Q3 2021 3D Systems Corp Earnings Call
[music].
Hello, and welcome to the <unk> systems Conference call and audio webcast to discuss the results of the third quarter 2021. My name is Kevin and I'll facilitate the audio portion of today's interactive broadcast at this time all participants are in a listen only mode. A question and answer session will follow the formal presentation, if anyone should require operator assistance.
During the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded its now my.
Pleasure to turn the call over to John <unk>, Vice President Treasurer, and Investor Relations for <unk> systems. Please go ahead John.
Thank you Kevin Good morning, and welcome to <unk> Systems Conference call with me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jack Hardin, a ruler 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 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.
For those who have accessed the streaming portion of the webcast. Please be aware that there may be a few seconds delay and that you will not be able to pose questions via the web.
The following discussion and responses to your questions reflect management's views as of today only and will include forward looking statements as described on this slide.
Actual results may differ materially.
Additional information about factors that could potentially impact our financial results is included in last Night's press release, and our filings with the SEC, including our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q.
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 with comparable GAAP measures.
Finally, unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2020.
Now I am pleased to turn the call over to Jeff Graves, our CEO yeah.
Thanks, John and good morning, everyone.
I'll open today's call with a phrase that I am sure. Many of you were saying to yourself. This morning, as well and Thats Wow, what a difference a year makes.
At this time last year, we were seeing only the very beginning of what we all hope will be a sustained recovery from the worst of the Covid pandemic.
But at the same time here at <unk> systems, we were in the midst of executing our four phased transformation journey.
We reorganized our company into two segments healthcare and industrial solutions, we had restructured our organization to gain efficiencies and we had announced the first of our divestitures of noncore assets.
As we speak to you today a year later these first three phases are complete we are.
Now a company that is singularly focused on additive manufacturing with a lean nimble operating structure global reach and breadth of metal polymer biological technologies, that's unparalleled in the industry.
These attributes brought together through an intense focus on our customers most demanding applications.
Is proven to be a powerful driver of value creation as reflected clearly in our organic growth rates, our profitability and our operating cash performance all of which we will recap for you in a few moments.
While we're pleased with this performance even more exciting is that we're now in the fourth and final stage of our transformation, namely investing for growth.
Since last quarter, we completed the last of our divestitures retiring our debt and stockpiling over $500 million of cash on the balance sheet.
We subsequently announced two acquisitions that embody our strategic focus on growth, which is to invest in businesses that drive the adoption of additive manufacturing.
Solve customers' most complex application needs and generate high margin recurring revenue streams that are critical to sustained value creation.
The first of these acquisitions was often.
Our unique software company that has emerged as a recognized leader in the creation of a new breed of intelligence cloud based manufacturing operating system. The.
The driver for this acquisition is very simple customers across our industrial and healthcare segments are now anxious to accelerate their adoption of additive manufacturing and full scale production environments, but.
But in doing so they are facing significant challenges in how to incorporate these technologies into their existing enterprise systems to date, they relied heavily on spreadsheets and highly skilled engineers to run production applications.
This is obviously too slow too inefficient and too expensive to scale as production volumes ramp up.
While we and others have made strides in optimizing and to some extent automating the performance of single printer or even a collection of like kind of printers working in parallel our customers' challenges extend well beyond this.
What they need as a manufacturing system that can easily and intelligently incorporate a mixed fleet of printers, often from a variety of manufacturers and in addition, one that will incorporate all of the surrounding digital production systems on the shop floor, such as post print thermal or mechanical processing.
<unk> motion systems and automated inspection systems.
<unk> not only provides this linkage it goes a step further and applying cloud based AI to optimize the entire workflow.
Then links this workflow to the customer's existing enterprise software such as those provided by Salesforce Oracle Microsoft SAP.
The end result is that ought to not only links optimizes and tracks a customer's unique operational workflow at an individual component level from raw material to finished and respected parts, but it also builds in the future flexibility to substitute new printing, finishing and automation technologies that will undoubtedly be.
Introduced in the years ahead.
These attributes which are unique to the auction platform will remove a significant barrier to the large scale adoption of additive manufacturing and production environments and for that reason, we've opened the system to the entire industry, which we hope will accelerate market growth for everyone.
In addition for the first time in our history, we will now make available our full complement of market, leading metal and polymer printing software platforms to all others in the industry, which we hope will accelerate the introduction of new printing technologies to customers around the world.
<unk> as with all software platforms. The span an entire industry. We are committed to okta and continuing to operate in this model of independence with the Supreme commitment to customer data protection and competency already.
I'm happy to tell you that we closed the <unk> acquisition on November one.
And the reception by our customers and partners alike has been very positive.
