Good afternoon and welcome to 3D Systems' Conference Call and Audio Webcast to discuss the Results of the Third Quarter and First Nine Months of 2017. My name is Darren and I will facilitate the audio portion of today's interactive broadcast. At this time, I would like to turn the call over to Stacey Witten, Vice President, Investor Relations, 3D Systems.

Good afternoon 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 Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast portion of this call contains a slide presentation that we'll 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 we issued today. For those who've accessed the streaming portion of the webcast, please be aware that there may be a few second delay and 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 in our most recent Annual Report on Form 10-K. During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against the results for the comparable period of 2016. Now I'm pleased to turn the call over to Vyomesh Joshi, our CEO. VJ.

Thanks, Stacey. Good afternoon, everyone. While our third quarter results did not meet our expectations, we believe the actions we took during the quarter both organizationally and operationally better positioned the company for the long-term success. We are keenly focused on meeting production customer needs, productivity, durability, repeatability and leadership in total cost of operations. We have accelerated investments in plastics, metals, materials, software and services to deliver new and innovative solutions to meet these needs and streamline production workflows. And over the coming months, we plan to launch numerous products across our portfolio, which we believe will drive growth in 2018 and beyond. At the same time, we are transforming the company's organizational structure, operations and service motion while in parallel resolving legacy quality, reliability and customer satisfaction issues as quickly as possible. I knew this would be hard work coming in. But the issues have been deeper and broader than initially anticipated. And it has taken us longer than I thought it would to put these things behind us. As we discussed on our last call, in the first six months of this year, our enhanced service processes and measurements uncovered more legacy quality, reliability and customer satisfaction issues that have taken additional time and resources to address. That said, we have made significant progress on a year-to-date basis. During the third quarter, we looked deeply into our newly implemented service matrix to develop a much better understanding of where our portfolio was meeting needs of customers and where it was not. And where it was not, we are making changes. In conjunction with this, during the quarter, we completed an extensive evaluation of inventory based on year-to-date demand, market trends and customer data, and as a result, recorded a significant adjustment to our inventory. We've also taken…

Thanks, VJ. Good afternoon, everyone. For the third quarter, we reported revenue of $152.9 million, a decrease of 2% compared to the third quarter of 2016. Gross profit margin was 38.3% compared to 44.1% in the third quarter of 2016, inclusive of $12.9 million of expenses to write down inventory as a result of a comprehensive review of our portfolio. GAAP operating expenses were approximately flat at $90.9 million with increased investments in R&D, IT and go to market. We reported a GAAP loss of $0.34 per share in the third quarter compared to a $0.19 loss per share in the third quarter of 2016. For the first nine months, we reported revenue growth of $1.8 million to $468.8 million, gross profit margin of 46.8% and a 1% decrease in operating expenses to $267.7 million. We reported a GAAP loss of $0.50 per share in the first nine months of 2017 compared to a loss of $0.39 per share in the same period of the prior year. Compared to the third quarter of 2016, non-GAAP SG&A expenses increased 15% to $51.5 million as we continued to invest in IT transformation and go to market initiatives. Non-GAAP R&D expenses increased 21% to $24.4 million primarily driven by investments in plastics, in particular our Figure 4 platform, metals, materials and software. These investments have been critical and support many new products we plan to ship over the next few quarters as VJ noted. We reported a non-GAAP loss of $0.20 per share or $22.6 million in the third quarter of 2017 compared to non-GAAP earnings of $0.14 per share or $15.8 million in the third quarter of 2016. For the first nine months of 2017, we reported a non-GAAP loss of $7 million or $0.06 loss per share compared to non-GAAP earnings…

