3D Systems Corp (DDD) 2016 Q2 法說會逐字稿

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results of the second quarter and first six months of 2016.

My name is Michelle 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 for 3D Systems.

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 Vyomesh Joshi, our President Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Andy Johnson, Executive Vice President and 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 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 and in the press release that we issued this morning.

For those who have access to the streaming portion of the webcast, please be aware that there may be a few second delay and will not be able to pose questions via the web.

The following discussion and responses to your questions reflect Management's view as of today only, and will include forward-looking statements as described on the slide.

Actual results may differ materially.

Additional information about factors that could potentially impact our financial results is included in today's press release in our filings with the SEC including our most recent annual report on Form 10-K.

During the 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 2015.

Now I am pleased to turn the call over to Vyomesh Joshi, our CEO.

VJ?

Thanks, Stacey, and good morning everyone.

In the last four months I've learned a lot about our business.

On September 12, the opening day of IMTS in Chicago, I plan to roll out the details of a market-based strategy for profitable growth.

Let me articulate the key priorities and operational initiatives guiding the strategy.

It is clear to me 3D Systems has a powerful synergistic and differentiated technology portfolio.

We are the only Company that can offer end to end solution for our key segments: aerospace, healthcare, automotive, consumer goods, and training and researching systems.

We're looking at the [use case by vertical] and understanding how we can enable our customers to digitize, design, simulate, make, inspect, and manage concept generation to manufacturing workflows.

This quarter we were pleased with continued strong demand for our healthcare solutions and software, as well as increased material sales into advanced industrial and healthcare applications.

We see this as evidence that many customers today are relying on our end to end solutions to power advance digital manufacturing workflows.

We expect this trend to continue as 3-D printing evolves from prototyping to like manufacturing.

And we believe our solutions approach positions us favorably to catalyze and capitalize on these opportunities.

Of course, we recognize that we have a lot of work to do.

In particular, we believe that our significant opportunities to grow sales of 3-D printers as well as generate greater revenue from our on-demand manufacturing services, which can serve as a platform to fuel [election] of our solution.

As we progress in developing our strategy, we are working hard to design and implement an organizational structure that aligns to this strategy and allows us to drive operational excellence across our business.

We have three guiding principles to help us build a world-class organization.

The first is simplicity, the second is accountability, and third is developing an appropriate cost structure for our Company, which provides us the capacity to reinvest in innovation, infrastructure, and process improvements.

We already identified many opportunities to drive profitable growth and have action plans that we are executing today, to build an appropriate cost structure, create capacity to invest and ensure we have the necessary talents to take our business to the next level.

With that in mind, it's my pleasure to introduce John McMullen, our CFO.

I had the privilege of working closely with John at HP for many years.

And I'm really pleased to be working with him once again.

Now let me turn it over to John to discuss our second-quarter 2016 performance as well as his approach to the CFO role.

John?

Thanks, VJ, and good morning everyone.

I'm excited to be part of 3D Systems and to have the opportunity to work alongside VJ once again.

I'll start this morning with our second-quarter results, and then spend a few minutes at the end discussing my priorities moving forward.

For the second quarter of 2016 we reported revenue of $158.1 million, a decrease of 7%.

Gross profit margin remained flat sequentially at 50.9% in the second quarter, and increased 300 basis points from last year.

Total operating expenses decreased $21.3 million to $84.1 million, primarily the result of lower amortization and stock-based compensation expense as well as timing of product development.

In the second quarter, we generated $12.9 million of cash from operations and $9.5 million of free cash flow.

We reported a GAAP loss a $0.04 per share, and non-GAAP earnings of $0.12 per share, compared to a GAAP loss of $0.12 per share and non-GAAP earnings of $0.03 per share in the second quarter of 2015.

For the first six months, we reported revenue of $310.7 million, gross profit margin of 50.8%, and operating expenses of $178.4 million.

We also reported a GAAP loss of $0.20 per share, and non-GAAP earnings of $0.17 per share for the first six months.

In the second quarter, non-GAAP earnings per share includes adjustments of $8.8 million of amortization expense, $7.2 million of stock-based compensation expense, and $1.8 million of acquisition and severance expenses, resulting $13.2 million of non-GAAP net income.

Revenue in the quarter benefited from an 11% increase in healthcare revenue to $38.8 million, a 12% increase in materials revenue to $40.6 million, and an 8% increase in software revenue to $22.0 million.

However, these gains were not enough to offset a 20% decrease in on-demand manufacturing services revenue to $27.1 million and a 30% decrease in 3-D printer revenue to $32.3 million.

The year-over-year decline in 3-D printer revenue was primarily driven by timing of orders for higher-end professional and production printers.

Professional and production printer units were 16% lower than the second quarter of 2015.

Geographically, Americas' revenue was 8% lower and EMEA and APAC were each 7% lower than the second quarter of 2015.

The impact of foreign exchange rates was not meaningful during the quarter.