Before I move to our most recent an incredibly exciting acquisition, let me step back and explain how we look at our company Holistically, which I believe is much different than others in this industry.
In the decades since three D printing was invented we and our competitors have routinely defined ourselves as hardware and material developers with our products sold broadly to customers around the world. While this is natural win any industry is young and when the product is mainly consumed in small quantities by labs or prototypes facilities.
As the industry now matures in production environments are targeted successful companies will need to adapt their entire operating model to reflect their deepening integration with specific markets and customers.
If you don't you will remains simply a vendor and not a true partner to your customers, which will ultimately be reflected in your organic growth rate and profit margins.
So with this in mind <unk> systems, beginning a year ago, we changed the way we defined ourselves by reorganizing our entire company around key markets and within those markets key vertical segments that we believe will derive the most value from their adoption of additive manufacturing.
We began with the creation of two business segments healthcare and industrial solutions.
Using a strong application focus these two businesses each integrate our printer materials and software technologies and unique combinations to solve a customer's product need.
Once complete our customers can then ask us to scale the process for them to a certain production level.
And then with increasing demand they can elect to have us enable a manufacturer of their choosing to continue scaling to high volumes.
This transfer of the workflow involves providing printing systems materials and software along with the process definition results in a seamless transfer capability to the chosen manufacturer whether it's the OEM themselves for a contract manufacturer of their choosing.
So fast forwarding to this year with the acquisition of Boston, We expanded our software capabilities into what we call broadly digital manufacturing software, which as we described earlier enables a rapid and efficient adoption of additive manufacturing in high volume production environments.
This operating model has been very well received by our customer base and we expect it to fuel exciting organic growth in the years ahead.
Most recently, we have added a strong biotech organizational focus and invested significantly to bring our emerging biological technologies to laboratory in human applications details of which we'll cover in a few moments.
So in short these are our five core market segments that Youll hear us talk about moving forward.
While each of the five will adapt to the needs of their customers. Each will also leverage our core technologies of hardware software and materials in the unique manner needed to fulfill their customer application needs.
Let me illustrate this approach using our health care business as an example.
In the mid 1990, <unk> systems pioneered medical modeling, which is the printing of highly detailed anatomical models from digital images. These models have proven instrumental and supportive complex surgical procedures.
In a highly publicized application of our modeling technology, which was beautifully documented by CNN. Dr. Sanjay Gupta, we created a number of medical models to assist in the separation of conjoined twins tjaden than an ice Mcdonald, who are born with the extremely rare cranial pegues condition in which twins are joined at the head Sherri.
Not only the skull and vasculature the portions of the brain itself.
The modeling used for the surgical planning was vital to the success of Dr. James Goodrich and his team they had in separating the twins, both of which are alive and living independently today. Many years later.
To date, our medical modeling technology has supported dozens of similarly complex operations around the world along with hundreds of others and it continues to expand each year.
Building upon this foundation and investing in point of care infrastructure that accompanied this growth we deepened our surgical support over the next decade and by 2005, we were working with surgeons to design and manufacture customized patient specific surgical guides and instruments using three D printing.
As this portion of the business in turn grew we expanded our scope. Once again. This time to include actual patient specific implants, which offered an even larger market opportunity.
Fast forwarding today, we offer the broadest range of FDA cleared capabilities for modeling surgical planning and patient specific medical implants, which inspires our customers to continue expanding their partnership with us year after year.
While we're very proud of our progress by now redefining ourselves as a health care business. In this example, and leveraging both our critical infrastructure and channel partner relationships, we can broaden our scope more aggressively to now include other parts of the human skeleton structure.
And importantly to advance these applications in parallel instead of in series as we have in the past.
This provides us the opportunity to bring benefits to a much larger patient population and at a much higher rate than ever before this is the power of redefining ourselves as a health care business and not simply a provider of printing technology to healthcare customers in the market.
Of note, our health care business grew over 28% and our most recent quarter.
And over 44% on an organic basis, which is where we disregard the businesses that we have divested.
This remarkable growth rate is a testament to our increasing momentum in this exciting market.
So building upon this discussion of our health care business.
To end my commentary for today on the remarkable emerging market of bio printing and our announcement last week of our acquisition of volumetric biotechnology.
This company under the inspired leadership of Dr. Jordan Miller bring specific expertise in biomaterials and regenerative medicine. The combined synthetic chemistry, three D printing micro fabrication and molecular imaging to direct cultured human cells to form more organized complex organizations of living.
Vessels and tissues.
<unk> systems has been a pioneer in our industry by focusing resources on regenerative medicine. Since 2017, when we began a joint development program with United Therapeutics Corporation to develop the capability to print scaffolds for human lungs, using a process we call printer profusion.
