3D Systems Corp (DDD) 2011 Q2 法說會逐字稿

Welcome to the 3D Systems conference call and audio webcast to discuss the results of the second quarter and first six months of 2011.

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

At this time, all participants are in a listen-only mode.

We will conduct a question-and-answer session toward the end of this conference.

(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 broadcast 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 side 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 management's discussion in this conference call should call in using the phone numbers provided here on slide three.

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'll not be able to post questions via the web.

Before we begin our discussions, I would like to mention the statement regarding forward-looking information that appears on slide four.

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, intention, projection, development, future events, performance for products, underlying assumptions, and other statements which are other than statements of historical fact.

In some cases you can identify forward-looking statements by terminology such as may, well, should, hope, expect, intends, plans, anticipates, contemplates, believes, estimates, predicts, projects, potential, continue and other similar terminology or the negatives of these terms.

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 and whether made by us or on our behalf are expressly qualified by the cautionary statements discussed on this conference, including those set forward below.

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

Forward-looking statements are only predictions and relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions, and risk factors, many of which are beyond our control and 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, development or achievements expressed, anticipated or implied by these forward-looking statements.

As a result, we cannot guarantee future results, outcomes, levels of activity, performance, development or achievements and there can be no assurances that our expectations, intentions, anticipations, beliefs or predictions, full results will 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 these 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 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 the time to listen to our call this morning.

As you know, earlier today we released our operating results for the second quarter and six months 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.

Let me begin by saying that we are pleased with our performance and results for the second quarter, which reflect contributions from all revenue categories and all the key industries that we serve on a robust 25% organic growth and record unit sales.

We earned $0.14 per share on 57% total revenue increase and 58% gross profit improvements, not withstanding sequential margin compression on unfavorable product and geographical mix, and higher expenses on higher revenue, cost of acquisitions and litigation.

Net income for the second quarter included share-based compensation, depreciation and amortization expense of $3.4 million.

It also included $0.4 million of restructuring expenses and $2.2 million of legal expenses that in the aggregate reduced EPS by $0.12.

Despite exceptional revenue and profitability growth over last year, three drivers suppressed our earnings.

First, consistent with our acquisition integration plans, during the quarter we incurred $24 million of restructuring expenses.

Second, the timing and concentration of litigation activities resulted in higher than expected legal costs of $2.2 million for the quarter, some $1 million higher than the comparable 2010 quarter.

And third, rapid revenue growth fueled by printers and custom parts as unfavorable mix compared favorably to last year, but compressed our sequential earnings power.

Together these items reduced our EPS by $0.05 for the quarter.

We expect to benefit from the restructuring expenses we incurred during the quarter.

We expect to continue to improve our custom parts margins up from our corporate margins, and we can't apologize for 3D printer unit sales even as unfavorable mix, given the impressive materials, revenue and margin growth we're experiencing.

Bottom line here the items that suppressed our earnings this quarter don't reflect any structural changes in our business model, and we expect our margins to rebound back to our targets in the coming quarters.

Our reported quarter and six months diluted earnings per share of $0.26 and $0.40 respectively benefited by $0.12 per share from releasing a portion of our valuation allowance on deferred tax assets.

We ended the second quarter of 2011 with $79 million of cash, reflecting $62.1 million net proceeds from our equity raise and $6.2 million of cash from operations, less $28 million paid in cash for acquisitions during the first six months of this year.

3D printer units sold tripled over the comparable period and accounted for $5.5 million revenue increase.

For the quarter, production printer sales increased 44%, and personal and professional revenue printer revenue increased 63% over the comparable 2010 period.

We continue to successfully expand our distribution channel, and during the second quarter, we recruited 27 new resellers to our global distribution network.

It is now aggregate to 167 channel partners.

Print materials grew by $2.4 million on strong end-user demand and an increase installed base, and print material gross profit margin expanded 530 basis points over the 2010 period and 150 basis points sequentially.

Services, including custom parts, increased by $12 million compared to the second quarter of last year, and our healthcare solutions grew 32% over the prior year.

As part of our continued 3D content to print solutions diversification, last week we acquired Alibre Inc., a leading provider of affordable 3D design productivity solutions.

We expect this acquisition to be immediately accretive to our net income and given its high software margins to contribute favorably to our long-term target operating model.

