3D Systems Corp (DDD) 2011 Q3 法說會逐字稿

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results of the third quarter and first nine months of 2011.

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

(Operator Instructions) As a reminder, I would like to inform you that this conference is being recorded for replay purposes.

At this time, I would like to turn the conference over to Stacey Witten with 3D Systems.

Ma'am, you may proceed.

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 this presentation may do so via the web at investor.3dsystems.com.

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 access to the streaming portion of the webcast, please be aware that there is a five-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 a 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 other than statements of historical facts.

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

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

All such forward-looking information, whether written or oral and whether made by us or on our behalf, are expressly qualified by the cautionary statements described on this message, including those set forth 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 reflect the occurrence or likelihood of unanticipated events, and we disclaim any such obligation.

Forward-looking statements are only 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.

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

As you know, earlier this morning we released our operating results for the third quarter and nine months of this year and filed our Form 10-Q with the SEC.

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

Let me start by saying that we are very pleased with our third-quarter performance that was led by record print materials and services revenue and tripling printer unit sales that resulted in a 48% gross profit improvement on a 39% revenue increase compared to the third quarter of last year.

Importantly, at the end of September our year-to-date revenue of $161 million exceeded full 2010 revenue, representing some 48% year-over-year growth.

Record materials and services revenue more than offset our anticipated printers mix shift towards our lower priced printers on continued strong demand for our personal and professional printer category.

Consistent with our expectations gross profit margin rebounded to 48.3%, reflecting the anticipated favorable impact from our effective acquisitions integration results over time, other ongoing operational improvements and the positive margin contribution from our extended 3D design productivity tools and print materials strategy.

We generated record $12.6 million cash from operations during the third quarter, despite a $5.3 million increase in our operating expenses.

The increase in our operating expenses included $1.2 million of higher research and development expenditures compared to the 2010 period in support of a number of significant new product launches that occurred during the quarter, and in support of our consumer and design productivity growth initiatives that we previously disclosed.

We earned $0.14 per share for the quarter and $0.54 per share for the nine months, and our net income for the third quarter also included share-based compensation, depreciation and amortization expense in the amount of $3 million; $2.1 million of litigation and acquisition expenses; and $0.6 million of currency revaluation expense that, in the aggregate, reduced our EPS by $0.11.

We ended the third quarter with $72.6 million of cash reflecting $62.1 million net profit from our earlier equity raise and $18.8 million of cash generated from operations, less $44.8 million paid in cash for acquisitions during the first nine months of this year.

We entered the fourth quarter with positive sales momentum that is reflected in part by our September-end $11.3 million of backlog, including $6.3 million from our on-demand parts and the remainder primarily production printers.

This represents a $3.9 million increase over the second quarter backlog of this year and $4.3 million increase over the comparable 2010 period.

We completed several acquisitions during the quarter in support of our strategic growth, global expansion, and diversification initiatives.

We continued to successfully expand our distribution channel and added another 18 new resellers to our global network that aided in tripling total printer unit sales over the comparable 2010 quarter.

Revenue from print materials grew a record 30% to $18.5 million on strong user demand and our growing installed base.

Print materials gross profit margin expanded from 370 basis points over the comparable quarter.

And our healthcare solutions enjoyed another strong quarter, delivering 20% revenue increase over the prior-year period.

We introduced several significant new products during the quarter, including the game-changing ProJet 1500 and the new 3DTouch personal 3D printer.

We also launched our first ever Class VI VisiJet Clear material and Alibre Design 2012, an exciting new powerful easy-to-use design productivity CAD tool for professionals and makers alike.

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

Damon?

Thanks, Abe.

Good morning, everyone.

We delivered another record revenue quarter with growth from all revenue categories, driven by continued strong automotive, aerospace, and healthcare growth.

Quarterly growth was led by a 90% increase in services revenue and a 30% rise in our print materials sales on strong user demand and growing installed base.

Growth factors were artificially skewed towards acquisitions primarily due to the timing, concentration, and size of certain acquisitions, resulting in 12% organic growth.

For the second quarter in a row, printer units tripled but continued an expected shift in printers mix towards lower priced personal printers, resulting in a modest 2% printers revenue increase.

Service revenues for the quarter included $15.6 million of custom parts revenue, nearly tripling the $5.3 million in the prior year.

Reflecting on our performance during the quarter, we believe that the record growth of our recurring revenue streams and [this] continued margin expansion validates our business model and our revenue distribution across custom parts, printers, and print services and print materials illustrates the quality and diversity of our business model.

As Abe mentioned earlier, we ended the quarter with approximately $11.3 million of backlog compared to $7.4 million at June 30, 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.

Current backlog includes $6.3 million of custom parts orders that are scheduled for future delivery.

