Stratasys Ltd (SSYS) 2009 Q3 法說會逐字稿

Good today, ladies and gentlemen, and welcome to the third-quarter 2009 Stratasys earnings conference call. My name is Latasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Shane Glenn, Director of Investor Relations. Please proceed.

Good morning and welcome to the Stratasys conference call to discuss the third-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, envision, 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 3-D printing market; our objectives for the marketing and sale of our Dimension 3-D printers and our Fortus 3-D production systems particularly for use in direct digital manufacturing; demand for our primary consumables; the expansion of our paid parts service; and our beliefs with respect to the growth and demand of our products.

Other risks and uncertainties that may affect our business include our ability to penetrate the 3-D printing market; our ability to maintain the growth rates experienced in preceding quarters; our ability to introduce, produce, and market new materials such as ABSplus, and ABS-M30 and the market's 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 for 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 are 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 10-Q.

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 to exclude certain expenses. The non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the Company's operations and comparative performance. Primarily the identification and exclusion of expenses associated with an impairment charge for certain auction rate securities, restructuring expenses, and expenses associated with stock-based compensation required in our SFAS 123(R).

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

Good morning and thank you for joining us to discuss our third-quarter financial results. We are pleased with the third-quarter performance when you consider the unprecedented economic environment. In addition, revenue was strong when considering the seasonally weak, which is typical of our summer period. Stronger sales of our higher priced 3-D printers contributed to the improved margins and profitability over the second quarter.

We are especially pleased with our strong cash flow from operations, which is $8.7 million for the third quarter. This resulted from significant improvements we achieved in managing our working capital, particularly inventory and receivables. We've strengthened our financial position substantially through our third quarter and now maintain nearly $60 million in cash and investments.

Our financial stewardship remains a top priority especially through these unprecedented economic times and we continue to manage our expenses accordingly. Although economic challenges remain in our markets, the leading indicators within our sales channel continue to improve and we believe our results over the past nine months suggest a building of a positive momentum. So we are cautiously optimistic that our business will continue to improve in the coming quarters.

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

Thank you, Scott. Total revenue declined by 20% to $24.3 million for the third quarter of 2009 compared to $30.6 million for the same period last year. The Company shipped 454 systems during the third quarter versus 497 last year. As we expected, market conditions remained difficult in the third quarter, which is reflected in our total revenue compared to last year. However, we continue to observe indicators that channel activity is improving and we are cautiously optimistic that the positive trend can be sustained.

Third-quarter product revenue declined by 25% to $18 million when compared to the $24 million for the same period last year. Three factors impacted our product revenue growth in the third quarter. First, revenue from our Fortus 3-D production systems declined by 42% when compared to last year.

While on the surface this decline may appear quite significant, it should be noted that the decline was driven in part by the timing of our Fortus 900mc introduction last year. As you may recall, we introduced and began taking orders for the 900mc in December of 2007; however, by plan we began commercial shipments of the systems in the third quarter of 2008.

Consequently, the third quarter of last year included the shipments of several orders for the 900mc taken over the first nine months of 2008. The 900mc is our highest priced system at approximately $400,000 and had a significant positive impact on the third quarter last year. As you would expect, the current economic environment has made selling the 900mc more challenging. However, given the recent feedback from our channel partners, we are cautiously optimistic that market conditions will continue to improve for our Fortus business.

The second item impacting our product revenue was a 20% decline in our 3-D printer revenue compared to last year. However, 3-D printer revenue increased sequentially by 9% over the second quarter. The mix within our 3-D printer business favored our higher priced 3-D printers, representing a significant shift from the second quarter of this year.

Our most affordable 3-D printer, the uPrint, represented only 45% of all 3-D printer unit sales during the third quarter compared to 66% and 53% of 3-D printer unit volume in the first and second quarter respectively. This trend resulted from successful upselling by our channel partners to the dimension 1200 and Elite series.

