3D Systems Corp (DDD) 2012 Q1 法說會逐字稿

(audio in progress) -- risk, 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 (technical difficulty).

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 which was filed on February 23, 2012.

At this time, I would like to turn it to 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 first quarter of this year and filed our Form 10-Q with the SEC.

This morning, Damon and I will recap our quarterly highlights and share with you several key accomplishments.

We will go over our financial results in more depth, including our non-GAAP results and reconciliation from net income and earnings per share and we will also update you on our progress, provide an outlook for the second quarter, and affirm our revenue and non-GAAP earnings guidance for 2012.

Let me begin by saying that I'm really pleased that we delivered another solid quarter of profitable growth, benefiting from our focus on well-executed growth initiatives.

We extended our revenue leadership position further on a 63% increase to an all-time Company record quarterly revenue of $77.9 million.

We grew our gross profit by 67% and extended our gross profit margin to 50% and generated $15.8 million of cash from operations.

We extended our printers leadership growing quarterly units 153% over the prior year and driving substantial print material growth that, as expected, contributed to a significant improvement in our operating income and earnings for the quarter, fueled by a 26% organic growth.

During the first quarter of this year, we extended our innovation and technology leadership further into new consumer and professional opportunities, including the Cube, our first-ever plug-and-play a home 3D printer and Cubify.com, the online destination to create and make; and the new ZPrinter 850 and ProJet 3500 professional 3D printers that we launched earlier this week.

We completed and fully integrated the Z Corp.

and Vidar acquisitions, delivered on all of our identified cost synergies, and put in place many of the required building blocks for future growth.

We're pleased that, on a quarterly basis, all of our revenue categories contributed to our growth.

Printer units grew 153% for the quarter, resulting in another all-time record quarter of printer revenue and units shipped as we continue to benefit from the timely and strategic realignment of our entire printer portfolio mix towards lower-price production, professional, and personal in-home 3D printers, coupled with the effective integration of Z Corp.

and Vidar printers into our portfolio.

Revenue from Print Materials amounted to a record $24.7 million for the quarter on a healthy printer unit sales increase to manufacturers and consumers alike, underscoring the power of our growing installed base and the effectiveness of our unmatched printer portfolio performance and price points.

We're pleased that our Services revenue for the quarter increased by $9.8 million over 2007 to $28.5 million and included $17.7 million of on-demand parts revenue from acquisition activities and the organic growth of these acquired businesses.

We're very excited that Healthcare revenue, our fastest-growing vertical, continued its rise, growing some 93% over 2011 to $12 million.

Consistent with our expectations, we extended our gross profit margin and net income on record growth in both revenue and units.

At the same time, consistent with our targets, we improved our employee productivity another 12% as measured by our net income per employee, notwithstanding the temporary adverse effect that recently-acquired businesses had on our overall productivity.

Although we had a great quarter and were able to expand our non-GAAP adjusted net income by 62% over 2011, the concentration of restructuring costs from larger acquisitions during the quarter reduced our net income for the first quarter of this year as we absorbed the acquisition and integration costs and operating expenses over the acquired businesses.

We believe that, as we continue to systematically take costs out of our recently-acquired businesses, we will see a corresponding increase to our net income and profitability.

As we increase our R&D investments to support our portfolio expansion and diversification, we continue to closely monitor the effectiveness of our R&D expenditures and their contribution to our profitable growth.

We're thrilled that our new product revenue grew 53% to $23.9 million for the quarter, up from $15.6 million in the 2011 period.

Just as a reminder here, we track new product revenue only for the first three years of the product commercial life.

Of even greater significance, our integrated Print Materials revenue increased 101% over 2011 -- over the quarter, 2011 -- and amounted to 63% of total Print Materials revenues for the first quarter of this year, including the acquisitions of non-integrated (inaudible) print materials and integrated Z Corp.

print materials.

We firmly believe that our sustained integrated materials growth, coupled with the fact that materials is 32% of total revenue, contributed 43% of our gross profit, validates our strategic direction and our emphasis on recurring revenue, which amounted to 68% of total revenue for the first quarter of this year.

By comparison, revenue from acquisitions grew to $17.5 million, reflecting the fact that within our balanced growth strategy new products and integrated print materials continue to fuel our organic growth and underscore the effectiveness of our R&D investments.

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

Damon?

Thanks, Abe.

Good morning, everybody.

First-quarter revenue increased 63% over the 2011 quarter with a gross profit improvement of 67%, primarily driven by the increased revenue across all categories with a larger portion of revenue from higher-margin Print Materials and an improvement in gross profit margin of our on-demand part services.

This is combined with a printer mix shift toward lower gross profit margin personal, professional, and production printers.

On a non-GAAP basis, our total operating expenses increased to $21.9 million but declined to 28% of revenue, reflecting a rise in compensation costs driven by sales commissions from increased revenue and the operating costs of the newly-acquired businesses.

