Good morning and welcome to the 3D Systems Conference Call and Audio Webcast to discuss the Results of the Third Quarter and First Nine Months of 2016. My name is Brock, and I'll 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 call over to Stacey Witten, Vice President, Investor Relations for 3D Systems.

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 this slide and in the press release that we issued this morning. For those who have access to 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 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 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. On September 12, at IMTS we rolled out the details of market-based strategy for profitable growth. We believe our full 3D printing ecosystem is a source of our competitive differentiation. With our hardware, materials, software on-demand solutions, application engineering and partnership, we are able to provide complete end-to-end solutions for digital manufacturing. This enables our customers to digitize, design, simulate, manufacture, inspect and manage in a single workflow. We believe these capabilities are key to meeting real customer needs, particularly within production applications. We are focusing on use cases in the vertical markets of aerospace and defense, automotive, healthcare, durable goods, as well as the teaching and training institutions that support these verticals. Prototyping will remain a critical application for our technology and important part of our business. However, looking forward to the next three years, we believe the greatest and most disruptive opportunities will come from customers shifting from prototyping to end use production using 3D printing technology. As we have begun implementing our strategic plans, our third quarter results are reflective of our progress toward making 3D production real. For the third quarter of 2016, we reported revenue of $156.4 million, an increase of 3%. Overall, printer unit growth was 12%, with strong sequential and year-over-year growth of production units. In our view, strong demand for our production printers, materials and software, as well as healthcare solutions during the third quarter is indicative of our growth potential and market opportunities going forward. To better focus on the opportunities we see, we are taking decisive steps to prioritize our portfolio and resources. In line with this, we are exiting certain products and projects, including CubePro, CubeJet, the ProX 400 and other high speed continuous jetting printer known as Project Atlas. We are redirecting resources from these projects to advance and accelerate next-generation capabilities in metal printing as well as Figure 4. We truly believe our go-forward portfolio of products and services can meet complete range of professional and industrial needs in the market and drive the shift from prototyping to production. And now, I will turn the call over to John to discuss our third quarter 2016 performance. John?

Thanks VJ and good morning everyone. As VJ mentioned, we reported a 3% increase in revenue for the quarter to $156.4 million. On a GAAP basis, gross profit margins for the third quarter of 2016 was 44.1%. Gross profit margin was negatively impacted by non-recurring charges of $10.7 million related to prioritizing projects and resources consistent with our recently announced strategic direction. Total operating expenses decreased $14.7 million to $91 million. The decrease in OpEx was primarily the result of lower amortization and legal expenses, partially offset by a $6.1 million non-recurring write-off of assets related to exiting projects. In the third quarter, we generated $7.2 million of cash from operations. We reported a GAAP loss of $0.19 per share compared to a GAAP loss of $0.29 per share in the third quarter of 2015. For the first nine months, we reported revenue of $467 million, gross profit margin of 48.6% and operating expenses of $269.4 million. We reported a GAAP loss of $0.39 per share for the first nine months of 2016 compared to a loss of $0.53 per share for the first nine months of 2015 As VJ mentioned in his opening remarks, after an extensive review of all projects and market opportunities, we reached the decision to exit certain products and projects. This rationalization of our product portfolio enables us to focus our resources on solutions that directly address customer needs in key verticals within the ecosystem, VJ discussed earlier. Our reprioritization resulted in $16.8 million of non-recurring charges and a write-off of assets, which increased cost of sales $10.7 million and R&D expenses $6.1 million. We exclude these charges, as well as expenses from non-cash compensation, amortization, acquisitions, severance and litigation settlements from our non-GAAP results. Non-GAAP gross profit margin for the third quarter of 2016…

Thanks, John. We truly believe our metal technology, Figure 4 technology and software innovation such as 3D Expert will enable our customers to shift from prototyping to production over time. A key priority for us is reducing cost of sales, so that we can become more aggressive in the marketplace and capture market share. We have spent a lot of time over the past months talking to and getting to know the market. What we have learned is that enterprise customers are looking at these four needs to move from prototyping to production: productivity, durability, repeatability and total cost of operation. We believe, we are at the inflection point in the evolution of additive manufacturing and our technology, our experienced leadership team, our strategy and our ecosystem uniquely position us to make 3D production real. With that, I'd 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. We will now be conducting a question-and-answer session. Our first question today comes from Jim Ricchiuti of Needham & Company. Please go ahead.

John, I may have missed it. But did you say printer revenues were down 6%?