Now, for a more detailed look at our financial performance for the second quarter and six months 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.

We delivered record second-quarter revenue, including growth from all revenue categories and all key marketplaces we serve with continued strong automotive and healthcare growth.

Quarterly growth was led by a 115% increase in services revenue and a 52% increase in printer sales.

We are pleased that our trend of expanding our rapid manufacturing footprint and penetration continued with the sale of more than half of our professional and production printers into direct manufacturing applications.

Growth was balanced between organic and acquisitions with 25% organic growth.

For the quarter, print materials revenue increased by 18% on strong end-user demand and a growing installed base.

Service revenue for the quarter grew 115% and included $14.2 million of custom parts revenue.

Although we believe that our revenue distribution across custom parts, printer services, printers, and print materials illustrates the quality and diversity of our business model, unfavorable product and geographical mix negatively impacted our gross profit margin, which we'll discuss in more detail a little bit later.

We ended the quarter with approximately $7.4 million of backlog compared to $7.9 million at March 31, 2011, and $7.6 million of backlog at December 31, 2010.

Although production and delivery of our printers and services is generally not characterized by long lead times, customer-requested delivery dates may impact our backlog.

Prior period backlog included multiple production printer order that was placed in Q3 of 2010 and was partially delivered in Q4 of 2010, Q1 of 2011, with the balance being completed during the second quarter of this year.

Current backlog includes $4.2 million of custom parts orders that are scheduled for future delivery.

New product revenue grew 52% to $16.4 million for the second quarter compared to $10.8 million in 2010.

New products continue to fuel our organic growth and underscore the effectiveness of our R&D investments.

As a reminder, we track new product revenue only for the first three years of our product's commercial life.

Integrated materials revenue increased 80% over the comparable 2010 period and amounted to 54% of total print materials revenue.

Integrated materials growth validates our business model, and its increasing share of our total materials revenue is helping to drive materials margin expansion.

For the first six months of 2011, revenue grew by 54% with 24% coming from organic growth.

Printers grew 53% to $29.7 million on record units sold.

Print materials revenue increased by 16%, and services revenues increased 109%, including $24.4 million of custom parts revenue.

Healthcare solutions revenue grew 41% to $12.7 million.

Second-quarter revenue increased 57% over the 2010 quarter.

For the quarter, gross margin expanded 30 basis points to 45.7% on a gross profit increase of $9.2 million as compared to the 2010 quarter.

And total operating expenses increased to $17.2 million, but decreased as a percentage of revenue, down to 31% from 36% in Q2 of 2010.

As a result of our strong revenue growth and expanded gross profit, we generated net income of $7.2 million, which excluded the benefit of the partial release of our valuation allowance on deferred tax assets and earned $0.14 per share.

For the first six months of 2011, revenue increased 54% over the 2010 period.

This increase was led by a $10.3 million improvement in printer sales and a $21.6 million improvement in services revenue.

For the six months, gross margin expanded 170 basis points to 47% on a gross profit increase of $18.1 million as compared to the 2010 period.

Total operating expenses increased to $33 million, but decreased as a percentage of revenue, down to 32% from 36% in the 2010 period.

As a result of our improved revenue and expanded gross profit, we generated net income of $14 million, which also excluded the benefit of the partial release of our valuation allowance on deferred tax assets and earned $0.28 per share.

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

For comparison purposes, earnings per share for the 2010 period have been adjusted to reflect the 2-for-1 stock split that was affected during the second quarter of 2011.

Printer products and geographical mix, along with the impact of higher custom parts revenue at lower margins, compressed gross profit margin by 4.3% sequentially.

Net income included depreciation, amortization, and share-based compensation expenses of $2.4 million, restructuring expenses of $0.4 million, and $2.2 million of legal expenses, primarily related to litigation that together reduced EPS by $0.12.

For the second quarter and first six months of 2011, we benefited by $6.2 million from the partial release of the valuation allowance on our deferred tax assets for future periods, which resulted in the $0.12 per share benefit, bringing our reported diluted earnings per share to $0.26 and $0.40 respectively.

We have $55 million of net operating losses remaining, of which $36 million are fully reserved.

