3D Systems Corp (DDD) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to 3D Systems conference call and audio webcast to discuss the results of the fourth quarter and full year 2017.

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

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you.

You may begin.

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

I'm 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 Andrew 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 on the Investor Relations section of our website.

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 accessed the streaming portion of the webcast, please be aware that there may be a few seconds 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 the 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, which are both 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 the results for 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.

During 2017, we built a foundation for a stronger company.

We worked very hard, made substantial progress, and we believe we closed the year in a position of strength for the future.

As we discussed last quarter, we faced more challenges in 2017 with quality, reliability, processes and infrastructure than we initially anticipated.

We believe the actions we took both organizationally and operationally throughout the year positions the company well for sustainable growth going forward.

Before we get into the details about the fourth quarter, I would like to take a few minutes to reflect on the last year and the progress we have made.

Throughout 2017, we improved our operational cadence, analytics and utilization of our sales force platform for improved visibility and execution, began the process of supply chain optimization both internally and through a strategic partnership with Sanmina, rebuilt our service model to be metric-driven, with a focus on customer satisfaction, including material improvements in customers' hardware and service experiences, which resulted in achieving a 20 point improvement in our Net Promoter Score during the year, while at the same time, making good progress in fully integrating with our product development and supply chain organizations.

We rationalized our product portfolio to focus more on production applications and repositioned our go-forward products more competitively via cost-reduction programs and new offerings.

And completed significant work and improved analytics to drive the shift both from a business model and company culture perspective from a hardware-centric company to an annuity-based system model where materials, software and services are the long-term driver of return on investment across our installed base.

We improved our employee infrastructure, including a market-based rebuild of the company's job hierarchy, which we believe will give us the visibility to drive improved cost structure over time and made significant investments for a series of new product offerings from our flagship Figure 4 technology and low-cost DLP to next-generation metals and expansion in dental.

We also invested in the IT infrastructure and transformation to drive long-term efficiency, including a major Oracle ERP system upgrade.

We have enhanced the company's go-to-market strategy with a worldwide consolidation and made a real-time adjustment during the year to improve execution.

To date, we have made the most progress with our go-to-market reorganization in EMEA, which we believe is reflected in the consistent growth in that region throughout the year.

However, in the fourth quarter, we experienced more balanced performance across all regions as the more recent work in Americas and APAC is also beginning to show returns.

We expanded our direct sales and application engineering teams, implemented tools designed to improve our lead generation and conversion rates and continue to refine and improve the focus of our sales channel.

While our actions and investments in go-to-market are not done, we have made significant progress and believe we are on the right track to continue to drive growth and improve execution worldwide.

We are in a multiyear transformation and actions last year centered around building the foundation to enable the company to capitalize on significant opportunity ahead of us.

We focused on building the infrastructure, processes, analytics and organizational structure necessary to take the company forward.

We have prioritized the critical needs and actions to stabilize the company and enable our marketplace strategy to drive the expansion in 3D production use case by use case.

With this work behind us, we believe 2018 is a corner turn year for the company.

Our energy and focus are on execution, improving efficiency and introducing disruptive new products to drive customers' shift to 3D production.

Our planned product launches throughout the coming year will continue to build momentum as we drive efficiencies in the next phase of transformation.

As we showcased in November, we plan to introduce several products to enable customers to seamlessly scale from prototyping to production and bridge the gap between traditional and additive manufacturing.

We plan to launch next-generation production system with our Figure 4 DLP, SLS and metal technologies as well as a range of materials, software and services to help customers integrate 3D printing into their manufacturing workflow.

We remain excited about our significant long-term opportunity, and I'm confident in our ability to be a leader in the market and drive sustainable profitable growth.

With that, I would like to provide an overview of our fourth quarter results before John provides more detail.

Throughout 2017, we talked about several drivers to revenue performance, and I would like to recap where we are with this.

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

During the fourth quarter, total revenue increased 7% to $177.3 million.

Demand from healthcare and industrial customers continued to be strong, resulting in a 13% increase in healthcare revenue, with growth across all categories.

Printer revenue has improved and was approximately flat in the fourth quarter.

For the fourth quarter, total printer units sold increased 15%, with growth in both production and professional printer units.

