Stratasys Ltd (SSYS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 Stratasys Incorporated Earnings Conference Call. My name is Jessica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Shane Glenn, Director, Investor Relations. Please proceed.

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 investor section of our website at www.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 expects, anticipates, projects, estimates, vision, planning, could, plan, believes, desires, intends, 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 support removal systems, 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 ABS ESD7, 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, our ability to successfully integrate and market Solidscape products, our ability to retain management, and our ability to protect and defend intellectual property, 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 10K and quarterly reports on Form 10Q.

The information discussed within this conference call includes financial results that are in accordance with US Generally Accepted Accounting Principles or GAAP. In addition, non-GAAP financial measures are included that exclude certain expenses and income. 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 expense. 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. We're very pleased with our record performance which reflects a continuation of the positive trends we've observed over the past year. Total revenue has expanded to a record $35 million for the second quarter and that doesn't include the contributions made by our new acquisition of Solidscape. Including Solidscape, our sales grew by 25% to $37.6 million for the quarter.

Fortus system revenues grew by an impressive 67% over last year, benefiting from the growing demand for direct digital manufacturing applications. Consumable revenue grew to an all-time record level, driven by an acceleration in customer usage and our expanding install base of systems. We continued to make incremental progress in our game changing collaboration with HP during the quarter and we're pleased to report that we have mutually renewed the agreement for another year. In addition, HP will be expanding into new European markets beyond the five countries that they currently serve, later this year.

Gross margins were notably strong during the second quarter, improving both sequentially and year over year during the quarter. In fact, the second quarter generated the highest quarterly gross margin within the past three years when you exclude non-reoccurring items. A continuation of our favorable margin trends is being driven by the strong sales of our higher margin products, including consumables and Fortus systems. The strong revenue growth combined with our improved margins drove a 76% increase in non-GAAP operating profit during the second quarter over last year. This represents the highest quarterly operating profit in our Company's history.

We're excited about our recent acquisition of Solidscape and the opportunity that provides within a broader set of consumer and industrial DDM applications. This is in addition to expanding our leadership position within the jewelry market. We remain encouraged by the positive trends within our business and are optimistic about the balance of 2011. I'll return later to update you on some of our initiatives but first I'd like to turn the call over to our CFO, Bob Gallagher, who will further highlight our second quarter results. Here's Bob.

Thank you, Scott. As I begin, I want to remind everyone of the financial implications of our recent acquisition of Solidscape. We closed the acquisition on April 30 of this year. Consequently, Solidscape is included in only two months of our consolidated financial results for the second quarter. During our discussion today, we will provide you certain pro forma financial metrics that exclude Solidscape. We believe this will provide you with a more appropriate comparison of our second quarter financial performance relative to last year.

Total revenue was a record $37.6 million for the second quarter, a 25% increase over the $30.1 million for the same period last year. Excluding Solidscape, revenue would still have represented a record at $35.5 million, an 18% increase over last year. Excluding Solidscape, the Company shipped a total of 690 units during the second quarter versus 682 last year. Similar to last year, unit shipments of our Fortus 3D production systems were very strong during the period, expanding by 51% over last year.

Fortus continues to generate a lot of traction within the direct digital manufacturing applications for jigs, fixtures, and assembly tools. We estimate that approximately 30% of all our Fortus systems sold during the second quarter were sold principally for DDM applications. In addition, we estimate that 50% our Fortus systems sold in North America will be used at least in part for DDM. Unit shipments of our 3D printers were down 2% during the second quarter over last year.

Sales of HP Designjet 3D printers declined by 18% over the second quarter of last year. We believe our 3D printer business is being impacted by two factors. First, we believe our channel remains under developed and that sales and marketing commitments have been inadequate to significantly expand our 3D printer sales. Simply put, we need additional resources that are committed to selling only our lower priced 3D printers.

Secondly, approximately 60% of our reseller locations worldwide can up sell their customers to a Fortus system from a 3D printer. The resellers have been very successful in up selling of Fortus which is evident in our strong Fortus system sales during the period. Scott will talk later on some steps we're currently taking to address the gaps we see in our 3D printer channel.

Second quarter product revenue was $30.4 million. Excluding Solidscape, second quarter product revenue was $28.4 million, a 19% increase over the $23.8 million reported for the same period last year. Two factors drove our product revenue growth during the quarter.

First, Fortus system revenue increased by an impressive 67% when compared to the same period last year. As mentioned earlier, Fortus sales have continued their strong positive momentum driven by the rising demand from customers using our systems for DDM applications. In addition, Fortus systems have benefited from resellers successfully up selling to higher priced products.

