3D Systems Corp (DDD) 2009 Q2 法說會逐字稿

Good morning and welcome to the 3D Systems second quarter and first six months 2009 earnings results conference call and audio webcast.

My name is Jennifer 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 like to turn the conference over to Chanda Hughes with 3D Systems.

Please go ahead.

Good morning and welcome to 3D Systems conference call.

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

The audio webcast portion of this call contains a slide presentation that we will refer to during the call.

Those following along on the phone who wish to access the slide portion of this presentation may do so via the web at www.3dsystems.com/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 three.

The phone numbers are also provided in the press release that 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 pose questions via the web.

Before we begin this discussion, I would like to preface the 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 conditional tenses or that include the terms believe, believes, expects, estimates, intends, 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 its business.

Forward-looking statements are based upon management's current expectations concerning future events and trends and are necessarily subject to uncertainties, many of which are outside the control of the Company; in particular, the factors stated under the heading forward-looking statements, cautionary statements and risk factors that appear in the Company's periodic filings with the Securities and Exchange Commission as well as other factors could cause actual results to differ materially from those reflected or predicted in forward-looking statements.

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

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

As you know, yesterday we released our operating results for the second quarter and first half of 2009.

We also filed our form 10-Q with the Securities and Exchange Commission.

This morning together with Damon, we will review these operating results with you and give you a perspective on our current business operations and prospects.

We are pleased that amidst the continued unprecedented global slowdown that has led to the reduction in our revenue compared with the 2008 period, sales of our systems and proprietary materials improved sequentially during the second quarter.

Sequentially, system sales increased by $1 million and material sales grew by $1.1 million.

As you also know by now, we commenced commercial shipments of our V-Flash desktop printer in May of this year to favorable initial marketplace acceptance.

Commercial V-Flash activity during the second quarter negatively affected our total gross profit margin by 2.1 percentage points for the quarter, consistent with our prior comments regarding its anticipated short-term effects.

Revenue from services declined sequentially by 17% in the second quarter primarily as a result of a significant drop in the maintenance and warranty revenue, reflecting the trailing 12 month cumulative impact of the decline in large frame systems revenue that began during the first quarter of 2008.

While the near-term economic outlook remains uncertain, we believe that market conditions may have begun to stabilize and that our revenue decline may have bottomed out during the first quarter of this year.

Moving on to slide seven, I would like to continue with some factors shaping the quarter.

Notwithstanding the challenging operating environment we continue to operate within, our gross profit margin for the quarter increased and our operating expenses decreased compared to the second quarter of '08.

These improvements have now demonstrated sustainability for three successive quarters.

For the quarter, we reduced our net loss by 60% on a 33% revenue decline, reflecting the positive impact of our ongoing cost control and profit improvement efforts and our $1.3 million net loss included $2.1 million of non-cash expenses.

For the first six months of 2009, we generated $1.8 million of net cash and finished the period with $24 million of available cash.

As indicated by the table on slide number seven, we have been able to reduce our operating expenses, improve and sustain our gross profit margin, reduce our inventory and increase the amount of available cash over the past three successive quarters.

During this challenging quarter, our team continued to work to deliver these results in a weak demanding environment.

I believe that our results are noteworthy considering that our business has a higher manufacturing, durable goods and automotive component and a more diverse international footprint than many companies in our sector.

Although we continue to feel the impacts of an unprecedented slowdown in the economy worldwide, we are encouraged by the sequential gain that we have made in systems and materials revenue during the quarter and are encouraged that our pipeline of opportunities has grown.

We believe that we have entered the second half of 2009 with a stronger sales funnel that could contribute favorably as market conditions improve.

Now for a more detailed look at our financial performance for the second quarter and first half of 2009, I will turn the presentation over to Damon.

Damon?

Thanks Abe.

Good morning everybody.

As you can see on slide nine for the second quarter of 2009, we reported a 33% revenue decline from our 2008 second quarter primarily due to the economic environment that we are operating in which affected all of our revenue categories.

