Earnings Call Transcript - DDD Q2 2021

Operator, Operator

Good morning and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the results of the Second Quarter 2021. My name is Donna, 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. As a reminder, this conference is being recorded. At this time I would like to turn the conference over to John Nypaver, Junior Vice President, Treasurer, and Investor Relations. Thank you, Sir. Please go ahead.

John Nypaver, Junior Vice President, Treasurer, and Investor Relations

Thank you, Donna. Good morning and welcome to the 3D Systems conference call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and 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. For those who have access to the streaming portion of the webcast, please be aware that there may be a few seconds delay and that 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 the slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in last night's 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, which are both 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 2020. Now, I am pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Jeffrey Graves, CEO

Thanks, John. And good morning, everyone, and thank you for joining our call today. When we reported Second Quarter results last year, our Company and the world at large were increasingly gripped in the COVID crisis. No one could foresee how long and painful this situation would become. We were concerned foremost about the safety of our employees and then meeting the ongoing needs of our customers, particularly in the Healthcare industry, where the focus had rapidly shifted to the treatment of the victims of the pandemic. While there were to be many dark days ahead, the resiliency of our employees and our customers sustained and inspired us to weather the storm. We will forever be grateful to our 3D Systems colleagues and to the multitude of frontline workers who struggled each day to take care of the sick, protect the well, and keep our essential services running. It was in this call that our new 3D Systems leadership team was formed. Coming together quickly to develop plans, not simply to stem the losses, but to position our Company to emerge from the pandemic stronger and more focused than ever. Ready to capture the exciting future we saw ahead for additive manufacturing. Our first essential step was to develop a clear purpose statement, which is to be leaders in enabling additive manufacturing solutions for applications in growing markets that demand high-reliability products. We then executed a four-phase plan to enable this vision; reorganizing the two business units, restructuring for efficiencies, divesting non-core assets, and investing for future growth. Our results since that time have shown consistent steady progress. First, we returned to growth and profitability by Q4 of last year and then continued momentum this year, which carried us in Q2 well beyond 2019, Second Quarter levels, an important pre-COVID benchmark for all companies to measure themselves against. Looking specifically at this year's Second Quarter results, given the difficult environment of Q2 last year, it's no surprise to see an exceptional rebound in revenue, profitability, and cash performance. When adjustments were made for divestitures, which we then refer to as our organic performance, our top line grew almost 60% year-over-year, and EBITDA by a whopping 650% to a level of 12.4% of revenue for the quarter. Jagtar will review the details for you in a few moments. In addition to the usual year-over-year comparisons, two additional reference points are helpful in understanding our business momentum. One is our consecutive quarter performance, which reflected revenue growth of over 11% in Q2 versus Q1 of this year. The second reference point, and perhaps the most compelling, is our pre-pandemic performance. If we compare Q2 of this year to the second quarter of 2019, our organic revenue grew 11.4%, which reflects a true acceleration in the adoption of additive manufacturing and the effectiveness of our intense focus on select market verticals and applications. From a cash perspective, I'm very proud of the team's ability to manage the business efficiently in this rapidly changing environment, which resulted in a quarter in the generation of over $13 million of operating cash flow. This allows us to make critical investments needed to support the exciting growth opportunities that we see ahead. So reflecting on the overall state of our business from a strategic positioning standpoint, our combination of global scale, industry-leading breadth of technology across metals and polymer platforms, and our consistent financial performance have now combined to differentiate our Company and positioned us well to be a partner of choice to leading OEMs in healthcare and industrial markets. Turning into our divestitures, to improve our focus and greatly enhance our ability to invest in exciting growth opportunities, we moved aggressively over the last year to divest non-core assets. In June, we announced an agreement to sell our On-Demand Parts business. This business focuses on the rapid production of components using additive and subtractive manufacturing methods, which in addition to having divergent business metrics from our core focus, often put us in conflict with other service bureaus, which is an increasingly important market for additive technology. This sale not only increased cash for investment but also increases our available market for future sales. More recently, just after quarter-end, we announced the planned divestiture of Simbionix, our medical simulation business. This is a very good business and one that does not align with our core focus on additive manufacturing. By selling it to a strategic buyer, we created a sustainable leader in medical simulation while delivering to us significant cash for future investment in our core. A true win for all stakeholders. In executing these divestitures, it's important to note that we have now completed our plan to exit non-core businesses. The proceeds from these sales will leave us in a strong position with a cash balance of roughly $500 million and no debt. We now move forward with strong organic growth and profitability at both the gross margin and EBITDA margin level. Positive operating cash flow capable of sustaining the investments needed to meet increasing customer demand. And plenty of dry powder on our balance sheet for additional growth investments. I, again, want to thank all of my colleagues at 3D Systems who have worked so hard in executing our business plan, which has successfully reinforced our leadership position over what's been an extremely challenging 12 months. As we near completion