Stratasys Ltd (SSYS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2014 Stratasys earnings conference call. My name is Sheena and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I now would like to turn the call over to Mr. Shane Glynn, Vice President of Investor Relations. Please proceed, sir.

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

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 and can be accessed through the Investor Relations section of our website.

A reminder that certain information included and incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private securities litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934.

Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project, or other similar words, but are not the only ways 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 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 or 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 the experience and the perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the Company's ability to officially and successfully integrate the operations of Stratasys Inc. and Objet Ltd. after their merger as well as the ability to successfully put in place and execute an effective post-acquisition integration plan for MakerBot and the Company's other acquisitions, including the ones announced on April 2, 2014; the overall global economic environment; the impact of competition to new technologies; 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 reviewing 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.

We (inaudible) urge 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 day here of and the Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. Now I would like to turn the call over to David Reis, Chief Executive Officer of Stratasys. David.

Thank you, Shane, and good morning, everyone. Thank you for joining today's call. We are very pleased with our first-quarter results. During the first quarter we enjoyed strong demand for our higher-margin products which helped drive a 33% increase in organic revenue over the prior year. The strong growth of our higher-margin products and services contributed to an impressive gross margin of 61% for the first quarter representing an extension over both prior year and the [first] quarter of 2013.

MakerBot products and services contributing impressive revenue of approximately $21 million during this period, a 79% increase over the revenues that MakerBot generated as an independent company during the first quarter of 2013. We invested in sales, marketing and product development projects during the first quarter, especially around MakerBot products, investments which we believe will help us sustain strong growth over the coming periods.

More recently we announced a major new initiative through our agreement to acquire Solid Concepts and Harvest Technologies which we believe will create the leading strategic platform to meet our customers' growing (inaudible) manufacturing needs.

Finally, our outlook for 2014 remains very positive as we continue to position the Company for future growth through enhancements in our organization structure to support our growth objectives. I will return later in the call to provide you 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. Erez.

Thank you, David, and good morning, everyone. As in previous quarters, our focus on today's call will be on Non-GAAP Financial results. These non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance.

We 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 16, 2013. The non-GAAP to GAAP considerations are provided in the tables contained in our slide presentation and press release.

As David mentioned in his opening remarks, we are very pleased with our first-quarter performance. We generated (inaudible) organic growth and generated impressive gross margin driven by the demand for our higher-margin products and services.

Operating expenses expanded materially in the first quarter compared to the first quarter of 2013 driven by significant investment in sales and marketing programs to support new MakerBot product introductions. These expenses are in line with our guidance we provided at the end of the fourth quarter and are according to our plan as part of our strategy to accelerate initiatives that will drive future growth.

Net income was $20.6 million for the first quarter or $0.40 per diluted share compared to net income of $17.6 million or $0.43 per diluted share reported for the same period last year. The effective tax rate declined to 3.8% for the first quarter compared to the effective tax rate of 15.1% in the same period last year.

Our effective expense was impacted by the unique mix of taxable income that favored lower effective tax rate (inaudible). We expect our annual tax rate to be around the low end of our long-term project operating model in [2014].

Product revenue in the first quarter increased by 56% to $129.5 million as compared to $82.8 million for the same period last year. Within product revenue, system revenue increased by 71% in the first quarter over the same period last year driven in large part by MakerBot's impressive contribution to the quarter.

System revenue growth, excluding MakerBot product, was also impressive for the period, growing by 40% over the last year. We observed strong sales growth across all our 3-D printer lines driven by the ongoing reduction of (inaudible) manufacturing and high-end prototyping applications.

Three notable area of (inaudible) were [service] Objet500 Connex3 color multi-material 3D printer, the first and only 3D printer to combine color with (inaudible) 3D printing. And the Fortus 400 (inaudible) 3D production system which produces accurate and repeatable production parts made of highly durable thermoplastics.

Within product revenue (inaudible) revenue increased by 36% in the first quarter compared to the same period last year of 29% when excluding MakerBot consumables revenue. Consumable revenue continued to be driven by an acceleration in customer usage, our growing (inaudible) of systems and our effort surrounding application, training and material (inaudible).

We believe that our growing installed base and specifically the installment of the production [series] in high-end design (inaudible) systems is a positive indicator of consumables revenue growth in future periods.

Service revenue in the first quarter increased by 41% to $21.7 million as compared to $15.4 million for the same period last year. The growth in service revenue was driven by increased revenue from maintenance contracts and service parts in selecting our growing base of installed systems.

Revenue from our RedEye [paid] Parts Service increased by 4% during the first quarter over last year. We believe that the slower growth in RedEye sales for the first quarter is an isolated event and we expect sales growth will rebound in the second quarter.

