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Edited Transcript of DDD earnings conference call or presentation 30-Oct-18 8:30pm GMT

Q3 2018 3D Systems Corp Earnings Call

ROCK HILL Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of 3D Systems Corp earnings conference call or presentation Tuesday, October 30, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Nicholas McMullen

3D Systems Corporation - Executive VP & CFO

* Stacey Witten

3D Systems Corporation - VP of Finance, IR and Financial Planning & Analysis

* Vyomesh I. Joshi

3D Systems Corporation - President, CEO & Director

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Conference Call Participants

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* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* David Ryzhik

Susquehanna Financial Group, LLLP, Research Division - Associate

* Hendi Susanto

G. Research, LLC - Research Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Good afternoon, and welcome to 3D Systems' conference call and audio webcast to discuss the results of the third quarter of 2018. My name is Latanya, and I will facilitate the audio portion of today's interactive broadcast. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Stacey Witten, Vice President of Investor Relations for 3D Systems. Please go ahead.

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Stacey Witten, 3D Systems Corporation - VP of Finance, IR and Financial Planning & Analysis [2]

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Good afternoon, and welcome to 3D Systems Conference Call. I'm Stacey Witten, and with me on the call are Vyomesh Joshi, our President and Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Andy Johnson, Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone, who wish to access the slide portion of this presentation, may do so on the Investor Relations section of our website. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call, should call in using the phone numbers provided on the slide and in the press release that we issued today. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few second delay, and you will not be able to post questions via the web.

The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K.

During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying the webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against the results for the comparable period of 2017.

Now I'm pleased to turn the call over to Vyomesh Joshi, our CEO. VJ?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [3]

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Thanks, Stacey. Good afternoon, everyone. We are pleased with our continued strong growth in printer units and printer revenue across both metals and plastics with balanced execution across all regions.

Our new products have been very well received, and we continue to ramp sales and production of these new solutions. We are seeing early returns on the investments we have made and continue to deliver growth across many revenue drivers.

In the third quarter, we reported printer revenue growth of 17% on a 93% increase in printer unit sales. Materials revenue growth of 2%, software revenue grew 8% and health care solution revenue grew 14%.

While our actions and investments in go-to-market are not done, we have made significant progress to drive growth and improve execution worldwide. And we are starting to see cost structure improvements as a result of the actions we are taking.

In the third quarter, we began to ramp production and sales of our new products. While it is still early in commercial shipments, we are very pleased with the reception and performance of the SLS 6100, FabPro 1000, NextDent 5100, StandAlone Figure 4 and MJP 2500 investment casting.

During the third quarter, we also debuted our new DMP Factory 500 at IMTS 2018, our first solution from our partnership with GF Machining Solutions. The DMP Factory 500 is now available to order with the limited shipments plan to begin this year. We are now shipping the ProX DMP 350, the next generation of the ProX DMP 320. The 320 has been a very successful product for us, and customer demand in the third quarter exceeded our manufacturing capacity during the quarter. We are excited to continue to build on the success of our metals platform with ongoing innovation designed for advanced manufacturing, including materials expansion and software and workflow capabilities.

Additionally, our partnership with GF is expanding our capabilities, and together, we plan to provide automation and enhanced integration with traditional manufacturing.

With that, I'd like to provide an overview of the third quarter before John provides more detail on financial results.

During the third quarter, total revenue increased 8% to $164.5 million, including continued strong growth in printer revenue of 17% on a 93% increase in unit sales and double-digit growth in health care.

Gross profit margin in the third quarter of 2018 was 47.3%. We are beginning to see results from our actions we are taking to improve our cost structure, and operating expenses decreased in the third quarter.

For the third quarter of 2018, we reported non-GAAP earnings of $0.02 per share and a GAAP loss of $0.10 per share.

Now let me turn it over to John to discuss our third quarter 2018 financial performance in more detail. John?

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [4]

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Thanks, VJ. Good afternoon, everyone. For the third quarter, we reported revenue of $164.5 million, an increase of 8% compared to the third quarter of 2017 despite a 1% negative impact of foreign currency.

GAAP gross profit margin was 47.3% compared to 38.3% in the third quarter of 2017. GAAP operating expenses decreased 2% to $88.8 million. We reported a GAAP loss of $0.10 per share in the third quarter of 2018 compared to a loss of $0.34 per share in 2017.

