3D Systems Corp (DDD) 2013 Q1 法說會逐字稿

Good morning.

Welcome to the 3D Systems conference call and audio webcast to discuss the results of the first quarter 2013.

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

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

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

Please 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; and Damon Gregoire, our CFO; and, Andrew Johnson, our General Counsel.

The webcast portion of this call contains a slide presentation that we will refer to during the call.

Those following along on the phone, who wish to access the slide portion of the presentation, may do so via the web at investors.

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's a five-second delay and that you will not be able to pose questions through the web.

Before we begin the discussion, I'd 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 fact.

All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described on this slide.

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.

As a result, we cannot guarantee future results or performance, and past performance is not necessarily indicative of future results.

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

We undertake no obligation and do not intend to update these forward-looking statements.

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 February 25, 2013.

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

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

Let me begin by saying that we are very pleased to report record quarterly revenue and gross profit on higher printer units.

This morning, Damon and I will recap our quarterly highlights, we will go over our financial results in more depth, update you on our progress, and provide an outlook for the remainder of this year.

Our revenue grew 31% from the prior year, to $102.1 million on a 61% increase in printers and other products, and 22.1% overall organic growth.

Gross profit increased 38%; and gross profit margin extended 250 basis points to 52.4%.

Successful new products, key acquisitions, and expanded channels contributed favorably to our quarterly results.

Since the beginning of this year, we launched quite a few exciting new products, including several printers and powerful design software tools, between the engineers desktop empowering designers to create and print without limitation.

Our new Cube and CubeX 3D printers, that we launched at CES 2013, enjoyed favorable marketplace reception and sales of these printers continue to be at the top end of our expectations.

In January, we also commercialized eight new models of our Next Generation Project 3510 3D printers, that deliver greater productivity, higher definition printed parts, and an enhanced user experience.

We also completed the acquisition of Geomagic, a leading provider of design modeling, sculpting, scanning, and inspection software tool.

We believe that our performance reflects the strength and innovation of our diversified portfolio, the productivity of our channels, and the effectiveness of our strategic initiatives.

For the first quarter of this year, all of our revenue categories contributed to growth.

3D Printers and Other Products revenue increased $15 million to $39.7 million.

Print Materials revenue grew $4.1 million over 2012 to $28.7 million and Services revenue rose $5.1 million over 2012 to $33.6 million.

Healthcare Solution revenue contributed $14.1 million to our total revenue on moderate growth as a result of timing of printer sales.

We expect the overall Healthcare growth trajectory for the full year to remain robust.

Our New Product Introduction Plan is off to a great start, and consistent with that, we increased our R&D spending by 32% to a total of $6.5 million for the first quarter of 2013.

We are thrilled that revenue from New Product grew 60% to $38.3 million, and believe that our results reflect the effective R&D investments that's still effective in timely productions of new product.

We expect 2013 to be our most exciting new-product-introduction year ever.

And as a reminder, we track New Product revenue only for the first three years of the product commercial life.

With that, I will now turn the discussion over to Damon for a more detailed look at our financial performance for the first quarter.

Damon?

Thanks, Abe.

Good morning, everyone.

First quarter revenue grew 31% from the prior year to $102.1 million.

Gross profit increased 38% to $53.5 million; and gross profit margin expanded 250 basis points to 52.4%.

On a non-GAAP basis, our total operating expenses increased to $27.8 million, but decreased to 27% of revenue on higher sales costs for much higher revenue, incremental costs from acquisitions, and higher R&D expenses in support of our expanded portfolio.

Sequentially, our non-GAAP operating expenses decreased by $400,000.

As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $18.9 million, which is a 43% improvement over the 2012 quarter, and earned $0.21 per share, tax-affected.

On a GAAP basis, we earned $0.06 per share for the quarter.

We report non-GAAP adjusted results that exclude the tax-affected impact of amortization of intangibles, noncash interest expense, nonrecurring acquisition, integration and severance expenses, including gain or loss on acquisitions, impact of litigation settlements, stock-based compensation, and noncash loss on conversion of the convertible debt.

Our total depreciation cost and our cash interest expenses are appropriately included in our non-GAAP net income.

