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Earnings call: 3D Systems faces headwinds in Q3 amid global uncertainty

Published 27/11/2024, 15:42
Earnings call: 3D Systems faces headwinds in Q3 amid global uncertainty
DDD
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3D Systems (DDD), a leader in additive manufacturing solutions, has reported a decrease in its third-quarter revenue for 2024, citing macroeconomic and geopolitical challenges that have affected capital expenditure spending across industries. The company's revenue stood at $112.9 million, representing a 9% decline from the same period last year, with no significant change from the previous quarter. Despite the downturn, 3D Systems has seen growth in its healthcare segment, particularly in dental and personalized healthcare, and remains committed to innovation and market expansion.

Key Takeaways

  • 3D Systems' Q3 revenue dropped to $112.9 million, a 9% year-over-year decrease.
  • Industrial segment revenue fell by 19%, while healthcare segment revenue grew by 5%.
  • The company's non-GAAP gross margin was affected, standing at 37.6%.
  • Adjusted EBITDA was reported as negative $14.3 million.
  • Cash reserves remained strong with $190 million in cash and cash equivalents.
  • Full-year revenue targets are set between $440-$450 million.
  • Nearly 40 new products were introduced, including materials, software, and printing platforms.
  • Expansion in healthcare with new FDA clearances and growth in AI-driven applications.

Company Outlook

  • A modest recovery is anticipated in the latter half of 2024.
  • The company aims for mid-40% gross margins in the long term.
  • Efforts to reduce operating expenses are ongoing.
  • Optimistic projections for potential growth in 2025 due to new applications and market recovery.

Bearish Highlights

  • The global economic environment has led to reduced capital expenditure, impacting revenue.
  • The industrial segment experienced a significant 19% revenue drop.

Bullish Highlights

  • The healthcare segment showed resilience with a 5% increase in revenue.
  • The dental business saw a rebound of over 30%, and personalized healthcare rose by nearly 20%.

Misses

  • The company's adjusted EBITDA was in the negative at $14.3 million.
  • Year-over-year revenue declined by 9%.

Q&A Highlights

  • The CEO expressed confidence in the industry's macro trends beginning to improve.
  • Emphasis was placed on the economic value provided by 3D Systems' polymer and metal printing solutions.
  • The company is working towards delivering mid-forty percent margins or greater through in-sourcing and restructuring initiatives.

In summary, 3D Systems is navigating a challenging economic landscape with a strategic focus on innovation and efficiency. While the industrial segment has faced declines, the healthcare division's growth and new product developments are positive indicators for the company's future. With a strong cash position and a clear outlook for recovery and growth, 3D Systems is poised to capitalize on market opportunities as they arise.

Full transcript - 3D Systems Corporation (NYSE:DDD) Q3 2024:

Conference Operator: Greetings, and welcome to the 3 d Systems Third Quarter 20 24 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode.

: Call.

Conference Operator: As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mick McCluskey, Vice President, Investor Relations. Please go ahead, Mick.

Mick McCluskey, Vice President, Investor Relations, 3D Systems: Hello, and welcome to 3 d Systems' Q3 2024 Conference Call. With me on today's call are Doctor. Jeffrey Graves, President and CEO and Jeff Creech, EVP and CFO. 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 on the Investor Relations section of our website.

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 our latest press release and our recent filings with the SEC, including our most recent Annual Report on Form 10 ks and quarterly reports on Form 10 Q. During this call, we will discuss certain non GAAP measures. In our press release and slides accompanying this webcast, you will find additional disclosures regarding these non GAAP measures, including reconciliations with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2023. With that, I'll turn the call over to our CEO, Jeff Graves for opening remarks.

Jeff Graves, President and CEO, 3D Systems: Thank you, Mick, and good morning, everyone. Today, I'll begin with an overview of our Q3 results and then touch on some recent key accomplishments and announcements. I'll then ask our CFO, Jeff Creech to take us through the Q3 in greater detail before closing the call with comments on our outlook, after which we're happy to take questions. So let's start on Slide 5. At a high level, our Q3 revenue largely represents a continuation of the trends that we and the additive industry broadly have been contending with for several quarters now.

Very simply, macroeconomic and geopolitical uncertainties have caused our customers to reduce CapEx spending for new capacity in their factories, which in turn has created a persistent headwind to hardware system sales. It's really that simple. As a consequence, our revenues were essentially flat on a sequential basis. This was slightly weaker than we had anticipated as a few key installations of new systems, which were targeted for acceptance late in Q3, slipped into the Q4. However, while the sale of new printing systems is still sluggish, what is changing for the better is the utilization rate of our installed base, as indicated by rising sales of consumables to our customers.

Consumable materials grew approximately 10% from the prior year and demonstrated sustained sequential growth, a trajectory that has consistently improved since the beginning of the year, most recently growing 9% sequentially in the Q3 versus Q2. In a similar vein, interest in new application development has been on a very robust trajectory. As many of you know, we have one of the largest and most capable application engineering groups in the world. These engineers work directly with our customers on new applications for both metal and polymer 3 d printing. Year to date, revenues from our industrial application group are up 26% from last year and continue to rise.

We monitor this activity level as a directional indicator of growth potential for important new applications. The performance we experienced in Q3 is a strong indicator of continuing growth in customer interest in 3 d printing for their production needs. We expect this interest to ultimately translate into more robust sales as the economic environment improves. To provide a little more color on where this interest is coming from, leading the way are what we refer to as the high reliability markets such as energy, oil and gas, semiconductor equipment manufacturing, and aerospace and defense, all of which have a very high standard for component quality, performance, reliability, and traceability. For these customers, which are often subject to strict regulatory requirements, the ability of both our polymer and metal printing solutions to meet their needs and to do so with compelling economics is a cornerstone of our value proposition.

