3D Systems Corp (DDD) 2015 Q1 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 first quarter 2015.

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

(Operator Instructions)

As a reminder, this conference is being recorded.

At this time, I would like to turn the call over to Stacey Witten, Vice President of Investor Relations at 3D Systems.

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

I'm Stacey Witten and with me on the call are Avi Reichental, our 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 have access to a streaming portion of the webcast, please be aware that there may be a few 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.

Actual 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, slides accompanying this webcast and our filings with the SEC; each of which is available on our IR 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 on this call will be against our results for the comparable period of 2014.

Now I will turn the call over to Avi Reichental, 3D Systems' President and CEO.

Good morning, everyone and thanks for joining us today.

As we shared with you earlier during our preliminary results conference call, we were surprised and disappointed by the abrupt interruption in customer demand late in the first quarter from several economic factors that we believe caused many of our industrial customers to be defer their planned investments and by stronger than expected US dollar that reduced our total quarterly revenue by $11.7 million, at comparable third quarter 2014 currency rates.

As a result, we generated only $160.7 million of revenue during the quarter.

And, recorded a GAAP loss of $0.12 per share and a non-GAAP earnings of $0.05 per share.

After analysis, we believe that several economic factors, including the decline in the euro and the yen relative to the US dollar, caused the majority of our aerospace automotive and healthcare customers to curb new printer purchases during the quarter and curtail their materials and services purchases.

Additionally, we estimate that several metal and nylon applications and performance issues, delayed our ability to sell another approximately $5 million worth of printers during the quarter.

The combined impact compressed our revenue growth for the quarter to 9%, or 17% at first quarter 2014 exchange rates.

Altogether, these factors reduced sales of our design and manufacturing printers and materials.

And, resulted in a decline in organic revenue of 7%, compared to total revenue in the first quarter of 2014.

On a positive note, our other revenue categories, including consumer software and services, improved.

Deferred purchases of our professional 3D printers and materials by OEMs, constrained revenue growth within our design and manufacturing category to just 5%.

Amidst what we believe to be an industry level pause, the number of direct metal units sold increased 46% and that's delay on it, increased 50% over the comparable 2014 quarter.

With, both categories declined sequentially after a record 2014 fourth quarter.

We're very pleased to report that consumer revenue increased 65% over the first quarter of last year.

With modest sequential growth driven by 169% increase in consumer 3D printers sold.

Services revenue increased from 31%, primarily, from expanded healthcare and software services and modest Quickparts growth over the first quarter of 2014.

Our continued investments in direct metal printing resulted in a 39% revenue growth despite several application-related performance issues.

As 3D printing migrates into more and more real manufacturing use cases, we see open-ended opportunities for our direct metal products and services primarily in aerospace, automotive, and healthcare applications.

Additionally, we have successfully combined our Phenix and LayerWise engineering teams and they are now working on future products that we plan to bring to market, strategically, over time.

Healthcare revenue for the quarter increased 38% to $30 million despite the abrupt pause in OEMs' orders for printers and materials.

Revenue from newer healthcare products and services drove this growth.

During the first quarter, we expanded our global sales coverage by entering into a multinational distribution agreement with Henry Schein, a leading provider of healthcare products and services.

Under the agreement, Henry Schein will offer our dental 3D printers to its dental customers in select markets, substantially expanding our reach into the dental industry.

Moving into our software category, we see 3D software as an integral part of mainstreaming 3D digital fabrication.

Accordingly, over the past several years we have assembled a comprehensive offering from perceptual devices to design, manufacturing, and metrology products.

For the first quarter, software revenue increased from 53%, in part, from the addition of Cimatron in February.

We believe that the impressive array of revenue-generating software products that we have assembled, strengthens our advanced manufacturing leadership and portfolio, extends our global sales coverage, and multiplexes our cross-selling opportunities.

The convergence of macroeconomic factors, including adverse currency rates, held EMEA revenue growth to only 2% and compressed APAC revenue some 20%, primarily on weaker Japanese depend.

Revenue from the Americas increased 27%, on rising demand for the Company's extended products and services.