of our divestiture efforts and our momentum accelerates in both of our business units, we turn to the future and have begun making investments for continued growth and profitability. Over the last several months, we announced plans for the expansion of our facilities in Rock Hill, South Carolina, and Littleton, Colorado. In addition, we recently announced the creation of a new executive leadership role, Chief Technology Officer for Additive Manufacturing. The purpose of this role is to drive organic growth by expanding and accelerating application development and product innovation, including all hardware, software, and materials development for production scale Additive Manufacturing solutions. I'm pleased that Dr. David Leigh joined the Company in this capacity. David has been a pioneer in Additive Manufacturing with more than 30 years of experience in the industry. With this new role, we're accelerating our investments in people, processes, infrastructure, and technologies that position us for future growth and profitability. 3D Systems has tremendous potential to revolutionize markets. Through the enablement of production scale, additive manufacturing, and delivering breakthrough innovation is essential to achieving this vision. We're very fortunate to have David join us on this exciting journey. Before I continue, I'd like to offer an example of how our application focus is driving our development efforts and translating into accelerated growth opportunities for our business. As many of you might remember, over the last few years, we developed a new printing platform called Figure 4, a DLP-based technology that opened up new and exciting applications for polymeric components. Central to Figure 4's success is the availability of new polymer materials that offer customers attractive performance characteristics. To this end, over the last year, we've expanded our investments in photopolymer development targeted towards specific applications and market verticals. As an example for the automotive applications, a key relationship was established with Toyota Gazoo Racing, where our joint teams focused on a new Figure 4 material called Pro-Black 10. This was successfully introduced for racing applications but our work did not stop there. Looking to expand to larger component sizes, we worked with the Toyota team to modify the material and process for broader SLA applications. This work has now led to the introduction of a new material called Accura AMX Rigid Black, a material that has excellent mechanical and environmental performance, along with the automotive quality surface finish, and can be printed economically in large SLA formats that deliver tremendous productivity improvements over competing production processes. Moving forward, this material will provide application solutions well beyond automotive, such as consumer goods, service bureaus, and specialty contract manufacturing markets. It is this combination of materials, printing technology, and software focused on specific breakthrough customer applications that are at the heart of our organic growth engine. And finally, before I close, I'd like to comment on an area that I am particularly excited about for our longer-term future, and that is regenerative medicine. One of the key reasons behind Dr. Leigh's appointment as our new CTO for additive manufacturing is that it allows our Co-Founder, Chuck Hull, to focus increasingly on our groundbreaking biotechnology efforts as our Chief Technology Officer for Regenerative Medicine. As we've stated before, our partnership with United Therapeutics is essential to our combined efforts to print human organs, beginning with a human lung. These efforts are, by any measure, extraordinary. And we look forward to updating you on progress at some point in the future. Building upon this core development program, we are accelerating our efforts to develop and bring to market other non-organ human applications for the body. Just as with our existing healthcare business, this extension of 3D printing into other human applications involves the combination of new tailored materials, very high precision printing technologies, and customized software solutions. In addition to being printable, the materials used in these applications must meet very specific requirements, including physical and mechanical properties, as well as having bio-compatibility characteristics to limit or even eliminate the risk of rejection in patients. In this pursuit, we're partnering with other firms that can bring specific technology or application know-how that can move us ahead more quickly. One such partnership that we announced this quarter is with CollPlant, a biomaterials Company that brings unique expertise in plant-derived rhCollagen material. One application of this material that we're focused on is its use as printed soft tissue matrices for breast reconstruction procedures. Today, these soft tissue matrices are most often derived from human cadavers or ineffective. In application expertise for regenerative medicine. There will be many more to follow. A natural extension of our efforts in this area, enabled in part by our recent acquisition of Allevi, is our move to support academic and other research laboratories that are studying the fundamental science of regenerative medicine. From this foundation for which Allevi has a presence in over 350 research labs around the world, we're increasingly excited about the potential of pursuing applications in the pharmaceutical markets, where printed, customized 3-dimensional tissue samples can be used for advanced drug therapy development. The ability to print specific 3-dimensional tissue specimens representing either healthy vascularized cellular structures or even tumor tissues offers the potential of enabling tailored experiments for drug development, which could shorten time to market and improve patient outcomes. While these investments will take time to bear fruit, with our strong foundation in healthcare, which now comprises over half the Company's revenue and key technology partnerships that we're now establishing, we believe we are well-positioned to play a leadership role in this emerging field of regenerative medicine. So to summarize, having executed our 4-phase plan launched last summer, we're now a Company exclusively focused on additive manufacturing. With industry-leading scale and the broadest range of metal and polymer technologies all linked together, we are in the midst of a turnaround from the economic slowdown due to the pandemic. We saw this turnaround accelerate in the second quarter. After seeing a return to growth in Q1, industrial continued to rebound in Q2, growing sequentially 8.3% as compared to the first quarter of 2021. The performance of