Stratasys Ltd (SSYS) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Stratasys Inc. first-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Shane Glenn, Director of Investor Relations. Thank you, Mr. Glenn. You may begin.

Thanks, Jen. Good morning and welcome to the Stratasys conference call to discuss first-quarter 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. It can be accessed through the Investor section of our website at 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 line, Prodigy Plus, Maxum, Vantage and Titan product lines; the size of the 3-D printing market; our ability to penetrate the 3-D printing market; our success in launching new 3-D 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 Arcam productline; the success of our recent R&D initiative to expand the rapid manufacturing capabilities of our core FDM technology, and the success of our RedEyeRPM paid part 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, 2005.

The information we discuss today within this conference call includes financial results that are forward-looking that include forward-looking financial guidance and are in accordance with U.S. generally accepted accounting principles or GAAP. In addition, non-GAAP financial guidance is included that 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 performance, primarily the identification and exclusion of expenses associated with stock-based composition required under SFAS 123R.

We would like to confirm the date of our second-quarter 2006 earnings release and conference call. Stratasys' second-quarter results will be released on or before the morning of August 1, 2006, followed by a conference call on the day of the release. We release the conference call time and details about two weeks prior to that date.

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

Good morning. We're pleased to report our first-quarter financial results with record revenue and unit shipments which reflect the impact of a major new product and strategic pricing initiative within our 3-D printing group. This initiative began in January with the introduction of new price points for our Legacy 3-D printers and culminated with the recent introduction of four new 3-D printers in early April. We believe our first-quarter financial results demonstrate a positive impact from the first phase of this strategy as the lower price points have contributed to a significant increase in our 3-D printer sales. The second phase of our strategy announced on April 13 includes the introduction of a new line of 3-D printers. The new products provide improved functionality to our end users with a broader range of price points.

Starting with the second quarter, we believe these new products will augment the growth that we have begun recognizing in the first quarter, as well as provide an opportunity for improved profitability through expanded margins. I will return later in the call to discuss this initiative in more detail, as well as discuss other opportunities we believe will continue to make our Company an exciting growth story going forward.

But first I would like to turn the call over to our CFO, Bob Gallagher, who will further highlight our first-quarter results. Here is Bob.

Thank you, Scott. Total revenue increased by 18% to 22.2 million for the first quarter of 2006 compared to 18.9 million for the same period last year. The Company shipped a record 403 systems during the first quarter, an increase of 45% over last year. Our record unit volume was a result of strong growth within our 3-D printer business as 3-D printer units grew by an impressive 56% during the first quarter when compared to the same period last year.

As Scott mentioned, we believe this growth is a direct result of the new price points introduced to the market in January, which we will discuss in more detail later in the call.

First-quarter product revenue increased by 18% to 17.5 million compared to 14.8 million for the same period last year. The strong growth in 3-D printer units contributed to a record level of 3-D printer system revenue, which grew by 38% during the first quarter. In addition, growth in product revenue was driven by a record level of consumable sales during the quarter, which grew by 25%. High-end system revenue declined slightly during the quarter, but this was in line with our expectations. Our high-end system business includes both our internally developed FDM systems, as well as our line of PolyJet systems that we distribute for Objet geometries.

Our T-Class system sales continued to underperform during the quarter, but this was offset by strong domestic sales of our distributed Eden productline. We believe future T-Class 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 16% to 4.7 million for the first quarter compared to 4 million for the same period last year. A record level of maintenance revenue, which grew by 19% for the quarter, contributed to the growth in service revenue.

The paid parts business grew by 22% during the first quarter, driven by contributions from RedEyeRPM.com, as well as a recent availability of new SLA-like UV polymer material offerings. We would like to emphasize that the record system sales recorded in the first quarter bode well for the ongoing strong growth in the reoccurring revenue components of our business, which include both the maintenance and consumable businesses.

Total sales into Europe increased by over 40% during the first quarter compared to the first quarter last year, which was driven by strong sales of our 3-D printers and consumables. We are optimistic the balance of 2006 will be a productive year in Europe. The introduction of the Vantage X and the repricing of the Vantage I has improved our competitive positioning within the European market.

