Stratasys Ltd (SSYS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Second Quarter 2009 Stratasys Earnings Conference Call. My name is Katina 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 presentation. (Operator Instructions)

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

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

We will begin with the Safe Harbor statement. All statements herein that are not historical facts or that include 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 that 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 the marketing and sale 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 and demand for our products.

Other risks and uncertainties that may affect 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, produce, and market new materials such as ABS Plus 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 recent R&D initiative to expand the DDM capabilities of our core FDM technology, and the success of our RedEye on-demand and other paid parts services.

Our 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 risk 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 10K and quarterly reports on Form 10Q.

The information discussed within this conference call includes financial results that are in accordance with US generally accepted accounting principles or GAAP. In addition, non-GAAP financial measures are included that exclude certain expenses. The non-GAAP financial measures are provided in an effort to give information investors may deem relevant to the Company's operations and comparative performance, primarily the identification and exclusion of expenses associated with impairment charge for certain auction rate securities, restructuring expenses, and expenses associated with stock-based compensation required under SFAS123R.

The Company uses these non-GAAP financial measures for evaluating comparable financial performance against prior periods. The appropriate reconciliations between non-GAAP and GAAP financial measures are provided in a table at the end of our press release.

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

Good morning and thank you for joining us to discuss our second quarter financial results. Although the challenging economic environment continued in the second quarter, we've begun to observe signs that the market conditions have stabilized. Order activity did remain depressed in the second quarter, but leading indicators within our sales channel have improved recently. We're consciously optimistic that sales activity will improve in the coming quarters.

Our new personal 3D printer, the uPrint, continues to be well received following its successful January launch. Although 3D printer sales have been slowed by the economic downturn, our pipeline of opportunities have grown significantly. This strong pipeline should bode well when market conditions improve.

Fortus production system sales declined in the second quarter versus last year by sales nearly doubled over levels realized sequentially from the first quarter of this year. We are optimistic that this represents the start of a positive trend that will continue going forward.

We've strived to remain good financial stewards and manage our assets effectively through these unprecedented economic times. We believe that we've met this goal. We returned to profitability in the second quarter and generated $2.5 million of cash from operations. In addition, we maintain a strong financial position with over $51 million in cash and investments on our balance sheet.

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

Thank you, Scott.

Total revenue declined by 21% to $24.6 million for the second quarter of 2009 compared to $31.3 million for the same period last year. The Company shipped 442 systems during the second quarter versus 540 last year. As we expected, market conditions remained difficult in our second quarter which is reflected in our total revenue; however, we have begun to see positive indicators within our channel that conditions could be improving but it's too early to predict the timing or magnitude of a significant recovery.

Second quarter product revenue declined by 27% to $18.2 million when compared to the $24.8 million for the same period last year. Three factors impacted our product revenue growth in the second quarter, all driven by the difficult market environment. First, revenue from Fortus 3D production systems declined by 33% when compared to last year; however, Fortus sales nearly doubled from the levels recognized in the first quarter. Given the recent feedback from our channel partners, we are cautiously optimistic that market conditions may be improving for this business.

Second, 3D printer revenue declined by 34% when compared to last year. 3D printer sales continued to be impacted by the weak global economy. The mix within 3D printer business continued to favor the lower priced uPrint which represented 53% of all 3D printer unit sales during the quarter; however, when compared to the first quarter, the mix shifted slightly toward the higher priced 3D printers, the Elite and 1200 FST. The first quarter included the initial rollout and promotion of uPrint and represented approximately 66% of all 3D printer unit sales versus 53% in the second quarter.

Lastly, our consumable revenue was down 8% during the second quarter over last year as our customers have remained cost conscious in the current difficult economic environment.

Second quarter service revenue was flat at $6.4 million. Our maintenance revenue increased by 12% for the second quarter compared to last year. The growth in maintenance revenue is less acceptable to the current economic environment given that most of the revenue is generated from contracts signed in prior periods.

Revenue in our RedEye paid parts business declined by 13% in the second quarter. Growth in the paid parts business continues to be negatively impacted by an aggressive pricing environment. Gross profit declined 33% to $11.6 million for the second quarter of 2009 when compared to the same period last year. Gross profit as a percentage of sales declined to 47% compared to 55.3% for the same period last year. A factor driving our decline in gross margin percentage versus last year was the impact of our fixed costs allocated over a relatively lower total revenue for the quarter.

