3D Systems Corporation

Greetings, and welcome to the 3D Systems second quarter 2025 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation, and you may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Mick McCluskey. Treasurer and Vice President, Investor Relations. Please go ahead, Mick.

Hello, and welcome to 3D Systems' second quarter 2025 conference call. With me on today's call are Dr. Jeffrey Graves, President and CEO, and Jeff Creech, EVP and CFO. 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. 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 our latest 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. In our press release and slides accompanying this webcast, you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2024. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Mick, and good morning, everyone. I'll start today with a brief recap of our second quarter results before reviewing in detail where we're at in our restructuring and efficiency initiatives. While much of our dialogue must center on getting our cost structure right for today's market conditions, given the value creation for our shareholders that's tied to long-term growth, it's important to briefly mention the progress we're making against our key growth strategies as well. I'll then turn things over to our CFO, Jeff Creech, to provide details on the quarter's financials. We'll then open the calls for the Q&A. So let's turn to slide five. I'll start by stating the obvious. The macro environment for our company and 3D printing OEMs broadly remains challenging. You can see this very clearly simply by looking at our year-over-year revenue decline of 16%. As I've stated for the last several quarters, this is primarily attributable to a rapid drop in our customers' CapEx spending for new production capacity. This decline is clearly correlated to the uncertainty around tariffs, which has given our large OEM customers pause on where to invest their capital most economically. While we believe this is a transient effect, it's been protracted, and therefore we're taking aggressive actions to adjust our cost structure to match this current reality. Fortunately, we've had the scale and balance sheet flexibility to navigate this large-scale restructuring while maintaining core R&D investments that are so essential for long-term growth. This is the balance we must continue to strike. While our year-over-year revenue decline was significant, we were pleased to see the stabilization of these pressures in our sequential quarterly results. In fact, if you take away the impact of the software divestiture that we completed at the beginning of this quarter, which contributed roughly $7 million of revenue in Q1, our continuing operations grew 8% sequentially. While I don't want to overstate its significance, as I do expect continuing revenue volatility quarter to quarter until the tariff situation subsides, it was certainly a welcome outcome. We owe this success to our outstanding employees who've maintained their focus throughout this tumultuous period and to the strategic investments we've made over the past years in both metal and polymer 3D printing technology for critical markets such as med tech and aerospace and defense. As you'll hear from me later, these areas are growing rapidly, and specifically for MedTech, has now done so over multiple years. Importantly, these are soon to reach a point of critical mass that we believe will drive meaningful revenue growth in the years ahead. All of this is supplemented by a reinforced balance sheet following our Q2 transactions, which include the sale of our non-core geometric software platform, our June debt transaction and share repurchase. Taken in combination with our restructuring actions, we believe this places the company well on the path to sustainable profitability and long-term growth. But we still have much work to do. Let's now move to slide six and talk about our near-term priority, which we call profitability first. As I've shared before, we've identified actions across the entire organization that to be executed through the first half of next year to drastically improve profitability. Our goal is to align our costs with the current market realities. These actions are designed to positively influence gross margins, leveraged by additional efficiencies we gained from our decision to in-source manufacturing two years ago. More significantly, they will unlock a material reduction in OPEX, targeting improvements in every single function and geography we operate in today. In the aggregate, we plan to deliver over $85 million in annualized savings by mid-2026. Based on the $50 million wave we announced in March of this year, annualization of the roughly $20 million of in-year savings from incremental actions we began implementing when we spoke in May, following the broad announcements around tariffs. While timing is always a risk, particularly when it comes to gross margins where there are so many dependencies, We're determined to move to positive cash flow even in the current market environment by restructuring our business and driving process improvements that translate to efficiency gains. We have the scale to do this, and it is our top priority. To provide more perspective to items already actioned and those still in scope, the chart on this slide provides relative sizing of the broader market categories for our initiatives. Our organizational capacity alignment entails streamlining of our functions to efficiently match the needs of the business. R&D, for example, is historically operated at about 20% of revenues, a strategic decision we made for the last few years to ensure that our industry-leading portfolio of metal, polymer, and regenerative technologies remains at the forefront. This range of technology sets us apart from all others in the industry. As we're now entering the next phase of commercialization of dozens of new products brought to market through this investment, we're positioning to capitalize on these prior investments, allowing us to bring R&D spending to levels that are strong but sustainable. Similarly, business and legal entity rationalization emphasizes the simplification and concentration of our efforts in core markets that will deliver not only significant value but on an attractive timeline. focusing on those that deliver the most compelling ROI that matches our internal mandate to return to profitability. In critically evaluating the returns on our R&D investments, we've taken the hard decision to spin off or mothball some exciting opportunities that simply had too long or too expensive a runway to fully commercialize. For example, in July, we made the difficult decision to