Once developed this bio printing technology can be applied to other major organs in the human body.
As well as a wide range of other human and laboratory applications.
We've made significant strides in this unique technology and as a result, we recently announced an expansion of our development program with United Therapeutics and expansion that includes increased funding and an extension to two additional Oregon's This program.
Expansion reflects the progress that our joint team has made in this groundbreaking endeavor.
By acquiring volumetric, we're adding critical skill sets to our <unk> systems team, which we feel are a perfect complement ours, bringing strong biological expertise in cellular engineering skills, along with highly creative bio printing systems to our development group.
As I realize this is an entirely new area for many that have followed our company for some time, let me quickly recap our regenerative medicine strategy and the market opportunities that we are addressing through our unique bio printing technology.
The first opportunity is the printing of human organs beginning.
Beginning with the lung and expanding from there to two additional organs.
We're pursuing this as a joint program with our partner United Therapeutics.
The ambitious goals that we've set for this program are driving quantum advances in our technology and laying the foundation for the rest of our regenerative medicine efforts.
In our second regenerative medicine market opportunity, we're taking the core unique disruptive technologies developed for the bio printing of human organs and applying it to other parts of the human body.
There are tremendous number of these applications ranging from the printing of human skin for burn victims.
Soft tissue for breast reconstruction and repair to critical blood vessel and bone replacements and many many more.
We are now forming partnerships focused on each application area, where we can combine our bio printing expertise with the appropriate application experts to provide unique and highly impactful solutions for people in need.
We refer to this second market vertical within regenerative medicine is human non Oregon bio printing.
Our last but certainly not least market opportunity is to extend our bio printing technologies into research labs, providing advanced printing systems and unique biological materials to those of the study the basic science of regenerative medicine.
And in the pharmaceutical laboratories, where the ability to print high precision three dimensional vascularized cell structures can be used for the development of new more effective drug therapies.
Our acquisition of volumetric and their unique capabilities in combination with our own will allow us to expand the pace of our efforts in all three of our regenerative medicine markets.
Amazes me to think of these revolutionary applications enabled by our three D printing technologies applications that we are uniquely positioned to deliver with our extensive history in advanced three D. Printing technologies are material expertise our application development expertise, our deep understanding of FDA and other regulatory processes and now.
Our biological and cellular engineering capabilities.
We believe that in the years to come bio printing will take its place as a very significant business for our company, bringing critical relief to patients in need of lifesaving procedures and great value to our company's employees and our shareholders alike.
Moving from our strategic growth investments to our most recent quarterly performance.
Pleased to say that we've continued to execute well on our core business.
With continuing strong demand our operational challenges have largely centered around global supply chain and logistics issues, which are unfortunately continued to plague most companies around the world.
Our solid execution in the face of these challenges in the third quarter resulted in strong double digit growth with revenues, increasing by 15% before adjusting for divestitures.
With these adjustments are made which is a much better reflection of our core business performance revenues were up over 36% versus 2020 and up over 20% versus our pre pandemic 2019 third quarter benchmark, we consider very important.
Looking at our major business segments, our industrial solutions segment is continuing its rebound seeing strong performance, particularly in jewelry automotive and transportation and general manufacturing and.
In healthcare, we see continuing strong demand for personalized health services as well as solid performance in dental.
As Jeff will discuss shortly in addition to the strong revenue performance, our EBITDA climbed by over 125%.
We generated positive cash from operations for the fourth consecutive quarter. The first time. This has happened in four years.
With our cash generation. In addition to the proceeds from divestitures, we built a sizeable cash balance by the end of Q3.
A portion of these funds will be used to fund the strategic growth initiatives I mentioned earlier, but we will still have be left with a significant amount of liquidity to pursue additional opportunities.
I'm sure it's clear to everyone I am very excited.
Not only about what we've accomplished this last year, but even more so about the future as our focus on growth in this final stage of our transformation has only just begun.
With that let me turn the call over to Jack <unk>, who will now describe our third quarter results in more detail <unk>.
Thanks, Jeff Good morning, everyone for.
For the third quarter, we reported revenue of $156 1 million, an increase of 14, 6% compared to the third quarter of 2020.
Our organic revenue growth, which excludes divestitures completed in 2020 in 2021 was 35, 9% in Q3 2021 versus Q3 2020 since the third quarter of 2020 was the beginning of the economic reopening from the Covid related shutdowns.
We think it is valuable to compare our results to Q3, 2019, which was untainted by the pandemic.
When excluding divested businesses, we are comparing on an apples to apples basis, our revenue in the third quarter 2021 was 21, 2% higher than pre pandemic Q3 2019.
