Good afternoon and welcome to 3D Systems Conference Call and Audio Webcast to discuss the Results of the Second Quarter and First Six Months of 2017. My name is Rob, and I will facilitate the audio portion of today's interactive broadcast. At this time, I would like to turn the call over to Stacey Witten, Vice President, Investor Relations, 3D Systems.

Good afternoon and welcome to 3D Systems' conference call. I am Stacey Witten and with me on the call are Vyomesh Joshi, our President and Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Patrick Rogers, Vice President and Assistant 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 at www.3dsystems.com/investor. 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 on the slide and in the press release we issued today. For those who have accessed the streaming portion of the webcast, please be aware that there may be a few second delay and 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 today's press release and our filings with the SEC, including our most recent Annual Report on Form 10-K. During this call, we will discuss certain non-GAAP financial measures. In our press release, and slides accompanying this webcast, both of which are available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations 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 2016. Now, I'm pleased to turn the call over to Vyomesh Joshi, our CEO. VJ?

Thanks, Stacey. Good afternoon everyone. We have continued to drive customer shift from prototyping to production, with our comprehensive 3D printing solutions. We are focused on meeting production customer needs, productivity, durability, repeatability, and leadership in total cost of operations. Demand from healthcare and industrial customers supports this strategy and validates our focused innovation and investments. We are pleased with the growth in production printers, materials, software and healthcare in the second quarter, and our ongoing progress in on-demand manufacturing services. However, professional printers' revenue was soft and our execution geographically was uneven. And we are particularly disappointed in the results in the Asia Pacific region. For the second quarter, total revenue was $159.5 million and gross profit margin was 50.6%. Non-GAAP operating expenses increased 7% compared to the second quarter of 2016, as we continued our investments in R&D including Figure 4, metals and materials. While non-GAAP SG&A expenses increased 2% inclusive of IT and go-to-market. We reported non-GAAP EPS of $0.08 per share in the second quarter of 2017. Based on the results and our plans for the remainder of the year, we are revising our full year 2017 guidance. We now expect revenue growth for the year will be in the range of 2% to 6% and non-GAAP EPS will be approximately flat for the full year compared to the year 2016. We are focused on building the company for the long-term and we will continue to make investments including accelerating quality and reliability improvements for our customers, innovation including our Figure 4 platform, metals and materials, go-to-market strategy in support of the shift to 3D production, and IT systems and infrastructure to improve our overall effectiveness and efficiency as a company. Over the past several months, we have performed very well in some areas and other…

Thanks, VJ. Good afternoon, everyone. For the second quarter, we reported revenue of $159.5 million, an increase of 1% compared to second quarter of 2016. Gross profit margin was 50.6% compared to 50.9% in the second quarter of 2016 as cost savings from supply chain and manufacturing improvements continue to support strategic investments and competitive pricing. GAAP operating expenses increased 4% or $3 million to $88 million of higher R&D expenses. We reported a GAAP loss of $0.08 per share in the second quarter compared to a $0.04 loss per share in the second quarter of 2016. For the first six months, we reported revenue growth of 2% to $316 million, flat gross profit margin at 50.9%, and slightly lower operating expenses of $177 million. We reported a GAAP loss of $0.17 per share in the first six months of 2017 compared to a loss of $0.20 per share in the same period of the prior year. Compared to the second quarter of 2016, non-GAAP SG&A expenses increased $1 million to $46 million as we continue to invest in IT and go-to-market initiatives while driving cost reductions in other areas. R&D expenses increased $4 million to $24 million, primarily driven by investments in our Figure 4 platform, metals and materials. We reported non-GAAP earnings of $0.08 per share or $9 million in the second quarter of 2017 compared to non-GAAP earnings of $0.12 per share or $13 million in the second quarter of 2016. For the first six months of 2017, we reported non-GAAP earnings of $16 million or $0.14 per share compared to non-GAAP earnings of $18 million or $0.17 per share in the same period of the prior year. Healthcare revenue for the second quarter of 2017 increased 25% to $49 million as a result of growth in…

Thanks, John. We continue to focus on driving the shift in 3D production. We are placing more SLA, SLS, and metal printers into manufacturing environment. Growth in materials continues from higher utilization of production applications and software revenue is growing. We are leaders in precision healthcare and are growing that category at double-digit rates. We are accelerating cost reductions into the latter half of 2017, while continuing to invest in innovation, so we can enter 2018 with an improved product portfolio, and more streamlined cost structure to drive higher growth and improved profitability. We have plans in place to step-up regional execution in the Americas and Asia Pacific, and grow on-demand manufacturing and overall revenue from printers in the second half. I truly believe we have a phenomenal opportunity to lead the additive manufacturing industry. And the investments we are making today position us well for the long-term. With that, I would like to turn the call back to Stacey, who will open the floor for questions. Stacey?

We will now open the call to questions. We would like to ask you to limit yourself to one question and one follow-up, thus allowing others to participate in the discussion. As a reminder, please direct all questions to the teleconference portion of this call. The telephone numbers are provided again on the slide. If you are calling inside the U.S., the number is 1-877-407-8291. And if you're calling outside the U.S., the number is 1-201-689-8345.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today comes from the line of Wamsi Mohan with Bank of America Merrill Lynch. Please proceed with your questions.

