Stratasys Ltd (SSYS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Stratasys earnings conference call. My name is Katina and I will be your coordinator for today.

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Shane Glenn, Vice President, Investor Relations. Please proceed.

Thank you, Katina. Good morning, everyone, and thank you for joining us to discuss our first-quarter 2015 financial results. On the call with us today are David Reis, CEO, and 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 investors section of our website later today.

We will begin by reminding everyone that certain statements in this press release are 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 characterized by the use of forward looking terminologies such as will, expects, anticipates, continue, believes, should, intended, projected, guidance, preliminary, future, plan, committed, or other words. These forward-looking statements include, but are not limited to, statements relating to the Company's objectives, plans, and strategies; statements of preliminary or projected results of operations or financial conditions; and all statements 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 Ltd. after their merger, as well as MakerBot, Solid Concepts, and Harvest Technologies after their acquisitions, and to successfully put in place and execute an effective post-merger integration plan; 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 approval; 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 on Form 20-F for the year ended December 31, 2014, filed with the Securities and Exchange Commission, the SEC, and the risk factors attached as Exhibit 99.3 to the Report of Foreign Private Issuer on Form 6-K furnished by the Company to the SEC on the date hereof, and other reports the Company has furnished to or filed with the SEC.

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 guidance and forward-looking statements in this press release are made as of the date hereof and the Company undertakes no obligation to publicly update or revise any forward-looking statement, 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 do not provide 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. Good morning, everyone. Thank you for joining today's call. On April 28, we announced that our preliminary financial results where we outlined the factors that impacted our first-quarter performance, provided updates of 2015 financial guidance, and reiterated our commitment to our long-term investment plan.

While we are disappointed with our first-quarter results, we believe the long-term opportunity in our industry remains unchanged. We believe additive manufacturing remains in the early phases of adoption and we focus on developing our organization and pursuing strategies that will help drive growth over the coming years. While we remain confident in our long-term prospects, in light of the current growth environment, we have re-examined our 2015 operating plan and have taken action to adjust near-term operating expenditures and capital investments for the remainder of 2015.

Today we will review our first-quarter results in more detail, discuss our strategies to capitalize on an attractive pipeline of future opportunities, and highlight examples that will illustrate the exciting potential for our products and services, such as our recently announced success with the aerospace industry.

But, first, I would like to turn the call over to our CFO and CFO, Erez Simha, who review the details of our financial results. Erez?

Thank you, David, and good morning, everyone. The lower growth experienced in the first quarter, compared to Stratasys's historical growth rate, is primarily due to the overall market weakness and a slowdown in sales across most regions and business units.

Sales were impacted by market softness that we believe was driven primarily by the following: a decline in capital spending in certain regions and industries; strength of the US dollar relative to foreign currencies impacted first-quarter revenue by approximately $7.8 million on a constant currency basis; increased M&A activity within our North American channels; slower than expected adoption of higher-end Connex systems following the introduction of eight new Connex systems in the fourth quarter; and a period of slower-than-expected channel ramp-up in Asia.

Total revenue in the first quarter increased by 14% to $172.7 million when compared to $151.2 million for the same period last year on an organic basis, which excludes the impact of acquisitions. Revenue growth was flat compared to the same period last year, or 6% on a constant currency basis.

Non-GAAP net income for the first quarter was $2 million, or $0.04 per diluted share, compared to non-GAAP net income of $20.6 million, or $0.40 per diluted share, reported for the same period last year due to shortfall in revenue.

MakerBot product and service revenue declined by 18% in the first quarter over last year, driven by the overall market weakness, as well as by the challenges associated with the introduction and scaling of its new product platform and its evolving distribution model.

Product revenue in the first quarter decreased by 2% to $126.7 million as compared to the same period last year. Within product revenue, system revenue decreased by 12% in the first quarter over the same period last year, with the decline driven primarily by the factors we have previously outlined.

However, consumables revenue grew according to the plan during the quarter, expanding by 18% over the same period last year, or 25% on a constant currency basis, driven by increased system utilization as well as our growing installed base of systems. Service revenue in the first quarter increased by 112% to $46.1 million as compared to the same period last year. The increase in service revenue is driven primarily by the revenue contribution of Solid Concepts and Harvest Technologies, which were acquired during the first quarter of 2014 and thus not included in the prior year's results.

