Stratasys Ltd (SSYS) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Stratasys earnings conference call. My name is Ian. I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I'd like to turn the call over to Mr. Shane Glenn, Vice President, Investor Relations. Please proceed, sir.

Thank you, Ian. Good morning, everyone, and thank you for joining us to discuss our fourth-quarter and full-year 2013 financial results. On the call with us today are David Reis, CEO, and Erez Simha, CFO and COO of Stratasys. Bre Pettis, CEO of MakerBot, will join us later in the call to answer questions regarding MakerBot products and strategy.

I'll 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 also be available; it can be accessed within the Investors section of our website.

I'll 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, and 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 of financial condition, including with respect to the MakerBot acquisition; 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 risk and uncertainties. The Company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and in 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 successfully put in place and execute an effective postacquisition integration plan for MakerBot; 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 Company operates; projected capital expenditures and liquidity; changes in the Company's strategy; government regulations and approvals; changes in customers' budgeting priorities; litigation and regulatory proceedings; and those factors referred to under risk factors, information on the Company, operating and financial review of prospects, and generally in the Company's annual report for 2013 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 operation, and prospects.

Any forward-looking statements in this presentation are made as of the date hereof, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by law.

Now I'd 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 fourth-quarter and full-year financial results. The Company of observed strong demand across all product categories during the fourth quarter, driven by the merger revenue synergies and our rapidly growing industry.

Organic revenue growth was an impressive 36% during the fourth quarter over the fourth quarter of last year, with hardware and consumable revenue, excluding sales of MakerBot products, growing by 38% and 33%, respectively. MakerBot also performed impressively, contributing revenue of approximately $25 million to the fourth quarter as the rapidly growing desktop category sustained strong growth sales momentum.

Our gross margin increased both year-over-year and quarter-over quarter-driven, by the sale of our higher-margin products and operational improvement. The margin expansion, combined with our strong sales performance, contributed to a record quarter in terms of profit and earnings per share.

In addition to our strong fourth-quarter financial performance, we continued to aggressively expand our global market presence through channel expansion and strategic partnerships. And we introduced several new systems and materials as a result of our focused investment in R&D and product development.

Finally, with the first phase of the Stratasys-Objet merger integration completed, we are now focusing our attention on better aligning additional functional areas within our Company, including R&D and operations. I will return later in the call to provide you with more detail on these developments and our strategy moving forward; but first I would like to turn the call over to our CFO and COO, Erez Simha, who will provide you details 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 for the fourth quarter of 2013 and pro forma non-GAAP financial results in the fourth quarter of 2012, giving effect to the Stratasys-Objet merger as if it had occurred on January 1, 2012. These non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance.

You should also note that we are not providing any pro forma financial results for the MakerBot acquisition. MakerBot results were included in the GAAP and non-GAAP results commencing August 15, 2013.

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 fourth-quarter performance. We generated $156 million in revenue in the fourth quarter, an impressive 62% increase over the pro forma results for the same period last year.

Our organic revenue growth was an impressive 36% over the same period last year, driven by Stratasys-Objet merger synergies and the rapidly expanding market for 3D printing and additive manufacturing solutions worldwide. MakerBot also made a significant revenue contribution of $24.9 million to the fourth quarter, sustaining its strong positive sales momentum within the rapidly growing desktop category.

Driven by our strong sales and combined with the sales mix of higher-margin products, we generated record profits in the fourth quarter. Although MakerBot product margins slightly lower than our corporate average, we were pleased to see our margin move higher for the quarter.

Net profit grew by 59% to $25.8 million or $0.50 per diluted share over the $16.3 million or $0.40 per diluted share on a pro forma basis for the same period last year.

Product revenue in the fourth quarter of 2013 increased by 66% to $135.6 million as compared to pro forma combined product revenue in the fourth quarter of 2012. System revenue increased by 80% in the fourth quarter over the pro forma results for the same period last year, driven in part by MakerBot's impressive contribution to system revenue during the period. Hardware revenue, excluding MakerBot products, was also impressive for the period, growing by 38% over last year.

This strong organic growth was a result of broad-based demand across our entire product line including the Production Series, Design Series, and Idea Series of 3D printers. The demand for manufacturing and high-end prototyping applications continues to drive this growth.

Consumables revenue in the fourth quarter increased by 40%, or 33% excluding MakerBot revenue, compared to the pro forma results for the same period last year. Consumables revenue continues to be driven by an acceleration in customer usage, our growing installed base of systems, and our efforts surrounding applications training and materials education.

In addition the strong sales of our Production and Design Series systems previous periods contributed to the strong consumables sales growth in the fourth quarter, given the relatively higher consumables utilization rates. We believe that the continued strength in the Production and Design Series systems sales are positive indicators of consumables revenue growth in future periods.

Revenue from service offerings in the fourth quarter of 2013 increased by 37% to $20.2 million as compared to the pro forma results for the same period last year. The growth in service revenues, driven by increased revenue from maintenance contracts and service parts, reflecting our growing base of installed systems. In addition, revenue from our RedEye paid parts service increased by 22% for the fourth quarter over last year, primarily due to the increasing demand for large and complex production parts as well as the ongoing development of the RedEye sales channel.