Specifically, our first-quarter operating expenses included a $7.3 million increase in compensation costs primarily from higher commissions on increased revenue and from the higher concentration of new acquisitions and $2.4 million of acquisition, integration, and restructuring costs.

We expect these costs to translate to future annual cost savings of $5 million to $5.5 million, which is already reaching the level of our guidance on estimated combined revenue and cost synergies -- cost saving synergies of $5 million to $10 million.

Our quarterly expenses also included a $2.1 million increase in R&D expenditures were primarily driven by new product development and acquisition-related R&D expenses.

As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $13.2 million and earned $0.25 per share tax affected.

On a GAAP basis, we earned $0.12 a share for the year -- for the quarter.

Record Materials and Services revenue more than offset planned printer mix shift towards our lower-priced printers on continued record demand of our personal, professional, and production printers.

As a reminder, we report non-GAAP adjusted results that exclude the impact of amortization of intangibles; non-cash interest expense; nonrecurring acquisition and severance expenses; stock-based compensation; and any release of portions of the valuation allowance on deferred tax assets.

Please note that our total depreciation costs and our senior convertible note cash interest expenses in connection with these acquisitions are appropriately included in our non-GAAP presentation.

For your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide as well as in our 10-Q filed this morning.

As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $13.2 million, or $0.25 a share, for the quarter.

The excluded items aggregated to a $7 million tax affected adjustment to GAAP net income worth $0.13 per share.

We call your attention to the fact that we have $39.2 million of net operating losses remaining, of which $8.5 million are available for future release.

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

Our reported tax rate for the quarter was 15% and consistent with previous guidance, we expect our cash tax rate to remain in the range of 3% to 5% notwithstanding the fact that we expect our annualized effective tax rate for the full year 2012 to be in the range of 20% to 22%.

For clarity, these rates are already reflected in our annual guidance which I will cover in more detail shortly.

Reflecting on our continued strong revenue growth, we believe that our results are consistent with our strategy to remix and diversify our revenue streams and in line with our expectations.

In fact, quarterly recurring revenue amounted to 68% of our total revenues with Print Materials contributing over $24 million and Services exceeding $28 million.

Quarterly printers revenue increased by $11.2 million, reflecting production printers revenue of $7.4 million and personal and professional printers revenue of $16.9 million led by sales to healthcare, transportation, and education customers.

Personal and professional printers revenue increased 230% over the comparable quarter, and the decrease in production printers revenue reflects the impact of our continued realignment of printer price points across our entire portfolio with lower-price printers, which are capable of producing annual materials consumption comparable to our higher priced production printers.

On a unit basis, production printers units increased 11% in the 2012 quarter compared to the 2011 period.

Z Corp.

and Vidar added $12.4 million of revenue for the quarter.

Geographically, we experienced stronger growth in North America aided in part by the acquisition of Z Corp.

and Vidar, which had higher revenue in North America.

Despite ongoing regional economic uncertainties, we experienced sustained growth from both our European and Asia Pacific regions, which remained at similar percentages of total revenue amidst a substantial increase in our North America revenue that also included growing on-demand part services revenue.

Sales into Germany and other European marketplaces remain strong.

For the first quarter, gross profit improved some 67% over the 2011 quarter to $38.9 million.

Our gross profit margin for the quarter expanded primarily from the combined effect of expanding Print Materials' gross profit margin some 460 basis points and continuing to expand on demand parts gross profit margins coupled with a larger portion of revenue from Print Materials.

Consistent with our planned printer portfolio realignment, quarterly printer gross profit margin decreased compared to the prior period on record unit sales but was more than offset by our Print Materials' gross profit increase of $6.9 million, or 69%, on a revenue increase of 58%, primarily benefiting from favorable mix towards our higher gross profit integrated Print Materials and from the addition of higher-margin rent shape and Z printer materials required in the fourth quarter of 2011 and first quarter of 2012.

Our Services gross profit of $12.5 million included printer services, on-demand part services, and consumer solutions services.

Services gross profit margin expanded 220 basis points over the prior-year period.

As you can see, we are making steady progress towards our target gross profit margins and over the past eight periods we have increased our consolidated gross profit margins from 45% up to 50% for the first quarter of this year.

Consistent with our past practices, for discussion purposes, we have rounded our results to the nearest percentage point.

As you can compute, gross profit margin for the quarter amounted to 49.9%.

Going forward, as our business has increased in size substantially, we plan to present our results to the tenth of a percent.

Our gross profit margin progressive trend displayed on this chart supports our expectation that, in periods of higher acquisition concentration, we gave up some margin ground.

But we were quickly able to recover and resume our margin expansion trend in the following period.

We generated $15.8 million of cash from operations in the first quarter of 2012.

