3D Systems Corporation (DDD) Q4 2011 Earnings Call Transcript

Good morning, and welcome to the 3D Systems conference call and audio webcast to discuss the results of the fourth quarter and full year 2011. My name is Fabiola, 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 with 3D Systems.

Good morning, and welcome to 3D Systems' conference call. I am Stacey Witten and with me on the call are Abe Reichental, our CEO; Damon Gregoire, our CFO; and Bob Grace, our General Counsel. The webcast portion of this call contains a slide presentation that 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 via the Web at investor.3dsystems.com. 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 here on Slide 3. The phone numbers are also provided in the press release that we issued this morning. For those who have access to the streaming portion of the webcast, please be aware that there's a 5-second delay and that you will not be able to post questions via the web. Before we begin the discussion, I would like to mention the statement regarding forward-looking information that appears on Slide 4. This presentation contains forward-looking statements as defined by federal and state securities laws. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements, which are other than statements of historical facts. In some cases, you can identify forward-looking statements by terminologies such as may, will, should, hope, expects, intends, plans, anticipates, contemplates, believes, estimates, predicts, projects, potential, continue and other similar terminologies or the negative of these terms. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by the cautionary statements described on this message, including those set forth below. In addition, we undertake no obligation to update or revise any forward-looking statements to reflect events, circumstances or new information after the date of the information or to reflect the occurrence or likelihood of unanticipated events, and we disclaim any such obligation. Forward-looking statements are only predictions that relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond our control, that may cause actual results, outcomes, levels of activity, performance, developments or achievements to be materially different from any future results, outcomes, levels of activity, performance, developments or achievements expressed, anticipated or implied by these forward-looking statements. As a result, we cannot guarantee future results, outcomes, levels of activity, performance, developments or achievements and there can be no assurance that our expectations, intentions, anticipations, beliefs or projections will result or be achieved or accomplished. These forward-looking statements are based on current expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management. Our actual results could differ materially from those stated or implied in forward-looking statements. Past performance is not necessarily indicative of future results. We do not intend to update these forward-looking statements even though our situation may change in the future. Further, we encourage you to review the risks that we face and other information about us in our filings with the SEC, including our annual report on Form 10-K, which was filed this morning, February 23, 2012. At this time, I would like to introduce Abe Reichental, 3D Systems' President and CEO.

