3D Systems Corp. (NYSE:DDD)
Stifel 2017 Technology, Internet & Media Conference
June 06, 2017 04:15 PM ET
Vyomesh Joshi – President and CEO
Patrick Newton – Stifel, Nicolaus & Company, Inc.
We will be starting here. Thank you for joining us. My name is Patrick Newton, the Applied Technologies Analyst here at Stifel. Thank you for joining us at the 2017 Technology, Internet & Media Conference. It’s my pleasure to introduce 3D Systems, where we’re joined by the Company’s Chief Executive Officer, Vyomesh Joshi, who is VJ for short, thank goodness. And also in the crowd, we’ve John McMullen, the Company’s Chief Financial Officer and Stacey Witten, the Head of IR. We are [indiscernible] rated on shares of 3D System upon a combination of valuation execution risk that we see and move into production solution. And we see an overall [indiscernible] kind of growth environment for 3D printing today. That being said, we want to give all the credit to VJ and his team for bringing experience to the Company, cleaning up the business model and putting the Company on solid operational footing, that we think could lead to the next leg of growth overall. So without further ado, VJ floor is yours and we will go through the presentation and move to Q&A.
Thank you. Can you hear me all okay? Great. All right. So I’m — what I want do is I want to talk about the market as we see it and how we can really grow the Company profitably. So, let me see — are they moving? Okay. I think let me go back, all right. So what I — in last 14 months have done is really understanding of the portfolio that we have and the business model that I believe long-term, which is annuity based business model that I can set it up.
The way I think about our ecosystem is start through the customer in the middle, and the three key segments that I believe the automotive and aerospace, healthcare and industrial are the three really the segments that we absolutely believe that we have a tremendous opportunity.
The other important part from the business model point of view is once you install the printer, the materials, software and services, are really the annuity that we can generate. And that is so important, because in my view the most important part of the Company is materials, because especially when we shift from prototyping to production, the usage of the machines and the materials that it will generate in terms of both gross margin and the revenue growth is going to be extremely important for the Company.
The next very important part for us is the software. Software is a very profitable business for us. And as you move again from prototyping to production, software is the glue, which can go all the way from design to manufacture to inspect, because production manager would like to have a seamless flow in terms of the workflow that we need to design. And software will become a sustainable competitive advantage for our Company.
The next part is the whole transition as we move from prototyping to production. Our Service Bureau business, our on-demand parts business becomes a very important asset, because customers are coming to us and saying okay, show me, prove me that this is a production process. Make 10 parts, 100 parts, 1000 parts, let’s make sure that we can characterize the process, so we can hold their hands and transition the company from prototyping to production. So that parts business is also very strategic for us.
It’s about material, software, and parts and the services, because once it is in production, the uptime is going to be the way they’re going to measure whether it would be 3D production capability is production ready or not. So having that uptime, anyway my view is I look at the semiconductor manufacturing company. When you think about a semiconductor manufacturing company, 20% of — to 25% of the revenue comes from services. If you’re really into the production, the services could become very important annuity stream just like materials and software.
The other aspect of our ecosystem is partnership, because we can do everything on our own. We want to really rise the shoulders of [indiscernible]. So we had announced relationship with PTC because again what we want to do is make sure that replaying the whole ecosystem should have big market. And what we need to do is focus on where we can make a contribution and partner for the rest.
Now when I joined the Company, it was very clear to me that I need to focus on the portfolio where we can take it to production. So SLS, SLA, metals, are the three technologies I fundamentally believe are really production kind of a ready technologies. The usage that we get — the Company had never paid attention to that and these technology is way higher than consumer or desktop products. So we need to really think about the usage, and the material aspects of our business, because I say that’s the annuity scheme that we want to build.
The last part is the execution. When I joined the Company, our quality, reliability, we had issues. We were not really the execution engine. So I hired nine Managers and Leaders that I knew that — who could really help the Company to take into the execution. So we have 5 leaders who are from 3D Systems on my staff and 9 from outside and total 15 of us that we can really augment that leadership team in making that transition that I’m talking about. So these supply chain, CFO, Marketing Manager, Region Managers, so for example Doug, Reinhard, John, Chris, Jim, Eric, our IT Manager also and they all — the managers I worked with head HP. So I know that — they really built with me a multibillion dollar business for Hewlett Packard. I think that’s the team that we can take into the execution, because my belief in the technology portfolio is there, it’s all about now execution.
