3D Systems Corp (DDD) 2014 Q4 法說會逐字稿

Greetings, and welcome to the 3D Systems Corporation's fourth-quarter and full-year 2014 conference call and webcast.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Stacey Witten, of 3D Systems Corporation.

Thank you.

You may begin.

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

I'm Stacey Witten, and with me on the call are Avi Reichental, CEO; Ted Hull, our CFO; and Andy Johnson, our Chief Legal Officer.

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 numbers provided on the slide.

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

For those who have accessed the streaming portion of the webcast, please be aware that there may be a few second delay, and you will not be able to post 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.

Actual results may differ materially.

Additional information and factors that could potentially impact our financial results are 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, slides accompanying this webcast, and our filings with the SEC, each of which is available on our investor relations 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'll turn the call to Avi Reichental, 3D Systems' President & CEO.

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

For the fourth quarter 2014, we generated record revenue of $187.4 million, representing a 21% increase over the comparable 2013 quarter, despite significant foreign currency headwinds that reduced our total revenue by some $6 million during the quarter.

We reported GAAP earnings of $0.01 per share and non-GAAP earnings of $0.21 per share.

Notwithstanding the challenging operating environment in Europe, we recorded an impressive 46% revenue increase from EMEA, driven by 28% organic growth.

However, channel productivity, primarily in North America, fell well short of our expectations, restricting our total organic growth to 7% for the quarter.

Direct metals revenue increased by 178%, and healthcare revenue grew by 96% with both verticals decisively surpassing industry growth rates.

Consumer revenue increased substantially over the same period, growing by 68%, as our new product gained momentum.

All told, our product category was the most negatively impacted by foreign currency, growing only 16%, while services revenue increased 33%.

Our order book held steady at $46.5 million, even as revenue increased by 12% sequentially, reflecting robust demand for our products and services.

We generated $23 million of cash from operations during the fourth quarter and ended the year with $285 million of cash on hand.

For the full year, we're pleased with the overall performance of our key verticals, but not so much with regional weaknesses in our channel coverage.

Within our verticals, our design and manufacturing category grew by 27% over 2013, and revenue from our rapidly expanding healthcare category increased by 80%.

Consumer revenue increased 26% to $43.8 million, rebounding strongly later in the year, as we commenced commercial shipments of our newest consumer printers.

We're additionally disappointed that we were not able to fully capitalize faster on the strength of our portfolio and close the revenue gap that was caused by delayed consumer products and direct metal capacity constraints.

This product availability headwind and weakening channel performance, primarily in North America, suppressed our annual organic growth rate to 13%.

The strategic investments that we've made to build an end-to-end 3D healthcare business continue to deliver impressive results.

Specifically, for the quarter, healthcare products and services revenue grew to $42.8 million, a 96% increase over the same period last year, on strong organic growth.

Throughout 2014 we acquired three strategic healthcare businesses -- Medical Modeling, LayerWise, and Simbionix.

With these assets in hand, we can deliver the full benefits of personalized medicine through custom-made surgical instruments, implants, and devices.

Under the very capable leadership of Kevin McAlea, whom we recently named Chief Operating Officer Healthcare, we're now moving quickly to fully integrate these assets and extend our 3D healthcare solutions from the training room to the operating room.

We believe that our proprietary 3D healthcare products and services address a truly open-ended opportunity and position us to deliver long-term beneficial outcomes for providers and patients alike.

Our decisive investments involve acquiring and further developing proprietary direct metal printing products contributed to revenue growth of 178% for the quarter and 175% for the full year, compared to our 2013 pro forma results.

With the benefit of a second manufacturing facility in operation during the fourth quarter, we increased our metal revenue some 73% sequentially and ended 2014 at the higher end of our direct metal revenue guidance range of $25 million to $50 million.

We see open-ended opportunities for our direct metal products and services, primarily in aerospace, automotive and medical applications, and we believe that we can leverage decades of domain expertise in these verticals to help our customers manufacture flight-ready aerospace parts, functional automotive assemblies, production tire molds, and ready-to-use medical devices.

Additionally, during the fourth quarter, we took steps to equip several Quickparts and healthcare facilities with 10 direct metal printers that are expected to be in full operation by mid-year.