Yes.

Okay. And wonder if you could talk a little bit about the – sounds like you saw a nice pickup in the higher end printers. So could you maybe give us a little bit more color on that? And I don't know if you could provide what the unit decline was.

Sure. I'm going to let VJ talk a little bit – give you some color on the high-end printer.

So, Jim...

Okay. Hi, VJ.

So, first of all, overall unit growth was 12%. So I just want to make sure. And the revenue decline was mainly because of the mix in ASP, especially when we ship more MJPs, that's the reason. Second thing is, on the production side, as I mentioned in my commentary, we are seeing a really good unit growth. The unit growth is coming on all three core technologies, SLA, SLS and metals. With respect to the professional printers, first of all, we are not doing any more consumer printers, the desktop printers, that's the first one. The second reason is our CJP printers, we are seeing actually not as good unit growth there. MJP, we are still doing fine. So as I mentioned PJP and CJP that's where our weakness is in professional printers.

Got it. And VJ, would you talk to the growth in healthcare, that was very strong?

Yeah. Our healthcare growth, as I always said, that I am really very happy with the way we're doing healthcare as a vertical. And that's our really formula for our strategy, for all the verticals. I want to really replicate and scale exactly the way we have been doing healthcare. The approach that we've taken there is to really understand our customers and figure out the solutions. So we have software. We have simulation. We have the design and actually making devices for the healthcare companies. And I think that's the right model and that I have been very consistently talking about how I want to do it. And I truly believe that our healthcare business is going to continue to grow and software business will continue – you saw software also growth of 11%.

Okay. Thank you.

The next question comes from Patrick Newton of Stifel. Please go ahead.

Yea. Good morning, VJ and John. Thank you for taking my questions. Metals, clearly a standout for the industry and you've had new product releases throughout 2016 that seemed you have rectified some quality issues and metals were clearly emphasized in your prepared remarks as a key core driver for the company in the future. So I guess my question is, given the importance what is your metals revenue currently or what level could it be in 2017?

So, we don't breakdown our metals revenue. But I do believe metals is a very big opportunity. As you could see, GE's entry and really acquiring metal companies validates that this is a very important market. With our both 300 and 320, we have a very unique technology. I also believe the introduction of 3D Expert, the software that we have developed really helps the customers to simplify their workflow and drive the right kind of a results with our metal portfolio. I believe we have a unique advantage. The other last part I can tell you, consistent with what I've been saying, because if you think about metals, the two key verticals are very important are aerospace and healthcare. And having this healthcare business and having that vertical focus means that the medical device manufacturers, they don't come to us just as another metal printer, they come to us because we are the solution provider.

VJ, is it fair to say it's still sub 10% of your revenue?

Well, again, as I say, I don't want to talk about it. It's a good growth opportunity.

Okay. And then John, I guess a lot of low hanging fruit to cut expenses across the company, and whether through integration of acquisitions, footprint consolidation or rationalization of your OpEx. And just focusing and trying to understand what you said on the OpEx side, trying to look at in six-month increments and that it'll be lumpy on a go forward basis. Should we think that your ability to cut OpEx is done and now we should think about it being relatively stable or growing with revenue as we look into 2017 and beyond?

Yeah. No, I would – first of all, the focus is also on costs of sale. So we have a focus on both costs of sale and SG&A, and particularly G&A within SG&A. So, no, I don't think you should think of it as being done. I think the way I would characterize the last couple of quarters is that we've been very careful with our operating expense and we've been doing a lot of planning relative to the opportunities in cost of sales and OpEx going forward. And you will hear us talk about our reduction efforts as we enter 2017. But you'll also hear us talk about some investments that we're making. So we're making a pretty significant investment in IT across the company that we just recently kicked off. So it's going to be a plus/minus kind of thing as we go through 2017. And we think that the net yield of that positions the company to have the opportunity for profitable growth going forward. But you shouldn't think of it as done, actually in some ways, you should think of us as really just getting started.

Yeah. I think the important part here is to really focus on cost structure. Because I truly believe we need to take the cost out, so we can create the capacity to invest. That's the first thing. The second thing is, I think, as I always define the cost, it's revenue minus operating profits, both cost of sales and OpEx. And cost of sales we have lot of opportunity, this company didn't focus on really looking at how to take the cost out from the cost of sales. So my opinion is we got to continue to focus on it and use that capacity to invest and I also want to go aggressive in terms of gaining market share.

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

Thank you.