Thanks, John. Although we have not met our expectations in short-term execution over past two quarters, we remain excited about and focused on the long-term success of the company. We believe we have taken the actions necessary throughout the third quarter to improve our execution going forward. We have made significant investments in quality, reliability and customer satisfaction in our service motions. And we have seen significant progress year-to-date and believe we have turned a corner in services. We have taken a hard look at our portfolio and where we do an excellent job at meeting customer needs and where we have not. And where we have not, we have made the necessary decisions and changes. Although it was a significant negative impact to our third quarter results, the inventory adjustments made this quarter reflect the collective learnings we have on a year-to-date basis and solves needed cleanup of historical inventory. We are operating on a model of trust, empowerment and accountability. In the areas that have not been performing well this year, we have made leadership changes to improve execution going forward. We have learned a lot while building out the type of service motion that will be needed in the transition from prototyping to production. Throughout the year, we have consistently focused on making investments and organizing the company for long-term success and we plan to continue to do this. We have invested in innovation. And over the next several months, we'll be introducing exciting new offerings into the market across our portfolio. We plan to launch our Figure 4 modular and scalable platform during the first half of 2018 ranging from standalone offerings to highly customized in-line production systems with price points from $25,000 to over $1 million. Leveraging the combined capabilities of Figure 4 and our…

Thanks, VJ. Before we open the call for questions, I'd like to take a moment and mention the product launch event we plan to hold on November 7 at our Denver facility. The general session, presentation and Q&A will be webcast live and I invite you to listen and watch via our Investor Relations website. Now, we will open the call for questions. We would like to ask you to 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.

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

Yes, thank you. Hey, VJ. Hey, John. Hey, VJ, you've withdrawn the guidance – or your last (28:46) quarter you cut it. Now would you say the uncertainty in withdrawing guidance is more related to the competitive shifts that are underway? Would you attribute it more to battling legacy issues that seem to be taking longer? And what percent of products do you believe still have quality issues? Or maybe a different way to ask that, what percent of the installed base at customers would you still say have quality issues that are not yet addressed? And I have a follow-up for John.

Yeah. So I think clearly we looked at our issues with respect to the legacy products. And as I mentioned in my prepared speech, we are making tremendous progress there. It was very important for us to solve those quality and reliability issues. And I believe we have turned the corner. And our NPS score has improved significantly. The other important part for us was to really make sure that we understand the market from the customer point of view, we understand how the customers are using our products. As we serviced, we learned from that with respect to where our products have the right kind of a value proposition so that we can also find the gap between the portfolio that we have versus what we need to do. And that's the investments we are making to drive the innovation in terms of the Figure 4 metals and materials. So this exercise really helped us in finding the gap, solving the customer problems and making sure that we look at overall our portfolio. And places where we are having a strong value proposition, we invest. Places where we don't have a very good product offering, we should be looking at that very critically. And that's what we did in Q3. And, John, you may want to add on to this thing.

Yeah, I think – just onto the other thing that we just stepped back a little bit, right. And we put a plan in place for 2017, including what we believe to be a reasonable buffer relative to risks in providing the guidance range that we did. We executed pretty well in the first quarter. But in Q2, as we discussed with all of you, we were surprised at some level in our results, particularly by the execution in the Americas and Asia Pacific regions. We provided revised guidance at the end of Q2. And we thought we had factored in what we believe we needed to relative to the risks that we saw at the end of the second quarter. We went a lot deeper in the third quarter from an analysis point of view. VJ talked about the portfolio. We went a lot deeper in terms of execution. We continued to see weak execution in the Americas and Asia Pacific in third quarter – in some cases, worsening execution – that VJ made some organizational changes in both the Americas and Asia Pacific. We've shifted to a worldwide go to market organization under the leadership of Herbert Koeck. Herbert's done a really nice job in EMEA. And we want to leverage the go to market model that's been built in Europe on a go-forward basis in the Americas and APAC. And a lot of this work that we went through in Q3 really culminated at the end of the quarter in making this decision going forward.

Okay. Thanks for the color there. And, John, if I could follow up. Can you talk about the write-down? I think you mentioned both plastics and metals. How long have these products/inventory been in the finished goods inventory? And what drove the decision on where to cut off these products? Have you gone deep enough in your write-downs?

Yeah. No, good question. I think from an inventory point of view, we gave you some color in the scripts on the models and clearly just related parts and materials affiliated with them. We did a very comprehensive analysis in the third quarter based on year-to-date demand, market trends that we're seeing, the customer data and very comprehensive learnings thus far from the increased focus on our service motion in the first six to nine months of the quarter. So I feel good that we have pruned the portfolio at some level. That really has a go-forward current portfolio for where we feel very good about meeting our customer expectations. We feel good about where we are from a quality point of view in these products. And we also feel good about how we will complement on this go-forward set of products as we go forward with our launches over the coming months.

Thanks, VJ. Thanks, John.