We reported $80.4 million of gross profit for the quarter and gross profit margin of 50.9%.

Gross profit margin was flat sequentially at a 300 basis-point improvement from the second quarter of 2015.

The comparable period of 2015 included charges in connection with the consolidation of production facilities that reduced gross profit margin.

Consolidated gross profit margin in the quarter benefited from discontinuation of consumer products, and the growth in materials, software, and healthcare solutions.

Operating expenses for the quarter decreased $21.3 million from the second quarter of 2015, to $84.1 million, including a 21% decrease in SG&A expense to $63.2 million and a 19% decrease in R&D expense to $20.9 million.

The decrease in SG&A is primarily from lower amortization, timing of stock-based compensation expense, lower bad debt expense during the quarter, and savings from our discontinuation of consumer products.

The shift away from consumer products and timing of development and new product launches contributed to the decrease in R&D expense.

In addition to year-over-year compares, we believe sequential operating expense trends going forward will be helpful in understanding our progress, as we balance cost savings with necessary investments in quality infrastructure and other key areas.

It is our intention to provide with more detail and direction regarding our expectation for operating expense as we progress through the remainder of 2016 and into 2017.

We generated $12.9 million of cash from operations in the second quarter, and generated $31 million in the first six months of 2016.

We exited the quarter with $176.2 million of cash on hand, up from $155.6 million at the end of 2015.

And our $150 million revolving credit facility remains fully available.

We ended the second quarter with $123.2 million in net inventory.

The $9.2 million sequential increase is primarily attributable to timing of orders and delivery.

We're implementing improvements within our planning and procurement processes to better manage inventory.

Although we see opportunities to improve working capital performance and overall cash flow over the balance of the year and into 2017, I'm comfortable with our cash balance and overall liquidity position.

Before turning the call back to VJ, I'd like to take a moment to summarize my thoughts one month in, and share my perspective on the role I will play as CFO for 3D Systems.

Like VJ, I see tremendous opportunity for 3D Systems in the marketplace going forward.

We have great technology, the broadest portfolio in the industry, and we are making the changes we believe are necessary to best meet the needs of our customers while driving long-term shareholder value.

We have work to do.

But the good news is, it is within our control.

As CFO, my focus will be on partnering with VJ, the leadership team, and all employees of 3D Systems to ensure we are optimizing our cost structure -- both cost of sales and operating expense; building the capacity we need to invest back into our businesses to drive profitable growth; and improving the already strong balance sheet of the Company through efficiency and continued cash flow growth.

VJ and I will share more specifics about our plans and actions at our event in September, and I look forward to meeting and talking with many of you over the coming months.

With that, I'll turn the call back to VJ for some concluding remarks.

Thanks John.

This year, 3D Systems is celebrating its 30-year anniversary.

For the past three decades, we have built what we believe is an unparalleled 3-D printing ecosystem comprised of hardware, materials, software, services, and support.

Partnership are also a key component of our ecosystem and we will be looking to expand these moving forward.

As 3D printing evolves into live production, we believe this ecosystem becomes an increasingly important differentiator for our Company.

Customers today are looking for more than a 3-D printer -- they are looking for productive, reliable, end to end manufacturing solutions to solve complex business challenges.

The strength and breadth of our portfolio uniquely positions us to provide these solutions.

These solutions in turn, are enabling and expanding the customer base to achieve better results faster.

With the right team, the right strategy, and the right portfolio, we believe we can take advantage of opportunities in our industry, drive long-term profitable growth, and accelerate digital manufacturing.

With that I would like to turn the call back to Stacey, who will open the floor for questions.

Stacey?

We will now open the call to questions.

We would like to ask that you limit yourself to one question and one follow-up, thus allowing others to participate in the discussion.

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 are calling inside the US, the number is 1-877-407-8291.

If you're calling outside the US, the number is 1-201-689-8345.

Thank you.

At this time I'll be conducting a question and answer session.

(Operator Instructions)

Wamsi Mohan, Bank of America Merrill Lynch.

Yes thank you.

Good morning.

VJ, can you comment on the consumption of materials in your installed base here?

Your installed base is growing slowly here and given your printer growth decline.

But your materials revenues are up 12% year-on-year.

That's the best growth since September of 2014 quarter.

Can you address utilization, pricing, share?

Any other metrics that you think can help us understand this improvement in trajectory.

And I have a follow up.

Good morning Wamsi.

I think as I talked about in the last quarter earnings call, our focus is on production printers.

Because the uses that we see with production printers is way more than consumer printers rr even professional printers.

So I think, as we move forward our strategy is more and more going to be on driving the install base growth especially in the production printers.

The second thing is that it's very important for us to continue to develop new materials because materials are the key for our business.

So as we move forward with our new Figure 4 with the way we will be really developing our solutions, our focus is going to be on materials.

In last four months, I really started asking the organization to really pay attention to materials management.

Now what we also want to make sure that we continue to have a good share position in our materials.

