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3d Systems (DDD)_updated for Q32013

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Fundamental analysis of 3d Systems updated to include the results of Q32013

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3d Systems (DDD)_updated for Q32013

  1. 1. 3D Systems Report 3rd Quarter 2013 update Black Arbs: Research 11/07/2013 1
  2. 2. +Table of Contents                     Company Introduction Key Business Highlights Key Financial Highlights Key Stock Value Drivers Earnings Build (Quarterly) EBIT and Net Income (bar chart) Earnings Growth Q/Q (line chart) Revenue Build (Quarterly) by Business Segment Revenue Breakout by Business (bar chart) Revenue Composition by Business (Quarterly bar chart) Revenue % Growth by Business Q/Q (line chart) Revenue Build (Quarterly) by Region Revenue Breakout by Region (bar chart) Revenue Composition by Region (Quarterly bar chart) Revenue % Growth by Region Q/Q (line chart) Gross Margin Build Gross Profit Growth by Business Q/Q (line chart) Fair Value Estimate (Sensitivity Table) Things to Consider Contact me 2
  3. 3. Company Introduction  3D Systems began as a rapid prototyping manufacturer founded in 1986 by Chuck Hull. He is known as the inventor and patent holder of the first stereolithography (SLA) rapid prototyping system (see 3D Printer Wars for technology breakdown). The idea was to reduce the high resource expenditures necessary to produce concept models. Fast forward to the present and 3D Systems is now a leader in the 3D printing industry.  From their website: “3D Systems is a leading provider of 3D content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and consumers alike. The company also provides CAD, reverse engineering and inspection software tools and consumer 3D printers, apps and services. Its expertly integrated solutions replace and complement traditional methods and reduce the time and cost of designing new products by printing real parts directly from digital input. These solutions are used to rapidly design, create, communicate, prototype or produce real parts, empowering customers to create and make with confidence.” 3
  4. 4. Key Business highlights        DDD does a good job of fulfilling its stated goal to vertically integrate internally and via aggressive acquisitions to provide complete and integrated 3D printing solutions for industrial, commercial, and retail users. Their business lines are composed of Printers and other Products, Materials, and Services. They produce and sell printers ranging from $1299 up to $1 million. DDD manufactures and distributes over 100 different performance materials ranging from plastics, acrylates, waxes, metals and composites. Their service business produces parts and helps with overflow from other firms or people who lack specific resources. Their retail operations are driven by a developing ecosystem they have built called Cubify. Cubify has application sharing and design apps simple enough to be used by children as well as adults. On September 12, 2013, Damon Gregoire, CFO of DDD presenting at the Deutsche Bank tech conference was quoted saying that DDD is the only firm to provide the seven (7) different print technologies. The technologies he mentioned are stereolithography, selective laser sintering, multi jet modeling (multi material, and full color printing), film transfer imaging (DLP), and extrusion plastics 4
  5. 5. Key Financial highlights       Fair value estimates the stock value at $56.81 a ~13% upside from the current intraday price of $50.12. *Well this price target has been destroyed and my fair value estimates have been revised accordingly to $74.25. My price sensitivity table is also updated later in the report. FY12 DDD earned an industry leading 353.6 million in revenue representing a 53% increase year over year. FY12 Diluted EPS was $0.71 a 51% increase Y/y. Compared to industry competitors Stratasys (SSYS) and ExOne (XONE), 3D systems (DDD) is the only firm with positive earnings. *Still true even after SSYS “blowout quarter” where they had a GAAP loss of $0.16. Using Wohlers’ 2013 market size estimate of $2.2 billion DDD market share is estimated at 16% which tops it’s largest competitor Stratasys (SSYS) which has approximately 10%. CFO quoted organic growth as averaging between “20% to 30%” quarterly. 5
