Stratasys Ltd (SSYS) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2012 Stratasys earnings conference call. My name is Jenada and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Shane Glenn, Director of Investor Relations. Please proceed.

Thanks Jenada. Good morning everyone and thank you for joining us to discuss our second quarter results. On the call with us today are Scott Crump, Chairman and CEO of Stratasys, and Bob Gallagher, CFO of Stratasys. Following their prepared remarks, we will open the call for questions. An audio replay of the call will also be available on our website later today.

Statements made during this call about Stratasys beliefs, intention and expectations including statements regarding the expected timing and ultimate closing of the merger of Stratasys and Objet Ltd. as well as the benefits thereof are forward-looking statements. The statements involve risks and uncertainties both known and unknown that may cause actual results to differ materially from those projected in this presentation.

Actual results may differ materially due to a number of factors, including risks and uncertainties relating to Stratasys' ability to penetrate the 3D printing market; Stratasys' ability to introduce, produce and market consumable materials and market acceptance of these materials; the impact of competitive pricing and products; Stratasys' timely development of new products and materials and market acceptance of those products and materials; the success of Stratasys' recent R&D initiative to expand the DDM capabilities of its core FDM technology; the success of Stratasys RedEye On Demand and other paid parts services; and the Stratasys ability to complete its transaction with Objet Ltd. on the proposed terms and schedule and achieve the anticipated benefits of the transaction.

These and other applicable factors are discussed in the presentation and in Stratasys filings with the Securities and Exchange Commission including its report on Form 10-K for the year ended 12/31/2011 and subsequent filings. Any forward-looking statements included in this presentation are as of the date they are given and Stratasys does not intend to update them if its views later change, except as may be required by law. These forward-looking statements should not be relied upon as representing Stratasys views as of any date subsequent to the date they are given.

Information discussed within this conference call includes financial results that are in accordance with accounting principles generally accepted in the United States or GAAP. In addition certain non-GAAP financial measures have been provided that exclude certain charges, expenses and income. Non-GAAP measures should be read in conjunction with the corresponding GAAP measures and should be considered in addition to, and not as an alternative or substitute for, measures prepared in accordance with GAAP.

The non-GAAP financial measures are provided in an effort to provide financial information investors may deem relevant to evaluate results from the Company's core business operations and to compare the Company's performance to prior periods. The non-GAAP financial measures primarily identify and exclude certain discrete items such as amortization expenses, expenses associated with stock-based compensation and the expenses related to completing the proposed combination with Objet. The Company uses these non-GAAP financial measures for evaluating comparable financial performance against prior periods.

Now I'd like to turn the call over to Scott Crump, CEO of Stratasys.

Good morning and thank you for joining us to discuss our financial results. We're very pleased with our second quarter performance. Total revenue expanded to a record $49.4 million for the second quarter, an increase of 31% over last year.

Non-GAAP operating profit was also impressive, increasing by 30% over last year. And we just raised our revenue in non-GAAP earnings guidance for 2012.

As we observed in the past several quarters, the second quarter benefited from a strong sales of our higher-margin Fortus 3D production systems which grew by 126% compared to last year. This strong performance in our Fortus line also helped drive impressive consumable revenue growth of 34% year-over-year during the second quarter.

Consumable revenue continues to benefit from the expanding use of direct digital manufacturing applications which maintain relatively higher consumable utilization rates. We continue to believe the emerging market for DDM applications is at the beginning of a multi-secular growth opportunity.

Orders for our revolutionary new Mojo 3D printer were stronger during the quarter following the new product introduction in May. Mojo revenue during the quarter was minimal, given customer shipments didn't commence until the final days of the quarter according to our plan. We believe Mojo is in an ideal product to combine with our new channel development initiatives aimed at growing the sales of our most affordable products.

We've now recruited and trained over 120 new sales agents that will focus on our most affordable products, including our uPrint line and our new Mojo 3D printer. We also introduced an exciting new product within our Solidscape subsidiary which I will discuss in more detail later in the call.

And of course we're most excited about our announced plan to come combined with Objet, a leading global manufacturer and distributor of 3D printing and rapid prototyping systems. We've made substantial progress in planning for the combined organization and remain on track for a third-quarter closing of the transaction. Combining with Objet will expand our reach and provide a complementary product line that we can leverage into a rapidly growing market opportunity.