During the first quarter, under the capable leadership of our Chief Operating Officer, Mark Wright, we began implementing a series of initiatives to strengthen our channel partner program and to improve our overall sales productivity and coverage.

I will discuss this efforts in more detail during my closing remarks.

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

Ted.

Thanks Avi, and good morning everyone.

For the first quarter, we announced revenue of $160.7 million.

We reported a GAAP loss of $0.12 per share and non-GAAP earnings of $0.05 per share.

During the first quarter, curtailed spending by OEMs constrained our revenue growth from product sales to 3%.

And, the combined shortfall in new printer sales and lower overall customer utilization during the quarter, resulted in an 8% reduction in materials revenues.

Services revenue increased 31%, driven by growth from healthcare services, including virtual surgical planning and simulation, software services, including Cimatron, and to a lesser extent Quickparts.

Gross profit margin expanded 120 basis points, sequentially, to 49.1%.

Products and materials gross margins were compressed from mix, more specifically, from a larger portion of sales from consumer products.

Services gross profit margin expanded from the addition of healthcare services, software growth and improving Quickparts gross profit margin.

First quarter operating expenses increased 46% to $97 million, reflecting, a 52% increase in SG&A cost and a 29% increase in R&D expenses.

SG&A increased primarily from compensation and acquisitions.

R&D expenses increased primarily from the addition of Cimatron during the quarter and from programs in support of our expanding portfolio.

As we mentioned previously, with the completion of the Easyway acquisition in China, we have decisively shifted our focus towards leveraging recently acquired assets.

We believe that our ongoing investments are sufficient to support our growth plans for the foreseeable future and expect to maintain our 2015 capital expenditures, as planned, at approximately $25 million.

We used $900,000 of cash in operations during the quarter and exited the March quarter with $200 million of cash on hand, after paying $78 million for Cimatron during the first quarter.

We have not used any of our available $150 million revolving credit facility.

We ended the March quarter with $115 million in inventory, that we plan to reduce over the coming periods.

The aforementioned factors reduced our order book some 19% from December, to $38 million in March.

Given marketplace uncertainties, including those that we have discussed on this call, we believe that it is prudent at this time to withdraw our previously issued annual guidance.

We continue to rigorously assess the macroeconomic environment and we will provide an update regarding guidance when we have more clarity that sector conditions have stabilized.

We remain optimistic about the market opportunities ahead and are taking advantage of this period by focusing on what we can control; refining our cost structure and strengthening our execution.

And, that concludes my comments.

Avi.

Thanks, Ted.

During the quarter, we successfully concluded the current phase of our M&A roadmap.

First, we completed the acquisition of Cimatron in February, strengthening our 3D digital design and manufacturing portfolio.

And, second, we acquired Easyway, which provides a strong platform to scale our cloud manufacturing operations and multiplex our 3D printing reseller coverage within China.

These recent acquisitions added synergistic technology, demand expertise, and complementary sales channels, as well as extended regional coverage.

Additionally, during the quarter, we progressed through the construction of our new state-of-the-art 70,000 square-foot healthcare facility in Littleton, Colorado.

And, completed the installation and start up of our continuous high-speed 3D printer in our Wilsonville, Oregon facility.

To further extend our services, we are in the process of installing 10 additional direct metal printers within our global Quickparts and healthcare operations.

And, now following this phase of stepped up investments, we have turned our focus to fine tuning and leveraging our comprehensive portfolio of products and services.

Consistent with our earlier comments, we commenced a series of specific initiatives under the leadership of our Chief Operating Officer, Mark Wright, that are designed to strengthen our channel partners and to improve our overall sales productivity and coverage.

Specifically, we're in the process of rolling out a tiered performance-based structure to better incentivize and reward valuable channel partners.

We're also deepening the CRM integration between us and our partners to improve customer intimacy and efficiency across every step of the customer experience.

And, we're creating a state-of-the-art training facility in Rock Hill, South Carolina.

Finally, we are building a world-class service center to enhance responsiveness, effectiveness, and coverage.

