3D Systems Corp (DDD) 2015 Q3 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 third quarter and first nine months of 2015.

My name is Donna, 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 Investor Relations 3D Systems.

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

I am Stacey Witten.

And with me on the call are Wally Loewenbaum, Chairman of the Board of Directors; Chuck Hull, Executive Vice President, Chief Technology Officer and Chairman of the Executive Management Committee; Andy Johnson, our Interim President and CEO and Chief Legal Officer; Dave Styka, Executive Vice President and Chief Financial Officer; and Mark Wright, Executive Vice President and Chief Operating 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 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 this 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 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 also 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 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 2014.

Now, I will turn the call over to Andy Johnson, our Interim President and CEO.

Thanks, Stacy, and good morning everyone.

Thank you for joining us today.

As you know, last week, Avi Reichental stepped down as President and Chief Executive Officer, and as a Director of the Company, by mutual agreement with the Board of Directors.

The Board has commenced a comprehensive search and evaluation process to select a permanent replacement for the role of President and Chief Executive Officer.

In the meantime, the Board has established an executive management committee to provide ongoing leadership, and to support company-wide operations and strategic initiatives during this transitional period.

It is an honor for me to serve on this committee as Interim President and CEO, in addition to my ongoing role as Chief Legal Officer.

I have been with 3D Systems for over nine years, during which time I have gained valuable insight into our business and our industry.

I have the utmost confidence in the strength of our technology, and of our global team, and am fully committed to our Company's success.

I am fortunate to be joined on this committee by a team of dedicated and capable leaders, all three of whom are with us on this call this morning.

Chuck Hull, our Cofounder, Director and Chief Technology Officer, who is serving as Chairman of the committee; Dave Styka, our Chief Financial Officer; and Mark Wright, our Chief Operating Officer.

The committee is working to ensure the continuity and effectiveness of day-to-day operations.

At the same time, we are completely aligned and fully committed to accelerating measures aimed at improving quality across our organization, reducing our cost structure and refocusing our resources around near-term opportunities.

We will talk more about these initiatives later in the call.

But let's turn now to Q3 results.

During the third quarter, revenue decreased by 9%, to $151.6 million.

On a constant currency basis, revenue decreased 3%.

We are disappointed with our overall results, and a lower revenue from our 3D printing products and services, which we believe were negatively impacted by continued challenging market conditions that extended customers' capital investment cycles and reduced demand across all geographies.

However, despite these challenging conditions, we still observed a few bright spots, notably in 3D healthcare simulators and services, and 3D software.

Gross profit margin decreased 90 basis points, to 46.9%, primarily due to the negative impact of consumer products.

Operating expenses remained flat sequentially, at $105.7 million, inclusive of $22.5 million of R&D expenditures, and an $11.3 million expense provision for an arbitration award related to a business acquisition in 2011.

Our cash operating expenses decreased 8% sequentially.

We reported a third-quarter GAAP net loss of $32.2 million, or a $0.29 loss per share, and non-GAAP net income of $800,000, or $0.01 earnings per share.

Before Dave provides financial details, I'd like to turn the call over to Mark Wright, Chief Operating Officer, to discuss our progress on operational initiatives.

Mark?

Thanks, Andy.

We have a number of ongoing strategic initiatives underway that are aimed at improving our core 3D printing business.

We've identified three areas of focus that we believe are critical to our success: 3D printers, partners, and productivity.

As Andy mentioned, we are disappointed with our revenue from 3D printing products and services in the third quarter.

In addition to the negative impact of market conditions, we believe that the residual reputational damage, as a result of our earlier printer performance issues, also impeded our sales efforts in the quarter.

Working on a customer-by-customer basis, we continue to remediate previously-known SLS and DMP printer performance and quality issues in the field.

All SLS and DMP printers that are currently shipping include the latest improvements.

Through these efforts, we are systematically raising the bar on performance and quality standards across our full range of 3D printers, both with the existing products and those in development.