Materials revenue increased 8% in the fourth quarter with the utilization of the installed base, including high demand from healthcare customers.

On-demand manufacturing revenue increased 10%, and software revenue increased 8% in the quarter.

Additionally, our solid execution in EMEA continued, and demand in the region remained strong.

And our performance in the Americas and Asia Pacific improved during the fourth quarter.

Gross profit margin was 48.2%.

Non-GAAP operating expenses increased 17% compared to the fourth quarter of 2016, including a 9% increase in R&D as we continued our investments to bring new products to market in plastics, metals, materials and software and a 21% increase in non-GAAP SG&A expenses, inclusive of IT and go-to-market investments.

We reported non-GAAP earnings of $0.05 per share in the fourth quarter of 2017 and a GAAP loss of $0.08 per share.

Now let me turn it over to John to discuss our fourth quarter and full year 2017 performance in more detail.

John?

Thanks, VJ.

Good afternoon, everyone.

For the fourth quarter, we reported revenue of $177.3 million, an increase of 7% compared to the fourth quarter of 2016.

Gross profit margin was 48.2% compared to 50% in the fourth quarter of 2016.

GAAP operating expenses increased 16% to $91.2 million, including an 18% increase in SG&A expenses and a 9% increase in R&D expenses.

We reported a GAAP loss of $0.08 per share in the fourth quarter of 2017 compared to $0.05 earnings per share in the fourth quarter of 2016.

For the full year, we reported revenue growth of 2% to $646.1 million, gross profit margin of 47.2% and a 3% increase in operating expenses to $358.8 million, primarily driven by increased investments in R&D.

We reported a GAAP loss of $0.59 per share for the year compared to a loss of $0.35 per share in the prior year.

Compared to the fourth quarter of 2016, non-GAAP SG&A expenses increased 21% to $54.6 million as we continue to invest in IT transformation and go-to-market initiatives.

Non-GAAP R&D expenses increased 9% to $23 million, primarily driven by investments in plastics, in particular, our Figure 4 platform, metals, materials and software.

These investments have been critical and in support of the many new products we plan to bring to market throughout 2018.

We reported non-GAAP earnings of $0.05 per share or $5.3 million in the fourth quarter of 2017 compared to non-GAAP earnings of $0.15 per share or $16.7 million in the fourth quarter of 2016.

For the full year 2017, we reported a non-GAAP loss of $1.7 million or a loss of $0.02 per share compared to non-GAAP earnings of $50.8 million or $0.46 earnings per share in the prior year.

Healthcare revenue for the fourth quarter of 2017 increased 13% to $50.4 million, driven by growth across all categories.

We continue to be pleased with the overall demand trends for all categories of healthcare.

And for the full year, healthcare revenue increased 18% to $188.7 million.

We expect continued double-digit growth in healthcare going forward.

In the fourth quarter, on-demand manufacturing revenue increased 10% to $26.5 million.

Our investments in facilities, technology, customer experience, demand generation and enhanced sales approach has helped drive a return to growth in on-demand manufacturing.

For the year, on-demand manufacturing was approximately flat at $104.6 million.

Printer revenue was approximately flat for the fourth quarter.

Printer unit sales grew 15% in the fourth quarter, with growth in both production and professional unit sales.

For the full year 2017, total printer revenue decreased 7% and total units decreased 4%.

Production printer units sales increased 20% and professional printer unit sales decreased 7% for the year.

Throughout the year, printer revenue and ASPs were negatively impacted by mix, particularly by the increasing sales of our lower-priced MJP 2500 wax printer.

Materials revenue increased 8% to $42.8 million in the fourth quarter.

For the year, materials grew 8% to $168.8 million, driven by the addition of Vertex and continued utilization from our installed base.

We expect ongoing growth in materials as we continue to increase our understanding of the installed base, improve sales execution, improve -- increase production applications and drive a more annuity-based business model.

Software revenue increased 8% from the fourth quarter of the prior year to $26 million.

For the year, software revenue increased 5% to $91.7 million.

We continue to expect growth in software going forward.

We reported 48.2% gross profit margin in the fourth quarter of 2017 compared to 50% in the prior year.

For the full year, we reported 47.2% compared to 48.9% in 2016.

Gross profit margin includes the negative impact of product discontinuations and the legacy inventory cleanup charges which offset supply chain efficiency improvements made during 2017.

