Stratasys Ltd (SSYS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Stratasys Earnings Conference Call. My name is Sue and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Shane Glenn, Vice President of Investor Relations for Stratasys. Please proceed, sir.

Thank you, Sue. And good morning, everyone, and thank you for joining us to discuss our second quarter financial results. On the call with us today are David Reis, CEO, and Erez Simha, CFO and COO of Stratasys. A reminder that access to today's call, including the prepared slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call including access to the slide presentation will also be available and can be accessed through the Investor Section of our web site.

A reminder that certain information included or incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project, or other similar words, but are not the only way these statements are identified. These forward-looking statements may include, but are not limited to, statements relating to the Company's objectives, plans and strategies, statements that contain projections of results of operations or of financial condition including, with respect to the MakerBot, Solid Concepts, and Harvest Technologies acquisitions and all statements other than statements of historical facts that address activities, events, or developments that the Company intends, expects, projects, believes, or anticipates will or may occur in the future.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. The Company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Important factors that could cause actual results, developments, and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the Company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Limited after their merger as well as the ability to successfully put in place and execute an effective post-acquisition integration plan for MakerBot, Solid Concepts, Harvest Technologies, and the Company's other acquisitions, the overall global economic environment, the impact of competition and 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 Review and Prospects, and generally in the Company's annual report for 2013 filed on Form 20F and other reports that the Company files with the SEC, including the Risk Factors described in our Report of Foreign Private Issuer on Form 6K furnished to the SEC on August 7, 2014. Readers are urged to carefully review and consider the various disclosures made in the Company's SEC reports, which are designed to advise interested parties of the risks and factors that may affect its business, financial condition, results of operations, and prospects. Any forward-looking statements in this presentation are made as of the date hereof, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by law.

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 15, 2013. Certain non-GAAP to GAAP reconciliations are provided in a table contained in our slide presentation and press release.

And now I would like to turn the call over to our CEO, David Reis. David?

Thank you, Shane. And good morning, everyone. Thank you for joining today's call.

We are very pleased with our second quarter results, which represent quarterly records for revenue, non-GAAP net income and non-GAAP earnings per share. We continued to observe strong positive sales momentum for our higher performance systems and materials, which is reflected in the impressive 35% organic revenue growth we generated during the period compared to last year.

Equally impressive were the sales of MakerBot products and services, which contributed $33.6 million to revenue during the second quarter, a 100% increase over the revenue MakerBot generated as an independent company during the same period last year.

As we begin the second half of 2014, we expect our positive momentum to continue. Accordingly, we have raised our financial guidance and long-term revenue growth targets. In addition, we continue to position Stratasys for the long-term growth through improvements in our organizational structure as well as additional investments in channel and product development. We will also look for additional strategic acquisitions, such as our recent acquisition of Solid Concepts and Harvest Technologies, two companies that we believe will contribute exciting new growth opportunities for Stratasys.

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

Thank you, David, and good morning, everyone.

As David mentioned in his opening remarks, we are very pleased with our second quarter performance. Financial highlights include total revenue for the second quarter increasing by 67% over last year to $178.5 million, impressive year over year organic revenue growth of 35%, an acceleration over the rate observed in the first quarter, gross margin coming in at a strong 60% for the quarter, non-GAAP net income for the second quarter increasing by 51% over last year to $28 million, or $0.55 per diluted share, MakerBot branded products and services contributing $33.6 million to second quarter revenue, a 100% increase over the revenue MakerBot generated as an independent company during the same period last year, the Company significantly raising its financial guidance for fiscal 2014 to account for our improved outlook, as well as to account for the recent acquisitions of Solid Concepts and Harvest Technologies, the Company raising its organic revenue growth forecast for 2014 to at least 30%, versus a previous forecast of at least 25%, and the Company updating its long-term operating model, which included raising its long-term annual organic revenue growth projection to at least 25%, versus the Company's previous projections of 20%.

Product revenue in the second quarter increased by 70% to $154.1 million, as compared to $90.4 million for the same period last year. Within product revenue, system revenue increased by 108% in the second quarter over the same period last year, driven in large part by MakerBot's impressive contribution to the quarter. System revenue growth, excluding MakerBot products was impressive, growing by 51% over last year. This included strong growth for all our 3D printer lines driven by the ongoing adoption for a broad range of applications from prototypes to DDMs.

A few notable areas of strength included sales of high-end Fortus systems, driven by increased demand for manufacturing applications,

sales of the Objet500 Connex3 Color Multi-material 3D Printer, driven by applications for multi-material color 3D printing, and sales of entry-level Mojo and uPrint 3D printers.

