3D Systems Corp (DDD) 2010 Q2 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 second quarter and first six months of 2010.

My name is Tameka 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 Stacey Witten with 3D Systems.

Good morning and welcome to 3D Systems conference call.

I'm Stacey Witten 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 this live portion of this presentation may do so via the web at www.3DSystems.com/ir.

For 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 accessed 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 a 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 with 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 perspectives 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 Systems' 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 second quarter and first six months 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.

First let me say that we are very pleased with our continued revenue recovery and improved earnings from our extended gross profit margin.

During the second 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 productions systems growth and record 3D printer revenue contribution.

Healthcare solutions revenue made up 14% of our total revenue compared to 12% in the first quarter of 2010.

On a comparable basis, we extended gross profit margin 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 comparable prior year quarter for the fifth quarter in a row, while absorbing the planned V-Flash margin drag, demonstrates our sustained operating leverage.

We ended the second quarter with a backlog of $5.2 million compared to $1.6 million for the comparable 2009 quarter.

The increase in backlog this period resulted from the timing of customer orders and requested deliveries.

During the second quarter and subsequently we continued to extend our 3Dproparts services for organic growth and additional acquisitions.

We believe that we are benefiting competitively from our extending product 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 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 second quarter and first six months of this year I will turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thanks Abe.

Good morning everyone.

The second quarter revenue increased 42% over the 2009 quarter.

This increase was led by a $4.8 million improvement in systems sales.

For the quarter gross margin expanded 160 basis points to 45.4% on a gross profit increase of $5.2 million as compared to the 2009 quarter.

Consistent with our prior guidance, V-Flash sales negatively impacted our gross margin by 2.3 percentage points.

We also reported operating expenses of $12.5 million, bringing our operating expenses as a percentage of revenue down to 36% from 47% in Q2 of 2009.

Net income of $2.7 million and earnings per share of $0.12 that included the negative impact of $0.03 per share from planned V-Flash ramp-up and a $0.05 per share from ongoing litigation activities.

For the first six months, revenue increased 37% over 2009.

This increase was led by an $8.7 million improvement in system sales.

For the first six months gross margin expanded 164 basis points to 45% on a gross profit increase of $9 million as compared to 2009.

Consistent with our prior guidance, V-Flash sales negatively impacted our gross margin by 2.3 percentage points for this first six months.

We also reported operating expenses of $24.2 million bringing our operating expenses as a percentage of revenue down to 36% from 49% in the first six months of 2009.

Net income of $4.8 million and diluted earnings per share of $0.20 that included the negative impact of $0.04 per share from the planned V-Flash ramp-up at $0.09 per share from ongoing litigation activities.

As Abe mentioned earlier, all of our revenue buckets showed quarter-over-quarter growth in Q2 2010.

Of the $4.8 million increase in system sales, $2.1 million was from higher sales of 3D printers and $2.9 million was from increased sales of large frame systems.

For the quarter, 3D printer revenue represented 42% of total systems revenue; large frame production systems accounted for 35% of total systems revenue; and mid-frame systems contributed the remaining 23%.

Materials sales grew by $2.3 million over the second quarter of 2009 and revenues from services increased by 47% in the second quarter with revenue from our new 3Dproparts service more than offsetting the expected decline in systems upgrade sales.

We are continuing to make good progress in growing our healthcare solutions revenue; in fact, we are pleased to report that or the second quarter of 2010 healthcare solutions revenue made up 14% of our total quarterly revenue compared to 12% in the first quarter.

For the second quarter, recurring revenue from materials and services represented 73% of our total healthcare solutions revenue compared to 68% in the first quarter.

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 healthcare solution business development, we expect that production systems [core] to the revenue may fluctuate.

And we expect 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 160 basis point gross profit margin expansion over the comparable 2009 quarter, underscoring the sustainability of our gross profit improvements over the past seven successive quarters.

Revenue was negatively impacted by 3.5% due to the changes in foreign currency exchange rates; however, the impact to the gross profit was insignificant.

These improvements also enabled us to move from a net loss of $1.3 million in Q2 of 2009 to $2.7 million of net income in Q2 2010.

Net income for the second quarter of 2010 included $2.4 million of non-cash expenses primarily related to depreciation and amortization expense.

During the quarter we generated $2.6 million of net cash from operations; we used $3.2 million to fund our strategic investing activities; and finished the quarter with $25.9 million of available cash.

Our inventory balance at quarter end rose by $1.7 million.

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

I will discuss this in greater detail on a later slide.

On slide 13 we have broken out second quarter revenue as a percentage of sales by product category and region.

As you can see on the left, consistent with our expectations, 70% 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 second quarter materials generated $14 million of revenue, representing a 19% increase over the second quarter of 2009.

