3D Systems Corp (DDD) 2007 Q1 法說會逐字稿

Good morning, and welcome to the 3D Systems conference call and audio webcast.

(OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Chanda Hughes, Investor Relations for 3D Systems.

Good morning, and welcome to 3D Systems conference call.

I am Chanda Hughes and with me on the call are Abe Reichental, CEO; Damon Gregoire, VP and CFO; and Bob Grace, General Counsel.

The audio 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 via the web at www.3Dsystems.com.

Should you choose to do so we recommend that you sign in for the interactive teleconference.

This will give you the ability to ask questions related to operational issues raised in this conference call at the end of the session.

For those who have accessed the streaming portion of the webcast, please be aware that there is a three-second delay and that you will not be able to post questions via the web.

Before we begin the discussion, I would like to preface our presentation today with a statement regarding forward-looking information.

Certain statements made in this presentation that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.

In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements in the future or conditional tenses or that include the terms believe, believes, expect, estimates, intends, anticipates or plans to be uncertain and forward-looking.

Forward-looking statements may include comments as to the Company's beliefs and expectations as to future events and trends affecting its business.

Forward-looking statements are based upon management's current expectations, concerning future events and trends and are necessarily subject to uncertainties, many of which are outside the control of the Company.

In particular, the factors stated under the heading Forward-looking Statements, Cautionary Statements and Risk Factors and risk factors that appear in the Company's periodic filing with the Securities and Exchange Commission as well as other factors could cause actual results to differ materially from those reflected or predicted in forward-looking statements.

At this time I would like to introduce Abe Reichental, President and CEO.

Good morning, everyone.

Thanks for taking the time to listen to our call this morning.

I'm very pleased to be able to share with you our first quarter 2007 financial results and gratified that we're caught up on our quarterly financial reporting requirements.

Rest assured that with our new CFO Damon Gregoire onboard, a stronger financial team in place, and rigorous remediation underway, we will be working very hard to maintain timely and accurate reporting of our operating results.

I'm very pleased this morning to report that yesterday we filed our first-quarter Form 10-Q and that our results for the first quarter of '07 were generally in line with the expectations that I discussed with you on May 11.

As expected the first-quarter results for '07 were as follows.

Revenue increased to a first quarter record of $36.9 million, up from $33.6 million in the first quarter of '06.

Operating expenses were $18 million for the first quarter compared to $15 million in the '06 first quarter.

Net loss available to common stockholders was $3.1 million compared to $1.9 million of net loss in the '06 quarter.

And loss per share was $0.16 on a fully diluted basis compared to $0.13 per share in the '06 quarter.

Gross profit for the first quarter of '07 increased to $15.9 million from $13.6 million in the first quarter of '06.

The gross profit margin increased to 43% of total revenue in the first quarter of '07, up from 40% for the first quarter of '06, reflecting our higher profit margins on sales of engineered materials and systems, but partially offset by the continuing expected decline in profit margins on service revenue.

In fact, service gross profit margins decreased to 17% of consolidated service revenue for the first quarter of '07, down from 25% for the first quarter of '06.

I would like to highlight that our revenue increase in the first quarter of '07 was driven by higher volumes and materials which amounted to almost 42% of our total revenue in the first quarter of '07, a significant milestone towards achieving our long-term business model targets.

Consolidated revenue increased 9.8% to a first-quarter record of $36.9 million, up from $33.6 million for the first quarter of '06.

As I mentioned earlier, this increase was led by revenue from engineered materials and composites, which increased 29.4% to $15.4 million, up from $11.9 million in the '06 quarter.

Revenue from systems and other products also increased by 6.6% to $13.2 million, up from $12.4 million for the first quarter of '06.

Revenue from services decreased 10.8% to $8.4 million, down from $9.4 million in the '06 quarter.

Geographically, our higher level of revenue in the first quarter of '07 reflects the lumpy nature of our large frame system sales as it is translated into reportable quarters.

