3D Systems Corp (DDD) 2019 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 of 2019.

My name is Jeremy 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 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 Rebecca Totten, Assistant General Counsel.

The webcast portion of this call contains a slide presentation 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 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, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to comparable GAAP measures.

Finally, unless otherwise stated, all comparisons of this call will be against our results for the comparable period of 2018.

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

VJ?

Thanks, Stacey.

Good afternoon, everyone.

GAAP Revenue in the second quarter was $157.3 million, and Non-GAAP revenue was $156.4 million and printer unit sales increased 46.4% from the prior year.

Expected revenue headwinds continued this quarter based on the ordering patterns of a large enterprise customer and the pause we have taken on factory metal systems as we complete technical enhancements to ensure the quality and reliability levels meet our expectations for high volume production environments.

Additionally, we saw weaker macroeconomic conditions, particularly in Europe and the automotive sector, impacting both printer shipments and our on-demand services.

Overall, our new products continue to be well received and we are on track to begin shipping exciting new production materials during the second half of this year which we believe will significantly expand our growth opportunities in plastic printers going forward.

Although we did not ship DMP factory metal systems during the quarter, we are making good progress on the technical enhancements and we continue to see solid demand and positive customer feedback for our DMP Flex 350 systems.

Gross profit margin improved sequentially for the second quarter as a result of lower cost of sales and revenue mix.

Operating expenses declined as a result of our cost reduction plans beginning to take hold as discussed over the past couple of quarters.

I am pleased with our progress here and we will continue to be laser-focused on cost reduction opportunities in the second half to offset short-term revenue headwinds while at the same time moving to an appropriate cost structure for the long term.

For the second quarter of 2019, we reported non-GAAP earnings of $0.00 per share and GAAP loss of $0.21 per share.

Now let me turn it over to John to discuss more details on the second quarter of 2019.

John?

Thanks, VJ.

Good afternoon, everyone.

For the second quarter, we reported GAAP revenue of $157.3 million, a decrease of 10.9% compared to the second quarter of 2018.

GAAP gross profit margin was 46.6% compared to 48.8% in the second quarter of 2018.

GAAP operating expenses decreased 1.5% to $92.5 million.

We reported a GAAP loss of $0.21 per share in the second quarter of 2019 compared to a loss of $0.08 per share in 2018.

We reported non-GAAP earnings of $0.00 per share in the second quarter of 2019 compared to $0.06 per share in the second quarter of 2018.

During the second quarter, printer unit sales increased 46.4% driven primarily by sales of our Figure 4 platform.

Printer revenue decreased 27.4% to $30 million driven by year-over-year timing of a large enterprise customer's orders, our decision not to ship DMP factory solutions during the quarter, and the softer macroeconomic industrial environment.

Printer unit sales, revenue mix and overall average selling price will likely continue to fluctuate, as we ramp sales of new products at a wide range of prices and as macro uncertainty and current slowdown in large capital purchases continues.

Materials revenue decreased 8.5% to $41.2 million in the second quarter.

As we discussed last quarter, we have been experiencing a decline in legacy materials at a faster rate than materials growth related to core and new systems.

We continue to believe those trends begin to flip this year and that we expect to have year-over-year materials growth in the second half of 2019.

Healthcare Services and simulation revenue increased but the impact of the large customer's order timing offset those increases and total healthcare revenue decreased 8.1% to $56.4 million.

Excluding the large enterprise customer's orders from each year, healthcare revenue increased 11.4%.

We continue to be pleased with the overall demand trends for healthcare, including our NextDent 5100 3D printer.

On-demand manufacturing revenue decreased 12.4% to $24 million in the quarter.

As we discussed last quarter, we expected headwinds through the second quarter related to the business adjustments connected to export compliance and outsourcing changes.

We also experienced additional weakness from automotive and European customers in the second quarter.

Software revenue including haptics and scanners decreased 0.5% to $25.1 million in the second quarter primarily as a result of lower Symmetron product revenue driven by weakness in automotive.

While quarterly performance may fluctuate, we continue to expect growth from software long term and are taking actions to improve software growth rates and enhance our software portfolio.

Despite the revenue headwinds we are currently experiencing, we continue to expect long-term growth in printers, materials, healthcare and software.

We reported GAAP gross profit margin of 46.6% in the second quarter of 2019, a 220-basis point decrease from the prior year.

Non-GAAP gross profit margin in the second quarter of 2019 was 47.4%, a 150-basis point decrease from the prior year, but a 320-basis point improvement sequentially as a result of revenue mix and improved cost absorption.