As we have discussed previously with the completion of our <unk> and on demand manufacturing divestitures. In Q3 2021, we have completed our planned divestitures and are now focused on the performance growth and investment of our core additive manufacturing business.
I would like to note that our debt post divestitures, we continue to generate nearly two thirds of our revenue from our recurring revenue streams.
These high margin lines of business highlight the strength and diversity of our core business, our ability to weather various economic cycles and around which we will continue to make strategic investments.
Turning to earnings we reported GAAP net income of $2 34 per share in the third quarter of 2021 compared to a GAAP loss of 61 in the third quarter of 2020.
The year over year improvement was driven by gains in divested businesses as well as the goodwill impairment charge, we took in the third quarter of 2020.
For our non-GAAP results, we reported non-GAAP income of <unk> <unk> per share in the third quarter of 2021 compared to a non-GAAP loss of <unk> <unk> per share in the third quarter of 2020.
The year over year improvement reflects higher revenue with lower non-GAAP operating expense as.
As a result of the cost actions, we took last year.
Now I will discuss revenue by market healthcare grew 28, 3% year over year and decreased seven 8% compared to the last quarter.
The decrease was primarily a result of the divestiture of the Synbiotics medical simulation business during the quarter.
Adjusted for divestitures health care revenue increased 44, 5% year over year as a result of strong demand for dental applications in both printers and materials.
In fact, the last four quarters have seen the highest level ever ever of dental materials sales as compared to any prior four quarter period.
Our industrial segment generated revenue growth of 4% to $79 $7 million compared to the same period last year and was flat to last quarter, reflecting the divestiture of the on demand manufacturing parts business during the quarter.
Adjusted for divestitures industrial revenue increased 28, 1% year over year, and two 1% over the last quarter the.
The increase was driven by higher demand in both printers and materials in a variety of sub segments, most notably jewelry automotive and transportation and general manufacturing.
Now, we turn to gross margin, we reported gross profit margin of 41, 2% in the third quarter of 2021 compared to 43, 1% in the third quarter of 2020.
Non-GAAP gross profit margin was 41, 5% compared to 43, 2% in the same period last year.
Gross profit margin decreased primarily as a result of businesses divested in 2020 in 2021.
If we exclude the impact of those divestitures gross profit gross margins increased 80 basis points in the third quarter of 2021 compared to the same period last year, driven by 2020 cost actions and the higher revenue, which resulted in better capacity utilization.
As evidenced by our strong performance. This year demand continues to be strong for both our for our products in both business segments. The.
The biggest challenge, we face isn't unique to <unk> systems.
We are all aware of the supply chain issues that are affecting everyone from multinational corporations to small businesses to individuals on main street and.
In fact, our Q3 revenue while strong was impacted by supply limitations on certain products.
Consistent with last quarter, we continue to see a tightening of cost and availability for certain components that go into our products.
Our team is doing a heroic job as it manages through these challenges.
Supply chain and net end customer demand remains the key headwind in our business and as our strong focus as we finish out the year we.
We have taken steps to mitigate the economic impact such as adding alternative sources for key components where possible.
We have seen some cost impacts from the supply chain constraints, especially and increased freight charges.
<unk> instituted a temporary surcharge for our customers on certain types of purchases.
Effective in the fourth quarter.
Year to date, our non-GAAP gross profit margin was 42, 6% and we expect full year gross profit margins to be between 41% and 43%.
Operating expenses for the quarter were $81 5 million on a GAAP basis, a decrease of 35, 4% compared to the third quarter of 2020.
This year over year decrease reflects a goodwill goodwill impairment booked in Q3 2020.
Our non-GAAP operating expenses in the third quarter were $54 1 million.
A decrease and 8% decrease from the third quarter of the prior year.
Compared to second quarter of 2021, non-GAAP operating expenses decreased 2%, primarily driven by lower R&D spend.
Adjusted EBITDA defined as non-GAAP operating profit plus depreciation was $16 3 million or 10, 5% of revenue compared to $7 2 million or five 3% of revenue in the third quarter 2020.
Our disciplined approach to growth cost management and focus on our core business is resulting in continued strong adjusted EBITDA.
Turning to the cash flow statement and balance sheet. We are pleased to sell $502 8 million of cash on the balance sheet.
An increase of $418 $4 million since the beginning of the year.
The increase was primarily driven by proceeds from the divestitures of the on demand parts business and our medical simulation business, but supported in no small part by our extremely strong cash generation from operations.
During the quarter, we generated $27 million of cash from operations, marking the fourth straight quarter of positive cash from operations. This is the first time in four years. The company has achieved four straight quarters of positive operating cash flow and reflects a strong transformation of our business.
