3D Systems Corporation Q3 2009 Earnings Call Transcript

| About: 3D Systems (DDD)

3D Systems Corp. (TDSC) Q3 2009 Earnings Call November 4, 2009 9:00 AM ET


Amanda Molbert - IR

Abe Reichental - President and CEO

Damon Gregoire - VP and CFO

Bob Grace - VP, General Counsel and Secretary


Jim Bartlett - Bartlett Investors

David Mandel - William Blair

Jay Harris - Goldsmith & Harris

Herb Pathfinder - Wells Fargo


Welcome to the 3D Systems Conference call and audio webcast to discuss the results of the Third Quarter and First Nine Months of 2009. My name is Vanessa and I will facilitate the audio portion of today's interactive broadcast. All lines have been place on mute to prevent any background noise. After the speakers remarks there will be question and answer session. (Operator Instructions).

At this time I would like to turn the call over to Ms. Amanda Molbert with 3D Systems. Please go ahead ma’am.

Amanda Molbert

Good morning everyone and welcome the 3D Systems conference call. I am the Amanda Molbert and listening on the call our Abe Reichental, our CEO; Damon Gregoire, our CFO; and Bob Grace, our General Counsel.

The audio 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 we via the web www.3dsystems.com/ir.

Participants who would like ask question 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 three. The phone numbers are also provided in the press release that we issued yesterday. For those who have access to streaming portion of the webcast, please be aware that there is a three second delay and that you must be able to pose the questions via the web.

Before we begin the discussion, I would like to preface our presentation today with a statement regarding forward-looking information. 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 involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company to be materially different from historical results or from any future results expressed or implied by such forward-looking statements.

In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements in the future or conditional tenses or that include the terms believe, belief, expects, estimates, intends, anticipates or plans to be uncertain and forward-looking. 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.

In particular, the factors stated under the heading forward-looking statements, cautionary statements and risk factors that appear in the company's periodic filing with the Securities and Exchange Commission as well as other factors could cause actual results to differ materially from those reflected or predicted in forward-looking statements.

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. Yesterday, we released our operating results for the third quarter and first nine months of '09. We also filed our annual report on Form 10-K with the SEC this morning together with Damon and we will review these operating results with you and give you our perspective on our current business operations and prospects.

Let me begin by saying that considering the unprecedented economic environment, we are very pleased with our third quarter performance and the continued sequential improvement of our financial results.

Notwithstanding the persisting economical challenges that we encountered in the market place during the third quarter, we were able to generate sequential revenue growth from all of our primary revenue buckets.

Sequentially, systems sales increased by $0.9 million and material sales grew by $1.4 million. Sales of our V-Flash Desktop Printer contributed $0.9 million of revenue for the quarter and V-Flash sales negatively affected our total gross profit margin by 4.1 percentage points this quarter, consistent with our prior comments regarding the anticipated short-term gross profit margin drive that we have been talking about for the past few quarters.

Revenue from services increased sequentially by 8% in the third quarter, primarily as a result of an increase in maintenance contract revenue. While we expect the economic recovery to be agonizingly slow, based on the sequential progress we have made since the first quarter of this year, we believe that our market place conditions have stabilized. We believe our sales opportunities funnel continues to strengthen and our installed base began to exhibit early signs of recovery is evident by our material revenue snap back.

Accordingly, we are cautiously optimistic that our positive sequential revenue and trend may be sustained. Notwithstanding the challenging operating environment within which we continue to operate, our gross profit margin for the quarter increased and our operating expenses decreased compared to the third quarter of ’08. These improvements have now demonstrated sustainability for four successive quarters.

While revenue declined 22% from the third quarter of ’08 to the third quarter ’09, our ongoing cost control and productivity improvements enabled to us to move forward from $1 million net loss in the '08 quarter, to a net income of $0.9 million for third quarter of '09, including a $1.8 million of noncash expenses primarily related to depreciation and amortization expenses.

Our earnings per share of $0.04 included 4.1 percentage point drive from V-Flash sales, representing negative $0.03 per share and litigation cost of $0.9 million representing another negative $0.04 per share.

For the first nine months of ‘09 we generated $1.8 million of net cash and finished the period with $24 million of available cash. The combined effect of changes in our manufacturing strategy and our expanding product portfolio resulted in a modest sequential increase in inventory, related primarily to procurement cycles. We remain commented to achieving further inventory reductions.