Through these and other initiatives, we believe that we are better positioned to attract high caliber experienced partners that can expand our original coverage and deepen our reach in all key markets and verticals.

In addition to Henry Schein, which I mentioned earlier on the call, we recently added Carolina Wholesale as the national distributor for our consumer products, expanding our coverage domestically.

And, we're pleased to announce yesterday, that HK 3D Printing, a leading reseller in the United Kingdom and Ireland, chose 3D Systems and plans to sell our entire product portfolio in both the United Kingdom and Ireland.

We're taking full advantage of this period to accelerate our planned integration productivity and efficiency measures.

That includes leveraging and optimizing our infrastructure, which we believe has ample capacity to support future growth; driving operational synergies and cost downs throughout our global organization; creating an integrated global supply chain, and reducing our procurement spend substantially; enhancing and expanding our quality processes and organizing our business practices to better align our talents and technologies with market opportunities.

We expect these initiatives to yield substantial cash operating expense reductions over the next few periods and to result in a stronger Company with significant competitive advantages.

While current conditions may indicate an industry level pause, we believe that it is not unusual in emerging tech to encounter periodic episodes of equilibrium that are followed by resumption of upward growth.

We continue to closely monitor conditions and note that several weeks into the second quarter our bookings are ahead of the same period in the first quarter.

More specifically, we're encouraged to see that certain OEMs are beginning to resume their capital investments and are making the purchases they deferred during the first quarter.

Over the past several years, we have allocated the vast majority of our M&A spending to high-growth sectors within professional products and services, including healthcare and software, and are pleased with the early returns.

Now, we are focusing on specific operational initiatives that are designed to deliver greater earnings power, as our industry resumes its growth trajectory.

While the current economic climate interfered with our planned cadence for 2015, we believe that the fundamentals of our business and the strength of our portfolio are intact.

We remain optimistic about the market opportunities ahead and are using this period to fast-track our planned productivity and efficiency measures without impairing future growth.

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

Stacey.

We will now open the call to questions.

I'd like to remind everyone that your line will be muted after you're first question.

As we kindly request that you ask one question at a time and then return to queue.

That's allowing others to participate in the Q&A session.

As 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 1-877-407-8291.

And, if you are calling outside the US, the number is 1-201-689-8345.

Thank you.

At this time we will be conducting a question-and-answer session.

(Operator Instructions)

Patrick Newton, Stifel Nicolaus.

Yes, thank you, good morning.

Thank you for taking my question.

I guess, I really want to dive down into the lack of providing full-year guidance.

If you could elaborate on this?

Your press release talks about several categories and verticals performing well.

You talked about certain OEM's purchasing again in the quarter.

And, I guess I'm curious if this is an unwillingness due to lack of stability?

Why, perhaps, investors shouldn't see the current challenges as being beyond short term in nature and more long term, and potentially structural later, with 3D Systems or the industry?

And, I think, Avi, you talked about this potentially being a pause.

But, we're seeing several of your smaller, and perhaps private peers, reporting pretty robust organic growth in markets where you're citing challenges.

Then also, one other follow on is that you talked about materials being impacted by FX.

And, I'm curious if you could comment on why FX would lower material purchases?

Because, that would seem to indicate lower utilization in your machines.

Thank you.

Okay, let's start with the guidance, which is, I think, a fair and a good question.

And, the reality is, that we see indications of a recovery.

And, we also want to take a little bit more time to make sure that we fully and completely understand some of the macroeconomics and FX related issues.

So, to us, while the current conditions may indicate an industry level pause, we believe that it's premature to determine its duration and recovery slope.

And, we believe that it is prudent to withdraw our guidance at this point and take a little bit more time to assess.

Our plan is to provide an update when we have more clarity and when sector conditions stabilize.

And, that is exactly what we are doing.

On the one hand, we are pleased to note, that several weeks into the second quarter our books -- our bookings ended are ahead of the same period in the first quarter.

And, in addition to that, our sales funnel looks very promising.

Importantly, aerospace and healthcare customers that curbed purchases during the first quarter, are indeed, resuming purchases of multiple systems.

