3D Systems Corporation (DDD) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to 3D Systems' Conference Call and Audio Webcast to discuss the Results of the Fourth Quarter and Full Year 2017. My name is Matt and I will facilitate the audio portion of today's interactive broadcast. [Operator Instructions] At this time, I would like to turn the call over to Stacey Witten, Vice President of Investor Relations for 3D Systems. Thank you, you may begin.

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 on the investor relation section of our website. 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 seconds 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. During 2017, we built a foundation for a stronger company. We worked very hard, made substantial progress and we believe we closed the year in a position of strength for the future. As we discussed last quarter, we faced more challenges in 2017 with quality, reliability, processes and infrastructure than we initially anticipated. We believe the actions we took both organizationally and operationally throughout the year, positioned the company well for sustainable growth going forward. Before we get into the details about the fourth quarter, I'd like to take a few minutes to reflect on the last year and the progress we've made. Throughout 2017, we improved our operational cadence, analytics and utilization of our sales force platform for improved visibility and execution, began the process of supply chain optimization both internally and through a strategic partnership with Sanmina, rebuilt our service model to be metric driven, with a focus on customer satisfaction, including material improvement in customer hardware and service experiences, which resulted in achieving in our net promoter score during the year, while at the same time, making good progress in fully integrating with our product development and supply chain organizations. We rationalized our product portfolio to focus more on production applications and repositioned our go-forward products more competitively via cost reduction programs and new offerings. And completed significant work and improved analytics to drive the ship both from a business model and company culture perspective from a hardware centric company to an annuity based systems model, where materials, software and services are the long term drivers of return on investment across our installed base. We improved our employee infrastructure, including a market-based rebuild of the company's job hierarchy, which we believe will give us the visibility to drive improved cost structure overtime and made significant investments for a series of new product offerings from our flagship Figure 4 technology and low cost DLP to next generation metals and expansions in deep dentals. We also invested in the IT infrastructure and confirmation to drive long term efficiency including a major Oracle ERP system upgrade. We have enhanced the company's go-to-market strategy with a worldwide consolidation and made a real time adjustment during the year to improve execution. To date, we've made the most progress with our go-to-market reorganization and EMEA, which we believe is reflected in the consistent growth in that region throughout the year. However, in the fourth quarter we experienced more balanced performance across all regions as the more recent work in Americas and APAC is also beginning to show returns. We expanded our direct sales and application engineering teams, implemented tools designed to improve our lead generation and conversation rate and continued to refine and improve the focus of our sales channel. While our actions and investments in go-to-market are not done, we've made significant progress and believe we are on the right track to continue to drive growth and improve execution worldwide. We are in a multiyear transformation and actions last year centered around building the foundation to enable the company to capitalize on significant opportunity ahead of us. We focused on building the infrastructure, processes, analytics and organizational structure necessary to take the company forward. We're prioritized the critical needs and actions to stabilize the company and enable our market based strategy to drive the expansion in 3D production used case by used case. With this work behind us, we believe 2018 is a corner turn year for the company. Our energy and focus are on execution, improving efficiency and introducing disruptive new products to drive customer shift to 3D production. Our planned product launches throughout the coming year will continue to build momentum as we drive efficiencies and the next phase of transformation. As we showcased in November, we plan to introduce several products to enable customers to seamlessly scale from prototyping to production and bridge the gap between traditional manufacturing. We plan to launch next generation production systems with our Figure 4, DLP, SLS and metal technology as well in the range of materials, software and services to help customers integrate 3D printing into their manufacturing workflow. We remain excited about our significant long term opportunity and I'm confident in our ability to be a leader in the market and drive sustainable profitable growth. With that I'd like to provide an overview of our fourth quarter results before John provides more details. Throughout 2017, we talked about several drivers to revenue performance and I would like to recap where we're with these. These drivers included continued double digit growth in healthcare, continued growth in materials, continued growth in software, on demand manufacturing return to growth and printer revenue return to growth. During the fourth quarter, total revenue increased 7% to $177.3 million. Demand from healthcare and industrial customers continued to be strong resulting in 13% increase in healthcare revenue with growth across all categories. Printer revenue has improved and was approximately flat in the fourth quarter. For the fourth quarter, total printer unit sold increased 15% with growth in both production and professional print equipments. Materials revenue increased 8% in the fourth quarter due to utilization of the installed base including high demand from healthcare customers. On demand manufacturing revenue increased 10% and software revenue increased 8% in the quarter. Additionally, our solid execution in EMEA continued and demand in the region remained strong. And our performance in the Americas and Asia Pacific improved during the fourth quarter. Gross profit margin was 48.2%. Non-GAAP operating expenses increased 17% compared to the fourth quarter of 2016, including 9% increase in R&D, as we continued our investment to bring new products to market in plastics, metals, materials and software and 21% increase in non-GAAP SG&A expenses inclusive and IT and go-to-market investments. We reported non-GAAP earnings of $0.05 per share in the fourth quarter of 2017 and a GAAP loss of $0.08 per share. Now, let me turn it over to John to discuss our fourth quarter and full year 2017 performance in more detail. John?

