Good afternoon and welcome to the 3D Systems' Conference Call and Audio Webcast to Discuss the Results of the Fourth Quarter and Full Year 2018. My name is Roya and I will facilitate the audio portion of today's interactive broadcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to turn the call over to Stacey Witten, Vice President, Investor Relations and FP&A 3D Systems. Please begin.

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 Andy Johnson, Chief Legal Officer. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. 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 this slide and in the press release that we issued today. For those who've accessed the streaming portion of the webcast, please be aware that there may be a few-second delay and you'll not be able to post 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 the 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 the webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against the results for the comparable period of 2017. Now, I'm pleased to turn the call over to Vyomesh Joshi, our CEO. VJ?

Thanks, Stacey. Good afternoon everyone. We have made significant progress in our multiyear turnaround and transformation of the Company. Before we discuss the details of our financial results, I would like to recap the progress we made during 2018. After stabilizing the Company and putting a foundation in place, we shift our transformation efforts, enhancing our portfolio with several innovative and disruptive new products, while at the same time improving our infrastructure, operations, go-to-market and cost structure. Throughout the year, we launched a series of new products from the next generation SLS 6100 and expanded MJP 2500 product line and low cost DLP FabPro 1000 printer to disruptive Figure 4 Standalone and production systems and a game changing dental solution with the NextDent 5100 printer and 30 dental-specific 3D printing materials. Additionally, we introduced our next-generation mail systems with the DMP Flex 350, DMP Factory 350 and DMP Factory 500. Announced a strategic partnership with GF Machining Solutions which brings us traditional metals manufacturing expertise, automation knowhow and scalability as well as strong partner sales network and enhanced integration capabilities between additive and subtractive solutions. Implemented a major oracle ERP system upgrade which went live in mid-2018, which we expect will help drive longer term operational efficiencies, better automation of processes and data analytics. Continue to invest in a build-out our go-to-market strategy, including completing the building customer innovation centers in Germany and Belgium. And in fourth quarter, we hired a VP and General Manager to lead the Americas region. Lynn McLean brings a wealth of experience as a sales executive leading direct and partner sales team in digital transformation, cloud service and industrial environment. Lynn joining also fills the last portion of our regional sales management structure under Herbert Koeck's Direct global leadership. Additionally, in the fourth quarter, we…

Thanks, VJ, good afternoon, everyone. For the fourth quarter, we reported revenue of $180.7 million, an increase of 2% compared to the fourth quarter 2017. GAAP gross profit margin was 45.7% compared to 48.2% in the fourth quarter of 2017. Gross profit margin was pressured by sales mix across printers, materials and on demand services and lower on demand margins were also pressured by facility consolidation costs while also investing in other facilities to improve and enhance our overall capabilities and global footprint. GAAP operating expenses decreased 2% to $89.6 million as we begin to see the results of our cost structure improvement actions which offset higher legal costs related to the ongoing export compliance investigation and litigation. We reported a GAAP loss of $0.04 per share in the fourth quarter of 2018 inclusive of a $4.9 million tax benefit related to the release of reserves resulting from the expiration of open tax periods compared to a GAAP loss of $0.08 per share in the fourth quarter of 2017. We reported non-GAAP earnings of $0.10 per share, or $11.4 million in the fourth quarter of 2018 including the tax benefit compared to non-GAAP earnings of $0.05 per share or $5.3 million in the fourth quarter of 2017. We are pleased with our revenue growth across many categories of the business in the fourth quarter, in particular, the continued growth in print revenue, which resulted in growth across multiple platforms in all regions as well as continued growth in software and healthcare solutions revenue. Printer revenue increased 17% to $40.7 million on a 113% increase in printer unit sales across categories. As we have discussed, printer unit sales, revenue mix and overall average ESPs will likely continue to fluctuate particularly as we ramp sales of new products, which have a very…

Thanks, John. We have made significant progress in our turnaround and transformation work for the Company. We launched several new products in 2018 and are very excited about the strength of our entire portfolio of work flow solutions, focused on production applications. We believe we have significant opportunities across our key verticals and are increasing our market share in several categories, but also expanding our market opportunities with new solutions and additional capabilities. With our improved operations, execution and unmatched portfolio we believe we’re well-positioned to drive continued and increasingly profitable growth in 2019 and beyond. And with that, I would like to turn the call back to Stacy who will open the floor for questions. Stacy.