Good morning, everyone, and thanks for taking the time to listen to our call this morning. As you know, earlier today we released our operating results for the fourth quarter and full year of 2011 and filed our Form 10-K with the Securities and Exchange Commission. This morning, Damon and I will recap our quarterly and annual highlights and share with you several key accomplishments. We will go over our financial results in more depth, explain why we decided to report non-GAAP financial measures, and review our non-GAAP methodology and reconciliation for net income and earnings per share. We will also update you on our integration progress for our recent acquisitions and provide an outlook for the first quarter and full year, including the initiation of revenue and non-GAAP earnings guidance for 2012. Let me begin by saying that we had an incredible year of growth and benefited substantially from our focused growth initiatives. We extended our revenue leadership position, growing annual revenue by 44% to an all-time record of $230.4 million, and grew our gross profit by 47%. We assumed printer unit sales leadership, growing annual units by 242% and driving substantial print materials growth that contributed to significant improvement in our net income and earnings for the year. And importantly, we grew our business organically for both the fourth quarter and annually by 19%. During 2011, we extended our -- we also extended our innovation and technology leadership into new manufacturing and consumer opportunities, introduced a significant number of new products, and extended our print engines and materials portfolio. We completed several key acquisitions in line with our growth initiatives, doubled our reseller coverage and put in place many of the required building blocks of future growth. We are excited that, both on a quarterly and annual basis, all of our revenue categories contributed to our growth. Printer units grew 190% for the quarter and 242% for the year, resulting in record printer revenue and units shipped as we continued to benefit from our planned shift in the mix of printers sold towards lower-priced personal, professional and production printers. We are thrilled that revenue from print materials topped $20 million for the quarter and $70 million for the full year, on nearly tripling printer unit sales to manufacturers and consumers alike, underscoring the power of our growing installed base and the effectiveness of our extending printer portfolio and price points. We're pleased that our services revenue for the quarter increased by $13.7 million over 2010 to $27.9 million and included $18.7 million of on-demand parts revenue, primarily from acquisition activities, and the organic growth of these acquired businesses. We continually measure our performance, productivity and effectiveness, and for the full year 2011, we extended our gross profit and net income on record growth in both revenue and units. We also improved employee productivity some 24%, as measured by our net income per employee, notwithstanding the temporary adverse effect that recently acquired businesses had on our overall productivity. Although we had a superb year and were able to extend our annual non-GAAP adjusted net income by 83% over 2010, the higher concentration of larger acquisitions that we completed during the latter part of 2011 reduced our net income for the fourth quarter of 2011 as we absorbed the initial acquisition cost and operating expenses of these acquired businesses. We believe that as we continue to systematically take costs out of our recently acquired businesses, we will see a corresponding increase to our net income and profitability that mirrors our 2011 annual trend. On Slide 8, you will see the first reference to non-GAAP financial measures that we introduced this morning to clearly show the full impact of our recently acquired businesses' cost on our operating expenses. And as you will hear from Damon soon, we believe that these costs reduced our earnings per share in the fourth quarter by $0.11. We monitor closely the effectiveness of our R&D expenditures and their contribution to our profitable growth, and we're very pleased that our new product revenue grew 33% to $77.8 million for 2011 from $58.6 million in 2010. As a reminder, we track new product revenue only for the first 3 years of a product's commercial life. Of even greater significance, our integrated materials revenue increased 84% over 2010 and amounted to 52% of total print materials revenue in 2011, even after the inclusion of legacy RenShape materials that we began to sell in November of last year. We firmly believe that our sustained integrated material growth, coupled with the fact that material is 31% of total revenue, contributed 42% of our gross profit, validates our strategic direction and our emphasis on recurring revenue, which amounted to 71% of total revenue for 2011. By comparison, revenue from acquisitions grew to $39.9 million, reflecting the fact that, within our balanced growth strategy, new products continue to fuel our organic growth and underscore the effectiveness of our R&D investments. And now for a more detailed look at our financial performance for the fourth quarter and full year 2011, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Thanks, Dave. Good morning, everyone. As Dave just mentioned, earlier this morning we introduced non-GAAP financial measures. I will give some consolidated results on both GAAP and non-GAAP and quickly get into a much more detailed explanation of our non-GAAP measures and reconciliation back to GAAP. Fourth quarter revenue increased 35% over the 2010 quarter, with a gross profit improvement of only 32%, which is primarily driven by the concentration of newly acquired on-demand parts businesses with lower initial gross profit margin. I will further explain this temporary anomaly shortly. On a non-GAAP basis, our total operating expenses increased to $16.8 million but declined to 24% of revenue, reflecting a rise in compensation cost driven by sales commissions from increased revenue and the initial operating and compensation costs of newly acquired businesses. Specifically, our fourth quarter operating expenses included a $2.5-million increase in compensation cost, primarily from higher on increased revenue and from a higher concentration of new acquisitions. Our quarterly expenses also included a $1.8-million increase in R&D expenditures, primarily from the timing of several new product launches and the beta release of our Cubify.com consumer destination. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $13.8 million and earned $0.27 per share. On a GAAP basis we earned $0.16 a share for the quarter. Record materials and services revenue more than offset the planned printers mix shift towards our lower-priced printers on continued strong demand for our personal, professional and production printer categories. For the full year of 2011, revenue increased 44% over 2010. This increase was well distributed across all revenue categories. On a non-GAAP basis, total operating expenses increased to $63 million but decreased as a percentage of revenue to 27% from 31% in 2010. This increase was primarily due to higher sales commissions on higher revenue and the initial higher compensation cost we absorbed from recently acquired businesses before taking any benefit from restructuring activities. SG&A also included litigation expense of $5.2 million compared to $3.8 million in 2010. R&D expenses increased $3.6 million or 33.6% compared to 2010 in support of a significant number of new product launches and the development of our game changing Cubify.com consumer destination. We generated non-GAAP adjusted net income of $41 million and earned $0.81 per share. On a GAAP basis we earned $0.70 per share for the full year. As mentioned earlier, in order to facilitate a better understanding of the impact that several significant strategic acquisitions had on our ongoing financial results, with today's earnings release we began to report non-GAAP adjusted results that exclude the impact of stock-based compensation, amortization of intangibles, noncash interest expense, nonrecurring acquisition and severance expenses, and the releases of portions of the valuation allowance on deferred tax assets. Please note that our total depreciation cost and our senior convertible notes cash interest expenses, in connection with these activities -- acquisitions, are appropriately still included in our non-GAAP presentation. For your convenience, a reconciliation of GAAP to non-GAAP results is provided here on Slide 13 as well as in our earnings release this morning. As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $41 million or $0.81 per share for the year. The excluded items aggregated to a $5.5 million tax effected adjustment to GAAP net income or $0.11 a share. As a reminder, we have $44 million of NOLs remaining, of which $16 million are available for future release. We continue to evaluate the timing and amounts of future releases of valuation allowances as required. Reflecting on our continued strong revenue growth, we believe that our results are consistent with our strategy to remix and diversify our revenue streams and completely in line with our expectations. In fact, annual recurring revenue amounted to 71% of our total revenue, with print materials topping $70 million and services exceeding $93 million. Annual purchase revenue increased by $12 million, reflecting production printers revenue of $35.7 million and personal and professional printers revenue of $30.1 million, led by sales to health care, automotive and motor sports customers. Personal and professional printers revenue increased 35% over the comparable quarter and production printers revenue increased 10%, notwithstanding the unfavorable comparison to last year that included a higher concentration of production printers. Geographically, North America revenue increased $45.3 million over the prior year and made up 51% of revenue for the year. European revenue increased $17.8 million and Asia Pacific revenue increased $7.5 million. Despite ongoing economic uncertainties, we experienced sustained growth for both our European and Asia-Pacific regions, which remained at similar percentages of total revenue amidst a substantial increase in our North American revenue that also included growing on-demand parts services revenue. Sales into Germany and other European marketplaces remained strong. For the quarter, gross profit improved some 32% over the 2010 quarter to $32.9 million. Our gross profit margin for the quarter compressed slightly, primarily from the combined effect of adding several newly acquired on-demand parts businesses that came with substantially lower initial gross profit margin in to the mix. However, for the full year, gross profit margin expanded by 100 basis points to 47.3%. Our full year 2011 gross profit margin reflects the continued margin improvements from our print materials, combined with higher print materials revenue and the impressive year-over-year 1,694-basis-point expansion of our on-demand parts services gross profit margin that was partially offset by a higher portion of sales from lower-margin personal, professional and production printers. Quarterly printer gross profit and margin decreased compared to the prior period on record unit sales, reflecting our planned and managed shifted mix towards lower-margin personal and professional and production printers. Print materials gross profit for the fourth quarter of 2011 increased by $2.8 million or 26.8% on a revenue increase of 21%, primarily benefiting from our printers mix that continues to drive a favorable shift in the mix of materials to higher-margin personal and professional integrated print materials and from the addition of higher-margin RenShape materials we acquired in the fourth quarter. Our services gross profit of $11.8 million included printer services, on-demand parts services and consumer solution services. Services gross profit margin expanded 570 basis points over the prior year period. And as I mentioned earlier, without the addition of several on-demand parts acquisitions during the latter part of 2011 that temporarily set us back, our on-demand parts service margins would have been further along. For the full year 2011, gross profit improved 47% over 2010 from all revenue categories to $109 million. Demand for our higher gross profit margin materials combined with improved gross profit margin on services more than offset the impact of record unit sales of lower-margin personal and professional printers. Print materials gross profit margin expanded 370 basis points over the 2010 period to 64.8%. Print materials gross profit increased by $10 million or 28.1% on a revenue increase of 20.9%, primarily due to the continued favorable shift of the mix of materials to higher-margin personal and professional integrated print materials. Our services gross profit margin of 41.1% included printer services, custom parts services and consumer solution services. Custom parts margin expanded to 38.1% compared to 21.1% in the 2010 period. With all the moving parts within our gross profit margin category, it might be difficult to see just how much progress we have been making towards our long-term target. So we thought that it would be useful to consider the information on this slide with the following explanation. First, it is important to note that our total gross profit increased 32% for the fourth quarter and 47% for the full year 2011, and that our gross profit margin expanded 100 basis points to 47% for the full year 2011, reflecting steady progress from our effective integration and cost-out initiatives. Now the underlying trends. Our annual gross profit margin, excluding the revenue and cost of sales from all acquisitions since 2009, expanded from 47% for the full year 2010 to 52% for the full year of 2011. That means that for all businesses that we had through the first half of 2009, including our printers, print materials and print services, gross profit margin expanded some 600 basis points. Our annual gross profit margin, excluding all businesses acquired during 2011, improved from 46% for 2010 to 49% for 2011. This view includes all acquired businesses from the second half of 2009 through the end of 2010. This represents a solid 300-basis point expansion, notwithstanding the higher concentration of acquisitions towards the latter part of this period. Our reported actual fourth quarter and full year total gross profit margin of 47% primarily reflected the expected temporary drag from our more recently acquired businesses, with the higher concentration of acquisitions during the second half 2011. We firmly believe that our continued progress and success in delivering leverage, even during a year in which we doubled our acquisitions activity, underscores the year-over-year favorable trend and explains the relational impact of recent and distant acquisitions on our gross profit margin progress. We generated cash from operations of $27.7 million in 2011 and $8.9 million of that during the fourth quarter. We ended the year with $179.1 million of cash, an increase of $141.8 million since the end of 2010. This increase primarily reflects $145.4 million of debt proceeds from the issuance of senior convertible notes during the fourth quarter, $62.1 million of net proceeds from the sale of common stock and $92.7 million of cash paid for acquisitions in 2011. Subsequently, we paid $135.5 million of this cash on January 3, 2012, to complete the acquisition of Z Corp and Vidar. As of February 22, 2012, we have $51.6 million of cash on hand. Working capital increased by $159.9 million, primarily reflecting the increase in cash, a $15.4-million increase in accounts receivable from higher revenue and a $1.5-million increase in inventory primarily due to the timing of inventory purchases, while accounts payable remained relatively flat. Without the effect of the senior convertible notes, equity raise and acquisitions, our cash would've increased $30.1 million and working capital would have increased $48.2 million for the year. We believe that the substantial progress we made in diversify our business puts us in a position to affirm our long-term targets and initiate annual revenue and non-GAAP earnings guidance. With all the positive changes in our business, we believe that a forward-looking forecast of revenue ranges and non-GAAP adjusted earnings is more informative to our investors than a sole reliance on our historical comparison. Accordingly, for 2012, management expects revenue to be in the range of $330 million to $360 million, inclusive of the recently completed Z Corp and Vidar acquisitions; and non-GAAP adjusted earnings per year to be in the range of $1 to $1.25 per share. Management believes that these ranges correspond to adjusted net income between 16% of revenue and 18% of revenue. That depicts earnings power expansion potential in the range of 25% to 55% over our 2011 non-GAAP adjusted results, reflecting our expected continued P&L leverage consistent with our long-term targets. Our non-GAAP adjusted earnings estimate is fully tax affected. It includes management's anticipated incremental expenditures related to Cubify, all planned restructuring and other costs in connection with the integration of our recent acquisitions, and expected litigation cost as we understand them. As a reminder, our non-GAAP earnings exclude acquisitions and severance expenses, noncash interest expenses related to our outstanding senior convertible notes, noncash stock-based compensation expense, intangibles amortization and releases of the valuation allowance on our deferred tax assets. I would also like to call your attention to the fact that we expect to incur additional acquisition-related expenses in the range of $2 million to $2.5 million, primarily during the first quarter 2012, driven by the completion of Z Corp and Vidar acquisitions and related integrations. These costs are already included in management's annual guidance and are expected to be incurred primarily during the first quarter of 2012. I'd also like to remind you that this guidance is based on current plans and assumptions and subject to risks and uncertainties formally -- more fully described in the company's report filed with the SEC. That concludes my comments. Abe?