We shipped 8,802 3D printers and additive manufacturing systems in the first quarter as compared to 1,168 units shipped in the first quarter last year. The significant increase in unit shipments resulted primarily from the inclusion of MakerBot products.

However, we also observed strong unit sales growth across our other product lines during the first quarter driven by service of our high-end FDM production in (inaudible) systems, including all systems sold by Stratasys, Objet, Solidscape and MakerBot since their respective inception. The Company has now sold 84,620 units worldwide on a combined basis as of March 31, 2014.

As we mentioned earlier, sales of the Company's higher-margin products and services drove a significant increase in gross margin for the first quarter which expanded to a record of 60.9% compared to 59% for the same period last year. We believe that this is made more impressive when you consider the significant amount of MakerBot product revenue in the quarter which inherently maintains lower gross margins.

Operating expenses increased materially in the first quarter compared to the first quarter of 2013 driven by the inclusion of MakerBot as well as increased sales, marketing and R&D investments to fund growth in new product development.

In addition, we made significant incremental sales and marketing investments to target primarily MakerBot product expansion. (Inaudible) sales and development expenses increased by 54.4% to $15.3 million in the first quarter as compared to the same period last year. R&D expenses as a percentage of sales was 10.1%, similar to the same period last year.

SG&A expenses increased by 95% to $54.1 million for the first quarter as compared to the $27.7 million for the same period last year primarily driven by the inclusion of MakerBot as well as changes in our product distribution strategy. And the volume being increased with independent sales agents, which resulted in increased sales commission, incremental expenses for strategic and marketing initiatives and including headcount and infrastructure to support our growth.

Compared to the first quarter operating margin was [expected] to ramp higher for the remainder of 2014 and are projected to remain relatively constant for the full year when compared to the level recognized in 2013.

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. The Asia-Pacific region continued to be our fastest growing region on an organic basis driven by our ramp up of sales and marketing investments in this (inaudible). Revenue in all regions, including the first quarter of 2014 as compared to the first quarter of 2013, due to strong demand for our product as well as the inclusion of MakerBot revenue. MakerBot revenue was generated primarily in North America.

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

We maintain approximately $607.5 million in cash and cash equivalents and short-term bank deposits on our balance sheet and margins of $12.03 per share which was relatively unchanged as of the balance at the end of the fourth quarter of 2013.

Net operating cash flow from operations in the first quarter was $4.9 million. Capital expenditures amounted to approximately $10.9 million for facility and equipment investments. Our strong cash balance combined with our available $250 million revolving credit facility provide us with the flexibility to fund our internal growth plan as well as future M&A initiatives.

Inventory increased to $99.8 million compared to $88.4 million at the end of the fourth quarter primarily due to the planned inventory increases to allow for increased supply flexibility as well as new product introductions.

Accounts Receivable increased to $106 million in the first quarter compared to $99.2 million at the end of the fourth quarter while DSO on 12 month trailing revenue was 72 compared to 74 in the fourth quarter.

In summary, we are very pleased with our first-quarter results. We generated impressive organic sales growth combined with a strong revenue contribution from MakerBot. The reported and impressive expansion of our gross margin driven by sales of our higher-margin products and services.

We should also highlight that our pro-business, excluding MakerBot, experienced an expansion in operating and net margins over last year, which was offset by significant investments in MakerBot market development projects to drive future growth.

And finally, we have a strong balance sheet that continues to position the Company for future growth through strategic investments as well as additional acquisitions.

I would like now to turn the call over to our VP of Investor Relations, Shane Glynn, who will update you on our annual -- 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. Financial guidance excludes the impact of the Company's pending acquisitions of Solid Concepts and Harvest Technologies. Those transactions are expected to be completed early in the upcoming third-quarter subject to customary closing conditions and are expected to be accretive to Stratasys' earnings per share within the first 12 months after closing.

Operating expenses are projected to expand materially in 2014 driven by investments in sales and marketing programs to drive future market adoption as well as by increased R&D investment to fund technology innovation and new product development.

Incremental sales and marketing investments will focus on expanding sales channels, enhancing regional infrastructure and building unique go to market programs targeting certain market verticals and customer applications.

Compared to the first quarter operating margins are expected to ramp higher for the remainder of 2014 and are projected to remain relatively consistent for the full year when compared to the level recognized in 2013. Operating margin expansion in the Company's core business is expected to be offset by a full-year impact from MakerBot which is investing aggressively in market development and new product introductions.

Projected net income is expected to be derived disproportionately from the second half of fiscal 2014 driven by the projected timing of operating expenses as well as the projected timing and success of new product introductions and a corresponding ramp-up in sales.

Capital expenditures are projected at $50 million to $70 million which includes significant investments in manufacturing capacity in anticipation and support of future growth.

Non-GAAP earnings guidance includes $64.8 million of projected amortization (technical difficulty).