In line with that, during the quarter, our direct metals team expanded beta testing of our next generation metals printer, the ProX 320.

Leveraging our combined metals expertise, the ProX 320 is designed to complement our direct metals portfolio, and extend our reach into additional prototyping and manufacturing applications.

And we are currently progressing through rigorous testing, both internally and with industrial customers.

When I joined the Company about a year ago, we set a goal to become the best partner company to work in our industry.

Not only by having the best products, but by promoting and embracing partner friendliness across our organization, from manufacturing to services to logistics.

And we've been working very hard towards achieving that goal.

During the quarter, we continued to build out our performance-based partner program, Partner Excel, which provides enhanced tools and resources to align partner sales efforts with our priorities.

We also expanded and refined our lead generation, forecasting, training and service tools, to improve productivity and profitability for us and our partners.

Additionally, we recently announced several key partnerships that we believe will advance our technology, as well as increase adoption and drive new use cases for our 3D printers.

We expanded partnerships with Philips Corporation, US Army Research Lab, and Penn State, to advance material and process developments, including critical defense and aerospace applications.

Methods Machine Tool, a US-based leading supplier of precision machine tools and automation for manufacturing, recently became a partner in our distribution network.

Methods will offer our full portfolio to its customer base of 30,000 companies, and will put a strong strategic focus on our direct metal printers, based on their expertise in metal precision machining and industrial applications.

In addition, we recently partnered with GPI Prototype and Manufacturing, a leader in direct metal printing, to increase access to and adoption of DMP printers for the manufacture of end-use parts, and to drive new applications.

The third key area of operational focus for us is increased productivity, and we've been driving productivity gains throughout our organization, through the combination of talent and process improvements.

Recently, Charlie Grace joined our Company as Chief Revenue Officer, Professional Products, leading all of our professional and production 3D printer-related revenue generation activities worldwide.

Charlie has more than 25 years of experience at Xerox and EFI, and he will be looking to immediately enhance customer relationship management and channel building leadership with direct sales and reseller partners.

One of our most experienced sales leaders Michele Marchesan, is now spear-heading our efforts to build an effective partner channel for desktop 3D printers.

Michele is focusing on creating a productive, responsive and scalable sales network that can address what we believe are near-term opportunities for our desktop printers in education and in engineering.

During the third quarter, Bill Sanger joined our Company as Vice President of Global Manufacturing, and will lead the production of all 3D printers.

Bill brings a great deal of senior management experience in manufacturing, supply chain and operations, with a strong focus on lean manufacturing.

He is working closely with managers globally to continue to create scalable, efficient processes, to deliver the highest quality products in the most cost-effective way.

During the quarter, we also continued to improve our call center operations for field service and customer support, by investing in best in class service tools.

We also recently opened a new worldwide service training center in Rock Hill, focused on partner education, training and new product rollouts.

We believe that these key investments in our business infrastructure will lead to improved partner performance and operational efficiencies.

We also recognize that all of these operational initiatives I've discussed are ongoing, and require continuous improvement.

We are committed to carrying on these and other initiatives, moving forward.

With that in mind, I will turn the call over to Dave Styka, to discuss the financial results for the quarter.

Dave?

Thanks, Mark.

Good morning everyone.

For the third quarter of 2015, our revenue decreased 9%, to $151.6 million.

We reported a GAAP loss of $0.29 per share, and non-GAAP earnings of $0.01 per share.

For the first nine months of the year, we reported revenue of $482.8 million, an increase of 4%.

We reported a GAAP loss of $0.53 per share, and non-GAAP earnings of $0.08 per share.

Our GAAP net loss included an $11.3 million expense for an arbitration award, related to an earn-out in connection with the acquisition of Print 3D Corporation in 2011.

As we stated on our press release last week, we disagree with the arbitrator's findings and conclusions, and intend to challenge this ruling in federal court.

Notwithstanding our right to appeal, we recorded an expense in the third quarter for the amount of the arbitrator's award.