Gross profit increased by 3.7% to 11.8 million for the first quarter of 2006 compared to 11.4 million for the same period last year. Gross profit as a percentage of sales declined to 53.1% from 60.3% for the first quarter of last year. The gross margin percent benefited from the growth in our consumables, maintenance and paid parts business during the first quarter; however, strong growth in our distributed Eden productline, which maintains more traditional distributor margins, offset this gross margin expansion.

In addition, the lower price points and relatively strong growth of our Dimension 3-D printers, which maintain relatively lower gross margins compared to Company average, provided additional offset to gross margin expansion. Looking forward, we believe the margin outlook for our 3-D printer business improved significantly given the recent introduction of the new Dimension 1200 line. The new products provide new features and improved functionality and are priced accordingly.

In addition, the new systems maintain manufacturing costs that are comparable to our lower-priced 3-D printers, thus providing an opportunity for higher margin sales.

Operating expenses as reported were 9 million. Excluding stock-based compensation, operating expenses increased only 7% to 8.6 million in the first quarter compared to 8 million for the same period in 2005. Operating expenses and operating profit as reported included stock-based compensation expense required under statement of financial accounting standards or SFAS 123R. Stock-based compensation expenses amounted to 413,000 during the first quarter 2006, but were not required and thus not included in the 2005 first-quarter financial results.

Operating profit as reported was 2.8 million or 12.7% of sales. Excluding stock-based compensation expense, operating profit declined by 5% to 3.2 million for the first quarter 2006 compared to 3.4 million for the same period in 2005. Excluding stock-based compensation expense, operating profit as a percentage of sales declined to 14.6% from 18% for the same period last year. Operating profit was favorably impacted by the strong growth in 3-D printers, consumables and maintenance revenue. A sales mix within our high-end system business that favored our distributed Eden productline offset these favorable contributions. We expect operating expenses will continue to track materially ahead of comparable periods as we move throughout fiscal 2006, driven by higher R&D expenses, as well as higher expense associated with our expanding operations.

Total interest and other income for the first quarter decreased to 240,000 versus 409,000 last year. The declined resulted partly from the relatively larger impact of foreign currency translation due to the Euro movement relative to the dollar. Interest income declined by 14,000 during the first quarter to 359,000.

Pretax profit as reported was 3.1 million or 13.8% of sales. Excluding stock-based compensation expenses, pretax profits declined by 8.6% to 3.5 million for the first quarter 2006 compared to 3.8 million for the same period in 2005. Excluding stock-based compensation, pretax profit as a percentage of sales declined to 15.6% from 20.2% for the same period last year.

Income taxes reported amounted to $1 million or a rate of 34.2%. Excluding the impact of stock-based compensation expenses, income tax expense amounted to 1.2 million or 33.2% for the first quarter versus 1.4 million or 37% for the same period last year. The effective tax trade for the first quarter of this year is lower than the same period last year, primarily due to the benefit from non-taxable interest income, as well as greater expected benefit from the manufacturer's reduction in 2006 than anticipated in the first quarter of 2005.

Net income as reported was $2 million or $0.20 per diluted share. Excluding stock-based compensation expenses, net income declined by 3% to 2.3 million for the first quarter of 2006 or $0.23 per diluted share. This compares to 22.4 million or $0.22 per diluted share for the same period in 2005. Our diluted shares outstanding dropped by over 480,000 shares from the first quarter last year, a result in part from significant stock repurchases we completed during the fourth quarter of 2005. The Company repurchased no shares during the first quarter and maintains approximately 11.1 million in authorization under the $20 million stock repurchase authorization.

Our cash and investment position amounted to 40.2 million at the end of the first quarter versus 41.4 million at the end of fiscal 2005. The decrease in cash and investments from the end of fiscal 2005 is a result of changes in our operating assets, most notably a higher level of finished goods for our new product launch in April 2006. Consequently inventories were 13.3 million at the end of the first quarter, a 23% increase over the 10.9 million at the end of fiscal 2005. Accounts Receivable were 20.7 million at the end of the fiscal quarter compared to 20 million at the end of the first quarter of 2005.

