Good afternoon and welcome to 3D Systems Conference Call and Audio Webcast to discuss the results of the Second Quarter of 2019. My name is Jeremy and I will facilitate the audio portion of today’s interactive broadcast.

[Operator Instructions]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’m 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 Rebekah Toton, Assistant General Counsel.The webcast portion of this call contains a slide presentation we’ll refer to during the call.

Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website.

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 this slide and in the press release that we issued today.

For those who have access to the streaming portion of the webcast, please be aware there may be a few second delay and 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 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 to comparable GAAP measures.

Finally, unless otherwise stated, all comparisons of this call will be against our results for the comparable period of 2018.Now, I’m pleased to turn the call over to Vyomesh Joshi, our CEO.

VJ?.

Thanks, Stacey. Good afternoon, everyone.GAAP revenue in the second quarter was $157.3 million and non-GAAP revenue was $156.4 million and printer unit sales increased 46.4% from the prior year.

Expected revenue headwinds continued this quarter based on the ordering patterns of a large enterprise customer and the pause we have taken on Factory metals systems as we complete technical enhancements to ensure the quality and reliability levels, meet our expectations for high volume production environment.

Additionally, we saw weaker macroeconomic conditions, particularly in Europe and the automotive sector, impacting both printer shipments and our on-demand services.Overall, our new products continue to be well-received.

And we are on track to begin shipping exciting new production materials during the second of this year, which we believe will significantly expand our growth opportunities in plastic printers going forward. Although, we did not ship DMP Factory metals systems during the quarter, we are making good progress on the technical enhancements.

And we continue to see solid demand and positive customer feedback for our DMP Flex 350 systems.Gross profit margin improved sequentially for the second quarter, as a result of lower cost of sales and revenue mix.

Operating expenses declined as a result of our cost reduction plans, beginning to take hold, as discussed over the past couple of quarters. I’m pleased with our progress here.

And we will continue to be laser-focused on cost reduction opportunities in the second half to offset short-term revenue headwinds, while at the same time, moving to an appropriate cost structure, for the long term.

For the second quarter of 2019, we reported non-GAAP earnings of $0.00 per share and GAAP loss of $0.21 per share.Now, let me turn it over to John to discuss more details on the second quarter of 2019.

John?.

Thanks, VJ. Good afternoon, everyone.For the second quarter, we reported GAAP revenue of a $157.3 million, a decrease of 10.9% compared to the second quarter of 2018. GAAP gross profit margin was 46.6% compared to 48.8% in the second quarter of 2018. GAAP operating expenses decreased 1.5% to $92.5 million.

We reported the GAAP loss of $0.21 per share in the second quarter of 2019 compared to a loss of $0.08 per share in 2018.

We reported non-GAAP earnings of $0.00 per share in the second quarter of 2019 compared to $0.06 per share in the second quarter of 2018.During the second quarter, printer unit sales increased 46.4%, driven primarily by sales of our Figure 4 platform.

Printer revenue decreased 27.4% to $30 million, driven by year-over-year timing of a large enterprise customer’s orders, our decision not to ship DMP Factory solutions during the quarter and the softer macroeconomic industrial environment.

Printer unit sales, revenue mix and overall average selling price will likely continue to fluctuate as we ramp sales of new products at a wide range of prices, and as macro uncertainty and current slowdown and large capital purchases continues.Materials revenue decreased 8.5% to $41.2 million in the second quarter.

As we discussed last quarter, we have been experiencing a decline in legacy materials at a faster rate than the materials growth related to core and new systems.

We continue to believe those trends begin to flip this year and we expect to have year-over-year materials growth in the second half of 2019.Healthcare services and simulation revenue increased, but the impact of the large customer’s order timing offset those increases and total healthcare revenue decreased 8.1% to $56.4 million.

