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Executives

Amanda Molbert – IR

Abe Reichental – President and CEO

Damon Gregoire – VP and CFO

Analysts

Brian Drab – William Blair

Jim Bartlett – Bartlett Investors

Jay Harris – Goldsmith & Harris

3D Systems Corporation (TDSC) Q1 2010 Earnings Call Transcript May 5, 2010 9:00 AM ET

Operator

Good morning and welcome to the 3D Systems conference call and audio webcast to discuss the results of the first quarter of 2010. My name is July and I will facilitate the audio portion of today's interactive broadcast. (Operator instructions).

At this time I would like to turn the call over to Amanda Molbert with 3D Systems.

Amanda Molbert

Good morning and welcome to 3D Systems Conference Call. I am Amanda Molbert and with me on the call are Abe Reichental, our CEO; Damon Gregoire, our CFO; and Bob Grace, 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/ir.

Participants who would like to ask questions related to matters discussed in this conference call at the end of the session 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 streaming portion of the webcast, please be aware that there is a three second delay and that you will not be able to pose questions via the web.

Before we begin the discussion, I would like to mention the statements regarding forward-looking information that appears on Slide #4. Certain statements made in this presentation that are not statements of historical or current facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include comments as to the Company's beliefs and expectations as to future events and trends affecting its business.

Forward-looking statements are based upon management's current expectations concerning future events and trends and are necessarily subject to uncertainties, many of which are outside the control of the company.

Please also see forward-looking statements and risk factors that appear in the Company's periodic filings with the Securities and Exchange Commission.

At this time, I would 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. As you know, earlier today, we released our operating results for the first quarter of 2010 and filed our Form 10-Q with the SEC this morning. Damon and I will review and discuss these operating results with you.

Let me begin by saying that we are pleased with our continued revenue recovery and improved earnings from our operating leverage. During the first quarter we experienced improved business conditions across all regions and enjoyed quarter-over-quarter revenue growth from all of our revenue buckets, led by significant materials and 3D Printer revenue contribution.

As indicated during our last earnings call we expected a lower first quarter seasonal impact than we experienced in previous years. And are pleased to report that seasonal decline shrunk from 45% for the '09 quarter to only 15% this quarter.

On comparable basis we extended the gross profit margin primarily as a result of our higher level of sales coupled with the continued positive effects of our ongoing cost savings initiatives. We believe that our continued ability to improve our bottom-line relative to the prior year quarter for the fourth quarter in a row while absorbing the 10:26 plus negative margins driver demonstrates our sustained operating leverage.

During the first quarter and subsequently we continued to extend our 3Dproparts services through organic growth and additional acquisition. We believe that we’re benefiting competitively from our extending products and services portfolio and our stronger financial position that has allowed us to self-fund all of our recent growth initiatives.

While we continue to expect the economic recovery to be slow based on the sequential progress we’ve made we believe that our marketplace conditions have stabilized. Accordingly, we remain optimistic with our positive quarter-over-quarter revenue trend may be sustained and expect to be able to preserve and expand our operating leverage.

Now for a more detailed look at our financial performance for the first quarter of this year, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Damon Gregoire

Good morning. For the first quarter revenue increased 32% over the 2009 quarter. This increase was led by a $3.9 million improvement in systems sales. For the quarter gross (inaudible) expanded 167 basis points to 45% on a gross profit increase of $3.8 million as compared to the 2009 quarter. Consistent with our prior guidance V-Flash sales negatively impacted our gross margin by 2.2 percentage points.

We also reported a 3% decline in operating expenses to $11.7 million, bringing our operating expenses as a percentage of revenue down to 37% from 50% in Q1 of 2009.

Net income of $2 million and earnings per share of $0.09 had included the negative impact of $0.01 per share plan V-Flash ramp up and $0.04 per share from ongoing litigation activities. FX activity recorded in other income expense also negatively impacted EPS by $0.01 per share.

As Abe mentioned earlier, all of our revenue bucket showed quarter-over-quarter growth in Q1 2010. Of the $3.9 million increase in system sales $2.1 million was from higher sales of 3-D Printers and $1.7 million was from an increased sales of large frame systems.

For the quarter 3-D Printer revenue represented 54% of total systems revenues. Large frame production systems accounted for 25% of total systems revenues and mid-frame systems contributed the remaining 21%.

