Q1 2025 3D Systems Corp Earnings Call
Greetings and welcome to <unk> Systems' first quarter 2025 earnings call.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Speaker Change: And what you require operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host make Mccloskey VP Treasurer and Investor Relations. Thank you you may begin.
Speaker Change: Hello, and welcome to <unk> systems first quarter 2025 conference call.
Speaker Change: With me on today's call are Dr. Jeffrey Graves, President and CEO and Jeff Creech E.
Speaker Change: <unk> and CFO.
Speaker Change: 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.
Speaker Change: The following discussion and responses to your questions reflect management's views as of today only and will include forward looking statements. As described on this slide actual results may differ materially additional information about factors that could potentially impact our financial results is included in our latest press release.
Speaker Change: And our filings with the SEC, including our most recent annual report on Form 10-K.
Speaker Change: Reports on Form 10-Q.
Speaker Change: During this call we will discuss certain non-GAAP financial measures in our press release and slides accompanying this webcast you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures finally, unless otherwise stated all comparisons in this call will be against that.
Speaker Change: Results for the comparable periods of 2024 with that I'll turn the call over to our CEO, Jeff Graves for opening remarks.
Jeff Graves: Thank you Mick and good morning, everyone.
Jeff Graves: As usual I'll provide some opening comments on our current operating environment, our key initiatives and priorities and then end with a few highlights of areas I think are important to investors in the future.
Jeff Graves: I'll, then hand off to our CFO, Jeff <unk> to provide details on the quarter's financial results.
Jeff Graves: Well then open up the call for Q&A.
Jeff Graves: So with that let's move to slide five.
Speaker Change: Well, let me start by putting the current market dynamics and perspective.
Speaker Change: Our three D printing industry broadly is pioneering a new compelling method of manufacturing products that will take place over time alongside traditional methods such as injection molding in polymers and chassis of metals in factories around the world.
Speaker Change: This trend is exciting and it's unstoppable.
Speaker Change: These three D printing technologies bring unique benefits to customers in terms of performance cost it dramatically shorten lead times and they also provide an effective means of producing supply chain disruption risks as the world experienced during COVID-19 or even as we're going through now with the tariff landscape shifting dramatically.
Speaker Change: And often on a daily basis, just look at the last 36 hours.
Speaker Change: As such each year three D printing is earning its way into factories around the world.
Speaker Change: So if this trend is so prevalent.
Speaker Change: His question is buyer sales week.
Speaker Change: Well the simple answer is the capital spending by customers across most markets is virtually frozen due in large parts of the uncertainty around tariffs.
Speaker Change: <unk>, specifically for our customer base with the exception of personalized health care experience.
Speaker Change: And AI infrastructure to some extent virtually all others are waiting to see what the future demand looks like and where they will need new capacity to meet this demand cost effectively.
Speaker Change: That's simple.
Speaker Change: Until this situation becomes clear I believe capex investments will remain somewhat anemic.
Speaker Change: So that means our sales will be impacted for some period of time, and consequently that will need to prioritize cost reduction efforts as long as this environment persists.
Speaker Change: To be very transparent and.
Speaker Change: Three D systems, we've resisted this pressure to some extent in order to complete our three year journey.
Speaker Change: Fresh our entire polymer and metal product lines.
Speaker Change: And bring what I believe are industry, leading printing solutions to markets.
Speaker Change: This is a journey we started in 2022.
Speaker Change: And we've seen it through.
Speaker Change: Over this period, our R&D investment has been held at just over 20% of revenue.
Speaker Change: Reflecting the breadth of our technology portfolio, whereas our competitors are similar that are similar in size are well below this level and declining.
Speaker Change: Sustained focus on our development programs combined with the in sourcing of our manufacturing operations, which is now virtually complete.
Speaker Change: Much different paths and others in our industry have taken and.
Speaker Change: And I believe the benefits of it'll be clear in the years ahead as the market ultimately rebound.
Speaker Change: Our technology refresh has been dramatic and scope and that has spanned all five of our major polymer printing platforms and very.
Speaker Change: Accordingly, our metal printing platform.
Was it a critical crossroads, just a few years ago.
Speaker Change: While many companies would have in many did bail out of metal printing at that point given the competitive landscape in the growing threat from the Chinese three systems did not <unk>.
Speaker Change: And because we didnt I can proudly say that our generation two metal printing systems, which are just now entering the commercialization phase.
Speaker Change: All for an outstanding combination of performance reliability and cost that rivals any platform on the market today.
Speaker Change: Our focus for these metal system. These are markets that are most demanding.
Speaker Change: Aerospace and defense and oil and gas in addition to applications throughout the human body.
Speaker Change: Through these efforts, we positioned ourselves to not only sell great printing systems, but to provide the industry's best application support as well as the capability to produce limited quantities of parts for customers until they install their own printers or move to a contract manufacturer.
Speaker Change: It is this combination of capability spanning process development to full production that is unique to our company.
Speaker Change: We provide these capabilities for a mature facilities in the United States and Europe, and now via our joint venture in Saudi Arabia, which you'll hear much more about in the future.
Speaker Change: It's a business model that we've successfully executed for years in our health care business in areas, such as titanium spinal implants, and we're now expanding into specific high rise high reliability industrial markets.
Speaker Change: So while it's always great to discuss our market, leading photopolymer printing systems, because they are truly fantastic.
Speaker Change: I believe it's absolutely essential for the company in our industry to offer both polymer and metal printing solutions.
Speaker Change: This is needed in order to ultimately obtain the scale that's required to service key customers around the world as their production demands grow.
Those companies that do not have this capability will ultimately need to develop it or acquire it in order to be successful. This.
Speaker Change: This is why would not trade our position in this industry for any others today.
Speaker Change: Even in the face of a challenging end market.