We shipped 70% more design and manufacturing printer units in 2014 than the previous year, and strong demand for our extended portfolio of SLA printers resulted in a 356% increase of total units shipped.

We also shipped 89% more SLS printers and increased placement of direct metal printers by 167% compared to 2013 pro forma.

Our jetting category delivered only modest printer unit growth, as a result of North American channel weakness.

Our EMEA channel performance delivered revenue growth of 46% for the quarter and 47% for the year, including organic growth of 28% and 33% respectively.

This is particularly impressive, given the foreign currency headwinds that we faced, which substantially compressed revenue in the region in the fourth quarter.

By contrast, channel productivity, primarily in North America, fell well short of our revenue expectations, restricting our overall organic growth to just 7% for the quarter.

Under the leadership of our COO, Mark Wright, we're taking decisive steps to improve the productivity and coverage of our North American and APAC channels to the level of our EMEA region.

Specifically, we have reorganized and strengthened our North American senior leadership.

We aligned our North American and APAC channel growth plans and incentives to closely mimic our successful EMEA program, and we're investing in specific channel expansion initiatives as well as productivity and training tools.

I fully expect us to deliver meaningful results from these corrective actions as the year progresses.

Our effective R&D investment contributed to a 44% increase in new product revenue over the past 2 years and delivered 27 new products last year alone.

Included in our 2014 R&D investments was the strategic addition of the Xerox Wilsonville team that is working on several breakthrough new products that are designed to fuel incremental revenue growth, beginning in the second half of 2015.

And with that, I'd like to turn the call over to Ted Hull, our CFO, who will discuss our financial results in more detail.

Ted?

Okay.

Thanks, Avi, and good morning, everyone.

For the fourth quarter, we announced record revenue of $187.4 million, net income of $1.6 million, and earnings per share of $0.01.

On a non-GAAP basis, we earned $0.21 per share.

For the full year, we increased revenue 27% from the prior year to $653.7 million and reported net income of $11.6 million and earnings per share of $0.11.

On a non-GAAP basis, we earned $0.70 per share for 2014.

During the fourth quarter, design and manufacturing revenue increased by 18%, and our healthcare revenue grew an impressive 96% on higher demand.

Our consumer revenue increased 68%, coinciding with the commercial shipments of our new Cube 3 and CubePro consumer printers.

All categories contributed to revenue growth for the year.

Products revenue, including materials, grew 24% to $442 million, driven by strong printer placement and aided by our growing healthcare, perceptual devices, and software products.

Service revenues rose 34% to $211.5 million, as we expanded the range of services and global footprint.

Throughout 2014 we progressively increased printer units faster than printer revenues, underscoring a shift in mix and higher volume that is consistent with our plans to expand the reach of 3D printing from the factory floor to the desktop.

While in the short term, this self-cannibalizing strategy understates our top-line growth and pressures margin expansion, we firmly believe that it is key to our long-term recurring revenue momentum, and that printer units growth is the most relevant organic growth metric, as we rapidly expand our installed base.

Sequentially, materials gross profit margin expanded 220 basis points to 75.3%, and services gross profit margin increased to 340 basis points to 49.7%.

Notwithstanding these gains, consolidated gross margin for the fourth quarter remained at 47.9%, as a result of the residual impacts of transitions to new products, manufacturing expansion, and unfavorable mix.

Looking beyond these transitional factors, we believe that the fundamentals of our business model remain intact, and we expect gross margin to resume its expansion by increasing materials, software, and healthcare revenue contributions at higher gross profit margins; recovering product gross margins following a period of concentrated new products and facilities transition; and continuing operational synergies and greater leverage from tighter integration and operational efficiencies.

Non-GAAP operating expenses for the full year increased 45%, reflecting a step-up of 73% in R&D and 33% in SG&A costs, consistent with our planned expansion.

Now that we're at the end of our stepped-up investment phase and are beginning to tightly integrate our assembled assets, we anticipate increased leverage as our revenue growth rates outpace our operating expenses.

We expect non-GAAP G&A expenses to decrease as a percent of revenue throughout 2015 and R&D expenditures to normalize at approximately 8% to 10% of revenue this year, resulting in progressively expanding operating leverage throughout 2015 and beyond.

We believe that we have put in place the cost structure we need to scale the business, but the meaningful returns will lag a couple of periods, as we grow into our operating expenses.

