Good morning, and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the Results of the Third Quarter and First Nine Months 2015. My name is Donna, and I will facilitate the audio portion of today's interactive broadcast. At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Stacey Witten, Vice President, Investor Relations, 3D Systems. Please go ahead..

Good morning, and welcome to 3D Systems conference call.

I am Stacey Witten, and with me on the call are Wally Loewenbaum, Chairman of the Board of Directors; Chuck Hull, Executive Vice President, Chief Technology Officer and Chairman of the Executive Management Committee; Andy Johnson, our Interim President and CEO and Chief Legal Officer; Dave Styka, Executive Vice President and Chief Financial Officer; and Mark Wright, Executive Vice President and Chief Operating Officer.

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 at www.3dsystems.com/investor.

Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone numbers provided on the slide. The phone numbers are also provided in the press release that we issued this morning.

For those who have access to the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to post questions via the web.

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 the slide. Actual results may differ materially.

Additional information about factors that could potentially impact our financial results is included in today's press release and also our filings with the SEC, including our most recent Annual Report on Form 10-K. During this call, we will discuss certain non-GAAP financial measures.

In our press release, slides accompanying this webcast and our filings with the SEC, each of which is available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2014. Now I will turn the call over to Andy Johnson, our Interim President and CEO..

Thanks, Stacey, and good morning, everyone. Thank you for joining us today. As you know, last week, Avi Reichental stepped down as President and Chief Executive Officer and as the Director of the company by mutual agreement with the Board of Directors.

The Board has commenced a comprehensive search and evaluation process to select a permanent replacement for the role of President and Chief Executive Officer.

In the meantime, the Board has established an Executive Management Committee to provide ongoing leadership and to support company-wide operations and strategic initiatives during this transitional period. It is an honor for me to serve on this committee as Interim President and CEO, in addition to my ongoing role as Chief Legal Officer.

I've been with 3D Systems for over nine years during which time I've gained valuable insight into our business and our industry. I have the utmost confidence in the strength of our technology and of our global team and I'm fully committed to our company's success.

I am fortunate to be joined on this committee by a team of dedicated and capable leaders, all three of whom are with us on this call this morning. Chuck Hull, our Co-Founder, Director and Chief Technology Officer, who is serving as the Chairman of the Committee; David Styka, our Chief Financial Officer; and Mark Wright, our Chief Operating Officer.

The committee is working to ensure the continuity and effectiveness of day-to-day operations. At the same time, we are completely aligned and fully committed to accelerating measures aimed at improving quality across our organization, reducing our cost structure and refocusing our resources around near-term opportunities.

We'll talk more about these initiatives later in the call, but let's turn now to Q3 results. During the third quarter, revenue decreased by 9% to $151.6 million. On a constant currency basis, revenue decreased 3%.

We're disappointed with our overall results and the lower revenue from our 3D printing products and services, which we believe were negatively impacted by continued challenging market conditions that extended customers' capital investment cycles and reduced demand across all geographies.

However, despite these challenging conditions, we still observed a few bright spots, notably in 3D healthcare stimulators and services and 3D software. Gross profit margin decreased 90 basis points to 46.9%, primarily due to the negative impact of consumer products.

Operating expenses remained flat sequentially at $105.7 million, inclusive of $22.5 million of R&D expenditures and an $11.3 million expense provision for arbitration award related to a business acquisition in 2011. Our cash operating expenses decreased 8% sequentially.

We reported a third quarter GAAP net loss of $32.2 million or a $0.29 loss per share and non-GAAP net income of $800,000 or $0.01 earnings per share. Before Dave provides financial details, I'd like to turn the call over to Mark Wright, Chief Operating Officer, to discuss our progress on operational initiatives.

Mark?.

3D printers, partners and productivity. As Andy mentioned, we're disappointed with our revenue from 3D printing products and services in the third quarter.

