3D Systems Corp (DDD) 2009 Q4 法說會逐字稿

Good morning, and welcome to the 3D Systems Conference Call and audio webcast to discuss the results of the fourth quarter and full year of 2009.

My name is Vernelle, and I will facilitate the audio portion of today's inter-access 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.

If you would like to ask a question during that time, simply press star then the number one on your telephone keypad.

If you'd like to withdraw your question press the pound key.

Thank you.

I would now like to turn the call over to Amanda Molbert of 3D Systems.

Ms.

Molbert, you may begin your conference.

Good morning, and welcome to 3D System's 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 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 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's a three-second delay and you will 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 the statements in the future or conditional tenses or that include the terms believes, beliefs, 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 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'd like to introduce Abe Reichental, 3D System's President and CEO.

Thanks, Amanda.

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 fourth quarter and full year of 2009.

We also filed our Form 10-K and an S-3 universal shelf registration with the SEC.

This morning, Damon and I 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 we're very pleased with our overall fourth quarter results, particularly given the continued challenging economic environment in which we operate.

We experienced improved business conditions across all our regions and enjoyed sequential revenue growth from all revenue buckets.

In particular, our higher margin material sales enjoyed continued sequential growth, a trend that resumed during the second quarter of '09.

Compared to 2008, we expanded gross profit margins primarily as a result of our ongoing operational cost reductions and quality performance improvements, and we believe that our ability to improve our bottom line on lower revenue for the third quarter in a row while absorbing the planned V-Flash negative margin drive demonstrates the leverage we achieved from the cost reductions and productivity improvements we've implemented over the past two years.

During the fourth quarter, we successfully launched and significantly expanded our 3Dproparts services through additional acquisitions and capacity expansion.

We believe that we are benefiting competitively from our expanding products and services portfolio and our stronger financial position that has allowed us to self-fund all of our recent growth investments.

While we continue to expect the economic recovery to be slow, based on the sequential progress we have made, we believe that our marketplace conditions have stabilized.

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

Reflecting on the steady progress that we have made, we expect to be able to maintain and continue to improve on the gains we made in our profitability and authorizing expenses over time.

Now for a more detailed look at our financial performance for the fourth quarter and full year of 2009, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thanks, Abe.

Good morning, everyone.

Our revenue improved modestly in the fourth quarter of 2009 compared to the same quarter in 2008.

This increase was led by a $1.2 million improvement in system sales.

Gross margin remained consistent at 44% relative to the fourth quarter of 2008 and gross profit increased by $0.9 million.

Consistent with our prior guidance, V-Flash negatively impacted our gross margin by 1.5 percentage points.

We also reported a 16% decline in operating expenses to $11.7 million, net income of $3.6 million and earnings per share of $0.16, which includes a $0.01 per share negative impact from V-Flash sales and a $0.04 per share negative impact of our ongoing litigation.

We ended the year with $1.4 million of backlog, a level consistent with our business trends and comparable to prior periods.

For the full year of 2009, we reported gross profit decreased to $49.7 million on a 19% revenue decline from 2008.

Our gross profit margin increased -- or, improved by 408 basis points from 2008, and we reduced our operating expenses by 24% to $46.7 million.

We generated $1.1 million of net income, an improvement over our $6.2 million net loss in 2008, and net income per share improved to $0.05 from a loss of $0.28 per share in 2008.

As Abe mentioned earlier, all of our revenue buckets showed sequential growth in Q4 of 2009.

Sequentially, system sales increased by $6.1 million, revenue from 3D printers increased by $0.5 million over the third quarter.

Material sales grew by $1.7 million over the third quarter of 2009.

Commencing the second quarter of 2009, material sales resumed their sequential growth every quarter of 2009, indicating a continued recovery across our installed base.

The revenue from services increased sequentially by 12% in the fourth quarter as a result of sales from our new 3Dproparts service, and this increase was partially offset by a planned decrease in system upgrade sales.

Notwithstanding the challenging operating environment in which we continue to operate, our gross profit margin for that quarter remained stable and our operating expenses decreased compared to the fourth quarter of 2008.

These improvements have now demonstrated sustainability over five successive quarters for gross profit and 10 successive quarters for operating expenses.

45 to 8:52) [$0.16]includes a negative $0.01 per share drag from V-Flash sales and a negative $0.04 per share impact from litigation costs of $1 million.

During 2009, we generated $7.7 million of net cash from operations.

We used $5.2 million to fund our strategic investing activity and finished the year with $24.9 million of available cash.

