3D Systems Corp Q2 FY2025 Earnings Call

Greetings, and welcome to the 3D Systems Second Quarter 2025 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Mick McCloskey, Treasurer, and Investor Relations. Please go ahead, Mick.

Hello, and welcome to 3D Systems Second Quarter 2025 Conference Call. With me on today's call are Dr. Jeffrey Graves, President and CEO; and Jeff Creech, EVP and CFO. The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our latest press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable periods of 2024. With that, I'll turn the call over to our CEO, Jeff Graves, for opening remarks.

Thank you, Mick, and good morning, everyone. I'll start today with a brief recap of our second quarter results before reviewing in detail where we're at in our restructuring and efficiency initiatives. While much of our dialogue must center on getting our cost structure right for today's market conditions, given the value creation for our shareholders that's tied to long-term growth, it's important to briefly mention the progress we're making against our key growth strategies as well. I'll then turn things over to our CFO, Jeff Creech, to provide details on the quarter's financials. We'll then open the calls for Q&A. So let's turn to Slide 5. I'll start by stating the obvious. The macro environment for our company and 3D printing OEMs broadly remains challenging. You can see this very clearly simply by looking at our year-over-year revenue decline of 16%. As I've stated for the last several quarters, this is primarily attributable to a rapid drop in our customers' capital expenditures spending for new production capacity. This decline is clearly correlated to the uncertainty around tariffs, which has given our large OEM customers pause on where to invest their capital most economically. While we believe this is a transient effect, it's been protracted, and therefore, we're taking aggressive actions to adjust our cost structure to match this current reality. Fortunately, we've had the scale and balance sheet flexibility to navigate this large-scale restructuring while maintaining core R&D investments that are so essential for long-term growth. This is the balance we must continue to strike. While our year-over-year revenue decline was significant, we were pleased to see the stabilization of these pressures in our sequential quarterly results. In fact, if you take away the impact of the software divestiture that we completed at the beginning of this quarter, which contributed roughly $7 million of revenue in Q1, our continuing operations grew 8% sequentially. While I don't want to overstate its significance, as I do expect continuing revenue volatility quarter-to-quarter until the tariff situation subsides, it was certainly a welcome outcome. We owe this success to our outstanding employees, who've maintained their focus throughout this tumultuous period, and to the strategic investments we've made over the past years in both metal and polymer 3D printing technology for critical markets such as MedTech and Aerospace and Defense. As you'll hear from me later, these areas are growing rapidly and specifically for MedTech have now done so over multiple years. Importantly, these are soon to reach a point of critical mass that we believe will drive meaningful revenue growth in the years ahead. All of this is supplemented by a reinforced balance sheet following our Q2 transactions, which include the sale of our noncore Geomagic software platform, our June debt transaction and share repurchase. Taken in combination with our restructuring actions, we believe this places the company well on the path to sustainable profitability and long-term growth, but we still have much work to do. Let's now move to Slide 6, and talk about our near-term priority, which we call profitability first. As I've shared before, we've identified actions across the entire organization to be executed through the first half of next year to drastically improve profitability. Our goal is to align our costs with the current market realities. These actions are designed to positively influence gross margins, leveraged by additional efficiencies we gained from our decision to in-source manufacturing 2 years ago. More significantly, they will unlock a material reduction in operating expenses, targeting improvements in every single function and geography we operate in today. In the aggregate, we plan to deliver over $85 million in annualized savings by mid-2026. Based on the $50 million wave we announced in March of this year, annualization of the roughly $20 million of in-year savings from incremental actions we began implementing when we spoke in May, following the broad announcements around tariffs. While timing is always a risk, particularly when it comes to gross margins where there are so many dependencies, we're determined to move to positive cash flow even in the current market environment by restructuring our business and driving process improvements that translate to efficiency gains. We have the scale to do this, and it is our top priority. To provide more perspective to items already actioned and those still in scope, the chart on this slide provides relative sizing of the broader market categories for our initiatives. Our organizational capacity alignment entails streamlining our functions to efficiently match the needs of the business. R&D, for example, has historically operated at about 20% of revenues, a strategic decision we made for the last few years to ensure that our industry-leading portfolio of metal, polymer, and regenerative technologies remains at the forefront. This range of technology sets us apart from all others in the industry. As we're now entering the next phase of commercialization of dozens of new products brought to market through this investment, we're positioning to capitalize on these prior investments, allowing us to bring R&D spending to levels that are strong but sustainable. Similarly, business and legal entity rationalization emphasizes the simplification and concentration of our efforts in core markets that will deliver not only significant value, but on an attractive timeline. We're focusing on those that deliver the most compelling return on investment that matches our internal mandate to return to profitability. In critically evaluating the returns on our R&D investments, we've taken the hard decision to spin-off or mothball some exciting opportunities that simply had too long or too expensive a runway to fully commercialize. For example, in July, we made the difficult decision to curtail the level of investment in Systemic Bio, a truly incredible technology that we believe has the potential