3D Systems Corporation (DDD) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the 3D Systems Corporation Fourth Quarter and Full Year 2014 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Stacey Witten of 3D Systems Corporation. Thank you. You may begin.

I am Stacey Witten, and with me on the call are Avi Reichental, our CEO; Ted Hull, our CFO; and Andy Johnson, our 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 via the web at www.3dsystems.com/investor. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone numbers provided on the slide. The phone numbers are also provided in the press release that we issued this morning. For those who have access the streaming portion of the webcast, please be aware that there may be a few second delay, and you will not be able to post questions via the web. The following discussion and responses to your question reflect management’s view as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information and factors that could potentially impact our financial results are 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, slides accompanying this webcast and our filings with the SEC, each of which is available on our IR 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 2013. Now I will turn the call over to Avi Reichental, 3D Systems’ President and CEO.

Good morning, everyone, and thanks for joining us today. For the fourth quarter of 2014, we generated record revenue of $187.4 million, representing a 21% increase over the comparable 2013 quarter despite significant foreign currency headwinds that reduced our total revenue by some-some $6 million during the quarter. We reported GAAP earnings of $0.01 per share and non-GAAP earnings of $0.21 per share. Notwithstanding the challenging operating environment in Europe, we recorded an impressive 46% revenue increase from EMEA, driven by 28% organic growth. Channel productivity primarily in North America fell well short of our expectations restricting our total organic growth to 7% for the quarter. Direct metals revenue increased by 178% and healthcare revenue grew by 26% with both vertical decisively surpassing industry growth rates. Consumer revenue increased substantially over the same period growing by 68% as our new product gained momentum. All told, our product category was the most negatively impacted by foreign currency growing only 16% while services revenue increased 33% Our order book held steady at $46.5 million even as revenue increased by 12% sequentially, reflecting robust demand for our products and services. We generated $24 million of cash from operations during the fourth quarter and ended the year with $285 million of cash on hand. For the full-year, we are pleased with the overall performance of our key verticals, but not so much with regional weaknesses in our channel coverage. Within our verticals, our design and manufacturing category grew by 27% over 2013 and revenue from our rapidly expanding healthcare category increased by 80%. Consumer revenue increased 26% to $43.8 million, rebounding strongly later in the year as we commenced commercial shipments of our newest consumer printers. We are definitely disappointed that we were not able to fully capitalize faster on the strength of our portfolio and closed the revenue gap that was caused by delayed consumer product and direct metal capacity constraints. This product availability headwinds and weakening channel performance primarily, in North America, suppressed our annual organic growth rates to 13%. The strategic investments that we made to build in end-to-end 3D healthcare business continued to deliver impressive results. Specifically, for the quarter, healthcare products and services revenue grew to $42.8 million, a 96% increase over the same period last year on strong organic growth. Throughout 2014, we acquired three strategic healthcare businesses, Medical Modeling, LayerWise and Simbionix. With these assets in hand, we can deliver the full benefits of personalized medicine through custom-made surgical instruments implants and devices. Under the very capable leadership of Kevin McAlea, whom we recently named Chief Operating Officer, Healthcare, we are moving quickly to fully integrated these assets extend our 3D healthcare solutions from the training room to the operating room. We believe that our proprietary 3D healthcare product and services address a truly open ended opportunity and position us to deliver a long-term beneficial outcome for providers and patients alike. Our decisive investments in both, acquiring and further developing proprietary direct metal printing products contributed to revenue growth of 178% for the quarter and 175% for the full-year compared to our 2013 pro forma results. With a benefit of the second manufacturing facility in operation during the fourth quarter, we increased our metal revenues from 73%, sequentially, and ended 2014 in the higher end of our direct metal revenue guidance range of $25 million $50 million. We see open ended opportunities for our direct metal products and services, primarily in aerospace, automotive and medical applications and we believe that we can leverage decades of domain expertise in these verticals to help our customers, manufacturer, flight-ready aerospace parts, functional automotive assemblies and production tire molds and ready to use medical devices. Additionally, during the fourth quarter, we took steps to equip several Quickparts and healthcare facilities with 10 direct metal printers that are expected to be in full operation by mid-year. We shipped 70% more design and manufacturing printer units in 2014 than the previous year and strong demand for our extended portfolio of SLA printers resulted in a 356% increase of total unit shipped. We also shipped 89% more SLS printers and increased placement of direct metal printers by 167% compared to 2013 pro forma. Our jetting category delivered only modest printer units growth as a result of North American channel weakness. Our EMEA channel performance delivered revenue growth of 46% for the quarter and 47% for the year, including organic growth of 28% and 33%, respectively. This is particularly impressive given the foreign currency headwinds that we faced with substantially compressed revenue in the fourth quarter. By contrast, channel productivity primarily in North America, fell well short of our revenue expectations restricting our overall organic growth to just 7% for the quarter. Under the leadership of our COO, Mark Wright for taking decisive steps to improve the productivity and coverage of our North American and APAC channel, to the level of our EMEA region. Specifically, we have reorganized and strengthened our North American senior leadership, we aligned our North American and APAC channel growth plans and incentives to closely mimic our successful EMEA program and we are investing in specific channel extension initiatives as well as productivity and training tools. I fully expect us to deliver meaningful results from these corrective actions as the year progresses. Our effective R&D investments contributed to a 44% increase in new products revenue over the past two years and delivered 27 new products last year alone. Included in our 2014 R&D investments was the strategic addition of the Xerox Wilsonville team that is working on several breakthrough new products that are designed to fuel incremental revenue growth beginning in the second half of 2015. With that, I would like to turn the call over to Ted Hull, our CFO, who will discuss our financial results in more detail. Ted?

