Fintrust Brokerage Services Equity Researchfintrustadvisors.com/.../02/3-D-Systems-Coverage-Initiation-Report.pdf · tolerant investors. Our target is derived from a DCF analysis

3D Systems Corp (DDD) Initiation of Coverage

Fintrust Brokerage Services Equity Research

September 2, 2014

1 Fintrust Brokerage Services www.Fintrustadvisors.com 124 Verdae Blvd, Ste. #504

864-288-2849 Equity Research Greenville, SC 29607

Please see pages 30 and 31 of this publication for important certification and disclosure information.

Company Summary: 3D Systems Corporation (‘3DS’), based in Rock Hill, South Carolina, provides 3D printing centric design-to-manufacturing solutions in the United States, Germany, the Asia-Pacific, and other European countries. Its 3D printers convert data input from computer aided design generated software format or 3D scanning and sculpting devices to printed parts. The company offers stereolithography, selective laser sintering, direct metal sintering, multi-jet modeling, color jet printing, and film transfer imaging printers, as well as plastic jet printing products. It also manufactures proprietary plastic, nylon, and metal materials and composites for the use in printers. In 2013, the Company generated $513 million in revenues.

Fintrust Recommendation

Fintrust Rating: BUY

Target Price: $57.00

Current Share Price $53.51

Expected Return 5.96%

52 Week Price Range $97.28 - $43.35

Fintrust Brokerage Services, LLC rates companies a BUY,

HOLD, SELL, or SHORT.

A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

A SELL SHORT is given when the security is expected to decline in value over the next year.

The distribution of ratings across Fintrust’s entire

company universe is _71.4_ %Buy, 28.6 %Hold, _0_

%Sell, _0_ %Short

Key Figures Key figures pricing data reflects previous trading day’s

closing price. Other applicable data are trailing 12-months

unless otherwise specified.

Debt/Capital Ratio 1.4%

Return on Equity 4.2%

Net Margin 4.1%

Payout Ratio n/a

Revenue (000’s) $697,000

Net Income (000’s) $28,390

Shares Outstanding (mi) 106.4

Shares Short (mil) 31.5

Market Capitalization ($ mil) $5,213.6

Cash ($ mil) $570.2

Beta 1.62x

Valuation

Price/Book 4.40x

Book Value/Share $12.10

Sales (13A) (000s) $513

Sales (‘14E) (000s) $697

Sales (‘15E) (000s) $937

P/S (13) 11.0x

P/S (14) 8.1x

P/S (15) 6.1x

Est. 2014-2019 Sales CAGR 29.3%

Industry: Information Technology (GIC Code: 45) GICS Sector: Technology Hardware and Equipment (GIC Sub code: 4520)

Analyst Notes:

Analysis by Bruce Roberts (917) 701-3357 & Allen Gillespie, CFA (864) 288-2849

Fintrust Brokerage Services is commencing coverage of 3DS, a leading global supplier of 3D printers, materials and services with a BUY rating and $57 target price, or 6.5% upside for risk tolerant investors. Our target is derived from a DCF analysis that assumes 10% perpetuity growth and a 14.7% discount rate. We estimate that due to the high-growth profile of the 3D printing industry and the Company’s industry-leading position, that 3DS will generate at least 29% revenue CAGR through 2019.

The 3D printing industry has recently entered a higher rate of growth, of 30%-plus annually, due to a number of factors including (1) the development of faster and less costly printers (2) continual addition of new materials that can be ‘printed’ (3) improving capabilities of image capture and manipulation and object design computer-aided design software (4) a raised awareness of 3D printing capabilities by manufacturers for complex part production and (5) emerging 3D printing applications emerging from various constituencies including the medical devices and dental industries.

While 3DS’ 2Q 2014 revenue and gross profit results fell below expectations, driving down the company’s share price, we estimate that the shortfalls were largely temporary in nature; we forecast 36% and 34% revenue generation in 2014 and 2015, respectively, to $697 million and $937 million, respectively. Our 2015 estimate is below company guidance at $1.0 billion. To the extent our estimate proves to be more accurate, 3DS shares are vulnerable to near-term volatility.

The shares are only appropriate for long term oriented investors. The 3D printing industry’s growth, while significant, may be volatile. As well, we expect that (1) significant future competition from the Asia Pacific may impinge upon profitability (2) 3DS’ highly active M&A program could result in poorly integrated transactions and (3) we note that the shares trade for a high multiple of sales and EBIT and that they are volatile. We recommend that investors refer to both our report and the Company’s 10K for a list of added risks.

http://www.fintrustadvisors.com/



September 2, 2014



What’s fundamentally driving 3D Printing?

Historically, prototype development and customized manufacturing have been performed by traditional methods using metal extrusion, computer-controlled machining and manual modeling techniques, in which blocks of material are carved or milled into specific objects. These ‘subtractive’ manufacturing methodologies have numerous limitations. The time intensity of traditional modeling can leave little room for design error or subsequent redesign without meaningfully impacting a product's time-to-market and development cost. As a result, prototypes have traditionally been created only at selected milestones late in the design process, which prevents designers from truly visualizing and verifying the design of an object in the preliminary design stage. The inability to iterate a design rapidly hinders collaboration among design team members and other stakeholders and reduces the ability to optimize a design, as time-to-market and optimization become necessary trade-offs. Introducing 3D modeling earlier in the design process to evaluate fit, form and function can result in faster time-to-market and lower product development costs. 3D printing is already replacing traditional prototype development methodologies across various industries such as architecture, automotive, aerospace and defense, electronics, medical, footwear, toys, educational institutions, government and entertainment, underscoring its potential suitability for an even broader range of industries.

Professional Market Opportunity: 5 million CAD ‘seats’ and growing / 50k 3D printing systems sold through 2011

Additionally, 3D printing has created new applications for model-making in new m arket categories, such as: education, where institutions are increasingly incorporating 3D printing into their engineering and design course programs; dental and orthodontic applications, where 3D printed models are being used as replacements for traditional stone models, implants and surgical guides and for crowns and bridges for casting; and jewelry, where 3D printers are being used to produce custom-designed pieces of jewelry.

For customized manufacturing, 3D printers eliminate the need for complex manufacturing set-ups and reduce the cost and lead-time associated with conventional tooling. Direct digital manufacturing - DDM - involves the use of 3D production systems for the direct manufacture of parts that are subsequently incorporated into the user's end product or manufacturing process. DDM is particularly attractive in applications that require short-run or low-volume parts, and rapid turnaround, for which tooling would not be appropriate. DDM also enables the production of objects that have been topologically designed (a mathematical approach that optimizes material layout within a given design space), or designed on the basis of a computerized determination of where to place the key components of the object and how to connect them, a process that is generally unavailable using conventional subtractive manufacturing methodologies. In other words, 3D printing can in many cases manufacture more complex parts and objects used for exacting requirements in many industries such as aerospace, automotive, and medical devices. Behind a broad-based potential adoption in the 3D printing industry is the adoption of desktop systems. These systems are expected to penetrate a broad and largely untapped addressable market, targeting small design teams within large organizations, small and medium-sized businesses and individuals. In addition, desktop adoption should be further stimulated whereby 3D printers continually incorporate features of high-end series of printers into entry-level series over time. The promise of 3D printing has never been greater, and interest in the discipline can be found in industry and on Wall Street:

4.8x3.4x

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3D Systems Market Cap / TTM Revenues

Analyst’s Notes....Continued




September 2, 2014



Industry Overview

3D printing has been around since the 1980s, when the technology was first used to make plastic products. In recent years the technology has advanced, however, so that companies are now able to build complex shapes from metals, such as titanium or aluminum, by using lasers to melt metal powders. 3D printing, also known as additive manufacturing (“AM”), is a growing field that draws researchers from a variety of disciplines — computing, materials science, mechanical and electrical engineering, physics, chemistry, and even medicine. Currently, the 3D industry ecosystem – printers, materials, and printing service bureaus - is generating worldwide annual revenues of ~ $4 billion, and currently growing around 30% annually. It is estimated that annual industry revenues grew ~ 25% since its inception in the late 1980s before falling 10% in 2009. Consumer 3D printing, which is largely limited to printing ABS plastic materials using a technique called ‘FDM’ accounts for a small percentage – approx. 5% - of the industry’s revenue base. ‘SLS’ printing techniques, used in industry, can print many more materials including metals, and with SLS patents expiring this past January, the price of SLS printers should come down significantly and eventually find their way into the home. Specific 3D company growth is being spurred by both organic growth and acquisitions (note: 3DS acquired 43 companies from August 2009 through April 2014).

$4 billion 3D Printing Marketplace = Printers, printing service bureaus and printing materials

Printers: ~ 28% of total industry revenues. ‘Lumpy revenue streams’ (~45% Gross profit margins)

Bureaus and materials: ~ 72% of total industry revenues. Hi-margin, recurring consumables and services sales

(40% to 75% Gross profit margins)

3D printers can take a number of different materials including plastics, polymers, metal alloys, ceramics, glass, concrete, paper, and even concrete to create every piece of the final structure from scratch, with no raw materials wasted (however, most home printers are limited to ABS, a plastic as string as LEGO blocks, and a few other materials). 3D printing is characterized as "additive" manufacturing, which means that a solid, three-dimensional object is constructed by adding material in layers; akin to creating a loaf of sliced bread in reverse. This is in contrast to regular "subtractive" manufacturing (as in sculpting or milling), through which an object is constructed by cutting (or "machining") raw material into a desired shape. By computer-controlled layering 3D printing can (1) print complex objects and (2) use only raw material that is incorporated into the structure, without waste. If you require moving parts in your design, the printer leaves gaps in the right spots or injects gel between the parts. The first stage of 3D printing is laying out an original idea with digital modeling — that is, with computer aided design (CAD) or animation modeling software - to create a virtual blueprint of the object you want to print. The program then divides the object into digital cross-sections so the printer is able to build it layer by layer. The first 3D printer was produced by Charles Hull in 1984, who utilized a patented stereo lithography method for the print process. Hull’s technique involved creating a 0.0025-inch layer of liquid photo curable polymer that could be cured with a UV laser. In 1988, the first commercially available 3D printer was officially launched by 3D Systems called SLA-250, which utilized a photo-optical acrylic resin. In the early 1990s, a number of other methods were developed, including fused deposition modeling – FDM - that extruded thermoplastics for layering and multi-jet modeling, based on ink-jet printer technology. Techniques have also been developed that use powder and lasers. Over time, a multitude of companies across the world have sprung up offering their high-end printers combined with CAD software and scanners, allowing objects to be either scanned or designed from scratch. The two biggest players in the market, 3D Systems and Stratasys (SSYS, NR, $103), make printers small enough to sit on desktops and large enough to make engine parts. Non consumer printer prices range from $10k to $1 million, while consumer price points have recently dipped below $300. Businesses can print parts on their own commercial production printers or send designs to rapid prototype or 3D printing service providers to print on their printers. Home users can print their own or others' designs on home printers. Using an enormous array of materials (3D Systems has over 120 materials), from polyethylene to titanium to living cells, 3D printers can print almost anything from personalized medical devices such as precision crafted prosthetics to functional airplane and car parts such as complex jet engine fuel injection systems and from individualized accessories to customized jewelry and toys. Companies using 3D printing have the freedom to create and manufacture customized products with no additional cost for complexity and uniqueness. Instead of investing in expensive tooling and incurring long times users can employ 3D printing to ‘mass customize’ and locally print what they





September 2, 2014



need, when they need, it while saving money over traditional tooling and manufacturing techniques that waste materials. The growth in 3D printing is being driven by many factors including lower priced printers, a recent spate of patent expirations, expanded printer capabilities, increasing printer speeds and an ever expanding array of materials that can be ‘printed’. Their expansion into production (mass production and distributed manufacturing) has been in development for some time. Industrial production roles in metalworking have achieved large scale recently. For example, Avio Aero, a GE Aviation business, said its new 2,400 square meter facility in Italy will have the capacity for 60 3D machines making metal production parts, which would make this facility the largest additive metal manufacturing plant in the world. Avio Aero expects to capture advantages that include significant savings in time, material, energy, emissions and part weight, and allow what once would have been an assembly of five pieces to be replaced by a single intricate component grown in an additive cycle. According to GE, the production of a 1 – kilogram metal part will require 1.5 kilograms of raw materials versus 4 kilograms under subtractive (traditional) tooling techniques.

