Good afternoon and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the Results of the First Quarter of 2017. My name is Tim 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 will like to turn the call over to Stacey Witten, Vice President, Investor Relations, 3D Systems..

Good afternoon and welcome to 3D Systems' conference call. I am Stacey Witten and with me on the call are Vyomesh Joshi, our President and Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Andy Johnson, Executive Vice President and Chief Legal 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 and in the press release we issued today.

For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds' delay and you will not be able to pose 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 this 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 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, both of which are 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 2016. Now, I'm pleased to turn the call over to Vyomesh Joshi, our CEO.

VJ?.

Thanks, Stacey. Good afternoon everyone. As you know, we have a market-based strategy focused on enabling digital manufacturing workflows in key verticals, use case by use case.

We are driving the shift from prototyping to production with 3D printing solutions that deliver improved productivity, repeatability, durability and total cost of operations to meet the needs of industrial customers.

Ongoing strength in healthcare solutions, production printers and materials continues to support this strategy and validates our focused innovation investments. In the last 12 months we have made clear progress in quality, reliability, supply chain and overall cost structure.

Steps we have taken are beginning to show returns across the company but we still have work to do throughout the rest of the year. We also received very positive early feedback from the industrial customers on our breakthrough Figure 4 platform as well as on our expansion in the dental market and enhancement in materials development capabilities.

I'll talk more about these and other recent announcements later in the call, but first I want to discuss the results of the first quarter. For the first quarter, revenue increased 3% driven by healthcare and industrial customer demand.

We improved non-GAAP gross profit margin 40 basis points and reduced non-GAAP operating expenses, including a 6% decrease in SG&A expenses compared to the first quarter of 2016 as we balanced investments in IT, go-to-market and innovation, while driving operational efficiencies in other areas.

Our non-GAAP EPS improved 20% and we generated additional cash for the company. Based on these results and our expectation for the remainder of the year, we are reiterating the full year 2017 guidance we provided in February. We still have work to do.

But we are pleased with the progress we have made to improve our cost structure and align our operations and investments with our strategy to enable us to drive profitable growth. And now let me turn it over to John to discuss our first quarter 2017 performance in more detail.

John?.

Thanks, VJ. Good afternoon everyone. For the first quarter we reported revenue of $156 million, an increase of 3% or 4% in constant currency compared to the first quarter of 2016.

Gross profit margin improved both sequentially and from the first quarter of the prior year to 51.3% as we continue to realize cost savings from supply chain and manufacturing improvements. GAAP operating expenses decreased 5% or $5 million to $89.3 million.

We reported a GAAP loss of $0.09 per share in the first quarter compared to a $0.16 loss per share in the first quarter of 2016. We continued to take steps to drive an appropriate cost structure and operating model and focus our resources to drive profitable growth.

Non-GAAP gross profit margin in the first quarter of 2017 expanded to 51.3% from 50.9% in the prior year. Compared to the first quarter of 2016, non-GAAP SG&A expenses decreased $3 million to $49 million as we balanced investing in IT and go-to-market initiatives with operational excellence and efficiencies across the business.

Non-GAAP R&D expenses increased $2 million to $23 million, primarily driven by investments in new technology, particularly our Figure 4 platform and materials. Non-GAAP earnings improved 20% to $0.06 per share or $7 million in the first quarter of 2017 compared to earnings of $0.05 per share or $5 million in the first quarter of 2016.

Healthcare revenue for the first quarter of 2017 increased 29% to $43 million which benefited from growth in all categories within healthcare. While timing of printer orders continues to be lumpy, we are pleased with the overall demand trends for printers and materials from medical and dental customers.

Software revenue was flat for the quarter at $20 million. We expect software to be a growth driver over the coming periods. On-demand manufacturing decreased 6% to $25 million in the first quarter. This represents a significant improvement from our performance in Q4 2016 where we were down 18% compared to the same quarter of the prior year.

We've begun to see improvements in our on-demand manufacturing business as a result of the investments we've made as well as from better alignment of our operations and go-to-market approach.

We have additional changes underway we believe will continue to drive improvements throughout the year, including the new e-commerce website that we announced last week. Printer revenue decreased 4% to $31 million.

While total printer revenue decreased, we were pleased with production printer revenue in units which increased compared to the prior year's first quarter. We continue to see strength in key areas of our portfolio including SLA and we've had positive reception of our ProX DMP 320 and MJP products we launched in 2016.

Materials revenue increased 11% to $43 million, as utilization by our installed base remains strong as a result of production orders combined with the contribution of Vertex-Global. We have made clear progress within our supply chain cost structure which has resulted in gross profit margin expansion to 51.3% in the first quarter.