Continued challenging market conditions reduced 3D printer sales across all categories in the third quarter, which in turn resulted in lower sales of materials.

Total printed units for the quarter decreased 26% compared to the third quarter of 2014, and 29% sequentially.

For the quarter, design and manufacturing revenue decreased 9%, and consumer revenue decreased 14%.

For the first nine months, design and manufacturing revenue increased 2%, to $447.4 million.

Healthcare revenue grew 15% over the same period, contributing $99.3 million, driven by expanded products and services.

For the nine months, software grew 119%, contributing $56.3 million, including the addition of Cimatron.

Consumer revenue improved 23% for the nine months, inclusive of some residual backlog in 2014.

During the third quarter, products revenue decreased 27%, and materials revenue decreased 11%, primarily as a result of lower printer sales.

Services revenue increased 16%, from growth in both software and healthcare services.

All geographic regions decreased compared to the third quarter of 2014 and sequentially.

In the third quarter, revenue from the Americas decreased 11%, EMEA revenue decreased 5% and revenue from APAC decreased 10%.

Revenue decreases in global markets were driven by lower printer sales, but were also adversely affected by foreign currency rates during the quarter.

Gross profit margin for the quarter was 46.9%, a 90 basis point decrease over the third quarter last year, and a 100 basis point decrease sequentially.

Materials gross profit margin improved due to supply chain efficiency in the mix, while services gross profit margin expanded on higher healthcare and software contributions.

These increases were more than offset by the decline in products gross profit margin that was primarily due to the negative impact of consumer products.

GAAP operating expenses increased compared to last year, but were flat sequentially, at $105.7 million.

In addition, cash operating expenses decreased 8% sequentially.

Compared to the third quarter of 2014, SG&A increased from acquired expenses, including intangibles, amortization and higher compensation, as well as the $11.3 million expense provision for the aforementioned arbitration award.

R&D increased to $22.5 million, from new product developments and acquired businesses' R&D expenditures.

During the quarter, we used $4.3 million of cash in operation, and paid $2 million for venture investments.

We exited the quarter with $157.5 million of cash on hand, and we have not used any of our available revolving credit facility.

We ended the quarter with $138.2 million in inventory that we plan to reduce over the coming periods.

Backlog increased 4% sequentially, to $40.5 million at September 30.

In addition, we estimate that the inventory held by our channel partners at the end of the third quarter decreased sequentially, to approximately 4% of revenue.

While we are continuing investments in new product quality and partner-centric initiatives, we are taking decisive steps to further reduce our cost structure and better prioritize our resources around near-term opportunities.

These measures include additional facility consolidation and headcount reductions.

Last quarter, we consolidated manufacturing from Herndon, Virginia into our new 200,000 square foot facility in Rock Hill, and we recently finalized plans to relocate our manufacturing and R&D activities from Andover, Massachusetts.

We have begun to see the early impacts of these types of efforts that contributed to sequentially flat operating expenses.

Our work in this area is ongoing.

The executive management committee is now conducting a comprehensive evaluation of our business and market opportunities, to refocus and re-prioritize our resources and investments.

We are committed to making the necessary decisions to foster sustainable growth and improved profitability, and are of the shared opinion that there are no sacred projects.

Now, I'd like to turn the call back to Stacey, who will open the floor for questions.

Stacey?

We will now open the call to questions.

I'd like to remind everyone that your line will be muted after you first question, as we kindly request that you ask one question at a time, and then returned to the queue, thus allowing others to participate in the Q&A session.

As a reminder, please direct all questions through 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.

(Operator Instructions)

Our first question today is coming from Jim Ricchiuti of Needham & Company.

Good morning.

I'm wondering if you can give us some help on how we should think about operating expense levels at these low levels of revenues?

I think you just alluded to sequentially flat OpEx.

Do you -- where do you see OpEx going?

And do you still see, in 2016, a decline in OpEx in absolute dollars?

And I wonder if you can just walk us through how we get there.

