3D Systems' CEO Hosts Recent Articles Discussion Conference (Transcript)

| About: 3D Systems (DDD)

3D Systems Corp. (NYSE:DDD)

Recent Articles Discussion Conference

November 19, 2012 8:30 am ET


Stacey Witten

Abraham N. Reichental - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Damon J. Gregoire - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


James Ricchiuti - Needham & Company, LLC, Research Division

Jay Richard Harris - Goldsmith & Harris Incorporated, Research Division

Troy D. Jensen - Piper Jaffray Companies, Research Division

Brian Drab - William Blair & Company L.L.C., Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Charles P. Carriere - Johnson Rice & Company, L.L.C., Research Division


Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss recent articles. My name is Towanda, 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 with 3D Systems. Please proceed.

Stacey Witten

Good morning, and welcome to 3D Systems conference call. I am Stacey Witten, and with me on the call are Abe Reichental, our CEO; Damon Gregoire, our CFO; and Andrew Johnson, our General Counsel.

The webcast portion of this call contains a slide presentation that we'll refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so via the web at investor.3dsystems.com. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in and use the number provided here on slide 3. The phone numbers are also provided in the press release that we issued.

For those who have access to streaming portion of the webcast, please be aware that there's a 5-second delay, and that you will not be able to post questions via the web.

Before we begin discussion, I'd like to mention a statement regarding forward-looking information that appears on Slide 4. This presentation contains forward-looking statements as defined by federal and state securities laws. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, development, future events, performance or products, underlying assumptions and other statements, which are other than statements of historical facts.

All such forward-looking statements, whether written or oral and whether made by us or on our behalf are expressly qualified by the cautionary statements described on this slide. Forward-looking statements are only predictions that relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond our control. As a result, we cannot guarantee future results or performance, and past performance is not necessarily indicative of future results.

These forward-looking statements are based on expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management. We undertake no obligation and do not intend to update these forward-looking statements.

Further, we encourage you to review the risks that we face and other information about us in our filings with the SEC, including our annual report on Form 10-K, which was filed on February 23, 2012.

At this time, I would like to introduce Abe Reichental, 3D Systems President and CEO.

Abraham N. Reichental

Good morning, everyone, and thanks for taking the time to listen to our call this morning. We would like to call to your attention that several recently published online articles contain materially false statements and erroneous conclusions that we believe defamed the company and its reputation and resulted in losses to our shareholders.

While in the ordinary course, we respect opposing views on our company's strategy and valuation and generally refrain from commenting on bearish analysis, we believe that these particular articles cross the line and are based on blatantly false statements and fabricated allegations that are designed to damage our reputation and impair our ability to operate for the benefit of our customers and shareholders.

So the first order of business this morning is to affirm the accuracy of our public filings and accounting methods in all respects. Let me be clear for the avoidance of any doubt, that we stand behind all our public disclosures and filings and believe that in all respects we're using the correct accounting methods.

Furthermore, in view of the damage caused by what, in our opinion, constitutes malicious and self-serving articles, we're pursuing all available legal remedies to hold those responsible parties accountable for their actions.

The second order of the day is to fact-check and refute materially false statements and any erroneous conclusions. To facilitate the fact-checking process, I will discuss our growth initiatives, review a summary of our acquisitions since the second half of 2009 and their link to our growth strategy, recap how we financed these acquisitions, update you on the performance of our acquisitions and share with you a summary of our R&D and technology investments and their effectiveness.

Then Damon Gregoire, our CFO, will discuss our revenue growth, and specifically, how we account for organic revenue and how we treat acquisition revenue with examples from the most recent quarter and the first 9 months of this year. Damon will also describe the factors that led to record unit growth; dispel the ridiculous notion of channel stuffing, review for you our cash sources, uses and generation capacity; update you on our insider's stock holdings; and finally, recap our disciplined approach to and compliance with public disclosures.

At the end of this presentation, we included for your review 11 supplementary slides that provide additional detail on the false allegation versus facts that we will discuss with you this morning, which we have already filed with the SEC and are also available for public viewing on our Investor Relations website. This same supplementary fact-checking slides are also provided to Seeking Alpha and we understand that at least one of the offending article has been removed from their website.

Finally, I want to point out that all the information presented to you this morning has been previously presented to our shareholders through public filings and is sourced from previous SEC disclosures and investor presentations that were filed as required and are available on our website under the Investor tab, as well as on the SEC's website.

With that, I'd like to turn to our growth initiatives, and I'd like to begin my presentation this morning with a recap of our strategic growth initiatives because these focused initiatives drive all of our actions.

As you know, we're focusing primarily on 5 growth initiatives: first, to accelerate 3D printer penetration including our Project in ZPrinter brands through a steady stream of new products and ongoing channel extension; second, to grow our healthcare solutions revenue, including our and Bespoke and Vidar brands through expanded applications, new materials and integrated personalized medical device solutions for orthotic and orthopedic devices; third, to extend our on-demand parts services, including our leading Quickparts brand worldwide through organic growth, acquisitions and investments in technology and capabilities; fourth, to build a significant consumer presence including our Cubify brand through simplicity, affordability and the gamification of the entire content-to-print experience; fifth, to integrate 3D authoring tools that include our Rapidform and Alibre brands that integrate computer-aided design, capture, inspection and manufacturing tools onto to a single platform to serve all our customers ideation to production needs.