Okay. Thanks Avi. Good morning, everyone. For the fourth quarter, we announced record revenue of $187.4 million, net income of $1.6 million and earnings per share of $0.01. On a non-GAAP basis, we earned $0.21 per share. For the full year, we increased revenue 27% from the prior year to $653.7 million and reported net income of $11.6 million, and earnings per share of $0.11. On a non-GAAP basis, we earned $0.70 per share for 2014. During the fourth quarter, design and manufacturing revenue increased by 18% and our healthcare revenue grew an impressive 96% on higher demand. Our consumer revenue increased 68%, coinciding with the commercial shipments of our new Cube 3 and CubPro consumer printers. All categories contributed to revenue growth for the year. Products revenue, including materials grew 24% to $442 million, driven by strong printer placement and aided by our growing healthcare, perceptual devices and software products. Service revenues rose 34% to $211.5 million as we expanded the range of services and global footprint. Throughout 2014, we progressively increased printer units faster than printer revenues, underscoring a shift in mix and higher volume that is consistent with our plans to expand the reach of 3D printing from the factory floor to the desktop. While in the short-term, this self canalizing strategy understates our top-line growth and pressures margin expansion, we firmly believe that it is key to our long-term recurring revenue momentum and that printer unit's growth is the most relevant organic metric as we rapidly expand our installed base. Sequentially, materials gross profit margin expanded 220 basis points to 75.3% and services gross profit margin increased 340 basis points to 49.7%. Notwithstanding these games, consolidated gross margin for the fourth quarter remained at 47.9% as a result of the residual impacts of transitions to new products, manufacturing expansion and unfavorable mix. Looking beyond these transitional factors, we believe that the fundamentals of our business model remain intact and we expect gross margin to resume its expansion by increasing materials, software and healthcare revenue contributions at higher gross profit margins, recovering product gross margins following a period of concentrated new products and facilities transition and continuing operational synergies and greater leverage from tighter integration and operational efficiencies. Non-GAAP operating expenses for the full-year increased 45%, reflecting a step up of 73% in R&D and 33% in SG&A cost, consistent with our planned expansion. Now that we are at the end of our stepped up investment phase and are beginning to tightly integrate our assembled assets, we anticipate increased leverage as our revenue growth rate our outpace our operating expenses. We expect non-GAAP G&A expenses to decrease as a percent of revenue throughout 2015 and R&D expenditures to normalize at approximately 8% to 10% of revenue this year, resulting in progressively expanding operating leverage throughout 2015 and beyond. We believe that we have put in place the cost structure we need to scale the business, but the meaningful returns will lag a couple of periods as we grow into our operating expenses. We generated $23 million of cash from operations during the fourth quarter and $51 million for the full year 2014. We paid $107 million of cash for acquisitions and venture investments in the fourth quarter and $352 million for the year. We ended 2014 with $285 million of cash and we have not used our credit facility. We believe that our strong working capital performance enables us to self-fund our growth. Consistent with our previous comments, we have reduced our inventory balance by $8 million from the September quarter and expect to deliver further reductions throughout 2015. While we expect our DSO to fluctuate a bit in the ordinary course, we are taking decisive steps to improve our cash collection cycle and reduce DSO over time by another five days. That concludes my comments, and I will turn it back over Stacy, who will provide our 2015 guidance.