And there it is the required that we work in regions to have very specific focus on materials.

Again focus on production printers, make sure that we manage materials as a business, and drive the right kind of a global market approach in the regions is going to be important as we move forward.

Thanks VJ.

And John, congrats on the new role.

Can you give us more color and quantify the impact of this product timing relative to the R&D expense in the quarter?

And any comments on the broader demand trends in the near term by region will be helpful.

Thank you.

Yes.

This quarter we commented on just the timing.

Particularly in the higher end professional production systems.

So I have spent time with the team going back, looking at linearity last year.

It's a little bit bumpy.

It's a little bit bumpy for us.

So I would expect to see a little bit different mix going into the second half.

And we'll keep you posted.

In terms of overall demand, VJ thoughts, if you want talk about the market in general?

I think as we talked about last quarter, the prototyping market is where the growth is going to be difficult.

My opinion is, we need to start moving from prototyping to live production.

And that's why the focus on production printers, that's why what you'll see the strategies going to be making sure that we continue to innovate our DMP, our SLA and our SLS products.

Those are the production printers.

And we're really talking about the strategy.

As I mentioned in my earlier comments.

We want to go by vertical markets.

So, if you think about [my] vertical you're going to figure out the use case.

And each use case will determine whether when we can flip the market from prototyping to production.

And the solution approach that we are taking is going to be very important for us.

Because that's the way we're going to start growing the market.

As we move from prototyping to live production.

And the process we want to take is by vertical market.

You know the proof is like healthcare.

So healthcare grew 11% this quarter.

And, this is a great example of how we have really put together a vertical approach for specific markets.

And that domain knowledge, and that solution approach in healthcare I want to replicate on scale for automotive, for aerospace, for consumer goods, and for teaching and training institutes.

I think that's the approach.

And then, once you see that then you'll see the growth that we want to have, a sustainable growth in the market.

And we want to be number one player in that particular market.

Great.

Thanks for all the color.

Patrick Newton, Stifel.

Good morning VJ.

And John, welcome to the team.

Jumping right in VJ, last quarter you spoke to some operational challenges with quality, reliability, and supply chain in certain product lines.

And I'm curious, with another quarter under your belt can you highlight where you've made improvements on operational issues?

And then maybe also talk about progress on cost reduction with your larger platforms?

Yes.

So I think we need to continue focus on quality, reliability and the parts availability.

I think we're making progress, one of the key things that I have talk about and I'm going to bring the experience into this particular approach.

So I hired Reinhard Winkler as our Supply Chain and Operations Manager.

Reinhard comes from Hewlett-Packard where he was managing my supply chain and operations for the printing business.

And I think this is very important for us to re-look at our team, our processes.

And some of the work that we're doing.

So that we design for quality.

We make sure that we don't ship product before it is ready.

So some of the work that we're doing in the product lifecycle management.

The work that we're doing right now with our suppliers.

Making sure that we have enough inventory for the parts that we have.

So we are looking everything, we're making progress.

But still have a lot of work to do.

I think it's very important for us that we bring confidence and credibility in channel and our customer.

The products that we are focusing on, in terms of innovation we're going to make sure we design for quality and design for manufacturability.

I think we're making progress.

We have work to do.

But I'm very confident, these are solvable problems.

And we're bringing the right team and the right focus in the organization making that happen.

In terms of the cost structure.

As I mentioned last quarter, what I want to focus is on both cost of sales and the operating expenses.

Reinhard and the team are already looking at what we can do, systematically, to reduce our cost of sales.

Because we have a lot of suppliers, a lot of factories.

Our overall, the logistics that we have we have work to do here to really bring every cent out from our total cost of sales.

So as we come on September, we will even give you more specifics what we're doing in terms of the cost structure.

Great looking forward to the specifics.

Shifting gears to printers.

Being down 30% year-over-year, can you help us understand what vertical or printer family experienced the brunt of the downtick.

And then given your comments this is largely timing related.

Should we see pretty healthy printer growth sequentially?

Yes I think one of the key things that, when we look at our printer order.

First of all, the timing of the orders.

So, if you think about we talked about our new introductions with 3500 and 3600.

As we are ramping the product and we're making sure that the we don't ship anything with quality problems.

That ramp take little longer.

I think the timing of orders was the first main reason.

The second thing is, the CJP printers.

Also we have a little bit different overall numbers in CJP printers compared to last year.

The third thing, is of course, we don't have consumers.

So that could be the reason.

My view is, as we move forward into the second half our printer units are going to improve.

And what we need to do is to continue to focus on the overall solution.

You can see our software growth was 8%, our healthcare growth was 11%.

Great thank you for taking my questions.

Good luck.

Ben Hearnsberger, Stephens.

Hello.

Thanks for taking my question.

My first question, I want to ask about SG&A, which was down about $9 million sequentially.

I know half of this was lower stock-based comp.

I guess the question is are we at a sustainable run rate for the back half of the year?