Ladies and gentlemen, I apologize. We will just contact your speakers and bring them back into the call as soon as possible. Thank you. Ladies and gentlemen, thank you again for your patience we will bring our speakers back in as soon as possible. Thank you, gentlemen, please go ahead.

Hi, Sheena, we are back in the call.

Thank you, sir. You are open and live into the main call with your audience, sir.

Okay. Do know approximately how -- where we got cut off?

I am looking at approximately 45 seconds, sir.

Okay, we are going to turn it back over to David, David Reis, CEO of Stratasys.

Thank you, Shane. our dynamic industry continues to grow rapidly and we continue to invest in projects that support our core strategic objectives. These objectives includes leadership in the prototyping market, the expansion into direct digital manufacturing, the introduction of new niche vertical applications, the acceleration of new solutions to market, improvement in 3D printing accessibility and improvement in customer intimacy.

(Inaudible) new strategic initiative we recently announced revolves around our intent to acquire two privately held companies, Solid Concepts and Harvest Technologies. As you know, at Stratasys we have a strong track record of acquisitions to drive shareholder value including our transactions with MakerBot and Objet.

The acquisition of Solid Concepts and Harvest Technologies are consistent with our core strategic imperative and M&A strategy which is focused in acquiring leading companies to support our goal of continual leadership in the areas in which we operate as well as reaching new niche verticals.

Solid Concepts brings deepened knowledge of manufacturing and vertical focus in medical and aerospace and Harvest Technologies brings experience in part production as well as material and system know-how. Together with RedEye these two leading providers are expected to strengthen our direct digital manufacturing and parts production expertise, enabling us to enhance value for our customers and our shareholders alike.

With additional Solid Concepts and Harvest Technologies we intend to create a leading strategic platform to meet our customer additive manufacturing needs through the expanded technology and business offerings.

Upon closing Solid Concepts and Harvest Technologies will merge with our RedEye digital manufacturing service business, Joe Allison, the President of Solid Concepts, will join the Stratasys management team and will lead the combined parts business supported by the leadership team of Solid Concepts, Harvest Technologies and RedEye.

We expect that the larger combined part business will provide more opportunities for both parts and systems sales by addressing a full range of customer needs under one roof.

Solid Concepts and Harvest Technologies provide Stratasys with significant capacity, process know-how and experience, allowing us to expand into a broad range of capabilities and applications expertise across a wide new range of new and existing applications.

Once Solid Concepts and Harvest Technologies have been integrated into single business unit with RedEye, Stratasys will look to leverage opportunities in selling systems and service across our large customer base. Furthermore, the transaction brings compelling financial benefits as both companies have strong financial track record. The transactions are expected to be accretive to our non-GAAP EPS within the first 12 months after closing.

Employees across all levels of the three organizations are excited about creating a new industry leader through this combination and opportunities they will have as part of the larger Company. As we mentioned previously, the transactions are subject to customary closing conditions and we expect to complete the transaction early in the upcoming third quarter.

We believe Stratasys is an innovating leader within our industry which is reflected in the nine revolutionary systems and multi-material we have introduced over the past 18 months. In the first quarter alone we launched a total of five new systems and two innovative new materials. This includes the recently announced Objet500 Connex3 Color Multi-material 3D printer.

The new system is a groundbreaking 3D printer that combines color with multi-material 3D printing and features a unique triple jet technology that allows the user to combine color with a wide variety of combination of [rigidity], flexibility and transparency. We have seen very high demand for the Connex3 and are encouraged by the customer feedback we have been receiving.

At CES we announced a new 3D printing platform designed to improve system affordability, reliability, ease of use and user connectivity. The new MakerBot Replicator platform is an up 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.

Toward the end of the first quarter we began shipping the new MakerBot Replicator 3D printer and announced the availability of the MakerBot mini compact 3D printer and the MakerBot Z18 3D printer for preorder. The amount of the new MakerBot replicator products has been strong and we expect all three products to have begun shipping by the end of the second quarter.

Our new MakerBot replicator product line provides unmet (technical difficulty) speed, reliability, quality and connectivity. Combined with our MakerBot 3D printing ecosystem, which includes [3Dverse], the MakerBot digital desktop 3D scanner, the MakerBot digital store, as well as the new and exciting desktop and mobile application, replicator platform delivery easy to use and reliable desktop 3D printing to a full range of customers, consumers and professional users.

Most recently we announced Endur, an advanced simulated polypropylene material suitable for high-end prototyping applications for use with all objects, even Connex, Connex3 and Objet30 Pro 3D printers. Endur is the second simulated polypropylene material we have launched and is ideal for building tough prototypes for snap fit components, [living hinges] and other demanding applications.