In addition to the negative impact of market conditions, we believe that the residual reputational damage as a result of our earlier printer performance issues also impeded our sales efforts in the quarter.

Working on a customer-by-customer basis, we continue to remediate previously known SLS and DMP printer performance and quality issues in the field. All SLS and DMP printers that are currently shipping include the latest improvements.

Through these efforts, we are systematically raising the bar on performance and quality standards across our full range of 3D printers, both with existing products and those in development. In line with that, during the quarter, our Direct Metals team expanded beta testing of our next-generation metals printer, the ProX 320.

Leveraging our combined metals expertise, the ProX 320 is designed to complement our Direct Metals portfolio and extend our reach into additional prototyping and manufacturing applications. And we are currently progressing through rigorous testing, both internally and with industrial customers.

When I joined the company about a year ago, we set a goal to become the best partner company to work with in our industry, not only by having the best products, but by promoting and embracing partner friendliness across our organization, from manufacturing, to services, to logistics. And we've been working very hard towards achieving that goal.

During the quarter, we continued to build out our performance-based partner program, Partner Xcel, which provides enhanced tools and resources to align partner sales efforts with our priorities. We also expanded and refined our lead generation, forecasting, training and service tools to improve productivity and profitability for us and our partners.

Additionally, we've recently announced several key partnerships that we believe will advance our technology, as well as increase adoption and drive new use cases for our 3D printers. We expanded partnerships with Phillips Corporation, U.S.

Army Research Lab and Penn State to advance material and process developments, including critical defense and aerospace applications. Methods Machine Tool, a U.S.-based leading supplier of precision machine tools and automation for manufacturing, recently became a partner in our distribution network.

Methods will offer our full portfolio to its customer base of 30,000 companies and will put a strong strategic focus on our direct metal printers, based on their expertise in metal precision machining and industrial applications.

In addition, we recently partnered with GPI Prototype & Manufacturing, a leader in direct metal printing, to increase access to and adoption of DNP printers for the manufacture of end-use parts and to drive new applications.

The third key area of operational focus for us is increased productivity; and we've been driving productivity gains throughout our organization through the combination of talent and process improvements.

Recently, Charlie Grace joined our company as Chief Revenue Officer, Professional Products, leading all of our professional and production 3D printer related revenue generation activities worldwide.

Charlie has more than 25 years of experience at Xerox and EFI, and we're looking to immediately enhance customer relationship management and channel building leadership with direct sales and reseller partners.

One of our most experienced sales leaders, Michele Marchesan, is now spearheading our efforts to build an effective partner channel for desktop 3D printers.

Michele is focusing on creating a productive, responsive and scalable sales network that can address what we believe are near-term opportunities for desktop printers in education and in engineering. During the third quarter, Bill Sanger joined our company as Vice President of Global Manufacturing and will lead the production of all 3D printers.

Bill brings a great deal of senior management experience in manufacturing, supply chain and operations with a strong focus on lean manufacturing. He's working closely with managers globally to continue to create scalable, efficient processes to deliver the highest quality products in a most cost-effective way.

During the quarter, we also continued to improve our call center operations for field service and customer support by investing in best-in-class service tools. We also recently opened a new world-wide service training center in Rock Hill focused on partner education, training and new product rollouts.

We believe that these key investments in our business infrastructure will lead to improved partner performance and operational efficiencies. We also recognize that all of these operational initiatives I've discussed are ongoing and require continuous improvement. We are committed to carrying on these and other initiatives moving forward.

With that in mind, I will turn the call over to Dave Styka to discuss the financial results for the quarter.

Dave?.

Thanks, Mark. Good morning, everyone. For the third quarter of 2015, our revenue decreased 9% to $151.6 million. We reported a GAAP loss of $0.29 per share and non-GAAP earnings of $0.01 per share. For the first nine months of the year, we reported revenue of $482.8 million, an increase of 4%.