Thanks, Ted, before we provide 2015 guidance, I want to take a few minutes to discuss several factors that may impact our expectations. First, although we exited the year with substantially stronger consumer momentum, it will take us a few periods to make up for cumulative revenue short from delayed products during 2014. Second, we expect that planned discontinuation of certain legacy products will reduce historical revenue contributions, primarily from organic activities for as much as $20 million for the year. Third, we anticipate a continuing foreign currency headwind will mask our sharp EMEA performance well into the second half of 2015. Finally, we estimate that it will take several periods to bring the performance of our North America and Asia Pacific channels up to EMEA levels. Additionally, we plan to keep our 2015 capital expenditures at 3% of revenue and expect to moderate our M&A activities. Factoring in all of these drivers and consistent with prior years, we expect to generate approximately 44% of our revenue in the first half of the year, with greater organic growth and increased earnings as the year progresses. Accordingly, we expect 2015 revenue to be in the range of $850 million to $900 million. We expect GAAP earnings per share to be in the range of $0.35 to $0.45 and non-GAAP earnings per share to be in the range of $0.90 to $1.10. As a reminder, our guidance is fully tax effected and is inclusive of our acquisitions completed to-date. Our expected blended annual tax rate is 32% to 36% and is reflected in our annual guidance. I would also like to remind you that this guidance is based on current plans and assumptions and subject to risks and uncertainties including those detailed in our risk factors and our Safe Harbor statement, annual report on Form 10-K and other filings with the SEC. That concludes my comments. Avi?

Thanks, Stacey. During the fourth quarter, we continued to expand our manufacturing and IT infrastructure. First, we started manufacturing operations at our new 200,000 square-foot facility in Rock Hill, South Carolina to better meet growing demand. We successfully brought on line a second direct metal printers manufacturing facility at our Oregon contract manufacturing. We completed the ramp up a new consumer materials manufacturing facility in Barberton, Ohio and we broke ground on a new healthcare facility in Littleton, Colorado, to support our expanding portfolio and increasing demand for its personalized medicine product and services. Throughout FY'14, we also made significant IT infrastructure, capacity and continuity investments. We expect these across the board foundational investments will support our growth plans for some time to come. During the quarter, we added powerful synergistic technologies, domain expertise and complementary sales channels through the completion of several acquisitions. In February of this year, we completed the acquisition of Cimatron, substantially strengthening our 3D digital design and fabrication portfolio and extending our leadership position in 3D printing centric advanced manufacturing. In December of last year, we acquired botObjects, enhancing our desktop printing product line with the addition of the CubePro C, the first affordable full-color plastic 3D printer. In November of last year, we completed the acquisition of Robtec, creating a strategic growth platform in Latin America to accelerate adoption of our manufacturing solutions. Under the leadership of Mark Wright, we are taking decisive steps to unify all businesses practices and shared capabilities throughout our company worldwide. We are also working to increase customer intimacy and responsiveness across all of our businesses and build and leverage an integrated global supply chain. In addition to that, we are taking steps to improve working capital management and enhance business planning and decision making velocity throughout the company. We expect these specific initiatives to result in a sustainable and scalable company with significant competitive advantage. We are in the early innings of mainstreaming adoption for our products and services and believe that the effective and disciplined investment we have made over the past 15 months, position us extremely well for the open-ended opportunities in front of us. Having assembled the technology building blocks, infrastructure and talent required scale our business and extend our first mover advantage in key vertical, we believe that we are now poised to leverage all of our fundamental assets and strengthen our execution to create greater value faster. With that, we will now gladly take your questions. Stacey?

