3D Systems Corp (DDD) 2008 Q3 法說會逐字稿

Good morning and welcome to 3D Systems' third-quarter and first-nine-months 2008 earnings results conference call and audio webcast.

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

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

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

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

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

I am Chanda Hughes and with me on the call are Abe Reichental, CEO; Damon Gregoire, 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 the presentation may do so via the Web at www.3dsystems.com/ir.

Participants who would like to ask questions related to matters discussed in this conference call at the end of the session should call in using the phone numbers provided here on slide 3.

The phone numbers are also provided in the press release we issued yesterday.

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

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

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

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

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

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

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

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

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

Good morning, everyone, and thanks for taking the time to listen to our call this morning.

Yesterday we released our operating results for the third quarter and first nine months of '08.

And we also filed our quarterly report on Form 10-Q with the SEC.

I would like to review these operating results with you this morning and give you my perspective on our current business operations and prospects.

As you might already have seen, we reported the following results -- 7% revenue decline to $35.6 million, primarily due to a shortfall in our high-end large-frame system sales; a corresponding 13% gross profit decrease to $13.8 million, primarily on lower volume; a favorable 3 percentage point sequential gross profit margin improvement; a favorable 8% decline in operating expenses to $14.3 million; and a $0.5 million operating loss.

We also reported $1 million net loss that resulted in $0.04 net diluted loss per share.

And with regards to cash, we reported that our unrestricted cash declined during the quarter by $1 million to $18.1 million at the end of September.

Given the importance of cash during these trying times we disclosed yesterday that as of November 4, we had $19.5 million of unrestricted bank balances.

I am now moving to slide 6.

As I already indicated in our press release yesterday, I remain disappointed by the Company's overall operating performance so far this year, and with the slower than expected progress that we have made this year against some of our key initiatives.

I believe that my disappointment is well founded, notwithstanding the difficult economic environment in which we're operating and several favorable developments in our operations.

I recognize that our year-to-date revenue was adversely impacted by the difficult global business climate and more directly by the credit crisis that intensified during the latter part of the third quarter.

These adverse business conditions contributed to some $2 million of revenue shortfall from our high-end large-frame systems compared to our mid-September expectations.

Systems revenue decreased by 30% to $10.2 million from $14.5 million in the third quarter of '07 as we continued to experience an extended selling cycle.

Slower customer spending on high-end large-frame systems pushed anticipated orders into subsequent quarters.

This reflected in part our heavier reliance on high-end large-frame system sales in a compressing economy.

It also highlighted our limited offering in the sub-$500,000 systems category.

As you know, we have been working for some time to enhance our offering within this category and, in line with that, have recently introduced several new systems, including the iPro 8000 and sPro 140 Precision Centers.

On a somewhat positive note, I would like to share with you this morning that during the third quarter we actually received several high-end large-frame orders from leading automotive companies around the world that were previously delayed.

While I'm grateful to receive these orders, albeit months later, this development confirms that we are experiencing delays and stretched selling cycles, not a fundamental shift in marketplace behavior.

Nevertheless, I'm disappointed that our total revenue from large-frame systems fell very short of expectations and accounted for only 31% of total systems revenue for the third quarter.

It is particularly gratifying to me that during the third quarter we sold a higher number of 3-D printers, although the associated 50% increase in revenue from these printers over the third quarter of '07 was not enough to overcome the decline in revenue from our high-end, large-frame systems, and in and of itself fell some $0.5 million short of our own mid-September expectations.

While the growth which we are experiencing in our 3-D printing business may seem to defy conventional expectations in the current economic environment, I believe that this performance suggests that our new products, which target new high-definition applications like digital dental manufacturing, are gaining positive traction.

However, given the $0.5 million shortfall in 3-D printer sales against our own mid-September expectations, I believe that we need to do more to realize the full potential of our growing and differentiated portfolio of 3-D printers, even during these trying economic times.

But, as I said before, we also experienced several other favorable developments in our operations during the third quarter, including the sequential 3 percentage point improvement in gross profit margin that we achieved from the second quarter to the third quarter of '08.

This reflected in part the absence in the third quarter of a high incidence of used equipment sales as we experienced in the second quarter and, more importantly, early results from a series of initiatives aimed at improving our gross profit margins.

