Stratasys Ltd (SSYS) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Stratasys Second Quarter 2007 Earnings Conference Call. At this time all participants are in 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 begin.

Good morning. Welcome to the Stratasys conference call to discuss second quarter financial results. Representing Stratasys' Executive 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 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, FDM 200MC, 400MC, 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 ABS M30 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 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, 2006 and 10-Q filed throughout 2007.

The information discussed within this conference call includes financial results and forward-looking 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. 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 compensation required under SFAS 123R.

We would like to confirm the date of our third quarter earnings release and conference call. Stratasys' third quarter results will be released on or before the morning of October 30, 2007, 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 on our CEO, Scott Crump.

Good morning. Stratasys is pleased to report a record second quarter with the highest quarterly unit shipments in our history. We are especially pleased with our second quarter performance given the strong second quarter comparison that we face from fiscal 2006 which was a result of the highly successful Dimension 1200 launch with commercial shipments in April of last year. Although revenue increased by only 6% to $28.3 million for the second quarter, revenue grew by 22% for our proprietary products and services. As you are probably aware, we've stopped selling the EDEN product line which accounted for approximately $4 million of our second quarter revenue in 2006 so we had to play catch up here.

Despite the strong quarterly comparison generated last year, operating profit grew by 22% during the second quarter with our operating margins expanding to 18% from 15% last year. Net income over the first six months of this year was up by 37% over last year. Our second quarter results were made more impressive when you consider the incremental growth we generated from direct digital manufacturing applications or in other words the manufacture of end use parts. Our proprietary high end systems sales grew by an impressive 40% during the quarter which included incremental sales for direct digital manufacturing applications. We believe our introduction of our new FDM 400MC system two days ago will augment this trend.

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

Thanks, Scott. Prior to discussing the details of our quarterly financials, it's important to outline the relative financial impact of discontinuing our distribution agreement with Objet Geometries.

As we have previously outlined, we discontinued the distribution of EDEN products at the beginning of 2007 and will continue to recognize a nominal amount of EDEN related service revenue through the third quarter of this year. This decision has created certain issues when conducting year over year comparative analysis of our revenue growth and margins. In the second quarter of 2007, we recognized approximately $526,000 of sales related to EDEN systems, consumables, and maintenance compared to $4 million in the same period last year. The gross margin impact of EDEN related revenue was negligible on the second quarter of 2007.

Total revenue increased by 6% to $28.2 million for the second quarter of 2007, compared to $26.7 million for the same period last year. The Company shipped 564 systems during the second quarter, an increase of 7% over last year. 3D printer units increased by 9% during the second quarter when compared to the same period last year. It's important to note that our second quarter results in 2007 are being compared to a very strong second quarter from 2006. As Scott indicated, this strong comparison was a result of the highly successful Dimension 1200 introduction which began shipping in April of last year. Unit sales of our proprietary high end systems increased by an impressive 35% over last year. In addition, we didn't ship any EDEN systems in the second quarter but shipped approximately 20 EDEN systems during the second quarter of last year.

Regardless of the strong second quarter comparison from last year and the impact of discontinuing the distribution of EDEN systems, we are pleased that our total quarterly unit volume in the second quarter represents a record for our Company. We continue to observe strong demand for the new Dimension Elite but also observe strong demand for our legacy 3D printers, particularly the higher priced FFT systems. The Elite and FFT 3D printers represented over 70% of our 3D printer unit volume during the second quarter.

Second quarter product revenue as reported increased by 2% to $22.2 million when compared with $21.7 million for the same period last year. EDEN related product revenue amounted to $150,000 in the second quarter versus $3.8 million for the same period last year. Excluding EDEN related product revenue, total product revenue increased by 24%. The major contributor to product revenue growth in the second quarter was a 40% increase in our proprietary high end system sales. This growth was driven by an improvement focus on proprietary products as well as direct digital manufacturing opportunities.