Speaker Change: So with these investments behind us in our in sourcing near complete it's time to focus on costs. In this period of economic turbulence last quarter, we announced a new initiative to reduce our annualized cost by almost $50 million over a six quarter period.
Speaker Change: This involved primarily a consolidation of our operating footprint and a streamlining of our back office operations.
Speaker Change: With ongoing sales pressures. However, we will now take the added step of aligning our overall organizational structure with the demand profile, we experienced in the first quarter.
Speaker Change: While we certainly hope that this market condition is short lived with the tariff situation as yet unresolved, it's prudent to assume that it will continue to adjust our costs accordingly.
Speaker Change: These incremental cost actions, which will be completed over the next two months.
Speaker Change: Will yield roughly $20 million of cost savings in the current year.
Speaker Change: Again, this is incremental to the $50 million of savings that is on track for completion by mid 2026.
Speaker Change: Thus, providing at least $70 million of cost savings in total.
Speaker Change: From a timing standpoint, our priority is to get to a positive EBITDA situation as quickly as possible.
Speaker Change: And then moving to positive operating and free cash flow performance. We believe this is highly attainable with the current sales levels. Once these programs are completed.
Speaker Change: With that introduction, let me move to a brief update on our key growth initiatives.
Speaker Change: One of the most exciting markets now opening before us as dentistry and I've spoken to you about this on several calls.
Speaker Change: When we last spoke we identified a $1 billion total addressable market opportunity in the United States alone with Europe, and Asia more than doubling December.
Speaker Change: We divide this market into four parts straighten protect repair and replace.
Speaker Change: The general repair market, which we've not spoken a great deal about has been foundational to us for many years.
Speaker Change: And one in which we have a leading brand in nexium materials, these materials or FDA and CE approved for sale in all major markets and they had a record sales performance in the fourth quarter of last year, while the first quarter was slightly softer the trend is upward and we expect it will continue particularly as patient tooth repairs are typically not.
Speaker Change: Awesome.
Speaker Change: In addition to our Nextgen materials for the repair of cheap a significant contributor today to our dental business relates to the straightened market, namely a liners and application that's been central to our success for decades, and with last year's announced signing of the largest contract in our company's 40 year history.
Speaker Change: Foundational to our dental business going forward.
Speaker Change: There were no due to the very concentrated nature of this customer base, we can expect more pronounced volatility in the straightened segment.
Speaker Change: The key manufacturer of these products periodically adjust their inventory levels and migrates over time to just in time materials sourcing strategies to reduce overall inventory exposure.
Speaker Change: This will lead to some degree.
Speaker Change: To some degree in quarter to quarter volatility in demand as it did in Q1.
Speaker Change: But overall this business remains on a solid growth curve as people around the world increase their use of the liners for teeth straightening.
Speaker Change: And finally as I've described before an important and exciting milestone with rapidly approaching for our dental business and that's the launch of our new next Gen 300, Jetting system designed specifically for the printing of monolithic dentures having.
Speaker Change: Having gained FDA approval for the dentures several months ago. The launch of the full printing platform is on schedule for full released this summer its already in beta testing and customer feedback is very positive.
Speaker Change: This will give us full capability to address the U S dental market, which is estimated to be over $400 million that several times the size of the aligner market.
Speaker Change: European certification is expected to follow next year, which will significantly add to this market size.
Speaker Change: Now, let's turn to some additional growth drivers and areas of strategic focus for the future.
Speaker Change: Our growth in hardware systems and service revenues in this challenging economic climate provides important early feedback on our long term growth strategy.
Speaker Change: We've navigated through a challenging sales environment in recent quarters, we've continued to see demand for new customer application development and spin and specialty perks manufacturing to increase.
Speaker Change: With respect to industrial companies, we view, our application innovation group or AIG as a unique enabler that allows us to aggressively address this growing customer need.
Speaker Change: In the first quarter the effectiveness of our AIG group was demonstrated most tangibly see the double digit revenue growth of our metal printing platforms enable.
Speaker Change: Even in the face of a soft capex spending environment metal parts that are of greatest interest to our customers are typically highly complex and they're designed.
Speaker Change: Commonly comprised of special metal alloys for use in high temperature corrosive high stress environments, which makes them expensive our.
Speaker Change: Our application engineers worked with customers through the entire design and workflow optimization process planting test parts for validation and in some cases manufacturing initial production volumes as a bridge to the ultimate purchase of metal printers software and supporting services. This model is proving very effective for us and one that will expand upon.
Speaker Change: And in the future.
Speaker Change: As an example of our technology advancement in metals that underpins. This growth is the new D. M. P $3 50, triple laser metal printing system.
Speaker Change: Which is now in full production.
Speaker Change: Over the last two years, we've made significant strides in application capability in machine productivity and the $3 50, culminating in the system's ability to print the highest quality metal parts, having very low oxygen contamination. This capability, which was an outgrowth of our titanium printing requirements for human spinal implants is attributable in parts of the unit.
Speaker Change: Vacuum chamber design of the DNP Flex 350 printers with this system argon gas consumption is significantly reduced which reduces operating costs, while yielding best in class oxygen levels, plus the 25 parts per million, resulting in exceptionally strong high quality high purity parks.
Speaker Change: In addition, we recently introduced a removable print module with a larger build volume, making the DMT. The most compact system in this size category in the industry.
Speaker Change: The triple laser system with its advanced objects offers high energy input from greater throughput and a system cost and provides a compelling return on investment for our customers.
Speaker Change: Key markets for this system or defense and aerospace as well as AI infrastructure applications with sales spanning the U S Europe, and middle East and Asia.
Speaker Change: A similar story will soon unfold for our D. N. P 500, Gen. Two system, which is now in operation within our AIG group and is expected to enter full full commercial production in the near future.
