Good afternoon and welcome to 3D Systems' Conference Call and Audio Webcast to discuss the Results of the Second Quarter 2018. My name is Overin 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..

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 Patrick Rogers, Assistant General Counsel.

The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the web who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website.

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've accessed the streaming portion of the webcast please be aware that there may be a few-second delay and you'll 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 and slides accompanying this webcast, which are both 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 on this call will be against the results for the comparable period of 2017. Now, I'm pleased to turn the call over to Vyomesh Joshi, our CEO.

VJ?.

Thanks, Stacey. Good afternoon everyone. We are pleased with our second quarter results and believe we are turning the corner in the transformation of the company. We are seeing early returns on the investments we have made over the last two years and are delivering on our previously-communicated drivers to growth.

In the first half of this year, we have reported printer revenue return to growth, including 41% revenue growth this quarter on a 37% increase in printer unit sales, continued growth in materials, continued growth in software, on-demand manufacturing return to growth, and continued double-digit growth in health care, 26% this quarter.

Well, our actions and investments in go-to-market are not done, we have made significant progress to drive growth and improve execution worldwide.

Our customer service transactional net promoter score has improved an additional 10 points, customer satisfaction scores at an all-time high and customer loyalty measures are improving, which will help fuel our annuity-based business model. Our execution has improved and we are seeing returns on our investments.

Our go-to-market strategy is more effective with better sales motions and enhanced sales tools based on meeting customer needs. We have the broadest portfolio of products in the industry and multiple sales channels, including direct, more than 100 resellers and new e-commerce capabilities.

We have strengthened our reseller network and our support, training and education of the channel. Partners provide particular value in certain geographies with specific vertical expertise and with a subset of our products and solutions.

We also significantly enhanced our direct sales motion, which is critical to many of our production-oriented offerings.

Our direct sales team and our application engineers who support them have the skills and capabilities to help design solutions for customers, provide application know-how, enable more high-tech support during the sales process and offer customers deep relationships within the company.

We will continue to balance between direct sales and resellers to meet the needs of a wide range of customers and reach the broad market opportunity we have with our end-to-end portfolio of solutions.

I would like to take a moment now to provide an update on our portfolio and the products we showcased in November 2017 with launches planned throughout 2018. Our plans remain on track and we have already started shipping several of these new products. During the second quarter, we began shipping FabPro 1000 industrial desktop 3D printer.

This compact device offers professional and industrial customers a powerful, integrated solution that delivers very high quality parts very quickly and efficiently with low total cost of operation. The early feedback from our customers and industry experts has been excellent versus competition in this category.

In the second quarter, we also started shipping the ProX SLS 6100, which offers the widest range of materials in its class and we believe delivers lower total cost of operation compared to similar competitive systems, including HP. In July, we commercialized the MJP 2500 investment casting 3D printer in the U.S.

and are on track with plans to roll it out globally later this year. The 2500 IC is specifically designed for the investment casting and foundry markets, offering high quality and reliability with two new materials and the transformative production workflow, which can be dropped into the existing foundry processes.

The 2500 IC offers reflective total cost of operation, which can capture 30% to 40% of average foundry part volume. It provides fast turnaround times and high-quality parts and enables opportunities for expanded capacity, more complex parts, new business models, and improved customer profitability.

Last week, we began shipping commercial units of the award-winning NextDent 5100 with the largest number of materials in the dental market today, and the potential to redefine digital dentistry.

NextDent 5100 beta users confirm up to 4x faster speed than comparative offerings, including Formlabs, 70% to 80% time reduction in denture production and up to 90% cost savings compared to conventional methods. We also began shipping the first commercial Figure 4 standalone unit.

The standalone Figure 4 offers a wide range of materials for production applications across targeted key verticals and provides lower total cost of operations and faster time to part compared to similar systems, including Carbon.

We believe Figure 4 can reduce injection molding cycle times by over 40%, provide 20% plus cost savings, and increase production rates by 30% compared to traditional manufacturing. We previously discussed a Fortune 50 industrial customer as a beta customer for a large scale production Figure 4 system.