Material sales grew by $3 million over the first quarter of 2009 and 3-D Printer material sales made up 16% of total material sales for the quarter.

Revenue from services increased by 8% in the first quarter, with revenue from our new 3Dproparts service more than offsetting the expected decline in system upgrade sales.

In response to previous questions regarding the progress we’re making and growing our health care solutions revenue we’re pleased to report that for the first quarter of 2010 health care solutions revenue made up 12%of our total quarterly revenue.

Health Care Solutions revenue consist of sales of systems, materials and services for hearing aid, dental and medical device applications, and other health care applications. Given the early stage of our Health Care Solutions business development we expect the production systems quarterly revenue may fluctuate.

For the first quarter recurring revenue from materials and services represented 68% of our total health care solutions revenue. We expect to continue to report progress on our health care solutions revenue in future periods.

Improved revenue and sustained favorable impact from our cost and productivity initiatives resulted in a 167 basis point gross profit margin expansion over the comparable 2009 quarter and a 108 basis points sequentially.

This underscores the sustainability of our gross profit improvements over the past six successful quarters and operating leverage over the past 11 successful quarters. These improvements also enabled us to move from a net loss of $2.1 million in Q1 of 2009 to $2 million of net income in Q1 of 2010.

Net income for the first quarter of 2010 included $1.8 million of non-cash expenses primarily relating to depreciation and amortization.

During the quarter we generated $4.8 million of net cash from operations and we used $3 million to fund our strategic investing activities and finished the quarter with $26.6 million of available cash.

Our inventory balance at quarter-end rose $1.9 million. This is primarily due to the timing of customer orders and revenue recognition. I’ll discuss this in greater detail on a later slide.

On Slide #12, we’ve broken out our first quarter revenue as a percentage of sales by product category and region. As you can see on the left, consistent with our expectations 72% of our total revenue for the quarter was generated from a higher margin recurring revenue buckets.

Materials revenues are largest and most profitable revenue category and for the first quarter materials generated $13.6 million of revenue, representing a 28% increase over the first quarter of 2009.

Service revenue for the quarter increased by $700,000 compared to the first quarter of 2009 and included sales from our 3Dproparts service business. 3Dproparts increased more than offset of plan decrease in system upgrade sales.

And systems revenue increased by $3.9 million in the first quarter of 2010 from $4.9 million in the 2009 quarter. Consistent with our expectations 3-D Printers including V-Flash accounted for more than half of our total systems revenue.

For the quarter gross profit improved by 37% over the 2009 quarter to $14.3 million. Our gross profit margin for the quarter increased to 45.3% from 43.6% in the first quarter of 2009.

The continued favorable impact from our cost savings initiatives coupled with improved overheads absorption from higher sales during the first quarter of 2010 more than offset the expected negative 2.2 percentage point impact of V-Flash revenue in the quarter.

As you can see from the chart on Slide #14, our DSO increased sequentially by two days primarily due to our lower level of sales compared to the fourth quarter of 2009. And in this challenging credit environment we continue to actively manage our receivables and credit level and are pleased with the quality of our receivables.

Inventories for the quarter increased by $1.9 million over the prior quarter, primarily as a result of higher finished goods inventory due to the timing of certain sales, revenue recognition activities that fell outside of this reporting period. This has also reflected in our quarter end backlog of $2.8 million.

During the quarter we used $3 million of cash in investing activities including 2.6 million specifically related to acquisitions. And we ended the quarter with $26.6 million of available cash, reflecting a $1.7 million increase over our 2009 year-end cash balance.

Our availability of increased cash for concurrently funding strategic investments reflects the quality of our earnings, the strength of our balance sheet and our ongoing cash management discipline that generated $4.8 million of net cash from operating activities for the quarter.

We believe that our financial resources are adequate for our current and anticipated future needs during this uncertain economic period and we continue to focus on improving our working capital management in order to pursue our near-term growth opportunities vigorously

That concludes my comments. Abe?

Abe Reichental

Thanks, Damon. Before we begin the question-and-answer session I would like to spend a few minutes discussing with you our progress and future outlook. During the course of the first quarter and subsequently we extended our new 3Dproparts services organically and for acquisitions.

During the quarter we acquired Moeller Design, a leading provider with aerospace and medical device customers. And in April, we acquired Design Prototyping Technologies, leading online provider of fast turnaround, high quality, functional parts and prototypes. These acquisitions have enabled us to extend and enhance our 3Dproparts offering.

