Stratasys Ltd (SSYS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth 2011 Stratasys earnings conference call. My name is Jeanetta, and I will be your operator for today. (Operator Instructions). I will now like to turn the conference over to your host for today, Mr. Shane Glenn, the Director of Investor Relations at Stratasys. Please proceed.

Thanks, Jeanetta. Good morning, and welcome to the Stratasys conference call to discuss our fourth quarter and full year financial results. Representing Stratasys's 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 over the investor section of the website at www.stratasys.com or directly by accessing a link provided in our press release.

We will begin with the Safe Harbor statement. All statements herein that not historical facts or that includes such words expects, participates, projects, estimates, vision, planning, could, plan, believes, desires, attends, assume 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 proprietary consumables; the expansion within paid parts service; and beliefs with respect to the growth and demand for our products.

Other risks and uncertainties that may affect our business include our ability to penetrate the 3D printing market and 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 [ES D7], 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 of our core FDM technology; our ability to successfully integrate and market Solidscape products; our ability to retain and our ability to protect and defends intellectual property; and our success of RedEye On Demand and other paid part 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 expectation change. In addition to the statements described above, such forward-looking statements include the risks and uncertainties described more fully in our reports filed or to be filed with the Securities and Exchange Commission, including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

The information discussed within this conference call includes financial results that are in accordance with 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 get information investors may deem relevant to the Company's operations and [compared] performance, primarily the identification and exclusion of expenses associated with impairment charges, restructuring expenses, expenses associated with stock based compensation expense, and the amortization expense associated with acquired Solidscape intangibles. 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 financial results.

We're very pleased with our performance. The quarter and full year results represents record levels of both revenue and operating profit. Total revenue expanded to a record $43.6 million for the fourth quarter, an increase of 28% over last year. Operating profit outpaced revenue growth, expanding by 45% over last year in the fourth quarter.

As we observe throughout the year, the fourth quarter benefited from strong sales of our higher margin Fortus 3D production systems, which grew by nearly 80% over last year. Our sales momentum within Fortus was particularly strong during the final weeks of the year, resulting in a record year-end backlog. This backlog includes over $12 million in system orders at the year end.

Consumable revenue continue to grow impressively during the fourth quarter, increasing by 25% over last year. The Fortus line is driving a higher amount of this growth, given the product lines rapidly growing installed base and relatively higher utilization rates driven by emerging DDM applications.

We continue to observe a significant untapped sales potential within Dimension and uPrint 3D printer lines, and we remain committed to ourdistribution collaboration with HP in Europe. However, we have made progress with developing independent channel strategies that will augment our HP collaboration. We believe these initiatives will position our 3D printing products for stronger growth in coming months. We believe that we are well positioned as we begin 2012.

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 fourth quarter results. Here's Bob.

Thanks, Scott.

As I begin, I want to remind everyone of the financial implications of our recent acquisition of Solidscape. We closed the acquisition in May of last year. Consequently Solidscape's results are included in our fourth quarter financial results for 2011. During our discussion today, we will provide you with certain pro forma financial metrics that excludes Solidscape. We believe this will provide with you a more appropriate comparison of our fourth quarter financial performance relative to last year.

Also during the fourth quarter, we made a minor reclass of our customer reimburse rate to include it as both revenue and expense, as opposed to netting it in our cost of sales. This reclassing increased 2011 fourth quarter and full year revenue by $259,000 and $1 million respectively. This compares to $194,000 and $745,000 for the comparable 2010 periods.

Total revenue was a record $43.6 million for the fourth quarter, a 28% increase over the $34 million reported for the same period last year. Excluding Solidscape from our results, revenue would have still represented a record at $40.4 million, a 20% increase over last year. Including Solidscape, the Company shipped a total of 700 systems during the fourth quarter, versus 632 last year.