We generated $23 million of cash from operations during the fourth quarter and $51 million for the full-year 2014.

We paid $107 million of cash for acquisitions and venture investments in the fourth quarter and $352 million for the year.

We ended 2014 with $285 million of cash, and we have not used our credit facility.

We believe that our strong working capital performance enables us to self-fund our growth.

Consistent with our previous comments, we have reduced our inventory balance by $8 million from the September quarter and expect to deliver further reductions throughout 2015.

While we expect our DSO to fluctuate a bit in the ordinary course, we are taking decisive steps to improve our cash collection cycle and reduce DSO overtime by another five days.

That concludes my comments, and I'll turn it back over to Stacey, who will provide our 2015 guidance.

Thanks, Ted.

Before we provide 2015 guidance, I want to take a few minutes to discuss several factors that may impact our expectations.

First, although we exited the year with a substantially stronger consumer momentum, it will take us a few periods to make up the cumulative revenue shortfall from delayed products during 2014.

Second, we expect that planned discontinuation of certain legacy products will reduce historical revenue contributions, primarily from organic activities, by as much as $20 million for the year.

Third, we anticipate the continuing foreign currency headwinds will mask our strong EMEA performance well into the second half of 2015.

Finally, we estimate that it will take several periods to bring the performance of our North American and Asia-Pacific channels up to EMEA levels.

Additionally, we plan to keep our 2015 capital expenditures at 3% of revenue and expect to moderate our M&A activities.

Factoring in all of these drivers and consistent with prior years, we expect to generate approximately 44% of our revenue in the first half of the year, with greater organic growth and increased earnings as the year progresses.

Accordingly, we expect 2015 revenue to be in the range of $850 million to $900 million.

We expect GAAP earnings per share to be in the range of $0.35 to $0.45 and non-GAAP earnings per share to be in the range of $0.90 to $1.10.

As a reminder, our guidance is fully tax affected, and is inclusive of our acquisitions completed to date.

Out expected blended annual tax rate is 32% to 36% and is reflected in our annual guidance.

I would also like to remind you that this guidance is based on current plans and assumptions and is subject to risks and uncertainties, including those detailed in our risk factors and our Safe Harbor statement, annual report on Form 10-K, and other filings with the SEC.

That concludes my comments.

Avi?

Thanks, Stacey.

During the fourth quarter, we continued to expand our manufacturing and IT infrastructure.

First, we started manufacturing operations in our new 200,000 square foot facility in Rock Hill, South Carolina, to better meet growing demand.

We successfully brought online a second direct metal printer manufacturing facility at our Corvallis, Oregon, contract manufacturing.

We completed the ramp up of a new consumer materials manufacturing facility in Barberton, Ohio.

And we broke ground on a new healthcare facility in Littleton, Colorado, to support our expanding portfolio and the increasing demand for personalized medical products and services.

Throughout 2014, we also made significant IT, infrastructure, capacity, and continuity investments.

We expect these across-the-board foundational investments to support our growth plan for some time to come.

During the quarter, we added powerful synergistic technologies, domain expertise, and complementary sales channels through the completion of several acquisitions.

In February of this year, we completed the acquisition of Cimatron, substantially strengthening our 3D digital design and fabrication portfolio and extending our leadership position in 3D printing-centric advanced manufacturing.

In December of last year, we acquired botObjects, enhancing our desktop printing product line with the addition of the CubePro C, the first affordable, full-color plastic 3D printer.

And in November of last year, we completed the acquisition of Robtec, creating a strategic growth platform in Latin America to accelerate adoption of our manufacturing solutions.

Under the leadership of Mark Wright, we're taking decisive steps to unify all business practices and shared capabilities throughout our Company worldwide.

We're also working to increase customer intimacy and responsiveness across all of our businesses and build and leverage an integrated global supply chain.

And in addition to that, we're taking steps to improve working capital management and enhanced business planning and decision-making velocity throughout the Company.

We expect these specific initiatives to result in a sustainable and scalable Company with significant competitive advantage.

We're in the early innings of mainstreaming adoption for our products and services and believe that the effective and disciplined investments we have made over the past 15 months position us extremely well for the open-ended opportunities in front of us.

