3D Printing

DDD Had a Good Q1 — But Just What Will It Take To Make Those Analysts Happy?

The bubble burst and now the slide continues. But expectations within investor circles have much to contribute to the fall in 3D print stocks further to the announcement of 3D Systems’ 2014 Q1 earnings yesterday. Revenue was lower than the expectations raised in said circles, forcing a 9% drop for NYSE:DDD. But larger investment players remain positive: Citi Group, Brean Capital, Canaccord, Pacific Crest and more retained the stock owing to strong Q1 2013 to Q1 2014 figures such as +76% design & manufacturing growth and +41% growth in materials sales.

It’s been a strange year for 3D printing stocks. The hype regarding 3D printing in 2013 was almost intangible, with everyone getting ahead of themselves, a bit of confusion regarding the technology, and, I would suggest, a certain amount of ‘future-feedback’ in our age of predictive analytics and prediction analysts. Peer anticipations hold a sway over stock prices beyond the macroscopic and localised variables. To quote a Forbes reaction to the Q1 results:

It may seem strange that the [3D Systems] stock is plunging after reporting good earnings, good projections, and showing tremendous growth. The reality is that after the earnings stocks move not based on the difference between the published estimates and actual earnings, but based on the differential between the actual earnings and whisper estimates. If the communications I receive are any indication, whisper numbers have been running much higher than the excellent earnings the company reported.

3D Systems’ stock creates the benchmark for the 3D printing ‘sector.’ Alongside Stratasys, no other publicly floated specialist additive manufacturing machine producers come close in terms of market capitalisation and revenue. 3D Systems has continued to add patents to their portfolio, branch out into service provision, pursued new markets geographically, sought new partnerships – including with Google and Staples – and generally maintained a good long term strategy for growth.

Could it be said that the ‘uncertainty’ regarding 3D print stocks is in part a measure of the expectations created regarding the future of the technology and where it is now, alongside the short term projections of revenue and yield. This is not a Nokia moment. There is little uncertainty regarding a new additive technology entering the market for 3D Systems, Stratasys and so forth akin to Nokia’s short sightedness and consequential rapid decline. Yes, Hewlett Packard is on record to be entering the fray this year. Some analysts are contextualising this variable as being of high importance. But, more probably than not, this is not going to create any huge upset for the holders of a range patents in a range of additive technologies that perform analogous functions. Each additive technology has its niche applications. Most industrial additive manufacturing now produced has been designed with specific sectors in mind. HP is unlikely to produce a technology that will undermine a large proportion of the niches and sectors that current patented devices serve.

There is an element of a race to create energy efficient machines that output at a large build volume, quickly. Also to print in multiple colours and materials. But additive manufacturing technologies are increasingly broad in range of application, and increasingly analogous to subtractive and moulding technologies in terms of potentiality. The slower single colour single material machine will not be completely displaced as faster multicolour machines become more available, simply because there will always be industries and production applications that only require those devices. Thus we see a lateral broadening of varieties of additive machine, and the potential for increase in unit sales.

An analogy: as Apple release newer iterations of the iPhone the range has broadened. At first there was one model. So the more expensive new releases were being purchased alongside the cheaper older iterations. It was not just that different saleable entities were produced by adding new features or bigger screens which then replaced the old models. A person wanting solely mobile internet access, phone and App Store would be just as served by an iPhone 3GS as an iPhone 5. It is in spotting this that we now see the iPhone 5C as part of the range: cheaper, less features. It is interesting that this iteration of the iPhone has to date sold less than anticipated. Does an iPhone 5C hold appeal when an iPhone 4 does the same job for the same price? There are many variables here, but for the analogy, as a breakthrough technology gradually becomes a mainstay, its breadth of iterations expands to serve new markets. Unit sales in industrial additive manufacturing devices will increase not just because of R&D, but also because of increase of breadth of range of types of devices.

In the home market, the 3D printer is, as yet, no smartphone. People are not queuing around the block to get the latest version. 3D printing is a fascination for the masses more than a past time. But unlike the smartphone, which may be viewed as merely the latest iteration of a computer: a portable touchscreen computer, mixing the markets for the PC and the phone, home 3D printers are something quite new. Not wholly new, in as much as a smartphone may be seen as a computer, they are merely the latest iteration of a CNC machine: the conversion of digital designs into actual objects via tooling. But both the smartphone and a desktop 3D printer are also an evolutionary leap in terms of functionality and convenience. The former makes information and relationships immediately available, the latter makes objects immediately available. It is when the home 3D printer becomes as functionally useful as the smartphone that sales will breach their highest potential. That is far from a prerequisite for a wider adoption than we see at present. And it is in more minor adoption that more immediate goals lay. Let us not confuse the notion of a 3D printer owned by a billion, and a 3D printer owned by a million. In 2014 we are at the very start of the potential of home 3D printing.