Thanks, Damon. On January 3 of this year, we successfully completed the acquisition of Z Corp and Vidar. We believe that this complementary combination, together with 3D Systems' portfolio, uniquely positions us for accelerated growth in the rapidly growing 3D content to print space by filling specific product performance and price gaps with complementary products and technology and by the effective doubling of our reseller coverage globally. We expect that our combined channel of over 330 resellers strong will drive acceleration of revenue growth from sales of the combined portfolio through the combined channel. Additionally, ZPrinter portfolio perfectly filled the price and performance gap that we had in our product line, with differentiated products that combine speed and ease-of-use with the only full-color 3D printer available in the marketplace today. We also believe that Vidar's extensive digitizing technology and reputable product manufacturing quality, together with its global brand recognition, will serve as a springboard to accelerate the overall growth of our profitable health care solutions. I'm happy to report that, as of today, we substantially completed all our organizational, financial, ERP and operational integration activities that were required to deliver on all the identified customer and company synergies. Our product line is stronger, our integrated team is in place and our resellers are embracing the strategy by opting in. In January we also unveiled our first ever true home 3D printer: the Cube, an affordable, simple-to-use 3D printer for children and adults alike, priced at $1,300. Concurrently we also launched in a beta release, Cubify.com, a unique marketplace and meeting place destination where artists, designers, kids and makers can sell their 3D designs and anyone can download, customize and 3D print. Cubify provides a new business model and a powerful platform for individuals and garage entrepreneurs to access the same resources previously available only to larger companies, effectively leveling the competitive landscape and empowering start-ups to succeed in growth. It combines Apple-like content and app store delivery and monetization with Facebook-like social connectivity to deliver the most intuitive and fluid 3D create-and-make experience available today. It's the culmination of several smaller innovation building blocks that we acquired in the course of last year, like Freedom of Creation, The3DStudio.com and SYCOD, together with our own internal development. And we believe that it represents significant untapped marketplace opportunity to monetize 3D content to print by consumers and professionals alike. We expect both Cubify and the Cube to be fully commercial during the first half of this year. Finally, we entered 2012 with a positive sales momentum that is augmented by over $8 million of backlog and powered by a 330-member-strong reseller channel that is ready to sell our combined portfolio of personal and professional printers. While we face lingering economic uncertainties in parts of the world and residual growing pains from our rapid expansion, we believe that we are well positioned organizationally, geographically and technologically to benefit from the expanding rapid manufacturing and emerging consumer opportunities. And with that, we will now gladly take your questions. Stacey?

