Stratasys Ltd (SSYS) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter earnings results call moderated today by Mr. Shane Glenn, Director of Investor Relations. [OPERATOR INSTRUCTIONS] I would now like to introduce you to your moderator. Mr. Glenn, you may begin.

Good morning and welcome to Stratasys' conference call to discuss third quarter 2005 financial results. Representing Stratasys' senior management on the conference call is the Chairman and CEO of Stratasys, Scott Crump; COO Tom Stenoien; and CFO Bob Gallagher.

A quick reminder that today's conference call is being transmitted over the web and can be accessed through the IR section of our website, www.stratasys.com.

We will begin with the forward-looking statement. Except for the historical information herein, the matters discussed during this call are forward-looking statements that involve risks and uncertainties. These include the continued market acceptance and growth of our Dimension, Prodigy Plus, Maxum, Vantage and Titan product lines, the size of the 3D printing market, our ability to penetrate the 3D printing market, our success in launching new 3D printing products in the future and the market acceptance of those products, our ability to maintain the growth rates experienced in this and preceding quarters, our ability to introduce and market new materials such as PC ABS and the market acceptance of these and other production-grade materials, the impact of competitive products and pricing, the timely development and acceptance of new products and materials, our ability to effectively and profitably market and distribute the Eden PolyJet line, and the success of our RedEye RPM service and the other risks detailed from time to time in our SEC reports, including Form 10-K for the year ended December 31st, 2004, and Forms 10-Q filed throughout fiscal 2005.

We'd like to confirm the date of our fourth quarter 2005 earnings release and conference call. Stratasys' fourth quarter results will be released on or before the morning of February 15th, 2006, followed by a conference call on the day of the release. We release the conference call time and details about 2 weeks prior to that date.

Now I'd like to turn over the call to our CEO, Scott Crump.

Good morning. Stratasys just announced third quarter results. Revenues rose 11% to $19.7 million for the third quarter of 2005 over the prior period in 2004. Record levels of consumables and maintenance revenue, as well as strong growth in the company's 3D printer and paid parts businesses drove the revenue growth.

The third quarter did present challenges within our high-end system business as heightened competition and a significant shift in sales mix drove a decline in the revenue and profitability of that business. These issues had a significant impact on our overall performance during the quarter and will be addressed in greater detail later in the conference call.

However, despite recording only 11% revenue growth during the quarter, the company generated record order bookings during the period, which grew by 27% over the same period last year. Despite these challenges and the quarter-to-quarter fluctuations that are inherent in our businesses, we remain confident in our ability to successfully execute our core growth initiatives going forward and I will discuss those in more detail shortly.

First, I'd like to turn the call over to our CFO, Bob Gallagher, who will further highlight our third quarter financial results. Here's Bob.

Thank you, Scott. As Scott said, total revenue increased by 11% to $19.7 million for the third quarter of 2005 compared to $17.7 million for the same period last year.

The company shipped 306 systems during the third quarter of 2005 compared with 246 systems during the same period of 2004, an increase of 24%. Our low price or 3D printer product line, represented by our Dimension products, grew as expected with year-over-year unit growth of approximately 35%.

As we look at the high-end system mix in the quarter, we saw a shift in our mix. Eden 333 revenue, which we distribute, increased 82%, while our internally manufactured high-end products revenue declined 37%. We believe this shift is driven by 3 main factors, a growth in our backlog of manufactured high-end FDM systems from the second quarter, the lack of any recent high-end new FDM product introductions by the company and aggressive competitor pricing, particularly in the European market.

These points bear repeating. Quarterly high-end manufactured systems revenues did not meet our expectations partially because of the growth in our backlog of our high-end systems where the units could not be shipped to the customers for various reasons, but also because of aggressive competitor pricing, particularly in Europe. While Europe rebounded somewhat from our second quarter, it did not meet our revised expectations. We are taking steps to address our competitive, specifically as it relates to the European market. For competitive reasons, we will not elaborate on this further.

Product revenue increased by 9% to $15.5 million for the third quarter compared to $14.2 million for the same period last year. The growth in product revenue was driven by record levels of consumable revenue, which expanded by 32% for the quarter. In addition, 3D printer system revenue increased by 23% over the same period last year, contributing to the growth.

