Q3 2024 3D Systems Corp Earnings Call
[music].
Greetings and welcome to the <unk> systems third quarter 2024 earnings conference call and webcast. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad.
Question and answer session will follow the formal presentation. He may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It's now my pleasure to turn the call over to Nick Mccluskey, Vice President of Investor Relations. Please go ahead ma'am.
Hello, and welcome to <unk> Systems' third quarter 2024 conference call with me on today's call are Dr. 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 follow.
Speaker Change: [noise] 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.
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 reach.
Speaker Change: <unk> 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 measures in our press release and slides accompanying this webcast you will find additional disclosures regarding these non-GAAP measures.
Speaker Change: 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.
Thank you Mick and good morning, everyone.
Today I'll begin with an overview of our third quarter results and then touch on some recent key accomplishments and announcements I'll then ask our CFO, Jeff <unk> 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.
Speaker Change: Let's start on slide five.
Speaker Change: At a high level, our third quarter 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.
Speaker Change: 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 fourth quarter.
Speaker Change: 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.
Speaker Change: Consumable materials grew approximately 10% from the prior year and demonstrated sustained sequential growth trajectory that has consistently improved since the beginning of the year. Most recently growing 9% sequentially in the third quarter versus Q2.
Speaker Change: In a similar vein interest and 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.
Speaker Change: These engineers worked directly with our customers on new applications for both metal and polymer three D printing.
Speaker Change: 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.
Speaker Change: The performance we experienced in Q3 is a strong indicator of continuing growth and customer interest in three D printing for their production needs.
Speaker Change: We expect this interest to ultimately translate into more robust sales as the economic environment improves.
Speaker Change: To provide a little more color on where this interest is coming from.
Speaker Change: Leading the way or 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.
Speaker Change: 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.
Speaker Change: As an example of markets that I'm, particularly excited about these days.
Speaker Change: Are those driven by the trillion dollar investments being made in AI. These.
Speaker Change: 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.
Speaker Change: As just one example.
Speaker Change: The management of heat is absolutely essential to both a manufacturer of silicon chips as well as their performance and life in a data center environment.
N Ho 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.
Speaker Change: 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.
Speaker Change: Combining the inherent capability of three D printing to manufacturer 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 architecture, a powerful means of removing heat effectively from the system.
Speaker Change: Given that the power consumed by data centers now exceeds that of many small countries. This cooling capability is increasingly valuable.
Speaker Change: And this is just one example of our increasing focus on the whole semiconductor ecosystem that we believe will provide one avenue for meaningful growth for our company in the future.
Speaker Change: Another market, we continue to be excited about as high performance automotive, an example of which is F. One racing.
As an example, you may have seen our announcement earlier this month with silver Motorsports in this case, we updated the entire Sabra production facility, yes. They added 10 of our newest production printer systems to their manufacturing workflow.
Speaker Change: This included eight of our market leading S. L. A 750 dual laser printers and two of our just released P. S. L. A 270 platform.
Speaker Change: All enabled by a host of industry, leading high performance materials.
Speaker Change: Sabra will use these systems in large part to validate their aerodynamic designs through rapid fabrication of production components for wind tunnel testing.
Speaker Change: This award builds on our nearly 20 year relationship between our companies, reflecting the trust they have in our technological leadership.
Speaker Change: 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 billion in the next few years.
Since I mentioned it let me take a moment to focus on our newest photopolymer printing platform. The P. S. L. A $2 70.
Speaker Change: This is the first of all will be a family of new projector over bad printing systems, combining the superior surface quality associated with our flagship S. L. A 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 incur.
Rates are very high resolution projection system.
Speaker Change: By replacing a single point laser with a full field projection system, we obtain high precision.
Speaker Change: Much higher print speeds in fact, the closest competitive solution today would have to run two machine simultaneously to achieve the same output is one P. S. L. A 270.
Speaker Change: In addition, this system is designed to use our entire portfolio of advanced polymers originally developed for the figure four system.
Speaker Change: By offering this exceptional platform as a part of a complete factory workflow. We believe our P. S. L E platforms will lead the industry forward in photopolymer applications.
From a health care standpoint, the third quarter was strong with solid growth on a sequential and year over year basis.
Speaker Change: We attribute this growth to a meaningful recovery in dental up well over 30% and another impressive performance in personalized health care, which was up almost 20%.
Speaker Change: Given the momentum we have in our health care 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.
Speaker Change: From a gross margin standpoint in the third 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 creates who'll take you through the specifics in more detail shortly but after normalizing for inventory reserves are <unk>.
