Stratasys Ltd (SSYS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-three 2014 Stratasys earnings conference call. My name is Mark, and I'm your operator for today's call. (Operator Instructions).

And now, I'd like to hand the call over to Shane Glenn, Vice President of Investor Relations for Stratasys. Go ahead, please.

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

I 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 section of our website later today.

I remind you that certain information included or incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project or other similar words, but are not the only way these statements are identified.

These forward-looking statements may include, but are not limited to, statements related to the Company's objectives, plans, strategies, statements that contain projections of results of operations or financial conditions, including with respect to the MakerBot, Solid Concepts, Harvest Technologies and GrabCAD acquisitions, and all statements other than statements of historical fact that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. The Company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the Company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Limited after their merger, as well as the ability to successfully put in place and execute an effective post-acquisition integration plan for MakerBot, Solid Concepts, Harvest Technologies, GrabCAD 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, 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 the Company's annual report for 2013 filed on Form 20-F and other reports that the Company files with the SEC, including the risk factors described in our Report of Foreign Private Issuer on Form 6-K 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 acquisitions. Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and press release.

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 third-quarter results, which include strong top-line revenue growth, including an impressive organic revenue growth of 35%. We continue to observe positive sales momentum from a broad range of products and applications, including a significant expansion in manufacturing application, as well as another impressive contribution from MakerBot. In addition, the strong demand we continue to observe for our high-performance systems and materials is contributing to a favorable product mix, which is having a positive impact on our margins.

We believe our third-quarter performance provides additional validation for the rationale behind our strategic initiatives and acquisitions. During the third quarter, we closed on the acquisition of Solid Concepts, Harvest Technologies, GrabCAD and HAFNER. We believe these acquisitions will expand our ability to address a wider spectrum of market verticals, application and technology solutions.

We are focusing on serving our growing customer base and executing our integration plans. In addition, we're on an aggressive path to position the Company for long-term growth through incremental strategic investment in our channel and corporate infrastructure, as well as through new product development and additional acquisitions.

I will return later in the call to provide you more detail on these developments and our strategy, but first I would like to turn the call over to our COO and CFO, Erez Simha, who will provide you detail 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 third-quarter performance. Financial highlights include total revenue for the third quarter increased by 62% over last year to $203.6m.

We generated impressive year-over-year organic revenue growth of 35%, driven by strong demand for our products and services. MakerBot branded product and services revenue was also impressive, increasing by over 80% when compared to the pro forma revenue that MakerBot generated during the third quarter of 2013.

Our gross margin came in at a strong 58.4% for the quarter, impressive when you consider the lower gross margin contribution of recent acquisitions.

Non-GAAP net income for the third quarter increased by 50% over last year to $30.1m, or $0.58 per diluted share.

Cash flow used for operations was $11m, driven by one-time employee bonuses and retention payments related to the Solid Concepts and Harvest Technologies acquisitions.

Product revenue in the third quarter increased by 48% to $160.2m, as compared to $108.3m for the same period last year. Within product revenue, system revenue increased by 59% in the third quarter over the same period last year, driven in large part by MakerBot's impressive contribution to the quarter. Note that MakerBot became an organic revenue source as of August 15, midway through the period.

System revenue growth, excluding the non-organic portion of MakerBot, was also impressive, growing about 41% over last year. We continued to observe strong growth across a wide range of products, driven by ongoing adoption of 3D printing technology for a broad range of applications, from prototype to direct digital manufacturing.

A few notable areas of strength included the continued spend in high-end photosystem cells, driven by increased demand for manufacturing applications, strong sales of high-end PolyJet systems, including our new line of Objet500 Connex multi-material 3D printers, as well as the Objet1000. In addition, we are encouraged by the strong demand for our fifth-generation MakerBot products.

Within product revenue, consumables revenue increased by 32% in the third quarter compared to the same period last year, or 28% when excluding the non-organic portion of MakerBot. The growth in consumables is driven primarily by our growing installed base of 3D printers and the relatively high usage trends of our high-end systems.

In addition, we are observing favorable results from our efforts to provide applications training and material education to our customers. These efforts are driving utilization toward advanced, higher-margin materials. Combined with our growing installed base and specifically the installed base of the Production series and High-End Design series systems, we believe our strategy of increasing consumption and encouraging use of premium materials is a positive indicator of consumables revenue growth in future periods.

Service revenue in the third quarter increased by 145% to $43.4m, as compared to $17.7m for the same period last year. This included a 38% organic increase in service revenue.

Please note that the acquisition of Solid Concepts and Harvest Technologies both closed in the third quarter and made significant inorganic contributions to service revenue. David will provide more details on our integration focus for Solid Concepts and Harvest Technologies later in the call.

The growth in service revenue was positively impacted by the increasing revenue from maintenance contracts and service parts, driven by growing installed base of systems. In addition, the growth in service revenue was impacted by the change in accounting treatment we implemented last year surrounding how we recognize warranty revenue.

