Stratasys Ltd (SSYS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 Stratasys earnings conference call. My name is Heather and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions.)

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

Good morning and welcome to the Stratasys conference call to discuss first-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 Investors section of our website at www.stratasys.com or directly by accessing the link provided in our press release.

We will begin with a safe harbor statement. All statements herein that are not historical facts or that include such words as "expects," "anticipates," "projects," "estimates," "vision," "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 and sales of our 3-D printers, our WaveWash support removal system, the demand for 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 rates experienced in this and preceding quarters, our ability to introduce, 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 our forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements, but we expressly disclaim any obligation to do so even if our beliefs and expectations change.

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

The information discussed within this conference call includes financial results that are in accordance with the 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 comparative performance, primarily the identification and exclusion of expenses associated with the warrant charge, 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 and thank you for joining us to discuss our first-quarter financial results. During the first quarter we entered into a game-changing exclusive agreement with HP for the worldwide distribution of 3D printers. In addition to this historic development, we are pleased to see a continued improvement in business conditions across our core markets.

Revenue for our products and services increased by 21% over last year and when you exclude the one-time noncash charge for the warrant, our margins continued to expand year over year and quarter on quarter. The strong year-over-year performance was somewhat expected, given the very weak comparison from last year. However, we were pleased to generate strong sequential growth, considering the seasonal weakness that is typical for our first quarter.

Highlighting our first-quarter results was a 140% increase in Fortus system sales over last year. Fortus sales have rebounded dramatically, benefiting most from the economic recovery. In addition, our RedEye and consumable revenue grew an impressive 25% and 22%, respectively, during the first quarter. We believe the growth in these two businesses could be a positive leading indicator for the months ahead.

As we begin the second quarter, we are entering an exciting new phase of our agreement with HP, as they launch into the distribution of our 3D printers. HP officially introduced its line of Stratasys-manufactured DesignJet 3D printers last week and we've begun shipping these new products. We believe this marks a major inflection point for our company's history.

I'll return later to update you on some of our initiatives, including our game-changing agreement with HP, but first I'd like to turn the call over to our CFO, Bob Gallagher, who will further highlight our first-quarter results. Here's Bob.

Thank you, Scott. Total revenue as reported was $23 million for the first quarter of 2010, which included a one-time noncash charge against revenue of approximately $5 million. The one-time charge resulted from the warrant granted to HP for 500,000 shares of Stratasys common stock. As we disclosed in our January announcement, the distribution agreement with HP included a one-time warrant that vested upon the grant date in January. The proper accounting treatment for this noncash expense is a charge against revenue and amounts to approximately $5 million.

Total product and services revenue was $28 million for the first quarter, a 23% (sic - see Press Release) over the $23.1 million reported for the same period in 2009. The Company shipped 610 systems during the first quarter versus 590 (sic - see Press Release) last year. Overall, the positive momentum we began to observe in our businesses during the fourth quarter carried over into 2010 and we are cautiously optimistic that this trend can be sustained.

First-quarter product revenue increased by 28% to $21.8 million when compared to $17 million for the same period last year. Three factors impacted our product revenue growth in the first quarter. First, revenue from Fortus 3D production systems increased by 140% when compared to the same period of last year. It should be noted that the first quarter of 2009 represented the start of a dramatic decline in Fortus system revenue, as sales were significantly impacted by the economic downturn. Given the positive trends we are observing in 2010 and the favorable year-over-year comparisons, we expect to generate strong, positive growth in Fortus systems sales during 2010.

The second item impacting our product revenue was a 22% increase in our consumable revenue compared to last year. This is a dramatic improvement compared to the 4% year-over-year growth we experienced during the fourth quarter. We believe this growth may be a positive leading indicator for our businesses going forward.

The third item impacting our product revenue was a 10% increase in our 3D printer sales in the first quarter compared to last year. The relatively lower growth for 3D printers was expected, given a tough quarter comparison. 3D printer sales during the first quarter last year were bolstered by the introduction of our revolutionary new uPrint 3D printer. While we did announce an extension of the uPrint platform in the first quarter of this year, with the introduction of uPrint Plus, the uPrint Plus rollout lacked the promotional impact of last year.

Our higher-priced Dimension 3D printers continued to be our best sellers in the first quarter, with our most affordable 3D printer, the uPrint, representing 41% of all 3D printer unit sales during the first quarter compared to 61% in quarter one last year. We did begin to ship the HP DesignJet 3D printers in the final week of the quarter, but the impact on product revenue was immaterial.

