3D Systems Corp (DDD) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to 3D Systems conference call and audio webcast to discuss the results of the second quarter and first 6 months of 2017.

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

(Operator Instructions) At this time, I would like to turn the call over to Stacey Witten, Vice President, Investor Relations, 3D Systems.

Good afternoon, and welcome to 3D Systems conference call.

I am Stacey Witten, and with me on the call are Vyomesh Joshi, our President and Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Patrick Rogers, Vice President and Assistant General Counsel.

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

Those following along on the phone who wish to access the slide portion of 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 and in the press release we issued today.

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

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

Actual results may differ materially.

Additional information 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 and slides accompanying this webcast, both of which are available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliation of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons on this call will be against our results to the comparable period of 2016.

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

VJ?

Thanks, Stacey.

Good afternoon, everyone.

We are continuing to drive customer shift from prototyping to production with our comprehensive 3D printing solutions.

We are focused on meeting production customer needs, productivity, durability, repeatability and leadership in total cost of operations.

Demand from health care and industrial customers supports this strategy and validates our focused innovation and investments.

We are pleased with the growth in production printers, materials, software and health care in the second quarter and our ongoing progress in on-demand manufacturing services.

However, professional printers revenue was soft, and our execution geography [piece] was uneven.

And we are particularly disappointed in the results in the Asia Pacific region.

For the second quarter, total revenue was $159.5 million, and gross profit margin was 50.6%.

Non-GAAP operating expenses increased 7% compared to the second quarter of 2016, as we continued our investments in R&D, including Figure 4, metals and materials, while non-GAAP SG&A expenses increased 2%, inclusive of IT and go to market.

We reported non-GAAP EPS of $0.08 per share in the second quarter of 2017.

Based on the results and our plans for the remainder of the year, we are revising our full year 2017 guidance.

We now expect revenue growth for the year will be in the range of 2% to 6%, and non-GAAP EPS will be approximately flat for the full year compared to the year 2016.

We are focused on building the company for the long term, and we will continue to make investments, including accelerating quality and reliability improvements for our customers; innovation, including our Figure 4 platform, metals and materials; go-to-market strategy in support of the shift to 3D production; and IT systems and infrastructure to improve our overall effectiveness and efficiency as a company.

Over the past several months, we have performed very well in some areas and other areas require improvement.

While it does take longer and costs more than initially anticipated, we have made significant improvements in quality and reliability and expect these costs to continue throughout the balance of the year.

We are putting very clear actions in place both organizationally and operationally to address short-term issues as well as longer-term needs of the company to achieve accelerated performance in 2018 and beyond.

Previously, we discussed the key drivers for 2017 performance, and I would like to take a moment to recap where we are with these.

These drivers included: continued double-digit growth in health care; continued growth in software; continued growth in materials; on-demand manufacturing return to growth; and printer revenue return to growth.

Several of these key areas performed well during the second quarter, including health care, software and materials.

And we expect growth in these areas during the second half.

We continued to make improvements in our on-demand manufacturing services and believe our ongoing efforts and investments can result in positive growth in the second half.

Printer revenue declined during the second quarter, an increase in sales of production printers across all of our technology platforms was offset by softer MJP revenue during the quarter.

We expect continued growth in production printers combined with ramping of our manufacturing capabilities to meet increasing demand for our new ProJet MJP 2500 wax printer will result in improved total printer revenue performance.

We will continue to invest strategically to drive higher revenue growth in the second half of the year and beyond, while at the same time driving further cost of sales reduction and reducing operating expenses.

Now let me turn you over to John to discuss our second quarter 2017 performance in more detail.

John?

Thanks, VJ.

Good afternoon, everyone.

For the second quarter, we recorded revenue of $159.5 million, an increase of 1% compared to the second quarter of 2016.

Gross profit margin was 50.6% compared to 50.9% in the second quarter of 2016, as cost savings from supply chain and manufacturing improvements continue to support strategic investments and competitive pricing.

GAAP operating expenses increased 4% or $3 million to $88 million of higher R&D expenses.

We reported a GAAP loss of $0.08 per share in the second quarter compared to a $0.04 loss per share in the second quarter of 2016.

For the first 6 months, we reported revenue growth of 2% to $316 million, flat gross profit margin at 50.9% and slightly lower operating expenses of $177 million.

We reported a GAAP loss of $0.17 per share in the first 6 months of 2017 compared to a loss of $0.20 per share in the same period of the prior year.

Compared to the second quarter of 2016, non-GAAP SG&A expenses increased $1 million to $46 million, as we continue to invest in IT and go-to-market initiatives, while driving cost reductions in other areas.

R&D expenses increased $4 million to $24 million, primarily driven by investments in our Figure 4 platform, metals and materials.

We reported non-GAAP earnings of $0.08 per share or $9 million in the second quarter of 2017 compared to non-GAAP earnings of $0.12 per share or $13 million in the second quarter of 2016.

For the first 6 months of 2017, we reported non-GAAP earnings of $16 million or $0.14 per share compared to non-GAAP earnings of $18 million or $0.17 per share in the same period of the prior year.

Health care revenue for the second quarter of 2017 increased 25% to $49 million as a result of growth in all categories within health care.

While timing of system orders continues to be lumpy, we are pleased with the overall demand trends for printers, materials and services from medical and dental customers.

Software revenue increased 9% during the quarter to $24 million, a strong rebound from flat software revenue in the first quarter.

On-demand manufacturing revenue decreased 5% for the quarter from the prior year period to $26 million in the second quarter.

