3D Systems Corp (DDD) 2014 Q2 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 second quarter and first six months of 2013.

My name is Whitley 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.

Please proceed.

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 Andy Johnson, our General Counsel.

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

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

Participants would like to discussions at the end of the session related to matters discussed in this conference call, should call in using the phone numbers provided here on slide 3. The phone numbers are also provided in the press release that we issued this morning.

Those who have accessed the streaming portion of the webcast, please be aware that there is it a 5-second delay and that you will not be able to pose questions via the web.

The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide.

Actually results may differ materially.

Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K During this call, we will discuss certain non-GAAP financial measures.

In our press release, the slides accompanying this webcast, and our filings with the SEC, each of which is available on our website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013.

Now, I will turn the call over to Avi Reichental, President and CEO.

Thanks, Stacey.

Good morning, everyone, and thanks for joining us today.

Let me begin by saying that we are pleased to report that strengthening demand for our design and manufacturing printers drove 126% increase in printer units sold for this category.

Print materials revenue increased 30% and services revenue expanded 38%.

Total revenue for the quarter increased 25% to $151.5 million on a 77% higher bookings over the last quarter, resulting in a record $31.9 million of backlog as we exited the quarter.

That included $23.1 million of orders in hand for professional production and consumer printers, representing a 29% sequential increase in printer bookings alone.

Several factors contributed to the expansion of our order book.

First, higher demand for our Direct Metals printers that continue to rise faster than we could add manufacturing capacity.

Second, booked orders for polymer printers that were scheduled for labor deliveries by our customers, And finally, our decision to postpone shipments of new consumer products to improve user experience led to an extended backlog of our consumer orders.

These factors shifted a portion of our organic bookings into future periods, and temporarily suppressed our organic growth rate to 10% during the quarter.

Our growth profit margin shouldered the transitional effect of concentrated new product launches, as well as the absorption of legacy product obsolescence and manufacturing expansion cost.

Together, these factors and changed mix compressed gross margins from 400 basis points from the prior-year's quarter to 47.8%.

While it's clear that this transitional forces temporarily pressured our gross profit margin, a detailed examination of the specific drivers confirms that our fundamentals are intact, and our gross profit margins are poised to rebound and resume their expansion trajectory.

We effectively kept our authorizing expenses flat on a sequential basis, even with continued investments in R&D, sales, marketing, and manufacturing capacity.

And we generated $19 million of cash from operations during the second quarter as returns on our recent stepped up investments began to materialize.

Revenue from our design and manufacturing category increased 28% to $144.2 million on 126% increase in units sold.

Our growing installed base and increased [trentory] utilization fueled materials revenue growth of 30% percent, and our expanding services menu contributed to 38% increase in services revenue.

Revenue from our rapidly expanding healthcare category increased 46% to $27.5 million as we continue to expand our user base and products.

During the quarter, we acquired Medical Modeling adding virtual surgical planning guiding and 3D printing of medical devices to our capabilities.

And as you know, just yesterday we announced that we signed a definitive agreement to it acquire Simbionix, a leading provider of the 3D virtual reality surgical simulation and training product.

This transaction expands our digital thread in personalized medical services even further from the training room to the operating room.

And this is an exciting acquisition for our Company, one that's been in the works for over a year and a strategic use of our recently raised capital, which I'll talk about a little bit in more detail later today.

Delayed new product availability held consumer revenue to $7.4 million, but did not impede higher consumer bookings of an additional $7.7 million.

In July, we commenced commercial shipments of our new CubePro printer and iSense scanner and expect to begin shipping the new Cube and August.

We expect this product and additional new consumer products, planned for later this year that you can see on this slide, to drive higher consumer revenue contribution in the second half.

R&D remains a strategic priority for us and through June of this year, we more than doubled our R&D expenditures to $34.9 million, including the addition of the Xerox Wilsonville R&D and engineering team.

While we expect most of the benefits from these investments to accrue in later periods, they are already helping to accelerate product development and drive innovation across all product categories.