[Operator Instructions]

[Operator Instructions] And your first question will come from the line of Jim Ricchiuti with Needham & Company.

Can you talk a little bit about Q1? Normally, you'd see some sequential, seasonal weakening. It sounds like you're entering the year with a fairly strong momentum. Not only some backlog, but just in general you're seeing pretty good demand across the product portfolio and geographies. What can you say about Q1 in terms of what you normally would see?

Well I don't know, Jim, that normally applies as much, which is why we tried to provide more definitive annual guidance. And the reason that normally doesn't apply as much is just given the addition of recently acquired businesses in the latter part and the changing of the mix. It's true that, historically within our business, we always experienced a historical reset between Q1 and Q4 and a steady stairstep-ing throughout the year. But we can't tell you that, that kind of pattern will or will not repeat. It's better to focus on the annual guidance and try to discern from that how we may have been through the year. We have good sales momentum, we have good backlog and our portfolio enjoys strong demand.

Your next question will come from the line of Jay Harris of Goldman [ph] -- Goldsmith.

Abe, I presume, from your comments about Europe, that the installation and sales of new printers helped your business mask what other companies had experienced late in December as an inventory correction. Can you provide any insights? Do you see a -- as the first quarter, January, early February developed, was there a re-acceleration? I can't imagine that you did not get some impact from, in your revenue base, from what other companies have experienced.

Well I think, Jay, that first, let me say that we're not in the inventory corrections space. That is more appropriate to retail consumer and manufacturing companies. We're more linked to R&D spending, new product development cycles and the emergence of new manufacturing activities, and if you look at what has happened in R&D spending worldwide, inclusive of Europe, it has performed at a healthy multiple to any regional GDP, and that bodes well for the kind of end-user behavior that we are experiencing. And as long as that continues, we expect that we would continue to perform accordingly, and reflecting specifically on our European performance, we've enjoyed very strong performance. And in fact, the rest of the world held its part as a percentage of total revenue, notwithstanding the significant North American growth. So all that we can say is that we continued to enjoy strong worldwide performance from every region and that we believe that, that largely has to do with trends. Product development cycles are shorter and more frequent, and most companies are spending more on R&D in the last 2 years than they did previously, and they have to do it and we fit very well into that cycle.

Your next question will come from the line of Bill Gibson of Legend Merchant.

I've got -- it's actually like 1.5 questions closely related. You had the big spike in unit shipments and you said you took over leadership in that regard. Was that a fourth quarter phenomena or full-year phenomena? And then secondly, what on a rough percentage basis, is V-Flash of that increase?

Okay. So first let me ask -- let me answer that it's not an either/or. It's both. So when we say that we took unit sales leadership, it's for the quarter and annually. And in fact, if you look at it, you can see that the acceleration happened over the year, because the year-over-year unit growth is about 240% and the quarter -- year-over-year quarter increase is 190%. And so, as the increase -- as the base is getting -- or as comparable periods are getting larger, we have seen some reduction in the rate of growth, but in absolute units it's increasing. And so the answer is both. We, as a matter of fact, at this point in time, nearly came to the end of V-Flash and are replacing V-Flash with the ProJet 1000 and 1500, which are in our personal printer category. And our principal printer category is obviously leading the charge. Between the PJ 1000, 1500, the 3DTouch and the RapMan, that category is leading unit growth. And as Damon said earlier, personal and professional printers combined grew some 35%.