We continue to evaluate the timing and amounts of future releases of the valuation allowances as required.

For the quarter, our recurring revenue, which includes $14.2 million from custom parts, amounted to 71% of our total revenue.

Total printer revenue increased by $5.5 million compared to the 2010 period.

For the quarter, production printers contributed $8.9 million to revenue, and personal and professional printers contributed $7.3 million, underscoring growth in both categories led by sales to healthcare, automotive and motorsports customers.

Productions printers revenue increased 44% over the comparable 2010 quarter, and personal and professionals revenue increased 63% over the 2010 quarter.

Even though North America made up 52% of revenue for the second quarter regionally, Asia-Pacific revenue increased some $3.5 million with Japan making the largest contribution to revenue for this region.

This validates our expectation of strong Japanese recovery.

Overall, revenue remains well distributed geographically.

For the six months ending June 30, 2011, our recurring revenue, which includes $24.4 million from custom parts, amounted to 71% of our total revenue.

Total printer revenue increased by $10.3 million compared to the 2010 period, and printers contributed $29.8 million to revenue, underscoring growth across all key industries and marketplaces we serve.

For the quarter, gross profit improved 58% over the 2010 quarter from all revenue categories to $25.2 million.

Our gross profit margin for the quarter expanded 30 basis points over the 2010 period to 45.7%, but compressed 270 basis points sequentially.

The 2011 gross profit margin reflected a higher portion of sales from lower margin personal and professional printer sales and a higher portion of revenue from lower margin custom parts.

This was partially offset by continued margin improvements in print materials and printer services.

In fact, print materials gross profit margin expanded 530 basis points over the 2010 period and 150 basis points sequentially.

Print materials gross profit margin for the second quarter of 2011 increased by $2.4 million or 27.9% on a revenue increase of 17.5%.

This is primarily due to the favorable shift of the mix of materials to higher margin personal and professional integrated print materials.

Our services gross profit of $8.6 million included printer services and custom parts services.

Services gross profit expanded 60 basis points over the prior quarter.

Gross profit margin of our printer services increased 40 basis points from the prior year to 47.2%.

For the six months ending June 30, 2011, gross profit improved 60% over the 2010 period from all revenue categories to $48.4 million, and our gross profit margin for the six months increased 170 basis points to 47% over the comparable 2010 period.

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 410 basis points over the 2010 period to 64.2%.

Print materials gross profit increased by $4 million or 24% on revenue increase of 16%, primarily due to the continued favorable shift of the mix the materials to higher margin, personal and professional integrated print materials.

Our services gross profit of 39.7% included printer services and custom parts services.

Printer services gross profit margin expanded 70 basis points over the 2010 period to 45.8%, custom parts margin expanded to 35.5% compared to 12.1% in the 2010 period.

Sequentially, gross profit margin decreased 270 basis points from 48.4% in the first quarter of 2011 to 45.7% in the second quarter.

We believe that this explanation is fairly simple and underscores the margin expansion guidance we provided previously.

Given the moving parts, let's take this by category.

Print materials gross profit margin expanded to 65% from 63% in the first quarter, positively impacting margin by 0.4%.

Professional printers positively impacted gross profit margin by 0.8%.

Printer services margin expanded to 47% from 44% in the first quarter, which positively impacted our gross profit margin by 0.4%.

However, the combined effect from the positive categories wasn't enough to offset the impact of an all-time record unit sales of personal and professional printers, coupled with the unfavorable production printer mix that negatively impacted margin by 1.7%.

Custom parts gross profit margin decreased 690 basis points sequentially to 32.3% from 39.2%, negatively impacting gross profit margin by 2.6%.

So let's take a closer look at the sequential progression of custom parts gross profit margin.

As you know, the rapid organic and acquisition growth of our custom parts revenue resulted in this category making up 26% of our total revenue compared to 21% in the first quarter.

Although we continue to execute on our initiatives to expand margins to corporate averages, rapid revenue growth outpaced our margin expansion initiatives, resulted in an 80 basis points compression to overall gross profit margin.

As I noted previously, total custom parts margin decreased sequentially from 39.2% to 32.3%.

Higher Quickparts revenue at lower gross profit margin accounted for 280 basis point compression, and 3Dproparts Europe negatively impacted our custom parts margin due to a seasonal shortfall of higher margin, Italian revenue reflecting the automotive design cycles.

