Stratasys Ltd (SSYS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Stratasys ratings conference call. My name is Matthew and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference where you can ask one question and one follow-up question. (Operator Instructions).

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

Thank you, Matthew. Good morning, everyone. Thank you for joining us to discuss our third-quarter results. On the call with us today are Scott Crump, Chairman and CEO of Stratasys, and Bob Gallagher, CFO of Stratasys. Following the prepared remarks, we will open up 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's beliefs, intentions 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's ability to penetrate the 3D printing market; Stratasys's ability to introduce, produce, and market consumable materials and a market acceptance of those materials; the impact of competitive products and pricing; Stratasys's timely development of new products and materials and market acceptance of those products and materials; the success of Stratasys's recent R&D initiative to expand the DDM capabilities of its core FDM technology; the success of Stratasys's RedEye On Demand and other paid parts or visit; and Stratasys's ability to complete its transaction with Objet Ltd. on the proposed terms and schedule and achieve the anticipated benefits of the transaction, as well as the successful conclusion of the review of our merger with Objet by the Committee on Foreign Investment in the United States or CFIUS.

These and other applicable factors are discussed in this presentation and in Stratasys's filing with the Securities and Exchange Commission, including its report on Form 10-K for the year ended October 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 be relied upon as representing Stratasys's views as of the 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. The 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 that are provided in an effort to provide information to investors may be relevant to evaluate the 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 disclose certain discrete items such as amortization expenses, expenses associated with stock-based compensation expense and 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 would 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 are very pleased with our third-quarter performance. Total revenue expanded to a record $49.7 million for the third quarter, an increase of 24% over last year. Unit sales expanded by 52% over last year to a record 911 systems, far exceeding our previous unit record for a quarter.

Net income increased by 42% over last year on a non-GAAP basis and, for the third time this year, we raised our guidance for revenue and non-GAAP earnings.

As we observed for the past several quarters, we generated strong sales of our higher margin Fortus 3D production systems which grew by 37% over last year. In addition, our 3D printer unit sales goal also accelerated dramatically in the third quarter expanding by 69% over last year.

This acceleration is attributed to the launch of our new Mojo 3D printer, the first commercially available 3D printer priced under $10,000. Our other core businesses, including consumable revenue, RedEye part services and our Solidscape product line all performed very well during the quarter.

We remain excited about our pending game-changing combination with Objet Ltd. As you are aware we have a detailed set of discussions with the Committee on Foreign Investments in the United States or CFIUS and we continue to believe that their concerns will be addressed and the merger will be completed prior to the end of this year.

We have made substantial progress in planning for the combined reorganization and believed the merger with Objet will expand our sales reach and provide a complementary product line that can leverage into a rapidly growing market opportunity.

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

Thank you, Scott. Total revenue was a record $49.7 million for the third quarter, a 24% increase over the $40 million reported for the same period last year. The Company shipped a record 911 units during the third quarter, a 52% increase over the 600 units shipped last year.

Sales growth of Fortus 3D productions system units remained strong in the third quarter increasing by 21%. Although the primary obligations for customers purchasing our Fortus systems remains rapid prototyping, much of the incremental demand is being driven by new direct digital manufacturing applications.

Another factor driving Fortus system sales has been the ongoing improvements in reseller productivity. We are now three years into our transition from a direct to indirect channel in the US for Fortus and our channel partners continue to invest in additional sales and marketing resources to further penetrate the market. We believe that direct digital manufacturing applications in our channel are driving incremental growth.

Our 3D printers unit sales which includes Dimension, uPrint and Mojo surged 69% in the quarter, benefiting significantly from the launch of our revolutionary new Mojo 3D printer.

Sales of our new Mojo 3D printer have helped us by -- were helped by our new channel program to recruit sales agents that focus exclusively on selling our most affordable products, the Mojo and uPrint 3D printer lines. The growth in 3D printers follows several quarters of disappointing performance as the Company has now transitioned away from its distribution relationship with HP and is focused exclusively on its independent channel strategy to accelerate growth.