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

As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $18.9 million, or $0.21 per share for the quarter.

The excluded items aggregated to a $13 million tax-affected net increase to GAAP net income, or $0.15 per share in the first quarter.

Our non-GAAP net income was positively impacted by adding back $3.8 million of amortization expense; $2.2 million of acquisition and integration expenses; $2.2 million of stock-based compensation; a $5.7 million loss on conversion of convertible notes; $.5 million of noncash interest expenses; and a loss on the litigation settlement.

These were partially offset by a $3.4 million tax impact related to the items just mentioned.

As we said previously, we expect our reported tax rate for 2013 to be in the range of 35% to 38%; and our cash taxes to remain in the range of 10% to 15%.

For the first quarter of 2013, all of our revenue categories contributed to growth.

But Printers and Other Products growth continued to outpace Materials and Services, resulting in 61% recurring revenue for the quarter.

3D Printers and Other Products revenue grew 61% to $39.7 million; and 3D Printers contributed $31.8 million, a 43% increase over the 2012 quarter.

Other Products revenue consist of software authoring tools, Vidar Digitizers, and SensAble haptic devices.

For the first quarter of 2013, software products contributed revenue of $4.2 million.

And as we have introduced new printers and price points, the professional and production printer capabilities have now fully merged into a single category.

Revenue from our combined Professional and Production printers increased 41%, and our Personal Printers revenue increased 85% over 2012.

Print Materials grew to $28.7 million and made up 28% of total revenue.

And Services revenue increased some $5.1 million to $33.6 million, and made up 33% of total revenue.

Revenue from U.S. operations increased 25% to $57.2 million on higher volume, which is partially offset by the impact of negative price and mix.

Revenue from European operations grew 38% to $28.6 million in 2013, reflecting a $13 million increase in volume, partially offset by a $4.9 million combined unfavorable impact of price and mix, and a $200,000 unfavorable foreign currency translation.

Revenue from Asia-Pacific operations increased 45% to $16.3 million, primarily due to a $9.6 million increase in volume, partially offset by $4 million unfavorable combined effect of price and mix, and a $600,000 unfavorable foreign currency translation.

Despite ongoing regional economic uncertainties, we experienced robust growth in all geographic regions.

For the quarter, gross profit improved some 38% over the 2012 quarter to $53.5 million, from increased revenue and expanded gross profit margins in all categories.

Although we generated a higher portion of our revenue from lower margin categories, driven primarily by the continued strong printer sales, we managed to expand our gross profit margin a full 250 basis points over the 2012 period, and 70 basis points sequentially, to 52.4%.

This increase over the first quarter of last year was driven by a 620 basis point expansion to our printers and other products gross profit margin, aided by the addition of higher margin software products to 44.9%, and a 470 basis point improvement to our materials gross profit margin at 72.7%.

As shown on this slide, Print Materials contributed 39% of our corporate gross profit on only 28% of total revenue; and as our overall materials category grow, we expect continued consolidated gross profit margin expansion.

For the first quarter, non-GAAP operating expenses increased to $27.8 million, or 27% of revenue.

Sequentially, non-GAAP operating expenses decreased $400,000 from the fourth quarter of 2012.

For the first quarter of 2013, non-GAAP SG&A expenses increased $4.3 million, including a $1.4 million increase in compensation costs, which are primarily from higher commissions and sales costs on higher revenue increase and increased operating costs from acquired businesses.

Legal costs improved $0.5 million for the quarter, primarily driven by reduced litigation activity and costs.

Consistent with our plans, we increased our R&D spending by $1.6 million, compared to the first quarter of 2012, primarily in support of our expanded portfolio of Products and Services and New Product Introductions.

For the first quarter, we generated $10.7 million of net cash from operating activities, and we ended the quarter with $110.5 million of cash on hand, representing a $45.4 million decrease versus the end of 2012.

As we have said, although we expect to continue to report strong cash generation from operations, the quarterly amount may fluctuate from period to period.

And, as a reminder, we accrue interest expense each quarter for the senior convertible notes, and cash interest is paid semi-annually in June and December.

And, additionally, annual bonuses are paid in the second quarter of each year.

