Stratasys Ltd (SSYS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q1 2013 Stratasys earnings conference call hosted by Shane Glenn, our VP, Investor Relations. My name is Gary. I will be the coordinator of your call today. During the presentation, your lines will be on listen-only. (Operator Instructions). I would also like to advise all parties the conference is being recorded for replay purposes. And now I would like to hand over to Shane. Please go ahead.

Thank you, Gary. Good morning, everyone. Thank you for joining us to discuss our first-quarter financial results. On the call with us today are David Reis, CEO; Erez Simha, CFO and COO, Israel; and Scott Crump, Chairman and Chief Innovation Officer of Stratasys.

A reminder that access to 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.

A reminder that certain information included or 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 or operations or of financial condition and all statements, other than statements of historical facts, 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 their 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 the 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 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 operation 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 would like to turn the call over to Scott Crump, Chairman and Chief Innovation Officer of Stratasys. Scott?

Thank you, Shane. I would like to welcome you to our first-quarter conference call. In addition to our strong financial performance, we were very pleased with our many other accomplishments in the quarter. I am pleased with how our team has come together since completing our game-changing merger. The past five months have provided me with additional confirmation that we truly have a world-class organization that is well positioned to lead the way within our rapidly growing industry. I believe interest in additive manufacturing solutions has never been higher on a global basis and the game-changing combination between Stratasys and Objet is very well-timed. I believe that we have only begun to meet our potential. Now I would like to turn the call over to our CEO, David Reis. David?

Thank you, Scott and good morning, everyone. I would like 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. We generated record revenue and earnings during the first quarter reflecting a continuation of the strong demand for our innovative products and services worldwide. We are pleased to report that our plan to integrate and combine sales and marketing organization as a result from the merger is proceeding as planned. The hard work of integration is being accomplished while we remain focused on our customers and core business.

In addition, we introduced an exciting new product in the first quarter for the dental market and have been investing in new marketing campaigns to raise brand awareness and drive future growth.

And finally, following our strong first quarter, we remain confident in our growth plans for 2013. I will return later in the call to provide more detail on our first-quarter development and strategy, but, first, I would like to turn the call over to our CFO and COO, Israel, Erez Simha, who will provide you details on our financial results.

Thank you, David and good morning, everyone. We have provided you a significant amount of financial information in today's press release and conference call presentation. Our focus on today's call will be on the non-GAAP financial results of the combined company, Stratasys Ltd. for the first quarter of 2013 and pro forma non-GAAP financial results for the first quarter of 2012. These non-GAAP financial measures should be viewed in combination with our GAAP metrics to evaluate our performance.

Note that when we refer to GAAP metrics in respect of period to January 1, 2013, we are referring to pro forma GAAP numbers prepared in accordance with Article 11 of SEC Article SX, which gave effect to the merger as though it had occurred on January 1 of the relevant year with one-time merger-related costs excluded from the numbers. The non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and press release.

Our first-quarter results were impressive. We generated $98.2 million in non-GAAP revenue in the first quarter, an organic increase of 18% over the same period last year. GAAP revenue for the first quarter of 2013 was $97.2 million, which includes $1 million amortization expense on deferred revenue intangible assets, which resulted from our recent merger.

Our margins during the period benefited from our overall sales growth and the relatively stronger sales of our higher-margin systems and consumables. Non-GAAP operating margin improved to 20.7% from 19.8% and non-GAAP net margin improved to 17.9% from 15.2%. Non-GAAP net profit increased by an impressive 40% in the first quarter over the period to $17.6 million, or $0.43 per diluted share. GAAP net profit was a loss of $15.5 million in the first quarter, or $0.40 per share. Overall, we are pleased with our first-quarter results, which were in line with our plan.

Non-GAAP product revenues in the first quarter of 2013 increased by $11.6 million, or 16%, as compared to pro forma combined product revenues in the first quarter of 2012. Our product revenue in the first quarter of 2013 was reduced by approximately $2 million resulting from the unification of business practices surrounding the recognition of system [warrant] revenue and its associated warranty expense. The pro forma results provided for the first quarter of last year do not reflect this change in business practices.