First quarter service revenue was flat at $6.2 million when compared to the same period last year. Revenue on our RedEye paid parts business increased by 25% in the first quarter compared to last year. This represents a significant recovery for RedEye, which had been negatively impacted in recent periods by an aggressive pricing environment. The improvement in business conditions we have recognized over the past six months is beginning to have a positive impact on our RedEye business.

Our maintenance revenue declined by 12% in the first quarter compared to last year and reflects an extension in the warranty period we began to implement in early 2009 for most of our systems. In addition, it should be noted that maintenance revenue is less susceptible to near-term changes in the economic environment, given that most of the revenue is generated from contracts signed in prior periods.

Including the one-time noncash charge against revenue, gross profit was $9.4 million. Excluding the one-time warrant charge, gross profit increased by 50% to $14.4 million for the first quarter 2010 when compared to the same period last year. Excluding the one-time charge, gross profit as a percentage of sales increased to 51.5% when compared to 41.4% for the same period last year and 51% in the fourth quarter of 2009. The gross profit percentage was positively impacted by the growth in total product and service revenue, as well as a favorable mix in product sales, particularly our consumable and higher priced 3D printers.

In addition, our margins in the first quarter benefited from the cost-saving measures we implemented in early 2009, as well as our successful initiative to lower our manufacturing costs of our uPrint 3D printers. We began last year with a goal of reducing the manufacturing costs of uPrint by 15% and we exceeded that goal. We will continue to drive initiatives whose goal is to lower the manufacturing costs of our products.

Including the one-time noncash charge against revenue, we incurred an operating loss of $762,000. Excluding this one-time warrant charge and other discrete items, we had an operating profit of $4.5 million in the first quarter of 2010 compared to a loss of $578,000 for the same period last year.

Operating expenses declined by 9% to $10.2 million during the first quarter compared to last year. Operating expenses benefited from headcount reductions taken the first quarter of last year which amounted to approximately $2.7 million in annualized savings for the Company. We will begin to anniversary the benefit of those reductions starting in Q2 of 2010.

SG&A expense in the first quarter included $150,000 of stock-based compensation expense, net of tax, compared to $197,000 for the same period last year.

In other income, the first quarter included a relatively large foreign currency loss of $359,000 compared to a $236,000 gain for the same period last year. The loss was a result of the significant appreciation in the dollar relative to the euro during the period.

Including the one-time charge against revenue we incurred a pretax loss of $880,000. Excluding the warrant charge and other discrete items, pretax profit was $4.4 million for the first quarter of 2010 compared to a loss of $42,000 for the same period last year.

Total interest and other income for the first quarter declined to $215,000 from $286,000 last year. This is due to a decline in interest rates and a more conservative investment portfolio. Excluding the warrant charge and other non-GAAP items, income tax expense amounted to $1.5 million in the first quarter or an effective rate of 34.2% compared to a tax credit of $46,000 for the same period last year. We expect the tax rate in 2010 will average between 34 to 37%, excluding any incentive stock-option-related impact.

Including the one-time charge against revenue, we incurred a loss of $443,000. Non-GAAP net income, which excludes the warrant charge, certain discrete items, and stock-based compensation expense was $2.9 million, or $0.14 per share for the first quarter of 2009 (sic) compared to a $5,000 profit for the same period last year.

A table provided within our press release provides itemized details surrounding all non-GAAP items incurred during both periods.

We generated positive cash flow from operations of $2.7 million during the first quarter and we finished the period with approximately $72.1 million in cash and investments. We continue to be pleased with our management of working capital.

Inventory balances were $16.9 million at the end of the first quarter, which is up when compared to the $14.6 million at the end of the fourth quarter, but down significantly from the $20.2 million at the end of the first quarter last year. The increase in inventories was planned in anticipation of HP's new product launch during the second quarter, as well as inventory for our new uPrint Plus and our new support removal system branded WaveWash.

Accounts receivable was $19.7 million at the end of first quarter, which is comparable to the $19.3 million at the end of the fourth quarter, but down significantly when compared to the $23.7 million at the end of the first quarter last year. I'm pleased to report days sales outstanding, or DSOs, was 63 days compared sequentially to 68 days at the end of the fourth quarter last year and compared to 90 days at the end of the first quarter of last year.

