Stratasys Ltd (SSYS) 2007 Q3 法說會逐字稿

Greetings and welcome to the Stratasys third-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.

Thanks, Jerry. Good morning and welcome to the Stratasys conference call to discuss third-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 Web site 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; FDM 400mc; the 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 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 property profitably market and distribute the Arcam product line; the successive our recent R&D initiative to expand the direct digital manufacturing capabilities of our core FDM technology; and the success of our RedEyeRPM 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 Form 10-Q filed throughout 2007.

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

We would like to confirm the date of our fourth-quarter earnings release and conference call. Stratasys' fourth-quarter results will be released on or before the morning of February 26, 2007, followed by a conference call on the day of the release. We will 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. Stratasys is very pleased to report a record third quarter. Revenue grew a strong 26% for our proprietary products and services in the third quarter. Dimension 3-D printer unit shipments grew by 44% and 3-D printer system revenue grew by a whopping 50%, so our 3-D printing business continues its outstanding, rapid growth performance.

Equally impressive was a 20% increase in proprietary high-end systems sales, a result of our successful launch of two new systems in the past six months. We are especially pleased with the results of our new FDM 400mc, which we launched in August, as this new product was our best-selling high-end system during the third quarter. The new FDM 400mc allows Stratasys to expand into new applications of direct digital manufacturing with its higher part accuracy and higher part strength, while also providing features that our rapid prototyping customers need.

Net income over the first nine months of this year is up 34% over last year's period and we finished the period with our largest quarter-ending backlog this year. 37% of our systems sales in the third quarter came from new products launched in 2007.

Okay, I will return later to discuss some of the strategic initiatives that we have, but first, I would like to turn the call over to our CFO, Bob Gallagher, who will further highlight our third-quarter results. Here is 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 continued to recognize a nominal level of Eden-related service revenue through the end of the third quarter.

This decision has created some certain issues when conducting year-over-year comparative analysis of our revenue growth and margins. In the third quarter of 2007, we recognized approximately $310,000 of sales related to Eden systems, consumables and maintenance, compared to $4.5 million in the same period last year.

Total revenue increased by 5% to $26.5 million for the third quarter of 2007, compared to $25.1 million for the same period last year. The company shipped 521 systems during the third quarter versus 383 last year, an increase of 36%.

As Scott mentioned, 3-D printer units increased by 44% during the third quarter when compared to the same period last year. This represents our fastest year-over-year growth for 3-D printers thus far in 2007.

We experienced continued strong demand for the new Dimension Elite,, but also observed strong demand for our legacy 3-D. The Elites and SST 3-D printers represented over 60% of our 3-D printer unit volume during the third quarter. In addition to strong unit growth for the 3-D printers, unit sales of our proprietary high-end systems increased nicely as well, expanding by an impressive 43% over last year.

Third-quarter product revenue, as reported, increased by 5% to $20.7 million when compared to $19.8 million for the same period last year. Eden-related product revenue amounted to $50,000 in the third quarter versus $4.3 million for the same period last year. Excluding Eden product revenue, total product revenue increased by 33%. The major contributor to product revenue growth in the third quarter was a 50% increase in our 3-D printer system revenue. In addition to strong growth in our 3-D printer system revenue, we generated a 20% increase in proprietary high-end system revenue, the positive result of our focus on proprietary products and recently-introduced new products.

Total consumable revenue was flat over last year, given the absence of Eden-related consumables, but sales of our proprietary consumables increased by 20% over last year, driven by an ongoing expansion of our install base of proprietary systems, especially 3-D printers.

Third-quarter service revenue, as reported, increased by 8% to $5.8 million when compared to $5.4 million for the same period last year. Eden-related service revenue amounted to approximately $261,000 in the third quarter versus $239,000 for the same period last year. Our Paid Parts revenue grew by 8% during the third quarter as the Company faced a strong quarterly comparison from last year. However, year-to-date, to the Paid Parts business grew by 35% and we remain excited about the growth prospects for this business.