Despite the strong second quarter comparison created by last year's introduction of the Dimension 1200 in April, 3D printers system revenue increased by 19%, a result of our successful new Elite introduction combined with a strong demand for our higher priced FFT printers.

Total consumable revenue was flat over last year given the absence of the EDEN related product consumable but sales of our proprietary consumables increased by 23% over last year, driven by an ongoing expansion of our install base of proprietary systems, especially 3D printers.

Second quarter service revenue as reported increased by 20% to $6 million when compared to $5 million for the same period last year. EDEN related service revenue amounted to $376,000 in the second quarter versus $179,000 for the same period last year. Growth in service revenue was driven by our paid parts business. Paid parts had another record quarter with sales increasing by 40% over the same period last year. Paid parts continues to benefit from online parts quoting and ordering service RedEyeRPM.com. As we have indicated previously, we will recognize some additional EDEN service revenue through the third quarter 2007 as we will continue to support our customers that received EDEN systems installed by Stratasys.

Gross profit increased by 15% to $15.6 million for the second quarter of 2007 when compared to $13.6 million for the same period last year. Gross profit as a percentage of sales increased to 55.3% versus 51% for the same period last year. The gross margin percentage benefited from better average prices for 3D printers as well as strong growth in our paid parts and proprietary consumable products. More importantly, the gross margin percentage benefited from improved mix from our high end system business as a decline in sales of distributed EDEN products was partially replaced by an increase in sales of our proprietary high end systems. As we have indicated previously, we maintained relatively low gross margins on the distributed EDEN product lines when compared to our proprietary products. The gross margin on all EDEN related revenue was negligible during the second quarter.

Operating profits increased by 22% to $5 million for the second quarter of 2007 compared to $4.1 million for the same period last year. Excluding stock based compensation expenses, operating profit increased by 18% to $5.2 million for the second quarter of 2007 compared to $4.4 million for the same period last year. Stock based compensation expense recorded under statement of financial accounting standards or SFAS 123R amounted to approximately $179,000 in this second quarter compared to $284,000 for the same period last year.

Operating expenses increased by 11% during the second quarter compared to last year. The increase in operating expenses was partially driven by a negative impact of a receivable write off taken during the quarter. We have bad debt of $564,000 that comes from an Italian distributor we originally signed up in early 2005 to sell 3D printers. At that time they were a subsidiary of a large Italian company called [Gytech] with about $30 million in equity. While collections were slow, they were not out of line for this part of the world. The reseller was found out of [Gytech] but unfortunately we were not aware of this in the U.S. until November 2006 at which point our employee informed us the reseller had a large equity investment. During this quarter we found the reseller's CEO had misled us as well as his own employees and no investment was made. The company is now bankrupt. We tried to identify and mitigate the risk as quickly as possible but it's not a perfect system. I consider this a rather unusual situation because of the spin off from the original well capitalized parent.

We expect modest growth in operating expenses as we move through the balance of 2007. Total interest and other income for the second quarter increased to $525,000 versus $328,000 last year. Pre-tax profit increased by 25% to $5.6 million for the second quarter of 2007 compared to $4.5 million for the same period last year. Excluding stock based compensation expenses, pre-tax profit increased by 21% to $5.7 million for the second quarter of 2007 compared to $4.7 million for the same period last year. Income tax as reported amounted to $1.9 million, our rate of 34.7% compared to $1.5 million or 34.1% for the same period last year. Excluding the impact of stock based compensation expenses, income taxes spent amounted to $2 million or 34.4% for the second quarter versus $1.6 million or 33.3% for the same period last year.

Net income increased by 24% to $3.6 million for the second quarter of 2007 compared to $2.9 million for the same period last year. Excluding stock based compensation expenses, net income increased by 19% to $3.8 million for the second quarter of 2007 compared to #3.2 million for the same period last year.

