3D Systems Corporation (DDD) Q2 2012 Earnings Call Transcript

Good morning, and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the results of the second quarter and first 6 months of 2012. My name is Grant, and I will facilitate the audio portion of today's interactive broadcast. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. 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 Andrew Johnson, our General Counsel. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the 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 of products, underlying assumptions and other statements, which are statements other than statements of historical facts. 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 slide. 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. As a result, we cannot guarantee future results or performance, and past performance is not necessarily indicative of future results. These forward-looking statements are based on current expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management. We undertake no obligation and do not intend to update these forward-looking statements. 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, and our Form 10-Q which was filed this morning. At this time, I'd like to introduce Abe Reichental, 3D Systems' President and CEO. Abraham N. Reichental: Good morning, everyone, and thanks for taking the time to listen to our call this morning. We are very pleased to report another record revenue quarter driven by doubling printer units and balanced organic and acquisition growth. 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, update you on our progress and provide an outlook for the third quarter. Quarterly revenue increased 52% over last year to a record $83.6 million on a 20% organic growth. We were able to extend our revenue leadership position further on strong growth from all our revenue categories that was led by 111% increase in our sold printer units. We exited the quarter with $12.3 million of backlog, representing a 28% sequential backlog increase that reflects continued, across-the-board strong demand for our printers material and on-demand parts services and the growing effectiveness of our sales channels. We grew our gross profit by 71% and expanded our gross profit margin up to 51.4%, driven by significant year-over-year sequential improvements to our on-demand parts services and printers gross profit margin. We generated $21.4 million of cash from operations during the first half of this year. Our cash generation capacity during the second quarter was strong and sequentially comparable. Our uses of cash for the quarter included a total of $17.5 million comprising of our semiannual interest payment on our convertible note, annual employee performance bonuses and an increase to inventory to support our new product launches and increased backlog. During the second quarter of this year, we launched several flagship professional 3D printers and completed a few acquisitions in support of our growth initiatives. At the end of May, we began commercial shipments of Cube, the first-ever home 3D printer. Since its launch, Cube 3D printer orders topped the upper range of our expectations, and Cube consumables orders exceeded our expectations some threefold. While we don't expect revenue from Cube to be material to our results for the remainder of this year, we're very pleased with the overall marketplace reception and have already increased capacity to stay ahead of growing demands. During the quarter, we delivered on all of our identified cost synergies from the acquisition of Z Corp and Vidar and put in place the required building blocks for the future of growth. In fact, during the second quarter, we successfully reversed printer units decline from these acquired businesses and delivered 25% total revenue growth compared to the second quarter of 2011. On a quarterly basis, all of our revenue categories contributed to our growth. Printer units grew 112%, resulting in another record quarter, as we continued to benefit from the timely and strategic realignment of our entire printer's portfolio mix towards lower-priced units, from the addition of new and acquired printers and from the increased effectiveness in productivity of our extended channels. For clarity, our reported 112% printer unit growth for the quarter excluded Cube units sold. Revenue from print materials increased 60% to $26.2 million for the quarter on a healthy printer unit sales increase underscoring the power of our growing installed base and the effectiveness of our unmatched printer portfolio performance and price points. Service revenue for the quarter increased by 39% to $31.3 million and included $20.5 million of on-demand parts revenue, representing 43% growth over last year and 16% growth sequentially. Health care revenue, our fastest-growing vertical, grew some 87% over 2011 from both organic and acquired growth. For the first half of this year, revenue grew 57% reflecting