3D Systems Corp (DDD) 2007 Q2 法說會逐字稿

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

My name is [Fredricka] and I will facilitate the audio portion of today's interactive broadcast.

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(OPERATOR INSTRUCTIONS).

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

Please go ahead, ma'am.

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, 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.

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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 fact 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, belief, expect, estimate, intend, anticipate, or plan 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 related under the heading forward-looking statements, cautionary statements and risk factors, and risks actors that appear in the Company's periodic filings 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, and thanks for taking the time to listen to our call this morning.

Yesterday afternoon we filed our second quarter 10-Q with the SEC and issued a press release with our operating results for the second quarter and first six months of '07.

We are pleased to have returned to our normal timely reporting of operating results.

Before I delve into the actual numbers, let me say that I am pleased to the redemption of healthy revenue growth and the continued improvement in our operating results.

I believe that we are continuing to experience gains from our extensive and painful business transformation efforts.

I am particularly pleased that for the second quarter revenue from systems increased by 70% and our engineered materials and composites grew by 30%.

I am also gratified that growth from new systems and materials more than offset the planned decline in revenue from our discontinuation of various negative products and other less-profitable activities.

Case in point, our revenue for the second quarter of '07 set a new second quarter record, representing a 34% increase to $36.4 million, compared to its depressed level of $27.1 million for the second quarter of '06.

We ended the second quarter with backlog of approximately $1.5 million, a significant reduction from the $5 million of backlog recorded at the end of December of '06.

As we said previously regarding the significance of backlog in our business model, we believe that June 30 level of backlog is more consistent with the normal operating trend in our business, which are generally not characterized by long lead time.

Gross profit for the second quarter of '07 more than double to $13.5 million.

Our gross profit margin trends showed significant improvement over the second quarter and first six months of '06, reflecting the ongoing progress we are making.

It is important to note that in connection with our targeted Rapid Manufacturing growth initiative, during the second quarter of '07 we discounted several large systems sales in order to promote certain long-term strategic opportunities.

We estimate that the net effect of this targeted strategic discount was to constrain our gross profit in the second quarter of '07 by approximately four percentage points.

While this strategic move clearly results in a gross profit setback for the second quarter, we believe that they are well-placed and fit nicely into our targeted long-term growth initiative for Rapid Manufacturing opportunities.

We expect that this strategic placement will contribute favorably to our growing install base and that coupled with the integration of our new systems with proprietary material cartridges, recurring revenues from material consumption from these systems in future periods will more than offset the gross profit setback incurred during the second quarter.

We expect that over time this trend should lessen the volatility and improve the stability of our revenue base and gross profit as consumable sales rise as a percentage of product mix relative to systems.

Operating expenses were $2.2 million higher in the second quarter of '07 than the second quarter of '06.

We believe that as of the end of the second quarter, most of the significant, abnormally high accounting and legal costs related to our restatement on our '06 year-end audit and the implementation of our new ERP system are behind us and that the majority of our operating issues have been resolved successfully.

We believe that apart from these abnormally high cost, our quarterly operating expenses have begun to resume a more-normalized run rate and accordingly, we expect our SG&A for the second six months of this year to fall in the range of 22 to 26 million.

Operating loss for the second quarter declined by more than 50% to $4.9 million from $10.3 million for the second quarter of '06.

For the first six months of '07, revenue increased 21% to $73.4 million from $60.8 million for the first six months of '06, a $12.6 million increase.

For the first half of '07, both systems sales and the engineered material and composite revenue grew by 30%.

For our material sales, this is a significant heftier step up from its '06 growth rate of 18%.

Gross profit increased by 51% to 29.4 million from $19.4 million in the first six months of '06, continuing its trend of returning to its pre-2006 levels of profitability.

Operating expense for the first six months of '07 was $5.3 million higher than those for the first half of '06, reflecting more fully the impact of the significant of abnormally high accounting and legal costs related to our restatement are '06 year-end audit and the implementation of our new ERP system had on the P&L.

As a result of the overall progress we are making, operating loss for the first six months declined by more than 40% to $7 million from $11.7 million in the '06 period.

Operating loss included $5.6 million of non-cash expenses in the first six months of '07 and $5 million of non-cash expenses in the '06 period, which included higher depreciation and amortization expense in the '07 period as a result of our higher capital expenditures in '06 for our facilities consolidation into Rock Hill and the implementation of our new ERP system.