Our diluted shares outstanding increased by approximately 345,000 shares from the second quarter last year a result of our higher stock price as well as the exercising of employee stock options. The Company maintains approximately $8 million in authorization under a $20 million stock repurchase authorization.

Our cash and investment position amounted to approximately $55 million at the end of the second quarter, an increase of approximately $10 million from the end of fiscal 2006. The second quarter increase in cash and investments from the end of fiscal 2006 is a result of approximately $9.4 million positive cash flow from operations through the first six months of the year combined with the positive impact of stock option exercises.

Inventories increased to $11.4 million from $9.9 million at December 31, 2006. The increase is largely due to part orders and the anticipation of the new 400MC product release as well as some ship and mix for finished goods. Net profit in equipment was $24.1 million at the end of the second quarter compared to $20.4 million at the end of fiscal 2006. The growing compliance of our business required much of the capital expenditure. In addition, we are renovating the 86,000 square foot building we purchased in late 2005 across from our system manufacturing building. This building became our corporate headquarters in the second quarter and has required approximately $2 million in renovations thus far in 2007.

Accounts receivable at the end of the second quarter was $27.5 million compared to $25 million at the end of fiscal 2006. Days sales outstanding or DSO was approximately 89 compared to 77 days at the end of fiscal 2006 and comparable to the 87 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 resellers that allow participants to purchase a limited number of 3D printers with extended 180 day payment terms during the first part of the year. This follows a similar pattern we have now observed over the past four years. 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.

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

Thank you, Bob. Stratasys modified its financial guidance for the fiscal year ending December 31, 2007 as follows; revenue guidance of $107 million to $112 million. This is versus previous guidance of $105 million to $110 million. Non-GAAP earnings guidance of $1.40 to $1.50 per share versus previous guidance of $1.37 to $1.49 per share which both exclude the impact of stock based compensation expense required under SFAS 123R. GAAP earnings guidance of $1.31 to $1.41 per share versus our previous guidance of $1.28 to $1.40 per share. Reconciliation between non-GAAP and GAAP financial projections is provided in a table at the end of our press release. We're 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 second half of this year. We'd like to remind shareholders that the third quarter is a seasonally weak quarter given the impact of slower summer sales, particularly in Europe. In addition, we are currently introducing our first major new high end system in over three years. While we are very optimistic about the new product, our outlook for the second half of 2007 is dependent on successful introduction of that system.