Yes so, as we talked about this is John.

So, as we talked about the OpEx decrease, both timing of stock-based compensation expense amortization.

So if you take those things out, if you look at it separate of those and figure out the second half, we will have some timing issues in stock-based compensation.

But the run rate operating expense and non-GAAP operating expense for us in the first half for example, was down year-over-year by 4%.

And I think you should expect from first half to the second half separate of things like stock-based comp.

And any other timing issues flat to potentially slightly up in the second half.

Driven by some of the near term investments that we're making back into the business, but flattish first half to second half.

I think the important part here Ben, is to make sure that as we look at our strategy and as we organize around the strategy, we're going to find opportunity to work on our cost structure.

So (inaudible) two key things that I am thinking about.

One, is systematic work that we do on our cost of sales.

With the Reinhard's help.

And then the work that we will do as we move a new organization structure.

Which will be aligned to the strategy an the opportunity to drive cost from that.

And I think those cost structure work, the impact you will see in 2017 but we need to start that work in the fall of this year.

One of the things we will do going forward is VJ and I will provide a lot more color in terms of what your expectation should be relative to cost savings moving forward.

And the areas that we're investing in.

And what the balance of that should look like and how it should translate on the P&L.

So we will be providing a lot more color going forward.

Because there's going to be puts and takes along the way we want to make sure that you understand them.

Okay that's helpful and as a follow-up.

VJ, I was wondering if you could give us some color on the pipeline for metal printer sales?

Specifically the recently release 320?

Yes so I think the approach we are taking with metal is solution approach.

Because we don't want to be another metal printer.

I think this is the reason that my focus is on vertical markets.

If you think about the two key verticals where metal really important as part of the solution for live production, our healthcare, and aerospace.

And as you can see we had an 11% growth in healthcare.

What we're finding from our healthcare customers they are not only looking at just a metal printer.

They want to see do we have the production capability with FDA approval processes?

Do we have the quality and reliability that you could expect?

Because we are talking about application which is specific to healthcare.

That we need to do a lot of work upfront.

And having the workflow in terms of surgical planning, in terms of simulation gives us the credibility and confidence in medical device manufacturers and other healthcare customers.

So I think our approach with metal printing is more going to be a solution approach rather than another metal printer.

And fortunately, the technology that we have, with both [Phoenix and layer wise] we can provide a phenomenal part that attaining partner with our technology.

I think the approach that I also want to take is very similar to healthcare for aerospace.

So for both these two were verticals, aerospace and healthcare, our approach is going to be solution.

Our approach is going to be really having capability within our service bureau we will be able to work with the customers so they can move from prototyping to live production using our service bureau strategy.

So service bureau is very strategic for us, our solution focus is very specific for us.

And that's how we want to build our metal business.

Okay that's helpful, thank you.

Ananda Baruah, Brean Capital.

Good morning appreciate the question.

VJ, Stacy good morning.

John, welcome.

I guess two for us if we could.

Just piggy backing off of some of the unit dynamic here that you guys have talked to already.

You grew revenue sequentially for, I think it was the third time in six quarters now.

And you're heading what is traditionally a easily firmer part of the year historically.

Does this quarter suggest, VJ that you guys can put up something that resembles typical seasonality directionally?

So maybe growth sequentially for the back half of the year?

And if not how come?

I realize [that's a] softer prototyping environment still.

But would love to hear what you think that the that doesn't happen?

And I have a follow up.

I don't want to just say that sequential growth.

I think the approach that we want to take is to really make sure that we have clarity in terms of our value proposition in the market.

Because quality reliability issues were there, we want to bring the confidence back in our customers and our channel.

The second thing I want to do, is to really focus on our portfolio.

And focus our production portfolio.

So the SLA technology the [figure 4] I think is going to be a breakthrough.

And we will talk more about in September.

Because this is where are going to bring production, basically the user needs.

Which in terms of productivity total cost of operation materials, which would be really used for the production processes and reputability and [part] quality.

So I think what I want to really focus on is not just having a sequential growth.

My focus is going to be on production technologies and solution approach.

Long-term, we want to set of this company to really have that kind of a growth opportunity.

Now, clearly, from first half to second half, there will be definitely a growth that we would like to talk about.

Because I don't want to be in pointing to a particular quarter.

Let's look at the half.

Because the way the sales process works, there's a long lead cycle and I think what I believe we're going to continue to grow second-half versus the first half and that's the focus that we want to have and that's the conversation we want to have with you all.

Okay I could appreciate that.

That's great contact.

Thanks.

And just quickly follow-up.

Would love to get your views, its early days, some of the new wrinkles in the competitive environment.

But I would love get your thoughts about how you guys are synthesizing it as you look into 2017, now that you have HPs coming to market and Carbon is starting ramp volume.

And they have different business models and different technologies.

So it's begins to feel like for the first time in a while, there might be apples and oranges come to market proposition.

And I would just love to get your early thoughts on that.

Thanks.