In addition, the decline in gross margin percentage was driven by a significant shift within our 3D printer business as we began shipping the uPrint 3D printer in the first quarter and unit sales of our higher priced 3D printers declined significantly versus last year. As you'll recall, our 3D printer mix last year favored our higher priced, higher margin 3D printers; however, the gross margin percentage of 47% was a dramatic improvement over the 41.4% recorded in the first quarter. This sequential increase is attributable to the sequential shift in product mix within our 3D printer business we outlined earlier.

During the first quarter conference call, we outlined our objective to reduce the direct material cost of uPrint by 15%. We remain on track to meet or exceed this objective by the end of 2009. 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 higher margin consumable revenue.

We had an operating profit of $1.5 million in the second quarter of 2009 compared to a profit of $5.8 million for the same period last year; however, operating profit in the second quarter increased by over $3.1 million when compared to the first quarter. Our sequential improvement in operating profit is a result of the favorable shift in product mix as well as our effectiveness in reducing our operating expenses. Operating expenses declined by 12% to $10.1 million during the second quarter last year. As we reported last quarter, headcount reductions taken in the first quarter will amount to approximately $2.7 million in annualized savings for the Company.

SG&A expense in the second quarter of this year included $182,000 in stock-based compensation expense required under statement of financial accounting standards or SFAS123R compared to $320,000 for the same period last year. Stock-based compensation expense net of tax was $162,000 or $0.01 per share in the second quarter compared to $268,000 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 non-GAAP items incurred during both periods.

Our pretax profit was $1.3 million for the second quarter of 2009 compared to a profit of $6.2 million for the same period last year. Total interest and other income for the second quarter declined to $150,000 loss from a $382,000 gain last year. Income tax expense amounted to $451,000 in the second quarter or an effective rate of 34.7% compared to $2.1 million expense for the same period last year or an effective rate of 34.1%.

Net income was $850,000 for the second quarter of 2009 or $0.04 per share compared to $4.1 million or $0.19 per share for the same period last year. Excluding stock-based compensation expenses, net income was $1 million for the second quarter of 2009 or $0.05 per share compared to $4.4 million or $0.20 per share for the same period last year. Our diluted shares outstanding declined by 1.2 million shares from the second quarter last year, a result of our lower stock price as well as significant share repurchases made in 2008.

We generated positive cash flow from operations of $2.5 million during the second quarter. This brings our cash and investment position to approximately $51.1 million at the end of the second quarter compared to approximately $49.4 million at the end of the first quarter. We have no debt on our balance sheet.

Inventory balances were $18.4 million at the end of the second quarter which was down significantly when compared to the $20.2 million at the end of the first quarter. Accounts receivable at the end of the second quarter was $24.3 million compared with $34.5 million at the end of the second quarter last year. Days sales outstanding or DSOs were just under 90 days compared to 100 days at the end of the second quarter last year.

I'd like to reiterate a point that Scott made in his opening remarks. We experienced unprecedented conditions within our core markets but have been very effective at controlling our costs and managing our assets. We are well positioned for a rebound in market conditions.

I now would like to turn the call over to our Director of Investor Relations, Shane Glenn, for comments regarding our outlook.

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and the investment community. Based on the current economic environment, Stratasys is currently not providing financial for the fiscal year ending December 31, 2009. We are currently operating in an environment with unprecedented economic volatility and uncertainty. This uncertainty combined with the many changes in our go-to-market and product strategies over the past few months make visibility in 2009 extremely difficult.

We expect that the third quarter which is our seasonally weakest period will remain challenging but qualitatively, we are observing some signs that conditions may be improving.

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

Thank you, Shane. The strength of our competitive position was recently confirmed by the 2009 Wohlers Report which indicated that Stratasys shipped over 43% of all additive systems globally during 2008. The report also indicated that we have the highest global install base of systems compared to any other competitor. We believe on positive opportunity of the recent economic downturn will be to strengthen our competitive position given the relatively strong financial position and fresh lineup of products. We should note that the majority of our products are relatively new having been introduced within the past 18 months.

