Stratasys Ltd (SSYS) 2005 Q4 法說會逐字稿

Good day and welcome to today's Stratasys year-end earnings release conference call. As a reminder today's conference is being recorded.

At this time I would like to turn the call over to Mr. Shane Glenn. Please go ahead, sir.

Good morning and welcome to the Stratasys conference call to discuss fourth quarter and fiscal year 2005 financial results.

Representing Stratasys' senior management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump and Chief Financial Officer, 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 Web site, www.stratasys.com.

We'll begin with the forward-looking statement. Except for the historical information herein, the matters discussed during this call are forward-looking statements and involve risk 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, acceptance of new products and materials, our ability to effectively and profitably market and distribute the Eden PolyJet line and Arcam product line, the success of our recent R&D initiative to expand the rapid manufacturing capabilities of our core FDM technology and the success of our Redeye RPM-paid parts service as well as the other risks detailed from time to time in our SEC reports including Form 10-K for the year ended December 31, 2004 and Forms 10-Q filed throughout fiscal 2005.

The information discussed today within this conference call includes financial results and forward-looking financial guidance in accordance with U.S. Generally Accepted Accounting Principles.

In addition, non-GAAP financial guidance is included. It excludes certain expenses.

The non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the Company's operations and comparative financial performance, primarily the identification and the exclusion of expenses associated with stock-based compensation required under FASB 123.

We'd like to confirm the date of our first quarter 2006 earnings release and conference call. Stratasys' first quarter results will be released on or before the morning of April 27, 2006, followed by a conference call on the date of the release. We will release the conference call time and details about two weeks prior to that date.

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

Good morning.

Stratasys is pleased to announce our fourth quarter and fiscal 2005 financial results. These results represent the strongest quarterly revenue and earnings performance in the Company's history.

Revenues rose 21% to $23.5 million for the fourth quarter of 2005 over the same period in 2004. In addition, earnings grew by 37% to $0.30 per share for the period compared to the fourth quarter of last year.

The fourth quarter generated record revenues across multiple business groups. Notably we observed improvement within our high-end system business as the market environment for our high-end systems improved over the third quarter levels.

In addition, our strategy of expanding the sales of our 3D printers into a growing universe of three-dimensional CAD workstations continues to succeed.

This success was evidenced in the record 363 total system shipments we made during the quarter, representing 23% growth over the fourth quarter last year. We are pleased that our record $82.8 million fiscal 2005 revenue and earnings of $0.99 per share met or exceeded the high end of our financial guidance that we provided following our third quarter release.

And although fiscal 2005 did present challenges, we've done some course corrections and are excited about the position heading into fiscal 2006. We are accelerating the introduction of new products and programs with three new major initiatives already announced this year, and more to come over the next few months.

I will return later in the call to expand upon some of the more recent initiatives as well as to discuss some of the opportunities we believe will continue to make our Company an exciting growth story over the next several years.

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

Thanks, Scott.

Total revenue increased by 21% to 23.5 million for the fourth quarter of 2005 compared to 19.4 million for the same period last year. As Scott mentioned, the Company shipped a record 363 systems during the fourth quarter of 2005 compared with 275 systems during the same period of 2004, an increase of 32%.

Our strong system unit growth was as a result of the ongoing expansion of our 3D printer business. As 3D printer units grew by an impressive 41% during the fourth quarter when compared to the same period last year.

Fourth quarter product revenues grew by 18% to 18.9 million compared with 16 million for the same period last year. In addition to the expansion of our 3D printers, the growth in fourth quarter product revenues was driven by a record level of consumable sales which grew by 38% over the same period last year.

The recent introduction of the Eden 500 has provided additional momentum within our line of distributed of Eden products. The Eden product line more than doubled in sales revenue during the fourth quarter but remained less than 10% of the overall total.