The strong demand we are observing for our premium products such as Connex3 is reflective of the growth we're seeing across our entire line of higher margin systems in the periods. Direct digital manufacturing and high-end prototyping applications have been the driving forces behind this demand, which has been a contributing factor to our strong gross margins. We expect this trend to continue in the coming quarters.

In addition to our focus on exciting new product and investing in platforms to meet our customers' growing needs we must invest in building the necessary corporate infrastructure that can support our future growth objectives. To this end we recently announced and closed the acquisition of certain assets of Interfacial Solutions.

Interfacial Solutions provides significant expertise in plastic and filament development. We believe that its knowledgeable team and experience it will accelerate Stratasys' material development efforts for all our FDM platforms including MakerBot.

The acquisition is expected to accomplish three objectives for Stratasys, which include -- strengthening our material R&D scale and bandwidth; enabling us to become vertically integrated in material development and manufacturing; and increasing material production space and capacity. Overall we expect to accelerate new material development allowing us to introduce new products to the market faster.

The revenue synergies that are resulting from the successful Stratasys Objet merger combined with the rapidly growing marketplace are once again reflected in the strong organic revenue growth which we generated during the first quarter. We remain pleased with the results of our sales, marketing and service team integration and now we are excited to announce that we have completed the global alignment of our Company R&D operations which result from Stratasys Objet merger.

As Stratasys grows we must build a foundation that allows an ongoing emphasis on innovation and product development which provides the necessary tools to fully leverage our products and service into the marketplace.

In summary, we are extremely pleased with our first-quarter results as the market demand for our industry leading products and services remains very strong. The rapid introduction of our higher-margin product and service helped drive strong organic revenue growth and significant increases in our gross margin.

MakerBot product revenue remains strong and we continue to invest aggressively in sales, marketing and product development initiatives which we believe will drive incremental growth over the coming periods. We believe that the platform created by our pending acquisition of Solid Concepts and Harvest Technologies will create a comprehensive solution for our customers and will help drive incremental growth opportunities.

We announced and begin shipping multiple new systems and materials with additional systems shipping before the end of Q2. In addition, we continue to position the Company for future growth through enhancement to our organization structure and through strategic investments in channel, product and technology developments. We believe this investment combined with our ongoing acquisition strategy will support our growth objective and position of market leader going forward.

And finally, we continue to observe favorable market environment and remain on track to meet our financial projections for the year. Operator, please open the call for questions.

(Operator Instructions). John Baliotti, Janney Capital Markets.

Obviously the spending in the quarter is very consistent with how you laid out the year in terms of what to expect given the strategic investments you are planning to make. I am curious, you had really good absorption of that cost in the first quarter, certainly compared on as a percent of sales basis, but the leverage was very significant.

And I am wondering, were you able to take advantage of the strong revenues and accelerate your strategy in this quarter? Or did you pretty much have the year laid out as planned?

Hi, John, it is Erez. we did accelerate a little bit, I'm not sure if it is significant enough for you to change the model. But it did increase the level of investment this quarter again mainly around MakerBot. Once we understood that the revenue is going to be a little bit higher than our expectations we allowed ourselves to spend a little bit more money in order to accelerate the growth around MakerBot business.

Great. And Erez, just a follow-on to that. That obviously bodes well because these investments you are making are geared to growing the Company at these accelerated -- at these higher rates. And it just seems that that bodes very well for future leverage. Do you agree with that?

Yes, absolutely.

Great. Thank you very much. Congratulations.

Jim Ricchiuti, Needham & Company.

Erez, I would just like to pursue a little bit the operating margin leverage issue, particularly as you look into the back half of the year. Clearly it sounds like it is going to be a function of the top-line growth. But I wonder if you could give us some sense as to your comfort for the expansion in the second half also coming from maybe some efficiencies on the cost side.

And clearly you are ramping OpEx, but, as you look at the back half and you look at your guidance, it is pretty significant versus where we are starting the year. So it is just getting comfortable with the operating leverage.

Jim, I think that the level of investment that we made in Q1, A, is in line with our plan. B, I think this is what -- when we discuss again the queue for our plan this is what we said that we will do. There is nothing there that would change our plan. I think that we will be able to leverage the operating margin a little bit in Q2 and more in H2, once we see higher revenue due to the new product introduction.

It is unique, however, MakerBot has two new products targeting two new markets, and the product will be available only at the end of Q2 commercially. I think it will have a low impact or a small impact on Q2 revenue.

The same is for Stratasys, we have our new stuff coming, but we have to invest in order to introduce to the market, and this will happen probably end of Q2, Q3 and Q4, and the impact of our H2 revenue.

I can add that the nature, some of the nature of the sales and marketing investment can be described as more infrastructure.

Okay, thank you. That is helpful.

Troy Jensen, Piper.