to ultimately transform the way in which new drugs are developed in the pharmaceutical industry. This technology in which vascularized human tissue is printed on chips, allowing for new drugs to be tested in human relevant models in the lab simply had too long of a commercialization timeline given the conservative nature of the pharmaceutical industry and adopting new test methods. So we put this effort on the shelf for now, having developed some unique IP, and we'll return to it in the future if the market dynamics become more favorable. This is the analysis we're undertaking with all of our long-term investments. Now since I touched on an adjacent element of our Regenerative Medicine program, I'll take a moment to confirm that our core efforts to deliver the first 3D-printed human lung in close partnership with United Therapeutics continues to progress very well, as evidenced in yesterday's announced technical milestone recognition. After updating the testing criteria for the program at the end of last year to incorporate human seed testing protocols in order to accelerate full-scale testing of printed lungs, our technical milestones are reset to support this objective. Our milestone attainment in the second quarter marks a significant step forward in printing technology that underpins this incredible program, one that promises to change the lives of millions of people who are waiting for a lung transplant. I look forward to keeping you updated as frequently as possible on this exciting journey. So moving back to cost efficiencies. Through actions taken to date, we've already seen significant cost improvements driven by a reduction in contracted employee costs and professional services, enabled by upskilling the capabilities of our internal workforce. This activity alone represents our third-largest opportunity for cost reductions and should drive a reduced operating expenses footprint as we move forward. The next step is to introduce more streamlined back-office processes and greater automation to improve both speed and efficiency in our support functions. We expect these efforts, combined with the focusing of our R&D investments to reduce operating expenses materially in the coming quarters. In addition to operating expenses, our actions are also designed to positively impact gross margin performance. To do this, we'll leverage our prior strategic decision to in-source manufacturing and supply chain management as we consolidate our footprint globally. Starting at roughly 50 locations worldwide when I first joined the company 5 years ago, we're making solid progress on a path to integrate production and service capabilities to reduce this footprint by over 50% through mid-2026. The benefit from these last two pillars will come from reduced facilities costs, management costs as duplicate teams are consolidated and more efficient supply chain and logistics management. From a working capital standpoint, consolidated operations and distribution centers are already improving inventory control and manufacturing efficiencies through our Lean and Six Sigma implementations. Notably, this structure also enables a more rapid introduction of new products into manufacturing, significantly improving control over product quality and a heightened level of agility with respect to navigating complex global supply chains that continue to be impacted by rapid tariff changes. In the second quarter, the positive effect of these actions more than offset the rise in component costs from tariffs, and our goal is to continue on this trajectory. As you can see from our Q2 results, we're well on our way to deliver the benefits from our cost reduction plans. Margins for the quarter were more robust and operating expenses were $47 million, a reduction of 27% year-over-year and 24% sequentially. With actions we've taken to date and those in our plan for the balance of the year, we're targeting to exit Q4 with operating expenses in the low $40 million range. So to be very clear, our top priority is to align our costs with the current market conditions in order to move to positive cash flow in 2026. With that said, we must also emerge from this period with a strong portfolio of new products in markets that will drive sustainable growth and profitability in the years ahead. So let's now shift to talk about some of our most important growth factors on Slide 7. I'll start with our healthcare business. For many years, we've spoken glowingly about the progress in our Personalized Health Services or PHS business, as it frequently grows at double-digit rates and did so again in Q2. However, as our PHS business has continued to expand and mature, our customers are increasingly asking for additional orthopedic-related products and services. These include a further expanded portfolio of FDA-cleared surgical guides and along with them medical implants for patients. In addition, there is an increasing call for point-of-care services in which we provide trained staff and advanced printing technology within the hospital itself. Offering point-of-care services is unique to our company and offers us exceptional insights as we work shoulder to shoulder with surgeons to rapidly develop new applications for 3D printing. We piloted this program with the VA, and we've now expanded it to many of the leading research hospitals who are at the forefront of medical breakthroughs. Recent examples range from new ways to rapidly address trauma injuries to novel approaches to treat patients with bone cancer. We then use this knowledge to expand these applications to other hospitals that can benefit from the breakthroughs, which in turn drives growth in our business. This flywheel is in its earliest stage, but we can already see its potential. Given this expanding business model, moving forward, we will refer to our combined orthopedic activities as our MedTech business, which is separate from our Dental and our Regenerative Medicine businesses, as you can see on Slide 8. These three businesses, which together make up our healthcare business unit, share a common foundation of outstanding quality and regulatory practices and in certain cases, common printing technologies. Supporting over 100 CE-marked and FDA-cleared devices all over the world, we've today brought relief to millions of patients globally. For perspective, our MedTech business reached over $80 million in annual revenue last year. And this quarter, on trend grew 13% from prior year and 16% sequentially. Our expertise in MedTech is most prominent for personalized solutions targeted Above-the-neck. This area of the human body is our largest contributor to MedTech and has historically been the fastest