Thanks, VJ. Good afternoon everyone. For the fourth quarter, we reported revenue of $177.3 million, an increase of 7% compared to the fourth quarter of 2016. Gross profit margin was 48.2% compared to 50% in the fourth quarter of 2016. GAAP operating expenses were increased 16% to $91.2 million, including 18% increase SG&A expenses and 9% increase in R&D expense. We reported a GAAP loss of $0.08 per share in the fourth quarter of 2017 compared to $0.05 earnings per share in the fourth quarter of 2016. For the full year, we reported revenue growth of 2% to $646.1 million, gross profit margin of 44.2% and 3% increase in operating expenses to $358.8 million, primarily driven by increased investments in R&D. We reported a GAAP loss of $0.59 per share for the year compared to a loss of $0.35 per share in the prior year. Compared to the fourth quarter of 2016, non-GAAP SG&A expenses increased 21% to $54.6 million, as we continued to invest in IT transformation and go-to-market initiatives. Non-GAAP R&D expenses increased 9% to $23 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 bring to market throughout 2018. We reported non-GAAP earnings of $0.05 per share or $5.3 million in the fourth quarter of 2017 compared to non-GAAP earnings of $0.15 per share or $16.7 million in the fourth quarter of 2016. For the full year 2017, we reported a non-GAAP loss of $1.7 million or a loss of $0.02 per share compared to non-GAAP earnings of $50.8 million or $0.46 earnings per share in the prior year. Healthcare revenue for the fourth quarter of 2017 increased 13% to $50.4 million, driven by growth across all categories. We continue to be pleased with the overall demand trends for all categories of healthcare and for the full year healthcare revenue increased 18% to $188.7 million. We expect continued double digit growth in healthcare going forward. In the fourth quarter, on demand manufacturing revenue increased 10% to $26.5 million. Our investments in facilities, technology, customer experience, demand generation and enhanced sales approach has helped drive a return to growth in on demand manufacturing. For the year, on demand manufacturing was approximately flat at $104.6 million. Printer revenue was approximately flat for the fourth quarter. Printer unit sales grew 15% in the fourth quarter with growth in both production and professional unit sales. For the full year 2017, total printer revenue decreased 7% and total units decreased 4%. Production printer unit sales increased 20% and professional printer unit sales decreased 7% for the year. Throughout the year, printer revenue and ASPs were negatively impacted by mix particularly by the increasing sales of our lower priced MJP 2500 Plus printer. Materials revenue increased 8% to $42.8 million in the fourth quarter. For the year, materials grew 8% to $168.8 million, driven by the addition of Vertex and continued utilization of our installed base. We expect ongoing growth in materials as we continue to increase our understanding of the installed base, improve sales execution, improve increased production applications and drive a more annuity based business model. Software revenue increased 8% from the fourth quarter of the prior year to $26 million. For the year, software revenue increased 5% to $91.7 million. We continue to expect growth in software going forward. We reported 48.2% gross profit margin in the fourth quarter of 2017 compared to 50% in the prior year. For the full year, we reported 47.2% compared to 48.9% in 2016. Gross profit margin includes a negative impact of product discontinuations and legacy inventory cleanup charges which offset supply chain efficiency improvements made during 2017. We've begun supply chain optimization throughout our procurement and manufacturing processes and have entered into a strategic relationship with Sanmina, a recognized technology leader providing end-to-end design, manufacturing and logistics solutions delivering high quality and support. We expect these changes and ongoing efficiency improvements to help to maintain improved gross profit margins overtime. GAAP operating expenses for the quarter were $91.2 million, an increase of 16% compared to the prior year including 18% increase in SG&A expenses and 9% increase in R&D expenses. Non-GAAP operating expenses in the fourth quarter were $77.6 million, 17% increase from the prior year, but only 2% increase sequentially. Compared to the 2016 quarter, non-GAAP SG&A expenses increased 21% and R&D expenses increased 19% primarily from additional investment in support of the recently announced new products which are planned for commercialization over the coming months. For the Full year, GAAP operating expenses increased 3% to $358.8 million, including 2% increase in SG&A expenses and 7% increase in R&D expenses. Non-GAAP operating expenses increased 10% to $296.6 million. Non-GAAP SG&A expenses increased 8% and non-GAAP R&D expenses increased 15%. Throughout 2017, we made significant investments in IT, go-to-market and innovation, which we believe are critical for the company for long term growth. We're committed to driving an appropriate cost structure and we believe over the next couple of years, we can drive operating expenses materially lower. We generated $8.2 million of cash from operations during the fourth quarter resulting in $25.9 million of cash generated from operations in 2017. We ended the quarter with $136.3 million of cash. While quarter-to-quarter cash generation and expenditures timings will fluctuate, we expect to continue to generate cash from operations over meaningful periods while at the same time investing in growth and infrastructure. . Before turning the call back to VJ, I'd like to take a few moments to discuss where we're today and a high level outlook going forward. We're focused on building the company for long term growth, profitability and success. We are still in the midst of a multi-year transformation of the company. As VJ described, we've made significant progress in many areas and completed a lot of foundational work in 2017, but we still have more work to do. As we build momentum throughout the coming year with disrupted product launches to drive production applications for additive manufacturing, we will also remain focused on continuing to improve our organization and operational efficiency. We have plans in place to improve leverage from the P&L and drive operating cost down meaningfully over the next couple of years. Over the same period, we plan to balance investments with these cost reductions, maintain a solid cash position, drive profitability and ultimately improve our earnings power. With that, I'll turn the call back to VJ for some concluding remarks. VJ?