As an example of markets that I'm particularly excited about these days are those driven by the $1,000,000,000,000 investments being made in AI. These investments cascade directly into several of our targeted end markets, ranging from semiconductor equipment manufacturing to data centers to the power generation equipment needed to provide electricity critical to their operation. As just one example, the management of heat is absolutely essential to both the manufacturer of silicon chips, as well as their performance and life in a data center environment. The nano scale of advanced microprocessors combined with the extraordinary number used in a modern data center creates an extremely challenging environment to keep the processors cool in operation. One way to effectively do so is through the use of high purity copper elements that can be placed in or very near the heart of a GPU.

Combining the inherent capability of 3 d printing to manufacture complex, high surface area components with our unique capability to print ultra high purity copper with our advanced metal printing systems gives GPU and data center architects a powerful means of removing heat effectively from the system. Given that the power consumed by data centers now exceeds that of many small countries, this cooling capability is increasingly valuable. And this is just one example of our increasing focus on the full semiconductor ecosystem that we believe will provide one avenue for meaningful growth for our company in the future. Another market we continue to be excited about is high performance automotive, an example of which is F1 racing. As an example, you may have seen our announcement earlier this month with Sauber Motorsports.

In this case, we updated the entire Sauber production facility as they added 10 of our newest production printer systems to their manufacturing workflow. This included 8 of our market leading SLA 750 dual laser printers and 2 of our just released PSLA 270 platform, all enabled by a host of industry leading high performance materials. Sabra will use these systems in large part to validate their aerodynamic designs through rapid fabrication of production components for wind tunnel testing. This award builds on a nearly 20 year relationship between our companies, reflecting the trust they have in our technological leadership and outstanding service capabilities, both of which are essential to their success in this challenging industry. This important win as a strong new element to our automotive foundation, a market which is expected to grow to almost $8,000,000,000 in the next few years.

Since I mentioned it, let me take a moment to focus on our newest photopolymer printing platform, the PSLA-two seventy. This is the first of what will be a family of new projector over VAD printing systems, combining the superior surface quality associated with our flagship SLA printing platform with the blazing speeds offered by the latest high resolution projector technology. This technology is an outgrowth of our work in regenerative medicine, which incorporates a very high resolution projection system. By replacing a single point laser with a full field projection system, we attain high precision at much higher print speeds. In fact, the closest competitive solution today would have to run 2 machines simultaneously to achieve the same output as 1 PSLA-two seventy.

In addition, this system is designed to use our entire portfolio of advanced polymers originally developed for the Figure 4 system. By offering this exceptional platform as a part of a complete factory workflow, We believe our PSLA platforms will lead the industry forward in photopolymer applications. From a healthcare standpoint, the 3rd quarter was strong with solid growth on a sequential and year over year basis. We attribute this growth to a meaningful recovery in dental, up well over 30% and another impressive performance in personalized healthcare, which was up almost 20%. Given the momentum we have in our healthcare business broadly and our strong pipeline of new products and applications ahead, we remain very excited about the future of this portion of our business.

From a gross margin standpoint, the 3rd quarter was softer than we had anticipated, predominantly driven by an increase in inventory reserves and continued lower factory utilization, both driven by softness in printer volumes. Jeff Creech will take you through the specifics in more detail shortly, but after normalizing for inventory reserves, our Q3 operating margins were roughly in line with recent performance. We continue to target a business model that can deliver mid-forty percent margins or greater over time, once the benefits of our in sourcing and restructuring initiatives are fully realized with increasing volume. Operating expenses for the quarter were consistent with our expectations. We're pleased that our restructuring actions have started to more positively influence performance, representing a nearly $3,000,000 sequential improvement.

And while our overall OpEx expenses are declining, we continue to invest extensively in our R and D activities, which is fueling a historic year of product innovation for our company. More on this in just a few moments. While we're encouraged by some of the leading indicators that we're now seeing, we also recognize that the revenue environment we're operating in today demands an even greater degree of operational efficiency to gain sustained profitability, which is our clear goal. As such, operating expenses remain a strong focus and a lever largely within our direct control in this environment. With that in mind, we maintain our goal of reducing operating expenses to below $6,000,000 for the Q4, with the majority of this improvement coming from reductions in G and A.

Lastly, to our balance sheet, where we've been focused on optimizing working capital as we position ourselves for future growth, we entered 2024 with a goal to deliver inventory reductions as a healthy generator of cash throughout the year. Today, we remain on pace to reach our target of a 20% inventory reduction by year end. Over the course of the Q3, cash on our balance sheet declined $3,000,000 from the prior quarter, a significant rate improvement from prior quarters. This leaves us with one of the strongest cash positions of any company in our industry. On Slide 6, I'd like to take a few moments to reflect on the historic year of progress across our technology roadmap.

You've heard this from us many times before, but as the inventor of the technology that birthed the 3 d printing industry, our dedication to innovation is a core element of our company culture, Maintaining momentum with mission critical R and D even through a challenging sales environment is not only fundamentally different than most of our peers, but it's embedded deeply in our DNA. This is the primary reason customers turn to 3 d Systems first in assessing the capability of 3 d printing to meet their metal and polymer production needs. Reflecting this commitment, you witnessed an unprecedented pace of innovation from our company over the last 12 months, contributing nearly 40 new materials, software enhancements and metal and polymer printing platforms since Q3 of last year, 25 in this year alone. And the momentum will continue as we exit this year and move into 2025. This represents the culmination of 3 years of focus and investment as we're refreshing our entire portfolio of printing platforms and the materials and software that enable their outstanding production performance.

