3D Systems Corp (DDD) 2013 Q4 法說會逐字稿

Good morning and welcome to the 3D Systems conference call and audio webcast to discuss the results of the fourth quarter and full-year 2013.

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

(Operator Instructions).

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

Good morning and welcome to 3D Systems' conference call.

I am Stacey Witten, and with me on the call are Avi Reichental, our CEO; 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 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 matters discussed in this conference call should call in using the phone number 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 our webcast, please be aware that there is a five-second delay and that you will not be able to post questions via the Web.

Before we begin the discussion, I would like to mention the 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 of 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 or on our behalf, are expressly qualified by the precautionary 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 performance -- future results or performance and past performance is not necessarily (technical difficulty).

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 this morning.

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

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

Today, Damon and I will go over our financial results in more depth and update you on our progress and, at the end, provide an outlook for 2014.

Let me begin by saying that we are pleased to report another record revenue quarter on robust design and manufacturing printers demand, on accelerated materials growth rate, and on total unit sales that more than tripled last year's units.

Our fourth-quarter revenue grew 52% from the prior year to $154.8 million on a 76% revenue increase in printers and other products and expanding overall organic growth of 34%.

Although we have grown our total revenue by 52%, we actually expected more.

In fact, compared to our late October expectations, certain revenue categories fell short, and our much stronger order book didn't convert to higher revenue for the quarter, instead resulting in a near doubling of last quarter's backlog.

Unfavorable mix and extraordinarily high concentration of new product announcements also deferred some sales and helped suppress our expected gross profit margin.

As a result, gross profit margin remained flat from the prior year's quarter at 51.7%, and our operating expenses also exceeded our expectations, and Damon will cover that in more detail shortly.

For the year, revenue grew 45% to a record $513.4 million on an 80% revenue increase in printers and other products and a 29% organic growth.

Gross profit margin extended 90 basis points to 52.1%, despite unfavorable mix.

All of our revenue categories contributed to record sales for the quarter, but 3D printers and other products outpaced all other categories, growing 76% to $73.9 million, primarily as a result of strengthening demand for our design and manufacturing printers.

Our materials revenue growth rate accelerated to 39% and contributed some $37.2 million to revenue for the quarter, and our healthcare solutions revenue grew 67% for the quarter and contributed $21.8 million to our total revenue.

Despite posting impressive year-over-year total revenue gains for the quarter, services and consumer performed below our expectations.

Services rose 33% to $43.7 million, primarily driven by Quickparts, and consumer rose 162%, delivering $8.9 million of revenue for the quarter.

For the year, we experienced strong demand and high growth across all of our revenue categories, led by an 80% increase in 3D printers and other products to $227.6 million.

Materials revenue contributed some $128.4 million, a 24% increase, and services revenue rose 27% to $157.4 million.

Healthcare solutions revenue grew 45% for the year and contributed $71.7 million to our total revenue, and consumer grew 206% and added some $34.8 million of revenue.

Demand for our direct metals 3D printers continues to rise.

Major OEMs and service providers alike are investing in our ProX direct metals printers because of their capability the most demanding industrial-grade precision metal parts.

In the fourth quarter, we again sold out our direct metal printers manufacturing capacity and exited the quarter with a healthy backlog of metal printers ordered.

Just as a reminder here, we acquired Phenix Systems in July 2013, and on a pro forma basis, our 2013 annual direct metals revenue grew some 204% over 2012 to $14.3 million, driven primarily by Phenix printer sales.

During 2013, we increased our R&D expenditures some 87% to $43.5 million to further extend our leadership and extend our market share.

While we expect most of the benefit from these investments to accrue in later periods, for the full year of 2013 as a result of our R&D productivity, new product revenue rose an impressive 75% to $231 million.

As a reminder, products are considered new only for the first three years of a product's commercial life, for the purpose of this calculation.

Let's take a moment to unpack the positive impact of our R&D productivity and effectiveness.

For the full year of 2013, plus the first week of January 2014, we announced 39 new products, of which 24 were introduced during the six-week period between EuroMold in early December and CES in early January.

These significant new products span across of our revenue categories and verticals and included several breakthrough design and manufacturing printers, 3D scanners, and software.

Our introductions also included significant new consumer products, platforms, and experiences that we expect will shape and define the future of the consumer retail 3D printing categories and address completely new marketplace opportunities, including ceramics and food printing.

Based on marketplace feedback following EuroMold and CES, we fully expect these new professional and consumer products to accelerate our organic growth -- to accelerate our organic revenue growth rate in the second half of 2014.

Now for a more detailed look at our financial performance for the quarter and full-year 2013, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer.

Damon?

Thanks, Avi.