By contrast, in portions of our customer parts business that we had the benefit of several quarters to affect our margin expansion initiatives like 3Dproparts North America, our gross profit margin expanded some 1370 basis points over the first quarter of 2011.

Accordingly, we believe that we can improve total gross profit margin of our custom parts up to our corporate levels.

Operating expenses increased $4.7 million for the quarter compared to the second quarter of 2010 on higher compensation costs associated with acquisitions and higher sales commissions from increased revenue and operating costs we absorbed from newly acquired companies.

Legal costs of $2.2 million for the quarter also contributed to this increase and were driven primarily by litigation activities, and SG&A expenses also included restructuring expenses of $0.4 million.

Notwithstanding this increase, operating expenses as a percentage of revenue decreased to 31% of revenue from 36% in the second quarter of 2010.

Operating expenses increased $8.8 million for the first six months of 2011 compared to the 2010 period, primarily due to a $2.9 million increase in compensation expenses from acquisitions and higher sales commissions from increased revenue and operating costs from the acquired companies.

Legal costs of $3.9 million also contributed to this increase and were driven primarily by the litigation activities.

SG&A also included $0.4 million of restructuring costs for the first six months.

Notwithstanding this increase, operating expenses as a percentage of revenue decreased to 32% of revenue from 36% in 2010.

We expect to realize annual savings in the range of $1 million to $2 million from the restructuring expenses and other cost containment initiatives implemented during the first half of 2011 and expect operating expenses as a percentage of revenue to converge with our long-term target operating model.

We ended the second quarter with $79 million of cash, which was an increase of $41.7 million since the end of 2010.

This increase primarily reflects $62.1 million of net proceeds from the sale of common stock and $28 million of cash paid for acquisitions for the first six months of 2011.

We generated cash from operations of $6.2 million in the first six months.

Working capital increased $48.6 million, reflecting the increase in cash, a $6.4 million increase in accounts receivable, and a $3.6 million increase in inventory.

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

Without the effect of the equity raise in acquisitions, cash would have increased $7.6 million and working capital would have increased $14.5 million.

For reference, we have highlighted our second-quarter and six months 2011 results, excluding the benefit of the partial release of the valuation allowance on our deferred tax asset in relation to our previously disclosed long-term operating model.

We believe that our revenue growth and operating expenses are on track with our operating model.

While the concentration of additional acquisitions during the six-month period temporarily slowed some of our operating leverage, we expect to see continued improvement to our operating leverage as we continue with the integration of our recently acquired businesses.

Without the reversal of the valuation allowance on our US net deferred tax assets, our income tax rate would have been 34.6% for the second quarter.

Due to the use of our US net operating losses, our rate of cash taxes was 5.4% of taxable income, and we expect our effective tax rate for 2011 to be comparable to our historical tax rate.

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

I would like to take -- spend a few minutes and repeat the previous guidance we provided on our plan to achieve continued gross profit margin expansion in line with our long-term operating model and the factors that could impact that expansion.

There are several key drivers to our gross profit margin expansion plan -- first, better overhead absorption from higher revenue; second, an anticipated favorable shift of print materials mix toward integrated print materials and higher margin personal and professional print materials; third, our planned migration of additional printer and print materials manufacturing to Rock Hill, enabling cost reductions, and importantly, targeted and continuous improvements in operational cost downs throughout our operations and supply chain.

As we have said previously, factors that could temporarily slow our plan to expand gross profit margin include higher personal printer unit sales as a percentage of total sales in a given period, which have lower gross profit margins than our professional and production printers, the timing, concentration, and size of acquisitions in any given period.

We believed then as we get firmly into the revenue run rate of our long-term models goalpost at $200 million to $300 million for several quarters, we can expect to achieve our target gross profit margin.

And that concludes my comments.

Abe?

Thanks, Damon.

We entered the third quarter of 2011 with a strong sales funnel and continued healthy backlog.

As evidenced from the recent (inaudible) and General Motors' presentations and videos, we continue to make good progress in automotive and healthcare applications.

Accordingly, we're optimistic about the third quarter and expect revenue growth over the prior year quarter and sequentially.