Sure, Jim, this is Dave Styka, and thanks for the question.

I think it's very appropriate, given where we are at.

You are right, we did see OpEx flat on a GAAP basis, and then [our] cash OpEx declined 8%, period over period.

So we are seeing some of the -- as I spoke in the last call, I said we were going to be flat the back half of the year.

And then going into 2016, we'd see a decline, given the way that we are actually making reductions, but still investing in the business, in key items.

We still see that as going forward here.

The place that we actually see our opportunity is continuing to work on things that are efficiency, with respect to facilities consolidation, making sure we have the right people in the right places, as well as still making investments that we need to make.

But, overall, what we gave you last quarter is accurate, and as we see this going, we do see, in 2016, we will see a decline in OpEx.

We actually saw a little bit of that in this quarter.

Our next question is coming from Bobby Burleson of Canaccord Genuity.

Good morning.

Just curious -- I guess this one is for Mark.

Can we talk a little bit about what your thoughts are on the top line, in terms of organic growth?

Now that some of the quality issues are behind you, and you are making some plans on the operating expense front, what is the revenue lens you are looking for, in terms of three- to five-year top-line growth, organically?

Thanks.

So, thanks.

This is Mark Wright.

I will take a little bit of this, and I think, Dave, hand some over to you.

Overall, our sales team are very -- we have a good product portfolio.

We have a sales channel that we are growing and driving.

We see opportunity with our product line.

We have things on the road map that I think will help hit key price points.

I think one of the things we've seen is new price points come up, and we have to make sure we have products there.

And I feel really good about our road map to do that.

So we are driving that forward.

Metals, I think, continues to be an area where we've expanded, and we see opportunity.

Yes, and this is Dave Styka.

I would like to chime in on that one, too.

Because I think it's clear from this quarter, we really need to have a much better clarity as to what's going on in the marketplace.

And we really just don't have the that right now.

Not only ourselves, but other people in this industry are all struggling, and trying to get our hands around the explanations for this.

So we are continuing to review what's going on.

We will provide guidance on our results, as well as organic growth, once we feel it's appropriate, and we have some visibility.

In the meantime, I want to reemphasize, we're really focusing on the things we can control.

The undertaking of the complete review of our organizational structure.

We're focusing on investments, specifically in OpEx and CapEx.

We're focusing on initiatives and spending, to draw improved profitability.

Our next question is coming from Jason North of Jefferies.

Yes.

Looking at your consumables revenues, a decent portion of that is tied into your -- just the overall printer sale decline.

But also seems like there could be -- the printers may not be being used at much at customers.

If you could just comment on that, the trends there?

This is Stacey.

I can start with that one.

What we are seeing is, materials revenue is primarily impacted by lower 3D printing sales during the quarter, as well as some fluctuation of timing of sales and materials.

If you look at our largest customers, we see overall continued utilization and demand for materials.

Certain customers and timing of sales may fluctuate quarter to quarter, but we're not seeing a big change in the utilization for our larger customers.

The other thing I would maybe like to remind you is the metals printers, when we sell those, they don't necessarily come with the volumes of materials -- of revenue sales.

This is one area where we see some opportunity, going forward, and various paths to integration and value-added materials for metals in the future.

Great, thank you.

Our next question is coming from Patrick Newton of Stifel.

Dave, one housekeeping item before my question is, what was the overall organic growth rate for the Company, as well as the organic growth rate of product and materials on service revenue?

I think I missed that.

And then my question is, on product gross margin, it's the lowest level since 2009.

And you talked about consumer mix being the reason for the pressure.

But given how small of a revenue contribution consumer is, there appears to be other headwinds.

So I'm curious if you are seeing any pricing competition creep across your portfolio as the industry is pressured by lower sales?

And -- or are you using discounting tactics, in an attempt to re-accelerate the pipeline conversion rates?

Yes.

Thanks, Patrick.

I will take the first half of that, and probably, on some of the pricing stuff, I'll slide over and let Mark give his vision on it.