We expect that depreciation and amortization expense for the full year '07 will be in the range of 6.5 to 7.5 million.

We believe that our overall results reflect the continued demand for our products and demonstrate that the strategic action that we have taken to reshape our organization from our product portfolio and reengineer our business model are, in fact, taking effect.

For a more detailed look at our '07 financial performance through June 30 of '07, let me turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Thanks, Abe.

For the second quarter of '07 revenue from systems increased by $5.2 million, or 70%, to $12.7 million for the quarter ending June 30 07, from a suppressed level of $7.5 million for the second quarter of '06.

It comprised 34.8% of consolidated revenue in the '07 quarter, compared to 27.5% in the '06 period.

Higher systems sales in all geographic regions were the primary growth driver, translating to a $4.9 million increase in sales of newer systems, a favorable $0.7 million price and mix effect, and a $0.3 million positive impact from foreign currency translation.

This was partially offset by a $0.7 million decline in sales of legacy systems.

Revenue from materials increased by $3.4 million, or 30%, to $14.9 million from $11.5 million for the '06 quarter and comprised 41% of consolidated revenue in the '07 period, compared to 42.3% in the '06 period.

Higher unit volume, with unit sales of new and core materials, drove growth resulting in a total increase of $4.2 million.

Partially offsetting this increase was a $1.1 million year-over-year decline from price and mix effects.

Foreign currency translation also had a $300,000 positive impact.

Service revenue increased modestly by $0.6 million, or 7.8%, to $8.8 million for the second quarter of '07 from $8.2 million for the '06 period and declined by 24.2% of consolidated revenue from 30.2% for the '06 period.

The continued decline of service revenue as a percentage of total revenue was primarily due to the proportionately higher increase in revenue from systems and material.

Higher unit volume of $400,000 from new services and $200,000 of favorable foreign currency translation were partially offset by a small decline in volume of core services, as we continue to discontinue service and upgrade support for certain legacy systems.

On a geographic basis, our revenue growth in both the second quarter and first six months of '07 were derived primarily from the U.S.

and Europe.

For the first six months of '07, revenue from systems increased by $6 million, or 30.4%, to $25.8 million for the first six months of '07 from $19.8 million for the six months for the '06 period and comprised 35.2% of consolidated revenue in the '07 period, compared to 32.6% in the '06 period.

This increase resulted primarily from higher volume of systems sales in all geographic regions.

The increase was driven primarily from a $6.3 million increase in sales of our newer systems, $0.7 million positive impact from foreign currency translation, and a $0.1 million favorable price and mix change.

This was partially offset by a $1.1 million decline in legacy product sales for the six-month period.

Revenue from materials increased by $6.9 million, or 30%, to $30.3 million for the six-month period from $23.4 million for the six months ended June 30 '06 and comprised 41.3% of consolidated revenue in the '07 period, compared to 38.4% in the '06 period.

As was the case with the second quarter, this increase was primarily the result of higher unit volume, with unit sales of new and core materials increasing by a total of $6 million in the first six months of '07.

Foreign currency translation also had a $0.9 million favorable impact.

Revenue from services decreased slightly by $0.4 million, or 2.2%, to $17.2 million for the first six months of '07 from $17.6 million for the 2006 period and comprised 23.5% of consolidated revenue in the '07 period, compared to 29% in the '06 period.

This decrease in revenue arose from a $0.9 million decrease in volume that was only partially offset by favorable impact of foreign currency translation.

On a consolidated basis, gross profit for the second quarter of '07 increased by $7.7 million to $13.5 million from its depressed level of $5.8 million in the second quarter of '06.

Gross profit margin in the second quarter of '07 increased to 37% of revenue from 22% of revenue for the '06 quarter.

As we have said before, '06 gross profit was adversely affected by the business disruption that we experienced in the second quarter of '06.

We did not experience these same disruptions in the second quarter of '07.

Gross profit in the '07 quarter was also positively impacted by $0.2 million of favorable foreign currency translation and higher installation revenue, resulting in better fixed cost absorption.

However, in connection with our targeted rapid manufacturing Rapid Manufacturing growth initiatives that Abe mentioned earlier this morning, during the second quarter of '07, we discounted several large systems sales in order to promote certain long-term strategic opportunities.