We are very pleased to share with you that our new products revenue grew 38% to $50.5 million for the nine months compared to $36.6 million in 2010.

By comparison, revenue from acquisitions grew to $31.2 million, reflecting the fact that within our balanced growth strategy new products continue to fuel our organic growth and underscore the effectiveness of our R&D investment.

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

Of even greater significance, integrated materials revenue increased 90% over the comparable 2010 period and amounted to 52% of print materials revenue.

We firmly believe that our sustained integrated materials growth affirms our strategic direction and its increasing share of our total materials revenue is driving our print materials margin expansion.

For the first nine months of 2011 revenue grew some 48%, including 20% organic growth, exceeding our full-year 2010 revenue.

Printers revenue increased 31% to $44.5 million on record unit sales.

Print materials revenue increased 21% on a rapidly expanding printers installed base and services revenues rose 102%, including $40 million of custom parts revenue.

Our healthcare solutions revenue grew 38% to $20 million.

Third-quarter revenue increased 39% over the 2010 quarter.

For the quarter, gross margin expanded 290 basis points to 48.3% on a gross profit increase of $9 million, or 48% as compared to the 2010 quarter.

Total operating expenses increased to $19 million, but remained at 33% of revenue, notwithstanding a $1.2 million increase in R&D expenses.

The R&D increase was primarily in support of several new product introductions that occurred and our expanded technology portfolio that now includes significant 3D content and consumer solutions.

As a result of our strong revenue growth and expanded gross profit, we generated net income of $7.2 million and earned $0.14 per share.

Our net income for the third quarter included share-based compensation, depreciation and amortization expense of $3 million; $2.1 million of litigation and acquisition expenses; and $0.6 million of currency revaluation expenses that in the aggregate reduced EPS by $0.11.

Currency revaluation is primarily the result of currency fluctuations on balance sheet items in various currencies and, despite the adverse quarterly currency fluctuation, our overall strategy yielded modest positive revaluation results for the year.

For the first nine months of 2011 revenue increased 48% over the 2010 period.

This increase was well distributed across all the categories, with a $10.6 million increase in printers revenue and an $8.7 million increase in print materials and a $33.1 million improvement in services revenue.

For the nine months, gross margin expanded 200 basis points to 47.4% on a gross profit increase of $27.1 million compared to the 2010 period.

Total operating expenses increased to $52 million, but decreased as a percentage of revenue to 32% from 35% in the 2010 period.

As a result of our improved revenue and expanded gross profit, we generated net income of $24.8 million and earned $0.49 per share, excluding the benefit of the partial release of the valuation allowance on deferred tax assets for the nine months.

Net income for the first nine months included share-based compensation, depreciation and amortization expense of $9.2 million; $4.8 million of litigation and acquisition expenses; and $0.4 million of restructuring expenses.

And that in the aggregate reduced EPS by $0.29.

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

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

In addition to the items discussed in operating expenses, which reduced EPS by $0.11 for the quarter and $0.29 for the nine months, for the first nine 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 a $0.12 per share benefit, bringing our reported diluted earnings per share to $0.54.

As a reminder, we have $48 million of net operating losses remaining, of which $30 million are reserved.

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

And consistent with our strategy to remix and diversify our revenue streams, for the quarter our recurring revenue, which included $15.6 million from custom parts, amounted to 74% of our total revenue.

This is nearing the upper range of our target operating model.

And total printer revenue increased by $300,000 compared to the 2010 period, reflecting production printers revenue of $7.8 million and personal and professional printers revenue of $7 million.

This is led by sales to healthcare, automotive, and motor sports customers.

Personal and professional printers revenue increased 27% over the comparable quarter and production printers revenue declined 13%.

North American revenue increased $13.5 million over the prior year and made up 55% of revenue for the third quarter, while Asia-Pacific revenue decreased $1 million.

I'd like to point out that, while we experienced a year-over-year decline in our production printers revenue for the quarter, we believe that due to the relatively high list prices, the combined impact of the timing of purchasing decisions and revenue recognition can shift revenues significantly from one period to another and does not constitute a trend in and of itself.

Case in point -- of the $11.3 million in backlog, $5 million is comprised of production printers backlog.

For the nine months ending September 30, 2011 our recurring revenue, which included $40.1 million from custom parts, amounted to 72% of our total revenue.

Total printer revenue increased by $10.6 million compared to the 2010 period.

Printers contributed $44.5 million to revenue, underscoring growth across all key marketplaces we serve.

For the quarter gross profit improved some 48% over the 2010 quarter to $27.8 million.

Our gross profit margin for the quarter expanded 290 basis points over the 2010 period to 48.3%.

