Stratasys Ltd (SSYS) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 Stratasys earnings conference call. My name is Sue and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

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

Thanks, Sue. And good morning, ladies and gentlemen. And welcome to today's conference call to discuss the Stratasys' fourth quarter and fiscal year 2012 financial results. My name is Shane Glenn and I will be moderating the call today. Thank you for joining us. On slide 2 you will find the details of the call today. On the call with us are David Reis, CEO; Erez Simha, CFO and COO of Israel; and Scott Crump, Chairman and Chief Innovation Officer of Stratasys. I remind you that access to this today's call, including the prepared slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will be made available on the investors section of our website later today.

On slide 3, a reminder that certain information included and incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project, or other similar words. But are not the only way these statements are identified. These forward-looking statements may include, but are not limited to, statements relating to the Company's objectives, plans, and strategies, statements that contain projections of results of operations or financial condition. And all statements, other than statements of historical fact, that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. The Company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and the perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements, include, among other things, the Company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Ltd. after their merger; the overall global economic environment; the impact of competition and new technologies; general market, political and economic conditions in the countries in which the companies operate; projected capital expenditures and liquidity; changes in the Company's strategy, government regulations and approvals; changes in customers' budgeting priorities; litigation and regulatory proceedings. And those factors referred to under Risk Factors, Information on the Company, Operating and Financial Review and Prospects, and generally in the Company's annual report for 2012 to be filed on Form 20-F, and other reports the Company files with the US Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made in the Company's SEC reports, which are designed to advise interested parties of the risks and factors that may affect its business, financial condition, results of operations and prospects. Any forward-looking statements in this presentation are made as of the date hereof. And the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Now I'd like to turn the call over to Scott Crump, Chairman and Chief Innovation Officer of Stratasys. Scott?

Slide 4. Thank you, Shane. I'd like to welcome all of you to the first quarterly conference call of Stratasys Ltd. as a combined company. We are very pleased with our accomplishments in the fourth quarter, including our strong financial performance. These are very exciting times with significant opportunities for long-term growth. Prior to closing the merger, our combined team spent five months developing a comprehensive integration plan to prepare for a success. The fourth quarter was a very busy time for our Company as we worked hard to close the game-changing merger between Stratasys and Objet. While at the same time conducting business as usual within our extensive sales and marketing organization. I'm happy to report that we pulled it off and we have established a world-class organization of employees and partners to lead the Company forward.

Now I'm also very pleased to introduce to you the new CEO of Stratasys, David Reis, who will lead our conference call today. Let's go to slide 5. Okay. David?

Thank you, Scott, and good morning, everyone. I would like also to thank you for joining today's call. As Scott mentioned, this is an exciting day for all of us. And we are very pleased with the results we have released today.

Switching to slide 6. In addition to our impressive financial results, we are excited about completing the merger of our two leading companies, and the positive implication it has on our future. We have initiated our integration plan for our worldwide sales and marketing organization, introduced exciting new products, and are planning for additional investments in products and channel development that we believe will extend application and drive future acceptance. We have a focused strategy and are confident that our new combined organization will be a leader in this rapidly developing market. And provide significant long-term value to our shareholders.

I will return later in the call to provide more detail on our strategy. But first I would like to turn the call over to our CFO, and COO of Israel Operations, Erez Simha, who will provide you detail on our financial results. Erez?

Thank you, David. I'm switching to slide 7. We have provided you a significant amount of financial information in today's press release and conference call presentation. In addition to the performance GAAP financial results, we have included (inaudible) pro forma non-GAAP financial results, which we believe more accurately reflect the combined performance of our Company. Within these non-GAAP presentations we would like to make special note of the significant acquired intangible asset amortization expense that is excluded. This intangible asset was created by the merger of Stratasys and Objet Ltd., for $163 million of intangible assets, which will be amortized over approximately 10 years on average. And will have a significant impact on our GAAP results during that period.

In addition to the amortization of intangible assets, other costs excluded from our non-GAAP presentation include a significant cost associated share-based compensation expense, the expenses related to completing our merger, and expenses associated with Objet therefore to go public in 2012. Our focus on today's call will be on the pro forma non-GAAP financial results of the combined company Stratasys Ltd. However, this non-GAAP financial measure should be used in combination with our GAAP metrics to evaluate our performance. Note that when we refer to GAAP metrics, we are referring to pro forma GAAP numbers prepared in accordance with Article 11 of SEC Article SX, which numbers give effect to the merger as though it had occurred on January 1, 2011 of the relevant year. With one-time merger-related costs excluded from the report. The non-GAAP to GAAP reconciliations are provided [in the table] reading our slide presentation and press release.