We expect strong demand for our personal, professional, and production printers helped by our expanding channel and new content creation and design productivity tools.

We expect custom parts revenue growth from a combination of organic growth and additional acquisitions.

We expect healthcare solution revenue growth benefiting from our expanding solutions portfolio and our growing installed base.

I would like to remind you again that, while we remain confident in our ability to expand gross profit margins toward our target model, we expect it to be susceptible in any reporting period to potential adverse printer mix in favor of lower margin printers and to custom parts revenue with lower gross profit margin to make up a higher percent of total revenue.

As we remain acquisitive, we expect the 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 2011, we expect SG&A expenses to be in the range of $29 million to $32 million inclusive of higher litigation expenses as we currently understand them and increased operating costs associated with acquisitions we made thus far.

We expect R&D expenses for the remainder of 2011 to increase and be in the range of $6 million to $7 million, reflecting our expanding print engine portfolio and planned new professional and consumer product and production throughout the remainder of this year.

As we mentioned earlier, last week we acquired Alibre Design.

Our acquisition of Alibre is consistent with our strategy to democratize access and accelerate adoption of affordable 3D content to print solutions that empower professionals and consumers that create and make in 3D.

By adding meaningful design productivity tools and plug-ins to our portfolio, we make it easier and simpler for our users to access all their design to manufacturing requirements in one place.

Alibre develops powerful, affordable design productivity tools that enable many businesses to expand and complement their 3D content creation employee base, as well as provide many professional designers and engineers by day with the option to bring home viable, affordable tools that support their hobbies and garage entrepreneurialship activities.

We plan to expand the utility and functionality of the Alibre tools in ways that serve this growing user base and effectively address this estimated multibillion-dollar marketplace.

We expect Alibre gross profit margins in excess of 85% to favorably contribute to our long-term target property model.

We plan to evolve Alibre into a powerful brand that delivers a complete suite of design productivity tools and services for the benefit of professional makers and consumers alike.

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

We expect that our 3D content to 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.

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

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 other people to participate in the Q&A session.

As a reminder, please direct all questions to the (inaudible) portions in the call.

Telephone numbers are provided again on this slide.

If you are a client inside the US, the number is 1-800-798-2864.

If you are a client outside the US, the number is 1-617-614-6206.

The conference ID is 19161466.

(Operator Instructions).

Jim Ricchiuti, Needham & Co.

My question relates to gross margins.

As we look out over the next two quarters, Abe or Damon, can we comment on what might change with respect to mix in the systems area, given the strength and personal printers that could impact your gross margin favorably?

And secondly, on custom parts gross margins, I'm still not quite clear on what the strategy is to improve those margins.

Maybe you can't elaborate on that.

Thank you.

Let's start with custom parts because there we can point out to 3Dproparts North America, which is a combination of the acquired service bureaus in the United States.

And there you can see not only year-over-year improvements, but also continued healthy sequential improvement.

And the strategy simply is the continuous improvement of our operations and sales and marketing initiatives that allow us to price in accordance with the value that we impart.

Both sequentially, I believe, and year over year the improvements there have been substantial.

In fact, the sequential improvement in that segment of the business, which we simply had more time to improve, is over 1300 basis points.

Similarly, with regards to Quickparts, this is merely the gestation period.

It's the first full quarter that we had a substantial amount of revenue at lower gross profit coming into the business that was dilutive.

The strategy there, Jim, simply is to improve our in-sourcing, so to source more of it internally, which would create two positive impacts.

One is it will improve our overhaul 3Dproparts margins and operations, and two, it would improve the Quickparts margins simply because we're going to be sourcing and doing the fulfillment ourselves as opposed to doing it externally.

And thirdly, to also look at the pricing and value and pricing would accordance to value.

And our expectation is that we'll be able to given a little bit more time, will be able to improve the Quickparts portion of the business and bring it up to the corporate averages as well.

What happened to us in Europe in the quarter in custom parts had just to do with seasonality, and we expect that to recover and return quickly to normal.

With regards to what could happen mix-wise in printers, as I said in my opening remarks, it's hard to apologize for tripling units sold, especially when we see what it does to the rapid growth of our print materials and the favorable mix shift in print materials that has expanded print material margins year over year by over 500 basis points and sequentially by as much as 150 basis points, simply on favorable mix.