Unit shipments of our Fortus 3D production systems were very strong during the quarter, more than doubling levels sold during the same period last year. However, it is important to keep this performance in context, given the significant impact of our recently introduced Fortus 250 MC, which was our best selling system during the fourth quarter. The 250 MC has a build envelope similar to a dimension 1200 and fills a void at the lower end of our Fortus product lineup. It is positioned very close to our Dimension 3D printer line within the marketplace. We believe the new product generated significant interest from customers that would have otherwise purchased a Dimension 3D printer. This likely skewed the resulting growth trends during the quarter by favoring our higher end Fortus systems over our lower end 3D printers. The 250 likely will have an impact on unit sales mix over the coming quarters.

Unit shipments for Dimension, uPrint and HP 3D printers were down 18% during the fourth quarter over last year. For the reasons we just discussed and similar to last quarter, we believe the Fortus 250 MC introduction had a significant impact on our 3D printer sales during the quarter. Approximately 60% of our resellers sell our entire product line and can upsell their customers to a Fortus system from a lower end 3D printer. As we discussed in prior calls, our resellers have been very successful in upselling to Fortus, given the positive momentum within the marketplace, created by emerging direct digital manufacturing applications. This trend continued to be evident in the fourth quarter and reflects our need to develop a channel more focused on 3D printing.

We continue to manufacture an HP branded 3D printer for distribution in Europe, and HP recently added three additional European countries to their network. We're pleased to see the sales of HP branded 3D printers grow by 15% during the fourth over last year, outpacing the growth of Stratasys branded 3D printers in non-HP countries. However, as we had mentioned last quarter, our 3D printer channel remains underdeveloped, and the sales and marketing commitments have been inadequate to achieve the full potential of our products. Scott will provide some details later in the call on our initiatives to expand our 3D printer sales independent of our collaboration with HP.

Fourth quarter product revenue is $36.2 million, an increase of 32% over last year. Excluding Solidscape, fourth quarter product revenue was $33.1 million, a 21% increase over the $27.4 million for the same period last year.

Two factors drove our product revenue growth during the quarter. First, Fortus system revenue increased by 79% when compared to the same period last year. As we mentioned earlier, Fortus sales have continued their strong positive momentum driven by the successful introduction of the 250 MC, the successful upselling trends within our channel, as well as a rising demand from customers using their systems for new DDM applications. 3D printer system revenue was down 26% over the fourth quarter of last year for the reasons we discussed earlier.

The second factor driving product revenue growth in the fourth quarter was a 25% increase in consumable revenue over last year, which was up 18% when you exclude the impact of Solidscape. Consumable revenue in the fourth quarter was the highest in our Company's history. The biggest driver behind consumable revenue growth has been rapidly growing Fortus line, which typically uses market consumables.

Fourth quarter service revenue was $7.4 million. Excluding Solidscape, fourth quarter service revenue was $7.3 million, which is up 11% when compared to the same period last year. Our maintenance revenue increased by 12% for the fourth quarter over last year, or 10% when you exclude the impact of Solidscape. Our maintenance revenue is benefiting from our strong Fortus system sales, given Fortus systems generally have higher attachment rates for maintenance contracts relative to 3D printers.

Revenue in our RedEye Paid Parts business increased by 17% in the fourth quarter over last year, representing a record sales quarter for the business. Our RedEye business continues to benefit from customers accessing our significant capacity, as well as our ability to produce large parts made of high grade thermal plastics.

Excluding Solidscape, domestic sales grew by 22% during the fourth quarter over last year and represented $22.1 million or 55% of total revenue. Excluding Solidscape, international sales grew by 15% to $18.3 million, representing 45% of total revenue. Despite global concerns over Europe, sales into the region were up 16% over last year when you exclude the impact of Solidscape.

Gross profit was $22.9 million for the fourth quarter, or 52.5% of sales. Excluding the Solidscape acquisition, gross profit was $21.4 million for the fourth quarter, a 24% increase over the $17.2 million recorded for the same period last year. This pro forma gross margin was 53% of sales versus 50.6% for the same period last year.

The strong growth in our higher margin products, especially Fortus systems and consumables, contributed to the significant improvements in gross margins. The most notable impact in gross margin in the fourth quarter was the strong sales of our recently introduced Fortus 250 MC, the highest margin system we sell. In addition, sales of our lower margin 3D printers have been below our expectations, which is having a positive impact on the overall margin profile.