I'm switching to slide number 8. The merger between Stratasys, Inc. and Objet Ltd. was completed on December 1, 2012, creating an industry leader within the additive manufacturing and 3D printing industry. The two companies that merged to create Stratasys Ltd. have a history of strong growth, with a financial model driven by selling a broad portfolio of systems, consumables and services. In 2012, the Company generated $359 million in pro forma combined revenue. And a comparative organic increase of 30% over the $277 million in pro forma combined revenue for fiscal 2011. Pro forma non-GAAP gross margin improved by approximately 158 basis points in fiscal 2012 to 58%, driven by strong sales of our higher-margin products. And finally, pro forma non-GAAP net profit for 2012 grew by an impressive 60% over 2011 to $59.6 million, or 49%. We would also like to highlight the strong $28.6 million system backlog we carry into fiscal 2013.

I'm switching to slide number 9. Pro forma product revenue increased by 31% in 2012 over the prior year, driven by the strong growth of the Company's system and consumable revenue. System revenue increased by 33% in 2012, driven by demand for the Company's higher-priced Fortus 3D production system and broad portfolio of PolyJet 3D printers. Within Fortus, DDM applications and the introduction of the Fortus 250mc were the primary contributors to growth. Within PolyJet, the growth was broad-based as the channel continues to grow and mature.

Consumable revenue was consistently strong throughout 2012, increasing by 26% for the year. Driven by an acceleration in customer usage, as well as the Company growing its total [base of] system. Our high-end FDM and PolyJet system sales were the principal driver of consumable sales growth in 2012, given the product's ranked relatively higher consumable utilization rates. Pro forma service revenue increased by 21% in 2012 over the prior year, driven by a 90% increase in maintenance revenue and a 24% increase in revenue within Redeye paid past service. Maintenance revenue benefited from our growing install base of systems. While our Redeye benefited from strong demand for large and complex production parts.

Slide number 10. Pro forma unit sales increased by 29% in fiscal 2012 over the prior year, driven by sales of the Company's Fortus system, PolyJet 3D printers, and a [DCS] uPrint and Mojo 3D printers. Stratasys has now sold 29,816 systems worldwide on a consolidated basis.

Slide number 11. Pro forma non-GAAP gross margin improved to 58% in fiscal 2012 over the 56.5% for the same period last year. Pro forma non-GAAP product gross margin benefited during 2012 from the relatively strong growth in sales of the Company's higher-margin system and consumables. Growth in gross margin also benefited from the better overhead coverage provided by increasing sales volume compared to prior-year periods. As well as the buildup of finished goods inventory to stock third-party distribution centers in Asia and Europe. The stocking of third-party distribution centers, which remain as inventory on our balance sheet, was done in anticipation of completing the merger and initiating the combined all the (inaudible) human forces which is locally focused. Pro forma non-GAAP service gross margin was lower in 2012 due to higher new product introduction service-related costs. We proactively initiated sales related to the upgrades to certain systems to improve customer satisfaction.

Slide number 12. Pro forma non-GAAP results and development expenses increased by 15% for fiscal 2012 over the last year. Driven by new systems and material development initiatives. Pro forma non-GAAP SG&A expenses increased by 32% for fiscal 2012. The increase was driven by changes in our product distribution strategy in volume independent sales agents, which resulted in increased sales commissions paid to those agents. SG&A expenses were also impacted by significant expenses surrounding our new Mojo 3D printer launch, and increased expenses for strategic initiatives to increase our market awareness. Pro forma non-GAAP operating income increased by 46% for fiscal 2012, driven by strong sales, as discussed previously.

Slide 13. Our fourth-quarter pro forma non-GAAP results were also impressive. Especially when you consider the significant amount of resources committed during the period to complete our game-changing merger. And initiate an integration plan for our worldwide sales and marketing organization. The Company generated $96.4 million in pro forma combined revenue in the fourth quarter, an organic increase of 23% over the same period last year. Pro forma non-GAAP net profit increased by 40% over the prior year to $16.3 million, or $0.40 per share.

Slide 14. Pro forma product revenue increased by 23% for the fourth quarter over the prior year. And similar to fiscal year results, was driven by strong growth of the Company's systems and consumables revenue. System revenue increased by 25%. And consumable revenue increased by 17% for the fourth quarter. Pro forma service revenue increased by 25% in the fourth quarter over the prior year, driven by a 23% increase in maintenance revenue, and a 33% increase in revenue within our RedEye paid parts service. Similar to fiscal year, maintenance revenue benefited from our growing install base of systems. While RedEye benefited from strong demand for large and complex production parts.

Slide 15. Pro forma unit sales increased by 17% in the fourth quarter over the prior year, driven by sales of the Company Fortus, PolyJet and Mojo systems.