Now for a more detailed look at our financial performances for the third quarter and first nine months of ‘09, I will hand the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Damon Gregoire

Thank Abe. Good morning. As you can see on slide nine for the third quarter 2009, we reported that 22% revenue decline from our 2008 second quarter, primarily due to the economic environment in which we are operating, which affected all of our revenue categories.

While gross margin improved by 507 basis points the improvement was not enough to overcome lower revenues resulting in a 12% gross profit decrease to $12.3 million. As Abe mentioned earlier, initial V-Flash sales negatively impacted our gross margin by 4.1 percentage points.

We also reported a 22% decline in operating expenses to $11.2 million, net income up $0.9 million and earnings per share of $0.04. Our initial V-Flash sales negatively impacted EPS by $0.04 and ongoing litigation fees had a negative effect of $0.03 per share. For the first nine moths of 2009 we reported that gross profit decreased to $33.6 million on a 27% revenue decline from the first nine months of 2008. Our gross profit margin improved by 523 basis points from the first nine months of 2008.

We reduced operating expenses by 26% to $35 million. Net loss for the first half of the year was narrowed by 69% or $5.5 million year-over-year and net loss per diluted share improved to $0.11 from $0.36 in the first nine months of 2008.

On slide 11 we have broken our third quarter revenue as a percent of sales, by product category and region. As you can see on the left our largest product revenue category was materials, which continues to be our highest margin category. While material sales declined 20% relative to the third quarter of 2008 they increased $1.4 million sequentially compared to the second quarter of ’09. This compares to $1.1 million sequential increase from the first quarter of ’09 to the second quarter of ’09.

While all revenue categories decreased in the Q3 2008, systems revenue decreased by a disproportionately higher percentage of the materials and services, due to reduced sales of our large-frame systems.

Systems revenue decline to $6.8 million in the third quarter of ’09 from $16.3 million in the 2008 quarter but increase sequentially $0.9 million led by 181% rebound in large-frame systems. Large frame systems represented 31% of total systems revenue for each of the third quarters of 2009 and 2008.

Mid frame systems accounted for another 23% of total systems revenue for the 2009 quarter, compared to 49% for the same period in 2008 and 3-D printers made up the remaining 46% of systems revenue in the third quarter of 2009 increasing from 20% in the third quarter of 2008.

Service revenue decreased 14% year-over-year to $7.7 million for the quarter, however sequentially service revenues increased by $0.6 million. This was lead by an increase in maintenance contract revenues.

The right side of the graph shows that our revenue base remains geographically diversified, sales from Asia Pacific region made up approximately the same percentage of total revenue in both 2009 and 2008, however a $4.5 million decline in volume from European operations resulted in European sales composing about 40% of total revenues for the quarter compared to 45% of revenue in the third quarter of 2008.

North American sales made up 45% of total revenue for the third quarter of 2009 compared to 40% for the third quarter of 2008.

Foreign currency translation had a $0.3 million negative impact on revenue in the third quarter of 2009 compared to a $1 million favorable impact on revenue in the third quarter of 2008.

As reflected on slide 12 the drop in service revenue compared to the third quarter of 2008 resulted from the decline in maintenance and warranty revenues, which are the largest components of the service revenue. As we mentioned in previous webcast the decrease in maintenance and warranty revenues is a rearview mirror reflection of our large-frame system sales decline. Specifically were impacted by the trailing-off effect of carved out revenue amount that we recognized randomly over the first 12 months of new equipment operations and the lack of comparable install base available for service contract renewals.

Additionally it is important to note that the decrease in service revenue partially reflects our continued effort to improve the profitability of our field service offerings by culling out less profitable components.

As slide 12 also shows our gross margin on services has steadily increased in each of last four quarters from 16% to 48%. In other words, our gross profit margin expansion on a $1.3 million revenue shortfall resulted in a $1.3 million incremental improvement to our service gross profit for the quarter.

Our gross profit improved to $12.3 million in the third quarter of 2009 from $10.8 million in the second quarter of 2009. Our gross profit margin increased from 44.5% in the third quarter of 2009 compared to 39.5% in the third quarter of 2008, even after including the negative 4.1 percentage points impact of the initial V-Flash revenue in the quarter.