Hey, Wamsi.

Yes, thank you. Hi, VJ, hey, John. So when we look at the miss in the quarter, right, both on revenues and margins and you clearly lowered your fiscal year outlook as well, what really changed in the last 90 days? Would you say that the demand ended up being weaker or was it competitive dynamics and pricing got more aggressive or was it just largely execution in some of the areas that you noted?

So I think it's largely execution, because if you look at our – Asia, that deteriorated significantly. And our professional printers, their revenue declined year over year. And I think there are two parts. One, our new 2500 Wax product, the acceptance is very good, but we couldn't make enough. And the second part is, especially in Asia, we saw that we were not able to sell as many professional printers. As far as the production printers, we did very well in Q2. We grew both units and revenue well. So I really believe our own execution in Americas and in Asia, I would say, that that's what the issue is.

And the reason why you think that the – you were not able to sell as many printers as you had originally hoped, was that competitive or pricing-based or not?

No, I think the first one is, our quality and reliability issues we had, which continued. Frankly, the problems were deeper than I thought on the quality and reliability. I will be the first one to say I was a little bit more optimistic that I could solve the problems and deploy them into the field faster. So I think that was the one issue that probably I miscalculated. And the second thing is, and I said, our professional printers, I thought that we will sell more. And those are the two key things, and the regional uneven performance will be the way, because a lot of people were concerned about HP and the competition there, and actually we sold more SLS units than last year. So I don't see any issue from competition from Carbon or HP. I think it's really our execution, and that's why I want to focus on execution. And the reason for looking at second quarter different – based on second quarter differently, I just wanted to make sure we get confidence in our execution and I think that's the reason on the revising the guidance.

Okay. No, I appreciate that. And then if I could just follow up one for John as well. I mean, this increase in R&D was substantial. I think you noted that, there will still be continued investments, but you're also accelerating some of the cost reduction initiatives. So can you give us some sense of how we should be thinking about the timing for the return of these current investments that you're doing? And I mean that sort of, I think, bridges most of the EPS shortfall as purely this OpEx increase. So should this continue into the back half with really no offset from – coming from the cost reductions?

Yeah. So first of all, I think you got it right. I think that, clearly, the drivers of R&D and then what you saw on a year-over-year basis in Q2 are bringing Figure 4 platform to market between now and the balance of the year and increased investment in metals, what we believe, that's a very important business for us over time. What we haven't talked about so much and even in the Q1 call, we've been very focused on cost of goods sold cost reductions and we talked about focusing on operating expense more as we enter 2018. We're going to move quicker on that in the back half of 2017 to help offset on both the cost that we're incurring from an R&D point of view, but, honestly, this cost is associated with the quality and reliability issues that VJ is talking about as well. So we've got a series of actions teed up that make perfect sense where the company is now, don't interfere with the future, and we're going to get after them.

So Wamsi, I think one more very important point I want to make. Really we are building the company for long-term, it's very important for us to make sure our customers are happy with quality and reliability, it's very important for us that we invest in R&D to really have a very different production portfolio because, frankly, getting into the consumer business and those distractions where not something I want to shift to production and I want to make sure that we develop our Figure 4 with that robust platform so there are no quality, reliability and manufacturability issues. I want to make sure we have a broad materials portfolio. And as John mentioned, I want to make sure we have the right metals. So, I really believe what we have decided that, short-term, we may invest more but, long-term, we will really set the company up for profitable growth.

Okay. Thanks a lot. I appreciate the color.

The next question comes from the line of Patrick Newton with Stifel. Please proceed with your questions.

Yeah. Good afternoon, VJ and John. Thank you for taking my questions. I guess, first one a follow-up on the quality and reliability issues you're talking or is this specifically associated with a printer, a technology or an end market or is this more of a generic statement across the company?

No, no, no, I think our production printers are really very well designed and they are doing extremely well. It's really the professional printer that we have some real issues in quality and reliability. And I think what we wanted to do was to make sure that, as I said, we want to make customers happy. So it's really local issues with the professional printers. And I think that's why having that reliability, quality issue and not making enough of Wax product, the combination is a result. We had a weak revenue in professional printers.

The other thing to I think about with the quality and reliability space for us is that – and we learned a lot more about this in Q2 and it's – we've invested a lot over the last six months in building a much more rigorous service model than the company's had historically. We brought some key people into the company. And certainly in the second quarter that we learned by having more customer focus, from a service point of view, that we have more problems on a legacy basis out there than we don't understood earlier in the year and late last year. So it's a good thing in the sense that we're getting the right visibility and we're doing all the things we need to do to make our customers happy and want to continue to move forward with us. But there's a little more work than we thought...

And what...

...and the happy customers is job one and we have to take care of it.

And just to clarify one more fine point in the quality, reliability is, there is nothing around the metals side, given some of the challenges there.

Well, I think our older platform, we had some issues. And I think that the 300 metals, we have issue. So, I don't want to just focus on professional. And specifically on 300 and that's why our 320, our new product line, I'm very, very happy with that, because the performance of 320 in the marketplace is excellent. But with 300, we made beautiful parts, but the robustness of that platform was an issue. So no, I agree with you on that also.

