Good morning and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the Results of the Second Quarter and First Six Months of 2016. My name is Michelle and I'll facilitate the audio portion of today's interactive broadcast. At this time, all participants are in a listen-only mode. A brief 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 call over to Stacey Witten, Vice President and Investor Relations for 3D Systems. Thank you. You may begin.

Good morning, and welcome to 3D Systems conference call. I am Stacey Witten, and with me on the call are Vyomesh Joshi, our President and Chief Executive Officer; John McMullen, Executive Vice President and Chief Financial Officer; and Andy Johnson, 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 at www.3dsystems.com/investor. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone numbers provided on the slide and in the press release that we issued this morning. For those who have access to the streaming portion of the webcast, please be aware that there may be a few second 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 this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent Annual Report on Form 10-K. During the 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 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 2015. Now, I am pleased to turn the call over to Vyomesh Joshi, our CEO. VJ?

Thanks, Stacey. And good morning everyone. In the last four months I have learned a lot about our business. On September 12, the opening day of IMTS in Chicago I plan to roll out the details of a market-based strategy for profitable growth. Let me articulate the key priorities and operational initiatives guiding the strategy. It is clear to me 3D Systems has a powerful synergistic and differentiated technology portfolio. We are the only company that can offer end-to-end solution for our key segments; aerospace, healthcare, automotive, consumer goods and training and teaching institutes. We're looking at the use case by verticals and understanding how we can enable our customers to digitize, design, simulates, make, inspect and manage conceptualization to manufacturing workflows. This quarter, we were pleased with continued strong demand for our healthcare solutions and software as well as increased material sales into advanced industrial and healthcare applications. We see this as evidence that many customers today are relying on our end-to-end solutions to power, advanced, digital manufacturing workflows. We expect this trend to continue as 3D printing involves from prototyping to light manufacturing. And we believe our solutions approach positions us favorably to characterize and capitalize on these opportunities. Of course, we recognize that we have lot of work to do. In particular, we believe there are significant opportunities to grow sales of 3D printers as well as generate greater revenue from our on-demand manufacturing services, which can serve as a platform to fuel adoption of our solution. As we progress in developing our strategy, we are working hard to design and implement an organizational structure that aligns to this strategy, and allows us to drive operational excellence across our business. We have three guiding principles to help us build a world-class organization. The first is simplicity, the second is accountability, and third is developing an appropriate cost structure for our company, which provides us the capacity to reinvest in innovation, infrastructure and process improvements. We already identified many opportunities to drive profitable growth and have action plans that we are executing today to build an appropriate cost structure, create capacity to invest and ensure we have the necessary talent to take our business to the next level. With that in mind, it is my pleasure to introduce John McMullen, our CFO. I had the privilege of working closely with John at HP for many years. And I'm really pleased to be working with him once again. Now, let me turn it to John to discuss our second quarter 2016 performance as well as his approach to the CFO role. John?

Thanks, VJ and good morning, everyone. I'm excited to be part of 3D Systems and have the opportunity to work alongside VJ once again. I'll start this morning with our second quarter results, and then spend a few minutes at the end discussing my priorities moving forward. For the second quarter of 2016, we reported revenue of $158.1 million, a decrease of 7%. Gross profit margin remained flat sequentially at 50.9% in the second quarter, and increased 300 basis points from last year. Total operating expenses decreased $21.3 million to $84.1 million, primarily the result of lower amortization and stock-based compensation expense, as well as timing of product development. In the second quarter, we generated $12.9 million of cash from operations and $9.5 million of free cash flow. We reported a GAAP loss of $0.04 per share and non-GAAP earnings of $0.12 per share, compared to a GAAP loss of $0.12 per share and non-GAAP earnings of $0.03 per share in the second quarter of 2015. For the first six months, we reported revenue of $310.7 million, gross profit margin of 50.8%, and operating expenses of $178.4 million. We also reported a GAAP loss of $0.20 per share and non-GAAP earnings of $0.17 per share for the first six months. In the second quarter, non-GAAP earnings per share includes adjustments of $8.8 million of the amortization expense, $7.2 million of stock-based compensation expense, and $1.8 million of acquisition and severance expenses resulting in $13.2 million of non-GAAP net income. Revenue in the quarter benefited from an 11% increase in healthcare revenue to $38.8 million, a 12% increase in materials revenue to $40.6 million, and an 8% increase in software revenue to $22.0 million. However, these gains were not enough to offset a 20% decrease in on-demand manufacturing services revenue to…

