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3D Systems (NYSE:DDD)

Q1 2013 Results Earnings Call

April 30, 2013 9:30 a.m. ET

Executives

Stacey Witten - Director, Investor Relations

Abraham Reichental - President and CEO

Damon Gregoire - Chief Financial Officer

Andrew Johnson - General Counsel

Analysts

James Ricchiuti - Needham & Company

Jay Harris - Goldsmith & Harris

Troy Jensen - Piper Jaffray

Holden Lewis – BB&T Capital Markets

Brian Drab - William Blair

Paul Coster - JP Morgan

Hendi Susanto - Gabelli & Company

Prabhakar Gowrisankaran - Canaccord

Operator

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results for the first quarter 2013. [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'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. 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 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 begin by saying that we are very pleased to report record quarterly revenue and gross profit on higher printer units. This morning, Damon and I will recap our quarterly highlights. We will go over our financial results in more depth, update you on our progress, and provide an outlook for the remainder of this year.

Our revenue grew 31% from the prior year to $102.1 million on a 61% increase in printers and other product, and 22.1% overall organic growth. Gross profit increased 38% and gross profit margin expanded 250 basis points to 52.4%.

Successful new product key acquisitions and expanded channel contributed favorably to our quarterly results, and since the beginning of this year, we launched quite a few exciting new products, including several printers and powerful design software tools that reinvent the engineer’s desktop, empowering designers to create and print without limitation.

Our new Cube and CubeX 3D printers that we launched at CES 2013 enjoyed favorable marketplace reception and sales of these printers continued to be at the top end of our expectations. In January, we also commercialized eight new models of our next-generation ProJet 3510 3D printers that deliver greater productivity, higher definition printed parts, and an enhanced user experience. We also completed the acquisition of Geomagic, a leading provider of design modeling, sculpting, scanning, and inspection software tools.

We believe that our performance reflects the strength and innovation of our diversified portfolio, the productivity of our channels, and the effectiveness of our strategic initiatives. For the first quarter of this year, all of our revenue categories contributed to growth.

3D printers and other product revenue increased $15 million to $39.7 million. Print materials revenue grew $4.1 million over 2012 to $28.7 million, and services revenue rose $5.1 million over 2012 to $33.6 million. Healthcare solution revenue contributed $14.1 million to our total revenue, on moderate growth as a result of timing of printer sales. We expect the overall healthcare growth trajectory for the full year to remain robust.

Our new product introduction plan is off to a great start, and consistent with that, we increased our R&D spending by 32% to a total of $6.5 million for the first quarter of 2013. We’re thrilled that revenue from new products grew 60% to $38.3 million, and believe that our results reflect the effective R&D investment that yield effective and timely introductions of new products. We expect 2013 to be our most exciting new product introduction year ever, and as a reminder, we track new product revenue only for the first three years of a product’s commercial life.

With that, I will now turn the discussion over to Damon for a more detailed look at our financial performance for the first quarter. Damon?

Damon Gregoire

Thanks, [Abby]. Good morning everyone. First quarter revenue grew 31% from the prior year to $102.1 million. Gross profit increased 38% to $53.5 million, and gross profit margin expanded 250 basis points to 52.4%. On a non-GAAP basis, our total operating expenses increased to $27.8 million, but decreased to 27% of revenue on higher sales costs for much higher revenue, incremental costs from acquisitions, and higher R&D expenses in support of our expanded portfolio. Sequentially, our non-GAAP operating expenses decreased by $400,000.

As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $18.9 million, which is a 43% improve over the 2012 quarter and earned $0.21 per share tax affected. On a GAAP basis, we earned $0.06 per share for the quarter.

We report non-GAAP adjusted results that exclude the tax affected impact of amortization of intangibles, noncash interest expense, nonrecurring acquisition, integration, and severance expenses, including gain or loss on acquisitions, impact of litigation settlements, stock based compensation, and noncash loss on conversion of the convertible debt.

Our total depreciation cost and our cash interest expenses 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 that we filed this morning.

As mentioned previously, on a non-GAAP basis we generated adjusted net income of $18.9 million, or $0.21 per share, for the quarter. The excluded items aggregated to a $13 million tax affected net increase to GAAP net income or $0.15 per share in the first quarter.

