3D Systems Corp (DDD) 2011 Q1 法說會逐字稿

Good morning, and welcome to today's 3D Systems conference call and audio webcast to discuss the results of the first quarter of 2011.

My name is Patrick, 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 am 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 the slide portion of the presentation may do so via the web at www.3DSystems.com/IR.

Participants who would like to ask questions at the end of the session related to matters discussed in this conference call 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 post 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.

This presentation contains forward-looking statements as defined by federal and state securities laws.

Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements which are statements other than historical facts.

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From time to time, we may publish or otherwise make available forward-looking statements of this nature.

All such forward-looking statements, whether written or oral, or whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this message, including those set forth below.

In addition, we undertake no obligation to update or revise any forward-looking statement to reflect events, circumstances or new information after the date of the information or to reflect the occurrence or likelihood of unanticipated events, and we disclaim any such obligation.

Forward-looking statements are only predictions, predictions that relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond our control, that may cause actual results, outcomes, levels of activity, performance, developments or achievements to be materially different from any future results, outcomes, levels of activity, performance, developments or achievements expressed, anticipated or implied by these forward-looking statements.

As a result, we cannot guarantee future results, outcomes, levels of activity, performance, developments or achievements, and there can be no assurance that our expectations, intentions, anticipations, beliefs or projections will result or be achieved or accomplished.

These forward-looking statements are based on current expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management.

Our actual results could differ materially from those stated or implied in forward-looking statements.

Past performance is not necessarily indicative of future results.

We do not intend to update these forward-looking statements even though our situation may change in the future.

Further, we encourage you to review the risks that we face and other information about us in our filings with the SEC, including our annual report on Form 10-K, which was filed on February 17, 2011.

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

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

As you know, earlier today, we released our operating results for the first quarter of this year and filed our Form 10-Q with the Securities and Exchange Commission.

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

For the first quarter of this year, we earned $0.28 per share fully-diluted on a 51% revenue increase and a 62% gross profit improvement compared to the first quarter of last year.

We are pleased with our strong performance and results for the first quarter, which reflect revenue growth from all categories and continued margin expansion.

Our organic growth accounted for 23% of total revenue increase, and acquisitions for 28% of our revenue increase for the quarter.

During the quarter, we made several acquisitions in support of our growth strategy and completed an equity raise that enhances our financial strength and flexibility to fund our strategic initiatives in a disciplined and accretive manner.

This morning, we also announced that our Board of Directors declared a two-for-one split of our common stock.

On May 18, 2011, each stockholder of record as of the close of business on May 9 will receive one additional share for every outstanding share held on the record date.

We expect trading on a split-adjusted basis to commence on May 19 of this year and believe that this stock split could increase trading liquidity and attract a broader investment base.

We remain focused on democratizing access to affordable and viable 3D content print solutions for professionals and consumers alike, and we believe that our addressable marketplaces remain highly underpenetrated and that we are on track to achieve our long-term target operating model.

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

Damon.

Thanks, Abe, and good morning, everyone.

We delivered record first-quarter revenue, including growth from all revenue categories.

Quarterly growth was led by 110% increase in production printer sales.

Services revenue for the quarter grew 103% and included $10.3 million of custom parts services.

For the quarter, print materials revenue increased by 15%.

Foreign currency translation was not material to revenue or gross profit, either year-over-year or sequentially.

We believe that our revenue distribution across custom parts services, printer services, 3D printers and print materials illustrates the quality of our business model and that our solid revenue growth and continued margin expansion validates the credibility of our long-term operating model.

We ended the quarter with approximately $7.9 million of backlog compared to $7.6 million of backlog at December 31, 2010.

And although production and delivery of our printers and services is generally not characterized by long lead times, the current higher quarterly backlog included a multiple production printer order that was placed in Q3 of 2010 that was partially delivered in Q4 2010 and Q1 of 2011, with additional printers designated for delivery this year.

Current backlog also includes $4.3 million of custom parts orders that are scheduled for future delivery.

For the first quarter, revenue increased 51% over the 2010 quarter.

This increase was led by a $4.4 million improvement in production printer sales and a $9.6 million improvement in services revenue.

For the quarter, gross margin expanded 310 basis points to 48.4% on a gross profit increase of $8.9 million as compared to the 2010 quarter.