Second, FDM consumable revenue increased by 20% over last year. Consumable revenue is being driven by a significant acceleration in customer usage as well as our growing install base of systems, particularly Fortus. 3D printer system revenue was flat during the first quarter for the reasons we discussed earlier.

Second quarter service revenue was $7.1 million. Excluding Solidscape, second quarter service revenue was $7 million which was up 12% compared to the same period last year. Our maintenance revenue increased 12% for the second quarter and has continued to improve as we are observing a waning impact from the extension in warranty periods we implemented in 2009. We are now beyond the one year anniversary of that change and we expect maintenance revenue will continue at a more favorable growth trend going forward.

Revenue in our RedEye paid parts service during the second quarter increased 22% sequentially and 13% over the same period last year. After witnessing a slow start to the year, RedEye is benefiting from improvements in new customer business and an increase in average selling price.

Excluding Solidscape, domestic sales grew by 12% during the second quarter over last year and represented $18.8 million or 53% of total revenue. Excluding Solidscape, international sales grew by 26% to $15.6 million, representing 47% of total revenue. Our Fortus system sales were particularly strong in Europe which drove a higher relative growth rate in international sales.

Gross profit was $19.7 million for the second quarter of 2011 or 52.6% of sales. This includes Solidscape's operating results as well as a onetime adjustment for the revaluation of Solidscape's inventory. The inventory adjustment amounted to a $561,000 reduction in gross profit for the second quarter.

As part of the acquisition accounting we were required to write up the clearing value of Solidscape's finished goods in inventory as of the acquisition. This $561,000 acquisition based inventory write up above Solidscape's costs was then charged to cost of sales in the second quarter ending June 30. Excluding this revaluation, gross profit was $20.3 million or 54% of sales. For an apples to apples pro forma comparison, removing the impact of Solidscape from our second quarter financial results translates to a gross profit of $19.3 million, a 31% increase over the $14.8 million reported for the same period last year.

The pro forma gross margin was 54.4% of sales versus 49.1% for the same period last year and 53.2% for the first quarter of this year. The strong growth in our higher margin products, especially Fortus systems and consumables contributed to the significant improvement in gross margin. In addition, sales of our lower margin 3D printers have been below our expectations which is having a positive impact on our overall margin profile.

Operating profit was $6.1 million for the second quarter of 2011 or 16.2% of sales. This includes Solidscape's results as well as the $561,000 onetime adjustment for Solidscape's inventory revaluation. In addition, our operating profit was reduced by $615,000 in onetime expenses related directly to closing the Solidscape acquisition. These non-recurring expenses are primarily related to professional and advisory fees.

Excluding the inventory revaluation and onetime expenses, operating profit was $7.3 million or 19% of sales. For an apples to apples pro forma analysis, removing the impact of Solidscape from our second quarter financials translates to an operating profit of $6.5 million, a 62% increase over the $4 million reported for the same period last year. The pro forma operating profit was 18.3% of sales versus 13.4% for the same period last year.

Operating expenses increased by 27% in the second quarter over last year which includes Solidscape's results as well as the onetime expenses related to closing the acquisition. The biggest impact on operating expenses was Solidscape and a 35% increase in non-Solidscape related R&D expenses driven by our new product initiatives. As a reminder on Solidscape, we expect the acquisition will contribute approximately $1.2 million in free cash profit in 2011 or $0.04 per share net after-tax. This excludes the non-reoccurring items.

Funds provided by our unnamed Fortune 500 partner to develop DDM applications for our Fortus line was $208,000 for the second quarter versus $274,000 for the same period last year. This compares to $131,000 for the first quarter of 2011. We expect this R&D collaboration will continue in 2011 and beyond.

SG&A expense in the second quarter included $212,000 in stock based compensation expense net of tax or $0.01 per share compared to $262,000 net of tax or $0.01 per share for the same period last year. Net income was $4 million for the second quarter of 2011. This includes Solidscape's results, the onetime adjustment for Solidscape's inventory revaluation as well as the onetime expense related to closing the Solidscape acquisition.

Non-GAAP net income of $5 million or $0.23 per share increased by 95% when compared to the $2.6 million or $0.12 per share for the same period last year. Items excluded from non-GAAP net income include the onetime expenses related to closing the Solidscape acquisition, the onetime adjustment for the revaluation of Solidscape's inventory as well as stock based compensation expense net of cash in both periods. A table provided within our press release provides itemized details surrounding all non-GAAP items incurred during both periods.