Fueled by stepped-up R&D, we already launched 10 new products in the first half of this year, and revenue from new products increased 49% to $135.1 million.

We expect to see greater revenue contributions and accelerated organic growth curtailed by our newer products during the second half of this year.

And with that, I will now turn the presentation over to Damon Gregoire, our Financial Officer.

Damon?

Thanks, Avi, and good morning, everyone.

For the second quarter, we announced net income of $2.1 million and earnings per share of $0.02.

And on a non-GAAP basis, we earned $0.16 per share.

For the first six months, we increased revenue 34% from the prior year to $299.3 million, and reported net income of $7 million and earnings per share of $0.07.

On a non-GAAP basis, we earned $0.30 per share.

Printers and other products revenues rose to $61.9 million and made up 41% of total revenue.

Higher placement and utilization of our plastic, nylon, and metals printers continues to fuel strong materials revenue, which increased 30%, contributing $38 million in revenue.

Service revenue rose 38% to $51.5 million and made up 34% of total revenue.

We continue to experience robust growth in all geographic regions during the year with a 45% revenue increase from Asia-Pacific, 32% revenue growth from Europe, and a 16% revenue increase for North America.

Materials revenue continued to benefit from strengthening design and manufacturing demand.

Integrated material sales, which more accurately represent the strength of our install base, grew by 35% to $27 million for the period, and 41% for the first six months.

We expect materials growth rates to rise further as our industrial printers install base expands our newer and faster printers and the introduction of higher performance materials.

Demand for our Direct Metals printers continues to rise faster than we can add manufacturing capacity.

After maxing out our Phoenix manufacturing facility, we are bringing a sister manufacturing facility online in the United States during the third quarter, and expect to enter 2015 with ample production capacity for metals printers.

I want to remind everyone that when we acquired Phoenix last July, its revenue was in a multi-year decline.

And under our leadership, Phoenix revenue more than doubled during the first six months and increased sequentially by 55% from the March quarter.

We expanded sales of metal printers into aerospace, automotive, and medical customers.

We are adding metals printers to our Quickparts services fitting our Medical Modeling operations with our Direct Metals printers and pursuing FDA clearances for personalized medical devices.

Gross profit for the quarter was $72.4 million and gross profit margin was 47.8%.

The decrease in gross profit margin reflects the absorption of a one-time inventory write off from our aggressive shift to multiple new products, which accounted for a 1.3 percentage points compression, and a change in mix of sales which amounted to another 2 percentage points.

During the first half of the year, our gross profit margin shouldered a number of factors.

The impact of a concentrated number of new product launches that bring additional start-up costs, the end of life for legacy products, including a one-time inventory write down in the second quarter, the incremental costs to bringing several manufacturing facilities online, and first-half sales mix.

While these transitional forces temporarily pressured our gross profit margin, after conducting a careful and detailed analysis of the specific drivers, we concluded that our fundamentals are intact and our gross profit margins are poised to rebound and resume their expansion trajectory.

Specifically, we expect to begin to see materials margin recovery in the third quarter and further expansion thereafter.

We see a rebound in printers' margin beginning in the third quarters as we work through the product transition and complete recovery to historic printer gross profit margins in the fourth quarter.

And we expect continued service margin expansion, driven by higher Quickparts margin contribution, continued software revenue growth, and our expanding healthcare services.

Sequentially, quarterly non-GAAP operating expenses remained flat.

Clearly indicating that our stepped-up operating expenses have stabilized and our operating leverage is set to expand further during the second half of this year and through 2015, which is consistent with our expected revenue growth.

We generated $19 million of cash from operations during the quarter and ended with $570.3 million of cash on hand.

During the first half of the year, we paid $53.8 million for acquisitions and venture investments and $9 million for capital investments, and we also received $299.7 million of cash proceeds from our equity raise in May.

Continued enterprise-wide synergies more than offset a temporary rise in inventory that resulted in substantially higher cash from operations.

For the first half of this year, we generated $15.9 million more cash from operations than in the same period last year, notwithstanding the $15.1 million of new product inventory buildup that we expect to liquidate in the second half of this year.

