3D Systems Corp (DDD) 2013 Q2 法說會逐字稿

Good morning and welcome to 3D Systems conference call and audio webcast to discuss the results of the second quarter and first six months of the 2013.

(Operator Instructions).

I would like to turn the call over to Stacey Witten with 3D Systems.

Please proceed

Good morning, and welcome to the 3d Systems conference call.

I am Stacey Witten, and with me on the call are Avi Reichental our CEO, and Damon Gregoire our CFO(inaudible)portion of this call contains a slide presentation that we will refer to during the call.

Those following along on the phone who wish to access the slide portion of this presentation may do so via the web at www.3dsystems.com/investor.

Participants who would like to ask questions at the end of the session related to matter discussed in this conference call should call in using the phone number provided here on slide three.

The phone numbers are also provided in the press release that we issued this morning.

For those who have accessed the streaming portion of the webcast, please be aware that there is five-second delay, and that you will not be able to post questions via the web.

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

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

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

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

Forward-looking statements are only predictions that relate to future events or future performance, and are subject to known and unknown risks, uncertainty, 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 looking results.

These Forward-looking statements are based on current expectations, estimates, forecast and projections as well as risks and assumptions of management.

We undertake no obligation and do not plan to update these Forward-looking statements.

Further, we encourage you to review the risks that we face(inaudible) in our filings with SEC, including our annual report on form 10-K which was filed February 25th, 2013At this time, I would like to introduce Avi Reichental, 3D Systems President and CEO.

Good morning, everyone.

Thank you for taking time to listen to our call this morning.

We are pleased to report record quarterly revenue and gross profit.

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 44.5% from the prior year to $120.8 million on 108% in printers and other product revenue, and 30.1% overall organic growth.

Gross profit increased 46% and growth profit margin expanded 40 basis points to 51.8% even with the impact of the adverse mix and drag from the recent acquisition of RPDG.

Heavy (inaudible)to demand also resulted in a 60% sequential increase to our backlog and significant near term advance manufacturing and consumer opportunities compelled us to accelerate our in quarter R & D and marketing expenditures.

New product expanded channels into a lesser extent acquisitions contributed favorably to our record revenue.

Since the beginning of this year, we launched significant new product including a completed refresh of our best-selling ProJet 3500 and ProJet x60 series printers and high performance 3D print materials.

We also launched Geomagic Solutions 2410 a (inaudible) of powerful new design software tools(inaudible) the engineers desktop empowering designers to create and print without limitations.

During the second quarter, we completed the acquisition of RPDG continuing to expand and enhance our Quickparts services and acquired 81% of Phenix Systems a couple of weeks ago adding strategic direct-metal 3D printer's capability to our growing print engine portfolio.

We believe that our accelerated growth rate reflect the strength of our diversified portfolio, the productivity of our channels, and the effectiveness of our strategic initiatives.

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

3D printers and other product revenue more than doubled to $54.2 million, print materials revenue grew $3.1 million to $29.3 million, and services revenue rose $6 million to $37.3 million.

Healthcare solutions revenue grew 55% for the quarter resuming its wealth trajectory contributed some $18.9 million to our total revenue.

We have come to believe that right now is an unique moment in our business.

The level of inbound interest in adopting our product is unprecedented across both the consumer and advanced manufacturing factors.

As the magnitude of these opportunities crystallize during the second quarter, we offensively elected to materially accelerate our R&D and marketing spending programs to fully address these opportunities.

We firmly believe that the accelerated investments we are making right now will significantly influence our results in the coming periods.

In line with that, we are also thrilled that revenue from new products for the first six months of this year grew 73% to $90.9 million on a 63% increase in our R & D expenditures to $16.1 million or 7% of total revenue for the same six months.

Through the end of June, we have launched nine new products, and we expect to deliver a greater number of significant new product introduction during the second half of this year.

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

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

Damon.

Thank you, Avi.

Good morning everyone.

The second quarter revenue grew 45% from the prior yearto $120.8 million.

Gross profit increased 46% to $62.6 million, and gross profitmargin expanded 40 basis points to 51.8%.

Our totally operating expense increased to $45.8 million and increased to 38% of revenue on higher sales cost from higher revenue, accelerated R & D and marketing expenses, in support of our expended portfolio and incremental cost from recent acquisitions that for the quarter contributed incremental cost ahead of our expected revenue contributions for a full quarter.

As a result of our strong revenue growth and expanded gross profit, we generated net income of $9.3 million which is a 12% improvement over the 2012 quarter,and earned $0.10 per share.

On a non-GAAP basis, we earned $0.20 per share for the quarter, and l will discuss our non-GAAP results in more detail later.

For the first six months, revenue grew 38% from the prior year to $222.9 million.

Gross profit margin increased 42% to $116.1 million, and gross profit margin expanded 140 basis points to 52.1%.

Our total operating expenses increased to $81.7 million on higher sales cost from much higher revenue,incremental costs from acquisitions, and higher R & D expenses in support of our expanded portfolio.

As a result of our strong revenue growth and expanded gross profit, we generated net income of $15.2 million, a 5% improvement over the 2012 period and earned $0.16 per share exclusive of approximately a$20 million share increase in share count for the period.

