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3D Systems Corporation (NYSE:DDD)

Q4 2012 Earnings Conference Call

February 25, 2013 9:00 a.m. ET

Executives

Stacey Witten - Director, Investor Relations

Abraham Reichental - President and Chief Executive Officer

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

Analysts

James Ricchiuti - Needham & Company

Troy Jensen - Piper Jaffray

Paul Coster - JP Morgan Chase & Co.

Brian Drab - William Blair

Holden Lewis – BB&T Capital Markets

Operator

Good day and welcome to the 3D Systems Conference Call and audio webcast to discuss the results for the fourth quarter and full year 2012. My name is Alex and I will be your facilitator in the audio portion of today's interactive broadcast. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Stacey Witten of 3D Systems.

Stacey Witten

Good morning, and welcome to 3D Systems conference call. I'm 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 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 via the web at investor.3dsystems.com.

Participants who would like to ask questions at the end of the sessions, related to matters discussed in this conference call, should call in using the phone numbers provided here on Slide 3. The phone numbers are also provided in the press release that we issued this morning.

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

Before we begin the discussion, I would 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, developments, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. As such, all 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 the 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 as that performance is not necessarily indicative of future results. These forward-looking statements are based on current 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 this morning. At this time, I'd like to introduce Abe Reichental, 3D Systems President and CEO.

Abraham Reichental

Good morning everyone and thanks for taking the time to listen to our call this morning. Let me first say that we’re very pleased to report our best ever quarterly and annual results on accelerated printer sales. This morning Damon and I will recap our quarterly and annual highlights and share with you several key accomplishments. We will go over our financial results in more depth, update you on our progress and provide a fairly comprehensive outlook for the whole year of 2013.

Quarterly revenue grew 45% to a record $101.6 million on a 93% surge in printers’ and other products revenue and 18.8% organic growth. But importantly, stronger printer demand bolstered our quarter-end backlog up to $11.4 million at year-end, representing a 23% sequential increase, and included $3.2 million of current printer sales. We grew our gross profit some 60% and expanded our gross profit margin 460 basis points to 51.7%, contributing to non-GAAP net income improvement of 64% over 2011 quarter on continued P&L leverage.

For the full year of 2012, revenue grew 54% to a record $353.6 million, on a 90% boost in printers and other product revenue and 22.4% organic growth. Gross profit increased 66% and gross profit margin increased 3.9 percentage points over to 51.2%, despite adverse product mix on surging printer sales that overshadowed higher gross profit margin material contribution.

Successful new product, key acquisitions and expanded channel contributed favorably to our quarterly and annual results. We believe that our performance is in line with our plans and expectations and reflects the potency of our diversified portfolio, the productivity of our channel and the effectiveness of our strategic growth initiatives.

For the full-year, all of our revenue categories contributed to growth. 3-D printers and other product revenue nearly doubled to $126.8 million on stronger demand as a result of our effective portfolio and price point realignment, channel cross-selling and expansion and the continued successful convergence of our professional and production printer capabilities. As expected, print materials revenue rebounded during the fourth quarter and for the full year grew 46% to $103.2 million on stronger printer sales that drove a 76% increase in our integrated materials revenue.

Services revenue increased some $30.5 million or 33% over 2011 to $123.7 million and included $79.2 million of on-demand parts. Our fastest growing vertical, healthcare solutions including Vidar, delivered revenue growth of 77% for the year and contributed $49.3 million to our total revenue or 14% compared to $27.9 million and only 12% for our 2011 total revenue. Throughout 2012, consistent with our plan, we increased our annual R&D spending by 62% with total of $23.2 million in support of our portfolio expansion and diversification efforts.

Our effective R&D investments resulted in the introduction of 16 new products including eight new printers spanning four print engines. We are thrilled that revenue from new products grew 70% to $131.9 million, and just as a reminder, we track new product revenue only for the first 3 years of a product's commercial life.

Now, for a more detailed look at our financial performance for the fourth quarter and full-year 2012, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Damon Gregoire

Thanks, Abe, and good morning everyone. Fourth quarter revenue increased 45% to a record $101.6 million on a 93% jump in printers and other product revenue. For the quarter, materials revenue increased 33% and services were up 18%. Gross profit improved 60% and our gross profit margin expanded 460 basis points to 51.7%, contributing to non-GAAP net income improvement of 64% over the 2011 quarter. On a non-GAAP basis, our total operating expenses increased to $28.2 million or 28% of revenue on higher sales cost from much higher revenue, incremental cost from acquisition and $3.2 million higher R&D expenses in support of our expanded portfolio and diversified business model.

