3D Systems Corporation

Good morning and welcome to the 3D Systems conference call and audio webcast to discuss the results of the second quarter 2021. My name is Donna and I will facilitate the audio portion of today's interactive broadcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question on the phone, you may do so by pressing star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to John Naipavar, Jr., Vice President, Treasurer, and Investor Relations. Thank you, sir. Please go ahead.

Thank you, Donna. Good morning, and welcome to 3D Systems Conference Call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jagtar Narula, Executive Vice President and Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer. 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 on the Investor Relations section of our website. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to pose questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in last night's press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. and our press release and slides accompanying this webcast, which are both available on our investor relations website, you'll find additional disclosures regarding these non-GAAP measures, including reconciliation of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. Now, I am pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Thanks, John, and good morning, everyone, and thank you for joining our call today. You know, when we reported second quarter results last year, our company and the world at large was increasingly gripped in the COVID crisis. No one could foresee how long and painful this situation would become. We were concerned foremost about the safety of our employees and in meeting the ongoing needs of our customers, particularly in the healthcare industry, where focus had rapidly turned to treatment of the victims of the pandemic. While there were to be many dark days ahead, the resiliency of our employees and of our customers sustained and inspired us to weather the storm. We will forever be grateful to our 3D Systems colleagues and to the multitude of frontline workers who struggled each day to take care of the sick, protect the well, and keep our essential services running. It was in this cauldron that our new 3D Systems leadership team was formed, coming together quickly to develop plans, not simply to stem the losses, but to position our company to emerge from the pandemic stronger and more focused than ever, ready to capture the exciting future we saw ahead for additive manufacturing. Our first essential step was to develop a clear purpose statement, which is to be leaders in enabling additive manufacturing solutions for applications in growing markets that demand high-reliability products. We then executed a four-phase plan to enable this vision, reorganize into two business units, restructure to gain efficiencies, divest non-core assets, and invest for future growth. Our results since that time have shown consistent, steady progress, first with a return to growth and profitability by Q4 of last year, and then continued momentum this year, which carried us in Q2 well beyond 2019 second quarter levels, an important pre-COVID benchmark for all companies to measure themselves against. Looking specifically at this year's second quarter results, given the difficult environment of Q2 last year, it's no surprise to see exceptional rebound in revenue, profitability, and cash performance. When adjustments are made for divestitures, which we then refer to as our organic performance, our top line grew almost 60% year over year, and EBITDA by a whopping 650%, to a level of 12.4% of revenue for the quarter. Jagtar will review details for you in a few moments. In addition to the usual year-over-year comparisons, two additional reference points are helpful in understanding our business momentum. One is our consecutive quarter performance, which reflected revenue growth of over 11% in Q2 versus Q1 of this year. The second reference point, and perhaps the one that's most compelling, is to our pre-pandemic performance. If we compare Q2 of this year to the second quarter of 2019, our organic revenue grew 11.4%, which reflects true acceleration in the adoption of additive manufacturing and the effectiveness of our intense focus on select market verticals and applications. From a cash perspective, I'm very proud of the team's ability to manage the business efficiently in this rapidly changing environment. which resulted this quarter in the generation of over $13 million of operating cash flow. This allows us to make critical investments needed to support the exciting growth opportunities that we see ahead. So reflecting on the overall state of our business, from a strategic positioning standpoint, our combination of global scale, industry-leading breadth of technology across metals and polymer platforms, and our consistent financial performance has now combined to differentiate our company from and positioned us well to be a partner of choice to leading OEMs in healthcare and industrial markets. Turning then to our divestitures, in order to improve our focus and greatly enhance our ability to invest in exciting growth opportunities, we've moved aggressively over the last year to divest non-core assets. In June, we announced an agreement to sell our on-demand parts business. This business focuses on the rapid production of components using additive and subtractive manufacturing methods which, in addition to having divergent business metrics from our core focus, often put us in conflict with other service bureaus, which is an increasingly important market for additive technology. So this sale not only increased cash for investment, but increases our available market for future sales. More recently, just after quarter end, we announced the planned divestiture of Symbionics, our medical simulation business. This is a very good business and one that does not align with our core focus on additive manufacturing. By selling it to a strategic buyer, we created a sustainable leader in medical simulation while delivering to us significant cash for future investment in our core, a true win for all stakeholders. In executing these divestitures, it's important to note that we have now completed our plan to exit non-core businesses. The proceeds from these sales will leave us in a strong position with a cash balance of roughly a half billion dollars and no debt. We now move forward with strong organic growth and profitability at both the gross margin and EBITDA margin level, positive operating cash flow capable of sustaining the investments needed to meet increasing customer demand, and plenty of dry powder on our balance sheet for additional growth investments. I again want to thank all of my colleagues at 3D Systems. We've worked so hard in executing our business plan, which has successfully reinforced our leadership position over what's been an extremely challenging 12 months. As we near completion of our divestiture efforts and our momentum accelerates in both of our business units, we turn to the future and have begun making investments for continued growth and profitability. Over the last several months, we announced plans for the expansion of our facilities in Rock Hill, South Carolina and Littleton, Colorado. In addition, we recently announced the creation of a new executive leadership role, Chief Technology Officer for Additive Manufacturing. The purpose of this role is to drive organic growth by expanding and accelerating application development and product innovation, including all hardware, software, and materials development for production scale additive manufacturing solutions. I'm pleased that Dr. David Lee joined the company in this capacity. David's been a pioneer in additive manufacturing with more than 30 years of experience in the industry. With this new role, we're accelerating our investments in people, processes, infrastructure, and technologies that position us for future growth and profitability. 