Your next question is a follow-up from the line of Jim Ricchiuti with Needham & Company.

Abe, when we look at your full year guidance, can you talk a little bit about what some of the drivers might be to get you to the high end of the guidance, whether it's strength in the personal/professional, materials? And to what extent have you -- can you talk a little bit about the savings that you are expecting from Z Corp? To what extent is that baked into the full year earnings guidance? You've given a range, I believe, of $5 million to $10 million of cost savings, half of which I think you talked about in the first year.

Yes. I'll let Damon talk about the baked-in savings and then I'll talk about what would get us to one point in the range versus another.

So for the savings, you're exactly right, Jim. When we originally had announced the details around the acquisitions of Z Corp and Vidar, we said we expected synergies in the range of $5 million to $10 million, and that -- around that half for the first year. Those are baked in at about the half, but you also -- about the half of those synergies, but you also got to realize that we have, in this guidance number, future investments in like our Cubify space and our consumer space that we have in there that's partially offsetting some of those. So we don't have just the good in this guidance; we have the other spending that we think is going to help drive our business much farther and much faster.

Yes. And in terms, Jim, of what gets us to one point in the guidance range versus another, that will be largely mix-driven and it would be the timing of how quickly we succeed in leveraging the full impact of the combined channel and the full impact of our cost-downs and initiatives. We think that the top line growth rate is fairly conservative. It reflects the current economic realities worldwide as we understand them, and the bottom line range really reflects timing and mix.

Your next question will come from the line of Ben Reitzes with Barclays Capital.

My question is, for modeling purposes, just given there's a lot of changes, what is the Vidar -- the Z Corp and Vidar contribution for 2012 roughly? And then, I wanted you to just reiterate your non-GAAP gross margin outlook for the year.

All right. So the Z Corp and Vidar -- when we signed Z Corp and Vidar, we put some information out there about what their revenues were and that the actual results for the last 12 months haven't changed substantially. It was right around $56 million in revenue together, so that's what's feeding into that. And what was the other question?

What's your non-GAAP gross margin assumption for the year? I think you mentioned, on the call, 300-basis-points improvement. I wanted to see if that was clear.

No, no. What that was, when we were talking about the 300-basis-points improvement was based on -- that's when we were looking back at what the impact of acquisitions were. The 300-basis-point improvement was, if you looked at our core business, per se, our businesses before the acquisitions, we've been able to keep expanding that. And then, even as we've added acquisitions that were sort of like fully baked in, in 2011, so that we have done in 2009 and 2010, we continue to have margin improvement. As far as this model goes -- I mean, let me first start by saying that this guidance is meant to just supplement the model that we have out there. We haven't changed our business view or the model substantially or fundamentally. This is a simpler way to look at it. That's driven by the same drivers. If you look at our non-GAAP items for gross profit margin, I mean, it's -- there's really only one part of amortization that's in there and if you look at it, it was like $200,000 for the quarter, $275,000 for the quarter. So that's not the driver. Non-GAAP and GAAP gross profit margin are similar. And if you end up looking at our bottom line here, on the guidance, $330 million to $360 million. So $360 million, our net income -- our non-GAAP net income, is between 18% and 19% and that's been rising as we move throughout the years. Our target model, at $400 million, had a non-GAAP net income of 20%. So you can see we're converging on that model as we move forward and we're really just affirming the model by this guidance also.

So you're saying, on the other targets like gross margin, just use the prior target model as a guide to kind of get to...

Basically, we did 2 things here, Ben. We said that we're affirming our long-term target model and we're providing specific guidance to enable all of you to assign timelines to the progress that we make. And we're trying to basically make it much simpler by saying, "Here is where we see revenue going. Here are the ranges. Here is what we expect of net income and EPS and so forth." And if you look at it, I think Damon has some very good comments when he talked about that, and he basically said, if you look at it -- where is that? Give me one second; I'll specifically reiterate what Damon said, because I think that, that could help you in your modeling. No, no. I was looking at the guidance script. There we go. So Damon specifically said that management believes that these ranges correspond to adjusted net income of 16% of revenue and 18% of revenue. And that, that depicts earning power extension within those ranges of between 25% to 55% over our 2011 non-GAAP adjusted results. And if you take those percentages, you can very quickly link it to the target model and see that it is completely consistent with the target model.

Okay. And then, I guess finally is just, you mentioned in the first quarter you would have incremental restructuring charges. Did you mean that those charges were on top of the 2.5 that you had in the last quarter, amounting to around 5? Or did you just mean the total restructuring...

The ones that we reported in this last quarter were last quarter, and we're trying to make everybody aware of that. These restructuring charges for this year, primarily in the first quarter, will be $2 million to $2.5 million.

Your next question will come from the line of Marcelo Desio with CrossLink.

Can you just tell us what organic growth rate was in the quarter for the systems business? And also, what -- in your guidance, what kind of tax rate are you expecting?

Sure. Now organic growth rate for the systems -- I mean, all of our systems growth was organic.

190...

Yes. So, exactly. It's that, for the -- annually it was 22% and then it was the other percentage for the quarter. For the tax rate in our guidance, what we've given is, we've actually said it's a full tax rate. The 35...

So 38%?

35% to 38%, depending on the breakdown that we had between international and U.S.

So for your guidance that you're giving on EPS, it's a 35% annual tax rate.

Yes. It depends on where we are in the range, between 35% to 38%, and that's just based on the mix. So, yes, it's a fully converted tax rate.