significant growth from all of our revenue categories, on 130% increase in printer units, excluding Cube units sold. Printer revenue increased 71% on solid unit growth. And revenue from print materials increased 59% to $50.9 million, and services revenue increased 45% to $59.9 million and included $38.2 million of on-demand parts revenue. Health care revenue nearly doubled to $24.2 million and included $4.5 million of Vidar revenue. Consistent with our plans, we increased our R&D spending for the first 6 months of this year by $4 million in support of our portfolio expansion and diversification. For the first half of this year, our effective R&D investments resulted in the introduction of 9 new products. We are thrilled that revenue from new products grew 60% to $52.5 million. As a reminder, we track new product revenue only by the third -- only for the first 3 years of the product's commercial life. Let me say that again. As a reminder, we track new product revenue only for the first 3 years of product's commercial life. Of greater significance, our integrated materials revenue grew 91% over last year and amounted to 62% of total print materials revenue for the first 6 months of this year. We believe that our sustained integrated materials growth, coupled with the fact that materials, at 32% of total revenue contributed 42% of our gross profit, validates our strategic direction. Recurring revenue amounted to 69% of total revenue for the first 6 months of this year, even with the 71% increase in printers revenue. By comparison, revenue from acquisitions grew to $35 million, reflecting the fact that within our balanced growth strategy, new products and integrated materials continue to fuel our organic growth and underscore the effectiveness of our R&D investments. Now for a more detailed look at our financial performance for the second quarter and first 6 months of this year, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon? Damon J. Gregoire: Thanks, Abe. Good morning, everyone. Our second quarter revenue increased 52% over the 2011 quarter, with a gross profit improvement of 71%, primarily driven by increased revenue across all categories, with a larger portion of revenue from higher margin print materials and a substantial improvement in gross profit margin of our on-demand parts services and printers. On a non-GAAP basis, our total operating expenses increased to $24.3 million, or only 240 basis points, to 29% over 2011. The favorable impact from synergies cost downs that we put in place during the first quarter were enough to keep our sequential expenses flat for the second quarter, notwithstanding our much higher sales costs from revenue growth, $1.9 million higher R&D expenses in support of new products and portfolio expansion, and the incremental costs we incurred from the acquisition of new startups that increased our costs without any near-term revenue benefits. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $13.9 million and earned $0.27 per share, tax-effected. On a GAAP basis, we earned $0.16 a share for the quarter. Revenue for the first 6 months of 2012 increased 57% over the 2011 period, with a gross profit improvement of 69%, primarily driven by the increased revenue across all categories combined with a larger portion of revenue from higher margin print materials and an improvement in gross profit margin of our on-demand parts services and our printers. On a non-GAAP basis, our total operating expenses increased to $47.1 million, but only increased 80 basis points over the 2011 period to 29%, primarily reflecting a rise in compensation costs driven by sales commissions from increased revenue of the operating cost of the newly acquired businesses. Specifically, our 6 months 2012 operating expenses included a $12 million increase in compensation costs, primarily from higher commissions on increased revenues and from the higher concentration of new acquisitions, a $2.7 million of acquisition integration restructuring cost. We expect these costs to translate to future annual cost savings of $5 million to $5.5 million, which reaches the level of our guidance on estimated combined revenue and cost saving synergies. Our first 6 months 2012 expenses also included a $4 million increase in R&D expenditures that were primarily driven by new product development and acquisition-related activities. And as a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $27.1 million and earned $0.52 per share, tax-effected. On a GAAP basis, we earned $0.28 a share for the first half of 2012. As a reminder, we report non-GAAP adjusted results that exclude the impact of amortization of intangibles, non-cash interest expense, non-recurring acquisition and severance expenses, stock-based compensation and any release is a portion of the valuation allowance on deferred tax assets. Please note that our total depreciation costs and our senior convertible note cash interest expense in connection with these acquisitions are