Stratasys Ltd (SSYS) 2007 Q1 法說會逐字稿

Welcome to Stratasys Incorporated first quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 now begin.

Good morning, and welcome to the Stratasys conference call to discuss first quarter financial results. Representing Stratasys executive management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump; the Chief Financial Officer Bob Gallagher.

A quick reminder that today's conference call is being transmitted over the Web and can be accessed through our 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 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 ABS Plus 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 Arcam product line, the success of our recent R&D initiative to expand the direct digital manufacturing capabilities of our core FDM technology, and 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, 2006.

I would also like to note that the information discussed within this conference call includes financial results and forward-looking financial guidance that are in accordance with the U.S. generally accepted accounting principles, or GAAP. In addition, non-GAAP financial guidance is included that excludes certain expenses. 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 in the identification and exclusion of expenses associated with stock-based compensation required under SFAS 123R.

We would like to confirm the date of our second quarter earnings release and conference call. Stratasys' second quarter results will be released on or before the morning of August 1, 2007, followed by a conference call on the date of 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 on our CEO, Scott Crump.

Good morning. It's a beautiful spring day here in Minneapolis. Stratasys is very pleased to report a record first quarter. Our first quarter results reflect favorable contributions from all of our core businesses. We achieved strong revenue growth in the quarter, which increased by 23% to over $27 million. Our revenue growth was driven by the successful launch of our fifth 3D printer, the Dimension Elite, and this growth occurred despite the elimination of the distributed Eden products.

In addition, strong demand from all of our 3D printers contributed to the highest number of quarterly unit sales in our company's history. More importantly, our operating profit and earnings per share grew by over 50% in the quarter representing the fastest growth rate that we have attained in over two years.

I'll return later to discuss some of our strategic initiatives, but first I'd like to turn the call over to our CFO, Bob Gallagher, who will further highlight our first quarter results. Here's Bob.

Thank you, Scott. Total revenue increased by 23% to $27.3 million for the first quarter of 2007 compared to $22.2 million for the same period last year. The company shipped 548 systems during the first quarter, an increase of 36% over last year.

The sale of 3D printers continues to drive unit growth with 3D printer units growing by 39% during the first quarter when compared to the same period last year. As Scott mentioned, we observed strong demand for our new 3D printer, the Dimension Elite, but we've continued to observe strong demand for our legacy 3D printers, particularly the higher-price SST systems.

First quarter product revenue increased by 24% to $21.7 million when compared to $17.5 million for the same period last year. The major contributor to product revenue growth in the first quarter was a 59% increase in 3D printer system revenue over the same period last year, a result of our successful new product introduction combined with strong demand for our legacy printers.

High-end system revenue was flat over last year, which included the impact of winding down the distribution agreement for Eden products. However, sales of our proprietary high-end FDM systems increased by 28% during the quarter.

Part of this increase was due to shipping some of our 2006 year-end backlog. In some of our weaker quarters in the past, I've talked about the timing of booking orders versus shipping and recognizing revenue as a reason for some softness in high-end system sales. This is a quarter where I'm pointing out the opposite effect. The quarter benefited from a higher shipment and revenue rate than order booking rate.

However, our proprietary high-end system order rate did increase 12% over the first quarter 2006 as we are refocusing our domestic resources on selling our proprietary products after discontinuing the sale of Eden products at the end of 2006. We did recognize some residual Eden system revenue during the quarter, a result of bookings placed at the end of the fourth quarter of 2006 but not shipped until early in the first quarter. Eden's system revenue amounted to $670,000 in the first quarter compared with $1.7 million for the same period last year.

Consumable revenue was essentially flat over last year, but sales of our proprietary consumables increased by 21%. The growth was a result of our ongoing expansion of our installed base of proprietary systems especially 3D printers.

First quarter service revenue increased by 21% to $5.7 million when compared to $4.7 million for the same period last year. Growth in service revenue was driven by paid parts. Paid parts had record sales and grew by 70% over the same period last year. Our paid parts business continues to benefit from our online part quoting and ordering system, RedEyeRPM.com.

As we indicated previously, fiscal 2007 will include some revenue from maintenance contracts associated with the Eden systems that were sold by Stratasys. The revenue associated with these contracts was approximately $400,000 in the first quarter versus $200,000 for the same period last year.