Having assembled the technology building blocks, infrastructure, and talents required to scale our business and extend our first mover advantage in key verticals, we believe that we're now poised to leverage all of our fundamental assets and strengthen our execution to create greater value faster.

With that, we will now gladly take your questions.

Stacey?

Will now open the call to questions.

I'd like to remind everyone that we have approximately 30 minutes for the Q&A session and that your line will be muted after your first question, as 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 the slide.

If you're calling inside the US, the number is 1-877-407-8291, and if you are calling outside the US, the number is 1-201-689-8345.

(Operator Instructions)

Bobby Burleson, Canaccord.

Just wondering about the FX comments -- what you would have expected the growth rate to be in 2015 minus FX headwinds.

And if there's any kind of -- on the parts business or any other metals, any of your other areas where maybe there's aggressive pricing concerns out of European competitors?

Yes.

There are a couple of things, Bobby, to consider here.

First, as we look at FX, we certainly did not foresee the sharp decline in foreign currencies that happened towards the tail end of the year.

And as we look and particularly at Europe at the moment, we see those headwinds continuing well into the second half of this year.

However, we are very pleased with our European performance, notwithstanding these headwinds.

Remember for the quarter alone, the foreign currency reduced our revenue by some $6 million.

So that can give you an early indication.

However, as we go forward, we think that our EMEA channel is probably our strongest performing channel.

They have been selling all of our products extremely well, and we expect that, notwithstanding these kinds of headwinds, we will continue to do well in Europe.

However, it does certainly compress growth rates.

And it will also put some pressure, as the year progresses, on earnings.

And we have tried, to the best of our ability, to factor all those items into our guidance.

If you look at growth in particular, I think that it's important to see a few things, as we build into 2015.

First, in terms of design and manufacturing units, we continue to have very strong growth.

For the quarter, it was 41%.

And for the full year, it was 70%.

Second, I think that it's also important to note that with all of these headwinds over meaningful periods, our material growth translated to a 24% CAGR over the last 24 months.

Third, is that during a period of aggressive seeding and expansion of our install base, as Ted said earlier this morning, we believe that printer unit growth is the only relevant organic growth metric -- not so much printer revenue.

And in fact, in our case, we have increased printer units about 3.5 times higher than we increased revenue, so it's an important ratio to keep in mind.

Having said that, we expect organic growth for 2015 to increase progressively, starting in Q1 at comfortable levels to what we exited Q4 with for all the reasons that Stacey mentioned, but extending throughout the year progressively, all the way up to 30% for Q4.

So for the full year, considering the FX headwinds and some of our product pruning plans, for the full year, we expect it to be at around 20%.

Jim Ricchiuti, Needham and Company.

I just want to understand some of the components to the revenue guidance for 2015 a little bit better.

You're discontinuing some legacy revenues.

Is that product and service?

Is that some Quickparts?

And can you give us a sense as to what your expectations are, perhaps, for consumer and metals?

And you alluded to some new products -- how important is that at the back half of the year?

Thank you.

Thank you, Jim.

Let's start with what we are discontinuing.

We are discontinuing, specifically, the VIDAR scanning products.

We're discontinuing some of our older printers, like the ProJet 1000 and 1500.

We are further consolidating and discontinuing a few of our software products, and we're discontinuing several Quickparts activities that we had in our historical revenue and we're not going to have, going forward.

We're doing it because we believe that it will make us faster, more focused, more nimble, and more profitable going forward.

And by shedding these legacy activities, although it would reduce our historical revenue base or run rate, positions us to run faster and execute better in 2015 and beyond.

So we look at it as an opportunity.

We've been doing it at a slower pace over multiple periods.

It certainly has been impacting our organic growth calculation for the last few quarters.

And we decided that, given the breadth of product and opportunities around us, given the fact that this is the year that we're turning our attention, strictly speaking, to better execution, leverage, and integration, we want to accelerate the shedding, the pruning, and the ending of life so that we could replace things faster with more profitable revenue that is fully in alignment with our business model.

Patrick Newton, Stifel.

Just drilling down on the guidance side, Ted, given this is the first year that you've been able to guide for the Company, I'm curious if you've taken a different approach to guidance, especially given some of the operational missteps that hit the 2014 outlook.