appropriately included in our non-GAAP presentation. For your convenience, the 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 39 -- or $13.9 million, or $0.27 per share, for the quarter. The excluded items aggregated to $4.9 million, tax-effected, adjustment to GAAP net income, or $0.11 per share. For the 6 months, we generated non-GAAP adjusted net income of $27.1 million or $0.52 per share, the excluded items aggregated to $12.6 million or $0.24 per share. We also want to note that we have $27.2 million of NOLs and $5 million valuation allowance remaining on our net deferred tax assets. We continue to evaluate the timing and amounts of future releases of valuation allowances as required. Our reported tax rate was 19% for the quarter and 17% for the 6 months of 2012. Consistent with our previous guidance, we expect our cash taxes to remain in the range of 3% to 5%, notwithstanding the fact that we expect our annualized effective tax rate for the full year 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 on our continued strong revenue growth, we believe that our results are consistent with our strategy to remix and diversify our revenue streams and are in line with our expectations. In fact, both our quarterly and 6 months recurring revenues amounted to 69% of total revenue. With print materials contributing over $50 million and services at almost $60 million for the 6 months. Quarterly printers revenue increased by $9.9 million, reflecting production printers revenue of $8.2 million and personal and professional printers revenue of $17.4 million. Personal and professional printers revenue increased 138% over the comparable quarter, including revenue from Z Corp and Vidar, which contributed $14.4 million for the quarter. Production printer revenue decreased 12% over last year's quarter and increased 11% sequentially. For the first 6 months, production printer revenue decreased some 10%, reflecting the impact of the ongoing printer price point realignment across our entire portfolio, with lower-priced point printers, which are capable of producing comparable annual materials consumption to that of a higher priced production printers. On a unit basis, production printer units sold were comparable in both years, and personal and professional printers units, excluding the Cube, increased 135%. Despite ongoing regional economic uncertainties, we experienced growth in all geographic regions with sustained performance from our European and Asia Pacific regions, which remained at similar percentages of total revenue amidst a substantial increase in our North American revenue benefiting from acquisition concentration that was skewed in favor of the U.S. Sales into Germany and other EMEA countries remained strong, with revenue and income from operations for the second quarter up over the 2011 quarter and sequentially. As a reminder, our foreign income from operations is a function of transfer pricing and there has been no change to this methodology. For the quarter, gross profit improved some 71% over the 2011 quarter, to $43 million, from increased revenue and expanded gross profit margin in all categories. Our gross profit margin expanded 570 basis points to 51.4%, primarily from 840 basis point expansion to our services gross profit margin and some 620 basis point improvement to our printers gross profit margin compared to the 2011 quarter. Our printers gross profit margin expansion is being driven by our realignment portfolio -- our realigned portfolio, which includes more profitable lower-priced printers that are capable of consuming materials levels over higher-priced printers, combined with continuous operational improvements and improved overhead absorption. Our services gross profit of $14.5 million included printer services, on-demand parts services and consumer solution services. Services gross profit margin expansion was driven by an impressive on-demand parts gross profit margin expansion of 1,240 basis points year-over-year and 630 basis points sequentially, even with the negative impact on gross profit margin from the acquisition of Paramount during the quarter. As we previously said, over time, we expect that our on-demand parts gross profit margin will mirror our consolidated gross profit margins. For the first 6 months of 2012, gross profit improved some 69% over 2011 period, to $81.8 million, from increased revenue and expanded gross profit margin in all categories. Our gross profit margin expanded 370 basis points to 50.7% for the first 6 months, driven by expanded -- expanding services gross profit margin of some 550 basis points and printers and other products and print materials gross profit margins of some 620 basis points, each compared to the 2011 period. Consistent with our previous comments, we continue to make steady progress towards our target gross profit margins. So far as a result of our strategy and execution, consolidated gross profit margins improved some 600 basis points from 45% in 2010 