Most analysts are using a 12% to 15% type of tax rate. So you're saying they should change that to 38% -- 35% to 38%.

This takes the full burden tax rate and it also takes into account that we would have -- that on the non-GAAP basis we back out any releases of the tax reserve, the fully reserved tax reserves that we have, of which we have about $16 million that's available for future release.

Okay. And so you didn't actually answer the first question, which was on the systems business, the organic growth rate for the quarter, not...

All of the system growth is organic at this point, so there is no...

Right. What was the actual number? It looks like it was up only $1 million year-over-year.

Hang on a second. We'll find it for you. Yes, in units we have grown 190% and in revenue we'll find the number for you. We're looking at the 10-K. We'll find it for you in a second.

Yes. And we did break out what we said as -- I mean, the personal and professional printers grew by 35% versus the last year's quarter and the production printers grew by 10%.

By 10%, correct.

Right, so what was, organically, the growth vehicle...

That's all organic. There is no acquisitions in printer sales. It's all organic.

If you back out the materials revenue from...

There is no material revenue in printers. Printers are just printers.

Right. So what was the printer revenue number, the actual printer revenue number for the quarter? I come up with about a $21.5-million number. Is that correct?

Hang on one second...

Yes, that's approximately -- yes...

All right. So last year you had $20.7 million in revenues in the quarter, in system. So the growth in systems was less than 5%.

The revenue, remember that the shift that we're making towards lower-price printers, both within our personal...

I understand that. I just want an actual revenue number for system.

And we've given it to you. But it's also important to understand that, for us, the significance is that these lower-priced units pump and consume as much material as the units that we sold. So a year ago we sold fewer units for higher ASP, and this quarter we sold 190% more units at far lower ASPs that have the same output of material consumption, which is what matters to us.

Okay. I mean, I'm still -- so you're saying the systems revenues were around $21.5 million, which is less than 5% year-over-year growth.

In revenue.

Yes, in revenues. Okay. And there's one last question. In the 10-K there was about a $7 million -- $7.9 million capitalized software development cost in the quarter. Can you just address that?

The -- any of the capitalized items were due to the acquisition costs, so when we -- the acquisitions that we incurred through that quarter are what they are. We do not internally capitalize any of our internally developed software.

Your next question will come from the line of Troy Jensen with Piper Jaffray.

Two quick questions if I could. Just to follow-up on Marcelo's question. Could you guys just specifically talk about SLA and SLS? Clearly, the low-ends business is really strong. You get good growth there. I get that. But can you just talk about -- is the SLA and SLS business growing for you?

Yes. And so the SLA and SLS business falls into the production printer category and production printers have grown by 10%. And what's important to understand here, Troy, is that we have been systematically reducing ASPs by introducing new price points in all 3 categories. This is not a low-end versus a high-end discussion. This is an all-in discussion. We have been reducing price points in what you called the low-end from $9,900 a few years ago, all the way to $1,300, with many price points in between. We've been reducing -- within our professional category the price is down. But also within our SLA and SLS category, we have been introducing new price points and migrating from well over $0.5 million to the ranges of between $150,000 and $350,000. That allows us to place more systems and accelerate adoption and, obviously, that is not fully reflected in revenue, but is fully reflected in units.

Okay, I got it. And just for Damon, I appreciate the full-year guidance. Could you just help us out with -- how about the OpEx lines in Q1, given that you've got Z Corp and Vidar coming online? What is R&D and SG&A going to look like? Just to help us on the modeling side.

From the side, if we're looking, again, at the couple of components that would be non-GAAP related because, obviously, once Z Corp and Vidar are in, they're also in addition to the other acquisitions. The amortization of the intangibles is a larger number. So we talk about this non-GAAP ratio and it really -- again, I'll point you back to target model that was there and saying that even with the revenue that you're adding, and these expenses associated with Z Corp and Vidar, are not averse to what we put out for our model.

But can you just help us with dollar amounts? I mean is R&D going to be $6 million or higher? Is SG&A going to be -- I mean, just if you could help out that'd be appreciated.

Well, I mean, we really haven't said anything. If I start saying those numbers, I guess, I'm sort of going to say where we are in the range of the $330 million to $360 million, which is...

Yes. We're not ready, Troy, to begin to give quarterly guidance. I think that we've taken a significant step forward here in providing annual guidance, and we've given quite a bit of detail on any extraordinary charges that we expect to take in the first quarter. Outside of that, we can't tell you much.

The next question is a follow-up from the line of Jim Ricchiuti.

I guess, I was wondering, it's still early days in terms of where you are in the integration, but can you talk a little bit about how this combination of the Z Corp and 3D channel is going? And maybe if you could also give us a number in terms of how many resellers you have currently and whether you see that bleeding out a little bit.

Well, it's not that early days in the sense that we, internally, completed all of the integration steps and goals that we had for ourselves, with 6 to 7 weeks into this. And we are in the midst of completing, at the end of this week, the first round of sales meetings with the combined channel in all regions of the world. And we haven't lost a single reseller in the process, so we're still talking 330 resellers as of today. And the measurement of success here, over time, is how quickly each and every reseller embraces the full product line and how quickly they'll come up to speed, and how do we accelerate that. That becomes the measure of success. But in terms of progress, both organizationally, financially and market-facing-wise, we have moved very decisively and very quickly and so far we're very pleased.

Well, as an organization you may have, but I'm just -- as I think of the channel partners, when -- in terms of seeing the benefits starting to flow through, is that something you would anticipate in Q1 or -- given the training involved and whatnot? Is that something that maybe begins to become more meaningful in Q2?