3D Systems has tremendous potential to revolutionize markets through the enablement of production scale, additive manufacturing, and delivering breakthrough innovation is essential to achieving this vision. We're very fortunate to have David join us on this exciting journey. Before I continue, I'd like to offer an example of how our application focus is driving our development efforts and translating into accelerated growth opportunities for our business. As many of you might remember, over the last few years, we developed a new printing platform called Figure 4. It's a DLP-based technology that opened up new and exciting applications for polymeric components. Central to Figure 4's success is the availability of new polymer materials that offer a customer attractive performance characteristics. To this end, over the last year, we've expanded our investments in photopolymer development, targeted towards specific applications and market verticals. As an example, for the automotive applications, a key relationship was established with Toyota Gazoo Racing, where our joint teams focused on a new figure four material called Pro Black 10. This was successfully introduced for racing applications, but our work did not stop there. Looking to expand to larger component sizes, we worked with the Toyota team to modify the material and process for broader SLA application. This work has now led to the introduction of a new material called Acura AMX Rigid Black, a material that has excellent mechanical and environmental performance, along with automotive quality surface finish, and can be printed economically in large SLA formats that deliver tremendous productivity improvements over competing production processes. Moving forward, this material will provide application solutions well beyond automotive, such as consumer goods, service bureaus, and specialty contract manufacturing markets. It is this combination of materials, printing technology, and software focused on specific breakthrough customer applications that's at the heart of our organic growth engine. And finally, before I close, I'd like to comment on an area that I am particularly excited about for our longer term future, and that is regenerative medicine. One of the key reasons behind Dr. Lee's appointment as our new CTO for additive manufacturing is that it allows our co-founder, Chuck Hall, to focus increasingly on our groundbreaking biotechnology efforts as our chief technology officer for regenerative medicine. As we've stated before, our partnership with United Therapeutics is central to our combined efforts to print human organs, beginning with a human lung. These efforts are by any measure extraordinary, and we look forward to updating you on progress at some point in the future. Building upon this core development program, we are accelerating our efforts to bring to develop and bring to market other non-organ human applications for the body. Just as with our existing healthcare business, this extension of 3D printing into other human applications involves the combination of new tailored materials, very high precision printing technologies, and customized software solutions. In addition to being printable, the materials used in these applications must meet very specific requirements, including physical and mechanical properties as well as having biocompatibility characteristics to limit or even eliminate the risk of rejection in patients. In this pursuit, we're partnering with other firms that can bring specific technology or application know-how that can move us ahead more quickly. One such partnership that we announced this quarter is with Coal Plant, a biomaterials company that brings unique expertise in plant-derived RH collagen material. One application of this material that we are focused on as its use is printed soft tissue matrices for breast reconstruction procedures. Today, these soft tissue matrices are most often derived from human cadavers or even animal sources, which have limited supply and complications driven by incompatibility with the patient. A biocompatible collagen-based matrix could potentially address these issues and improve patient outcomes for those needing breast reconstructive surgery following cancer treatment. This is only one example of the rapidly emerging range of human applications that we're excited about as we expand our technology base and application expertise for regenerative medicine. There will be many more to follow. A natural extension of our efforts in this area, enabled in part by our recent acquisition of a levy, is our move to support academic and other research laboratories that are studying the fundamental science of regenerative medicine. From this foundation, for which Alevi has a presence in over 350 research labs around the world, we're increasingly excited about the potential of pursuing applications in the pharmaceutical market where printed, customized three-dimensional tissue samples can be used for advanced drug therapy development. The ability to print specific three-dimensional tissue specimens representing either healthy vascularized cellular structures or even tumorous tissues offers the potential of enabling tailored experiments for drug development, which could shorten time to market and improve patient outcomes. While these investments will take time to bear fruit, with our strong foundation in healthcare, which now comprises over half the company's revenue, and key technology partnerships that we're now establishing, we believe we are well-positioned to play a leadership role in this emerging field of regenerative medicine. So to summarize, having executed our four phase plan launched last summer, we're now a company exclusively focused on additive manufacturing. With industry leading scale, the broadest range of metal and polymer technologies, all linked together through a strong application focus with customers that are true leaders in their market. The success of our approach is reflected in our financial performance, where we've consistently delivered the strongest top and bottom line performance in our industry. From a balance sheet perspective, After the close of our remaining divestitures in Q3, we expect to have approximately a half billion dollars of cash on our balance sheet to support the exciting future we see ahead. With this investment capital, we're increasingly looking for strategic investments that will add to our scale and technology portfolio in a systematic and disciplined manner. With that, let me turn the call over to Jagtar, who will now describe our second quarter results in more detail. Jagtar. Thanks, Jeff.

