Stratasys Ltd (SSYS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 Stratasys earnings conference call. My name is Brandy and I will be your operator for today. At this time all lines are listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions.)

I'll turn the call over to Mr. Shane Glenn, Director of Investor Relations. Please proceed, sir.

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

A quick reminder that today's conference call is being transmitted over the web and can be accessed through 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 3D printing market, our objectives for the marketing and sale of our Dimension and uPrint 3D printers and our Fortus 3D production systems, particularly for use in direct digital manufacturing, our agreement with HP to expand the distribution and sales of our 3D printers, our WaveWash support removal system, 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 3D printing market, our ability to maintain the growth rates experienced in this and preceding quarters, our ability to introduce, produce and market new materials such as 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 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 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 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, and thank you for joining us to discuss our second-quarter financial results.

During the first quarter we entered into a game-changing, exclusive agreement with HP for the worldwide distribution of our 3D printers. During the second quarter HP began marketing and shipping those products to end customers. We're excited to report that HP exceeded their initial order forecast for the second quarter and reported strong sales through to end users. We are pleased with this progress and have become more optimistic about expanding the relationship in the future. Consequently, we have begun to plan for the next phases of our collaboration with HP.

In addition to the progress we made with HP, we are pleased to see a continued improvement in business conditions across our core markets during the second quarter. Total revenue for products and services increased by 22% over last year, led by a 56% increase in 3D printer system revenue. In addition, our consumable revenue grew by an impressive 25% to a record level during the second quarter. Our system unit sales also represented a quarterly record, growing by 54% over last year.

We were proud to launch our new WaveWash easy-to-use automated support removal system that further uniquely differentiates Stratasys competitively. Within Fortus we continued to main a strong pipeline of orders, driven by the improvement in business conditions within our core markets. We're excited about a recent contract extension with our Fortune 500 partner to develop exciting new DDM applications within the Fortus line.

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

Thanks, Scott. Total revenue was $30.1 million for the second quarter of 2010, a 22% increase over the $24.6 million reported for the same period last year. The Company shipped a record 682 units during the second quarter, a 54% increase over last year. The strong unit growth was driven by growth in our 3D printer unit system sales.

Domestic sales represented 56% of total revenue during the quarter and grew by 26% over last year. International sales were up 18% for the quarter. The international sales growth was impacted by the decline in the euro. The euro decline from the average first-quarter rate resulted in $382,000 lower Q2 revenue.

Second-quarter product revenue was $23.8 million, a 31% increase over the $18.2 million reported for the same period last year. Two factors impacted our product revenue growth during the quarter. First, 3D printer unit sales increased by 60% when compared to the second quarter of last year, driven by the new Designjet we shipped to HP, as well as strong growth in our Stratasys-branded 3D printers. Although HP has only recently initiated their marketing programs, we believe they are having a positive impact on the market.

HP significantly exceeded their original forecast for the second quarter and reported that virtually all systems have sold through to end users. Reflecting their impact, our 3D unit sales within markets served by HP, which includes both Designjet and Stratasys-branded systems, increased by 74% during the second quarter. Despite this strong growth, we want to remind everyone that HP's overall unit volume at this stage remains relatively small given their limited rollout of only two products in five European countries. As Scott will address later in the call, HP is more focused on refining their go-to-market strategy during the initial launch to better prepare for future expansion and accelerated sales volumes.

The second item impacting our product revenue during the quarter was a 25% increase in our consumable revenue compared to last year. This represents a positive trend that began in the fourth quarter of last year, and we believe represents a positive leading indicator of our businesses going forward.

Fortus sales were down slightly in the second quarter versus last year. This was a function of timing, as Fortus system bookings increased by 30% over last year during the second quarter.

Second-quarter service revenue was $6.3 million, which was down slightly from the $6.4 million reported for the same period last year. Our maintenance revenue declined by 13% during the second quarter compared to last year. The recent decline in maintenance revenue reflects an extension in the warranty period we implemented in early 2009 for most of our systems.

Revenue in our RedEye paid parts business increased by 20% in the second quarter compared to last year. This represents a positive trend that began last quarter as RedEye continues to recover from a period of overly competitive pricing that occurred during the recent recession.

