3D Systems Corporation (DDD) Q1 2012 Earnings Call Transcript

Good morning, and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the results of the first quarter 2012. My name is Robin, 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. Please proceed.

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 a 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, expect, intend, plan, anticipate, contemplate, believe, estimate, predict, project, potential, continue and other similar terminology or the negative of these terms. From time to time, we may publish or otherwise make available forward-looking statements of this nature. As such, forward-looking statements, whether oral or written 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 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 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 these 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 on 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 first quarter of this year and filed our Form 10-Q with the SEC. This morning, Damon and I will recap our quarterly highlights and share with you several key accomplishments. We will go over our financial results in more depth, including our non-GAAP results and reconciliation for net income and earnings per share, and we will also update you on our progress, provide an outlook for the second quarter and affirm our revenue and non-GAAP earnings guidance for 2012. Let me begin by saying that I'm really pleased that we delivered another solid quarter of profitable growth, benefiting from our focused and well-executed growth initiatives. We expanded our revenue leadership position further on a 63% increase to an all-time company record quarterly revenue of $77.9 million. We grew our gross profit by 67% and expanded our gross profit margin to 50%, and generated $15.8 million of cash from operations. We expanded our printers' leadership, growing quarterly unit 153% over the prior year, and driving substantial print materials growth that, as expected, contributed to a significant improvement in our operating income and earnings for the quarter, fueled by a 26% organic growth. During the first quarter of this year, we expanded our innovation and technology leadership further into new consumer and professional opportunities, including the Cube, our first ever plug-and-play home 3D printer and Cubify.com, the online destination to create and make, and the new ZPrinter 850 and ProJet 3500 professional 3D printer that we launched earlier this week. We completed and fully integrated the Z Corp and Vidar acquisitions, delivered on all of our identified cost synergies and put in place many of the required building blocks for future growth. We are pleased that on a quarterly basis, all of our revenue categories contributed to our growth. Printer units grew 153% for the quarter, resulting in another all-time record quarter of printer revenue and units shipped as we continue to benefit from the timely and strategic realignment of our entire printer's portfolio mix for lower-priced production, professional and personal and home 3D printers, coupled with the effective integration of Z Corp and Vidar printers into our portfolio. Revenue from print materials amounted to a record $24.7 million for the quarter on a healthy printer unit sales increase to manufacturers and consumers alike, underscoring the power of our growing installed base and the effectiveness of our unmatched printer portfolio performance and price point. We're pleased that our services revenue for the quarter increased by $9.8 million over 2011 to $28.5 million and included $17.7 million of on-demand parts revenue from acquisition activities and the organic growth of these acquired businesses. And we're very excited that healthcare revenue, our fastest-growing vertical, continued its rise, growing some 93% over 2011 to $12 million. Consistent with our expectations, we expanded our gross profit margin and net income on a record growth in both revenue and unit. At the same time, consistent with our target, we improved our employee productivity another 12%, as measured by our net income per employee, notwithstanding the temporary adverse affect that recently acquired businesses had on our overall productivity. Although we had a great quarter and we're able to expand our non-GAAP adjusted net income by 62% over 2011, the concentration of restructuring costs from larger acquisitions during the quarter reduced our net income for the first quarter of this year as we absorbed the acquisition and integration costs and operating expenses of the 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. As we increase our R&D investment to support our portfolio expansion and diversification, we continue to closely monitor the effectiveness of our R&D expenditures and their contribution to our profitable growth. And we're thrilled that our new product revenue grew 53% to $23.9 million for the quarter, up from $15.6 million in the 2011 period. And just as a reminder here, we track new product revenue only for the first 3 years of the product commercial life. Of even greater significance, our integrated print materials revenue increased 101% over 2011 -- over the quarter of 2011 and amounted to 63% of total print materials revenue for the first quarter of this year, including the acquisition of nonintegrated RenShape print materials and integrated Z Corp print materials. We firmly believe that our sustained integrated materials growth, coupled with the fact that materials at 32% of total revenue contributed 43% of our gross profit, validates our strategic direction and our emphasis on recurring revenue, which amounted to 68% total revenue for the first quarter of this year. By comparison, revenue from acquisitions grew to $17.5 million, reflecting the fact that within our balanced growth strategy, new product and integrated print materials continue to fuel our organic growth and underscore the effectiveness of our R&D investment. Now for a more detailed look at our financial performance for the first quarter of this year, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Thanks, Abe. Good morning, everybody. First quarter revenue increased 63% over the 2011 quarter with a gross profit improvement of 67%, primarily driven by the increased revenue across all categories, with the larger portion of revenue from higher margin print materials and improvement in gross profit margin of our on-demand parts services. This is combined with the printer mix shift towards lower gross profit margin personal, professional and production printers. On a non-GAAP basis, our total operating expenses increased to $21.9 million but declined to 28% of revenue, reflecting a rise in compensation costs, driven by sales commissions from increased revenue and the operating cost of the newly acquired businesses. Specifically, our first quarter operating expenses included a $7.3 million increase in compensation costs, primarily from higher commissions on increased revenue and from the higher concentration of new acquisitions, and $2.4 million of acquisition, integration and restructuring costs. We expect these costs to translate to future annual cost savings of $5 million to $5.5 million, which is already reaching the level of our guidance on estimated combined revenue and cost synergies -- cost saving synergies of $5 million to $10 million. Our quarterly expenses also included a $2.1 million increase in R&D expenditures, were primarily driven by new product development and acquisition-related R&D expenses. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $13.2 million and earned $0.25 per share, tax effective. On a GAAP basis, we earned $0.12 a share for the year -- for the quarter. Record materials and services revenue more than offset the planned printers mix shift towards our lower-priced printers on continued record demand of our personal, professional and production printers. As a reminder, we report non-GAAP adjusted results that exclude the impact of amortization of intangibles, noncash interest expense, nonrecurring acquisition and severance expenses, stock-based compensation and any release of portions of the valuation allowance on deferred tax assets. Please note that our total depreciation costs and our senior convertible note cash interest expenses in connection with these acquisitions are appropriately included in our non-GAAP presentation. For your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide, as well as in our 10-Q filed this morning. As mentioned previously, on a non-GAAP basis, we generated adjusted net income of $13.2 million or $0.25 a share for the quarter. The excluded items aggregated to a $7 million tax-effected adjustment to GAAP net income or $0.13 per share. We call your attention to the fact that we have $39.2 million of net operating losses remaining, of which $8.5 million are available for future release. We continue to evaluate the timing of amounts on future releases of valuation allowances as required. Our reported tax rate for the quarter was 15% and consistent with previous guidance, we expect our cash tax rate to remain in the range of 3% to 5%, notwithstanding the fact that we expect our annualized effective tax rate for the full year 2012 to be in the range of 20% to 22%. For clarity, these rates are already reflected in our annual guidance, which I will cover in more detail shortly. Reflecting our continued strong revenue growth, we believe that our results are consistent with our strategy to remix and diversify our revenue streams and in line with our expectations. In fact, quarterly recurring revenue amounted to 68% of our total revenues, with print materials contributing over $24 million and services exceeding $28 million. Quarterly printers revenue increased by $11.2 million, reflecting production printers revenue of $7.4 million and personal and professional printers revenue of $16.9 million, led by sales to healthcare, transportation and education customers. Personal and professional printers revenue increased 230% over the comparable quarter. And the decrease in production printers revenue reflects the impact of our continued realignment of printer price points across our entire portfolio with lower-priced printers which are capable of producing annual materials consumption comparable to our higher priced production printers. On a unit basis, production printers units increased 11% in the 2012 quarter compared to the 2011 period. And Z Corp and Vidar added $12.4 million of revenue for the quarter. Geographically, we experienced stronger growth in North America aided in part by the acquisition of Z Corp and Vidar, which had higher revenue in North America. Despite ongoing regional economic uncertainties, we experienced sustained growth from 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 first quarter, gross profit improved some 67% over the 2011 quarter to $38.9 million. Our gross profit margin for the quarter expanded primarily from the combined effect of expanding print materials gross profit margins some 460 basis points and continuing to expand on-demand parts gross profit margins coupled with a larger portion of revenue from print materials. Consistent with our planned printer portfolio realignment, quarterly printer gross profit margin decreased compared to the prior period on record unit sales but was more than offset by a print materials gross profit increase of $6.9 million or 69% on our revenue increase of 58%, primarily benefiting from favorable mix towards a higher gross profit, integrated print materials and from the addition of higher margin RenShape and ZPrinter materials we acquired in the fourth quarter of 2011 and first quarter of 2012. Our services gross [Audio Gap] $12.5 million included printer services, on-demand parts services and consumer solution services. Services gross profit margin expanded 220 basis points over the prior year period. As you can see, we're making steady progress towards our target gross profit margins. And over the past 8 periods, we have increased our consolidated gross profit margins from 45% up to 50% for the first quarter of this year. And consistent with our past practices, for discussion purposes, we have rounded our results to the nearest percentage point. And as you can compute, our gross profit margin for the quarter amounted to 49.9%. And going forward, as our business has increased in size substantially, we plan to present our results to the 0.1%. Our gross profit margin progressive trend displayed on this chart supports our expectation that in periods of higher acquisition concentration, we gave up some margin ground, but we were quickly able to recover and resume our margin expansion trend in the following period. We generated $15.8 million of cash from operations in the first quarter of 2012. We ended the quarter with $60 million of cash, which was a decrease of $119.1 million since the end of 2011. But on January 3, we paid $140.3 million for the acquisition costs of Z Corp and Vidar. Excluding the senior convertible notes proceeds from the cash balance at the end of 2011, cash increased $26.3 million since the end of 2011. And while we accrue interest expense each quarter for the senior convertible notes, cash interest is only paid semiannually in June and December. And although we expect to continue to report strong cash generation from operations, the quarterly amounts may fluctuate from period to period. Working capital decreased by $113.4 million, primarily due to the decrease in cash, a $9.9 million increase in accounts receivable from higher revenue and a $9.6 million increase in inventory, primarily due to the addition of Z Corp -- ZPrinter and Vidar inventory to support their ongoing business and the timing of inventory purchases while accounts payable increased by $7.2 million due to additional payables acquired with Z Corp and Vidar and the timing of vendor payments. And based on our performance to date, we reaffirm our 2012 guidance that we previously announced. As a reminder, 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 share 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, which 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 effected. It includes management's anticipated incremental expenditures related to Cubify and expected litigation costs as we understand them. It also includes all planned restructuring and other costs in connection with the integration of our recent acquisitions, which we substantially completed during the first quarter of 2012. As a reminder, our non-GAAP earnings exclude acquisitions and severance expenses, noncash interest related to our outstanding senior convertible notes, noncash stock-based compensation expenses, intangibles amortization, and any release of the valuation allowance on our deferred tax assets. I'd also like to remind you that this guidance is based on current plans and assumptions, subject to risks and uncertainties, more fully described in the company's reports filed with the SEC. And that concludes my comments. Abe?