Our 2011 gross profit margin reflects the continued margin improvement from our print materials combined with higher print materials revenue and increasing custom parts service margin that was partially offset by a higher portion of sales from lower-margin personal and professional printer sales.

Printer gross profit and margin was unchanged compared to the prior period, despite the significant increase in unit sales of lower-margin personal printers.

Print materials gross profit margin for the third quarter of 2011 increased by $3.3 million, or 37.5%, on revenue increase of 30%.

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 $10.5 million included printer services and custom part services.

Services gross profit expanded 530 basis points over the prior quarter and prior year.

I'd like to point out that, consistent with our expectations, gross profit on our custom parts services expanded 1,620 basis points over the prior year, which is partially offset by a decrease of 370 basis points in printer services gross profit margin from the prior year to 42.8%.

For the nine months ending September 30, 2011 gross profit improved 55.1% over the 2010 period from all revenue categories to $76.2 million.

Our gross profit margin for the nine months increased 200 basis points over the comparable 2010 period to 47.4%.

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 400 basis points over the 2010 period to 64.5%.

Print materials gross profit increased by $7.2 million, or 28.6%, on a revenue increase of 20.7%.

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

Our services gross profit margin of 41% included printer services and custom parts services.

Custom parts margin expanded to 37.9% compared to 18.6% in the 2010 period.

Operating expenses increased to $19 million for the quarter compared to 2010.

This was primarily driven by higher sales commissions from increased revenue and increased operating and compensation costs we absorbed from newly acquired companies.

Litigation and acquisition expenses of $2.1 million for the quarter also contributed to this increase.

Operating expenses remained at 33% of revenue for the 2011 and 2010 quarter, notwithstanding the $5.3 million increase reflecting significant 3D content and consumer R&D initiatives that contributed to a $1.2 million increase in our R&D expenditures.

Operating expenses increased to $52 million for the first nine months of 2011 compared to 2010.

This increase was primarily due to higher sales commissions from increased revenue and the operating and compensation costs we absorbed from newly-acquired companies.

Litigation costs of $4.4 million represented a $1.9 million increase over 2010.

SG&A also includes $0.7 million of restructuring and acquisition-related expenses.

Not withstanding this increase in total dollars, consistent with our expectations operating expenses as a percent of revenue decreased to 32% of revenue from 35% in 2010.

And from our current initiatives we expect to realize annual savings in the range of $1 million to $2 million from the restructuring expenses and integration activities that were [implementing] during the first nine months of 2011 and expect operating expenses as a percentage of revenue to converge with our revised long-term operating model that I will discuss shortly.

We generated cash from operations of $18.8 million in the first nine months and $12.6 million during the third quarter.

We ended the third quarter with $72.6 million of cash, an increase of $35.3 million since the end of 2010.

This increase primarily reflects $62.1 million of net proceeds from the sale of common stock and $44.8 million of cash paid for acquisitions in the first nine months of 2011.

Working capital increased by $46.6 million, reflecting the increase in cash; a $6.8 million increase in accounts receivable from higher revenue; and a $4 million increase in inventory, primarily due to the timing of inventory purchases and customer deliveries.

Without the effect of the equity raise and acquisitions, our cash would have increased $18 million and working capital would have increased $29.4 million.

I'd like to spend a few minutes and discuss our revised target operating model, revised simply because it's become evident that our successful acquisition strategy is contributing faster top-line growth that negates, in the short-term, faster margin expansion.

In fact, given our current acquisition cadence, we are growing our top line faster than our ability to deliver targeted operating margin expansion from the acquired businesses.

Given that we are already on a revenue run rate that exceeds our $200 million goalpost, in order to provide sufficient timeline to catch up to our targeted bottom-line improvements, we decided to raise our revenue goalposts to $300 million and $400 million.

As we continue to remix our revenue across our six distinct revenue streams, we are giving greater weight to mix and accordingly revised our gross profit margin target to 54% at $300 million revenue run rate and 60% at a $400 million revenue run rate.

To adequately fuel and feed this accelerated growth phase, we've slightly increased our operating expenses targets to 31% of revenue at $300 million and 27% at $400 million, maintaining our overall leverage.

Accordingly, as compared to our previous model, our net income at $300 million is slightly reduced by 200 basis points and 100 basis points at $400 million.

We believe that our revised long-term operating model more accurately reflects our anticipated revenue growth and mix shifts in our business, as you can see.

Notwithstanding these model revisions, we remain directionally and substantially unchanged.

For reference, we have highlighted our third-quarter and nine-month 2011 results excluding the benefit of the partial relief of the valuation allowance on deferred tax assets for the nine-month results in relation to our long-term updated operating model.