We will now open the call to questions. I would like to remind everyone that we have approximately 30 minutes for the Q&A session and that your line will be muted after your first question as we kindly request that you ask one question at a time and then return to the queue thus allowing others to participate in the Q&A session. As a reminder, please direct all questions to the teleconference portion of this call. The telephone numbers are provided again on this slide. If you are calling inside the U.S., the number is 1-877-407-8291. If you are calling outside the U.S., the number is 1-201-689-8345.

Thank you. [Operator Instructions] Our first question comes from Bobby Burleson with Canaccord. Please state your question.

Just wondering about the FX comments, what you would have expected the growth rate to be in 2015 minus FX headwinds, and if there is any kind of, on the parts business or any other metals, any of your other areas, where maybe there is aggressive pricing concerns out of the European competitors?

Yes. There are a couple of things, Bobby, to consider here. As we look at FX, we certainly did not foresee the sharp decline in foreign currencies that taps in towards the tail end of the year. As we look, particularly, at Europe at the moment, we see those headwinds continuing well into the second half of this year. However, we are very pleased with our European performance, notwithstanding these headwinds. I mean, remember the fourth quarter alone the foreign currency reduced our revenue by some-$6 million, so that can give you an early indication. However, as we go forward, we think that our EMEA channel is probably our strongest performing channel. They have been sailing all of our products extremely well and we expect that notwithstanding these kinds of headwinds, we will continue to do well in Europe. However, it does certainly compress growth rates and it will also put some pressure as the year progresses on earnings and we have tried to the best of our ability to factor all those items into our guidance. If you look at growth in particular, I think that it is important see a few things as we build into 2015. First, in terms of design and manufacturing unit, we have continued to have very strong growth. For the quarter it was 41%, and for the full-year it was 70%. Second, I think that it is also important to note that with all of headwinds, over meaningful periods, our material growth translated related to a 24% CAGR over the last 24 months. Third is that, during the period, of aggressing seeding an expansion of our installed base, as Ted said earlier this morning, we believe, that printer units' growth is the only relevant organic growth metric, not so much printer revenue. In fact, in our case, we have increased printer units about 3.5 times higher than we increased revenue, so it is important for AFRL [ph] to keep in mind. Having said that, we expect organic growth for 2015 to increase progressively, starting in Q1 at comparable levels to what we exited Q4 for all the reasons that Stacey mentioned, but expanding throughout the year progressively all the way up to 30% for Q4. For the full year considering the FX headwinds and some of our product pooling plan for the full year we expect it to be around 20%.

Thank you. Our next question comes from Jim Ricchiuti with Needham & Company. Please state your question.

Hi. Thank you. Good morning. I just want to understand some of the components to the revenue guidance for 2015 a little bit better. You are discontinuing some legacy revenues, is that product and service, is that some Quickparts and can you give us a sense as to what your expectations are perhaps for consumer and metals and you alluded to some products, how important is that at the back half of the year? Thank you.

Thanks, Jim. Let's start with our work that You Bartlett what we are discontinuing. We are discontinuing specifically wider scanning products, we are discontinuing some of our older printers like the ProJet 1000 and 1500. We are further consolidating and discontinuing a few of our software products and we are discontinuing several Quickparts activities that we had in our historical revenue and we are not going to have going forward. We are doing it, because we believe that it will make us faster, more focused, more nimble and more profitable going forward. By sharing these legacy activities, although it would reduce our historical revenue base or run, positions us to run faster and execute better in 2015 and beyond. We look at it as an opportunity. We have been doing it at a slower pace over multiple periods. It certainly has been impacting our organic growth calculation for the last few quarters and we decided that given the breadth of product and opportunities around us, given the fact that this is the year that we are turning our attention strictly speaking to better execution and leverage and integration, we want to accelerate the shedding, pruning and the ending of lives, so that we could replace it faster with more profitable revenue that is fully in line and with our business.

Thank you. Our next question comes from Patrick Newton with Stifel. Please state your question.

I guess, just drilling down on the guidance side, Ted, given this is the first year that you have been guiding for the company, I am curious if you are taking a different approach to guidance, especially given some of the operational missteps that hit the 2014 outlook. Then, I guess, Avi, if you could maybe elaborate on how we should think about direct metals revenue in 2015, consumer and medical. I think you give us some bogies for 2014 at the same time last year. Thank you.