Gross profit was $14.8 million for the second quarter of 2010, a 28% increase over the $11.6 million reported for the same period last year. Gross profit as a percentage of sales increased to 49.1% when compared to the 47% for the same period last year. The gross profit percentage was positively impacted by the growth in total revenue and service -- product and service revenue over last year, as well as strong sales of our consumables and higher-priced 3D printers. Gross profit as a percentage of sales declined sequentially from the 51.5% reported for the first quarter. The sequential decline in gross profit percentage was driven by the weaker euro, sales of our lower-margin HP Designjet, and a mix shift within Fortus that favored lower-margin 360mc over the higher-margin 400mc.

Operating profit was $4 million for the second quarter of 2010, 177% increase over the $1.5 million reported for the same period last year. Operating profit as a percentage of sales increased to 13.4% when compared to 5.9% for the same period last year.

Operating expenses increased by 6% over last year to $10.7 million during the second quarter. The biggest impact on operating expenses was a 54% increase in R&D expenditures driven principally by development programs that support new product introductions, such as the recent launch of our eco-friendly automated support removal system called WaveWash. In addition, the R&D offset from funds provided by our Fortune 500 partner to develop DDM applications for our Fortus line was lower during the quarter at $274,000 versus $978,000 for the same period last year. SG&A expense in the second quarter included $262,000 of stock-based compensation expense, net of tax, compared to $162,000 for the same period last year.

In other income, the second quarter included a relatively large foreign currency loss of $439,000. This loss was the result of the significant appreciation on the dollar relative to the euro during the period.

Pre-tax profit was $3.7 million for the second quarter compared to $1.3 million for the same period last year. Income tax expense amounted to $1.4 million for the second quarter, or an effective rate of 37.2% compared to $450,000, or 34.7% for the same period last year. The federal R&D credit has yet to be renewed for 2010 and we have accrued our tax liability accordingly. This contributed to a tax rate in Q2 that is relatively high compared to the range we expect for 2010 of 34 to 37%. Assuming renewal of the tax credit later this year, we will recoup some of our tax expense accrual.

Net income was $2.3 million for the second quarter compared to $850,000 for the same period last year. Non-GAAP net income was $2.6 million, or $0.12 per share, compared to $1 million, or $0.05 per share for the same period last year. Non-GAAP net income includes stock-based compensation expense in both periods. A table provided within our press release provides itemized details surrounding all non-GAAP items incurred during both periods.

We finished the period with approximately $72 million in cash and investments and we continued to be pleased by our management of working capital.

Inventory balances were $17.3 million at the end of the second quarter, which is up when compared to the $14.6 million at the end of fiscal 2009. The increase in inventory was planned and driven principally by the anticipated introduction of our new WaveWash support removal system, the longer lead times required by suppliers, as well as anticipation of stronger orders over the coming months. Right now we expect inventories will reduce as we move through the last six months of the year.

Accounts receivable was $21.7 million at the end of the second quarter, which is up when compared to $19.3 million at the end of the fiscal year. Days sales outstandings, or DSO, was 66 days compared sequentially to 63 days at the end of the first quarter and compared to 68 days at the end of fiscal 2009.

And now I'd like to turn the call over to our Director of Investor Relations, Shane Glenn, for comments regarding out 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 second quarter and we are optimistic about the coming periods. However, it remains difficult to predict our performance coming out of the deep recession as we move into our seasonally weakest quarter. Consequently, 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 we can continue to observe a favorable business environment for the balance of the year. The second quarter brought significant progress to our game-changing collaboration with HP. In April HP introduced and began shipping the new Designjet printer in five European countries, which includes Germany, Italy, France, Spain and the UK. And this HP division responsible for this collaboration is located in Spain. In addition to using our existing channel, HP has added resellers within those five countries and has numerous additional resellers asking for the product line.

As Bob mentioned, system orders from HP exceeded their original Q2 forecast and the sell-through to end users has been strong. We believe HP is already having a positive impact within the marketplace as our system sales grew significantly in those five countries.

Although we are excited about these early signs of success and believe the collaboration is off to a great start, we are more excited about what these developments suggest about the future. As we've communicated previously, the near-term financial impact of the current phase of our agreement with HP is expected to be relatively immaterial in 2010. More importantly over the near term is the refinement of HP's go-to-market strategy within this well defined region so they can prepare for a broader and possibly more accelerated market expansion in the future.