On a non-GAAP basis, we earned $0.40 per share for the six months of 2013.

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

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

For your increase, 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.

On a non-GAAP basis, we generated adjusted net income of $19 million or $0.20 per share for the quarter.

The excluded items aggregated to a $9.7 million tax effected net increase to GAAP net income or $0.10 a share in the second quarter.

Our non-GAAP income was positively impacted by adding back $5.1 million of amortization expense, $2.5 million of acquisition and integration expenses, $3.1 million ofstock-based compensation, a$3.5 million loss of conversion of convertible notes.

and $0.3 million of non-cash interest expenses which was all partially offset by $4.9 million tax impact related to items just discussed.

For the six months of this year on a non-GAAP basis, we generated adjusted net income of $37.8 million or $0.40 per share.

The excluded intense aggregated to $22.6 million tax effected net increase to GAAP net income or $0.24 per share.

As we said previously, we expect our reported tax rate to be in the range of 35% to 38% and our cash taxes to remain in the range of 10% to 12%.

For the second quarter and six months of 2013, all of our revenue categories contributed to growth, but printers and other product growth continues to outpace materials and services resulting in 55% recurring revenue for the quarter and 58% for the six months.

In the second quarter, 3D printers and other products grew 108% to $54.2 million, and made up 45% of total revenue.

3D printers contributed $45.4 million to the 97% increase over the 2012 quarter.

Other product revenue consists of software offering tools, VIDAR Digitizers, and sensible haptic devices.

For the second quarter of 2013, software products contributed revenue of $5 million.

Revenue from our combined professional and production printers increased 78% and our personal printers revenue increased 333% over 2012.

Script materials revenue grew to $29.3 million and made up 24% of total revenue, and services revenue increased some $6 million to $37.3 million and made up 31% of total revenue.

Revenue from US operations increased 45% to$67.9 million.

Revenue from European operations grew 29% to $31.9 million, and revenue from Asia Pacific increased 73% to $21.1 million.

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

for the quarter, gross profit improved some 46% over the 2012 quarter to $62.6 million from increased revenue and expanded gross profit margin 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 40 basis points over the 2012 period.

This increase over the second quarter of the last year was driven by an 800 basis point expansion to our materials gross profit margin to 73.6% aided by 250 basis point expansion to printers and other product gross profit margin to 45.6%.

This was partially offset by 260 basis point decrease to our services gross profit margin to 43.8% which resulted in a total gross profit margin of 51.8%.

As shown on this slide, print materials contributed 34% of our corporate gross profit margin on only 24% of total revenue.

We expect to see the impact of multi quarter printer units surge translate to accelerated materials revenue growth during the second half of this year, and as our overall materials category grows, we expect continued consolidated gross profit margin expansion.

For the first six months of this year, gross profit improved some 42% over the 2012 period to $116.1 million from increased revenue and expanded gross profit margin and printers and other products in print materials categories partially offset by margin compression and services due to acquired lower margin Quickpart services.

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 140 basis points over the 2012 period.

This increase was driven by a 430 basis point expansion to our printers and products profit margin aided by the addition of higher margin software products to 45.3% margin and a 630 basis improvements to our materials gross profit margin to 73.1%.

This was offset by 140 basis point decrease in services gross profit margin to 43.8% which resulted in overall gross profit margin of 52.1% for the six months of 2013.

As shown on this slide, print materials contributed 36% of our corporate gross profit margin on only 26% of total revenue, and as our overall materials category grows, we expect continued consolidated gross profit margin expansion.

For the second quarter, non-GAAP operating expenses increased to $35.1 million or 29% of revenue.

Sequentially, non-GAAP expenses increased $7.4 million from the first quarter of 2013.

Significant near term advance manufacturing and consumer opportunities compelled us to double our R&D expenditures over the last year second quarter, and accelerate our marketing spending.

For the second quarter of 2013, non-GAAP SG&A expenses increased $6.4 million primarily from increased compensations costs, higher commission costs, and sales costs on higher revenue, and increased operating costs from acquired businesses.

R & D spending over the second quarter of 2012 rose to a total of $9.6 million.

The overall increase also reflected our expanded portfolio of products and services including Geomagic Solutions.

For the first six months, Non-GAAP expenses increased to $62.9 million and held at 28% of revenue.

For the first six months of 2013 non-GAAP SG&A expenses increased $10.7 million primarily from increased compensation costs, higher commission and sales costs, and higher revenue, and increased operating costs from acquired businesses.

Legal costs improved $500,000 for the last six months.

In view of the extremely favorable conditions, we increased our year-to-date R & D expenditures some 63% to a total of $16.1 million or 7% of revenue.

During the first six months of 2013, we generated $12.8 million of net cash from operating activities.

We and ended the quarter with $349.3 million of cash-on-hand representing a $193 million increase versus the end 2012.

This includes $272 million net proceeds from our common stock offering and $86 million paid for acquisitions.

As we have said, although we expect to continue to report strong cash generations from operations, the quarterly amount may fluctuate from period to period, and additionally annual bonuses are paid in the second quarter of each year.