Accounts receivable increased as a result of our increased revenue and the continued shifting of higher portion of sales to resellers, as reflected in the increase in Day Sales Outstanding to 79 days in 2013 from 72 days in 2012.

Our Day Sales Outstanding increased due to the timing of sales and the acquisition accounting related to our Geomagic acquisition for a single month of the quarter.

We expect DSO to return to our previous normalized levels over the next several periods.

Inventories increased in support of our expanded portfolio and due to the timings of orders and delivery of finished goods, materials, and raw materials, which we purchase in large quantities.

So, that concludes my comments.

Abe?

Thanks, Damon.

We continue to expand our portfolio, extend our reach and diversify our business model.

Since the beginning of 2013, we have launched four new printer products, extending three of our print engines further accelerate and drive our 3D printers adoption.

We launched eight models of our new ProJet 3510 3D professional printers, and within the last few weeks, we launched the new ProJet x60 series of full-color professional printers.

We, also, successfully launched the new Cube and CubeX personal printers in support of our consumer solutions growth initiatives.

In support of our 3D authoring tools initiatives, we acquired Geomagic, a leading provider of modeling design, sculpting and scanning software tools, and subsequently, launched new Geomagic Design software that leverages our combined Alibre and Geomagic Design and modeling software platform.

We're pleased that the rapid formation of an integrated 3D authoring business unit that combines our Rapidform Geomagic and Alibre products already resulted in the introduction of several new products.

In terms of outlook, we enter the second quarter with positive sales momentum and expect to benefit from growing demand for our newest product, increased demand from advanced manufacturing activities, and strong R&D spending by our customers worldwide.

We expect our ongoing portfolio diversification, extending channels and focused growth initiatives, to deliver continued success.

We believe that we are extremely well-positioned to monetize the extending events, manufacturing and healthcare opportunities, and the emerging consumer opportunity.

We expect meaningful revenue contribution from Consumer Solutions and the commercialization of the Spot personalized medical devices in the second half of this year.

And, finally, we expect to be able to deliver continued top line strength and margin expansion, as the benefits of scale and our solid M&A execution continues to manifest.

With that, we will now gladly take your questions.

Stacey?

We will now open the call to questions.

(Organizer Instructions).

(Operator Instructions).

Your first question comes from the line of Jim Ricchiuti of Needham & Company.

Please proceed.

If you could comment on the moderating growth in the healthcare area, and to what extent you see that picking up in the second quarter, or is that more in the second half of the year?

Yes.

The moderation, Jim, is merely a function of the timing of 3D printer sales to certain healthcare companies.

We see it as just that and not something that will impede on the growth trajectory.

And we expect our normalized healthy growth in healthcare to resume for the rest of the year.

Got it.

And service margins?

Looked like they ticked down a little bit from Q4 levels.

Where do you see that going over the next couple of quarters?

For services, again with that, it was just a mix of timing of some sales.

We continued in services where we have the on-demand parts.

It was the continued pruning and shifting of the lower profit products that we had out there that we talked about in earlier periods that we said would remain for the next quarter or two after this.

We expect it to continue to rise as the year progresses, though.

In essence, Jim, we're proactively taking the opportunity to enhance the mix of what we sell on the on-demand parts towards higher gross profit margins.

We talked about it in connection with the fourth quarter and we said it will take us a few quarters to shed what we need to shed and replace it with higher GPM products.

And it's ongoing.

And we think that we're on the right track here to build a much more profitable on-demand business.

Abe, your materials margins, can they go much higher from here?

We believe so.

We believe there is still opportunity to continue to expand margin on materials.

And, I think Damon said it in his comments earlier today, that as overall material revenue becomes a greater percentage of total revenue we see that also contributing more to our consolidated gross profit margins.

Thanks a lot.

Your next question comes from the line of Jay Harris of Goldsmith & Harris.

Please proceed, Mr. Harris.

Mr. Harris, please check your line for the mute feature.

Can you hear me now?

Yes.

Alright, I had my phone muted.

It was my perception, entering the year, that the growth rate in material sales, or revenues, relative to more traditional printer sales would start to pick up.

That ratio of relative growth rates would start to pick up.

Now, you're putting software revenues into Printer and Other Product sales.