Sequentially, we reduced DSO for the quarter by three days and expect DSO to decline further to 77 days, with periodic fluctuations depending on timing and concentration of sales.

We enter the second half of this year with higher demand, favorable growth indicators, and a record order book of $31.9 million, a 77% increase compared to last year's June quarter.

We typically generate a higher portion of our revenue during the second half of the year, as we evidenced last year when 57% of our 2013 revenue was in the second half of the year.

Accordingly, and as we have said all along, we expect to deliver a higher portion of our annual revenue during the second half.

Let me be more specific on this.

If we just apply our historic second-half annual revenue distribution ratio of 57%, it suggests a growth rate up 37% for the second half of this year.

Add to that the fact that we expect less than 10% of our total revenues for the second half to be generated from businesses we acquired within the past year, and the organic growth rate is in line with expectations.

But beyond the historic factors, we expect higher revenue contributions from all the new products that were not available during the first half of 2014, and to recognize the revenue from the rising number of orders already placed for our new consumer products.

These factors, combined with a record bookings for our design and manufacturing solution, provide us with the confidence to revise our revenue guidance this morning.

Factoring in the expected net contribution after the planned completion of Simbionix acquisition and the delayed closing of the Robtec acquisition that was already included in our previous guidance, we are raising our 2014 revenue guidance.

We expect revenue to be in the range of $700 million to $740 million, and we are reiterating our EPS guidance expecting 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.

As a reminder, our guidance is fully tax affected and inclusive of our acquisitions completed to date, and the anticipated closing of the previously-announced acquisitions of Robtecs and Simbionix, both of which we expect to close during the second half of this year.

Our expected blended annual tax rate is 32% to 35% and is reflected in our annual guidance.

But I would also like to remind you that this guidance is based on our current plans and assumptions and is subject to risks and uncertainties.

That concludes my comments.

Avi?

Thanks, Damon.

During the second quarter, we continue to expand and refine our business in line with our growth initiatives.

We acquired Medical Modeling, and that added proprietary virtual surgical planning, guiding, and delivery of 3D printed medical implants and devices.

We announced the acquisition of Robtec in Brazil to establish a strategic sales and service platform and a scalable gateway into Latin America, which we now expect to close later during the second half of this year.

And we added several major distributors, including ScanSource, Konica Minolta, and Canon Marketing Japan, that we expect will contribute meaningfully to future growth.

We advance the development of our continuous high-speed fab grade 3D printer platform and related polymer and conductive materials development.

And we are convinced at this point that this advanced manufacturing platform can significantly increase 3D printing production speeds, and successfully address the needs of many industrial and consumer goods companies.

We launched our Make.

Digital educational initiative at the recent White House Maker Faire to promote and advance digital literacy and education by empowering and equipping students with 3D design, scanning, and printing capabilities made by 3D Systems.

And we also secured an additional 200,000-square foot manufacturing facility in Rock Hill, South Carolina to further enhance and expand our manufacturing capacity and capabilities., and we expect that this facility will become fully operational during the first quarter of 2015.

I also wanted to note, or by way of an update, share with you that our CFO search has attracted a number of highly qualified candidates, and accordingly, we expect to successfully fill this important position during the second half of this year.

As a reminder, and as both Damon and I have said previously, Damon plans to continue to act as our CFO until we find his successor, at which point he will transition into his new M&A leadership role.

Yesterday, we announced that we entered into a definitive agreement to acquire Simbionix.

Simbionix is a leading provider of 3D virtual reality surgical simulation products, and the acquisition is for $120 million in cash, subject to customary closing adjustments and conditions.

We expect to be able to close this transaction within the next 30 days.

And we expect it to be immediately accretive to cash generation and contribute to non-GAAP earnings per share after closing.

This combination expands our healthcare reach from the training room to the operating room.

More importantly, it brings synergistic technologies that enables us to accelerate the creation of an end-to-end platform, 3D simulation, training, virtual surgical planning, guiding, and the delivery of 3D-printed procedures and medical devices.