Speaker Change: With this larger print volume and greatly enhanced laser system. It will open an even greater range of applications and the higher reliability markets around the world.
Speaker Change: Now turning to slide seven.
Speaker Change: Personalized healthcare and medical parts manufacturing business are also key areas of strategic focus for our future as discussed previously were on mix. We are increasing our focus in these critical areas of our portfolio and I'm pleased to share that medical parts manufacturing and personalized health care grew revenues, 18% and 17%.
Speaker Change: <unk> in the quarter.
Speaker Change: On a year over year comparison.
Speaker Change: Led once again by our AIG expertise, we partner closely with leading medical device manufacturers collaborating with them from concept to commercialization of three D printed implants and instruments within a variety of surgical specialties.
Based on the growing demand. We see ahead, we've increased our ability to scale. This business unlocking double digit momentum for FDA and CE approved medical implants, and surgical AIDS manufactured in our ISO 13485 certified factories in the U S and Europe.
Speaker Change: And our personalized health care business, we tailor specific patient specific solutions partnering with manufacturers and health care providers to transform surgical outcomes for both patients and surgeons.
Speaker Change: Our multifaceted offerings include advanced design, and planning software, creating custom solutions that help translate virtual surgery into the or improving outcomes and the overall patient experience our long standing success in the cranial maxillofacial or TNF space was on display again in April when we announce.
Speaker Change: Our solutions enabled under the world's first facial implant manufacturer to point of care within the hospital.
Speaker Change: In collaboration with the University hospital of basal.
Speaker Change: We're now expanding our focus to address new areas of the human body and into new geographies.
Speaker Change: Accelerant to our growth in the nearly 250000 patients served through our personalized health care solutions business.
Speaker Change: So before I turn things over to Jeff <unk> to discuss our financials in more detail I'd like to conclude my remarks on slide eight.
Speaker Change: Given the continuation of economic and geopolitical instabilities and the rapidly shifting tariff landscape, which is still impacted our customer spending patterns, we decided to approach our outlook for the remainder of 2025 with a conservative view.
Speaker Change: This cautious approach, which we believe is prudent considers the softer than expected start to the year given the pause we saw in our customers capex spending since early in the year.
Speaker Change: While we remain encouraged by the new printer and service sales growth during the first quarter on balance of the year is off to a rough start and we therefore need to take more aggressive approach to reduce our cost structure.
Speaker Change: In order to do this well now execute against two work streams, both focused on profitability improvements as I've described the first is our previously announced cost actions, which are on track to deliver over $50 million of annualized savings by the first half of next year.
Speaker Change: This is largely focused on footprint consolidation and back office efficiency improvements.
Speaker Change: In addition, we decided to implement an incremental set of actions to deliver an additional $20 million of in year savings for calendar 'twenty five.
Speaker Change: The center will focus on resetting our organizational structure to align it with the demand environment that we currently face.
Speaker Change: Our continuity in R&D investment over the last three years combined with our in sourcing of manufacturing and supply chain management.
Speaker Change: Given our strong foundation to leverage as we now adjust our cost structure in the face of challenging market dynamics. We believe that these efforts will result in our structure and operating model that will deliver positive EBITDA performance and the cash generation levels that are needed to sustain long term investment in the future.
Speaker Change: While I do not like having to pull our 2025 guidance at this point given the current volatility stemming from the fluid tariff situation.
Speaker Change: See no option, but to do so hopefully this will resolve itself in the near future, but until it does we'll be very prudent in our planning focus on our costs. So we can be profitable at our current revenue levels. When these actions are completed.
Speaker Change: Finally on April 1st we announced the completed sale of our Geo magic asset portfolio.
Speaker Change: The transaction delivered over $100 million of net proceeds to our balance sheet, leaving us in a strong net cash position as we now address our cost structure.
Speaker Change: As we move forward our execution of these restructuring plans combined with our current cash reserves enable greater flexibility positioning our leading portfolio of assets to transform manufacturing for a better future.
Jeff Graves: And with that I'll, now turn things over to Jeff Jeff.
Speaker Change: Thank you, Jeff and good morning, everyone I'll.
Speaker Change: I'll begin with our revenue summary on slide 10.
Speaker Change: For the first quarter, we reported consolidated revenues of $95 million declining 8% from prior year as growth in services and hardware systems was offset by a decline in materials.
Speaker Change: Within our segments industrial solutions declined 7% with revenues of $53 million with the shortfall driven by material shouse somewhat offsetting this was growth in printer sales and a continuation of success in aerospace and defense end markets.
Speaker Change: Health care solutions revenues of $41 million decreased 9% from the previous year as growth in services was offset by a decline in materials and essentially flat printer.
Speaker Change: Materials performance was primarily driven by near term inventory adjustments in the dental orthodontics market. However, customer commentary suggest more of a as a patient demand to continue supporting the business.
Jeff Graves: As Jeff mentioned earlier personalized healthcare and parts manufacturing remain integral pieces of our strategy and were up 17% and 18% respectively.
Jeff Graves: Now the gross margins on slide 10.
Jeff Graves: For the first quarter, we reported non-GAAP gross profit margin of 35% compared to 40% in the prior year.
Jeff Graves: This decline in period over period margin was primarily driven by lower volumes and unfavorable price and mix.
Jeff Graves: Longer term, we maintain the expectation to drive benefits to our margin profile by way of our announced cost initiatives focused on footprint consolidation.
Jeff Graves: <unk> factory utilization and inventory management as well as logistics efficiencies.
Jeff Graves: Let's look at slide 12 for operating expense.
Jeff Graves: non-GAAP operating expense for the first quarter was $61 6 million a $5 million improvement from the prior year driven by our cost initiatives.
Jeff Graves: Looking ahead, we expect our cost management programs inclusive of yesterday's announcement to continuing to drive a meaningful improvement in operating expense going forward.
