3D Systems Corporation (DDD): Shaky Confidence In Long-Term Model

BAMl analyst Wamsi Mohan maintains an Underperform rating for 3D Systems Corporation (NYSE:DDD) as negative trends crop up in the 3D printing industry.

Filings indicate negative trends in printer mix and materials volume growth. 9% of accounts receivable are now past due over 90 days, which is negative given the weak operating cash flow in 4Q13. We continue to prefer Stratasys, Ltd. (NASDAQ:SSYS) over 3D Systems Corporation (NYSE:DDD) for exposure to 3D printing. Lowering PO from $65 to $60.

Printer mix moving lower, materials dynamics interesting

The latest 10-K filed by 3D Systems Corporation (NYSE:DDD) shows some interesting trends in terms of the volume and mix dynamics for printers and materials. The data suggests that the printer mix is gravitating lower (higher volumes of lower ASP machines), which is likely to result in a lower level of materials attach over time. Although one quarter does not make a trend, we are surprised that materials growth y/y was driven more by less ASP decline rather than higher volumes relative to 3Q. Reiterate Underperform and lowering PO to $60 on lower confidence on longer term model.

What explains the lower mix/price for printers?

The volume and mix impact started to diverge from historical trends starting in 2Q13. Part of the divergence can be explained by increased contribution from the consumer printers that ticked up significantly in 3Q13. However the longer term trend suggests that the printer mix is moving toward lower ASP printers that potentially have lower attach rate to materials usage relative to production printers.

Materials volume impact very different for year vs. quarter

The volume impact of materials in 2013 vs. 2012 was clearly positive, however, we are surprised at the trend, where the volume impact for y/y growth in 4Q13 in materials decelerated versus the prior quarter rate and the y/y improvement (for 4Q) was largely driven by better price/mix. As Phenix (metal) ramps, the price/mix could trend higher but we expected the rate of increase in volumes to be higher given the commentary on better utilization rates of production printers installed in 1H2013.

3D Systems: Channel inventory steps up slightly q/q

10-K suggests 2% of 2013 revenue (~$10mn) was related to reseller revenue. In 3Q (6% of quarterly revenue) the corresponding level was ~$8mn. The percentage of accounts receivable over 90days past due also increased to 9.1% in 2013 vs. 6.4% in 2012. Given the poor operating cash flow in 4Q, we view this as concerning. Our PO for 3D Systems Corporation (NYSE:DDD) of $60 is based on 7x 2015E EV/Sales.

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