Late in the quarter we completed our marketplace evaluation and launched the project MP 3000 and economical 3-D Production System for small-to-medium-size dental labs. The project MP 3000 print working dental model with crisp feature definition from a new durable high contract material designed specifically for this application.

Since quarter end we also announced the immediate availability of two new SLA Plastic, Accura PEAK and Accura CeraMAX, further expanding our materials and composites applications reach and geographical coverage.

Consistent with our approach to guidance I would like to provide some color on revenue drivers for the remainder of this year. Let me begin by saying that we believe that our sales funnel of opportunities for production system and 3-D Printers continues to strengthen. And accordingly, we remain optimistic that sales activity for the remainder of this year may continue to improve for relative comparable period last year.

Specifically, we expect sales of our spending line of 3-D Printers including V-Flash to continue to grow. We also expect continued growth of our health care solutions. We plan to increase 3Dproparts revenue organically and for additional domestic and global acquisition throughout the course of this year.

When marketplace conditions improve we believe that overall global economic conditions remain somewhat uncertain. Despite this uncertainty given our strengthened portfolio of products and services we expect continued revenue growth for the remainder of this year.

We intend to grow 3Dproparts revenue both organically and for additional strategic acquisition and now expect revenue from our 3Dproparts services to which something between 15% and 20% of our ongoing total revenue by the end of this year. We expect to continue to benefit competitively from our new and expanded products and service portfolio as well as our stronger financial position.

Let me offer a few comments on our expectations regarding gross profit and operating expenses. We expect our gross profit margins to remain stable despite adverse system mix towards lower profit margin printers as this category begins to represent more than half of our total systems revenue and includes our plan V- Flash ramp up activities for the first half of this year.

And margin drive from newly acquired businesses during their integration theories. After giving ways to the additional acquisitions we made recently and our anticipated ongoing litigation expenses as we currently understand them we expect SG&A expenses for the remainder of this year to be in the range of 27.5 million to 31.5 million.

We expect R&D spending for the remainder of this year to be in the range of $7.5 million to $9 million while keeping pace with our planned new product and production. We believe we can further enhance our operational effectiveness and optimize our operating costs over time.

In summary, let me say that our business model is built around significant recovering revenue component that help generate improved contribution margins. We believe that a stronger sales funnel together with the extension of our3Dproparts services could result in significant recurring revenue opportunities.

We remain committed to our long-term growth objective and are confident in our ability to provide values to our customers and stockholders.

With that I’m going to turn it back to Amanda.

Amanda Molbert

Before we open the call to questions I want to take a minute to invite you to attend our Analyst and Investor Day at the NASDAQ market site in New York on Tuesday, May 1. Our Investor Day will feature the following presentation:

Strategic Directions from Abe Reichental, our CEO, 3Dproparts and Production Systems Update from Kevin McAlea, our Vice President of our Global Business, 3-D Printer and Branding Activities from Cathy Lewis, Vice President of Global Marketing, Product Development Roadmap from Chuck Hull, our Chief Technology Officer and Key Operating Results and Announces from Damon Gregoire, our CFO. This will also feature a Dental Customer presentation from Mark Maier, Vice President of Corporate Development for the Aurum Group of Dental Laboratories.

Registration and lunch begins at 11:30 Eastern Time and the presentations begin at noon. If you haven’t done so already please register via the links at our Web site www.3dsystems.com/ir. Please be sure to register by tomorrow, May 6, at noon Eastern Time.

We will now open the call to questions. We kindly ask that you ask one question at a time and then return to the queue thus allowing others to participate in the Q&A session. As a reminder please direct all questions to the teleconference portion of this call. The phone numbers are provided again on this slide. If you are calling inside the US the numbers is 1-888-336-3485. And the conference code is 70048832.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Brian Drab with William Blair.

Brian Drab – William Blair

Good morning. This is Brian Drab with William Blair. My question I’ll get back in the queue after my first one, I have a few, but just around the V-Flash you had indicated earlier over the last couple of quarters that you expect to get to a run rate of about 250 units by third quarter at this point of course we’re just couple of months away from the third quarter so do you feel like you’re on track to hit that that run rate of 250 units and related to that you indicate 2 to 4 percentage points drag on gross margin in the first half. Should we expect the gross margin step up in the second half as you hit this run rate? Thanks.

