3D Systems Corp (DDD) 2007 Q3 法說會逐字稿

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

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

All lines have been placed on mute to prevent any background noise.

(OPERATOR INSTRUCTIONS)

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

Please go ahead.

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

I'm 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 I begin today's discussion, I would like to preface or 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 include involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements for 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 are presently] described as risks or uncertainties, readers are urged to consider statements in the future are conditional (inaudible) or that include the term believe, belief, expect, estimate, intend, anticipate 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 this 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 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.

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

As you already know, yesterday afternoon, we filed our third quarter 10-Q with the SEC and issued a press release of our operating results for the third quarter and first nine months of '07.

We are very pleased to share the results with you this morning.

To our memory this is the earliest the Company has released its quarterly operating results in a long time.

We're pleased to be able to release them on this schedule and we plan to maintain an earlier release schedule in the future.

Before Damon and I delve into the actual numbers, let me say that I'm pleased with the healthy revenue growth and the improvement in our operating results that we have experienced thus far this year.

These improved results are consistent with our expected gain from our extensive business front formation efforts.

These results include record year-over-year revenue growth in both third quarter and first nine months of this year, substantially higher gross profit and improved gross profit margin in both periods and [among the software], I think, profit and net income in the third quarter.

Our revenue for the third quarter increased by 21% to $38.2 million from 31.5 million for the third quarter of 06.

At September 30th of this year, our backlog was about 1.5 million, approximately the same amount that we had at the end of March and June, a significant reduction from our 5 million backlog at the end of last year.

As noted in past discussions with you, our business is not generally dependent on backlog and therefore we believe that the lower quarterly levels of backlog this year are more consistent with the normal operating trends of our business.

Notably we reported $400,000 of operating income for the third quarter reversing an $8.7 million operating loss for the third quarter of '06.

Our improved operating performance in the third quarter resulted primarily from higher revenue, higher gross profit and higher gross profit margins and lower operating expenses in the third quarter of '07.

Our revenue growth is consistent with our expected gains from the extensive business transformation effort that we have been working on.

For the third quarter, revenue from systems increased increased by 56% all by comparison [and mimic] '06 third quarter, but it reflects the continued growth in revenue from our new systems and their healthy fraction in the marketplace.

It's also important to note that as we predicted, revenue from services resumed an upward growth path.

I'm disappointed this revenue from our engineered materials and composites grew by only only 9% compared to the third quarter '06, but upon further and more detailed examination, I believe that this reflects primarily the timing of certain recurring orders from customers and routine third quarter seasonal factors related to the summer shutdown of some of our European customers' business.

Gross profit in the third quarter of '07 increased 48% to $15.9 million from 10.7 million from the third quarter of '06, primarily as a result of our higher revenue end period.

And our gross profit margin increased to 42% from 34% in the '06 quarter.

Consistent with our expectations, operating expenses declined by 3.9 million to 41% of revenue, reflecting lower SG&A expenses, lower research and development expense and the absence of the restructuring costs which incurred in '06 for our relocation to Rock Hill.

The declining in SG&A expenses largely reflected the reduction in the third quarter of the significant abnormally high accounting and legal costs related to our restatement, our '06 year end audit and the implementation of our new ERP systems, head on the P&L that we incurred earlier in the year.

I'm also pleased to report that we had $330,000 of net income for the third quarter, which equated to $0.01 per fully diluted share.

Although modest, this income reversed and 11.3 million net loss in the third quarter of '06 and was a further indication of the improvement in our operations.

For the first nine months of '07, revenue increased 21% to $111.6 million from 92.2 million for the comparable '06 period.

A $19.4 million increase and a new nine-month record for us.

Our continued revenue growth from new systems and materials for the first nine months more than offset the planned declines in revenue from our discontinued legacy products and other (inaudible) activities.

For the nine months of '07, operating loss declined by 68% to 6.6 million from 20.4 million in the '06 series.

Gross profit increased by 50% to 45.3 million from 30.2 million in the first nine months of '06, continuing its trend of returning and eventually exceeding its pre'06 levels of profitability.

Our gross profit margin continued to show an improving trend over the third quarter and first nine months of '06, reflecting our higher revenue, the relatively low increases in our cost of sale, and the absence in the '07 period of the business disruptions that adversely affected our profitability in the third quarter and first nine months of '06.

