3D Systems' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: 3D Systems Corp. (DDD)
by: SA Transcripts

3D Systems (NYSE:DDD)

Q3 2013 Results Earnings Conference Call

October 29, 2013, 9:00 a.m. ET

Executives

Stacey Witten - Director, Investor Relations

Abraham Reichental - President and Chief Executive Officer

Damon Gregoire - Chief Financial Officer

Andrew Johnson - General Counsel

Analysts

James Ricchiuti - Needham & Company

John Baliotti – Janney Capital Markets

Troy Jensen - Piper Jaffray

Holden Lewis – BB&T Capital Markets

Wamsi Mohan - Bank of America Merrill Lynch

Jonathan Shaffer - Credit Suisse

Ken Wong - Citigroup

Paul Coster - JPMorgan

Bobby Burleson - Canaccord

Jay Harris - Axiom Capital Management

Brian Drab - William Blair

Ananda Baruah - Brean Capital

Paul Coster - JP Morgan

Operator

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results for the third quarter and first nine months of 2013. [Operator instructions.] At this time, I would now like to turn the call over to Stacey Witten with 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 www.3dsystems.com/investor.

Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone numbers provided 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 and past 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 February 25, 2013. At this time, I'd like to introduce Abe Reichental, 3D Systems president and CEO.

Abe Reichental

Good morning everyone, and thanks for taking the time to listen to our call this morning. Let me start by saying that we are very pleased to report record revenue for both the quarter and the year. This morning, David and I will go over our financial results in more depth to update you on our progress and provide an outlook for the remainder of this year.

Our revenue grew 50% from the prior year to $135.7 million on a 76% increase in printers and other products revenue and 30% overall organic growth. Gross profit increased 52% and gross profit margin expanded 80 basis points to 52.6% despite the adverse impact of unfavorable mix and the additional drag from the recent acquisitions of RPDG and CRDM.

New products, extended channels, strong advanced manufacturing and consumer demand, and to a lesser extent acquisitions, contributed favorably to our record revenue. Since the beginning of this year, we commercialized 12 new products and the best is yet to come as we plan to launch just as many new products including several breakthrough advanced manufacturing printers and professional scanners at Euromold 2013 this December and cutting-edge consumer printers and scanners at CES 2014 this coming January.

During the third quarter, we completed several acquisitions in support of our strategic growth initiatives. CRDM expands our global quick parts footprint and extends our U.K. presence. TeamPlatform, a powerful online collaboration tool, strengthens our consumer and professional design and communications capabilities, and the Sugar Lab speeds up our entry into food printing.

We also acquired 82% of Phoenix Systems, adding proprietary direct metal printing capabilities to our advanced manufacturing portfolio. We believe that our accelerated growth rate reflects the strength of our diversified portfolio, the productivity of our channels, and the effectiveness of our strategic initiatives.

All of our revenue categories contributed to record revenue for the quarter. 3D printers and other product revenue grew to $59.8 million on a 66% increase in 3D printer sales. And, as anticipated, materials revenue growth rate increased to 30% and contributed some $33.2 million to revenue for the quarter, and services revenue rose $11.7 million to $42.7 million.

Healthcare solutions revenue grew 39% for the quarter, and contributed some $16.9 million to our total revenue. And, consistent with our expectations, consumer products revenue reached meaningful levels during the third quarter, adding some $13.5 million to revenue, primarily from printer sales. By way of background, consumer products revenue includes Cube and CubeX printers, print materials, and other cubify.com products and services.

During the third quarter, we sold well over 6,000 consumer 3D printers, primarily via our expanding field and online channels. Compared to the first half of 2013, third quarter consumer products and services revenue nearly doubled and for the first nine months of this year, amounted to $25.8 million.

More importantly, we set the stage to expand our in-store operations substantially during the fourth quarter of this year to approximately 400 retail stores, including Staples and Office Depot, by Black Friday. During the fourth quarter, we also plan to increase our online retail presence globally and expect our consumer products to be featured in several holiday catalogs.

We continue to broaden our licensing activities with major brands like CBS, Manchester United, and the NBA, and to expand our consumer design tools with new products like Cubify Design, a consumer CAD package that we launched yesterday for advanced users. And once again, we expect to launch several exciting new products and partnerships leading up to CES 2014, early next January.