Speaker Change: Third quarter operating margins were roughly in line with recent performance. We continue to target a business model that can deliver mid 40% margins or greater over time once the benefits of our in sourcing and restructuring initiatives are fully realized with increasing volume.
Speaker Change: Operating expenses for the quarter were consistent with our expectations. We're pleased that our restructuring actions have started to more positively influenced performance, representing a nearly $3 million sequential improvement.
And while our overall opex expenses are declining we continue to invest extensively in our R&D activities, which is fueling a historic year of product innovation for our company more on this in just a few moments.
Speaker Change: 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.
Speaker Change: As such operating expenses remain a strong focus and a level largely within our direct control in this environment.
Speaker Change: With that in mind, we maintain our goal of reducing our operating expenses to below $6 million for the first quarter.
Speaker Change: With the majority of this improvement come from reductions in G&A.
Speaker Change: 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.
Speaker Change: Over the course of the third quarter cash on our balance sheet declined $3 million from the prior quarter, a significant rate improvement from prior quarters.
It leaves us with one of the strongest cash positions of any company in our industry.
Speaker Change: On slide six 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. The birth of three D printing industry, our dedication to innovation as a core element of our company culture.
Speaker Change: Maintaining momentum with mission critical R&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 turned to three D systems first in assessing the capability of three D printing to meet their metal and polymer production needs.
Speaker Change: Reflecting this commitment you witnessed an unprecedented pace of innovation from our company over the last 12 months contributed nearly 40, new materials software enhancements and metal and polymer printing platform since Q3 of last year 25, and this year alone.
Speaker Change: And the momentum will continue as we exit this year and move into 'twenty five.
Speaker Change: This represents the culmination of three years of focus and investment and we're refreshing our entire portfolio of plant printing platforms and the materials and software that enable their outstanding production performance.
Speaker Change: From a key application standpoint during the third quarter, we announced quick cast air which is targeted for the investment casting market.
Speaker Change: This casting method is essential to aircrafts and rocket propulsion systems and other high performance applications. It's expected to reach nearly $34 billion over the next 10 years quick cast ear reliably delivers a large high precision investment casting pattern.
Speaker Change: Fraction of the time and cost of traditional methods, providing up to a 50% reduction in Russia resin usage in some cases, while maintaining the inherent advantage virtually unlimited geometric complexity of design.
Speaker Change: The result for our customers is higher performing components.
Speaker Change: Cost and in much shorter production cycle times for their most demanding applications.
Speaker Change: On the software front, we announced a significant milestone in commercializing our aten industrial M. O S platform with our strategic partner Baker Hughes, our software, which is now utilized in Bakers Houston, Texas manufacturing facility is enabling on demand additive manufacturing to provide full factory floor workflow.
Speaker Change: Integration automation control and optimization.
Speaker Change: Its production implementation is providing key proof points such as a 98% reduction in active monitoring engineering time savings of 136 engineering hours per printer annually and.
Speaker Change: And an 18% reduction in costs associated with scrap due to real time actionable alerts during component production.
Turning to health care, our personalized health care business delivered another quarter of meaningful growth during.
Speaker Change: 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 <unk> nephew's total ankle replacement solution.
Speaker Change: This expands our patient specific surgical solution capabilities in a market anticipated to grow to over $5 billion in the next few years.
Speaker Change: Today, we're exceptionally well positioned in the cranial maxillofacial 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.
Speaker Change: 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.
Speaker Change: And we see opportunities to expand our personalized self service in Europe, and elsewhere and are investing accordingly to ensure regulatory approvals or are acquired.
Speaker Change: These growth elements reinforced our enthusiasm about our growth in this key area of our company.
Speaker Change: For our dental activities, a key growth engine for the future as the multibillion dollar dentures market.
Speaker Change: And an important milestone we secured FDA clearance in September for our first to market and multi material single piece jetted denture solution.
Speaker Change: Our unique denture offers offering provides unparalleled combination of toughness to ensure long term reliability with outstanding aesthetics for enhanced patient experience.
Speaker Change: As previously shared we found an excellent launch partner in Glidewell, one of the world's largest producers of restorative dental devices, who has hit the ground running with implementing jetted dentures intuit's workflow following our clearance with the FDA where.
Speaker Change: Excited to see this product entered the market in the coming months.
Speaker Change: To wrap up my introduction undoubtedly 2024, it's been a difficult sales environment, but with our strong balance sheet, we've delivered tremendous progress transforming our technology portfolio.
Speaker Change: Form next the largest am conference of the year. There was just held last week gave us the opportunity to highlight this journey with the announcement of several new product introductions.
Speaker Change: In addition to our metal N P. S. L. A polymer platforms, we highlighted our newest tightened.