Good morning, everyone. For the second quarter, we reported revenue of $162.6 million, an increase of 44.1% compared to the second quarter of 2020. Our organic revenue growth, which excludes divestitures completed in 2020 and 2021, was 59.3% in Q2 2021 versus Q2 2020. As Jeff discussed earlier, Q2 2020 was heavily impacted by the COVID pandemic, which makes year-over-year comparisons less useful. We believe that comparing revenue to Q2 2019, which was prior to the COVID pandemic, is informative. Compared to Q2 2019, our organic revenue, again, adjusted for divestitures, was 11.4% higher in Q2 2021. We were also pleased with our quarter-over-quarter growth following a very strong first quarter this year. we had double-digit quarter-over-quarter growth of 11.3% driven by strong demand in new hardware purchases as well as growing material sales as printer placements are resulting in strong recurring revenue streams. We reported a gap loss of $0.08 per share in the second quarter of 2021 compared to a gap loss of $0.33 in the second quarter of 2020. Turning to non-gap results, We reported non-GAAP income of $0.12 per share in the second quarter of 2021 compared to a non-GAAP loss of $0.13 per share in the second quarter of 2020. The year-over-year improvement reflects a significantly higher revenue I mentioned earlier with improved gross margins and lower non-GAAP operating expense. Now I will discuss revenue by market. Healthcare grew 68.6% year over year and had double digit growth of 14.2% compared to what was a very strong first quarter. We saw solid growth in all our major categories with growth in products and services and even higher growth in materials, which is a key high margin recurring revenue stream for us. Demand in dental applications remains robust, And we also continue to see increased demand for personalized health services and advanced manufacturing of medical devices, as evidenced by the 15.5% quarter-over-quarter growth in our non-dental segment of healthcare that we call medical applications. This performance validates our application focus, which combines our application engineering capabilities with customer needs to develop high-reliability parts. produce those parts through our advanced manufacturing centers, and then help the customers scale up and produce parts on their own. This process is on display every day at our Littleton, Colorado facility, where earlier this year we announced an investment to expand the company's application development capabilities for both healthcare and industrial by adding 50,000 square feet of facility space, additional application expertise, and new additive manufacturing technologies. Shifting to the industrial segment, industrial revenue was up 25.3% year-over-year and 49.6% when we exclude the businesses divested in 2020 and 2021. We spoke last quarter about industrial revenue being in the midst of a turnaround from the economic slowdown due to the pandemic. We saw this turnaround accelerate in the second quarter. After seeing a return to growth in Q1, Industrial continued to rebound in Q2, growing sequentially 8.3% as compared to the first quarter of 2021. The performance of our industrial segment reflects the continued market rebound combined with organizational enhancements that we have implemented as part of our reorganization and restructuring efforts. These enhancements have resulted in reduced internal friction, a more holistic view of our customers and pursuits, and improved sales efficiency through a segment-oriented approach. Our improved model is evidenced by the sale of a record three of our flagship Factory 500 metal machines this quarter, which were sold into the aerospace and transportation segments. While the last two quarters have seen good growth from solid execution combined with improving macroeconomic conditions, we continue to see challenges that could impact economic performance. including new variants of the COVID virus, inflation concerns, and continuing supply chain shortages. In regards to this last item, we have begun to see tightening of costs and availability for certain components that go into our products. Our team continues to manage through the issues, and we remain positive about the second half, but we see this as a potential headwind as we move through the year. Now we turn to gross margins. We reported a gross profit margin of 42.4% in the second quarter of 2021 compared to 31.2% in the second quarter of 2020. Non-GAAP gross profit margin was 42.4% compared to 41% in the same period last year. When compared to the first quarter of this year, gross profit decreased from 44%. This sequential decrease was primarily the result of non-recurring write-downs related to equipment and inventory impacting margin by approximately 140 basis points. Even with this non-recurring charge and announced investors, we continue to expect non-GAAP gross margins in a range of 40 to 44% for 2021. Operating expenses for the quarter were $79.1 million on a GAAP basis an increase of 14.5% compared to the second quarter of 2020. This year-over-year increase is primarily related to higher stock compensation expenses, including higher expense for employee bonuses that are tied to the strong performance of our business. Our non-GAAP operating expenses in the second quarter were $55.2 million, a 3.3% decrease from the second quarter of the prior year. Compared to the first quarter of 2021, non-GAAP operating expenses increased 7.7% as our focus turns to growth and we invested in our operational infrastructure, which will allow our people and systems to better absorb the growth as strategic investments are made. Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $20.1 million, or 12.4% of revenues. compared to a negative $3.6 million or a negative 3.2% of revenue in the second quarter of 2020. Compared to the first quarter, adjusted EBITDA margin is slightly lower, driven by the investments mentioned earlier to improve our corporate infrastructure and support future growth. Now, let's turn to the cash flow statement and balance sheet. Cash on hand decreased $600,000 during the quarter. This decrease was driven primarily by acquisition costs of $10.9 million and capital expenditures of $4.3 million, offset by cash generated from operations of $13.5 million. We ended the quarter with no debt and full capacity on our $100 million undrawn revolving credit facility. We were quite pleased with our continued strong generation of cash from operations, which, as mentioned, was $13.5 million. This compares favorably to cash used in operations of $18.7 million in Q2 2020. Our strategic reorganization and cost management have enabled this extremely positive turnaround in operating cash flow. Before I conclude my commentary, I would like to provide additional detail on the expected impact of our two recently announced investors. the on-demand parts business, and symbionics. We expect both deals, which will be the last of our planned divestitures, to close in the mid-third quarter, after which they will no longer be included in our results. On a quarterly basis, these combined businesses generated approximately $25 million of revenue per quarter and non-GAAP contribution margin of approximately $5 to $6 million per quarter. So, what will we look like when these divestitures are complete? From a strategic standpoint, we will be a company with a singular focus on additive manufacturing, an exciting and fast-growing industry driven by both healthcare and industrial markets worldwide. We will go forward as one of the largest and best-known comprehensive providers of additive manufacturing technology, comprising the broadest range of polymer and metal printing platforms in the industry. a market-leading materials portfolio, and an extensive suite of software to enable large-scale, efficient conversion of electronic component designs to finished products for our customers worldwide. From a financial standpoint, following the completion of our divestitures in the third quarter, we will have the strongest financial profile in our industry. We will be a roughly half-billion dollar revenue profitable company with strong cash generation from operations and an outstanding balance sheet with approximately $500 million of cash and no debt. This profile is unique in our industry and positions us well to invest in exciting organic growth, including expansion of our development infrastructure and technology teams, having unique talents that are demonstrating daily new applications of this exciting manufacturing technology for our customers the world over. We are also in an excellent position to execute on strategic growth opportunities that will support our long-term objective to reach sustainable double-digit revenue growth, gross profit margins of 50%, and adjusted EBITDA margins of 20%. We believe that with our focus, scale, profitability, and balance sheet, we are very well positioned to continue to succeed in this exciting growth industry of additive manufacturing. Finally, I wanted to provide an update on our Investor Day event that we have scheduled for September 9th in the Denver, Colorado area. As many of you know, we are seeing a rise in cases of COVID infections primarily related to the Delta variant. This has created uncertainty in the ability of some interested parties to travel and to attend in-person gatherings. Out of an abundance of caution for the safety of our investors, analysts, and employees, we have decided to postpone our Investor Day event. We plan to reschedule to a later date this fall, and our preference is to continue as an in-person event, depending on the trends of the virus variant, the vaccine rollout, and new guidance from public health officials. We will provide an update as soon as possible and look forward to sharing our long-term growth strategy in more detail with the investment community. With that, I'll turn the call back to Jeff.