From a key application standpoint, during the Q3, we announced QuickCast Air, which is targeted for the investment casting market. This casting method is essential to aircraft and rocket propulsion systems and other high performance applications. It's expected to reach nearly $34,000,000,000 over the next 10 years. QuickCastAir reliably delivers a large high precision investment casting pattern in a fraction of the time and cost of traditional methods, providing up to a 50% reduction in resin usage in some cases, while maintaining the inherent advantage of virtually unlimited geometric complexity of design. The result for our customers is higher performing components at lower cost and in much shorter production cycle times for their most demanding applications.

On the software front, we announced a significant milestone in commercializing our Okton industrial MOS platform with our strategic partner Baker Hughes (NASDAQ:BKR). Our software, which is now utilized in Baker's Houston, Texas manufacturing facility is enabling on demand additive manufacturing to provide full factory floor workflow integration, automation, control and optimization. Its production implementation is providing key proof points such as a 98% reduction in active monitoring engineering time, a savings of 136 engineering hours per printer annually and an 18% reduction in costs associated with scrap due to real time actionable alerts during component production. Turning to healthcare, our personalized healthcare business delivered another quarter of meaningful growth. During the quarter, we were very pleased to announce that we're once again expanding our orthopedic surgical planning portfolio, this time with FDA clearance for our new total ankle patient matched guides to pair with Smith and Nephew's total ankle replacement solution.

This expands our patient specific surgical solution capabilities in a market anticipated to grow to over $5,000,000,000 in the next few years. Today, we're exceptionally well positioned in the craniomaxiofacial and spinal markets and new FDA approved solutions such as this highlight our ability to expand our orthopedic applications much further in the human body. We're also leveraging our expertise in surgical solutions into adjacent markets, rolling out expanded capabilities to address the needs of trauma patients in addition. We see opportunities to expand our personalized health service in Europe and elsewhere and are investing accordingly to ensure regulatory approvals are acquired. These growth elements reinforce our enthusiasm about our growth in this key area of our company.

For our dental activities, a key growth engine for the future is the multi $1,000,000,000 dentures market. In an important milestone, we secured FDA clearance in September for our 1st to market multi material single piece jetted denture solution. Our unique denture offering provides unparalleled combination of toughness to ensure long term reliability with outstanding aesthetics for enhanced patient experience. As previously shared, we found an excellent launch partner in Glidewell, one of the world's largest producers of restorative dental devices, who's hit the ground running with implementing jetted dentures into its workflow following our clearance with the FDA. We're excited to see this product enter the market in the coming months.

To wrap up my introduction, undoubtedly 2024 has been a difficult sales environment. But with our strong balance sheet, we've delivered tremendous progress transforming our technology portfolio. Formnext, the largest AM conference of the year that was just held last week, gave us an opportunity to highlight this journey with the announcement of several new product introductions. In addition to our metal and PSLA polymer platforms, we highlighted our newest Titan extrusion platform, which is our inroad into the industrial extrusion printing market. The EXT family as we call it, includes the 1270, the 1070 and our newest addition, the 800 provides novel approach to extrusion technology, offering a hybrid solution that can accommodate pellets, filaments and traditional CNC machining all in one platform.

Delivering speeds of 5 to 10 times faster and having raw material costs roughly 10 times lower than its closest competitor, we see increasing interest from our customers around the world for this family of products. Rounding things out, we've also announced a plethora of new materials supporting our SLA, MJP and SLS platforms, further expanding the broadest portfolio of additive solutions in the industry and setting the stage for us to drive increased adoption in the years ahead. So with that, I'll turn things over to our CFO, Jeff Creech for more on the quarter. Jeff?

Mick McCluskey, Vice President, Investor Relations, 3D Systems: Thank you, Jeff, and good morning, everyone. I'll begin with our revenue summary on Slide 8. 3rd quarter revenues of $112,900,000 declined 9% from prior year, driven primarily by a continuation of macroeconomic pressures impacting hardware system sales, partially offset by growth in material sales. On a sequential basis, revenues were roughly flat and impacted by a few large dollar orders that fell outside of our 3rd quarter close. Within our segments, industrial revenues were $57,900,000 and down about 19%, predominantly driven mostly by a decline in printer sales.

In our healthcare segment, revenues were $55,100,000 for the quarter and grew 5% from prior year. As Jeff just mentioned, growth in the Q3 was primarily driven by a healthy rebound in dental and our personalized healthcare business. Now let's turn to Slide 9. Non GAAP gross margin for the 3rd quarter was 37.6% and included an increase in inventory obsolescence reserves taken in the quarter representing approximately $3,000,000 Normalizing for the impact related to inventory reserves would result in a margin of 40.2% for the Q3. Comparing to prior year, margin was 44.8%, which included a significant benefit of regenerative medicine milestone revenue recognition.

Excluding the impacts of inventory reserve increases and the milestone recognition in the current and prior quarters respectively, gross margins would have been 40.2% 42.7 percent with a year on year decline primarily driven by unfavorable absorption given lower sales volumes. Now let's move to Slide 10 for operating expense. Non GAAP operating expense for the Q3 was $61,400,000 increasing $5,600,000 from prior year, but declining $2,700,000 consecutively, in line with our expectations. As an important reminder, the prior year quarter comparison benefited from a tailwind associated with lower incentive compensation expense in addition to other benefits that were more one time in nature. 3rd quarter operating expense benefited from our previously discussed restructuring actions and we continue to expect an additional sequential reduction targeting OpEx below $60,000,000 for the 4th quarter.