Jeff Graves: Turning to slide 13 to finish up the P&L.
Jeff Graves: For the first quarter adjusted EBITDA of negative $23 9 million declined from the prior year by $4 million, primarily driven by lower revenues and gross margin.
Jeff Graves: Although we continued to maintain an elevated level of R&D investment in the quarter. We were pleased to see an improvement in overall operating expense driven by our cost actions.
Jeff Graves: non-GAAP loss per share was 21 cents compared to a loss per share of <unk> 17 cents in the prior year.
Jeff Graves: Let's take a look at the balance sheet on slide 14.
Jeff Graves: We closed the quarter with $135 million in cash and cash equivalents compared to $171 million at the end of last year with the sequential decline in cash predominantly driven by operations. However.
Jeff Graves: However, first quarter performance includes approximately $10 million of payments to support items outside of normal quarterly operations, including examples such as accelerated inventory purchases in anticipation of potential tariff impacts compliance requirements and expenditures on facilities closures among other things.
Jeff Graves: Yeah.
Jeff Graves: Immediately following the end of the first quarter, we announced the close divestiture of G M Magic software portfolio.
Jeff Graves: Gross proceeds from the sale increased cash by nearly a $120 million and we expect to return at approximately $10 million to $15 million.
Jeff Graves: And taxes associated with the transaction.
Jeff Graves: Before turning to the next slide I'd like to call out a few important items.
Jeff Graves: As an interim update accounting for the GM Magic sale proceeds and our April operations. Our most recent months in global cash balance was approximately $250 million.
Jeff Graves: We are currently in a net cash positive position in comparison to our outstanding unsecured convertible notes.
Jeff Graves: Which are due November 2026.
Jeff Graves: We are continuing to proactively analyze a range of scenarios to address this maturity that will come due in approximately 18 months.
Given our prudent and opportunistic approach to materially reduce the overall balance of this maturity at a highly attractive discount over the last two years.
Jeff Graves: We look forward to providing updates on our plans as we continue to move forward.
Jeff Graves: For slide 15, and some closing remarks.
Jeff Graves: As Jeff mentioned earlier due to the risk of protracted weakness in customer capital investment spending.
Jeff Graves: We are withdrawing our full year guidance for 2025, as we continue to focus on delivering profitability at our current scale.
Jeff Graves: We believe with our strong new product portfolio spanning all metal and polymer platforms.
Jeff Graves: That we are well positioned for accelerated growth and profitability when customer spending on capex rebounds.
Jeff Graves: We thank you for your time this morning, and your continued support of <unk> systems, and we will now open the line for questions operator.
Jeff Graves: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Jeff Graves: A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment for your first question.
Speaker Change: Our first questions come from the line of Troy Jensen with Cantor Fitzgerald. Please proceed with your questions.
Troy Jensen: Hey, good morning, gentlemen, thanks for taking my questions here, let me start out with you a doctor agrees.
Troy Jensen: Just to comment on our aligner inventory in a moment to just in time.
Troy Jensen: Can you go into that a little bit more and just kind of let us know what you think kind of occurrence.
Troy Jensen: You know material inventory levels are in numbers of weeks or something.
Jeff Graves: Yes, I'll take a shot at answering that Troy and it's great to hear your voice.
Troy Jensen: Uh huh.
Troy Jensen: So the aligner market continues to be a growth market all in all if you listen to the commentary by you know the companies that are in that space. It continues to be a growth market. It may have moderated some but it's still a growth market and moving global.
As the dominant companies there have gotten more sophisticated and larger.
Troy Jensen: And is there growth rates have slowed.
Troy Jensen: They're they're just paying a lot more attention these days to inventory and working capital.
Troy Jensen: I think it's a common common symptom of of a maturing business, where they have a more more sophisticated infrastructure to manage their inventory quite frankly, so they could move to if not a day to day process. They can move to a much more controlled environment.
Troy Jensen: And with factories around the world the money they tie up in working capital significant so it's a big pay off for them. So as a supplier to them. What it means is as they go through that transition just a lot more volatility and forecast and things to us. So we have we have a great relationship there and we've got it you know we talk to them.
Troy Jensen: On a daily or hourly basis about meeting their their supply needs.
Troy Jensen: It's clear that they're migrating to a more sophisticated approach to do it and with that though be closer in matching supply with demand.
Troy Jensen: In the past when they were growing really fast Troy I think it was just just make sure you never you always had materials on supply quite frankly, and I'm speaking for them, but the attitude. They projected was very much look just make sure. We have all the inventory we need to make sure we keep all the manufacturing running.
Troy Jensen: Now, we know with a more volatile.
Troy Jensen: Hey, good economy around the World I think it's just a more prudent way, they're managing their inventory reserves in their inventories and for us that transition can be a little bit volatile. So we had a very good year last year. We saw some softness in Q1, some of which was expected some of which was a bit of a surprise but.
Troy Jensen: It is the.
Troy Jensen: The public commentary as their business their business continues to grow and obviously as their key supplier of materials, our business will over time grow too. So I wouldn't read too much into it it's a symptom of growing up and becoming more sophisticated and as a supplier and leads you to having to be a little bit more nimble and you know you can ask.
Troy Jensen: Correct, a little bit more volunteer volatility.
Troy Jensen: In the in the early.
Troy Jensen: Early phases here of a multi year contract. So long term I don't worry about the business I love. It I just want to focus on executing well in the shorter term there can be some quarter to quarter variations, which are always painful but you. Just you just move on so anyway that was the story of the first quarter I wouldn't read anything more into it than that.
Troy Jensen: Aligner business is still a great one.
Troy Jensen: And there'll be more and more customers in that field by the way I believe it is.
Troy Jensen: People are used around the world.
Troy Jensen: So did somewhere in there did I answer your question Joel.