We ended the quarter with $60 million of cash, which was a decrease of $119.1 million since the end of 2011.

But on January 3, we paid $140.3 million for the acquisition costs of Z Corp and Vidar.

Excluding the senior convertible notes proceeds from the cash balance at the end of 2011, cash increased $26.3 million since the end of 2011.

While we accrue interest expense each quarter for the senior convertible notes, cash interest is only paid semi-annually in June and December.

Although we expect to continue to report strong cash generation from operations, the quarterly amounts may fluctuate from period to period.

Working capital decreased by $113.4 million primarily due to the decrease in cash, a $9.9 million increase in Accounts Receivable from higher revenue, and a $9.6 million increase in inventory, primarily due to the addition of Z Corp ZPrinter and Vidar inventory to support their ongoing business and the timing of inventory purchases, while Accounts Payable increased by $7.2 million due to additional payables acquired with Z Corp and Vidar and the timing of vendor payments.

Based on our performance to date, we reaffirm our 2012 guidance that we previously announced.

As a reminder, management expects revenue to be in the range of $330 million to $360 million, inclusive of the recently-completed Z Corp and Vidar acquisitions, and non-GAAP adjusted earnings per share to be in the range of $1 to $1.25 per share.

Management believes that these ranges correspond to adjusted net income between 16% of revenue and 18% of revenue, which depicts earnings power expansion potential in the range of 25% to 55% over our 2011 non-GAAP adjusted results, reflecting our expected continued P&L leverage, consistent with our long-term targets.

Our non-GAAP adjusted earnings estimate is fully tax affected.

It includes management's anticipated incremental expenditures related to Cubify and expected litigation costs as we understand them.

It also includes all planned restructuring and other costs in connection with the integration of our recent acquisitions which we substantially completed during the first quarter of 2012.

As a reminder, our non-GAAP earnings exclude acquisitions and severance expenses, non-cash interest related to our outstanding senior convertible notes, non-cash stock-based compensation expenses, intangibles amortization and any release of the valuation allowance on our deferred tax assets.

I'd also like to remind you that this guidance is based on current plans and assumptions, is subject to risk and uncertainties more fully described in the Company's reports filed with the SEC.

That concludes my comments.

Abe?

Thanks, Damon.

During the first quarter, we successfully completed the acquisition and integration of Z Corp and Vidar and were able to deliver on all of our anticipated cost synergies.

We've taken steps to re-energize these product lines and are already seeing positive results from these -- from our decisive action.

We believe that the resulting complementary product and services portfolio, together with the differentiated channel combination we created in this process, is unmatched and uniquely positions us for accelerated growth in the rapidly-growing 3D content print space.

We also unveiled our first-ever true home 3D printer with the Cube, an affordable, simple to use 3D printer for children and adults alike priced at $1300.

We are taking pre-orders for the Cube printer and expect printer shipments to commence late in May.

We also announced Cubify.com, a unique, online destination where artists, designers, kids and makers can sell their 3D designs and anyone can download, customize, and 3D print.

Cubify provides a powerful platform for individuals combining [epilike] content and App Store delivery and monetization with Facebook-like social connectivity to deliver the most intuitive and fluid 3D create and make experience available today.

We believe that represents significant untapped marketplace opportunity to monetize 3D content to print by consumers and professionals alike.

Cubify went live from beta in April, concurrent with the launch of our Cube Odyssey, a 25-city tour in the US with Cube printers creating and making in a customized nascent Cube car making stops at various events, children's museums, and schools to spread out the magical qualities of this new capability.

In the last few weeks, we acquired My Robot Nation, a consumer technology platform that provides intuitive, game-like content for integrating into Cubify.com.

We also acquired Fresh Fiber, which designs and markets innovative 3D printed accessories for retail consumer electronics, and Paramount Industries, a leading rocket manufacturer for aerospace and medical device companies with comprehensive design to production services and certified end-use parts.

These acquisitions fit well into our consumer and on-demand parts and services growth initiatives and bring to our Company significant technology and channel building blocks.

Since the beginning of this week, we launched three new products.

On Monday, we announced the immediate availability of our new ZPrinter 850, the largest format ZPrinter with higher print volume, greater productivity, and vibrant full-color that empowers designers, engineers and architects to create more and larger CAT parts faster.

We have doubled the print volume of our best-selling ZPrinter 650 in the same premium color printability, the ZPrinter 850 is the only high-speed, large format printer for professionals that need to create more at every stage of the design and development process.

Tuesday, we announced the immediate availability of the Vidar NDT PRO, a new nondestructive test x-ray film digitizer answering the call for effective aerospace, defense, and energy product and plant testing and compliance requirements.

The Vidar NDT PRO provides an affordable, precise and automated imaging solution for nondestructive test records using Vidar's next-generation proprietary digitizing technology.