We've begun supply chain optimization throughout our procurement and manufacturing processes and have entered into a strategic relationship with Sanmina, a recognized technology leader providing end-to-end design, manufacturing and logistics solutions delivering high quality of support.

We expect these changes in ongoing efficiency improvements to help maintain and improve gross profit margins over time.

GAAP operating expenses for the quarter were $91.2 million, an increase of 16% compared to the prior year, including an 18% increase in SG&A expenses and a 9% increase in R&D expenses.

Non-GAAP operating expenses in the fourth quarter were $77.6 million, a 17% increase from the prior year, but only a 2% increase sequentially.

Compared to the 2016 quarter, non-GAAP SG&A expenses increased 21% and R&D expenses increased 9%, primarily from additional investment in support of the recently announced new products which are planned for commercialization over the coming months.

For the full year, GAAP operating expenses increased 3% to $358.8 million, including a 2% increase in SG&A expenses and a 7% increase in R&D expenses.

Non-GAAP operating expenses increased 10% to $296.6 million.

Non-GAAP SG&A expenses increased 8% and non-GAAP R&D expenses increased 15%.

Throughout 2017, we made significant investments in IT, go-to-market and innovation, which we believe are critical to the company for long-term growth.

We are committed to driving an appropriate cost structure, and we believe, over the next couple of years, we can drive operating expenses materially lower.

We generated $8.2 million of cash from operations during the fourth quarter, resulting in $25.9 million of cash generated from operations in 2017.

We ended the quarter with $136.3 million of cash.

While quarter-to-quarter cash generation and expenditures timing will fluctuate, we expect to continue to generate cash from operations over meaningful periods while at the same time investing in growth and infrastructure.

Before turning the call back to VJ, I'd like to take a few moments to discuss where we are today and a high-level outlook going forward.

We are focused on building the company for long-term growth, profitability and success.

We are still in the midst of a multiyear transformation of the company.

As VJ described, we have made significant progress in many areas and completed a lot of foundational work in 2017 but we still have more work to do.

As we build momentum throughout the coming year with disruptive product launches to drive production applications for additive manufacturing, we will also remain focused on continuing to improve our organization and operational efficiency.

We have plans in place to improve leverage from the P&L and drive operating costs down meaningfully over the next couple of years.

Over the same period, we plan to balance investments with these cost reductions, maintain a solid cash position, drive profitability and ultimately improve our earnings power.

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

VJ?

Thanks, John.

In 2017, we made significant progress to stabilize and turn around the company, addressed many legacy issues and put in place the foundation for scalable growth.

We believe we are turning the corner in a multiyear transformation project.

We are focused on execution, driving operational efficiencies and bringing our disruptive and innovative new products to market.

We have a strong portfolio of additive manufacturing solutions for the entire digital manufacturing workflow with a series of new product introductions planned throughout 2018 to further solidify our leading market portfolio.

At Lab Day in Chicago, the largest dental laboratory event in America, we introduced the NextDent 5100, a Figure 4-based 3D printer specifically designed for dental labs.

The NextDent 5100 is our first entry to market with our scalable Figure 4 platform and we believe it is a breakthrough product, which will redefine digital dentistry.

At the same time, we launched several new materials for the NextDent 5100, bringing the total number of 30 dental-specific materials for this printer.

This innovative solution is 4x faster and up to 90% more cost-effective than any other solution today.

It was extremely well received at the show.

[Smartech] has defined dental hardware and materials as a $1 billion market by 2020, and we believe we are the best positioned to address this.

We also launched the FabPro 1000, our new low-cost, high-productivity DLP-based 3D printer designed for dental and jewelry production and high-functionality industrial prototyping.

During the first quarter, we plan to begin shipping our next-generation SLS printer, the ProX SLS 6100, with 6 production-grade materials to deliver superior product quality with greater efficiency and lower total cost of operations versus our competitors.

And over the coming months, we plan to launch additional Figure 4 products designed to meet various production environment needs from stand-alone units, to modular, to fully automated production solution.

Later in the year, we also plan to launch the DMP 8500, a scalable, automated, fully integrated, next-generation metals platform to deliver a true end-to-end solution for metal additive manufacturing.