We continue to make progress and believe our investments will drive a return to growth during the second half of this year.

Printer revenue decreased 14% to $28 million in the second quarter.

While total printer revenue decreased, production printer revenue in units increased compared to the prior year's quarter.

During the quarter, there was increased demand for SLA, SLS and DMP systems, which was offset by lower sales of MJP professional printers.

We have had very positive reception of our MJP 2500 printers, including the 2500 wax, and we continue to improve our production efficiency and capacity to meet increasing customer demand for these printers.

Materials revenue increased 8% to $44 million from ongoing strong utilization, higher installed base, combined with the contribution of Vertex materials.

Continued growth in materials is indicative of success in the shift to production applications that provide higher volume materials usage, which is key to our business model.

We reported 50.6% gross profit margin in the second quarter of 2017.

Cost savings in supply chain and manufacturing continue to support strategic investments and competitive pricing to align with the market, drive adoption and expand our opportunity going forward.

Additionally, in the second quarter, we made significant investments in quality and reliability improvements for our customers, and we expect this will continue through the balance of this year.

GAAP operating expenses for the quarter were $88 million, down 2% sequentially and a 4% increase compared to the prior year.

Non-GAAP operating expenses in the second quarter were $71 million, a 3% decrease sequentially and a 7% increase from the prior year.

Compared to 2016, non-GAAP SG&A expenses increased 2%; and R&D expenses increased 17%, primarily from additional investment in production opportunities, including Figure 4, metals and materials.

In the first 6 months of 2017, we made significant investments in IT, go to market and innovation.

For the remainder of the year, we plan to continue to invest in these strategic areas while accelerating other cost reductions, including operating expenses.

We used $1 million of cash in operations in the second quarter, resulting in $18 million of total cash generated from operations during the first 6 months.

While cash from operations may fluctuate quarter-to-quarter due to timing, we continue to expect positive cash from operations for the full year 2017.

We also continue to drive improvements in working capital performance and our cash conversion cycle in 2017.

We ended the quarter with $154 million of cash compared to $162 million at the end of the first quarter 2017.

Our $150 million revolving credit facility remains fully available.

Before turning the call back to VJ, as he noted previously, based on the results and our plans for the remainder of the year, we are revising our full year 2017 guidance.

We expect annual revenue to grow between 2% and 6% compared to 2016, which results in revenue in the range of $643 million to $671 million.

We expect non-GAAP EPS to be approximately flat for the full year 2017 compared to non-GAAP earnings of $0.46 per share for the full year of 2016.

We expect GAAP EPS to improve to approximately a $0.14 loss per share for full year 2017 compared to a loss of $0.35 per share for full year 2016.

Additionally, we expect positive cash flow from operations for the full year.

We continue to see good execution and performance in several key areas of the company that remain significant drivers to 2017 and beyond, including health care, software and materials.

However, it is necessary that we improve our execution in the geographies and areas that are not performing as well to drive stronger growth in the second half.

We also need to accelerate cost reductions, including operating expenses, while supporting strategic investments.

We have plans in place and actions already underway to improve our execution and cost structure while continuing to invest in quality and reliability, innovation, go to market and IT.

We believe we are taking the right actions to position us well for 2018 and long-term, sustainable, profitable growth.

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

VJ?

Thanks, John.

We continue to focus on driving the shift to 3D production.

We are placing more SLA, SLS and metal printers into manufacturing environments.

Growth in materials continues from higher utilization of production applications, and software revenue is growing.

We are leaders in precision health care and are growing that category at double-digit rates.

We are accelerating cost reductions into the latter half of 2017, while continuing to invest in innovation so we can enter 2018 with an improved product portfolio and more streamlined cost structure to drive higher growth and improve profitability.

We have plans in place to step up regional execution in the Americas and Asia Pacific and grow on-demand manufacturing and overall revenue from printers in the second half.

I truly believe we have a phenomenal opportunity to lead the additive manufacturing industry.

And the investments we are making today position us well for the long term.

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.

(Operator Instructions)

(Operator Instructions) Our first question today comes from the line of Wamsi Mohan with Bank of America Merrill Lynch.

So when we look at the miss in the quarter, right, both on revenues and margins and you clearly lowered your fiscal year outlook as well, what really changed in the last 90 days?

Would you say that the demand ended up being weaker?

Or was it competitive dynamics and pricing got more aggressive?

Or was it just largely execution in some of the areas that you noted?

So I think it's largely execution.

Because if you look at our Asia, that deteriorated significantly.

And our professional printers, their revenue declined year-over-year.

And I think there are 2 parts.

One, our new 2500 wax product, the acceptance is very good, but we couldn't make enough.

And the second part is, especially in Asia, we saw that we were not able to sell as many professional printers.

As far as the production printers, we did very well in Q2.

We grew both units and revenue well.

So I really believe our own execution in Americas and Asia, I would say that, that's what the issue is.

And the reason why you think that the -- you were not able to sell as many printers as you had originally hoped, was that competitive or pricing based?

Or not?

No, I think the first one is our quality and reliability issues we had, which continued.

Frankly, the problems were deeper than I thought on the quality and reliability.

I will be the first one to say I was a little bit more optimistic that I could solve the problems and deploy them into the field faster.

So I think that was the one issue that probably I miscalculated.

And the second thing is -- and I said, our professional printers, we -- I thought that we would sell more.

And those are the 2 key things, and the regional uneven performance will be the way.

Because a lot of people are concerned about HP and the competition there.

And actually, we sold more SLS units than last year.

So I don't see any issue from competition from Carbon or HP.

I think it's really our execution.

