3D Systems Corp (DDD) 2009 Q3 法說會逐字稿

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results for the third quarter and first nine months of 2009.

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

(Operator instructions.)

At this time, I would like to turn the call over to Ms.

Amanda Molbert with 3D Systems.

Please go ahead, ma'am.

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

I'm Amanda Molbert, and with me on the call are Abe Reichental, our CEO, Damon Gregoire, our CFO, and Bob Grace, our General Counsel.

The audio 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 3.

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 3-second delay, and that you'll not be able to pose 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, beliefs, 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 this 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, 3D Systems 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 third quarter and first nine months of '09.

We also filed our Form 10-Q with the SEC.

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

Let me begin by saying that considering the unprecedented economic environment, we are very pleased with our third quarter performance and the continued sequential improvement of our financial results.

Notwithstanding the persistent economical challenges that we encountered in the marketplace during the third quarter, we were able to generate sequential revenue growth from all of our primary revenue buckets.

Sequentially system sales increased by $0.9 million and material sales grew by $1.4 million.

Sales of our V-Flash Desktop Printer contributed $0.9 million of revenue for the quarter, and V-Flash sales negatively affected our total gross profit margin by 4.1 percentage points this quarter, consistent with our prior comments regarding the anticipated short-term gross profit margin drive that we've been talking about for the past few quarters.

Revenue from services increased sequentially by 8% in the third quarter primarily as a result of an increase in maintenance contract revenue.

When we expect the economic recovery to be agonizingly slow, based on the sequential progress we have made since the first quarter of this year we believe that our marketplace conditions have stabilized.

We believe our sales opportunities funnel continues to strengthen, and our installed base began to exhibit early signs of recovery as evidenced by our material revenue snapback.

Accordingly, we're cautiously optimistic that our positive sequential revenue and trend may be sustained.

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

These improvements have now demonstrated sustainability for four successive quarters.

While revenue declined 22% from the third quarter of '08 to the third quarter of '09, our ongoing cost control and productivity improvements enabled us to move forward from a $1 million net loss in the '08 quarter to a net income of $0.9 million for the third quarter of '09, including a $1.8 million of noncash expenses, primarily related to depreciation and amortization expense.

Our earnings per share of $0.04 included 4.1 percentage points derived from V-Flash sales, representing a negative $0.03 per share, and litigation costs of $0.9 million representing another negative $0.04 per share.

For the first nine months of '09 we generated $1.8 million of net cash and finished the period with $24 million of available cash.

The combined affect of changes in our manufacturing strategy and our extending product portfolio resulted in a modest sequential increase in inventory related primarily to procurement cycles.

We remain committed to achieving further inventory reductions.

Now, for a more detailed look at our financial performance for the third quarter and first nine months of '09, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thanks, Abe.

Good morning.

As you can see on slide nine, for the third quarter of 2009 we reported a 22% revenue decline from our 2008 second quarter, primarily due to the economic environment in which we were operating which affected all of our revenue categories.

While gross margin improved by 507 basis points, the improvement was not enough to overcome lower revenues, resulting in a 12% gross profit decrease to $12.3 million.

As Abe mentioned earlier, initial V-Flash sales negatively impacted our gross margin by 4.1 percentage points.

We also reported a 22% decline in operating expenses to $11.2 million, net income of $0.9 million, and earnings per share of $0.04.

Our initial V-Flash sales negatively impacted EPS by $0.04, and ongoing litigation fees had a negative affect of $0.03 per share.

For the first nine months of 2009 we reported that gross profit decreased to $33.6 million on a 27% revenue decline from the first nine months of 2008.

Our gross profit margin improved by 523 basis points from the first nine months of 2008.

We reduced operating expenses by 26% to $35 million.

Net loss for the first half of the year was narrowed by 69% or $5.5 million year-over-year and net loss per diluted share improved to $0.11 from $0.36 in the first nine months of 2008.