The number of 3D printers and additive manufacturing systems shipped in the fourth quarter was 10,963 units as compared to 1,136 units shipped in the fourth quarter of 2012 on a pro forma combined basis. The significant increase in unit shipments resulted primarily from the inclusion of MakerBot products.

We also observed strong unit sales growth across our other product lines, with organic unit sales increasing by 44% for the fourth quarter as compared to sales on a pro forma basis for the same period last year. Including all systems sold by Stratasys, Objet, Solidscape, and MakerBot since their since their inception, the Company has now sold 75,818 units worldwide on a pro forma combined basis as of December 31, 2013.

Driven by sales of our higher-margin systems and consumables, the Company gross margin percentage improved to 60.2% in the fourth quarter over the 57.8% on a pro forma basis for the same period last year. Gross margin percentage also improved over the level recognized in the third quarter of 2013.

As we mentioned earlier, we believe that this is very impressive when you consider the impact of MakerBot on the quarter, given that MakerBot systems inherently maintains lower margin.

Net research and development expenses increased by 67.7% to $15.5 million in the fourth quarter as compared to pro forma amounts for the same period last year, driven by the inclusion of MakerBot R&D expenses as well as higher spending on new projects. SG&A expenses increased by 66.4% for the fourth quarter as compared to pro forma amounts for the same period last year, driven by the inclusion of MakerBot SG&A expenses as well as expanded headcount to support our growth plans, higher commission expenses due to increased sales, and -- more important -- incremental sales marketing and infrastructure investments.

Slide 10 provides you 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.

We witnessed strong growth in North America, driven in part by MakerBot's strong focus on the US market. The Asia-Pacific region was our fastest-growing region on an organic basis, driven by our ramping sales and marketing investments in that region.

I won't be reviewing the specific reconciliations to GAAP for the non-GAAP measures we have discussed throughout our presentation today. This information is provided in the slide appearing at the end of our presentation as well as in our earnings release.

We maintain approximately $616 million in cash, cash equivalents, and short-term deposits and investments on our balance sheet, amounting to $12.50 per share, which was relatively unchanged versus the balance of the end of the third quarter of 2013. Net operating cash flow from operations in the fourth quarter was $15.6 million; and capital expenditure amounted to approximately $30 million in facility and equipment investments. Our significant cash balance, combined with our available $250 million revolving credit facility, provides us flexibility to fund our internal growth plans as well as future M&A projects and investments.

Inventories increased to $88.4 million in the fourth quarter compared to $79.8 million at the end of the third quarter, in anticipation to our companywide Oracle implementation in January. Accounts receivable increased to $99.2 million in the fourth quarter compared to $86.6 million at the end of the third quarter, while DSO on 12 months' trailing revenue was 74 for both periods.

In summary, we are very pleased with our fourth-quarter results. We generated impressive organic sales growth, observed a strong contribution from MakerBot, experienced impressive margin expansion, and generated record profits and earnings per share. We have a strong balance sheet, and continue to position the Company for future growth through strategic investment in R&D and channel development as well as additional acquisitions.

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. Stratasys reiterated the following information regarding the Company's projected revenue and net income for the fiscal year ending December 31, 2014: revenue guidance of $660 million to $680 million; non-GAAP net income of $113 million to $119 million, or $2.15 to $2.25 per diluted share; GAAP net income of $10.5 million to $19.9 million, or $0.20 to $0.38 per diluted share. We expect organic sales, which exclude MakerBot sales, to grow at least 25% over 2013, with additional growth coming from MakerBot, which is expected to grow at a higher rate.

Stratasys provides the following additional information regarding the Company's performance and strategic plans for 2014. Operating expenses are projected to grow materially in 2014, driven by investments in sales and marketing programs to drive future market adoption as well as by higher R&D investments to fund technology innovation and new product development. Incremental sales and marketing investments will focus on expanding sales channels, enhancing regional infrastructure, as well as building unique go-to-market programs targeting certain market verticals and customer applications.

Non-GAAP operating margins in 2014 are projected to remain relatively consistent with levels recognized in 2013, as margin expansion in the Company's core business is offset by a full-year contribution from MakerBot, which maintains lower operating margins. Projected non-GAAP net income is expected to be derived disproportionately from the second half of 2014, driven by the projected timing of operating expenses as well as the projected timing and success of new product introductions and their corresponding ramp in sales. All the new fifth-generation MakerBot systems, for example, are expected to have begun shipment by the middle of 2014.

Capital expenditures are expected to be $50 million to $70 million, which includes significant investments in manufacturing capacity in anticipation of future growth. Non-GAAP earnings guidance excludes $64.8 million of projected amortization of intangible assets; $25.1 million to $28.2 million of share-based compensation expense; and $8.8 million to $9.8 million in nonrecurring expenses related to M&A transactions.

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% to 25%; an effective tax rate between 15% to 20%; and non-GAAP net income as a percent of sales of between 16% and 21%.

Now I'd like to turn the call back over to David Reis, who will provide you with a more detailed strategic overview. David?

