3D Systems (DDD, Financial), the infamous additive manufacturing company, reported the results of its second quarter after the bell yesterday, topping estimates.
The manufacturer of 3D printers managed to post revenue of $176.6 million, up 10.7% year-over-year. The Street was modeling for revenue of $165.9 million. Earnings also came ahead of analysts’ consensus as 3D Systems reported earnings per share of 6 cents compared to the Street’s consensus of just 1 cent.
For the third quarter, Wall Street is anticipating sales to reach roughly $164 million, up 7%. For the full year of 2018, the revenue of the additive manufacturing company is expected to reach $680 million, according to the consensus of analysts. The stock is skyrocketing, and is up 20% since 3D Systems released its earnings in afterhours on Tuesday. 3D printing peers are also up: Stratasys (SSYS, Financial) by 2.5%, Voxeljet (VJET, Financial) by 4.7% and ExOne (XONE, Financial) by 4.1%.
What drove the top line?
The surge in revenue was primarily fueled by sales of printers followed by revenue from health care solutions. Printer sales increased 41% year-over-year while health care-related revenue increased 26% during the quarter.Ă‚
Source: 3D Systems 10-Q, Q2 2018
What hindered growth?
The growth was moderated by a 6% rise in materials and 3% increase in on-demand manufacturing, which made up more than half of the company’s revenue. Furthermore, average selling price also put pressure on the revenue growth of 3D Systems. Although unit volume grew 14.4%, average selling prices declined 6.3% during the quarter.
To review, 3D Systems had a good quarter with doubled-digit revenue growth fueled by revenue from its health care products and services. However, declining average selling price and low growth in the services segment took the sting out of 3D Systems’ top line growth.
Points of concern
1. Pricing competition
3D Systems has been driving volumes by reduction in prices, which indicates price competition in the industry. It seems natural as key patents have long been expired, and 3D printers are turning into more of a commodity, rather than a specialized good.
2. Declining gross margin
Due to pricing pressure, gross margin is following a slightly downward trajectory. Gross margin fell from 50.9% in the first half of 2017 to 47.9% during the first half of 2018. The long-term gross margin trajectory is also following a downward trend.
3. Slow growth in the services segment
Slow growth in services, i.e., on-demand additive manufacturing, is taking a toll on overall growth of 3D Systems. Although revenue from sales of printers grew 18% year-over-year during the first half of 2018, total revenue increased by merely 8%. In contrast, on-demand printing services counterpart Materialise (MTLS, Financial) grew its revenue by 34.1% during the second quarter of 2018.
In effect, 3D Systems seems to be losing market share on the services side. This can have two-fold impact on 3D Systems. First, on-demand printing is a rather high growth segment, and decline in services market share will hinder 3D Systems’ overall growth prospects. Second, services are a high-margin business, meaning that losing market share in this segment will impact the bottom line and earnings of the company going forward.
4. Playing catch up
IDC, in its latest 3D printing report, forecasted that the 3D printing market to grow at a compound annual growth rate of 18.4% during 2017 to 2022; industry revenues are set to reach $23 billion by 2022. The point to note is that 3D Systems reported a 10.7% growth in its revenue during the quarter, which is quite below the industry forecast cited by IDC. This is indicative of the fact that 3D Systems might be losing market share to other 3D printing players.
Takeaways
3D Systems is witnessing double-digit growth in sales of its printers, especially in health care-related printers. However, the growth is being shadowed by sub-par growth in materials and services.
The company faces several headwinds including pricing competition, resulting in lower gross margin, and below-average top-line growth compared to the industry.
Unless 3D Systems addresses its low growth problem in the services segment, it will continue to lag behind the industry in terms of overall growth.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