We shipped 10,965 3D printers and additive manufacturing systems in the third quarter, as compared to 5,925 systems shipped in the third 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 other product lines during the third quarter, including our high-end Fortus and PolyJet systems.

Including all systems sold by Stratasys, Objet, Solidscape and MakerBot since their respective inceptions, the Company has now sold 110,494 units worldwide on a combined basis as of the end of the third quarter. This is a significant milestone for the Company, as we believe Stratasys is the only company to have shipped over 100,000 systems on a combined basis.

Gross margin was 58.4% for the third quarter, compared to 58.8% for the same period last year. Sales of the Company's higher-margin products offset the impact of relatively lower gross margin currently generated by MakerBot and the lower gross margin generated by the incremental revenue recognized from the acquisition of Solid Concepts and Harvest Technologies.

Operating expenses increased materially in the third quarter compared to last year, driven by the inclusion of Solid Concepts, Harvest Technologies and MakerBot, as well as from increased sales, marketing and R&D investments to support our growth expectation and fund new product introductions.

Net R&D expenses increased by 60% to $19.2m in the third quarter, as compared to the same period last year. R&D expenses as a percentage of sales were 9.4%, compared to 9.5% for the same period last year.

SG&A expenses increased by 79% to $67.9m for the third quarter, as compared to $37.9m for the same period last year, driven primarily by the inclusion of Solid Concepts, Harvest Technologies and 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.

We believe our accelerating organic growth rate is a reflection of our successful investment we have made over the past several quarters, and we will continue to make incremental investments going forward to support our aggressive growth expectations.

Our effective tax rate was 1.1% for the third quarter, compared to the effective tax rate of 15.6% for the same period last year. Our tax expenses 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. Sales in all regions increased significantly in the third quarter of 2014, as compared to the same period last year, driven by the inclusion of MakerBot revenue, as well as from a strong demand we are experiencing across all regions. As in previous quarters, the Asia Pacific region remains one of our faster-growing regions.

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

We maintain approximately $459m in cash and cash equivalents and short-term bank deposits in our balance sheet, amounting to $9 per share, compared to $578m at the end of the second quarter. The decrease in cash is primarily a result of acquisitions of Solid Concepts and GrabCAD, as well as investment in working capital and expansion projects, offset by a $50m withdrawal from our credit facility.

Cash flow used for operations was $11m, as the Company used significant free cash for one-time employee bonuses and retention payments related to the Solid Concepts and Harvest Technologies acquisitions. Capital expenditures amounted to approximately $20.3m in facility and equipment investment.

Inventory increased to $119.3m in the third quarter, compared to $114.3m at the end of the second quarter, primarily due to the inclusion of newly acquired parts services businesses.

Accounts receivable increased to $140.7m in the third quarter, compared to $113.6m at the end of the second quarter, while DSO on 12-month trailing revenue was 74, compared to 68 in the second quarter and 74 in the third quarter last year, primarily due to the inclusion of newly acquired service [builds].

In summary, we are very pleased with our third-quarter result. We generated very impressive organic sales growth. We reported record financial results, driven by broad-based demand across our product lines. We should also highlight that our business excluding acquisitions experienced an expansion in margin over the last year.

We believe that we are making the appropriate investment 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 investment, as well as additional acquisitions. Our investments will support future growth mainly in headcount, infrastructure, new product initiatives and sales and marketing to support new product introductions.

And finally, excluding an adjustment to our earnings forecast for the recent acquisition of GrabCAD, we have maintained our financial outlook for 2014, based on our positive momentum going into the fourth quarter.

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. As previously communicated, the recent acquisition of GrabCAD, which was closed in September, currently provides no incremental revenue and includes ongoing development costs that are expected to negatively impact the fourth quarter by $0.03 to $0.05 per share.

Stratasys provides the following information regarding the Company's projected revenue and net income for the fiscal year ending December 31, 2014.

Revenue guidance remains at $750m to $770m. Reflecting the recent acquisition of GrabCAD, non-GAAP net income guidance was adjusted to $115m to $120m, or $2.21 to $2.31 per diluted share, versus our previous guidance of $117m to $122m, or $2.25 to $2.35 per diluted share. GAAP guidance was updated to a net loss of $31.6m to $24.4m, or a loss of $0.63 to $0.49 per basic share.

Non-GAAP earnings guidance excludes $80.6m to $81.1m of projected amortization of intangible assets, $29.4m to $29.9m of share-based compensation expense, $14.6m of impairment charges, $66.7m to $68.7m in non-recurring expenses related to acquisitions, and includes $46.9m to $47.9m in tax expenses related to non-GAAP adjustments.

Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of this press release, and the table provides itemized detail of the non-GAAP financial measures.

