Stratasys Ltd (SSYS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Stratasys earnings conference call. My name is Alex and I will be your operator 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) I would like to advise all parties this conference is being recorded for replay purposes.

And now I would like to hand the call over to Shane Glenn, Vice President of Investor Relations. Go ahead, please, sir.

Thank you, Alex. Good morning, everyone, and thank you for joining us to discuss our second-quarter financial results. On the call with us today are David Reis, CEO, and Erez Simha, CFO and COO Israel of Stratasys.

I will remind you 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.

We will start with the forward-looking statement. I will remind you 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 of operations or financial condition, including with respect to the planned MakerBot merger; 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 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 Limited after their merger, as well as the ability to complete the MakerBot merger and to successfully put in place and execute an effective postmerger integration plan; 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 approval; 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 that 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 would like to turn the call over to David Reis, Chief Executive Officer of Stratasys. David?

Thank you, Shane, and good morning, everyone. Thank you for joining the call today.

We are very pleased with our record second-quarter performance. We continue to observe a growing interest in 3D printing and strong demand for our products and services.

In addition to generating significant growth in revenue, margins, and profitability over the last year, we had several additional positive developments during the second quarter that are worthwhile highlighting. First, we have completed most of the critical integration initiatives that result from the merger of Stratasys and Objet. While work still remains and as we continue to divert significant resources to integration, we now have an even more productive channel which is selling a broader range of complementary products and services. This integration is being accomplished while remaining focused on our customers and core business.

Second, manufacturing applications continue to be a core driver of our growth. This was highlighted by a multimillion-dollar order for Fortus systems we received during the quarter from a major global manufacturing company, which we anticipate to ship in the second half of this year.

Lastly, we are most excited about our announced plan to merge with MakerBot, which we believe will accelerate our growth within the rapidly expanding segment for desktop 3D printers.

We finished the second quarter with positive momentum that has carried into the third quarter. We are excited about our new initiatives and remain confident in our growth plans.

I will return later in the call to provide more detail on our second-quarter developments and strategy, but first I would like to turn the call over to our CFO and COO in Israel, Erez Simha, who will provide you details on our financial results. Erez?

Thank you, David. Good morning, everyone. As in previous quarters, our focus on today's call will be on the non-GAAP financial results of the combined Company, Stratasys Ltd., for the second quarter of 2013 and pro forma non-GAAP financial results for the second quarter of 2012. These non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance.

Note that when we refer to GAAP metrics in the respective period, period to January 1, 2013, we are referring to pro forma GAAP numbers prepared in accordance with Article 11 of SEC Article S-X, which give effect to the merger as though it had occurred on January 1 of 2011, with one-time transaction costs excluded from the numbers. The non-GAAP to GAAP reconciliations are provided in a table contained in our slide presentation and press release.

As David mentioned in his opening remarks, we are very pleased with our second-quarter results. We generated $106.7 million in non-GAAP revenue in the second quarter, an organic increase of 20% over the same period last year. GAAP revenue for the second quarter of 2013 was $106.5 million.

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 20.3% from 19.8%, and non-GAAP net income margin improved to 17.4% from 15.9% over the same period last year.

Non-GAAP net profit increased to an impressive 31% in the second quarter over the same period last year, to $18.6 million or $0.45 per diluted share. GAAP net profit was a loss of $2.8 million in the second quarter or $0.07 per share.

The effective non-GAAP tax rate decreased by approximately 8 percentage points this quarter compared to the same period last year. As a result of the Objet-Stratasys merger, we have begun to realize some tax synergies that are expected to lower our effective tax rate compared to the pro forma rate for 2012.

Overall, we are very pleased with our second-quarter results, which were in line with our expectation.

Non-GAAP product revenues in the second quarter of 2013 increased by 90% to $90.4 million as compared to pro forma combined product revenues in the second quarter of 2012. System revenue increased by 16% in the second quarter over the same period last year, driven by sales of our Ideas, Production Series, and this year's product lines.

Applications driving this growth include direct digital manufacturing and the continued adoption of affordable desktop systems for prototyping applications. As we indicated last quarter, our China cross-training program included the shipment of several demo units to our China partners, though it should be noted that demo unit shipments during the second quarter were immaterial.

Consumable revenue in the second quarter of 2013 increased by 23% as compared to pro forma combined consumables revenues in the second quarter of 2012, driven by acceleration in customer usage and our growing installed base of systems. We should note that year-over-year growth rate in consumable revenue accelerated in the current quarter compared to the rate observed in the first quarter.

We believe the recent strength in our Production Series line and our growing installed base of systems are positive indicators of consumables revenue growth. We are also benefiting from expanding our consumables product line, making it a separate business with a focus on expanding customer usage.

