The fact 3D Systems (DDD - Get Report) is soaring -- and taking peers Stratasys (SSYS - Get Report) and ExOne (XONE - Get Report) higher with it -- after posting mixed second-quarter results says a lot about how low expectations have become for 3D printer makers still contending with weak demand from traditional industrial and prototyping clients. It also might reflect some of the glimmers of hope for the industry found in 3D's report.
The bad news: 3D's sales fell 7% annually, to $158.1 million, missing a consensus estimate of $161 million. A 30% decline in printer revenue hurt sales -- many traditional clients still clearly have excess capacity, following a 2013-14 printer buying binge, and 3D's decision to exit the consumer printer market also had an impact -- as did a 20% drop in on-demand manufacturing services revenue. Overall, product revenue, which covers printers and materials, fell 9%, to $94.9 million, and services revenue fell 4%, to $63.2 million.
Nonetheless, EPS of 12 cents beat consensus by six cents, thanks largely to the fact that job cuts led to a 20% drop in GAAP operating expenses to $84.1 million. SG&A spend fell 21%, to $63.2 million; R&D spend fell 19%, to $20.9 million. Also lifting EPS: Gross margin was 50.9%, up from 50.8% in Q1 and 47.9% a year earlier. 3D once more declined to provide formal sales and EPS guidance.
While total revenue is still under pressure, certain businesses and verticals are faring well. Materials revenue rose 12%, a sign that 3D printer usage by businesses is still growing, even as excess supply hurts printer sales. Software revenue rose 8%, and sales to the healthcare vertical grew 12% -- 3D is two years removed from buying Simbionix, a maker of 3D surgical simulation-training systems, for $120 million. A mix shift toward materials and software boosted 3D's margins.
On the earnings call, new CEO Vyomesh Joshi, once the head of HP's printer unit, talked up 3D's efforts to provide end-to-end solutions covering printers, materials, software and services for key verticals, and promised to unveil a new strategy for "profitable growth" at a Sept. 12 event. Joshi has been busy restructuring 3D's management ahead of the reveal. CFO John McMullen noted printer sales were hurt by order timings for high-end printers.
There are still plenty of signs that business interest in adopting 3D printing, both for quickly prototyping product designs and engaging in low-volume production, is steadily growing, as printer and materials prices drop and software support improves. Research firm Wohlers Associates estimated in April the total additive manufacturing industry grew 25.9% in 2015 to $5.165 billion and that sales of desktop 3D printers surged from roughly 160,000 to over 278,000.
There are also signs competition is intensifying. Wohlers estimates 62 manufacturers sold "industrial-grade" additive manufacturing systems in 2015, twice the number that did so in 2011. HP (HPQ - Get Report) will make its anticipated entry into the 3D printer market later this year with its Jet Fusion printers. The printers are accompanied by impressive performance and cost claims, but can only print using black plastic for now.
But with 3D Systems and its peers down over 80% from their early-2014 highs, competition worries have been baked in, as have concerns about an industrial printer glut. As a result, an EPS beat and evidence of some pockets of strength are enough to propel 3D's heavily shorted shares higher.