Speaker Change: Extrusion platform, which is our in road into the industrial extrusion printing market.
Speaker Change: <unk> family as we call. It includes the 12 70 that 10 70, and our newest edition the 800.
Provides a novel approach to extrusion technology offering a hybrid solution that can accommodate.
Speaker Change: Accommodate pellets filaments and traditional CNC machining all in one platform.
Speaker Change: Delivering speeds of five to 10 times faster and having raw material cost roughly 10 times lower than its closest competitor, we see increasing interest from our customers around the world for this family of products.
Speaker Change: Rounding things out we've also announced a plethora of new materials supporting our S. L. E N J P and SLS platforms further expanding the broadest portfolio of added additive solutions in the industry and setting the stage for us to drive increased adoption in the years ahead.
Speaker Change: So with that I'll turn things over to our CFO, Jeff Creech for more on the quarter Jeff.
Jeff Creech: Thank you, Jeff and good morning, everyone I'll begin with our revenue summary on slide eight.
Jeff Creech: Third quarter revenues of $112 $9 million declined 9% from prior year, driven primarily by a continuation of macroeconomic pressures impacting hardware system sales, partially offset by growth in materials sales on a sequential basis revenues were roughly flat and impacted by a few large.
Jeff Creech: <unk> orders that fell outside of our third quarter close.
Jeff Creech: Within our segments industrial revenues were $57 $9 million and down about 19% predominantly driven mostly by a decline in printer sales.
Jeff Creech: In our healthcare segment revenues were $55 $1 million for the quarter and grew 5% from prior year.
Speaker Change: As Jeff just mentioned growth in the third quarter was primarily driven by a healthy rebound in dental and our personalized health care business.
Speaker Change: Now, let's turn to slide nine.
Speaker Change: non-GAAP gross margin for the third quarter was 37, 6% and included an increase in inventory obsolescence reserves taken in the quarter, representing approximately $3 million.
Speaker Change: Normalizing for the impact related to inventory reserves would result in a margin of 42% for the third quarter comparing to prior year margin was 44, 8%, which included a significant benefit of regenerative medicine milestone revenue recognition.
Speaker Change: Excluding the impacts of inventory reserve increases in the milestone recognition in the current and prior quarters, respectively gross margins would've been 42% and 42, 7% 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.
Speaker Change: non-GAAP operating expense for the third quarter was $61 4 million, increasing $5 6 million from prior year, but declining $2 7 million consecutively in line with our expectations.
Speaker Change: 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 onetime in nature.
Speaker Change: Third quarter operating expense benefited from our previously discussed restructuring actions and we continue to expect an additional sequential reduction targeting opex below $60 million for the fourth quarter.
Speaker Change: Now to slide 11 to finish up the P&L.
Speaker Change: We reported adjusted EBITDA of negative $14 3 million for the third quarter compared to a gain of $4 7 million for the same quarter last year.
Speaker Change: Declines in adjusted EBITDA, primarily reflect lower sales volumes margin and higher operating expenses as just discussed.
Speaker Change: 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 unexpected Opex savings in the fourth quarter. We would also expect an improvement in adjusted EBITDA sequentially as we continued to move towards our longer term goal of consistent profitability.
Speaker Change: For the third quarter, we reported a fully diluted loss per share of $1 35, and this includes noncash charges of approximately $144 million associated with the impairment of goodwill and other long lived assets as a result of our interim valuation testing during the third quarter of this year.
Speaker Change: This compared to a loss per share of nine cents in the third quarter prior year.
Speaker Change: non-GAAP loss per share was <unk> 12 cents compared to a gain per share of one penny in the prior year.
Speaker Change: Now to slide 12 for the balance sheet.
Speaker Change: We closed the quarter with $190 million of cash and cash equivalents compared to $193 million at the end of the second quarter of this year as.
Speaker Change: 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 actions from prior years as.
Speaker Change: As noted on previous calls we've been highly proactive in repurchasing our debt and have reduced our zero percent convertible notes down by over 50% since Q3 of last year fortifying our position to continue supporting critical R&D investments for the new product releases combined with a keen focus on re.
<unk> expenses to drive profitability looking forward, we continue to view inventory as a source of cash in the fourth quarter.
Speaker Change: I'll conclude my remarks on slide 13.
Speaker Change: As you heard from US. This morning, we continue to make strides across our portfolio to emerge stronger from the current economic cycle when pent up demand for additive solutions returns.
We've been consistent in fueling our R&D engines through a tougher macro environment driving an acceleration of applications and new product development to emerge stronger in the years ahead.
Speaker Change: However, we are adjusting our guidance expectations for the full year 2024 as follows.