And now I'd 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 continued to observe an improvement in market conditions during the first quarter and we are optimistic about the coming periods. However, continued uncertainty in the strength of the economic recovery, as well as the many changes in our go-to-market and product strategies over the past few months, continue to make visibility difficult. Based on those factors, we will continue to not provide financial guidance for 2010.

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

Thank you, Shane. We are optimistic that the first quarter represents an upturn for the economy and a return to a more favorable business environment for our company. In addition, we believe the start of our second quarter represents the beginning of a revolutionary new period for our company.

In January we announced our exclusive agreement with HP for the distribution of our 3D printing products. Last week HP formally launched the DesignJet 3D printing series. The DesignJet 3D printer is engineered and manufactured by Stratasys and is based on our proprietary FDM technology. HP is targeting the mechanical, CAD, and educational markets in five European countries, with the DesignJet series, which starts at less than $17,500 US dollars. The DesignJet series is comparable to our uPrint 3D printers that we'll continue to sell in markets not currently served by HP. For the countries served by HP, Stratasys is no longer selling the uPrint line. However, we'll continue to sell the Dimension line of 3D printers in all markets worldwide. In anticipation of HP's announcement last week, we began limited shipments of their new products in the final days of our first quarter.

We're excited about entering this stage of our agreement with HP. We believe their expansion into 3D printing with Stratasys products represents a major inflection point in our company and is further confirmation that a significant market opportunity exists. Stratasys and HP believe that millions of product designers are now ready to bring their designs to life in 3D. We also believe that HP's decision to enter the market with products based on our proprietary FDM technology will provide a market boost for all of our Stratasys FDM products, including Fortus and Dimension, based on expanded awareness and HP's endorsement of FDM.

Well, another big development in the quarter was the introduction of our uPrint Plus 3D printer. The uPrint Plus is an extension of the uPrint platform, which was introduced last year. The new system provides many new enhancements for our customers, including the ability to print in eight different colors. And in addition, the uPrint Plus has two resolution settings and 33% more build volume than basic uPrint, enabling larger models. It represents a higher-margin system for Stratasys relative to the basic uPrint and has been well received within our market. We now offer two versions of the uPrint, which are comparable to the HP new DesignJet lineup.

Coinciding with the introduction of HP's new DesignJet 3D printers, both Stratasys and HP recently launched an eco-friendly automated support removal system. The new platform will improve upon the whole product experience for customers by providing a hands-free process to automatically dissolve support material. Sold under the WaveWash brand by Stratasys and DesignJet brand by HP, the new system is office-friendly and easy to use. The product includes a compact liquid agitation tank and a new cleaning agent called Ecoworks. The cleaning agent is added to water, creating a solution that dissolves the temporary support structure on the model. The wastewater is at a pH level that meets household drain water requirements worldwide. HP's strategic input was instrumental in our development of this new support removal system, and they fully appreciate the need to offer a product that is affordable, office-friendly, easy to use and highly reliable.

Well, we're pleased with the dramatic turnaround for our Fortus 3D production system business during the first quarter, which grew an impressive 140% over last year. Before the deep recession we were experiencing strong growth in our Fortus line, reflecting our success in targeting new direct digital manufacturing, or DDM, applications. DDM is a new and progressive approach to manufacturing and during the economic downturn most manufacturers were more focused on survival and preserving cash instead of taking a calculated risk on new technologies and new processes.

With the recent economic upturn our customers' willingness to make investments in innovative new processes that save them time and money is returning. Manufacturers have begun to recognize the value of our technology for end-use part production, including fixtures and assembly tools for manufacturing. In addition, the capabilities of our technology allow for the production of complex geometries that would be impossible to produce through conventional processes. We continue to see a strong pipeline of opportunities for our Fortus line relative to last year, which should translate into higher revenues going forward.

Well, with the recent improvement in our business conditions, we've observed an upturn in our RedEye business as well, which grew an impressive 25% during the first quarter. In addition, our consumable business continued to rebound in the first quarter, expanding by 22% over last year. We believe the strong growth in our consumable and RedEye paid parts revenue could be an indicator of a sustainable growth trend.

We are encouraged by the positive trends during the first quarter and our optimism for the rest of the year is growing. However, we remain cautious in our outlook and will continue to control our expenses accordingly, given the uncertainty that persists over the economic recovery. We maintain a healthy balance sheet and we're well positioned to execute on all of our growth plans going forward.

