Stratasys Ltd (SSYS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2009 Stratasys earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Shane Glenn, Director of Investor Relations at Stratasys. Please proceed, sir.

Good morning and welcome to the Stratasys conference call to discuss fourth-quarter financial results. Representing Stratasys executive management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump, and CFO Bob Gallagher.

A quick reminder that today's conference call is being transmitted over the web and can be accessed through the investor section of our website at Stratasys.com or directly by accessing the link provided in our press release. We will begin with the Safe Harbor statement.

All statements herein that are not historical facts or that include such words as expect, anticipates, projects, estimates, envision, planning, could, plan, 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 3-D printing market, our objectives for the marketing and sale of our Dimension and uPrint 3-D Printers and our Fortus 3-D production systems, particularly for use in direct digital manufacturing, our agreement with HP to expand the distribution sales of our 3-D Printers, the demand for our proprietary consumables, the expansion of our Paid Parts service, and our beliefs with respect to the growth in demand for our products.

Other risks and uncertainties that may affect our business include our ability to penetrate the 3-D printing market, our ability to maintain the growth rate experienced in this and preceding quarters, our ability to introduce and produce and market new materials such as ULTEM, 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.

Actual results may differ from those expressed or implied in forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may like 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 10K and quarterly reports on Form 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 that 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 compared to performance, primarily the identification and exclusion of expenses associated with impairment charges, restructuring expenses and expenses associated with stock-based compensation.

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. We are pleased with our fourth-quarter performance considering the difficult economic environment.

We finished 2009, encouraged by the positive trends within our market or as well as our record year-end backlog. And we begin the year emboldened by our record -- a major game-changing agreement with HP for the worldwide distribution of 3-D printers.

We observed an improvement in the business conditions during the quarter as our customers have become more confident in the economic recovery and became more willing to increase spending. Sales in the month of December were notably strong, leading to a record year-end backlog of system orders.

Our margins for the fourth quarter improved over last year and sequentially, driven by the relatively strong contribution of our high-margin consumables. The positive growth in consumable revenue for the quarter was significant, given it was the first positive year-over-year sales growth in that 12 months. We believe this bodes well for the coming quarters.

We are especially pleased with our strong cash flow from operations, which totaled $11 million for the fourth quarter and $25 million for the year. This was a significant accomplishment, considering the difficult 2009 year. Our finance and operations team deserve a lot of credit for their continuous improvement in managing our working capital.

We believe we are financially strong and strategically well-positioned coming out of the recession. I will return later to update you on some of our initiatives, including our gamechanging agreement with HP, but first I'd like to turn the call over to our CFO Bob Gallagher, who will further highlight our fourth-quarter results. Here's Bob.

Thank you, Scott. Total revenue declined by 18% to $26.2 million for the fourth quarter of 2009 compared to $31.9 million for the same period last year.

The Company shipped 431 systems during the fourth quarter versus versus 570 last year.

As we expected, market conditions remained difficult in the fourth quarter which is reflected in our total unit and revenue comparisons. However, we continue to observe an improvement in market conditions, which gained momentum in the fourth quarter.

This positive momentum carried over into 2010 and we are cautiously optimistic that this trend can be sustained.

Fourth-quarter product revenue declined by 20% to $20 million when compared to $25.1 million for the same period last year. Two factors impacted our product revenue growth in the fourth quarter.

First, revenue from Fortus 3-D Production Systems declined by 32% when compared to the fourth quarter of last year. It should be noted that the fourth quarter of 2008 represented a record quarter for the Fortus system revenue.

However, given the positive trends we are observing in 2010, we expect to generate positive growth in Fortus system sales during 2010.

The second item impacting our product revenue was a 24% decline in our 3-D printer revenue compared to last year. Our 3-D printer sales in the fourth quarter continued to reflect the weak global economy. Our most affordable 3-D printer, the uPrint, represented 47% of all 3-D printer unit sales during the fourth quarter, which was a similar mix to the third quarter of 2009.

We are pleased to observe an increase in our consumable revenue during the fourth quarter, which grew by 4% over last year. While 4% may not seem significant, it represents the first positive growth in the past 12 months.

This positive trend in consumables has continued in the first quarter and has gained some momentum. We believe this may be a positively leading indicator for our system sales.

Fourth-quarter service revenue declined by 10% to $6.2 million when compared to the same period last year. Our maintenance revenue declined by 6% for the fourth quarter compared to last year and reflects an extension in the warranty period we implemented in early 2009 for most of our systems.