Unit sales within our Solidscape division also increased nicely during the quarter, expanding by 28%. Solidscape's new 3D product line introduced in the second and third quarters was a major contributor to the growth.

Third-quarter product revenue was $41.3 million, an increase of 27% over last year. Two factors drove our product revenue growth during the period. First, total system revenue grew by 27% over last year with Fortus system revenue a major contributor, increasing by 37%. 3D printer revenue grew by 10% in the third quarter, a dramatic improvement over the levels generated in recent periods.

We should note that 10% growth in 3D printer system revenue is lower than the 69% in 3D printer units during the period, given their relatively strong sales of our highly affordable Mojo 3D printer, the first commercial 3D printer priced under $10,000. The new Mojo represents a significant improvement in affordability of a commercial printer for the marketplace.

We continue to believe the market for 3D printers is price-elastic and the most affordably priced Mojo will expand our install base of systems going forward. A significant expansion in our install base should bode well for the sustaining strong sales of our higher margin consumable revenue in future periods.

Driven by the new 3Z product line, Solidscape's revenue increased by 37% for their systems during the third quarter.

The second factor driving product revenue growth in the third quarter was a 23% increase in consumable revenue over last year. The biggest driver behind consumable revenue was a rapidly growing Fortus line and DDM applications which generally use more consumables. We believe that continued strength in Fortus system sales and the acceleration in 3D printer unit sales during the third quarter are both positive indicators of strong consumable revenue growth going forward.

Third-quarter system revenue was -- excuse me, third-quarter service revenue was $8.4 million, which is up 13% when compared to the same period last year. We had a modest increase in maintenance revenue compared to last year's third quarter. I am happy to report revenue in our RedEye paid parts service increased by 26% in the third quarter as the business continues to experience strong demand, especially for large and complex production parts produced in the 900mc.

North American sales grew by 31% during the third quarter over last year and represented $28.9 million or 58% of total revenue. International sales grew by 16% to $20.8 million, representing 42% of revenue. Despite global concerns over Europe, sales into the region were up 16% over last year.

Non-GAAP gross profit was $28.5 million for the third quarter or 57.2% of sales versus 55% of sales last year. The strong growth in our higher margin products especially Fortus systems and consumables made positive contributions to gross margins.

Gross margins also benefited from a significant build in finished goods inventory, relative to the second quarter. I will discuss the inventory strategy in a moment.

Operating profit was $9.1 million for the third quarter versus $7.9 million last year. Non-GAAP operating profit was $13 million for the third quarter or 26% of sales which represents a 47% increase over the $8.9 million or 22% of sales reported for the same period last year.

We would like to address the significant cost related to our ongoing efforts to combine with Objet, which is the major component distributing to our non-GAAP adjustment in operating profit.

The vast majority of Objet-related expenses -- which are enumerated in a table at the end of our press release -- relates to advisory, legal, accounting, and integration services. As you are aware, we are working aggressively to complete a review by the Committee on Foreign Investment in the United States or CFIUS. We are incurring significant legal expenses related to this review.

However, we are very excited about the potential of combining these two growing and successful companies. Given the size and complexity of this transaction, we are investing in the proper support and advisory services that can allow us to maintain our focus on our business today and be better prepared once the transaction closes. We believe these investments are well spent and will provide for a stronger and more profitable combined company after closing.

Excluding non-GAAP items, operating expenses increased by 17.6% in the third quarter of the same period last year. The growth in operating expenses is a combination of R&D investments to support our new product development and SG&A expenses to support our ongoing growth.

Net income was $5.2 million for the third quarter versus $5.9 million last year. Non-GAAP net income was $8.7 million for the third quarter or $0.40 per share, a 42% increase over the $6.9 million or $0.29 per share reported for the same period last year. The three expensive items excluding in calculating our non-GAAP financial measures during the third quarter were the expenses related to employee stock options, expenses related to amortization of acquired Solidscape intangibles and the expenses associated with our announced plan to combined with Objet.