up to 51% for the second quarter of this year. Operating expenses increased $11.8 million for the quarter compared to last year. For the second quarter of 2012, SG&A expenses increased $9.8 million, including a $5.1 million increase in compensation costs, primarily from higher commissions on higher revenue and increased headcount that came with the acquired businesses. SG&A expenses also included a $1.8 million in amortization expense from acquired intangibles. Legal costs improved by $1.2 million for the quarter primarily driven by reduced litigation activity and costs. Consistent with our plans and comments, we increased our R&D expenses by $1.9 million compared to the second quarter of 2011. This is primarily related to activities in support of our expanded portfolio of products and services into our health care consumer growth initiatives. For the first 6 months, operating expenses increased $24.9 million compared to the 2011 period, primarily due to a $12 million increase in compensation expenses from higher sales commissions, from increased revenue and higher staffing from acquisitions and bonuses associated with 2012 acquisitions and integration activities. SG&A expenses also included $2.7 million of acquisition and restructuring costs from which, consistent with what we've said previously, we expect to realize annual savings of $5 million to $5.5 million. R&D expenses increased by $4 million in the first 6 months of 2012 compared to 2011, primarily from increased costs from acquisitions and increased development of new products and consumer solutions. As a reminder, we do not capitalize any R&D or other development costs, rather, we expense these costs as they are incurred. The favorable impact from synergies cost downs that we put in place during the first quarter were enough to keep our sequential expenses flat for the second quarter, notwithstanding our much higher sales cost from revenue growth, $1.9 million higher R&D expenses in support of new products and portfolio expansion and the incremental cost we incurred from the acquisition of new startups that are increased our cost without any near-term revenue benefits. We generated $21.4 million of cash from operations in the 6 months of 2012 with some $5.6 million generated during the second quarter. Our cash generation capacity during the second quarter was strong and sequentially comparable. Our uses of cash for the quarter included a total of $13.5 million comprising of $8.1 million of our semi-annual interest payment on our convertible notes and annual employment performance bonuses and a 5.5 -- $5.4 million increase to inventory to support our new product launches and increased backlog. We expect inventory to decline and normalize as we ship the portion of backlog that is associated with this inventory. We ended the quarter with $158.5 million of cash, a decrease of $20.6 million since the end of 2011. The December balance included a $145.5 million from our senior convertible notes issuance, from which we paid $141.3 million of that for the acquisition costs of Z Corp and Vidar during the first quarter of 2012. The June 30, 2012 balance also includes $106.9 million of proceeds from our common stock offering completed in June. Excluding the senior convertible note proceeds and common stock issuance proceeds from the cash balances, cash increased $17.9 million since the end of 2011 after paying $12.6 million for acquisitions in the second quarter. As reminder, we accrue interest expense each quarter for the senior convertible notes, and cash interest is paid semiannually, in June and December. Although we expect to continue to report strong cash generation from operations, the quarterly amount may fluctuate from time to -- from period to period. Working capital decreased by $2.9 million, primarily due to the change in cash, a $12.7 million increase in accounts receivable from a higher revenue and the revenue mix shift towards products sold through resellers and on credit terms. Our inventory increased some $14.7 million, primarily due to the addition of acquiring Z Corp and Vidar products, the timing of additional inventory purchases that we fully paid for to support the concentration of significant new products during the quarter and a sequential 28% backlog expansion. Our accounts payable increased some $8.3 million, primarily from incremental payables that we acquired with Z Corp and Vidar and the timing of inventory purchases and vendor payments. Based on our performance to-date, we affirmed the 2012 guidance that we previously announced, notwithstanding the incremental R&D and SG&A costs from acquisitions of Bespoke, Viztu and My Robot Nation, 3 startups that altogether aren't expected to contribute materially to revenue for the balance of this year. Management expects revenue to be in the range of $330 million to $360 million for the full year 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 of 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 