And that's why I want to focus on execution.

And the reason for looking at the second quarter differently -- based on second quarter differently, I just wanted to make sure we get confidence in our execution, and I think that's the reason on the -- revising the guidance.

Okay.

And then if I could just follow up one for John as well.

This increase in R&D was substantial.

I think you noted that there would still be continued investments, but you're also accelerating some of the cost reduction initiatives.

So can you give us some sense of how we should be thinking about the timing for the return of these current investments that you're doing?

And I mean, that sort of I think bridges most of the EPS shortfall is purely the OpEx increase.

So should this continue into the back half with really no offset from -- coming from the cost reductions?

Yes, I think -- so first of all, I think you got it right.

I think that, clearly the drivers of R&D and what you saw on a year-over-year basis in Q2 are getting -- bringing Figure 4 platform to market between now and the balance of the year and increased investment in metals, where we believe that's a very important business for us over time.

What we haven't talked about so much, and even in the Q1 call, we've been very focused on cost of goods sold cost reductions.

And we talked about focusing on operating expense more as we enter 2018.

We're going to move quicker on that in the back half of 2017 to help offset both the costs that we're incurring from an R&D point of view but, honestly, this cost associated with the quality and reliability issues that VJ is talking about as well.

So we've got a series of actions teed up that are -- make perfect sense where the company is now, don't interfere with the future.

And we're going to get after them.

So Wamsi, I think one more very important point I want to make, really, we are building the company for long term.

It's very important for us to make sure our customers are happy with quality, reliability.

It's very important for us that we invest in R&D to really have a very different production portfolio.

Because frankly, getting into the consumer business and those distractions were not something -- I want to shift to production.

And I want to make sure that we develop our Figure 4 with -- as a robust platform so there are no quality, reliability and manufacturability issues.

I want to make sure we have a broad materials portfolio.

And as John mentioned, I want to make sure we have the right metals.

So I really believe what we have decided that short term we may invest more, but long term, we will really set the company up for profitable growth.

The next question comes from the line of Patrick Newton with Stifel.

I guess, first one, a follow-up on the quality and reliability issues you're talking about.

Was this specifically associated with a printer, a technology or an end market?

Or is this more of a generic statement across the company?

No, no, no.

I think, our production printers are really very well designed, and they are doing extremely well.

It's really the professional printer that we had some real issues in quality and reliability.

And I think what we wanted to do was to make sure that, as I said, we want to make customers happy.

So it's really local issues with the professional printers.

And I think that's why having that reliability, quality issue and not making enough of wax product, the combination is the result we had weak revenue in professional printers.

The other thing to think about with the quality and reliability space for us is -- and we learned a lot more about this in Q2, and it's -- we've invested a lot over the last 6 months in building a much more rigorous service model than the company's had historically.

We brought some key people into the company.

And certainly, in the second quarter, that we learned by having more customer focus from a service point of view that we have more problems on a legacy basis out there than we understood earlier in the year and late last year.

So it's a good thing in the sense that we're getting the right visibility, and we're doing all the things we need to do to make our customers happy and want to continue to move forward with us.

But there's a little more work than we thought.

So we left -- and happy customers is job 1, and we have to take care of it.

And just to clarify one more fine point on the quality, reliability.

There's nothing around the metals side, given some of the challenges there?

Well, I think our older platform we had some issues.

And I think that the 300 metals, we have issues.

So I don't want to just focus on professional, specifically on 300.

And that's why our 320, our new product line, I'm very, very happy with that because the performance of 320 in the marketplace is excellent.

But with 300, we made beautiful parts, but the robustness of that platform was the issue.

So no, I agree with you on that also.

All right.

And then as my follow-up, VJ, I think you'd previously said if you were to march towards your full year guidance that you just reduced that you could -- you'd be on pace to set up 2018 for 10%-plus organic growth excluding anything from the Figure 4. And given the reduction in guidance, and it seems like a little bit more of a slide in the back half of the year, is there any kind of recalibration of that 2018 comment that you could provide us currently?

No.

I think my view is -- I think, of course, we need to demonstrate that we can do the high end of the range, the new range that I gave.

But if you do that, I'm still feeling very comfortable, I mean, of double-digit growth in 2018.

I think most important for 2018 is to really make sure that we launch our Figure 4. We execute second half, as I said, so that we can be the high range of the -- like that 6% number, then I'll feel very confident about that.

I also would like to state that in November we are going to have an Analyst Day.

And there, what we want to do is we want to lay out our long-term business model so that you all can see how this whole long-term approach that I'm taking will allow us to really grow the business double digits in 2018, and we can show you by business the appropriate revenue growth and the margin that you can expect on the business models.

Yes.

The other thing kind of goes back to the first question of Wamsi is that we want to give visibility to a multiyear view, at least directionally.

It won't be multiyear guidance but directionally, on how we see it because it will help people understand how some of those investments that we're making this year in particular start to work their way out of the business model from a cost structure point of view '18 and beyond.

And we know -- we've gotten a lot of questions about that in conversations outside of earnings calls.

And so we're going to try and do a real good job of providing that kind of insight.

Next question comes from the line of Bob Burleson with Canaccord.

Yes.

So I guess, going back to professional printers.

Is there a relationship you guys can kind of point to in terms of yours customers' R&D and kind of just design new products, design work that's done out there and the natural level of professional printer growth that you would expect?

Well, I think our professional printers, first of all, what I want to do is there are 3 key markets that we are really aiming at.

There are 2 verticals, the investment casting and jewelry, are very important for our MultiJet printers.

