3D Systems Corporation's Most Disappointing Segment in 2016 So Far

By Markets Fool.com

Demand for 3D printers has slowed notably in 2016. Image source: 3D Systems.

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After six months of results, it's looking like 2016 is shaping up to be a transition year for 3D Systems (NYSE: DDD). During this time, 3D Systems' revenue has fallen 6.2% compared to the same six-month period in 2015. For the most part, 3D Systems' falling sales can be attributed to the widespread slowdown in customer spending that's affected the industrial and professional 3D printing markets since the start of 2016.

Out of all of 3D Systems' segments, this slowdown has put the most pressure on its 3D printer sales, making it the company's most disappointing segment in 2016 so far.

From bad to worse

3D Systems' 3D printer sales have gone from bad to worse in 2016. Excluding consumer 3D printers, which 3D Systems' no longer offers, printer sales fell 17% year over year in the first quarter and 30% in the second quarter. This worsening situation suggests that demand has yet to stabilize for 3D printers -- a potentially worrying sign for investors.

After all, each printer sale fuels the repeated sales of materials, which tend to command higher margins. Without healthy growth of 3D printer sales, the long-term prospects of this margin-enhancing revenue stream come into question.

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Signs of encouragement

The prevailing theory behind the widespread slowdown in 3D printer spending is that customers have an oversupply of 3D printing capacity on their hands, which is prompting them to increase the utilization of their existing printer systems instead of purchasing new printers.

Judging by 3D Systems' rising material sales, which increased 7.5% to $79.1 million during the first six months of 2016, this theory may hold some truth. It suggests that utilization of its previously sold 3D printers is on the rise, and existing customers may be finding more uses -- and greater value -- out of their printers.

The bigger picture

Being a 3D printer hardware company first and foremost, it's certainly not ideal that 3D Systems' printer sales are struggling in 2016. However, it's worth noting that 3D Systems is growing its installed base of 3D printers with each sale it makes, regardless of growth rate. Technically, each 3D printer sale creates a potential stream of recurring revenue that's realized over the printer's lifetime. In other words, as long as 3D Systems sells more 3D printers, the base from which it can generate recurring sales of materials continues to grow -- albeit much slower than if printer sales were increasing.

Going forward, 3D Systems will continue to build out and emphasize its manufacturing solutions over its prototyping solutions as a way to drive 3D printer sales. But until printer sales pick up, 3D Systems doesn't seem likely to realize its full potential.

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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.