Net accounts receivable increased $31.6 million from December 31st, 2012 with a higher portion of our revenue mix shifting to resellers and retailers as part of our planned business model.

A larger portion of our sales are transacted on standard credit terms.

This shift in our business model was acerbated by the combined effect of timing and concentration of orders during the third month of the quarter as a result of increased demand, meaningful contributions from new products, and the impact of RPDG acquisitions during the quarter which drove our DSO higher to 84 days on June 2013 quarter from 72 days at December 31st, 2012.

Over the next periods, we expect DSO to normalize at the rate of 75 days.

Inventories increased in support of our expanded portfolio and due to the timing of orders and delivery of finished goods and materials and raw materials which are purchased in large quantities.

As of today, the remaining balance of the $152 million convertible notes we issued 20 months ago is down to $12.5 million.

Despite management deliberate i quarter decision to increase certain discretionary expenses to accelerate the adoption of our products and services in anticipated drag related to acquiring 80% of Phenix Systems based on the Company current progress, we reiterate our 2013 guidance.

To reiterate, Management expects revenue to be in the range of $485 million to $510 million for the full year of 2013, and non-GAAP adjusted earnings per share to be in the range of $1.05 to $1.20 per share

Our non-GAAP adjusted earnings estimate if fullytax effective and inclusive of our acquisitions completed to date.

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

That concludes my comments.

Avi.

Thank you, Damon.

We continue to expand our portfolio, extend our reach, and diversify our business model, report during the second quarter strong demand for our full color ProJet x60 series of professional printers added to our sales momentum, and the commercialization of two new materials with injection-molded like properties expanded our use cases.

Heavier than expected demand for our award-winning Cube and Cube X consumer 3D printers contributed to our backlog and resulted in a second expansion of our manufacturing lines in successive quarters.

We also expanded our reseller network with the addition Seiko Infotech in Asia Pacific, Hawk Ridge Systems and SYNNEX Corporation in the United States and Canada, and expect these new networks to begin to contribute meaningfully to our growth during the second half of this year.

As part of our consumer initiatives, during the second quarter, we announced that Staples, the world largest office products company and second largest e-commerce company has become the first major US retailer to sell our Cube 3D printer online and in select stores.

This morning, we are happy to share with you that in-store sales commenced late in June to enthusiastic customer reception.

Both companies are pleased with their results to date, and plan to expand in-store availability at Staples from a couple of dozen stores today to a couple of hundred stores over the next few months.

Yesterday, we also announced that the Yamada Denki, Japan's largest consumer and electronic retailers started selling our Cube in select stores.

We expect additional top-tier retailers in North America, Europe, and Asia Pacific to follow suit during the second half of this year.

Early in the quarter, we acquired RPDG, a provider of on-demand editing and traditional manufacturing services, and immediately integrated its state-of-the-art capabilities into our growing Quickparts services.

We also launched Geomagic Solutions 2014 during the quarter which is a comprehensive sweep of printable CAD designs, scanning and inspection software tools that is packed with broad array of enhanced new features that deliver greater productivity, use case versatility and seamless design to manufacturing integration for engineers, product designers, artists, and manufacturers.

And a few weeks ago, we completed the acquisition of 81% of Phenix System, a leading global provider of direct metal selective laser centering systems that is based in Riom, France.

Phenix designs, manufactures, and sells proprietary direct metal 3D printers that can print chemically-pure, fully-dense metal and ceramic parts from very fine powders with the granularity of six to nine microns.

Materials include stainless steel, tool steel, super alloys, non-perish alloys, precious metals, and alumina for a variety of advanced Aerospace automotive and patient-specific medical device applications.

We believe that the combination of Phenix Systems uniquely direct metal technology with our own extensive portfolio strengthens our offering and immediately positions us at the heart of the fast growing Aerospace, automotive, defense, and patient-specific Healthcare manufacturing opportunities.

We have the fastest, most accurate and capable industrial grade systems available on the market today.

Towards the end of the quarter, together with Deloitte, we announced an exclusive alliance to jointly assist companies and industries to adopt and integrate 3D priming design and manufacturing systems and solutions into their business for their own sustainable competitive advantage.

This first of its kind multi year alliance combines our comprehensive product and solutions experiences with Deloitte's leading strategy, technology and industry-specific consulting services to develop a platform for learning, experimentation, outpatient, and business transformation powered by 3D printing solutions and capabilities.

As a component of this alliance, Deloitte and 3D Systems will jointly launch and operate a series of solution centers in key locations to deliver joint training, education, and implementation services.

We expect this exclusive alliance to become a significant demand generation platform for our own future growth.

We enter the third quarter with heavy demand for our advance manufacturing and consuming solutions.

We expect to continue to benefit from accelerated adoption of our product and services that is fueled by customers our robust R&D and manufacturing spending worldwide.

We expect consumer solutions revenue to reach meaningful levels in the second half of this year, and we expect to begin to provide additional information on the category when we report our third quarter results.

We expect our ongoing portfolio diversification accelerated second half new product introductions, expanding channels, and focus growth initiatives channel to deliver continued success.