Operating profit was $8.9 million for the fourth quarter, or 20.4% of sales. This represents the highest operating profit in our Company's history. Excluding Solidscape, operating profit was $8.5 million for the fourth quarter, a 39% increase over the $6.2 million reported for the same period last year. This pro forma operating profit was 21.1% of sales versus 18.1% for the same period last year.

Operating expenses increased by 27% in the fourth quarter over last year. The biggest impact in operating expenses was the addition of Solidscape. Funds provided by our unnamed Fortune 500 partner to develop DDM applications for our Fortus line was $160,000 for the fourth quarter, versus $351,000 for the same period last year. This compares to $170,000 for the third quarter of 2011. We have recently agreed to continue this collaboration into 2012.

Other income in the fourth quarter include an expense of $458,000 related to foreign currency exchange expense. This expense related to the significant appreciation of the US dollar relative to the euro during the quarter.

Net income was $5.8 million for the fourth quarter of 2011. Non-GAAP net income was $6.6 million for the fourth quarter, or $0.31 per share, a 49% increase over the $4.4 million reported, or $0.21 per share, for the same period last year. The two expense items excluded in the calculating of our non-GAAP net income during the fourth quarter were the expenses related to employee stock options and the expenses related to amortization of acquired Solidscape intangible assets.

Stock based compensation expense, net of tax, was $482,000 or $0.02 per share, compared to $144,000 net of tax or $0.01 per share for the same period last year. The amortization expense related to acquired Solidscape intangibles net tax was $344,000 or $0.02 per share for the fourth quarter of 2011. We obviously had no expenses related to acquired Solidscape intangibles during the fourth quarter of 2010.

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

We generated approximately $10 million in cash from operating -- from operations during the fourth quarter and finished the period with $67 million in cash and investments. Inventory balances were $22.8 million at the end of the fourth quarter, which is up modestly from the $22 million at the end of the third quarter. Inventories have risen due to the Solidscape acquisition as well as the to match the strong quarter flow for both Fortus systems and consumables.

Accounts receivable was $26.2 million at the end of the fourth quarter. Day sales outstanding, or DSO, was 55 days at the end of the fourth quarter and remained unchanged from the level at the end of the third quarter.

Overall, we are pleased with our financial performance during the fourth quarter. Our Fortus system and consumable revenue continue to grow impressively, both having sustained strong double digit sales growth over the past several quarters. The growth of these businesses have been the primary contributors to our strong financial performance, as revenue and profitability have reached record levels. Notably, our strong growth comes in spite of our underperforming 3D printing business.

We recognize and acknowledge that the HP collaboration has not progressed as we have planned. However, we are taking independent steps to remedy the performance of our 3D printing business, which we believe will begin to demonstrate stronger growth in the coming quarters. Although we believe our recent results have been impressive, we are excited about the prospect of all our businesses operating at their fullest potential and the positive implications this has in our future financial performance.

And now I'd like to turn the call over to our Director of Investor Relations, Shane Glenn, for comments regarding our outlook.

Thank you, Bob.

Stratasys has reiterated the following information regarding financial guidance for fiscal year December 31, 2012. Revenue guidance of $175 million to $190 million, and GAAP earnings guidance of $1.02 to $1.13 per share. Our earnings estimates are reduced by the expenses related to employee stock options, as well as the expenses related to the amortization of Solidscape intangibles. We estimate the stock based compensation expense will amount to $2.1 million net of tax, or $0.09 per share, and that the amortization of Solidscape intangibles will amount to $1.4 million netof tax, or $0.06 per share in 2012.

We would also like to provide additional details surrounding the assumptions of 2012 guidance. We continue to observe a favorable market environment for our products, and we are assuming that will continue throughout 2012. However, we are assuming the growth in our Fortus system sales will moderate in the coming months relative to the very high levels we have recently observed. We are also assuming that our new initiatives within 3D printing will lead to higher sales of 3D printers in 2012, which should lead to acceleration in system unit sales. This should bode well for future sales for higher margin consumer revenue.

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

Thank you, Shane.