Given the initial success and growing optimism about expanding the relationship, we've begun to prepare for the next phase of the collaboration. This includes planning for expansion in capacity as well as a dramatic evolution in our product line. While the uPrint platform represents a major step in providing a whole product solution that appeals to a broader market, we will continue to develop new products that provide the opportunity to accelerate future adoption. We will accomplish this by making systems that capitalize on a price-elastic market, with products that are more reliable, easy to use, and office-friendly.

Our recent introduction of the WaveWash support removal system is a great example of improving upon our whole product strategy. This new platform improves the ease of use for customers by providing them a more hands-free process to automatically remove support material. Under the WaveWash brand by Stratasys and the Designjet brand by HP, the new system is also office- and eco-friendly. HP's input was instrumental in our development of this new support removal system. We continue to believe this relationship represents the beginning of a revolutionary new period for our company. Stratasys and HP believe that millions of product designers are now ready to bring their designs to life in 3D. And we're collectively preparing to satisfy that demand.

While our relationship with HP represents a game-changing opportunity within 3D printing, you should not overlook the growth opportunity within our Fortus line of 3D production systems. We believe HP's decision to enter the market with products based on our proprietary FDM technology will provide a market boost for our Fortus line of 3D production systems as well.

In addition, companies have begun to recognize the value of our technology for DDM applications, including fixtures and assembly tools within the manufacturing applications. One example of this is the US Army, who recently purchased a 400mc to quickly produce jigs and fixtures as well as specialized repair tools to sustain the existing fleet of helicopters for all the branches of the military. The FDM technology provides them with a quick-response manufacturing capability to reduce repair times and overall vehicle ownership costs.

Another example is Lockheed's initial mission -- missile division in Orlando, who recently purchased a 900mc system to accelerate product development and has found a growing demand to use the FDM technology to produce low cost [to] composite fabrication tools.

To further our goals within DDM, we are pleased to announce that we recently extended a collaboration with our Fortune 500 partner to develop new platforms for DDM applications. The contract extension, signed this month, includes approximately $800,000 of additional R&D funds for 2010 to further develop our Fortus line for DDM. This brings their total spending in product development projects with Stratasys to approximately $5.5 million over the past five years. They view this project as highly strategic and critical to future programs. We are excited that the industry -- that our leading industry company shares our vision and recognizes the potential of our FDM technology for manufacturing of end-use parts. With the recent economic upturn and emerging DDM opportunities we continue to see a strong pipeline relative to last year and we remain optimistic about a strong year within Fortus.

As we emerge from last year's Great Recession, we continue to observe a positive trend in consumable sales in our RedEye business. We believe the strong growth in our consumable revenue of 25% is a positive indicator of a sustainable growth trend.

Okay, in summary we are pleased with the progress in our relationship with HP and we believe that we are well positioned for a significant expansion in 3D printer sales in the future. I believe that HP will begin to execute a global expansion throughout 2011. In addition, you need to respect the fact that we are in the early stages of this relationship and therefore can provide only limited information. We want to adhere to our confidentiality arrangements with HP and we do not want to jeopardize the impact of future marketing programs. We believe that this is in the best interest of our shareholders.

Business trends remained encouraging during the second quarter and we are optimistic about the remainder of 2010. However, we will continue to conservatively manage our spending and resources, given the difficulty in predicting market conditions over the near term. In addition, we are excited about the incremental growth opportunities provided by the emerging DDM applications within our Fortus line.

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

(Operator instructions.) Troy Jensen; Piper Jaffray.

So maybe a quick for Bob -- can you touch on the gross margins here? It dropped to, I think, 49.1% down from 51.5%. Given that consumables were up, all-time record levels here, why the drop? I'm assuming it's product mix, but when does consumables start to really grow the gross margin line here?

Yes. We had an unusual mix in the quarter. Some of the things that it impacted strongly, as I mentioned on the call -- one, we were hit by the euro as I think it moved it down to a significantly lower rate than the previous quarter. And also the Designjet, as we mentioned and as expected, would have a lower margin than our other 3D printers. But also importantly, in the mix in the Fortus line is we saw a significant shift between the 360mc versus the 400mc. As I look out into what we have in backlog as well as orders so far in the quarter, I don't see that that will necessarily be a continuing trend. And we've always had product mix issues and this is a quarter where it brought down our lower margins.