I'll return later to discuss these developments in more detail, but first I'd like to turn the call over to our CFO, Bob Gallagher, who will provide the highlights of our second quarter results. Here's Bob.

Thanks, Scott. Total revenue was a record $49.4 million for the second quarter, a 31% increase over the $37.8 million reported for the same period last year. The Company shipped a total of 776 units during the second quarter versus 735 last year.

As we have observed over the past four quarters, our Fortus 3D production unit sales were very strong during the period, increasing by 3X during the second quarter over last year. This strong growth has been driven in part by the successful introduction of the 250mc last fall. The 250mc is positioned very close to our Dimension 3D printer line within the marketplace and is generating significant interest from customers that would've otherwise purchased a Dimension 3D printer.

Similar to prior periods, this likely skewed the unit growth trends during the quarter by favoring our higher end Fortus systems over our lower end 3D printers. However, in addition to the 250mc we also generated strong growth in our Fortus 400mc and 900mc platform, driven by the growing demand for direct digital manufacturing. Excluding the impact of the 250mc, Fortus system units still grew by 43% in the second quarter over last year.

Regardless of how you slice it, Fortus system sales continue to be impressive.

Unit shipments of our Dimension and uPrint 3D printers were down 20% during the second quarter over last year for the reasons we just discussed. And similar to previous quarters, we believe that Fortus 250mc introduction had a moderating impact on our 3D printer sales during the period. In addition, our resellers are focusing on the Fortus line in an effort to capitalize on the growing demand for direct digital manufacturing applications, which is why we're developing a separate channel to focus on our most affordable products.

In addition, our resellers are focusing on the -- excuse me; however, the biggest factor impacting 3D printer sales during the quarter was the introduction of our new Mojo 3D printer combined with the timing of first customer shipments of the new product. Our Mojo 3D printer has been well-received within the marketplace following its introduction in May, and we have generated orders for over 275 systems worldwide.

In accordance with our plan, customer shipments of Mojo didn't commence until the final days of the second quarter. Consequently, the strong order flow did not translate into significant revenue for the second quarter. Most of these orders will ship in third quarter and we expect that product have a more meaningful impact on revenue in the second half of 2012.

Unit sales of our HP branded 3D printers were flat during the second quarter over last year, and we have announced our intention to discontinue manufacturing and distribution agreement effective later in 2012. Despite some success, sales of HP branded systems have remained below levels needed to sustain a viable relationship for us. We're working with HP to ensure an orderly transition within the European markets they serve.

As we have communicated over the past two quarters, our primary focus within 3D printing has now turned to the opportunities presented to us through combining our own channel development initiatives with our recently introduced Mojo 3D printer. We continue to believe our 3D printer channel remains underdeveloped, and that the channel must expand if we are to achieve the full potential of our most affordable products. Scott will discuss later in the call how we are making progress in developing a more focused channel strategy.

Second-quarter product revenue was $41.4 million, an increase of 35% over last year. Similar to last quarter, two factors drove our product revenue during the period.

First, total system revenue grew by 31% over last year with Fortus system revenue increasing by 126 %. As we have discussed earlier, Fortus sales have continued their strong positive momentum driven by the introduction of the 250mc, the upselling trends within our channel as well as the rising demand from customers using their systems for new DDM applications.

3D printer system revenue was down 35% during the second quarter over last year, partly driven by the reasons just discussed. However the most important factor was the timing surrounding the introduction and shipment of the new Mojo 3D printer.

The second factor driving product revenue growth in the second quarter was a 34% increase in consumable revenue over last year. Consumable revenue in the second quarter was the highest in the Company's history for the third consecutive quarter.

Excluding the impact of the Solidscape acquisition, consumable revenue grew by approximately 23% in the current trailing 12-month period over the prior 12 months. The biggest driver behind consumable revenue growth has been a rapidly growing Fortus line, and DDM applications, which generally use more consumables.

Second quarter service revenue was $8 million, which was up 12% when compared to the same period last year. Our maintenance revenue increased by 6% for the second quarter over last year. Our maintenance revenue is benefiting from our strong sales of our higher-priced Fortus systems, given Fortus generally have higher attachment rates for maintenance contracts relative to our 3D printers.