On slide 11 we have broken out third quarter revenue as a percent of sales by product category and region.

As you can see on the left, our largest product revenue category was materials, which continues to be our highest margin category.

While material sales declined 20% relative to the third quarter of 2008 they increased $1.4 million sequentially compared to the second quarter of '09.

This compares to $1.1 million sequential increase from the first quarter of '09 to the second quarter of '09.

And while all revenue categories decreased in Q3 2008, systems revenue decreased by a disproportionately higher percentage than materials or services due to reduced sales of our large frame systems.

Systems revenue declined to $6.8 million in the third quarter of '09 from $16.3 million in the 2008 quarter, but increased sequentially by $0.9 million led by 181% rebound in large frame systems.

Large frame systems represented 31% of total systems revenue for each of the third quarters of 2009 and 2008, mid frame systems accounted for another 23% of total systems revenue for the 2009 quarter compared to 49% for the same period in 2008, and 3-D Printers made-up the remaining 46% of systems revenue in the third quarter of 2009, increasing from 20% in the third quarter of 2008.

Service revenue decreased 14% year-over-year to $7.7 million for the quarter.

However, sequentially service revenues increased by $0.6 million.

This was led by an increase in maintenance contract revenues.

The right side of the graph shows that our revenue base remains geographically diversified.

Sales from Asia-Pacific region made-up approximately the same percentage of total revenue in both 2009 and 2008.

However, a $4.5 million decline in volume from European operations resulted in European sales composing about 40% of total revenues for the quarter compared to 45% of revenue in the third quarter of 2008.

North American sales made-up 45% of total revenue for the third quarter of 2009 compared to 40% for the third quarter of 2008.

Foreign currency translation had a $0.3 million negative impact on revenue in the third quarter of 2009 compared to a $1 million favorable impact on revenue in the third quarter of 2008.

As reflected on slide 12, the drop in service revenue compared to the third quarter of 2008 resulted from the decline in maintenance warranty revenues, which are the largest component of the service revenue.

As we've mentioned in previous webcasts, the decrease in maintenance and warranty revenues is a rearview mirror reflection of our large frame system sales decline.

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

Additionally, it's 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 services has steadily increased in each of the last four quarters from 16% to 48%.

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

Our gross profit improved to $12.3 million in the third quarter of 2009 from $10.8 million in the second quarter of 2009.

Our gross profit margin increased from 44.5% in the third quarter of 2009 compared to 39.5% in the third quarter of 2008 even after including the negative 4.1 percentage point impact of the initial V-Flash revenue in the quarter.

Continued supply chain efficiencies and cost reductions in our field service organization helped to offset overhead absorption over lower sales, and we also improved our overhead absorption during the third quarter of '09 by moving the manufacturing of our ProJet line of 3-D Printers in-house.

This has enabled us to better utilize our facilities and to maintain better quality control.

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

As you recall, our mix last year favored our higher priced, higher margined systems.

Our gross profit margin was down by $6.7 million compared to the first nine months of 2008, primarily due to our lower level of revenue.

While gross margin has remained at 44% for each of the last four quarters, the impact of our continued cost savings initiatives and productivity improvements noted on slide 14 have been overshadowed by the impact of initial V-Flash commercial shipments, which had a negative impact of 2.1 percentage points in Q2 and 4.1 percentage points in Q3.

Operating expenses continued their favorable downward trend in the third quarter of 2009, declining by 22% to $11.2 million from $14.3 million in the third quarter of 20008 as our cost savings initiatives have continued to gain traction, evidenced by the declines in operating expenses in each of the last eight quarters.

This decrease was due to $2 million in lower selling, general, and administrative expenses, and $1 million of lower research and development expenses.

The decline in SG&A costs closely follow our cost reduction initiatives that we started in 2008.

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 of our acquisition of Acu-Cast Technologies we have revised our expectation for SG&A costs.