and includes management's anticipated incremental expenditures related to Cubify and the recent acquisition of Bespoke Innovations and our expected litigation costs as we understand them. As a reminder, our non-GAAP earnings exclude acquisition and severance expenses, non-cash interest expenses related to our outstanding senior convertible notes, non-cash stock-based compensation expense, intangibles amortization and any releases of the valuation allowance on deferred tax assets. I'd also like to remind you that this guidance is based on current plans and assumptions and subject to risks and uncertainties more fully described in the company's reports filed with the SEC. That concludes my comments. Abe? Abraham N. Reichental: Thanks, Damon. During the second quarter, we made several significant new product introductions, including the ZPrinter 850, 8 models of the ProJet 3500, a new crossover, ProJet 7000, and a new Vidar NDT PRO scanner. We expect these products to contribute materially during the second half of this year. Since its launch, our Cube 3D printer continues to enjoy a fantastic marketplace reception. In fact, Cube orders topped expectations, and Cube consumables exceeded our estimates some threefold. While we don't expect revenue from Cube to be material to our revenue for the remainder of this year, we're very pleased with the overall marketplace reception and have already increased production capacity to stay ahead of growing demands. During the second quarter, we made 2 acquisitions in support of our rapidly growing health care solutions business. We acquired Bespoke Innovations, a San Francisco startup with proprietary scan-to-print technology for individualized prosthetics, orthotics and orthopedic devices. We integrated Bespoke Innovations into our health care solutions business and are leveraging its technology and know-how to develop and commercialize a full range of individualized, ventilated, lightweight, custom fit prosthetics, orthotics, and orthopedics, that we expect to begin to launch during the first half of 2013. We also acquired and integrated Paramount Industries, an on-demand parts provider that is specifically focused on medical device and aerospace manufacturing. To expand our consumer business, we acquired My Robot Nation, a consumer technology platform that provides intuitive gamelike content that we already integrated into Cubify. We also acquired Fresh Fiber, which delivers 3D-printed accessories for consumer electronics. This past Monday, we acquired Viztu Technologies, the developer of Hypr3D, an online platform that allows anyone to turn pictures and videos into printable 3D creations. We plan to integrate Viztu into Cubify, adding intuitive and fun scan-to-print and create-to-print apps. These acquisitions bring significant technology building blocks for our consumer initiative. And earlier this week, we launched Cubify Invent, the first 3D CAD program developed specifically with 3D printing in mind, empowering users to turn their ideas into reality for just $49. Cubify Invent combines the power of professional design tools with intuitive free tutorials that make learning fun and easy. People new to CAD and those familiar with basic programs like SketchUp can quickly advance to create and make in 3D, transforming even their most complex designs into 3D printables. During the second quarter, we also completed a common stock offering that resulted in net proceeds of $107 million for acquisitions and general corporate purposes providing us with enhanced financial strength and flexibility to continue to execute on our focused growth initiative. As we have previously discussed, we expect to continue our balanced growth strategy that includes acquisition opportunities that are accretive to our business model and deliver meaningful value to our stockholders. We entered the third quarter with positive sales momentum, reflecting continued strong demand and record backlog of $12.3 million. Our June 30 backlog is well distributed across all our revenue categories, including personal, professional and production printers, as well as print materials and on-demand parts, indicating continued strong demand for our entire portfolio. While we may face lingering economic uncertainties in parts of the world, we expect to continue to benefit from robust R&D spending by our customers worldwide. Accordingly, we expect continued strong organic and acquired growth and expanding gross profit margins. We believe that the marketplace for our professional and consumer 3D content-to-print products and services remains underdeveloped and under-penetrated. We expect that our portfolio diversification, growing geographic presence and focused growth initiatives will deliver continued success. Finally, we believe that we are extremely well positioned to benefit from the expanding rapid manufacturing and emerging maker and consumer opportunities. And with that, I will now gladly take your questions. Stacey?