Our 672 basis point improvement in gross profit margin was not enough to overcome lower revenues resulting in a 20% gross profit decrease to $10.8 million, a 28% decline in operating expenses to $11.7 million, a 60% or $2 million improvement in net loss and a 60% or $0.09 fully diluted net loss per share.

Net loss for the second quarter declined by $1.3 million compared to $3.3 million for the second quarter of 2008.

Although we are not yet satisfied with our operating results, we're pleased that our gross profit margin improvement and cost control initiatives lowered our net loss per diluted share to $0.06 from $0.15 in the second quarter of 2008.

Factoring in the $2.1 million of non-cash expenses arising primarily from our depreciation and amortization expenses, improvements from operations helped lead to a stronger quarter end cash position.

For the first six months of 2009, we reported that gross profit decreased to $21.3 million on a 29% revenue decline from the first six months of 2008, a 529 basis point improvement in gross profit margin from the first six months of 2008 and a 28% reduction in operating expenses to $23.8 million.

Net loss for the first half of the year was narrowed by 52% or $3.4 million year over year and net loss per diluted share improved to $0.15 from $0.31 in the first half of 2008.

On this slide, we've broken out second-quarter revenue by product category and region.

As you can see on the left, our largest product revenue category was materials which declined 28% relative to the second quarter of '08 but increased $1.1 million sequentially compared to the first quarter of '09.

While all revenue categories decreased compared to Q2 2008, systems revenue decreased by a disproportionately higher percentage than materials or services due to reduced sales of our large frame systems.

Systems revenue decline to $5.6 million in the second quarter of '09 from $11.5 million in the 2008 quarter but increased sequentially by $1 million led by an 89% rebound in large frame systems.

Service revenue decreased some 20% year-over-year to $7.1 million for the quarter and I will delve into the drivers of this decline in a few minutes.

The right side of the graph shows that even with the lackluster performance of our Asia Pacific operations which decreased 5 percentage points, our revenue base remains geographically diversified.

Foreign currency translation had a $1.6 million negative impact on revenue in the second quarter of 2009 compared to a $2.2 million favorable impact on revenue in the second quarter of 2008 as the US dollar strengthened in 2009 against most major currencies with the exception of the Japanese yen.

As reflected in slide 12, the significant drop in service revenue resulted from the decline in maintenance and warranty revenues which are the largest component of service revenue.

This drop reflected cumulative impact of the trailing 12 month decline in large frame systems revenue that began during the first quarter of 2008.

So to a large extent, the service revenue decline reflects a rear mirror view of large frame system sales decline.

Specifically, we were impacted by the trailing off effect of carved out warranty amounts that the Company recognizes ratably over the first 12 months of the new equipment operations and lack of comparable installed base available for service contract renewals.

While this was a factor in the first quarter of the year as well, strong upgrade sales helped offset this decline for the first quarter but were not enough to fully mitigate warranty and contract shortfall during the second quarter.

Additionally, it is important to note that the decrease in service revenue partially reflects our continued effort to improve the profitability of our field service offerings by culling out less profitable components.

As slide 12 also shows, our gross margin on service has steadily increased in each of the last four quarters from 16% and 38%.

In other words, our gross profit margin expansion on $1.8 million revenue shortfall resulted in a $1.3 million incremental improvement to our gross profit for the quarter.

Our gross profit improved modestly to $10.8 million in second quarter of 2009 from $10.5 million in the first quarter of 2009.

Our gross profit margin increased 6.7 percentage points to $43.8 million in the second quarter of 2009.

Even after including the negative 2.1 percentage point impact of V-Flash commercial shipments in the quarter.

Continued supply-chain efficiencies, the elimination of certain third-party logistics costs in the United States, enhanced equipment reliability and cost reductions in our field service organization more than offset overhead absorption over lower sales.

It is also important to note that the actual improvement in gross profit margin was overshadowed by a significant shift towards our 3D printer business and away from sales of our higher priced, large frame, rapid manufacturing centers that declined significantly.