In 2013, 3DS generated $71.7 million in healthcare revenues, or 14% of all 3DS sales, for hearing aid, dental, medical device and other applications. In 2Q 2014, healthcare sales grew 46% y-o-y and comprised 18.2% or $27.5 million of total sales.

3-D printers create an object by building thin layers of materials such as plastic powder, metal or liquid resin one on top of the other, following instructions created from a computer-drawn – CAD – blueprint or via a 3D scanner. The primary advantage of this technique is the ability to create almost any shape or geometric feature. While much of the printing materials are supplied by the printer manufacturers and are thus proprietary, material market standardization could lower input costs. 3D printers could be placed close to end users, for example, in airports to produce replacement airplane parts, which could decentralize customized manufacturing, and as well be used to print out of date replacement parts used in the automotive industry, rather than storing such parts in a warehouse, redefining the logistics of production and distribution. There is an extraordinarily wide range of industry growth estimates projections from 3D independent research firms.

According to Wohlers Associates, a 3D printing research firm, 3D products and services revenues grew 27% over the last 25 years, and 32.3% over the 2011 – 2013 period. According to Wohlers the 3D industry took 20 years to reach $1 billion in sales. After another 5 years it doubled to $1 billion. Now the industry is on a pace to double in size every 2-3 years, over the next several years. Wohlers estimates 30% sales CAGR in the AM industry through 2020 to $21.0 billion.

According to a March 2014 report from 3D independent research firm Canalys, the global 3D market will generate sales of

$16.2 billion in 2018, up from its 2014 estimate of $3.8 billion, indicating a 43.6% CAGR. In particular, the value of the 3D printer market grew 109% in 2013, to $711 million, and is expected to grow 79% this year, according to the firm. This suggests that 3DS, which generated ~ $200 million in printer sales in 2013, held a 28% total printer market share.

40.0%44.1% 46.3% 47.3%

51.2% 52.1%

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3D Systems Revenues Growth Resumes in 2010

Printers Materials Services Gross Margin





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By 2018 the $16.2 billion 3D market could be comprised of:

1. 3D printers: $5.4 billion; up from $0.7 billion last year, or a 50.1% CAGR. 2. Services and materials: $10.8 billion; up from $1.8 billion last year, or a 43.8% CAGR.

Several of the largest and most recognizable brands are wading into the industry. UPS, Office Depot, and Staples offer 3D printing services in a select number of stores. The latter two also sell 3D printers in their retail stores. Microsoft, Adobe Systems, and Autodesk have added features to software products that attempt to make 3D printing as easy as document printing. And Hewlett–Packard is expected to announce – before the year is up - that it is ‘entering’ the 3D industry. Perhaps the most impactful and ongoing transformation in the AM industry is the transition from prototyping to AM manufacturing of end use products. Previously, companies have mainly used 3D printing to make prototype parts and products for testing. In 2003, the use of AM for parts production constituted just 3.9% of the AM industry’s total product and services revenues. Today, about 28% of 3D industry revenues emanates from the production of final products. Several of the world’s biggest manufacturers, such as GE, BAE Systems and Siemens, are leading the way in moving the technology from design shop to factory floor. The shift is occurring because AM produced end user products offer several advantages such as weight reduction, greater production dimension accuracy and improved part performance. GE’s 70-person 3D staff for example is using 3D-printing machines to make fuel nozzles for jet engines. Those fuel nozzles used to be made up of 18 different parts but now comprise one single piece, making them 25% lighter and 5X more durable. While there are many large corporations using 3D printing, final parts production using 3D printing remains in its infancy. In a 2014 survey

of over 100 manufacturers by PriceWaterhouseCoopers and The Manufacturing Institute, the following emerged.014 (by PricewaterhouseCoopers and the Manufacturing Institute):

“25% are using 3D printing for prototyping only.

10% are using it for both prototyping and the production of final parts.

1% is using it for final parts production only.

64% apparently aren’t using it at all.”

Disruptive Capability

A 2014 survey of over 100 industrial manufacturers, ranging from small contract manufacturers to multinationals, by PriceWaterhouseCoopers and the Manufacturing Institute, showed that 2/3rds are either implementing or evaluating how to use 3D technology. The report suggests that 3D technology is “on the cusp of being mainstreamed”, creating opportunities to speed up the launching of new products and revamping supply chains by creating a “world of networked printers where logistics may be more about delivering digital design files – from one continent to printer farms in another”. We estimate that AM technology represents a prospectively disruptive force in manufacturing and the supply chain: The blurring of additive and conventional manufacturing. Manufacturers can produce multiple prototypes on machines that offer greater resolution and color reproduction without tooling and get them into the hands of customers for feedback, reducing product launch risk. With 3D manufacturing, companies can go into limited production while the traditional means of mass production are being set up, or even before the decision to mass produce has been made. Once made, 3D can be used to produce the tools that will be needed, saving more time and money.

One of 3DS’ key long term goals is to set up a global presence of service bureaus that print parts, potentially altering profile from just a 3D systems related company to a general ‘manufacturer’.





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Viable manufacturing alternative. Increasingly, 3D printers can produce larger components with greater resolution and precision at faster speeds and lower costs, reducing the product development lifecycle from days or weeks to hours. This means that AM is transitioning from a niche context to a viable alternative to traditional manufacturing processes in a growing number of applications. This translates into more adaptive manufacturing that eliminates tooling costs, slashes development time and simplifies production runs while making more complex shapes and structures than were previously feasible. 3D printing will enable increased productivity in industries that turn out many replications of the same part for assembly into complete products. While total 3D industry spend is growing ~ 30% per annum, end user 3D manufacturing which accounts for 28% of output is growing 60% per year, according to McKinsey (2014), making it the fastest growing 3D segment.

Boeing for example is printing 200 parts for 10 different aircraft types, while medical products companies are printing parts for hip replacements.

GE will begin printing fuel injectors for its new LEAP aircraft engine in 2016, and expects to print 35k injectors a year by 2020, making this the largest print manufacturing undertaking ever.

AM could revamp the existing manufacturing supply chain. By creating a globally connected / local supply chain where products are printed locally where and when needed, aftermarket manufacturers who are challenged to maintain the right mixture of product parts especially for legacy products, can replace large warehouses with small facilities that house AM printers. The fully digital nature of 3D printing could make it feasible to produce complex parts in countries with lower labor and electricity input costs. As an example, service parts used at airports and hospitals may one day be manufactured on site, with the digital designs supplied by manufacturers.

3D Printing Detractors

Facilities and trained technicians for large scale 3D manufacturing projects don’t yet exist. In the case of GE’s LEAP jet engine injectors, the company hasn’t yet amassed the printers it needs, and there is no system to ensure consistency and quality in the raw materials they acquire. And the technology to scan and test the integrity of printed parts is primitive. That is, while there are perhaps dozens of major manufacturers ‘going additive’, the supply chains of printers, raw materials, inspection equipment, and various services are still very limited, suggesting that large scale print manufacturing is not yet a reality. 3D printing is a costly and slow process. 3D printing is still being held back by the costs involved. The machines themselves and the metal and other materials they use remain expensive. Another problem is machine printing speed, which limits the use of the technology for mass production.

Material variety still not as extensive as those used by traditional manufacturing processes

Production speed of 3D printing is still outpaced by many traditional manufacturing processes, especially in hi-volume

production

While the cost of 3D printers is dropping, high quality / hi-speed printers are expensive

Safer Investment alternatives? Software plays a crucial role in the 3D industry. Software is used to develop 3D objects and to run printers. As well, 3D printing companies like 3DS and Stratasys have high stock betas and face eventual competition from larger companies. In that sense, names like Adobe (ADBE, NR, $35) and Autodesk (ADSK, NR, $35) could represent an alternative method to invest in 3D printing. For example, Adobe’s Photoshop software has extended into 3D modeling and 3D printing applications.

SOME UNFOLDING APPLICATIONS Printed clothing. Nike made headlines in February 2013 when it unveiled its Vapor Laser Talon American football boots, which are the first boots to come with cleats that have been created using a 3D printer. The company used selective laser sintering (SLS) technology to fuse the plastic together. The boot weight was very light and customized cleats were quickly designed and manufactured. In the future, it is not hard to imagine companies like Nike printing out personal boots for individual players.

Bio Printing. In this process, layers of living cells are deposited onto a gel medium or sugar matrix and slowly built up to form three-dimensional structures including vascular systems. Organovo scientists have bio printed experimental human blood vessels and animal cardiac tissue. Currently, printing is being used to print tissues that can be used for drug testing. The long term goal is to print out custom designed whole organs. The consensus is that routine human organ printing won’t occur for at least another 10 years.





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Implants and Medical Devices. 3D printing has been used to print patient specific implant and device for medical use. Successful operations include a titanium pelvis implanted into a British patient, titanium lower jaw transplanted to a Dutch patient, and a plastic tracheal splint for an American infant. The hearing aid and dental industries are expected to be the biggest area of future development using the custom 3D printing technology. While the health care sector is in the relatively early stages of adopting 3-D printing, it's already having a major impact largely because 3-D imaging and printing allow for more precise surgical planning, and for the production of exact-fitting products.

Printing Technologies

3D printers can, in many ways, be compared with the traditional 2D printers. The internal technology is very similar; the 3D version just adds a Z (up and down) axis to the print. An additive approach is unique among manufacturing technologies because it gives the user independent access to every (x, y, z) coordinate—termed "voxel'' (volume pixel) - within a given volume. Access to each voxel makes 3D printing a slow process. Furthermore, each time print resolution is doubled, the number of required voxels scales by a factor of eight (2^3 = 8). This can take several hours or days depending on the size and complexity of the object. Higher priced printers can deposit layers as thin as 16 micrometers which enables the construction of very small and intricate products (a typical bacterium has a width of 10 micrometers). This has led to using molecules as ‘ink’ and to the printing of pharmaceuticals such as ibuprofen. A number of additive processes exist. They differ in the way layers are deposited to create parts and in the materials that can be used. Some methods melt or soften material to produce the layers, e.g. selective laser melting (SLM), selective laser sintering (SLS), and fused deposition modeling (FDM), while others cure liquid materials using different technologies, for example stereo lithography (SLA).

SLA - Light Polymerized Stereo lithography, or SLA, was invented in 1984 by the founder of DDD, Chuck Hall. SLA uses UV lasers to cure photopolymers, polymers sensitive to a UV laser or another similar power source. Polymers range from familiar synthetic plastics such as polystyrene and nylon to natural biopolymers such as DNA. In photo polymerization, a vat of liquid polymer is exposed to controlled lighting under safelight conditions. The exposed liquid polymer hardens. The build plate then moves down in small increments and the liquid polymer is again exposed to light. The process repeats until the model has been built. The liquid polymer is then drained from the vat, leaving the solid model. After it is rinsed with a liquid solvent to free it of excess resin, the object is baked in an ultraviolet oven to further cure the plastic. SLA has been in use for many years, and can be useful for projects requiring high levels of accuracy and a fast turnaround time. SLA is thought to have much better feature resolution, surface smoothness, edge definition and tolerances than FDM printers and results which rival CNC-machined plastic parts. Proponents of SLA also argue that the process, by using liquid plastic, wastes fewer raw materials. Although stereo lithography can produce a wide variety of shapes, it has often been expensive; the cost of photo-curable resin has long ranged from $80 to $210 per liter, although we have spotted web sites advertising hard resin as low as $25 per liter.

Resolution of SLA rapid prototyping varies from 0.05mm to 0.15mm with the industry average tolerance around 0.1mm. On average this is significantly more precise than FDM and is the preferred rapid prototyping solution when extremely tight tolerances are required. This is mainly because the cross sectional area of the laser can easily be made smaller than the extruder nozzle in the FDM method. Due to the smaller cross sectional area of the laser, SLA is a significantly slower fabrication method than FDM. Small parts take hours and large parts can take days to complete. Additionally, the material costs are significantly higher due to the proprietary nature and limited availability of the photopolymers. This method is typically not compatible with production runs for these reasons.