And then, Avi, if you could maybe elaborate on how we should think about direct metals revenue in 2015, consumer, and medical?

I think you gave us some bogeys for 2014 at the same time last year.

Thank you.

Yes.

As we look at guidance, we've taken both a bottoms-up look, as well as a tops-down look at how we see the year developing.

And that led to the $850 million to $900 million range.

We see a lot of positive things as we go through the year, and we expect to be in our typical kind of skew through the quarters -- being more in the back-end loaded, if you will, from a revenue standpoint.

And with the actions that we have in place from our product lines and some of the strength that we have, especially with some of the higher-margin products, we're pretty optimistic, in terms of how that will develop through the year.

So we basically really wanted to link the Company together, in terms of looking at how we see the guidance coming together and then, go forward and execute against it.

Yes.

And in terms of expectations for 2015, look for us, the consumer game is just beginning.

We held our powder most of 2014 with, I would say, great discipline to make sure that, when we pulled the trigger, we had the best product on the market.

For Q4, consumer revenue was up 68%.

For the full year, not so much.

Because for the full year, we didn't have much by the way of product to sell.

But the game is just beginning, and the demand is very strong.

The reception is exceptional.

The product is outstanding -- I should say, the products are outstanding.

In terms of a bogey for 2015, I would say that the range that we provided a year ago, which was in the range of the $80 million to $120 million, hasn't evaporated.

It just moved forward a few periods.

Stacey said, in her prepared remarks earlier this morning, that it's going to take us a couple of periods to catch up to the run rate that we had hoped to exit the year with.

The good news is that we haven't lost these opportunities.

They just moved forward a little bit.

As to direct metals, with the second manufacturing facility online, we enjoyed a sequential unit increase of about 78% for the fourth quarter.

For the full year, we had about a 63% increase in units.

So we expect that trajectory to continue.

Ananda Baruah, Brean Capital.

Avi, could you walk through -- maybe Ted, as well -- Avi, what components are factored into the ramp of the organic revenue growth in the second half of the year?

Would love to get your thoughts there.

And then Ted, any comments on the rate of leverage, as we go through the year?

Is that more in the second half as well?

Thanks.

I think that as we go through the year, we're starting with actually reducing, if you will, the organic revenue baseline from the planned end-of-life of certain products.

And as we get past this, we see a real acceleration that's going to come, primarily, from a variety of products that we are already selling, like SLA, like SLS, like direct metal, and consumer.

And from some of the catch-up that we expect to see, specifically in the area of materials revenue and software revenue and Quickparts revenue, as it progresses.

Finally, don't forget that healthcare continues to be our fastest, if you will, growing vertical at the moment.

And with the investments that we are continuing to make in healthcare, the expectation is that will continue for quite some time.

Ted, do you want to talk a little bit about leverage?

Yes, absolutely.

Now that we're coming to the end of our stepped-up investment phase, we're really shifting our attention to tightly integrating the assembled assets that we have.

We have really tremendous capability and some really high-margin opportunities, I think, that we can really grow into.

As we execute on that, we anticipate this leverage and revenue growth rates to outpace our operating expenses, especially as we go through the back half of the year.

I would like to add -- you asked a little bit about where will the growth come from.

It's important to note that just for 2014, our total SLA units went up 356%.

SLS went up 89%.

And I've already given you the metal numbers before, which was up, for the full year, about 63%.

That gives you the real sense of what does real organic growth looks like, in a period in which units are outpacing revenue by about 3.5 times.

Ken Wong, Citigroup.

Could you perhaps give us a little more color on what kind of issues you were seeing in the North American channel?

And as you look to 2015, you pointed to trying to align that with the EMEA channel.

What specific actions are being taken there?

Is it better training, giving them more products to sell?

Is it commissions?

Yes, if you could walk us through those two, that'd be great.

What happened to us in North America is we've seen what I call a little bit of a subterranean detour, if you will, in the sense that the channel gravitated towards the higher end of the product line, instead of immediately investing in expanding their feet on the street to achieve optimal sales coverage for the entire portfolio, which is exactly what happened in EMEA and not so much in North America.

In fact, instead of adding coverage, the majority of our North American channel shifted their focus away from selling the middle of the range to selling the production portfolio of our printers.