This positive impact has been offset by lower maintenance revenue from our lower-end 3D printers, as well as the relatively low maintenance revenue generated from sales of our Fortus 250mc.

Revenue in our RedEye paid parts service business increased by 13% in the second quarter over last year. Our RedEye business continued to benefit from customers accessing our significant capacity as well as our ability to produce large parts made of high-grade thermoplastics. We also generated a significant amount of orders during the quarter for non-FDM related services in RedEye.

North American sales grew by 36% during the second quarter over last year, and represented $26.2 million or 53% of total revenue. International sales grew by 26% to $23.2 million, representing 47% of total revenue. Despite global concerns over Europe, sales into the region were up 18% over last year.

We observed approximately a 5% reduction in the euro relative to the dollar during the second quarter, which had approximately a $500,000 impact on revenue and operating profit during the period.

Gross profit was $23.2 million for the second quarter or 52.9% of sales versus 52.2% of sales last year. The strong growth in our higher margin products, especially Fortus systems and consumables, made positive contributions to gross margin. These positive contributions were partially offset by non-FDM services in our RedEye business and the relatively lower margin generated from the maintenance contracts on our rapidly growing Fortus line.

Operating profit was $5.8 million for the second quarter, or 12% of sales. Non-GAAP operating profit was $10.5 million for the second quarter, a 38% increase over the $7.6 million reported for the same period last year.

We would like to address a significant cost related to our ongoing efforts to combine with Objet. The vast majority of Objet-related expenses, which are enumerated in our press release, are related to advisory, legal, accounting and integration costs. We are very excited about the potential of combining these two growing and successful companies.

However, given the size and complexity of this transaction, we're investing in the proper support and advisory services that can allow us to remain focused on our business and be better prepared once the transaction closes. We believe these investments are well spent and will provide for a stronger and more profitable Company after closing.

Non-GAAP operating profit was 21% of sales, similar to the percentage last year. Excluding non-GAAP items, operating expenses increased by 27% over the same period last year. This relatively high growth in operating expenses was driven in part by the costs surrounding our new Mojo 3D printer launch, which included a large reseller and sales agent conference in April, as well as higher advertising and promotional expenses. A comparable event or product launch was not held in the second quarter of 2011.

It's also important to note that we generated very little Mojo revenue during the second quarter given the planned timing of first customer shipments.

Net income was $3 million for the second quarter of 2012. Non-GAAP net income was $7 million for the second quarter or $0.32 per share, a 39% increase over the $5 million or $0.23 per share reported for the same period last year. The three expense items excluded in calculating our non-GAAP net income during the second quarter were the expenses related to employee stock options, expenses related to amortization of acquired Solidscape intangible assets, and the expenses associated with our recently announced plan to combine with Objet.

We should note that the vast majority of expenses incurred for the purposes of completing our combination with Objet are not tax-deductible. A table provided with our press release provides itemized details surrounding all non-GAAP items incurred during both periods.

We generated approximately $5.1 million in cash from operations during the second quarter and finished the period with $73.4 million in cash and investments. Inventory balances were $22.5 million at the end of the second quarter, which is up modestly from the $21.6 million at the end of the first quarter. Accounts Receivable was $33.5 million at the end of the second quarter and days sales outstanding, or DSO, was 62 days.

Overall, we are pleased with our financial performance during the second quarter. Our Fortus system and consumable revenue continues to grow impressively, both having sustained strong sales growth over the past several quarters. The growth of these businesses has been the primary contributor to our strong financial performance.

We are optimistic in the new sales agent program and our new product initiatives. More importantly we're excited about the opportunities that will arise out of our combination with Objet. I would now like to turn the call over to Director of Investor Relations Shane Glenn for comments regarding our stock outlook.

Thank you, Bob. Stratasys revised its financial guidance for the fiscal year ended December 31, 2012 as follows. Revenue guidance of $193 million to $198 million versus our previous guidance of $183 million to $193 million. Non-GAAP earnings guidance of $1.31 to $1.38 per share versus previous guidance of $1.29 to $1.38 per share.

GAAP earnings guidance of $0.83 to $0.98 versus our previous guidance of $0.97 to $1.13 per share. The revision in GAAP earnings guidance is primarily a reflection of the inclusion of the additional estimated impact of Objet transaction related expenses, most of which are not tax-deductible.