Thanks, John. In 2017, we made significant progress to stabilize and turnaround the company. Addressed many legacy issues and put in place the foundation for scalable growth. We believe we're turning the corner in a multiyear transformation project. We're focused on execution, driving operational efficiencies and bringing our disruptive and innovative new products to market. We have a strong portfolio of additive manufacturing solutions for the entire digital manufacturing workflow, with a series of new product introductions planned throughout 2018 to further solidify our leading market portfolio. At Lab Day in Chicago, the largest dental laboratory event in America, we introduced the NextDent 5100, a Figure 4 based 3D printer specifically designed for dental labs. The NextDent 5100 is our first entry to market with our scalable Figure 4 platform and we believe it is a breakthrough product, which will redefine digital dentistry. At the same time, we launched several new materials for the NextDent 5100, bringing the total number of 30 dental specific materials for this printer. This innovative solution is four times faster and up to 90% more cost effective than any other solution today and it was extremely well received at the show. SmartTech has defined dental hardware and materials as the billion dollar market by 2020 and we believe we're in the best position to address this. We also launched the FabPro 1000, our new low cost high productivity DLP based 3D printers, designed for dental and jewelry production and high functionality industrial prototyping. During the first quarter we plan to begin shipping of our next generation SLS printer, the ProX SLS 6100, which fixed production grade materials to deliver superior part quality with greater efficiency and lower total cost of operation versus our competitors. And over the coming months, we plan to launch additional Figure 4 products designed to meet various production environment needs from standalone units to modular to fully automated production solutions. Later in the year, we also plan to launch the DMP 8500, a scalable, automated, fully integrated next generation metals platform to deliver a true end-to-end solution for metal additive manufacturing. With it, we plan to offer an expanded materials portfolio, durable and removable print modules, powder management module and fully integrated 3DXpert software to help streamline production of parts as well as the industries, largest part diameter compared to what is available today. These products expand our leading suite of end-to-end solutions and believe they will help accelerate the ship from prototyping to products. We remain excited about our complete portfolio, ongoing innovations and significant market opportunities and we continue to be focused on the long term growth and success of the company. With that, I would like to turn the call back to Stacey who will open the floor for questions. Stacey.