On the other hand, we don't yet have a clear line of sight into the exact timing and pace of revenue recovery, or any further insights, quite frankly, into currency volatility.

I'll even add a little bit more color on the kind of due diligence that we are doing.

Over the past several weeks, we met with all of our EMEA.

And, this week, our North American channel partners.

We have many of our global OEMs.

And, based on these extensive meetings and interviews, we believe that there is not so much a question of, if recovery will occur or is occurring, but more of when and at what rate?

Next week, we are doing the same due diligence in region in APAC.

And so, we are taking the time to evaluate.

We think that it's the responsible thing to do.

We are very excited about the future of our space.

We don't see any structural issues here.

We think that our portfolio is intact and attractive.

And, we see lots of evidence that more and more of our partners in our OEMs are opting in to do business with us, because of the powerful nature and attractiveness of our portfolio.

Now, you also asked a little bit about why were we impacted in certain areas and maybe some of our smaller competitors were not?

And, let me say, that we believe that we have greater concentration in -- oh, I should say differently.

We believe that the combination of our expanding international business, which is much greater than most of our competitors if not all of them, and our growing concentration in real manufacturing and industrial applications and customers, makes us much more vulnerable to the steep currencies decline relative to the US dollar.

The aftermath of some of the other macroeconomic issues that particularly, delayed some of our aerospace and automotive customers' expenditures.

The good news is that they are returning.

And, that what we expected is beginning to happen.

The disappointment is that it certainly disrupted our cadence.

The other thing that I want to remind you is that we get into applications that require longer selling cycles.

And, are subject to, sometimes, multi-year qualifications.

The good news is that those are also sticky long-lived relationships.

And so, we expect that industry growth trajectory will resume on the other side of this pause.

And, we're just trying to assess the duration and estimate the slope of recovery.

That's where we are today.

Thank you.

Jim Ricchiuti, Needham & Company.

Yes, I wonder if you could talk about, perhaps, some of the things you think you can control here?

Just in light of the uncertainty in the market, what can you tell us, maybe in more detail, about how we should think about operating expense levels as we go through the year?

Do we see it peaking in the June quarter?

And, can you give us a sense as to what that might look like?

And then, how does OpEx play out in the second half of the year?

Yes.

So, there are a few things that we can control, Jim.

And, the first and foremost amongst them is operating expenses.

Now, that we concluded the current phase of acquisitions, we expect our cash operating expenses to peak in the June quarter.

We have already initiated, as we got into 2015, a series of efficiencies and productivity improvements, and tighter integration of the remaining acquisitions that we made from the December quarter through the March quarter.

And, those are expected to begin to reduce in absolute dollars our operating expenses as we get into the third and fourth quarter of 2015 and beyond.

We feel that we have a good hand on it -- a good handle on it.

The programs and initiatives have been identified.

Some of them are already in motion.

And, we believe that as the year progresses into the September quarter and the December quarter, we will begin to see substantial cash operating expense reductions progressively.

There are other things that we can control.

We can control how we enhance our attractiveness to partners and become more a partner centric Company to all of our resellers.

And, we are taking significant initiatives there.

We can control our order-to-delivery cycles in the Company and we are taking significant steps towards that.

We have taken comprehensive supply chain initiatives that we believe would yield, in the third and the fourth quarter of this year, significant improvements to our cost of goods across the board.

And, those are all planned productivity and initiatives that we commenced in the 2014 December quarter that are beginning to hit optimal pitch here in the Company, and we expect to see the benefit of -- the benefits of those in the coming quarters.

There is another element that we can partially control, which is our gross profit margin.

I say partially, because we can't necessarily control the mix, but we can certainly control our ASPs, and we can certainly control our manufacturing goods.

And, those are the areas that we are focusing on.

We feel reasonably confident, based on the talent that we have and the systems that we have installed, and the kind of enhanced execution that have come with the additional experienced talent that is sitting around the table now, that gives us a great deal of confidence that margins will continue to expand.