All right. And then, as my follow-up, VJ, I think you had previously said, if you were to march towards your full year guidance that you just reduced, that you could – you'd be on pace to set up 2018 for 10%-plus organic growth excluding anything from the Figure 4, and given the reduction in guidance and it seems like a little bit more of a slide in the back half of the year. Is there any kind of recalibration of that 2018 comment that you can provide us currently?

No, I think my view is – I think, of course, we need to demonstrate that we can do the high-end of the range, the new range that I gave. But if we do that, I'm still feeling very comfortable; I think a double-digit growth in 2018. I think the most important for 2018, is to really make sure that we launch our Figure 4. We execute second half, as I said, so that we can be at the higher range of the – that 6% number, I feel very confident about that. I also would like to state that in November, we're going to have an Analyst Day. And there what we want to do, we want to layout a little long-term business model so that you all can see how this whole long-term approach that I'm taking will allow us to really grow the business double-digit in 2018. And we can show you, by business, the appropriate revenue growth and the margin that you can expect on the business models.

Yeah. The other thing, it kind of goes back to the first question of Wamsi is that, we want wanted to give visibility to a multi-year view, at least directionally – it won't be a multi-year guidance but directionally on how we see it, because it will help people understand how some of those investments that we're making, this year in particular, started to work their way out of the business model from a cost structure point of view, 2018 and beyond. And we know we've gotten a lot of questions about that in conversations outside our earnings calls. And so we're going to try and do a real good job of providing that kind of insight.

Great. Thank you for taking my questions. Good luck.

Thank you, Pat.

Thanks, Pat.

The next question comes from the line of Bob Burleson with Canaccord. Please proceed with your questions.

Hey. Good afternoon.

Yeah.

Yeah. So, I guess going back to professional printers, is there a relationship you guys can kind of point to in terms of your customers R&D and kind of just design a new products, design works that's done out there. And the natural level of professional printer growth that you would expect?

Well, I think, our professional printers – first of all, what I wanted to do is there are three key markets that we are really aiming at. There are two verticals, the investment casting and jewelry, are very important for our MultiJet printers. And the third particular one is entry-level prototyping. And, as I said, with our Wax product, we are seeing tremendous – the response is fantastic on our Wax printer. And frankly, we could have sold more if we had the capacity to build in our production line. So I think that, that part of the business, I'm very bullish and I think that's why seeing that printer revenue growth in second half, I'm really counting on our success of 2500 Wax product globally. As far as the R&D part and the saturation, I think that that's a different problem in the entry-level or the prototyping business, but I think our success is more going to be in the verticals, especially jewelry, dental, and investment casting.

Okay. And then for my follow up, just wondering, if we should be concerned about any kind of knock-on effects in terms of materials growth given multiple quarters of low overall printer demand?

Well, I think what we are doing there is putting more production units into the installed base. Now, all these things is not going to be showing up in materials growth overnight, but because the usage of the production printer is significantly more than professional and the consumer printers. My view is, we are going to continue to see the growth in materials and that will accelerate in 2018, because now the shaping of that installed base is very important to me, and creating more and more production opportunities and applications, that would be the driving force. So I don't think that the negative revenue growth that we are seeing in printer now for a few quarters should have a significant impact on our materials growth. And mainly because the shaping of the installed base that I'm talking about.

And in addition to that, VJ noted the execution issues that we had and they're pretty – we know where they are and we're dealing with them aggressively.

Okay. Thank you.

Our next question comes from the line of Matthew Cabral with Goldman Sachs. Please proceed with your questions.

Hi, Matt.

Yeah. Thank you. Hi. How are you? I have two questions about pricing, so I'll just ask them at the same time. The first is just on the 30% price cut that you guys announced in April on the ProX SLS 500. I guess now that it's been a few months, I'm curious as to what you learned from the move and what that means for your broader pricing strategy going forward? And then the second question, just taking a step back and thinking more about the competitive response and just if you've seen any changes in the wider pricing environment over the last couple quarters?

So, I think, let me start off with the answering the first question. I believe that with our 30% reduction in SLS and appropriately positioning that product and basically great in terms of total cost of operations is we are seeing the results. We are seeing that our SLS printer both from unit and revenue has grown year-over-year. So I really believe that it is a very positive move on our side. The other important point that I want to make, SLS printers have a lot of materials consumption, so connecting the dots back to the earlier question, I think putting SLS machines into the marketplace will also enable us for more materials growth. As far as the competitive pricing, we don't see that much. I mean I think I really believe that the opportunity for us is to continue to drive more production growth and then come up with the right kind of verticals which I've talked about for our MJP, which is a jewelry, dental, and the investment casting, because I think those are real production niches that we can have with our MJP printer. And my view was, once the Figure 4 will be there, we will be really having the right kind of a portfolio. And on the metals side, I really believe our 320, especially in the healthcare side, we are very successful. As a matter of fact, you saw the 25% healthcare growth. And having metal printer for healthcare, people are not looking for another metal printer, they are looking at the whole workflow and our 3DXpert software, the materials, we are very successful in metals in the healthcare. And I think our main thing that we want to do, is we want to expand into the industrial, into the aerospace with the metal opportunity. So I believe that it's not about the pricing, it's just having the focus on the right verticals, the right applications where we have a contribution to make.