We estimate that the net effect of these targeted strategic discounts was to constrain our gross profit in the second quarter of '07 by approximately four percentage points.

For the second quarter of '07, cost of sales increased by 7.8%, a rate less than the rate of increase in revenue, to $22.9 million from $21.3 million for the second quarter of '06 primarily due to the incremental cost of sales associated with our higher revenue and a $0.6 million foreign currency translation adjustment.

Cost of sales in the '06 quarter was adversely affected by the operating issues previously discussed above.

Product gross profit for the second quarter of '07 increased by $7.3 million, or 164%, to $11.7 million from $4.4 million for the '06 quarter.

This increase was primarily due to the absence in the '07 quarter of the disruptions that reduced '06 margins.

Product gross profit for the 2007 quarter was adversely affected by the selected discounts that I mentioned above.

Gross profit for services for the second quarter of '07 increased by $0.4 million, or 26%, to 1.8 in dollars from $1.4 million for the '06 quarter.

This increase was primarily related to higher installation training revenue recognized during the second quarter of '07, resulting in a better absorption of fixed cost.

On a consolidated basis, our gross profit for the six months ending June 30 '07 increased by $10 million to $29.4 million from $19.4 for the six months ending June 30 '06.

Gross profit margin increased to 40% of revenue from 32% of revenue for the '06 period.

The improvement in the first six months of '07 resulted primarily from the absence of the disruption that reduced '06 margins and a $0.7 million favorable effect of foreign currency translation, which was partially offset by the selected discounts mentioned above.

Product gross profit for the six months ending June 30 '07 increased by $10.5 million, or 67%, to $26.2 million from $15.7 million for the '06 period.

This increase was primarily due to the absence in the '07 period of the negative impact of the disruptions that affected our business beginning in the second quarter of the '06 and higher revenue.

Gross profit for services for the six months ending June 30 '07 declined by $0.6 million, or 16%, to $3.2 million from $3.8 million for the '06 period.

The decrease was primarily related to increased product costs and lower maintenance billings due to our discontinuation of providing service and spare parts for certain legacy systems.

We have not incurred any restructuring costs in the first half of '07, as we completed our relocation to the rock Hill, South Carolina facility last fall.

So our operating expenses this year consist of SG&A and R&D expenses.

As shown on slide 13, these expenses increased by $5.3 million, or 17%, to $36.4 million for the first half of '07 from $31.1 million for the first half of '06.

The $8.8 million increase in selling, general, and administrative expenses for the first half of '07 was due primarily to $1.8 million of costs associated with our restatement at 2006 year-end accounting-related costs, $1.7 million of additional legal fees, $2.5 million of contract labor, $1 million of severance and stock-based compensation expense, primarily related to the separation from service of our former Chief Financial Officer, $0.5 million of additional depreciation expense arising from the Rock Hill facility, and $300,000 of amortization expense related to the new ERP system, and $0.6 million of foreign currency translation.

The effect of these increases was partially offset by the absence in the first six months of 2007 of $3.9 million of restructuring costs that we incurred in the '06 period for our relocation to Rock Hill.

Our continuing high level of work on selected new product developments, including our new V-Flash desktop 3-D Modeler, led to the higher research and development expenses in the '07 period.

We expect to incur 12 to $13 million of research and development expenses in 2007.

Selling, general, and administration expenses were abnormally high in the second quarter of '07 due primarily to $1.2 million of incremental costs associated with year-end and Q1 accounting costs; another $1.2 million of contractor and consulting costs, used mainly in the finance area; $0.8 million of additional legal fees; and $0.3 million in carrying costs for Grand Junction and Valencia.

We believe that, as of the end of the second quarter, most of the significant abnormally high accounting and legal costs related to our restatement and our 2006 year-end audit are behind us and that the majority of our operational issues have been resolved successfully.

We believe that apart from these abnormally high costs our quarterly operating expenses have begun to resume a more normalized run rate and accordingly, we expect our SG&A expenses for the second six months of this year to fall into the range of 22 to $26 million.

Net loss available to common stockholders for the second quarter of '07 decline to $5.3 million from $11.5 million for the '06 quarter.

And net loss available to common stockholders for the first half of '07 declined to $8.4 million from $13.5 million for the first half of 2006.