I believe that these initiatives have already resulted in a 2 percentage point improvement to our materials margin to 63% from 61%, and improved our service margins by 11 percentage points to 27% from 16%.

We recognize this improvement against the backdrop of a year-over-year 3 percentage point decrease in our gross profit margin to 39% for the third quarter of '08 from 42% in the '07 period, primarily as a result of the decline in large-frame systems sales, which resulted in the absorption of overhead over fewer units, a change in systems revenue mix towards 3-D printers and other small-frame systems, and certain other key items that Damon will cover with you shortly.

On another positive note, even during what appears to be a down cycle in our service providers paid-parts business, our own integrated materials revenue grew some 38% since the first quarter of this year, indicating that our integrated materials strategy, which is at the heart of our longer-term business model, is continuing to gain positive momentum even during difficult economic times.

And finally, we have made good progress in each quarter this year reducing our operating expenses.

Damon will cover both the quarter and year-end gross profit and operating expense analysis in more detail.

I'm going to move to slide 7 and spend a couple of minutes discussing the performance of our integrated materials segment of the business.

Revenue from engineered materials and composites increased by 12% in the third quarter of '08 to $16.3 million from $14.6 million in the third quarter of '07 primarily due to the growing contribution of recurring revenues from our newer integrated systems.

In fact, for the third quarter of '08, integrated materials accounted for 27% of all materials revenue, reflecting a 5 percentage point improvement over the materials revenue for our installed base of systems since the first quarter of '08.

Notwithstanding this double-digit growth, I'm not entirely pleased with this outcome, as our materials revenue fell some $0.5 million short of our mid-September expectations, underscoring the reality that some 73% of our unintegrated legacy installed base remains heavily contested.

We believe that our integrated materials strategy, which is at the heart of our long-term target business model, is gaining positive momentum.

Now for a more detailed look at our financial performance for the third quarter and first nine months of '08, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thank you, Abe, and good morning.

On the first slide we have broken out our third-quarter revenue by category and region.

As you can see on the left, our largest revenue category was materials, which increased to 46% of total revenue for the 2008 quarter.

The right side of the graph shows that European region was the largest revenue contributor geographically, with 45% of total revenue, followed closely by North America with 40%.

As Abe pointed out earlier in the presentation, revenue for the third quarter declined by 7% to $35.6 million from $38.2 million as a result of a shortfall in our high-end large-frame system sales.

Gross profit margin decreased 13% to $13.8 million from $15.9 million, and operating expenses also decreased to $14.3 million from $15.5 million, representing an 8% savings quarter over quarter.

I will discuss gross margin and operating costs in more detail shortly.

Net loss amounted to $1 million compared to a $300,000 profit in the prior-year quarter.

Revenue for the first nine months decreased by 7% to $104 million from $111.6 million for the '07 period.

This was primarily due to a shortfall in large-frame systems sales that was partially offset by higher materials sales and by higher sales of 3-D printers.

Gross profit for the first nine months of 2008 decreased by 11% to $40.5 million.

Correspondingly, gross margins decreased to 39% from 41% for the nine months.

Operating expenses declined by 9% to $47.1 million from $51.9 million and net loss declined by 1% to $8 million, or $0.36 per share, from $8.1 million, or $0.40 per share in the first nine months of 2007.

Despite the decline in gross profit margin compared to the 2007 third quarter, gross profit margin for the third quarter of '08 sequentially improved by nearly 3 percentage points compared to the second quarter of '08.

This reflected the absence in the third quarter of the high incidence of used equipment sales that we experienced in the second quarter.

And we believe that those used equipment sales suppressed our second-quarter margin by 200 basis points.

We also implemented a series of initiatives aimed at improving our gross profit margins and we believe that these deliberate initiatives resulted in the 2 percentage point improvement to our materials margin to 63% from 61%, and improved in service margins by 11 percentage points to 27% from 16%.

Changes in product mix among the systems that we sold during the third quarter and the shortfall in large-frame systems sales affected our gross profit margin, offsetting some of the progress noted above.