Now that we have demonstrated consistent profitability and cash generation and post divestiture at half a $1 billion of cash on hand, we are in a prime position to continue growing the company by taking a disciplined approach to invest in organic and inorganic solutions that will solve customer's complex needs drive.
The option of additive manufacturing and generate high margin recurring revenue streams.
We have previously announced some of those growth opportunities, namely our acquisitions of <unk>, which closed November one and volumetric biotechnologies, which is expected to close in the fourth quarter.
The cash considerations for these will total approximately $130 million, leaving roughly $370 million of cash.
Acquisitions will position the company for strong growth in our core to our strategies in both high margin software to enable the adoption of additive manufacturing as well as adoption of advanced <unk> printing technologies in the field of regenerative medicine, where we believe we will be a leader in the market.
As I conclude my remarks, I want to reflect in the past year.
I joined the company at the beginning of the third quarter of 2020.
At that time the company was just beginning its transformation.
We had just announced the results for the second quarter of 2020 that included negative negative operating cash flow of $21 million for the first half of that year cash and cash equivalents on the balance sheet of only $64 million and $22 million of debt.
Now fast forward to this year and the trends and the transformation. We've been through we have generated over $60 million of operating tax this year through the third quarter.
Ended the quarter with over $500 million of cash and cash equivalents with no debt we have.
Our 100% focused on additive manufacturing and growing strongly in our core markets.
We are able to make smart and strategic investments to support our core business and are rapidly advancing our key technologies into new segments, such as regenerative medicine.
I continue to believe that we are uniquely positioned in our industry with a strong balance sheet growth cash generation and a suite of technologies that continue to be in demand by our customers.
Finally, we wanted to provide an update at our Investor Day event, you may recall that we had scheduled an event for September 9th in the Denver, Colorado area.
Out of abundance of caution for the safety of our investors analysts and employees, we postponed the planned investor day as Covid infection Covid infection rates increased this past summer due to the Delta variant.
We are now seeing the hopeful signs of progress with once again declining infection rates rollout of booster shots and a newly announced pill that seems to offer promise of dramatically cutting the hospitalization rates from infection.
As a result, we are in the early stages of planning and the updated Investor day with an aim for the first half of 2022, we will provide an update as soon as possible and look forward to sharing our long term growth strategy in more detail with the investment community.
With that I'll turn the call back to Jeff Jeff.
Thanks J R.
Both Jack and I have covered the remarkable progress that we've made over the last year, we've created value for our investors our customers and our employees by remaking the business are.
Our growth and profitability distinguishes us in the industry and has made US a key partner for a growing number of organizations that are considering additive manufacturing.
At the same time, our transformation has also made us more exceptional in place to work to drive the future of additive manufacturing and as a result mortality individuals are becoming a part of the new <unk> systems each day.
However, as much as we've accomplished this last year, it's more about the future.
We will continue to be a valuable solutions partner with customers and deeply integrate with them as they adopt our solutions and technologies will also invest in our business and drive our solutions capabilities and the five key areas I spoke about earlier.
Im truly excited about the depth and breadth of technology, we bring to our markets and application expertise.
So with that I'll now open it up for questions Kevin.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if you'd like.
Sure. We'll take question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one.
One moment, please pull for questions.
First question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.
Hey, gentlemen, congrats on great results here.
Thanks Troy.
I guess for you.
Jeff I want to ask a few questions I did miss the volumetric skol.
I guess can you talk a little bit I got an email from John about this when you talked about the three facets for the space that you guys look at in Oregon printing non organ printing and then lab and research work.
Sure I don't want you to size them, but can you prioritize which ones bigger here as far as I guess when I think about <unk> you think about the materials are really the key secret sauce, and maybe the biopolymers are less but help me out.
What's most important.
Those are two interesting question Troy, let me talk about both of them I'll start with the second one actually the printing technology itself Troy I got to tell you it's remarkable.
We started this work back in 2017, frankly speaking thinking that it was impossible to get to the resolution required for printing a lung scaffold I mean, youre talking about micron level detail in an extremely complex structure to build the scaffold and it's a large scaffold you think of the size of a human lung.
And so the intricacy the complexity and the fine detail are really really hard and remember youre doing it with biomaterials youre doing it with materials that are the basic building blocks of your body a behemoth body materials that have rarely been printed before so all of that technology. It took us a few <unk>.
Years to really evolve that technology to the remarkable level. It is today.
That's what gave confidence to us the United Therapeutics that we can now expand that into other human organs. So I wouldn't underestimate the printer technology and to be honest with you we not only inventing it newly for bio printing, but we were leveraging some of the work we've done in photopolymer printing technologies as well along the way which was really.