We expect SG&A to fall within the range of $8.5 million to $10 million for the fourth quarter.

Total operating expenses decreased by $12.1 million or 26% to $35 million in the first nine months of 2009 from $47.1 million in the first nine months of 2008.

Selling, general and administrative expenses declined by $9.6 million to $26.4 million in the first nine months of '09, compared to $36 million in the first nine months of 2008.

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

Even in these current difficult economic conditions we were able to decrease our DSO to 63 days from 66 days at December 31st, 2008.

Bad debt expense for the first nine months of '09 was $0.9 million compared to $0.7 million in 2008, and our allowance for doubtful accounts increased to $2.5 million at September 30th, 2009 from $2 million at December 31st, 2008.

Both of these increases primarily related to 2009 sales to our largest Japanese customer prior to its filing for core protection in February of '09.

In this challenging credit environment we are prudently managing our receivables, evaluating credit levels, and staying in close contact with our customers.

This at times may affect future sales decisions.

Inventories decreased by $0.7 million to $20.3 million at September 30th, 2009 from $21 million at December 31st, 2008, resulting in days inventory on hand of 122 days.

This decrease primarily resulted from reduced finished goods inventory and higher sales.

Inventories at September 30th, 2009 increased compared to our June 30th, 2009 numbers as a result of the change in our manufacturing strategy, as discussed previously.

We are focused on driving additional inventory efficiencies and reductions.

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

The increase reflects our focus on cash management, as well as inventory and cost reduction that generated $1.8 million in cash in the first nine months of 2009.

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

We expect our capital expenditures for the remainder of 2009 to be in the range of half a million dollars to $1 million.

This range does not include expenditures that may be associated with acquisitions.

We 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.

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.

We recognize that the current market conditions present unique opportunities to enhance and broaden the recurring revenue portion of our business model and better utilize and monetize our rich technology platform.

Towards that end, we're focusing all of our activities and resources on growing the three key pillars of business -- parts, printers, and production systems.

Like gears working together, these three growth pillars work together to create tangible customer value by gaining access to our latest proprietary systems, materials, and parts technology.

We believe that by offering our customers the convenience and economical benefits of a one stop shop for all their design to manufacturing needs we can build and sustain profitable growth momentum and deliver significant stockholder value.

We expect that we will grow these three key business pillars through a combination of investments in organic initiatives and acquisitions.

With the three growth initiatives we've announced since September, we have already begun to execute our new business model.

In September we acquired the key assets of Desktop Factory, a company that was developing a sub $5,000 3-D Desktop Printer.

The Desktop Factory 3-D Printer exhibits, builds comparable to existing 3-D printing technologies to produce robust plastic parts.

As we've said previously, we expect to complete the development and integration of Desktop Factory's technology into several new products within our existing research and development budget.

On October 1st we acquired the assets of Acu-Cast Technologies, a leading provider of rapid prototyping and manufacturing services, that offers precision parts made on a wide range of traditional and additive manufacturing systems.

Concurrently, we launched 3Dproparts, the world's largest rapid prototyping and direct manufacturing parts service.

We expect our 3Dproparts service to bring together a wide range of production and additive grade materials, and the latest additive and traditional manufacturing systems, enabling us to deliver a broad range of precision plastic and metal parts and assemblies to our customers.

We plan to capture and report revenues from Acu-Cast and 3Dproparts within our service revenue line.

We appreciate the need to provide financial guidance to our stockholders and the investment community, but believe that based on the current economic environment such an attempt would be irresponsible.

However, in order to assist our investors and followers I would like to provide as much color as we can on revenue drivers for the remainder of the '09 and beyond.

As I mentioned in my opening remarks, we believe that we have entered the fourth quarter of '09 with a stronger sales funnel of opportunities for our new direct rapid manufacturing process systems and 3-D Printers, and as a result we remain cautiously optimistic that sales activity may improve in the coming quarters.