Could you comment on whether that perception is going to be the correct perception for this year?

Well, there is no question, Jay, that as we place more printers into the market, within a certain lag time, we see an increase in materials revenue generation, and we have seen that.

It's tracking our expectations very nicely.

You're right that we have a category that's called Printers and Other Products.

But, within that, in Damon's comments this morning, he, basically, spelled out what 3D printers, only, contributed to the quarter, which was $31.8 million, or a 43% increase over the 2012 quarter.

So, that's really the number to focus on if you want a relationship between printers and materials.

Well, as you look at the trends in both categories of Printers and Materials, are the slopes of the curves moving towards each other, or are they still moving away from each other with the printers growing more rapidly?

Well, I don't know that they're moving away.

One leads the other, and one leads the other by a multiple at some periods.

But there's no question that over time, it's pulled the materials curve to it.

So, we just see it as a very healthy and a very natural progression, where we plant more trees in every period than the ones that are capable of bearing fruit; and, then, in subsequent periods, we get the benefit.

All right.

If I can ask another question, why are the margins in Germany and the rest of Europe so much lower than Asia-Pacific and the U.S.?

It's pretty much strictly around how it's transfer pricing.

And part of it is, in Asia-Pacific, especially with software right now, is where the IP sits for the Rapidform acquisitions, so they enjoy a little higher margins because that's where the IP is.

Yes.

The simple answer, Jay, this is merely a function of how transfer pricing mechanisms work, or in most of the countries outside of the U.S., it's a distribution model.

Okay.

Thank you.

Your next question comes from the line of Troy Jensen of Piper.

Please proceed.

Hey, congratulations on a nice quarter, gentlemen.

Thanks, Troy.

So, just a quick question.

Could you talk about the R&D move on a sequential basis?

It was down, I think, it was $1.3 million sequentially, so I was curious if there was one-time stuff in there or -- you just typically don't see companies growing, seeing big declines in R&D.

If you could touch on that, that would be helpful.

It's not indicative of the trends for the year.

It's just a mere function of concentrations of activities in any given period.

And, as you know, not all R&D is headcount driven.

Some of it is specific project expenses.

So, in the fourth quarter, we had some concentration in preparation for Euro mode and CES, and those are likely to reoccur in subsequent quarters.

So don't read too much into the sequential decrease.

It's likely to come back in subsequent quarters.

We're absolutely on a trajectory here to spend more on R&D, as we have done throughout last year.

We think it's the right place to make investments.

It's already baked into our guidance for the year.

Okay.

Fair.

And, then, if I could do one follow-up?

Could we just touch on cash flows?

I mean, they were down on a year-over-year basis, despite profitability being up.

And I think the last quarter, you guys mentioned that cash flow, or you talked about sales to resellers driving the build in the receivables?

Just curious, what was the gap between the profitability and the cash flow statement this quarter?

I mean, it was receivables, again, so what drove the receivables up?

Receivables up, and payables down, which is just timing of payables and payables due types of things.

Definitely, receivables up on higher sales, but, also, continued higher sales through resellers in that professional category, which the majority is through our reseller and distributor channel, including the addition of in last year's quarter, Q4, of Rapidform and, now, Geomagic in this quarter.

So those are all sold through resellers, also.

Was linearity any different in the quarter?

Pardon?

Linearity?

What do you mean by "linearity"?

Percentage of sales in the last month; just wondering if it was more backend-loaded quarter?

Obviously, this is our largest revenue quarter.

So as a percentage of, in the last month, it's not different than it was.

But the same as it has been in previous quarters.

Sure.

Understood.

Keep up the good work, guys.

Thank you.

Your next question comes from the line of Holden Lewis of BB&T.

Please proceed.

Thank you.

Good morning.

Good morning, Holden.

No mention, I guess, of the prior guidance of $1.00, $1.15 in revenue growth.

Can you sort of touch on that?

We stand by the guidance that we have given.

Nothing has changed.

We didn't see any -- to particularly mention it.

But, I believe that our guidance was $1.00 to $1.15 on revenue of [$340 million] -- I'm sorry, [$440 million] to [$485 million].

Okay.

And, then, just explain to me how the tax rates are working.