Thanks, John. This year 3D Systems is celebrating its 30-year anniversary. For the past three decades, we have built what we believe is an unparalleled 3D printing ecosystem comprised of hardware, materials, software, services and support. Partnerships are also a key component of our ecosystem, and we will be looking to expand these moving forward. As 3D printing evolves into live production, we believe this ecosystem becomes an increasingly important differentiator for our company. Customers today are looking for more than a 3D printer. They are looking for productive, reliable, end-to-end manufacturing solutions to solve complex business challenges. The strength and breath of our portfolio uniquely positions us to provide these solutions. And these solutions in turn are enabling and expanding our customer base to achieve better results faster. With the right team, the right strategy and the right portfolio, we believe we can take advantage of opportunities in our industry, drive long-term profitable growth, and accelerate digital manufacturing. With that, I would like to turn the call back to Stacey, who will open the floor for questions. Stacey?

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

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

Yes, thank you, good morning. VJ, can you comment on the consumption of materials in your installed base here? Your installed base is growing slowly, given your printer growth declines, but your materials revenues are up 12% year-on-year. That's the best growth since September of 2014 quarter. Can you maybe address utilization, pricing, share, any other metrics that you think can help us understand this improvement in trajectory? And I have a follow-up.

Yes, good morning, Wamsi. So, I think as I talked about in the last quarter earnings call, our focus is on production printers, because you know the usage that we see with production printers is way more than like consumer printers or even professional printers. So, I think as we move forward, our strategy is more and more going to be on driving the installed base growth especially in the production printers. The second thing is that it's very important for us to continue to develop new materials, because materials are the key for our business. So, as we move forward with our new Figure 4, with the way we will be really developing our solutions, our focus is going to be on materials. In last four months, I have really started asking the organization to really pay attention to materials management. Now what we also want to make sure that we continue to have a good share position in our materials, and there it is required that we work in regions to have very specific focus on materials. Again, focus on production printers, make sure that we manage materials as a business, and drive right kind of a go-to-market approach in the regions is going to be important as we move forward.

Thanks, VJ. And John, congrats on the new role. Can you give us some more color and quantify the impact of this product timing relative to the R&D expense in the quarter? And any comments on the broader demand trends in the near-term by region will be helpful? Thank you.

Yeah. I think so – this quarter, we commented on just the timing, particularly in the higher end professional and production systems, so I have spent time with the team going back looking at kind of linearity last year, and it's a little bit bumpy, It's a little bit bumpy for us. So, I would expect to see a little bit different mix going into the second half, and we'll keep you posted. In terms of overall demands, I don't know, VJ thoughts? If you want to talk about the market in general.

Yes. I think as we've talked about last quarter, the prototyping market is where the growth is going to be difficult. My opinion is we need to start moving from prototyping to live production. And that's why the focus on production printers. That's why what you'll see, the strategy is going to be making sure that we continue to innovate our DMP, our SLA and our SLS products. So, those are the production printers. And we are really talking about the strategy, as I mentioned in my earlier comments. that we want to go by vertical markets. So, if you think about my vertical, we're going to figure out the use case, and each use case will determine, whether when we can flip the market from prototyping to production. And the solution approach that we are taking is going to be very important for us. Because that's the way we're going to start growing the market, as we move from prototyping to the live production. And the process we want to take is by vertical market. The proof is like healthcare. So, healthcare grew 11% this quarter. And this is a great example of how we have really put together a vertical approach for specific market. And that domain knowledge and that solution approach in healthcare, I want to replicate and scale for automotive, for aerospace, for consumer goods, and for teaching and training institutes. I think that's the approach. And then, once you see that, then you're going to see the growth that we want to have a sustainable growth in the market and we want to be number one player in that particular market.

Great. Thanks for all the color.

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

Yeah. Good morning VJ and John. John, welcome to the team.

Thank you.

Jumping right in, VJ, last quarter you spoke to some operational challenges with quality, reliability and supply chain in certain product lines. And I'm curious, with another quarter under your belt, can you highlight where you've made improvements on operational issues, and then maybe also talk about progress on cost reduction with your order platforms?