Financial guidance does not reflect the potential combined performance of Stratasys and Objet, nor does it include some of the estimated incremental transaction related costs that would be incurred upon the transaction's closing. In addition to excluding the impact of expenses associated with the proposed combination with Objet, non-GAAP earnings guidance excludes the impact of stock-based compensation expense and the amortization expense of acquired Solidscape intangibles.

Qualitatively, we continued to observe a favorable market environment for our products and we're assuming that will continue through 2012. However, we're assuming that the growth in our Fortus system sales will moderate in the coming months relative to the very high levels we have recently observed, given that we have now reached the anniversary date for the introduction of the Fortus 250mc. We should also note that the normal seasonal weakness we generally observe during the third quarter was mitigated last year by the launch of the Fortus 250mc.

Within 3D printing, we're assuming that our new initiatives lead to higher sales of our 3D printers in the coming months, driven by the introduction of mojo and implementation of our new sales agent program. Overall we're very optimistic about the balance of the year.

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

Thank you Shane. Based on our strong second-quarter performance, we're looking forward to a great year. As Bob mentioned, our higher-margin Fortus line continued its strong positive sales momentum into the second quarter. The 900mc and 400mc have been particularly strong for customers using the system for DDM applications within the aerospace and automotive sectors.

Manufacturers are recognizing the value of our technology for in-use part production, especially for 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.

We believe the evaluation and adoption of our proprietary FDM technology as a viable manufacturing alternative is still in the early stages of development.

We're very pleased that -- to recently announce a joint initiative with the US Department of Energy at Oak Ridge National Laboratory to further develop our technology for manufacturing applications. The Oak Ridge project aims to develop our FDM technology for mainstream manufacturing processes by improving FDM part quality as well as the development of carbon fiber reinforced materials to produce strong, lightweight components.

The project includes several million dollars of funding to be invested over the coming years for system and material development. We believe this project could lead to additional manufacturing uses for our proprietary technology.

We're also excited about our new Solidscape system we introduced during the second quarter called 3Z PRO 3D printer. The new 3Z represents a significant development within our Solidscape subsidiary. The new system includes an improved user interface and new materials. The new materials are easier to work with, while continuing to produce parts with high precision and high castability.

In addition to the added functionality, you should also note that the new 3Z system has achieved a significant reduction in manufacturing costs relative to prior systems. We will also be leveraging our educational channel in the US to provide access to new markets for the new 3Z. And we're excited about the new product's potential.

Our expanding base of Fortus 3D production systems and the higher usage rates generated by DDM applications is driving growth in our consumables. Consumable revenue reached another record level in the second quarter, growing by 34% over last year.

Our revolutionary new Mojo 3D printer was well-received following its introduction in late April at our reseller conference which attracted over 200 attendees, as Bob mentioned. Initial orders of the product has been strong and we began new product shipments on schedule during the final days of the second quarter. We believe the new low-cost Mojo represents a significant milestone in our goal of accelerating the sales of our 3D printers worldwide.

The new platform is small enough to fit on a desktop, employs a revolutionary new material delivery and support removal process, and is 1.5 times faster than our Dimension Elite when building at the same resolution settings. At $9500, we believe Mojo represents the first commercially viable whole product 3D printer available to end-users that is priced under $10,000. This is approximately $4000 below our previous entry-level price for 3D printer, the uPrint, at $13,900.

We believe the Mojo platform is a significant step forward in 3D printing and has the potential to greatly expand the addressable market opportunity. We believe the platform will allow us to capitalize on a market that we believe is price elastic by capturing incremental customers who had previously viewed 3D printing as unaffordable or unreliable. We believe this platform could ultimately sell over 10,000 units per year.

There are approximately 14 million total CAD seats and over 5 million 3D CAD seats currently worldwide, and the numbers continues to grow. However, despite this large addressable market, only about 50,000 3D printers have been installed through the end of 2011, suggesting a significant opportunity for us.

We believe Mojo combines nicely with our new channel strategies aimed at expanding sales of our most affordable systems. We are -- as we have communicated over the past several quarters, we believe additional channel development is required to accelerate the growth of our most affordable products.

We're pleased to report that we've now recruited and trained over 120 sales agents in the US that are focused exclusively on selling our uPrint and Mojo 3D printer line. In addition, we expect to recruit another 30 agents before the year-end to participate in this sales agent program. We expect this new channel initiative, combined with the revolutionary new low-cost Mojo 3D printing platform, will allow us to better capitalize on a significant untapped market opportunity.