For the first nine months of this year, operating expenses declined by more than 8 percentage points to 46% and were within the estimated range we outlined during the second quarter.

Reflecting on our year-to-date progress with 21% revenue growth and a stronger underlying trend of double digit growth from both systems and material sales, we believe that our overall improved results demonstrate that the painful, disruptive and expensive strategic and surgical actions that we have taken to reshape our organizations from former product portfolio and range near our business model are continuing to gain positive traction and expand our marketplace lead.

As you can clearly see from the chart on slide number 8, the compound annual rate of growth of our materials revenue has doubled to more than 17% since '04 from about 8% in the prior years, as we embark on the challenging journey to introduce proprietary material cartridges into our systems.

On a year-to-date basis, for this year, we have experienced an accelerated materials revenue growth rate of 22% consistent with the progress we have made on this journey.

And while I'm disappointed that revenue from our engineered materials and composites for the third quarter grew by only 9%, compared to the first quarter of '06, as I mentioned earlier, I believe that this reflected primarily the timing of certain recurring orders and routine third quarter seasonal factors related to summer holidays in various parts of the world.

Notwithstanding this third quarter seasonality and its impact on our actual third quarter materials growth rate, in view of our continued strong new systems placements and the fact that most of our new systems were now equipped with proprietary material cartridges, I expect materials revenue to resume its healthy double digit growth in the coming months.

And now for a more detailed look at our '07 financial performance through September 30th, let me turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thanks, Abe.

As you can see on slide 10 on a consolidated basis, we experienced strong improvement in our gross profit and gross profit margin in the third quarter of 2007.

Gross profit for the third quarter of 2007 increased by $5.2 million to $15.9 million from 10.7 million in the third quarter of 2006.

Gross profit margin in the third quarter of 2007 increased to 42% of revenue from 34% of revenue for the 2006 quarter.

As Abe mentioned earlier, these improvements reflect our higher revenue, the relatively lower increase in our cost of sales and the absence in the 2007 quarter of the business disruptions that adversely affected our profitability in the third quarter and first nine months of 2006.

An increase in service revenue also contributed to these improvements.

For the third quarter of 2007, cost of sales increased by 8%, a rate substantially less than the rate of increase in revenue to $22.3 million from $20.7 million for the third quarter of 2006, reflecting primarily the incremental cost of sales associated with our higher revenue.

We benefited from higher gross profit from both products and services in the third quarter of 2007.

Product gross profit increased by $4.2 million or 45% to $13.6 million from $9.4 million for the 2006 quarter.

And counter to its prior declining trend, gross profit for services increased by $1 million or 71% to $2.3 million from 1.4 million for the 2006 quarter.

These increases led to an 11 percentage point increase in our consolidated gross profit margin.

As you can see on slide 11, we are also experiencing strong improvement in our gross profit and gross profit margin in the first nine months of 2007.

On a consolidated basis, our gross profit for the nine-month period increased by $15.1 million to $45.3 million from $30.2 million for the nine months ending September 30, '06.

Gross profit margin increased to 41% of revenue from 33% of revenue for the 2006 period, and, in addition to the other contributing factors I mentioned above, was aided by the $1 million favorable effect of foreign currency translation.

As was the case in the third quarter, gross profit from our product and services both contributed to the increase in our gross profit in the nine-month period.

Product gross profit for the nine months ending September 30th, 2007 increased by $14.8 million or 59% to $39.8 million from $25.1 million for the 2006 period.

While gross profit for services for the same period increased by $400,000 or 7% to $5.5 million from $5.1 million for the first nine months of 2006.

Revenue from systems materials and services all increased in Q3 '07.

Revenue from systems increased by $5.2 million or 56% to 14.5 million from $9.3 million for the third quarter of 2006, leading to its increasing as a percentage of our consolidated revenue for the quarter to 38% of consolidated revenue from 30% in the '06 quarter.

The increase in systems sales was due primarily to a $3.1 million increase in volume and was aided by a $1.7 million increase to price mix and a $400,000 positive impact from foreign currency translation.

Revenue from materials increased by $1.2 million or 9% to 14.6 million from 13.4 million for the 2006 quarter, but declined to 38% of consolidated revenue in the '07 period compared to 43% in the '06 period.

As a result of the relatively higher level of systems sales.

This revenue increase was primarily the result of favorable $2 million increase in the combined effect of price and mix, $0.7 million increase in new products and a $400,000 positive impact from foreign currency translations.