As Scott mentioned, we did recognize improvements in our high-end system business during the fourth quarter when compared to the difficult operating environment in the third quarter. Our high-end system business includes both our internally developed FDM systems, otherwise known as our T-Class, as well as our line of PolyJet systems that we distribute for Objet Geometries.

As we indicated in our third quarter conference call, our high-end system business was not meeting our expectations for reasons that included aggressive competitor pricing, particularly in Europe, and our lack of any recent T-Class product introductions. On a sequential basis, overall European sales were up by 58% in the fourth quarter of 2005 compared with the third quarter of 2005.

We saw strong growth in consumables in Dimension 3D printers, however, Europe was still 5% lower than the fourth quarter of 2004. But this was in line with our revised expectations as we discussed in the third quarter conference call.

Our T-Class system sales continued to underperform during the fourth quarter but this was offset by strong domestic sales of our distributed Eden product line.

We believe T-Class sales will benefit from the January 2006 introduction of a new high-end FDM product, the Vantage X. This is a critical first step in improving the performance of our T-Class line.

Service revenue increased by 33% to 4.6 million for the fourth quarter compared to 3.5 million for the same period last year. The growth in service revenue was driven by record levels of paid parts and maintenance revenue, with paid parts revenue growing by an impressive 84% over Q4 of last year.

The rollout of RedEye RPM, our online prototype parts quoting and ordering service, contributed to the strong paid parts growth.

Gross profit increased by 12% to 13.1 million for the fourth quarter of 2005 compared to 11.7 million for the same period last year. Gross margin as a percentage of sales declined to 55.8% from 60.2% for the fourth quarter of last year.

The decline gross margin percentage was driven by the strong growth in our Dimension 3D printers as well as the growth in our distributed Eden product line.

In addition, the relatively weak performance of our T-Class line, which generally maintains higher gross margins, was a mitigating factor on gross margin percentage. The gross margin percentage benefited from the growth in our consumables and paid parts business during the fourth quarter.

Operating profit increased by 34% to 4.1 million for the fourth quarter of 2005 compared to 3.1 million for the same period last year. Operating expenses were 9 million for the fourth quarter compared with 8.6 million for the same period last year, an increase of only 4%.

Operating profit as a percentage of sales increased to 17.6% from 15.9% for the same period last year.

The relatively small increase in operating expenses was driven in part by the absence of certain Sarbanes-Oxley-related expenses that were incurred during the fourth quarter of last year, as well as a relatively small impact from commission accelerators compared to last year's fourth quarter.

Operating profit was favorably impacted by the strong growth in our consumables, maintenance and paid parts business. We expect operating expenses will continue to track materially ahead of comparable periods as we move through fiscal 2006, driven by higher R&D expense as well as higher expense associated with our expanding operation.

Total interest and other income for the fourth quarter decreased to 299,000 versus 475,000 last year.

The decline resulted from a relatively large impact from foreign currency translation, as the euro continued to weaken relative to the dollar. This contributed to a loss of $82,000 versus a gain of $185,000 in the fourth quarter of last year.

Interest income increased by 112,000 during the fourth quarter to 385,000, a result of higher returns on cash and investments. Pretax income increased by 24% to 4.4 million for the fourth quarter versus 3.6 million for the same period last year.

Income taxes amounted to 1.3 million for the fourth quarter versus 1.3 million for the same period last year. The effective cash rate was 29.1% versus 35.7% for the same period last year.

We had anticipated an effective tax rate of 34 to 34.5% in the fourth quarter. Our actual rate was lower primarily due to higher annualized benefits from tax free interest income and the new manufacturers deduction.

Assuming an accrual at the previous expected tax rate of approximately 34%, the Company would have incurred an additional tax expense of approximately 218,000, which translates into approximately $0.02 per share in net income.

Net income increased by 37% to 3.1 million, or $0.30 per diluted share for the fourth quarter versus 2.3 million, or $0.21per diluted share for the same period last year. Our diluted shares outstanding dropped by over 300,000 shares from the third quarter, a result in part from significant stock repurchases we completed during the fourth quarter.

