On Wednesday morning, 3D Systems (NYSE:DDD) announced its third-quarter earnings, which underscored the challenges plaguing the 3D printing industry and their adverse effects on the company.
Sales declined by 9% year over year to $151.6 million, translating to an earnings loss of $0.29 per share, or a gain of $0.01 per share on an adjusted basis. On a constant currency basis, 3D Systems' revenue fell by 3%. Gross margins fell 90 basis points annually to 46.9% and fell 100 basis points sequentially. Although the results fell below consensus expectations, shares at one point were trading over 18% higher.
A recurring theme
As interim CEO Andrew Johnson put it, 3D Systems' results were "negatively affected by continued market conditions that extended customers' capital investment cycles and reduced demand across all geographies." The company also cited that previous performance issues affecting some of its professional 3D printers damaged its customer reputation and impeded sales efforts.
Compared to last year, 3D Systems' third-quarter product revenue decreased by 27%, material revenue decreased by 11%, and services revenue increased by 16%. Moreover, 3D printer units fell by 26% annually and by 29% sequentially -- a clear sign of deteriorating demand.
Stratasys (NASDAQ:SSYS), which also reported its third-quarter earnings Wednesday morning, experienced a similar industrywide slowdown. Management attributed the weakness to an oversupply of 3D printing capacity in the marketplace, which is prompting customers to take pause with purchasing new 3D printing equipment.
During the conference call, 3D Systems reported that its organic growth rate, which measures annual revenue growth excluding acquisitions made within the last 12 months, declined by 22%, or by 15% after accounting for currency headwinds. In other words, had 3D Systems not made any acquisitions within the last 12 months, its revenue would've declined by 22%, instead of by the 9% it reported.
3D Systems' materials and services margins increased modestly on an annual basis, while its product segment's margin fell from 35.3% to 24.2%. Product margins were dragged down by consumer 3D printer weakness. For perspective, 3D Systems' consumer revenue fell by 14% annually to $10.1 million.
As a percentage of revenue, 3D Systems' third-quarter operating expenses ballooned from representing 43% of revenue last year to 70%. The increase was primarily driven by a combination of inherited expenses from acquisitions, increased compensation and R&D development, and an expense provision related to an arbitration award from its Print3D acquisition in 2011.
Despite former CEO Avi Reichental's abrupt departure last week, there was almost no discussion of finding a potential successor during the conference call. There was also no focus on how 3D Systems' goodwill assets have been performing even though Stratasys took a $910 million goodwill and intangible impairment charge against its third-quarter earnings.
What management did focus on was how it's conducting a comprehensive review of the company's current organization and will take necessary actions to improve its long-term operating performance. This may include reducing head count, lowering capital expenditures, and improving operational efficiency.
Steve Heller owns shares of 3D Systems. The Motley Fool recommends 3D Systems and Stratasys. 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.