We reported non-GAAP earnings of $0.02 per share or $2.4 million in the third quarter of 2018 compared to a non-GAAP loss of $0.20 per share or $22.6 million in the third quarter of 2017.

We are pleased with our revenue growth across many categories of the business in the third quarter, in particular, the continued growth in printers revenue, which resulted from growth across multiple platforms in all regions. Printer revenue increased 17% to $34.5 million on a 93% increase in printer unit sales with strong growth in both production and professional units.

As we have discussed, printer unit sales, revenue mix and overall average ASPs will likely continue to fluctuate, particularly, as we launch and ramp products at a very wide range of prices. We believe the printer unit placements we are making now will help fuel our annuity-based business model over the long term.

Materials revenue increased 2% to $40.3 million in the third quarter. A lag time between printer placements and scaling materials utilization is very typical, and over time, we expect stronger growth in materials as we continue to place highly productive units quarter-after-quarter.

Health care revenue increased 14% to $53.1 million with growth across all categories. We continue to be pleased with the overall demand trends for health care.

NextDent 5100 printers began shipping, and we are pleased with the results thus far and expect continued ramp over time in sales of these low-cost, high-productivity dental solutions.

Software increased 8% to $22.9 million in the third quarter. While quarterly performance may fluctuate, we continue to expect growth from this category long term.

On-demand manufacturing revenue decreased 3% to $26.3 million in the quarter. We believe our investments in facilities, technology, customer experience, demand generation and our enhanced sales approach have resulted in improvements in our on-demand business. However, during the third quarter, we took actions to change our approach and processes related to global sourcing of orders. And as a result, put significant negative pressure on on-demand sales during the quarter, which we believe will remain a negative impact on sales in the fourth quarter of 2018 as well.

We reported GAAP gross profit margin of 47.3% in the third quarter of 2018 as cost improvements from ongoing supply chain cost reduction initiatives were offset by the impact of sales mix and production and actions related to ramping new products.

In the third quarter of last year, gross profit margin was 38.3%, inclusive of $12.9 million of charges related to portfolio realignment and product discontinuations. We continue to drive supply chain optimization, manufacturing efficiencies and process improvements, and therefore, continue to expect fairly stable gross profit margins for the balance of the year and opportunities for expansion over the longer term with increasing materials growth.

GAAP operating expenses for the quarter were $88.8 million, a decrease of 2% compared to the third quarter of 2017, including a 1% decrease in SG&A expenses and a 5% decrease in R&D expenses.

Non-GAAP operating expenses in the third quarter were $73.7 million, a 3% decrease from the third quarter of the prior year and a 7% decrease sequentially. While a portion of the decrease in operating expenses sequentially relates to timing of expenses, we're beginning to see the results of the actions we are taking to reduce our cost structure. Compared to the 2017 quarter, non-GAAP SG&A expenses decreased 1% to $50.8 million and non-GAAP R&D expenses decreased 6% to $22.8 million as we begin to shift from development to marketing and sales support of the new products we have rolled out this year.

We continue to invest in IT and go-to-market, including new product launch support, while at the same time, we have reduced overall headcount and other employee-related expenses, resulting in lower operating expenses even as higher legal fees related to export compliance are ongoing.

We are very pleased with the progress we are making as we are executing on our plans to align resources with key priorities, reduce overhead costs and leverage our IT infrastructure investments.

While operating expenses may vary quarter-to-quarter in the near term due to timing of expenses and product and sales cycles, we continue to expect cost structure improvements and increased operating leverage over the long term.

We used $12.1 million of cash in operations during the third quarter and $2.9 million of cash in operations in the first 9 months of the year. We ended the quarter with $92.1 million of cash on hand. We have continued to invest in IT transformation and go-to-market, including support for new product rollouts. Support for the rollout and ramping of new products also included a significant increase in inventory as a result of timing of supply chain lead times and product production in shipment plans for our expanded portfolio. In the third quarter, we also paid a previously accrued liability related to the conclusion of litigation in connection with a prior acquisition, which used $9.1 million of cash during the quarter.

We expect cash use and generation will continue to fluctuate from period-to-period as we continue to make the investments we believe are critical, while at the same time improving our operational performance over time.