Some other items that negatively affected gross profit margins in the third quarter were amounts associated with our initial planned build-up of V-Flash finished goods inventory, duplicate supply chain costs, and the unfavorable effect of foreign currency translation on cost of goods sold.

We believe that these items negatively impacted our systems margin by 7% and our total gross margin by 2%.

We expect that the initiatives we put in place will result in an additional $1 million of sustainable quarterly gross profit starting in the first quarter, which will be fully realized by the end of Q1 2009.

For the first nine months, gross profit decreased by 11% to $40.5 million.

Gross profit margin decreased to 39% for the first nine months of 2008 from 41% in the first nine months of 2007.

The decline in gross profit margin for the first nine months of '08 was primarily due to the factors just discussed that affected the third quarter, along with a significant decline in volume of large-frame systems sales that we experienced in the first nine months of the year.

Operating expenses continued their favorable downward trend in the third quarter of '08, declining by 8% to $14.3 million from $15.5 million in the third quarter of '07.

This decrease reflected lower selling, general and administrative expenses that was partially offset by $300,000 of higher research and development expenses that arose from the Company's accelerated new product development activities.

On a sequential quarter basis, operating expense has declined in each quarter this year.

It declined by 11%, or $1.8 million, from the second quarter to the third quarter, and by 3%, or $500,000, from the first quarter to the second quarter of the year.

The decline in SG&A costs reflected reductions in 2008 of contract labor, consultants and savings from other cost-cutting initiatives Abe will discuss a little later.

Our progress would have been even greater except for the $500,000 in increased legal costs relating to our previously disclosed litigation matters.

R&D expenses increased to $3.9 million in the third quarter of '08 from $3.6 million in the third quarter of '07.

SG&A costs decreased 13% to $36 million in the '08 nine-month period.

These savings consisted primarily of contract labor, accounting fees, severance and stock-based compensation, as well as other discretionary cost cutting initiatives.

These savings were partially offset by $600,000 of special investigation costs previously disclosed in the first quarter.

And consistent with our new product rollouts, R&D increased 8% to $11.1 million.

So we expect SG&A costs to be in the range of $10 million to $11 million and R&D expenses to be approximately $4 million in the fourth quarter of '08.

Turning to working capital, accounts receivable decreased to $24.2 million at September 30, '08 from $28.5 million at June 30, '08, which is primarily due to our lower third-quarter revenue.

Our days sales outstanding improved to 63 days at September 30, from 70 days at June 30, 2008.

And the slight sequential decrease in days inventory on hand by one day to 101 days was due primarily to decreased revenue for the third quarter of '08.

At September 30, 2008 inventories decreased to $23.9 million from $26.1 million at June 30, reflecting some of the progress in our efforts to reduce inventory.

And, based on our current go-to-market strategy, we still expect inventories to decline to between $20 million and $22 million by the end of this year.

And we also believe that our financial resources are adequate for our current and anticipated future needs during this trying economic period.

And we continue to focus on improving our working capital management in order to pursue our near-term growth opportunities vigorously.

Despite the contracting economy in which we operated during the third quarter, our restricted cash declined by only $1 million to $18.1 million at September 30, 2008 from $19.1 million at June 30.

This reflects our effort to conserve cash by reducing operating expenses and managing working capital through inventory reductions.

And finally, as Abe mentioned earlier this morning, given the importance of cash during these challenging economic environment, we disclosed yesterday that we had $19.5 million of unrestricted bank balances as of November 4.

That concludes my comments.

Abe?

Thanks, Damon.

Before we begin the question and answer session I would like to spend a few minutes reviewing the state of our business and give an update on the initiatives we put in place to reduce SG&A and improve gross profit.

And I'm on slide 20 for those of you who are following the webcast.

Based on our integrated materials strategy and results to date, we are cautiously optimistic, even during this uncertain economic period, and believe that our growing installed base, coupled with the integration of our new systems of proprietary materials' cartridges should improve the profitability of our business as revenue from materials continues to outpace the growth in systems.

We also expect that stability of our revenue base should improve as consumable sales rise as a percentage of the product mix relative to large-frame systems.

We expect our operating expenses to continue to decline as we continue to drive all of our cost reduction programs.