Our competitive position is strongest within 3D printing; according the Wohlers Report Stratasys shipped over half of all of the 3D printers globally in 2008. this position is a testament to the unique capabilities of our core FDM technology as well as our ability to provide our customers with the best whole product solution. Our whole product criteria includes an affordable price, but equally important is the product reliability, ease of use, and office readiness. Supporting our products with an expansive and highly trained distribution network is also essential for our ongoing success.

We are focusing on opportunities to expand our distribution reach and this remains a top priority. We are hopeful that plans to significantly expand our distribution capabilities can be outlined to you later this year.

We're convinced that our personal 3D printer, the uPrint, represents a significant step within our 3D printing strategy. We believe this product combined with the right distribution model will propel our Company to the next level in unit volume within 3D printing. We also believe an opportunity exists for over 500,000 3D printers to serve the existing 5 million seats of 3D CAD.

We're also building a pipeline of opportunities with our Fortus 3D production systems which should translate into higher sales when market conditions improve. Direct digital manufacturing applications remain a focal point of our sales and marketing efforts for growth within Fortus.

For example, we are currently evaluating opportunities with the U.S. military at their fleet readiness centers and repair depots which are responsible for rapid repair and redeployment of military aircraft and equipment. The military is evaluating Fortus as a quick response technology in tooling and repair applications. The military currently maintains dozens of fleet readiness centers and repair depots around the world which could potentially benefit from our technology. Our systems are currently being used on a limited basis for rapid tooling and fixture applications for metal and composite part fabrication as well as for tools used in the trimming and drilling of parts.

The significant cost saving measures we enacted over recent periods have contributed to a return to profitability in the second quarter. We're in a strong financial position, having generated $2.5 million in cash from operations in the second quarter and, as Bob mentioned, we have over $51 million in cash and investments. So, we're cautiously optimistic about the positive signs of improvement within our sales channel, but we continue to prudently manage our resources given the market environment. Most importantly, we remain focused on executing our long-term plan and remain confident in our long-term growth opportunities within our core businesses.

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

(Operator Instructions) Your first question comes from the line of Troy Jensen representing Piper Jaffray. Please proceed.

Congrats on a nice quarter, gentlemen.

Thanks, Troy.

Scott, could you give us a quick update on the channel realignment on the Fortus side? I'm just curious to know if you think it's fully integrated now and if there's been any surprises or just your updates on how it's going.

Of course the realignment was primarily in the U.S. where we went from approximately ten direct to now over 45 feet on the street, meaning over four times the amount of people selling but through resellers. I think that for me the second quarter proved that that's moving along per plan. I think those, as you know, those type of changes are strategic and they do take time. But I'm very optimistic based on what I see in the first half on how that will continue to grow and not only grow for rapid prototyping but grow also for the DDM applications now that we have so many more people out there selling it.

Understood. And then just on the follow-up side on uPrint have you guys been able to get any consumable usage data yet? Or is it still kind of too early to get that?

It's really too early, Troy, to be able to get good data related to usage out there.

Can you just update us on what you guys use as assumptions? Kind of historically what the Dimension drives $3,000 to $5,000 in consumables. What's kind of the range you guys expect out of uPrint?

Yes. On a uPrint level, what we initially thought coming out of shoots and we don't have the data to observe is that we thought the usage would probably be at about 80% of a Dimension level.

Perfect. Good luck in the second half, guys.

Thanks, Troy.

Your next question comes from the line of Brian Drab representing William Blair. Please proceed.

Good morning.

Good morning, Brian.

First question, on SG&A, it was a little bit higher than I had forecast. I'm wondering if this is the type of run rate that we should expect? It's a little bit higher because it's about the same as the first quarter level when you had your kickoff meeting and I know you had implemented further cost cutting in the first quarter that I thought would carry over to the second quarter. So, could you talk a little bit about why you're at that level in the second quarter and what the run rate might be going forward?

Yes, Brian. What you'll notice is on -- if you're comparing to the first quarter, you'll see a drop of about $200,000 within the R&D line. Part of the cost cutting measures we took was also up in the above the gross margin line, but we did have some of what I would call period expenses related to second quarter to the tune of a $280,000 to $300,000 that were specific to the period that don't go in the normal run rate. So, looking forward, adjusted for seasonality, I would expect our run rate to be slightly lower as you go forward to the third quarter and fourth.