As we have indicated previously, we recognized some additional Eden service revenue through the third quarter of 2005 as we continued to support our customers that received Eden systems installed by Stratasys. We have now transitioned all Eden service to the manufacturer.

Gross profit increased by 12% to $13.5 million for the third quarter of 2007 when compared to $12 million for the same period last year. Gross profit as a percentage sales increased to 51% from 47.7% for the same period last year. The gross margin percentage year-over-year benefit from better average prices for 3-D printers as well as strong growth of our proprietary consumables products. More importantly, the gross margin percentage year-over-year benefited from improved mix within our high-end system business as the decline in sales of distributed Eden products was partially offset -- replaced by an increase in sales of our proprietary high-end systems.

As have indicated previously, we maintained relatively low gross margins on the distributed Eden product line when compared to our proprietary products. The gross margin impact from the residual Eden-related revenue was negligible during the third quarter of this year. However, the impact during the third quarter of last year was decidedly negative.

The sequential decline in gross margin percentage in the second quarter of this year resulted primarily from three things. First, the sale of an Arcam system during the period. The Arcam tradition arrangement to date has been a disappointment for both Stratasys and Arcam. The effort has yielded both lower revenue and margin than originally anticipated. Secondly, the sequential gross margin change was impacted by a sequential decline in proprietary consumables. We believe the sequential decline in proprietary consumables is a function of seasonality combined with the inconsistent purchasing patterns of our largest distributors. Lastly, the mix within 3-D printers was impacted by strong demand from educational customers relative to the second quarter, with these customers favoring our lower-priced 3-D printers.

Operating profit increased by 15% to $4.1 million for the third quarter of 2007, compared to $3.5 million for the same period last year. Excluding stock-based compensation expenses, operation profit increased by 13%to $4.3 million for the third quarter of 2007, compared to $3.8 million for the same period last year. Stock-based compensation expense required under Statement of Financial Accounting Standards, or SFAS 123(R), amounted to approximately $241,000 in the third quarter, compared to $284,000 in the same period last year.

Operating expenses increased by 11% during the third quarter compared to last year. The increase in operating expenses was driven by a 25% increase in our R&D spending as well as rental costs associated with the launch of the 400mc. The accelerated R&D spending is associated with products that are expected to be introduced during the next twelve months.

Total interest and other income for the third quarter increased to $525,000 versus $350,000 last year. Pretax profit increased by 19% to $4.6 million for the third quarter of 2007, compared to $33.9 million for the same period last year. Excluding stock-based compensation expenses, pretax profit increased by 16% to $4.9 million for the third quarter of 2007, compared to $4.2 million for the same period last year.

Income tax, as reported, amounted to $1.4 million, or a rate of 30%, compared to $1.3 million, or 34%, for the same period last year. The quarterly tax rate was favorably impacted from employees' exercises of incentive stock options during the quarter as well as a change in our estimated tax benefits from research and development credits. Excluding the impact of stock-based compensation expenses, income tax expense amounted to $1.4 million, or 29%, for the third quarter versus $1.4 million, or 33%, for the same period last year.

Net income increased by 26% to $3.2 million for the third quarter of 2007, or $0.15 per share, compared to $2.6 million, or $0.12, per share for the same period last year. Excluding stock-based compensation expenses, net income increased by 23% to $3.4 million, or $0.16 per share, for the third quarter of 2007, compared to $2.8 million, or $0.14 per share, for the same period last year. Our diluted shares outstanding increased by approximately 1.2 million shares in the third-quarter last year, a result of our higher stock price as well as the exercising of employee stock options.

Our cash and investment position amounted to approximately $56 million at the end the third quarter, an increase of approximately $12 million from the end of fiscal 2006. The third quarter increase in cash investments from the end of fiscal 2006 is a result of our approximately $8 million positive cash flow for operations through the first nine months of this year combined the positive impact of stock option exercises.

Inventory balances increased to $13.1 million from $9.9 million at December 31, 2006. The increase is largely due to three things -- a buildup of Dimension units due to a difference in our forecast mix versus actual demand; an increase in inventory to support our new product introductions; and an increase in consumables inventory to support our increasing install base.