Thank you.

The next question comes from the line of David Ryzhik with Susquehanna Financial. Please proceed with your questions.

Hey, David.

Hi. Hi, guys. Thanks so much for taking the question. Just going back to materials, excluding Vertex coming out with 2% year-over-year growth approximately materials, what's – how can we think about like the go-forward growth rate now that you've kind of gotten your arms around the installed base, and I have a follow-up?

Well, I think we need to continue to see materials growth, because of the shaping of the installed base. Because, see – if you look at the company in the last two-and-a-half to three years, I think that's how we should look at it. What happens is, you look at the installed base, and which part of installed base is coming out, which part of installed base is active, and how much usage they do per year, so that's how we do all our modeling. And now for the last two quarters, last two to three quarters where we are focusing on the production printer, I'm feeling now that slowly we are changing the way the installed base in constructed. And as we go more and more on these vertical applications like jewelry and investment casting rather than the simple prototyping, my view is we are going to continue to see the materials growth. The other important part is, as I always said, because we do R&D in materials, we will be also able to maintain our gross margins.

Got it. Thanks. And I would just love to get an update on Figure 4, your conversations with customers, and when I guess we can see timing of shipments this year. I guess your other competitor in the 3D space has taken the approach of a lot of collaborations with large customers. Can we see some of these collaborations with Figure 4...

Yeah.

...public announcements, et cetera, would love to get just further insight? Thanks.

I think we are working with customers, that's a very important part, is that some of our customers, they don't want to make a public announcement. So I think that's the key. But for us, we've got to have that whole platform developed, and we will have revenue in later part of 2017.

Thanks.

Thanks.

You're welcome.

Our next question comes from the line of James Kisner with Jefferies. Please proceed with your questions.

Hey, James.

Yeah. Hi, VJ. This is actually Timur Ivannikov on for James Kisner.

Yeah.

Yeah. Hi. First, a quick clarification here. So, your printer segment has been somewhat weak in terms of growth for several quarters now. Can you disclose what portion of your printer segment is production printers versus professional printers?

Sure. So, our SLS, our high-end of SLA like 800 and 950 and the metal printers are all production printers. The professional printers are MJP, CJP, and the 6000 and 7000 SLA printers. Okay?

All right.

And our weakness in Q2 specifically was not SLA, but specifically MJP. So, I just wanted to be clear.

Yeah. Just to isolate a little bit more for folks a few. If you took the year-over-year performance that – the poor performance that we had in Asia Pacific, and what we weren't able to fulfill with the 2500, those two things effectively accounted for the whole year-over-year decline in total printer revenue.

Okay, great. And I guess another clarification about the MultiJet printer. So when you're saying – it looks like you were saying, you said you had quality and reliability issues with that printer, but did you have to do any discounting? Did you have to cut prices in any way to customers?

No. I think the main thing that I'm saying and I think John really articulated very well in the way he answered, if you think about our APJ and our not fulfilling the 2500 Wax would have explained the whole thing. I think moving forward, I'm actually very excited about MultiJet Printing, as I said, our acceptance of 2500 Wax product is exceptional. Our dental product in 2500 is also very successful. So I really think we just have to focus it on the three key verticals that I talked about, dental, investment casting, and jewelry. And we will do extremely well. My opinion is what we need to do is continue to focus on verticals that we have production capabilities that we're offering to the customers.

Okay, great. And so I mean it looks like you're forecasting about, if I'm not mistaken, 9% half-over-half growth and so is that mostly driven by this MultiJet Printers coming back or is that fundamental?

No. So let's talk about all the drivers, so that I want to make sure. I absolutely believe our healthcare business will continue to grow. Remember, healthcare business grew 27% in Q1 and 25% in Q2, so we need to really make sure. As I promised that software will now become positive, so remember it was flat in Q1, now it is 9% growth, so we need to continue our software growing. Materials growth was 8% this quarter. We will continue to grow our materials as I've talked about it. I think those three are going to continue to grow. They are going to be very important part. In addition, our on-demand parts business, which was minus 5% which actually improved from minus 6% to minus 5% going to the Q2, now in Q3 and Q4 they're going to be positive because we invested into capital, we are investing into that sales and marketing. And I absolutely believe that will be another important part or another important driver for the growth that I'm talking about. And then finally, on the printer side, continue to grow our production printers. But now – with MJP, now contributing to the growth that will be the fourth element in terms of the growth that you're going to see.

Okay, great. Thank you very much.

Thank you.

Our next question is from the line of Ananda Baruah with Loop Capital. Please proceed with your questions.

Hey, Ananda, how are you?

Hey, VJ, John, Stacey, thanks for taking the question.

Yeah.

Yeah, thanks. Hope you guys are great. A couple for me, just a little higher level to start with the guidance. There is a bit of a range with the revenue guidance, but you guys are saying flat EPS. So why wouldn't there a view (42:20) – if you sort of fall at the high end of the range, why wouldn't there be some leverage and does that mean you're sort of going to manage – will you be investing more if you actually achieve the high-end of the range, I have a follow-up there, too. Thanks.

