3D Systems Corporation (DDD) Q3 2012 Earnings Call Transcript

Good morning, and welcome to the 3D Systems Conference Call and audio webcast to discuss the results of the third quarter and first 9 months of 2012. My name is Tony and In will facilitate the audio portion of today's interactive broadcast. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Stacey Witten with 3D Systems. Please proceed, ma'am.

Good morning, and welcome to 3D Systems conference call. I'm 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 sessions, 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 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, development, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. As such, all 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 the 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 as that 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 we 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're 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 fourth quarter. Quarterly revenue increased 57% over last year to a record $90.5 million on 26% organic growth. We were able to extend our revenue leadership position further on strong growth from all our revenue categories, led by 123% increase in our sold printer units, excluding Cube printer sales. We grew our gross profit by 69% and extended our gross profit margin to 51.8%, driven by significant year-over-year and sequential improvement to our printers and print materials gross profit margin. Consistent with our prior comments, a couple of weeks ago, we announced a further diversification of our business model through a fifth growth initiative: 3D authoring solutions to combine scanned data capture, meshed processing, auto servicing and CAD modeling into a single platform. In connection with this growth initiative, we acquired Rapidform, a leading provider of 3D reverse engineering and inspection software solutions, for $35 million and expect it to contribute $15 million of high-margin revenue in 2013 and generate between $0.06 and $0.09 of non-GAAP accretion per share. We believe that Rapidform extends the attractiveness of our content-to-print capture and authoring solutions portfolio, enhances our position in Korea and Japan and expands our channel coverage some 30%, along with significant cross-selling synergies. On the consumer front, we're thrilled with the overall progress that we're making with Cubify.com, our online consumer destination and we're pleased to report that Cube orders continue to exceed our expectations and that Cube printers are now available for next day shipment. While we still don't expect revenue from our consumer growth initiative to be material to our revenue for the remainder of 2012, we're very pleased with the overall marketplace reception and the number of distinguished awards our Cube won so far this year. On a quarterly basis, all of our revenue categories contributed to our growth, which amounted to 26% organic growth and 57% overall growth. Printer units grew 123%, excluding Cube units, resulting in another record quarter, as we continue to benefit from the timely introduction of several new printers, the strategic realignment of our entire printers portfolio mix towards lower priced printers, the addition of ZPrinters to our portfolio and the increased effectiveness and productivity of our extended sales channel. For the third quarter, printers and other products revenue grew to a record $34.1 million on 75% organic growth. Revenue from print materials increased 38% over 2011 to $25.5 million for the quarter on healthy printer unit sales increase, underscoring the power of our growing installed base and the effectiveness of our unmatched printer portfolio performance and price point. Services revenue for the third quarter increased by 28% to $31 million and included $20 million of on-demand parts revenue, representing 28% growth over last year. Healthcare revenue, our fastest-growing vertical, grew some 67% over 2011. Healthcare revenue grew 29% organically. Sequentially, we're very pleased that record printers revenue more than offset our expected seasonal flatness from extended summer shutdowns that historically impede materials, services and healthcare revenue growth. For the first 9 months of this year, revenue grew 57%, reflecting significant growth from all our revenue categories and 24% organic growth. Printer revenue increased 91%, driven by 128% increase in printer units, excluding Cube units sold. Revenue from print materials increased 51% to $76.4 million and services revenue increased 39% to $90.8 million and included $58.3 million of on-demand parts revenue. Healthcare revenue increased 82% to $36.2 million and included $8.9 million of Vidar revenue resulting in 37% organic growth. For the first 9 months, Healthcare Solutions revenue made up 14% of our total revenue. Consistent with our plans, we increased our R&D spending for the first 9 months of this year by $5.7 million in support of our portfolio expansion and diversification. For the first 9 months of this year, our effective R&D investments resulted in the introduction of 11 new products, including 8 new printers, spanning 4 