Jeff? Thanks, Jagdar. The last 12 months are now behind us, and I truly believe the next 12 months can be the best this company has seen in its history. Financially, we are arguably the strongest company in the space, which means we're the best position to take advantage of accelerating adoption of additive manufacturing. We'll use our balance sheet to drive growth in our core business and a keen focus on driving recurring revenue streams. We'll be deliberate in searching for strategic investments that will support the core business we built. We'll now take your questions. Operator?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to register questions at this time. Our first question is coming from Ananda Barua of Loop Capital Markets. Please go ahead.

Hi. Good morning, guys. Thanks for taking the question, and congrats on the ongoing solid execution. Thanks, Amanda. Yeah, you're welcome. It's good to see it, you know, sort of clicking, continuing to click all together. I guess just one for me, you know, I guess maybe a couple parts, but all related. How do you guys see the organic growth profile going forward? And, Jagtar, you sort of referenced double digit and and getting to that but just any context around how you see the organic growth profile going forward and what the key action items you know and milestones are to uh to achieving that and then just as as you know sort of like an additional part to that you know what what could also happen to allow you to exceed that so that's it for me thanks

So I'd say I want to nod to thanks for that question. That's very thoughtful. And I'll comment and I'll leave it for Jagtar if he wants to supplement as well. So, look, we adopted a very specific business model a year ago, and that model is really working well for us. I mean, we're extremely application focused in very specific markets. And clearly health care is tremendous. I mean, we've got a lot of expansion capability there. And industrial verticals are becoming increasingly attractive across a number of them. So there's plenty of room to hunt, and that horizon's expanding every day as businesses reopen, and they're reopening, Ananda, with new concerns and paradigms about their supply chain. I think you see this broadly as folks are nervous, and you see the rise of the Delta virus now, right? We're having the same conversations of last year of, gosh, where will we make parts? How do we get them in? How do we get them in? This is our customer conversations. Well, additive manufacturing can address a great many of those concerns and offer higher performance parts, whether it's for human application or industrial markets. So their willingness to experiment, to try new applications, to come in and work with our application engineers, their appetite for that is up tremendously. And as the economy reopens on the industrial side and healthcare continues to grow, I think we see no end in sight for that. I think the adoption of production scale, industrialized additive manufacturing is here, and it's going to really take root and grow from here. So that's a comment I'd say for the entire industry. For us specifically, I think our business model is somewhat unique. We really focus on on finding the right customer and exciting market verticals and really demonstrating exciting applications. I'll give you an example, Ananda, of what's been really terrifically exciting is in the semiconductor manufacturing industry. We pioneered some applications with one of the leading providers of semiconductor manufacturing equipment over the last couple of years. We've really accelerated that in the last year. as there's been a chip shortage and there's more demand for new machines. Our customers are investing more R&D dollars, development dollars for new manufacturing platforms, and they're pulling on the best attributes of additive manufacturing to help get them there. A lot of that is around heat transfer control, extending the thermal stability of the equipment so you can print very fine detailed semiconductor chips. That's just one example, but there's a window of embracing now additive manufacturing that's really exciting. So the punchline from a growth rate perspective, if you look at our Q1 to Q2, probably the best reference point you have is Q1 to Q2. You know, again, if I remember the numbers correctly, Jagtar, from your portion of the dialogue here, we were about mid-teens in healthcare growth, and we were nearing double digits on industrial, actually, high single digits. And I think, Anandi, you're going to see that momentum continue. I think in healthcare, the ability to customize product for implants is is really attractive. It improves patient outcomes. It reduces the cycle for healing, for getting patients out of the hospital. It improves the performance of parts for their rehabilitation often, at least in skeletal applications. and other med devices. Dental is talked about a lot. I mean, clearly we have a lot of momentum in the dental area as well, and that's continued to expand. Industrial, I think you'll see it take root broadly in many verticals. So I would expect the growth momentum to certainly continue, and there's a lot of opinion about what the whole industry will grow at. You know, people talk about, you know, mid to high teens, even 20% plus. whatever that overall industry growth rate is, I think we'll certainly be able to mirror that ourselves and hopefully in the most preferred markets so that we also get not only volume leverage, but some gross margin improvement from being in the really difficult parts of the market. So again, I would say in the long term, it's a strong double-digit growth business. Gross margins are in the low 40s today. We see those going to 50% plus in the future. Due to business mix, health care is clearly growing faster than industrial, but industrial will grow. And then you'll see us, by running a good business, get a lot of that to the bottom line and generate strong cash performance for future investments. So that's the model. I'm thrilled that we're finished with our divestitures. Those are difficult things. We've got to still close them out here in Q3. But it leaves us just in a great position from an organic momentum standpoint with a lot of dry powder on the balance sheet. So long-winded answer to your simple question, but somewhere in there, I hope you found an answer.