With this, we plan to offer an expanded materials portfolio, durable and removable print modules, powder management modules and fully integrated 3DXpert software to help streamline production of parts as well as the industry's largest paradigm compared to what is available today.

These products expand our leading suite of end-to-end solutions, and we believe they will help accelerate the shift from prototyping to production.

We remain excited about our complete portfolio, ongoing innovation and significant market opportunities.

And we continue to be focused on the long-term growth and success of the company.

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

Stacey?

Thanks, VJ.

We will now open the call to questions.

(Operator Instructions) As a reminder, please direct all questions to the teleconference portion of this call.

The telephone numbers are provided again on this slide.

If you are calling inside the U.S., the number is 1 (877) 407-8291.

And if you are calling outside the U.S., the number is 1 (201) 689-8345.

(Operator Instructions) Our first question is from Ananda Baruah from Loop Capital.

I guess I'd just like to start out with, VJ, you guys spent some time teasing out the areas that you grew this quarter and going through some of the -- peeling back, going through some of the metrics, and you made mention that you believe you're positioned for ongoing growth.

So I'm going to take that to mean -- including calendar '18, you also made mention, I believe, of improvement in lead generation and, correct me if I'm wrong, conversion rates?

So if that's not accurate, improving the conversion rates, then please correct that.

But I guess, the question is, is what -- can you talk to the degree to which you might expect to grow this year?

And which aspects of the business do you expect to grow this year?

Do you think printers grow as well?

You had made mention of a couple of...

Yes.

So let me start out by saying that the way I'm building that growth engine, healthcare, materials, software and on-demand manufacturing will continue to grow.

I mean, the important part for 2018 will be our printer revenue growth.

So if you look at printer revenue growth, it was minus 4% in Q1, minus 14% in Q2, minus 11% in Q3 of 2017 and nearly flat in fourth quarter 2017.

Slowly, we are now getting into a place where we can now feel good about growing our hardware printer revenue growth.

And I think that's what -- the sign that we are looking at.

The second thing that I can say is beyond the investments we made in go-to-market, will also help, as you talked about the conversion rate because we are having now competitiveness, especially with the launches that we will do with Figure 4, with our FabPro, new next-generation SLS machine and the 8500, the metal product.

So I believe that should help us now to drive the printer hardware revenue growth.

And I think that will be very important for 2018.

So it sounds like you have an expectation of print -- you have -- driving printer revenue growth in 2018?

Yes, we need to do that.

I think we are making the progress, and we will continue to do that throughout the year in 2018.

I also want to make sure that, as a reminder, there is a seasonality in our revenue.

And first quarter always is the softer quarter.

So I think we need to -- you guys need to model that as kind of a build for 2018.

And just as a quick follow-up.

How much -- you've spoken about the work that you've done in the go-to-market and in the channel.

How much of that work remains as you go through this year?

I guess, can you [tease for us] where you are in that process?

Yes, I understand.

So I think the main important part for go-to-market is this whole shift from prototyping to production is very important, and there are 2 aspects of it.

We need to build our direct sales force because, for production, it's a complex sale, and I think we need to make sure we build our -- what we call customer innovation center, our direct sales force and application engine.

The second part is getting the right kind of a channel where they can sell this complex solution.

So what we are doing globally, building both a direct sales force, application engineering and the right channel.

Our next question is from Jim Ricchiuti from Needham & Company.

I wanted to ask a question, first, about the services business.

The revenues there were significant -- up significantly from Q3.

Was there anything unusual about that?

And maybe, VJ, if you could, talk a little bit about the seasonality of that business.

Would use expect a significant drop off in Q1 in that area?

Or are we at a new level in that area of the business?

Well, I think, in services, we include healthcare, which is very important to note because if you look at our healthcare business, this quarter, meaning fourth quarter, it grew 13%.

And if you look at the profile, 29% in Q1, 25% in Q2, then 10% in Q3 and then now 13%.

So I think that's kind of a seasonality you'd expect with a lot of our healthcare business, during the summer months and during the Christmas month, we have a uptick.

So yes, Q1 will be a little different because the seasonality will be lower than we talked about the seasonality of our healthcare business.

I think that's the driving force for our services business.

Okay.

That's helpful.

And then you have a fairly active new product, new printer introduction schedule for this year.