Days sales outstanding or DSO were approximately 84 days compared to 78 days at the end of fiscal 2005. The DSO was calculated by eliminating the effects of our leasing program. Over the past three years, we have offered a special program for our resellers where participants could purchase a limited number of 3-D printers with extended 180 day payment terms. The voluntary program is provided to resellers with a valuable selling and marketing tool to sell multiple systems. For those of you have seen our technology work, you can appreciate the value of demonstrating the system to a potential end user.

This program has proven to be highly successful, but can contribute to elevated Accounts Receivable balances, which elevates DSOs during part of the year. Past history shows that virtually all of these systems sold under the extended payment program are eventually sold to end-users and paid for by the reseller. Given the success of this program over the past two years, we offered a similar voluntary program at this year's annual reseller meeting in April, which generated significant new system orders. The level of participation per reseller is consistent with the participation of past programs.

While we could experience an increase in DSOs during fiscal 2006 as a result of this program, we believe our past history has proven the program's value and manageability. Moreover, we believe this year's level of participation reflects our reseller's excitement over our new products, as well as our confidence in maintaining strong sales momentum through fiscal 2006.

Net property and equipment increased to 17.9 million at the end of the first quarter compared to 17.3 million at the end of fiscal 2005. Our largest fixed asset additions were the purchase of an Arcam EBM system and tooling costs associated with new product development. Our balance sheet continues to be very strong with almost $4 per share in cash and investments. 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 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 3-D printing industries and reporting increased earnings and profitability.

Now we would like to turn it over to our Director of Investor Relations, Shane Glenn, to update our financial guidance.

Thank you, Bob. While the first quarter is not indicative of the growth goals we're maintaining for the balance of 2006, the results have met our expectations. During our last conference call, we indicated that the first quarter would likely be our weakest earnings comparisons in fiscal 2006. We based this statement on the timing of our new product initiatives within 3-D printing and their impact, as well as the expectation of improved performance within our high-end system business during the latter part of the year. We're maintaining this outlook and believe we're well positioned for improvements in our financial performance as we proceed through 2006.

We reaffirm revenue guidance of 98 million to 102 million or growth of 18 to 23% over fiscal 2005. We reaffirm 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 SFAS 123R. Earnings guidance on a GAAP basis is $1.05 to $1.15 per share. The reconciliation between non-GAAP and GAAP financial performance and projections is provided in tables at the end of the first-quarter press release. We are providing non-GAAP financial estimates in an effort to give investors continuity in our earnings comparisons.

In addition, our current compensation plan includes no significant incentive-based option grants going forward as we are currently evaluating alternatives to option-based incentive compensation. We have attempted to provide guidance that incorporates our plans for new product introductions, our current growth in product mix expectations, coupled with limitations in predicating our operating environment over the next several quarters.

Now I would like to turn the call back to Scott Crump.

Thank you. Considering the impact of our major new product initiatives recently implemented within 3-D printing, we're very pleased with our first-quarter performance. The first phase of this exciting new growth initiative was launched in January as we lowered the price points of our two Legacy Dimension 3-D printers. The goal of the price reductions was to trigger greater demand among the 5 million three-dimensional CAD users that currently exists globally. We're pleased to report that our strategy contributed to a significant increase in demand for our 3-D printers, which is evidenced in the record level of unit sales and 3-D printer revenue we generated during the first quarter.

The second and equally important phase of our strategy was the rebranding of our Legacy 3-D printers and the simultaneous introduction of two new 3-D printers in April. Our Legacy Dimension BST and SST 3-D printers were repositioned under the Dimension 768 brand, which included a new look and software upgrade improvements to the Catalyst EX. The new software makes significant improvements upon the user friendliness of the system. Beyond the software upgrades, the Dimension 768 is offered with the same two support options, the BST and the also alternative automated support removal SST and maintains the same functional characteristics and high reliability of our Legacy 3-D printers.