We generated $4.1 million in cash from operations during the second quarter and finished the period with $57 million in cash and investments. We should point out that the acquisition of Solidscape which closed in April consumed approximately $38 million of cash from our first quarter ending balance. We still maintain a very healthy balance sheet even after the acquisition.

Inventory balances were $21.2 million at the end of the second quarter which is up modestly from the $18.8 million at the end of the first quarter. Inventories have risen due to the Solidscape acquisition as well as to match our strong order flow and forecast for both Fortus systems and consumables.

Accounts receivable was $23.5 million at the end of the second quarter. Days sales outstanding or DSO was 57 days compared to 59 days at the end of the first quarter. Overall, we are very pleased with our financial performance during the second quarter and the continued improvement in our markets.

Now I'd like to turn it over to our Director of Investor Relations, Shane Glenn, for comments regarding our outlook.

Thank you, Bob. We continue to observe positive trends in our markets and we are optimistic about the coming quarters. We also appreciate the need to provide financial guidance to our shareholders in the investment community. However, our recent financial modeling has been focused on evaluating the Solidscape acquisition as well as the various mid- to long-term financial scenarios for our collaboration with HP. We have not committed much time short-term for forecasting. Consequently, we do not feel comfortable giving revenue and earnings guidance at this time for 2011 but we do intend to resume some form of financial guidance in fiscal 2012. This will likely be outlined in our fourth quarter press release and conference call.

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

Thank you, Shane. We're pleased with our second quarter performance which was driven by a continuation of the positive trends we have observed over the past year. We continued to make some incremental progress in expanding our agreement with HP for the sale and distribution of our proprietary 3D printers. We are pleased to report that we recently renewed our agreement with HP through September of 2012. In addition, HP will be expanding the distribution of their Designjet 3D products into new European markets later this year.

We believe HP is spending more now than a year ago. They were preparing for a US 3D printer launch in Q1 of this year but became short-term distracted lately with many internal issues at HP. Stratasys is the industry leader in 3D printing, represents a majority of our unit sales. Stratasys and HP continue to see a significant market opportunity within 3D printing and we remain mutually committed to developing this collaboration. We believe HP can become the ideal partner to grow the sales of our low-end 3D printers. However, the full potential and ultimate success of our collaboration with HP will require sales and marketing programs that go beyond the current commitments.

As you may recall, when we initially introduced uPrint in 2008, we expected to develop an additional layer of resellers focused exclusively on uPrint but before we executed that strategy we entered into an agreement with HP expecting them to be our master distributer for uPrint category of 3D printers worldwide. Originally we expected the collaboration to significantly expand in 2011. We believe the lack of channel expansion either through HP or independently by Stratasys has been critical to our recent lack of growth within 3D printing. Given we currently have no commitments from HP to significantly expand the collaboration over the near-term, we will accelerate our independent channel development strategies. For example, we're in the process of adding resellers worldwide that will be exclusively selling our Stratasys brand uPrint 3D printers. Some of these resellers currently sell HP's 2D printers and are eager to distribute our 3D products.

We believe we can help accelerate the sales of our most affordable product. We believe our collaboration with HP can develop successfully over time and ultimately we believe their worldwide distribution capabilities, combined with their brand and marketing muscle is the best way to drive increased adoption of our industry-leading products and although it might take longer than we originally anticipated, we're looking forward to growing the market with HP.

Fortus system sales sustained strong positive momentum in the second quarter, driven by the growing expertise of our team to market DDM capabilities. As Bob mentioned, we estimate that approximately 30% of all Fortus systems purchased during the second quarter were sold principally for a DDM application addressing jigs, fixtures, and assembly tools. We believe the recent introduction of our Fortus 250MC will add to this effort with a system that combines the higher functionality of the Fortus production systems with the ease of use and affordability of a Dimension 3D printer. The new 250MC includes Insight software used only on the Fortus line which provides added control of build speed, part accuracy, and feature detail. Initial sales have been strong following this new product launch earlier this month.

We also bolstered our long-term DDM strategy last quarter with the acquisition of Solidscape, a leading provider of 3D printers targeting applications for investment casting and mold making. These printers are marketed worldwide and are known for the production of wax parts with ultra-fine feature detail and smooth surface finish that are highly castable offering the highest resolution and accuracy in the industry. Our subsidiary is well positioned for manufacturing applications serving the custom jewelry market. As we further develop the technology, we are also very excited about new opportunities that Solidscape provides for expanding into a broader set of industrial applications.