Okay. And then on HP, I'll just ask one two-part question here for my follow-up. But can you let us know is HP going to be classified as domestic or international? And then you had some comments in your press release about a $5 million one-time charge? Was that in Q2 or was that already reported in Q1?

Yes. HP we will -- because of the markets that they're in today, we include that in our international sales. And that $5 million charge that you're referring to would be the Q1 charge. There was no specific charge like that in Q2 at all.

Okay. All right. Well, good luck going forward, guys.

Steve Dyer; Craig-Hallum.

Bob, are you willing to at least let us know if HP was a 10% customer in the quarter?

Yes. As I said, they are not a material part of our sales and at the end of the year if they exceed 10% we'll disclose that. Right now, it's all about the long-term growth in the relationship and expansion. And we're excited about how it's been moving forward so far to date. Remember that they only entered the quarter probably starting the introduction in May. So we only have part of a quarter. And we really need to focus on the long term here and we're really excited about the initial.

Okay. And then, did I hear that correctly -- domestic was 56% of revenues and leaving international to be 44%, which I would assume was driven a lot by HP?

You've got the percentages correct, which is really not a significant change from the overall percentages in the last quarter.

Okay. How should we think about operating expenses going forward? It was just a touch higher maybe than I had modeled at least this quarter. Is this kind of a decent way to think about the run rate going forward?

Yes. Probably the area, as I look out there, probably the area that's higher than probably what people would have expected is our R&D expenses. And [we're seeing] some really good opportunities that we're working on in terms of product development. We're working with two different Fortune 500 companies, with HP and another partner. So we think that there's a great opportunity within R&D and we will continue to spend at a similar level in the second half.

Okay. And then last question -- I ran over my allotment here. But you had indicated the need for expansion here. What is that going to involve in CapEx I guess for the quar-...or kind of looking out?

Yes. We're not -- we'll give more color around that in the future quarters.

Okay. And then, do you have the CapEx number for this quarter, and also cash from operations?

Give us a second here.

I don't have the cash from operations at hand -- oh, cash from operations, I have it for the full year so far as $2.6 million. I don't have it for the individual quarter.

Okay. All right. Thank you.

Brian Drab; William Blair.

Looking at the 60 -- you said 6-0, 60% growth for 3D printers. Is that right?

Correct.

For units? So basing off my historical numbers, it looks like that might be the best result that you've had in terms of 3D printer units in the Company's history. I'm wondering, how does that break down, just roughly, in terms of uPrint versus legacy product? And I guess Designjet too, but I know you won't be able to give us too many specifics on Designjet.

Yes. We'll try to give you some color around that number as it relates to what we -- our uPrint and Designjet represented about 37% of the overall mix within the products. We consider the uPrint Plus -- we put that in with the legacies because there's a differentiation in margin of the products. So the uPrint, the 1200 SST and the Elites represented 60 -- or the uPrint Plus, excuse me, Elite and 1200es represented 63% of the volume, while the uPrint and the Designjets represented 37% of the volume.

Okay, great. And then, give us a little help on the interest income and other line and what we should expect going forward in the third and fourth quarters, just on a directional basis.

Yes. Directionally we've been doing a partial hedging program. Starting effective August 1st we're going to more fully hedge in that, so I think you're going to see a small impact on that line overall, is what I would expect. From a cash and earnings standpoint the amount of interest income is relatively nominal given interest rates today. So I wouldn't expect much impact on that line whatsoever directionally.

So just to be clear, not much impact meaning that it should be roughly a wash on that line or close to zero or close to the second-quarter result?

Close to a wash on that line.

Okay. All right. Thanks, guys.

Chad Bennett; Northland Capital Markets.

Just a couple questions. Bob, you gave a -- I missed this number -- you gave a 74% growth number year over year. I don't know if you could go back to -- do you remember what that -- do you recall what that was related to?

Yes, I do. We spoke about the five European countries that HP is in. We sell both the -- HP sells the Designjet and we sell our own 3D printers within those countries. So within those five countries the combination of HP sales as well as Stratasys 3D printer sales increased by 74%.

Okay. That's what I thought. So if we were to look and if I recall you -- prior to HP you sold uPrints in those five countries before. Right?

Correct.

So if we were to look -- I know you don't like to give a lot of detail, but if we were focused on uPrint specifically, or that kind of priced product, what would the unit growth be year over year, excluding kind of Dimension and I don't know if you sell any Fortus in those five countries, but kind of the uPrint-related products is -- can you give us any insight there?