Service revenue increased by 19% to $4.2 million for the third quarter, compared to $3.5 million for the same period last year. The growth in service revenue was driven by a record level of maintenance revenue, which grew by 20% for the quarter. In addition, growth within our paid parts business rebounded from the levels experienced in the second quarter, growing by 34% over the third quarter of last year.

Gross profit increased by 4% to $10.8 million for the third quarter of 2005 compared to $10.4 million for the same period last year. Gross margin as a percentage of sales declined to 55% from 58.9% for the third quarter of last year. The gross margin percentage benefited from the strong growth in consumables, maintenance and paid parts business during the quarter.

However, this positive impact was more than offset by other factors, including the decline in our high-end system FDM system sales, which generally generate very strong gross margins. The gross margin percentage was also pressured by the strong growth in our distributed product line of Eden PolyJet systems, which generate dramatically lower gross margins compared to our proprietary systems.

Operating profits declined by 18% to $3 million for the second quarter of 2005 compared to $3.6 million for the same period last year. Operating expenses were $7.8 million for the third quarter compared with $6.8 million for the same period last year, an increase of 15%.

Operating profit as a percent of sales declined to 15% from 20% for the same period last year. The drop in revenue and sales mix shift within our high-end system business was a contributing factor to the operating profit decline. In addition, we expanded our Dimension sales and marketing initiatives significantly during the quarter with the anticipation of driving future growth. These issues offset the favorable-- the favorable impact of growth within our consumables, maintenance and paid parts businesses.

As we have articulated in previous conference calls, we expect operating profits will continue to track materially ahead of comparable periods as we complete fiscal year 2005, driven by higher R&D expense as well as higher expense associated with our expanding operation.

Interest and other income for the third quarter increased to $323,000 versus $209,000 last year. Interest income increased significantly during the quarter, a result of higher cash balances and returns on our cash and investments. Pretax income declined by 14% to $3.3 million for the third quarter versus $3.8 million for the same period last year.

Income taxes amounted to $1.1 million for the third quarter versus $1.3 million for the same period last year. The effective tax rate was 34.25% versus 33.5% for the same period last year.

Net income declined by 15% to $2.2 million or $0.20 per diluted share for the third quarter versus $2.5 million or $0.24 per diluted share for the same period last year.

Our cash and investment position amounted to $53 million as of the end of the third quarter versus $57 million at the end of fiscal 2004. The decrease in cash and investments from the end of fiscal 2004 is a result of changes in our operating assets and strategic investments.

Inventories were $11.1 million at the end of the third quarter compared to $7.5 million at the end of fiscal 2004 and $10.2 million at the end of the second quarter. In particular, higher inventories have been driven by $2.8 million of the Eden systems, many of which were in transit at 9-30 from the manufacturer to us. We take title of these systems when they leave the manufacturer. Also, given the lower expected sales of our high-end FDM systems during the quarter, we carried a higher-than-anticipated inventory of high-end manufactured systems at quarter end.

Accounts receivable were $18.8 million at the end of the third quarter compared with $15 million at the end of fiscal 2004. DSO or days sales outstanding were approximately 88 days compared to 71 days at the end of fiscal 2004 and 85 days at the end of the second quarter of this year. The DSO is calculated by eliminating the effect of our leasing program.

As we have said before, in fiscal 2004 we offered a special program for our resellers where resellers could repurchase two Dimension systems, one BFT and SST, with extended 180-day payment terms. The voluntary program provided the resellers with a valuable selling and marketing tool to sell multiple systems. The program proved to be highly successful as Dimension orders exceeded expectations throughout 2004.

However, the program resulted in an elevated accounts receivable balance, which elevated DSOs during part of the year. Virtually all of the demos sold last year under the extended payment program were sold to end users and paid for by the resellers by year end. This contributed to a significant decline in our year-end DSO.

Given the success of last year's Dimension demo program, we offered a similar voluntary program at this year's annual reseller meetings in February. The initial order activity within our network of Dimension resellers, including the demo program, improved substantially over last year, and while we are experiencing a similar spike in DSOs during fiscal 2005 as a result of the program, we believe fiscal 2004 proved the program's value and manageability.

