DDD - NYSE

Greetings, and welcome to the 3D Systems Second Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Mick McCloskey, Treasurer, and Investor Relations. Please go ahead, Mick.

Hello, and welcome to 3D Systems Second Quarter 2025 Conference Call. With me on today's call are Dr. Jeffrey Graves, President and CEO; and Jeff Creech, EVP and CFO. 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 on the Investor Relations section of our website. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our latest press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable periods of 2024. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Mick, and good morning, everyone. I'll start today with a brief recap of our second quarter results before reviewing in detail where we're at in our restructuring and efficiency initiatives. While much of our dialogue must center on getting our cost structure right for today's market conditions, given the value creation for our shareholders that's tied to long term growth, it's important to briefly mention the progress we're making against our key growth strategies as well. I'll then turn things over to our CFO, Jeff Creech, to provide details on the quarter's financials. We'll then open the calls for Q&A. So let's turn to Slide 5. I'll start by stating the obvious. The macro environment for our company and 3D printing OEMs broadly remains challenging. You can see this very clearly simply by looking at our year-over-year revenue decline of 16%. As I've stated for the last several quarters, this is primarily attributable to a rapid drop in our customers' CapEx spending for new production capacity. This decline is clearly correlated to the uncertainty around tariffs, which has given our large OEM customers pause on where to invest their capital most economically. While we believe this is a transient effect, it's been protracted, and therefore, we're taking aggressive actions to adjust our cost structure to match this current reality. Fortunately, we've had the scale and balance sheet flexibility to navigate this large-scale restructuring while maintaining core R&D investments that are so essential for long-term growth. This is the balance we must continue to strike. While our year-over-year revenue decline was significant, we were pleased to see the stabilization of these pressures in our sequential quarterly results. In fact, if you take away the impact of the software divestiture that we completed at the beginning of this quarter, which contributed roughly $7 million of revenue in Q1, our continuing operations grew 8% sequentially. While I don't want to overstate its significance, as I do expect continuing revenue volatility quarter-to-quarter until the tariff situation subsides, it was certainly a welcome outcome. We owe this success to our outstanding employees, who've maintained their focus throughout this tumultuous period, and to the strategic investments we've made over the past years in both in both metal and polymer 3D printing technology for critical markets such as MedTech and Aerospace and Defense. As you'll hear from me later, these areas are growing rapidly and specifically for MedTech has now done so over multiple years. Importantly, these are soon to reach a point of critical mass that we believe will drive meaningful revenue growth in the years ahead. All of this is supplemented by a reinforced balance sheet following our Q2 transactions, which include the sale of our noncore Geomagic software platform, our June debt transaction and share repurchase. Taken in combination with our restructuring actions, we believe this places the company well on the path to sustainable profitability and long-term growth, but we still have much work to do. Let's now move to Slide 6, and talk about our near-term priority, which we call profitability first. As I've shared before, we've identified actions across the entire organization to be executed through the first half of next year to drastically improve profitability. Our goal is to align our costs with the current market realities. These actions are designed to positively influence gross margins, leveraged by additional efficiencies we gained from our decision to in-source manufacturing 2 years ago. More significantly, they will unlock a material reduction in OpEx, targeting improvements in every single function and geography we operate in today. In the aggregate, we plan to deliver over $85 million in annualized savings by mid-2026. Based on the $50 million wave we announced in March of this year, annualization of the roughly $20 million of in-year savings from incremental actions we began implementing when we spoke in May, following the broad announcements around tariffs. While timing is always a risk, particularly when it comes to gross margins where there are so many dependencies, we're determined to move to positive cash flow even in the current market environment by restructuring our business and driving process improvements that translate to efficiency gains. We have the scale to do this, and it is our top priority. To provide more perspective to items already actioned and those still in scope, the chart on this slide provides relative sizing of the broader market categories for our initiatives. Our organizational capacity alignment entails streamlining of our functions to efficiently match the needs of the business. R&D, for example, has historically operated at about 20% of revenues, a strategic decision we made for the last few years to ensure that our industry-leading portfolio of metal, polymer, and regenerative technologies remains at the forefront. This range of technology sets us apart from all others in the industry. As we're now entering the next phase of commercialization of dozens of new products brought to market through this investment, we're positioning to capitalize on these prior investments, allowing us to bring R&D spending to levels that are strong but sustainable. Similarly, business and legal entity rationalization emphasizes the simplification and concentration of our efforts in core markets that will deliver not only significant value, but on an attractive time line. We're focusing on those that deliver the most compelling ROI that matches our internal mandate to return to profitability. In critically evaluating the returns on our R&D investments, we've taken the hard decision to spin-off or mothball some exciting opportunities that simply had too long or too expensive a runway to fully commercialize. For example, in July, we made the difficult decision to curtail the level of investment in Systemic Bio, a truly incredible technology that we believe has