Later in the call, Scott will address the opportunities that exist for expanding the sales of uPrint going forward, which includes building on our distribution capabilities.

The last item impacting our product revenue was a 7% decline in consumable revenue over last year as our customers have remained cost-conscious in the current difficult economic environment.

Third-quarter service revenue declined by 5% to $6.3 million when compared to $6.6 million for the same period last year. Our maintenance revenue increased by 4% for the third quarter compared to last year. The growth and maintenance revenue is less susceptible 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 20% in the third quarter. Growth in the paid parts business continues to be negatively impacted by an aggressive pricing environment.

Gross profit declined 25% to $11.9 million for the third quarter 2009 when compared to the same period last year. Gross profit as a percentage of sales declined to 48.8% compared to 51.7% 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 being allocated over relatively lower total revenue for the quarter.

In addition, the decline in gross margin percentage was driven by a significant shift within our 3-D printer business as we began shipping the uPrint 3-D printer and unit sales of our higher priced 3-D printers declined significantly versus last year. The third quarter last year had no uPrint sales.

Consequently, our 3-D printer mix last year favored our higher priced, higher-margin 3-D printers. However, the gross profit percentage of 48.8% was a significant improvement over the 47% in the second quarter of this year. This sequential increase is attributable to the sequential shift in our product mix within our 3-D printer business as we outlined earlier as resellers have been successful in up selling to our higher priced 3-D printer systems.

During the first-quarter conference call, we outlined an objective to reduce the direct material cost of uPrint by 15% by year-end. We remain on track to meet or exceed this objective.

It is important to emphasize that we believe that uPrint can significantly expand our installed base of systems going forward, which bodes well for future sales of higher-margin consumable revenue.

We had an operating profit of $2.4 million in the third quarter of 2009 compared to a profit of $5.3 million for the same period last year. However, operating profit in the third quarter increased by nearly $1 million when compared to the second quarter. Our sequential improvement in operating profit is a result of the favorable shift in product mix as well as our effectiveness in controlling our operating expenses.

Operating expenses declined by 10% to $9.5 million during the third quarter compared to last year. SG&A expense in the third quarter this year included $238,000 of stock-based compensation expense compared to $321,000 for the same period last year. Stock-based compensation expense net of tax was $210,000 or $0.01 per share in the third quarter compared to $238,000 net of tax or $0.01 per share in the same period last year. A table provided within our press release to itemize details surrounding non-GAAP items incurred during both periods.

Our pretax profit was $2.6 million for the third quarter of 2009 compared to a profit of $5.7 million for the same period last year. Total interest and other income expense for the second quarter declined to $215,000 from $381,000 last year.

Income tax expense amounted to $1 million in the third quarter or an effective rate of 39.7% compared to $2 million expense for the same period last year for an effective rate of 34.7%. The higher tax rate was the result of higher foreign effective tax rate. We expect the tax rate in the fourth quarter will moderate to a level between 34% to 36%.

Net income was $1.6 million for the third quarter of 2009 or $0.08 per share compared to $3.7 million or $0.18 per share for the same period last year. Excluding stock-based compensation expense, net income was $1.8 million for the third quarter of 2009 or $0.09 per share compared to $4 million or $0.19 per share for the same period last year.

We generated positive cash flow from operations of $8.7 million during the third quarter alone. This brings our cash and investment position to approximately $60 million at the end of the third quarter compared to approximately $51 million at the end of the second quarter. We have no debt on our balance sheet.

We are especially pleased with our management of working capital during the third quarter. Inventory balances were $15.4 million at the end of the third quarter, which was down dramatically when compared to the $18.4 million at the end of the second quarter and the $20.2 million at the end of the first quarter. The reduction in inventory was a result of significant reduction in finished goods and prudent inventory management.

Accounts receivable was $20.9 million at the end of the third quarter which was down dramatically when compared to the $24.3 million at the end of the second quarter and the $23.7 million at the end of the first quarter. The reduction in receivables was a result of focused collection efforts.

