Stratasys Ltd (SSYS) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the quarter three 2013 Stratasys Earnings conference call. My name is Sheila, and I am your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Shane Glenn,Vice President of Investor Relations. Please proceed, sir.

Thank you Sheila. Good morning everyone. Thank you for joining us to discuss our third quarter financial results. On the call with us today are David Reis, CEO, and Erez Simha, CFO and COO, Israel. 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, the replay of today's call including access to the slide presentation will be made available on the Investor section of our website later today.

A reminder that certain information included and incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities and 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 that are not the only way these statements are identified. These forward-looking statements may include, but not limited to statements relating to the Company's objectives, plans, and strategies, statements that contain projections of results of operations or financial conditions, including with respect to the MakerBot acquisition, and all statements other than statements 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 Limitedafter their merger, as well as the ability to complete the MakerBot acquisition and to successfully put in place and execute an effective post-acquisition integration plan,the overall global economic environment, the impact of competition and new technologies, the general market, political, and economic conditions in the countries in which the Companies operate, the projected capital expenditures and liquidity, changes in the companies 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 of prospects, and generally in the Company's Annual Report for 2012 filed on Form 20-S, and any 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' SEC reports, which are designed to advise interested parties of the risks and factors that may effect its business,the financial condition, results of operations, and prospects. Any forward-looking statements in this presentation are made as of the date hereof. 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 today's call. We are very pleased with our record third quarter results, our organic growth rate accelerated to 26% during the third quarter over last year, as synergies of the merger between Stratasys and Objet continue to develop. Overall we recognized strong growth across multiple product lines, and addresses an extending range of application, and we sustained strong margins which help drive record non-GAAP profit for the quarter. We are especially pleased with the contribution made by our recent acquisition of MakerBot which contributed $11.6 million in non-GAAP revenue from the closing of the transaction on August 15 through the end of the third quarter.

In addition to our strong financial results, we have reinforced our commitment to extending our global market presence and reach to meet rising demand by investing in our global sales and marketing and channel infrastructure, especially in Asia. We demonstrated our commitment to internal product development with the release of several new products and material offerings backed up by our industry-leading R&D investment levels. And we completed a successful equity offering of approximately 500 shares, raising over $460 million. This addition of capital has strengthened our balance sheet, and improved our ability to execute on internal expansion plans, as well as capitalize on other acquisition opportunities. We begin the fourth quarter with positive momentum have and raised our financial guidance to reflect our positive outlook.

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

Thank you David, and 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 third quarter of 2013 proforma non-GAAP financial results for the Stratasys Objet merger in the third quarter of 2012. This non-GAAP financial measure should be read in combination with our GAAP metrics to evaluate our performance. Note that when we refer to GAAP metrics in the spec, we generally refer to 2013, we are reciting to proforma GAAP numbers prepared in accordance with our [accountants] and the SEC, called [Essix] which give us a sector to the merger between Stratasys and Objet, as though it has closed on January 1st of 2012, with one-time transaction costs excluded from the numbers.

We should also note that we are not providing any proforma financial results for the MakerBot acquisition. The GAAP and non-GAAP results presented for Stratasys Ltd. include MakerBot results as of the close of the declaration on August 15 of this year. 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 third quarter performance.

We generated $126.1 million in non-GAAP revenue in the third quarter, an impressive increase of 39% over the same period last year. GAAP revenue for the third quarter of 2013 was $125.6 million. Excluding MakerBot, our organic revenue growth was also impressive at 26% over the same period last year. We are pleased to see the revenue synergies from the merger between Stratasys and Objet continue to develop, which is reflected in our strong organic growth rate.

Gross margin remains relatively strong during the third quarter, and the impact of acquiring MakerBot which maintained slightly lower gross margins, was mostly offset by the strong growth of our higher margin systems and consumables. Non-GAAP operating margins was 19.2% compared to 24%, and non-GAAP net income margin was 15.9%, compared to 18.3% over the same period last year. Driven by the inclusion of MakerBot, and incremental investment in sales and marketing in new product development. We generated record non-GAAP earnings of $20 million, or $0.45 per share, a 21% increase over of $16.6 million, or $0.31 per share for the same period last year. Lastly, we raised our non-GAAP financial guidance for the year given our positive outlook.

Non-GAAP product revenues in the third quarter of 2013 increased by 41% to $108.3 million as compared to proforma combined product revenues in the third quarter of 2012. Within product revenue, system and other revenue increased by 47% in the third quarter, over the same proforma period last year. MakerBot experienced strong sales of their desktop 3D printers as it contributed $11.6 million mostly in system revenue for the quarter. We also observed strong sales of our highest priced production and design serial systems, with unit sales increasing by 27% for the third quarter as compared to proforma period last year. This growth continues to be driven by the development of new DDM applications for our Fortus system, and the continuing adoption of our component system for complex prototyping applications.