Services revenue for the quarter increased by $3.4 million compared to the second quarter of 2009 and included sales from our 3Dproparts services.

And the 3Dproparts service increase more than offset the planned decrease in system upgrade sales.

Systems revenue increased by $4.8 million in the second quarter of 2010 from $5.9 million in the 2009 quarter.

Consistent with our expectations, 3D printers including V-Flash represented the most improved revenue category with systems with an increase of 92% over the 2009 quarter.

For the quarter gross profit improved by 47% over the 2009 quarter at $16 million; our gross profit margin for the quarter increased to 45.4% from 43.8% in the second quarter of 2009.

The continued favorable impact from our cost savings initiatives, coupled with improved overhead absorption from higher sales during the second quarter of 2010 more than offset the expected negative 2.3 percentage point impact of V-Flash revenue in the quarter.

And for the first six months gross profit improved by 42% over the 2009 quarter to $30.3 million.

Our gross profit margin for the period increased to 45.3% from 43.7% in 2009 and the continued favorable impact from our cost savings initiatives coupled with an improved overhead absorption for the year from higher sales still more than offset the expected negative 2.3 percentage point impact of V-Flash revenue in the first six months.

We are pleased with the quality of our receivables in this challenging credit environment and we continue to actively manage our receivables and credit levels which have helped us to decrease our DSO by three days compared to the first quarter of 2010.

Inventories for the quarter increased by $1.7 million over the prior quarter, primarily as a result of higher finished goods and materials inventory due to the timing of certain sales and revenue recognition activities that fell outside of this reporting period.

This is also reflected in our quarter end backlog of $5.2 million.

During the first six months we used $6.2 million of cash and investing activities, including $5.6 million specifically related to acquisitions and ended with $25.9 million of available cash, reflecting a $1 million increase over our 2009 year-end cash balance.

Our ability to increase cash while concurrently funding strategic initiatives reflects the quality of our earnings, the strength of our balance sheet, and our ongoing cash management disciplines that generated $7.4 million of net cash from operating activities for the first six months of 2010.

We believe that our financial resources are adequate for our current 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.

I would also like to take this opportunity to update you on our long-term operating model which reflects our business structure and our targets at two revenue milestones of $150 million and $200 million in revenue.

At these revenue milestones we expect to continue to expand our gross margin to a range of 48% to 58% corresponding to these levels; we also anticipate that at these revenue levels our operating leverage will increase without any reduction in the pace of our planned new product and business development.

As a result of revenue growth, margin expansion and continued operating leverage we expect to be able to deliver net income of 10% to 20% at the corresponding revenue level.

But please not that this long-term target operating model assumes that our recurring revenues will be at the levels of between 70% and 80% of total sales.

Finally, I would like to remind everyone that this target model is not intended to constitute financial guidance related to the company's performance; it is based on management's current expectation concerning future events and trends and is necessarily subject to uncertainties.

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 six months of 2010 we expanded our new 3Dproparts services organically and through acquisitions.

During the second quarter we acquired Design Prototyping Technologies, a leading online provider of fast turnaround, high quality functional parts and prototypes.

And in July we acquired CEP and ProtoMetal, two leading French rocket prototypers.

These acquisitions have enabled us to expand and enhance our 3Dproparts offering domestically and in Europe.

During the quarter we also invested in several new state-of-the-art iPro and sPro systems in order to expand our 3Dproparts available capacity and added two new iPro XL systems to our fleet which are capable of making single piece large parts the size of a car's dashboard.

We continue to expand our healthcare solutions revenue and install base and grow our reseller channel.

Our ongoing 3D printer channel and product expansion resulted in a record 92% revenue improvement over the comparable '09 quarter.

Consistent with our approach to guidance, I would like to provide some color on revenue drivers for the remainder of 2010.

We entered the third quarter of 2010 with a strong sales funnel and accordingly we expect 3D printer sales to continue to grow, helped by our expanding reseller channel and marketplace acceptance of our personal and professional printers.

We expect revenue from our 3Dproparts services to continue to grow globally, aided by our ongoing capacity increase and additional planned acquisitions.

Consistent with our earlier comments, we expect sales of our healthcare solutions to increase, benefiting from our expanding solutions portfolio and growing installed base.

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

Despite this uncertainty, given our strength and portfolio of products and services we expect continued revenue growth over prior year quarters and sequentially during the second half of 2010.

Specifically we expect continued record 3D printer revenue growth driven by higher ProJet and V-Flash sales.

I would like to share with you that our total printer revenue led by ProJet sales is ahead of our expectations and represents nearly a two-fold increase compared to the first half of '09.

We believe that this is due primarily to the exceptional marketplace acceptance of our printers and our ongoing and successful reseller channel expansion.