As you recall, our mix last years favored our higher priced, higher margin systems.

Our gross profit was down by $5 million compared to the first six months of 2008 primarily due to our lower level of revenue.

Countering the adverse effect of our lower revenue, gross profit margin increased, reflecting the effect of various cost savings initiatives that we pursued in 2008 in the first two quarters of 2009; which included certain supply-chain efficiencies, the movement of certain third-party logistics activities in-house, the sale of systems upgrades and a reductions in field service costs.

Operating expense also continued their favorable downward trend in the second quarter of 2009, declining by 28% to $11.7 million from $16.1 million in the second quarter of 2008 as our cost savings initiatives have continued to gain traction.

This is evidenced by the decline in operating expenses in each of the last seven quarters.

This decrease was primarily due to $3.8 million in lower selling, general and administrative expenses and $600,000 of lower research and development expenses.

The decline in SG&A costs closely follow our cost reduction initiatives that we started in 2008 and we expect to continue to manage expenses and drive our costs down where possible without impairing our ability to operate and service our customers.

As a result, we expect our SG&A cost for the remainder of the year to be between 17 and $19 million.

Total operating expenses decreased by $9 million or 27.6% to $23.8 million in the first six months of '09 from $32.8 million in the first six months of 2008.

Selling, general and administrative expenses declined by $7.6 million to $18 million in the first six months of '09 compared to $25.6 million in first six months of 2008.

This is primarily related to the new operating cost levels that we've achieved.

Even in this current difficult economic conditions, we were able to decrease our DSO to 60 days from 66 days at December 31, 2008.

Bad debt expense for the first six months of 2009 was $900,000 compared to $300,000 in 2008.

This increase primarily related to 2009 sales to our largest Japanese customer prior to its filing for [core] protection in February 2009.

In this challenging credit environment, we are prudently managing our receivables, evaluating credit levels and staying in close contact with our customers which at times may affect future sales decisions.

Inventories decreased by $1.9 million to $19.1 million at June 30, 2009 from $21 million at December 31, 2008; resulting in a decrease in days inventory on hand to 125.

This increase primarily resulted from reduced finished goods inventory and we are focused on driving additional inventory efficiencies and reductions.

And despite the contracting economy, we ended the second quarter of 2009 with $24 million of available cash compared to $22.2 million of available cash we had at December 31, 2008.

The increase reflects our focus on cash management as well as inventory and cost reductions that generated $1.8 million in net cash in the first six months of '09.

We continue to evaluate expenditures necessary to maintain and expand our business and used $700,000 cash in investing activities.

We expect our capital expenditures for the remainder of '09 to be in the range of $0.5 million million to $1.5 million.

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

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

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.

As I mentioned earlier, during the second quarter of '09 we began commercial shipments of our V-Flash desktop printer.

We're very pleased with the initial marketplace reception that this sub $10,000 3D printer is enjoying, particularly within educational MCAD applications due to its superior speed, (inaudible) quality and durability.

Consistent with our plan, we expect shipments of V-Flash desktop printers to increase during the third quarter

As we place V-Flash desktop printers in the marketplace, we're learning about its value together with our customers.

Based on early feedback, we believe that V-Flash is priced at 65% of comparably equipped competitive models and that it produces finer details, features and smoother walls at four times the build speed of its competitive models.

And most importantly to our customers, we believe the V-Flash total platform cost is some 20% less than other brands which means that if compared to these other brands on the slide, each V-Flash platform comes for free.

To illustrate the comprehensive value of V-Flash, we included some pictures on slide 22.

The photo on the left shows a (inaudible) built on V-Flash that took only seven hours and 45 minutes to build.

Those same parts shown in the photo on the right side of the slide were built by one of our users who also have a comparably equipped competitive system on site.

As you can see, it took 27 hours and 42 minutes to complete the build of the same exact suite of parts by the comparable competitor's equipment.

We are entering the second half of 2009.

We have a stronger [sales channel] of opportunities for our new direct, rapid manufacturing (inaudible) systems and 3D printers.