Specifically, consolidated revenue for the first quarter benefited from higher revenue from our European and Asia Pacific operations, partially offset by lower revenue from our U.S.

operations.

Total operating expenses increased by $3 million to $18 million in the first quarter of '07 compared to $15 million in the first quarter of '06, but began a favorable sequential quarterly decline from its fourth quarter high of $21 million.

The increase in operating expenses for the first quarter of '07 was due primarily to a $4.8 million of higher selling, general, and administrative expenses.

These abnormally high SG&A expenses resulted mostly from special costs associated with our restatement activities, our expanded scope year end audit, the departure of our former CFO, and depreciation expense related to our Rock Hill facility and European equipment.

Our third-quarter operating expenses were aided by the absence in '07 of $1.6 million of restructuring costs that we incurred in '06 related to our relocation to Rock Hill, South Carolina.

Let me point out, however, that while Research and Development expenses declined by $200,000 in the first quarter of '07, we continue to work on new product developments and expect to incur up to $13 million of Research and Development expenses in '07 by further developing additional desktop 3-D Modelers and other Rapid Manufacturing Solutions and Materials.

Slide 10 sums up the operating result story for the past five quarters.

As you may recall, we encountered several severe disruptions in the second quarter of '06 that led to significant decline in revenue and [deferred] operating losses.

After working to correct the sources of these distractions, our revenue in both the third and fourth quarter of '06 rebounded, increasing sequentially over the immediately prior quarter with lower operating losses and net losses in each quarter.

As we entered '07, we are (inaudible) the return to quarterly growth, delivering nearly 10% topline while we continue to transition the business forward.

Our quarterly operating losses, which increased significantly in the second quarter of '06 have continued to improve sequentially over the past three quarters.

Those losses continued to narrow in the first quarter of '07 despite our $3 million of higher operating expenses and our higher interest expense and provision for income taxes in the first quarter of '07.

As you can see from slide 11, the underlying trends in revenue, gross profit, and operating expenses suggest that we have recovered to levels generally equal or better than our first-quarter '06 for our revenue and gross profits and that our operating expenses and losses are trending in the right direction, indicating that the majority of our operational issues have been resolved successfully.

We remain confident in our overall direction and expect that the key initiatives and investments that we undertook throughout '06 will provide us with the right platform to achieve our long-term objectives.

We ended the quarter with $7 million of unrestricted cash.

We have $8.2 million drawn against our bank credit facility that comes due at the beginning of July.

We expect to begin work on renewing or replacing this facility shortly.

Our quarter [end] cash positions reflects in part our continued effort to improve our working customer management, which included a further reduction in our days sales outstanding in the first quarter of '07.

In fact, while I'm pleased with the steady progress that we are making towards reducing our accounts receivable days sales outstanding from 103 days at the end of the second quarter of '06 down to 68 days in the first quarter of '07, I'm disappointed with our current high level of inventory.

We believe that for the current business we should operate at an ongoing inventory level of between $12 million and $14 million and are confident that, as we make further improvements in our working custom management, we can expect a return to our historical levels of performance, both in accounts receivable, days outstanding, and inventory.

I would like to spend the next few minutes reviewing with you recent developments in our business and how we see them contributing to our growth.

If you follow me on to slide 14, we believe that the significant business setbacks and disruptions as we experienced in the course of implementing our strategic initiatives in 2006 are now largely behind us; and we're gratified of the progress that we're making.

In the first quarter of '07, we continued to incur abnormally high expenses related to the restatement and year-end audit while we continue to see a strong demand for our materials suggesting that the demand for our products remain strong.

We believe that our growing installed base, coupled with the integration of our new systems with proprietary materials cartridges and our continuum of expert solutions, should improve the profitability of our business as revenue from materials continues to outpace growth in systems.

The stability of our revenue base should also improve as consumable sales rise as a percentage of the product mix relative to systems.