We firmly believe that our 5 growth initiatives uniquely position us to address and monetize a broader portion of a rapidly changing and growing design-to-manufacture value chain with unmatched proprietary products and complementary services that are delivered through multiple direct dealer and online channels.

Case in point, our first 3 growth initiatives delivered significant results and are responsible for our record revenue growth and earnings expansion over the past several quarter. While we're benefiting from our first 3 growth initiatives, which we started much earlier than the other 2, we are investing in our fourth growth initiative, which, as we have said all along, isn't yet material to revenue, but which we believe could represent a significant growth opportunity over the next 3 to 5 years that could potentially dwarf our existing business.

Accordingly, for such continued investments, we're positioning ourselves as the first mover in the 3D consumer space.

Our fifth growth initiative that now encompasses a elaborate CAD cycled plug-ins and Rapidform reverse engineering modeling and inspection tools and services is material to revenue. And as we expanded further, we believe that our users will benefit from seamless scan-to-CAD, CAD-to-print and print-to-validation integration that we plan to deliver. And importantly, that it will spur increased 3D printing usage throughout the design and manufacture of product life cycle.

I would like to summarize for you how the 31 acquisitions that we made since the second half of 2009 fit into our growth initiatives. Nearly 1/2 of our acquisitions, 15 to be precise, were made in support of growing our ongoing demand parts and services; 6 were related to expanding our 3D printer penetration and technology platform; 2 were related to growing our healthcare solution; 5 were related to launching our consumer solutions; and 3 remain in connection with our integrated 3D authoring solutions.

It is important to note that included within the 31 acquisitions are 10 early-stage start-up technology companies that, in the aggregate, have not contributed materially to revenue to date. In fact, as we have stated previously, we acquired these start-ups for their proprietary R&D assets, know-how and technology building blocks. Furthermore, most of the acquired companies contributed significantly to our technology, R&D and intellectual property portfolio, and 6 acquisitions strengthened our printers portfolio and marketplace presence.

Notwithstanding these 10 start-up technology investments in which we absorbed R&D costs without any material revenue benefit, we have continued to increase our earnings.

Finally, it's worth noting that we acquire companies with the intent of integrating, leveraging and operating them for a seamless customer experience and the greater good of 3D Systems as a whole. We do not acquire business to freeze them in time and preserve their historical product or financial performance. We are quick and efficient with our integration process and decisive with our organizational product and channel decisions that very quickly render comparisons to an acquired self-standing entity's performance less relevant.

Since we commenced this acquisitive phase late in 2009, we paid a total of $300.3 million in cash and $16 million in shares of our common stock for these 31 companies. For the 16 acquisitions that included partial payment in shares of 3D Systems' common stocks, the shares issued by the company to the sellers were issued in a private transaction exempt from registration under the Securities Act of 1933, which simply means that the shares issued in these acquisitions were privately placed to the owners of the acquired companies and didn't require SEC registration. The disclosure regarding these private transactions in our public filings is standard disclosure and these privately placed shares are fully counted as part of our share count.

For the sake of complete clarity here, please note that the management of 3D Systems has never had any stake or ownership in any of the acquired companies and did not benefit in any way from these acquisition transactions.

From my earlier discussion, it should be clear that each and every acquisition we made is linked directly to one of our growth initiatives. But what is the strategic link?

Well, starting with our on-demand parts services, our approach from the get-go was to acquire marketplace presence, manufacturing and service expertise, transactional technology and channel access. But in complete contrast to classic consolidations and roll-ups, our strategy is differentiated by vertical integration to the machinery and materials for which we are a primary OEM. It is based on a proprietary integrated online sales and manufacturing platform that virtually plans and aggregates capacity and delivers back office and manufacturing efficiencies that have allowed us to extend gross profit margins in this business some 640 basis points since the third quarter of 2010 and we're not done yet. Our on-demand parts services deliver real power to customers that require quick-turn rapid response. Perhaps the most powerful driver of this growth initiative is the fact that our on-demand parts services give us unfiltered direct access to end users. This access allows us to shape our customers' brand experience and expectations, build sticky relationships and benefit from significant cross-selling and upselling opportunities because our customers that buy parts also buy printers and the customers who buy printers continue to rely on and purchase on-demand custom parts from us.

With regards to accelerating our 3D printer penetration, we continue to extend our portfolio through new printers and material introductions and the ongoing and deliberate shifting of our production and professional printers toward lower-priced printers that are capable of generating comparable materials revenue to our more expensive printers. Additionally, our successful new printer development and commercialization activities resulted in 11 new printer introductions over the past 2 years that, that when coupled with the pruning and discontinuation of certain printers, complicates comparisons to prior periods. Equally significant is the effective way in which we doubled our reseller channel to 330 resellers at the beginning of 2012 through the Z Corp acquisition, and now, after the Rapidform acquisition, emerged with a channel that is over 420 resellers strong with significant upside from additional cross-selling, upselling and dealer productivity gains over time.