I mean, you sort of indicated, I think, the 35% to 38% type tax rate.

It looks like it came in more like a 21% tax rate.

Whether you're using it on a GAAP or non-GAAP, which would suggest that you kind of came in line with the bottom line, but it seems like tax rate kind of helped us there relative to expectations, or I'm missing something from a messaging standpoint.

Can you help me out with the tax rate?

Yes.

We do expect the tax rate to continue to moderate up.

It's going to change from period to period, based on how the distribution of earnings and revenue comes from country to country.

That definitely changes things around.

And, then, the ability to have some credits, like one of the items was the R&D tax credit that we were able to take this quarter that was deferred from last quarter, due to it not being signed yet by the government.

But it should moderate back to those rates that we had said in our guidance.

Okay.

So for the three quarters making up the balance of the year, you would expect that [35%] to [38%] number to kind of be right?

Right now, yes.

And we'll update if it changes.

So, I guess the way I'm trying to think about the quarter is, I mean, it came in largely as expected, but it seems that you got a benefit from the tax rate to get there.

You're kind of expecting tax rates to go up for the balance of the year.

You're keeping the guidance in the same place.

There must be some sort of step-up effect somewhere on the profit side, on the margin side, in order to make that happen.

Can you give some color as to what you expect to improve beginning in Q2, Q3, Q4?

There's two areas.

We continue to expect to make progress in the gross profit margin, which, obviously, drops right -- drops down to the operating income line, the pretax line and, then is taxed at whatever effect.

And we also continue to expect to have some synergies as we combine the business, especially in Rapidform and Geomagic, that Geomagic was just completed for only one month of this last quarter.

Okay.

Then, on the gross margin, do you feel that like that was lower than you would expect it to be this quarter and why?

And where are you expecting improvement to balance the year?

We expect to get those margins to continue to steadily increase.

There's a couple things that happened this quarter.

One of them being that, with the acquisition accounting of Geomagic, you have to take what's called this deferred revenue haircut on profitability of deferred revenue that's brought in.

That actually negatively impacted our gross profit margin by almost a half a percentage point for this quarter, and that goes away over the next few quarters, and we still have the effect of the Rapidform acquisition there, too.

Because you have the cost associated with it, but you have to reduce the revenue associated with the deferred revenue when you bought the company.

So, that's been a fairly significant impact at that point for those things too, which we would have expected, in a normalized basis, our gross profit margin to be higher this quarter than, actually, we even reported.

Okay.

Thanks, guys, I'll jump back in.

Thanks.

Your next question comes from the line of Brian Drab of William Blair.

Please proceed.

Good morning.

Good morning.

So, as usual, I'm going to ask you a question that I'm not sure you're going to be willing to answer.

But, can you talk through the organic revenue growth for each of the segments; printers, material service?

We, basically, Brian, gave you the consolidated organic growth, and we broke out what was software in the number, with the exception of software and detail of Paramount, everything else is organic, so you already got it in the consolidated number.

So, acquisitions that should have contributed, should have been counted as acquisition revenue at Paramount, but also Rapidform; right?

That's $15 million annual revenue business, or about, almost, $4 million a quarter.

Which we just broke out.

Right?

With Geomagic?

We told you what software was for the quarter.

Okay.

So when you say -- okay.

So, Rapidform and Geomagic you told us?

You got it.

So, on the service side, the 18% -- so if I take out Paramount, making some assumptions, is it fair to infer that service organic revenue growth was in the single digits?

No.

No.

The Paramount is not that large --

Okay.

-- out of the total number.

And it's not really that material to the final number.

So, the bottom line is within the 22.1% organic growth, we broke out what software was, and with the exception of the tale of Paramount, everything else is organic.

So, it's time, Brian, to move on.

Well, I'll work through these numbers more after we get off the call.

But, the printer growth of 61%, you're saying is printer and products.

If I take out the software, I should be able to get to an organic number there, because the software is in that segment?

Yes.

And in the printer, we broke it out.

We said that printers contributed $31.8 million.

Yes.

And it represented a 43% increase over the prior year.

And within printers, it's all organic at this point.

Okay.

Got it.

And within materials, it's all organic as well; right?

Right.