In addition, it should be noted that maintenance revenue has been less acceptable to the 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 16% in the fourth quarter. Growth in the Paid Parts business continues to be negatively impacted by an aggressive pricing environment.

Gross profit declined by 16% to $13.4 million for the fourth quarter of 2009 when compared to the same period last year. However, gross profit as a percentage of sales increased to 51% compared to 49.9% for the same period last year and 48.8% in the third quarter of 2009.

We believe this is an impressive accomplishment, considering our gross margin has been negatively impacted by several factors including our fixed costs being allocated over lower total revenue versus last year, a mix shift within our 3-D Printer business following the introduction of our lower-priced uPrint 3-D Printer, and the negative impact from changing our distribution model for Fortus in North America from our direct distribution model to an indirect channel at the beginning of 2009. These negative factors were more than offset by the relatively strong sales of our higher-margin consumables during the quarter.

We would like to emphasize the consumable impact in the fourth quarter. The strength in gross margin percentage demonstrates the leverage that is possible as we expand our higher-margin consumable revenue. The ultimate goal of our distribution agreement with HP is a significant expansion of our install basis systems which would drive significant growth in our higher-margin consumable revenue.

In addition, our margins in the fourth quarter benefited from the cost-saving measures we implemented in early 2009, as well as our successful initiative to lower the manufacturing cost of our uPrint 3-D Printers. We began 2009 with the goal of reducing the manufacturing costs of uPrint by 15% and we exceeded that goal.

We had an operating profit of $3.6 million in the fourth quarter of 2009 compared to a profit of $4 million for the same period last year. Operating expenses declined by 18% to $9.8 million during the fourth quarter compared to last year. Operating expenses benefited from headcount reductions taken in the first quarter of last year, which amounted to approximately $2.7 million in annualized savings for the SG&A expense.

Also included in the fourth quarter was $243,000 of stock-based compensation expense, net of tax compared to $341,000, net of tax for the same period last year. In addition, we took charges during the fourth quarter for the carrying value of an investment we have in another company as well as an investment in auction rate securities.

These charges totaled $296,000 net of [tax] or almost $0.02 cents per share. A table provided press release provides itemized details surrounding non-GAAP items during both periods.

Our pretax profit was $3.3 million for the fourth quarter 2009 compared to a profit of $3 million for the same period last year. Total interest and other income for the fourth quarter declined $235,000 from $391,000 due to a decline in interest rates and a more conservative investment portfolio.

Income tax expense amounted to $942,000 in the fourth quarter or an effective rate of 28.3% compared to a $1 million tax expense in the same period last year or an effective rate of 33.7%. The lower effective tax rate was a higher -- was a function of a higher tax benefit from the exercise of incentive stock options and a lower requirement for a tax contingency reserve.

We expect the rate for 2010 will average between 34 to 36%, excluding any incentive stock options-related impact.

Net income was $2.4 million for the fourth quarter of 2009 or $0.12 per share compared to $2 million or $0.10 per share for the same period last year. Non-GAAP net income, which excludes the charges and the stock-based compensation expense, was $2.9 million or $0.14 per share for the fourth quarter of 2009 compared to $3.2 million or $0.16 per share for the same period last year.

We generated positive cash from operations of $11.3 million during the fourth quarter and $25.5 million for the full year. Full year operating cash flow totaled an impressive $1.26 per share. This brings our cash and investment position to approximately $70.9 million at the end of 2009, compared to approximately $48 million at the end of 2008.

We have no debt on our balance sheet.

We are very pleased with our management of working capital during the fourth quarter, given the difficult economy. Inventory balances were $14.6 million which was down compared to the $15.4 million at the end of the third quarter and the $19.9 million at the end of 2008.

The reduction in inventory was a result of lower finished goods.

Accounts receivable was $19.3 million at the end of the fourth quarter which was down significantly when compared to the $20.9 million at the end of the third quarter and the $26.5 million at the end of 2008. The reduction in receivables was a result in part of focused collection efforts.

Day sales outstanding or DSOs was 68 days compared sequentially to 79 days at the end of the third quarter and compared to 76 days at the end of 2008.

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 I would now 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. We continue to observe an improvement in market conditions as we enter 2010 and we are optimistic about the coming quarters.

However, continued uncertainty in the strength of the economic recovery as well as the many changes in our to to market and product strategies over the past two months make visibility extremely difficult. Based on these factors we will continue to not provide financial guidance as we begin 2010.

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

Thank you, Shane.