print engines. We are thrilled that revenue from new products grew 76% to $89 million. As a reminder, we track new product revenue only for the first 3 years of a product's useful commercial life. For even greater significance, our integrated materials revenue grew 81% over the 2011 period and amounted to 63% of total print materials revenue for the first 9 months of this year. We believe that our sustained integrated materials growth, coupled with the fact that materials at 30% of total revenue contributed 40% of our gross profit, validates our strategic direction. Recurring revenue amounted to 66% of total revenue in the first 9 months of this year, even with the 91% increase in printers and other product revenue. By comparison, revenue from acquisitions grew to $52.9 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 this quarter and the first 9 months of this year, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon? Damon J. Gregoire: Thanks, Abe, and good morning, everyone. Third quarter revenue increased 57% over the 2011 quarter with a gross profit improvement of 69%, which is primarily driven by the increased revenue across all categories and an improvement in gross profit margin of our printers. On a non-GAAP basis, our total operating expenses increased to $24.5 million but decreased to 27% of revenue from 30% in 2011. The favorable impact from our identified and delivered synergies and cost downs was enough to keep our sequential expenses flat for the third quarter, notwithstanding our much higher sales cost from revenue growth, incremental cost from absorbed acquisitions and $1.7 million higher R&D expenses in support of our expanded portfolio and diversified business model. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $18.2 million and earned $0.32 per share, tax-effected. On a GAAP basis, we earned $0.24 a share for the quarter. Revenue for the first 9 months of 2012 also increased 57% over the 2011 period with a gross profit improvement of 69%, driven by increased revenue across all categories, combined with improvement in gross profit margin of our on-demand parts services, printers and materials. On a non-GAAP basis, our total operating expenses increased to $71.6 million but decreased slightly, as a percentage of revenue, to 28%. This reflects a rise in compensation cost that was primarily driven by higher sales commission from increased revenue and incremental operating cost of newly acquired businesses. Specifically, our 9 months 2012 operating expenses included a $15.8 million increase in compensation costs, primarily from higher commissions on the increased revenue and from higher concentrations of new acquisitions and $3 million of acquisition integration and restructuring costs. As we said previously, we expect this acquisition integration costs to translate to future annual cost savings of $5 million to $5.5 million annually. Importantly, our first 9 months 2012 expenses also include a $5.7 million increase in R&D expenditures that were primarily driven by our expanded products and services portfolio. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $45.3 million and earned $0.85 per share, tax-effected on a GAAP basis. On a GAAP basis, we earned $0.52 per share for the first 9 months of 2012. As a reminder, since the second half of 2009 when we commenced making acquisitions, we've been accounting for all acquisition revenue in a consistent, transparent and fully disclosed manner. Specifically, we count newly acquired business revenue from the date of acquisition until its 12-month anniversary as acquired revenue. From its 12-month anniversary forward, we add the actual total first year revenue to our total base and count only the incremental revenue growth going forward on our total base as organic revenue. In cases where a new product was released during the first 12-month period that was commercialized using our own R&D and product development, that specific product revenue is counted as organic revenue. From the second half of 2009 to date, only 2 products met this criteria and the revenue from these 2 products to date hasn't been material to our results. And once again, let me reiterate that we have not changed our organic growth methodology since we began making acquisitions in 2009. And for illustration purposes, I've included an example on Slide 13 that depicts how the calculation works. As you can see from this example, if the company had a core revenue of $100 million in year 1, that constitutes the base. If in year 2, the company grew its core business by $20 million and acquired a business that contributed an additional $10 million of revenue in the first year, organic growth for year 2 will be calculated by dividing the core business growth of $20 million by the prior year base of $100 million, which would represent a 20% organic growth rate. As you can see on this Slide, the same methodology applies for any other acquisition and corresponding periods. So consistent with our methodology, for the first 9 months of this year, our organic growth rate for printers was 39.8%; materials, 18.9%; on-demand parts, 22.3% and other printer services; 9.4%, which in the aggregate, amounts to