Good morning, everyone.

Our fourth-quarter revenue grew 52% from the prior year to $154.8 million, and despite mix and new product pressure, our gross profit margin held at 51.7%.

Consistent with our prior comments, we more than doubled our fourth-quarter R&D spending and continue to rapidly increase our sales, marketing, and infrastructure expenditures in support of our growth initiatives and recently announced joint development and alliances.

These expenditures and investments that aggregated to $50 million of non-GAAP operating expenses for the quarter are designed to increase our leadership position and expand our market share.

We believe that maintaining our historical performance doesn't require this level of increased expenditures, but that planning to double our revenue over the next couple of years does.

Although in October we guided for reduced earnings to reflect these actions, additional opportunities that added to our late quarter expenditures ramp surpassed our expectations and compressed our net income to $11.2 million and our earnings per share to $0.11.

On a non-GAAP basis, we earned $0.19 per share for the quarter.

Our 2013 revenue grew 45% to a record $513.4 million and gross profit margin expanded 90 basis points to 52.1%.

Our total operating expenses increased 55% to $186.7 million from the increased investment in sales, marketing, infrastructure, talent, and accelerated R&D expenditures.

Our strong revenue growth expanded gross profit margin and materially increased investments resulted in a net income of $44.1 million, representing a 13% improvement over 2012, and GAAP earnings per share of $0.45 and non-GAAP EPS of $0.85 per share for the year.

As you know by now, we report non-GAAP adjusted results that exclude the taxes that could impact amortization of intangibles; non-cash interest expenses; nonrecurring acquisition, integration, and severance expenses, including gain or loss on acquisitions; impact of litigation settlement and tax settlements; stock-based compensation; and non-cash loss on conversion of convertible debt.

Our total depreciation costs 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 the slide, as well as in our 10-K that we filed this morning.

On a non-GAAP basis, we generated adjusted net income of $19.7 million, or $0.19 per share, for the quarter.

The excluded items aggregated to an $8.5 million tax effective that increased to GAAP net income, or $0.08 a share, in the fourth quarter.

Our non-GAAP income was positively impacted by cutting back $5.5 million of amortization expense, $1.7 million of acquisition and integration expenses, $5 million of stock-based compensation, and $0.1 million of non-cash interest expenses, which was partially offset by a $3.9 million tax impact related to the items just discussed.

For the full year, on a non-GAAP basis we generated adjusted net income of $83.7 million, or $0.85 per share.

The excluded items aggregated to a $38.8 million tax affected net increase to GAAP net income, or $0.40 per share in 2013.

In the fourth quarter, 3D printers and other products revenue grew 76% to $73.9 million and made up 48% of total revenue.

3D printers alone contributed $63.1 million, growing 81% over the 2012 quarter.

Revenue from our design and manufacturing printers increased 75% and our consumer printers revenue increased 162% over the 2012 quarter.

Other products revenue includes software and perceptual devices.

For the fourth quarter of 2013, software products grew 95% to $6.3 million, reflecting channel expansion and the early impact that our new perceptual devices are generating.

With 3D printers revenue growth continually eclipsing our other categories, we are now also experiencing a significant uptick in our materials revenue, delivering a solid 39% increase over the 2012 quarter and contributing $37.2 million to our revenue.

Integrated materials grew 59% over the fourth quarter of 2012 and 40% for the full year.

Services revenue increased to $43.7 million and made up 28% of total revenue.

We continued to experience robust growth in all geographic regions during the year with a 68% revenue increase from Asia-Pacific, 45% revenue increase from the US, and 33% revenue growth in Europe.

And while we are very pleased to report record revenue growth for this year and the quarter, certain revenue categories fell short of our expectations.

First, it is worth noting that while we were experiencing much higher demand for design and manufacturing printers, the timing of orders, customer delivery would cost and direct metals orders that exceeded manufacturing capacity resulted in some $17 million or print orders alone in our year-end backlog and some of those will be delivered over the next few periods.

Print materials revenue exceeded our expectations in the fourth quarter and software revenue rose 23% sequentially as our new product launches and expanding channel began to take hold.

Quickparts revenue grew 36% over the fourth quarter of 2012, but was below our expectations, and it contributed revenue of $28.4 million as a result of shedding of unprofitable activities from two recently acquired businesses and some stronger-than-expected business seasonality.

Consumer products revenue fell well below our expectations for the fourth quarter and contributed $8.9 million of revenue.

We believe that our decision to preannounce our upcoming 2014 consumer product lineup substantially suppressed our sales for the quarter, as customer and channel partners delayed orders in anticipation of new products.