Yes. As we look at guidance, we have taken both, the bottoms up look as well as the tops down look at how we see the year developing and that led to the $850 million to $900 million range. We see a lot of positive things as we go through the year and we expect to being in a typical kind of skew through the quarters that is more in the back end loaded, if you will, from a revenue standpoint. With the actions that we have in place from our product lines and some of the strength that we have, especially with some of the higher-margin products, we are pretty optimistic in terms of how that will develop through the year, so we basically really wanted to link the company together in terms of looking at how we see the guidance coming together then go forward and execute against it.

Yes. In terms of the expectation for 2015, look, for us, the consumer game is just beginning. We held our powder most of the 2014, with, I would say great discipline to make sure that when we pull the trigger, we have the best product on the market. For Q4, consumer revenue was up 68%. For the full-year, not so much, because for the full year we did not have much by the way of a product to sell, but the game is just beginning and the demand is very strong, the reception is an exceptional, the product is outstanding. I should say the products were outstanding. In terms of the bogie for 2016, I would say that the range that we provided a year ago, which was in the range of the $80 million to $120 million has not evaporated. It just moved forward a few periods As Stacey said in her prepared remarks earlier morning, that it is going to take a couple of periods to catch up to the run rate that we had hoped to exit the year with. The good news is that we have not lost these opportunities. They just moved forward a little bit. As for direct metals, with the second our manufacturing facility online, we enjoyed a sequential units increase of about 78% for the fourth quarter. For the full-year, we had about that 63% increase in units, so we expect that trajectory to continue.

Thank you. Our next question comes from Ananda Baruah with Brean Capital. Please state your question.

Hi, guy. Good morning and thanks for taking the question. Avi, could you just walk through and maybe tell as well, I guess, what components are factored into the ramp of the organic revenue growth in the second half of the year. I would love to get your thoughts there. Then Ted, just any comments on the rate of leverage as we go through the year, is that more in the second half as well? Thanks.

I think that as we go through the year, we are starting with actually reducing, if you will, the organic revenue baseline from the planned end of life of certain products. As we get past that, you know we see a real acceleration that is going to come primarily from a variety of products that we are already selling like SLA, like, SLS, like direct metal and consumer. From some of the catch up, is we expect to see specifically in the area of materials revenue, in software revenue and Quickparts revenue as it progresses. Finally, do not forget that healthcare continues to be our fastest, if you will, growing vertical at the moment and with the investments that continuing to make in healthcare, the expectation is that that will continue for quite some time. Ted, you want to talk a little bit about leverage?

Yes, absolutely. Now that we are kind of coming to the end of our stepped up investment periods, we are really shifting our attention to tightly integrating the assembled assets that we have, and we have really tremendous capability and some really hard margin opportunities I think that we can really grow into. As we execute on that, we anticipate this leverage in revenue growth rate outpace our operating expenses especially as we go through the back-half of the year.

I would like to add to you asked a little bit about where will the growth come from. I mean, it is important to note that just for 2014, our total SLA went up 356%. SLS went up 89% and I have already given you the metal number before, which was up for the full-year about 63%, that gives you the kind of real sense of what does real organic growth looks like in period in which units are outpacing revenue by about 3.5 times.

Thank you. Our next question comes from Ken Wong with Citigroup. Please state your question.

Hi. Thanks for taking the question. Could you perhaps give us a little more color on what kind of issues you were seeing in the North America channel? I guess as you look to 2015, you pointed to trying to align that with the EMEA channel. What specific actions are being taken there? Is it just better training, so giving them more products to sell? Is it commissions, yes, if you could just walk us through those two that would be great.