The improvements within costs have also enabled us to review and in some cases strategically adjust pricing of printers and materials to align with the market, drive adoption and expand our opportunity going forward. GAAP operating expenses for the quarter decreased 5%, including a 10% decrease in SG&A expense, primarily from non-cash expenses.

Non-GAAP operating expenses for the quarter decreased 1% to $72 million, including a 6% decrease in SG&A. R&D expenses increased 13% due to focused additional investment in production opportunities, Figure 4 and materials.

As we continue to reinvest some of our cost reductions into IT infrastructure, go-to-market and innovation, we expect to see quarterly fluctuations in operating expenses due to timing of key investments and cost reduction efforts. We generated $19 million of cash from operations during the first quarter.

After purchasing Vertex-Global, we ended the quarter with $162 million of cash, compared to $185 million at the end of 2016. Our $150 million revolving credit facility remains fully available.

We will continue to drive improvements in working capital performance, cash flow and our cash conversion cycle in 2017, and I remain comfortable with our cash balance and overall liquidity position. Before turning the call back to VJ, I'd like to take a moment to reiterate our full year 2017 guidance.

Based on the results of the first quarter and our expectations for the remainder of the year, we remain comfortable with our previously provided full year 2017 guidance. We expect annual revenue to grow between 2% and 8% compared to 2016. We expect both GAAP and non-GAAP EPS to improve in 2017.

We expect non-GAAP EPS to increase 10% to 20%, which results in a range of $0.51 per share to $0.55 per share, and we expect a GAAP EPS of $0.02 to $0.06 earnings per share for the year. Additionally, we expect continued positive cash flow from operations.

We believe we are striking the right balance between investments and go-to-market and innovation while improving operations across our business. We have many initiatives in place which will continue throughout this year while we put the appropriate structure in place to drive profitable growth.

With that, I'll turn the call back to VJ for some concluding remarks.

VJ?.

Thanks, John. We are enabling 3D production through digital design and manufacturing workflows, technology advancements and materials innovation and application engineering expertise.

Figure 4 combines all of these into a modular, scalable platform to fit the needs of a range of part volumes, including automated production applications, customers from dental and medical to automotive and aerospace and select the configuration which meets their needs.

The Figure 4 platform can scale by adding additional print engines, automation and inspection components as customer grow and evolve. We have the exceptional feedback on Figure 4 thus far from both beta users and customers evaluating benchmark part samples.

This feedback includes fast system startup time, excellent productivity, throughput and ease of use, great reliability and uptime, high quality parts and compelling total cost of operations. We're working with customers from multiple verticals. And we believe we are on track to ship and recognize revenue on sales of the Figure 4 platform this year.

In addition to the benefits compared with traditional manufacturing, we are also disrupting total cost of operations within 3D printing. It is all about part quality and cost. In the real part example shown on this slide, we demonstrate the significant improvements Figure 4 can provide compared to a traditional SLA 3D printer.

When the same parts are produced on Figure 4, they cost 30% of today's SLA part cost. Figure 4 requires less facility space, provides automation, reduces direct labor cost and enables higher materials utilization, all of which contribute to lower total cost of operations compared not only to traditional manufacturing but also to other 3D printers.

We plan to replicate and scale Figure 4 across industries. During the quarter, we unveiled a next-generation additive manufacturing solution for the dental industry based on Figure 4 and NextDent materials.

This combination provides breakthrough productivity and compelling total cost of operation that we believe will revolutionize the multi-billion-dollar dental industry.

We're taking a similar approach to all of our key verticals, leveraging our core technology and platforms to provide complete solutions to meet professional and industrial customer needs in each of our targeted vertical markets.

Beyond Figure 4, we are continuing to accelerate innovation in other key production technologies including our precision metal solutions and software. In March, we unveiled four new materials optimized for producing precision metal parts and announced DMP Vision to enable process monitoring for new and existing ProX DMP 320 customers.

In addition, we have begun bundling our innovative 3DXpert software with all direct metal printers. This workflow software combined with our printers reduces design and print time and produces better parts with powerful print preparation, shape optimization, printing strategies and slicing capabilities.

We believe our focus on meeting customer needs with advanced solutions in plastics and metals through a combination of hardware, materials and software for 3D production can accelerate adoption of 3D printing, expand the market and drive profitable growth for the company.

Specifically, we expect Figure 4 and dental to be significant catalysts to growth in 2018. To ensure you understand Figure 4 and the opportunity it provides, we are planning a preview event for analysts in the next couple of months to demonstrate capabilities, share more details and preview what we are doing today.

With that, I would like to turn the call back to Stacey, who will open the floor for questions.

Stacey?.

Thanks, VJ. We'll now open the call to questions. We would like to ask you to limit yourself to one question and one follow-up, thus allowing others to participate in the discussion. 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're calling outside the U.S., the number is 1-201-689-8345..