During the fourth quarter, Stratasys spent cash of 8.9 million to repurchase 371,400 shares at an average price of $23.77. The Company maintains $11.1 million in authorization under its $20 million current stock repurchase authorization.

Looking at the whole year, total revenue increased by 18% to 82.8 million for fiscal year 2005 compared to 70.3 million for fiscal 2004. The company shipped a record 1,297 systems during fiscal 2005 compared with 1,094 systems during fiscal 2004.

Gross profit increased by 12% to 47.5 million for fiscal 2005 compared with 42.3 million for fiscal 2004. Gross margin as a percentage of sales declined to 57.4% from 60.2% for the comparable periods.

Operating profits increased by 8.9% to 14.2 million for fiscal 2005 compared to 13 million for fiscal 2004. Operating expenses were 33.4 million for fiscal 2005 compared with 29.3 million for the same period last year, an increase of 14%.

Net income increased by 16% to 10.6 million, or $0.99 per diluted share for fiscal 2005 versus 9.1 million, or $0.85 per diluted share for the same period last year.

Our cash and investment position amounted to 41 million at the end of fiscal 2005 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 the changes in our operating assets, strategic investments, as well as over $9 million of stock repurchase during the year.

During fiscal 2005, we purchased a facility located adjacent to our corporate headquarters in Eden Prairie. The facility provides approximately 86,000 square feet of office and manufacturing space which will accommodate the Company's intermediate expansion requirements. The purchase price was approximately $5 million.

Inventories were 10.9 million at the end of fiscal 2005 compared to 7.5 million at the end of fiscal 2004, but down from the 11.1 million at the end of the third quarter of 2005.

Although inventories declined from the third quarter levels, higher year-over-year comparison was driven by additional Eden systems, many of which were in transit at 12/31from the manufacturer to us. We take title of these systems when they leave the manufacturer in Israel.

In addition, the higher inventories were a result of additional 3D printer units available to accommodate shipments anticipated in the first half of 2006.

Accounts receivable were $20 million at the end of the fourth quarter compared with 15 million at the end of fiscal 2004.

Day sales outstanding were approximately 78 days compared with 71 days at the end of fiscal 2004, but down from the 88 days at the end of the third quarter of 2005. The day sales outstanding, or DSO, is calculated by eliminating the effects of our leasing program.

Net property and equipment increased to 17.3 million at the end of fiscal 2005 compared to 10 million at the end of fiscal 2004, principally reflecting strategic investments within our Company, including the facility we recently purchased for $5 million.

Our balance sheet continues to be very strong with almost $4 million -- or excuse me, with almost $4 in cash and investments. Our financial strength is a competitive advantage, and as a company, we have decided to use our strength strategically to grow the business as we recognize opportunities.

Going forward, we will focus on growing our existing businesses, investing in projects that will strengthen our leading position within the RP and 3D printing industries and reporting increased earnings and profitability.

Now, I would like to turn the call over to our Director of Investor Relations, Shane Glenn, to update our financial guidance.

Thank you, Bob.

Stratasys updated its fiscal 2006 financial guidance as follows this morning. We reaffirmed revenue guidance of 98 million to 102 million, a growth of 18% to 23% over fiscal 2005.

We reaffirmed earnings guidance of $1.15 to $1.25 per share on a non-GAAP basis which excludes the impact of stock-based compensation required under FASB 123. Estimated impact of stock-based compensation expense required under FASB 123 is 1.65 million pretax, or $0.10 per share in net income during fiscal 2006.

GAAP earnings guidance of $1.05 to $1.15 per share assumes the recognition of the estimated expense associated with the FASB 123 stock-based compensation and is based on currently outstanding options. The option related expense is calculated using Black-Scholes.

We are providing non-GAAP financial estimates in an effort to give investors continuity in our earnings comparisons. In addition, the impact of stock-based compensation going forward will likely diminish as our current plans include no significant incentive-based option grants going forward.