Thank you.

Our next question comes from Ananda Baruah of Loop Capital. Please proceed with your question.

Hi. Thanks, guys, VJ, John. Appreciate the question. I guess just two if I could. The first is – and maybe they both will be with regards to the gross margin. And so, John, given your remarks about where you feel like you're comfortable with regard to inventories right now; should we expect that $12 million or so or the impact of that to normalize when we get to the December quarter? And so then if I...

We're kind of losing you in and out on the phone, so I'm catching about 80%.

Thanks. Yeah, I took it off. Sorry, just went to the handset here. So to be...

I followed the beginning. But – yeah.

Sorry about that, guys. Should we expect...

That's okay.

...giving it a feel, sounds like you're comfortable where you are in inventory write-downs. Sounds like it's pretty much isolated to Q3. Should we expect some of that on the margin side now to normalize in Q4? And even after I adjust for the margin for the write-down, I'm getting a margin of like 46%. And the last time you guys did $152 million, your margins were close to 51%. So if you could just sort of flip that delta for us as well. And then I have a quick follow-up.

Yeah. Yeah. Let me give you a little color. So separate of the inventory write-down, we definitely had some things in the third quarter that impacted margin. Some we believe on a short-term basis, and some that reflect, I think, a little bit of a change in the business model. Let me walk you through the big pieces. We definitely had a sequential decline in plastics. It was primarily driven by mix. And it's reflective of the significant ramp that we've had in the [ProJet MJP] 2500 space in our professional offering. The good news in that offering is that we've had very strong and increasing demand for that product. As you recall, we talked about it in Q2, in fact, our difficulty in meeting that demand. We did a much better job in Q3. But that mix shift within the quarter definitely drove ASPs down on a short-term basis and had some margin impact. We also had a sequential decline in metals. Part of it was due to mix of what we sold. But frankly part of it was about being more competitive in what's a very competitive marketplace today. And we made some decisions there. Service margins were down sequentially. And that's driven by the increase – the short-term focus that we put on the field in resolving issues and the cost associated with doing that during the quarter. But we would expect as we continue to improve – and we've made a lot of progress – that we'll see service margins move back up. Final two pieces. We're in the healthcare space. We had a good quarter in total. We fell short in the simulation space. We believe it's a short-term issue, but there's margin impact associated with that based on the margin structure of that business. Now we think that will recover in the fourth quarter. And then, finally, the last piece that had an impact on margin for us in the third quarter was in the on-demand manufacturing space. We have definitely been a bit more aggressive in the market. I think that's appropriate. You see that we grew that business by 3% this quarter. That's the first time we've grown this business since Q2 of 2015. This was a major goal for us. I suspect we'll continue to be pretty aggressive from a competitive position, because we see no reason over time why this business shouldn't grow in the market. So those pieces contributed to your rough calculation of gross margin separate of the inventory write-down. I think over the coming quarters as we get more balance between production and professional units, we'll see some bounce back in plastics. I think that the more scale and leverage in the [ProX DMP] 320 in the metal space will certainly help us. And the quicker we get [ph] problems (38:34) behind us, like we've made good progress over the last three months in particular in services, we'll see those margins kick back as well.

So if you look at the good news, it was the materials. We maintained the margins. And that's an important point. As we increase our installed base – you saw 8% unit growth. And these are all productive units. We want to continue to drive higher and higher materials revenue growth. And that should also help us from the mix point of view.

Got it. And then thank you for that context. That's very helpful. And then just as my quick follow-up. So should we sort of use this – assuming my math is right, the 46% as kind of the new baseline for the time being? It normalized back into the margin or normalized out the impact from the inventory write-down. I just want to be clear about that and I appreciate it. Thanks.

Yeah. We're not going to give you any specific guidance on margin. I just suggest you consider some of my comments about what feels like short term versus what might be some model changes for us in terms of being a little more aggressive in metals and certainly ODM.

Okay. But just for clarification. If you do you have more inventory write-downs in Q4, then there would not be such an impact going forward.

Yeah. We believe that we've dealt with our portfolio issues for the time being in the third quarter.

Thank you so much. Really appreciate it.

Thank you.