Putting all the pieces together, we are convinced that this is a unique moment for our business. The level of inbound interest is at an all-time high across both the advanced manufacturing and consumer sectors. Specifically, we sold out our current direct metal printers manufacturing capacity and decided to triple our manufacturing capacity over the next 12 months, as well as accelerate the development of additional direct metal 3D printer models.

To support the aggressive rollout of our consumer printers to about 400 retail stores by Black Friday, we decided to substantially ramp up our retail field operations to ensure the success of this rapid expansion. And to further extend our first mover advantage in key verticals, we decided to compress our plans to commercialize a number of significant new products, including several breakthrough advanced manufacturing printers and professional scanners before year-end this year.

In line with that, for the second quarter in a row, we decided to materially accelerate our R&D and marketing spending to fully address these opportunities. Simply put, for the next few periods we are going for accelerated market share extension ahead of earnings per share extension.

Given the marketplace opportunities in front of us, we readily embrace the temporary pressure to our earnings during this phase because we believe that the fundamentals of our business model remain intact and because we fully expect the higher investments that we are currently making to favorably influence our results and our competitive advantage in the coming periods.

Outcomes and results from our earlier investments support this move, with year to date revenue from new products rising an impressive 75% to $156 million, while during the same nine-month period we increased our R&D expenditures some 95% to $10.8 million. Armed with increased investments, we expect to extend our market share faster and enhance our competitive advantage further.

Now, for a more detailed look at our financial performance for the third quarter and nine months of this year, I will turn the presentation over to Damon Gregoire, our chief financial officer. Damon?

Damon Gregoire

Thanks, Abe. Good morning everyone. Third quarter revenue grew 50% from the prior year to $135.7 million, and gross profit margin expanded 80 basis points to 52.6%. Our total operating expenses increased to $42.9 million on higher sales costs from 50% higher revenue, incremental costs from recent acquisitions, and accelerated R&D and marketing expenses in some of our expanding portfolio in new products.

Despite stepped up R&D and marketing expenses during the third quarter, operating expenses remained flat as a percentage of revenue. As a result of our strong revenue growth and expanded gross profit, we expanded our net income some 31% to $17.7 million over the 2012 quarter and earned $0.17 per share. On a non-GAAP basis, we earned $0.26 per share for the quarter.

For the first nine months, revenue grew 42% to $358.6 million and gross profit margin expanded 120 basis points to 52.3%. Our total operating expenses increased to $124.6 million on higher sales costs from much higher revenue, incremental cost from acquisitions, and deliberate acceleration of marketing and R&D expenses in support of our expanded portfolio in new products.

As a result of strong revenue growth and expanded gross profit, we generated net income of $32.9 million, a 17% improvement over the 2012 period, and we earned $0.34 per share inclusive of approximately a $16.7 million increase to our share count for the period. On a non-GAAP basis, we earned $0.66 per share for the nine months of 2013.

As you know by now, we report net 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, the impact of litigation settlements, [unintelligible] settlements, stock based compensation, and noncash loss on conversion of convertible debt. Our total depreciation cost and our cash interest expenses are appropriately included in our non-GAAP net income. And, for your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide, as well as in our 10-Q we filed this morning.

On a non-GAAP basis, we generated adjusted net income of $26.2 million, or $0.26 per share for the quarter. The excluded items aggregated to an $8.5 million tax affected net increase to GAAP net income or $0.09 per share in the third quarter.

Our non-GAAP net income was positively impacted by adding back $6.2 million of amortization expense, $0.7 million of acquisition and integration expenses, $3.1 million of stock based compensation, a $2 million loss on conversion of convertible notes, and $0.1 million of noncash interest expenses, which were partially offset by a $4 million tax impact related to the items just discussed.

For the first nine months of this year, on a non-GAAP basis, we generated adjusted net income of $64 million, or $0.66 per share. The excluded items aggregated to a $31.1 million tax affected net increase to GAAP net income, or $0.32 per share, in the nine months of 2013.

And, we now expect our reported tax rate for 2013 to be in the range of 32% to 35%, and our cash taxes to remain in the range of 10% to 12%.

For the third quarter and first nine months of 2013, all of our revenue categories contributed to growth, but printers and other products growth continued to outpace materials and services, reducing recurring revenue for the quarter to 56% for the nine months to 57% of revenue.