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

Stacey?

We will now open the call for questions.

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

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

The telephone numbers are provided again on the slides.

If your calling inside the US, the number is 1-877-474-9505.

If you are calling outside the US the number is 1-857-244-7558.

The conference ID is 62870047.

(Operator Instructions).

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

Please proceed.

All right.

Thank you.

Good morning.

Avi or Damon, question just with respect to the second half of the year.

In light of the makeshift to lower price printers.

What gives you the confidence that you are going to see this acceleration in the growth and the materials revenue?

Just given the materials usage on these machines at least initially is a bit lower.

Jim, this is an excellent question.

Clearly, we acknowledge that there is some lag in material revenue growth rate relative to the surge in printer sales.

But we are not concerned about it specifically because it is a function of a lag.

So given the surge that we enjoyed in the last few quarters, we expect to see the impact of our multi quarter printer unit surge translate to accelerated materials revenue growth during the second half of this year.

As our overall materials category grows, we expect continued consolidated gross profit margin expansion.

We had a similar question on our Healthcare sales last quarter, and we expressed our confidence that the growth trajectory would remain intact over a meaningful period not withstanding the periodic fluctuation, and that was an expectation that you can see clearly materialized this quarter with resumption of growth at the rate of 55%.

Just on that acceleration and printer revenues that you saw, I am wondering if there is any additional color you can give on the sales linearity in the quarter of the product business, and what drove that?

Damon mentioned that there was heavier concentration in the third month of the quarter, and that was driven by a few factors.

One, is that the end-quarter introduction of the ProJet x60 series that took hold more towards the end of the quarter as people began to realize all the amazing features and benefits, and that also contributed to sales momentum and also to backlog.

Channel expansion that we just began to see some early indications of what it could do, and we expect the full impact to come in the second half from some of the bigger additions that we have made.

And the extension of our retail channels and consumer activities that for the second quarter in a row contributed not just to backlog, but compelled us into successive quarters extended our manufacturing capacity.

What is also interesting to note, Jim, not just the revenue that was recognized but sequential backlog also increased some 60% quarter-over-quarter which just underscores the strength of this increase demand.

Got it.

Thank you very much, Avi.

Your next question comes from the line of [Sam Bulotti] from Capital Markets.

Please proceed.

Good morning.

Avi, (inaudible) and then Damon you mentioned last quarter that you are expecting R & D spending to pick up, and obviously it did, and certainly given the increase in the backlog, it makes sense to want to capture that business.

I am curious is there a way to look at that going forward for the balance of the year, or maybe as it goes into next year.

How do you see that shifting with respect to recognizing that business that you are investing toward?

Well look, we clearly believe that we are in a very unique and exciting period in our business here.

When we factor the significant increase of inbounded interest in the quarter, we made this affirmative decision to boost certain discretionary expenses to accelerate adoption.

And we did it because we have come to believe that right now is the time to do it.

The interest in our product and services is unprecedented, and it is unprecedented across both the consumer and advance manufacturing sectors.

For this reason, we basically kind of took the offensive decision to offensively and materially accelerate both R & D and marketing spending to fully address these opportunities.

Our belief is that this will benefit us in coming periods in a way that also gave us comfort to reiterate and affirm our guidance for the full year.

Remember that these decisions are discretionary, and this - - and certainly R & D and marketing spending are discretionary.

At this time, we felt that this was the right decision to make given the abundance of opportunities that are in front of us in the here and now.

Sure, I think it is totally understandable.

You do not want to give up the momentum that you have.

I was curious, give that Phenix just recently closed, was any of that pick up part of your effort to start to scale up the opportunities of Phenix, or should we expect that more in the upcoming quarters?

That is in the upcoming quarters because we have to close, and none of that activity was involved in the first half of the year.

Okay, great, thank you very much.

Your next questions comes from the line of Troy Jensen from Piper Jaffray, please proceed.

Congrats on the top line, gentlemen.

Thanks.

So, Avi and Damon too, I get the accelerated investments because the opportunity is there, I am just having problems just trying to get to just the margin targets.

If I am doing my Matthew correctly here, you guys were in the midpoint of your guidance for revenues and earnings.

That implies like 40% operating margins in the second half.

That seems pretty steep margin expansion.

Can you help me?

How you get there, or should we think more in the lower end of the range given that the margins you said, pretty aggressive.

Well, it does imply , and it does have that our margins would increase, and we do believe that as revenue margins increase our margins increase.

We reiterated the range, but not exactly where it would be in the range.

You might have--you possibly could be in the higher end of the revenue range to achieve the point of the EPS range to get there, but we still feel comfortable and confident with the ranges that we put out.

Troy, it is important also to note that if you look at the second quarter revenue mix, it was really fairly adverse mix in terms of gross profit margin.

Notwithstanding all of that, year-over-year we extended our gross profit margin.

If we can do it, it is such a poor mix, we are fairly confident that as material revenue kicks into higher gear in the second half, and the mix normalizes a little bit where we have a higher component over recurring revenues in the mix, that will certainly boost our gross profit margins to a level that gives us confidence to reiterate our guidance.