Consumables revenue in the third quarter of 2013 increased by 30% as compared to the proforma period last year. Driven by an acceleration in customer use of our growing installed base of systems, and the Company's effort surrounding application training and material education for both our channel and end users. The strong sales of our production and design series systems in prior periods contributed to strong consumable sales growth, given the relatively higher consumable utilization rates. We believe this is a continuing statement in the production and design serial system sales are prolific indicators of consumables revenue growth in future periods.

Revenue from services offerings in the third quarter of 2013 increased by 28% to $17.7 million as compared to the proforma period last year. The cost in service revenues is attributable to increased revenue for maintenance contracts in service parts, reflecting our growing base of installed systems. In addition, revenue from Redeye [Power] pay for service increased by 37% for the third quarter, over third quarter of last year, primarily due to increased demand for large and complex production parts, as well as ongoing development of the Redeye sales channels.

The number of 3D printers sold in the third quarter was 5,925 units, compared to 1,214 units sold in the third quarter of 2012 on a proforma combined basis. The significant increase in unit shipments resulted primarily from the inclusion of MakerBot since the closing of the accusation on August 15. Including all systems sold by Stratasys and MakerBot, the Company has now sold 64,855 units worldwide on a proforma combined basis.

As expected, due to the MakerBot transaction non-GAAP gross margin percentage declined slightly to 58.8% in the third quarter over the 59.9% for the same proforma period last year. Non-GAAP product gross margin percentage benefited during the quarter from the growing increase in sales volume to cover fixed overhead and the product mix that favors our higher margin systems and consumables.

Non-GAAP net Research & Development expense increased by 51% to $12 million in the third quarter, as compared to the proforma period last year. Driven by the inclusion of MakerBot's R&D expenses, as well as the higher spending on new products. Non-GAAP SG&A expenses increased by 53% for the third quarter, as compared to the proforma period last year, driven by the inclusion of MakerBot SG&A expenses,as well as expanded head count to support our growth plans,higher commission expenses, due to increased sales, and more importantly, in commencement sales and marketing and infrastructure investments. Slight gain provided with an overview of the major growth drivers we have discussed for the period.

The following slide provides you a breakdown of our geographic sales. Asia Pacific was our fastest growing region during the third quarter, as compared to the proforma period last year,driven by our ramping sales and marketing investment in the region. I won't be reviewing the specific reconciliations to GAAP for the non-GAAP measures we are discussing throughout our presentation today. This information is provided in the slide at the end of our presentation, as well as in our earnings release.

Our cash and cash equivalents balance shows our deposits and investment increased by approximately $467 million to $616.5 million at the end of the third quarter. The increase is from our successful equity offering of approximately 5.2 million shares in September. The Company now has improved flexibility to invest for growth.

In summary, we are very pleased with our third quarter results. We generated an impressive acceleration in the growth, observed a strong contribution from MakerBot, and generated record non-GAAP profit. We have improved our balance sheet, and continue to position the Company for future growth, for strategic investment in R&D, and China development, as well as additional acquisitions.

I would like now to turn over to our VP of Investor Relations, Shane Glenn, who will update you on our financial guidance. Shane.

Thank you Erez. The Company's overall outlook has improved for Q4 2013, which is reflected in upper revision to 2013 financial guidance. Earnings per share guidance incorporates a $0.06 per share positive impact from the improved outlook. This $0.06 per share improvement is offset by $0.06 per share of earnings dilution,resulting from the Company's public offering of approximately5.2 million shares on September 18, 2013. The earnings impact for the equity offering which occurred during the third quarter, had not been previously incorporated into our financial guidance.

GAAP earnings guidance has been revised principally to reflect higher estimates for stock compensation expense, revised amortization expense related to acquired MakerBot intangible assets, and higher expenses related to the MakerBot performance bonus plan. Accordingly, Stratasys is updating its financial guidance for the fiscal year beginning December 31, 2013, as follows. Revenue guidance of $470 million to $490 million, versus previous guidance of $455 million to $480 million. Non-GAAP earnings guidance of $1.75 to $1.90 per diluted share. GAAP earnings guidance of $0.83to $0.55 per share loss, versus previous guidance of a $0.76to $0.49 per share loss. Non-GAAP earning guidance excludes $67.2 million of projected amortization and intangible assets, $22.2 million to $22.9 million, the compensation expense, and $18.1 million, to $24.9 million of share based compensation expense,and $18.1 million to $20.7 million in merger related expenses. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of this press release. The table provides itemized details of the non-GAAP financial measures. Our long term target operating model remains annual organic revenue growth of at least 20%, non-GAAP operating income as a percentage of sales of between 20% and 25%, an effective tax rate of between 15% to 20%. And Non-GAAP net income of a percentage of sales of between 16% to 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 reiterate our progress in the Stratasys and Objet merger integration, which is leading to meaningful revenue synergies, and is reflected in our 26% organic revenue growth in the third quarter. We are observing acceleration of cross-selling opportunities during the period, as our channel partners increasingly focused on complimentary sales. The feedback we are getting from our channel partners and customers has been very positive. We look forward to sustain this policy momentum, as we finish this year and again in 2014.