In the third quarter, 3D printers and other products revenue grew 76% to $59.8 million and made up 44% of total revenue. 3D printer contributed $51.7 million, a 66% increase over the 2012 quarter.

Other products revenue includes software, digitizers, and haptic devices, and for the third quarter of 2013, software products contributed only $5.1 million, but we believe that software products represent an upside to revenue and gross profit margins in the coming period as we complete the consolidation of our acquired software products, bring the market new professional scanners with integrated capture and inspection software capabilities, and complete the rollout of software products through our reseller channel.

Sales of new bespoke braces, scanners, and software were not material to our revenue for the first nine months of this year, but we believe this class of products represents an opportunity to our revenue and gross profit margin as we expand the rollout of these products, both nationally and internationally.

Revenue from our combined professional and production printers increased 42%, and our consumer printers revenue increased 353% over 2012. Printed materials revenue grew to $33.2 million and made up 24% of total revenue and service revenue increased some $11.7 million to $42.7 million and made up 32% of total revenue.

Consistent with our expectations, our materials revenue growth rate picked up, delivering a 30.2% increase over the 2012 quarter, with integrated materials growing 49.4% over the 2012 quarter and 20.4% sequentially.

We continue to experience robust growth in all of our geographic regions, led by a 77% revenue increase from Asia Pacific, followed by 52% revenue increase for the United States and 28% revenue growth from Europe.

Gross profit for the quarter improved some 52% to $71.4 million on higher revenue and expanded gross profit margin in all categories. Although we generated a higher portion of our revenue from lower margin products, including two recent acquisitions, we were once again able to expand our gross profit margin 80 basis points over the comparable 2012 period and sequentially.

This increase over the third quarter of last year was driven by a 550 basis point expansion to our materials gross profit margin to 73.8% and a 150 basis point expansion to our services gross profit margin to 46.9%, which was partially offset by a 20 basis point decrease to our printers and other products gross profit margin to 45%, which was primarily from higher sales of lower margin products, resulting in total gross profit margin of 52.6%.

As shown on this slide, print materials contributed 34% of our corporate gross profit margin on only 24% of total revenue. Higher quick parts revenue constrained our margin expansion as recently acquired on-demand parts businesses pressured our overall service margin expansion for the quarter, pending extraction of operational synergies and efficiencies and the depletion of lower margin acquired backlog.

While it’s clear that our gross profit margin expansion is suppressed by the substantial printers growth rate that is outpacing all of the revenue categories, it should be equally clear that we expect continued gross profit margin expansion in future periods to be driven by ongoing materials revenue growth, higher contributions from software sales, and improving quick parts gross profit margin.

For the nine months, gross profit improved some 46% over the 2012 period to $187.5 million on higher revenue and expanded gross profit margin from printers and other products and print materials, which was partially offset by services margin compression from recently acquired businesses.

Although we generated a higher portion of our revenue from lower margin categories, we managed to expand our gross profit margin 120 basis points over the 2012 period. This increase was driven by a 610 basis point improvement to our materials gross profit margin to 73.4% and a 250 basis point expansion to our printers and other products gross profit margin, aided by the addition of higher margin software products to 45.2%, which was offset by a slight decrease in service gross profit margin to 45%, which resulted in an overall gross profit of 52.3% for the first nine months of 2013. As shown on this slide, print materials contributed 36% of our corporate gross profit margin on only 25% of total revenue

For the third quarter, non-GAAP operating expenses amounted to $33 million, or 24% of revenue. Sequentially, non-GAAP operating expenses decreased $2.2 million. We believe this trend confirms the operating leverage in our P&L, even after absorbing higher sales and marketing costs and nearly doubling R&D expenditures to support our significant near term advanced manufacturing and consumer opportunities and accelerated new product development programs.

For the third quarter of 2013, non-GAAP SG&A expenses increased $3.7 million and R&D expenses for the quarter rose $5.3 million. For the first nine months, non-GAAP operating expenses increased to $95.9 million, but remained at 27% of revenue, even with higher sales costs, increased operating and compensation costs from acquisitions, and accelerated R&D investments.

For the first nine months of 2013, non-GAAP SG&A expenses increased $14.4 million and year to date R&D expenditures increased 75% to a total of $26.9 million or 8% of revenue.