In addition to the 768 line, we introduced an entire new line of 3-D printers under the Dimension 1200 brand. The new Dimension 1200 line, which includes the BST or the SST option, incorporates functional and productivity improvements that are a direct result of customer feedback that we have garnered from our extensive user base and surveys. The new systems include a 1200 cubic inch build capacity that is 57% larger than a Dimension 768. We believe this larger build envelope is adequate for more than half of all the parts currently made within the industry. The new systems include the new Catalyst EX software and can build parts 20% faster than a Dimension 768 on the average.

In addition, we have made significant improvements to the FDM modeling heads within the 1200 line that improve upon the machine serviceability.

The new product lineup offers customers a broader range of functionality and expanded price points. Going forward, we believe this dual strategy of price and performance addresses the price elasticity of demand, while simultaneously providing margin enhancement opportunities through the sale of higher price systems. It's important to reinforce that all of our 3-D printers utilize our patented Fused Deposition Modeling process otherwise known as FDM. FDM is the only rapid prototyping technology that constructs parts out of real production grade thermal plastic and has been evaluated by industry analysts as the most dimensionally accurate rapid prototyping technology on the market.

Turning to our high-end system business, system revenue declined slightly during the first quarter but met our expectations. We maintain and we are optimistic that we can build positive momentum in that business over the coming quarters, driven by the recent introduction of new products and distribution agreements. Our new FDM Vantage X and the new EBM S400 metal system will require some time to generate incremental business, given the lengthy sales cycle that is common within our high-end system business.

Notably we recently placed an order for two EBM S400 systems from Arcam in anticipation of receiving orders for those machines over the next few months.

In addition, we continue to generate positive momentum within our distributed Eden PolyJet line falling the introduction of two new products last year, the Eden 500 and the Eden 350.

Now, as Bob mentioned, the paid parts business grew during the first quarter as we continue to invest in infrastructure automation and sales support resource for the business. In addition, we are capturing incremental orders of parts constructed within the Eden PolyJet technology, an offering that we began in the fourth quarter.

We are receiving an increasing number of inquiries for rapid manufacturing projects within our paid parts business. With over 60 machines dedicated to the RedEyeRPM.com, we can provide rapid turnaround of large volume orders which is crucial as a requirement for rapid manufacturing customers. We believe that our systems can build one functional part faster than any other competitive system on the market. So if you line up 60 of these machines, you can truly offer very fast turnaround. Very fast delivery.

In addition, we are making progress with our strategic rapid manufacturing R&D initiative and working with end-users on ways our current systems could address their needs.

Well, in closing, we remain confident in our growth goals for 2006. Following our first-quarter results, we believe the elastic demand model is working within the 3-D printing as our new initiatives represent an evolutionary step within the longer-term strategy targeting a market potential of 500,000 3-D printers worldwide.

In addition, we are excited about the incremental growth opportunities provided by our paid parts and rapid manufacturing initiatives. Regardless of the application, our consumables and maintenance businesses are poised to expand as a result of our expanding installed base of systems.

Well, at this point, we would like to address any questions that you might have.

(OPERATOR INSTRUCTIONS). Troy Jensen, Piper Jaffray.

Congratulations on a nice quarter, gentlemen. So I will stick with one question. I guess I would like to hear a little bit about the margin profile difference between the 1200 and the 768? Do you think -- I guess I'm going to extend it to two -- but do you think Q1 is going to be the low quarter for gross margins, or would a couple of shipments of Arcam potentially include that a little bit lower?

If you look at a system pricing between the 1200s and the 768s, you will see that they have between a 5000 and $6000 price differential. But the 1200 is higher because it has a faster build speed and a larger build envelope by 56%.

As I mentioned in my comments in the call, from a manufacturing cost standpoint, they are very similar to the 768s, which consequently means we are going to have a gross margin expansion to the extent that we ship 1200s over 768s.