Yeah. So, I think we need to continue focus on quality, reliability and the parts availability. I think we are making progress. One of the key things that I've talked about, and I'm going to bring the experience into this particular approach. So, I hired Reinhard Winkler (21:21) as our Supply Chain and Operations Manager. Reinhard (21:26) comes from Hewlett-Packard, where he was managing light Supply Chain and Operations for the printing business. And I think this is very important for us to re-look at our team, our processes. And some of the work that we are doing, so that we design for quality. We make sure that we don't ship product before it is ready. So, some of the work that we want to do in the product lifecycle management, the work that we are doing right now with our suppliers, making sure that we have enough inventory for the parts that we have. So, we are looking at everything. We're making progress, but still we have a lot of work to do. I think it's very important for us that we bring confidence and credibility in our channel, and in our customer that the products that we are focusing on in terms of innovation, we are going to make sure that we design for quality and design for manufacturability. I think we are making progress. We have work to do, but I'm very confident, these are solvable problems. And we are bringing the right team and the right focus in the organization making that happen. In terms of the cost structure, as I mentioned last quarter, what I want to focus is on both cost of sales and the operating expenses. And Reinhard (22:48) and the team are already looking at what we can do systematically to reduce our cost of sales. Because we have lot of suppliers, we have lot of factories. Our overall, the logistics that we have. We have work to do here to really bring every cent out from our total cost of sales. So, as we come in September, we will give you more specifics what we are doing in terms of the cost structure.

Great. Looking forward to the specifics. Shifting gears to printers. Being down 30% year-over-year, can you help us understand what vertical or printer family experienced the brunt of the downtick. And then given your comments this is largely timing related. Should we see pretty healthy printer growth sequentially?

Yeah. I think one of the key things that when we look at our printer order. First of all the timing of the orders, so if you think about, we talked about our new introductions with 2500 and then 3600. As we are ramping the product and we are making sure that we don't ship anything with quality problems that ramp is taking longer. So, I think the timing of orders was the first main reason. The second thing is – the CJP printers also, we have a little bit different overall numbers in CJP printers compared to last year. The third thing is, of course, we don't have consumers. So that could be another – the reason. My view is, as we move forward into the second half, our printer units are going to improve, and what we need to do is to continue to focus on the overall solution. You can see that our software growth was 8%. Our healthcare growth was 11%.

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

Our next question comes from the line of Ben Hearnsberger with Stephens. Please proceed with your question.

Hey, thanks for taking my question. My first question, I want to ask about SG&A, which was down about $9 million sequentially. I know half of this was lower stock-based comp. I guess the question is, are we at a sustainable run rate for the back half of the year?

Yes. So, as we talked about – this is John. So, as we talked about the OpEx decrease, both timing of stock-based compensation expense, the amortization. So, if you take those things out, if you look at it separate of those, and think about the second half, we will have some timing issues in stock-based compensations, but the run rate operating expense and non-GAAP operating expense for us in the first half for example was down year-over-year by 4%. And I think you should expect from first half to second half, separative things like stock-based comp and any other timing issues, flat to potentially slightly up in the second half, driven by some of the near-term investments that we're making back into the business, but flattish first half to second half.

I think the important part here Ben is to make sure that as we look at our strategy and as we organize around the strategy, we're going to find the opportunity to work on our cost structure. So, I think there are two key things that I am thinking about. One, is systematic work that we do on our cost of sales with the Reinhard's help (26:43). And then the work that we will do as we move a new organization structure, which will be aligned to the strategy and the opportunity to drive cost from that. And I think those cost structure work, the impact you will see in 2017, but we need to start that work in the fall of this year.

Yeah. One of the things we will do going forward is VJ and I will provide a lot more color in terms of what your expectation should be relative to cost savings moving forward and areas that we're investing in and what the balance of that should look like and how it should translate on the P&L. So, we will be providing a lot more color going forward, because there's going to be puts and takes along the way, we want to make sure that you understand them.

Okay. That's helpful. And as a follow-up, VJ, I was wondering if you could give us some color on the pipeline from metal printer sales, specifically the recently released 320?

Yeah. So, I think the approach we are taking with metals is solution approach, because we don't want to be another metal printer. I think this is the reason that my focus is on vertical markets. If you think about the two key verticals, where metal will be really important as part of the solution for live production, our healthcare and aerospace. And as you could see that we had 11% growth in healthcare. What we're finding from our healthcare customers, they are not only looking at just the metal printer, they want to see, do we have the production capability with FDA approval processes, do we have the quality and reliability that you could expect, because you know we are talking about application which is specific to healthcare that we need to do lot of work upfront and having the workflow in terms of surgical planning, in terms of simulation, gives us the credibility and confidence in medical device manufacturers and other healthcare customers. So, I think our approach with metal printing is more going to be a solution approach rather than another metal printer. And fortunately, the technologies that we have with both Phenix and LayerWise, we can provide a phenomenal parts, the titanium parts with our technology. I think the approach that I also want to take is very similar to healthcare for aerospace. So for both these two verticals; aerospace and healthcare, our approach is going to be solution. Our approach is going to be really having capability with our service bureau where we will be able to work with the customers, so they can move from prototyping to live production using our service bureau strategy. So, our service bureau is very strategic for us, our solution focus is very specific for us and that's how we want to build our metal business.