Stratasys provides the following additional information regarding the Company's performance and strategic plans.

Operating expenses will 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 includes significant investments to support the integration and alignment of the recent acquisitions of Solid Concepts and Harvest Technologies, as well as the inclusion of significant development expenses associated with the acquisition of GrabCAD.

Capital expenditures are projected at $50m to $60m for 2014 and $160m to $200m for 2015, which includes significant investments to support future growth.

Additionally, Stratasys reiterated its long-term operating model as provided on the following slides.

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

Thank you, Shane. We are recognizing the results of focused strategies and capitalizing on many exciting growth opportunities. We begin the fourth quarter with significant positive momentum, as our markets continue to grow and opportunities develop at an exciting rate.

We remain focused on our strategic imperatives and will pursue leadership in every area in which we operate, while investing aggressively to capture future growth and deliver shareholder value. We remain focused on those objectives.

One of the fastest-growing segments within our industry is direct digital manufacturing and end use parts production. Our parts service strategy supported our core strategic imperatives of expanding our DDM expertise, as well as leading the market in an introduction of vertical market solutions.

Our recent acquisition of Solid Concepts and Harvest Technologies has helped us to grow our DDM and vertical market capabilities. Since closing these acquisitions in the third quarter, we have been focused on the post-merger integration process for the newly acquired companies with RedEye, with the team consisting of leaders from across the combined organizations.

The integration will be an ongoing process over the next 18 months. Our plan is to combine the sales application, marketing, business development and manufacturing functions into one unified group.

The rationale for our parts service initiative remains the same. First, the new offering will be a growing and profitable business, supporting our strategic imperatives around DDM and vertical market applications. Although early in the process, we are observing some positive trends from the combination, as we have begun to shift order fulfillment to maximize capacity utilization, as well as make better use of our geographical reach and combined technology expertise.

Second, we believe Stratasys will have opportunities for synergistic selling of systems and services across our larger combined customer base. To be clear, we're in the early stages of the integration process and have not yet focused on realizing cross-selling synergies. These transactions are fundamentally about growth and building the necessary infrastructure to continue to lead the additive manufacturing markets.

Future success with our industry will go beyond simply providing the market with best hardware and material solutions. We believe we must develop a leading 3D printing ecosystem that will improve accessibility to our solutions and allow us to enhance customer intimacy.

To advance this strategy, we recently announced the acquisition of GrabCAD, a leading cloud-based CAD collaboration platform and community site. GrabCAD's solutions is CAD software agnostic and empowers designers and engineers to manage, share and view CAD files

GrabCAD has built a global leading and fast-growing community of mechanical engineers and designers, with approximately 1.5m users who are passionate about design. The Company has also established an industry-leading team of software professionals with deep understanding of the needs of designers and engineers.

GrabCAD will operate as a unit within Stratasys' global product and technology group, and is expected to continue to provide enhanced collaboration tools and improving accessibility related to 3D CAD contents.

We believe that improving 3D printing accessibility is critical to drive adoption for our products and services. GrabCAD is a unique opportunity to Stratasys to strengthen our ecosystem by providing a common core platform and user experience for all our 3D printing system and parts service offering. We are early in the post-merger integration process with GrabCAD and are optimistic about the opportunities that this acquisition is expected to provide for our Company.

While we have been busy with expanding our offering through a strategic acquisition, we have maintained our internal focus on accelerating new solutions to market. Our strategy includes the aggressive development of new products to meet our customer needs, as well as the development of innovative go-to-market and channel expansion initiatives.

We introduced several new products since the beginning of the last quarter. For example, the advanced capabilities of the Connex line is driving new opportunities within the medical applications that require multiple materials, as well as high-color and fine-feature resolution.

Demonstrating our commitment to leading the market with innovative new products, yesterday we announced two new Fortus FDM systems and eight new PolyJet systems, including a significant extension of our successful Connex line of multi-material 3D printers. Additionally, we strengthened our material portfolio with the ULTEM 1010 resin for the Fortus 900mc.

These product announcements were previously scheduled [to be remote], but based on anticipated strong demand, we announced the new products yesterday at the CMAA Trade Show in Las Vegas.

This has been a very big year for new product introductions, as we've already released multiple new products and materials across our combined portfolio. For example, the Objet1000, which began shipping early this year, experienced strong demand and was a significant contributor to our quarter. We believe the unmatched build size, material selection and part quality, our high-end PolyJet offering creates a value proposition for numerous applications across multiple vertical markets.

In addition to launching new products, we are also focused on the development of new channel go-to-market strategies and strategic partnerships. Expanding our channel and pursuing strategic partnerships not only supports distribution of our new product introductions, but also improves 3D printing accessibility and customer intimacy by allowing us to connect with our customers in new and innovative ways.