We will recognize some additional Eden maintenance revenue through August 2007 as we continue to support our customers that received Eden systems installed by Stratasys.

Gross profit increased by 36% to $14.7 million for the first quarter of 2007 when compared to $10.8 million for the same period last year. Gross profit, as a percentage of sales, increased to 53.8% from 48.7% for the first quarter of last year. The gross margin percentage benefited from the better average prices for 3D prints as well as strong growth in our paid parts and proprietary consumable products.

More importantly, the gross profit margin benefited from improved mix within our high-end system business as a decline in Eden system sales was offset by an increase in our sale of our proprietary high-end systems.

As we have indicated previously, we maintained relatively low gross margins on the distributed Eden product line when compared to our proprietary products. The gross margin on all Eden-related revenue was negligible during the first quarter.

Operating profit increased by an impressive 57% to $4.4 million for the first quarter of 2007 compared to $2.8 million for the same period last year.

Excluding stock-based compensation expenses, operating profit increased by an impressive 46% to $4.7 million for the first quarter of 2007 compared to $3.2 million for the same period last year.

Stock-based compensation expense required under the statement of Financial Accounting Standards are SFAS 123R amounted to approximately $303,000 in the first quarter compared to $413,000 in the same period last year.

Operating expenses increased by 28% during the quarter with the increase being driven by the timing and costs associated with our annual Dimension reseller meeting. The annual reseller meeting and its representative costs were associated with the first quarter this year compared to last when the event occurred and costs were recognized during the second quarter. We expect the growth of operating expenses to moderate as we move through the balance of 2007.

Total interest and other income for the first quarter increased to $370,000 versus $240,000 last year. Pretax profit increased by 57% to $4.8 million for the first quarter of 2007 compared to $3.1 million for the same period last year. Excluding stock-based compensation expenses, pretax profit increased by an impressive 47% to $5.1 million for the first quarter of 2007 compared to $3.5 million for the same period last year.

Income taxes reported amounted to $1.6 million for a tax rate of 34.2% compared to $1 million, or a 34.2% for the same period last year. Excluding the impact of stock-based compensation expenses, income tax expense amounted to $1.7 million, or 34% for the first quarter versus $1.2 million, or 33.1% for the same period last year.

Net income increased by an impressive 57% to $3.2 million for the first quarter of 2007 compared to $2 million for the same period last year. Excluding stock-based compensation expenses, net income increased by 45% to $3.4 million for the first quarter of 2007 compared to $2.3 million for the same period last year.

Our diluted shares outstanding increased by approximately 302,000 shares from the first quarter last year, a result of our higher stock price as well as the exercise in employee stock options. This was partially offset by the stock repurchases completed last year.

The company maintains approximately $8 million in authorization under the current $20 million stock repurchase authorization.

I would like to highlight the cash flow from operations generated in the first quarter, which exceeded $8 million for the three-month period. The strong cash flow was due to strong earnings as well as favorable changes in our working capital.

Our cash and investment position amounted to approximately $54 million at the end of the first quarter, an increase in nearly $10 million from the end of fiscal 2006. The first quarter increase in cash and investments from the end of fiscal 2006 is a result of the $8 million positive cash flow from operations combined with the positive impact of stock option exercises.

Inventory balances declined to approximately $9.8 million from approximately $9.9 million at December 31, 2006. The decline is largely due to a $750,000 reduction of Eden product inventory related to our transition out of the Eden product distribution offset by an increase of $650,000 in inventory for our proprietary products.

Net property and equipment increased to $22.5 million at the end of the first quarter compared to $20.4 million at the end of fiscal 2006. The growing components of our business have required much of the capital expenditure.

In addition, we are renovating the building we purchased in late 2005 across from our system manufacturing building. This building will become our corporate headquarters in the current quarter.

Accounts receivable at the end of the first quarter was $24.1 million compared to $25 million at the end of fiscal 2006. The decrease was principally due to lower sales in the first quarter compared to the fourth quarter of 2006. Day sales outstanding, or DSO, were approximately 80 days compared to 77 days at the end of fiscal 2006 and down from 85 days at the end of the same period last year.

As we have observed in prior quarters, our DSOs will likely continue to be impacted by our successful program for our resellers that allow participants to purchase a limited number of 3D printers with extended 180-day payment terms. This follows a similar pattern we have now observed over the past four years.