Okay. That's helpful. Thank you.

Our next question comes from the line of Ananda Baruah with Brean Capital. Please proceed with your question.

Hi. Good morning. Appreciate the question. Yeah, VJ, Stacey, good morning. John welcome.

Thank you.

Yeah. You got it. I guess, two for us, if we could, just kind of piggybacking off of some of the unit dynamics here that you guys have talked to already. You grew revenue sequentially for, I think, it was the third time in six quarters now, and you're heading into what is traditionally and seasonally firmer part of the year historically, does sort of this quarter suggest, VJ, that you guys can put up something that resembles typical seasonality directionally, so maybe growth sequentially kind of for the back half of the year, and if not, how come I realize that's a softer prototyping environment still, but we'd love to hear why you think maybe that doesn't happen, and then I have a follow-up?

So, I think, I don't want to just say that sequential growth, so I think the approach that we want to take is to really make sure that we have clarity in terms of our value proposition in the market, because quality, reliability issues were there and we want to bring the confidence back in our customers, in our channel. The second thing that I want to do, is to really focus on our portfolio – and focus on our production portfolio. So, SLA technology, the Figure 4, I think is going to be a breakthrough. And we're going to talk more about in September, because this is where we're going to bring production. Basically the user needs which in terms of productivity, total cost of operation, materials, which would be really used for the production processes, and repeatability and part quality. So, I think what I want to really focus on is not just having a sequential growth. My focus is going to be on production technologies and solution approach. Long-term, we want to set up this company to really have that kind of a growth opportunity. Now, clearly, from first half to second half, there will be definitely a growth that we would like to talk about. But, I don't want to be pinpointing to a particular quarter. Let's look at the half, because the way, the sales process works, these are long lead cycles, and I think what I believe, we're going to continue to grow the second half versus the first half and that's the focus that we want to have and that's the conversation we want to have with you all.

Okay. I could appreciate that. That's great concept. Thanks. And just quickly follow-up, would love to get your views, it's early days, sort of some of the new wrinkles in the competitive environment, but I'd love get your thoughts about how you guys are sort of synthesizing it? As you look into 2017, now that you have kind of like HP is coming to market and Carbon is sort of starting to ramp volumes, and they have different business models and different technologies. So, it sort of begins to feel like for the first time in a while – while there might be kind of apples and oranges, kind of come to market proposition, and we just love to get your early thoughts on that? Thanks.

Yeah. So, I think it's a great question, Ananda. So, I think, as far as the HP is concerned, I have a tremendous respect for HP. Both John and I come from there. So, we understand what to expect from them. I really believe, they have one product with one material and they have a good product, but they have lot of work to do with respect to get that particular material to produce production quality parts. Because that's where the focus is. So, we are focusing on making sure that our technology is going to be developed such a way that we have a broader range of materials that we can do, because that's what the overall, all our customers are telling us. As I said earlier, materials is the core focus of the 3D printing system and we need to provide broad range of materials, if want to be successful. And that has to have production kind of a quality. Going back to the three user needs; productivity, repeatability and the part quality and total cost of operation. Unless you have all those three, the customers are not going to move from prototyping to live production. So, both for Carbon and HP, I would put more emphasis on what kind of materials they are going to develop and what they are going to offer next year. Our strategy is going to be, we are going to be the company, where we will not only provide the materials and printers, but we're also going to provide the complete solution. So, that's the second differentiation that I do believe compared to both Carbon and HP, they're just a printer company with one material or few materials, which are really we have to prove that they could be the production material. So, I think that's the strategy. I want to focus on what we, our strengths are, and what our customers are telling us. Remember, we have 30-year experience in this particular market and we understand these customers very, very well and how we can take them from prototyping to live production.

Thanks so much.

Our next question comes from the line of Bobby Burleson with Canaccord Genuity. Please proceed with your question.

Yeah, good morning.

Good morning, Bobby.

Thank you for taking my questions. Good morning. So, just a question and a follow-up. It sounds like on the printer side of the business, you're expecting an improvement in units in the second half, and that's part of that potential half-on-half growth, and I'm wondering should we be thinking about some kind of gross margin impact as the mix of products revenue starts to see a higher share from printers?