Continued supply chain efficiencies and cost reductions in our field service organization helps to offset overhead absorption of lower sales. We also improved our overhead absorption during the third quarter of '09 by moving the manufacturing of our ProJet line of 3-D printers in-house.

This has enabled us to better utilize our facilities and to maintain better quality control. It is important to note that the actual improvement in gross profit margin was overshadowed by a significant shift towards our 3-D printer business and a way from sales of our higher priced large-frame Rapid Manufacturing centers that declined significantly. As you recall our mix last year favored a higher price, higher margin systems.

Our gross profit margin was down by $6.7 million compared to the first nine months of 2008, primarily due to our lower level of revenue, while our gross margin as remained at 44% for each of the last four quarters. The impact of our continued cost saving initiatives and productivity improvements, noted on slide 14, have been overshadowed by the impact of the initial V-Flash commercial shipments, which had a negative impact of 2.1 percentage points in Q2 and 4.1 percentage points in Q3.

Operating expenses continued their favorable downward trend in the third quarter of2009, declining by 22% to $11.2 million from $14.3 million in the third quarter of 2008,as our cost savings initiatives has continued to gain traction, evidenced by the declines in operating expenses in each of the last eight quarters.

This decrease was due to $2 million in lower selling, general and administrative expenses; and $1 million of lower research and development expenses. The decline in SG&A cost closely follow our cost reduction initiatives that we started in 2008.

We expect to continue to manage expenses and drive our cost downward possible without impairing our ability to operate and service our customers. As a result of our acquisition of Acu-Cast Technologies we have revised our expectation for SG&A cost. We expect SG&A to fall within the range of $8.50 million to $10 million for the fourth quarter.

Total operating expenses decreased by $12.1 million or 26%, to $35 million in the first nine months of 2009, from $47.1 million in the first nine months of 2008, selling general and administrative expenses declined by $9.6 million to $26.4 million in the first nine months of ’09, compared to $36 million in the first nine months of 2008. This is primarily related to the new operating cost levels that we have achieved.

Even in these current difficult economic conditions, we were able to decrease our DSO to 63 days from 66 days at December 31, 2008. Bad debt expense for the first nine months of ‘09 was $0.9 million compared to $0.7 million in 2008, and our allowance for doubtful accounts increased to $2.50 million at September 30, 2009 from $2 million at December 31, 2008.

Both of these increases primarily related to 2009 sales to our largest Japanese customer prior to its filing for court protection in February of ‘09. In this challenging credit environment we are prudently managing our receivables, evaluating credit levels and staying in close contact with our customers. This at times may future sales decisions.

Inventories decreased by $0.7 million to $20.3 million at September 30, 2009 from $21 million at December 31, 2008 resulting in day inventory on hand of 122 days. This decrease primarily resulted from reduce finished goods inventory and higher sales. Inventories at September 30, 2009 increased compared to our June 30, 2009 numbers as a results of the change in our manufacturing strategy as discussed previously. We are focused on driving additional inventory efficiencies and reductions.

Also despite the contracting economy we ended the third quarter of 2009 with $24 million of available cash, compared to the $22.2 million of available cash that we had at December 31, 2008. The increase reflects our focus on cash management, as well as the inventory and cost reductions that generated $1.8 million in cash in the first nine months of 2009.

We continue to evaluate expenditures necessary to maintain and expand our business and used $700,000 cash in investing activities. We expect our capital expenditures for the remainder of 2009 to be in the range of $0.5 million to $1 million. This range does not included expenditures that may be associated with acquisitions.

We believe that our financial resources were adequate for our current and anticipated future needs during this trying economic period. 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 stand a few minutes reviewing the state of our business. We recognized that the current market conditions present unique opportunities to enhance and broaden the recurring revenue portion of our business model and better utilize and monetize our rich technology platform.

Towards that end, we are focusing all of our activities and resources on growing the three key pillars of business, part, printers and production systems. Like gears working together in this three broad pillars, work together to create tangible customer value by gaining access to our latest proprietary systems, materials and parts technology.

We believe that by offering our customers the convenience and economical benefits of a one-stop shop for all their designs and to manufacturing needs, we can build sustained profitable growth momentum and deliver significant stockholder value. We expect that we will grow this three key business pillars through a combination of investments in organic initiatives and acquisitions.