Within service revenue, customer support revenue, which includes the revenue generated mainly by maintenance contracts on our system, increased by 28% compared to the same period last year, reflecting our growing installed base of systems.

Despite the challenges our company faced due to market softness, we believe that our material and customer service sales successfully demonstrated how our business model can continue to generate recurring revenue from the installed base, even in a period of slower-than-expected industry growth.

The Company sold 7,536 3-D printing and additive manufacturing systems during the first quarter and on a pro forma combined basis has sold total of 129,197 systems worldwide as of March 31, 2015. Unit sales in the first quarter, relative to prior periods, was impacted by lower-than-expected makeup of unit sales as well as the overall impact of the market factors we outlined previously.

Non-GAAP gross margins declined to 54.1% for the first quarter, compared to 60.9% in the same period last year. The decrease in gross margin was driven primarily by a product mix that included increased numbers of lower margin systems, particularly within the Connex line, the impact of the inclusion of Solid Concepts and Harvest Technologies, and an overall decline in production capacity utilization at MakerBot.

Operating expenses increased by 36% to $94.2 million as compared to the same period last year. Net R&D expenses increased by 60% to $24.4 million in the first quarter over last year, driven by increased headcount and an overall acceleration in system and material project development.

SG&A expenses increased by 29% to $69.8 million for the first quarter over last year, driven primarily by the exclusion of Solid Concepts' and Harvest Technologies' operating expenses.

We received a tax benefit of 132.3% in the first quarter compared to an effective tax rate of 3.8% for the same period last year. Our tax expense was impacted by losses incurred in high-tax jurisdictions that were offset by lower taxable income in low-tax jurisdictions.

We have updated the goodwill impairment analysis of our MakerBot reporting unit, and as a result, we recognized a non-cash goodwill and other intangible asset impairment expense of $194 million in the first quarter. Non-GAAP EBITDA for the first quarter amounted to $2.2 million.

The Company generated $3.9 million in cash from operations during the first quarter and currently holds approximately $425 million in cash and cash equivalents and short-term bank deposits. The cash balance includes a $50 million drawdown on the Company's revolving credit facility.

Capital expenditures amounted to approximately $14.4 million in facility and equipment investments. Inventory increased to $131 million as compared to $123 million at the end of the fourth quarter of 2014, representing a 6% increase, driven by the Company's lower first-quarter sales.

Accounts receivable decreased to $142 million, representing a 6% decrease as compared to $151 million at the end of the fourth quarter while DSO 12-month trailing revenue was 67 compared to 73 at the end of the fourth quarter.

In summary, our first-quarter results were lower-than-expected across most geographies and industries, compared to growth levels the Company has experienced historically. However, revenue for both consumables and customer support grew as expected. We have re-examined our 2015 operating plans in light of the challenging market conditions we observed in the first quarter and have taken immediate action to adjust near-term operating expenditures for the remainder of 2015 and are reducing our 2015 capital expenditure plans.

Most of these reductions are expected to be short-term, related to our lower near-term revenue expectations. The reductions are occurring across most areas of our business, but we continue to invest aggressively in critical areas including vertical market development, strategic accounts, customer support services, IT, and channel development. Despite these adjustments we will remain well-positioned to react to an acceleration in demand or improvements in overall market conditions.

Additionally, we recently initiated a reorganization within MakerBot, that is intended to focus efforts on improving products, growing the 3D ecosystem, and increasing our efforts in the professional, education, and consumer markets. As the reorganization progresses, MakerBot growth rates are expected to improve and ramp up to, or exceed, overall company averages by 2016.

We believe that we have a strong balance sheet and are making the appropriate investments in strategic initiatives and building infrastructure to accelerate our growth moving forward, and that we are in the leading edge of our exciting industry.

I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will provide you greater details on our 2015 finance guidance, Shane?

Thank you, Erez. As we announced on April 28, for 2015 we estimate total revenue in the range of $800 million to $860 million, with non-GAAP net income in the range of $63 million to $90 million, or $1.20 to $1.70 per diluted share. We now project a GAAP net loss for fiscal 2015 of $256 million to $224 million, or $5 to $4.38 per share.