This was partially offset by a $1.9 million planned decline in sale of legacy products.

Service revenue increased modestly by $300,000 or 4% to $9.1 million for the third quarter of '07 from $8.7 million for the '06 period, but declined to 24% of the consolidated revenue from 28% for the '06 period, reflecting the proportionately higher increase in revenue from systems and materials.

On a geographic basis, our revenue growth in both the third quarter and first nine months of 2007 was derived primarily from the U.S.

and Europe.

For the first nine months of 2007, revenue from systems increased by $11.2 million or 39% to $40.4 million from the first nine months of '07 from $29.2 million for the 2006 period and comprised 36% of consolidated revenue in '07 compared to 32% in '06.

The increase was driven primarily from a $10.7 million increase in sales of our newer systems, the $1.1 million positive impact from foreign currency translation and a $1.7 million of favorable price and mix changes.

This was partially offset by a $2.3 million planned decline in legacy product sales for the nine-month period.

Revenue from materials increased by $8.1 million or 22% to 44.9 million for the nine-month period from 36.8 million for the nine months ending September 2006, and comprised 40% of consolidated revenue in both the 2007 and 2006 periods.

As was the case with the third quarter, this increase was primarily the result of higher unit volume with unit sales of new and core materials increasing by a total of $4.2 million in the first nine months of 2007.

Foreign currency translation also had a $1.3 million favorable impact.

Our $26.3 million of revenue from services for the first nine months of 2007 approximated its level for the 2006 period and comprised 24% of consolidated revenue in 2007 period, compared to 28% in the 2006 period.

Declines in volume of new and legacy services completely offset an $800,000 favorable impact of foreign currency translation.

As you can see on slide 14, operating expenses for Q3 '07 declined by $3.9 million or 20% to $15.5 million compared to Q3 '06.

$1.9 million of this decline is related to decreased SG&A costs.

SG&A was 11.9 million for Q3 '07 and we expect SG&A to be in the range of 11 million to 13 million for Q4 2007.

In following quarters, we expect to responsibly continue to move SG&A costs lower towards our historical levels.

R&D costs were $3 .6 million in Q3 '07 which was $200,000 lower than Q3 '06.

There are four new products launched in Q3 '07 including V-Flash.

As we've continue to invest in products and new product development, most notably our V-Flash desktop modeler, we have revised our full-year estimate for R&D in 2007 upward from 12 to $13 million to 13 to $14 million.

Operating expenses increased by 1.3 million to 51.9 million for the first nine months of 2007 compared to 2006.

These higher operating expenses were primarily due to the higher SG&A expenses that we incurred through the first six months of '07 that were only partially offset by the third quarter decline in SG&A expenses.

We also benefited in both the third quarter and first nine months from 2007 from the absence of the restructuring costs that we incurred in the 2006 periods, primarily for our relocation to Rock Hill which reduced our '07 operating expenses by $1.7 million in Q3 '07 and $5.7 million in the first nine months of '07.

We also continued to improve management of our inventories and accounts receivable.

Accounts receivable decreased by $6.5 million to 28 million at September 30th, '07 from 34.5 million at December 31st, '06.

This decline resulted in a reduction of day sales outstanding to 68 days at September 30th from 74 days at December 31, 2006.

We expect to continue to reduce and maintain our DSO at or near our historical range between 59 and 63 days.

Inventories decreased $3.6 million to $22.6 million at September 30th, '07 from $26.1 million at December 31st, 2006.

We are continuing our effort to reduce inventory with a goal of reducing them to as low as $15 million over the next few quarters without compromising service to our customers.

We ended the third quarter of 2007 with $25.5 million of unrestricted cash compared to $21 million of unrestricted cash at June 30th, 2007 net of $8.2 million that we used after June 30th to prepay or S.V.B revolver.

This $4.5 million increase in unrestricted cash resulted primarily from $6.2 million of cash derived from operating activities.

During the third quarter of 2007, we reduced our indebtedness by $23 million resulting primarily from the conversion of the remainder of our 6% convertible subordinated debentures into common stock and the voluntary pre-payment of our Silicon Valley Bank revolving credit facility that we chose to let expire on October 1st.

On a going forward basis, we elected not to renew the revolver with S.V.B.

expecting that we may be able to negotiate more favorable terms in the future as credit conditions and our performance improve.

In the meantime, our strength in cash position and operating performance, we do not believe that we will have a need to make bank borrowings for the remainder of this year.