With the three growth initiatives, we’ve announced since September, we have already begun to execute our new business model. In September, we acquired the key assets of Desktop Factory, a company that was developing a sub-$5,000 3-D desktop printer. The Desktop Factory 3D printer exhibits a build speed comparable to existing 3D printing technologies to produce robust plastic parts.

As we’ve said previously we expect to complete the development and integration of Desktop Factory's technology in to several new products, within our existing research and development budget.

On October 1st, we acquired the assets from AcuCast technologies a leading provider of rapid prototyping and manufacturing services that offers precision parts made on a wide range of traditional and additive manufacturing systems. Concurrently, we launched 3Dproparts the world’s largest rapid prototyping and direct manufacturing parts service. We expect our 3Dproparts service to bring together a wide range of production and additive grade materials and the latest additive and traditional manufacturing systems, enabling us to deliver a broad range of precision plastic and metal parts and assemblies to our customers. We plan to capture and report revenues from AcuCast and 3Dproparts within our service revenue line.

We appreciate the need to provide financial guidance to our stockholders and the investment community but believe that based on the current economic environment such an attempt would be irresponsible. However, in order to assist our investors and followers, I would like to provide as much color as we can on revenue drivers for the reminder of '09 and beyond.

As I mentioned in my opening remarks, we believe that we have entered the fourth quarter of ’09 with a stronger sales funnel of opportunities for our new direct rapid manufacturing Pro Systems and 3-D printers and as a result we remain cautiously optimistic that sales activity may improve in the coming quarters. Specifically we expect sales of our extending line up of 3-D printers to continue to grow helped by our expected commercial shipments of the new project ProJet 5000 later this quarter.

We also expect continued growth of Dental Manufacturing Solutions benefiting from our extending portfolio of dental production systems and dental marketplace technology leadership. We also anticipate revenue growth from our new 3Dpropart service and the related AcuCast acquisition.

We are pleased with our first full quarter of V-Flash sales and believe that we are on track to achieve our targeted first anniversary run rate of 250 units per quarter, which should begin with the third quarter of 2010.

Since January ’09, we have added 35 new resellers and we expect to continue to add resellers at a rate of 10 to 15 per quarter.

As I mentioned in the earlier remarks we believe that while the economic recovery will be agonizingly slow market condition have began to stabilize and our revenue decline may have bottomed out during the first quarter of this year.

Given our strengthened portfolio of product and services, we expect sequential revenue growth during the fourth quarter, although we do anticipate lower material revenue growth for the fourth quarter, as we expect service revenue to continuous to lag and its recovery behind systems and materials

As we have previously announced we intend to grow our annual rate of 3Dproparts service both internally and through additional strategic acquisitions.

By the end of 2010 we expect sales of 3Dproparts to reach a minimum level of 10% of total revenue. We expect to benefit competitively from our new and expanded product and services portfolio, as well as our stronger financial procession.

In terms of operating expenses and cash, we expect our growth profit margin to remain strong, notwithstanding lower revenue, adverse system mix that Damon talked about earlier and continued quarterly drive on our gross profit margins in the range of 2 to 4 percentage points for the remaining three quarter of the first year of our V-Flash shipments.

With regards to operating expenses for the fourth quarter of '09 we are providing the following guidance. Based on improvement we made in our cost structure, we expect SG&A to be in the range of $8.5 million to $10 million for the fourth quarter, inclusive of our anticipated higher litigation expense and increased operating cost associated with the AcuCast acquisition.

We expect our R&D spending to be in the range of $2 million to $3 million for the fourth quarter, without slowing down the rate of planned new product and production for the balance of ’09.

Finally we anticipate our capital spending to be in the range of $0.5 million to $1 million for the remainder of the year, This range is limited to ordinary capital expenditure required to run the business inclusive of our 3Dproparts activity. This range does not include capital required to finance additional acquisitions.

We recognize that the current market conditions present unique opportunities to enhance our business model and expect to make additional strategic investment in the coming period.


Looking forward we believe with our new broad initiatives in place, our funnel of new opportunities for the fourth quarter is stronger than it was previously. We expect that execution on our three key pillars of business growth initiative, parts, printers and production systems should help drive demand for our product by OEM’s.