Helpful and Thats, the kind of synergy technology synergy, we see going forward, which is really beneficial but from a material standpoint. These are unique materials.
And we will continue to involve unique biological materials. So part of the driver in acquiring volumetric was.
Have the biological expertise that we really needed.
They have excellent printer expertise as well, but they've approached it from the biology standpoint. So they are cellular engineering and biology expertise that if we're really going to grow in this space, we needed to bring in house and we can now use it not only for organ printing, but to leverage into non Oregon parts of the human body.
And then also laboratory applications.
Remarkable technology, Troy and when these when these organs and non Oregon articles are built for your body. They are largely constructed from a patient's own cells in the and so theyre fully biocompatible and they're they're meant to survive in your body for your entire lifetime without the need for.
<unk> drugs, which has been an ongoing issue for transplant patients today. So we're tremendously excited and that Oregon printing effort is driving a lot of the core technology that we're taking into these other markets for non Oregon printing and for labs in terms of the size of the markets Troy.
<unk>.
They are emerging markets, it's very hard to.
Get your arms around the size and scale of it.
If you just strictly look at the number of organ transplants. For example, today that are done. The list is kept very small on purpose because there's so few oregon's to go around so you can put it you can put dollar estimates on the number of organs, but the market itself will expand to millions and millions of patients. So obviously, it's a very high value on.
Article and it avoids spending a lot of money on traditional transplanted medications. So we believe it is a highly valuable highly differentiated.
Product you are providing into a market that'll be measured in billions and then when you go to non or non Oregon applications I'd say the equivalent it's it's hard to estimate, but you think of skin arteries.
Soft tissue implants around your body, it's going to again amount to billions of dollars of market size and then I'd say the same in laboratory may be a bit smaller what we've said is a $1 billion 1 billion plus market for laboratory applications. We're really excited about research labs, it's a great business, we acquired <unk> early in the year.
<unk> had a really nice footprint in research labs and over 300 research labs around the world.
And that's the way you really develop a lot of the science of regenerative medicine. So you want to be in with those guys selling them printers and consumable materials, but the real market. We're excited about beyond that just from a dollar standpoint.
And the benefits it bring us in drug therapy. So pharmaceuticals, so the ability to print three D. Cellular structures that have blood vessels in them. So you flow blood through them allow pharmaceutical companies to test drugs more quickly.
So they no longer have to jump from an animal to a full scale person. They can test it in the laboratory, but with real human biological cells, and blood flowing through them and and Architected way a reproducible way. So we see the benefits there is tremendous.
It'll be in providing printers and materials that may actually be in doing some of the testing eventually as well, but it's a it's going to be I believe a marvelous business for us, but again I would put $1 billion plus tag on right now for lack of a better number but they are clearly sizable markets and I believe Troy transformational.
Two our company, it's a logical extension of our health care business today, with our FDA knowledge and our process discipline, but it is an entirely new market.
I really want to make sure we're very well positioned we have a lead today, we're adding really great technical resources and we want to continue really pushing the technology in that area.
Thanks, Jeff.
Quite the healthcare expert in a short period of time.
But a quick follow up with your AG tire.
Just gross margins hit a little bit if we can get to the midpoint of the range.
Called out.
2021 here it would imply 40% to 45% for Q4.
Just thinking about billing for Lori.
Base level here do we grow it from here I know you probably don't want to give a lot of guidance on 2022 yet.
Well, we're working on our models now thoughts yes.
We put out the guidance.
What I'd say is are our plan is to absolutely grow from there and we are as you heard in my prepared remarks, we're investing in the type of businesses that are going to drive gross margin right. The recurring revenue streams that we've talked about software materials and alike. We think will drive gross margin in the future at the same time, we continue.
It's good cost discipline and cost management on our existing products to manage costs I think we're going through as you heard me talk about some near term headwinds with supply chain constraints and the impact that has two to pricing and are managing appropriately, but I think.
Over the medium term youll start to see gross margins tick back up.
Alright, good luck guys keep up the good work.
Troy just a quick thanks for picking up coverage on the company to I know you guys are stretched than all of you guys.
Europe, while respect a guy in the industry really appreciate your following the company and picking up coverage.
Looking forward to working with you guys.
<unk>.
Thank you. Our next question today is coming from Greg Palm from Craig Hallum Capital Group. Your line is now live.
Thanks, Good morning, and appreciate some of the commentary around.
Everything that sort of hooker over the last year.
We had a pretty amazing turnaround or transformation of the company. So kudos to you on that.
Jim there thanks.
Thanks, Greg.
So maybe let's start with supply chain.