Again, we are very pleased with our record fourth quarter and full year performance. Our higher margin Fortus line retained strong positive sales momentum in the fourth quarter. This growth was a result of strong sales across our entire Fortus line. Direct digital manufacturing applications remains the primary driver behind our recent success in Fortus. Manufacturers increasingly recognize the value of our technology for end use part production, including fixtures and assembly tools used in manufacturing. In addition, the capabilities of our technology allow for the production of complex geometries that would be impossible to produce through conventional processes.

Stratasys was recently awarded a contract from Air Force Research Labs to evaluate the FDM technology as a means to manufacture and reconfigure unmanned air vehicles, or UAVs. This contract follows multiple orders of our systems from other US Army bases for innovative manufacturing applications. The military often requires the manufacture of parts in low volumes that must maintain stringent material characteristics.

We believe our Fortus systems are an ideal solution byproviding the military with a quick response platform for manufacturing that can shorten repair times and reduce overall vehicle costs. Also, within DDM, we believe our recent acquisition of Solidscape, which was accretive during the fourth quarter, will open up additional opportunities in the coming quarters as we further develop this unique technology.

We continue to observe a significant untapped sales potential for our Dimension and uPrint 3D printer products. As we communicated last quarter, we believe additional channel development is required to continue growing this business. Although we continue to manufacture a HP branded 3D printers for distribution in Europe, we are also making progress in expanding independent channel strategies that will augment our HP collaboration.

We have initiate ad program to recruit and train a significant number of new selling agents that will focus exclusively on selling our most affordable products. We have initiated this program in the US, and we are in the process of recruiting and training a total of 90 sales agents that will be in place by April of this year. We expect this initiative, combined with other programs that we've planned on, will drive incremental new volume beginning in the second quarter of this year.

In addition to expanding our channel, we have increased the incentive for selling our most affordable 3D printers. The distribution margin for our uPrint line was increased beginning in the fourth quarter. We believe the new incentive structure will create greater focus and drive incremental sales of the uPrint line, and combined with the expansion of our sales channel, bodes well for our 3D printing business in coming months.

A new initiative we expect to introduce in the second quarter will significantly reduce the manufacturing cost of our most affordable 3D printers. We're excited about this revolutionary new development, which is a result of significant investments made over the past three years. Most importantly, this development should help us sustain a favorable profit margin on our most affordable systems as we become more aggressive with our 3D printing go-to-market strategies. We'll be providing additional details on this development over the coming months.

We believe all these initiatives will allow us to better capitalize on a significantly undertapped market opportunity and profitably grow our 3D printing business in 2012.

Well, new and innovative applications continue to emerge for our products. One of our Dimension 3D printers was recently used by Artem, a highly regarded producer of models and miniatures for the advertising industry. Artem used one of our 3D printers to help produce small individually crafted models for a promotional video called "Back to the Start." The video was made for the Chipotle Mexican Grill and highlights the restaurant's advocacy for sustaining farming techniques.

Artem used stop animation processes that rely on individually crafted models to tell the story of a farmer committed to quality ingredients. Our 3D printer helped Artem cut the time and cost compared to making models with traditional techniques. Models that would have taken weeks to produce were produced in only hours. I would encourage you to read more about this application and view the video by accessing the link provided on the front page of Stratasys's website.

Stratasys is also committed to helping educate and train the designers and engineers of tomorrow. The Department of Defense STARBASE program is an initiative that focuses on motivating elementary school students to explore science, technology, engineering, and math. The program serves underprivileged and socioeconomically disadvantaged children with a hands-on curriculum that encourages students to work through experimentation and teamwork. For example, using 3D CAD software, students design components for submarines, land rovers, UAVs, cars, and rockets, and then they use our 3D printers to produce them for functional testing.

We recently announced that the STARBASE program had placed a $1 million order with Stratasys for uPrint 3D printers. This order brings the total to more than 100 Stratasys 3D printers used as classroom technology by the STARBASE program worldwide. We believe Stratasys was chosen as the vendor for this program given the uPrint's whole product characteristics, and this includes the product's affordability, ease of use, reliability and classroom friendly operation. We hope to build on this program and believe the primary and secondary education markets remain significant market opportunities that we've only begun to explore.