Our inventory balance at the end of the year was $2.6 million lower than it was at the end of 2008.

I'll discuss this in greater detail on a later slide.

On slide 12 we have broken out fourth quarter revenue as a percentage of sales by product, category and region.

As you can see on the left, 65% of our total revenue is generated from our higher-margin, recurring-revenue buckets.

Our largest product revenue category is materials, which continues to be our highest-margin category.

Material sales totaled $14.8 million for both the fourth quarter of 2009 and 2008, but it increased $1.7 million sequentially compared to the third quarter of '09, continuing the growth trend that resumed during the second quarter of 2009.

Service revenue for the quarter increased by $0.3 million compared to the fourth quarter of 2008 and included sales from our 3Dproparts service that we have introduced and acquired this past October.

This increase was partially offset by a planned decrease in system upgrade sales.

Systems revenue increased by $1.2 million in the fourth quarter of '09 from $11.7 million in the 2008 quarter.

Systems revenue also increased sequentially by $6.1 million.

These increases are driven by increased sales of our production systems and printers.

Large-frame systems represented 47% of total systems revenue for the fourth quarter of '09 compared to 57% in the same quarter of 2008.

Mid-frame systems accounted for another 24% of total systems revenue for the 2009 quarter compared to 21% for the same period of -- in 2008, and 3D printers made up the remaining 29% of systems revenue in the first quarter of 2009, increasing from 22% in the fourth quarter of 2008.

Our gross profit improved by $16.1 million in the fourth quarter of 2009 from $15.2 million in the same quarter of '08.

Our gross profit margin increased to 44.2% in the fourth quarter of 2009 compared to 43.6% in the fourth quarter of '08.

This included the negative 1.5 percentage-point impact of V-Flash revenue in the quarter.

And continued supply chain efficiencies and cost reductions in our field service organization improved our gross margin, and moving the ProJet line of 3D printer assembly operations in-house during the third quarter of '09 improved our overhead absorption during the fourth quarter of 2009, enabling us to better utilize our facility and reduce manufacturing costs.

For the full year our gross profit was down $5.9 million compared to 2008 primarily due to depressed revenue.

While our gross margin stabilized at 44% over the last five quarters, the impact of our continued cost-savings initiatives and a productivity improvement noted previously was overshadowed by ongoing V-Flash commercial shipments, which has a negative impact of 1.8 percentage points for the year.

Operating expenses continued the favorable downward trend in the fourth quarter of 2009, declining by 16% to $11.7 million from $13.9 million in the fourth quarter of 2008 as our cost-savings initiative has continued to gain traction, as evidenced by the declines in operating expenses in each of the last 10 quarters.

This decrease was due to $0.6 million in lower selling, general and administrative expenses and $1.6 million of lower research and development expenses.

We expect to continue to manage our expenses and drive our costs down where possible without impairing our ability to operate and service our customers.

Accordingly, we expect SG&A costs to fall within the range of $36 million to $40 million, inclusive of our anticipated litigation expense and incremental costs of business we acquired thus far.

We expect our R&D costs to range from $10 million to $12 million for the full year of 2010.

Total operating expenses decreased by $14.5 million, or 24%, to $46.6 million, for 2009.

Selling, general and administrative expenses declined by $10.4 million to $35.5 million in 2009, and SG&A costs included a $1.3 million increase in litigation costs compared to 2008 and a $1.1 million increase in the amount we have accrued for incentive compensation in 2009.

Even in these current difficult economic conditions we were able to decrease our DSO to 60 days from 66 days at December 31st, 2008, and 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 $2.6 million to $18.4 million at December 31st, 2009, from $21 million at December 31st, 2008, resulting in days inventory on hand of 83.

This decrease primarily resulted from reduced finished goods inventory and higher sales and is partly overshadowed by an increase in inventory as a result of our change in manufacturing strategy as we moved our ProJet assembly in-house during the third quarter of 2009.

After using $5.2 million of cash in investing activities, including $4.1 million specifically related to acquisitions, we ended 2009 with $24.9 million of available cash compared to $22.2 million of available cash that we had at December 31st, 2008.

Our cash increase reflects our ongoing focus on cash management, inventory reductions and continued cost reductions that generated $7.7 million of net cash from operating activities for the year.

We believe that our financial resources are adequate for our current and anticipated future needs during this uncertain 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 Q&A session, I would like to spend a few minutes reviewing the state of our business.