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Stereo Lithography

FDM - Extrusion Deposition

Traditional techniques like injection molding can be less expensive for manufacturing polymer products in high quantities, but additive manufacturing can be faster, more flexible and less expensive when producing relatively small quantities of parts. In 1990, the plastic extrusion technology most widely associated with 3D printing (particularly in the hobbyist and consumer oriented segments) was commercialized by Stratasys under the name fused deposition modeling (FDM). FDM printing is one of the most widely used forms of 3D printing, especially for home use, because the printers often come at a low price point. Fused deposition modeling has many of the same characteristics as SLA, but is generally considered a simpler technology (and hence is the standard technology for consumer and ‘pro-sumer’ customers). An FDM part has a rougher surface finish than an SLA part, but typically is stronger and more durable. The downside to FDM printing is the inability to make 3D moving parts without requiring extra assembly. In general, FDM objects have less resolution than SLA products. Furthermore, SLA uses a vat of resins and thus waste less material than FDM. FDM printers use a thermoplastic filament, which is heated to its melting point and then extruded, layer by layer, to create a three dimensional object. FDM printers use two kinds of materials, a modeling material, which constitutes the finished object, and a support material, which acts as a scaffolding to support the object as its being printed. The most common printing material for FDM is acrylonitrile butadiene styrene (ABS), a common thermoplastic that's used to make many consumer products, from LEGO bricks to whitewater canoes. Thermoplastics can endure heat, chemicals and mechanical stress, which make them an ideal material for printing prototypes that must withstand testing. And because FDM can print highly detailed objects, it's also commonly used by engineers that need to test parts for fit and form. Along with ABS, some FDM machines also print in other thermoplastics, like polycarbonate (PC) or polyetherimide. Due to the large scale expiration of FDM patents, there is a large open-source development community which utilize this type of 3D printer. This has led to a two orders of magnitude price drop since this technology's creation.

SLS - Granular Materials Binding Printing Unlike SLA and FDM printers, Selective Laser Sintering printers can print metal. Metal and ceramic materials are very fine powders with granularity of six to nine microns. These include ceramics, stainless steels, tool steels, super alloys, non-ferrous alloys, precious metals and alumina. SLS is a newer technology than SLA and generally can print more expensive materials. SLS converts print materials and composites by melting and fusing (sintering) into solid cross sections, layer by layer. The combination of print materials flexibility, part functionality and high throughput of SLS printers makes it well suited for rapid manufacturing of durable parts for applications in various industries, including aerospace, automotive, packaging, machinery and motor-sports.





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Selective Laser Sintering

SLS involves the use of a high powered carbon dioxide laser to fuse small particles of plastic, ceramic, or glass powders into a mass that

has a desired three-dimensional shape (DMLS is a similar process, but is only used with metal alloys). The system consists of a laser,

part chamber, and control system. The part chamber consists of a build platform, powder cartridge, and leveling roller. A thin layer of

build material is spread across the platform where the laser traces a two-dimensional cross section of the part, sintering the material

together. The platform then descends a single layer thickness and the leveling roller pushes material from the powder cartridge across

the build platform, where the next cross section is sintered to the previous. This process is repeated one slice at a time until the part build

height is completed. Once the model is complete, it is removed from the part chamber and finished by removing any loose material and

smoothing the visible surfaces. Part support is accomplished by the un-sintered powder that surrounds the parts during processing.

Unlike some other additive manufacturing processes, such as stereo lithography (SLA) and fused deposition modeling (FDM),

SLS does not require support structures due to the fact that the part being constructed is surrounded by un-sintered powder at

all times, this allows for the construction of previously impossible geometries.

Compared with other methods of additive manufacturing, SLS can produce parts from a relatively wide range of commercially

available powder materials. These include polymers such as nylon, polystyrene, metals including steel, titanium, alloy mixtures,

ceramic powders, and composites and green sand. The physical process can be full melting, partial melting, or liquid-

phase sintering. Depending on the material, up to 100% density can be achieved with material properties comparable to those

from conventional manufacturing methods. In many cases large numbers of parts can be packed within the powder bed, allowing

very high productivity. Full melting is a process called Selective Laser Melting – SLM.






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Case Study – SLM Printing of NASA Rocket Parts

NASA’s Marshall Space Flight Center in Huntsville, Alabama, has 3D printed nickel alloy rocket engine parts using SLM. The part will be

used on the J-2x engine for the largest rocket ever built, known as the Space Launch System. In the traditional sintering process, a part

is first molded from ceramic or metal powder and pressed into the desired shape. The resultant object is then fired in an oven to bond it

at 70% to 90% of the temperature needed to melt the

powder. Since full melting of the powder would destroy

the part in the process of fusing it, sintered parts are not

as strong as cast or machined parts, but they do retain

intrinsically desirable properties like resistance to

corrosion and temperature. It was later discovered that

full melting of powdered metal particles could be

achieved by a technique called electron beam melting,

or EBM. Since electrons tend to scatter off of gas

molecules, expensive and inconvenient vacuum

chambers are required for this process to work. As more

affordable laser systems with higher power and better

focusing optics were developed, SLM was born. Like

EBM, the powder material is fully melted during fusion,

but the SLM laser does not require vacuum to function.

It only requires that an inert argon or nitrogen

atmosphere is used in the work area to prevent

oxidation. A part such as this J-2x manifold would not be

milled on a CNC (computer numerical controlled) machine because the forces required to remove metal would warp and destroy a part

this thin. It would have to be fabricated as a weldment from its component parts. Its curved and flaring nozzles would first be stitched

together from sheet metal, than bent, and tacked to the main body. Welding introduces non-uniform stress points at the weld sites, and

makes failure modes less predictable. It would be beyond human skill to manually reproduce parts like this to the required tolerances. It

would therefore have to be made using automated bending machines and robotic welders, which take considerable time to program and

set up.

What Is Propelling 3D Printing?

Flourishing 3D Ecosystems. As 3D printers became more accessible to consumers, online social platforms developed to support the user community. This includes websites that allow users to access information such as how to build a 3D printer, as well as social forums that discuss how to improve 3D print quality, and share 3D files. RepRap is a wiki based website that was created as a repository of information on 3d printing, and has developed into a community that aims to bring 3D printing to everyone. These websites have allowed for greater social interaction between users, creating communities dedicated around 3D printing. Burgeoning 3D Metal printing. According to Wohlers, metal printing systems sales rose 75.8% in 2013. With growing demand from the aerospace, medical, dental, and automotive sectors, the metal AM supply chain – system manufacturers, material suppliers and service providers – will not be able to keep up with demand. Customer demand is outpacing the Company’s metal printing manufacturing capacity. The Company is bringing on a second manufacturing location online this quarter. In 2013, metals sales were $14.3 million – or just 3% of sales. 3DS’ metals printer and materials sales are anticipated to be $25 - $50 million in sales this year. 3D Printing Software Development. Meshmixer is an experimental 3D modeling tool developed by the computer graphics research team at Autodesk Research. Last November, Microsoft released its 3D Builder app, which allows Windows 8.1 users to print 3D objects. The simplistic, free app from Microsoft provides a basic way to print common 3D objects, as well as to import other files from SkyDrive or elsewhere. Adoption of 3D Printing in Medical Research. According to a July 2013 article in Chemistry World, researchers at Princeton University created a 3D printed bionic ear. The device was the first to use 3D printing to interweave electronics and biological tissue. This technique allows three-dimensional objects to be manufactured layer-by-layer using biological cells as the ‘ink’, and has already been used to create replacement knee and spine components. The process is simple in principle. The researchers send a three-dimensional blueprint of their bionic ear to a 3D printer, which contains three different inks: silicone infused with silver nanoparticles for the electronics; silicone alone for structural support; and chondrocyte cells, responsible for producing cartilage, in a gel. Once the researchers printed the ear, they





September 2, 2014



incubated it in a culture medium to allow the cartilage to form and fuse together. The result is a perfectly ordinary looking ear – albeit with no skin – complete with a spiral coil antenna that mimics the inner ear’s cochlear structure. Falling Prices. Continued adoption and technology advances are stimulating price declines, not only in the home printing arena, where assemble-it-yourself printers sell for $300 and are available on Amazon.com, but in the enterprise space, as well. Gartner predicts that enterprise-class printers will become available for under $2,000 by 2016, down from ~ $10,000 today.

Advances in Materials Science. Materials science and engineering is an interdisciplinary field which deals with the study of matter and their properties, as well as the discovery and design of new materials. Some of the more unusual materials that have been printed include:

Chocolate – Material engineers have devised a way to use chocolate in 3D printers.

Bio-Ink - Biomedical professionals are researching the use of materials such as bio-ink. Bio-ink comprises stem cells and cells from a patient, which can be laid down, layer by layer to form a tissue. Human organs such as blood vessels, bladders and kidney portions have been replicated using this technology.

Bone Material - A research team headed by Dr Sushmita Bose from Washington State University printed a bone-like material comprising silicon, calcium phosphate and zinc. This bone-like material was integrated with a section of undeveloped human bone cells. In about a week, growth of new bone was seen along the structure. This new material dissolved eventually and did not harm the patient.

Medication - Engineers and doctors are working to create 3D-printed medication.

3D Systems Company Overview

3D Systems is one of the two largest 3D printing companies in the world. With an approximate 18% share of the $4 billion industry, 3DS is a leading provider of 3D printing centric solutions including 3D printers, printer and design software, image capture equipment, print materials and cloud sourced on-demand custom parts for professionals and consumers in materials including plastics, metals, ceramics and edibles. 3DS’ solutions address applications in the aerospace, automotive, healthcare, education, MCAD, architecture and consumer marketplaces, and target customers’ entire design-to-manufacturing requirements from desktop prototyping to fab-grade manufacturing. The Company expects to generate $720 million in revenues this year and $1.0 billion in 2015, which we estimate are reasonable forecasts given (1) the unusually high rate of organic industry growth and (2) 3DS’ voracious M&A appetite. 3DS operates in the U.S., Europe and Asia-Pac, and such sales represented 52.1%, 27.7% and 20.2% of total sales, respectively, in 2Q 2014. 3DS reports revenues in 3 key verticals: printers and other products (such as software), printing materials, and services (on demand custom parts printing) in the following proportions:

$61.9, 41%

$38.0, 25%

$51.5, 34%

3D Systems 2Q14 Revenues Were $151.5 MM

Printer / Other Products Sales Materials Sales Services Sales





September 2, 2014



The company pioneered 3D printing and digital manufacturing with its invention of SLA, SLS and other printing methods beginning in the mid-1980s. The company’s portfolio of printers range from $1,000 to $1 million. The printers use both 3D supplied materials and materials purchased from 3rd parties. DDD also provides quick turnaround, short run customer manufacturing services, offering an entire design-to-manufacturing solution.

3D printers

3D printing material

3D scanning tools for the professional and consumer marketplace

3D capture and manipulate software

3D customized manufacturing services, including ‘cloud’ based printing services Commercial customers include major companies and small and midsize businesses in a broad range of industries. Purchasers of printers include original equipment manufacturers, government agencies, universities and other educational institutions, independent service bureaus and consumers. 3DS assembles its Cube X consumer 3D printers and ProJet 1000 through 7000 professional 3D printers and other equipment at its Rock Hill, South Carolina facilities, where the Company’s headquarters are located. The Company is opening a 200k square foot facility in Rock Hill that will be operational in mid-2015, to augment its current 80k square feet of facilities. The company continues to expand it 3D ecosystem through internal development, relationships with 3rd parties and acquisitions. In April, 2014, DDD announced the earnings-accretive acquisition of Medical Modeling which employs 3D to produce anatomical models for surgical planning and also manufactures medical devices which will make 3DS the largest participant in these applications. This deal enhances 3D’s health care portfolio which accounted for 18.2% of the company’s revenue in 2Q 2014, or $27.5 million. Partnerships, frequent product introduction and acquisition by 3DS is robust as the Company competes to acquire new technologies for itself, and to prevent others from gaining an edge.