But with respect to the organic growth, we did have -- organic growth was a negative 22% this quarter.

It was a negative 15% decrease, on a constant-currency basis.

And, to be honest with you, we saw a negative organic growth in all of our regions -- Americas, EMEA, and APAC.

This is Mark Wright.

In regards to pricing, actually, where our products are competitive, we didn't see any statistical change in our pricing.

So there was no abnormal discounting.

What we did see, though, is -- with the tightening of CapEx and the lengthening of the deals, we did see some price points emerge, and we are actively looking.

We have products on the road map that address some of those price points, and we think those are all opportunities, but no adverse discount.

And I think there was one other piece of the question, on margins, that we'll make a couple of comments.

Yes, Patrick.

So the other piece that I didn't catch on your question was the margins piece.

Margins are 46.9%.

What we really see is materials in our service margin, they are holding up pretty well to where we expected, and where we were last quarter.

Down a bit, but given this competitive and challenging environment, that is a reasonable expectation.

But our products margin, that's where we really see a lot of challenge coming on, particularly in the consumer printers area.

In the long term, the very long term, we still believe about a 50% GAAP margin is appropriate, on a long-term basis, and in a more normalized environment.

Hopefully, that answers your question.

Our next question is coming from Ben Hearnsberger of Stephens.

Hi, thanks for taking my question.

On the organic growth number, there's always a lot of noise around what's truly organic.

I guess, can you just tell us what is currently inorganic in the model?

And when does that run off and we're looking at a clean organic growth rate?

Sure, Ben, thanks.

This is Stacey.

We will get organically generated revenue at -- from the first 12 months in an acquisition.

So if you look back over the last 12 months, there's a small piece of some of the service bureaus we acquired in acquired revenue, a little bit -- a partial quarter of Simbionix, and then Robtec, Easyway, and Cimatron are the remaining pieces.

So, Cimatron was early first quarter this year, so as we get through the next quarter, it will really become all organic revenue.

Thank you.

Our next question is coming from Ananda Baruah of Brean Capital.

Hi, thanks, guys, for taking the question.

Can you give us -- just remind us, given what's gone on the last couple of quarters, what the M&A -- how you guys are viewing M&A, going forward?

Really, I guess, in two ways.

How are you viewing -- what is the M&A strategy, in the near to intermediate term?

And then, in the context of longer-term thoughts, has your M&A strategy shifted from what it's been over the last handful of years?

Thanks.

And that's it for me.

Sure.

Thanks for the question.

This is Andy Johnson.

We are finished with M&A, as we've known it, over the last five years.

We are at the point where we are focused intently on executing and leveraging the assets that we acquired through our robust M&A program that started in the fall of 2009, until the first quarter of 2015.

When we look long term, from here on out, we are looking more at venture investments, which we've talked a little bit about.

And that is something that allows us the ongoing ability to keep a pulse on the market, and to get a look at emerging applications, and also to attract innovators into our ecosystem.

So we'll continue to facilitate a ventures program but, at this point, we have no planned M&A activities.

Thank you.

Our next question is coming from Ken Wong of Citigroup.

Hi, thanks for taking the questions, guys.

So you guys mentioned earlier about refocusing some of your efforts, and really dialing in on near-term opportunities.

You guys have had so many different opportunities in the past.

Just trying to get a sense for what you guys do view as the near-term opportunities that you guys will double down on?

Sure.

This is Andy again.

You are exactly right.

And as we talked about in the prepared remarks, the Executive Management Committee is conducting an evaluation, currently, of our business, and also market opportunities.

Our goal is to refocus and re-prioritize both our resources, and look at cost, as well as investments.

What we are focused on here is sustainable growth and improved profitability.

And when we consider near-term opportunities, we look at our technology today, and we look at a couple very important verticals that we've talked about: one, being aerospace; two, being automotive; and, three, being healthcare.

Those are absolutely near-term opportunities that we are focused on.