Having realized that, with some deep analysis over what we consider now to be a more meaningful period, and under the leadership of our new Chief Operating Officer, Mark Wright, who, I think, brings a great deal of relevant experience to the table, we are taking decisive steps to improve the productivity and coverage of our North American and, to a certain extent, also our APAC channels to the same level of our EMEA region, which has done exceptionally well over the same meaningful periods.

And what that means, specifically, is that first, we have already reorganized and strengthened the leadership on the ground for North America.

We have taken decisive steps to align our North American and APAC channel growth plans and incentives to closely mimic the successful program that we have in EMEA.

We are further investing in specific channel extension initiatives, as well as some specific productivity and training tools.

And when you put that all together under the guidance driving it, under Mark, I fully expect us to deliver meaningful results from these corrective actions as the year progresses.

We're not going to fix it overnight; we're not going to fix it in a single period.

But I am confident that we will see progressively improved results until we get this channel up to the level of our EMEA channel.

Holden Lewis, Oppenheimer.

You referenced the jetting being a specific problem.

Can you clarify -- is that the multi-jet printing, or the color jet printing, or both were the problem in the channel?

Well, it's a combined problem of both of them.

And it's completely isolated, Holden, to North America.

In fact, if you look at EMEA for example, which is our best performing channel, in EMEA, jetting units increased 109% in 2014 compared to 2013.

And jetting printers revenue in EMEA went up 86%.

So to the extent that one would wonder, is this a product performance issue or a channel performance issue, clearly the numbers suggest that it's isolated to a specific regional channel performance issue.

Troy Jensen, Piper Jaffray.

A couple quick questions on guidance, here.

One, Ted, you had said that R&D had about 8% to 10% of revenues, I believe.

You exited the quarter, here, at 12%.

So I'm assuming it just trends down and exits the year there.

And also, on the revenue side, if we take the midpoint of the guidance -- and I think Stacey implied that about 56% of sales is going to be in the second half of the year -- that implies about 38% year-over-year growth second half over second half.

So just curious to know how you have visibility to guide to such a big inflection.

Thank you.

Yes.

First of all, as we said, we expect to grow into our expenses as we go through the year.

And that's how we got to the R&D number at the 8% to 10% range.

I think, as we look to the second half, and we a look at the programs we have in place -- the focus areas that we have -- and some of the very strong businesses that I think we were blessed with, from a software perspective, for example, as well as from the material side, that we will see that growth and -- come with that, I expect very solid gross margin performance as well, as we grow through the year, especially into the second half.

Ben Hearnsberger, Stephens.

This is Brandon, in for Ben.

Just wanted to get a little bit of color on your expectations for Cimatron in 2015.

What do you expect to be layered on there?

And obviously, with it being software, higher-margin, the impact you see coming in there?

I think that, from Cimatron, specifically, we're looking to immediately have some cross-selling leverage because they have a very strong channel, we have a very strong channel, and they are completely complementary, in terms of the go-to-market strategy.

Cimatron also opened a very strong door for us into rail manufacturing applications on the manufacturing floor.

It extends our coverage, it multiplexes our cross-selling opportunities, and it (inaudible) out our software interoperability as we begin to look at 3D digital design and fabrication, both in terms of subtractive and additive.

Remember, too, that Cimatron has about 40,000 [seats] that have already been placed that could be very attractive targets to us in a very, very good channel.

Now, let's talk a little bit about our overall software business.

We have, in the last couple of years, completely realigned our software go-to-market strategy along the following lines.

We made it easier for users to enter, so we lowered entry costs for end-users and biased our model towards annual subscriptions.

And, we begin to introduce new devices like our Capture.

And Capture Mini is a really sophisticated delivery container for software.

The net result of that is that what we call our maintenance and subscription revenue for software actually increased 15% in 2014.

And the overall combination of software, subscriptions, and devices actually increased 24% for the full year.

That is the kind of trajectory we hope to evolve the Cimatron business onto, as we begin to integrate it and leverage it throughout 2014, because that's exactly what we have done for our Geomagic and Rapidform businesses in the last 18 months.

And it's quite an impressive outcome.

Scott Schmitz, Morgan Stanley.

Avi, I'm just wondering if you can reconcile some your comments on the strong unit growth against the 25% product growth you saw in 2014?