As I already mentioned previously, our 3D authoring solutions' combine scan-data capture, mesh processing, auto surfacing and CAD modeling into a single platform.

And on the consumer front, we're thrilled with the overall progress that we're making with Cubify.com, our online consumer destination, and we're very pleased with the overall marketplace reception and the number of distinguished awards that our Cube won so far this year, including just being named simplest to use and most reliable to operate 3D printer in MAKE Magazine's extreme 3D printing guide.

Notwithstanding our excitement about the investment in this initiative, I would like to once again reiterate that we don't expect revenue from our consumer growth initiatives to be material to our revenue for the remainder of this year.

Healthcare solutions remain our fastest-growing category, and as we previously reported, for the first 9 months of this year, revenue increased 37% organically and 82% overall, including Viper revenue. For the first 9 months, healthcare solutions revenue made up 14% of our total revenue.

Musculoskeletal medicine accounts for approximately 30% of all acute orthopedic care including sports, industrial or job-related injury and chronic conditions. So it stands to reason that we are making additional investments that center around the delivery of personalized medical devices. In line with that, several weeks ago, we announced that we developed the next generation of custom 3D printed hand brace devices, representing a new paradigm and advancement in the state-of-the-art of musculoskeletal medicine. We plan to launch these breakthrough devices to provide a superior patient experience during the second half of 2013. And to accomplish this, we deployed acquired Bespoke Innovations' integrated scan-to-print proprietary technology and extensive know-how to replace traditional labor-intensive, cumbersome hand brace devices with custom-fitted 3D printing braces that are streamlined, adoptive and personalized to the lifestyle and the condition of the patient.

So to conclude on the topic of acquisitions. We acquired 31 companies from August '09 to November of this year related to our 5 growth initiatives. All were integrated effectively and timely. We invested some $316 million to purchase these businesses and assets, primarily in cash with a 5% stock portion.

During the corresponding Q3 2009 to Q3 2012 period, we generated $109 million of cash from operations, reflecting only a partial contribution from acquired businesses. And from September 2010 to September 2012, we extended our on-demand part gross profit margin some 1,640 basis points; our overall corporate gross profit margin, some 640 basis points; and our consolidated GAAP earnings per share by 118%, reflecting the power of our growth initiatives, the vitality of our diversified revenue stream, the leverage from synergies and effective management execution.

I'd like to turn now to a little bit of a summary on R&D investments and their effectiveness. Since 2009, we continued to increase our R&D's spending year-over-year to support our growth initiatives. In fact, for the first 9 months of this year, our R&D spending rose some $5.7 million or 58% over the same 2011 period in support of our portfolio expansion and diversification.

In addition to our R&D expenses, it is important to note that the total $316.3 million that we paid for all acquisitions is inclusive of $19.6 million that we paid for the 10 early stage start-ups that we acquired for their proprietary R&D assets, know-how and technology building blocks. Furthermore, the majority of our other acquisitions also contributed significantly to our technology, R&D and intellectual property. Through these investments and our R&D expenses, we believe that our total R&D spending is commensurate with our opportunities and well ahead of our peers.

And the result speak for themselves. As you can see from our continued new product introductions, we get attractive returns on our R&D spending. For the first 9 months of this year, our effective R&D investments resulted in the introduction of 11 new products, including 8 new printers spanning 4 print engines and we're thrilled that revenue from new products grew 76% to $89 million. As a reminder, we track new product revenue only through the first 3 years of a product's commercial life.

By comparison, revenue from acquisitions grew to $52.9 million, reflecting the fact that within our balanced growth strategy, new products and integrated materials continue to fuel our organic growth and underscore the effectiveness of our R&D investment.

Now, for a more detailed look at some of the accounting topics that were raised in these articles, let me turn over the discussion to Damon Gregoire, our CFO. Damon?

Damon J. Gregoire

Thanks, Abe, and good morning. Before I get into the methodology of how we calculate and report organic growth and acquisition revenue growth, I'd like to take a moment to recap our revenue growth for the third quarter and first 9 months of 2012.

As we reported in our third quarter of 2012 earnings call, we grew revenue by 57% overall for both the quarter and the year on 26% organic growth for the quarter and 24% organic growth for the first 9 months. Each category has contributed to our revenue growth. And excluding Cube units, printer grew 123% over the third quarter of 2011 and increased 128% for the first 9 months compared to the 2011 period as we continue to benefit from the timely introduction of new printers, their strategic realignment of our entire printers portfolio mix towards lower-priced printers, the addition of ZPrinters to our portfolio and the increased effectiveness and productivity of our expanded sales channels.

As a reminder, since the second half of 2009 when we commenced making acquisitions, we have been accounting for all acquisitions revenue in a transparent and fully disclosed manner consistent with standard practice. Specifically, we count newly acquired business revenue from the date of acquisition until its 12-month anniversary as acquired revenue. From its 12-month anniversary forward, we add the actual total first year revenue to our total base and count only the incremental revenue growth going forward on our total base as organic revenue.