In August we completed our acquisition of MakerBot, the leading manufacturer within the rapidly growing desktop 3D printing category. MakerBot provides an affordable, reliable, and assessable desktop 3D printing experience, that is driving strong sales of their products. The MakerBot 3D ecosystem includes two replicator 3D printers, the MakerBot digitizer 3D scanner, Thingiverse.com, Maker's software and the MakerBot retail store experience.

Stratasys and MakerBot estimate that between 35,000, and 40,000 desktop 3D printers were sold in 2012. This number is expected to double in 2013. As individual designers, engineers, and manufacturers incorporate 3D printing into their product development and manufacturing processes. Exposure to 3D printing leads to increased demand for 3D printing capabilities, as customers find new and innovative use cases for the technologies that add significant value to their business. Rapid growth in MakerBot and the desktop category is demonstrated by MakerBot's strong third quarter performance, as it contributed $11.6 million of non-GAAP revenue to the period.

In addition to this impressive growth, MakerBot is developing a community of users that we believe will lead to additional business opportunities in the future. For example, the company has built a strong and loyal user community on Thingiverse.com. A 3D design community for discovering, sharing, and printing 3D models. Thingiverse has become the world's largest 3D printing community, and is exhibiting some impressive usage strengths. The site has over 150,000 total users, with 10,000 added in September alone. It has over 100,000 downloadable objects, and is growing at a rate of nearly 7,000 new objects per month. In the first nine months of 2013, Thingiverse was visited over 11 million times, with nearly 5 million unique visitors. Each month Thingiverse has on average approximately 600,000 unique visitors. We believe we have only began to tap into the potential of 3D printing, and are excited about the many ways MakerBot can help capitalize on this opportunity.

In addition to inorganic opportunities like MakerBot, internal product development remains a top priority, which we demonstrate with the release of two innovative systems during the third quarter. The 3Z MAX introduced in August by our Solidscape subsidiary, is thefastest 3D wax printer ever introduced by the Company. The 3Z MAX supports high throughput and delivers significant production gains when working with precision designs in jewelry, industrial, and medical applications. MakerBot also launched the MakerBot digitizer desktop 3D scanner, a fast and reliable way to turn objects into 3D models, which you can then modify, improve, share, and 3D print. We believe the digitizer is unlike any other product, and will define the 3D desktop scanning space. The scanner is paired with simple yet sophisticated software to create clean, watertight models.

Additionally we launched two materials for the MakerBot platform, giving a new flexible filament and a new absorbable support material. The MakerBot's flexible filament allows for printing items that include functional hinge, joints, and items that can be shaped after printing. MakerBot's absorbent filament is a new material for the use in conjunction with ABS filament, that adds absorbable support structure for the creation of detailed and delicate internal geometries, including moving parts. Beyond these two new materials, MakerBot has recently added seven new colors to its catalog of PLA and ABS filaments. Bringing these innovative new capabilities down to the desktop 3D printing space helps to reinforce MakerBot's status as a market leader.

Going forward, we will continue to invest aggressively in new product development. We invested approximately $12 million in R&D projects during the third quarter. A level we believe is unmatched within the industry. This level of investment continues to produce products, that both expand the functionality of the existing platform, as well as create new categories defining product lines. You should expect to see an acceleration in our new product introduction over the coming months.

In addition to new product offerings, we are aggressively extending our global customer reach, especially in Asia. Our extension into Asia is multi-phased, first in the third quarter, we announced a major distribution agreement with Aurora Group, a leading provider of office automation equipment in China. A subsidiary of Aurora Group, Shanghai Aurora Office Automation will act as the master distributor and service provider for the Idea Series of 3D printers in China. We have seen strong demand in the region, and we believe tapping into Aurora Group's local knowledge and [nest] work will improve our ability to meet that demand.

Secondly, we recently announced the opening of a local sales office in Singapore. A local presence in Singapore strengthens our ability to meet the needs of this region. The Singapore government has pledged an investment of $500 million over the next five years as part of its future of manufacturing program. With a goal to kick start its advancement of [section] technologies adoption. We believe we are uniquely positioned to help with this initiative, and our local office will allow us to capture this opportunity.

Lastly, and most recently, we announced our intent to exercise our option to acquire the remaining holdings from Fasotec in Stratasys Japan. Following the exercise of the options, Stratasys Japan will become a wholly-owned subsidiary of Stratasys LTD. Acquiring Fasotec minority interest in our Japanese business will allow us to invest in additional infrastructure to meet the regions growing demand. We are also extending our reach into the desktop category. [Maker] was recently entered into a strategic agreement that allowed Ingram Micro, the Fortune 100 company, and the world's largest wholesale technology distributor to act as a distributor for the US for their products.