Revenues from our service offering in the second quarter of 2013 increased by 28% to $16.3 million as compared to pro forma combined service revenues in the second 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.

The increase in service revenue was also a result of growth in our RedEye paid parts service which increased by 34% as compared to the second quarter of 2012. RedEye continues to benefit from the demand for large and complex production parts as well as the continued development of our sales channels.

The number of system units shipped in the second quarter increased to 1,261 units as compared to 1,085 units shipped in the second quarter of 2012 on a pro forma combined basis. We should note that the units shipped in the second quarter of 2012 benefited from units shipped for our OEM agreement with HP, which was terminated effective December 31, 2012. Excluding the HP units, we shipped 993 units during the second quarter of last year.

Pro forma non-GAAP gross margins improved to 59.2% in the second quarter over the 57.5% 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 the sales of the Company's higher-margin systems and consumables.

As we predicted last quarter, service gross margin benefited in the second quarter from the resolution of certain issues surrounding system service cost as well as the lower costs associated with cross-training our channels.

Non-GAAP net research and development expenses increased by 90% to $9.5 million for the second quarter over the same period last year, driven by new systems and material development initiatives. Non-GAAP SG&A expenses increased by 25% for the second quarter over the same period last year, driven by higher sales commissions and increased marketing expenses.

Non-GAAP operating income increased by 24% for the second quarter over last year's second-quarter pro forma results, driven by the strong growth in our relatively higher-margin product. Slide 12 provides you with an overview of the major growth drivers we have discussed for the period.

The following slide provides you with a breakdown of our geographic sales. Sales growth in North America and Asia-Pacific regions continue 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 slides appearing at the end of the presentation, as well as in our earnings release.

Our cash and cash equivalent balance including short-term deposits and investments increased by $7.2 million to $149.7 million at the end of the second quarter as compared to $142.5 million at the end of the first quarter.

In summary, we are very pleased with our second-quarter results. We generated strong organic 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.

Finally, we are positioning the Company for strong growth in the future through 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, Erez. We updated our financial guidance this morning, taking into consideration the expected closing of our merger with MakerBot later this month. As we indicated at the time of announcing the planned merger, the transaction was expected to accelerate Stratasys's growth rate and be slightly dilutive to non-GAAP earnings per share in 2013 and accretive to Stratasys's non-GAAP earnings per share by the end of 2014.

In line with those expectations we are introducing revised financial guidance as follows. Revenue guidance of $455 million to $480 million, versus previous guidance of $430 million to $445 million; non-GAAP earnings guidance of $1.75 to $1.90 per diluted share, versus previous guidance of $1.80 to $1.95 per diluted share; GAAP earnings guidance of $0.76 to $0.49 per share loss, versus previous guidance of a $0.41 to $0.16 per share loss.

Our guidance assumes no operating and revenue synergies related to the MakerBot transaction. In addition, changes in our estimated liability for MakerBot-related performance-based earnouts could have a material effect on our GAAP earnings.

As we indicated last quarter, organic revenue growth is expected to be relatively stronger toward the latter part of the year as we progress through our integration plan and revenue synergies from selling the combined product portfolio begin to ramp. Our updated guidance assumes that the Company will successfully complete the MakerBot merger later this month and continue to make significant investments to fund growth, including incremental sales, marketing, and R&D expenses in the second half of 2013.

Our updated guidance also assumes relatively stable gross margins compared to the levels observed in the first half of 2013, 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 additional expenses related to mergers; the impact of share-based compensation expense; and the significant expense associated with the amortization of acquired intangibles. The reconciliation to GAAP is provided in the slide presentation and our press release.

Our long-term target operating model remains (technical difficulty) organic revenue growth at least 20%; non-GAAP operating income as a percentage of sales of between 20% and 25%; an effective tax rate of between 15% and 20%; and 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 would first like to provide you a quick update on where we stand on the merger integration process between Stratasys and Objet. I am pleased to report that many of the critical sales, marketing, and service team integration initiatives have been achieved.

During the second quarter we have completed the cross-training for product sales and customer support, the training and implementation of Salesforce.com, and the ramp-up of benchmarking capabilities to support our sales efforts. We can now focus more intently on leveraging our combined sales and marketing organization to drive faster growth. In addition to the opportunity to cross-sell a complementary product line into the Company's large installed base of systems, we are now better equipped to provide the right solution for a broader range of applications.

What you see on the following slide is a working model of what the Stratasys-Objet merger is all about -- two complementary 3D printing technologies used together to create a hybrid functional prototype.

Patrick Harder, a fourth-year student of automotive engineering at the University of Applied Science in Berlin, used a mix of Stratasys FDM and PolyJet 3D printing technologies to design a new airbox for small-scale formula style racing car. The prototype include Stratasys's Ultem material for parts of the airbox where high temperature resistance and vibration resistance were required. Meanwhile, the digital ABS materials created in the PolyJet-based Objet Connex 3D printer were used where the air box required a combination of toughness, unique geometry, and unique surface finish.