For the first nine months of 2007, we used $1.4 million of net cash for operating activities.

This use of cash consisted of our $8.1 million net loss and $1.8 million of cash consumed by net charges and operating accounts that we partially offset by $8.5 million of non-cash items that were included in our net loss.

The principal changes in operating accounts included $7.1 million of cash provided from our lower accounts receivable, $9.1 million of cash used in the reductions of accounts payable, $2.7 million of cash provided from inventory reduction, and $3.4 million of cash used with respect to customer deposits.

The principal changes in non-cash items that favorably affected operating cash flow included $5.4 million of depreciation and amortization expense, and $2.2 million of stock based compensation expense.

Net cash provide by financing activities increased to $14.7 million for first nine months of 2007 from 1.7 million for 2006.

This increase resulted primarily from $20.4 million of net proceeds from a private placement of common stock in June 2007, partially offset by the $8.2 million repayment of a revolver compared to the 2006 period.

Our total outstanding debt and capitalized lease obligations is now about $12.2 million, reflecting primarily the outstanding industrial revenue bonds covering the Grand Junction facility which we are still planning to sell and the capital leases on our Rock Hill facility.

That concludes my comments.

Abe?

Thank you, Damon.

Before we begin the question and answer 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 and profitability.

As we mentioned earlier today, we believe that the significant business setbacks and disruptions that we experienced in the course of implementing our strategic initiatives in '06 are not completely behind us.

Healthy sales of our systems and materials suggest that the demand for our new product is strong.

As a matter of fact, repeat sales of Viper, Pro and Center Station Pro systems to early adapters indicate marketplace confidence in them and a preference for them.

With that said, we believe that our growing install base coupled with integration of our new systems with proprietary materials cartridges should improve the profitability of our business as revenue for materials continues to outpace the growth in systems, and as such, the stability of our revenue base should improve as consumable sales rise as a percentage of the product mix relative to systems.

We believe that we are on track towards completing our financial control remediation efforts and having state-of-the-art financial controls procedures and processes.

And we expect to complete our remediation program as of year end subject to the completion of satisfactory testing.

We are gratified over the progress we're making with reductions in inventory and day sales outstanding and believe that our stronger balance sheet enhances our financial strength and flexibility.

In September, we announced that 3M Corporation selected our Viper Pro SLA technology for its digital production of dental molds.

The plan is for our rapid manufacture and platform to seamlessly integrate with the soon to be released 3M chair side oil scanner.

Under an engineering development arrangement, 3D Systems is co-developing a proprietary rapid manufacturing methodology for the production of accurate durable models of individual teeth and arches with crisp resolution that combines the 3M chair side oral scanning technology with the Viper Pro SLA systems and a new proprietary Accura sales material.

Additionally, we developed new proprietary material specifically for this high volume, high resolution application.

The new Accura material exhibits high detail, higher durability and offers superior resolution.

3M actually plans to introduce this capability to dentists in North America and Europe in 2008.

The new 3M chair side digital imaging solution will provide an alternative to the traditional dental impression process and enable to the high-speed 3D motion capture of two anatomy used to create CSM and all ceramic crowns and bridges manufactured by dental labs.

This arrangement has made 3D System the rapid manufacturing provider of choice for digital dentistry.

Just as we have pioneered rapid manufacturing for the hearing aid industry, we're pushing the envelope within the dental arena with our technology.

We're thrilled to work with 3M [SD] on this useful solutions that benefits both dental professionals and patients and expect to realize multiple system sales as a result of this collaboration starting sometime in 2008.

The most significant new product development for us this year is our revolutionary compact, fast and affordable V-Flash desktop module.

As you all know by now, recently we unveiled new V-Flash module at our inaugural 3D Systems World Conference held from September 24th through 27th, and subsequently commenced with [rate seller] training and selected system shipments.

Since our world conference, we demonstrated the second [film faster] imaging system the V-Flash hearing aid manufacturing system.

The first economical high-speed [disk] manufacturing system for hearing aids in partnership with Dreve, and the recent hearing aid manufacturing Congress in Nuremberg, Germany.

During the Nuremberg exhibition, we held multiple demonstrations for the benefit of all major hearing aid manufacturers, showcasing its expertly integrated Dreve materials on the V-Flash hearing aid (inaudible) systems.