We are currently evaluating alternatives to option-based incentive compensation.

Our guidance assumes a tax rate of 32.5 to 34.5% for the year for the tax rate and an average diluted share count ranging from 10.5 to 10.9 million.

We expect capital expenditures will range from 5 million to 8 million during fiscal 2006.

While we currently do not provide earnings guidance for individual quarters, we would like to provide investors with some insight into the impact our new programs and initiatives might have on our quarterly growth progression, particularly during the first and second quarters of 2006.

We currently expect the first quarter earnings comparison to be the weakest comparison in fiscal 2006. We base this observation on the timing of initiatives announced in the first quarter, as well as the impact of initiatives that have yet to be announced but are expected to have a material impact on our operations in 2006.

Furthermore, we expect a significant portion of the perceived weakness in Q1will be offset by strong growth in Q2 as key components to our growth strategy for 2006 are implemented. We want to be clear, this expectation is not based on the perceived condition of the current business environment and is driven solely by the timing of our new initiatives.

We have attempted to provide guidance that incorporates our plans for new product introductions, our current growth and product mix expectations, coupled with the limitations in predicting our operating environment over the next several quarters.

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

Thank you, Shane.

As Shane has indicated, we have a busy year ahead of us. I'd like to high highlight some initiatives we announced recently.

We recently introduced a new configuration of company successful T-Class line of Rapid Protyping Systems with the Vantage X. The new system offers our customers more material options and improved resolution than we previously had available on the comparably priced Vantage i.

Concurrently, we lowered the price of our Vantage i, providing a more affordable entry point of our customers that require the functionality of a high-end rapid prototyping system. These initiatives should make us more competitive within the high-end market by improving upon the functionality and affordability of the mid-priced systems.

We believe the price reductions we recently implemented for our Dimension 3D printers are strengthening our leadership position within the 3D printer category. Moreover, we are encouraged by the recent analysis conducted by T.A. Grimm Associates, which rank the Dimension SST 3 printer number one in Dimensional accuracy when compared to other leading 3D printers.

Now T.A. Grimm Associates is a leading independent consulting firm covering the rapid prototyping market. So now in addition to providing the lowest priced 3D printer in the marketplace, we believe we can also say that our 3D printer produces parts with the best dimensional accuracy.

Now if you'd like to review the analysis, the full report is made available on our Dimension printing Web site.

We continue to observe an underpenetrated market for our 3D printers with users of three-dimensional CAD software. Our goal is to take advantage of that opportunity with a range of systems that focus on functionality in addition to affordability.

We have expanded the Eden product line to offer -- and these products are a distribution of Objet Geometries and these two new products are the Eden 350 and the Eden 500. The new products broaden our offering of wider range of prices and system capabilities.

The Eden PolyJet technology is successfully complimenting our own high-end systems, the T-Class and the Maxum lines, which produce parts with production grade thermal plastics. The Eden PolyJet systems produce parts with unique photopolymers that are ideal for certain applications that are not as easily addressed with thermal plastics.

This best of both worlds strategy allows to us address a wider range of customer applications.

Well following the successful launch of our Redeye RPM.com last October during our NASDAQ closing bell ceremony in Times Square, revenue within our paid parts business nearly doubled in the fourth quarter. The new site allows for instant quoting and ordering of prototype parts over the Web.

In an effort to maintain our positive momentum within the paid parts business, we are currently investing in additional sales and customer support resources for that business.

We recently announced a distribution agreement with Arcam in Sweden for Stratasys to be the exclusive North American distributor of Arcam's metal-based rapid manufacturing and rapid prototyping systems. This action strategically expands Stratasys into metal parts offering for rapid prototyping and for rapid manufacturing.

Following extensive evaluations of the Arcam technology, we concluded the company's proprietary electron beam melting technology, or EBM, could produce parts that were superior to competitive additive metal-based processes with part properties that emulate conventionally manufactured metal parts such as investment cast parts. This agreement will allow Stratasys to target an additional user base that is focused exclusively on metal parts.

