Stratasys Ltd (SSYS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Stratasys earnings conference call. My name is Dan and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) During questions and answers, in the interest of time, please ask one question and then one follow-up and then re-enter the queue.

I would now like to turn the call over to your host for today's call, Mr. Shane Glenn, Director of Investor Relations. Please proceed, sir.

Good morning. Welcome to the Stratasys conference call to discuss fourth-quarter financial results. Representing Stratasys' executive management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump, and CFO, Bob Gallagher. A quick reminder that today's conference call is being transmitted over the web and can be accessed through our Investors section of our website at www.Stratasys.com.

We will begin with the Safe Harbor statement. All statements herein that are not historical facts or that includes such words as expects, anticipates, projects, estimates, vision, planning, or believes or similar words constitute forward-looking statements covered by the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Except for the historical information herein the matters discussed in this news release are forward-looking statements and involve risks and uncertainties. These include statements regarding projected revenue and income in future quarters; the size of the 3D printing market; our objectives for marketing and sales of our Dimension 3D printers and our Fortus 3D production systems, particularly for use in direct digital manufacturing; the demand for our proprietary consumables; the expansion of our paid parts service; and our beliefs with respect to the growth in demand for our products.

Other risks and uncertainties that may effect our business include our ability to penetrate the 3D printing market; our ability to maintain the growth rates experienced in this and preceding quarters; our ability to introduce and produce and market new materials such as ABSplus and ABS-M30 and the market acceptance of these and other materials; the impact of competitive products and pricing; our timely development of new products and materials and market acceptance of those products and materials; the success of our R&D initiative to expand the DDM capabilities of our core FDM technology; and the success of our RedEye OnDemand and other paid parts services.

Actual results may differ from those expressed or implied in our forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements but we expressly disclaim any obligation to do so even if our beliefs and expectations change.

In addition to the statements described above, such forward-looking statements include the risks and uncertainties described more fully in our reports filed or to be filed with the Securities and Exchange Commission including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

The information discussed within this conference call includes financial results and forward-looking guidance that are in accordance with US Generally Accepted Accounting Principles. In addition, non-GAAP financials are provided in an effort to give information that investors may deem relevant to the Company's operations and comparative performance, including the identification and exclusion of expenses associated with stock-based compensation required under SFAS 123R, impairment charges, and restructuring expenses. Appropriate reconciliations between non-GAAP and GAAP financial measures are provided in a table at the end of our press release.

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

Good morning and thank you for joining us to discuss our fourth-quarter financial results. During the quarter we generated 11% revenue growth in our proprietary products and services despite the challenging economic environment.

Sales of our high-end FDM systems grew by 41% during the quarter and 40% for the year. We recently repositioned our high-end FDM systems as 3D production systems under the Fortus brand name. This performance is a result of several new product introductions and our successful expansion into new direct digital manufacturing applications or DDM applications. DDM applications also had a positive impact on our RedEye paid parts business, which grew by 36% during the fourth quarter.

Fiscal 2008 represented on another record year for revenue and operating profit for Stratasys. In 2008 we introduced five new products and reached a major milestone upon installing our 10,000th system since our company's inception. We also completed a major development project within our 3D printing business and launched a revolutionary new product, uPrint, the first world's first personal 3D printer. All of this despite a very challenging economic environment.

Okay, I will return later to discuss some of our strategic initiatives but first I would like to turn the call over to our CFO, Bob Gallagher, who will further highlight our fourth-quarter results. Here is Bob.

Thank you, Scott. Prior to discussing the details of our financial results, we would like to outline the relative impact of discontinuing in our product distribution agreements in 2007. As we have previously outlined, we discontinued the distribution of Arcam products in 2007 which has created certain issues when conducting year-over-year comparative analysis of our financials.

In the fourth quarter 2008 we recognized no revenue related to discontinued products compared to approximately $1.4 million in the same period last year. Starting with the first-quarter of 2009 the prior year's quarterly revenue comparisons should be relatively free of distributed product revenue.

Total revenue increased by 6% to $31.9 million for the fourth quarter of 2008 compared to $30.2 million for the same period last year. Revenue from proprietary products and services, which excludes the $1.4 million in distributed product-related revenue from last year, increased by 11% in the fourth quarter over the same period last year.

The Company shipped 570 systems during the fourth quarter versus 536 last year. Our 3D printer sales continued to be negatively impacted by the weak global economy as our users deferred capital investments and cut back on discretionary expenditures. In addition, the fourth-quarter results include a limited number of Dimension uPrints. We have began limited distribution of the system in December to better position for the product's immediate availability in January of this year. As we will discuss later, we believe the anticipated availability of the uPrint 3D printer may have impacted our 3D printer sales during the fourth quarter.

Fourth-quarter product revenue as reported increased by 1% to $25 million when compared to $24.7 million for the same period last year. We recognized no distributed product revenue during the fourth quarter compared to $1.4 million in revenue we recognized during the same period last year. Excluding this revenue, proprietary product revenue increased by 8% over the same period last year.