Yes. I think that in terms of color that we've given you, we've tried to given you some color related to the numbers. And we're not really going to go into more specifics. Again, we need to focus on the long term and that the relationship is going strong with HP.

And, Chad, just one other thing. We were hesitant to even give you the numbers that we did because, once again, the focus is all about them getting their strategy correct here over the short term before they expand further. But we did at least want to provide one tidbit about the fact that, yes, you know what, they are doing -- they are selling more systems into the market. But as we said, they're just now getting started.

Yes. No, I understand. Going back to gross margin, I think you answered it, but do you have any more specifics? You gave three impacts on gross margins. Is there a way to quantify those three things in terms of importance on the gross margin this quarter?

If you put them on the order of priority I would -- the shift in the mix within the Fortus was the number one item. And probably equal then between the euro as well as the impact of the Designjet versus uPrints.

The Fortus probably had over 100 basis point impact just alone.

Okay. That's good color. And then just last question for me, on the balance sheet I think you reclassified a decent amount of cash from cash to long-term investments held to maturity? Any type of color there on why the reclassification and what you're invested in?

Yes. We continue to invest in nothing below a AAA standard. And we moved some more of our investments into a commercial paper -- of high-grade commercial paper that has maturities more than 12 months.

All right. Thanks.

Graeme Rein; Bares Capital.

Scott, could you talk -- I know you didn't want to talk about the capital spending to expand capacity, but can you kind of discuss where you are right now in terms of how many units you could produce annually and where you want to get in the next 6 to 12 months?

We've talked a lot about the S curve ramping in our industry. And we expect that the ramp will be very similar to that, which is more back-end loaded. We think that the lineup will be very similar to the way the 2D plotter market developed over time, a market that HP now dominates. We currently -- more to your question, we currently ship over 2,000 units per year, with a plan to go well over 10,000 units per year over the next few years. But we're not giving guidance over the next few months or the next two quarters.

Right. But at your current capacity if you sort of worked around the clock, what type of unit output are you at right now -- like 5,000? Or is that too high?

No, we could probably double our current capacity from where we're at right now. But when you go into things like facility plannings, as you can appreciate there's a long lead time on some of those items in terms of if we need to acquire additional space and getting that space prepared. So some of those plans are longer-term plans that you need to start initiating in the near term.

So we're working today; we're working towards mid-term as well as our long-term plans to grow.

Okay, great. And then the follow-up, have you seen any price changes on consumables or in the RedEye business?

No. We've seen a little less -- there's been some really aggressive pricing in the RedEye business historically in the Great Recession. We've seen some of that ease up in the current quarter. And from a consumable standpoint we've seen no change in our pricing whatsoever.

Okay. Thank you very much.

Jim Ricchiuti; Needham & Company.

Bob, did you say Fortus revenues were down year over year, slightly?

Yes, they were. Fortus revenue was down about 2.8% year over year. But the other thing that I highlighted is that's more of a timing issue as opposed to a sales issue, because bookings in Fortus quarter over quarter were up 30%.

Okay. And just wanted to follow up on that. And the decline you saw and similarly the increase you saw in bookings, is there any color you can provide as to whether there was some geographic dynamics at work there or specific vertical markets where you saw the change?

No, not really. We did -- like I said, the bookings were strong and it was -- we saw strong bookings both in the Far East as well as in the Americas as it relates to Fortus.

Okay. How about Europe, since that's been an area of concern for some folks?

Europe was okay. It wasn't as strong as the other two regions.

Okay. Thank you.

Chuck Murphy; Sidoti & Company.

I was just wondering if you could tell us how many distributors you had in Europe prior to the HP deal and how many you have now?

Well, you know, Chuck, it's important to remember this agreement is about more than the five initial countries and just the uPrint. It's going to ultimately be about worldwide distribution. And HP's using the initial introduction to kind of refine that strategy and messaging. Any number we'd give you would be misleading, really, to the ultimate goals. They have a lot of resellers asking for the product today. They want the product in these regions. And, once again, I think that they're -- what they're looking to do is get the go-to-market strategy right before they add any additional resellers.