We're committed to completing our remediation effort and to having state of the art controls, procedures, and processes; and we continue undeterred to focus on our goals and our efforts to transfer our Company and the way we do business to establish a strong record of sustained growth and profitability.

I'm also pleased to share with you, as mentioned before, that we continue to develop and introduce first class products on an ongoing basis.

In fact, in the first quarter of '07, we're proud to announce developments and productions and availability of new technology platforms, systems, and materials.

Specifically, in January, we announced a successful development of the revolutionary compact fast and affordable V Flash Desktop Modeler.

We announced a partnership with Tangible Express and introduced the first fractional ownership program in the industry.

In partnership with Dreve, a world-class manufacturer of hearing aid materials and systems, we announced the V-Flash hearing aid manufacturing system, the first economical high-speed desktop manufacturing system for hearing aids.

We introduced Acura 55 Plus, the attach and versified stereo lithography material that simulates the look and feel of molded AVS.

And we announced introduction of the InVision XP 3D Modeler, a new 3D modeler that is designed to produce high definition, functional and durable models for form, fit, and function analysis.

Now that we've had a chance to review our financials as well as the state of the business, I would like to address our business fundamentals and expectations.

As you already know from our earlier review this morning, we believe that we're making progress.

However, bear in mind that beyond the current progress we also expect to maintain our average selling prices.

Additionally, we believe that as the friction costs that have impacted our cost of goods sold continue to subside, our gross profit will continue to return to more normal levels.

Consequently, we expect our profitability to return and exceed its historical level.

Regarding the current execution of our business plan, we expect to be able to revive healthy sales as we restore customer confidence.

One key element is the recent organization of our business around growth initiatives that we expect to drive growth.

Most significantly, we believe that proprietary materials will leave the growth of recurring revenue.

We are continuing to work hard to remedy all material weaknesses and achieve robust, effective control with the expectations that growth will resume at an accelerated pace.

As to working capital, we expect to free cash by reducing inventory and returning day sales outstanding to historical levels.

We also expect our operating expenses to decline with the completion of our relocation and ERP implementation; and we intend to achieve the anticipated savings from our Rock Hill operation.

We have all the key elements in place, we're turning our attention to leveraging our business.

Our revenue mix is changing as planned.

Materials with the highest margin in the mix, double digit growth.

Service with the lowest margin in the mix flattening.

With systems, we see new systems growing at the proxy margin.

Our targeted growth programs are poised to deliver growth through higher material consumption with higher speed systems and proprietary material cartridges.

In conclusion, we believe that we're continuing to turn the Company around and place it on a solid longer term sustained profitable growth.

Towards that end, we expect to continue to leverage our strong fundamentals, which include our living marketplace position, which we continue to strengthen and build for unwavering commitment to technology leadership, our dedicated business units focused on profitable growth, our clear priorities for sustained profitable growth, our powerful brand, deep customer relations, and diverse customer base, our global presence and reach, our differentiated product portfolio, our four patented and proprietary technology platforms, our proven record of business development, our healthy pipeline of additional opportunities -- which we expect will continue to deliver a steady stream of new products, our performance improvements and remediation initiatives, continued progress in our two significant growth programs -- 3D Modeling and Rapid Manufacturing -- and our fundamental understanding that we're in business to deliver a measurable value to our customers and stockholders.

We expect to continue to leverage these strong fundamentals as we transition ourselves from restructuring to profitable growth.

We will now open the call to questions.

We kindly request that you ask one question at a time and then return to the queue, thus allowing others to participate in the Q&A session.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Eric Martinuzzi with Craig-Hallum.

Good morning.

I want to talk about the growth rates of the different businesses.

In 2006 we saw two of the three decline, materials was up 16%.

Here in Q1 '07, we've got significant growth out of that materials segment again, 29%.

Systems is back to single-digit growth and services is a double-digit decline.

Based on the slide where you talked about your expectations there, I want to get a greater visibility, if I can.