Well, I think there are two parts. We want to continue to invest in R&D. As I've said, R&D is important and the IT, because remember, we want to make sure that we create automation of the processes, because effectiveness and efficiency is going to be very important. So those two are important things that we need to do. The last part is, as we go to the production, we need to add direct salespeople into the region will be the investment that we need. So I think you have to look at that revenue growth that will be a flow-through definitely from the gross margin point of view that we will be able to achieve and we will have a cost reduction that we are doing in cost of sales. But to really make sure that we look at our long-term, what we want to do for the company, we want to continue to invest in the very specific strategic thing that we are working on. At the same time, we are going to do things organizationally and we are going to really be controlling how we want to do discretionary. And maybe, John, you want to add few things to that.

Yeah. I think it was – tactically, was your question around why we didn't put a range around that the EPS that (43:51) correlated with 2% to 6% or...?

Yeah, John, it is. I guess the way – I mean, you guys, it sounds like...

Yeah.

...there is so many things you'd like to invest in so...

Yeah.

...the way it occurred to me was, if you did the high end of the range maybe you take the opportunity to just sort of lean into new investment a little bit more.

Yeah. So we were very conscious in saying approximately flat with – on a year-to-year basis, when we did the revision to the guidance. I mean we don't want to have a broad range around that. We have a lot of cost things going on. We're going to be watching cost very carefully through the second half and we have – we got pretty good insights to where we think revenue could head for us in the second half. But I don't want you to think that there could be a little movement one way or the other. I mean, I wish we were that good, but we can't peg it right to exactly the $0.46 right now. I think the thing for us to think for that's really important to understand here is that we certainly could have, based on Q2 results, based on some of the areas where we know we're spending, where we want to spend for the future, where we need to solve for the past, there is certainly other options from a cost point of view that you could take to drive your EPS number up short-term. That's not what it's about for VJ and I right now. We want to do the things that are appropriate and responsible in response to where we are from a performance point of view. But we're not willing to do that and sacrificing the future of the company. We have too many things that we're trying to bring forward that are going to drive a lot of great things for the company next year and beyond. So our decision here and what you see from a non-GAAP EPS point of view is really driven around us trying to strike the right balance between having a reasonable performance with things we know we need to deal with and there is a number of them. Part of it starts with accountability when we have areas in the company that are not performing well, we need to address them. In Asia Pacific, particularly one country in Asia Pacific was a real problem. We've already made leadership changes there. We have skills mix issues in the company that we need to address for the business going forward. There will be some work there. We have discretionary areas of the company that, over the last six to nine months, it was appropriate spending more money (46:26) so a lot things that we have that will help us between now and the end of the year and put the cost structure where we wanted as a starting point going into 2018. But we didn't want to start cutting into the things that are going to make a material difference for the company 2018 and beyond. And so the net of all that was pulling back a little bit on the EPS.

Got it. That's great. I appreciate it. Thanks a lot.

Thanks.

Thank you. Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please proceed with your question.

Hi. It's Jeff Rand on for Sherri. Gross margins were down despite the fact that hardware was down and higher margin materials business was up. Can you just talk through that a little bit?

Yeah. I think part of it is the mix particularly within hardware, the mix within the hardware business. We saw a bit of a sequential decline in materials margins, nothing that was unusual. But we're at – we're low-70s kind of margin profile in materials and we can move around couple of points quarter-to-quarter. Nothing unusual in the quarter other than that the mix of what we're selling. And to be honest, we didn't meet our own revenue expectations in the second quarter, and when you do that, you have other issues, absorption type issues that can have a small impact on margin. Had we met our own internal forecast, we would have done better from a margin point of view.

Great. Thank you. And just as a follow-up, can you – how much did acquisitions add to material sales during the quarter?

You mean Vertex or anything incremental?

Yeah, anything incremental in Vertex. Yeah.

No, nothing incremental. No acquisitions during the quarter that added to our profile.

Great. Thank you.

You bet.

Next question is coming from the line of Brian Drab with William Blair. Please proceed with your questions.

Hey, Brian.

Hey, Brian.

Hey, good afternoon. Thanks for taking my questions. Can you just remind me and maybe add if there is anything new in your reseller base. I've been in discussions with some of your resellers, come to understand that you are asking some of them to make a decision to prove and kind of show you how committed they are to selling 3D Systems and to focus on 3D Systems equipment rather than selling 3D and equipment from competitors. And I'm wondering if that kind of asking them to make that decision is paring down your reseller base and maybe having some impact on the sale of equipment?

So I think we made those decisions earlier in the quarter because I felt that it's important for us. I think channel is very important to the company. We absolutely believe that we want healthy channel. We want the channel that will work with us, invest with us, because it's important not just about having a channel, but marketing. My view is we need to be in front of our customers with clear value proposition that means we need to invest together in making sure that we provide that value proposition to the customer. The second part is we also rely on the channel on servicing our professional equipment that means that they need to have skills, they need to have staffing, so that they will be able to serve our customers (50:10) quality and reliability issues frankly – we had to really make sure that whatever channels that we work with, they will have time, energy, and investment dollars to invest both on the marketing and on the services side. And I think that's how we made the decision. I am very happy about the channel partners that we have. We need to probably do more as we go into our dental business with the Figure 4. So I really believe, I think, we are very happy with overall our channel, and I think what we need to do is make sure we invest together on marketing and services.