This system uses the same proprietary film transfer imaging FPI technology that 3D Systems developed for its [reflect desktop] modelers.

To broaden the audience awareness of this new and revolutionary technology, we also expect to launch, during the fourth quarter of this year, a V-Flash printed card e-commerce site in partnership with one of our preferred service providers.

As we said previously, we expect to conduct a carefully managed phased rollout of our V-Flash desktop modelers starting in the United States.

Upon successful completion of our initial rollout phase in the United States, we anticipate expanding the marketing rates of our V-Flash modeler into Europe during the first quarter of '08.

As part of our initial phased rollout plan, we expect to place up to 100 systems in the marketplace before the end of the year.

Together, with Dreve, we also expect to launch the V-Flash hearing aid system in the coming months.

Dreve develops and manufactures resins, including resins used for the manufacturing of hearing aid shells and ear molds.

We're enormously proud that over 400 people from 18 countries attended a unique learning and networking experience at our inaugural World Conference from September 24th to September 27 in Rock Hill, South Carolina.

We had more than 70 educational and networking sessions offered at the World Conference, more than 20 extensive hands-on sessions, presentations by more than 60 industry leaders and almost 30 comprehensive partner exhibits on display and participation from every major global industry segment.

Our guests experienced the full range of possibilities and opportunities including modeling, rapid prototyping and rapid manufacturing.

Our guests were exposed to seven new product introductions, and were able to tour our new global headquarters and research and development facilities as well as our 3D Systems Universities, the premier planning center for 3D modeling, rapid prototyping and rapid manufacturing, that is operated by York Technical College.

Let me say again how grateful, honored and pleased we are that we could open our facilities and host our customers in such a unique learning, training and networking opportunity.

We're deeply grateful to all of our customers who took time to collaborate with us in this event and continue to collaborate with us in shaping the present and future face of this exciting field.

[Bolster] is our inaugural conference is set, we already set the date for our next event.

The next 3D Systems world conference is scheduled to be held during the week of October 20th, 2008.

As you already know from our earlier review this morning, we believe that we are continuing to make good progress.

Our average selling prices and costs of goods sold remain relatively unchanged so far this year.

Therefore, we expect that our gross profit will continue to improve.

We believe that as of the end of the third quarter, all of the significant abnormally high accounting and legal costs related to our restatement, our '06 year end and first quarter [August] work and the implementation of our new ERP system are behind us, and that the majority of our operational issues have been resolved successfully.

We remain confident in our overall direction and believe that the (inaudible) investment which we undertook throughout '06 have provided us with the right platform to achieve our long-term objective.

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

Regarding the current execution of our business plan, we are continuing to build customer confidence and to deepen our customer relationships.

We're actively remediating our remaining material weaknesses and working to achieve a robust, effective control, and subject to the satisfactory completion of testing, we expect to complete our remediation program as of the end of this year.

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

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

With all of the key elements in place, we're turning our attention to leveraging our enhanced business model.

Our revenue mix is changing as planned.

Materials with the highest margin in the mix expect to resume double digit growth.

Service was the lowest margin in the mix flattening and resuming more profitable growth, and with systems we anticipate significant new systems growth at attractive margins.

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

Reflecting on the progress we have made to date against our long-term objectives and the significant infrastructure we have put in place for growth and scalability, we believe that our long-term operating model is achievable.

As demonstrated by our progress to date, we believe that we are continuing to turn the Company around and place it on a solid, longer term sustained profitable growth path for meeting or exceeding our customers' needs, leading in innovation for technology and proving financial strength and flexibility, developing new products and categories, growing globally, creating new markets in rapid manufacturing and 3D modeling and providing measurable value for our customers and stockholders.

Chanda?

We will now open the call to questions.

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

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the q&a roster.

Your first question is from Matt Hewitt from Craig-Hallum.

Congratulations on the good quarter.

Looks like the turn around is well on its way and things are improving.

Two real quick questions.

First of all, the tax rate was 42% in the quarter.

What should we be forecasting as we look out for the remainder of the year and as we look into '08?

And then, second question, last quarter you mentioned that there was a couple discounting offered on a couple of system sales.

Was there any of that here in Q3 or was that just a Q2 phenomena?

First of all, thanks, Matt.

Let me answer the discounting part and I'll let Damon talk about the tax rate.

We, as I said during the second quarter, the number of discounts and the opportunity in that particular quarter we felt was somewhat unique.