Now to Slide 11 to finish up the P and L. We reported adjusted EBITDA of negative $14,300,000 for the Q3 compared to a gain of $4,700,000 for the same quarter last year. Declines in adjusted EBITDA primarily reflect lower sales volumes, margin and higher operating expenses as just discussed. The prior year profitability performance was also significantly impacted by the milestone revenue recognition from our Reg Med business as I just mentioned. In line with my commentary on expected OpEx savings in the Q4, we would also expect an improvement in adjusted EBITDA sequentially as we continue to move towards our longer term goal of consistent profitability.

For the Q3, we reported a fully diluted loss per share of $1.35 and this includes non cash charges of approximately $144,000,000 associated with the impairment of goodwill and other long lived assets as a result of our interim valuation testing during the Q3 of this year. This compared to a loss per share of $0.09 in the Q3 of prior year. Non GAAP loss per share was $0.12 compared to a gain per share of $0.01 in the prior year. Now to Slide 12 for the balance sheet. We closed the quarter with $190,000,000 of cash and cash equivalents compared to $193,000,000 at the end of the Q2 of this year.

As expected, cash performance represented an improvement in working capital management, particularly as we look to continue driving down inventories as a result of our in sourcing from prior years. As noted on previous calls, we've been highly proactive in repurchasing our debt and have reduced our 0% convertible notes down by over 50% since Q3 of last year, fortifying our position to continue supporting critical R and D investments for the new product releases combined with a keen focus on reducing expenses to drive profitability. Looking forward, we continue to view inventory as a source of cash in the Q4. I'll conclude my remarks on Slide 13. As you heard from us this morning, we continue to make strides across our portfolio to emerge stronger from the current economic cycle and pent up demand for additive solutions returns.

We've been consistent in fueling our R and D engines through a tougher macro environment, driving an acceleration of applications and new product development to emerge stronger in the years ahead. However, we are adjusting our guidance expectations for the full year 2024 as follows. We expect full year revenues between the range of $440,000,000 to $450,000,000 which implies a mid to high single digit percentage sequential recovery in the second half revenues from the first half of this year. While the 4th quarter has historically reflected a higher degree of year end capital budget spending, given current uncertainty in the near term as well as indications of timing adjustments related to inventory management among a few customers, we expect the benefits to be more modest ending the year. Full year gross margins are expected to be in the range of 38% to 40%, given the impact of short term inventory reserve adjustments as we continue to integrate our in sourcing capabilities that we believe longer term will improve gross margins to the mid-forty percent range as volumes recover and we are able to reap the full benefits of our in sourcing and restructuring actions.

We are maintaining our expectations to deliver OpEx at or below $60,000,000 for the Q4, continuing its trend of sequential improvement and reflecting the benefits of our previous restructuring. As a result, adjusted EBITDA is expected to improve on a sequential basis, primarily driven by the reduction in operating expense. Jeff, I'll hand it back to you.

Jeff Graves, President and CEO, 3D Systems: Thanks, Jeff. We believe that the broader macro trends negatively impacting our industry to the greatest extent are beginning now to move behind us. With our strong cash position, we've been able to maintain our core investments for the future, while consistently restructuring our company to maximize operating efficiencies. Our determination to support key R and D investments are fundamentally different from many others in the industry that we believe position us well for accelerated growth and profitability as our end markets inevitably strengthen. While we will not be providing explicit comments on 2025 yet, looking beyond this year, as much of our critical R and D work is behind us, we will continue to evaluate incremental actions that can strategically remove costs from our business and drive sustainable profitability.

In doing so, I believe we'll deliver meaningful value to all of our stakeholders. So with that, we'll now open the line for questions. Kevin, if you'd open the line for us, please.

Conference Operator: Certainly. We'll now be conducting a question and answer session. Our first question is coming from Jim Ricchiuti from Needham and Company. Your line is now live.

: Hi, good morning. So I'm looking at your implied revenue guidance for Q4, it's a little surprising with only a month left in the quarter that there's a relatively wide range of scenarios. I'm hoping you could help us understand what's driving that. I mean it sounds like potentially some of your customers may be working through inventories and maybe that's on the material side, but maybe if you could help us understand that a little. And then I have a quick follow-up.

Jeff Graves, President and CEO, 3D Systems: Yes, Jim, I think there's 2 factors. One of it clearly is inventory management from our customers. They're in good shape, but they want to make sure they don't get out over their skis with all the changes coming in 2025 the in the political environment and the geopolitical issues. I think nobody wants to be overly exposed to inventories. So I don't think it's a massive problem, but it's certainly they'll be managing them customer by customer.

The big unknown, Jim, is really how much CapEx they'll be willing to spend in the Q4 and at what rate. Even if they cut loose CapEx late in the quarter, as we saw in Q3, some of those installations aren't then completed until the following quarter, which delays revenue recognition on many of them. So there can be a timing issue on their capital spend. In normal times, they try to a lot of them would try to spend their capital up in the Q4 and get it done as early as possible for planning. Right now what we're seeing is a bit of trepidation, a bit of slowness in issuing POs.

I expect this quarter to certainly be up and but not quite if I had to guess, Jim, not quite in line with historical norms. But there is some upside for us versus our midpoint. But given that Q3, there was some slippage at the end of the quarter into the following quarter, I just don't want us to get out ahead of ourselves. So that's why you'd see a little bit of a wider range and a little bit more modesty, if you will, on the growth rate in Q4. So we believe it will be up and up nicely for the quarter.

But CapEx, inventory management are just unknowns and we want to buffer for those.

: Okay.

Jeff Graves, President and CEO, 3D Systems: That makes sense?

: It's helpful. And maybe we could just turn to gross margins because the guidance for the year, I guess 38%, 40%, Again, a little surprising given that your 9 month gross margin was 39.5%. Is this all a case of unfavorable absorption if the Q4 revenues come in at the low end of your implied guidance?