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

Thank you, Shane. While we're very pleased with our second quarter performance as we maintained our strong growth in 3D printing, parts, and propriety consumables, the 40% increase in proprietary high end systems sales was particularly impressive. High end system sales were driven by an improved focus on proprietary products that also reflected the recent sale of six FDM Titans to a Fortune 500 company for direct digital manufacturing applications. The company currently employees 12 of our FDM Titan systems at the same location and it is aggressively migrating to direct digital manufacturing. While the large Titan order is certainly significant for our second quarter results, we also believe the order provides some confirmation of the opportunities that exist for direct manufacturing and we believe this is an indication of future opportunities. In our recent survey of 1000 of our customers, 42% of them say they use their Stratasys FDM system for manufacturing of in-use parts in frequency. It's worth noting that the big Titan order preceded our recent introduction of the FDM 400MC earlier this week, a system we believe will improve upon our value proposition for direct manufacturing and directly targets these applications. The 400MC achieves improvements in five areas that will make the platform more appealing for a direct digital manufacturing application as well as strengthen our value propositions for rapid prototyping with the same system. These advances include improvements in accuracy, repeatability, materials, speed, and machine flexibility. We recently had an independent study that analyzed the parts produced from the 400MC and the study confirmed these significant improvement relative to our legacy high end FDM systems. In conjunction with the 400MC release, we have introduced a new material available on this system called the ABS M30 that is up to 70% stronger than our standard ABS. Looking forward, new product introductions like the 400MC should augment the positive trends in our high end system business. We continue to believe the opportunity presented by direct manufacturing could provide a significant incremental growth opportunity that could exceed the demand for our concept models and prototypes going forward. Following the success of the launch of the Dimension Elite in January, the performance of our 3D printing business continues to exceed our expectations. Demand for the highly functional and higher priced Elite has been as strong which contributed to a increase in average printer prices and improved margins during the quarter. 3D printer sales for educational customers in North America grew by 57% during the first six months of 2007 driven in part by the initiatives like Project Lead the Way and our extreme redesign contest. The educational initiatives have increased awareness and promoted our technology among university and high school students across North America. The opportunity remains very significant as we have sold systems now to less than 5% of the 10,000 high schools that exist in North America. In addition to new projects, expanding our distribution continues to be a key area of focus within 3D printing, particularly in the Asia-Pacific region. In June we announced an agreement with Digital China, China's largest IT products distributors and IT systems integrator. The company employees several thousand telemarketers and will make Dimension 3D printers available to end user throughout the distribution network and its experienced centers. Our 3D printer strategies continue to capitalize on the proven market for our 3D printing system which we believe could reach over 500,000 systems worldwide to serve the 5 million existing catch stations globally. Once again, our paid parts business grow impressively, expanding by 40% during the second quarter and 53% year to date versus last year. We continue to maintain high expectations for this business driven by our customer friendly parts quoting and ordering service, RedEyeRPM.com. We recently added a premium over night build option to our RedEye parts service that gives customer next day shipment on parts ordered by 4PM eastern time. In addition, we added machine capacity to our paid parts business during the quarter and we currently have over 80 systems to support the growing operation. Our growing install base of systems is driving strong growth in our proprietary consumables, particularly within 3D printing. Overall total proprietary consumable sales grew by 23% during the quarter but expanded to an impressive 42% for our Dimension 3D printers. We expect this trend will continue and it could be augmented by incremental demand from direct digital manufacturing customers. Given that consumables represent our highest margin product, of course we're very pleased with this trend. Although we recognized no revenue in the second quarter relating to our distributed Arcam EBM system, we have an active pipeline of opportunities and recently announced the sale of an Arcam A2 to North Carolina State University. This is the university's second EBM system. The university will use the system for advanced research and material qualification in aerospace, biomedical, and high tech industries. We are pleased with our strong performance over the first six months of 2007 and this has allowed us to increase our financial guidance and we're looking forward to continued success in 2007. I'll return with some closing comments, but first we'd like to address any questions that you might have. Operator, let's open the call up for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Mr. Jensen from Piper-Jaffray. Please proceed with your question.

Congrats on a nice quarter, gentlemen.

Thanks.

Scott, I'd like to follow up with you on the digital manufacturing side. Is there any way you could quantify maybe what percent of revenues or any insight into how impactful this is to your business currently?

It's steadily growing. As I've announced in past conference calls, it's growing from I think the first that we were in it, 3% to 6%, 9%. We believe that last year we ended the year at about 11% of our system business and depending on the definition, but on a conservation basis we believe that the paid part business which is a little bit more of a leading indicator, more of a real-time leading indicator, is over 20% of our business currently. And with of course the launch of the new direct digital manufacturing system, the 400MC and then last quarter the Q1 quarter we released the 200MC, we should see -- I think it's realistic to see that steadily grow.

For one of the specific discussion you probably heard during the march was the study we recently did that showed 42% of our customers are using the machine at some frequency -- that could be anywhere from a dedicated machine or a direct manufacturing to a customer that uses nominally for part sides and concept models and accesses on a limited basis for direct manufacturing. So it's difficult to quantify given how a particular machine may be used relative to prototyping versus direct manufacturing.

Got it. And then sticking on the subject here, the Fortune 100 that helped pay for some R&D for rapid manufacturing applications; can you just update us on what the next milestone is for them?

The next milestone that would be due would be to -- down the road for them would be to deliver commercial payment.