16%, that's a purely organic number.

You got it.

Okay.

And how are the sales going through the new resellers that you added with Rapidform?

I know the Geomagic resellers were added even more recently, but can you give us an update there on the progress?

Well, it's early days.

We're still working on the Rapidform reseller training and qualification.

Nothing really happened with Geomagic in the first quarter, because we only had Geomagic for a month; so, it was premature to do something there.

So, in a similar way that it took us about four quarters to train all of the Z Corp resellers a year ago, it's kind of going to be a similar journey here.

Given that these are largely software resellers, it's going to take, probably, a little bit longer to bring them all up to a level where they could fully cross-sell all of our products, but it's a journey worth taking.

Okay.

And is it more challenging given the geographic diversification of the Rapidform resellers, in particular?

No.

Because we have good presence in all these geographies.

And it's actually very attractive to us, it strengthens our presence in Asia-Pac, in particular.

But, remember, we now have a thoroughly large presence both in Japan and Korea and that's quite helpful.

Okay.

And, then, if I could, just one more?

The question was asked why the margin's so low in Europe, but could you remind me why they're so high in Asia, and above the U.S. in Asia?

Yes.

All of it has to do with transfer of pricing policies and mechanisms, which remained unchanged, in our case, for quite some time.

And so in a transfer pricing scenario, most of the out of the U.S. sales are handled as distribution-type margins.

The exception in Asia-Pacific is that Rapidform is headquartered there and most of the IP of Rapidform is resident in Korea, which dictates higher transfer prices.

That's kind of the same answer that you gave related to the European margins, but there's such a discrepancy.

What's the difference between Europe and Asia?

Brian, that's actually the opposite of.

If you look at Europe, they don't have the IPs, so they're getting treated as a reseller or distributor, which has lower profit margin.

In Korea, Korea developed the software and the IP sits there, so they get the benefit of higher revenue or higher margins associated with the sales, due to the transfer prices.

Yes.

So, take Rapidform out of the equation and go back before the Rapidform acquisition, the margins in the third quarter were 37%, 28% in the second quarter, 28% in the first quarter in Asia; what else is going on, besides the software dynamic you're talking about?

Asia-Pacific also includes -- excuse me -- it includes Australia, which has some other activity and things going on there.

It really does just relate to how the profitability of the different countries through the transfer pricing has to be done.

The umbrella answer is, it's all transfer-pricing related.

Okay.

I'll follow up more later.

Thank you.

Your next question comes from the line of Jim Ricchiuti of Needham & Company.

Please proceed.

Yes.

You've introduced a number of new products, are those all currently shipping; and, what's the outlook for the balance of the year in terms of new products?

Is this the biggest group, in terms of the new product introductions that you're planning for the year as a whole?

Have we seen those?

No.

As we've said, publicly now quite a few times, we expect 2013 to be our most exciting and most productive new product introduction year in the history of the company.

And so we're probably, maybe, halfway through everything that we plan to introduce for the balance of this year.

Everything that we have introduced, thus far, is shipping.

And it's doing really well.

The market reception has been extraordinary.

And our expectation is to introduce quite a few more significant products for the balance of this year.

Okay.

And just with respect to the Europe, Germany, other Europe, the numbers I have are correct, you're showing pretty good year-over-year growth.

I don't know how much of that might be skewed by the software acquisitions, but can you comment a little bit about what you're seeing in Europe?

Yes.

I mean, what we've seen in Europe is, basically, 38% revenue growth; and, in Asia-Pacific, we've seen 45% revenue growth.

Some of it, obviously, is aided by the recent software acquisitions.

But, what we're saying, generally, Jim, is that even in some of these more uncertain economies, the demand for our products and services remains very high, and it's, in our mind, primarily related, A, to very robust R&D spending by the companies that are, within our universe of use cases; and, number two, a greater demand for our systems and services for outright advanced manufacturing applications.

And that's what's driving our revenue.

Okay.

Thanks a lot.

Your next question comes from the line of Paul Coster of JPMorgan.

Please proceed.

Yes.

Thanks for taking my question.

I would like to dwell to Europe, as well, if you don't mind.

Are the sales largely to existing customers who are upgrading, or adding capacity?