As a result of our strong revenue growth and expanded growth profit, we generated non-GAAP adjusted net income of $22.6 million, a 64% improvement over the 2011 quarter, and earned $0.39 per share tax effective. On a GAAP basis, we earned $0.19 per share for the quarter. Revenue for the full year 2012, increased 54% to a record $353.6 million on a 90% boost in printers and other product revenue. Gross profit increased 66% and gross profit margin expanded 390 basis points to 51.2% from 47.3% to 2011.

Consistent with our expectations, gross profit margin increased in 2012 despite adverse product mix on a surging printer sales that diluted higher gross profit print materials contribution. On a non-GAAP basis, our total operating expenses increased to $99.8 million or 28% of revenue reflecting an $18.4 million rise in compensation cost that was primarily driven by higher sales commissions from increased revenue, incremental operating cost of newly acquired businesses and $5.1 million of acquisition, integration and restructuring costs. Importantly, full year expenses also included an $8.9 million increase in R&D expenditures that were primarily driven by our expanded portfolio and diversification initiatives.

For the full year, we generated non-GAAP net income of $67.9 million, representing a 66% improvement over last year and earned a $1.25 per share tax affected. On a GAAP basis, we earned $0.71 per share for the year.

Our GAAP net income included a $7 million non-cash loss on the conversion of our 5.5% convertible notes by note holders which we’ll discuss in more detail later. Our quarter end backlog increased to $11.4 million at year end on strong demand, representing a 23% sequential increase and included $3.2 million of current printer sales and $5.9 million of on-demand part sales.

Consistent with our methodology, our organic growth was 18.8% for the fourth quarter of 2012 and 22.4% for the full year. For comparison, in 2011 our organic growth was 8.8% for the fourth quarter and 19.2% for the full year.

As a reminder, we count newly acquired business revenue from the date of acquisition until its 12 month anniversary of acquired revenue. From its 12 month anniversary forward, we have the actual total first year revenue to our total base and count only the incremental revenue growth going forward on a total base as organic growth.

While the timing and concentration of new acquisitions in anniversary days for prior acquisitions understated our fourth quarter organic growth progress two years in a row, we believe that the 10 percentage points step up in organic growth rate for the fourth quarter of 2012 compared to the 2011 quarter on a much larger total revenue base reflects the potency of our organic growth engine.

By revenue category for the full year 2012, printers grew organically by 40%. Total materials grew organically by 17% and services grew organically by 13%.

We report non-GAAP adjusted results that exclude the impact of amortization of intangibles, non-cash interest expense, non-recurring acquisitions and severance expense, including gain or loss or acquisitions, impact of litigation settlements, stock-based compensation, non-cash loss on conversion of convertible debt and any net impact of releases of portions of the valuation allowance on deferred tax assets. Please note that our total depreciation cost and our Senior Convertible Note cash interest expense are appropriately included in our non-GAAP net income.

For your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide as well as in our 10-Q filed this morning. As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $22.6 million or $0.39 per share for the quarter. The excluded items aggregated to an $11.7 million tax-effected net increase to GAAP net income, or $0.20 per share in the fourth quarter. For the year 2012, we generated non-GAAP net income of $67.9 million or $1.25 per share. The excluded items aggregated to $28.9 million tax effect net increase or $0.53 per share.

Our 2012 non-GAAP net income was impacted significantly by the loss on conversions of our 5.5% convertible notes and I’d like to take a moment to discuss what this means. As holders convert the notes into shares of our common stock, the costs that we would have recognized over the life of the notes are accelerated and are reflected in our P&L in interest and other expenses and they’re recognized as a non-cash loss on conversion.

Absent these conversions in 2012, our GAAP net income would have been approximately $5.7 million higher or an additional $0.10 per share and conversions continued since last December and as of February 15, we’re pleased that approximately two thirds of our $152 million of convertible notes have been converted resulting in future reduction of annual interest expense from approximately $8 million per year to approximately $5.2 million per year.

The combined effect of our improved performance over the last three years in our financial outlook as reflected by our guidance this morning led to the release of the remainder of our valuation allowance on our net operating losses resulting in a reported tax rate of negative 15% for the fourth quarter of 2012 and 10% for the full year. We have $42.2 million of NOLs reflected on our current deferred tax assets and consistent with our guidance for 2013, we expect our cash taxes to remain in the range of 10% to 15%. Based on the geographic distribution of our income through the end of 2012, we expect our annualized our effective tax rate for the full-year 2013 to be in the range of 35% to 38%, which is consistent with our previous expectations. For clarity, these rates are already reflected in our annual guidance which I will cover in more detail shortly.

