3D Systems Reports Operating Results for Q1 2008

I believe that several independent events coincided during the period to counter the sequential progress that we made in 2007, commented Reichental.

Our revenue declined during the first quarter primarily as a result of lower sales of our large-frame rapid manufacturing systems, reflecting domestic marketplace softness in demand for prototypes and functional parts produced on these systems. I believe that the U.S. soft demand for end-user parts during the quarter slowed our ability to close sales for systems destined to parts manufacturers as they hesitated to invest in significant capacity additions during an uncertain economic period. Regretfully, due to their relatively lower selling prices, sales from our mid-range prototyping systems and 3-D printers were not enough to offset the revenue gap created by the anemic demand for large-frame systems, continued Reichental.

Furthermore, I believe that, as a result of the highly publicized Tangible Express business failure, our ability to close sales of new systems suffered during the first quarter. Some prospective large-frame buyers paused to evaluate the Tangible Express situation while others tried to acquire this equipment at deep discounts as a result of Tangibles announcement during the winter that it was going out of business and putting its entire fleet of 3D Systems equipment up for sale. These two unrelated speed bumps caused our domestic U.S. sales to decline to 38% of global sales, continued Reichental.

The third factor that affected our business in the first quarter of 2008 was that, throughout the quarter, the company received several anonymous letters alleging wrongdoing by the company and certain members of its executive management. The Audit Committee of the Board promptly conducted a comprehensive investigation through independent outside counsel, continued Reichental.

That investigation concluded that all of these anonymous allegations were baseless and that there was no wrongdoing either by the company or its management. While we may never learn of the motivation of the nameless author, this investigation consumed considerable resources and time and resulted in operational disruptions during the first quarter including the sales process which in the ordinary course of business tends to intensify during the second half of each quarter. It also added $0.6 million of investigative legal and accounting expense to SG&A in the first quarter, added Reichental.

For the first quarter of 2008, consolidated revenue benefited from the favorable effect of foreign currency translation that was more than fully offset by the unfavorable combined effect of volume, price and mix. In the absence of significant large-frame systems sales, revenue from systems and other products decreased by $5.3 million to $7.8 million from $13.2 million for the first quarter of 2007.

Revenue from materials was also adversely impacted by the absence of large-frame systems sales, which are typically accompanied by significant initial materials purchases to charge-up new systems and commence production, and the anemic U.S. marketplace demand for large parts, continued Reichental. As a result, materials revenue decreased by $0.4 million or 3% to $14.9 million for the first quarter of 2008 from $15.4 million for the 2007 quarter.

Service revenue increased by $0.6 million to $9.0 million for the first quarter of 2008. This increase was primarily the result of $0.5 million of favorable foreign currency translation as changes in sales volume of new and core services largely offset each other.

At March 31, 2008, the companys backlog was approximately $2.3 million compared with the $3.1 million of backlog at December 31, 2007, and consistent with the normal operating trends in its business.

Gross profit for the period declined by 16% to $13.4 million primarily as a result of lower large-frame systems revenue that had a $1.2 million adverse effect on the absorption of overhead for the systems category of products. We believe that this $1.2 million decline accounted for approximately 80% of the margin decline for systems in the first quarter of 2008. Gross profit was also negatively affected by certain supply chain and third-party logistics inefficiencies, which resulted in higher cost of goods sold and additional freight charges, and by higher warranty costs. The increase in cost of sales also included $1.3 million of unfavorable foreign currency exchange effects related to the decline in the U.S. dollar relative to other currencies. Most of this currency effect relates to materials that the company purchases or produces outside of the United States.

As a result, consolidated gross profit margin declined by one full percentage point to 42% compared to the first quarter of 2007, reflecting a 72% drop in systems gross profit margin to 18%, partially offset by 65% materials gross profit margin and an improved 27% service gross profit margin for the quarter.

I am very disappointed that we lost ground during the first quarter against our previously stated gross profit margin targets, commented Reichental. While we have been taking deliberate actions designed to return to and exceed our historical gross profit margin levels, the contribution from these operational improvements was not enough to overcome the adverse impact of unabsorbed overhead and unfavorable foreign exchange effects on our cost of sales. Had it not been for the net effect of foreign currency exchange and $1.2 million of unabsorbed overhead discussed above, our gross profit margin percentage would have increased as materials revenue decreased only marginally compared to the decrease in systems revenue.

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