Home 3D printers are not going to be a Star Trek like device that heralds the new dawn of a new way of doing things that will replace the existing way entirely. But, in time, they do have the potential to offer a platform for a wide range of personalised products to be delivered to the home. That platform will have to compete against delivery drones and online shopping delivered to the home by more traditional means. Even more traditional means, such as walking into a shop, are far from going to vanish, and more certainly under no threat from home 3D printing at all for a decade. Advancements in 3D printing, the advancements that will put printers in homes, are happening fast. And, relatively unusually, they are happening because of people at home designing new devices arguably almost as much as companies with large resources, in a way that few other technologies or products can boast. How far the industrial ramifications of 3D printing permeate will be contingent upon, among manifold other factors, how much investment is available to put into R&D for these potentials.

For those with a limited portfolio, 3D System’s does not currently create an attractive proposition. The small time investor is perhaps the one most likely to flee a stock when its yield is relatively low. There is an irony that the mass media and 3D printing insiders creation of the monolithic bubble of hype in mid 2012- late 2013 has much to do with the landslide in valuation occurring for 3D print stocks in 2014. Some longer term investors have felt an itch to be rid of a volatile stock for more certain returns until 3D printing can ‘prove itself.’ The wise are waiting to enter (or re-enter) the 3D printing investment game when indicators start to suggest that revenues are picking up. I believe the widest are simply holding out, looking at 3D print stocks as a long term investment, ignoring the shorter term fluctuations of the markets. The larger investment players will be trading in fractions of seconds via algorithms and any commentary such as this are perhaps simply words in a game of mathematics.

I am not a stock analyst by trade. I am a person who analyses systems and concepts, particularly regarding technology. But stocks of course exist as conceptual entities within a system. In terms of this, for a macroscopic picture of the variables that affect 3D print stocks, recent articles 3D Printing Trend Evolution Part 1 and Part 2 proffer a perspective, regarding technology, economics, consumerism, patents and more.

Looking more closely at those Q1results:

Q1 2013 to Q1 2014 revenue grew 45% to $147.8 million on 28% overall organic growth, resulting in GAAP earnings of $0.05 per share and non-GAAP earnings of $0.15 per share.

  • Gross profit increased 41%
  • Product revenue increased 53% to $60.8 million.
  • Services revenue rose 38% to $46.6 million.
  • Consumer revenue expanded 150% to $9.7 million.
  • Print materials revenue grew 41% to $40.4 million.

The March 2014 backlog included $17.9 million of printer orders, in part reflecting increased demand for the company’s Direct Metal 3D printers, which continues to outstrip manufacturing capacity. The company exited the quarter with $28.8 million of backlog.

Quarter four 2013 saw a lower printer revenue stream as the company revitalised its 3D printer range across the board. The consensus analysis was that potential purchasers were waiting for these new printers. Now, in Quarter One 2014, we witness the fulfilment of that analysis, as sales from printers outstrip the rest of the company’s revenue streams and show substantial growth upon the same quarter of the previous year.

To quote: ‘Management reiterates its 2014 guidance, expecting revenue to be in range of $680 million to $720 million and its GAAP earnings per share to be in the range of $0.44 to $0.56 and non-GAAP earnings per share to be in the range of $0.73 to $0.85. Additionally, management expects a greater portion of revenue and earnings to be generated during the second half of 2014, as the full impact of its new products and services materializes.’

As commented previously at 3D Printing Industry, 3D Systems has been pursuing a strategy of creating new partnerships in the area of services, expanding its patent portfolio, and continues to push for high profile opportunities which both catalyse technological growth and capture the public’s imagination: This year will see Made In Space put a 3D printer on the International Space Station with 3D System’s technical input. The innovative pop star W.i.lliam is now a creative lead and incorporates 3D printing into his live stage show performances. The deal clinched to 3D print the modular units for Google’s Ara smartphone – a device which I rate as on one hand the culmination of the modular sensory approach pioneered by Apple with onboard sensors that are exploitable by an application platform, although on the other may be slightly stifled by ‘just more things to lose down the sofa’ potential in an age where consolidating devices, such as the internet computing and television in the form of smart-TV’s is the current trend. Or will this lead to modular tablet computing?

That expansion strategy saw the following highlights in quarter one:

  • Advanced progress on continuous, fab-grade 3D printer platform and materials in support of Google’s Project Ara phone.
  • In-store 3D printing experience launched by Staples in New York and Los Angeles.
  • Acquired Medical Modeling, a leading provider of FDA cleared, Personalised patient specific medical devices for the 3D printing of medical devices.
  • Acquire Robtec to create a strategic Latin American sales and service platform.
  • Began R&D operations at acquired Wilsonville location to support the accelerated development of next-generation products.

Avi Reichental, 3D Systems’ President and Chief Executive Officer said: “Our first quarter results reflect expanding demand across all of our revenue categories, led by strong 76% unit sales growth of design and manufacturing printers, and the ongoing placement of manufacturing printers that continued to increase the growth rate of materials. Our first quarter results reflect expanding demand across all of our revenue categories, led by strong 76% unit sales growth of design and manufacturing printers, and the ongoing placement of manufacturing printers that continued to increase the growth rate of materials. We believe that 3D Printing is on the cusp of accelerated design and manufacturing adoption, and the ultimate measure of our success will be the value we create from our market share and scale gains over time. While our stepped up strategy and investments continue to pressure our quarterly earnings, we believe that our actions set the stage to substantially compress the time required to deliver greater value. Accordingly, we expect operating leverage to resume in the second half of 2015 and be fully restored the following year.”