In addition to the Arcam agreement, we are developing new opportunities in rapid manufacturing including our $3.6 million initiative with a Fortune 100 global manufacturing company. The initiative's long-term goal is to develop our core fuse deposition modeling technology, FDM, to allow for the manufacture of [end-use] plastic parts.

We are pleased to report that we are making progress with that initiative and certain R&D objectives have been recently fulfilled. We're excited about this initiative given our belief that rapid manufacturing will become a strong incremental growth driver for Stratasys in the future.

Although fiscal 2005 provided challenges, our near-term performance has improved, and we are excited about our prospects heading into fiscal 2006 and beyond. We are accelerating the introduction of new products and services, striving to provide our customers with innovative solutions that address design, development and manufacturing of new products.

We believe these new offerings, combined with our price leadership in the 3D printing, will contribute to strong growth over the next several years.

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

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Andy Schopick with Nutmeg Securities.

Thanks, Bob.

I'm wondering if you can just give us a breakdown on the split between North America and international for the full year?

I believe that domestic was almost 60% of our sales for the full fiscal year.

And can you comment about the backlog, just the year ending backlog?

At the end of the year we had 2.8 million of backlog and that compares to 3.2 million at the end of fiscal 2004. So it's very comparable year-to-year.

Thank you. I'll pass it along now.

Moving on to Mujal Shah with Piper Jaffray.

Hi. This is [Funjal] for Troy Jensen. Good morning. I have a couple of questions.

Could you talk about your traction with the price cuts on the Dimension side, any type of demand elasticity or price elasticity that you're seeing in that space?

And in Europe was very strong. Could you tell which area, was it the high-end systems or was it the Dimension that was really strong?

Yes, to take the first part of the question, the initiatives of reducing the price on our Dimension systems, that's been very well received by our dealers, however, because we did that just in the beginning of January, the best thing I can say at this point is that we're cautiously optimistic about that.

Okay.

And in terms of the growth in Europe, the sequential growth, again, over the third quarter was about 58%. But the fourth quarter is traditionally strong for us in Europe, and that is 5% lower than the previous year.

The growth that we saw over Q3 was particularly strong in both our consumables as well as our Dimensions systems.

Okay. And what about the high-end systems?

There was, you know, quarter-over-quarter, certainly there was a recovery in our high-end systems but it's still lower than the previous year quarter-over-quarter.

Okay. Great. Thanks a lot.

We'll take our next question from Eric Martinuzzi with Craig-Hallum.

Good morning and congratulations on a strong finish to the year.

Good morning, Eric.

My question has to do with the Eden in North America. You saw good recovery there, good success, do you feel there's a share, are you gaining market share in North America or do you feel that it was sort of Stratasys specific there?

Well, Eric, I think one of the things that we've definitely noticed on Eden this year is that it does provide a nice complimentary technology to, you know, the FDM technologies and the core systems that we have within our portfolio.

We think that the, you know, the Eden system is a nice alternative for the customer when it comes to some of our competitors' technology, particularly the SOA technologies and addresses applications that we can't easily address with the thermo plastics. You know, it's also, you know, it's a system that, you know, they've introduced a lot of new systems, obviously we've announced those, and there's lot of interest in that system.

But as far as other competitors that -- maybe I should rephrase the question. What competitors do you see in North America for that product?

The Eden 500, in particular, is a good competitor to SLA technology.

In other words, generally PolyJet from the Eden is aimed at the SLA applications which is a UV polymer laser systems.

Okay.

And your comments as far as percentage of market share, you feel that you're gaining or maintaining there for North America?

Well, I think the [inaudible] report will come out in the second quarter with all the detail, so I think at this point, you know, we can speculate, but I think we need to probably wait for the facts to come out.

Thank you.

We'll take our next question with David Cullen with Midwood Capital.

Hey, guys.