Three main factors impacted our proprietary revenue growth in the fourth quarter. First, revenue from proprietary high-end systems, which we are now calling Fortus 3D production systems, increased by an impressive 41% when compared to last year. This was a result of the positive momentum we are experiencing from our new systems combined with our successful efforts to expand into new direct digital manufacturing applications. We continue to be pleasantly surprised by the outstanding performance of our Fortus line.

Second, although 3D printer units increased by 5% during the fourth quarter, 3D printer revenue declined by 12%. As we mentioned earlier, 3D printer sales continued to be negatively impacted by the weak global economy. However, 3D printer revenue was likely negatively impacted by the anticipated rollout of our new personal 3D printer, the uPrint, which we announced publicly in January but began limited distribution of in December of 2008.

The uPrint may have been the most highly-anticipated product in our company's history. During the fourth quarter certain orders for our existing 3D printer line may have been delayed to provide customers with the option of purchasing the new revolutionary, low-priced uPrint in January. Lastly, our consumable revenue was flat during the fourth quarter, a function of the inconsistent buying patterns of our resellers combined with the likely negative impact from the slowing economy.

Fourth-quarter service revenue as reported increased by 25% compared to the same period last year. We recognized no distributed product-related service revenue during the fourth quarters of 2007 or 2008. Our paid parts revenue increased by 36% for the fourth quarter compared to last year, which represents an acceleration in the growth rate experienced during the third quarter. The RedEye paid parts business continues to improve on their execution, particularly for low-volume, direct digital manufacturing applications.

Gross profit was flat at $15.9 million for the fourth quarter of 2008 when compared to the same period last year. Gross profit as a percentage of sales declined to 49.9% when compared to 52.7% for the same period last year. The decline in gross margin percentage was driven by a major shift within our 3D printer business as we began distribution of our uPrint 3D printers in the fourth quarter.

As we discussed earlier, the anticipated introduction of uPrints likely disrupted sales of our legacy Dimension 3D printers during the period. These legacy printers carry relatively higher margins. As you recall, our 3D printer mixer over the prior quarters has been favoring our higher-priced, higher-margin 3D printers.

In the fourth quarter of 2008 uPrint represented approximately 30% of all 3D printers shipped in the fourth quarter and although we have continued to generate solid gross profit margin on uPrint system sales, the system represents our lowest margin 3D printer. It's important to emphasize that we believe the uPrint can significantly expand our install base of systems going forward, which bodes well for future sales of high-margin consumable revenue.

Operating profit including discrete items declined by 20% to $4 million for the fourth quarter of 2008 compared to $4.9 million for the same period last year. Operating expenses including discrete items increased by 9% to $12 million during the fourth quarter compared to last year. The fourth quarter of 2008 included restructuring expenses totaling $545,000. The restructuring expense net of tax was approximately $357,000 or $0.02 per share.

These restructuring expenses are associated with the recent change in the Company's North American sales and marketing organization. With this restructuring, we changed our distribution model for our high-end systems now called Fortus 3D production systems from a direct sales model to an indirect sales model. Under this new structure a select group of geographically located resellers will sell the Fortus line allowing us to eliminate certain fixed expenses associated with our selling and distribution efforts in favor of the cost structure that is more variable and remains greater flexibility.

SG&A expense included $361,000 of stock-based compensation expense required under Statement of Financial Accounting Standards or SFAS 123R compared to $232,000 for the same period last year. Stock-based compensation expense net of tax was $341,000 or $0.02 per share in the fourth quarter compared to $202,000 net of tax or $0.01 per share for the same period last year. A table provided within our press release provides itemized details surrounding this and other discrete items incurred during the period.

Pretax profit including discrete items declined by 44% to $3 million for the fourth quarter of 2008 compared to $5.4 million for the same period last year. Total interest and other income for the fourth quarter decreased to a loss of $923,000 from a profit of $470,000 last year. Other income in the fourth quarter of 2008 included an asset impairment charge of $831,000 for an adjustment to fair value of an auction-rate security in Jefferson County, Alabama. The impairment charge net of tax was approximately $512,000 or $0.03 per share.

The fourth quarter also included approximately $535,000 in foreign currency transaction losses, which was attributable to the strengthening dollar during the period.

Income tax expense as reported amounted to $1 million or a rate of 33.7% in the fourth quarter compared to $1.1 million or 20.2% for the same period last year. As you may recall, income tax expense for the fourth quarter of 2007 includes approximately $710,000 or $0.03 per share in previously unrecognized state sales tax -- state tax credits for prior year's research and development expenditures.

Net income including discrete items declined by 53% to $2 million for the fourth quarter of 2008 or $0.10 per share compared to $4.3 million or $0.20 per share for the same period last year. Excluding stock-based compensation expenses as well as all other restructuring items and nonrecurring expenses net income declined by 15% to $3.2 million for the fourth quarter of 2008 or $0.16 per share compared to $3.8 million or $0.17 per share for the same period last year.