As you know, our business model is built around significant recurring revenue components that have begun to generate improved contribution margins over the past four quarters. We believe that launch of our 3Dproparts business significantly enhances our recurring revenue business model.

We remain committed to our long-term growth objectives and our confident in our ability to provide value for our customers and stock holders.

With that we will now gladly take your questions. Amanda?

Amanda Molbert

We will now open the call to questions. We kindly request that you ask one question at the time and then return to the queue thus allowing others to participate in the Q&A session As a reminder please direct all question to the teleconference portion of this call. Replay numbers are provided again on /27. If you are calling inside US the numbers is 1-888-336-3485. The conference code is 36028148.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Jim Bartlett from Bartlett Investors

Jim Bartlett - Bartlett Investors

A terrific performance. Could you expand a little bit more on V-Flash, have you gotten a sense of the material usage rate yet or is that too early and does it include Asia and Europe rollout and also what kind of mix are you getting with your the [curing] stations?

Abe Reichental

Good morning Jim and thanks. As I said in my opening remarks we are pleased with the first full quarter performances we had with V-Flash and we mentioned that V-Flash sales have contributed $0.9 million of revenue to the mix here. It was primarily generated in the United States and Europe. The roll out in Asia is more of a fourth quarter event and what we are finding in term of [curing] stations is that we have an initial system and we always sell the [curing] station and then receive orders on to require rates. In terms of material usage, we have had a nice performance from the initial installs in terms of repeat cartilage orders. So far we are very pleased.

Jim Bartlett - Bartlett Investors

Just following on the cost allocations to V-Flash, what portion is really a sort of a fixed cost and what portion is variable cost. I'm trying to get an idea as to how you ramp up, you approach profitability?

Damon Gregoire

On that one, Jim we outsource the production of the V-Flash unit and as we move along we've been working with that outsourced contractor to continue to reduce the cost.

So it's basically on a build-by-build that we keep reducing that cost, we don't really have at this point for internal purposes here much of our fixed cost there, but we do keep moving ahead with sourcing and productions to keep bringing that cost down.

Abe Reichental

This is literally a function, Jim of ramping up and scaling up cost that we believe will fade away at the end of the first four full quarters. We believe that we have responsibly and so far very accurately estimated the range, and we're pleased that we were able to absorb and more than make up for it within our own internal savings and productivity improvements, because as you recall our gross profit margin for the second quarter was 44% and that was with at 2.1 percentage points absorption, in our negative absorption of V-Flash. In this quarter, we also have 44% plus with 4.1 percentage points negative drop. So, we believe that we are not only estimating this negative drag from the initial launch cost but finding ways to more then make up after it.


(Operator instructions) Your next question comes from a line of Brian Drab from William Blair

David Mandel - William Blair

Good morning. This is [David Mandel] on for Brian. With regards to Desktop Factory acquisition, how close is the technology to being commercial ready at this point?

Abe Reichental

We are not in the habit of discussing pending commercial announcement until we have a date certain and so I can’t comments on how close it is. Needless to say we found the technology interesting, advanced enough and complimentary, so that we decided to acquire it and as we said publically David, we intend into several new product developments that we have. We already have the lowest cost commercial printers on the market. It’s $9900 with of V Flash and we expect that Desktop Factory technology would allow us to push that barrier even further down over time.


(Operator Instructions) Your next question is to follow up question from Jim Bartlett from Bartlett Investors

Jim Bartlett - Bartlett Investors

Hi, yes, could you talk a little bit about your material margin and the trends you see there and margins in general, but the material margins specifically. I know it was 57%, is there room from improvement there? Is this also impacted by foreign currency trends?

Abe Reichental

A few things that I like to say about materials. I think that, the fact that the way we enjoyed and realized sequential material revenue growth of $1.4 million is the testimony to the quality of our installed base. If you look at other parts of this marketplace not everybody could claim that they actually enjoyed material sales growth sequentially between the second and the third quarter. I think that’s the testimony to the quality of our installed base and the consumption ability of our systems, which is certainly high in comparison to competitive systems.

A margin-wise Jim, of course in times like this there is some pressure on the margin and certainly currency is not always helpful in situations like this, particularly since our sales in Europe did not grow at the same rate that sales in the US gross for the third quarter, but we are not really concerned about material margins.