Troy Jensen: A number of weeks of inventory, but that's okay.
Troy Jensen: Go onto the next one here.
Speaker Change: Yeah in terms of in terms of inventory numbers I really I really can't call. The number for you, but I think it's very well managed right now I think they've worked through a lot of their their inventory bring down. If you will are leaning out. So I don't have a number for you, but I think they've worked it to where they want it to be.
Troy Jensen: Hey.
Troy Jensen: To kind of match their growth trajectory now so you know it's just full speed ahead.
Speaker Change: Perfect very helpful. All right. So then my follow up question you know with all the cost cuts going on you know I've known over the past couple of years, you've entered some new markets with the M via acquisitions at quite a new technology does.
Speaker Change: Does it make sense to like maybe completely exit some of these new technology areas that just your niece into with respect to your revenues right.
Speaker Change: Yeah, Troy that's that's.
Speaker Change: It's an excellent question to always ask especially when sales are off as you know what what can you.
Speaker Change: Greater assurance really focus on.
Jeff Graves: Some of the acquisitions that we did have a new technology, bringing in and integrating their clearly winners I love, our extrusion technology with a tightened platform more fully integrating that come out of this acquisition for some of the cranial implants, great technology, we can fully integrate those get cost out and just keep running great.
Jeff Graves: Some of the stuff that we've moved into and regenerative medicine I'll be I'll be candid with you.
Jeff Graves: Our lung program with United Therapeutics is fantastic.
Jeff Graves: And if I if I go back three years ago.
Jeff Graves: Its bond some truly novel technology that we really wanted to explore and see what the potential was done with so you know everything from printing other other types of human tissue to looking at the pharmaceutical market and tissue printing for for those organ on a chip printing basically for testing a drug.
Jeff Graves: So those were exploratory efforts towards the R&D efforts to to see how far we can carry the technology and to lockup. Some IP for the future things like that when when sales are soft you start looking really hard at those R&D investments and say should I ran them back or even even pause them for a while.
Jeff Graves: <unk>.
Jeff Graves: And let the world kind of kind of stabilize that's very much the mode. We're in right now so we're picking our priorities.
Jeff Graves: Again, our Oregon program is fantastic the partnership with United Therapeutics, The long work.
Jeff Graves: You know I think revolutionary things that come out of that in a couple of years.
Jeff Graves: The spin offs of that technology are going to slow down undoubtedly.
Jeff Graves: And then the other.
Jeff Graves: The benefit is we can carry some of their technology into our industrial printers.
Jeff Graves: For example, very high precision projection systems has been a real boon for the industrial space and you know things like electrical connectors and other applications. So we're we're exploiting that now putting putting some of that technology into our industrial printers will continue doing that but we're going to focus Troy. The mantra is focus on the markets.
Jeff Graves: But you're absolutely certain our mood in the right direction for three D printing.
Jeff Graves: So for personalized healthcare winter its core quarter are being in both the design of surgical procedures. The surgical AIDS in the parts. That's great. That's fantastic business for US will continue expanding throughout the body there on the industrial side.
Jeff Graves: You'll see us moving from a broad based supplier for them for all industries to over time to a more focused supplier to the high reliability markets, So aerospace and defense oil and gas.
Jeff Graves: AI infrastructure is great for us that kind of stuff. So those clearly benefit from three D printing a lot and when we've got really good technology synergies with our health care business, So you'll see us really focus.
Jeff Graves: On certain markets and.
Speaker Change: I tried to say it in the opening script our model our business model is going to migrate over time, a little bit what we're seeing from customers Troy as it is a demand not only to demonstrate that FERC can be made its actually didn't make it and some limited quantities. So we're not gonna be a service Bureau, but I will tell you our special.
Speaker Change: In metals, our ability to manufacture limited volumes of parts is going to grow.
Speaker Change: For those high reliability markets on a bespoke basis for certain customers to actually bridge them. Because these systems you know all in all are fairly extensively the metal printing systems so customers.
Speaker Change: What's their capex spending so if you can bridge them to a period, where they can either decide okay, I'm going to buy printers or I'm going to outsource to a contract manufacturer that's really valuable to them. So in our metals business. While you don't get a lot of the consumable pull through.
Speaker Change: We're updating the model to say, yes, we'll demonstrate the process with your materials, which are often exotic and we'll do some limited part manufacturing for you in order to bridge you to a higher volume future and I think that combination is how we continue to drive gross margins up in the metals business versus the.
Speaker Change: Consumables, which have always been a big part of the polymer business.
Speaker Change: So long winded answer to your question.
Speaker Change: Hope again somewhere I addressed it yeah.
Speaker Change: Thank you Jessa and good luck guys added this year.
Speaker Change: Thanks.
Speaker Change: Thank you. Our next question is come from the line of Greg Palm with Craig Hallum. Please proceed with your questions.
Greg Palm: Hey, good morning can we just maybe go back to the quarter end and spend a couple minutes I'm still a little confused because you.
Greg Palm: How does the Q4 earnings call on March 27. So you had just a handful of days left in the quarter and you guided for flattish revenues at that point, you know call. It 103 million you know, which means you Miss by like nine I mean are you able to break that out I mean, what are you expecting like a $9 million consumable shipment rate at the end of the <unk>.
Greg Palm: Or what what exactly sort of caused the shortfall.
Greg Palm: Yeah Fair question, Greg So two two factors and they both relate to either our shipments on the materials side Youre right. I mean, we were expecting and I know your magnitude is off but I mean, the you are right we were expecting as always theres into quarter shipments for materials, particularly in the it frankly in the in the aligner.
Greg Palm: Market, there's always there's always plans for shipments at the end some of those logistics, we don't control and we don't have direct control up so some of those we prepare for and in good faith expect but they can often slip into the new quarter. So there's a bit of materials part of that.