Jeff Graves, President and CEO, 3D Systems: Yes, there's 2 factors, Jim. One of them is that, one of them is factory absorption. The other one really is mix because and I'm keeping my fingers crossed here, we should see an uptick in printer sales and that's good for the long term from a materials utilization standpoint. I'm a little concerned that customers will be managing inventory on materials and it's an unknown. So you could see a mix effect and you certainly will still see a factory utilization effect.

So I'd say there's 2 factors in that. And both of them lead to a little modesty on the gross margin for the quarter. Nicely, the in sourcing work we've done, I think it will pay real dividends for us from a printer manufacturing standpoint as volumes rise again, hopefully in 2025. But for right now, it's any uptick in printer sales in Q4 would be a drag on gross margins.

: Got it. Thank you.

Jeff Graves, President and CEO, 3D Systems: Thanks, Jim. Have a good Thanksgiving.

Conference Operator: Thank you. Next (LON:NXT) question is coming from Greg Palm from Craig Hallum. Your line is now live.

Jeff Graves, President and CEO, 3D Systems: Good morning, Greg. Yes,

Jeff Creech, EVP and CFO, 3D Systems: thanks. Hey, guys. This is Danny Eggerich on for Greg today. Thanks for taking

Jeff Graves, President and CEO, 3D Systems: my questions. Hey, Danny. Sure.

Jeff Creech, EVP and CFO, 3D Systems: I know you kind of said you're not going to touch on 25 yet, but just thinking about maybe profitability, I know in the release maybe some commentary was like trajectory towards profitability in quarters ahead. Are we thinking about it as something that can be a 'twenty five event? Or is it just kind of too early to tell how should we be thinking about breakeven and what's been the profitability?

Jeff Graves, President and CEO, 3D Systems: Yes, Danny, it's the art of prediction. So I'm very encouraged by the number of new applications customers are talking about. If they put real capital behind that, we could see a nice lift in revenues in 2025. It's a question of how quickly will they spend the money for it. I nicely I have no doubt these applications are things they really want to put in their factories.

That's a good thing. It's a timing issue. So we're hopeful revenues will be rising in 2025, which will be helpful. Factory utilizations then improve. The inventory reduction plan we have will be great for cash.

So those are all positive factors. And we have I'll be candid with you. We have real opportunities for cost management, which I think will really help in 2025. So I can't give you a number, but I think you'll see significant movement in 2025. If those things come to pass, you'll see significant movement in 2025 toward profitability.

And hopefully, at some point during the year, you'd see a swing to positive EBITDA and growth from there. So it's just too early to tell and we won't put out guidance until we get to our 4th quarter results. But I'm encouraged by the trends and we'll see if they continue.

Jeff Creech, EVP and CFO, 3D Systems: Yes, that makes total sense. Maybe if we can just touch on that AIG (NYSE:AIG), the Application Innovation Group, sounds like it was really strong in the quarter. Just maybe trying to size up that opportunity, maybe where contribution currently is and when the cycle eventually turns, how should we be thinking about that opportunity moving forward?

Jeff Graves, President and CEO, 3D Systems: And Danny, I would tell you that the revenue we generate from AIG, so these are obviously their applications customers are paying for us to develop with them. So there is a revenue stream there. The important thing about that is the trend of the revenue stream. So if it's growing, it's not it may not be a material we actually it may not be a material number on the overall P and L, but if it's growing, then customers are demanding more and more of our time to develop new applications. And we're picking and choosing those very carefully to make sure they're the highest volume, highest value components that we can help them develop for their factories.

So I would tell you the magnitude of revenue is not really important. It's the direction that is headed in that 26% I think we've quoted a 26% rise is fabulous. I mean our guys are swamped and we have 80 plus applications here. It's the biggest I believe it's the biggest in the industry and certainly I'm very proud of them. I think they're the best in the industry.

And these new applications they're working on are tremendous. The amount of interest we have related to semiconductors broadly and data centers and things, all driven by I believe this overall AI investment in the use of AI. That I think is going to be a nice way for us and for anybody in this industry that's positioned for primarily in the metal side of the business. I think the ability to print basically heat sinks, heat conduction capabilities are very, very positive. So you could see some large applications flowing through in the future for those.

And that goes all the way down to semiconductor equipment manufacturing. We can consolidate the number of parts of the machine. These are extremely expensive machines, as you might know. We can consolidate number of parts. We can make them higher performing parts, all by 3 d printing them.

And so we've got all of the major semiconductor equipment manufacturers working with us. We have people that are using GPUs and data centers working with us. In fact, at Formnext, I wish I'd put this on a slide, you would have seen a copper heat sink that was incredibly interesting. It's out on the website, I believe, but it was designed using AI, quite frankly, and it can conduct heat away 3x more efficiently than any other high purity copper heat sink in the world. And so we're tremendously excited about markets like that because they're very valuable, high payoff components, which will help the whole supply chain.

So I quoted the AIG rise not because it's material impactful on the P and L, but because the trend is really positive in terms of customer interest in 3 d printing. So can't really help you from a timing standpoint on revenue specifically, but the trend is very positive.

Jeff Creech, EVP and CFO, 3D Systems: Okay. That's great. Appreciate the color.

Jeff Graves, President and CEO, 3D Systems: Okay. Stay warm, Danny. Have a good Thanksgiving.

Conference Operator: Thank you. Our next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.

Troy Jensen, Analyst, Cantor Fitzgerald: Hey, gentlemen. Thanks for taking my questions here. I guess, Jeff, one thing I picked up in Formnext that I thought was kind of new was a lot of positive talk about OCTAN. You did mention it in your kind of pre remarks, but can you just kind of talk, give us an update on software in general on 3DxBriden?

