3d Systems (DDD)_updated for Q32013

3D Systems

Report 3rd

Quarter 2013

update Black Arbs: Research

11/07/2013

1

+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

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

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

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

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

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 Sep-13 AverageOperating Income (EBIT) $9,970 $13,999 $18,436 $18,166 $17,519 $16,796 $28,570

Y/Y change 34.5% 75.0% 109.7% 69.8% 75.7% 20.0% 55.0% 62.8%Q/Q change --- 40.4% 31.7% -1.5% -3.6% -4.1% 70.1% 22.2%

Net Income $6,188 $8,324 $13,517 $10,912 $5,883 $9,343 $17,640Y/Y change -9.3% -37.8% 87.2% 36.3% -4.9% 12.2% 30.5% 16.3%Q/Q change --- 34.5% 62.4% -19.3% -46.1% 58.8% 88.8% 29.9%

Basic 0.12 0.16 0.24 0.19 0.06 0.10 0.17Y/Y change -14.3% -40.7% 71.4% 18.8% -25.0% -9.1% -29.2% -4.0%Q/Q change --- 33.3% 50.0% -20.8% -68.4% 66.7% 70.0% 21.8%

Diluted 0.12 0.16 0.24 0.19 0.06 0.10 0.17Y/Y change -14.3% -42.9% 71.4% 18.8% -25.0% -9.1% -29.2% -4.3%Q/Q change --- 33.3% 50.0% -20.8% -68.4% 66.7% 70.0% 21.8%

7

EBIT and Net Income

$6,188

$8,324

$13,517

$10,912

$5,883

$9,343

$17,640

$9,970

$13,999

$18,436 $18,166 $17,519

$16,796

$28,570

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Re

ve

nu

e (in

th

ou

sa

nd

s)

Earnings (Quarterly)

Net Income Operating Income (EBIT)

8

Earnings Growth (Quarterly)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%


Pe

rce

nta

ge

Ch

an

ge

Earnings Growth Q/Q

Operating Income (EBIT) Net Income

9

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 AveragePrinters and other Products $24,719 $26,071 $34,069 $41,939 $39,723 $54,190 $59,841

Y/Y change --- 61.0% 130.3% 89.4% 60.7% 107.9% 75.6% 87.5%Q/Q change --- 5.5% 30.7% 23.1% -5.3% 36.4% 10.4% 16.8%

Materials Revenue 24,678 26,204 25,482 26,818 28,729 29,275 33,179Y/Y change --- 59.6% 38.1% 33.0% 16.4% 11.7% 30.2% 31.5%Q/Q change --- 6.2% -2.8% 5.2% 7.1% 1.9% 13.3% 5.2%

Services Revenue 28,523 31,335 30,981 32,814 33,627 37,322 42,697Y/Y change --- 39.2% 27.5% 19.1% 17.9% 19.1% 37.8% 26.8%Q/Q change --- 9.9% -1.1% 18.0% 2.5% 11.0% 14.4% 9.1%

Total Revenue $77,920 $83,610 $90,532 $101,571 $102,079 $120,787 $135,717Y/Y change --- 51.7% 57.3% 45.4% 31.0% 44.5% 49.9% 46.6%Q/Q change --- 7.3% 8.3% 12.2% 0.5% 18.3% 12.4% 9.8%

10

Revenue Breakout (Business)

$24,719 $26,071 $34,069

$41,939 $39,723

$54,190 $59,841

24,678 26,204

25,482

26,818 28,729

29,275

33,179

28,523 31,335

30,981

32,814 33,627

37,322

42,697

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000


% C

ha

ng

e

Re

ve

nu

e (in

th

ou

sa

nd

s)

Revenue by Business (Quarterly)

Printers and other Products Materials Revenue Services Revenue Total Revenue q/q (rhs)

11

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.

31.7% 31.2% 37.6%

41.3% 38.9% 44.9% 44.1%

31.7% 31.3%

28.1% 26.4% 28.1%

24.2% 24.4%

36.6% 37.5% 34.2% 32.3% 32.9% 30.9% 31.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Pe

rce

nt o

f To

tal

Revenue Composition by Business (Quarterly)

Printers and other Products Materials Revenue Services Revenue

12

Revenue Breakout (Business)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


Pe

rce

nta

ge

Ch

an

ge

Revenue % Growth by Business Q/Q

Printers and other Products Materials Revenue Services Revenue

13

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 CustomersRevenue Build ($ in thousands) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 AverageUnited States $45,909 $46,761 $48,828 $54,916 $57,153 $67,870 $74,427

Y/Y change --- 63.4% 54.1% 58.8% 24.5% 45.1% 52.4% 49.7%Q/Q change --- 1.9% 4.4% 12.5% 4.1% 18.8% 9.7% 8.5%