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

We used approximately $10 million in cash during the third quarter and finished the period with $65.7 million in cash and investments. The net use of cash was primarily a result of the planned increase in inventories during that period.

Inventory balances were $32.1 million at the end of the third quarter which is up significantly from the $22.5 million at the end of the second quarter. The significant increase in inventory during the third quarter is a result in large part of our planned strategy to transition from order fulfillment processes. Currently our order fulfillment is conducted from a single distribution center located in Minnesota. Given the needs of our growing Company and in anticipation of our combination with Objet, we are preparing for order fulfillment into additional distribution centers, one located in Asia and one in Europe.

We had anticipated closing the merger in Q3 and consequently made a strategic decision to have finished goods inventory in these international distribution centers as of September 30. Consequently, we built an additional $3.1 million of finished goods during the quarter in order to do so.

Included in this inventory was overhead of approximately $744,000 that would not have otherwise been capitalized during the quarter. As a result, our third-quarter earnings per share benefited by approximately $0.02 per share.

The new distribution structure will allow us to better address the growing demand for our products worldwide, especially as we begin selling the combined product portfolio provided by our ultimate combination with Objet Ltd.

Besides the finished goods inventory added to the distribution centers, we added approximately $2.2 million [assistance] finished goods due to a combination of actual Q3 product mix varying from our forecast and also to help meet Q4 demand while having less fourth-quarter production days due to the Thanksgiving and Christmas holidays.

Additionally, we made a strategic quantity buys of resins and certain components totaling approximately $2 million in the quarter. I am confident we will see a drop in our overall inventory levels by the end of the year. Accounts receivable was $35.9 million at the end of the third quarter and days sales outstanding or DSO was 66 days.

Overall, we were very pleased with our financial performance during the third quarter. It has been very gratifying to see the continued strong growth of Fortus and our direct digital manufacturing efforts. It has also been gratifying to see the recovery of our growth in our 3D printers and the strength of our channel. Most importantly, we continue to be very excited about combining with Objet.

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

Thank you, Bob. Stratasys revised its financial guidance for the fiscal year ending December 31, 2012, as follows -- revenue guidance of $194 million to $199 million versus previous guidance of $193 million to $198 million. Non-GAAP earnings guidance of $1.37 to $1.40 per share versus previous guidance of $1.31 to $1.38 per share. GAAP earnings guidance of $0.77 to $0.88 per share versus previous guidance of $0.83 to $0.98 per share. The revision in GAAP earnings guidance is primarily a reflection of the inclusion of the additional estimated impact of the merger-related expenses, most of which are not tax-deductible. This includes significant costs related to our ongoing discussions with CFIUS.

Financial guidance does not reflect the potential combined performance of Stratasys and Objet, nor does it include some of the estimated incremental transactional-related costs. In addition to excluding the impact of expenses associated with the proposed combination of Objet, non-GAAP earnings guidance excludes the impact of stock-based conversation expense and the amortization expense of acquired Solidscape intangibles.

Qualitatively, we have continued to reserve a favorable market environment for our products and we are assuming that we will continue for the balance of 2012.

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

Thank you, Shane. We are very pleased with our third-quarter results. Fortus 3D production systems continue to have strong positive momentum growing by 37% over last year, driven by the demand created by innovative new direct digital manufacturing applications across multiple industries. Our proprietary [fuse] Deposition Modeling Technology continues to be recognized as an innovative and cost-effective alternative manufacturing solution.

We are honored that Stratasys was recently chosen to be part of the National Network for Manufacturing Innovation. This Presidential initiative brings US industry together to develop innovative manufacturing solutions using advanced technology. Stratasys was chosen to participate, given our Company's leadership within the industry and our technology's potential uses within US manufacturing.

The potential DVM applications of additive manufacturing are truly wideranging. I hope all of you have had a chance to view the touching story of Emma Lavelle, a four-year-old girl that has overcome the limitations of a congenital disorder with the help of our 3D printers.