And, that operating costs on a cash basis will decline in the second half of the year.

Thank you.

Jason North, Jefferies.

Hi, I know you've withdrawn the full-year guidance.

Can you give any color, though, if you -- when you would expect organic growth to return to positive levels?

Thank you.

Yes, I think that's another good question.

Relative to organic growth, it should be abundantly clear that because the -- it should be crystal clear, I should say.

That, our organic growth is directly related to our higher than others industrial and healthcare business, and to our greater exposure to international markets and their currencies.

For those reasons, our organic growth is directly impacted by the weakening in demand from industrial and healthcare OEMs that we experienced in the March quarter, and the FX.

So, if and when our industry resumes its growth trajectory, and we see a rebalancing in currency rates, we think that our organic growth rates will reflect that, and will certainly string back to industry growth rates such as they will be.

Our sense is, we feel pretty good about our ability to generate healthy organic growth in periods that demand exists, and in periods where FX doesn't so adversely impact our organic growth rates.

Thank you.

Bobby Burleson, Canaccord Genuity.

Hi, sorry about the speaker equipment here if I'm not clear.

I just had a quick one on the metal machines.

You have growth there, but, I'm curious, excluding any kind of quality issues, what is the demand look like so far this year, versus where you thought it might have been at the beginning of the year?

In other words, has there been a deceleration in metals versus expectations, at least?

Thanks.

Well, let's say a few things about metals.

One, is we continue to believe, notwithstanding some of the defined and isolated application and performance issues that we encountered, we continue to believe that we have an awesome portfolio of direct metal printers that is in high demand.

We are further enhancing that through the combination of our Phenix and LayerWise teams, and the work that they are doing on bringing to market additional capabilities, as a result of the collective expertise and wisdom that comes from those teams.

So, we're pretty excited about what we're doing and we're excited about the potential.

As to the numbers themselves, revenue was up 39% for the quarter on a 46% unit increase.

But, it did decline from the fourth quarter of 2014, in which we had a record quarter demand.

What we see in the current period and what we see in our pipeline, is continued strong demand, which was certainly compressed by all of the macroeconomic conditions that we mentioned and further by FX.

So, do we see a deceleration going forward?

Not so much.

Do we see that we are vulnerable in some areas to the purchasing patterns of customers that are assessing there own P&Ls and their own business plans and FX?

Absolutely.

Are we less excited about the open-ended opportunities in aerospace and in automotive and healthcare?

No.

Do we see that in any way our competitive position has been underminded over the last few periods?

We don't think so.

Are we in denial about some of the unique application and performance issues that we have?

No.

We're all over them.

We are enhancing our capabilities and developing additional capabilities that we plan to bring in to the market in the coming periods.

Strategically.

So, when all is said and done, we are as optimistic about the future of direct metals and its mainstreaming, as we were over a year ago when we began to make this investment, and we are fully committed to lead within the space.

Thank you.

Kenneth Wong, Citigroup.

Hello, guys.

With guidance off the table, perhaps you can provide some color on how we should think about revenue seasonality?

It's going to be much more pronounced in the, kind of, close to 60/40 you guys talked about in the past?

Then maybe you can comment a bit on Japan?

You guys specifically called out weaker demand there.

What's the -- what specifically is at the root of that?

And, are you starting to see some of those trends turn?

Thank you.

Yes, let me start with Japan.

We certainly experienced some unique conditions in Japan during the first quarter, as it pertains to companies' abilities to invest and how that translated into order cadence for us.

We have, as part of my prepared comments around that, that we see customers that sat on the sidelines in the first quarter, are resuming their purchases.

We -- that also includes seeing a recovery in Japan.

So, we certainly view those unique Japanese conditions as being unique to Japan and being time defined.

With regards to seasonality.

I mean, let me be again clear, that there is no question in our mind that there will be a recovery in our sector.

We have no doubt about it.

We have now conducted hundreds of discussions and interviews and meetings.

And, we're seeing encouraging signs, already a quarter to date, in Q2 versus Q1.

So there's no question of -- that things are getting better.