Days Sales Outstanding or DSO was 79 days compared to 90 days at the end of the second quarter and compared to 94 days at the end of the third quarter last year. Despite the current economic conditions, we have been very effective in controlling our costs and managing our assets. We are well positioned for a rebound in market conditions.

And now I 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 investment community, but based on the current economic environment, Stratasys continues to not provide financial guidance for the fiscal year ending December 31, 2009.

0We remain in an environment with significant economic volatility and uncertainty. This uncertainty combined with the many changes to our go to market and product strategies over the past few months make visibility extremely difficult. We expect that the fourth quarter will remain challenging but we are observing signs that conditions are improving.

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

Thank you, Shane. Revenue was strong in our third quarter when considering the seasonal weakness as is typical during the period, considering seasonal factors and the difficult comparison created by the launch of our 900mc last year; we are pleased that our Fortus system sales were comparable to levels recognized in the second quarter. We continue to build a pipeline of opportunities within the Fortus line, which should translate into higher sales as market conditions improve.

As we mentioned in last quarter's conference call, we are currently evaluating opportunities with the US military fleet readiness centers. We recently published a case study which highlighted our successful relationship with another additional military customer, Sheppard Air Force Base in Texas. Sheppard maintains a facility that designs, develops, and manufacturers training equipment for the Air Force. This facility uses our Fortus systems for the direct manufacturing of the vast majority of its training products.

Before using direct digital manufacturing, the training facility used conventional methods of manufacturing such as lathe work, welding, sheet metal vending, and cutting. These conventional processes are expensive and very time-consuming. This training facility considered several alternative technologies and concluded that the Stratasys FDM process was ideal for their manufacturing needs.

Our systems produce the required part durable and feature detail and they offer an environmentally safe process is green with zero waste. Their use of our Fortus equipment has generated measurable benefits for them. They completed project in 1/10th the time and since 2004 when they purchased our first four machines, our Fortus systems have saved the government over $3.8 million and they expect a total of $15 million in savings over the next 10 to 15 years. Going forward, direct digital manufacturing applications like this one will remain a focal point of our Fortus sales and marketing efforts.

Sales of our higher-priced Dimension 3-D printers during the third quarter had a favorable impact on our margins. Although our lower-priced uPrint remain our best-selling 3-D printer in the third quarter, our channel partners were successful in upselling to 3-D printers with more features and system functionality.

In addition, 3-D printing experienced another strong quarter for educational sales and represented about 60% of all 3-D printer sales in North America for that period. Given that our third quarter represents the beginning of the budget cycle for most schools in North America, we are optimistic for strong educational sales over the next nine months.

We recently announced our sixth annual extreme redesign 3-D printing contest, which challenges CAD students globally to submit their most creative and useful product design. Last year, we had over 800 students participate in the contest that awards nine students with college scholarships. We believe our focus on the educational channel is critical to expanding our use of 3-D printers worldwide.

Our top priority remains expanding the distribution of our more affordable 3-D printer, the uPrint. The unique capabilities of its core FDM technology as well as our ability to provide our customers with the best full product solutions should support us in developing our channel and we are making good progress towards implementing this strategy. And we plan to update you with greater details in the coming months on this.

We continue to believe an opportunity exists for over 500,000 3-D printers to serve the existing 5 million seats of 3-D CAD globally.

Looking forward, our resellers continue to observe a recovery in channel activities as economic conditions improve. We believe our results over the past nine months suggest the building of a possible momentum. This momentum is a combination of our successful go to market strategy combined with the incremental improvements in economic conditions.

The prudent cost saving measures we implemented over the past year have also enabled us to keep our expenses in check. We believe our competitive position has improved during the economic downturn as our strong financial position has allowed us to remain committed to our long-term goals and objectives. While the near-term economic outlook remains challenging, we are encouraged by the positive signs within our channel and we are cautiously optimistic about the fourth quarter.

