3D Systems Corporation (DDD - Analyst Report) posted an incredible earnings beat in second-quarter 2016, following an abysmal miss in the last quarter. The company reported adjusted earnings (including share-based compensation expense) of 6 cents per share for the quarter, miles ahead of the Zacks Consensus Estimate of breakeven earnings.

Shares climbed nearly 6% pre-market in the aftermath of the results, as investors cheered the company’s return to profitability.

The company posted a GAAP loss of 4 cents per share, much narrower than the loss of 12 cents reported in the year-ago quarter. Strained revenue growth dragged the company’s bottom line. However, increased sales of higher margin materials, software and healthcare solutions, in addition to lower R&D and administrative expenses, boosted the bottom line.

Inside the Headlines

The 3D printer maker reported revenues of $158.1 million for the quarter, reflecting a year-over-year decrease of 7.3%. The top line benefited somewhat from robust demand for the company’s health care solutions and software, as well as higher materials orders from health care and industrial clients. However, a continued challenging operating environment and lower demand for 3D printers and on demand manufacturing restricted top-line growth.

Revenues missed the Zacks Consensus Estimate of $161 million by a small margin.

Gross margin for the second quarter expanded 300 basis points on a year-over-year basis to 50.9%, helped by the company’s shift from consumer products to materials, software and healthcare solutions, which carry higher margins.

Also, the company’s operating expenses plunged drastically (20.2%) to $84.1 million, as both R&D (19%) and SG&A (21%) expenses fell significantly.

Despite challenging growth conditions, 3D Systems continues to focus on expanding its market share and exploring diverse market opportunities. Its recent partnerships with two major healthcare companies to expand its Simbionix training product line for women will strengthen its competitive position in the healthcare market and boost results.

In addition, the company is committed to channelizing its resources toward more profitable markets. 3D Systems recently announced its decision to cease the production of Cube, the entry-level consumer 3D printer. Although it might hurt revenues in the short term, we believe that it will direct the company’s resources toward higher-margin products and thus enhance profitability in the long run.

Cash Flow and Balance Sheet

3D Systems ended the quarter with cash and cash equivalents of $176.2 million, up from $155.6 million as on Dec 31, 2015. For the first half of 2016, cash generated from operating activities came in at $31 million, as against cash used in operating activities of $6.4 million as of Mar 31, 2015.

3D SYSTEMS CORP Price and EPS Surprise | 3D SYSTEMS CORP Quote

To Conclude

Over the past few quarters, 3D Systems has been experiencing unfavorable broader market conditions that have badly hit its financial performance. The company is grappling with strong volatility in macroeconomic factors such as economic slowdown, inflation, currency fluctuations, commodity prices and credit availability. These conditions continue to impact the company’s performance negatively.

However, the company is taking initiatives to channelize its resources into more lucrative areas in professional and industrial markets. 3D Systems also conducted numerous successful product launches and strategic deals, which could help the company to combat these persistent challenges in the near future.

Also, 3D Systems’ healthcare business continues to gain traction, driven by rising demand from customers who print medical and dental devices. The company is also focusing on enhancing its existing 3D printers line, reinforcing partnerships and boosting productivity.

3D Systems presently carries a Zacks Rank #3 (Hold). Other stocks in the broader sector that are worth a look include Brunswick Corporation (BC - Snapshot Report) , Pool Corp. (POOL - Analyst Report) and Marine Products Corp. (MPX - Snapshot Report) . All these stocks carry a Zacks Rank #2 (Buy).