MakerBot also announced the opening of two new retail locations before the holidays. The new MakerBot stores are located in Boston and Greenwich, Connecticut, and will join the MakerBot flagship New York City retail store in offering MakerBot products. Innovative application and mainstream adoption of 3D printing continue to drive new growth opportunities for Stratasys. For example, Schafer, a German parts supplier, with appliance and commercial vehicles recently shared how the use of Stratasys 3D printing technology, to create draft version of injection molds has resulted in 97% cost savings. Certain processes that previously required for up to 8 weeks of manufacture of metal tooling, can now be replaced overnight with 3D printing.

The ability to streamline the tool creation process for production of these parts, is another example of how Stratasys can revolutionize manufacturing, by augmenting traditional processes, or providing a cost effective alternative for certain applications. Our previously-announced partnership with The UPS Store to provide in store 3D printing services is moving forward, with six store locations offering the service using our uPrint 3D printers. We see this program as another indication of the rising mainstream adoption of 3D printing, and we are excited to support these projects.

We are observing new applications from our entire range of products, including desktop 3D printers, for example, in [Geneva's form Rocket Martin use Maker] bought desktop 3D printing as the design of NASA James Webb Space Telescope. At a recent event at the flagship MakerBot store in New York City, the architecture firm, Perkins & Will notes that the use of makeable 3D printers for in-house modeling has resulted in automatic cost savings while increasing turnaround time and flexibility. As you can see, our industry remains poised for expansion. Its new and innovative applications continue to emerge for our technology.

In summary, we are extremely pleased with our record third quarter results. the organic growth rate we enjoyed in the quarter highlights the ongoing progress we are making with the integration of Stratasys and Objet. As well as the favorable market conditions that persist within our industry. Our strong organic growth and the significant contribution we expect from MakerBot, should help contribute to a strong finish of 2013. Accordingly, we have raised our non-GAAP financial guidance for this year. Looking forward beyond 2013, we are well-positioned to sustain our positive momentum, as we accelerate our rate of new product introduction, extend our global market reach, and prepare to capitalize our additional inorganic growth opportunities. We are excited about the future, and look toward to execute on the many opportunities we have before us.

Operator, please open the line for questions.

(Operator Instructions). Please stand by for your first question. Your first question comes from the line of Troy Jensen of Piper. Please proceed.

Troy, are you there?

Can you guys hear me?

Yes.

Congratulations on the nice results everyone.

Thank you.

David, how do you distinguish between sales synergies from the merger, versus just an inflecting market growing at this rate?

It is not easy to distinguish, but what we see very clearly, is as a result of the merger of Stratasys and Objet,we do see increased costs. All of our most product lines and channels around the world are increasing cross-selling. I believe it is a good indication to improve synergies of that transaction.

Alright, sir. How about a follow-up for Shane. A two-part here. So revenue guidance was up, but EPS was unchanged, so if you could touch on that. On the full-year EPS guidance, versus the sum of the quarterly EPS numbers, are the shares from the secondary and MakerBot skewing the earnings here a little bit?

Hi Troy, yes. Regarding the adjustment in revenue, and no adjustment in the non-GAAP released, it appears as no adjustment in the non-GAAP EPS, keep in mind that we had not adjusted for the secondary yet, as it relates to the diluted impact of those shares. That certainly is going to be diluted for the remainder of the year, but we did not adjust for that dilution, given the fact that we saw a favorable outlook, and we were pleased with our performance. So we really didn't adjust it. It is really an effective raise in the non-GAAP EPS when you think about the offset of the other dilution from the offering.

The guidance we are getting is an annual calculation. It is not the summation of our quarterly reported earnings per share. The recent increase in our share count for the MakerBot acquisition, and the equity offering in September, will contribute to a significant increase in the weighted average share count for the fourth quarter. Consequently, the significant disconnect between the summation of the quarterly reported EPS number and 2013 and the Annual Report of the EPS number for the same year.

So this doesn't impact our net income projections which you can see, and we provided at the end of the press release in the table, but you can see that those levels were actually increased from the levels we reported in the prior quarter. If you are going to work toward strictly a Q4 EPS calculation, what I would suggest is you take those net, non-GAAP net profit projections that we provide in the press release, subtract out our year-to-date numbers, and then come out with what you want to use for the share count. The share count adjustment will be the share count, which taken into consideration is the full quarter of the MakerBot impact, and a full quarter of the equity offering, and any additional incremental for the dilution.

Can you give us a share count that we should model for Q4 just so we know we are right?

Troy, hi, good morning. I think that all of the information is in the 6-K, you can find all of the information there.

Okay. Perfect. Thank you. Congratulations. And good luck.

Thank you.

Your next question comes from the line of John Baliotti of Janney Capital Markets. Please proceed.

Good morning.

Good morning.

David, you mentioned the acceleration of new products in the next couple of months. I was just curious, I know it is still early in terms of the integration of the acquisition of MakerBot, but should we think about synergies, and some input from that side in terms of some of the products that we should be looking for going forward?

