3D Systems (DDD, Financial) continues to be volatile. The stock jumped on better than expected earnings recently, only to retreat later. The company reported its quarterly earnings last month, beating the revenue and earnings consensus. Revenue grew 6.8% year-over-year to reach $165.9 million. Analysts were modeling for revenue of $163.5 million. Earnings per share came in at 5 cents. While earnings per share growth came ahead of analyst consensus, the company registered a decline as non-GAAP earnings per share stood at 15 cents during the same quarter last year. The stock soared 10% to a high of $13 on the day of the earnings release. However, 3D System has erased all the gains and is down around 23% since then.
Revenue growth isn’t very impressive
Although the company reported high-single digit revenue during the last quarter of 2017, full-year revenue growth was muted. 3D Systems increased its revenue merely 2% during the year.
Slowdown in printer sales continues to offset revenue growth
Sales of 3D printers were down as the company reported a roughly 6% decline in product revenue. Growth primarily came from sales of printing material and printing services. This consolidates the view that the industry is shifting towards a service-oriented model as customers are shying away from capital expenditure in 3D printers.
Going forward, most of the printer sales are expected to come from “services customers” – providers with their own 3D printing service. Note that 3D Systems also provides printing services, the revenue from which makes up 40% of the total revenue of the company.
There are strong indications of commoditization of 3D printers. As most of the SLA and SLS printing patents are expired now, 3D Systems is experiencing a decline in unit sales and price of printers. During the year ended 2017, prices of printers fell 7.1% while unit sales remained flat for 3D Systems. The decline can be attributed to new incumbents in 3D printing industry alongside reduction in demand for printers.
On-demand printing is showing signs of growth
3D printing users are favoring printing services rather than buying their own printers to keep capital expenditures down. For the years ended Dec. 31, 2017 and 2016, revenue from on-demand manufacturing services contributed $104.6 million and $104.4 million, respectively. In short, services will be a lucrative business going forward as opposed to selling printers outright.
Competition and on-demand printing is pressurizing margin
The decline in pricing power amid competition and emergence of on-demand printing is weighing on margins.
Source: Annual Report 2017
It can be seen that margin is trending downwards. Competitive pressure is weighing on 3D Systems. However, services offer a much higher gross margin than selling printers. Gross margin for services is also flat. The point is that 3D Systems will naturally move towards services in order to increase its margin.Ă‚
3D Systems growth is not in line with industry growth
IDC forecasts that 3D printing spending will reach $12 billion during 2018, up 19.9% over 2017. Global 3D printing spending was around $10 billion for 2017. With revenue standing at $646 million, 3D Systems only managed to capture 6% of this spending. Moreover, IDC also expects the spending to grow at a CAGR of 21% to reach $20 billion by 2020. Given a strong industry forecast, 3D Systems’ 2% growth is alarming. It might be indication of others gaining market share at 3D Systems' expense.
If you look at the metal landscape, 3D Systems doesn’t offer a very strong portfolio of metal printers. According to all3dp, 3D Systems was not among the top five commercial metal printers of 2017. Moreover, Hewlett-Packard (HPQ)'s HP Jet Fusion3D 3200/3400 holds the top spot in industrial printing. Overall, industrial and metal weakness of 3D Systems doesn’t bode well for the company’s market share.
Takeaways
3D Systems' revenue growth was not impressive during 2017. The industry, on the other hand, is expected to witness double-digit growth. The bottom line also doesn’t look good at this point. Despite revenue growth, earnings per share declined during 2017 compared to 2016.
Increasing competition and commoditization of 3D printers also doesn’t bode well for 3D Systems and its margin. The company is also weak on the commercial and metal printing front, which is the fastest growing segment in the industry.
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Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