In cases where new a product was released during the first 12-month period that was commercialized using our own R&D product development, that specific product revenue is counted as organic revenue.

And from the second half of 2009 to date, only 2 new products met this criteria and the revenue from these 2 products to date hasn't been material to our results. And once again, let me reiterate that we have not changed our organic growth methodology since we began making acquisitions in 2009.

So for illustration purposes, I've included an example on this slide that depicts how the calculation works. As you can see from this example, if the company had core revenue of $100 million in year 1, that constitutes the base. If in year 2, the company grew its core business by $20 million and acquired a business that contributed an additional $10 million of revenue in the first year, organic growth for year 2 will be calculated by dividing the core business growth of $20 million by the prior year base of $100 million, representing a 20% organic growth rate. And as you can see on the slide, the same methodology applies for any acquisition in corresponding periods.

So for the sake of complete clarity, let's look at our actual Q3 2012 organic growth calculation.

As you can see on Slide 16, in Q3 2010, we generated revenue of $41.5 million, which constitutes the base for comparison to 2011. In Q3 2011, we grew our core business by $4.8 million and business acquired within 12 months contributed an additional $11.2 million of revenue. So organic growth is calculated by dividing the core business growth of $4.8 million by the prior year base of $41.5 million, representing a 12% organic growth rate as we had disclosed in our 2011 filings with the SEC.

For 2012, our Q3 2011 revenue of $57.5 million is the base for the calculation. In Q3 2012, we grew the core business by $15.1 million and businesses acquired in the last 12 months contributed an additional $17.9 million of revenue for Q3 2012. Therefore, organic growth is calculated by dividing core business growth of $15.1 million by the prior year base of $57.5 million, representing a 26% organic growth rate as we had disclosed in our 2012 filings with the SEC.

So while we're at it, let's also look at our actual 9 months 2012 organic growth calculation. As you can see, the company generated revenue of $108.3 million for the first 9 months of 2010 and that constitutes the base for comparison to 2011. During the first 9 months of 2011, we grew our core business by $21.1 million and businesses acquired within 12 months contributed an additional $31.2 million of revenue. Therefore, organic growth is calculated by dividing the core business growth of $21.1 million by the prior year base of $108.3 million. This represents a 20% organic growth rate, precisely as we disclosed in our 2011 filing with the SEC.

And for the 9 months 2012, our 2011 revenue of $160 million is the base for the calculation. In 2012, we grew our core business by $38.6 million and businesses acquired in the last 12 months contributed an additional $52.9 million of revenue. Therefore, organic growth is calculated by dividing the core business growth of $38.6 million by the prior year base of $160.6 million, representing a 24% organic growth rate for the 9 months 2012, exactly as we disclosed in our 2012 filings with the SEC.

So in 2011, we began reporting our non-GAAP income and earnings in order to facilitate a better understanding of the impact that several significant strategic acquisitions had on our ongoing financial results. I think that it's prudent for us to remind everyone that we report non-GAAP adjusted results that exclude the impact of amortization of intangibles, noncash interest expense, nonrecurring acquisitions and severance expenses, including gain and loss on acquisitions, impact of litigation settlements, stock-based compensation, noncash loss on conversion of convertible debt and any releases of portion of the valuation allowance on a deferred tax asset. And please note that our total depreciation costs and our senior convertible note cash interest expense are appropriately included in our non-GAAP presentation. So for your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide and is included in our quarterly filings.

As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $18.2 million or $0.32 per share. That's for the third quarter of 2012. The excluded items aggregated to a $4.6 million tax effective adjustment to GAAP net income or $0.08 per share.

For the 9 months 2012, we generated non-GAAP adjusted net income of $45.3 million or $0.85 per share. The excluded items aggregated to a $17.3 million or $0.33 per share.

So there were several factors that contributed to our printer unit sales increase over the past couple of years that we believe underscore the effectiveness of our strategy. First, our focused demand generation from cross-selling our Quickparts service customers. Second, the deliberate way in which we are extending our portfolio through new product introductions and the continued shifting of our production and professional printers towards lower-priced printers that are capable of generating comparable materials revenue to our more expensive printers. Third, our ongoing successful new printer development and commercialization program that resulted in 11 new printer introductions over the past 2 years and some pruning of older printers. Fourth, the effective way in which we doubled our reseller channel to 330 resellers at the beginning of 2012 and now after the Rapidform acquisition emerged with a channel that is over 420 resellers strong with significant upside from additional cross-selling, upselling and dealer productivity gains over time.

The combined effect of these factors resulted in decisive units growth over the last year and consistent with our plan, printer mix is settling in the middle of our professional range, contributing to record third quarter printer revenue. And to reiterate that we have said in numerous occasions previously, we generally ship printers against actual end-user purchase orders and not into reseller stock. While we had a modest initial uptick in units during the first quarter from the combining of the Z Corp and 3DS channels from floor demos, that onetime event did not carry forward into subsequent quarters.