Total operating expenses increased to $15.8 million, but decreased as a percentage of revenue, down to 33% from 37% in Q1 of 2010.

As a result of our improved revenue and expanded gross profit, we generated net income of $6.8 million, which included $2.8 million of non-cash expenses related to depreciation, amortization and stock-based compensation expense.

And we earned $0.28 per share.

I would like to take a few moments to comment on key factors that affected our earnings per share for the quarter.

So consistent with prior guidance on these items, for the first quarter, EPS was negatively impacted by $0.07 per share from legal costs, primarily due to litigation expenses.

And as you may recall, we expected V-Flash printers' negative drag on EPS to decline and disappear altogether during the first half of 2011.

We are pleased to report that for the first quarter, V-Flash printer activity was neutral to EPS.

For the first quarter 2011, we did not benefit from any releases of the valuation allowance on the deferred tax assets for future periods.

However, as we've mentioned previously, we will assess the release of valuation on deferred tax assets on an ongoing basis.

For the quarter, our higher recurring revenue margin, which included $10.3 million from custom parts services, amounted to 72% of our total revenue.

Total printer revenue increased by $4.8 million compared to the 2010 period.

For the quarter, production printers contributed $8.4 million to revenue and personal and professional printers contributed $5.1 million, underscoring growth in both categories led by sales to healthcare, automotive and motorsports customers.

Professional printers revenue was negatively impacted by the timing and delivery requested by certain customers.

Consistent with prior quarters, revenue from outside North America contributed over half of our revenue, at 52% for the first quarter of 2011.

The unfortunate Japanese disaster resulted in some printer sales delays.

However, during the first quarter of 2011, we enjoyed comparable revenue growth from our sales from our Asia-Pacific region, which remained at 14% of global revenue, reflecting continued healthy print materials and services purchases amidst the natural disasters in Japan.

For the quarter, gross profit improved 62% over the 2010 quarter from all revenue categories to $23.2 million.

Our gross profit margin for the quarter increased 310 basis points to 48.4% over the comparable 2010 quarter, and strong demand for our higher gross profit margin professional and production printers more than offset the impact of record unit sales of lower-margin personal printers.

Print materials' gross profit margin expanded 280 basis points over the 2010 period to 63.4%.

And print materials' gross profit for the first quarter 2011 increased by $1.6 million, or 20%, on revenue increase of 15%, primarily due to the favorable shift of the mix of materials to higher-margin personal and professional print materials.

Our services gross profit of 41.6% included print services and custom parts services.

Gross profit margin on our printer services increased 190 basis points to 44.5%.

In the first quarter, custom parts services' gross profit margin expanded to 39.2% compared to 25.5% in the fourth quarter of 2010, and this continued our positive trend for each of the last five quarters.

We are pleased that our overall gross profit margin expansion trend continued during the first quarter of this year.

Operating expenses increased $4.1 million for the quarter compared to the first quarter of 2010 on higher sales commissions from increased revenue and on the incremental operating costs we absorbed from the number of newly acquired companies during the quarter.

Legal costs of $1.7 million for the quarter also contributed to this increase, and were driven primarily by litigation activities.

Notwithstanding this increase, operating expenses as a percentage of revenue decreased to 33% of revenue from 37% of revenue in the first quarter of 2010.

We ended the first quarter with $70.8 million of cash, an increase of $33.5 million since the end of 2010.

This increase primarily reflects $54 million of net proceeds from the sale of common stock and $22.1 million of cash paid for acquisitions in the first quarter of 2011.

Working capital increased by $34 million, reflecting the increase in cash, a $3.5 million increase in accounts receivable, a $2.8 million increase in inventory and a $7.5 million decrease in trade accounts payable.

The increase in inventory was related primarily to the timing of inventory purchases and customer deliveries.

Without the effect of the equity raise and acquisitions, cash would have increased $1.6 million and working capital would have increased $9.4 million.

For reference, we have highlighted our first-quarter results in relation to our previously disclosed long-term operating model.

We believe that our revenue growth and margin expansion are on track with this model, and while the concentration of the additional acquisitions during the period temporarily negated some of our operating leverage, we expect to restore comparable leverage as we continue with the integration of our recently acquired businesses.