Good morning.

My question is really to the balance sheet. One specifically with respect to the intangible assets.

What account [inaudible] like a over $1.2 million increase Q3 to Q4, which is sort5 of most of the increase for the year, at least two-thirds of the increase for the year, what is different there? What's happening in that quarter in particular and what would account for the overall change in intangible assets? You guys obviously, you're not doing any acquisitions so why is that going up?

Yes, we made a classification of investment that we made earlier in the year. We've made investments in some intangibles that, for competitive reasons we don't want to talk about what specifically we've invested in in the fourth quarter.

It's actually a reclassification from other assets versus intangibles, as we classified and looked specifically at how to do that investment that we actually made at the end of September 30th. It's directly related to our paid parts business and initiatives that we're doing in that area.

Okay.

And with respect to, refresh my memory on how the investment and sales-type leases works its way through the income statement. Or basically between that line item and the income statement.

Sales-types leases are really a financing transaction so that you're recognizing both the revenue and the cost of sales at the point in time that you're doing the transaction. For each lease that we do during the course of the year, we're evaluating the credit on a customer-by-customer basis, so in essence, it's very similar to having it receivable at the end of the day.

When we go to evaluate that, we put allowances against them, similar to what we do against our accounts receivable.

Okay. And so you booked the gross value of the sale, net some allowance in that line item?

Right. Most of the customers that we're leasing to are pretty solid companies. But we do evaluate that on a customer-by-customer basis and then look at that for over a period of time also, similar to the receivables.

Okay. Thanks. I'll get back in queue.

Once again, it is star one on your touch-tone telephone to ask a question. We'll move on to Clint Morrison with Feltl and Company.

Good quarter, guys.

The 3.6 million initiative you've got with a global company, you said you hit some milestones. Can you give us a sense as to sort of how far you've gone, obviously, I assume you've gotten some of those dollars and kind of tell us about, I guess, the dollars, where they went and how far through this program are you?

Well, it's a mid to long-term program. Upon success, it is a long-term program, and I guess I can't, since we're under a non-disclosure, talk about the details, but it is milestone based and it's at the technology phase now, and for all of this year, and then, of course, we're attempting to push that for 2007 into actual products, not just for the program, but for commercial products, and those milestones payments, as you mentioned, do come in as reimbursements, as cash reimbursements into the P&L.

We -- for conservative reasons we've chosen not to show those as revenue. They're direct reimbursements.

They're not offset to R&D, and my question is, is how many of those dollars have come in?

Clint, substantially more dollars have come in. The dollars did not have a material impact on the quarter whatsoever.

We actually collect ahead of the actual spending rate, so the milestones that we've made to date were not significant to the fourth quarter whatsoever.

Okay. So you're not willing to give us, you know, are we 5% into the 3.6 million? Are we 50%? I'm just trying to get some sort of sense as to where we are in this process.

We're very early on in the process. In the original announcement we said that the money would be over a four-year period of time.

We have some early on key milestones that we have proven to make to date, but we're still very early on in the overall process.

Okay. I'll get back in queue.

Thanks, Clint.

We'll hear next from Jeff Evanson with Dougherty.

Good morning, everybody.

Good morning.

I know that ASP decreases impact this a bit, but could you talk about the trends in the growth of deferred maintenance revenue? That seemed to be growing a little bit slow relative to the overall sales growth.

You know, I think our maintenance revenue is up substantially year-over-year. I don't think, you know, we don't anticipate on sales of 3D printers that the same proportion will take maintenance contracts as they do in our high-end systems.

On our high-end systems we find maintenance rates of over 90% on our systems out there in the field. So if you look at that on a unit growth basis, we don't expect that to be growing as fast as the unit base, however, there's been good growth in our maintenance revenue as well as the deferred maintenance on a year-over-year basis.

Did it grow faster than the overall company growth rate in the quarter?

No. I think it was on a comparable rate. I don't have that split down right now.

Okay.