Net property and equipment was $25.6 million at the end of the third quarter compared to $20.4 million at the end of fiscal 2006. The growing components of our business have required much of capital expenditure as well as the renovation of the 86,000-square-foot building purchased in 2005 that is now our corporate headquarters.

Accounts receivable at the end the third quarter was $25.2 million, compared to $25 million at the end of fiscal 2006. Days sales outstanding, or DSO, was approximately 87 days, compare to 81 days at the end of the same period last year and comparable to the 89 days at the end of the second quarter. As we have observed in prior quarters, our DSOs was will likely continue to be impacted by our successful program for our resellers that allow participants to purchase a limited number of 3-D 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 for resellers 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.

I would like to reiterate what I believe our three of the key points to highlight for the quarter. First, the strong system growth for both our 3-D printer as well as our proprietary high-end systems; secondly, a sequentially smaller gross profit margin due to the mix within 3-D printers, sequentially lower consumables sales due to seasonality and the inconsistent purchasing patterns of our large distributors, and also the lower margin Arcam system. The third point I would like to highlight is the accelerated R&D expenses focused on products to be launched over the next twelve months.

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

Thank you, Bob. Stratasys provides the following financial guidance for the fiscal year ended December 31, 2007 as follows, which is adjusted for the two-for-one stock split we completed in August, revenue guidance of $109 million to $112 million versus previous guidance of $107 million to $112 million; non-GAAP earnings guidance of $0.70 to $0.75 per share, which excludes the impact of stock-based compensation expense required under SFAS 123(R); GAAP earnings guidance of $0.66 to $0.71 per share.

The 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.

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

Thank you, Shane. Our third-quarter results reflect another strong contribution from our Dimension 3-D printing business as we continue to experience strong overall demand for our higher priced 3-D printers as well as strong growth from our lower-priced BST units, particularly in the education channel.

Our overall 3-D printing strategy has not changed, but we are executing better than planned. We believe that the Dimension brand has become synonymous with 3-D printing and with every passing quarter, that our competitive position is strengthening within the category. We believe that we have a two-year lead over competition based on whole product criteria. Our success has been achieved by providing the best whole product offering over the past five years. This includes price, system reliability, customer support, materials, ease-of-use and office compatibility. We have found that executing across these key criteria has been critical to its success.

However, our success is also the result of an extensive global reseller network that is well-trained and highly motivated. We discovered that such a channel was not ready-made and we spent the past five years developing relationships with a global group of resellers that are exclusive to our product line and the value of this crown jewel cannot be overstated.

From a market development standpoint, we believe our dominant position within the education will provide dividends in future periods as engineers and design students currently in school enter the workforce and demand the same productivity tools that they utilized during their education. This is a strategy that has been widely recognized and used by the CAD software industry for many years.

I would like to note that approximately one-third of our Dimension 3-D printers are sold to teaching institutions, with the strongest portion going to high schools globally. In fact, to date, we've sold 3-D -- approximately 500 high schools in North America.

Our proprietary high-end systems sales have grown by an impressive 33% during the first nine months of this year, driven in part by the successful launch earlier this year of the new FDM 200mc and in the third quarter, the FDM 400mc. These two new product represents 40% of all high-end systems sales during the quarter, with demand for the 400mc being particularly strong.

As I mentioned earlier, the new FDM 400mc system allows Stratasys to expand into the new application of direct digital manufacturing for the manufacture of in-use parts with its higher part accuracy and higher part strength. This product allows us to continue to expand our rapid prototyping applications as well.

We expect to maintain positive momentum in our high-end system business. At our global user conference in September, rapid prototyping and direct digital manufacturing applications using our proprietary FDM technology took center stage and were highlighted by several global customers, including Lockheed Martin and Siemens.