We continue to drive supply chain optimization, manufacturing efficiencies and process improvements, but with inventory reduction actions and lower production plans at our manufacturing facilities, we continue to expect gross profit margins to be in the mid-40s range throughout the balance of this year.

GAAP operating expenses for the quarter were $92.5 million, a decrease of 1.5% compared to the second quarter of 2018, including a 0.7% increase in SG&A expenses and an 8.4% decrease in R&D expenses.

Non-GAAP operating expenses in the second quarter were $71.7 million, a 9.3% decrease from the second quarter of the prior year and a 1.7% decrease sequentially.

We are beginning to see the results of the actions we are taking to accelerate cost reductions and lower overall cost structure.

Compared to the 2018 quarter, non-GAAP SG&A expenses decreased 9.3% to $51.2 million.

Non-GAAP R&D expenses decreased 9.2% to $20.5 million.

While there is continued uncertainty in the macro environment, we are focused on what we can control, reducing our cost structure by continuing to drive efficiencies, lower headcount, and reduced cost of sales and operating expenses will prioritizing investments to drive profitable growth.

With these actions going forward, we expect to keep Non-GAAP operating expenses relatively flat.

We generated $18.7 million of cash in operations during the second quarter.

We ended the quarter with $150.4 million of unrestricted cash on hand.

We improved working capital performance during the second quarter including improved DPO and DSO while at the same time reducing aggregate inventory levels.

We also reduced cash capital spending during the second quarter to $5.6 million and expect to keep this lower rate of CapEx throughout the second half of 2019.

While cash use and generation will continue to fluctuate from period to period, we are very pleased with the cash results for the second quarter.

We will continue reducing operating spend levels, improving working capital performance, and tightly managing capital expenditures, driving for organic free cash flow going forward.

With that, I'll turn the call back to VJ.

VJ?

Thanks, John.

We remain confident in the long-term market opportunities we see for the company and are pleased with the early progress we are making with our cost structure.

We remain very focused on the bottom-line performance of the company given short-term revenue headwinds, but we are also optimistic for future growth.

Our expanded hardware portfolio has been well received and we are in the process of launching a number of new and very innovative materials in support of production solutions.

While at the same time, focusing even more on our software capabilities to drive true workflow solutions.

We are on track to take out an additional $10 million to $15 million of operating expense in 2019 on top of our original plans for this year, as discussed in our last earnings call.

We also recently concluded the sale of the entertainment business.

The leaders of entertainment division have left 3D Systems to continue to run the business as an independent company and we wish them all the best and look forward to partnering with them in the future.

In closing, we remain confident in our broad portfolio of adaptive capabilities, workflow solutions and overall market opportunity.

And we remain keenly focused on executing on our strategy, reducing costs, and driving long-term profitable growth.

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

Stacey?

Thanks, VJ.

We'll 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 the slide.

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

And if you're calling outside the U.S., the number is 1-201-689-8345.

(Operator Instructions) Our first question comes from the line of Ananda Baruah from Loop Capital Markets.

I guess both of mine will be demand related.

Could you guys talk to how you've seen the demand environment shift over the last 90 days?

So what's incremental, that's the first part.

I'll ask the second part at the same time.

And despite sort of saying weaker macro, you still put up a seasonal type quarter and are you expecting similar typical seasonal patterns in the September and Decembers quarters?

Those are my 2 questions.

Yes, I think firstly answering the last question, yes, we are expecting the seasonal, the third and fourth quarter.

As far as the macro, what we are seeing, especially in Europe, we are seeing weakness in automotive sector and even automotive sector in China and India also, we are seeing a weakness.

And that impacts both our printers and on-demand printing, the ODM business.

We really feel that these are certainties.

We need to really focus on our cost structure and the cash generation.

Our next question comes from the line of Jim Ricchiuti from Needham & Company.

We're hearing quite a bit of commentary around Europe from other companies, but if I look at your geographic regions, it looks like the U.S. was down more and Asia posted the biggest decline.

So I wonder if you can talk a little bit about what's contributing to the weakness in those 2 regions.

Thanks.

I think the first thing that we had already mentioned in last quarter call, one of the biggest headwinds we have is this big enterprise customer.

That customer bought equipment to place in Asia and in Americas and not in Europe.

So now you have that headwind which will really drive the Americas and Asian revenue decline in hardware.

In Europe, because our healthcare is doing well, especially our dental printer and the overall healthcare business like the medical simulator which is based in Europe, that's growing.