We reported a GAAP loss of $0.53 per share and non-GAAP earnings of $0.08 per share. Our GAAP net loss included an $11.3 million expense for an arbitration award related to an earn-out in connection with the acquisition of Print3D Corporation in 2011.

As we stated in our press release last week, we disagree with the arbitrator's findings and conclusions and intend to challenge this ruling in federal court. Notwithstanding our right to appeal, we recorded an expense in the third quarter for the amount of the arbitrator's award.

Continued challenging market conditions reduced 3D printer sales across all categories in the third quarter, which in turn resulted in lower sales of materials. Total printer units for the quarter decreased 26% compared to the third quarter of 2014 and 29% sequentially.

For the quarter, design and manufacturing revenue decreased 9% and consumer revenue decreased 14%. For the first nine months, design and manufacturing revenue increased 2% to $447.4 million. Healthcare revenue grew 15% over the same period contributing $99.3 million, driven by expanded products and services.

For the nine months, software grew 119% contributing $56.3 million, including the addition Cimatron. Consumer revenue improved 23% for the nine months, inclusive of some residual backlog in 2014. During the third quarter, products revenue decreased 27% and materials revenue decreased 11%, primarily as a result of lower printer sales.

Services revenue increased 16% from growth in both software and healthcare services. All geographic regions decreased compared to the third quarter of 2014 and sequentially. In the third quarter, revenue from the Americas decreased 11%; EMEA revenue decreased 5%; and revenue from APAC decreased 10%.

Revenue decreases in global markets were driven by lower printer sales, but were also adversely affected by foreign currency rates during the quarter. Gross profit margin for the quarter was 46.9%, a 90 basis point decrease over the third quarter last year and a 100 basis point decrease sequentially.

Materials gross profit margin improved due to supply chain efficiencies and mix, while services gross profit margin expanded on higher healthcare and software contributions. These increases were more than offset by the decline in products gross profit margin that was primarily due to the negative impact of consumer products.

GAAP operating expenses increased compared to last year, but were flat sequentially at $105.7 million. In addition, cash operating expenses decreased 8% sequentially.

Compared to the third quarter of 2014, SG&A increased from acquired expenses, including intangibles amortization and higher compensation, as well as $11.3 million expense provision for the aforementioned arbitration award. R&D increased to $22.5 million from new product developments and acquired business's R&D expenditures.

During the quarter, we used $4.3 million of cash in operations and paid $2 million for venture investments. We exited the quarter with $157.5 million of cash on hand, and we have not used any of our available revolving credit facility. We ended the quarter with $138.2 million in inventory that we plan to reduce over the coming periods.

Backlog increased 4% sequentially to $40.5 million at September 30. In addition, we estimate that the inventory held by our channel partners at the end of the third quarter decreased sequentially to approximately 4% of revenue.

While we are continuing investments in new products, quality and partner-centric initiatives, we are taking decisive steps to further reduce our cost structure and better prioritize our resources around near-term opportunities. These measures include additional facility consolidations and head count reductions.

Last quarter, we consolidated manufacturing from Herndon, Virginia, into our new 200,000 square foot facility in Rock Hill; and we recently finalized plans to relocate our manufacturing and R&D activities from Andover, Massachusetts.

We have begun to see the early impacts of these types of efforts that contributed to sequentially flat operating expenses. Our work in this area is ongoing. The Executive Management Committee is now conducting a comprehensive evaluation of our business and market opportunities to refocus and reprioritize our resources and investments.

We are committed to making the necessary decisions to foster sustainable growth and improve profitability and are of the shared opinion that there are no sacred projects. Now I'd like to turn the call back to Stacey, who will open the floor for questions.

Stacey?.

We will now open the call for questions. I'd like to remind everyone that your line will be muted after your first question, and we kindly request that you ask one question at a time and then return to the queue thus allowing others to participate in the Q&A session.