Abe Reichental

Thanks, Brian. Good morning. We expect to achieve our run rate goal and objectives with regard to V-Flash and we believe that we’re making a reasonably good progress on that. I should also add to that that we’re pleased with our early indications of material consumption through V-flash. And we see also in the overall contributions of our entire 3-D Printer sales which represented for the quarter more than 54% of total systems revenue. And 3-D Printer material sales, as Damon indicated, in his comments, also amounted to 16% of total material revenue. So we have positive indications in all respects, not just from V-Flash but from our extending and growing 3-D Printer systems category as a whole.

Regarding to potential negative drive or additional margin pickup or extension, once we get past the first half of the year, we will update you on any further developments regarding that. We did indicate this morning that we expect our margin to remain stable despite any potential margin headwinds and we will continue to update you on that from period to period.

Operator

(Operator instructions). Your next question comes from the line of Jim Bartlett with Bartlett Investors.

Jim Bartlett – Bartlett Investors

Congratulations on another great performance and great progress.

Abe Reichental

Thank you, Jim.

Jim Bartlett – Bartlett Investors

You did address on the proparts business you raise the percentage from 15% to 20% ongoing revenue by year-end. Does that include future acquisitions will be one part of the question. And also can you give us some idea of the organic growth so far in proparts and give us maybe some help and guidance on how much acquisitions that contributed to-date?

Abe Reichental

Sure. Let me first say that in our revised revenue outlook for 3Dproparts, we have not counted anything that we don’t have in our revenue composites today. That is to say that we have not counted on additional acquisitions and so from time to time we may continue to revise and amend our guidance regarding the contribution of 3Dproparts to total revenue. We tried to be very conservative and only give you an outlook on what we already have in our composite as it gets integrated into a run rate over the next few periods.

With regards to organic growth versus acquisitions, it’s a little bit harder to answer that because we are experiencing organic growth from the earlier acquisitions. This we have made starting in October of last year. We have obviously integrated in the last six weeks, two additional acquisitions, even those are experiencing some growth because of our ability to optimize, provide new tools, and increase available capacity. So I can’t give you any more color on this at this point, Jim.

Operator

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

Jay Harris – Goldsmith & Harris

Hey, this the principal reason for the rise in SG&A this year versus last year the litigation costs.

Abe Reichental

Damon, do you want to address that?

Damon Gregoire

There is a litigation cost are built into that, but we’ve had other areas that we’ve been able to optimize and bring down. The primary reason for the rise in the SG&A has been building the sales and marketing activities surrounding 3Dproparts and some of the new marketing activities in regards to the other parts of the business which will be talked about next week at the NASDAQ presentation too. So what we’ve done is we’ve really been able to take a lot of what we’ve considered as non-revenue generating activities and reduced those costs and been able to invest in is what we consider to be revenue generating activities.

Jay Harris – Goldsmith & Harris

Just repeat what you said on the call in terms of litigation burden in the quarter.

Damon Gregoire

What we said in the quarter was $900,000, $0.04 a share and that’s been equivalent to what it was running in the second half of last year too though.

Jay Harris – Goldsmith & Harris

Alright, so until further notice, there’s a $3.6 million burden in, I don’t know, $35 million to $40 million, I’m sorry I think it’s higher than that, I don’t have the number. Here it is, $35 million to $40 million SG&A for the year kind of thing is that right?

Damon Gregoire

Yes.

Abe Reichental

That’s an accurate reflection on your part, Jay. We’ve been very transparent with that component and have disclosed it on a quarterly basis. I think for more than four quarters now and the run rate is consistent within plus or minus $100,000 on a quarterly basis and I think that for the last few quarters, if my memory serves me correctly, it amounted to the same $0.04 per quarter.

Jay Harris – Goldsmith & Harris

And I presume there are normal legal expenses in SG&A above and beyond that.

Damon Gregoire

That is just the litigation cost, there are normal other costs (inaudible)

Jay Harris – Goldsmith & Harris

Thank you.

Abe Reichental

You are welcome.

Operator

Your next question is a follow up from the line of Brian Drab with William Blair.

Brian Drab – William Blair

Hi. Just want to be clear on your guidance for revenue growth in 2010, on the slide, you say, continued revenue growth. Are you talking about year-over-year revenue growth or sequential revenue growth as well meaning of course that you’re expecting second quarter to be better than first quarter and third quarter to be better than second quarter and so on?