Our effective tax rate for Q1 was 11.5%.

We expect our effective tax rate for 2011 to be comparable to our historic tax rate and remain in the range of 10% to 12%.

Our long-term operating model includes estimated fully-burdened tax rates at 31% to 38%, depending on the period.

And accordingly, we believe that our first-quarter 2011 results validate our long-term operating model.

That concludes my comments.

Abe?

Thanks, Damon.

We continue to expand our custom parts, services organically and through acquisitions.

And during the first quarter we acquired Quickparts and ATI, as we continued to refine operations and optimize capabilities and capacity within our custom parts services as required.

We also strengthened our printer services offering through the acquisition of National RP Support.

During the first quarter, we expanded our reseller channel and group personal and professional printer unit shipments and revenues over the comparable 2010 quarter.

Consistent with our gross profit margin improvement initiatives, we announced plans to bring additional printer and print material production to Rock Hill and purchased expansion land adjacent our headquarters.

We continued to grow our Healthcare Solutions revenue and installed base year over year, And for the first quarter of this year, Healthcare Solutions revenue increased to $6.2 million, representing a 52% increase over the first quarter of last year.

Late in the quarter, we acquired SYCODE, a software development company based in Goa, India that specializes in providing plug-ins for all commercially available computer-aided design packages.

SYCODE represents a step towards building 3D professional and consumer content tools and is part of our India expansion plan.

We also acquired Print3D, a startup company with revolutionary desktop tools and utilities that provides custom parts services, including instant close in orders directly from customers' computers.

We enter the second quarter of this year with a strong sales funnel and expect revenue growth year over year and sequentially for the second quarter of this year.

While we remain confident in our ability to expand gross profit margins towards our target operating model, we like to remind you again that we expected to be susceptible in any recording period to potentially adverse printers mix in favor of lower margin printers.

We expect that potential concentration of acquired businesses in any reporting period may also adversely impact gross profit margin and operating expenses during the integration period.

For the remainder of this year, we expect SG&A expenses to be in the range of $40 million to $45 million, inclusive of higher litigation expenses as we currently understand them, and anticipated operating costs associated with acquisitions that we made thus far.

We expect R&D expenses for the remainder of this year to increase and be in the range of $9 million to $11 million, reflecting our expanding print engine portfolio and planned new professional and consumer product introductions throughout the year.

Finally, our sales funnel remains robust, and our backlog reflects the strength of our business model.

We expect that our 3D content print products and services will generate increased customer demand, and we believe that our business model is built on continuity from our growing recurring revenue components that help generate improved margins.

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

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&A session.

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

Telephone numbers are provided again on this slide.

If you are calling inside the US, the number is 1-888-626-7452.

If you are calling outside the US, the number is 1-201-604-5102.

(Operator Instructions) Troy Jensen.

Congratulations on the nice quarter, gentlemen.

Abe or Damon, just a question on the business model targets here.

The past two quarters here, you guys have been running at roughly this $200 million run rate.

Your gross margins are -- what -- 48% and op margins ex legal are about 19%, I think I calculated.

So below the targets of 56 and 26, respectively.

So can you just bridge the gap here between kind of where you are running now currently and how do you get to these higher-margin profiles?

We have said before that as we achieve these run rates, we get to these margins and get to these operating metrics.

We also said it wouldn't happen all at once and it wouldn't happen linearly.

You can also see, if you look at last year's Q1 through Q4, what happens to the margins throughout the different quarters.

We continue to expect our margins to improve, as we've said and relate to these rates.

One of the other issues that we have here that is coming -- that we've talked about is a lot more of our revenue is being derived from the Pro Parts business, our custom parts service business.

And although we have continually increased our margin every quarter through the last five quarters -- you know, it got up to almost 40% for this quarter versus 25.5% for this same quarter last year -- we are not at the corporate level that we believe we are going to attain there over the next periods.

And that is a big driver in driving that margin rate itself.

To add to that, Troy, if you look at the quarterly and sequential progression that we made, on a quarterly basis, printer gross profit margin up from 35.8% to 40.6% on record personal printer sales for the quarter, which adversely impacts gross profit margin, notwithstanding the significant improvement.