Excluding the large enterprise customer’s orders from each year, healthcare revenue increased 11.4%. We continue to be pleased with the overall demand trends for healthcare, including our NextDent 5100 3D printer.On-demand manufacturing revenue decreased 12.4% to $24 million in the quarter.

As we discussed last quarter, we expected headwinds through the second quarter related to the business adjustments connected to export compliance and outsourcing changes.

We also experienced additional weakness from automotive and European customers in the second quarter.Software revenue including haptics and scanners decreased 0.5% to $25.1 million in the second quarter, primarily as a result of lower Cimatron product revenues, driven by weakness in automotive.

While quarterly performance may fluctuate, we continue to expect growth from software long-term and are taking actions to improve software growth rates and enhance our software portfolio.

Despite the revenue headwinds we are currently experiencing, we continue to expect long-term growth in printers, materials, healthcare and software.We reported GAAP gross profit margin of 46.6% in the second quarter of 2019, a 220 basis-point decrease from the prior year.

Non-GAAP gross profit margin in the second quarter of 2019 was 47.4%, a 150 basis-point decrease from the prior year but a 320 basis-point improvement sequentially, as a result of revenue mix and improved cost absorption.

We continue to drive supply chain optimization, manufacturing efficiencies and process improvements but with inventory reduction actions and lower production plans at our manufacturing facilities, we continue to expect gross profit margins to be in the mid-40s range throughout the balance of this year.GAAP operating expenses for the quarter were $92.5 million, a decrease of 1.5% compared to the second quarter of 2018, including a 0.7% increase in SG&A expenses and an 8.4% decrease in R&D expenses.

Non-GAAP operating expenses in the second quarter were $71.7 million, a 9.3% decrease from the second quarter of the prior year and a 1.7% decreased sequentially.We are beginning to see the results of the actions we are taking to accelerate cost reductions and lower overall cost structure.

Compared to the 2018 quarter, non-GAAP SG&A expenses decreased 9.3% to $51.2 million, non-GAAP R&D expenses decreased 9.2% to $20.5 million.While there is continued uncertainty in the macro environment, we are focused on what we can control, reducing our cost structure by continuing to drive efficiencies, lower headcount and reduce cost of sales and operating expenses, while prioritizing investments to drive profitable growth.

With these actions, going forward, we expect to keep non-GAAP operating expenses relatively flat.We generated $18.7 million of cash from operations during the second quarter. We ended the quarter with $150.4 million of unrestricted cash on hand.

We improved working capital performance during the second quarter, including improved DPO and DSO while at the same time reducing aggregate inventory levels.

We also reduced cash capital spending during the second quarter to $5.6 million and expect to keep this lower rate of CapEx throughout the second half of 2019.While cash use and generation will continue to fluctuate from period-to-period, we are very pleased with the cash results for the second quarter.

We will continue reducing our operating spend levels, improving working capital performance, and tightly managing capital expenditures driving for organic free cash flow going forward.With that, I’ll turn the call back to VJ.

VJ?.

Thanks, John.We remain confident in the long-term market opportunities we see for the Company and are pleased with the early progress we are making with our cost structure.

We remain very-focused on the bottom line performance of the Company, given short-term revenue headwinds, but we are also optimistic for future growth.Our expanded hardware portfolio has been well-received.

And we are in the process of launching a number of new and very innovative materials in support of production solutions, but at the same time, focusing even more on our software capabilities to drive true workflow solutions.

We are on track to take out an additional $10 million to $15 million of operating expense in 2019 on top of our original plans for this year, as discussed in our last earnings call.We also recently concluded the sale of the entertainment business.

The leaders of entertainment division have left 3D Systems to continue to run the business as an independent company and we wish them all the best and look forward to partnering with them in the future.In closing, we remain confident in our broad portfolio of additive capabilities, workflow solutions and overall market opportunities; and we remain keenly focused on executing on our strategy, reducing cost and driving long-term profitable growth.And with that, I would like to turn the call back to Stacey who will open the floor for questions.