So the operating framework that I have in mind is really the first parties of our structure, because if we do the right execution, the way I think about the past is revenue minus operating profit. And we’ve big opportunity in cost of sales. My view is working with the suppliers, looking at the supply chain, we can take tremendous cost out from the Company and invest that into innovation and go-to-market, because the operating model that I’m building basically is saying the businesses will create the product portfolio and the regions will take into the market especially in the countries where we’ve tremendous opportunity like China, Japan, even Europe where we didn’t pay any attention. If you look at our Q1 growth, Europe is coming back. So my view was taking that cost out, investing into innovation, investing into the go-to-market is extremely important.
IT, because we never had any processes. Most of the processes were manual. My view is standardizing in automating and investing into IT is also very important. So 2017 is the year that I believe we will stabilize the business and give the guidance of 2% to 8% revenue growth and 10% to 20% EPS growth. So Q1, we’re on that path and we both are very confident that we will be able to achieve that kind of a financials for 2017.
The other important part is innovation. My view is the whole, this market, this will shift from prototyping to production. So let me define what I mean by production. What are the core customer need for production. There are four customer deals. Productivity: that means talking about million parts a year, not thousand parts a year. We need to have a capability where we will be able to do million parts a year.
The second part is the part that we produce needs to be functional. It can really have durability and repeatability that you will not be able to pass that test unless it is production ready. So the part quality and durability and repeatability is a second important part.
The third very important part is total cost of operation, because you’re not comparing against another 3D printing technology, you’re talking about conventional technology that you can’t do some complex parts or custom parts, but the cost structure needs to be right. So the total cost of operations including the capital cost, the footprint, how many operators you need, all those calculation need to be such that our customers will basically say its production ready, and it is the right cost structure.
As a matter of fact, when we shipped our first industrial figure for unit, the conversation that I had with the customer was saying, can we really do this part at a cost which is very similar to a conventional molding process. This is going to be extremely important to really shift from prototyping to production. So innovation, having a technology, with which we can do functional parts and a right total cost of operation is going to be the key to shifting from prototyping to production.
Now what I have done here is look at all our technology and talked about the key competitor and then show total cost of operations and throughput differences, and really creating that value proposition all the way from our color jet printing to SLS to SLA. I have put the right kind of a competition and look at the value proposition. So when you think about a MultiJet printing against our competitor, we have lower cost of operation and faster throughput.
If you look at our SLS machine against competition, people are talking about the competition saying, oh, they’re going to change the industry, but we do really talk about what’s the total cost of operation and making sure that we have a versatile product having multiple materials that could be used on our products. So, I think people will always talk about just hey I’m 2x faster, but they don’t really talk about the part durability, repeatability and total cost of operation. Total cost of operation is a single figure of merit where I think production manager will be able to really say this is the right technology on that.
Let me talk about Figure 4, because my view this is a revolutionary technology with which we will shift to production for small parts. So the first thing is it’s modular. That means that you could have one engine, a print engine, two print engines, like this one has 16 print engine modular 4 and you do post-processing in line. So you don’t need a batch processing. Most of the competing technologies are batch processing that you bring for 10 hours and you cool it down for 4 to 10 hours.
My view, that will not really be a production ready technology. I think because it will become a critical station or you would add multiple station if you want to really do million parts. My view is, you need to be able to print, have a robotics which can take into the post-processing station and then the end part comes. That’s the only way you could have a footprint, the number of operators you need and the capital to really match the conventional printing, or the conventional manufacturing process.
The other important part of Figure 4 is depending on how many parts you need to build? As I said, you could have multiple engines. Also you could have material delivery system depending on how many parts you’re doing. You could have a model if you are doing a dental lab, because the number of crowns that you’re going to make are fewer versus if you’re doing million parts where you may need gallons of drum — so the drum kind of based material delivery system.
So the beautiful thing about this platform is you could pick how many engines you want, what kind of material delivery system you want, do you want automation, you want a manual product, all these things are designed as a platform so you could pick and chose the configuration that you want depending on the customer need. So I’m showing here that is a 1 engine to 2 to 4 to 8 to 16, you could add 20 engines and one controller to run the production line. So depending on the volume and depending on the use case, you will be able to configure the Figure 4 production system.
