3D Systems Corp (DDD) 2010 Q1 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 first quarter of 2010.

My name is Juree 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 Amanda Molbert with 3D Systems.

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 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 3.

The phone numbers are also provided in the press release that we issued this morning.

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 the discussion, I would like to mention the statement regarding forward-looking information that appears on Slide 4.

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

Forward-looking statements may include 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.

Please also see Forward-looking Statements and Risk Factors that appear in the Company's periodic filings with the Securities and Exchange Commission.

At this time, I would like to introduce Abe Reichental, 3D System's President and CEO.

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

As you know, earlier today we released our operating results for the first quarter of 2010 and filed our Form 10-Q with the SEC.

This morning Damon and I will review and discuss these operating results with you.

Let me begin by saying that we are pleased with our continued revenue recovery and improved earnings from our operating leverage.

During the first quarter we experienced improved business conditions across all regions and enjoyed quarter-over-quarter revenue growth from all revenue buckets, led by significant materials and 3-D printer revenue contributions.

As indicated during our last earnings call, we expected a lower first-quarter seasonal impact than we experienced in previous years, and are pleased to report that, in fact, seasonal decline shrunk from 45% for the '09 quarter to only 15% this quarter.

On a comparable basis we expanded gross profit margins, primarily as a result of our higher level of sales, coupled with the continued positive effect of our ongoing cost-savings initiatives.

We believe that our continued ability to improve our bottom line relative to the prior-year quarter for the fourth quarter in a row while absorbing the planned V-Flash negative margin drag demonstrates our sustained operating leverage.

During the first quarter and subsequently we continued to expand our 3Dproparts services through organic growth and additional acquisitions.

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

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 remain optimistic that our positive quarter-over-quarter revenue trend may be sustained, and expect to be able to preserve and extend our operating leverage.

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

Damon?

Good morning.

For the first quarter, revenue increased 32% over the 2009 quarter.

This increase was led by a $3.9 million improvement in systems sales.

For the quarter, gross margin expanded 167 basis points to 45% on a gross profit increase of $3.8 million, as compared to the 2009 quarter.

Consistent with our prior guidance, V-Flash sales negatively impacted our gross margin by 2.2 percentage points.

We also reported a 3% decline in operating expenses to $11.7 million, bringing our operating expenses as a percentage of revenue down to 37% from 50% in Q1 of 2009.

Net income of $2 million and earnings per share of $0.09 that included the negative impact of a $0.01 per share planned V-Flash ramp-up and $0.04 per share from ongoing litigation activities.

FX activity recorded in other income and expense also negatively impacted EPS by $0.01 per share.

As Abe mentioned earlier, all of our revenue buckets showed quarter-over-quarter growth in Q1 2010.

Of the $3.9 million increase in systems sales, $2.1 million was from higher sales of 3-D printers and $1.7 million was from increased sales of large-frame systems.

For the quarter, 3-D printer revenue represented 54% of total systems revenues, large-frame production systems accounted for 25% of total systems revenues, and mid-frame systems contributed the remaining 21%.

Material sales grew by $3 million over the first quarter of 2009 and 3-D printer material sales made up 16% of total material sales for the quarter.

Revenue from services increased by 8% in the first quarter, with revenue from our new 3-Dproparts service more than offsetting the expected decline in system upgrade sales.

In response to previous questions regarding the progress we are making in growing our Healthcare Solutions revenue, we are pleased to report that for the first quarter of 2010 Healthcare Solutions revenue made up 12% of our total quarterly revenue.

Healthcare Solutions revenue consists of sales of systems, materials, and services for hearing aids, dental and medical device applications, and other healthcare applications.

Given the early stage of our Healthcare Solutions business development, we expect that Production Systems quarterly revenue may fluctuate.

And for the first quarter, recurring revenue from materials and services represented 68% of our total Healthcare Solutions revenue.

We expect to continue to report progress on our Healthcare Solutions revenue in future periods.

Improved revenue and sustained favorable impact from our cost and productivity initiatives resulted in a 167 basis point gross profit margin expansion over the comparable 2009 quarter and a 108 basis point sequentially.

This underscores the sustainability of our gross profit improvements over the past 6 successive quarters and operating leverage over the past 11 successive quarters.

These improvements also enabled us to move from a net loss of $2.1 million in Q1 of 2009 to $2 million of net income in Q1 of 2010.

Net income for the first quarter of 2010 included $1.8 million of noncash expenses, primarily relating to depreciation and amortization.

During the quarter we generated $4.8 million of net cash from operations and we used $3 million to fund our strategic investing activities and finished the quarter with $26.6 million of available cash.

Our inventory balance at quarter end rose $1.9 million.

This was primarily due to the timing of customer orders and revenue recognition.

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

On Slide 12 we have broken out our first-quarter revenue as a percentage of sales by product category and region.