Okay. And it was a three year contract right? It was for a three year time frame when it was first announced?

I believe it was a four year time frame overall for that contract. It included both the R&D portion of it as well as delivering of commercial units in the later stages of the contract.

Okay. Got it. Keep up the good work, guys. I'll get back in queue.

Thanks.

Thank you. Our next question comes from Mr. Schopick from Nutmeg Securities. Please proceed with your question.

Thank you and good morning. Bob, I'm going to ask you for a couple of updates on some of these numbers that I do like to track. First, can you update us on the R&D reimbursements or offsets that you received in the quarter as well as for year to date? I don't think I have the first quarter number in front of me.

Andy, I don't think I have the number for the quarter handy. The number year to date is $449,000.

Okay. How much is left on that in terms of the potential reimbursement that you'll receive?

We didn't disclose a break down of the original contract. The original contract included both commercial units as well as R&D and we didn't disclose and have not disclosed that breakdown. We have disclosed the offsets as we've gone along.

And one follow up here on the international side of things. Can you give us a breakdown on the international percentage of revenues derived from international and the extent to which there was any foreign currency impact?

Yes. We don't quantify the foreign currency impact but clearly the Euro -- most parts of the world outside of Europe were selling in U.S. dollars and European customers are a mix of dollars as well as zero customers. Obviously we're going to have a positive impact from the Euro right now. From a mix in our business, we really saw this stronger growth coming from the U.S.

Can you give us --

Once you take Objet out of there, it was probably somewhere in the neighborhood -- I think it was 57% of our business.

North America?

It was North America. Yes.

Yes. That's pretty -- alright. Capitalized software. That one.

Year to date, the capitalized software was about $974,000.

Thank you very much, Bob.

You're welcome.

Thanks, Andy.

Thank you. Our next question comes from Mr. Rein with Bares Capital. Please proceed with your question.

Hi, Scott.

Hi. Good morning.

Hi, Graeme.

Hi. Could you just talk a little bit more about the Arcam relationship? Is it kind of inline with your expectations for how it's ramping up or have there been frustrations in the sales process? Can you just provide a little bit more color on that?

It is a pioneering sale. It's a sale to early adopters. We're very optimistic on short-term, mid-term, and long-term with the potential. But going into it, I've actually personally been tracking it for about a five year period. It is a pretty traditional leading edge early adopter type of a sale that you work references and you get repeat sales like we just did this last quarter. But finally we're disappointed with our sales in Q1 and Q2 and we're continuing to work hard at it. We've got a great pipeline. We continue to review that with the sales team. And we feel we're very close to breaking open some big orders.

These are orders that are between $0.5 and $1 million. They're a different type of a sale cycle type as well compared to a 30 or 60 day sale cycle on a 3D printer. And of course it's a totally different sales team.

What kind of -- I would imagine it's lower margin sales. Can you provide any sort of details on what kind of margin that would look like?

Yes. We don't want to specifically talk about margin on the Arcam product line but it's -- history always shows you that distributed products because you're sharing a margin with both the manufacturer and the distributor. The distributor always gets a lower margin on distributed products than they do on their proprietary products. We certainly saw that with EDEN systems too. But we're not going to discuss specific margins related to Arcam.

Okay. Thanks for your time.

Thank you. Our next question comes from Mr. Rosenberg from William Blair. Please proceed with your question.

Good morning. I wanted to talk a little bit about the trends in 3D printer growth. Maybe qualitatively be effective, the timing of the reseller conference. Try to help us understand. Can you maybe talk about whether 3D printer units were up sequentially Q2 over Q1 or maybe talk about the first half of this year versus the first half of last year and what kind of growth you saw from that perspective?