Net property and equipment increased to $11.6 million at the end of the third quarter of 2005 compared to $10 million at the end of fiscal 2004, principally reflecting strategic investments within our company. The quarter end property values exclude the company's recent purchase of a building located adjacent to the corporate headquarters in Eden Prairie, Minnesota. The facility provides approximately 86,000 square feet of office and manufacturing space, which will accommodate the company's intermediate expansion requirements. We would expect to close on this facility in the fourth quarter.

Our balance sheet continues to be very strong. Our financial strength is a competitive advantage and, as a company, we have decided to use our financial strength strategically to grow our business as we see opportunities. Going forward, we will focus on growing our existing business, investing in projects that will strengthen our leading position within the RP and 3D printing industries and report increased earnings and profitability.

Now I would like to turn it over to our director of investor relations, Shane Glenn, to update our financial guidance.

Thank you, Bob. Stratasys updated its fiscal 2005 financial guidance as follows. We currently expect fiscal 2005 revenue of $81 million to $83 million compared to our previous revenue guidance of $84 million to $89 million. We currently expect fiscal 2005 earnings of $0.94 to $0.97 per share compared to our previous earnings guidance of $1.07 to $1.12 per share.

The change in our fiscal 2005 financial-- financial guidance incorporates the slower growth experienced in the third quarter, as well as the greater competitive risks we're observing for the balance of the year, particularly in Europe and within our high-end system business. Secondly, given the mix shift we observed this quarter, internally we have reforecasted our estimated profit contribution from those sales.

We are introducing fiscal 2006 revenue guidance this morning of $98 million to $102 million, a growth of 20% to 24% over fiscal 2005. We are introducing fiscal 2006 earnings guidance of $1.15 to $1.25 per share, a growth of 20% to 31% over fiscal 2005.

Despite the adjustments we have made to our fiscal 2005 earnings guidance, we continue to expect our business to grow significantly in 2006. We have attempted to provide guidance that incorporates our current growth and product mix expectations, coupled with the limitations of predicting our operating environment over the next several quarters.

In a separate item, the company announced this morning that its board of directors has authorized the company to repurchase up to $20 million of its common stock. This announcement supersedes the previous stock repurchase authorization, which was for $10 million.

Now I'd like to turn back the call to Scott Crump.

Thank you, Shane. Despite the unfavorable comparison in the third quarter, we remain focused on the long term. I believe our business fundamentals are sound. We are excited about our programs we have in place for growth and remain confident in our ability to successfully execute our core growth initiatives going forward.

Our 3D printing business remains on track and despite experiencing a decline in the high-end systems sales for the quarter, Dimension unit sales revenue grew by 35% for the quarter compared to Q3 last year. We successfully lowered our product manufacturing costs for Dimension by approximately 10% during the quarter and these cost reductions have gone into effect in this fourth quarter, boosting 3D printing margins over the near term and providing us with greater price flexibility in the future.

Our paid parts business rebounded in the third quarter, growing by 34% over last year.

This month's big launch of the RedEyeRPM.com, the world's largest rapid prototyping and part building service, should provide an additional growth catalyst for the business going forward. The new initiative employs a proprietary, secure quoting and ordering web engine that allows automated instant quoting and ordering around the clock, seven days a week. We would encourage you to take a test drive at the site.

We announced in September a $3.6 million initiative with a Fortune 100 global manufacturing company to advance Stratasys' proprietary FDM technology for rapid manufacturing applications. The long-term goal of the initiative is to develop our core technology to allow for the manufacture of end-use parts.

Rapid manufacturing has begun to provide incremental business for Stratasys and could become our dominant growth driver in the future.

There is a growing universe of 5 million 3D CAD software stations being used by mechanical design engineers around the world, more and more of whom are beginning to view rapid prototyping as a critical part in their design engineering processes. We believe an addressable market exists for over 500,000 3D printers at the right price and we are confident that our early entrance and whole product solution approach to this market provides us a significant competitive advantage.