Consumable revenue reached the highest level in our Company's history during the fourth quarter, growing by 25% over last year. Our expanding base of Fortus 3D production systems and the higher usage rates generated by DDM applications is driving this growth. In addition, consumable usage is benefiting from a growing demand for our innovative new materials. Our ability to offer unique materials such as ULTEM as well as our recent introduction of our static free thermal plastic have opened up new, previously untapped opportunities. We expect the growth trend of consumables to continue throughout 2012.

Revenue within our RedEye Paid Parts business also represented a record level by expanding 17% over the fourth quarter last year. Our RedEye business continues to benefit from customers accessing our significant capacity for large orders, as well as our ability to produce large parts made from strong, high-grade thermal plastics.

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 to questions.

(Operator Instructions). Your first question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed.

Thank you. Good morning.

Good morning, Jim.

My question concerns gross margins. I wonder if you can talk a little bit about the sequential movement in gross margins, with product gross margins coming down quarter on quarter and the increase in service gross margins. Were there some specific issues there, Bob?

If you recall, last quarter we talked about -- I made some comments, because this came up last quarter because of the strong margins that we had. And really, we hit kind of a perfect wave in terms of product mixes that went in Q3 of 2011. And if you look at Q3 relative to Q4, what you see sequentially, we shipped 700 units versus 600 units in the quarters.

And our 3D printing, while down year over year, was up substantially over the third quarter. And then if you look at the mix within our 3D printer, what we found with the mix is it really favored the lower priced printers, uPrint, and our volume quarter over quarter was up substantially with HP, which was obviously the lowest margin piece to it.

So we didn't think that last quarter that we were kind of at a high and not necessarily sustainable. I think this is a more reasonable margin profile for us.

Got it. And just with respect, Scott, to the program to expand the network of sales agents, the 90 new sales agents I think you're targeting by Q2, those are primarily in North America. Will those only be covering the uPrint, or will they also be working on the Dimension products?

Just the uPrint so we can grow a focus on that uPrint. And as you mentioned, we're starting in the US, but eventually will expand that worldwide.

Okay. Thank you.

Thank you, Jim.

Thanks, Jim.

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

Congrats on a nice quarter.

Thanks, Troy.

Scott, you alluded to new product coming out significantly lowers the manufacturing cost. I guess I've always been under the assumption the majority of the cost is the consumables that are used in those productions. Can you just kind of guide on that a little bit more?Are we talking about lowering pricing on consumables for volume purchases, or just give us a little more color there?

Well, yes,we're significantly lowering our system product cost, or I think you would say cost of goods sold. And, of course, all 3D printers and Fortus systems use a considerable amount of consumables, and -- butthe launch in the future will include primarily a significant reduction in our product cost, to your question.

Okay, so it's not the manufacturing -- it's -- fromthe user's perspective it's the upfront purchase price versus the ongoing manufacturing cost.

That's right, Troy. Our comments related more to the cost of our systems.

Understood. And then how about, just on the product backlog, it was a big number. Can you just remind us maybe what was it at prior record levels or last year so we can compare?

Yes, itwas about $8.6 million of product backlog last year. So on a year over year basis, it's up between 40% and 45%.

Got it. All right, guys. Good luck going forward.

Thanks, Troy.

Thanks, Troy.

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

HI. Good morning. Great job.

Good morning.

Just two questions. You've had success with the Fortus 250 MC, and I was wondering if the success there has changed your strategy or you've adapted at all? Obviously you're going to come out with the low end and start selling that, but do you think more products in the mid end are in the future as well?

Well, we feel that the best for the customer is to provide a wide range of offerings, which include, of course, features, benefits, as well as price ranges. So as you saw last year, we had a very successful launch of our 250, which is as you point out, morein the mid range. We're going to continue to grow our family of products with eventually lower prices, but also higher feature performance, higher prices, over time, all with a goal to provide kind of a one-stop shop for customers, including our RedEye service.