What happened to us in North America, we haves seen what I would call a little bit of frustrating [ph] detour, if you will, and since that the channel gravitated towards the higher end of the product line instead of immediately investing and expanding their feet on the street to achieve optimal sales coverage for the entire portfolio, which is exactly what happened in EMEA and not so much in North American. In fact instead of adding coverage, the majority of our North American channel shifted their focus away from selling the middle of the range to selling their production portfolio of our printers. Having realized that with some deep analysis over what we consider not be a more meaningful period, and under the leadership of our new Chief Operating Officer, Mark Wright, who I think brings a great deal of relevant experience to the table, we are taking decisive steps to improve the productivity and coverage of our North American and to certain extent also our APAC channel to the same level our EMEA region, which has done exceptionally well over the same meaningful periods. Definitely and specifically is that first, we have already reorganized and strengthened the leadership on the ground for North America. We have taken decisive steps to align our North America and APAC channel growth plans and incentives to closely mimic their successful program that we have in EMEA We are further investing in Pacific channel expansion initiatives as well as some specific productivity and training tools. When you put that all together, under the guy that is driving it, under, Mark, I fully expect that to deliver meaningful result from this corrective action as the year progresses. We are not going to fix it overnight, we are not going to fix it in a single period, but I am confident that we are able to see progressively improve the results until we get this channel up to the level of our EMEA channel.

Thank you. Our next question comes from Holden Lewis with Oppenheimer. Please state your question.

Great. Thank you very much. Good morning. You referenced the Jetting being specific problem. Can you just clarify, is that the multi-jet printing or the color jet printing or both were the problem in the channel?

Well, it is a combined problem of both of them and it is completely isolated, Holden, to North America. In fact, if you look at EMEA for example, which is our best performing channel, in EMEA, jetting units increased 109% in 2014 compared to 2013 and jetting printer's revenue in EMEA went up 86%. To the extent that one would wonder is this kind of a product performance issue or a channel performance issue, clearly, the numbers suggest that it is isolated to a specific original channel performance issue.

Thank you. Our next question comes from Troy Jensen with Piper Jaffray. Please state your question.

Thanks for taking my question. A couple of quick questions on guidance here, one, Ted you had said that R&D at about 8% to 10% of revenues, I believe. You exit the quarter here at 12%, so I am assuming it is just trends down and exit for the year there? Then also on the revenue side, if we take the mid-point of the guidance and I think Stacey implied that about 56% of sales is going to be in the second half of the year. That implies about 38% year-over-year growth second half over second half, so just curious to know how you have visibility to guide to such a big inflection? Thank you.

Yes. First of all as we said, we expect to kind of grow into our expenses as we go through the year and that is how we got to the R&D number of the 8% to 10% range. I think as we look to the second half and we look at the programs we have in place, the focus areas that we have and some of the very strong businesses that I think we are blessed with from a software perspective, for example as well as from a material side that we will see the growth and come with that, I expect very solid gross margin performance as well as we roll through the year, especially into the second half.

Thank you. Our next question comes from Ben Hearnsberger with Stephens. Please state your question.

Hey, guys. Thanks for taking my questions. This is Brandon in for Ben. Just want to get a little bit of color on your expectations for Cimatron in '15, kind of, what do you expect to be layered on there. Obviously, with being software higher margin kind of the impact you see coming in there?

I think, that from Cimatron, specifically, we are looking to immediately have some cross selling leverage, because they have a very strong channel, we have a very strong channel and they are completely complimentary in terms of the go-to-market strategy. Cimatron also opened a very strong door for us into real manufacturing applications on the manufacturing floor. It extends our coverage, it multiplexes our cross selling opportunities and it carves out our software interoperability as we begin to look at 3D digital design and fabrication both, in terms of subtractive and additive. Remember too that Cimatron has about 40,000 seats that have already been placed that could be very attractive targets to us, and a very, very good channel. Now, let us talk a little bit about our overall software business. We have, in the last couple of years, complete realigned our software go-to-market strategy along the following lines. We made it easier for users to enter it, so we lowered entry cost for end users and biased our model for annual subscription and we begin to introduce new designs like our Capture, and Capture Mini, is really sophisticated delivery containers for software. The net result of that is what we call our maintenance and subscription revenues for software actually increased 15% in 2014 and the overall combination of software subscriptions and devices actually increased 24% for the full-year. That is the kind of projector that we hope to evolve the Cimatron business on field as we begin to integrate it and leverage it throughout 2014, because that is exactly what we have done for our Geomagic and Rapidform businesses in the last 18 months and it is quite impressive outcome.

Thank you. Our next question comes from Scott Schmitz with Morgan Stanley. Please state your question.