Yeah. I think, right now, I think a good expectation from half-to-half on gross margin performance would be flat to slightly up. We are making some level of investments in quality and some of the things that VJ has talked about. But that said, I think the mix will continue to be good relative to things, the healthcare, software, materials. And we expect to see some pick-up during the second half also in the professional and production higher end units there. So, I think overall flat to slightly up in gross margin performance in the second half would be a reasonable assumption.

I think our focus is really going to be on making sure that we look at the lifetime value of our customers. So, it's not just about installing a printer. How can we help them with the great materials, the software, the services, because the annuity stream business model is very important for us? And that's how we feel that having this kind of a flat to little slightly up gross margin we can maintain. And as we enter 2017, our focus on solutions will enable us to continue to have this kind of a gross margin performance that we would like to have.

Great. And then just a quick follow-up, kind of longer-term as we think about materials margins, in some cases there's a range of margins obviously based on the materials. I'm wondering, as you shift your focus more to production, what's kind of the longer-term impact on the materials margins?

Yeah. So, I think, the important part here is continue to innovate in materials, because, as I said earlier, that the overall user needs, in terms of productivity, making sure that we have repeatability and the production kind of a part quality that our customers are looking for, and total cost of operation. We need to continue to innovate in materials. And if we innovate in materials and have the intellectual property, we will be able to enjoy the margins. And in some cases, we need to have open materials, but there I think we need to look at software and services margins to really offset the work that we will have to do. So, I think my opinion is that if we continue to focus on complete solutions, and have an innovation agenda, focus on production materials and software and services, we will be able to maintain these margins.

Thank you.

Welcome.

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

Good morning, VJ and John, and thank you for taking my questions. VJ, would you help us understand why you think the growth in the prototyping market is difficult. There's been some concern of excess supply; is that the case?

Oh, I think, the prototyping market, I'm not – look, there is no question that from form, function and fit, customers are basically saying prototyping, using additive technology is very important. So, there is going to be more and more opportunities in prototyping. I think we need to also look at all the service bureaus. They are already having – they acquired the equipment, they need do have the right utilization. So, I think the approach that we need to think about is there is a certain growth that you could achieve with the prototyping market, but the much bigger opportunity is if you move from prototyping to live production. So, I think, I'm talking about overall growth that how we can achieve. I think the other important part is, if you can flip and a lot of experts are talking about going from prototyping to production, that's where the bigger profit pull opportunities are. So, it's not just about whether prototyping is going to grow or not. There will be a growth. My view is the bigger opportunity is to flipping from prototyping to live production.

One follow-up question for, John. May I enquire why printer service costs were higher in the second quarter? Is that mainly because of lower production scale in Q2? Or are there more reasons beyond that? And what should our expectation be on the printer service side for the second half?

So, your question was on service costs?

Yes.

Yeah, it's just service costs, right?

Yep.

Yeah. So, there is definitely some short-term impacts on our focus on resolving product reliability issues, and that definitely translates into the service costs in the margin. So over time, I would expect to see that improve as we get through that. It's not a huge increase on a sequential basis, but we are definitely putting some money into making sure that things are working well out in the field.

I think our commitment is to make sure that all the equipment that we have installed, they work; because at the end of the day, the usage is the only driving force for materials consumption. And we want to make sure that the products and solutions that we have installed, they are working properly. And as we were acknowledging that we have quality, reliability issues. So, we wanted to make sure that we are upfront, we are proactive in taking care of our customer issue. But as John mentioned, we want to really design for quality, design for reliability, so that in future, we could avoid these kind of costs.

Thank you.

Our next question comes from the line of Kenneth Wong with Citi. Please proceed with your question.

Hi, this is Rich Hilliker on for Ken today. Thank you for taking my question. I was wondering if you might be able to give us a little bit more color on the order timing from this quarter. What do you think was the main driver of slipping it further back, do you think it was competitive, do you think it was...?

Oh, I think, if you think about our 2500 and 3600 introduction and then we have the ramp. I think the way the wholesale cycle works here, is a channel gets the product, they test it out for themselves, because they are working with their customers and making sure that we can meet the customer needs that we are talking about. So, this sales cycle is little longer, because we took little longer to ramp our new products, that's why what you are seeing is the impact of that and that's why the order that – the approach that we are talking about, why we are seeing a different kind of a revenue growth. I think my view is, as we get the confidence in the channel, in the customer, as we roll out our new technology, I really believe this demand/supply matching and the order book will definitely be a different way that I want to think about. I think that we also need to be predictable. We need to be really having the right kind of forecast process and demand and supply matching process. As we move forward, the organization structure that I am building, I talked about simplicity and accountability. And really focus on the cost structure will help us to bring the right talent with which we can really have the forecasting process, demand and supply matching process, and then driving our value proposition in the market. I really believe we've got to make aware, awareness is very important part of our outbound marketing. So, what you're going to see, starting again, in September, we're going to start telling the story. We're going to drive the right kind of organization structure. And then presence in the market, our sales coverage model, the way we talk about our value proposition, we have lot of work to do.