Most importantly, as we begin the distribution phase of our agreement with HP, we believe that we are well positioned for a significant expansion in 3D printer sales in the future. We now have the right solution, with the right partner, targeting a significantly under-penetrated market, with millions of CAD seats to serve with our 3D printer.

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

Thank you. (Operator instructions.) Chad Bennett; Northland Securities.

Good morning, guys. Just a couple questions. First of all -- maybe I missed it -- did you give a backlog number?

No. We don't -- the only time that we give backlog is at the end of the year when we're required to do it. So, no, we did not.

Okay. And then, Bob, I think you talked about hitting your target on uPrint gross margins and cost cutting there. So uPrint gross margins, I think -- remind us again where -- what the target was there. I believe it was 25%, but maybe it was even higher, closer to 30%.

No. It was -- what we said at the first quarter last year was to reduce the material cost by 15%. And we exceeded that target.

Okay. So did you ever -- you never gave a gross margin target, though?

No. We only gave you how much we thought we could reduce the material cost of the product by.

Okay. Okay. And then, now that you're actually shipping to HP, and I think it's probably earlier than what most of us thought, can you give us a better sense of kind of what the ramp potentially would look like, or what the next steps are in kind of the channel fill or demand there through HP, at least over the next quarter or two?

The comment that we made when we announced the HP agreement, we said that it wouldn't have a material impact on the top or the bottom line in 2010. And I think it's important to remember that the launch is only in five countries. And the launch is really only two products, which are equivalent to the uPrint and the uPrint Plus. So as you look out at 2010, we have said and we continue to say that we don't think that the HP agreement is material to 2010.

Let me tag onto that, just to repeat, the announcement was in January, but the actual product launch was just last week.

Right. Okay. And then, the last question for me, on the consumable side, obviously a nice return to growth there. Scott, can you talk about -- or Bob, for that matter -- can you talk about kind of what markets or was it across all your product lines that you saw improved "utilizations" or can -- any type of further color there on what you're seeing?

Well, I think it was fairly uniform over both the high-end Fortus as well as Dimension. I think it's a fairly straightforward reflection of higher design, higher prototyping, greater business that's out there within our customer base.

Okay. Thank you.

Again, ladies and gentlemen, in the interest of time, please try to limit your questions to one, with a follow-up. Brian Drab; William Blair.

Good morning. Just wanted to start by asking about the first-quarter 2010 3D printer sales. Should we assume that the first quarter benefited at all from the introduction of the uPrint Plus in terms of channel fill. I know you said it's nothing on the order of magnitude as we saw last year with the uPrint, but is this run-rate unit volume that we saw in the first quarter what you'd expect going into the second quarter, or might we see a modest downtick related to the uPrint Plus introduction?

As -- I think you quantified it correctly, is that we did a modest event as it related to the uPrint Plus. Part of that is in anticipation of the HP agreement, too, for the five countries that were being impacted. So there's clearly some impact of the uPrint Plus, but it was fairly nominal in Q1.

Okay. Then, I just want to go back to the HP ramp and, Bob, your comment that it shouldn't be material in 2010. And I understand the timing und- -- I understand that you're only going to have sales through HP for eight months of the year and you said it's only in five countries. But these are major European countries and eight months of sales in five European countries, even if you only sell 10 units per country per month for the rest of the year, I mean, that could be significant. So it sounds like you're -- I'm just trying to gauge what we're talking about here. Just rough numbers, I think if you did for eight months, five countries, say 10 units per country, we're talking about something in the $5 million to $10 million range in revenue, aren't we?

Yes, but you have to remember that those are coun- -- and I'm saying relative to without the agreement -- you have to remember that all those countries are countries that we were selling in for the uPrint and uPrint Plus already. So I'm looking -- when I'm talking about HP's impact, I'm talking about it relative to what Stratasys thought we would do on our own within those countries. So I think what I look at it is what incrementally is HP adding to us in 2010, and I continue to believe, as they refine their marketing message in those five countries before they expand for additional rollout, that it will not be material to 2010.

To the percentage, I think it's realistic to view that -- those five countries as maybe 15 -- historically about 15% of our business. And what this does is it gives HP and the Stratasys/HP relationship a way of learning about 3D. Of course, HP knows a huge amount about the two-dimensional market, but they're learning about the three-dimensional market. And this gives them an excellent way to understand things like the Dimension university program and how best to sell as they further expand from there.