[Operator Instructions]

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

A question regarding the geographic composition of the revenues and what you're seeing in the market. You showed what appears to be a pretty good sequential growth, particularly in the markets that I think people are more concerned with, notably Europe. Can you talk a little bit about how the business tracked during the quarter? And is there any color you can provide on how business is trending thus far in Q3? Abraham N. Reichental: As you noted, we indicated a good sequential growth in Europe and in Asia Pacific for that matter. Within the countries in Europe, Damon also commented, that not only did we grow sales, we also grew our operating income from these regions. And our expectation is that we continue to benefit from robust R&D spending by customers, and we have not seen, when we compared this period to last year, we have not seen any discernible difference, notwithstanding all the economic uncertainties related to specific countries in Europe. We have not seen any discernible difference in the behavior of our customers. Our customers continue to invest and their own R&D spending remains robust. And we believe, generally, that our growth is much more linked to global and regional R&D spending trends than to any other macroeconomic or GDP performance.

Our next question comes from Ben Reitzes from Barclays. Matthew Markezin-Press: It's Matt Markezin-Press on for Ben. I was wondering if you guys could give a little bit more color on Z Corp and Vidar's contribution to your revenue segments, like printers and products materials and services? Abraham N. Reichental: Yes, absolutely. First, we noted on the call that we reversed the historical decline in these businesses, and we're pleased to report a revenue increase of some 25% during the second quarter year-over-year. We also can tell you that excluding Vidar and Z Corp, we have good growth amongst our core businesses. So for example, if you excluded those, our units still grew by some 198% on a year-to-date basis for the first 6 months that included these 2 acquisitions in the mix. What we can also tell you is that as a result of having Z Corp and Vidar in the channels, it contributed favorably to our own unit growth. Because in many instances, as we predicted, the ability to sell the combined portfolio into the combined channel resulted, basically, in the second quarter, in doubling of the units altogether. And we benefited beyond just jump-starting these 2 product lines growth, our other product lines benefited from the availability of the channel. So all in all, it has been enormously successful. Matthew Markezin-Press: All right. And then with the higher share count, following your offering, and you guys maintaining your guidance, I was wondering how you guys can offset the higher share count? Is it coming from some enhanced margins, or is this coming from elsewhere? Damon J. Gregoire: Well, it's coming from us delivering on the schedules that we put out there. And it is increasing margins, as you can see, we're over 51% in gross profit margin this quarter. And it is from other cost containment, which were somewhat overshadowed by some of the costs, as we talked about with the startup cost, from the companies -- the startup companies that we added this quarter, even though we were able to keep our operating costs flat with Q1 even with those costs added. Abraham N. Reichental: Yes. And so to summarize that, we basically see that our fundamentals are very strong, and the fundamentals that we projected in our guidance earlier in the year strengthened sufficiently to the point that we can absorb additional incremental investments, such as Bespoke and Viztu and My Robot Nation that add to our operating expenses and not generate any near-term revenue and still deliver. Because of our margin expansion, because of our other synergies and cost downs, we can still achieve the guidance which we affirmed today. And so we're basically saying today, our fundamentals have strengthened, the demand is strong as far as we can see it and that business can afford to make these additional investments today without changing the guidance.

Our next question comes from the line of Tim Mulrooney from William Blair.

This is actually Brian Drab at William Blair. The first question, just trying to sort through some of the growth rates here on an organic basis given all the acquisitions growth that you've had in the last year here, and the year-over-year numbers by segment are interesting on Slide 7, but it would be really useful if you can give us an idea on what organic growth was by segment. Could you do that? Abraham N. Reichental: We can do a little bit of it. I mean, our organic growth overall was 20%, as we reported. Within that, if you look at materials, excluding the acquisitions of materials from Huntsman and Z Corp, materials was up much higher. It was 28.3% for the quarter, 26.4% for the full year. And on-demand parts growth year-over-year was 43%. Most of it, since we haven't had that many more recent acquisitions, most of it was attributed to organic growth. On the units, I don't have it in front of me. So, we can get back to you on that one.

How about on the printers and other products side then, is it 61% total growth? Is that? Abraham N. Reichental: Do you have that growth results, Damon? Hang on one second, Brian, we'll see if we have it at our fingertips here. Why don't you go ahead and ask your next question, and we'll see if we can get it for you.

We appear to have lost him from the queue. [Operator Instructions] As we're waiting -- we have Tim (sic) [Brian] back on the line.

I'm not sure what happened there. What was your sequential growth in Europe excluding acquisitions? Or said another way, did acquisitions have a material impact on sequential growth from first to second quarter? Damon J. Gregoire: Acquisitions in Europe did not have a material impact in any regard in Europe, sequentially from Q1 to Q2. So the growth is... Abraham N. Reichental: So the growth is basically organic. And if you noted, Damon talked about the fact that acquisitions skewed favorably, results in North America versus Europe.

Okay. And then on the professional, personal printer growth, if I have heard this correctly, great growth, excluding the Cube, of 135%. Can you give us an idea how that breaks down between professional and personal, given personal, I assume, has some outstanding growth probably from Bits from Bytes type of machines? Abraham N. Reichental: Well, actually between personal and professional, there was more growth in professional on a weighted basis than personal, if you look in terms of the percentage of unit growth, although both have grown substantially. And within personal, we have had a very, very strong reception of our new 3500. And in fact, a portion of the increase in backlog is attributable to professional printers’ materials and on-demand parts.