Importantly, I would like to point out that with the release of the remainder of our valuation allowance behind us and as balances of our convertible notes may be converted, we expect our non-GAAP earning to begin to converge with our GAAP earnings several years ahead of our earlier estimates. Reflecting on our continued strong revenue growth, we believe that our annual 2012 results at $353.6 million revenue and $1.25 non-GAAP EPS, are fully in line with our raised 2012 guidance expectations and consistent with our strategy to expand and diversify our portfolio, our sales channel, and our geographical presence.

Our revenue is well distributed across our portfolio categories, geographies, customers and applications, and we do not have any 10% customers so we do not depend on any one customer industry for our revenue. For the full-year 2012, all of our revenue categories contributed to growth. For printers and other products, growth outpaced materials and services resulting in 64% recurrent revenue for 2012. 3D printers and other products revenue grew 90% to $126.8 million. In fact, despite the discontinuation of sales of some acquired products earlier in 2012, our combined professional and production printers revenue increased 83% and our personal printers revenue increased 87% over 2011.

Print materials grew 46% to $103.2 million and services revenue increased some $30.5 million or 33% over 2011 to $123.7 million and included $79.2 million of on-demand parts. For the year, revenue from U.S. operations increased 67% to $196.4 million on higher volume and revenue from non-U.S. operations expanded 40% to $157.2 million and amounted to 44.5% of our consolidated revenue. Revenue from European operations grew 21% to $100.7 million in 2012, reflecting a $28 million increase in volume partially offset by a $6.6 million unfavorable effect of foreign currency translation and $4 million combined unfavorable impact of price mix.

Revenue from Asia Pacific operations increased 93% to $56.5 million, primarily due to a $34.3 million increase in volume and $0.5 million favorable foreign currency translation which was partially offset by a $7.5 million unfavorable combined effect of pricing mix. Reflecting on these results, it is evident that despite ongoing regional economic uncertainties, we experienced growth in all our geographic regions with sustained performance from both our European and Asia Pacific regions. North America delivered the strongest growth benefiting from acquisition concentration that was skewed in favor of the U.S.

Sales into Germany and other EMEA countries remained strong. As a reminder, our foreign income from operations is a function of transfer pricing and there is no change to our methodology for this transfer pricing. For the quarter, gross profit improved some 60% over the 2011 quarter to $52.5 million, from increased revenue and expanded gross profit margin in all categories. Although we generated a higher portion of our revenue from lower margin categories, driven primarily by the step-up in printer sales, we managed to expand our gross profit margin of full 460 basis points over the 2011 period, to 51.7% and give up only 10 basis points sequentially.

This increase was driven by a 690 basis point expansion to our printers and other products gross profit margin to 43.1% and a 550 basis point improvement to our materials gross profit margin compared to the 2011 quarter to 71%. Our printers gross profit margin expansion continues to benefit from our realigned portfolio which includes more profitable lower priced printers that are capable of consuming comparable materials levels to our higher priced printers combined with continuous operational improvements and better overhead absorption.

For the full year 2012, gross profit improved some 66% over the 2011 period to $181.2 million from increased revenue and expanded gross profit margin in all categories. Our gross profit margin expanded 390 basis points to 51.2% for the full year, driven by a 540 basis point gross profit margin expansion from printers and other products and a 340 basis point gross profit margin expansion from print materials and a 470 basis point expansion from on-demand part services compared to 2011. Consistent with our previous comments, we believe that we’re closing in on our targeted gross profit margin of 56% at a $400 million revenue run rate.

For the fourth quarter, non-GAAP operating expenses increased to $28.2 million or 28% of revenue on much higher sales costs from revenue growth, incremental costs from acquisitions, and $3.2 million higher R&D expenses in support of our expanded portfolio and diversified business model.

For the fourth quarter of 2012, non-GAAP SG&A expenses increased $8.1 million, including a $2.6 million increase in compensation costs primarily from higher commissions on higher revenue and increased operating costs from acquired businesses.

Legal costs improved $600,000 for the quarter, primarily driven by reduced litigation activity and costs, including the third quarter settlements of two of the ongoing litigation cases which were excluded from our non-GAAP earnings.

Consistent with our plans, we increased our R&D spending by $3.2 million compared to the fourth quarter of 2011, primarily related to activities in support of our expanded portfolio of products and services as already reflected by the number of new product introductions we announced. And the combination of the surge in our printer sales and the planned increase in R&D spending has temporarily slowed our progress on expanding our operating margins at this point.