Concurrent with this growth we are experiencing an unexpected favorable and significant shift in mix towards our higher priced, higher throughput professional printers.

While we are moving ahead at full speed with our V-Flash personal printer rollout as planned, as result of this shift in marketplace preference we now expect that it will take us longer to reach our 250 unit/quarter V-Flash sales target.

Although we are unable to predict exactly in which period we will achieve the V-Flash-only sales target, we believe that our total 3D printer revenue model remains on track.

We expect continued growth from our healthcare solutions from sales of additional production systems and printers as well as from resulting material revenue from these systems.

We also expect 3Dproparts revenue to reach 15% to 20% of our revenue run rate by the fourth quarter of this year.

We expect our gross margin to remain stable besides the ongoing adverse system mix in favor of lower margin printers; the adverse impact of acquired businesses during the integration period and the continued negative 2% to 4% percentage point quarterly drag from V-Flash through the second half of the year.

We expect SG&A to be in the range of $19 million to $21.5 million for the remainder of this year inclusive of our anticipated litigation expenses as we currently understand them.

This range anticipates increased operating costs associated with 3Dproparts acquisitions we made thus far and higher sales expense from anticipated higher revenue.

We expect R&D spending for the remainder of the year to be in the range of $5 million to $6 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.

Finally, I would like to remind everyone that our business model is built on the continuity from our growing recurring revenue component that helped generate improved margins.

We believe that a stronger sales funnel, together with the expansion of our 3Dproparts services and healthcare solutions, should 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 stock holders.

And with that we will now gladly take your questions.

Stacey?

We will now open the call to questions.

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

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

The telephone numbers are provided again on this slide.

If you are calling inside the U.S., the number is 1-888-336-3485.

The conference code is 81216601.

(Operator Instructions) Your first question comes from the line of Andy Schopick with Nutmeg Securities.

Good morning.

Abe I would like to ask a follow-up question on V-Flash and what are the factors at this time that are causing the company to more or less stretch out its overall targets for market acceptance and penetration of unit sales?

It's called unintended success of selling 3D printers.

It's hard to apologize for successful channel acceptance and for marketplace behavior that sometimes deviates from our plan.

We are on track with our channel expansion.

We nearly doubled 3D printing sales on a comparable basis and in the process we discovered that combined marketplace and channel behavior is directing sales towards the higher priced, higher throughput printers which makes it a little bit more unpredictable for us to pinpoint with precision when we will reach the V-Flash-only targets.

But as I said, it is hard to apologize for success.

We are very, very excited about our overall 3D printer growth and acceptance.

And let me reiterate that we believe that our combined 3D printer model or target model is on track.

Okay, one follow-up on that.

What are the consumables averaged in terms of annual usage of consumables on your 3D printers?

I will let Damon answer that.

We haven't put out in this information what they actually are per quarter.

We did put out last quarter a model that we believe we are achieving and will achieve which shows that on a blended rate for every 100 machines that we sell at our blended sales mix for 3D printers we generate $12,000 per machine annually in materials revenue.

$12,000?

$12,000.

Okay, thank you.

(Operator Instructions) Your next question comes from Jim Bartlett with Bartlett Investors.

Yes, could you give us updates on the number of resellers in the printer channel as well as the number of resellers in 3Dproparts?

Good morning Jim.

We have not put out numbers of resellers on either.

We like to maintain that as a proprietary number at this point in time given competitive marketplace forces, especially within the 3D printing channel.

But I can tell you that we are on track in our plans and targets.

We have made significant progress in reseller recruitment.

And we are very pleased with the results as evident by the significant record revenue improvement in 3D printing.

In the case of 3Dproparts channel, our plans to expand the channel are very deliberate.

Here the case is not so much about channel expansion as it is about marketplace presence in all of the available key markets which include online key accounts and specialty.

And once again we are very pleased with our channel development in all respects, the online channel, the reseller channel, and our [best] efforts.

Thank you.

Thank you.

At this time there are no other questions.

I would like to turn the call back over to Stacey Witten for closing remarks.

Actually, wait a minute and let's see if there are any more.

We do have a follow-up from Andy Schopick.

Yes, thank you.

I would like to come back to the reseller channel expansion and basically just comment a little bit further about what your goals are, how many resellers you have added over the past year.

And if you could comment in a general way, compare and contrasting the types of resellers or VARs that you are using or approaching versus a Stratasys which would be one of your competitors.

Okay, so without getting into specific numbers in terms of the progress that we have made, our target is to reach at a certain point in time a reseller channel of about 200 resellers.

We are making good quarterly progress as evidenced by the significant growth in 3D printers.

We are looking for several types of resellers.

We are looking obviously for all purpose MCAD type resellers.