Our non-GAAP net income was positively impacted by adding back $3.8 million of amortization expense, $2.2 million of acquisition and integration expenses, $2.2 million of stock based compensation, a $5.7 million loss on conversion of convertible notes, $0.5 million of noncash interest expenses and a loss on the litigation settlement. These were partially offset by a $3.4 million tax impact related to the items just mentioned. And as we said previously, we expect our reported tax rate for 2013 to be in the range of 35% to 38% and our cash taxes to remain in the range of 10% to 15%.

For the first quarter of 2013, all of our revenue categories contributed to growth, but printers and other products growth continued to outpace materials and services, resulting in 61% recurring revenue for the quarter. 3D printers and other products revenue grew 61% to $39.7 million, and 3D printers contributed $31.8 million, a 43% increase over the 2012 quarter.

Other products revenue consists of software [authoring] tools, Vidar digitizers, and sensible haptic devices. For the first quarter of 2013, software products contributed revenue of $4.2 million, and as we have introduced new printers and price points, the professional and production printer capabilities have now fully merged into a single category. Revenue from our combined professional and production printers increased 41% and our personal printers revenue increased 85% over 2012.

Print materials grew to $28.7 million and made up 28% of total revenue, and services revenue increased some $5.1 million to $33.6 million and made up 33% of total revenue. Revenue from U.S. operations increased 25% to $57.2 million on higher volume, which is partially offset by the impact of negative price and mix.

Revenue from European operations grew 38% to $28.6 million in 2013, reflecting a $13 million increase in volume partially offset by a $4.9 million combined unfavorable impact of price and mix and a $200,000 unfavorable foreign currency translation.

Revenue from Asia-Pacific operations increased 45% to $16.3 million, primarily due to a $9.6 million increase in volume, partially offset by a $4 million unfavorable combined effect of price and mix and a $600,000 unfavorable foreign currency translation.

Despite ongoing regional economic uncertainties, we experienced robust growth in all geographic regions. For the quarter, gross profit improved some 38% over the 2012 quarter to $53.5 million from increased revenue and expanded gross profit margins in all categories.

Although we generated a higher portion of our revenue for the lower-margin categories, driven primarily by the continued strong printer sales, we managed to expand our gross profit margin a full 250 basis points over the 2012 period and 70 basis points sequentially to 52.4%.

This increase over the first quarter of last year was driven by a 620-basis point expansion to our printers and other products gross profit margin, aided by the addition of higher margin software products to 44.9% and a 470-basis point improvement to our materials gross profit margin to 72.7%.

As shown on this slide, print materials contributed 39% of our corporate gross profit on only 28% of total revenue. And as our overall materials category grows, we expect continued consolidated gross profit margin expansion.

For the first quarter, non-GAAP operating expenses increased to $27.8 million, or 27% of revenue. Sequentially, non-GAAP operating expenses decreased $400,000 from the fourth quarter of 2012.

For the first quarter of 2013, non-GAAP SG&A expenses increased $4.3 million, including a $1.4 million increase in compensation costs, which were primarily from higher commissions and sales costs on higher revenue and increased operating costs from acquired businesses.

Legal costs improved $500,000 for the quarter, primarily driven by reduced litigation activity and cost. Consistent with our plans, we increased our R&D spending by $1.6 million compared to the first quarter of 2012, primarily in support of our expanded portfolio of products and services and new product introductions.

For the first quarter, we generated $10.7 million of net cash from operating activities and we ended the quarter with $110.5 million of cash on hand, representing a $45.4 million decrease versus the end of 2012.

As we have said, although we expect to continue to report strong cash generation from operations, the quarterly amount may fluctuate from period to period. And as a reminder, we accrue interest expense each quarter for the senior convertible notes and cash interest is paid semiannually, in June and December. And additionally, annual bonuses are paid in the second quarter of each year.

Accounts receivable increased as a result of our increased revenue, and the continued shifting of a higher portion of sales to resellers, as reflected in the increase in days sales outstanding to 79 days in 2013 from 72 days in 2012. Our days sales outstanding increased due to the timing of sales and the acquisition accounting related to our Geomagic acquisition for a single month of the quarter. We expect DSO to return to our previous normalized levels over the next several periods.