an overall organic growth rate of 24% that Abe mentioned earlier. Additionally, it's important to note that 10 of our start-up technology acquisitions, in the aggregate, have not contributed materially to revenue today. In fact, as we have stated previously, we acquired the startups for their proprietary R&D assets, know-how and technology building blocks. Furthermore, 15 of our acquisitions contributed significantly to our technology and intellectual property portfolio and 4 of these acquisitions strengthened our print engine portfolio. And finally, it's important to note that, notwithstanding these 10 start-up technology investments, in which we absorbed R&D cost without any material revenue benefits, we have continued to increase our earnings. So 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, including gain or loss on acquisitions, impact of litigation settlements, stock-based compensation, noncash loss on conversion of convertible debt and any releases of portions of the valuation allowance of deferred tax assets. Please note that our total depreciation cost and our Senior Convertible Note cash interest expense are appropriately included in our non-GAAP presentation. And for your convenience, we have included a reconciliation of GAAP to non-GAAP results, which 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 $18.2 million or $0.32 per share for the quarter. The excluded items aggregate to $4.6 million, tax-effected, adjustment to GAAP net income, or $0.08 a share. For the 9 months 2012, we generated non-GAAP adjusted net income of $45.3 million or $0.85 per share. The excluded items aggregated to a $17.3 million or $0.33 per share. We also want to note that we have $24.7 million of NOLs and $9.3 million of 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 17% for the quarter and for the 9 months 2012. Consistent with our previous guidance, we expect our cash taxes to remain in the range of 3% to 5%, but based on the geographic distribution of our income through the end of the third quarter, we now expect our annualized effective tax rate for the full year 2012 to be in the range of 17% to 20%, a decrease from our previous expectations on higher income contributions from the U.S., which results in accelerated NOL usage and a corresponding reduction in our reported tax rate. For clarity, these rates are already reflected in our annual guidance which I'll 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. This Slide shows our balanced revenue distribution among categories and geographies. It is also well-distributed among customers and applications. We do not have any 5% or 10% customers, so we do not rely on any one customer or industry for our revenue. Our quarterly and 9-month recurring revenue amounted to 62% and 66% of our total revenue, with print materials contributing over $76 million and services at almost $91 million for the 9 months. Quarterly printer revenue increased by $19.3 million, reflecting production printers revenue of $10.2 million and personal and professional printers revenue of $23.1 million. For the third quarter, production printers revenue increased 30% over 2011 and 24% sequentially, all of which was organic. Personal and professional printers revenue increased 231% over the comparable quarter, including revenue from Z Corp and Vidar which contributed $7.4 million of printer revenue for that quarter. For the first 9 months, production printer revenue was up slightly, reflecting the impact of our ongoing successful printer price point realignment across our entire portfolio with lower price printers which are capable of producing comparable annual materials consumption to that of our higher priced production printers. On a unit basis, production printers unit sold were comparable to both years and personal and professional printers units, excluding the Cube, increased 128%. Despite ongoing regional economic uncertainties, we experienced growth in all geographic regions, with sustained performance from both our European and Asia-Pacific regions. North America delivered the strongest growth benefiting from acquisitions concentration that was skewed in favor of the U.S. Sales into Germany and other EMEA countries remain strong despite the negative impact of summer holidays. As a reminder, our foreign income from operation is a function of transfer pricing and there's been no change to our methodology for transfer price. Several factors contributed to our printer unit sales increase over the past couple of years that, we believe, underscore the effectiveness of our strategy. First, the deliberate way in which we are extending our portfolio through new product introductions and the continued shifting of our production and professional printers towards lower-priced printers that are capable of generating comparable materials revenue to our more expensive printers. Second, our ongoing, successful new printer development and commercialization program that resulted in 11 new printer introductions over the past 2 years and some pruning of older printers. Third, the effective way in which we doubled our reseller channels, at 330 resellers at the beginning of 2012 and now, after the Rapidform