curtail the level of investment in systemic bio, a truly incredible technology that we believe has the potential to ultimately transform the way in which new drugs are developed in the pharmaceutical industry. This technology in which vascularized human tissue is printed on chips allowing for new drugs to be tested in human relevant models in the lab simply had too long of a commercialization timeline given the conservative nature of the pharmaceutical industry in adopting new test methods. So we put this effort on the shelf for now. having developed some unique IP, and will return to it in the future if the market dynamics become more favorable. This is the analysis we're undertaking with all of our long-term investments. Now, since I've touched on an adjacent element of our regenerative medicine program, I'll take a moment to confirm that our core efforts to deliver the first 3D-printed human lung in close partnership with United Therapeutics continues to progress very well, as evidenced in yesterday's announced technical milestone recognition. After updating the testing criteria for the program at the end of last year to incorporate human decedent testing protocols in order to accelerate full-scale testing of printed lungs, our technical milestones were reset to support this objective. Our milestone attainment in the second quarter marks a significant step forward in printing technology that underpins this incredible program. One that promises to change the lives of millions of people who are waiting for a lung transplant. I look forward to keeping you updated as frequently as possible on this exciting journey. So moving back to cost efficiencies, through actions taken to date, we've already seen significant cost improvements driven by a reduction in contracted employee costs and professional services enabled by upskilling the capabilities of our internal workforce. This activity alone represents our third largest opportunity for cost reductions and should drive a reduced OpEx footprint as we move forward. The next step is to introduce more streamlined back office processes and greater automation to improve both speed and efficiency in our support functions. We expect these efforts, combined with the focusing of R&D investments, to reduce OpEx spending materially in the coming quarters. In addition to OpEx, Our actions are also designed to positively impact gross margin performance. To do this, we'll leverage our prior strategic decision to in-source manufacturing and supply chain management as we consolidate our footprint globally. Starting at roughly 50 locations worldwide when I first joined the company five years ago, we're making solid progress on a path to integrate production and service capabilities to reduce this footprint by over 50% through mid-2026. The benefit from these last two pillars will come from reduced facilities costs, management costs as duplicate teams are consolidated, and more efficient supply chain and logistics management. From a working capital standpoint, consolidated operations and distribution centers are already improving inventory control and manufacturing efficiencies through our Lean and Six Sigma implementations. Notably, this structure also enables a more rapid introduction of new products into manufacturing, significantly improved control over product quality, and a heightened level of agility with respect to navigating complex global supply chains that continue to be impacted by rapid tariff changes. In the second quarter, the positive effect of these actions more than offset the rise in component costs from tariffs, and our goal is to continue on this trajectory. As you can see from our Q2 results, we're well on our way to deliver the benefits from our cost reduction plans. Margins for the quarter were more robust, and OpEx was $47 million, a reduction of 27% year-over-year and 24% sequentially. With actions we've taken to date and those in our plan for the balance of the year, we're targeting to exit Q4 with OpEx in the low $40 million range. So to be very clear, our top priority is to align our costs with the current market conditions in order to move to positive cash flow in 2026. With that said, we must also emerge from this period with a strong portfolio of new products in markets that will drive sustainable growth and profitability in the years ahead. So let's now shift to talk about some of our most important growth vectors on slide seven. I'll start with our healthcare business. For many years, we've spoken glowingly about the progress in our personalized health services or PHS businesses as it frequently grows at double-digit rates and did so again in Q2. However, as our PHS businesses continue to expand and mature, our customers are increasingly asking for additional orthopedic-related products and services. These include a further expanded portfolio of FDA-cleared surgical guides and, along with them, medical implants for patients. In addition, there is an increasing call for point-of-care services, in which we provide trained staff and advanced printing technology within the hospital itself. Offering point of care services is unique to our company and offers us exceptional insights as we work shoulder to shoulder with surgeons to rapidly develop new applications for 3D printing. We piloted this program with the VA, and we've now expanded it to many of the leading research hospitals who are at the forefront of medical breakthroughs. Recent examples range from new ways to rapidly address trauma injuries to novel approaches to treat patients with bone cancer. We then use this knowledge to expand these applications to other hospitals that can benefit from the breakthroughs, which in turn drives growth in our business. This flywheel is in its earliest stage, but we can already see its potential. Given this expanding business model, Moving forward, we will refer to our combined orthopedic activities as our MedTech business, which is separate from our dental and our regenerative medicine businesses, as you can see on slide eight. These three businesses, which together make up our healthcare business unit, share a common foundation of outstanding quality and regulatory practices, and in certain cases, common printing technologies. Supporting over 100 CE-marked and FDA-cleared devices all over the world, we've today brought relief to millions of patients globally. For perspective, our MedTech business reached over $80 million in annual revenue last year. In this quarter, on-trend grew 13% from prior year and 16% sequentially. Our expertise in MedTech is most prominent for personalized solutions targeted above the neck, This area of the human body is our largest contributor to MedTech and