In general, in 2006 we had our big launch of the Dimension 1200 in the second quarter and we see with that type of selling with the resellers a bump or a bowl within the second quarter. This year, 2007, we had our big launch of the lead in the first quarter. So if you compare year to date over year to date you get some really good insight and you see some very strong growth there. The first quarter where you compare the second quarter, you really get two dissimilar apples and oranges type of comparison. That's just kind of an in general. Bob, you want to add on to that?

That's a great question. Because of the timing of the reseller meetings really has an influence on the comparison from quarter to quarter and that's some of the things that we indicated in our conference comments that the second quarter last year when we had the introduction of the Elite as well as the reseller conference, we had very strong comparable to the second. So going back to your question of trend lines, for the six months of 2007 compared to the first six months of 2006, we saw a 22% increase in unit volume to give you more of an apples to apples comparison that you're looking for.

And on a revenue basis?

On a revenue basis, this is where I need someone to place some muzak for me so I can --

I'll ask you another question while you're doing that. Maybe as you're looking at that, about maybe quantifying how much the average selling price has increased there? You've talked about the trend but can you give us a little more specificity on how much it's gone up?

The answer to your first question is -- which I think helps quantify the change in unit prices -- we had a 36% increase in revenue, six months to six months. So obviously the average selling price has increased. We didn't have a Dimension Elite in the mix at all last year and the 1200 was brand new. Since March of last year, we've introduced two of the three highest priced products which happen to be our two best selling products.

Okay. And then just as a follow up, when you talk about seasonality in your commentary about what to expect in the third quarter you did have a little bit of a difficult comparison quarter on quarter last year because of the strong reseller participation in the new 1200. Is that any less of an effect this year do you think because the new product introduction was earlier?

That's difficult to say. We're not really sure at this point in time.

Okay. Thanks a lot.

Thank you. Our next question comes from Mr. Martinuzzi from Craig-Hallum. Please proceed with your question.

Thanks. Wondering about the sustainability, the high end systems up 40%. That's pretty impressive. It's part of the market that in my own mind I estimated maybe high single digits or 10% at best for growth. You put up 40%. Does that -- what do you see that for the back half of the year? Is that sustainable?

Yes. It was a great quarter. I think we need to sit back and enjoy a good quarter on the high end and give the sales team a lot of credit for it. And obviously that percentage increase benefited from the six Titan order that we got from the Fortune 500 company. I wouldn't go out and make a prediction that that's a sustainable quote level but I think we need to enjoy the growth that we've seen in that business and the focus that our sales team has had on the proprietary products in the first six months. So I think it bodes well year over year but I wouldn't say that 40% level is a sustainable level at all.

What was it for the first half? Do you have a first half number? A year to date number?

Let me tag on to that -- this is Scott. Internally we're planning and budgeting for high single digit type growth with some pretty good consistent growth but there's a new -- this whole direct digital manufacturing application is new and there's a high likelihood that that can take off and grow like it did four, five, six years ago just because companies invest 10 to 20 times more in the manufacturing production equipment than they do historically with engineering type budgets. I think we have some very large upside but we're not necessarily spending that level or budgeting to that level going forward.

For those us without your industry knowledge, what was that four, five, six years ago?

Each year is a little different but some years we were around 30%, 35%, 33% growth on a year to year basis for this category that we're talking about of prototyping or high end prototyping.

Okay. And then somewhat related, the product gross margin is very strong at 56.3%. I imagine that's also driven by the upside of the high end systems. For modeling purposes, should we anticipate that to decline on the product side for the back half of the year?

I think in the quarter it was particularly strong with the high proprietary systems and as well as the mix that we even saw on the 3D printers. It certainly favored the Elite and the FFTs. So while we don't predict gross margins, I would say that the quarter that we had had a lot of favorable things going on in the mix.

Okay. And then one last one if I might. The SG&A spiked up. I assume that's tied to this write-off that you had. Can you quantify that specific bad debt write-off you took?

Yes. It's $564,000.

Thank you.