Thanks, Damon. During the first quarter, we successfully completed the acquisition and integration of Z Corp and Vidar, and were able to deliver on all of our anticipated cost synergies. We've taken steps to reenergize this product line and are already seeing positive results from these -- from our decisive action. We believe that the resulting complementary products and services portfolio, together with the differentiated channel combination we created in this process, is unmatched and uniquely positions us for accelerated growth in the rapidly growing 3D content-to-print space. 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. And we're taking pre-orders for the Cube printer and expect printer shipments to commence late in May. We also announced Cubify.com, a unique online destination where artists, designers, kids and makers can sell their 3D designs, and anyone can download, customize and 3D print. Cubify provides a powerful platform for individuals, combining 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 to date. We believe the depth represents significant untapped marketplace opportunity to monetize 3D content-to-print by consumers and professionals alike. Cubify went live from beta in April, concurrent with the launch of our Cube Odyssey, a 25-city tour in the U.S. with Cube printers creating and making in a customized Nissan Cube car, making stops at various events, children's museums and schools to spread out the magical qualities of this new capability. In the last few weeks, we acquired My Robot Nation, a consumer technology platform that provides intuitive, game-like content that we're integrating into Cubify.com. We also acquired Fresh Fiber, which designs and markets innovative 3D printed accessories for retail consumer electronics, and Paramount Industries, a leading rapid manufacturer for aerospace and medical device companies with comprehensive design-to-production services and certified end-use parts. These acquisitions fit well into our consumer and on-demand parts services growth initiatives and bring to our company significant technology and channel building blocks. Since the beginning of this week, we launched 3 new products. On Monday, we announced the immediate availability of our new ZPrinter 850, the largest format ZPrinter, with higher print volume, greater productivity in vibrant full color that empowers designers, engineers and architects to create more and larger CAD parts faster. We've doubled the print volume of our best-selling ZPrinter 650 and the same premium color printability. The ZPrinter 850 is the only high-speed, large-format printer for professionals that need to create more at every stage of the design and development process. Tuesday, we announced the immediate availability of the Vidar NDT PRO, a new nondestructive test x-ray film digitizer, answering the call for effective aerospace, defense and energy products and plant testing and compliance requirement. The Vidar NDT PRO provides an affordable, precise and automated imaging solution for nondestructive test records using Vidar's next-generation proprietary digitizing technology. And finally, yesterday, we announced the immediate availability of our next-generation ProJet 3500 professional series 3D printers. The ProJet 3500 comes in 8 configurations with 9 new performance tailored VisiJet print materials that deliver greater user ease of use with enhanced high definition printability and performance for functional prototyping, investment casting patterns for healthcare, automotive and aerospace manufacturing applications. The ProJet 3500 printers incorporate our latest patented Multi-Jet Modeling print technology, including our production-grade printhead, advanced material management and intuitive touchscreen interface, to produce high-definition functional plastic parts and wax patterns with unmatched performance, detail and surface quality. The extended range of new VisiJet print materials available for the ProJet 3500 cover the widest array of customer applications, including high-impact, durable plastic for functional testing, cast-friendly wax for rapid foundry production, and specialized tailored materials for digital production of jewelry, dental prosthesis, dental models and medical implants. The ProJet 3500 is the only printer on the market that come with a 5-year printhead warranty that saves thousands of dollars in annual customer operating costs compared to other alternatives. We expect these 3 new products to contribute to revenue immediately starting in the second quarter of this year. Finally, for the outlook. We entered the second quarter of this year with positive sales momentum that is augmented by over $9.6 million of backlog. We delivered an unmatched blend of professional and consumer products and services through unparalleled field-deployed and online channels that are delivering improved performance and results. We believe that the marketplace for our professional and consumer 3D content-to-print products and services remains underdeveloped and underpenetrated. And we expect that our portfolio diversification, growing geographical presence and focused growth initiatives will deliver continued success. Finally, we believe that we are extremely well positioned to benefit from expanding rapid manufacturing and emerging maker and consumer opportunities. And with that, we will now gladly take your questions. Stacey?