Thanks, VJ. We'll now open the call for questions. We 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.

Great, thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ananda Baruah from Loop Capital. Please go ahead.

Hey, good afternoon guys. Thanks for taking the questions. I guess I think I just like to start out with - VJ, you guys spent some time teasing out the areas which you grew this quarter and go into some of the - kind of going back to some of the magic and you made mentioned that you're positioned for ongoing growth. So I'm going to take that to mean, including calendar '18, you also made mentioned I believe of improvement in lead generation and cracking it on conversion rates. So if that's not accurate, improvement in conversion rates then please correct that. But I guess is, what - can you talk to the degrees in which you might expect to grow this year and which aspects of the business do you expect to grow this year? Do you think printers grow as well, you had made mentioned of a couple of things.

Yeah, so let me start out by saying that the way I'm building that growth engine, the healthcare, materials software and on demand manufacturing will continue to grow. I think the important part for 2018 will be our printer revenue growth. So if you look at printer revenue growth, it was minus 4% in Q1, minus 14% in Q2, minus 11% in Q3 of 2017 and nearly flat in fourth quarter 2017. Slowly we're now getting into a place, where we can now feel good about growing our hardware printer revenue growth and I think that's what the sign that we're looking at. The second thing that I can say is all the investments we made in go-to market will also help as you talked about the conversion rate, because we are having now competitiveness especially with the launches that we will do with Figure 4, with our FabPro new next-generation SLS machine and the 8500 the metal products. So I believe that should help us now to drive the printer hardware revenue growth and I think that will be very important for 2018.

That sounds like you have an excavation of driving printer revenue growth in 2018.

Yes. We need to do that. I think we are just making the progress and we need to continue to do that throughout the year in 2018. I also want to make sure that as a reminder there is a seasonality in our revenue and first quarter always is a softer quarter. So I think we need to - you guys need to model that kind of a built for 2018.

And just as a quick follow-up, how much - you've spoken about the works you've done in the go-to market and in the channel. How much of that work remains as you go to this year? I guess can you talk a little more on that process?

Yeah, I understand. So I think the main important part for go-to market is this whole shift from prototyping to production is very important and there are two aspects of it. We need to build our direct sales force because for production it's a complex sale and I think we need to make sure we build our - what we call customer innovation center, our direct sales force and application engineering. The second part is getting the right kind of a channel where they can sell these complex solutions. So what we are doing globally building both direct sales force, application engineering, and the right channel.

Got it. Thanks so much.

Thanks, Anand.

Our next question is from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi. Good afternoon. I wanted to ask a question first about the services business. The revenues there were up significantly from Q3. Was there anything unusual about that and maybe VJ, if you could talk a little bit about the seasonality of that business? Would you expect a significant drop-off in Q1 in that area? Are we at a new level in that area of the business?

Well, I think in services we include health care which is very important to note because if you look at our health care business, this quarter - the fourth quarter improved 13% and if you look at the profile, 29% in Q1, 25% in Q2, then 10% in Q3 and then now 13%. So I think that kind of a seasonality you have to expect with a lot of our health care business. During the summer months and during the Christmas month, we have an uptick. So, yeah, Q1 will be little different because the seasonality will be lower when you talk about the seasonality of our health care business. I think that's the driving force for our services business.

Okay. That's helpful. And then you have a fairly active new product, new printer introduction scheduled for this year. And what I'm wondering is, yeah, obviously you can't comment specifically on individual products. But if we look at these new products in aggregate, how meaningful could the impact of these new products be on the printer revenues in the second half of this year?