The next question comes from Wamsi Mohan of Bank of America Merrill Lynch. Please go ahead.

Yes. Thank you. Good morning. So when you look at the quarter or maybe if you look at the full year, can you give us some sense of how much of a revenue headwind these product exits will pose going into next year? And do you think, VJ, that there are more assets in your portfolio that you will exit or are you substantially done here? And I have a follow up.

Well, I don't think that these exits were really two folded. The first one was the desktop market, because we don't want to participate in that. And because we had taken that kind of a approach that it's not as much revenue decline that you will see, as we move forward in terms of the headwind.

Yes.

Second part is, when I look at restructuring, and I think, I want to go careful because I think we were going step-by-step process in terms of which assets that are going to – really we're going to invest versus which assets we're not going to invest. I think this is the first step. We'll continue to look at our portfolio. We are not done looking at all the portfolio, but I do believe this is a significant thing that both John and I want to do, get us behind, because I really focus on where the resources on our metal and Figure 4 technology. And so it's all about focusing the resources, it's all about getting the right cost out and then invest.

And just three of the four exits that we noted in our materials were not really generating any revenue at this point. And so, you shouldn't view this as having a revenue impact on us going forward. But you should view it as having us being able to focus more heavily on the things that are important to us going forward. I think what VJ said is correct. We think we've put a lot of things behind us. And, certainly, for now, we feel pretty good about the portfolio going forward. It's just a question of where do we want to invest and focus more within that existing portfolio going forward.

Okay. Great. Thanks. I appreciate the color. And then, as my follow-up, can you talk a little bit about what's going on in the on-demand parts, that was down 16%. Was there something specific and episodic just in maybe third quarter of last year or it's a tougher comp or it's just a demand environment weaker or could you just share some color around that? Thanks.

Yeah. So I think this is the one business is very strategic for us, first of all, because I do believe having this services and solutions are very vital for the shift from prototyping to production. Because enterprise customer would like to have a way where they can test out their prototyping to production shift. The reason that we are seeing this kind of a decline, I believe the business models that we had in our on-demand solutions, which was very conservative. We were not going after the business as aggressive that I would like to go after. I think this cost structure work that John and I talked about now gives us the capacity to go after aggressively this market. Because you know, this is all about utilization and the fixed assets we have. I will rather go aggressive and not limit the opportunity that we have in the prototyping market. So as we go into 2017, we're going to go aggressive into this particular business.

Thanks, VJ.

The next question is from Shannon Cross of Cross Research. Please go ahead.

Thank you very much for taking my question. I'm curious when we saw you out in Chicago, VJ, you had changed out several for your senior management. And I think I want to talk to John out there, he had mentioned that sort of you're starting to look at the next levels in that. So I'm curious as to how we should think about where you are at in the process, and I know a lot of the questions so far have kind of gotten around that. But are we in early innings? Did the Cubs just win? So sort of where do you sort of see where the business is today relative to where you want it to be from an organizational standpoint?

Yeah. So I think the top level is in place now. And I feel really very good about the organization structure we have. And we now have all of our focus on execution. There may be some other changes throughout the organization as we cascade the approach and the operating model that John and I talked about, but I absolutely believe that we have all what we need to really solve our execution. My opinion is all our issues are internal, having this great leadership team now and having a great portfolio, we can focus on execution and go aggressive as I said to really get some share.

And Shannon, we've already sort of operationalized our new team and our new model with the regional execution and the GPU structure that we have and have already built that into a planning process for the next year and two to follow. So we're already executing against the new structure and now it's working through what the appropriate cost structure is for new structure which we're also doing at the same time.

Great. And then just a follow-up, John, you had mentioned you're deploying a new IT systems throughout the company. Can you give us more detail on what you're doing there, timing of that, and magnitude, and what kind of cost benefits, I assume if it's ERP, typically, eventually we get to the promised land and see cost benefits out of it? Thank you.

Yeah. I think, you should think about this as a 12 to 18 month project. We've literally just kicked it off. And it'll be a relatively significant benefit to the company over time. I think the benefits from the IT work and the biggest initiative within that is really the whole "cash process" and how we standardize and how we automate (29:25) today. But we will certainly see benefits over time from the IT work. But we have – I think about cost structure in two phases; we have opportunities as we are and we will have other opportunities over time with efficiencies from the investments that we're making in IT. So I think we will definitely be talking about this throughout 2017 to give more color on where we are, because it's a big deal for the company.

Thank you.