On a non-GAAP basis, our total operating expenses for the year increased $99.8 million or 28% of revenue, reflecting an $18.4 million rise in compensation costs that was primarily driven by higher sales commissions from increased revenue, incremental operating costs and acquired businesses and $5.1 million of acquisition integration and restructuring costs. Importantly, full year expenses also included an $8.9 million increase in R&D expenditures that were primarily driven by our expanded portfolio and diversification initiatives. As a reminder, we do not capitalize any R&D or other development costs. Rather, we expense those costs as they are incurred.

For the full year, we generated $53 million of net cash from operating activities was some $9 million provided during the fourth quarter. We entered the year with $155.9 million of cash on hand, representing a $23.2 million decrease versus the end of 2011 after raising $106.9 million of proceeds from our common stock offering in June of 2012 and paying $183.7 million for acquisitions.

We accrue interest expense each quarter for the senior convertible notes and cash interests paid semi-annually in June and December. As we have said, although we expect to continue to report strong cash generation from operations, the quarterly amounts may fluctuate from period-to-period.

Accounts receivables increased as a result of our record revenues for 2012 and a higher portion of sales through resellers. This is reflected in the increase in day sales outstanding to 72 days in 2012 from 67 days in 2011.

Inventories increased in support of our expanded portfolio and due to the timing of orders and delivery of finished goods and materials and raw materials which they’re purchased in large quantities. To help you better reconcile our cumulative cash generation capacity, it’s worth noting that since September 2009 when we commenced with our acquisition activities, our cash on hand increased $117.1 million after excluding $314.3 million of net proceeds from capital market transactions and $299.7 million cash paid for acquisitions.

As you may recall, in November 2011 we issued senior convertible notes due in 2016 in an aggregate principal amount of $152 million at a fixed rate of 5.5% per annum payable in June and December of each year while they’re outstanding. Interest payments began June 15 2012 and the net proceeds of the notes were uses to fund the acquisition of Z Corp and Vidar and for general corporate purposes. We subsequently announced that conditions for conversion have been satisfied and the notes are convertible. During 2012, notes holders converted $61 million of notes into approximately $2.8 million shares of common stock. In connection with this accelerated note conversion, we recognized a $7 million non-cash loss in other expenses net. As of December 31, 2012, the aggregate amounts of notes outstanding was $91 million, and as of February 15 of this year, an additional $34.6 million of notes have been converted leaving an outstanding balance of $56.4 million.

Consequently, we expect to record an additional non-cash loss of these incremental conversions of $4.8 million on the first quarter of 2013. As additional conversions occur, we expect to recognize non-cash losses on these conversion and interest and other expense, and anticipate that our interest expense going forward will be further reduced. In fact, with the amounts converted today our interest expense will be reduced from the original approximately $8 million per year to approximately $5.2 million per year. And I would also like to point out that the non-cash loss on conversions is a result of accelerating loan costs, original issue discount and debt accretion associated with the amounts converted.

So I would like to take a moment to reflect on our multiyear performance which we believe to be consistent with our strategic plan and then align with our targets, guidance and expectations. As you can see on this slide, since the end of 2009, we tripled our annual revenue, expanded our gross profit margins 710 basis points from 44.1% in 2009 to 51.2% in 2012. In spite of unfavorable mix we delivered significant value to our customers and stockholders. For the full year 2012, indicative of our continued P&L leverage, we improved our performance and productivity further by delivering a 66% improvement in non-GAAP operating net income on a 54% revenue growth that was driven by 125% boost in printer units sold.

And notwithstanding our increased headcount in support of growth initiatives and activities that did not bear revenue during 2012, we were able to improve net income per employee by 17% over 2011 underscoring the effectiveness of our execution. So as a backdrop to our 2013 guidance, I would like to review our overall growth expectations and underlying trends. As indicated on slide 19, over the past four years our topline growth was driven by printers and other product sales at a CAGR of 61%. With continued strong demand on robust R&D and advanced manufacturing spending by our customers and enhanced channel effectiveness, we expect printers and other product sales to continue to shape and drive our growth in 2013.

With the completion of the Geomagic acquisition later this week, we expect our 3D authoring solutions to become a more significant revenue category this year. Print materials growth trailed printers growth over the past four years at a CAGR of 27%. However, with the expected faster installed base expansion and the higher growth rate of our integrated materials, we expect an uptick in our total print materials growth rate going forward on accelerated printer unit shipments.

Services have grown at a CAGR of 57% over the past four years, primarily through acquisitions. As a reminder, services include a lower growth rate component of printers, field service and maintenance revenue as a result of improved overall product quality and reliability and the continued shifting of field service activities and corresponding revenue to our channel partners. While this activity suppresses our overall service revenue growth rate, we believe that it's critical to our accelerated printer sales and material growth plans because it provides better local service and support to our customers and enhanced value proposition for our resellers and approved profitability for us.