We believe that our revenue growth and operating expenses are on track with our revised operating model and, while the concentration of additional acquisitions during the nine-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 36.9% for the nine months.

Due to the use of our US net operating losses, our rate of cash taxes was 2.6% of taxable income for the third quarter and 4.8% of taxable income for the nine months.

We expect our effective tax rate for 2011 to be comparable to our historical tax rate and our long-term operating model includes estimated fully burdened tax rates of 31% to 38%, depending on the period.

I'd like to 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 continuous improvements in operational cost-downs throughout our operations and supply chain.

As we 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; and the timing, concentration, and size of acquisitions in a given period.

We believe that as we get firmly into the revenue run rate of our long-term model goalposts at $300 million and $400 million for several quarters, we can expect to achieve our targeted gross profit margins.

And that concludes my comments.

Abe?

Thank you, David.

During the third quarter we have taken decisive steps to expand our product line and our geographical footprint.

These steps included the introduction of two next-gen 3D printers -- the intuitive 3DTouch desktop 3D printer and the revolutionary ProJet 1500 personal color 3D printer, a slick new office printer that delivers high resolution, durable plastic parts, in 6 vibrant colors.

We also commenced shipments of our new flagship ProJet 6000, the most productive high-resolution professional 3D printer available on the market today.

And we announced the immediate availability of VisiJet Clear, a new healthcare print material that meets the rigorous requirements of USP Class VI for plastics.

This material is designed for advanced medical and dental applications and is available only with the new ProJet 6000 professional 3D printer, further expanding our extensive healthcare solutions offerings.

We also expanded our geographical footprint to Australia, India and the Benelux.

In Australia we acquired Formero, a Melbourne-based leading provider of on-demand custom parts services and 3D printing solutions.

We concurrently launched 3D Systems Asia-Pacific, which immediately began offering our extended range of 3D content-to-print solutions in Australia for the benefit of design-to-manufacturing professionals and consumers alike.

Formero brought nearly two decades of experience providing best-in-class rapid prototyping and custom manufacturing services.

And Formero is also a leading provider of personal, professional and production 3D printers in Australia.

Through this acquisition we now also operate a facility in Shenzhen, China that gives us a strong foothold to support our growing on-demand custom parts services in this rapidly growing Chinese marketplace.

During the quarter we completed the formation of 3D Systems India, expanded our in-country development staff substantially, and are focusing on our consumer initiatives development out of our new Goa facility in India.

Two weeks ago we acquired Kemo, a leading provider of an on-demand custom parts services headquartered in Budel, the Netherlands.

Kemo now serves as the base for 3D Systems Benelux which immediately began offering our entire range of 3D content-to-print solutions in the Benelux region.

I'd like to point out that Kemo is our second Dutch acquisition this year, joining Amsterdam-based Freedom of Creation that we acquired earlier this year, underscoring the strategic importance of the Benelux marketplace to our European growth plan.

And finally, this past week we announced the immediate availability of Alibre Design 2012, the latest in design productivity software, delivering professional-grade CAD design simulation solutions, priced from $199 to $1,999.

It's combination of exceptional features, utility and affordability makes Alibre Design the highest-value content-creation solution available today for professionals, makers and students and consumers.

We entered the fourth quarter of this year with a strong sales funnel and continued healthy backlog.

Accordingly, we expect revenue growth over the prior-year quarter and sequentially for the fourth quarter of this year.

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, and we continue to expect our healthcare solutions revenue to grow, benefiting from our expanding solutions portfolio and growing installed base.

I would like to remind you again that while we remain confident in our ability to expand gross profit margin towards 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 margins to make up the higher percentage 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 this year we expect SG&A expenses to be in the range of $15.5 million to $16.5 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 this year to increase and be in the range of $3.5 million to $4.0 million, reflecting our expanding print engine portfolio and additional new professional and consumer product introductions throughout the remainder of this year.

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 ask that you ask one question at a time and then return to the queue, thus allowing others to participate in the question-and-answer session.

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

The telephone numbers are provided again on this slide.

If you are calling inside the US, the number is 1-800-783-2140.

If you are calling outside the US, the number is 1-857-350-1599.

Conference ID is 69090514.

Thank you.

(Operator Instructions) Jim Ricchiuti; Needham & Company.

The question is just with respect to the production printing business.

You've built some backlog here.

Can you talk a little bit about why that occurred?

Did you just see some customers pushing out some deliveries?

And I don't know if there's a way for you to maybe give us a sense as to looking at backlog in recent quarters, how much of that has been production printer.

Is this typically -- is this something you see frequently?

Yes.

Let me address it in a few ways.

One is we don't see any customer pushback.

If we had customer pushback it wouldn't be a booked order in backlog.