In the fourth quarter of 2009, we continued our new product development activities and launched the ProJet 5000, the largest-format, high-definition 3D printer available on the market today, which enables customers to build larger parts and gain the benefit of 3D printing for more of their projects and applications.

We also continued to execute our strategy to grow our new 3Dproparts services organically and through acquisitions.

During the fourth quarter, we acquired Acu-Cast Technologies, AdvaTech Manufacturing, and launched 3Dproparts in Europe and, as you know, last week we completed the acquisition of Moeller Design, a leader in investment casting and urethane casting services and prototyping for aerospace and medical device applications.

The sum total of our three acquisitions and capacity investment expands our menu of available services from [M cabs] to aerospace and defense, including direct and indirect manufacturing and best-in-class prototyping available from the widest range of materials and additive and subtractive technologies.

We also were able to expand the geographical coverage for our 3Dproparts services to the West Coast.

We appreciate the request 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 our revenue drivers for 2010.

We believe that our sales funnel of operations for our new Direct Rapid Manufacturing pro systems and 3D printers is strengthening.

While we typically would expect revenue during the first quarter of a new year to lag behind the previous fourth quarter revenue, we remain cautiously optimistic that sales activity may continue to improve relative to comparable periods last year.

Specifically, we expect sales of our expanding line-up of 3D printers to continue to grow helped by our commercial shipments of the new ProJet 5000 that was introduced in the fourth quarter of 2009.

We also expect to continue to grow our dental and medical device solutions, benefiting from our expanding portfolio of dental production systems and dental marketplace technology leadership.

We're pleased with the progress we are making on V-Flash sales and continue to 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, and we're also pleased with the progress we're making on 3Dproparts and expect to continue to grow this service organically and through additional domestic and global acquisitions throughout 2010.

As I mentioned in my earlier remarks, we believe that while economic conditions remain uncertain we're optimistic about ability to continue to make progress.

Given our strength in portfolio of products, we expect continued revenue growth during 2010.

And as we previously announced and as we have demonstrated since the October launch of our 3Dproparts service, we intend to grow our 3Dproparts both internally and through additional strategic acquisitions.

By the end of 2010, we expect revenue from our 3Dproparts services to reach a minimum level of 10% of total revenue, and we expect to benefit competitively from our new and expanded product and service portfolio as well as our stronger financial position.

Let me also give a little bit more color on our expectations for gross profit and operating expenses.

We expect our gross profit margin to remain stable despite the potential of an adverse systems mix towards lower profit margin printers and the continued negative 2 to 4 percentage point drop from V-Flash activities, at least through the first half of 2010.

As Damon mentioned previously, we expect SG&A expenses for 2010 to be in the range of $36 million to $40 million, and this range includes the higher litigation expenses we anticipate, as well as the increased operating costs associated with acquisitions we made last fall.

We expect research and development spending for 2010 to be in the range of $10 million to $12 million while keeping pace with our planned new product introductions, and we believe that we can further enhance our operational effectiveness and offer -- and optimize our operating costs over time.

I'd like to spend a couple of minutes also addressing the universal shelf filing that we announced yesterday after the markets closed.

As you know, yesterday we filed with the SEC a universal shelf registration statement providing for the offer and sale from time to time of up to $75 million of securities, including equity of debts and other securities as described in the registration statement.

I want to be clear that, in our view, filing this registration statement is completely consistent with good corporate stewardship that is designed to enhance our ability to respond to future strategic and accretive opportunities by providing us with efficient means to access capital markets and maximize our financial flexibility.

As we have demonstrated over the past two years, we believe that we have sufficient financial resources to carry out our growth plan and self-fund our strategic investments.

Therefore, since we do not have any current opportunities or commitments, we have no intention to sell securities at this time.

However, should the right strategic and accretive opportunity arise we expect to use the net proceeds from any offering that we may make under the registration statement to finance future acquisitions and for working capital and other general corporate purposes.

The registration statement has been filed with the SEC but has not yet become effective.

Accordingly, we caution you that these securities may not be bought or sold, nor may offer to buy them be accepted prior to the time the shelf registration statement becomes effective.

Any offering of the securities covered under the shelf registration statement will be made solely by means of prospectus and an accompanying prospectus supplement relating to that offering.

Finally, in looking forward, we believe that with our new growth initiatives in place our funnel of new opportunities for 2010 is strengthening.

We expect that focused execution on our three key pillars of business--growth initiatives, parts, printers and production systems should help drive demand for our products by OEMs.

And, as you know, our business model is built around significant recurring revenue components that continue to generate improved contribution margins over the past 5 quarters.