That is fair.

Last question for me.

Cash flow was a little soft this quarter, and obviously it was due to receivables, and it was due to linearity in the quarter.

Could you help us out with - - when you are in this channel expansion mode like you are now when you are adding a SYNNEX, a Staples, A Hawk Ridge, what does that do to channel inventory?

And could you just help us out with the difference between sales in versus sales out?

Avi, I understand you guys are investing, the market is taking off.

So the channel needs to grow, but help us with what that contribution you think that has in the quarter?

Well, in terms of channel contribution in the quarter - - from the additions of channels, as we said in our prepared remarks, most of that will probably come in the second half.

We have not yet had a significant impact to revenue or to receivables.

To your point for example for the addition of SYNNEX and some of the others.

That will contribute to second half results.

If you look at what happened in net account receivables we have seen an increase by about $31.6 million from last December on subtantial sales growth.

What is going on there is, that with the higher portion of our revenue mix shifting to resellers and retailers as part of our planned business model here, a larger portion of our sales are transacted on standard terms.

But what happened in the quarter is this shift was further exacerbated by the combined affect of the timing and concentration of orders during the third month of the quarter as a result of the increasing demand that was driven by the meaningful contributions from some of the new products that we mentioned, but also the impact of the RPDG acquisition during the quarter that when you put all together, it drove our DSOs higher to 84 days for the June quarter from 72 days at December last year.

As Damon mentioned previously, our expectation over the next few periods is that our DSO will normalized at around 75 days towards the end of the year.

Sorry for all the questions.

Good luck in the second half.

Thanks.

Your next question comes to the line Ananda Baruah from Brean, Murray, Carret.

Please proceed.

Thanks for taking the question.

Avi and Damon, given the new revenue run rate, $120 million, does that have you, as we-- if it is the second half of this year but maybe going into 2014.

Do you think the longer term business model at all?

I believe you guys have made comments in the past that at $500 million run rate, which you are pretty close to as of this quarter, you start to think of gross margins in the 60% range and not margins in the 40% range.

There are dynamics going on near term with the increase R&D spend and some mix stuff, but if this run rate continues, and you sort of suggest it will.

It gets to the midpoint of your rough guidance this year.

Do you begin to rethink the margin structure as we get into 2014?

Thanks.

I think the margin structure based on components of margin remains the same.

The mix does effect that.

The models we put out there before at those run rates called for 75% and 80% recurring revenue, and as you can see this quarter we are in 55% and 58% for the year.

Obviously it does effect your overall gross profit margin, but each individual component in those rates that we are shooting for are still intact and making progress and growing every quarter.

Got it.

So just a quick clarification thought on that.

It is as much around the recurring route component as it is around the overall revenue component of the $500 million.

So we need the recurring route higher as well to get up to the 60% gross margins and the 40% - -

Yes, we always said that it is a component of being firmly in the run rate, and having the mix in the right range which when we model that, we looked at recurring revenues to be at least north of 70% of total revenue.

One of the reasons why we are optimistic and have optimistic expectations going forward is because we put in a significant amount of new printers into the market with a significant portion of it into outright professional and production installations.

So we have a reasonable expectation that the second half we will also see a significant uptake in our materials of our revenue, and that begins to rebalance the recurring revenue mix towards the targets that we modeled long term.

And with that kicking in, we think our over all model for the next year is not only intact, but probably somewhat accelerating given the heavy demand.

Got it.

Thank you very much.

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

You may proceed.

Good morning, gentlemen.

Good morning.

R&D.

How much increase was due to acquisitions?

How much from additional expenditures?

And can you comment on the future profile of R & D expenditures beyond this year?

Jay, the deliberate end quarter R & D increases that we made were above and beyond what came with- - what was already acquired.

So as Damon clearly said in his prepared remarks, a portion of the R & D certainly included things like Geomagic Solutions.

But most of the increases were deliberate end quarter increases where we decided to basically address opportunities that became definitively crystallized during the quarter both on the advance manufacturing front and the consumer front.

And our expectation given what we know today, our expectation is that these R & D run rates will continue, and might even slightly increase further because we see an abundance of opportunities ahead of us and heavy demand to confirm - - to validate those opportunities.

Well, will we see--you have a very robust pipeline of objectives.

Will the R & D increase at a 5% annual rate, 10% annual rate?

As we said during our June New York City Investor Conference, our expectation is that R & D will be somewhere in the range of 7% to 8% of revenue, and for this period it was at 7%.

Okay, thank you.

(Operator Instructions).

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

Please proceed.

Good morning, Avi, Damon, and Stacey.

I would like to dig further on Phenix Systems.

How many patents does Phenix Systems have?

What does their expiration timeline look like, and what are your view on barriers of entry and direct (inaudible) centering?

I could add one more, may I know how much sales of Phenix Systems are embedded in your full year revenue guidance?

Yes, so in terms of patents there are about 50 patents in the portfolio.

Most of them are fairly recent, and so they do not have any meaningful near or midterm (inaudible) dates.

A lot of them have to do with unique attributes like compacting powder (inaudible) the ability to get to much lower granularity, and the ability to create basically feature details and surfaces that are of quality and accuracy that are unparalleled in the marketplace.