Well, we expect some visible benefit in Q1, but we expect to see the full impact of the benefit starting in Q2.

Your next question will come from the line of Jay Harris with Goldsmith & Harris.

I may have missed it, but if not, perhaps you could give us, in terms of your revenue guidance for 2012, how much of that would be organic growth?

We haven't broken, Jay, the growth between organic and inorganic because that would have added, we think at this point in time, some confusion. So we kept it very simple. But it's based on all businesses that we have had as of today. So it does not contemplate -- the guidance does not contemplate any additional acquisitions that we may make later in the year.

But you made enough acquisitions last year that haven't -- that you haven't owned for 12 months yet that there's a...

That's correct, but we haven't broken the ranges here between organic and inorganic.

Well, do you see any change in the trend thus far this year in terms of organic growth versus last year?

We don't see any discernible changes as of yet.

Your next question will come from the line of Jim Bartlett with Bartlett Investors.

Where is mid-brand FOC and Sutton [ph] Studio in the revenues from the organization? Where is that in the product breakdown?

They're broken out in a couple of different places. The majority is in services with a smaller portion that's up in products.

And did you give out the gross margin for on-demand parts in the fourth quarter?

In the fourth quarter, I don't -- it wasn't in here, but it was...

We have it in the K, though.

I may have missed it in the K.

It was 39% for the quarter.

39%. One final thing. I believe -- the introduction that you had just mentioned, the first ever integrated design-to-print experience with the free plug-in. How significant is this?

You're talking about the announcement that we made yesterday or the day before about Print3D.

Right.

Yes. Print3D is a plug-in that we have been developing. We initially acquired this technology and continue to develop it internally. We think that it's a very significant dynamic design feedback tool that can reside on any designer's CAD software and allow them to, as they design, with every design change that they make, to get costing feedback so they could make design trade-offs between complexity, the number of halls and machining paths and so on and so forth, wall thicknesses that would allow them to make intelligent decisions. And when they're ready, without ever sending their design for an online quote, they could actually place an order with us directly from their desktop. We think that this -- for many companies that are cost conscious and want to design against specific cost objectives and refine the skills of their designers to do it, and companies that worry about design security and safety, this may be a preferred way for both reasons. So it could, over time, change the way that people design and buy on-demand parts and that's why we launched it. We think that it could be a game changer.

And could you just give us a little update on how Quickparts did last year and how they're progressing?

Quickparts has done extremely well last year and they have grown their revenues consistent and at the high-end of our expectations, as well as helped us a great deal in our overall year-over-year margin extension, which was over 1,600 basis points. Damon mentioned that earlier. And in fact, we are at the conclusion of integrating Quickparts parts and Pro-Parts activities onto a single proprietary platform that further drives our sales and marketing effectiveness and at the same time puts, in the hands of our users, cutting-edge quoting, ordering and project management technology.

And when will that be combined?

It's in final stages so within the next few weeks.

Your next question will come from the line of Bill Gibson with Legend Merchant.

Just one last bookkeeping item. How many employees did you have at year end?

I believe it's about 900.

Well, at the end year, it was about 724, I believe. Or 14 -- 714, and as of the completion of the Z Corp and Vidar acquisitions we're close to 900.

[Operator Instructions] Your next question is a follow-up from the line of Jim Ricchiuti.

Last question for me. But this may help address the earlier question about printer revenue growth. Is there a way for you to look at, and maybe help us understand, what the ASP decline has been, for example, in production printers and in personal and professional printers? Because I mean, I think in part, that helps explain what's happening in that line item.

Well first if you break it down and if you look at the product mix, in total, there would be an ASP design, but it's not saying that for the products that were -- we're not reducing our prices on existing products. It's by introducing new products at lower price points. And we still have the same range, like in the production printers up to almost $1 million, but there's much more down near the $500,000 range that's available to consumers alike -- or production people alike.

But you are seeing this mixed shift toward lower ASP printers in both categories, but presumably that's also driving your materials revenue.

We're definitely seeing the volume of those printers at the lower ASP going up and those printers at the lower ASP are still capable of going through the same amount of materials, if not more, than some of the other printers.

I mean, Jim, let me try, maybe a little bit, another tack here to explain this. We now have, in our professional category, printers that traditionally would have been considered production SLA printers, like the ProJet 6000, which is a crossover. We have created printers that are priced from $350,000 to $400,000 and $500,000 in the iPro 8000 series, which brought ASP down from the 9000. Because for a period of time, there was only a 9000 and the 9000 XL. In the SLS category, we created a whole new range of products in the sPro 60 SD and HD that brought those price points down from the over $0.5 million to a range of between $250,000 and $400,000. And so this has been a systematic and deliberate move that allowed us to create additional demand for these printers. Now the beauty for us is that whether we sell a production printer for $175,000 or $575,000, the consumption of material through these printers is largely identical. And so as we move price points down, not through discounting but through proliferation of products, it substantially increases our consumable generation power. And that's what we're focusing on, which is why we're not that focused on absolute revenue increase from the printer category and laser-sharp focus on the unit increase.

Your next question will come from the line of Herb Buchbinder with Wells Fargo Advisors.

With all the acquisitions you made, can you give us an idea of what some of the percentage of end-use markets, like how much you're selling to medical and dental, defense? Has there been a dramatic change in -- how much do you look at that at this point?

Well, we continue to look at medical and dental, in particular, because that continues to be an important part of health care. And as you know, health care solutions today include dental, hearing aids, prosthetic, orthopedic and aligners. It has grown year-over-year by 29%, and for the full year 2011, it represented $27.9 million of total revenue, which I believe put it in the range of 12% to 14% of total revenue, something like that.