We are pleased with the overall progress we are seeing year-to-date in many areas, and we continue to be keenly focused on execution and operational efficiency to drive long-term growth and profitability.

With that, I'll turn the call back to VJ for some concluding remarks. VJ?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [5]

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Thanks, John. We are pleased with our results this quarter and the progress we have made to transform the company. We have improved our worldwide execution to better leverage our unmatched offering of editing solutions for the entire digital manufacturing workflow. We are very excited about our enhanced and complete end-to-end portfolio, our ongoing innovation and significant market opportunities.

We are building the foundation for growth to scale the company and strengthen our leadership position in the industry. We are focused on operational excellence and customer-driven innovation to expand applications and use cases through our advanced and complete workflow solutions.

We have the leadership, expertise, talent and partnerships combined with the best and the broadest portfolio to drive customer shift to 3D production.

And with that, I'd like to turn the call back to Stacey, who will open the floor for questions. Stacey?

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Stacey Witten, 3D Systems Corporation - VP of Finance, IR and Financial Planning & Analysis [6]

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Thanks, VJ. We'll now open the call for questions. (Operator Instructions) As a reminder, please direct all questions to the teleconference portion of this call. The telephone numbers are provided again on the slides. If you're calling inside the U.S., the number is 1 (877) 407-8291, and if you're calling outside the U.S., the number is 1 (201) 689-8345.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [2]

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A couple, if I could, just with regards to new product introductions that occurred in the -- during the September quarter and the 8% revenue growth, similar to last quarter. Could you just sort of unpack for us how much of the new products contributed to the revenue growth this quarter? And then, any -- VJ, any context you could give us around -- you kind of ramped the Figure 4. I believe that the modulars -- is the modular shipping, it's not shipping from '19, I think. But if that's changed, let us know. And do you think that DMP -- when will the DMP 500 be out? And then I've a follow-up.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [3]

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So yes, okay, so you have 3 phases of questions. Let me go one by one. So I think the important part is, we had a very good quarter with respect to the overall printer hardware revenue growth, 17% and then the unit growth because, as you know, that there are categories now, which are like $5,000 to $22,000 within the low price point, so we had an incredible 93% unit growth with 17% overall hardware revenue growth. The new products are just ramping. So I think you're going to see more effect of that in Q4 and 2019. But we are very pleased with the response that we are getting in the marketplace. So that's the first part of the question. Second on the Figure 4, the dental product, which won 2 big awards. The 5100, the response is fantastic and this is global response. And I do believe that, that's going to be a very important category for 2019 taking our hardware and then getting the materials growth that you will see in 2019. The third part about the modular. Modular will be introduced in 2019. And then the fourth question on DMP 500. That's a significant product, especially with our partnership with GF Machining. I really believe this partnership is going to be very important in a mix environment where you have a traditional subtractive and additive manufacturing. They bring tremendous capability with respect to the go-to-market and also in terms of the postprocessing and automation. So the 500 we have introduced, they have -- there are already customers, but the real scale in the 500 will happen in 2019.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [4]

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VJ, that's really helpful. And then just quickly, John, you mentioned stable gross margin for the balance of the year, which would be just this quarter, if taken literally. Is the spirit of kind of into '19 foreseeable future like that or is it really kind of just December quarter remarks?

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [5]

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Yes. I think, definitely for the balance of the year, but to your point, we don't anticipate big margin fluctuations entering '19 at this point either. So if you look at the last 4 quarters -- 3, 4 quarters on a non-GAAP basis either plus or minus 1 point or 1-point-something. But we think margins will continue certainly for the foreseeable future on that type of a turn line, and we'll keep you posted on a quarter-by-quarter basis.

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Operator [6]

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Our next question comes from Wamsi Mohan from Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [7]

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A couple of questions, I guess. Can you just talk about the revenue environment more broadly? I mean, it looks like there is a pretty broad macro slowdown across industrial and auto in China. So just what is your view of the broader demand environment? And does that impact like revenue from a sequential perspective here in the third quarter?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [8]