The questions that we're still wrestling with are, line of sight as to how fast and what trajectory?

And, when we have better clarity and understanding that the sector has stabilized, we will come back and update you guys with guidance.

As to seasonality, we -- from the get go, expected the revenue trajectory this year will be more weighted towards the second half of the year.

And, that would have been the case in any event.

We are going to start with a slow start and progress and generate more of the revenue in the second half.

What we are trying to assess right now, is, when did -- when does 2015 order cadence begin?

If it didn't begin in January, did it begin in April?

Or, when does it begin?

And, how does it project forward?

And, as we gain clarity into that, you guys will be the first to know.

Thank you.

(Operator Instructions)

Ben Hearnsberger, Stephens.

Hello, thanks for taking my question.

On gross margins, we saw them expand sequentially, despite the slower revenue growth.

Can you give us some color?

Take us through the moving parts there?

Specifically, how much Cimatron improved your gross margin in the quarter?

Then, looking out over the year, I know you're not providing guidance, but do you think, given the fact that you've got some of this higher-margin revenue in Cimatron coming on, do you think you can still expand gross margins in FY15?

The answer is yes.

We believe that we will continue to expand gross profit margins throughout 2015.

And, I mentioned some of the drivers when I was answering Jim Ricchiuti's question earlier about what we can control.

So, one of the Company-wide initiatives that we have underway, under the leadership of our Chief Operating Officer, Mark Wright, is a comprehensive worldwide supply chain initiative, which is designed to substantially improve our cogs in ways that we think will translate into across-the-board gross profit margin expansion.

Primarily, for printers the materials.

Now that we concluded the current phase of M&A.

And we have all of our service bureau operations bolted on and we don't have new ones coming in for the foreseeable future.

We believe that we will see a net and continued improvements in Quickpart's gross profit margins.

We're seeing expansion in our healthcare gross profit margins.

And, of course we see contributions from software and from Cimatron.

However, I want to caution you not to place to much emphasis on Cimatron at this point.

Because, we acquired Cimatron in February.

They've contributed only a partial quarter.

And, in addition to it, because of a deferred revenue haircut, that is required from an acquisition accounting point of view, that further had reduced their revenue contribution for the first quarter.

So, when all is said and done, I just want to caution you not to attribute too much of our at -- consolidated gross profit margin expansion to Cimatron.

Because, the rest of the story is that we've seen improvement in all these other categories.

Certainly, printers continued to put pressure on gross profit margins.

And, specifically, consumer printers, as we enjoyed a very strong revenue growth in the first quarter from consumer; 65%.

We shipped 169% more consumer units versus the comfortable quarter of last year.

But, that is being addressed through our supply chain initiatives, and we believe we will see substantial gains there as the year progresses.

Thank you.

Troy Jensen, with Piper Jaffray.

Hello, thanks for taking my question here.

A quick one for Avi.

So, on the channel expansion, you announced a lot of new partners.

I guess one thing we hear, Avi, a lot from the resellers is that's there's too much -- too many channel partners.

I think through all the acquisitions you've done, you've added a lot of resellers.

And, there's a lot of competition in the channel.

So, love you to touch on that.

Then, also, if you could let us know what percent of sales went into channel partners in Q1?

That'd be helpful.

Thanks.

So, let me start with talking about the number of partners and then we'll talk about your channel inventory question.

The -- with regards to the number of partners, we decided, Troy, that we're actually going to go and talk with all of our partners.

Face-to-face.

So, we are in the middle of doing all of that.

In the last few weeks we were in EMEA.

This week we have the vast majority of our partners from the United States and Latin America here in Rock Hill, South Carolina.

Next week we will be in APAC.

We have taken substantial steps to make 3D Systems a very partner centric and attractive partner.

And, as a result of this, we also see some good partners being attracted to 3D Systems.

Like, HK 3D from the UK, that we announced last night, and a few others.

We also learned from our partners where are the friction points, which are not so much around coverage.

Because, believe it or not, Troy, we still have some zip codes and geographies that are not covered at all.

That we are actually encouraging good partners to step up and invest and cover.