Finally, yesterday, we announced the immediate availability of our next generation ProJet 3500 Professional Series 3D printers.

The ProJet 3500 comes in eight configurations with nine new performance-tailored visages print materials than deliver a greater user ease of use with enhanced high definition printability and performance, functional prototyping, investment casting patterns for healthcare, automotive, and aerospace manufacturing applications.

The ProJet 3500 printer incorporates our latest patented multi-jet modeling printer technology, including our production grade printhead, advanced material management, and intuitive touchscreen interface to produce high-definition functional plastic parts and wax patterns with unmatched performance, detail, and surface quality.

The extended range of new visages print materials available for the ProJet 3500 cover the widest array of customer applications, including high-impact durable plastic for functional testing; CAT-family wax for rocket foundry production; and specialized, tailored materials for the digital production of jewelry, dental prosthesis, dental models and medical implants.

The ProJet 3500 is the only printer on the market that come with a five-year printhead warranty that saves thousands of dollars in annual customer operating costs compared to other alternatives.

We expect these three new products to contribute to revenue immediately, starting in the second quarter of this year.

Finally, for the outlook, we enter the second quarter of this year with positive sales momentum that is augmented by over $9.6 million of backlog.

We deliver an unmatched blend of professional and consumer products and services through unparalleled field deployed at online channels that are delivering improved performance and results.

We believe that the marketplace for our professional and consumer 3D content-to-print products and services remains underdeveloped and under-penetrated.

We expect that our portfolio diversification, growing geographical presence, and focused growth initiatives will deliver continued success.

Finally, we believe that we're extremely well-positioned to benefit from extending rocket manufacturing and emerging maker and consumer opportunities.

With that, we will now gladly take your questions.

Stacey?

We will now open the call to questions.

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

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

The telephone numbers are provided again on this slide for reference.

(Operator Instructions)

(Operator Instructions).

Jim Ricchiuti, Needham & Co.

Thank you.

My question is on the margins in the quarter, both product and materials.

The product gross margins showed some nice improvement sequentially.

It looks like up about 300 basis points.

Is there anything seasonal with respect to product gross margins?

You started out last year with stronger product gross margins.

We saw that tail off a bit as we went through the year.

Is there anything -- any seasonality to that?

Or do you think you can maintain the product margins at these levels?

Then secondly, on materials gross margins, again, you are at a very high level.

Given the mix now toward integrated materials, is there any reason why you won't be able to maintain your materials margins at these levels?

Thank you.

Okay, let me start and then I will ask Damon to add some comments.

Let me start with materials, Jim.

We believe that we still have upside to our material gross profit margin expansion journey.

It's a reflection, as you correctly pointed out, of the growing portion of integrated materials into the mix, which has been the strategy all along.

I think we see it play out from period to period.

So we expect that as the mix continues to change in favor of more integrated Print Materials, our gross profit margin on materials will continue to expand.

With regards to product margins, the setbacks that we have had in prior periods where we gave some ground on gross profit margin came primarily from concentration of acquisitions.

You can see that bouncing back in subsequent periods as we integrate and expand the margins of these acquired businesses.

We certainly have been deliberately managing over quite a few products now the remixing of our entire portfolio, including production printers, personal, professional printers and creating additional price points, giving up some margin on the product side but more than offsetting it with the significant expansion in materials.

Damon, do you want to add anything to --?

One instance with Q1 here also Abe had mentioned was that we were slowed in the quarters of acquisitions, one of the reasons why is the acquisition accounting that needs to get done, any backlog that was in prior to the acquisition.

We actually take a haircut on the profit, so you don't realize all the profit from that because you take out the benefits of the selling.

It's purchase accounting.

So in fact, this quarter, our gross profit margin was negatively impacted by about 0.5 point, just due to the acquisition accounting which we expect to get back in the future.

So in answer though too, especially the product is not seasonal.

It's more in line with the business flows and introductions of products and acquisitions of companies.

So Damon raised a very important point here, Jim, that for the first quarter of this year, our consolidated gross profit margin was actually understated by this 0.5 percentage point as a result purely of the acquisition accounting.

That will come back in subsequent quarters.

Okay, thanks very much.

I'll jump back in the queue.

Ben Reitzes, Barclays.

Thanks.

I wanted to ask you about backlog.

The $9.7 million figure compares to $8.3 million at the end of last quarter.

Does -- what is that without Z Corp and Vidar?

Was the $8.3 million you reported last quarter, was that inclusive of Z Corp and Vidar, or is the organic backlog from the pre-existing business down Q-to-Q?

If you could explain that, thanks.

Good.

Last quarter Z Corp and Vidar was not in the backlog.

We did -- we hadn't completed the purchase at that period of time.

This quarter, it's a very small amount that is associated with Z Corp and Vidar.