Thank you. Our next question comes from Mr. [Shecter] from Prospective Capital. Please proceed with your question.

Good morning, guys, and congratulations on a great quarter.

Thanks.

I wanted to ask a competitive question. One of the things that happened during the quarter was 3D Systems made some money at a big discount to the current price with the stated objective of launching or helping launch their new LeadFlash, also announced the hiring or arrangements to use Canon to build it. This seems to be a continuation of longtime and coming launch. What can you do to handicap for us when in fact that's coming and what impact that might have on your business?

In general we continue to primarily compete with ZCore in the 3D printing areas and even there mostly in the educational channel. We're definitely tracking and watching the LeadFlash mostly at trade shows, et cetera. Our current assessment, we're being careful not to be overly confident in this application. Our current observation is that it's not a whole product offering. Obviously we can't talk to the product itself because it doesn't exist yet. But if you look at the channel that should exist by now, the training, the whole product solution, not just the price points or product type. The real muscle is in sales and service, marketing side. We don't see that. We could be surprised. And that's why we're careful in looking at it. I think on the other hand, one of the things that we think for the last three to four years that has been missing from the application is we're a leader in that application of 3D printers with over 50% of the unit volume and the color volume. But having another new player in that business would actually help awareness. It would probably accelerate even our sales, both awareness from a lead standpoint but also closure on our revenues. So we're watching. I think it's an interesting technology. But we're kind of watching like you are and frankly I hope that they're successful with it because it will help support the whole application. Remember, we're going after as a group 500,000 opportunities to serve over 5 million seats of CAD. So the more awareness we have, especially at these types of margins and consumable flow, the better.

Thanks. You mentioned the channel and ZCore. Both you and ZCore ask your distributors not to distribute the other person's product and it doesn't seem as if between the two of you, you haven't gotten essentially everyone covered. So I've been wondering the same thing. Even if they launch the product how are they ever going to get distribution for it?

I think that's more of a question for 3D Systems. We have a respect for the management team there and I'm sure they'll find a good channel for their product.

Thanks very much, guys.

Thank you.

Thank you. Our next question comes from Mr. Berry from SMH Capital. Please proceed with your question.

Good morning, guys, great quarter.

Thanks.

Want to get back just briefly to the Arcams. I understand it's a difficult and a different sales cycle. Is that the kind of thing you anticipate kind of being back end loaded in years as people come up against spending the rest of their budget, that sort of thing? Is that your anticipation?

Somewhat. I think some of that with budgets that we see having sold in the high end productivity systems now for over 10 years. I think there's other pioneering that goes on with FDA, FDA approval, and medical applications. Once you break through those in one or two companies alone, they go into multiple buying and then in aerospace there's continued focus on material, material specification, internal to our customers and prospects, to their testing of materials. And once you break through those -- and we're partway through that -- you start to create our success. So, yes, you're definitely going to see some of that at yearend but I don't know that that's a dominant factor. We're focused on two primary applications. Just to summarize, that is in medical and aerospace.

Okay. Just in a related question, how is the revenue recognition typically handled with that? I mean is there an acceptance period you go through after you actually sign a contract and make a sale? What's the lag there typically in your expectations?

Yes. The customer may or may not have an acceptance criteria within the purchase order themselves; however, we do not recognize revenue until the system has been installed and we know that it's up and running. We consider in the Arcam system that the installation is a key part of the earnings process. So until we know we have a satisfied customer, we're not going to recognize revenue on those systems.

One last quick one. I know you've announced the 400MC and haven't really begun to roll it out quite yet. Any of those in your paid part shop yet making parts? Or immediate plans for that?

We're certainly making parts. We're not necessarily advertising a launch for that. Essentially the commercial shipments of systems are in Q3 and you'll probably see something similar to that in the RedEye.

Right now we're focused on making it commercially available to customer.

It's just a system right now.

Alright. Terrific. Thanks again. And once again, great quarter.

Thanks.