Major Partnerships

Partner Project Name Application Other

Google Ara Produce customized smartphones using 3D printing Announced Nov. 2013

Intel N.A. Adopt DDD consumer scanning, editing and printing software applications for Intel-powered laptops and tablets

To ‘mainstream’ adoption of 3D scanning & printing

The Hershey Company N.A. To explore and develop 3D printing of edible foods Confectionaries and other

Product Announcements

Product Name Function Key Attributes Other

ProJet 5500X Printer/Parts

Prints flexible and rigid parts that are fused together at the pixel level

Realistic functional multi-color output Accurate and tough parts

ProX 300 DMS Printer Industrial grade direct metal printer Designed for demanding manufacturing floor conditions

High density, accurate precision parts

iSense 3D Scanner for physical photography For iPads for objects up to 10 feet large $499 price point

Recent Acquisitions

Acquisition Target Target Product / Service Attributes Other

Village Plastics Co. Maker of ABS, PLA and HIPS 3D printing material

Company delivers high quality precision printing filaments

Cross sell DDD’s portfolio of products and services

Figulo Makes and sells 3D printed ceramics

Integrated into DDD’s cloud printing service - Quickparts

Leverage ceramics materials knowledge to ‘fast track’ DDD

ceramic printers

Simbionix 3D virtual reality surgical simulation

Brings DDD ‘into’ the operating room / synergistic with Medical

Modeling acquisition

Price Paid: $120 million - Cash

Rapid Product Development Group

A global provider of additive and traditional quick turn

manufacturing services.

RPDG’s operations have been integrated into Quickparts services

Price Paid: $44.4 million – Cash/stock

American Precision Prototyping 3D Rapid Prototyping Service Bureau using additive and traditional manufacturing

Large presence in the aerospace industry

Long-tenured Company – 24 years





September 2, 2014



Company Products and Services

3DS is active is 5 key areas of the 3D printing ecosystem – printer manufacture, materials manufacture, software development, warranty and other assorted services, and printed parts outsourcing:

1. 3DS printers utilize one of the company’s 7 print engines which convert data input from any CAD generated software format or 3D scanning and sculpting devices, to printed parts using proprietary engineered plastic, metal, nylon, rubber, wax and composite print materials.

2. Professional and production printers include SLA, SLS, DMS, MJP, CJP, and FTI printers. Professional printers are capable of rapidly producing tools, fixtures, jigs, patterns, medical models and end-use parts.

3. 3DS develops and sells a wide range of proprietary print materials that replicate the performance of engineered plastics,

composites and metals.

4. 3DS provides customers proprietary software tools under its Geomagic brand name for professionals and Cubify brand for consumers and provides a library of content files and content creation apps through its Cubify.com online destination.

5. 3DS provides pre-sale and post-sale services, ranging from applications development to installation, warranty and maintenance

services.

6. 3DS provides a comprehensive suite of printed parts services through its Quickparts branded, on-demand custom parts services, which offer a broad range of precision plastic and metal parts service capabilities produced from a wide range of 3D printing and traditional materials using a variety of additive and traditional manufacturing processes. Printed parts revenues provide revenue growth stability. Since 2009, 3DS has acquired 16 service providers in the U.S., Europe and Asia-Pac.

Sales, Support and Applications Engineering

The Company’s consumer and professional printers and related print materials, services, 3D scanners and software solutions are sold worldwide directly and through a network of authorized distributors and resellers who are managed and directed by a dedicated team of channel sales managers. Consumer oriented 3D printers and other services are available through 100s of retail stores and traditional retail distributors. Application engineers provide professional services through pre-sales and post-sales support and assist existing customers in taking advantage of the latest print materials and techniques to improve part quality and machine productivity. As of December 31, 2013, 3DS’ worldwide sales, application and service staff consisted of 234 employees, and the Company sold its products through ~ 600 resellers.

Investment Concerns

Achieving Long Term 30% Organic Growth. With the expiration of key patents between 2014 and 2017, the ongoing entrance of Asian manufacturers and the eventual availability of printers from the likes of HPQ, the achievement of long term (2016 and beyond) 30% organic growth – strikes us as challenging. We estimate that the combination of organic and acquisition-stimulated sales growth will results in a gradually falling sales growth rate through 2019, reaching 23% in 2019. Achieving Near Term Revenue Guidance. The achievement of 2014 and 2015 revenue guidance will require a sharp bounce back in organic growth and a resumption of strong consumer revenue growth. In fact, we estimate that investors will focus on organic growth to a greater degree than in the past as they try to discern the reasons behind the weak 2Q 2014 results. Is 3DS losing market share, are printer ASPs dropping at a quickening pace, or was the timing of orders and printer deliveries to blame? We estimate that printer ASPs are falling quickly (as they have in the past) insofar as printer revenues grew just 14.3% while unit shipments exceeded 120%. However, we estimate that the sub optimal growth rate in printer and other revenues in the quarter was due principally to the timing of orders and delivery (which negatively impacted gross margins), and that organic growth will reinvigorate in 2H 2014 and next year – but not to the extent the company is suggesting:





September 2, 2014



We estimate that legacy sales grew ~ 24% in 2H 2014 on a y-o-y basis, but advanced ~ 28% and ~ 45% on a y-o-y basis in 2012 and 2013, respectively, suggesting that 3D products may be becoming obsolete more quickly, and that the Company may not be in a position to simultaneously flat line R&D expense, generate expanding operating leverage and achieve its sales growth guidance in 2014 and 2015. Our earnings model, in fact, forecasts 2014 and 2015 revenue generation that, while impressive, is marginally below guidance.

To achieve $1 billion in 2015 sales, the Company must generate slight increases in the current rate of y-o-y growth in both new product and legacy sales, which seems unlikely given the law of large numbers and the fact that both growth rates have come down in each of the last 3 years. This further suggests that the Company will need to maintain high rates of R&D and product introductions to meet, let alone exceed, its sales guidance for 2014 and 2015, which could put pressure on profit margins. Alternatively, M&A may play an even bigger role in company expansion as it relates to 2015.

Having said that, we estimate that 3DS will, though a resumption of organic growth and further M&A, achieve 35.8% and 34.4% y-o-y sales growth in 2014 and 2015, respectively.

While the potential inability to achieve $1.0 billion in sales next year may weigh on 3DS shares in the near term, we estimate that the Company is positioned to generate substantial long term revenue growth and is therefore appropriate for long term investment.

Falling Printer Margins. As we discuss in the financial review section of this report, printer gross margins have declined to a low point of just 35.7%, down from 45.6% last year. The drop may well be temporary; the company is in the process of introducing many new products which typically depresses gross margin. On the other hand, the change in the mix of printer models sold and in their ASPs during the quarter accounts for a portion of the overall printer gross margin decline. Management has indicated that gross margins will return to ‘historic’ levels by 4Q 2014. Operating Leverage? In its 2Q 2014 quarterly results commentary, management indicated that operating margins should expand going forward due to prior, heightened investment in SG&A and R&D. True, at 11.7%, the Company has invested a greater portion of revenues into R&D than its nearest competitor, SSYS, and we estimate that R&D / sales should decline henceforth. On the other hand, we would point out that the Company has underinvested in SG&A; since 2011 the SG&A / sales ratio has fluctuated between 24% and 33%. SSYS, on the other has has invested over 40% of sales into SG&A in each of the last 6 quarters, and posted 35% y-o-y organic growth in the latest quarter. Goodwill Asset. The Company carries $404 million of goodwill which is continually evaluated for impairment. A key part of the impairment process focuses on valuation of the goodwill asset. Such valuation is impacted by factors including current takeover multiples and takeover premiums in the 3D printing industry. Insofar as the 3D industry is in a dynamic phase of growth and evolution, takeover metrics could change significantly, potentially requiring the Company to adjust the valuation of its goodwill asset which could negatively impact reported income. Acquisition are likely to continue and add further goodwill. In 2013, of the $179 million paid for acquisitions, $128 million was allocated to goodwill. Growing Dependence on Asia Pac Results. In 2011, income and revenues from Asia Pac accounted for 12.3% of total sales and 20.3% of total EBIT. In 2013, those respective metrics moved up to 18.4% and 30.7%. In 2Q 2014, Asia Pac equaled 20.2% of total revenues and 82.6% of the $11.5 million in EBIT generated among Asia Pac, Germany and other Europe (1st half 2014 U.S. sales were unprofitable). Growing demand for 3D printers in China, for example, could enable Tier Time Technology Co. Ltd of China become the world’s largest 3D printer manufacturer this year. The Chinese government's strategy is to buy its way into a global leadership position in 3-D printing, according to Wohler’s research. Beijing has pledged to invest 1.5 billion Yuan ($245 million) in a seven-year project to spur development of the technology, with the goal of being a global additive manufacturing leader within three years. Wohler’s indicated that Singapore is building a 3-D printing infrastructure, investing S$500 million (US$400 million) in a five-year advanced manufacturing program. Trailing Consumer Business. We estimate that with the delays in consumer printing shipment and the fact that consumer sales make up just ~ 6% of revenues, that 3DS is not yet a significant factor in the consumer 3D printing segment, which is a key driver of future growth in the 3D printing industry. With the emergence of Asian 3D printer manufacturers and the potential entrance of major U.S. participants such as HP, the consumer segment may be an Achilles heel of the Company for some time. Acquisition Integration. In an attempt to expand its reach to as many 3D verticals as possible, 3DS has aggressively acquired other companies leading to concerns about profitability and acquisition integration. 3DS acquired 43 companies from August 2009 through April 2014. Acquisitions represent both opportunity and risk. Serial acquisitions may present a deluge of integration issues that may overwhelm management attention away from the underlying business. In addition, ongoing acquisition activity is likely to require significant funding which may induce the Company to raise funding that dilutes shareholders. The Company issued $271 million and $54 million of





September 2, 2014



Common Stock in 2013 and 2Q 2014, respectively, to assist in paying for its acquisitions. We note, however, that the Company has a solid acquisition integration track record. Emerging 3D Competition from Traditional Companies. As another example of pending competition, a traditional metal fabrication machine manufacturer – Cincinnati Incorporated – has plans to “…lead the world in big area additive manufacturing machinery for both prototyping and production”. Cincinnati Incorporated is a global technology leader in manufacturing press brakes, shears and laser cutting systems for metal fabricating. In addition Cincinnati powdered metal compacting presses are used to cost effectively make high volume production parts that make cars lighter and more efficient. Cincinnati machines have built tooling machines for the aircraft, agricultural equipment, trucks and trailers, restaurant equipment and medical devices manufacturing industries. Volatile Results. The Company is in a constant state of expansion into new products, geographies, selling channels and suppliers which could result in constantly shifting gross profit margins and earnings surprises. Furthermore the company is subject to significant competition in the 3D printer arena which experiences bouts of price deflation. The 3D printing industry is in a state of rapid evolution which can consistently present the threat of product obsolescence and shifting competitive positioning. If the Company’s forecasts exceed actual orders, for example, 3DS may end up holding large inventories of slow-moving or unusable parts, which could have an adverse effect on gross margins, cash flow and profitability.

Investment Positives

Well Positioned in Fast Growing industry. The 3D ecosystem is growing quickly. As the 2nd largest company in the 3D segment, 3DS has the resources, revenue diversity and experience to take advantage of the industry’s emergence. Diverse, Synergistic Revenue Streams. For example, by offering a 3D printing service to customers in a wide range of industries, 3D printer manufacturers are in a position to become better informed on what 3D technologies are best for various applications. In addition, printers can be cross sold to service bureau customers. Furthermore, 3DS’ diverse revenue stream provides a shield from poor performance in one of its segments: Despite 14.3% y-o-y printer sales growth, in 2Q 2014, 3DS achieved 25% overall revenue growth. Metal Printing Breakout. In 2013, direct metal revenue was just $14.3 million, however the company is predicting a rapid ramping in revenues from this business. CEO Avi Reichental mentioned on a recent earnings call that metals revenues may jump to $25 - $50 million in 2014. To that end, the Company announced its intention to at least triple its direct metals printer production output. Materials Growth and Margin. Materials, which represents the Company’s most profitable segment (70% gross margins in 2Q 2014) and accounted for 25% of total revenues, up from 24% last year, is likely to enjoy accelerating sales growth over time as 3D printing segues into manufacturing from prototyping. In 2Q 2014, materials sales grew 30% y-o-y versus 25.4% total Company sales advancement. Successfully Negotiating Growth. The Company has successfully managed 3 large and quickly evolving product divisions. Since 1Q 2013, the percentage contribution of the printers, materials and services segments’ to total revenues has remained largely intact. Acquisitions are a 2-sided coin: in just the last several quarters the Company has introduced a record number of new products, made two significant health-care related acquisitions (among others) and expanded into the Latin American market for the first time.