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So I think, if we look at the revenue in our Q3, we had 2 things happening. One, our metal printers, we had more demand than we could really fulfill in terms of the manufacturing capacity, and we're working on it now in building the capacity for our metal printers. And the second thing is, we talked about ODM business where we have to change the way we -- global sourcing is done for our -- that parts business. And that also had impact in Q3. And it will have a little bit more impact in Q4, the ODM in terms of the revenue. So for us, we actually see really no impact of overall any globally issue with respect to the revenue. As a matter of fact, if you look at our Asia Pacific revenue, we grew 27% in Q3. So I think for us, it was internal, those 2 things that I talked about, the metals and the ODM. But when you look at 93% unit growth, actually we're gaining share as far as the unit share is concerned.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [9]

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And, VJ, this metal printer sort of couldn't meet the demand and you were sort of constrained on supply. Do you expect that to reverse and that become a tailwind here in the fourth quarter?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [10]

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Not in fourth quarter. I think, we have still demand, which is outstripping our manufacturing capacity. But we are working hard, and in '19, we should be able to do that. Remember, we got a great product in the 350 and 500. And we are partnering with GF, so it's really those 2 things are creating the demand that we need to now figure out how we can now really build our manufacturing capability, and I think...

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [11]

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Yes, Wamsi, the other thing to think about is that, I think we may have mentioned it somewhere in our prepared materials around inventory in general, but some of that parts and things are at long lead times in the metal space. So as we see this heightened demand, our ability to respond and plan for that now is underway.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [12]

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And if I could really quick. How much of the inventory step-up was from preparing for these new product launches? And what's your expectation around timing for becoming free cash flow positive year?

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [13]

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Yes, the majority of the inventory uptick was related to new products, both in plastics and metals, and both from a finished goods point of view and from a component kind of build all the way to spare parts and getting ready to be able to service these products in the field. We haven't given any direction on timing of free cash flow, Wamsi, but what I will tell you is that, I mean, we're being very planful and thoughtful in terms of how we're utilizing cash right now. We understand what we're doing and not something that we are overly worried about, but we also understand what our options are for cash on a go-forward basis. And as we start to normalize from an inventory point of view, we should see the benefit of that for sure. And as our performance continues to improve from a profitability point of view, we'll see the benefit from that as well.

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Operator [14]

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Our next question comes from David Ryzhik with Susquehanna.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [15]

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So for materials, I think, you mentioned you anticipate perhaps an acceleration on materials growth. Can you just talk about what gives you the confidence that, that can occur? I'm just looking at the first 9 months of '18. I guess, the average growth there is 1% per quarter. So on a year-over-year basis, just wanted to know if this is based on any kind of internal analysis on utilization or not? And I have a follow-up.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [16]

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Yes. So I think there are 2 parts. The first part is, the focus that we have on getting the productive installed base is very, very important for us. So if you think about, for last 4 quarters, our unit growth has gone from 8% to 15% to 44% to 38% or 93%. And that's really installing those productive units. The second part is, we know by technology, what kind of usage we can expect and that's a very important part of the equation. So the first part is the unit and the actually installed base growth, then by technology, what kind of a usage that we are going to have. And the third very important part is, we are maintaining the average selling price of our materials portfolio. So I think those 3 things, the way we put the equation together in terms of how do we really build the right kind of a portfolio and there is a lag between the actually placing the units and getting the right kind of materials growth. So starting 2019, we are very confident that we are going to have the materials growth that we are really looking for, so that the business model that we have talked about, putting the installed base and enjoying the annuity stream will come through.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [17]

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Great. And just drilling back to metals. If you were able to fulfill all those orders, would it have been a material impact to September quarter results? And then broadly speaking, can you give us a sense of how material the metals business can become? Can it become 5% or 10% of revenue by 2019? Just would love some kind of color around this because it sounds like you guys are gaining some traction there with the 350.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [18]

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Yes, I think we are not going to break down our revenue, but I think the important part is, we believe that between metals and ODM, it could have been a significant growth that we would have seen in Q3. What I believe that our success of our 320, the 350 platform. And then at IMTS, we really showed our 500 product with really GF and us together, and the response that we are getting and the customers who are really getting interested in our metal technology with our value proposition in terms of total cost of operation and the precision plus the health care segment that we are really focused on is really giving me a lot of positive feeling about our metal business and that could become a significant part of our overall revenue growth in 2019.