As you can see from the substantial recovery in gross profit margin in the third quarter, we didn't have any of these kinds of discounts present.

We don't anticipate having heavily discounted systems in the ordinary course of business unless we come upon a unique and significant opportunity.

And when that happens, as it did in the second quarter, we carefully assess the cost and benefit and prefer, in most cases, to offer a one-time system discount in favor of long-term strong recurring revenues.

In the course of the third quarter, we did not have any significant discounts, and you can see the nice recovery that we're making in gross profit margin as a result.

Damon, do you want to deal with the tax rate?

Sure.

Matt, you're correct with the tax rate that you had gotten out of the filing.

That is based on our current distribution of revenue worldwide and where we stand.

We have not forecast a future tax rate, and I don't think we intend to at this point.

I don't think we will.

Your next question is from Dennis Wassung from Canaccord Adams.

Thank you and congrats on turning the profitability here.

I guess my question is more on the materials revenue side of the equation.

Obviously the growth number wasn't as high as you've seen lately.

Talk a little about that.

Can you give just a little more detail, maybe, what was the surprise in the quarter here?

Obviously Q3 has the weaker seasonal things to deal with, but it did last year as well.

I'm just curious, what was the driving force here?

You mentioned some timing of expected orders.

Any other detail you can give us here?

I can give you -- first of all thanks, Dennis.

I can give you a little bit more color on it.

Material has been coming, obviously, a more significant part of the business as you can see by the first nine months revenue numbers, and we can say for the first time, that we're becoming more and more a materials company, and that's what we set out to do a few years ago.

With that, we have, in some instances, concentration of higher volume users and the more of them that we have, over time, we are more susceptible to their ordering patterns and to their seasonality.

So, we've nearly half the business happening outside of the United States and a significant portion of it coming out of Europe, when some of our key customers go on holiday for three or four weeks and all of a sudden 1/3 of the quarterly consumption slows down it has some impact on sales.

However, having said that, we have now conducted a thoroughly extensive evaluation, and we don't see any leakage.

We don't see any erosion in the base.

This is simply seasonal factors, and in some instances, just the timing of larger order that tend to come into the Company in slugs and the rhythm of those slugs as they come in.

So we don't see any reason for alarm here.

We believe that we wail continue to enjoy our resumption of healthy double digit growth in materials, and particularly with the kind of quarter that we had in the third quarter with such an increase in new systems sales, that's typically a precursor for healthy revenue sales from material to precede the installation.

Your next question is from Jay Harris from Goldsmith & Harris.

Good morning, Abe.

Good morning, Jay.

When I compare the June quarter to the September quarter, on higher revenues for products and higher revenues for services, both the costs of goods sold in each segment went down.

What am I observing here?

What are the factors that are influencing this?

Well, are you talking as a percentage of revenue or in absolute dollars?

I mean, what you're observing, Jay, is a couple of things, and Damon talked to them, I think, a little bit in his commentary.

One is, when you look at price and mix, I think you're observing that we had over the mix some favorable improvement in pricing.

The second thing that you're observing is the absence of some of the disruptions that we had in previous quarters, obviously going all the way back to the '06 period.

And the continuous improvement that we have made in eliminating and resolving all of these disruptions over time.

So what you're observing overall, Jay, is an improvement in how we operate, an improvement in out-of-box quality and reliability, and improvement in our supply chain capabilities, and also an improvement in our price mix performance in the marketplace.

Your next question is from Bill Gibson from Nollenberger Capital.

Abe, are we going to experience the normal seasonal trend or do you expect that this year where you get a bigger percent of sales in the fourth quarter?

Bill, you know that I'm not in the habit of looking ahead and predicting revenue from seasonality or other factors.

The only thing that I can tell you is that, as long as I have been here and earlier than that, the historical trends suggest that there is kind of a stair step that tends to get a little lift in the fourth quarter.

That's how this business behaved in prior years.

Whether that pattern repeats again we'll find out.

Your next question is from Jim Shulman from Costa Brava.

Hi, guys.

Couple questions, I'm just trying to understand the sales increase.

Depending on how you look at it, looks like 70% of that jump comes from pricing and FX, and, you're just kind of slightly more than covering your legacy wind downs there.

Well, it's horrid to -- I don't know how you conclude that it comes from pricing.

Certainly with half of our business coming from outside of the United States, we benefit some from FX when the dollar gets weak like this.