In RedEye, improvements to our sales program and new major account initiatives are generating positive results as second quarter revenues increased by 22% sequentially and 13% over last year. RedEye parts services also experienced a significant improvement in profitability to the second quarter.

Consumable revenue grew to a record level in the second quarter, increasing by 20% over last year. Our Fortus line is driving this growth, propelled by an expanding base of systems and product lines with relatively higher utilization rates, particularly within DDM. And we continue to develop new materials. We believe our recent introduction of a revolutionary new FDM material provides a competitive advantage and will create new DDM opportunities within the electronics industry.

The new material called ABS ESD7 eliminates static electricity which can be potentially damaging during the manufacture of sensitive electronic components. With this new material, manufacturers can now make static-free assembly aids and fabrication tools that improve the performance of their manufacturing processes. We are optimistic that we can sustain positive momentum in the consumable sales given new application needs, the positive trends within our markets, as well as our expectation of significantly growing our install base.

We're pleased to see our leadership position within the additive manufacturing industry reconfirmed in the Wohlers Report 2011. The report indicates that Stratasys had a 41% market share in 2010 and has sustained a market leadership position now for the ninth consecutive year. We believe our position within the industry will be strengthened over the coming quarters as we execute on our new product roadmap and further develop our channel strategy.

In summary, in addition to our distribution agreement with HP, we are moving forward on new product and distribution initiatives which we believe will greatly expand the sales of our industry-leading products. We remain encouraged by the positive trends within our business and we begin the third quarter with an active pipeline of new opportunities. We're observing growth opportunities on multiple fronts including 3D printer, Fortus, and direct digital manufacturing. We look forward to a very successful year.

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 here for questions.

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

Congrats on the record results, gentlemen. So, a quick question. Fortus's consumable mix has been very strong recently. Do you think you can sustain the strength here? I'm trying to kind of figure out whether or not we can expect gross margins to stay at these levels?

We're not going to give specific guidance, Troy, on gross margin. I think the margins that we observed in the second quarter are probably at the high end of what we would expect. Our short-term outlook on margins remains favorable to the historical norms as we continue to develop the channels to sell larger quantities of our lower priced 3D printers. That will have a negative impact on margins, but like I said, the short-term profile looks very favorable right now.

I know you guys don't want to give guidance for Q3 but can you remind us how much education vertical exposure you have in Q3 and if you look at just kind of the normal seasonality you get this quarter, what can buck that trend? Is it strength in Fortus again?

Troy, I think we definitely have positive momentum in Fortus which will benefit us but I think it's important to remember that Q3 is seasonally our weaker period. Take that into consideration. Q2 and Q3 are generally our strongest educational quarters.

Any sense of how much contribution you get from education?

I wouldn't want to predict a specific percentage for the quarter.

No worries. Good luck, guys.

Your next question comes from the line of Jim Ricchiuti from Needham & Company. Please proceed.

Thanks. Good morning. The question I have, I'm still somewhat unclear as to how the strategy for jumpstarting the 3D printer portion of the business, just in light of the flux with HP, can you elaborate on that? Are you going to -- perhaps you can give us some detail in terms of the rollout of uPrint in the HP channel? Is there any sense as to the timeline of that?

We don't really outside of what we've stated relative to HP in terms of modest expansion within Europe there's really no timeframe for additional expansion with HP at this time. As Scott said on the call, we're focused right now on building additional channels and marketing initiatives to expand non-HP channels throughout the rest of the world.

On that point, is there anything you can say in terms of your plans, your expectations for that channel in the second half of the year?

Jim, we're talking to several resellers right now. That includes HP resellers in North America. We believe we can expand the distribution for the uPrint line. We don't have any specific numbers to share with you related to specific resellers but the thing to remember, I think we articulated this on the call, we're also moving forward with a broader strategy to expand the channel that's going to be dedicated solely to that lower priced 3D printers worldwide. We're in the process of contacting and talking with those resellers as we speak.

Is that something we'll see more of in terms of how that plays out in Q3 or is that a Q4 -- when you think you might have some of those other channel partners on board?

Even if we have those channel partners in Q3, there's training aspects of those partners and it takes a little bit of time in order to get up to speed. Relative to an impact, I think the impact would be more of a 2012 versus a 2011 phenomenon.