And what I'm wondering is, obviously, you can't comment specifically on individual products but if we look at these new products in aggregate, how meaningful could the impact of these new products be on the printer revenues in the second half of this year?

Yes.

So I think, first of all, you are right on.

It's a build.

And I think second half is where you need to be really looking at all these new products, how that can help our printer revenue.

The good thing -- there are 2 good things I can tell you.

First of all, the products that we are working on, the feedback that we are getting from our beta customer is phenomenal.

And I'm very excited about the contribution we are making with respect on the customer value proposition.

The second thing is most of the products, except for the SLS, are new categories.

That means they're going to be additive to our overall product portfolio.

And that's why it will be additive in terms of the revenue growth, especially in the second half.

The last piece that I can talk about are in new categories.

We also have to be careful in how we build the go-to-market.

So that's why the uptick will be gradual but the approach that we are taking is the right combination of value proposition and disruptive products and then building that go-to-market.

Our next question is from Bobby Burleson from Canaccord Genuity.

So I was curious, like just looking at the printer mix as a headwind for printer revenue growth in 2017.

Do you think that mix is stabilized kind of where it is?

You had a flat year-on-year printer revenue performance in Q4.

Or do you think with some of the new products coming, mix could shift higher in terms of ASP?

Well, I think, first of all, that's the reason I was sharing what was our profile.

It was a build, right?

And my view is the mix between production and professional printer is going to be very similar.

And the reason for that is the SLS, the Figure 4, these are all production printers but the MultiJet printing, where we have been very successful with our wax products, and some of the FabPro will be the professional printers.

So that's why the mix sets we are seeing right now between professional and production will continue in 2018.

And as I said earlier, because there is not as much overlap because, for example, FabPro is a $5,000 product and is a completely new category, we're not going to have as much impact on our current portfolio.

Okay.

And I guess, as a follow-up to that, if you're going to have a concentration of new products this year versus last year, it sounds like you're going to be more innovative in terms of how much stuff you're bringing to the market.

Should we be thinking about start-up costs there or anything associated with gross margin or operating margin that can be a little front-end-loaded expense-wise?

Yes, this is John.

I think a lot of that front-end loading of the cost is taking place through the latter part of 2017, and then there will be some of that in Q1 as we do final work in launching the products.

But then at that point, we'll just start to ramp those products in the market.

So there's been a lot of investment both from an R&D point of view and from a marketing point of view in advance of these launches.

And there's a meaningful set of launches in the next half year.

And I think that's the reason we want to invest into R&D.

We want to invest in go-to-market because we felt that these new categories require a right go-to-market and the innovation, the disruptive innovation.

The combination of this will build the category, and this is front-loaded, as might fully -- that's what you are indicating.

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

My first question is for VJ.

VJ, how do you characterize the 3D printing market and market opportunities in 2018?

How are they different compared to 2017?

Well, I think my view is, overall, market opportunity continues to be there, I think, in 2018.

And I really go back to my fundamental belief that we need to shift from prototyping to production.

And production opportunities are going to be the driving force in the coming 3 to 5 years from the growth point of view.

I also believe on-demand manufacturing, our parts business is also a very big opportunity.

As you can see in Q4, we grew that opportunity by 10% because a lot of companies slowly are understanding the value of additive manufacturing, and they may start by outsourcing, saying, "Hey, let me play with this thing using our on-demand parts capability.

And then eventually bringing it in-house.

And that's where you will see a combination of outsourcing and in-sourcing.

So my view is '18 should be a good year.

And as I said, it will be driven both for production opportunities and the opportunity in on-demand manufacturing, the parts business.

And then VJ and John, post Q3, 3D Systems has been reorganizing your go-to-market structure towards your Europe's best practices in North America and Asia Pacific.

How far along is that in terms of making organizational changes and sales productivity ramp up?

Yes, so if you remember, we announced that Herbert, he runs now the worldwide go-to-market organization.

And he's bringing all the processes that he has built in Europe in both Americas and in Asia.

And these processes improvements are showing the results.

If you look at what we achieved in Q4, we had much more balance than either Q2 or Q3.

I still think we have work to do because these processes and the talent that we need in both Americas and APJ, we need to continue to build because it's all about the people and processes.