And we believe that our accelerated new product introduction activities, which have recently culminated in the introduction of seven new systems that we plan to commercialize during this quarter and the first quarter of '09, will contribute favorably to our revenues starting in the fourth quarter of this year.

Notwithstanding the downturn that we have experienced this year in capital equipment market, we believe that our recently released, innovative and well-positioned new products should help our manufacturing customers by reducing their development costs, shortening their time to market, and providing real economic cost savings alternatives to their traditional manufacturing processes.

Accordingly, I expect that these factors will help drive stronger demand for our products, even during this uncertain economic period.

Turning to our SG&A reduction initiatives, in anticipation of the difficult economic climate ahead of us and its uncertain duration, we undertook a series of additional cost reduction programs during the third quarter.

This included the curtailment of various non-critical planned expenses for the balance of '08 and beyond.

And while I believe that we have made good progress in curtailing our operating expenses, as evidenced by the sequential improvement this year, we have not yet achieved our stated target.

Reflecting on our actual SG&A performance and factoring in our planned marketing activities for the remainder of this year and the uncertainty of our legal expenses due to pending litigation, I expect SG&A expenses for the remainder of this year to continue their downward progress and be in the range of $10 million to $11 million during the fourth quarter, as Damon already indicated.

Turning to gross profit improvement, as evidenced by our materials gross profit margin, we have been taking deliberate actions designed to return to and exceed our historical gross profit margin levels.

However, the contributions from these operational improvements has not yet been enough to overcome the adverse impact of unabsorbed overhead from lower systems sales and unfavorable foreign change effect on our cost of sales.

I believe that the items that Damon identified earlier largely negated our gross profit improvement initiatives during the third quarter, and I expect to benefit from our previously disclosed additional gross profit improvement initiatives starting in the fourth quarter of this year.

With slide 22 I would like to provide you with an update on the additional gross profit improvement plan objectives that we shared with you during our last investor call in August.

First, we completed the relocation of our domestic logistics activities to Rock Hill during the third quarter, and expect to realize savings from this move during the fourth quarter.

Second, to resolve outstanding material weaknesses which we reported related to inventory management, we have completed the integration of an ERP module and moved the activity in-house.

Third, to eliminate an inefficient system for handling an inefficient parts return system, which inflated inventory in our cost of goods, we completed our initiative to streamline the process and moved our entire returned parts activity in-house.

Fourth, to remedy premature failures of warranty parts supplied by third parties, we are continuing to work diligently to improve the quality of third-party-supplied parts.

These efforts contributed to our 11 percentage point improvement in our service gross profit margins during the third quarter.

Finally, to mitigate further adverse foreign exchange impact on our materials produced in Europe, we completed a resin blending facility in Rock Hill.

This initiative has already contributed a 2 percentage point improvement to our materials gross profit.

As Damon already mentioned, we expect to gain approximately $1 million of additional improvements in our gross profit margins during the next two quarters as a result of the successful completion of these initiatives which we believe will be sustainable.

In terms of progress against our long-term target model, I want to spend a few minutes discussing our long-term target operating model that we shared with you during the last conference call.

As I mentioned during our August call, our revenue growth and gross profit performance were disappointing during the last couple of years.

I believe that our lackluster performance reflects two key vulnerabilities in our historical business model, namely, heavy reliance on high-end large-frame systems sales and prior lack of an integrated materials strategy.

We believe that we have taken significant steps to remedy both weaknesses in our business model, as reflected in the mix of what we sell, which has shifted significantly towards our operating target, with materials reaching beyond our goal and contributing some 46% of revenue, and with integrated materials contributing a growing portion of this revenue.

And while we have not completely reduced our top-line dependence on the sale of high-end large-frame systems, we believe that the recent systems portfolio extension, which we announced in the weeks leading up to our October World Conference, will help us to get closer to our desired systems revenue mix.

As for gross profit, we have reviewed with you earlier several items that offer us the opportunity to improve our gross profit by several percentage points.

We intend to continue to execute those initiatives with the objective of reaching our goal.

With regards to SG&A, while our progress has been slower than expected, we have been making steady sequential progress.

While this is some 10 percentage points shy of our target, we intend to steadily close the gap over time.