How much of that is mix driven, and how much of that is pricing pressure?

Or any change in the competitive landscape?

Thanks.

Yes.

So I want to be crystal clear that we have not experienced any change or any outlying behaviors, in terms of discounting.

So the simple answer is that ASV erosion is really not a driver in our results.

And specifically, we didn't experience any unusual discounting activities during the period.

The reality is that we increased printer units 3.5 times faster.

And I'm excluding consumer from the discussion so that you understand that we're talking, here, strictly about design and manufacturing printers.

I'm excluding units in both periods and revenue of consumer.

So within design and manufacturing, the reality is that throughout 2014, we increased printer units faster than printer revenue by about 3.5x, underscoring a shift in mix and a higher volume that, by the way, is consistent with what we've been saying all along.

This is how we're going to accelerate share in installed base.

We're doing it, in the short term, in a way that is self-cannibalizing.

That substantially understates top-line growth and pressures margins to a certain extent.

However, we continue to believe that this is a key to our long-term recurring revenue momentum, which again, as I said earlier, on materials alone, over meaningful periods, translated to a 24% CAGR over the past two years.

Samuel Eisner, Goldman Sachs.

Going back to the margin increase, I think you guys are implying about almost a 30% incremental margin, about 300 basis points of margin expansion at the midpoint.

I was wondering if you could bucket how you think about that margin expansion on a basis point level.

Is it 50 to 100 bps of volume?

What is the mix impact?

What is the impact from lower R&D expense?

If you can help us triangulate that, that would be great.

Yes.

Well, you kind of identified the key levers.

I think, as we see revenue growth, that will help us in a couple of ways and also give us some more scale.

I also see us really developing and growing into our higher-margin businesses as we go through the year.

We talked about some of them already, whether it's the software or some of the other capabilities we have.

And with the acquisition of Cimatron, that, for sure, will help us and provide some uplift as well, especially given their very strong performance and their high margins and the opportunities that we'll see there.

So when we take that bottoms-up look, and we look at the variety of businesses we have -- once again, coming back to the strong performance we have in materials -- that we see the margins accelerating and growing as we go through the year.

On top of the fact, I think we have some really good operating objectives around supply chain and some things that I think we can really help drive, that should also add margin points, as we go through the year as well.

So I think it's several factors coming together.

And that's how we built the guidance, in terms of -- especially as it develops through the fiscal year.

Yes.

And if I may add to that, a couple of things.

One is there is no question that for us, 2015 is all about integration, leverage, and execution, and fine tuning all the assets that we have assembled.

We're coming off a period of [setup] investments.

And we're coming off a period of, also, higher concentration of new products, which introduced certain inefficiencies into the whole supply chain and manufacturing.

We're coming off a period of massive manufacturing facilities and infrastructure investments.

All of that, operationally speaking, as we progress throughout the year, represents juicy target for operating improvements, first and foremost, on the product line gross profit margin.

And secondly, in terms of doing more for less, in terms of our overall operating cost structure.

I will further add that, because we have been investing all along, and we have been adding infrastructure and capacity all along, we don't foresee any unusual large investments.

We have all the things that we need.

We have sufficient capacity and infrastructure and organizational strength.

And so we expect to, really, get progressively stronger leverage from the middle of the P&L.

And at the same time, as we demonstrated even in a difficult operating quarter, our gross profit margin, with all the headwinds that we had from ramping up facilities and FX, we still held our gross profit margin on a sequential basis at the same level as we had it in Q3.

But within the element of gross profit margins, even in the fourth quarter, we continued to expand gross profit margin on materials.

We continued to improve our Quickparts gross profit margins and services in general.

And the area that is still under pressure was printers.

And there, our expectation, quite frankly, is that the higher-end printers will rebound, and the consumer printers will weigh us down for a period of time.

And that will be remediated eventually by higher volume.

As Ted said, we have a good plan.

We have assembled some incredible talent to execute it.

We are laser focused.

And on top of all of that, we have quite a few groundbreaking new products that are slated for introduction in the coming periods, which will catapult us even further forward faster.

Ladies and gentlemen, that's all the time we have for questions today.

I will now turn the conference call back over to Stacey Witten.

Thank you.

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.

This concludes today's conference.

All parties may disconnect.

Have a good day.