Specifically, we expect sales of our expanding lineup of 3-D Printers to continue to grow, helped by our expected commercial shipments of the new ProJet 5000 later this quarter.

We also expect continued growth of dental manufacturing solutions benefitting from our expanding portfolio of dental production systems and dental marketplace technology leadership.

We also anticipate revenue growth from our new 3Dproparts service and related Acu-Cast acquisition.

We're pleased with our first full quarter of V-Flash sales, and believe that we're on track to achieve our targeted first anniversary run rate of 250 units per quarter which should begin with the third quarter of 2010.

Since January '09 we have added 35 new resellers and we expect to continue to add resellers at the rate of 10 to 15 per quarter.

As I mentioned in my earlier remarks, we believe that while the economic recovery will be agonizingly slow, market conditions have begun to stabilize, and our revenue decline may have bottomed out during the first quarter of this year.

Given our strength in portfolio of products and services we expect sequential revenue growth during the fourth quarter, although we do anticipate slower material revenue growth for the fourth quarter, as we expect service revenue to continue to lag in its recovery behind systems and materials.

As we have previously announced, we intend to grow our newly created 3Dproparts service, both internally and through additional strategic acquisitions.

By the end of 2010 we expect sales of 3Dproparts to reach a minimum level of 10% of total revenue.

We expect to benefit competitively from our new and expanded product and service portfolio, as well as our stronger financial position.

In terms of operating expenses and cash, we expect our gross profit margin to remain strong, notwithstanding lower revenue, adverse system mix that Damon talked about earlier, and continued cost related drag on our gross profit margin in the range of 2 to 4 percentage points for the remaining three quarters of the first year of our V-Flash shipments.

With regards to operating expenses for the fourth quarter of '09, we are providing the following guidance, based on improvements we made in our cost structure we expect SG&A to be in the range of $8.5 million to $10 million for the fourth quarter, inclusive of our anticipated higher litigation expense and increased operating costs associated with the Acu-Cast acquisition.

We expect our R&D spending to be in the range of $2 million to $3 million for the fourth quarter without slowing down the rate of planned new product introductions for the balance of '09.

Finally, we anticipate our capital spending to be in the range of a half million to $1 million for the remainder of the year.

This range is limited to ordinary capital expenditure required to run the business inclusive of our 3Dproparts activity.

This range does not include capital required to finance additional acquisitions.

We recognize that the current market conditions present unique opportunities to enhance our business model, and expect to make additional strategic investments in the coming periods.

Looking forward, we believe that our new growth initiatives in place, that with our new growth initiatives in place our funnel of new opportunities for the fourth quarter is stronger than it was previously.

We expect the softness in execution on our three key pillars of business growth initiatives, parts, printers, and production systems, should help drive demand for our product by OEMs.

As you know, our business model is built around significant recurring revenue components that have begun to generate improved contribution margins over the past four quarters.

We believe that the launch of our 3Dproparts business significantly enhances our recurring revenue business model.

We remain committed to our long-term growth objectives and are confident in our ability to provide value to our customers and stockholders.

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

Amanda?

We will now open the call for 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 phone numbers are provided, again, on slide 27.

If you're calling inside the U.S.

the number is 1-888-336-3485.

The conference code is 36028148.

(Operator instructions.)

Your first question comes from the line of Jim Bartlett from Bartlett Investors.

A terrific performance.

Could you expand a little bit more on V-Flash?

Have you gotten a sense of the material usage rates yet, or is that too early?

And does -- did it include Asia and Europe rollout?

And also what kind of mix are you getting with the [curing] stations?

Good morning, Jim, and thanks.

As I said in my opening remarks, we're pleased with the first full quarter performance that we had with V-Flash, and we mentioned that V-Flash sales contributed $0.9 million of revenue to the mix here.

It was primarily generated in the United States and Europe.

The rollout in Asia is more of a fourth quarter event.

And what we're finding in terms of curing stations is that with an initial system we always sell the curing station and then repeat orders then to acquire it.