growing, primarily due to patients' needs for highly customized craniomaxillofacial or CMF implants. Our printing technology has now reached the point where response times allow it to be increasingly used in trauma circumstances, which is a major focus for us over the next few years. Below-the-neck targets applications for areas such as spines, knees and hips. As you can imagine, there's great expansion potential in these areas with an addressable market size in 2024 of over $40 billion. We'll continue to build upon this excellent foundation in the years ahead. Now turning to another important growth strategy element on Slide 9. An increasingly recognized differentiator for 3D Systems is our ability to help customers not only navigate early-stage process development, but then also scale it to a desired production output with additive manufacturing. In virtually all cases, this now translates to an evolution from process development to limited parts production and finally, to the sale of printers for larger volume production. We are uniquely positioned to support each stage of this customer evolution. Very simply, we call this market strategy the 3P's: process, parts, and printers. We cover the spectrum from end-to-end, starting with initial exploration and ideation of the value proposition that only additive manufacturing can accomplish. Then migrating through the proof-of-concept to production of end-use parts in limited quantities and ultimately, the customers' capital investment in additive equipment and materials for integration into their production workflow. Each element has its own unique revenue stream, supported by the widest range of technologies in the industry, spanning both metal and polymer printing platforms and materials. And we can do so across the global manufacturing footprint, which reduces supply chain costs and risks to our customers. To execute this unique business model, we leverage an industry-leading team of application engineers, which we refer to as our application innovation group, who then translate the desired application, which is the problem the customer wants to solve with additive into a fully functioning workflow or process. That process can then migrate into either of the following Ps, either parts or printers. And what we see in many cases, particularly relevant in today's economic climate, is a unique ability to serve as a bridge for them, smoothing the transition from low volume to high-volume production capability. The ability is unique in our industry today, and we increasingly are asked to provide it on a regional basis within the U.S. and EMEA. The appeal for parts manufacturing is well known to our industry and has long been a focus of our service bureau partners who are themselves some of our best customers. In that respect, let me be very clear to state that by no means do we have a desire to compete with a service bureau and participate in large quantity on-demand part manufacturing. On the contrary, for industries that require the highest level of complexity with limited quantities of parts that are vital to the customer and economically attractive to 3D Systems, we offer this as an added service, with the ultimate goal being the sale and service of printing systems to these customers. In this period of time where tariffs are slowing the decision process in terms of capital expenditures investment in new production capacity, offering this capability to our customers allows them the time needed to fully assess their future needs. With rising demand, we continue to preferentially invest in our capacity to scale the entirety of this value chain. Turning to Slide 10. We provide a relative overview of how this works within some of our most critical industrial markets. This model speaks to much of the success for our Aerospace business, which in Q2 nearly doubled revenues from last year. That performance represents the effectiveness of our 3P strategy applied to a vertical that now contributes over $30 million of revenue annually to the company. Growth in parts and process succeeded globally, with the U.S. Naval and Air Force wins serviced from our U.S. locations and similar success in EMEA service from our European locations. From a technology standpoint, multiple wins for our SLS 380 polymer and DMP 350 triple laser metal system were the preferred choice for these applications. We'll continue this approach, particularly focusing on the high reliability markets such as aerospace and defense, AI infrastructure, oil and gas and power generation, where we believe can increasingly drive our growth moving forward. Let's now flip to Slide 11 to finish my remarks with an update on Dental. 3D printing for dental has been core to this company for decades and will always be embedded in our DNA. Our leadership in orthodontics is well known and cemented by last year's milestone contract, providing a foundation for years to come. In the long term, this provides stability, it has occasionally resulted in year-over-year variations, which are reflected in the results for this year following a strong 2024. Our outlook in this respect is stable on a sequential basis going forward, and we've launched new products expected to drive growth in the quarters ahead. Just a few weeks ago, we announced another major milestone in digital dentistry with the full commercial release of our new FDA-cleared NextDent Jetted Denture Solution for the U.S. market. This technology redefines dental prosthetics with revolutionary single-piece multi-material dentures, delivering a distinctive combination of exquisite aesthetics, comfort and outstanding resistance to breakage for an enhanced patient experience. Throughout our beta customer testing, it's been validated with strong endorsements, highlighting effortless usability, unmatched material properties and groundbreaking efficiency improvements of up to 300% versus traditional manufacturing methods. With our beta testing now complete, we've entered full commercial production for the U.S. market significantly expanding our leading digital dentistry portfolio, which in total addresses straightening, protection, repair, and replacement of teeth. With this specific solution targeting a U.S. replacement addressable market that we expect to reach $600 million by 2029. In addition to shipping a few samples of these unbreakable and beautiful dentures to our shareholders, who started to appreciate the potential of this milestone for our business, more importantly, we've begun to ramp our production in the back half of this year for purchase orders already received in the last few weeks. So with that, I'll turn things over to Jeff Creech, our CFO. Jeff?