This has to do clearly with customers' scheduled deliveries and the production planning and scheduling that we have.

And as you can see, I gave some comparisons of backlog already, Jim, in my opening remarks and how much backlog has increased sequentially and how much it increased also year over year.

And most of the printers components of backlogs, which for the third quarter, exiting the third quarter, was about $5 million, is predominantly made of production printers.

And that has been a trend that now has taken place over, I want to say, at least a full year.

So we're not concerned by the timing and the momentary slip that we experienced in the quarter.

In fact, we believe that if you look at what is sitting in backlog the demand and the trend for production printer is -- remains strong.

And that is on top of the 27% growth year over year that we enjoyed for the quarter in personal and professional printers and the overall tripling of units.

And just remind us, price points in terms of how you categorize production printers -- what is your range, high/low?

We categorize production printers in the range from $250,000 and up to $850,000.

Got it.

I'll jump back in the queue.

Thank you.

Ben Reitzes; Barclays Capital.

I want to talk about your operating model changes.

I mean, this is pretty significant.

You were slated to earn, according to your old model and the current share count by my math, about $1.28 at $300 million in run rate revenue when you got there, maybe sometime in FY '13 or -- well, you would get there in a run rate by the end of next year.

So that would be the earnings power.

Now it's talking about $0.93.

So that's a reduction of 27% in your viewed earnings power in one comment.

And, I mean, that's the math.

I just triple-checked it.

So am I right?

And can we just go into a lot more detail about that, because that's a pretty big cut in the operating model.

The biggest differences in the operating model really relates around our acquisition activity and getting the costs out of the acquired companies and increasing our margin with the acquired companies.

I mean, if we were not in acquisitive mode this model would be a little bit different again.

It would be pretty close to back to where it was.

This is really just breaking down that trend of what it takes a little bit to get to these areas.

One example is we even said last quarter where the parts business, the custom parts business, which was 32% and change for margin, which we said was due to the timing of acquisitions, would bounce back.

And it did, up to above 39% this quarter.

And those are the biggest drivers.

And we wanted to just be clear and forthright with that.

Again, if you took out the acquisition activity that we have and was looking at the businesses that we've owned for three, at least three quarters or more along with our core business, we are well above 50% in margin, which puts us right at the original model.

Let me --

One second.

One second.

It was my understanding that the acquisitions were actually supposed to help scale you to the operating model.

Now the acquisitions are scaling it down.

No.

Ben --

I just want to be clear.

Ben, let me perfectly clear.

We believe that our earning power overall in the business model remains intact.

This is a discussion about timing.

Our rate of top-line growth has accelerated significantly.

The cadence of our acquisitions accelerated significantly.

And we have been crystal clear that we're bringing in businesses that in many instances had to undergo significant margin expansion and margin improvement, which we also demonstrated very clearly that over a period of two and three quarters after we acquired them we can in many instances double the operating results of these acquired businesses.

So this is not a discussion about earning power.

This is a discussion about a timeline.

And it's a trade between accelerated top line and a lagging operating margin expansion.

And rather than say it's going to take longer rather than shorter, given that we already have blown past the $200 million mark very rapidly, the way for us to adjust the timeline was to increase the revenue goalposts and for a period of time trim the margin by a few hundred basis points and get at it that way to help you model what we're doing here.

That's all it is.

We're not considering that we lost our earning power here.

We're just giving ourselves a little bit of a realistic run rate, given the accelerated top line.

Okay.

And then just -- sorry, the last follow-up, though, is given that is -- your free cash flow in the quarter was improved and above EPS.

Does at least the cash flow trend within this earnings model -- is the free cash flow trend above EPS?

Or is there anything you could say about the ability to generate cash that might not be diminished as much as the earnings?

With the acquisitions that we have done and that are built into this model where we have it, there is a larger percentage that is depreciation and amortization of those amounts.

So that is a bigger percentage of the total operating expenses than it had been previously.

So, yes.

Okay.

Thanks.

Bill Gibson; Legend Merchant.

I noticed you paid more attention to backlog than typically is the case.

Is this going to be ongoing, just so we can track the on-demand parts business?

We've actually broken that out every quarter this year, the on-demand parts business.

And we will continue to do that going forward, I believe.

Great.

Yes.

Look, as our -- I mean, we have come from a couple of years ago when backlog typically was between $1 million and $2 million now to having backlog at anywhere between $7 million and $11 million.

So it has become a mirror reflection of the remixing of our revenue buckets.

More than half of it is related to our on-demand custom parts.

But the remainder, as we said previously, is predominantly comprised of production printers for future deliveries.

And given the remix of our revenue buckets we felt that it's important on a quarterly basis to report the size of the backlog and the makeup and composition of the backlog.