And I think my view is in '18, we need to make sure we continue to build our Asia Pacific and Americas.

Our next question is from Joe Wittine from Longbow Research.

To put a finer point on your answer to Bobby's question, do you anticipate consolidated printer ASPs will increase this year when taking into account the impact of the launches ahead?

So I think it may not be that way.

The reason, remember, we are going all the way from $5,000 to multimillion dollar offers.

So you need to really look at this thing, where, depending on the participation and depending on the mix that we generate, all the way from $5,000 to multimillion-dollar solution, you are going to see the appropriate ASP.

The thing that we want to watch for is the unit growth because we got to build the right kind of an installed base, and that's what I'm on, right?

I really believe annuity-based business model with materials, services and software is the model that I want to build.

So what we want to do is we want to have productive installed base.

And I think that's what I'm more interested.

The ASP is depending on the mix.

You're going to have a different answer.

Okay.

That's helpful.

And then, John, your prepared remarks on driving total OpEx dollars, I think you said materially lower, were interesting.

It doesn't sound like you're ready to give details on the size of these initiatives today.

Correct me if I'm wrong there.

But can you also address -- can you address the timing as we adjust our models today.

Do the initiatives become visible to the Street this year or are you looking beyond that?

Sure.

Yes, I think my comments -- prepared comments around that were a multiyear approach for us.

I think the way to think about it is, we spent a lot of time in 2017 really understanding what we have, cleaning up a lot of things, improving our visibility across all the organizations, making some organizational changes.

And we also front-end loaded some investments that we felt were needed for the long-term growth of the company.

But we're at a point now where we have a baseline that we can really look at and take more of a business model approach going forward and what we think are appropriate cost structures over time.

So this is a -- it's a multiyear project.

I think we have a pretty broad portfolio.

We've done some good early work in terms of setting the stage for where we think we should be heading as a company but it's a multiyear project.

As you think about '18, I think that the Q4 numbers from an operating expense, we're not providing any specific guidance or direction on the P&L but the Q4 is a decent proxy for kind of a run rate of OpEx.

We're not looking to grow our company -- our headcount more as a company.

We're going to start turning the corner gradually on operating expense.

And we'll keep you posted.

We'll keep you posted on a regular basis, but this is not -- this is a multiyear project for us.

I think the most important thing for us is we are building the company for long term, and we need to invest appropriately in innovation and go-to-market.

And I think that's what we are focused on.

If I could sneak in one really quick follow-up.

John, if you could just quantify how big a tailwind the euro is to your 2018 from where we sit today, and I'll step out.

Yes, we don't really make projections on foreign currency, right?

Things can move pretty quick, so no projections around that.

Our next question is from Wamsi Mohan from Bank of America Merrill Lynch.

It's actually Ruplu filling in for Wamsi today.

VJ, in the past, you've talked about product quality issues.

So just -- can you give us an update, maybe what percent of printers in the field still have issues with them?

So I think -- remember, I talked about our legacy products, especially MultiJet printing, where we had a lot of issues and our 300 platform.

We have tackled all the issues throughout 2017.

And I do believe that shows up into our Net Promoter Score, where we -- I talked about 20 point improvement in Net Promoter Score.

So customers now are really very, very happy that we are attending to them, we are solving their problems.

And moving forward, all the new products that we will be introducing in 2018, I'm taking personal accountability in making sure that we are going to have great quality and reliability because we are designing for quality reliability, designing for manufacturing, designing for assembly.

So I believe we have turned the corner, as I've talked about.

I believe that -- no, but we had to invest a lot because we had all these legacy issues.

I think we are seeing now turning the corner, and I'm very confident that we are going to continue to work on that and make sure that quality and reliability is a very important aspect of every solution that we built.

Okay.

That's helpful.

And maybe, John, can you just help us quantify, was there any impact from the accounting changes on revenue and earnings in fiscal 4Q?

Yes.

So first of all, as we noted in our preliminary results, we chose to do additional analysis around the revenue and costs related to product warranties.

The outcome of that was no impact to Q4 or full year financial results.

We did add a disclosure in the balance sheet around projected cost liability relative to original warranties on the balance sheet but there was 0 impact relative to the financial results for Q4 or full year.