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

Yeah. Good afternoon, VJ and John. I guess just sticking on the margin profile and moving a little bit down the P&L, John, I wanted to focus on OpEx trends. And I was wondering if you can give us some thoughts about how to think about that line item given the lack of visibility into revenue trends. I think, previously, you had targeted second half OpEx to be roughly flat or even slightly below first half levels. That seems like a tough bogey now given that I think 3Q had been the highest spending quarter of the year. And then any commentary on OpEx trends into 2018, which I think you'd previously said should be relatively flat to 2017 levels?

Sure. Happy to give you some color there. Look, I think one of the things that was something that we worked through during the third quarter was we're taking an approach here where we want to be prudent on cost wherever we can. And we have pretty strong resolve in not sacrificing anything relative to the longer term for short-term actions. So in the third quarter in particular, we increased and we accelerated our R&D investments to support the upcoming new products that VJ covered in his prepared remarks and a little bit in the first Q&A piece. In SG&A, we're staying the course from an IT transformation which will continue to 2018. And we've been investing in our go to market organization. And one of the reasons we've been successful in Europe is because of the investments we've made. We're replicating that model in the Americas and the Asia Pacific because it's appropriate for where we want to go. So I think that quarter-by-quarter we try to be real transparent in terms of where we are on OpEx because we know it's been lumpy. I think that the assumptions around 2008 of leveling off and as we get further along in the IT transformation process and some of the things that we're putting behind us, our ability to start leveraging some of that work in cost structure will materialize as well.

Great. And I guess just shifting to for VJ or John to thinking about production versus professional printers. Within the printer revenue declining 11%, can you help us to understand the relative mix between those two buckets and then how they both fared either sequentially or year-over-year? And then just trying to pair those together with some pricing trends; I think you said that industrial demand was strong, but printer ASPs are declining. And I think in response to an earlier question, you alluded to cutting some prices in metals. So if you could comment on the pricing trends.

So let me start and then John will add comments to that. So if you look at the production printers in Q3 were flattish. And most of the growth, that unit growth that I talked about was in the professional printers. And in professional printers, we are very excited about our ProJet MJP 2500 Series. Our ProJet MJP 2500 had a better cost structure. So compared to the last year's MultiJet printing product portfolio like ProJet MJP 3600, ProJet 3510, ProJet MJP 5500; these are lower priced products because we fundamentally believe that in jewelry and in investment casting, we have a value proposition where we will be able to drive more and more productive installed base. So what we have done is basically said that let's focus on getting the installed base of MultiJet printer where we have investment casting and jewelry applications. So that actually drove the unit growth. Unfortunately, they are lower priced compared to the last year's MJP portfolio. And that's why the ASP declined and that's why the printer revenue declined. So what we need to do moving forward is continue to really meet the demand on our ProJet MJP 2500 products but also increase, especially with our new portfolio, on the production products. And then that right balance not only will give us more unit growth but also the overall printer revenue growth. John, you want to add anything?

Yeah. I think you pretty much said it, VJ. But I think we definitely saw an acceleration because of the ProJet MJP 2500 in the third quarter. At the end of the day, it's not always about absolute numbers or units though. Our focus and resolve longer term is around the Type C units and the annuity streams that we expect and we want to get. I think that we need to strike the right balance over time with highly productive and production related units as well as professional offerings that have been successful like the ProJet MJP 2500.

And on the metals, we are very successful in healthcare segment. I think the competition that we are seeing is outside the healthcare. And I think that's where we need to continue to build our core competency so that we will be able to be as successful that we are in healthcare in other segments. Now that's a competitive environment and I think that's why you saw some price pressures.

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

Thank you.

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

Hi. This is Jeff Rand on for Sherri. Last quarter you talked about leadership changes in Japan. Were these changes not effective or were they just not widespread enough?

So I think we made a change in Japan last quarter. In third quarter, I made a change to the overall Americas and Asia leadership because as we mentioned, if you look at our performance, is a very big difference between our Europe, EMEA performance versus Americas and Asia. And I took a decision at my staff level that we need to really implement the model that I have in Europe in Americas and in Asia. So I made a change -several changes actually not only Japan leader, the Americas and APJ region leader. We also changed the Americas person in charge because I feel strongly that I could see that our portfolio that we have pruned down, we have focused. We have been very successful in Europe. I would like to see the same success in Americas and Asia. And making those changes are going to be very important moving forward. The other important part for us is we need to hire more people, especially on direct sales, and really get our channel appropriately invested so that we will see the same effect in Americas and in Asia.