Greg Palm: The other and we have no no real visibility of that until the last day of the quarter. Its very its often very backend loaded.
Greg Palm: On the on the equipment side is a little bit more interesting answer.
Greg Palm: Probably no less no more satisfying but on.
Greg Palm: On the equipment side.
Greg Palm: Trading real production environments, now, okay, and especially.
Greg Palm: Especially in metal systems, or the big polymer systems, where the Asps are higher.
Greg Palm: A lot of those deals end up happening in those pose will have the finished goods in stock and ready to go and we're waiting on the P. O to be issued and we saw in Q1 of a particular spike in P. OS that we're that we looked at it.
Greg Palm: I wouldn't say all you've been pushed out I would I would say, that's where my comments around customers revisiting how they're spending capital.
Greg Palm: There is a broad I think most every company that has industrial exposure there is a broad relocate and where they want to put factories and where they want to put production capacity. So we felt the brunt of that you know you've got people, saying, Hey, you know with good intentions, we hedge and prepare this we're not going to issue right now.
Greg Palm: And in many cases, it just slipped into the next quarter.
Greg Palm: I think that trend will continue in some cases, it's a.
Greg Palm: Hey, they put it back in their pocket and say I got to reevaluate where I want capacity.
Greg Palm: Or do I want it in the U S. Do I wanted overseas some markets much more predictable like aerospace and defense No doubt you know a lot of that is headed toward the state's and verticalizing.
Greg Palm: Rising their supply chain, that's great and so we love those those we saw very little movement on at the end of the quarter. The closer you get to a consumer driven good or something like that and the more extended supply chains. The more they are really looking at where they put their factory capacity.
Greg Palm: And it's incredibly frustrating I would tell you so and I'm sure. It's frustrating for our investors and it's an embarrassment of mis revenue like that when you're so close to the end of the quarter, but that is the reality right now which is why we're just saying look we're kind of saying look the world is going to be volatile. This year, we're going to focus.
Greg Palm: On costs, we're going to we're going to get our costs down let's assume the world doesn't give me Kinder and let's just get cost out of the business and and kind of right size. It for the current demand environment. So.
Greg Palm: <unk>.
Greg Palm: Wish we had been more accurate at the end of last quarter.
Greg Palm: It's you know I'd like to say it was out of our hands, but it sounds like an excuse.
Greg Palm: It's the reality of the World We live in right now and frankly, Greg is why we pulled guidance because I don't want to put numbers out there that we can't hit.
Greg Palm: Or are you able to quantify what the consumable or material sales were on a year over year basis in Q1.
Greg Palm: The material sales in Q1.
Greg Palm: Total.
Greg Palm: Is that the question is how much of.
Greg Palm: Revenue declined yeah, Yeah, I mean.
Greg Palm: Yeah. It was it was.
Greg Palm: It.
Greg Palm: I'll be wrong, and I'll be wrong, a little bit wrong, but it's it was in the higher single digits.
Greg Palm: Millions I'm, not a prudent percentage, but and correct me, Jeff mix, if I'm wrong, there, but it was in the.
Greg Palm: So materials were actually down.
Greg Palm: 23% period over period, and we've spoken to that Jeff did I did as well in our comments, we did experience a fair amount of material decline in the period over period comparison, which was propped up in the services and printers area.
Greg Palm: And again this gets back to the comments that Jeff made just a moment ago right predictability of.
Greg Palm: These sales into markets that are becoming increasingly more unpredictable so.
Greg Palm: And again back to the dental materials area continued inventory management that cause those numbers together. Its you know its interesting Greg and I'll get off this question in a minute, but when you look at the impact of tariffs.
Greg Palm: The bigger impact for us and I think it's this way for a lot of companies is not so much in the purchased components that come out of China or elsewhere. It's in logistics costs, you know, where where are you shipping stuff on a transitory basis, where you're warehousing thing stuff like that.
Greg Palm: So the desire to bring inventories down it is a little counterintuitive you would think people would lay in more inventory when theres a risk of tariff ahead, but when you look at the logistics costs and the effect of tariffs when you ship to one warehouse and ship to another geography, it can be really significant so when we.
Greg Palm: To our customers about Hey, why why would you bring your inventories down.
Greg Palm: Certainly the soft economy can do that but the unknown risk of tariffs.
Greg Palm: Here's a big ripple effect on logistics costs, which companies are really starting to try to manage so to minimize that risk they start bringing inventory levels down and I think that was a big part of what we saw even in the aligner market. Some of it was just.
Greg Palm: Inventory, obviously, it was inventory adjustments, but I think it wasn't all demand related a lot of it was in interim cost related as they ship materials around <unk> around the world. So I understand that we go through the same analysis ourselves and it's really maddening.
Speaker Change: Yeah I understand are in.
Speaker Change: In terms of the path to profitability I guess when these current cost savings programs are completed do you have a break even rate in mind I think you mentioned profitability at current revenue levels that implies like $95 million does that is that the case again, when you're sort of fully completed with the $70 million.
Speaker Change: Yes, and it's it's it's.
Greg Palm: A rough number Greg.
Greg Palm: Our goal right now is we're driving to be profitable at current revenue levels. When you in your analyst.
Greg Palm: Assuming we get all of our cost takeout finished up and it's all flowing through but we're we're we're we're just making this macro assessment is saying.
Greg Palm: At the current revenue level, we need to be profitable and generate positive cash flow. So what's adjust our cost structure to get there. We've spent a lot of money in the last three years and refreshing our portfolio and in sourcing manufacturing we're in a great position to do it so let's focus on it and assume the world stays stays as it is.
If they get tariffs figure it out and the world turned brighter there'll be just upside from that.
Greg Palm: So that's our goal and we're not laying out a specific date, but what I will tell you is our cost actions. We're taking right now are aimed to get us there when they're all implemented at the current kind of revenue levels, we're saying.