Print materials up from 60.6% to 63.4% on primarily favorable mix from personal and professional print materials, which we have said would be forthcoming.

And services up from 31.7% to 41.7%.

And specifically within the services category, notable improvements, both in print services and custom parts services, which, as Damon said, we expect to reach our corporate gross profit margins and have demonstrated significant capability to expand.

So we believe that we are on track both year-over-year and sequentially.

And we believe that as we hit those run rates, we will achieve our long-term target operating model.

Just so I understand it, it is primarily just mix within the product categories that is going to get you there.

And I'm just curious to know why you think the mix would change here throughout the remainder of the year.

I understand Q4 is big for high-end sales, but outside of that --

Troy, it's not -- I think we just said -- it is not just mix.

It is work on especially (multiple speakers)

(multiple speakers)

On the custom parts businesses getting that margin overall up, and we've been doing that every quarter for the last five quarters.

There are a few things, Troy, that we said repeatedly would get us to the desired long-term target gross profit margins.

One has to do with continuous improvements in our ability to expand printer margins and parts margins, and also benefit from more favorable material margins as more of it is generated from personal and professional printers, all which has been materializing.

And the second would come from overall mix of recurring revenue versus nonrecurring revenue, which we expect, as the two goalposts of $200 million and $300 million, to be between 70% and 75% of total revenue.

We have been performing according to those targets and we believe that we are making the right progress against those targets.

All right.

Well, good luck going forward, gentlemen.

Brian Drab.

Good morning.

I was wondering if we could just turn to slide 8 for a second and look at the growth rates across the different categories.

Could you tell us -- given all of the acquisition activity in the last 18 months, could you tell us on an organic basis what growth was for each of those categories?

Well, all of the -- the services line includes our Pro Parts, our custom parts business.

So if you look at production printers, that is all organic growth.

If you are looking at print materials, that's all organic growth.

The personal and professional printers does include the Bits from Bytes activity that is in there, so there is some organic and nonorganic growth in that.

We didn't break out those numbers at this point.

It wasn't necessarily -- the revenue (inaudible) amounts of those wasn't necessarily material to those numbers at this point, as we are still just ramping up the Bits from Bytes.

But the majority of the nonorganic growth is in the service line.

And obviously, healthcare as a segment here or as a category is all organic.

Okay, that is somewhat helpful.

But could I just press you a little bit and ask then, in the personal and professional printers, if you removed Bits from Bytes, would sales still have been up year-over-year?

In total, sales would have been up year-over-year, if you removed just Bits from Bytes, included V-Flash and the professional printers, yes.

Okay.

And then sort of the same question on services.

If you removed all the impact from acquisitions, would sales have been up in the services category?

Now, sales -- the two acquisitions that affected -- well, the acquisitions for our custom parts business services, our acquisition of NRPS, which is more of our print services, is in there also.

If you remove the custom parts services and the NRPS sales, we still would have been up this year versus last year, yes.

Okay.

And if you look at it, Brian, on a consolidated basis, we said in our prepared remarks that of the 51% revenue growth, 23% came from organic growth, 28% came from acquisitions.

I appreciate that.

I see that on the slide, too.

And could you give us any feel, I guess, for just how the V-Flash is doing in terms of unit volume this quarter compared to last, or how it is progressing sequentially?

We have not disclosed specifically V-Flash, but we did say in our prepared remarks that our personal printer category, which includes V-Flash and Bits from Bytes, had record unit sales quarter.

And I'll leave it to that.

Okay, all right.

We had a real good run in our personal printer category this quarter.

Okay.

I'm going to ask one more follow-up then to that, though.

You say you had a really good run.

But if I look at the personal and professional printer going from $4.7 million to $5.1 million with some nonorganic help there, it seems to suggest that sales were not up materially and they are very close to flat.

So I am -- I feel like there is a disconnect between that and a really good run.

No, I think it -- I was thinking about units.

And it is important to note that the personal category now makes an ASP that is in the range of $1300 to $9900.

So we are now selling printer kits at $1300.

We are selling fully-assembled printers at $3900.

And we are selling V-Flash at $9900.

And when we talk here about a really good, record quarter in personal printers, we are talking about units, which have been very impressive, and we are very pleased with.

Separately, Damon said that in terms of revenue, even excluding the personal category, we would have enjoyed significant growth.