Inventories increased in support of our expanded portfolio and due to the timings of orders and delivery of finished goods, materials, and raw materials, which we purchase in large quantities.

So that concludes my comments. [Abby]?

Abraham Reichental

Thanks, Damon. We continue to expand our portfolio, extend our reach, and diversify our business model. Since the beginning of 2013, we have launched four new printer products, [extending] three of our print engines, to further accelerate and drive our 3D printers adoption.

We launched eight models of our new ProJet 3510 3D professional printers and within the last few weeks, we launched the new ProJet X60 series of full color professional printers. We also successfully launched the new Cube and CubeX personal printers in support of our consumer solutions growth initiative.

In support of our 3D authoring tools initiatives, we acquired Geomagic, a leading provider of modeling design, sculpting, and scanning software tools and subsequently launched new Geomagic design software that leverages our combined Alibre and Geomagic design and modeling software platform.

We’re pleased that the rapid formation of an integrated 3D offering business unit that combines our rapid form Geomagic and Alibre products already resulted in the introduction of several new products.

In terms of outlook, we entered the second quarter with positive sales momentum and expect to benefit from growing demand for our newest products, increased demand from advanced manufacturing activities, and strong R&D spending by our customers worldwide. We expect our ongoing portfolio diversification, expanding channels, and focused growth initiatives to deliver continued success.

We believe that we are extremely well-positioned to monetize the expanding advanced manufacturing and healthcare opportunities and the emerging consumer opportunity. We expect meaningful revenue contribution from consumer solutions and the commercialization of [unintelligible] personalized medical devices in the second half of this year. And finally, we expect to be able to deliver continued top line strength and margin expansion as the benefits of scale and our solid M&A execution continues to manifest.

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

Question-and-Answer Session

Stacey Witten

We will now open the call to questions. We kindly request that you ask one question at a time and then return to the queue, allowing others to participate in the Q&A session. As a reminder, please direct all questions through the teleconference portion of this call. The telephone numbers are provided again on the slide. If you are calling inside the U.S., the number is 1-866-318-8616, and if you are calling outside the U.S. the number is 1-617-399-5135. The conference ID is 19084856.

Operator

[Operator instructions.] Your first question comes from the line of Jim Ricchiuti of Needham & Company. Please proceed.

James Ricchiuti - Needham & Company

If you can comment on the moderating growth in the healthcare area, and to what extent you see that picking up in the second quarter or is that more in the second half of the year?

Abraham Reichental

The moderation, Jim, is merely a function of the timing of 3D printer sales to certain healthcare companies. We see it as just that, and not something that will impede on the growth trajectory. And we expect our normalized, healthy growth in healthcare to resume through the rest of the year.

James Ricchiuti - Needham & Company

And service margins look like they ticked down a little bit from Q4 levels. Where do you see that going over the next couple of quarters?

Damon Gregoire

For services, again with that it was just a mix of timing of some sales. We continue, in services, where we have the on-demand parts, it was the continued pruning and shifting of the lower-profit products that we had out there that we talked about in earlier periods, that we said would remain for the next quarter or two after this. We expect it to continue to rise as the year progresses, though.

Abraham Reichental

In essence, we’re proactively taking the opportunity to enhance the mix of what we sell on the on-demand parts towards higher-growth profit margin. We talked about it in connection with the fourth quarter and we said it will take us a few quarters to shed what we need to shed and replace it with higher GPM products. And it’s ongoing, and we think that we’re on the right track here to build a much more profitable on-demand business.

James Ricchiuti - Needham & Company

Your materials margins, can they go much higher from here?

Abraham Reichental

We believe so. We believe that there is still opportunity to continue to expand margin on materials, and I think Damon said it in his comments earlier today, that as overall material revenue becomes a greater percentage of total revenue, we see that also contributing more to our consolidated gross profit margin.

Operator

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

Jay Harris - Goldsmith & Harris

It was my perception entering the year that the growth rate in material sales or revenues relative to more traditional printer sales would start to pick up. That ratio of relative growth rates would start to pick up. Now you’re putting software revenues into printer and other product sales. Could you comment on whether that perception is going to be the correct perception for this year?