Projected non-GAAP net income is expected to be derived disproportionately from the second half of fiscal 2015, driven primarily by the projected timing of revenue and operating expenses. We expect to see a bottom-line benefit of the previously outlined reduction in operating expenses throughout 2015. We continue to expect total operating expenses as a percent of revenues to be in the range of 46% to 47% for 2015 and capital expenditures in the range of $80 million to $110 million.

Finally, we want to reiterate the following goals for the Company's long-term operating model, which include annual organic revenue growth of at least 25%, non-GAAP operating income as a percentage of sales of 18% to 23%; non-GAAP effective tax rate of 10% to 15%; non-GAAP net income as a percentage of sales of 16% to 21%.

Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of our press release, providing itemized details of the non-GAAP financial measures.

Now I would like to turn the call back over to David Reis. David?

Thank you, Shane. We believe our industry is poised to transform manufacturing, engineering, and design processes across a wide range of sectors. With our strong pipeline of future opportunities and our position of leadership within the industry, we believe we are well positioned to capitalize on these opportunities.

As we mentioned earlier, we are committed to our strategic investment plan that was unveiled last quarter, which is designed to support the future growth of our business and sustain our leadership position. The multiyear investment plan focuses on enhancing vertical industry solutions, expanding customer support services, building an enhanced sales and marketing infrastructure, and accelerating product development. All designed to support an annual revenue of $3 billion in 2020.

Despite the challenges we experienced in the first quarter, this time we've seen no indication of fundamental change in market opportunity.

To help ensure long-term success, we are enhancing our organization structure and I would like to share a brief overview of our recent progress.

During the first quarter we combined Solid Concepts, Harvest Technologies, and RedEye to form the Company's newly-branded Stratasys Direct Manufacturing Division, or SDM. Now we believe the largest customer manufacturing service organization built around additive manufacturing in North America. Our goal with SDM remains to leverage the platform into manufacturing applications, as well as across our large installed base of systems beginning in 2016.

We recently announced the creation of Stratasys Strategic Consulting, the service offering which is designed to help customers build and implement their additive manufacturing vision and strategy. Dr. Phil Reeves and the consulting team from recently-acquired Econolyst forms the foundation of this new division.

We made several key management appointments in the first quarter to position our company for future growth. Josh Claman, formerly of Dell, has joined Stratasys's as Chief Business Officer. The role oversees the Company global sales, service, and chain organizations and will be focused on driving commercial and go-to-market-focused activities across the Company's different business units.

The addition of the CBO follows the appointment of Jerome Hamilton, formerly from 3M, as Senior Vice President of Global Operations. Jerome was tasked with leading global manufacturing, strategic sourcing, and supply chain.

Finally, as part of our MakerBot reorganization, Jonathan Jaglom has been promoted to Chief Executive Officer of MakerBot. Jonathan brings 10 years of experience as a key contributor to the strong performance and scaling of operations at Objet and then Stratasys. We're confident he can lead MakerBot to the next level.

We believe we are making the necessary move to prepare for the long-term opportunities we see before us as additive manufacturing industry moves increasingly towards manufacturing application and vertical solutions. Global companies across a variety of industries from aerospace to automotive to consumer goods and medical are looking to Stratasys to help them evaluate, develop, and adopt additive manufacturing strategies.

Our vertical business unit and strategic account management infrastructure were created in part to support these emerging opportunities and I would like to share with you some of our recent success.

In aerospace, we are observing increased interest in using additive manufacturing with certified materials for flight applications. Today four aerospace companies have ULTEM 9085 material certification that allows for additive manufacturing of end-use parts using Stratasys FDM technology. In addition, we are working with several other aerospace companies that are taking steps towards manufacturing certification.

Each of these engagements is, by necessity, a long-term project as it can take months or years for aerospace companies to certify a manufacturing process and material for flight-ready parts. A great example of our progress is our recent announcement that Airbus selected Stratasys FDM technology to produce 3-D printed flight parts for their first-of-type A350 XWB aircraft. Stratasys ULTEM 9085 thermoplastic material has been certified by Airbus according to regulatory material specification, which includes flame, smoke, and toxicity performance required in aircraft interiors.