Thank you, Shane. The revenue synergies that are resulting from the Stratasys-Objet successful merger, combined with the rapidly growing marketplace, are once again reflected in the strong organic revenue growth that we generated during the fourth quarter. We are very pleased with the results of our sales, marketing, and service team integration, which is now completed.

We now turn our integration focus to align the other functions areas within the Company to include R&D and operations. We continue to invest effort in building and implementing the scale and infrastructure needed to execute the broad growth strategy in the following areas.

We will seek to maintain our leadership in the prototyping market by extending the functionality and affordability of our products. We will seek to expand the direct digital manufacturing business by building on proven opportunities as well as developing exciting new applications and technologies.

We will seek to introduce new niche vertical applications, like we are currently doing in the education and dental markets. We will seek to accelerate new solutions to market, with an unmatched commitment to product development and innovation.

We will seek to continue to improve our 3D printing accessibility with our market leading desktop 3D printing solutions. And we will seek to improve customer intimacy by developing an ecosystem around which we can strengthen our competitive position and create new business opportunities.

Critical to our success is the focus on innovation. This is visible in our strong commitment to technology and development and our industry-leading investment in R&D. This commitment resulted in several recent new product introductions that we believe will help us build on proven opportunities as well as drive expansion into new markets and applications.

A great example of how we are transforming the way our customers can innovate, design, and manufacture new products is the new Objet500 Connex3 color multi-material 3D printer. The printer is the first and only printer to combine color and multi-material printing.

The system features a unique triple-jet technology that allows the user to combine color with virtually unlimited combination of rigidity, flexibility, and transparency. The ability to produce the characteristics of an assembled part, including matching the look and feel of the finished product, is a unique capability that we believe will empower manufacturers to accelerate the design process.

In addition, at CES last January we launched a new 3D printing platform designed to improve system affordability, reliability, ease of use, and user connectivity. The new MakerBot Replicator platform is an app-enabled platform that includes three new fifth-generation MakerBot Replicator 3D printers: The MakerBot Replicator desktop 3D printer; the MakerBot Replicator Mini compact 3D printer; and the MakerBot Replicator Z18 3D printer.

The new platform includes an advanced microprocessor, a common component set, and onboard 3D file storage. It also includes user-friendly online access to MakerBot Thingiverse filesharing website and to social networks, as well as a full-color LCD display and an onboard camera for print monitoring.

Compared to existing desktop printers, we believe this enhanced capability is similar to the evolution in going from basic mobile telephony to smartphones. Further enhancing the MakerBot 3D printing ecosystem we also launched a suite of apps for the MakerBot Replicator platform which I will discuss in more detail later in the call.

We believe the new MakerBot platform provides unmatched speed, reliability, quality, and connectivity and delivers easy to use and reliable desktop 3D printing to a full range of consumers and professional users. Desktop 3D printing remains one of the fastest-growing opportunities within our industry, and Stratasys is the leading of this category.

As we advance the capabilities of our 3D printers, accelerating the development of new material is becoming more critical. Simply stated, better materials make our systems more functional, which expands their usage. For example we recently released Nylon 12 for our Fortus FDM platform in Euromold in December. We believe Nylon 12 is ideal material for applications that require functionality and endurance, and believe that the new material will appeal to customers that require custom production tools, jigs, fixtures, functional prototypes, and low-volume production parts.

In addition to Nylon 12 we recently announced several new PolyJet materials for the Connex platform, including Digital ABS2, which creates realistic, precise prototypes that also are tough and heat resistant. Combined with the three new color-enabling materials we recently introduced for the new Connex3 color 3D printer, our investment in material and R&D for PolyJet platform is resulting in an impressive expansion of the platform capabilities.

Our growth in sales depends highly on the continued development of our channels. This includes the regional expansion of our global presence as well as development of strategic partnerships.

To support the marketing and sales of our growing portfolio we remain aggressive in expanding our global customer reach. Following our third-quarter expansion into Singapore, Japan, and China, we recently established Stratasys Korea as an indirect wholly-owned subsidiary of Stratasys Ltd. Stratasys Korea provides a localized and expanded presence that will support our local channel and the rapid growing demand in the region.

In addition we recently announced two important expansions of our distribution strategy. The first was a distribution agreement with Dell to provide MakerBot Replicator 3D printers standard with Dell Precision workstation for small and medium-size businesses.

Dell is now selling the full portfolio of MakerBot Replicator 3D printers, the MakerBot Digitizer desktop 3D scanner, and the MakerBot filament. We believe this partnership can expand our access to more engineers, architects, designers, and small to medium-size business markets.

Additionally, we recently entered into a distribution agreement with the MakerBot product with Micro Center, a US technology retailer with national reach that caters to tech-savvy customers. We believe our new channel development program, combined with the growing commitment for our existing channel partner to broaden their reach, will help drive rapid growth in the markets and are unprecedented and ready for expansion -- unpenetrated and ready for expansion.

Another component of our go-to-market strategy is expanding into unique industry verticals and applications, such as education and the dental market, as well as the rapidly growing opportunity for manufacturing applications. Building on our Company's success in targeting teaching institutes, we recently launched the MakerBot Academy, a program that aims to put a 3D printer in every school in the United States.

