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

1. 3D Systems
Report 3rd
Quarter 2013
update
Black Arbs: Research
11/07/2013
1

2. +Table of Contents
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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. Company Introduction
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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.
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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.”
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4. Key Business highlights
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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. Key Financial highlights
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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. Key Stock Value Drivers
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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. 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. 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. 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. 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
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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
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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. 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. 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. 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. 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
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$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
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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. 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. 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. 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. 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. 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. 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. Things to Consider
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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. +Contact
Brian Christopher
617.642.9211
BCR@BlackArbs.com
BlackArbs.com
22