On Thursday morning, 3D Systems (NYSE:DDD) released preliminary fourth-quarter results that were better than what many investors were likely expecting. 3D Systems believes it generated $183 million in revenue in the fourth quarter, representing a 2.4% year over year decline and an encouraging 20.7% increase from the third quarter. Prior to the release, the Wall Street consensus expected sales would fall over 14% to $161 million, reflecting fears that the customer spending slowdown it and rival Stratasys (NASDAQ:SSYS) faced throughout the first nine months of 2015 would be more pronounced.
In addition to preliminary sales figures, 3D Systems announced it will take a significant writedown of its goodwill and intangible assets, which suggests that management is bracing for subdued growth in the future. The company also expects to take a $27 million inventory charge to exit the consumer 3D printing business.
The goodwill story
Generally speaking, 3D Systems' goodwill and intangible assets carried on its balance sheet reflect the premiums it's paid for acquisitions over their liquidation value. Accounting rules require that companies must test these assets each year to determine if they're still worth their carrying value. If they don't live up to management's previous growth assumptions -- a key factor of valuation -- the company must take a non-cash charge against earnings.
In the fourth quarter, 3D Systems expects to write down $510 million to $570 million of its goodwill and intangible assets. At the close of the third quarter, 3D Systems carried about $890 million in goodwill and intangible assets on its balance sheet. Taking the writedown midpoint of $540 million, 3D Systems is essentially writing off 60% these assets. This strongly suggests that 3D Systems' multi-year, hyper-aggressive acquisition strategy failed to generate the growth required to sustain the assets' lofty valuations.
An impairment charge of this magnitude isn't unprecedented in the 3D printing space. Stratasys took several impairment charges related to its MakerBot and merger with Objet, and has collectively written off about 61% of its goodwill and intangible assets.
Considering 3D Systems and Stratasys both took massive writedowns, the parabolic growth the 3D printing industry experienced between 2012 and 2014, which created lots of hype, may have gotten the best of them.
Turning a corner?
3D Systems is scheduled to report its final fourth-quarter earnings and host an earnings conference call on Feb. 29 before the market opens. Focus on how the underlying business is performing, rather than how investors react to the news, which will help determine if 3D Systems may be turning a corner. A major question for investors is whether the industry slowdown has stabilized like 3D Systems' preliminary results imply.
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.