We believe that the launch of our 3Dproparts services significantly enhances our recurring revenue business model, and 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 to questions.

We will now open the call to questions.

We kindly ask 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 US, the number is 1-888-336-3485.

The conference code is 52985568.

Thank you.

As a reminder, if you would like to ask a question, you may do so by pressing star, then the number one, on your telephone keypad.

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

Our first question is from the line of Brian Drab with William Blair.

Good morning.

This is David Mandel for Brian.

You've done a few acquisitions lately.

Although none may be material individually, I was wondering, as a whole, if they had an impact on the quarter and what type of impact we could expect from them over the next few quarters?

Thank you.

You're welcome.

Good morning.

Yes, we have done several acquisitions, as you know, we embarked on acquisitions in October and had one last week, which is not material to the fourth quarter.

There was some incremental modest revenue contribution in the fourth quarter, but at this point in time, we did not deem it to be material enough to talk about it.

However, by way of future guidance, I said a few minutes ago that by the end of this year, 2010, we expect revenue from 3Dproparts to reach a minimum level of 10% of total revenue.

Thank you.

Our next question is from the line of Jay Harris with Goldsmith & Harris.

Good morning, Abe.

Good morning, Jay.

In your operating expenses, you did $46 million in 2009 and the low-end of the projected range for 2010 is $46 million.

What are the elements that would cause the operating expenses to rise and be above the minimum that you're projecting -- the low end of the range you're projecting?

Well, there are a few moving elements within our operating expenses that could move the range from the lower end to somewhere closer to the higher end.

The first one is very positive.

Assuming that we get the revenues we're planning to get, we hope to pay higher commissions, so one would expect that to move the range.

The other is we made plans for a continued high level of litigation expenses.

We continue the journey with particularly the DSM litigation and we also made some provisions to absorb successfully and comfortably all the acquisitions that we have made thus far, which also introduced some increases into SG&A and so I think that, Damon, am I missing anything here?

I think the only other item is the uncertainty in foreign markets with FX that would affect --.

Right.

The fixed costs that we have in our -- in SG&A in our foreign markets.

So those are the elements, Jay, that gave rise to the range that we are sharing with you today.

Thank you.

Our next question is from the line of Jim Bartlett with Bartlett Investors.

Yes.

Congratulations on a very good year in a difficult environment and a good quarter and a good outlook year.

Thank you.

Could you fill me in on a couple of things?

First of all, on printers, they're going to -- an increase in printers this year without V-Flash?

We believe so.

I mean, remember that printers have increased sequentially now, I believe, since the second quarter of '09.

As you heard in Damon's remarks, increased again by incrementally a $0.5 million in the fourth quarter.

That is a combination of V-Flash and the professional printers that we have in the mix.

We expect that trend, unless we have unusual surprises from the economy down the road, we expect that trend to continue because many of our printers are sold into unique applications where we enjoy true application and technology leadership, like dental applications, like micro-castings applications and so forth.

Of course that, in combination with V-Flash, which on the leading edge is not a big revenue contributor, given the average selling price of the units, but nevertheless contributes to revenue and in combination with the Project 5000, gives us information and a belief that we can continue to grow this entire bucket of revenue.

Thank you.

Our next question is from the line of Andrew Nowinski with Piper Jaffray.

All right.

Good morning.

Nice results today.

Thank you.

Just had a question, first a clarification.

I guess, did you say large frame printers or large frame systems were 47% this quarter?

That's correct.

Yes.

Okay.

That was up pretty substantially, on a sequential basis.

Just wondering, was that a factor of a budget flush?

If you could put that in perspective with your comments about an adverse system mix in the first half of 2010, should we assume that large frame drops off or is that just because of three printers ramping up?

Thanks.

No, we assume that over time the primary units that we would sell and place in the marketplace would alter our total system mix in the direction of the lower gross profit margin printers.

That is not a projection that we will have a drop in large frames over time.

It's simply a change of the mix over time in terms of the impact of the number of units that are generated from lower average selling prices of printers and lower margins on printers.

I'd like to remind you, however, that consumable contribution of many of our printers is every bit as attractive as some of our, certainly, mid-frame systems and so since -- at the end of the day, it's all about generating recurring revenues from these systems, we think that we're on the right track here.

With regards to the first part of your question, did we enjoy some kind of a budget crunch at the end of the year?

It's hard to tell if that's the case.

We certainly are not back to historical level performance of the fourth quarter, but it's hard in this economic environment, Andrew, to discern if we enjoyed any kind of a budget crunch, since most companies that froze their budgets pocketed the cash and hung onto it.