Hardware revenue increased by 15% in the first quarter over last year, driven by sales of higher-priced systems. Applications driving this growth include direct digital manufacturing and continued adoption of PolyJet systems for complex prototyping applications. As we indicated last quarter, our channel cost [draining] program includes the sales of demo units to our channel partner. The demo units is an essential part of our plan in 2013 to achieve revenue synergies by combining the channel and promoting the complementary productline.

We were able to ship most of those demo units in the first quarter, which contributed approximately $6 million in revenue during the period. This was part of our plan and we do not expect demo unit sales to be a material portion of our overall 2013 results.

Consumables revenue in the first quarter of 2013 increased by 18% as compared to pro forma combined consumables revenues in the first quarter of 2012 driven by an acceleration in customer usage and our growing installed base of systems. We believe that the continued strength in our production series and high-end design series systems sales and our growing install base of systems are positive indicators of consumable revenue growth in future periods.

Revenue from our service offering in the first quarter of 2013 increased by $3.6 million, or 31%, as compared to pro forma combined service revenues in the first quarter of 2012. The increase in service revenues was driven by an increase in revenue from maintenance contracts and service parts reflecting our growing base of installed systems.

Revenue from our RedEye paid parts service in the first quarter of 2013 increased by 41% as compared to the first quarter of 2012, primarily due to the increased demand for large and complex production parts and the continuing development of our sales channel.

The number of system units shipped in the first quarter increased to 1168 units as compared to 1115 units shipped in 2012 on a pro forma combined basis. You should note that the units shipped in 2012 benefited from units shipped surrounding our OEM agreement with HP, which was terminated effective December 31, 2012. Excluding the HP units, we shipped 877 units during the first quarter of last year.

Pro forma non-GAAP gross margin improved to 59% in the first quarter over 56.7% for the same pro forma 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 systems and consumables. Non-GAAP net research and development expenses increased by 21% to $9.9 million for the first quarter over last year driven by new systems and material development initiatives. Non-GAAP SG&A expenses increased by 24% for the first quarter over last year driven by higher sales commission and increased marketing expenses.

As a result of the merger, we have begun to realize some tax synergies that will lower our effective tax rate compared to the pro forma rate for 2012. The effective non-GAAP tax rate decreased by approximately 9 percent points in Q1 as compared to Q1 2012. Non-GAAP operating income increased by 23% for the first quarter over last year's pro forma results driven by the strong growth in our relatively higher-margin products.

Slide 13 provides you with an overview of the major growth drivers we have discussed for the period. The following slides provide you a breakdown of our geographic (inaudible) sales. Sales growth in the North America and Asia-Pacific regions continues to outpace the EMEA region. I won't be reviewing the specific reconciliations to GAAP for the non-GAAP measures we have discussed throughout our presentation today. This information is provided in the slide at the end of our presentation, as well as in our press release.

Our cash and cash equivalents balance, including short-term deposit and restricted cash, decreased by $13.1 million to $141.7 million at the end of the first quarter as compared to $154.8 million at December 31, 2012. This decrease is primarily due to payment of nonrecurring merger-related expenses of $15 million, a planned increase in finished goods inventory, an increase in AR primarily due to significant order flow at the end of the quarter and higher capital expenditure. DSO at 67 remains very reasonable and comparable to the 61 days at the end of 2012.

In summary, we are very pleased with our first-quarter 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 investment in R&D and channel development. I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will update you on our financial guidance. Shane.

Thank you. Non-GAAP revenue guidance of $430 million to $445 million for 2013 indicates growth of 20% to 24% or $359 million in pro forma revenue reported for fiscal 2012. The market environment for the Company's products has improved substantially in recent months driven in part by the significant attention that 3D printing is receiving from the trade and mainstream media. We expect a favorable environment will continue in 2013. Revenue growth is expected to be relatively stronger toward the second half of the year as we progress through our integration plan and revenue synergies from selling the combined product portfolio begin to ramp.