The other thing that I think is very important, as we look at near term, are desktop 3D printers.

We've talked about how we've enhanced our focus on education and desktop engineering.

That's been evidenced in recent actions by the Company.

We invested in STEAMTrax, which is not just an educational curriculum, but also brings a sales approach.

Mark talked about Michele Marchesan and his focus on building a scalable, efficient channel for our desktop.

And also, we are looking at investments in actual new products that are focused on educational and engineering applications.

So those are the near-term opportunities that the Executive Management Committee is focused on.

Thank you.

Our next question is coming from Paul Coster of JPMorgan.

Yes, thanks for taking my question.

It's just an immediate follow-on from that point, which is, it's all very well that you are focusing on the opportunities.

But are you also going to cull some of the underperforming assets?

I think some rationalization may make sense here because, otherwise, you're going to be sub-scale in a couple of areas, I think.

Yes, this is Dave Styka.

I will start with it, and I think then Andy can give you a bigger version.

That's exactly right.

In my comments, when I said we are looking at business opportunities and profitability, profitability is not lost on us, right?

So we do recognize we've got to have profitable opportunities.

And we will look across our portfolio at what makes sense and what gives us the best opportunity to be the most profitable.

I don't have anything much more to add, other than I think it's very important that Dave's comment was, no sacred projects.

And that's exactly the approach we're taking here.

We're looking at profitability.

And we are taking -- undertaking a very comprehensive review of the entire spectrum of our current offering.

One moment, please.

Our next question is coming from Joe Wittine of Longbow Research.

How big is the healthcare business today?

And why are you no longer breaking it out, given it's probably among the best or the best secular growth story for the Company, in the mid to long term?

We are actually breaking that out.

It is going -- and it's in the Q, which will be filed shortly.

So healthcare -- let me just grab the number real quick.

For the nine months, healthcare revenue grew 15%, and contributed $99.3 million.

Thanks, Stacey.

Our next question is coming from Troy Jensen of Piper Jaffray.

Hi, thanks for taking my question.

This one is going to be for Mark Wright.

Mark, you'd mentioned in your comments earlier that known product quality issues, and I think all of us know about the ProX 500.

And it's something that I've heard in the past about 3D, and shipping products that may not be ready.

So outside of that -- the high-end metals product -- which other systems do you think have some of the most quality problems?

So -- thanks, this is Mark Wright.

So we worked hard, over the years, on all of our product lines, and we have seen strong performance over time.

Especially like, for instance, in the jetting area, from the 3500 Series and X60 Series.

And we continue to enhance all of our products.

A lot of work we are doing on the SLS and DMP are, frankly, fundamental process changes in the way we manufacture, service, and support.

And in those changes, we are actually impacting all of our product lines, and I think you will see a benefit across there.

A lot of these are just standard operating processes.

Many different acquisitions not operating the same way, and all those things will benefit there.

So I actually think there's going to be improvement everywhere, through those changes.

And a lot of those aren't necessarily to the product itself.

Don't forget, you can have a bad service experience, and you tie that back to the product.

But all of that is quality, and so I think we have a lot of areas that we are improving.

And I've gotten a lot of feedback that our partners, especially end customers, are starting to see those improvements.

We're showing time for one additional question today.

Our next question is coming from Hendi Susanto of Gabelli & Company.

Good morning, and thank you for taking my questions.

In light of the challenging market environment, how should we think of weaknesses in consumer revenue?

Do you foresee that trend to continue for multiple quarters?

Additionally, should we expect new product introduction to be less, compared to the last two years?

Our consumer revenue, again, that will be -- the exact number will be in the Q. It was down 14% for the third quarter, to $10.1 million.

And we're seeing softer demand in there.

And as Andy spoke to, we have shifted our focus to what we believe are near-term opportunities within that space -- education and desktop engineering.

Thank you.

At this time, I would like to turn the floor back over to Ms. Witten for any additional or closing comments.

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, thank you for your participation.

This concludes today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.