For the quarter, we generated $31.6 million of net cash from operations and $44 million for the first nine months of the year. We ended the quarter with $345 million of cash on hand, including $217 million net proceeds from our common stock offering and $117 million paid for acquisitions and 3D venture investments. 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.

So, consistent with our expectations, DSO declined sequentially from 84 days during the second quarter to 77 days for the third quarter, on higher sales. Over the next periods, we expect DSO to normalize at the rate of 75 days. Inventories increased in support of our expanded portfolio and in anticipation of our planned new product launches.

Continued unprecedented demand for our advanced manufacturing consumer products compels us to increase our 2013 revenue guidance and concurrently accelerated new product introductions and retail channel expansion opportunities justify a further increase to our R&D, marketing, and retail field operations spending. Additionally, significant marketplace interest in our direct metals 3D printers encourages us to triple our metals printers manufacturing capacity and to fast track additional printers development.

Accordingly, this morning we are updating our annual guidance for the full year of 2013. Specifically in view of our accelerated growth rates, we are increasing our revenue guidance to be in the range of $500 million to $530 million, and consistent with the incremental step up in discretionary spending, we are reducing our non-GAAP earnings per share guidance to be in the range of $0.93 to $1.03. Our non-GAAP adjusted earnings estimate is fully tax affected and inclusive of our acquisitions that we have completed to date.

So, I’d like to take a moment to say a few words about our revised guidance. First, I want to affirm our belief that the fundamentals of our business model remain intact. Second, I want to clarify that while we are not in the habit of providing quarterly guidance, the growth initiatives we are currently undertaking are in response to significant near term opportunities that are well ahead of our prior expectations.

Third, from our revised guidance it should be evident that the next few periods we are accelerating our unit growth rate further in order to capture a higher recurring revenue stream in future periods, specifically our higher margin materials, because we believe that our materials revenue can become a larger contributor to mix and earnings power.

We fully expect improved product mix from the other side of these initiatives to drive faster gross profit margin expansion and to close in on our gross profit margin targets. And finally, because these fundamentals of our business model remain intact, we expect to realize operating leverage as the higher investments we are currently making begin to favorably influence our results and enhance our competitive advantage in coming periods.

I’d also like to remind you that this guidance is based on current plans and assumptions, and is subject to risks and uncertainties which are more fully described in the company’s report filed with the SEC.

That concludes my comments. Abe?

Abe Reichental

Thanks, Damon. As you can tell by now, we believe that our five strategic growth initiatives are paying off. Unprecedented demand for our professional and consumer printers continues to drive our growth and to shape the rapid extension of our portfolio. New materials, extended manufacturing use cases, and new software products set the stage for further margin expansion, and the addition of direct metal printers to our portfolio positions us at the heart of the rapidly unfolding advanced manufacturing opportunity while CRDM extends our quick parts global footprint and enhances our presence in the United Kingdom.

Teaming up with a leading technology distributor, Midwich, in the U.K. services as a force multiplier for our education growth plan and signing up China’s Tianjin real estate development company as a master reseller multiplexes our consumer and professional printers presence in China with broad reach into hospitality, technology, property, and retail.

The acquisition of TeamPlatform strengthens our consumer and professional design and communication capabilities with unique and powerful online collaboration tools and the Sugar Lab accelerates our food printing development and marketing initiatives.

We enter the fourth quarter with positive sales momentum, driven by increased demand for advanced manufacturing and consumer activities. We expect the decisive steps we have taken to accelerate our growth rate and market share expansion to deliver continued success, and we expect to launch breakthrough products, including several advanced manufacturing printers and professional scanners, at Euromold 2013 early this December and cutting-edge consumer printers and scanners at CES 2014 early this coming January.

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 through 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 1-800-706-7745, and if you are calling outside the U.S., the number is 1-617-614-3472. The conference ID is 86406937.

Question-and-Answer Session

Operator

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

Jim Ricchiuti – Needham & Company

The question I have is two-part. Damon, can you talk a little bit about the guidance relative to how we should think about operating expenses? Most of that reset coming from R&D and sales and marketing? Or should we assume some narrowing of gross margins in the implied guidance for Q4? And then the follow up is just on the metals capacity. When would you see that being ramped up?

