Good morning, and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the results of the second quarter and first 6 months of 2012. My name is Grant, and I will facilitate the audio portion of today's interactive broadcast. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. At this time, I would like to turn the call over to Stacey Witten with 3D Systems.

Good morning, and welcome to 3D Systems' Conference Call. I am Stacey Witten, and with me on the call are Abe Reichental, our CEO; Damon Gregoire, our CFO; and Andrew Johnson, our General Counsel. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so via the web at investor.3dsystems.com. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone numbers provided here on Slide 3. The phone numbers are also provided in the press release that we issued this morning. For those who have access to the streaming portion of the webcast, please be aware that there's a 5-second delay and that you will not be able to post questions via the web. Before we begin the discussion, I would like to mention a statement regarding forward-looking information that appears on Slide 4. This presentation contains forward-looking statements as defined by federal and state securities laws. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance of products, underlying assumptions and other statements, which are statements other than statements of historical facts. All such forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by the cautionary statements described on this slide. Forward-looking statements are only predictions that relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions and other factors, many of which are beyond our control. As a result, we cannot guarantee future results or performance, and past performance is not necessarily indicative of future results. These forward-looking statements are based on current expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management. We undertake no obligation and do not intend to update these forward-looking statements. Further, we encourage you to review the risks that we face and other information about us in our filings with the SEC, including our annual report on Form 10-K which was filed on February 23, 2012, and our Form 10-Q which was filed this morning. At this time, I'd like to introduce Abe Reichental, 3D Systems' President and CEO.

Good morning, everyone, and thanks for taking the time to listen to our call this morning. We are very pleased to report another record revenue quarter driven by doubling printer units and balanced organic and acquisition growth. This morning, Damon, and I will recap our quarterly highlights and share with you several key accomplishments. We will go over our financial results in more depth, update you on our progress and provide an outlook for the third quarter. Quarterly revenue increased 52% over last year to a record $83.6 million on a 20% organic growth. We were able to extend our revenue leadership position further on strong growth from all our revenue categories that was led by 111% increase in our sold printer units. We exited the quarter with $12.3 million of backlog, representing a 28% sequential backlog increase that reflects continued, across-the-board strong demand for our printers material and on-demand parts services and the growing effectiveness of our sales channels. We grew our gross profit by 71% and expanded our gross profit margin up to 51.4%, driven by significant year-over-year sequential improvements to our on-demand parts services and printers gross profit margin. We generated $21.4 million of cash from operations during the first half of this year. Our cash generation capacity during the second quarter was strong and sequentially comparable. Our uses of cash for the quarter included a total of $17.5 million comprising of our semiannual interest payment on our convertible note, annual employee performance bonuses and an increase to inventory to support our new product launches and increased backlog. During the second quarter of this year, we launched several flagship professional 3D printers and completed a few acquisitions in support of our growth initiatives. At the end of May, we began commercial shipments of Cube, the first-ever home…

Thanks, Abe. Good morning, everyone. Our second quarter revenue increased 52% over the 2011 quarter, with a gross profit improvement of 71%, primarily driven by increased revenue across all categories, with a larger portion of revenue from higher margin print materials and a substantial improvement in gross profit margin of our on-demand parts services and printers. On a non-GAAP basis, our total operating expenses increased to $24.3 million, or only 240 basis points, to 29% over 2011. The favorable impact from synergies cost downs that we put in place during the first quarter were enough to keep our sequential expenses flat for the second quarter, notwithstanding our much higher sales costs from revenue growth, $1.9 million higher R&D expenses in support of new products and portfolio expansion, and the incremental costs we incurred from the acquisition of new startups that increased our costs without any near-term revenue benefits. As a result of our strong revenue growth and expanded gross profit, we generated non-GAAP adjusted net income of $13.9 million and earned $0.27 per share, tax-effected. On a GAAP basis, we earned $0.16 a share for the quarter. Revenue for the first 6 months of 2012 increased 57% over the 2011 period, with a gross profit improvement of 69%, primarily driven by the increased revenue across all categories combined with a larger portion of revenue from higher margin print materials and an improvement in gross profit margin of our on-demand parts services and our printers. On a non-GAAP basis, our total operating expenses increased to $47.1 million, but only increased 80 basis points over the 2011 period to 29%, primarily reflecting a rise in compensation costs driven by sales commissions from increased revenue of the operating cost of the newly acquired businesses. Specifically, our 6 months 2012 operating expenses included a…