Speaker Change: We expect full year revenues between the range of $440 million to $450 million, which implies a mid to high single digit percentage sequential recovery in the second half.
Speaker Change: Revenues from the first half of this year.
Speaker Change: While the fourth 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.
Speaker Change: We expect the benefits to be more modest ending the year.
Speaker Change: 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 40% range as volumes recover and we're able to reap the full benefits of our <unk>.
Speaker Change: And restructuring actions.
Speaker Change: We are maintaining our expectations to deliver opex at or below $60 million for the fourth quarter, continuing its trend of sequential improvement and reflecting the benefits of our previous restructuring.
Jeff Creech: 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. Thanks.
Speaker Change: Thanks, Jeff.
Speaker Change: So we believe that the broader macro trends negatively impacting our industry to the greatest extent are beginning now to move behind us.
Speaker Change: 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&D investments are fundamentally different from many others in the industry and we believe position us well for accelerated growth and profitability as our end markets.
Speaker Change: <unk> strengthened.
Speaker Change: While we will not be providing explicit explicit comments on 2025, yet looking beyond this year as much of our critical R&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 will deliver meaningful Val.
You too all of our stakeholders so with that we'll now open the line for questions. Kevin If you would open the line for US. Please.
Speaker Change: Certainly, 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 May press star two if you'd like to remove your question from the queue.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: Our first question is coming from Jim Ricchiuti from Needham <unk> Company. Your line is now live.
Jim Ricchiuti: Hi, good morning.
Speaker Change: I'm looking at.
Speaker Change: I'm looking at your <unk>.
The implied revenue guidance for Q4, it's a little surprising.
Speaker Change: With only a month left in the quarter that there's there's a relative.
Speaker Change: Relatively.
Speaker Change: Good range of scenarios. So I'm, hoping you could help us understand what's driving that I mean, it sounds like.
Speaker Change:
Speaker Change: Essentially some of your customers.
Working through inventories.
Speaker Change: Maybe that's on the materials side, but maybe if you could help us understand that a little quick.
Speaker Change: Quick follow up.
Speaker Change: Yeah, Jim I think Theres two factors one of it clearly is inventory management from our customers. They are in good shape that they want to make sure they don't get out over their skis with.
Speaker Change: All the changes coming in 25 with the in the political environment and the geopolitical issues I think nobody wants to be overly exposed on inventories. So I don't think it's a massive problem, but it's certainly there'll be managing them customer by customer the big unknown, Jim is really out how much capex there'll be willing to spend in the fourth quarter and at what rate.
Speaker Change: The the even if they cut loose capex late in the quarter as we saw in Q3 some of those installations.
Speaker Change: Thing completed until the following quarter, which delays revenue recognition on many of them. So so there can be a timing issue on their capital spend in normal times, you know they try to a lot of them would try to spend their capital up in the fourth quarter and get it done early as early as possible for planning right now what we're seeing is a bit of trepidation.
And a bit of slowness in issuing P. O's I expect.
Speaker Change: I expect this quarter to certainly be up and you know it but not quite if I had to guess Jim not quite in line with historical norms.
Speaker Change: But there is some upside for us versus our midpoint, but I you know 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 modestly. If you will on the growth rate in Q4, So we believe it'll be up and or not.
And then up nicely for the quarter, but Capex inventory management are just are just unknown and we want a buffer for those.
Speaker Change: Okay. Thanks.
Speaker Change: 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 nine month.
Speaker Change: Gross margin was 39, 5% is this is this all a case of unfavorable absorption.
Speaker Change: Q4 revenues came in at the low end of your implied guidance.
Jim Ricchiuti: Yeah, there's two factors Jim one of them is that one of them is factory absorption. The other one really is mix because you know what 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.
Jim Ricchiuti: 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 you'll still see.
Jim Ricchiuti: Factory utilization effect, so so I'd say, there's two factors in that.
Jim Ricchiuti: And both of them lead to a little modestly on the on the gross margin for the quarter.
Jim Ricchiuti: Nicely the in sourcing work, we've done I think a payroll real dividends for us from a printer manufacturing standpoint as volumes rise again, hopefully in 'twenty five but for right. Now. It's you know any uptick in printer sales in Q4 would be a drag on gross margins.
Speaker Change: Got it thank you.
Speaker Change: Thanks, Jim and have a good Thanksgiving.
Speaker Change: Thank you. Your next question is coming from Greg Palm from Craig Hallum. Your line is now live.
Good morning, Greg, Yes, Thanks, Hey, guys. This is Danny aggregate Jon for on for Greg today, Thanks for <unk>.
Speaker Change: Sure.
