated on the conference call that consumables in the "core business" -- which excludes the desktop 3D-printer maker MakerBot and the services operation -- increased 19% on a constant-currency basis.) So, we're likely to see a very weak number from 3D Systems. It would be helpful for investors if 3D Systems' management provided color on the consumables number, as Stratasys' management did.
Innovation is the key to driving future consumables growth
On Thursday, and going forward, investors should make like one of 3D Systems' metal 3D printers and laser-focus on the company's consumables revenue growth. It's the single best data-source reflection of how well the company's business model is performing, in my view. That said, an anemic number doesn't necessarily mean the company is in trouble. After all, one quarter's results are just that; we're concerned with results over a much longer term. Additionally, it's important to keep in mind that consumables growth could soar along with successful introductions of new products. So, investors need 3D Systems to innovate, innovate, innovate.