Much of our business of our RedEye service comes from providing customers that need additional capacity on a Monday, and by Tuesday or Wednesday, we're getting parts to them. So it's really more about the full whole product offerings for our customers than anything else.

Okay. And then as far as the HP partnership, just can you give us some sense of timing of what you have to communicate to them, and when -- or when they communicate to you, just how you've been in touch, and if you wanted to back out it have or if they did, when that would have to be communicated? Just timing, thanksso much.

Yes, we're in regular communication with HP on an ongoing basis, and we share marketing strategies that are being done throughout different parts of the world. In terms of the mechanics of the contract, we have a contract that runs with HP through September 30, 2012, that involves the two products, which are the equivalent of our uPrint and uPrint Plus for eight European countries. And we discontinued the relationship by mutual agreement within 30 days. And more formally within the contract, if we want to terminate it prior to September 30, 2012, we would be required to give -- one party or the other would be required to give notice by March 31 of this year. Otherwise, the contract is an evergreen contract where it automatically renews year over year.

However, we could expand into the US and global within a 30 day period on a mutual basis.

Thank you so much. I'd love -- since you're giving me the time and I'd love to ask one more. Your guidance for this year, are you taking into assumption any acquisitions? Obviously your new selling strategy. Just kind of what went into your guidance when you were coming up with that. Thank you so much.

No, that -- the guidance is all organic growth, Andrea. And we did make some kind of qualitative commentary surrounding the guidance, I think, in our prepared remarks, and I think we'll stick with that.

Thank you so much. Very helpful.

Thank you.

(Operator Instructions). Your next question comes from the line of Tim Mulrooney with William Blair.

Good morning, gentlemen

Good morning.

Just a follow-up on the guidance question real quick. The $0.15 in stock options and amortization, is that included in your guidance? In other words, is your adjusted EPS number like $1.17 to $1.28?

That's correct. You would have to add that back to the guidance numbers. If you want to get to a non-GAAP adjusted guidance, would you have to add that $0.15 back to the numbers provided in the press release.

Okay. Great. Thank you. And then as my follow up, on the HP partnership, sales were up 15% in the European region. Is that apples to apples on a year over year basis,does that include territories as well?

It would include all territories that they're in on a year over year basis.

Okay. Thank you.

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

Yes, withrespect to operating expense for 2012, I was wondering if you could talk a little bit about that. Do you anticipate higher levels of R&D expense earlier in the year, particularly as you move toward driving down manufacturing costs?And then also with respect to SG&A expense, the impact possibly on that line item as you expand the dealer channel?

Yes,I mean I think we talked last quarter that we would expect to see some higher SG&A expenses as it relates to our channel development programs. But at the same time, we still are maintaining an indirect channel. So there's obviously costs that are borne by the channel itself. So, yes, we factor that into the guidance. And I think the R&D expenses, yes, we're going to see some higher R&D expenses in the year, and we factor that into our guidance as it relates to some of our new initiatives.

Is R&D expected to -- I mean, would you expect R&D to grow in line with revenues, or would you expect it to grow below, say, the midpoint of your revenues? I'm just trying to get a sense if we're going to see potentially a bigger spike in R&D just given what you have on your planning.

No, I think if you look at year over year, what you did is you really saw a spike in our planning in 2011 compared to 2010, and I expect that to moderate more in 2012 as it relates to revenue.

Got it. Thank you.

Thanks, Jim.

(Operator Instructions). Your next question comes from the line of Jim Gentrup with Discovery Investment Research. Please proceed.

Good morning, gentlemen.

Good morning, Jim.

I just wanted to get your comments on the Z Corp acquisition by 3D Systems, and just on a competitive basis where you see that -- how you see that affecting you?

Well, Z Corp has been a competitor within the marketplace for many, many years. And their products have a niche within the marketplace. And I don't think we see a dramatic change relative to it being acquired from 3D Systems in terms of a competitive positioning for us.

Do you see 3D -- well, what's the market share again of Z Corp and their 3D printer systems?

It's small.

We don't -- what we found is it's from -- on our sales calls, we really don't run into Z Corp head to head very often, except maybe within the educational channel.