Regardless of the application, as our products become more pervasive across multiple industries, we expect to continue to increase paid parts, consumables and maintenance revenue, business that should provide substantial operating leverage going forward.

OK. At this point, we'd like to address your questions.

[OPERATOR INSTRUCTIONS] Andrew Schopick, Nutmeg Securities.

Boy, it's hard to limit it to one, but I'll try to step back into queue if there's more time. Scott, I'd like to ask you, given the difficulty that you've had in forecasting the short term performance of the company over the last year and some of these unanticipated surprises, what is really happening in the business and in the industry? Can you elaborate on what's going on in Europe and what's going on competitively that has caused the results today and the lower guidance?

Well, as I mentioned, the fundamentals of the business are sound and I think sometimes in a business that is technology-based like Stratasys it's actually easier to look out over a year and in our three-year plan as opposed to the quarter.

As far as general trends, I think Stratasys continues to offer better price performance products and services to our customers, including lower priced products like the 3D printer, and that has-- and that is slowly providing a lower ASP throughout the industry, throughout the world.

I think specifically within Europe there always has been and there definitely was in the third quarter more competitive pressures and Stratasys has a historical position to compete but not to slash prices or heavy discounting. And so that-- that's good from a standpoint of profitability but isn't always good as far as capturing every last revenue.

So I think we are seeing more-- actually significant more 3D printers being in demand and being sold worldwide by Stratasys and I think that we're also seeing increased features in systems, whether they be high speed or surface finish, but that's a trend that's, well, probably 10 years-- over the last 10 years has been in demand by customers.

We're also seeing more and more applications. For Stratasys we're seeing more rapid manufacturing applications. The last survey we did showed over 9% of our business is already in rapid manufacturing and with this home run business partnership with a Fortune 100 company, that'll establish us in the mid term and the long term as a strong player within rapid manufacturing and, most likely, on our current platforms so we don't have to reinvent a platform. That platform is the T-class.

Where is the pressure in Europe coming from? I mean, which competitors are-- is this domestic and European?

Andy, please get-- just jump back in the queue. We've got a lot of people on the call, a lot of questions here, so if you'll just jump back in the queue, we'll get back to you.

Eric Martinuzzi, Craig-Hallum Capital.

The mix shift is, obviously, what's key here. I was wondering, could you give us some specifics just the high end or maybe you could break it apart by the systems overall, but 2004 versus 2005 versus 2006, how you're thinking about that, both from a revenue perspective as well as a gross margin perspective? Thank you.

I think from-- in 2005, obviously, Eric, we saw a shift in the quarter. As I said, particularly in the European market with competitive pressures there. Part of it for the quarter, again, we did grow our backlog of our high-end FDM systems.

As we look out and as we've changed our guidance, we've put more sensitivity to our model. There's a higher risk element to our model and we've reflected that going forward and, from a mix perspective I guess we've sensitized it looking at the current quarter.

I know you've sensitized it. What I'm wondering is in 2004 was it a third high end, a third low end, a third the rest of the business? And then 2005, is it 25% high end and 35% low end and 40%-- 50%-- 40% the rest of the business? That's what-- I'm looking for a little more granular there, what does your sensitivity specifically get to?

I think part of the model for the company has been from a unit growth volume and, as you saw in the growth driver for the quarter, has been from our 3D printing business. 3D printers are a good margin product, but not as strong as our high-end product margin.

In terms of the level of granularity that you're asking for, I don't think we've really given that type of--

Well, how about just gross margins? I mean, in 2004 gross margins were 60% and then just this quarter just ended we're at 55%. What-- what are you anticipating for 2006?

Eric, we are-- we're not going to provide gross margin guidance for 2006. I mean, it's a highly mix-dependent number, so we're not going to-- we're not going to provide any guidance for gross margin.

What we did try to do is get out earlier and give you, at least, some top and bottom line ideas early in the year for you, recognizing that we have a shift going on here.

Troy Jensen, Piper Jaffray.

Can we focus on the bookings for a bit here? You commented on record bookings during the quarter but revenues went down, so just a little color with respect to the bookings. More 3D printers? Were they record bookings for the high end? And how come you weren't able to turn those bookings around into revenues this quarter?