our industrial segment reflects the continued market rebound combined with organizational enhancements that we have implemented as part of our reorganization and restructuring efforts. These enhancements have resulted in reduced internal friction, a more holistic view of our customers and pursuits, and improved sales efficiency through a segment-oriented approach. Our improved model is evidenced by the sale of a record 3 of our flagship Factory 500 Metal machines this quarter, which was sold into the Aerospace and Transportation segments. While the last two quarters have seen good growth from solid execution combined with improving macroeconomic conditions, we continue to see challenges that could impact economic performance, including new variants of the COVID virus, inflation concerns, and continuing supply chain shortages. In regards to this last item, we have begun to see the tightening of costs and availability for certain components that go into our products. Our team continues to manage through these issues and we remain positive about the second half, but we see this as a potential headwind as we move through the year. Now, we turn to gross margin. We reported a gross profit margin of 42.4% in the second quarter of 2021, compared to 31.2% in the second quarter of 2020. The non-GAAP gross profit margin was 42.4% compared to 41% in the same period last year. When compared to the first quarter of this year, gross profit decreased from 44%. This sequential decrease was primarily the result of non-recurring write-downs related to equipment and inventory, impacting margin by approximately 140 basis points. Even with this nonrecurring charge and announced divestitures, we continue to expect non-GAAP gross margins in the range of 40% to 44% for 2021. Operating expenses for the quarter were $79.1 million on a GAAP basis, an increase of 14.5% compared to the second quarter of 2020. This year-over-year increase is primarily related to higher stock compensation expenses, including the higher expense for employee bonuses that are tied to the strong performance of our business. Our non-GAAP operating expenses in the second quarter were $55.2 million, a 3.3% decrease from the second quarter of the prior year. Compared to the first quarter of 2021, non-GAAP operating expenses increased 7.7% as our focus turns to growth and we invested in our operational infrastructure, which will allow our people and systems to better absorb the growth. Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $20.1 million or 12.4% of revenue compared to a negative $3.6 million or negative 3.2% of revenue in the second quarter of 2020. Compared to the first-quarter adjusted EBITDA margin is slightly lower driven by the investments mentioned earlier to improve our corporate infrastructure and support future growth. Now, let's turn to the Cash Flow Statement and Balance Sheet. Cash on hand decreased by $600,000 during the quarter. This decrease was driven primarily by acquisition costs of $10.9 million and capital expenditures of $4.3 million, offset by cash generated from operations of $13.5 million. We ended the quarter with no debt and full capacity on our $100 million undrawn Revolving Credit facility. We were quite pleased with our continued strong generation of cash from operations, which, as mentioned, was $13.5 million. This compares favorably to cash used in operations of $18.7 million in Q2 2020. Our strategic reorganization and cost management have enabled this extremely positive turnaround in operating cash flow. Before I conclude my commentary, I would like to provide additional detail on the expected impact of our two recently announced divestitures: the On-Demand Parts business and Simbionix. We expect both deals, which will be the last of our planned divestitures, to close in the mid-third quarter, after which they will no longer be included in our results. On a quarterly basis, these combined businesses generated approximately $25 million of revenue per quarter and a non-GAAP contribution margin of approximately $5 million to $6 million per quarter. So what will we look like when these divestitures are complete? From a strategic standpoint, we will be accompanied by a singular focus on additive manufacturing, an exciting and fast-growing industry driven by both healthcare and industrial markets worldwide. We will go forward as one of the largest and best-known comprehensive providers of Additive Manufacturing technology, comprising the broadest range of polymer and metal printing platforms in the industry. A market-leading materials portfolio and an extensive suite of software to enable large-scale, efficient conversion of electronic component designs to finished products for our customers worldwide. From a financial standpoint, following our customers worldwide. Following the completion of our divestitures in the third quarter, we will have the strongest financial profile in our industry. We will be a roughly $500 million revenue profitable Company with strong cash generation from operations and an outstanding balance sheet with approximately $500 million of cash and no debt. This profile is unique in our industry and positions us well to invest in exciting organic growth, including the expansion of our development, infrastructure, and technology teams, having unique talents that are demonstrating daily new applications of this exciting manufacturing technology for our customers around the world. We're also in an excellent position to execute on strategic growth opportunities that will support our long-term objective to reach sustainable double-digit revenue growth, gross profit margins of 50%, and adjusted EBITDA margins of 20%. We believe that with our focus, scale, profitability, and balance sheet, we are very well-positioned to continue to succeed in this exciting growth industry of Additive Manufacturing. Finally, I wanted to provide an update on our Investor Day Event that we have scheduled for September 9 in the Denver, Colorado area. As many of you know, we are seeing a rise in cases of COVID infections, primarily related to the Delta variant. This has created uncertainty in the ability of some interested parties to travel and attend in-person gatherings. Out of an abundance of caution for the safety of our investors, analysts, and employees, we have decided to postpone our Investor Day event. We plan to reschedule to a later date this fall, and our preference is to continue as an in-person event, depending on the trends of the virus variant, the vaccine rollout, and new guidance from public health officials. We will provide an update as soon as possible and look forward to sharing our long-term growth strategy in more detail with the investment community. With that, I will turn it back to Jagtar.