And so I would say one of the things that has happened, we had a large order that we've announced from the last couple of quarters before this of a large production print to order that was being delivered over future periods.

A number of that was delivered through Q4 but ended into Q1, which came out of the backlog number.

But I believe organically we are close to the same if not just above where it was for last year.

Z Corp and Vidar make a smaller amount of it.

Which is unprecedented, then, typically on a sequential basis.

There are a few interesting and unprecedented developments here.

One is that typically on a quarterly basis you would have expected to exit the first quarter with lower backlog than the fourth quarter.

Similarly, unprecedented to have significant sequential growth in Print Materials from a fourth quarter to a first quarter, we need both.

So we view those as very favorable trends.

Yes.

Okay, and just another clarification on the Z Corp, Vidar.

What was their contribution to the three segments?

You said $12.43 million in revenue.

Are you able to break that out across the segments, just so we can see how they are impacting by printers, services, and the other category?

We can.

I don't have that right in front of me.

I think we can pull this and give the answer to the question in a couple of minutes.

That would be great.

Just to see the impact.

Thanks.

Thank you.

Jim Ricchiuti, Needham & Co.

It looks like your operating expense levels now are at perhaps higher levels than maybe some of us were thinking.

Just in terms of year R&D spend, any reason why that would go down from these levels, or do you think, with the new products that you're planning, it will be at these levels?

Then with respect to SG&A, the $2.1 million of acquisition severance expense that was in SG&A, do you expect any additional acquisition-related expense in Q2?

Again, it looks like your OpEx is at a higher level.

Yes, the actual amount, Jim, was $2.4 million.

That was for the acquisition and severance-related expenses.

That was all recorded and it was recorded in SG&A.

The tail that we have wouldn't be more than another $100,000 or so, which is still within the range, the $2 million to $2.5 million that we've given.

In this quarter, not only did we have that expense, but we also didn't have any of the expense savings in the quarter associated with those, which we say will result to another $5 million to $5.5 million going forward.

That's without other cost savings and synergies we expect to get out of this, moving forward that, might not have as much costs associated with them.

So we do expect our SG&A number to not reflect that $2.4 million.

Also, in that number, if you look at it, there's $3.5 million of intangibles expense, which is a non-cash expense.

So I think that number might be a little higher than some people have expected it to be, too.

Got it.

Damon, just to clarify on the tax rate, you're now assuming a reported rate of 20% to 22% for the year?

For the year, we still -- and that will still ramp through the year, so I don't expect to go there.

We were 15% in Q1 and I expect it to ramp through the year to 20% to 22%, which I believe is very consistent with our prior guidance.

But our cash tax rates still remain in that 3% to 5% even into next year, not just this year.

Okay, thank you.

So Jim, just to recap, on R&D, given the expanded portfolio and the professional and consumer and rocket manufacturing initiatives, we expect R&D spending to remain at the higher level because we think that, for a company of our size, given the near-term and the midterm opportunities, it is the right action to take.

But on the SG&A, I think that we will begin to enjoy the savings from all the charges that we've taken in the first quarter.

Just to reiterate, we believe that we have already taken all the required steps to realize the $5 million to $5.5 million of costs down from the Z Corp and Vidar acquisition, which puts us already in the range of the $5 million to $10 million of synergies which are going to come from a combination of cost-downs and revenue.

Okay, thank you.

Brian Drab, William Blair.

Can you just give an update on the reseller network?

How many resellers are you at today?

And also, can you just remind us what the growth was in resellers, maybe where were you in terms of number of resellers at this time last year compared with where you are today?

Then finally, how much runway do you think there is left in terms of building out your reseller network?

Okay, so a year ago this time, we were probably at about 100 to 110 resellers.

We exited the first quarter of this year with about 330 resellers, partly because of the addition of Z Corp resellers into the mix.

We spent the first quarter of this year as we will spend the second quarter in conversion and training of our combined 330-strong network of resellers and making sure that they are all up to speed with the combined and complementary portfolio of printers.

Beyond that, our expectation, Brian, is to continue to expand the reseller channel.

We have the most comprehensive portfolio of personal, professional and production printers.

It's going to expand even further, both in terms of capabilities, price points, and tailored end-use applications.

So our -- we believe that, for the next few years, we have basically an open-ended opportunity to continue to expand and segment the channel as we expand our portfolio of products and services.

I should also add, Brian, that we are significantly expanding our on-line channel as well and leveraging our unique on-line technology across multiple product lines.

Can you elaborate on that last point a little?

Are you talking about Quickparts, primarily, or Cubify.com?

Or which is the biggest opportunity there?

Well, it's both.

We basically have successfully integrated what we call the Qsoft technology that came from Quickparts into other online reselling opportunities such as our RapMan, 3DTouch, and of course now the Cubify.com opportunity.

Also, that is coupled with our outbound high-touch capabilities that come with it.