While we remain very excited about the opportunities that will arise from our recently announced plan to combine with Objet, a privately-held global company that manufactures 3D printers for rapid prototyping, we're making significant progress in preparing for combining our leading companies. Specifically, we recently completed to proposed combined organizational structure for the new company which has been communicated to all the employees.

We're nearing the completion of a plan that will be initiated on day one following the transaction closing, and we've begun to cross-train our people internally. And we'll begin the cross training of their respective reseller channels in the third quarter. And externally we have received all the relevant antitrust approvals required for closing and have filed the preliminary proxy materials with the Securities and Exchange Commission.

In short, we expect to hit the ground running. Together with Objet, we will be a leader within our industry with a broader, more comprehensive product and technology portfolio and the resources team and financial strength to achieve our goals.

Similar to Stratasys, Objet has a strong financial model driven by its broad portfolio of high-performance systems and proprietary consumables. Objet's PolyJet technology allows for high-resolution printing that creates highly detailed models with the look and the feel of the final design product.

Their systems can also deposit two materials simultaneously, enabling the printing of models with a wide range of physical attributes, including building models that have both rigid and flexible materials in a single part. These attributes are highly complementary to the Stratasys portfolio of products which provide great solutions for functional prototypes and direct digital manufacturing applications. Together, we'll offer customers a broad array of innovative 3D printing and direct digital manufacturing solutions all from the same company.

Looking at the combined company, our sales and marketing organization will be impressive. We believe together we can expand the market to create dynamic cross-selling opportunities for our combined portfolio. Our combined channel will offer solutions across the entire design and manufacturing spectrum, from content modeling through direct digital manufacturing.

As a larger organization with our recent product introductions, we expect to grow overall customer awareness of 3D printing, rapid prototyping and direct digital manufacturing applications. We believe this will create new opportunities to sell our combined products.

The combined company will be positioned at the sweet spot of a growing demand for 3D printing and direct digital manufacturing. As the use of 3D tools and content continues to grow, so will the opportunity to provide products such as 3D printers that can add value by utilizing that content.

This growth opportunity should also be augmented by improvements in 3D printing technologies that will create more functional, affordable and easier to use 3D printers. We believe the combined company will be a leader in providing these new innovative products to customers.

From a financial standpoint, we now expect the transaction to be accretive to non-GAAP earnings per share immediately after closing. We will also provide for significant incremental long-term value based upon higher revenue growth rate, operational synergies and a significantly stronger long-term operating model. In short, we believe this combination will drive significant shareholder value.

We continue to target a third quarter closing for this transaction.

So in summary, we're pleased with our second quarter performance. We're very excited about the future. The interest in our industry and the potential of our revolutionary new products seem to be growing daily.

We believe our new products, such as Mojo and 3Z PRO, can help us expand aggressively into under-penetrated markets. Most importantly, we believe the combination of Stratasys and Objet will establish a premier portfolio of products that can further reshape the way new products are designed and manufactured.

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

(Operator Instructions) Troy Jensen, Piper Jaffray.

Gentlemen, congratulations on a nice quarter.

Thanks, Troy.

Thanks, Troy.

So, first question, you talked a little bit on the HP relationship. I'd be curious to know who initiated talks to end the partnership. And then is there any callbacks on the shares you issued to the company?

Yes, I think it's important to focus on you know the reasons that we don't have the relationship anymore, and it really comes down to the relationship didn't work financially for us. It's as simple as that. Given the volumes and pricing within the channel, it simply was a financial decision.

And then on the callback? Any potential callback on the shares issued to either of those?

No, there's none.

Okay, and my follow-up on the Objet, did you guys accelerate the accretion timeframe here, I think Scott mentioned? And then also, any update you can give us on Objet's first-half growth or the assumptions of growth post-closing?

Troy, the comments we made this morning regarding accretion, yes, are a little bit more positive than what we stated originally when we announced the merger. I think when we originally announced the merger, we thought -- we projected that the combination would be accretive within a year post closing. Now we're saying that we believe it would be accretive immediately post-closing. So that is a step up from what we said earlier.