[Operator Instructions]

[Operator Instructions] And our first question comes from the line of Jim Ricchiuti of Needham & Company.

My question is on the margins in the quarter, both product and materials. The product gross margins showed some nice improvement sequentially. It looks like up about 300 basis points. Is there anything seasonal with respect to product gross margins? You started out last year with stronger product gross margins, and we saw that tail off a bit as we went through the year. Is there anything, any seasonality to that? Or do you think you can maintain the product margins at these levels? And then secondly, on materials gross margins, again, you're at a very high level. And given the mix now toward integrated materials, is there any reason why you won't be able to maintain your materials margins at these levels?

Let me start, and then I'll ask Damon to add some comments. Let me start with materials, Jim. We believe that we still have upside to our material gross profit margin expansion journey. And it's a reflection, as you correctly pointed out, of the growing portion of integrated materials into the mix, which has been the strategy all along, and I think we see it play out from period to period. And so we expect that as the mix continues to change in favor of more integrated print materials, our gross profit margin on materials will continue to expand. With regards to products margins, the setbacks that we have had in prior periods where we gave some ground on gross profit margin came primarily from concentration of acquisitions. And you can see that bouncing back in subsequent periods as we integrate and expand the margins of these acquired businesses. And we certainly have been deliberately managing over quite a few products now the remixing of our entire portfolio, including production printers, personnel, professional printers, and creating additional price points, giving up some margin on the products side, but more than offsetting it with the significant expansion in materials. Damon, do you want to add anything, too?

One instance with Q1 here also, as Abe had mentioned, with -- that we were slowed with -- in the quarters of acquisitions. One of the reasons why is the acquisition accounting that needs to get done, any backlog that was in prior to the acquisition, we actually take sort of a haircut on the profit. So you don't realize all the profit from that because you take out the benefits of the selling. It's purchase accounting. So in fact, this quarter, our gross profit margin was negatively impacted by about 0.5 point, just due to the acquisition accounting which we expect to get back in the future. So in answer, though to the -- especially the product is not seasonal. It's more in line with the business flows and introductions of products and acquisitions of company.

And so Damon writes a very important point here, Jim, that for the first quarter of this year, our consolidated gross profit margin was actually understated by this 0.5 percentage point as a result purely of the acquisition accounting. And that will come back in subsequent quarters.

And our next question comes from the line of Ben Reitzes of Barclays.

I wanted to ask you about backlog. The $9.7 million figure compares to $8.3 million at the end of last quarter. Does -- what is that without Z Corp and Vidar? Was the $8.3 million you reported last quarter, was that inclusive of Z Corp and Vidar? Or is the organic backlog from the preexisting business down Q-to-Q? If you could you explain that?

Last quarter, Z Corp and Vidar was not in the backlog. We didn't -- we hadn't completed the purchase at that period of time. This quarter, it's a very small amount that is associated with Z Corp and Vidar. And so I would say one of the things that has happened, we had a large order of -- that we've announced for the last couple of quarters before this -- of large production printer order that was being delivered over future periods. And the number of that was delivered through Q4 but ended into Q1, which came out of the backlog number. But I believe organically, we are close to the same, if not just above, where it was for last year. And Z Corp and Vidar make a smaller amount of it.