In the third quarter, we announced two significant channel expansions for our MakerBot brand products. First, Home Depot, which is now carrying MakerBot fifth-generation 3D printers in selected stores as a pilot program, and second is the creation of MakerBot Europe, the result of the acquisition of MakerBot's German distributor HAFNER'S BUERO.

We are also reaching new customers through the expansion of our UPS partnership. Last year, UPS stores selected the uPrint SE Plus as part of the 3D printing pilot program in six stores in selected markets across the United States. Over the past year, the six locations experienced increasing demand for 3D printing services among small business startups, inventors, artists and professionals.

After the successful pilot program, UPS announced a nationwide expansion of the 3D printing services at nearly 100 locations. We believe this is a positive indication of our customer demand for increased access to 3D printing technology, and we believe we are well positioned to capitalize on the opportunity with our industry-leading products.

To support all these initiatives, and in light of the market demand we are experiencing, we will continue to invest in the necessary infrastructure that can support our growth. We are rapidly expanding the global company with over 29 offices worldwide and nearly 3,000 employees. Over 700 employees were added in the third quarter alone, the majority as a result of our recent acquisitions.

As Stratasys grows, we must build a scalable foundation that allows an ongoing emphasis on innovation and product development by providing the necessary tools to fully leverage new products and services into the marketplace. We believe we are leading the industry in building such infrastructure.

In summary, we are extremely pleased with our third-quarter financial results, including record top-line revenue, impressive organic growth and strong profit growth. We observed broad-based demand for our products and services, with particular strength in our high-performance systems and materials, as well as an impressive contribution from MakerBot.

The impact of our strategic investments is reflected in our impressive revenue growth, which we believe validates our strategy. We closed the acquisition of Solid Concepts, Harvest Technologies and GrabCAD, expanding our ability to address a wide spectrum of market verticals and develop a broad set of solutions to meet our customers' evolving needs.

We continue to position the Company to capitalize on future growth opportunities by making the necessary strategic investment in channel, product, technology development, as well as the execution of a focused M&A strategy.

And finally, we continue to observe a favorable market environment and expect a strong finish to this year.

Operator, please open the call for questions.

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

Good afternoon, gentlemen. David, I would say just based on the comments and the revised numbers that we have, it looks like the increased expenses for 2014 are discrete events, the M&A, the 11 new products.

But, David, given your comments and the fact that you left the long-term guidance intact, is it fair to expect that you have built in a path to the greater efficiency and scale of these portfolio additions?

I'll take maybe the first part, and David will answer the second one. On the thing that -- when you look at what happened to Stratasys this quarter and year to date, we are growing extremely fast, 35% organic growth, with and without MakerBot. It's a little bit higher than what we planned and what we expected to grow.

There are plenty of opportunities on the table, in the market, that we can capture, and those opportunities require investments. Once we understood that the effective tax rate will be a little bit lower than what we estimated, we leveraged the opportunity to invest more, capture more opportunities. And don't forget that the tax structure is part of our unique business model and allows us to invest more, capture more opportunities and probably grow faster.

I think that part of the -- the fruit of those investments you cannot see in the financial statement, meaning every box that we put out there, we generate a stream of recurring revenues which is extremely profitable in the future of consumables and services that you don't see today in the financial statement. And I think that the (inaudible) is extremely, extremely fast.

You just gave the full answer. I'm speechless.

Okay. Great. Thank you very much.

Thanks, John.

Troy Jensen, Piper.

Yes. Congrats on the impressive top line, guys. I guess I want to follow up to John's question a little bit. Just on the spending side, so I think the reason the stock's down today and the concerns a lot of new investors have is just with respect to operating margin leverage. So if you look at this quarter, you had a nice revenue beat, but your operating margins came in below my model and the EPS upside really came from taxes.

So can you just talk on when do you think the spending will slow down and when do you -- or slow more than the growth rate of the revenues, and when can we start to see leverage? And when do we hit this 18% to 23% range?

I'll try again with the splitting into two. I'll take the first part. David will take the second part. And you have to understand the details behind the financial statement. When we added MakerBot and we added the service bureau businesses, those businesses had an impact on the combined operating margin of the Company, and it formed a side effect that we choose to invest a little bit more.

The core business of Stratasys is generating extremely high, profitable margins, as it used to do. We are adding business models that are a little bit different, that maybe the mathematical result is lower operating margins. Still, this does not have any impact on the profitability of the core business and/or profitability of our other businesses which are healthy but carry different business models.

I think that the investment that we choose to do is part of our strategy to try and grow as fast as possible and capture all the opportunities that are on the table today. And every box that we put there, you know will generate in the future an extremely high stream of revenue which is profitable.

David?

Troy, I think that we said it also during our opening slides. The acquisition strategy is very, very focused. Not all the acquisitions that were done in the later part of the year were planned at the beginning of the year. Okay?