Okay. I'll just make one last comment, that I would think that HP would be disappointed in their results if they weren't able to sell 10 units a month in Spain or in France and -- incrementally to what you're selling already, which could -- I mean, maybe it's not material in terms of $5 million to $10 million, but it seems like you should see some revenue from that opportunity this year.

But I guess I'll just ask another question, just one last question on the price point. It looked like in HP's press release that they said that their product is going to be selling for around $17,000 US dollars. And they have two products, so I imagine one of them is around that $17,000 range and one's a little higher. Is that correct?

Those are the published prices that you see out there from HP. But I think you need to keep in mind there's a lot of different ways within the marketplace of how prices are determined. And ultimately for the end customer, we don't think the end customer is going to see an ascertainable difference in the prices.

Okay. All right. Thank you.

Chuck Murphy; Sidoti & Company.

Good morning, guys. Your unit shipments were up quite sharply sequentially, while the product revenue was up, but just not nearly as much. And I'm guessing that's due to product mix, but what I'm a little confused on is why the gross margin managed to be up in that case, if the product mix was tilted towards the lower-end products.

And I think part of that that I need to add to that is to remind you that consumable revenue growth was up 22% over the last year. So the consumable growth, as everyone knows on the call, is a major component to our gross margin.

Okay. So attribute it mostly to consumables and maybe -- yes, okay. All right. And then my other question was just, do you guys expect Fortus to continue to ramp up sequentially or was the first quarter benefiting from some seasonality or a few kind of one-off orders?

Well, I think it's dependent upon a slowly growing economy out of the recession. But I definitely believe that there's -- that we're going to see continued growth. If you go back to just before the deep recession, some quarters we were growing 27, 30, 33, and in one quarter 40% growth on a quarter-over-quarter -- I mean, not -- year-over-year basis for the quarter. And I think the primary reason for the growth is capital dollars are freeing up. And we're in a new, or fairly new, application which gives very good return on investment to the customer. And we're unique. There's only a couple companies in the world that can provide additive fabrication to this application of end-use parts and fixtures and assembly tools. So I definitely believe that we're going to see continued strong growth.

Yes. Just tagging on behind Scott, obviously with the beginning of the year a lot of companies reset their capital budgets. I think Q1 benefited from some pent-up demand, and whether that's a continuing fact or not I think will remain to be seen. But we're, as we said, cautiously optimistic, but I don't think we're in a position to predict that as a yes or no at this point in the year.

Got you. Right. And if I could just come back to my previous question before about the margins, did you say how much consumables were up sequentially?

We don't have that right here. We don't have that, Chuck.

Okay. All right. Thanks, guys.

Steve Dyer; Craig-Hallum.

Thanks, guys. Good morning. A lot of mine have been answered. Just -- and I don't want to beat the HP thing to death, because it's been come at from every angle. But so, Bob, is your definition of materiality kind of 15% of sales, give or take, in these countries as being something material or worth talking about with respect to HP?

When I define materiality in my own mind, I look at, like I said, what I think they're adding incrementally to us within those countries. And then I'm looking at it from a Stratasys overall, both from our Fortus and Dimension product line. So I'm talking about revenue on a gross basis for the Company.

Okay. And obviously you're not willing to give numbers on HP, but I'm just trying to get a sense for -- kind of going back to the question of how that ramps throughout the year. Are you going to see kind of a -- or is your expectation that you'll see sell-in here largely in kind of Q2 and then a lot will depend on sell-through? Or how would you expect that to hit your P&L throughout the year?

Well, we sell directly to HP. And they take ownership at the dock. But in terms of the timing of sales, you have to remember, we just announced the HP relationship. Last week is when they actually introduced the products. They're dealing with a lot of resellers who have never sold a 3D printer before. So there's a lot of moving parts to this and in order to predict the ramp at this point in time after they just announced it last week, it's too premature.

And the good news there is that all of our active European resellers have expanded to not just sell the Stratasys products, but also now are certified in their area to sell HP, so certified HP for 3D printing, which I see as a very good sign for stability in the sales force, and should carry over as we expand into other regions.

Okay. And then, with respect to R&D costs, they bumped up a little bit relative to where they were a couple of quarters ago. Is this kind of a new run rate to think of in terms of that line?