Chuck Murphy, Sidoti & Company.

My questions were pretty similar to Jim's.

So, Abe, if I'm hearing you correctly, the service gross margins were impacted by these acquisitions that you've made that haven't fully ramped up their volumes yet, is that fair to say?

The volumes are pretty ramped.

Our ability in real time as we ramp up revenue to also expand margins was somewhat impeded simply because sales growth outpaced our ability to improve the gross profit margins.

And we're simply saying, look at what we have done in the same kind of business with units that we have had for a little longer period, which is why we pointed you to 3Dproparts North America where sequentially the margin improved by over 1300 basis points.

This is just a question of timing in our minds, and we feel very confident that the Quickparts portion of the business will catch up in gross profit margin to the rest of the parts business.

But to be clear, you are saying the businesses that haven't been acquired recently, your kind of existing service (inaudible) businesses, those margins were still fine.

It just getting them --

They are not just fine.

They expanded significantly.

It's a very simple point, Chuck.

It's a very simple point there.

We absorbed a very large portion of new revenue at lower gross profit margin.

The arithmetic of this is that it was dilutive to our gross profit margin.

With a little bit more time, we feel fairly confident that we can expand it.

And can you say why 3D printers jumped significantly on a sequential basis?

Was there a sell-in of a new product or anything like that?

No.

We have continued -- look, over the last two years, we have kept our eyes on the ball and diligently and continuously added product and added channel.

And if you look at our presentations over the same period, you see that in every opportunity that we had to present the Company and talk about what we do, we always talked about growth from 3D printers through continuous product portfolio expansion and channel expansion.

And I think that what we're experiencing now for several quarters is the result of a very attractive and complete printer portfolio in price points from about $1000 all the way to hundreds of thousands of dollars in personal, professional, and production categories, and from a channel that has continued to expand nicely with 27 new channel partners just in the second quarter.

I also think it is important to point out that the revenue expansion from new products is coming nicely from all the categories, not just from personal printers or professional printers, but also our production printer side.

So it's spread nicely across there as we have new products.

So, again, new products aren't just being introduced in just one category but across all of them.

Absolutely.

(Multiple speakers) And material growth and the noticeable shift in material mix toward the personal, professional and integrated materials, which now make up by than half of total material revenue and has expanded by some 80% over last quarter, that is the ultimate validation of our business model, which remember, largely depends on our ability to grow our personal, professional, and integrated materials, which shifts our gross profit margins to the high-end.

Thank you.

Jennifer Thorwart, Barclays Capital.

Thanks for taking my question.

Could you give us some little more detail on the progress on the migration of manufacturing to Rock Hill?

I assume there was no real benefits to margins in the second quarter, but will there be benefits to margins in the second half from that move?

And any color you could give on how big of a tailwind that could possibly be.

Actually, one of the areas that we did highlight was not necessarily from products that were brought in this quarter, but from continued cost downs of products that were brought in over the past few quarters.

And that actually impacted our margin positively, our overall margin positively by 0.4%, almost 0.5%.

Within the category, it is a much higher, couple percentage point increase.

So we've continued to have margin expansion to the products we brought in.

We are looking at having, bringing in products over these next couple of quarters, and as some of the introductions of the new products that we have that are coming out in the third quarter and the fourth quarter that we did announce are planned to be built here also.

So, in a nutshell, over the next couple of quarters, we will be bringing in, and we said this previously, three printer product lines in-house.

That will be a combination of products that were previously made on the outside and new models that are going to be made on the inside and some new models.

And the benefits of bringing those products in-house will begin to be realized towards the latter part of this year into next year.

Jay Harris, Goldsmith & Harris.

On the printer materials, are we still suffering a contraction in open source in the revenue sales of open source materials, or has that run its course?

Clearly, with some 48% of total material revenues still in legacy systems, there is an exposure.

But it is an exposure that is diminishing over time, and it is diminishing not just because the number of legacy systems is being diluted.

But we are enjoying significant material growth from our personal and professional printers, which were always in integrated systems, and we always said, come at much higher gross profit margins, which accounts for the steady progression.

If you look at this time a year ago, consolidated transit material gross profit margin was just around 60%, and this time a year later, it's about 65%.

