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Investors Are Not Happy With 3D Systems Corporation (DDD)’s Outlook

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3D Systems Corporation (NYSE:DDD) may have released results for 2012, but investors are punishing the stock for 2011 and 2013. If that is as puzzling as it sounds, then keep reading. After digesting results released Monday morning, investors will find that the growth trend continued in 2012. While there is no denying that the company will grow for the foreseeable future, there are valid concerns surrounding the source and pace of growth. Are analysts and investors building up expectations to unreasonable levels? Let’s examine a few areas that require some caution moving forward.

3D Systems Corporation (NYSE:DDD)To the moon!
Here is how 3D Systems left 2012 in the dust:

4Q11 4Q12 2011 2012
Revenue $69.9 million $101.6 million $230.4 million $353.6 million
Gross Profit $32.9 million $52.6 million $109.3 million $181.4 million
Operating Expenses $16.8 million $28.2 million $63 million $99.8 million
Net Income $13.8 million $22.6 million $41 million $67.9 million
Diluted EPS $0.27 $0.39 $0.81 $1.25

Source: SEC filing

It’s quite obvious that the company crushed 2012 by moving forward in all key areas. New product revenue – a key driver of growth – leaped to $131.9 million from just $77.8 million in 2011. Acquisitions weren’t the only means of growth either, as organic revenue growth jumped 22.4% compared to 19.2% last year. If we can believe it, that is (see below).

Another relief for investors is that 3D Systems is continuing to increase its gross profit margins across the board:

2011 Gross Profit Margin 2012 Gross Profit Margin
Printers and other 37.4% 42.8%
Print materials 64.8% 68.2%
Services 41.1% 45.7%
Total 47.3% 51.2%

Source: SEC filing

As I mentioned above, however, the results from 2012 are not the point of contention for investors.

A haunting past? It’s complicated
Shares stumbled out of the gates after earnings were released and fell even harder during the conference call. The reason? An analyst pointed out an error of unknown origin in the earnings presentation regarding the company’s stated organic revenue growth. A simple graph comparing the category in 2012 to the year ago periods certainly doesn’t add up to what the company reported last year.

The new presentation states that organic growth in the fourth quarter of 2011 was 8.8%, while the company’s SEC filing last year stated it was 19%. Ironically, the full-year number presented in the graph today was the same that was reported in the 2011 filing referenced above, also at 19%.

Looking back at the reported organic revenue growth for the remaining three quarters of 2011 raises more questions. From the first quarter onward, 3D Systems stated growth of 23%, 25%, and 12%, respectively. It would be reasonable to expect the fourth-quarter totals for a quickly growing company such as 3D Systems to be weighted more heavily than the preceding quarters. So how does the reported organic growth figure for the fourth quarter of 2011 drop from 19% to 8.8% while the full-year figure remains the same?

Is it possible that the company’s acquisition accounting principles are so complicated even it cannot accurately trace revenue sources? Its actually a simple process, so maybe the company really did just report the wrong numbers by accident. There is certainly some explaining to do. Unfortunately, since the company does not report actual organic revenue totals, just percentage changes, investors may never know what really happened. Let’s just hope it does not continue to be an issue in the future.

Outlook gut check
Accounting discrepancy aside, the company’s fourth-quarter earnings per share of $0.39 beat estimates of $0.38. And although quarterly revenues of $101.6 million missed the mark of $103.86 million it wasn’t by a wide margin. All systems go, right?

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