acquisition, emerged with the channel that is over 420 resellers strong, with significant upside from additional cross-selling, upselling and dealer productivity gains over time. The combined effect of these factors resulted in decisive units growth over the last year and consistent with our plans, printer mix is settling in the middle of our professional range, contributing to record third quarter printer revenue. For the quarter, gross profit improved some 69% over the 2011 quarter to $46.9 million from increased revenue and expanded gross profit margin in all categories. Even with a higher portion of our revenue coming from lower margin categories, we've managed to expand our gross profit margin modestly sequentially and a full 350 basis points over the 2011 period to 51.8%. This increase was driven by a 970-basis-point expansion to our printers and other products gross profit margin to 45.2% and a 340-basis-point improvement to our materials gross profit margin compared to the 2011 quarter. Our printers' gross profit margin expansion continues to benefit from a realigned portfolio which includes more profitable, lower-priced printers that are capable of consuming comparable materials levels to our higher-priced printers, combined with continuous operational improvement and better overhead absorption. For the first 9 months of 2012, gross profit improved some 69% over the 2011 period to $128.7 million from increased revenue and expanding gross profit margin in all categories. Our gross profit margin expanded 370 basis points to 51.1% for the first 9 months, driven by a 510-basis-point gross profit margin expansion from printers and other products, a 490-basis-point gross profit margin expansion from on-demand parts services compared to the 2011 period. And 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 margin improved some 370 basis points from 47.4% in 2010, up to 51.1% for the first 9 months of this year. Our non-GAAP operating expenses increased $7.4 million for the quarter compared to the last year, but decreased to 27% of revenue. For the third quarter of 2012, SG&A expenses increased $5.7 million including a $3.9 million increase in compensation costs primarily from higher commissions on higher revenues and increased operating cost from acquired businesses. Legal cost improved $1.9 million for the quarter, primarily driven by reduced litigation activity and cost. This quarter, we reported that we settled 2 of the ongoing litigation cases and, as I previously mentioned, the settlement are excluded from our non-GAAP earnings. Consistent with our plans, we increased our R&D expenses by $1.7 million compared to the third quarter of 2011, primarily related to activities in support of our expanded portfolio products and services, as already reflected by the number of new product introductions we announced this year. For the first 9 months, non-GAAP operating expenses increased $25.2 million compared to the 2011 period, primarily due to a $15.8 million increase in compensation expenses from higher sales commissions on increased revenue and higher staffing and operating cost from acquisitions. R&D expenses increased by $5.7 million in the first 9 months of 2012 compared to 2011, driven primarily by acquisitions and higher development costs in support of our expanded product portfolio across all categories. As a reminder, we do not capitalize any R&D or other development costs. Rather, we expense those costs as they are incurred. The favorable impact from synergies cost down that we put in place during the first quarter were enough to keep our sequential expenses flat for both the second and third quarters, even with our increased sales and marketing costs from revenue growth, higher R&D expenses in support of new products and portfolio expansion, and the incremental cost we incurred from the acquisitions of new startups that increased our costs without any near-term revenue benefits. We generated $44 million of cash from operations in the first 9 months of 2012, with some $22.6 million generated during the quarter. Our stronger cash generation capacity during the third quarter benefited in part from approximately $10 million timing difference in accrued liabilities which will reverse in the fourth quarter. We ended the quarter with $183.9 million of cash, which is an increase of $4.8 million since the end of 2011. As a reminder, we accrued interest expense each quarter for the Senior Convertible Notes and cash interest is paid semiannually, in June and December. As we have said, although we expect to continue to report strong cash generation from operations, the quarterly amount may fluctuate from period-to-period. Working capital increased by $19.9 million, primarily due to the change in cash and an $18.6 million increase in accounts receivable from higher revenue, and the revenue mix shift towards products sold through resellers and on standard credit terms. Consistent with our expectations, our receivables over 90 days past due, decreased to 8.2% of gross receivables, trending to our expected normal levels after the temporary increase that we experienced from absorbing acquire Z Corp and Vidar receivables. Our inventories