Abraham Reichental

Well, there is no question that as we place more printers into the market, within a certain lag time we see an increase in materials revenue generation. And we have seen that, and it’s tracking our expectations very nicely. And you’re right that we have a category that’s called printers and other products. But within that, in Damon’s comments this morning, he basically spelled out what 3D printers only contributed to the quarter, which was $31.8 million, or a 43% increase over the 2012 quarter. So that’s really the number to focus on if you want the relationship between printers and materials.

Jay Harris - Goldsmith & Harris

Well, as you look at the trends in both categories of printers and materials, are the slopes of the curves moving towards each other? Or are they still moving away from each other, with the printers growing more rapidly?

Abraham Reichental

I don’t know that they’re moving away. One leads the other, and one leads the other by a multiple at some period. But there is no question that over time it pulls the materials curve to it. So we just see it as a very healthy and a very natural progression, you know where we plant more trees in every period, then the ones that are capability of bearing fruit, and then in subsequent periods, we get the benefit.

Jay Harris - Goldsmith & Harris

If I can ask another question, why are the margins in Germany and the rest of Europe so much lower than Asia-Pacific and the U.S.?

Damon Gregoire

It’s pretty much strictly around transfer pricing, and part of it is in Asia-Pacific, especially with software right now, is where the IP sits for the Rapidform acquisition, so they enjoy a little higher margins because that’s where the IP is.

Abraham Reichental

The simple answer is this is merely a function of how transfer pricing mechanisms work, or in most of the countries outside of the U.S. it’s a distribution model.

Operator

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

Troy Jensen - Piper Jaffray

Could you talk about the R&D move on a sequential basis? It was down I think $1.3 million sequentially, so just curious if there is one-time stuff in there? You just typically don’t see companies growing, seeing big declines in R&D. If you could just touch on that, that would be helpful.

Abraham Reichental

It’s not indicative of the trend for the year. It’s just a mirror function of concentrations of activities in any given period. And as you know, not all R&D is headcount-driven. Some of it is specific project expenses. And so in the fourth quarter we had some concentration in preparation for EuroMold and CES. And those are likely to reoccur in subsequent quarters. So don’t read too much into the sequential decrease. It’s likely to come back in subsequent quarters.

We’re absolutely on a trajectory here to spend more on R&D as we have done throughout last year. We think it’s the right place to make investments. And it’s already baked into our guidance for the year.

Troy Jensen - Piper Jaffray

And if I could do one follow up, can we [unintelligible] in cash flows? They were down on a year over year basis, despite profitability being up, and I think last quarter you talked about sales to resellers driving the building of the receivables. So just curious what we’ll see, the gap between the profitability and the cash flow statement this quarter. I mean, it was receivables again, so what drove the receivables up so much?

Damon Gregoire

Receivables up and payables down, which is just timing of payables and payables due types of things. Definitely receivables up on higher sales, but also continued higher sales through resellers in that professional category, which the majority is through our reseller and distributor channel, including the addition of, in last year’s quarter, Q4, of Rapidform and now Geomagic in this quarter. So those are also through resellers also.

Troy Jensen - Piper Jaffray

Was linearity any different in the quarter?

Abraham Reichental

What do you mean by linearity?

Troy Jensen - Piper Jaffray

Percentage of sales in the last month. Just wondered if it was a more back end loaded quarter.

Damon Gregoire

And obviously this was our largest revenue quarter, so as a percentage of, in the last month it’s not different than it was, but the same as it has been in previous quarters.

Operator

Your next question comes from the line of Holden Lewis of BB&T. Please proceed.

Holden Lewis – BB&T Capital Markets

No mention, I guess, of the prior guidance of $1.00, $1.15 in revenue growth? Can you just sort of touch on that?

Abraham Reichental

We stand by the guidance that we have given. Nothing has changed. We didn’t see any need to particularly mention it, but I believe that our guidance was $1.00 to $1.15 on revenue of $440 [million] to $485 [million].

Holden Lewis - BB&T Capital Markets

And just explain to me how the tax rates are working. You sort of indicated, I think, a 35% to 38% type tax rate. It looks like it came in more like a 21% tax rate, whether you’re using it on a GAAP or non-GAAP, which would suggest that you kind of came in line with the bottom line. But it seems like tax rate kind of helped us there relative to expectations. Or I’m missing something from a messaging standpoint. Can you help me out with the tax rate?