Within our on-demand parts services, we have been gradually shedding less profitable activities from acquired businesses and replacing those with higher value services. This multi-quarter initiative has temporarily slowed down net growth for this category as we expand margins. Accordingly, we expect our total services growth rate to moderate somewhat this year. So all told, with some categories growing faster than others, we expect overall revenue growth to be in the range of 24% to 37% for the full year of 2013, excluding any unannounced future acquisitions. I’d like to point out that our annual revenue growth expectations for 2013 primarily reflect organic growth. Currently, the only acquired revenue contributions for 2013 are 3D operating revenue from Rapidform and Geomagic and the residual inorganic revenue from Paramount Industries.

Based on our historical seasonality increased revenue throughout the year, I suggest that you place greater emphasis on our annual guidance as the actual quarterly amounts may fluctuate period to period and trends are only meaningful over several periods.

Now that we’ve covered our topline growth expectations, I’d like to go over the underlying drivers for expected continued earnings expansion. As shown on slide 20, integrated print materials as a percentage of total materials continued to increase from 30% in 2009 to 63% of total materials in 2012, even after the inclusion of acquired open source materials.

Print materials already contributed nearly 40% of our corporate gross profit and within this category, integrated materials delivered the highest gross profit margin. As our overall materials category grows and mixed within it tips decisively towards integrated materials, we expect continued consolidated gross profit margin expansion. Case in point. For 2012, materials revenue made up 29% of our total revenue but contributed 39% of our total gross profit.

We believe that the combined impact of growing integrated material sales at higher gross profit margins, together with growing 3D authoring solution tools at software gross profit margins which we expect to become more meaningful this year will drive our corporate margins higher and support our earnings expectations.

Based on the progress that we have been making, our sales momentum in the favorable marketplace trends that we are observing, management expects full year 2013 revenue to be in the range of $440 million to $485 million and full year 2013 non-GAAP earnings per share to be in the range of $1 to $1.15 per share adjusted for our recent stock split and inclusive of approximately 417 million of revenue that we expect from Geomagic which we expect to close later this week. For reference, if we had not completed the three for two stock split, our revenue guidance would have remained $440 million to $485 million, but our EPS guidance would have been $1.50 to $1.73.

Our full year 2013 non-GAAP earnings estimate is fully tax affected. It includes management’s anticipated incremental revenue and expenditures related to all of our current growth initiatives as well as our expected litigation costs as we understand them and it excludes the impact of future unannounced acquisitions. I'd also like to remind you that this guidance is based on current plans and assumptions and subject to risks and uncertainties, more fully described in the company's reports filed with the SEC.

That concludes my comments. Abe?

Abraham Reichental

Thanks, Damon. We continued to extend our portfolio, extend our reach and diversify our business model. In support of our rapidly growing 3D printer business, we launched eight models of our new ProJet 3510 3D professional printers, a two models of the new ProJet 3500 Max professional printers and two new print materials, VisiJet Pearlstone dental material, and VisiJet X, ABS performance material.

In support of our consumer initiative, we launched the second generation Cube and the new CubeX at CES this past January, winning a KAPi award and Best of CES in emerging tech. We also acquired COWEB, a startup in France with technology to customize 3D printed novelty items and collectibles.

In support of our on-demand parts growth initiative, we acquired TIM, a leading provider in the Netherlands, and expanded our QuickParts technology platform to Europe and Asia-Pacific.

And in support of our 3D authoring solutions growth initiative, we acquired Rapidform, a global provider of 3D scan-to-print and inspection software tools based in South Korea and we announced that we signed a definitive agreement to acquire Geomagic, a provider of design, sculpt, and scan software tools, which we expect to close later this week.

We entered 2013 with positive sales momentum and expect to benefit from growing demand from our list products. We believe that the level of interest in our products and services is at an all-time high and the volume of sea level engagement across many industries in pursuit of joint development opportunities is unprecedented. We believe that we are well positioned to shape and serve the movement through localized manufacturing, where the convergence of 3D printing, robotics, next gen sensors, mobile devices and cloud computing, begins to redefine advanced manufacturing. While we may face lingering economic uncertainties in parts of the world, we expect to continue to benefit from a robust R&D and manufacturing spending by our customers worldwide. And we expect our ongoing portfolio diversification, expanding channels and focused growth initiatives to deliver continued success.