Yes. During the quarter we introduced the uPrint Plus. We introduced both our version of the support removal system, the WaveWash, as well as the DesignJet version of that. So we've had significant efforts within the R&D area. But, yes, we -- with the HP relationship and the quality, we're putting a heavy emphasis on R&D within 2010.

Sure. Okay. And then I think, Bob, you said cash from operations was $2.7 million. Did you have any CapEx of anything worth talking about in the quarter?

CapEx was somewhere in the $800,000 range.

Okay. All right, great. Thanks, guys.

Ryan Thibodeaux; Maple Leaf Partners.

Good morning. Just to go back to the HP deal, just trying to get a sense of the scope. Originally in January in the 8-K you guys said that you thought that HP in five years could be shipping 50,000 units a year. That's kind of how you got to the numbers of the $500 million in revenue for Stratasys. So --

Right.

-- what I'm trying to understand better is how, if the entire industry shipped an average of 3,300 units, according to the Wohlers data, over the last five years, how is it that HP's going to grow the market by 13 times over the next five years, shipping a product that's priced higher than the uPrint is priced now?

Yes. Well, I think it's a good question. If you look at the application, which is currently mechanical, so the future is the area of architectural, and if you look at the application in, I'll call it, a three-dimensional blueprint -- so rather than a two-dimensional plotter, which they dominate, we'll call it a three-dimensional plotter. When you look at their rapid growth as they entered that market, their growth was at a -- or the market overall was at even a higher rate. And you can see that in almost all S curves of when the tornado -- if you get into crossing the chasm and the tornado -- the current amount of volume -- let's say [perspex] is a 2,000 units per year, is a nothing. It's on the beginning stages of the -- or let's say, five or six years into the S curve. When it starts to take hold, the potential here with millions of existing CAD seats, solid mechanical CAD seats, the opportunity is for over 500,000 3D printers.

And if you have the awareness -- in our case, if you have the endorsement on the technology, high reliability -- so I'm getting to a whole product offering. If you can satisfy the customer, as HP has proven time and time again, and has proven in this market with these budgets, with these customers, it is more -- I believe it is more than possible. I believe myself it is inevitable. And I've been tracking it for about 18 years through a company that used to dominate the 2D plotter area called Calcomp. And of course now HP does dominate it. And that's the basis for our vision of being a $0.5 billion revenue company.

But that's essentially the same thesis that you guys had five years ago. Right?

Well, with one huge difference. We've got the muscle and the awareness, endorsement of a company, HP, that knows these customers, that can do top-down selling that we have not been able to do, to sell to these exact same customers for the exact same application. So yes, we're consistent with our vision.

Okay. Well, if that's the case, what's your capacity right now to build these uPrint units?

Well --

How many can you build in a year?

The question is what is our expanded capacity. If there's little capacity you have to include huge overheads, which we don't have. Right? So we believe that we can expand through 6,000 units and well, with more work, to get to over 10,000. And now, part of that is going to include, as we grow beyond 10,000 units per year, with the help of HP's worldwide supply chain, which we're not currently using yet.

And I think you have to remember from a manufacturing standpoint, we're really a final assembly and test, and that we bring in a lot of subcomponents here. So ramping up is relatively easy (inaudible - multiple speakers.)

But presumably you'd have to have a great deal of CapEx and additional labor to assemble them. Right?

Well, no, because most of the CapEx in the printer is really with our manufacturers, our suppliers. We have a certain amount of hours of what we call touch labor and burn-in and assembly. So that's -- what you say is probably true for the consumable side, but for the unit shipment side it really lies within our supplier, to make motors that our supplier -- yes, they have to have a lot of CapEx, painting equipment at our suppliers, yes, metal bending, yes, but not here at Stratasys.

And Ryan, one other thing. You mentioned our ability to get to those kind of numbers when -- and you referred to the uPrint specifically and the price points there. We have a plan and we believe HP's going to be involved with that, that looks at introducing -- we're not going to sit still. We're going to introduce additional products over time. We still hold by our thesis that the market's price-elastic and as we continue to make the products more affordable, more easy to use, more office-friendly, that's one of the -- those factors are pretty critical -- and reliability -- are really critical to expanding the market. To say that we're going to get to those kind of numbers with the product we have today, I think is -- that would be pretty shortsighted in the vision.

Okay. Thank you.

Jim Ricchiuti; Needham & Company.