And as a result, we are cautiously optimistic that sales activity may improve in the coming quarters.

Specifically based on our pipeline, we anticipate continued growth of dental manufacturing solutions as well as incremental growth on our expanding lineup of 3D printers.

We expect growth from our new MQast online service and we believe that new materials like our recently introduced DuraForm Flame Retardant 100 will create additional part demand.

As I mentioned in my earlier remarks, we believe that while the near-term economic outlook remains uncertain, market conditions may have begun to stabilize and our revenue decline may have bottomed out during the first quarter of this year.

Based on historical sales performance, we expect that the third quarter might be a seasonally weak period but qualitatively we are observing some signs that conditions may continue to improve.

Against this challenging backdrop, we anticipate slower material revenue growth for the remainder of '09.

And notwithstanding continued upgrade sales, we expect service revenue to lag in its recovery behind systems and materials.

Given the progress we've made thus far, we expect to benefit competitively from our new and expanded product portfolio and stronger financial position.

We expect our gross profit margin to remain strong notwithstanding lower revenue, adverse systems mix and continued quarterly drive on our gross profit margin in the range of 2 to 4 percentage points for the initial four quarters of commercial activity of our V-Flash shipments.

Based on the improvements we made in our cost structure, we expect SG&A to be in the range of 17 to $19 million for the second half of '09, inclusive of our anticipated higher litigation expense for the remainder of '09.

We expect our R&D spending to be in the range of 5 to $6 million without slowing down the rate of planned new product introductions for the balance of '09.

And also we anticipate capital spending in the range of half $0.5 million to $1.5 million for the remainder of '09.

Throughout this global economic crisis, we have been able to reduce our operating expenses and cost of goods spending without impairing our ability to operate effectively or cutting the resources required to scale up as economic growth resumes.

Despite the challenges presented by the global economy, we remain committed to our long-term goal of improving our customers' bottom line through economical direct profit prototyping and manufacturing solutions that help our customers reduce costs and accelerate their new products to market.

Although we're feeling the impacts of an unprecedented slowdown in manufacturing worldwide, we believe that our strengthening financial position and debt-free balance sheet are more than adequate to enable us to continue with our future plans.

Our expanding lineup of 3D printers, our new third generation direct profit manufacturing centers and new materials at attractive price points should help drive demand for our products during this uncertain economic period.

Our business model is built around significant recurring revenue components that are beginning to generate improved contribution margins and we remain committed to our long-term growth objectives and expect to benefit competitively from our new and extended product portfolio and stronger financial position.

We are cautiously optimistic about the positive signs of improvement we experienced during the second quarter while at the same time we continued to manage our resources in line with the current marketplace realities.

Given the progress we've made over the past three quarters, we're confident in our ability to execute on our plan and provide value to our customers and stockholders.

And with that, we will now gladly take your questions.

Chanda?

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.

As a reminder, please direct all questions to the teleconference portion of this call.

The telephone numbers are provided again here on slide 27.

If you're calling inside the US, the number is 1-888-336-3485.

The conference code is 20863398.

(Operator Instructions) Danny [Avaudi], [Avaudi] Printing.

Yes, hello.

I would like to know what is the product breakdown terms of units, how many projects and V-Flash you sold this quarter and the beginning from this year?

This is a piece of information that we do not disclose publicly for obvious competitive reasons.

Okay.

Jim Bartlett, Bartlett Investors.

Yes, could you expand a little bit more on the outlook for the service revenue?

And you also had mentioned part of that was due to -- the decline was due to culling.

Was that a significant part and what kind of lag do you look forward to from service as related to large frame systems?

And just the general outlook (multiple speakers)

Let me start by saying that two legs of the business model stool actually exhibited improvement sequentially i.e.

materials and systems.

And in service, we have the trailing effect of warranty revenue and renewals based on now the rear view mirror effect of the last 12 months.