3D Systems is set to close on its acquisition of Robtec before the end of this year, providing the Company with a significant AM bureau presence in Latin America. Robtec is the largest Latin-American additive manufacturing service bureau and the leading 3D printing and scanning products distributor headquartered in Sao Paulo, Brazil.

3DS just closed on its acquisition of Simbionix, a maker of 3D virtual reality simulation systems for surgeons that would further inch the overall business away from printers. The purchase would complement its growing medical business after its April acquisition of Medical Modeling, a maker of surgical planning and clinical transfer tools using 3D modeling and printing.

Valuation. Last, but not least, our DCF valuation model indicates that the Company’s shares are undervalued by at least 5.96%. Please refer to the valuation section on page 24.





September 2, 2014



Financial Overview: 2010 – 2Q 2014

In 2Q 2014, the impact of price and product mix on printer sales was more muted than in 2013. In 2Q 2014, core and new product printer sales rose $8.9 million, while the change in selling prices and product mix negatively impact printer revenue growth by $1.9 million. 80%, or $3.4 million of total company price / mix erosion took place in Asia in 2Q 2014. This result confirms our thesis that while Asia Pac represents opportunity, there is a real threat of imminent in-region competition.

Sales Growth

Company sales took off in 2010; from 2010 to 2013 total sales advanced 46.9% per annum, from $159.9 million to $513.4 million, highlighted by a 61% CAGR in printer sales. In contrast, during the 2005 – 2010 period, sales increased a cumulative total of 15%. However, y-o-y sales growth in both 2013, 1Q 2014 and 2Q 2014 decelerated. Driven by lackluster results in the U.S. market and the printer segment, 2Q 2014 financial results were disappointing and represented a significant deceleration in revenue growth, to 25.4%, or $151.5 million (versus consensus revenue estimates of $162.2 million). While materials and services sales grew strongly in 2Q 2014 (up 30% and 38%, respectively), we estimate that a decline in printer sales is likely to be followed by a drop-off in materials sales, a theory borne out by a review of 2Q 2014 y-o-y sales decline in materials sales as indicated in the following chart.

41,323 30,501 54,686 66,665126,796

227,627

62,29050,297

58,43170,641

103,182

128,405

35,32732,037

46,751

93,117

123,653

157,368

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2008 2009 2010 2011 2012 2013

$ 0

00

s

3DS Sales Take Off in 2010

Printer / Other Products Sales Materials Sales Services Sales Total Sales Growth





September 2, 2014



The drop in printer sales growth in 2Q 2014 to 14.3% is due to several factors. First consumer sales were tepid at just $7.4 million, or 4.8% of total sales (the Company attributes the slowdown in printer sales growth to a decision to delay consumer product sales to allow the Company the ability to revamp consumer printer features such as print speed, to enable a strong rebound in consumer sales in 2H 2014). If consumer revenues grew at the same rate they advanced in 2013 (238.4%), 2Q 2014 consumer printer sales would have been ~ $20.2 million, which would have boosted total printer growth to a respectable 37.8% y-o-y rate of growth. The remaining growth ‘gap’ is attributable to a sizable sequential decline in (1) core and new printer products sold, (2) a sizable increase in price / mix revenue erosion, and (3) temporary customer timing issues, which in part was driven by the unusually high number of printer introductions in late 2013.

Organic Growth Drops to 10%

At the end of 2013, management guided for organic growth of ‘at least’ 30% in 2014. Organic growth was 28% and 10.0% in Q114 and Q214, respectively, versus a 30.1% y-o-y organic sales expansion in 2Q 2013, and versus 35% y-o-y organic growth by similarly-sized competitor, Stratasys Systems (SSYS). At 10%, the Company is growing well below the market expansion rate that we estimate is 30% to 40% per annum. In 2Q 2014, the Company’s order backlog reached a record $32 million. During the 2Q 2014 conference call, management indicated that the ‘lost’ organic growth all went into the increased order book. We estimate that as the order book is transformed into sales, that organic growth will reaccelerate in 2Q 2014 and 4Q 2014.

60

%

16

%

18

%

31

%

10

7%

11

% 19

%

44

%

76

%

30

% 38

%

50

%

76

%

39

%

33

%

52

%

53

%

41

%

39

% 45

%

14

%

30

% 38

%

25

%

P R I N T E R / O T H E R S A L E S M A T E R I A L S S A L E S S E R V I C E S S A L E S T O T A L S A L E S

3DS YEAR-ON-YEAR SEGMENT SALES GROWTH

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014





September 2, 2014



Declining Profitability

Issues regarding lackluster printer financial performance emerged in 1Q 2014. In 1Q 2014, printer and other gross profits expanded 35.5% y-o-y despite a 53% y-o-y jump in printer and other revenues. The 1Q 2014 printer gross margin of 39.8% represents the beginning of the decline in the category’s profit margin. Admittedly, the Company did introduce 24 new products in the Q4 2013 – Q1 2014 period, and we estimate that the introductions generated upfront cost of goods sold expenses that will be spread over many more units in coming quarters. In 2Q 2014, total gross margins fell 400 basis points to 47.8% from 51.8% in 2Q 2013. The Company attributes the 400 basis point drop to the following categories: 130 basis points due to inventory write-down of legacy products; 200 basis points due to product price erosion; and 70 basis points due to new product manufacturing startup costs. With respect to profit margins, printer gross margins are, like printer sales, lumpy, which we estimate is a function of the quickly evolving, competitive market place and the Company’s rapid deployment of new printer models. We note that after rising steadily from 2010 to 2013, in 2Q 2014 printer gross margins were the lowest in at least 4+ years at 35.7%. At the same time, in 2Q 2014, both SG&A and R&D expenses expanding rapidly. Hence, y-o-y sales, gross profit and EBT grew 25.4%, 15.6% and (85.0) %, respectively.

31.0%

45.0%50.0%

52.0%

45.0%

25.0%22.1%

30.1%29.7%

34.3%

28.1%

10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014

3D Systems Total and Organic Sales Expansion

Total Y-o-Y Sales Growth Y-o-Y Organic Sales Growth





September 2, 2014



Going forward, 3DS expects overall gross margins to rebound as materials gross margins expand, printer shipments increase, and high-margin software sales accelerate. Printer sales are expected to rebound as recent acquisitions make an impact, the recent addition of new distributors weighs positively on results, and the record printer order backlog – expanded by strong demand for metal printers and the delay in shipment of consumer printers (from 1H 2014 to 2H 2014) - turns into shipments. Given the dynamics of the industry and other companies’ results we would expect a re-acceleration as well.

77

%

45

%

44

%

52

%

35

%

17

%

74

%

46

%

44

%

52

%

38

%

14

%

74

%

45

%

47

% 53

%

32

%

21

%

74

%

44

%

46

% 52

%

40

%

12

%

75

%

40

% 45

% 51

%

45

%

6%

70

%

36

%

46

%

48

%

45

%

3%

M A T E R I A L S G R O S S M A R G I N

P R I N T E R G R O S S M A R G I N

S E R V I C E S G R O S S M A R G I N

T O T A L G R O S S M A R G I N

S G & A A N D R & D / S A L E S

E B I T M A R G I N

3DS MARGIN ANALYSIS

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014


73.5% 75.7%

19.9%

54.9%

-1.1%

-45.7%

-74.0%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

FY2012A 1Q 2013A 2Q 2013A 3Q 2013A 4Q 2013A 1Q 2014A 2Q 2014A

3D Systems Y-o-Y Growth Rates: Despite Falling OPEX Growth, EBIT Drops Sharply in 2Q 14

Total Sales Total Gross Profit Total OpEX EBIT




September 2, 2014



Strong Working Capital Management and Cash Conversion Cycle (CCC) Metrics

Given the steady increase in the cash conversion cycle to 103 days (days it takes to generate cash from its assets), the Company’s management of working capital is arguably weaker since 2012. The Company’s A/R days outstanding has held steady since 2010 at ~ 75 days, while days in inventory has increased 38% since 2012, to 100 days. Furthermore, days payable outstanding has declined significantly, before turning up in 2014.

Having said that, in light a working capital analysis of competitors Stratasys (SYSS) and ExOne (XONE), the Company’s working capital management is superior in every respect excluding DSOs:

Working Capital Metric DDD SYSS XONE

Days Sales Outstanding 73 58 69

Days Payable Outstanding 70 44 58

Days in Inventory 100 124 255

CCC 103 138 266

Sources: Company reports, Fintrust Brokerage estimates

Competitive Analysis

The similarities between 3DS and SYSS are striking. In their 2Q 2014 conference calls, both indicated that the overall 3D market is ‘stable-to-expanding’. In term of scale and revenue category proportionality 3DS and SYSS are highly similar. Excluding this quarter’s results, both 3D companies share similar organic growth rates, gross margins and R&D / sales ratios. Both even offer around 120 different printing materials. One consistent key difference over the last 6 quarters is that SYSS invests a higher proportion of revenues into SG&A, as depicted in the following graph. At the same time, SYSS’ organic y-o-y sales growth has outperformed 3DS in each of the last 3 quarters. Another key difference is that SYSS’ service bureau’s (‘Redeye’) growth is anemic at 9%, when compared to 3DS. Furthermore, 3DS’ service bureau operations are much more global in reach; SYSS’ service bureau business is mostly located in the U.S.

71 71 7279

7384

79

61 6270

89

74 72

87

100

7666

82

104 103

0

20

40

60

80

100

120

2010 2011 2012 2013 2Q 2014

3D Systems A/R, A/P, Inventory and CCC

Days Sales Outstanding Days Payable Outstanding Days in Inventory CCC





September 2, 2014



Together, SSYS and 3DS represent ~ 37% of the $4 billion in total sales the 3D printing industry is expected to generate this year. We estimate that total industry expansion leaves room for both companies to grow at the industry’s organic growth rate or better, without competing with each other solely on price. The two don’t compete head-to-head across their entire product lineup; since 3DS has a significant metals printing business and produces SLS printers, which arguably print higher durability objects, we estimate that 3DS has a higher exposure to hi-end manufacturing applications in the aerospace and automotive and medical industries. XONE, a much smaller company, has shifted its focus to original equipment manufacturers (OEMs) from the foundry industry because foundries perceived that the control of 3D metal casting moved to the OEMs from the foundries. This shift, according to XONE management will place a focus on 3D service bureau parts printing lines of business away from machine sales. All three companies have similar EV / sales ratios and approx. the same expectations for gross profit growth this year. XONE plans to rapidly expand its service bureau revenues, accounting for the LT organic sales guidance outlier of 45%.

DDD SSYS XONE

2014 Revenue Guidance $720 mm $760 mm $58 mm

Implied y-o-y Sales Growth 40% 56% 45%

Current Enterprise Value - EV $4,800 mm $5,070 mm $362 mm

EV / 2014E Sales 6.7x 6.7x 6.2x

2014E Gross Margin 50% 51% 38%

SG&A / Sales 33.2% 43.6% 33.6%

Long Term Organic Sales Growth Guidance

30% 25% 45%

28.82% 29.97%23.57%

31.62% 32.94% 33.19%44.60% 40.10% 41.00% 41.50% 44.70% 43.60%

15.00%

35.00%

55.00%

75.00%

95.00%

115.00%

135.00%

155.00%

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014

3D Systems Invests Less In SG&A Than SSYS

DDD Y-o-y sales growth DDD SG&A / Sales SYSS Y-o-y sales growth





September 2, 2014



Fintrust Brokerage Services Earnings Forecast & Valuation Analysis: DDD

0.0%

10.0%

20.0%

30.0%

40.0%

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014

SYSS' Y-o-Y Organic Sales Growth Accelerates

3DS Organic Sales Growth SYSS Organic Sales Growth

Summary Income Statement: 2013 - 2019E

3D Systems Corp.