the potential to ultimately transform the way in which new drugs are developed in the pharmaceutical industry. This technology in which vascularized human tissue is printed on chips, allowing for new drugs to be tested in human relevant models in the lab simply had too long of a commercialization time line given the conservative nature of the pharmaceutical industry and adopting new test methods. So we put this effort on the shelf for now, having developed some unique IP, and we'll return to it in the future if the market dynamics become more favorable. This is the analysis we're undertaking with all of our long-term investments. Now since I touched on an adjacent element of our Regenerative Medicine program, I'll take a moment to confirm that our core efforts to develop -- to deliver the first 3D-printed human lung in close partnership with United Therapeutics continues to progress very well, as evidenced in yesterday's announced technical milestone recognition. After updating the testing criteria for the program at the end of last year to incorporate human to seed testing protocols in order to accelerate full-scale testing of printed lungs, our technical milestones are reset to support this objective. Our milestone attainment in the second quarter marks a significant step forward in printing technology that underpins this incredible program, one that promises to change the lives of millions of people who are waiting for a lung transplant. I look forward to keeping you updated as frequently as possible on this exciting journey. So moving back to cost efficiencies. Through actions taken to-date, we've already seen significant cost improvements driven by a reduction in contracted employee costs and professional services, enabled by upskilling the capabilities of our internal workforce. This activity alone represents our third largest opportunity for cost reductions and should drive a reduced OpEx footprint as we move forward. The next step is to introduce more streamlined back-office processes and greater automation to improve both speed and efficiency in our support functions. We expect these efforts, combined with the focusing of our R&D investments to reduce OpEx spending materially in the coming quarters. In addition to OpEx, our actions are also designed to positively impact gross margin performance. To do this, we'll leverage our prior strategic decision to in-source manufacturing and supply chain management as we consolidate our footprint globally. Starting at roughly 50 locations worldwide when I first joined the company 5 years ago, we're making solid progress on a path to integrate production and service capabilities to reduce this footprint by over 50% through mid-2026. The benefit from these last two pillars will come from reduced facilities costs, management costs as duplicate teams are consolidated and more efficient supply chain and logistics management. From a working capital standpoint, consolidated operations and distribution centers are already improving inventory control and manufacturing efficiencies through our Lean and Six Sigma implementations. Notably, this structure also enables a more rapid introduction of new products into manufacturing, significantly improved control over product quality and a heightened level of agility with respect to navigating complex global supply chains that continue to be impacted by rapid tariff changes. In the second quarter, the positive effect of these actions more than offset the rise in component costs from tariffs, and our goal is to continue on this trajectory. As you can see from our Q2 results, we're well on our way to deliver the benefits from our cost reduction plans. Margins for the quarter were more robust and OpEx was $47 million, a reduction of 27% year-over-year and 24% sequentially. With actions we've taken to-date and those in our plan for the balance of the year, we're targeting to exit Q4 with OpEx in the low $40 million range. So to be very clear, our top priority is to align our costs with the current market conditions in order to move to positive cash flow in 2026. With that said, we must also emerge from this period with a strong portfolio of new products in markets that will drive sustainable growth and profitability in the years ahead. So let's now shift to talk about some of our most important growth factors on Slide 7. I'll start with our healthcare business. For many years, we've spoken glowingly about the progress in our Personalized Health Services or PHS business, as it frequently grows at double-digit rates and did so again in Q2. However, as our PHS business has continued to expand and mature, our customers are increasingly asking for additional orthopedic-related products and services. These include a further expanded portfolio of FDA-cleared surgical guides and along with them medical implants for patients. In addition, there is an increasing call for point-of-care services in which we provide trained staff and advanced printing technology within the hospital itself. Offering point-of-care services is unique to our company and offers us exceptional insights as we work shoulder to shoulder with surgeons to rapidly develop new applications for 3D printing. We piloted this program with the VA, and we've now expanded it to many of the leading research hospitals who are at the forefront of medical breakthroughs. Recent examples range from new ways to rapidly address trauma injuries to novel approaches to treat patients with bone cancer. We then use this knowledge to expand these applications to other hospitals that can benefit from the breakthroughs, which in turn drives growth in our business. This flywheel is in its earliest stage, but we can already see its potential. Given this expanding business model, moving forward, we will refer to our combined orthopedic activities as our MedTech business, which is separate from our Dental and our Regenerative Medicine businesses, as you can see on Slide 8. These three businesses, which together make up our healthcare business unit, share a common foundation of outstanding quality and regulatory practices and in certain cases, common printing technologies. Supporting over 100 CE-marked and FDA-cleared devices all over the world, we've today brought relief to millions of patients globally. For perspective, our MedTech business reached over $80 million in annual revenue last year. And this quarter, on trend grew 13% from prior year and 16% sequentially. Our expertise in MedTech is most prominent for personalized solutions targeted Above-the- neck. This area of the human body is our largest contributor to MedTech and has historically been the fastest