You called out that headwind not surprisingly can you quantify what the revenue impact.
And I'm curious maybe you can just look ahead I mean do you think that this could be a tailwind or a driver or additive manufacturing at least for companies that are looking to I don't know maybe added localized on demand production or at least secondary sources of supply.
Sure, Greg I'll start with the quantification and let and let Jeff talk through the impact to our customers. So on the on the quantification side in.
In Q3, we probably had about.
$3 million of revenue kind of $3 million to $4 million of revenue left on the table that we would have captured had had the supply chain issues not occurred if you exclude divestitures revenue was up for US Q3 versus Q2.
Normally Q3 is lighter than Q2, so if I think about revenue being up and the fact that we that we left the revenue on the table because of the supply chain.
A pretty strong indicator of customer customer demand.
I do think we will see a little bit of impact in Q4, but like I said in my prepared remarks, we continue to do.
Women's job of dealing with the issues out there.
Yes, Greg.
Having lived through a couple of cycles before in the electronics industry, particularly these are always painful cycles. When there is a real uptick in demand and as people try to expand capacity. They are always resolved and theyre always resolved.
Generally more quickly than you imagine they will be <unk>.
Feel bad when youre going through them I mean, it's hard we have really exceptional demand out there right now for our our products, but particularly for our application knowledge for the reason that you pointed out it's in the silver lining in the supply chain shortages.
Virtually all of our key customers are saying, we've got to change the nature of their.
Fly chain, they can't live any longer.
Especially when you look at the pandemic effects and on top of it now the supply chain shortages. They have to have a more flexible nimble yet cost effective supply chain.
And perhaps a little bit closer to home. So that you don't have all the logistics cost compounding all the other frustration so while it's painful for us to live through and in meeting customer demand right. Now. It's I believe it's a really good tailwind for us in our for our entire industry because additive as a solution for a lot of there are a lot of.
<unk>.
In terms of being a real production process now that will allow them to streamline their supply chain and bringing closer to home very cost effectively and what we did with the <unk> acquisition as we wanted to remove a big barrier to that happening because as customers really tried to set up production capability for printers.
They were really stumbling over how do you do it when they can't afford to hire Phd level engineers to run production lines and do it on a spreadsheet.
So they needed a software tool that would allow them to bring printers and all the supporting equipment into the factory set it up on a plug and play approach with a plug and play approach and nowadays apply machine intelligence and artificial intelligence to the workflow and Thats, what often does so we tried we're working hard to remove any barriers.
Because I believe we have the.
As an industry, we've got an excellent tailwind coming in.
As big companies revisit their supply chain.
Yes.
Ed.
Where would you envision that demand coming from I don't know whether that.
The end market or by technology.
Outside of dental I guess, where are you seeing the most demand as warranted.
Income from.
It's really interesting and it's quite different by market, Greg and Thats, why frankly to come back to that theme. We've reorganized the company around markets now because that dynamic is different in each market segment for healthcare in general the growth even in dental whether it's dental or other med devices. The growth is being driven by this disk drive the person.
<unk> solution for people. So if you've got a broken bone or you need a tissue implant or.
Or a base specialized surgical procedure.
One is they have it has to be cost effective, but they want a personalized approach to medicine to drive better outcomes and that it's a big need to reduce infection rates its higher throughput and surgical suites, that's really the driver in healthcare on the industrial side of the business. It's much more what you just said, it's an idea of looking at their extended supply.
My chain and really reworking that so when you think about it on the industrial side, it's the big consumers the big the big OEM of similar products. So it's automotive it's aerospace it's all of the related technologies or companies to that buses trucks cars airplanes.
All of those guys that are designing and building those they want their supply chain to be closer to home and more nimble and yet cost effective so on the industrial side. Its exactly what you would imagine and because each one of those has trends of its own like automotive today moving heavily to EV technology again, very good tailwind for additive manufacturing.
Factoring so I love being in the business, we are today and I love the structure, we've adopted today with health care and industrial vertical focus because each industry moves at its own pace with its own unique needs.
Anyway, that's my view on what's driving the spaces, Greg Yes.
Yes, that's great and if I could just.
Sneak in one follow up your disclosure of your largest customer being 20% of our revenue. This year, that's a pretty big step up relative to prior year, how sustainable at that level going forward.
Well it's.
As a result, primarily Greg about divesting other businesses, we divested businesses.
They were not involved with.
I Love I love, the dental space I loved the customers we have the large customer we have is tremendous.
Their penetration rate in the market is still relatively low so I think they've got a great future based on our technology and I and so I think we've got a nice runway with them and have never had a better relationship.