Germany 7,423 9,896 11,608 10,821 11,911 13,286 11,039Y/Y change --- 19.1% 40.1% -7.1% 60.5% 34.3% -4.9% 23.7%Q/Q change --- 33.3% 17.3% -6.8% 10.1% 11.5% -16.9% 8.1%

Other Europe 13,288 14,757 13,991 18,903 16,669 18,569 21,728Y/Y change --- 43.8% 16.0% 29.1% 25.4% 25.8% 55.3% 32.6%Q/Q change --- 11.1% -5.2% 35.1% -11.8% 11.4% 17.0% 9.6%

Asia Pacific 11,300 12,196 16,105 16,931 16,346 21,062 28,523Y/Y change --- 53.4% 192.3% 88.3% 44.7% 72.7% 77.1% 88.1%Q/Q change --- 7.9% 32.1% 5.1% -3.5% 28.9% 35.4% 17.7%

Total Revenue $77,920 $83,610 $90,532 $101,571 $102,079 $120,787 $135,717Y/Y change --- 51.7% 57.3% 45.4% 31.0% 44.5% 49.9% 46.6%Q/Q change --- 7.3% 8.3% 12.2% 0.5% 18.3% 12.4% 9.8%

14

Revenue Breakout (Region)

$45,909 $46,761 $48,828 $54,916 $57,153

$67,870 $74,427

7,423 9,896 11,608

10,821 11,911

13,286 11,039

13,288 14,757

13,991

18,903 16,669

18,569 21,728

11,300 12,196

16,105

16,931 16,346

21,062

28,523

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000


Re

ve

nu

e (in

th

ou

sa

nd

s)

Revenue by Region (Quarterly)

Asia Pacific

Other Europe

Germany

United States

15


58.9% 55.9% 53.9% 54.1% 56.0% 56.2% 54.8%

9.5% 11.8% 12.8% 10.7%

11.7% 11.0% 8.1%

17.1% 17.6% 15.5% 18.6%

16.3% 15.4% 16.0%

14.5% 14.6% 17.8% 16.7% 16.0% 17.4%

21.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Pe

rce

nt

Revenue Composition by Region (Quarterly)

Asia Pacific

Other Europe

Germany

United States

16


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%


Pe

rce

nta

ge

Ch

an

ge

Revenue % Growth by Region Q/Q

United States

Germany

Other Europe

Asia Pacific

17

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 Sep-13 AveragePrinters and other Products Gross Profit $11,237 $15,412 $18,052 $17,829 $24,701 $26,933

Y/Y change 87.9% 193.2% 119.2% 86.2% 119.8% 74.8% 113.5%Q/Q change 17.4% 37.2% 17.1% -1.2% 38.5% 9.0% 19.7%

Printers and other Products Gross Margin 43.1% 45.2% 42.8% 44.9% 45.6% 45.0% 44.4%

Materials Gross Profit 17,193 17,410 19,040 20,878 21,548 24,481Y/Y change 61.3% 45.3% 44.1% 24.5% 25.3% 40.6% 40.2%Q/Q change 2.5% 1.3% 9.4% 9.7% 3.2% 13.6% 6.6%

Materials Gross Margin 65.6% 68.3% 68.2% 72.7% 73.6% 73.8% 70.4%

Services Gross Profit 14,538 14,057 15,404 14,770 16,334 20,023Y/Y change 69.8% 33.6% 34.9% 18.1% 12.4% 42.4% 35.2%Q/Q change 16.3% -3.3% 9.6% -4.1% 10.6% 22.6% 8.6%

Services Gross Margin 46.4% 45.4% 45.7% 43.9% 43.8% 46.9% 45.4%

Total Gross Profit $42,968 $46,879 $52,496 $53,477 $62,583 $71,437Y/Y change 70.5% 68.9% 59.7% 37.6% 45.7% 52.4% 55.8%Q/Q change 10.6% 9.1% 12.0% 1.9% 17.0% 14.1% 10.8%Gross Margin 51.4% 51.8% 51.2% 52.4% 51.8% 52.6% 51.9%

18

Gross Profit Growth

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Pe

rce

nta

ge

Ch

an

ge

Gross Profit Growth by Business Q/Q

Printers and other Products Gross Profit Materials Gross Profit Services Gross Profit

19

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.

Total Price Per Share

Terminal Perpetuity Growth Rate

3.0% 3.5% 4.0% 4.5% 5.0%

Discount 6.0% $150.86 $179.50 $294.09 $437.33 $437.33

Rate 8.0% 86.98 95.84 121.16 140.15 140.15

(WACC) 10.0% 59.81 63.88 74.25 80.98 80.98

12.0% 44.86 47.11 52.52 55.80 55.80

14.0% 35.44 36.83 40.05 41.93 41.93

20

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

+Contact

Brian Christopher

617.642.9211

[email protected]

BlackArbs.com

22

mailto:[email protected]

Technology

3d Systems (DDD)_updated for Q32013