Speaker Change: I know you kind of said you know you're not going to touch on twenty-five yet, but just thinking about maybe profitability I know in the release, maybe some commentary it was like trajectory towards profitability in quarters ahead.
Speaker Change: Are we thinking about it as something that can be at 25 events.
Speaker Change: Or is it just kind of too early to tell how should we be thinking about.
Speaker Change: Yes, and the profitability Yeah, Danny it's it's you know the art of predictions. So 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 and 25. It's a question of how quickly will they spend the money for it.
Speaker Change: You know a nicely I have no doubt these applications or are things they really want to put in their factories. That's a good thing. It's a timing issue. So you know were hopeful revenues will be rising and twenty-five which will be helpful. Factory. Utilizations then improve the inventory reduction plan, we have would be great for cash.
So those are all positive factors and we have I'll be I'll be candid with you we have real opportunities for cost management, which I think it will really help in 25. So I can't give you a number but I think youll see significant movement in 'twenty five if those things come to pass Youll see significant movement in 'twenty five.
Speaker Change: Toward profitability and hopefully at some point during the year you'd see a swing to positive EBITDA and growth from there. So.
Speaker Change: So it's just too early to tell and we won't put out guidance until.
Speaker Change: We get to our fourth quarter results, but I am encouraged by the trends and we'll see if they continue.
Speaker Change: Yeah that makes that makes total sense.
Speaker Change: If we can just touch on that that AIG the application innovation group.
Speaker Change: Sounds like it was really strong in a quarter, just maybe trying to size up that opportunity.
Speaker Change: You may be aware contribution currently is and any alwyn when the cycle. Eventually returns you know how should we be asking about that opportunity going forward.
Speaker Change: And Danny I would tell you that the the revenue we generate from AIG. So these are these are obviously there are applications customers are paying for us to develop with them.
Speaker Change: 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 actually it may not be a material number on the overall P&L, but if it is growing and customers are demanding more and more of our time to develop new applications and we're picking and choosing those very carefully to <unk>.
Speaker Change: Sure. They are the highest volume highest value components that we can help them develop their factories. So I would tell you. The magnitude of revenue is not really important is the direction that is headed in that 'twenty Sig I think we've quoted of 26% rise is fabulous I mean, our guys are swamped and we have we have 80 plus applications and here's the big.
Speaker Change: I believe it's the biggest in the industry is certainly I'm very proud of them I think they're the best in the industry.
Speaker Change: And these new applications are working on are tremendous.
Speaker Change: The amount of interest we have related to semiconductors broadly in Datacenters and things all driven by I believe this overall AI investment.
Speaker Change: And the use of AI.
Speaker Change: That I think is going to be a nice way for us and for anybody in this industry thats positioned for primarily in the metal side of the business.
Speaker Change: Think you know the ability.
Speaker Change: To print basically heat sinks. He he conduction cable is very very positive. So you could see some large applications flowing through in the future for those.
Speaker Change: 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 a number of parts, we can make them higher performing parts all by three D printing them and we so we've got all of the major.
Speaker Change: Assuming that your equipment manufacturers working with US we have people that are using gpus in data centers working with us in factored form next I wish I'd put this on a slide you would've seen a copper heat sink that was incredibly interesting it's out on the on the website I believe but it was designed using AI quite.
Speaker Change: <unk> and it it can conduct heat away three X more efficiently than any other high purity copper zinc and the world.
Speaker Change: So we're tremendously excited about markets like that because they're very valuable high do you have a high payoff components, which will help the whole supply chain. So I I quoted the AIG rise not because it's material and impactful on the P&L, but because the trend is really positive in terms of <unk>.
Speaker Change: <unk> interest in three D printing, so can't really help you from a timing standpoint on revenue specifically, but the trend is very positive.
Speaker Change: Okay.
Speaker Change: Great appreciate the color.
Speaker Change: Okay stay warm Danny you have a good Thanksgiving.
Speaker Change: Huh.
Thank you. Our next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.
Troy Jensen: Hey, gentlemen, thanks for taking my questions here.
Troy Jensen: I guess, Jeff one thing I picked up in a farm next to that that was the new as well.
Troy Jensen: A lot of positive talk about often.
Jeff Creech: 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 through the expert.
Speaker Change: Yes, sure Troy and thanks for the call and thanks for the interest in <unk>.
Speaker Change: Yes, you you asked about two things there.
Speaker Change: I'd throw in a third so our <unk> sprint software, which which drives our polymer machines in and three expert on the metal side tremendously valuable tools for people that want to apply three D printing.
Speaker Change: What we've done now with Austin is basically integrate three D expert into the opt in workflow and we've really targeted and focused often on the high reliability markets like oil and gas were doing with Baker Hughes and others, but.