Yes I think it's a great question.

I think as far as HP is concerned, I have tremendous respect for HP.

Both John and I come from there.

So we understand what to expect from them.

I really believe to have one product with one material.

And they have a good product, but they have a lot of work to do with respect to get that particular material to produce production quality parts.

Because that's where the focus is.

So we're focusing on making sure that our technology is going to be developed in such a way that we have a broader range of materials that we can do.

Because that's what the, overall all our customers are telling us.

As I said earlier, materials is the core focus of the 3-D printing system.

And we need to provide broad range of materials if you want to be successful.

And that has to have production kind of a quality.

Going back to the user needs.

Productivity, reputability, and the part quality.

And total cost of operation.

Unless you have all those three, the customers are now going to move from prototyping to live production.

So both for Carbon and HP, I would put more emphasis on what kind of materials they are going to develop.

And what they're going to offer next year.

Our strategy is going to be, we are going to be the Company where will not only provide the materials and printers, but we are also going to provide the complete solution.

So that the second differentiation that I do believe compared to both Carbon and HP.

They're just a printer company with one material or few materials.

Which are really, we have to prove that [their] could be the production material.

So I think that's the strategy.

I want to focus on what we our strengths are and what our customers are telling us.

Remember we have 30 year experience in this particular market, and we understand these customers very well.

And how we can take them from prototyping to live production.

Thanks so much.

Bobby Burleson, Canaccord Genuity.

Good morning so just a question and a follow up.

Sounds like on the printer side of the business you're expecting an improvement in units in the second half.

And that's part of that potential half-on-half growth.

I'm wondering should we be thinking about some kind of gross margin impact as the mix of product revenue starts to see a higher share from printers?

Yes I think right now, I think a good expectation from [half to half] on gross margin performance would be flat to slightly up.

We are making some level of investments in quality, and some of the things that VJ has talked about.

But that said, I think the mix will continue to be good, relative to things, the healthcare software, materials.

And we expect to see some pick up during the second half also in the professional and production [hiring the] units there.

So, I think overall flat to slightly up in gross margin performance in the second half would be a reasonable assumption.

I think our focus is really going to be on making sure that we look at the lifetime value for our customers.

So it's not just about installing a printer.

How can we help them with great materials, the software, the services?

Because the annuity stream and business model is very important for us.

And that's how we feel that having this flat to slightly up gross margin we can maintain.

And as we enter 2017 our focus on solutions will enable us to continue to have this kind of a gross margin performance that we would like to have.

Great.

And then just a quick follow-up.

Longer-term, as we think about materials margins.

In some cases there's a range of margins obviously based on the materials.

I'm wondering, as you shift your focus more to production what's the longer-term impact on the materials margins?

Yes, so I think the important part year's continue to innovate in materials.

Because as I said earlier, that the overall user needs in terms of productivity, making sure that we have repeatability and the production part quality that our customers are looking for.

And total cost of operation.

We need to continue to innovate in materials.

And if you innovate in materials, and have the intellectual property, we will be able to enjoy the margins.

And in some cases, we need to have open materials.

But there, I think we need to look at software and services margins to really offset the work that we will have to do.

So I think, my opinion is that we continue to focus on complete solutions, and have innovation agenda, focus on production materials and software and services, we will be able to maintain these margins.

Thank you.

You're welcome.

Hendi Susanto, Gabelli & Company.

Good morning VJ and John.

And thanks for taking my questions.

VJ you help us understand why you think the [close in the] prototyping market is difficult?

There's been some concern of excess supply.

Is that the case?

There is no question that from form, function and fit the customer are basically saying prototyping using [the] technology is very important.

So there's going to be more and more opportunities in prototyping.

I think we need to also look at all the service bureaus.

They acquired the equipment they need to have the right utilization.

So I think the approach that we need to think about is, there is a certain growth that you could achieve with the prototyping market.

But the much bigger opportunity is if you move from prototyping to live production.

So think I'm talking about overall growth that we can achieve.

I think the other important part is, if you can flip and a lot of experts are talking about going from prototyping to production.

That's where the bigger profit [pull] opportunities are.

So it's not just about whether prototyping going to grow or not.

There will be a growth.

My view is the big opportunity is to flipping from prototyping to live production.

One follow up question for John.

May I inquire why printer service costs were higher in the second quarter?

Is that mainly because of lower production scale Q2?

Or are there more reasons beyond that?

And what should our expectation be on the printer service side for the second half?

Your question was on service costs?

Yes.

Yes I just missed the -- so service cost, right?

Yes.

Yes, so there's definitely some short-term impacts on our focus on resolving product reliability issues.

And that definitely translates into the service cost in the margin.

So, over time, I would expect to see that improve as we get through that.

It's not a huge increase but on a sequential basis.

But we're definitely putting some money into making sure that things are worth a lot out in the field

I think our commitment is to make sure that all the footprints that we have installed, they work.