We've already started that in the Q2 timeframe. We've already brought a few on in Q2. We'll bring more on in Q3 and more on in Q4 as we expand it.

Okay. I'll jump back in the queue. Just one final question. Just in light of what you're doing here in this area, with respect to SG&A expense, how might we see that directionally going in the second half of the year? Just as you begin to add more resources?

We had to add some additional resources as it relates to our sales and marketing efforts. We've had high R&D expenses in the first half of the year. From a trend perspective we see our operating expenses being relatively consistent, maybe a slight increase overall in the second half of the year versus the first half.

Thanks a lot.

Your next question comes from the line of Andrea James from Dougherty & Company. Please proceed.

Good morning. Please forgive me. I'm still a bit confused about what's going on with HP in the US. It sounds like they had plans in Q1 to expand but then they stopped and now you guys are partnering with your resellers in the US on your own. Can you make that more clear?

Sure. Stratasys has a global network of successful resellers, both for high end products as well as lower priced products like the uPrint. As we have launched a year ago with HP to be effectively a master distributer for the lower end, meaning uPrint products starting in Europe. In that process, the first step was to go into Europe, understand the process, and then expand into other regions like the United States. I believe that was in process through Q1 but some internal changes within HP that I think a lot of us read about in the newspaper in the April timeframe changed the situation, I think temporarily. That's my own opinion. Time will tell. It's affecting us. I think they in fact have been distracted lately with some of their internal issues.

On the same token, we have successfully and are successfully leading the 3D printing industry. We'll continue as we have in the past to expand our resellers, specifically for this low end of 3D printing which is in the uPrint area in the US and other areas of the United States -- and Asia.

Let me tag on a little bit to that because I think it's important. We believe that HP still sees a very exciting opportunity within 3D printing. There may have been some distraction that have affected their short-term and mid-term commitments to the collaboration. We don't think there's any question about the potential of the market for them or that Stratasys offers the best solution. There continues to be a question related to the timing of the market for them. We've got visibility at very high levels within HP and the visibility can be a great thing. But then you get a lot of different opinions too. Sometimes as a small Company where we focus and live and breathe 3D printing, that can be frustrating.

But having said that, we still believe that HP is the best potential channel partner in the long run and sometimes we have to be more patient whether we like it or not. That's for both us as management and for our shareholders too.

Okay. And just one follow-up. Thank you. That was very thorough. A couple quarters ago you guys had said that you were investing in new property to double your capacity? What's the status of that? When do you think you'll need that capacity and until then what happens with the property?

Yes. We're in the processing of outfitting to expand Stratasys. As you know, successful companies, as they grow need additional facility. We have in the past expanded through leasing. So, we're able to do some consolidation in the process and in terms of operating the facility, it will be between now and the end of the year. As I said, it allows us to consolidate some leasing facilities and address all of our product growth plans as we go forward, including our consumables.

We're currently shipping over 2,500 units a year. Our plan is to go and grow to make that over 4,000 a year. Our vision is to grow to well over 10,000 units a year. As we've successfully done in the past we do that by expanding with these facilities, including some subleasing to make it more efficient. Clearly we're ahead of the curve in the capacity that we need but I think when you look at capacity you need to look at planning on a one to four year time horizon. We feel comfortable with the plans that we have in place.

Thank you very much.

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

Good morning. Congratulations on record results and the introduction of the new 250MC. It looks like a great product. My first question is just on that 250MC. Can you tell us, give us any idea how well that sold in the second quarter and also talk a little bit about the distribution of that product and whether you may have sold some to some distributers, maybe for display units and maybe there was some benefit to Stratasys in the quarter just by getting those units in distributers' hands and maybe not selling through to the final customer?

Brian, thanks. That's a good question. The answer is no. We introduced that to -- our system began shipping that product in July. So, there was no impact in Q2 as it relates to that particular product. The answer to your first question, the orders have been really good for that product and we can't provide you with any specific unit numbers but we're very pleased with the rollout and the channel seems to be excited about that product and it just kind of fills a void, a gap we've had in our product portfolio. So, we've got bookings in Q2 and then revenue shipments that actually started in the beginning Q3.

Okay. And then just to be clear, is it the case that some of those shipments are to distributers that may hold a couple in stock?

We've always made it very clear when we introduce new products that we sell them to the resellers and the resellers sell them to the end user. We always encourage them to have units available for that. The 250 is no different than any other product.

What is your -- I know you have something like 250 plus resellers but can you give us an idea how many resellers you have that understand and sell the high-end equipment?