Good.

No, I'm all for it.

I appreciate the help.

Thank you.

Patrick Mulvehill; Piper Jaffray.

Quick question for Damon -- I know you said for the remainder of 2011 you'd expect a tax rate that's consistent with what you guys have experienced.

But for 2012 should we begin to start modeling that full mid-30% tax rate once you've burnt through the NOLs?

Well, we still have NOLs to release and we will be burning through them.

We will be experiencing a ramp in the tax rate but it doesn't start in 20- -- at the beginning of 2012 at the fully burdened rate.

Again, we have over $30 million of reserved NOL.

So through the year it will start to ramp up, but it will not reach -- we do not believe at this point it will reach the fully burdened rate in 2012.

Okay.

That's helpful.

And then, kind of going back to Ben's question on the target operating model, your organic growth rate was about 12% year over year.

And you mentioned you're moving the revenue goalposts.

So if I'm thinking that the only way you can grow is through acquisitions, but then those acquisitions also add expense, I'm just having some trouble reconciling the revenue growth and the margin expansion.

So I think it's a good question.

You're making one assumption and that is that our organic growth is going to be in the low to mid teens.

The reality is if you look at our organic growth for the nine months, it's much higher than that.

And the organic growth in the third quarter was skewed in favor of acquisitions.

Some of it had to do just with timing and concentration of larger acquisitions that either came in or fell off and skewed the computation.

A lot of it had to do with the big backlog position that we have that, but for timing, would have completely altered or shifted the organic growth.

We don't see that as a trend here.

And our long-term target model here with the new revenue goalposts, reflects balanced growth between organic and acquisition growth and reflects our margin expansion capabilities from the success that we're [have] with print materials and the significant, over-1,600-basis-points improvement from all of the acquired businesses, which we said we would do and we delivered.

And remember, the biggest indicator for us of organic growth over time is materials.

And materials have grown by 30%.

Okay.

Well, thank you, and good luck going forward, gentlemen.

Jay Harris; Goldsmith & Harris.

Abe, as you've gone first to moving to the service bureau channel and then gone beyond that to encourage connection with customers through the internet and then developed software to make the internet experience more efficient, what's happened to the numbers of customers that you're servicing and -- I don't know, you probably don't have this number in your head -- the revenues per customer?

Well, it's hard to -- I mean, the general answer is that the number of customers that we serve in one way, shape, or form increased by thousands because we have now new constituents that are buying CAD software from us.

They're buying content download.

They're buying plug-ins.

They're buying parts.

And this universe of 3D Systems users presents significant cross-selling and up-selling opportunities for the Company and will no doubt be a big part of the organic growth that is built into our model.

In terms of revenue per customer, it's very hard to compute at this point in time, because we have customers that buy one item and we have customers that buy everything that we have to sell.

And what -- just to follow up on this, as you've acquired service bureaus, what kind of retainage have you had in the people who were responsible for their customer relationships?

Our retention rate has been exceptionally good, particularly in the customer-facing activities in terms of maintaining relationships.

And as you compare it to retention averages from acquisitions in general, we're probably 2.5x better than the benchmarks out there.

And finally, what kind of organic growth rate have you been experiencing in the service bureau channel?

I think we reported organic growth in general.

For the nine months it was -- how much?

20%.

Yes.

So that would represent the composite of revenues including service bureaus.

Was there much of a variance between service bureaus and traditional?

Not really.

It was fairly evenly distributed.

So organic accurately represents the various streams of revenue.

Thank you.

Bob Sales; LMK Capital [Marketing.]

Not to beat a dead horse, but back to the revised target model.

The part I'm struggling with is that even if you've moved the goalposts $100 million higher and the operating margins lower, for three quarters in a row you've had, from what I can see -- tell me if my numbers are wrong -- you've had operating profits at 15% of revenue, and with operating expenses ticking up a little bit next quarter.

So what can we hang our hats on to understand how the margin expansion will occur, given that you've had great growth over three quarters and we haven't yet seen it?

Well, first let's focus at the targets.

We've reduced our target gross profit margin in the model by 200 basis points from 56, I believe, to 54, at the $300 million, so just to put that in perspective.

And we have been expanding our margins year over year and sequentially, with the exception of one quarter, the second quarter, where we had a little bit of backslide.

And we assured everybody that we expected to pounce right back and we did.

The margin expansion that we are realizing happens at the same time that we're remixing our revenue streams towards much higher volume, tripling units of personal and professional printers, which bode extremely well for material revenue, which increased 30% and is our single largest gross profit margin generator at the moment.

That is what should give you the confidence that we're doing the right things here and that we expect to continue to expand the margins in line with our operating model, because it's happening in plain sight.