Hey, gentlemen, congrats on the nice results. Maybe a first question for David here. David, can you just talk about industrial applications and kind of movements you are seeing there? I would love to get thoughts on how Fortus is growing. It seems like that is probably the better product line for some of the industrial applications we are seeing.

We typically don't break it between the different high-end machines. But you are right, our leading industrial product is around the Fortus line. Nevertheless, we see adoption of PolyJet technology for some manufacturing applications. And in general, we see a really strong growth as far as manufacturing, both for PolyJet and of course for Fortus.

Do feel like there has been any inflection in that piece of the business, or maybe an inflection soon?

I don't like the word inflection. I think we see a steady -- very strong growth.

Okay, perfect. How about a quick then for Erez. Just to challenge you a little bit, you guys just did 33% organic growth. I think your target has been 25% and you just reiterated it. It seems like -- what would cause the market to slow down that dramatically to that top, this 25% target of yours?

Yes. So, Troy, when we put the guidance at the beginning of the year, we guide the market for more than 25% organic growth. If you look at 2013, H2 2013 was extremely strong compared to H1 due to the integration issues that we had. Nevertheless, we will update guidance. We will discuss the growth of 2014 also, once we close the Solid Concepts and Harvest.

Okay. All right, gentlemen. Well, good luck going forward.

Ken Wong, Citigroup.

It sounded pretty clear that MakerBot was much better than you guys expected. Can you provide any early color on just the few weeks that you guys had with MakerBot mini and the Z18 orders?

The mini and the Z18 [obviously booking], they are not available for shipment. They will be available for shipment -- the mini will be available I think in the next two weeks, 18 at the end of Q2. But we do see strong flow of booking for both mini and Z18.

Got you. And then perhaps maybe just a quick follow-up on your services business. Can you perhaps give us a little more color on what that one time potential impact is on RedEye, why it was weaker?

Again, we consider it to be kind of a one-time event. We expect that during 2014 RedEye will experience a much more impressive growth. Let's describe it as kind of a one-time event or a short time event.

Nothing unusual behind it.

Yes.

Okay, so just a little bit of softness but perhaps (multiple speakers).

Yes, again, just remember that RedEye is experiencing for many causes very significant growth. There was a little bit of a slowdown in the growth, it's not negative it in any way and we expect that in the continuation of the year RedEye will continue to grow rapidly.

All right, great. Thanks a lot, fellas.

Wamsi Mohan, Bank of America-Merrill Lynch.

Can you talk a little bit about the trajectory of the operating expenses through the course of the year? So if you continue to beat on both the revenue and gross margin as you did this quarter would you continue to increase OpEx to keep full-year operating margin flat or will you let some of that upside flow-through and keep sort of OpEx at the level of spend you expected at the beginning of the year? And I have a follow-up.

We usually do not provide any specific operating (inaudible) projection. I think compared to the first quarter operating margins are expected to ramp higher for the remainder of 2014 and are projected to remain relatively consistent with the full year when compared to the level of 2014 and 2013.

And again, we expected the same for gross margin to be at the level of 2013, maybe -- maybe a little bit higher. I do expect some operating leverage next year.

Okay, great. And can you give us some sense of the magnitude of the margin improvement quarter on quarter excluding MakerBot? Was it all from systems mix and how sustainable do you view that? Thanks.

I think that the organic business of Stratasys we do see ongoing improvement in margin both at the gross margin, on the operating margin, we see better ASP on the core business. We do not provide any standalone information.

I can tell you that, A, we are very, very pleased with the strong result of the Stratasys business. I think that due to the fact that the strong result of Stratasys will allow us to invest a little bit more even in the MakerBot product in anticipating of introducing new product and maybe to accelerate the growth there.

I want to emphasize maybe to Erez that I think over the last few quarters we provide more and more value. And like Erez said as a result of it we see an improvement in ASPs, which is reflected in the gross margin.

Great, thanks, David, thanks, Erez.

Samuel Eisner, Goldman Sachs.

Just on the SG&A year-on-year increase, it seems like you are basically doubling the expenses there. The incremental let's call it $26 million on a year-on-year basis, could you maybe breakout how much of that is for new product introduction, how much of that is for selling, just trying to understand really, really what the components of that I guess incremental $26 million are.

Hi, Sam, it is Erez. I think that when you compare Q1 2013 and Q1 2014 the picture is a little bit misleading. You are looking at Q1 2013 Stratasys standalone and you are looking at Q1 2014 at Stratasys and MakerBot together. A significant part of the increase -- of the incremental increase of SG&A is due to the inclusion of Stratasys business and now our consolidated (multiple speakers).

MakerBot business.

-- MakerBot business, in our consolidated report and the entire spend, incremental spend that you see is around new product introduction.