Guidance assumes that the merger 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 $1.95 per share represents growth of 21% to 31% over the $1.49 in pro forma non-GAAP earnings per share reported for fiscal 2012. Our guidance assumes relatively stable gross margins relative to the levels observed in the pro forma non-GAAP fiscal 2012 results, as well as the partial realization of some merger-related synergies. The most significant cost synergy in 2013 coming from income tax expense.

Non-GAAP earnings guidance excludes the estimated impact of some additional merger-related expenses, the impact of share-based compensation expense and the significant expense associated with the amortization of inquired intangibles. The reconciliation to GAAP is provided in the slide presentation and our press release.

Our long-term target operating model includes annual revenue growth of at least 20%, non-GAAP operating income as a percentage of sales between 20% and 25%, an effective tax rate of between 15% and 20%, a non-GAAP net income as a percentage of sales of between 16% and 21%. Now I would like to turn the call back over to David Reis who will provide you with a more detailed strategic overview. David?

Thank you, Shane. I will first provide you a quick update on where we stand on the merger integration process between Stratasys and Objet. As Scott mentioned in his opening remarks, we are very pleased with the progress we are making in bringing our teams together. The process is requiring us to invest a significant amount of time and resources across our entire organization and sales channel.

In addition to integrating our sales, marketing and service teams, we are in the process of cross-training our own employees, integrating our service and support functions, combining physical facilities outside of the US and integrating our IT, ERP and CRM systems. At the same time, we held four channel partners meeting during the first quarter to keep our partners informed and focused on sales. As you can see, we have been very busy.

Despite this major undertaking, our plan to integrate the combined sales channel is ahead of schedule. We have now cross-trained 112 channel partners to sell the combined product portfolio. These partners represent approximately 80% of the Company potential future revenue. As a result, we are now beginning to see opportunities with new customers, as well as for opportunities to cross-sell the complementary product portfolio into the Company's large installed base of systems.

In conjunction with our merger, we initiated a significant rebranding campaign in the first quarter. The campaign aimed to raise awareness of the new Stratasys and our value proposition with C level executives and other decision-makers. This included an ad campaign targeting readers of business and financial media and trade publication worldwide. The goal of the campaign was to increase the brand awareness of Stratasys and our value proposition following the merger and included ads like the one you can see here.

This is the first time Stratasys has done a branding campaign to media outlets of this magnitude. Our ultimate goal is to make Stratasys synonymous with 3D printing. In support of this campaign, we also launched a combined post-merger Web and social media strategy that includes an integrated website and social media channels. These efforts to raise brand awareness and improve upon the go-to-market capabilities of our channel to help us capitalize on the rapid growing interest we are observing for additive manufacturing solutions worldwide. This interest has been driven in part by the mainstream media and their expanding coverage of our industry.

In addition to developing our channel and growing our brand awareness, we continue to invest aggressively in new product development. We invested approximately $10 million in R&D projects during the first quarter, a level we believe is unmatched within the industry. This investment will produce products that expand the functionality of existing platforms, as well as products that address totally new applications.

The Objet30 OrthoDesk introduced in March is one example. The OrthoDesk is a 3D printer specially designed for smaller orthodontic labs and clinics. 3D dental applications are growing rapidly given the many business advantages, including the ability to significantly shorten delivery time, increase production capacity and eliminate bulky model storage. The affordability of the OrthoDesk printer makes 3D dental application more practical for facilities of all sizes. We have identified the dental market as an attractive vertical that we will target through innovative products and channel development strategies.

In summary, we are pleased with our record first-quarter results. We generated strong revenue growth while continuing to focus on the major task of merger integration. We continue to integrate our [server] marketing organization and we are ahead of schedule in cross-training our combined reseller channel and dealer network. We are observing heightened market interest from mainstream sources and we initiated the marketing campaign to raise brand awareness among decision-makers and C level executives. We continue to invest aggressively in the future through innovative product and channel development programs. We are looking to grow through strategic acquisitions. And last, we maintain a positive outlook for 2013 and continue to expect strong growth for the year.