growing, primarily due to patients' needs for highly customized craniomaxillofacial or CMF implants. Our printing technology has now reached the point where response times allow it to be increasingly used in trauma circumstances, which is a major focus for us over the next few years. Below-the-neck targets applications for areas such as spines, knees and hips. As you can imagine, there's great expansion potential in these areas with an addressable market size in 2024 of over $40 billion. We'll continue to build upon this excellent foundation in the years ahead. Now turning to another important growth strategy element on Slide 9. An increasingly recognized differentiator for 3D Systems is our ability to help customers not only navigate early-stage process development, but then also scale it to a desired production output with additive manufacturing. In virtually all cases, this now translates to an evolution from process development to limited parts production and finally, to the sale of printers for larger volume production. We are uniquely positioned to support each stage of this customer evolution. Very simply, we call this market strategy the 3P's: process, parts, and printers. We cover the spectrum from end-to-end, starting with initial exploration and ideation of the value proposition that only additive manufacturing can accomplish. Then migrating through the proof-of-concept to production of end-use parts in limited quantities and ultimately, the customers' capital investment in additive equipment and materials for integration into their production workflow. Each element has its own unique revenue stream, supported by the widest range of technologies in the industry, spanning both metal and polymer printing platforms and materials. And we can do so across the global manufacturing footprint, which reduces supply chain costs and risk to our customers. To execute this unique business model, we leverage an industry-leading team of application engineers, which we refer to as our application innovation group, who then translate the desired application, which is the problem the customer wants to solve with additive into a fully functioning workflow or process. That process can then migrate into either of the following Ps, either parts or printers. And what we see in many cases, particularly relevant in today's economic climate, is a unique ability to serve as a bridge for them, smoothing the transition from low volume to high-volume production capability. The ability is unique in our industry today, and we increasingly are asked to provide it on a regional basis within the U.S. and within EMEA. The appeal for parts manufacturing is well known to our industry and has long been a focus of our service bureau partners who are themselves some of our best customers. In that respect, let me be very clear to state that by no means do we have a desire to compete with a service bureau and participate in large quantity on-demand part manufacturing. On the contrary, for industries that require the highest level of complexity with limited quantities of parts that are vital to the customer and economically attractive to 3D Systems, we offer this as an added service, with the ultimate goal being the sale and service of printing systems to these customers. In this period of time where tariffs are slowing the decision process in terms of CapEx investment in new production capacity, offering this capability to our customers allows them the time needed to fully assess their future needs. With rising demand, we continue to preferentially invest in our capacity to scale the entirety of this value chain. Turning to Slide 10. We provide a relative overview of how this works within some of our most critical industrial markets. This model speaks to much of the success for our Aerospace business, which in Q2 nearly doubled revenues from last year. That performance represents the effectiveness of our 3P strategy applied to a vertical that now contributes over $30 million of revenue annually to the company. Growth in parts and process succeeded globally, with the U.S. Naval and Air Force wins serviced from our U.S. locations and similar success in EMEA service from our European locations. From a technology standpoint, multiple wins for our SLS 380 polymer and DMP 350 triple laser metal system were the preferred choice for these applications. We'll continue this approach, particularly focusing on the high reliability markets such as aero and defense, AI infrastructure, oil and gas and power generation, where we believe can increasingly drive our growth moving forward. Let's now flip to Slide 11 to finish my remarks with an update on Dental. 3D printing for dental has been core to this company for decades and will always be embedded in our DNA. Our leadership in orthodontics is well known and cemented by last year's milestone contract, providing a foundation for years to come. In the long term, this provides stability, it has occasionally resulted in year-over-year variations, which are reflected in the results for this year following a strong 2024. Our outlook in this respect is stable on a sequential basis going forward, and we've launched new products expected to drive growth in the quarters ahead. Just a few weeks ago, we announced another major milestone in digital dentistry with the full commercial release of our new FDA- cleared NextDent Jetted Denture Solution for the U.S. market. This technology redefines dental prosthetics with revolutionary single- piece multi-material dentures, delivering a distinctive combination of exquisite aesthetics, comfort and outstanding resistance to breakage for an enhanced patient experience. Throughout our beta customer testing, it's been validated with strong endorsements, highlighting effortless usability, unmatched material properties and groundbreaking efficiency improvements of up to 300% versus traditional manufacturing methods. With our beta testing now complete, we've entered full commercial production for the U.S. market significantly expanding our leading digital dentistry portfolio, which in total addresses straightening, protection, repair, and replacement of teeth. With this specific solution targeting a U.S. replacement addressable market, that we expect to reach $600 million by 2029. In addition to shipping a few samples of these unbreakable and beautiful dentures to our shareholders, who started to appreciate the potential of this milestone for our business, more importantly, we've begun to ramp our production in the back half of this year for POs already received in the last few weeks. So with that, I'll turn things over to Jeff Creech, our CFO. Jeff?