The improvement in net loss for both the second quarter and first half of '07 were due to the lower operating loss in each '07 period and the absence of dividends paid on outstanding shares of preferred stock before they were converted into common stock in June 2006.

This improvement was partially offset by increased interest expense and changes to the tax provision.

For the first half of 2007, we used $7.6 million of net cash for operating activities.

This use of cash consisted of our $8.4 million net loss and $4.8 million of cash consumed by net changes in operating account that we partially offset by $5.6 million of non-cash items that were included in our net loss.

The principal changes in operating accounts included $8.6 million of cash provided from our lower accounts receivable, $11 million of cash used in the reduction of accounts payable, and $5 million of cash used with respect to customer deposits.

The principal changes in non-cash items that favorably affected operating cash flow included $3.6 million of depreciation and amortization expense and $1.7 million of stock-based compensation expense.

Net cash used in investing activities in the first half of '07 decline to $1 million from $3.7 million for the first half of '06, reflecting our lower level of capital expenditures in the '07 period.

Now that we completed the relocation to our Rock Hill facility in '06 and our ERP system is operational, we have been incurring a more normal, lower level of capital expenditures in '07.

Net cash provided by financing activities increased to $23 million for the first half of '07 from $1.1 million in '06 period.

This increase resulted primarily from $20.6 million of proceeds from our private placement of common stock in June '07 and a $0.7 million increase in proceeds from the exercise of stock options and restricted stock awards compared to the '06 period.

Slide 18 sums up the operating results story for the past six quarter.

As you may recall, we encountered severe disruptions in the second quarter of '06 that led to a significant decline in revenue and deeper operating loss.

After working to correct the sources of these disruptions, our revenue in both the third and fourth quarter of 2006 rebounded, increasing sequentially over the immediately prior quarter, with lower operating losses and net losses in each quarter.

In 2007, we have been heartened by quarterly revenue growth in both the first and second quarters.

We delivered 10% top line revenue growth in the first quarter year-over-year period and 34% top line revenue growth in the second quarter '07 year-over-year period.

Our quarterly operating results, which increased significantly in the second quarter of 2006, improved continually in the third and fourth quarters of '06, but have suffered in the first and second quarter of '07 due primarily to the higher operating expenses we have discussed with you earlier.

As we have said before, we expect SG&A expenses to fall into the range of 22 to $26 million, which should help to restore our improved trends.

Our net working capital increased by $18.7 million to 36.1 million at June 30, 2007 from $17.3 million at December 31, 2006.

Inventory days on hand declined to 105 days at the end of June from 136 days at the end of March.

We are working to reduce inventories further for the balance of the year, even as our revenue and profitability grow.

Accounts receivable decreased by $8.3 million to $26.2 million at June 30 '07, from $34.5 million at December 31 '06.

This decline was primarily attributable to the timing of collections, which resulted in a reduction of days sales outstanding to 65 days at June 30 '07 from 74 days at December 31, '06.

Our gross accounts receivable declined $9.1 million from December 31 '06 to June 30 '07.

Accounts receivable more than 90 days past due declined to 5.6% of gross receivables at June 30 '07 compared to 9.9% of gross receivables at December 31, 2006, primarily due to our focus on resolving past due accounts.

Inventories decreased by $900,000 to $25.2 million at June 30 '07 from $26.1 million at December 31 '06.

The $0.9 million decrease in inventories at June 30 '07 resulted from a decrease of $1.4 million in inventory held by assemblers and finished goods that was partially offset by a $0.5 million increase in raw materials inventory.

We expect to be able to continue to reduce inventory to as low as $15 million over the next few quarters without any compromise to customer satisfaction.

We ended the second quarter of '07 with $29.2 million of unrestricted cash compared to $14.3 million of cash at December 31 '06.

This included $8.2 million of borrowing under the Company's Silicon Valley Bank revolving credit facility at each date.

Most of this increased level of cash came from $20.6 million of net proceeds from the private placement of common stock we completed in June.

About $2.6 million in proceeds from stock option exercises in the first six months of '07 also contributed to it.

This increase in cash was partially offset by $7.6 million of cash that we used in operating activities in the first six months of '07, $7.1 million of which was used in the first quarter and $0.5 million was used in the second quarter.

It was also reduced by our low level of capital expenditures in the first six months of '07.