Well, let me just make sure I'm looking at the right numbers.

The long-term target range now is operating profits of 23% at $300 million.

And looking at the slides in the first quarter I think you had 26% at $200 million.

Is that correct?

Well, if you look at the actual results -- I'm sorry, I -- what--

Yes.

That is --

Okay.

And then just, again, to make sure I'm looking at it right, you've had 15% operating margins now in Q1, Q2 and Q3.

Is that correct?

That's correct.

Okay.

And then operating expenses, looks like the range for next quarter is $19 million to $20.5 million, up from $19 million in Q3.

And so I can't -- if my numbers are right, I hear what you're saying, but I can't see.

The revenue target has gone up.

The operating profit target has gone down.

And there's been no progress over three quarters, plus higher expenses next quarter.

And that -- is there some cost reduction program that happens next year?

There are cost reduction programs that have been implemented throughout the year.

Those we expect to generate between $1 million and $2 million in and of themselves.

And there has been -- if you look at the gross profit margin, it has gone up for the first nine months by quite a bit relative to last year.

And it continues to inch up, with the exception that in the second quarter we had a dip in gross profit margin and we recovered from it.

And we expect that expansion to continue.

Okay, thanks.

I don't want to dwell on it too much, so I'll follow up afterwards.

But I appreciate your answering the question.

Absolutely.

Jim Ricchiuti; Needham & Company.

I'm just wondering if you're willing, since we're in Q4 -- would you assume that your organic growth rate in the quarter would be better than the organic growth rate that you saw in Q3?

What we're looking at, I think, again -- one of the things we said, over quarter to quarter the organic growth rate is a little harder to look at due to the timing of the production systems.

Right now we would expect it to come close (inaudible) to the three quarters.

Okay, that's helpful.

And, David, just with respect to litigation expense, is there anything we should be aware of in this quarter?

I think the litigation expense was up significantly versus Q2.

How should we think about it for Q4?

And maybe you could just provide us an update as to where you stand with that.

Well, we have given you a full and complete disclosure every quarter about litigation and we have always also in our range going forward put in a phrase that says "inclusive of litigation expenses as we understand them." So in the increased SG&A for the fourth quarter we basically factored in also legal and acquisition expenses as we understand them.

In terms of an update on the litigation, there is no new activity.

These are ongoing activities in connection with the several lawsuits that the Company has been dealing with for several years now.

And that will -- we expect that to continue until either a legal resolution or a commercial settlement materializes.

We feel very strongly about our position and we're vigorously defending ourselves.

And we are transparent with you in terms of what the costs are.

Okay.

Just one other question on an unrelated subject -- your competitor yesterday alluded to some weakness as well in Asia.

And just wondering if you could talk a little bit about what you're seeing in that market.

I would assume with the acquisition things pick up a little bit in Q4.

But just in general, what are you seeing in that market?

We have had a very strong first half in Asia.

We had some softness in the third quarter.

In our kind of business in Asia, which is primarily skewed towards professional and production printers, we don't read too much into it because in any period a few sales can swing the results, or sway the result one way or the other.

We are investing significantly in the region.

And the combination of adding Formero, having now direct presence in China, and continuing our investments, we're very optimistic about Asia-Pacific, notwithstanding some of the macroeconomics, particularly in Japan.

We're very optimistic about Asia-Pacific and we believe that our enhanced presence and investments will bear fruit in the coming period and that we will return to significant growth there.

So you're suggesting the weakness is more in Japan in the quarter?

Yes.

It's been -- and, again, it's not -- in our mind there are no trends here.

These are fluctuations that are ordinary in the kind of business that we have.

We wouldn't read any trends into them.

Okay.

Thank you.

Jay Harris; Goldsmith & Harris.

Abe, why did the litigation expenses jump in the third quarter?

Well, it has to do with basically the ordinary course of what happens in litigation.

It has to do with the cycle.

In this case it had to do with depositions of expert witnesses on both sides, et cetera, et cetera.

There is nothing extraordinary here, except the amounts.

Exactly.

Are you in discovery with any of the three cases now?

We're basically past the discovery.

We're in the winding down of depositions in the DSM case.

And we basically are in pre-damage phases with the Envisiontec phase.

Is there any reason why -- is that the reason why one should not assume lower litigation expenses --

Well, look, we've give you --

-- in the fourth quarter?

We have given you our best estimate for SG&A for the fourth quarter --

Okay.

-- inclusive of litigation.

I would not assume anything other than what we have given you by way of ranges.

All right.

That sounds reasonable.

(Operator Instructions) [Kim Moleny]; William Blair.

It's actually Brian Drab at William Blair.