We finished the year encouraged by the positive trends in our business and we are excited about executing on our new strategic initiatives. We believe the growth trend in consumables, combined with our record year end backlog, suggests a building from the positive momentum within our core businesses and despite the difficult operating environment in 2009, our margins expanded in the fourth quarter and we strengthened our financial position.

While eight years ago we launched the first successful 3-D printer at under $30,000 proving a significant inflection point within our industry and the 3-D Printer price elastic business model, a year ago, we established another major milestone by introducing the uPrint 3-D Printer platform -- the world's first personal 3-D printer priced under $15,000.

In January, we expanded the uPrint family to include the uPrint Plus, an enhanced version of the uPrint with significant new features and priced at 19,800. We believe that the uPrint family of products has significantly advanced our 3-D printing product strategy by improving upon several key product characteristics critical to ongoing success, including affordability, reliability, ease-of-use and office friendliness.

Throughout 2009, we communicated our goal of significantly expanding our sales channel within 3-D printing. In a major strategic step to meet that goal, we announced a gamechanging agreement with HP last month for the worldwide distribution of Stratasys's developed and manufactured 3-D printers. HP will begin the rollout of HP-branded 3-D printers in the first half of this year starting in Europe and we are on track to begin shipping those products in the coming months.

We believe this agreement will represent a major inflection point in the advancing of 3-D printing as a strategy worldwide, and represents a watershed event for our industry. In 2008, HP approached Stratasys as they began an assessment of the 3-D printing market. This process included an evaluation of the market's potential as well as an assessment of the commercially available 3-D printing technologies.

We believe HP's decision to enter the market is further confirmation that a significant market opportunity exists among the millions of designers that are using 3-D CAD today.

For Stratasys, HP's proven track record within our target market has established a -- as they are established as a sales leader for the 2-D plotters makes them an ideal candidate for collaboration within 3-D printing.

When we first entered the 3-D printing market, we recognized a need to develop a productive reseller network. We spent years developing relationships with an extensive global reseller network that is highly trained, highly motivated and exclusive to our 3-D printers. This channel remains a valuable asset to our Company and we are pleased to report that the vast majority of our effective channel partners in Europe will become HP qualified resellers.

While we are now ready to leverage our industry leading technology with HP's brand awareness and their extensive sales and marketing orientation, we believe this agreement will allow us to realize the full sales potential within our target market and we continue to believe the market potential exists for over 500,000 3-D printers serving the millions of mechanical 3-D CAD workstations installed today.

In evaluating our industry, HP concluded that Stratasys FDM technology represented the best platform for their 3-D printing products. A perfect example of our industry-leading technology capabilities was recently put on display at Autodesk, the world leader in design software, at their annual user conference in December.

During the conference Autodesk unveiled a full-scale triple [crop] aircraft engine model designed in Autodesk inventor software and produced entirely by using Stratasys FDM technology. You can view a video on YouTube that records the development of this triple crop by accessing the link included in our press release.

FDM is the core technology that drives all of our products including our Fortus line of 3-D production systems. The highly durable and accurate production-grade plastic part output of our Fortus line provides an ideal solution for a broad range of applications, including direct digital manufacturing or, in other words, the production of finished parts.

We are excited that our continued collaboration with an unnamed Fortune 500 company to develop products targeting PDM applications have been extended for the fifth straight year. Before the economic downturn, we had begun to generate strong growth in our Fortus line, reflecting our success in targeting these DDM applications. We are optimistic that the recent positive trends in our market will allow us to reserve that growth in 2010.

Our new indirect distribution model for Fortus systems in North America is beginning to generate positive results. As you recall, we converted our Fortus direct sales model in North America to an indirect model that leverages the capabilities of a reseller network. So last year this allowed us to triple the effective sales force for Fortus in North America.

Our goal is to make the most of our expanding product lines in our new DDM initiatives.

Although business trends are encouraging as we begin 2010, we will continue to conservatively manage our spending and resources given our difficulty in predicting market conditions over the near term. However, the economy aside, we believe the long-term opportunities available to us are the most exciting in our Company's history and we look forward to successfully executing our plan over the coming months.

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

(Operator Instructions). Brian Drab with William Blair.

Good morning. Congratulations on a good quarter.

First question, just around the backlog. It looks like the backlog is very strong. Can you give us an idea of how that backlog breaks down at all? Or at least, roughly, is it leaning more towards uPrint or 3-D printers in general or Fortus?

It's leaning towards Fortus.

Any more detail than that that you could give us? In terms of how it is breaking down?