The third particular one is entry-level prototyping.

And as I said, with our wax product, we are seeing tremendous -- the response is fantastic on our wax printer.

And frankly, we could have sold more if we had the capacity to build in our production line.

So I think that that part of the business, I'm very bullish.

And I think that's why seeing that printer revenue growth in second half, I am really counting on our successful 2500 wax product globally.

As far as the R&D part and [visibility and] saturation, I think that that's a different problem, the entry-level of the prototyping business.

But I think our success is more going to be in the verticals, especially jewelry, dental and investment casting.

Okay.

And then for my follow-up, just wondering if we should be concerned about any kind of knock-on effects in terms of materials growth given multiple quarters of slow overall printer demand.

Well, I think what we are doing there is putting more production units into the installed base.

Now all these things is not going to be showing up in materials cost overnight.

But because the usage of the production printer is significantly more than professional and consumer printers, my view is we are going to continue to see the growth in materials, and that will accelerate in 2018.

Because now, the shaping of that installed base is very important to me.

And creating more and more production opportunities and applications, that would be the driving force.

So I don't think that the negative revenue growth that you are seeing in printer now for a few quarters should have significant impact on our materials growth, and mainly because the shaping of the installed base that I'm talking about.

And in addition to that, VJ noted the execution issues that we had, and they are pretty -- we know where they are, and we're dealing with them aggressively.

Our next question comes from the line of Matthew Cabral of Goldman Sachs.

Two questions about pricing.

So I'll just ask them at the same time.

The first is just on the 30% price cut that you guys announced in April on the ProX SLS 500.

I guess now that it's been a few months, I'm curious as to what you learned from the move and what that means for your broader pricing strategy going forward.

And then the second question, just taking a step back and thinking more about the competitive response and just if you've seen any changes in the wider pricing environment over the last couple quarters?

So I think -- let me start out with me answering the first question.

I believe that with our 30% reduction in SLS and appropriately positioning that product and basically great in terms of total cost of operations we are seeing the results.

We are seeing that our SLS printer both from unit and revenue has grown year-over-year.

So I really believe that it is a very positive move on our side.

The other point that I want to make: SLS printers have lot of materials consumption.

So in all, connecting the dots back to the earlier question, I think putting more SLS machines into the marketplace will also enable us for more materials growth.

As far as the competitive pricing, we don't see that much.

I mean, I think -- I really believe that the opportunity for us is to continue to drive more production growth and then come up with the right kind of verticals, which I've talked about for our MJP, which is jewelry, dental and the investment casting because I think those are real production niches that we can have with our MJP printer.

And my view, once the Figure 4 will be there, we will be really having the right kind of a portfolio.

And on the metals side, I really believe our 320, especially in the health care side, we are very successful.

As a matter of fact, you saw the 25% health care growth.

And having metal printer for health care, the people are not looking for another metal printer.

They're looking at the whole workflow.

And our 3DXpert software, the materials, we are very successful in metals in health care.

And I think our main thing that we want to do is we want to expand into the industrial, into the aerospace with a metal opportunity.

So I believe that it's not about the pricing.

It's just having the focus on the right verticals, right applications where we have a contribution to make.

The next question comes from the line of David Ryzhik with Susquehanna Financial.

Just going back to materials.

Excluding Vertex coming out with 2% year-over-year growth, approximately materials, what's -- how can we think about like the go-forward growth rate now that you've kind of gotten your arms around the installed base?

And I have a follow-up.

Well, I think, we need to continue to see materials growth because of the shaping of the installed base.

Because, see, if you look at the company in last 2.5 years or 3 years, I think that's how we should look at it.

What happens is you look at the installed base and which part of the installed base is coming out, which part of installed base is active and how much usage they do for a year.

So that's how we do all of our modeling.

And now for last 2 quarters -- last 2 to 3 quarters, where we are focusing on the production printer, I'm feeling now that slowly we are changing the way the installed base is constructed.

And as we go more and more on these vertical applications like jewelry and in aerospace casting rather than the simple prototyping, my view is we are going to continue to see the materials growth.

The other important part is, as I always said, because we do R&D in materials, we will be also able to maintain our gross margins.

Got it.

And would just love to get an update on Figure 4, your conversations with customers and when, I guess, we can see timing of shipments this year.

I guess your other competitor in the 3D space has taken approach of -- a lot of collaborations with large customers.

Can we see some of these collaborations with Figure 4, public announcements, et cetera?

Would love to get just further insight.

Yes.

I think we are working with customers.

That's a very important part is that some of our customers, they don't want to make a public announcement.

So I think that's the key.

But for us, we've got to have that whole platform developed, and we will have revenue in later part of 2017.

Our next question comes from the line of James Kisner with Jefferies.

This is actually Timur Ivannikov on for James Kisner.

So first, a quick clarification here.

So your printer segment has been somewhat weak in terms of growth for several quarters now.

Can you disclose what portion of your printer segment is production printers versus professional printers?

Sure.

So our SLS, our high SLA, like 800 and 950, and the metal printers are all production printers.

The professional printers are MJP, CJP and the 6000 and 7000 SLA printers, okay?

All right.

And...

And our weakness in Q2 was specifically -- was not SLA, but specifically MJP.

I just wanted to...

Just to isolate it a little bit more for folks.

If you took the year-over-year performance that -- the poor performance that we had in Asia Pacific and what we weren't able to fulfill with the 2500, those 2 things effectively accounted for the whole year-over-year decline in total printer revenue.

Okay.

Great.

And I guess another clarification about the MultiJet printer.