Spider the logistics issues and things, we've been able to take care of them and support their growth in their market as the economies reopened and folks who are really interested in their products. So I'm thrilled for them Im thrilled for us it's a great customer at the same time, Greg we've got.
We exhibited and correct me, if I'm wrong inject our 15% growth in the med device that device, so 15% excluding divestitures I think for divestitures. So if you take out divestitures and stuff. We got out of we had 15% growth in the med device space outside of dental if you exclude dental 15% growth, which we're thrilled by that.
That's an exceptional number and I see that continuing and getting bigger so I think the whole business will get bigger for healthcare.
The fact that we have a very successful customer that continues to grow based on our largely on our technology and I think we've got a great horizon with them and with many others in the dental industry and in the med device industry.
Awesome I appreciate the color best of luck going forward.
Thanks, so much Greg.
Thank you. Our next question is coming from Noelle Dilts from Stifel. Your line is now live.
Hi, guys and again congrats on the progress you've made over the past year.
Thanks.
Sure.
Just one question for me given that you are now moving into this and best Spain I was hoping that you could in a bigger way I was hoping that you could kind of comment on what the pipeline looks like in terms of.
Companies that you're talking to you about your conversations are like and then maybe if you could just revisit.
If you had to kind of rank priority in terms of bringing into slides. If you could talk about medical versus industrial and then software versus applications, just kind of giving us a sense of how youre thinking about this next phase moving forward. Thanks.
Very happy to know and again, if I Miss one of those we feel free to ask me again, but in terms of priorities, it's pretty simple.
<unk>.
Underneath our market focus lies our three core technologies printers materials and software we want to make sure that those remain highly differentiated so that gets down to sometimes component level of investment.
Disruptive technology, so new ways to print parts.
A big priority in that area NOLA is materials and we have a great photo polymers group internally, we continue to look at photopolymer.
Experts outside but whether it's an individual person small groups or even larger groups.
That are involved in materials development that could advance additive manufacturing those are always high on our priority list. We're always looking for them because value added material brings incredible value to our customers and it's really good for us in recurring revenue. So so we really love that software obviously is a priority we've developed some platforms nicely.
Internally and we're making those available now at others and we've invested in the auction platform to help our customers. So software will remain a priority.
I'm not sure how many other resources and software really out there, but it would always behind list if something became available. So I would say materially if you get down to two two the underlying technologies materials, a high priority and disruptive printer technology is always important.
When you when you look at market priorities, our application priorities healthcare certainly is a wonderful business. We have a tremendous foundation we've expanded it now into biotech, we're really interested in growing that area, but in our traditional health care med device business.
Whats really expanding now or the number of applications. I think we have one chart that showed the human skeleton our past NOLA has pretty much been from the from the neck up we've been heavily focused on the head the skeletal structure of the head and doing good work around that with surgeons. What we're now doing is try to attack other parts.
Of the skeletal system in parallel and go after that so youre looking at the application expertise other things that will advance the state of the art and in health care applications around the skeletal system. In addition to biotech.
I love, those and industrial were being a little bit more a little bit pickier in terms of what areas that we really believe will be differentiated in the future. So it gets back to this theme of differentiated technology aerospace and space Technology General Rocketry satellites propulsion Dave.
Always really valued technology for performance reasons and weight, obviously in many cases, so on the additive has a lot to offer there and so we will always remain a priority for us.
Ground vehicles cars from primarily a.
A mixed bag in the past because you have cars that heavily price driven kind.
Kind of high volume business, which would have traditionally been tougher additive tougher.
Tougher for additive now with Evs, it's really interesting because they are borrowing a lot of technology from aircrafts materials and applications. So what makes you successful in aerospace can help you in electric vehicles as well and they benefit from some of them more exotic part designs that you can do with additive to breach the lightweight.
Create a lightweight strong vehicle structure for battery power to go further so evs are a really interesting area in automotive and under the Hood Hot applications. We have some new specialty materials coming out now that are really good for hot applications under the hood and other demanding automotive applications. So.
I've, probably blanketed every every area there, but hopefully that gives you a sense of.
What are our priorities would be and we've.
Developed a nice war chest now to go after it and we're generating good cash flow to support that further.
Great. Thanks, so much.
Thank you.
Thank you. The next question is coming from Sarkis <unk> from B Riley Securities. Your line is now live.
Hi, Good morning, and thank you for taking my question here.
The last 12 month period, excluding divestitures sales were just over $520 million.
Wanted to get a sense for what's your outlook on organic growth for the top line going forward on that basis.
Yes.
In terms of organic growth.
It's.
Everybody struggles to put a number on the industry I would put it this way our organic growth rates should be equal to or better than the industry norms.