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3D Systems Corp (NYSE:DDD)
Q3 2019 Earnings Call
Oct 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to 3D Systems conference call and audio webcast to discuss the results of the third quarter of 2019. My name is Robert and I will facilitate the audio portion of today's interactive broadcast. [Operator Instructions]

At this time I'd like to turn the call over to Melanie Solomon Investor Relations.

Melanie Solomon -- Investor Relations

Good afternoon and welcome to 3D Systems conference call. With me on the call are Vyomesh Joshi our President and Chief Executive Officer; Todd Booth Executive Vice President and Chief Financial Officer; and Andrew Johnson Executive Vice President and Chief Legal Officer. The webcast portion of the call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website. Participants who would like to ask questions at the end of the session related to matters discussed in this conference call should call in using the phone number provided on this slide and in the press release that we issued today. For those who have accessed the streaming portion of the webcast please be aware that there may be a few seconds delay and you will not be able to post questions via the web. The following discussion and responses to your questions reflect management's views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During this call we will discuss certain non-GAAP financial measures. In our press release and the slides accompanying this webcast which are both available on our Investor Relations website you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with the comparable GAAP measures. Finally unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2018.

Now I'm pleased to turn the call over to Vyomesh Joshi our CEO. VJ?

Vyomesh I. Joshi -- President and Chief Executive Officer

Thanks Melanie. Good afternoon everyone. GAAP revenue in the third quarter was $155.3 million and non-GAAP revenue was $155.1 million. The difference being the entertainment divestiture completed in July. These results reflect a decrease of 5.6% but had the entertainment business being excluded from our results the revenue would have decreased by 3.6%. GAAP gross profit margin was 43.3% and non-GAAP gross profit margin was 44.4%. For the third quarter of 2019 we reported a GAAP loss of $0.15 per share and a non-GAAP loss of $0.04 per share. The well-known industry decline in manufacturing activity and industrial production has impacted our business this year as overall demand from our customers is down. We also continued to experience revenue headwinds this quarter due to the ordering patterns of a large enterprise customer and the pause we have taken on factory metal systems. From a geographic standpoint these challenges impacted results in the Americas and Asia Pacific which was slightly offset by strength in the EMEA region primarily driven by healthcare. I want to highlight a few positive developments from this quarter. As expected we have returned to growth in materials and we are working closely with our customers to find the right production workflows. We are excited that since our last earnings call we have introduced 8 new production materials for our Figure 4 platform. These include application-specific resins like EGGSHELL medical resins like MED-AMB and MED-WHT and production resins like PRO-BLK 10 and HI TEMP 300. Early feedback from customers tell us that they are very innovative and the customers are very excited about these new materials for end-user product production.

These materials will open up new production workflows in our target markets of healthcare automotive consumer electronics and other industrial segments enabling us to transition from prototyping to production. Our Figure 4 dental platform has been very successful with NextDent materials. And with these 8 new production materials we will scale our industrial Figure 4 platforms significantly in the coming months. Our healthcare revenue grew 6% and excluding our large enterprise customer it grew 15%. We are committed to operational excellence and are keenly focused on cost structure and cash flow. In the third quarter we decreased net inventory by $11.2 million quarter-over-quarter and generated $6.5 million of cash from operations. We believe in this uncertain environment that our most important area of focus is profitability. And to achieve this we continue to take costs out of the business. Compared to last year at this time we reduced SG&A by 5% and R&D by 8%. We have been taking cost out of the business throughout 2019. And in the first 9 months we have lowered SG&A by 6% and R&D by 11% for total operating expense reduction of 8% in 2019. In the coming months we will be accelerating our strategic reductions so that as we enter 2020 we will have the right cost structure for the company. Last quarter we disclosed a suspension of federal contracting from the United States Air Force and I'm pleased that this has now been resolved. On September 6 the Air Force lifted the suspension following our execution of a 2-year administrative agreement with them and we are now eligible to obtain and perform new U.S. government contracts without restrictions. Finally I would like to introduce our new CFO Todd Booth who joined us in September. I'm very excited to have Todd here as we are partnering to focus on operational excellence and driving toward a common goal of profitability and cash generation for 3D Systems.