  6. 6. Key Stock Value Drivers       Organic growth meeting and/or exceeding expectations *CEO 3rd quarter earnings transcript states organic growth ~30% with potential to accelerate in the future. Successful acquisition integration. DDD has acquired 16 companies since 2011. 3d Industry market growth as well as market share growth exceeding expectations. *SSYS and DDD continue to beat topline expectations and issue positive guidance. Earnings meeting expectations or surprising to the upside. *SSYS and DDD continue to meet or beat earnings expectations and issue positive guidance. Continued retail adoption and growth. Gross margin stability and/or growth of the higher margin Materials business. *Gross margin overall increased 80 bps sequentially. 6
  7. 7. Earnings Build (Quarterly) When I wrote this report initially EBIT had posted 3 consecutive quarterly declines. Well we can see that rumors of a slowdown were unfounded as EBIT exploded 70% q/q! Net income has also grown substantially on a sequential basis. Earnings Build Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Operating Income (EBIT) Y/Y change Q/Q change $9,970 34.5% --- $13,999 75.0% 40.4% $18,436 109.7% 31.7% $18,166 69.8% -1.5% $17,519 75.7% -3.6% $16,796 20.0% -4.1% $28,570 55.0% 70.1% 62.8% 22.2% Net Income Y/Y change Q/Q change $6,188 -9.3% --- $8,324 -37.8% 34.5% $13,517 87.2% 62.4% $10,912 36.3% -19.3% $5,883 -4.9% -46.1% $9,343 12.2% 58.8% $17,640 30.5% 88.8% 16.3% 29.9% Basic Y/Y change Q/Q change 0.12 -14.3% --- 0.16 -40.7% 33.3% 0.24 71.4% 50.0% 0.19 18.8% -20.8% 0.06 -25.0% -68.4% 0.10 -9.1% 66.7% 0.17 -29.2% 70.0% -4.0% 21.8% Y/Y change Q/Q change 0.12 -14.3% --- 0.16 -42.9% 33.3% 0.24 71.4% 50.0% 0.19 18.8% -20.8% 0.06 -25.0% -68.4% 0.10 -9.1% 66.7% 0.17 -29.2% 70.0% -4.3% 21.8% Diluted Sep-13 Average 7
  8. 8. EBIT and Net Income Earnings (Quarterly) $30,000 $28,570 Revenue (in thousands) $25,000 $20,000 $18,436 $13,999 $15,000 $10,000 $18,166 $17,519 $16,796 $17,640 $13,517 $10,912 $9,970 $9,343 $8,324 $6,188 $5,883 $5,000 $0 Mar-12 Jun-12 Sep-12 Net Income Dec-12 Mar-13 Jun-13 Sep-13 Operating Income (EBIT) 8
  9. 9. Earnings Growth (Quarterly) Earnings Growth Q/Q 100.0% 90.0% 80.0% 70.0% 60.0% Percentage Change 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 -20.0% -30.0% -40.0% -50.0% -60.0% Operating Income (EBIT) Net Income 9
  10. 10. Revenue Build (Business) The biggest revenue driver by business segment continues to be Printers and other products followed by Services and Materials. On a quarterly basis Printers also have the highest simple average growth rate. We do see revenue from Materials and Services increasing on an annual and sequential basis which is indicates longer term adoption of 3d Systems products as previous buyers of printers are now purchasing more materials and add-on services. Revenue Build ($ in thousands) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Average Printers and other Products Y/Y change Q/Q change $24,719 ----- $26,071 61.0% 5.5% $34,069 130.3% 30.7% $41,939 89.4% 23.1% $39,723 60.7% -5.3% $54,190 107.9% 36.4% $59,841 75.6% 10.4% 87.5% 16.8% Materials Revenue Y/Y change Q/Q change 24,678 ----- 26,204 59.6% 6.2% 25,482 38.1% -2.8% 26,818 33.0% 5.2% 28,729 16.4% 7.1% 29,275 11.7% 1.9% 33,179 30.2% 13.3% 31.5% 5.2% Services Revenue Y/Y change Q/Q change 28,523 ----- 31,335 39.2% 9.9% 30,981 27.5% -1.1% 32,814 19.1% 18.0% 33,627 17.9% 2.5% 37,322 19.1% 11.0% 42,697 37.8% 14.4% 26.8% 9.1% Total Revenue Y/Y change Q/Q change $77,920 ----- $83,610 51.7% 7.3% $90,532 57.3% 8.3% $101,571 45.4% 12.2% $102,079 31.0% 0.5% $120,787 44.5% 18.3% $135,717 49.9% 12.4% 46.6% 9.8% 10