Okay. Great. Thanks. And one more question just in the education space. It sounds like your overall end market environment is stabilizing and improving, but could you make some comments specifically on the education space and how you feel that end market is holding up and how it's going to perform going into 2010?

Yes, Brian. I think we have some good data for North America because we have a dedicated educational channel in North America. We get the data back pretty quickly. The education channel was a really strong point for us in the quarter. As we've communicated to you in the past, typically education is around a third of the Dimension unit sales and the early look at it seems to be worldwide that it was above that in the second quarter.

Great. Thanks, guys.

Your next question comes from the line of Chad Bennett representing Northland Securities. Please proceed.

Hi, guys.

Good morning.

Just a couple questions and I know you guys don't give a lot of data on this, but it appears obviously we get the uPrint unit numbers and they were down sequentially. Obviously you had the first quarter kickoff and channel fill there. So that makes sense. By my kind of back of the envelope magic, Dimension units look to be down sequentially and then you indicated Fortus revenue, I believe, was nearly double sequentially. I'm just wondering, I'm fairly new to the story. I'm just wondering what are the end market dynamics there that would create such a big disparity between the high-end units versus the low-end to mid-priced units in this environment kind of versus Fortus channel realignment and kind of real end market demand?

On the Fortus side, I think one of the things that you're seeing between quarter one and quarter two is the fact that with the changeover in the North American channel, you have a little lag time. I still think that we're seeing some of the lag in getting the channel fully engaged in the product line. So, I think there's some impact of that between Q1 and Q2. Within the product mix within 3D printer I don't think it's surprising that the uPrint with this launch in Q1 was as significant. It was the majority of our business. I think it was 66% in Q1 and down to 53% in the second quarter. So, relative to where we were coming from, I think things on the Fortus side we're starting to see more effectiveness within the channel as it gets up to speed and on the Dimension side I think you're seeing a little bit more normalization relative to the fact that the uPrint was launched in Q1 and usually we have significant sales in the period that products launched.

Okay. And I know you talked about Fortus year over year progression and overall 3D printer year over year progression. Did you give a number for Dimension specifically?

No. I think the only number that we -- yes. I did. Dimension combined with -- we gave 3D printer only.

Okay.

We gave a Fortus number and 3D printing. 3D printer year over year was down 34%.

Right. So we didn't segment out Dimension. Okay. And then consumable, down 8% year over year. Can you give what they did sequentially?

Sequentially it was actually up 12% to 13% but I think it's important to note that that still represents being down year to date about 7%. So, while it was a positive trend, it still is a negative trend through the first six months of the year.

Okay. Then last question. It seems like based on your comments that you believe the kind of existing run rate for Fortus is sustainable at least through the second half of the year here?

You know we're in a really volatile economy. What we're seeing is we're seeing good pipeline as it relates to our Fortus products and it's too early to tell in this environment whether people are going to take those calls and turn them into orders. That's where I think the words "cautiously optimistic" come in.

Okay. Thank you.

Your next question comes from the line of Jeff Evanson representing Dougherty and Company. Please proceed.

Good morning, gentlemen. Thanks for taking my questions.

Good morning, Jeff.

Congratulations on the solid quarter. So, there's not any concern here. I want to talk about Fortus and its change from direct to indirect distribution. Do you feel this improvement here sequentially in the high-end systems is indicative of end market demand or was there any channel fill?

Within Fortus, it's end market demand.

Those guys really aren't carrying any inventory? They're just passing on a sold unit to a customer, right?

Yes. I think we're definitely seeing, if you want to measure based on pipeline, a lot more quote activity, a lot more demos, and what we call benchmarks than sequentially -- let's say sequentially to the first quarter. So, I think that having 4.5 times more people out there selling and all of those resellers understand FDM having been involved in Dimension prior to picking up the full line, it should have a very positive impact in the second half here.

Jeff, just one -- and I know you know this, but obviously we have seasonality to our business and so when you start looking at it sequentially it can get a little bit tricky. So, I just want to be clear that certainly doubling from Q1 to Q2 is -- we find that encouraging. There is seasonality to our business. We're still are in a difficult environment. But to our point, the point we are trying to make is that we are seeing some positive signs in the channel.