Are there any advances being made or more usage in digital dentistry that you can talk about? And who are there some of the companies that you might be working with in that area?

Well, there are lots of advances that are being made and I believe that just in the last couple of days we made some announcements in connection with some dental applications and events. And so we're developing new printing capabilities; we're developing new print materials; we have a brand-new Vidar dental digitizer that we just began to sell; and we have the first benefit, if you will, of Vidar and ZPrinter and our dental know how, in putting together a system that can take a Vidar scan and turn it into a dental model in full-color that we're also going to showcase in the up-and-coming midwinter lab event in Chicago. So there are lots of advancements. We're also making great inroads on orthopedic and prosthetic development and we remain very, very excited about this health care segment, which is a very fast growing segment.

And your European business, is there a disproportionate amount of health care? Or is it -- your European business spread out?

Our European business is well distributed and it largely mimics what we see in North America, which means we have a growing participation in automotive motor sports, durable goods, health care and the likes.

You haven't seen much weakness in Europe?

We haven't seen -- well, you can see our numbers. We haven't seen a noticeable weakness in Europe and we attribute this to the fact that we're more closely linked to R&D spending pattern and not so much to the other stuff.

Okay, last. Are there any write offs you're going to have to take for Z-Flash [ph]? It sounds like -- I thought you said Z-Flash [ph] is sort of being phased out? Is that correct?

It's the end of -- we've had V-Flash for several years and it was succeeded by its next-generation, which is the ProJet 1000 and 1500. Both the ProJet 1000 and 1500 are based on the V-Flash technology, still transfer imaging, and it's consistent with our new product road map and we continue to obsolete ourselves with better and newer product, and we don't anticipate any write-offs. It's the end of the season. The shelves are empty of the old and filled with the new.

That's what at, it there was a bunch of old units that you had to write-off, and I guess that's not the case.

Your next question will come from the line of Richard Wallman [ph] with George Weiss Associates [ph].

Could you give us the earnings per share guidance on a GAAP basis?

We haven't put out GAAP-basis guidance. We think that, given the impact of the recent acquisitions, looking at it in non-GAAP measures is more meaningful and so we provided the guidance only in non-GAAP.

But you did say that the non-GAAP guidance would exclude the tax release for the tax sheltering?

Yes. And so, just as we're providing at a full tax rate, the benefit of a tax release will be excluded from non-GAAP also.

Your next question will come from the line of Kathie Grasser with Glen Group.

Yes. I would like to know, who do you expect to see to compete with your Z Corp full-color machine? And when is that likely to happen?

Okay. Well, we are fully commercial with the full-color high-speed ZPrinters, and we see those as ideal marketing and communication tools. They have been very effective for a variety of athletic wear companies, architectural companies, consumer display companies, trade show and marketing activities, fashion presale and pre-marketing, focus studies and the likes, and they also power new consumer applications like My Robot Nation and others. And so we see it as another good example where we are highly differentiated and can deliver the end solution in a way that nobody else can, because there is no other full-color 3D printer on the market today.

And when do you expect someone else to enter that category? Do you think it will be in the next year?

Well, we are not aware of anybody that reached that level of technological capability, so I can't comment on any disruptive activity. At the moment, we're the only company that can do this.

Your next question will come from the line of Robert Hoffman with Princeton Opportunity Partners.

Two related questions. One, is Cubify.com in your numbers? And could you just elaborate a little on the business model? Because it seems -- it might be very intriguing. It almost sounds like you're setting up an iTunes platform for 3D product. Are you going to be taking a 20%? If I upload something and I want to sell it for $10, you're going to take $2 of that? How does that work?

Well, you're absolutely right that Cubify.com is very much like an Apple iTunes and app platform, and as we announced publicly, that we will allow the developers and designers to retain 60% of net sales and we would keep the rest. We -- in our guidance for next year, we have not put much weight into Cubify. It's all in the upside column at this point in time. It's a very intriguing business model for us, because we think that we are the first to remove all the friction that stands between this technology and mass adoption. And the friction is the need, today, for expertise to know how to use this, and we're looking to basically bring coloring book simplicity and gaming-like intuitiveness into the whole create-and-make process. And with that, we have high hopes for the Cube at homes, as the last toy that kids may ever need to get, because they will subsequently be able to print all their toys and create them and share them. And if you don't have a Cube, no problem. You can upload what you want to print and we will cloud print it and it will show on your doorstep.

It sounds like an accelerant for -- my kids are now over the age of what you're talking about, but one of the -- I would think one of the concerns would be, buy this $1,000 printer and what can they do it? Because they're not smart enough or experienced enough to create 3D product for themselves. But then if they can go out and find them and pay $1 here and $3 there and obviously those things that they're buying, you make the profit there, but obviously you're going to make a profit on the materials when they eventually...

And we're taking it a step further. We're saying, you and I, and our kids and grandkids, will be able to create in 3D without ever having to learn CAD, because we're going to give them apps and we're going to attract app developers to give them apps that will allow you to stretch and indent and chisel and create on a tablet. It will allow you to transform your voice into unique and distinct geometries and it will allow you, obviously, to download existing models and modify them. And so this is all about democratization, it's about the removal of friction and it's about unleashing people's creativity to work with the elements of a digital canvas that are available to them today -- their tablets, their smartphone, their laptop, their home computer -- without ever having to learn the first thing about CAD.

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. Stacey?

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 the Investor Relations section of our website, investor.3dsystems.com.