If you noticed on the slides that Damon showed, slide 12, you can see what happened comparably from the second quarter of '08 all the way to the second quarter of '09.

You can see how the mix is changing.

We have the same impact in the first quarter, within the first quarter of this year.

We also enjoyed significant upgrade revenue that nearly mitigated completely the shortfall that we experienced in warranty and contract revenue.

What can we expect looking forward?

To me this completely depends on the number of large frame systems that we install, which then we would carve out the warranty portion and begin to ratably recognize that over the next 12 months.

It will depend on our ability to continue to renew maintenance agreements with less available installed base until it replenishes itself and it will depend on our ability to sell upgrades.

So I expect on the service portion of it to have a ladies and gentlemen time of six to 12 months depending on our ability to resume reasonable large frame systems sales and depending on our ability to continue to sell upgrades at an acceptable revenue level.

Just to follow on into large frame systems sales.

First of all, have small frame systems sales generally followed the same pattern as large frame?

Are they sequentially -- second quarter to first quarter did they show an improvement?

Do you give some reference with small frame sales as well as large frame with comments on both automotive and Japan?

Let me start with Japan.

Japan for us underperformed the other regions noticeably and if you have a chance to look at our 10-Q, it will be visibly evident that the decline of sales in Japan, which in our case is primarily driven by the state of Japan's automotive industry at the moment, has been lackluster.

In general terms, the recovery in large frames sequentially was also mirrored by small frames and it was also -- even though the mix changed, the units in printers also increased obviously with the addition of V-Flash into the mix.

So, if you are looking for leading indicators here in terms of why we cautiously believe that we may have seen a bottoming out in the first quarter, to me, leading indicators in this business are first and foremost some recovery in material revenue which I also mentioned to you during our conference call in connection with the first quarter.

Because we have a large installed base and as it begins to recover, we expect to see the early signs of recovery and some uptick in material revenue and we have seen some modest improvement sequentially.

We're cautiously optimistic but it's premature to declare a victory.

And secondly, you will see it in some sequential pickup in equipment sales which we've also seen in the second quarter.

And that is much as I can tell you in an uncertain period.

Jay Harris, Goldsmith and Harris.

You and I had conversation several weeks ago and I asked about the process by which durable manufactures would start to spend capital dollars on systems and increase their purchase of materials.

I presume your sales organization has sort of a profile on various target accounts and which they -- under certain circumstances, they have expectation that those accounts would start to place orders again.

Can you -- on the assumption that that's true, can you fill in some color for us in terms of whether you see these trends and on some uncertain timeframe, you anticipate that that orders will start to come through?

I tried to address that in my prepared remarks.

I think I said several times that we have entered the third quarter and the second half of 2009 with a stronger sales funnel.

While there are no guarantees that a stronger sales funnel automatically translates into orders, we believe that we have the kind of sales funnels of opportunities that we have now and given the fact that things seem to have stabilized at many of our existing customers and prospects are getting used to operating in this uncertain environment and given the fact that we have seen some sequential improvement in systems and materials in the second quarter, we are cautiously optimistic that given the fact that our sales funnel is much stronger heading towards second half of 2009, we have a greater opportunity to convert these prospects into orders and that's as much color as I can give you in this uncertain period.

Is there anyway you can provide some color as to the industrial makeup of that sales funnel?

Sure, the industrial makeup of the funnel includes medical devices.

It includes dental components in it.

It includes automotive components in it.

It includes a variety of jigs and fixture applications and it and it includes a component of service [bureau] in it.

Brian Drab, William Blair.

I was wondering if you could talk a little bit more about the service revenue and the type of contracts that you have with your customers.

I was surprised to see that your service revenue continues to be down as much as it is.

And some of your competitors actually have seen some strength in that area given the service revenue I would think is based on the installed base and some long-term service contracts that you have with your customers.

Can you just talk about what type of contracts you have, service contracts you have and provide a little more clarity why you are down 17% there?