Quarter-for-quarter basis.

All right. Bob, could you give us your free cash flow in the quarter, how much cash came from operations and how much Cap Ex expenditures you had?

When we publish our cash flows, of course, we do it for the year. What you'll see for the year is that we had cash flow from our operations of about $8 million.

If I recall correctly, we were probably at about a $2 million level at the end of the third quarter, so there's probably close to $4 million of operating cash flow in the fourth quarter.

From a Cap Ex standpoint, you'll see that we did about 9.8 million for the year in total, and I don't recall what that number was for the third quarter offhand.

Cash from operations must have been higher than 8 million, right, for the year?

No, if you go back to what it was, if you look at the year-over-year jump in receivables was about $5 million, there's about a $3 million jump in inventories, and our net investment and sales-type leases is another 1.1 million. Those are all items that will reduce your cash flow from operations.

So, no, 8 million is the appropriate number. And again, that compares to about 2 million at the end of the third quarter.

So we generate a lot of cash but a lot of that into A/R and inventory.

All right. And the 9.8 million includes the 5 million for the building, right?

Yes.

Okay. Bob, what type of tax rate should we be modeling for '06?

Within Shane's guidance and it was 32.5 to 34.5%.

Okay. All right.

Scott, given that this is kind of the year the proof of the elasticity of demand theory, in other words, prices going down but unit growth staying real strong, have you tested that theory at all? What are kind of your initial impressions of that function curve? And can you commit to some kind of a gross margin level on products?

Well, let's see, I think you got two or three questions.

The first one, I agree with you. I think that by the end of 2006, we're going to know a significant amount with really good statistical data for just the 3D printer market, which really is, we think, $40,000 and below in U.S. dollars.

I think that we have three years of solid evidence that when you lower the price below, well, for sure, $35,000, that you get a disproportionately higher amount of unit growth, revenue growth and earnings growth. There's no question about that.

And I think the other thing that we've observed is, and we're going to learn a lot more about this in 2006, is that the mix of the Dimension, BST and SST is perhaps more influenced at roughly 1,000 units per year, or let's say in the 2 or 3,000 units per year range. More probably due to the incentives in the reseller channel probably at this point than the actual, you know, elasticity.

So we're more focused at this point with the general elasticity of 3D printing compared to the high-end productivity systems. And so I think we can say without a question or a doubt that the 3D printer with, of course, a whole product offering.

So it's not just price but a true whole product offering, ease of use, reliability, et cetera, is definitely a business, it's an elastic business model with, you know, price and volume that follow.

In terms of your gross margin question, I think maybe I'll defer that to Bob.

Yes, you know, while we continued to lower the price we announced in the third quarter call that we had also lowered the cost of the Dimension systems. Besides just moving down the [inaudible] ASP curve, we also continued to move down our cost of sales but we're not willing to predict at the gross margin level going forward. So --

So you don't have a level at which you won't go below on product gross margins?

Well, we have targets that we have internally, but we're not willing to share those on a public basis at this point in time. And, Jeff, I'm going to have ask you to jump back into the queue if you will.

Yep, will do. Thanks.

Thank you.

One final reminder. If you'd like to ask a question, please press star one on your touch-tone keypad. Once again, we do ask you to limit yourself to one question then pop back into the queue for any follow-ups. We'll take our next question from Van Brady with Presidio Management.

Good morning. I would like to ask two short ones and I promise that's the last of it. If you could answer them as I ask them, I'd appreciate it.

With regard to Op Ex in the quarter, you mentioned a benefit from the absence of SOx, and also lack of commission accelerators which I was kind of curious why that would be the case with such a strong sales quarter.

One of things with accelerators, first SOx, a couple of things is one is we're doing SOx throughout the year whereas last year with it being new, is more of a fourth quarter effort, as I think everybody was scrambling a little bit more in 2005 as opposed to making it a part of your natural operations.

