Printer Error Stalls 3D Systems In Q1

3D Systems Corporation DDD fell far short of Street forecasts in the first quarter. Loss per share of 9 cents missed estimates for a 1-cent loss, and sales of $151.98 million underperformed $164.69 million expectations.

What Went Wrong

The stalls were partly due to a technical problem in two printer models. 3D Systems stopped shipments on those products and forfeited $8 million in revenue.

“While the company expects to resolve the issue during 2H19, we expect headwinds in the near term,” Bank of America Merrill Lynch analysts wrote in a note. “Although stopping shipment is prudent to prevent escalation of quality issues, it gives new entrants like Desktop Metal and Markforged [room] to capitalize on missteps.”

B Riley expects the problem to weigh on revenue in the second quarter.

Lower service bureau sales also stunted performance, and printer fixed costs pressured gross margins.

“From another standpoint, price/mix remains a significant headwind for system revenue expansion, although unit shipments continue to grow rapidly,” B Riley wrote. “With new lower-price products ramping and likely seeing solid demand, the price/mix headwind could persist for the near term, in our opinion.”

Bank of America expects low hardware sales to pressure gross margins through 2019.

“We remain concerned as year-over-year trajectory continues to be negative (GM of 69.6% was down 5% year over year), particularly as metal printers should see higher 3rd party material use,” Bank of America wrote.

What Went Right

Piper Jaffray was optimistic about 3D’s health care business, which would have seen revenue rise if not for the poor timing of a major order. It also celebrated a 90-percent increase in printer unit sales.

“Despite these new [technical] issues, we continue to believe the underlying demand from production applications is improving and should provide a tailwind for DDD and the rest of the industry,” Piper Jaffray wrote.

B Riley likewise affirmed long-term opportunity for 3D printing in industrial manufacturing.

“DDD has several initiatives that will, in our view, be positive for the operating profile and help offset some of the growth challenges,” B Riley wrote. “Management indicated efforts to keep opex under control and also disclosed that it is exiting its entertainment business.”

It cites incremental growth opportunities in product launches and considers the exit of Gentle Giant Studios margin-accretive. Piper Jaffray expects the latter to improve the bottom line. It also forecasts sales growth in new plastics materials in the second half of 2019.

The Ratings

• Bank of America Merrill Lynch reiterated an Underperform rating with a $9 price target;
• B Riley maintained a Sell rating and cut its target from $9 to $8; and
• Piper Jaffray maintained an Overweight rating with a $12 target.

3D Systems traded lower by more than 19 percent at $8.55 per share Wednesday afternoon.

Related Links:

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Stifel's 6 Takeaways From 3D Systems' Better-Than-Expected Q4