The other thing that was said in our prepared remarks, which I like to draw your attention to, which is related to this, is we had some professional printer orders that we were unable to revenue in the quarter simply due to customer requested deliveries.

That is reflected somewhat in our backlog, it is reflected in our increased inventories and it was reflected in our opening remarks.

Thank you very much.

Jim Ricchiuti.

Thank you.

The question I had is just with respect to the production printers and the strength you saw in that area.

I wonder if you would elaborate on where you are seeing that.

And is there any seasonality that you would normally see in Q1 in that side of the business?

I'm trying to get a sense if that was stronger than expected.

We've said for some time, and we said it again in our presentation this morning, that we have been enjoying and we are entering the second quarter with a strong funnel of sales opportunities that are distributed production, personal and professional printers.

Within the production printers specifically, for quite some time now we've been benefiting from ongoing strong interest from automotive, motorsports and healthcare applications, primarily.

And we expect this to continue in the coming periods.

With regards to your question on seasonality, historically speaking, we would have expected third quarter to be slower than other quarters with regards to the ability to sell as many production printers.

So this has been a welcomed change relative to historical seasonal behavior, which was more of a stairstep progression from quarter to quarter on the production printers specifically.

And we also like to remind everybody, and Damon said it in his presentation this morning, that we are still benefiting from some backlog in production printers on orders that were placed last year and partially delivered.

That's helpful.

Is there any flavor you can give us with respect to the print engines that drove some of the production printing equipment sales?

It was primarily our two best-selling print engines, SLA and SLS, that drove production printer sales.

And obviously, within personal, it is our MJM print engine primarily that drove sales.

And within personal, it is V-Flash or FTI and Bits from Bytes.

Okay.

Thanks a lot.

Ben Reitzes.

Can you talk about the geographies?

In particular, the German growth slowed, I believe, or was a little lower than I modeled, but the APAC was a lot better than I would have modeled, given what happened in Japan.

I was just trying to get a flavor of maybe what happened in Germany, maybe competition there or timing related to some product sales.

And then the same thing with APAC, why you did so well there.

Thanks.

Do you want to address that, Damon?

Sure.

We started to touch on Asia-Pacific and primarily Japan as our biggest market in Asia Pacific.

So -- and Abe had also mentioned that there is some timing -- some sales of printers that were affected negatively due to -- hopefully due to timing.

But we were able to make up that difference both in the print, print services and materials.

And that still remained at 14% of our total revenue, even with the disaster, the Japanese disaster that happened.

It is interesting to point out there that it kept it -- so that kept up with the growth rates that we had, but we've also not moved as quickly into Asia into our parts markets yet.

So if you actually stripped it out and looked at the core businesses, it grew a little quicker than that, in fact.

Which really underscores the strength of our model there as far as the recurring revenues of materials and services.

So we were pretty pleased with that, even with what ended up happening.

In Germany, per se, we really look at Germany, but we look at Pan Europe activity.

And in total, that still remained very strong.

The difference in Germany for this quarter was just a fluctuation -- that is normal ebb and flow of the type of business and timing of sales.

And in fact, some of our backlog that we had reported and said was due to the timing is related to German sales.

So to sum it up, Ben, we were able to grow our APAC sales at actually a faster rate than North America and Europe, because in North America and Europe, we benefited from acquisitions.

And in APAC, revenue did not benefit from acquisitions.

And that is notwithstanding the Japanese disaster.

And with regards to Germany specifically, we don't see anything structurally different there except the timing of deliveries of some customer orders.

All right.

And if you could just talk a little bit more about supply sales, how follow-on supplies did in the quarter and how that may improve in the future.

For materials, you are discussing?

Yes.

Materials were up 15% versus the last year.

And we believe we are benefiting from continued demand and continued strong sales as we move quarter-over-quarter, that you will get the recovering revenues from there.

We believe strongly in the model and think it will continue to improve.

It is interesting to note that this quarter now, sales for our integrated materials, cartridges, was at 50% of our total revenue for this.

So that has been expanding even at a greater rate now than the total materials, which shows that people are using the newer machines that are out there and we are benefiting from those sales.

Yes, which is a new record, because prior to that it was in the 30s.

39%.

Yes, 39%.