  11. 11. Revenue Breakout (Business) Revenue by Business (Quarterly) $160,000 20.0% 18.0% $140,000 16.0% 42,697 37,322 $100,000 32,814 $80,000 $60,000 $40,000 28,523 12.0% 33,627 33,179 30,981 29,275 31,335 26,818 10.0% 8.0% 28,729 6.0% 25,482 24,678 14.0% % Change Revenue (in thousands) $120,000 26,204 $20,000 $24,719 $26,071 Mar-12 Jun-12 $34,069 $54,190 $41,939 $39,723 Dec-12 Mar-13 $59,841 4.0% 2.0% $0 0.0% Printers and other Products Sep-12 Materials Revenue Services Revenue Jun-13 Sep-13 Total Revenue q/q (rhs) 11
  12. 12. Revenue Breakout (Business) Moving forward it will become increasingly important to watch the revenue proportion of the Materials segment. As you will see later Materials comprises the highest margins of all the business segments. Materials as proportion of sales slightly increased 20 bps. This a positive sign but must be monitored. Revenue Composition by Business (Quarterly) 100% 90% 80% 36.6% 37.5% 32.3% 32.9% 26.4% 28.1% 37.6% 41.3% 38.9% Sep-12 Dec-12 Mar-13 34.2% 30.9% 31.5% 24.2% 24.4% 44.9% 44.1% Jun-13 Sep-13 Percent of Total 70% 60% 50% 31.7% 28.1% 31.3% 40% 30% 20% 31.7% 31.2% Mar-12 Jun-12 10% 0% Printers and other Products Materials Revenue Services Revenue 12
  13. 13. Revenue Breakout (Business) Revenue % Growth by Business Q/Q 40.0% 35.0% 30.0% Percentage Change 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 -5.0% -10.0% Printers and other Products Materials Revenue Services Revenue 13
  14. 14. Revenue Build (Region) The U.S. is the largest regional segment on an absolute basis. Asia Pacific looks to be the largest growth opportunity as evidenced by the Y/y growth and second largest Q/q average. Asia Pacific continues to show outperformance of revenue growth on an annual and sequential basis quickly becoming the second largest regional revenue driver on an absolute basis. By Location/Unaffiliated Customers Revenue Build ($ in thousands) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Average United States Y/Y change Q/Q change $45,909 ----- $46,761 63.4% 1.9% $48,828 54.1% 4.4% $54,916 58.8% 12.5% $57,153 24.5% 4.1% $67,870 45.1% 18.8% $74,427 52.4% 9.7% 49.7% 8.5% Germany Y/Y change Q/Q change 7,423 ----- 9,896 19.1% 33.3% 11,608 40.1% 17.3% 10,821 -7.1% -6.8% 11,911 60.5% 10.1% 13,286 34.3% 11.5% 11,039 -4.9% -16.9% 23.7% 8.1% Other Europe Y/Y change Q/Q change 13,288 ----- 14,757 43.8% 11.1% 13,991 16.0% -5.2% 18,903 29.1% 35.1% 16,669 25.4% -11.8% 18,569 25.8% 11.4% 21,728 55.3% 17.0% 32.6% 9.6% Asia Pacific Y/Y change Q/Q change 11,300 ----- 12,196 53.4% 7.9% 16,105 192.3% 32.1% 16,931 88.3% 5.1% 16,346 44.7% -3.5% 21,062 72.7% 28.9% 28,523 77.1% 35.4% 88.1% 17.7% Total Revenue Y/Y change Q/Q change $77,920 ----- $83,610 51.7% 7.3% $90,532 57.3% 8.3% $101,571 45.4% 12.2% $102,079 31.0% 0.5% $120,787 44.5% 18.3% $135,717 49.9% 12.4% 46.6% 9.8% 14
  15. 15. Revenue Breakout (Region) Revenue by Region (Quarterly) $160,000 $140,000 28,523 Revenue (in thousands) $120,000 21,062 $100,000 16,931 $80,000 11,300 $60,000 13,288 7,423 12,196 14,757 9,896 16,346 18,903 16,669 10,821 13,991 11,608 $40,000 $20,000$45,909 $46,761 $48,828 Jun-12 Sep-12 21,728 11,911 16,105 $54,916 $57,153 Dec-12 Mar-13 18,569 13,286 11,039 Asia Pacific Other Europe Germany United States $67,870 $74,427 $0 Mar-12 Jun-13 Sep-13 15
  16. 16. Revenue Breakout (Region) Revenue Composition by Region (Quarterly) 100% 90% 80% 14.5% 14.6% 17.1% 17.6% 17.8% 16.7% 15.5% 18.6% 12.8% 10.7% 70% Percent 60% 9.5% 11.8% 16.0% 17.4% 16.3% 15.4% 11.7% 11.0% 21.0% 16.0% 8.1% Asia Pacific Other Europe 50% Germany 40% United States 30% 58.9% 55.9% 53.9% 54.1% 56.0% 56.2% 54.8% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 20% 10% 0% Mar-12 16
  17. 17. Revenue Breakout (Region) Revenue % Growth by Region Q/Q 40.0% 30.0% Percentage Change 20.0% United States Germany 10.0% Other Europe Asia Pacific 0.0% Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 -10.0% -20.0% 17