Thank you, Jeff, and good morning, everyone. Before I begin, I would remind you that we divested our Geomagic software business on April 1, 2025. Throughout today's call, in addition to comparisons to prior period results, we will also make specific reference to prior periods to exclude Geomagic operations for an apples-to-apples comparison. With that, I'll begin with our revenue summary on Slide 13. Second quarter consolidated revenue was $95 million, down 16% year- over-year or 11% when excluding Geomagic. Sequentially, revenue was up modestly and when adjusting for Geomagic in Q1, we saw 8% growth. Within our segments, Industrial Solutions revenues of $50 million declined 23% or 13%, excluding Geomagic. This was primarily driven by printer and material softness in consumer-facing end markets. Encouragingly, as Jeff highlighted earlier, this was partially offset by tremendous momentum in Aerospace and Defense, nearly doubling revenues from last year and growing over 50% from the prior quarter. Healthcare Solutions revenues of $45 million decreased 8% from the previous year, predominantly driven by Dental with 2024 representing a significant year of purchases by a specific customer, as earlier mentioned. Outside of Dental, MedTech delivered impressive growth, up 13% from last year and 16% from last quarter. Now to Slide 14. For the second quarter, we reported non-GAAP margin of 39%, which compared to 41% in the prior year and 38% when adjusted to exclude Geomagic. Performance for the second quarter was very strong and also delivered a significant improvement on a sequential basis, primarily attributable to favorable manufacturing variances given higher volume and cost efficiencies. Additionally, gross margins include approximately $2 million of benefit associated with milestone recognition within our Regenerative Medicine business. Now turning to Slide 15. In Q2, we delivered strong cost performance with non-GAAP operating expense of $47 million, down 27% year-over-year and 24% sequentially. This improvement reflects the impact of our restructuring actions, which drove meaningful efficiencies across nearly every function and geography, along with significantly reduced spend on external services. We also saw a benefit from a onetime compensation adjustment. Looking ahead, we expect continued sequential reductions through the remainder of 2025, targeting OpEx in the low $40 million by year-end with the continued momentum we expect for our reduction initiatives. Now turning to Slide 16 to finish up the P&L. For the second quarter, adjusted EBITDA of negative $5 million significantly improved from the prior year by $8 million and prior quarter by $19 million, a testament to our profitability first execution. As a result of gains related to our Geomagic asset sale and proactive debt repayment at a discount, we reported GAAP net income of $104 million for the quarter. This resulted in GAAP earnings per share of $0.57, up $0.78 per share from prior year. On a non-GAAP basis, loss per share was $0.07, also an improvement compared to $0.14 per share loss in the prior year. Turning now to Slide 17 for our balance sheet. We closed the quarter with over $116 million in cash and cash equivalents and $17 million in restricted cash, which is predominantly related to the convertible note refinancing executed in June. Our expectation is that the majority of this restricted cash may be used to address about half of the remaining $35 million in debt due November 2026. In the aggregate, cash and cash equivalents and restricted cash on our balance sheet totaled $134 million. This compared to $171 million at the end of last year with the decline in cash driven by $60 million used in operations, $113 million generated by investing activities, largely representing the proceeds from our asset sale and $97 million used in financing activities, which I'll expand on momentarily. In late June, we took proactive action to strengthen our balance sheet, permanently retiring $88 million in outstanding debt at a meaningful discount to par, extending the due date on an overwhelming majority of our debt out into 2030, and repurchasing $8 million of our common shares to reduce dilution. The net result provides a very manageable convertible note maturity of approximately $35 million due in November 2026 and $92 million of senior secured convertible notes due 2030. The 2030 notes have a conversion price of approximately $2.24 per share, a 20% premium over our share price of $1.87 at the time of the transaction. Looking forward, our improved profitability is already starting to have a positive impact on operations. At the beginning of August, we still held approximately $130 million in global cash and restricted cash and expect a more modest level of cash usage as a result of our cost improvements as we continue to execute against our plans to enable positive cash generation in 2026. So with that, we thank you for your time and continued support of 3D Systems, and we'll now open the line for questions. Operator?