Furthermore, based in the overwhelmingly positive reception that our powerful CES 2014 lineup received, and subsequent channel opportunities and brand partnerships we attracted, we believe that it is erroneous to conclude that consumer demand overall is slowing down.

Gross profit for the quarter improved 53% to $80.1 million on higher revenue, and while we were pleased that our gross profit margin held at 51.7%, as compared to last year quarters, I want to emphasize here that it fell below our expectations for the quarter.

Higher gross profit margin contributions that we got from accelerated materials growth rate and rising software sales, both at a much higher gross profit margin than our corporate average, were not enough to mitigate the impact of lower-than-expected revenue, adverse product mix, lower service gross profit margin, and the heavy concentration of new product launches in the quarter that, altogether, kept our gross profit margin flat.

So even with a 70 basis-point expansion in printers and other products' gross profit margin and a 340 basis-point expansion in materials' gross profit margin, it was not enough to overcome the overall unfavorable mix of products.

While it's clear at the moment our gross profit margin expansion is pressured by the substantial printers growth rate, we expect gross profit margin expansion to resume after this temporary margin compression from the heavy concentration of new products and our significant manufacturing expansion.

Specifically, we expect continued gross profit margin expansion to be driven by accelerated materials revenue growth, higher contributions from software sales, and improving Quickparts gross profit margin.

For the year, gross profit margin improved some 48% over 2012 to $267.6 million.

This improvement was driven by higher revenue and expanded gross profit margin from printers and other products and print materials, but it was partially offset by service margin compression from recently acquired businesses.

Although we generated a higher portion of our revenue from lower-margin categories, we managed to expand our gross profit margin 90 basis points over 2012.

This increase was driven by a 550 basis-point improvement to our materials gross profit margin, to 73.7%, and a 190 basis-point expansion to our printers and other products gross profit margin.

This improvement was aided by the addition of higher-margin software products to 44.7%, but offset by a slight decrease in services gross profit margin to 45.2%, resulting in an overall gross profit margin of 52.1% for the full year.

For the fourth quarter, non-GAAP operating expenses amounted to $50 million, or 32% of revenue.

Sequentially, non-GAAP operating expenses increased $21.8 million, or 78%, primarily from increased R&D, sales, marketing, and talent expenditures and investments.

For the fourth quarter of 2013, non-GAAP SG&A expenses increased $13.1 million and R&D spending for the fourth quarter rose $8.8 million.

For the year, non-GAAP operating expenses increased to $145.9 million, or 46%, remaining flat as a percentage of revenue at 28%, even with higher sales cost, increased operating and compensation cost from acquisitions, and accelerated R&D investments.

For the year, non-GAAP SG&A expenses increased $25.8 million, or 34%, and R&D expenses increased $20.3 million, or 87%, to a total of $43.5 million and remained at 8% of revenue.

During the fourth quarter, we made very significant R&D, manufacturing, and sales and marketing investments.

As we previously stated, we are willing to tolerate earnings reductions to substantially accelerate our growth rate in market share, because we firmly believe that these investments, that already resulted in the announcement of 24 new products in six weeks, position us to double our revenue over the next couple of years and to achieve greater earnings power and profitability over the long term.

Certain new product development opportunities, alliances, and partnerships manifested faster than we had anticipated and accelerated our quarterly spending beyond our previously expressed expectations.

During our mid-quarter assessment and subsequent guidance update in late October 2013, we expanded our sales and marketing expenses -- we expected our sales and marketing expenses to increase by $3 million sequentially, but actual sales and marketing expenses increased $8.4 million, due to the expanded number of new products we unveiled, the faster and greater sales and channel expansion activities we undertook, and the higher concentration of acquisitions in the quarter.

While we expected R&D to increase by 1.4 -- $1.5 million, our actual R&D increased $5.8 million.

This is primarily from accelerated product launch timelines and additional partnerships and joint development opportunities we engaged in.

And finally, we expected our non-GAAP G&A expenses to increase by $0.5 million over Q3, but our actual non-GAAP G&A expenses increased some $2.5 million, driven by increased legal fees, bad debt, and operating costs from recently acquired companies.

All told, while our spending ramp exceeded our expectations, we believe that we got our money's worth in the sense that stepped-up investments that we made later in the fourth quarter help set the stage to substantially compress the time it will take us to extend our leadership, expand our market share, and deliver greater value over the long term.

We ended the year with $306 million of cash on hand, including $272 million net proceeds from our common stock offering and $167 million paid for acquisitions and 3D ventures investments.

We used $19.2 million of net cash from operations during the fourth quarter, resulting in $25.2 million cash generated by operations for the full year.

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.

During the fourth quarter of 2013, cash flow from operations was significantly impacted by the timing of purchases related to our increase in inventory from productions of dozens of new products and expanded demand and by the timing of orders and customer and vendor payments.