The program gives students better access to technology that is reshaping the future of design and manufacturing. We have already placed over 854 Replicator 2 3D printers in schools as a result of the program.

Both higher education and corporate clients are increasingly looking to jumpstart innovation within their institutes and organizations. To meet this demand, we recently launched the MakerBot Innovation Center at two universities in the US. The Centers, built in partnership with us, are large 3D printing hubs equipped with MakerBot 3D printers and scanners.

In addition to education, the dental vertical is one of the fastest-growing medical applications within the 3D printing. During the last quarter we observed accelerated adoption of the Objet30 Autodesk 3D printer, our affordable, simple-to-use, desktop system designed to provide a cost-effective entry point for digital dentistry. We have seen strong global demand for this unit from small dental labs that are looking for significantly shortened delivery time, increased production capacity, and eliminate bulky model storage.

Adding to our portfolio of dental solutions, we also recently announced Objet's Eden 260V Dental Advantage 3D printer and VeroGlaze dental material for use with Objet Eden V and Autodesk printers.

Direct digital manufacturing applications continue to expand rapidly and are driving strong demand for our Fortus, Connex, Solidscape, and Eden lines of additive manufacturing systems. A great example of the value we provide in manufacturing is the success of Spring Srl, a major Italian service bureau that recently purchased a second Stratasys Fortus 900mc, their seventh Stratasys system overall.

The Company uses the Fortus system to produce jigs, fixtures, and end-use components for industrial clients. The Stratasys FDM system have enabled the company to cut turnaround time for their customers by 66% and achieve 50% cost savings compared to traditional manufacturing techniques.

We view the Fortus line, with its proprietary technology and thermoplastic materials, as uniquely positioned to capture the market for jigs, fixtures, and fabrication tools. We believe the application is proven and that the market is significant in size and very unpenetrated.

These applications have been instrumental in driving the strong growth we are observing within the Fortus line in recent quarters. We also believe our recent introduction of Nylon 12 will expand our DDM opportunities within the Fortus line, given the material's high functionality and durable characteristics.

In addition to education, dental, and DDM we will continue to identify other opportunities in vertical markets. Our strategy will be to identify multiple opportunities and strive to deliver the platforms and solutions that will allow us to be the market leaders in those areas.

In parallel with expanding into new markets and applications and growing our market reach, we are making our technology more accessible and connective with our customers. To that end, we are broadening our 3D printing ecosystem and expanding our reach with customers across all levels of the 3D printing experience.

For example, we continue to observe an impressive growth with Thingiverse.com, our loyal and dynamic 3D design community for discovering, sharing, and printing 3D models. Usage trends for the site reflect a vibrant and engaged community of users that reinforce the MakerBot brand and develop future customers.

Key data points include the following. The site has over 178,000 total users, with over 36,000 added in Q4 alone. It has more than 218,000 downloadable things, with more than 21,000 uploads in December alone.

In 2013 Thingiverse was visited nearly 60 million times, with more than 6 million unique visitors. For the quarter, Thingiverse has a monthly average of approximately 600,000 unique visitors.

Building on the remarkable growth of Thingiverse.com, at CES we announced new additions to the MakerBot 3D printing ecosystem to include MakerBot's Desktop, MakerBot Mobile, MakerBot Printshop, and the MakerBot Digital Store. MakerBot Desktop and MakerBot Mobile apps provide a complete 3D printing solution to discover, manage, and share 3D prints from desktop computers or mobile devices.

MakerBot Printshop is a tablet-based app for creating and printing 3D content that require no 3D design skills. The simple interfaces allow users to quickly and intuitively create and print 3D models without prior experience.

The MakerBot Digital Store allows users to purchase high-quality and printable 3D models and collections. The models are available as both individual purchase and as a collection.

The development of our ecosystem adds rich functionality to our 3D printing platforms and lowers the barriers to entry for customers. We also believe that enhancing the user experience and providing a full 3D printing solution for users of the desktop product will drive future sales of our higher-priced systems. We encourage you to check out these exciting new offerings by visiting the MakerBot website.

In summary, we are extremely pleased with our record fourth-quarter results. The organic growth rate we enjoyed in the quarter highlights the success of the first stage in the Stratasys and Objet integration as well as the favorable market condition that persists within our industry.

We believe Stratasys is well positioned within our rapid growing industry as we begin 2014. We have positive momentum, driven by the ongoing demand for our industry-leading products and services. We are pleased with our many recent new product introductions and channel initiatives that we believe will greatly improve 3D printing accessibility and drive expanded usage for our products.

And finally, we are excited about the many new internal projects that we believe will further our objective of market leadership and long-term growth as we continue to evaluate additional acquisitions opportunities to accelerate our growth. Operator, please open the call for questions.

(Operator Instructions). Troy Jensen, Piper Jaffray.

Yes, congratulations on the great results, gentlemen. David, how about quickly for you; you mentioned doing the next phase of the integration here between Objet and Stratasys, the R&D and the operations. I guess I'd just like to get some more details on that, because to me it feels like FDM and jetting are a little bit different technologies. So what are the synergies in R&D? And then I do have a follow-up.