We have said before that we have not been willing to give guidance as it relates to gross margin. This quarter is a great example of why we have been unwilling to do that in the past. So I think we have to stick with our guidance from both a top and bottom line perspective. You are going to see variations in our gross margin, but again we are comfortable with our overall guidance that we have given.

Understood. I will jump back in the queue, and keep up the good work.

Eric Martinuzzi, Craig-Hallum.

Just a couple of housekeeping questions on an overall strong quarter there. The tax rate and the share count, obviously you did not buy back anymore shares in Q1, but the actual price of the shares moved significantly. For modeling purposes, what should we be looking at for a share count?

Then also on the tax rate, is that something -- the tax rate that you just reported -- is that something that is good for the foreseeable future?

This is Bob. On the share count, we would expect a share count to elevate because of the weighted average shares outstanding will increase given a higher stock price profile. Our stockprice during the first quarter we thought was relatively low compared to what we will see going into -- or what we are seeing today at least. I guess we will find out over time what it will be for the quarter. So I would expect to see an increase in the share count.

From a tax perspective, we will see I think rates consistent with what you saw in the first quarter for a GAAP basis. We've reported 34.2%. On a non-GAAP basis, it was about 33.2.

The one catch in there is the R&D credit expired at the end of 2005, and that is something that has really been around for decades and keeps getting renewed. But under FAS 109 for accounting for income taxes, if it is not an effect in the tax law, you're not allowed to take it into consideration. If that comes back later in the year, you can see our effective rate for the year drop by another .5% to 1%. I guess lacking changes in legislation, what we have given this quarter is probably within the range of what I would do for modeling.

But the share count, that 10.3, there is no insight as to whether it is 10.5 or 10.7?

Yes, I have not gone through the calculation looking at movements in the stock price.

One follow-on. That obviously is going to be dependable on what happens with the stock. We would expect barring any additional repurchases for that number to turn upward.

Jeff Evanson, Dougherty & Co.

I would assume that you're probably going to reconfigure the demo financing program a little bit. Either if you did that this quarter possibly or to support the new 1200 series 3-D printing line, could you talk about any changes you might have made or be making there and what you think its impact on DSOs could be? I guess you kind of addressed the DSOs question already.

Yes. We have been pretty consistent in that we believe that the demo program is really an important part of our strategy and has helped us expand the number of units that we have had out there. We have offered additional demo units at our program in April, so we expect to see DSO. Consequently Accounts Receivable are tied in with that to trend up during the year. But again, for anybody who has seen our technology, the difference between when you see it and the understanding of it comes so quickly for end-users that we think it's a very effective sales tool.

So how about any changes in the program to support the new products?

No, what we did in April was consistent with what we have done in the past.

You did not expand the program to support the new products?

Jeff, we had in April at the reseller meeting, the program that was offered to them during that week was a program that allowed them to buy two to three systems. I think what we have said in the past is two systems, so there was some expansion, but not everybody participated at a higher level. So that is why we mentioned it. You know, the participation is consistent with what we have seen in the past.

And then also, there is, of course, there's new products, additional new products, and going forward new volume.

Sure. I am little puzzled as to why you're not upping the guidance this morning given the strong performance in the quarter. I think what is reasonable to assume some strong performance probably next quarter. Is there something we should be thinking about for the back half, or are we just being conservative at this point?

I think that the guidance is kind of in line with -- we feel the guidance is where it should be relative to where we were when we reported last quarter. As you know, we don't give quarterly guidance, and while obviously the number that you have seen this morning is relative on a non-GAAP basis is higher to the street expectations, we feel we are really positioned well where we are at today and still feel comfortable with the numbers we presented last quarter.

Okay. Then this is the last part of my three-part single question. Would you be willing to tell us how fast your 3-D printers sales grew in the quarter? I think that would be very helpful in helping us appreciate the elasticity of demand that you are seeing.

I believe I mentioned, from a unit volume, it was 56%, and from a revenue perspective, it was 38% in the first quarter.

Andy Schopick, Nutmeg Securities.