Todd will now provide more details on our results for the third quarter of 2019. Todd?

Todd Booth -- Executive Vice President, Chief Financial Officer

Thanks VJ. Good afternoon everyone. For the third quarter we reported GAAP revenue of $155.3 million a decrease of 5.6% compared to the third quarter of 2018. GAAP gross profit margin was 43.3% compared to 47.3% in the third quarter of 2018. GAAP operating expenses decreased 10.8% to $79.2 million. We reported a GAAP loss of $0.15 per share in the third quarter of 2019 compared to a loss of $0.10 per share in 2018. We reported non-GAAP loss of $0.04 per share in the third quarter of 2019 compared to earnings of $0.02 per share in the third quarter of 2018. Printer revenue decreased 17.2% to $30.4 million driven by the ordering patterns of a large enterprise customer and the softer macro industrial environment. Materials revenue increased 2.8% to $41.4 million in the third quarter. We are pleased to have turned that corner to growth and expect to continue going forward. Healthcare services and simulation revenue increased 6.3% to $56.4 million. As VJ mentioned excluding the large enterprise customer orders from each year healthcare revenue increased 15%. We continue to be pleased with the overall demand trends for our Virtual Surgical Planning medical simulators and advanced manufacturing. On-demand manufacturing revenue decreased 12% to $23.1 million in the quarter attributable to the decline in the manufacturing activity in our industry and the headwind associated with the now resolved government suspension. We expect this headwind to persist in the fourth quarter due to its impact on the pipeline. Software revenue increased 0.1% to $24.6 million in the third quarter.

We are still seeing some headwinds from the automotive slowdown in our Cimatron product revenue that we expect to continue in the fourth quarter so we are taking actions to enhance our software portfolio and expect long-term growth. Looking at the fourth quarter given the ongoing macroeconomic challenges and persistent headwinds that we have been facing we are expecting mid-single-digit sequential revenue growth. We reported GAAP gross profit margin of 43.3% in the third quarter of 2019 a 400 basis point decrease from the previous year. Non-GAAP gross profit margin in the third quarter of 2019 was 44.4% a 300 basis point decrease from the prior year. The decrease was driven primarily by factory utilization mix and inventory adjustments. As we continue our cost reductions during Q4 and drive supply chain efficiencies we expect gross profit margins to remain in the mid-40s range in the near term. GAAP operating expenses for the quarter were $79.2 million a decrease of 10.8% compared to the third quarter of 2018 including the 11.2% decrease in SG&A expenses and 9.7% decrease in R&D expenses. Non-GAAP operating expenses in the third quarter were $69.3 million a 6% decrease in the third quarter of the prior year and a 3.4% decrease sequentially. Compared to the 2018 quarter non-GAAP SG&A expenses decreased 4.9% to $48.3 million. Non-GAAP R&D expenses decreased 8.3% to $20.9 million. We are focused on reducing our cost structure by continuing to drive efficiencies and lowering headcount to reduce cost of sales and operating expenses while prioritizing investments to drive profitable growth. We ended the quarter with $127.6 million of unrestricted cash on hand. We generated $6.5 million of cash from operations and paid down debt by $21 million during the third quarter. We improved working capital performance sequentially reducing inventory by $11.2 million to $122.7 million. While cash use and generation will continue to fluctuate period to period we are very pleased with the cash results for the third quarter.

With that I'll turn the call back to VJ. VJ?

Vyomesh I. Joshi -- President and Chief Executive Officer

Thanks Todd. Over the last three years since I joined 3D Systems we have stabilized the company. We have introduced innovative platforms for plastics with SLA Figure 4 and our new production materials. And we are gaining share in our 350 metals platform. We are confident that we will ramp up our metal factory system solutions by the end of the first quarter of 2020 and metals will become a good opportunity for the company. For the remainder of this year we remain focused on profitability and cash generation. We are structuring the company to be lean and profitable. We enhanced our focus on cost structure in 2019 and have reduced non-GAAP operating expenses by 8% in the first nine months. And we will continue taking cost out in the fourth quarter to rightsize the company in this uncertain environment. Looking ahead we believe our focus on innovative production workflows including hardware platforms materials software and professional services will drive profitable revenue growth in 2020.