Emma was born with arthrogryposis, which is a disorder that can lead to muscle weakness and fibrosis. Using our Dimension 3D printer, researchers at the Alford I. duPont Hospital for Children in Philadelphia were able to create what little Emma calls her magic arms. The device is a custom-designed robotic exoskeleton made from our lightweight durable thermoplastic material that enables her to conquer limited joint mobility and underdeveloped muscles. If you have not viewed the case study and video which stars Emma, I would encourage you to access the link provided in our press release.

Our RedEye parts service business, which grew by 26% over last year, continues to experience strong demand, especially for large complex and highly durable production parts. We believe RedEye has a distinct advantage over those type of projects, given our ability to rapidly deliver high-quality parts produced on the Fortus 900mc made of production thermoplastic. RedEye currently operates 14 of our 900mc systems that are ideal for serving customers that need larger production parts. The automotive and aerospace industries have been instrumental to RedEye's recent growth.

Turning to yet another growth driver of the third quarter is Solidscape which experienced strong growth in revenue of 21% over last year during the period. Solidscape, which we acquired in April of 2011, is widely recognized as the leader for DDM wax casting applications that require high precision, ultrafine feature detail and smooth surface finish.

Solidscape's new 3Z product line introduced in the second and third quarters of this year represents a significant development for the Company and is a major contributor to their recent success. The new system includes an improved user interface new materials and enjoys a lower manufacturing cost relative to prior systems. The 3Z can produce parts at the highest possible resolution in the industry and is generating significant interest with jewelry and dental customers. The sales pipeline for 3Z is growing and we are optimistic about maintaining the positive momentum and, to further develop the end market opportunity for Solidscape's products, we are currently initiating a program to expand 3Z Series into the Stratasys US educational channel.

We have been pleased with Solidscape's performance following its acquisition last year and believe the transaction has been good for investment -- as an investment for our shareholders.

Turning to 3D printing, shipments for our Mojo 3D printer was a major contributor to our 52% unit sales growth for the quarter. We believe the Mojo is the first commercially available 3D printer priced under $10,000 and represents a significant milestone for our Company and the industry.

We project that the affordable price point combined with the system's ease of use and office friendly footprint will allow us to capitalize on a market that is price elastic by capturing incremental customers who had previously viewed 3D printers as unaffordable or unreliable.

Sales of Mojo have benefited from our new program to recruit sales agents that focus exclusively on selling our most affordable 3D printers, the Mojo and uPrint lines. We have expanded our sales agent program to include approximately 130 individuals and we will continue to grow the program in the coming months with a goal of 160 agents trained by January of next year. We believe that the Mojo platform combined with our new sales agent program will continue to drive an expansion in our 3D printer sales.

Now I would like to provide a brief update on the status of our exciting merger with Objet. As previously announced, we received HSR approval. In addition, over 99% of our voting stockholders voted in favor of this merger. We are currently waiting for the Committee on Foreign Investments in the United States or CFIUS to complete this review. Just over two weeks ago we announced that CFIUS granted our request to withdraw and resubmit our joint voluntary notice. This redraw and resubmit all was done at CFIUS's request. This provides CFIUS with an additional 45 days to review the merger. This review period will close on November 30. However, CFIUS can complete its review at any time during this period.

We are conducting detailed discussions with CFIUS. While I can't comment on the specific nature of our discussions, what I can tell you is that we are encouraged by CFIUS's willingness to work with us. We are optimistic that any national security concerns it may have surrounding the merger can be addressed during the 45-day review period.

Accordingly, we have agreed with Objet to extend the date under our merger agreement, the end state of that merger agreement until December 6 of this year. We believe this transaction will close within this fourth quarter.

We continue to be extremely excited about the compelling combination of Stratasys and Objet which will position us as a leader within our high-growth industry with an expansive product and technology portfolio, that the combined company will offer customers the right solution for a broad range of applications across a wide range of industry verticals. Our combined marketing and sales capabilities will provide extensive geographic reach which should help grow customers awareness of the many opportunities to deploy our product.