Is materials expected to accelerate the growth rate in '07 versus 2006?

Then on the systems side, having grown in Q1, do you expect to grow that, whether it's single digits or whatever, do you expect to grow that throughout the year?

In terms of materials, Eric, we expect to continue to grow the materials at a healthy rate.

It's a little bit difficult for us to predict to what accelerated rate materials might grow, simply because we don't have yet enough history as to the impact of the new proprietary cartridges on the exponential growth that we experience with materials.

Remember that this is the first year that everything that we sell in [essence] goes up with integrated material cartridges, so we don't have much basis for comparison yet, although we're encouraged with the trend.

We certainly expect to continue to grow system sales.

We believe that what we experienced last year between the disruptions and the relative newness of some of the systems -- and also the fact that we proactively pulled the plug on certain flagship legacy systems like the SLA 5000 and the SLA 7000 -- certainly depressed any growth in equipment sales for a period of time.

But as the portfolio now is clean and we're selling only the new systems we certainly expect a return to growth on the system side.

With regards to service, we expect service as a category to stabilize.

We are continuing to fine-tune, if you will, our service business model.

Late yesterday afternoon we announced that we appointed another authorized reseller of service, if you will, National RP, which is another good independent service provider and as we transition to the right level within service, we expect revenues from service to stabilize.

But we also expect to return to higher gross profit margins on service as well.

A follow-up on the services.

In 2006, we were off 8%.

Q1, we're off 11%.

I understand what flattening is and that is not flattening.

When do you expect flattening to occur?

Given the National RP relationship, there could be more services revenue going the other way.

I understand the margins will improve, but when does flattening occur?

It obviously didn't occur in Q1 or 2006.

No, certainly it did not occur in 2006 and it will not occur probably for another quarter or so.

But we believe that when we complete a full lapping 12 months on the initiatives that we have taken with service, we will see a clear, clean picture going forward.

We also expect some revenue pickup from relationships like National RP because what we get in return from them is all the parts business.

Thank you.

Your next question comes from the line of Dennis Wassung with Canaccord Adams.

Thank you.

Good morning.

A quick question on the materials side.

Diving in a little deeper, obviously very strong growth in the quarter and obviously good progress over the last few quarters.

I'm wondering, Abe, if you can talk about the sources of that growth.

I know you talked about better utilization of your systems and a growing installed base as well as recapturing some of that installed base in terms of material business.

Can you go deeper in terms of how much of this growth at this point is coming from this expanded utilization or the installed base or have you made a lot of progress on recapturing some of that business you haven't had in the past?

I think that predominantly the growth is coming in the last few quarters from the new systems that are going out with proprietary and integrated material cartridges.

Those would be primarily the Viper Pro and the Sinterstation Pro.

We see two elements then of display here.

One is that the Sinterstation Pro in particular is used primarily for high volume applications and consumes a great deal of material when it's utilized properly.

So we've enjoyed significant pickup in our [sintering] powder sales as a result of this.

In the case of our ancillary resins, we benefited both from the new materials that we've introduced in the last 12 months, packaged into the Viper Pro, which again can make larger or more accurate power faster.

We did enjoy some pickup off the legacy installed base, which is still an open stream where we compete with other material providers, as you know, simply because we're able to bring to the market some new and differentiated materials.

And we will continue to go after the existing legacy installed base, which has the open systems, because it represents a significant growth opportunity for the Company.

Remember, we've said on many occasions that we believe that today we probably have only about one-third of the potential revenue opportunity over the legacy installed base.

When you look at those Viper Pro and Sinterstation Pro drivers, is there a meaningful increase in the material opportunity with those systems versus your historical sales?

And anyway you can quantify what that is maybe per--?

There is a meaningful increase in two ways.

One is these machines can either build more power per batch or per build cycle or they can build greater parts in size because they have larger build chambers and that in and of itself suggests higher material consumption.