Airbus initiated the development and certification of Stratasys technology and material in 2013 as a scheduled risk reduction activity which has subsequently been very valuable for the A350 XWB program. More than 1,000 flight parts were 3-D printed by Airbus for the A350 XWB on the Fortus platform using our ULTEM 9085 thermoplastic.

Compared to conventional manufacturing processes, integrating Stratasys technology is expected to allow Airbus to enjoy greatly improved buy-to-fly ratio by manufacturing strong, lightweight parts with processes that reduced cost, decrease material waste, increase supply chain flexibility, and improve on-time delivery. Airbus has taken the time, resources, and effort to qualify our technology and material which has undergone rigorous certification processes. This is an example of long-term relationship and mutual commitment to the adoption of additive manufacturing in place of traditional manufacturing flight parts, and is the end result of a lengthy effort by both companies to identify and implement Stratasys manufacturing solutions.

We believe it is reasonable to expect that as parts are certified and deployed on specific aircraft, more applications would present themselves, and we anticipate further announcements as other projects develop.

Another Aerospace initiative that we recently announced is the adoption of Stratasys additive manufacturing technology for the joint venture between Boeing and Lockheed Martin called United Launch Alliance, or ULA. ULA is 3-D printing multiple flight-ready components for Atlas V rocket, including internal ducts, brackets, nozzles, and panels that are used to seal off compartments. The initiative is generating an estimated $1 million in savings per year for ULA compared to traditional manufactured parts.

In addition, we believe the current applications with ULA are likely just the beginning. If testing goes well, ULA intends to use 3-D printed parts on unmanned space flights starting in early 2016.

Working closely with our aerospace customers, we are developing roadmaps designed to meet their long-term needs. We believe this exciting new partnership demonstrates the success of applying our innovative products to create significant value manufacturing and reinforce our belief that the long-term future of our market remains bright.

Our Stratasys FDM manufacturing solutions are offered as both in-house production solutions as well as a service via Stratasys Direct Manufacturing, giving manufacturing customers flexibility as they our solutions. We look forward to continuing to collaborate with leading companies like Airbus and ULA to advance capabilities of additive manufacturing.

In summary, while we are disappointed with our first-quarter results, at this time we see no indication of change in the fundamental growth drivers for additive manufacturers and we believe the long-term opportunity remains unchanged. We believe additive manufacturing technology remains in the early phase of adoption and we are focused on pursuing our existing strategies to drive sales growth and adoption during this challenging period.

While we remain confident in our long-term market prospects, in light of the current growth environment, we have re-examined at 2015 operating plan and have taken immediate action to adjust our near-term operating expenditure for the remainder of 2015. Finally, we are confident that our investment plans and our growth strategy will enable us to put greater focus on long-term manufacturing-related applications such as Airbus and ULA; further positioning the Company to capitalize on future growth opportunities and help solidify our leading position in additive manufacturing and 3-D printing.

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

(Operator Instructions) Troy Jensen, Piper.

Thank you for taking my question, gentlemen. I guess I want to start with Erez and then I got a follow-up for David. Erez, halfway through Q2 here, roughly. Just curious to know how bookings look, either quarter over quarter or year over year this far into the quarter.

Troy, good morning. I think that the guidance we provided are annual guidance. It's really, really too early to give any comment on Q2. And I think that what we saw in Q1 was a different phenomenon than what we used to see and a much stronger end of the quarter compared to previous quarters.

And I want to stay here cautious with providing anything, any forecast opinion in Q2. I can tell you that the pipeline of both opportunities currently looks okay; however, I am not sure that this is enough for now to judge any performance (inaudible).

All right, that's fair. And then for David; I was hoping you could spend a little bit more time on this Airbus deal and this aerospace vertical focus. Was Airbus using FDM in-house or were they using Stratasys direct manufacturing? Just be curious to know if there's other materials in the pipeline for aerospace outside of ALTEM. And has this really been a result of your vertical-focus initiative?

Thank you for the question, Troy. Good morning. First of all, again maybe I will kind of look at it for a second at a higher level. It seems that Airbus and the ULA relationship are again another indication to the fact that additive manufacturing, 3-D printing has a long way to go.

Particularly to your question, in this case the parts were manufactured, for the most part, or almost all of them internally in Airbus. We are in the constant process of working with a multiple of aerospace companies to develop more advanced materials, and when they are going to be available we're obviously going to announce it.