($ in thousands)

Income Statement 2013 1Q 2014 2Q 2014 3Q14E 4Q14E 2014E 2015E 2016E 2017E 2018E 2019E '14-'19 CAGR

Printer / Other Products Sales 227,627 60,753 61,948 80,785 103,422 306,908 398,981 518,675 658,718 823,397 988,077 26.3%

Materials Sales 128,405 40,441 38,036 43,133 50,250 171,860 232,010 301,613 407,178 529,331 661,664 30.9%

Services Sales 157,368 48,564 51,528 58,922 61,211 220,225 305,515 412,445 536,178 697,031 871,289 31.7%

Total Revenues 513,400 149,758 151,512 182,840 214,883 698,993 936,506 1,232,733 1,602,074 2,049,759 2,521,030 29.2%

Gross Profit 267,594 75,472 72,390 90,775 108,932 347,569 479,357 644,493 860,396 1,125,420 1,412,937 32.4%

SG&A 143,244 48,720 50,322 58,899 67,072 225,013 283,605 354,822 437,099 528,496 612,190 22.2%

R&D 43,489 17,235 17,714 19,548 20,825 75,322 84,286 104,782 128,166 153,732 176,472 18.6%

EBT 80,861 8,469 2,886 10,852 19,599 41,806 105,990 179,413 289,655 437,716 618,799 71.4%

Net Income $44,107 $4,910 $2,125 $7,597 $13,691 $28,323 $74,193 $125,589 $202,753 $306,401 $433,159 72.5%

Basic GAAP EPS $0.45 $0.05 $0.02 $0.07 $0.13 $0.27 $0.70 $1.18 $1.90 $2.87 $4.04 71.8%

Percentage of Sales

Gross Profit 52.1% 50.4% 47.8% 49.6% 50.7% 49.7% 51.2% 52.3% 53.7% 54.9% 56.0%

EBIT 15.8% 5.7% 1.9% 5.9% 9.1% 6.0% 11.3% 14.6% 18.1% 21.4% 24.5%

Other

ROA 4.02% - - - - 3.60% 4.58% 7.07% 10.04% 12.90% 15.10%

ROE 4.72% - - - - 4.19% 5.37% 8.33% 11.86% 15.20% 17.69%





September 2, 2014



Financial Analysis The 2nd half is the industry’s seasonally most active. We expect that both printer sales and gross margins will rebound in 3Q and 4Q 2014, as customers take delivery of the many new products introduced late last year. While management is calling for 55% gross margin in 2015, we expect margin improvement to be gradual with gross margin reaching 2013 levels of ~ 52% by late 2015. Our 2014 and 2015 sales estimates are $699 million and $937 million, respectively, which are estimate marginally below company guidance of $720 million and $1.0 billion in 2014 and 2015. From a longer term perspective, we see sales growth slowing through 2019, generating a 2014 – 2019 sales CAGR of 29.2% highlighted by slowing printer sales from historically high levels, but hastening material and service bureau revenue growth. We incorporate SG&A and R&D operating leverage in our earnings model which in combination with resurrecting printer margins drives 70% - plus EBT and EPS growth over the next 5 ½ years. By 2019, we expect the Company to generate $2.52 million in total revenues, which will represent a market share of ~ 15% to 20%, indicating that the company is positioned, through an intense product development and M&A acquisition program, to keep pace with the larger 3D printing industry’s growth. We estimate that 3D’s market share currently stands at ~ 18%. Our cash flow forecast make a reasonable assumption for future acquisition activity; while many companies in the industry are guiding for 30% to 45% annual organic growth, we estimate that 3DS’ organic growth will hover in the 25% range. Thus our estimates for cash funneled into M&A activity assumes that the delta between 25% and 29% sales CAGR is made up through acquisition by the company. With respect to cash flow, we estimate that 3DS will generate $775 million of free cash from 2015 to 2019, which may prove to be conservative insofar as (1) we incorporate cash-based acquisition activity (we roughly estimate that 3DS will spend $885 million on M&A though the 2015 – 2019 period) and (2) our balance sheet model doesn’t incorporate additional improvement in working capital management. We estimate that near term company results, i.e., the next two quarters – are subject to variation from our estimates insofar as there are many ‘moving parts’, such as (1) shifting consumer sales growth (2) metal printing capacity expansion and (3) the extent to which the company’s core design and manufacturing

business’ new printer models and materials sell well. Based on the Company’s global presence, wide array of printing technologies, strong balance sheet and working capital management, among other factors, we expect 3DS to prosper over the long term, and recommend purchase of 3DS shares only to patient investors with a long term outlook.

Growth Analysis

($ in 000s except per share data)

Income Statement 2016E 2015E 2014E 2013A

Revenues $1,232,733 $936,506 $696,993 $513,400

Gross Profit $644,493 $479,357 $347,577 $267,594

Gross Profit Margin 52.3% 51.2% 49.9% 52.1%

SG&A $354,822 $283,605 $225,012 $143,244

R&D $104,782 $84,286 $75,323 $43,489

EBIT $184,889 $111,466 $47,242 $80,861

Interest expense / other $5,476 $5,476 $5,476 $16,855

EBT $179,413 $105,990 $41,766 $64,006

Taxes $53,824 $31,797 $13,376 $19,867

Net Income $125,589 $74,193 $28,390 $44,139

Diluted Shares Outstanding 106,600 106,100 105,700 102,900

EPS $1.18 $0.70 $0.27 $0.42

Balance Sheet, other 2016E 2015E 2014E 2013A

Total Assets $1,776,934 $1,619,054 $1,522,052 $1,097,856

Shareholders Equity $1,506,909 $1,381,320 $1,307,127 $933,972

TBV / Share $8.45 $7.65 $6.81 $4.10

Growth Rates 2016E 2015E 2014E 2013A

Revenues 31.6% 34.4% 35.8% 45.2%

EBIT 65.9% 135.9% -41.6% 33.5%

Net Income 69.3% 161.3% -35.7% 24.0%

EPS 68.5% 160.3% -36.5% -2.4%

($ in millions except per share data)

2016E 2015E 2014E 2013A

Cash $602 $586 $515 $306

Return on Assets 7.07% 4.58% 3.60% 4.02%

Return on Equity 8.33% 5.37% 4.19% 4.72%

Cash from Operations $193 $169 $25 $25

Financial Strength and Return Analysis

Income Statement, Balance Sheet and Growth Analysis





September 2, 2014



Valuation Analysis

Our DCF analysis indicates that DDD shares would be fairly valued at $57 by year-end 2014. At $57, the EV / sales and EV / EBIT ratio would equate to 6.5X and 54.3X 2015E sales and EBIT, respectively. We expect that sales and EBIT will grow 29.3% and 67.6%, respectively, over the 2014 – 2019 timeframe. Out price target represents 6.5% year-end 2014 upside. We estimate that our 10% perpetuity growth rate may prove to be conservative; in out-year 2019, we estimate 23% y-o-y revenue growth.


3D Systems Corp. DDD

Discounted Cash Flow Analysis Inputs

10 Yr Treasury 2.37%

DDD Beta 1.62x

Cost of DDD Equity 14.7%

Equity / EV 98%

AT Cost of Debt 3.7%

WACC 14.7%

FY Ended December ($ 000s)

3DS - DDD 2014E 2015E 2016E 2017E 2018E 2019E

EBITA 47,242 111,466 184,889 295,131 443,192 624,275

Taxes 17,480 33,440 55,467 88,539 132,957 187,282

Unlevered NI 29,763 78,026 129,423 206,592 310,234 436,992

+ D&A 50,013 62,517 78,146 97,682 122,103 152,629

+ Capex (16,965) (3,384) (3,553) (3,730) (3,917) (4,113)

+ Inc in A/R (64,495) (27,696) (70,414) (73,256) (91,570) (114,462)

+ Inc in Inv (46,309) (12,080) (33,221) (41,526) (51,907) (64,884)

+ Inc in A/P 34,087 17,309 25,963 32,454 40,568 50,710

= ULFCF (13,906) 114,692 126,345 218,216 325,511 456,871

2015-2019 ULFCF CAGR 31.8%

NPV of 2014 - 2019 ULFCFs $649,460




September 2, 2014



Company versus Market Comparison Chart:


Corporate Governance:

The Board is authorized to issue up to 5 million shares of preferred stock without shareholder approval, which could make it difficult for a 3rd party to attempt an acquisition of DDD. The preferred stock may be granted certain rights and privileges that disadvantage common shareholders including dividend rights.

If the Board has determined that any fraud or intentional misconduct by one or more executive officers caused the Company to restate its financial statements, it may require reimbursement of any bonus or incentive compensation awarded to such officers and/or effect the cancellation of unvested restricted stock or outstanding stock option awards previously granted to such officers in the amount by which such compensation exceeded any lower payment that would have been made based on the restated financial results.

3DS has a registration statement on Form S-3 under

which it may issue up to $500.0 million of securities.

DDD issued $272.1 million of Common Stock in 2013

and $112.1 million in 2012, and the remaining $115.8

million of securities covered by it may be issued until

June 12, 2015. Insofar as the Company is a consistent

and active acquirer of other companies, potentially

dilutive share issuance is a constant possibility.




September 2, 2014

[Type here]





Income Statement FY Ended December 31

($ in thousands)

FY2011A FY2012A 1Q 2013A 2Q 2013A 3Q 2013A 4Q 2013A FY2013A 1Q 2014 2Q 2014 3Q 2014E 4Q 2014E FY2014E

FY2011A % of Total FY2012A % of Total 1Q 2013A % of Total 2Q 2013A % of Total 3Q 2013A % of Total 4Q 2013A % of Total FY2013A % of Total 1Q 2014 % of Total 2Q 2014 % of Total 3Q 2014E % of Total 4Q 2014E % of Total FY2014E % of Total

Revenues:

Printers / other products 66,665 28.9% 126,798 35.9% 39,723 38.9% 54,190 44.9% 59,841 44.1% 73,873 47.7% 227,627 44.3% 60,753 41.1% 61,948 40.9% 80,785 44.2% 103,422 48.1% 306,909 44.0%

Materials 70,641 30.7% 103,182 29.2% 28,729 28.1% 29,275 24.2% 33,179 24.4% 37,222 24.0% 128,405 25.0% 40,441 27.4% 38,036 25.1% 43,133 23.6% 50,250 23.4% 171,859 24.7%

Services 93,117 40.4% 123,653 35.0% 33,627 32.9% 37,322 30.9% 42,697 31.5% 43,722 28.2% 157,368 30.7% 46,564 31.5% 51,528 34.0% 58,922 32.2% 61,211 28.5% 218,225 31.3%

Total revenues 230,423 100.0% 353,633 100.0% 102,079 100.0% 120,787 100.0% 135,717 100.0% 154,817 100.0% 513,400 100.0% 147,758 100.0% 151,512 100.0% 182,840 100.0% 214,883 100.0% 696,993 100.0%

Revenues by Region:

US 117,739 51.1% 196,414 55.5% 57,153 56.0% 67,870 56.2% 74,427 54.8% 85,302 55.1% 284,752 55.5% 68,032 46.0% 78,895 52.1% 96,905 53.0% 118,185 55.0% 362,018 51.9%

Europe 83,324 36.2% 100,687 28.5% 28,580 28.0% 31,855 26.4% 32,767 24.1% 40,579 26.2% 133,781 26.1% 47,564 32.2% 42,015 27.7% 47,538 26.0% 49,423 23.0% 186,540 26.8%

Asia Pac 29,360 12.7% 56,532 16.0% 16,346 16.0% 21,062 17.4% 28,523 21.0% 28,936 18.7% 94,867 18.5% 32,162 21.8% 30,602 20.2% 38,396 21.0% 47,274 22.0% 148,435 21.3%

Total revenues 230,423 100.0% 353,633 100.0% 102,079 100.0% 120,787 100.0% 135,717 100.0% 154,817 100.0% 513,400 100.0% 147,758 100.0% 151,512 100.0% 182,840 100.0% 214,883 100.0% 696,993 100.0%

Cost of sales: COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS%


Materials 24,890 35.2% 32,764 31.8% 7,851 27.3% 7,727 26.4% 8,698 26.2% 9,548 25.7% 33,824 26.3% 10,225 25.3% 11,418 30.0% 12,085 28.0% 13,577 27.0% 47,305 27.5%

Services 54,807 58.9% 67,151 54.3% 18,857 56.1% 20,988 56.2% 22,674 53.1% 23,674 54.1% 86,193 54.8% 25,470 54.7% 27,882 54.1% 31,290 53.1% 33,144 54.1% 117,786 54.0%