So when you're saying -- it looks like you were saying -- you said you had quality and reliability issues with that printer.

But did you have to do any discounting?

Did have to cut prices in any way to customers?

No, no, no.

I think the main thing that I'm saying -- and I think John really articulated it very well in the way he answered, if you think about our APJ and our not fulfilling the 2500 wax would have explained the whole thing.

I think moving forward I'm actually very excited about MultiJet printing.

As I said, our acceptance of 2500 wax product is exceptional.

Our dental product (inaudible) is also very successful.

So I really think we just have to focus on the 3 key verticals that I talked about, dental, investment casting and jewelry, and we will do extremely well.

My opinion is what we need to do is continue working on verticals where we have production capabilities that we are offering to the customers.

Okay.

Great.

And so -- I mean, it looks like you're forecasting about -- if I'm not mistaken, 9% half-over-half growth.

And sorry, is that mostly driven by this MultiJet printers coming back?

Or is that...

No, no, no.

So let's talk about other drivers so that -- I want to make sure.

I absolutely believe our health care business will continue to grow.

Remember, health care business grew 27% Q1, 25% in Q2.

So we need to really make sure.

As I promised that software now will become positive.

So remember, it was flat in Q1.

Now it's 9% growth.

So we need to continue our software growing.

Materials growth was 8% this quarter.

We will continue to grow our materials, as I've talked about it.

I think those 3 are going to continue to grow.

They are going to be very important part.

In addition, our on-demand parts business, which was minus 5, it's actually improved from minus 6 to minus 5 going to Q2.

Now in Q3 and Q4, they're going to be positive.

Because we invested into capital, we are investing into the sales and marketing, and I absolutely believe that will be a very important part -- a very important driver for the growth that I'm talking about.

And then finally, on the printer side, continue to grow our production printers.

But now with MJP now contributing to the growth, that will be the fourth element in terms of the growth that you are going to see.

Our next question is from the line of Ananda Baruah with Loop Capital.

A couple from me.

Just a little high level to start with, with the guidance.

There's a bit of a range with the revenue guidance, but you guys are saying flat EPS.

So why wouldn't there, if you sort of fall at the high end of the range, why wouldn't there be some leverage?

And does that mean you're sort of going to manage -- will you invest more if you actually achieve the high end of the range?

I have a follow-up there, too.

I think there are 2 parts.

We want to continue to invest in R&D.

As I said, R&D is important.

And IT.

Because remember, we want to make sure that we create automation of the processes because effectiveness and efficiency is going to be very important.

So those 2 are important thing that we need to do.

The last part is as we go to the production we need to add direct sales people into the region will be the investment that we need.

So I think you ought to look at that revenue growth that will be a flow-through definitely from the gross margin point of a view that we will be able to achieve.

But -- and we will have a cost reduction that we are doing in cost of sales.

But to really make sure that we look at our long term, what we want to do for the company, we want to continue to invest in the very specific strategics that we are working on.

At the same time, we are going to do things organizationally, and we are going to really be controlling how we want to do discretionary.

And maybe John, you want to add something to that?

Yes.

I think, yes -- tactically, was your question around why we didn't put a range around the EPS that correlated with the 2% to 6% or...

Yes, John, it is.

I guess, the way -- I mean, you guys -- it sounds like there's so many things you'd like to invest in.

So the way it occurred to me was, if you hit the high end of the range, maybe you'd take the opportunity to just sort of lean into new investment a little bit more.

Yes.

So we were very conscious in saying approximately flat with -- on a year-to-year basis when we did the revision to the guidance.

I mean, the -- we don't want to have a broad range around that.

We have a lot of cost things going on.

We're going to be watching cost very carefully through the second half.

And we have -- we've got pretty good insights to where we think revenue could head for us in the second half, but I don't want you to think that there could be a little movement one way or the other.

I wish we were that good, but we can't tell you, right, to exactly the $0.46 right now.

I think the thing for us -- the thing for -- that's really important to understand here is that we certainly could have -- based on Q2 results, based on some of the areas where we know we're spending, where we want to spend for the future, where we need to solve for the past, there's certainly other options from a cost point of view that you could take to drive your EPS number up short term.

That's not what it's about for VJ and I right now.

We want to do the things that are appropriate and responsible in response to where we are from a performance point of view, but we're not willing to do that and sacrificing the future of the company.

We have too many things that we're trying to bring forward that are going to drive a lot of great things for the company next year and beyond.

So our decision here and then what you see from a non-GAAP EPS point of view is really driven around us trying to strike the right balance between having a reasonable performance with things we know we need to deal with, and there's a number of them, with -- part of it starts with accountability.

When we have areas in the company that are not performing well, we need to address them.

In Asia Pacific, particularly one country in Asia Pacific was a real problem.

We've already made leadership changes there.

We have skills mix issues in the company that we need to address for the business going forward.

There will be some work there.

And we have discretionary areas in the company that over the last 6 to 9 months it was appropriate to spend more money (inaudible).

(inaudible) a lot of things that we have that will help us between now and the end of the year and put the cost structure where we want it as a starting point going into 2018, but we didn't want to start cutting into the things that are going to make a material difference for the company '18 and beyond.

And so the net of all that was pulling back a little bit on the EPS.

Our next question comes from the line of Sherri Scribner with Deutsche Bank.

It's Jeff Rand on for Sherri.

Gross margins were down despite the fact that hardware was down and higher-margin materials business was up.

Can you just talk through that a little bit?

Yes, I think part of it is -- the mix, particularly within hardware, the mix within the hardware business, we saw a bit of a sequential decline in materials margins.