In many instances, like in the case of the Viper Pro, we have the dual machines so you get in essence two in one, and that increases material consumption quite a bit.

To what extent we can quantify that, it will take us some time.

We don't have clear enough trends yet to be able to predict the delta (technical difficulty) or the multiplier here in how much and how fast material we grow, but as we get better clarity between what is driven by legacy systems versus what is driven by the new systems and what's the average use per new system, we will come back out and give you more clarity on it.

Thank you.

Your next question comes from the line of Troy Jensen with Piper Jaffray.

Abe, congrats on the improved financial metrics this quarter.

Thanks.

Quickly, a couple questions here.

Tangible Express, just curious to know if you guys recognized any revenue in the fourth quarter from that nice big win?

We did recognize some revenue on Tangible Express.

I can't tell you off the top of my head exactly how much, but we did.

Okay, perfect.

Then a quick question on the income statement stuff.

You gave a little bit of guidance here with respect to some of the expense items, R&D and some of the one-time stuff that was in SG&A.

I was wondering if you guys could take it maybe a little step further.

Any comments on what any other income or other expense might look like for the remainder of this year?

When should we assume you guys will pay or start reporting a full tax rate and what the GAAP share count would have looked like, if you guys would have had a GAAP income in the quarter?

Well, a couple of things.

In terms of our operating expenses, we tried to break it out so we could see what we consider to be ordinary [for] course kind of expenses versus the abnormally high expenses and that is on one of the slides.

I don't know if you have the webcast in front of you, Troy, but it's on one of the slides, it's on slide 9.

It's broken out pretty clearly in terms of what we consider to be the incremental abnormal expenses.

Obviously, we would like to return back to normalized SG&A and normalized R&D as we had at the time that we kind of exited '05 and went into '06 as a base line.

In terms of the share account, I believe that the share account for EPS calculation was -- what was it?

About over $19 million, if I'm not mistaken.

19.1.

19.1.

And in terms of when we would have kind of a taxable provision, that will depend on a few things.

It will depend on a number of quarters of profitability that would perhaps allow us to take the deferred tax asset that we have.

It would then, of course, will depend on how long it will take us to consume the NOL, which we are consuming in any event, whether it is set up as a deferred tax asset or not.

But until those NOLs are fully depleted, the Company's tax rate is going to be very low and it will reflect primarily foreign operations.

I understand you guys won't pay taxes for a while, but do you think you guys will have to report them in 2008 is what I'm trying to get to?

If you think about it, Abe, if you exclude the one-time items that came through in the SG&A line, you guys would have had a GAAP profit this quarter.

Things seem to be improving for you.

Q1 has typically traditionally been the lowest point in any given year so we should assume profitability going forward, right?

Can you help me think through --?

And then secondly, I do think that the GAAP share count changes if you have a GAAP profit versus a GAAP operating loss.

Maybe tell us what the fully diluted share count is?

I believe -- and I'll have to double check this so don't quote me accurately here, I believe, Troy, that on an if-converted basis, if everything that we had converted were under 22 million shares -- all in, that would be options, the remainder of the 6% convertible debenture.

So all in it would be under 22 million shares.

Okay, okay, perfect.

And then thought on tax rate, Abe.

Not to hammer it home, but I'm just trying to get my model right.

I'll have to confer with our new CFO on it.

I'm doing my best, but I'm not the CFO.

I'll check with Damon, who's here on the call, but only been with the Company a few weeks.

How about if we come back to you on that.?

Perfect, perfect.

One question and I'll get out of the queue here, but is there all the restriction -- or the callable option or the putable option you guys have on the convert now, is there anything now preventing you that you have to see with all the financials and any reasonably that you guys wouldn't convert that to such equity sometime soon?

Well, as we become timely in our financials and our house is in order, there are no obstacles to call those.

Okay, perfect.

Keep up the good work, Abe.

Thanks.

I'm doing my best, Troy.