As a reminder, please direct all questions to the teleconference portion of this call. The telephone numbers are provided again on the slide. If you are calling inside the U.S., the number is 1-877-407-8291; and if you are calling outside the U.S., the number is 1-201-689-8345..

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question today is coming from Jim Ricchiuti of Needham & Company. Please proceed with your question..

Hi. Good morning. I'm wondering if you can give us some help on how we should think about operating expense levels at these low levels of revenues. Think you've just alluded to sequentially flat OpEx.

Where do you see OpEx going? And do you still see in 2016 a decline in OpEx in absolute dollars? And I wonder if you can just walk us through how we get there..

Sure, Jim. This is Dave Styka, and thanks for the question. I think it's very appropriate given where we're at. You're right, we did see OpEx flat on a GAAP basis and then cash OpEx declined 8% period-over-period. So we are seeing some of the – as I spoke in the last call, I said we were going to be flat for the back half of the year.

And then going into 2016 we'd see a decline given the way that we're actually making reductions but still investing in the business in key items. We still see that as going forward here.

The place that we actually see our opportunity is continuing to work on things that are efficiency with respect to facilities comp (19:56) consolidation, making sure we have the right people and the right places, as well as still making investments that we need to make. But overall what we did the last quarter is accurate.

And as we see this going, we do see in 2016 we will see a decline in OpEx. We actually saw a little bit of that in this quarter..

Gentlemen, are you ready for the next question?.

Yes..

Our next question is coming from Bobby Burleson of Canaccord Genuity. Please proceed with your question..

Hey, good morning. Just curious. I guess this one's for Mark.

Can we talk a little bit about what your thoughts are on the top line in terms of organic growth? Now that some of the quality issues are behind you and you're making some plans on the operating expense front, what is the kind of revenue lens you're looking for in terms of three-year to five-year kind of top-line growth organically? Thanks..

So, thanks. This is Mark Wright. I'll take a little bit of this and I think Dave, hand some over to you. I mean, overall, our sales teams are very – we have a good product portfolio, we have a sales channel that we're growing and driving. We see opportunity with our product line. We have things on the roadmap that I think will help hit key price points.

I think one of the things we've seen is new price points come up and we have to make sure we have products there; and I feel really good about our roadmap to do that. And so, we're driving that forward. Metals, I think, continues to be an area where we've expanded and we see opportunity..

Yeah. And this is Dave Styka. I'd like to kind of chime in on that too because I think it's clear from this quarter we really need to have a much better clarity as to what's going on in the marketplace, and we really just don't have that right now.

I mean, not only ourselves, but other people in this industry are all kind of struggling and trying to get their hands around the explanations for this. So we're continuing to review what's going on. We'll provide guidance on our results as well as organic growth once we feel it's appropriate and we have some visibility.

In the meantime, I want to kind of reemphasize we're really focusing on the things we can control. The undertaking of a complete review of our organizational structure. We're focusing on investments. Specifically in OpEx and CapEx, we're focusing on initiatives and spending to kind of draw (22:32) improved profitability..

Thank you. Our next question is coming from Jason North of Jefferies. Please proceed with your question..

Yes. Looking at your consumables revenues, a decent portion of that is tied into your just the overall printer sale decline, but also seems like it could be – the printers may not be being used that much at customers. If you'd just comment on that, the trends there..

This is Stacey. I can start with that one. What we're seeing is materials revenue is primarily impacted by lower 3D printing sales during the quarter and some fluctuations of timing on sales and materials.

If you look at our largest customers, we see overall continued utilization and demand for materials; certain customers – and timing of sales may fluctuate quarter-to-quarter, but we're not seeing a big change in the utilization for our larger customers.

And the other thing I would maybe like to remind you is the metal printers, when we sell those they don't necessarily come with these volumes of materials revenue. So this is one area where we're seeing some opportunity going forward in various paths to integration and value-added materials for metals in the future..

Great. Thanks..

Thank you. Our next question is coming from Patrick Newton of Stifel. Please proceed with your question..