The next question comes from Sherri Scribner of Deutsche Bank. Please go ahead.

Hi. Thank you. I was just curious with the restructuring and the changes that you're making with the company. It sounds like many of these will continue into 2017. Can you give us some sense of how long you expect restructuring charges and severance charges to continue? Should we expect that to continue through 2017 and what sort of magnitude should we expect?

So, when I talk about continuing restructuring, I'm just mainly talking about cascading the organization structure at my level that I announced in Chicago. What we are doing is, we need to adjust a few things. But this is not going to be a major restructuring that you should be expecting.

Yeah. I wouldn't think about this as large restructuring type charges. I would think about it as us kind of paring costs where we see the opportunity as we go. And as VJ mentioned, it's not just SG&A and head count type related cost opportunities. We see some significant opportunities in cost of sales that in our procurement world and so forth so. But we're just in the midst of starting the executing in some of those.

And I think we talked about this thing. Supply chain is a very big opportunity for the company. And Reinhard Winkler and I are really figuring out what we need to do from cost of sales point of view, so that we can save some significant cost for the company.

Okay. I guess, also, how should we think about the categories that you'll present to us going forward? It looks like healthcare and materials and software are categories that you're focused on. Are these metrics that we'll be seeing on a go forward basis and are these metrics that management is being evaluated on?

So I think those four things are very important. As you can understand, those are the annuity stream. John and I are working on our 2017 plan. Let us come back to you in specifics, okay. But I think those are very important. Because, as I said, those are the annuity stream for the installed base that we are going to work on.

I think it's fair to expect that we will be providing similar information certainly through 2017. And as we have talked about last quarter, VJ and I want to provide as much transparency as we can and want to be able to communicate as much information over time as we can, but we want to get through the execution and implementation of our new operating model and this will be progressive quarter-to-quarter.

And then just a quick clarification. Can you give us the breakout between stock comp and amortization this quarter? Thanks.

Yeah. Stacey, do you have the exact numbers...

Yes. Stock comp was $9.5 million of that so then the remainder of that would be amortization.

Thank you.

I think the details are actually spelled out in the...

In the Q.

In the Q with the reconciliation. Yeah.

The next question comes from Kenneth Wong of Citi. Please go ahead.

Hi. Morning, guys.

Morning.

Morning.

So healthcare obviously was a very strong vertical for you guys. Any rough sense in terms of some of your other key verticals, whether it's aerospace, autos, and whether or not you're seeing much growth in those particular verticals?

Yeah. I think, frankly, we just started that work, because I really believe, as I said, I want to shift the company from prototyping to production. Shift the company from looking at the general market, a prototyping market to really understand the use case by use case by verticals. So this work has started. And as we move forward into 2017, we are going to build – because this vertical approach requires investment and understanding the domain knowledge. Fortunately, we started that healthcare work a year and a half ago and that's why we are seeing the results. I believe as we build it out the use case by use case by vertical, we are going to see a much, much better traction.

The early work really suggests a really significant opportunity for the company going forward, from a lot of the early work we've done.

Got it. And then maybe flipping to the cost side, so we didn't talk much about R&D and R&D is settled in sort of this $20 million run rate. Is that the right levels to be thinking about how to model that going forward?

So I think R&D and sales are the two places I want to invest because innovation is our bloodline. And that's the only way – but focused, I don't want to invest everywhere. That's what you're going to hear from me all the time. I want to invest, I want to invest more in sales and R&D. I don't want to invest lot of in G&A. No, that's where our opportunity is to take the cost out. So I would say that I want to invest more. I don't think that this is something I want to go lot more investment, but I just want to focus and I want to invest more in both sales and R&D. So you could – but I think we have given you roughly the guidance of half to half. And so we're not going to go above the OpEx number that half-to-half, kind of said flattish, and I think we want to continue to be in that kind of an envelope for the company. But get that focus on sales and R&D.

Got it.

Remember the equation here for us is that, there is efficiencies in the new operating model to begin with and that goes across the board. But we also know that from a go-to-market point of view, these are opportunities to invest more into certain areas in sales that we will do and we will have the capacity to do that. In the R&D space, its more around how we take that R&D envelope and prioritize it and where we may want to increment it a bit over time for areas that VJ's talked about, things like application, engineering for example, so.

Yeah. I think materials is also very important because materials and application engineering will allow us to build that annuity stream that I have been talking about.

Great. Thanks a lot guys.

You're welcome.

The next question comes from Hendi Susanto, Gabelli & Company. Please go ahead.