Within product revenue, consumables revenue increased by 35% in the second quarter compared to the same period last year, or 24% when excluding MakerBot consumables. The growth in consumables is driven primarily by our growing install base of 3D printers, and the relatively higher usage of our high-end systems. In addition, we are observing favorable results from our efforts surrounding applications training and materials education.

We believe that our growing installed base, and specifically the installed base of the Production Series and high-end Design Series systems, is a positive indicator of consumables revenue growth in future periods. Service revenue in the second quarter increased by 50% to $24.4 million, as compared to $16.3 million for the same period last year. Within service revenue, customer support revenue increased by 59%. The increase in customer support revenue was driven primarily by the inclusion of MakerBot revenue, as well as the increased revenue from maintenance contracts and service parts, reflecting our growing install base of 3D printers. Within service revenue, revenue from our RedEye paid parts service increased by 9% during the second quarter over last year. RedEye performance improved compared to the first quarter, and we expect sales growth will continue to improve moving forward.

We shipped 14,909 3D printers and additive manufacturing systems in the second quarter, as compared to 1,261 systems shipped in the second quarter last year. The significant increase in unit shipments resulted primarily from the inclusion of MakerBot systems. However, we also observed strong unit sales growth across our other product lines during the second quarter, including our higher-end Fortus and Connex systems, as well as our entry-level Mojo and uPrint 3D printers. Including all systems sold by Stratasys, Objet, Solidscape, and MakerBot since their respective inceptions, the Company has now sold 99,529 units worldwide on a combined basis, as of June 30, 2014.

Gross margin of 59.8% for the second quarter expanded when compared to 59.2% for the same period last year. Sales of the Company's higher-margin products, as well as improvements in service gross margin, more than offset the impact of the relatively lower gross margin currently generated by MakerBot and other entry level products. The strong revenue contribution of MakerBot products make the gross margin expansion even more impressive.

Operating expenses increased materially in the second quarter compared to last year, driven by the inclusion of MakerBot, as well as from increased sales, marketing, and R&D investments to fund growth and new product development. In addition, we continue to make significant incremental sales and marketing investments that target primarily MakerBot product expansion.

Net R&D expenses increased by 86% to $17.6 million in the second quarter as compared to the same period last year. R&D expenses, as a percentage of sales, were 9.9%, a slight increase from 8.9% for the same period last year. SG&A expenses increased by 89% to $60.3 million for the second quarter as compared to $31.9 million for the same period last year, driven primarily by the inclusion of MakerBot, as well as changes in our product distribution strategy involving an increased use of independent sales agents, which resulted in increased agent commissions, incremental expenses for strategic and marketing initiatives, and an increase in headcount and infrastructure to support our growth.

Our effective tax rate was 3.8% for the second quarter compared to the effective tax rate of 14.8% for the same period last year. Our tax expense was impacted by the unique mix of taxable income that favored lower effective tax rate regions.

The following slides provide you a breakdown of our geographic sales. As in prior quarters, the Asia-Pacific region remains one of our faster growing regions. However, sales in all regions increased significantly in the second quarter of 2014 as compared to the same period last year, driven by the inclusion of MakerBot revenue, as well as from the strong demand we are experiencing in all regions.

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

We maintain approximately $577.9 million in cash and cash equivalents, and short term bank deposits on our balance sheet, amounting to $11.7 per share, compared to $607.5 million at the end of the first quarter. The decrease in cash is a result primarily of the 2013 MakerBot earn out and performance bonus payment as well as from investments in working capital, expansion projects, and acquisitions.

Net cash flow from operations in the second quarter was $4.8 million. Capital expenditures amounted to approximately $12.6 million in facility and equipment investments. Our strong cash balance, combined with our available $250 million revolving credit facility provide us flexibility to fund our current growth plans.

Inventories increased to $114.3 million in the second quarter compared to $99.8 million at the end of the first quarter, primarily due to the planned inventory increases to allow for increased supply flexibility, as well to support new product introductions and increased demand.

Accounts receivable increased to $113.6 million in the second quarter compared to $106 million at the end of the first quarter, while DSO on 12 month trailing revenue was 68 compared to 72 in the first quarter.

In summary, we are very pleased with our second quarter results. We generated impressive organic sales growth combined with a strong revenue contribution from MakerBot. We reported record financial results, driven by broad-based demand across all of our product lines. We should also highlight that our business, excluding MakerBot, experienced an expansion in margins over last year which was offset by significant investments in MakerBot development projects to drive future growth. We believe that we are making the appropriate investments in strategic initiatives and infrastructure to accelerate our growth moving forward, and that we are on the leading edge of our exciting industry. We have a strong balance sheet and we continue to position the company for future growth through strategic investments, as well as additional acquisitions. And finally, we have raised financial guidance for 2014 and increased our long-term revenue growth target based on our favorable outlook.