We said about 50% of the locations worldwide have the ability to sell Fortus systems.

Got it.

Given the economy today, I think you'll find that the resellers are -- after 2009 are less reluctant to be what we call stocking resellers than they were historically, especially for higher priced units.

Okay. Great. And then I think I missed it actually. You said HP Designjet units were down 18%? Is that right?

Yes.

Did you give a number for overall 3D printer units in terms of growth or decline?

Yes. The year over year change on --

Units was 2%.

2% down.

Thanks, guys.

Your next question comes from the line of Chad Bennett from Northland Capital Markets. Please proceed.

Good morning, guys. Were there any changes in terms on the HP renewal? Anything change from either financial or strategy standpoint there?

As we mentioned there was a modest expansion within Europe and there's nothing that's of a significant change within the overall agreement in our opinion.

Can you provide any color? You gave the year over year numbers but the sequential kind of unit growth numbers by category?

What we saw, I mean, sequentially we saw good growth in the overall units for 3D printing because Q1 was a very weak quarter relative to historical levels. On our overall 3D printing we saw probably a 23% increase in the overall unit volume which could be a little bit misleading. What we saw is that 66% of the unit volume in this quarter was made up of what we call our high-end 3D printers which would be the 1200s and the Elite and the uPrint plus. That would compare to 69% in the first quarter.

And Fortus was up sequentially, Chad, 8%. Units.

Units? Okay. Great.

Fortus units really get -- because the price points are so varied from historically having a 360 that's got an end user price probably in the neighborhood of $80,000 and having a 900MC that's got an end user price in the $400,000 range, unit volume on Fortus can really be misleading.

And you should look at it year over year.

Is it safe to say -- ?

Pardon?

Is it safe to say average Fortus ASP was up decently sequentially or was it not?

No. Sequentially it was not only because of the mix within the products there. That's not reflective of the excitement relative to the Fortus line whatsoever. It just has to do with the timing of shipments between 900s and 400s and 360s.

Can you just say directionally was HP up or down sequentially?

HP was -- from a sequential standpoint, they were pretty much flat overall.

Got it. Okay. And one last one for me. The channel expansion that you're putting together for the uPrint line, in the five countries that HP is selling into right now in Europe, do you plan on developing your own channel partners in those five countries for uPrint?

No.

That's all I have. Thanks.

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

Thanks. Good morning, guys. A lot of mine have been answered but just a few things. Designjet down 18% year over year I guess is a little bit surprising to me. Is it based on -- was last year this quarter a good sell-in quarter or how should we think about that? Otherwise it sort of appears as if it's losing momentum but I'm guessing it's not that.

Yes. I think as we've said in the past, I think you've got to be careful of judging things in a short-term period. If we looked from last year we know that HP's got more people dedicated to 3D printing. They've been trying different tactical approaches in the different markets that they serve and we also believe that they're spending more on marketing. They're really interested in how to reach the market versus a quarterly volume at this point. They did some things tactically in Q1 that lowered the pipeline coming into the quarter. That's not the case going into Q3. In the meantime we're focused overall on what Stratasys is doing, the actions that we have control over.

Then Solidscape, is it a lumpier business than your business historically? It looks like it's maybe a little bit light of sort of the run rate that they had been on if I'm doing my math right.

Yes. There's a little bit of that. I think anytime that you're being acquired it's a fairly significant distraction for a Company and for the management of a small Company like Solidscape. I don't think that's any different than any other Company. We're excited, we continue to be excited about Solidscape. I don't think there's any surprises that we've seen relative to what we expected and it's going to be a great acquisition for us in the long-term.

Okay. Thanks, guys.

Your next question comes from the line of Chuck Murphy from Sidoti & Company. Please proceed.

Good morning, guys. First question just kind of regarding unit sales. I mean, it's been fluctuating pretty drastically the last few quarters sequentially. I was just wondering why it went down so much in the first quarter sequentially and why it kind of came back so much in the second quarter?

Therein lies the risk, Chuck, of looking at our business quarter to quarter. There's oftentimes timing associated with order shipments. We have mix issues in different quarters and you kind of have to look at it more on a rolling basis or look at it more long-term because it can be a little frustrating and a little bit difficult to explain oftentimes when you look at it quarter to quarter.

Alright. Then a question regarding kind of the new distributers you're looking at. What percentage of them already have relationships with HP for the 2D printers or something like that?

We don't -- we know that a portion of them do. We don't have the statistics here of all the people that our sales and marketing people are talking to throughout the world.