Slide 16. Pro forma non-GAAP gross margin improved to 57.8% in fourth quarter over the 56.9% for the same period last year. Pro forma non-GAAP product gross margin benefited during the quarter from the relatively strong growth in sales of the Company's higher-margin system in consumable. Pro forma non-GAAP service gross margin was lower in the fourth quarter due to the factor we discussed earlier.

Slide 17. Pro forma non-GAAP research and development expenses increased by 25% for the fourth quarter over last year. Driven by a new product initiative discussed earlier. Pro forma non-GAAP SG&A expenses increased by 29% for the fourth quarter over last year, driven by the higher sales commission and market development initiatives. Pro forma non-GAAP operating income increased by 9% for the fourth quarter over last year, driven by the strong growth in sales. Slide 18. Slide 18 provides you an overview of the major growth drivers we have discussed for this period.

Slide 19. The following slide provides you a breakdown of our geographic sales. Sales growth in North America and Asia-Pacific regions continued to outpace the EMEA region.

(inaudible) specific item in slide 20, 21 and 22, which provides you reconciliation to GAAP for the non-GAAP measures we have discussed throughout our presentation today. This information is provided for your reference.

Slide 23. We increased our pro forma combined cash, cash equivalents and investments balance by approximately $28 million in 2012 over the prior year. And finished the year with approximately $156 million. Inventory balances were $68 million at the end of fiscal 2012, which is up significantly from the $48.8 million at the end of 2011. Inventories are, in last part, from our planned strategy to transition our other procurement processors for the Stratasys end product line to include fewer regional distribution centers, one located in Asia and one in Europe. Inventory was also higher in anticipation of future growth in sales. Accounts receivables was $64.7 million at the end of fiscal 2012. And days sales outstanding, or DSO, was 62 days.

Slide 24. Revenue guidance of $430 million to $445 million for 2013 indicates growth of 20% to 24% over the $359 million pro forma revenue reported for fiscal 2012. Market activity for the Company's product has increased substantially in recent months, driven in part by the significant attention that 3D printing has received from the trade and maintenance media. We expect this favorable environment will continue in 2013. Revenue growth is expected to be relatively strong in second half of the year, as we progress through our integration plan. And revenue synergy from selling the combined product portfolio begin to end.

Guidance assumes that the major integration plan will be a major focus in 2013. And that the Company will make significant investments to fund growth, including incremental sales, marketing and R&D expenses. Non-GAAP earnings per share guidance of $1.80 to $1.85(sic-see presentation slides "$1.95") per share represents growth of 21% to 31% over the $1.49 in pro forma non-GAAP earnings per share total for fiscal 2012. Our guidance assumes relatively stable gross margins relative to the level observed in the pro forma non-GAAP fiscal 2012 results. As well as partial realization of some merger-related synergies. The most significant cost synergy in 2013 coming from income tax expense. As the result of the merger, we began to realize some step-in synergies in the fourth quarter. And we expect to generate additional synergies in the coming months, which will lower our effective tax rate compared to rate for 2012.

Our guidance also incorporates significantly higher investments to fund growth, which includes incremental sales, marketing and R&D expenses. Non-GAAP earnings guidance excludes the estimated impact of some additional merger-related expenses, the impact of share-based compensation expenses, and the significant expense associated with amortization of acquired intangibles. The reconciliation to GAAP is provided in the slide presentation and our press release.

Slide 25. Our long-term operating model target includes annual revenue growth of at least 20%, non-GAAP operating income as a percent of sales of between 20% to 25%, an effective tax rate of between 15% to 20%, and non-GAAP net income as a percent of sales of between 16% to 21%.

And moving to slide 26. In summary, we are very pleased with our fourth-quarter and full-year financial results. We generated strong growth on a pro forma non-GAAP basis in both revenue and net income. And experienced expansion in our gross margin, driven by sales of our higher-margin products. And finally, we are positioning the Company for strong growth in the future for strategic investments in R&D and general development.

Now I would like to turn the call back over to David Reis who will provide you with more details for strategic overview. David?

Thank you, Erez. We are on slide 29. I would like, first, to provide you a quick update on where we are standing with the merger between Stratasys and Objet. As you know, we completed the merger through an all stock transaction on December 1, bringing together two companies with complementary product lines, as well as shared commitment to innovation and excellence. So far everything is going according to plan. The new Stratasys now offers customers a broad array of innovative 3D printing and direct digital manufacturing solutions from a single destination. We can deploy this comprehensive product portfolio across a large and more experienced sales and marketing team. Our market reach has extended. And we are beginning to see opportunities for cross-selling of the complementary product portfolio into the combined company large install base of systems.