Stacey?.

Thanks, VJ. We will now open the call to questions. We 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’re calling inside the U.S.

the number is 1-877-407-8291 and if you’re applying outside the U.S., the number is 1-201-689-8345..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from a line of Ananda Baruah from Loop Capital Markets. Please proceed with your question..

Hey. Good afternoon, guys. I appreciate the questions. I guess, both of mine will be demand related. Could you guys talk to how you’re seeing the demand environment shift over the last 90 days? So, what's incremental? That’s the first part. I’ll ask the second part at the same time.

And despite sort of saying weaker macro, you still put up a seasonal type quarter and are you expecting similar typical seasonal patterns in the September and December quarter? Those are my two questions. Thanks..

Yes. I think, first answering the last question, yes, we are expecting the seasonal, the third and fourth quarter. As far as the macro, what we are seeing, especially in Europe, we are seeing weakness in automotive sector and even in automotive sector in China and India also, we are seeing weakness.

And that impacts both, our printers and on-demand printing, the ODM business. We really feel that these uncertainties, we need to really to focus on our cost structure and the cash generation..

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

So, we're hearing quite a bit of commentary around Europe, but from other companies. If I look at your geographic regions, it looks like the U.S. was down more and Asia was -- posted the biggest decline. So, I wondered if you could talk a little bit about what's contributed to the weakness in those two regions. Thanks..

So, I think the first thing that we had already mentioned in last quarter call, one of the biggest headwind we have is our this big enterprise customer. And that customer bought equipment to place in Asia and in Americas, and not in Europe. So, now you have that headwind, which will really drive the Americas and Asian revenue decline in hardware.

In Europe, because our healthcare is doing well, especially our dental printer and the overall healthcare business, like the medical simulator, which is based in Europe, that's growing.

And when you have that growth offset by weakness in Europe with ODM and our printer hardware is a reasons you are seeing that kind of a mix regionally for the Company..

I’m not sure you answered this. You did -- held your discussion around healthcare specifically. But, if you look at the U.S.

and Asia Pacific regions and parse out the revenue from this large customer, what are we looking at in terms of the business trends?.

So, the business trend in Asia is weak, because as I said earlier, China, India and the overall automotive sector in China is -- and the trade tariffs also is really impacting our Asian business. In Americas, I think, because the growth -- generally it comes from our software and the healthcare in Europe, that’s what is offsetting.

So, if you take out -- if you just take a step back and look at our printers and materials business without the big enterprise account, Americas is better than Europe and Asia..

Okay. That’s helpful. Thank you..

Our next question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Please proceed with your question..

If we look at the materials trajectory comments, right, I mean, down 8% in revenues and volumes were down over 11%. What is accounting for that sharp drop off? And I know you made some comments around that turning around in the back half.

So, can we also get a look in this quarter of how much the drag of these legacy products was and how that underlying trajectory is, excluding that?.

Yes. I think, we are feeling very comfortable that it will flip in second half of 2019.

Because when we look at our installed base of legacy and the new printers, and where we see the materials coming from those printers -- because that’s really important to really understand the installed base and really understand where the materials revenues coming from, starting third quarter and then really getting into 2020, we think that it was really be a very different kind of a profile of our materials mix, which will come more from our core and new products versus legacy.

And that gives us the confidence that will flip starting in second half and continuing 2020..

VJ, can you just clarify that currently in the -- in this current quarter that you just reported, what is the -- what’s the rough size of maybe the materials revenue that’s coming from legacy versus the….

We are not breaking that down. But, as I -- yes, I understand, Wamsi. But, I really believe that the way we look at our current materials mix, we feel very comfortable that we’re going to show the growth in second half..

Last quarter, Wamsi, we kind of talked about that crossover. We are seeing growth in our core and new products materials. It’s just the question of the crossover. And so, the confidence comes from our ability to see both parts of the equation..