There are two areas of synergies. One of them has to do with the operations. We just recently restructured ourselves in a way that will allow us to benefit from operational synergies across the different platform technologies and geographies, and we are going to do it during 2014 and 2015. There is a lot to do there.

On the R&D side of it, we are looking mainly better on a global perspective of the overall portfolio of technologies and products in a centralized way, which again was driven by an organization change that took place here. It will allow us better perspective on the overall product portfolio, technology offering, etc.

All right. Understood. So then a follow-up either for you, David, or for Bre, on the MakerBot side. If you guys achieve this minimum organic growth rate of about 25% I think you mentioned in a prior guidance, I think that implies $105 million to $110 million for MakerBot revenues, by my estimate.

So if you just look at the midpoint -- or excuse me, what the company just did and a run rate at about $100 million, it seems like that is a little conservative. So could you just talk about the organic growth for MakerBot and reconcile these two numbers here?

This is Bre. Thanks for asking the question. There's a couple factors there. The first one is the MakerBot product line is subject to greater seasonality. We've had a prosumer line, and one of the 3D printers we are launching is a consumer 3D printer, so that has more seasonality to it.

In addition several of the new products we have recently introduced will not begin shipment until later this year. So we want to factor that into our assumption.

We are really pleased -- and I mean, it we are really pleased with our recent growth, and we are very optimistic about 2014, and the guidance reflects that. We have established the guidance that we think is achievable.

But you have to understand that we are participating in a very dynamic industry, and we are exploring new territory.

All right. Understood. Good luck, gentlemen.

John Balliotti.

Thank you. David, following up on Troy's question, you talked about aligning functions like operations and R&D, given the three merged portfolios. And despite some market perception that MakerBot is more for consumers, we know many professional engineering departments that are using them, for whether it's tooling or prototyping, and seeing many of them expand into either the traditional Stratasys units or the Objet or -- obviously, which is a combined portfolio.

Are you expecting -- maybe this is for you and/or Bre -- expecting to have a more synchronized product development, given that your customers are using the entire breadth of your offering?

Part of your question I cannot answer. There are a lot of synergies between obviously the Stratasys product and the MakerBot product, are basically operating very, very same technology. So in the background -- we said it earlier, before and during the merger -- we are planning to align efforts in R&D to share IP and technology.

On the other hand on the go-to-market I think they are very unique products. As you can see, both of them are selling very well; and we will continue I think with this direction.

Like we said all the way, we will integrate with exception. I mean, it is not a full integration.

Sure. I mean I've just talked to some people who have started with a MakerBot, used it really aggressively, and ended up buying a Fortus, which obviously you wouldn't be disappointed with, and maybe not have bought a Fortus had they not had exposure with the MakerBot. Just it seems like the synergies between the two or the complementary aspects are getting a lot tighter.

Yes. Again, I agree. The synergies are around for example the size of the printers, the variety of materials, the ability to use sophisticated support. So I hope that the trend that you describe will become even more natural.

Yes. I mean, your story makes me really happy. Because getting into it is a lot about what MakerBot is; but it is also a professional-level machine that expands in. That story just makes me happy. Thanks for sharing it.

Thanks, Bre.

Wamsi Mohan, Bank of America Merrill Lynch.

Yes, thank you; good morning guys. Can you address the comment around the linearity across first half and second half relative to revenues? Obviously MakerBot, given the timing of the product introductions and the increased seasonality that Bre mentioned, is going to be more back-half loaded.

But could you maybe size the relative seasonality between the first half and second half for the core business, excluding MakerBot?

Hi, Wamsi; it's Erez. When we provided the 2014 guidance we said that we see 2013 as more backloaded in both revenue and net income for the entire year. There are a few reasons for that.

The first one was all activity around new product that we are going to introduce throughout the year; some of it will not be available in the first part of the year. However it required a massive investment around R&D, marketing, and sales in order to introduce those products to the market.

So when we provided the guidance for 2014 we said that the second part of the year we see more revenue and more net income compared to the first part of the year. We didn't provide any size to this phenomenon.

And if we are talking about organic versus MakerBot, I think that the phenomenon is similar. Both MakerBot and Stratasys will enjoy new products; some of them will not be available in Q1, even not in Q2. However the investment that we have to do in order to introduce those products to the market has to be done upfront prior to the introduction of the product, obviously in Q1 and Q2.

This has impact on profitability and, of course, on net income -- on revenue.

Okay, thanks. As my follow-up, can you address the material usage dynamics that you are seeing in your installed base? It seems as though you are seeing an acceleration in materials usage. I am curious how sustainable you think that is, and if there is a way to isolate the impact of the increased units versus increased utilization on the installed base. Thank you..

That's a very good question. Thank you. It's David. You indicated correctly; there's these two growth drivers that we see for the increased usage.

One of them is -- let's call it the organic growth of the idea itself. Here, you know the database or the statistic significance is big, and we know quite well how to estimate machine consumption per industry, per geography, which is a base for our projections.