And that's on growth that comes from favorable mix change in favor of the personnel and professional print materials, which is something that we expected and discussed all along.

Well, I haven't done the math, but I think you've given enough numbers out to do the math.

But, the nonintegrated material revenues in the June quarter, how does that compare to the first quarter and the fourth quarter last year?

We actually have those numbers because we share them in those quarters.

So we will pull that and announce it later on the call.

Thank you.

[Tom Hayman], private investor.

I don't have a question.

That must have been a mistake.

Sorry.

Troy Jensen.

This is Troy Jensen from Piper Jaffray.

A quick question for Damon here.

Now that you've reversed your tax allowance, will you be reporting a full tax rate next quarter?

I understand you won't have to pay taxes; I'm just curious whether or not you're going to have to report them.

Yes, I said in my comments that we expect for the remainder of this year for our tax rate, our reported tax rate to be at historical levels, which has been between 10% and 12%.

The way this release works it is for future periods.

It's not for this year.

We had already done the release that we have been accounting for at the end of last year that would have covered this period.

But wouldn't you think you have to pay or actually start reporting -- I know you got what, $55 million in NOLs remaining.

When do you think you will have to start reporting and pay a full tax rate?

We have $55 million in NOLS.

$36 million are still reserved, so we have to release those.

But this amount that we released in now, the $17 million in gross amount, will start to be used in Q1 of next year.

So our tax rate in the next year should start to go up, although the cash tax rate, as you said, will be still lower.

And remember, the model we did put out there accounts for the fully burdened tax rate.

I do understand.

And a quick one for Abe.

European exposure, 34% of revenues in Q2.

Just curious what the pipeline looks like there and your confidence that that geography remains healthy.

We are confident that the geography remains healthy.

The pipeline looks pretty robust and promising.

We, and I said this previously, we don't read too much into quarterly fluctuations between the regions simply because it's quite acceptable in our business given the fact that a portion of our production printers are at ASPs that could make any single region somewhat lumpy.

So we don't tend to get overly excited.

The pulse in Europe continues to be strong, and we expect Europe to continue to contribute to our revenue favorably in coming quarters.

And you also do have to realize that if you back out the increase -- we had a full quarter of Quickparts business in this quarter, which is just in the United States.

That starts to weigh a little more to the United States, even without reducing revenue in other areas.

For instance, our Japanese, our Asian revenues still stayed at 14%, but their revenue is increasing at a very healthy rate.

But that's not due to those acquisitions comparable to the United States.

That's an excellent point that Damon is making, that part of what they looked at the other regions is the sizable Quickparts acquisition, which is US-centric.

There is no international revenue.

And on the flip side, all of our growth in Asia Pacific and Japan is purely organic.

There is no acquisition impact in those regions.

Good luck in the second half, guys.

[Robert Latterly, Rose Advisors].

I was wondering if you could just clarify your statement on organic growth in the quarter.

So was organic growth 25% of the total year-over-year revenue increase, or was the year-over-year organic growth rate 25%?

The year-over-year organic growth rate was 25%.

Great.

Thanks.

(Operator Instructions).

Jay Harris.

There was something in the 10-Q which indicated that on your incoming orders for systems, that the late shipments had been made.

Should we assume, therefore, that the backlog of $7.6 million represent orders that came in in the last month of the quarter?

I wouldn't necessarily know if it's the last month.

The order that we put in is one that was a large order from last year that we tracked there because it tended to be larger than others.

But normally on these kind of bases, they clear out within the quarter depending on customer-requested delivery dates.

I think the significant point here is that at the time that our backlog incremented to about $7 million last year, it was to a large extent as a result of this one big order that we booked that was scheduled for multiple deliveries over the fourth quarter of last year, the first quarter of this year and the second day of this year.

Damon said in his opening remarks that, as of the end of the June quarter, we finished all outstanding deliveries against that order.

The fact that our backlog stayed at a more or less comparable level bodes well for the strength of our revenue generation pipeline, and we view that as positive at this level.

Have you already shipped that $7.6 million or will by the end of August you will have shipped it?

That's not how it works.

This kind of backlog tends to replenish itself in the course of the quarter.

Remember that over $4 million of it is related just to custom parts, and that has to strictly do with delivery requests from customers in future periods.