Okay. And then, just on OpEx, if I could also ask, you guys obviously have done a great job here in the quarter in sort of managing that OpEx in this tough revenue and macro environment. And it’s -- I heard that you are going to keep OpEx relatively flat from these current levels. Is that the right way to think about it into the back half? So….

Yes. That’s right, Wamsi. We said relatively flat. We’ve got two things going on. From an operating expense point of view, we’re driving some actions, continue to work hard on all the global functions; where we see the opportunity, we’re reducing headcount.

And perhaps more important longer term, we’re driving more simplicity from a structural point of view.In the R&D side of the world, and I think we talked about this last quarter, we really front-end loaded and compressed a lot of development efforts for all the products that we put out over the last 12 to 18 months.

So, there's a natural -- there's a natural fall off from an R&D point of view. And our focus really this year has been on materials development. We mentioned that we're making good progress, as well as in the software space. So, R&D has kind of fallen off naturally, but we're also looking at ways to be more efficient there.

So, the flattish is -- typically we would see an uptick in the second half OpEx with our seasonal revenue patterns. But, we believe the actions that we’re doing -- continue to do throughout the second half and beyond, will enable us to stay relatively flat..

So, as we talked about in the last quarter call, we are simplifying the organization with the two business models. This is very, very important for the Company. And when you simplify, you’re able to take cost out throughout the Company, especially in SG&A.

So, the approach that we're taking is really developing those platforms, and now focusing on the annuity stream based materials and software R&D, and then implying the Company so that we can take the parts out of SG&A. And that is a result that we got 9% reduction year-over-year, and we just need to continue to do that..

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

Hey. Can you talk a little bit about the new materials? I thought that was pretty interesting. Something more you can say about it? And just I had one follow-up on that..

So, the new materials that we are developing, our focus is on production. We absolutely believe that with our Figure 4 platform, when you have the right materials and the right platform and the right kind of software, we are seeing incredible pickup in the market, like dental product.

So, we believe now for our standalone and our modular product, we are going to introduce new products and materials, like tough black material, which will have capability with the UV, stability, and we could use for the end-user part, will have biocompatible materials that we are introducing, which I absolutely believe with our healthcare focus will be very important for our product.

We're also introducing high-temperature materials, so that we will be able to go in the automotive market for under the hood applications. And we absolutely believe we're going to have world-leading production materials for these kinds of use cases.So, this is what I absolutely believe was the potential for our Figure 4 platform.

And we started with our dental materials, and now introducing these new production materials really sets us very well in 2020..

And then, a quick one for John. Just on the gross margins, they upped a lot here despite materials declining as a percentage of revenues.

So, can you go through just little bit more detail what drove such strong gross margins?.

Yes. We had a very strong sequential improvement. And clearly, part of that is sequentially from Q1 to Q2, there were some mixed elements that helped us out. And materials stayed relatively stable from gross margin point of view quarter-to-quarter, a little bit down.

But we also -- we’ve been focused very hard over the last six months to nine months, Phil Schultz and his team on driving down some of the fixed cost elements in the supply chain that were causing us to have under absorption issues, certainly ones we saw in Q1. So, it’s two things.

It’s mix, but it’s also some good cost work by folks, based on lower volumes that we’re putting through. And it’s a little bit of a balancing act right now because we’re trying to bring inventory down at the same time, which can work against you. Right? Because you’re not utilizing those supply chain resources.

But, I think teams did a really good job in Q2. We put -- for the second half, we set an expectation of mid-40s. I don’t want us to get ahead of ourselves relative to what we saw in Q2, and we’ll see how Q3 plays out. But, we made some good progress..

When we look at our cost structure work, we look at both OpEx and cost of sales. And I think it’s very important for us to continue to focus on cost of sales and cash, when we think about from the manufacturing point of view..

Our next question comes from the line of Greg Palm from Craig-Hallum. Please proceed with your question..