In closing, I would like to say that 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 call for questions. Thank you.

(Operator Instructions). Cindy Shaw, DISCERN.

Thank you. A couple of questions, if I may. First, on the gross margins, there was some nice expansion during the quarter. Do you think that is sustainable throughout the year? And the second one, in terms of the cross-training in the demo units, it seems like there should be a bit of a sales cycle and when would you expect to start seeing the revenue from the cross-training and the new opportunities?

Hi, good morning. It's Erez.

Good morning.

As for the gross margin, we do believe that we were able to keep the current level of gross margin. You need to remember that the gross margin is a mix between the territories that we serve and the way we serve, meaning the mix between direct and indirect. But I think that the current level of gross margin on Q1 is sustainable for 2013.

And as for the demo, I must say that we here are very pleased to see the channel partner invest in corporate tools to drive future growth, which includes the purchase of a demo system. The fact that they're willing to commit shows the trust they have in our combined business model. Demo sales is as complicated as regular sales or sale of new printers to a new customer. It will help us to focus on cross-sell. I think at the beginning of H2, we already see some cross-sell opportunity that obviously were not translated into revenue in Q1, but I guess it will be translated into revenue in H2.

Thank you.

Troy Jensen, Piper.

Hey, congrats on the nice quarter, gentlemen.

Thanks, Troy.

Maybe a quick for Erez or David. Specifically on service gross margins, I mean obviously when the deal closed, Objet had a lower corporate service margin. So I am wondering what is going to prevent or how long would it take to get the service gross margin line back up to where Stratasys was premerger.

Hi, Troy, good morning. It is Erez. In the first three -- we saw in Q1 an improvement in gross margin compared to Q4. However, it was heavily impacted by the acceleration in cross-training that we did in customer support. It requires a lot of resources focused for cross-training the partners. I think that Q2 we will face a better gross margin service organization and of course in 2013.

Where do you think service gross margins can get, Erez?

It is really, really difficult to say, Troy. I can say that the current level that we are at in Q1 is lower compared to the level of service gross margin we want to see. It has impact and efficiency, the number of new products that we introduce to the market and I think that all we can say now that Q2 will be better and probably the average in 2013 will be better than in Q1.

All right, perfect. And then how about for David, Objet, can you talk about the 2400 -- or excuse me -- the 24 and the 30 and maybe how that has done against your biggest competitor out there with the ProJet 3500?

I am not sure -- can you repeat the question?

Just the Objet 24 and 30, if you can just give an update on how those products have been perceived. And then I am assuming competition for that would be the jet ink products from 3D systems.

Again, we don't quote the exact number of units, but I can say that there was very good acceptance for both the 24, 30 and especially for the 30 Pro machine and we are doing very well in the market.

David, while I have got you, how about -- of the integration risks you kind of list, which one do you think is the biggest obstacle that us, as investors, need to watch?

As mentioned earlier, we are ahead of plan in integration. It is a very complex process, but we are doing, I think, good and better than expected. I don't see any one significant element that you or anyone should be concerned about. I just can state that it is a complex progress. We are doing better than expected and I am very optimistic about the remaining of the year.

All right. Well, keep up the good work, gentlemen.

Paul Coster, JPMorgan.

Yes, thank you. David, the complexity of your integration contrasts with that of your nearest competitor for whom it seems to be fairly straightforward, the integration of new companies. And your gross margins are significantly north of theirs and yet your operating margins are not. Can you talk a little bit about what you think is happening here and whether this integration is going beyond 2013 yield significantly favorable margins?

Good morning. It's Erez. I will take the gross margin and I guess David will take the integration. I do not refer to the other competitor, but we have a different business model of go-to-market and the way we approach the market. It is a combination of different territories and different mix between direct and indirect that impact the gross margin. When you measure the net result, you look at the operating margin because the part of the cost that we have of the distribution cost is on the OpEx, which I am not sure was the case in other places.