We expect that to continue to offer us differentiation in our channel strategy.

Okay, and then just one more.

Could you give us a break-down within the product, printer and product category, between -- can you give us a sense for what percentage of that was accounted for by 3D printers, lower-end systems versus higher-end production systems?

I think that we -- Damon said earlier that production systems expanded some 11 percentage points or grew 11% for the quarter.

Personal and professional was -- how much?

$[0.9] million.

213 --

230%, yes.

So personal and professional up 230%, production printer up 11%.

In terms of -- I was thinking more in terms of a breakdown of the -- what percentage of your product revenue was accounted for by low-end printers and what percentage by the higher end?

Even just roughly?

Well, I think we said $7.4 million was production printers --

Yes.

-- and $16.9 million was personal and professional.

Okay, got it.

Sorry if I missed that.

Thanks a lot.

Just to answer Ben's question earlier, the breakdown of Z Corp and Vidar revenue by category, printers was about $5.9 million; materials, $4.3 million; and services, $2 million, for the $12.2 million in total.

Ben Reitzes, Barclays.

Speak of the devil.

Or the angel.

I wanted to ask you a question about organic growth.

You mentioned 26% in the quarter.

So I back into, excluding Z Corp, Vidar, I get $5.3 million from other acquisitions.

I was wondering if that was accurate.

Then I was wondering if you could just mention what you think your organic growth rate would be for the rest of the year, roughly.

I'm not sure about the comment from other acquisitions.

As you know, we've been very conservative in how we count organic growth.

And so for the first year of any acquired business, even if that acquired business grows organically, we count all of it as growth from acquisition.

And so when we look at the organic growth for the first quarter at 26%, it's still, if you will, understated because it doesn't count organic growth from acquired businesses for the first year.

In terms of expectations for the full year, we've given our guidance on revenue for the year, which includes Z Corp and Vidar, to be at $330 million to $360 million.

It excludes any other potential acquisitions that may or may not occur for the balance of the year.

So it basically gives you a representation for the kind of growth that we expect for the remainder of the year.

That's over 20%, though, if you back into it, right?

I think you can do the math.

Yes.

Your math on just the over $5 million of the other non-organic acquisitions -- we just did the math again, that is about right.

Okay.

Okay, great.

Then I wanted to -- let's see, I had one more question here I was going to clarify with regard to the share count for the year, just a clarification.

Is there a share creep throughout the year in terms of our modeling?

It was just a little higher than we had modeled.

It's probably our fault there, but -- or is that pretty stable?

Is there share creep --?

For what we have guided to, it's stable because it doesn't include anything else if we did any other acquisitions or anything.

It also, at this point, does not include the anticipation that the convert would be counted as diluted.

But if it does get counted as diluted, it adds to the share price, but then your interest expense gets reduced by the amount, too, so --.

Got it.

I remember my other question.

I was wondering if you guys had any basic question -- basic views on the Stratasys Objet deal and how that could impact the industry.

Any comment is welcome in terms of what it would mean for pricing, competition, what it means for the sector.

That's my final question.

Thanks.

In terms of the combination of Stratasys and Objet, we view it as a positive development in the space.

We think that it's going to make it a more compelling and mature space in terms of behavior and development.

We have been successfully competing with and outpacing in growth each and every one of them independently, so we think it will be interesting and exciting to compete against them as a joint entity.

From an opportunity perspective into manufacturing and consumer, we think that we are much better positioned and nothing really changes through the combination of these two entities.

From a number of printer units sold perspective, we think that we will continue to maintain a growing lead.

We expect that to continue.

From an overall content-to-print portfolio point of view, we think that we are unmatched.

In fact, the fact that they are combining underscores the validity of what we've been saying for quite some time, that this is more of a toolbox solution selling exercise.

To succeed in this content-to-print space, companies need multiple print engines.

I think, as pure-play print engines, these two entities got what they got, but to grow they recognize they need to combine.

We view that as taking a page out of our playbook.

And it's validating our strategy.

So we wish them luck.

Thank you very much.

Troy Jensen, Piper Jaffray.

Abe, I was wondering if you could spend some time and talk about your service bureau business.

I guess what I'm trying to figure out is maybe number of machines, maybe square footage of your capabilities now.

Then specifically, what percent of the revenues are coming from additive -- SLA, SLS or other 3D printers, versus other traditional manufacturing -- C&C and injection molding?

Okay, so we have multiple on-demand part facilities in the United States, in Europe, and in Asia-Pacific.

I can't give you a specific count of how many systems we have deployed worldwide, but it's probably well over 100 production printers that are deployed in our various facilities.

It's a business now that has been integrated onto this proprietary Qsoft platform that manages the business as a homogeneous and cohesive business with fulfillment facilities throughout the world.

It's growing nicely.