And when you have that growth offset by weakness in Europe with ODM and our printer hardware, is the reason you are seeing that kind of mix regionally for the company.

I'm not sure you can answer this, you did it in your discussion around healthcare specifically, but if you look at the U.S. and Asia Pacific regions and parse out the revenue from this large customer, what are we looking at in terms of the business trends?

Well so the business trend in Asia is weak.

Because as I said earlier, China, India and the overall automotive sector in China, and the threat of tariffs also is really impacting our Asian business.

In Americas, I think because the growth generally comes from our software and the healthcare in Europe, that's what is offsetting.

So if you just take a step back and look at our printers and materials business without the big enterprise account, Americas is better than Europe and Asia.

Our next question comes from the line of Wamsi Mohan from BofA Merrill Lynch.

If we look at the materials trajectory comments, right, I mean down 8% in revenues and volumes were down over 11%.

What is accounting for that sharp drop-off?

And I know you made some comments about that turning around in the back half, so can we also get a look in this quarter of how much the drive of these legacy products was and what the underlying trajectory is, excluding that?

Yes, I think we are feeling very comfortable that it will flip in second half of 2019 because when we look at our installed base of legacy and the new printers, and where we see the materials coming from those printers, because that's very important to really understand the installed base and really understand where the materials revenue is coming from.

Starting third quarter and then really getting into 2020, we think that it will really be a very different kind of a profile of our materials mix which will come more from our core and new products versus legacy.

And that gives us the confidence that it will flip starting in second half and continuing in 2020.

VJ, can you just clarify that currently in this current quarter that you just reported, what's the rough size of maybe the materials revenue that's coming from legacy versus…

We are not breaking that down.

I understand, Wamsi, but I really believe that the way we look at our current materials mix, we feel very comfortable that we are going to show the growth in second half.

Last quarter, Wamsi, we kind of talked about that crossover, right?

We are seeing growth in our core and new products materials.

It's just a question of the crossover.

So the confidence comes from our ability to see both parts of the equation.

Okay.

Then just on OpEx if I could also ask, you guys obviously did a great job here in the quarter in sort of managing that OpEx in this tough revenue and macro environment.

I heard that you were going to keep OpEx relatively flat from these current levels.

Is that the right way to think about it into the back half?

Yes, that's right, Wamsi.

We said relatively flat.

I mean -- we've got 2 things going on.

From an operating expense point of view, we're driving some actions, continue to work hard on all the global functions where we see the opportunity.

We're reducing headcount and perhaps more important longer-term, we're driving more simplicity from a structural point of view.

In the R&D side of the world, and I think we talked about this last quarter, we really frontend loaded and compressed a lot of development efforts for all the products that we put out over the last 12 to 18 months.

So there's a natural fall off from an R&D point of view and our focus really this year has been on materials development.

We mentioned that that because we're making good progress, as well as in the software space.

So R&D has kind of fallen off naturally, but we're also looking at ways to be more efficient there.

So the flattish is, typically we would see an uptick in the second half OpEx with our seasonal revenue patterns, but we believe the actions that we're doing, continue to do throughout the second half and beyond, will enable us to stay relatively flat.

As we talked about in the last quarter call, we are simplifying the organization with the 2 business models.

This is very, very important for the company.

When you simplify, you are able to take costs out to help the company, especially in SG&A.

So the approach that we are taking is really developing those platforms and now focusing on the newly stream-based materials and software R&D.

And then simplifying the company so that we can take the parts out of SG&A.

And that is the real result that we got 9% reduction year-over-year and we just need to continue to do that.

Our next question comes from the line of Troy Jensen from Piper Jaffray.

Can we talk a little bit about the new materials?

I thought that was pretty interesting.

Is there anymore you can say about it?

And I just have one follow-up on that.

The new materials that we are developing, our focus is on production.

We absolutely believe that with our Figure 4 platform, when you have the right materials and the right platform and the right kind of software, we are seeing incredible pickup in the market, like dental products.

So we believe now for our standalone and our modular product, we are going to introduce new products and materials, like a [tough black] material which will have capability with the UV stability.

And we could use for the end user part, it will help biocompatible materials that we are introducing, which I absolutely believe with our healthcare focus will be very important for our products.

We are also introducing high temperature materials so that we will be able to go in the automotive market for under the hood applications.

And we absolutely believe we are going to have world leading production materials for these kind of use cases.

So this is what I absolutely believe was the potential for our Figure 4 platform.