increased some $16 million, primarily reflecting the addition of Z Corp and Vidar products, and the timing and concentration of inventory purchases, in support of new product introductions during the first 9 months. Our Accounts Payable increased $0.9 million dollars due to the timing of inventory purchases and vendor payments. So to help you better reconcile our cumulative cash generation capacity, it's worth noting that since September 2009 when we commenced our acquisition activities, our cash on hand increased $160 million after excluding the $317.9 million of proceeds from capital markets transactions and $264.2 million that we paid for acquisitions. Based on our progress, that we've been making, we are raising our 2012 guidance. Despite the incremental rise in R&D and SG&A expenses to support several start-up stage acquisitions that, in the aggregate, are expected to contribute materially to revenue this year. In line with that, management now expects revenue to be in the range of $345 million to $365 million for the full year 2012 and non-GAAP adjusted earnings per share to be in the range of $1.20 to $1.30 per share. Our non-GAAP adjusted earnings estimate is fully tax-effected. It includes management's anticipated incremental revenue and expenditures related to Cubify and the recent acquisitions of Bespoke Innovations, Viztu, TIM and Rapidform, as well as our expected litigation cost, as we understand them. 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. So that concludes my comments. Abe? Abraham N. Reichental: Thanks, Damon. We continue to extend our portfolio, extend our reach and diversify our business model. In support of our rapidly growing printer business, we launched the new ProJet 5000, a large-format professional printer designed for production, durability and productivity, while remaining compact, quiet and easy to use. This new printer offers print speeds twice as fast as its predecessor and prints parts with the highest print resolution available in its class today. The ProJet 5000 comes with up to 8 material delivery modules, enabling configuration for flexible materials management and the longest unattended continuous operation available, over 80 hours. Then, last week we launched VisiJet Jewel, a new specialized material formulated for high-volume jewelry production and designed for use with our ProJet 6000 and 7000 professional 3D printers. VisiJet Jewel enables cost-effective direct casting with unparalleled detailed accuracy and quality and its high-contrast coloring allows for detailed visual inspection of designs and patterns. In support of our consumer initiative, we acquired Viztu technologies, a startup based in Boston with a technology platform for content creation and application development. We also introduced Cubify Invent and several new apps and tools. Cubify Invent is 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 professional design tools with intuitive free tutorials that make learning fun and easy, enabling even beginner CAD users to create and make in 3D, transforming even their most complex designs into 3D printables. In support of our on-demand parts growth initiative, we acquired TIM, a leading provider of on-demand parts services located in the Netherlands. And we also extended our Quickparts technology to Asia Pacific. In connection with our new growth initiative, this one that we mentioned earlier, we acquired Rapidform, 3D scan-to-CAD and inspection software tools. And last week, we were awarded a United States Air Force Rapid Innovation Fund for $2.95 million to transition specialty-engineered SLS materials and machinery into the production of F-35 and other weapon systems. This award is a 2-year joint project that will be recorded as a reduction to our R&D expenses in which we will provide a complete solution for end use part manufacturing capabilities. We believe that the Air Force selected us from the field of other candidates based on our -- on their extensive evaluation and conclusion that we, 3D Systems, have the required technology and manufacturing know-how to transition this capability into production readiness. We entered the fourth quarter with positive sales momentum, further strengthened by our recently acquired Rapidform product and channel. Our September backlog of $9.3 million is well distributed across all our revenue categories, indicating continued strong demand for our entire portfolio. While we may say it's 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 addressable marketplaces for our professional and consumer products and services remain underdeveloped and underpenetrated and we expect continued portfolio diversification, extended channels and focus growth initiatives will deliver continued success. We plan to continue to execute on our strategic initiatives through our combination of organic growth and acquisitions. These are accretive to our business model and deliver meaningful value for our stockholders. Finally, we believe that we are extremely well positioned to monetize the expanding rapid manufacturing and healthcare opportunities in the emerging consumer opportunities. And with that, we will now gladly take your questions. Stacey?