I was just wondering if you do happen to expand the HP partnership, what's going to happen to the distributers you've gone out and started selling to? I mean, is HP is then going to take over the relationship and you're going to have to give them some of the margin?

No. From the standpoint of the Stratasys independent channel. However, when you go and look at our success in Europe when HP launched in the first half of last year the resellers that were place for Stratasys continued to stay in place but were additionally certified to sell HP products. So, I would assume the same thing would occur here in the US, that the distributers that sell at the uPrint level would simply become certified to sell for HP.

Is HP really even that necessary at this point? Could you not just find who's selling HP 2D printers and go to them and say -- hey, sell our 3D?

I think it's really important. There's a lot of great marketing muscle within the HP organization and HP has been great at creating markets in the long-term. So, we continue to believe that HP is the best potential partner in the long run. We've got some short-term frustrations here but in the long-term we still believe HP can be a great channel partner.

With that, that brings awareness, endorsement -- not just of Stratasys but of 3D printing and more importantly in the mid-term and long-term, they have thousands of resellers. We have -- if you do an apples to apples comparison, not to location but to resellers, we have about 100. So, they've got well over ten-fold at the sell up and they also have the capability of enterprise selling top down which usually starts at the CEO of these Fortune 500 and 1000 companies.

Okay. Thank you.

Your next question comes from the line of Walter Ramsley from Walrus Partners. Please proceed.

Thank you. I've got a couple of questions. The Company added a deferred tax liability in the quarter of $7.5 million? Can you explain where that came from and how it will affect things in the future?

Yes. That's a very easy thing to explain relative to the acquisition is that we put -- with the Solidscape acquisition part of our purchase price then creates intangible assets that we will amortize over described periods of time. For tax purposes, those -- that amortization will not be tax deductible. Consequently, at the time that you put the asset on the books you also set up a current tax liability so that you continue to have a normalized tax rate going forward. So, the effective rate won't impact it going forward.

Okay. Could you explain why you had to write up the Solidscape inventory and then write it off again? I didn't quite understand that one.

That's Generally Accepted Accounting Principles but with Generally Accepted Accounting Principles, not to turn this into an accounting lesson call, to the extent a Company has finished goods inventory at the time of acquisition, Generally Accepted Accounting assumes that most of the earnings process has been done at the time that the goods are finished. So, consequently to the extent that Solidscape has finished goods on their balance sheet at the time of acquisition, we write that inventory up closer to its selling price as opposed to its historical cost. Those units then flow through, were sold in the quarter, that write up then hit the cost of sales in the quarter.

Which is just a short-term phenomenon.

Alright. So, the margins aren't going to be impacted in the future, that was just a one shot deal?

Correct.

Then you mentioned in the press release that most of the revenue from Solidscape was the jewelry market up to now but there's some new markets that are being developed. Could you discuss those and give us an idea how big they might become?

Sure. Starting with jewelry, we were the leader in the overall jewelry market with high precision masters that are then created into metal jewelry. The products and the technology has the capability -- actually the proven capability to expand into other medical applications like masters for implants like hip bone replacements with systems that already work in the field for that. It also has the capability by increasing the speed of the systems to become masters in patterns for industrial applications like Turing blades, for example for jet engines. So, to kind of repeat our strategy is to grow and expand within the jewelry area but also over time expand and leverage synergistically leverage our sales and marketing channel into industrial applications that we have resources to sell and market into.

In the mid-term, in the short-term obviously it's all about jewelry market today and it will continue to have a big impact on Solidscape not only today but also in the long-term. In the mid-term we would also be looking at the dental markets where they have a small foray into it today and then, as Scott mentioned, longer-term in some of the industrial markets. Solidscape is a very successful Company and we want to make sure that we continue that success and that we can enhance that as opposed to get them distracted by going too far too fast into other markets.

Okay. And one last thing, I know there was no guidance issued but tell me how murky is the outlook for the third and fourth quarter?

We feel good about the second half of the year. It's just we've been focused on Solidscape. We've been focused on evaluating scenarios with HP. And we think giving guidance at this point wouldn't be prudent but we'll get back to doing -- or we expect to get back to doing that with the fourth quarter conference call.

Okay. Thanks for taking the questions.

(Operator Instructions) Your next question comes from the line of Ryan Thibodeaux from Maple Leaf Partner. Please proceed.

Two quick housekeeping items. You guys in the past have given this metric as unit growth in the markets which HP serves. Did you give that number for the quarter? Or was the down 18% number?