Yes. Thanks. I guess, starting with the large enterprise customer by our math, it was down something like 30% or 35% year-over-year. That’s our estimate. I don’t know if you’re willing to bless that.

But, what are your expectations there for the second half? And I guess, is your outlook of that customer changed at all, given some of their own recent commentary?.

No. I think, that customer is still printing 0.5 million 3D printed parts a day. So, we think that that customer is still doing really well. There is always going to be that seasonality when they will be buying the capacity for getting the new factory done. And I think that’s the headwind that -- we will have some of that in second half.

And the important part for us is, they are printing with the -- more than 0.5 million parts every day, which will help us also in our materials growth..

Okay. Fair enough. And then, just going through the Q, it looked like you received a notice related to the export compliance item that you’ve been dealing with.

But requiring immediate suspension of contracts with the air force, how much revenue is it going to impact? I mean, how big of a customer are they?.

I think, government isn’t very important customer. We just learned that on July 19th. So, we are still figuring out the overall impact. And what we want to do is, we want to make sure that we support the investigation.

But at the same time, the suspension does allow us to continue to perform current federal contracts and the products which are not very custom, we can still ship. So, we absolutely believe this is something that we need to address, and we are working on it..

But can you comment how big of a customer they’ve been, maybe in the past, just as a reference point?.

Right now, we just don’t know how much the impact we will have, because it’s not going to be all of it. And so, I think we are going to evaluate and we will just -- we will really need to evaluate overall the impact. The one thing I can say, they are not significant customer in terms of the revenue..

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

First, I just wanted to clarify, you mentioned, again, in the first part of Q&A, sequential revenue trajectory is expected for the second half. And looking at the model over the last four years, it’s averaged down about 6% from second quarter to third quarter in terms of revenue.

Is that what you are thinking about?.

You are thinking about it right, Brian. You are thinking about it right..

Yes..

Okay.

And are you thinking now that given some of the headwinds you are seeing in Europe and that, can you comment anything that you’ve seen in July that gives you confidence that it would only be down kind of that typical seasonal amount?.

We just don’t have enough information. But, we feel that single digit down what we mentioned is reasonable for modeling purpose..

And then, I listened to the last question about the gross margin and the mix, and I still feel like I’m not hearing anything's very tangible in terms of the mix.

[Technical Difficulty] why the gross margin 45% for the balance of the year?.

Yes. So, I think the two things that we need to be looking at, one, we want to continue to drive our inventory down, so the factory utilization point of view, we need to make sure that we appropriately model that. And the second thing is the mix of materials and software with our hardware is going to be the second one.

I think that it's important for us to really take the inventory very seriously because we feel that our cash preservation is going to be very important for us. I think, that’s why we're putting that balancing approach….

Yes. That’s consistent. We defiantly saw -- we saw a bit of a bump in Q2 there and that was great but mid-40s is not inconsistent with certainly what we’ve done prior to Q2 and what we've been saying for the balance of year. So, we think that's directionally a good way to think about it..

Our next question comes from the line of David Ryzhik from Susquehanna Financial Group. Please proceed with your question..

Thanks so much for taking the question. Hi, guys. I just wanted to get an update on the powder management system, the technical issues there. And you noted that you made a decision not to ship the factory solutions during the quarter. So that suggests that you had orders but you consciously decided not to ship.

Is that because you’re just not comfortable yet, shipping the product? And I have a follow-up..

Yes. What we basically committed to really make sure that every product we ship is going to meet our quality and reliability requirements. That's very important for the Company. We understand the root cause of the technical issue. We have started putting together the solution and the design.

And we believe that we will have limited shipments in later of 2019, and we will scale this particular solution in 2020..

Okay, got it. And as far as European automotive softness, that’s certainly a key market, I believe, for your DMP product line.

What impact is that having specifically on the entirety of your metals portfolio?.