We will now open the call to questions. [Operator Instructions] If you're calling inside the U.S., the number is 1 (866) 356-4441, and if you are calling outside the U.S., the number is 1 (617) 597-5396. The conference ID is 18351731.

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

I wanted to just maybe pursue the sequential trends that you're seeing in the business? In -- on the systems, the printer system side, I mean, you showed very good growth sequentially and I wonder if you could talk a little bit about that, as well as -- geographically, I was struck by the sequential increase that you saw in a couple of the markets that people are a little bit more concerned with -- particularly Germany. And were there some unusual factors that were driving some of the trends on a sequential basis? Or is -- a, does the market just generally that healthy or systems at the moment if you feel you're gaining share? Abraham N. Reichental: Well, we feel that certainly the factors that Damon and I mentioned earlier in our prepared remarks, which include our deliberate portfolio extension, the shifting of printers towards lower priced points, the increased productivity and effectiveness of the combined channel and just what we consider to be a healthy R&D spending environment in all the regions that we do business contributed to increase, a significant increase in printer sales, both year-over-year and sequentially. The overall sequential trend, mind you, was somewhat muffled by summer vacations which, in our case, impact our dental and orthodontics businesses, our motorsports and automotive businesses, motorsports in particular because they have a 4- or 3-week shutdown. It impacts our education business and so forth. So notwithstanding all of these expected seasonal behaviors, we still did pretty well. As to the geographic trends, I'll turn this over to Damon to talk about the strength that we've exhibited in the EMEA countries and in Asia Pacific, because obviously, the U.S. had the strongest growth and that was somewhat benefiting from higher concentration of acquisitions. But Damon, why don't you talk about the rest of the world? Damon J. Gregoire: Yes. We're very pleased with our overall growth rate in all the different regions. Europe was very strong, Germany was the strongest portion out of it all together. But this really just holds together, as what we've said all this year and going into this year, that we believe we're positioned well in our -- our business strategy is positioned well to move along. And my belief, also with this, you asked about market share isn't just a question of are we gaining share within the industry, are we expanding share and adoption? And that's what I believe is happening and what's going on here too. There's still a lot of growth that can happen in the whole industry. I'm more happy with what's happening there rather than saying you're trading market share with different companies.

Your next question comes from the line of Jay Harris of Goldsmith and Harris.

I'd like to talk a little about distributors. If I assume all of your system sales and materials sales went through a distribution, that was -- and you had 330 distributors, that's $170,000 on average. What's the range that, that represents? And do you expect that number, that average number to stay where it is, move up or down as time progresses? Abraham N. Reichental: Well, for clarity, Jay, bear in mind that distributors primarily play a role in our personal and professional printers, not so much in our production printers, which we continue, by and large, to sell directly through our direct sales force. So you would have to, in your analysis there, factor that only the personal and professional printers are sold through distribution. Having said that, in the beginning of the year, we doubled our channel through the acquisition of Z Corp to 330, and we are just beginning to hit stride. It has taken us several quarters to complete the training and orientation and get everybody into a position where they became fully versed. And we're seeing increasingly that the benefit of adding fully complementary portfolio and channel and what that can do and we believe that there's plenty of upside in terms of productivity and effectiveness from the channel. Now, a few weeks ago, we are fortunate to add another 90-some odd resellers from Rapidform, which could also contribute to our overall channel expansion and present additional cross-selling and upselling opportunities. So in a space of 9 months, we have assembled probably the largest channel for 3D content-to-print products and solutions and services that's available today. And we have plenty of upside here in terms of ongoing activities to enhance the productivity and effectiveness, enhance to continue to grow printer sales further in future periods.

Can you give us a rough number as to what the average revenues were per distributor in the third quarter? Abraham N. Reichental: We don't have that available, Jay.

Your next question comes from the line of Troy Jensen with Piper Jaffray. Troy D. Jensen: So I just want to kind of expand on the comment that Damon just said about the growing market here. So historically, 3D printers have been very discretionary, at least they were in 2009. But now you guys are just kind of blowing through it. It's not just you, it's everybody in the industry, it feels like, but can you talk about sales cycles? Are they shortening now because CEOs and executives view this as -- it's critical technology? Or is it just similar sales cycles but more opportunities just because there's more awareness with the technology. Abraham N. Reichental: It's a very good question, Troy, and a very insightful one. And the short answer is it's both. Certainly, increased awareness and accelerated democratization of 3D printers, and by democratization, what I mean is greater utility and simplicity and lower prices, which has been something that we have deliberately done for multiple quarters now, tends to compress the selling cycle, certainly on the personal and professional side and we're benefiting from it, and I think that everybody else in the States is benefiting from it. The second is that, in a post-recession period, particularly for companies that are in the new product development and manufacturing space, which is anybody out there from shoemakers to automobile makers and durable goods and electronics and so forth, they have come out of it with heightened intensity to become better and faster at what they do. And that, Troy, is reflected in the overall R&D spending worldwide. And I think that all of us are benefiting from it, so we're -- up to '09, perhaps 3D printing was a bit more discretionary. Now, it's a must-have tool in everybody's portfolio. And in our case, it's not just 3D printers, it's the on-demand parts, services, it's the authoring tools and platforms that we have which all empower and enable these customers to do their job a little bit better, and I think we're all benefiting for it.