Beyond direct digital manufacturing, we're finding new applications for indirect digital manufacturing, or IDM. Unlike DDM, where the end-use part is made, indirect digital manufacturing applications utilize our patented FDM technology for the production of jigs and fixtures that facilitates the manufacture of unfinished product. BMW is a prime example of a customer that uses our technology for indirect digital manufacturing, as the company produces unique tools on our FDM system that are subsequently used to align the headlights of newly-manufactured vehicles. Not to be outdone, Stratasys currently utilizes several tools, jigs and fixtures on our own manufacturing floor that are made on our FDM 400mc system.

Our next FDM product announcement expected later this year should further strengthen our value proposition for these direct and indirect manufacturing applications.

Overall we're excited about the trends within our high-end system business as we enter a traditionally-strong fourth quarter for high-end systems sales. We remain confident in our new product initiatives and renewed focus on proprietary products that will continue to generate positive results. Our Paid Parts business grew modestly during the third quarter, as the business faced a strong quarterly comparison from last year. However, as Bob mentioned, the Paid Parts business is up 35% year-to-date and we remain excited about its growth prospects. We're currently initiating plans this quarter for the expansion of the highly-successful RedEye brand into Europe as well as Australia.

Our proprietary consumables continue to grow steadily, increasing by 20% in the quarter. We believe the coming quarters could produce a strengthening in consumables sales as a result of the strong systems sales that we have generated over the past several quarters.

We have shipped over 2000 systems over the past twelve months, driven by continued strong growth in our Dimension 3-D printing business. We are planning for 4000 units per year in the future, with a long-term vision of 13,000 units per year. As the install base of systems grow geometrically, this will translate into strong sales growth for our high-margin consumable products.

I would like to note that we completed our record third quarter with the highest quarterly-ending backlog this year, an extraordinary achievement given our third quarter is traditionally a seasonally weak period. It is also notable that approximately 80% of our system backlog is comprised of new products introduced this year (technical difficulty) 2007.

Given our strong backlog and positive outlook going forward in the fourth quarter, we remain confident in our financial guidance and we're looking forward to continued success in 2007. I will return with some closing comments, but first I would like to address any questions that you might have. Operator, let's open up the call to questions.

(OPERATOR INSTRUCTIONS) Andy Schopick, Nutmeg Securities.

Thank you and good morning. A comment, first, because the press release in the first paragraph states that total system shipments increased to a record 521 units. I have got like 564 and 548 in the preceding quarters. How is this a record number?

Andy, it says 521 units for the third quarter. It would be a record for the third quarter.

Okay, you are only implying it for the quarter and not --? That's just a little misleading, but let me move on.

That is what it says, Andy.

It says for the third quarter.

Okay, sorry, then, my apology. The question I'm going to ask is about general business conditions that you see developing out there and any concerns you may have about tightening credit market conditions, how this might affect any of the VAR reseller channels that you work with. I do see that the provision for bad debt looks like it dropped quite a bit from the preceding quarter. That might be contrary to what I would have expected and just would like a comment about that and the effect that it may have had on the income statement.

Andy, the overall economy for our focused application is strong globally. We do not really see any exceptions globally. The recent things that went on in the real estate and the interest markets do not seem to be having any real direct impact on our particular market. Bob, do you want add-on to that?

Well, Andy, related specifically to the allowance for doubtful accounts and bad debts, we always remain concerned about our VAR channel and monitor them very closely. As you know, in the second quarter, we had an Italian distributors to be part of a large company, then was spun out, and we took a bad debt charge of over $40,000 in the second quarter.

The reason you're seeing a drop in the allowance for doubtful accounts during the third quarter is the fact that we directly wrote off that, so we wrote off the receivable and the allowance. When you look at the results for the quarter itself, we actually took a charge within bad debts of approximately $115,000, so we actually added to our expenses will rather than picking up any credits.

Okay, that is real helpful. The last question I want to ask is about capitalized software, if you could just give me at an update on that number for the quarter in terms of the gross capitalized software and the amortization.

It was about $[197,000] for software capitalization. Our depreciation for the quarter was about a $859,000 and amortization is about $325,000.

What was the capitalized software, $97,000?

No, $397,000.

Okay, I didn't catch it. Thank you.

Troy Jensen, Piper Jaffray.