Hi. Good morning. Maybe we could just shift gears a little bit. And I was hoping you might expand a little bit more about the strength you're seeing in Fortus. Whether you could talk about utilization rates or maybe some color on the end markets where you're seeing strength? Or perhaps -- I assume you guys have a pretty good idea of where this equipment is going in terms of existing versus new customers.

Well, the applications vary across eight different market sectors. It is still -- for Fortus is still used predominantly for rapid prototyping. However, as we've indicated in the past, approximately 40% of our customers are using our systems for DDM, which would be, let's say, end use parts for manufacturing. It would be end use parts as well as fixtures and assembly tools in the manufacturing process. And that they're using it -- or, excuse me, 40% of the customers are using them in some capacity. So it goes across a fairly wide set of applications, and in most of the countries that we sell into as well.

It's pretty broad-based, Jim. We've got to remember we also sell through distribution, so we do have -- we're one degree removed from the end customer, particularly with the consumables and oftentimes with the system sale. But it's pretty broad-based.

Well, of course, if you wanted to get a lot of details -- I don't think we want to turn the call into like a technology application, there's a number of very fascinating real applications on our website. I'd invite you to take a look at that as well.

Well, I'm just thinking more in terms of the strength you saw this quarter. And I know you've been building out your indirect channel in North America. Did that perhaps contribute to some of the strength? And what --just some color -- were you seeing strength in Fortus geographically across your regions?

I think you hit on just the point I was going to bring up. In Q1 last year we really changed our distribution model within North America to go to -- from a direct sale into an indirect channel. We did -- we clearly lost some momentum in Q1 of 2009 with selling Fortus in North America. That channel has now been at if for 12-plus months. And that channel is much better educated within the Fortus systems. And some of that movement of shifting gears was why you saw the 140% quarter-over-quarter growth. So clearly, North America was a strong point when you look at year-over-year. Because --

Okay. And, Bob, from the standpoint of looking out over Q2 and the balance of the year, the distribu- -- the changes you made in the channel were less disruptive, I guess, beginning, when, Q2, Q3?

I would say probably Q3.

Okay. Thanks very much.

Andy Schopick; Nutmeg Securities.

Thank you and good morning. I just want to come back to HP. Bob, you can run through these very quickly with me. Will HP, for purposes of financial reporting, be grouped as domestic or international revenue?

We will group them as international.

Okay. Also, for purposes of materiality, will you be breaking out HP separately when they become a 10% customer in terms of revenue contribution?

That's something that we're required to do, so, yes.

Okay. Can you provide us with any indication as to the impact on shipments in this quarter? I'm assuming there was just some stocking type of shipments that were -- impacted revenue this quarter? I mean, was it more or less than 50 units? Can you give any indication?

Yes. It was clearly immaterial to the quarter.

Not material.

Okay. Other than that, you don't want to be any more specific?

No.

Okay. And will HP be giving you rolling monthly or quarterly forecasts to which you will build and ship to them? And how are you sorting this out right now in terms of trying to smooth this process?

Yes. No, we work with HP very closely. We work with rolling forecasts. And the nearer-term the forecast, the more committed the forecast is. But in order to make sure that we're managing our relationship as well as our capacity, we're really looking out over the course of a year.

Okay. Thank you.

Graeme Rein; Bares Capital.

Good morning. Scott, could you just talk about the RedEye business briefly? Are you seeing any competitive changes there? Do you have any sort of comments on the strength there?

Yes. For most countries, and for RedEye it's primarily US, there's more business. There's more projects. There's more acceleration of design/engineering projects, which has taken a lot of the pressure that we saw a year ago today where the small mom and pop in order to survive would take an order pretty much on -- at any basis. And we were not at that time, and going forward we're not. So I think the -- there's more business. There's less pressure. So we not only have more revenue opportunity, but at more normal margins. And I would expect that to be the case going forward within the -- and certainly the US market for the kind of parts that we produce.

Okay. And are you converting any of those RedEye customers into systems sales? Or do you even have visibility into that?

That's a good question. Many times we'll sell up a system and where a customer might need 10 systems, they have one. That many times can create even more business at that site for RedEye. In fact, we've tracked some customers where they've done that cycle, let's say, three or four machines, and then each year actually also ordering more from Red Eye. So I'm viewing it really more -- I think we can say maybe 30 or 40% of the business is where we have machines. Customers want to get some help on their peak and valley. So we can't help them on their valley, but on the peak, they'll place orders to Red Eye, and we cover them for that week or that (technical difficulty.) And it's a way of not only getting business for RedEye, but, certainly as we grow, more rapid prototyping business as well as DDM system business.