Yes, hi, Troy. Woody Frost and his organization did have real strong bookings. They were heavily influenced by successes of selling the Eden product line and pretty strong success with the Project Plus.

Year-over-year, the Vantage system sales are holding their own throughout the world, with the exception of Europe where we've struggled. It's a the T-class that we've really predominantly struggled in and then we're addressing, as Bob indicated earlier, addressing those type of issues with-- both the regional issues and the product issues in Q3 and-- or Q4 and we'll be taking a look at it going forward, as well.

Ironically, in terms of quotas, the Dimension class is actually below quota. However, they had such a strong backlog going in, as well as such a strong first half, that it's helped us with the full-year performance being up significantly.

So is the record bookings mix more towards the low-end 3D printers and less in the high end?

Basically -- this is Scott Crump -- the backlog grew quarter-over-quarter and it's roughly-- about an even mix of 3D printing as well as high-end systems.

Troy, I think a point to be made here is that our FDM system-- our high-end business system is doing well. It didn't meet our expectations within the European market. It's been strong within the North American market place and some of the things that included into the backlog of why we couldn't get the systems out of here within the quarter would be things like where a customer is building a facility and we had several items within our backlog that shipped internationally where there's letters of credit and things like that to clear out.

OK. That helps.

Brion Tanous, Merriman, Curhan, Ford & Company.

I wanted to focus in on whether you're considering any-- just changes in your distribution strategy, particularly in Europe, and also were there any write-offs to receivables related to Europe in the quarter?

Yes, this is Tom Stenoien. And Europe we're clearly looking, Brion, at both our organization, as well as our lineup of distributors. Beyond that, I don't care to much discuss it. We clearly see that there's some issues there, but some of our distributors are performing quite well there. Some of the distribution work that we've done on the Dimension class are actually bearing a lot of fruit this year that we started late last year and we've continued. We've also expanded the Dimension organization over there to select and identify and recruit and bring on new Dimension resellers.

So clearly we're concerned about the European market place. It has become increasingly competitive and we're going to be taking a look at both organization, as well as channel development, and other issues in Q4 and continue out throughout 2006.

In terms of the questions in terms of write-offs of bad debts, no we didn't-- the distributors that we're dealing with are-- are the same distribution network primarily. We've added some Dimension distributors, which-- within the European market, but we haven't seen anything unusual in our bad debts within the European market within the quarter.

Are you considering going direct to European customers rather than through distribution?

In small regions we are direct, essentially, now. We'll review our options there, but we're still looking at utilizing a distribution network and a channel network in-- in Europe for 2006.

Jeff Evanson, Dougherty & Company.

Could you tell us why you think the Eden is doing so well? And I believe that's a non-FDM technology. Is there anything we should read there?

Well, we successfully launched the best of both worlds program a few calendar years ago and each quarter it seems to be working better and better. Some examples, general examples, where we've been able to go into accounts that preferred UV polymer applications for their prototyping and sold both the Eden, which provides PolyJet UV polymer and, for example, the Titan FDM system. And then we have, actually, quite a few examples in the reverse.

So there is-- there is a growth of the Eden sales within the United States and we consider that very successful and, along with that, there's, many times, tag-along sales of FDM systems, as well.

But more specifically to the technology, to your question, the FDM systems continue to do a great job for companies that want fit, form and function, where they actually do functional testing with the part and the technology currently does not offer extremely high feature detail and the Eden 333 product, in other words, PolyJet technology, does provide extremely good feature detail and for some applications in the fit, form and reproducibility where you want to use that part as a master for a rubber or PV mold to do, maybe, let's say, to reproduce 50 parts for maybe a beta test, it's really a wonderful product.

Jay Harris, Goldsmith & Harris.

I'm very confused about your comments about price competition in Europe. If it's in the 3D printer area, is it because competitors have introduced lower priced printers? If it's in other areas, what-- have people lowered their selling prices or introduced new pieces of equipment at lower selling prices?

I think-- my comments in terms of aggressive competitive pricing specifically was to the high-end systems.