Jeff Graves, President and CEO, 3D Systems: Yes, sure, Troy. And thanks for the call and thanks for the interest at Formdex too. Yes, you asked about 2 things there, and I'd throw in a third. So our 3 d Sprint software, which drives our polymer machines and 3dXpert on the metal side, tremendously valuable tools for people that want to apply 3 d printing. And what we've done now with Okton is basically integrate 3dXpert into the Okton workflow.

And we've really targeted and focused Okton on the high reliability markets like oil and gas, we're doing with Baker Hughes and others. But that software platform, Troy, will allow us to monitor the entire workflow, not us, but customers that likes the entire workflow from raw materials to finished part. And what we're seeing in the Baker Hughes production lines right now is a tremendous improvement in the productivity and quality of parts they can get out. The real time monitoring, the feedback control, the traceability required. So it impacts everything from setup time to the time a part is produced and it gives you full traceability of the part when it's finished.

So you make we're making 3 d printing a true production process with this. Interesting feedback from Baker Hughes as also a customer of the software was this industry is now starting to really think about how to use 3 d printing in production, whereas before it mainly went into laboratories for prototyping and even demo parts. Now it's being used in the factory floor. Those requirements are so different and so much more rigorous in terms of monitoring the job, monitoring the actual production of the parts. So I'm really pleased with Oktund's progress.

I think we'll demo it very nicely with Baker Hughes and then we're rolling it out broadly to other primarily industrial applications that have to make high reliability parts. So energy, aero, certainly the medical markets, anybody that has to make a high reliability parts at high productivity.

Troy Jensen, Analyst, Cantor Fitzgerald: Okay. How about 2 other questions here? Did you have a 10% customer in the quarter?

Jeff Graves, President and CEO, 3D Systems: We do. Jeff, I have to yes, I'm sure I don't have the number in front of me, Troy, but it would be in our Q, I believe, Jeff, right. So it's in our Q and certainly it will be related to dental, Troy, as it has been historically true. So that relationship remains very strong. The indirect printing aligners is a great way to make them and we continue to be a key supplier in that market.

So yes, I mean, that and I don't have a number Troy, but it's in the queue and we can certainly get back to you.

Troy Jensen, Analyst, Cantor Fitzgerald: Yes. I'm just glad to hear they're back. But, and then just last question, regenerative business, can you just talk about when you expect to hit the next milestones?

Jeff Graves, President and CEO, 3D Systems: Yes, Troy, I think we'll see some additional milestones in 2025. I wish we could talk more about it. Both the precision and the speed at which we can print extremely fine structure now is amazing. We have multiple paths to the design of those printers for production applications for organs in the human body, specifically lungs. So I am really pleased with progress on the technology and the implementation of that for lung manufacturing.

So you can expect to we'll be talking about milestones in 2025 that we're hitting and I continue to believe we're on track to be in a position to get to human demonstration on a reasonable timeline. United Therapeutics (NASDAQ:UTHR), our partner in this, we'll have to speak to that milestone. But in terms of the printing technology and things and the materials that go with it, extremely pleased with progress. And Troy, just one more advertisement for that. It's really cool applications that are going to bring a lot of benefit to humanity.

It's also generating some great technology that we can transition into our industrial printers. For example, the PSLA with this high precision projection system over VAT, that's a direct outgrowth of our work on regenerative. So if you take a hardened projector that's used for industrial applications for workflow, it's a direct transfer and a drop in. So you'll see some real technology synergy coming out of our work on regenerative into our industrial markets.

Troy Jensen, Analyst, Cantor Fitzgerald: Awesome. All right, guys. Good luck going forward. Happy Thanksgiving.

Jeff Graves, President and CEO, 3D Systems: Thanks, Troy. Happy Thanksgiving to you too, bud.

Conference Operator: Thank you. Next question today is coming from Ananda Baruah from Loop Capital Markets. Your line is now live.

Jeff Graves, President and CEO, 3D Systems: Good morning, Yolanda.

Ananda Baruah, Analyst, Loop Capital Markets: Good morning. Good morning. Yes, thanks for taking the question. Happy Thanksgiving. Yes, I appreciate you guys taking the question here.

I guess a couple if I could. The first is on just sort of the core healthcare business and industrial solutions. Sort of taking it backwards, sort of the softer sellout notwithstanding, you guys do seem like the last three quarters, you kind of baselined at this high 50s, low 60s run rate. And in healthcare, you've picked up both because of the dental business and then also here's kind of a question, is there anything in personalized healthcare as distinct from dental that we should be aware of? And so really with that as a backdrop and sort of the supplies business continuing to grow, what does the baseline business look like into 'twenty five understanding, Jeff, you're not giving guidance yet, but if industrial solutions is baseline right now and if you're seeing a pickup in healthcare and if you're also seeing a pickup, the ongoing growth in supplies, what does that say structurally about going into 25?

Jeff Graves, President and CEO, 3D Systems: Yes. So on that, I'll start with the last point and on the yes, all of that would lead you to say look 25 should be a better year. As long as I think the whole world feels a bit snake bit. As long as the geopolitical climate calms down and the economies continue moving in the direction they are, the unknown is that we have a change in administrations in not only in the U. S.

But potentially other countries and these wars tend to flare up periodically. So, all of that said, which are unknowns, the trends are moving in the right direction in terms of both printer platform sales and consumable sales over the future. So hopefully we'll be sitting here when we announce Q4 results, we'll talk about a stronger 25. And also I think we've got some real cost opportunities quite frankly. So we've made we've been consistent in our investments in R and D.