Great. And just as a follow-up, you talked about launching the Figure 4 in the beginning of 2018. Do you no longer expect to have revenue in 2017 from that end? If not, why?

Well, I think what we had always said that we are not going to have revenue in 2017 for Figure 4. We always had assumed that all the revenue will come in 2018. Now, the significant, what I mean. What we are seeing that the response from the products that we are going to introduce next year from our alpha and beta sites is very, very positive. And I'm going to talk more about that on November 7.

Great. Thank you.

Thank you.

Thank you.

Our next question comes from David Ryzhik of Susquehanna Financial Group. Please proceed with your question.

Hi.

Hey, Dave.

Thanks so much for taking my question. Hi, guys. Just going back to product quality. You've mentioned in the past that it's largely been confined to MJP. I just wanted to make sure this was still the case. And have you seen any issues in SLS or SLA? And I had a follow-up.

No, I don't think – I think our mainly issues in plastics were legacy MJP. Legacy, not 2500; I want to be very clear on that. And another issue that we had talked about in the metals side was ProX DMP 300. And we made significant progress in all those products. And we absolutely believe we have turned the corner.

Great, thanks. And you've talked about pruning the portfolio. Just wanted to know if you can elaborate on that. Have you decided to exit any products?

Well, I think we -

...think you can dig deeper into that, please.

Sure. When we looked at our MJP portfolio and then we talked about, I think, in the remarks that John made in terms of ProJet 5500, ProJet 4500, the low end of the ProJet 1200 product because we fundamentally believe these products were not selling enough or there are issues that absolutely we have solved. But moving forward, it didn't make sense. So what we have done on MJP lineup and the low end of the SLA machine that we talked about, the ProJet 1200. Plus, we thought that we want to focus more ProX DMP 300 on the new products because that's where absolutely the customers will qualify their products. We are committed to help them, support them. But the remaining parts, we felt that we need to really move. My view is very simple. If you look at SLA; we are the gold standard, the ProX 800s and ProJet 6000 and ProJet 7000. And we are doing extremely well there. We need to continue to focus on that. SLS is very important. They do the functional prototypes and low-volume production. We want to continue doing that. On MJP side, I want to do design verification with ProJet MJP 2500 Plus. The jewelry and investment casting with the ProJet MJP Wax products. These are moving forward in terms of the right portfolio and we're going to focus on that. The gaps we have, we're going to close that with our Figure 4 and in the announcement that you will see on November 7.

Great. Thanks so much, VJ.

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

And, John, reorganization of go to market team and leadership changes generally result in productivity lag for the next multiple quarters. In addition to that, past quality issues may impact your future sales. How should we think about those going forward? And how long should we expect yourself and go to market to return to full productivity?

Yeah. So I think, first of all, we've been pretty aggressive in making the shift from a leadership point of view to Herbert. That said, it's hard to put a specific timeline on this. So I think we expect that we'll be progressive in our improvements. Herbert has absolutely dived right in from an Americas and APAC point of view. Hard to put a timeline on it over the next – I think we'll update you on a quarter-by-quarter basis on the progress we're making. And we'll be able to explain that within the context of execution.

Thank you.

Our next question comes from Jim Ricchiuti of Needham & Company. Please proceed with your question.

Thanks. Just putting aside some of the internal challenges that you're facing. I'm wondering to what extent the competitive landscape out there might also be exerting some pressure on you. Clearly, you're addressing some of these issues with some pricing initiatives. But just in general, has the competitive landscape become more challenging for you as you try to work through this?

Yeah, I think what I want to do is go over the segments and make sure where there are some real competitive forces. So I think I talked about the metal outside the healthcare. We absolutely see those forces. And we have a very good portfolio with [ProX DMP] 320, with our 3DXpert. And as we talked about, we're going to announce a factory systems approach on the metals side. In respect to our plastics portfolio, there is a market in low-end DLP, which we are not participating right now. And we feel that that market is growing. We need to have – and I think with our new desktop industrial printer and Figure 4, we're going to go after that market very aggressively. With respect to HP and Carbon, there is no question. We are seeing them in the marketplace. They are aggressive. What I believe is the offer that we have, especially in the use cases that we excel, I do believe with our current [ProX] 800 SLA portfolio, with our SLS portfolio, where we have much broader materials, and now with Figure 4, I truly believe we're going to have a very, very competitive product solutions to compete aggressively with them. So my view is the market now is ripe for the right kind of products, which can take from prototyping to production. There is no question that these two are – we are seeing them in the marketplace. But for the use cases that we have and the value proposition that we are going to bring, I'm very comfortable.