Thank you, Jeff, and good morning, everyone. Before I begin, I would remind you that we divested our Geomagic software business on April 1, 2025. Throughout today's call, in addition to comparisons to prior period results, we will also make specific reference to prior periods to exclude Geomagic operations for an apples-to-apples comparison. With that, I'll begin with our revenue summary on Slide 13. Second quarter consolidated revenue was $95 million, down 16% year-over-year or 11% when excluding Geomagic. Sequentially, revenue was up modestly and when adjusting for Geomagic in Q1, we saw 8% growth. Within our segments, Industrial Solutions revenues of $50 million declined 23% or 13%, excluding Geomagic. This was primarily driven by printer and material softness in consumer-facing end markets. Encouragingly, as Jeff highlighted earlier, this was partially offset by tremendous momentum in Aerospace and Defense, nearly doubling revenues from last year and growing over 50% from the prior quarter. Healthcare Solutions revenues of $45 million decreased 8% from the previous year, predominantly driven by Dental with 2024 representing a significant year of purchases by a specific customer, as earlier mentioned. Outside of Dental, MedTech delivered impressive growth, up 13% from last year and 16% from last quarter. Now to Slide 14. For the second quarter, we reported non-GAAP margin of 39%, which compared to 41% in the prior year and 38% when adjusted to exclude Geomagic. Performance for the second quarter was very strong and also delivered a significant improvement on a sequential basis, primarily attributable to favorable manufacturing variances given higher volume and cost efficiencies. Additionally, gross margins include approximately $2 million of benefit associated with milestone recognition within our Regenerative Medicine business. Now turning to Slide 15. In Q2, we delivered strong cost performance with non-GAAP operating expenses of $47 million, down 27% year-over-year and 24% sequentially. This improvement reflects the impact of our restructuring actions, which drove meaningful efficiencies across nearly every function and geography, along with significantly reduced spend on external services. We also saw a benefit from a one-time compensation adjustment. Looking ahead, we expect continued sequential reductions through the remainder of 2025, targeting operating expenses in the low $40 million by year-end with the continued momentum we expect for our reduction initiatives. Now turning to Slide 16 to finish up the P&L. For the second quarter, adjusted EBITDA of negative $5 million significantly improved from the prior year by $8 million and prior quarter by $19 million, a testament to our profitability-first execution. As a result of gains related to our Geomagic asset sale and proactive debt repayment at a discount, we reported GAAP net income of $104 million for the quarter. This resulted in GAAP earnings per share of $0.57, up $0.78 per share from the prior year. On a non-GAAP basis, loss per share was $0.07, also an improvement compared to a $0.14 per share loss in the prior year. Turning now to Slide 17 for our balance sheet. We closed the quarter with over $116 million in cash and cash equivalents and $17 million in restricted cash, which is predominantly related to the convertible note refinancing executed in June. Our expectation is that the majority of this restricted cash may be used to address about half of the remaining $35 million in debt due November 2026. In the aggregate, cash and cash equivalents and restricted cash on our balance sheet totaled $134 million. This compared to $171 million at the end of last year with the decline in cash driven by $60 million used in operations, $113 million generated by investing activities, largely representing the proceeds from our asset sale and $97 million used in financing activities, which I'll expand on momentarily. In late June, we took proactive action to strengthen our balance sheet, permanently retiring $88 million in outstanding debt at a meaningful discount to par, extending the due date on an overwhelming majority of our debt out into 2030, and repurchasing $8 million of our common shares to reduce dilution. The net result provides a very manageable convertible note maturity of approximately $35 million due in November 2026 and $92 million of senior secured convertible notes due 2030. The 2030 notes have a conversion price of approximately $2.24 per share, a 20% premium over our share price of $1.87 at the time of the transaction. Looking forward, our improved profitability is already starting to have a positive impact on operations. At the beginning of August, we still held approximately $130 million in global cash and restricted cash and expect a more modest level of cash usage as a result of our cost improvements as we continue to execute against our plans to enable positive cash generation in 2026. So with that, we thank you for your time and continued support of 3D Systems, and we'll now open the line for questions.