We believe that there is plenty of room for improvements there and that would follow also with larger sales volumes. Because remember, with all the improvements that we have made in our gross profit margin overall and materials being a very large parts of what we do, we are still up against less than optimal overhead absorption here in all categories relative to, let’s say, this period last year.

So, quite a bit of what may appear to be in the materials margins; some sliding back could very easily be remedied with the little bit more volume that will fix our less than optimal absorption.

Jim Bartlett - Bartlett Investors

Forget about follow-up questions. Could you just talk into parts, printers and production system that you mentioned the focus is on. Can give some idea of how it is structured, how you are structured with the business unit and how that plays in to the overall company business model now that you have of Proparts as part of the model?

Abe Reichental

Yes, I talked a little bit early today about the fact that we now have basically three key business activities within the company or as we call them key drivers or key business pillars and that's parts, printers and production systems, which in our mind represent a continuum of touch points with the customer.

A customer today, may only have a need to access the latest technology parts, as their in-house development activities grow they may want to bring the printer in-house and eventually they may want to bring a production system in-house and still continue to buy parts for other activities that they may not want to invest in-house for.

So our go-to-market strategy is such that we want to make sure that we are tapping into the largest audience, that we give the largest audience in the market place an opportunity to experience the 3D Systems brand and its latest capabilities and its value proposition, leveraging latest technology in systems and materials, and the go-to-market strategy remains with production system, we have a direct sales force and with our 3-D printers and 3Dproparts, we are going to go through a combination of channel management resellers and authorized partners to help us penetrate into all these accounts that have multiple acquisition points for parts, printers and ultimately production systems.

Also separate from that we also recognize that there is a growing internet market place for paid parts and in line with that we also launched on October 1, our 3Dproparts website.

Jim Bartlett - Bartlett Investors

Is Dental a business unit on its own, I believe you had set that up sometime ago.

Abe Reichental

Well, we’ve set Jim dental as the business development group, not as a business unit because into Dental we have again three different types of solutions. We have two 3-D printers now that are designated as professional dental systems, one is the DP, and the other is the one that we have just previewed at the Shanghai show a few weeks ago, the MP. Those are the two designated dental lab printers, one for wax-ups and coatings, the other for dental models, but we also sell production systems into the dental universe and we have a few SLA systems and direct metal systems that are designated for dental solutions.

We also plan to provide dental model VR 3Dpropart to certain dental customers, so what we have today in place, organizationally speaking is not a dental business unit but a dental business development role that can pick the best parts from each one of our business units and offer a continuum of comprehensive dental solutions into this space.


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

Jay Harris - Goldsmith & Harris

I wonder if we could go back to defining the market into three systems into three segments. Well I am broadening the name systems, printers, value added manufacturing operations and you are using now, propaid parts also as that segment. I would like to hear you talk about the momentum or lack of momentum in the profile of each these businesses? When you comment on printers to what extent was the performance in the third quarter, which was very good, promoted or aided by the introduction of new printers? I think you always said when you introduce a new system, there is always a surge in orders and to what extend does it reflect the pick up in trend demand?

Abe Reichental

Okay, let me start by explaining three areas of concentration that we now have parts. printers and productions system. As you know we come from background of selling large-frame production systems and we have learned over time that with that kind of business model you have somewhat of a finite universe of deep pocketed companies that can afford to invest and have the justification to invest in a large production system. We have than began to set our sights on lower priced entry and mid range systems and printers and obviously we have a price point in all this within different capabilities.

We concluded that we could attract a much larger audience and began to really go after the 500,000 available CAD seats that are out there, that represent really the power get for 3D printers. We believe that more than 500,000 users of CAD seats are actually buying prototypes and parts and so by doing that, we are now setting site into the constituency that actually falls through and creates the entire demands in our states, because nothing happens in the states of the additive manufacturing until somebody orders the parts. If they order it from the wrong internal companies shop then eventually it will require additional capacity in-house by a company.

If they order it on a service bureau, eventually the service bureau has to order another machine and so we are beginning now to address with our products initiatives, at much larger audience that we want to induct into the latest and greatest technology and value proposition and give them an entirely new brand experience.

So that when they are ready to invest in their own printer they would bring that printer in-house and it will be a 3-D printer, 3-D systems printer, and when there are production system they would want the same quality and access to the same technology that they have experienced when they purchased the part from 3-D Pro-parts.