Okay. All right. That's all I have. Thanks, guys.

Thanks, Jim.

Your next question comes from the line of [Andy Schopick] with -- private investor. Please proceed.

Thank you. Good morning. Bob, I wondering if you can give a little color to the Solidscape business in terms of its revenue breakdown between domestic and international.

I don't have -- that's fairly granular for the call. I don't have those numbers sitting in front of me. I think what we're seeing, it's about a 60/40 split in terms of domestic versus international. But that's a guesstimate as opposed to an accurate number, because I don't have that in front of me right now.

Okay, fairenough. Scott, question for you to kind of follow up here on theprospects for future M&A in the business. Clearly we're seeing consolidation occurring led by yourself and 3D Systems. There are still a few other players that are out there in the market. One that comes to mind immediately is Objet, which you did have a relationship with at one time. Are there many other players or opportunities that you see for a possible future M&A activity in the business?

Shane, why don't you take that one.

No,I think as we stated before, Andy, we will be opportunistic and look at opportunities where we feel we can acquire a platform that's complimentary to what we're doing or complimentary to our strategies within the 3D printing or the direct digital manufacturing. As you know, there's -- this industry is fairly tight as far as the number of players that exist out there. We're aware of them, they're aware of us. And as opportunities arise, we will take a look at that, and if it makes sense and we can make a nice investment for our shareholders, we'll do that. But we're not feeling the need -- wedon't feel we're being pushed into M&A opportunities, given some of the consolidation that's been going on within the industry.

Yes, we get some wonderful organic growth, as we've laid out in the conference call here.

Excellent. Just to follow up, Bob, I want to be clear on the guidance with respect to the non-GAAP measures for 2012. I believe you mentioned amortization anticipated or estimated at $1.4 million. Is that net of tax?

Yes.

And the stock-based comp, I think you indicated that would equal about $0.09 of the $0.15 of the non-GAAP measure. Again, can you just clarify what that number is on an after-tax basis?

That is the net of tax number.

And in dollar amounts?

Stock based compensation is $2.1 million net of tax, and the Solidscape amortization is $1.4 million net of tax.

Thank you. That's it for me.

Thanks, Andy.

Thanks, Andy.

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

Did you say Europe ex-Solidscape was up 16% in the quarter?

Yes.

And just given the concerns people have about Europe, what -- is there any additional color you can provide just in terms of how the demand progressed through the quarter? Was it fairly linear, were there any bumps, just given the concerns people have had?

We've been asking -- we've been answering questions probably relative to Europe now for about the past six months. And we keep giving a similar answer, that we we've seen strength within Europe. And in terms of linearity, we saw strength throughout the quarter, probably uncharacteristically. It's usually more -- a lot of our business comes at the back end of the quarter, and what we really saw in Q4 was really more of a linear quarter from Europe's standpoint.

Great. And any color you can provide on Asia? I don't know if you broke out -- can you break out what Europe represents, and maybe again just talking a little bit about what you're seeing in Asia.

Yes. Asia -- the Far East grew -- on a year over year basis, the Far East grew at about a 10% rate. What we're seeing in Asia is they're not quite as quick at adopting some of our DDM applications, so I think that's impacting the growth on a year over year basis.

Okay. And can you --

Jim, domestic was about 55% of sales during the quarter. Europe was about 31%. This is excluding Solidscape. So 55% domestic, 31% Europe. Far East was around 13%.

Okay. Thank you.

Thanks, Jim.

At this time, there are no further questions. I will now like to turn the call back over to Mr. Scott Crump for any closing remarks.

Okay, insummary, we entered 2012 with significant positive momentum in our Fortus product line. In addition, our consumable business continues to benefit from our growing install base of Fortus systems and high utilization trends provided by DDM applications. We remain excited about our recent acquisition of Solidscape, which was accretive in 2011, and has provided an additional technology platform that we plan to expand into new applications. And finally, we are working very hard on several new initiatives within 3D printing that we believe will position our products for a stronger growth in the future.

We look forward to a strong 2012, and like to thank you for your interest in Stratasys. We look forward to speaking with you again next quarter. Good-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.