Our diluted shares outstanding declined by 782,000 shares from the fourth quarter last year, a result of our lower stock price as well as significant share repurchases.

Our cash and investment position amounted to approximately $48 million at the end of the fourth quarter compared to approximately $61 million at the end of fiscal 2007. We have no long-term debt on our balance sheet. The change in cash and investments from the end of fiscal 2007 as a result of cash used for the stock repurchases combined with higher working capital requirements offset partially by cash flow from operations. We generated approximately $8.7 million in cash from operations just during the fourth quarter.

Inventory balances were $19.9 million at the end of the fourth quarter, which is up from the $12.8 million at the end of fiscal 2007. Our buildup of inventories in 2008 was attributed to four main reasons -- a buildup of inventory to support new product introductions, particularly the 900mc and uPrint; last time buy for legacy system inventory; an increase in consumable inventory to meet future customer demands; and additional strategic buys of consumable raw materials in anticipation of future needs.

Accounts receivable at the end of the fourth quarter was $26.5 million compared to $26.3 million at the end of fiscal 2007, but down significantly from the $31.5 million at the end of the third quarter. Days sales outstanding or DSOs was 76 days compared to 80 days at the end of fiscal 2007 and down significantly from the 94 days at the end of the third quarter.

I would like to summarize some key financial highlights for the quarter. Continued strength in our Fortus 3D production system business driven by our new products and emerging DDM applications. Continued weakness for the sale of our legacy Dimension 3D printers driven by the soft economy and destructive impact of introducing the uPrint 3D printer. Continued strength of our RedEye 3D parts business as we improved upon our execution and benefited from emerging DDM applications.

Flat consumable revenue driven by a weaker economy and inconsistent buying patterns of our resellers. Gross margin contraction driven by a major shift in 3D printer mix; an extremely strong balance sheet and improvements in working capital allocations. We believe our business model is very much intact.

I would like to provide a few highlights regarding the full 2008 year. Fiscal 2008 represented a record year for units shipped, revenue, and operating profit. Revenues rose to a record $124.5 million for the 12 months ended December 31, 2008, and over the $112.2 million reported for the same period last year. Revenue from proprietary products and services increased by 15% in the 12-month period over the same period last year. Despite the weak global economy and restructuring charges, operating profit increased 11% to a record $20.6 million for the 12-month period compared to operating profit of $18.5 million for the same period in 2007.

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

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and the investment community, but based on the current economic environment Stratasys is currently not providing financial guidance for the fiscal year ending December 31, 2009.

Although we have performed well during periods of economic weakness in the past, we are currently operating in an environment with unprecedented economic uncertainty. This uncertainty combined with the many changes in our go-to-market and product strategies over the past few months make visibility into 2009 extremely difficult. We will continuously re-evaluate our position and provide you with updates as conditions change and our visibility improves.

However, I would like to highlight that we have strong positive cash flow and maintain a business model with significant recurring revenue components that maintain strong contribution margins. We generated approximately $14.5 million in cash from operations in 2008. We are also financially solid with no long-term debt, with a cash and investment balance that is approaching $2.50 per share.

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

Thank you, Shane. Fiscal 2008 generated record revenue and operating profit for Stratasys. We introduced five new products during the year and reached a major milestone with the installation of our 10,000th system since our company's inception. In 2008 we also made changes to our distribution strategy, announced a major collaboration with a world leader in digital design technologies, and completed a major product development initiative in 3D printing. So, yes, 2008 was a very busy year.

We recently announced the repositioning and rebranding of our high-end FDM systems, which we are now calling 3D production systems under our Fortus brand name. Starting in January of this year we began selling our Fortus line through a select group of Dimension resellers in North America. These new resellers will continue to support our Dimension 3D printer line but also have committed additional resources that will greatly expand the sales and support of our Fortus line in North America.

This is similar to our successful international model where resellers support both product lines and it leverages the Company's success with what we believe is the strongest sales channel in the industry. We now have a three-tiered distribution model -- full-line Stratasys resellers, which sell the entire Stratasys product line; full-line Dimension resellers that sell legacy Dimension 3D printers, which also includes the new personal 3D printer, the Dimension uPrint; and lastly, uPrint resellers which will sell only the Dimension uPrint 3D printer.

We believe our uPrint distribution provides the most opportunity for expansion over the coming months. We believe this new distribution structure will make the most of our expanding product line and our new DDM initiatives.

DDM will remain a focal point for our Fortus line in 2009. As you recall, we recently announced the addition of Jeff DeGrange to spearhead our DDM initiatives internally. Jeff says a former senior project leader from the Boeing Company.