And with that we will now open the floor for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Hendi Susanto with Gabelli & Company. Please proceed with your question.

Hendi Susanto -- Gabelli & Company -- Analyst

Good evening And welcome Todd. VJ and Todd I would like to ask more questions about the upcoming strategic initiatives to rightsize your cost structure for 2020. Can you share what major areas you are planning to address and how long it may take?

Vyomesh I. Joshi -- President and Chief Executive Officer

So I think we started cost reduction and throughout 2019 we are reducing the cost. So we reduced 8% as I talked about both in R&D and SG&A. And we need to really focus on getting the companies -- a smaller company which is profitable. We believe that there is a lot of opportunity in SG&A side because as we understand better the revenue profile that we want to generate. And I talked about the 2 business model where you have printer hardware materials and the on-demand parts and the second business model on healthcare and software. What we would like to do is we want to work toward how we want to organize so that we can focus on those 2 business model and simplify the company. And that will enable us to continue to drive our SG&A cost reduction. As far as R&D is concerned we had upfront R&D dollars to really develop platforms.

And now as the platforms have been developed both for plastics and metals we are going to focus on very specific product category which can really drive overall solution strategy that I've been talking about. We are going to look for more production workflows. And if you think about we have a line of production workflow dental production workflow jewelry production workflow medical devices production workflow. What we want to do is to find hardware materials software and professional services combination so we can find new production workflow. And that's where we will focus R&D dollars and try to reduce both R&D and SG&A.

Hendi Susanto -- Gabelli & Company -- Analyst

Got it VJ. And second question is it is great to see the reason of growth in your material business how sustainable is that if the...

Vyomesh I. Joshi -- President and Chief Executive Officer

Yes. So I think fundamentally we believe that as I've always talked about that in second half we should be able to see all the hard work we have done in growing our installed base and delivering materials growth. So I do believe that we will have this material growth next quarter and in 2020. Now there could be some seasonality and flexibility. But I do believe fundamentally that we are on a path now for materials growth onwards. The important part of the materials growth is the -- as I said to really have those right production workflows. Our enterprise customer is doing really well. So that materials growth is going to contribute into the overall positive growth. We also feel that dental market where we introduced our NextDent is doing very well. We are gaining share and then that dental material growth is also -- we are seeing. We also feel that the approach that we have taken to go after production workflows will enable us to drive more and more materials growth. The new production materials that we just introduced it's going to take some time because remember with this now we will have the growth of the hardware in 2020 of our industrial Figure 4. And then in 2021 we will see the results of also this new production materials. So no I think we can sustain the positive materials growth that we are talking about.

Hendi Susanto -- Gabelli & Company -- Analyst

Thank you, VJ. Good luck on finishing strong in 2019.

Vyomesh I. Joshi -- President and Chief Executive Officer

Thank you very much.

Operator

Our next question comes from Chris Van Horn with FBR. Please proceed with your question.

Chris Van Horn -- FBR. -- Analyst

Hey, Chris. Good evening guys taking the call and welcome Todd. You cited some soft macro industrial environment. I was wondering if you could get into -- was there any positive or silver linings within that statement?

Vyomesh I. Joshi -- President and Chief Executive Officer

Sure. So I think the automotive market and I think we all know right now the overall industrial market the manufacturing category has a lot of pressure especially in Europe and in China. And the positive side for us is of course Americas for those categories and then healthcare. I really want to talk about our healthcare business. If you look at healthcare in third quarter if you just take out the big enterprise customer we grew 15%. Every single category in healthcare Virtual Surgical Planning simulators our advanced manufacturing of medical devices we do for the medical device company all those 3 businesses grew in the third quarter. So the thing that I can tell you from the growth point of view I absolutely believe healthcare is in forefront.