And in terms of Objet's financials, we're not in a position where we can comment on them at this time. We'll give guidance on the combined Stratasys and Objet following the close of the transaction. Our current expectation is that guidance for the combined company will be given at some point within the first two quarters after closing.

Okay. Once again, congrats on the nice results and good luck in the second half.

Thanks Troy.

Thanks Troy.

Tim Mulrooney, William Blair.

(inaudible question - microphone inaccessible)

Mr. Mulrooney, your line is open.

Good morning guys. I have a question about your guidance. For this year you've raised revenue guidance and then narrowed EPS guidance. So can you talk about the factors there, whether it was higher than expected operating expenses or gross margins that led you to do that?

Yes, Tim; there's a few things, I think, at play here. I think we are expecting stronger growth of our to 3D printers in the second half as we have -- as we're two quarters through the year here in evaluating looking at the second half.

Generally 3D printers are lower margins relative to the higher-margin Fortus 3D production systems, which we expect to have more moderate growth in the second half which we've been saying now for the last couple quarters. Another factor is Europe and the euro decline, which has a negative implication on margin that -- absent any price changes that we have within that region.

The other factor is when you look at -- we have begun to evaluate selling 3D printers through the sales agent model. There is a little bit of a different revenue recognition on with the sales agent.

The sales agent recognized the gross sale in revenue and then you subtract the commission out of an operating -- out of the operating expense line, whereas sales of our 3D printers into resellers, we recognize the net revenue for the systems. So, what that essentially causes is higher revenue given the way you recognize that, and some higher operating expenses as you back the commission out of the operating expense line.

Great, that was very helpful. Thank you. And then just a follow-up on your -- I think you gave detail around 3D printer units and revenue. I know on your high-end Fortus units, the revenue was up 126% year-over-year. Can you give us any detail on unit growth year over year?

Fortus units were up about -- I think 3X year-over-year. But once again, keep in mind that that includes the 250mc introduction that we have in this quarter. We didn't have that in the same quarter for last year. So it was about 3X over last year.

Andrea James, Dougherty & Company.

Good morning, thanks for taking my question. Just taking a step back a little bit, I was wondering if you could give us maybe an updated assessment of the competitive landscape? You know there has been a lot of industry consolidation, new players being introduced.

And also, it looks like there's some innovation in injection molding and rapid delivery from C&C machines. So I was just curious to get what you think, if any of that poses a competitive threat, and also in light of the Objet merger, what that means for you guys.

Well, from a revenue, competition around the world, there's not any -- let's say radical or significant material changes. We do see Z Corp systems, mainly in the education market from a competition standpoint. We compete on the high end, mostly in the Europe area with the EOS SOS system.

And then in -- well, in the service side, the service bureau side, there's definitely an amount of consolidation of service bureaus, primarily in the US by 3D Systems.

You know, one other thing I think is important to keep in mind Andrea is the fact that there's 14 million CAD seats out there, over 5 million 3-D CAD seats out there. That number continues to grow. I think we're in an industry where there's a lot of room for a lot of growth.

That's very helpful, thanks so much. And then also it looks like your Europe sales were up about 18%, you said, despite concerns. Is that because the verticals are strong that you're targeting? Or do you think it's just broader awareness of 3D systems across the board and under-penetration?

I think it's broader awareness and the fact that we have a great value proposition to offer the customer.

Steve Dyer, Craig-Hallum.

Bob, I think -- I don't know if I missed it, Solidscape revenues the quarter?

We didn't break out Solidscape's revenue separately in the quarter because we had two months in there for last year and three months in there for this year. We don't report that is a separate vertical.

Okay, and then service cost has been elevated here for a couple quarters. Can you just talk a little bit about what's behind that?

It's the combination of -- you know, as we said, we're selling a higher rate of maintenance on our Fortus systems, which are lower maintenance margins than we have on some of our 3D printers. In addition to that, some of the growth we've had within our RedEye has been for non-FDM services.

We've been -- the RedEye started offering the beginning of the year a lot of different non-FDM services in order to capture more of the customer's mind share. In the short term this is a strategy that's impacting the service margin, but we believe it will drive sales and proprietary parts longer-term.

So, we're going to have some lower margins within our service business in the near term, but we don't think it's a trend, if you look out long-term, that will be sustained.