Thank you. At this time, we will be conducting a question-and-answer session. One moment please while we pool for questions. Our first question comes from the line of Wamsi Mohan of BAM Merrill Lynch. Please proceed with your question..

Hi, this is Jen Lang on behalf of Wamsi Mohan. First of all congratulations on the quarter. I just wanted to touch on the moving parts within your printer margins.

I mean, you still had printer declines within the quarter although you noted unit growth year-on-year and you had – gives you a nice margin extension within products, looks like it grew over 300 bps year-over-year. I just wanted to touch upon the moving parts there.

How much more room is there to take cost out from a supply chain perspective and manufacturing perspective versus, obviously you've been investing in pricing.

So, how should we think about that on a go-forward basis? Did you see share gains and are you growing the TAM though those product investments?.

Yeah. So, this is John. I'll start and I'll let VJ kick in as well. So, we expect to continue to generate cost of goods sold savings throughout the balance of the year.

And as VJ has mentioned in the past, we will always be driving productivity on a go-forward basis and we never stop, but in terms of our plans for this year, we will continue to see benefits play in the gross margin. That said, we noted that in some cases, we will utilize some of that savings from a pricing point of view.

And as the mix of our business continues to lean more towards production-oriented solutions, that's a help for us as well..

Yeah. The other important part is as we get more materials growth, which I believe the fundamental strategy is to go after the production. Our mix, having more materials will also improve our margin. So, I think what we want to do is continue to focus on materials, production printers and take cost out of our supply chain.

And some of that, as John mentioned, we need to invest into IT and innovation..

Thank you..

You're welcome..

Our next question comes from the line of Jim Ricchiuti of Needham & Company. Please proceed with your question..

Hi. Thank you. Good afternoon. I was wondering if you could talk a little bit more about the growth you saw in your materials business.

Is there any additional color that you could provide on that, it's very solid growth ,and maybe talk a little bit about the areas or if there's some new strategy that you're implementing?.

Well, I think there are two parts. All right, so first part is, as I've said, the production printers, because we fundamentally believe that usage of SLA, SLS printers are significantly more than professional printers.

And we believe that ideally moving to production and focusing on SLS, SLA, metal and Figure 4 technology is extremely important for us to drive more materials growth. The second part is, and that's another reason why we invested in NextDent, because dental is also a very big opportunity for us.

So, combination of production printers and finding an application where we will be able to create significant competitive advantage for the company and drive more materials growth is the strategy.

And I believe as we enter 2018, all these investments in installing more production printers, Figure 4, which is a production technology and investing into materials is going to show up in terms of significant growth in 2018.

So, I think materials and where we are, with respect to where – what we want to do at production, is going to be a driving force in 2018 also..

John, I don't know if you can give us the organic growth rate for the materials.

And then, VJ, if you could talk a little bit about how many beta units there might be out there for Figure 4 and if there is any additional color on the timeline, sounds like you're still anticipating this year for commercial?.

Yeah. So, we had mentioned back on our last call that we weren't going to break out the results relative to the acquisition. But we did say that Vertex represented about 1% to 2% of our last year's revenue on the total base, is that going to help you a little bit (23:11)..

Okay..

So I think on the Figure 4, I think we already told you that we shipped one unit, we already have a lot of work going on in multiple customers in multiple vertical segments. And I believe that by the fourth quarter we will have revenue in the Figure 4 technology.

The feedback is fantastic, the customers are very happy with the part quality, the total cost of operations that I talked about in my slide where we see a significant change in the terms of what the customers will be able to achieve.

The last thing is I really believe the whole automation part and the post-processing part is very unique to 3D Systems and the feedback that we are getting on having that in-line post-processing and automation is a driving force for the adoption of this technology in, my mind, long-term..

Thanks very much..

You're welcome..

Our next question comes from the line of Patrick Newton of Stifel. Please proceed with your question..

Hi, VJ and John, good afternoon. Thank you for taking my questions. Just another one on Figure 4 given that you talked to revenue contribution exiting 2017 and more material growth in 2018. Could you help us understand how we should think about pricing per module and the material set that can be used with Figure 4? And then also.....

So, I think....

how do I...?.

I should just say the customer feedback, do you have any sense of average number of modules that customers are considering implementing and then in the end market that's – that do you think you could see the highest adoption rate?.

Well, I think let me just state that depending on the customer need, that we're going to put the engines, because so for a dental application that we showed at IDS, there were only one engine, and we have implemented for some of our industrial customers 16 and more engines.

So, depending on the customer needs, depending on how many parts per year that they will do – be in production, we will have the right kind of a configuration. The other part is, it's not the customers, they want post-processing integrated, inspection integrated, automation integrated. And based on that, the pricing will vary.