has historically been the fastest growing, primarily due to patients' needs for highly customized cranial maxillofacial or CMF implants. Our printing technology has now reached the point where response times allow it to be increasingly used in trauma circumstances, which is a major focus for us over the next few years. Below the neck targets applications for areas such as spines, knees, and hips. As you can imagine, there's great expansion potential in these areas with an addressable market size in 2024 of over $40 billion. We'll continue to build upon this excellent foundation in the years ahead. Now turning to another important growth strategy element on slide nine. An increasingly recognized differentiator for 3D systems, is our ability to help customers not only navigate early stage process development, but then also scale it to a desired production output with additive manufacturing. In virtually all cases, this now translates to an evolution from process development to limited parts production, and finally to the sale of printers for larger volume production. We are uniquely positioned to support each stage of this customer evolution. Very simply, we call this market strategy the three Ps, process, parts, and printers. We cover the spectrum from end to end, starting with initial exploration and ideation of the value proposition that only additive manufacturing can accomplish, then migrating through the proof of concept to production of end-use parts in limited quantities, and ultimately, the customer's capital investment in additive equipment and materials for integration into their production workflow. Each element has its own unique revenue stream, supported by the widest range of technologies in the industry, spanning both metal and polymer printing platforms and materials. And we can do so across the global manufacturing footprint, which reduces supply chain costs and risks to our customers. To execute this unique business model, we leverage an industry-leading team of application engineers, which we refer to as our application innovation group, who then translate the desired application, which is the problem the customer wants to solve with additive, into a fully functioning workflow or process. That process can then migrate into either of the following piece, either parts or printers. And what we see in many cases particularly relevant in today's economic climate, is a unique ability to serve as a bridge for them, smoothing the transition from low volume to high volume production capability. The ability is unique in our industry today, and we increasingly are asked to provide it on a regional basis within the U.S. and within EMEA. The appeal for parts manufacturing is well known to our industry and has long been a focus of our service bureau partners who are themselves some of our best customers. In that respect, let me be very clear to state that by no means do we have a desire to compete with a service bureau and participate in large quantity on-demand part manufacturing. On the contrary, for industries that require the highest level of complexity with limited quantities of parts that are vital to the customer and economically attractive to 3D systems, we offer this as an added service. with the ultimate goal being the sale and service of printing systems to these customers. In this period of time where tariffs are slowing the decision process in terms of CapEx investment in new production capacity, offering this capability to our customers allows them the time needed to fully assess their future needs. With rising demand, we continue to preferentially invest in our capacity to scale the entirety of this value chain. Turning to slide 10, we provide a relative overview of how this works within some of our most critical industrial markets. This model speaks to much of the success for our aerospace business, which in Q2 nearly doubled revenues from last year. That performance represents the effectiveness of our 3P strategy applied to a vertical that now contributes over $30 million of revenue annually to the company. Growth in parts and process succeeded globally, with the U.S. Naval and Air Force wind service from our U.S. locations and similar success in EMEA service from our European locations. From a technology standpoint, multiple winds for our SLS-380 polymer and DMP-350 triple laser metal system were the preferred choice for these applications. We'll continue this approach, particularly focusing on the high-reliability markets such as aero and defense, AI infrastructure, oil and gas, and power generation, where we believe can increasingly drive our growth moving forward. Let's now flip to slide 11 to finish my remarks with an update on dental. 3D printing for dental has been core to this company for decades and will always be embedded in our DNA. Our leadership in orthodontics is well known and cemented by last year's milestone contract, providing a foundation for years to come. On the long term, this provides stability. It has occasionally resulted in year-over-year variations, which are reflected in the results for this year, following a strong 2024. Our outlook in this respect is stable on a sequential basis going forward, and we've launched new products expected to drive growth in the quarters ahead. Just a few weeks ago, we announced another major milestone in digital dentistry with the full commercial release of our new FDA-cleared next-gen jetted denture solution for the U.S. market. This technology redefines dental prosthetics with revolutionary single-piece, multi-material dentures, delivering a distinctive combination of exquisite aesthetics, comfort, and outstanding resistance to breakage for an enhanced patient experience. Throughout our beta customer testing, it's been validated with strong endorsements and highlighting effortless usability, unmatched material properties, and groundbreaking efficiency improvements of up to 300% versus traditional manufacturing methods. With our beta testing now complete, we've entered full commercial production for the U.S. market, significantly expanding our leading digital dentistry portfolio, which in total addresses straightening, protection, repair, and replacement of teeth. with this specific solution targeting a U.S. replacement addressable market that we expect to reach $600 million by 2029. In addition to shipping a few samples of these unbreakable and beautiful dentures to our shareholders, who've started to appreciate the potential of this milestone for our business, more importantly, we've begun to ramp our production in the back half of this year for POs already received in the last few weeks. So with that, I'll turn things over to Jeff Creech, our CFO. Jeff?