Thanks, VJ. We'll now open the call to questions. We 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. If you're calling outside the U.S., the number is 1-201-689-8345.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ananda Baruah with Loop Capital. Please proceed.

Just two for me if I could. Just on the revenue guide, can you walk us through why this softer seasonality in the March quarter? And then VJ, do you think that revenue growth in 2019 can be as strong or stronger as in '18? It sounds like you have more things, more wind in the sail, so to speak. But if not, what would be the reason that it might not be? And then I have a follow-up.

Yes. I'll say a little on Q1. Maybe turn it over to VJ for the full year. So, in Q1, I think one of the impacts for us and the reason that we directed to a little more sequential seasonality there is related to large customer year-over-year order trends which, by the way, has nothing to do with their own revenue performance or anything like that but just timing of large orders. And we have visibility to that. And that has some of an impact in Q1. But it's not something we view as weakness.

So, I think for 2019, we will continue to drive the unit growth because the unit growth is going to be very important. The new products now, they all are ramping very nicely. As I mentioned, our dental product is doing extremely well. Even in the lab day last week, we heard from our customers and our channel partners that the acceptance of our 5100 is phenomenal. We also feel very good about our metal printers, the 350, the 500. And materials growth will come in second half because we absolutely are putting out the units. Our legacy materials are declining a little bit faster than we thought. But I do believe by second half of 2019, you will be able to see the materials growth. The healthcare and software will continue to grow. Again, in healthcare, depending on the big enterprise customer, we may have a different kind of a growth rate. But I absolutely believe that 2019, we want to grow both top line and the profitability and cash generation will be also a focus for 2019.

I can give you a little more color on Q1 versus what was in the prepared remarks. So, our typical seasonality from Q4 to Q1 is, on average -- it varies a little bit year to year. It's about 6%. And we think it could be a few points higher than that this year if that helps you.

And then my follow-up is in both the press release and prepared remarks, John, you talked about focus in materials innovation and software growth opportunities. Can you just go into that a little bit more and give a little more detail around where you're focusing, what we should expect, like that? That'd be great. Thanks a lot.

Yes. I'll let VJ take that one because I think he can explain a little bit more on the focus.

So, I think the materials -- for us, we go for the really incredible leads on some of these platforms. And I think what we need to do is to focus on use cases where we can go after the production workflows. So, what we are doing now is to really align our application engineering, our materials science developers in saying, "Okay. Let's pick two or three very important production workflows just like what we have done in dental. Can we come up with some new production workflow that we are inventing new materials for that?" That's the innovation R&D that will really enable us to scale our figure-four platform for production workflows. As far as the software is concerned, I really think software in the digital factory environment, we have incredible opportunity. When we think about -- right now, we have what I call complement-based point solutions for additive manufacturing. But I think we can really build out some cloud-based solutions and new ways to do additive manufacturing. That's why software is another very important R&D work that you wanna do. And these are the two annuities. The way I think about it is we will do the install base and then enjoy the annuities stream in materials and services.

And when should we expect the innovation to bear fruit? When do you expect -- or when can we expect you guys to actually -- for both of those? For materials --

So, I think it's gonna be coming throughout the year of 2019 and beyond. Basically, if you think about it, our turnaround and transformation was build a foundation, get the part in the lab right. Get the go-to-market and all the supply chain and all the business processing right. Invent new products. And that's what really building plastics and metals and software platform. Now, let's add new materials both in plastics and metals and go after the innovation in software.

And just from a cost structure point of view, there's an opportunity for us right now to save because we put so much money into product development over the last year, year and a half with all these launches. So, we're able to scale back there and now put some of that to these two areas. And that was the message we were trying to get across in terms of the shift.

That's great. And we can expect to see new solutions and new materials and new workflow solutions come to market in 2019?

Yes.

Thank you. Our next question comes from the line of Jim Ricchiutti with Needham & Co. Please proceed.

Just a question on the materials business, it sounds like there's some moving parts to the business. It seems like your legacy materials businesses may be declining a little faster. And I'm wondering are you seeing the pickup from some of the -- you had strong unit shipments for several quarters now. And yet you still seem to be suggesting the real benefit of that may still be a couple of quarters away. So, I'm trying to understand when you're gonna start to see that.