To begin developing the cross-selling opportunity, we completed the cross-training of 18 resellers in December that began the task of selling the combined product portfolio on January 1, 2013. We are currently accelerating the cross training of additional resellers, and expect to have the channel fully trained within 18 months. We are very excited about the long-term potential of this merger. And we have initiated a detailed plan of integration of our two companies. However, we do not underestimate the sizable costs we have at hand, and the significant resources required to integrate our sales and marketing organizations. The integration plan will be a major focus throughout 2013, which we believe will ultimately create significant value through the creation of stronger company. The financial guidance we have provided today is driven by a balance between driving new-term growth with the need to focus on initiatives that build long-term shareholders' value creation.

Slide 29. Our industry has received a lot of attention lately. I think it's important for me to take a moment to review our market opportunity and the unique developments we are observing within the industry. And combine that with a discussion of the strategies we are implementing to exploit those opportunities. We are at the forefront of a significant change within manufacturing, as companies are utilizing our products to change the ways they conceive, design and make things.

Slide 30. This opportunity starts with the rapid growth of 3D design and analysis tools that are becoming more functional and easier to use. There are approximately 40 million total CAD seats, and more than 5 million 3D CAD seats currently worldwide. And we expect those numbers to continue to grow. However, despite this large addressable market, we estimate fewer than 50,000 professional 3D printers have been installed through the end of 2011, suggesting a significant market opportunity for us.

Slide 31. In targeting this opportunity, we have a strategy to expanding within the traditional 3D CAD market, while focusing on providing our customer across multiple verticals with expanding number of applications. We believe we can achieve this by focusing on developing innovative new systems and materials. And by investing the new avenues of distribution to drive adoption. As we grow and expand our install base of systems, we will benefit from business model that offers significant leverage potential through the sale of high-margin consumables. We believe we are in the early stage of multi-year growth opportunity.

Slide 32. We now employ three very distinct technology platforms. We offer advanced FDM technology, which is great solution for functional prototyping and application requiring high level of durability. We also have PolyJet technology, which provides high resolution printing for applications that require high feature detail. And also Solidscape technology, which is great for sophisticated investment casting applications. We offer customers the best of all worlds. Whether the customer needs multi-material capabilities or durable materials, prototype or finished parts, Stratasys can meet their needs with a product or service.

Slide 33. Our proprietary technology support an impressive portfolio of high functional and complementary 3D printing and direct digital manufacturing systems. We can provide the right solution to customers to address their needs across the entire 3D design and manufacturing spectrum. From concept modeling to direct digital manufacturing, we expect to have a solution.

Slide 34. We serve a broad range of industries and have products ranging from entry-level to high-end systems. Within the Idea series, Stratasys offers several leading products, starting with the module which are used for conceptual and functional modeling. These products help give form to designers' ideas quickly, in a format that is highly accessible, affordable and easy to use. Within the Design series, we offer products that help companies refine and finalize their designs before committing them to production. This includes high-performance prototyping and functional testing, as well as systems which offer true-to-life design for visual verification. Within the Production series, we offer products which produce finished parts, or produce complex work patterns used in the investment casting process of finished parts.

We now offer solutions across the entire design and manufacturing spectrum, from conception modeling, to fit-and-form prototyping, to functional prototyping, and up to direct digital manufacturing. Our portfolio of products will continue to extend, given our focus on investing in technology and new products. For example, we recently introduced the Objet1000 Euromold in November. The Objet1000 is the wide form of 3D printer that allows for rapid printing of industrial-sized parts that are highly complex and detailed. The new system features a dual chamber that is more than 14 cubic feet in size, 10 times larger than the build volume of our next larger PolylJet system. The system is ideal for producing big-scale models in industries that make large end products such as automotive, aerospace, household applications, defense systems, and industrial equipment. The new system is priced in the premium. And offers the full functionality of the Connex machine, with the choice of more than 120 different materials. The Objet1000 is the third major system platform introduced within the last six months period for Stratasys, which includes the Solidscape 3Z and the module products.

Slide 35. The value proposition for our customers is clear. For design applications we help liberate creativity by allowing the designer to test multiple ideas before committing to one design. Our printers help designers get their products to market faster by shortening the design cycle and accelerating lead times. In addition, our printers help eliminate costly design errors by making sure the final product is true to the intended design. Slide 36. A great example of how our product provides value in the design process is with Microsoft and the design of their new tablet surface, which was refined and finalized by evaluating several hundred prototypes made on the Stratasys' 3D printer.