All told, while this has taken a great deal longer than anticipated to achieve, and while we have experienced more than the anticipated speed bumps along the way, as seen here on slide 24, our integrated materials strategy is clearly beginning to bear fruit.

We believe that continued integrated materials revenue growth, coupled with the decline of SG&A and the realization of our gross profit improvement plan, will result in returning and exceeding our historical performance in these categories and convergence to the threshold of our target operating model.

We will now open the call to questions.

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

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Jay Harris.

Abe, can you discuss a little and tell us what your priorities are at this point in time between generating free cash flow, generating profits, and positioning the Company for growth?

I heard -- let me repeat your question, Jay, because it was a little bit garbled.

You would like me to discuss the priorities between cash conservation, reducing expenses and positioning the Company for revenue growth?

No.

Not cash conservation; growth in cash.

I'm sorry.

Can you please -- okay, to generate cash?

To generate cash.

Yes.

Okay.

Generating profits and positioning the Company for growth.

I'd like you to discuss your priorities.

Okay.

Thank you.

I can hear you much better now.

The way that we are prioritizing our activities right now, and I think it's reflected somewhat in the results that we already announced and what we introduced in the last, say, six weeks -- we are balancing three key priorities.

The first is to drive additional revenue generation from the new products that we have introduced, and are introducing, this period and well into the first quarter, trying to create additional revenue opportunities at different price points and at the same time mitigate the elongated selling cycles that we experienced over the last few quarters, which, as I mentioned earlier today, the good news is we're getting those orders.

The not-so-good news is that it's taking much longer to get those orders to come in.

The second thing we are doing to obviously generate additional incremental cash above and beyond increasing our revenues, is to continuously manage our working capital much better.

And I think that if you look at the progress that we have made in the last three quarters it's clear that we are beginning to not only close the gap, but to come very close to actually generating cash, as evidenced by the sequential progress that we've been making, and also as evidenced by the point that we believe that we have adequate cash as indicated by our quick snapshot of the November 4th cash balances.

And finally, in a period like this, Jay, we have to be very selective in where and how we spend our resources, both in terms of additional product development and also in terms of discretionary expenses.

Part is due to the uncertainty of how our customers' survivability and sustainability may play out over time.

And the other part is we want to make sure we that come out on the other end of it, not just as a viability company with what we have, but well positioned for a recovering market.

So we believe that we add value to our customers by offering them systems that help them save money and collapse time to market.

And with the seven new systems and additional five technology announcements that we made in the last six, seven weeks, we believe that we have a robust pipeline that not only will position us to maximize revenue generation during this depressed economic period, but hopefully will also position us to come out stronger on the other side of this economic cycle when the economy begins to recover.

Bill Gibson; Nollenberger Capital.

Could you share with us the price points on the new systems?

What's the range on these models?

Well, we have introduced, Bill, several systems in the last six weeks, starting with the iPro 8000 that has several models within it, ranging from $399,000 to $499,000.

We also introduced a few RealWax pattern manufacturing tools within our 3-D printer segment that range between $70,000 and $90,000.

We also announced the introduction of a new sPro Sintering Precision Center that will have a range of between $350,000 to about $499,000.

And we've made several technology announcements, including a very large format ProJet 5000 system that will have price points from the low $100,000's, like from $129,000 to over $200,000.

So we are deliberately and decisively sealing the gap with systems that we feel will have the right monetized value proposition at the right price for our customers.

Thanks, Abe.

I've got more questions but I'll get back in queue.

Eric Martinuzzi; Craig-Hallum.

It's Eric Martinuzzi from Craig-Hallum.

I know you guys don't give guidance, but I'm hoping you would comment at least on seasonality.

Q4 historically has been a real strong quarter for 3D Systems.

Obviously it's a more challenging macroeconomic environment.

But what's your sense as far as Q4, at least versus Q3?

Are we up?

Are we flat?

Are we down?

You've got one month down in the quarter.

What's your outlook?

We have had a reasonably good beginning to the quarter.

It's premature to be able to anticipate, since our quarterly performance as you know is back-end loaded.

And it's unprecedented times, Eric.

So I can't tell you how we're going to end the quarter.

I believe that we are well positioned.