Jagtar Narula, CFO

Thanks, Jeff. The last 12 months are now behind us and I truly believe the next 12 months can be the best this Company's seen in its history. Financially, we are arguably the strongest Company in the space, which means we're the best positioned to take advantage of the accelerating adoption of Additive Manufacturing. We'll use our balance sheet to drive growth in our core business, with a key focus on driving recurring revenue streams. We'll be deliberate in searching for strategic investments that will support the core business we built. We will now take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Ananda Baruah of Loop Capital Markets. Please go ahead.

Ananda Baruah, Analyst

Hi. Good morning, everyone. I appreciate you taking my question and congratulations on the strong execution. It's encouraging to see everything coming together. I have a couple of related questions. How do you anticipate the organic growth profile evolving moving forward? Jagtar, you mentioned double-digit growth, but I would like more context on your outlook for organic growth and what key actions and milestones you see as essential for achieving this. Additionally, what factors could potentially lead you to surpass these expectations? That's all from me. Thank you.

Jeffrey Graves, CEO

Thank you for your question, Ananda. It's a thoughtful one. I’ll share some insights, and Jagtar can add if he wishes. We adopted a specific business model last year, and it's proving to be effective. Our focus is on applications within particular markets, with Healthcare standing out as a key area with significant expansion opportunities. Industrial sectors are also becoming more appealing, providing ample opportunities as businesses adjust their supply chains post-pandemic. There’s a general sense of caution in the market, especially with the rise of the Delta variant, prompting similar discussions we had last year about production and logistics. Additive Manufacturing addresses many of these challenges, offering high-performance parts for both human and industrial uses. Customers are eager to explore new applications and collaborate with us, and this interest has notably increased. As Industrial sectors reopen and Healthcare continues to thrive, the momentum seems strong. I believe that the trend towards large-scale industrialized Additive Manufacturing is taking hold and will continue to expand. This applies to the entire industry, though our approach is somewhat distinct as we prioritize finding the right customer and showcasing innovative applications. A notable example is our work in semiconductor manufacturing, where we have developed applications with a leading equipment provider. Last year’s chip shortage accelerated demand for new machines, leading to increased investment in R&D and new manufacturing platforms, leveraging the strengths of Additive Manufacturing. A lot of that involves heat transfer control and enhancing the thermal stability of the equipment to enable the printing of highly detailed semiconductor chips. This is just one example, but there's a current opportunity to embrace additive manufacturing that is very exciting. Looking at our growth rates from Q1 to Q2, which are likely the most relevant reference points, we observed mid-teens growth in Healthcare and nearly double-digit growth in Industrial, actually high single-digits. I believe that this momentum will carry on. In Healthcare, the ability to customize products for implants is particularly appealing. It enhances patient outcomes, reduces recovery times, and improves the functionality of parts for rehabilitation, especially in skeletal applications and other medical devices. The Dental sector has also shown significant momentum and continues to grow. In the Industrial sector, I expect to see broad growth across various verticals. The growth momentum should certainly persist. There are different opinions on the overall industry growth, with some estimates suggesting mid to high teens and even over 20%. Regardless of the overall rates, I believe we will be able to reflect that in our performance, especially in preferred markets, which should provide us with both volume leverage and improved gross margins by operating in the more challenging segments of the market. So