And I continue to see the progress that we are making in that particular segment and we are going to have that in the coming quarters and in 2020. The other thing that I want to let you all know that as I said that we have stabilized the company. Once we get our factory metal systems completely qualified and start shipping in end of the Q1 our customers are just waiting for our solutions. I do believe that also will help us for growth in 2020. So materials healthcare and then software. Right now we are seeing fundamentally some issues especially on the Cimatron. But I do believe that in 2020 with our new platforms and the solution focus that we have on software and the sales focus we are having on software and healthcare will also enable us growth in 2020.

Chris Van Horn -- FBR. -- Analyst

Okay. Got it. And maybe on that front are you seeing the competitive landscape change at all maybe specifically in healthcare and other markets or competitors leaving due to the softness?

Vyomesh I. Joshi -- President and Chief Executive Officer

So I think the thing about this category you have lots of competitors. So you really talk about specific segment and a competitor. So as for example in my mind for the SLA category in the low end I think there is a real demand issue than people are seeing on the low end. Our SLA platform are very very competitive. As a matter of fact we are the best in the world. And we are seeing growth. But I'm just telling you in that category I do believe that we have a much better value proposition. The MultiJet printing category. Our success in jewelry market is there. But overall that segment is under pressure and we can see that pressure. The SLS market is growing and we have a very good product. And what we need to do is continue to drive more share gains in SLS. And I think U.S. is a very good competitor. Of course HP plays into that particular segment. In the metals segment I think our 350 is a very very innovative product especially in healthcare. I absolutely believe our focus on healthcare with medical device is really paying off.

And I do believe that that category continues to grow in 2020. There I don't -- in healthcare we don't see that much competition for the medical devices. With respect to the software side clearly we have to compete with Materialise but I do believe that we have a much better value proposition. My view is right now the macroeconomic issue in the industrial and auto market will be the one. But I think what we are doing is we're really trying to focus on profitability right now and making sure that when the market comes back we will be able to grow faster than the market.

Chris Van Horn -- FBR. -- Analyst

Great, thanks so much for all that color.

Vyomesh I. Joshi -- President and Chief Executive Officer

Thank you.

Our next question is from Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

Craig-Hallum -- Capital Group -- Analyst

VJ and welcome aboard Todd. So I guess starting off with the kind of the Q4 guidance. Normally you see a bigger jump sequentially I think mostly that's due to budget flush-type scenarios. I'm just kind of curious what gives you the visibility now given a lot of those sales tend to come in sort of the December time frame anyway. Is that just sort of where the pipeline is? How it's developing right now? And so...

Vyomesh I. Joshi -- President and Chief Executive Officer

No. I think we are just trying to make sure that there is uncertainty in the market. And I think that's what we are trying to reflect. I think our pipeline is healthy but I just want to make sure that we are prudent and not really look at our revenue profile but I do want to really focus on profitability and cash flow. So what I am doing with Todd's help is to really say "Okay let's make sure that we take cost out. Cost out of the company because that's what will really enable us." Whether the mid-single digits that we are talking about directionally it may be plus or minus and I think that's not what we want to drive. I think we are going to get as -- revenue as much as we can get but I want to focus the company really on making sure we take the cost out.

Craig-Hallum -- Capital Group -- Analyst

Yes. That's helpful. And I mean do you care to quantify sort of what you think is the appropriate cost structure for this company either next year or on a long-term basis? I don't know if you can make any commentary either on an absolute basis or maybe as a percentage.

Vyomesh I. Joshi -- President and Chief Executive Officer

Well I think what we are saying we have mid-40s in the gross margin. And what we need to do is to really figure out starting in the first half of 2020 how could we be profitable? And I think -- so that kind of gives us the guidance -- guideline in our mind that -- let's just be conservative in terms of the revenue growth. Look at our mid-40s gross margin and then appropriately size the structure. The second thing that we want to do is to really make sure that we look at our capital expenditure and manage the cash. As you saw in this quarter which I absolutely take tremendous pride in my team that we took our inventory down we are not consuming as much cash. We basically consumed $3.9 million cash. In Q3 we generated $6.5 million cash of operating cash. And I think we need to continue to do that because I do believe that having that focus on making sure that we get the right kind of a cost structure so we'll be profitable with lower revenue because I just don't want to count on getting the revenue and use that as an angle. I want to really say at this revenue level that we have I want to be profitable.