Right. And obviously your DSOs give me confidence that there's no issue there. So, Scott, you actually anticipated my next question. I do want to unpack your positive comments about the pipeline building. Can you give us a sense of how much quote and demo activity is up sequentially? Or maybe year over year?

No. We really don't have that hard data to share. Just the fact that there's significantly more activity. Now of course we're comparing it to a January and February that was by all standards pretty dismal.

Right.

Not just in the stock market but I think throughout industry.

Yes. But then you also mention that 3D printing pipeline is picking up. Let's talk about what you're seeing there with a little more granularity, please?

Most of the data, most of the information we have, Jeff, to be quite honest with you, is anecdotal at this point. It's talking with the channel, talking with our channel managers, what our sales directors are seeing in the various regions. That's why we're trying to be cautious about our comments because at this point, it's anecdotal evidence, but it's definitely a significant improvement in tone from what we saw in February.

Alright. I'm going to cheat and push for one more follow-up. Looking at this 15% BOM reduction for uPrinter.

Yes?

Did you get GM improvement in uPrinter quarter on quarter?

You know what? Jeff, we would've gotten some but it was fairly nominal. What I look at what happens is we're putting the changes in place. We're on track to achieve the 15% for the year. The problem is that some of those parts won't come in where you make the change in Q2, you'll get the effect of that change in Q3. So, there wasn't a significant impact on the building materials as it relates to Q2.

Alright. Very helpful. Thank you. Thank you.

Your next question comes from the line of Jim Ricchiutirepresenting Needham and Company. Please proceed.

Thank you. Good morning.

Good morning.

Question on uPrint. It sounds as if uPrint has done well in the education market. You are seeing, I believe, that demand overall in the education market is fairly strong. How satisfied are you with the performance of uPrint in the commercial market?

I think we're not at this point yet. It's because we're still operating and we introduced this system in January right at a real low point for the overall markets and the economy. So, I think, Jim, it's still operating. We're still to try this system and when you look at it in an environment difficult and when you really try to test out the price elasticity model in an environment like this, it's very difficult. I'd say we're not satisfied yet but we'll have to see conditions improve before we can make that kind of conclusion.

Okay. Fair enough. Gross margin sequentially showed some nice improvement. I know mix plays a big role in your gross margin. But can you give us a sense directionally how you see gross margin in the second half of the year. Do you feel these are sustainable?

What you saw in gross margin is going from 41.4% to 47%. within the product category itself it went from 37% to 43%. Obviously we're doing things within the product side as we indicated with uPrint to try to make that a sustainable target. The volatility and the mix of our products really makes it difficult for us to give guidance as it relates to margin. You've seen our margin swing dramatically between this year and last year and I think it's a positive trend. We're working hard to continue to have positive trends but I'm not ready to give you a range as it relates to gross margin.

Okay. I'll jump back in the queue. Thanks.

Thanks, Jim.

Your next question comes from the line of Steve Dyer representing Craig-Hallum. Please proceed.

Thanks. Good morning. Nice quarter, guys.

Good morning, Steve.

Quick question here just to clarify. You gave 3D printers year over year as down 34%. Was that units or revenue?

Revenue.

Okay. And then I'm wondering if you can give any color on the uPrint, your thoughts on kind of the uPrint inventory in the channel? You had the big fill in Q1 and you clearly saw some reorders. What's your sense as to sort of where inventory it? The level maybe that the buyers are willing to carry? That sort of thing. I guess I'm just trying to gauge if this quarter is maybe a little bit lower than you'd expect given the fact that there were so many in Q1 or if this is kind of a run rate you'd expect?

I think it's important for everybody on the call to remember is that we do sell to the channel. So, we do not own any inventory in the channel. Having said that, when we have a product launch and have the owners of our channels together, quite properly we try to sell them units and we did sell in Q1. Our channel -- we do know that our channel inventory or our channel partners inventory is lower at the end of the second quarter as it was compared to the first quarter. There's always an impact of higher units and the time of a product launch and some -- to the end customers in the following quarter. That's what you're seeing in Q2.

Okay. And then, Bob, just a housekeeping item. Do you have CapEx in the quarter?