again, given the challenging aspects of the market, forms are very specific materials. There's considerable potential for consolidation of that kind of expertise, and we want to ensure we have the appropriate platform for it. Therefore, we are investing some funds in our foundational platform and basic infrastructure, including IT and finance, to ensure that if we do participate in that, we can integrate our Company effectively and progress. We've started on some of that and will expand on it. More broadly, there is continuous innovation in this industry. We are the largest player, so additional scale is always beneficial. However, for us, it is likely more focused on technologies, specifically in three areas: printing, materials, and software. These three will define our focus. I want to emphasize again that I believe the next frontier for Additive Manufacturing is in Biotech. There is significant potential for current applications in both industrial and healthcare sectors. Looking beyond those, there exists an entirely new frontier in Biotech for printing. I am quite enthusiastic about positioning ourselves advantageously in that market as well. From our shareholders' perspective, it should translate into positive short-term benefits through growth in existing markets and the adoption of additive manufacturing in healthcare and industrial fields. Furthermore, there is long-term value potential in the biomedical and Biotech sectors focused on regenerative medicine. Does that make sense?

Ananda Baruah, Analyst

Yeah. All good. I appreciate all the insight. Thanks. I'll hop back in the queue.

John Nypaver, Junior Vice President, Treasurer, and Investor Relations

Thanks.

Operator, Operator

Thank you. Our next question is coming from Sarkis Sherbetchyan of B. Riley FBR, please go ahead.

Sarkis Sherbetchyan, Analyst

Hey, good morning, and thank you for taking my question here.

John Nypaver, Junior Vice President, Treasurer, and Investor Relations

Morning.

Sarkis Sherbetchyan, Analyst

The first question just really revolves around the revenue from divestitures that are called out for both Fiscal '19 and '20 on the bottom of the release. I think the total let's call it a range of $40 to $50 million on the year, but in the prepared comments, I think you mentioned the quarterly run rate of the revenues from divestitures is $25 million, so that adds up to a 100 million. Just wanted to get a sense of the revenues called out in the press release for where from GibbsCAM, Cimatron, and the other revenues that you called out in the Earnings deck. Is that for the businesses pending divestiture in 3Q?

Jagtar Narula, CFO

Yes, Sarkis, you are correct. The release highlights the need to reconcile to organic growth, which only includes the acquisitions and divestitures that have already been finalized, such as GibbsCAM, Cimatron, and several smaller divestitures from last year, along with the business in China and Australia. This relates to the $40 to $50 million in revenue you mentioned. The $25 million I noted in my prepared comments pertains to the divestitures that have not been finalized yet, specifically the On-Demand Parts business within the Simbionix sector. We anticipate that this will be completed around the middle of the second quarter or into the third quarter.

Sarkis Sherbetchyan, Analyst

Okay. So just to use some crude math here, if I simply take the sum total of the 19 as a baseline rate. X divestitures and then remove about $100 million in top-line, I guess at about $500 million or so. And let's call it perform the top-line. We should grow the business from that point forward and then kind of take your margin range of I think you said 40% to 44% still. And work with that, correct?

Jagtar Narula, CFO

Yes. That's absolutely correct. I think I mentioned in my prepared remarks that we would expect to be on the order of $500 million revenue Company post divestitures profitable. And so I think you've got that exactly right.

Sarkis Sherbetchyan, Analyst

Okay, great. And just one final one for me. From a Capex perspective, I know you're kind of reinvesting back into some of these interesting drivers for future growth. Any revisions or any kind of outlook you can provide us for capital expenditures this year and next? Thank you.