Damon Gregoire

We do expect the tax rate to continue to moderate up. It’s going to change from period to period based on how the distribution of earnings and revenue comes from country to country. That definitely changes things around. And then the ability to have some credits. Like one of the items was the R&D tax credit that we were able to take this quarter that was deferred from last quarter due to it not being signed yet by the government. But it should moderate back to those rates that we had said in our guidance.

Holden Lewis - BB&T Capital Markets

So for the three quarters making up the balance of the year, you would expect that 35% to 38% to kind of be right?

Damon Gregoire

Right now, yes. And we’ll update if it changes.

Holden Lewis - BB&T Capital Markets

So I guess the way that I’m trying to think about the quarter is it came in largely as expected. It seems like you got a benefit from the tax rate to get there. You’re kind of expecting tax rates to go up for the balance of the year, you’re keeping the guidance in the same place. There must be some sort of step up effect somewhere on the profit side, on the margin side, in order to make that happen. Can you give some color as to what you expect to improve beginning in Q2, Q3, Q4?

Damon Gregoire

There’s two areas. We continue to expect to make progress in the gross profit margin, which obviously drops onto the operating income line, the pretax line, and then is taxed at [unintelligible]. And we also continue to expect to have some synergies as we combine the business, especially in Rapidform and Geomagic. That Geomagic was just completed for only one month of this last quarter.

Holden Lewis - BB&T Capital Markets

And with the gross margin, do you feel like that was lower than you would expect it to be this quarter? Why? And where do you expect the improvement to balance in the year?

Damon Gregoire

We expect to get those margins to continue to steadily increase. There’s a couple of things that happened this quarter, one of them being that with the acquisition accounting of Geomagic you have to take what’s called this deferred revenue haircut on profitability of deferred revenue that’s brought in.

So that actually negatively impacted our gross profit margin by almost a half a percentage point for this quarter, and that goes away over the next few quarters, and we still have the effect of the Rapidform acquisition there too. Because you have the costs associated with it, but you have to reduce the revenue associated with the deferred revenue when you bought the company.

So that’s been a fairly significant impact at that point for those things too, which we would have expected, on a normalized basis, our gross profit to be higher this quarter than actually we even reported.

Operator

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

Brian Drab - William Blair

As usual, I’m going to ask you a question I’m not sure you’re going to be willing to answer. But can you talk through the organic revenue growth for each of the segments, printers, materials, service?

Abraham Reichental

We basically gave you the consolidated organic growth and we broke out what was software in the number. With the exception of software and the [tail] of Paramount, everything else is organic, so you already got it in the consolidated number.

Brian Drab - William Blair

So acquisitions that should have been counted as acquisition revenue at Paramount, but also Rapidform, right?

Abraham Reichental

Yeah, and as I just said…

Brian Drab - William Blair

The $16 million annual revenue business, or about almost $4 million a quarter, right? In Geomagic?

Abraham Reichental

Which we just broke out. We told you what software was for the quarter.

Brian Drab - William Blair

On the service side, the 18%, so if I take out Paramount, making some assumptions, is it fair to infer that service organic revenue growth was in the single digits?

Abraham Reichental

No. Paramount is not that large out of the total number. It’s not really that material to the final number. The bottom line is within the 22.1% organic growth, we broke out what software was, and with the exception of the tail of Paramount, everything else is organic. So it’s time, Brian, to move on. [laughter]

Brian Drab - William Blair

Well, I’ll work through these numbers more after we get off the call. But the printer growth of 61%, printer and products, if I take out the software I should be able to get to an organic number there. The software is in that segment?

Abraham Reichental

Yes, and in the printer, we broke it out. We said that printers contributed $31.8 million and it represented a 43% increase over the prior year. And within printers, it’s all organic at this point.

Brian Drab - William Blair

And with the materials, it’s all organic as well, right? The 16%, that’s a purely organic number?

Abraham Reichental

You got it.

Brian Drab - William Blair

Okay, and how are the sales going through the new resellers that you added with Rapidform. I know the Geomagic resellers were added even more recently, but can you give us an update there and the progress?