Because at the end of the day, the usage is the only driving force for materials consumption.

And we want to make sure that the products and solutions that we have installed, they are working properly.

And as we were [acknowledging] that we had quality and reliability issues.

So we want to make sure that we're upfront.

We are proactive in taking care of our customer issues.

But as John mentioned, we want to really design for quality, design for reliability.

So that in future we could avoid these kind of cost.

Thank you.

Kenneth Wong, Citi.

Hi, this is Rich Hilliker on for Ken today thank you to take my question.

I was wondering if maybe look to give us a little bit more color on the order timing from this quarter?

What do you think was the main driver of slipping it further back?

Do you think it was competitive you think it was --?

If you think about our 2500 and 3600 introduction.

And then we had the ramp.

I think the way the whole sales cycle works here, is the channel gets the product they tested out for themselves.

[Because] they are working with their customers and making sure that we can meet the customer needs that we're talking about.

So the sales cycle is a longer.

Because we took a little longer to ramp our new products.

That's why what you're seeing is the impact of that.

And that's why the approach that we're talking about why we're seeing a different kind of a revenue growth.

My view is, as we get the confidence in the channel in the customer, as we roll out our new technology, I really believe this demand supply matching and the order book will definitely be a different way that I want to think about.

I think, that we also need to be predictable.

We need to be really having the right kind of forecast process and demand and supply matching process.

As we move forward, the organization structure that I am building, I talk about simplicity and accountability.

And really focus on the cost structure will help us to bring the right talent with which we can have the forecasting process, demand and supply matching process, and then driving our value proposition in the market.

I really believe we have to make awareness a very important part of our [outboard] marketing.

So what you're going to see starting again in September we are going to start telling the story, we're going to drive the right kind of organization structure, and then presence in the market.

Our sales coverage model, the way we talk about our value proposition, we have a lot of work to do.

Thanks and just a quick follow-up.

I know you talked a bit about the cost structure and finding the market-based strategy and finding your niche.

And last quarter you talked on that too.

Just wondering, which do you think still needs the most work as where approaching the mid-point of Q3?

I guess improving the slot supply chain, finding and establishing the market a strategy or improving the Company culture around cost.

Yes.

It is all of it.

Because the way I think about it is, our revenue minus the profit and the cost opportunity.

So you think about cost of sales and OpEx all of that is our opportunity.

So cost of sales, for example.

We never had a focus in saying how do we work with our suppliers?

And figure out what kind of a procurement strategy we want?

Do we really need all the manufacturing sites that we have?

Do we really need the network that we have in terms of logistics?

And how do we really look at this thing holistically so that we will be able to drive tremendous cost reduction in cost of sales.

The second part is, as I mentioned, I will really have a simpler organization with a clear accountability.

So the current organization versus the new organization.

We also have a lot of opportunity to take cost out, to remove duplication, to really have the right kind of emphasis on where we'll be able to innovate.

So, all these things will allow us to get the right kind of a cost structure, both from cost of sales point of view and OpEx point of view.

And I think we will lay out as I mentioned earlier, both John and I will lay out this plan in September with some specifics.

Perfect, thank you so much.

You're welcome.

Sherri Scribner, Deutsche Bank.

Hello it's Jeff Rand on for Sherri.

VJ, are there any holes left in the portfolio that you would still want to fill?

I think we're looking at portfolio very critically.

Because my view is, I want to build this complete solution ecosystem that I talked about.

But there are certain assets that we need to look at critically and see what we want to do.

The great thing about all the acquisitions this Company has done that we have a great powerful portfolio.

But also we need to really figure out which one we want to focus on, and which one really going to yield long-term profitable growth.

Great thank you.

And just as a follow-up have you see any impact --

The other thing is very important for you to know that I am not planning for any new acquisition.

I think we can really take this Company and drive organic growth.

Great thank you.

And just as a follow-up, have you seen any turmoil in Europe?

And what is your currency exposure to the British pound?

Well I think for Europe, what I believe is what we need to do is to really get our global market engine much stronger.

I think, my view is, there is a demand.

What we need to do is to get the right sales (inaudible) the right channel strategy.

And also, we need to really a much better job in our account management.

So I think that Europe is a good opportunity for us.

The current environment, of course, is a concern.

But my view is, I think it's mainly our focus rather than thinking about it.

And then John can answer about anything that you can see.

Yes, I think if you looked at my remarks at the beginning, the foreign exchange impact on our business this quarter was relatively neutral.

We have some natural hedges cost and revenue impact.

And frankly all three REITS behaved the same in terms of overall year-over-year revenue performance.

So we're not seeing a big impact right now.

Certainly that could change over time.

But we will keep you posted on foreign-exchange impact.

Great thank you.

Welcome.

Brian Drab, William Blair.

Good morning thanks for taking my questions.

First question is just around, VJ, your comment that it's important to simplify.

And building on the last question taking a different direction, around acquisitions.

And where you need to fill holes in the portfolio.