In addition, we will benefit from a world-class R&D team focused on developing new systems and consumables. We will be uniquely positioned to offer a comprehensive portfolio of innovative products and technologies and we have the scale, the team and the financial strength to achieve our goals.

We have completed our merger integration planning. We have crosstrained 18 resellers who will begin selling the combined product portfolio after closing. Additionally, we have built an integrated sales and marketing structure that is ready to serve the needs of the combined organization. In short, we are ready to hit the ground running and we look forward to realizing the value of this transaction for all stakeholders.

So, in summary, we are pleased with our third-quarter performance and are very excited about the future included our merger with Objet.

Okay, I will return with some closing comments, but first we 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.

Congratulations on another really nice quarter. So, first question here, I want to talk about 3D printer unit growth or maybe revenue growth to X Mojo. I would be curious to know if Dimension and uPrint are starting to see growth for you guys?

Yes. We are giving comments relative to the overall growth of the printers and we are not going to break out individual units. I think that the most important thing out of that is a growing trend that is reversed from previous, that we saw good growth in our 3D printers overall.

All right, that's fine. So then, Bob, I want to talk about operating margins for a second. So two-part question. So first of all, how much deal-related expense did you have in the third quarter that will start to go away once CFIUS is done with their final questions? And then ultimately, I'm trying to figure out I think I asked you guys previously -- business model targets gross specifically of the operating margin line, I may be wrong here, but I think previously you've talked about there's no reason you can't be in the mid- to high 20% operative margin line and we are there already and you had a huge step function on the operating margin that feels like there's more leverage left in this model.

So could you talk about the two long-term operating margin targets? Or maybe revenue levels that you'd need to hit that you would like a 30% operating margins?

I will take the easy part of that and then turn it over to Shane. The easy part of that on the deal-related expenses attached to the press release is a non-GAAP table and I think we've highlighted and identified how much of the merger-related expenses are in there.

Thanks, Bob. Troy, I think at this point we are not going to go beyond the long-term target operating model that we provided you when we announced the release with Objet. As we continue to work toward that combination and the Company begins to work together, we will obviously update that with any changes that we feel are necessary.

How about -- forgetting the Objet merger though, I mean how about Stratasys's stand-alone? You guys are showing great operating leverage here. So is 30% achievable in your organic businesses?

I don't think it is. One of the things that we highlighted within the quarter is we had a favorable impact of about $744,000 relative to our gross margin and about $0.02 earnings-per-share. And we have a very strong business model, but let's not get ahead of ourselves here either.

All right. Well I will cede the floor. Good luck, guys.

Thanks, Troy.

Steve Dyer, Craig-Hallum.

Good morning, nice quarter. So, just to be clear, you are not going to break out the Mojo review, Mojo shipment, anything of that nature?

No.

And you said about 700 and some thousand dollars. Does that amount to a couple of points on the gross margin line from the inventory build?

Yes I didn't do the -- I gave the specific number. I didn't do the calculation on it, how much points that was, but it is pretty easy math to do.

And could you walk me through just some mechanics of why that would be the case again? I guess you were talking a little bit about capitalization of some overhead maybe?

That is exactly what it is. We wanted to point that out because we did have a significant build in the inventory is part of our strategy to expand from one distribution center just here in North America to be able to better serve our customers and have additional distribution centers in Europe as well as Asia. And additionally, given the product mix and what we hope is strong demand coming in the fourth quarter, we build additional finished goods here within Minnesota.

All those things lead to a higher capitalization of overhead in the quarter, which then goes on to the balance sheets and is removed from the P&L. And as we have done historically, we'd like to tell you guys the straight story of the good news and the bad news of the things that we think are useful to our shareholders.

And is the plan going forward then that these three distribution centers will carry both your product as well as Objet?

Objet already has -- these are third-party warehouses. Objet already has the distribution model that has distribution centers on all three continents. Yes.

So they will all be coming out at the same place?

Yes. But that serves the customers.