Well in some cases, people, they are very satisfied with manual pour of the material. So, depending on the material handling, depending on the automation and post-processing, you will have a different pricing.

My view is because we are going after the production customer, the pricing is not what their primary factor is, the primary factor is part cost, which is very important in total cost of operations and the productivity.

The most important thing that we are focusing on, how do we get a functional production part which has durability, repeatability and the total cost of operation..

Great. Thank you for the details.

And I guess just as a follow-on on the pricing front in April, I guess it's been less than a month, you lowered the price on your ProX SLS 500?.

Yes, yes..

I'm curious if you can comment on what changes you've seen in the demand trends post this announcement? And then given what you've seen from a market reaction, are you considering any changes in pricing strategy to other printers in your portfolio?.

Well, as I think in the last call that we'd indicated that all the cost savings that we have, some of it will flow through to the margin expansion. But a lot of it that I want to use for pricing. My view is SLS is a production technology. It will really do functional parts, especially big parts.

And what I really believe is once you get focused again on total cost of operation and one of the key part of the acquisition cost and that's why we reduced our printer pricing by 30%, because it's a very versatile product.

And we absolutely believe that once you talk about what other core applications you could have with our SLS and SLA technology, the combination, we will expand the market. The last part, our SLA products and SLS products are the standard for service bureau. If you look at the installed base of our machines, they always call out 3D Systems.

So, my view is as this overall market now is expanding having our presence and really focus on total cost of operations is the reason I really believe that we moved our pricing and we are getting good response from the market because we believe that that versatility that I talked about in the functional parts is what our customers are looking for..

Thank you for taking my questions. Good luck..

Our next question comes from the line of Ken Wong of Citigroup. Please proceed with your question..

Hey, Ken..

Hey, how is it going, guys?.

Good, Ken..

So, VJ, on the Figure 4 roll-out, I guess how should we think about is this going to be very staggered in terms of your focus on dental initially then whatever the next vertical you develop an application for or should this be a much broader launch? And then when you mention contributing to growth, I guess is it fair to assume that revenue could accelerate next year from the 2% to 8% you guys have touched on?.

Yeah. So, I think that's two questions, right? So, first of all, it's a broader approach because my view is this is a platform which is modular, scalable, that can apply depending on the customer need to dental, to aerospace, to automotive, to industrial, to even service bureau because everybody is looking for productivity.

One of the key things that I want to just say is that once you really improve the productivity and make the functional parts, the overall product development cycle now got a technology that you could use it from prototyping to production.

You don't have to switch the technology, so the feedback that we are getting for all the verticals is really telling me that we are going to have a broad implementation of this technology.

Now, for the dental, because of our NextDent material and having a unique value proposition having approval in 70 countries, we believe that the penetration in dental is going to be even much bigger deal, and all those things will absolutely accelerate our growth in 2018.

Remember I always said that 2017 is the year of transition and 2018 is the growth. And that's what you're going to expect from us..

Sure. Got it. And then a quick follow-up for John. In terms of the cash flow, I just noticed a big jump in deferred revenue, which I guess is not super common for 3D in the past.

What caused that?.

Yeah, I'm not sure we see that as a big jump, Ken, but hold on a sec, VJ's (30:47) just going through the numbers quickly. There's nothing that took place in the quarter that would have been unusual from a deferred revenue point of view..

You know, overall we are very pleased with the quarter. The performance that we have now, where we have year-over-year revenue growth, we grew our EPS 20% year-over-year and then positive cash flow, $19 million cash flow from the operations. We fundamentally believe that from execution point of view we are really now turning things around.

I also believe that as we move forward into the next quarters because the way we are looking at our 2017 is very similar profile that what you saw last year in terms of the revenue and margin. And I think that's why we are very pleased with our performance in Q1..

Yeah. Absolutely, you can think about our linearity from an earnings point of view and from revenue point of view, even though we're not giving quarterly guidance to be similar from first half to second half.

And to VJ's point, we're generally quite pleased with the outcome in the first quarter and cash is performing very well for us, it's performing very well..

Got it. All right. Thanks a lot, guys..

Our next question comes from the line of James Kisner of Jefferies. Please proceed with your questions..

Yeah. Go ahead, James..

Yes. Hi, everybody. This is actually Timur Ivannikov on for James today. First, I have a clarification and then a question. So, thank you for reiterating the annual guidance. Looks like your Q1 OpEx was a little high, maybe relatively speaking on an annual basis.

Are you more confident in meeting the midpoint of guidance now than you were a quarter ago?.

Well, I think, Jim (sic) [Timur] (32:43), I'm going to tell you specifically that I absolutely believe, as I said, we are very pleased with our Q1 performance and we are very confident of getting to the 2% to 8% revenue growth and 10% to 20% EPS growth.