I would now like to turn the call over to our VP of Investor Relations, Shane Glenn, who will provide you greater details on our updated financial guidance. Shane?

Thank you, Erez.

To reflect our improved outlook for 2014, as well as the recently closed acquisitions of Solid Concepts and Harvest Technologies, Stratasys updated the following information regarding the Company's projected revenue and net income for the fiscal year ending December 31, 2014.

Revenue guidance was increased to $750 million to $770 million versus previous guidance of $660 million to $680 million. The increase in revenue guidance includes $35 million to $40 million in revenue attributable to the recent acquisitions of Solid Concepts and Harvest Technologies with the balance related to our improved outlook.

Non-GAAP net income guidance was increased to $117 million to $122 million, or $2.25 to $2.35 per diluted share versus previous guidance of $113 million to $119 million, or $2.15 to $2.25 per diluted share.

The acquisitions of Solid Concepts and Harvest Technologies are expected to be modestly accretive to Stratasys' Non-GAAP earnings per share in 2014. The Company expects organic sales growth, excluding acquisitions, of at least 30% in 2014 over 2013 an increase over the previous guidance of at least 25% growth.

GAAP financial guidance is not being provided at this time given that the initial accounting for the business combination of Solid Concepts and Harvest Technologies is incomplete. This makes the supplemental information required to calculate GAAP earnings unavailable. GAAP financial guidance will be calculated and communicated upon the completion of that analysis.

Stratasys provides the following additional information regarding the Company's performance and strategic plans for 2014. Operating expenses are projected to expand materially in 2014 compared to 2013, driven by significant investments to support MakerBot product development and sales expansion, other investments in sales and marketing to drive future market adoption, and increased R&D investments to fund technology innovation and new product development.

Growth in operating expenses in the second half of 2014 will include significant investments to support the integration and alignment of the recent acquisitions of Solid Concepts and Harvest Technologies. We also expect significant non-recurring integration cost related to the Solid Concepts and Harvest Technologies integration. Capital expenditures are projected to be at $50 million to $70 million, which includes significant investments in manufacturing capacity in anticipation and support of future growth.

Additionally, Stratasys updated the following information regarding the Company's long-term operating model. Annual organic revenue growth of at least 25% versus the previous projection of at least 20%. Non-GAAP operating income as a percentage of sales of 18% to 23% versus the previous projection of 20% to 25%, non-GAAP effective tax rate of 10% to 15% versus the previous projection of 15% to 20%, and non-GAAP net income as a percent of sales projection remains unchanged at 16% to 21%.

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

Thank you, Shane.

We are extremely pleased with our second quarter results. We begin the second half of the year with significant positive momentum, as our markets continue in their rapid growth.

According to the 2014 Wohlers Report, revenue for additive manufacturing products and services in 2013 grew by 35% to approximately $3 billion. Wohlers projects that the market will more than quadruple by 2018 to $12.5 billion, and then will exceed $21 billion by 2020.

Additive manufacturing and 3D printing solutions are disrupting enterprise processes, and empowering the creativity and innovation of individuals around the globe, by changing or enhancing many traditional product development and manufacturing processes. Opportunities are developing rapidly, and we are focused on investing in projects that support our core strategic imperatives.

These includes leadership in prototyping, the continued expansion into direct digital manufacturing, the introduction of new niche vertical applications, the acceleration of new solutions to market, improvements in 3D printing accessibility, customer intimacy.

Our strategy has always been to pursue leadership in every area in which we operate, execute our growth strategies to deliver shareholder value, and invest aggressively to capture future growth. We remain focused on those objectives.

I would like to take a moment to highlight the completion of our acquisition of Solid Concepts and Harvest Technologies, and the opportunities we see developing from these exciting acquisitions. With both transactions now closed, we will begin the process of combining the companies with RedEye, our existing parts services business, to establish a leading strategic platform focused on to meet our customers' additive manufacturing needs.

We have an integration team composed of leaders from Stratasys, RedEye, Solid Concepts, and Harvest Technologies that has been working hard on integration planning since we announced acquisition. The integration will be an ongoing process for a period of approximately 18 months, with our plan to first combine the sales, marketing, and business development teams into one unified group. Final branding is yet to be determined, but we are undergoing a disciplined process to ensure the best positioning within our corporate structure.

Looking at the strategic rationale of these acquisitions, we see the parts services business as a growing and profitable business, which supports our strategic imperative to lead in end use parts production and niche vertical market applications. Additionally, our market analysis suggests that once Solid Concepts and Harvest Technologies have been integrated, Stratasys will have opportunities for the synergistic selling of systems and services across our larger combined customer base.