CapEx year to date was about $1.2 million and $538,000 in the second quarter.

Great. Thanks a lot, guys.

Thanks.

Your next question comes from the line of Graeme Rein representing Bares Capital. Please proceed.

Good morning.

Hi, Graeme.

Could you talk a little bit more about the consumables. I know you have limited visibility into what's going on there. But do you get the sense that ordering patterns have changed or is it mothballed units or -- can you provide any more kind of the details on what might be going on there?

As Bob mentioned, it's up Q2 over the Q1 sequentially. I believe that the education consumable usage is about the same rate. I think that there's less users because of the deep recession on the commercial side. Less there's nine engineers basically using. But in some cases actually you're seeing more usage because people understand you've got to have new product in order to grow out of the recession. So, some projects are doubling up in some companies and therefore increasing the rate. But I think the rates actually should be about the same but there is less, at least temporarily less commercial design engineers using the systems during this year.

There's no reason -- we have no indications that it's related to units being mothballed. I think it's our customers in this economy are being very cost conscious on their expenses too and we're seeing a reduced usage on our machines.

Okay. Thank you. And then is there any strengths geographically that you're seeing? Any countries that might be stronger than others that is unusual?

Yes. I looked at that. I wouldn't say that we really saw anything that was indicative of any strength or weakness relative to any particular economy.

Okay. Thanks for taking my questions.

Thanks, Graeme.

Your next question comes from the line of Andy Schopick representing Nutmeg Securities. Please proceed.

Scott, excuse me, I wanted to ask you if you could comment a little further on what some of the leading indicators are in the sales channel that you made a reference to as an indication of some optimism going forward?

We definitely have more sales and quoting activity, Andy. Now whether that translates over to sales, time will tell. Our Fortus sales pipeline is growing and as we mentioned, our uPrint sales pipeline is building; however, we don't have a lot of hard data on that and, as I mentioned, we don't know that that will necessarily convert into the sales growth. I think as Shane mentioned that it's important to remember that Q3 typically is our seasonally weakest period historically. Now whether that's true during a recession, especially if we're coming out of a recession, whether that's true, time will tell.

Okay. If I can follow-up with Bob for just a couple of quick ones here, I've noticed that the net investment sales type leases is down about $1 million from yearend. I wondered what the initiatives are in that aspect of your business, what might be happening there, whether you're really devoting any resources to continuing to grow that?

Andy, I think if we look -- if you look at quarter over quarter -- I don't have the yearend number in front of me. But there was actually about - I thought about a $300,000 increase in our lease portfolio relative to Q1. So, too me it's been pretty much at a fairly normal level for us, not significantly different than the prior years.

I'm just referencing the yearend 2008 number. But it doesn't appear to me that there's really very much happening in that area of the business that you're not aggressive expanding the lease portfolio at this time.

Your question is Q2 over yearend?

Yes.

I did look at it as it related to the quarter itself and the level that we had in Q2 this year is very similar, I think, to previous year's patterns.

Okay. And finally, if you could just give me an update on those capitalized software numbers and the amortization of prior differed software?

Yes. We capitalized $338,000 of software capitalization in the quarter. And amortization was $436,000.

Okay. Thank you.

Thanks, Andy.

Your next question comes from the line of Ryan Thibodeaux representing Maple Leaf Partners. Please proceed.

Good morning.

Good morning, Ryan.

How are you? Just real briefly, were there any inventory write downs in the quarter?

We have inventory write downs in every quarter. In terms of obsolescence, we're reviewing our inventory month by month. So, yes. But nothing significantly different than our historical patterns.

I'd like to tag on to that, in the technology business that we're in, we're adjusting through our engineering change order system on a daily basis when we see improvements and if those improvements can ROI, they flow through and then not accumulate as a problem in inventory.

Okay. The next question would be you said that the 3D printer revenue as a whole was down 34% year over year.

That's correct.

My question is if the uPrint represented half of all 3D sales, that seems to imply that the 3D printer's excluding uPrint were down more like 60%, I guess, on a unit basis. So, I'm just trying to tie those numbers out.

I don't have the numbers in front of me but it makes sense. Really when you look at the bringing uPrint up, we also discontinued some of the other products within the line so the uPrint was replacing some of the units that existed before. So, yes, we would expect a drop.