How about thoughts regarding trimming the portfolio and focusing?

Well I think that's what I was trying to answer initially.

I think, what I believe is we have to build this solution approach that I talked about.

So software assets, and you can see, we grew 8%.

We had a very good growth in our healthcare.

And so I do want to focus, but I do believe we have a real, sustainable competitive advantage in the solution approach that we have taken.

So what we're going to do is, John and I will look at critically at the overall portfolio.

Figure out how we can fulfill the strategy that I laid out in terms of digitization, design, simulation, make, inspect, and manage.

But at the same time, which particular technology or particular portfolio that we have is going to really be part of the vision by talk about.

So I think we're going to be very thoughtful, mindful.

And the other important part I really want to state is better leverage of our assets.

We have been operating that as independent Companies we didn't integrate them.

We didn't really do cross selling.

I think it's a lot of opportunity wherever we are selling software to talk about our complete portfolio.

Although, vice versa, wherever we're selling our materials and hardware we have opportunity to sell software.

So the focus that I'm talking about, and the simplicity that I'm talking about, ought to get the right kind of accountability.

Right now, my view is, if I can simplify, focus on where the growth is going to come from, and leverage the assets that we already have, that's the right strategy forward.

Okay thanks.

And then my follow-up question is on SG&A again.

This really I think going to be the main question for most people trying to model this Company for the back half of the year.

OpEx on a non-GAAP basis, last second quarter it was $77 million, then fourth quarter $67 million, then first quarter $73 million and this quarter $66.4 million.

Can you talk about what drove that $73 million in the first quarter?

So we can understand some of the moving parts?

And why the big step down here.

And I know you said it should tick up a little bit in the back half of the year.

But why and how much?

(inaudible) wait until September.

Yes understood.

So I think on a non-GAAP basis, I commented earlier that half to half, you should expect that SG&A would be relatively flat to slightly up.

On half to half basis.

If you think about you think about Q1, we had a bit of a spike because the [CES] and the partners on that we held in Q1.

We didn't have similar events in Q2.

In Q3 we'll have an event in September that will have an impact in our participation in IMHS.

So I know that's hard when you are going up and down throughout the course of the year so I was trying to give some color more on a half to half expectation that we would be relatively flat, maybe slightly up because of some of the investments short-term that we are making.

But think about Q3 could have a little bit of an uptick relative some of these events.

Q4 at the offset, but flat to slightly up half to half non-GAAP.

Non-GAAP or total?

Non-GAAP.

Thank you.

I think the important part is we want to lay out our strategy lay out our organization.

And all these cost structure work that we're going to do is going to take some time.

It's not going to be overnight.

And I think that's why we want to show you the modeling that we are doing in September.

And then what you can expect in 2017, 2018 and 2019.

Thank you.

You're welcome.

Steven Milunovich, UBS.

Good morning Steve.

Good morning how are you?

Good.

You may have touched on this.

But I wouldn't mind having a little more detail on the on-demand manufacturing service decline of 20%.

The factors behind that and where you see that going forward?

Yes so I think one of the key things that as I went around in the last four months to look at our on-demand services business.

I think the three key things that I want to say.

First of all it's very strategic.

As you move from prototyping to live production, having that capability so that we can work with our customers so that we can help them as we go from prototyping to production.

They don't want to put new processes into their production environment.

They want to test it out they want to qualify.

And these assets are going to be very valuable for that.

Second thing is, in last few years we didn't really invest into this capability.

So my view is, I want to invest in our on demand manufacturing services.

Because I believe these are very strategic assets.

We need to upgrade the equipment we have and capability.

So for example, I talked about in our healthcare we have now a service bureau which is really working with healthcare.

Both in the Europe and in the United States.

I want to take that capability and create very similar approach for aerospace.

And another thing that talk about for the metal.

So for service bureau right now we're seeing the reduction.

Because we didn't invest into that particular business.

And second thing is we're not chasing low commodity.

Some of the jobs that we are getting.

So my view is this is very strategic.

We're going to invest into this business, and you will see a very different profile in 2017 and 2018.

Okay thank you.

And then also maybe give us the state of the distribution channel?

What's the satisfaction level are you seeing much turnover?

Is HP out there trying to take some of them away from you?

How does that also fit into your vertical focus?

Is there a vertical strategy in terms of distribution?

I don't think we are seeing any turnover.

There is a lot of noise in the market.

But we don't see any turnover.

I think important part here is I want to actually really have a systematic approach for go to market.

Because some of our customers, which have big accounts, I want to really have account management.

The places where we can have very specific focus on our aerospace, automotive, healthcare.

We need to have the right kind of a distribution there, so we want to get the right coverage globally.

And then we need to spend some time in training the channel.

Because I think that we are not invested enough in training the channel.

In creating the right kind of a marketing program.

So working with the channel, so that we can go to the market and talk about our value proposition very effectively.

So what I would like to see is increase our sales coverage, focus on training, and focus on marketing programs so that we will be able to continue to grow the business.