Understood. And then just because the revenue was a bit better on Maker than you guys were expecting, do you know how much of the incremental spending you kind of pulled into the quarter, if you will?

We do not (inaudible), we do not share we do not provide such information.

Sounds good. Thank you.

Amit Daryanani, RBC Capital Market.

Two questions for me. One I guess -- I'm getting asked this a fair bit today -- but given the upside in March quarter revenue that you guys had could you maybe talk about what's the hesitancy not taking the full-year numbers higher as well at least by the magnitude that you beat March by? And do you still think the linearity for 2014 it will be [40-60] for first half and second half of the year?

I will try to answer both questions and one answer. I think Q1, it's too early for us to change the right guidance for 2014. However, we plan to discuss the guidance and probably to update the guidance once we close Solid Concepts and Harvest. And then we will discuss both the impact of Solid Concepts and Harvest in 2014. And if any changes are applicable for the Stratasys business we will discuss it also.

Fair enough. And then I guess you guys talked about the strength you are seeing in Fortus, a lot of the drivers for the systems growth. Can you maybe talk about what end markets, what verticals are you seeing better adoption of this especially from a manufacturing basis?

Yes, I want to maybe just to elaborate, the strong growth that we see is both on the Fortus side and the PolyJet side. As we said in the script, we saw very strong demand for Connex3. With respect to Fortus, a very high percentage of those machines are being sold for a manufacturing application, especially the augmented manufacturing such as [jig picture] guides and so on. And we do see increased demand there.

Thank you very much.

Weston Twigg, Pacific Crest Securities.

I was wondering actually if you could maybe explain a little bit more along -- regarding your efforts to align R&D and operations globally, maybe add some more detail, what specifically was accomplished. And then I am also wondering where there are more opportunities for improvement in that aspect.

Just to go back to a little bit of history when we merged Objet and Stratasys we said that at this time we are going to spend the first 18 months in combining and merging our sales, marketing, service, operations globally which we've done successfully.

When this was concluded about two or three months ago we consolidated and aligned our products, R&D and operations under one -- each one to his own organization and today those organizations are consolidated. And I think that over time we are going to be able to extract some synergies from this consolidation.

Okay, so there is more opportunity to streamline say R&D and operations even further?

Yes. Mainly operations.

Good. And then just as my follow-up, you said you will reiterate -- or not reiterate, but update guidance later in the year when you acquire Solid Concepts and Harvest systems. I'm just wondering if maybe you can give us a preliminary look ahead.

Presumably it will be dilutive initially. Could you give us an idea of if you actually close these in early Q3 like you hope, what the full-year guidance might be or might look like?

No, we will do it only upon closing of the transaction of Solid Concepts and Harvest.

All right, thank you.

Peter Misek, Jefferies.

I had a question just in terms of any more detail you can give us last time on Solid Concepts and Harvest about the rationale for doing the two at once and the potential product roadmap. I noticed from the slides there are some interesting materials being used, I would love to understand that. And then maybe we can walk through the pipeline on the industrial side if you could give us a sense of what the pipeline or backlog looks there? Thank you.

That's a long question. First of all, the rationale of doing both transactions at the same time has to do with a slightly different expertise that both companies are bringing to the table.

Solid Concepts first of all is the leading service bureau I think in the US and maybe worldwide bringing to the table a lot of knowledge in both prototyping and [DBN] and parts applications with a lot of technologies relevant technologies. Harvest, on the other hand, is most focused on end use part applications based on additive manufacturing.

So the combination of those two is basically plus RedEye is basically covering the full spectrum that any of our customers can imagine in respect to end use parts or prototyping.

If you go to the rationale of the deal, we said all the way that first of all we believe that this business on a stand-alone basis is growing and should be a growing and profitable business. We believe that the combining of RedEye, Solid Concepts and Harvest Technologies will create a platform that will allow Stratasys to expand our end-use part strategy.

And we believe once we merged this very large service bureau with the Stratasys operation it will create opportunities for both cross-selling machines and parts to a very, very large customer base.

And in terms of the pipeline or backlog, any data you could share on that?

We are not disclosing or sharing backlog information during the year, we did it at the end of the year, we will do it at the end of this year.

Okay. Thank you very much, gentlemen.

Cindy Shaw, Discern.

I wanted to ask about the North American revenue growth. Back of the envelope it looks like it was actually -- revenue was actually down year over year particularly with MakerBot. And I wanted to see if I could get some color on what is happening there and what the outlook is on that and then I have a follow-up.

MakerBot grew almost 80% quarter over quarter. It is appearing in the slides. And with respect to the core business of Stratasys in the North American operation, we saw significant growth during Q1 over Q1. So I am not sure where this confusion comes from. Erez?