But I think the most important thing about these two announcements is again a strong indication that those industries and many other industries are looking at additive manufacturing as a future manufacturing technology. And this pattern or fundamental, I would say, growth area did not change in the last few quarters and I don't think it is going to change in the future.

All right, fair. Good luck for the remainder of the year, gentlemen.

Rob Stone, Cowen.

Good morning, gentlemen. I wanted to just ask first about the trend in systems, specifically industrial units, compared to last year. I know you mentioned MakerBot was down quite a bit, but what were you seeing in terms of the year-over-year unit trend for industrial systems? And then I have a follow-up.

Good morning, it's Erez. We didn't break down the different product lines in terms of units. All we provided was the total number of units compared to previous year. And, again, we do not provide the information broken down by product line.

Okay. So my second question is (technical difficulty).

We did indicate that we did see a slowdown in our Connex sales, and I think we estimate that the reason for it is the fact that we announced many new products, like in the Connex line, towards the end of last year, which caused some delay in customer purchases. Otherwise, like Erez said, we are not breaking it out.

Are you seeing, given what looks like a fairly broad industry slowdown, not just for Stratasys, changes in competitor behavior, or do you see an impact on system pricing at this point?

Yes, we do not see any change in the competitive environment, not in impact on ASP. What we saw in Q1 in the reduction in gross margin was mainly, mainly, mainly due to mix of product.

We don't believe that the issues of first quarter are related to competition and we're not seeing any indication of that in the market. I think that if you take order reports; in 2014 Stratasys sold over 50% of the industrial systems. And again, around ASP, we didn't see any issues around it, the result of several new lower-cost (inaudible) product that we introduced (inaudible).

Great, thanks for taking my questions.

Wamsi Mohan, Bank of America Merrill Lynch.

Thank you, good morning. So one for Erez and one for David. Erez, can you give us some examples of where you are actually cutting down on CapEx and OpEx based on these new revenue targets? And if revenue turns out better, should we expect to see these spending estimates move higher? And I have a follow-up for David.

Good morning. What we did we actually scaled down operating expenses and also CapEx in most areas of the organization. We didn't touch what we Fortus-specific activity [beginning] of the year when the investment plans were announced. And we didn't touch with you -- we didn't touch [SAM], IT, customer support facing any activities, application, and some specific R&D products.

So those are longer-term, have longer-term volume and contribution. They are strategic to the Company and we didn't touch them. We scaled down on the risk, so we scaled down the regions and the businesses plan to actually be in line with lower revenue plans, scaled down some corporate activity not in those areas. And we try to keep the capability, the core capability of the Company as such that we do not touch it and we are ready to move really fast and accelerate the operations really fast if market conditions will change.

So we kept the core capabilities of the Company in place. We didn't touch it and actually I would say that most -- not all, but most of that scale down in operating expenses were around revenue or short-term-related activities that we touched.

Capital expenditures, more of the same. Meaning we didn't touch any capital expenditures that are related to IT, to R&D, (inaudible). All those are kept as original plans; however, we did track and reduce I would say significantly in other places in order to maintain or to control P&L contribution of course and maintain our cash position in the market.

Thanks, Erez. And, David, you clearly spent some time talking about the opportunities here in aerospace. Can talk any other additional verticals where you believe there are similar opportunities?

And longer-term do you still believe that MakerBot is an area in the market where you want to continue to play? Or do you view yourself as a company that's going to just move higher up in the marketplace? Thanks.

I will start with the first call. We see few verticals with great future opportunities. We mentioned to the aerospace.

We think there is great opportunities in the auto industry, in the health area, in terms of in education. And each one of them is a little bit different growth drivers and our vertical business unit is handling each one of them with separate business plans and separate kind of activity and operations. So it's not just aerospace.

In respect to MakerBot, I think that the future of desktop printing is great. We did have a slowdown and we discussed it a few times before in MakerBot. I think we're doing the right things to restructure the Company and prepare it for future growth. I think it is an opportunity in desktop. In fewer areas it is great, such as education. I think that the office space is a great opportunity for desktop.

So I don't think this market disappears. I think we need to restructure and we are doing it in order to serve it better, but I don't think the potential of the market disappeared.

Thanks, David.