Most importantly, we are excited about new programs we hope to initiate over the coming quarters and we remain confident in our long-term growth opportunities.

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

(Operator Instructions) Chad Bennett, Northland Securities.

Yes, good morning, guys. Just a couple questions. On the Fortus, I guess strength or stabilization you are seeing, obviously you have built out the new channel late last year and we are kind of half year into it or three quarters. Can you give a sense of if the new channel partners are penetrating new end markets for that unit or kind of what's going on there? Obviously it's somewhat counterintuitive for your highest priced system to be, relatively speaking, your best performer. So any color there?

Well, there's always in a fairly new application like the 3-D printer, there's always new applications that continue to be found globally. We definitely have more quoting and pipeline activity from the Fortus standpoint, the Fortus sales pipeline is growing and I guess obviously, our uPrint sales pipeline is building.

Q3, is usually a seasonally weak period, typically down from Q2, but we were able to record flat sales relative to Q2. So we remain in a difficult economic environment. However, we continue to focus on managing our resources as we grow out of this recession.

Chad, one thing I would add to that is that if you look at -- I think we are happy with the new channel structure we have. What is difficult as you can probably appreciate is given the environment that we are in, it's hard to completely evaluate the effectiveness of that new strategy. But what we can say is that we are certainly seeing customers that we didn't see before and the DDM efforts that we have undertaken are certainly starting to provide us opportunities that we didn't before.

So as the economy improves, we will probably get a better sense for how much leverage we have with that new strategy.

And has anything changed on the financing side of the Fortus business from a reseller standpoint?

No.

Okay, all right. And then can you give us a sense for -- I know you don't like to talk about guidance in this environment, but in terms of seasonality looking at next quarter, is there anything you can talk about or speak to in terms of what your expectations is for this spending environment? Do you expect it to improve decently relative to where we were this quarter?

And if you look at seasonality last year, sequentially, your fourth quarter was tough last year and I don't know if you can compare it relative to the spending environment then where you were up modestly sequentially from a revenue standpoint, or in the prior years where I think you were up 15% to 20% sequentially. Any color there would be helpful.

I think the important thing is no one is predicting that we are in a [V] recovery whatsoever. I think it's much more of an L and I would say if you look at it sequentially, we expect to be substantially below the prior year. We are still in a very difficult economic environment and we do expect it to be substantially lower than Q4 last year.

Right, right, okay. Then last question in terms of your service business in RedEye, is there anything we should take away there other than it's obviously a tough pricing environment? Are you seeing anybody new com in so to speak, or has anything else changed there?

We continue to work on our sales metrics within that group and try to -- I would say bifurcate between what we call the direct digital manufacturing orders versus the prototyping orders. We are trying to drive our sales metrics to really focus on the higher value orders within DDM.

Let me add to that. The environment remains incredibly competitive with irrational pricing in some of the cases. In fact, we have begun to hear about some larger service bureaus that are in financial difficulties and maybe exiting the market.

Chad, we need to move on to other questions.

Brian Drab, William Blair.

Good morning. I just wanted to follow up on the uPrint sales here. It sounds like what the uPrint in part is doing for you is it is getting you in the door at some customers, maybe some new customers. Then once you get in, you have a chance to upsell to the higher margin, higher price point 3-D printers. Is that kind of how the trend has been playing out and are you surprised to see that?

It has worked that way in the third quarter. In fact, you could mathematically say about half the time, because roughly half of the 3-D printers or just slightly less than half were uPrints. But the resellers are trying to go after applications and some of the applications require more features, higher pricing.

I think the thing if you looked over quarters, I think what it is is an indication that people have a little bit more freedom on their capital spending than what we've seen in the previous quarters, but the channel always tries to sell the highest price. That's how they get paid. But it also means that some of the customers out there have a little bit more money to spend than we had seen in prior quarters.

Putting aside the recession, we still firmly believe that the 3-D printer market follows a price-elastic business model, so we definitely believe the uPrint pricing should generate substantially higher volume.