I can only also add to it, Paul, that, and I think I mentioned it in the last call, we really, I think, have a good mix of strategy of short-term results and long-term. And as you can see, we heavily increased investing in R&D and we don't have plans to decrease this investment, which also has an impact on the level of OpEx.

And is the investment primarily centered on the photopolymer jet technology or on the FDM? Can you just sort of give us some sense of how it is being chunked out?

Again, I cannot go into detail, but the investment is across both platforms and new technology in the platforms, which are going to hopefully become very dominant in the industry in the future. So we are -- it is a very large amount of money, which is going to both platforms and new platforms and technologies.

Okay, finally, your competitors raised some funds to go about making acquisitions and you have expressed an interest in acquisitions as well. To what extent is there a window here that kind of closes? What is the pipeline of potential acquisitions like? Are they very few and far between or are there lots of them?

First of all, I agree. We stated very clearly that part of our growth plans will include inorganic growth. We are constantly searching. We have a very clear method and infrastructure to evaluate potential acquisitions and when it will be relevant, obviously we are going to update the market.

All right. Thank you.

Jim Ricchiuti, Needham & Co.

Hi, thank you. I was wondering if you might be able to provide a bit more color on the performance of the productlines, the FDM versus the PolyJet. Can you talk a little bit about the demand you are seeing for both productlines in the market?

Basically, as you know, we don't give a breakdown of the product sales and revenue. I can just state that we see good demand as we saw last year for both productlines and we are very happy about it. I can't specify if one is bigger than the other, but both productlines see good demand.

David, can you talk at all about the different segments without getting specific about FDM, PolyJet just in terms of what you are seeing for DDM versus DeskJet Professional, any color you could provide along those lines?

We do see increased demand for our high-end products across both platforms. A significant amount or number of units in the high-end FDM are being sold towards DDM applications, which we believe in the future will become an even more significant part of our business.

Last question for me and I will jump back in the queue, the paid parts business, the RedEye business, was very strong in the quarter. Can you talk a little bit about what you might be seeing there?

I think, first of all, the increase in revenue -- the growth in revenue is driven by really three factors. One of them is the increased demand in the market for end-use parts, especially complex end-use parts from the industrial side of our business, combined with increased investment on our side in both the manufacturing infrastructure and the channel and marketing development.

Is that kind of growth sustainable as you go through the year, do you think?

I think it will continue to grow. Again, if it is sustainable at this rate, it is difficult to say, but it definitely will continue to grow.

Okay, thanks a lot.

John Baliotti, Janney Capital Markets.

Good morning. Dave, I was wondering, or maybe for Scott, is there a way to characterize the R&D for the balance of the year in terms of is it balanced across product, as well as material or is there any particular focus or was it pretty even? (multiple speakers)

Go ahead, Scott.

No, no. Go ahead, David.

As I mentioned earlier, I think we have a balanced R&D plan between both productlines and materials. Obviously, material is a significant part of our business and we heavily invest in material developments. But in general, I can say that it is balanced.

Is there any kind of typical sort of R&D time span between the R&D concept points and when it actually shows up in the marketplace or is it too broad to characterize?

It is very, very broad. Basically you can look at it in two directions. One of them, we, first of all, developed a technology platform and as a result of it, only to rebuild products, which typically will have a shorter time to market. And when we talk about new platforms, it's typically longer and we are talking about years.

Okay, thanks.

Steve Dyer, Craig-Hallum.

Thank you, good morning. You had mentioned about $6 million in demo revenue in the quarter. How many units was that and then secondly is that largely done at this point?

No, we didn't provide the number of units and yes, we believe that the majority of the service demos this year is done. We do not expect any significant demo sales again throughout the rest of the year.

Okay. And then piggy-backing on an earlier question about RedEye growth there, obviously very, very strong. Are you building out additional capacity there? I mean have you seen enough in terms of demand to suggest that there is maybe a step-function change there or is it sort of a one-off this quarter?