We offer the same program at our annual reseller meeting in January, as the voluntary program has provided the resellers with a valuable selling and marketing tool to sell multiple systems. The current level of participation per reseller is consistent with historical levels, and we have made no significant changes to the program. We believe our past history has proven the program's value and manageability.

For those of you doing financial models, I would like to recap some of the Eden-related information. In the first quarter of 2007 we recognized approximately $1.1 million of Eden-related sales including systems, consumables, and maintenance compared to $3 million in Q1 of last year.

In Q1 of 2007, we recognized the negligible gross margin on the Eden-related revenue given losses we incurred on the maintenance portion of the business. In Q1 of 2006, we recognized a gross margin around 20% on the approximately $3 million of sales.

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

Thank you, Bob. Stratasys reconfirmed the following information regarding its financial guidance for the fiscal year ending December 31, 2007. Revenue guidance of $105 million to $110 million, non-GAAP earnings guidance of $1.37 to $1.49 per share, which excludes the impact of stock-based compensation required under SFAS 123R; GAAP earnings guidance of $1.28 to $1.40 per share; SFAS 123R expenses are estimated and then taxed to be approximately $0.09 per share in fiscal 2007.

Reconciliation between non-GAAP and GAAP financial projection is provided at a table at the end of our press release. We are providing non-GAAP financial estimates for those analysts and shareholders that want to use that information in evaluating our performance.

Although we do not provide quarterly financial guidance, we would like to make some observations regarding the first half of this year.

Looking at operating expenses, we would note that our Dimension reseller conference was held in January this year, or the first quarter compared to 2006 when it was held in April, or the second quarter. This reseller conference represents a substantial cost for the company, which is shifted into the first quarter of this year compared to last year when those expenses were in the second quarter.

In addition, following the same pattern we have observed over the past four years, we received orders for a significant number of 3D printers at our reseller conference held this year in January, the first quarter. Given this conference was held in the second quarter of last year, we would encourage you to consider these factors in your year-over-year analysis.

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

Thank you, Shane. We are very pleased with our first quarter performance and have additional exciting initiatives planned for this year. As I mentioned, we began the year by successfully launching our fifth 3D printer, the Dimension Elite, and a new, stronger ABS material called ABS Plus. The Elite and ABS Plus material provides our customers with 40% stronger more functional models that exhibits finer feature detail and improved surface finish.

After introducing the new Elite and the ABS Plus material at our global reseller event in January, we were pleased with the enthusiasm demonstrated by our more than 200 channel partner locations. This enthusiasm for our new Elite combined with strong first quarter demand for our legacy 3D printers, particularly the Dimension 1200SST contributed to the record unit volume we generated in the first quarter.

We recently completed our third annual extreme redesign -- the ultimate 3D printing challenge, a global design and 3D printing contest for high schools and college students. More recently, our involvement with Project Lead the Way has positioned the Dimension 3D printer as an advanced design tool for our students interested in engineering careers.

Project Lead the Way is a not-for-profit organization that promotes pre-engineering courses and technologies for middle and high school students. The Project Lead the Way and extreme redesign initiatives are valuable marketing tools, especially as our education resellers begin to experience their seasonally strongest order activity in the coming months.

Sales of our high-margin proprietary consumables maintain their strong growth trajectory, a result of the ongoing expansion of our proprietary system sales particularly 3D printers.

Given that we generated record system sales in the first quarter combined with the expectation of strong unit growth for the balance of 2007, we expect this trend will continue.

As Bob mentioned, our paid parts business generated a record level of revenue for the first quarter. We believe our success in paid parts is driven by a unique value proposition as our customer-friendly Internet part quoting and ordering service, RedEyeRPM.com is combined with unparalleled capacity to meet time-sensitive requirements of our customers.

This value proposition is strengthened further by our proprietary FDM technology, which we believe produces the most dimensionally accurate, stable, and durable prototypes in the industry. The structure of our paid parts business provides us a competitive advantage, particularly with customers that are time-sensitive or requiring a large number of highly durable parts.

We've recently expanded machine capacity for this business and also maintain a facility that could more than double our current capacity.

