3D Systems (Nasdaq — DDD) Reports On-Target Q2 Results

3D Systems (Nasdaq: DDD $22.25) reported good Q2 earnings. A day after direct competitor Stratasys unveiled earnings that fell below expectations, 3D Systems reported record revenues of $55.1m, a 57% increase from $35.1m in Q2 a year ago. Sales of the company’s DDM printers tripled from the same period last year, accounting for $5.5m in new revenue.

Twenty-seven new distributors were added to the company’s global distribution network – the company now has 167 channel partners total. 3D System’s method of finding its own distributors worked out much better than Stratasys’ pairing with HP. The company expects strong demand for its products in Q3. Sales of custom parts are also expected to grow, as is revenue from healthcare solutions.

Service and maintenance (including custom parts) revenue rose $12.0m compared to the same period last year; printing materials revenue increased by $2.4m. Gross profit margin swelled 30 basis points to 45.7% for the quarter compared to 2010, with gross margin from printing materials zooming 530 bips to 67%. Printers’ gross margin expanded 220 basis points for the quarter, but sequentially decreased 360 basis points. Custom parts services gross margin increased 1,290 bips over the comparable quarter, but also fell sequentially 690 points based on a seasonal revenue shortfall.

3D Systems ended the first six months of 2010 with $79.0m of available cash and cash equivalents. Net income of $13.4m for Q2 included $0.4m in restructuring costs that are expected to save the company money in the future. Legal expenses rose to $2.2m in the quarter, an 83% increase from $1.2m the year before; the increases were primarily due to litigation in a lawsuit filed by customers unhappy with warranty cancellations stemming from third-party printing materials use. Non-cash expenses related to depreciation, amortization and share-based compensation totaled $3.4m in Q2 2011, compared to $2.4m in 2010. Rapid revenue growth on printers compared favorably to last year but compressed earning power. Gross margins are expected to rebound back to target in coming quarters.

The company reported earnings per share of $0.26, but these include a $0.12 per share benefit from the company releasing a portion of its valuation allowance on deferred tax assets. Subtracting the benefit and applying a 35% tax rate, we calculated earnings per share of $0.12 (check here for our complete accounting notes). Share earnings are on track to reach $0.50 for 2011.

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Stratasys (Nasdaq — SSYS) -- HP Partnership Yields Lackluster Result

Stratasys (Nasdaq: SSYS $29.70) reported underwhelming second-quarter results. An agreement with Hewlett-Packard to distribute Stratasys’s lower-end 3D printers has not produced, with 18% fewer printers sold this year compared to last. The HP deal didn’t open the distribution channels Stratasys believed it would – a proposed Q1 launch in the U.S. was postponed due to turmoil at HP. The companies are working together to correct this, as their agreement was renewed through September 2012, but it will take some time to recover.

Stratasys will accelerate its independent channel development. The HP agreement currently serves only five countries in Europe – HP plans to expand its European markets later this year, but that remains to be seen. The company reaffirmed its commitment to HP, but Stratasys is intent on increasing distribution by other means.

The stock price fell eight points from 37.97 after this morning’s earnings report. Stratasys’ direct competitor, 3D Systems, also fell, though not as far. 3D Systems reports its earnings tomorrow – if that company's sales are also below expectation it could mean that 3D printing isn’t expanding as rapidly as some believed it would. There are other factors at play, and we’ll have to wait until 3D Systems reports to get a clearer picture.