In terms of material usage, we've had a nice performance from the initial installs in terms of repeat cartridge orders, so far we're very pleased.

And just following on on the cost allocations, the -- to V-Flash, what portion is really sort of a fixed cost and what portion is variable cost?

I'm trying to get an idea as to how you ramp up, you approach profitability.

Well, on that one, Jim, I think you know that we outsource the production of the V-Flash unit, and as we move along we've been working with that outsourced contractor to continue to reduce the cost.

So it's basically on a build-by-build that we keep reducing that cost.

We don't really have at this point for internal purposes here much of our fixed cost there, but we do keep moving ahead with sourcing and productions to keep bringing that cost down.

Yes, and this is merely a function, Jim, of ramping up and scaling up costs that we believe will fade away at the end of the first four full quarters.

We believe that we have responsibly and so far very accurately estimated the range, and we're pleased that we were able to absorb and more than make-up for it within our own internal savings and productivity improvements.

Because, as you'll recall, our gross profit margin for the second quarter was 44%, and that was with a 2.1 percentage points absorption, negative absorption of V-Flash.

And in this quarter we also have 44% plus with 4.1 percentage points negative drag.

So we believe that we are not only estimating this negative drag from the initial launch cost but finding ways to more than make-up for it.

Okay, great.

Thank you very much.

(Operator instructions.)

Your next question comes from the line of [Brian Drab] from William Blair.

Good morning.

This is [David Mandel] on for Brian.

Hey, David.

With regards to the Desktop Factory acquisition, how close is the technology to being commercial ready at this point?

Well, we're not in the habit of discussing pending commercial announcements until we have a date certain, and so I can't comment on how close it is.

Needless to say, we've found the technology interesting, advanced enough, and complementary so that we decided to acquire it.

And, as we said publicly, David, we intend to integrate it into several new product developments that we have.

We already, as you know, have the lowest cost commercial printer on the market at $9,900 with V-Flash, and we expect that Desktop Factory technology would allow us to push that barrier even further down over time.

All right, sounds great.

Thank you.

(Operator instructions.)

Your next question is a follow-up question from Jim Bartlett from Bartlett Investors.

Yes, could you talk a little bit about the -- your materials margin and the trends you see there?

And, let's see, well, margins in general but the material margin, specifically?

I noticed it was 57%, is there room for improvement there?

And is this also impacted by foreign currency trends?

There's a few things that I'd like to say about materials.

I think that the fact that we enjoyed and realized sequential material revenue growth of $1.4 million is a testimony to the quality of our installed base.

If you look at other parts of this marketplace, not everybody could claim that they actually enjoyed material sales growth sequentially between the second and the third quarter, and I think that's a testimony to the quality of our installed base and the consumption ability of our systems which is fairly high in comparison to competitive systems.

Margin wise, Jim, of course in times like this there is some pressure on margin, and certainly currency is not always helpful in situations like this, particularly since our sales in Europe did not grow at the same rate that sales in the U.S.

grew for the third quarter.

But we're not really concerned about materials margins.

We believe that there's plenty of room for improvement there, and that would follow also with larger sales volumes.

Because, remember, with all the improvements that we have made in our gross profit margin overall and materials being a very large part of what we do, we're still up against less than optimal overhead absorption here in all categories relative to, let's say, this period last year.

And so quite a bit of what may appear to be in the materials margin, some sliding back, could very easily be remedied with a little bit more volume that will fix our less than optimal absorption.

I have a follow-up question, could you just talk the printers and production systems that you mentioned the focus is, could you give us an idea of the structure, how you're structured with business units, and how that sort of plays into the overall company business model now that you have Pro-Parts as part of the model?

Yes, I talked a little bit earlier today about the fact that we now have basically three key business activities within the Company, or as we call them key drivers or key business pillars, and that's parts, printers, and production systems.