I think, automotive market is very important for two places. The first place will be our prototyping business because we still have a big prototyping business where automotive is really using for getting the rapid prototyping. And the second place that we have also is our on-demand parts business in Europe, which is also impacted from the automotive.

So, both, printer hardware and the on-demand printing business are impacted..

Great. And then, if I can just squeeze one last one in, the materials strategy. Can you remind me, does that include anything around metals powder or is that entirely around your Figure 4....

Mainly -- I would say, it’s mainly -- 95% would be plastics materials, because our approach has been that we want to really invest in materials R&D where we can create proprietary materials with which we’ll have a very unique value proposition. And that’s why we are very excited about the production material that we’ll be introducing later this year.

For metals, it’s a commodity, and we don’t really invest into that..

[Operator Instructions] Our next question comes from the line of Ananda Baruah of Loop Capital Markets. Please proceed with your question..

Hey, guys. I appreciate the follow-up. Hey. I just wanted a quick clarification on the OpEx remarks. You guys -- you’re talking clearly about flattish OpEx dollars this point forward. But, VJ, you also mentioned that you are -- we’re going to take out an additional $10 million to $15 million through the year.

So, could you just sort of put those two comments for us?.

Yes. So, the $10 million -- first of all, the $10 million to $15 million comment which we made last quarter too was based on the whole year across both cost of sales and operating expense versus our own original plans, Ananda. So, we’re on track with that.

The actions that we’ll continue that have already started that we’ll continue in the second half will allow us to be flattish per our comments. So, it’s not on top of that. Certainly, if we see other opportunities, we’re going to take them. But, I think right now, that’s the best direction we’d give you..

So, if you look at what we spent in OpEx in 2018, we are going to reduce that substantially in 2019. And the other very important thing that we are doing is in our cost of sales reduction and what that Phil and the supply chain team is doing.

So, that’s the combination in terms of what we believe that we need to really continue to drive our cost reduction. The other important thing that I want everybody to hear is we’re also focused on cash, because we absolutely believe that in these market uncertainties we want to make sure that we are focused on cash generation..

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

Your commentary about Figure 4, I wonder if you can go into a little bit more detail.

Can you just talk about where you’re getting the traction, which versions, production, the modular?.

Yes. So, first of all, we are getting incredible traction with our dental printer because we have a very unique value proposition. And we are seeing that we gain significant market share with our NextDent 5100 dental printer. And I do believe that we will continue to really gain share and grow that category.

The other good thing about that, it will also generate the materials revenue growth in our dental materials. So, that's the place we’re doing really well.With respect to modular, we just introduced modular. So, we are still in the scaling that particular category.

The standalone Figure 4 is really waiting for this production materials that I talked about, because in my view, the platform is very sound, it is very reliable, it prints very fast, but just like dental application, unless you have the materials, the software and the hardware, you're not going to get the traction.

So, I absolutely believe with these new production materials, we're going to get traction in both standalone and modular, starting in fall, but really in 2020 it will become as successful as our dental printer..

VJ, within your medical business that grew 11%, excluding the large enterprise customer, it sounds like the biggest driver has been dental..

No. There are three drivers. One is a simulator. Our simulators are doing really well, I mean value proposition here, especially in countries where you need to use simulator for training purposes, for nurses and doctors, like France, China, there become mandatory. So, it’s really helping our simulator business. The second thing is of course dental.

And the third thing is the advanced manufacturing. When you think about companies, the medical devices companies, they want to get into printing medical devices because that's a very big opportunity.

And our advanced manufacturing team is getting lots and lots of growth because of medical device companies are seeing really the opportunity to learn about how to do 3D printed medical devices, and we hold their hands in growing and scaling that business.So, I think those are the three places I absolutely believe that the growth we've seen in the first two quarters of 2019 and that growth will continue for the remaining of 2019 and 2020..

Thank you. There are no other questions at this time. I would like to turn the call back over to Stacey Witten for closing remarks..

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. Thank you..

This is the end of the conference. Thank you for your participation..