Are there other industry verticals, in particular, that you'd like to call out as driving this growth, particularly in the advanced manufacturing space?

Yes.

Our sales, Paul, has been, you know, split at 50/50, or slightly better than 50/50, between new and existing.

And so as we expand our universe of use cases here, it's tilting more in favor of more and new, as opposed to just existing, which we view as very positive.

In terms of verticals, it's the usual suspect.

It's automotive, and aerospace, and consumer electronics, and durable goods.

But the pickup is coming, now, from more interest in advanced manufacturing, as opposed to just rapid prototyping.

Which brings me to my second question.

In your prepared remarks, and what you've just emphasized, it sounds like your highest priority opportunities are in advanced manufacturing and healthcare.

I may have that wrong.

And de-emphasizing a little bit consumer-enthusiasts markets and Rapid prototyping, is that a fair statement of where your priorities lie?

Only in part.

I've been saying now for, probably, I don't know, eight to ten quarters, that we have two big growth opportunities; in the here and now, and in the near term, it's the migration from the traditional sandbox of Rapid prototyping, firmly into advanced manufacturing opportunities, both in aerospace, automotive, and healthcare, with patient-specific medical devices, and equally as excited about the opportunity in consumer.

In my prepared remarks today, I, also, mentioned that Cube and CubeX continue to perform extremely well, and we expect those to become meaningful enough in the second half of this year so that we can begin to disclose and discuss our progress with you.

So it's not an either/or.

It's a both/and.

The advanced manufacturing opportunities is more obvious, and more mature, and actionable in the here and now.

The consumer one, we're continuing to develop and we're very gratified by the results.

One sneaky last question, then, what's the your equivalent of Moore's Law in terms of print speeds over the next few years, and the benefits that will bring to advanced manufacturing?

Well, I'm saying that Moore's Law applies here, literally; but, also in terms of exponential convergence.

So, will we continue to be able to double space every couple of years in the reduced costs and enhanced functionality?

I think so.

There is a preponderance of evidence that this will continue to happen, and the technological feasibility is quite favorable to that.

But we also think that we will benefit from the convergence of other exponential technologies, like robotics, and sensing, and cloud computing, and other enablers that will actually make the overall manufacturing process much more efficient across the board.

So, in our mind, it's Moore's Law, plus the exponential technologies.

Okay.

Thank you.

Your next question comes from the line of Hendi Susanto of Gabelli & Company.

Please proceed.

Good morning, and thank you for taking my questions.

Damon, It's very encouraging to see margin expansion in the first quarter.

Would you provide more insight on whether or not you think the first quarter gross margin of 73% is material, is sustainable, considering that the second half of the year is usually stronger?

Similarly, using the Service gross margin of 44% in Q1 is sustainable, as well?

Right.

The materials gross profit margin, we've been steadily increasing every quarter for the last few years, all the way from the upper 50%s to the low 70%s, and we do expect it to continue to expand as periods progress.

On the services side, we actually expect those to continue to make progress there, too.

And broken down between the two categories of on-demand parts and the traditional service business of the company.

The traditional service business, the break-fix warranty, we don't expect that to expand materially, but we've said that the on-demand parts, with what we've been doing and shedding some of the lower gross profit margin business, that we do expect that to continue to expand.

Okay.

I also noticed the sub segment reporting is now combining production and professional printers, would you be able to break down what the combined revenue of production and professional printer revenue in Q1 was?

It's getting much more difficult to do that because of the convergence between production and professional printers.

It's really one category now, and that's how we're going to refer to it going forward.

We've been talking about this, I think, for more than four quarters, that we're gradually merging these two categories, so it shouldn't come as a surprise.

Okay.

Thank you.

Your next question comes from the line of Holden Lewis of BB&T.

Please proceed.

Thank you.

Trying to get a feel for kind of the mix effect that you spoke to.

I think you kind of positioned it as a negative.

I assume you're talking about the fact that materials growth was a little bit lower than printers and such.

But within the printers, that 43% growth, what are you seeing in terms of mix there?

Is the margin mix stronger because you're seeing faster revenue at high level machines; or is it getting diluted by the growth in the low level machines?

