3D Systems Reports Results for Second Quarter and First Half of 2008

Revenue

Notwithstanding the improved sequential-quarter revenue growth that we achieved from the first quarter to the second quarter of 2008 and higher materials sales during the second quarter of 2008, our second-quarter revenue fell some $4 million short of our mid-June expectations primarily as a result of this years continued uncertain economic environment, and with that shortfall we missed several other key targets. This resulted in overall disappointing results, said Abe Reichental, President and Chief Executive Officer of 3D Systems.

While, on the surface, we returned to modest top-line growth over the 2007 quarter during a difficult economic period, the mix of our revenue in the second quarter of 2008 was very different from that in the second quarter of 2007, reflecting in part the positive contributions from our integrated systems materials strategy and initial traction from our recently introduced 3-D Printers and the negative impact of significantly higher used equipment sales, said Reichental.

Revenue in the 2008 second quarter benefited from higher materials sales and the favorable effect of foreign currency translation. However, this benefit was largely offset by lower unit volume from sales of Large-Frame systems and a higher than normal incidence of used equipment sales. These used equipment sales, with lower margins than those the company generally recognizes on new systems sales, accounted for 20% of total systems sales for the quarter. Of the used equipment sales, 33% in units and 40% in revenue involved the resale of systems that we acquired from Tangible Express in the first quarter of 2008. The company also recorded $0.4 million of additional deferred revenue in the second quarter of 2008 in connection with several extended warranties and discounted service related to certain systems, which the company expects to recognize ratably over the contracted warranty and service periods.

The company benefited from higher unit volume from the sale of Small-Frame systems and 3-D Printers during the second quarter, but this increase in revenue was not enough to overcome the revenue shortfall from Large-Frame systems and used equipment sales.

Revenue from 3-D Printers was helped by growing demand for the companys Dental Professional Printers and grew to 26% of total systems sales. With the previously reported electrical noise problem related to the companys V-Flash® Desktop modeler and the resulting delays to its planned commercial shipments, the company neither made any commercial shipments of its V-Flash® modeler during the second quarter nor recognized any revenue from its V-Flash® Desktop Modelers in the second quarter or first six months of 2008.

As a result of the factors discussed above, systems revenue decreased by 9% to $11.5 million from $12.7 million in the second quarter of 2007. Large-Frame systems represented only 25% of total systems revenue for the quarter while sales of Small-Frame systems and 3-D Printers increased as a portion of total systems sales, accounting for the remaining 75% of systems revenue compared to 70% of systems revenue in the second quarter of 2007. As a general matter, Small-Frame systems and 3-D Printers have lower gross profit margins than Large-Frame systems.

Revenue from engineered materials and composites increased by 9% to $16.2 million from $14.9 million for the second quarter of 2007, primarily due to the growing contribution of recurring revenue from the companys newer integrated systems. For the second quarter of 2008, integrated systems accounted for 26% of all materials revenue, reflecting a 4% sequential improvement over the materials revenue for the companys installed base of systems.

Consistent with the companys expectations, service revenue rose slightly to $8.9 million in the second quarter 2008 compared to $8.8 million in the 2007 second quarter.

The recovery that we experienced in systems and materials revenue during the second quarter of 2008 was well below our expectations and not enough to close the gap from the companys very anemic first-quarter revenue, commented Reichental. As a result, revenue for the first six months of 2008 decreased by 7% to $68.4 million from $73.4 million for the corresponding 2007 period. This revenue decline reflected the effect of our first-quarter revenue shortfall and included, for the six-month period, a 25% decrease in systems revenue that more than offset our 3% gain in revenue from materials and a 4% increase in revenue from services, continued Reichental.

At June 30, 2008, the companys backlog decreased to approximately $1.1 million compared with the $3.1 million of backlog at December 31, 2007. The company believes that this lower level of backlog is consistent with the normal operating trends in its business, which are not generally dependent on backlog.

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