Okay, that's helpful. Thanks for taking my question.

Russell Lynde; Park West Asset Management.

Hey, good morning. Couple questions. Was HP a 10% customer in this quarter?

No.

And you mentioned that 15% -- or the countries that HP represents is 15% of your sales?

I think historically you could take those five countries and say (technical difficulty) 15 or 20%, but not necessarily HP.

Yes. And so that -- Scott said 15%. I think the number is closer to the 20% range. And that's for all our products, which would include our Fortus, our Dimension, as well as our uPrint, uPrint Plus products.

Okay. So do you expect HP to be material in any quarter this year? I know it's not for the year, but in any quarter?

In -- my comments go back to it being -- we'll find out where -- they just announced the product last week. We've got new resellers, who have never sold 3D printers before, selling 3D printers. My comments as to materiality relate to what I said would be incremental sales that we thought within those countries and if it's material within those quarters we'll report it as such.

I guess just philosophically why wouldn't you just tell us what the HP sales are? Is there a competitive reason because --

Well --

-- I mean, clearly it's -- we all want to know about the relationship.

Great. But HP -- we're working with HP and they're not all that interested in sharing it.

Okay. So HP is -- has asked you not to share that information?

We're under a nondisclosure with them that they -- we may mutually change that, but if we do you'll get that information from HP. Because they control -- they are selling the 3D printer and they control that. We don't.

Okay. And then, can you just take us through how the accounting works? Do you book a -- is it a receivable and what are the terms when you sell to HP?

Yes. We -- when we ship units to HP they take ownership of those units. And just like any other distributor or reseller that we have, we have receivable terms as it relates to that. And it'll be reflected in our days sales outstanding, along with the rest of our resellers.

Okay. And so do you expect that to be a use of cash as you ramp that relationship? Do you expect days sales to go up as you ramp that relationship?

Well, just like usually when you're growing receivables over the period of time, you see that as a use of working capital. What we've been able to do most recently is reduce our days sales outstanding as evidenced in the current quarter, going from 90 last year down to in the 60's. So we'll continue to manage that component of our working capital, as well as our inventory.

Okay. Thank you for taking my questions.

Andy Schopick; Nutmeg Securities.

Yes. One follow-up on the HP relationship -- has a decision been made yet when you will roll out into additional countries or regions and the timeframe for which you will do that beyond the five initial countries right now in Europe?

No. I think that could occur at any time by mutual agreement. But, again, remember, they just launched the product last week. We've gone through the last two or three months a pretty extensive education, but focused really on those areas, those five countries. And to repeat, although HP is a proven leader in the 2D plotter market, 3D printing is a new [initiative] for them. And introducing in these five countries will allow them to refine their sales and marketing approach before they expand into other countries.

We have heard of some demands now that the product is out, but there's no decision to -- to your question, no, there's no decision.

Has HP been able to forward any leads to you that you've been able to ship directly or through your other resellers in that context of what you just said?

Well, we're hoping to leverage. But remember, in four days or five days since the launch, not -- you can't operate that quick, right? I mean --

Well, I'm just wondering whether you've been able -- if you're not -- if HP's not formally launched in other countries beyond the five that's been rolled out, are they able to forward or would they forward to you any interest that they might be seeing that they simply cannot address right now through the existing relationship.

Right. Andy, right now HP doesn't have a mechanism today after just announcing the product last week. They don't have any mechanism to get any type of that information back to us. As you can appreciate, given the size of HP relative to us, that mechanism just isn't placed today. From a contractual obligation, any expansion into other countries would be by mutual agreement during this year.

Understood. Thank you.

As there are no further questions in queue at this time, I'd like to turn the call back over to Scott Crump for closing remarks.

Okay. Well, in closing, we believe that we're off to a great start in 2010. The economic recovery appears to have gained momentum and we've begun to deliver on our distribution agreement with HP. I'd like to thank all of our employees and strategic partners that have made this HP agreement possible.

We have an exceptionally strong balance sheet and we remain committed to our long-term goals and objectives. We remain confident in our ability to provide long-term value to our customers, channel partners and shareholders.

And I'd like to thank you for your interest in Stratasys. We look forward to speaking with you again next quarter. Goodbye.

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