Your next question comes from the line of Phil Goldsmith with Goldsmith and Harris.

Hello?

Phil?

Mr.

Goldsmith, your line is open.

Perhaps we should move to the next one.

Your next question comes from the line of Bill Gibson with Nollenberger Capital.

Hi, Abe.

Before I go to my question, I just wanted to confirm something I heard on the first one from Eric.

And that is, every system we're shipping now now has an integrated delivery cartridge?

With the exception of one older sintering system, that is correct.

Okay, good.

And then are we still on for the timing of the introduction of the V-Flash?

We're still on for an introduction this summer, yes, sir.

Good.

And you -- I sensed real confidence in being able to renew or replace the credit line.

Is that a fair statement?

That is a fair statement, in fact, yes.

Thanks, Abe.

Your next question comes from the line of [Cliff Ransom] with Ransom Research Inc.

Hi, guys.

You say the fiction costs are expected to continue.

Why, in the first quarter of '07, is it still an issue?

What parts of the friction costs are persisting?

I'm sorry, Cliff.

Maybe it's my thick accent this morning.

I believe I said it as we get past the friction cost.

You expect them to improve, but what are they in the first quarter that has been deleterious?

Well, in the first quarter we still had some remnants of commitments that were made to customers on various service issues or missing spare parts, some odds and stuff.

As you can see from the gross profit improvement, we believe that the first quarter already gave us a fairly clean picture.

I said in my comments, Cliff, that we expect not only to return to our historical gross profit margins, but to exceed them at some point in time this year.

That should indicate that friction costs are no longer a significant element in the picture.

We believe that most of those got washed through the P&L in the first quarter.

There may be a little bit of a residual, but I don't see it as a significant element at this point in time.

I can appreciate that you don't want to quantify the materials increase because you want to have more time with the new systems with integrated proprietary cartridges.

Are you seeing any preliminary data that contradicts your assumption that it's going to increase?

In other words, are you just not willing to quantify the level of increase, but you're still comfortable that it will increase?

Well, I'm comfortable that it will increase simply because of the fundamentals.

I know that with every system that I sell, I'm going to get 100% of the materials consumption on that system.

It becomes merely now an ability to predict with more accuracy rates of growth as we get a little bit more experienced with consumption per machine and so forth.

Remember too, Cliff, that once we introduce the V-Flash, then that is going to be another very significant contributor in material consumption, because we're going to introduce a fairly low cost machine that will have a fairly high volume of material consumption through it.

In some instances, it could rival the value of some of our large frame older systems.

As that goes into place in the next period or so, that will further complicate our ability to predict material consumption for the next few periods.

What is the next -- this is my last question.

What is the next data point, timing point, date on the V-Flash, what's the next thing we're going to see?

The next thing that you're going to see is an announcement in fairly short order, hopefully in the next few days, of the company that we selected to manufacture the V-Flash for us.

I made mention of this in the last couple of weeks.

We selected a very significant player to provide the contract manufacturing both for the machine and for the cartridge, a company that will bring a great deal of value to the table in terms of immediate and pertinent expertise.

That will be the next announcement that, in essence, indicates that we are getting closer to prime time here.

Thank you.

Your next question comes from the line of Jeff Rosenberg with William Blair.

Morning.

Abe, is it possible for you to give us some sense, if you look at your systems growth that you had in the quarter, whether there's any kind of color commentary about relative growth of SLA, Viper, SLS, or 3D printers?

Which of those or are any of those doing much better than the corporate average or much worse?

Any kind of help there in terms of what's driving growth?

It's actually -- for the first quarter, I would say that all three segments did reasonably well.

I will also caution you, Jeff, that our business today is still very lumpy in nature.

So when we go out and sell machines for $0.5 million or $0.75 million, if you look at it in terms of revenue contribution, it tends to skew what's really going on.

Just to illustrate the point, if I sell a few Dual Vat Viper Pros, each one of those could be worth something like $800,000, I would have to sell, even within SLA about five smaller Vipers to equal one large Viper.