Okay well I thought that I provided -- and Damon in particular provided a lot of clarity on the fact that the two most significant components of service revenue are comprised of the initial warranty carve out which is a carve out from the system price that is then ratably recognized over the next 12 months and renewed maintenance contracts.

After that, we have time and material customers and after that we obviously have upgrades and the sale of spare parts.

What is happening in an environment like this, because our footprint is much more significant in manufacturing operations, service providers that supply manufacturing operations, some of the legacy installed base gets idled in times like this.

That impacts service revenue and it also impacts material revenue.

And we obviously took the hit and suffered the impact, the adverse impact on both.

The biggest missing component for us in service right now is really the lagging or the trailing effect of missing warranty revenue which we have been missing now as a result of a steady decline that started in the first quarter of 2008.

So we are missing now five quarters of large frame revenue with all of its potential warranty revenue drained because there is a lagging effect here with all of the numbers of systems missing from the installed base as potential renewal candidates; and on top of that, with customers that have older equipment idling it and not requiring service during this period.

And all of that is in fairly detailed fashion, is displayed or depicted on slide number 12.

Okay, I'll go back and take another look at that.

If I could just ask one more quick one.

Maybe I missed this but it looks like Europe did a little bit better than Asia for you in the quarter and I'll hang up and listen to the answer.

But could you talk a little bit about the end markets that may be outperforming and one geographic region versus the other?

Thanks a lot.

Thanks.

I said earlier and maybe I wasn't clear, so I'll try differently.

Japan in particular which represents the lion's share of our Asia Pacific revenues underperformed Europe and underperformed the United States and we have all the detail on that in the 10-Q.

As you look at it, it will be immediately evident.

And the key, the chief reason why Japan is underperforming for us is the state of automotive.

A great deal of our business in Japan is directly related to automotive and to consumer electronics and durable goods.

These companies which represent the lion's share of Japanese exports have been impacted severely.

We lost the ability to do meaningful business from some of our largest customers, one of whom filed for bankruptcy.

So in the short-term, Japan is not performing.

We believe that Japan represents significant opportunities for the Company.

We believe that Japan will in due course recover and we believe that we have significant future business prospects in Japan.

But for the time being, we can only operate within the existing environment and do our best within it and the results reflect the actual marketplace reality.

Jim Bartlett, Bartlett Investors.

Yes on the V-Flash, the 2.1% hit to gross profit that you took, roughly $500,000; how much of that number is really the cost of production and how much would be sort of other costs or what costs that are in there in V-Flash?

And then are there other costs in V-Flash that are in the marketing line for example that (multiple speakers)

This is predominantly -- obviously since it's a gross profit margin impact, it's all in costs of goods, if you will.

It's in line and completely consistent with the guidance that we have given on it.

And what we're trying to say in so many words is that without the V-Flash negative impact, gross profit margin for the Company for the quarter will have been 2.1% higher.

I understand that part of it.

I'm just trying to get some idea of the cost of production and (multiple speakers)

As we have said repeatedly, for the first four quarters of operations with V-Flash, as we scale up, we are going to suffer some inefficiencies in production and all of these inefficiencies and costs that are related to volume and scalability are being absorbed directly as part of cost of goods which is where they belong.

And what kind of -- the V-Flash hearing aid unit, where are you on that and when would you expect to release that product?

Consistent with our priorities to go out first with a general purpose unit that is suitable for MCAD applications and education, we have given that the first priority.

We anticipate now that we will continue with V-Flash and actually start the introduction in Europe and in Asia Pacific already in this month and that will take priority over hearing aids.

So at this point in time, I would expect hearing aid systems to fall off probably sometime in the fourth quarter.

We want to give the general purpose unit first priority because there is a greater opportunity to serve the market with general purpose units and so we're concentrating on that right now.

And the number of dealers you have selling V-Flash and what would you expect in the future?

That is a work in progress.

What I said during the TCE (inaudible) is that we believe the (inaudible) is about half strength now of where we need to be and we expect that we are adding dealers on a weekly basis and we expect that in about 12 months time, we will be at full strength.

And full strength would be?