I think what we are seeing is in all our new products, we are seeing the appropriate materials growth. From the core platforms like our SLA machines, our SLS machines, our new 2500 MJP, we are seeing materials growth consistent with our install base. The legacy printers like the wipers which have been introduced years ago, our 3600 MJP, our 5000 MJP, our CJP printers, their materials revenue is declining. So, that's the kind of headwind that we have to fight. And I think it'll take us next six months where the crossover will happen. And you're gonna see very consistent materials growth with the install base growth. So, I think we have two more quarters of really managing that balance between the legacy this quarter versus the new products.

I think the other thing that I'd add to -- we really have some pretty good analytics now around understanding all those components. So, we're looking at this as a model of when those lines cross over, basically. And that's why we feel the way we do relative to the second half.

And one final question, if I may. And I'll jump back in the queue. John, you seem to suggest that some changes in the on-demand business and the organization could impact the business in the near-term if I heard you correctly. I'm just wondering is that the case? And when should we start seeing the benefits of some of the changes you're making there?

Yes. I think what we wanted to get across there is that we did see some slowdown and pullback in revenue in the second half as a result of some of the actions we're taking. So, if you look at that from a run rate point of view throughout 2019, we're thinking flattish there for --

Yes. I think main thing that we had talked about, the export compliance headwinds we have. And because of that, we are changing our outsourcing strategy. And that has impact because this is something that we absolutely need to make sure we do the right thing on the export compliance point of view. And that puts pressure on our on-demand parts business.

Thank you. Our next question comes from the line of Brian Drab with William Blair. Please proceed.

This is actually Joe Aiken on for Brian Drab today. Staying on the materials business, do you see the gross margin in that business continuing to decline? Or do you think that could stabilize in the coming year?

Oh, I think it will stabilize because I think the important part here is this phenomena of the legacy materials. And we are really seeing very good correlation with our core products and the new products. And they have a very healthy margin that we get for the materials. And even more important part for us is to invent those new materials that I talked about because at the end of the day, going after new production workflows with the right application engineering is what I would like to do. So, I really believe as long as we continue to innovate in materials, our gross margin on materials should be stable.

And what about for overall gross margin? Do you see that directionally trending up or down in 2019?

I think it'll be roughly stable. It depends on the quarter or the mix that we have quarter to quarter. Our belief is over time, there's opportunity for margin expansion when the material growth kicks in. But I think in the interim, relatively stable. Maybe some ups and downs quarter to quarter but relatively stable.

And if I could just sneak one more in, how many installations of the figure-four system have you made at this point?

Well, if you think about the dental printer, we have done really well on the dental printer side because it's in 100s. It's not in just one or two. That's how I would think about it.

Thank you. Our next question comes from the line of Hendi Susanto with G Research. Please proceed.

So, looking at 2018, you demonstrated strong products revenue growth of 25%. And then as 3D Systems shifted its focus more on materials innovation and saw great growth opportunity and considering that you introduced a good number of new products in 2018, should we expect printer’s products revenue growth in 2019 to normalize to a lower base?

Well, I think in my view, first two quarters, we should continue to see the unit growth. The printer revenue growth may be different depending on, as John mentioned, with respect to what's going to happen with our enterprise customer. But in second half, still, we absolutely believe that we'll have a very good unit growth. Our revenue growth will depend on the mix because, as you know, we go all the way from $5,000.00 product to $1 million products. So, it's very hard to really look at the revenue growth and the unit growth in the same way. I think the important part for us -- and I think that's how you should be measuring us -- in the second half, our materials growth. That should come back.

And then any insight on on-demand manufacturings in 2019?

So, I think that John mentioned it's kind of flat because we have the headwinds of the export compliance. We need to put some right processes and right software in place. And we need to find right kind of outsourcing partner in United States. And I think that -- the market is growing. But I think here, we need to really do the right thing from export compliance. And I think that's the headwind that we are really looking at.

So, that headwind should continue throughout first half, at least? Is that the right --

That's our current approach. And our view is --

Yes. Next few quarters. Obviously, we'll keep you up to date quarter to quarter. But that's our plan.

Right now, our planning assumption is throughout 2019.

Thank you. We have reached the end of our Q&A session. I would like to turn the call back over to Stacey Witten for closing remarks.

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.