Finally, we believe that we are extremely well positioned to monetize the expanding advanced manufacturing and healthcare opportunities and the emerging consumer opportunities. We expect material revenue contributions from consumer's solutions and the commercialization of (inaudible) personalization medical devices in the second half of this year, and accordingly we expect to be able to deliver continuous top line strength and margin expansion, as the benefit of scale and our solid M&A execution continues to manifest.

And with that, we will now gladly take your questions. Stacey?

Stacey Witten

We will now open the call for questions. We kindly request that you ask one question at a time and then return to the queue thus allowing others to participate in the Q&A session. 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 1-800-295-3991, and if you're calling outside the U.S., the number is 1-617-614-3924. The conference ID is 68343877.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jim Ricchiuti from Needham & Company.

James Ricchiuti - Needham & Company

I haven’t had a chance to go through your 10-K yet, but can you give some color on the growth in professional and personal printers in Q4 and I am assuming consumer is part of personal. Do you plan to break that out at some point later this year?

Damon Gregoire

Yeah, I mean right now it was -- we did breakout some of the information, professional and production. Personal is included in that personal and professional section right now. We do expect this year to start talking a little bit differently about it and breakout the personal portion from the two of those. And as we have said all the way all along, that professional and production printers is a blurred line between those and it's getting difficult to differentiate between the two. So we should be talking a little bit differently about that this year.

We did say though that, if you look at professional and production printers as a total category, now grew by almost 83%. And the consumer and personal side grew by 87% for the 2012.

Abraham Reichental

And so, Jim, to summarize what Damon said, for the fourth quarter and for the full year, but particularly for the fourth quarter we experienced a surge in printers and other product demand. And we see continued demand into this year. In fact, you can tell from our current backlog that some of our printer demand at the end of the year ended up in backlog for a variety of timing and recognition issues. And in terms of our consumer activities, we expect revenue from our consumer activities to become significant in the second half of this year, and at that point in time we expect to begin to break it out and report on it.

Operator

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

Troy Jensen - Piper Jaffray

I guess I’ve got a two-part question here maybe for Abe, specifically on the jetting products. I’d be curious to know if you plan on having a broader range of pricing. Obviously you’re competitors in that category seemed to have just a larger spectrum of products. And then the second part here is cross licensing agreement with Objet, are you guys prevented at all from developing a Connex type of printer or if you can just touch on with the cross licensing agreement what can you do, what can’t you do versus what Objet currently offers?

Abraham Reichental

Let me start with our jetting product. Our jetting products have enjoyed significant success and in no small part are responsible for the surge in overall printer demand, some that translated into our fourth quarter revenue, some that ended up in backlog. And as you know, we just refreshed our jetting products and introduced some new categories and extended the price points and we expect to continue to do that. With regards to cross licensing and the freedom to operate, we obviously have a cross license that covers a period of patents through the season that we signed that cross license agreement and we have capabilities and technologies that will allow us to operate and to develop what we need to develop not just within the cross license agreement but within our ability to continue to innovate and freely practice lawfully what is available. So in a nutshell we believe that we have what we need to develop our product and our product roadmap in any direction that within the market to demand, including multi-material capabilities if we determine that that’s a lucrative market for us.

Troy Jensen - Piper Jaffray

So you can develop multi-material jetting products?

Abraham Reichental

We believe that we can do it and we believe that we can do it in ways that would respect everybody else’s IP.

Operator

Your next question comes from Paul Coster of JP Morgan.

Paul Coster - JP Morgan Chase & Co.

A couple of questions related to the guidance. The first one is, can you talk a little bit about the OpEx this year and particularly R&D and where you are focusing your R&D proportionately. And you said that it’s difficult to predict the quarters. Is there anything though that you’ve learned from the accumulation of products, services and solutions here that gives you any sense of seasonality or when we might see some kind of trend emerge from quarter to quarter?

Abraham Reichental

Okay. So starting with R&D and then I’ll let Damon reflect on the expected trending in revenue from quarter to revenue, our expectation is to make sure that we’re adequately spending on R&D and as you see, for 2012 we increased our R&D spending to 62% and it’s fairly evenly split between printer development, material development and non-increasingly 3D authoring solutions developments in some of our consumer initiatives. And our plan is to continue to push hard and decisively. In fact we expect 2013 to be probably our best year ever in terms of new product introductions, both in the area of additional 3D printers and capabilities, exciting new material and significant breakthroughs in authoring solutions and consumer apps and capabilities. So we think that notwithstanding everything that we did in the last couple of years and all the success that we’ve enjoyed from our R&D, this is poised to be our best year ever in terms of new products and services. In terms of what’s baked in the guidance in terms of seasonality, I’ll let Damon address that.