Craig-Hallum -- Capital Group -- Analyst

Yes makes sense. And your goal at this point is profitability starting in Q1 in '20 and then obviously...

Vyomesh I. Joshi -- President and Chief Executive Officer

I would say...

Todd Booth -- Executive Vice President, Chief Financial Officer

We expect first half of the year 2020 profit -- non-GAAP profitability.

Craig-Hallum -- Capital Group -- Analyst

Yes. Okay. And then I guess just lastly Todd it would be helpful to get some sense on maybe what excites you about joining 3D Systems? I mean obviously it sounds like operating costs are sort of first and foremost. But what are some of your other near and longer-term priorities here?

Todd Booth -- Executive Vice President, Chief Financial Officer

I'll do stress that. So I'm very happy here partnering with VJ on the profitability and cash generation but the technology the company has and the direction with where we're going with healthcare and software metals and just the platforms we have that really excites me.

Craig-Hallum -- Capital Group -- Analyst

Great. All right. Good luck going forward. Thanks.

Vyomesh I. Joshi -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Troy Jensen with Piper Jaffray. Please proceed with your question.

Troy Jensen -- Piper Jaffray -- Analyst

Welcome Todd. Quick for you VJ. Can you just dive a little bit more into this metal factory comment you made? And I'm curious to know too is this related at all to the metal material handling problem that we had earlier in the year? Are these...

Vyomesh I. Joshi -- President and Chief Executive Officer

Yes exactly the same things. So Troy you see what we wanted to make sure that a part of management unit that we are planning to ship with over 350 we look at the reliability and make sure that we don't have any issues. And that's why we paused and we are making incredible progress. We know the root cause. And it's a tough problem because when you are moving that metal powder the electrostatic forces and lot of things that we need to really pay attention to so it doesn't clamp up. And I think we are finding a very good solution to that. We are testing it thoroughly. And I would rather wait than ship a product having a quality issue. That has been a fundamental thing that as you know for the last three years I've been focusing on. Quality reliabilities of a job. Number one. We want to make sure. And so yes it's taking a few months but I absolutely believe that we are going to have an incredible solution. And if you look at the marketplace there are not that many companies -- actually there are no company which can really provide this kind of an automatic powder management unit for the metal printer. So this will be a unique value proposition but we want to do it right. And we are very excited that we have a solution that we will be able to ship in end of Q1.

Troy Jensen -- Piper Jaffray -- Analyst

So you are confirming you have a solution for the problem and it's just going through the final testing?

Vyomesh I. Joshi -- President and Chief Executive Officer

Yes. Yes yes.

Troy Jensen -- Piper Jaffray -- Analyst

Perfect. Okay. Cool. And then how about -- just mainly for Todd just if you can help to give us great guidance on revenues and margins sequential basis we appreciate that transparency. Sequentially do you think the OpEx on a dollar basis is going to go up flat or down sequentially?

Todd Booth -- Executive Vice President, Chief Financial Officer

So as a percentage of sales it will go down but we're going to be relatively flat on a dollar basis to slight up. Slightly up. Sure. You need to look at it more of a long-term as we continue to drive it down.

Troy Jensen -- Piper Jaffray -- Analyst

Yes I figured this...

Vyomesh I. Joshi -- President and Chief Executive Officer

But I think Troy as you -- the focus is on taking the cost out. So that -- if you think about it we have done it now for the last 3 quarters and overall year-to-date 8% down in operating expenses. So I would to like to see -- continue that kind of profile because we just want to set up the company for profitability and cash generation.

Troy Jensen -- Piper Jaffray -- Analyst

Yes. Okay sir. How about just quick for you VJ. Just could you give us an update on production platforms for Figure 4? Have you been shipping many? Is there a big pipeline? Any update would be great.