Our first question today is coming from Troy Jensen from Cantor Fitzgerald.

Congrats on all the improvements here. Jeff, a quick question for you or maybe either Jeff. $80 million you guys said for MedTech, can you just break that out between hardware versus kind of the customized healthcare services that come out of Littleton?

Yes. The vast majority of it is the latter, Troy. It's mainly the personalized health services we provide. We do sell printers, but the -- into that market as well. That's been a little bit influenced as well by the tariff situation because those sites are scattered with our customers around the world. And obviously, we have our own printing capacity in Littleton as well to make parts. So the sale of printers into that market is relatively modest. Most of it is services and parts.

Perfect. So then healthcare combined is MedTech, plus Dental, plus Lungs. Is that kind of how we think of it going forward?

Correct. That's the healthcare business, Troy, and we're just trying to -- because MedTech now encompasses more and more things under the orthopedic banner, we're trying to group that separate it from Dental and then -- and obviously, Regenerative is a new area. So all of that's embedded in healthcare.

Perfect. And then how about just quickly on Dental. I know that's been a vertical you guys have been really excited about with some of these new product launches. So the NextDent 300 is kind of next phase for you guys as far as kind of revenue milestones or products that will kind of start to really help. I just kind of get an update on kind of your Dental progress here.

Yes, Troy, we're still putting together the expected penetration rate of that market, but the economics are so favorable when you move to 3D printing of dentures that I think it will happen relatively fast. And we're not the only provider in that area, but obviously, I love our solution and feedback has been great. So we're hoping to have a meaningful share of that market. Today, it's $400 million in the U.S., rough number and generally equivalent size in Europe, which requires separate certifications, but -- which are well underway for us. But the U.S. market alone is $400 million. The traditional way they make dentures through a lot of manual labor is expensive and slow. And 3D printing is a fantastic approach. The challenge has been what took us long to get there was multiple materials that you're 3D printing at the same time and getting the aesthetics right and the toughness right because, again, the common way these things fail is by people dropping them in the sink or on the floor that balance was tough to achieve, and we got there. So I was very pleased we got there. We got FDA certification for it. And we've gone through this really protracted beta testing to prove both the viability of the product, but also the economics and they're excellent. So we'll start giving more color on that as we go into '26. I can tell you right now, folks have been waiting to place purchase orders and they're starting to come in. So we're ramping production here in the third and fourth quarter. And I would expect next year, it will be a material contributor to the Dental business.

Perfect. If I can sneak one last one in for Jeff Creech here. Just gross margins kind of ex-the revenue milestone, it looks like it's about 38%. And just kind of can you confirm that and thoughts on gross margins in the next couple of quarters?

So yes, that's exactly right, Troy. The milestone revenue falls directly to the bottom line. So it does have a very nice lift for us, and it did cause the spike in the margin in the second quarter. What we see for the balance of the year is something that's a little more normalized, something akin to what we started the year off with. So we're going to continue to pursue the manufacturing efficiencies and hopefully drive as much margin as we possibly can. But yes, for certain, the lift in the second quarter was significantly attributable to the milestone revenue.

Next question today is coming from Jim Ricchiuti from Needham & Company.

So I just want to make sure I'm clear on this. Your dental business, excluding the aligner business decline was down about 3%?

Yes. Well, including the drop in aligners, including the drop, which -- and that drop, Jim, to calibrate you, that was 19%, okay? So that was a major headwind. And in spite of that, we dropped -- in total for Dental, we dropped 3%. So we were very pleased with the remainder of the business. And the aligner business, clearly, it's been affected undoubtedly by the economy. Much of that we had anticipated and things that wasn't a surprise to us, but it was a major headwind.

Jeff, putting aside the aligner business, where we know what's happening with the large customer, you're seeing this kind of improvement in the broader dental business without the contribution that you're expecting on NextDent 300 looking out to '26?

Yes. That's exactly right, Jim. That's why this -- the dental industry in total is great for 3D printing and particularly for our company because we've been in it so long. And that's why I talk about all four elements. The straightening is one element that's been foundational for us, but the protection is new with nightguards. We're moving in that direction. We've got repair with our Vertex and NextDent materials, which we've been in for some time. Those continue to grow. And now we've got a brand-new market in dentures which is growing on top of that. So I'm super excited about dentistry. I think 3D printing in total is going to be great for it and 3D Systems will be at the front of that parade. We're very excited about it. We expect to have the rest of our regulatory approvals around the world done over the next 12 to 18 months, which will, again, multiply the U.S. market by several times. So we are -- today, we've got a $400 million new market to go after with compelling economics and a great product. And then you double that with Europe and then you add on the rest of the world, it's an exciting horizon for us in dentistry.

When you talk about providing trained staff for point-of-care service for the personalized health portion of the business, is that something that's being done gradually? Do we have to think about that looking out next year, potentially layering in more of that and presumably that's going to be accompanied by revenues?

Yes. It is a paid for service, Jim. I don't look at it as a significant revenue generator. What I look at is it's an outstanding application developer. You're right at the front of how they want to use 3D printing in a hospital. And often, this is moving very rapidly. So somebody comes in with a trauma case and they say, can we perform the surgery or even do an implant rapidly to help this patient. And it's pulling us into brand-new applications, brand-new areas. We get paid along the way. It's a nice service, but I don't look at it as a meaningful revenue stream. I look at it as an application area that will move us into new markets. It's confirmed our move into trauma very significantly. So we see outstanding trauma applications coming from this in obviously, bone repair to the skeletal system. And now moving into cancer treatment for bones, it not only provides a lot of bone cancer is very tricky in the way the tumors grow into the bones. So surgical guides, FDA-approved surgical guides are an important element to help the surgeon remove the tumor, but then to help them repair the bone or support the bone in some way through an implant is a great extension for 3D printing technology. So we've got the polymer and metal technology to apply. It's the knowledge of where to apply it. And that point-of-care service is the tip of the spear. That's really what leads us in these directions. And we're now embedded in most leading research hospitals.

Next question is coming from Greg Palm from Craig-Hallum.