Good morning, VJ and John and thank you for taking my questions.

Good morning.

Good morning.

What is your expectation on Q4 relative to past historical seasonality in Q4? Should we still expect some seasonal sequential strength in sales in Q4?

Yeah. Q4 is typical a strong sequential quarter for us. I wouldn't expect anything different. I think that what VJ and I talked about last time was really looking at half-over-half. Our expectation that we'll continue to have a strong margin performance similar to what you've seen over the last several quarters and that we will do a good job of managing our OpEx to be flattish to may be slightly up half-to-half and then typical sequential revenue trends.

Plus, we want to continue to focus on our cash generation, because that's very important for the company.

Yeah. We've done a really nice job. I think there's much more opportunity frankly going forward, but in terms of overall cash flow from operations generation of $38 million year-to-date, $7 million in the third quarter and absolute cash growth to almost $24 million on a year-to-date basis is really good thing for us.

Thank you

The next question comes from Brian Drab of William Blair. Please go ahead.

Hey, Brian.

Hi, Brian.

Good morning. Thanks for taking my questions. I just wanted to make sure that I understood the operating expense guide correctly. So adjusted OpEx, that's flat to up in the second half of 2016 versus the first half of 2016, in the first half SG&A plus R&D was $139.3 million, we did $64.7 million in the third quarter. So that implies that the fourth quarter is $74.6 million or higher, and that's up significantly from the third quarter. I just want to make sure I have that math correct.

Yeah. We will go into specific numbers around it, but we guided that we would be flat to perhaps slightly up, we'll see, half-to-half. It's a little lumpy for us now in terms of where we're making investments and where we're not on a quarter-by-quarter basis, so that plays into it a little bit.

Okay. Just from my follow-up then I guess, I just want – so if I hold R&D flat from third quarter to fourth quarter, that guidance that you gave implies that we're going to go roughly from $44.7 million in the third quarter in SG&A to $53.5 million, somewhere in that range. And I'm just wondering, can you talk about the driver of those?

So I wouldn't look at it that way. I would look at that maybe there is some R&D investments we need to make, and so I would look at the total OpEx rather than trying to break it down that way. Because, you know, look the Figure 4 technology is very transformative for us. And I want to make sure that we invest appropriately there. So I think you should look at the overall OpEx profile rather than R&D versus SG&A.

Okay. Thank you.

Your next question comes from Bobby Burleson of Canaccord. Please go ahead.

Yeah. Good morning.

Good morning.

Good morning.

So just focusing on the metal business a little bit more. Curious what the mix has been there in terms of the different markets you are selling into. Obviously, there has been some M&A with some other metal companies out there that had good orthopedic implants traction. So wondering, how much of the mix these days is healthcare and whether or not implants like hip cups things like that help to drive that healthcare growth?

Yeah. I think, as I said, the two key verticals for metals are healthcare and aerospace. The third one, the universities, because they are – I am including defense into aerospace also, okay. The universities are also yearly testing it out. Because this is a new technology. They want to really understand how this will change the metallurgy, how this will change automotive and aerospace. The last part is the industrial, what we're seeing a lot of interest now that customers, who would like to look at this technology, especially as I said the GE's entry is really validating the market and there is a lot of interest right now even from industrials. The last part is the 3D Expert, the software that we have developed, we're getting tremendous interest into the software, because even the installed basis is basically saying we want to really play with this software. I think that between healthcare and aerospace and then this 3D Expert software our opportunity for growth in 2017 is substantial.

Okay. Great. And then just shifting a little bit to professional printers. In order to get back into kind of a nice growth mode overall for printers, I would assume professional needs to deliver growth, and also I think there's some high margin materials in that segment. So, curious whether or not that's an area of investment? Is it more of an investments in the materials or is it more of an investments in the machines themselves or some kind of channel realignments or something that percolates through?

Yeah, yeah. Let me describe to you three things that I really believe to accelerate our professional growth. The first one is the new introduction of 2500 and 3600 platforms have been very good. Especially 2500, we are getting very good acceptance in the market. And I believe that as we start talking about our value proposition aggressively, because you know this is a product where there is a tremendous improvement in productivity, there is a tremendous improvement in ease of use. The software, the 3D Sprint that we have introduced now with our professional products is really enabling the customers to drive the prototyping business in a very different way. I also think that with our cost structure improvement that we are making, I want to use that to aggressively go after the competition. We have a formnext which is the next show in Europe. And you could expect us to really drive some significant thing that we want to do with our professional printers.