Damon Gregoire

I’ll answer the first part and let Abe answer the second part of that question. We absolutely don’t expect gross profit margin pressure, and are expanding our gross profit margin for that quarter. And in fact even over these periods you’ve seen this year, we’ve continued to expand our gross profit margin and continue to expect that to occur.

Within SG&A and R&D, we definitely see that the large part of this is due to R&D expansion that we’ve talked about on the new product rollouts that Abe had mentioned in here. And within the SG&A specifically, it’s really around the marketing side. We’ve actually had other operating leverage that we’ve achieved in the SG&A side over this period that have not expanded at the rates of revenue, but actually have been cost reductions, and it’s really just been offset by the expansion of the sales and marketing side to handle the unprecedented inbound activity that we’ve had.

I’ll let Abe answer the metals question.

Abe Reichental

I’ll add to what Damon said. I think that based on our results to date, it should be clear that we could have left guidance unchanged, and gone for a 2013 photo finish, at the expense of some of the nearer term opportunities that are in front of us. Because if you look at the fundamentals, sales are increasing, margins are expanding, the P&L leverage is clear and present, and the variables, like discretionary spending and mix, could be manageable from period to period.

What we decided to do here is that given the near term market opportunities, and also the rapidly changing competitive landscape, we felt that now is a good time to forego a single quarter photo finish in favor of shoring up the next few years, because what’s new here is we have greater than expected demand for both our professional and consumer printers.

We’re sold out on our metal printers capacity. We have a unique opportunity to launch both professional and consumer scanners and really seize control of our own destiny on the whole scanning and reverse engineering software future. And we have an opportunity to fast track several groundbreaking advanced manufacturing printers in time for Euromold this year. And finally, we have an opportunity to engage in several joint development agreements for high speed manufacturing that we believe could shore up a substantial future for us and for the people the companies that are sponsoring those joint developments.

That’s why we did what we did, and it’s primarily R&D and marketing driven. It’s not going to put pressure on our ability to continue to expand margins. Specifically, to the direct metal question, the plan is afoot to expand our capacity in every quarter. It’s a multipronged approach to do that, and our expectation is to get ourselves into a position where we can manufacture over the next 12 months three times the amount that we were able to manufacture in 2013.

Operator

The next question comes from John Baliotti from Janney Capital Markets. Please proceed.

John Baliotti - Janney Capital Markets

Following on to Jim’s question, I think it’s pretty interesting or exciting that you’ve already had Phoenix just for a short period of time and yet you’re already ramping up production. I was curious, should they have already ramped up production and based on your balance sheet and your size, you’re able to do it? Or is it a combination of that plus you’ve just been able to because of your positioning in the market, being able to stimulate their demand faster, to the point where this is certainly a high quality issue?

Abe Reichental

Yeah, it’s a high quality challenge, and it’s a combination of the factors that you mentioned. It’s also an outcome of the fact that the Phoenix technology is thoroughly proprietary and unique in terms of the output that it produces.

And the existence of Phoenix and the unique performance characteristics of their product was not that visible and evident to key customers globally, because it was a relatively small company that was French and European centric and our ability to put it in front of the leading advanced manufacturing companies on a global basis is generating a great deal of demand and interest.

And with that, also, we felt compelling to speed up the development of even a larger format metal system, because we now have specific RFQs and demands for that kind of a system. So it’s a very high quality problem, and I think it validates the investments that we made in Phoenix in the past period.

Operator

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

Troy Jensen - Piper Jaffray

This is a big year for channel expansion for 3D Systems. So can you just give us any sense for how much revenue you contributed from these new partners? And ultimately, what we’re trying to figure out is this sell into the channel versus sell out? And then just a follow up, excluding consumer, can you just highlight which 3D printers are growing the fastest, so we can try to figure out where you’re taking the most share?

Abe Reichental

Starting with what you’re really triangulating, at what we would characterize, perhaps, as reseller inventory, we estimate a reseller inventory at the end of the quarter to be under 6%. So that hopefully answers that question succinctly and clearly.

In terms of what percentage of our total revenue is going through the channel, we don’t have any information on that to give you today. In terms of where, excluding consumer, where we get most of our growth in printers, it’s primarily in the combined professional and production series that now encompasses the ProJet 3500 series, the ProJet 5000 series, 6000, and 7000, and our full color x60 series. Those are the products that are growing the fastest.