After June 30, all of our outstanding convertible subordinated debentures were converted to common stock and we repaid our $8.2 million of outstanding revolving credit loans, reducing our total debt by $23 million.

Our total outstanding debt in capital lease obligations is now about $12.4 million, reflecting primarily the remainder of our industrial revenue bonds on the Grand Junction facility and the capital lease on our Rock Hill facility.

That concludes my comments.

Abe?

Thank you, Damon.

Before we begin the Q&A session, I would like to spend a few minutes reviewing with you recent developments in our business and how we see them contributing to our growth.

As we mentioned earlier today, during the second quarter of '07 we continued to incur abnormally high costs pertaining to the restatement in year-end and first quarter '07 audit work.

We believe that these costs will update in the second half of the year.

Furthermore, we believe that at the end -- as of the end of the second quarter, the significant business setbacks and disruptions that we experienced in the course of implementing our strategic initiatives in '06 have been resolved successfully.

We remain confident in our overall direction and expect that the key initiatives and investments that we undertook throughout 2006 will provide us with the right platform to achieve our long-term objectives.

We are gratified with the progress we are making with the reduction in inventory and days sales outstanding and we plan to continue to make progress in these areas for the remainder of this year.

We believe that our growing installed base, coupled with the integration of our new systems with proprietary material cartridges, will continue to improve the profitability of our business, as revenue from materials continues to outpace our growth in systems.

Over time, the volatility of our revenue base should decline and its stability should improve as consumable sales rise as a percentage of the product mix relative to systems.

Bolstered by our year-to-date improving results, we're continuing to focus on our efforts to transform our company and the way we do business to establish a strong record of sustained growth and profitability.

During the first half of this year, we announced several new product developments and alliances during the first half of the year.

The most significant is our revolutionary compact, fast, and affordable V-Flash desktop modeler.

As you know by now, we subsequently selected Canon Virginia Inc.

as the manufacturer for our new V-Flash systems and we plan to unveil the system at the 3D Systems world conference, starting September 24.

We expect commercial shipment to commence around the world conference.

We also an announced a second film transfer imaging system, the V-Flash hearing aid manufacturing system, the first economical, high-speed, desktop manufacturing system for hearing aids, in partnership with Dreve that we expect to begin to ship commercially sometime this fall.

A few weeks ago we announced the new revolutionary stereolithography material, Accura Extreme plastic, a tough and durable material that enables faster product design.

We expect selected shipments to commence in September.

During the first half of this year, we announced an innovative marketing partnership with Tangible Express, the first fractional ownership program in the industry designed to replicate the success the private jet industry is enjoying from similar fractional ownership programs.

We also launched Accura 55 plastic, a tough and versatile stereolithography material that simulates the look and feel of molded ABS.

And we also commercialized the most powerful and capable 3-D Modeler, the InVision XT.

Finally, we are pleased to share with you that after the end of the second quarter, we were informed by the U.S.

Department of Justice that it has closed the investigation that we previously disclosed in our periodic SEC filings, as it pertains to the Company and to individuals associated with the Company, and that the Department of Justice will take no action with respect to the Company or those individuals.

We expect the end of these proceedings to contribute to a lower level of legal expenses than the Company incurred in responding to the Department's inquiries for the remainder of '07.

As you already know from our earlier review this morning, we believe that we are me can progress.

Our average selling price and cost of goods sold remained relatively unchanged so far this year.

Therefore, we expect that our gross profit -- we expect the gross profit will continue to recover as the year progresses.

We believe that as of the end of the second quarter, most of the significant abnormally high accounting and legal costs related to our restatement, our '06 year-end and first quarter audit work, and the implementation of our new ERP system are behind us, and that the majority of our operation issues have been resolved successfully.

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

Consequently, we expect gross profit to return and to exceed historical levels in the coming quarters.

Regarding the current execution of our business plan, we are continuing to restore customer confidence.

We are actively remediating our remaining material witnesses and we're working to achieve robust, effective controls.

Most significantly, as we already demonstrated in the course of the first half of this year, we expect our proprietary materials to grow recurring revenue and drive growth at an accelerated pace.

As to working capital, we expect that our reduction in inventory and days sales outstanding to historical levels will free up cash and we expect our operating expenses to decline over the completion of the activities that generated abnormally high expenses.

We have all the key elements in place to returning 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, the flattening and stabilizing.