Which is unprecedented, Ben. Typically, on a sequential basis, there are a few interesting and unprecedented developments here. One is that typically, on a quarterly basis, you would have expected to exit the first quarter with lower backlog than at fourth quarter. And similarly, it's unprecedented to have significant sequential growth in print materials from a fourth quarter to a first quarter. We beat both. So we view those as very favorable trends.

Okay. And just another clarification on the Z Corp, Vidar. What was their contribution to the 3 segments? You said $12.43 million in revenue? Are you able to break that out across the segments just so we can kind of see how they're impacting, by printers, services and the other category?

We can. I don't have that right in front of me. I think we can pull this and give the answer to the question in a couple of minutes.

And we have a question from Jim Ricchiuti of Needham & Company.

It looks like your operating expense levels now are at perhaps higher levels than maybe some of us were thinking. Just in terms of your R&D spend, any reason why that would go down from these levels? Or do you think with the new products that you're planning, it will be at these levels? And then with respect to SG&A, the $2.1 million of acquisition severance expense that was in SG&A, do you expect any additional acquisition-related expense in Q2? And again, it looks like your OpEx is at a higher level.

Yes, the actual amount, Jim, was $2.4 million. That was for the acquisition and severance-related expenses. And that was our recorded -- it was recorded in SG&A. I mean, the tail that we have wouldn't be more than another $100,000 or so, which is still within the range, the $2 million to $2.5 million that we've given. In this quarter, not only did we have that expense, but we also didn't have any of the expense savings in the quarter were associated with those, which we say will result to another $5 million to $5.5 million going forward. And that's without other cost savings and synergies we expect to get out of this moving forward that might not have as much costs associated with them. So we do expect our SG&A number to not reflect that $2.4 million. So in that number, if you look at it, there's $3.5 million of intangibles expense, which is a noncash expense. So I think that number might be a little higher than some people have expected it to be, too.

Got it. And Damon, just to clarify, on the tax rate, you're now assuming reported rate of 20% to 22% for the year?

For the year, we still and that will still ramp through the years. I don't expect to go there. We're 15% in Q1, and I expect it to ramp through the year to 20% to 22%, which I believe is very consistent with our prior guidance. But our cash tax rates still remain in that 3% to 5% even into next year, not just this year.

So Jim, just to recap. On R&D, given the expanded portfolio and professional and consumer and rapid manufacturing initiatives, we expect R&D spending to remain at the higher level because we think that for a company of our size, given the near-term and the mid-term opportunities, it's the right action to take. But on the SG&A, I think that we will begin to enjoy the savings from all the charges that we've taken in the first quarter. And just to reiterate, we believe that we've already taken all the required steps to realize the $5 million to $5.5 million of costs down from the Z Corp and Vidar acquisitions, which puts us already in the range of the $5 million to $10 million of synergies which were going to come from a combination of cost downs and revenue.

And our next question comes from the line of Brian Drab of William Blair.

Can you just give an update on the reseller network? How many resellers are you at today? And also, what -- can you just remind us what the growth was in resellers? Maybe where were you in terms of number of resellers at this time last year compared with where you are today? And finally, how much runway do you think there is left in terms of building out your reseller network?

Okay. So a year ago this time, we were probably at about 100 to 110 resellers. We exited the first quarter of this year with about 330 resellers, partly because of the addition of Z Corp resellers into the mix. And we spend the first quarter of this year as we will spend the second quarter in conversion and training of our combined 330-strong network of resellers, and making sure that they're all up to speed with the combined and complimentary portfolio of printers. Beyond that, our expectation, Brian, is to continue to expand the reseller channel. We have the most comprehensive portfolio of personal, professional and production printers. It's going to expand even further, both in terms of capabilities, price points and tailored end-use applications. And so our -- we believe that for the next few years, we have basically an open-ended opportunity to continue to expand segments, the channel, as we expand our portfolio of products and services. And I should also add, Brian, that we are significantly expanding our online channel as well and leveraging our unique online technology across multiple product lines.

Can you elaborate on that last point? Are you talking about Quickparts primarily or Cubify.com? Or which is the biggest opportunity there?

Well, it's both. And we basically have successfully integrated what we call the Q Soft [ph] technology that came from Quickparts into other online reselling opportunities, such as our RapMan, 3DTouch and, of course, now the Cubify.com opportunity. And also, that's coupled with our outbound high-touch capabilities that come with it, and we expect that to continue to offer us differentiation in our channel strategy.

Okay. And then just one more. Could you give us a breakdown within the product -- printer and product category between -- can you give us a sense for what percentage of that was accounted for by 3D printers, lower end systems versus higher end production systems?