Now, each acquisition like this requires effort and requires investment in order to integrate it correctly into Stratasys and in the future enjoy the synergies. I want to repeat what Erez said; the core business of Stratasys did have improved margins, okay, if compared to previous quarters. So what you see is really the result of the acquisition.

And as I said earlier, I think the acquisitions are extremely focused, are serving the strategy the way we published it, which I think is unique. Therefore we have increased expenses in the short and medium term, to finance this PMI activity.

That's fair. Guys, if I could do just one follow-up, David. Of all the new products launched yesterday, did any of them come out of Skunkworks? And are there still seven new technologies in the pipeline?

Any of them came out of Skunkworks. I prefer not to answer this question, Troy. I think we came out with many, many new, very innovative products. Again, I think we're talking about in the last two quarters, probably altogether over 10 new products and materials which are impressive, regardless of their origin.

Yes, agreed. All right, guys. Good luck going forward.

Thanks, Troy.

Ken Wong, Citigroup.

Hi, guys. I guess hitting the profitability angle once more, when we look at the gross margins, clearly some of the services side was impacted by the acquisition. When should we expect that to get back to -- you guys hit mid-40s the last couple of quarters. What's the timing on possibly ramping back to those levels?

Can you repeat the question again? When do we expect --?

Sure. I think -- services gross margins were obviously impacted by the acquisitions. Just wondering when should we expect you guys to be able to ramp those gross margins back to the mid-40s that we saw the last couple of quarters?

You are talking about the services gross margin. So the services gross margin that you see there is a mix between the parts business, which obviously is now taking a larger part of the equation and the business, and the traditional service business that you saw in previous quarters. And I can tell you the traditional service business is doing or is generating the same margin as it used to generate in previous quarters. But again, adding our parts business which carries a little bit of a lower margin, the result is a consolidated average lower margin as you see in Q3.

I think that it will take time to drive margins up. It requires integration activity which will take a few quarters to try and leverage the synergies between the two companies. It's not a one quarter, or not even a two or three quarters story. But we do see and we do think that we will be able to leverage those margins up in the future.

Yes. I can add to what Erez said. I think we said also in the presentation that we expect the PMI process or the service bureaus to take 18 months. Now, we -- if you go back to the rationale which was presented I think in the last call, in the previous call, why we went ahead and made those transactions, a lot of it relies on the fact that we do believe, strongly believe, that over time we are going to be able to generate synergies between the parts business, the hardware sales, our strategic account activity.

Now, in order to get to it, we need first of all to integrate Solid Concepts, Harvest with RedEye, which is stage one. And then we're going to go ahead and try and explore those synergies. And as I said, this will take up to 18 months.

Yes, got it. Great. Thanks a lot, guys.

Thanks, Ken.

Amit Daryanani, RBC Capital Markets.

Thank you. Good morning, guys. I have two questions as well. Maybe first to start off with, regarding the MakerBot portfolio, which seems to be part of the issue on the margin side for you guys. I'm curious if you can talk about is there a focus, is there a potential to improve MakerBot margins over the next one to two years? And if so, what are the levers that could help you improve the MakerBot margin, given the fact you do have good growth there?

Yes. I think that -- it's David. I think that over time there is an intention to improve the MakerBot margin. I think that in a business such as MakerBot, which is relatively -- compared to the core Stratasys, is high volume, we should expect over time to create -- improve margin for improved manufacturing processes. I think that we're going to improve our offering in a way that will allow us to generate better margins. The answer's yes.

And again, it's not in the short term, Amit.

Yes.

So I guess maybe I don't understand. How do you get there? Is it going to be more services? Are you going to try to make it a more flows and materials loop? If you could maybe talk about what are the potential levers to help the margins out?

Just to give you an example, we introduced -- I don't remember when it was. I think it was this quarter we introduced a new offering for services, for example, for MakerBot customers, which is adopted nicely by those customers. This is improving our overall margin. We are adding product elements which is sold with the printers, with the consumables. The overall offering over time will improve its margin.

Got it. That's helpful. And just as a quick follow-up, the GrabCAD dilution that you talked about in Q4, $0.03 to $0.05, does that sustain through 2015, as in could it be $0.16 dilutive in 2015, or are there offsets that you're looking at to hopefully reduce that dilution? Any help on that would be helpful, and thanks.

Amit, we didn't discuss this yet. We didn't discuss it, 2015 guidance. The nature of the acquisition is almost -- almost all of it is R&D type, but when we will guide about 2015 we will also discuss GrabCAD.

I want to say just one word about the GrabCAD acquisition, which is a little bit, maybe, remote from the EPS effect. I think that the GrabCAD first of all is a great company. And what we got with GrabCAD is the leading team of software professionals which I consider and we consider to be the top of the industry, coming with an extremely strong community with 1.5m users. That I think today all of you can appreciate the huge value the [thinkers] gave to MakerBot, and we are adding another very strong community to the Stratasys family.