So it is a significant improvement and validating it.

And the other point to add to that is that on 15% increase in revenue, we enjoyed a 20% improvement in gross profit on the period.

And that is simply an indication that the mix is changing in favor of the higher gross profit margin personal and professional print materials, which is another driver that we talked about previously and expected to happen and it is materializing.

Great.

Thanks a lot.

(Operator Instructions) [Travon McCoy.]

I was wondering, based on the results that you posted that was pretty excellent, why your shares still trade lower in the markets today, even though you all have the estimates that's pretty much better than last year's growth?

We can't comment on how the market responds.

We can only talk about our business model and our expectations and beliefs.

And we will let you guys decide how to respond to it.

I can't offer you any insight as to why the market is responding the way that it does.

Well, congratulations on your earnings and everything.

Thank you very much.

We are pretty pleased with it ourselves.

Bob Sales.

A couple questions.

You said that $4.3 million of the $7.9 million in backlog ending the quarter was custom parts.

Is that correct?

Correct.

Can you tell us -- give us some feel for what it was last quarter?

Hang on one second.

We disclosed it last quarter as well.

While you're looking for the number, my follow-up to that is -- should we expect that as you acquire more service companies that the backlog for custom parts orders builds because of the nature of that service business?

The answer is yes, because we've -- a lot of what we do in the custom parts services business has to do with long-term projects.

It has to do with sometimes low-volume production orders.

And as a result of it, deliveries tend to stretch.

It also has to do with, in many instances, going all the way from a prototype to production tooling.

And so it is pretty ordinary to have this kind of backlogs.

And as we add more businesses through acquisitions, we expect that backlog to increase as well, just in the ordinary course.

Damon, do you have the number?

Yes, the number for last order for the custom parts business is $1.9 million backlog.

Okay.

So the difference, I assume, is primarily product -- printer-related revenue, primarily?

Primarily, and then some of the materials that go along with an initial printer sale, yes.

Okay.

So the drop -- just looking at it sequentially, is that the shipment that spilled over from the prior quarters of the production printers that you talked about from late last year?

There is a number of that.

We did deliver portions of that contract in Q1 this year that came out of backlog also, yes.

And we picked up backlog in professional printers that we did not deliver during the quarter because of the timing of a customer's delivery request.

Got you.

How do we think about materials revenue?

As you -- I think this was talked about in the last conference call.

As you acquire a service company, the materials sales to that, what once was third party then goes intercompany.

And so my sense is that materials revenue would have a drag due to the acquisitions, but gross margins overall due to that transaction would shift into making the service gross margin higher for the acquired company.

I'm just trying to understand the flow of things as you acquire these service companies.

When we acquire one of these service providers, any revenue that we had previously from the sales of materials, from the sales of print services, from the sales of equipment to them disappears, because it now becomes just an intercompany transaction.

On the other hand, we pick up their parts revenue, and we pick up the opportunity to vertically integrate, because, to a large extent, we are also the original equipment manufacturer of the materials, the provider of system services and the provider of systems.

And if you look at the progress that we've made just in custom parts services gross profit margin year-over-year, we took it from 25.5% in the fourth quarter of last year -- sorry -- this is sequentially -- we took it from 25.5% in the fourth quarter of last year up to 39.2% in the first quarter of this year.

Notwithstanding the fact as we continued to make acquisitions in the first quarter and that it takes us some time to get the full impact of these integrations and continuous improvements.

So Damon mentioned earlier that our expectation from these acquired businesses on the parts side is to get them up to the corporate margins.

And I think that just the sequential improvement that we made from the fourth quarter of last year for the first quarter of this year demonstrates the kind of leverage that we have as we vertically integrate.

My follow-up to that is -- does that parts gross margin specifically benefit due to the material then being sold intercompany?

Or is there something else that is benefiting the parts margin?

In other words, the gross margins that you went through quarter to quarter, is that only external sales, or does that include intercompany margins on the materials side?

Our margins internally are -- the custom parts business does benefit from lower materials costs by buying them through intercompany.

But that is not nearly what is making up this difference for this growth rate.

And if you look at, say, even for this quarter, our Quickparts purchase -- acquisition, as an aggregator, they didn't buy materials and they still don't buy materials from us.