Slide 37. For manufacturing application, we give manufacturers a more cost-effective process to make usable parts and processes that allow for greater manufacturing flexibility and mass customization. Slide 38. One more innovative manufacturing application we have observed recently was on the runway of the Fashion Week in Paris. An elaborate 3D printed skirts and cape created in collaboration with Professor Neri Oxman from MIT was displayed at the show. The 3D printed skirts and cape were produced using Stratasys' unique Objet Connex multi-material 3D technology, which allows a variety of materials property to be printed in a single build. This allows both the hard and soft materials to be incorporated within the design, crucial to the movement and texture of the piece. The prints are quite amazing, and I encourage you to review them by accessing the video provided on our Investor Relations website.

Slide 39. Growing our marketing and sales capabilities, as well as our combined network of resellers, would be crucial or critical to future growth. We currently partner with approximately 260 resellers and sales agents worldwide, supported by 42 direct channel managers in more than 70 countries. We believe we're the best channel in the industry. But we'll continue to invest aggressively in channel development over the coming quarters. We've identified three areas of focus for the development of the specific channel strategies, which include dental, education and the DDM markets. We believe those markets are significantly underdeveloped for certain additive manufacturing applications, and require unique channel strategies to fully exploit them.

Slide 40. In summary, I would like to emphasize the tremendous strategic opportunity for our customers, our channel partners, and for our employees around the world. The merger of Stratasys and Objet has placed the Company in the leadership position within a market that is developing rapidly. Going forward, our strategy will identify new applications for our proprietary 3D printing technologies, while extending beyond the traditional CAD market to various vertical markets and applications. Drive farther market adoption through lower-capacity entry-level systems. Leverage our global reseller network to expand our customer base and farther penetrate existing customers. Maintain and extend our technology lead. And grow through complementary acquisitions. We plan to execute this strategy while maintaining the very attractive business model that has a significant leverage potential as we grow our business.

Me and all of us at Stratasys are passionate believers in the value and power of 3D printing. And we are here to lead the development of this industry. We would like now to address any questions you might have. Operator, please open the line for calls.

(Operator Instructions)

Brian Drab.

Welcome to the Company, David and Erez. And congratulations on completion of the merger. The first question I had is, just I think people are going to be trying to discern what the growth was at the legacy Stratasys business in the quarter. And what the growth was at Objet. And it's hard to discern that from what you released. So maybe if I could just start with that question. What was organic growth in the legacy Stratasys business and legacy Objet business in the fourth quarter?

Brian, we are not providing standalone performance of the Company. We believe that the merger has combined certain functions of the two companies as of December. And we believe it provides a clear picture of our Company. Looking forward in 2013, there's really no meaning to differentiate between the Objet legacy and the Stratasys legacy. We manage it here as one product line, one business. And we don't evaluate it as two businesses, as standalone.

Okay. I can understand the need to talk about the Company that way going forward. I was hoping we could just get a sense, since everyone's estimates and models for the quarter were largely focused on the Stratasys business, it would have been interesting to get an idea for the health of that standalone business one last time. But I understand. One specific question then about the sub segments. Within maintenance, I thought it was interesting that the Stratasys business year to date as of September had only grown at a mid single-digit rate in that maintenance segment. But for the full year, it looks like maintenance revenue was up 19%. And I'm just wondering if you could, for the combined entity -- and I'm wondering if you could provide any insight into the momentum in Objet's maintenance business, which appears to have been up well over 30% for the full year 2012.

Yes, Brian, for sure. And, actually Objet was growing faster the last three years. And service revenue (inaudible) was completely related to the growth in the install base. So when you look at the service revenue of Objet as a standalone, which you don't have it, you could expect that Objet will grow faster than the average of the combined company generally. But the growth that you see in 2012 was mainly related to the fast growth of the (inaudible) for the last few years.

Okay. I'll get back in line. Thank you.

Troy Jensen.

Congratulations on a nice quarter, gentlemen. How about two quick questions here. Backlog to me looked pretty interesting. It was $28.6 million. I went back and looked at the K for last year, I think for Stratasys standalone it was $12.5 million exiting 2011. So curious to know if you guys view $28.6 million of backlog as an excessively high number. Maybe not excessively, but just a high number. And what was Objet's traditional backlog coming into a quarter?

The backlog level of $28.6 million was obviously high. Give us a level of confidence entering 2013, in Q1 and also the full year of 2013 when we gave our guidance on top line. And yes we consider $28.6 million as a high amount of backlog.

To that point, Erez, was there just orders came in late in the quarter, you couldn't turnaround quick? Is there a lot of Objet1000 in that backlog? Can you just touch to why it was so high this quarter?

There are no Objet1000 at all in the backlog. It's mainly an order that we had to ship, post end of the year orders that we got, and we had to ship in Q1, and partially small amount in Q2. And also that we didn't have the time to ship toward the end of year that we are seeing actually in the last few days of the quarter.