Our margins in the first quarter benefited from our winding down of Eden product distribution and the streamlining of our resources for the purpose of growing our proprietary high-end FDM system business.

We are pleased that sales of our proprietary high-end systems grew by over 28% during that first quarter.

We are excited about our new high-end product initiatives that remain on track for multiple new product introductions this year. Specifically, we believe we will improve upon our value proposition for rapid prototyping applications while providing customers with better tools for direct digital manufacturing, or in other words, the manufacture of in-use parts.

We remain on track in the development of our revolutionary direct digital manufacturing systems to support our Fortune 500 customer for their short-run production needs with one prototype system already installed.

Later this year, we plan to launch a commercial system based on that as well, and these initiatives should augment the positive trends in our proprietary high-end system business as we began to observe in this first quarter.

It bears repeating that we believe the opportunity presented by direct digital manufacturing could provide a growth catalyst for Stratasys that exceeds the growth opportunities in 3D printing and RP combined.

We have an active pipeline of opportunities for the Arcam EBM system and remain optimistic about our opportunity for Arcam systems in the North American market. We believe the technology could be an ideal platform for direct digital manufacture of metal parts.

I'll return with some closing comments, but first we'd like to address any questions that you might have. So, Operator, let's open up the call for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Troy Jensen, Piper Jaffray & Company.

Thanks. Congrats on a nice quarter, gentlemen.

Thanks, Troy.

Hey, a quick question on -- if you look at the units here, I know you guys won't quantify, but can you help us out with what percent of these units were stocked 3D printers versus old that were actually sold to end customers?

Troy, we don't keep track 100% of what's out there in the active pipeline. Anytime we have the reseller meetings, we see a bubble within the sales, but we don't give specific numbers related to that.

There's not a significant amount of stocking, it's negligible. But during that first quarter, there were a significant amount of demo systems, which is normal during our launch, but certainly not all of them, but we don't know the exact percentage.

Understood -- I'll go to a high-end question here. Scott, what's typically the sales cycle for the high-end products? Assuming that you guys need to get in the fourth quarter spending craze, obviously the high-end products need to come out pretty soon, I would imagine.

The sales cycles are typically nine months. Some of that activity is under nondisclosure, already started, actually started last year in order to get into budgets. And some of the equipment with high ASPs can have sales cycles a year and sometimes more, but if there's one average, it's right now. In this economy it's about nine months.

But a lot of the activity -- we've been at this a long time for the company launching new products properly, actually has occurred at high levels and medium levels within our customer base as early as last year.

Eric Martinuzzi, Craig-Hallum Capital.

Your gross margins -- nice improvement there year-over-year, up over 500 basis points. I'm curious -- where can this long-term gross margin percent wind up, do you think?

Eric, because of the product mix, we've stayed away from trying to project our gross margin. Obviously, it was a strong gross margin quarter for us with the 3D printers, it favored the high-end printers this quarter.

I think, again, we need to stick to our guidance from the top and bottom-line standpoint, but, obviously, we said last year that the impact of the Eden products was a drag on gross margin percentage, and it was proven in the first quarter here.

Okay, and then just a housekeeping follow-up -- given the share price improvement here, your diluted shares outstanding should probably increase here. You just posted Q1 with 10.6 million shares outstanding, I think it was. Where do you expect that to go for Q2?

From an option standpoint, we haven't issued any options in the past 15 months, so it's a pretty easy calculation, and it's really predicated on what our stock price is but, again, it's going to increase maybe by -- could increase by another 200,000 shares, depending on what happens with the stock price.

Andy Schopick, Nutmeg Securities.

Thank you, good morning, it's hard to argue with some of the decisions you've made in the last year. I can see the impact here in the numbers. I do have a question here regarding the reseller expenses that were incurred in this quarter. If you could be a little more specific and what that impact was in the second quarter of last year -- approximately.

Yes, we don't break that out. We have -- the meeting is a significant meeting for us -- it's attended by over 200 people.

From all around the world.

From all around the world, and it's a big even because it's a -- for both the last two years, it's been a major launch event. Last year it was launching both the 1200SST and the BST and this year it was launching the Dimension Elite. So it's significant to our quarter, but we don't want to quantify the cost of the meeting itself.

But those did occur, just to repeat what Shane had said, in different quarters?

I understand.

This year, first quarter; last year, second quarter.