Okay. Great. I know you guys already touched on on-demand parts, but it seems like there are some companies out there, that are really marketing web based, either injection molding service or 3D printing service, it's a little bit more crowed in terms of those types of companies these days. And I am wondering if you need to kind of increase or revisit your marketing plan for on-demand parts in order to get growth there?

Yeah. And I think you're asking a very good question, right. I think as I said earlier this is a very strategic business. What I'm doing is having a deep dive to really understand. I think there are two parts of the business. The first part of the business is what I call a fast turnaround 3D printing. And what I want to do is, I want to really look at our assets, look at our website, make significant improvements where the customers can come there. They can get a quote, aggressive quote, as I said you know because our utilization is very different. And then I want to drive rapid turnaround and then having – there's a real opportunity here to just focus on that part. And then the second part of the business is what I call high-touch business where what we want to do, we want to be a place where our enterprise customers by verticals can come. And then they can fulfill and say okay, can you work with us on a project basis, rather than a quick turnaround. And on the project basis what we want to do is, we want to provide all the services, so they can prototype it, they can scale and they can actually shift to production. So I want to really segment our on-demand solutions business into those two segments and invest appropriately so that we can have a quick turnaround business, and then, invest properly with respect to the go-to-market engine, so that we can do a project-based approach. And I think that's what we want to do. Right now we were kind of in between. And I want to really segment the market and focus our on-demand business in that way.

Great. Thank you.

The next question comes from Steve Milunovich of UBS. Please go ahead.

Hey, Steve.

Great. Thank you. Hey, how are you doing VJ?

Doing well.

You mentioned the importance of training the channel in order to drive awareness of how to use 3D printing in production, can you give us a sense of what proportion of the current channel is ready for these more advanced conversations and whether requires additional investments or recruiting new channel partners?

Well, I think we have a really good channel partners. I think what I'd rather to do is training. I think the thing that we have not done a good job is to really train our channel. The second thing is to give them a playbook with a very clear value proposition. And I think that's the work we are doing right now. What I want to do, give them training, give them the sales playbook, and then, really as I said, come up with the right kind of a pricing approach with which we can go aggressively in the market. Because I think those three things – I want to really start talking about our value proposition aggressively, I want to show up in the market aggressively. It's not about recruiting more channel partners, to really give them the right tools and training so that we could be successful in the market.

And how do you feel about material margins in the longer term, HP is kind of making a big push about an open platform and kind of viewing that the traditional 2D printer market doesn't work here?

Steve, I just don't agree that that's what they're saying. When they say open material what they are basically talking about is that you could work with multiple material vendors and I just don't buy that. My opinion is all innovation is going to come in materials. This is just in infancy in terms of where the market is. So, HP's strategy, I think it's a great company, but they are talking about binder, as where they want to have the gross margins. But overall, we should look at the part cost, rather than – whether it is open materials or close materials. If we can achieve the right kind of use of ease that I talked about of durability and repeatability at a total cost of operation, at the end of the day, that's what we should be thinking about. And my opinion is that's the only way the customers are looking at. They're not looking at whether it's open materials or not. At the end of the day, what is the part cost that I'm going to achieve. And once you measure that, I don't think there is going to be any question that the 3D Systems has the right kind of a solution. And with that in mind, and with innovation and materials in mind, I'm not worried about the gross margin on the materials.

You've talked about riding on the shoulders of giants in the past. I guess what are you doing in terms of increased focus on partnerships?

Yes, so the first thing that we talked about was the PTC that we announced in the Chicago meeting. The second thing that I'm really interested is not just on the software side, on the material side, because that partnership is also very important because we are not going to invent all the materials. But it's not like a open materials approach. I want to partner with some great innovative companies who are working at a molecular level on designing new materials. And I think that's what I want to focus on. So you're going to see more partnership as we go into the 2017, on software side, on material side and even around the go-to-market side, because we always want to find the right partners. And I absolutely believe in riding the shoulders of the giants.

Great, thank you.

Thank you.

Our next question is from Ananda Baruah of Brean Capital. Please go ahead.

Hey, thanks guys for taking the question. A couple if I could? I guess the first is, VJ, going back to materials, the growth has been pretty solid the last couple of quarters, but the comp has been easier and if I actually track it back the run rate, back the last 12 quarters the rev run rate on the materials is sort of this 37% (51:09) 41% range and this quarter was 37% down sequentially. So I'd love to get your thoughts, sort of given the context of the....