Our cross-selling initiatives are generating tangible results as our channel partners and customers have begun to recognize the value of our complementary product lines. The following graph shows the month-over-month growing in number of opportunities our combined resellers have registered into Salesforce.com through the first part of this year.

An opportunity is a prospect that has an intention to buy a 3D printer within a year and has a budget to purchase a machine. As you can see, activity has been robust. We believe this trend is a positive indicator of our business over the coming quarters.

As in previous quarters, manufacturing applications remained one of the big drivers of our growth in the second quarter. This was highlighted by a sizable order we received from a major global manufacturing company during this period.

The customer placed a multimillion-dollar order for several Stratasys Fortus 3D production systems that will be used at manufacturing sites around the globe. These systems were shipped at the second half of this year and will be used for the production of prototypes, manufacturing tool, and eventually end-use products.

This order underscores the growing momentum the 3D printing technology has within the manufacturing process of some of the world's largest and most sophisticated companies. Moreover, our effort to advance how 3D printing technology is being used amongst some of the world's most sophisticated manufacturers continues to gain momentum.

We are empowering manufacturers to be more competitive in the global economy by enabling Objet (technical difficulty) to be produced on demand in fast, simple, and efficient process using production materials that designers and engineers are already familiar with. In short, 3D printing is enabling industry to innovate at will, and this is transforming how products are made and strengthening manufacturing competitiveness as a result.

As you know, in June we entered into a definitive agreement under which we will merge with MakerBot, a leader within the rapidly growing market for desktop 3D printers. The merger is about growth through the acceleration of 3D printing adoption.

MakerBot is providing an affordable, accessible desktop 3D printing experience that is driving broad adoption of their products. Stratasys and MakerBot estimate that between 35,000 and 40,000 desktop printers were sold in 2012. This number is estimated to double in 2013 as individual designers, engineers, manufacturers incorporate 3D printing into their product development and manufacturing processes.

Our experience confirms that using 3D printing technology tends to expand the demand for 3D printing capabilities. Customers that acquire a technology for one use discover it has value in other areas.

We believe this journey is similar to the evolution in personal computers. What began as a kit-based product became mainstream tool as business and industry -- as affordability, access, and ease-of-use improved.

The merger of Stratasys and MakerBot represents a significant opportunity for our combined product portfolio, given the wide range of solutions we will provide individual and commercial users. As a combined Company, we will broaden our product offering to include 3D printers priced from $2,200 to more than $600,000, which are suitable for home, desktop, professional, and industrial users.

Together we believe we will offer the best and most complete line of 3D printing systems, delivering ecosystems that encourage adoption by making 3D printers more accessible than ever, and provide a host of complementary products and services which will promote the proliferation of 3D printing in both established and (technical difficulty).

From our initial conversation with the team at MakerBot, we are already seeing ways to further strengthen our combined capabilities by leveraging to intellectual property, technical and consumer expertise, marketing know-how, R&D investment, market reach, and global infrastructure.

We are very excited and anticipate closing this transaction later this month.

The increased interest in mainstream use of 3D printing and the accelerated adoption of the technology are also at the heart of our recent collaboration with The UPS Store that was announced last week. We were selected to provide our uPrint 3D printers to The UPS Stores as part of a pilot program that will put machines in six locations, enabling UPS Store customers to have 3D designs printed on-site.

While available to any retail customer, this service is aimed at small business owners, who are increasingly recognizing how 3D printing technology can help them design and make products more efficiently. This collaboration supports Stratasys's vision of strengthening innovation and competitiveness by making 3D printing more accessible to a growing number of users.

In summary, we are pleased with our record second-quarter results. We generated strong organic growth in revenue and profitability and observed significant cross-selling opportunities develop from the Company recently combined channel.

We completed many of the critical sales, marketing, customer support, team integration initiatives that result from the merger of Stratasys and Objet. And now we have an organization that is better positioned to drive faster growth.

We announce the merger with MakerBot, a leading manufacturer of systems and ecosystem developer within the rapidly growing desktop 3D printing segment. We continued to observe a growing interest in 3D printing within our markets, which was highlighted by a large system order we received for multi Fortus 3D production systems to be used for functional prototyping, the manufacturing of tools, and end-use products.

We continued to invest aggressively in future growth through innovative products and channel development programs. And we are looking to grow through additional strategic acquisitions.

And last, we [reiterate] 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 now like to address any questions you might have. Operator, please open the call for questions.

(Operator Instructions) John Baliotti.