Okay. And then if I could just one more. Regarding your guidance, the revenue guidance implies second half of 2012 revenue growth of between 32% and 56% year-over-year. And I'm just wondering why such a wide guidance range? And do you have a sense for where you might be in terms of lower end to higher end? Damon J. Gregoire: We look at this and we say, it is the range that we feel comfortable with. And certain activities can move revenue from just one quarter to another, but I mean, it's sort of hard to really narrow that. And please remember though, too, this guidance does not include -- if we do any future acquisitions, we would update guidance again. So it's only based on our current activity as we have it.

Our next question comes from, again, from the line of Jim Ricchiuti from Needham & Company.

I wonder if you could talk a little bit about the health care market. You continue to show very strong growth. And I wonder if you could talk a little bit about the components of that growth, and to what extent do you see the Bespoke acquisition inactivity in the prosthetic market being a driver next year? Abraham N. Reichental: So as you note, Jim, for the first 6 months, if you look at the meaningful period, our health care revenue nearly doubled versus the first half of last year. And it comprises today of revenue from hearing aid activities, a variety of dental restoration activities and aligners, a variety of medical modeling and supports of surgical procedures, some new activity in support of what's called computer-aided surgical procedures. And more recently, with Bespoke as part of 3D Systems, we're now setting our sights on a variety of orthopedic, orthotic devices. And we're very excited about the Bespoke Innovations acquisition. It brings some really unique and proprietary technology in the scan-to-print at the point of treatment that could substantially transform complete brace and cast and prosthetic-type devices looking into the future and significantly alter the quality of treatments and outcomes. Our expectation is that for the remainder of this year, we're going to be in R&D and pre-commercial phases. So we're going to be in an investment mode for the remainder of this year and into early next year. But in the first half of next year, we'll begin to commercialize some products that we would view as disruptive and transformative. And certainly, the second half of next year, we expect revenue from the Bespoke acquisition to begin to add and contribute to our health care segment.

Okay, that's helpful. Just looking at the performance year-to-date, my impression was that markets like the hearing aid market is a more established market for you. In terms of the growth, is it coming, the real strength in the growth that you're seeing coming from the relatively new market like dental, or is something like... Abraham N. Reichental: You're correct that hearing aid is a bit more developed, although there are new applications within hearing aids that will contribute to growth on an ongoing basis. You're also correct, Jim, in pointing out that dental is growing very rapidly, and within dental, both dental restoration and aligners are growing very, very well. But we're also enjoying quite a bit of growth in the whole area of implant surgical kits and other surgical kits in support of computer-aided surgical procedures. That's a very fast-growing field, and it's contributing very favorably to our growth.

Our next question comes from the line of Paul Coster from JPMorgan.

You talked about growth being fueled in part by expanding channel. Can you share with us any stats regarding the dealer and distributor network, and how that's expanding? And also in passing, how you intend to expand the channel for Cube moving forward? Abraham N. Reichental: So in regards to the channel, as you know, we entered the year with roughly 330 channel members, effectively doubling our channel and geographical coverage through channel with the acquisition of Z Corp. And we have been focusing all of our efforts to basically make the channel productive and effective by selling the combined portfolio through the combined channel. That has been enormously successful. We completed all the training and the rollouts and the increase in units on a year-to-date basis. And the increase in overall printer revenue, which is up some 71%, which included very healthy growth of the core 3D Systems printers and the reversing of the decline of the Z Corp printer units, is the ultimate indication of how successful the channel integration and productivity has been. We also added some additional channel members. But not too many, because our primary purpose for the first half was to get maximum productivity from the combined channel. In terms of Cube channel, at the moment, we largely are doing it online through Cubify.com. And we have been extremely pleased with the response and the effectiveness of the online channel. In fact, we had to already increase capacity, because, since the launch, the order influx rate exceeded the top range of our expectations. So we are in a bit of a ramp-up in terms of production capacity to cope with the demand and to be prepared for increased rates before we begin to more formally promote Cube. And so our expectation for Cube for the foreseeable future is that the channel is going to be primarily Cubify.com, it has been enormously effective.