So the perspective of GrabCAD, yes, it's affecting EPS, but we are bringing on board the team which at the end of the day supports our strategy of increasing 3D printing accessibility, improving customer intimacy, basically the ability to create collaboration tools that will improve and encourage the use of 3D printing. So it's really a strategic acquisition and, yes, it has in the short to medium term an effect on EPS.

Appreciate the insight and congrats on a nice quarter.

Thanks, Amit.

Thanks.

Wamsi Mohan, Merrill Lynch.

Yes. Thank you. Good morning. You beat the quarter solidly here, but you're not increasing your full-year top line, indicating some deceleration from very strong organic growth rates. So, two parts. Is this market related or product transition related, or just some conservatism on your part? And the actual organic growth rate, which is so much higher than the rest of the market and the other large player in the market, perhaps you could comment about that?

And one quick one for Erez as well. The increase in CapEx seems quite significant. Can you give us some more color about these 2015 CapEx plans and also how you intend to fund it? Thanks.

Maybe I will start and I will let Erez take the second part. We said in the presentation that we entered Q4 with good momentum. Okay? On one hand, it's a very exciting quarter. We are replacing and upgrading the majority of our product offering in one quarter, including all the Connex Eden lines, most of the Fortus lines. So I think the guidances should stay where they are. Nevertheless, as I said, we enter the quarter with good momentum.

Erez?

Yes. The CapEx needs, and you know when you grow 35% organically you have to plan ahead, both manufacturing capacity and infrastructure. What you see there is around -- mainly around infrastructure, manufacturing capacity and manufacturing equipment that we have to build up in order to fulfil our plan for the next three to four years.

Those kind of investments by nature are made in advance, and you build later on the utilization for free during the next three to four years. And we see 2015 as a step year for us to invest around facilities and manufacturing capacity, in order to make sure that the Company has whatever it requires to fulfil our needs in 2016, 2017 and 2018.

Okay. Thanks, Erez. And how do you intend to fund it?

I did not decide it yet.

Thank you.

Thanks, Wamsi.

Patrick Newton, Stifel.

Thank you. Good morning, gentlemen. Thanks for taking my questions. I guess one clarification, in case I missed it. Erez, did you provide RedEye revenue or collective service bureau revenue in the quarter? And then I have a margin question.

No, you didn't miss it. We didn't provide. RedEye today is part of the parts business and we report it as one unit.

Can you quantify that at all, just on a sequential or year-over-year basis, just to give us an idea of how much of a contribution Harvest and Solid Concepts was in the quarter?

It's very difficult. Although we are only -- we just started the PMI two months ago, a lot of the activity is already integrated. The go-to-market sales is under one hat. We're already doing manufacturing load balancing between the different physical locations. So basically the standalone reporting is not available.

Okay. That's fair. And then on the gross margin side, you cite strong demand of high-performance systems that drove the product gross margin. Can you give us visibility into these demand trends? And should we view the product gross margin as representing peak levels, or is there still upside?

And then on the service gross margin side, I think definitely below our expectations, but can you help us maybe provide a reasonable gross margin range for this business now that you have higher service bureau revenue post the Harvest and Solid Concepts acquisitions?

I would look at the gross margin as -- and not try to break it down between the products and the service. And I think that if you look ahead, at least for the short time, gross margin should stay the same, the same level that you see today, the same level that you saw during the last previous quarters.

As for the service gross margin, it will take us time to bring it up to a level that the core service business of Stratasys used to be. It's not a quarter, it's not two quarters, it's not three quarters, as David said. It's a plan of six quarters, looking ahead in terms of trying to integrate the entire business into our core business.

As for the products, I think that a fair assumption would be that product gross margin will stay at the level that you see today in Q3 and you saw year to date for those products.

Great. Thank you for taking my questions. Good luck.

Thanks, Patrick.

Ananda Baruah, Brean Capital.

Thanks, guys, for taking the question. Congrats on a strong revenue quarter. I guess one two-part question for both David and Erez. Beginning with operating margins, I guess OpEx investment, given the conversation, the dialogue around increased M&A, new product cadence and investment to grow those new products, do you think that you can, and should we have an expectation for operating margins to expand in 2015? It sounds like your teeing up another investment heavy year, so I just wanted to understand that context.

And I guess, Erez, in that regard, you also -- there also was in the prepared remarks mention of a reflective -- I guess a reflective view of tax rate in the context of your investment cadence. So how should we think about tax rate going forward as well? Thanks.

So I think that 2015, it's really too early to discuss. We are just now in the middle of process of planning 2015, and we will guide the market when the process is done and finished and we have good understanding of 2015 plan and good plan in place.

As for 2014 and the effective tax rate, the tax rate -- the effective tax rate is one of the most difficult parts to forecast. It's actually based on the regional taxable income and many more parameters that are difficult both to forecast and to manage. I think that a unique part of our business model is the low effective tax rate that allows us to invest more while maintaining health of stability of the entire business.