Thank you.

Once again, if you would like to ask a question, you may do so by pressing star then the number one on your telephone keypad.

Our next question is from the line of Herb Buchbinder with Wells Fargo.

Buchbinder, thank you.

I've got a couple of quick questions.

Can you give us an idea as to much of your revenue is in dental and, I asked this before, and are you getting -- or could you at least tell us if maybe it's up to 10% or more?

We have not yet, Herb, disclosed how much of our revenue comes from dental revenue -- from dental applications.

The only thing that I can tell you is that we're continuing to increase our installed base in dental and expect to continue to do it in coming periods.

Okay.

Can you give us an idea of what -- did somebody ask about the tax rate?

I actually just got on the call, but you had a pretty low tax rate last year, what's the estimate for 2010?

We have put out an estimate for 2010.

What does drive a lot of our tax rate is are international sales with how we have to transfer pricing.

But as -- so even in periods of low profitability, the tax rate can be higher because some of it gets allocated to foreign locations first and we don't get to benefit from our NOL that's out there from -- in the US.

But as the numbers change, that sort of fluctuates back and forth.

So as the bottom line fluctuates up and down from a lower portion, it can swing fairly dramatically and we have a given guidance on that.

All right.

The other thing is your material sales from V-Flash, when you give the loss from V-Flash of a penny and the effect on gross margins, does that take into account the material sales or not?

Or is it just the actual equipment?

That is just -- that's sales of equipment, not the materials.

We are starting to benefit from material sales of V-Flash already too.

Thank you.

Our next question is a follow-up from the line of Jay Harris of Goldsmith & Harris.

Hey.

In your introductory remarks, you indicated that the -- there was a possibility that you could show consecutive quarterly revenue growth and then later on, as you were rounding up, you clearly stated year-over-year revenue growth.

Is it possible that your system sales, particularly large frame, were low enough in the December quarter that you won't have the historical or traditional fall-off going from the fourth quarter to the first quarter?

I hope that I was consistent in my remarks.

I said two things.

One is that our funnel of opportunities is strengthening, and I also said that we always experienced some kind of a drop in the first quarter of the new year relative to fourth quarter of the previous year, at least looking at it historically.

It's hard to tell, Jay, if the level for operating could have sequential improvement first quarter over fourth quarter, which is why I specifically cautioned that historically in this kind of a business and in this kind of marketplace, we've experienced that stair stepping trend, progressing to the fourth quarter and then taking a step backwards as we enter a new year.

There's nothing that indicates changes here, one way or the other.

So in other words, if you were to look at the profile of business over the three months of the fourth quarter, was there much of a skew towards December?

And then looking at January, where -- did January start out at the same rate as the fourth quarter?

Well, interestingly enough, more and more we are experiencing more of an even distribution between months in a quarter, which is an interesting new phenomena for us.

As I said, we started the year with a strong sales funnel and we're not in a position yet to predict or to offer any color on how revenue in the first quarter would compare with revenue in the fourth quarter.

We're continuing to remain confident in our ability to generate revenue and to continue to grow revenue over the next few periods.

But I can't tell you today, Jay, how revenue in the first quarter will compare to the fourth quarter.

Thank you.

Once again, if you would like to ask a question, you may do so by pressing star, then the number one, on your telephone keypad.

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

You had announced American Precision as your first, I guess you call them, preferred channel partner.

Could you talk more specifically about other channel partners?

How that retailing strategy is -- has been working as part of the propart strategy?

Well, I can tell you that since we've launched 3Dproparts in October '09, we recruited over 20 channel resellers into the mix.

We typically don't announce each and every one of them.

We had specific marketing reasons why we wanted to announce American Precision Products, I think, which is why, for marketing purposes, we made that announcement on a press release.

But for a variety of competitive reasons, we don't always announce all of our resellers or our preferred channel partners in connection with 3D pro parts.

The strategy is going well.

I mean, obviously, our strategy with 3D pro parts is to develop a robust menu of services to make sure that we have sufficient geographical coverage to cover different time zones and to make sure that we can serve all the needs of our customers.

So we've -- in [Laurinberg], Tennessee, we now have most of our online parts operations and we also have our Accu-Cast metal casting operations in Goodland, Indiana.

We have a facility that is dedicated strictly for SLS aerospace manufacturing.

Everything that we do in that facility has to do with making great parts for various applications in aerospace and this facility has orders and contracts that cover it into -- well into the future, into 2014, I believe.