Greg Palm: Okay Yep, Okay, I will I'll leave it there thanks.
Speaker Change: Thanks, Greg.
Speaker Change: Thank you. Our next question is coming from the line of Brian Drab with William Blair. Please proceed with your questions.
Brian Drab: Hi, Good morning, Thanks for taking my questions I wanted to just start by asking.
Speaker Change: Yeah.
Speaker Change: The options as you view them as is.
Speaker Change: You stare down that.
Speaker Change: Debt maturity 18 months from now.
Speaker Change: Obviously, it's going to be higher it seems like it's going to be a higher rate environment than you'd like I'm. Just wondering what are the options as you view that.
Speaker Change: Well, Hey, Brian good to hear your voice.
Speaker Change: Our current rate zero, so it's been great that actually I mean.
Speaker Change: We went to market just as the right time for years ago that was great.
Speaker Change: Fortunately you know that will come to an end as well.
Speaker Change: Well.
Speaker Change: We will do something whatever debt, we have remaining in Dallas it'll be at a higher interest rate.
Speaker Change: We're looking at all options, Brian, but we'd love to have the cash to just pay it off.
Speaker Change: If we if we if the world looks tough and we want more cash on the balance sheet. We're looking at options to roll that forward. So I'd say everything's on the table, we wanted to wait to get the Geo magic sale done in the cash in the bank, which we've done now. So now we were going through a thoughtful process to say, okay. How does that balance sheet to look how much debt did.
Speaker Change: We want to have left to your point, it's going to have it's going to carry some interest rate.
Speaker Change: And how much of it can we just pay off how much comfort do we have.
The world is going to get kind of your how much cash we want to have remaining so those are the variables, we're going through and it's.
Speaker Change: We're marching down the path of assessing those options will be even with the board and we will make a decision in the very near future about what we do.
Speaker Change: Okay. Thanks, and then can you just talk a little bit about.
Speaker Change: The areas, where you're going to cut costs and I'm seeing that would be incremental.
Speaker Change: Plants at an impasse.
Speaker Change: And how that.
Speaker Change: It could or.
Speaker Change: And just the concern is that it could affect your growth in and.
Speaker Change: Yeah, and then it kind of relates to my first question because you need it if you need it I think those are probably the two biggest questions that youre thinking about.
Speaker Change: Yes, that's that's yeah, Brian I'd tell you that's that's it.
Speaker Change: Absolutely great question, because that's the debate you go through and we have we have stubbornly held onto our R&D spend particularly for the last three years, we've been spending 20% of sales and that has been very deliberate and our competitors are all cut back they've all they won't throttle back and I understand.
Speaker Change: Why is current demand is soft, but I really believe Brian on the rebound these.
These new systems will sell very well and I also believe as I said very clearly I think for a company to be successful you're going to have to have polymers in metals, both and youre going to have to have a range of polymer solutions because they are all good for different things. So I love our portfolio unfortunate it is expensive from an R&D standpoint to maintain at all.
Speaker Change: We had a big Hill declined three years ago, and refreshing the whole thing and we've done it I mean, it's not all commercialized yet, but its all passed the point of intense spending for development.
Speaker Change: And you can never stop but you can throttle back on the on the rates and just kind of maintain momentum kind of like riding a bike up a hill you had to work real hard to get near the summit and then it sort of pedal, but it but it takes less effort. So you can afford to take some cost out at that point, where does that point.
Speaker Change: I would say the same thing with in source manufacturing I think it's a it's a strategic advantage for us to be able to make our own products because the because of the quality control and the and the mix of customers want we directly do that now.
Speaker Change: Predominantly here in South Carolina, and it's a great asset for us So the art of it now is picking what we maintained investments in for growth and I can tell you very clearly Brian health care is top of the list. We love that it's great personalized health care, which are implants in the body.
Speaker Change: Is great. The regenerative medicine program. Fortunately, we have a great partnership on that that helps us to help us grow the costs.
Speaker Change: That's going to be an incredible business in a few years for us I believe in the dental business as you and your team saw.
Speaker Change: The lab day show in Chicago, the dental business can be a great one for us.
Speaker Change: I love it it's a billion dollar industry in the U S and we'll work with the sport. So those are those all make the cut on the industrial side.
Speaker Change: Aerospace and defense is something we'll focus more and more and we get a lot of requests now for parts for the Navy and for the flying Air Force.
Speaker Change: That.
Speaker Change: For a range of purposes. Some are lightweight high temperature materials. Some are for corrosion resistance lead times on these these exotic system parts are outrageous through traditional means we had told the story a fair bit now, but one of the submarines in the in the U S fleet, we were able.
Speaker Change: To turn parts around in days with a very exotic alloy that goes on the submarine we were able to turn them around in days and their lead time through traditional methods was over a year, so getting that seven out of out of dry dock and back to see those kind of benefits are real they're extremely valuable we're gonna do more of that so our metal.
Speaker Change: Printers have been designed for that.
Speaker Change: To do more of it and we're going to expand some part manufacturing to bridge customers until they buy systems is what we've been seeing Brian is people say, yes, I love I love the process it'll take me a while to get my capital request through so you see a loss of months and months and purchase order, but they still need parts. So we're able to go into limited.
Speaker Change: Production, we are not going to be a service Bureau, okay, but when we've helped the customer develop a process, we're going to offer to make parts for them in certain cases up to a certain point, where they can either buy a printer or they can move it to a contract manufacturer that they choose so and we'll help them with that that's our business model, especially in metals. So we'll do it.
Speaker Change: Aerospace and defense, we're already doing it and AI or AI infrastructure for data centers, we will do it in oil and gas and our JV in Saudi Arabia is great for that you know it gives us great insights into the Uinta oil new oil and gas industry.