Thanks. And just a quick follow-up, I know you've talked a bit about the cost structure and finding the marketplace strategy and finding your niche. And last quarter, you kind of talked on that too. And just kind of wondering, where – which do you think still needs the most work as we're approaching the midpoint of Q3. So, I guess, improving the slot supply chain, finding and establishing the market-based strategy or improving the company culture around cost discipline?

Yeah. So, I think it's all of it. Because the way I think about it is, our revenue minus the profit is the cost opportunity. So, you can think about cost of sales and OpEx, all of that is our opportunity. So, in cost of sales, for example, we never had a focus in saying, how do we work with our suppliers and figure out what kind of a procurement strategy we want? Do we really need all the manufacturing sites that we have? Do we really need the network that we have in terms of logistics? And how do we really look at this thing holistically, so that we will be able to drive tremendous cost reduction in cost of sales? The second part is, as I mentioned, I want to really have a simpler organization with a clear accountability. So, the current organization versus the new organization, we also have lot of opportunity to take cost out, to remove duplication, to really have the right kind of emphasis on where we will be able to innovate. So, all these things will allow us to get the right kind of a cost structure both from cost of sales point of view and OpEx point of view. And I think, we will lay out, as I mentioned earlier, where John and I will lay out this plan in September with some specifics.

Perfect. Thank you so much.

You're welcome.

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

Hi. It's Jeff Rand (47:28) on for Sherri. VJ, are there any holes left in the portfolio that you just still want to fill?

Well, I think, we are looking at our portfolio very critically, because my view is, I want to build this complete solution ecosystem that I talked about. But there are certain assets that we need to look at critically and see what we want to do. The great thing about all the acquisitions this company has done that we have a great powerful portfolio, but also we need to really figure out which one we want to focus on and which one really going to yield long-term profitable growth.

Great. Thank you. And just as a follow-up, have you seen any impact...?

The other thing is very important for you to know that I am not planning for any new acquisition. I think we can really take this company and drive organic growth.

Great. Thank you. And just as a follow-up, have you seen any turmoil in Europe and what is your currency exposure to the British pound?

Well, I think, for Europe, what I believe is what we need to do is to really get our go-to-market engine much stronger. I think my view is, there is a demand. What we need to do is to get the right sales coverage, right channel strategy, and also we need to really do a much better job in our account management. So, I think that Europe is a good opportunity for us. The current environment, of course, it's a concern; but my view is, I think it's mainly our focus rather than thinking about it. And then, John, can answer about anything that you can see.

Yeah, I think if you look at my remarks at the beginning, the foreign exchange impact on our business this quarter was relatively neutral. We have some natural hedges cost on revenue impact, and frankly, all three areas kind of be the same in terms of overall year-over-year revenue performance. So, we're not seeing a big impact right now. Certainly that could change over time. But, we'll keep you posted on foreign exchange impact.

Great. Thank you.

You're welcome.

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

Good morning. Thanks for taking my questions. First question is, just around VJ your comment that it's important to simplify and kind of building on the last question taking a different direction, around acquisitions, and where you need to fill holes in the portfolio, how about thoughts regarding trimming the portfolio and focusing?

Well, I think that's what I was trying to answer initially. I think what I believe is we've got to build this solution approach that I talked about. So, our software assets, and you could see we grew 8%, we had a very good growth in our healthcare. And so, I do want to focus, but I do believe we have a real sustainable competitive advantage in the solution approach that we have taken. So, what we're going to do – we're going to – John and I are going to look at critically at our overall portfolio, figure out how we can fulfill the strategy that I laid out in terms of digitization, design, simulation make, inspect and manage; but at the same time, which particular technology or particular portfolio that we have is not going to be part of that vision that I talked about. So, I think we are going to be very thoughtful, mindful. And the other important part, is I really want to state is better leverage our assets. We have been operating that as independent companies. We didn't integrate them. We didn't really do cross selling. I think there is a lot of opportunity wherever we are selling software to talk about our complete portfolio or vice-a-versa wherever we are selling our materials and hardware we have opportunity to sell software. So, the focus that I'm talking about and the simplicity that I'm talking about, I want to get the right kind of accountability. Right now, my view is, if I can simplify focus on where the growth is going to come from, and leverage the assets that we already have, that's the kind of a right strategy forward.