Operator

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

Holden Lewis - BB&T Capital Markets

Obviously you’re ramping up expenses, and I noticed there’s sort of an annual guide to come after Q4, but can you give us a sense of the whether expense level you’re looking at in Q4 is kind of what you need to get ahead of the curve, or whether you’re going to continue to expand the expense level? And then I guess ultimately, you talked about being able to expand the margins, perhaps farm some of these investments. When do you anticipate getting to that point, where we’re not going to be talking about these quarterly aggressive hikes in investment spend, and we’re going to be able to talk about perhaps more stability and therefore even better incrementals?

Abe Reichental

Let me say a few things. One is that things have been moving very, very quickly and that our decisions to step up certain activities now are directly linked to nearer term consumer and advanced manufacturing opportunities that were not clear, present, and evident, even several weeks ago.

Secondly, the competitive landscape is changing, and we believe that we are in a unique position to extend our first mover advantage in certain key verticals and to shore up earning power expansion via margins on the other side of it.

Without getting into specifics that would begin to provide 2014 guidance ahead of schedule, we think that we’re looking here at a few periods after which, we think on the other side of it, we will see the incremental improvement. In the meantime, it’s important to note that while we have sequentially stepped up our operating expenses related specifically to R&D and marketing, we continue to reduce back office expenses and G&A expenses, as Damon noted, which means the leverage in the P&L exists.

We continue to extend margins, even though the mix is not ideal right now. The mix is heavily weighted in favor of printers and services, not yet materials. We were able to step up the growth rate in materials as we predicted, and this is a high quality opportunity in front of us that we think will last a few periods to position us where we need to be to turbocharge both our growth and future earning power.

And you’ll see it in more clarity when we report next time and provide annual guidance for 2014, but we believe that this is the right move for us to make, A) to seize on these opportunities and monetize them, and B) to make sure that we further extend our competitive position and extend our market share, which as you can see, just by shipping well over 6,000 consumer printers in the quarter, and some of the other results, it should be clear that we’re expanding our market share.

Operator

The next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Please proceed.

Wamsi Mohan - Bank of America Merrill Lynch

It’s nice to see the strong revenue growth and the growth catch up in materials as well. Abe, you mentioned that revenue related to reseller inventory amounted to less than 6% of total revenue. Can you give us some sense on where that number has been historically? And do you expect this to be the nominal inventory level carried by resellers on a go forward basis? And do you think the dynamic creates an increased lag between printer growth and material growth?

Abe Reichental

In terms of reseller inventory, it has inched up over previous periods, as you might expect, with extending the reseller channel and the portfolio of products that are being sold through the channel. Is it nominal at 6%? We don’t know. That’s why we decided to now, rather than guess at it, report on it.

And if it changes, we’ll let you know. We think that 6% of revenue is pretty reasonable in a channel environment. What it tells you is that we’re not getting into stocking situations here. This is transitory inventory, and that’s the purpose of a channel, to act as a conveyor, a conduit, not as a warehouse.

And I think that’s healthy, and if it grows a little bit more, with additional channel extension and higher revenue, it’s probably healthy and normal. Beyond a certain point, it may not be. Where we are today, we think it’s healthy, normal, and vibrant. And I’m sorry, I don’t remember the second part of your question.

Operator

Your next question comes from the line of Jonathan Shaffer with Credit Suisse. Please proceed.

Jonathan Shaffer - Credit Suisse

I’m just trying to get a little bit of a better understanding of the margin impact around the metal printer ramp, both from kind of a systems sales side and then the size of the material opportunity that follows the sale of the metal printer. And kind of does this have any impact on your long term margin targets?

Abe Reichental

We think that metal printers as a category is and will continue to be accretive to our printers margins. And we certainly expect metal materials to be accretive to our materials margins. And we believe that the kind of investments we’re undertaking in metals and in also fast tracking a group of nearly half a dozen new printers that we plan to introduce in the next few months, many of which are groundbreaking advanced manufacturing printers, will significantly enhance our recurring revenue generation capacity post those periods, namely materials at increasingly higher margins.

Operator

The next question comes from the line of Ken Wong from Citigroup. Please proceed.