Good morning. First, I had just a housekeeping question for Erez. Erez, the increased revenue range for the year, is that assuming about a third of the year for MakerBot? Is that how we should look at that?

We assume that we will close the transaction in middle of August, so it represents a growth in the half for MakerBot revenue.

Okay. All right. That is what I was thinking.

And, David, you've got a number of interesting technologies coming together. You've got MakerBot coming in, you had Objet last year. If you put all that together in terms of what you are talking about with new development, is there any color or insight that you could provide in terms of how you see, let's say, for the rest of this year maybe and into 2014, what kind of things we should -- in terms of products or materials that we might expect to see, in terms of functionality?

Unfortunately I cannot disclose specific products and timing of specific offering. What I can say, that in general we will continue our efforts in developing in a few directions. One of them is improving our capabilities as far as DDM is concerned, which including both machines and materials.

We will expand and improve our capabilities of the products in the desktop area. And we will continue investing in developing products and materials which are suitable for various application, vertical application within the space.

Okay, all right. Thank you.

Troy Jensen, Piper.

Hey, congratulations on the nice results, gentlemen. A quick question maybe for you, David. This Fortune 500 company, is this the same company that helped Stratasys pay for some of their R&D investments in the past? Or is this a new Fortune 500?

Apologies. I cannot disclose any more information above what we said.

Can you help us with the vertical they're in?

Sorry, Troy.

All right, I tried. Okay. I have a quick for Erez or for Shane, and a follow-up on the guidance question. Is it safe to assume that organically you are not changing your guidance, and this whole $25 million to $35 million and the $0.05 reduction is purely MakerBot?

Yes, Troy, this is correct. Actually, we really confirmed today the guidance for 2013, the organic guidance for Stratasys that we gave at the beginning of the year. The change is a result of having MakerBot onboard.

Okay. So is it safe to assume MakerBot is in the $65 million range for this year? Or could you let us know maybe what their Q2 results were?

We didn't provide a Q2 result for MakerBot. Upon closing and only upon closing we are going to file a 6-K with the H1 results for MakerBot.

Okay, all right. Then just last question and I will cede the floor here. But can you just talk quickly about product gross margins and maybe service gross margins? They went different directions.

And specifically on products, given that materials were up so much more than products or systems sales, I would have thought you would have had a positive gross margin benefit from that mix shift.

I think, Troy, that product gross margin is in line with our expectation and in line with what we said at the beginning of the year. There are no surprises here.

We had some reduction in service gross margin at the beginning of the year. I think we are on track now, and this is in line with our expectation.

The product gross margin is a combination of mix, of direct and indirect sales, of territory, that it is really difficult to take any conclusion out of the small changes between the quarters here.

Okay. All right. That's fine. Good luck in the second half, gentlemen.

Jim Ricchiuti, Needham & Company.

Hi, thank you. I was wondering if you might be able to provide some additional color on the unit growth that you're showing. Just in terms also of -- where are you seeing it skewed? More toward the production side? Any color you can provide on the composition of the unit growth in the quarter.

Jim, what we see in Q2 is no different than the mix and the growth that we saw in Q1 quarter-over-quarter. Like I said, the growth is coming from all product lines, from the desktop, from a high-end product. And there is no clear change between the quarter in terms of the growth.

Okay. The other question I have for you, David, I am wondering if there is a way for us to track or to evaluate the progress that you are making in integrating the channel.

You have a slide in the presentation that is helpful. But is there any other way that we might be able to measure the progress you are making with respect to integrating the channel and the productivity you are getting?

First of all, I can talk on a high level. Like I said in my short speech here, we concluded all the major integration items on our list. Okay? So worldwide, the channel is cross-trained for both sales, marketing, service, and benchmarking. Okay?

Now it takes time to ramp up sales just because it takes time to learn, to educate the salespeople. And there is also a cycle time of selling of a machine.

Now what we showed on the slide is an increase month-over-month of creation of opportunities, which means potential sales for the future, within the channel worldwide. Now this, we expect this momentum to continue as the channel get better understanding and better ability to sell the cross-sold products.

Above this, I am not sure what I can add. But we really concluded a huge job of cross-training and cross-selling which are giving fruit as we speak today.

Okay, thanks. One final question and I will jump back in the queue. I know you can't disclose a lot on this contract that you talk about in your press release this morning. But is there -- can you help us understand the significance of this?

Is this, for instance, among your largest orders that you have ever received? Is this customer someone who has been using 3D printing in the past? Is there any additional color you could provide on that?

First of all, it is one of the larger orders Stratasys ever got. The customer, like I said in the presentation, is an industrial customer, which is going to use those printers around the world for all the typical application of additive manufacturing, which is prototyping, functional prototypes, and end-use parts. This is what I can say at this time.

All right, thanks. Congratulations.

Steve Dyer, Craig-Hallum.