OK.

I think-- I believe out there in the market place on the 3D printers that is not the case there. We're competitive within the pricing. There's been a lot of aggressive pricing from our competition as it relates specifically to the high-end systems.

When you say aggressive pricing, have they been lowering their pricing on systems that have already been on the market, or is this new-- new product introduction?

In-- it's a combination, I believe, primarily related to existing products in the market place from what we're seeing. Part of that evidence is difficult to get because we're-- we're looking at how we lost sales to various customers and why we don't get an order, but primarily it relates to existing products within the market place.

As well as how we gain those orders there that we did gain.

Can you mention names of competitors that are involved in this?

No, we're not-- Jay, we're not going to get into that.

Clint Morrison, Feltl & Company.

You indicated that you have cost reduced your Dimension by 10%. What did you do there? Is there more of that to come? Are we getting the full benefit of this this quarter? Did we see some of it last quarter? I'm just trying to get a sense as to kind of when that cost or gross margin improvement cut in.

Sure, Clint. This is Scott. The 3D printer application, we believe, is all about offering a whole-product solution to customers, which goes to everything from ease of use, reliability, push-button, no operator, the operator is, in fact, the design engineer, and one of the key, but not the only key, one of the key elements of the whole-product offering is the pricing. In order to get pricing there's two methods. One is you can subsidize and the other one is to be prepared quarters or years in advance with lower cost.

And this program of cost-- this would be product cost reduction is actually a long-term, ongoing effort where we've engineered product cost out as well as in the purchasing area, through modest volumes, also we're able to get quantity discounts. So if you look back over, I don't know, a 3 or 4, maybe even 5 years with out product cost initiatives, either every quarter or at least every half a year we've been able to get continued cost reductions and this last quarter we considered those to be substantial and noteworthy on the conference call here.

Now to your second question, yes, those cost savings will be seen this quarter.

Specifically, Clint, we-- it was released-- the new design-- or the new cost-reduced design was reduced to production yesterday. So the fourth quarter will have a mix of products under both cost structures.

OK. So the products being sent out now have a full 10% lower cost than those being sent out a couple weeks ago.

It was released to production like yesterday, so everything produced up through yesterday was-- or the day before would have been under the old cost structure, so you're going to see a real mix in the fourth quarter from it.

And you'll see a full effect in the first quarter.

Evan Greenberg, Meadowbrook Capital Management.

Number one question, was there any-- did you talk about anything in the automotive sector? I missed the beginning of the call. Is there anything in the automotive sector showing any weakness due to-- I mean, there's a lot of redesign going on with hybrids, et cetera, et cetera, but auto sales being down and slumping somewhat, is that hurting you at all?

We have not seen-- Evan, we have not seen that weakness in that vertical. So right now I know there's a lot of turmoil in that vertical, but we have not seen it yet. In fact, on our business in Q3 we got-- we're continuing to get good signals from at least a couple of the major manufacturers that they're interested in adding to their capacity.

Overall, globally the automotive market for RP is actually fairly strong. As you know, Detroit is coming out of a deep recession, depression for capital equipment that was in effect about 3 years ago.

OK. The second question is, if you execute this buy-back, that should be accretive by 8% to 10%, because you're-- you've got no cost of capital from the buy-back, you've got the capital in, maybe your cost is interest rates and it should be highly accretive. Have you factored any buy-back into your estimates or that hasn't been factored in? I would assume not.

No, Evan, we have not.

Sarah Bayrick (ph), Artemis (ph).

I just wanted to check back on the European competition or competition there. Can you say whether that's a new competitor, a European-based competitor?

Well, these are our-- Sarah, these are our normal competitors. We're seeing-- seeing them more frequently. It has always been a very competitive environment and we usually get our share. It's just that we hit a rough spot in Q3. Frankly, I'm optimistic that we're going to be doing better in the next several quarters in that region and we're going to be taking a look, as I said earlier, both organizationally, as well at our channel, at making, I think, some tweaks to make sure that that happens.

Jim Bradshaw (ph), Bard Capital Management (ph).