Obviously, I cannot disclose this kind of information. We said immediately after the merger with MakerBot that over time we are going to contribute to MakerBot's technology offering. At this point of time, MakerBot is executing their original, plan and we are going to see synergies coming a little bit later in the future.

How about, you launched a number of new products and new materials, do you think that will be a balance as well? I mean, without getting too specific about which systems we are talking about, but a complement of product and material as we go forward?

The material we talked about during the quarter, are materials that were added to the MakerBot offering. It was a dissolvable support material and the new colors and the flexible material. It is related all to the MakerBot site.

Right. I was just thinking about in general going forward that we should expect more materials, as well as the acceleration of new products?

Sure. Sure. Again, I cannot disclose the percentage.

Sure I understand.

But a nice percentage of the combined Company R&D is devoted to material development, and it is a key success factor in our future growth plans, and therefore are you going to see new materials coming in the future. Sure.

Just quickly on the Ingram Micro, is it too early to talk about any of the impact yet of that relationship?

Yes. Yes. It is too early. That just took place a few weeks ago.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Cindy Shaw of Discern. Please proceed.

Thank you. I was hoping you could talk about the competitive landscape. In particular-- Hello? Can you hear me? Sorry, I have got an echo here. The competitive landscape and in particular another large 3D printing company said just last week, that it is changing very rapidly, and it was a cause for them to adjust their guidance in a negative fashion. They didn't offer any color on what those changes are, so I was hoping to get your take on what is going on in the competitive landscape?

Maybe I ought to first talk about Stratasys. First of all, we are very excited about what is happening in the markets. We are in a very dynamic market. And on the positive side, there are a lot of positive sides, but all of the potential growth engines for Stratasys, the desktop part of it, the prototyping, and the direct manufacturing, the DVM applications are growing. So all of the growth engines are there. This is cooked with increased awareness. I think Stratasys is very well-positioned within this environment to continue to be the leaders.

And you said you are accelerating your products, is that in response to changes in the environment, or is it basically just seeing opportunities and taking advantage of them with some of the additional capital you have raised?

Our product [RoseNet] is really based on customer and market requirements. It is not something that's been changed overnight because of changes inter markets. A have a solid few years planning for the future for product and we are executing on the plan. And we talk about products, I said this to a previous question, we were talking about the hardware and materials. In our case also a very large ecosystem.

Okay. A change of direction here on the units, and I haven't had a chance, I am traveling, hasn't had a chance to go through all of the details you have released. But are you going to break out your MakerBot units, and year-over-year growth specifically for MakerBot, or are we going to continue to get things in a rolled up fashion?

Cindy, hi. First of all I want to say that we are very pleased with the income from MakerBot in Q3. They are on a very strong growth path. We won't be disclosing the impact beyond the revenue numbers that we have provided. And I can say that regarding the units, significant growth in the unit volume during the period was driven by MakerBot.

Great. Okay. Thank you. Congratulations on a nice quarter.

Thank you, Cindy.

Thank you.

Thank you. And your next question comes from the line of Jim Ricchiuti of Needham and Company.

Hi good morning, thanks for taking the question. The question relates to MakerBot. Can you talk about perhaps the annual revenue run rate you are at right now, and talk a little bit about the strength you are seeing in MakerBot? Is this particularly US based right now, or has it spread into some of the other markets?

Jim, hi. Again as the previous question, we wanted to cement in the revenue from MakerBot as a separate number. The guidance that we change now, two days now, is due to the fact that overall we see a stronger momentum in the market. Q3 was strong. We didn't get the guidance that we gave for 2013 now, and present I would say in a more focused way out in the other markets. And again MakerBot is selling in the US, but not only in the US The growth of MakerBot is across, I would say across regions. Not only in the US. But we won't be providing any standalone numbers for MakerBot.

In general though, the growth you saw in Asia Pacific, is this mode primarily the synergies from the Objet merger, or the base business in general? Can you talk a little bit about that? Thanks.

I would say it is a combination of one, we start to see the results of the integration in Pacific, and the very high growth rate of the Company due to the innovation of the product offering, the wider product offering that we have today. The channel expansion that I believe are very nice, and how it works with the channels. And the market itself is growing. So it is a combination.

Okay. Thanks, very much.

Thank you.

Thanks Jim.

Your next question comes from the line of Wamsi Mohan. Please proceed you are now on the call.

Yes, thank you. Good morning. Excluding MakerBot, at what price points are you seeing the highest level of interest in your portfolio, and where are you seeing the most growth, in looks like Fortus and Connex together grew 27%. Can you share any color between the two?

Again, I cannot distinguish between the specific lines of product you discussed. The positive experience, this 26% of growth is driven by all product lines. We said this the last few quarters. We see increased demand for our production systems, but I would consider it across the board we see growth in both of our entry level prototyping and manufacturing printers. It is not just one segment which is pushing it up.

Okay. Thanks. Can you give us an update on the total MakerBot installed base as of the end of the third quarter?