Jagtar Narula, CFO

I mentioned before that we anticipate capital expenditures to be around 4% to 5% of revenue, and I still stand by that estimate. Our capital expenditures include some investments in Additive Manufacturing due to the increased risks in the supply chain, which is a persistent challenge for many companies. They are seeking new methods to produce parts closer to home with greater reliability. This quarter was significant as we exceeded our sales figures from 2019 by a substantial margin. There are a few factors driving this. First, I believe we are executing very well. Our model is effective, with customers showing a strong application focus. I think our approach is correct, and customers are very open to adopting additive manufacturing. We're engaging with a customer base that is enthusiastic about Additive, and our current business model is well-suited to capitalize on this. This is reflected in the numbers, and I am particularly pleased with the growth we've achieved over consecutive quarters compared to 2019. That 11% growth since 2019 indicates that our model is performing effectively, and customers are embracing it as it transitions into true production environments.

Sarkis Sherbetchyan, Analyst

Okay, great. Thanks. Very helpful. And then on the printer side, just given your broad portfolio, I'm just curious if you could point out any particular areas or lines of strength, and even if there are some notable trends in terms of what you're seeing across metals versus plastics.

Jagtar Narula, CFO

Yes, that's another good question. I have been particularly pleased with the performance in metals. Customer interest and volume growth in this area are quite strong, especially with both our 350 units and 500 units.

Jeffrey Graves, CEO

As Jagtar mentioned, we had three sales of our Factory 500, which is our largest flagship metal product, and the 350 is performing well. We are very pleased with the metal side, particularly as customers demonstrate interest and move forward with applications. They are making a variety of parts that significantly enhance performance and understand the workflow and cost implications, leading them to place orders for those machines. On the polymer side, we are also seeing strong demand as we improve our materials, especially in the photopolymer area, focusing on performance, toughness, and surface finish. The effectiveness of our software in optimizing printing chamber density further drives this demand. I am very excited about our developments in polymers, particularly with SLA and DLP using these new photopolymers. The integration of material with the printing process is crucial; the combination is tremendously valuable to our customers. Additionally, the advancements in the photopolymer area have been key to our efforts in regenerative medicine, and our core expertise in this field will continue to be advantageous. We will share more about these developments in the years to come.

Sarkis Sherbetchyan, Analyst

All right, thanks so much.

Jagtar Narula, CFO

Thanks, Rob.

Operator, Operator

Thank you. Your next question is coming from Paul Chung of JP Morgan. Please go ahead.

Jagtar Narula, CFO

Morning, Paul.

Paul Chung, Analyst

Morning. Thanks for taking my questions. So on the top line, can you give us a sense of materials versus systems mix? You mentioned higher growth in materials in the quarter in healthcare. So should we start to see materials kind of accelerate over the next couple of quarters and some upward contribution on overall margins as you've seen, some nice momentum on-system sales over the past three quarters?

Jagtar Narula, CFO

Yeah, Paul, so I think you articulated our strategy a little bit. Material sales, I think we've got a disclosure in the Q we're mentioned recurring revenue which we put materials into that bucket. So material sales, as I think roughly about 1/3 of our revenue in the quarter. It is high margin revenue for us, so one of our stated strategies is to continue of printers, drives future materials revenue and that future material revenue turns into high margin recurring revenue. I think you've captured nicely how we think about the business.

Jeffrey Graves, CEO

Just to supplement what Jagtar said on software. Some of the most positive feedback in the last 12 months has been around the software platforms, so we're looking to expand our use by customers. They are wonderful tools. I don't know that we've been aggressive enough about getting out and explaining to new customers how really effective they are. You will see an increased focus from us on software. It's a vital part of the ecosystem. And it's one that I think we've got a really good foundation in that we just need to grow from.

Paul Chung, Analyst

Great. Well congrats again, gentlemen, and I look forward to seeing you in a few weeks.

Jeffrey Graves, CEO

Yes, we will. Troy. Thanks so much.

Operator, Operator

Ladies and gentlemen, we would like to apologize for the technical difficulties experienced by participants on today's webcast. A complete archive will be available later this morning using the same link. At this time, I would like to turn the floor back over to Mr. Graves for closing comments.

Jeffrey Graves, CEO

So thank you for joining the call today and for your continued support of 3D Systems. A replay of this webcast will be available on our Investor Relations page, where you can see the supplemental charts they go through it, they appreciate the time and the interest in the Company, and we'll look forward to talking to you again next quarter.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.