Thank you. Good morning, guys. Nice quarter. Just wondering if I could dig a little bit on the UPS deal. Interesting deal.

Can you talk a little bit about the model there as well as the -- do they view this as a trial or a beta? And does this have the potential to grow at all with these guys or maybe others?

Yes, I will take it. It's David. I think the significance of the UPS deal is, first of all, I personally find it very, very exciting. This is an indication (technical difficulty) I think a very long-awaited industry and world around us go ahead in respect to additive manufacturing and 3D printing. Okay?

The nature of the relationship at this point of time is, let's call it, an experiment, an exciting experiment by which we are going to install the six uPrints in six of UPS's stores and test the water in respect to what is the level of usage and interest from the public around those stores.

What is important to add, that the survey that was done by UPS suggested a significant market opportunity. In parallel to it, I just want to mention that MakerBot, very soon a part of the Stratasys group, recently announced that they will make available their products within 80 Microsoft retail stores in North America, which is just adding I think to the excitement and the potential of this direction.

Okay, great. That's all I have. Thank you.

Paul Coster, JPMorgan.

Thank you for taking my question. Erez, if I just strip out the acquired revenue from MakerBot from the full-year guidance, and I assume sequential growth for the remainder of the business through the end of the year, which seems pretty reasonable, nonetheless by the end of the year I am well below 20% year-on-year growth.

Does that mean that I am wrong in assuming sequential growth and that perhaps it is more back-end loaded than I have assumed in the fourth quarter? Or do you feel like that it will dip below 20% before resuming that organic growth again?

Paul, good morning. It's David. The high end of the range, the $445 million in our original guidance is exactly 25% year-over-year growth.

Organically.

Organically.

At the high end of the range? If I take out 25% from that I get $465 million, and that assumes presumably somewhere in the region of $110 million to $150 million in the fourth quarter for the remainder of the business, ex-MakerBot?

Well, let me try and help you. The original guidance that we provided at the beginning of the year was $430 million to $445 million, which represent an organic growth of 20% to 24% organically. We also said that the year will look like the revenue will be higher in the second part of the year as a result of integration efforts. And we will be able to utilize and benefit on the result of the integration more in the second part of the year.

On top of that, we are now increasing the range of the guidance for 2013 and adding MakerBot numbers for the next one and a half quarters.

Yes, I got that. I think I must have my core -- my legacy business numbers wrong. Okay. I apologize for that.

The other thing I wanted to just touch on was the gross margins, which are pretty flat from the prior quarter, notwithstanding the shift towards the DDM and consumables type sales. Are we going to -- do you think there is still leverage in the gross margin line from the shift to consumables, which is welcome?

But what are the gross margins for that consumables business? And should we expect that to play out over the next few quarters?

We didn't provide a breakdown between the gross margins of the consumables and other product. And I think that the guidance that we gave at the beginning of the year, the gross margin that you see today is in line with our expectation. It is nothing new and no surprises.

I think that looking at the second half of the year, gross margin remain the same. Meaning we expect the same gross margin for the second part of the year, meaning we have around 59% gross margin during this year.

And please remember that gross margin has different parameters when you look at it. It depends if you sell direct or not direct; the mix of product; the territory that we sell; the mix between service, consumables, and product; and the mix between the product itself. So it is difficult to measure, and I think that as long as we are able to keep the gross margin in 59%, which is in line with our expectation, we are happy.

Paul, just to add one other thing on your previous question regarding the balance of the year. Take into consideration that all else equal Q3 is our seasonally weakest quarter. Obviously, things are never all else equal; but seasonally, Q3 is our weakest quarter.

We only have MakerBot for the 45 days in Q3. And then you have a fairly strong sequential ramp that you see, that we have been seeing from MakerBot. So you need to factor that into how you look at the second half of the year.

Right, I think that answers my question, actually. Thank you, Shane. Thanks very much.

Cindy Shaw, Discern.

Thank you. A couple questions if I may. Talking about the consumables margin, there has been in the industry certainly an upward trend in the ratio of materials revenue to systems revenue. I am wondering for Stratasys, particularly with the acquisition of MakerBot, how you think that is going to be impacted by the MakerBot acquisition and what you see for Stratasys and the Company as you (technical difficulty) growing share of your mix for revenue?

I think, Cindy, that MakerBot has a different business model compared to Stratasys. They rely more on sales of hardware.

Today they are growing very, very, very fast. However, they generate a lower gross margin compared to the average gross margin of Stratasys.

I don't think it will have any impact on 2013 because we have only a quarter and a half revenue and business from MakerBot, and it is really yet too early to say about 2014. But in general, the gross margin of MakerBot compared to Stratasys is lower. Did I answer your question?