We saw strong sales for the first time in a year, related to our 900 products which added to our backlog and some into the 400. So it's really focused on the high-end of the system. It is probably two thirds of the backlog is in the Fortus area.

And then that kind of leads into my follow-up question, I guess, in terms of what you can do to help us think about margins going forward.

It looks like the trend is for improving margins, of course, more high-end printer -- high-end systems is going to help your margins, but you've got some maybe offsetting factors, I would imagine some margin pressure from the deal with HP.

What can we expect directionally, you think, with margins? Let's start with gross margins specifically going into 2010?

I think much to the chagrin of some people, we've really focused trying to talk about our operating income line as opposed to our margins because we are so dependent on the mix. We are certainly encouraged by the margins this quarter and the trends that we are seeing in consumables, but we are really too dependent on the volume and mix to give you a meaningful range per gross margin. But we -- again we think there is operating leverage in the model of 2010 versus 2009.

You know, the other thing that we said on the call about the consumables, we had -- as Bob outlined, we had three or four factors that were working against us on the gross margin line percentage, yet our consumables picking up wiped that out essentially. We saw some strength in the margin.

Okay. Thank you.

Steve Dyer from Craig-Hallum.

Thank you. Congratulations on a nice quarter. A couple of mine have been answered. Is there any HP, maybe an initial order or something like that in that backlog? Or is that too far off to comment on?

There is no HP in the backlog.

Okay and when -- any more clarity sort of as to when you would expect that to launch? I know we've kind of talked about later this year, maybe summertime. Any more clarity there?

The -- as clear as we're going to get is to say it's the first half of this year.

The first half of this year. Okay. I'll hop back in the queue, thanks.

Jeff Evanson with Dougherty & Co.

Actually all my questions were about backlog so I guess I will step out. Thanks.

Chad Bennett with Northland Securities.

This is Ian sitting in for Chad today. Just wondering on the material side, was the growth there driven by the increase in the installed base or are you seeing an actual increase in utilization out there? And are we getting to a point now that we have seen some growth here in this quarter, where we can see consistent year-over-year growth on the consumables?

Yes, I -- you know the 4% growth, obviously, is generally isn't something we would consider significant, but it was good to see it as a positive trend. If you look at 2009, we obviously expanded our install base yet for nine months of the year we saw a reduction in the use of the consumables for our machine.

So it is too early to predict it as a trend being that it was just the one quarter. But we are happy to report that we have positive momentum carry over through the first six weeks of 2010.

So difficult to predict at this time, with -- in this economy. But it's good to have it as a positive trend.

Great and then just as a follow-up, any particular verticals here or at the end of December that really drove the system's backlog growth? Thanks.

No, really, the backlog growth was across all verticals. We saw strong orders from international.

Chuck Murphy with Sidoti & Company.

Good morning. Just a quick question about the unit shipments in the fourth quarter down sequentially a little bit, and just kind of wondering was that more the printers or the systems? And I guess also Dimension versus uPrint?

I think one of the -- it was on both sides. One of the things last year that impacts the number of units shipped between is that we did ship uPrints last year in anticipation of its launch in January of last year. So if you look at it on a year-over-year basis the biggest impact was probably within the 3-D Printers because of the introduction of uPrint and shipments of that in December 2008.

Okay but I guess like why sequentially would the 3-D printers be down? Is there a seasonality there?

I don't have the numbers in front of me of what they were for the third quarter. So I can't really comment on that.

Andy Schopick with Nutmeg Securities.

Thank you and good morning. Couple of quick ones for you. On HP, now -- I assumed that we are expecting initial deliveries sometime before the end of June. How many HP resellers do you envision having by the end of this year? Can you give us kind of a sense of a number there?

Well, you know we are not going to speak for HP but we do have indications that a vast majority of our current resellers in those affected European countries will become HP-qualified resellers. It's also important to remember that this agreement is all about more than five initial countries.

It's ultimately worldwide. It is a global distribution strategy and I think that both companies are doing it right by going through some initial steps to get the pilot right, get the messaging and the marketing perfect before in fact going global.

Of course, but I assume that by 2011 you would expect to have a global -- a true global rollout by next year or some time during the course of next year?

Yes. The timing is dependent on how well the initial launch goes and we are not here to comment about when the rollout will be. I think that really is more of an announcement that will come from both us and HP at the appropriate time.

All right. Bob, as a follow-up, could you give us a percentage of sales international versus US in the fourth quarter and the year if you have that?