We certainly are trying to do a better job in managing pricing in the marketplace.

But having said that, our mix continues to change in favor of lower price units over time, so if you try to get its units placed, which is something that we don't typically disclose for competitive reasons, we believe that the fact that overall ASPs of the composite products that we sell are actually trending down because we have more printers in the mix and so forth than we had in prior years.

We think that the revenue actually represents a robust placement of systems, not just dollars that are concentrated over fewer systems.

Your next question is from Andy Schopick from Nutmeg Securities.

Thank you, good morning.

You've created quite a bit of interest in V-Flash, and I do have some follow-up questions relating to the comments you made during the presentation.

I'm wondering if you can just, Abe, tell us, besides the hearing aid application, what the top three or four applications are expected to be for V-Flash?

And when you would expect to be in full production for customer delivery?

In terms of applications, the basic V-Flash unit is basically designed to satisfy a general purpose modeling and prototyping applications for engineering and design offices.

That means that anybody with a mechanical CAD system who has today the need to output shapes, geometries, parts for communication, design and testing purposes could benefit from the basic V-Flash unit.

The hearing aid opportunity's kind of unique, because we feel that we can deploy into hearing aid companies a very efficient and simple manufacturing platform, which is very different from the intent or the general purpose unit.

And we anticipate pursuing other vertical applications as well with V-Flash beyond just hearing aids.

We see opportunities down the road in digital dentist industry and many other opportunities.

In terms of the planned phase rollout that we have, we are very mindful of the fact that V-Flash is a game-changing event for us.

We never in our history had a system that potentially could be sold enmass.

With that, we're also mindful that, with all the upside, we need to also manage any potential downsides, which is any unintended performance issues that may arise, any unintended feature set issues that may apprise.

With all the work and all the testing that we've done to date, we are pretty satisfied with where we are.

But the proof is going to happen when we get the first hundred or so systems into the marketplace and capture any additional feedback that we need to capture.

That's why we said during our World Conference, that we're going to take it a little bit slow.

We're going to be very deliberate.

This is going to be a managed, phased rollout because as much as we're excited about the upside, we don't want any unintended consequences here.

So once we get the first batch of machines out there and verify that we don't have any surprises, then scaling up to full production is going to be fairly routine.

The issue for us today is test and verify and make sure that as we scale up we don't have any surprises or any unintended consequences, because, V-Flash for us is clearly in the upside column, and we want to keep it as such.

Your next question have from Jeff Rosenberg from William Blair.

Good morning.

Good morning.

On the question of, I know you don't want to give out this in number of units, and that makes sense, but can you talk about whether or not the unit growth in systems was higher than the 56% revenue growth?

I don't have that number off the top of my tongue here to give you, but what I can tell you is that we had a very healthy quarter by way of system placement.

So whether it's more or less than the 56%, I can't tell you right now, but what I can tell you, Jeff, is that we enjoy the very healthy quarter in terms of system placements.

Your next question is from Jim Bartlett from Bartlett Investors.

Yes.

You used to give out the percentage of the products that were new, going back to your available [2003] base.

Yes.

Given the changes, could you give us an update on what that percentage is now?

The last number I had was in fourth quarter, I believe, of '04 when it was like [37].

Yes.

At a certain point in time, Jim, we stopped doing it because we got to a point where most of what we were selling was new.

But, I think your point is well taken, we owe you an update, and I will make sure that for our next investor presentation we will update that chart and share it with you.

I don't have it to give you this morning.

Your next question is from Andrew Nowinski from Piper Jaffray.

Good morning.

This is Andrew calling in for Troy Jensen.

Congrats on an improved operating results this quarter.

Thanks, Andrew.

Just two quick questions.

You mentioned the timing of the recurring orders on the materials this quarter caused a sequential decline.

Just wondering if you expect those orders to come through December -- in the December quarter?

And then secondly, from a directional perspective, do you expect the share counts -- or which way do you expect share count to go, given the improved working capital conditions?

Okay.

In terms of the material orders, I mentioned two things.

I said some of it had to do with timing and some of it had to do with seasonal factors outside of the United States, and in particular, some holiday shutdowns in Europe.

The timing orders, we most definitely expect to recover in the fourth quarter, because those typically have to do with, again, the order on the 28th of the previous month or on the 2nd of the next month.

Anything that has to do with order timing, we absolutely anticipate recovering in the fourth quarter.