We absolutely believe that what we are seeing in the market and the revenue growth trajectory that we are seeing, we are very pleased..

Yeah, the other thing to think about, first of all from an OpEx point of view in the first quarter, there's nothing in our numbers that would make us feel like we're getting ahead of ourselves versus our own plan.

We did talk about at the end of the year and then going into this year with the guidance that OpEx is going to be little bit lumpy throughout the course of the year because we've got investments that we're making early in the year, things we're doing later on in the year.

So, our intent is to give you as much color as we can on the absolute results of the quarter and we were very balanced relative to our own expectations line-by-line in the P&L..

The other thing that we talked about, the focus on cost of sales reduction, not on OpEx, because we have to invest in IT. We can hardly (33:54) invest in our Figure 4, that's our future. So, I really want to make sure that you hear and consistently I've been saying in last two quarters that we can't take cost out from our cost of sales.

That's the place where we want to go because this company needed that focus on cost of sales. And we are making a lot of progress and we are not done yet..

All right, great. Thank you. And I guess my second question is on your healthcare revenues, they came back to the September quarter level after a relatively weak Q4.

And could you talk about what's causing this fluctuation and compared to a year ago, what's different now, what's the strength, where it's coming from?.

Yeah. Remember, there is the overall healthcare, there are multiple components.

There is a services business, there is a parts business and there are printer business and materials business, and printer and materials business is going to be lumpy depending on when we get the orders in the quarter, while the services business and the parts business and the simulator business is very good and is growing on the level and a rate that we are very happy with.

So, depending on where the printer and materials revenue is going to come in the quarter, you are going to see it. So I think what you want to do is you want to average it out rather than trying to look at individual quarter. And on that basis, it's a very, very good business for us and a very healthy growth..

All right. Thank you. Congratulations..

Thank you..

Our next question comes from the line of Rob Stone of Cowen & Company. Please proceed with your questions..

Hi, guys. Thanks for taking my questions. The first one I wanted to ask is sort of what factors you foresee taking you either to the high end or the low end of guidance for this year.

Are there certain segments in particular or products where you see the chance for upside?.

Rob, I think the first thing we need to make sure, that our production printer and material growth will continue, because I'm still not happy with our printer decreasing 4% in revenue, we got to turn it around to make sure, and yeah, we made a lot of progress from Q4 to this quarter.

But I want to continue to drive that because that's where we need to make sure we get our installed basis, especially on the production printer, because that's the usage of the materials that I talked about.

Number two, we need to continue our healthcare growth, because healthcare growth is very fundamental and we are already seeing a lot of work there. The third part is our on-demand manufacturing.

As John talked about, as we have gone from minus 18% to minus 6%, we are on the right track, but we are putting a lot of effort into our capital that we want to invest there, we are putting effort in our go-to-market for on-demand manufacturing. And that business should be able to also help us in the growth as we move forward.

So I think those are the core elements, and my view is we are very confident..

And we're pretty happy with where we were at the end of Q1 from an OEM point of view. We started pretty early in the year in terms of Q4 actually as well in capital investments and hopefully you've all seen the press release on the new e-commerce capability that we announced last week.

So, we're full steam ahead of doing the things that we need to do to get that business back where we think it should be..

All right. My follow-up question is on pricing. You mentioned the good response from the customer side.

Are you seeing a response within the industry? How have competitors reacted to your pricing change, if you can detect their response?.

No. No, I don't think so. We have not seen it. Again, I think you need to have the right option to make those moves. And that's where the hard work that we have been doing, which enable us to make those pricing moves.

We also believe that because there are a lot of probably, talk about the productivity gains and pricing moves in the comparable technologies, we believe that we have a unique advantage with our SLS machine. It's a versatile machine where you could do a lot of materials.

And now with our pricing move, the total cost of operation point of view, making functional parts. And the other thing that we are doing is we are also working on how to really create the right kind of a user experience.

And one of the core things I believe, the focusing on software and workflow is going to be important as we move forward, in terms of the production technology. So my view is creating the right kind of a portfolio with materials in this hardware technology and then focusing on software workflow is going to be the enabling technology for our growth..

Great. Thank you..

Thank you..

Our next question comes from the line of Brian Drab of William Blair. Please proceed with your question..

Hey, Brian..

Hey, good afternoon. Thanks for taking my question. First one, just looking at some of the numbers around the acquisition and you paid it looks like $37.5 million for about – it sounds like roughly $10 million in revenue, I guess we don't know that number exactly.

But if I look at – you had two full months of Vertex in the first quarter and I imagine that's all reported and if I'm understanding that business properly, that's all reported in the materials segment. And if that's the case, it seems like about $1.5 million or so in revenue and materials related to acquisitions.