DSO was 79 days for the full year, up from 72 days in 2012, and was 77 days in the fourth quarter of 2013.

We expect DSO to normalize around 75 days, but fluctuate depending on timing and concentration of sales.

Inventories increased in anticipation of higher sales, support of our expanded portfolio, and in preparation for our 24 planned new product launches.

The number of unprecedented opportunities in front of us convinced us that now is the time to take bolder steps, like acquiring the Xerox Wilsonville team.

Bold investments such as this has brought us over 100 experienced engineers, including over 20 materials scientists, state-of-the-art facilities, and significant IP access which are meant to catapult us years ahead of the pack and to position us to accelerate our organic growth and set the stage for doubling our revenue over the next two years.

With higher revenue, we also expect our gross profit margin to continue to expand starting as early as the second half of 2014 and then reach levels of 55% to 60% as we get into the $750 million to $1 billion revenue run rate.

During the next couple of years, we expect sales and marketing expenses to rise incrementally with revenue and our R&D expenses to hover around 8% of revenue, as we fully absorb the Xerox acquisition, execute on our partnerships and alliances, and continue innovative new product development.

Even with our increased level of discretionary investments, we expect our operating leverage to resume in 2015.

We continue to focus on accelerating our growth and expanding our market share in order to deliver the full potential of our business model over the long term, and accordingly, we expect our 2014 revenue to be in the range of $680 million to $720 million, with greater growth during the second half of the year.

We expect our GAAP earnings per share to be in the range of $0.44 to $0.56 per share and our non-GAAP earnings per share to be in the range of $0.73 to $0.85 per share.

Our non-GAAP adjusted earnings estimate is fully tax effective and inclusive of our acquisitions completed to date.

We expect our reported tax rate for 2014 to be in the range of 32% to 35% and our cash taxes to converge with that reported rate in 2014.

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

Given the marketplace opportunities in front of us, we are prioritizing initiatives and investments ahead of short-term earnings during this phase because we believe that the fundamentals of our business model remain intact and because we fully expect the higher investments that we are currently making to favorably influence our results and our competitive advantage in the coming periods.

We firmly believe that the ultimate measure of our success will be the sustainable value we create over the longer term.

Through our accelerated actions and investments, we believe that we set the stage to substantially compress the time it will take us to extend and solidify our leadership position and deliver greater value.

That concludes my comments.

Avi?

Thanks, Damon.

We believe that we have a head start as leading industrial, healthcare, consumer electronics, athletics, toymakers, and food companies are receptive to forming the relationships with us, and as other and potentially larger players marshal their resources to pursue the 3D printing opportunity.

As the competitive landscape continues to evolve at a fast pace, our goal is to move even faster to solidify and extend our first-mover advantage, while we concurrently begin to pursue opportunities in new areas.

We see substantial organic and inorganic opportunities in the areas we are targeting, and we expect growing demand for our design and manufacturing solutions to continue to drive, lead, and shape our growth.

As a reminder, our 2013 annual revenue from our design and manufacturing 3D printers increased 60%, with some 50% of those units already sold into outright manufacturing applications.

Our growing installed base in this category already accelerated our materials growth rate and generated a 40% increase in integrated materials revenue for the year.

We expect further material sales upside as more of our customers' manufacturing facilities come online.

We launched 12 new game-changing professional and design and manufacturing products at EuroMold 2013, and we believe that we are the domain expert in aerospace, automotive, medical device, and jewelry manufacturing.

And we further believe that the acquisition of Xerox Wilsonville, combined with our Google's Project Ara, positions us to be able to catapult our R&D capabilities a full decade forward.

We believe that the consumer opportunity is nascent.

It's in its early innings, and during 2013, we conducted a series of experiments and built the channels, the retail presence, and product line.

It is worth noting that despite some quarterly bumps, largely of our own making, we managed to triple our consumer revenue for the full year and have sold over 22,000 consumer printers since the 2010 inception of our consumer initiative.

And we are just beginning.

At CES 2014, we unveiled 20 new prosumer, consumer, and retail products, and we came away from CES believing that we have the most comprehensive and attractive consumer portfolio available today at the right performance levels and price points to accelerate adoption.

We expect the recent acquisition of Village Plastics to bolster our consumer material development and margins, and the alliances and partnerships with domain experts in toys and food to position us for leadership in those categories.

Furthermore, we expect the acquisitions of Gentle Giant and Digital PlaySpace to enhance our brand publishing capabilities and the attractiveness of our consumer and retail platform.

We believe that starting in the second half of this year, consumer product could represent a substantial upside to our growth.