Okay. Thanks. And then my follow-up question, just on, SG&A again this is really I think going to be the main question for most people trying to model this company for the back half of the year, SG&A on a non-GAAP – actually, let me just say, OpEx on a non-GAAP basis last second quarter was $77 million, then fourth quarter $67 million, then first quarter $73 million, and then this quarter $66.4 million. Can you just talk about what drove that $73 million in the first quarter, so we can understand some of the moving parts and why the big step down here. And I know you said it should tick up a little bit into the back half of the year, but why and how much? Because we do think we have to model today and can't wait until September, unfortunately.

Yes. Yeah, understood. So, I think on a non-GAAP basis, I commented earlier that half-to-half you should expect that SG&A would be relatively flat to slightly up on a half-to-half basis. If you think about Q, you think about Q1, we had a bit of a spike, because of CES and the partners summit that we held in Q1. We didn't have similar events in Q2. In Q3, we'll have an event in September that will have an impact in our participation in IMHS. So, I know it's hard when you're going up and down throughout the course of the year, so I was trying to give some color more on half-to-half expectation that we would be relatively flat, maybe slightly up because of some of the investments short-term that we're making. But think about, Q3 could have a little bit of an uptick relative some of these events, Q4 would be offset, but flat to slightly up half-to-half non-GAAP.

Talking about non-GAAP or total?

Non-GAAP.

Thank you.

I think the important part is, we want to lay out our strategy, lay out our organization, and all these cost structure work that we are going to do is going to take some time. It's not going to be overnight. And I think that's why we want to show you the modeling that we are doing in September and then what you can expect in 2017, 2018, and 2019.

Thank you.

You're welcome.

Our next question comes from the line of Steve Milunovich with UBS. Please proceed with your question.

Good morning, Steve.

Good morning. How are you?

Good.

You may have touched on this, but I wouldn't mind having a little more detail on the on-demand manufacturing service decline of 20%, the factor is behind that and where you see that going forward?

Yeah. So, I think, one of the key things that as I went around in last four months to look at our on-demand services business. I think there's three key things that I wanted to just say. First of all, it's very strategic. As you move from prototyping to live production, having that capability so that we can work with our customers, so that we can help them, as we go from prototyping to production. They don't want to put new processes into their production environment. They want to test it out. They want to qualify. And these assets are going to be very valuable for that. Second thing is, in last few years, we didn't really invest into this capability. So, my view is, I want to invest in our on-demand manufacturing services, because I really believe these are very strategic assets. We need to upgrade the equipment we have and capability. So as for example, I talked about in our healthcare, we have now service bureau, which is really working with healthcare both in the Europe and in the United States. I want to take that capability and create very similar approach for aerospace, the other thing that I talked about for the metal. So for service bureau, right now, you are seeing that reduction, because we didn't invest into that particular business. And second thing is, we are not chasing low commodity some of the jobs that we are getting. So, my view is, this is very strategic. We are going to invest into this business, and you will see a very different profile in 2017 and 2018.

Okay. Thank you. And then also maybe give us the state of the distribution channel, what's the satisfaction level? Are you seeing much turnover? Is HP out there trying to take some of them away from you? How does that also fit into your vertical focus? Is there a vertical strategy in terms of distribution?

Yeah, I don't think we are seeing any turnover. There is lot of noise in the market, but we don't see any turnover. I think the important part here is I want to actually – really have a systematic approach for go-to-market, because some of our customers, which are big accounts, I want to really have account management. Now the places where we can have very specific focus on our aerospace, automotive, healthcare, we need to have the right kind of a distribution there. So, we want to get the right coverage globally, and then we need to spend some time in training the channel, because I think that we have not invested enough in training the channel, in creating the right kind of a marketing program, so working with the channel, so that we can go to the market and talk about our value proposition very effectively. So, what I would like to see is increase our sales coverage, focus on training, and focus on marketing programs, so that we will be able to continue to grow the business.

Great. Thank you.

Our next question comes from the line of Troy Jensen with Piper Jaffray. Please proceed with your question.

Yeah, thanks for sneaking me in here. Quick question for John or VJ, and I do have a follow-up after this. But do you guys endorse the prior management's guidance for revenues to being flat to up slightly this year?