And I'm just kind of trying to piece this together and first of all that would mean that the materials business was relatively flat year-over-year organically.....

No, that's not accurate..

No, that's not accurate..

That's not accurate..

Then I'd love if you could clarify that because it's a.....

No, we are not going to....

We're not going to break it out for you, but the materials segment is....

Which segment – you won't tell us which segment you're reporting that business in?.

So, it is true that Vertex is part of the materials, but it's not the other – our core business material growth is not flat. So, I am giving you two facts..

So, you did $29.998 million in materials in first quarter 2016 and you did $31.689 million in first quarter 2017. So, I don't know if.....

(41:11).

Sorry, no, no. I'm looking at it the wrong way..

No, you are looking at wrong number, my friend..

Sorry, John, you've got the wrong (41:20)..

No, no. Actually no, I'm not. No, I'm not. No that's.....

You are – it's $38.5 million materials last year and $42 million this year..

What am I looking at – I'm looking at – shoot, I'm looking at gross profit..

Okay..

Okay, sorry about that..

(41:33) So, growth (41:36) $4.4 million....

My follow-up question, that is, why is the – what's going on with the margins and in materials and is there something that's hitting gross margins, or is it the pricing change at all in material?.

So, that's a separate question. So, that's a separate question, yeah. So, in Vertex that we acquired, some of them are conventional materials and some portion is the 3D printed version of it. The 3D printing version of our materials for the NextDent is a very similar margin profile as ours, but the conventional ones are not.

So that's the one core reason and the second core reason, there is a mix there just....

Just mix within our own (42:24) materials, so we will.....

I wouldn't worry too much about it..

Yeah, we're – we don't – there's nothing that we see as a trend that concerns us relative to material margins..

Okay. And just to clarify, you're saying you did grow organically then on the materials..

Yes..

Yes, we did..

And Vertex is reported in that segment?.

Yes..

Okay. All right. Thanks. Sorry for the confusion. Got it..

Our next question comes from the line of Troy Jensen of Piper Jaffray. Please proceed with your question..

Yeah. Thanks for taking my.....

Hi, Troy..

Hi, gentlemen. Thanks for taking my question. I want to start out with one with VJ, but I'll do a follow-up with John here. I'm going to go out on a limb and assume that Align is one of your Figure 4 beta customers, even though you're talking of dental here.

So, I'd just be curious to know like the incremental opportunity, if I think about someone like Align which historically already purchased a lot of SLA from you, if they migrate to Figure 4, how incremental is that obviously versus the new candidate?.

I don't think we want to talk more about that stuff, but I think we have all the opportunities are incremental. I'm very, very confident to say that..

So, how about just not speaking specifically to Align, but just in general an existing SLA customer?.

I'm talking about in general..

Yeah..

I'm talking about in general, because see, a lot of people – when I showed the total cost of operation comparison, just with our SLA machines, just look at that.

When we are talking about that – just go to the chart, because that's important to really understand that chart, that for a traditional SLA, with one Figure 4 with 16 engines, you have 225 more printers you need when it is a traditional SLA.

So, just look at that, so the productivity of this machine with 16 engines is so far different that the kind of capability that we are talking about and that's the reason a lot of people talk about other competing technology, there is no comparison here.

When you have 16 engines and then you have automation, you're going to do the productivity of the – one-third the cost of a traditional SLA. And the reason I did this thing is because I'd compare it with my own technology, so that I know what I'm talking about here. So I don't know how (44:45) to give any other comparison with other technologies.

So I just want to be clear that when you have that kind of an improvement in productivity and total cost of operations, you're going to have completely new use cases. So, just want to be clear that this is all going to be new use cases and that's why I'm very excited about it, not just replacing our existing technology..

Once you get to this type of total cost of operations, it's an accelerant for our ability to move out of the manufacturing into application spaces that wouldn't make economic sense or haven't made economic sense historically. So you should think about this incrementally for sure..

Okay. Perfect. And then John, my follow-up for you is just with respect to the guidance. So, if I go to the midpoint of revenues, to get to the midpoint of EPS, we have to have absolute declines in the OpEx on a quarterly basis.

So, am I correct in that? I mean, am I assuming that correctly or maybe the offset is like you took margins to be significantly higher? And then if so, was it all in SG&A, given CES and EIMA (45:52) this past quarter?.

Yeah. I think I'm not going to comment specifically on where our OpEx is going to end up or what our margins might do for the balance of the year.

But I do think you have to look at – you've got to look at linearity here in terms of – we said earlier in the conversation that our linearity first half to second half from an earnings point of view will be very similar. And we'll have similar-ish linearity from a revenue point of view first half to second half.