Okay. And then one for David. David, with the integration in front of you, what component, or is there a certain area that you think is the most risky thing to integrate, or one that keeps you up at night the most?

First of all, like I said in the presentation, I think that so far so good. We spent a substantial long time in planning this integration. Maybe too much time, unfortunately. So we are well-prepared and we have plans for all the different avenues of integration. At this point of time, I don't have any specific areas that I am more concerned about. In general, (inaudible) I cannot under-estimate the challenge. It's a major challenge. So far so good. I must also add that both employees, channel partners, resellers and other partners are extremely enthusiastic and excited about it. So I don't have a -- I can't give you a specific area of concern. It's a complex operation.

All right. Well put. Good luck this year, gentlemen.

Paul Coster.

I'm more interested in the future than the past, of course. But whether you're referring to revenue that you've already reported or what you're seeing in the pipeline and backlog, can you give us some breakdown of where your sales are going in terms of industry verticals? Where the fastest growth is. And also what the application mix is between idea, design and production.

I think that looking at 2013, we cannot specify a specific vertical or application to drive the growth. I think that we are growing in all service line, in all segments. In 2013 it's naturally, really difficult to grow in such numbers for one vertical or one application which is specifically growing. However, I think that, looking at 2013, part of the growth will come through our ability to focus on verticals that we were not focused on in 2012 as a result of the merger.

If I can add, there's a great opportunity for us . We mentioned it a few times in the past. We are in only initial stage of attempting to cross sell a product feature with a complementary nature to a very large combined install base. Now, this will take time but it is definitely a growth engine in the coming few quarters.

So the easiest growth path is to sell more to your existing customers rather than find new customers?

No, I think the growth strategy has a few pillars. One of them is continue what we did before, extending within the CAD market to traditional, let's call it, traditional customers of Stratasys. Another pillar is to try and sell our complementary offering to our customers that we already sold previously. And like Erez said, the third pillar is expanding with specific go-to-market strategies to few verticals. And I mentioned them in my presentation, which are the education, the direct digital manufacturing, and dental/medical markets.

Okay. Thank you. And then looking into 2013 guidance, do you anticipate a significant shift in mix? For instance, will consumables grow in 2013 or do you still think we're at the bleeding edge of system sales?

We assume that we will grow through product consumables and service in 2013. There is no one product type or sales type that will grow faster than the other. We will still generate revenue from the install base in growing phase and in growing through the hardware sales.

Excellent. Thank you very much. I'll hop back on the queue.

(Operator Instructions)

Jim Ricchiuti.

The question I had is, Erez, maybe you can address it, you talked about stable gross margins in 2013. I'm just trying to get a sense as to where you see the margins going in the service business, which was -- maybe you could elaborate on the decline -- 32.5% for Q4. Does that improve? And what happens? How should we think about product gross margins?

Firstly, related to the services, in 2013 we expect a higher gross margin compared to Q4. Q4 was, I think we had issue with the new product implementation, introduction. And we incurred some cost for ongoing upgrades that we did to improve satisfaction. I think that overall gross margin -- overall gross margin, not only one service but product and service -- in 2013 we should assume that the gross margin will be staying more or less the same to 2012. Although we see a little bit higher gross margin in service, which has minor impact on the overall gross margin.

Okay. And R&D expense, as we think about that for the full year, somewhere in the 9% area of revenues? Or could that be a little higher just given the investments you're making?

We didn't provide any guidance for the percentage of R&D out of sales. And we did say that we are going to invest heavily in R&D in the channel, in order to support the growth in 2013. And you should assume higher operating expenses in 2013 compared to 2012.

Okay. And one final question and I'll jump back in the queue. When you talk about revenue growth being relatively stronger in the second half of the year, and I look at the range of revenues that you're giving for the full year, if we just look at the low end of the range, I think in the past, if we think of both standalone Stratasys and standalone Objet, it looks like you're getting somewhere around 53% to 55% of your revenues in the second half of the year. When you talk about relative to second half of the year, the upside to the high end of that range, is that how we should think about the potential for a stronger component of the revenues in the back half?

Jim, what we want to say here is actually that second half of the year in terms of revenue will be stronger compared to the first half. Not to be divided 50-50. And this is also part of our ongoing effort to finalize the cross-selling and cross-training on the channels. Which I think that we will be able to see the results in H2. Because anything that we look at the upside that will come in the second part of the year, but we want to say that the revenue will not be divided equally between the two half of the year.

Okay. Which has been the case all along. Okay. Thank you.

Steve Dyer.

Just a follow-up on the earlier backlog question. Can you remind me how backlog is defined, that number?