Scott, I am curious. You threw out the 4000-unit comment. I would love to get a sense of time frame when you guys could reach that type of level?

In the future.

I mean, any -- obviously I do not think it is going to be an '08 story, right, if you're at 2000 run rate currently?

I think it is important from time to time to step a little bit longer-term than the normal street view and look at the long-term. I think in doing so, we are seeing -- we are at a run rates over 2000 units and we have a plan in the future for 4000, with a vision of 13,000, which says we have got what I believe is a very good long-term future that, by the way, will increase every year as we achieve more and build more confidence in that going after the 500,000 seats of 3-D printers that we believe exist to serve the 500 million at CAD seats that are out there in the world.

And then I have one for Bob. Did you say on the call the service and maintenance was $5.8 million?

Yes.

So that implies that Paid Parts was $2 million? That is the only other component in those services revenues?

There would be an inference there.

Okay, keep up the good works.

Ryan Thibodeaux, Maple Leaf Partners.

Bob, could you clarify a little bit around the decrease in SG&A from the second quarter and just kind of if we should model that going forward as a run rate or was there some kind of one-time benefits from last quarter in there, because the last two quarters, it looks like the run rates was around 8.4. This quarter we're at 7.2, so just curious for the drop off there.

There is some timing of different events that we have that do not necessarily follow quarterly patterns. For example, something as simple as our vacation accrual quarter-to-quarter has an impact. Also, I will go back to be Italian distributor that we took over a $400,000 charge in Q2. Also some of the time of the meetings that we held for our resellers and distributors, so there is really not -- for certain events, there is not a quarter-to-quarter pattern that follows. And again, we try to give our guidance more towards the year on the top line and bottom-line standpoint than trying to break out the individual components.

The implication is that SG&A will then move back up to a more "normalized" run rate in the fourth quarter?

I do not see this as a -- in other words, growth -- if you look at last year, too, I think the third quarter was a lower quarter relative to the second, if I'm not mistaken.

Okay, then can you provide anymore commentary on the Paid Parts business? The growth rate obviously slowed from the prior two quarters and I understand it's up against a tough comparison of last year, but are you seeing any other sequential patterns there or is this business just kind of leveling off at a run rates in here do you think?

No, we continue to be very excited about the growth in the business. As we said, in the nine-month period, it is a 35% growth year-over-year. The thing that makes this quarterly comparison very difficult is the fact that if you go back a year, the quarter-over-quarter growth was 70% as we had some large orders in the third quarter of last year, but as we look long-term, we continue to be very excited about our Paid Parts business.

I apologize, my last question was I think in your comments you had said something about gross margin of 47% last year, but, per the release, it is 52%. If you could just clarify that?

I believe the overall gross margin when you look at the two of them combined is at 47.7 last year.

I'm sorry, the two of what?

Both parts and services.

Okay, all right. Thanks.

One clarifying point before going back to Troy Jensen, Troy, you made an inference that there was a service in revenue. What I reported was the $5.8 million is the total service revenue, so there's no implications as it relates to Paid Parts.

Scott Berry, SMH Capital.

Nice quarter. What is your typical consumable usage you see in the education market versus your other more commercial markets?

Well, typically we are seeing between -- overall, between $3000 and $5000 per year per system in the field, and that would be, let's say, for commercial. With the education operating typically, what, three-quarters of the year, we see three-quarters of that. Had it run full year, you would see the full as the commercial goes.

Okay, so you do not see either less because they are little more budget-conscious or more usage because they have got students running the machine on full-time?

No, not really. We're tracking it every quarter and continuing to analyze it because we're learning more and more as we really went after this about 2.5 years ago, but the only thing that I would comment on it is that there's usually peaks and valleys more so in education because of the way the projects are set up and certainly the final projects relative to, let's say, the commercial market. But as far as overall usage, it's, let's say, three-quarters of the commercial.

Scott, because we sell through resellers and we have that one level of disconnect between end-users, sometimes it's hard to get good information on the consumable usage. We are aware of one educational customer that is using around $10,000 to $12,000 per year, but obviously that would be an exception. So it could be all over the map.