Damon Gregoire

It’s quarter-over-quarter, but I think what we’ve said is in total we’re expecting the revenue growth to increase from the prior years.

Abe Reichental

The answer is that our expectation is that both will happen. We will enjoy sequential growth and also quarter-over-quarter.

Brian Drab – William Blair

Okay, thank you.

Operator

Your last question is from a follow-up from the line of Jim Bartlett with Bartlett Investors.

Jim Bartlett – Bartlett Investors

Thanks. Getting back to 3Dproparts. When you acquired design prototype and you said that they had a unique online market price placed at a capacity, is this something with design prototyping that you can also incorporate into some of your other sites and acquisitions and just not only for this specific thing, but generally, will you be adding offerings that you have and one acquisition of new offering to be more broadly to your other acquisitions?

Abe Reichental

The broad answer is yes, but let me be a little bit more specific. In every acquisition that we’ve targeted so far, we look for entities that will bring into the created 3Dproparts services, unique capabilities and differentiated offering. So, in the case of Acu-Cast in Tennessee, we were looking to enhance our overall SLA production capabilities and metal castings.

In the case of AdvaTech in Indiana, we are looking to create the foundation for our aerospace and defense services. In the case of Moeller Design in Seattle, we were looking to build up a premier services organization around quick cast patterns and urethane casting. And in the case of Design Prototyping or DPT as they are known from Syracuse, our intent was to create user-friendly online presence using living edge online technology and information.

In all these instances, we are integrating not just the back office and transactional activities, but we’re beginning to look at all of these facilities as a fleet of services and capabilities. We’re looking at the technology that could be shared. We’re looking at building blocks of automation that can be shared and certainly, the DPT online technology component, we view it as a proprietary asset that we purchased that is going to be shared as required between the sites.

Operator

(Operator instructions). You have a follow up question from the line of Jim Bartlett with Bartlett Investors.

Jim Bartlett – Bartlett Investors

Another follow up on that. As you look by the technology that you are offering now in proparts, in addition to your more traditional additive technology of printing material target and considering now you’ve gotten a lot of new ones with urethane casting CNC, you got (inaudible) assembly, simulated data casting, quick cast, what has been the experience so far in, as far as I assume, one goal would be to offering more than one of these new product offerings to different customers so you can expand another number of usage by customer and just along that line of what you have seen so far in the sort of non-traditional additive technology business you are doing in proparts versus the traditional?

Abe Reichental

Let me say a few things, Jim. First is that even within the traditional custom manufacturing activities such as urethane casting or simulated dye casting, everyone of this projects typically starts with an SLA pattern. So there is still a very healthy and relevant link to our own kind of core technologies, in the sense, that it’s all driven by our own additive manufacturing technology, which is an enabling key component in it.

Our experience has been that customers that buy rapid prototypes also need to scale up to a variety of preproduction or small desk production and that we would like to uniquely position ourselves as a complete source for all of our customers designed to manufacturing needs. And so far the experience on this journey suggests that customers that are looking to complete a new product development projects can benefit from the complete range of services and it’s reflected in the revenue from 3Dproparts.

Jim Bartlett – Bartlett Investors

Thank you.

Operator

Your next question is a follow up from the line of Jay Harris with Goldsmith & Harris.

Jay Harris – Goldsmith & Harris

Hey, (inaudible) maneuver with the margin structure, part of your business is preassembled, so your cost of goods sold on that business contains all the fixed charges and I presume as the volume changes in that part of the business you just get your gross profit contribution on the incremental volume. And part of the business is a little more backward integrated. Can you give us a rough guidance for this year as to what percentage of your gross profits or fixed costs as we look at it now or on incremental revenues, what would be the incremental profit contribution for dollar revenue, if we had the same nix as we had in the first quarter?

Abe Reichental

Yes I don’t know, Jay that either Damon or myself are prepared to do it off the cuff or on the back of a napkin. Let us digest this question and figure out between now and our Investor Day next week, how to properly address it.

Jay Harris – Goldsmith & Harris

Alright, thank you.

Operator

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

Amanda Molbert

Thank you for joining us today and for your continued support to 3D Systems. A replay of this webcast will be made available after the call on the Investor Relation section of our Web site, www.3Dsystems.com/ir.

Operator

This concludes the conference call. We thank you for your participation. You may now disconnect.

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