Our DDM efforts should be bolstered by our recent introduction of a strong, light-weight, and flame retardant thermal plastic material called ULTEM, which is now available on our 400mc and 900mc systems. ULTEM is used on commercial aircraft and is widely used in aircraft interiors. The material was originally developed to help the aerospace industry boost fuel efficiency as well as safety. It offers strength and flexibility while producing 5% to 15% lighter interior parts than other aerospace plastics and is a production grade thermoplastic.

The introduction of Dimension uPrint in January, the world's first personal 3D printer, represents a major inflection point in our goal of expanding our 3D printing business. This new product was received with great enthusiasm at our global reseller meeting last month in Anaheim, California, which was attended by over 250 channel partners and industry professionals.

With uPrint we have improved upon several key whole product characteristics that are critical for our ongoing success. These characteristics include product price, functionality, reliability, ease of use, and office compatibility. Specifically, the uPrint has a smaller footprint, higher reliability, and easier serviceability compared to previous products.

The consumable delivery system has an eco-friendly design, which also offers our -- an ability to lower our cost on the consumables and provides the user with uninterrupted print capability. The product comes ready to use at only $14,900 and will be serviced by a third-party service company.

We believe the new price point represents a significant milestone in a market we continue to believe is price elastic and ripe for expansion. Seven years ago during a recession we launched the first successful 3D printer at $30,000 proving an inflection point in this price elastic market as our sales increased significantly. Two years ago we set our next tipping point price point with the launch of our $19,000 3D printer in the education market. And now we have set our next significant inflection point at $14,900 in our long-term strategy to make the printers more affordable.

One other notable advantage of uPrint is the opportunity we have to greatly expand our points of distribution. The new price of $14,900 combined with this attractive features and third-party service agreement will lend itself to new distribution opportunities which we will be addressing in coming months. Bottom line, we believe uPrint is a product that can ultimately propel our 3D printer unit volume to the next level.

Most importantly we will ultimately accelerate -- the uPrint will ultimately accelerate our highly profitable, reoccurring consumable and revenue streams. It's important to remember that 3D CAD seats rapidly exploded upon hitting their $15,000 inflection point to now over 15 million seats. Understand that this is to the same user, the same application, and the same budgets for our uPrint 3D printer. If you have not yet seen the uPrint, we would like to encourage you to view our new product demo that can be accessed on the Dimension website, dimensionprinting.com.

Well, our RedEye paid parts business increased 36% during the fourth quarter as business continues to gain traction with DDM customers that require low volume manufacturing of finished parts. This easy-to-use online part quoting, ordering, and fulfillment service is ideal for the entire spectrum of new product development from functional prototypes, jigs, fixtures, as well as low-volume manufacturing of end-use parts.

The RedEye team was excited to announce in December a major collaboration with Autodesk, a $2 billion-size world leader in digital design technologies. The new offering allows users of AutoCAD design software to order digitally manufactured parts quickly and easily from RedEye through a printing feature embedded in AutoCAD.

In conjunction with that announcement, our technology took center stage at the Autodesk University in December where Autodesk displayed a full-scale motorcycle model built at RedEye from the designs generated in Autodesk Inventor software. The motorcycle is now on display at the Autodesk's new demo technology center in San Francisco. We were pleased that companies like Autodesk are increasingly recognizing the value of incorporating additive fabrication technologies into the design process.

Although consumable revenue was flat during the fourth quarter, we believe uPrint can generate significant growth in our unit volumes during 2009 which bodes well for our future consumable and maintenance revenue. It can't be overstated that the introduction of uPrint represents a significant milestone in our goal to greatly expand our installed base of systems.

Since the introduction of our first 3D printer in 2002, our system unit sales have grown at a compound annual rate of 34%. Over that same period our consumable revenue has grown at a compound annual rate of 28%. We plan to continue this strong trend over the coming years.

Okay, I will return with some closing comments. But, first, we would like to address any questions that you might have. Operator, let's open up the call for questions.

(Operator Instructions) Eric Martinuzzi, Craig-Hallum.

Thanks. I understand your reluctance to give revenue guidance in the current environment, but I was wondering if you could give some directional if not specific commentary regarding gross margin expectation or maybe operating expenses? In other words the 49.9% that we saw for Q4, do you view that as something from which to grow or is that a peek that the impact of the uPrint continuing to weigh there?

And then on the operating expense side, I know historically Q1 you have had seasonal things like maybe audit charges or reseller conference launch fees, but operating expense commentary. Anything you could give us would be helpful there.

I think, Eric, if you look at the product mix and the comments that we have made, certainly the uPrint is a product that we have great hope for going forward in the future. And we did indicate that it's the lowest margin of our 3D printers so it's going to have an impact on our margins as we look going forward.

What should offset that going forward is that it's going to expand our install base of systems and as you know, our consumables has very generous margins. The timing of the units getting out there in the install base will impact what the margins would be quarter-to-quarter so the uPrint is going to weigh it down and we should have some uptick coming back on the consumable side.

