3D Systems' Earnings Reflect a Continued Challenging Market; Stock Drops 10%

By Beth McKennaMarketsFool.com

3D Systems(NYSE: DDD)reported its fourth-quarterand full-year 2016 earnings before the market opened on Tuesday. For the quarter, the largest publicly traded pure-play diversified 3D printing company posted a year-over-year revenue decline of 9.5%, while adjusted earnings per share fell 21%.

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Along with fellow industry leader Stratasys, the company has struggled to grow revenue since a widespread slowdown in demand for its 3D printers began two years ago. Excess capacity in the field and a lengthening of sales cycles due to increased competition are likely two main factors at play.

This was the third quarterly report that covers a period for which Vyomesh Joshi -- appointed last April -- has been CEO.

Shares of 3D Systems dropped nearly 10% soon after the market opened and have been struggling throughout the day, as of this writing on midday Tuesday. The market's reaction is likely due to the company's fourth-quarter revenue and 2017 revenue guidance coming in lighter than Wall Street analysts were expecting. The stock has gained about 46% for the one-year period through midday on Tuesday, versus the S&P 500's total return of approximately 24%.

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3D Systems' quarterly key numbers

Data source: 3D Systems. GAAP = generally accepted accounting principles.

For the quarter, 3D Systems' gross profit margin improved to 50%, up from 47.7% in the year-ago period, excluding charges related to discontinued consumer products. The companygenerated $18.7 million of cash from operations during the quarter and$56.9 million for the full year, and it ended the year with $184.9 million of cash on hand compared to $155.6 million at the end of 2015.

For the full year 2016, revenue decreased 5% to $633.0 million compared to $666.2 million in 2015, which included approximately $20 million of revenue from consumer products that the company discontinued at the end of 2015. Excluding 2015's revenue from consumer products, 2016 revenue dipped about 2% year over year. GAAP loss per share narrowed significantly to $0.35 from $5.85, and adjusted earnings per share increased more than 70% to $0.46 from $0.27 in 2015.

3D Systems didn't provide guidance for 2016. For some context -- though investors shouldn't pay much attention to Wall Street's near-term estimates -- analysts were looking for fourth-quarter adjusted EPS of $0.13 on revenue of $176.76 million. So, 3D Systems beat the earnings estimate by $0.02, but it came in light on revenue.

Image source: 3D Systems.

Segment results

Data source: 3D Systems.

Overall in the quarter, revenue declined 9.5% as demand from industrial customers combined with growth in software and healthcare services were not enough to offset the impact of weaker sales of professional printers and on-demand services.

For the full year 2016, year-over-year revenue change by business was as follows:

  • Healthcare (spans both products and services): up 5%
  • Materials (within products segment): up 4%
  • Software (within products): up 12%
  • 3D printers (within products): down 21%
  • On-demand parts (within services): down 18%

What management had to say

CFO John McMullen had this to say in the press release:

2017 guidance

3D Systems provided full-year 2017 guidance as follows:

Data source: 3D Systems.

3D Systems also said it expects to continue to generate positive cash flow from operations in 2017.

Going into earnings, analysts were looking for 3D Systems to post adjusted EPS of $0.51 on revenue of $684.8 million. So, Wall Street was likely pleased with the company's adjusted EPS guidance and disappointed with the revenue guidance. Nonetheless, the revenue does reflect a modest improvement from 2016. Moreover, it's good news that the company expects to return to profitabilityfrom a GAAP standpoint in 2017.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool has a disclosure policy.