Is that as an organization for MakerBot? In terms of the ratio of materials revenue to systems revenue, what would the profile look like there? And do they make --

Go ahead.

Do they make a greater margin on their materials than they do on the systems?

It is a different business model, Cindy, compared to ours. I wouldn't go into details about the gross margin and the different gross margin between consumables and product for MakerBot.

But in general, I can say that the gross margin of the company, MakerBot, is lower than the average gross margin of Stratasys as a Company.

Still healthy.

But very healthy.

Very healthy, yes.

Very healthy? Okay. So it sounds like we think about that more as we approach 2014. I will change gears here if I may.

The UPS Stores, I understand you can offer limitations. In terms of the six locations, obviously a very small subset of UPS's locations.

Right.

Are there particular demographics that they were looking for in those locations to trial it? For example, an area that is rich in engineers or architects. Or are they looking for a really different type of customer?

I apologize but I don't have the answer. I can look for it and maybe come back to you later. I am not sure what was the consideration for choosing those specific stores.

Okay. Then finally if I may, I noticed some quarter-over-quarter improvement in the organic growth. I am wondering what sort of factors do you think may have driven it.

Was that internal factors where, as you got the integration behind you, you could turn your eyes elsewhere? Or were there external factors? Was it demand pull ads that you have been running? Just what is causing that acceleration of organic growth, if you may?

I think the leading reason is the fact that we are focusing with integration. The second one is increased marketing activity. And third one is general increase in awareness and interest in worldwide customers.

But I think that the highest impact has to do with the fact that we are concluding the integration and concluding training and so on.

Okay. Then one last clarification. It sounds like the integration is going very well versus the plan. Would you describe it as being on plan, or it sounds like maybe a little bit ahead of plan?

Compared to our original plans we are definitely ahead of plan. And it went faster and better than our expectations.

Good. Congratulations. Thank you very much, gentlemen.

Hendi Susanto, Gabelli & Company.

Good morning and thank you for taking my questions. I have two questions. First, would you be able to share how you structure MakerBot's performance? Specifically I would like to understand how high the financial hurdles and what criteria you have for the earnout.

We won't be able to give the details of the earnout. What I can say, that they are very, very aggressive and we will be very pleased to pay.

Okay. Then second question, the majority of MakerBot's sales is through direct online sales. Do you plan to leverage your global channel partners and change that business model?

We are in, again -- we're just before closing the transaction, in the early stage of the [PMI] process. We have a lot of opportunities in respect to MakerBot. But first of all I would like to say, like I said in the conference call a few months ago, the intention is to keep MakerBot as a standalone company and to allow them to maximize their market presence and brand.

Nevertheless, there is a lot of opportunities and synergies both on the IP and technology side, utilizing Stratasys's worldwide infrastructure and reach, and so on. But again, we're in the process of planning, so at this point of time this is what I can say. There are a lot of opportunities and synergies between the companies.

Thank you.

Brian Drab, William Blair.

Hi, I just have a few questions. Thanks for taking my questions. First, I would like to talk about the increase in the guidance for a second, just to make sure that I understand this. It has been talked about but I don't think it is really clear yet.

The midpoint of the guidance is up $30 million for revenue for 2013. You have 4.5 months contribution from Maker as we have talked about. If that was exclusively due to Maker, that would suggest that MakerBot is on an $80 million revenue run rate for the back half of this year.

It would make much more sense to think that, given their first-quarter result of $11.5 million, that they would be more on a maybe $50 million to $60 million run rate. That would imply that something -- I guess the large order that you took -- had a material effect on the guidance increase.

I don't think that has really come through yet. I don't know if Shane or Erez, you can talk about that.

I think that the midpoint of MakerBot represent a quarter and a half, as you said, of revenue. Don't forget that there is a lot range between the low point and the highest point of $25 million to $35 million in the range that was added to revenue.

I wouldn't do the math in order to take conclusion on MakerBot annual revenue or MakerBot annual run rate now. I would wait until the end of Q3 to see the result of MakerBot.

There is a relatively large range there of almost 40% between $25 million to $35 million. That might be misleading.

Okay. Is it clear, though, that the large order that you took from the Fortune 500 Company had a material effect on the increase in your guidance, or not?

No, it is not. The order is part of Stratasys's business and we didn't change Stratasys's guidance for 2013. We just added the MakerBot numbers.

Okay, so just to be absolutely clear, the increase in the revenue guidance only has to do with incorporating MakerBot's results into the consolidated result.

Correct.

Correct.

Okay, okay. Sorry if I didn't get that earlier, but it is -- the numbers weren't adding up for me.

Then I just want to make sure I understand the Salesforce.com slide, which is very interesting. Just a point of clarification. Is this a slide that is representing cumulative opportunities or new opportunities?