Okay, and then with respect to the Mojo launch, what is sort of the channel strategy in terms of how much selling will there be? I know back when you launched the uPrint each -- or a variety of VARs took a fair amount kind of initially. Is that what you expect that they'll -- because it's lower end, they'll still keep in decent amount of inventory on hand?

Yes, we don't expect a similar channel fill there, Steve, because the sales agent program is set up to avoid significant levels of inventory made by the channel. In many cases, we're shipping directly to the customers. So the sales agent is not taking title. So, while we do expect Mojo to be contributing in the third quarter, we do not expect a big channel event like we've seen with some of our prior product introductions.

Okay, very helpful. And then a last question just on operating expenses, and I guess primarily with color around how much more may be in there for acquisition-related expenses in Q3, Bob?

I'm sorry, I missed that. Could you repeat that, please?

Just looking for a little bit of help with OpEx in Q3 and then in particular how much more may be in there for the acquisition-related costs.

We -- in the second half of the year we expect the acquisition related-costs to probably be somewhere in that $4 million to $6 million range.

With an emphasis on Q3, I would guess?

Absolutely.

(Operator Instructions) [Patrick Wu, Battle Road Research].

Good morning guys. Very good job in the quarter. A quick question on the Fortus, sort of your expectations for the [fall] run rate when you guys do have Mojo rolled out [for] quarter. I think you guys said 275 systems have been ordered for Q2 to be delivered in Q3. But what is the [full] run rate you guys expect that to be?

Yes, Patrick we really haven't projected that. It's -- we're obviously still early in the product launch. We see big potential for the product, but we haven't really projected what we think the Mojo, in its current incarnation, can generate.

I think one of the things I'll reiterate, as Scott said in his comments, is that Mojo is a new platform for us. We believe it's a revolutionary product with a very critical price point at under $10,000. And we see the potential to sell thousands per year with that platform, but we haven't made any specific estimates or projections or communicated that regarding the current product.

Okay, great. Moving on to the HP relationship, obviously it has ended. But I'm just thinking from your strategic perspective, are there any possible relationships down the road, down the hatch that you guys might be looking at? Obviously, you guys are in the thick of things with Objet and all those things that you guys might be tightening up right now. But just down the road, do you guys imagine that may be a possibility as well?

You know, we're in a very visible industry and I think those are the type of things you comment on more when they happen as opposed to speculate on whether they ever do or not.

That's fair. Just one quick one; I think you guys might have already answered it. But do you guys expect -- it seems like SG&A expenses have gone up this quarter. Like I said, you probably have talked about it earlier. But do you guys expect that to continue for the rest of the year, or something that you guys see as the quarter off thing?

One of the things that we mentioned within the quarter specifically is that we had, with the Mojo, we had high advertising marketing costs associated with the product launch as well as a meeting for our resellers and our agents during the quarter. And we didn't have a similar event in Q2 of 2011. So there were some specific items within the quarter.

At the same time, we still need to continue to invest in developing our channel, but probably not at the same level that we saw in Q2.

Let me add on to that. The Mojo launch event, the reseller that we put on was over $600,000 in expense for that particular event that we had with our resellers.

[Andy Schopick], Private Investor.

Bob, I'm curious to ask you, with respect to that HP agreement as I recall, there were warrants and/or stock that was involved in the initial agreement. I think it was 500,000 warrants, and I know they were convertible at something in the high teens.

What has happened to those warrants? Were they all converted? Has HP sold those shares? Is there any financial implications with respect to that aspect of the agreement?

That's a separately filed public agreement that out there. And those are taken into consideration in our computation of our diluted earnings per share.

Okay, you don't wish to be any more specific than that, I assume?

I shouldn't be commenting on HP, what HP is doing. I need to comment on what Stratasys doing.

Okay, thank you.

This concludes the Q&A session for today's call. I would now like to turn the call back over to Mr. Scott Crump for any closing remarks.

Okay. In conclusion, we are well-positioned for the long-term. We have continued to see momentum in our Fortus product line.

In addition, our consumable business continues to benefit primarily from our growing installed base of Fortus systems and higher utilization trends provided by DDM applications. We're very excited about the introduction of our new products and we believe these can drive market expansions to a new level.

Finally, we look forward to combining with Objet. This is an important transaction for our companies and for the industry. We believe this combination will create significant value for all of our stakeholders and we look forward to an exciting future.

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

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