In short, these transactions are fundamentally about growth and being able to provide the best solutions to our customers, and we are excited to have both Solid Concepts and Harvest Technologies as part of the Stratasys family.

Stratasys has a growing suite of products and services that address enterprise development and manufacturing processes across many industries and markets. Our solutions have the ability to significantly disrupt a growing number of business processes by enhancing or replacing traditional techniques. Manufacturing is one area where we continue to observe a growing number of opportunities and ongoing strong demand for our higher-end systems.

We believe our leadership in direct digital manufacturing is driven by the unique capabilities of many of our systems and material offerings, combined with our ongoing efforts to better educate the market around solutions and applications.

Our technology disrupts the manufacturing process in the following ways. One, additive manufacturing eliminates the restrictions that subtractive methods impose, additive manufacturing significantly disrupts the economic formulas associated with shorter-run and customized production, and additive manufacturing requires significantly fewer processing steps, less assembly, and generates minimum waste.

One area of increased utilization for our systems is for augmented manufacturing applications. These include the production of molds, patterns, jigs, and fixtures used throughout the manufacturing and product assembly process. From surveying our customers, we have learned that approximately 80% of Fortus system owners in the US are using the technology for these types of manufacturing applications.

This continues a positive trend of customers discovering new applications for 3D printing after they have brought the technology into their organization. In addition, these types of applications typically drive higher system utilization, which has a positive impact on consumables sales.

We have learned further from our surveys that organizations can realize between 40% and 90% reductions in lead-times for producing jigs and fixtures and between 70% and 90% cost savings for finished parts by utilizing our additive manufacturing and 3D printing solutions. We believe the ROI for organizations is clear.

The rising demand for these types of applications, combined with our capabilities to address opportunity is a major driver behind the positive momentum that we carry into the second half of 2014.

Stratasys has multiple solutions that address new product design and we believe we continue to lead the market in addressing those types of applications. According to Wohlers Associates, modeling and prototyping applications account for more than one-third of the 3D printing use cases. We believe the strong demand we are observing in our MakerBot, Idea, and Design Series systems reflect the value that organizations are deriving from being able to produce functional parts, high-quality models, and visual aids.

We are also pleased with the success of the new Objet500 Connex3 Color Multi-material 3D Printer, a system that produces high-detail, color, multi-material concept models and prototypes. Customer feedback has been very positive, with many noting that the ability to combine color and multiple-materials in a single build enables them to produce fully functional parts that are closer to the final product than any other technology.

To support the strong demand for multi-material and color 3D printing, in the second quarter we added new flexible, rigid, and opaque color palettes. The color options are ideal for creating medical, automotive and consumer product components that offer true-to-life aesthetics. This helps product designers to validate designs and make decisions in advance of tooling, improving design quality and reducing tooling costs and time to market. We believe product design and direct digital manufacturing are two additional areas where Stratasys presents a clear ROI and is able to meet the needs of customers with innovative solutions.

Our strategy includes targeting niche verticals where we believe traditional processes can be disrupted. The dental market is an area where we believe we can address multiple applications. To support our efforts we recently announced the establishment of the Stratasys Dental Advisory Board to help advance digital dentistry. The Stratasys Dental Advisory Board will provide thought leadership and direction to the Stratasys dental business unit by developing research and content that supports the evolution of Stratasys dental products, and supports the introduction of initiatives aimed to encourage dental education, clinical cases, and future innovation.

Adding to our existing extensive line of solutions that support the dental market, we recently introduced two new 3D printers for the dental lab community, the Stratasys CrownWorx and the FrameWorx. The new systems allow dental laboratories to produce wax-ups for crowns, bridges and denture frameworks. With the new additions, Stratasys now offers six systems for the dental market that utilize five innovative materials.

The education business is another area where we see significant opportunities, and are observing strong growth. Helping to drive this success are teaching institutions that increasingly use 3D printing technologies as a competitive advantage to attract the best and brightest students.

We are also observing a favorable trend in the sale of multiple units, as school districts adopt 3D printing curriculums, and equip several schools at one time. Concurrently, we are seeing a healthy product mix trend with MakerBot and Idea Series systems performing well, but balanced out by orders from our higher-end systems, particularly in higher education.

Several second quarter success stories are highlighted on Slide 23. We believe our broad portfolio of products, combined with our dedicated channel strategy for education, makes us well positioned to address the needs of this significant market opportunity.

We were very pleased with the performance of MakerBot during the second quarter, which contributed $33.6 million in revenue during the period, a very impressive achievement. All of the new MakerBot 5th generation products are now shipping, and we are observing strong demand across the entire product line while our FDM, PolyJet and Solidscape product offerings enabling disruption of enterprise processes, we believe our MakerBot products empower individuals by making 3D printing highly accessible.