And with systems, we see new systems growing at attractive margins.

And 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 are continuing to turn the Company around and place it on a solid, longer-term, sustained profitable growth path.

Towards that end, we expect to continue to leverage our strong fundamentals, which include our leading marketplace position, which we continue to strengthen and build through unwavering commitment to technology leadership; our dedicated business units focused on profitable growth; our clear priorities for sustained profitable growth; our powerful brands and good 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 improvement and remediation initiatives; the continued progress on our two significant growth programs, which are 3-D Modeling and Rapid Manufacturing; and our fundamental understanding that we are in business to deliver 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.

Troy Jensen, Piper Jaffray.

Hey, Abe, could you talk about the Rapid Manufacturing opportunity on the consumables site?

I guess what I would really like to hear it is how much consumables per system for, like, a big Sinterstation Pro or some of your newer machines out there for the Rapid Manufacturing applications.

Good morning, Troy.

It is difficult to distill Rapid Manufacturing opportunities at this point into a distinct consumption per machine, because applications are all over the lot.

I will just give you a couple of examples.

If we make millions of hearing aids, the consumption of material per a single hearing aid is very small just by virtue of the size of a hearing aid.

On the other hand, if you manufacture air ducts for airplanes or helicopters, the consumption per machine could be very, very high because you make a very, very large parts.

So when we talk about Rapid Manufacturing, Troy, you could have consumption anywhere in the range from 40 or 50,000 per machine and it could be as high as 250 and 300,000 per machine.

So it is a very broad range.

Got you.

All right.

And then just if I could sneak another one in for Damon, could you let us know what you think the share count is going to be at the end of the third quarter?

It's -- we -- I don't expect any -- we don't have any big swings or anything that we have disclosed in there at all.

At this point, Troy, it is -- everything is converted and, you know, you have to guess what was placed in the private placement.

That will give you the total share count.

But the convertible go for the third quarter?

Shouldn't that add a few million shares to the share count?

Yes, that has what was disclosed in the Q, I believe it was 1.3, 1.2 million -- isn't that right?

We can provide you with an exact share count after the meeting.

It is all in our disclosure, Troy.

It is all in the 10-Q.

Bill Gibson, Nollenberger Capital.

Abe, in regards to the price discounting in the Rapid Manufacturing area, were these new applications or were these for areas you were already in and I am going to throw out a couple of related questions.

Are these new customers and then lastly, related to that, is this a competitive situation where you were beating out somebody else or going against other capital equipment?

Let me say that that the discounts that we provided, which we believe are strategic and will more than pay for themselves in future period material consumption, came from a few significant opportunities.

Most of them are new to us.

In one or two situations, those were extensions of manufacturing activities on the part of some existing customers that are taking the technology into new areas within their operation.

We believe that given the size and magnitude and the opportunity to place these systems either instead of traditional manufacturing opportunities or two make sure that the ROI reward for this customers, this was a good thing to do simply because we believe that within a matter of months, the initial discounts will more than be recouped for material consumption.

Thanks, Abe.

David Cohen, Midwood Capital.

Hi, Abe.

Now, help me with something.

Taking a long-term view, here, I have been involved with this stock for over three years and I know you're approaching your fourth anniversary.

And my question is when is the Company going to reach a reasonable level of profitability?

I think you presented in May at your investor day some targeted economics for a company in this industry of about $150 million of revenue and you're getting very close to that level of revenue if you look at your last four quarters or annualize your first half.

And you are very far a way from the gross margin, the operating margin targets that you articulated in that target model.

And I am wondering how long -- how much longer can the Company continue to generate such low levels of profitability?

I mean all your comparisons for this quarter versus a very low base last year and last year was clearly not reflective of what the Company can do.

But I don't see how -- and how much longer can the Company make no money, notwithstanding its industry-leading position with all these great technologies?

I think, David, these are fair questions and, clearly, we said several times that morning that the comparison of the results of this quarter are compared to depressed levels in '06, so you know --

Right, we're going to throw out the depressed levels.

Let's not even look relative, let's just look absolute.

Okay.

But let's look at the few significant underlying trends here, okay?

For the first six months of '07, growth from material revenue and system revenue is up 30%.

In systems, it is not that significant because it is compared to a depressed level.

However, I will point out to you that last year material revenue, in spite of all of our difficulties, still continued to grow by 18%.