Thank you. Our next question comes from Mr. Jensen from Piper-Jaffrey. Please proceed with your question.

Just two quick follow ups here. Maybe the number of resellers you guys had in the quarter and how that compares to last year?

Yes, Troy. I think we -- I don't have an exact number for you. But it's over 200. I think at this time last year I think we were probably sitting around the 170, 180 level for retailers. And one of the reasons we're a little bit reluctant to continue with being very specific on that is because when you look at the relative strength of resellers today versus last year, I mean whereas just hypothetically last year you had reseller that maybe had -- that we counted as a reseller, maybe had one or two individuals supporting what we considered a reseller location. Today that reseller may have three or four added sales people, added as sale individual support technicians. So while the number is up, certainly qualitative the reseller is getting better and better in their ability to sell. So that's why we kind of shy away a little bit from talking about just number.

Understood. And one for Bob. Bob, I know you don't have any official business model targets but over the last three quarters you've had great growth in gross margins. Anything on the operating lines? I'm curious if you've maybe made the long-term targets on the gross? Could we see 60% gross margins sometime soon?

We're going to continue to give you top line guidance and bottom line guidance and I'm not going to go off and start predicting higher gross margins than we're at today. We're pleased with the mix of products that we have and the gross margins that we have this quarter but I'm not going to go out and predict the future.

Understood. Very good, guys. Thanks.

Thanks, Troy.

Thank you. Our next question comes from Mr. Schopick from Nutmeg Securities. Please proceed with your question.

Scott, I'm wondering if you could just comment or update us on the status of the [mirabini] order and also any commentary you can offer on the recently agreement with Digital China, what the expectations are for beginning to deliver product through that reseller in China?

Sure. We're on schedule with [mirabini] and as you recall, they gave us the largest order that the Company's ever received earlier this year with a release on a monthly basis throughout the year. And I'm happy to say that as we speak, they're on schedule with that. And it should be not just ordering. But we should be shipping in fact to that -- mostly all of that order by the end of the year, this year, 2007. With Digital China, of course a lot of that's new. So I believe at this point we've been able to position a few double units, I think to the three primary experience centers they have or demo sites. But I don't believe there's a significant amount of pass through to end users at this point but we're definitely very, very optimistic that that flow will start occurring this quarter.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Mr. Morrison from Feltl and Company .

Hey, guys. Great quarter. You talk a lot about the growth in education. Can you give us a sense on the 3D? How much of your business is going in the educational as opposed to the commercial manufacturing business?

Yes. Clint, the education business represents about a third of the 3D printing business.

Okay. And has that been relatively stable or threatened at all?

I think it's been relatively stable.

Okay. And I think you said EDEN revenue in third quarter was going to be kind of the tail end. Can you give us any kind of sense as to how much of that as we clean things up here?

Yes. We had during the current quarter I think I said that it was about $356,000 that we had in - $376,000 of service related revenue to EDEN. It will be a number less than that in Q3 because it ends sometime in August.

Okay. Thank you.

Thanks, Clint.

Thank you. Our next question comes from Mr. Rosenberg from William Blair. Please proceed with your question.

Bob, did you give us forward-looking tax expectations? Tax rate expectations?

We've been in a fairly similar range I think for the -- plus or minus 1% off of the 34% for awhile now. And I would anticipate that it's going to be in a similar range. Part of it is how large our income for the year and what the difference is, the permanent difference is. But I would say in a similar range to what you're seeing currently.

Okay. Thanks.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. In closing, we believe that we are in the early stages of a tremendous growth opportunity. Our 3D printing business has maintained strong, positive momentum. Our proprietary consumables are growing with our install base and the RedEye parts business continues to expand. And finally we're excited about our strategic initiatives that could provide additional growth opportunities in direct digital manufacturing -- DDM. I'd like to thank you for your interest in Stratasys and look forward to speaking with you again in October. Good bye.

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