3D Systems Fights Margin Pressure

After posting strong revenue growth in 2007 and turning a profit for the second half of the year, 3D Systems Corporation (TDSC - Snapshot Report) has posted disappointing results for the first and second quarters of 2008. Results have been well-below our estimates and consensus forecasts, which TDSC blamed on lower product unit sales of large-frame rapid manufacturing systems and the unfavorable combined effect of price and mix due to the softness in the U.S. demand.

Although we believe that much of 3D Systems future success will hinge on new systems, such as the VFlash Desktop Modeler, the company does not anticipate the V-Flash Desktop Modeler to be a material revenue contributor during 2008. Moreover, with an extremely competitive environment, the company will be hard pressed to return to strong growth in 2008.

Working to drive improvements in gross margin, TDSC will move third-party logistics and warehousing in-house by the end of August 2008. The company has implemented ERP software to resolve weaknesses related to its inventory management, and moved inventory management activities in-house.

Moreover, to mitigate further adverse foreign exchange impact on cost of sales and to enhance its disaster recovery plans, the company built a blending facility in Rock Hill, NC, which is now fully operational and duplicates its facility in Marly, Switzerland.

We therefore maintain our Hold rating on TDSC shares. Our six-month price target of $10.00 represents a P/S [price-to-sales] multiple of approximately 1.4x our 2008 revenue estimate of $6.95 per share, in line with the industry mean but a discount to the S&P 500.

Read the full analyst report on TDSC