And also, since we're on kind of changes and related topics, we want to make it clear that there was no -- absolutely no impact relative to 606 in '17.

That's a 2018 event.

And as we get into 2018, right now, we don't believe that 606 will have any material impact on the company in either costs or revenues.

Separately, as I do want to let folks know that as part of our ongoing disclosure enhancements and reviews and to be consistent with how we internally review the company's results, in 2018, we will reclassify revenue costs related to initial product warranties from services to products.

We've traditionally shown that in services.

We're going to reclassify that from services to products.

And we're going to give -- we'll give disclosure each quarter that will enable all of you to do apples-to-apples comparisons on a year-over-year basis for those changes.

And we will also give disclosures for any impact related to 606.

We think those impacts will be minimal, not material to the company.

And again, no impact in 2017.

And the work we've done over the last weekend, no impact on financial results in 2017 at all.

Okay.

And if I can just ask one quick clarification.

There have been a lot of questions on go-to-market.

So I take it like -- when you say that OpEx will remain challenged, is it because of go-to-market?

Or what else is contributing towards your OpEx spend here from -- sorry, go ahead.

Yes, there are 3 aspects of it.

First is IT because we want to make sure that we bring the processes to the right place or the business processes.

We need to automate them.

And so we had a major upgrade for our Oracle IT system.

And that is also in our OpEx that what we're seeing.

And the other 2 places are innovation in our R&D budget because we want to make sure we build a platform.

And the third one is the go-to-market.

So I just want to be clear that there are 3 aspects of it.

John, do you want to add anything?

Yes.

I think the earlier question around the longer-term outlook around OpEx, we -- as VJ noted and I noted, we front-end loaded a fair amount of cost over the last 6 to 9 months in support of things where we really believe we need to invest, like go-to-market, like IT.

Quality.

Quality in our services P&L.

So the work -- the advance work for all the launches coming over the next 6 months.

And so our run rate coming out of Q4 is something that's going to continue for a bit but we'll be able to turn the corner on that and start driving more cost out now based on a lot better visibility and having the organization and the structure and the operational cadence where we want it.

So we have good -- we have very good views on where we ought to get, but we don't want to set an expectation that, that's an overnight kind of event.

That's going to take us some time.

Our next question is from Brian Drab from William Blair.

One -- first, just a quick clarification.

Did you reclassify some revenue in the healthcare segment because the 2016 10-K shows $148 million in healthcare revenue but the 2017 10-K says that in 2016 you did $159 million?

Yes.

So first of all, we haven't changed the way we classify healthcare revenue, but unfortunately, there was an error last year, and we understated health care revenue for the fourth quarter in 2016.

So in the 10-K, we provided the correct information for the comparison to 2017.

So if you look at -- when we talk about healthcare growth of 13% for the fourth quarter, 18% for the full year, those are based on the corrected numbers.

So we had an error but we didn't change anything in terms of how we aggregate and classify healthcare revenue.

Okay.

All right.

That makes sense.

And then, John, you said, I think pretty clearly, that the fourth quarter OpEx level should be the guidance, so to speak, for...

No guidance.

No guidance.

I used the word guidance -- let me edit the word guidance but that's the -- whatever you want to call it, guide post, but...

I would say I think it's a good tag for kind of a run rate-ish number.

That can vary quarter-to-quarter but it's not our intent to continue to ramp from an OpEx point of view.

Let's put it that way.

Okay.

And how about gross -- the last question is just on gross margin.

It's been around 47% adjusted in the third quarter, 48% this quarter.

What should we expect in '18?

I think the fourth quarter is a reasonable proxy, plus or minus, where margins will trend throughout the year.

Our next question is from Patrick Newton from Stifel.

This is James on for Patrick.

John, just a clarification on the OpEx commentary that you've given about driving it down over the next couple of years.

Is that on a percentage of revenue basis or an absolute basis?

And how should we expect that to fluctuate if you see a more meaningful return to growth here up into the high single digits or even double digits?

Yes, I think, certainly, on a model basis, you should expect improvement and we'll -- on an absolute basis, it'll -- that will be driven on where the P&L goes in general, right?

So I think that's all we can really say right now.

Okay.

And then just a follow-up on the IT and ERP investments that you made.

How should we think about those costs in terms of being onetime cost relative to subscription models?

Yes.