Thanks, Damon. During the second quarter, we made several significant new product introductions, including the ZPrinter 850, 8 models of the ProJet 3500, a new crossover, ProJet 7000, and a new Vidar NDT PRO scanner. We expect these products to contribute materially during the second half of this year. Since its launch, our Cube 3D printer continues to enjoy a fantastic marketplace reception. In fact, Cube orders topped expectations, and Cube consumables exceeded our estimates some threefold. While we don't expect revenue from Cube to be material to our revenue for the remainder of this year, we're very pleased with the overall marketplace reception and have already increased production capacity to stay ahead of growing demands. During the second quarter, we made 2 acquisitions in support of our rapidly growing health care solutions business. We acquired Bespoke Innovations, a San Francisco startup with proprietary scan-to-print technology for individualized prosthetics, orthotics and orthopedic devices. We integrated Bespoke Innovations into our health care solutions business and are leveraging its technology and know-how to develop and commercialize a full range of individualized, ventilated, lightweight, custom fit prosthetics, orthotics, and orthopedics, that we expect to begin to launch during the first half of 2013. We also acquired and integrated Paramount Industries, an on-demand parts provider that is specifically focused on medical device and aerospace manufacturing. To expand our consumer business, we acquired My Robot Nation, a consumer technology platform that provides intuitive gamelike content that we already integrated into Cubify. We also acquired Fresh Fiber, which delivers 3D-printed accessories for consumer electronics. This past Monday, we acquired Viztu Technologies, the developer of Hypr3D, an online platform that allows anyone to turn pictures and videos into printable 3D creations. We plan to integrate Viztu into Cubify, adding intuitive and fun scan-to-print and create-to-print apps. These…

[Operator Instructions]

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

A question regarding the geographic composition of the revenues and what you're seeing in the market. You showed what appears to be a pretty good sequential growth, particularly in the markets that I think people are more concerned with, notably Europe. Can you talk a little bit about how the business tracked during the quarter? And is there any color you can provide on how business is trending thus far in Q3?

As you noted, we indicated a good sequential growth in Europe and in Asia Pacific for that matter. Within the countries in Europe, Damon also commented, that not only did we grow sales, we also grew our operating income from these regions. And our expectation is that we continue to benefit from robust R&D spending by customers, and we have not seen, when we compared this period to last year, we have not seen any discernible difference, notwithstanding all the economic uncertainties related to specific countries in Europe. We have not seen any discernible difference in the behavior of our customers. Our customers continue to invest and their own R&D spending remains robust. And we believe, generally, that our growth is much more linked to global and regional R&D spending trends than to any other macroeconomic or GDP performance.

Our next question comes from Ben Reitzes from Barclays.

It's Matt Markezin-Press on for Ben. I was wondering if you guys could give a little bit more color on Z Corp and Vidar's contribution to your revenue segments, like printers and products materials and services?

Yes, absolutely. First, we noted on the call that we reversed the historical decline in these businesses, and we're pleased to report a revenue increase of some 25% during the second quarter year-over-year. We also can tell you that excluding Vidar and Z Corp, we have good growth amongst our core businesses. So for example, if you excluded those, our units still grew by some 198% on a year-to-date basis for the first 6 months that included these 2 acquisitions in the mix. What we can also tell you is that as a result of having Z Corp and Vidar in the channels, it contributed favorably to our own unit growth. Because in many instances, as we predicted, the ability to sell the combined portfolio into the combined channel resulted, basically, in the second quarter, in doubling of the units altogether. And we benefited beyond just jump-starting these 2 product lines growth, our other product lines benefited from the availability of the channel. So all in all, it has been enormously successful.

All right. And then with the higher share count, following your offering, and you guys maintaining your guidance, I was wondering how you guys can offset the higher share count? Is it coming from some enhanced margins, or is this coming from elsewhere?

Well, it's coming from us delivering on the schedules that we put out there. And it is increasing margins, as you can see, we're over 51% in gross profit margin this quarter. And it is from other cost containment, which were somewhat overshadowed by some of the costs, as we talked about with the startup cost, from the companies -- the startup companies that we added this quarter, even though we were able to keep our operating costs flat with Q1 even with those costs added.

Yes. And so to summarize that, we basically see that our fundamentals are very strong, and the fundamentals that we projected in our guidance earlier in the year strengthened sufficiently to the point that we can absorb additional incremental investments, such as Bespoke and Viztu and My Robot Nation that add to our operating expenses and not generate any near-term revenue and still deliver. Because of our margin expansion, because of our other synergies and cost downs, we can still achieve the guidance which we affirmed today. And so we're basically saying today, our fundamentals have strengthened, the demand is strong as far as we can see it and that business can afford to make these additional investments today without changing the guidance.

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

This is actually Brian Drab at William Blair. The first question, just trying to sort through some of the growth rates here on an organic basis given all the acquisitions growth that you've had in the last year here, and the year-over-year numbers by segment are interesting on Slide 7, but it would be really useful if you can give us an idea on what organic growth was by segment. Could you do that?

We can do a little bit of it. I mean, our organic growth overall was 20%, as we reported. Within that, if you look at materials, excluding the acquisitions of materials from Huntsman and Z Corp, materials was up much higher. It was 28.3% for the quarter, 26.4% for the full year. And on-demand parts growth year-over-year was 43%. Most of it, since we haven't had that many more recent acquisitions, most of it was attributed to organic growth. On the units, I don't have it in front of me. So, we can get back to you on that one.

How about on the printers and other products side then, is it 61% total growth? Is that?

Do you have that growth results, Damon? Hang on one second, Brian, we'll see if we have it at our fingertips here. Why don't you go ahead and ask your next question, and we'll see if we can get it for you.

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

I'm not sure what happened there. What was your sequential growth in Europe excluding acquisitions? Or said another way, did acquisitions have a material impact on sequential growth from first to second quarter?