Well, I think that we -- Damon said earlier that production systems expanded some 11 percentage points for -- or grew 11% for the quarter. Personal and professional was -- how much?

230%

230%, yes. So personal and professional, up 230%, production printer up 11%.

And in terms of -- I was thinking more in terms of a breakdown of the -- what percentage of your product revenue was accounted for by low-end printers and what percentage by the higher end? Just -- even just roughly.

Well, I think we've -- we said that $7.4 million was production printers and $16.9 million was personal and professional.

And just to answer Ben's question earlier, the breakdown of Z Corp and Vidar revenue by category: printers was about $5.9 million; materials, $4.3 million; and services, $2 million; for the $12.2 million in total.

And our next question comes from the line of Ben Reitzes of Barclays.

Well, I wanted to ask you a question about organic growth. You mentioned 26% in the quarter. So I back into -- excluding Z Corp, Vidar, I get $5.3 million from other acquisitions. I was wondering if that was accurate. And then I was wondering if you could just mention what you think your organic growth rate would be for the rest of the year, roughly.

Well, I'm not sure about the comment from other acquisitions. As you know, we've been very conservative in how we count organic growth. And so for the first year of any acquired business, even if that acquired business grows organically, we count all of it as gross from acquisition. And so when we look at the organic growth for the first quarter at 26%, it's still, if you will, understated because it doesn't count organic growth from acquired businesses for the first year. In terms of expectations for the full year, I mean, we've given our guidance on revenue for the year, which includes Z Corp and Vidar to be at $330 million to $360 million. It excludes any other potential acquisitions that may or may not appear for the balance of the year. So it basically gives you a representation for the kind of growth that we expect for the remainder of the year.

Okay. That's over 20%, though, if you back into it, right?

I think you can do the math. And your math on the -- just the over $5 million of the other nonorganic acquisitions. I mean, we just did the math. Again, that's about right.

Okay, great. And then I wanted to -- let's see. I had one more question here I was going to clarify. With regard to the share count for the year, just a clarification, is there a share creep throughout the year in terms of our modeling? It was just a little higher than we had modeled. It's probably our fault there, but -- or is that pretty stable?

For what we have guided to, it's stable because it doesn't include anything else if we did any other acquisitions or anything. It also, at this point, does not include the anticipation that the convert would be counted as diluted. But if it does get counted as diluted, it adds to the share price, but then your interest expense gets reduced by the amount, too, so...

Got it. Oh, and I remember my other question. I just was wondering if you guys have any basic question -- I mean, basic views on the Stratasys-Objet deal and how that could impact the industry? Any comment's welcome in terms of what it would mean for pricing competition, what it means for the sector. And that's my final question.

Well, in terms of the combination of Stratasys and Objet, we view it as a positive development in the space. We think that it's going to make it more compelling in mature space. In terms of behavior and development, we have been successfully competing with and outpacing in growth each and every one of them independently. So we think that it will be interesting and exciting to compete against them as a joint entity. From an opportunity perspective into manufacturing and consumer, we think that we are much better positioned, and nothing really changes through the combination of these 2 entities. From a number of printer units sold perspective, we think that we will continue to maintain a growing lead. We expect that to continue. And from an overall content-to-print portfolio point of view, we think that we're unmatched. In fact, the fact that they're combining underscores the validity of what we've been saying for quite some time that this is more of a toolbox solution selling exercise. And to succeed in this content-to-print space, companies need multiple print engines. And I think as pure play print engines, these 2 entities got what they got, but to grow, they recognize that they need to combine. And we view that as taking a page out of our playbook and it's validating our strategy. So we wish them luck.

And our next question comes from the line of Troy Jensen of Piper Jaffray.

Abe, I was wondering if you could just spend some time and talk about your service bureau business. I guess what I'm trying to figure out is maybe number of machines, maybe square footage of your capabilities now. And then specifically, what percentage of the revenues are coming from additive, so the other 3D printers versus traditional manufacturing, CNC and injection molding?

Okay. So we have multiple on-demand power facilities in the United States, in Europe and in Asia-Pacific. I can't give you a specific count of how many systems we have deployed worldwide, but it's probably well over 100 production printers that are deployed in our various facilities. It's a business now that has been integrated onto this proprietary Q Soft [ph] platform that manages the business as a homogeneous and cohesive business with fulfillment facilities throughout the world. And it's growing nicely. We're very pleased with it, and the margins are expanding consistent with expectations and we expect them to continue to expand. It is still predominantly an additive business, although we are opportunistically expanding it in other secondary downstream operations. And we have a growing Urethane casting operation, and we have all along operated a plaster molding foundry and some CNC machining, rapid tooling and injection molding, which we see as a continuation of playing a vital role for all of our customers' design-to-manufacturing needs.