Yeah, no, that's super helpful. I appreciate it, guys.

Thanks a lot. Thanks.

Thank you. Our next question is coming from Greg Palm of Craig Hallam.

Please go ahead.

Yeah, thanks. Good morning. Congrats on the good quarter as well. I guess just kind of starting off, it sounds like it was pretty broad-based, but wondering if there is a certain end market, certain geography that you want to point to that maybe caused a bulk of the upside in the quarter.

I'll let Jagtar comment on the geographics there. Certainly, in the past, the U.S. has been opening faster than Europe, so it's been a better market for us. And the healthcare business obviously is growing leaps and bounds. And again, dentistry is strong. We're also seeing really nice growth, as Jagtar mentioned, 15 plus percent consecutive quarter growth in non-dental medical markets. And it's the same reason I just mentioned, Greg. Doctors are really starting to appreciate, and our channel partners, the ability to customize implants for procedures. and take advantage of that. They're very economical to manufacture and make, and they improve patient outcomes. And that's just terrific. So healthcare has been growing faster than industrial. Industrial overall is probably a bigger end market and has more potential for long-term growth, and it's coming back very nicely. But I certainly wouldn't underestimate healthcare. It's going to continue to grow. Jack, do you want to comment on the geographic?

Yeah, Greg, the The Americas were about 60% of our system sales this quarter, a little higher than historical. So I would say it's a little bit stronger than the Americas probably due to the reopening of the economy here faster than we saw around the rest of the world. So that was one big difference. And I think Jeff commented on, you know, the healthcare versus industrial healthcare group quite strongly. You know, we were actually pretty pleased at the medical applications that, you know, grew faster than the overall healthcare number. So it was nice to see that balance and growth in healthcare.

Got it. Okay, that's good color. Maybe sticking on the healthcare segment, you're clearly focused and excited on this regenerative medicine opportunity. I know there's a pretty successful, I think it's publicly traded, but Swedish company. But I don't know, can you give us a little bit more color on that? what you think the size of this market is, could be your competitive positioning, I guess if successful, how do you envision revenue ramping over the coming years?

I would tell you, Greg, honestly, it's very hard to put numbers to, but it will be a substantial market over the years. And it's certainly a nascent market that's evolving because only now do you have really the three elements coming together for printing the materials, the hardware and the software. But it's really being demonstrated more and more quickly, Greg. And then you have to obviously get through all the government-required approvals in the U.S. and Europe as well to actually have a successful product. But we are tremendously excited. And so our strategy has really evolved pretty quickly over the last 12 months. We started out on the most difficult end of the spectrum, working with United Therapeutics on human organs. And that's really the brass ring. That is the ultimate goal is the ability to print replacement human organs because, as you know, and probably everyone knows, there is a huge shortage of, you know, lungs, livers, kidneys, other organs that fail over time. And some people, there's a huge shortage of those. And unfortunately, the supply chain is really related to to the availability of an organ from someone who's deceased. And so it's a very difficult process today. There's many shortages, and unfortunately, many people die waiting for organ transplants. So we're heavily focused on that. It's certainly the largest market and the most exciting market in the long term to be in, But as you go toward that market, there's a lot of spinoff technologies that are really exciting as well and can improve the quality of life for people. Soft tissue implants is just the start of it. We announced our cold plant partnership to make these matrices for breast reconstruction for women that have had cancer treatments and mastectomies associated with them. So it's an exciting application. I would tell you there's tens of those, Greg. I mean, there's a lot in the works. We're identifying more partnerships to form around those now that we have the base technology for printing. And you have to customize it for different materials and make sure you have the software support for it. But those are going to roll out increasingly, not in the near term, but over time. And then moving beyond that, we were so excited about those markets, but we wanted a shorter term market, if you will, to also go after with that base technology. And that's moving into the laboratories. And we started, that was the basis of the Alevi acquisition. We did this small acquisition that we did around the Alevi group that had very good printers for research labs. And they were present in over 350 labs around the world. And those researchers that they were selling to were studying regenerative medicine. So we moved in that direction. We're going to expand that presence. And then we're very excited moving beyond that about the pharmaceutical industry because if you look at pharmaceutical labs, their whole value play is trying to get drugs developed that are useful as quickly as possible. And you saw this in the COVID case here the last year, the remarkable progress those guys have made. So we want to play in those labs. where we can, again, provide printers and consumables to help in the development of drug therapies more quickly. I would not call any of those short-term markets, Greg, and they're all developing. They may be tens of millions of dollars today. They will grow to be hundreds of millions and billions over time, but it will take time. And again, you've got to have a very focused approach around specific applications, which is really our hallmark. That's what we do. So over time, you'll hear us talk about human organs. You'll hear us talk about other body parts, if you will, other implants. And then you'll hear us talk about laboratory, the laboratory setting for regenerative medicine. I am tremendously excited about it. I think it will add a whole new growth vein onto this company, but it will take time to develop.

