Stratasys Ltd (SSYS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2015 Stratasys earnings conference call. My name is Jemma and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Shane Glenn, Vice President of Investor Relations. Please proceed, sir.

Thanks Jemma. Good morning, everyone, and thank you for joining us to discuss our fourth-quarter and full-year 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 investor section of our website.

We will begin by reminding everyone that certain statements in this presentation regarding Stratasys' beliefs and its comprehensive new strategy will help grow its markets and the statements regarding its projected future financial performance including under the heading financial guidance, are forward-looking statements reflecting management's current expectations and beliefs. These forward-looking statements are based on current information that is by its nature subject to rapid and even abrupt change.

Due to risk and uncertainties associated with Stratasys' business, actual results could differ materially from those projected or implied by these forward-looking statements. These risks and uncertainties include but are not limited to the overall global economic environment; the impact of competition and new technologies; general market, political and economic conditions and the countries in which Stratasys operates; changes in projected capital expenditures and liquidity; changes in Stratasys strategy; changes in government regulations and approvals; changes in customers' budgeting priorities and other factors referred to under risk factors information on the Company operating and financial review and prospects and generally in Stratasys' annual report on Form 20F for the year ended December 31, 2015 December 31, 2014 filed with the US Securities and Exchange Commission and in other reports that Stratasys has filed with or furnished to the SEC from time to time.

Readers are urged to carefully review and consider the various disclosures made in Stratasys' SEC reports which are designed to advise investors as to the risks and other factors that may affect Stratasys business, financial condition, results of operations and prospects. Any guidance and other forward-looking statements in this press release and conference call are made as of the date hereof and Stratasys undertakes no obligation to publicly update or revise any forward-looking statements which as a result of new information, future events or otherwise except as required by law.

As in previous quarters, today's call will include non-GAAP financial measures. 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 tables contained in our slide presentation and today's press release.

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

Thank you, Shane. Good morning, everyone, and thank you for joining today's call. The operating environment during the fourth quarter was characteristic of the difficult market conditions that impact our performance throughout 2015. This includes the weaker macroeconomic environment compared to prior years and the shift in the customer buying patterns following two years of extraordinary strong demand.

Despite these near-term challenges, we were pleased to recognize a favorable trend in operating expense as well as improvement in cash generating during the quarter both driven by the initial success of our ongoing restructuring and efficiency initiatives.

As we enter 2016, we have entered a new phase in our Company development. We are looking to maintain our leadership position in prototyping by developing a solution-based business model which target key vertical markets and emerging application for tools and end use parts. At the same time, we are committed to further improve our financial performance by aggressively managing our expenses and driving additional operational efficiencies.

I will return later in the call to provide you more detail on these improvements and initiatives and other key developments but first I would like to turn our call to our CFO and COO, Erez Simha, who will review in detail our financial results. Erez?

Thank you, David, and good morning, everyone. As David mentioned, we continued to observe a challenging business environment during the fourth quarter driven by macroeconomic considerations, enhancing of product sales cycle in our core markets.

Total revenue in the fourth quarter decreased by 20% to $173.4 million when compared to $217.1 million for the same period last year. Our core business revenue which excluded MakerBot and Stratasys Direct Manufacturing declined by 14% in the fourth quarter of last year. MakerBot product and service revenue declined by 62% in the fourth quarter over last year driven by the overall market weakness as well as by the impact of ongoing restructuring of that business.

Non-GAAP net loss for the fourth quarter was $0.7 million or a loss of $0.01 per diluted share compared to non-GAAP net income of $24.9 million or $0.48 per diluted share reported for the same period last year.

The Company completed the goodwill impairment analysis of all of its reporting units that began in the [third] quarter and recognized an additional non-cash goodwill and other intangible asset impairment charges of $104 million net of tax in the fourth quarter.

In addition, the Company determined that non-cash valuation allowance against deferred tax assets was required as near-term realization of this asset is unlikely. This allowance amounted to $95 million in the fourth quarter. It should be noted that these deferred tax assets have expire dates many years into the future and we do anticipate being able to recognize their value to offset perspective tax liabilities. We are pleased to end the year with a healthy backlog of $27.3 million versus $14.3 million at the end of 2014.

Given current market conditions and [down] certain timing of recovery, we continue to make operational adjustments to better align our cost structure with the lower growth environment. Our ongoing restructuring initiatives include the following; plans to improve working capital management, a reduction in global workforce by 10% during the fourth quarter of 2015, and programs to reduce operating expenses and optimize manufacturing. The impact of these restructuring activities will be realized throughout 2016.