We gave the combine, service of the combined companies for the end of the quarter. It is in the press release.

Okay. And last one. How many of your customers are using multi-materialed futures, and where are we in the adoption of that across the overall installed base? Thank you.

A number is difficult. I don't think we can disclose this number, but in general I can say that the vast majority of people which are buying multi-material and Connex technology are using it for multi-material printing. The people are not buying those machines which are relatively more expensive than the [Eden] line without using those capabilities. And we are showing those, so people are using this technology. It is both providing them the multi-material capabilities, but it is also provides in some cases better basic materials which are resulting from our ability to create digital materials.

Thank you.

Thanks Wamsi.

Your next question is on the line of Paul Coster, JPMorgan. Please proceed.

Thanks for taking my question. The growth rate continues to surprise to the up side. Operating margins though have been drifting down relative to my long term expectations. But it looks like you have drawn a line under it now, above the20% rate. Can you talk a little bit about the assumptions in terms of gross margin outlook, and what the drivers are for that, and also R&D versus SG&A, in terms of the relative levels of investment over the next few years?

Yes. I hope that I remember all of the parameters you spoke of, I will start with the gross margin. I think working with the next few quarters, you should expect a slightly lower gross margin compared to the gross margin that the US has for Stratasys. As a result of the inclusion of MakerBot now. The MakerBot business model carries a lower gross margin. And we are facing an amazing growth in the business in Q3. It didn't have a significant impact in the gross margin. But I think that looking forward in the next three to four quarters, we would say just slightly lower gross margins for the combined Company. So the R&D. We would, as long as we believe in the growth, we would continue to invest. We invest between 9% to 10% following revenue in R&D. And we will continue to do so. And SG&A, I think that the main point here in Q3 for the SG&A, is actually Q3 last year. Q3 last year was a quarter that we were either all busy in the merger of Stratasys and Objet. And we actually invested less than our plan, and less than our actual run rate, and when you compare Q3 this year to Q3 last year, you get a exceptional growth which is little bit misleading. Looking forward for the growth quarter-over-quarter will be slower or below compared to the numbers we see today.

Okay. Thanks. Last quarter you saw this big order for Fortus machines. Have you seen any follow-on from that? Any way in which that kind of business can be used as a reference in going after new customers, and is it being used in that manner?

Hi, this is David. We said on the last call that we should not expect to get these kind of orders every week, or every month, or every quarter. Nevertheless, it was I think, a very strong indication to one of the changes in the market is the fact that large corporations are looking today on the attitude in manufacturing, this technology is something more strategic and are able to place such orders for this kind of equipment. I think that this order in this company, which is taking it extremely seriously, we lead the way for other companies to follow. I really can't predict or commit on when the next such order will come in.

You can't confirm which industry vertical it was in?

No. We said last time that we were asked specifically by the customer not to disclose this type of information.

Okay. Thank you very much.

Thank you Paul.

Thank you.

Your next question comes from the line of Hendi Susanto, Gabelli & Company.

Good morning David and Erez. Congratulations on solid execution. And thank you for taking my questions. My first question is for David. I would like to understand more about building channel partner infrastructure globally? Would you share your view on competition with 3D system as both companies are building channel partners? As we know, 3D system tends to have exclusive channel partners, furthermore how do you structure your relationship with new channel partners?

I prefer to talk about ourselves. We said all of the way up to the merger between Stratasys and Objet, that both companies had and have a very good strong relationship with our channel worldwide. In the last year I think we proved that we stick with our partners, and we help them to grow their businesses as a result of it, we are growing our business.

The places in which we are expanding channels are in places where we either don't have coverage, and we need more coverage, or we need some vertical expansion. For example, one example could be the dental industry. Which our traditional channel is less capable to extend into dental. Our channel strategy is looking for places we don't have coverage, and mainly for vertical areas, we feel that we need specific channels in order to handle them. For the most part, we believe that the channels that we inherit from the Objet/Stratasys merger is strong, and a healthy capability to carry us a few years into the future.

Okay. And second question is for Erez. Could you give some insight on performance bonus expense in the third quarter, and whether there are future performance bonus expenses that we should anticipate? And how you structure it?

The performance bonus that you see this quarter is part of the agreement between Stratasys and MakerBot. MakerBot executives, part of their performance model is tied to a very aggressive business performance in 2013 and 2014. This is part of the GAAP result. It is excluded from the GAAP results, it is not in the non-GAAP results that you see to date. It is only for 2013 and 2014. It is measured throughout the period of the next five quarters until the end of 2014.

And could you share how you structure it? Is it based on dollars of revenue?

It has two parameters. We did not disclose the parameters. I would say that the targets and the business targets are very, very aggressive. And I will also say that I will be very, very happy to pay it.

Okay. Thank you.

Thank you.

The next question comes from the line of Ananda Baruah of Brean Capital. Please proceed.