Well, I think – what, I think, we already gave you the comments that from second half we are going to do better than first half in the revenue. And we already told you about the approach that we are taking with respect to our OpEx. I think that – and then margins are going to be also flat to little bit up. My view is, with all our issues, we are basically delivering non-GAAP EPS of $0.12. We have $12.9 million cash that we generated, and we are going to continue to generate cash. Look, this business, we are focusing on solving our problems, which are really internal problems. My view is this business, which is delivering the cash, delivering that kind of a performance, we want to continue to focus on innovation, focus on our strategy, and get the right organization structure, so we can really build the solution business for the company.

And then my follow-up, kind of two-part here is. So the down 30% on printer sales, does that normalize the discontinuation of the consumer business? And can you give us any color on, of your system sales, how much of it is production versus professional?

Well, I think, without the consumer, that number would have been very similar. Because if you think about, we got out of the consumer business in the first half of last year, and then we already had – so I think this is more about the timing that we talked about, rather than just the consumer business. The second thing that we need to really look at, as I said, where the market is in terms of the prototyping. So my view is focusing on production, getting the solution effort is the right way to look at the business.

Good luck, gentlemen.

Our next question comes from the line of Joe Wittine with Longbow. Please proceed with your question.

Hi, thanks. Just repeating that last question: you said you need to move from prototyping to live production, but can you give us some idea of your approximate mix in each today?

We are not giving that information. I think the important part is to really look at the business the way I described. I think we're going to continue to focus on production printers where the uses are. And some specific segments like jewelry segment, where we really have a very good product offer, or specific things that we can take our MJP technology, the 2500, where we have introduced our new platform, I believe that those opportunities will go after. But long-term, innovation focus needs to be in the production technologies. Okay?

Our final question comes from the line of Paul Coster with JPMorgan. Please proceed with your question.

Well, thanks for putting me into the queue there. Thanks. So, you gave an example of the healthcare segment, and a sort of clue as to how to correct these solution sets by embedding domain expertise into everything you do. But, of course, much of that was acquired, and you acquired maybe in some cases years of expertise. Can you talk to us about how you're capturing the domain expertise and encoding it in the new solution sets, for instance, aerospace? Are you embedding people into your customers' accounts? Are you building custom solutions and then hoping to kind of genericize them for the whole industry? Something around the process would be helpful. Thank you.

Yeah. I think, it's a great question, because I really believe the way we build our healthcare business, focusing on the segment, getting the domain knowledge, getting the domain experts, and try to really build complete solution, including our manufacturing capability, was the right approach. Because, if you look at our healthcare business, it's not only delivering the right kind of a metal printing and the plastic printing that we do, but also professional service. So, my view is having that kind of a focus, work by use case by use case. So, as for example, our focus right now is, in the healthcare is for the orthopedic. But, you know, then we can go to the next level, where we can go up for cardiovascular; again, we got to do that by really getting the domain knowledge and understanding of it. So, when we go to a medical device manufacturer, we can talk about saying, look we are not just providing you another metal printer. We are providing you with the complete solutions from digitization. So, we understand that how CAT scan and how that overall process happens, where we acquire the image, and then we figure out the surgical planning. We figure out how we are going to do some specific designing that instrument and the implant that we work with and then we manufacture that. So, that we are providing a complete end-to-end solution. That's the approach we want to take with aerospace; that's the approach we want to take with automotive; that's the approach we want to take for all our verticals. I believe that's the long-term, because having that service bureau and having manufacturing capability, also gives the confidence to our customers that we're going to qualify the part and the process and the software with which you will be able to now scale into the manufacturing environment. And I do believe that's where the market is going and that's where we want to lead.

I get that. But how are you doing it? Are you putting people into customer accounts? Are you building the team?

So, let's take example. So, I think, if you look at the sites that we have in Denver and then site that we have in Belgium, we have actually created a workforce, a process, and strategy to be successful in the healthcare business. So, we have hired people. Of course, we had done some core acquisitions there, but we are augmenting now that with our manufacturing capability. We are augmenting that with a direct interaction with our customers, because they are explaining to us what they would like to see and you will see some very specific example in September.

Okay. Thank you.

There are no further questions at this time. I would like to turn the call back over to Stacey Witten for any closing comments.

Before we close out the session, I want to remind you, we'll be hosting a special event to coincide with IMTS 2016 on September 12 at 10:30 AM Central Time in Chicago. This event will be available to the public. We have live webcast and online replay. Specific web and dialing details for that event will be provided in the press release and will be available on our Investor Relations website in the coming weeks. 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 Investors Relations' section of our website www.3dsystems.com/investor. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.