So, potentially half of all the uPrint sales are -- would've otherwise been just Dimension sales if uPrint did not exist? So, I guess the question is how much of the uPrint sales are essentially cannibalizing the older 3D Dimension sales?

Ryan, it's hard to say particularly given the environment that we're in. I think you're certainly going to have some customers that purchase a uPrint that would've otherwise purchased a Dimension 1200 or an Elite. But at the same time, within a normal operating environment, you hope that the new product with a new price point expands the market beyond any cannibalization effect. It's difficult to quantify exactly what you're asking. As we've launched historically, we've launched new lower priced systems in the past, this would be the past eight years, it usually take about three to four quarters to really see the full effect. But we plan for in the strategy to do some cannibalization as we expand more market share. Personally I'm not -- I'm concerned but I'm not overly alarmed on, say, an annual basis.

Okay. Can you remind me again, I think originally what was the number of uPrints that you guys had set up as a potential target on an annual basis?

I think we made comments in our previous quarters that the uPrint represents a platform that could take us to a 3,000 to 4,000, $3,000 to $5,000 units per year ultimately.

Our vision basically takes us from our past annualized rates of about 2,000 total units a year for the corporation to 3,000 to 4,000 units. I still believe, especially as we exit this recession that that will happen for the Company. And then on a longer-term basis, up in that 10,000 units per year as we further expand our strategy. But I think it's hard to microscopically look at that during a deep, deep, unprecedented recession.

Okay. And then on the uPrint cost reduction. Can you talk a little bit about where you're able to reduce costs and how you're going to go about doing that?

It's how we are doing that. I think that's an important fact. We're seeing it in some of the electronics that we did. We're also taking some of the -- you take something, uPrint comes with a second bay. You look in the second bay at whether you're having -- whether that can be stamped or whether that is an item that you're going to punch out and they have a significant difference in terms of the cost profile. So, we're looking at individual pieces, are the big cost drivers and where we can get the largest return on investment. So, it's really going through the unit on a part by part basis, looking for the big hitters. We're really confident that we'll achieve that 15%.

Does that get you more in line with the historical Dimension gross margins?

No. It does not. The uPrint is out there. It's part of our long-term strategy of driving down to the price elasticity curve and getting more consumable sales out there. uPrint will still be our lowest margin product.

Do you have any kind of long-term vision of where product gross margins are heading?

In this economy, we're managing our business much more --

I don't mean this quarter or next quarter. I'm just saying two years down the road, a year down the road. If things were not as they are today.

We're not -- historically, what we've said is that we believe we have a model that will allow us to increase the amount of operating income we can deliver to our shareholders and we've been less about talking about margin versus operating expenses other than to say in a normal environment, we believe from where we were last year that we could increase our operating income as a percentage of sales.

Alright. Thank you.

Your next question comes from the line of Jay Harris representing Goldsmith and Harris. Please proceed.

Thank you for taking my question. It concerns inventory management. Would you have -- a number of questions on inventory. One, had your revenues been higher in the June quarter, would the inventories have come down more? Were you shipping more out of inventory because you got a lot of orders in the last 15 days of June? And going forward, if your volume increased revenue, orders increased what would you do about inventory levels?

A lot of questions within there. I'll do my best to address them. We built a forecast so we're looking at what we forecast through the quarter. We're not building to order, we're building to forecast. We've always said that there's a significant amount of our orders that come towards the end of the quarter. But obviously we've adjusted our forecast in this environment. So, that has an impact on bringing down inventories. If the volume increases, clearly we would be reducing inventories more from a longer-term strategy as I look at inventories today, at where they're at versus where I think they should be at the end of the year, I think there should be a continued trend to reduce our inventory throughout the remainder of 2009.

So had you had more orders in the June quarter, the inventories would've come down? And what does this mean about your manufacturing levels? To what extent can you lean on your inventory levels bringing them down and not increase your plant output?

We just implemented actually within this year something called inventory quality reporting where we're looking at the various individual buckets within inventory, assigning them to individual purchasers, looking at lead times, in order to get it down to a granular level and be able to effectively manage inventory. If you look at inventory on a gross level, it's really easy to get lost in the forest. So, we're trying to break it down to a tree level so that we can continue to reduce inventory without having any impact on our ability to deliver within the quarter. I think it's an effective tool that we've just started to implement and it will give us confidence that we will be able to reduce our inventories from where we're at today and still be able to meet forecasted demand.