Speaker Change: That software platform Troy will allow us to monitor the entire workflow not us but customers that the licensing the entire workflow from raw materials to finished part.
Speaker Change: And what we're seeing in the Baker Hughes.
Speaker Change: Production lines right now is a tremendous improvement in the productivity and quality of parks that you can get out the the real.
Speaker Change: Real time monitoring the feedback control the traceability required.
Speaker Change: So it impacts everything from setup time to the time apart is produced and it gives you full traceability of the part when it's finished.
You make your we're making three D printing a true production process with us.
Interesting feedback for Baker Hughes.
Also a customer of the software it was.
Speaker Change: This industry is now starting to really think about how to use three D printing and production, whereas before it mainly went into laboratories for prototyping and even demo parts now it's being used in the war in the on 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 <unk>.
Speaker Change: So I'm really pleased with ottens progress and I think we will demo very nicely with Baker Hughes and then we're rolling it out broadly to other other primarily industrial applications that have to make high reliability parts. So energy arrow.
Speaker Change: Certainly the medical markets anybody that has to make a high reliability parts at high productivity.
Speaker Change: Okay, Okay, how about that two other questions here did you have a 10% customer in the quarter.
Speaker Change: We do have Jeff I have to say, yes.
Speaker Change: I'm sure I don't have the number in front of me Troy, but I 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 Ed as it has been historically true.
Speaker Change: So that's you know that relationship remains very strong the indirect printing the liners is a great way to make them and we continue to be a key supplier in that market. So yes.
Speaker Change: And I don't have a number troy, but it's in the queue and we can certainly get back to you.
Speaker Change: Yeah, I'm, just glad to hear they're back with them and then just last question a regenerative business that can you just talk about when do you expect to hit the next milestones.
Yeah, Troy I think we will see some additional milestones in 'twenty five.
Speaker Change: I wish we could talk more about it the the.
Speaker Change: Both the precision and the speed at which we can print extremely fine structure now is amazing.
Speaker Change: We have multiple paths to the to the design of those printers for production applications.
Speaker Change: For organs in the human body, specifically lungs, so I am really pleased with progress on the technology and the implementation of that for long manufacturing. So you can expect.
Speaker Change: We'll be talking about milestones in 2025 that we're hitting and I continue to believe we're on track to be.
Speaker Change: To be in a position to to get to human demonstration on a reasonable timeline.
Speaker Change: <unk> therapeutics, our partner and this will have to speak to that to that milestone, but in terms of the printing technology and things in the materials that go with it extremely pleased with progress.
And Troy just one more one more advertisement for that.
Speaker Change: It's really 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 P. S. L. A with this this high precision projection system over VAT.
Speaker Change: It's a direct outgrowth of our work on regenerative. So if you take a hardened.
Speaker Change: Projector.
Speaker Change: Thats used for industrial applications for workflow, it's a direct transfer and a drop and so you'll see some real technology synergy coming out of our work on regenerative into our industrial markets.
Speaker Change: Awesome Alright, guys. Good luck on happy Thanksgiving.
Speaker Change: Happy Thanksgiving to Youtube.
Speaker Change: Thank you. Your next question today is coming from Ananda Baruah from loop capital markets. Your line is now live.
Speaker Change: Good morning Amanda.
Speaker Change: Good morning, Good morning, Thanks for taking the question happy Thanksgiving.
Speaker Change: Yes.
Speaker Change: Are you guys, taking the question I guess, a couple if I could.
Speaker Change: The first is on <unk>.
Speaker Change: Sort of the core healthcare business and in industrial solutions.
Speaker Change: It's sort of taken exactly.
Speaker Change: The faster sellout notwithstanding.
You guys seem like the last three quarters your kind of baseline.
Speaker Change: This high <unk> low <unk> run rate.
Speaker Change: And.
Speaker Change: And in healthcare you would take that both because of the dental business and then also.
Speaker Change: He is kind of the question is there anything in personalized healthcare.
From that though that we should be aware of.
Speaker Change: Okay really.
With that as a backdrop.
Speaker Change: And sort of the supplies business continuing to grow.
What is the baseline business to look like in <unk>.
Speaker Change: 25 understanding.
Speaker Change: Guidance yet.
Speaker Change: In industrial solutions at baseline.
Speaker Change: Right now and as you're seeing a pickup in health care and then you're also seeing a pick up the ongoing growth in supply.
Speaker Change: What does that say structurally about <unk> 20.
Speaker Change: 25.
Speaker Change: Yes, so so on that I'll start with the last point an idea yes, all of that would lead you to say look 25 should be a better year.
Speaker Change: You know as long as.
Speaker Change: You know 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 you know the.