Armed with our new powerful product lineup, our expanded retail channels, and our new exclusive co-ventures and alliances, we believe that we have the necessary muscle in place to as much as triple revenue again, and we accordingly expect our 2014 consumer revenue to grow substantially and be in the range of between $80 million to $120 million, primarily driven by 3D printer sales.

Since acquiring Phenix Systems in July 2013, we have sold out of direct metals printers each quarter and, on a pro forma basis, tripled our direct metals revenue to $14.3 million from $4.7 million in 2012.

Based on our current lineup of direct metal printers, customer demand, and planned capacity expansions, we expect our direct metals business to generate between $25 million and $50 million of revenue in 2014, and for metals, this represents the beginning.

Some may view this as a small niche; however, we believe that direct metal printing represents one of the most important and exciting advanced manufacturing growth opportunities over the next few years, and our plan is to as much as quadruple sales over the next 12 to 18 months.

We believe that plan is fully consistent with the growing demand of our expanding direct metal lineup.

Over the past few months, we announced several key strategic partnerships and alliances with some of the foremost leading corporations in key areas of mutual opportunity.

Our partnership with Google is designed to deliver the first-ever high-speed continuous manufacturing of multi-materials 3D printer for the manufacturing of functional components of Google's planned Ara phone.

Our joint development agreement with Hershey is designed to explore and develop fab-grade manufacturing platforms, as well as prosumer and consumer 3D printers for edible chocolate and sweets.

Our recent Hasbro co-venture announcement is designed to exclusively co-develop and commercialize innovative play 3D printers and platforms.

Through this association, Hasbro will leverage its renowned brands and retail presence with our powerful 3D printing portfolio to redefine digital play.

Jointly, we plan to co-develop and commercialize innovative toy printers and platforms later this year.

Our exclusive Deloitte consulting partnership is designed to combine each of our areas of expertise to guide business leaders through the full spectrum of solutions required to integrate 3D printing into their business models for sustainable competitive advantage.

We view this as one of the most innovative executive education and demand generation channels available to date.

Our Intel alliance is designed to mainstream desktop and tablet embedded 3D scanning by providing our software and SDK for Intel's RealSense 3D Camera during the second half of 2014.

All told here, we believe that our ability to attract category leaders as co-developers, collaborators, and partners with real skin in the game positions us favorably for accelerated success.

We entered the first quarter of 2014 with positive sales momentum and stronger backlog, driven by increased demand for our advanced manufacturing activities.

We expect our growth initiatives and accelerated investments to extend our first-mover advantage and market share, and we believe that our enhanced and expanded channel can deliver continued success.

We believe that the ultimate measure of our success will be the sustainable value we can create over the long term, and we expect value to be generated as a direct result of our ability to extend and solidify our leadership position and are convinced that stronger market ship -- marketplace leadership translates directly to higher revenue and profitability faster.

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

Stacey?

We will now open the call to questions.

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

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

The telephone numbers are provided, again, on this slide.

If you are calling inside the US, the number is 1-866-953-6856, and if you are calling outside the US, the number is 1-617-399-3480.

The conference ID is 771-717-7985.

(Operator Instructions).

John Baliotti, Janney Capital Markets.

This is probably a question for Damon and Avi, probably each of you.

But I was thinking, recognizing you made several comments about willing to forgo the near-term margin improvement for the long-term growth and leverage, Slide 10, I think, to a degree speaks to that, recognizing the new products (technical difficulty) several years of growth and R&D is not a one-year phenomenon.

It has multiple years of benefits.

But if you look at just the discrete periods, it seems interesting that in 2012, your new products grew 70%; 2013, 75%; and yet the preceding 12 months, the R&D expenses lagged -- the growth in R&D lagged that.

So it certainly seems that your absorption of the R&D efforts is very high with the market, and I was just curious if you could talk maybe about some of the inputs you are getting, obviously internally, but also externally, to help you efficiently allocate those dollars.

Look, I think first, it is important to note that we measure the effectiveness and productivity of our R&D based on its market acceptance and revenue generation, and we have historically believed -- have gotten a great deal more out of every R&D dollar that we spend vis-a-vis the other players in our industry and in other industries.

So we believe that we are very good custodians of R&D activities in dollars.

The investments that we're making now are clearly designed to accelerate leadership in key verticals, extend and expand market share, and do it in a way that attracts more channels faster, attracts more domain experts in key areas that we are interested in, and build out both the manufacturing and consumer deployment ahead of anybody else's ability to catch up.

And we think that it's working.

It's working in terms of the opportunities, the conversations, the order book, the ventures and alliances that are on the table, and, most importantly, John, the impressive lineup of new products that will only begin to accrue benefits for us in the second half of this year.