For the fourth quarter, it was 55% of it was domestic and 45% of it was international. And I don't have it right in front of me for the full year.

For the full year about 56% was domestic and, obviously, 44 international.

Thank you. Let me pass it along.

Andrew Nowinski with Piper Jaffray.

Good morning. Just had a question on Fortus, I guess.

So you say you tripled the sales force of Fortus this year with the new channel rollout but it looks like revenues in Q4 were still clearly lower than any other quarter in 2008. So just wondering when should we expect these revenues to start ramping up or should we expect to ramp up in 2010 or should we just wait for more? Does the channel need more time to kind of make traction?

Yes as we said on the call we expect positive growth in 2010 for Fortus. When you look at 2009, obviously, a very difficult year and the comparisons were quite difficult when you look at -- particularly the fourth quarter.

I mean 2008 Q4 was one of the best quarters we've ever had or is the best quarter we have ever had for Fortus. And as if you recall, Fortus's system revenue collapsed because of the economy in Q1 of 2009.

So theoretically in 2010 in Q1 we are starting to anniversary some significantly easier comparisons in Fortus. And that is why we feel good, we feel optimistic, and we said that we expect positive growth in this year from Fortus.

At this point, six weeks into the year it really becomes almost anecdotal, but I can tell you that the orders we've received in the first six months of the year related -- or first six weeks of the year for Fortus are substantially higher than they were last year.

Got it. And then with regard to Paid Parts, would you think or should we expect the pricing pressure to ease in 2010 here? Or is that going to continue?

I would expect some of it to really continue because I think a lot of the service bureaus out there are well under their capacity. And a lot of the mom and pop shops are struggling. Some of them may go out of business. And if that happens, that will ease the pricing pressure but until then I think we are going to see some continued pricing pressure.

Ryan Thibodeaux with Maple Leaf Partners.

Good morning. A follow-up to Chuck's question on the Q4, seeing a decline of [Q3]. I think if you go back all the way to 2003, Q4 units have been up on average 15% quarter over quarter in Q4. So if you could just kind of readdress what, if any, significance that might have for this year?

I think the unit volume also has to be taken into consideration as it relates to the backlog that we are carrying into 2010, that we have had positive momentum and positive backlog year over year. In fact, a record backlog, and a substantial number of units of that being within the Dimension line.

Additionally if you are doing a quarter-over-quarter comparison, you are going to find that, with the launch of uPrint last year, we had a substantial number of uPrints shipped in the fourth quarter of last year. So I think comparison is a very difficult comparison period.

So it's -- on the uPrint comment then we had a larger number of uPrint shipped in the March quarter. So does that mean that we will have a less than seasonal Q1 on a unit basis for this March?

Well, one of the things that you know the uPrint when we had our introduction of it so it had -- it has a positive impact on the fourth quarter of 2008. It had a positive impact on Q1 2009, but --.

But a much larger impact on Q1 '09 than Q4 '08.

Right but I think that the takeaway, I would hope from the call, is, one, we are seeing a positive impact both from the backlog that we are carrying into 2010 as well as a positive impact on the orders that we have received through the first half of the quarter.

So I think that both of those factors are going to diminish that impact as you look at Q1 of 2010.

I think what the people may be having trouble with is your record backlog that's bigger than the '07 backlog which was $5.7 million back then and, yet, you were able to get pretty good guidance back at the end of '07. Considering the overall improvement of the company and how those companies now are getting better visibility, it's a little puzzling as to why you can't provide some sort of guidance at least for the quarter?

Because I don't think anybody knows -- I don't think anybody knows the strength of the recovery. And we are not willing to try to predict what the strength of the recovery would be and demand is fairly significant and you can see the impact that we had with the consumables growth in the fourth quarter about what that does to our margins.

So we don't think that we could give you something that was going to be meaningful through the quarter. The other thing is, we've said previously is, a lot of our orders are towards the tail end of the quarter which makes that predictability more difficult.

Is it more difficult than it has been in the past?

We have never given you -- we've never given quarterly guidance and we've seen highs and lows on the quarters. If you go back historically and look at this Company, we surprised you negatively and positively when it comes to quarters in years where we've given you very good annual guidance.

This is a difficult business to predict on a quarter-to-quarter basis under normal times and it hasn't gotten any easier right now.

[Robert Brody] with Bears Capital Management.

So what's been the reaction from our North American resellers with regard to the HP deal?

Shane, you want to repeat the question so the --?

Yes I think the question was, Robert, is what has been the reaction from our North American channel partners from the announcement of the HP deal? Is that correct? Is that your question?