Speaker Change: The unknown is the you know we have a change of administrations and not only in the U S, but potentially other countries and these wars tend to flare up periodically. So so all of that said, which are unknowns. The trends are moving in the right direction in terms of.
Speaker Change: Both printer platform sales and consumable sales you know over the future. So hopefully we'll be sitting here when we announce Q4 results and 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&D those are paying dividends now and we've got.
Speaker Change: Some flexibility going into 'twenty five to to really manage our cost structure and a more optimum way. So so I think there's some real opportunities and within the four walls and then also in the external environment.
Speaker Change: In terms of health care is a great business.
Speaker Change: The orthopedic business as I call. It. The you know the work we do for surgical planning on bone repair and surgeries.
Speaker Change: Is terrific, we continue to gain FDA approvals for for other areas of the body where.
Speaker Change: 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 can I expect to continue to see <unk>.
Speaker Change: 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 so I think that's a great business the dental business.
Speaker Change: Got a good foundation with with indirect of liners, 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 three D. Printing is a natural for those and we have a great offering so I am excited about twenty-five for for dentures funny as it sounds and then.
Speaker Change: And then you've got other dental applications night guards and others. So I loved the health care business continues to be a core focus of the company on the industrial side. These high reliability markets were swamped with interest on new applications from customers and I would hope twenty-five would see them start spending some real capital money in those directions.
Speaker Change: Because the payoff is clear so that gets back to the world economy in their factory utilization.
Speaker Change: So hopefully and all of that I answered your questions. If I can clarify anything I'm happy to do it or not.
Speaker Change: That's really great and I guess, just a quick follow up on tariffs anything to be aware.
Speaker Change: And the tariffs.
Speaker Change: So far our voice.
It is.
Our non dispute.
Speaker Change: Yes, it's very interesting and this is this is all public.
Speaker Change: If you if you look at the tariffs that have been talked about and particularly with respect to China.
Speaker Change: The Chinese metal printing companies have sprung up over the years and I think you know aimed towards Chinese markets and others. They are increasingly looking to export those products into the U S.
Speaker Change: And you know in a lot of the U S applications or defense oriented. So I think both the tariff situation and their focus on defense will help us as a U S company I think thats a great thing.
Speaker Change: Because of the influx of those printers and I've shared this information. It's all publicly available has been high and I would hope is as in onshoring.
Speaker Change: Onshoring and supply chain shortening effects take take hold if we do see tariffs coming in and certainly the growth in defense and aerospace those are all positives for us as a U S company.
Speaker Change: Super helpful. Thanks, a lot have a great holiday guys. Thanks. So now that you have a great Thanksgiving as well.
Speaker Change: Thanks, you as a reminder, that star one to be placed in the question queue. Our next question is coming from Brian Drab from William Blair. Your line is now live.
Speaker Change: 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 co place that go on Gpus and the other data center infrastructure.
Speaker Change: 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 40% gross margin what revenue rate would.
We need to be to support those levels, assuming that 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 I appreciate the time and happy Thanksgiving.
Speaker Change: Thanks, So much for the question and a happy Thanksgiving to you as well.
Speaker Change: So so you touched on the key points.
Speaker Change: The factory basically our gross margins if you look at Cogs.
Speaker Change: Our factories.
Speaker Change: That's going to be a direct outgrowth of a factory volumes and the increased benefit from insourcing. So it clearly as volumes rise. It's a good thing for factory utilization rates.
Speaker Change: The other benefit that brings us is a lower propensity to write down inventory.
Speaker Change: We absorbed the reality is we've absorbed a lot of inventory when we in sourced manufacturing aggressively over the last two years and I would tell you for everybody listening. This call I think it's a tremendous move for a <unk>.
Speaker Change: A low volume high mix company like ours in this industry taking.
Speaker Change: Taking full control over year your product from the startup design to the time, you ship and install to a customer is critically important in controlling the pace of new product introduction and the quality of the product we ship.
Speaker Change: Firmly believe that so we spent a 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.
Speaker Change: Net inventory down we will bring it down 20% this year for starting point, we'll continue to do that unfortunately, if volumes stay low and the plant you're more exposed to inventory write offs due to the aging of the parks. They don't go bad but the age out. According to your policy. So we have some headwinds on the last few quarters from that hope.
Speaker Change: Hopefully as volumes pick up that affect that kind of over the top effect will go away and you'll see them 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 were also really driving services because the customers that have fab.
Speaker Change: <unk> want great service so.
Speaker Change: 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 mid forty's. That's that's our near term goal. We have a long term goal of getting over 50, which we had given the given the the.
Speaker Change: 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.