I'm just curious maybe an update on just the broader macro, whether it's sales cycles, feedback activity, any change over the last 3, 4 months since we got our last update?

As I look back, Greg, I mean, clearly, before April, things were sluggish because people were worried about where interest rates were going to go. I mean I'm generalizing, but if I can speak for our customers, they were worried about interest rates, what it would do to the end demand and all that stuff. So there was already a drag on CapEx spending. After April and just the incredibly volatile tariff environment that emerged quickly and continues, customers just started really dragging their feet on CapEx saying they don't know where to put their new production capacity. And it's not that their end demand has been dramatically affected because they don't know where to make the product. So -- and most of these folks have plants all over the world. So we're working with them. That's frustrating. But on the bright side, if there is a bright side to this, we see an increasing demand for short-term parts supply, limited quantity part production. And again, we're not going to move into the business of being a service bureau. But in terms of responding to a customer where they've proven the process, and this I could give you 100 examples of, especially in the metal arena, for these high-reliability markets, they say, look, we love 3D printing for this application. It's going to work. We don't know where to put our printers. So can you sell us 100 parts? Can you do something to bridge the period? And that's this gap that's opening up right now. I think it's sustainable. I think we're in a great position to bridge people from process development through limited parts production into putting capacity in their plant with selling them 3D printers. So it's ongoing, Greg. It's not getting better or worse right now. It's pretty stable. I think everybody is just in a wait-and-see mode about where things really shake out in terms of tariffs. In the meantime, we have a new growth area for us in manufacturing parts, and we're going to take advantage of that.

Yes. That's good color. In terms of the dental opportunity, are you planning -- like is this mostly going to be a CapEx sale? Or are you planning on offering some sort of service just because where I'm going with this question is the same dynamics that have impacted the core business, macro, lack of CapEx, like what makes you confident that those same items aren't going to impact the dental opportunity if you're thinking this is going to be a significant contributor next year?

There's two reasons, Greg. Number one, people need teeth. So in terms of a predictable demand, it's highly sustainable in my opinion. So there's not much of an option. The question is how do they get them. And it's a completely different CapEx consideration here because these printers are relatively inexpensive. They're affordable by regional labs. I mean even a dentist office could get in the business if they really tried. So it is the overused word of democratization. It moves dentures from being a very difficult process that often involves overseas labor and all of that stuff to something that can be done locally, regionally, and it could be done nationally as well with preferred economics. But it is so much less expensive. The return on capital, first off, the CapEx spend is lower, much lower than these big metal printers or something that we're talking about for industrial applications. It's much lower. These are much more affordable, and I don't think it's a major impediment for any dental lab of size in the country to buy. One of the parts of your question was, is it more of the traditional model that we followed, it is. We sell a printer, we sell consumables, we provide services to the printer. That's the model for us. And I'm convinced demand is out there and very sustainable. The price of entry for our customers is relatively low and most often probably do this regionally in laboratories. And the economics are so preferential that the return for them on the capital investment is extremely manageable. You're talking kind of 1-year or less return on capital investment for the printer itself and the post-print processing. So the economics and the quality of the product, Greg, combined, I think it's going to be just an outstanding business. And not only for 3D Systems. I mean, I think it will be a great business for 3D printing in general, and I want to be at the front of that parade with our product.

Yes, makes sense. And then just last one on the cost reduction program. It felt like maybe you're running a little bit ahead of where you thought you were. So maybe you can just give us a little bit more color on where exactly we are. And just to confirm, I think last quarter, you were talking about being able to reach EBITDA profitability at the sort of mid-90s revenue level. Are you -- when you're sort of fully done, are you still as comfortable with that target, more comfortable, less comfortable? What's your thought there?

Yes, Greg. We're executing to plan. We're ahead of plan in some areas. We're executing to plan, though. And -- so yes, in terms of the ultimate targets, where we're going, absolutely. At this scale, we can be profitable and we can generate positive cash. We have the scale to do that. We've got the mass to basically restructure to do that at this revenue level. So I'm very comfortable with where we're going to get to. The problem is predicting timing. A lot of the headcount changes, if you will, we've done. Those are relatively fast to do, depending on geography, relatively fast. The trickier part is exiting complete facilities and worrying about subleases. Those things can take some time. So that means I have to be a little squishy about the ultimate timing because it depends on somebody subleasing and building in many cases. And those are big dollars for us. We've got a lot of upside for reducing our footprint. In addition to efficiencies, just getting out of facilities and shedding fixed costs of leases and utilities and that stuff, but it requires somebody to sign a sublease. So we're trying to help them as much as we can and where it makes sense and get it done, but it just takes time. So to answer your question, I'm very comfortable with where we're going. The exact timing on getting there, I'm pleased to date that we're basically running on our plan. Things are going well. We've got some of the tougher things at the end with these facility subleases and stuff we've got to get done as well, okay?

Next question is coming from Trevor Sahr from William Blair.