  18. 18. Gross Margin Build As previously mentioned Materials has the largest gross margin average at ~70%. Surprisingly Materials has also had the largest gross profit on an absolute basis aside from the mrq. However Printers are growing the fastest on an average Y/y and Q/q basis. Hard to find anything not to like here; gross profit increased annually and sequentially for all segments and more importantly total gross margin increased 80 bps Q/q. Gross Margin Build ($ in thousands) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 $11,237 87.9% 17.4% $15,412 193.2% 37.2% $18,052 119.2% 17.1% $17,829 86.2% -1.2% $24,701 119.8% 38.5% $26,933 74.8% 9.0% 113.5% 19.7% 43.1% 45.2% 42.8% 44.9% 45.6% 45.0% 44.4% 17,193 61.3% 2.5% 17,410 45.3% 1.3% 19,040 44.1% 9.4% 20,878 24.5% 9.7% 21,548 25.3% 3.2% 24,481 40.6% 13.6% 40.2% 6.6% 65.6% 68.3% 68.2% 72.7% 73.6% 73.8% 70.4% Services Gross Profit Y/Y change Q/Q change 14,538 69.8% 16.3% 14,057 33.6% -3.3% 15,404 34.9% 9.6% 14,770 18.1% -4.1% 16,334 12.4% 10.6% 20,023 42.4% 22.6% 35.2% 8.6% Services Gross Margin 46.4% 45.4% 45.7% 43.9% 43.8% 46.9% 45.4% $42,968 70.5% 10.6% 51.4% $46,879 68.9% 9.1% 51.8% $52,496 59.7% 12.0% 51.2% $53,477 37.6% 1.9% 52.4% $62,583 45.7% 17.0% 51.8% $71,437 52.4% 14.1% 52.6% 55.8% 10.8% 51.9% Printers and other Products Gross Profit Y/Y change Q/Q change Printers and other Products Gross Margin Materials Gross Profit Y/Y change Q/Q change Materials Gross Margin Total Gross Profit Y/Y change Q/Q change Gross Margin Sep-13 Average 18
  19. 19. Gross Profit Growth Gross Profit Growth by Business Q/Q 45.0% 40.0% 35.0% Percentage Change 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 -5.0% -10.0% Printers and other Products Gross Profit Materials Gross Profit Services Gross Profit 19
  20. 20. Fair Value Estimate (Sensitivity Table) My previous fair value estimates, based on some fairly conservative assumptions, had DDD in $56-$60 range. After revising my assumptions based on the outperformance they achieved in 3Q 2013, my estimates have to be revised upwards to $74.25. Below is my updated sensitivity table. Discount Rate (WACC) 6.0% 8.0% 10.0% 12.0% 14.0% Total Pric e Per Share Terminal Perpetuity Growth Rate 3.0% 3.5% 4.0% 4.5% $150.86 $179.50 $294.09 $437.33 86.98 95.84 121.16 140.15 59.81 63.88 74.25 80.98 44.86 47.11 52.52 55.80 35.44 36.83 40.05 41.93 5.0% $437.33 140.15 80.98 55.80 41.93 20
  21. 21. Things to Consider       3d Systems is arguably the industry leader in this space. They have been consistently profitable and managed their expenses and margins well. Management has wisely chosen to increase spending on R&D. I believe this is important strategically for the following reasons: to maintain and grow their market share, to increase the barriers to entry for competitors and, to increase their lead on potential new entrants like HP. There are risks to the DDD story as they have been on an acquisition binge for the last few years therefore assessing their organic growth and the quality of their earnings can be challenging. Detractors of DDD are mistaken in believing that 3d printing has to replace traditional manufacturing or become a consumer product before they can have legitimate success. I believe that stance is incorrect. The value add is in the customization, and versatility of this manufacturing process in the industrial space. Consumer adoption may be important in the future but industrial market penetration is still low and growing wildly as companies find ways to integrate 3d manufacturing into their production processes. The current market niche still has a lot of room to run. There are better short targets in this industry (cough…XONE…cough) but DDD isn’t one of them. 21
  22. 22. +Contact Brian Christopher 617.642.9211 BCR@BlackArbs.com BlackArbs.com 22

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