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Imagine that you are a blind man standing in front of a life-sized braille version of the 3D Systems Corp (NYSE:DDD) stock chart. Imagine that you reach out and locate the share price as of 02 January 2014. At 94.19, it is just about at shoulder height. Now imagine that you begin to trace the share price moving forward. By 05 February, you arm would be only waist high at 64.10.
By 14 April, you would be crawling on your other hand and knees just so you could still touch the line that had now dropped to your ankles at 46.26. From thereon you would continue crawling until 01 July when the line reached your knees (in a standing position) at 63.46, only to be driving by to your ankles when you reached 1:00 pm EDT today. That, my friends, is reality. And it is not a reality that investors want to see.
The market for 3D modeling systems and services is rapidly expanding. 3D Systems ought to be riding that wave, but its second quarter results published yesterday were indicative of some internal issues that need to be addressed if the company expects to successfully compete for a large portion of market share.
I get just a bit antsy when an operational report begins with the balance sheet. Perhaps it is because I expect the P&L to come first and that, therefore, I expect there is some bad news in the latter that might be best preceded by something better. I don’t know if there are any statistics about this, but it seems as though my fears are usually confirmed, just as they were with 3D Systems’ report.
Revenues Up; Profits Down
Revenues for the quarter and the half were up.
- Q2 total revenue was $99.9 million, up from $83.5 million LFL.
- 1H total revenue was $201.2 million, up from $151.9 million.
But, as one of my former sales managers said, “We just have to sell more.” Talk about your rocket scientists! Unfortunately, cost of sales and operating expenses were also up.
- Q2 operating expenses increased to $68.0 million from $45.8 million.
- 1H operating expenses increased to $134.0 million from $81.7 million.
That increase, combined with the aforementioned increase in cost of sales does not bode well for profit results. All you have to do is do the math.
- Q2 income from operations dropped from $16.8 million to $4.3 million.
- Q2 pretax income dropped from $14.1 million to $2.9 million.
- Q2 net income fell from $9.3 million to $2.2 million.
- Q2 net income per share fell from $0.10 cents to $0.02.
The first half results don’t look any better.
- 1H income from operations dropped from $34.3 million to $13.9 million.
- 1H pretax income dropped from $21.6 million to $11.4 million.
- 1H net income fell from $15.2 million to $7.1 million.
- 1H net income per share fell from $0.16 to $0.07
I don’t know a CEO anywhere in the world who wants to report a performance like that. It indicates a need to deal with out-of-control expenses. The fix for that, according to my former sales manager is, “We just have to sell more.” You may be able to ascertain by now why I have been emphasizing former.
Another reason for balance sheet first.
Perhaps another reason why the balance sheet preceded the P&L was so that one of the first things investors notice is the increases in cash and cash equivalents from $306.3 million to $570.3 million and a total increase in current assets from $526.9 million to $820.1 million.
That might also ease some of the angst that may have been felt by the additional announcement that 3D Systems is acquiring Israeli virtual reality simulation systems manufacturer, Simbionix, for $120 million in cash. Simbioxnic products are used to prepare surgeons for operation through virtual simulations. The acquisition should be completed by September.
Analysts’ dim view.
As of early this morning, 3D Systems was hit by four separate downgrades, each of which, in my personal perspective, miss the point entirely by citing a diminishing market or something similar. 3D Systems’ problems can be solved, but they have to be solved internally. It’s not a simple, but mistaken, matter of “We just have to sell more.” (I’ve been waiting for years to out that jerk.)