So, right now I wouldn't say that – we have a lot of work to do on really getting our install base going. See, my opinion is, the work that I'm doing is saying let's just first of all figure out where the usage is. And clearly, I've been saying for last three quarters to you all that the production printers have much higher usage, significantly higher usage than professional. And then desktop, I don't want to even talk about it, right. So the approach that I'm taking and saying let's make sure that we can get our install base of our production printer and the high usage professional printers like the 2500, so that once we do that then we will enjoy consistent materials growth. Right now, it's kind of lumpy. Some quarter, we do well, some quarter we don't do well. I just want to get that kind of a rhythm into our install base and then you will see a consistent significant materials revenue growth as we move forward.

That's really helpful. VJ, as we look out, kind of through 2017, is there any – as you provision for a higher quality install base production et cetera, is there anything that's inherent to the current materials run rate that could push sort of this range down lower, before you get the printer mix into the markets, or should we expect this range and then you go up from there?

It's not like, I wouldn't be able to tell you, I don't want, let me just start there. I don't want to see materials revenue declining. But at the same time right now because it's all about the install base, what has happened in past I can't fix. So I can just tell you what I can do moving forward. So I can't guarantee you right now that you're going to see this kind of a 9% kind of a growth. I do believe we'll have a positive growth. I just want to make sure, I set it up so like 2017, 2018 and 2019 will have a significant materials growth.

Got it. That's helpful. And then just going back to your comment about sort of wanting to get more aggressive in the market, can you give us what does aggressive means to you, your full context, just kind of (53:45) approach?

Stay tuned. I'm saying stay tuned, because I really believe we're taking the cost work first, because I always want to do into this steps. I want to take the cost out and then get aggressive. (54:01) now also we have made a lot of improvements in our quality and reliability. Remember I've been talking about in for last – I believe by end of this year, I'm going to feel very good about it. Now is the time to really talk about how do we get more install base.

Got it. I mean does that – just one clarification then I'll leave the floor. Does that – I'm sort of putting words in your mouth, does that mean you feel like you'll get to the point where you can be aggressive on price without sacrificing margin?

Well, just stay tuned.

Okay, VJ. Appreciate it. Thanks guys.

All right. Take care.

The next question comes from Troy Jensen of Piper. Please go ahead.

Hi, Troy.

Hi, there. Thanks for sneaking me in. I guess I want to focus a couple questions on the Figure 4. VJ you'd said during the Q&A that some of the R&D investment's going to come from that product. It looks like a great product. But to me if you're investing in R&D still for the product, can you just kind of help us on when the product will be generally available and what are the sales cycles going to be? So I'm trying to get a...

Yeah. So...

Go ahead.

Yeah. Yeah. So I think I can't tell you specifics about introduction, but let me tell you since IMTS, we are seeing significant interest in enterprise customers for this technology. They're all coming to us and the approach that I want to take here is I want to get their feedback, because their feedback is very vital for us. We believe the technology now is in place for, especially, for plastics, that up to now the prototyping to production transition was very difficult. I can see now with this technology that we can have an inflection point that I talk about moving into production. So with respect to productivity, with respect to repeatability and durability of the part and with respect to total cost of operation, this technology is really a breakthrough technology. And the second thing that I can tell you is all the customers, what we are doing is we can say, okay, tell us the use case, if you have a small custom or a complex part, we absolutely believe that we can move into a light production with this technology. So, working with them, evaluating the kind of a configuration they want, they want a configuration, they want where we have two print engines or four print engines or eight print engines and laying it out in a way where we can meet their productivity and the total cost of operations is the approach I am taking. So instead of a normal, regular way what you're used to in terms of the introduction of another printer, what I would like to talk about is how many customers are interested, how many customers are really now transitioning into where they will be able to move into light production. And I think that's how you should be measuring us. So the way you want to measuring us is how many customers we signed up and that customer growth is what I want to talk about. But this is not a introduction kind of, hey printer is introduced and now we can look at that. I think what I would like to really measure us on Figure 4 is how many customers we signed up.

Right. Understood. And then just have a follow-up for John. It looks like the majority of the EPS be it this quarter was a tax benefit versus a tax expense. So can you just help us out with what we should model for a tax rate maybe in Q4? And then any color on what the taxes would look like next year would be great.