And reflecting on the record year-over-year units growth amidst flat days sales outstanding, it should be abundantly clear that the vast majority of our sales are through and not to our resellers.

Our growth, both organic and acquired, has enhanced our cash generation capacity. It's worth noting that since September 2009, when we commenced our acquisition activities, to September 2012, our cash on hand increased $160 million after excluding$317.9 million of proceeds from capital markets transactions and $264.2 million that we paid for acquisitions, driven by cash from operations over that period of $109.9 million.

I'd like to provide clarity on our current insider holdings. First, as evidenced by their holdings, our insiders believe that our company represents a solid long-term investment. For reference, as of the date of our 2012 proxy statement, insiders, which include 6 independent directors and 5 named executive officers, held 5 million shares of our common stock. As of the past Friday, November 16, insiders held 4.9 million shares and during the last 8 -- past 8 months, some 950,000 options were exercised by insiders. All of these options were due to expire by 2013. As of last Friday, there are 20,000 options remaining among all insiders from a legacy stock option plan that was terminated in 2004, and those options also expire in 2013.

Shares held by Abe Reichental, our CEO, actually increased from 758,232 shares at the time of our 2012 proxy statement to 1,189,379 shares as of today, after exercising 800,000 options. The difference was primarily used to settle the option exercise costs and tax. So Wally Loewenbaum, our Chairman of the Board, continues to directly and indirectly hold 2,280,003 shares or 4% of total outstanding shares.

So we prepare our financial statements and disclosures in accordance with U.S. GAAP and the regulations of the SEC. Our financial statements and disclosures are reviewed quarterly and audited annually by BDO, the seventh largest global accounting firm and reviewed by our Audit Committee prior to filing with the SEC. We file Form 8-Ks with historical financial statements and pro forma information for all significant acquisitions as required by the SEC. Form 8-Ks have been filed for Provel, Quickparts, Z Corp and Vidar. We evaluate the intangibles assets, fair values and estimated useful life for each acquisition individually as prescribed by acquisition accounting rules of U.S. GAAP.

Our financial statement disclosures comply with U.S. GAAP and SEC regulation, and our disclosures are reviewed and updated each quarter with new disclosures implemented when effective. Our 2011 Form 10-K and our 2009 Form 10-K were reviewed by the SEC.

So before we open the line for your questions, I'd like to review with you a few items from the supplemental slides. As Abe noted earlier, the supplemental slides provide a fact check against false accusations made in recent article published on Seeking Alpha. I'll review a few specific items with you, but encourage you to review the entire set of facts submitted to Seeking Alpha and included on the supplemental slides.

The first false allegation for discussion appears in the 10th paragraph of the article where it stated, "We need to back out the acquisition numbers to ferret out DDD's actual organic growth rates. Sadly, this cannot be done. DDD rarely discloses its acquisitions revenue or anything else." So the fact is that we disclose our organic growth rate on Page 20 and 25 of our 2012 third quarter Form 10-Q and each Form 10-Q from the second quarter of 2011 forward.

We also stated on Pages 20 and 25 as in our 2012 third quarter Form 10-Q what our growth rate would have been if we had prior-year pre-acquisition revenue. Since the first -- fourth quarter of 2010, we also disclosed organic growth rates in our quarterly earnings press release and each quarter's webcast slides. In the script of each recent webcast, we have also disclosed new product revenue and acquired revenue in dollars, even though you can calculate acquired revenue from our organic growth rate. Our most recent webcast discloses this information in the commentary with Slide 9, noting acquired revenue of $52.9 million for 9 months 2012.

The second false allegation for discussion appears in the 22nd and 23rd paragraph of the article. These paragraphs state, "13 of the 24 or 54% were cash and stock deals. All of the disclosures of the 13 cash and stock deals contain the bold type sentence, 'What is the nature of our private transactions?' I found these disclosures in the 2011 10-K, Page 43." It goes on to say, "Net cash provided by financing activities increased to $210 million in 2011 from $1 million in 2010. Net cash provided by financing activities in 2009 was $0.3 million. The increase in 2011 primarily results from the previous discussed net proceeds of the common stock issuance and net proceeds of the convertible notes issuance and from $2.8 million of stock-based compensation proceeds."

"The cash provided by financing activities in 2010 resulted primarily from higher stock option exercise activity. This looks like members of the executive team are using their personal stock holdings earned via employee ownership schemes to buy into the acquisitions to the tune of $7.7 million. This represents 97% of the stock paid in the 18 stock and cash transactions in 2010 and '11. This reeks of self-dealing. The stock portion of the total investment in 2011, for example, was only 3.3%. Clearly, the deals could have been consummated without the stock component. It appears that the executives are enriching themselves while enjoying the added benefit of avoiding SEC disclosures."