Because, we don't necessarily want to add more players.

What we're also discovering is that our partners and other key distributors and resellers that are serving this industry, are interested in a more comprehensive portfolio.

They're interested in metals.

They're interested in SLS.

They're interested in a much more comprehensive SLA portfolio that takes you from the desktop to the manufacturing floor and everything in between.

And so, we're having those discussions and dialogues and we're taking specific actions on channel improvements, that we believe, are creating a lot of opportunities for our channel.

Those include creating a tiered performance-based structure to better incentivize and reward our partners.

Tighter integration into salesforce.com, that gives complete and full transparency in terms of performance and territories.

It includes faster response.

It includes the creation of a new service center that is here to enhance responsiveness and a world-class training center, that we're building for our partners here in Rock Hill.

Those are the elements, that we believe from now, touching all of our channel partners, will resonate with them.

Coming to channel sales.

It's actually a pretty good story.

Consistent with lower customer demand, our channel inventory also declined about 30% from the December level.

And, so we're -- it was about $8 million -- I'm sorry, where it was about -- it declined about $2.8 million, which means it went down from about $11 million to $8 million sequentially, which is very encouraging and very validating.

It continues to tell us that our resellers, on a rolling 90 day basis, only buy what they can sell, where they have a clear line of sight into real end-user orders.

They're not in the habit of stocking for the sake of stocking.

The inventory moves very fast, and it mimics really directly be ebbs and flows in the order cadence.

Thank you.

Sherri Scribner, Deutsche Bank.

Hi.

Thank you.

I wanted to get a sense of how much the organic revenue growth was impacted by currency?

Being down 7%.

Then, in terms of the backlog with the decline this quarter down to $38 million.

Can you give us a sense of where the backlog is now at this point in the second quarter?

Have you seen some improvement?

Because it sounded like some deals have got pushed into Q2.

Thanks.

So, in terms of FX.

It's important to note that the FX impact on revenue was nearly $12 million.

It was I think, $11.8 million, or some -- $11.7 million, $11.8 million, yes.

The vast majority of it came from core businesses, which were directly impacted.

Printers, materials, things like that.

So, we don't have a direct correlation between FX and organic growth, but suffice it to say, when most of the pressure comes from those core activities, FX was a significant driver.

The other significant driver was, as we said, many OEMs that were a little slow to get started on their own spending roadmap and CapEx for the first -- for the beginning of the year.

Assessing their own P&Ls and what all these conditions meant to them.

Backlog, on a sequential basis, was down about 19%.

And, again, this is fairly consistent with the abrupt disruption of orders at the end of the second -- at the end of the -- towards the end of the first quarter.

And, as we see resumption of order patterns in -- for the first several weeks of this quarter, relative to the first quarter, certainly the order book is expanding.

Thank you.

Holden Lewis, Oppenheimer and Co.

Great.

Thank you, and good morning.

You had -- I think that you had commented that your Quickparts business grew fairly slowly.

I didn't see actual numbers, but, I think that I sort of, caught that comment.

And then, obviously, materials was down.

I think you had -- might have missed that question earlier.

I'm just kind of curious, I mean, your Quickparts and materials.

We, sort of, consider that to be more production less CapEx, presumably a bit more stable?

And, not likely to be affected by the sort of capital expenditure deferral's that you're, sort of, referring to.

Can you comment on the relatively slow growth there?

The degree to which that's affected by this slowdown that you think you're seeing?

And, why that would be behaving in a way similar to your capital goods?

Yes, it's actually a fairly simple answer.

In the case of Quickparts, we have said in connection with the full 2014 earnings call, that we are actually accelerating and fast tracking what remained of the shedding activities.

And, that's certainly played a part.

Quickparts, because our Quickparts business is also heavily exposed to FX, it was impacted by the strong dollar as well in terms of a reduction to revenue.

So, we see the modest growth in Quickparts considering these two activities.

One, by design to eliminate what's left of undesired revenue buckets.

And, the second from FX is pretty straightforward.