Total cost of operation, because I think this is important as I said earlier. Since you’re comparing with any competitive technology, I’m comparing this part that was done on an SLA machine and Figure 4. So the comparison that I’m doing is if you want to do million parts a year, you will need 225, our own SLA machines versus one 16 engine Figure 4. That is 225 times faster, okay. The footprint, because if you have 225 engines in a room it will be a big room. So if you look at the floor space 26x bigger floor space you need, if you put 225 engines versus single Figure 4.
So this is the calculation every production manager will do. What’s the capital? How many operators I need to run the machine? What’s the total cost if I do this part on SLA machine versus on Figure 4? And what we’re saying it will be one third the cost. Now we can do million parts and the cost comparison with a traditional conventional manufacturing is in the ballpark that things will shift to production. So every technology should be really evaluated in this kind of a figure of merit. Unless you do that saying, hey it is 10x faster, doesn’t mean a thing, because if the post-processing is slow or if the footprint is much, much bigger, you’re not going to get to that kind of a total cost of operation.
The other thing that I want to talk about in metals, already customers are doing production. In plastics, that’s what the Figure 4 technology. In metals, our 320 and our software — again, here the important part is a software, because right now you have to buy multiple software to do design, to do actual production and then post-processing. Three Expert is the software where you don’t need multiple software packages. One package can actually do the whole thing.
The other important part for metals is a two key verticals, healthcare and aerospace. In healthcare, we built a complete workflow engine. Actually we are number one in healthcare. When a medical device manufacturer is looking for — they’re not looking for other metal printers. They’re saying who is going to really provide a complete workflow from design to simulation to manufacture the part in FDA control environment. That’s what we are looking at and that’s why our penetration of our metal printers and solution in medical devices is much bigger. After even in Q1, we grew our healthcare business 29%.
So metals for healthcare, 3D Systems have a fundamental competitive advantage compared to any other Company, because they don’t have that healthcare vertical market focus capability and box manufacturing, which is FDA approved process. So again our strategy, our focus is shifting and making three production real. It’s all about as I said, productivity, repeatability, durability of the part and the total cost of operation. In understanding that workflow, understanding and then having that software capability, the materials capability and the production capability is the only way things will move from — and I think you all understand that why the additive manufacturing makes sense.
It’s when you do custom parts and then you do complex part, when you’ve cost into the [indiscernible] production, or things that you will not be able to do with the traditional processes. And both from economics point of view and from the design point of view, the value proposition is to be there. There is no way we’re going to reply this molding machine, because in certain applications molding is fine. And you don’t need to really have a additive manufacturing. Additive manufacturing only works when there is a clear value proposition against the conventional process, but it has to the right cost structure.
Let’s talk about healthcare. So as I said in healthcare, we absolutely are the leaders and we’re going to continue to grow this business. My view is I can simply define this custom parts point of view. So that’s 7 billion people 206 bones right. So that’s 1.4 trillion custom parts opportunity. That’s the biggest custom parts opportunity and that’s how I think about it. And once you think about that way, now I’m [indiscernible] not going to get 1.4 trillion parts, but just even 1% could be a huge opportunity that you can think about. And that’s the reason, because it has to be custom. You can’t really — we are all are different, and just an example of dentistry.
But let me — oh sorry, let me just talk a little bit about the healthcare part. So as I said, we already do half a million medical devices. Already they’re printing unless we understand what it will take to do that. We also have bought ISO and FDA approved processes. As I said earlier, medical device company is not just going to buy another metal printer and qualify. You got to have the right kind of an environment in making that happen.
So let’s talk about dentistry, because I really believe this is a huge — it’s a $3.7 billion market. And if I just use the same analogy 7 [indiscernible] 210 million custom parts. That’s a big number right and you think about if you want to do a clown, the current process is milling. So you start with a big puck [ph] and then you mill out a crown. With additive, only you need 2 grams of material. And you could do 32 crowns with a single engine of Figure 4 versus one crown per milling machine.