The backlog is our [CM] PO which we haven't had, and it was not shipped yet to the customer.

And that's generally shipped in the subsequent quarter? Or is that not a safe assumption?

Most of it is shipped the following quarter.

Okay. Question on the addressable market. You talked about five million-plus 3D CAD seats. And I think you had said, either David or Erez, 50,000-ish professional systems shipped since the inception of the industry, I think is what I heard. Can you help me reconcile that with the 29,000 combined last year? Are you just assuming that some subsection of that is professional?

Let me elaborate on the numbers. The 29,000 printers, the total number of printers that we've sold like Stratasys, the combined new Stratasys, between Objet and Stratasys Inc. since inception, okay? The 50,000 is the number which we estimate was sold totally in the market in the professional market since the inception of our industry.

Okay. That's helpful. Thank you. One last question and I'll hop back in line. CapEx expectations for '13?

Again we didn't provide any CapEx expectations for 2013. I think it will be -- the CapEx investment in 2013, in order to support the growth, will be higher compared to 2011. It will be around the line in the infrastructure of the facility (inaudible) systems in preparing ourselves for additional production capabilities and to support the demand for 2014 and '15.

Okay. Thank you, guys.

[Andy Pizzanto].

First question, would you help us understand how Stratasys achieved the targeted effective corporate tax rate of 15% to 20%? I'm thinking that you have a low tax rate in Israel, but at the same time the majority of sales, up to 50% of revenues, come from North America? And how long will it take you to get there?

The effective tax rate that you are talking about on the long-term model is a mix between the effective tax rate in the US, the effective tax rate in Israel, and the effective tax rate around the world in the countries we have any activities. I think that looking in 2013, we should take into consideration that we will be close to the higher part of the range of the long-term model. And I guess it will take us two to three years to go down to the lower range of effective tax rate of the Company.

Okay. And then second question, would you be able to share how much of your revenues come from medical surgical?

We did not and we do not provide such information.

Thank you.

Andrea James.

I wanted to see what the inflection point was in your sense of where the bigger expansion opportunities are. Is it moving toward more lower-cost systems? Or maybe moving up the value chain a little bit into just different verticals? I'm just curious where you see those things intersecting.

I think that we are lucky, to the extent, that we feel our growth going in more than one direction. On the one hand, we are going to expand our offering and reach, let's call it, in the higher end of the market in DDM applications, by providing better production printers and materials to suit this segment of the market. In (inaudible), we will increase our penetration in the lower end by introducing less expensive, lower-end, easy-to-use office-friendly printers. And in parallel to those let's call them two main growth directions, as I mentioned earlier, we are going to expand and focus even more in the coming years on vertical applications that require special solutions, either from hardware or a material standpoint. And one example is the dental market. Another example is the DDM direct digital manufacturing market.

And then as you focus your R&D versus acquisition strategy, how do they play into what you just said, and how each one gets you there?

At any point of time we need to consider and balance between trying making it on our own, or via acquisition. Find complementary technologies that will help us to achieve the goals I mentioned earlier. It's an ongoing process which we are doing on a regular basis.

Okay. Thank you. And one final, just on your 29,000 cumulative sales, how do you look at your attrition rate? Or could you give us a sense of your own install base?

It's very difficult to say what the active install base within those 29,000 printers. Very difficult to say. I cannot give an answer on this issue.

Okay. Thank you.

Holden Lewis.

I wanted to ask, in terms of the sales channels and the cross-selling, how do you seed those sales channels with machines? Or do you seed them with machines? Is this a case where you're going to have to seed all the Objet guys the Stratasys machines, and vice versa? And does that have any impact on your revenue stream that might be a short-term benefit? How do we view that process?

Again, when you look on our historical combined customer base, you see more than a few. A certain percentage of customers that, when the companies were separated, elected to buy both technologies. And the reason is, it has to do with complementary nature of the technologies and the different fit of the different technologies to the different stages of the design and production. The advantage which is coming out of the merger is that suddenly those install base customer names are open, in front of the Company, in front of the channel, and the products are available for the resellers. So the assumption here is that there is a need for both products. And some of the customers will elect to buy the other complementary product when it's going to be offered to them. Again, as I said, we have quite a lot of example of customers that did it before.

Right. I guess what I was curious about is the resellers themselves. Do you need to sell units into the resellers, that they have both Objet and Stratasys products to demo? How does that work?

Some of the resellers that would like to sell the complementarity of products, and it's most of them, they will probably buy demo machines in order to demo their new equipment. The answer is yes.

Okay. And does that benefit the revenue guidance that you provided in '13? The reason I'm asking, obviously, is that, as they do that, it seems like that would be a one-time tailwind that on the back end, on the backside of that, you wouldn't have that benefit anymore.