You know where I'm going. I just want to make sure that there is no either upside or downside from an increased system sales into the education market on the consumable side going forward. I think the long-term strategy makes a let's sense. I'm just trying to kind of gauge the next year or two.

We have not observed that. At least, we have not observed that as yet. We're not expecting that either.

One more quick one on Paid Parts. You have any kind of long-term planning estimate on your growth for that, anything you expect? Thirty-five or 33, whatever it was, is certainly impressive. Do you think that is going to continue at roughly that annualized rate?

You know, I think what we have done with Paid Parts at this point is we have said that it is not a material part of our business to break out separately at this point. We're excited about the growth, but I do not think we're at a point in the business that we are going to give a prediction of future growth patterns, other than to say that we continue to be very excited about the potential of the business.

Also the synergy of selling parts that those accounts later typically can use systems, and then later can use parts as their peak and valley goes, so a lot of synergy between 3-D printing, high-end productivity systems, as well as the Paid Parts portion of the business.

As you expand into Europe and Australia with that, are you going to make the parts in Minnesota and ship them or are you going to do any facilities-based manufacturing there in Europe? (multiple speakers)

Scott, we got a lot of people on the call, so if you could get back in queue and then we'll get back to your question, okay? Thanks.

Eric Martinuzzi, Craig-Hallum.

You guys gave three reasons for the gross margins being perhaps less than you had originally hoped for. I'm curious specifically on the Arcam, the system there, what is the expectation -- now that that is a part of your business, how should we be modeling gross margins I guess for the Arcam systems?

We struggle with that. We have not had that many Arcam's sales to date. We're still probably what I would say getting reference accounts within there, even though it has been close to a two-year relationship. So that is someplace I cannot really give you good guidance on it. What I would say is I look forward to Q4. I would expect margins to be above Q3's, but probably less than Q2's, just as a general guide.

Okay. Then strategically, you have been down this path before, distributing other folks' product. Is there a sense -- a timeline, I guess, that internally you guys are using to make a decision about the ongoing relationship here? If we have the same level of sales or implementations of the product a year from now, how should we be thinking about the long-term relationship?

I think what we have said before on the relationship were we took on the distributor relationship not looking at being a distributor long-term, but looking and evaluating the technology as we know it today and then looking at what we thought was the future of the technology, potentially deciding whether it was a technology that we wanted to try to merge companies in the future and that is something that we continue to look at. Obviously the initial two years has been slower and a disappointment both to ourselves as well as Arcam.

Of course that is very typical in early-adopter type sales of new technologies, that is very, very typical of not (technical difficulty) industry, but any technology.

Lastly on the tax rate, it was slightly less than I had anticipated for this quarter. Do we run with that as far as anticipated tax rate for Q4 and beyond?

No, part of the things that happens with the new FAS 123(R) (technical difficulty) variability within a quarter, because the stock option exercises of incentive stock options in a given quarter have an impact on the quarterly rate. As I look at Q4, I would expect us, excluding any potential discrete items that may come up in the quarter, I would expect the rate to go back to a higher rate more in the normal range for Q4.

That normal range being --?

I think we gave probably in the 33 to 35% range.

Thank you.

Jeff Rosenberg, William Blair.

On the gross margin issues, when you talked about the fact that 3-D printers are still seeing the benefits of higher ASPs year over year, but it seems like from the fact that the way you have cited that mixe as an issue in the quarter, was ASP down in the quarter sequentially versus Q2?

Yes, Jeff, what you saw in, as we mentioned that a little over 60% of our 3-D printers in the quarter were the high-end Elites, or SSTs, whereas I think in the previous quarter and year-to-date were running a rate of about 70% were Elites and SSTs. That is not unusual given the fact that the Elites was a new product introduction earlier in this year, so a sequential basis, the gross margin would be down.

Okay, so you are sort of implying -- and you said this in your kind of gross margin guidance or commentary about Q4 -- a bit of an unusual bump in Q2 and so -- just because of the new product introduction, but we should think of a little bit more like 60% mix as being more normal. Or was there some seasonality with the low-end in education that maybe made that part higher than usual this quarter?