Our target is to end up with between 150 and 200 dealers as the first full strength milestone.

(Operator Instructions) [Arthur Johnson], [Bergins and Jenkins].

Three years ago, you guys said that you wanted a world class manufacturer and you outsourced your production.

It appears that you are now doing production in-house.

Is this a philosophical switch and what kind of margin impact will this have in the future?

No, we have always felt that given our historical business model which was of a mix that was consistent thoroughly of large frame systems and some small frame systems and specialty printers, that given those volumes and the proliferation, the number of models that were required to feed this business model that there was never an opportunity for 3D to become a best practice, world-class manufacturing player because it was a very complex portfolio.

As we are looking at the opportunity to have some single model, high volume products where we can apply our expertise and develop some core competency; that is a shift in our business model.

And with that, we are entertaining some in-house production in areas where we feel that we can either add significant value and/or in areas where we feel that this will turn into a competitive advantage for us.

Suffice it to say, if and when we decide to bring something in-house, it has to also generate significant savings or the potential for additional gross profit margin expansion or else we're not going to do it.

And that was the case, by the way, also when we decided to bring in activities like warehousing and logistics.

We will only do things like this if it makes sense in terms of volume, in terms of overhead absorption, in terms of developing core competencies in the Company over a large volume opportunity.

And it has to have also a clear path towards margin expansion.

Jim Bartlett, Bartlett Investors.

You mentioned MQast is a revenue opportunity.

Could you give us some indication of the magnitude of that and the timing and what kind of short-term revenue opportunity do you see on this?

As you know, during the Time Compression Expo and [RAPID], we launched the MQast joint venture with Scicon Technologies who is one of our preferred service providers.

It is a new technology that can deliver in days diecast quality aluminum and stainless steel parts.

It is an online service, so we take orders online and we have been taking and shipping hundreds of unique metal items since the introduction.

It is premature for me to begin to give you specific revenue guidance.

But what I will tell you is that it's growing steadily.

It has a healthy backlog of orders and units associated with it.

And it is particularly successful so far in the whole area of medical device and medical and surgical instruments where we really have an opportunity here to offer something truly unique.

And so far, so good.

It's not going to be material to our revenue for some quarters, simply because we're starting from zero.

But the activity level is healthy.

The margins are more than accretive to our corporate margins.

And so far, the ramp is exciting.

Jay Harris, Goldsmith and Harris.

Your working capital, receivables inventories and payables; I didn't have a chance to get out the first quarter's numbers on receivables versus the $24 million of revenues that quarter.

What should we expect going forward?

It looks to me like you collected $9 million since the beginning of the year in receivables and paid payables down by $5 million.

Your cash -- and your inventories went down by $2 million.

But your cash only went up by $2 million.

Can we get some color on what to look for in the future and what happened in the first six months of the year?

I will let Damon take this one.

Let's start with the first six months of this year.

You did highlight a couple items.

In that receivables number that came down, we did also have -- we had the Japanese bad debt allowance in the first quarter which is included.

It reduces your receivables numbers there.

Our receivables actually went up in second quarter versus the first quarter.

And you also take into account what we've used for some investing activities.

We spent $700,000 in investing activities for the first half of the year.

And I think just like we had in our prepared remarks that we have had, out of the loss that we did report for this quarter, there was $2.1 million of non-cash expenses.

I think if you look forward at -- it's all in the Q too with the information about our depreciation and what's going forward, those levels will remain about the same and that looks -- so that's the majority of that $2.1 million that was made up there.

So I think you can look forward and take -- that's how we ended up in the cash position we are.

Going forward, there's a lot of different things that depend on where we are for margin, where we are for revenue.

I think as Abe had said, in the first half of the year it looks like we may have hit bottom for revenue.

We also gave the ranges for our SG&A expenses, the 17 to $19 million.

So if you add all those things up, you can sort of come out to where you where you may think it could be.

Well assuming there's not a lot of revenues or an excessive amount of revenues done in the last 15 days of the quarter kind of thing, where do you think your receivables should be at the end of a normal quarter relative to revenues?