Abraham Reichental

Well, it’s early days. We’re still working on the Rapidform reseller training and qualification. Nothing really happened with Geomagic in the first quarter, because we only had Geomagic for a month. So it was premature to do something there. So in a similar way that it took us about four quarters to train all of the Z Corp resellers a year ago, it’s kind of going to be a similar journey here. And given that these are largely software resellers, it’s going to take probably a little bit longer to bring them all up to a level where they could fully cross sell all of our products. But it’s a journey worth taking.

Brian Drab - William Blair

And is it more challenging given the geographic diversification of the Rapidform resellers in particular?

Abraham Reichental

No, because we have good presence in all of these geographies. And it’s actually very attractive to us that it strengthens our presence in Asia-Pac in particular. But remember that we now have a fairly large presence, both in Japan and Korea, and that’s quite helpful.

Brian Drab - William Blair

And then if I could, just one more. Can you remind me, the question was asked why the margin is so low in Europe. Could you remind me why they’re so high in Asia? And above the U.S. in Asia?

Abraham Reichental

Yes, all of it has to do with transfer pricing policies and mechanisms which remained unchanged in our case for quite some time. And so in a transfer pricing scenario, most of the out of the U.S. sales are handled as distribution type margins. The exception in Asia-Pacific is that Rapidform is headquartered there and most of the IP of Rapidform is resident in Korea, which dictates higher transfer prices.

Brian Drab - William Blair

That’s kind of the same answer you gave related to the European margins. But there’s such a discrepancy. What’s the difference between Europe and Asia?

Damon Gregoire

Brian, that’s actually the opposite. If you look at Europe, they don’t have the IP, so they’re getting treated as a reseller or distributor, which has lower profit margin. In Korea, Korea developed the software and the IP sits there, so they get the benefit of higher revenue or higher margins associated with the sales due to the transfer prices.

Brian Drab - William Blair

So take Rapidform out of the equation and go back before the Rapidform acquisition. The margins in the third quarter were 37%, 28% in the second quarter, 28% in the first quarter in Asia. And what else is going on besides the software dynamics you’re talking about?

Damon Gregoire

Asia-Pacific also includes Australia, which has some other activity and things going on there. It really does just relate to how the profitability of the different countries through the transfer pricing has to be done.

Abraham Reichental

The umbrella answer is it’s all transfer pricing related.

Operator

Your next question comes from the line of Jim Ricchiuti of Needham & Company. Please proceed.

James Ricchiuti - Needham & Company

You introduced a number of new products. Are those all currently shipping? And what’s the outlook for the balance of the year in terms of new products? Is this the biggest group in terms of the new product introductions that you’re planning for the year as a whole? Have we seen those?

Abraham Reichental

No, as we’ve said publicly now quite a few times, we expect 2013 to be our most exciting and most productive new product introduction year in the history of the company. And so we’re probably maybe halfway through everything that we plan to introduce for the balance of this year. Everything that we have introduced thus far is shipping. And it’s doing really well. The market’s reception has been extraordinary. And our expectation is to introduce quite a few more significant products for the balance of this year.

James Ricchiuti - Needham & Company

And just with respect to Europe, Germany, other Europe, and if the numbers I have are correct, you’re showing pretty good year over year growth. I don’t know how much of that might be skewed by the software acquisitions, but can you comment a little bit about what you’re seeing in Europe?

Abraham Reichental

Yeah, I mean, what we’ve seen in Europe is basically 38% revenue growth and in Asia-Pacific we’ve seen 45% revenue growth. Some of it obviously is aided by the recent software acquisitions, but what we’re seeing generally is that even in some of these more uncertain economies, the demand for our products and services remains very high, and it’s, in our mind, primarily related, A) to very robust R&D spending by the companies that within our universe of use cases, and number two, a greater demand for our systems and services for outright advanced manufacturing applications. And that’s what’s driving our revenue.

Operator

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

Paul Coster - JP Morgan

I’d like to dwell on Europe as well if you don’t mind. Are the sales largely to existing customers who are upgrading or adding capacity? Are there industry verticals in particular that you’d like to call out as driving this growth, particularly in the advanced manufacturing space?