Thanks for taking my question. Avi, I am just wondering if you could reconcile some of your comments on the strong unit growth against the 25% product growth you saw in 2014, so how much of that is mix-driven and how much of that is pricing pressure or any changes in the competitive landscape? Thanks.

Yes. I want to be crystal clear that we have not experienced any change or any outlying behaviors in term of discounting. The simple answer is that ASP erosion is really not as wider in our results and specifically we did not experience any unusual discounting activities during the period. The reality is that we increased printer units three-and-half times faster the design and I am excluding consumer from the discussion, so that you understand that we are talking here strictly about design and manufacturing printers. I am excluding units in both period and revenue of consumer, so within design and manufacturing the reality is that throughout 2014, we increased printer units faster than printer revenue by about 3.5x, underscoring a shift in mix and a higher volume that by the way is consistent with what we have been saying all along. This is how we are going to accelerate, share and install base. We are doing it in the short-term in a way that is self-canalizing that substantially understates top-line growth and pressures margins for a certain extent. However, we continue to believe that this is a key for a long-term recurring revenue momentum, which again as I said earlier, on material alone, over a meaningful period, translates into at 24% CAGR over the past two years.

Thank you. Our next question comes from Samuel Eisner with Goldman Sachs. Please state your question.

Good morning, everyone. Just going back to the margin increase, I think you guys are implying about almost a 30% incremental margin, about 300 basis points of margin expansion at the mid-point. I was wondering if you could buck it, how you think about that margin expansion on a basis point level, is it 50 bps to 100 bps of volume, what is the mix impact what would be the impact from lower R&D expense, if you can just help us kind of triangulate that.

Well, you have kind of identified the key levers. I think, as we see revenue growth that will help us in a couple of ways and also give us some more scale. I also see us to really developing and growing into our higher margin businesses as we go through the year. We talked about some of them already whether it is the software or some of the other capabilities we have. With the acquisition of Cimatron, that for sure will help us and provide some uplift as well, especially given their very strong performance and their high margins and the opportunities that we will see there, so when we kind of take that bottoms up look and we look at that the variety of businesses we have, once again coming back to the strong performance we have in materials, that we see the margins accelerating and growing as we go through the year. On top of the fact I think we have some really good operating objectives around supply chain and some things that I think we can really help drive that should also add margin points as we go through the year as well, so I think it is a several factors coming together and that is kind of how we built the guidance in terms of especially as it evolves through the fiscal year.

Yes. If I may add to that a couple of things, one is, there is no question, but that for us 2015 is all about integration, leverage and execution and fine-tuning all the assets that we have assembled. We are off a period of stepped up investments, and we are coming off a period of also higher concentration of new products, which introduced certain inefficiencies into the whole supply chain and manufacturing. We are coming off a period of massive manufacturing facilities and infrastructure investments and all of that operationally speaking, as we progress throughout the year, represents juicy target for operating improvements. First and foremost on the product line gross profit margins and secondly in terms of doing more a for less in terms of our overall operating cost structure. I will further add that, because we have been investing all along, and we have been adding infrastructure and capacity all along, we do not foresee any unusual large investment. We have all of the things that we need. We have sufficient capacity and infrastructure and organizational strength, so we expect to really get progressively stronger leverage from the middle of the P&L. At the same time, as we demonstrated even in a difficult operating quarter, our gross profit margins with all the headwinds that we had from our ramping up facilities and assets, we still held our gross profit margin on a sequential basis at the same level as we had it Q3, but we have aimed element of gross profit margins even in the fourth quarter. We continued to expand gross profit margin on materials, we continued to improve our Quickparts gross profit margins and services in general. The areas that is still under pressure was printers and there are expectation quite frankly that the higher end printers will rebound and the consumer printers will weigh [ph] down for period of time and that will be remediated eventually by higher volumes. As Ted said, we have a good plan. We have assembled some incredible talent to execute it, we laser-focused and on top all of that we had quite a few groundbreaking new products that are slated for introduction in the coming periods, which we think [ph] even further, forward, faster.

Thank you. Ladies and gentlemen, that is all the time we have for questions today. I will now turn the conference call back over to Stacey Witten. Thank you.

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

This concludes today’s conference. All parties may disconnect. Have a good day.