Anything that has to do with shutdowns, obviously that is not recoverable.

Your second question, Andrew had to do with share accounts?

I guess we lost Andrew?

I apologize, Andrew.

I didn't get your second question.

Maybe can you get in the queue again.

Okay.

Can you hear me now?

Yes, I can hear you now.

Okay, great.

I just said, directionally, where do you expect the share count to go in the next few quarters given your improvements in working capital?

Damon, do you want to answer that?

Sure.

As of this period, if you're asking -- we had said before that with the conversion of our debt and with the private placement earlier, we do not see the need in the future as normal operations occur to increase our share count.

Your next question is from Jay Harris from Goldsmith and Harris.

Just some following up earlier, Abe, if you look at the costs of goods sold and the June quarter for services, it, on lower revenues then occurred in the third quarter, you had higher expenses.

Are you reducing your staff in the service area?

Absolutely not.

To the contrary.

We, since the '06 period have worked very hard to make sure that our field service is adequately staffed.

I think what you see, Jay, is what I talked about earlier, and that is the elimination of the disruptions or the improvement of out-of-box quality with the enhancements of overall performance and reliability.

Machines don't break down as often.

They perform a lot better.

Installations don't last as long as they did a year ago, or even as long as they did six months ago and three months ago.

This is all under the heading of continuous improvements, which, when all is said and done gets better utilization of our expenses and our costs.

Your next question is from Bill Gibson from Nollenberger Capital.

Actually, Jeff asked my follow-up question on the percent of new products.

Thank you.

Your next question is from Dennis Wassung from Canaccord Adams.

Thanks.

A quick follow-up on the V-Flash.

You made some comments about it in terms of how it's progressing, I'm just wondering if you can give us any commentary as to how the order environment started out with this?

Obviously, you rolled it out at the World Conference, there's a lot of activity around it.

Did you get the initial order wave you expected?

And I guess how would you describe the reception and the order activity right off the chute there?

The reception is very enthusiastic, and I think I said, even during the World Conference that orders are not -- the order environment is very positive, and the realities that we could book and ship many more units than the first 100 that we intend to roll out in this managed phased out rollout.

So, Dennis, with the kind of system that we have, we think that we could enjoy orders for quite a few quarters to come.

We don't see orders as an issue whatsoever.

What we're really focused on is to make sure we deliver to the market a real success and that we don't get somehow intoxicated by the early successes and overlook any potential downsides.

We have worked hard to build a new company here, and we want to make sure that we continue to build on the successes and the execution that we're putting in place now.

Again, for us, V-Flash is going to represent a game changing environment.

We have never had a device that potentially could be sold in the thousands.

And for the kind of device like that that has this kind of potential, we just want to make sure that before we get overly excited and open throttle 100%, that the system is tested, verified, enmass, and that we are not experiencing any potential unintended consequences.

Once we do that, and that's the intent for the first phase here, once we get past it, and we're absolutely reassured, based on what we experienced in terms of enthusiasm in the marketplace and the order environment, we, as I said, could book today many more orders than the ones ones that we intend to take.

We have not seen any challenges in getting orders for V-Flash thus far.

It's been very easy.

(OPERATOR INSTRUCTIONS) Your next question is from Jim Bartlet from Bartlet Investors.

Could you give us maybe a little better idea of what you're looking for in R&D in 2008?

And the same with SG&A.

And along with that on SG&A, were there any sort of one-time charges in the third quarter of carryover of financials or any special charges?

I know the World Conference was probably several hundred thousand dollars?

Jim, I would prefer to say with the ranges that Damon gave this morning, which is 11 to 13 in SG&A for the fourth quarter and an indication that we will responsibly continue to reduce it to historical levels in '08.

I think that what we will do is, once we announce the fourth quarter results and the full year, we will update the range for you for the '08 period more responsibly at that point.

With R&D for this year, you heard Damon say that we've increased the range by $1 million.

Long term, we still anticipate R&D will be in the range of 12 to $13 million, but recognizing the extraordinary R&D approach that we're in the midst of right now, we felt that we may exceed the range, and that's why we updated the range to date slightly.

But, I don't see that as a permanent increase to the R&D range.

I said on numerous occasions that, even as revenues increase, we believe in absolute dollars the R&D range that we have today is sufficient for the kind of plans that we have in place.

We have reached our allotted time for questions, I will now turn the call over to Miss Hughes for closing remarks.

We will now close the call.

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