Paul Coster, JPMorgan.

Thanks very much for taking my question. First up, has this slowdown impacted all products or systems segments equally, meaning PolyJet and the FDM technology in equal measure? And are there any areas that survived the slowdown and so it's possible to point to them as mission-critical, versus those that are just sort of zero-based budgeting, discretionary investment activities on the part of your customers? And I have a follow-up.

I will take the first part. David, you take the second part.

I think we saw weakness in most of our product line. The biggest effect, or the largest effect, was around a high-end Connex product. And as you say, we do believe that it is related to the introduction of eight new systems and eight new platforms at the end of Q4 in 2014.

Okay. So my follow-up question then is you are clearly spending a lot of time now working on solutions for industry verticals and for strategic accounts. Do you think the business model is going to change here? Because with such huge investment do you get repaid through shipping product, or do you foresee sort of bespoke solutions and being paid on a -- for the entire solution or for [NRE]-type activities?

At this time -- we don't observe at this time in our vertical activity a solution that will require us to change our basic model, our basic business model. Nevertheless, I think that as we are going to advance in the manufacturing space and our systems are going to be better tailored to certain applications, it might require some changing of the business model. Maybe different mix of the cost of hardware and cost of consumables.

At this point of time I do not observe such solutions, but I am not ruling that we are going to see something like this in the future.

Okay, thank you.

Jim Ricchiuti, Needham.

I wonder if you could comment on the verticals where you saw the weakness. Was it across the board or were their specific verticals where the weakness was a little bit more pronounced?

Again, it's David. Good morning. I think in general we saw softness across most of our activities. There are some verticals -- again, I don't want to disclose the specific verticals over this call -- that acted better than others. But in general, the slowness was across all our activities with some islands in which it did not slow. But the overall picture was a slowness, slower market.

And yet, David, it looks like you showed reasonably good growth on consumables. I wonder if you could talk a little bit about that.

Yes, I think this is one of the good news that both consumer and service grew as we expected it to grow, which means that customers continue using the machine. In some cases, accelerating the utilization of the machines. And the fact that customers elected to buy less in Q1 did not affect other customers' usage and desire to use the technology.

I think it's good news because it means that people are using the machines either as they are using them today, or in some cases more. And I think it also a good, strong indication to the business model of the Company.

So was the growth in consumables in any specific areas again, or was that more across the board? I'm just trying to get a sense if (multiple speakers).

Erez, correct me; I think it was across all territories or most territories and most industries and technologies.

Yes, correct.

Okay, thanks.

Samuel Eisner, Goldman Sachs.

On the acceleration in the second half and I guess the implied declines in OpEx as a percentage of revenue, can you talk about which line items, SG&A or R&D, or what specifically you will be reducing as a percentage of revenue as you start to enter the back half of your year?

Thanks and good morning. It's Erez. Looking forward as of Q2 to Q4, what we did we adjusted the operating expenses and as I said earlier, we didn't touch specific items that we thought of strategic and longer-term items.

And by nature, when you scale down revenue, so you have to spend a little bit less on revenue-related items, I think that when you look at the operating expense we did reduce a little bit SG&A and sales and marketing and less on the R&D line. However, we didn't provide any number of guidance or dollar amounts or each one of this P&L line and just say that operating expenses for the entire 2015 will be 46% to 47%, up revenue.

That's helpful, thanks. Then I guess to follow-up, I think that your Asia-Pacific growth you guys did not see the normal kind of seasonal build that would occur in the first quarter as we are now almost all the way through -- or we are all the way through April.

Did you see a snapback in April from some of that seasonal build, or are we still waiting for those Asia Pacific customers to re-up their spending? Thanks.

I will go back to Erez's answers to Troy, which I think the first question -- was the first question. I think it's too early in the quarter to discuss Q2. Asia Pacific enjoyed a few years of very nice growth, up to the end of 2014, and Q1 of 2015 was slower. We explain it by slower ramp of the channel in Asia and I think we need to wait and see.

We did not -- we are not ready to disclose at this point in time what is the status of Q2. I will go back to what Erez said: if you look at the overall opportunity generation, lead generation it looks healthy across the world, not only in US or Europe.

Great, thanks.

Steve Milunovich, UBS.