So any future needs to ramp up square footage here? Or is the acquired kind of footprint that you've been buying enough square footage for quite some time?

We have been making nice and steady investments within the acquired footprint. So we've made substantial investments in our Lawrenceburg and Seattle facilities over the last 2 years. We recently announced the expansion of our Italian facility, which came -- was on press release recently. We have done -- we've taken similar steps in our Australian, Melbourne facility. So in terms of square footage, we think that we're adequately covered. In terms of adding capacity within that square footage, we do it on a quarterly basis.

Or kind of success-based model as business ramped, you add machines as needed?

Yes.

And our next question comes from the line of Jim Ricchiuti of Needham & Company.

I have a question just relates to what you're seeing out there just from a standpoint of overall demand in the different geographies just based on some of the concerns people have about Europe. And then it's -- again, it's hard to tell with the acquisitions, but maybe you can characterize that. And also looking at the healthcare business, which is showing very, very strong growth, and I'm wondering if you would comment on that, if it's being driven largely by materials revenue or if you're also seeing a decent amount of demand from equipment.

Sure, absolutely. So starting with geographical performance, there's no question that for the first quarter, North America outperformed Europe in growth, benefiting substantially from the acquisition of Z Corp and Vidar and the strength of the overall channel, because certainly, on the case of Z Corp and Vidar, they had stronger sales presence in North America than outside of North America. However, notwithstanding the shift in our revenue generation composition, Europe performed extremely well. And given our stronger European presence relative to the historical Z Corp organization, we expect an upside in Europe for the remainder of the year as the entire channel gets up to speed. And we expect Asia-Pacific to continue to perform well for us as well. In terms of healthcare performance, actually, it's both. We've had a steady increase in the number of systems that have been placed into healthcare applications, and we are enjoying a corresponding healthy increase in print material consumption rate.

And with the increase you're seeing in equipment sales into that market, is that coming from primarily increased sales to existing customers? Or are you winning new business? I'm just trying to get...

We're winning new business. We're expanding the range of applications. So we're gaining more ground in dental applications. We're gaining more ground in a variety of orthopedic-related applications. And some of our existing customers are also enjoying growth, and we benefit from that as well. And of course, remember that we also have a Vidar component now in our healthcare solutions, although even absent the Vidar component, we've done pretty well.

Yes. I was just going to say that, Abe. It was -- Vidar contributed about 12%. So we did 81% increase if you took the acquisition out of it, and then Vidar brought it up to the 93%.

Yes, it remains, Jim. Healthcare remains our fastest growing vertical, and we remain very bullish on it.

And also, is it fair to say you're among your more profitable verticals?

Yes.

[Operator Instructions] Our next question comes from the line of Jim Bartlett of Bartlett Investors.

Could you discuss where you are in training in the channel, both domestic and overseas? And then I have another question.

Yes. Sure, Jim. We have successfully converted and trained more than half of our combined channel over the first 90 days since the acquisition, and we expect to carry out the balance of this activity throughout the second quarter.

And also, on the 3500, could you compare more specifically how it is different from the 3000 series?

Well, it's really a completely new platform in terms of its architecture and its capabilities. So it brings to -- it's a new technology platform that brings to bear enhanced material delivery and management system, enhanced printability capabilities which would translate, not just in the immediate term into what we are doing today but will become a platform from which we will be launching additional capabilities in the coming period. So it's a new generation. It's a new technology infrastructure. It comes with immediate end-user benefits in terms of automation, user interface, printability, robustness, reliability, and most importantly, the tailor-made range of materials and quality of feature detail and output within these materials that is unprecedented. But more importantly, it's a platform from which we will be launching additional capabilities in the coming periods.

But it's the same printhead technology?

It's the same printhead technology, but it has more hooks in it for future -- feature and performance capabilities.

Okay. One last question. Damon, what is the headcount end of the quarter?

Headcount? I don't think we have that number right in front of us right now. Obviously, it increased due to the acquisitions. And yes, it's still -- I think it's right around 900.

It's in the range of 900, Jim. We will dig out the precise number for you.

And finally, more of a better understanding of the Paramount acquisition, what really was key to you making this purchase?

Well, the key is -- our ongoing and strong interest to enable, catalyze and penetrate many -- real many factoring opportunities in aerospace, defense and medical device. And the unique capabilities that Paramount brings to variables in terms of their material development experience, machine technology development experience, manufacturing of certified aerospace and medical parts capabilities, and their substantial connections and involvement, reputation and credibility within the defense and aerospace community.