In terms of operating expenses, in this environment we think it's really important to keep control of our operating expenses. However, we did have reseller meetings for both our Fortus product lines with the rebranding efforts in Q1 as well as a large reseller meeting in Q1 as it relates to the public introduction of the uPrint. So there is going to be some significant costs associated with those introductions in Q1.

Okay, and then just one follow-up. The number of uPrints, you talked about them being about 30% for of the Dimensions. I missed some numbers there. Can you go over those numbers again for Dimension in total and then if you can give uPrints specific, i.e., number of units in the revenue?

Yes, we said that the unit volume had grown 5% for 3D printers, but the revenue had declined by 12%. So I think those are significant factors in there. We said that we had shipped 570 systems during the fourth quarter versus 536 last year and that uPrint was 30% of the 3D printer unit volume in Q4.

Okay, thank you.

Andrew Nowinski, Piper Jaffray.

Thanks for taking the call. I am sitting in here for Troy Jensen. Just wondering on the uPrint, you said it had a one-time freezing effect or disruption effect due to the anticipation of the uPrint. Just wondering is that going to further cannibalize any sales of your SST offerings or was that really just a one-time slowdown?

If you look at that and took the advice that it was going to freeze the rest of them, we would never have introduced our whole Dimension product line with the idea that our high-end systems would never sell. And in 2002 when we introduced the Dimensions, people believed that it would freeze and cannibalize completely our high-end systems sales. As you will note, throughout the year we have been reporting a 41% increase in our high-end system sales so we think there is enough differentiation in the features, etc., that for people who can afford a uPrint, they will buy a uPrint. People who can afford more features will buy our high-end Dimensions.

Okay, got it. Thanks. Could you give any color on the percentage of US-based resellers that are selling the high-end this quarter and what do you expect it to be at the end of Q1?

Andrew, it's a few numbers, less than 15 resellers in North America that are selling the Fortus line now. So there is opportunities to expand that, but it will remain a fairly low number relative to the overall distributors that we have in North America.

But that is -- in terms of selling feet on the street, it's over three times the amount of feet on the street year-over-year.

Okay, great. Then just one last question, the $3,000 price cuts you guys spoke about at the launch of the uPrint have those already taken effect?

Yes.

Okay. Thanks, guys.

Jim Ricchiuti, Needham & Co.

Thank you. I was wondering if you might be able to comment on the lag that you might anticipate as you get the uPrint units in the field and at what point they will be generating consumables. Maybe contrast it with some of the previous 3D printers you have introduced?

We were very excited the momentum that we saw in the show and we know -- we have uPrints out there within customers now that are up, running, and generating consumable revenues. With any product launch it's difficult to predict when exactly they all get out there, but we will start seeing some consumable revenue for that starting in Q1.

We also typically don't see a lag because many times customers want consumable -- at least a month of consumable with the sale of the system. So there is -- if there is a lag that usually bridges the lag or the gap.

One thing that is exciting about the uPrint is we talk about the ease-of-use. For someone unfamiliar with this system, from the time getting it out of the box, getting it up, and network running is well less than a half a day's time.

Okay, thank you. I wonder if you could also comment about the strength you again saw with Fortus in the quarter. Can you give us a sense of what end-markets that might be coming from and to what extent do you feel that is sustainable, particularly as you transition to this new strategy?

I can talk generally, but I am not sure I can talk specific. I think in general there is great traction in aerospace, good traction in areas of automotive and automotive aftermarket. There is a large automotive aftermarket for custom cars and autos that we have been positioned for about a two-year period that we are going after quite well.

The other thing that we are seeing is that some of these applications that we are seeing from DDM are very unique. For example, we have someone using the systems for complete DDM applications within the medical area, using it for large medical devices. And I think we are going to see more and more of those types of applications and it's going to be more of the specific applications than reliance on any particular industry.

Okay, thank you.

[Ryan Thibodeaux], Maple Leaf Partners.

Good morning. Could you talk a little bit more -- I know you are not able to give specific numbers -- but just a little bit more framework on the uPrint gross margins and how that is going to impact the product gross margins going forward?

Yes, Ryan, in terms of the uPrint, as we indicated we do not give margins related to our various products. I think we have made it clear in the past that we have made great margins on our high-end 3D printers as well as our Fortus line.

Our uPrint is our lowest margin product that we have so it's going to have an impact on margins as you see somewhat in Q4. Part of it is what is the growth in the consumable usages that we are going to see from the systems that is going to offset that. I think it's really difficult at this point as the product is just getting out in the marketplace and into users hands to give you much color related to that.

Maybe to ask it a different way, if you are looking at roughly a 30% price reduction like from the $15,000 -- from the average $22,000 or so that we were looking at in the past several quarters, it's safe to assume that the costs were not reduced that much as well?

No, the Company, Stratasys, has an excellent history of successfully engineering our costs down and now with our supply chain management also getting the quantity costs driven down as well. So for the past seven successful years of 3D printers, each quarter we have had successful reduction in product cost not just in direct labor and materials but then the overhead that drives that. So uPrint definitely has a lower product cost than our other Dimension products.