In terms of the commission accelerators is, it's a strong quarter, but year-over-year at 16% growth, we've always increased the targets of our salespeople in order to earn that accelerators. So we had substantially increased their quotas on a year-over-year basis and that decreases the impact of the accelerators in the fourth quarter.

Okay. That's a good answer.

The other question I had was relative to the guidance that you gave, where you said that -- where because of your spending on new initiatives the first quarter would be relatively weak and I was curious whether you were referring to just the higher expenses or whether revenue growth would be kind of seasonally weak?

You always experience a down quarter in the first quarter from the fourth. So if you could clarify exactly what you're referring to, I'd appreciate that.

Sure, I'll follow-up on that again, you know, what we said in the call was that, you know, based on the timing of initiatives that we've announced, the product initiatives as well as the impact of initiatives that we haven't announced yet, we think that that's going to have a material impact on how the quarters flow in 2006.

So it's more, you know, at this point, it's more of an issue of timing of initiatives and how we think that's going to impact the quarters although, you know, we are spending higher levels to meet our expanding operations. You know, we do have this issue with, you know, how we think some of these impacts or how some of these initiatives are going to impact the order flow throughout the year.

So the impact would be sales and expenses. Is that right?

More so, I would say, that it's going to be a combination of the mix that we anticipate coming in the first quarter, as well as some of the initiatives and maybe less so from a revenue standpoint.

Yeah. Okay. Thank you.

And we do have a follow-up question from Andy Schopick.

Just a couple of things, real quick.

Can you give us a split between the SST and the BST and at some point whether the BST really becomes, you know, kind of an older, mature product which will be of less appeal to users?

Yes, the, Andy, the mix is about three to two, three favoring the SST, you know, versus the BST. I think that not to speak directly to, you know, the current Dimension BST that we have in our current product portfolio but I think is our strategy to continue to have a system, you know, at the low-end within a price spectrum that drives that, as Scott mentioned, it drives that price elasticity within the marketplace.

As that evolves, you'll see a full family of products for a lot of different type applications within the 3D printer family.

I understand but I'm just wondering whether the BST is becoming mature to some extend that would either reduce its appeal or its effectiveness for a growing number of users as you enhance or provide enhanced systems such as the SST?

Well, on [orchard] today it's definitely the best price performance for education, for some commercial, it's best price performance, the favor it for commercial since the SST of course has the no labor, fully automatic support removal as the favorite is the Dimension SST for the commercial. So I think both products are very viable.

On the same token, we continue to invest very heavily and have for a number of years, over five years, in the 3D printing area, you know, in addition to the high-end productivity side of the business.

Of course. Bob, one other question on the leases, please.

How many units that were previously put out on lease, you know, in 2003, I don't know, 3, 4, 5 are currently scheduled to come off lease and what is your expectation for whether those users will convert to purchase or whether there may be some that just don't get renewed?

Yeah. Most of our leases are, as it says in the financials, most of them are sales-types leases which means it's really a financing transaction as opposed to an operating lease.

I understand, but doesn't the user have an option to buy or not to buy at the end of the lease term?

Really under financing-type leases they are going to own the units at the end of lease term. In most, we have very few that fall into the operating where they may have a bargain purchase option at the end but most all of them are strict financing transactions where they own the units at the end of lease term.

Okay. Eden, is that only sold in the U.S. or will that be sold internationally?

The Eden product is sold throughout the world. We happen to be the distributor for it in North America.

Okay. Thanks.

Thanks, Andy.

We'll take a follow-up question from [Funjal] Shah.

Yes, my question was on the leasing program. Do you plan to continue the leasing program or will it subside over time?

We think the leasing program is a great use of our balance sheet strength and currently we only offer leasing in North America and we think there's an opportunity to expand our leasing program over a period of time.

Okay. Thank you.

Sara, do you have any more questions?

Okay, at this time, we'll conclude our conference call. I appreciate your interest, and we'll talk to each other at the end of the first quarter conference call.

The conference call is over. Thank you.