Great, then question on the education space. You sound pretty optimistic about the education end market over the next nine months, I guess. I am looking for a little more clarity on that given that what I have been seeing and I think a lot of the headlines have been showing is that education budgets at least across the US could be really under pressure in 2010 with further budget cuts. And if I am missing something there, maybe I will give you a chance just to talk about that.

No, Brian, you're exactly right. But when you look at the third quarter, the third quarter is typically our strongest quarter for education and as we said in our prepared remarks, it's also the start of the budget cycle for most of the schools in North America. So to have educational sales that were roughly flat year-over-year from a unit standpoint, we found that very encouraging. Why we remain encouraged for the next nine months is because it is -- its new budget money and we will see how the rest of the year plays out. But right now, as we've stated several times about other parts of our business, cautiously optimistic.

Great. And then just if I could ask one more, over the next year specifically in the direct digital manufacturing opportunity, which end markets do you think you have the most potential to penetrate further in? Maybe you can make a comment specifically about auto since that has of course been a very challenging end market lately.

Well, one of the exciting parts about direct digital manufacturing is that there's a lot of opportunities. One of the problems with it is you have to stay focused and our first primary focus is the fixtures and assembly tools that are used in manufacturing over -- I believe seven of our different industry segments in order to build their parts, in order to build their end-use parts. So that's the first one.

However, we also are involved with currently and definitely in the future with end-use parts where the end-use part is going out into -- as a product. And that covers places like aerospace, medical. It also will cover a subset of more of the auto industry as it comes out.

One of the big opportunities and we are probably four years into it now, 3.5 years into it -- is the auto customization or I think it's formally called the auto aftermarket, where you buy your standard auto but then you want to do a modification and there's actual large conventions that we go to like in the big SEMA show out West. So -- and that market is actually strong for Stratasys, where of course -- out of Detroit is not.

Okay, thank you.

[Jeff Evenson], [Dougherty & Co].

Good morning, gentlemen. So talk to me a little bit about what's going on with consumable sales and where you are seeing channel inventory for consumables. Down a few quarters in a row here is getting a little tiring for me and I'm sure for you as well. So talk to me about what you're thinking there.

You know, I think fundamentally there's 15 or at least there was 15% to 20% less design engineers around the world working for their projects. Now the 85%, 80% to 85% that are employed following this deep recession, they may be in fact working on over time and we see that actually quite a lot and actually pulling machines that in the second quarter weren't working, not using consumables and starting to work those in Q3 and in Q4.

But fundamentally, we've just gone through a deep recession and there's less physical bodies working at those stations and less consumables being used. I don't personally believe that change is necessarily our midterm and long-term strategy, but it has affected -- basically the deep recession has affected every one and that does in fact include the consumables. Do you want to add to that, Bob?

Yes, one of the things I would say, Jeff, is that we are actually adding a position within the Company to focus directly on consumables and make that their sole responsibility for exactly the reasons that you say. We've seen the lower usage there and we want to put a focused effort in trying to drive demand. But I don't think it should be lost on the fact that our installed base is growing and that bodes really well when there's an economic recovery for us.

And what is --? Where do you think channel inventory is for consumables, cartridges?

Yes, we don't really -- from the inventory itself, I don't think anybody carries a significant inventory relative to what our sales volume is there.

But you have had lumpy sales to the channel in the past. I'm wondering if we are due for a lump?

I think if you look at the trend for the quarter and the trend year to date are very similar, so I don't think we should be predicting that one way or the other right now.

And you had talked about applying the uPrinter consumable cartridge form factor into the Dimension line. What is the progress on that?

Could you explain --?

Jeff, are you talking specifically of the reusable case that we have with uPrint?

Exactly, to improve your margins there.

Yes, you know there's no intention right now to take that particular form and put it into at least short-term plan to put that into Dimension. It certainly is possible that we could do that, but we don't have a set plan for that right now.