Those are paying dividends now and we've got some flexibility going into 'twenty five to really manage our cost structure in a more optimum way. So I think there's some real opportunities within the four walls and then also in the external environment. In terms of healthcare, Bernard, it's a great business. The orthopedic business, as I call it, the work we do for surgical planning on bone repair and surgeries is terrific. We continue to gain FDA approvals for other areas of the body.

We're very strong in everything above the neck fundamentally and on the spine. We're continuing to grow throughout the body elsewhere and it's a clear strategy. We're going to expand those applications below the neck just as quickly as we can develop them because all the same basic tools apply. So I expect to continue to see growth. There may be noise quarter to quarter, but continue to see growth in that business and it's a very good business, very hard for others to get into unless it takes time.

So I think that's a great business. The dental business, we've got a good foundation with indirect aligners. And I think you'll see a lot of new products hit the market. And I mentioned dentures on the call, great business. I think 3 d printing is a natural for those and we have a great offering.

So I'm excited about 25 for dentures, funny as that sounds. And then you've got other dental applications, night guards and others. So I love the healthcare business. It continues to be a core focus of the company. On the industrial side, these high reliability markets, we're swamped with interest on new applications from customers.

And I would hope 25 would see them start spending some real capital money in those directions because the payoff is clear. So and that gets back to the world economy and their factory utilization. So hopefully in all of that I answered your questions. If I can clarify anything, I'm happy to do it, Ananda.

Ananda Baruah, Analyst, Loop Capital Markets: No, that's really great. And just a quick follow-up on tariffs. Anything to be aware of in the tariffs that have been announced so far or supposed to

Jeff Graves, President and CEO, 3D Systems: be announced? Yes. It's Ananda, yes, it's very interesting and this is all public. If you look at the tariffs that have been talked about and particularly with respect to China, the Chinese metal printing companies have sprung up over the years. And I think aimed toward Chinese markets and others, they're increasingly looking to export those products into the U.

S. And a lot of the U. S. Applications are defense oriented. So I think both the tariff situation and the focus on defense will help us as a U.

S. Company. I think that's a it's a great thing, because the influx of those printers and I've shared this information, it's all publicly available, has been high. And I would hope as on shoring and supply chain shortening effects take hold. If we do have see tariffs coming in and certainly the growth in defense and aerospace, those are all positives for us as a U.

S. Company.

Ananda Baruah, Analyst, Loop Capital Markets: Super helpful. Thanks a lot. Have a great holiday you guys.

Jeff Graves, President and CEO, 3D Systems: Thanks, Ananda. You have a great Thanksgiving as well.

Conference Operator: Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.

Brian Drab, Analyst, William Blair: Good morning. Tyler here filling in for Brian. It was great color on the data center equipment. It sounds like additive would be great for the cold plates that go on GPUs and the other data center infrastructure. But I only have two questions today.

First, what are your plans for convertible debt coming due in 2026? And then second, you mentioned a target of mid-40s gross margin. What revenue rate would need to be to support those levels assuming that on historically similar revenue levels going forward, you'd probably do higher margin just driven by the in sourcing efforts. If you could just elaborate on that situation. Appreciate the time and happy Thanksgiving.

Jeff Graves, President and CEO, 3D Systems: Thanks so much for the question and a happy Thanksgiving to you as well. So you touched on the key points. It's the factory basically our gross margins, if you look at COGS, our factory that's going to be a direct outgrowth of factory volumes and the increased benefit from in sourcing. So it's clearly as volumes rise, it's a good thing for factory utilization rates. And the other benefit that brings us is a lower propensity to write down inventory.

We absorbed the reality is, we absorbed a lot of inventory when we in sourced manufacturing aggressively over the last

Jeff Creech, EVP and CFO, 3D Systems: 2 years. And I would tell you

Jeff Graves, President and CEO, 3D Systems: for everybody who listen on this, aggressively over the last 2 years. And I would tell you for everybody who listen on this call, I think it's a tremendous move for a low volume, high mix company like ours in this industry, taking full control over your product from the taking full control over your product from the start of design to the time you ship an assault to a customer is critically important in controlling the pace of new product introduction and the quality of the product you ship. I firmly believe that. So we spend great effort in sourcing. And unfortunately, with that, we had to absorb a lot of inventory from our contract manufacturing partners that they had purchased.

And we're working that inventory down. We'll bring it down 20% this year. For a starting point, we'll continue to do that. Unfortunately, if volumes stay low in the plant, you're more exposed to inventory write offs due to just aging of the parts. They don't go bad, but they age out according to your policy.

So we had some headwinds on the last few quarters from that. Hopefully as volumes pick up that effect that kind of over the top effect will go away and you'll see improvements in factory utilization. So both those will really help gross margin significantly. And then on top of that, we're rolling out new materials all the time. So new consumables, we're also really driving services because the customers that have factories want great service.

So the increase in services revenue, the increase in materials revenue will all support higher gross margins. So fundamentally, those are the levers. And I have no doubt we can get some mid-40s. That's our near term goal. We have a long term goal of getting over 50, which given the growth in metals in the world right now and the relatively lower materials pull through on metals, that's a challenge.

And but we're getting there, we're headed that direction. And I have confidence over the long term, we will get there. And then eventually metals, some of the metal materials will probably evolve to match 3 d printing as well. But for now, there's not a lot of materials pull through from our standpoint on the metal side. So it is a drag on the overall gross margin.

But we're getting there, it's improving and I'm thrilled to have both metals and polymers in our portfolio. Some of the most exciting applications we're seeing on the industrial side are hardcore metal applications with difficult materials like copper, which are hard to print. So long winded way of saying those are the elements that get us to mid-40s and then up to 50%, which is our ultimate goal.