In an effort to further improve that accessibility, and lower the barriers often associated with 3D printing, we continue to improve MakerBot's 3D Printing Ecosystem. During the second quarter this includes the launch of the previously announced MakerBot PrintShop, as well as the addition of the MakerBot Developer Program to provide resources for developers to integrate 3D printing into apps and games.

We also announced multiple content agreements for the MakerBot Digital Store. Within the channel, we have made several significant additions to our distribution network for MakerBot products that includes Home Depot, which is now carrying MakerBot 5th Generation 3D Printers in several stores as a pilot program, TechData which has been added as a North American master distributor, Anatek has been added as MakerBot's first reseller in Central America, and Stratasys Japan is now acting as a distributor for MakerBot products in Asia-Pacific region. We also recently created MakerBot Europe, the result of the successful acquisition of our German-based MakerBot partner, HAFNER'S BRO.

Our goal with MakerBot is to empower the individual with easy-to-use, affordable 3D printing technology no matter the location or application. We remain excited about the many opportunities within this rapidly growing segment, and believe that with MakerBot we are well positioned to lead the category as well.

To support our aggressive growth goals, we will continue to invest aggressively in product and channel development as well as building the necessary corporate infrastructure that can support our growth. As Stratasys grows, we must build a scalable foundation that allows an ongoing emphasis on the innovation and product development, while providing the necessary tools to fully leverage new products and service into the marketplace. We believe we are leading the industry in building such infrastructure.

In summary, we are extremely pleased with our second quarter financial results that include record revenue, non-GAAP net income, and non-GAAP earnings per share, as well as strong organic growth and expanding gross margins. We continue to enjoy strong positive sales momentum for our higher-performance systems and materials, as well as impressive contributions from MakerBot supported by our investments in sales, marketing and product development initiatives.

We continue to disrupt enterprise processes and expand market adoption in key areas, including manufacturing, prototyping, dental, and education, as well as leading the market in empowering individuals with affordable, reliable desktop printers.

We recently closed the acquisitions of Solid Concepts and Harvest Technologies, allowing us to begin the post-merger integration process, which we believe will lead to many exciting opportunities as we develop a broad set of solutions to address our customer's evolving needs.

We continue to position the Company for future growth through enhancements to our organizational structure, and through strategic investments in channel, product, technology development as well as a focused M&A strategy. And finally, we continue to observe a favorable market environment and have raised our financial guidance for the year as well as our long term revenue growth projection.

Operator, please open the call for questions. Thank you.

(Operator Instructions) John Baliotti, Janney Capital.

Good morning. David and Erez, you discussed before and today the strategic investment and your core growth path is working. You also communicated high costs associated with these investments but if you look at the quarter, it seems your costs as a percent of sales were down and your working capital turns improved with respect to not only last quarter but last year. So, it seems the investments while higher are more efficient and I was just curious, is that a reflection of better feedback with customers or a more rigorous process? Because it seems like you're getting a lot better traction just two quarters into this higher investment spend.

John, it's Erez. Hi. Good morning. I think it's really difficult to pinpoint what exactly is behind it. I would say I think we put our hand in the right place and we invested in the right places and obviously you can see the results now on a comparative but also we continue to invest while accelerating our channel in the period and specific R&D projects because we believe we can grow faster than we planned.

Great. Thank you. Congratulations.

Thank you.

Troy Jensen, Piper.

Congratulations, gentlemen, on a really solid quarter.

Thank you.

How about starting with Erez here I know 2014 was an investment year but I'd be curious to know if you're expecting operating margin expansion in 2015 or when do you think we could get to this 18% to 23% target that you guys are showing us?

Troy, good morning. First, 2014, I think that the second half will be a little bit stronger than H1. We regained some operating leverage in H2 compared to H1 due to the fact of relatively higher business on the way we try to invest but not in the pace that revenue is going. I think that we will regain some operating margin in 2016. I cannot say now how much it will be and what the range will be. We didn't start to yet discuss 2016. But obviously in the size of business we have today we will move forward with operating leverage, a lot around the MakerBot business model that will take us another three to four to five quarters to create an efficient business model that also can contribute to the business model of the Company and of course the new company we acquired just now, Harvest, which by definition has a lower operating margin and also the right investment and the right synergies, it will take us another three to four quarters to gain those synergies.

Okay. Maybe a follow up, Erez. Your biggest competitor reports sales into channel inventory. I'm just curious how much that would be for you guys or if you've been aided recently by that channel inventory growth?

Troy, we have a very, very strict policy here in determining -- we take it very closely. Actually we do not allow our channels, we do not see it as a business of inventory going above a certain limit. I would say that this quarter as well as previous quarters, 2% to 3% of our revenue are in the channel. I think this is the minimum amount of inventory that is needed for them to run the business efficiently.