Thank you. I just want to make sure that I heard a few numbers correctly. First, that 3-D printers units were up 56% year-over-year and total printer units were up 38%.

In revenue?

No, total units were up 45%. 3-D printers units were up 56%.

What was the 38%?

38% was the growth in 3-D printer system revenue.

Okay, thank you. Also, on the machines dedicated to RedEye, did I hear 16 or 60?

6 0.

6 0. Can I just ask how these are accounted for in terms of whether they are accounted for as inventory on the balance sheet or whether these are expensed in some manner or capitalized in some manner?

Andy, those are capitalized at our costs and then depreciated out over time. The number of systems that we had during the quarter is consistent with what we had at the end of fiscal 2005.

What is the timeframe under which you do capitalize these?

I believe it is a five-year life.

Five-year?

Yes.

Jim Bradshaw, Ferris Capital Management.

I was wondering if you could speak briefly to any -- when you might run up on any capacity issues in the paid parts business?

Well, it is an excellent question. Over the last year and the beginning of this year, we spent a considerable amount of time evaluating utilization and the effects of operating, let's say, at 100% utilization how many orders do you lose and how many accounts do you lose because of that. I think we can say that we're monitoring it monthly, and I think for at least going out at least the next quarter, we should not have a capacity restraint at least from a build or fulfillment. Like any growth or emerging business, there is always bottlenecks, and the bottlenecks right now are more in processing of leads or telesales in that area. But I think as we either see the growth or anticipate the growth, then we add additional incremental machines onto the line and, of course, capitalize those.

I think it is important to remember that in Q4 of 2005 we invested in a new building. So, from a square footage expansion point of view, we have more than enough space to take care of the needs of the growth of our businesses for the next couple of years.

Okay. Great. Great news. Nice quarter and thanks for your help.

Clint Morrison, Feltl & Co.

Your R&D expense, the only number that seemed a little out of whack and you dropped off first quarter last year, I'm just trying -- can you give a little color as to where that is going to be moving forward and is this just reflecting the fact that you are kind of done with your new 3-D intro products?

No, I think you are going to watch R&D continue to expand during the course of the year. I think one of the things that is important to note, we announced in the end of Q4 last year, end of Q3 somewhere in there, about a major RM initiative with a Fortune 100 company for $3.6 million over the course of four years. What we said in that to the extent that it is related to research and development activities that those monies would be used to offset R&D expansion or expenses.

During the quarters we offset about $333,000 of R&D expenses for efforts related to that project, which is trailing our actual billings to the customer, which I think is important. So that is going to have an impact on R&D as it rolls out during the year, but --

And Clint, one other follow-on, just to be clear that those R&D expenses would not exist had it not been for this agreement. So we don't want to give the impression that we're offsetting R&D expenses that would have occurred had we not entered into this agreement.

Right. Okay. So what I'm hearing is at least relative to the rate last year, 7.7% of revenues, we anticipate being below that this year?

Yes, I would say as a percentage of revenue it will decline. It will be expanding R&D, but as a percent of revenue, it will decline.

Okay. And just quickly, I want to clarify what I had heard before because I kind of missed it, are you sort of thinking that the tax rate we saw this quarter, did you say it is going to continue moving forward more or less?

Given the factors we know today, I would say it is as good an estimate as we have out there.

(OPERATOR INSTRUCTIONS). Troy Jensen, Piper Jaffray.

A question for Scott. Scott, the industry has been using these 5 million 3-D CAD/CAM seats it seems like for a couple of years now. But if you listen to the CAD/CAM software guys, they have seen a pretty substantial growth rate in 3-D licenses. So I'm wondering, is this a dated number you're using? Obviously the associated tax rate then for 3-D printers could potentially be higher?

Yes, good question. As you know, there was a recent conference last week down in Phoenix where there were updated numbers, so the number 5 million is dated. However, we have been tying it to the RP experts of the industry, the [Withers] associates, and what they are doing is they are looking at the increased number of legal seats worldwide but specific to mechanical three-dimensional CAD that can be applied specific to any of the RP systems. Of course, we apply it to our RP systems. Then you can further break that to 1.3 million commercial, and we sell it to that market, and then the balance of that 5 million in education, of course, we sell to that market. But we're anticipating a significant increase in that total 5 million seats of CAD when Withers presents that in about three, maybe three and half weeks from now.