And recall, ultimately they've got -- they're going to have access to over 10 times the number of resellers that we've had historically. But they've very prudently managed and limited the number of resellers during the early launch. So I think that's all the color we can provide on that.

Okay. Could you say kind of what the profile of the distributors is these days? I mean, are they selling mostly the 2D plotters? Are they also selling some CAM software, or both, or -- ?

It would be both.

Okay. All right. And then my other question was, I know you didn't provide guidance, but you did kind of remind us that third quarter is seasonally the weakest. I mean, is it fair to assume that HP probably still won't be that material and thus the seasonal trends should probably hold this year as well?

Yes, the seasonal trends should hold. HP's focused on Europe and Europe is traditionally the region of the world that has the biggest impact on us in Q3.

Okay. All right. Thank you.

Andy Schopick; Nutmeg Securities.

Yes. Bob, a couple of just quick ones for you. Revenue recognition on the HP deal, you will be recognizing revenue on a sell-in basis as opposed to a sell-out from their channel?

Correct.

Okay. And will you continue to provide some color around the sell-in and sell-out in future periods, as you've done today?

To the extent that we have that information from HP during those quarters, we would certainly do that.

Okay, that's great. On the foreign exchange, I believe you said it was $382,000 impact of reducing revenue in the quarter. Is that correct? And how would that impact compare with last year's quarter in terms of FX-related impact on revenue?

We did some system changes in the current year, so I don't have a comparable number from the previous year. You do have the $382,000 number correct for this quarter. And I can't give you color as it relates to last year because of system changes.

All right. How about for the year to date, the revenue impact from just the FX?

If you took it versus the exchange rate that was in place at 12/31, the overall impact is just under $600,000.

Okay. And just one or two others here. R&D funding I believe was about $2.2 million last year. Looks like you're tracking well below that so far year to date. Can you give us any general estimate of what you expect the R&D funding to be for this full year?

Certainly. As Scott mentioned, we're excited to announce that we had an extension of our R&D partnership with a Fortune 500 company, which will provide an additional $800,000 of funds for the remainder of 2010.

Okay. Thank you very much.

(Operator instructions.) Ryan Thibodeaux; Maple Leaf Partners.

Just a quick follow-up on that last question on the R&D credit. Bob, I believe you mentioned something about R&D being relatively flat for the rest of the year. Did that include the R&D offset?

Correct.

That would -- so $2.6 million includes a $400,000 per quarter offset. Right?

Correct.

So it would otherwise be $3 million?

The level of spending will be higher, right.

Okay. First question is, I think it would be -- again, I ask this every quarter -- but helpful to everyone if you could just provide some kind of a baseline breakout on revenue for 3D versus Fortus versus consumables. I mean, I know you guys give this year-over-year growth rate every quarter, but with that I think everyone's got different numbers on what historical baseline is. I'm just curious if you would consider disclosing that before HP really ramps up so we could have a general sense of how that deal is contributing to the overall business.

Yes. We're looking at that, Ryan. And we'll continue to try to provide you more information. Unfortunately we can't on this call. But we'll do that -- hopefully we'll expand the amount of information we can give you in the coming quarters, but at this point we can't give you any more information.

Okay. And the next question is I believe, Bob, you said that uPrint plus Designjet was 37% of the, I guess, overall unit mix or Dimension unit mix?

It was of the 3D printer.

Okay. So --

That was uPrint, the basic uPrint and Designjet. We --

It's 37% of the overall 3D printers.

3D printing.

Yes.

What we do is, because of the higher margins on the uPrint Plus, we kind of characterize it as a higher-priced system. And so we just have the uPrint, the basic uPrint, and the Designjet systems in that 37% number.

When you disclosed the 41% and the 60% number for Q1 in last quarter's call, was that on the same basis or that included the Plus as well? I'm just trying to see if it's apples to apples on the --

Right.

Again, a reason that just giving units would be helpful.

Right. And I think the number that you're referring to in the first quarter is really was -- we misspoke when we gave that number. To make it more comparable -- we saw strong sales of our uPrints in the first quarter of this year and it was a mix that would have favored more so to the uPrint and Designjet product in Q1. But I don't have the specific number in front of me.

I think -- well, I'm looking at the transcript. It says 41% was uPrint, representing 41% of all 3D printer unit sales in the first quarter compared to 61% in the first quarter a year ago.