So for the first six months of this year, we have a significant step-up in material revenue over, coming on the heels of a year that it grew by 18%.

That is significant, David, because this is the kind of business that we are building here.

Material represents the most profitable part of the business and we have been saying all along that the way for us to not only achieve our historical growth profit, but to exceed them and get into the range that we talked about this May, material consumption is going to be a major component of it.

When you look at the first six months of this year, the fact that material has grown by 30%, to us is significant and it tells us that we are getting closer to the kind of business model that we believe we will deliver the operating target that you spoke about.

The fact that that comes with an overall increase in top line is very gratifying.

So we are not in any way walking or in any way relaxing our target operating model.

To the contrary, we believe that notwithstanding the setback of the second quarter, the underlying trends are very positive and very sustainable.

And we also believe that now most of the abnormally high expenses that were related to the difficulties that we had last year are behind us.

You put those two together and it is not too difficult to see that we are very close to returning to profitability and we'll see -- and beyond that, that we should be in a position to deliver sustained profitability in the same way that we did it in the '04 and '05 period.

Abe, if I may, your operating income margin range from that May presentation was 15% to 25%.

So on a company with $150 million of revenue, that is $30 million of operating income.

I mean, even if you add back the margin you sacrificed for those long-term relationships on the systems, the sort of duplicative cost that you are still running with your transition, I mean you are still -- you are not even close to those targets.

David, we didn't say that we were going to get to that target on the day that we achieved $150 million in revenue.

We said that for a company like ours in this industry, with the kind of business model that we are putting in place, and with revenues in this range, we believe that we can achieve this operating target.

We still believe that we can achieve them.

You have to look at some of the changes, the significant changes in the business model and in the mix of revenue as we deemphasize less-profitable activities and come up with new profitable activities and you have to look at what is around the corner, things like V-Flash that come with, you know, very low initial cost of placement and very attractive recurring revenues for materials.

It is based on those initiatives and those significant changes in our business model that we believe that we can achieve these kinds of target over time.

And I would leave it at that.

Cliff Ransom, Ransom Research Inc.

Good morning, folks.

I was surprised, Damon, to hear that you expect inventories to fall, because I was under the impression that you were doing some significant pre-building of V-Flash in order to populate your resellers with perhaps some additional pipeline filling.

Can you help reconcile maybe my misunderstanding, or talk about that a moment?

I think Abe is closer to that relationship right now.

I will let him answer that question.

I will answer it, Cliff.

Remember that in the -- at the end of the third quarter, we had inventories in excess of $30 million.

We reduced it by over $5 million from the first to the end of -- from the end of the first to the end of the second quarter and we said that we over time expect to reduce the inventory to around $15 million.

The inventory that we are talking about today, Cliff, comprises of large, high-value ticket items.

It is separate and apart from the exercise that we are talking about with V-Flash, which would have items in inventory that on a unit count each one would be less than $10,000.

Yes, we certainly intend to build inventory and populate, you know, the channel with V-Flash systems.

But in the aggregate when you look at the composite of our inventory today, we expect to continue to bring it down, notwithstanding the temporary increase in the next few quarters that we will have in the V-Flash bucket.

Matt Hewitt, Craig-Hallum.

Good morning.

A quick question.

You mentioned the 22 to $26 million for the second half of this year in SG&A.

I am just wondering, do you expect that includes what I would expect as far as a large amount of additional marketing and advertising for your world conference that is coming up in September?

Does that already incorporate that, and if so, where do you see a normalized SG&A, I guess on a quarterly or annualized basis?

The range of 22 to $26 million includes the world conference.

It also includes stepping up some of our advertising and other activities in connection with the launch of V-Flash, etc.

We will continue, Matt, to revise down our SG&A to bring it back to historical levels because we believe that over time, we should continue to adjust it downward as some of these activities work themselves through the system.

To us, the 22 to $26 million is a starting point to indicate that we believe that all of the extraordinary costs are kind of behind us, all the abnormally high costs are behind us, and we are getting it back into the range.

But it is a starting point; it is not the end game.

James Mullins, D.L.

Carlson Investments.

Hi.

I am just curious, I didn't find it in a 10-Q in a quick look.

Is there sell restrictions on the new private placement?

If you could just give us a thumbnail sketch on that, that would be helpful.