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Operator [19]

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Our next question comes from Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [20]

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I guess, the first question, I was looking for a little more clarity in your comments around printer revenue and just how to think about this. I know year-over-year, I think that you would probably admit that you had a fairly easy comp year-over-year. And if you just humor me for a minute and look at it sequentially, down $5 million sequentially in printer revenue, but -- and my impression was that we wouldn't see, based on your 2Q comment, was that we probably wouldn't see that much seasonality from 2Q to 3Q and you have the new products rolling out. I'm wondering if you could just comment on whether you're surprised to see that sequential decline and what you think about that.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [21]

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No, I think the way I told you about the metals is where -- we had more orders than we could fulfill is the real reason. I do believe that if you think about year-to-date, our printer revenue growth has been 28%. That in itself tells you that it was not just the easy compare, but we absolutely believe that we are gaining share in all the categories, from $5,000 price point to $20,000 price point to $100,000 price point all the way to $400,000 to $500,000 price point. So I really think that -- my view is this is something that I have been really telegraphing, saying, "look, we had health care revenue growth, we had software and now we need to really make sure that with our strength of the portfolio, I want to drive the printer hardware revenue growth." I think the next thing that we all need to look at in 2019, how that now really translates into the materials revenue growth. And I think, I'm very confident that in 2019, we will show the materials growth. So I really believe that's how we should look at it. It's a build. And that's how we should look at it. The other important part is having these new categories, that $5,000 price point and $20,000 price point, we have a lot of work to do in building the awareness, getting the marketing right because these are new categories. But if you think about what we are doing with our FabPro, we are growing really at $5,000 entry-level industrial printer. If you think about $20,000 price point, we are really going after functional prototyping business with a Figure 4 capability. My view, competitively, we are placed way better than any other competitor at those price points. So I just think that if this requires our sales and marketing machine now working in driving the potential that we have in terms of the gaining share and driving the hardware revenue, which will set us up very well in 2019 for materials.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [22]

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Okay, okay, and then just, since we're talking about materials, I guess, my follow-on is going to be on that category. And the gross margin has come down, right. If you look back to the average in 2016, it was 77% and 2017, 73%. This quarter is 69%. So as we look out to this building, the foundation for the materials to come, should we expect this gross margin for materials to stabilize here and you'll get 70% gross margin on those materials? Or is this going to continue to kind of come down? And why has it come down?

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [23]

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Yes. So Brian, it's John. Clearly, we've got a lot of mixed things going on from materials. We have that every quarter. But as you see, so as we look at both plastics and metals, clearly, the mix between plastics and metals materials has an impact on, overall, what we report in the Q. Metals margins being lower than plastics margins. And then we have mix within different -- if you think about that overall 71%, 72% and try to go back 2016 because we have other things like Vertex now with lower margins and so forth, but if we think even over the last several quarters, the real driver of fluctuations that we're seeing in margins for materials now is simply mix. And so we're not out there pricing dramatically or anything like that. It's really mixed case. So I think, we'll see some fluctuations both up and down in margins over the next several quarters based on mix. And we'll give you color on what's going on from a mix point of view. There's nothing surprising, for us anyways, in terms of what we saw based on the mix.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [24]

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And our success in metals will also drive more and more metals...

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [25]

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As metals become a higher percent, that's a great thing from a growth point of view, the margin profile for metals is lower and that on a consolidated basis, you will see the impact of that on materials margins.

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Operator [26]

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Our next question comes from Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [27]

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Can you talk a bit about what you've done in the U.S. in terms of the changes in go-to-market? I know you said you still have work to do overall, but with some of the management changes you've had in the region, if you could be a little bit more specific? And maybe I don't know, what inning are we in, in terms of where you were versus where you are trying to get to?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [28]

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Yes, so I think, there are 3 things that we have done. The first one is to really have the right balance between the indirect and direct go-to-market model. The second thing that we have done, we brought the pipeline processes that we had started in Europe and now we're applying that in both Americas and in Asia Pacific. And the third thing that we are doing is a lead generation because I absolutely believe that if you look at what we have done with respect to marketing, that IMTS was the example that how we showed up in terms of really focusing on production workflows. And I think that will drive the lead generation, which will be very important in terms of really building the right of go-to-market engine. We think we are in the fifth or sixth inning of the go-to-market build. And we are now seeing that kind of a performance across the 3 regions. And I really believe that the work that now we need to do is to really train both our channel partners and our sales force about the production workflow.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [29]