Brian Drab, Analyst, William Blair: Thank you, Jeff. That's great color. I just wanted to follow-up. Do you have on the plans for the convertible debt coming due in 2026, just any color you provide there? Thank you.

Jeff Graves, President and CEO, 3D Systems: Yes. It's certainly a work in progress, I would tell you right now. I mean, that's been a lovely debt instrument for us. We obviously went to market at a great time and it's a zero coupon piece of paper. It's been terrific for us.

It will come due at some point. We got to deal with that. And so we're looking at how do we do that with the most traditional methods we can. Okay. So we're looking at how we can really reduce that debt.

I'm not in a position to talk about it today, but clearly we want to deal with it as early as possible and not get into get toward maturity dates. So you'll hear a lot more about that in 2025. Okay?

Brian Drab, Analyst, William Blair: All right. Sounds good. Looking forward to 2025 for you guys and have a happy Thanksgiving again.

Jeff Graves, President and CEO, 3D Systems: Thank you. And happy Thanksgiving to you and Brian as well. Okay?

Conference Operator: Thank you. Next question is coming from Jacob Stefan from Lake Street Capital Markets. Your line is now live.

Jacob Stefan, Analyst, Lake Street Capital Markets: Hey, good morning guys. Thanks for taking my questions. Just curious on the healthcare business, obviously nice to see that return to growth this quarter. But maybe just kind of give us a sense on the order patterns now that we're kind of 2 thirds of the way through Q4. I mean do you feel like kind of the revenue level where you guys were at in Q3 here is a good I guess a place to build off of or do you expect stability

Jeff Graves, President and CEO, 3D Systems: Yes. So first, good morning, Jacob, and happy Thanksgiving to you coming up. Thanks for calling today. Yes, I think that this is the foundation to build from. It's a healthcare is on the orthopedic side of our business, the healthcare business, it's a good steady business.

And the nice thing for us, we're doing 2 things to grow that business. Number 1 is developing more applications below the neck, for the skeleton below the neck and it's really a great business. It continues to grow nicely steadily over time. We work closely with the FDA to get certifications on those. It's a great business.

We are moving with our partners, our channel partners into the trauma field in that, which I'm really excited about. Obviously, it's tragic when someone comes to an emergency physician with trauma into the skeleton and our technology can apply there. It challenges us on speed because those people need very fast treatment, but it's a lovely growth area for our business. So I like that. And we've been stronger in the U.

S. Than Europe on in that personalized health service. So Europe remains a strong focus as well and in fact some other parts of the world. But so I look at all those growth vectors. I like the foundation of the business today, it's a terrific business, strong brand, very happy.

I see it growing from here. The dental business, obviously a little bit more volatile. We've been very primary in indirect printing of aligners and we're diversifying that portfolio now as we move into dentures and elsewhere. So a little bit more volatility as those markets rise and fall, but the diversification of the portfolio will really help in dental over time and you'll see that over the next 2 years. So again, expect quarter to quarter noise like any business, But by and large that healthcare business in total is going to continue to grow for us and we're thrilled with it.

It's a terrific business to be in.

Jacob Stefan, Analyst, Lake Street Capital Markets: Got it. And then maybe just kind of on the, I guess, in sourcing initiative requiring more inventory to be repurchased back from your contract manufacturers. I'm just curious, I guess, what percentage of that kind of inventory surplus was repurchased from the contract manufacturers and

Jeff Graves, President and CEO, 3D Systems: maybe any kind of Oh gosh. Yes, Jacob. We had to buy and I don't have a real number for you, but we had to buy, I think, Jeff, well over $100,000,000 of inventory we had to bring back in house. I wasn't I'll be frank with you, Jacob, I was not pleased and I'm not blaming them. We were a small customer to these very large contract manufacturers.

I was not pleased with their inventory management, their supply chain management and the quality of the product they were shipping on our behalf and the speed at which you could introduce a new product. So those four things drove us to in source, okay? And we're headquartered in South Carolina, it's a lovely place to build product. We've in sourced 80%, 90% of our business now, largely in South Carolina. We do some manufacturing in Europe as well.

But as a part of that whole taking it back in, we needed to buy the good inventory that they had purchased on our behalf. So it created a small mountain, not Mount Everest, but a small mountain of inventory that we've been burning down. So we'll continue to work away at that. It's all good stuff, but the good parts, but we've just got to continue to work it down. And it's been difficult in a low sales environment that's been challenging.

So I'm proud of the 20% reduction we'll attain by the end of the year, but we've got more to go. And on the bright side, when you do it, it's a good source of cash. It frees up cash, but it has we've been able to make the investment because we had a lot of cash on the balance sheet. So we did that at a time where we could afford it. And as we work it down, we'll realize the benefit from a cash and from a gross margin standpoint on COGS.

Jacob Stefan, Analyst, Lake Street Capital Markets: Got it. Very helpful. I appreciate all the color. Happy Thanksgiving and looking forward to 25 for you guys.

Jeff Graves, President and CEO, 3D Systems: We are too. Thanks so much for calling in.

Conference Operator: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Jeff for any further or closing comments.

Jeff Graves, President and CEO, 3D Systems: Hey, Kevin, first of all, I want to wish you a very happy Thanksgiving as well. You've been terrific at moderating our calls for many, many quarters now. So thank you for that. And for everybody else that's tuned in, I want to thank you all for joining our call today. For those in the U.

S, I wish you all a happy and safe Thanksgiving holiday with your families. For those outside of the U. S, I wish you a very happy holiday season coming up. We'll look forward to talking to you again at least in the New Year.

Conference Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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