Speaker Change: We're using that combined with our relationship with Baker Hughes and others.
Speaker Change: To really drive penetration in those markets those high reliability markets. What we are we will always continue to provide parents through a service bureaus and in other more consumer driven applications as needed, but more and more it'll be a bespoke industry for us in.
Speaker Change: In those high reliability markets, where we are so good we'll leverage what we've done in health care into the industrial space. So again apologize for the long winded explanation, but you asked a very good question about focus.
Speaker Change: And I hope I've answered it in that in that.
Speaker Change: Little speech I gave you.
Speaker Change: Yeah.
Speaker Change: Hey, Danielle O'brien.
Okay, Alright, it did mute because I'm outside and it's noisy I don't know.
Speaker Change: I hope that's all very helpful. I, just think in the modeling it would help us if you could.
Speaker Change: Could you give us any sense for costs and I don't know if you said this but costs coming out of SG&A and the incremental yen.
Speaker Change: Are costs coming out of cost of goods and yeah that was a good description of the growth opportunities, but I'm really try and I know it's sensitive to talk about.
Speaker Change: There were cuts are going to happen, but I'm I'm concerned like are you going to be able to maintain the reseller channel of the marketing the sales and everything to drive that growth and how do you strike that balance, but all we can discuss later too but any more comments on that would be helpful. But I'll I'll pass it on.
Speaker Change: It's gonna be a it's going to be a fairly fairly evenly split between between cost of goods and opex Bryan so.
Speaker Change: The Devil's in the details there as you pointed out so we'll come back to that in the future with you okay.
Speaker Change: Sounds good yes, thank you very much.
Speaker Change: Thanks.
Speaker Change: Thank you. Our next question is come from the line of Alex Valero with loop capital markets. Please proceed with your questions.
Speaker Change: Hey, guys. Thank you for taking my question. This is Alex on Fernando. So you mentioned AI infrastructure can you elaborate.
Speaker Change: I guess you are currently in Boston and can you provide any color on any potential future infrastructure I guess, where you think you can play a meaningful role.
Speaker Change: Yes. So there's two there's two areas you can think of for AI infrastructure actually three.
Speaker Change: One of them has been making chips. Okay. So the so the semiconductor equipment manufacturers, so that the folks that make the equipment to print. The chips that are involved in that very expensive machinery and firm for a very good reason, then the precision and making it a chip it has to be.
Speaker Change: <unk> high and the machine has to be extremely stable.
Speaker Change: And so one of the attributes of it is getting heat out of it and to make sure. It's thermally stable, okay extremely and obviously structurally stable. So we can make basically.
Speaker Change: Collections of components that are normally bolstered our welded together, we can make them in single printings. We can also make hollow structures that allow <unk> to be removed very quickly from from the from the platform where the chips printed on.
Speaker Change: In the end, we can make very stable.
Speaker Change: Oh platforms to print shifts on.
Speaker Change: And with fewer part count So you get some cost out you get higher performance. It's a perfect for three D printing, we've been asked that for.
Speaker Change: Several years to work our way in and it was announced the time, so I love that business. It's it's it's hard to work your way in and where they're on the chip making side.
The interesting second area. That's opening up right now is as people are building. These massive data centers getting heat out of them is a huge challenge because of the electronics getting heat out is an enormous challenge, we can print pure copper or high or high purity copper with some strength in the agents in order to.
With exotic shapes to get heat out of the data center more effectively very simply so whether it's a GPU or the entire data center, we can get to eat out much more effectively so you'll see copper printing primarily for that.
Speaker Change: As a growth area for us in the future and then you've got the whole electricity supply question from people like General electric and others that are having to put in capacity to supply the massive amounts of energy needed by data centers.
Speaker Change: <unk> printing is a key role to play in that in those in those machines those turbines, whereas for turbine blades or our other other infrastructure in a turbine that has to be cooled.
Speaker Change: Three D printing has been there for some time and we will continue to grow so there's three areas in AI infrastructure, we're very excited about chips datacenters and energy production.
Speaker Change: Really helpful. Just a quick follow up just kind of on a similar note removing the impact of macro what what areas would you identify as being the greatest opportunity Tony for you at the moment.
Speaker Change: Well the most stable areas or they are the most predictive is this the best to be in right now aerospace and defense is is great. Okay, and we've historically had a smaller presence there metals for us has been instrumental in getting into that business and have been in a bigger way and it'll be a.
Speaker Change: An investment area for growth for us because we are a U S company, we have our full capability here in the states as we want to exercise or for the U S Defense Department and others.
Speaker Change: Also our facilities in Europe for the European Aerospace business as well up in Belgium. So we have great capability locally to handle sensitive data the manufacturer parks develop processes and ultimately to sell printers, such as aerospace and defense is a big area.
Speaker Change: And AI infrastructure tends to be a very regional business. When it comes to data centers and energy production. So I like that area very much it's good oil and gas.
Speaker Change: Clearly oil and gas needs are going to go on for decades to come.
Speaker Change: We've made a lot of inroads there so those industries aren't as affected by tariffs and so we like them very much.
Speaker Change: And then the same would apply to a polymer systems in those same industries. The more in the closer you get to the consumer the more extended supply chains.
Speaker Change: Those are less exciting right now because of the tariff volatility.
Speaker Change: You just have to see where people want to put capital once they make those decisions that can be great markets, but in the short term many customers are pausing or reducing their capex spend waiting to see where all of this discussion goes in the world.
Speaker Change: Okay.
Speaker Change: That was really helpful. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you we have reached the end of our question and answer session I would now like to find the floor back over to Jeff graves for any closing comments.
Jeff Graves: I just want to thank you all for participating in the call today, we look forward to updating you once again at the close of the second quarter, Thanks, operator, and that'll be the end.
Speaker Change: Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.
Speaker Change: Yes.
Okay.