Q4 2016 Real-Time Call Brief

Highlights

For the full year, revenue declined 2%, excluding from 2015 the revenue related to consumer products, the company discontinued in 2015.

Even with this decline in revenue, we improved our gross profit margin 270 basis points on a non-GAAP basis.

Non-GAAP operating expenses declined 4% year-over-year, including second half investments in IT, go-to-market, and focused innovation.

Our non-GAAP EPS improved 70% and we've generated additional cash for the company.

We expect revenue to grow in the range of 2% to 8% and we expect non-GAAP earnings per share to improve 10% to 20% compared to the full year results for 2016.

For the fourth quarter we reported revenue of $165.9 million, a 10% decrease year-over-year driven by lower printers and on-demand services revenue.

On a GAAP basis, gross profit margin for the fourth quarter of 2016 improved 50%.

Excluding the impairment charges in the prior year, operating expenses decreased $10 million to $78.8 million.

The decrease in operating expenses was primarily the result of lower stock-based compensation, amortization and legal expenses and a $1.3 million decrease in R&D expenses, partially as a result of more focused investments.

We reported GAAP earnings of $0.05 per share in the fourth quarter, which is the first quarter with GAAP earnings since 2014.

We also generated cash from operations each quarter of 2016 including $18.7 million in the fourth quarter for a total of $56.9 million during the year.

For the full year 2016, we reported revenue of $633 million, gross profit margin of 48.9% and operating expenses of $348.2 million, a decrease of 12%, excluding the impairment charges in the prior year.

We reported a GAAP loss of $0.35 per share compared to a loss of $5.85 per share for full year 2015.

Non-GAAP gross profit margin for the fourth quarter of 2016 was 50% compared to 47.7% for the fourth quarter of 2015, despite lower revenue in 2016.

Compared to the fourth quarter of 2015, non-GAAP SG&A expenses increased $1 million to $45.1 million as we are investing in IT and go-to-market initiatives.

Non-GAAP R&D expenses decreased $1.3 million to $21.1 million.

Non-GAAP earnings were $16.7 million or $0.15 per share in the fourth quarter of 2016 compared to earnings of $20.9 million or $0.19 per share in the fourth of 2015.

For the full year non-GAAP gross profit margin improved to 50.7% and non-GAAP operating expenses decreased 4% to $270.2 million.

We reported non-GAAP earnings of $0.46 per share in 2016 compared to $0.27 per share for the full year of 2015.

Revenue for the full year of 2016 benefited from the 5% increase in healthcare revenue from higher healthcare services and simulation revenue for total healthcare related revenue of $148.1 million.

We also had a 4% increase in materials' revenue to $156.8 million, even with lower printer sales as the utilization of install base remains strong.

Software revenue increased 12% in 2016 to $87.7 million.

We experienced softness in on-demand manufacturing which decreased 18% to $104.8 million for the year.

Total printer revenue decreased 21% to $133.3 million in 2016.

While total printer revenue decreased, we experienced slightly improved production printer revenue for the year and excluding discontinued consumer and desktop sales, printers' revenue decreased 13%.

Gross profit margin for the year improved to 48.9%, our cost reduction efforts as well as growth in sales of higher margin software and healthcare solutions contributed to this gross profit margin expansion.

GAAP operating expenses for the quarter decreased, including a 13% decrease in SG&A expense and a 6% decrease in R&D expenses.

Non-GAAP operating expenses for the quarter decreased slightly to $66.2 million. This includes a 2% increase in SG&A heavy expenses.

We generated $18.7 million of cash from operations in the fourth quarter and $56.9 million in the full year of 2016.

We entered the year with $184.9 million of cash on hand an increase of $29.3 million from the end of 2015 and our $150 million revolving credit facility remains fully available.

Inventory decreased sequentially $10.4 million to $103.3 million at the end of December, very close to our internal goal for the year of $100 million.

We expect revenue to grow between 2% and 8% inclusive of the contribution of Vertex Dental and NextDent.

We expect non-GAAP EPS to increase 10% to 20% which results in a range of $0.51 per share to $0.55 per share and we expect GAAP EPS of $0.02 to $0.06 per share for the year.