All right, and Scott, we are excited about you inking future deals for uPrinter distribution. Could you talk a little bit about some of the parameters you are thinking about in terms of what are going to be some important constraints on such relationships?

Well, the general direction is accessing more of the high-volume CAD resellers like Autodesk and of course, having a very positive marketing relationship with Autodesk helps with that -- the solid works resellers. And actually many other CAD company resellers that essentially want to sell, don't want to do service, and are more box movers as opposed to high-end solution focused. And by implementing a quarter, roughly a quarter ago, our new service program, we have now been able to access unlike in the past six years, and now we are able to access many of these other CAD resellers globally.

And of course, how we bring them on and how we go through the educational process and keeping focused away from conflict is the name of the game. Execution on that is all going to define our success.

Jeff, one thing -- I think the important message here on the call is expanding our uPrint distribution continues to be a key objective for us and when we have things to announce in the future, we will.

And last question for you, Bob, this level of SG&A in the quarter is pretty impressive. Is that roughly a level we can expect for the next couple quarters?

That would get really close into guidance. I think the thing that we feel good about the level of expenses that we have done and the cost control we have had. But I'm not going to predict outgoing into future quarters. That's more into the guidance area.

Okay, thanks.

[Graham Raines], [Bears Capital].

Good morning. Scott, in your prepared remarks, you talked about how you believe your competitive position has improved. Can you talk a little bit in more detail about what signs you are seeing or what gives you that sense? And also from a competitive standpoint, how you think the consumables are? Have you seen any competitive threats on that front?

On the consumables, I think we are just impacted by less machine usage temporarily due to all the cost control and cost reduction measurements that every company in the world has gone through in the last two quarters.

In terms of competition, for a number of reasons that are both strong channel or the strongest channel globally related as well as our technological solutions, we have seen more progress on converting the sales that are out there compared to other competitors. Like for instance, 3-D systems in the high-end, for instance, like Z Corporation in the commercial mechanical area. However, they are definitely pioneering into the architectural space and we will try to continue to track how they progress and lead in that area.

And we have also seen -- and this is probably more of a year, a year and a half type of a trend -- in the DDM area going after fixtures and assembly tools, when the Company needs a fixture, let's say one fixture or they needs a series of one fixture for this, one fixture for that, but a continual stream of fixtures, our product and our price points excelled in that over our other two competitors in that space, which really focus in on more high-volume end-use parts. And they do a good job in the end-use parts area.

Okay, great. Then the last thing, Bob, can you provide any sort of outlook on capital spending? Do you have any projects lined up in the next 12 months that might require capital? How are you approaching that in relation to how quickly you are growing? Can you just of talk generally about how the capital spending looks for the next 12 months or so?

Well, 12 months in this economy -- 12 months is a long way to look out, but what I can say is if you look at last year, we spent about $6.2 million through the first nine months on the capital expand. This year year-to-date we are at about $1.2 million, so we are down substantially. We have been controlling our CapEx spending. Obviously we did a headcount reduction during the course of the year. That means that we have less people in the existing space that we have. So the needs that we have going forward in the next 12 months would be more related to new product launches as they would be to need for infrastructure.

Okay, great. Thanks for your time.

Andy Schopick, Nutmeg Securities.

Good morning. Very quickly for you, Bob, could you give us a split between US and international for the quarter?

Yes, Andy. It was sort of -- let's see, it was 53% domestic and 47% international.

Now is that for total revenue or just product sales?

That is for total revenue.

Very good. Foreign-exchange impact, can you quantify what the impact was on revenue from a weakening dollar, since you are mostly exposed to the euro?

Europe represents probably about 20% of our sales, some of which are done in US dollars, some of which are done in euros, but we don't quantify individually because we do have price adjustments that will come within the European market in order to make our sales price often comparable to the US price.

Can you just give me an update on capitalized software and amortization for the quarter?

We capitalized $360,000 and we amortized $434,000.

