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3D Systems Q2 financial results, focus on 3D printing in production

by • August 2, 2016 • No Comments

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In a lengthy earnings call with investors and analysts this morning 3D Systems presented their many new financial results and addressed the next of the company. Presentation of the 2nd quarter’s results was rapidly covered in less than 15 minutes. But analysts extended the call by almany another hour with a detailed Q&A session.

The company reported revenue of $158.1 million for the 2nd quarter of 2016. This is a 7% minimize on the comparative period for 2015, but represents a $5.5 million increase on the initially quarter of this year.

The year on year revenue minimize is greater than investment analyst consensus expectations; this point of view anticipated a 5.6% minimize in revenue compared to the reported 7%.

Today’s results show 3D Systems Corporation created a loss of $11.2 million for the quarter (Q2 2015 $893k profit). This takes the loss for the year to $21.1 million, an $11.8 million improvement on the comparative figure for 2015.

This quarter in addition represents an improvement on Q1 where the net loss was $17.8 million.

3D Systems Consolidated Income Statement

3D Systems Consolidated Income Statement

Anticipated Strategy Announcement

CEO and President Vyomesh Joshi spoke to investors on Wednesday morning during his 2nd earnings call since he joined 3D Systems in April. The CEO came out of retirement to lead the company and as a former executive vice president of HP he brings a affluence of experience, and insight into the future rival.

VJ’s announcements regarding strategy were keenly anticipated but exact details were not to be forthcoming on today’s call. Interested parties can have to wait until September 12th to learn how 3D Systems plan to complete profitable growth when the company presents at Chicago’s IMTS event.

The CEO did provide an overview of the key initiatives guiding the strategy. At the core of this is VJ’s view that, “3D Systems has a powerful synergistic and differentiated technology portfolio.”

The reported 11% increase in revenue of the healthcare segment is seen as, “Evidence that customers are relying on [3D Systems] end-to-end solutions to power high end digital making workflows,” said VJ.

3D Systems Revenue Chart

3D Systems Revenue Chart

John McMullan, executive vice president and CFO, is a former colleague of VJ of his time at HP and presented the Q2 results and the priorities for moving forward.

The minimize in operating expenses was primarily due to the lower amortization ($8.8 million), or depreciation, and costs related to stock based incentive packages ($7.2 million). In the case of the later these are many most likely to be non-recurring savings. McMullan reported that the business created $12.9 million of cash of operations, and $9.5 million of free cash flow.

The revenue gains in healthcare (11%), materials (12%) and software (8%) were insufficient to offset the minimizes reported in on demand making services (-20%) and printing equipment (-30%). The minimize in printing device revenue was partly due to a renewed focus on high end and ensuring rushed shipping of products was not at the expense of high end, explained the CEO.

McMullan introduced the decline in printing device revenue was, “Primarily driven by the timing in orders for higher end pro and production printing equipment.” This ties in to early speculation that future customers may be delaying investment until later in the year when other major industrial players like HP and Carbon bring products to market.

“Gross profit margin was flat sequentially,” said McMullan. Analysis of the 50.9% (47.9% Q2 2015) headline gross profit margin illustrates the ‘razor and blade’ business version of 3D Systems. Of the three revenue streams, Materials have the top gross margin earning 76.4% (77.3& Q2 2015). In comparison Products, e.g. 3D printing equipment and software, have a gross profit margin of 32.6% (27.8% Q2 2015). In short, 3D Systems sell less profitable 3D printing equipment in order to earn higher profits on the consumable materials.

The third revenue stream, Services, has a gross profit margin that sits close to the headline average at 50.2% (Q2 2015).

Gross Profit Margin Trends

Gross Profit Margin Trends

“The minimize in products revenue for the quarter and six months ended June 30, 2016 was primarily driven by lower sales of 3D printing equipment and the discontinuation of consumer products,” explains the company’s 10-Q filing with the SEC. A concern for investors is that lower sales of 3D printing equipment can feed a minimize in the demand for the additional profitable materials in the next.

Gross Profit Margins Q2 2016

Gross Profit Margins Q2 2016

The company’s 10-Q gives additional details and states, “In addition to changes in sales volumes, that include the impact of revenue of acquisitions, there are two other major drivers of changes in revenue of one period to another: the combined effect of changes in product mix and average selling prices, a fewtimes referred to as price and mix influences, and the impact of fluctuations in foreign currencies.”

Shifting away of the consumer market has minimized the expenses synonymous with research and development and these savings can need to be balanced with investment in, “high end, infrastructure and other key areas,” for the long-term. McMullan reinforced VJ’s earlier understanding that 3D Systems has a sturdy technology platform and, “the broadest portfolio in the industry.” The CFO in addition acknowledged that, “Things were little bit bumpy,” regarding the company’s historic trajectory.

Focus on production

VJ explained that 3D Systems can focus on production printing equipment, pretty than pro grade printing equipment and the strategy can target increasing the installed base in this area. A 2nd focus can be on new materials that are, “The key for our business.” The CEO announced that since joining the company he has directed employees to concentrate on materials management as an worthwhile business.

Broader demand trends were in addition addressed by VJ. In particular growth in the prototyping market may be complex and that a focus on light production may most likely be a advantageous version. This can involve continued technology around the 3D Systems range of production printing equipment and looking at use cases in vertical markets. “The solution based approach,” can be an worthwhile part of this strategy. As stated previously, this approach can need a worthwhile level of engagement with customers.

VJ pointed to growth in healthcare as a version to replicate in the aerospace, car, consumer goods and other verticals. When this is completed he believes company-wide growth can be sustainable.

Quality and donate chain issues were the focus of one analysts question and VJ explained that the hire of a donate chain and operations officer of HP can address issues such as shipping product preceding it is eager and ensuring optimal inventory levels. He acknowledged the company have work to do in this area.

The reception by the stock market to today’s news was affirmatory and shares were up in early trading. The 2nd half of the year is most likely to create a few informative news and as additional companies enter the production and pro 3D printing space the reaction of incumbents such as 3D systems can be closely scrutinized.

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