I wonder if the-- I was going to ask about the sales of the high end being a little bit lower compared to the lower end. Was there any more focus on the low end, just to kind of maybe get more machines out there so that, obviously, more consumables-- more machines, more consumables, the higher margin, that kind of thing?

Well, I think there's at least two parts to your question. In terms of sales order bookings, we had overall record sales order bookings. Some bookings in our business, since we're conservative on collection, are in the form of a letter of credit that many times gets shipped in the following month that goes on to a system backlog, which provided lower-than-expected revenue. So I'm kind of trying to differentiate between the order bookings coming in, the backlog and then the revenues going out.

I think the simple answer is no. I think we continued to stay focused on both segments within the market place.

Andrew Schopick, Nutmeg Securities.

I would just like to ask about the leasing programs and, given the potential exposures that might exist as some of these sales-type leases and terms expire, I believe you have 150 to 200 units out on lease on the Dimension family and with interest rates having risen steadily, can you indicate what, if any, exposures you might have in this area and whether-- to what extent any of these lease terms will be expiring over the next year?

Hi, Andy, the leasing program, in our opinion, has been very successful. It's introduced a lot of companies that have preferred to use the leasing option rather than outright purchase. I don't think our exposure is any higher and there's no evidence that it's any higher than our sales that would be outright.

In terms of expanding the program, we're looking at all kinds-- tweaking the program in different ways and, in fact, on some of the systems that we lease, we actually are fairly high in terms of the interest rates we charge, at least compared to the Dimension program that we have in place, and so we're really at market on many of the higher-end systems.

On the lower-end systems, what we're finding here is that interest rates aren't the key driver in terms of driving this leasing option and, in fact, it's our ability to turn the leases around internally and we're working on that, as well. So we think that the-- the leasing program that we've introduced with Dimension -- we'll be tweaking that -- but, again, I think we'll be able to drive additional leasing growth through the process that we utilize.

I think it's important to note that we are leasing today only in the United States. We're looking at options to expand that and perhaps using key partners there.

Are these all 2 or 3-year leases on Dimension? They're sales-type leases, as I understand it.

That's correct. They're either 2, 3 or 4-year leases.

They can be 2, 3 and 4?

Yes.

Troy Jensen, Piper Jaffray.

I'm going to spin two questions into one here, but can you talk about the BST/SST mix this quarter? What you expect going forward? And then do you plan to do a demo plan again in 2006 or is the channel getting familiar enough with the products that you don't need to do the demos any more?

The mix has shifted predominantly to SSTs, about a 65% mix in favors of SSTs. The value proposition there is apparent to our users, although the magnitude of the shift was a little surprising to us.

In terms of the demo program, it's been very successful in introducing these systems. We think it's key to having and giving our distributors the ability to have a system on place to showcase. We're in the middle of developing our programs for 2006. I believe we'll continue to utilize it as a tool, but those marketing plans have not been formalized.

Jeff Evanson, Dougherty & Company.

Bob, I needed a little clarity on some of the growth items here. Product was up 9%. You said consumables was up 32%? Is that right?

Yes, I believe so.

And then you said system-- what was that up? System sales?

We said product revenue was 9% and services was 19%.

And then you mentioned consumables and system sales growth. Consumables was 32%. I have system down here--?

Consumables was 32%, correct, and 3D printer sales 23%.

That was 3D. OK, got it. And then on the service side, 19%. You said maintenance was 20% and paid parts was 34%?

Correct.

How do we get to 19%. Is there another line item we're not talking about there?

No, Primarily what it's telling you is that the maintenance-- we've said before that the paid part is kind of a startup part of our business and our-- the maintenance is the lion's share of that. There's a few other tweaks in there and maybe some rounding differences, but it's primarily driven by the maintenance revenue.

Because we can't both growing in excess of 19% and have the whole growing 19%.

Yes, I recognize that and I think part of that is a little bit of rounding and small other differences that bring it down.

[OPERATOR INSTRUCTIONS]

Hey, Erin (ph), let's reserve it to a couple more questions, please.

There are no further questions at this time.

OK. We appreciate your interest and look forward to the next conference call. We'll stop the conference call at this point. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference call. At this time you may all disconnect.