Yes, that is the other comment that we made is that we had very strong sales in the education, which is exciting for the long-term. For the particular quarter, it creates a margin mix issue. There's a lot of variable and moving parts in order to predict gross margin and rather than try to look at a particular product line, that is why we gave a range I guess, taking into consideration 3-D printers as well as potential Arcam sales Q4.

Okay. And then the other question I wanted to ask was on consumables. I guess maybe not looking at the quarter, but maybe year-to-date it seems like -- I don't know if this is true, but the consumables growth has lagged the overall growth rate pro forma from Objet and so taking apart the lumpiness or the seasonality, is that something that -- is that accurate? If so, is that different than what you would have expected with the rise in your installed base and the thought that maybe consumables would actually grow higher than the corporate average?

Well, of course consumables track our install base and not necessarily the systems that were shipped in that particular quarter or it even for the full year. But we believe that the consumables are tracking to our growth of the install base, the installed base of systems. So we definitely expect that to continue to grow. I'm saying that as a proprietary consumables, to your comment, adjusting out the Eden consumables.

Okay, but I guess I'm trying to -- it feels like maybe it is wrong that the growth rate has been dashed it has been solid, but has not been quite as strong as I might expected given how much growth you've seen in the installed base with all of the 3-D printer growth a unit basis and I am just trying to understand that relative to expectations. I'm in the growth certainly has not been dashed it is not been poor by any stretch, but it is not been leading the Company's gross like I might have thought. I'm try to understand why might have been wrong and I expect that.

Sure, it is a good observation. The way I would look at it is on a revenue basis if you have, say, proprietary systems growing at 44% year-to-date and we know that that is going into a bigger pool of installed base, you to me it would be natural to assume that the consumables of that I would be a smaller percentage. But over a longer period of time, so let's say next year, you should start to see that more and more. The greater the amount of the systems, that kind of keeps the consumables growing but also a check I percentage of the pie.

I think let me follow-up on that. It is really important look at the growth in the overall installed base as opposed to looking at the quarter over quarter or year over year growth of systems and look to growth in the installed base. So you need to look about trend. The other thing that is really important here is that as the lookout in the marketplace we do not feel that it is a matter that we are losing our consumables assist anybody else. We believe that we are having good cause strong increases to our installed base and that we are managing to keep that as a proprietary consumables for ourselves.

Right, yes, maybe it is a function of the $3000 to $5000 and then the higher number of high-end systems weather as you continue to get data whether that's still feels confident in those numbers.

Yes.

Okay, thank you.

Graham [Raine], [Ferris] Capitol.

I know you don't talk about specific margins for consumables, but can you speak to if they are getting squeezed at all? Do you see any of that trend at all?

We have not had any changes in our consumable pricing whatsoever.

Okay. And then could I get a current share count, please?

Sure, give us a second.

The diluted is 21.8 million.

Okay, thank you.

Clint Morrison.

Backlog, you talked about a strong backlog. Can you give any kind of -- quantify that? Then I am curious as to what is in the backlog. Are you referring to just sort of machines or does that also have service and Paid Part and supplies and that kind of stuff involved? Can you kind of break that out a little bit?

Yes, when we -- we report our back number, our backlog number just once annually, but we wanted to give some color on it as it relates to this quarter because it was a strong backlog as well as being mostly made up of new products, which is really exciting. When we report the backlog number in the 10-K last year, we only report the systems. We do not include any of our maintenance or service revenues whatsoever.

It was interesting. We were able to meet our plans for the third quarter as well as build backlog, so I think we have got a pretty good position not only going into the fourth quarter, but building that up into 2008.

Can you give at all kind of a splits as to how much of that is 3-D versus high-end? Is that sort of different from where the backlog traditionally is?

I thought we did give some numbers and I'll have to go back and find it. I think 80% of the backlog is new products --

We did not split -- we did not give any color as it relates to 3-D printers versus high-end.

I believe it was 40% 3-D printers.

Believe 40% 3-D printers.