Yeah, sounds pretty interesting. And I guess just last one. So post-close, $500 million of cash on the balance sheet puts you in a very different position relative to where we were a year ago. So how do you approach capital allocation, strategic investments? I know you called that out, but what are your overall thoughts going forward?

Well, that's a great question, Greg. So there's two veins to that. One is supporting our current customer base, our growing customer base with organic growth activities. And there's more and more need for application expertise provided as a big demand from our customers for that. So that really is why we're investing in our footprint out in our medical facility in Littleton and here in Rock Hill, South Carolina. We're expanding that and the activity here in South Carolina is in part for materials development, polymeric materials development, photopolymers and production. So that addresses our organic growth needs. We'll continue to make those investments over time. It's not an enormous amount of capital, but you have to systematically do it. As we have divested businesses, we're now looking at ourselves as becoming a very attractive platform company for continued consolidation in the industry to leverage. There's a lot of innovative folks that try to get in this industry with either printing platforms or very specific materials. There's a lot of room for consolidation of that kind of expertise. And we want to make sure we have the right platform for that. So we are investing some money in our basic platform, our basic infrastructure, IT, finance, all of that to make sure that if we did participate in that, that we could integrate a company very well and move forward. So we've been doing some of that. We'll do more of it. And then more broadly, obviously, there's continuous innovation in this industry. We are the largest player in the industry. So scale is always helpful, additional scale. But for us, it's probably more around technologies. And there's three of them. There's printing, there's materials, and there's software. So those three will encompass our focus. And I would again come back, Greg, to biotech. I just think I think the next horizon for additive manufacturing, there's an enormous runway for current applications in both industrial and healthcare. But when you look out past those, there is a whole new horizon on biotech for printing. And I'm really excited to be making, to position ourselves well for that market as well. So hopefully from our shareholder standpoint, investors, You get very short-term, you know, good short-term benefits by growth in the existing markets and the adoption of additive for healthcare and industrial, and then you provide a long-term value play in the biomedical space, biotech space with regenerative medicine. Does that make sense?

Yeah, all good. I appreciate all the insight. Thanks. I'll hop back in queue. Thanks, Greg.

Thank you. Our next question is coming from Sarkis Sabatchian of B. Reilly FBR. Please go ahead.

Good morning and thank you for taking my question here. So first question just really revolves around the revenue from divestitures that's called out for both fiscal 19 and 20 on the bottom of the release. I think it sum totals to let's call it a range of you know 40 to 50 million dollars on the year but you know in the prepared comments I think you mentioned the quarterly run run rate of the revenues from divestitures are 25 million. So that adds up to a hundred million. So just wanted to get a sense if the revenues, um, called out in the press release for were from Gibbs cam, Symmetron, um, and, and the other revenues that you called out in the earnings deck, um, is that for the businesses pending divestiture and three Q. Yeah, circus.

You've got that exactly right. So what's, what's called out in the release. is to reconcile to organic growth so those are only the acquisitions that have have already closed or sorry the divestitures have already closed which is gives cam simitron and a couple small uh divestitures that we did uh did last year uh od our odm business in in china and australia uh and that's the the 40 to 50 million dollars that you're referencing of revenue The $25 million I referenced in my prepared remarks are for the divestitures that we have not yet closed. That's the on-demand parts business and the symbionics business. And we expect that to close midway through the second quarter at some point, or sorry, third quarter at some point.

Okay. So just to use some crude math here, you know, if I simply take the some total of the 19 as a, as a baseline, right. Um, X, the divestitures and then remove about a hundred million bucks in top line, I get to about $500 million or so in, in let's call it pro forma top line. Um, we should grow the business from that point forward and then kind of take your margin range of, I think you said 40 to 44% still, um, and, and kind of work with that. Correct.

Yeah, that's absolutely correct. I think I mentioned in my prepared remarks that we would expect to be, you know, on the order of $500 million revenue company post-investors profitable. And so I think you've got exactly right.

Okay, great. And just one final one for me, you know, from a CapEx perspective, I know you're kind of reinvesting back into some of these interesting drivers for future growth. Any revisions or any kind of outlook you can provide us for capital expenditures this year and next? Thank you.

Yeah. So I've said in the past that we expect CapEx about 4% to 5% of revenue. I'm still holding to that number. Our CapEx spend for the first half was actually a little bit lower than I expected. We've approved a number of CapEx projects, but I think they've been slower to start. so that, you know, I still expect that 4% to 5% of revenue range.

Thank you.

That's all for me.

Thanks, Sargis.

Thank you. Our next question is coming from Wasmi Mohan of Bank of America. Please go ahead.

Yes, thank you, and congrats on the strong execution. I was wondering, you know, both of you spoke about the momentum in the business. As we think about Q3 and Q4, can you give us some sense of whether we should expect seasonal or higher or lower than seasonal as we think about these quarters when adjusted for the divestitures? And I will follow up.

Hey, Wamsi, this is Jack. So, yeah, I would expect, you know, our normal seasonality going into Q3, you know, with some of the headwinds that we've talked about in supply chain, you know, you might say it's a little higher than normal, but sort of in that normal seasonality range, we I think typically see, you know, 4% to 5% declines from Q2 to Q3, and I'd sort of expect in that range, plus or minus.

And that's ex-divestitures, correct?

That would be ex-divestitures, yes. Okay. I mean, that would be not factoring in divestitures, so I would look at, you know, that seasonality and then take off divestitures from there. Oh, okay.