We started with our dental materials and now introducing these new production materials, really sets up very well in 2020.

Perfect.

Then a quick one for John.

Just on the gross margins, that they are up a lot here despite materials declining as a percentage of revenue.

So can you go through just a little bit in more detail what drove such strong gross margins?

Yes, you know, we had a very strong sequential improvement and clearly part of that is sequentially from Q1 to Q2 there were some mix elements that helped us out.

And materials stayed relatively stable from a gross margin point of view quarter to quarter, a little bit down.

But we also, we've also been very focused very hard over the last 6 to 9 months, Phil Schultz and his team, on driving down some of the fixed cost elements in the supply chain that were causing us to have under absorption issues.

Certainly, the ones we saw in Q1.

So it's 2 things.

It's mix, but it's also some good cost work by folks based on lower volumes that we're putting through.

It's a little bit of a balancing act right now because we're trying to being inventory down at the same time which can work against you because you're not utilizing those supply chain resources.

But I think the team did a really good job in Q2.

We put, for the second half, we set an expectation of mid-40s.

I don't want us to get ahead of ourselves relative to what we saw in Q2 and we'll see how Q3 plays out, but we made some good progress.

Again, when we look at our cost structure work, we look at both OpEx and cost of sales, and I think it's very important for us to continue to focus on cost of sales and cash when we think about it from the manufacturing point of view.

Our next question comes from the line of Greg Palm from Craig-Hallum.

I guess starting with the large enterprise customer, by our math it was down something like 30% or 35% year-over-year.

That's our estimate, I don't know if you're willing to bless that.

But what are your expectations there for the second half?

And I guess has your outlook of that customer space changed at all given some of their own recent commentary?

I think that customer is still printing half a million 3D printed parts a day.

So we think that that customer is still doing really well.

There is always going to be that seasonality when they will be buying the capacity for getting the new factory done.

And I think that's the headwind that we will have some of that in second half.

And the important part for us is they are printing with the more than half a million parts every day which will help us also in our materials growth.

Fair enough.

Then just going through the Q, it looked like you received a notice related to the export compliance item that you've been dealing with, but requiring immediate suspension of contracts with the Air Force.

How much revenue is it going to impact and how big of a customer are they?

I think going with a very important customer, we just learned that on July 19th, so we are still figuring out the overall impact.

And what we want to do is we want to make sure that we support the investigation.

But at the same time, the suspension does allow us to continue to perform current federal contracts and the products which are not very custom, we can still ship.

So we absolutely believe this is something that we need to address and we are working on it.

But can you comment on how big of a customer they've been maybe in the past, just as a reference point?

Right now we just don't know how much the impact will have.

Believe it's not going to be all of it.

So I think we are going to evaluate and we will just really need to evaluate overall the impact.

The one thing I can say, that are not a significant customer in terms of revenue.

Our next question comes from the line of Brian Drab from William Blair.

First, I just wanted to clarify, you mentioned I think in the first part of Q&A sequential revenue trajectories expected for the second half.

And looking at the model over the last 4 years, it's averaged down about 6% from second quarter to third quarter in terms of revenue.

Is that --

Yes, you're thinking about it right, Brian.

You're thinking about it right.

Okay.

Are you thinking though that given some of the headwinds you're seeing in Europe and that, can you comment on anything that you've seen in July that gives you confidence that it would only be down kind of that typical seasonal amount?

We just don't have enough information.

But we feel that single digit down, what you had mentioned, is reasonable for modeling purpose.

Okay.

I listened to the last question about the gross margin and the mix and I just still feel like I'm not hearing anything very tangible in terms of the mix.

What really is happening and why does the gross margin go to 45% for the balance of the year?

Yes, so I think the 2 things that we need to be looking at, one, we want to continue to drive our inventory down so from the factory utilization point of view, we need to make sure that we appropriately model that.

And the second thing is, the mix of materials and software with our hardware is going to be the second one.

I think that it's important for us to really take the inventory very seriously.

Because we feel that our cash preservation is going to be very important for us.

I think that's why we are putting that balancing approach.

That's consistent -- we had, we definitely saw a bit of a bump in Q2 and that was great.

But mid-40s is not inconsistent with certainly what we've done prior to Q2 and what we've been saying for the balance of the year.

So we think that's directionally a good way to think about it.

Our next question comes from the line of David Ryzhik from Susquehanna Financial Group.

Just wanted to get an update on the powder management system, the technical issue there.

You noted that you made a decision not to ship the factory solutions during the quarter, so that suggests that you had orders, but you consciously decided not to ship.