It's being followed, Troy, by channel, by territory, and we're extremely strict in this respect. So, we have no access to inventories whatsoever into channel.

It's not an issue.

Not an issue.

Alright, guys. And congrats again.

Thank you.

Steven Milunovich, UBS.

Hi. This is Peter Christiansen in for Steve. Great quarter, guys. I think this is one of the first times you've called out success or strong traction with the Mojo and the uPrint series. Can you give us a sense of whether this is customers upgrading to more capable or higher end devices? Or are they just entirely new 3D printing customers?

Good morning. We're not breaking down the group between the different specific product lines. We're talking about the families. And like it was said during the presentation, we are experiencing growth in any area that we're active in, okay? So, again, without getting into the details which are confidential information, growth is accumulative.

Okay. And then following up on the previous question on the channel versus the sell through, it seems like sell through at least for some of the new MakerBot products looks pretty robust. Have there been any supply constraints in meeting that demand?

No. Not at all. No.

Thanks again.

You're welcome.

Samuel Eisner, Goldman Sachs.

Yes. Good morning, everyone. Just regarding the closing of the acquisitions of Solid Concepts and Harvest, I was wondering if you could give an update on the financing of those two? I believe you were able to use some combination of cash and stock? I just wanted to understand if there's any dilutive impact going forward?

Both of those transactions were closed. On Solid Concepts we announced that we closed in the middle of July. A week later we closed on Harvest. We won't be providing any additional segmentation beyond the guidance that we provided. We do project the transaction will be modestly accretive in 2014. I think it's important to mention that we have our intention to blend the team that we have in place to accelerate the integration for the three service businesses into one, the RedEye, the Solid Concepts, and Harvest. And we will be investing significantly in the coming months to accomplish that and to leverage the synergy that we believe we can leverage out of those businesses together with the core business of Stratasys.

Alright. And then perhaps a follow up on margins here. You did bring down your long-term expectations for operating margins. Just curious what is baked into that? Are you assuming any synergies that you just mentioned regarding the service bureau transactions? Just any additional data you can provide on that would be helpful.

Yes. The long-term model came with two -- I would say I would slip into the first one, we believe we can capture higher growth for the Company. This higher growth is a little but more ahead of time in order to generate this growth. More importantly, the last three acquisitions that we did -- MakerBot, Solid Concepts, and Harvest -- carry lower operating margins that has impacts on the consolidated results of the combined business. However, please note that we didn't change the margin of the long-term -- the long-term net margin of Stratasys.

Thanks.

Thank you.

Paul Coster, JPMorgan.

Good morning. Thanks for taking my questions. You've raised your long-term growth expectation by 500 basis points. Can you give us some sense of what you mean by long-term? And I'm more interested in what you saw internally that might have made you feel confident in raising your growth expectations? Thank you.

Good morning, Paul. It's David. First, the model is reflecting our estimate for the three to five years going forward. The reason we raised the projection is because we really feel as I said earlier increased demand, additional applications that we think will have great success across the board, across all territories, and across all product lines. So, we gained more confidence, observing what took place in the last two or three quarters. And therefore we are confidently raising the guidance. The market is moving and moving fast and we are very equipped to tackle it. So, this is the reason.

Got it. And your point about no excess inventory as it relates to MakerBot but perhaps you can tell us to what extent you expect the growth to be fueled by continued channel expansion and international expansion over the next year or two versus organic growth? Is it like a 50-50 split for instance?

This is David again. I want to make sure we're absolutely clear. When we say we have no extra inventory, it's including all product lines. Not only MakerBot. It's including also Stratasys core. It's being controlled extremely close and we're operating with absolute minimum operational inventory. It has to be in the channel and it's very small numbers. This is number one.

With respect to the channel expansion, we will need in order to achieve the growth we discussed earlier, we need to expand our channel. The current channel is doing a lot of work in channel enablement and channel growth and channel investment. This will require adding some channels and vertical applications in places where we do not have enough coverage today. It's a combination of both. Mainly growing the current channel but fixing coverage issues and niche applications and vertical applications where we don't have coverage.

Okay. Thank you.

Thank you.

Amit Daryanani, RBC Capital Markets.

Good morning, guys. Congrats on the good quarter. Two questions. One, I think Erez mentioned that margins ex-MakerBot would be up year over year. I'm curious, is that comment more on operating margins, essentially the drag you have on op margins is all MakerBot driven? Or was that a gross margin comment?

No. It was mainly for the operating margin of MakerBot. I think it will take us time to build to create and leverage the synergies of MakerBot being part of Stratasys and build the system around the back office in order to increase the operating margin of MakerBot.