Nothing that was unusual, but we're a low 70s kind of margin profile in materials, and we can move around a couple of points quarter-to-quarter.

Nothing unusual in the quarter other than the mix of what we're selling.

And to be honest, we didn't meet our own revenue expectations in the second quarter.

And when you do that, you have other issues, absorption-type issues that could have a small impact on margin.

Had we met our own internal forecast, we would have done better from a margin point of view.

Great.

And just as a follow-up, can you -- how much did acquisitions add to material sales during the quarter?

You mean Vertex or anything incremental?

Yes, anything incremental and Vertex.

Yes.

Nothing incremental, yes.

No acquisitions during the quarter that added to our profile.

The next question is coming from the line of Brian Drab with William Blair.

Can you just remind me, are -- and maybe add, if there's anything new in your reseller base, are you -- I, in discussions with some of your resellers, come to understand that you're asking some of them to make a decision to proof and kind of show you how committed they are to selling 3D Systems and to focus on 3D Systems equipment rather than selling 3D and equipment from competitors.

I'm wondering if that -- kind of asking them to make that decision is paring down your reseller base and maybe having some impact on the sale of equipment.

So I think -- we made those decisions earlier in the quarter because I felt that it's important for us.

I think channel is very important to the company.

We absolutely believe that we want healthy channel.

We want a channel that will work with us, invest with us.

Because it's important not just about having a channel, but marketing.

My view is we need to be in front of our customers with clear value proposition.

That means we need to invest together in making sure that we provide that value proposition to the customer.

The second part is we also rely on the channel on servicing our professional equipment.

That means that they need to have skills, they need to have staffing so that they will be able to serve our customers with (inaudible) quality and reliability issues.

Frankly, we have to really make sure that whatever channels that we work with they will have time and energy and investment dollars to invest more on the marketing side and on the services side.

And I think that's how we made the decision.

I'm very happy about the channel partners that we have.

We need to probably do more as we go into our dental business with the Figure 4. I really believe -- I think we are very happy with overall our channel.

And I think what we need to do is make sure we invest together on marketing and services.

Okay.

And then on the health care business.

At this point, I'm wondering if -- I'm just wondering how much of that segment or that business is actually 3D printing -- 3D printers and 3D printing-related services versus some of the Simbionix-related -- the virtual training solutions?

How does that break down 3D printing versus non-3D printing at this point?

I think we are seeing growth across all the categories here, not just about Simbionix.

Very balanced performance.

Very balanced performance in the second quarter (inaudible).

Very balanced.

If it's not in the services, the 3D printing parts that we do for our health care companies, our printers, our materials, our software.

This has been a broad -- and I think -- I really believe that the health care vertical is extremely important for the company.

And growing at 25% across the board and across all the categories is a very, very positive thing for the company.

I really believe...

I'm just trying to get a sense too is it like 50% 3D printing and 50% non-3D printing?

Or is that way off (inaudible)?

No, no, no.

It's way off.

It's -- I think it's more 3D printing than what you think.

Well, I don't know what to think.

I'm trying to poke you with a number to see if you give me one back.

I don't know what to think.

No, what I'm just giving you -- I'm giving you already -- telling you it's more than 50%.

I got it.

All right.

I got it.

The way we think about health care is it's our own internal benchmark for what we want future production environments for 3D printing to look like as the market moves more towards that, so we use that as our own guiding light.

And it's a very good balance in the business.

So Brian, I think the way you want to think about that is, as I always talk about the workflow, from digitization to design, to manufacture to manage, and that's a perfect example of that vertical.

And I would like to create similar vertical approach in aerospace, in dental, in automotive.

I think that's where things are going.

I think that we're going to continue to really replicate and scale that model that we have with health care.

The next question comes from the line of Ken Wong with Citigroup.

On -- so kind of building on the gross margin question earlier.

As you guys weigh the efficiencies that you're extracting and then also the pricing, how should we think about what that trajectory looks like maybe in '17?

And then -- I mean, you guys aren't really targeting '18, but is '18 when we might see some uplift to those margins?

Yes, I think we'll -- on '18 and beyond, we'll talk a little bit more around models when we set up an event in November.

I think for the balance of the year, this year, I would think about margins very similar to what you've seen in the first half, not a lot of movement.

If we -- if we're successful in driving more growth, you could see a little bit of uptick.

I think -- I don't expect our gross margins in general to move quickly over time.

I think the thing that's going to shape us most from a gross margin point of view will be the longer-term fixed cost (inaudible) that can be a benefit to margins, and it can be an offset for any other areas that we might want to invest in.

That's the way I would think about it right now.

We'll continue to -- you can be sure that as we go '18 and forward, we will continue the goal of our great leaders in supply chain to generate additional productivity improvements, but -- so that doesn't necessarily stop for us.

And right now, it's a good balance for us in terms of helping to fund some of the things that we want to do in our company with the short-term things we can do, while also allowing us to be competitive in the marketplace.

But I think -- I continue to feel pretty solid about margins.

Got it.

And then VJ, maybe kind of marrying the -- kind of the tick down in guide and then some commentary around you guys are really, really kind of pushing to get the Figure 4 out, should we still think about that revenue contribution coming in Q4 as being on track?

Or is that still something you guys are -- or is that something that might have gotten pushed out?

As I always said, (inaudible) on revenues -- but significant revenue to (inaudible) and that thing has not changed (inaudible).

Hello?

Hello?

It's a bad line (inaudible).

It got really scratchy.

I wasn't sure if it was my phone or your phone or the conference line.