We're very pleased with it and the margins are expanding consistent with expectations and we expect them to continue to expand.

It is still predominantly an additive business, although we are opportunistically expanding it in other secondary downstream operations.

We have a growing urethane casting operation.

We have all along operated a plaster molding foundry and some C&C machining, rocket tooling, and injection molding, which we see as a continuation of playing a vital role for all of our customers' design to manufacturing needs.

So any future needs to ramp up square footage here?

Or is the acquired footprint that you have been buying enough square footage for quite some time?

We have been making nice and steady investments within the acquired footprint, so we've made substantial investments in our Lawrenceburg and Seattle facilities over the last two years.

We recently announced the expansion of our Italian facility, which came on press release recently.

We have done -- we've taken similar steps in our Australian, Melbourne facility.

So in terms of square footage, we think that we're adequately covered.

In terms of adding capacity within that square footage, we do it on a quarterly basis.

A very kind of success-based model.

As business ramp, you add machines as needed.

Yes.

All right, perfect.

Good luck going forward, guys.

Thank you.

Jim Ricchiuti, Needham & Co.

A question just relates to what you're seeing out there just from a standpoint of overall demand in the different geographies, just based on some of the concerns people have about Europe.

Again, it's hard to tell with the acquisitions, but maybe you can characterize that.

And also, looking at the healthcare business, which is showing very, very strong growth, and I'm wondering if you would comment on that, if it's being driven largely by materials revenue, or if you're also seeing a decent amount of demand from equipment?

Thank you.

Sure, absolutely.

So starting with geographical performance, there's no question that, for the first quarter, North America outperformed Europe in growth, benefiting substantially from the acquisition of Z Corp and Vidar and the strength of the overall channel, because certainly, in the case of Z Corp and Vidar, they had stronger sales presence in North America than outside of North America.

However, notwithstanding this shift in our revenue generation composition, Europe performed extremely well.

Given our stronger European presence relative to the historical Z Corp organization, we expect an upside in Europe for the remainder of the year as the entire channel gets up to speed.

We expect Asia-Pacific to continue to perform well for us as well.

In terms of healthcare performance, actually, it's both.

We've had a steady increase in the number of systems that have been placed into healthcare applications.

We are enjoying a corresponding healthy increase in print material consumption rates.

Is the increase you're seeing in equipment sales into that market, is that coming from primarily increased sales to existing customers, or are you winning new business?

Just trying to get --

We're winning new business.

We're expanding the range of applications, so we're gaining more ground in dental applications.

We're gaining more ground in a variety of orthopedic related applications.

Some of our existing customers are also enjoying growth.

We benefit from that, as well.

Of course, remember that we also have a Vidar component now in our healthcare solutions, although even absent the Vidar component, we've done pretty well.

Yes, I was just going to say that it was -- Vidar contributed about 12%.

So we did 81% increase if you took the acquisition out of it and then Vidar brought it up to the 93%.

Yes, it remains -- Jim, healthcare remains our fastest-growing vertical and we remain very bullish on it.

Also, is it fair to say you're among your more profitable verticals?

Yes.

Thank you.

(Operator Instructions).

Jim Bartlett, Bartlett Investors.

Yes, could you discuss where you are in training in the channel, both domestic and overseas?

And then I have another question.

Yes, sure, Jim.

We have successfully converted and trained more than half of our combined channel over the first 90 days since the acquisition.

We expect to carry out the balance of this activity throughout the second quarter.

Also, on the 3500, could you compare more specifically how it is different from the 3000 series?

It is really a completely new platform in terms of its architecture and its capabilities.

So it brings to -- it's new technology platform that brings to their enhanced material delivery and management system, enhanced printability capabilities, which would translate not just only in the immediate term into what we are doing today but will become a platform from which we will be launching additional capabilities in the coming periods.

So it's a new generation.

It's a new technology infrastructure.

It's comes with immediate end-user benefits in terms of automation, user interface, printability, robustness, reliability, and most importantly, the tailor-made range of materials and quality of feature, detail, and output within these materials that is unprecedented.

But more importantly, it's a platform from which we will be launching additional capabilities in the coming periods.

But it is the same printhead technology?

It's the same printhead technology, but it has more hopes in it for future and performance capabilities.

One last question, Damon, what was the headcount at the end of the quarter?

Headcount, I don't think we have that number right in front of us right now.

Obviously, it increased due to the acquisitions.

I still think it's right around 900 --

It's in the range of 900, Jim.

We will dig up the precise number for you.

Finally, more better understanding of the Paramount acquisition, what really was key to making this purchase?

Well, the key is our ongoing and strong interest to enable, capitalize, and penetrate real manufacturing opportunities in aerospace, defense and medical device, and the unique capabilities that Paramount brings to bare, both in terms of their material development experience, machine technology development experience, manufacturing of certified aerospace and medical parts capabilities, and their substantial connections and involvement, reputation, and credibility within the defense and aerospace community.