Again, as I said earlier, first of all, our plan for the year is talking about continuous investment in RedEye, both in infrastructure, which means facilities and it is not only in the US, it is including our partners worldwide and significant investment in the marketing and channel development. Again, to your question, is this rate of growth sustainable? It is difficult to say, but, as I said earlier, we do expect RedEye to continue to grow and to grow in a substantial way.

Okay, last question from me, you spoke last quarter about implementing a couple -- rolling out a couple of distribution centers. Is that sort of fully in effect and sort of any early thoughts there?

It is up and running as of the beginning of the year. We have local inventory in the regions and we act locally from each one of the regions that we have.

Okay, thank you.

Hendi Susanto, Gabelli & Co.

Good morning and thank you for taking my questions and congratulations on the strong start for the year. First question, I would like to understand the service gross margin better between historical and current gross margins. If I look at pro forma service gross margin, it was significantly higher at 43% in 2011. Would you share what drove those high service gross margin in 2011 compared to 2012 and 2013? And the reason for my question is I would like to see where service gross margin expansion opportunity is going forward and whether services can reach the high service gross margins seen in 2011?

Hi, good morning. As I said before, in Q1, the service gross margin was really impacted by the acceleration in cross-training that we had in customer support organization. Don't think it reflects the gross margin we do expect in 2013 and we cannot specify any number for the gross margin. It is really difficult to predict. I can say that Q2 will be higher compared to Q1 and 2013 will probably be higher compared to Q1 also. And again, it really depends on the level of activity, new product introductions that we have, unexpected issues that we have or we do not have in the field and what you have to compare is really the trend year-over-year, not just the third quarter compared to 2011 or 2012.

Okay. And then my follow-up question, the first-quarter tax rate of 15% is at the low end of your 2013 guidance. Do you have updates on how we should expect progression in the combined tax rates? And I am wondering also whether there was tax like positive impacts of R&D credit as a one-time benefit in the first quarter.

Yes, there was a one-time effect of R&D credit that was signed by Obama at the beginning of 2013 and reflected in our tax rate in Q1. You should take the midrange -- really we gave a mid-range of I think 15% or 16% to 20% and you should assume midrange for 2013.

Thank you.

(Operator Instructions). Bobby Burleson, Canaccord.

Hi, thanks for taking my question. Congratulations on the nice earnings upside.

Thanks, Bobby.

So I guess one of them -- this is for David, I guess -- what is it that gives you the visibility for the inflection and growth in the back half of the year given kind of the short leadtime nature of this business?

I think it is a combination of a few parameters. First of all, in general, I think all of us share the increased interest in our industry, which is coming from many, many verticals and potential buyers. It is combined with the fact that we see good demand for our products from the end of Q4 to the beginning of Q1 and through Q2, combined with the fact that we are ahead of our plan in integrating and cross-training our channel and our own people. Combining all those together gives me a very optimistic outlook or optimistic outlook for the rest of the year. Naturally, there are no guarantees, but it seems positive and we are standing behind our guidance as we presented last quarter.

And then I guess just a quick follow-up. With the higher materials pricing for the PolyJet material versus the FDM, is there an inflection we can expect for gross margins or the material components of your sales in terms of mix at some point as your installed base of Objet systems grows as a percentage of total printer mix?

I think I will refer to the earlier answer. We expect gross margin to be in line with what you see -- what you saw in Q4 into the continuation of the year. Going forward, I will be cautious to predict. I will keep it the way Erez presented it.

Okay, great, thanks.

Andrea James, Dougherty & Company.

Hi, thank you for taking my question. How important is it, do you think, strategically for you guys to, I guess, get into metals, maybe sand metal and glass, to maintain sort of a lead in this space in general?