And were there any R&D -- reimbursed R&D costs at all?

Yes, there was about -- I believe the number is about $400,000 of reimbursed R&D costs from a Fortune 500 company during Q3.

How about for the year to date from that same program?

We've been very -- that customer has been very good working with us during this economic environment because they see our technology is key to their future and year-to-date reimbursements have been to the tune of about $1.9 million.

$1.9 million and that will continue into the fourth quarter at a comparable rate, I assume?

We continue to work with that customer.

Okay, so it's a variable. Okay.

But it is has been I think a four or five year working relationship, so I think I would put it more in the category of a long-term working relationship.

I understand.

It has varied dramatically from year to year, though.

Bob, I missed consumables. What was that change in growth rate in the consumables revenue?

The consumable growth -- it was 7% decline on a year-over-year basis (multiple speakers) and 8% for the quarter-over-quarter.

Okay, that's it for me. Thank you.

Jim Ricchiuti, Needham & Co.

Thanks, just a question regarding the up selling that you saw in the September quarter, do you expect this phenomenon to continue in the December quarter? Is your sense that this is going to -- you will see a continued shift toward the higher end 3-D printers?

I think, Jim, what you see in our channel is again that they are always trying to sell the highest price system that they can and but they will always take a sale first. I think the key effort for us is to continue to build out the uPrint distribution separately from our existing channel to get a focus on the uPrint.

But what it signaled to us is that there is then a little bit of ease on the amount of money that people are willing to spend on the product. We do have a good value proposition for both the 1200 and the Elite relative to the uPrint and our channel has been successful. There's no reason to think that that would change in the fourth quarter.

Bob, I know you can't give any guidance on some of the expense items, but can you talk a little bit about as you have been through this very challenging environment, are there temporary costs, temporary costs savings that will be restored as the business begins to improve?

You know, I said earlier in the year I think we said it in the first quarter call that we did cost reductions that would result in annual savings of about $2.7 million. We run our business for the long term. We don't run quarter to quarter and if we see economic improvements in areas, we do expand our spending where we think it's in the best value for shareholders.

Okay, but nothing in terms of [furloughs] or anything like that that -- and/or 401(k) match or anything like that?

We reduced our headcount. We gave no raises this year. We did away with a 401(k) match this year. As the economy improves, we will put some of those back into place, but we are going to be prudent about it and looking at it relative to what we think our revenue will be.

Okay, and you alluded to in discussing Fortus that the new channel strategy has opened up some new markets. You are seeing some new customers. Can you talk a little bit more about that and can you maybe talk a little bit about the sales that you are seeing in the DDM area? Is that going to more existing customers or new customers?

Well, I think that we've been talking about here, Jim, in the last two months some of the opportunities we had with the military and the fleet readiness centers. A specific example where they are going to use our technology in unique tooling applications in the repair of various aircraft. The Sheppard Air Force Base is a great example, where they have expanded the use of our technology in the use of actually building the test equipment that they use at their facility. So we are seeing opportunities in low-volume specialty manufacturing.

One of the issues that we have is that a lot of customers are beginning to see the use of our equipment as a competitive advantage. They really don't like us talking a lot about what they are doing, unfortunately. But we are seeing more opportunities and you can guess the kind of industries that are going to look at the technology and embrace it, but it's going to be in more low-volume specialty time-sensitive applications.

I think one thing I would add to that was the change in the channel in North America to go into a resellers is the level one resellers that are also selling our Fortus systems were people who have been selling our 3-D printers for a long period of time, and what we have seen them be able to do is to take customers that have been traditional 3-D printer customers and not only keep them as 3-D printer customers but add them as Fortus customers also.

Is the mix between new and existing --? I'm just curious if you are seeing more equipment going into new customers?

Yes, and to be quite honest with you, I don't think we have very good statistics on that.

And the total amount of units in DDM, it's higher ASP is, so you can a lower amount of units. So typically we study those at the end of the year or let's say annually, so actually next quarter, we should have more data and be able to shed a little bit more light on that.