Simbionix also brings a complementary global sales channel and deep clinical relationships that our expected to substantially accelerate cross-platform adaption between our mutual capabilities.

The combined capabilities could revolutionize surgery by allowing physicians to master surgical procedures with improved performance, and shape next gen patients specific modeling, 3D printing, and simulation, a key driver in personalized surgery and personalized medicine.

Simbionix brings the most comprehensive and technologically advanced product line, and already has 60-plus interventional procedures across eight specialties, with 16 simulation platforms and 70-plus software modules that are protected by 46 global patents.

Additionally, Simbionix strengthens our R&D capabilities further with substantial demand expertise in software engineering, in physics, mathematics, medical specialty, modeling, and it already serves the world's leading hospitals simulation centers and medical device OEMs.

Finally, putting Medical Modeling and Simbionix technology together establishes a first of its kind digital thread for human body for an extending range of bony and soft tissue medical procedures, and extends our first mover advantage in this fast growing 3D healthcare vertical.

We enter the third quarter of 2014 with a record order book and strong sales momentum, driven by increasing demand from all of our categories, and we also expected to benefit from the recent addition of several major distributors.

We expect to generate a higher portion of our revenue during the second half of this year on normalized mix and rebounding margins, and our first-half actions and investments that pressured our revenue and earnings but strengthened our order book, portfolio, and channel, we believe also substantially compressed the time required for us to deliver greater value and achieve scale.

We believe that the fundamentals of our business model remain intact, and that the ultimate measure of our success will be in the sustainable value we create through 2015 and beyond.

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

Stacey?

(Operator Instructions)

John Baliotti, Janney Capital Markets.

Good morning.

Hey, Damon, I was just wondering, with respect to the comments you made about gross margin, it looks like about half of the pullback was you delineated those two categories.

And I guess framing the first-half gross margin with respect to your comments in June about expecting leverage in the second half and further into 2015.

Is all that on track?

Is this what you were, to a degree, with some one-time items of course, but does this still keep you guys on track for that kind of a shift in the second half?

Yes, we believe so.

I did delineate the a couple of factors -- one was that one-time write off, which was 1.3 percentage points; and the other is mix, not just between the different categories, but within the categories.

And our view that, when we're looking forward, especially as we're expanding more and more into the manufacturing areas that we talked about, we have a good vision of what those future sales will be in certain areas, especially material usages as these machines come online.

So, that's what gives us confidence, and we do believe that we rebound back into the levels we were and our gross profit margins rebound, in total, back to those levels.

John, we together conducted under Damon's leadership, a very careful and complete analysis.

We have fairly good visibility of the remainder of the year in terms of the puts and takes that could influence gross profit margins.

And we concluded that, excluding these transitional factors and one-time items that Damon already talked about, the fundamentals are intact.

We expect materials recovery very quickly and continued extension, and we also expect that, in a post concentrated startup of all the new products, printers will resume as well.

We also expect to continue the expansion in our on-demand parts, which favorably expanded during the quarter, and we expect additional oomph there for the remainder of the year.

Jim Ricchiuti, Needham and Company.

Thank you.

I realize there are a number of moving parts in the printer revenues.

You've had record -- very strong bookings, backlog, and, clearly, it sounds like a good quarter in metals.

But I'm trying to get a sense -- if we look at the core plastics printers, you have clearly seen a deceleration of growth there.

What gives us the confidence that there hasn't been either some slowing in the market or potentially some share shift?

Well, I think that several factors give us confidence that actually the underlying strength is there, Jim.

First, that if you look at the category of design and manufacturing, unit sales are up 126%.

If you look at it as a revenue category, which also includes materials in it, et cetera, it's up, I believe, by 28% or something like that.

And while metals contributes to that, there is no question that our polymer printers, including SLA and SLS, are contributing substantially to that growth.

And also, Jim, when we look at what's in our backlog, what's in the order book that has expanded substantially for printers, there is a healthy amount of polymer printers, or, more specifically, SLA, SLS, and other plastic printers that we characterize in this category, to give us the confidence that nothing is slowing down and that the demand will continue to be strong.