So based on all these inputs and outputs, we believe that now is the time to step up our activities.

You have seen early returns from that step up in the six weeks between EuroMold and CES, and there is more to come.

And we also feel that now is the time to take even bolder steps and bring on capabilities like the Xerox Wilsonville team that brings additional 100 engineers, scientists, technologists, with 20 materials scientists, their labs, their know-how, access to hundreds of patents, with a powerful reminder here that this is the team that mainstreamed 2D color printing in the last decade to decade and a half and were able to crack the code on making high-performance, reliable, plug-and-play low-cost printers that are very (technical difficulty)

(multiple speakers)

They catapult us forward at least a decade.

Troy Jensen, Piper.

Thanks for taking my question.

Maybe a quick follow-up on the OpEx.

I appreciate you guys' commentary on what the incremental above-plan expenses were, but could we just focus on the sales and marketing?

I think it was $8.5 million above your original expectation.

Just curious to know, was there any co-marketing payments, any distributor incentives baked into those numbers?

In sales and marketing, as far as distributor incentives, no.

All of the distributor incentives and all of the discounts and everything they get, they actually get recorded in net revenue.

That doesn't get recorded down there.

We did make some marketing payments and do some marketing for different areas, for sure, but that wasn't the drivers.

The real drivers again were, just like we said there, the accelerated new product introductions, which aren't -- they're not co-marketing payments, but there is marketing campaigns around those, and there is literature and all the assets that go around providing a marketing campaign, but not necessarily co-marketing payments as you would define them.

Yes, for the sake of clarity, Troy, the increase -- or I should say it differently.

During the fourth quarter, we didn't have any extraordinary or unusual reseller or co-marketing or other incentives.

The increase is purely linked to the extraordinary number of new product introductions, to the activities around those, and, to a lesser extent, a much faster expansion of sales organization and channel and, to a lesser extent, some acquisitions.

Ananda Baruah, Brean Capital.

Thanks, guys, for taking the questions.

I guess let's give you one for both Avi and Damon.

Just with regards to the revenue guidance for the year, I guess the midpoint, the $700 million, Avi, Damon, if I back out what you are suggesting the contribution -- incremental contribution to the growth of revenue dollars for both metals and for consumer is for 2014, it seems to suggest that you are implying some slowing, some potentially meaningful slowing, in your core commercial plastics business.

And I guess the question is, is that the case?

And if not, it would seem that there is some conservatism, maybe meaningful conservatism, baked into the rev guidance.

So I was just looking for some context around that.

Thanks.

Definitely, as Avi spoke about the consumer range and the metals range, those are ranges just like the revenue range of $680 million to $720 million is.

So you can't just take the midpoint of one and the others; you got to look at the whole thing, and there is some -- why we give ranges is there is some play in how those ranges will work out.

We do not believe that there is weakness in the plastics side for this and that we will achieve growth rates in all areas.

Yes, and I would add to that that I prefaced in my prepared remarks that our consumer initiatives, to a certain extent, represent an upside.

So yes, there is some conservatism in our guidance, appropriately so.

We think that certainly in the case of consumer, it is early days, and based on all the experiments that we conducted in 2013, we believe that we have built the presence, the product, and the necessary muscle via some of our new co-ventures and alliances to actually plan on [twerkling] revenue again there.

Metals is in the beginning stages of what we believe is a very exciting journey.

As we have said repeatedly now, we have been sold out of capacity every quarter since we acquired this business, and we expect that this year it could generate someplace between $25 million and $50 million in revenue, and it is just the beginning.

We don't recall many exciting opportunities and we expect our plastics business to continue to grow strong.

Bear in mind that just on our design and manufacturing printers that are primarily plastics, that category grew last year by 60%.

And that is primarily driven -- or was primarily driven by plastics, and about half of those installs now going to outright manufacturing environment.

And so, we see significant expansion opportunities in plastic, and we think that the more that we expand that category, new-use cases and applications both in design and manufacturing will avail themselves.

Jim Ricchiuti, Needham & Company.

I just wanted to follow up on the discussion around metals, the range that you are suggesting for 2014 and the increase that potentially you could see over the next 12 to 18 months.

First off, is that all organic?

And secondly, what gets you -- if it is all organic, what gets you there?

Is it new products; is it market share gains; or is it just your expectations for the overall health of the market demand in that area?

Jim, clearly the growth in metal that we anticipate is going to be based on our organic efforts to grow that product line.

Within that range, we are not contemplating additional acquisitions in direct metals to aid -- to achieve that range.

We may contemplate direct metal acquisitions, but not to reach this range.

This range is predicated solely on our organic efforts.