So, our first quarter results were within our planning parameters for Q1. So, one of the things we're trying to help a little bit, we're not giving quarterly guidance, but we're trying to help a little bit, in terms of expectations for second half-year.

And our plans and the results reflected in the first quarter are reflective of our OpEx plans as well..

Yeah. Thanks..

So, there's no concern there..

I don't think we have a concern at all, Troy. We fundamentally believe that the cost structure we want to do on the cost of sales again is very important, I wanted to state that.

And not really relying on OpEx to drive the EPS growth and the revenue growth has to come from the innovation of what we are doing, the moves that we are making in terms of really driving the new product introductions and the coverage model that we are working on.

So, I think you will look at the top-line growth, the cost structure, what we are doing in cost of sales and I think you will get to the same point that we are guiding..

Yeah. And we'll provide color along the way relative to OpEx vis-à-vis our own expectations and where we could talk about elements that could move it around a little bit throughout the course of the year. But we're investing in IT, that didn't start at the beginning of the year.

We've made near-term investments in go-to-market which we already believe we're benefiting from. So, we'll talk about that throughout the course of the year in our quarterly results. But we're not ahead of ourselves from an operating expense point of view. Our Q1 results were very balanced relative to our expectations..

Perfect. All right guys, good luck for the remainder of the year..

Our next question comes from the line of Hendi Susanto of Gabelli & Company. Please proceed with your question..

Thank you for taking my questions. VJ, you sounded more and more bullish on Figure 4 outside of dental applications.

Which verticals and major application are suitable to be the early adopters of Figure 4? Would you help us identify those?.

Yeah. So, I think there are two key applications. This is just very similar to any additive manufacturing, right? If you have a complex part and then you want to take it into production, then the Figure 4 will be a great technology.

And the second one is custom parts and that's where the dental is because I said, like there are 7 billion human beings and they have 32 teeth. It's a 210 billion custom parts business. So, I really think those are the two core applications I believe when you need – with production volume Figure 4 will be the right kind of a technology.

I also believe in some cases where – so I'll give another use case. If I'm a start-up, and I need 1 million units, and I don't want to do a molding version of that, I want to go directly to the production process.

Because of that kind of a volume, Figure 4 will be also a very good technology to be in a production line, because now you're going to reduce the time to market.

So you can go from prototyping to production in a compressed time, because you can save probably 16 weeks to 24 weeks off their development process time, and for a start-up that's a big deal. So I think my view is, those are just simple use cases I've been telling you.

What I'm finding is more we connect with the customers, more use cases that we are finding where the Figure 4 will be applicable. And the reason I'm very excited is the total cost of operation, because up to now in plastics, the technologies were there, good for prototyping.

But this conversation on production doesn't happen with the design engineers, it happens with the manufacturing managers, and manufacturing managers are going to talk about what's the footprint, how much space it's going to take, what's the labor content, what are we – how many operators we need.

And showing the total cost of operation I really believe is the only way you're going to convince the manufacturing manager of the floor, saying this is the production technology. And for the first time with Figure 4, we have a production technology..

And, the team spent a lot of time building the analytical capabilities to do end-to-end TCO-type modeling and we can bring that into discussions with customers and be able to evaluate how this would look like for them in a Figure 4 type environment..

Because in traditional, if we were just talking about number one, 15 (51:25) times faster, and I'm 10 times faster, that's 11, it is a (51:29) batch process.

You've got to really talk about saying, okay, how many machines you need to do 1 million parts and if you need 225 machines that means the kind of a – millions of dollars of capital that you need. So, the whole conversation needs to be a complete conversation on total cost of operations and that's why I'm excited..

And, VJ, if I may verify, so you are pretty agnostic in terms of which verticals, which applications?.

Yes. Yes. It's not, I'm focused on application, not agnostic on application, because it has to be something which makes sense for additive manufacturing.

We're not going to just replace the molding machine for a traditional part, because then the volumes and the cost structure is very different, but it's a complex part that they need in volume and they can't do it or the traditional processes, the yields are very low.

Then we have a very, very good application here, or for the custom parts, because you can't (52:28) afford to create a mould for every custom part that you need and then the third part is the time to market.

So I think what we are doing is we are looking – we're having a conversation customer by customer and understanding their needs, the part volume that you need and let's figure out the material that you need and then build out, you need one engine, two-engine, four-engine, 16-engine for automation post-processing and that's the process..

Thank you, VJ. Thank you, John..

You bet..

Our next question comes from the line of Bobby Burleson of Canaccord Genuity. Please proceed with your question..

Hey, Bobby..

Hello, there..

Hey, guys. Good afternoon..

Good afternoon..