In the case of materials, we saw basically three factors, that reduced revenue for the quarter.

First, FX.

The second is the steep decline in new production systems that are sold typically with initial material installation kits that are pretty substantial.

And, those were missing in the quarter.

The third, we did see some slowdown in purchases of key OEMs.

Both, in healthcare and industrial that did not use as much material in the first quarter as they used previously.

We're happy to report that we have seen a pick up specifically.

Because, we monitor all these customers very closely.

We haven't lost anybody.

Utilization did not decline.

And, we have seen a resumption of what we would consider more of an ordinary pace, both in terms of materials and Quickparts, so far into the second quarter.

Thank you.

Ananda Baruah, Brean Capital.

Hi, guys, good morning.

Thanks for taking the question.

Just a quick one if I could for, maybe Avi, instead.

Just, sort of, going back to your comments with regards to how the model progresses through the year and some of the initiatives.

Is it -- is an accurate assumption to think that the OpEx dollars actually decreased in the December quarter, relative to the September quarter?

While the gross margin increases in the December quarter relative to the September quarter, which would, I guess, set you guys up for an opportunity for pretty nice leverage in the December quarter if revenue is up sequentially.

Thanks.

Well, it's reasonable to make a few assumptions here.

One, is that as we get into the current year's September and December quarters, in absolute dollars and as a comfortable business, in the sense that we don't add or subtract anything.

We continue to run the business as it is today.

There will be an absolute decline in cash operating expenses that will begin to become very visible in the September quarter, and even more so in the December quarter.

The next question is around gross profit margins.

And, within what is in our control, which is costs of goods and what we -- and how effectively we sell.

We expect to see a continued margin expansion opportunity here that will play in the next few quarters progressively.

To the extent that we get additional help for him external sectors that are not in our control in terms of mix and currency, that could be even more pronounced.

But, we're very, very encouraged.

That, even in a less than ideal quarter in terms of everything that we experienced from mix and decline in revenue and FX and everything else, we were still able to expand our gross profit margins based on good operations and good executions.

And, we expect that to play for the rest of the year.

Thank you.

Ladies and gentlemen, that is all the time that we have for questions.

My apologies.

Ladies and gentlemen, we will actually take another question.

Steven Milunovich, UBS.

Hi, good morning.

This is Peter in for Steve.

Thanks for fitting me in.

Avi, I was just wondering if you could go into a bit more of the specifics of this tiered performance structure that you're looking to implement across your reseller network?

And, are you seeing an increased impetus of M&A among your resellers?

We haven't seen any increased M&A amongst resellers.

We don't see reseller channel consolidation.

In fact, to the contrary, we see lots of channel opportunities.

And, we are focused on everything that we need to do to become better channel partners, and to enhance productivity and profitability of our channel partners.

We -- what we're doing specifically, is we are creating opportunities for our channel to, based on performance, have incentives to be able to continue to invest in their business for growth.

So, it's going to be based on performance.

It's going to be based on realigning and allocation, and reallocating co-marketing incentives and dollars that have available to them today.

To actually parlay those towards opportunities for them to add feet on the street.

Opportunities for them to add training and capabilities.

We've also just launched a pretty comprehensive and experienced team of presales specialists that are employed by us.

And, have been employed by us for some time.

We made them available to our top-tier channel partners.

We're giving them greater access, direct access, to resources inside of 3D Systems, as if they are employees of the Company.

So, the top-tier partners will have unfettered access, direct access, to resources as if they are a part of the Company.

We're also -- we brought in a fairly experienced senior service center executive to come and kind of, create a state-of-the-art service center to support all of our resellers.

There are many more details to this.

We've been presenting it to our resellers.

And, we're working with them to fine-tune it.

It's going to be in a beta state for the next several months.

Because we want our key resellers and partners to actually iterate with us.

We're going to run it as a beta program for several months and then we're going to institutionalize it.

The early returns are very, very encouraging.

Ladies and gentlemen, that is all the time we have for questions.

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

Stacey.

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, this does conclude today's conference.

We thank you for your participation, and you may disconnect your lines at this time.