Damon Gregoire

Right. Historically, we have always looked at stair stepping throughout the year in seasonality. Prior to 2008 and prior was more of a hockey stick but that’s sort of leveled out over the past years. We expect to be increasing through the year. One thing that is important to note, we talked about the Geomagic acquisition that we expect to add $17 million this year in revenue and that’s a prorated number for the remainder of the year. If we close that at this week, you are basically talking one month out of this quarter that is only in. So that has to be factored into that too.

But definitely, we have enjoyed sort of this stair stepping as we moved along throughout the year with one exception, in certain categories in Q3, materials in some other areas tend to be impacted in Q3 by the European shutdown and the shutdown in education. Just like you had this year but we saw a rebound back in those categories of materials and other services in Q4. And right now we are not seeing much difference in that.

Operator

(Operator Instructions) The next question comes from the line of Brian Drab from William Blair.

Brian Drab - William Blair & Company

I have a lot of questions but unfortunately I only have time for one. First of all, one suggestion, I am not sure what happened this morning, but it would be much more helpful to the investment community if we could get fourth quarter results more than 20 minutes before the conference call because I have not had time to do my work that I would need to do to ask questions, or at least the best questions on this call. So something to think about for the future. I am sure everyone who is analyzing your numbers is thinking the same thing. My question that I want to ask is around organic revenue growth because I am looking back to the fourth quarter '11 transcript and looking at my model and numbers that we entered in the fourth quarter '11, and trying to reconcile the 19% organic revenue growth, Abe, that you mentioned as reported for the fourth quarter 2011.

Abraham Reichental

I think....

Brian Drab - William Blair & Company

And now you are saying it's 8.8% for the fourth quarter. And I have asked this in the past but when there are discrepancies like that it sure makes me feel uneasy about your ability to give us accurate organic revenue growth?

Abraham Reichental

Well, I am sorry, Brian. What I said is that in the fourth quarter of 2011 we had 8.8% and in the fourth quarter of this year we had 18.8%.

Brian Drab - William Blair & Company

I am looking back at the transcript from fourth quarter 2011 right now and you said, business organically for both fourth quarter and annually 19%. So that’s confusing. I mean if those kind of discrepancies are out there it would be great to find out after -- right after that call instead of a year later, because I have been modeling based on those numbers.

Abraham Reichental

Well, I believe that all of our results were in our Ks and Qs and if something was misunderstood out of my transcript, I apologize. I can't control how my transcript is transcribed but I believe that our results are our results and they are as we reported them.

Brian Drab - William Blair & Company

And could I just squeeze in one more then. For Geomagic, what do you expect in for a contribution there for 2013.

Abraham Reichental

Well, Damon just got down saying that for the balance of this year we expect them to add about $17 million to revenue and it's already baked into our guidance for 2013.

Brian Drab - William Blair & Company

Okay. Sorry, I missed, I was running some numbers here. I will get back in line.

Operator

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

James Ricchiuti - Needham & Company

Yes, if we look at your full year revenue guidance, the range of revenues, can you talk a little bit about what gets you the high end of the range? Are there any specific areas? Your healthcare business is growing -- continues to grow very rapidly and I am wondering if you are also factoring in a much stronger consumer business. Just talk a little bit about the range of revenues and what gets you to that high end?

Abraham Reichental

Okay. What gets us to the high end is, where we are seeing unprecedented interest. And I kind of touched on it in our remarks. We are seeing unprecedented interest of the highest levels of companies, at a sea level of companies for a variety of business developments and joint development around advanced manufacturing. To the extent that some of those materialized, that’s going to get us to the higher end. We believe that healthcare is going to continue to grow at a healthy rate and we expect that, including some of the Bespoke products that we’re going to commercialize in the second half (inaudible). And we certainly expect both our consumers’ solutions and our 3D authoring solutions to meaningfully contribute towards the second half of this year. And there is another element, Jim. With the addition of Geomagic, we’re going to have another opportunity to add somewhere in the range of another 80 to 100 channel partners. That gets us to now a channel of nearly 500 resellers and with that, we see that there’s lots of opportunity for cross selling and upselling and opportunities to generate incremental growth rate, very similar to the growth rate that we enjoyed in printers and other products in 2012 which was for the year 90%, for the quarter 93% and organically 40%. That comes from those incremental cross selling and upselling opportunities. So that’s what gets us to the higher and over the guidance.

Operator

Our next question comes from Brian Drab from William Blair.

Brian Drab - William Blair

Just one more question. I’m wondering if you could – this one is for Damon. If you can talk a little bit about what this non-cash transfer line is in here, financial statements from the cash flow.