Thanks guys. Thanks for taking my question. Congratulations on a solid quarter and solid guidance. Two if I could, the first with result to Objet, it seems, I mean, very reasonably that you are focused on developing revenue synergies currently. It looks like it is going well. At what point do you expect to being to realize, I guess, operating leverage from the revenue synergies? Is it in 2014, is it in 2015, and how do you have expect this to occur, and then I have a follow-up?

The current business model and the current results that you see are in line with our long-term model. We are thinking the low part of the range that we provided. And regarding our load lock block long term model, both from the stability and operating margin. And once we discuss 2014 at the end of the year/beginning of next year, we will give more color on the operating leverage and operating margin that we expect in 2014.

Okay. Got it. It is reasonable to expect that there would be operating leverage in the future?

Yes.

Got it. Thank you. And then my follow-up iswith regards to the acquisition strategy, now that you have completed the secondary, and now that you expanded your M&A team internally, what is the acquisition strategy, how should we think about how you guys are approaching M&A? Thanks.

First of all, I will make a statement before I get to your specific question. First of all, we are treating this in a very professional way. We have a team that is dealing is with M&A strategy planning. That is counting for opportunities and doing it extremely professionally. That is number one.

Number two, we are looking for opportunities basically in three main areas. One is complimentary technologies to support our long term strategy. Complimentary product, and the third element are areas of acquisition which a would enhance our channel in the global markets. We are looking on all three directions. And as I said, doing it professionally, and when we find candidates, and it will be an advisor of those opportunities will materialize, obviously we will report on them.

Okay. Got it. Thank you.

Thank you.

Your next question comes from the line of Ken Wong of Citigroup. Please proceed.

Hi guys. Touching on the units question again. You had 64,000, roughly 65,000 systems sold this year including MakerBot. Can you give a sense for what it was at last year at this time, or perhaps last quarter, or if not, maybe at the very lease could get some growth rates there?

It is not units that were sold this year. It is the accumulated number that were sold throughout the years in combination of MakerBot and Stratasys. And this is actually the current installed base that we have in place for the combined Company.

Yes, sorry. I meant the installed base. Can you give a sense of what it was last year and last quarter perhaps?

I think if you go to the 6-K and F-3 you will find numbers of MakerBotsthat were sold until the end of Q1. You will find also for the number for Stratasys. I don't remember if I have the number. But the numbers are there.

Okay. Okay. Perfect. You guys have consistently positioned MakerBot as a sorter lower-priced professional device. In terms of how you plan to position it to the consumer, should we expect really aggressive marketing ahead of the holidays, or is this still going to be more of a low-end professional device?

I think we are very aggressive in marketing regardless of the time of the year, but again I think that MakerBot targeting, like you said, I think correctly, lower end professional market, and multiple consumers, which are individuals that have some technical capabilities are obvious, and we are out into market to them aggressively, as we are doing all year, and especially during the holidays.

Got it. And my last question. You talked about gross margins likely trending down for the next few quarters. Should we expect that trajectory to start inching back up after a few quarters, or is that still going to kind of stay flattish?

It is really too early to say. I think if you want to discuss 2014 in general, our plan is once we have the MakerBot under the Stratasys group, to try and reverse the infrastructure and the scale of Stratasys, and to drive the margins up for MakerBot. They face a tremendous growth now in business. They enjoy a very nice operating leverage. I think it is too early to quantify the numbers or the trend for 2015.

Okay. Perfect, that is it for me, thank you, guys.

Thank you, Ken.

Your next question from Brian Drab of William Blair. Please proceed.

Congratulations on a nice quarter. First question is on the Aurora Group, I am not familiar with them outside of your press release. Can you give us a better sense for how many stores or outlets they have in China? How does your presence in China look after this combination, relative to what it looked like before, because I know Objet had a reasonably strong presence in Asia?

We will start with the second part of your question. We are local in China. We have our corporate offices based to Shanghai. We straddle those employees, which are managed from our corporate Asia Pacific headquarters in Hong Kong. We are investing a lot in the infrastructure in Asia in general, and China specifically. I think there is always a major move, I don't remember the exact statistics regarding the roll outs, I can maybe mail it to you later, but it is a major company. With many thousands of employees and many, many hundreds of locations, the distribution within China, but again, I don't recall the exact numbers.

At this point of time, the Aurora Group is responsible to distribute our Idea Series. And because the Idea Series, we described it as the high end of the lower end professional market, which requires more kind of complex sales, and we need a local presence. So I can probably provide you later the statistics about Aurora but it is a major, major, distributor within the Chinese markets.

Thank you very much. And one more question. On the last conference call, second quarter, you showed a slide with the number of opportunities registered, and your Salesforce.com system, is there any update to that? It looked like the momentum was 24% growth in April, 18% sequentially, and then 12% in June, how did that look in July, August, September?

Well, we continue the same response, strong growthin July and September. You can see the results in Q3.

I am sorry, you can see the results where?

You can see the results in the results of Q3.