Total Cost of Revenues 121,395 52.7% 172,437 48.8% 48,602 47.6% 58,204 48.2% 64,280 47.4% 74,720 48.3% 245,806 47.9% 72,286 48.9% 79,114 52.2% 92,065 50.4% 105,950 49.3% 349,415 50.1%

Gross Profit GM% GM% GM% GM% GM% GM% GM% GM% GM% GM% GM% GM%


Materials 45,751 64.8% 70,418 68.2% 20,878 72.7% 21,548 73.6% 24,481 73.8% 27,674 74.3% 94,581 73.7% 30,216 74.7% 26,618 70.0% 31,047 72.0% 36,673 73.0% 124,554 72.5%

Services 38,310 41.1% 56,502 45.7% 14,770 43.9% 16,334 43.8% 20,023 46.9% 20,048 45.9% 71,175 45.2% 21,094 45.3% 23,646 45.9% 27,632 46.9% 28,067 45.9% 100,439 46.0%

Total Gross Profit 109,028 47.3% 181,196 51.2% 53,477 52.4% 62,583 51.8% 71,437 52.6% 80,097 51.7% 267,594 52.1% 75,472 51.1% 72,398 47.8% 90,775 49.6% 108,932 50.7% 347,577 49.9%

Operating Expense

SG&A 59,795 26.0% 97,422 27.5% 29,454 28.9% 36,189 30.0% 32,054 23.6% 45,547 29.4% 143,244 27.9% 48,720 33.0% 50,322 33.2% 58,899 32.2% 67,072 31.2% 225,012 32.3%

R&D 14,331 6.2% 23,203 6.6% 6,504 6.4% 9,598 7.9% 10,813 8.0% 16,574 10.7% 43,489 8.5% 17,235 11.7% 17,714 11.7% 19,548 10.7% 20,825 9.7% 75,323 10.8%

Total OpEX 74,126 32.2% 120,625 34.1% 35,958 35.2% 45,787 37.9% 42,867 31.6% 62,121 40.1% 186,733 36.4% 65,955 44.6% 68,036 44.9% 78,447 42.9% 87,897 40.9% 300,335 43.1%

EBIT 34,902 15.1% 60,571 17.1% 17,519 17.2% 16,796 13.9% 28,570 21.1% 17,976 11.6% 80,861 15.8% 9,517 6.4% 4,362 2.9% 12,328 6.7% 21,035 9.8% 47,242 6.8%

Interest & Other 2,456 1.1% 17,292 4.9% 10,067 9.9% 2,662 2.2% 2,651 2.0% 1,475 1.0% 16,855 3.3% 1,048 0.7% 1,476 1.0% 1,476 0.8% 1,476 0.7% 5,476 0.8%

EBT 32,446 14.1% 43,279 12.2% 7,452 7.3% 14,134 11.7% 25,919 19.1% 16,501 10.7% 64,006 12.5% 8,469 5.7% 2,886 1.9% 10,852 5.9% 19,559 9.1% 41,766 6.0%

Income Taxes (2,974) -1.3% 4,338 1.2% 1,569 1.5% 4,791 4.0% 8,279 6.1% 5,248 3.4% 19,887 3.9% 3,559 2.4% 694 0.5% 3,256 1.8% 5,868 2.7% 13,376 1.9%

Net Income Available to Common $35,420 15.4% $38,941 11.0% $5,883 5.8% $9,343 7.7% $17,640 13.0% $11,253 7.3% $44,119 8.6% $4,910 3.3% $2,192 1.4% $7,597 4.2% $13,691 6.4% $28,390 4.1%

Net income per common share:

Basic $0.71 $0.70 $0.06 $0.06 #VALUE! $2.12 $8.33 $0.93 $0.41 $1.43 $2.56 $5.34

Diluted $0.70 $0.69 $0.06 $0.10 $0.17 $0.11 $0.43 $0.05 $0.02 $0.07 $0.13 $0.27

Weighted average common shares outstanding:

Basic 49,887,323 55,370,833 91,921,875 5,298,000 5,299,000 5,299,000 5,299,000 5,319,000 5,339,000 5,314,000

Diluted 50,600,000 56,150,704 91,921,875 96,248,000 102,437,000 102,900,000 102,900,000 103,546,000 106,407,000 106,427,000 106,447,000 105,706,750

Year-Over-Year Growth FY2012A 1Q 2013A 2Q 2013A 3Q 2013A 4Q 2013A FY2013A 1Q 2014A 2Q 2014A 3Q 2014E 4Q 2014E FY2014E

Printer / other Sales 90.2% 60.7% 100.8% 75.6% 76.3% 79.5% 52.9% 14.3% 35.0% 40.0% 34.8%

Materials Sales 46.1% 16.4% 11.7% 30.2% 38.8% 24.4% 40.8% 29.9% 30.0% 35.0% 33.8%

Services Sales 32.8% 17.9% 19.1% 37.8% 33.2% 27.3% 38.4% 38.1% 38.0% 40.0% 38.7%

Total Sales 53.5% 31.0% 44.4% 49.9% 52.4% 45.2% 44.7% 25.4% 34.7% 38.8% 35.8%

Cost of Goods Sold 42.0% 24.4% 43.4% 47.2% 52.1% 42.5% 48.7% 35.9% 43.2% 41.8% 42.2%

Printer / other Sales Gprofit 117.4% 86.2% 120.0% 74.7% 79.2% 87.6% 35.5% -10.4% 19.2% 36.5% 20.4%

Materials Sales Gprofit 53.9% 24.4% 25.3% 40.6% 45.4% 34.3% 44.7% 23.5% 26.8% 32.5% 31.7%

Services Sales Gprofit 47.5% 18.1% 12.3% 42.4% 30.2% 26.0% 42.8% 44.8% 38.0% 40.0% 41.1%

Total Gross Profit 66.2% 37.6% 45.6% 52.4% 52.5% 47.7% 41.1% 15.7% 27.1% 36.0% 29.9%

SG&A 62.9% 22.9% 50.5% 39.9% 71.6% 47.0% 65.4% 39.1% 83.7% 47.3% 57.1%

R&D 61.9% 31.8% 95.0% 95.1% 113.0% 87.4% 165.0% 84.6% 80.8% 25.7% 73.2%

Total OpEX 62.7% 24.5% 58.1% 50.7% 80.9% 54.8% 83.4% 48.6% 83.0% 41.5% 60.8%

EBIT 73.5% 75.7% 19.9% 54.9% -1.1% 33.5% -45.7% -74.0% -56.8% 17.0% -41.6%




September 2, 2014

[Type here]





Income Statement FY Ended December 31

($ in thousands)

FY2011A FY2012A FY2013A FY2014E FY2015E FY2016E FY2017E FY2018E FY2019E '14 - '19

FY2011A % of Total FY2012A % of Total FY2013A % of Total FY2014E % of Total FY2015E % of Total FY2016E % of Total FY2017E % of Total FY2018E % of Total FY2019E % of Total CAGR

Revenues:

Printers / other products 66,665 28.9% 126,798 35.9% 227,627 44.3% 306,909 44.0% 398,981 42.6% 518,675 42.1% 658,718 41.1% 823,397 40.2% 988,077 39.2% 26.3%

Materials 70,641 30.7% 103,182 29.2% 128,405 25.0% 171,859 24.7% 232,010 24.8% 301,613 24.5% 407,178 25.4% 529,331 25.8% 661,664 26.2% 30.9%

Services 93,117 40.4% 123,653 35.0% 157,368 30.7% 218,225 31.3% 305,515 32.6% 412,445 33.5% 536,178 33.5% 697,031 34.0% 871,289 34.6% 31.9%

Total revenues 230,423 100.0% 353,633 100.0% 513,400 100.0% 696,993 100.0% 936,506 100.0% 1,232,733 100.0% 1,602,074 100.0% 2,049,760 100.0% 2,521,030 100.0% 29.3%

Revenues by Region:

US 117,739 51.1% 196,414 55.5% 284,752 55.5% 362,018 51.9% 515,078 55.0% 678,003 55.0% 881,141 55.0% 1,127,368 55.0% 1,386,567 55.0% 30.8%

Europe 83,324 36.2% 100,687 28.5% 133,781 26.1% 186,540 26.8% 206,031 22.0% 271,201 22.0% 352,456 22.0% 450,947 22.0% 554,627 22.0% 24.3%

Asia Pac 29,360 12.7% 56,532 16.0% 94,867 18.5% 148,435 21.3% 215,396 23.0% 283,529 23.0% 368,477 23.0% 471,445 23.0% 579,837 23.0% 31.3%

Total revenues 230,423 100.0% 353,633 100.0% 513,400 100.0% 696,993 100.0% 936,506 100.0% 1,232,733 100.0% 1,602,074 100.0% 2,049,760 100.0% 2,521,030 100.0% 29.3%

Cost of sales: COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS% COGS%


Materials 24,890 35.2% 32,764 31.8% 33,824 26.3% 47,305 27.5% 61,542 26.5% 76,988 25.5% 99,863 24.5% 124,528 23.5% 149,043 22.5% 25.8%

Services 54,807 58.9% 67,151 54.3% 86,193 54.8% 117,786 54.0% 167,955 55.0% 230,864 56.0% 305,485 57.0% 404,101 58.0% 513,839 59.0% 34.3%

Total Cost of Revenues 121,395 52.7% 172,437 48.8% 245,806 47.9% 349,415 50.1% 457,149 48.8% 588,240 47.7% 741,678 46.3% 924,340 45.1% 1,108,093 44.0% 26.0%

Gross Profit GM% GM% GM% GM% GM% GM% GM% GM% GM%


Materials 45,751 64.8% 70,418 68.2% 94,581 73.7% 124,554 72.5% 170,468 73.5% 224,625 74.5% 307,315 75.5% 404,803 76.5% 512,621 77.5% 32.7%

Services 38,310 41.1% 56,502 45.7% 71,175 45.2% 100,439 46.0% 137,559 45.0% 181,581 44.0% 230,693 43.0% 292,931 42.0% 357,451 41.0% 28.9%

Total Gross Profit 109,028 47.3% 181,196 51.2% 267,594 52.1% 347,577 49.9% 479,357 51.2% 644,493 52.3% 860,396 53.7% 1,125,420 54.9% 1,412,937 56.0% 32.4%

Operating Expense

SG&A 59,795 26.0% 97,422 27.5% 143,244 27.9% 225,012 32.3% 283,605 30.3% 354,822 28.8% 437,099 27.3% 528,496 25.8% 612,190 24.3% 22.2%

R&D 14,331 6.2% 23,203 6.6% 43,489 8.5% 75,323 10.8% 84,286 9.0% 104,782 8.5% 128,166 8.0% 153,732 7.5% 176,472 7.0% 18.6%

Total OpEX 74,126 32.2% 120,625 34.1% 186,733 36.4% 300,335 43.1% 367,891 39.3% 459,604 37.3% 565,265 35.3% 682,228 33.3% 788,662 31.3% 21.3%

EBIT 34,902 15.1% 60,571 17.1% 80,861 15.8% 47,242 6.8% 111,466 11.9% 184,889 15.0% 295,131 18.4% 443,192 21.6% 624,275 24.8% 67.6%

Interest & Other 2,456 1.1% 17,292 4.9% 16,855 3.3% 5,476 0.8% 5,476 0.6% 5,476 0.4% 5,476 0.3% 5,476 0.3% 5,476 0.2% 0.0%

EBT 32,446 14.1% 43,279 12.2% 64,006 12.5% 41,766 6.0% 105,990 11.3% 179,413 14.6% 289,655 18.1% 437,716 21.4% 618,799 24.5% 71.5%

Income Taxes (2,974) -1.3% 4,338 1.2% 19,887 3.9% 13,376 1.9% 31,797 3.4% 53,824 4.4% 86,896 5.4% 131,315 6.4% 185,640 7.4% 69.2%

Net Income Available to Common $35,420 15.4% $38,941 11.0% $44,119 8.6% $28,390 4.1% $74,193 7.9% $125,589 10.2% $202,758 12.7% $306,401 14.9% $433,159 17.2% 72.5%