There is another element, which -- Stratasys for a relatively long time, maybe more than two years or three years already, is spending a lot of energy in -- is treating the consumables as a product and promoting them via improved training, mainly application training to customers. And we witnessed an increase in consumable demand which is above the organic growth. And here again it is related to the training, to product introductions, and to education.

So you are saying there is some cyclicality to it, and some season, some more secular growth trend.

No. No, it is not seasonal or cyclical. There's two elements.

One the growth in the consumable sales is, one, related directly to the number of machines that we are selling; and here it depends to where the machine is being sold, which industry and which geography. Some industries are consuming more; some geographies are consuming more or less.

And another parameter which increases consumable sales has to do with our ability to better train customers and introduce to them new materials and make them switch to better materials, which increasing consumption. So we are dealing with both those elements through our consumable business units.

Okay, thanks a lot.

Ananda Baruah, Brean Capital.

Hey, thanks guys for taking the question and congrats on the solid quarter and pretty solid commentary. Hey, just two if I could.

The first one is again with regards to the 2014 revenue guidance. Could you just go through the appropriate context for us to understand the implied deceleration to 25% from mid-30%s? And that 25%, is that getting impacted by the seasonality in the MakerBot revenue stream?

And then I have a follow-up, thanks. And I guess -- just say why would we expect that deceleration down to 25%? You guys have been accelerating for the last 12 months. Thanks.

The 25% was there -- and it's not 25%; we said it's more than 25%. And it refers to organic growth only.

We said that the nature, the organic business of Stratasys and Objet will grow more than 25% in 2014; and the MakerBot business will grow faster than that. I think that we feel comfortable with the guidance for 2014. Don't forget that we had a significant impact of integration in the first time in 2013; but I don't think that we will see a significant jump again in the contribution of integration results between Stratasys and Objet in 2014.

And again please, when you are looking at the number, please refer to more than 25%. We didn't say 25%. We said more than 25% organic growth.

Got it. That's very helpful. Thanks. I guess as my follow-up, I would love just to get an update on philosophically how you are thinking about the metals market.

And then the consumer market as well, you are introducing a new let's say a pure consumer MakerBot product. But just holistically how you thinking about metals and consumer going forward?

Again my perspective on the metal market, I said this a few times before. It's an interesting market. You know, we need to judge our M&A strategy.

We don't have metal in-house. According to what we perceive to be our customers' requirements and needs we are evaluating the market on an ongoing basis. And if and when we have something to say about it we will announce it. We are looking at this market, and we are following it up.

And the consumer?

The consumer? Well, you know, Bre is here and we are extremely involved. MakerBot Mini compact Replicator is the first move into this market. Bre?

Yes, I mean this is -- we have really focused with the MakerBot Replicator Mini on an easy-to-use 3D printer. It is one-touch 3D printing.

But there is no compromise there. The extruder that we have in the MakerBot Replicator Mini is the same extruder that we have in the whole lineup.

So it's a smaller 3D printer, but still you have got professional-grade components and you have got most of the features of the MakerBot Replicator line in there. It is just a little smaller footprint.

I just want to add one thing to Bre's words, that when you talk consumer, I mean it is not only true for consumer. I mean, the printer is just one element in the overall picture.

What I think MakerBot led by Bre is doing extremely well is creating the ecosystem which will allow the usage of those printers. The hardware itself is an important element; but without the ecosystem, without the content, without the ability to share, to modify, to author, the ability to accelerate adoption is going to be limited.

And what I think MakerBot is leaders by far is with this ecosystem, which is absolutely fundamental to the progression of this market.

One example of that is that we launched the MakerBot Digital Store. What we've found is that some of our -- some of the people who have bought MakerBot Replicator 2s ended up using them just to entertain themselves, just to make cool stuff. So the MakerBot Digital Store just makes it really easy for people who have never used a 3D printer to get great content that is really wonderful and download it and make it.

Got it guys. Thank you.

Sherri Scribner, Deutsche Bank.

Hi, thank you. I wanted to get a sense of your long-term guidance and your view of your positioning in the market. And also I wanted to get a little detail on what you are seeing from the market.

So thinking about the at least 25% organic growth for you guys, do you think that the market itself is accelerating? Or do you think that you are growing faster than the market?

And I wanted to get a little more detail on if you are seeing more customers and more interest in 3D printing.

Unfortunately there is no short answer. First of all, I think we are growing faster than the market. When you talk about the market, unfortunately I think we need to split it into three sections.

Let's call it the first one is the desktop; second is the rapid prototyping design market; and the manufacturing market. Now each one of them has a different growth pattern, but all of them are growing and all of them are creating more demand than what we created in previous years.

But nevertheless each one of them has its own characteristics. So the answer is a little bit complex.

Okay. Maybe I can ask you a little bit on the desktop market and the consumer/prosumer market. What is your view on growth in that market at this point? Clearly that is growing greater than 25%. But do you have a long-term expectation for that market's growth?

You know, it's one of those things where, because it really is a new frontier, that I would be hesitant to make predictions on this one. What I will say is the more 3D printers that are out in the world, the more access there are to them and the more familiar people get with them. And that context just provides a fertile ground.