So that wasn't a big driver for them for this quarter for this acquisition.

But to help you think about it, Bob, material costs and the costs of the parts typically represents between 10% and 15% of the total cost of goods of the part.

And so it is not such a big influencer.

And the margin expansion that we have enjoyed in the custom parts business comes from a variety of operational improvements and marketing strategy.

Okay.

Fair enough.

And then on the tax side, I went back and looked at your K.

How much more -- at some point, you go to fully taxed, and I'm just trying to understand how much of the deferred tax asset is still reserved that you will chew through this year due to increased profitability versus last year?

And trying to get a feel for whether we go fully taxed in 2012 or if it is later than that.

There is a couple ways to look at this.

First of all, we have about $65 million of valued fully-reserved NOLs on the books, of what is there.

So at some point, those will have to released, and that is when we become, effectively, fully burdened.

That doesn't mean we are cash basis -- our cash tax rate is much lower as we then churn through using the released NOLs.

For this year, we have said we are looking at what our forecasts and what our profitability and what the requirements are that will require us to look at releases throughout the future periods of these NOLs.

But again, accordingly, this year, we still have $65 million of unreserved and I believe it is 2.5 -- or of reserved -- and $2.5 million of unreserved NOLs on the books.

Fair enough.

Nice quarter.

Troy Jensen.

Sorry about that.

I was on mute.

First of all, just curious to know what we should model for the share count, given you guys announced -- or did the secondary in the quarter.

And secondly, any sense on what percentage of consumable usage your systems -- how much of it you capture now that your systems are using?

Let me give you an answer on capture that may help you.

We progressed from having about 39% of all material revenue come from integrated materials to this quarter having half of it come from integrated materials.

That is the best indication that I can give you in terms of the progress between integrated systems versus the legacy systems.

And that is in line with our expectations and demonstrates and validates the progress that we have been making.

In terms of the share count, Damon, go ahead.

The share count, after the equity raise and the exercise of the overallotment, and then including what we have outstanding as options on a fully-diluted basis, it is about $26 million now.

$26 million for the June quarter, we should model?

Yes, that is about what it is.

All right.

Perfect.

Thank you.

[Thomas Piccirillo.]

My question is in regards to printer materials, specifically ABS plastic.

I was wondering how much of your business comes from the sales of that printer material.

I think I remember you stating that you had a 15% increase in print materials, but 110% increase in printer sales.

I wanted to know what your feelings are about selling that ABS plastic versus what are you doing to keep that sale in place versus losing it to a competitor that could sell the ABS plastic to end-users using your printers.

Well, ABS material through printers is a thoroughly new activity for the Company, starting through the Bits from Bytes printers that we make and sell.

And it has not been significant to overall print material revenue at this point in time.

We do make ABS-like materials for our production printers.

Those are packaged in proprietary cartridges, and we don't believe that they are very susceptible to substitutions that would yield the same result.

And even through our Bits from Bytes printers, we also sell quite a bit of PLA material, which is a bit more proprietary and much more environmentally friendly.

And in all of these printers, our approach has been over time to develop printers that come with proprietary material cartridges that provide for good integration and also predictable performance.

The materials that you manufacture aren't necessarily a standard question; there is something unique to your printer that couldn't easily be substituted.

In most of our material -- most of our materials today are uniquely formulated by us directly.

And in most instances, we have also migrated to proprietary material packaging and delivery systems cartridges that assure that there is good (inaudible) integration between the materials and the printers.

And your comment -- your customers that are buying the printers are consistently purchasing the materials from you?

With regards to our personal and professional printers, that has been our experience.

With regards to our production printers, we have older legacy printers that are open and susceptible to other substitutions; the new generations of printers are not.

Okay.

Thank you very much.

(Operator Instructions) Brian Drab.

Just had one follow-up question.

I am looking at page 18 of your 10-Q, where you give a lot of good detail around organic growth -- I think it's organic growth.

I think I'm looking at these numbers incorrectly.

But if I look at the printer and other products category, which I guess if we -- I am trying to connect it with your slide eight that includes production printers and personal and professional printers -- you state here that core product and services revenue was down $600,000 year over year.

But we said earlier on the call that production printers were up $4.4 million organically.

And I feel like I don't understand how to reconcile that.