Yeah. So I think first of all you are right on that it's a built and I think second half is where you need to be really looking at all these new products, how that can help our printer revenue. The good thing, there are two good things I can tell you. First of all, the products that we are working on, the feedback that we are getting for our beta customer is phenomenal. And I'm very excited about the contribution we are making with respect from the customer value proposition. The second thing is most of the products except for the SLS, are new categories. That means they are going to be additive to our overall product portfolio and that's why it will be additive in terms of the revenue growth especially in the second half. The last piece that I can talk about that in new categories we also have to be careful and how we build the go-to market, so that's why the uptick will be gradual but the approach that we are taking is the right combination of value proposition and disruptive products and then building that go-to market.

Okay. Thanks very much.

Our next question is from Bobby Burleson from Canaccord Genuity. Please go ahead.

Hey, Bobby.

Hi. Good afternoon. So I was curious by just looking at the printer mix as the headwinds for printer revenue growth in 2017. Do you think that makes this stabilized kind of where it is and you had a flat year-on-year printer revenue performance in Q4? Or do you think would some of the new products coming, mix can shift higher in terms of ASP?

I think first of all that's the reason I was sharing what was our profile. It was a built, right. And my view is mix between production and professional printer is going to be very similar. And the reason for that is the SLS, the Figure 4, these are all production printers, but the multijet printing where we have been very successful with our wax products and some of the FabPro will be the professional printer. So that's why the mix that we are seeing right now between professional and production will continue in 2018. And as I said earlier, because there is not as much overlap, just for example, FabPro is a 5000 model product. It's completely new category. We are not going to have as much impact on our current portfolio.

Okay. And I guess as a follow-up to that, if you are going to have a concentration of new products this year versus last year, it sounds like you are going to be more innovative in terms of how much stuff you bring to the market. Should we be thinking about startup costs there or anything associated with gross margin or operating margin that can be little frontend loaded expense wise?

Yeah, this is John. I think a lot of that frontend loading on the cost is taking place to the latter part of 2017 and then there will be some of that in Q1 as we do final work in launching the products. But then at that point we'll just start to ramp those products to the market. So there has been a lot of investment both from an R&D point of view and from a marketing point of view in advance of these launches. And there is a meaningful set of launches in the next half year.

And I think that's the reason we wanted to invest into R&D. We wanted to invest in go-to market, because we felt that these new categories require a right go-to market and the innovation, the disruptive innovation with combination of this we'll build the category and this is front-loaded, I like to leave that what you are indicating.

Great, thank you.

You are welcome.

Thank you.

Our next question is from Hendi Susanto from Gabelli & Company. Please go ahead.

Good evening and thank you for taking my questions. My first question is for VJ. VJ, how do you characterize the 3D printing market and market opportunities in 2018? How are they different compared to 2017?

Well, I think my view is overall market opportunity has continued to be there. I think in 2018 and I really go back to fundamental belief that we need to shift from prototyping to production and production opportunities are going to be the driving force in coming three to five years from the growth point of view. I also believe on-demand manufacturing, our parts business is also very big opportunity. As you can see in Q4, we grew that opportunity by 10%, because a lot of companies' slowly are understanding the value of additive manufacturing and they may start by outsourcing saying, hey, let me play with this thing. We are using our on-demand parts capability and then eventually bring it in-house and that's where you see a combination of outsourcing and insourcing. So my view is '18 should be a good year. And as I said, it will be driven more to our production opportunities and the opportunity in on-demand manufacturing, the parts business.

Yeah. And then VJ and John, post Q3, 3D Systems has been reorganizing your go-to market structure to what your Europe's best practices and North America and Asia-Pacific. How far or long is that in terms of making organizational changes and sales productivity ramp-up?

Yeah. Yeah, so if you remember we are announced that Herbert, he runs now the worldwide go-to market organization and he is bringing all the processes that he had built in Europe, in both Americas and in Asia and these processes' improvements are showing the results. If you look at what we achieved in Q4 is much more balanced than either Q2 or Q3. I still think we have work to do because these processes and the talent that we need in both Americas and APJ we need to continue to build because it's all about the people and processes and I think my view is in '18 we need to make sure we continue to build our Asia-Pacific and Americas.

Thank you and good luck for 2018.

Thank you very much.