So the true fact is that we disclosed that 17 of the 29 transactions included shares of common stock issued by 3D Systems Corporation as part of the purchase consideration, and the author has the shares transaction and the total transaction count incorrect. Furthermore, stock-based compensation and option proceeds are separate from acquisitions. Stock issued for any acquisition is clearly broken out in the equity statement of every Form 10-Q and Form 10-K, as are grant and option proceeds. The proceeds from exercise of stock options in the cash flow statements are normal exercises of stock options by executives, all of which are disclosed properly to the SEC.

The stock-based compensation proceeds are related to the grants of shares of common stock to employees and directors, which is discussed further in the stock-based compensation footnote of each of our Form 10-Qs and Form 10-Ks. None of these transactions involved related parties or self-dealing in any way as alleged by the article's author. We strictly follow disclosure rules in this regard. In fact, in our second quarter Form 10-Q with the acquisition of Fresh Fiber, we noted that we were moving from a minority shareholder to a majority owner through the acquisition of all the outstanding shares. You see footnote 2 of our 2012 second quarter Form 10-Q.

So we encourage you to carefully read all 11 supplemental slides, so that you can come to your own conclusions on these false allegations. As Abe mentioned during his opening remarks, we have already filed these supplemental slides with the SEC and this entire presentation is also available for public viewing on our Investor Relations website.

So now I'd like to turn the call back over to Stacey Witten. Stacey?

Stacey Witten

We will now open the call to questions. [Operator Instructions] The telephone numbers are provided, again, on this slide. If you're calling inside the U.S., the number is 1 (866) 543-6407. And if you're calling outside the U.S., the number is 1 (617) 213-8898. The conference ID is 18116839.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Mr. Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I wondered if you can comment on the Z Corp/Vidar revenues, 9 months versus 9 months a year ago. How much of that decline that we see in those revenues is due to the elimination of product from both businesses as far as you may be moved away from OEM in product?

Abraham N. Reichental

Good morning, Jim, and thanks for your question. And to this point, let me first say that when we acquire businesses, we acquire them to integrate them, operate them and leverage them and leverage the channels and remix and re-purpose the products. In line with that, in the case of Z Corp, we immediately moved to discontinue the ZBuilder, which was an OEM's product and replaced it with the 3DS products. And then in the second quarter of operating the company, we also discontinued the ZScanner, and these 2 discontinuations basically account for any historical comparability decline. Net-net, we actually benefited significantly from the remainder portfolio of ZPrinters, which actually grew and from being able to sell more projects through the combined channel which accounts for the overall significant increase in units. So we're very pleased with our performance, and we're very pleased with the results and it's working exactly as we intended it to work.


Your next question comes from the line of Jay Harris with Goldsmith & Harris.

Jay Richard Harris - Goldsmith & Harris Incorporated, Research Division

I wonder if I could go beyond the scope of this presentation and ask you to comment a little on the organic growth rate of the company and how it has responded to the decline in real domestic product growth rate in Western Europe and changes ongoing in other geographic areas.

Abraham N. Reichental

Thanks, Jay. We have said now for over a year that we believe that we are benefiting from increased R&D spending in all the verticals that we serve, which tend to basically negate any regional decline in GDP. And so when we look at organic growth rates in the range of 24% to 26% between our quarterly and year-to-date results, those primarily reflect a few things. One is that we are addressing key lucrative verticals that are continuing to spend heavily on R&D; two, that our expanded portfolio addresses a broader share of the value chain within the design to manufacturing space; and three, that our expanded channel is becoming increasingly more productive and more effective. And the combination of these factors, we expect, should continue to bode well for our continued healthy organic growth.


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

Troy D. Jensen - Piper Jaffray Companies, Research Division

I guess, I got 2 questions. Topics that kind of discussed on some of those parts. One was on, can you just talk about if the auditor that you guys are using, I understand it's the #7 auditor in the world, but do they have extensive knowledge of kind of all the acquisitions you've done, or the guy you're working with there does?

Abraham N. Reichental

Troy, Damon will handle that.

Damon J. Gregoire

Absolutely. Like I said, I mean, BDO is the seventh largest international accounting firm. They're not regional. In fact, they're headquartered out of Belgium. So as we move through our processes of acquiring companies, they're highly involved on a regular basis, and they're doing their review and work through each quarter that we do them. So we said previously that we complete all of our accounting and integration work within the quarter that we acquire a company, and that is the same period of time that BDO is reviewing them for those periods, too. They do their in-depth analysis. We also do. It's interesting to note, we use an outside valuation company to help us assign values to intangibles, goodwill and the useful likes. So we go through that process through an independent outside agency for any material acquisition that we're doing. And I think out of the 31 we've done, we've used them 28 or 29 times. There's only been a couple of small ones that -- real small ones that we haven't. So in addition to BDO doing this real time, we also have the third-party helping us with it, too.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Got it. Okay. Then the other question, I guess, would be the composition of the board. Can you talk about who's all on the board and maybe how many of them are many close friends versus kind of independent third parties?