Those would be somewhat similar to the kind of resellers that Stratasys and Z Corp have.

We also have specialty resellers that sell into specific verticals like jewelry and like healthcare/dental solutions, et cetera.

Those are higher end specialized resellers.

And given the marketplace acceptance and comprehensive portfolio of 3D printers that we currently have, we have been very attractive to numerous resellers and the company on a weekly basis continues to engage in very active reseller recruitment with notable success.

Abe, could you comment a little bit on verticals?

You have mentioned healthcare solutions being 14%.

But I wonder if you could comment on other major verticals, whether they be educational, government?

Could you kind of detail the top three or four verticals for you and what their general contribution is to the business?

We have not broken out other verticals simply because we have been participating in a fairly well distributed business model for quite some time.

So we have not at any recent time broken out revenue by category for spaces like transportation or education or consumer goods, et cetera.

The reason that we started to break out healthcare is because that has been an area of a great deal of business development for us.

We think that it is an area where the company has unique solutions that are proprietary and add a great deal of value.

We think that that is a lucrative high growth, high profit opportunity for the company.

And we are getting good inroads as evidenced by just quarter-over-quarter growth of revenue going from 12% to 14% of total revenue with the recurring component which is of most interest to us going from 68% to 73%.

Is that your largest vertical?

I could not say that at the moment without having more data in front of me to share.

All that I can tell you is that it is a rapidly growing vertical and one that I think makes our business model more unique and differentiated and attractive for us, for our customers, and of course for our stockholders.

Okay, thank you.

(Operator Instructions) You have a follow-up question from Jim Bartlett.

Yes, could you give us an update on your acquisition progress and strategy in 3Dproparts?

Sure.

So as you know Jim we announced a couple of weeks ago the acquisition of two companies in France and we reiterated at that point in time that we intend to continue to expand our 3Dproparts business organically and through additional acquisitions.

We have been indicating publicly for some time that we intend to expand into the key marketplaces in European countries through further acquisitions.

And that we still have some additional acquisitive work to do here in the United States.

And we have also indicated expansion to facilitate organic growth through the addition of state-of-the-art equipment into the acquisition facility or the acquired facilities that we have already acquired and that included numerous iPro and sPro systems and other systems to facilitate additional organic growth from the acquired facilities.

As I said earlier today, Jim, we expect revenue run rate at the end of this year in the fourth quarter of this year to reach somewhere between 15% and 20% of total revenue.

And that is consistent with the current organic and acquisitive growth that we expect to achieve at the end of the year.

And for Damon, what was the sequential impact of ForEx?

The sequential impact, again, impacted us negatively on a revenue basis but on a gross margin basis was, gross margin was less than a 1% negative impact to gross margin -- it was a slightly negative one.

And we are still able to expand the gross margin a little bit even with that, not withstanding that.

And just one further comment on Abe's comments about acquisitions, we have been setting about sort of the pace and scale that we have been keeping up.

And we are still at between five and six weeks having closed a transaction since October.

We feel that that scale, that pace, we have been able to bring people in and handle things very well.

We have been able to still use all of our resources and still don't have any debt on the balance sheet as a result of this which we believe is a strength, too.

Sequentially revenue impact?

3.5%.

Yes, 3.5% plus the last, it was actually about 5% sequentially, yes.

It was 5% sequentially?

Yes.

So FX on a sequential basis cost us 5%.

And on a comparable basis, 3.5%.

3.5%.

Alright, thank you.

Your next question is from the line of Andy Schopick.

One additional follow-up.

Damon, on the consumables, do you include that as part of your materials revenue?

Or just where is the consumables basically broken down into the overall revenue categories?

Revenue we have broken down into systems, materials and services and the materials obviously are the consumables there.

For Proparts the consumables that are used are not, there are no intercompany sales that are recorded so that is eliminated from the materials number that we actually report.

There is no intercompany effect there at all.

Okay.

So it is all in materials?

Yes.

Thank you.

(Operator Instructions) Your next question is from Jim Bartlett.

Yes, the healthcare impact went from 12% to 14% -- I have another question.

Within services you said there was the Proparts growth offset still some reduction in services from other implementations.

What was that about?

From upgrades.

From upgrades.

Roughly what amount are you talking about in upgrades for the quarter?

This is primarily related to last year also.

It is not really an impact sequentially because we had the same thing happen last quarter.

Last year we had upgrades and I believe we reported that were in excess of $1 million for certain periods in the service number.

And we still have upgrades every quarter, just not to that extent?

So sequentially there is no impact?

Sequentially there is not really an impact from the upgrades.

It is more to the comparable 2009 quarter.

Yes.

Thanks.

(Operator Instructions) At this time there are no further questions.

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 participating in today's interactive broadcast.

You may now disconnect your line.