Right.

Well, you know, as you expect there's going to be a lot of questions for them but first of all I want to point out that there's been -- there's no [media] impact in North America from this announcement. Obviously this is a rollout initially in the five countries in Europe, but I think across the board whether it is in Europe or ultimately North America when we do expand into those markets this is a big opportunity for them.

I mean, they have an opportunity to partner eventually with HP and leverage their business with the HP brand and marketing muscle. I think that is one of the reasons that when you look in -- just look in Europe, for example. We are getting word that a vast majority of our resellers are going to look to be signing up with HP to become HP-qualified resellers.

So we don't expect to lose any resellers and you also have to remember that resellers have all of our resellers have a significant installed base of systems that are generating recurring revenue for their business. So it is in their interest and it's in our interest that everyone stays affiliated long term.

So I think, based on the reactions we have seen thus far in Europe and the introduction there, which is -- there's been questions obviously, but it looks like we are going to -- most of those are going to become HP resellers. We feel good.

(technical difficulty)

Robert, we are having a tough, tough time hearing you. I think you asked the question about just any development on the competitive side. Is that -- was that your question?

Correct.

Really our job on the call is to really focus on what we're doing and what direction we are moving in. But from a competitive standpoint it's been relatively quiet since the announcement.

Steve Dyer with Craig-Hallum.

Thanks. Just a follow-up. You guys continue to generate a lot of cash. Any thoughts or how do you think about your cash balance as a strategic tool or what might you do with that in the near term or longer term? Whether it be a buyback or acquisition, how do you guys think about that?

Just as I've said for a number of years, I don't look at it is having a cash problem as opposed to a cash opportunity. I think it is very impressive that we are able to generate in this economy $1.26 per share in cash from our operations in 2009. And we still have authorization related to a buyback. We continue to look at strategic ways to use that cash whether it be acquiring another company or acquiring technology.

But as we said in the past is, we are not going to let it burn a hole in our pocket and do something we don't think is prudent to the long term.

Andy Schopick with Nutmeg Securities.

Coming back to HP for a second, Bob, are there going to be any anticipated ramp-up or start-up costs that you will be absorbing in this calendar year that might be nonrecurring going forward? (multiple speakers) in connection with launching.

Yes, you know we've incurred even in what you'll see in our fourth quarter of 2009 is that you saw an increase in our R&D expenses as we have been working together with HP. We actually started working with them probably in the third quarter of the year even though we didn't have a signed agreement.

I'm referring more to launch costs.

Launch costs, the only thing that we have as I look at 2010, the only thing that I think is significant that we make -- that we've talked about before is the fact that we have the warrants that we issued to HP and that is a charge that you are going to see related to those warrants in 2010. And (multiple speakers) --.

Have you determined that charge? As of this --?

The charge will be approximately a one-time charge in the first quarter of approximately $5 million.

In connection with the warrants?

Correct.

Going back to the launch costs, of course, HP will start with some fairly significant marketing. So they are not just selling 3-D printers. They are making the executives as well as the managers that purchase aware and aware of the justification.

So starting now and going for a long time you'll see a significant amount of marketing. But they will incur that. We have no impact to our P&L on that marketing costs.

Fine. And lastly, Bob, customer-funded R&D for this year or 2009, can you give us that number versus 2008?

In -- it was approximately -- for the whole year, it was approximately $2.2 million from that Fortune 500 company as we've continued to work on relationship now for five years. In 2008 it was only about $300,000.

(Operator Instructions). Chad Bennett with Northland Securities.

Quick follow-up here. The 3-D printers in the quarter. Can you go over again for me what -- how much they were down and then how it broke out between uPrint and Dimension?

Sure. Yes the 3-D Printer units for the quarter were down 23%. 53% of the units during the quarter were what we would call our higher-price systems, the 1200s and the Elite. And obviously 47%, the balance for the uPrint.

Then I guess just on the uPrint side competitively, are you seeing any of the other -- there were a couple other low price printers that have been released there. Are you seeing those yet in the markets at all? Thanks.

No.

Ladies and gentlemen, there being no further questions, I would now like to turn the call over to Mr. Scott Crump for closing remarks.

Well in closing, we believe our recent OEM agreement with Hewlett-Packard is an inflection point that will accelerate the growth of our 3-D Printers globally. We have an exceptionally strong balance sheet and we remain committed to our long-term goals and objectives. We are in a great position in 2010 as we emerge from last year's great recession. 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 would like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Goodbye.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.