Whether or not history repeats itself in some fashion during a very different macroeconomic environment, it's hard to tell.

Those orders that slipped out of Q3, you mentioned at least $2 million worth of systems orders that were held up due to credit issues, have those been resolved?

And if they haven't, is there anything that 3D is doing to help those customers enable that purchasing process?

As I've mentioned now for several quarters, I purposely and deliberately decided to mention our disappointments and shortfall from our own internal expectations to give you some frame of reference to what is happening to us in terms of this elongated selling cycle.

And I mentioned this morning that we have received quite a few large orders from global automotive manufacturing companies, which to us is encouraging during this difficult economic times.

I can't comment today if we already received all the orders that we were counting on during the third quarter.

And finally, we are not in a position, Eric, to become a financing institution for our customers.

So to the extent that some of our customers may be struggling with credit, we don't think that with our own cash balances that we want to turn into an alternative leasing or financing institution here.

Our experience taught us over the last few quarters that while it takes a lot longer to finance some of these expensive systems, the companies that are on our list have come through by and large, and it's really a matter of being patient and persevering.

The value proposition is there.

It is going to take a little bit longer for some of our customers to come up with the financing, but the good news is they're not walking away.

Jim Bartlett; Bartlett Investors.

Yes.

Could you discuss -- Abe, you mentioned the disappointment in the printer sales, although that they're up 50%.

You said you needed to do more on that.

Could you expand about that?

Yeah.

It's -- I mean, it's nice to be able to report a 50% revenue growth year over year in the corresponding quarter, but we had higher expectations.

We think that we have a thoroughly unique and differentiated line-up of 3-D printers.

And we are looking very hard at what else we need to with our channel to make sure that they have all the tools, all the training and all the support that they need to be able to realize the potential.

We're not satisfied with a 50% increase at this point in time because we believe that there is additional upside to some of our 3-D printers.

And this is just pertaining specifically to the ProJet family, which we think is a breed apart in its capabilities from what's out there today.

So we have had all of our resellers in to Rock Hill in the last few weeks.

We provided more training.

We created more tools, including various compare and contrast analysis between what we have and what some of our other marketplace providers have out there.

And we're going to drive it harder.

I'm just not satisfied.

And how quickly would you be able to make sales in the RealWax ProJet printers?

Well, we are taking orders and shipping machines in the current quarter.

And you mentioned the 50%, that was up from what in the third quarter of last year?

No, that was up 50% from what the third quarter last year was.

But what was the third quarter of last year?

We did not break that separately as a reportable number.

Another item that you had mentioned, the $1 million gross profit improvement and that was over the next two quarters, or starting in the first quarter?

Well, some of it will be realized in the fourth quarter and the remainder will be realized in the first quarter.

And as Damon said, we expect this to be a sustainable reduction that will continue forward.

It's not a one-time gain.

And finally, in response -- Bill Gibson was talking about the price points on some of the various products, not the ProJet, but the iPro and the sPro.

Are those what you consider now mid-range systems, the under $500,000?

The iPro 8000 and the sPro 140 will fall into our mid-range systems.

And as we indicated with some of our other new technology announcements, we're not done yet.

Troy Jensen; Piper Jaffray.

Hey, Abe, quick question on the high end.

If you look at it, it looks like it was down significantly, maybe 50% year over year.

And your competitor Stratus was up 68% year over year.

So there still appears to be a market out there for high-end systems.

I'm just curious what you think caused the significant market share shifts?

Well, I think that you need to be mindful and cautious not to compare apples with oranges here.

What we call high-end and what I believe Stratus is calling high-end is somewhat different, both in terms of its price point and its applications, Troy.

And of course it's easy to grow a new segment and a new application 68% when you start from a relatively low base.

In our case what we call high-end goes primarily today into either indirect and direct manufacturing of end-use parts, not jigs and fixtures, or it goes into very high-end rapid prototypes, tools, patterns, casting applications, et cetera.

We have not seen Stratuses in any of those segments that we are playing.

And so I don't think that you are comparing apples to apples.

We do believe that there is a very good opportunity for our kind of high-end large frames and our kind of high-end mid frames.