First of all, currently, we don't have and we don't provide metal systems. I strongly believe that, as a result of the merger of Objet and Stratasys, the combined company has a very strong portfolio of products, which, as we said many times, are for the most part complementary and answers a lot or a high percentage of the required applications from our customer base and installed base. However, we always evaluate new opportunities and technologies and if we feel that metal should be part of our arsenal, we will do the right move. In this point of time, we are happy with what we have and we are concentrating on it, as I said, cross-training our channels and providing what we can provide with both or really our three main technologies.

Okay, thank you. And just one more, how is it going with the whole dual headquarters thing? Do you guys feel like you are having a lot of cross-meetings and I'm just wondering if you could just give some color on how that is going? Thank you.

I think I said in the script that we are extremely busy in integrating the two companies. The dual headquarters, with modern telecommunications, is not an obstacle. It is even maybe a benefit, but we are definitely being kept very busy at this time and it will continue for the rest of the year.

Thank you so much.

Jim Bartlett, Bartlett Investors.

Yes, could you expand on the item mentioned in the press release on your C level branding, what you are doing there, as well as -- I may have missed it -- but what was the level of backlog at the end of the quarter?

Maybe I will start with the first question. The campaign towards the C level executives and kind of high-level decisionmakers in our potential customer base aims to shift a little bit the way we are selling historically, which was kind of more -- let's call it a push mode to a more pull mode and the idea was to increase awareness in top-level executives around the world in the existence and the potential of 3D printing in the hope that that will drive demand downward within their organization.

This is the idea behind it. It was done via a very strong campaign in the leading financial publications, including newspapers such as the Wall Street Journal, Financial Times, magazines like Economist and Fortune. Again, also, you cannot see typically an immediate effect besides a jump in Web inquiries. I think that long term it will have substantial impact on the way we sell and our revenue potential.

In respect to the question regarding the backlog, we do not disclose our backlog level during the year. We do it once a year at the end of the year and we are going to do the same this year.

Thank you.

[Patrick Wu], Battle Road Research.

Hey, guys, thanks for taking my question. I wanted to get a better sense, I guess, from you guys in terms of verticals. Are there any particular pockets of strength that you guys saw during the quarter or was it pretty much balanced for you guys throughout the quarter?

Again, I think we mentioned earlier, in general, our sales were a reasonably good balance between our different productlines, price points. I can't give any indication on it. It was a relatively good balance.

I am speaking in particular to the different end markets actually.

Oh, okay. Sorry, okay. Again, also here, I think we followed our historical patterns from the point of view of percentage sales to different industries. We did not see any significant change here.

Okay, great. I guess sort of to further expand that point, you guys speak a little bit more about obviously new products down the pipeline. I was just wondering are there any focus areas that you guys are looking at, you guys are going to continue developing more printers for maybe the medical and dental areas or just any color from that standpoint would be great.

Obviously and unfortunately, I cannot give too much detail, as you know. It is kind of confidential information. I can give you just a general direction. The R&D plan has a few main kind of let's call it arms. One of them is continued investment in developing high-end machines with emphasis on [VBM] applications. Another arm is continuing developing, let's call them desktop printers, which are suitable for office use towards desktop applications. And we do have additional investments, which are targeting different verticals, that we consider to be lucrative with high potential of revenue.

Got it. Thank you.

Stephen Stone, Sidoti & Company.

Good morning. A quick question. Can you just provide some color on kind of growth opportunities, the market opportunities? Where are you seeing increased adoption? I'm guessing it is mostly from the high end. Anything on the lower end here?

Again, I agree with your first statement. We see increased demand in the high end. Nevertheless, there is also a lot of activity and excitement in the low end, the very low-end of the market and we are very active in both sites.

Any type of product introductions lowering the price point on the lower end? How competitive is the Mojo versus the lower end and lower-priced products?

The Mojo is a good product and competitive product in the high end of the low-end section. I cannot disclose any future introductions because obviously, as I said earlier, we are working in all directions.

Okay, thank you.

Thanks for your questions, ladies and gentlemen. I would now like to turn the call over to David Reis for the closing remarks.

I would like to thank everyone for joining us on this call. We look forward to speaking with you again next quarter. Thank you very much and goodbye.

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a good day.