Then if I might stretch a little, what was the relative gross profit of product shipped out of inventory versus products you're currently manufacturing?

Typically, from an end product standpoint we're building within the quarter by and large that we're forecasting. It might have an overlap of maybe two months tops. There's not a substantial difference between those. Most of our products with the exception of uPrint are fairly static in terms of other than the material costs of the products.

Alright. Thank you.

Thanks, Jay.

Your next question comes from the line of David Cohen representing Midwood Capital. Please proceed.

I just had one housekeeping question. Did you guys give a -- I know you gave a percent change in 3D printer revenue but in unit sales for 3D printers?

We did not give that, David.

Can you provide that or do I have to wait for the Q?

Hold on for a moment.

3D printer units versus last year were down 14%

Okay. And you said uPrint was 53% of that total versus 66% in the first quarter? Is that the comparison?

Correct.

Okay. Thanks, guys.

Thanks, David.

The next question comes as a follow-up from the line of Jim Ricchiuti representing Needham and Company. Please proceed.

Guys, if you look at the various streams of your revenue, product, consumables, paid parts, do you put more -- which of these do you put more weight on to really tell if your markets are beginning to recover. As you look at leading indicators for your business, what do you put more weight on?

You'd probably get a different answer from all three of us but I'll take the first shot. I really look -- people have asked me that question a lot, whether you look for employment, et cetera? But from our standpoint of what we're doing within our business, I think consumable usage because that comes back to how healthy are our customers. When do they start worrying a little bit less about their expenses and how much are they using our machines? The more they use the existing install base, the more they're going to be ready to buy that additional system out there.

The only thing I would add to that following actually the consumable would be sales, quoting activity. And I think although it's an extreme example, we probably saw the biggest example of that between Q2 and Q1 where I think in some weeks some system sale activity just stopped. It was dismal back there in February. But I would agree with Bob on overall consumable usage because it averages out.

Okay. Scott, when you talk to your channel guys, your partners, can you give us a sense where they're seeing some pick up in quote activity? Which vertical markets?

Maybe with the exception of Japan, I think it's pretty much across the board. I guess it would be with the exception of Detroit and Japan. I think we're seeing it in medical, we're seeing it in consumer products, business machines, really good. I'm very optimistic about the aerospace segment and education. If you look at market verticals, probably education would be the strongest. Right, Shane?

Yes. Absolutely.

One of the things that's really interesting to me is that Stratasys now has over 1,000 of our 3D printers in high schools in North America alone. Of course we sell education worldwide. So, it's not just a university, college, or a trade school discussion. It includes high schools and in some case, this is hard to believe, but junior highs as well.

Okay. Just last question. Paid parts. Do you see any sign of the pricing pressure stabilizing?

It continues to be a fairly irrational pricing environment. I would say at this point and for mainly the U.S., I have not seen that. I think that our team is going quite well in the environment that we're in. The environment that we're in, to give you an example, is difficult for those that aren't financially sound. We begin to hear about some of the larger service bureaus that are in financial difficulty possibly exiting the market. In fact, one did file bankruptcy in the last quarter. It's a tough service business, especially for those service companies that rely let's say solely on the U.S. auto market or the Detroit U.S. auto market which we do not. We've got a fairly broad spectrum that we -- of industries that we cover.

Okay. Thanks very much.

Gentlemen, your final question comes as a follow-up from the line of Jeff Evanson representing Dougherty and Company. Please proceed.

Sorry, gentlemen. Actually my question's already been asked and answered. Thank you.

Thanks, Jeff.

Ladies and gentlemen, there are no further questions in the queue at this time. I would now like to turn the call back over to Mr. Scott Crump for closing remarks.

Thank you. In closing, we have a strong balance sheet and we remain committed to our long-term goals and objectives. In addition, we are prudently managing our Company through an unprecedented market environment. We remain confident in our ability to provide long-term value to our customers, channel partners, and shareholders and we are well positioned as market conditions improve. I'd like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.