Cindy, hi, it is Erez. I think that -- I am not sure that your numbers are correct. Remember that North America business is almost 50% of the business and it should grow close to the organic growth of the entire business to allow us to grow more than 30%. So, no, there was a strong growth -- strong business in North America and we can catch up later on because I think that your numbers are wrong.

Okay, so I must have put a bad number in there. The other question I had is the new materials, and this goes to the acquisition of Interfacial -- as well as the new materials that you introduced outside of that acquisition. Do you see that new materials as just selling incremental materials or does adding new materials help you actually sell systems to people who otherwise might not buy them?

A combination of both. By offering to the market or to existing customers new materials typically we see an increase in machine utilization. By the way, we see increasing machine utilization across all our technologies year over year, so people are using the machine more.

Part of this increased utilization is coming from the fact that we are offering new and improvement (technical difficulty). And the other part of it, yes, the answer is yes. Some customers are waiting for specific materials and if we are providing them they are becoming machine buyers. So the answer is yes for both.

Great. And you mentioned taking orders for the MakerBots that aren't shipping yet. In general do you take orders in advance of shipping the more traditional machines, the large systems as well? And could you give us a sense of the sales cycle on that?

Usually we do not take orders in advance or not so early before the introduction of product on the core business of Stratasys. And that MakerBot, it is a different business, different sales cycle, different market with some customers, end customers.

And we do take relatively a long time ahead, preorders for shipment that will happen in the following weeks or sometimes even months. It helps us to give inventory, take us to ramp up production for those units, it is a significant number of units that are being shipped there.

Great, thank you.

Ajay Kejriwal, FBR.

I know a lot of questions around SG&A and maybe if I could ask one more. And it's related to the business model. So, David, how would you characterize the MakerBot business model? Is that inherently more SG&A intensive or would you say that what you saw in this quarter is more related to new product introductions and it is more transient and over time it should normalize towards (inaudible) businesses you have?

I think we are in the early stage of exploring the MakerBot product line and exploring the potential growth there. So at this point of time the growth is driven by both R&D investment and substantial investment in sales and marketing and I will describe it as infrastructure activity. Channel build up, channel training, and different other infrastructures. At this point of time the Company is growing rapidly and requires investments in both R&D and sales and marketing and such.

Okay. And then I thought one of your comments was that the SG&A increased, a lot of that is in infrastructure. Is the implication that a lot of that is fixed or would you say you have flexibility through the course of the year to kind of tune that up or down in dollar terms?

I just hinted that, to continue what Erez said, to answer the question whether there is some leverage towards the continuation of the year. So by saying that some of the investment in MakerBot has to do with infrastructure again is hinting to the fact that there is some leverage in the model even towards the end of this year.

In general I would add to David in general we tried to manage the incremental investments to be as much as possible for viable investment. We do not always succeed to do it, but we try to manage to plan and to control it in a way that we will invest as much as possible more on the viable part of the (technical difficulty).

Got it. And then gross margins, good to see 60% plus, so that is a good number. What is your confidence that this margin is sustainable for the course of the year, especially with MakerBot ramping up even further from here?

I think that the combined gross margin despite the fact of MakerBot gross margin which is lower than the traditional business went up this quarter. And I think we have a high level of confidence with the gross margin in 2014 to be at the level of 2013. May be a little bit higher. I think that MakerBot, despite of the fact that they carry lower gross margin they do have healthy margins at the end of the day.

Good, thank you very much.

Hendi Susanto, Gabelli.

I would like to ask your view on the nature of Harvest Technologies and Solid Concepts business specifically whether it may lead to like another aggressive investment. And then I would appreciate if you can share your expectation, like what the intensity of the integration may look like?

Maybe I will start with the second part of it. The integration has two elements, one of them is that first of all we need to integrate the operations of Harvest Technologies, Solid Concepts and RedEye which we started the early part of it now, it was a very organized and political way of handling this kind of PMI.

And later on, like we said in the presentation, we are going to explore and integrate some of those activities together with the Stratasys core business to leverage the ability to sell more machines and more parts to this very large customer base that we are creating. In respect to the needed investment, I am not sure I am clear on the question.

I am wondering whether it may involve like a lot of operating expense investment and that capital investment.

I think we are still early in the process of PMI and planning and putting on the table the different plans that we want to do. We didn't take any -- obviously we didn't take any decision yet. And I think we will be able to share more information and more regarding our plans moving forward once we close the transaction of both Companies.

Thank you.

Steve Milunovich, UBS.

Yes, could you update on your new Israeli plants and is much revenue from that plant in your plan for the year?

I am not sure I understand your -- can you clarify the question?

The new plant that you are building for Objet, sort of what does the timing on that look like and are you assuming much revenue from that?