And I'm looking into Q4, if this was your question. I think that effective tax rate in Q4 will be a little bit below the lower range of the long-term model that we provided to the market.

Got it. Thank you.

Thanks, Ananda.

Sherri Scribner, Deutsche Bank.

Hi. Thanks. I noticed that your units were down sequentially, and now that you've had MakerBot for more than a year, I wanted to get a sense of what you think typical seasonality is going to be for your shipments as we move forward. Thanks.

Sherri, did you ask about units, unit shipments?

Yes, unit shipments (multiple speakers) sequentially.

I think it's more a matter of mix, and it's a matter of mix of the MakerBot units that were more high-end MakerBot units that were sold this quarter compared to previous quarters. Don't forget that in previous quarters the Z18 was not available commercially and was not in the market. I wouldn't take any conclusion out of the number of units that you see, the change in number of units that you see in Q3.

Are you seeing any seasonality in that business? Would June typically be strong and would you expect December to be particularly strong? Just trying to understand the seasonality.

Usually, Q3 is a little bit slower than usual, due to the vacations time, schools and university offices. So usually Q3 is slow compared to, for example, Q2 or Q4. I think also, in the US, Q3 as a seasonal quarter is not as good as Q4 during the year.

Thank you.

Thanks, Sherri.

Jonathan Shaffer, Credit Suisse.

Hi, guys. Good afternoon. I was just wondering if you might be able to give a little bit of color around the MakerBot growth in the quarter. I know you had a couple of large product introductions, including the Z18 and the Mini, and I was just wondering what kind of customer appetite you're seeing for the Z18 in particular.

Again, we don't disclose a breakdown between the different product lines, but I think what is very visible is the fact that we did grow MakerBot sales 80% Q over Q. I can share with you that we see very good acceptance to the Z18, without indicating the exact number of units.

Thanks a lot, guys.

Jonathan, the 80% was based on a pro forma basis, when you look at the quarter over quarter -- year over year.

Sure. I just meant more underlying appetite, no specific numbers. Is the Z18 being well received?

Yes. The answer is yes, very well received.

Got it. Thank you.

Paul Coster, JPMorgan.

Yes. Thanks for taking my question. I just want to go to your comments on customer intimacy in the context of the service and parts business. Are you starting to see any examples of you placing your capabilities inside the supply chain of customers and/or customers placing discrete operational units inside your own facilities? And do you expect that to grow in the future? A virtual manufacturing capability, essentially.

Paul, I said -- good morning. It's David. I said earlier, what we are very focused in the next few months is first of all to integrate RedEye with Harvest and Solid Concepts. This is part number one. We need to unify the salesforce, manufacturing capabilities, the quoting systems. There's a lot of work has to be done there.

When this is done, we're going to go to the next stage, which has to do with exploring the synergies between the parts selling entity and the hardware and consumables selling entities. We did not change our mind and we think that there are a lot of synergies, but we did not start to explore them at this point of time.

Okay. My second question is to do with R&D, and that is that you've seen one of your potential competitors come out with a hybrid solution which is combining two types of print engines. Is this something we should also expect of Stratasys in the future, not that specific configuration but nonetheless combinations of print engines in one solution?

Obviously, Paul, and unfortunately, I cannot disclose our roadmap. What I can say is that, and I think it's being demonstrated very nice the last -- this quarter and previous quarters, that we are accelerating products to market. And we have all the intention and it's part of our strategic imperative to do it also in the coming quarters and years. So you should expect to see more and faster introductions to market. Nevertheless, I cannot discuss the technologies and combination and so on.

Thank you.

Jason North, Jefferies.

Hi. Could you discuss the ramp in CapEx for 2015? Is that mainly due to Solid Concepts, or there are other drivers in there?

And then also, how does that relate to the new mix for your geographic footprint? And with the big currency moves we've seen, what does that mean for your cost basis for next year? Thanks.

I think that it's mainly around the business which is not the parts business but the core business of Stratasys, or the business of Stratasys without the parts business. And again, I said it in previous questions, it's around investment in infrastructure and manufacturing capacity and manufacturing equipment, in order to make sure that we have enough capacity and enough infrastructure and IT infrastructure to serve us and to take us, as of 2015, for the next three to four years.

Those investments usually are being done in steps, meaning you don't build infrastructure and manufacturing capacity year over year. You do it once every three to four years. And I don't think it will have an impact, a significant impact on the cost basis of the Company.

And what do you overall see is the impact for the recent currency moves in terms of your margin profile for next year?

No. Nothing.

Okay.

Holden Lewis, Oppenheimer.