Abraham Reichental

Our sales have been split 50-50 or slightly better than 50-50 between new and existing. And so as we expand our universe of use cases, it’s tilting more in favor of more new as opposed to just existing, which we view as very positive. And in terms of verticals, it’s the usual suspects. It’s automotive and aerospace and consumer electronics and durable goods. But the pickup is coming now from more interest in advanced manufacturing as opposed to just rapid prototyping.

Paul Coster - JPMorgan

Which brings me to my second question. In your prepared remarks, and in what you’ve just emphasized, it sounds like your highest priority opportunities are in advanced manufacturing and healthcare. I may have that wrong. And deemphasizing a little bit consumer enthusiast markets and rapid prototyping. Is that a fair statement of where your priorities lie?

Abraham Reichental

Only in part. I’ve been saying now for probably eight to 10 quarters that we have two big growth opportunities. In the here and now, and in the near term, it’s the migration from the traditional [sand] box of rapid prototyping firmly into advanced manufacturing opportunities, both in aerospace, automotive, and healthcare, with patient-specific medical devices.

And equally as excited about the opportunity in consumer. In my prepared remarks today I also mentioned that Cube and CubeX continue to perform extremely well, and we expect those to become meaningful enough in the second half of this year so that we can begin to disclose and discuss our progress with you.

So it’s not an either or, it’s a both and. The advanced manufacturing opportunity is more obvious and more mature and actionable in the here and now. The consumer one we’re continuing to develop, and we’re very gratified by the results.

Paul Coster - JPMorgan

One sneaky last question then. What’s your equivalent of Moore’s Law in terms of print speeds over the next few years and the benefits that will bring to advanced manufacturing?

Abraham Reichental

I think that Moore’s Law applies here literally, but also in terms of exponential convergence. So will we continue to be able to double speed every couple of years and reduce costs and enhance functionality? I think so. There is a preponderance of evidence that will continue to happen, and the technological feasibility is quite favorable today. But we also think that we will benefit from the convergence of other exponential technologies like robotics and sensing and cloud computing and other enablers that will actually make the overall manufacturing process much more efficient across the board. So in our mind, it’s Moore’s Law plus the exponential technologies.

Operator

Your next question comes from the line of Hendi Susanto of Gabelli & Company. Please proceed.

Hendi Susanto - Gabelli & Company

Damon, it’s very encouraging to see margin expansion in the first quarter. Would you provide more insight on whether or not you think the first quarter gross margin of 73% is [unintelligible], is sustainable considering the second half of the year is usually stronger? Similarly, do you think the service gross margin of 44% in Q1 is sustainable as well?

Damon Gregoire

The materials gross profit margin we’ve been steadily increasing every quarter for the last few years, all the way from the upper 50s to the low 70s. And we do expect it to continue to expand as periods progress.

On the services side, we actually expect those to continue to make progress there too, and broken down between the two categories of on demand parts and the traditional service business of the company.

The traditional service business, the [unintelligible] warranty, we don’t expect that to expand materially, but we’ve said that the on demand parts, with what we’ve been doing in shedding some of the lower gross profit margin business that we do expect that to continue to expand.

Hendi Susanto - Gabelli & Company

I also noticed that the subsegment reporting is now combining production and professional printers. Would you be able to break down what the combined revenue of production and professional printer revenue in Q1 was?

Damon Gregoire

It’s getting much more difficult to do that, because of the convergence between production and professional printers. It’s really one category now, and that’s how we’re going to refer to it going forward.

Abraham Reichental

And we’ve been talking about this, I think, for more than four quarters, as we’re gradually merging these two categories. So it shouldn’t come as a surprise.

Operator

Your next question comes from the line of Holden Lewis of BB&T. Please proceed.

Holden Lewis - BB&T Capital Markets

Just trying to get a feel for the mix effect that you spoke to. I think you kind of positioned it as a negative. I assume you were talking just about the fact that the materials growth was a little bit lower than printers and such. But within the printers, that 43% growth, what are you seeing in terms of mix there? Is the margin mix stronger because you’re seeing faster revenue with higher level machines? Or is it getting diluted by the growth in the low level machines? What are you seeing within the printer mix?