Damon Gregoire

Hold on, just pulling up our cash flow here. So which one did you ask for, I’m sorry?

Brian Drab - William Blair

Just again we’ve got a lot of numbers here that I’m trying to sort through, but the non-cash transfers that you’ve been reporting and it looks like there’s some shifting between PP&E and inventory and I want to see if you can explain that to me and if that’s the case or if that’s not the case tell me that that’s not the case and…

Damon Gregoire

Yeah. That is what the case is. We do have different items if we place equipment into service from our inventory, that’s what happens. We also have some – or not just into servicing service goals but also has these demos or into our showrooms. That’s what we have and there’s other times where we actually have inventory that transfer back into inventory and it’s sold as used equipment after as we re-deploy these assets or upgrade our showrooms and things the new model that’s come out. That’s what basically what that is.

Brian Drab - William Blair

What percentage of your sales in the printer product segment roughly is used equipment?

Damon Gregoire

We haven’t done that but it’s not – I don’t have the number in front of me, but it’s not a meaningful number. It’s not a big number at all.

Abraham Reichental

It’s not significant.

Brian Drab - William Blair

Okay. And would you ever see the same equipment move from inventory into PP&E and then back into inventory?

Damon Gregoire

Well, if it’s coming back to inventory, at one point it had been in inventory prior, yes. But everything that we purchase that we manufacture ourselves starts out in inventory. It doesn’t go directly into an in-service product, but it is put in there, moves to wherever location, whatever service it’s in and if it comes back out and is re-deployed somewhere else or sold, yeah, it goes back into inventory.

Abraham Reichental

Yeah. This movement are primarily related to demos and equipment that we deploy at our various facilities for sales demonstration purposes and every time when we change a model like we did now with about eight different ProJets, we go out and we make sure that we replace all these equipment in our showrooms with the latest models and then we typically would sell the demonstrators before we launch – sell the demonstrators before we launch the new models.

Brian Drab - William Blair

How are your margins typically on something that on the sale of a demo piece of equipment versus…?

Abraham Reichental

It’s all reflected in our consolidated margins which have been increasing in all categories.

Operator

Our next question comes from the line of Holden Lewis from BB&T.

Holden Lewis – BB&T Capital Markets

Wanted to follow up a little bit on that last question. I’m curious and you indicated Geomagic will add a number of new resellers. I was just curious, in your revenue forecast are you building in the expectation that you might be putting demo machines into the Geomagic resellers or is that not planned for that particular channel? How should we view that? And then I guess most of us just make sure that all of your acquisitions, now that they’re launched anniversary for the those guys, do we feel like our reseller network with the possible exception of Geomagic is kind of full up with the necessary purchases of product?

Abraham Reichental

Let me first of all crystal clear. The previous question has nothing to do with demos into our resellers. It has to do with demos that we keep within our showrooms worldwide. We do not go back and forth and take resellers demos and put them back into our inventory. So I want to be crystal clear about that. The previous answer had to do with our own haul on the equipment and how it’s deployed either in our own showrooms or in inventory for sale purposes. With regards to did we factor anything in our guidance for incremental sales to Geomagic resellers, no we did not because we don’t view that as significant. We believe that the only significant sales of printers through the channel are sales to end users. And so although there may be temporary incremental benefit from selling some initial units to Geomagic resellers, that’s not built into our guidance. And I’m sorry, I forgot the last part. Oh, do we have all the products?

We’ve been very clear that our main focus is to continue to position ourselves at the heart of this value chain of contents to print and that it’s a combination of organic and inorganic efforts to get there. Damon in his remarks was also fairly clearly that the vast majority of revenue growth that is included in our guidance for this year which I believe is in the range for revenue growth between, is it 24 to 37%? Yeah. So we’re projecting revenue growth of 24% to 37% for this year as part of our guidance. The majority of it is going to be organic, with the exception of Rapidform, Geomagic and some of the trail of Paramount Industries. And Damon was very clear about that as well.

Holden Lewis – BB&T Capital Markets

Okay. And just to follow up on, you gave about $17 prorated revenues for Geomagic. Did you suggest how much the non-GAAP EPS contribution from that transaction would be?

Abraham Reichental

No. we haven’t yet. We said that we’ve included in our guidance in our total guidance for 2013 and once we close the deal later this week we’ll be at liberty to discuss some more of the details on that.

Operator

There are no further questions at this time. I would like to turn the call back over to Stacey Witten for closing remarks. Stacy?

Stacey Witten

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 our Investor Relations section of our website at investor.3dsystems.com.

Operator

This concludes your conference call for today. Thank you for joining. Good day.

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