Regarding the acquisition pipeline, so I believe you completed -- can you remind me how many total acquisitions, 9 or 10 this year?

A little higher than that, I believe.

Okay.

Would you -- looking forward to the next 12 months, do you feel like the pipeline is strong enough to where you're going to have that many, or more, acquisitions over the next 12 months, or fewer?

Well, I think if you look at what we've done in the last year and a half, you can see that we have very deliberately looked to remix our revenue streams and balance our growth, both geographically and between organic and acquisition growth.

And we demonstrated a competency to be able to acquire companies that fit specifically into our strategic growth initiatives.

We expect that to continue.

And I think that if you couple that with the revised target operating model at $300 million and $400 million, it gives you a window into the kind of revenue goalposts that we're setting ourselves to achieve in a combination of organic and acquisition growth.

And we basically expect to do it in a way that will also allow us to continue to expand our margins.

So the answer is, yes, the pipeline is very robust.

We believe that our overall strategy is working well, both in terms of top line and bottom line.

And we believe that it provides us with significant differentiation in the marketplace because we are now the only provider of 3D content-to-print solutions with significant cross-selling and up-selling opportunities.

Thanks.

Is there anything in the pipeline that would be as large as Quickparts, $20-million-plus in annual revenue?

Well, in any given period we have smaller acquisitions and larger acquisitions.

And so it's safe to assume that if you look over a 12-month period there will be other acquisitions the size of Quickparts, or larger.

Jim Ricchiuti; Needham & Company

I was wondering if you could talk a little bit about the new products, the reception.

I know it's a little early yet, but generally what can you say about those?

And also, you added a bunch of new resellers, I think about 18 you said, in the quarter.

Yes.

How quickly do they ramp up for you?

Okay.

In terms of the new products, we have had incredibly good reception for the 3DTouch and for the ProJet 1500s.

Those are now in full commercial status.

And the early feedback and the reception has been tremendous, both on the part of our resellers who know what they're looking for and know a good product when they see it, and also from the early users.

The ProJet 6000 is, we think, a home run in the sense that there is just nothing like it.

It's the only crossover printer out there that delivers professional grade SLA parts with the resolution.

It's twice the speed of any predecessors.

And that one we believe is going to be a home run in healthcare manufacturing, in hearing aid manufacturing, and in general purpose mechanical CAD applications and dental.

In terms of how long it takes to add resellers and bring them fully up to speed, it's about a 90-day cycle to get them fully up to speed, effective in selling.

And our pipeline and our initiatives are to continue to increase our reseller network at this rate indefinitely.

Our goal now is to get the number of resellers all the way up to 250.

And we're making good progress.

We now have a well oiled machine in terms of how many resellers we can recruit and how quickly we can get them up to speed.

How many do you have now, Abe?

I believe that we are somewhere in the range on a net basis of around 170.

Okay.

Thank you.

Jim Bartlett; Bartlett Investors.

Just to follow up on the resellers, how would you characterize the resellers in terms of you have some of them that are just focused on the lower-end personal printers?

Yes.

That's correct, Jim.

We have a channel that focuses primarily just on personal printers.

Those comprise of V-Flash and Bits from Bytes.

And we have resellers that carry the full product line, personal and professional.

And the way that we do it is we keep those two channels distinct and we allow resellers periodically to expand their portfolio if their business model and aspirations converge with the qualifications that we require.

So we continue to recruit for both.

We think that it takes a different business model and a different skill set to sell the personal printers versus the professional printers and production printers.

But we allow the personal printer resellers over time to swim up.

And roughly what's the mix now?

It's predominantly full product, with the exception of about maybe 25 that are personal printer only.

Also, could you discuss the seasonality that you expect in custom parts?

It's hard to say how the seasonality works because it's driven more by new product development cycles and production cycles than any traditional seasonality.

And given the number of acquired service bureaus that we keep on adding, we don't have a good handle yet on the consolidated seasonality.

As we learn more about it we'll let you know.

And sequentially, the third quarter versus second quarter, were there any acquisitions in that number, of the $15.6 million, acquisition revenue?

Damon?

On the -- (inaudible) yes.

We purchased Formero with about 10 days left to go in the quarter.

So there's --

It would be just whatever part of Formero?

I'm thinking I believe that was (inaudible - multiple speakers,)

No, that, that would not have been material because we had it for less than two weeks.

So sequentially there was very strong growth there?

Oh, yes, we said that we had growth that was at least around the 20%, comparable to the overall organic growth year to date.

Thank you.

Thank you.

There are no further questions at this time.

I would now like to turn the call back over to Stacey Witten for any 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 at investor.3dsystems.com.

Thank you.

Thank you for your participation in today's conference.

You may now disconnect.

Have a great day.