This beta unit converted to a sale in the second quarter, providing another strong proof-point for our Figure 4 as an integrated and automated platform for manufacturing volume production capability, well-suited for industrial companies and demanding production requirements in manufacturing environment.

With the production Figure 4, we are now working with customers on a case-by-case basis to meet specific customer needs and requirements with customized configurations.

Figure 4 has proven capabilities including Six Sigma repeatability, part durability, lower total cost of operations in low volume manufacturing, fast start-up and quick design-change capability, which in combination results in a very strong value proposition compared to both injection molding and other additive solutions.

As we previously shared, throughout the remainder of this year, we plan to roll out modular Figure 4 systems, as well as the DMP 350 and large format DMP 500 systems offering true factory solutions for both plastics and metals manufacturing.

With our product rollouts in 2018 and our continued investments in future innovation, we believe our portfolio is second to none in regard to breadth and competitiveness. And in parallel, we continue to be keenly focused on execution and operational efficiency to drive long-term growth and profitability.

With that, I would like to provide an overview of the second quarter before John provides more detail on our financial results.

We are pleased with our results for the second quarter, which were driven by strong revenue growth, including growth in printer revenue and units, materials, on-demand manufacturing and health care solutions, as we continue to improve execution and are seeing the early returns on our investments in both innovation and go-to-market.

During the second quarter, total revenue increased 11% to $176.6 million, including continued double-digit growth in health care and strong growth in printer's revenue of 41% on a 37% increase in unit sales. We are very pleased with our growth in printer revenue and units, which will help fuel our long-term material and service annuity streams.

GAAP gross profit margin in the second quarter of 2018 was 48.8% and non-GAAP gross profit margin was 48.9%. GAAP operating expenses increased 7% to $93.9 million in the second quarter.

Non-GAAP operating expenses were $79 million, a 12% increase compared to same quarter last year and consistent with our plans to be approximately flat sequentially from the first quarter. For the second quarter of 2018, we reported non-GAAP earnings of $0.06 per share and the GAAP loss of $0.08 per share.

Now let me turn it over to John to discuss our second quarter 2018 financial performance in more detail.

John?.

Thanks, VJ, and good afternoon everyone. For the second quarter, we reported revenue of $176.6 million, an increase of 11% compared to the second quarter of 2017. GAAP gross profit margin was 48.8% compared to 50.6% in the second quarter of 2017.

GAAP operating expenses increased 7% to $93.9 million, including a 13% increase in SG&A expenses, and a 7% decrease in R&D expenses. We reported a GAAP loss of $0.08 per share in the second quarter of 2018 and 2017. We generated $10.7 million of cash in operations during the second quarter.

We ended the quarter with $119.3 million of cash on hand, as we continue to invest capital in IT, new product launches, on-demand manufacturing and customer innovation centers.

Compared to the second quarter of 2017, non-GAAP SG&A expenses increased 22% to $56.5 million as we continue to invest in IT transformation and go-to-market initiatives, and incurred approximately a $3 million increase in legal fees over the prior year.

Non-GAAP R&D expenses decreased 8% to $22.5 million as we began to ship the new products planned for rollout throughout 2018. We reported non-GAAP earnings of $0.06 per share or $6.2 million in the second quarter of 2018 compared to non-GAAP earnings of $0.08 per share or $8.6 million in the second quarter of 2017.

As VJ said, we are pleased with our second quarter results, in particular our strong revenue growth across categories, including strong printer revenue grow. Printer revenue increased 41% to $39.2 million in the second quarter on a 37% increase in printer unit sales with strong growth in both production and professional units.

As we have discussed, printer unit sales and revenue mix may continue to fluctuate, specifically as we launch products throughout the year at a very wide range of prices. We believe the printer unit placements we are making now will help fuel our annuity-based business model over the longer term.

Materials revenue increased 3% to $45 million in the second quarter of 2018. While there can be lag time between printer placements and scaling materials utilization, we expect growth in materials as we continue strong unit placements and benefit from the incremental contributions of new products later this year.

We also continue to improve customer loyalty metrics and are working to drive higher utilization in our installed base. Health care revenue for the second quarter of 2018 increased 26% to $61.4 million.