And there is no incremental or little incremental CAPEX involved in rolling these out?

No, again like I said it is third-party distribution centers.

And then in terms of operating expenses for Q4, how should we think about that? How much merger-related expense do you anticipate in there?

I think if you look at their guidance from a non-GAAP basis versus GAAP basis, the primary drivers of that is obviously the amortization that we have talked which is going to be flat quarter over quarter and then the stock-based compensation again, which would be really flat quarter to quarter and the rest of the differences relates to merger-related expenses.

Okay. And then just as it relates to the tax rate, it looked high again this quarter. How should we think about that going forward?

Yes, you need to look at the tax rate on two bases. One is a GAAP basis, one is a non-GAAP basis. If you look at a -- on the -- GAAP basis it is extremely high because most of the expenses associated with the Objet merger are not tax-deductible. If you look at it on a GAAP basis and one difference on a year-over-year basis, there's not an R&D credit in 2011 that hasn't been approved and now there's questions about whether it would be approved or not. But if you look forward to Q4, I would say we would expect the tax rate in that 31% to 35% range.

And it has been approved for the last nine years, though, right? (multiple speakers).

It has been approved since 19 -- I've been in public companies since 1989 and we have always had an R&D credit. But there's questions of whether that will happen in 2011 or not.

Okay.

If the R&D credit, I want to be clear -- if the R&D credit does get approved, our effective tax rate will drop dramatically in the fourth quarter, but our guidance does not assume that the R&D credit is approved.

Okay, and that is a GAAP basis to be clear.

Yes. That would actually be GAAP and non-GAAP.

Perfect. Thank you.

Brian Drab, William Blair.

Good morning. Congrats. Just a couple of questions. First in RedEye, you are seeing really strong growth there. Are you offering any new services or in the services in a different way or increased marketing, you are seeing change in customer habits and just talk a little more about what is driving demand there?

The big driver there is similar to some of the trends that we are seeing with the system business. We are seeing the 900mc appeal to a lot of customers that are wanting large production parts with highly durable materials. As we mentioned in our prepared remarks, the aerospace and automotive industries are two industries that are accessing RedEye for those kinds of orders, similar to what we are seeing with our demand in some of our systems areas within those two verticals.

And I know you don't want to break out the revenue within these categories, but by model, but can you -- just reflecting on what has happened here over the last year at Fortus, you introduced the 250mc last July. I think it was late July. And I have seen great growth with that system. You had great growth again in the third quarter. I think there's some reason to think that maybe it would be difficult to show such strong year-over-year growth given the timing of the product introduction and such a successful product introduction. Did you -- can you comment at all on whether you saw growth in Fortus sequentially from the second quarter? And the impact that the 250mc is having on that growth?

I think sequentially in Fortus, in Fortus units you are looking at a more flat type comparison which is typical for the quarter given the seasonality trends within Europe. But having said that, I think you make a good point. The third quarter was the first anniversary of the -- where we -- essentially on an apples to apples comparison related to the full product line because we had a full quarter of 250mc in the third quarter of last year. So the year-over-year expansion that we talked about of north of 20% we thought was very impressive.

And then follow-up to that question, would you expect that the fourth-quarter growth for Fortus would slow the year-over-year growth?

Yes, we are not going to get into forecasting the specific [problem]. I mean that -- what our forecast for Fortus obviously flow-through to the numbers that we've provided you, but once again we are operating now comparatively speaking on an apples to apples basis as it relates to the full product line. And we have been very pleased with the growth we're seeing.

I think, Brian, if you look over the course of the year from our guidance at the beginning of the year to where we are at now, I think the difference between our guidance originally in the year has to do with the growth at Fortus. We have been very pleased with the continued strong growth within the Fortus and our DDM applications.

And then just one last housekeeping question. You may have given this number before, but just comparing your amortized intangibles year-over-year trying to determine how much solid-state contribute to EPS or how much amortization there is. Is it like $0.01 a quarter, $0.04 or $0.05 a year or am I off there?