I'm just trying to get a handle on whether this is more or less than a quarter of a million dollars.

It would be more than a quarter million dollars.

Okay -- Marubeni. I just want to get a feel for how that is tracking in terms of the order and the scheduled shipments. This is a $6 million or so order that you have received. I assume it will all ship this year. I wonder if you can give us any sense of whether that will be front-end loaded or linear through the year, and I guess it was 3 million that was shipped to Marubeni in '06. Can you confirm?

In terms of the 2007 shipments to Merubeni, obviously, it will shift throughout the full year. It will be based on their demand schedule. We would expect that to be linear throughout the year.

There were shipments here in the first quarter?

Yes, there was --

Oh, definitely.

Yes, there was the end customer demand and need for systems.

And it was 3 million in '06?

I think that's what we put in the press release.

Graeme Rein, Bares Capital Management.

Hi, guys, congratulations.

Thanks.

Could you just briefly talk about the relationship between the consumable revenue and the units shipped as far as how long does the consumable revenue usually lag the unit growth? How long does that usually take to show up in consumable growth?

For 3D printers, which is probably the easiest repetitive one that we could talk about, there are some one or two months of consumables that are sold with the system by the reseller, and then it's pretty uniform following that. So in other words, the revenue stream starts with the sales of the system. And, in some cases, mainly due to international customs, there is some exception to that, like, in Korea, where they'll try to preload it by a quarter, but generally it's a flow-through from our factory to the customer on a pretty continuous basis.

One thing that we do see with some of our larger distributors, both in Asia as well as in Europe, is there's economics of scale of buying consumables in blocks. So we do see some variation, quarter-to-quarter, within our consumables because of the ordering patterns of our resellers that may not be directly related to the machines in the field.

Great, and then a quick follow-up -- you mentioned that you're seeing favorable decisions. As far as within the 3D printer, then those five systems you said that consumers continue to favor the higher-priced Dimension Elite. Can you provide any color on that? I think in the first quarter you said two-thirds of them were choosing the higher-priced system. Is the trend kind of similar to that?

I think there's a two-part -- this is really a two-part answer. We still, from all of our studying of the trends, we still believe that we are operating the 3D printer with elastic price volume business model, and that the lower the price, assuming it's a full product, that the volumes go up, the revenues go up, the profitability goes up, and obviously the consumables, as we're seeing, goes up.

But then when you subdivide, which I think is kind of where you're going to the question, that range of the pricing of the five models, it doesn't work exactly to a price elastic business model because of things like incentives, I mean sales incentives, as well as the launches.

Typically, in a launch, there will be a focus on that product for a two- to three-quarter period, and then it kind of evens out from there. Do you want to add to that, Bob?

If we lump the Elite in with the SST units, we probably saw 75% of our volume in the first quarter, in terms of units, favoring the SSTs and Elite units, which is higher than it was last year. Last year was probably a 2:1 ratio SSTs to BSTs. But in the fourth quarter of last year, we were up at about a 70% rate on the SSTs.

So we're seeing a trend that favors a little bit right now the higher end. Customers really like the labor savings for the soluble supports. They like the whole product offering there.

Yes, it's all fully automated.

Jeff Rosenberg, William Blair & Company.

First, on the consumables, Bob, you said it was up 21%, I think. Was that excluding any of the effect of Objet in the year-ago, or did you -- is that not a pro forma number in terms of consumables growth?

No, that's a pro forma number. If we included the effects of Eden in there, it was pretty much flat quarter-over-quarter.

Okay, so I guess that number is a little bit slower than you've seen in recent quarters. Any color there?

Yes, and I was alluding to that a little bit when we see some of our larger distributors where the order, significant quantities of consumables and blocks for the economics of it -- the shipments and customs and duties, et cetera, internationally, and we probably saw lots of that in the first quarter.

Okay, and the follow-up I had was a little bit more detail on the -- maybe some quantification of the ASP. Given the 3D printers, that seems like it's really swinging to where you've got ASP increasing. Can you quantify where the ASP is today on 3D printers or maybe give us a comparison to how it's changed over the past year or six months or something that kind of helps clarify that a little bit?