So just a quick follow-up. A lot of new products in the project lineup this quarter. Does that reflect the sort of the intensity of the competition in that professional printers space? And is that the most competitive sort of subset of your landscape at the moment? Abraham N. Reichental: No. It effects leadership and attunement to customer needs and wants. We believe that within our professional printers, we set the benchmark in terms of accuracy, functionality, feature, detail and overall range of material performances across many, many segments and applications. And we have had this in our plan, and we continue to push the envelope in terms of what technology can deliver for the benefit of our customers. The fact that we could do it across so many models, concurrently, I think, speaks volumes about not only our technology capabilities but our execution. And what is even more gratifying is the incremental backlog that this new product have generated, which again, I think, validates how the market is viewing these technological improvements. I should also add that all of this is consistent with our multi-quarter realignment and remixing of our entire printers portfolio, which is really moving in a direction of more professional printers and more personal printers. As we continue to converge the production and professional into one category that is priced more in the middle, increases our unit placements year-over-year and sequentially and represents lower-priced printers that are capable of generating just as much consumable revenue as the higher-priced printers.

[Operator Instructions] Our next question comes from the line of Troy Jensen from Piper. Troy D. Jensen: Just a quick question here. A point of clarification first, did you guys say production printers were down 10% year-over-year and units were flat? Abraham N. Reichental: We said that production printers were up 11% in the second quarter over the second quarter of last year, flat for units and down 6 months 10%. And we also said that, that is largely because we are continuing the migration from the production category to the professional category. Troy D. Jensen: Can you explain a little bit, I mean are units that you're previously classifying as production are now moving into your professional category? Abraham N. Reichental: As we introduce these new printers like the ProJet 6000 and the ProJet 7000, those, increasingly are all falling into the professional category where their predecessors that we have retired belonged in the production category. The professional category over time, in terms of print format and consumable generation capability and price point, is going to become the category for the high-end. And that category is growing by leaps and bounds. Troy D. Jensen: And can I go to -- I think Brian was asking the question about organic growth rates, and you gave him the materials at 28% and on-demand at 43%? Abraham N. Reichental: Yes, we have it now. We can provide it. Damon J. Gregoire: The unit, the printer units grew at 47% organically versus the 61% in total. Troy D. Jensen: How about revenues? Because I think the 20% organic number you're quoting was a revenue number, and I thought that was with materials and on-demand was? Damon J. Gregoire: The 47% is the -- that is the unit number. And the revenue number is close to that. It's about 35%. Troy D. Jensen: Can I ask then, how can you have 3 categories: 28%, 43%, and 35% organic growth, within the total organic growth, there's only 20%? Damon J. Gregoire: For the -- well, you have -- under services, we look at this. In the services in total, if you look at the print service... Abraham N. Reichental: Print service and on-demand parts. Damon J. Gregoire: On-demand parts. But if you print out the -- if you take out the traditional break-fix warranty services, that is actually flat to last year to slightly down a bit. Abraham N. Reichental: Yes. So for clarification, Troy, the 43% that we cited on services was completely attributable to our on-demand parts services. On-demand parts services have grown 43%. Traditional break-fix printer services and warranties remained flat. Troy D. Jensen: I know this is more than one, but if I could just get a last one in. Just about direct digital manufacturing. Is there any way you guys can measure traction you guys are getting in that industry, and then what systems best play into that for you? Abraham N. Reichental: Yes. So for -- to a large extent, almost 100% of our health care business is directly attributable to direct manufacturing. And in addition to that, about 50% of our units for quite some time in the professional production category are also attributable to direct manufacturing. And most of that is in connection with aerospace, automotive and defense, in addition to health care. Troy D. Jensen: And is it your SLA and SLS systems you think are best positioned? Abraham N. Reichental: Well, it depends on the application. Certainly, in certain applications, SLA and SLS print engines have unique advantages. On the other hand, our ProJet 3500 and 5000 wax printers are also extremely well positioned on the production floor of foundries to generate thousands of patterns daily for a variety of applications.

We have no further questions. Therefore, that concludes your Q&A session for today.

Thank you for joining us today and for your continued support of 3D Systems. A replay of this webcast will be made available after the call on the Investor Relations section of our website, investor.3dsystems.com.

Thank you for your participation in today's conference. And that concludes the presentation. You may now disconnect. Have a good day.