Thank you. Could you elaborate a bit on your comment that distributors were a little weak due to M&A? I know you've talked about distribution being one of your key issues going forward. Is that an area that is having some cutbacks or an area that's protected?

Then, Erez, I also wondered: are your expenses potentially going to decline in dollars over the next few quarters or more just as a percentage of revenue?

Maybe I will take the first part of it. Like we said in the previous press release and also now, there was unusual increase in M&A activity of some of our channel partners, mainly in North America.

In general, I see it as a positive note. Channels are consolidating, expanding, but nevertheless this activity caused some of them to slow down and I think it's natural. And I hope that we are going to ramp up pretty soon. But this is mainly related to North America, which for some reason (inaudible) unusual I think (inaudible) activity during Q1.

Erez, do you want to take the second part?

Yes, the operating expenses in 2015. We maintain, as a percentage of sales, 46% to 47%. We didn't mention any dollar amount and I think it will be harder to, as you mentioned, because it is a mix of some items that are going back and some items that are going down actually to create a decent mix of what we believe is the right mix for the end of 2015, which is a different mix between investments in strategic areas and short-term areas that we'll adjust into for the rest of the year.

Brian Drab, William Blair.

Good morning. Just wanted to ask one question on Maker. You mentioned that you expect the growth there to re-accelerate to better than the corporate average, I guess is the hope, by 2016. Just wondering if you could give us more confidence in that forecast and specifically can you talk about the status of your new channel relationships for Maker, including Home Depot, Dell, Staples, just given Maker's quality issues really coincided with the launch of these new relationships.

I guess I'm wondering about that timing. It seems like the timing couldn't have been worse to have quality issues at the same time you're launching those relationships.

Erez, do you want to take the first one?

Yes, Brian, good morning. As for MakerBot, what we said that we believe that MakerBot will ramp up to the corporate average growth rate as 2016. We believe that 2015 will be the year that MakerBot is going through reorganization. There's a new management. We are recovering from some product issues that we faced and all those items will take time.

It will take the entire 2015 to create, build, and expect the scalable system in MakerBot while we strongly believe in the market that MakerBot (inaudible) which is a combination of consumer indication and some (inaudible) in the market. But again, the growth rate that we expect MakerBot to come back to is as of 2016 and not as of 2015. 2015 will be a turnaround year for MakerBot with all the changes that are going on there.

I guess can you comment specifically though --? Thanks for that answer, but can you comment specifically on have you have a lot of pushback at this point from Home Depot or Dell or Staples? Are you having -- can you talk about the challenges of -- if you are rebuilding, the challenges of rebuilding those relationships? And how have they responded to the quality issues that they have had after recently agreeing to distribute those products?

I will do this one. As far as I am updated now is those relationships are continuing. I think MakerBot took the right steps as soon as the external issues were known, to work with those companies to make sure that the effect on customers is minimal. And I think we will continue with the relationships. This is what I can say at this time.

Okay, thank you.

Sherry Scribner, Deutsche Bank.

Yes, this is Larry Zhong calling in for Sherry. I was just wondering in terms of margins, more specifically product gross margins, how should we think about it for the full year? And do you guys think that it will normalize in the back half of the year?

Yes, so we've provided annual quantities, annual guidance for gross margin and we said that gross margin will be around 200 basis points or 2% lower than 2014. Due to our different mix of products that we see, there's no impact or no issuer for ASP, only a different mix of products in 2015 compared to what we had in mind at the beginning of the year. And it is related also to the Connex phenomena that we saw in Q1, the high-end Connex performance in Q1.

Okay, great. Thank you for that. And can you just give an update on the MakerBot transition so far and the progress that you are seeing?

Jonathan joined I think just recently; I think a month ago, a little bit more. We are doing a lot of changes and I think there's a very positive attitude and acceptance in MakerBot. I am personally very confident that the turnaround will be successful and hopefully it's not going to take too much time.

I think MakerBot was and is a great company. It's great product and great ideas and great vision. Again, we need -- like Erez said, we need to give it the time to go through this reorganization. But again I am very confident with Jonathan taking the position of CEO. I know he is the right guy at the right place and we just need a little bit of patience in this case.

All right, thank you. Good luck.

Patrick Newton, Stifel.

Great, thanks for taking my questions. This is Rob Richardson on for Patrick this morning.