Okay. And that is fairly typical?

Well, it is mix-driven, so it does move around. I believe a few quarters ago it was up into the 60% 3-D printers, so it does move around.

Then the second question just sort of on a competitive standpoint, seeing any impact or sort of what is your thought with regards to 3D's $10,000 machine coming onto the market?

Well, of course we currently only compete in the 3-D printing space and this has been for the last five years with Z Corp. We really are not seen any revenue competition from 3D Systems.

To your comment on -- or question on V-Flash, of course V-Flash is not a commercial product as yet. We are -- we are tracking that, as we should, every month, seeing how that progresses, but we really do not see any effects of that either on the stopping of any type of orders or an effect on -- we do not see an effect on our reseller channel. Beyond that, I guess you'll need to talk to the V-Flash guys.

Good, so no impact as of yet. Very good, thank you.

David Cohen, Midwood Capital.

What is -- give me the high and low price range for your Dimension line now.

$18,900 at the low end on a commercial level and $32,900 at the high-end on the commercial level. Those our end-user prices.

Okay. And is very meaningful difference in the annualized rate of consumables between the low-end and a high-end buyer as far as you can tell?

Not as far as we know. Being that some customers have multiple machines in both platforms and they buy the same consumable, it is difficult to track that. But to the best of our knowledge, there is not a significant difference in the amount of consumables used between machines.

Okay, on the backlog, you said that was only systems revenue in that, is that right?

Correct.

You know, we have to backlog. One is shown on the balance sheet, which would be the maintenance, but we are -- in the press release -- yes, in the press release we were reflecting the systems backlog.

Okay. And did you give a number what the backlog was?

No, we did not. We only give that on an annual basis.

What was it the last time you gave it?

Around 4.5 million at the end of last year.

Actually I think number with higher than that, but I don't have a 10-K in front of me to answer that, but it would be an easy number to check.

Okay. Did you say in the press release that the current backlog is above that number?

Yes.

Okay. Was there any driver of the backlog, availability of parts, components, or anything in terms of your ability to get product out the door? You obviously had the orders. Was there, for any of the lines, issues in getting product out the door?

Yes, one of the things as I talk about the increase in inventory during the quarter, we had -- you know we have five different units that we offer on 3-D printers and our forecasted mixed was different than what we anticipated, so we actually built inventory for some components of our 3-D finished goods inventory, whereas part of the backlog is different units that we were completely sold out of.

Okay, thanks, guys.

Scott Berry, SMH Capital.

Do we -- have you sensed an increase in the number of or percentage of units being used for DDM? I think, Scott, you have said in the past it's in the 10%-plus range and rising. And same thing for Paid Parts, the number that are going toward DDM applications, can you talk (multiple speakers)

Yes, we believe that the usage or the sales to the usage continues to grow. It is hard to quantify, however, since for instance, on our survey of 1000 of our customers, 41% of the FDM system customers said that they use our system for (technical difficulty) or rapid manufacturing in some frequency, so what is difficult to quantify, and we are getting more clarity every quarter as go, is how much usage of the systems, and of the parts that are bought, let's say, in Paid Parts, how much of that is large betas, which may be more towards prototypes, how many are used for alpha applications versus actual end-use. And we are quantifying that.

But I think to your basic question, yes, we are seeing more and more use and it has been very steadily growing. I have been tracking it for about a four-year period and each year it has got a very healthy, consistent growth.

Good, thanks.

There are further questions of this time. I would like to turn the floor back over to management for closing comments.

Okay, well, in closing, we believe that we're in the early stages of a tremendous growth opportunity. Our 3-D printing business has maintained strong positive momentum. Our proprietary consumables are growing with our installed base and our proprietary high-end system business has renewed growth prospects. We are also very excited about the new opportunities from the new product to be introduced later this quarter, with more details coming out later in the quarter. Finally we're excited about our strategic initiatives that could provide additional growth opportunities in Paid Parts and direct digital manufacturing.

I would like to thank you for your interest in Stratasys and we look forward to speaking with you again in February. Goodbye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.