And we also believe that the marketplace behavior did not change in any material way, as evidenced by the fact that these orders that we have counted on to come in the last few quarters eventually do come in.

What we are experiencing is a thoroughly stretched, elongated selling cycle that I think is reflecting back to us the real contracting economy and the fact that many, many customers, including our own, understand that cash is king during this difficult period and are deliberating a lot longer and a lot harder before they decide to spend cash.

And some of them take even longer to secure the financing.

David Cohen; Midwood Capital.

I think you've had some commentary in the last couple of quarters where you've been very upfront about your sources of disappointment.

And in this quarter you also mentioned -- you and Damon both used the word "progress" in a number of instances.

And I know there are gives and takes on -- throughout the P&L.

But you have your target operating model on page 23, which is actually already materially different from your target operating from a year or so ago in terms of you know you need to hit the target margins and just what your target gross profit will be.

I think previously it was 55% to 65%.

And as I look, compared to 2004 and 2005, there just hasn't been much progress.

Barely any progress in gross profit, notwithstanding materials that are a much higher percentage of your product sales.

Your SG&A and your R&D is significantly higher as a percent of sales in the first nine months.

So I guess, what are you being measured against at this point?

I mean, how are you gauging the success in execution for this Company?

Well, we're gauging it primarily based on the sequential progress that we're making in the here and now.

As you correctly point out, I have been very up front about my disappointments, and I have highlighted every source of disappointment and where and why we have not performed.

And we have taken, we believe, very deliberate corrective action.

We are making progress on SG&A.

I said again this morning that I'm not entirely pleased because we haven't yet hit the target, but we're getting within the threshold of the target.

I am disappointed with gross profit; however, we are making progress on that.

The biggest difficulty, the biggest challenge that we have had in the last nine months has to do with our top line primarily in the large-frame, high-end segment.

And we have, I believe, at least taken all the possible necessary steps to remedy this in an environment that is not entirely cooperative.

If you look at our long-term target model, all that we tried to do in the target model from what we had previously is to give a little bit more definition and to create at least a couple of goalposts there to show you what happens to -- within certain revenue ranges -- to our gross profit potential, to our net income potential, et cetera.

If you look at it and compare it back to what we showed earlier with this detail imposed on it, you'll find that we're basically at the same place.

We have not changed our targets.

We just provided a better, more detailed framework as to how and when those could materialize.

Finally, with regards to gross profit specifically, if you look at the progress that we're making with materials and materials as a percentage of revenue, and you couple that with what is the unabsorbed overhead that Damon and I spoke about, it clearly points that, but for the shortfall in the large-frame systems, we would have been much, much further along in the here and now.

And yes, I'm disappointed, very disappointed.

And I have taken, with the entire organization I believe, very deliberate steps to try and remedy, particularly during this difficult environment, with the accelerated introduction of all the systems that we spoke about.

(Operator Instructions) Jay Harris; Goldsmith & Harris.

Good morning, Abe.

This is Phil Goldsmith.

With regard to the ongoing legal expenses, how is this going to be treated and how do you anticipate this running off over a period of time?

Well, it's treated in the way that we expense it as we incur it.

We talked and disclosed today $0.5 million of incremental expenses associated with this activity.

I should preface that overall we have done a good job of reducing our legal expenses.

This is only the incremental cost.

And our position here is that in certain situations we have to vigorously defend our intellectual property rights and other business rights that emanate from it.

And the objective here is to prevail and to be successful and to share with you on an ongoing basis what's the incremental expense, so that you understand the significance of the expense in and of itself.

And also the relative progress that we're making in all other areas because notwithstanding this incremental rise, we have been reducing our operating expenses.

All right.

Is there a normalized rate at which you foresee this as we go forward or is it just going to be up and down --

I don't think that there is such a thing as normalized rate for legal expenses.

It depends on so many different drivers that it would be naive on our part to try and give you a range that would normalize it, and not something that would bring any credibility to the discussion.

Bill Gibson; Nollenberger Capital.

I just wanted to go back down to the low end of the cost spectrum.

You didn't mention the V-Flash much this call.

Where are we on the progress spectrum there?