Meaning if you had 100 opportunities in January, does that mean that you took 100, or you created 100, or logged 100 opportunities in January? And then you logged 118 new opportunities in February? Or there were 118 cumulatively in the system in February?

Brian, those are not cumulative. Those are numbers for the individual month. So those percentage increases are the increase over the prior month sequentially.

Wow. Okay, so this is suggesting that you took 100 in January and then you grew that 18% and then grew that 26%? Those are all -- so you are up to -- into the 200-plus level by the time you get to June. Just in the month of June taking on 200 or 250 new opportunities, I guess. That is the way the math is --

That is correct. Keep one thing in mind there, is that we brought many new resellers onto Salesforce.com with the integration. So there is also a learning curve there, that -- a pretty steep curve with some of the resellers of using Salesforce.com, which could have a little bit of an impact on that.

Not to take away from the fact that we are very excited about the data and the fact that we are seeing lots of activity within the channel as far as prospects that could buy a system.

Okay. So said in my own words, I guess, so in January you didn't have all of your resellers participating in the use of Salesforce.com; and now you have many more that are participating. And some of the growth is just a function of that.

Yes, yes, some of it.

Okay, okay. Last question on the service gross margin. Great step-up sequentially. Have you said yet on the call here what you expect for the back half of the year in service gross margins? This 38%-ish type level what we should expect?

Yes, we expect similar gross margin for the rest of the year for the service.

Okay, great. Thank you and congratulations on a great quarter.

Thank you.

Thank you.

Andrea James, Dougherty.

You've been so thorough in your prepared remarks, and thank you for taking my questions. Microsoft has a 3D printer driver for Windows 8 they are talking about, and now they are saying they will be selling MakerBot printers. I am just curious to get your thoughts on the partnership with Microsoft and whether or not you think the new driver will have maybe a material impact on what you guys can do.

Again, I don't want to describe it in terms of big impact. I think it is another step in the overall move and adoption of additive manufacturing in desktop printers in a wider population. And I don't want to say that this is a turning point. It is one step in the process.

This is the way I think it should seem. A very important step because it is coming from Microsoft, because it is a driver; but it is part of a process.

Okay, thank you. Then when MakerBot units become your units, do you think you will break those out when you start reporting unit sales? Because clearly they are going to spike a lot.

As we see it now, I think that we will provide unit numbers as long as they bring any added value for understanding our financials.

Okay. Then just finally, do you have a target gross margin that you are managing toward?

Yes, we have our long-term model.

All right. Thank you so much.

Are you talking about 2013 or long-term?

Long-term, yes. Sorry, long-term, yes.

So we didn't provide any long-term gross margin. We did provide growth in net income and tax rate. But we didn't provide any gross margin targets for the long term.

Okay. Do you have one you are managing toward then for this year that you have already disclosed, that I missed?

No.

No.

Okay. Thank you so much.

Holden Lewis, BB&T.

Thank you. Good morning. When you talked about the big new order, I guess what I am curious about is what this is telling us about getting more big new orders. I think that a lot of activity has been prototyping, single units here, there sort of thing.

The idea that maybe you might start taking multitudes of multiunit, large unit type orders is pretty exciting. Can you tell us about what this says about the rate at which we might be seeing more and more of these? Is this the dam breaking, or should this just be viewed as a one-off?

Again, I think that I need to go back to my previous answer regarding the driver of Microsoft. I think it is another indication to the rapid adoption of this technology, also in manufacturing by large and small manufacturers.

This specific company has now decided to place a large order as part of their long-term plan to use this technology. And I think it is just another indication to where the industry is going.

Again, I don't want to say that this is another breaking point or a dramatic change. I think it is part of a process and a very good indication to where we are going to; but not more than this.

Holden, we have always been careful to temper enthusiasm. Because as you know and we have talked about often, is that education and awareness continue to be barriers for us with some of these applications. But at the same time, we are seeing greater acceptance of the technology for broader applications with large companies.

Okay, so when you think about -- this is only a single order, you don't want to put much color around that. But are you in talks for a lot more of these type of things somewhere down the road? Or again are these talks unique and again there is no trend here, if you will?

Obviously, we cannot disclose this kind of information. But again, more than a few large manufacturing companies around the world are evaluating, experimenting, using additive manufacturing for manufacturing in their engineering processes. And I think it is going to be a small secret to say that this space is accelerating.

Okay. Also related to this, how does this work in terms of -- you now have got the order. How long does it take to install these machines, getting certified in the process? At what point do you start to see meaningful materials coming out of this? Is that a one-month process, three-month, six-month?

Typically, first of all, we said in the earlier -- in the opening that we expect to install these systems in the second half of the year. And typically it takes time for customers to ramp up their production; it is ranging from a few weeks to a few months. This is typically what we see.