Is that because you're just not comfortable yet shipping the products?

Then I have a follow-up.

Yes.

So what we basically committed to really make sure that every product we ship is going to meet our quality and reliability requirements.

That's very important for the company.

We understand the root cause of the technical issue, we have started putting together the solution and the design, and we believe that we will have limited shipments in later of 2019 and we will scale this particular solution in 2020.

Okay, got it.

And as far as European automotive softness, that's certainly a key market I believe for you DMP product line.

What impact is it having specifically on the entirety of your metals portfolio?

I think the automotive market is very important for two places.

The first place will be our prototyping business.

Because we still have a big prototyping business where automotive is really using for getting the rapid prototyping.

The second place that we have also is the on-demand parts business in Europe which is also impacted from the automotive.

So both printer hardware and the on-demand printing business are impacted.

Great.

Then if I can just squeeze one last one in, the materials strategy, can you remind me, does that include anything around metals powder or is that entirely around your Figure 4 production?

Mainly, I would say it's mainly, 95% would be plastics materials.

Because our approach has been that we want to really invest in materials R&D where we can create proprietary materials with which we will have a very unique value proposition.

And that's why we are very excited about the production material that we will be introducing later this year.

For metals, it's a commodity and we don't really invest into that.

(Operator Instructions).

Our next question comes from the line of Ananda Baruah from Loop Capital Markets.

Appreciate the follow-up.

Just wanted quick clarification on the OpEx remark.

You guys are talking clearly about flattish OpEx dollars this point forward.

But VJ, you also mentioned that you are looking to take out an additional $10 million to $15 million through the year.

So could you just sort of put those 2 comments for us?

Yes, first of all, the $10 million to $15 million comment which we made last quarter too was based on the whole year across both cost of sales and operating expense versus our own original plans.

We're on track with that.

The actions that will continue, that have already started that will continue in the second half, will allow us to be flattish per our comment.

So it's not on top of that.

Certainly, if we see other opportunities, we're going to take them.

But I think right now, that's the best direction we can give you.

If you look at what we spent in OpEx in 2018, we are going to reduce that substantially in 2019.

And the other very important thing that we are doing is in our cost of sales reduction, the work that Phil and the supply chain team is doing, so that's the combination in terms of what we believe that we need to really need to continue to drive our cost reduction.

The other important thing that I want everybody to hear is that we are also focused on cash.

Because we absolutely believe that in these market uncertainties, we want to make sure that we are focused on cash generation.

Our next question comes from the line of Jim Ricchiuti from Needham & Company.

Your commentary about Figure 4, I wonder if you can go into a little bit more detail.

Can you talk about where you're getting the traction?

Which versions?

Production?

The Modular?

Sure.

So first of all, we are getting incredible traction with our dental printer because we have a very unique value proposition.

We are seeing that we gained significant market share with our NextDent 5100 dental printer.

And I do believe that we will continue to really gain share and grow that category.

The other good thing about that, it will also generate the materials, the revenue growth in our dental materials.

So that's the place we are doing really well.

With respect to modular, we just introduced modular, so we are still in the scaling of that particular category.

The standalone Figure 4 is really waiting for these production materials that I talked about.

Because in my view, the platform is very sound, it is very reliable, it prints very fast.

But just like the dental application, unless you have the materials, the software, and the hardware, you are not going to get the traction.

So I absolutely believe with these new production materials, we are going to get traction in both standalone and modular starting in fall but really in 2020 it will become as successful as our dental printer.

VJ, within your medical business that grew 11% excluding the large enterprise customer, it sounds like the biggest driver has been dental?

No, there are 3 drivers.

One is the simulators.

Our simulators are doing really well.

The value proposition there, especially in countries where you need to use simulator for training purposes for nurses and doctors.

Like France, China, they are becoming mandatory.

So it's really helping our simulator business.

The second thing is of course dental.

And the third thing is the advanced manufacturing.

When you think about companies, the medical devices companies, they want to get into printing medical devices because that's a very big opportunity.

And our advanced manufacturing team is getting lots and lots of growth because of medical device companies are seeing really the opportunity to learn about how to do 3D printed medical devices, and we hold their hands in growing and scaling that business.

So I think those are the 3 places I absolutely believe that the growth we have seen in the first 2 quarters of 2019 and that growth will continue for the remaining of 2019 and 2020.

Thank you.

There are no other questions at this time.

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

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.

Thank you.

This is the end of the conference.

Thank you for your participation.