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And then in terms of the aligner market, I know some of the competition has made some noise about getting more involved in that business, but clearly it's a big market opportunity although Align had a bit of a stumble in the most recent quarter. So if you could talk about where you see that market, how you see this sort of, I don't know, as everybody moves to Invisalign as opposed -- well, whatever it's called, as opposed to paying for braces like our son did. How we should think about your opportunity again with some of the competition that has made some noise?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [30]

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Yes, they can make a noise, but really we can always look at who are the leaders and which technology is really providing the right solution. I think Align, there is no question in my mind. They are the leaders, and they will continue to be leaders globally because it's not just about having an early start, but the kind of a solution that you need to have to work with the orthodontic community, working within building that whole software workflow and the solution that we provide in terms of the cost structure and in terms of the patient outcome is unparalleled. And I really believe that, that leadership that we have working with them -- as a matter of fact, I'm using that as an example of how you really build the production workflows, where the software workflow, the hardware and materials will become very important to us. So my view is we have a lead, and we are going global with them and they are a great partner.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [31]

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Okay, and then, I guess, John, can you just talk a little bit about cash flow at 91 -- you're down to $91 million of unencumbered cash. I know it'll be lumpy in that. But just what are your options for liquidity if you needed to get them? Or how are you sort of thinking about it? If we did go into recession just -- I'm sure, you are thinking about sort of where the company will be in the next couple of years. So anything you can provide would be helpful.

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [32]

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Yes, yes, sure, Shannon. I think it's pretty clear what -- from Q2 to Q3, what drove our use of cash in terms of about a $14 million inventory build, primarily in support of all the new products. We knew we would be faced with a litigation settlement that came in Q3 and that was an additional $9.1 million. And then, we did some small things that we always have timing-of-year-wise, stock settlements on employee stock, things like that. So very well understood. I think to your point, right now, as I think we also have a -- we have a revolver in place. We've never tapped into that, but it's always comforting to know that we have a $150 million revolver out there. So that's a good thing. I think that I won't get into any specifics, but as you might imagine, we're always understanding what our liquidity options would be beyond that, although we don't anticipate anything that would suggest that we would find ourselves in a place like that anytime soon. So I think that clearly understand that people are watching the cash balance over time, but we're extremely planful in what we're using that for and we'll continue to be planful in terms of what our needs are and what our users will be with a company that we expect to continue to grow.

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Operator [33]

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Our next question comes from Hendi Susanto with Gabelli & Company.

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Hendi Susanto, G. Research, LLC - Research Analyst [34]

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VJ, it is great to see 3 consecutive double-digit printer revenue growth in the first 9 months. Having said that, printer services revenue growth rates were significantly below those of printer revenue growth rates. And I was expecting that printer service has some kind of attachment. How should we think about the gap between the 2? And when can we see printer service revenue growth profile catching up?

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [35]

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So I think the services has more than just the printer services. That's the first thing that I want to say. And clearly, we are focused on making sure that we provide the right kind of a break and fix services. And that will follow as our revenue growth and the more and more units are placed. We will be able to win the maintenance contract, especially after 1 year and that's where you will be able to see the impact of this unit placements we have for our break and fix services revenue.

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Hendi Susanto, G. Research, LLC - Research Analyst [36]

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Does that imply that currently the attachment rate is lower? And then...

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [37]

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No, no what I mean by that is you are asking -- you are seeing the double-digit growth in the hardware revenue, when will that reflect into the break and fix services. I'm saying, there's a 12-month delay in terms of -- because you know, that's when you start talking about the maintenance contract. So that's what I'm talking, just like materials.

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John Nicholas McMullen, 3D Systems Corporation - Executive VP & CFO [38]

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Materials has a lag time for usage. Service has lag time for renewal space.

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Vyomesh I. Joshi, 3D Systems Corporation - President, CEO & Director [39]

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There is nothing any different. We are winning every maintenance contract in terms of the renewal that we get.

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Operator [40]

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At this time, I would like to turn the call back over to Stacey Witten for closing comments.

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Stacey Witten, 3D Systems Corporation - VP of Finance, IR and Financial Planning & Analysis [41]

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Thank you for joining us today and for your continued support of 3D Systems. A replay of this webcast will be made available after the call on the Investor Relations section of our website, www.3dsystems.com/investor. Thank you.

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Operator [42]

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This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.