As you can see on the left, consistent with our expectations, 72% of our total revenue for the quarter was generated from our higher-margin recurring revenue buckets.

Materials revenue is our largest and most profitable revenue category and for the first quarter materials generated $13.6 million of revenue, representing a 28% increase over the first quarter of 2009.

Service revenue for the quarter increased by $700,000 compared to the first quarter of 2009, and included sales from our 3Dproparts services.

3Dproparts increase more than offset a planned decrease in system upgrade sales.

And systems revenue increased by $3.9 million in the first quarter of 2010 from $4.9 million in the 2009 quarter.

Consistent with our expectations, 3-D printers, including V-Flash, accounted for more than half of our total systems revenue.

For the quarter, gross profit improved by 37% over the 2009 quarter to $14.3 million.

Our gross profit margin for the quarter increased to 45.3% from 43.6% in the first quarter of 2009.

The continued favorable impact from our cost savings initiatives, coupled with improved overhead absorption from higher sales during the first quarter of 2010, more than offset the expected negative 2.2 percentage point impact of V-Flash revenue in the quarter.

As you can see from the chart on Slide 14, our DSO increased sequentially by two days, primarily due to our lower level of sales compared to the fourth quarter of 2009.

And in this challenging credit environment we continue to actively manage our receivables and credit levels, and are pleased with the quality of our receivables.

Inventories for the quarter increased by $1.9 million over the prior quarter, primarily as a result of our higher finished goods inventory, due to the timing of certain sales revenue recognition activities that fell outside of this reporting period.

This is also reflected in our quarter-end backlog of $2.8 million.

During the quarter we used $3 million of cash in investing activities, including $2.6 million specifically related to acquisitions.

And we ended the quarter with $26.6 million of available cash, reflecting a $1.7 million increase over our 2009 year-end cash balance.

Our ability to increase cash while concurrently funding strategic investments reflects the quality of our earnings, the strength of our balance sheet, and our ongoing cash management discipline that generated $4.8 million of net cash from operating activities for the quarter.

We believe that our financial resources are adequate for our current and anticipated future needs during this uncertain 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 discussing with you our progress and future outlook.

During the course of the first quarter and subsequently, we expanded our new 3Dproparts services organically and through acquisitions.

During the quarter, we acquired Moeller Design, a leading provider to aerospace and medical device customers.

And in April we acquired Design Prototyping Technologies, a leading online provider of fast-turnaround, high-quality functional parts and prototypes.

These acquisitions have enabled us to expand and enhance our 3Dproparts offerings.

And later in the quarter we completed our marketplace evaluation and launched the ProJet MP 3000, an economical 3-D production system for small- to medium-size dental labs.

The ProJet MP 3000 prints working dental models with crisp feature definition from a new durable high-contrast material designed specifically for this application.

Since quarter end we also announced the immediate availability of two new SLA plastics, Accura PEAK and Accura CeraMAX, further expanding our materials and composites applications reach and geographical coverage.

Consistent with our approach to guidance, I would like to provide some color on revenue drivers for the remainder of this year.

Let me begin by saying that we believe that our sales funnel of opportunities for production systems and 3-D printers continues to strengthen.

And accordingly, we remain optimistic that sales activity for the remainder of this year may continue to improve relative to comparable periods last year.

Specifically we expect sales of our expanding lineup of 3-D printers, including V-Flash, to continue to grow.

We also expect continued growth of our Healthcare Solutions.

We plan to increase 3Dproparts revenue organically and through additional domestic and global acquisitions throughout the course of this year.

While marketplace conditions improved, we believe that overall global economic conditions remain somewhat uncertain.

Despite this uncertainty, given our strength and portfolio of products and services, we expect continued revenue growth for the remainder of this year.

We intend to grow 3Dproparts revenue, both organically and through additional strategic acquisitions and now expect revenue from our 3Dproparts services to reach something between 15 and 20% of our ongoing total revenue by the end of this year.

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

Let me offer a few comments on our expectations regarding gross profit and operating expenses.

We expect our gross profit margin to remain stable, despite adverse system mix towards lower profit margin printers as this category begins to represent more than half of our total systems revenue and includes our planned V-Flash ramp-up activities for the first half of this year and margin drag from newly acquired businesses during their integration period.

After giving weight to the additional acquisitions we made recently and our anticipated ongoing litigation expenses as we currently understand them, we expect SG&A expenses for the remainder of this year to be in the range of $27.5 million to $31.5 million.

We expect R&D spending for the remainder of this year to be in the range of $7.5 million to $9 million, while keeping pace with our planned new product introductions.

We believe that we can further enhance our operational effectiveness and optimize our operating costs over time.

In summary, let me say that our business model is built around significant recurring revenue components that help generate improved contribution margins.

