3D Systems Corporation: What Investors Need to Know About Its Q4 Earnings and Forward Guidance
3D Systems Corporation announced fourth-quarter and full-year 2013 results before the market opened on Friday. Revenue for the quarter jumped 52% to $154.8 million, while adjusted earnings per share fell 27% to $0.19. On a GAAP-basis, EPS were down 15% to $0.11.
For the full-year 2013, the leading 3-D printer manufacturer's revenue grew 45% to $513.4 million, while adjusted EPS rose 2% to $0.85, and GAAP EPS decreased 6% to $0.45. Notably, organic growth was a solid 29%. It's wise of 3D Systems to highlight its organic growth rate, as the company's growth has been heavily fueled by acquisitions, which has led to concerns relating to its organic growth rate, among other things.
Much of Friday's announcement was anticlimactic, as 3D Systems released lower-than-expected preliminary 2013 earnings results and 2014 earnings guidance in early February. So, not surprisingly, results were in line with analysts' estimates, which were revised downward after the preliminary announcement. 3D Systems' expectation of turbocharged revenue growth through 2015, however, pleased the market, which boosted the company's share price 6.8% at Friday's open, though shares slowly gave up most of their early gains to close the day up 1.74% at $75.96.
Beyond the headliner numbers, here's what investors need to know.
The Q4 nitty-gritty
While overall revenue grew 52%, here are how the segments performed in the quarter:
- 3-D printers: Revenue soared 81% to $63.1 million, accounting for 41% of total revenue.
- Other (software and perceptual devices): Revenue came in at $10.8 million, accounting for 7% of total revenue. Software grew 95% to $6.3 million; perceptual devices accounted for the remainder. ("Other" is part of the printer segment, but I broke it out for added clarity.)
- Materials: Revenue increased 39% to $37.2 million, accounting for 24% of total revenue.
- Services: Revenue increased to $43.7 million, accounting for 28% of total revenue. Within this category, Quickparts revenue grew 36% to $28.4 million.
Within the printer category, consumer printer sales soared 162% to $8.9 million, though this was below the company's expectations. Like other 3-D printing companies and many pundits, 3D Systems had rosier forecasts for the consumer market than panned out. The company anticipates consumer printer sales to further ramp up in 2014. While they'll likely grow nicely, I wouldn't count on reaching the tipping point for this category this year. It doesn't seem to me that there is yet a compelling reason, or "killer app," as some put it, for consumers to rush en masse to buy 3-D printers. Perhaps we'll see one before the holiday season, but 2015 is more likely, in my opinion.
On the other hand, the company's metals printing business has been performing better than expected. 3D Systems acquired Phenix Systems in July, and, on a pro forma basis, its 2013 annual direct metal revenue grew 204% to $14.3 million, driven primarily by Phenix printer sales, as CEO Avi Reichental said on the earnings call. Notably, Reichental added:
Metals is in the beginning stages of what we believe is a very exciting journey. As we have said repeatedly now, we have been sold out of capacity every quarter since we acquired this business [Phenix] and we expect that this year it could generate some place between $25 million and $50 million in revenue and it's just the beginning.
The health-care industry continues to power 3D Systems' printer sales, as revenue from this market increased 67% to $21.8 million. Investors should expect this outsized growth to likely continue, as 3-D printing is making increasing inroads in a wide range of health-care applications. These include making surgical models to producing medical implants and instruments.
Turbocharged revenue growth expectations for 2014 and 2015
3D Systems expects 2014 revenue in the range of $680 million to $720 million, while adjusted earnings per share are expected to be $0.73 to $0.85. This was simply a reiteration of the guidance the company announced in early February. Before that announcement, analysts had expected EPS of $1.27 on revenue of $671.3 million. Using the mid-point figures, the company is expecting EPS will decrease about 7%% in 2014, while revenue will grow about 36%.
In what was news to investors, 3D Systems stated that it expects 2015 revenue of $1 billion -- which is nearly a doubling of its 2013 revenue of $513.4 million.
As the company made clear when it released preliminary results, its game plan remains the same as it was in the fourth quarter: Sacrifice short-term profits for spending on activities intended to fuel long-term growth and capture market share. Those activities include stepping up research and development, increasing manufacturing capacity, and boosting sales and marketing efforts. No doubt, 3D Systems remains open to opportunistic acquisitions, too.
As to R&D, 3D Systems beefed up its fourth-quarter expenditures to $16.6 million, versus $7.8 million in the prior-year's quarter. This spending represents 10.7% of revenue, versus 7.7% in the prior period. Boosting R&D was a must if 3D Systems wants to maintain its leadership position in the 3-D printing sector and, more specifically, fulfill its end of the many partnership agreements it inked in 2013.
3D Systems partnered with dominant companies across a wide range of industries last year, including Google for Project Ara, Hershey Company to produce 3-D printed edibles and 3-D printers to produce edibles, and Hasbro to develop play 3-D printers, among others. Teaming with the main players across key industries -- especially before a competitor does -- seems a good move. After all, the 3-D printing sector is expected to balloon from $2.2 billion in 2012 to nearly $6 billion in 2017, according to industry expert Wohlers Assocs., and should eventually touch many diverse facets of our economy and lives.
A primary reason 3D Systems is going gangbusters with acquisitions and partnerships designed to capture as much market share as possible relates to material sales. The more 3-D printer installations the company installs, the more reoccurring revenue from material sales it should receive, since many, if not most, 3-D printers currently use proprietary materials. Notably, 3D Systems' materials segment generates higher profit margins than its overall business, which boosts its earnings' results.
Foolish final thoughts
3D Systems had an excellent 2013, and its forward guidance, most especially related to its metals printing business, bode well for the company's continued success. That said, profitability -- at least eventually -- is where the (3-D printed or not) rubber meets the road. While we know 3-D Systems' profit margins will be under pressure, given its strategy to sacrifice short-term profits for longer-term growth potential, investors should closely monitor gross margins, as well as keep an eye on operating margins, going forward.
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The article 3D Systems Corporation: What Investors Need to Know About Its Q4 Earnings and Forward Guidance originally appeared on Fool.com.Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 3D Systems, Google, and Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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