So unit count or revenue tends to be very confusing because we're not comparing apples to apples yet.

Well, along those lines, anything we should think about in terms of how the lumpiness affected the quarter positively or negatively as we look to revenue expectations for the next couple of quarters?

Well, I think that particularly the lumpiness here has to do more with the geographical story.

You can see between quarters the shift back and forth between Europe and the United States, primarily in terms of where sales are generated.

I wouldn't read too much into it, simply because the timeliness of revenue recognition, as it coincides with the timeliness of quarterly reports, sometimes tends to skew what's actually happening in the marketplace.

It's a mere reflection of the lumpiness and on the length of the selling cycle.

Okay, thanks.

Your next question comes from the line of Jim Bartlett with Bartlett Investors.

Could you give us some quarterly background of the percentage sales from new products?

Both first quarter versus say fourth quarter, third quarter, et cetera?

(multiple speakers)

I could, Jim, but not off the top of my head.

I don't have it at my fingertips.

I believe that we have it in our 10-Q filing and also in the 10-K and I'll be happy to extract it for you and get it to you.

But I don't have it off the top of my head.

The K is, I believe, doesn't have it on a quarterly basis, though, does it?

I believe that we can give it to you on a quarterly basis and extract it from the previous Qs and from the current Q.

Thank you.

And what is the -- what is the head count running now?

We, on a global basis, I believe are in the neighborhood of around 350 people.

So that's up slightly from year end?

It's about, I believe, on par with year end.

That's fine.

Thank you.

Okay.

Your next question comes from the line of David Cohen with Midwood Capital.

Hey, Abe.

Hey.

Can you give us a figure for what the materials revenue were in, let's say the last two quarters, Q3 and Q4 of '06?

Yes, I could, and in fact -- let's see if I can find it for you.

Maybe Damon, you can help me.

If you hang on a second, David, I'll give it to you.

Okay.

Trying to find it.

You can take the next caller and either I'll call back in or--?

Yes, we can -- it's all in the -- .

You can mention it.

Yes.

Okay, thanks.

Okay, let's take the next call and I'll mention it as soon as we get the number for you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Phil Goldsmith with Goldsmith and Harris.

Good morning.

This is [Ptolemy].

Abe, I'm sorry I have been in and out of the call so I apologize if you've already answered this question, but could you please let us know if there were any -- what impediments there were to stronger system sales in the quarter?

Can you also characterize any changes made to the sales force and your strategy for the sales force in 2007?

I'm not sure what you mean by impediments to system sales--?

Impediments to stronger growth.

I see.

Well, we are still transitioning the Company and so we are doing the best to keep all of our elements moving together cohesively.

We're actually not looking at impediments to sell, we're looking at gaining strength and doing it a little better every quarter.

In the first quarter, we continued to do better as an integrated entity, not just as the selling part of it.

Because we want to make sure that we can book it, ship it, sell, install it, collect on it, and make all of it happen seamlessly.

But I can't point to any particular impediments to sales, except that endurance and agility of our organization as we get past the '06 disruptions and stride here in all of our functions, including sales, specifically in terms of a sales organization, Ptolemy.

As you know, we announced about a month ago that we reorganized the Company into three dedicated business units, particularly around sales marketing and field service.

We now have a dedicated laser sintering business unit and a dedicated 3D modeling business unit and that was done primarily to improve upon our ability to sell and to install and service more efficiently so that we could digest and execute against higher volume sales transactions.

Terrific.

Thank you.

Your next question comes from the line of Jim Bartlett with Bartlett Investors.

You mentioned the inventory levels that you were not happy with.

What is your time line for getting those back in-line?

Well, we -- our internal objective, Jim, is to get those underline and into an acceptable level, which, as I said, should be between $12 million and $14 million within the next couple of quarters.

We certainly want to end the year with our ideal inventory level and on a going-forward basis maintain it as we have done in the '04 and '05 years.