Great thank you.

Troy Jensen, Piper Jaffray.

Yes thanks for sneaking me in here.

A question for John or VJ.

And I do have a follow-up after this.

Do you guys endorse the prior management's guidance for revenues to be flat to up slightly this year?

Well, I think we already give you the comments that for second half we're going to do better than first half in the revenue.

And we already told you about the approach that we are taking with respect to our OpEx.

And then margins are going to be also flat to a little bit up.

My view is, with all our issues we are basically delivering non-GAAP EPS of $0.12.

We have $12.9 million cash that we generated.

And we are going to continue to generate cash.

Look, this business we're focusing on solving our problems which are really internal problems.

My view is, this business which is delivering the cash, delivering that kind of a performance.

We want to continue to focus on innovation, focus on our strategy, and get the right organization structure so we can really build a solution business for the Company.

My follow-up is a two part here so the down 30% on printer sales, does that normalize the discontinuation of the consumer business?

And can you give us any color on of your system sales, how much of it is production versus professional?

Well, I think without the consumer that number would have been very similar.

Because if you think about the consumer business in the first half of the last year.

I think this is more about the timing that we talked about rather than just a consumer business.

The second thing that we need to really look at as I said, where the market is, in terms of the prototyping.

So my view is focusing on production, getting the solution effort is the right way to look at the business.

Good luck gentlemen.

Joe Wittine, Longbow.

Thanks.

Repeating that last question.

You said you need to move from prototyping to live production.

But can you give us some idea of your approximate mix in each today?

We're not giving that information.

I think important part is to really look at the business the way I described.

I think we're going to continue to focus on production printers [what their users] are.

And, some specific segments like jewelry segment.

Where we really have a very good product offer, or, specific things we can take our [MGP] technology, the 2500 where we have introduced our platform.

I believe that those are opportunities we go after.

But long-term innovation focus is to be on production technologies.

Okay.

Paul Coster, JPMorgan.

Thanks for putting me in to the queue.

Thanks.

So you gave an example of the healthcare segment.

Giving you a clue as to how to create these solution sets by embedding some main expertise into everything you do.

But of course, much of that was acquired.

And you acquired maybe in some cases, years of experience.

Can you talk to us about how capturing the main expertise and then coding it in the new solution sets.

And, for instance, aerospace.

Are you embedding people into your customers accounts?

Are you help building custom solutions and then hoping to genericize them for the whole industry?

Something around the process would be helpful thank you

Yes I think it's a great question.

Because I really believe the way we build our healthcare business, focusing on the segment, getting the domain knowledge, getting the domain experts.

And try to really build complete solution including our manufacturing capability with the right approach.

Because if you look at our healthcare business, it's not only delivering the right kind of metal printing and the plastic printing that we do.

But also professional services.

So my view is, having that kind of focus [work] by use case by use case.

For example our focus right now is, in the healthcare is for the orthopedic.

Then we can go to the next level where we can go up for cardiovascular.

Again, we have to do that we really getting the domain knowledge and understanding of it.

So when we go to a medical device manufacturer, we can talk about say look.

We not just providing you another metal printer.

We are providing you with the complete solutions from digitalization.

So we understand how CAT scan and how that overall process happens.

Where we acquire the image and then we figure out the surgical planning.

We figure out how we're going to do some specific designing that instrument and we [imply] that we work with and we manufacture that.

So we're providing a complete end to end solution.

That is the approach we want to take with aerospace, that is the approach we want to take with automotive, that is the approach we want to take for all of our verticals.

I believe that's the long-term and because having that service bureau and having manufacturing capability also gives the confidence to our customers that we're going to quality the part and the process and the software with which you will be able to now scale into the manufacturing environment.

And I do believe that's where the market is going, and that's where we want to be

I get that.

But how are you doing it?

Are you putting people into customer accounts are you building --?

I think if you look at the site that we have in Denver and the site that we have in Belgium, we have actually created a workforce, a process, and strategy to be successful in the healthcare business.

So we have hired people, of course we had some core acquisitions there, but where augmenting now.

That, with our manufacturing capability.

We are augmenting that with a direct interaction with our customers.

Because they are explaining to us what they would like to see.

And you will see some very specific examples in September.

Okay.

Thank you.

There are no further questions at this time.

I would like to turn the call back over to Stacey Witten for any closing comments

Before we close out the session, I want to remind you that we will be hosting a special event to coincide with IMTS 2016 on September 12 at 10:30 AM Central time in Chicago.

This event will be available to the public via live webcast and online replay.

Specific web and dial in details for that event will be provided in a press release and made available on our Investor Relations Website in the coming weeks.

Thanks for joining us today and for your continued support for 3D Systems.

A replay of this webcast will be made available after the call Investor Relations section of our website www.3DSystems.com/investor thank you.

This concludes today's conference.

Thank you for your participation may disconnect your lines at this time and have a wonderful day.