Are they one of the larger players in what they do?

They are a significant player within what they do.

They are one of probably very few that have been recognized as a leader and innovator with the reputation to match, and with the connection and opportunities that correspond with that kind of reputation.

Thanks.

Cliff Ransom, Ransom Research Inc.

I was beginning to despair I would ever get in the queue.

Can you talk to us, please?

Did you have an opportunity to look at the Objet transaction or was it a negotiated deal between them and Stratasys?

We can't comment on that (multiple speakers).

That's fine.

Do you believe that your limit to acquisitions, because you've been on quite a tear, is financial or managerial?

Do you have a span of control in your existing management forces to keep up that pace and still maintain, through the transitions, the transformations that you need to make, the integration that you need to make?

We believe that it is manageable.

Let me share with you that within the first 90 days post the Z Corp and Vidar acquisitions which have been the most sizable ones to date in the last 2.5 years, we fully integrated it.

We are on track with new product introductions -- not only did we integrate the acquisition, identified and delivered, in essence, all of the cost savings that we expected and integrated it fully into our Oracle system transactionally and otherwise and we were able to do it all, including the acquisition accounting in the current period, we also managed to introduce several new products into that business unit, if you will, one from the ZPrinter side and one from the traditional 3D Systems side, and managed to, immediately after the quarter closed, make a few other acquisitions as well.

I think that is a tribute to the kind of bandwidth and disciplined system that we have in place.

We expect to be able to continue to do that going forward and to do it well while delivering the added earning power that comes with it, which we also have been able to do.

So the answer is we think that we have the discipline; we have the proven systems.

More importantly, we have the experience of having done several dozens of these, large and small.

We certainly have the bandwidth to continue to do it and to do it well as this space continues to explode.

When you look at Cubify, do you expect -- who is going to be the biggest users of it?

Will it be artists, designers, kids, production people, makers, what?

Who is your biggest target audience?

Our biggest target audience is kids.

We are taking all the steps to remove all of the remaining expert user friction that stands between us and kids, which is why we are so excited about the gamification of content creation experiences.

I like what we are doing with My Robot Nation, which is a gamification technology platform that could fit into any geometry, so it could be My Barbie Nation, or it could be My GI Joe Nation, or it could be My Tennis Racket Nation.

And so by gamifying and democratizing and making it fun and engaging for kids, we're going after kids.

Our thesis, Cliff, is that if we get the kids, we will get everybody else.

Makers are interesting and important to us, and we have solutions for makers as well, but on Cubify.com, we want to make sure that, when people download something, it's readily printable and that they have the trust and confidence that everything they will do on Cubify will be printable and will give them an amazing experience.

Okay.

Then one last question, please.

If you had a choice in your acquisition hierarchy, which you rather buy service bureaus, new products, new technologies?

You've got a lot of ways you can expand.

You're still a relatively small company.

Where is your highest priority?

Please don't say all above the above (inaudible).

I think that we have been taking these in waves in accordance with our growth initiatives.

So we started the journey by doing a series of service bureaus and to build up the core business and the critical mass.

We're continuing to do this now more on an additive basis to add capabilities like we did with Paramount and also to add geographical coverage and expect that to be ongoing.

In terms of print engine technology, we've done a few of these.

There isn't much left out there that we need at this point in time in terms of print engine technology.

So those are substantially under our belt.

In terms of other content-to-print technology building blocks, expect that to be ongoing as well, because our aim at the end of the day is to create seamless user integration all the way from content to print.

Democratization to us is not just about price points for the active device.

It's about seamless content, creation to print, because therein lies, in our mind, the key to accelerated adoption.

Then the last question is, 20 years ago when I got involved with this company for the first time, I used to say the Holy Grail was in mass production, i.e., making parts.

The thought was that we would start with making cores and then ultimately, particularly with the invention of new materials and the ability to center a variety of metals and alloys, where is that in the hierarchy today?

Well, we think -- and if you read the various economists' articles, you'll see that they believe as well -- we think that the Holy Grail is in mass individualization and mass customization, and that's the direction in which the world is moving.

So we certainly see opportunities on the manufacturing floor.

That's why we're excited about adding companies like Paramount into the mix, because it comes with a lot of capabilities that could accelerate our penetration into bona fide aerospace, medical device, automotive applications.

But we really see two Holy Grails now.

One is in mass individualization of manufacturers' goods and potentially re-localization of a lot of that activity.

The second is in unleashing the creativity of consumers by removing all the friction and allowing anybody to create and make in 3D.

Thank you very much, sir.

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.

Thank you for joining us today and for your continued support of 3D Systems.

A replay of this webcast will be made available after the call on the Investor Relations section of our website, investor.3DSystems.com.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.