Yeah. I think we did have a benefit this quarter. But it's more of a look back, right, on a year-to-date basis. And so I think that the guidance that – or not guidance, but the direction that's been given up $1 million to $2 million of tax expense is still a reasonable way to think about Q4. And we haven't finalized everything relative to our 2017 plan, but we will give you an update on that. I don't expect major changes, but the $1 million to $2 million kind of range is a reasonable assumption on a quarterly basis.

So you think that $1 million to $2 million absolute basis will be throughout most of 2017?

Don't have – we're not going to give you specifics on 2017 yet, we're still completing our blend. But I don't think it's going to be materially different.

Okay, great. Understood. Thank you.

The next question comes from Paul Coster of JPMorgan. Please go ahead.

Yeah. Thanks. John I'm used to one-time adjustments to OpEx, but not substantial ones to COGS. Why is it that there is no an offsetting pro-forma adjustments to revenues in the current quarter as well? And then I have a follow-up for VJ.

Yeah, so this is primarily inventory raw materials type write-offs and asset write-offs. So it's not a customer crediting kind of scenario where you would pull back on revenue.

And it's mainly for (59:22) materials, correct? Or is it the...

...materials on products that we're not going to bring to market.

And the projects.

Yeah and projects that we're not going to bring to market.

Right, okay. Thank you. And then VJ, in your introduction you talked of the three year kind of journey here. Why three years? And maybe you could just sort of give us some of the main milestones on that journey.

Yeah. So I think the reason I'm saying it is, because majority of our business right now is prototyping. What I was talking about is the biggest opportunity is in this disruption going from prototyping to production. And that requires a lot of work, working with the design teams of the enterprise, the verticals that I talked about. The experience I have with the healthcare now, if you want to replicate that for aerospace and defense and automotive and durable goods, we'll need to work with the customers and it's a long lead thing. Because the customers are going to say, okay, now you have a technology that we take certain use cases and go through the parts and when the parts are then designed all the way in putting into the manufacturing is the lead time that I'm talking about. So I think what I'm basically saying that's the journey that we should be on. And once that happens you are going to see a significant growth into both the revenue and the bottom line.

Okay. Thank you.

The next question comes from James Kisner of Jefferies LLC. Please go ahead.

Thank you. So I guess my first thought is can you quantify the cash impact of these charges, has that already happened, is that in front of us maybe even the gross savings (01:01:12) charge you took this quarter? Thanks.

Yeah. There's no real cash impact of this, these are cash already incurred.

Okay. Great. And I was just wondering around 3D Sprint, I don't know if there's any way to provide any kind of quantitative metrics around the uptick there, even to talk qualitatively about sort of how broad the interest for that is, I mean, are we talking about a handful of folks or...

No, no, no, no. So basically what we're doing for our professional printers with MJP, all the MJP printers and the CJP printers, we are now bundling that with our printers because that's very important for us. And by middle of next year, we are going to extend that to our SLA and SLS products because those are very important products on the plastics side. So what you're going to see is the 3D Sprint will really improve the total workflow. And we already have lot of beta customers and now we have actual customers with our 2500 introduction.

Thank you so much.

Okay. Last question.

The last question is from Ben Hearnsberger of Stephens. Please go ahead.

Hey, Ben.

Hey, thanks for squeezing me in here the very last. So I'm looking at printers and then materials and software. I tend to think of materials and software lagging printers right as a derivative of printer sales. We have been pretty soft in terms of printer sales over the last four quarters to six quarters or so. Should we think about an air pocket forming in materials and services over the next few quarters or out into 2017?

So I want to talk about two things separately. First of all, let's talk about software. The software is an independent. It's not really tied, because we're talking about the workflow here. Now 3D Expert and 3D Sprint is exception, but the all other software was very different. The second part is I think what I am excited about is even with the units, which our printer business was declining in last three quarters, but our units are growing. So I think that our unit growth is very important, especially, the production unit growth because that's for the usages. So I wouldn't say that you're going to see any significant change in the materials kind of a revenue. It's just that when – my earlier comment was more on year-over-year growth number rather than the absolute materials number. So I wouldn't expect any air pocket.

Okay. That's helpful. And then my follow-up, can you talk about the percentage of your sales that are currently direct versus through the channel kind of how that's trended?

We don't talk about it. I think both our direct and indirect motion is very important for go-to-market. Our channel partners are extremely important because that's the only way we're going to get the global coverage that we get.

Understood. Thank you.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the floor back over to Stacey Witten for closing comments.

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 teleconference. You may now disconnect your lines. Thank you for your participation.