And we certainly, Jim, don't see any share shift.

In fact, the continued expansion of our bookings, specifically in printers, is at an all-time high.

Troy Jensen, Piper.

Thanks for taking my question here.

Question for Damon, if you look at the guidance, you boosted the range by about $20 million.

Could you give us any insight into how much you're getting from Medical Modeling, Simbionix, and Robtec, or whether or not that is above or below that $20 million boost?

Well, we have a couple of things that have happened here.

When we revised our guidance, that included Medical Modeling, the acquisition there.

It included an anticipated closing date of Robtec.

As we said this morning, that anticipated close date is still within this year but it's been pushed out.

And, if you remember, when we raised our guidance then, we didn't increase our EPS -- our non-GAAP or GAAP EPS guidance, even with the addition, but we didn't decrease it, even with the addition of all the shares that we added from the raise.

Some of that was offset by increased -- what we expect it would be, increased profitability or contributed profitability from Robtec.

With this now, this new guidance includes -- we expect that Simbionix will close in the next 30 days or so, and it includes that acquisition, but it also includes pushing Robtec out.

So it's both.

We didn't really break down anything beyond that of what contribution from each that they are.

Steve Milunovich, UBS.

Thank you.

You mentioned a delay in shipping the consumer products to improve the customer experience.

What exactly does that mean?

Were you having manufacturing issues?

Were there quality problems?

Can you go into that a bit?

I am glad you asked that question.

We conducted an extended data testing because we are focusing on how to mainstream, particularly the adoption of the new Cube 3 and the CubePro.

And in the process, in very close communications with dozens of beta testers, we identified several user experience enhancements that we believe had the potential to competitively enhance our brand, and we decided to take time to incorporate them even at the expense of short-term revenue pressure.

And we are happy to report that our rising orders suggest that we made the right call.

Can you indicate what kind of features you're talking about?

We're talking about differentiating features, like the need to have automated setup when you plug so that you can play.

We talk about enhanced multi-color printing capabilities.

We are talking about print speed and print fidelity areas that we determined, when we compared and contrasted our user experience with what's out there today, that, with the guidance and input from dozens of beta testers -- we determined that if we take a couple of months to push harder, we could have a superior user experience and we decided to take the time to do that.

As I said, we have commenced shipments of the CubePro and we now anticipate shipping the Cube 3 over the next few weeks, and we believe that we made the right decision.

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good morning, guys.

I'll use this to expand a question further up.

Could you maybe just quantify the impact you had from this customer launch delay?

And if you would just walk through the timing of when you decided to push this product out?

My suspicion is the $15 million of extra inventory you have is potentially related to these delays.

But maybe you could just walk through the impact on the revenue line from this.

I only heard part of your question, but let me try to address it.

What we said is that consumer revenue was held by this delay to about $7.4 million for the quarter.

But that we also booked an additional $7.7 million -- or exited the quarter with an additional $7.7 million of consumer bookings, and that, in July, the order book continued to rise.

We also included a slide in our presentation that outlined all the new products that we expect to launch during the coming period, starting with explaining what's going on.

So, CubePro is available, the iSense is available, Cube 3 in the next few weeks, the same with our new Touch, which is the magical haptic pen for consumers.

EKOCYCLE, which we announced together with Will.i.am, our Chief Creative Officer at the White House a few weeks ago, and a partnership with the Coca-Cola Corporation is expected in the fourth quarter.

The 3DMe Photo Book, we just debuted at ComicCon last week, and we expect it to be fully commercial in the fourth quarter.

And one of the, we believe, key movers in the fourth quarter is going to be the CubeJet, which will be the first ever full-color inkjet-type product under $5,000.

And, of course, let's not forget the ChefJet and the ChefJet Pro, that are also coming in the fourth quarter.

We believe that these kinds of products really differentiate our consumer offering in ways that others cannot do.

And it continues to really affirm the fact that, not only do we see great potential in consumer products, but that our approach to this 3D lifestyle is very differentiated from those who just offer some plastic printers to end users.