Thank you. I guess, Dave, one housekeeping item before my question is what was the overall organic growth rate for the company, as well as the organic growth rate of product, and materials and service revenue? I think I've missed that. And then my question is on product gross margin.

It's the lowest level since 2009 and you talked about consumer mix being the reason for the pressure. But given how small of revenue contribution consumer is, there appears to be other headwinds.

So I'm curious if you're seeing any pricing competition creep across your portfolio as the industry is pressured by lower sales or are you using discounting tactics in an attempt to reaccelerate the pipeline conversion rate?.

Americas, EMEA and APAC..

Hi, Patrick. This is Mark Wright. In regards to pricing, actually where our products are competitive we didn't see any statistical change in our pricing, so there was no abnormal discounting. What we did see though is with the tightening of CapEx and the lengthening of the deals, we did see some price points emerge, and we are actively looking.

We have products on the roadmap that address some of those price points; and we think those are all opportunities, but no adverse discount..

And I think there is one other piece of the question on margins that we'll make a couple of comments..

Yeah, yeah. Patrick, so the other piece that I didn't kind of catch on your question was the margins piece. Margins are 46.9%. What we really kind of see is materials in our service margin. They're holding up pretty well to where we kind of expect it and where we were last quarter, down a bit.

But given this competitive and challenging environment that's sort of kind of a reasonable expectation. But our products margin, that's where we really see a lot of challenge coming on, particularly in the consumer printers' area.

In the long-term, the very long-term, we kind of still believe about a 50% GAAP margin is appropriate on a long-term basis and in a more normalized environment. So, hopefully, that answers your question..

Thank you. Our next question is coming from Ben Hearnsberger of Stephens. Please proceed with your question..

Hey. Thanks for taking my question. On the organic growth and there was always a lot of noise around what's truly organic.

I guess can you just tell us what is currently inorganic in the model? And when does that runoff and we're looking at a clean kind of organic growth rate?.

Sure, Ben. Thanks. This is Stacey. We look at organically generated revenue at from the first 12 months of an acquisition. So if you look back over the last 12 months, there is a small piece of some of the service bureaus we acquired and acquired revenue.

A little bit about (27:01) purchase order of Simbionix, and then Robtec, Easyway and Cimatron are the remaining pieces. So Cimatron was early first quarter this year. So as we get to the next quarter, it will really become all organic revenue..

Thank you. Our next question is coming from Ananda Baruah of Brean Capital. Please proceed with your question..

Hey. Thanks, guys, for taking the question.

Can you give us – just sort of remind us, given what's going on in the last couple of quarters with the M&A, how you guys are viewing M&A going forward, well, really, I guess in two ways? What's the M&A strategy in the near intermediate-term? And then in the context of longer term thoughts has your M&A strategy shifted from what it's been over the last handful of years? Thanks.

And that's it from me..

Sure. Thanks for the question. This is Andy Johnson. We are finished with M&A, as we've known over the last five years. We are at the point where we are focused intently on executing and leveraging the assets that we acquired through our robust M&A program that started in the fall of 2009 until the first quarter of 2015.

When we look long-term from here on now, we're looking more at venture investments, which we've talked a little bit about; and that's something that allows us the ongoing ability to keep a pulse on the market and to get a look at emerging applications and also to attract innovators into our ecosystem.

So we'll continue to facilitate a ventures program, but at this point we have no planned M&A activities..

Thank you. Our next question is coming from Ken Wong of Citigroup. Please proceed with your question..

Hey. Thanks for taking the questions, guys. So you guys mentioned earlier about refocusing some of your efforts and really dialing in on near-term opportunities. You guys have had so many different opportunities in the past. Just trying to get a sense for what you guys do view as the near-term opportunities that you guys will kind of double down on..

one being aerospace; two being automotive; and three being healthcare. Those are absolutely near-term opportunities that we're focused on. The other thing that I think is very important as we look at near-term are desktop 3D printers. We've talked about how we've enhanced our focus on education and desktop engineering.