Okay. Then Erez, I just wanted to ask you a little bit about the operating margins as we move through the year. Would you expect operating margins to be at these similar levels as 4Q throughout the year? Or do you think they will be more heavily loaded to the front-end because you are introducing new products, or to the back-end of the year? Thanks.

I think that operating margin will look better in the second part of the year as a result of higher top line the second part of the year. And obviously, Sherri, most of the investment or a significant part of the investment will be done in the first part of the year.

Revenue from those investments we will see mainly in the second part of the year.

Thank you.

Jonathan Shaffer, Credit Suisse.

Hi guys, how's it going? I was just wondering if the new product line at MakerBot will have any impact on the profitability level there, and whether that will continue to be a drag to some degree on gross margin.

Let's see. Can you ask that again, to make sure I understand your question?

Yes, I'm sorry. I was just wondering if the new product line will change the margin profile of MakerBot in either a positive or a negative way.

We don't expect the gross margin of MakerBot to be changed significantly as a result of in production of those new products in 2014.

Then just on M&A strategy generally, I was just wondering if there's any areas of priority you guys are focusing on, and just if valuations are still higher or prohibitive to M&A right now.

I think you know the valuation as good as us in the markets. You know we have a professional process of searching for both technology products and channel acquisitions, both on the core Stratasys business and on the MakerBot business. Nevertheless like I said many times, we have a very professional team which is doing it in a very professional way.

And we are going to decide or try to act as long as it's within our strategic long-term plan. And we are doing it on an ongoing basis.

Thank you, guys.

Ken Wong, Citigroup.

Hi guys. On the 2014 guidance as well you guys talked about flat operating margins. How should we think about gross margins in 2014? Will it be closer to the 60% you guys put up this quarter or more in the high 50%s that you guys have done in the past?

Gross margin will be similar to the entire 2013 gross margin, and it will be a combination of probably a slight increase in Stratasys' gross margin that is somehow muted by the lower gross margin that's generated by MakerBot.

So it sounds like gross margin should be flattish or less.

Yes, yes.

Got you. Then on the MakerBot business, I think some of your competitors have gone pretty aggressively in terms of trying to develop a national retail footprint. How important do you guys think it is to have a similar type of a national presence? Or will you guys continue to build out the retail channel, as more of a -- specific nichey areas and building out your own MakerBot stores?

Well, there's a couple parts to that. We have just launched a partnership with Dell. We have just launched a partnership with Micro Center. And at the end of last year we opened two new retail stores.

So what I would say there is we really like having touch with our customers, and it is one of our overall goals to have more intimacy with our users. That is just one of the ways we do that.

Got it. Thanks, guys.

Paul Coster, JPMorgan.

Yes, thanks for taking my question. I just want to go back to the consumables for a second. David, you talked about how you are able to work with some of your customers, I assume in rapid prototyping and manufacturing, to help them optimize their use of materials.

Right, right.

At the entry-level desktop level I imagine that is a bit more difficult. I am curious to know what the shape of the usage is at the desktop, and also what you are doing there to try and promote usage. Then I have got one quick follow-up.

So for your first comment, you are right on [entry-level]. With respect to the desktop part of it, I think that the consumable market for the desktop is evolving. Okay? It is definitely different than the one that we are familiar with or are used to in the core Stratasys business.

Nevertheless I think we have the means and the tools over time to, A, increase it in size and improve its margins. So it is an ongoing process, but it is definitely different from what we and you are used when you look on the original Stratasys model.

Okay. What I am really driving at is, do you find that there is a peak usage right at the time of purchase then it trails off, and that is an issue to be addressed? Or do you find that for instance the MakerBot community are actually ramping up their usage over time?

Again, I think the market is evolving. I can ask maybe Bre to add his comment.

But we know that as we are adding new materials, new colors, new features, customers have a tendency to experience and try and build new things. So I don't think that it is relaxing over time; it really depends on our ability to initiate new and attractive products for this industry and encourage more consumption. Bre?

It's interesting. On the MakerBot side with folks who are getting it and using it for prosumer or professional uses, they really -- MakerBot can be like a really serious workhorse.

And so for those folks we see it is just great. They use lots of MakerBot filament. We love it.

I think what you see is more recreational users use less than that. But we have really optimized the filament to just be a great experience, so it's nice and sticky.

Okay. My quick follow-up is I am not seeing any evidence of price-based competition in the rapid prototyping and the direct digital manufacturing segments. I don't really know what is happening in the entry-level.

Can you talk about to the extent to which you see any price-based behavior amongst either the competitors or even amongst your consumers?

First of all I think Erez said earlier that we do not anticipate a decreasing margin on the MakerBot side. Okay?

And again I think that the way -- again we should not look on this market as selling hardware. It is not the case. Again, the providers of the ecosystem and the provider of the content and the tools and the accessibility and the community has an advantage.

So it is true there are people which are selling less expensive; but MakerBot is able to sustain its gross margin and we saying that we expect it to continue into next year. And the reason that they are able to do it is because, A, we have great product and, B, we are giving a full solution, which is the only full solution today in the market.

Okay. Thank you.

Ajay Kejriwal, FBR Capital Markets.