Abraham N. Reichental

Okay. So the composition of our board includes our Chairman, Wally Loewenbaum, who has been a very long-term investor and board member. It includes Kevin Moore from The Clark Estate, also a very capable and long-term serving director; Jim Kever, who, at one point in time, was the CEO of Envoy and a very capable director; Dan Van Riper, who, for more than 35 years, was a senior partner at KPMG; and Karen Welke, who was a Senior Executive at the 3M Corporation; Bill Curran, who was the CEO of Philips North America; and Chuck Hull, who is our cofounder; and myself. With the exception of Chuck Hull and myself, all of our other directors are completely independent, and several of our directors have been very long-term stockholders in the company, of significant holdings.


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

Brian Drab - William Blair & Company L.L.C., Research Division

One of these reports detailed a revision of your organic growth after one of the earnings calls and laid out what the organic growth rate was as was discussed on the call and then as it was revised after the call. Can you -- did that have -- was there a revision and can you -- if so, can you comment on why and what happened there?

Damon J. Gregoire

Well, that was one area that -- at part of the call Abe was talking about the organic growth from the paid parts business. And he said that the paid parts business grew by 40-some-odd percent and of which most of that was organic. And we said we look at -- we will look at that, and later in the call, I actually said that it was closer to 30%. As we've done it, we didn't have the exact number. But it was closer to 30%. That was never called out, but that was a little bit later in the call that happened. And that's I think ultimately it ends being 28% is what it was. So I mean, it wasn't a revision after the call. It was revision during the call.


Your next question is a follow-up from the line of Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I usually don't get this opportunity to talk to you guys during the quarter, but we're about 1.5 months through the quarter. And I wonder if you can comment on how the business is tracking just in light of the macro environment?

Abraham N. Reichental

Well, Jim, we continue to stand by our revised and raised guidance, and we continue to benefit from strong demand. And we believe that all of the underlying drivers of our business remain unchanged from the last time that we reported on them. So we remain optimistic.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. Damon, just for clarification. Can you define material revenues the way you guys view it with respect to these acquisitions?

Damon J. Gregoire

Material revenues can be defined -- we look at it a couple of different ways. One there is what the SEC calls significant purchase, which doesn't really relate to revenue. It relates to the size of the assets and the size of the acquisition. What we say from materials revenue, I mean, the SEC would define it as something on the lines of 10% that you'd have to breakout. We have that number being much, much smaller as you can see when we first started talking about revenues from the parts business that we've put on and everything. So for us, it'd be something much less than $10 million in a quarter.


Your next question comes from the line of Paul Coster with JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

Abe, this is going to be a 2-part question. You're a small company that's growing very rapidly, done a lot of acquisitions. I think you attracted a lot of attention and has done a great job of addressing some of these perceived issues, and I think this conference call is going to help very well in clearing the air. That said, maybe it's because you're doing so much at once. Is it -- how would you typify or characterize this stage of the company's development? And moving forward, do you expect the pace of acquisitions to moderate somewhat? And the second part of the question is, as you've done all of these acquisitions, inevitably, there must be some stresses inside the company, whether it's this sort of perceived issue of R&D spend per print engine or the channel conflict between your dealers and your part/printing business. Can you just -- and maybe also capital allocation more broadly when you've got so many things happening at once. Can you just talk about the phase the company is in, what you expect in the future and these internal challenges?

Abraham N. Reichental

Yes, thank you, Paul. Let me first say that we believe that we're doing both extremely well managing our organic growth in new product developments and complementing and augmenting with an effective acquisition strategy that in the whole is designed to position us much more broadly within what we see is a growing opportunity within the design to manufacturing value chain. And so we're moving quickly and decisively to position ourselves as a disruptive solution provider that has integrated capabilities that's run horizontally all the way from content-to-print and serve all of our customers ideation to production needs. With that, we are at the phase where we actually added a great deal of strength. And turned this ability to make effective acquisitions into a core competency of the company as evidenced not only by the effective way in which we target and close deals, but also the superb way in which we integrate, do the accounting and deliver the synergies and the continued improved results and earnings and gross profit margin expansions from these activities. We've added a great deal of bench strength. And in the process of completing 31 acquisitions and also doubling the channel, we added a great deal of experience to our fellow employees and capabilities and infrastructure. What to expect going forward? Expect that we would not only continue to more efficiently refine and leverage the investments that we have, but expect that we would fill the remaining gaps within our horizontal solution portfolio all the away from authoring to printing and manufacturing, and expect that we would fill the remaining gaps geographically where we believe that this tried and proven strategy could be leveraged by taking it to geographies where we are not fully present or adequately covered, and a few come to mind, China and Brazil, in particular. And finally, expect that we will continue to drive our growth both internally by making the right investments in R&D and technology and externally through acquisitions to really position ourselves to become a powerhouse all the way from 3D authoring solutions to printing materials and complementary on-demand parts, services and that we will continue to execute well. In terms of capital allocations, we do not expect the profile of the company to change materially. We're not a custom-intensive company. We haven't been in the past. And we -- although we have added many facilities and added substantially to our fleet of on-demand parts, printers worldwide, we expect our overall capital investments to remain in the range that we're running now as a percentage of revenue.


Your next question comes from the line of Charles Carriere with Johnson Rice.