Got it. That's helpful. And I guess just as a follow up you've had some tax benefits like two quarters in a row now. I'm curious on the updated EPS guide what sort of tax rate are you embedding there?

We provided the net income margin and I think the effective tax rate we expect for the entire year is in the higher part of our long-term -- around 10% to 15%, closer to 15%. I think that H1 does not represent the effective tax rate for the long-term for the Company. Our tax rate is effected by actually the taxable income based on the region that the tax is generated and I think the entire 2014 at least for your model, you should use the 10% to 15%, closer to 15% for tax rate.

Thanks a lot. That's helpful.

Sherri Scribner, Deutsche Bank.

Hi. Thank you. Just looking at the guidance for the full year when you think about the organic versus the total guidance that you provided, there's a $100 million delta which I assume is related to the acquisitions of Solid Concepts and Harvest. I just want to get a sense is that the right type of number to think about for those acquisitions? Is there anything else in that number? And then also what types of growth rates do you expect that business to grow at? The RedEye business grew about 9% this quarter. Would you expect Harvest and Solid Concepts to grow higher than the corporate average or lower or somewhere in the middle? Thanks.

Sherri, good morning. It's Erez. We provided the information in the script I think. If you take the midpoint, around $90 million, $35 million to $40 million is a result of the acquisition of Solid Concepts and the other is part of the organic growth we expect. By definition that is growing slower than the core organic growth of Stratasys but we do believe that putting the right plan in place we'll be able to generate a higher growth rate compared to today's growth rate of the entire business. I also think that RedEye's H1 growth rate does not represent the ongoing long-term growth rate for RedEye which I think H2 will show high growth rates overall.

Thanks. That's helpful. And I just wanted to get an update on your thoughts on seasonality with the MakerBot business, what type of seasonality would you expect for the back half of the year? Would you expect 4Q to be substantially up from 3Q? Just trying to get some ballpark. Thanks.

Usually not only for MakerBot but for the entire business Q3 is a little bit slower than Q4. It's vacation time in Europe. Almost nothing happens. It's vacation time in the US. It's vacation for schools. I think that H2 it will be back loaded both for revenue and EPS and I think that if you look back in previous years Q3 and Q2 were not so different in terms of revenue.

Thank you.

Jason North, Jefferies.

Hi. Stratasys is doing really well in terms of prototyping and also in terms of tooling in the area of manufacturing. What are your longer-term thoughts here? How are you going to address the mass manufacturing in terms of end products rather that just prototyping and tooling? Thanks.

I agree with this statement. We are doing very well in both prototyping and manufacturing. Those technologies, our main technologies, FDM and PolyJet have very good applications also in the end use parts section of the manufacturing market. We have more than a few, quite a lot of customers which today are manufacturing end use part, plastic base mainly with FDM technology but also with PolyJet with manufacturing of end use parts and we expect this phenomenon to continue to grow. It's growing constantly. It's relatively a longer-term process but we have the right technologies and it's progressing well.

Okay. And in terms of looking at the gross margin impact for Solid Concepts and Harvest relative to your -- what had been your services GM?

Can you please repeat the question?

How will Solid Concepts and Harvest impact your services good morning for the back half of the year and next?

They come a little bit below our services gross margin but in both the business volume is higher than the current services that we have. So, we do have impact on the gross margin.

Okay. Thank you.

Ken Wong, Citigroup.

In regard to the current situation in Israel, have you guys seen any impact to demand or your production capabilities?

Good morning. It's Dave. No. Despite the tension around this part of the world, basically in Israel business was as usual. We see a slowdown in manufacturing development activity. I just want to mention that we are a global Company. A relatively small part of our business today is in Israel and does not impact Stratasys as a whole.

Got it. And then just a quick follow up on the recent question about the gross margins of Solid Concepts and Harvest. You guys talked up some synergies as you bring the business together. Would you imagine that the gross margins overall, those two would trend up towards your current services gross margins over time?

It's difficult to estimate today. We mentioned before there were two steps to the process, one of them is to integrate the three service bureaus into one Company which we started as soon as we closed the transactions. I expect this transition to create some synergies which should improve gross margins. Later on when we've integrated them into the overall Stratasys we'll get some more benefits. I think it's a little bit too early to estimate how good it's going to be.

Great. Thanks for the color, guys.

Jonathan Shaffer, Credit Suisse.

Good morning, guys. I was just wondering if you could comment the Z18 impact on the quarter? I know it came out and started shipping pretty late in June and is arguably the most transformational new offering. I was just wondering if you could talk about, A, the impact on the quarter, and B, how you see that playing out for the rest of the year?

Good morning, Jonathan. It's Erez. It's hardly have any significant impact on the quarter. We started to ship it relatively late. However, we saw very nice workings around Z18. But it's too early to measure any trends in this product line.