I think if you look at it -- you know, I gave you some color on that. If you look -- our retail prices range from 18.9 to 31.9. When we came out with the Elite, we added another product that was higher-priced than anything that we had before, and what we've seen in the quarter was a favorable trend where 75% of the units are the higher-priced units compared to a 2:1 ratio for all of last year.

So, clearly, we're seeing an increase in ASP. I think you can do the math out there, if you look at the actual retail prices, which we advertise, and see that it's going to be a very favorable trend in the first quarter.

Scott Berry, SMH Capital Advisers.

Good morning, guys, great quarter. I've got a question on the Arcam machines. Did you book any revenue from those this quarter?

No.

None, okay. And just a follow-up -- you mentioned that -- I think Scott mentioned that you've been increasing the number of machines in paid parts, but I think the last total I heard was 60. Can you tell us where that stands now and also whether you have any Arcam machines employed in paid parts as well?

The latter part of your question, we don't have any Arcam systems, Scott, employed in paid parts, and we're over 70 systems now in the paid parts facility we have here in Eden Prairie.

Jeff Evanson, Dougherty & Company.

Could you give us a sense of what your mix was of Elites versus non-Elites in the 3D printer sales this quarter?

Elites within the quarter would have made up less than 20% of the overall 3D printer sales.

Okay, that's a little lower than I would have expected.

Well, of course, in order to sell, you've got to launch, right? So we launched, not mid but close to mid-quarter, and that's actually a little bit higher than I expected. The launch occurs, the demos get shipped, and then the local reseller, "local" meaning worldwide local, then start selling it.

So you start, in all these cases, seeing the ramp-up of the newly launched product in a big way in the next quarter, meaning the second and third quarter.

Let me add one thing to that this year. If you recall the last year, when we introduced the 1200, we had been building systems in anticipation of that launch, and so we were ready to ship. I think we indicated on the conference call last quarter that with the Elite, we didn't begin shipping those until the latter part of the first quarter.

But what it also says is that we've got a good, basic ongoing business with the full family of products, which is not a stop and then a start type of a business.

I really was thinking it would have been higher simply because of the demo financing opportunity, so that gives me a lot of comfort on that front. So I look forward to that product.

Bob, could you talk about the tax rate, going forward?

Yes, the tax rate -- we have indicated in the -- in our guidance, that we thought we would see a tax rate of 34% to 35% throughout the year. You're going to see more variation in the tax rate in 2007 because of some of the rules related to stock option expensing. They're fairly complicated, but there's going to be variation more this year in our tax rate, quarter-to-quarter, but by the time we flesh through the year, we would expect it to be in that 34% to 35% range.

Brian Thibodeaux, Maple Leaf Partners.

Good morning. Given the fact that you guys have such a broader product line now and given the swings in ASP, would you guys consider, going forward, breaking out the different line items within the Dimension product line as far as units go as well as breaking out the non-Dimension units?

Well, of course, we've segmented to service and products, and we currently, the size of the company, don't have an intention to do that.

All right, along that same vein, could you guys potentially break out what you think -- or what the paid parts business was as a component?

Again, today, that doesn't represent a material part of our business, and we think the paid parts business is also instrumental in selling machines, is very much linked to our system sales, too. So for today, for both competitive reasons, mostly for competitive reasons, as well as how we manage our business internally, I think the breakdown that you see now is the one you're going to continue to see from the company.

David Cohen, Midwood Capital Management.

Hey, guys, good quarter.

Thanks.

I thought that Bob made some comment in his prepared remarks about consumables revenue being flat versus the first quarter year-over-year. Did I mis-hear that in some way?

No, I said it was, year-over-year, essentially flat because of the Objet effect. If you took it from a proprietary consumable, they increase about 21%. But you heard correctly.

Paul Kaump, Northland Securities.

Good morning, gentlemen, great quarter.

Thanks, Paul.

A real quick question on Eden maintenance. If I heard you correct, it was a drag on service margins in the quarter. I'm curious -- do you have an organic Stratasys-only service margin that you can give us for Q1?

Yes, again, we don't break out our margins beyond what you see within -- our maintenance is included within our services, and we did say that we had about 400,000 of maintenance for Objet systems, and that was at a loss for the quarter.

Okay, and the end losses, or that maintenance, is expected to be recognized through August, if I heard you correct, right?

Right.