Yes the amortization related to Solid -- that can be very specific. The amortization on Solidscape within the quarter -- and it is in our non-GAAP table, it is combined as $569,000 per quarter.

I've got it. Thanks. I missed that. Thank you.

It is in the footnotes, I think, to the table.

Jim Ricchiuti, Needham & Company.

Good morning. Bob, I just wanted to go back to the comment you just made about the strength in Fortus and that being one of the major contributors to the change in guidance versus you were -- versus where you were earlier in the year. And a comment that you made earlier in the call, just in terms of the incremental demand for DDM applications.

Is there any way to put that in context or help us understand? How do you measure what you are saying that gives you the view that you are seeing this kind of an increase?

I think clearly the unit that we are seeing in the revenue growth is higher than what we originally forecasted at the beginning of the year. In terms of the reasons for that, I think that goes back into qualitative factors of talking with customers and talking to our sales channel about what they are seeing out there from the demand from our customers.

So it is really more qualitative factors outside of the actual units as well as the revenue growth that we are seeing.

But it sounds like you are seeing something in aerospace and automotive, or -- is there anything you are seeing in specific verticals that is telling you that things are changing slightly in terms of usage?

I think the traction that we are getting with the higher end systems within Fortus, the 900mc and the 400mc, the capabilities that they have as it relates to materials, the ULTEM material that we introduced I believe two years ago now has worked itself into particularly the aerospace industry very, very well. The 900mc continues to be more accepted as a platform to be used within that industry for a broadening number of applications. So I think it's -- part of this is the fact that it has taken some time to gain some momentum with some of these product lines and applications in order to continuing to see that build.

Four years ago we brought in a Vice President in direct digital manufacturing that was focused on aerospace and automotive industry. About two years ago we brought in automotive specialists that came out of that industry. So I think you are seeing some of the fruits of those efforts that we started four years ago.

Got it. And if the numbers I have are right, it looks like your SG&A backing out the deal expense from Q2 and Q3, did your SG&A expense decline by that $0.5 million?

Sequentially?

Yes.

We didn't go back and look at that specifically. I think we talked about some high expenses grow into the Mojo launch in the previous quarter. So that is possible.

And so, looking at -- thinking about Q4, how should we think about the basic expense ex the old related expense? Any additional expense related to adding more dealers or any other unusual expense or is that kind of a number to build off of?

Yes -- go ahead, Shane.

I was going to say compared to previous years, we don't see anything unusual to what we have experienced in the first nine months as it relates to trends and relative to historical norms.

Last question. Just I was a little surprised -- continuously very nice growth in Europe. But I think you said it was up 16% year over year. And is there any color you can provide on that in terms of where you are seeing the strength in units? Is it Fortus? Was it consumables? Can you just may be expand a little bit about what you are seeing in Europe -- just in light of the macro concerns that we are all talking about?

Well, it wasn't in Greece.

Fair enough.

Yes, we experienced good growth in Europe of 16% in the quarter. Which is good when you consider the ongoing uncertainty within the region. Clearly both Germany and France as well as reasonable sales within Italy and the UK. But France and Germany are clearly the leaders in there. Europe is growing slower than North America and we will expect that to continue, but we have seen continued growth coming from our new products as well as our DDM initiatives.

So it is pretty balanced in terms of what you're saying in terms of the business, consumables, equipment, and the type of equipment?

Yes.

Thank you.

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

I just wanted to quickly follow up Jim's question. The 16% that you guys talked about earlier in terms of international growth, and that is all attributable to Europe? Or is much of this from Europe?

Yes. Our overall international growth was 16% and a subcategory within that was Europe itself which was 16%.

So both were 16% as well. I guess my question regarding -- is regarding the Solidscape. I know that it has very strong growth for the quarter, but do you also perhaps talk about contribution to overall revenue for that line? I know you guys don't talk about that generally for most of the models, but I just want to get a flavor of that.