Thank you. Good morning. So on Connex3, it's a good milestone I think; you obviously have been working on that for some time here. So, give us a sense of the market size and opportunity. And then, where do you see the growth near term in terms of customer segments for the Connex product?

Let me -- I'll give you just one indication about the potential. We are surveying our installed base of customers every year for the last few years. What we found out from this research is that a lot of our customers -- and I am not talking about 5%, I'm talking about 10s of percentage of our customers in the design and engineering market -- are, at the end of the day, coloring and painting their models.

So you can imagine what the potential of machines that does it off the machine.

Okay.

I can say one other thing, that the moment color TV was fully available, nobody bought black and white.

Yes, yes, that's certainly -- that's a good analogy. Then on the launch of Z18 that obviously -- good product, large build size. Just David maybe any thoughts on implications for the merger? Would you expect any impact or shift in demand towards the Z18?

It's a little bit early to say. Z18 is coming to market in a few months. I think that if I judge from the short history that we have together, between the MakerBot and Stratasys, each of those machines like the other machines has its own space and its own customers.

Nevertheless I do think that some of them it will be a, quote-unquote, competitor, internal competitor. But I think the module will have its space in the high-engineering precise market that requires unique materials and [sale-level] support, and the Z18 will find itself in other spaces of the market.

It is too early to say but at this point of time my gut feeling and our analysis is that those products will be able to live side-by-side.

Okay. Thank you very much.

Cindy Shaw.

Thank you. First question; in the vertical market focus, is that more oriented towards direct digital manufacturing or prototyping? Or could you even say it is oriented towards one or the other?

When we are talking about vertical applications at this point of time we have a dedicated focus which is all the way from design, manufacturing, and go-to-market for three markets: dental, education, and DDM -- and by the way also to the desktop indirectly. I mean, from my perspective desktop is a huge vertical which has on the MakerBot side a unique R&D, unique design, unique go-to-market.

So really we have today four let's say end-to-end verticals which we are developing. One of them is also DDM, like you said.

In terms of -- it seems like it would be a fairly long process to ramp that up, really a multiyear process where you could be investing for an extended period of time and having it pay off for a period of time. Could you talk about how you are thinking about that and your expectations?

No, no. It's all in process. We are involved with the direct digital manufacturing for a few years. When we are saying vertical focus it means that internally and externally with our channel we are getting better organized to serve those markets.

So for example, in the US for example we have a dedicated, very large education market that we are now enhancing. Bre and MakerBot is developing special education initiatives and education channels which will deal with education for MakerBot.

So it is not a work starting today. In most cases the work started a few years ago. Likewise in dental.

But it means that the Company, part of its growth plans is reorganize around these verticals in a way that we can expose them faster.

In dental you have got a special machine oriented towards that market, is that right?

Yes, we have a few specialized machines, both on the PolyJet side of the technology and Solidscape.

Is that a big part of the focus of going after a vertical market, is not just the marketing but also having a dedicated machine? Or do you think it's going to be more of a sales and marketing?

No, no, this is true to all the verticals. When we talk about verticals we are talking about the total approach to market that starts from the printer, the consumables, the marketing approach, and the go-to-market.

So it is also true for dental. We have machines which are dedicated for dental. We have machines which are dedicated for manufacturing. So the idea is across all the sale or go-to-market process.

Is it fair to say that you think both the investment and the results are going to be a very long, drawn-out process? And there is not going to be at some point where you say: okay we have accelerated, we are over the hump; much like the integration of the Objet merger. Is this like a long steady ramp over several years we should be thinking about versus a kind of a (multiple speakers)

Yes, yes.

Thank you very much.

Yes, yes.

Jim Ricchiuti, Needham and Company.

Thanks, two quick questions. Just on the last topic, David, when would we know more about this, some of the additional verticals you'd be going into? Would you anticipate disclosing any of that in the second half of the year?

When we will have something to announce we will announce it. I don't want to refer to exact time.

Okay. Just a question on consumables; you showed very good growth in Q4 year-over-year. If we think about the consumables business in 2014, the addition of Nylon, what seems to be a stronger revenue stream on MakerBot's side from using their own filament, how should we think about the growth rate in consumables?

Is there any reason to think that it won't continue growing at this rate, just given what you are seeing in the market right now?

Jim, I think that the consumable analysis that you do, you should look on the entire year picture. Because the impact of the utilization of the installed base on the consumables revenue has larger impact than the new sales or the new material we introduce to the market.

I think that MakerBot at least at this stage, the business model of MakerBot is heavily relying on hardware sales, where the consumable part is relatively small today; I guess it will also be in 2014. All in all, I think that looking at the consumer picture in 2013, for us it is a great, great, great result. And looking into 2014 for sure will continue to grow at least in the pace that it is growing in the entire year of 2013.

Okay, thank you.

Ladies and gentlemen, we've actually run out of time for our allocated Q&A today. We did have a few questions still waiting, so our apologies; we are not able to answer them today. I will now hand the call over to David Reis for closing remarks.

Thank you for joining us today. I am looking forward to speak with you again next quarter. Thank you very much and goodbye.

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