And so, we're deliberately moving through it.

Our plastic printers are much more differentiated and refined, and carry with them, we think, groundbreaking features.

But that's only where our consumer strategy begins.

It extends into software.

It continues into the physical photography and haptics, and it ends with some really meaningful consumer experiences.

Ken Wong, Citigroup.

Hello, guys.

You guys have historically felt the need to really make the market here with aggressive investments that drive adoption.

And then, so with Medical Modeling, Bespokes, Simbionix, it appears you feel the need to drive the healthcare vertical.

Should we expect that you guys are going to do something similar to push some of your other key verticals to further adoption?

Well, it's true that we have historically identified strategic opportunities several years before they became obvious to the rest of the crowd.

And it's true that we wisely invested when those investments were much more affordable.

And it's also true that, in some instances, we were willing to do some of the earlier heavy lifting of consolidating certain segments, as opposed to paying huge premiums when the opportunity became more mature.

We have done it with service bureaus quite successfully.

And I think that investment is returning very nicely.

We have done it with some printer companies that were in decline at the time --Damon mentioned Phoenix this morning; we could also point to Z-Corp a few years ago -- two examples where we have identified the opportunities years ahead of the crowd and made very intelligent, cost-effective investments and parlayed them into tremendous growth stories.

And we see healthcare, and 3D healthcare -- and particularly the opportunity to integrate and deliver a seamless digital thread on the 3D virtual-reality planning, guiding, simulation, instrumentation of personalized surgical procedures, and printing of medical devices -- as a significant opportunity.

It's already our fastest growing vertical for the third year in a row.

It's generated, for the quarter, over a $27 million.

We expect it to continue to grow, and we expect to make additional investments.

We said, during our June investor call -- investor meeting in New York rather, that we are really turning our attention to several areas that could give us additional first-mover advantage in key verticals.

And those, first and foremost, I mentioned medical.

Second was material, which we see as instrumental to our growth strategy.

Third -- metals -- I mentioned that, with the incredible success that we've had from our Phoenix acquisition that is just anniversarying, we plan to invest more in metals beyond just the design of a larger metal system that we will debut at EuroMold this year, but that we want to make other technology investments in metal -- it's a hot area and it's a high-growth area.

And finally, manufacturing -- we see advanced manufacturing that is grounded in 3D printing as a big part of our future.

And in these areas, specifically, we intend to deploy the available capital that we have and put it into good use, sooner rather than later.

Holden Lewis, BB&T.

Thank you.

Good morning.

Wanted to just hit you again on the gross margin.

You're talking about the mix and the mix within the mix.

I think you cited maybe some pressure materials, even though it looks like the integrated growth went faster than the overall business.

I guess I was just trying to get a sense of -- can you give a bit more color on what the mix within the mix is?

Did you see subpar growth out of software?

What caused material?

I'm just trying to get more color on what exactly the mix problems were and the likelihood that they can reverse.

Well, one area that's obvious to look at that first comes to mind is that our materials margin decreased.

That was a mix area and it happened to do with the concentration of a couple large orders within the period of some different areas that --

Which are an anomaly.

Right.

Or, I should say, for all intents and purposes, a one-time anomaly related to a couple of specific situations that are not likely to recur.

And, additionally, we did talk about that the consumer business was held to $7.4 million because of the new products.

The margin on those materials, as they're being sold, is very high, that we've talked about before, so we expect that mix to rebound and to go back.

The biggest driver within that was the materials mix, which again, we said earlier, we have a strong view into the remainder of the year.

And then, on the printer side, again, the different mix of certain placements of printers between the categories can affect things a little bit.

And, with our backlog where we have, we see that mix changing back to what it historically has been.

Also, Holden, it's important to note that in a concentrated new product launch period, the initial series of a new printer cost of goods is much higher than what happens as you normalize it into higher volumes.

We have a period of pre-tooling series and other elements when we launch new products, which very quickly within a few periods, worked their way out into normalized cogs.

And all of that is factored into the careful analysis that we did.