Okay. And then can you talk about the write-offs that impacted gross margins? You called those out, equipment and inventory. What specifically are those? And when I look at your gross margin guide of 40 to 44, I mean, you guys have been doing sort of in the middle of that range pretty steadily over the last couple of quarters. As we look forward to the back half of the year, any reason to think that you know, there is even a possibility of going down to that low end of the range for the year. It just feels like that would mean significantly lower margins. So just are you trying to signal anything about the margins in the next two quarters that is abnormal? Or, you know, is that inclusive of the impact of the divestitures? Thank you.

Yeah. So let me address three parts of your question. So the first one on the write-offs in the quarter, So we had a couple of what I'd call kind of legacy items. One was a powder management unit for one of our metals printers that was developed back in 2019, or 2018, I believe it was. We've since introduced a new, better unit. We had some issues with the older one. So we had a number of these in inventory that were largely unsellable. So we wrote that off. We also had One of our early factory 500s, it was the first one that we produced some issues with it because it was the first one. And as a result, we had a write-off associated with that piece of equipment. So that's why I called them both non-recurring. These were both older pieces of equipment, stepping back to, I think, 2018. And so combined, as I mentioned, is about 140 basis points impact to the margin. For the rest of the year, I mean, you heard our guidance. We're not trying to signal anything for the rest of the year. We don't expect, we're not seeing anything that we expect from a write-off standpoint. We expect the business to continue kind of as it has, but we're holding to our sort of guidance range On the specific impact of the divestitures, you know, I will say that the divestitures, when combined, are slightly above, from a gross margin standpoint, are slightly above the guidance range that we've given. So that will push us down a little bit. You know, a half-pointish impact, 50 to 100 basis points is what we're expecting.

Okay, thank you so much.

Thanks, Robert.

Thank you. Our next question is coming from Noel Dilts of Stiefel.

Please go ahead.

Good morning, Noel.

Can you hear me? Hi, sorry. I had a problem getting off mute. Thanks, and again, congrats on the nice quarter. So I understand it may be difficult to put numbers to this, but just given... the strong revenue growth in the quarter, you know, are there any metrics or any ways that you're kind of trying to measure how much of what you're seeing in terms of your strength is recovery in the market or with your customers, you know, versus some of the benefits of the strategic efforts you've been undertaking, like realigning the sales force?

Yeah, we actually, we have that discussion internally a lot. And while it's, it's interesting when you're coming out of a difficult period like COVID it's, you know, every company should have a tailwind, obviously, on that. But this was the first, it was very interesting this quarter. This was the first quarter where we look at it and say the tailwinds, the big benefit of the tailwinds should kind of be subsiding and we can finally see some of the fruits of the focus, you know, and try to figure out what is actually being driven that's new growth by the focus. Clearly, all in all, coming out of just the depths of COVID, there is a much broader adoption attitude, if you will, among customers of additive manufacturing for the reasons I mentioned. It's supply chains have become very risky. And you see that as an ongoing issue for most companies. They're looking for new ways to make parts closer to home with more assurance. And that's so beyond COVID. And this was an important quarter for that. Because we surpassed our 2019 sales number quite substantially. You say, what's driving that? Well, there's a couple of things. Number one is, you know, I like to think we're executing very well. Our model's working with customers coming in with a strong application focus. I think the model is right. And I think their receptivity to adopting additive is really strong. So I think we're selling into a customer base that's excited about additive. And I think we've got just the right business model right now to take maximum advantage of that. And you see the net result of that reflected the numbers. I was particularly pleased with the consecutive quarter growth and the comparison to 2019. That 11% growth over 19, I think, honestly, I think that shows that the model's working. And customers are very receptive to additive right now as it moves into a true production environment.

okay great thanks um very helpful and then on the you know on the printer side just given your broad portfolio i'm just curious if you could you know point out any particular uh areas or lines of strength and even if there are some notable trends in terms of what you're seeing across um metals versus plastics yes i it's very that's another good question the i've been particularly pleased i would tell you on the metal side metals

Metals is really doing quite well in terms of customer interest, volume growth. Both our 350 unit and now our 500 unit. As Jagtar mentioned, we had three incremental sales on our factory 500, which is our largest, kind of our flagship metal product now. And the 350 is doing very well. So we're really pleased on the metal side. And it is customers that have shown interest and are now going – You know, as the applications are demonstrated in oil, they're going firmly in this direction where they say, okay, I've made a variety of parts now that really bring me performance benefits. I understand the workflow and the cost impact. I'm in. And they're placing orders for those machines. But also, excitingly, on the polymer side, the better we do on developing materials, especially in the photopolymer area, from a performance, a toughness perspective and surface finish, And the better we can use our software to densely pack printing chambers, the more these polymer systems are in demand. And I am extremely excited also about our polymeric work. It's really good. The work on SLA and DLP with these new photopolymers, but a lot of the magic there is in having the material and then integrating it with the process. So the printer itself is important. But I cannot understate the importance of the print process in conjunction with the material. Getting that combination right is extremely valuable to our customers. And then obviously the photopolymer area has been instrumental in helping us in our regenerative medicine efforts as well. So having that core expertise is very beneficial there. And again, you'll hear more about that in the years to follow.

Perfect. Thanks so much. Thanks, Will.

Thank you. Our next question is coming from Paul Chung of JP Morgan. Please go ahead.

Morning, Paul. Hi. Morning. Thanks for taking my question. So on the top line front, can you give us a sense of kind of materials versus systems mix? You mentioned, you know, higher growth in materials in the quarter in healthcare. So should we start to see materials kind of accelerate over the next couple of quarters and you know, some upward contribution on overall margins, you know, as you've seen some nice momentum on system sales over the past three quarters?