Okay. Then just last question, just in terms of the strategy around uPrint and consumables. Are you expecting a higher margin on the uPrint consumables or just simply volume driven? And if so, on both questions what kind of data do you have surrounding that that gives you the confidence that consumables are going to more than make up for the margin decrease?

Well, I think that when you -- Ryan, this is Shane, when you look at the life of the system and the expectations that we have on the consumable usage, we feel that the consumable usage is going to be close to in line with what we have seen historically with the 3D printers, which is a $2,000 to $5,000 range. I know it's a wide range, but really strong consumable usage per year per system. When you look at the returns on that over the life of the systems, which can be over five years, we certainly make more money on the consumable than we do on selling the system.

Now specifically to the margins on the consumables, the pricing is essentially the same for the consumables for the uPrint as it is with our other Dimension 3D printers. But if you look at the cost of the manufacturing of that consumables we have had some improvements there. As we outlined prior when we introduced the system, we have a brand-new delivery system with the consumables for uPrint.

There is no actual case that comes with the consumable like our other Dimension 3D printers. That is no longer there as a replaceable or reusable carrier that comes with the uPrint 3D printer, which greatly reduces our cost per cartridge. So we have higher margins on the consumables and our expectations are that we will see really strong usage in line with what we have seen historically. Over a five-year to seven-plus-year period that creates a really strong, profitable situation for us with that system in the field.

Okay, thanks a lot.

Brian Drab, William Blair.

Good morning. Just first on the paid parts business, in the previous few quarters, not including third quarter '08, growth had slowed sequentially and now it has stepped up again in the last couple of quarters and you have this interesting agreement with Autodesk going forward. When you think about that business do you expect that we are going to continue to see it accelerate through 2009?

We are expecting good growth for our paid parts business as we look throughout all of 2009. We have got some good momentum there and I think what we have said before on the calls is when we have had slow growth, part of that has been execution. I think we have put some metrics in place and parameters and new leadership there that will help drive that growth in 2009, especially when you take into consideration our relationship recently announced with Autodesk.

Okay. And then just one housekeeping question. Stock compensation typically is about a $0.01 a quarter; it's $0.02 a quarter here. What do you expect for run rate going forward just so we can model?

I think you going to see a run rate going forward very similar to what you saw in Q4.

Okay. All right, thank you.

Graeme Rein, Bares Capital Management.

Good morning. Scott, you mentioned the uPrint might open you up to some new distribution opportunities. Were you meaning that you might add on some resellers or are you talking about plugging into someone else's distribution system or can you say anything else along those lines?

Sure. We continually grow turnover, but grow with our Dimension University go through a full training program. So we have an ongoing growth plan for resellers and many of the resellers in the CAD markets that sell CAD typically don't do mechanical service. So by having -- using a third party to do the service we are able to on the mid-term and long-term cap into significantly more resellers at the right time. But, yes, we have a continued -- we have a history of growing the resellers and certainly the biggest in our industry. But we also have a plan to continue that growth.

How has the response been so far? Have you seen these types of resellers that you are mentioning that don't like to do the service jumping at the opportunity to distribute uPrint or is it too early to tell?

Well, in a way it's too early to tell because we just did our launch. However, for three to maybe four years globally resellers have been requesting to pick up the line but without the service. Our policy is to always have the service so we certainly have a long list of resellers that have been bugging us for the last three years that at the right time we can go to to expand.

I think it's important in our reseller channel -- our resellers have been long-term relationships with us. We are going to sign up new resellers that are only going to be uPrint, but we are going to make sure that we are signing up the right ones that are financially responsible as well as ones that we think have good opportunities to sell the products.

Okay. Then the last follow-up to Bob, in terms of the capital spending can you say what it was for the fourth quarter? I think it was 6.5 through the first nine months. And then maybe what it looks like for the next year or two?

Yes, in the fourth quarter it was approximately between $2.2 million and $2.3 million for the quarter bringing the total to about $8.5 million, I think, for the year. Looking to 2009 I would expect that to actually be trending down.

Okay. Thanks a lot, guys.

Andy Schopick, Nutmeg Securities.

Thank you and good morning. Bob, I am going to ask you my usual questions and a further clarification on the P&L as well. The $1.4 million and the restructuring and asset impairment charges, respectively, where are they reflected in the P&L? I am not sure what that other expenses and other income of 778?

Okay. From a housekeeping standpoint, the things that we have on a table in the quarter was the stock-based compensation expense, which shows up in SG&A, the auction rate security of $830,000 which shows up in the other income section as a loss. And then we had the sales and marketing reorganization which shows up as SG&A. I think if you look at the table attached to the press release, we put specific line items to give you that reconciliation.

Okay, thanks for that. Can you give me the capitalized software in fourth quarter and the amortization of prior deferred software?

The software capitalization was 444, and amortization was 438. So they are essentially flat.