We believe that a stronger sales funnel, together with the expansion of our 3Dproparts services, could result in significant recurring revenue opportunities.

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, I'm going to turn it back to Amanda.

Before we open the call to questions, I want to take a minute to invite you to attend our Analyst & Investor Day at the NASDAQ MarketSite in New York on Tuesday, May 11th.

Our Investor Day will feature the following presentations.

Strategic Direction from Abe Reichental, our CEO; 3Dproparts and Production Systems Update from Kevin McAlea, our Vice President of our global business; A 3-D Printer and Branding Activities from Cathy Lewis, Vice President of Global Marketing; Product Development Roadmap from Chuck Hull, our Chief Technology Officer; and Key Operating Results and Analysis from Damon Gregoire, our CFO.

This event will also feature a dental customer presentation from Mark Maier, Vice President of Corporate Development for the Aurum Group of dental laboratories.

Registration and lunch begins at eleven-thirty Eastern Time and the presentations begin at noon.

If you haven't done so already, please register via the links at our website, www.3dsystems.com/ir.

Please be sure to register by tomorrow, May 6th, at noon Eastern Time.

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 through the teleconference of this call.

The phone numbers are provided again on this slide.

If you are calling inside the US, the number is 1-888-336-3485 and the conference code is 70048832.

(Operator instructions.) Brian Drab; William Blair.

My question -- I'll get back in the queue after my first one; I have a few.

But just around the V-Flash, you had indicated earlier over the last couple of quarters that you expect to get to a run rate of about 250 units by third quarter and at this point, of course, we're just a couple months away from the third quarter.

So do you feel like you're on track to hit that run rate of 250?

And related to that, you indicate 2 to 4 percentage points drag on gross margin in the first half.

Should we expect the gross margin step-up in the second half as you hit this run rate?

Thanks.

Thanks, Brian.

Good morning.

We expect to achieve our run rate goals and objectives with regards to V-Flash and we believe that we're making reasonably good progress on that.

I should also add to that that we are pleased with our early indications of material consumption through V-Flash.

And we see that also in the overall contributions of our entire 3-D printer sales, which represented for the quarter more than 54% of total systems revenue.

And 3D Systems -- I'm sorry -- 3-D printers material sales, as Damon indicated in his comments, also amounted to 16% of total material revenues.

So we have positive indications in all respects, not just from V-Flash, but from our expanding and growing 3-D printer systems category as a whole.

Regarding to potential negative drag or additional margin pickup or extension, once we get past the first half of the year, we will update you on any further developments regarding that.

We did indicate this morning that we expect our margin to remain stable despite any potential margin headwinds and we'll continue to update you on that from period to period.

(Operator instructions.) Jim Bartlett; Bartlett Investors.

Congratulations on another good performance and great progress.

Can you address the -- on the proparts business, you raised the percentage from 15 to 20% as ongoing revenue by year end.

Did that include future acquisitions, would be one part of the question, and also can you give us some idea of the organic growth so far in proparts?

And give us maybe some help and guidance on how much acquisitions has contributed to date?

Sure.

Let me first say that in our revised revenue outlook for 3Dproparts, we have not counted anything that we don't have in our revenue composite today.

That is to say that we have not counted on additional acquisitions.

And so from time to time we may continue to revise and amend our guidance regarding the contribution of 3Dproparts to total revenue.

We try to be very conservative and only give you an outlook on what we already have in our composite as it gets integrated into run rate over the next few periods.

With regards to organic growth versus acquisitions, it's a little bit harder to answer that because we are experiencing organic growth from the earlier acquisitions.

We're experiencing -- that we've made starting October of last year.

We're obviously integrated in the last six weeks two additional acquisitions.

Even those are experiencing some growth because of our ability to optimize, provide new tools and increase available capacity.

So I can't give you any more color on that at this point, Jim.

Jay Harris; Goldsmith & Harris.

Abe, is the principal reason for the rise in SG&A this year versus last year the litigation costs?

Damon, do you want to address that?

Yes.

There's -- litigation costs are built into that, but we've had other areas that we've been able to optimize and bring down.

The primary reason for the rise in the SG&A has been building the sales and marketing activities surrounding 3Dproparts and some of the new marketing activities in regards to the other parts of the business, which will be talked about next week at the NASDAQ presentation, too.

So what we've done is we've been really been able to take a lot of what we've considered as nonrevenue-generating activities and reduced those costs and been able to invest in what we consider to be revenue-generating activities.

Just repeat what you said on the call in terms of the litigation burden in the quarter.

What we said in the quarter was it was $900,000, $0.04 a share.

And that's been equivalent to what it was running in the second half of last year, too, though.

All right.

So there's -- so until further notice, there's a $3.6 million burden in, I don't know, a $35 million to $40 million -- I'm sorry -- I think it's higher than that.