Last question -- with respect to CapEx for the remainder of the year, and your buildout of the new facility, what are you thinking there?

Yes, you're going to -- we have significant CapEx going on in fiscal 2007, both because of the buildout of the building, of our new headquarters, as well as to support our growth in our businesses and some of the new initiatives. You're probably going to see a CapEx in the range of $10 million this year.

You might want to comment on the spending from last year as well. We also had that going on for Edenville.

Yes, Edenville building is -- we bought it in 2005, and it seems odd that we're renovating it in 2007, but, really, we bought the building that was a multi-tenant building. Last year we took over probably about 20% of that building and moved our consumable manufacturing in there, so we did incur expenses related to that. This year we're probably taking over probably an additional 55% of the building, because we still have one tenant that will remain in the building through 2007.

So it is a significant expense to us, but the convenience of the building, we believe it's a low-cost solution to meet our space needs.

Andy Schopick, Nutmeg Securities.

A couple of quick follow-ups here. Bob, on the capitalized software, could I just ask for an update on that in the quarter?

Sure. Our capitalized software was $342,000; overall capitalization of intangibles was $389,000 compared to $432,00 in Q1 of last year.

And I'm just curious to ask you -- why would there be a slight decline in the overall -- on the balance sheet on the leased space? What's happening there in terms of your activities?

Yes, we had a program that was in place at the end of 2006 with good financing rates for our resellers offering down at a 2.9% rate. We indicated to our resellers that program would go away at December 31, 2006. So there was strong activity in some of the leases at the end of 2006 and not in the first quarter of 2007.

And the last question I really have really pertains to guidance, and I'm not sure if you're going to want to say much more about it, but looking at the strength of the first quarter and simply annualizing the first quarter revenues, we would come out within a 2000 revenue of about 109.4 million. The implications of that alone would just suggest that revenues would plateau, maybe even decline a little bit here in the balance of this year.

I'm not sure if I really want to believe that or understand why you would not be increasing the revenue guidance at least somewhat, just given the strength of the first quarter. You know, we can clearly isolate these Eden-related distortions, but they're not as meaningful now.

Any, you've got to realize that we just gave our guidance about 60 days ago on the annual call. So we knew about some of the things in terms of the reseller meeting, et cetera, and, as Scott mentioned, we have some new product introductions coming in the year. We always keep an eye to the competitive marketplace, too, and we just feel that the guidance that we've given is prudent guidance and where we should continue to guide today.

Yes, okay, I mean, just, again, on the strength of the first quarter revenue alone it just seems to me like you're shaping up for a somewhat -- that there's certainly the prospects of a somewhat stronger revenue performance than you are prepared to indicate right now.

Of course, we are managing to the year, and I think that we just gave the guidance 60 days ago.

We see a quarter-to-quarter fluctuation somewhat within our business, and we'll continue to see that in our guidance needs to stay on the annual basis.

(Operator Instructions) Scott Berry, SMH Capital Advisers.

A quick question or two for Bob -- did you mention what capital expense was in this quarter?

No, I didn't, but it was just a little under $2 million.

All right, and just a follow-up or another housekeeping kind of item -- you also mentioned that the high-end sales benefited a little bit from some order backlog that cleaned out. Can you give us a sense of where the order backlog stands at the end of first quarter?

No, we only give the backlog on a quarterly basis, but I know, as I said in the conference call, we had about a 28% increase in proprietary FDM high-end systems versus a 12% order rate.

Okay, and then we count it annually on the backlog?

Right.

There are no further questions in queue. I would like to hand the floor back over to management for any closing comments.

Okay, well, in closing, we are pleased with our success, thus far, in 2007, with the first quarter generating a 57% increase in operating profit, and a 50% increase in earnings per share -- our fastest year-over-year growth in over two years. Our 3D printing business is maintaining strong positive momentum, which is contributing to a growing installed base of systems using an increasing quantity of high-margin consumable sales.

We continue to believe that we are in the early stages of this growth opportunity for the 3D printer and its applications. Margins are benefiting from the growth in consumables and paid parts businesses as well as the positive trends in our high-end system business and, finally, we are excited about our strategic initiatives that could provide new growth opportunities this year.

Overall, we are very excited about 2007, and we'd like to thank you for your interest in Stratasys. We look forward to speaking with you again in August. Have a great day.

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