I should also add that the Phenix Systems can already process about 15 different materials, which is also a key strength.

And that we have some specific systems that are geared towards dental and medical devices as well as much larger systems that are completely geared for high-speed production.

Relative to other competitive direct-metal systems the Phenix systems appears to have much higher throughput in manufacturing state to the tune of about 20% overall advantage.

And about my questions, how much Phenix Systems sales is embedded in your revenue guidance.

Would you be able to share that?

We did break that out into the guidance.

If you look it is what they have historically done.

It is not a significant number compared to our total revenue.

For the second half of this year, our guidance that we reiterated this morning is not really dependent on Phenix revenue, but it reflects the drag that we anticipate from the Phenix operations.

So the drag is baked in.

We do not have a lot of high expectations for revenue that are built into our guidance for the remainder of this year.

Okay, very helpful.

Thank you so much, Avi and Damon.

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

Thank you very much.

Damon you have talked about the leverage from materials, and I believe you have expressed with confidence that the lag will cease soon, But I do not really understand what is going on here.

You have seen four quarters now of year-end revenue growth of materials decline.

You are seeing a shift towards lower-price systems which presumably means the materials consumption goes down.

And it just looks to me like the utilization rate for the incremental machine sale is lower then you have seen in the past.

So what gives you the confidence that will recover and we will see the Razor Blade model really being expressed in the margin mix?

Well, what gives us the confidence is that the vast majority of the machines that are being sol and installed into high(inaudible) accounts are the kind of machines that we expect will kick in the second half, and begin to contribute.

It is very truthful that we have seen a shift towards lower cost systems.

That is a shift that we have been driving for the last few years.

But bear in mind that a great deal of our success is coming from selling the midrange of our production and professional systems including the ProJet 6000, 5000, 3500, and now the new x60 series.

These are high throughput machines.

That is not to be confused with what we do on the consumer side, which you are absolutely correct.

Those are not heavily utilized machines.

But given the mix of what has been placed over the last few quarters, and how long it takes customers to install (inaudible)and fully employing into manufacturing projects.

That is what gives us the confidence.

Right.

Well, it seems to me to be a key metric here, but the second is I have been scrambling to keep up with your revenue run rate.

Also, I have been ratcheting down the in-state business model in terms of the EBITDA margins that you should achieve in the long term.

Are you prepared to express what your long-term target is now, or should we just sort of--we are just following two different vectors here in trying to figure out where you will end up ourselves.

Paul, we have expressed our targets very clearly and succinctly over several periods.

And I would urge to you take another look and reflect on what is going on here.

What is going on here is we have heavier demands and increased inbounded interests that compelled us to basically boost R & D and marketing spending because we believe that this is the most exciting moments in the development of the Company.

That does not change the business model or the trajectory.

It just in a temporary basis says we are stepping up and boosting expenses in anticipation of accelerated growth.

The fundamental remain intact.

Okay, got it, but what is the target model here?

I do not think ultimately that we are changing from the metrics that we had at those levels.

The big difference at those $500 million run rates is the mix of the revenue sales and not having those recurring revenue targets.

We sort of achieved that.

We achieved the revenue run rates prior to the mix that we expected, but as we move towards those mix rates, we get to right to those levels.

And the other thing, Paul, to remember is that notwithstanding this early product mix for the quarter, we still managed to expand our growth profit margins.

As the rest of it happens, and our expectation is that it boosts growth profits even further.

Of course as the mix kicks in, the business model and expectations in our view will remain intact.

What is happening temporarily is that we have increased demand, and the mix will adjust in due course.

But, what is happening right now is the fact that our margins actually expanded on poor mix is a reason to celebrate.

Okay, thank you.

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

Please proceed.

Good morning.

Good morning.

My first question, I just wanted to follow up Troy's question on receivables because I was left a little puzzled after the answer.

I just want to make sure I am understanding this.

Receivables are up about $22 million or 25% sequentially after that $10 million increase in the first quarter.

Total sales are up only $19 million sequentially.

So that is where the first kind of questions start.

You cited RPDG and strong sales at the end of the quarter as primary reasons for that step up in receivables.

But if assume that RDPG does a little over $30 million in revenue or $7 million to $9 million per quarter.

Let us assume that you collected only half of that in the second quarter.

You still have $18 million or so to explain and printer and product revenue was up less than $15 million sequentially.

As a side moment, Geomagic - - You had three months of Geomagic in the mix there too.

I am trying to reconcile this $12 million of $15 million sequential increase printer other-product revenue depending on if you adjust for Geomagic with the $18 million sequential increase plus or minus if you adjust for RPDG.

Oh, you get to these things where we did have this increase just as we said.

A higher portion of revenue mix shifting to retailers and resellers which are on credit terms.

That is part of our planned business model change.

That was further affected by the RPDG and Geomagic, as you had said, but also the sales coming closer to the end of that third month of the quarter for the different reasons of the new product announcements that were happening, including the ProJet x60 products that are really taking hold and the sales occurring in the latter part of the quarter, and other increasing demand of printers in the latter part of the quarter.