And then just as a follow up, it seemed like Florida Polytechnic was a major order of over 50 MakerBots. I was wondering if you're seeing any increased inquiries around large scale orders in the MakerBot line specifically?

Part of the MakerBot offering today is what we call Bot Farms which is large number of printers which are connected together and create innovation centers in universities and colleges across the US and other places around the world. It's a new offering but I expect it to accelerate in demand in the coming quarters and years. It's a very nice and very attractive concept for such institutes.

That's great. Thanks a lot, guys.

Ananda Baruah, Brean Capital.

Hi, guys. Congrats on the strong quarter. And thanks for taking the questions. I guess the first is with regards to applications and manufacturing, David, can you give us a sense of which ones you're seeing begin to accelerate and which ones you think hold the most promise?

Again, like I said in my presentation, we're seeing a lot of progress in manufacturing which is a great potential. We're talking about many, many manufacturing plants around the world which have the use for jigs, fixtures, guides, and no doubt that Stratasys has the best technology in order to assist those manufacturing plants to improve their processes. We see great growth there. We've seen more than a few end use parts applications, mainly in aerospace in the auto industry which are developing. So, again, in both segments we see growth. Again, the most maybe significant of the applications are maybe in aerospace.

And can you update us quickly on the competitive environment? You mentioned you think the market environment remains pretty robust. How do you view the competitive environment today? I guess what are your thoughts with regards to share gains out of that environment? Thanks.

Again, we presented our guiding growth numbers. I don't think something is dramatically changing with the competitive environment. We're doing very well. We're growing significantly. I don't see any dramatic changes in the competitive environment at this point in time.

Thank you very much.

You're welcome.

Rob Stone, Cowen & Company.

Hi, guys. I wanted to ask a strategic question about the new services businesses. How do you think about the opportunity in second -- like CNC and -- making -- and also further expansion -- also -- manufacturing --

Please, can you repeat the question? Sorry. You were cut off.

In the services businesses that you just acquired, how do you think about the opportunity in secondary services like CNC machining and mold making as well as further expansion into manufacturing in possibly new locations?

You're asking three questions in one. I'll start maybe from the first one. When we acquired the Solid Concepts and Harvest we said one of the reasons we chose these companies after much detailed analysis is the fact that these companies together with RedEye are mostly focused on additive manufacturing and not traditional manufacturing processes. Okay? So, our focus is additive manufacturing and although we have some traditional manufacturing within the organization this is not the focus and we intend mainly to grow our additive manufacturing activity. With respect to your I think third question regarding global expansion, today our service bureau activities are mainly focused in the US. But we will consider in the future to expand it globally. The other question -- I can't remember what it was, sorry.

Quick follow up is on dental which you mentioned as a strategic vertical. How do you think you are positioned in terms of share there and is there potential growth from share gain? Or just growing the application vertical? Thanks.

I think the dental vertical is growing and we're growing with this growth pattern. We have good solutions for some of the applications in dental, not all of them. We're expanding applications as we go. Regarding our market share, we'll gain market share. I'm not sure I have a very clear answer on that.

Thank you.

Bobby Burleson, Canaccord.

Thanks for taking my questions. Congratulations on the strong quarter. This one's for David. Stratasys has hired a new VP of Strategic Accounts and you're doing a top down kind of ROI analysis for some global manufacturing customers, et cetera. How does Solid Concepts help play into that? Given the decent number of SLA machines they have, how are you guys making sure those conversations look at the technologies that are available agnostically?

The strategy in this respect is really customer focused. What we've observed is the customers are approaching us, asking us top give them full solutions for their additive manufacturing needs. And we believe today our ability, the combination of offering both a hardware and consumables, professional servicing and consulting, end parts together is what is required by our customers and what we did in the past few years and we're doing very good probably in this respect is structuring our own operations to fit the customer need and the service bureau activity specifically is a great fit into it. Because if you look at our large customers, they have sometimes requirements for hardware, sometimes for parts, sometimes for consulting or any combination there of. So, basically we're structuring ourselves to serve the customer better. And the service bureau is part of this concept.

Great. And then a quick follow up. Speaking of kind of synergies across technologies, hardware and software, I think FISHER/UNITECH was saying at one point that their SolidWorks sales now, 50% of those include a printer, a 3D printer. I'm wondering if there's any update or kind of updated thoughts at least around what that penetration rate slash attach rate is for 3D CAD users and 3D printers especially now that MakerBot's getting a lot of traction? Thanks.

Unfortunately I don't have an answer but I'd be more than happy to research it and come back to you.

Okay. Great. Thank you.

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

Thank you for joining us for this call. Thank you very much.

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