That is good. Scott, a question for you about the concerns you may have about the auto industry, that particular vertical which is certainly one of your major verticals. What are the concerns that you may have at this time in that particular area of the business? What are you seeing?

Yes, our main focus here in this last couple of years has actually been in the automotive aftermarket. Stratasys is in a unique position to be focused on eight major market sectors and selling into three regions, meaning selling globally. So as one territory or even one region, industry is reduced, we simply move our resources around to areas that we think have more promise for that time period.

And we have certainly been doing that with the automotive aftermarket where they want to have customization of, in some cases, one part, two parts, 10 parts, and they want to have a quick turnaround.

All right, thank you.

Steve Denault, Northland Securities.

Good morning. When does the Dimension printers -- the average $3,000 ASP reduction take effect?

Immediate.

So when did it start, January sometime?

Yes, late part of January.

Okay. What are the international in terms of percent of mix in the quarter and what was the growth rate there?

I think international for the quarter represented about 43% of sales overall, and actually I think year-over-year I don't think we saw any growth in our international business. We had really strong international business in Q4 of 2007 so I think we actually saw a slight decline in our business in Q4 internationally.

Okay. How do you guys price your product from a currency standpoint in the various geographies?

Our pricing strategy is we sell in US dollars throughout the world with the exception of Europe where we sell in euros. Traditionally, especially as it relates to the Far East, we have a higher dollar price than we do in the US. And also we have a slightly higher -- taking currency out of the equation for the euro for a moment, we have a slightly higher price also in Europe for our products.

With a higher cost.

Yes. So internationally we have slightly higher prices by design than what we offer domestically.

Okay. Do you think that the product gross margin in the fourth quarter is representative of what we should expect for '09?

You know, we have seen dramatic ranges in our margins especially quarter-to-quarter as it relates going forward. But clearly with the uPrint being a significant new product it's going to put pressures on the margins as we go out through 2009. What the mix is going to be -- again remember this is a quarter where we saw flat consumables, whereas in Q3 we saw 20% consumable growth. So there is going to be pressure on margins but I don't think to the extent you saw in Q4.

Okay, thank you.

Clint Morrison, Feltl and Company.

Good morning, guys. Back to distribution, you talked about you have kind of got three types of distributors now. Can you give us some numbers, how many distributors you have in those categories? And specifically, I am looking at uPrint only. Obviously, those are new so how many new distributors have come on and maybe a little bit of color as to sort of what the numbers of distributors look like a couple of quarters out. What are you shooting for?

Clint, as Scott mentioned, we are kind of early in the process, only three weeks, with the strategy of looking at uPrint-only distributors. So I think if you were to look at the makeup of the channel today, once again you would have that relatively small number of full-line distributors, less than 15, in North America and you have a bulk of our distributors or our resellers are still in that full-line Dimension, which includes all the legacy 3D printers, the 768, the 1200, and the Elite plus the uPrint, and then a very small number of --. Once again, we are just developing the uPrint only strategy so a very small number of those.

So any expectation or target as to what you are looking for in terms of uPrint-only, assuming that is where the real distributor growth is going to be over the next year?

Clearly, that is going to be an area that we focus on over the next year is developing that you uPrint channel. But we are not prepared to discuss specific targets as to how many we want to sign up and how many locations we want to have today.

Okay. Do you have a total number of distributors at the moment?

Yes, we still have over 200 locations worldwide. Some of that is individual companies with multiple locations.

The amount of resellers really hasn't changed dramatically in 2008 over 2007.

Okay, thank you.

Jeff Evanson, Dougherty & Company.

Good morning, guys. Wondering if you could talk with us about when the Fortus go-to-market strategy is going to change? Did that change in January or sometime in Q4?

We started the process in Q4 on a highly confidential basis, signed up -- it's actually a slow process to get to 12 and now 15 total -- and officially launched that January 1, 2009.

Okay. Could you talk possibly the impact that the weaker US dollar had on your profit in Q4? Stronger US dollar, excuse me.

The dollar -- actually, we saw probably the most variation in the dollar that we saw probably in any quarter in the last five to 10 years. We saw probably a 17% to 18% fluctuation in the euro relative to the dollar going from very high, low, it came back up again. So there has been dramatic fluctuations.

Clearly, you saw in our transactions that we took losses as it relates to that. so the stronger dollar does have an impact on our margins. However, I think with the fluctuations in the currency it's going to require us to look at our euro pricing, not just on a semiannual basis, but probably be evaluating that on a quarter-to-quarter basis as we move forward so that we nominalize the impact that the exchange rates will have on our P&L as it goes forward.

And then how much do you think you can improve uPrint gross margins throughout 2009?

Our uPrint gross margins, are going to -- I don't think we are going to see a -- we just introduced the product, I don't think we are going to see a dramatic change in the cost as we look forward in 2009 from what it is today.

So your volume component buy has already happened?