Our first question today is coming from Troy Jensen from Cantor Fitzgerald.

Congrats on all the improvements here. Jeff, a quick question for you or maybe either Jeff. $80 million you guys said for MedTech, can you just break that out between hardware versus the customized healthcare services that come out of Littleton?

Yes. The vast majority of it is the latter, Troy. It's mainly the personalized health services we provide. We do sell printers, but those have been a little bit influenced as well by the tariff situation because those sites are scattered with our customers around the world. And obviously, we have our own printing capacity in Littleton as well to make parts. So the sale of printers into that market is relatively modest. Most of it is services and parts.

Perfect. So then healthcare combined is MedTech plus Dental plus Lungs. Is that kind of how we think of it going forward?

Correct. That's the healthcare business, Troy, and we're trying to separate MedTech, which now includes more aspects under the orthopedic category, from Dental. Regenerative is also a new area, so all of this is included in healthcare.

Perfect. And then how about just quickly on Dental. I know that's been a vertical you guys have been really excited about with some of these new product launches. So the NextDent 300 is kind of the next phase for you guys as far as revenue milestones or products that will kind of start to really help. I just kind of get an update on your Dental progress here.

Yes, Troy, we're currently assessing the expected penetration rate of that market, but the economics for 3D printing dentures are very favorable, so I believe progress will be quick. While we are not the only player in this field, I am confident in our solution, and the feedback has been very positive. We aim to capture a significant portion of this market, which is about $400 million in the U.S. and similarly sized in Europe, though Europe requires separate certifications that we are already working on. The U.S. market alone is valued at $400 million. The traditional process for making dentures involves a lot of manual labor, making it costly and time-consuming. In contrast, 3D printing offers a great solution. The main challenge we faced was successfully 3D printing multiple materials at once while achieving the right aesthetics and durability. These products often fail due to drops, so balancing these factors was difficult, but we succeeded. I'm pleased to report that we have received FDA certification and completed extensive beta testing, confirming both the product's viability and excellent economics. We will provide more details as we approach 2026. I can already say that there has been strong interest in placing purchase orders, and those are beginning to come in. We are increasing production in the third and fourth quarters, and I expect that it will be a significant contributor to our Dental business next year.

Perfect. If I can sneak one last one in for Jeff Creech here. Just gross margins kind of ex-the revenue milestone, it looks like it's about 38%. And just kind of can you confirm that and thoughts on gross margins in the next couple of quarters?

So yes, that's exactly right, Troy. The milestone revenue falls directly to the bottom line. So it does have a very nice lift for us, and it did cause the spike in the margin in the second quarter. What we see for the balance of the year is something that's a little more normalized, something akin to what we started the year off with. So we're going to continue to pursue the manufacturing efficiencies and hopefully drive as much margin as we possibly can. But yes, for certain, the lift in the second quarter was significantly attributable to the milestone revenue.

Next question today is coming from Jim Ricchiuti from Needham & Company.

So I just want to make sure I'm clear on this. Your dental business, excluding the aligner business decline was down about 3%?

Yes. The drop in aligners was significant, at 19%. This was a major challenge for us. Despite this, our overall dental business only experienced a 3% decline. We were quite satisfied with the performance of the rest of the business. The aligner segment has certainly been impacted by the economy, which we had expected, so it wasn’t a surprise to us, but it was a considerable setback.

Jeff, putting aside the aligner business, where we know what's happening with the large customer, you're seeing this kind of improvement in the broader dental business without the contribution that you're expecting on the NextDent 300 looking out to '26?