Yes we don't break out the revenue as it relates to that separately and I actually mis -- I said that the system revenue grew 37% and I actually misspoke. The system revenue grew 24%. I think the most important thing here is what we are seeing is really strong growth from a company that we acquired last May. We have got three new products that were introduced and we are really excited about the acquisition that we have had and think that it was a good acquisition in creating value for our shareholders.

Lastly, I don't really want to dwell on it too much, the Objet merger. Obviously you have done a lot of investments and your expectations are definitely going to -- expecting it to obviously go through. But I just wanted to understand from your standpoint, what is the delay attributable to? Is this more timing or is there something that the government is looking at that we might not want to get to know a little bit more about?

I think there's two parts to that question. One is understanding a little bit about CFIUS itself. And CFIUS is made up of nine different governmental agencies that are dealing with a multitude of domestic, international issues. Our discussions with CFIUS have been very positive over the -- and productive over the past couple of weeks. While we can't go into specifics, we believe that they are resolvable and CFIUS is very committed to working with us.

The most important thing is that we continue to believe we will close this merger in the fourth quarter.

Yes, also, I think it shows how important our technology can be in the future of advanced manufacturing including certain applications within the government. You need to remember that FDM is a relatively new technology and new applications within manufacturing that's gaining a lot of traction for unique applications. And this also requires assuming the amount of education by us to CPS for them to better review and assess the technology's role in manufacturing applications in the future.

Thank you.

Steve Dyer, Craig-Hallum.

Just a follow-up with respect to Mojo. And I know it is very early, but anecdotally are you seeing that that is at all cannibalizing uPrint or are you finding it to be complementary, or what is the early feedback there?

Well, Mojo is all about expanding the market, going from roughly 20,000 units that we have today towards 100,000 and eventually 200,000. So within -- we can sell up and today we reported a record level of unit sales following our introduction of the new system last quarter. We might have some cannibalization, but Mojo should continue to attract a significant number of customers that would not have otherwise purchased the system and are motivated to buy a 3D printer because of the increase affordability provided by Mojo.

Thanks.

Andrea James, Dougherty & Company.

Thank you for taking my questions. Both of them just on the pending merger. First, what gives you confidence about the Q4 closing timeline? Can you just talk a little bit about where the confidence comes from? I just know sometimes government can drag their feet and I'm just wondering if maybe that is feedback that you have gotten, or yes, just what you're hearing.

Yes. Here is what gives us the commitment is as we withdrew and reapplied with CFIUS, it was with the understanding that we would have a date of November 30 for them to complete their review. So we have their commitment that this -- we will not have to withdraw again and they are committed to working with us to come to a resolution relative to this.

So it's a schedule that we have established with the government in doing our -- withdrawing and re-application that gives us the confidence. And that is why we continue to believe we will close in the fourth quarter.

So there is no guarantee, but we are confident that we will complete the review and then close to start our day when we follow it with the merger with Objet.

That is actually really helpful. Thank you. And then if -- I guess you talk about the word resolution and what does that look like for us? Or what can you say about what a resolution will look like right now? And also if there is some sort of tweak to some sentence somewhere or some kind of firewall that needs to be put up, does Objet just seem just as committed to working with you on that?

It's probably the most positive thing out of all of the CFIUS review is that the strength of the management teams of the two companies working together has been extremely gratifying. And the two companies are both committed to working on this together and resolving the issues. So we think we will get a favorable resolution to this that will be -- still create tremendous value for our shareholders.

Thank you so much.

Thank you for your questions. I would now like to turn the call over to Scott Crump for the closing remarks.

Okay. In conclusion, we are pleased with our third-quarter performance and are excited about the many initiatives that we believe will continue to drive growth for our Company. In addition to the many opportunities provided by our pending merger with Objet, we will have a strategy that is focused on developing our core technology platforms to meet the future needs of our customers.

In addition, we are optimistic about our near-term performance and have raised our outlook for the balance of 2012. We remain a financially strong company that is a leader within a rapidly evolving industry and look forward to completing another successful year. We would like to thank you for your interest in Stratasys and 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. Good day.