Our next question is from Joe Wittine from Longbow Research. Please go ahead.

Yeah. Hi. Thanks for taking the questions. To put a final point on your answer to Bobby's question, do you anticipate consolidated printer ASPs will increase this year when taking into account the impact of launches ahead?

Joe, I think it may not be that way. The reason, remember we are going all the way from $5000 to multimillion dollar offer. So you need to really look at the things where depending on the participation and depending on the mix that we generate all the way from $5000 to multimillion dollar solution, you are going to see the appropriate ASP. The thing that we want to watch for is the unit growth, because we kind of build the right kind of an installed base and that's what I'm on, right. I really believe the annuity based business model with materials, services and software is the model that I want to build. So what we want to do is we want to have productive installed base and I think that's what I am more interested. The ASP is depending on the mix. You are going to have a different answer.

Okay. That's helpful. And then, John, your prepared remarks on driving total OpEx dollars, I think it's a materially lower or interesting. It doesn't sound like you are ready to give details on the size of these initiatives today. Correct me if I'm wrong there. But can you also address - can you address the timing as we [indiscernible] become visible to the street this year or are you looking beyond that?

Yeah. I think my comments, prepared comments around that were a multi-year approach for us. I think a way to think about it is we spent a lot of time in 2017 really understanding what we have tuning up a lot of things, improving our visibility across all the organizations, making some organizational changes and we also frontend loaded some investments that we felt were needed for the long-term growth of the company. But we are at a point now where we have the baseline that we can really look at and take more of the business model approach going forward and what we think are appropriate cost structures over time. So it's a multi-year project. I think we have a pretty broad portfolio. We've done some good early work in terms of settings this where we think we should be heading as a company. But it's a multi-year project. As you think about '18, I think that the Q4 numbers from an operating expense, we are not providing any specific guidance or direction on the P&L, but the Q4 is a decent proxy for kind of a run rate of OpEx. We are not looking to grow our headcount more as a company. We are going to start turning the corner gradually on operating expense and we will keep you posted. We'll keep you posted on a regular basis. But this is not - this is a multi-year project for us.

But I think the most important thing for us is we are building the company for long-term and we need to invest appropriately in innovation and go to market and I think that's what we are focused on.

Thank you. If I can sneak in one really quick follow-up, John, if you can just quantify how big a tailwind the euro is to your 2018 from where we sit today and I will step out, thanks.

Yeah. We don't really make projections on foreign currency, right. Things will move pretty quick, so no projections around that.

Our next question is from Wamsi Mohan from Bank of America Merrill Lynch. Please go ahead.

Hi. It's actually Ruplu filling in for Wamsi today. Thanks for taking the questions. Hey, VJ, in the past you have talked about product quality issues. So just can you give us an update, maybe what percent of printers in the field still have issues with them?

So I think remember I talked about legacy products, especially the multijet printing where we had a lot of issues and our 300 platform. We have tackled all the issues throughout 2017. And I do believe that shows up into our net promoter score where we - I talked about 20-point improvement in that promoter score. So customers now are really very, very happy that we are attending to them. We are solving their problems and moving forward all the new products that we will be introducing in 2018. I'm taking personal accountability making sure that we are going to have great quality and reliability because we are designing for quality and reliability, designing for manufacturing, designing for assembly. So I believe we have turned the corner. As I talked about, I believe that - but we had to invest a lot because we had all the legacy issues. I think we are seeing now turning the corner and I'm very confident that we are going to continue to work on that and make sure that quality and reliability is a very important aspect of every solution that we build.

Okay. That's helpful. And maybe, John, can you just help us quantify was there any impact from the accounting changes on revenue and earnings in fiscal 4Q?