So it is a timing issue there.

It seems like an--it is hard to understand how you would have that much in sales right at the end of the quarter when you are talking about $50 million sequential and now you are going to have $20 million sequential increase in receivables, and it all hit at the end of the quarter?

Or so much of it hit at the end of the quarter?

One part, just to be clear.

It is not at the end of the quarter.

It is within the last month of the quarter.

So the last third of the quarter.

It is not like the very end, either.

I just want to make cha that clear.

And Brian, we accept that it might be hard to understand, but those are the facts.

Okay.

And then just to clarify one point in RPDG.

I know that you incorporated that into the Quickparts operation very quickly.

Can you tell us whether that once something like RPDG is incorporated into Quickparts, is that revenue recorded as organic revenue?

Because the Quickparts operations is organic?

We are easily able to segregate the revenue and activity from RPDG verses the remaining of the business for the first year that we record for organic revenue.

So to be clear the 30.1% organic growth rate includes no RPDG revenue.

Okay.

Thanks for that clarification.

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

Thank you.

Good morning.

Good morning.

Can you comment on the progress that is taking place on the training of the (inaudible) the software sales?

I am interested in - - obviously you have been making the discreet sales of software, discreet sales of machines, et cetera...

And one of the goals is to ultimately get cross selling and selling entirely and work-flow products and things like that.

Can you tell us where you are in the process of training the sales force on the software side.

How successful you have found them at selling machines and things like that?

We have done the first round of training across the board, and we have held actually original training sessions in North America, Europe, and in Asia Pac, and as a result of that, we for all intents and purposes , got all of the qualified software resellers now into our personal printers as a first step.

We are now doing in Phase II the reverse.

We are getting most of our 3D printer resellers exposed to the Geomagic Solution 2014 sweep of products that we just introduced.

We did not want to do that prior to the integration of the product and the launch of the 2014 product.

So that second Phase.

Holden, it will probably in the same way that it took us a year or two to get fully up to speed the combined 3D Systems and Z-Corp resellers, it will probably take us that length of time to get this leg of the journey fully optimized.

We are probably another six to eight months away from declaring complete victory here which means plenty of upside in the second half.

All right.

Thank you.

Your next question comes from the line of Cindy Shaw from DISCERNPlease proceed.

We talked about the target mix for the long term model.

Thank you.

I wanted to know- - we have talked about the target mix for the long term model.

One thing I have not heard, and we heard about recurring revenue mix there might be, but I have not heard what sort of revenue growth you might anticipate to get that sort of recurring revenue mix.

And I was hoping you could give us some color on that.

I think, Cindy, that our growth rate is already implied in the ranges of our guidance.

What am I missing?

This would be for the long-term model with the operator and gross margins that we talked about.

There has not been any growth rate attached to that recurring revenue mix up north of 70% for the long-term model.

When we talked about the long-term model, we talked about revenue goal posts.

So we basically said in the range of $400 million to $500 million we expected a certain growth profit margin at certain recurring revenue mix and so forth.

For us to get to those targets of 66% and 60%, it basically depends on being firmly in a revenue run rate.

And secondly, on what percentage of total revenue will come from recurring revenue.

That is unchanged.

I understand that.

What I am asking is in that situation what kind of revenue growth would you expect?

Would you expect it to be the levels of revenue growth that you are seeing at this point?

Would it swell?

Would it accelerate?

It seems that and there was a previous goal in the $200 million to $300 million range that what we heard was well, we didn't hit that because we grew too fast.

And what I am wondering is what sort of revenue growth rate is compatible with the long-term model targets you have put out there.

Well, Cindy, that it is best to take another look at the implied growth rate that we have in this year's guidance, which gives you also an expectation for earnings per share, and that tells you the answers to what you are looking for.

So are you saying the revenue growth in this year's guidance would be compatible with the long-term model.

No.

I am not saying the revenue range for this year guidancewill give you the ranges of what we are guiding to this year.

Okay, I will move on.

There was - - at the recent shareholders meeting an authorization of 100 million additional shares to be issued which almost double from current levels, and it seems that with the recent secondary offering that would imply some pretty aggressive plans for spending within a year, or you might have waited until next year's meeting.

And I am wondering what sort of plans might be behind that authorization to almost double the share count over roughly a year.

The larger part of that is to true up with the authorized shares that we had out before, and it takes into account the splits we had done.

Is the biggest part of it.

The split adjusted it is not that big of difference, and it gets us to the same type of percentages of authorized shares versus outstanding shares that we have had in the past.

Is there the possibility of authorizing in the next year?

Almost doubling the authorized shares?

Cindy, you may be misreading what was done here.

The only thing that we did as a result of the split, we had to true up to come back to a comparable ratio between authorized and unauthorized.

It does not imply anything more than that.

I understood that explanation at the time . It just suggests to me there are plans to spend a lot more.

Maybe you give us some color on - -

That maybe a conversation that you are having with somebody else.

We have given you a fairly straightforward answer.

Yes, and it still left me wondering what the plans were.

Consumables - -

Wonder on.

You are free to wonder.