I don't have the numb- -- oh, here it is -- yes, $35 million to $40 million SG&A for the year kind of thing.

Is that right?

Yes.

That's an accurate reflection on your part, Jay.

We've been very transparent with [that compliant] and have disclosed it on a quarterly basis I think for more than four quarters now.

And the run rate is consistent within plus or minus $100,000 on a quarterly basis.

And I think that for the last few quarters if my memory serves me correctly, it amounted to the same $0.04 per quarter.

And I presume there are normal legal expenses in SG&A above and beyond that?

That is just the litigation costs.

There are normal other costs in the SG&A.

All right.

Thank you.

Brian Drab; William Blair.

Just want to be clear on your guidance for revenue growth in 2010.

In the slide you say continued revenue growth.

Are you talking about year-over-year revenue growth or sequential revenue growth as well, meaning, of course, that you're expecting second quarter to be better than first and third to be better than second and so on.

We are expecting -- it's quarter over quarter, but I think what we've said is in total we're expecting the revenue growth to increase from the prior year, so.

Yes.

And the answer is that our expectation is that both will happen.

We will enjoy sequential growth and also quarter over quarter.

Okay.

Thank you.

Jim Bartlett; Bartlett Investors.

Getting back to 3Dproparts, when you acquired Design Prototyping you said that they had a unique online marketplace capacity.

Is this something with Design Prototyping that you can also incorporate into some of your other sites and acquisitions, and just, not only for just specific things, but generally will you be adding offerings that you have from one acquisition, new offering, to the -- more broadly, to your other acquisitions?

Or other --

The broad answer is yes.

But let me be a little bit more specific.

In every acquisition that we've targeted so far, we looked for entities that would bring into the ]creative] 3Dproparts services unique capabilities and differentiated offerings.

So in the case of Acu-Cast in Tennessee we were looking to enhance our overall SLA production capabilities and metal castings.

In the case of AdvaTech in Indiana we were looking to create the foundation for our aerospace and defense services.

In the case of Moeller Design in Seattle, we were looking to build up a premier services organization around QuickCast patterns and urethane casting.

And in the case of Design Prototyping, or DPT as they are known, from Syracuse, our intent was to create a user-friendly online presence using leading edge online technology and automation.

In all these instances, we are integrating not just the back office and transactional activities, but we're beginning to look at all of these facilities as a slate of services and capabilities.

We're looking at the technology that could be shared.

We're looking at building blocks of automation that can be shared.

And certainly the DPT online technology component, we view it as a proprietary asset that we purchased that is going to be shared as required between the sites.

(Operator instructions.) Jim Bartlett; Bartlett Investors.

Just another follow-up on that.

If you look by the technologies that you're offering now in proparts, in addition to your more traditional additive technologies, the printing, stereolithography and laser sintering, now you've got a lot of new ones, with urethane casting, CNC.

You've got [ENCAST]; you've got simulated die casting and QuickCast.

What has been the experience so far in -- towards -- I assume one goal would be to -- offering more than one of these product offerings to different customers, so you can expand the number of usage by customer.

Just -- and along that line of what you have seen so far in the sort of the nontraditional additive technologies business you're doing in proparts versus the traditional.

The experience -- let me say a few things, Jim.

First is that even within the traditional custom manufacturing activities such as urethane castings or simulated die castings, every one of these projects physically starts with an SLA pattern.

So there is still a very healthy and relevant link to our own kind of core technologies in the sense that it's all driven by our own additive manufacturing technology, which is an enabling key component in it.

Our experience has been that customers that buy rapid prototypes also need to scale up to a variety of preproduction or small-desk production, and that we would like to uniquely position ourselves as a complete source for all of our customers design-to-manufacturing needs.

And so far, the experience on this journey suggests that customers that are looking to complete a new product development project can benefit from the complete range of services and it's reflected in the revenue from 3Dproparts.

Thank you.

Jay Harris; Goldsmith & Harris.

Jay Harris.

Abe, I've been trying to maneuver with the margin structure.

Part of your business is preassembled, so your cost of goods sold on that business contains all the fixed charges.

And I presume as the volume changes in that part of the business, you just get your gross profit contribution on the incremental volume.

And part of the business is a little more backward-integrated.

Can you give us some rough guidance for this year as to what percentage of your gross profits are fixed costs as we look at it now, or on incremental revenues, what would be the incremental profit contribution per dollar of revenue if we had the same mix as we had in the first quarter?

I don't know, Jay, that either Damon or myself are prepared to do it off the cuff or on the back of a napkin.

Let us digest this question and figure out between now and our Investors Day next week how to properly address it.

Fine.

Thank you.

There are no further questions at this time.

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

Amanda?

Thank you for joining us today and for our 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.

This concludes today's conference call.

You may now disconnect.