Well right now we are at 60 days for a DSO number.

We had said that we brought that down from 66 days.

And we've said in the past that we expect in our normal operating environment to be at 60 or below 60 on a global basis.

So if you look at it from the DSO, that's where I think our DSO is healthy and where it should be.

We'll continue to try to drive it to the upper 50s, I think.

But I think that's the range that we expect to be in and is in accordance with the models that we put out there.

Should we expect any further reduction in inventories?

Yes (multiple speakers) we are continuing to drive inventory down or trying to drive inventory down.

We said before and in our model, we expect it to be between 15 and $17 million in the normal operating environment.

We expect again to keep driving down -- I think our last quarter we said to be at $17 million by the end of the year and we're still in those ranges is what we expect.

And how should we measure the fluctuations in payables?

What is a normal range?

Well as we've hit these new spending levels and new SG&A, I think we have had this sort of step function where our payables have come down for the last few quarters.

Like you said, it is down $5 million from the beginning of the year.

We believe that we try to get as good a terms as we can and extend the payables as we can.

Low payables numbers over time is not necessarily the best thing.

We try to manage cash.

But I think the levels we are at right now for this revenue level is about where that payables level would end up staying with our current cost structure.

I'm sort of inferring from your comments that we should get more cash growth per dollar of incremental revenues going forward.

Is that the right conclusion?

Well what we've done, if you take all the items we just talked about especially at the gross margin level that we have been running and expect to have a sustained strong gross margin even with the V-Flash 2 to 4 percentage point drag, that is a big driver below -- down to the bottom line as incremental revenues go up.

(Operator Instructions) Mark [Fenlock], Covington Partners.

I was wondering if you might be able to tell me what some of the differences might be between the V-Flash machine and [Stratus's U-Print] machine.

I can tell you what we have learned.

As I mentioned earlier, we started shipping V-Flash units in late May and we placed quite a few of them at MCAD applications and also at educational applications and have an opportunity now to look at some comparisons.

The main things that we learned, which I touched a little bit on slide 22, is that we are priced at about 65% of [U-print], that we can build -- particularly when we build a full suite of parts like the ones that are on the picture on slight 22, we build at four times the speed.

We have 68% greater build volume versus [U-print] and we believe -- and you can see from the pictures -- that we can get much finer details, especially when it comes to small features and smoother walls, which means less finishing is required.

And when you put it all together, when you compare the full platform to a full platform, based on this example, we're about 20% less then [U-print] or a Dimension.

And that means that every [fifth] platform versus the competition is free of charge to the customer.

We have -- if you want to see more detail, our marketing team actually posted a much more in-depth and more detailed comparison on the V-Flash website which is www.modelin3D.com and there is a button on that website now that says click here to experience the V-Flash difference.

And if you go there, you will be able to get a much more detailed comparison including all the benefits to the customer.

Tim Bartlett, Bartlett Investors.

[If you were] to expand on what's happening in ProJet both in the dental and non-dental applications and -- well that's the basic question.

We have had another good ProJet quarter in the second quarter of 2009.

So we successfully grew the installed base.

Of that, we had a healthy component of dental applications.

It's clear to us now that the ProJet VP is fast becoming preferred dental lab tool for [copings and wax-ups] and that is very gratifying for us.

And we have also made some good inroads with the ProJet CP and CPX and the HD and SD models continue to make some inroads into high-definition MCAD applications and other mechanical applications.

So all I can tell you, Jim, is that we are grateful to have ProJet in the mix.

It certainly has been an important system revenue [producer] for the last several quarters.

And we expect to continue to grow the installed base and to bring additional applications of ProJet into the market.

Thank you there.

There are no further questions at this time.

I would now like to turn the call back over to Chanda Hughes for closing remarks.

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

A replay of this webcast will be made available after the call on the investor relations section of our website at www.3dsystems.com/ir.

This does conclude today's conference call.

You may now disconnect.