Which, in our mind, represent a continuum of patch points with the customer.

A customer today may only have a name to access the latest technology, parts, as their in-house development activities grow they may want to bring a printer in-house, and eventually they may want to bring a production system in-house, and still continue to buy parts for other activities that they may not want to invest in-house for.

So our go-to-market strategy is such that we want to make sure that we are tapping into the largest audience, that we give the largest audience in the marketplace an opportunity to experience the 3D systems brand and its latest capabilities and its value proposition, leveraging latest technology and systems and materials.

And the go-to-market strategy remains with production systems, we have a direct sales force, and with our 3-D Printers and 3Dproparts, we're going to go through a combination of channel management, resellers, and authorized partners to help us penetrate into all these accounts that have multiple acquisition points for parts, printers, and ultimately production systems.

And separate from that we also recognize that there is a growing internet marketplace for paid parts.

And in line with that we also launched on October 1st our 3Dproparts website.

And is dental a business unit on its own?

I believe that you had set that up some time ago?

Well, we've set the dental as a business development group, not as a business unit, because into dental we have again three different types of solutions.

We have two 3-D printers now that are designated as professional dental systems.

One is the BP and the other is the one that we just previewed at the Shanghai show a few weeks ago, the MP.

Those are two designated dental lab printers, one for wax-ups and copings, the other for dental models.

But we also sell production systems into the dental universe, and we have a few SLA systems and direct [metal] systems that are designated for dental solutions.

And we also plan to provide dental models via our 3Dproparts to certain dental customers.

So what we have today in place organizationally speaking is not a dental business unit, but a dental business development group that can pick the best parts from each one of our business units and offer a continuum of comprehensive dental solutions into this space.

Understood.

Thank you.

Your next question comes from the line of Jay Harris from Goldsmith & Harris.

Good morning, Abe, Damon.

Good morning.

I wonder if we could go back to defining the market into three -- for systems, into three segments?

Well, I'm broadening the name systems -- printers, value added manufacturing operations, and you're using now Pro-Parts as that segment.

I'd like to hear you talk about the momentum or lack of momentum in the profile of each of these businesses.

When you comment on printers to what extent was the performance in the third quarter, which was very good, promoted or aided by the introduction of new printers?

I think you've always said there's been a surge, you know, when you introduce a new system there's always a surge in orders.

And to what extent does it reflect a pick-up in trend demand?

Okay, let me start by explaining the three areas of concentration that we now have -- parts, printers, and production systems.

As you know, we come from a background of selling large frame production systems, and we have learned over time that with that kind of a business model you have somewhat of a finite universe of these pocketed companies that can afford to invest and have the justification to invest in a large production system.

We have then begun to set our sights on lower priced entry level and mid ranged systems and printers, and obviously with price points, elasticity, and different capabilities we concluded that we could attract a much larger audience and began to really go after the 500,000 available CAD seats that are out there, that represent really the target for 3-D printers.

We believe that more than 500,000 users of CAD seats are actually buying prototypes and parts, and so by doing that we're now setting our sights into the constituency that actually pulls through and creates the entire demand in our space.

Because nothing happens in the space of additive manufacturing until somebody orders a part.

If they order it from their own internal company's shop, then eventually that will require additional capacity in-house by a company.

If they order it on a service bureau, eventually the service bureau has to order another machine.

And so we are beginning now to address with our parts initiative a much larger audience that we want to induct into the latest and greatest technology and value proposition, and give them an entirely new brand experience, so that when they are ready to invest in their own printer, they would bring that printer in-house and it'll be a 3-D printer, 3-D systems printer.

And when they're ready for a production system they would want the same quality and access to the same technology that they have experienced when they purchased the parts from 3Dproparts.

Coming back to the first part of your question, Jay, in times like this when you introduce a new product, obviously there is a little bit more resistance than there would be if we introduced it in the same period in '07 or '08.