And that's what gives us the confidence that margins not only will rebound, but will continue to expand.

Wamsi Mohan, Bank of America.

Yes, thanks for taking my question.

On the inventory write-down, can you give us some sense of how much was consumer versus not, and how much was in printers versus was there anything in materials at all?

And do have a lot of product launches coming in the second half?

Do you think your inventory is appropriately aligned with the upcoming demand?

Thanks.

Well, first of all, there was nothing in materials that, that write-down specifically had to do in the printers category.

It had to do with the numbers of new launches that we had.

We didn't break out and -- with the specific breakdown between mix categories.

And we do believe that our inventory is properly aligned for what the demand is, and what we see again as backlog.

And that is part of this.

Our inventory increase that we have, part of it has to do it backlog.

Part of it's not -- and it's the timing of deliveries and revenue recognition where when it comes out, goes into backlog, if you're not able to recognize in this period, it goes back in inventory.

And the other part is supply-chain logistics for the manufacturing of these printers and all of the new products that we've had and the demand that we forecast for the second half of the year.

And, remember, Wamsi, that in the second half is part of the alignment in inventory.

We're shipping now the CubePro.

We're beginning to ship the Cube 3 in the next few weeks.

We expect to ship the Touch in a few weeks.

Then the EKOCYCLE and the 3DMe Booth and the ChefJet in the fourth quarter.

And, in addition to that, we have several large frame systems that we're also in development of that will come into play, probably sometime in the fourth quarter.

So we think that our inventory is fairly well aligned the way of what's to come.

And as we mentioned in our prepared remarks this morning, there is a rise in inventory of about $15.1 million that we expect to liquidate as these products are shipping.

So, expect additional cash generation from operations in the coming period.

Jay Harris, Axiom Capital.

Avi, should we assume on Simbionix that most of their revenues are made out of Israel?

Simbionix is, for all intents and purposes, an American company that is headquartered in Cleveland, and a company that has substantial R&D and manufacturing capabilities in Israel.

But a company that has worldwide sales.

And the distribution of revenue for the company, if you look at it by geography, Jay, almost half of the revenue is generated -- and this is for 2013, almost half of the revenue was generated in North America; another 30% from Europe; and the remainder from Asia-Pac and other parts.

I think it's also important to note that their manufacturing capabilities are not just in Israel either.

They're in Spain and they're in Ohio.

So, there's redundancy and backup to all of the areas that we have -- will have.

Ananda Baruah, Brean Capital.

Hello.

Good morning, guys.

Thanks for taking the question.

Could you, Avi, go back over what the impact -- I guess what the dynamics from the polymer printer impact was this quarter -- the SLA and the SLS impact?

And then, could specifically give us a sense of what SLA and SLS organic growth -- professional organic growth, was first half of this year relative to last half -- I'm sorry, relative to last year?

That would be really helpful.

Thanks.

Yes, so if you look at that category, which was on one of the slides, the design and manufacturing category, year over year, for the quarter was $144.2 million this year, $112.3 million last year -- 28% increase.

The vast majority of this was driven by our organic printers and materials.

There was a smaller contribution for metals, but the vast majority came from those categories.

And we expect that to continue.

Sherri Scribner, Deutsche Bank.

Hello, thank you.

I just wanted to get a sense, if you could give us some detail on what's included in the backlog in terms of the mix?

It seems like the metal piece was very strong and there's a lot of pent-up demand there.

And then, just going back to the polymer question, can you just give us a little more detail on the delay in the polymer printers this quarter?

Thanks.

Okay.

In terms of what's in the order book, we have about $23.1 million of printers in the backlog.

The remainder includes services and some softer components in it, et cetera.

Within the polymer area, obviously of the $23.1 million in printers, a portion of it is polymer printers that were ordered and scheduled by customers for later deliveries than the June quarter.

And within that overall mix, we also had a total of about $7.7 million of consumer components in it.

So those are the major elements of the backlog.

Let me say again, since several of you have asked about polymer printers, we have substantial -- a substantial portion of our order book is non-metal, or polymer printers.