So, just a couple of questions left here on my list. Just curious, you've talked about being, hoping to optimizing printer pricing in order to generate demand.

I'm wondering how open you are to looking at materials pricing?.

Yeah..

Yeah.

Are there going to be cases where you might want to make some adjustments there?.

Not really. I think the focus I have on really understanding the total cost of operations. Because materials is a very important component of it, but not everything. And my view is we should look at the overall equation, one. Two, I think that our current material pricing is in line with what I believe what we need to have.

So, there is no real need in looking at material pricing..

Okay. And then just as a follow-up, actually entirely different question. It sounds like Figure 4 is nicely disruptive in a positive way in terms of that total cost of operations.

And I'm wondering, as you go out and evangelize the technology and it gets to the point where it's generally available from you, is there going to be a difficult kind of process in terms of not disrupting the sales of your existing production printers? (54:48) customers need to evaluate this..

Yeah. So, I think, Bobby, there is one distinction, Figure 4 really works when you have a small part, 2 inch by 4 inch, I just want to be clear, by 13 inch. So, when you have a big part, then SLS and SLA technologies are the right technology. So I think that's the beauty of really having the technology focused on small parts.

And that's why SLS and SLA are long-term technology because my view is the positioning is very clear. If you want very good quality part, big part, then SLA is a great technology. If you want a functional part, big part then the SLS is the right technology.

If you want a small part which can do both great quality of the part, durability in the functional part and then productivity is the key, then the Figure 4. So, I think that positioning is very important. So, that's why all these three technologies will co-exist.

And my view, we will be able to really drive based on the right kind of application the right kind of the technology. Now our MJP technology, MultiJet Printing technology is also important because they are very much into production into certain key verticals like jewelry.

In jewelry market, essentially we are the leaders and these SLS, SLA technology will not be as applicable. But certain applications that we have where people are trying to get an entry level product for prototyping the MultiJet Printing is also very, very important.

So, I think the way I look at it is, based on the customer need, we need to have the right technology..

Great. Just curious, did you have to basically lease a (56:52) whole new set of counterparts at your customers because you mentioned the fact you said the manufacturing folks now, you are already engaged in conversations with them or has there been....

Yeah..

...a need to kind of develop that content (57:06)?.

Absolutely, absolutely. So think about it, when there's a prototyping you're talking to the engineering department, you're talking to the design engineers and you're creating more shapes more ways. But when you say, aha, I have a technology, not only it's a great thing in prototyping, but we can take it to the production.

That conversation can't be just with the design engineers. Because the production manager or the factory manager, they need to really say, aha, this thing now I can put it.

Because lot of technologies that we had, why they're not into production that easily, because there is a different kind of measures that you're going to have when you want to make into production-ready technology. They look at the footprint, the capital. But the capital budgets are going to be huge. They need to look at the new automation.

If it really fits into my ERP, meaning you also need to make that into industry 4.0, meaning you need to have the right kind of an uptime-based technology. And that's why this is not just about the printing technology. You got to have the right software workflow, and then connecting them with an ERP system.

So you need to really look at the connectivity and the IT-based approach that you regularly take (58:29), which is very different. That's the reason we are having this conversation with the production managers and IT managers when we talk about implementing Figure 4 into that environment..

Okay. Well, great. Thank you very much..

You're welcome..

Our next question comes from the line of Weston Twigg of Pacific Crest Securities. Please proceed with your question..

Yeah, hi. Thanks for taking my question. Actually I have one and then a follow-up, but the first one is just on Figure 4, you sound quite bullish. And I was just wondering if you could help give us some idea of what your goals are for that platform in 2018, whether it's 5% of revenue or a number of units or modules shipped.

So, any kind of color on your own internal expectations would be pretty helpful..

Yeah. We are not giving that. I think essentially what I said was Figure 4, materials and our metals are going to be our growth driver. And of course healthcare and software is already, but they're going to be the additional growth drivers for 2018.

My view is we got to grow in 2018 and double-digit growth in 2018 is something that we are looking for, for our revenue..

Okay, helpful. And then on the services side, you mentioned that it's performing well within your expectations.

Can you help us understand what your outlook is for the year, do you expect the growth rate to be within the 2% to 8% range or below or above that range?.

We are not breaking it down separately on that.

I think what I fundamentally believe and I think I've talked about it, right, that we need to bring our printer revenue into positive territory, we need to bring our on-demand manufacturing into the right kind of growth rate and then continue to grow our healthcare and software and materials business and we are very confident that we've meet the 2% to 8% kind of numbers..

Okay. Thank you..

Thank you..

Thank you. There are no further questions at this time. I will now like to turn the conference back over to Stacey Witten for closing remarks.

Stacey?.

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 at www.3dsystems.com/investor. Thank you..

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. Thank you..