We continue to be pleased with the overall demand trends for all categories of health care that expect continued double-digit growth in health care going forward. And just last week, we began to ship our NextDent 5100 printers and expanded materials offering. On-demand manufacturing revenue increased 6% to $27.4 million for the quarter.

We believe our investments in facilities, technology, customer experience, demand generation and our enhanced sales approach has helped drive improvements in our on-demand manufacturing business that will drive continued growth over the longer term. Software revenue was approximately flat from the second quarter of the prior year at $24.1 million.

While quarterly performance may fluctuate, we continue to expect growth from this category, long term. We reported GAAP gross profit margin of 48.8% in the second quarter of 2018 compared to 50.6% in the second quarter of last year.

We reported non-GAAP gross profit margin of 48.9% in the second quarter of 2018, also compared to 50.6% in the prior year. Non-GAAP gross profit margin improved 180 basis points sequentially from 47.1% in the first quarter of 2018.

We continue to drive supply chain optimization, manufacturing efficiencies, and process improvements and therefore expect fairly stable gross profit margins for the balance of the year, and opportunities for expansion over the longer term.

GAAP operating expenses for the quarter were $93.9 million, an increase of 7% compared to the second quarter of 2017, including a 13% increase in SG&A expenses and a 7% decrease in R&D expenses.

Non-GAAP operating expenses in the second quarter were $79 million, a 12% increase from the second quarter of the prior year, but approximately flat sequentially.

Compared to the 2017 quarter, non-GAAP SG&A expenses increased 22%, primarily from investments in IT infrastructure, implementation of our market-based job hierarchy, and increased compensation cost, as well as approximately a $3 million increase in legal expenses.

Non-GAAP R&D expenses decreased 8% as we began to launch our new products, which are planned to continue to rollout throughout 2018. We're very pleased with the progress we are seeing in the first half of 2018 from both our investments and the hard work by our employees.

We believe, we have made significant improvements in operations, and during the second quarter, we went live with our major ERP system upgrade. We are executing on our plans to align the resources with key priorities, reduce overhead costs and leverage our IT infrastructure investments.

We continue to make the investments we believe are critical for success, while at the same time improving our cost structure over the long term. With that, I'll turn the call back to VJ for some concluding remarks.

VJ?.

Thanks, John. We're pleased with our results this quarter, and the progress we have made to transform the company and improve execution to leverage our unmatched offering of additive solutions for the entire digital manufacturing workflow.

Today, we announced our partnership with Georg Fischer Machining Solutions, one of the world's leading providers in precision machining. This partnership immediately expands our global network and market opportunity and provides significant validation of our additive metals solutions for precision manufacturing.

We are excited to be working with a partner of the caliber of GF Machining Solutions to redefine manufacturing and the factory of the future.

Through this partnership, we plan to offer an integrated, additive and subtractive solution with automation and post-processing to provide seamless workflows for advanced manufacturing, while reducing total cost of operation. We plan to debut our first combined solution at IMTS in Chicago the week of September 10, 2018.

We are very excited about our enhanced and complete end-to-end portfolio, ongoing innovation, and significant market opportunities, while continue to be keenly focused on execution and operational efficiency to drive long-term growth and profitability. And 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 for questions. We ask that you limit yourselves 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..

Our first question comes from Jim Ricchiuti, Needham & Company. Please proceed with your question..

Hi. Thanks. Good afternoon. Congratulations on the strong top-line growth. I wonder if you could help us understand whether the new products collectively have begun to contribute to the stronger unit growth that you're seeing or is this something that we might anticipate over the next couple of quarters..

So, I think for Q2 the new products was immaterial. Most of this revenue growth is from our focus on our legacy products, our go-to-market and all the work that we have done in terms of improving our Net Promoter Score and customer engagement.

So that's the exciting thing that with our legacy products now and with our focus in go-to-market, we are generating this growth. And as we rollout our new products in second half and 2019, you will see the impact of the new products..

And my follow-up question, maybe this is a question for you, John, but as we start seeing these products rolling out and presumably the increased support to drive the marketing on this, how should we think about the operating expense? You're clearly showing stronger top line growth and, at what point, should we begin to anticipate the improved operating leverage in the model?.