Acquisitions in Europe did not have a material impact in any regard in Europe, sequentially from Q1 to Q2. So the growth is...

So the growth is basically organic. And if you noted, Damon talked about the fact that acquisitions skewed favorably, results in North America versus Europe.

Okay. And then on the professional, personal printer growth, if I have heard this correctly, great growth, excluding the Cube, of 135%. Can you give us an idea how that breaks down between professional and personal, given personal, I assume, has some outstanding growth probably from Bits from Bytes type of machines?

Well, actually between personal and professional, there was more growth in professional on a weighted basis than personal, if you look in terms of the percentage of unit growth, although both have grown substantially. And within personal, we have had a very, very strong reception of our new 3500. And in fact, a portion of the increase in backlog is attributable to professional printers’ materials and on-demand parts.

Okay. And then if I could just one more. Regarding your guidance, the revenue guidance implies second half of 2012 revenue growth of between 32% and 56% year-over-year. And I'm just wondering why such a wide guidance range? And do you have a sense for where you might be in terms of lower end to higher end?

We look at this and we say, it is the range that we feel comfortable with. And certain activities can move revenue from just one quarter to another, but I mean, it's sort of hard to really narrow that. And please remember though, too, this guidance does not include -- if we do any future acquisitions, we would update guidance again. So it's only based on our current activity as we have it.

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

I wonder if you could talk a little bit about the health care market. You continue to show very strong growth. And I wonder if you could talk a little bit about the components of that growth, and to what extent do you see the Bespoke acquisition inactivity in the prosthetic market being a driver next year?

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

Okay, that's helpful. Just looking at the performance year-to-date, my impression was that markets like the hearing aid market is a more established market for you. In terms of the growth, is it coming, the real strength in the growth that you're seeing coming from the relatively new market like dental, or is something like...

You're correct that hearing aid is a bit more developed, although there are new applications within hearing aids that will contribute to growth on an ongoing basis. You're also correct, Jim, in pointing out that dental is growing very rapidly, and within dental, both dental restoration and aligners are growing very, very well. But we're also enjoying quite a bit of growth in the whole area of implant surgical kits and other surgical kits in support of computer-aided surgical procedures. That's a very fast-growing field, and it's contributing very favorably to our growth.

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

You talked about growth being fueled in part by expanding channel. Can you share with us any stats regarding the dealer and distributor network, and how that's expanding? And also in passing, how you intend to expand the channel for Cube moving forward?

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

So just a quick follow-up. A lot of new products in the project lineup this quarter. Does that reflect the sort of the intensity of the competition in that professional printers space? And is that the most competitive sort of subset of your landscape at the moment?

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

[Operator Instructions] Our next question comes from the line of Troy Jensen from Piper.

Just a quick question here. A point of clarification first, did you guys say production printers were down 10% year-over-year and units were flat?

We said that production printers were up 11% in the second quarter over the second quarter of last year, flat for units and down 6 months 10%. And we also said that, that is largely because we are continuing the migration from the production category to the professional category.

Can you explain a little bit, I mean are units that you're previously classifying as production are now moving into your professional category?

As we introduce these new printers like the ProJet 6000 and the ProJet 7000, those, increasingly are all falling into the professional category where their predecessors that we have retired belonged in the production category. The professional category over time, in terms of print format and consumable generation capability and price point, is going to become the category for the high-end. And that category is growing by leaps and bounds.

And can I go to -- I think Brian was asking the question about organic growth rates, and you gave him the materials at 28% and on-demand at 43%?

Yes, we have it now. We can provide it.

The unit, the printer units grew at 47% organically versus the 61% in total.

How about revenues? Because I think the 20% organic number you're quoting was a revenue number, and I thought that was with materials and on-demand was?

The 47% is the -- that is the unit number. And the revenue number is close to that. It's about 35%.

Can I ask then, how can you have 3 categories: 28%, 43%, and 35% organic growth, within the total organic growth, there's only 20%?

For the -- well, you have -- under services, we look at this. In the services in total, if you look at the print service...

Print service and on-demand parts.

On-demand parts. But if you print out the -- if you take out the traditional break-fix warranty services, that is actually flat to last year to slightly down a bit.

Yes. So for clarification, Troy, the 43% that we cited on services was completely attributable to our on-demand parts services. On-demand parts services have grown 43%. Traditional break-fix printer services and warranties remained flat.

I know this is more than one, but if I could just get a last one in. Just about direct digital manufacturing. Is there any way you guys can measure traction you guys are getting in that industry, and then what systems best play into that for you?

Yes. So for -- to a large extent, almost 100% of our health care business is directly attributable to direct manufacturing. And in addition to that, about 50% of our units for quite some time in the professional production category are also attributable to direct manufacturing. And most of that is in connection with aerospace, automotive and defense, in addition to health care.

And is it your SLA and SLS systems you think are best positioned?

Well, it depends on the application. Certainly, in certain applications, SLA and SLS print engines have unique advantages. On the other hand, our ProJet 3500 and 5000 wax printers are also extremely well positioned on the production floor of foundries to generate thousands of patterns daily for a variety of applications.

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

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

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