Are they one of the larger players in what they do?

They are a significant player within what they do, and they are one of probably very few that has been recognized as the leader and innovator with the reputation to match and with the connection and opportunities that correspond with that kind of reputation.

And our next question comes from the line of Cliff Ransom of Ransom Research Incorporated.

Can you talk to us please -- did you have an opportunity to look at the Objet transaction? Or was it a negotiated deal between them and Stratasys?

We can't comment on that. I'm sorry, Cliff.

That's fine. Do you believe that your limit to acquisitions, because you've been on quite a tear, is financial or managerial? Do you have the span of control in your existing management forces to keep up that pace and still maintain due to the transitions, the transformations that you need to make, the integrations that you need to make?

Well, we believe that it's manageable. And let me share with you that within the first 90 days post the Z Corp and Vidar acquisitions, which have been the most sizable ones to date in the last 2.5 years, we fully integrated it. We are on track with new product introductions. Not only did we integrate the acquisition, identified and delivered in essence all the cost savings that we expected and integrated it fully into our Oracle system transactionally and otherwise, and were able to do it all, including the acquisition accounting in the current period. We also managed to introduce several new products into that business unit, if you will, one from the ZPrinter side and one from the traditional 3D system side, and managed to, immediately after the quarter closed, make a few other acquisitions as well. I think that attributes to the kind of bandwidth and disciplined system that we have in place. And we expect to be able to continue to do that going forward and to do it well while delivering the added earning power that comes with it, which we also have been able to do. So the answer is, we think that we have the discipline. We have the proven systems. More importantly, we have the experience of having done several dozens of these, large and small. And we certainly have the bandwidth to continue to do it and to do it well as this space continues to explode.

When you look at Cubify, do you expect -- who is going to be the biggest users of this? Will it be artists, designers, kids, production people, makers, what? Who is your biggest target audience?

Our biggest target audience is kids. And we are taking all the steps to remove all of the remaining expertise or friction on the fence between us and kids, which is why we're so excited about the gamification of content creation experiences, like what we're doing with My Robot Nation, which is a gamification technology platform that could fit into any geometry. So it could be My RV Nation or it could be My G.I. Joe Nation or it could be My Tennis Racket Nation. And so by gamifying and democratizing and making it fun and engaging for kids, we're going after kids. Our thesis, Cliff, is that if we get the kids, we'll get everybody else. Makers are interesting and important to us, and we have solutions for makers as well. But on Cubify.com, we want to make sure that when people download something, it's readily printable and that they have the trust and confidence, that everything that they will do on Cubify will be printable and will give them an amazing experience.

Okay. And then one last question, please. If you had a choice in your acquisition hierarchy, would you rather buy service bureaus, new products, new technologies? Kind of, you've got a lot of ways you can expand. You're still a relatively small company. Where's your highest priority? And please, Abe, don't say all of the above, I'll faint.

I think that we have been taking these in waves in accordance with our growth initiatives. So we started the journey by doing a series of service bureaus and to build up the core business and the critical mass. And we're continuing to do this now more on additive basis to add capabilities like we did with Paramount, and also to add geographical coverage. And expect that to be ongoing. In terms of print engine technology, we've done a few of these. There isn't much left out there that we need at this point in time in terms of print engine technology. And so those are substantially under our belt. And in terms of other content-to-print technology building blocks, expect that to be ongoing as well because our aim at the end of the day is to create seamless user integration all the way from content to print. Democratization to us, Cliff, is not just about price points for the output device, it's about seamless content creation to print because therein lies, in our mind, the key to accelerated adoption.

And on the last question is, 20 years ago, when I got involved with this company for the first time, I used to say that the holy grail was in mass production, i.e. making parts. And it was sort of the thought was that we would start with making cores and then ultimately, particularly with the invention of new materials and the ability to center a variety of metals and alloys, where is that in the hierarchy today?

Well, we think, and if you read the various economists' articles, you'll see that they believe as well. We think that the holy grail is in mass individualization and mass customization. And that's the direction in which the world is moving. And so we certainly see opportunities in -- on the manufacturing floor. That's why we're excited about adding companies like Paramount into the mix because it comes with a lot of capabilities that could accelerate our penetration into bona fide aerospace, medical device, automotive applications. But we really see 2 holy grails out there: one is in mass individualization of manufactured goods and potentially, relocalization of a lot of this activity; and the second is in unleashing the creativity of consumers by removing all the friction and allowing anybody to create and make in 3D.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.