Yes, that's exactly right, Jim. The dental industry is a great fit for 3D printing, and especially for our company since we've been involved for a long time. That's why I emphasize all four elements. Straightening has been foundational for us, while protection with nightguards is new and we're progressing in that area. We've also been utilizing our Vertex and NextDent materials for repairs, which continue to see growth. Additionally, we have a new and expanding market for dentures. I'm very enthusiastic about the prospects for dentistry. Overall, I believe 3D printing is going to excel in this field, and 3D Systems will be leading the way. We're very excited about it and anticipate completing the remaining regulatory approvals worldwide within the next 12 to 18 months, which will significantly expand the U.S. market. Currently, we have a $400 million new market to pursue with strong economics and an excellent product. If we factor in Europe and the rest of the world, we are looking at a promising future in dentistry.

When you talk about providing trained staff for point-of-care services for the personalized health portion of the business, is that something that's being done gradually? Do we have to think about that looking out next year, potentially layering in more of that and presumably that's going to be accompanied by revenues?

Yes. It is a paid-for service, Jim. I don't look at it as a significant revenue generator. What I look at is it's an outstanding application developer. You're right at the front of how they want to use 3D printing in a hospital. And often, this is moving very rapidly. So somebody comes in with a trauma case and they say, can we perform the surgery or even do an implant rapidly to help this patient. And it's pulling us into brand-new applications, brand-new areas. We get paid along the way. It's a nice service, but I don't look at it as a meaningful revenue stream. I look at it as an application area that will move us into new markets. It's confirmed our move into trauma very significantly. So we see outstanding trauma applications coming from this in obviously, bone repair to the skeletal system. And now moving into cancer treatment for bones, it not only provides a lot of bone cancer is very tricky in the way the tumors grow into the bones. So surgical guides, FDA-approved surgical guides are an important element to help the surgeon remove the tumor, but then to help them repair the bone or support the bone in some way through an implant is a great extension for 3D printing technology. So we've got the polymer and metal technology to apply. It's the knowledge of where to apply it. And that point-of-care service is the tip of the spear. That's really what leads us in these directions. And we're now embedded in most leading research hospitals.

Next question is coming from Greg Palm from Craig-Hallum.

I'm just curious maybe an update on just the broader macro, whether it's sales cycles, feedback activity, any change over the last 3 or 4 months since we got our last update?

Looking back, before April, things were slow because customers were concerned about future interest rates. Generally speaking, they were worried about how interest rates would impact end demand, which was already affecting capital expenditure spending. After April, due to the rapidly changing tariff environment, customers became very hesitant about making capital expenditures because they were uncertain about where to establish new production capacity. Their end demand hasn't drastically changed, but the uncertainty surrounding product placement has caused hesitation. Most of these customers operate plants globally, and we are collaborating with them, which can be frustrating. However, the positive side is that we are seeing growing demand for short-term parts supply and limited quantity part production. We aren't shifting to being a service bureau, but we are capable of responding to customers who have validated their processes. For instance, especially in the metal sector for high-reliability markets, customers recognize the value of 3D printing for their applications but are unsure where to install their printers. They are asking if we can provide them with 100 parts to help them during this transitional period. This opportunity is emerging right now, and I believe it is sustainable. We are well-positioned to assist customers from the development of their processes through to limited parts production, eventually leading to them investing in 3D printers for their plants. The situation remains stable, with no significant improvements or declines currently. Everyone seems to be in a wait-and-see mode regarding tariff outcomes. Meanwhile, we have identified a new growth area in manufacturing parts, and we intend to capitalize on that.

Yes, that's helpful information. Regarding the dental opportunity, are you primarily focused on a capital expenditure sale, or are you considering offering some type of service? The reason I'm asking is due to the same challenges that have affected the core business, such as macroeconomic factors and reduced capital expenditures. What gives you confidence that these issues won't also affect the dental opportunity if you're expecting it to be a major contributor next year?

There's two reasons, Greg. Number one, people need teeth. So in terms of a predictable demand, it's highly sustainable in my opinion. So there's not much of an option. The question is how do they get them. And it's a completely different CapEx consideration here because these printers are relatively inexpensive. They're affordable by regional labs. I mean even a dentist office could get in the business if they really tried. So it is the overused word of democratization. It moves dentures from being a very difficult process that often involves overseas labor and all of that stuff to something that can be done locally, regionally, and it could be done nationally as well with preferred economics. But it is so much less expensive. The return on capital, first off, the CapEx spend is lower, much lower than these big metal printers or something that we're talking about for industrial applications. It's much lower. These are much more affordable, and I don't think it's a major impediment for any dental lab of size in the country to buy. One of the parts of your question was, is it more of the traditional model that we followed, it is. We sell a printer, we sell consumables, we provide services to the printer. That's the model for us. And I'm convinced demand is out there and very sustainable. The price of entry for our customers is relatively low and most often probably do this regionally in laboratories. And the economics are so preferential that the return for them on the capital investment is extremely manageable. You're talking kind of a 1-year or less return on capital investment for the printer itself and the post-print processing. So the economics and the quality of the product, Greg, combined, I think it's going to be just an outstanding business. And not only for 3D Systems. I mean, I think it will be a great business for 3D printing in general, and I want to be at the front of that parade with our product.