Yeah. So first of all as we noted in our preliminary results, we chose to do additional analysis around the revenue and cost related product warranties. The outcome of that was no impact to Q4 or full year financial results. We did add a disclosure in the balance sheet around our projected cost liability relative to original warrantees on the balance sheet, but there was zero impact relative to the financial results for Q4 or full year. And also since we are on kind of changes on related topics, we want to make it clear that there was no - absolutely no impact relative to 606 in '17. That's a 2018 event. And as we get into 2018, right now we don't believe that 606 will have any material impact on the company in either cost of revenues separately. As I do want to let folks know that as part of our ongoing disclosure enhancements and reviews and to be consistent with how we internally review the company's results, in 2018 we will reclassify revenue costs related to initial product warranties from services to products. We are traditionally showing that in services. We are going to reclassify that from services, the products and we are going to give - we'll give disclosure each quarter that will enable all of you to do apples-to-apples comparisons on a year-over-year basis for those changes and we will also give disclosures for any impact related to 606. We think those impacts will be minimal, non-material to the company and again no impact in 2017 and these are the works we've done over the last week and no impact on financial results in 2017 at all.

Okay. Thanks for the clarification. And if I can just ask one quick clarification, there have been a lot of questions on go-to market. So I take it like when you say that OpEx will remain challenged, is it because of go-to market or what else is contributing towards your OpEx spend here? Sorry, go ahead.

Yeah, there are three aspects of it. Firstly, the IT, because we wanted to make sure we bring the processes to the right place of the business processes. We need to model them. And so we had a major upgrade for our Oracle IT systems and that is also in our OpEx that what you are seeing and another two places are innovation meaning the R&D budget, because we want to make sure we build the platform and the third one is the go-to market. So I just want to be clear that there are three aspects of it. John, you want to add any?

Yeah. And I think the earlier question around the longer term outlook around OpEx, we - as VJ noted and I noted, we frontend loaded a fair amount of cost over the last six to nine months in support of things where we really believe we need to invest like go-to market, like IT, quality and our services P&L, so the work - the advance work for all the launches coming over the next six months and so our run rate coming out of Q4 is something that's going to continue for that. But we'll be able to turn the corner on that and start driving more cost out now based on a lot better visibility and having the organization and the structure and the operational cadence where we want it. So we have very good views where we are going to get, but we don't want to set an expectation that that's an overnight kind of event. That's going to take us some time.

Okay. Thank you for all the details.

You bet.

Our next question is from Brian Drab from William Blair. Please go ahead.

Hey, Brian.

Hi. Hey, thanks for taking my questions. One, first just a quick clarification. Did you reclassify some revenue in the health care segment? Because the 2016 10-K shows $148 million in health care revenue, but the 2017 10-K shows that in 2016 you did 159.

Yeah. So first of all we haven't changed the way we classify health care revenue, but unfortunately there was an error last year and we understated health care revenue for the fourth quarter in 2016, so in the 10-K we provided the correct information for the comparison in 2017. So if you looked at when we talked about health care growth of 13% for the fourth quarter, 18% for the full year, those are based on the corrected numbers. So we had an error, but we didn't change anything in terms of how we aggregate and classify health care revenue.

Okay. All right. That makes sense. Thanks. And then, John, you said I think pretty clearly that the fourth quarter OpEx level should be the guidance so to speak for -

No guidance, no guidance.

I used the word guidance. Yeah, let me add the word guidance, but that's the and whatever you want to call it, guidepost.

Yeah, I would say - yeah, I think it's a good tag for kind of a run rate-ish number. That could vary quarter to quarter, but it's not our intent to continue to ramp from an OpEx point of view. Let's put it that way.

Okay. And how about gross - and the last question is just on gross margin. It's been around 47 adjusted in the third quarter, 48 this quarter, what should we expect in '18?

I think the fourth quarter is a reasonable proxy plus or minus for where margins will trend throughout the year.

Got it. Thank you.

Thank you.

Our next question is from Patrick Newton from Stifel. Please go ahead.

Hey, Patrick.

Hey, guys. Actually James on for Patrick, John, just a clarification on the OpEx commentary that you have given about driving it down over the next couple of years, is that on a percentage of revenue basis or an absolute basis and how should we expect that to fluctuate if you see a more meaningful return to growth here up into the high single digits or even double digits?

Yeah, I think certainly on a model basis you should expect improvement and on an absolute basis that will be driven only when the P&L grows in general, right. So I think that's all we can really say right now.

Okay and then just a follow-up on the IT and the ERP investments that you made. How should we think about those costs in terms of being one-time cost relative to subscription models?