And, VJ, as I look at slide 17, the new products that you'll be launching – and I assume you'll be talking more about this next week at the event. But just in general, how should we think about the rollout of these products over the course of 2018? Will they be staggered? Will they be concentrated in any one part of the year?

No. I think it'll be staggered, because what we want to do is – first of all, I want to make sure that we develop these products where the quality, reliability is given. They are designed for manufacturing, designed for supply chain. And we can ramp them because of the – and my expectation is this is going to create a lot of interest and excitement in the market, so that we need to make sure that we ramp them up. And I think that's what we are focusing on. I believe that as you – the next several months and in 2018, you're going to see all these introductions coming. The good thing about this thing is with our great portfolio we have, which we have focused now and pruned, and then these new announcements that we are making, we will be able to meet our customer needs for production, which I believe is the most important part in terms of the productivity, repeatability, durability and the total cost of operations.

Okay, thank you.

Thank you.

Our next question comes from Ken Wong of Citigroup. Please proceed with your question.

Hey, Ken.

Hey, Ken.

How's it going, VJ? Hey, John. You guys talked about the go to market and also product. Are you guys able to handicap how much of the issues were go to market specific versus product?

Well, I think we had issues with respect to the legacy quality, reliability. And now we are absolutely on it, and we are turning the corner. On the go to market issues were specifically to Americas and Asia, because in Europe with the portfolio that we have, we have been – really been successful. So I think you ought to look at a combination of the legacy issues that now we have turned the corner, getting the right kind of a go to market model similar to Europe in Americas and APJ, and then really enhancing our portfolio with our new introduction is the formula for growth in 2018.

Got it. And then on that comment, growth in 2018, I think you had that pop up earlier as well. Just wanted to make sure that, at a high level, that's kind of what you're thinking and not just a slip of the tongue.

No. I think that's why I'm setting it up.

Yeah. Okay. Great.

(58:10) for the company for long term as we said.

Yeah.

And that's what we want to do.

And, Ken, just maybe another point of clarity on the execution side of the discussion.

Sure.

On the quality and reliability, it's a lot of that is time, focus and talk (58:25), frankly, in getting our customers happy and moving forward. In the execution side, what we saw throughout the first three quarters of the year versus our own expectations was that the EMEA region had focused very well on driving the productive portions of our current portfolio. They've put a very good structure in place to effectively balance and grow both the channel and direct sales and built a more pipeline-driven and backline-driven business model. Those differences between EMEA and Americas and APAC are what we're addressing in this reorganization. We absolutely believe we can take what Herbert's been successful with in Europe, and we can replicate that in the Americas and APAC. And that on a standalone basis should improve our performance over time.

Okay, that's perfect. Yeah, that kind of addresses my first question a little better in terms of – I think the concern is that maybe the product was what's driving the weakness in those particular areas. And it sounds like you guys feel confident that cleaning up some of the execution in go to market will resolve things.

Yeah. The reason I think we are saying that is because we are seeing success in Europe and not the success in Americas and APJ with the same portfolio.

Fair enough. Got it. Appreciate the color, guys.

Thank you.

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

Hey, guys.

Hey there.

So just curious on the legal expenses front. Any color, timing or scope of legal costs around the Department of Commerce subpoena?

Yeah, we'll let our – Andy's here and he can comment on that.

Hey, this is Andy. It's very preliminary. As our disclosure says, we just started complying with the subpoena just this month. And we can't, at this point, predict with any precision what sort of legal fees we'll incur. But a subpoena like this is a very involved process internally. We're working internally as well as with outside counsel. We expect compliance with this subpoena will take several months. And as such, we think it's likely on par with other legal fees that we've incurred for other disclosure litigation matters that you'll see in the 10-Q. So we'll continue to update as we go quarter-by-quarter. But at this point, we're confident that it will be a multi-month process. And we will look at the scope as it evolves. But for now, the only certainty we have is that we'll have some significant legal fees.