So from productivity point of view, total cost of operation point of view, ease of use point of view, tremendous contribution. So next year, when we have a dental lab using Figure 4, and the material company that we acquired was very strategic. NextDent is a company that we acquired. NextDent has 12 materials that you could do 12 indication. You could do crown, you could do dentures. Think about dentures. Right now dentures is a manual process. Once you would make it into a digital processes, you do the pink part separate, the teeth part separate, put them together in an oven, and now you’ve got a denture, which is accurate. You don’t have to worry about the accuracy. We believe we’re going to have a great materials and hardware combination and a software combination with which we will be able to make tremendous contributions in dental market.
So on Figure 4, I’m very excited about dental market. I’m also excited about the parts business. You don’t need a molding. So in healthcare especially in dental, we believe, there is a tremendous growth opportunity for our Company, because of the materials, NextDent is the only company which has materials approved from FDA point of view in 70 countries. No other — it was started as a dental materials company and gliding [ph] to 3D printing rather a 3D printing materials company to figure out how to do dental. That’s the big distinction in my mind. And — so you could have a chair side kind of a product, you could have a lab product or for a company, which is doing million crowns a year, you could sell a 16 engine kind of a product. That’s the beauty of Figure 4, that I was talking about. Having that material, which has already got the FDA approval and going into this market is going to be a very big opportunity for us.
Automotive. I think that whole business started with a prototyping. My view now you will be able to do million parts a year, and the market really changes. So we think that all the work because that I talked about, healthcare, automotive, aerospace which is next, we have a tremendous opportunity to shift from prototyping to production. And as I said, the newly stream that we can generate in software, in materials, and services will really built the right kind of a profitable growth for us. I’ve also talked about the whole total cost of operations. Focusing on that, having a single figure of merit for production is very important.
Now let me shift to the financial. In Q1, we grew our revenue 3% and grew our EPS also. My view is 2% to 8% growth that I’m talking about, I’m very comfortable even without Figure 4. Let me show you the core drivers. Why I believe that. So, this is our guidance. And I’m going to show you how so we can continue to meet that guidance, and what are the core drivers for that.
So the first one is the printer growth. The printer growth in Q4 was minus 19% the revenue. It went to minus 4 and we believe it will become positive in the remaining of the year. If you look at our own demand parts business, it went from minus 16 to minus 6 is going to go on the positive side with the investments that we’ve made. Materials grew 11% in Q1. We absolutely believe with all the install base that we’re putting now for a production. We will be able to continue to grow our material stabilize it is.
Software was flat. We think we can take it to the positive. Again, having that focus, we absolutely believe that we could be — it will 2% to 8% of the growth and the revenue. From margin point of view, because more and more materials will become as part of the total revenue. And we’re taking cost out from our cost of sales point of view, I absolutely believe that we can maintain or improve our own gross margin in the rest of the year. So with all that, I absolutely believe that we can get to the 228% revenue growth and 10% to 20% EPS growth.
And if you can do 8% of revenue growth, I was pretty good. Then, the most important part I want to say, is we can have a double-digit growth in 2018. This is without Figure 4. And if you include Figure 4, in ’18, we can accelerate that. That’s why we’re very confident and you could see I didn’t fall. So we absolutely believe that this Company is now stabilized. We are taking the past out, and we are on the profitable growth that I talked about. Thank you for your time. Questions?
Q – Unidentified Analyst
Regarding your materials business, can you just scale on that. [Indiscernible] margin business. In metals though, isn’t the metal non-proprietary [indiscernible] general from …?
So I think you’re right. Metals is different than on the plastics. And plastics I’m very, very confident that the materials that we have are very much proprietary and we absolutely can scale that, and then we can enjoy the gross margin for long time. I don’t believe open materials make sense when you’re in production. You want a second source, but if you just put a open materials, who is going to be responsible for the part quality and durability, because the materials will play a very important role.
In metals, I think we’re going to think about partnership, because my opinion is that that’s a very different field. You need much more in terms of the metallurgy you need and the nick [ph] characterization. So my view is we’re going to partner, we’re going to work on software, because characterizing the hardware, the materials and software is also very important. I still believe that we will be able to create a different way of value proposition even on materials in metals, which it needs to be a partnership approach.
And with that, we’re actually out of time. VJ, thank you very much for your time.
Just one question? Okay, all right.
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