Yes. But we see it now absolutely insignificant to the 2013 guidance that we gave.

Okay. Got it. Thank you. And then, lastly, can you just give a sense of what the D&A that you expect in '13 is likely to be?

Again, we didn't provide any guidance also here -- are you asking about GAAP, non-GAAP intangibles included?

Yes. Just the total D&A number.

You had a slide that reconciled between the GAAP and non-GAAP in 2012. And you should assume that 2013 will be at least the number in 2012.

Okay. Thank you.

Jim Ricchiuti.

David, the merger closed about six months beyond when you initially were thinking. To what extent are you able to recapture some of the lost time in terms of realizing some of the integration synergies this year? And just a follow-up with respect to the reseller channel.

Jim, first of all, it was a substantial delay. The good news is that when we ramped it up again, I think all the different partners and stakeholders, from employees to channel partners, jumped on the wagon very, very fast. So basically, if you try and get my estimate, we basically had a delay or shift of between a quarter, maybe a little bit more than a quarter, in our integration plan. We originally were planning to close on October 1, we closed on December 1. So this gap was not closed. Again, it's being pushed into 2013.

Okay. And with respect to the reseller channel, about 18 months from now you expect to have it fully complete. Where would you anticipate you'd be by Q4 of this year in terms of the reseller channel? What percent of the reseller channel do you think would have access and be fully trained on both product lines from both standalone companies?

Maybe I'll answer in this way. Even if the training would be linear progress, the potential revenue, or the resellers which are going to be trained through the year, or the potential revenue, is going to be faster than the number of resellers. Because obviously we're going to stagger the resellers in certain order. And therefore, if you ask me by the end of the year what percentage of resellers are going to be trained, I'm not sure, but the revenues potentially could be generated by those resellers, be larger in percentage of the number of resellers that were trained.

Sure. So, in other words, you obviously are going after the resellers that are going to account for a bigger part of the revenues. Should we think of it in terms of an 80/20 rule by the end of this year?

Not sure if it's 80/20 but what you said is correct. Obviously we're trying to train the guys that can provide faster revenue in the early stage of the process.

Okay. Thanks a lot.

Paul Coster.

David, I wonder if you'd be kind enough to share with us your win rate in the photopolymer jet set? Or if you can't share the actual statistic, directionally where you're headed. Is it improving with the new materials you've got onboard, or is it stable, or whatever?

We are not disclosing our win rates, Paul. It's not something that we are sharing.

Okay. Got it. And then the other question I had was the product cadence. Actually, no. A broader question than that. Which is, 2013 is obviously an integration year. What would you describe 2014 as likely to be? Is it execution and growth year? Do you see acceleration then?

I think it's really too early to discuss 2014. We need you to see at least two quarters in 2013 to be able to discuss 2014.

Okay. Maybe a more specific question. The product cadence, the rates of new product introduction, how do you think that will evolve over the next 18 months or so?

I think we said earlier we're not decreasing in any way our R&D expenditure. The opposite. And therefore I don't expect, with the limitation of introducing products and R&D timetables, I don't foresee that the overall rate of bringing new products to the market should change.

All right. Thank you very much.

Brian Drab.

One of the recent questions just brought another question to mind for me. Just wondering if you could talk a little bit more about the potential for the channel combination resulting in a one-time benefit to sales. And I'm just looking at the total number of resellers that you have now, and that's about 260. And even if you say, assume maybe 20% of those buy some demo units in the first quarter, and assume maybe that's $100,000 a reseller, that could result in a $5 million, $6 million benefit in the quarter, based on those assumptions. I don't know if those assumptions are way off or not. I'm hoping you could comment on it. But the combined company did about $83 million in revenue in first quarter of 2012. And that $5 million or $6 million would result in 5 or 6 points, or even more than that, of revenue growth year-over-year. So I'm just wondering if you could comment on any of those assumptions. And let me know if you still think that it's immaterial. When you said it's immaterial, is it immaterial for the full year or the quarter? And where am I off in those assumptions?

Brian, I think it's -- the plan that we have today on the table doesn't necessarily include the sales through demo machines that they have to buy. We have other plans and other (inaudible) that not necessarily the demo. We will not offer demo to all the resellers, but only to the ones who has the potential to ramp up the business and contribute plus to sales of the combined company. The guidance that we gave for 2013 do not include any significant amount of demo machines. And if this will not be the case in Q1 and Q2, we will obviously disclose it.

Okay. Thanks.

I'd now like to hand the call back to David Reis for closing remarks.

I'd like to thank everyone for joining us for the call. We look forward to speaking with you next quarter. Goodbye and thank you very much.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.