Okay, that's helpful. And then as my follow-up, just curious. There has been some discussion about maybe pricing actions and mix issues impacting the overall printer revenue. I'm curious whether or not there's any read-through into materials. How long can we expect materials revenue to hold up given you're still trying to turn around growth for printers? Thanks.

Yeah. I think, first of all, from a materials point of view; our margins are steady right now in the low 70s. And it bumps up from quarter-to-quarter a little bit based on mix. Our focus is on driving the installed base for our productive units which over time, when successful particularly in production area, that will fuel more usage and hence more materials growth. But the margin problems that are not problems at all but direction from Q2 to Q3 that I spoke about were hardware-related.

Okay, thank you.

Thank you.

Our next question comes from Christopher Van Horn of FBR. Please proceed with your question.

Good afternoon. Thanks for taking our questions. This is Dan Drawbaugh on the line for Chris. So I was hoping just if we could talk briefly about the healthcare segment which – demand seems to be pretty strong there. Can you talk a little bit about how much of that is driven by the existing customer base returning and how much you're bringing in new customers to the table? And then more broadly, could you talk also about how adoption is sort of where we are in the game, kind of what inning in that market?

Yeah. And so I think in healthcare, there are three businesses. The Virtual Surgical Planning. In the parts business, we do medical devices. And then we have the simulator business. All the three businesses year-to-date have been growing well. This quarter, our simulator business was lumpy and I think John talked about that. With respect to customers, actually, we are acquiring more and more new customers. So the great thing about this business is because we have this workflow knowhow and we have a unique value proposition that we can go from digitization to simulation to manufacture the parts and qualify the parts with our facilities in Denver and in Leuven; we are not only helping our existing customers, but we are acquiring new customers. I think this opportunity is very big. We think that in the next 5 to 10 years, 10% of all the medical devices will be using additive manufacturing technology. And that really brings tremendous opportunity for 3D Systems.

Okay, terrific. That's very helpful. That's all I had. So thank you very much.

Thank you, Dan.

Our final question comes from Matthew Cabral of Goldman Sachs. Please proceed with your question.

Yeah, thank you. Wanted to go back to the earlier question on materials. I guess it looks as though if you back out the inorganic contribution from Vertex, it seems as though materials revenue was down year-over-year in the quarter. So I guess the first question is, is that correct. Is my math correct there? And the second question being if it is, just where are you seeing the biggest impact on usage patterns? And really taking a step back, what does that say about the health of the installed base going forward?

Yeah. So I think if you take the Vertex out, it's kind of a flattish – it's not down. But I think my view is as we focus on productive installed base and the thing that we learn as we had engaged our services organization that our lot of units that were installed were not really functioning properly. So in my mind, it's not just about having the units placed, but these units need to be productive. These units must be working and then consuming the materials. So I think what we are seeing now as we move forward and as we reshape our installed base, we're going to bring back the materials growth. So I think what we are seeing is all the legacy installed base where there were a lot of inactive installed base because what happened was they were not functioning right. We have corrected a lot of issues. But moving forward, what I want to make sure that we really focus on where we can find the customers who are going to use a lot of our products and consume materials. So what you're seeing now is we are stabilizing. And as we put more and more productive and production units, you're going to see the materials growth.

Got it. And then just a quick follow-up. Understanding that you guys aren't giving specific guidance. But the first time in a while that you had an operating loss on a non-GAAP basis. Just help us think about the path back to profitability. And was this sort of a one-off or should we be bracing for potential losses before ultimately you guys slip back into positive territory?

Yeah. Won't give you any specific guidance or direction on that since we're pulling back there. But I think you got to think about the one-time nature of some of the things that also hit our non-GAAP results like the inventory adjustment. And so in addition to that, we had some things hit us from a tax point of view from our valuation adjustments related to the ProX DMP 300 after taking those charges. So there's some short-term nature things that are reflected in that loss. And our focus going forward is doing everything we can for long-term profitable growth.

Thank you.

Thank you very much.

Thank you. There are no other questions at this time. I would like to turn the call back over to Stacey Witten for closing remarks.

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

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