And the demand for polymer or plastic printers is very strong, and we expect it to continue to strengthen.

Not taking anything away from the incredible strength that we have in metals.

Ajay Kejriwal, FBR Capital Markets.

Thank you.

Good morning.

Maybe on the organic growth -- and sorry if you mentioned this, but any color by categories, printers versus materials and services?

And then, is it possible to quantify how much impact, some of the issues that you highlighted in terms of delays, et cetera, how much of that impacted organic growth in printers in the quarter?

Thank you.

Yes, let me start by very simply reminding everybody that our materials were up 30% for the quarter.

That is primarily organic growth, and that, for the first half, it was up even higher.

And more importantly, integrated materials continue to rise as well and amounted to 41% for the first six months.

That's all on the strength of our core polymer plastic printers.

And we see that demand increasing even further.

When you look at the organic growth, there are a few ways to look at it.

The first way that you can look at it is that we exited the June quarter with an order book that is 77% higher than last June's order book.

It represented a substantial sequential order book increase in bookings.

And, as Damon said earlier today -- and we've be saying it all along, right?

Since the beginning of the year, we said we expect to generate higher revenue in the second half than in the first half.

Last year, we generated 57% of our revenue in the second half of the year.

We expect that a similar ratio will recur this year.

So, specifically, if you just apply our historical 57% annual revenue distribution ratio, it suggests that, for the second half -- if you just look at what we guided to today -- it will give you a growth rate of about 37% for the second half of this year.

And factoring into that, that, during the same period, less than 10% of our total revenue for the second quarter is expected to be generated from businesses that we acquired within the past year, I think that you can come to your own organic growth rate calculation that will be in line with our expectations.

I don't think that we lost any organic growth trajectory in the quarter.

Some of it just ended up in our order book, not in our recognized revenue.

Jason North, Jefferies.

Hello.

Over the last three years, looking at the second half, Q4 has represented between about 52% to 55% of the second-half revenues.

Based on the timing of the product launches in the back half of 2014, do you expect it to be skewed more towards the higher end of that range or maybe above it?

It's harder to say, but one of the areas that you can look at is on the consumer side with the product launches here.

We listed out which ones are third quarter, basically, which ones are fourth quarter.

That, obviously, will drive some of these revenue shifts, too, we believe.

Yes, but importantly with that, what we want to say is we certainly expect greater consumer revenue contribution in the second half than the first half.

You already know that we exited the first half with higher consumer bookings than we actually revenued in the quarter, and that continued to rise in the July month.

But I wanted to emphasize that, to reach the raised revenue guidance that we provided this morning, we don't need a great deal of consumer revenue contribution.

So we think that, even with just an incremental consumer revenue contribution, we will hit our revenue guidance range.

Of course, we are not slowing down.

We're actually speeding up.

But I just wanted to -- for those of you who think that somehow significant consumer revenue is going to tip the scale here, in our guidance, we're counting on incremental increase in consumer revenue, not in significant increase in consumer revenue.

To the extent that the significant increase happens, it's an upside to the business model.

Prab Gowrisankaran, Canaccord.

Hello, thanks for taking my question.

This is Prab in for Bobby.

I just had a couple of questions, one on the Phoenix metal machines, I know you said it increased 55% quarter on quarter.

You had provided a prior guidance of $25 million to $50 million.

What's your capacity now and is that still the expectation for 2014?

It's true that metal printers revenue increased on a sequential basis 55%, and we're bringing a second manufacturing facility online.

So we certainly expect to be able to have sufficient capacity to be in the range of the $25 million to $50 million that we guided to earlier in the year.

And, as Damon said earlier this morning, going into Q1 of next year, we expect ample manufacturing capacity, so that we, once and for all, catch up and have spare capacity to fulfill what we expect to be an increasing demand for metal printers.

And, finally, remember that our larger Direct Metal printer that we've been developing all year is going to debut at EuroMold 2014 and be available for sale in the first quarter of next year.

And that is on track to be completed timely and commercialized.

Thank you.

That is all the time we have for questions for today.

I would now 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.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.