This is Trevor on for Brian this morning. I just wanted to ask you guys a little bit about as it relates to the second half, some of the other markets like aerospace and defense and AI infrastructure. You guys have given a lot of great detail on Dental, but wondering if you could spend a minute on some of the other markets that are exciting to you right now?

Yes. Aerospace and defense will continue to be an exciting market for us. The only frustration, and it cuts both ways, is it is a slow market to move into. You got to really pay your dues. We've been working at it now for the last couple of years. We've targeted some of our metal printing technology at some nice applications in aerospace and defense around like naval applications. And obviously, there's a lot of flight systems, rockets, drones, things like that. We've targeted our metal printing technology to a lot of those. They take a lot of time, Trevor, to get into, which is why it's been a slower growth. But I don't -- I'm not sure that anybody realized how far we've come. We're at about a $30 million trailing 12 months now, a little over $30 million of revenue on an annual basis. So it's starting to get up there to be one of our more significant markets. And on the bright side, it's a very sticky market. I mean once you're a reliable supplier to that market, it tends to be very sticky. You get qualified on an application and you've got a good position as long as you execute well, which we will. So I love that market. AI infrastructure is obviously, that is just changing so rapidly. We've been working with the chip equipment manufacturers for some time now. And there's a lot of very good 3D printing applications in that manufacturing, particularly as it relates to heat management, thermal management of those systems is so critical. And you can do things with 3D printing in terms of the component geometry that you can't do any other way. And so it's a wonderful market. Those are very expensive machines. So that's -- from our standpoint, they're high-value components, that's good. But in terms of volume, there isn't as many of them because they're very expensive, high productivity machines. Now the growth in chip usage is great for that business. So I love the position we've established. It's taken us over -- well over 3 years to earn that position with some of the semiconductor chip equipment manufacturers. So I like that. What we're really looking at hard now is thermal management of data centers, and that's primarily around the printing of copper and other high conductivity materials to get heat out of GPUs. How do you best extract heat from a GPU because heat is a killer in terms of degrading chip performance and life. So when you hear people talk about power generation for data centers, a lot of that's around HVAC. A lot of it is around keeping the data center cool and the equipment inside cool. It's not so much around running the chips, which consume very little energy in total. It's around keeping the place cool. Well, if we can help extract heat better from GPUs, we can help make that cooling more efficient. So that's an area we're exploring very heavily right now. And you can see from the chart, we've got a revenue stream developing there. It's still smaller, but it's exciting. So data center build-out, I think, is very good for us. And then obviously, aerospace and defense, which tends to be a regional business. So we've got the U.S. OEMs that we've gotten the most traction with. We've also gotten customers developed in Europe that we service out of our Belgium facility for applications in aerospace and defense, which ranges from flight systems to ground and water systems to rocketry. So that's a little bit more color on those. Those are the -- what I would say -- are the two most exciting markets right now. Oil and gas, obviously, is up there, and it's going to continue. There's an emerging demand for customers in those types of industries to reduce working capital. So they want to reduce this billions of dollars of parts they have in warehouses to keep things like refineries and oil and gas pipelines running. So that inventory management is helped by on-demand 3D printing and metal components. We won't be in the business of making those components, but we will be in the business of providing printers to people that want to be in that business and making metal components to get that inventory down. So a lot of our work in Saudi Arabia around their electrical system and around the oil and gas infrastructure there is geared towards that goal of helping them better manage working capital and improving their ability to respond to urgent needs in their infrastructure. So those are the types of markets we're going after. They have in common are high reliability, high-value components. And again, our approach is develop a process with the customer, do some limited part production as they ask and then as quickly as possible, sell them printers so they can build out their infrastructure to manufacture parts.

Just one more for me, that was a clarification question. Sorry if I misunderstood this, but when you were talking earlier in the call about R&D spend, did you say that you were intending on getting R&D spend down to a more manageable long term level? I interpreted that as we should expect that R&D spend might come down in the following quarters or next year.

