Image source: 3D Systems.
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Last Wednesday, 3D Systems' (NYSE: DDD) second-quarter earnings highlighted several positive developments that suggest the company is making notable improvements in its business despite falling 3D printer sales.
Along with its earnings release, 3D Systems' management hosted a conference call to provide deeper insights about the underlying health of its business and future prospects. It marked the second time that investors got to hear from 3D Systems' recently appointed CEO, Vyomesh Joshi, a 32-year HP (NYSE: HPQ) executive with a history of improving operational performance.
There were five main takeaways from the call.
Having only been at the helm for four months, Joshi is still getting his bearings about the value proposition of 3D Systems' offerings. Early on the call, Joshi made it clear how he thinks 3D Systems is differentiated:
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We are the only company that can offer end-to-end solution for our key segments: aerospace, healthcare, automotive, consumer goods, and training and teaching institutes.
In 3D printing, an end-to-end solutions-based approach enables customers to digitize, design, simulate, prototype, inspect, and manage their entire workflow. In the context of the competitive environment, which is intensifying with the entrance of HP and Carbon, this diversified approach can help it mitigate the threat that these entrants pose to its competitive position.
2. Becoming a world-class organization
During the two years before Joshi was hired, 3D Systems struggled with myriad execution and quality issues, which weighed on its overall performance. In hindsight, it's clear that former CEO Avi Reichental's overly aggressive acquisition strategy came at the expense of operational excellence. To right those wrongs, Joshi has developed and begun implementing guiding principles to help build a world-class organization:
The first is simplicity, the second is accountability, and third is developing an appropriate cost structure for our company, which provides us the capacity to reinvest in innovation, infrastructure, and process improvements.
Along with a major restructuring, 3D Systems has been spending to improve the quality and reliability of its products, which suffered some reputational damage under previous leadership.
3. Plunging printer orders
Although 3D Systems' total revenue fell 7% year over year, its printer sales fell 30% and unit sales fell 16%. This undermines the attractiveness of 3D Systems' razor-and-blade model, where 3D printer sales fuel the recurring sales of consumable materials, which tend to command higher profit margins. During the call, Joshi explained that the timing of orders and the mix of printers being sold were mainly to blame -- and that he expects unit growth to improve in the second half:
First of all the timing of the orders, so if you think about, we talked about our new introductions with [ProJet] 2500 and then [ProJet] 3600. As we are ramping the product and we are making sure that we don't ship anything with quality problems that ramp is taking longer. So, I think the timing of orders was the first main reason.
The second thing is -- the CJP [ColorJet] printers also, we have a little bit different overall numbers in CJP printers compared to last year. The third thing is, of course, we don't have [a] consumer [3D printing segment anymore]. So that could be another reason.
My view is, as we move forward into the second half, our printer units are going to improve, and what we need to do is to continue to focus on the overall solution.
4. The future
Throughout the call, it's became clear that 3D Systems will be focused on a solutions-based approach to the market going forward, emphasizing higher utilization rates and production (i.e., manufacturing) uses over lower utilization rates and prototyping. Essentially, production uses tend to command higher utilization rates than prototyping uses, which in turn, fuel more recurring sales of materials.
Vyomesh Joshi. Image source: LinkedIn.
Here's how Joshi spelled it out:
My opinion is we need to start moving from prototyping to live production. And that's why the focus on production printers. That's why what you'll see, the strategy is going to be making sure that we continue to innovate our DMP [direct metal printing], our SLA [stereolithography] and our SLS [selective laser sintering] products. So, those are the production printers.
And we are really talking about the strategy, as I mentioned in my earlier comments. that we want to go by vertical markets. So, if you think about my vertical, we're going to figure out the use case, and each use case will determine, whether when we can flip the market from prototyping to production. And the solution approach that we are taking is going to be very important for us. Because that's the way we're going to start growing the market, as we move from prototyping to the live production.
During the Q&A section, management was asked about its views on the competitive landscape, specifically around HP's and Carbon's offerings. Overall, Joshi believes that customers want more than a one-material 3D printer, which reinforces its solutions-based approach:
I think, as far as the HP is concerned, I have a tremendous respect for HP. Both John and I come from there. So, we understand what to expect from them. I really believe, they have one product with one material and they have a good product, but they have lot of work to do with respect to get that particular material to produce production quality parts. Because that's where the focus is.
So, we are focusing on making sure that our technology is going to be developed such a way that we have a broader range of materials that we can do, because that's what the overall, all our customers are telling us.
As I said earlier, materials is the core focus of the 3D printing system and we need to provide broad range of materials, if want to be successful. And that has to have production kind of a quality. Going back to the three user needs; productivity, repeatability and the part quality and total cost of operation. Unless you have all those three, the customers are not going to move from prototyping to live production.
So, both for Carbon and HP, I would put more emphasis on what kind of materials they are going to develop and what they are going to offer next year. Our strategy is going to be, we are going to be the company, where we will not only provide the materials and printers, but we're also going to provide the complete solution.
More to come
While Joshi and his team are optimistic about 3D Systems' future, they also made it clear that the company has its work cut out before it can create long-term shareholder value. More details will be available on Sept. 12, when the company hosts a special event outlining its market-based strategy to drive profitable growth. Based on this conference call, investors should expect to management to expound upon its solution-based approach to increase the lifetime value of its customers.
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Steve Heller owns shares of 3D Systems. The Motley Fool recommends 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.