Okay. Thanks. And then, on the healthcare business. At this point, I am wondering – I am just wondering how much of that segment or that business is actually 3D printing – 3D printers and 3D printing related services versus some of the Simbionix related, the virtual training solutions. How does that break down 3D printing versus non-3D printing at this point?

I think we are seeing growth across all the categories here. So not just about Simbionix...

Yeah. Very balanced performance.

Very balanced performance.

Very balanced performance over the second quarter (51:33).

It's on our services, (51:33) 3D printing, parts that we do for our healthcare companies, our printers, our materials, our software. This has been a broad, and I think – I really believe that the healthcare vertical is extremely important for the company, and growing at 25% across the board, and across all the categories is a very, very positive thing for the company. I really believe...

Can I just ask...

Yeah. Go ahead.

I'm just trying to get a sense, too, is it like 50% 3D printing and 50% non-3D printing or is that way off.

No, it's way off. I think it's more 3D printing than what you think.

Okay. Well, I don't know what to – I don't know what to think, I'm trying to poke you at the number to see if you give me one back.

But, if that's the plan, I'm giving you...

I don't know what to think.

So, what I'm just giving you – I'm giving you, already telling you, it's more than 50%.

I got it. All right, I got it.

The way we think about healthcare is it's our own internal benchmark for what we want future production environments for 3D printing to look like, as the market moves more towards that. So we use that as our own guiding light. And it's a very good balance for the business.

So, Brian, I think the way you want to think about that is as I always talk about the workflow from digitization to design, to manufacture to manage, and that's a perfect example of that vertical. And I would like to create similar vertical approach in aerospace, in dental, in automotive, I think that's where the things are going. And I think that they're going to continue to really replicate and scale that model that we have in healthcare.

Okay. Thanks for taking my question.

Thank you.

Thank you.

The next question comes from the line of Ken Wong with Citigroup. Please go ahead with your questions.

Hey, Ken.

Hey, Ken.

Hey. How is it going guys?

Very good.

On – so kind of building on the gross margin question earlier, as you guys weigh the efficiencies that you're extracting and then also the pricing, how should we think about what that trajectory looks like maybe in 2017? And then, I mean, I know you guys aren't really targeting 2018, but is 2018 when we might see some uplift to those margins?

Yeah, I think we'll – on 2018 and beyond, we'll talk a little bit more around models when we set up an event in November. I think for the balance of the year, this year, I would think about margins very similar to what you've seen in the first half, not a lot of movement. If we were successful in driving more growth, we could see a little bit of uptick. I think I don't expect our gross margins in general to move quickly over time. I think that the thing that's going to shape us most from a gross margin point of view will be the longer-term (54:36) that can be a benefit to margins and it can be an offset for any other areas that we might want to invest in. That's the way I would think about it right now. We'll continue to – you can be sure that as we go 2018 and forward, we will continue to goal our great leaders in supply chain to generate additional productivity improvements. But – so that doesn't necessarily stop for us. And right now, it's a good balance for us in terms of helping to fund some of the things that we want to do in our company with the short-term things we can do while also allowing us to be competitive in the marketplace. But I think I continue to feel pretty solid about margins.

Got it. And then, VJ, maybe kind of marrying the kind of the tick-down in guide and then some commentary around you guys are really kind of pushing to get the Figure 4 out. Should we still think about that revenue contribution coming in Q4 as being on track or is that still something you guys are – or is that something that might have gotten pushed out?

As I've always said (55:47) significant revenue of Figure 4 will be in 2018 and that thing has not changed. Hello?

Hello?

Yeah. Oh, no, sorry, I got really scratchy. I wouldn't sure if it was my phone or your phone or the conference line.

I think it's our phone, it's our line. We're trying to work through, hopefully it's okay.

It's okay?

Okay, yeah. Yeah, so I can hear you guys now. So what I got was like we will get some revenue, but significant like – significant contribution will come in 2018 is – that's kind of what I caught.

Yeah, that's when it ramps.

Yeah.

Okay. Okay. So still it sounds like Q4 is kind of the initial go-date?

Initial revenue.

Correct. Okay. Thanks guys.

You're welcome.

Thank you. Our next question is from the line of Troy Jensen with Piper Jaffray. Please go ahead with your question.

Hey, Troy.

Yeah. Hi, VJ. Thanks for sneaking me in here.

Yeah. Hi. Sure.

Two questions I have – first, for John. John, if you look back last two years, Q3 has been down kind of seasonally weak quarter. And I think a few years ago there was a divestiture in there. So, can you just give us a bit of sense of seasonality in Q3, would you expect revenues to be up, flat, or down sequentially?

Yeah, I think I'll probably talk more about the half, I mean obviously if we were to get to the mid to high part of our revised guidance range, it implies growth half-over-half. Q3 and Q4 have moved back and forth over the last few years and a lot of that has been driven by the timing of large account orders. We don't see anything unusual and we're driving for – we're in driving for improved growth in throughout the second half.