Yes, I would tell you, Trevor, when -- if you turn the clock back 3 years, 3 to 4 years, my perception was our portfolio, we had the ability, if we invested heavily in R&D to have the most exciting portfolio of 3D printing products in the world. It was polymer and metal, okay, both. So we set out on that trend over 3 years ago. We took R&D spending to 20% of sales, which is a big number, a big number. And we did it purposefully. We said, look, we're going to refresh our entire product line, metals and polymers. We can do so largely organically. We have all the seeds to do it from. We got to do that. So we invested. And it takes in this industry about 2 to 3 years to get a new printer out and then supporting materials, year- long kind of cycle times on materials, FDA approvals take another year. So we ramped up, and that includes application development, 20% of sales application development. But we ramped up our own spending to 20% of sales for 3 years. And I would tell you, the last year, that was hard because our sales were under pressure from inflation, rising interest rates, tariffs. So I think it's a testament to alignment around our strategy that myself, the management team and our Board of Directors had around making sure we have market-leading products, we do. And those are entering commercialization now. So we can -- and I want to be clear about this. We can afford now to take our R&D spend to mid-teens, okay? And bring down that extra spending we were doing for 3 years to get into totally fresh. Now we have to maintain and refresh on a periodic basis, our products. So in total, we spend less money. The other thing we're doing, Trevor, very deliberately is looking at our return on investment for R&D. I mentioned some of the offshoots of Regenerative Medicine. The technology we're developing for printing human tissue is phenomenal, okay? The Lung Program for us with United Therapeutics is core. We're going to continue investing in that. It's an outstanding program. The side benefit of it is it spins off a lot of really interesting regenerative technology for printing human tissue. We ran for 2 years on that with Systemic Bio to try to print human tissue for testing drugs. okay? We believe, and I believe it's absolutely true, you could test a drug faster and better and eliminate a high degree of animal testing by testing human tissue in the lab, the effect of new drugs. The reality in that industry is they're slow adopters of new testing technology. And I think for good reason. Look, there are human lives at risk there. So they're very conservative. And reality was for a company our size, that time line just got too long. So we curtailed the effort. We may resurrect it someday, but we curtailed the effort. We put the IP on the shelf for now. But reality is we have the best printing technology for printing human tissue on chips of anybody in the world. It's just the market for that is too long for us right now. So we are -- those areas of R&D, we are curtailing. The ones where we have clear line of sight and it's short enough to strong markets and we get a good ROI, we're investing in. And I'm confident we can stay ahead of that curve at a level of spending that's kind of mid- teens, okay? So a long-winded answer to your question, but I think it's an important one. So thanks for asking, Trevor.

Next question is coming from Alek Valero from Loop Capital Markets.

This is Alek on for Nanda. So you guys mentioned that tariffs are going to impact OpEx through the second half of the year. And I know you've also mentioned your efforts to fully in-source manufacturing and your supply chain operations. So my first question is, how is the progress going on the in-sourcing? And to what extent are those efforts curtailing further tariff impact?

Yes. So good question, Alek. Let me be very clear on this. So we in-sourced manufacturing and supply chain over the last 2 years. That's virtually complete, okay? We've got a few odds and ends that we're still insourcing, but it's firstly done. We did that for two reasons. Number one, and first and foremost, control the quality of the product for the customer. Our products are moving into production facilities around the world. Customers cannot have quality issues. And we found contract manufacturing just wasn't -- we couldn't command enough attention to ensure quality of our products. So we in-source it all. We have complete control, and I'm really pleased with what we can ship today. It had the added benefit of being more efficient. So first of all, you're not paying somebody else's profit margin for outsourcing. And secondly, you can drive Six Sigma and Lean programs to get your own cost down. Those benefit COGS, okay? That benefits COGS and it contributes to gross margin, not so much OpEx, okay? It's COGS and gross margin. So we are pushing hard on those efficiencies to offset tariff impacts on the cost of certain components that we still buy overseas. And obviously, we're trying to qualify onshore suppliers here and in Europe as much as possible. And we can actively work that because we control our own supply chain. So all of those things contribute to COGS and are an offset to tariffs. On the OpEx side, it's much more around back-office efficiency. So automation of back-office operations, in-sourcing of things that were very expensive professional services that we had outsourced. We're in-sourcing those now to -- we build up our own expertise internally and it's lower cost. And so as we introduce automation, we'll take some of that cost out over the next few years. Those are all OpEx related. And then obviously, the R&D spending contributes to OpEx as well. So those are the different elements of our cost reduction. Facilities closures and subleases largely contribute on the COGS side of the equation as we consolidate those fixed costs more in the business, okay?

Just a quick other question. Guys, any discussion with your customers around like buying your systems as a way to mitigate tariffs on their part?

Yes, Alek. It's a great thought. And they certainly are having that discussion with us more and more. The problem is where do they put it? So it can mitigate tariffs if you know where tariffs are going to be. The problem they face is the tariff landscape is a moving target. And so they don't know whether they need to do it in the States or overseas. Many of these customers have factories overseas that they're buying for, and they want to know where to put the capital. So you are absolutely correct in saying that they want to have the discussion. The frustration I think they have is -- not to speak, but the frustration they have is where do they put it? Where are tariffs not going to impact their production. So if they're here in the states, like aerospace and defense, it's a pretty easy discussion. It's bring it onshore, do it here in the States as much as you can. If they have factories around the world, it's a little bit more complicated for them to know where to put it. So that's the drag we're seeing on POs is them deciding where to put their capacity. And in the meantime, if they -- like in aerospace and defense and other high reliability markets, if they say, look, we see the advantage of 3D printing, sell us a few parts, sell us some parts. That's why we're -- we talk about the 3P's, process parts and printers is there is a bridge there we can supply until they make that CapEx decision. So that's what we're working on right now.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Jeff, for any further or closing comments.

Thanks, Kevin, as always. And for everyone calling in, thank you for joining us today. We'll update you again in future quarters. We look forward to the discussion. Have a good day.