Yes. Ryan, if you look at the first quarter, if you take uPrint and Designjet -- and the few Designjet systems that we shipped, it was 47%. The balance being -- I'm sorry. I got that reversed. It's 47% would be the higher-priced system and then the balance would have been the lower-priced uPrint and Designjet. I apologize. So 47% being the higher-priced systems.

Okay. Last question -- the CapEx in the quarter?

I don't have the CapEx for the quarter. The CapEx year to date was just under $1.2 million.

Okay. And then, what was the reason, Bob, for the increase in the share count? It looks like it increased 3% quarter over quarter, but the stock was down, so it shouldn't be any kind of option-related dilution. Right?

It could have been the full year --

Yes. Full quarter of the warrants that were issued to HP during the quarter.

The warrants? Okay. Is that a good run rate to use for the September quarter?

Yes, it should be.

Share count number?

Yes, depending on the stock price, absolutely.

All right. Thanks.

David Trossman; MTB Advisors.

Can you give us a little update on what your views are of the opportunities of costing down some of your printers as we look forward over the year? And then, can you remind me, as you do that and as you sell more units to HP, are there volume pricing deals with them so you share that with them or does that benefit mostly accrue to you?

Well, our strategy has been, for the last nine years, a continued reduction in product costs and a continued increase in volume. So you can definitely expect a continued reduction in some product costs, but product costs that pertain to 3D printing, and actually a broadening of our overall price range in order to go after more and more applications. And, Bob, do you want to comment on whether we can discuss collaborations on this topic with HP?

Yes. As it relates to existing products, I don't think as you look out at the remainder of 2010 that you're going to see a dramatic change in our cost structure within our existing products. We continue within our product development to work on products that are going to be a better value proposition and are going to have a lower cost, so we can continue to move down the price elasticity curve that we think is so important to get the unit expansion.

In terms of pricing as it relates to HP, our current agreement relates to two products that we have on board and is really not related to future product introductions. So that's yet to be determined.

Thank you.

Follow-up question, Andy Schopick; Nutmeg Securities.

I wanted to ask -- I don't know if we've ever done this before, but I'd like to ask about the ASP, whether you can give us some sense of what the ASPs were for the 680-plus systems that you shipped in the quarter, excluding consumables, just product, versus a year ago? And I realize uPrint, of course, is driving those ASPs down, but can you give us a sense for that?

From an ASP overall standpoint, on all our 3D printers we have published prices that are out there. There's not been a dramatic -- we did some changes in those prices in Q1. We also did an introduction of a new product with the uPrint Plus that has a retail price of $19,900 in the US. So that's actually an increase. So overall there hasn't been a dramatic change in our ASPs from the previous --

No, I understand that, Bob. I think you misunderstood me. I'm trying to get a sense of what the average selling price per unit shipped was in the quarter and how that compared with a year ago.

Yes. Andy, depending on how many -- we have such a variety of products, and depending on the volume within -- specifically I'll speak to the 900. It has a ASP close to $400,000.

Of course.

And the number of units shipped, it's really not a meaningful statistic.

Okay, fine. All right. Thank you.

Follow-up question, Chuck Murphy; Sidoti & Company.

Just wanted to follow up Ryan's question from before. So you (inaudible) that the lower-end systems on a comparable basis were 53% of sales -- or 53% of 3D printer sales?

Right. It was about half and half for Q1 in 2010.

Okay. I guess I was just a little surprised. I would have thought that with the HP launch that maybe that side of the business more would have risen more as a percentage of sales, I mean -- or was it just that immaterial for the quarter?

Well, it was Q1 and we just started shipping a few systems at the end of the first quarter.

The other thing that's really important in that statistic is because we excluded the uPrint Plus. The uPrint Plus was introduced in Q1 and the uPrint Plus was a very strong performing product in Q2.

And of course, HP launched their Designjet in April, I believe April 19th, so that'd be Q2.

Okay. And I guess kind of a similar question, so I mean is it fair to assume that the HP-related stuff had no impact on the second quarter gross margin being a little bit lower sequentially?

No. We indicated that it did have an impact on the margins. It was one of the three factors, kind of equal weight to the euro impact.

Didn't catch that. Okay. Thank you.

This concludes today's question-and-answer session. I will turn the call over to Scott Crump for closing remarks.

Okay. Well, in closing I'd like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Thank you.

Thank you.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a good day.