If I could sneak in just another question here. On the service revenues, I'm just being curious, how much you guys are generating from 3D Systems developed content, like the iPad covers, the iPhone covers versus print services from customers that have their own CAD files? Damon J. Gregoire: Yes. The items that were from the iPhone covers and everything sold through our Fresh Fiber division, that's up -- that's actually up in other products. That's not in services. So the services number, that's -- there is the on-demand parts and the print services. Abraham N. Reichental: But the answer, Troy, is that obviously, within our Fresh Fiber and Cubify sales, what revenue that we generate there, we generate from selling the finished item ourselves. In addition to that, we have some content available on Cubify that anybody can download and print. And for that, we just monetize the content, not the printed item, and so that could be printed by others. And the good news is there are many other entities in startups that are also getting into the, what I call, 3D lifestyle and accessories business, and that helps us because these kinds of customers either buy cloud printing formats and sell it themselves or they buy printers and materials and they go into business, and in our mind, that's all good for accelerating consumer awareness.

Your next question comes from the line of James Ricchiuti of Needham & Company.

I was wondering if you have any kind of an early read that you can give us on Cube? Not so much in terms of shipments or revenues, but what is the typical Cube customer like? Are these people that are familiar with 3D printers, are perhaps using them at work and also then buying these for the home? What's -- do you have any kind of color on it? Abraham N. Reichental: We can offer some color on it by way of an early read, Jim, and it's all of the above. We see obviously that the people that are aware of and passionate about 3D printing and use it at work, having now the opportunity to bring it home. We have lots of good examples, even internally to the company because we open this to employees with an employee program and we discovered very quickly that lots of nonengineering functions within the company that never had any access to 3D printing want it at home, including Andy Johnson, our General Counsel, who sits here beaming from ear to ear. Even he has a 3D printer and now, a Cube. But externally, we see it from the tiger moms and cougar dads. We see it from people that are educational-centric. We see it from teachers and educators themselves. We see it from hobbyists and artists. And we also have a thorough participation within the maker market, even though the Cube specifically is not targeting makers per se. And that kind of represents the demographics. And it's very validating and very exciting to us. We've also done, Jim, some experiments in untraditional 3D printing spaces. So during the quarter, we did an experiment in the Benelux at the department store, it's called Bijenkorf. It will be kind of the analog to a Nordstrom's in the United States. And we sold lots of Cubes over a 3-day period in a department store environment. That's very telling to us. Last week, we exhibited in London at the first-ever 3D print show, which was primarily geared for consumers. And we were very pleased that by day 3, visitors purchased everything that we had on display even though our intention was not necessarily to sell any of it. And so what it teaches us is that consumer awareness is increasing and that the mixture that we have between the purchased items, content, apps and affordable printers like the Cube has some legs.

So are you in a position yet, Abe, or you can say whether this new area of the business is going to be meaningful in 2013? Abraham N. Reichental: Well, we will wait until the end of the year just because -- our conservative nature. But I can already tell you that we're very committed to it and it will definitely continue not only in 2013 but beyond. It's an exciting area, it's an area that has lots of legs and we're fairly confident that we're on the right track.

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

One thing that I wanted -- and I don't mean to be the only guy that's playing to something that doesn't look so great, but I mean, we've already talked about everything that's going well. But when you acquired Z Corp and Vidar, the LTM revenue is $58 million. And year-to-date, those businesses have contributed about $40 million. And so the run rate is coming in below, unless the fourth quarter is just outstanding. It's coming in below the $58 million. And I understand that Vidar isn't so much a growth business, but it seems like the decline in Vidar revenue would have to be really severe for us to still be seeing growth at Z Corp. So my question really is, based on all these numbers that you've shared with us around Vidar and Z Corp, is Z Corp growing or is that business declining? Abraham N. Reichental: No, the core Z Corp business is growing. It's important to note that immediately after the acquisition, we discontinued sales of the ZBuilder, which was a private-label arrangement and we also, at the end of the second quarter, discontinued the sales of the ZScanner. And when you take those out, the core ZPrinter business is doing quite well.