And could you give us some feel for the -- there was no backlog at the end of the first quarter?

Nothing to speak of.

It was very small.

Which would mean that actually the order rate was down from what it had been in the prior three or four quarters.

Could you categorize how you see the order rate?

Well, we actually view it more as a return to normalcy in terms of our lead times and our ability to transact orders in real time.

I will remind everybody that we historically did not talk about backlog because we didn't think that backlog was a good measurement for the business.

We -- up until the '06 periods -- were able to do business more or less in real time.

The only reason that we began to talk about backlog in '06 is because we had it and we could not ship it.

We could not process those transactions, and I said already in connection with the last couple of quarters that as we deplete our backlog and return more into just in time order fulfillment, I would consider that a healthy signal that the business has returned to normalcy.

Final question.

could you give us some idea on the, in the 3D printer modeling segment, historically 2005 and '06 revenues?

We, I believe at the end of -- well, at the end of '04, we had very little revenue in 3D modeling.

At the end of '05, I believe we put out a number of around $16 million in 3D modeling revenue.

We did not put out numbers since on 3D modeling as a segment, simply because it started expanding into some manufacturing [alterations] in jewelry and in dentistry and it became more difficult for us to categorize it as a clean segment for revenue purposes.

As we go out with the V-Flash product line shortly, we will try again to come up with a clean way to measure revenue from what we consider to be the purer 3D modeling side of the business.

Thank you.

Your next question comes from the line of Bernard Hamilton with -- private investor.

Hey.

You mentioned earlier that you were confident about replacing the credit line.

Does that mean that you can do that through debt and hopefully not further dilution through some convertible preferred or debenture?

Well, at the moment we have started discussions with Silicon Valley to either renew, replace, or pay down the revolver.

We haven't yet concluded how we are going to do it, but let me say that we believe that between the unliquidated inventory position that we have, our accounts receivables, the timing on other profits that the Company expects in the ordinary course of business, we would not go out and do another convertible debenture.

The only reason that the Company would do something else would not be in connection with the revolver, but rather in connection with an extraordinary opportunity.

So for example, if we concluded that we needed additional funding to launch V-Flash in the right way and give it more importance, both in terms of building up the inventory for it and the advertising component, what have you, that may constitute a reason to go out and do something.

If we had any other extraordinary opportunities that the Company did not have the financial resources to go after in future periods, that may give us a reason to go back, but just to deal with the Silicon Valley facility, we would not do that.

Okay.

When -- are you taking at all any preintroductory orders for the V-Flash?

Not yet.

Not yet.

Although we haven't had a shortage of people that offered us orders.

So at what point would you start doing that?

The day that we have units on the shelf ready to ship.

We don't want to start taking orders until we have units on the shelf ready to ship.

But I will tell you that we've had scores of companies offering us orders.

Okey-doke.

Okay.

Thank you.

Your next question comes from the line of Cliff Ransom with Ransom Research Inc.

Abe, let me just make sure that I understand this backlog issue.

I frankly viewed your backlog numbers as a negative because it meant you couldn't deliver.

That's right.

Okay.

Number two, this issue of moving your working capital down, is that really a relevant number?

You're about to go to a massively outsourced model on your newest and what you hope will be one of your fastest-growing product lines and therefore working capital will be on the books of this company you're going to introduce as your manufacturing, your outsourcer for both the machines and the cartridges.

So of course your working capital should go down, but I'm a lean fanatic, it's the leanness of the whole value chain that matters.

How should we think about that?

Are you asking if the $12 million to $14 million is relevant?

Yes.

If that was the old number, you were in a different business model then.

Yes, but you've known us long enough now, Cliff, to know that we're conservative so the first milestone is, let's get back to where we used to be and the next milestone after that would be let's reduce it further.

Thank you.

That's the answer I thought I was going to get.

Thank you very much.

Good day.

Thank you.

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