Well, yes. You have to understand the way we launch we start with high volume in order to get demo units out to our resellers. The demo units is an integral part to the process of doing benchmarks and samples and closing a sale. So we start that process actually way back in the tail end of Q3 all the way through Q4; you saw that in effect in our inventories. So we were already, both from a volume standpoint but also supply chain capacity, at a very high capacity. Higher than we have ever actually been at the Q4 point and we are today as well.

Okay, thank you.

Jim Ricchiuti, Needham & Company.

Thanks. A question just with respect to SG&A. Bob, I understand that there will be some unusual expenses in Q1 relating to the reseller meeting and some other expense. But I wondered, going forward as we look out to Q2 can you give any sense as to what savings that you might be realizing from the shift in strategy with respect to the Fortus product line?

Yes, as we modeled the Fortus line -- long-term it's going to give us great efficiency and we think it's incremental to us on the operating income line as we move forward in 2010, 2011, and beyond. As we look at it in 2009, we are going to make sure that we are supporting our channel very strongly. And we think that the change in strategy in 2009 will actually be neutral on an operating income line.

It's going to have reductions, obviously, in our sales and marketing expenses as we don't have the direct feet on the street. Conversely, that is going to be offset by some compression on the gross margins as we are giving a portion of the gross margin to that distributor as they have made that investment in feet on the street.

Okay, thanks. And just a question on -- you gave us a little bit of color on the international domestic sales. Apples-to-apples domestic what was that -- the increase in the business domestically?

In the quarter we actually saw a strong domestic business and we had on an apples-to-apples probably, I think, it was over a 30% growth in the quarter.

30%. Okay, thank you.

Ryan Thibodeaux, Maple Leaf Partners.

Just wanted to -- just considering the magnitude that the uPrint had on the quarter as far as unit shipments and the presumed impact it's going to have going forward, can you finally just give us a Dimension shipment number for the quarter? I know you said 5% year-over-year, but it's not really helpful when we have no base number. So just the one-time, can you just give us the number so we can have a better idea of modeling going forward?

We don't break out the Dimension as a unit breakdown.

So the last three calls you have given us number of 70% for the three highest priced Dimensions as a percentage of total Dimensions. Can you give that number for Q4?

Yes, what we said was that 30% of the units were uPrint and the balance of that is going to be, most of that is going to be the higher-priced systems.

So the higher-priced systems represented 55%, whereas in last year it was 76%. So that is the shift that you are seeing in our 3D printer business with the uPrint being 30% of the overall volume in the quarter.

75% versus the 70% last quarter.

76% -- yes, 76% in Q4 2007.

Okay. Just so I get the definition right, the three highest priced could you name those just so I make sure I have it correct?

Yes, 768 SST, 1200 SST, and the Elite.

So the balance then, which is around 30% as well, would be the 1200 and 768 BSTs?

That would actually be 55% for the three that I mentioned, 30% for the uPrint, would leave 15% for the other two units.

Okay. All right, thank you.

Jeff Evanson, Dougherty & Company.

Thanks for slipping me in there. I guess what I would like to know is on the guidance you mentioned the tough economy, but how much is the go-to-market strategy transition and the uPrint impacting the visibility that you have in '09? I would assume that is part of the equation here.

Yes, when we stated our reasons for our omission for guidance, Jeff, that certainly fits into that. So we obviously have a lot of things going on with uPrint, so you would have to go back to 2002 really to find a product introduction that is on the same scale as uPrint. Obviously, a big shift in the go-to-market strategy with the high-end systems and then on top of that you layer what is going on in this irrational market environment and it is what it is as it relates to the visibility that we are seeing right now in '09.

When do you think you will be able to give us some guidance? I would have thought the reseller show would have helped out to a certain extent on that front.

Yes, it did and it didn't. We saw a lot of excitement as it related to the uPrint but I don't know that we can translate that as to what it's going to be for the year in terms of in the market and this economy. I think as we all know the buyers have a crisis of confidence right now.

As we see an opportunity to have more clarity we won't hesitate to give guidance at the point in time where we feel we have more clarity in order to be able to give meaningful guidance.

I guess with about a month to go we shouldn't expect it on the Q1 call?

That would be safe to assume.

Okay, thank you.

That concludes our question-and-answer session for today's call. I would now like to turn the call back over to Mr. Crump for closing remarks.

Although the world is feeling the impact of an unprecedented slowdown in manufacturing worldwide, our financial position is strong. We are solidly profitable with significant recurring revenue components which maintain strong contribution margin. We will remain committed to our long-term goal of providing products and services that help our customers reduce costs and accelerate their new products to market.

We will maintain a flexible business model as we have reduced our fixed costs associated with the selling and distribution of our Fortus 3D production systems in North America. We have positive momentum in our RedEye paid parts and our Fortus production system businesses, and we have introduced a revolutionary new product in uPrint, the world's first personal 3D printer. So we are very well-positioned for the future.

I would like to thank you for your interest in Stratasys and we look forward to speaking with you again in April. Good bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.