Ken Wong - Citigroup

When we look at the increase in your full year revenue guidance range, is it fair to assume that most of that is coming from the consumer side, since the advanced manufacturing stuff probably has slightly longer lead times? And then second, on your balance sheet, your inventories have also popped up significantly Q over Q. Is that also largely due to just kind of building up some consumer printers ahead of the holiday launch?

Abe Reichental

It was very fair to assume that the increased revenue guidance is a composite of a significant uptick in professional advanced manufacturing sales and an uptick in consumer sales, which as you saw, just for the third quarter, consumer revenue doubled versus the first half of this year.

And in terms of inventory popping, Damon mentioned that already in his comments. I mean, we are gearing to introduce as many products in the next few months as we did year to date. So if you think that year to date we introduced 12 new products, we’re going to be introducing just as many products between now and the first week of January. That is largely responsible for the pop in inventory.

Operator

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

Paul Coster - JPMorgan

I’d like to go back to the question that was asked and answered from a couple of questioners ago, and that was to do with the channel expansion and the extent to which you believe that might be the reason why materials growth is lagging now the printer sales. Is that the principal reason?

Abe Reichental

Well, we always believe, and we explained it, I thought fairly extensively, a quarter ago, that a number of factors create some lag between the time that we sell printers and the time that we begin to see their recurring revenue. First, it has to do with when those printers actually get commissioned and installed.

Secondly, in many instances we have large advanced manufacturing companies that do a complete plant installation, and the actual go-live date of all the printers is dependent on when the plant goes live. And that is particularly true in the case of advanced manufacturing operations.

And lastly, we continue to point out that a more immediate indicator of material growth rate is integrated materials growth rate, which for the quarter I believe was in the high 40s as compared to total material growth rate, which was only in the 30s. So if you wanted a real finger on the pulse of material growth as it relates to more recent printer sales, the integrated material growth rate, which was 49%, more closely mirrors and mimics what’s happening in the here and now.

Operator

The next question comes from Bobby Burleson of Canaccord. Please proceed.

Bobby Burleson - Canaccord

On the Phoenix Systems capacity expansion, it sounds like there’s a nice uptick this year in terms of Phoenix units. I’m guessing 12-15 or so. Does that mean that you guys could approach maybe 50 units of production capacity next year?

Abe Reichental

In terms of capacity planning, those would be reasonable numbers to think about, yes.

Bobby Burleson - Canaccord

And then there’s definitely more demand, it seems like, at service bureaus these days for metal-based systems. We’ve seen a number of guys like C&A Tool buy some EOS machines. It sounds like Solid Concepts is building out a little bit more capacity there. With Morris Technologies now vertically in GE, what’s your service bureau opportunity to kind of satisfy that vacancy that’s been left, for your own metal production?

Abe Reichental

We’re certainly separate and apart from supplying advanced manufacturing companies with metal systems and supplying some service bureaus. We’re certainly going to extend our offering to include direct metal printed parts within our quick parts service. And you’re right to point out that there is some pent-up demand because of the vacuum that was created with the acquisition of Morris Technologies, and that’s an opportunity for us and also for other service bureaus, which we’re pursuing, both as a provider of equipment and as a supplier of parts.

Operator

The next question comes from the line of Jay Harris from Axiom Capital Management. Please proceed.

Jay Harris - Axiom Capital Management

Abe, are you in a position, at this point, to talk a little bit about the attributes of the metal parts that will be coming out of your metal printers on a relative term, speed and physical characteristics?

Abe Reichental

We’re in a position to spend days walking experts through all of the attributes of our printers, staring with the fact that our printers are probably around 20% faster than the comparable offering on the market, that we have the ability to compact and get to near real density and superior density to what you can get from investment casting and machining, that we exceed accuracies of machining operations, that we can do it in about 15 ferrous and non-ferrous alloys, and that this is only the beginning of the kind of capabilities that we have. We also point out that ours is the only true industrial grade manufacturing system out there that was never designed as a prototype system, but was designed from the get go as an outright production metal system.

Operator

The next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Please proceed.

Wamsi Mohan - Bank of America Merrill Lynch

Damon, I might have missed this, but can you quantify for us the dollar magnitude of the investments that you’re increasing here in absolute terms for R&D marketing and retail field ops?

Damon Gregoire

We didn’t break it out specifically, especially the R&D expenditures, the increase has been primarily related to that. On the SG&A and the marketing side, we haven’t broken it out.