Net income per common share:

Basic $0.71 $0.70 $8.33 $5.34 $13.22 $21.24 $32.63 $47.04 $63.57

Diluted $0.70 $0.69 $0.43 $0.27 $0.70 $1.18 $1.90 $2.87 $4.04

Weighted average common shares outstanding:

Basic 49,887,323 55,370,833 5,299,000 5,314,000 5,614,000 5,914,000 6,214,000 6,514,000 6,814,000

Diluted 50,600,000 56,150,704 102,900,000 105,706,750 106,006,750 106,306,750 106,606,750 106,906,750 107,206,750

Year-Over-Year Growth FY2012A FY2013A FY2014E FY2015E FY2016E FY2017E FY2018E FY2019E

Printer / other Sales 90.2% 79.5% 34.8% 30.0% 30.0% 27.0% 25.0% 20.0%

Materials Sales 46.1% 24.4% 33.8% 35.0% 30.0% 35.0% 30.0% 25.0%

Services Sales 32.8% 27.3% 38.7% 40.0% 35.0% 30.0% 30.0% 25.0%

Total Sales 53.5% 45.2% 35.8% 34.4% 31.6% 30.0% 27.9% 23.0%

Cost of Goods Sold 42.0% 42.5% 42.2% 30.8% 28.7% 26.1% 24.6% 19.9%

Printer / other Sales Gprofit 117.4% 87.6% 20.4% 39.8% 39.1% 35.3% 32.7% 26.9%

Materials Sales Gprofit 53.9% 34.3% 31.7% 36.9% 31.8% 36.8% 31.7% 26.6%

Services Sales Gprofit 47.5% 26.0% 41.1% 37.0% 32.0% 27.0% 27.0% 22.0%

Total Gross Profit 66.2% 47.7% 29.9% 37.9% 34.4% 33.5% 30.8% 25.5%

SG&A 62.9% 47.0% 57.1% 26.0% 25.1% 23.2% 20.9% 15.8%

R&D 61.9% 87.4% 73.2% 11.9% 24.3% 22.3% 19.9% 14.8%

Total OpEX 62.7% 54.8% 60.8% 22.5% 24.9% 23.0% 20.7% 15.6%

EBIT 73.5% 33.5% -41.6% 135.9% 65.9% 59.6% 50.2% 40.9%




September 2, 2014

[Type here]




Commom Sized Balance Sheet

($ in thousands)

2013A % of Total 1Q 2014 2Q 2014 3Q 2014E 4Q 2014E % of Total 2015E % of Total 2016E 2017E 2018E 2019E

ASSETS

Current Assets:

Cash & equivalents $306,316 27.9% $306,704 $570,262 $547,960 $514,932 33.8% $586,297 36.2% $601,648 $749,338 $975,933 $1,290,097

Accounts Rec 132,121 12.0% 141,990 137,432 165,849 194,914 12.8% 222,609 13.7% 293,023 366,279 457,849 572,311

Inventories 75,148 6.8% 86,030 90,204 104,970 120,802 7.9% 132,883 8.2% 166,103 207,629 259,536 324,420

Prepaid Expenses 7,203 0.7% 14,554 14,105 14,105 14,105 0.9% 14,105 0.9% 14,105 14,105 14,105 14,105

Deferred Tax Assets 6,067 0.6% 6,976 8,105 8,105 8,105 0.5% 8,105 0.5% 8,105 8,105 8,105 8,105

Total Current Assets 526,855 48.0% 556,254 820,108 840,989 852,858 56.0% 963,999 59.5% 1,082,984 1,345,457 1,715,528 2,209,038

PP&E, net 45,208 4.1% 48,982 59,671 63,671 67,671 4.4% 71,055 4.1% 74,607 78,338 82,255 86,367

Intangibles Assets 141,709 12.9% 150,946 177,783 206,582 217,439 14.3% 199,917 12.9% 235,258 211,542 192,889 188,755

Goodwill 370,066 33.7% 359,918 404,073 370,066 370,066 24.3% 370,066 33.7% 370,066 370,066 370,066 370,066

LT Deferred tax asset 548 0.0% 649 762 548 548 0.0% 548 0.0% 548 548 548 548

Other Assets 13,470 1.2% 13,308 13,973 13,470 13,470 0.9% 13,470 1.2% 13,470 13,470 13,470 13,470

Total assets 1,097,856 100.0% 1,130,057 1,476,370 1,495,326 1,522,052 100.0% 1,619,054 100.0% 1,776,934 2,019,420 2,374,755 2,868,244

0 0 (0) 0 (0) 0 (0)

LIABILITIES & SHAREHOLDERS' EQUITY

Current Liabiities:

Current portion of capitalized lease obligation 187 0.0% 190 194 187 187 0.0% 187 0.0% 187 187 187 187

Accounts payable 51,729 4.7% 56,414 65,440 75,256 86,544 5.7% 103,853 4.7% 129,817 162,271 202,838 253,548

Accrued and other liabilities 28,430 2.6% 35,356 28,543 28,430 28,430 1.9% 28,430 2.6% 28,430 28,430 28,430 28,430

Customer Deposits 5,466 0.5% 6,238 7,075 7,429 7,800 0.5% 8,970 0.5% 10,316 11,863 13,643 15,689

Deferred revenues 24,644 2.2% 24,266 26,188 27,497 28,872 1.9% 33,203 2.2% 38,184 43,911 50,498 58,072

Total Currentt Liabilities 110,456 10.1% 122,464 127,440 138,799 151,834 10.0% 174,644 10.1% 206,933 246,662 295,596 355,926

LT portion of capitalized lease obligations 7,277 0.7% 7,230 7,181 7,181 7,181 0.5% 7,181 0.7% 7,181 7,181 7,181 7,181

Convertible sr. notes 11,416 1.0% 11,500 11,585 11,585 11,585 0.8% 11,585 1.0% 11,585 11,585 11,585 11,585

LT deferred tax liability 19,714 1.8% 14,407 21,819 21,819 21,819 1.4% 21,819 1.8% 21,819 21,819 21,819 21,819

Other liabilities 15,201 1.4% 20,679 22,506 22,506 22,506 1.5% 22,506 1.4% 22,506 22,506 22,506 22,506

Total Liabilities 164,064 14.9% 176,280 190,531 201,890 214,925 14.1% 237,735 14.9% 270,024 309,753 358,687 419,017

Shareholders' equity:

Common Stock 104 0.0% 104 111 111 111 0.0% 111 0.0% 111 111 111 111

Added PIC 866,552 78.9% 881,775 1,210,017 1,210,017 1,210,017 79.5% 1,210,017 78.9% 1,210,017 1,210,017 1,210,017 1,210,017

Treasurt stock (286) 0.0% (301) (316) (316) (316) 0.0% (316) 0.0% (316) (316) (316) (316)

Accumulated earnings 60,487 5.5% 65,364 67,489 75,086 88,777 5.8% 162,970 5.5% 288,559 491,318 797,718 1,230,877

AOCI 5,789 0.5% 5,795 7,466 7,466 7,466 0.5% 7,466 0.5% 7,466 7,466 7,466 7,466

Noncontrolling interest 1,146 0.1% 1,040 1,072 1,072 1,072 0.1% 1,072 0.1% 1,072 1,072 1,072 1,072

Total shareholders' equity 933,792 85.06% 953,777 1,285,839 1,293,436 1,307,127 85.88% 1,381,320 85.06% 1,506,909 1,709,668 2,016,068 2,449,227

Total liabilities and shareholders' equity $1,097,856 100.0% $1,130,057 $1,476,370 $1,495,326 $1,522,052 100.0% $1,619,054 100.0% $1,776,933 $2,019,421 $2,374,755 $2,868,245

Solvency Ratios 2013A 1Q 2014 2Q 2014 3Q 2014E 4Q 2014E 2015E 2016E 2017E 2018E 2019E

Quick Ratio 4.1x 3.8x 5.7x 5.3x 4.8x 4.8x 4.4x 4.6x 4.9x 5.3x

Current Ratio (working capital ratio) 4.8x 4.5x 6.4x 6.1x 5.6x 5.5x 5.2x 5.5x 5.8x 6.2x

Total Liabilities / Shareholder Equity 17.6% 18.5% 14.8% 15.6% 16.4% 17.2% 17.9% 18.1% 17.8% 17.1%

LTD / Shareholder Equity 2.0% 2.0% 1.5% 1.5% 1.4% 1.4% 1.2% 1.1% 0.9% 0.8%

LTD / LTD + SE 2.0% 1.9% 1.4% 1.4% 1.4% 1.3% 1.2% 1.1% 0.9% 0.8%

Liquidity Ratios 2013A 1Q 2014 2Q 2014 3Q 2014E 4Q 2014E 2015E 2016E 2017E 2018E 2019E

DSO 78.9 73.7 69.6 69.6 69.6 72.9 72.9 70.1 68.5 69.6

Days Inventory Outstanding 111.6 108.6 104.0 104.0 104.0 106.1 103.1 102.2 102.5 106.9

Days Payable Outstanding 76.8 71.2 75.5 74.6 74.5 82.9 80.6 79.9 80.1 83.5

Cash Conversion Cycle 113.7 111.1 98.1 99.0 99.1 96.1 95.4 92.4 90.9 93.0

A/R Turnover 4.8x 4.3x 4.3x 4.8x 4.8x 4.5x 4.8x 4.9x 5.x 4.9x

Inventory Turnover 2.6x 2.3x 2.4x 2.5x 2.4x 2.4x 2.5x 2.6x 2.5x 2.4x

Average age of Inventory 143 156 154 149 149 154 144 143 143 150

Inventory / Revenues 14.6% 14.6% 14.9% 14.4% 14.1% 14.2% 13.5% 13.0% 12.7% 12.9%

Intangibles / Book Value 15.2% 15.8% 13.8% 16.0% 16.6% 14.5% 15.6% 12.4% 9.6% 7.7%

Goodwill / Book Value 39.6% 37.7% 31.4% 28.6% 28.3% 26.8% 24.6% 21.6% 18.4% 15.1%

Other 2013A 1Q 2014 2Q 2014 3Q 2014E 4Q 2014E 2015E 2016E 2017E 2018E 2019E

Working Capital $416,399 $433,790 $692,668 $702,190 $701,024 $789,355 $876,052 $1,098,795 $1,419,932 $1,853,112

Assets / Sales 2.1x 1.9x 2.4x 2.x 1.8x 1.7x 1.4x 1.3x 1.2x 1.1x

Total Liabilities / Net Worth .18x .18x .15x .16x .16x .17x .18x .18x .18x .17x

Current Liabilities / Inventory 1.5x 1.4x 1.4x 1.3x 1.3x 1.3x 1.2x 1.2x 1.1x 1.1x

ROA 4.02% 1.74% 0.59% 2.03% 3.60% 4.58% 7.07% 10.04% 12.90% 15.10%

ROE 4.72% 2.06% 0.68% 2.35% 4.19% 5.37% 8.33% 11.86% 15.20% 17.69%





September 2, 2014



Recommendation: We recommend purchase of DDD shares by long term, patient-only investors; the shares are volatile and carry a 1.62 beta. We consider 3DS to be an excellent vehicle to participate in the hi-growth 3d Printing industry which we estimate is growing 25% to 35% per year, and should do so for the next several years. In addition, the most recent quarter, DDD posted disappointing sales growth and gross margin results, which we estimate, however, were driven by temporal forces, including a slowdown in consumer shipments due to the intentional desire on the part of the company to add more attractive operating features to its consumer printers. In addition some of its customers for its large production and manufacturing printers delayed ordering machines in light of the large number of new models introduced by the company in late 2013. Our DCF valuation analysis is based on growth assumptions slightly below company guidance and our estimate of the long term growth potential of the industry. Still, our analysis indicates that DDD is undervalued by ~ 6.5% and more if in fact the company delivers on its 2014 and 2015 guidance. Risks include but are not limited to (1) failure to produce products that gain market traction, resulting in disappointing growth, (2) heightened competition from other 3d companies as well as traditional manufacturers and (3) a highly volatile stock that reflects the valuation of a company participating in a rapidly evolving industry. We strongly recommend that investors refer to this report and the latest 10K for additional risk factors to consider.




September 2, 2014



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September 2, 2014



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