Thank you.

Consumables.

You commented on it earlier,and I have heard this in the past and this is consistent with the industry, the consumables on the less expensive printers as a percentage of the printer price tend to be much less than the professional production printers.

Can you give us more color on what your expectations are there, and what your experience has been so far?

What our experience has been.

First of all, It is very true, what you said that on consumer level printers that consumption is much lower than the professional and production systems.

What we have sensed so far is that in our case, it has been about three times greater than our expectationswhere it will level off over time, and what the ratio is percentage wise between ASP, the printer, and annual recurring revenues, we don't know yet, because we are only 18 or so months into the journey.

But what I can tell you is two things.

One, demand is very high, both for the printers and the materials.

Both contributed to backlog.

And in two successive quarter, we had to increase our manufacturing capacity.

And that was specifically for the Cube.

That was specifically for the Cube, Cube X.

On a related note, the production and professional printers, I thought I understood you to say you expect that to accelerate in the back half.

Of growth in that category in revenue basis last year was only 2%.

Can you give us color, and I have not had a chance to go through this morning's 10-Q.

How does that fair pressure on production during the second quarter and expectations as to why this - -

I do not recall saying anything about production printer specifically.

Can you tell me what you think you heard?

Well, we have approached too much in the last hour, it would be hard to be specific, but I did thought I hear that was one reason for - -

You have to be specific because you are asking for a specific answer to something that I do not think I said.

We can follow up offline with the transcript.

Can you just comment on what professional and production was 2% of revenue growth last year.

Is there expectations that will be higher?

Well, if we read the queue together , it says that revenue from professional printers including production printers increased 78.3% over 2012.

So I am not sure what is the 2% - - you can look on the queue on what page is it?.

Avi, that was the 10-K for last year.

No, no.

Cindy, this is this is this morning's queue.

That I am referring to.

Avi, what I am saying - -.

Let us stay clear.

I am referring you to this morning's 10 Q, and the reality is that professional and production printers increased 78.3%, and Damon in his prepared remarks - - maybe that is what you are referring to- - in Damon's prepared remarks related to slide thirteen of this morning's webcast.

Damon said, and I quote, revenue from our combined professional and production printers increased 78%.

And our personal printers revenue increased 333% over last year.

Now, what is your question?

Avi, I am not disputing that.

My question is the 10-K for 2012 says professional and production grew 2%.

What is behind the acceleration?

Well, increased demand from advanced manufacturing and consumer interests.

The very reasons that has given us this reason to invest more in our R & D and marketing, Cindy.

We have increased demand.

We have lots of interesting events manufacturing applications that are boosting revenue.

And on the consumer side, it has been very interesting period and exciting period.

Can you give us more color - -

And incidentally, we are trying to find what you are referring to, and we cannot find it.

Okay.

Can you give us more color on what is behind the professional and production acceleration?

More implementation into advanced manufacturing applications across the board.

So widespread across the board in advance manufacturing.

Yes.

Okay.

Thank you.

You are welcome.

And we have a follow-up question from the line of Anand Baruah from Breans.

Please proceed.

Hello, Damon, I just wanted to get your view on where you guys expect to focus M & A going forward and investing these capital dollars now that you have Phenix under the fold.

My hunch is that you feel pretty content with your materials positioning with Phenix.

I just wanted to get a sense of where M&A may be focused going forward and capital spending maybe going forward.

Thank you.

We do our have five growth initiatives that we focused on and some different areas.

One, we had said that when we did the equity raise that we said that the near term focuses were a couple of different areas.

One was definitely on the metal side, which we have moved on, and then continued advanced materials capabilities is another area.

We have said that we will continue to expand our Quickpart on-demand part services both for tuck-ins and geographically where we need to keep adding, and then continue to invest on the consumer side and the Healthcare side.

Sort of still well distributed , but well focused on what we have based on our five growth pillars.

Got it, thank you.

Just to follow up on that.

Just a sense of what M&A environment feels like today relative to where it has been, and how the price tag of future M & A may look relative to what you have done the last couple of years, thank you.

Well, the M & A pipeline remains very robust.

We are not one of the companies that tend to pay significant premiums for what we acquire.

You might say that we probably had the first mover advantage in the consolidation strategy.

Given the five growth pillars that we have, we have more of a target rich funnel here.

Our aim is to deploy capital and investments into areas that would be not only accretive to the business model and to our shareholders, but we always want to have some longer terms strategic components.

And with all of that our DNA in deal making has been that we do not over pay for what we get.

So when you look at what we have done to date, over 30 acquisitions, we have practiced that extremely well.

And there is no question that some segments of (inaudible) manufacturing are overrated at the moment.

But we have many more targets to work on notwithstanding the overrating in some sectors.

Got it.

Thank you very much.

Ladies and gentlemen, that concludes the Q & A portion of the conference.

I will now turn the conference back over to Stacey Witten for any closing remarks.

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

A pre-play of this webcast will be available after the call on the investor relations section of our website at www.3dsystems.com/investor.

Ladies and gentlemen that, concludes today's conference.

Thank you for your participation.

You nay now disconnect.

Have a great day.