Well, the private placement stock could be sold when it is registered, and this has not happened yet.

And there is no timing you could estimate?

As quickly as practicable.

Bill Gibson.

Yes, I just wanted to zero in on operating expenses again.

And I know, Damon, when you were going through the extraordinary expenses in the quarter, at least I roughly added it up to $3.5 million.

And yet, you know, the second quarter was nearly 5.5 or $5.4 million higher than the high end of the guidance in the second half.

And I am just wondering what that other $2 million is, or is that just related to lower operating costs in Rock Hill, or what is going on there?

Well, for that I think we did outline where we thought our abnormally high expenses were.

And also in a previous slide to that, we outlined what the difference was between some of these costs that would still be remaining.

I think that is what we disclosed there.

So if you go back to those other numbers, I think they all add back to where I think you want to get.

Okay.

Yes, I wasn't looking at the slides.

I'll follow that up afterwards.

If you look basically at slide 14, you can see a nice reconciliation between what we think are the incremental abnormally high expenses versus what we estimate to be kind of an initial normalized run rate.

And that would give you a nice bridge from where we ended the second quarter to what we think normal should be in the next few quarters.

Okay.

Thank you.

Cliff Ransom, Ransom Research, Inc.

Yes, let me go back to this inventory issue if I may, because now you have gotten me confused.

When you were talking about the inventory today being comprised of large high-value ticket items that were separate from V-Flash, and then you said the unit count on V-Flash were less than $10,000.

What does all that mean?

Per machine.

I may have mischaracterized it and actually helped to confuse you, Cliff.

I am sorry.

No, I am fully capable of confusing myself.

It is not your fault.

Thank you.

What I meant to say is when you look at the cost of a single V-Flash machine, it is well below $10,000.

So you can build a very nice pipeline of V-Flash machines, of hundreds of machines for a few million dollars.

That is what I was trying to say, whereas it doesn't take very many large frame machines to aggregate to 5 or $6 million.

But if you are outsourcing to Canon, why is that inventory on your books and not theirs?

The inventory is going to be on our book when we take possession of units, and in the early days we expect to have quite a bit of units that we would acquire or purchase initially for the purpose of reselling it and filling the pipeline with resellers and demo units and initial installs.

That would be kind of a one-time abnormal activity, if you will.

Subsequent to that, we will be able to, in the ordinary course, forecast and do more just in time supply chain activities.

And obviously, to your point, lean on Canon and leverage the fact that they would carry the inventory until they ship it to us.

Okay.

Can you tell us if there are anything -- are there one or two things that were unexpected positives that you've experienced so far in the V-Flash introduction process, or are there one or two unforeseen negative things in the V-Flash introduction process?

Well, Cliff, it is a normal evolution and development of a new product.

You know, there are -- everything that you said is present in this kind of, you know, pre-commercial stage.

You know, there are some very delightful aspects to the system in terms of its performance, in part accuracy and the characteristics of what comes of it.

We have a couple of normal (inaudible) issues that we are dealing with on kind of the harder side of it.

I would say that V-Flash so far is a very typical development and in-production cycle.

Matt Hewitt, Craig-Hallum.

Could you just tell us how things are going as far as setting up the channel for selling the V-Flash?

It is going very well, Matt.

We literally have hundreds of applicants.

We obviously have our own core channel from our other 3D modeling products, primarily the InVision.

We have set up the 3D Systems University as an entity that would, in essence, train new resellers so that they could come up to speed on how to sell, how to service, and how to install V-Flash systems.

And we are on a weekly basis now qualifying and signing resellers in preparation for the launch.

Cliff Ransom, Ransom Research Inc.

Have you built final units of the V-Flash?

In other words, what is the experience of Canon so far in actually producing a product that can be put into a reseller's showroom?

We are working with Canon on all these aspects.

They are a first-class operation and we are very confident in all of their abilities.

They have more abilities and more capabilities in their shop than we have ever witnessed, Cliff, with any of our previous suppliers.

So we believe that they are doing and will continue to do an outstanding job for us.

Is there a significant amount of inventory in the second quarter number that relates to V-Flash?

I can't give you that detail at this point, Cliff.

Well, I am just trying to get a sense of whether they have actually built one, two, 10?

I understand and we are not ready to disclose that yet.

There are no further questions at this time.

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