Charles P. Carriere - Johnson Rice & Company, L.L.C., Research Division

Abe, I just had a couple of questions. Number one, the article -- one of the articles alludes to some, I guess, unhappy management individuals from some of the acquired companies. We'd just like for you to, if you don't mind, comment on sort of key people that from these acquisitions that have -- if you just say, are there any surprises in the folks that have left? Or any surprises in folks that have overstay -- have stayed beyond what they were required to by the terms of their -- the acquisition agreement? So it's the first question. The second one is, given the acquisitions that we've had over the last couple of years, would you expect the pace of intellectual property, patent filings et cetera, are we going to be able to see that -- for those of us that might sort of look at patent filings, et cetera, is that going to accelerate or broaden into new categories going forward as we -- if you could just comment on that, I'd appreciate it.

Abraham N. Reichental

Sure. Thanks, Charles. First, with regards to management retention from acquired companies. By definition, in many instances after we acquire a company, one of the reasons for selling us the company is the desire on the part of the proprietors or the owners, in particularly the smaller companies, to have some kind of an exit. This comes part and parcel to some of these deals. In cases of acquisitions where we acquire not owners and proprietor but more of a professional management team, we identify fairly quickly who we think we would like to retain. And we have open discussions about that from the get-go and more often than not, our initial assessment is correct. Sometimes we have pleasant and unpleasant surprises, which comes from cultural differences and comes from the fact that we operate at a very different pace that some other company's operate at. All told, we have done, we believe, a superb job of hanging onto key talents that we identified and wanted to hold on to. And we also have been quick and decisive to make decisions to part company with some talents, most times on mutual basis, when we realize that it wasn't going to work because in those instances, there was never a good time to make a difficult decision. Finally, let me, at the risk of stating the obvious, say that part of identified synergies, particularly in the larger deals, come from the reductions and pruning of duplicate headcount primarily within senior management ranks. It's expected, it's customary and it's part and parcel of combining 2 into 1 and we expect that to continue to happen as well. With regards to your second question in terms of intellectual property, in the course of making these acquisitions, many of which contributed to our technology platforms well beyond just the 10 pure start-up technology companies, we nearly tripled our IP portfolio for the last 3 years. And so it goes without saying that we will expect to see additional filings in areas of interest that we historically did not file in.


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

Brian Drab - William Blair & Company L.L.C., Research Division

For some reason, I was kicked out of the call without being able to ask a follow-up question, which I think is necessary. And my questions here are not, just to be clear, are not meant to be accusatory, but I think they're appropriate and probably helpful to your shareholders and you just given the topic of this call. And one of the things that I'm hearing from investors more than anything else is about the growth rate, organic growth rates. And I think that we should spend just at least another minute discussing why in the second quarter people are talking about a revision of organic growth numbers because if you come to the call with a set of numbers and then they're revised later, that's a serious issue because people are wondering why you would need to revise that and what the issues are there. And specifically, one of these reports states that on the call, we talked about or you talked about 35% organic growth in printers and other products. And said that later on the call -- the author said that later in the call with the company, that you significantly revised that downward. And I think we need to address that. If you can, I think it would be helpful.

Damon J. Gregoire

No, I don't -- I mean, I don't recall ever having revised that number. The one that we talked about just earlier, which was around the materials number -- not the materials, I mean, excuse me, around the paid parts business organic growth number. And I mean, we stumbled on it a little bit at the beginning of the call, and we corrected ourselves during the call. Other than that, we didn't correct anything, and our organic growth rate in total is not changing at all either, which is one of the things that this call...

Abraham N. Reichental

Yes, I think, Brian, we need to be clear here. Anything that we disclose in our prepared remarks and in our presentations during any of our earnings release calls and investor presentations has not changed. In the Q&A section in that particular quarter, somebody asked the question and I provided the wrong answer. I was confused in my mind between gross profit margin and growth rate. So I provided the wrong number. We promptly corrected it since we realized it on the same call, and that is a human error that happened in real time in a freewheeling conversation and it was promptly corrected within the same conversation.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. No, that's more helpful. And then if I could just ask one last quick one. Have you said in the past that the price paid for your service bureau acquisitions, excluding Quickparts and Provel, is about 0.85x LTM sales? Is that something you said in the past?

Damon J. Gregoire

On average, we said that, yes.


Your next question comes from the line of Sandy Billary [ph] with Billary and Company [ph].

Unknown Analyst

Damon, I just wanted to thank you and sort of just very appreciative that you're defending us as shareholders. I mean, some of these things are pretty vicious and even claim that I was on your board, which is obviously -- it's actually untrue. And so easy to prove wrong. I'm surprised they would put that in print. But I just wanted to thank you, and just know that if you take care of earnings, the stock is going to take care of itself. So we've got a lot of confidence in you and your team.

Abraham N. Reichental

Thank you.


Thank you. That's all the time we have for questions. I would like to turn the call back over to Stacey Witten for closing remarks.

Stacey Witten

Thank you for joining us today. A replay of this presentation webcast will be made available after the call on the Investor Relations section of our website investor.3dsystems.com.


Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a wonderful day.

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