In Seattle, Washington, we just headed a quick cast pattern making opportunity that serves primarily high precision applications for aerospace, aerospace engines and things like that, medical device applications, and also one of the largest urethane casting facilities in the United States.

As I said in my remarks, Jim, we intend to continue to build a comprehensive portfolio to address either a very interesting vertical market that can benefit from premier engineered services and the growing up and down [sprayed MCAD tarp] marketplace that buys either through key account relationships or online, not just here in the United States, but also in other key markets abroad.

Thank you.

Our next question is from the line of Bernard Hamilton, a private investor.

Abe, maybe you addressed this; I was a little late coming on the call, but any comments on the pros and cons of the Stratus - Hewlett-Packard deal?

I have addressed it previously on some calls, but I'm happy to recap for you, Bernard.

I think that for us, 3D Systems, this is a big net positive.

Number one, HP has an incredible marketing machine.

And they will validate and increase the awareness and hopefully begin to shift the business model here from push to pull, which may end up our V-Flash sales and our office printers will likely benefit from all of this because with the range of applications that a single technology can cover here are somewhat finite and limited.

And HP is going to learn that, through their own marketing efforts, that you can only address so many applications with a single bullet.

So we're likely to benefit from that halo effect immensely.

Secondly, and even more significantly at this point, I think that our 3Dproparts business will benefit significantly from all of the interest and from HP's sales success because most people that bring 3D printers in-house begin to [swim] up in the discernment and demand of accuracy, functional power, patterns and secondary applications, and all of that, we think, is going to send more discerning users our way to fulfill all the needs that an entry-level SBM printer is simply incapable of fulfilling.

So we think that that's going to be very good for us.

Finally, we believe that this will create interest and other alliance opportunities amongst all the remaining players, including HP, as everybody learns of the potential growth opportunities that exist within 3D printing and additive manufacturing.

So all in all, we're pretty excited about the entry of HP into this space.

Thank you.

Once again, if you would like to ask a question, you may do so by pressing star, then the number one, on your telephone keypad.

And we do have a follow-up from the line of Jim Bartlett with Bartlett Investors.

Yes, a couple for Damon.

What are you inventory and receivable turnover goals for the year?

How much was the -- what was the dollar decline in system upgrades that you mentioned?

Well, we were -- for our receivables and our DSO, we were at 60 days and we said in the past that we expect to remain 60 or get into the high 50s and that's a global number too, that's not just the United States.

We've also said, prior to having moved our Pro Jet assembly in house, that we expected to be in the longer term to get to a $15 million range, a little bit gets added for the projects, but not much so.

You're still in those same kind of ranges.

We expect over the mid and longer term to get to those ranges.

And what was your other question?

The decline in system upgrades and the service revenues?

We did announce that decline.

It's -- it wasn't, again, as significant a number to announce or to put out there, but there was a planned decline.

We went through a season of upgrades as we announced new products and things and that we had forecast that that would tail off as it has.

Yes, we harvested all the upgrade opportunities that we have identified and so this was a planned season-end of upgrades for a given series of machines.

And just a final one, when the R&D -- so R&D changed somewhat as a function of your doing more part of the proparts strategy?

Well, wherever we spend money on R&D or how we allocate our R&D resources in coming periods is certainly going to be shaped and influenced by 3D pro parts in a few key areas.

Number one, we planned to adopt some system manufacturing capabilities that will be uniquely developed for 3D pro parts operations and maybe for some of our potential aerospace and medical device customers as we begin to gear those systems more towards really parts production.

Secondly, we plan to develop certain materials that would be offered through our 3Dproparts as an opportunity to accelerate the adoption of new materials and new capabilities into the marketplace.

So when you look at the kind of opportunities that exist to accelerate adoption of new materials, new composites, into direct and indirect manufacturing applications, certainly that is likely to shape a portion of our R&D agenda going forward.

And along with R&D, could you just address the progress you've made with the acquisition of Desktop Factory?

What is happening there?

We have fully integrated the technology and R&D portion of Desktop Factory into our advanced research operations in Valencia.

We have gone through a series of knowledge transfers, for a lack of a better way to describe it and characterization of the technology that we acquired.

We are moving ahead with projects and plans to turn parts of this technology and in some instances, a combination of their technology with other technology assets that we have into future commercial products.

Thank you.

Thank you.

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Thank you.

There are no further questions at this time.

I would now like to turn the call back over to Amanda Molbert for closing remarks.

Amanda?

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