Coming back to the first part of your question Jay, you know in times like this when you introduce a new product, obviously there is a little bit more resistance than there would be if we introduced it in the same period in ’07 or ’08. So I do know that we were helped enormously in the third quarter from the fact that we had a full quarter of V-Flash. I think V-Flash is on schedule and it’s exactly where we expected it to be. I don’t think we have got much help from the economy, but it is new, it is differentiated, it is capable and it is the lowest priced 3-D printer on the market with a really impressive output and I think that is what selling V-Flash but if you look at the whole category of 3-D printers for their quarter and Damon talked about that.

It nearly doubled in its share of systems revenue from the comfortable quarter, went from like being 20% in the third quarter to 46% in this quarter and that was more than just V-Flash.

So, we are gaining traction across the board within our 3-D printing portfolio and it's what we've been saying we would be doing all along.

Jay Harris - Goldsmith & Harris

So, what has happened in the third quarter in terms of the trend in value added manufacturing?

Abe Reichental

I think that the trend in value added manufacturing right now is such that over the last four quarters, a great deal of existing fully utilized capacity became available. When you go through the kind of recessionary steps that lay off 15% to 20% of your manufacturing and design engineers worldwide, less projects are being attended to and all of a sudden many value-added production systems that are fully utilized have some available capacity, which is why you see some pick up. We did have some pick up in large-frame system sales in the quarter but not nearly enough to come back to historical levels because what we see is there is still lots of idle capacity out there and it’ll take some time for all that to be absorbed as we see real economic recovery that also begins to create some jobs.

Jay Harris - Goldsmith & Harris

I am not really in the comparisons with the third quarter of '08, I’m more interested in the concretive quarterly trend?

Abe Reichental

Generally we saw more large trends in the third quarter then in the second quarter.

Jay Harris - Goldsmith & Harris

Okay, and then when it comes to Proparts on a pro forma basis, how the business look to you in third versus the second quarter?

Abe Reichental

Well we I’ll remind you that we’ve launched 3Dproparts in the first day of the fourth quarter.

Jay Harris - Goldsmith & Harris

No I understand that but you had several operations, which you have consolidated in October in to Proparts. If you look at each one of those individually and add them up, how did the third quarter compare to the second quarter?

Abe Reichental

I am not prepared to talk about that today Jay. What I try to say in my prepared remarks is that we’ve aimed to give you a range of what to begin to look forward. We said that at the absolute minimum we expect 3Dproparts to represent at least 10% of total revenue at the end of 2010. Once we have several quarters of operating with 3Dproparts, we will begin to give you more color and as we add a few more acquisitions and organic initiatives to this we will also provide you with pro forma. It is a little bit premature and little bit there irresponsible to do that today.

Jay Harris - Goldsmith & Harris

All right, can you comment just to finish this off, can you comment on the trends on these three parts of your business thus far in the months of October?

Abe Reichental

I can but that would fall under the heading of forward guidance on revenue, which I tried very hurried not to do thus far. I think that it would be irresponsible given the current conditions to begin to give revenue guidance. We’ve given you very specific guidance on many other lines of the P&L and I very cautiously say that we expect a sequential progress in the fourth quarter but I don’t to say more than that.


Your next question comes from the line of [Herb Pathfinder] from Wells Fargo

Herb Pathfinder - Wells Fargo

Pleased to hear the progress making. You touch what I really want to talk about in detail. It may be you can extend on the progress you’re making, but as a group, could you give us an ideas what percentage of your revenues you might be generating in the future or even currently from your dental business?

Abe Reichental

Let me say that we’re very please of the progress we are making with dental and that, since we’ve started talking about the dental, we’ve placed several hundred units, primarily printers into dental labs world wide. We have made good progress on dental manufacturing with companies like 3M and more recently Sirona and [Sensible] and others. We do not track and report dental revenues separately. If that’s an area of events for us, we can look into factoring something like this into future disclosures, but I don’t have that readily to offer to your Herb. What I will tell you as that we are continuing to develop dental capabilities and as I mentioned earlier just in the last couple of weeks, we’ve introduced yet another dental system and if you want to have a quick look at, you can go onto our blog. We just blogged on yesterday. So, if you get in our live at 3D blog, you can see a picture and a brief description of the new dental systems that we have exhibited last week at the big dental show in Shanghai.