Okay, one final question, if I may. It's pretty clear I think to all of us that the global recovery seems to be coming more from Asia. Can you talk a little bit about your business there, what you are seeing in that market? Has it been meaningful? And are you seeing some new customers and applications for the equipment there?

There's definitely what looks like stronger, a stronger pullout of the recession in the Far East. I wouldn't say necessarily Asia, but I would say the Far East. In fact, I will be over there in the next 10 days to focus on some new business. Bob, do you want to add on that?

I think as we look into 2010, I think Asia represents more of an opportunity for us. We continue to work on our distribution there. We have opportunities to build out our channel more there than we can we do I think in Europe or in the United States. So we have probably been weaker there than relative to the volume historically, but we are making efforts to try to expand that.

Bob, can you say what that geography represents or represented in the quarter?

I don't have that in front of me how it breaks out in the quarter, so I would roughly say that it was probably a quarter of our sales, but I -- that's the number off the top of my head.

So it's actually a little bigger in Europe?

It will run close to Europe. It also depends on how you define the region.

I see. Okay, thank you.

Steve Dyer, Craig-Hallum.

Thanks. Good morning, guys. Most of mine have been answered by now. Regarding the uPrint, what is your sense as to channel inventory that is being carried?

I think it's important to know that we sell into the channel. The channel takes ownership of it at the point in time. We do monitor what they have out there, but we don't report that. I don't think it's anything abnormal from historical levels.

Okay. And then inventory usually jumps from Q2 to Q3 historically as for back as you look. It's down this quarter. Is that kind of by design? Is there a particular initiative to kind of improve working capital or is that a sign of certain things to come I guess would be the way to think about that?

No, if you go back several quarters ago, we talked about -- as our inventory was raising -- we talked about putting metrics in. We hired a new Vice President of Manufacturing probably two years ago and we've changed a lot of our processes within the last year as it relates to not only our inventory, but looking at our quality rating to the inventory. And I think you are seeing the fruits of some of the efforts that we have done over the last 12 months. I think some of those are sustainable efforts.

Okay, good. And then one last housekeeping question, Bob. I may have missed CapEx in the quarter.

I don't have a CapEx in the quarter. CapEx year to date was $1.2 million and I'm sure you can look at the Q from the six months to get the [delta] in the quarter.

Okay, thanks, guys.

Ryan Thibodeaux, Maple Leaf Partners.

Good morning, guys. It looks like we are kind of been running at about a 200 unit per quarter on the uPrint. I know that initially when you guys rolled it out there was a lot of talk of maybe getting that up to like a 3000 annual number. I am just curious given where we are today what initiatives we have in place to get there and over what time period?

Yes, Chris, we don't really itemize that, but our strategy all along has been to continue to grow the overall 3-D printers from roughly 2000 to 4000, 8000, 10,000, 13,000 per year. And then all of our initiatives inside pertaining to the 3-D printing and then with our channel and marketing outside have all focused on that. We have all gone through a year -- I don't know, a year and a half of a deep recession that changed the results, but the strategy doesn't change. The strategy I think is still a successful strategy. It's not broken.

But so to answer your question, yes, we have designed and then positioned our sales of that uPrint at 3000 to 4000 units per year. We are not there and I think it's solely due to the fact that we got hit by this recession.

I would think the other part of it besides the recession, though, is that we've had an objective to add additional channels specifically as it relates to the uPrint and to date, we haven't expended that dramatically. But as we said on our comments, that remains a key objective for us as a Company.

(Operator Instructions)

Latasha, is there any more questions?

(Operator Instructions)

Okay, Latasha, let's go ahead and end the call, please.

Okay, 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 these unprecedented times. We remain confident in our ability to provide long-term value to our customers, channel partners, and shareholders, and we are well positioned as the 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. Thank you. Goodbye.

This concludes the presentation and you may all now disconnect. Good day.