That's been evidenced in recent actions by the company. We invested in STEAMtrax, which is not just an education curriculum, but also brings a sales approach. Mark talked about Michele Marchesan and his focus on building a scalable efficient channel for our desktop.

But also we're looking at investments in actual new products that are focused on educational and engineering applications. So those are the near-term opportunities that the Executive Management Committee is focused on..

Thank you. Our next question is coming from Paul Coster of JPMorgan. Please proceed with your question..

Yeah. Thanks for taking my question.

Just a immediate follow-on from that point, which is it's all very well that you're focusing on the opportunities, but are you also going to cull some of the underperforming assets? I think sort of some rationalization may make sense here, because otherwise you're going to be sub-scale in a couple of areas, I think..

Yeah. This is Dave Styka. I will kind of start (31:08) and Andy can give you a bigger version. That's exactly right. In my comments when I kind of said we're looking at business opportunities and profitability, profitability is not lost on us, right.

So we do recognize we got to have profitable opportunities, and we will look across our portfolio at what makes sense and what gives us the best opportunity to be the most profitable..

I don't have anything much more to add other than I think it's very important that Dave's comment was no sacred projects, and that's exactly the approach we're taking here. We're looking at profitability and we're undertaking a very comprehensive review of the entire spectrum of our current offering..

One moment please. Our next question is coming from Joe Wittine of Longbow Research. Please proceed with your question..

Hi, thank you.

How big is the healthcare business today and why are you no longer breaking it out, given it's probably – it's among the best or the best secular growth story for the company in the mid to long term?.

We are actually breaking that out. It is in the Q which will be filed shortly. So (32:33) just garb the number real quick..

Yeah..

Anyway, for the nine months healthcare revenue grew 15%; it contributed $99.3 million..

Thanks, Stacey..

Thank you. Our next question is coming from Troy Jensen of Piper Jaffray. Please proceed with your question..

Yeah, hi. Thanks for taking my question. This one is going to be for Mark Wright. Mark, you've mentioned in your comments earlier that known product quality issues and I think all of us know about the ProX 500, and I mean it's something that I've heard in the past about 3D and shipping products that may not be ready.

So outside of that, the high-end metals product, which other systems do you think have some of the most quality problems?.

So, thanks. This is Mark Wright. So we've worked hard over the years on all of our product lines and we have seen strong performance over time, especially, like for instance, in the jetting area from the 3500 Series and x60 Series; and we continue to enhance all of our products.

A lot of work we're doing on the SLS and DMP are frankly fundamental process changes in the way we manufacture, service and support; and in those changes we're actually impacting all of our product lines and I think you'll see a benefit across there.

A lot of these are just standard operating processes, many different acquisitions not operating the same way; and all those things will benefit there. So I actually think there's going to be improvement everywhere through those changes. And a lot of those aren't necessarily to the product itself.

Don't forget, if you have a bad service experience you tie that back to the product, but all of that is quality. And so, I think we have a lot of areas that we are improving; and I've gotten a lot of feedback that our partners, especially end customers, are starting to see those improvements, so..

Thank you. We're showing time for one additional question today. Our next question is coming from Hendi Susanto of Gabelli & Company. Please proceed with your question..

Good morning, and thank you for taking my questions.

In light of the challenging market environment, how should we think of weaknesses in consumer revenue? Do you foresee that trend to continue for multiple quarters? Additionally, should we expect like new product introduction to be less compared to the last two years?.

So our consumer revenue, again that will be (35:12) number'll be in the Q, it was down 14% for the third quarter to $10.1 million and we're seeing softer demand in there and, as Andy spoke to, where we've shifted our focus to what we believe are near-term opportunities within that space, education and desktop engineering..

Thank you. At this time, I'd like to turn the floor back over to Ms. Witten for additional or closing comments..

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

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day..