Okay. Well, that answers that. I wasn't aware of that. And if you look at on your Slide 7, the growth rates that you provide, so -- and I think I've asked this on past calls, but it would just be so helpful if we could, given all of the acquisition activity, really primarily and almost exclusively Z Corp, understand the breakdown between Z Corp and your core business in terms of these categories, printers and other products, print materials. The 130% increase in printers is a big number and that's great, but it would just be more useful to know what the breakdown is of your ongoing -- your core business. Abraham N. Reichental: Yes. So I think that Damon and his remarks actually addressed that because he, I think, in the case -- or maybe I did. I think gave the comment on what was organic growth in printers, right? Damon J. Gregoire: Yes. Abraham N. Reichental: Hang on one second. Yes, so the answer to your question, Brian, is that on printers specifically, organic growth...

75%. Abraham N. Reichental: Yes, for 9 months, organic growth was 75%, yes. And so if you look at Slide 8 there, which shows you the full 9 months, of the 91%, 75% was organic and the rest came from acquisitions, or am I wrong? So that is -- I'm sorry, yes, so I was -- okay. Sorry, correction. For clarity, we're on Slide 7. For the third quarter, of the 130% growth on printers, 75% was organic.

Okay, great. And how about for print materials? Abraham N. Reichental: I don't know if we have that. Do we? Damon J. Gregoire: So what we did, Brian, too, in my comments, we did comment on the 9 months for everything. For the 9 months, it was 39.8% organic growth for printers. For materials, it was 18.9%, 22.3% for on-demand parts and then other service, other print services was a 9.4% increase. That's for the 9 months. Abraham N. Reichental: And that's only organic, excluding all acquisitions, which obviously would exclude Z Corp and Vidar. Damon J. Gregoire: And that gets to the 24% 9-month earnings growth rate.

Okay. I'll discuss that a little further later with you today, I guess, but the other number that's interesting is the 123% printer unit growth. Did you say what the core growth was in terms of units there? Abraham N. Reichental: No. Damon J. Gregoire: But it does exclude Cube printer units.

I understand that. Can you tell me what it is, excluding Z Corp? Abraham N. Reichental: Not this minute.

[Operator Instructions] And your next question comes from the line of Paul Coster with JPMorgan.

You've clearly benefited greatly from this expanded channel, in particular, the Z Corp channel. I'm getting a number of questions from clients really sort of focusing on whether or not the growth that you're experiencing is in part owing to -- that sell into the channel rather than sell through, meaning that the Z Corp distributors are taking on some product. Can you just comment upon that and sort of ring fence the issue? Abraham N. Reichental: Yes, absolutely. We have been very clear on this for quite some time. Even before we added the Z Corp channel, that the only, if you will, one-time incremental benefit from adding a channel member is the initial 1 or 2 systems that one would take not into inventory but as floor models for the purpose of demonstration, sales and benchmarking activities. To the extent that, that's benefited us in revenue, that has been long exhausted in the course over the first and the second quarter. So in the third quarter, there is really no incremental revenue benefit from any initial reseller or demo room programs.

Will that be true also at the Rapidform channel, or are we going to see another sort of rerun of that benefit? Abraham N. Reichental: Well, it's -- let me again reiterate that in the total scheme of things, it has not been material in any period relative to the units that we move. We expect to see some of it from the Rapidform channel as they gradually come up to speed. It's a one-time event, and we generally are not in a stocking mode with our resellers.

Okay, that makes sense. And then my last question then, you clearly have seen some strength in Asia Pacific. Can you just talk to us a little bit about the nature of the application there? Because I think I know that some or most of your clients anyway in Europe. Asia Pacific has been unfamiliar to me. Is it in the prototyping or manufacturing context, which industry verticals? Any color there would be helpful. Abraham N. Reichental: Well, typically, Paul, our customers in Asia Pacific tend to largely mirror our customers in Europe and in North America and they include automotive customers, they include healthcare customers. There are some larger concentration of jewelry and footwear manufacturing clearly in China, in places like Thailand. We certainly do a great deal with consumer electronics and automotive, both in Japan and now Korea. And so it tends to be the same vertical that are tried and proven in other parts of the world.

Thank you, ladies and gentlemen. We are out of time. I would like to turn the call back over to Stacey Witten for closing remarks. Stacy?

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

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 webcast, investor.3dsystems.com. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.