Damon Gregoire

Within the printer mix, you know, it sort of goes with the last answer, with the professional and production being converged together, that we’ve been steadily moving the ASP down with new products, but that doesn’t mean we’ve been giving up on margin. So our professional, that sort of middle level, is just our high-growth area on that. And those areas enjoy higher margins.

And then if you talk about the consumer side, the Cube and CubeX and everything, those enjoy margins that are similar to our corporate averages too. So the printer margins have actually been increasing, but those, in total, in the 40s, are still much lower than the materials margin.

So when the printer sales have grown at such an exponential rate, which again we believe will help our recurring revenue in the future, the mix of it doesn’t necessarily help our margin expansion at that point.

Holden Lewis - BB&T Capital Markets

And then now that you’re sort of breaking out printers versus software, all within that machine category if you will, you’ve talked about printer margins being kind of in this 43% going up into the mid to upper 40s. You’re kind of there, I guess, but can you talk about, or can you break out kind of what the software margin is looking like, or what the goals are there?

Damon Gregoire

We didn’t really break out the software margins as they stand, but I can talk generally about goals. Because software margins are normally fairly high. So the software margins you’d expect upper 60s plus. Up higher. But remember, in printers and other, you also have some other products in there, such as the haptic devices from [Sensible] and the Vidar digitizers, which although those have good margins, are not going to be what necessarily software margins are in the 60s and the 70s.

Holden Lewis - BB&T Capital Markets

So you’re still looking at sort of the printers being in that…

Damon Gregoire

The digitizers and the haptic devices are probably similar to the printers. The software will work much higher.

Holden Lewis - BB&T Capital Markets

I guess I’m just trying to figure out, of the improvement in the margins for the machines, how much of that is simply the inclusion of more software, and how much of that is the actual printers increasing?

Damon Gregoire

It’s both. And in this level, it’s probably somewhere between half and half for this quarter. If the software business continues to increase and continues to expand, obviously that will push that margin higher, faster. But you saw, it’s only $4.2 million, was the revenue from software for the quarter, because we only had Geomagic for one month of the quarter.

Operator

Your next question comes from the line of Prabhakar Gowrisankaran of Canaccord. Please proceed.

Prabhakar Gowrisankaran - Canaccord

I had a couple of questions. One on the healthcare. You talked about Bespoke and a bunch of other innovations. And you had 14% of revenue and 18% growth. What do you expect going forward in the second half? Should we see an acceleration of the healthcare growth?

Abraham Reichental

We should see a resumption of the trajectory that we had in previous quarters. And we should definitely see the Bespoke products coming onto the market in the second half of this year and contributing to that. But our expectation is that healthcare continues to be a very lucrative, high-growth vertical for us, and we are not overly concerned over the first quarter, because it was primarily just a timing issue.

Prabhakar Gowrisankaran - Canaccord

And one other question. Just piggybacking on the previous question. So just to clarify, it looks like of the $39.7 million, $31.8 was printers, $4.2 was software, and the remaining $3.7 is all the haptics and all those devices. I know you gave the 41-43% growth for printers. Can you talk about the growth in software and the haptic devices within that bucket?

Damon Gregoire

Well, definitely the software and the haptic devices were this quarter and last quarter of last year, so there’s not a comparison to Q1 of the year before.

Abraham Reichental

And the haptic devices also came with Geomagic, so we don’t have much history on it, given that we only had it for one month. It’s premature to comment on that.

Prabhakar Gowrisankaran - Canaccord

And in terms of the last question, on the organic growth of 22%, do you expect Geomagic on the printer side, Geomagic and the haptic stuff, to grow faster than your printers? Or do you expect a similar trajectory for the two of them? I don’t know if you’re breaking it out, but just qualitatively, within that printer and other segment, in terms of growth rate for the second half.

Abraham Reichental

When you look at our consolidated growth rate, inclusive of Geomagic, those are already reflected in the guidance that we’ve given in the top line guidance. I believe it is somewhere in the range of the low 20% to close to the mid-30%, as a range for top line. And that is all inclusive of everything as we know it today.

Operator

And that’s all the time that we have for questions today. I would like to turn the call back over to Stacey Witten for closing remarks. Please proceed.

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 the investor relations section of our website, investor.3dsystems.com.

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