Well, I didn't mention V-Flash on the call because we have treated it separately a few weeks ago in an announcement that we said that we are resuming shipments of V-Flash, and that we're getting back to where we had hoped to be quite a few months ago in terms of a managed phased roll-out of V-Flash with some checkpoints along the way.

We subsequently showcased five V-Flash machines at our late October World Conference.

We showcased hundreds of V-Flash parts and five fully functioning machines to 400-some people that came here and got to kick the tires.

And we are, as of today, on track with our managed phased roll-out plans that we articulated earlier in the year.

We have the hope and expectation that this time we can go the distance.

And that's where we are.

Troy Jensen; Piper Jaffray.

V-Flash, I think you said in previous earnings that you expect -- is it $0.5 million to $1 million in gross profit deterioration when you launch that?

(multiple speakers).

That is correct.

That is correct.

We said that in the early quarters since the whole V-Flash model is heavily weighted on material recurring revenues, in the early quarters we said that we expect, depending on the volume of V-Flash machines, that we would actually -- revenue in a given quarter, we expected a deterioration of gross profit anywhere between $0.5 million to $1.0 million.

And thank you for mentioning that, Troy.

Jim Bartlett; Bartlett Investors.

Could you give us an update on some of the vertical markets, more specifically dental and jewelry, aerospace?

And then any other comments on auto, since you did introduce a very large machine that could possibly see some sales, the XL?

But in this environment what are your thoughts on selling that machine?

Well, let's start with automotive since I mentioned it a little bit earlier in the call already.

It has been in defiance of conventional wisdom, if you will.

We have had several large orders from automotive companies.

And that's happened over the last few quarters and we expect to receive more such orders.

And it's, if you will, in a way in defiance to the conventional wisdom during an economic time such as this.

And on the other hand it's exactly in line with our own expectations that when we have the right cost saving tool we will eventually be able to sell it, even during a down economy.

We have not seen a great deal of movement in aerospace above and beyond the normal activity that we've enjoyed quarter over quarter, up or down.

In terms of verticals like jewelry and dentistry, we continue to enjoy ongoing growth.

And dentistry in particular is contributing to some of the growth in our more professional 3-D printers as we mentioned earlier today and in previous releases.

David Cohen; Midwood Capital.

My question's been answered.

Jay Harris; Goldsmith & Harris.

Abe, I guess this is a question for Damon.

With a contract assembly model for systems, where does the issue of unabsorbed overheads come in?

It's -- even with contract manufacturers we still have our supply chain and logistics overhead and we have our warehouse here in Rock Hill.

So there's overheads associated with all those items.

Troy Jensen; Piper Jaffray.

So, Abe, just to follow back on that V-Flash question, my real question was how many units are you assuming in that $0.5 million to $1 million dilution count?

And then if you could update us on is it fourth quarter, first quarter?

And will that ever turn profitable gross margin on system sales?

We said that from the time that we go full speed on commercial activities with V-Flash that we anticipate that within the first 12 months of full commercial operation to achieve a quarterly run rate of at least 1,000 units annually.

That was underpinned by the various models and projections that we put out there in terms of what a business such as this would be capable of delivering.

And so the expectation would be that the range of $0.5 million to $1 million in gross profit suppression -- if you look at what would be the quarterly run rate at the end of this 12 months -- it would mirror scaling up within that range to get to, I guess, 250 units a quarter at the end of the first 12 months period.

That's our expectation and that's our belief in terms of what a unit like that in this price point is capable of.

And that's what we shared with you earlier in the year in the various revenue generation models that we published on V-Flash and shared particularly with you during the Rapid presentation in this past May.

In the case of what we have experienced already in the course of the second and third quarter, Damon mentioned this again earlier today, some of this negative effect was already absorbed in our gross profit in the second and third quarter of '08.

And as we begin to scale up, as we said, the range could be anywhere between $0.5 million to $1 million quarterly, depending on the number of systems as we scale this thing up to what we hope would be the end of the first 12 months run rate of at least 250 systems a quarter.

And at this time there are no further questions.

Are there any closing remarks?

Thank you for joining us today, for your continued support of 3D Systems.

A replay of this webcast will be made available after the call on 3D Systems' website under the Investor Relations section.

This concludes today's conference call.

You may now disconnect.