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3D's Q2 Earnings: Flatter to Deceive?

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Stock prices of computer peripheral manufacturer 3D Systems Corp. (DDD - Free Report) had enjoyed a 6.7% upswing to $50.52 at the close of trading on Jul 29, largely driven by strong second quarter earnings expectations. However, as the company reported the results the following day, stock prices showed a knee-jerk reaction for the failure to meet earnings estimates and declined 4.7% to $48.16 at the closing bell.

Nonetheless, the fundamentals of 3D Systems are relatively strong to keep us maintain a bullish stance about its long-term performance.

Quarter Details

Second-quarter 2013 revenue increased 44.5% year over year to a record-high of $120.8 million, as all product categories contributed positively for an overall organic growth of 30.1%. The quarterly revenues exceeded the Zacks Consensus Estimate of $115 million. Revenues for 3D printers and other products more than doubled to $54.2 million from the year-ago quarter, print materials revenues grew $3.1 million to $29.3 million, and services revenues improved $6 million to $37.3 million. Healthcare solutions revenues increased 55% in the reported quarter, contributing about $18.9 million to total revenues.

The healthy revenue growth is attributable to new product launches that were well accepted by the market, resulting in a strong demand pull. During the reported quarter, 3D Systems introduced significant new products including professional 3D printers, advanced 3D print materials and powerful new designer software packages.  

Despite a nearly two-fold rise in research and development expenses in the quarter, 3D Systems recorded a gross profit increase of 46% year over year, while gross profit margin expanded 40 basis points to 51.8%. Management believed that the growth reflected the inherent strength of the diversified portfolio of the company, productivity of its sales channels and effectiveness of its strategic initiatives to continuously focus on R&D and marketing program.

Net income for the reported quarter was $9.3 million or 10 cents per share, compared with $8.3 million or 11 cents per share in the year-earlier quarter. Although the absolute earnings increased year over year, it declined on a per share basis due to higher number of shares outstanding for the reported quarter.

Excluding non-recurring items, earnings for second quarter 2013 were $18.9 million or 20 cents per share compared with $13.9 million or 18 cents in the year-ago quarter. The recurring earnings missed the Zacks Consensus Estimate by a couple of cents.

Cash flow from operating activities for the first half of the year was $12.8 million compared with $21.4 million in the prior-year period. Cash and cash equivalents at quarter-end was $349.3 million.

Looking Forward

Concurrent with the earnings release, 3D Systems reiterated its full year 2013 guidance despite higher costs from strategic R&D and marketing initiatives and an adverse effect from the Phenix Systems acquisition. Revenues for full year 2013 are expected to be in the range of $485 million to $510 million and its non-GAAP adjusted earnings are anticipated to be in the range of $1.05 to $1.20 per share.

We remain bullish on 3D Systems and expect it to comprehensively meet its earnings and revenue guidance with robust demand for its products across the globe. The stock also has solid fundamentals with a forward P/E of 52.44x and expected sales growth of 26.4%. The stock presently retains a Zacks Rank #2 (Buy). Some other stocks in the industry that are worth reckoning include Hewlett-Packard Company (HPQ - Free Report) , Gartner Inc. (IT - Free Report) and Franklin Covey Co. (FC - Free Report) , each carrying a Zacks Rank #2 (Buy).

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