So I don't know that we were helped enormously in the third quarter from the fact that we had the full quarter of V-Flash.

I think V-Flash is on schedule, it's exactly were we expected it to be.

I don't think that we got much help from the economy, but it is new, it is differentiated, it is capable, and it is the lowest priced 3-D printer on the market, with thoroughly impressive output.

And I think that is what's selling V-Flash, but if you look at the whole category of 3-D printers for the quarter, and Damon talked about that, it nearly doubled in its share of systems revenue from the comparable quarter.

It went from like being 20% in the third quarter of '08 to --

46%.

-- 46% in this quarter, and that was more than just V-Flash.

And so we are gaining traction across the board within our 3-D printing portfolio, and it's -- what we've been saying we would be doing all along.

Is the -- so what has happened in the third quarters in terms of the trend and value added manufacturing?

Well, I think that the trend in value added manufacturing right now is such that over the last four quarters a great deal of existing fully utilized capacity became available.

When you go through the kind of recessionary steps that lay-off 15% to 20% of your manufacturing and design engineers worldwide, less projects are being attended to.

And all of a sudden many value added production systems that were fully utilized have some available capacity, which is why you see some pick-up.

We did have some pick-up in large frame system sales in the quarter, but not nearly enough to come back to historical levels, because what we see is that there were still lots of idle capacity out there.

And it'll take some time for all of that to be absorbed as we see real economic recovery that also begins to create some jobs.

Well, I'm not really interested in the comparisons with the third quarter of '08.

I'm more interested in a consecutive quarterly trend.

What -- is the Pro-Parts --

We installed more large frames in the third quarter than in the second quarter.

Okay, and then when it comes to Pro-Parts on a proforma basis how did the business look to you in the third versus the second quarter?

Well, we -- I'll remind you that we launched 3Dproparts in the first day of the fourth quarter.

No, I understand that, Abe, but you had several operations which you have consolidated in October into Pro-Parts.

If you look at each one of those individually and add them up how did the third quarter compare to the second quarter?

I'm not prepared to talk about that today, Jay.

What I tried to say in my prepared remarks is that within the -- to give you a range of what to begin to look for, we said that at the absolute minimum we expect really Pro-Parts to represent at least 10% of total revenue at the end of 2010.

Once we have several quarters of operating with really Pro-Parts we will begin to give you more color, and as we add a few more acquisitions and organic initiatives to this we will also provide you with a proforma.

It's a little bit premature and a little bit irresponsible to do that today.

All right.

Can you comment, just to finish this off, can you comment on the trends in these three parts of your business thus far in the month of October?

I can, but that would fall under the heading of forward guidance on revenue, which I tried very hard not to do that.

I think that it would be irresponsible given the current conditions to begin to give revenue guidance.

We've given you very specific guidance on many other lines of the P&L, but I would -- and I very cautiously said that we expected sequential progress in the fourth quarter but I don't want to say more than that.

To be continued.

Thank you.

You bet.

Your next question comes from the line of [Herb Bookbinder] from Wells Fargo.

I see the progress you're making.

You touched on what I really wanted to talk about, it was dental, and maybe you can expand upon the progress you're making?

But as a group could you give us an idea as to what percentage of your revenues you might be generating in the future or even currently from your dental business?

We can -- let me say that we're very pleased with the progress that we're making with dental, and that since we have started talking about dental we've placed several hundred units, primarily printers, into dental labs worldwide.

We have made good progress on dental manufacturing with companies like 3M, and more recently [Sarona], and [Sensible] and others.

We do not track and report dental revenues separately.

If that's an area of interest we can look into factoring something like this into future disclosures, but I don't have that readily to offer to you, Herb.

What I will tell you is that we're continuing to develop dental capabilities and, as I mentioned earlier, just in the last couple of weeks we've introduced yet another dental system, and if you want to have a quick look at it, you can go on to our blog.