In your overall consolidated results. Okay. Sure. Thank you very much.

Your next question comes from the line of Andrea James, Dougherty & Company.

Thank you for squeezing me in. Real quick. It looks like you sold a combined number of 5,925 units in the quarter. How much is sell-in, and how much is sell through?

I don't have the number in front of me. But I can mail it later on to you. I don't have it in front of me.

But generally, we can accept that MakerBot is more of a direct sale to the consumer, and the legacy business is more through distributors? Or are you selling more directs?

It is a mix. If I want to understand again your question, are you asking for the level, you are asking for the level of inventory at the channels at the end of the quarter?

No.

The breakdown between direct and indirect?

Yes.

MakerBot is selling both direct and indirect. A mix of online sales and sell through. Resellers, we do the same with the geography and the business model. I don't have the numbers in front of me.

Okay. And then will we see any channel fill effect in Q4 because of the new distribution agreement with Ingram Micro, and also some of the expanded distribution in Asia?

It is really early to say. Ingram signed like a few weeks ago. The same with Aurora. It is more on the long-term relationship, than business generation, rather than next quarter. We do hope it will have impact, but it is really too early to say.

But do they just take an initial big order and then they sell them, or will it be more of a steady flow through on them? Just making sure on how to model it?

They are different. I would say that Ingram is buying first large quantity and then selling it. And Aurora, no.

Thank you very much.

Your next question comes from the line of Holden Lewis of BB&T. Please proceed.

Thank you. Good morning. Trying to think about the R&D. As a percentage of sales, you have obviously continued to ramp that up, which is impressive when you consider how strong your sales have been, in terms of making sure that you continue to get a good return, have we thought about where we begin to leverage the R&D, where perhaps you get diminishing returns such that you want to leverage the R&D? I don't know if you leverage this in terms of numbers of profits sold, or what percentage of products sold are new products over the last three years, or something like that, to tell us when maybe we are getting to the point where the accelerating R&D, and accelerating product is going to begin to level off?

It is David. I think that as much as this industry did for 25 five years, if you look at the future is great and with tons of opportunities. If we want to capitalize on what we see today on the table, and what is expected in the coming few years, we need to continue to invest massively in R&D, like we are doing. And therefore we are not in a point in time that we need to do those kinds of analysis. There are so many opportunities, and I wish we could spend more on R&D. Okay. We are really not there.

Okay. Great. We can expect to see at least the percentages at least to stay elevated, and that sort of thing?

Yes. Yes.

Okay. And just for the second question, again, with regards to Ingram Micro, obviously you guys went down a path using somebody to sell related type products with Hewlett Packard a while back, they had difficulty making that specialized sale. Why do we think that Ingram Micro is going to a better partner, more capable of making a pretty specialized sale with regards to these printers?

There is a basic fundamental difference, and it has to do with the products that you are selling. When Stratasys signed the agreement with HP, which I think was before five years ago, we were trying to sell a different product at a different price point to a different audience. Today, MakerBot again is targeting a different audience. It is a different sales model. It is much more pull than push, compared to what we tried to do with HP. Therefore, I don't think we should try to compare with those two agreements.

Okay, thank you.

Thank you.

Your next question comes from the line of Patrick Rau of Battle Road Research.

Hi guys, thanks for squeezing me in. I wanted to piggybacking on a question earlier regarding acquisition strategy. Is metal printing anything you are looking to bring into your portfolio anytime soon, and would you have any timeline for when that might happen?

Obviously it is very difficult to comment on timeline. We are seriously looking on different technologies which we think are complementary to our long-term strategy. We are obviously looking into metal in a very serious way. We did not take any decision to go into it or not to go into it. And something that when it is going to be relevant, we will announce, but we definitely did not make any decision now, we are in the process of learning this area of the markets.

Okay. Great. I wanted to touch upon Europe a little bit. I want to see your take on the region for the quarter, and how was the growth compared to the other regions, and what do you see as a trend there?

I think first of all we saw a very nice and aggressive growth in Pacific, we saw growth in North America. Europe is lagging behind,mainly because of the macro economic situation, over all of the world. Here, Europe is in line with our plan that we put in place at the beginning of the year. Although it is going slow, it is growing at a slower pace than in the Pacific and North America, but it is growing.

Very last one. Any comment on what kind of verticals you have strengthened, and how has that compared to previous years?

I think we are very active in dental medical space, we are very active in aerospace, and also automotive with respect to our manufacturing applications. In general, manufacturing is an area of focus. For both what we call augmented manufacturing, which is the ability to provide tools to the manufacturing floor. And for alternative manufacturing, which is replacing traditional manufacturing processes. So again, a few verticals, on which we are focused and we may have some in the future as well there as well.

Okay. Thanks for taking my questions, and congratulations on the quarter.

Thank you.

Thank you.

I would now like to turn the call over to David Reis for closing remarks.

Again, thank you very much for joining us. Hope to meet again at the end of Q4. Thank you.

Thank you.

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