Vyomesh I. Joshi -- President and Chief Executive Officer

So I think what we are finding now -- so I think as I said with our dental and NextDent material we are doing extremely well on Figure 4. With these new materials especially with 2 materials I'm very excited about. Out of the 10 the 8 that I talked about the BLK 10 -- I think BLK 10 for the first time Troy I fundamentally believe we have an end-user part production material. The customers -- the beta customer that we have provided this material they are very excited. They think that this is a game-changing material with which we will be able to really find a lot of new production workflows in healthcare in consumer electronics industry where they want to really have production parts that they could be doing it without using any tooling. We will be able to go into the industrial segment. And even the service bureaus are also getting very excited because I think they will be able to use this with a very short turnaround time on production runs for the parts that they will be doing.

So I really think that BLK 10 is a really innovative material. The other one is the HI TEMP because a lot of people talk about high temperature. I think we have now for the first time HI TEMP material for 300-degree centigrade which I really think is going to open up a lot of new applications in automotive under the hood. I really think this is going to be another very very important material. The biocompatible material will allow us to go into the healthcare applications. And then EGGSHELL which is a kind of an application but I do believe for doing elastomeric silicon kind of molding. That's also a very innovative material. And I think I always told you right that we were seeing -- whenever you have the right materials right software and the product we can really change the trajectory. In dental we have shown that with NextDent. I do believe with our new materials and with all the feedback that I'm getting from our beta sites I think now we have arrived for our industrial both the stand-alone and modular plus the production one also. So I'm very excited about these materials.

Troy Jensen -- Piper Jaffray -- Analyst

This is a good looking for. Thank you very much.

Operator

Our next question is from Brian Drab with William Blair. Please proceed with your day, Brian.

Brian Drab -- William Blair -- Analyst

Hey, good afternoon. Thanks for taking my questions to first. First I think it's really interesting that on this call we're talking a lot about cost reductions R&D and SG&A. And I've had enough time here. So I was listening to the call and looked at the second quarter transcript and the word flat was used over and over on that call with reference to how you wanted us to think about OpEx going forward. And at that time you had 2 quarters of about $72 million per quarter in OpEx. And now we're at $69 million in the third quarter and we're talking about it going down from there. So is this a shift in how you're thinking about how you want to manage the company? Is this related specifically to Todd joining? Like what -- are you not adjusting...

Vyomesh I. Joshi -- President and Chief Executive Officer

No no. I think -- no I think this is something I started accelerating there in 2019 quarter 1. I think what we were seeing at that time also John and I that we'll be flat meaning flat sequentially. That's what we were saying. And -- but at the same time I think we want to get aggressive. And you could see it already right? Then when we take our operating expenses for the year-to-date we took out 11% in R&D and 6% in SG&A in the first nine months. So this is not like this quarter we are talking about it. This was -- I'm on the path because I would rather have a smaller profitable company when you have so much uncertainty. And I think that's what we are focused on. My view is whenever you have uncertainty you want to get the right kind of a cost that you're not relying on revenue growth to get the right sizing. Because once you have that -- the other very important thing that I said which is very important is we had put all of our R&D to develop platforms. And once the platforms are developed their profile of R&D spend is going to be more on software materials and kind of a workflow solution rather than designing very expensive platforms. And that also is paying off because we believe that we have the right platforms. Now the investment must be in the software and material. I've been consistently saying that. So Brian this is not like last quarter thing. This has been something that we have been focused on and we really want to make sure we want to do the right thing. Yes?

Brian Drab -- William Blair -- Analyst

Okay. Yes. I mean it was -- it wasn't that long ago though the last call is mid-August and it's over and over flat flat flat going forward. So that was the reason I asked the question. Then now it sounds like it's down down down is the message. So that's like a shift for you...

Vyomesh I. Joshi -- President and Chief Executive Officer

But if you then -- if you look at every quarter we have gone down year-over-year you could check it out.

Brian Drab -- William Blair -- Analyst

Yes. No. I'm looking at it. Okay. I just want to make sure I understood the philosophy. And then one other question I guess if I could ask just on gross margin. So gross margin sounds like mid-40s is what we're expecting going forward. It was quite a bit higher in the past. I wonder if you could just summarize just what is the new model and why this kind of shifting profile from higher 40s...