We just blogged on it yesterday, so if you get on our live 3D blog you can see a picture and brief description of the new dental system that we have exhibited last week at the big dental show in Shanghai.

Is there more progress being made overseas in dentists applying new technology and trying to use your equipment versus what's going on in the United States, or not necessarily?

Yes, yes.

We initially, obviously the early adopters were in the United States.

That has now spread into Europe, and China, in particular, is becoming the new center for quite a few mega labs that are actually taking work also from the United States and carrying all of the dental lab process work in China.

And have you actually used the equipment to make, to form crowns?

They're using the equipment to form the wax-ups that then become the copings for crowns.

Okay, all right.

I mean I assume that as time goes on the applications are going to increase, and this should become a larger part of your business as you go forward, is that--?

As we look at various dental and other medical applications there's no question that that is becoming a more significant portion of the business.

By the time that we add-up dental and hearing aids, and other surgical procedures, and drill guides for implants and so forth, this field of organic shapes, you make organic shapes in mass production is becoming a much more important portion of our business.

Okay, keep up the good work.

Thanks, Herb.

(Operator instructions.)

Your next question is a follow-up question from the line of Jim Bartlett with Bartlett Investors.

Discuss a few other industry segments, aerospace, automotive, and jewelry, what you're seeing now and what you might expect in those segments?

Well, our -- from what we see, we see both aerospace and automotive slowly resuming some semblance of normal activity, and we've had quite a few positive developments with some of our automotive customers, and not only are they resuming some normal pattern of buying consumables but there's also discussions and proposals and acquisitions on new equipment.

So notwithstanding their own shaky environment, automotive companies are actually buying and continuing to invest.

The same is true with aerospace applications, primarily right now on the military side with fewer in commercial.

Jewelry is a little slow at the moment, and I think that has to do more with consumer shell shock and the really lack of strong demand for custom jewelry in this environment, as you might expect, you know, this one for many households is not a high priority at the moment.

But our jewelry installed base is so diverse that I'm fairly confident that it will bounce back and that it will continue to contribute in future periods.

Another question, what was your headcount at the end of the quarter?

Did you disclose headcount at the end of the quarter?

Yes, we do.

It was probably slightly below the second quarter.

I don't know what the number is off the top of my head, and it's obviously going to be higher at the end of the fourth quarter once we give weight to the Acu-Cast acquisition.

Did you, giving -- all the employees of Acu-Cast joining 3-D?

Yes, all of the employees of Acu-Cast have joined 3-D.

And as long as you're mentioning headcount, I'll take this opportunity and say a few things, that Damon kind of touched on it, but we believe that the cuts that we made and the cost control measures that we've put in place are sustainable and will be sustainable even as we continue to rebuild the top line.

We did not stop contributing to our 401(k), and we did not stop accruing something in our P&L for bonuses for people that actually earned them in '09.

And we did not cut any critical positions that we would have to turn around and rehire as the top line gets built-up a little bit.

So we have demonstrated over quite a few successive quarters that at the same time that we are rebuilding the top line, we're also continuing to stabilize the discretionary parts of our P&L in a way that we believe is sustainable and scalable.

And I wanted to say that in case some of you are wondering that whatever gains we're making are short-lived.

I would say the same thing about R&D, you know, we said starting five or six quarters ago that we had some element of R&D spending above and beyond the norm that was associated with V-Flash, and that once we would launch V-Flash we will return our R&D run rate back into a more normal run rate without impairing our ability to continue to develop new product at the rate that we want to develop new product.

And so once again, notwithstanding the additional Desktop Factory into the mix, we're still gong to do it within the ranges that Damon and I shared with you today.

And I just wanted to share all of this with you because we feel that the business model that we're building is not only sustainable but scalable.

That's great.

Thanks.

(Operator instructions.)

At this time, there are no further questions.

I would now like to turn the call over to Amanda Molbert 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, www.3dsystems.com/ir.

Thank you for your participation in today's conference call.

You may now disconnect.