I think it's our phone.

It's our line.

We're trying to work through it.

Hopefully, it's okay.

It's okay?

You're good?

It's okay.

I can hear you guys now.

So what I got was like we will get some revenue, but significant contribution will come in '18 is -- that's kind of where I caught.

That's when it ramps.

Yes.

Okay, okay.

So it still sounds like Q4 is kind of the initial go date?

Initial revenue.

Correct, okay.

(Operator Instructions) Our next question is from the line of Troy Jensen with Piper Jaffray.

Two questions.

How about, first, for John.

John, if you look back last 2 years, years 2 and 3 has been down, kind of a seasonally weak quarter.

I think 2 years ago there was a divestiture in there.

So can you just give us just a sense of seasonality in Q3 would you expect revenues to be up, flat or down sequentially?

Yes, I think I'll probably talk more about the half.

I mean, obviously, if we are to get to the mid to high part of our revised guidance range, it implies growth half over half.

Three -- Q3 and Q4 have moved back and forth over the last few years.

And a lot of that has been driven by timing of large account orders.

We don't see anything unusual, and we're driving for -- we're driving for improved growth in -- throughout the second half.

I think what's better to look at, Troy, is the half because in terms of bond rates.

And I'm -- I don't -- I just don't want to get into what ends up being like a quarterly guidance, Troy, which is not where we're at right now.

Yes, completely understand that.

Thought I'd throw it out there.

But then my follow-up would be just a follow-up to Brian's question just regarding the channel partners.

So did I understand you correctly, VJ, that anybody that picked up HP you will be severing ties with them and no longer partnering?

No, I didn't -- what I said was basically people who won't invest in what we are doing and not have the right services.

Because my view is -- and all that channel rationalization has already happened.

So I'm not working on any new plan.

Let me make sure.

I think you already are -- you and Brian both talk to our channel partners.

So basically, what we decided is already done, and we are moving forward now.

And as I said, Troy, frankly, we didn't see any change because of HP into our SLS printers.

So VJ, just to follow up though on the channel partners.

The companies like Cynex, [Hawk Ridge], Master Graphics, there's a handful of others, I mean, this create -- I think they were given like a 60-day window to close that pipeline.

But beyond that, is there -- I mean, is this a hole that you guys need to fill in your channel partners?

No.

I think we need to recruit new channel partners for dental because we believe that dental is a tremendous opportunity for Figure 4. We are going to look at some other partners because we believe that, as I said, channel is extremely important.

I'm not interested in closing down anything.

I'm interested in building new channel partners.

Our next question is from the line of Hendi Susanto with Gabelli & Company.

First, two questions.

How should we think about how long it may take to recover and improve execution in Americas and APAC and put in quality and reliability and professional printers behind?

Well, I think, my view is in second half.

That's where we need to deliver.

Period.

Because I really believe that, as I said, the response that we are getting right now in our product portfolio, I'm very excited.

But I just want to deliver.

I think in second half you will be able to see that.

Yes, we've got a very good understanding of where we're executing well and where we can do better.

And we also have some pretty clear actions teed up for that.

I think that -- to deliver kind of trajectory we want to deliver in '18 and beyond, VJ and I both know that there's -- we got to make very good progress in the second half.

I mean, the good thing is, is we know exactly where we can do better.

That's really important.

And we learned a lot about that in the second quarter in particular.

Got it.

And then second, I've noticed that APAC has lower material sales.

Is that demand?

Or is that execution?

Well, I think -- there are 2 parts, right?

When you have reliability issues, people are not using the printers.

And when you don't use printers, then you don't have the materials.

I think, my opinion -- that's why I want to focus on delighting our customers and resolving our quality and reliability issues.

And I think the second part is the profile of the printers.

I think there are more professional printers sold in Asia than production.

And I think that's another reason that you're seeing a different kind of on material.

And on top of that, as we noted earlier in the call, Asia Pacific was our biggest area of weakness relative to the professional printers base on a year-over-year basis in Q2.

I'm very -- so obviously, that plays into any kind of short-term materials sales you're going to look out there.

Our next question is from the line of Rob Stone with Cowen and Company.

I -- the first question I want to ask is on visibility.

You've said a number of times you have things in mind for the second half.

For example, you expect the on-demand part services to get from negative 5 to -- in this quarter to positive numbers in the second half.

As you've been working on systems in the company and improving the way you execute, what are you doing to drive your visibility specifically?

And are you seeing changes in things like the linearity of a quarter or the lead times?

You've already enumerated the things that you expect to drive growth.

My question is, really, how are you in the details better able to see that?

Yes.

So I think we have work to do there.

My view is we didn't have the processes when I joined, and we are building the processes in terms of the pipeline, in terms of really understanding what are the probability of getting -- converting the conversation into actually order and then converting that into shipment.

We have a lot of work to do in this company.

And those are the processes that I'm bringing.

I think we're making progress.

And we are getting much better visibility than what we used to, I would say, 6 months ago.

But we still have work to do.

And I think that's something I believe is going to give us more and more confidence in converting to the right kind of a revenue growth that we are looking for.

The last part is the skills set.

It is easy to say, let's move from prototyping to production.

But really, bringing that direct sales kind of approach, the pipeline and the whole processes to really figure out how do we have a CXO kind of a conversation rather than a transactional conversation.

Those are all the skill set that we are building, and we are investing into it.

But I would say, Rob, that compared to 6 months ago, we have much, much higher visibility.

John, you want to add...

Yes.