Vyomesh I. Joshi -- President and Chief Executive Officer

So I think this -- yes the first thing that you want to do is -- because based on the actual revenue profile we want to make sure that we reduce the inventory while the revenue is going down. And when you do that your factory utilization is going to be a factor. And so I want to make sure that we pay attention and that utilization was one of the key driving force in having the lower gross margin. The second one is we want to make sure that we look at our inventory and then inventory adjustments. That we do is the second reason that the gross margin -- the third thing is a mix because what we want to do is to really ensure that we are driving the production platforms. And then when you are in the production category the mix also of the materials that you have been shipping will have a different gross margin mix also. So I think those are the 3 things. And I do believe that now the way we are looking at our profile I think getting to the mid-40s in the gross margin is the right thing to do.

Brian Drab -- William Blair -- Analyst

Okay, thanks for taking my question.

Vyomesh I. Joshi -- President and Chief Executive Officer

Thanks, Brian.

Operator

Our next question comes from Jim Ricchiuti Needham & Company. Please proceed with your question.

Mike Cikos -- Needham -- Analyst

This is Mike Cikos on for Jim Ricchiuti today. First question was about the government contracts and the resolution. Congratulations on that. I just wanted to make sure that I heard correctly. So it sounds like there's going to be a bit of a hangover in the Q4 I guess because the pipeline was impacted by this activity. So first I wanted to confirm that. And then second is the expectation that I guess that hangover if you will will be gone as we move into 2020? Or is there still some pipeline activity that needs to be backfilled to make sure that Q1 is off to the races?

Vyomesh I. Joshi -- President and Chief Executive Officer

Yes. So I think -- I just want to make sure you understand there are two parts of the government thing. There is one particular government work that we have to do with the export compliance. And then we had our order which we talked about. And then there's the Air Force suspension which is now lifted and -- but it is lifted just in September. So that to the pipeline that I talked about for the -- especially in the ODM business. We still have work to do for over Q4. I do believe that it should -- the business will come back. But it's generally the sales cycles are long lead sales cycle. So I think there will be some impact also in Q1. But starting in second quarter on we should not have as much impact on the suspension that we had especially in Q3.

Mike Cikos -- Needham -- Analyst

Okay. That's helpful. And then just shifting markets. If we look at the automotive market obviously weaker there based on all the indications we've seen. But is there any reason to get more excited about that market near term? Or are you seeing any pockets where you might be seeing some green shoots?

Vyomesh I. Joshi -- President and Chief Executive Officer

Meaning the automotive market you're talking about?

Mike Cikos -- Needham -- Analyst

Yes.

Vyomesh I. Joshi -- President and Chief Executive Officer

Yes. So I think automotive market globally is weak. If you read everything there are a lot of reasons. People talk about electric cars to Uber to all kinds of reasons. And clearly for our prototyping market for our on-demand parts market and certain jigs and fixtures in those kind of applications automotive market is very important. And when you have that kind of a weakness -- plus we are not doing as many new models that they're used to do. And I think that has impact on overall the market. But there are a lot of innovative auto industry companies which are doing electric cars and electric vehicles. Actually they are still really asking for a lot of innovative design solution using additive manufacturing. So we see that part still really engaged with us and using this new innovative technology.

Mike Cikos -- Needham -- Analyst

Thank you very much.

Operator

Thank you. There are no other questions at this time. I would like to turn the call back over to Melanie Solomon for closing remarks. Melanie?

Melanie Solomon -- Investor Relations

Thank you all for joining us today for your continued support of 3D Systems. A replay of this webcast will be available after the call in the Investor Relations section of our website. Thank you and good night.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Melanie Solomon -- Investor Relations

Vyomesh I. Joshi -- President and Chief Executive Officer

Todd Booth -- Executive Vice President, Chief Financial Officer

Hendi Susanto -- Gabelli & Company -- Analyst

Chris Van Horn -- FBR. -- Analyst

Craig-Hallum -- Capital Group -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

Brian Drab -- William Blair -- Analyst

Mike Cikos -- Needham -- Analyst

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