Herb Pathfinder - Wells Fargo

If it is there, more progressing made overseas and dentist applying new technology and trying to use your of equipment versus what’s going on in the United States or not necessarily?

Abe Reichental

Yes, we initially obviously the early adapters were in the United States. That has now spread in to Europe. China in particular is becoming the new center for quite a few mega labs that our actually taking work, also from the United States and carrying all of their dental lab process work in China.

Herb Pathfinder - Wells Fargo

Have you actually used the equipment to make to form [proms]?

Abe Reichental

There we using the equipments to form the wax-ups that then become the copping for [proms].

Herb Pathfinder - Wells Fargo

Okay, I may, I assume that as time goes on the applications are going to increase and this should become a larger part of your business as you go forward. Is that right?

Abe Reichental

As we look at various dental and other medical applications, there is no question that, that is becoming a more significant portion of the business. By the time we add up dental and hearing aids and other surgical procedures and drill guides for implants and so forth. this field of organic shapes, unique organic shapes in mass production is becoming a much more important portion of our business.


(Operator Instructions). Your next question is a follow up question from the line of Jim Bartlett with Bartlett Investors.

Jim Bartlett - Bartlett Investors

Discuss a few other industry segments aerospace, automotives and jewelry, what you’re seeing now and what you might expect in those segments.

Abe Reichental

Well, from what we see, we see both aerospace and automotive slowly resuming some semblance of normal activity and we have had quite a few positive developments with some of our automotive customers and not only are they resuming some normal pattern of buying consumables but there is also discussions and proposals on acquisitions on new equipments, so not withstanding they are on shaky environment. Automotive companies are actually buying and continuing to invest, The same is true with aerospace applications, primarily right now on the military side, and with fewer in commercial.

Jewelry is a little slow at the moment and I think that has to do more with consumers shell shock, and the really lack of strong demand for custom jewelry in this environment. As you might expect, this one for many households is not a high priority at the moment, but our jewelry is so diverse that I am fairly confident that, this will bounce back and that it will continue to contribute in future periods.

Jim Bartlett - Bartlett Investors

Thanks, another question. What was your head count at the end of the quarter?

Abe Reichental

Did you, disclose head count toward the end of the quarter?

Damon Gregoire

Yeah, we had Abe.

Abe Reichental

It was probably slightly below the second quarter, I don't know what the number is, off the top of my head. It is obviously going to be higher at the end of the fourth quarter once we give weight to the AcuCast.

Jim Bartlett - Bartlett Investors

Are you keeping all of the employees of AcuCast joining 3D?

Abe Reichental

Yes, All of the employees of AcuCast have joined 3D, and as long as you are mentioning headcount, I will take this opportunity and say a few things. Damien, kind of touched on it, but we believe that the cuts that we made, you know and the cost control measures that we put in place, are sustainable and will be sustainable even as we continue to rebuild the top line. We did not start contributing to our 401-K, and we did not stop accruing something in our P&L for bonuses for people that actually earn them in ’09 and we did not cut any critical position that we would have to turn around then re hire is the top line gets, build up a little bit.

So we have demonstrated over quite few successive quarters that at the same time that we are rebuilding the top line, we are also continuing to stabilize the discretionary parts of our P&L, In way that we believe is sustainable and scalable and one has to say that in case some of your wondering that whatever gains were making are short-lived.

I would say the same thing about R&D. We said starting 5 or 6 quarter as ago that we had some element of R&D spending above and behind the norm that was associated with V-Flash and that once will launch V-Flash we will return our R&D run rate back into a more normal run rate without impairing our ability to continue to develop new product at the rate that we want to develop new product. So once again not we have extending the addition of Desktop Factory into the mix we are still going to do within the ranges that Damon and I shared with you today and just I want to share all with you because we feel that the business model that we are building is not on only sustainable but scalable.


(Operating Instructions) At this time there are no further questions. I would now like to turn the call over to Amanda Mober for closing remarks.

Amanda Mober

Thank you for joining us today and for you continued support of 3-D Systems. A replay of this broadcast will be made available after you call on the investor relation section on our website, www.3dsystems.com/ir


Thank you for your participation in today’s conference call. You may now disconnect.

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