Okay, perfect. And if I can sneak in a second one, can we just get an update on rapid manufacturing? Have you seen any uptake, maybe an update on milestones with this unannounced Fortune 100 partner?

Well, I think there's probably two parts to the question. I'm going to take the first part, Bob will take the second. In overall rapid manufacturing, Stratasys, depending on the heart of the company is doing somewhere between 10% of our business like in the systems side in rapid manufacturing applications where the system or the users using our system to build end use parts, to as high as 20% in the paid parts area doing rapid manufacturing parts or projects. Going forward we have internal initiatives to focus in a more strategic way from a product standpoint or products, I guess is the way to say it, standpoint. Those would be released when they are ready for the commercial market. In regard to the major initiative with our partner, maybe, Bob, you could address that one on milestones.

Sure. Just to remind everybody, it was a $3.6 million contract with a Fortune 100 company. But it is a four-year contract, and we're only six months into it. We're making progress on the project, but it is nothing that you would expect results immediately in the next couple of quarters. So it is out over an extended period of time, and it is really too early to comment beyond that.

[Ryan Tibadeaux], Maple Leaf Partners.

I wonder if we can get a little bit into just the fluctuations in the inventory over the last couple of quarters and how that kind of ties in with the previous quarters where it is pretty much at a level pace and how that -- if you can just kind of go into the changes there?

Sure. You saw a big increase in our inventory over the end of the year. That is really directly tied to the introduction of our Dimension 1200 in the first couple of weeks of April 2006. We had approximately $1.7 million of Dimension 1200s on-hand to support the product launch, so 1.7 is directly related at 331 to the Dimension 1200.

In addition, we had an increase between 600,000 and $700,000 of our consumable inventory again to support the launch in our expanded product base. So both of those were things that we did intentionally because of this new exciting opportunity with the Dimension 1200. (multiple speakers). You know, we would expect that to trend down given that we built up for the launch.

Okay. And then on the consumables, you said that they -- was it correct that they grew 25%? Was that year or over year in the quarter, or was that from --?

That was quarter-over-quarter.

That was quarter-over-quarter?

Yes.

Okay. The last question I had was on the units. Can you break out the difference I guess outside of the Dimension units how much was Eden and how much was T-Class or however you want to segment that?

We have continued to be consistent in not segmenting our business other than to give the gross number of units sold on a company of the 403 units total, and we are not going to segment our business.

Okay. Thank you.

Jeff Evanson, Dougherty & Co.

I apologize. I'm all set. Thanks.

David Cohen, Midwood.

I was listening to the call on the drive in, so I missed some of these numbers on growth. But it sounded like you gave several categories of revenue where you had pretty heady numbers in terms of growth. But your overall growth in revenue was what, around 18% did you say?

Correct.

So, which were the categories that drag you down? I mean your services, obviously your Dimension dollar revenue on 38%, I think you paid parts was up like 20% or something, so what was dragging you down?

It is our high-end system revenue. Our high-end system revenue actually quarter-over-quarter had a slight decline. But again, we want to say it was in line with our expectations for the quarter.

Does that include Objet?

Yes. Our high-end system is both our high-performance FDM systems, as well as the Objet systems. But our internal systems we often refer to as the T-Class, and the T-Class continued to underperform during the first quarter. We had strong sales of our Eden products.

Okay. Did you give that number? By what amount, the high-end systems revenue was down?

No. Again, we just said that it was -- the high-end system revenue declined slightly but was in line with our expectations.

Okay. Was there any other significant category that was down?

No.

Okay. Thank you.

Gentlemen, I'm showing no further questions in queue at this time.

Okay. Well, thank you for your interest in Stratasys, and we will be looking forward to speaking with you again next quarter. Good-bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.