The way I think about it, Rob, is we've kind of gone from certainly in the 12 months that I've been here, and VJ started it before I got here, we've gone from a company that really didn't have a consistent, defined operational cadence to a company that now has weekly operations processes with a lot of good support from our finance teams at FDNA.

And we've gone -- we took that to what felt more like a reporting exercise at the start.

Now we're moving more to attainment.

And so we're really talking about how to get things done as opposed to flashing forecasts we hope happen.

And then we get -- the next step for VJ and I is we now have better understanding where things are working well and where we need to focus more time on and can let things go and run themselves.

So it's an evolution, but it is definitely getting better.

Okay.

My second question is on the subject of pricing.

And you talked about how you were focused on more pricing towards an ROI model and driving the installed base towards production printers as opposed to necessarily responding to competitors.

And obviously, you wouldn't want to preannounce -- and I'm not asking you to -- anything else you've got planned there.

But my question is, are you also willing to use price tactically?

Do you think that's a tool that you might be able to deploy?

For instance, you said you want your channel partners to invest and support you.

And if there are quality and reliability issues, they have to be able to provide the local service and support.

Would you, for example, consider going out to those same partners and saying, "This period, we're going to give you a bigger discount on this range or that model because we want to move more of those machines.

And we know it's going to take more work from you." That sort of thing.

So...

I think that's what I call marketing that I was talking about.

I think what we need to do is to invest more into marketing and create the opportunity to talk about our value proposition.

See, the thing that I believe, we need to get much more sophisticated here rather than just saying, "Hey, here is the product and sell it." We need to create a conversation, and that's why marketing is going to be as important as creating the sales process.

The second part is, I think -- my view is as we go more and more production the conversation is not about the pricing.

It's about the total cost of operation.

And we need to change the conversation.

Because at the end of the day, they're looking for a part, which either is complex or custom.

And they want to make sure that they compare that against the conventional process.

And I think that's the experience that we are having.

So that's why my view is more and more we need to move the conversation on total cost of operations.

The other thing, Rob, you touched on is the quality and reliability space, as we're building out a very different service model from where we were, say, a year ago, much more engagement with our channel partners relative to issues around quality and reliability that we're trying to take on.

So we need to support the channel in doing that just like we're supporting ourselves in solving problems with customers.

So there's good engagement going on and improving engagement going on in dealing with that, making sure that our partners are well trained and prepared to solve problems as they come up.

So that's a build as well.

Our next question is from the line of Shannon Cross with Cross Research.

So pretty much all the questions have been asked, but I did have one last one.

With regard to cash flow, I'm just wondering how you're thinking about cash flow.

I know you guided for this year.

But I'm curious, as you launch Figure 4 is that going to take incremental inventory?

How we should think about some of the accelerated restructuring.

And how your -- just in general, how you're thinking about it as you look at this year.

And then I know you won't give guidance, but maybe (inaudible) next year.

Yes.

No, I think -- yes, I think -- first of all, I think in the first half it's a little lumpy because of sort of noncash items quarter-to-quarter.

But on a net basis, we generated $18 million of cash flow from operation in the first half.

There's leverage in the second half with stronger performance that helps that.

Will we invest some of that?

Sure.

We may invest some of that.

CapEx for the first half was pretty much what we expected.

We think we're tracking there.

I think we're going to have positive results for the year relative to cash flow.

I don't doubt that.

And I think there's a lot of leverage from a cash flow point of view going forward as we get some of these things behind us and we start to really ramp the business.

There's just a lot of leverage from a cash flow point of view.

And we have a healthy balance as a company.

I don't worry about that.

I spend more time making sure we're focused on the things that are going to make that leverage real.

And just actually just one last question.

What specifically changed in Asia on a quarter-over-quarter basis?

Or maybe it was something that was building over a couple of quarters.

I'm just trying to understand what the -- what sort of turned it this one quarter.

Yes.

I think the main -- the thing have really -- clearly, this has been building.

It's not just the second quarter.

And specifically, let me just tell you the country, Japan.

But I really think that we had a lot of issues in Japan.

And I think, as John talked about, we made some leadership change.

There were more than we understood, Shannon, than (inaudible).

So that's where I believe our issues were very much -- where -- I think that -- and as you all know, Japan is a country where quality and reliability will be a prime thing.

And I think not having that thing solved was the key issue.

So I'm just trying to be very clearly articulating what the issue was.

But the issue has been solved from your standpoint.

So going forward, it's just a matter of rebuilding?

That's what we're working on.

It takes time, right, when you have those issues.

We've added some (inaudible).

In a country like Japan, that is not going to be overnight.

But I'm just feeling that -- they're 2 parts, right?

As I mentioned, what happens when you have quality and reliability issue and the people are not using their equipment, the materials growth also is a concern.

So I really think -- I gave you a specific example of Japan because I think this is something important that all our learning.

And then we need to really pay attention how we want to globally drive the things that we are talking about.

And that's where we need to make sure we have the right channel, we the right training, we have right kind of a approach in making that happen.

Yes, the other thing that we did, Shannon, over the last few months is we actually added a senior leader, regional leader for all of APAC, who we can assure you has been spending a lot of time in Japan.

And so we needed that.

We needed that focus as well.

We found in EMEA that leadership process and rigor has made a huge difference.

And now we got to solve for that in APAC.

And we -- and honestly, we need to do better in the Americas as well.

So there's -- I think we understand it well.

There are no additional questions at this time.

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

Stacey?

Thanks.

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 in the Investor Relations section of our website, www.3dsystems.com/investor.

Thank you.

Thank you.

Today's conference has concluded.

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