Okay. So the new plant that we are building from -- in Israel here is actually we are expanding the capacity of PolyJet printers and materials to fulfill our plan needs and customer needs for 2017. It doesn't have impact on revenue but it is more on the operations side and we want to be able to meet the capacity need in the next two to three years.

The facility is ready and will be fully operated at the beginning of next quarter. We actually doubled the capacity of production of PolyJet printers double and more. And we are doing the same now for the materials.

Okay. And you made a comment about more independent sales agents, what does that compare to, what is the alternative channel and why are things shifting in that direction?

There are three different go to market approaches, one of them is for a distributor who is buying the equipment from us and selling to the end customer. The other one is (inaudible) there is more (inaudible) and the full transaction -- the risk of the transaction is on our books and on Stratasys. And I said that we are trying to expand our go to market and reach to the customer while building new or ramping up new network of agents in order to drive more business.

Thank you.

Jonathan Shaffer, Credit Suisse.

I was just looking at the slide where you kind of highlight revenue per employee. And it seems to suggest that there has been a significant ramp-up in the number of employees kind of North of 50%. I am just wondering kind of if you could highlight what your headcount plans are going forward and whether you need to as aggressively grow your employee base as you have in this quarter?

I think that when you grow to (inaudible) more year over year you cannot do without growing your headcount. And when we plan ahead, and we plan ahead, we try to make sure that our plan includes expansion where possible of operating expenses for variable costs and not fixed costs. We consider the headcount to be closer to fixed cost rather than variable cost.

But growing in the pace which we are growing now and we grew during the last two years it is almost impossible to do it without growing headcount. Add to that the acquisition of MakerBot that added a significant number of employees to our headcount number at the end of last year.

And then just a quick one on the maintenance and service revenue. It was very positive there, obviously. I was just wondering if a higher proportion of your customers are now opting for maintenance and service contracts or if that is just a function of the installed base growing?

The improving service margin that we see is a result of I would say three issues. The first one they are getting better on efficiency on the service business and service in the ratio of number of machines there, engineers, we can serve more machines with same number of engineers or growing slowly the number of engineers, number of calls is going down.

So the operational model of the service is getting better and more efficient. We are going through high-end product and usually the high-end product calls for service contracts. When it's more difficult for customers to serve the high-end product by themselves compared to a low end product.

And I think there is (inaudible), I don't know if you recall, but we changed the account treatment of warranty at the beginning of last year and this is the first quarter actually that we see the full impact in the service margin.

Thanks very much.

Brian Drab, William Blair.

Just wanted to quickly ask on MakerBot, in the third quarter you only had half a quarter, but run rate was around $23 million in revenue for Maker and then about $25 million in the fourth quarter and then $21 million in the first quarter. But I am getting the sense from your comments today that Maker was above expectations in the first quarter. Is that true? And if it is down from those previous two quarters why would that be above expectation?

Hi, it is a Erez. I think that the number that you have for Q3 is not the correct number.

Well, you did $11.5 million in Maker revenue in Q3. And I don't know what you did for the full quarter, but it is not [less] than $20 million.

No, no, it was not -- it's equally split between the two parts of the quarter. The MakerBot team was extremely busy in the first part of Q3 with the closing of the transaction with Stratasys that had impact on their business.

Nevertheless Q4 was strong and we said at the end of the quarter last quarter that this does not represent a typical run rate for the Maker business, which usually Q4 for them is the strongest throughout the year and sometimes equal to their business of 1.5 or 2 quarters together.

We did expect a decrease from Q4 for the MakerBot business and this is what happened. We had CES in Q1 when we introduced new product, product are -- most of them were not available in Q1. We do expect a ramp up in revenue in H2.

Okay. So Maker was ahead of your expectations by quite a bit in the first quarter then?

I didn't say so. And we didn't share that expectation -- the internal expectation of MakerBot.

Okay.

But I think we said this was below (inaudible) in Q4.

Okay. And I know there has been a few questions here on SG&A, but I just wanted to ask maybe a slightly different way. Given operating margin for the full year 2014 should be consistent with 2013. We know the first-quarter results, using the midpoint of your revenue guidance we would have to see 21% to 22% operating margin for the balance of the year with actually a sequential step down in SG&A dollars. Is that fair to expect that?

I think that the operating leverage that you can expect in the rest of the year, especially in H2, is combined from higher revenue. And if you look at the guidance of 40-60 actually significantly higher revenue. I would say a modest increase in operating expenses.

So from the first quarter SG&A goes up or down in terms of dollars?

In term of dollars it will not go down, it will not go up as Stratasys revenue will do.

Okay. Thank you.

Ladies and gentlemen, I would now like to turn the call over to Mr. David Reis for closing remarks.

Thank you for joining today's call. We look forward to speaking with you again next quarter. Thank you and goodbye.

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