Ryan, I'll give you a couple numbers here.

I'm sorry -- the comparison was like up 49% last quarter I think?

Right. If you look at 3D printing in the HP markets that includes -- that's going to include Dimension and the Designjet products. That was down 12%. If you look -- I'm sorry, go ahead.

I would say the down 12% is comparable to the up 49% that was the figure last quarter?

Yes. I think the up 49% included all 3D printing if I recall correctly, all 3D printing within the HP markets.

The other metric that you just talked about was the uPrint plus Designjet as a percent of total 3D units, do you have that number?

Yes. If you look at the 1200s which include the 1200 SST, the BST, you add in the Elite and then also add in the uPrint plus, that's 66% of unit volume in Q2.

So, the balance would be everything else?

The balance is going to be HP Designjet and our basic low end uPrint.

So, 34%. Got it. Okay. The other question I had was the strong unit growth this year that we've seen in Fortus. Do you guys think that you are benefiting from the 100% bonus depreciation this year and to what extent do you think that's pulled unit sales forward into 2011?

I think one of the things we mentioned on the call and went over rather briefly is that we saw out strongest growth in Fortus came from the international markets as opposed to the domestic markets. Clearly the bonus depreciation is a great vehicle but that's only a domestic phenomenon and doesn't impact the international growth. While it may be a benefit for us, it's certainly not the driver of our Fortus sales. In fact, Europe I wanted to say we talked about being down in the Dimension in HP countries where we saw the strongest growth in our Fortus systems was in our European marketplace.

Did you say what the international split was in the quarter?

We said there was 26% growth in the international sales and about a 12% domestic and the split between -- I think it was 53% in North America and 47% internationally on an overall sales mix.

Then lastly on HP, could you give us maybe some measure as to what the total units or total revenue that's come from the HP deal over the last six quarters since you've had the relationship?

We said in 2010 and again in 2011 that the overall sales to HP today is not material. This is all about trying to build a long-term relationship in the overall opportunity.

Along the same line of thinking could you maybe talk about the total investments that Stratasys has made directly related to this relationship as far as expanding capacity, et cetera.

The capacity expansions that we do, we said that's something we do over a one to a four year time horizon and that's capacity that will be of good use in the future.

We do that either way.

Yes. Whether it's -- we might have got a little ahead of ourselves in the curve relative to where we're at today but I think it's prudent use of cash for the long-term. It's an opportunistic time to acquire real estate within the marketplace.

Thank you.

Your next question comes from the line of Troy Jensen from Piper. Please proceed.

Hey, guys. Just one follow-up question. How about milestones now for this Fortune 100 customer on the R&D side? Is there anything you can share there?

We continue to have a relationship and we believe that relationship will go beyond 2011. We don't have any short-term milestones that we can talk to in the relationship there. Obviously as you know from the past we developed a 900MC out of that relationship and we believe that relationship longer-term can develop additional products for our product line.

Perfect. I'll leave it at that.

Your next question comes from the line of Chuck Murphy from Sidoti & Company. Please proceed.

Yes. A couple questions regarding DDM. First, can you say what it is as a percentage of your total sales?

I think what we said on the call, Chuck, is about 30% of the Fortus system sales that occurred during the second quarter were made because of a DDM application. Their purchase is determined predominantly by DDM application. Certainly some of those systems will be used for RP -- rapid prototyping -- applications as well but the DDM was the driving determinant behind around 30%.

But you can't say if this is a percentage of the total just as Fortus?

Just as Fortus.

And another question related to DDM, what do you guys think is the size of the addressable market for it and how do you calculate that figure?

There's two primary focuses for DDM at this point to be successful out of many, many possibilities. The first is fixtures and assembly tools which we believe is an existing $4 billion market. Again for fixtures and assembly tools that are required to build product. Then there's another category which is end use parts where you're actually building the part and it ships as part of the assembly or part of the product. And the opportunity there is well in excess of $40 billion. In fact, within our marketing groups we're spending time to focus in on smaller increments to be able to successfully market to those. So, again, $4 billion in the fixtures and assembly tools and in excess of $40 billion for the end use parts.

Would you be targeting current users of injection molds or machining or how do you guys go after that?

Yes. That would be called bridging where you're bridging to a tool. Injection molding tools can take up to 14 weeks to get so during the meantime there are pilots and bridge needs for parts and that is one of the tasks to end use parts both in the US as well as international.

Thank you.

I would now like to turn the call over to Scott Crump for closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.