Yeah, we'll continue to invest in IT in 2018 and the other part of it is that we've also rebuilt on the IT organization in general. So the biggest change for us I think coming out of the IT transformation work will be the efficiency opportunities we see in the organization from having much better systems and processes going forward and that will be a contributor reducing cost across the whole company over time.

Yeah, I think the investment in IT is important. It's not a one-time initially. Right now we wanted to upgrade the system, but I do believe our on-demand manufacturing and our services, they need the right kind of IT systems so that we can really go after the business model that I'm talking about on annuity-based where materials, services and software will be important for us.

Our next question is from Sherri Scribner from Deutsche Bank. Please go ahead.

Hi. Thank you. I know you guys wanted to do some new products last year in 2017 and you clearly have strong pipeline of products in 2018. I was trying to get a sense of how we should think about new products as a percentage of revenue in '17 and what is your goal for new products as a percentage of revenue in 2018? Thanks.

I don't think we are going to give any numbers there. I'm just very excited about the new products and the product launches because I do believe shifting the production is something that we believe is the way we are going to continue to grow this business.

Okay. And then thinking about production and some of your products which are targeted at final parts production, can you give us a sense of how much of your mix now is for machines that are going towards final parts and then what is your long-term goal for -

Again we don't give out that. We'll just give an example. So aligners, we produce 300,000 aligners a day and they would be for a particular site. The company is doing that using our technology aligned and I think that's fair that if you have a production comes a used case that's very vital for overall our growth and I think my view is we need to find more and more use cases like this which will give a significant opportunity for growth both in hardware and in materials.

Okay. Thank you.

Our next question is from Shannon Cross from Cross Research. Please go ahead.

Thank you very much.

Hey, Shannon.

Hey, how are you doing?

Good.

Good. So my question, I have a couple. One, from a consumables perspective, can you talk a little bit about where you are seeing the most growth in consumables on a vertical - from a vertical standpoint and maybe also from a geographic standpoint?

Well, I think materials growth depends on the use cases. I think I gave you one example of dental and the aligners because that's a very clear vertical that I believe is a tremendous opportunity for the growth. The second vertical that I believe long-term will be very important for us. It's not only in dental but also health care and aerospace because we think that those are the two verticals that your complex and custom parts are going to be done using additive manufacturing. And when you are into the production kind of arena, that's where the growth is going to come from because material usage is directly related to the way I want to set up the annuity business model.

And I guess when you are talking to end customers, I'm curious - I understand the goal is to move from prototyping to mass manufacturing or some level of manufacturing. Can you maybe characterize how the conversations have changed in the last year or two when you maybe came to last year to now in terms of where your customers are at in their thought process?

Yeah. So I think the customer needs are very clear. There are four customer needs that they talk about when you talk about production, the first and very important in the part, precision, quality, the repeatability and durability. And at the end of the day, it's the part which will determine whether it's going to be end user or not. The second thing that they ask is the productivity. Can I produce that part which could be end user part so that I will be able to run, let's say, between 100,000 to million or even more per year, the volume? The third thing that they always ask is total cost of operations, because they want - once we are in a production arena, cost becomes - total cost of operation including the footprint that you want to have, the cost of the materials, the maintenance cost and the uptime, those things become very, very important. And I think that's - so if you look at the dental model that we just introduced in Chicago with NextDent 5100, it's four times faster than anything comparatively technology. So now you have something very, very clearly productivity point of view. It has the precision of - so that because in dental you've got a lot of custom parts, it has to be accuracy and precision and it will last inside your mouth for multiple years. Having that NextDent acquisition that we did with the right materials and the Figure 4 technology, we are able to meet the customer needs for the production requirement. That's just an example that I'm giving, so it is four times faster and 90% more - from the cost effectiveness than any other solutions that you have and we had three customers actually quoting, when we launched that product. It's all about having the right customers and then they actually confirm that that's what we can achieve in the way things are going to shift to production used case by used case.

Thank you.

Thank you. This concludes the question-and-answer session. I would like to turn the floor back over to Ms. Witten for any closing comments.

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 teleconference. Thank you for your participation. You may disconnect your lines at this time.