Yeah, Paul. So, I think you kind of articulated our strategy a little bit. So, material sales, I think we've got a disclosure in the queue where it mentions recurring revenue, which we put materials into that bucket. So, material sales is, I think, roughly about a third of our revenue in the quarter. It is high margin revenue for us. So, you know, one of our stated strategies is the continued sales of printers drives future materials revenue, and that future material revenue turns into high margin recurring revenue. So I think, you know, I think you've captured it nicely, how we think about the business.

Okay. And then, you know, on the OpEx front, very nice leverage on the model, you know, in the first half. How do we think about the quarterly runway kind of post divestitures in the second half? Does that offense kind of stay in the two key range or does that come down further post divestiture?

So post divestitures, I have to run through them after my head. But if you think about the divestiture impact, you know, $25 million of revenue, per quarter, call it 45 to 50% gross margins. And I think I mentioned $5 to $6 million of contribution margins. So you can do the math to get the OPEX number associated with the divestiture. From an organic standpoint, we're going to continue to invest in OPEX. We are excited about our markets and our business. And Jeff talked about, you know, continuing to harden our back office infrastructure, especially IT and finance, but other areas as well. So I would expect organically that we'll, you know, increase OPEX, excluding divestitures, you know, on the, you know, million to $2 million per quarter range. Thanks.

And then lastly, on cash flow, you know, very nice start to the first half. I mean, we haven't seen this level of cash from operations in a long time. You know, as we think about component headwinds and some moving pieces from the divestitures, how do we think about kind of second half cash flow from operations?

Thanks. So I think you'll have, you know, obviously divestitures taken away from cash flow. You know, that operating income that I mentioned, you know, there's about a half million to a million dollars of depreciation associated with that. So I think you'll see Working capital aside, you'll see a bit of that fall to the cash flow line. That'll be the biggest impact in cash flow in the second half.

Thank you.

Thank you. Our last question for today is coming from Troy Jensen of Lake Street Capital. Please go ahead.

Hey, congrats on the outstanding results, gentlemen, and thanks for sneaking me in. I'll be quick. Thanks, Troy. Yeah, no problem, Jeff. Hey, so I guess recent chatter I've heard from industry contacts is that 3D systems now exceeds carbon, you know, carbon 3D, right, with respect to materials. I know you highlighted a couple in the ProBlack and the Acura. You know, are those the key materials that we need to be watching? And I guess what I'm asking, Jeff, is, you know, when I think about you guys talking about materials, I think of, you know, I'm making this number up, 180 different materials in that bucket. You know, is there one or two that are you know, greater than 10% of it? Are these new materials meaningful drivers? I mean, I assume it's production that's going to be the answer, but if you could hit that, that'd be great.

No, thanks, Troy. That's a thoughtful question. No, I tell you, the reason I put that pro-black in the script, Troy, was to give an example. Sometimes folks struggle with, well, what does it mean to have an application focus? How does that really translate into driving development? And the reason I put that in there is that the development of that Pro Black came out of a discussion we were having with Toyota to meet their needs. And the way at least their company pioneers a lot of technology is through the racing teams. So we launched that material with a racing team, developed it and launched it with them with an eye toward expanding it into their automotive business. And so we were able to do that, and they needed a larger format part, so we changed our development program to move it over to the SLA platform. So I thought it was a nice example to use. I would tell you, I wouldn't read too much into that one single material. It's a great material. But we're launching, we have a host of materials, polymer materials, photopolymers that are under development, Troy. It is a really important part of the business. And that's why we're putting a new building here in Rock Hill. We're expanding our development laboratories here. And we've got new production capacity coming on for materials, because particularly in the photopolymer area, having a material for a customer is absolutely instrumental. The best printer in the world without the right material, as you know, just fails. And so you've got to have those. And our best success is when we can tie it directly to a customer application. and drive our development off of that application, as long as the market is big enough out there to sustain growth. So that's the model we've adopted, and it's really resonated well with the workforce and with our customers. So don't read too much into the Pro Black example in terms of dollars, but it should serve as an example of how we're really driving our development efforts. Okay, that's fair.

Maybe for Jagtar, could you just size up software? I'm just curious to know how big that is within kind of the systems or product revenues.

You know, software is right now sub $10 million per quarter for us, between $5 million and $10 million per quarter for us. Is that mainly just 3D Expert? Yeah, 3D Expert, Geomagic, 3D Sprint. Okay, perfect.

Hey, congrats again, guys.

Hey, Troy, just a supplement with what Jack said on software. Some of the most positive feedback in the last 12 months has been around these software platforms. So we're looking to expand their use by customers, and they're wonderful tools. I don't know that we've been aggressive enough about getting out and explaining to new customers how really effective they are. So you will see an increased focus from us on software. It's a vital part of the ecosystem, and it's one that I think we've got a really good foundation in that we just need to grow from. Great.

Well, congrats again, gentlemen, and look forward to seeing you at Rapid here in a few weeks.

Yes, we will, Troy. Thanks so much.

Thank you. Ladies and gentlemen, we would like to apologize for the technical difficulties experienced by participants on today's webcast. A complete archive will be available later this morning using the same link. At this time, I'd like to turn the floor back over to Mr. Graves for closing comments.

So thank you for joining the call today and for your continued support of 3D Systems. A replay of this webcast will be available on our investor relations page where you can see the supplemental charts that go through it. We appreciate the time and the interest in the company, and we'll look forward to talking to you again next quarter.