And what gets us there is basically the attractiveness of the current product line.

It is very attractive because of the unique capabilities and differentiating output that it delivers.

And based on the current funnel of opportunities in the order book and also based on our plans to fast-track a larger format direct metal business, we think that the combination of the product and the extended channel that we have, we can continue to drive those kinds of growth rates just on our own volition, without any assistance from any other activities.

One important point to make here, just for clarification, is when we are talking organic and inorganic, we did not include the metals printers in the organic growth rate for this quarter and they will not be included in the organic growth rate until after July of this year.

So I just want to clarify that.

Bobby Burleson, Canaccord.

Thanks for taking my question.

Just back to the metals printers again, if you don't mind.

It sounds like there is a lot of demand out there for an alternative to EOS, and you guys are capitalizing on that.

How about on the service bureau side?

What kind of allocation are you giving yourselves internally in order to make sure you guys have an advantage there, let's say, versus a RedEye or other guys that are supplying service bureau capacity?

Yes, we're getting there, Bobby, but up until now, we have given clear preference to OEMs and other customers, so a little bit of the shoemaker syndrome here in the sense that we had to go barefoot for a few quarters while we shoed all of our customers.

But in the next few months, between now and the end of the second quarter, we will have installed our own service bureau capability within Quickparts so that we could also take advantage of increased demand for cloud printing of metal parts, which, as you know, with the acquisition of Morris Technologies by GE and some others, has taken quite a bit of capacity out of the service bureau marketplace that needs to be fulfilled, so we view that as a near-term opportunity for ourselves.

Holden Lewis, BB&T.

(Operator Instructions).

There is no response from that line.

Ken Wong, Citigroup.

Just a quick question on 2014 outlook.

I guess, one, with all the products launching in the back half, would you expect seasonality to trend meaningfully above roughly the 55% you usually see?

And then, second, how much cushion do you guys feel you have embedded in the OpEx guide there?

So should we expect that is a number you guys might have to revisit down the line?

I think we did put in the -- our comments here that we expect faster growth in the second half of the year from -- a lot of it is how the new products that we have launched will get brought to market and traction.

We believe that the EPS guidance that we put out there for 2014, there is a high and a low, again, for that and we feel very comfortable with the range that we have there for that, and that's [expected] by both -- definitely by both OpEx, but also revenue and margin.

And one thing I just want to make the point again, with where we are and what we have done with our preannouncement that we had, there has been a lot of focus, and rightfully so, on the operating expenses, but you also have got to realize, and I stated when we were talking about comments, that our mix also affected this, which is out of our control, to some degree.

That's affected the gross profit margin.

And our gross profit margin was below where we expected it to be, even though we were able to keep it flat to the last year's number.

So that was a driver to this last year's amount, too.

Jay Harris, Goldsmith & Harris.

First, my great respect for the extraordinary growth that you are generating and the details that you are providing in your formal remarks.

My question is simply this, is there anything looking out over the next few years which would interfere with your driving your operating expense ratio into the mid to high 20%s rate?

Look, Jay, first, thank you for your comments.

Secondly, for the next few years, it is about leadership, growth, and scale that on the other side of it, we believe, generates significant economic benefit.

And as Damon already mentioned in his prepared remarks, we fully expect operating leverage to return in 2015.

So we -- based on our planned product lineups, technology, and execution, we don't see any obstacles to success, unless the world collapses somehow.

And ultimately, we have mentioned before, and if you can see on the slide, these increases in expenses, both in R&D, sales, and marketing, probably to a lesser extent in the G&A site, but that was a lower increase, they're discretionary costs.

So they are ones that aren't -- they don't need to continue if we saw, like Avi just said, if the world started to fall apart and it affected some other areas of our business, we are able to scale back and not affect the business further.

Yes, and it has -- I also want to -- Damon said this, and I want to repeat what Damon said.

We have generated the results that we generated last year, the 52% revenue growth for the quarter and the 45% revenue growth for the year, without the need to step up our expenditures, and we still generated a significant number of new products based on a much lower level of spending.

What we're doing now is clearly preparing us for the next chapter of growth.

It wasn't necessary if we just wanted to continue as we are.

We think that it is necessary as we plan to double revenue again in the next couple of years.

And it's completely discretionary.

Amit Daryanani, RBC Capital Markets.

Just a question on, I guess, slide 20, where you talk about the 2015 aspiration.

I realize it is not a formal guide to get you to $1 billion by 2015, but that would imply you get 40%-plus kind of growth in 2015, pretty much on an organic basis.

Could you maybe just touch on what are the opportunities or where it grows that you are so excited about that you can see this ramp-up in 2015, beyond the growth in 2014?