Yes, that makes sense. Regarding the cost reduction program, it seems like you might be progressing faster than anticipated. Could you provide more details on our current status? Also, in the last quarter, you mentioned the potential to achieve EBITDA profitability at a revenue level in the mid-90s. Are you still comfortable with that target when fully implemented, or do you feel more or less confident about it? What are your thoughts on this?

Yes, Greg. We're executing according to plan and are ahead in some areas. I feel confident about our ultimate targets and believe we can be profitable and generate positive cash flow at this scale. We have the capacity to restructure at our current revenue level, and I'm very comfortable with where we're headed. The challenge lies in predicting timing. We've made some fast headcount changes, but exiting complete facilities and managing subleases can take time. This adds some uncertainty to the timing, as it depends on subleasing agreements and the construction involved, which involve significant expenses for us. There's great potential for reducing our footprint and cutting fixed costs, but we need to secure subleases. We're doing everything we can to facilitate this, but it requires time. To summarize, I'm very comfortable with our direction, and while we're proceeding according to plan, the timing for the final steps, particularly with the subleases, is still uncertain.

Next question is coming from Trevor Sahr from William Blair.

This is Trevor on for Brian this morning. I just wanted to ask you guys a little bit about as it relates to the second half, some of the other markets like aerospace and defense and AI infrastructure. You guys have given a lot of great detail on Dental, but wondering if you could spend a minute on some of the other markets that are exciting to you right now?

Aerospace and defense will continue to be an exciting market for us. The only challenge is that it is a slow market to penetrate. You really need to put in the effort. We've been working on this for the past couple of years, focusing some of our metal printing technology on promising applications in aerospace and defense, particularly in naval applications. Additionally, there are numerous flight systems, rockets, and drones that we are targeting with our metal printing technology. However, these sectors take a lot of time to enter, which is why growth has been slow. I'm not sure everyone is aware of how far we've come; we are now at around $30 million in trailing 12-month revenue. It's becoming one of our more significant markets, and positively, it's a very stable market. Once you establish yourself as a reliable supplier, it tends to remain that way. If you get qualified for an application and execute well, you secure a strong position. I really appreciate this market. AI infrastructure is evolving rapidly, and we have been collaborating with chip equipment manufacturers for some time. There are excellent 3D printing applications in that sector, especially concerning heat and thermal management, which are crucial for these systems. 3D printing allows for component geometries that are not possible through other methods, making it a valuable market for us, even though the machines are costly and there aren't as many of them due to their high productivity. The growth in chip usage is beneficial for this business, and we are pleased with the position we've built over the past three years with semiconductor chip equipment manufacturers. We are currently focusing on thermal management of data centers, primarily by printing copper and other high conductivity materials to effectively remove heat from GPUs. Efficient heat extraction is vital, as excessive heat can compromise chip performance and lifespan. When discussing power generation for data centers, much of it involves HVAC systems to keep the data center and equipment cool rather than the energy consumed by the chips themselves. If we can improve heat extraction from GPUs, we can enhance cooling efficiency. This is a promising area we are heavily exploring, and as shown in the chart, we have a developing revenue stream there, albeit smaller for now, it's exciting. The build-out of data centers looks favorable for us, along with aerospace and defense, which tends to be a more regional business. We've gained traction with U.S. OEMs and have also developed customers in Europe serviced from our Belgium facility for various aerospace and defense applications, including flight systems, ground and water systems, and rocketry. These are the two most exciting markets for us right now.

Just one more for me, that was a clarification question. Sorry if I misunderstood this, but when you were talking earlier in the call about R&D spend, did you say that you were intending on getting R&D spend down to a more manageable long-term level? I interpreted that as we should expect that R&D spend might come down in the following quarters or next year.