Okay. Then just one piece of housekeeping. You had mentioned I think that RedEye was up 34% I think in the quarter. What was the --

Right.

I didn't hear the maintenance increase.

You are talking about service?

Customers? You mean service, product service?

Right.

You were talking about --

Because your service (technical difficulty) was up about 28%, right, and that is usually comprised of RedEye as well as the other stuff, the maintenance. And I think in the past you have given us the RedEye growth and the maintenance growth that comprises that.

Yes. So it is 28%.

Customer service was up 28%.

28%.

I'm sorry. Customer service was up 28%?

Yes.

Right, and within that, RedEye was up 34%, or RedEye is not the total piece. There is also maintenance and other things in there.

Absolutely. The traditional service business of Stratasys, both on the PolyJet and FDM.

Right, and do you know what that was up?

No, we didn't provide the breakdown between the growth in service of FDM and PolyJet.

Okay, got it. Thank you.

David Ryzhik, Brean Capital.

Hi, guys. Going back to MakerBot, I know you guys aren't providing any specifics on margins. But can we at least know if they are profitable right now? And the ultimate -- I'm sorry, what did you say? Pardon me?

No, go on.

And long-term, within your model, how high do you believe MakerBot operating margins can go?

First of all, MakerBot is profitable. We intend to keep the MakerBot business as independent during the next few quarters.

I think it will take time to leverage the fact that MakerBot is part of a group that can leverage our channels and global presence and IP and technology capabilities. But we are working on long-term plans for MakerBot, for the business model of MakerBot, to create a more similar business model to the current one of Stratasys.

It is not a matter of a quarter or two. Not even three or four. It is a longer-term work that we are doing.

Right. So you don't really have any idea of what you are targeting as far as op margin profitability longer-term?

We said that longer-term MakerBot is going to be accretive to earnings per share, okay? This we said.

Okay.

And this is what we can say in this point of time.

Okay. Great. Thanks, guys.

Bobby Burleson, Canaccord.

Hi, thanks for taking my question. Glad to get in under the wire here. Just in terms of the large customer, the large order that came in, I am assuming since you didn't change your growth expectations for the Stratasys standalone business this year, and all of the increased revenue guidance is from MakerBot, was this large order something you have been working on for a while and was already factored into your expectations? Or did something change in the actual mix of Stratasys business that you were expecting this year when this came in?

No. What we said, this is large order relatively to the average size of orders that we receive today. Significantly higher.

And again if you look at the H2 business and the order within the H2 business, it doesn't create any change in our estimation for 2013. Yet the order as a standalone order from one customer is very, very large compared to the average order size that we have today on the table.

Right. But was this something that you were already aware of earlier in the year when you guided 2013?

No, no, no. This is a process that started after we provided the guidance.

Okay. I know you don't want to say that a dam is breaking or this is a watershed moment or anything. But are there similar discussions with other companies where these types of orders could come in, let's say over the next 6 to 12 months, that aren't necessarily in your pipeline? And if so, how many types of discussions are you having that could lead to this type of a similar order of this magnitude?

I really apologize, but we cannot disclose this kind of information, unfortunately.

Okay. Are you seeing these as inbound calls to you from large customers? Or is this part of your outreach, your marketing? Or is it more customer pull?

It is part of our overall relationship with those customers around the world. It is not -- we have ongoing relationship with many, many large and small manufacturers for many years, and this is part of this process.

Okay. Then just quickly on market share, any takeaways now that we have had two big guys report? What are you seeing on the market share front? Should we be drawing any kind of inferences in terms of market share based on the unit trends that we have seen so far in the first half?

Again, I don't think we can draw any new conclusions compared with what we are familiar with before. I think none of the players are disclosing the full numbers. It is very difficult to estimate.

We see that the industry as a whole is growing. We are part of the industry. We are growing fast, and I think it's a good enough indication to where everything is going. But I can't give an indication on significant change in market share as we don't have such data.

Okay. Then just one last quick one. In terms of MakerBot and the Cube, how do you see the machines stacking up against one another?

Again, I am not sure if you intend that I will give a full technology comparison presentation, which I can do. Maybe I will -- I prefer to talk on the MakerBot. MakerBot is a great machine with extremely high accuracy, very fast, well positioned, good reliability.

And as I think Erez indicated earlier, MakerBot are selling nicely and according to the plan. I don't want really now to get into a technical comparison. It is -- which I can do.

Great. Well, thank you very much for taking my questions.

Thank you. Ladies and gentlemen, I would now like to hand the call back to your CEO, David Reis, for closing remarks.

Okay. I want to thank everyone for joining us on the call. I look forward to speaking with you again next quarter. Thank you very much and goodbye.

Thank you for your participation in today's conference call. This concludes your presentation. You may now disconnect. Good day.