And maybe I'm not understanding what is in this category new products and services, where you say that contributed $5.1 million in the quarter.

Correct.

Now, new products -- when we are talking about organic versus nonorganic, we are talking about our traditional print engines versus -- in the printer category -- versus the print engine, like BfB, that we purchased.

New products and services may include new iterations and new models of existing products that we have out there in those categories, like our ProJet 5000 that we put out last year, which was an extension of our ProJet category, or different versions of our SLA or SLS systems also.

So it's not necessarily -- that doesn't necessarily relate to organic versus nonorganic.

If you'll recall, Brian, for quite some time, we've been talking about revenue from new products, and we looked at new products over the first few years since we commercialized them.

And this table on page 18 attempts to basically look at that in terms of the core versus the new.

And what that core product number is, basically, you can look at -- the core is any systems or any product we have that is over three years old.

Yes, it really is -- this whole category was meant to help investors understand the impact that R&D and new product development makes on our business.

Okay.

Yes, I see -- it does help us understand that.

But what it doesn't -- now I understand it doesn't help me understand organic growth, which is what would be (multiple speakers).

It helps -- (inaudible) you, if that is what you are looking to get, yes.

Well, thanks for clearing it up.

Sure thing.

I think that, taking your comment on board, we will try and further clarify it in subsequent disclosures to ensure that you don't get confused.

That would be great.

Thanks.

Jay Harris.

I apologize for having missed this segment of the call.

I had one thought that, given the detail of your disclosures, both in your press release and on your 10-K, there might be a need for more time lapse between getting that information out and having a conference call that people can respond to.

My question is associated with the efforts that you are making to market your parts services over the Internet.

Aside from Quickparts, and I guess SYCODE and other acquisitions that you've made, what are you building here that may be unique?

And can you describe the gap that you think you have between what you're doing and what is out there available from competitors?

Let me first say that with the acquisition of Quickparts and the recent acquisition of Print3D, I think that we acquired some unique and proprietary not only online technology, but sales and marketing methodology that nobody else has in the way that these companies [process it], particularly Quickparts.

What is unique about Print3D, which is a startup, is that Print3D has the tools and utilities that allow a designer at their desk, without ever even getting on the Internet, to have embedded inside of their CAD system a dynamic [quoter] that allows them to, in real time, see the cause-and-effect between their design changes and the cost.

And when they are ready, it can generate an instant quote for them and place an order.

So that is the kind of functionality that has not even been commercially available yet, which we acquired and plan to implement into Quickparts, Pro Parts and also in a variety of CAD plug-ins, across all CAD software packages that are available.

SYCODE is most related to our Pro Parts or Quickparts, most related to our custom parts services.

It is related more to our desire to begin to offer professional and consumer content to print utilities and plug-ins in support of both our acceleration of professional adoption and consumer adoptions of such tools, and also as a bridge head into India as part of our India growth strategy.

Where are some of your competitors in terms of marketing their services over the Internet?

Most of our competitors have online quoting capabilities.

They do not have the combination of online dynamic analytics and sophistication, coupled with high-touch response and outbound telemarketing and sales, at the level that we have.

And then they certainly don't have the plug-ins that we just acquired for all available CAD systems that allow people to have the utility on their desktop.

Would it be fair to reach a conclusion that between your entry into the service bureau business and the skill sets that you are talking about that you are developing for Internet communication, that you really have changed the profile of channels that the Company is marketing through, away from independent service bureaus and more towards the Internet?

And when do you think -- if that is true, when do you think it would be appropriate to give us a metric on how much of your business is being developed off the Internet with some of these unique attributes?

It is fair to say, Jay, that more and more commerce is conducted on the Internet.

And I think in terms of what portion of our business is generated on the Internet, you know at what run rate we exited the fourth quarter from custom parts, and you also know that when we acquired Quickparts, it came with 2010 revenue of about $25 million.

So it gives you a sense between how much is generated online and how much is generated from traditional channels.

And it is fair to say that the entire on-demand custom parts marketplaces are shifting in the direction of online because of accessibility and the convenience.

And we, through acquisitions and strategy here, would like to shape and lead in that direction.

Thank you.

Thank you.

There are no other questions at this time.

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

Stacey?

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.

Thanks.