Yes, Trevor, I want to clarify that if we look back three to four years, my belief was that our portfolio had the potential, with significant investment in R&D, to create the most exciting range of 3D printing products globally in both polymer and metal. We embarked on this journey over three years ago and allocated 20% of our sales to R&D, which is a substantial commitment. We made this decision with intention, aiming to refresh our entire product line for metals and polymers, primarily through organic growth, as we had everything we needed to do so. It typically takes about 2 to 3 years in this industry to develop a new printer and additional materials, with FDA approvals extending that by another year. We increased our spending on application development to 20% of sales for three years. However, the last year posed challenges due to inflation, rising interest rates, and tariffs impacting our sales. This situation highlights the strong alignment between myself, the management team, and our Board regarding our strategy to ensure we deliver market-leading products, which are now entering commercialization. I want to emphasize that we can now reduce our R&D expenditure to the mid-teens percentage of sales, allowing us to scale back the additional spending we had implemented to refresh our product offerings. While we will maintain and periodically update our products, our overall expenditure will decrease. Moreover, we are intentionally assessing the return on investment for our R&D initiatives. Our advancements in regenerative medicine are remarkable, particularly our collaboration with United Therapeutics on the Lung Program, which we will continue to support. This project also generates valuable regenerative technology for human tissue printing. We have explored printing human tissue for drug testing with Systemic Bio for two years, but the slow adoption of new testing technologies in that industry, understandably due to the risks to human lives, has led us to halt that effort for now. Although we have the leading technology for printing human tissue on chips, the market timelines are too lengthy for us at this moment. As a result, we are scaling back R&D in these areas, while focusing our investment on projects with clear short-term pathways to strong markets and favorable ROI. I am confident that we can maintain our competitive edge with sustained spending in the mid-teens percentage range. Thank you for your question, Trevor.

Next question is coming from Alek Valero from Loop Capital Markets.

This is Alek on for Nanda. So you guys mentioned that tariffs are going to impact operating expenses through the second half of the year. And I know you've also mentioned your efforts to fully in-source manufacturing and your supply chain operations. So my first question is, how is the progress going on the in-sourcing? And to what extent are those efforts curtailing further tariff impact?

Yes, that's a great question, Alek. I want to clarify that we have in-sourced our manufacturing and supply chain over the past two years, and that process is nearly complete. We have a few minor aspects still to in-source, but the majority is done. The primary reason for this move was to ensure we maintain control over product quality for our customers. As our products enter production facilities worldwide, it's essential to avoid any quality issues, and we found that relying on contract manufacturing did not allow us to guarantee that quality. By in-sourcing, we now have full control, and I’m very satisfied with our current shipping capabilities. Additionally, this shift has led to increased efficiency. By not paying the profit margins associated with outsourcing, we can implement Six Sigma and Lean programs to reduce costs. These improvements directly benefit our cost of goods sold and gross margin, rather than our operating expenses. We are actively working to enhance efficiencies to mitigate the impact of tariffs on certain components that we still source from overseas, while also trying to qualify onshore suppliers in both the U.S. and Europe, as we control our own supply chain. On the operating expense side, we focus on improving back-office efficiency. We are automating operations and in-sourcing expensive professional services that we previously outsourced to build our internal expertise at a lower cost. Over the next few years, automation will help reduce these costs. Research and development spending also contributes to our operating expenses. Finally, consolidating our facilities and subleasing will significantly affect our cost of goods sold as we streamline our fixed costs.

Just a quick other question. Guys, any discussion with your customers around buying your systems as a way to mitigate tariffs on their part?

Yes, Alek. That's a great point. We're definitely having more discussions with them about this. The challenge they face is figuring out where to allocate their resources to effectively mitigate tariffs, especially since the tariff situation is constantly changing. They are uncertain about whether to invest in the United States or abroad. Many customers have factories outside the U.S. that they're purchasing for, and they want clarity on where to direct their capital. You are right that they want to engage in this conversation. However, their frustration lies in determining the optimal location for their investments to avoid tariff impacts on production. When it comes to sectors like aerospace and defense, it's fairly straightforward – they prefer to bring operations onshore as much as possible. But for those with global manufacturing capabilities, it becomes more complex. This indecision is causing delays in purchase orders as they contemplate where to expand their capacity. In the interim, in industries like aerospace and defense, if they recognize the benefits of 3D printing, they may ask us to provide some parts. This is why we emphasize the three P's: process, parts, and printers. We can supply them during this transitional phase until they make their capital expenditure decisions. This is our current focus.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Jeff for any further or closing comments.

Thanks, Kevin, as always. And for everyone calling in, thank you for joining us today. We'll update you again in future quarters. We look forward to the discussion. Have a good day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.