We'll continue to invest in IT in 2018.

And the other part of it is that we've also rebuilt on the IT organization in general.

So the biggest change for us, I think, coming out of the IT transformation work will be on the efficiency opportunities we see in the organization from having much better systems and processes going forward.

And that will be a contributor, reducing cost across the whole company over time.

Yes, I think the investment in IT is important, right?

It's not a onetime initiative, but right now, we wanted to upgrade the IT system but I do believe our on-demand manufacturing, our services, they need the right kind of an IT system so that we can really go after the business model that I'm talking about on annuity-based, where materials, services and software will be important for us.

Our next question is from Sherri Scribner from Deutsche Bank.

I know you guys introduced some new products last year in 2017, and you clearly have a strong pipeline of products in 2018.

I was trying to get a sense of how we should think about new products as a percentage of revenue in '17.

And what is your goal for new products as a percentage of revenue in 2018?

I don't think we are going to give any numbers there.

I'm just very excited about the new products and the product launches because I do believe shifting to production is something that we believe is the way we're going to continue to grow this business.

Okay.

And then thinking about production and some of your products which are targeted at final parts production.

Can you give us a sense of how much of your mix now is for machines that are going towards final parts?

And then what is your long-term goal for machines?

We don't give out that but just to give an example.

So aligners.

We produce 300,000 aligners a day for a particular -- the company's doing that using our technology, Align.

And I think that's just fair that if you have a production kind of a use case, that's very vital for overall our growth.

And I think my view is we need to find more and more use cases like this, which will give us significant opportunity for growth both in hardware and in materials.

Our next question is from Shannon Cross from Cross Research.

So my question, I have a couple.

One, from a consumables perspective, can you talk a little bit about where you're seeing the most growth in consumables on a vertical -- from a vertical standpoint and maybe also from a geographic standpoint?

Well, I think materials growth depends on the use cases.

I think I gave you one example of dental and the aligners because that's a very clear vertical where I believe there's a tremendous opportunity for the growth.

The second vertical that I believe, long term, will be very important for us is not only in dental but also healthcare and aerospace.

Because we think that those are the 2 verticals, whether your complex and custom parts are going to be done using additive manufacturing.

And when you are into the production kind of an arena, that's where the growth is going to come from because material usage is directly related to the way I want to set up the annuity business model.

And I guess, when you're talking to end customers, I'm curious, I understand you -- the goal is to move from prototyping to mass manufacturing or some level of manufacturing.

Can you maybe characterize how the conversations have changed in the last year or 2 from when you maybe came to last year to now in terms of where your customers are at in their thought process?

Yes.

So I think the customer needs are very clear.

There are 4 customer needs when you talk about production.

The first and very important is the part, precision, quality, repeatability and durability because at the end of the day, it's the part which will determine whether it's going to be end user or not.

The second thing that they ask is the productivity.

Can I produce that part, which could be end-user part, so that I will be able to run, let's say, between 100,000 to 1 million or maybe even more per year, the volume?

The third thing that they always ask is total cost of operations because they want -- once you're in a production arena, cost becomes -- total cost of operation, including the footprint that you want to have, the cost of the materials, the maintenance costs and the uptime, those things become very, very important.

And I think that's -- so if you look at the dental model that we just introduced in Chicago with the NextDent 5100, it's 4x faster than anything competitive in technology.

So now you have something very, very clearly productivity point of view.

That's the precision of -- so that because, in dental, you got to have custom parts.

It has to have accuracy and precision.

And it will last inside your mouth for multiple years.

So having that NextDent acquisition that we did with the right materials and the Figure 4 technology, we are able to meet the customer needs for the production requirement.

And that's just an example that I'm giving.

So it is 4x faster and 90% more -- from the cost-effectiveness than any other solution that you have.

We had 3 customers, actually, quoting when we launched that product.

It's all about having the right customers and then they actually confirm that, that's what we can achieve, is the way things are going to shift to production use case by use case.

This concludes the question-and-answer session.

I'd like to turn the floor back over to Ms. Witten for any closing comments.

Thank you for joining us today and for your continued support of 3D Systems.

A replay of this webcast will be made available after the call on the Investor Relations section of our website, www.3dsystems.com/investor.

Thank you.

This concludes today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.