What are you seeing within the printers mix?

Well, within the printer mix, it's one of the reasons we -- it goes to this last answer, with the professional and production being converged together, that we've been steadily moving the ASP down with new products, but that doesn't mean we've been giving up on margins.

So, our professional, that sort of middle level is our high growth area on that.

In those areas, enjoys higher margins.

Then, if you talk about the consumer side of the Cube, and CubeXs and everything, those enjoy margins that are similar to our corporate averages, too.

So, you know, the printer margins have actually been increasing, but those, in total, in the 40%s are still much lower than the materials margin.

So, when the printer sales have grown at such an exponential rate, which again we believe will help our recurring revenue in the future, the mix of it doesn't, necessarily, help our margin expansion at that point.

Right.

Okay.

And, then, now that you're sort of breaking out printers versus software all within that machine category, if you will, you've talked about printer margins being kind of in this 43%, going up into the mid to upper 40s, you're kind of there, I guess, but can you talk about, or can you break out kind of what the software margin is looking like, or what the goals are there?

Well, we didn't really break out the software margins as they stand, but I can talk, generally, about goals, because software margins are normally fairly high.

So the software margins, you'd expect upper 60s-plus, up higher.

But remember, in Printers and Other, you also have some other products in there such as the haptic devices from SensAble, and the Vidar digitizers, which, although those have good margins, are not going to be what, necessarily, software margins are, in the 60s and the 70s.

Okay.

So you're still looking at the printers being in that --

The digitizers and the haptic devices, probably similar to the printers, the software will work much higher.

Okay.

I guess I'm just trying to figure out of your machine -- of the improvement in the margins for the machines, how much of that is simply the inclusion of more software; and how much of that is the actual printers increasing?

It's both.

And in this level, it's probably somewhere between half and half for this quarter.

If the software business continues to increase, and continues to expand, obviously, that will push that margin higher faster.

But you saw, it's only $4.2 million, was the revenue from software for the quarter.

Because we only had Geomagic for one month of the quarter.

Okay.

Alright.

Thank you.

Yes.

Your next question comes from the line of Prabh Gowrisankaran of Canaccord.

Please proceed.

Hi.

good morning.

Thanks for taking the question.

I had a couple of questions.

One, on the healthcare, you talked about [B-Spoke] and a bunch of other innovations, and you had 14% of revs and 18% growth.

What do you expect going forward in the second half?

Should we see an acceleration of the healthcare growth?

Well, we should see a resumption of the trajectory that we had in previous quarters.

We should definitely see the B-Spoke product coming onto the market in the second half of this year and contributing to that.

But, our expectation is, that healthcare continues to be a very lucrative, high-growth vertical for us, and we are not overly concerned over the first quarter because it was, primarily, just a timing issue.

Okay.

One other question, just piggybacking on the previous question, just to clarify, it looks like the $39.7 million, $31.8 million was printers; $4.2 million was the software; and the remaining $3.7 million is all the haptics and all those devices.

Is the growth -- I know you gave the 41%, 43% growth for printers, can you talk about the growth in software and the haptic devices, within that bucket?

Well, definitely, the software and the haptic devices were this quarter and last quarter of last year, so there's not a comparison to Q1 of the year before.

And the haptic devices also came with Geomagic, so we don't have much history on it, given that we only had it for one month, it's premature to comment on that.

Okay.

And in terms of the last question, the organic growth of 22%, do you expect Geomagic on the printer side, Geomagic and the haptic stuff to grow faster than your printers, or do you expect similar trajectory for the two of them?

I don't know if you're breaking it out, but just as qualitatively within that Printer and Other segment in terms of growth rate for second half?

Well, when you look at our consolidated growth rates, I think they are inclusive of Geomagic, those are already reflected in the guidance that we've given in the top line guidance that, I believe, is somewhere in the range of the low-20-percentage to close to the mid-30-percentage points, as the range for top line.

And that is all inclusive of everything, as we know it today.

Okay.

Great.

That's all the questions I had.

Thanks.

Thank you.

That's all the time that we have for questions today.

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

Please proceed.

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

A replay of this webcast will be available after the call on the Investor Relations section of our website, investors.

3dsystems.com.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.