I think it's much better to look at, Troy, is the half because sometimes the boundaries...

Yeah.

And I'm – I just don't want to get into it what ends up being like a quarterly guidance, Troy, which is not where we're at right now.

Sure. Yeah, I completely understand it. I thought I cleared up (58:10). But then I'm – my follow-up would be a – just a follow-up to Brian's question, just regarding the channel partners. So just – did I understand you correctly VJ that anybody that picked up HP, you will be severing ties with them and no longer partnering?

No, what I said was basically people who won't invest in what we are doing and not have the right services, because my view is – and all that channel rationalization has already happened, so I'm not working on a new plan, let me make sure. So I think you have – you already are, you and Brian both talk to our channel partners. So basically what we decided is already done and we are moving forward now. And as I've said, Troy, frankly, we didn't see any change because of HP into our SLS printers.

So, VJ, just to follow-up, though, on the channel partners, so companies like SYNNEX, Hawk Ridge, MasterGraphics as a handful of others. I mean this create – I think they are given like a 60-day window to close that pipeline. But beyond that, is there – I mean is this a hole that you guys need to fill on your channel partners.

No. I think we need to recruit new channel partners for dental, because we believe that dental is a tremendous opportunity for Figure 4. We are going to look at some other partners because we believe that, as I said, channel is extremely important. I am not interested in closing down anything. I am interested in building these channel partners.

All right. Understood. Good luck going forward.

Thanks.

Our next question is from the line of Hendi Susanto with Gabelli & Company. Please proceed with your questions.

VJ and John, thank you for taking my questions. First – two questions. How should we think about how long it may take to recover and improve execution in Americas and APAC, and putting quality and reliability in professional printers behind?

Well, I think my view is in second half, that's where we need to deliver, period, because I really believe that, as I said, the response that we are getting right now on our product portfolio, I'm very excited, but I just want to deliver. I think in second half, we will be able to see that.

Yeah, we've got a very good understanding of where we're executing well and where we can do better. And we also have some pretty clear actions teed up for that. I think that we should deliver – to deliver kind of trajectory we want to deliver in 2018 and beyond. VJ and I both know that that there is – we've got to make very good progress in the second half. I mean the good thing is as we know exactly where we can do better, that's really important, and we've learned a lot about that in the second quarter in particular.

Got it. And then second, I noticed that APAC has lower materials sales, is that demand or is that execution?

Well, I think, there are two parts, right. When you have reliability issues, people are not using the printers, and when you don't use printers, then you don't have the materials. So I think my opinion, that's why I wanted to focus on delighting our customers and solving our quality and reliability issues. And I think the second part is, the profile of the printers, I think there are more professional printers sold in Asia than production. And I think that's another reason that you're seeing a different kind of a materials...

And on top of that, as we noted earlier in the call, Asia-Pacific was our biggest area of weakness relative to the professional printer space on a year-over-year basis in Q2, I'm very – so obviously that plays in any kind of short-term materials sales you're going to look at there.

Got it. Thank you.

You're welcome.

Our next question is from the line of Rob Stone with Cowen and Co. Please proceed with your questions.

Hey, Rob.

Hey, Rob.

Hi, guys. Thanks for fitting me in. The first question I wanted to ask is on visibility, you've said a number of times you have things in mind for the second half, for example, you expect the on-demand parts services to get from negative 5% to – in this quarter to positive numbers in the second half. As you've been working on systems in the company and improving the way you execute, what are you doing to drive your visibility specifically and are you seeing changes in things like the linearity of a quarter or the lead-times. You've already enumerated the things that you expect to drive growth. My question is really, how are you, in the details, better able to see that? Thank you.

Yeah. So I think we have work to do there. My view is we didn't have the processes when I joined, and we are building the processes in terms of the pipeline, in terms of really understanding what are the probability of getting, converting the conversation into actually order and then converting that into shipment. We have lot of work to do in this company. And those are the processes that I'm bringing. I think we are making progress, and we are getting much better visibility than what we used to, I would say, six months ago.

Yeah.

But we still have work to do, and I think that's something I believe is going to give us more and more confidence and converting to the right kind of a revenue growth that we are looking for. The last part is the skill set. It is easy to say let's move from prototyping to production, but really bringing that direct sales kind of approach, the pipeline and the whole processes to really figure out how do we have a CXO kind of a conversation rather than a transactional conversation. Those are all the skill set that we are building and we are investing into it. But I would say, Rob, that compared to six months ago, we have much, much higher visibility. John, do you want to add anything?

Yeah, the way I think about it, Rob, is we've kind of gone from certainly in the 12 months that I've been here and VJ started it, before I got here. We've gone from a company that really didn't have a consistent defined operational cadence to a company that now as weekly operations processes with a lot of good support from our finance teams and FP&A, and we've gone – we took that to what felt more like a reporting exercise at the start, now we're moving more to attainment. And so we're really talking about how to get things done as opposed to flashing forecast we hope happen. And then we get – the next step for VJ and I is we now have better understanding where things are working well and where we need to focus more time on and to let things go and run themselves. So it's an evolution, but it is definitely getting better.