Great. Thank you. Good morning. I guess two things. First, what is -- you said yourself that you have to put more CapEx out there because of the rate of growth in the market. So I'm kind of curious, in light of your 25% organic growth rate, does the fact that you're continuing to ramp the CapEx suggest that at least for the foreseeable future that 25% is going to be a little bit low compared to the current rate of 35%?

And then the second question relates to your refresh of your products. Can you talk a little bit about, in light of the Hewlett Packard release, do these new products come with better speed, fine feature? In other words, is it cutting into what Hewlett Packard -- the lead that Hewlett Packard states that they will have?

I'll take the first part and David will take the second part. And I think that regardless of what is the growth rate that we expect, and we didn't provide any direction about our expectation for growth rate for 2015 and 2016, the fact is that year to date we grew 35% organically. If you add to that the amount of inorganic growth, the number is impressive.

And those numbers required investment in both infrastructure and manufacturing capacity looking three to four years ahead. And we had to plan our investment as such that will be ready in the next couple of years to fulfil the demand that we feel we will see in front of us.

It's David. To the second part of your question, we came out with I think very impressive new products to the market in the past quarter and we just announced yesterday more products. Each one of them has unique characteristics. I'm not going to go through all of them. Some of them are increasing speed, some of them are increasing capabilities, material availability, improved reliability.

Nevertheless, going back to the HP question, as I said already publically before, we have quite a lot of innovation in our pocket in different parts of the Company, and we feel very confident that we can deal with the HP challenge. And we are going to be ready when HP is going to reach the market.

Right. Thank you.

Thanks, Holden.

Peter Christiansen, UBS.

Thanks for fitting me in. This is Peter in for Steve Milunovich. Just following up on the HP introduction last week, I know it's early but has there been any feedback from any of your top customers? And do you get the sense or is there any fear that HP's announcement could lock up spending next year at all, as we wait for their product to be introduced?

Again, first of all, we did not get such a response from the market. Second, HP announcement I think is important announcement. I think it validates all of our thoughts about additive manufacturing and the potential in the market. Specifically, what was announced is technology.

From my perspective, I'm not sure and I don't think we have enough information to understand exactly what is the product which is going to result from this technology. I can also add that our market has a very large variety of requirements and our customers a very large variety of demands from us, and I don't think that a single technology will be able to answer all those demands. So, to put all of it together, I think HP joining the market is good news and Stratasys is going to be ready, and we are already ready for this event.

Great. Thank you. And then one last one. Can you just discuss some of the nature of some of the impairment charges that you took in the quarter? Thank you.

The nature is related to one of the product lines that we acquired in the MakerBot transaction.

Thanks.

Jim Ricchiuti, Needham and Company.

Thank you. Just a question on the integration of the parts businesses. 18 months, fairly long an integration, and I wonder if you can talk a little bit about milestones along the way and how that might translate to improving profitability on the service business.

Okay. I will divide it into two parts. Like I said, stage one is merging RedEye, Solid Concepts and Harvest into one operational entity. This should take, I would say, two to three quarters and should result in a more efficient activity of the salesforce, better customer access and some efficiencies in manufacturing across, I think, the seven facilities that we have now.

After this is done, we are going to get to the second stage, which will deal with, as I said earlier, with the synergies between the different parts of Stratasys and the service bureau activity, which will result in improvement in the margins at this time. But again, stage one is about two to three quarters and then we go to stage two.

Okay. And Erez, I wonder if you could talk, was the growth -- the organic growth that you saw in the quarter uniform across your geographic regions, just in light of concerns people have had about Europe?

I think that we saw an extremely high growth in Asia Pacific. Europe is doing extremely well, and ahead -- actually ahead of our plan. And by definition, North America is doing not so good. I didn't see any issues that make us to be concerned about any kind of influence of macroeconomic discussion on our business.

Thanks a lot.

Scott Schmitz, Morgan Stanley.

Yes. Thanks for fitting me in. Just a question on the consumables line. You talked about some education and some investments that are driving the consumables growth. So does the growth rate maintain at the same level here in the mid, low 30s, or is there an acceleration that you expect, or deceleration, on the back of some of these investments?

I think that the current growth is impressive and we are working extremely hard to keep it as it is.

Okay. And then just on the linearity in the quarter, the DSOs were up; I think you attributed it to the services business. But any comments on how linearity played out during the quarter and whether you expect DSOs to come back down, or does that stay elevated with the services impact?

No. The DSO was -- the DSO for Stratasys without the service growth was very similar to previous quarters, and the impact of adding the service bureau resulted in DSO as you see it there. I think that, looking forward, we will see the same level of DSO, which I would say is a reasonable level of amount of days provided to customers.

Thank you.

That concludes the question and answer session for today, so I would now like to hand the call back to the CEO, David Reis. Go ahead, please.

Thank you. Thank you for joining our call today. We look forward to speaking with you again next quarter. Goodbye. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Enjoy the rest of your day.