​3D Systems stumbles: A sign of 3D printing woes or HP?

Industrial customers have cut back on 3D printing purchase. A longer sales cycle could reflect a broader slowdown or that enterprises are conducting due diligence on HP 2016 entry to the market.

3D Systems cut its first quarter revenue targets due to a slowdown amid industrial customers, commodity costs and currency fluctuations.

The big question is whether 3D Systems' woes are the result of company-specific execution issues or a broader slowdown as Hewlett-Packard eventually wades into the market.

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On Friday, 3D Systems said that its first quarter revenue will be between $158 million and $160 million with a non-GAAP loss of 2 cents a share to 4 cents a share. Wall Street was expecting a non-GAAP profit of 17 cents a share on revenue of $183.5 million.

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What got analysts wound up was 3D Systems' explanation. First, 3D systems said currency fluctuations hurt revenue by about $12 million. In addition, the company couldn't procure metal and nylon applications to sell more printers. 3D systems also said that aerospace, automotive and healthcare customers cut new printer purchases due to lower oil prices as well as materials.

Avi Reichental, CEO of 3D Systems, said he was "surprised and disappointed" by the demand falloff. However, 3D Systems said it did sell more software, services and consumer units, but not enough to offset the industrial shortfall. Apparently, 3D Systems customers were also pondering how to manage currency headwinds and economic issues abroad.

3D Systems noted that second quarter demand appears to be strengthening, but the company is moving to integrate acquisitions and become more efficient.

Reichental argued that a lumpy quarter for 3D Systems didn't indicate a long-term concern. He said on a conference call:

This surprise abrupt pause in order cadence that happened to us in the first quarter is not -- we don't think it's indicative of a long-term change in what's happening in our space...We believe that we are still in the very early innings of the development of this industry. I think that what we experienced in the first quarter is indicative of periodic pauses in the fast growing industry, some that are out of our control, some that are probably indicative of the ebbs and flows of the whole industry, and some that are fully in our control and depend on our execution.

Broader slowdown?

Analysts hammered 3D Systems on Friday and Monday and now shares are down more than 14 percent over two days. These analysts are citing 3D Systems and how it has issued profit warnings before as well as the company's ability to execute in a fast-moving industry.

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Jefferies noted 3D Systems had another swing and a miss. Oppenheimer said 3D Systems had a habit of "snatching defeat from the jaws of victory." And many observers noted concerns about the industrial business, which is driving profits and sales growth overall for the 3D printing industry. While there is a maker movement and consumer 3D printing is promising, the enterprise base carries the financials.

Few analysts were buying that 3D Systems was the canary in the 3D printing coal mine. Oppenheimer analyst Holden Lewis said that company may do well despite its execution issues. Lewis said:

Management credibility is shot. Yet, conditions for leverage are being established, and while sales growth is hugely disappointing, it is likely unsustainably low amid industry trends.

Jefferies analyst Jason North said 3D Systems doesn't have the channel to compete well and new entrants to the market are going to pressure sales more. The initial read is that 3D Systems is its worst enemy.

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However, Canaccord Genuity analyst Bobby Burleson cut shares of Stratasys because his research indicates that sales are becoming tougher. Stratasys is likely to see the same currency effects and slowdown in the industrial base. Burleson said 2015 results will largely ride on the second half of the year and Stratasys will struggle to keep its growth target of 25 percent in the long run.

In other words, sales cycles for 3D printers are going to get longer, said Burleson.

HP effect already?

As those sales cycles get longer, customers are likely to delay purchase more if only to check out gear from HP.

HP is promising to enter the market in 2016 with 3D printing technology that's faster and less expensive. HP is initially focused on the enterprise, an arena where the company can use its sales channel that dwarfs first mover rivals.

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Burleson said that resellers have noticed that HP is reaching out more to potential customers and reaching out to the ecosystem.

Meanwhile, HP has also been demonstrating its Multi Jet Fusion technology more even though it won't have a product until late 2016. Burleson also noted that Rapid and EuroMold, two 3D printing heavy conferences, will be telling for established players relative to HP. He said:

HP dissonance could increase at Rapid and EuroMold. We believe customer projects that are more speculative and don't have a very clear near-term ROI could be delayed until the customer at least gains a better understanding of what HP will have to offer in terms of speed, cost of ownership, etc. We note that Rapid in Long Beach in mid-May and EuroMold in Dusseldorf Germany in late September may offer opportunities for customer to conduct additional diligence on the HP technology.

We also think customers are behaving more rationally and conservatively in their purchasing decisions following a period of euphoria.

Bottom line: Bets that the 3D printing market will recover for the second half may be a bit of a stretch. It's unclear whether HP can back up its 3D printing talk over time, but enterprises will have to at least conduct due diligence if only to squeeze existing suppliers such as Stratasys and 3D Systems.

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