Operator

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

Brian Drab - William Blair

First question is related really to the one that just preceded me. On the operating expenses, I’m trying to establish here by looking at my model exactly how much you’re increasing the spending. When I look at your second half expenses, and just thinking about the midpoints of the revenue and EPS ranges, it implies operating expenses in the second half of the year of about $68 million to $72 million. And that’s up from $63 million in the first half of the year. And on a percentage of sales basis, it’s actually down from the first half of the year. It’s about 28% opex as a percentage of sales in the first half of the year, going to 23% or 24%.

So I’m just trying to figure out, how much are you actually increasing the spending. And the related question is is this reduction in guidance more a reflection of getting a little too aggressive with the margin expectations when we heard from you last, rather than what looks like a modest increase in spending on an absolute dollar basis, and actually a decline in spending on a percentage of sales basis?

Damon Gregoire

It’s pretty interesting, that it really follows what we had said last quarter about where we thought our core base of spending would be. And we’ve been able to continue down that road to reduce spending in back office and other areas. And some of that is the increased spending in the sales and marketing is masked by some of those reductions, but it’s still there. R&D spending is pretty easy to see, because that’s a one on one comparison, and that’s what’s been increasing at the highest rate.

And including with that our gross profit margin is expanding, as we said they would be at the beginning half of the year. So no, this is not an adjustment to what we said from where we would be last quarter. It really is an adjustment from things happening much faster than we thought they would in these periods, and looking at where and how we should make the investments for the mid and long term, rather than for one quarter at a time.

Operator

The next question comes from Ananda Baruah from Brean Capital. Please proceed.

Ananda Baruah - Brean Capital

Abe, I guess with all the dynamics going on now, if we take a bigger picture view, multiyear view, how do you guys see, or do you see, the organic growth mosaic changing in the industry over the next couple of years? It’s been 20% to 30% for the last couple of years. Could you see that accelerating at any point to greater than 30% going forward at some point?

Abe Reichental

I think that is the implied message in the steps that we are taking in the here and now. The essence of what we’re doing, based on the opportunities that are in front of us, is we believe that we can accelerate growth rates. And by definition, accelerating growth rates would be primarily organically driven.

So I know that for example a year ago many people doubted why we entered into the consumer space. Today, you have the first glimpse of the kind of opportunity that even in its nascent stages consumer represents. We see opportunities to accelerate software growth by introducing scanners into the mix, with integrated software, because traditionally our ability to generate software revenue depended on hardware vendors selling a scanner before we could sell the software. We’re going to change that in the next few weeks, leading to Euromold.

And so can we scale up and increase our growth rate organically? We think so. That’s why we’re doing what we’re doing now, and that’s the essence of the message.

Operator

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

Paul Coster - JPMorgan

You talked about extension or expansion of the market. It didn’t sound like it’s really about share gain. And is this a product-led strategy for expanding or extending the market? Or is there more to it than just the product strategy?

Abe Reichental

There is no question in our mind that it’s both. There’s no question in our mind that we are expanding the market by creating new categories, but there is no question in our mind that we’re gaining share. If you look the the progress that we are making with our entire ProJet series, and when you come again at Euromold and see the groundbreaking advanced manufacturing and professional printers that are going to be on display, and how those printers further enhance our competitive advantages, it should be evident that this is not an either/or. It’s a both/and. It’s a product-led strategy, and it’s a share gain strategy.

Operator

The next question comes from the line of Jay Harris from Axiom Capital Management. Please proceed.

Jay Harris - Axiom Capital Management

Abe, as you look at what’s happened this year, and the acceleration of opportunities, are you uncertain as to how long the aggressive expansion phase, market share penetration phase, is going to take? Or can you say with some degree of confidence that within two or four or six quarters we ought to be getting back to the expense ratios and with higher gross margins etc. that we have been witnessing?

Abe Reichental

Well, we have prefaced the steps that we’re taking as a few periods. So we’re not thinking in terms of much longer than a few periods. And some of that will become more evident when we come out with our 2014 guidance. But we’re really looking at this as initiatives and investments that we’re undertaking over a short term few periods to basically shore up the next level of growth and extension in ways that gain us market share and extend our first mover advantage in key verticals ahead of other competitors entering the market.

Operator

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

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, www.3dsystems.com/investor.

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