And if I could just sneak in, the direct metal ramps you guys are talking about, do you think you have enough capacity to sustain that growth or should we think about more capacity additions there through this year?

You definitely should think about more capacity additions through this year, and we have already talked about those, last quarter and the quarter before that.

We are in the process of tripling capacity over -- from that period over this next year.

And if metals continues to do what we would expect and everything, you can expect additional expansion, and that's a good thing.

From getting to that $1 billion rate, next year's guidance of $680 million to $720 million doesn't -- it is our business as it stands today.

And so, that is -- would be organic, or some of it is acquired, but last year acquired.

We assume to get to the 40% and we are going to continue to do some acquisitions, so -- to the $1 billion.

We are going to do some acquisitions.

It isn't formal guidance out in year two; it's more of a directional thing to say.

And if we did something larger, we would even update about that or change that.

But the real formal guidance is just the next year one, which is $680 million to $720 million, which doesn't include any future acquisitions that we may do.

Yes, and we said that certainly for 2014, we expected organic growth to be at or above 30%, so just to preface that again for clarity.

And what gets us excited, back to the first part of your question, what gets us excited is -- look, we have grown our design and manufacturing printers at a very high rate over the last few years.

Most of it is -- the vast majority of it is organic growth in 2013.

We expect that to continue to accelerate.

Our materials revenue growth rate, which already for the quarter has risen to 39%, and integrated materials for the quarter of 59%, so we see lots of upside there within the main plastics.

Metals is very exciting, and it's in its beginning stages.

And consumer is in early innings, and we have the kind of experience that we gained, products that we developed, and partners that we attracted, we think that in the next few years it represents an upside to the business.

You put it all together, barring any unforeseen structural changes in the economy, we think that what we are doing now positions us for accelerated organic growth rates, and that is primarily what is behind the two-year outlook that we provided this morning.

Wamsi Mohan, Bank of America Merrill Lynch.

Thanks for taking my question.

Your revenue was up $19 million sequentially from 3Q to 4Q, but your receivables were also up $18 million quarter on quarter.

So the cash you are receiving from these sales didn't really grow in the quarter.

Do you expect that to reverse in 1Q?

And could you also reconcile the high level of finished-goods inventory with the commentary of growth being slower in the first half of 2014?

Thank you.

Two areas, yes, the receivables did grow.

Some of that is due to the timing of sales, but it also includes us having more and more sales, as we've talked about before, going through our reseller channel, which have terms, as opposed to the direct sales channels, which used to get deposits upfront and everything.

So the changing business model that we've been talking about for a number of quarters continues to affect that.

Timing of receivables, every quarter is going to change a little bit, so back and forth.

We don't see any issues with the receivables that we actually -- the net receivables that we have reported out there.

Inventory, the increase of finished-goods inventory was a couple of reasons.

One, we said that a few of these sales categories were below our expectations and we can't tilt inventory to them.

We do expect the sales to be moving through and we adjust our forecast for building over the next quarters.

The other one that is just as important or even more so is all the new products we announced, the 24 new products between EuroMold and CES, getting ready for the manufacturing and building those printers and inventory is also one of the areas that we are planning for this next year.

Yes, and remember, too, that -- Damon said this in his prepared remarks, a big part of our increase in backlog or the order book that didn't timely convert to shipped revenue for the fourth quarter amounts to about $17 million of printer orders that ended up shifting to backlog, and so that accounts for some of the inventory increase, as well.

Peter Misek, Jefferies.

Just two quick questions, or one question and one clarification.

On the seasonality, you have talked that growth will be bigger in the second half.

Is there any kind of percentage split or way you can help us model that progression for the year on the revenue side?

That would be extremely helpful.

And just to go back to metals, I guess if we look at what is going on in metals, give us some more detail or color on verticals that are driving the growth, any kind of mix shift?

Obviously, a lot of large orders seem to be circulating in that space from large industrial groups, but we're trying to just size that market opportunity for 2014 and also into 2015.

Thank you very much.

Let me start with the latter part of your question on metals.

What is driving metals adoption primarily today is aerospace, defense, and automotive, and then a series of very interesting patient-specific medical devices, from dental restorations to implantable knee and hip replacements and some other specialty type implants.

And also, some micromechatronic type of applications.

In all these areas, it is a beginning, so with every passing quarter, we just see increased opportunities in front of us, because in many instances, this will be the first time that the Company within a vertical is beginning to adapt this kind of technology, and in many of those instances, this is only a prelude to subsequent multiple orders in the future.

At this time, that is all the time that we have for questions, and I would like to turn the conference 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 made available after the call on the investor relations section of our website, www.3dsystems.com/investor.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.