Sure. So I think we've been pretty consistent going back to the first quarter and perhaps some direction back in the fourth quarter that we felt that the good proxy for operating expense for the year would be the run rate at that time of roughly $78 million a quarter.

So, I think if you think about that as a reasonable run rate for the full year of 2018 roughly, I think you can see what that would imply from a model point of view with revenue growth.

Does that make sense?.

Yeah, it does. So, you don't anticipate having to add much in the way of OpEx even with....

No, we've been....

Yeah....

Yeah, we may shift over time. We may shift where we invest our OpEx a little bit. But, in terms of being additive, no, that's not (00:26:00) that we're thinking..

I think what we are trying to do, James, is really drive more now in sales and marketing because now the product launches are there. Our biggest issue is awareness and training. And we need to just establish these new categories and make sure that we shape our overall operating expenses, but we are not trying to add to that..

Just one clarification, I just got to note that in VJ's first the answer to the question around the impact of new products on Q2 revenue, apparently they didn't – people didn't quite hear that well. So, VJ's response was that the new products in Q2 are immaterial relative to our revenue performance in Q2..

Thanks very much..

You bet. Thank you..

Thank you..

Our next question comes from Hendi Susanto, Gabelli & Company. Please proceed with your question..

Good evening, VJ and John..

Good evening..

Good evening..

VJ and John, if I look at printer services business, the sales declined 3% year-over-year despite of strong growth in printer products.

Is there some lag effect in printer services?.

Well, I think it is a lag, because what we are really right now focused on installed base, focusing on fixing the problems. But as the installed base grows, the new opportunity of maintenance contracts will appear. So I think you need to really look at that as a build..

I see.

And then one more question, VJ, for new products that you will introduce in the second half, when do you expect that – those sales contribution to be material?.

Well, I think it's the definitional material. We already talked about that we are shipping FabPro 6100. We started shipping last week our NextDent 5100 and we are slowly ramping our figure for standalone. So, my view will be a ramp – kind of a slow ramp that you could see in Q3 and Q4, but 2019 we should have a significant revenue..

Got it. And then congrats on delivering high growth in printers for two consecutive quarters..

I think it is set up to really to drive our installed base, productive installed base as I always say and then we want to enjoy our annuity stream in materials and services. Thank you..

Thank you..

Our next question comes from Ananda Baruah, Loop Capital. Please proceed with your question..

Hey. Good afternoon, guys. Thanks for taking the question. Congrats on two straight quarters of solid results and I'll say probably seeing the action collectively take hold over the last six months, probably a little sooner than I think we all probably would have expected. I think I probably had the same comment last quarter.

So VJ, do you think, I mean, this is the highest year-over-year growth you've – the company has generated in a couple of years. Coincidently, I actually think it was the June quarter a couple of years ago where you grew sequentially 6% in the June quarter that had you generate the last quarter of growth year-over-year that was this strong.

Given that it's structural, it's a result of the actions you guys have taken and given that it's actually ahead of what we all collectively thought with the most exciting of the product launches this year, do you think you've altered the growth profile of the company in the immediate term and how would you like us to think about that? In the last question, you actually made mention that you expect significant growth in 2019.

I know that's anecdotal, but could you just sort of frame how you'd like us to think about the growth profile and sort of the impact from the structural changes along with the impact that these new products can have since they do seem to be a significant group of products? Thanks..

So, if you think about it, I laid out a plan in October of 2016 and then I was really surprised by how deep the issues were.

So what we did was say, okay, let's turn around the company, stabilize the company, that's what we did, and then make sure that we get the right focus on execution, especially the go-to-market engine, supply chain, and that's what we have done in last three quarters now. We started really shifting our investments.

You saw the growth in health care and software consistently. And now you're seeing the growth in our on-demand manufacturing business. And on the printer side, we went from minus 3% to minus 14% to minus 11% to minus 1% and, in last two quarters, 24% growth and then 41% growth in revenue.

So I really believe we have been very consistent, we have been very focused on execution and that's what we want to continue to do. And in parallel, we developed incredible product line and our portfolio now is very, very strong with our FabPro in the low end of the market; the production Figure 4 in the high end of the market.