That kind of backlog tends to replenish itself.

Well, I presume as we see backlogs in subsequent quarters, everything will have replenished itself.

One hopes.

Could you comment a little on whether you've laid plans yet to expand Quickparts activities into other areas of the world?

We have laid plans to leverage the Quickparts technology, not just in other parts of the world, but also in other parts of our business.

Some of the technology that powers Quickparts both on the customer data and CRM basis, the high touch outbound sales and marketing, and the ability to efficiently convert leads into sales is relevant and pertinent not just in other parts of the world but also in other parts of our business.

And that is in motion.

Have we already booked orders from customers in foreign countries through Quickparts?

That has always been the case, as well as from 3Dproparts, although that is not significant at this point.

What we want to with that capability is we want to deploy into other regions in local languages and local currencies.

That would make it then more meaningful.

And finally, could you give us a little color on how the various software capabilities that you are generating and acquiring are affecting sales?

With the exception of Alibre, which was already an established business that had commercial revenue and thousands of users, the other businesses that we acquired were more under that heading of technology capabilities.

They become more relevant, or some of them become more relevant with the availability of Alibre.

And, of course, as we get into the third and fourth quarter of this year, we get to report some revenue from these new design productivity tools and content capabilities.

So we will begin to appreciate the revenue generation and the handsome margins that come from these software and content businesses.

But the only one that has relevance in terms of revenues at this point in time is Alibre.

The others were more acquisition or technology building blocks.

Is there a way to follow the developments in your revenue pattern of those activities?

In terms of how and where we would report that revenue?

Well, if you are enriching the buying experience, making it easier for customers to come in and complete orders, is there some manner in which that could be reflected in the future?

Let's see, let's be clear.

Our intent is to monetize all of this design productivity and content creation product and services that we are either building or we are launching.

So we're not looking at this just as an opportunity to generate leads.

We are looking to actually monetize it for the sale of design, productivity tools and content.

In the case of Alibre, we will be reporting revenue from Alibre I guess under product sales, right, David?

Yes, under product sales, yes.

And similarly, we plan to add other design productivity plug-ins and content creation tools to that product category.

And separate from that, we are using some of these building blocks to progress along the consumer initiative that we shared with all of you this past May 26, which we expect to launch in the next few periods.

And once we do that, we will begin to report revenue from that initiative separately.

Good enough.

Thank you.

Jim Ricchiuti.

The legal expense, Damon, you shared in the quarter, I think you called out about $2.2 million.

Was that higher than you were expecting as you were entering the quarter?

I would say it is definitely a higher run rate than we have.

We would also look for it to be lower.

It probably is a little higher than we were expecting at that point, yes.

So, as we think of that, the SG&A expense that you are guiding to in the second half of the year, is that assuming the legal expense remains at these levels?

Within that SG&A range, we have a range of legal expenses, which ranges up into that level.

At this point we're hoping it's not going to be higher than that level, but somewhere around there.

It is maybe a little bit lower.

And just on the production printing portion of the business, you saw fairly strong growth, and I wondered if you could talk a little bit about that is the end markets.

I think you talked about a couple of markets that have been very strong, but is that sustainable just in light of concerns people have about overall economic growth slowing?

As far as we can see, Jim, in production printers, we believe that it is sustainable.

We have seen now for nearly I want to say off the top of my head, 18 to 24 months of sustained strong activity from end markets like automotive and healthcare in particular that are driving the kind of revenue generation that we've been enjoying.

We have seen a steady reinvestment on the part of motorsports teams that have been ongoing.

And when we look at what we have in the funnel and we see that and we compare that also with some of the public endorsements that we are getting like the recent General Motors series of videotapes, which we are very excited about since they have done it completely on their own, it begins to inform us that, particularly in automotive, in defense applications, and in aerospace, companies are viewing our technology very differently than how they viewed it in a pre-2008 recession.

They are looking at this technology now as a real differentiator in their entire design to manufacturing cycle.

And that is what in our minds fueling the kind of demands that we are enjoying.

Thanks very much.

Thank you.

There are no other questions at this time.

I would 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 broadcast will be made available after the call on the Investor Relations section of our website, www.3dsystems.com/ir.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.