I think if we could just start off going back to the Airbus ULA agreement. I'm just trying to get an understanding of how big of a revenue contributor these projects are currently and kind of thoughts on where you think they can go in the next 12 months or so.

Again, we did not disclose, and unfortunately I cannot disclose what the volume of business was each one of those phases. We did indicate the savings in the ULA.

I think that in the Airbus and other cases like this we did look in the very big picture; the fact that a company like Airbus, which is one of the leaders in the world, is taking the time, energy, and effort to qualify our products, to qualify our materials, to invest a lot of energy into it. It's done because they believe in the technology and believe that it will be part of future manufacturing processes.

So, again, I can't indicate what the potential business here, but I think that the big picture in this case is more important than the short-term dollars which are also a very important. I think the indication is very, very positive.

Okay, great. Thanks, I understand that. Then just for my follow-up. Erez, you mentioned specifically the decline in capital spending; certain regions and industries had impacted the quarter.

Just looking if we can get some insight into sort of what regions or industries you actually saw this impacting from. Is there any kind of specific end markets in particular that -- where capital spending was more impacted than others?

Erez, you don't want to take it?

Can you repeat the question? Sorry.

Yes, just the comments earlier on sales in the quarter impacted by declining capital spending. I wanted to see if we could get some more detail or thoughts on any specific regions are industries in particular where spending was more impacted than others.

We said earlier the slowdown is -- and virtually everything is in the press release. The slowdown is across territories and across industries. It was only a few industries that kind of shine above all the others, so this is what I can say at this point in time.

All right, thank you.

Barry (sic) Burleson, Canaccord.

Thanks for taking my questions. I was just wondering: can you talk a little bit about some of your larger global customers that have large internal service bureaus, whether or not their capacity utilization is low or full or much the internal capacity of your customers was a dynamic in the weakness in Q1?

(inaudible) question. Most of these are internal service bureaus in large companies with multiple technologies and I'm not familiar with the utilization of the technologies that we do not sell. We have one indication, it was mentioned earlier, the fact that consumable sales grew as we expected, which means that customers continue to use our machines as much as they used them before or more. That is the only indication tied to their utilization.

Then my follow-up is just on China as an opportunity for direct manufacturing, the parts business. How big of an opportunity is that? Do you foresee China as perhaps the biggest geography in the future in terms of parts? And what actions are you guys taking there to address that?

China is a very big country and we identified China as a target market for us many, many years ago. Over the last few years, and especially in the last two years, we established in China a very strong position with local Stratasys employees in a number of offices. So we believe in the Chinese market and we believe in the growth of the Chinese market.

You asked me how big it could be; I'm quite sure it could be very, very big and we are in this very early stage of adoption in China of this technology. As I said earlier, we took it very seriously many years ago and we are very well-established in China.

And there's no change in the commitment there in terms of the CapEx and operating spending cuts for this year?

No, Erez said it on the phone. The scale down of commitment in general into the go-to-market and distribution was mainly related to the decrease in expected revenue. Nevertheless, as I said, we have a very strong infrastructure in China today which I think can support growth for a few years going forward.

Okay, thank you.

Jason North, Jefferies.

Your product revenues, excluding MakerBot, were greater than 25% and with MakerBot about flat for the year. What's your updated assumption now based on the new revenue guidance for this year? Thank you.

We can hardly hear you. Can you please repeat the question?

Sorry, previously you had guided non-MakerBot product revenues for 2015 at greater than 25% and MakerBot revenues around flat. Both of those, I assume, are lower based on your underlying assumptions for the 2015 revenue guidance. What are your new assumptions for non-MakerBot product revenues and MakerBot revenues? Thank you.

I can take you through the different parameters, but I think the most important part is to understand that we reduce revenue for the entire organization, to Stratasys as well as MakerBot. We don't see MakerBot as flat in 2015 now and I think that that compares to 2014. Our MakerBot numbers will be down between 25% to 30% and for this you can take the direct product growth in 2015.

Great, thank you.

Ladies and gentlemen, this concludes the time we have for questions and answers. I would now like to turn the call back to Mr. David Reis for closing remarks.

Thank you for joining today's call. We look forward to speak with you again next quarter. Goodbye and thank you.

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