We have the dental lab, which is incredible. We are getting lots of awards for this. We believe that our standalone Figure 4 is a very competitive product compared to any other competition. And in the metals side, we believe that our ProX DMP 320 is a fantastic platform.

We also talked about, which we will really start shipping in fourth quarter, our large format ProX DMP 500 printer. Plus, I also believe that this relationship with Georg Fischer is significant. The way I believe we need to be really looking at the market in a mixed environment where both subtractive and additive solutions will be there.

Having a partnership with a leader in precision machining company, which has a global footprint, I think you're going to see us also accelerating our metal and the automation of the factory system that we can apply across our product line. We are very excited about this partnership.

So, my view is we are consistent, we are going to continue to drive the hardware revenue growth, with which we will be able to enjoy our materials and services revenue. Health care is incredible growth engine. Health care growth of 26% really sets up, because if you think about our health care business, it's 35% of the total revenue.

And that's a big business that we are building with our workflow knowhow, with our understanding of the whole digital workflow with great printing and the services that we built.

So, I really think that now what we need to do is just focus on execution, make sure all the new products that we are introducing, we can scale them, and I'm very excited about what results we can get..

Okay. Great. I appreciate.

Just, John, just quickly, how should we think about seasonality for the rest of the year? Top line seasonality?.

Yeah. I think I would think about seasonality in what's typical for us in a Q3, Q4. Q3 can be anywhere from slightly up to slightly down on a sequential basis. And I think you can think about Q4 with the typical kind of uptick and also with a little energy from our new products as well. So, we'll give you more color on that as we get out of Q3..

That math suggests nice double-digit revenue growth for the year, so to be there, congratulations. Appreciate it..

Thank you..

Our next question comes from Sherri Scribner, Deutsche Bank. Please proceed with your question..

Hi. Good evening. Thank you. I was curious if you could provide a little bit of detail on what you're seeing with the printer growth in terms of the split between metal and plastics types of printing. Are you seeing stronger growth in any one of those segments or would you say that you're seeing balanced growth across sort of those....

Yeah. We are seeing balanced growth; we are actually seeing balanced growth in professional, production, plastics and metal printers. So that means it is a broad range of the product portfolio and we're seeing growth in every single category..

Okay, great. And then....

You can't achieve that 41% kind of a growth unless you can see that kind of a growth – and globally, so think about, I have been talking about our execution was very good in Europe.

We took some of the same processes and applied that into Americas and in Asia, and this quarter we had Americas growing 6%, Europe growing 6% and Asia-Pacific growing 38%.

So if you remember, last year I had talked about the leadership change in Japan, I had talked about we need to have the same processes that we had in Europe, apply that into Americas and in Asia, and I'm very, very happy to report that now we are seeing growth in all the three regions, so not only all the categories but also balanced growth in all the regions..

That actually – I think you read my mind VJ because I was going to ask you about that growth in Asia, since it was so strong. Is it all attributable to the management changes that you've made or would you say there is anything else in particular that's helping drive that....

No, I think the management changes and putting the right kind of processes, because we talked about lead generation engine.

In my mind, we need to have both balance between indirect and direct, because there are some reports that we don't have the right resellers, I think I really believe that we have done lot of hard work in pruning initially, because I wanted to make sure that the channel partners that we have, they are engaged, they are trained, they understand this business and then now actually globally we are adding new resellers, so as for example with other dental printer, we are adding dozen new dental specific resellers, because we absolutely believe that domain knowledge is going to be important.

So, I think that combination of our indirect and direct sales is what is also a very key factor and in the direct sales point of view, we are very focused, we are focused working with the application engineers and the direct sales team that we can go and really say, okay, what do we need to do to solve our customer problems.

The production printers are really sold to our direct sales motion.

So building the right team, building the right processes and having this marketing, so that we can have the lead generation are the three important things that we have done with the portfolio frankly that I focused because I really wanted to make sure we focus on the productive installed base and with our new products, I really believe we are going to continue to see the growth..

Great. Thanks so much..

Thank you..

Thank you..

Ladies and gentlemen, we have reached the end of the question-answer-session. Now, I would like to turn the call back to Stacey Witten for closing remarks..

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

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..