Okay. My second question is on the subject of pricing, and you talked about how you were focused on more pricing towards an ROI model and driving the installed base towards production printers as opposed to necessarily responding to competitors and, obviously, you wouldn't want to preannounce and I'm not asking you to – anything else you got planned there. But my question is, are you also willing to use price tactically, and do you think that's the tool that you might be able to deploy? For instance, you said you want your channel partners to invest and support you and if there are quality and reliability issues, they have to be able to provide the local service and support. Would you, for example, consider going out to those same partners and saying, this period we're going to give you a bigger discount on this range or that model, because we want to move more of those machines and we know it's going to take more work from you, that sort of things.

Yeah. I think that's what I call marketing that I was talking about. I think what we need to do is to invest more into marketing and create the opportunity to talk about our value proposition. See, the thing that I believe, we need to get much more sophisticated here rather than just saying, hey, here is a product and sell it, we need to create a conversation and that's why marketing is going to be as important as creating the sales process. The second part is, I think my view is as we go more and more production, the conversation is not about the pricing, it's about the total cost of operation and we need to change the conversation. Because at the end of the day, they are looking for a part, which either is complex or custom, and then if they want to make sure that they compare that against the conventional process, and I think that's the experience that we are having. So that's why my view is more and more we need to move the conversation of total cost of operations.

The other thing Rob, and you touched on, in the quality and reliability space, as we're building out a very different service model from where we were, say, a year ago, much more engagement with our channel partners relative to issues around quality and reliability that we're trying to take on. So we need to support the channel and in doing that just like we're supporting ourselves in solving problems with customers. So there is good engagement going on and an improving engagement going on in dealing with that and making sure that our partners are well trained and prepared to solve problems and fix them up. So that's a build as well.

All right. Thank you.

You're welcome.

Thank you.

Our next question is from the line of Shannon Cross with Cross Research. Please go ahead with your question.

Hey, Shannon.

Hey, Shannon.

Hi. Hi, guys. So pretty much all the questions have been asked, but I just have one last one. With regard to cash flow, I'm just wondering how you're thinking about cash flow, I know you guided for this year, but I'm curious as you launch Figure 4, is that going to take incremental inventory, how we should think about some of the accelerated restructuring and how you are – just in general, how you're thinking about it as you look at this year and then I know you won't give guidance, but maybe in general sense. Thank you.

Yeah. First of all, I think in the first half, it's a little lumpy because of sort of non-cash items quarter-to-quarter, but on a net basis, we generated $18 million of cash flow from operations in the first half. There is leverage in the second half with stronger performance that helps that. Will we invest some of that? Sure, we may invest some of that. CapEx for the first half was pretty much what we expected. We think we're tracking there. I think we're going to have positive results for the year relative to cash flow. I don't doubt that, and I think there is a lot of leverage from a cash flow point of view going forward as we get some of these things behind us and we start to really ramp the business. There is just a lot of leverage from a cash flow point of view. And we have a healthy balance as a company. I don't worry about that. I spend more time making sure we're focused on those things that are going to make that leverage real.

Thanks. And then actually just one last question. What specifically changed in Asia on a quarter-over-quarter basis or maybe it was something that was building over a couple of quarters.

So I think...

I'm just trying to understand what the – what sort of turned it this one quarter?

Yeah. I think the main – the things have really – clearly, this has been building, so it's not the just the second quarter. And specifically, let me just tell you a country, Japan, but I really think that we had a lot of issues in Japan. And I think as John talked about it, we've made some leadership change...

Because they were more than we understood, Shannon, (01:11:20).

So that's where I believe our issues were very much, where – I think that, and as you all know, Japan is a country where quality and reliability will be a prime thing and I think not having that thing solved was the key issue. So I'm just trying to be very clearly articulating what the issue was.

But the issue has been solved from your standpoint, so going forward, it's just a matter of rebuilding?

That's what we are working on. But it takes time, right. So when you have those issues...

We've added (01:11:55).

...in the country like Japan, that is not going to be overnight but I'm just feeling that there are two parts, right, as I mentioned that. What happens when you have a quality and reliability issue and the people are not using their equipment, that is a materials growth also is a concern. So I really think – I gave you a specific example of Japan because I think this is something important that all our learning and then we need to really pay attention how we want to globally drive the things that we are talking about. And that's where we need to make sure we have the right channel, we have right training, we have right kind of approach in making that happen.

Yeah. The other thing that we did, Shannon, over the last few months is we actually added a senior leader, regional leader for all of APAC. We can assure he has been spending a lot of time in Japan. And so, we needed that, we needed that focus as well. We found in EMEA that leadership process and rigor has made a huge difference, and now we got to solve for that in APAC, and we've been – honestly, we need to do better in the Americas as well. So, there is, I think we understand that well.

Great. Thank you very much.

Thank you.

Thank you. There are no additional questions at this time. I would like to turn the call back over to Stacey Witten for closing remarks. Stacey?

Thanks. 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, www.3dsystems.com/investor. Thank you.

Thank you. Today's conference has concluded. You may disconnect your lines at this time. Thank you for your participation.