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3D Systems' (DDD) CEO Avi Reichental on Q1 2014 Earnings - Call Transcript

Services revenue rose 38% to $46.6 million primarily driven by Quickparts. Revenue from our growing healthcare category increased 53% to $21.7 million as we defend our rates into existing opportunities and expanded into new applications with new products materials and services.

With the acquisition of Medical Modeling in April, we expect to significantly expand our reach and expertise in this rapidly growing category while we continue to push 3D technology to new levels and applications.

Consumer revenue increased 150% and contributed $9.7 million as we extended our consumer products and services beyond the home use printers into education, entertainment and consumer goods.

Through our growing ecosystem we're extending our desktop design and prototyping reach by delivering more affordable offering to engineers, students, makers, entrepreneurs and home users and through acquisitions like Gentle Giant Studios we are extending services to the entertainment and toy industries.

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We expect accelerated growth in our consumer category in the second half of this year. As we began shipping the recently announced Cube 3, CubePro and iSense scanners late in the second quarter and as we often completely new consumer and consumer application with the ChefJet, CeraJet and CubeJet 3D printers that our slated for commercial shipments during the second half of this year.

We continue to see substantial organic and inorganic opportunities within the professional areas we are targeting including personalized surgery, patient specific medical devices, automotive and aerospace and expect rising demand for our design and manufacturing solutions to continue to drive our growth.

To better serve this growing opportunity and to multiplex our marketplace sales presence, during the first quarter we combined our direct sales organization with our channel sales organization into a unified sales force and commenced selling all our design and manufacturing products, including our SLA, SLS and Direct Metal 3D printers and materials for our global reseller channel.

We're pleased that our unified sales channel delivered a 64% increase in revenue from design and manufacturing 3D printers with very little contribution as of yet from our recently announced new products. Our growing installed base has already accelerated our material growth rate and we expect further material sales upside as more of our customers' manufacturing facilities come on line.

During the first quarter of 2014, we increased our R&D expenditures some 165% to $17.2 million on continued accelerated product development and the addition of the Wilsonville team, which we believe catapults our R&D capabilities several years forward. While we expect most of the benefits from these investments to occur in later periods, we already announced nine new products in the first quarter of 2014 and total new products revenue rose 71% to $65.4 million.

Just as a reminder here, products are considered new by us only for the first three years of a product's commercial life. Based on marketplace feedback of our recent new products and our plans for future products, we fully expect our new products to accelerate our organic revenue growth later in the year.

Now, for a more detailed look at our financial performance for the first quarter of this year, I will turn the presentation over to Damon Gregoire, our Chief Financial Officer. Damon?

Damon Gregoire

Thanks, Avi, and good morning, everyone. Our first quarter revenue grew 45% from the prior year to $147.8 million. This pressure held our gross profit margin to 51.1% and consistent with our prior comments we more than doubled our quarterly R&D spending and continue to increase our sales, marketing and infrastructure expenditures in support of our growth initiatives, the combination of our direct and reseller sales teams and our strategic joint developments and alliances. These expenditures and investments that aggregated to $66 million of operating expenses for the quarter, are designed to increase our leadership position and hence our portfolio.

Our strong revenue growth combined with compressed gross profit margin and increased investments resulted in net income for the first quarter of $4.9 million and earnings per share of $0.05.

On a non-GAAP basis we earned $0.15 per share for the quarter. And as you know by now, we report non-GAAP adjusted results that exclude the tax affected impact of amortization of intangibles, non-cash interest expense, non-recurring acquisition, integration and severance expenses, including gain or loss on acquisitions, impact of litigation settlements and tax settlements, stock-based compensation and non-cash loss on conversion of convertible debt. Our total depreciation costs and our cash interest expenses are appropriately included in our non-GAAP net income.

For your convenience, a reconciliation of GAAP to non-GAAP results is provided on this slide as well as in our 10-Q that we filed this morning.

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