Speaker Change: And then eventually metals you know some of the metal materials will probably evolve to match three D printing as well, but for now there's not a lot of materials pull through from our from our 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 it's improving and I'm thrilled to have both metals and polymers in our portfolio some of them.
Speaker Change: 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 so long winded way of saying those are the elements that get us to mid Forty's, and then up to 50%, which is our ultimate goal.
Jeff Creech: Thank you, Jeff that's great color I, just wanted to follow up on.
The plans for the convertible debt coming due in 2020, just any color there. Thank you.
Speaker Change: It's certainly a work in progress I would tell you right now I mean, that's been that's been a lovely debt instrument for us.
Speaker Change: Obviously went to market at a great time, and it's a zero coupon piece of paper, it's been terrific for us.
Speaker Change: It will come due at some point, we've got to deal with that and so we're looking at.
Speaker Change: How do we do that with the most traditional methods we can okay.
Speaker Change: So so we're looking at how we can really reduce that that 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 you know get toward maturity dates. So you'll hear a lot more about that in <unk> and 'twenty five okay.
Speaker Change: Alright, it sounds good looking forward to 2025 for you guys and I have a happy Thanksgiving again.
Speaker Change: Thank you and happy Thanksgiving to you and Brian as well okay.
Speaker Change: Thank you next question is coming from Jacobs Stefan from Lake Street Capital markets. Your line is now live.
Speaker Change: Okay.
Jacobs Stefan: Hey, good morning, guys. Thanks for taking my questions. Just curious on the health care business, obviously nice to see that return to growth this quarter.
Jacobs Stefan: But maybe just kind of give us a sense.
Jacobs Stefan: Order patterns now that we're kind of two thirds of the way through Q4, I mean do you feel like kind of the revenue level, where you guys were at in Q3 years are good.
Jacobs Stefan: I guess a place to build off of or do you expect stability here.
Speaker Change: Yeah. So first good morning, Jacob and a happy Thanksgiving to you coming up.
Speaker Change: Thanks for calling today.
Speaker Change: Yes, I think that this is the foundation to build from it's a you know.
Speaker Change: Healthcare is on.
Speaker Change: On the orthopedic side of our business you know of the health care business, It's a good steady business.
Speaker Change: The nice thing for US we're doing two things to grow that business number one 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 and 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 you know obviously it's.
Speaker Change: Tragic when someone comes to an emergency physician with trauma into the skeleton and our technology can apply their 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 and Europe.
Speaker Change: 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.
Speaker Change: Like the foundation of the business today, it's a terrific business strong brand very happy I see it growing from here.
Speaker Change: The.
Speaker Change: The dental business, obviously, a little bit more volatile we've been very primary and indirect printing of of liners 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.
Time, and Youll see that over the next two years, so again expect quarter to quarter.
Noise like any business, but.
Speaker Change: 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.
Speaker Change: Got it and then maybe just kind of on the E.
Speaker Change: I guess in sourcing initiative.
Speaker Change: Requiring more inventory to be repurchased back from your contract manufacturers and I'm just curious.
Speaker Change: I guess, what percentage of that kind of inventory.
Speaker Change: Surplus was repurchased from the contract manufacturers.
Speaker Change: Oh gosh.
Speaker Change: Jacob we had to buy and I don't know of a real number for you, but we had to buy I think Jeff well over $100 million of inventory, we had to bring back in house.
Speaker Change: I wasn't I'll be Frank with you Jacob I was not pleased.
Speaker Change: 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 that we're shipping on our behalf.
Speaker Change: And the speed at which you could introduce the new products. So those four things drove us to in source, Okay, and we're headquartered in South Carolina's lovely place to build product we've in sourced.
Speaker Change: 80%, 90% of our business now largely in South Carolina, we do have some manufacturing in Europe as well.
Speaker Change: But as a part of that whole taking you 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 amount 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 just.
Speaker Change: 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 will attain by the end of the year, but we've got more to go and on 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.
Speaker Change: On the balance sheet. So we did that at a time, where we could afford it.
Speaker Change: And you know as we work it down will realize the benefit from a cash and from <unk>.
Speaker Change: Gross margin standpoint on Cogs.
Speaker Change: Okay got it very helpful. I appreciate all the color happy Thanksgiving.
Speaker Change: Looking forward to 'twenty five for you guys.
Speaker Change: We are too thanks, so much for calling in.
Speaker Change: 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 Creech: 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.
Jeff Creech: For those in the U S. I wish you all a happy and safe.
Jeff Creech: Giving holiday with your families for those outside of the U S. I wish you a very happy holiday season coming up we will look forward to talking to you again at least in the new year.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Speaker Change: Yeah.