We were pleased to see some positive trends in our expenses during the fourth quarter that resulted from these initiatives.

Product revenue in the fourth quarter decreased by 26% to $124.3 million as compared to the same period last year. Within product revenue, system revenue for the fourth quarter declined by 37% over the same period last year driven primarily by the overall market weakness as discussed previously. Consumables revenue for the quarter was relatively flat when compared to the same period last year.

While also impacted by the overall market slowdown, consumer revenue growth is more a function of our installed base and less affected by a decline in systems served within any given quarter. Services revenue in the fourth quarter increased slightly to $49 million as compared to the same period last year. Within service revenue, customer support revenue during the quarter which includes the revenue generated mainly by maintenance contracts on our systems increased by 11% compared to the same period last year driven primarily by growth in our installed base of systems and the success of our programs to extend service contracts.

The Company sold 4629 3D printing and additive manufacturing systems during the fourth quarter and have sold a total of 146,024 systems worldwide as of December 31, 2015 on a pro forma combined basis. Unit sales in the fourth quarter relative to peers were impacted by low megawatt unit sales as well as the overall impact of the market factors we have outlined previously.

For our core products, system ASP in the fourth quarter improved sequentially and year-over-year driven by the product mix and favorable higher value systems compared to prior periods including strong sales of our Connex line.

Gross margin declined to 48% for the fourth quarter compared to 56% for the same period last year. The decrease in gross margin over last year was driven primarily by one-time items which are included in our non-GAAP presentations as well as the inefficiency related to lower production volumes. The one-time item includes a negative impact of approximately $7.7 million related primarily to inventory adjustments. Product gross margin decreased to 53% in the quarter compared to 59% for the same period last year reflecting the impact of the one-time items as well as the inefficiency related to low production volumes.

Service gross margin decreased to 36% in the quarter as compared to 44% in the same period last year driven primarily by a one-time inventory adjustment and build up of capacity at Stratasys Direct Manufacturing. However, Stratasys gross margins improve sequentially from the 32% recognized in the third quarter.

Operating expenses decreased by 5% to $92.3 million for the fourth quarter as compared to the same period last year. In addition, operating expenses in the quarter declined by 3% when compared to the third quarter of 2015. This favorable trend reflects the positive impact of our efficiency and cost savings initiatives including reduction in headcount, (inaudible) facility consolidation and an overall focus on reducing our direct and indirect spend.

Net R&D expenses decreased by 4% in the quarter to $22.2 million over the same period last year driven by our overall cost reduction efforts.

SG&A expenses decreased by 7% in the quarter to $70.1 million over the same period last year reflecting the impact of lower sales commissions and planned cost reductions. We should note that this planned cost reduction should not impact long-term strategic initiatives and in some cases we have actually increased investment in areas we view as important for long-term growth. Net income included a tax benefit of $8.9 million which resulted mainly from the impact of losses incurred in high tax jurisdictions.

The following slide provides you a breakdown of our geographic sales for the quarter which reflects the broad-based weakness we have outlined previously.

Our regional results were consistent with trends we have observed throughout the year. Non-GAAP EBITDA for the fourth quarter amounted to a loss of $1.4 million. The Company generated $7.7 million in cash from operations during the fourth quarter and currency holds approximately $258.2 million in cash, cash equivalents and short-term bank deposits.

Our cash from operations improved in the fourth quarter driven by improvement in working capital management. Inventories at the end of the fourth quarter declined to $123.7 million as compared to $140.8 million at the end of the third quarter driven primarily by plant production levels and heightened focus on inventory management.

Accounts receivable decreased by 6% to $123.2 million compared to $130.7 million at the end of the third quarter with DSO and 12-month trailing revenue remaining relatively flat at 65 compared to 64 in the previous quarter.

In summary, the challenging market environment persisted into the fourth quarter which is reflected in our results. We are making adjustments to our cost structure accordingly and are encouraged by the positive trends in operating expenses and working capital management. Given the uncertain timing of return to a stronger growth rate, we have planned for a continuation of current market conditions throughout 2016.

Regardless, we remain focused on improving operational efficiencies and we stand prepared to make additional adjustments to better align with changes in the business environment.

Finally, we believe in maintaining a strong balance sheet with sufficient capital to invest for the future and capitalize on emerging opportunities.

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 2016 financial guidance. Shane?

Thank you, Erez. As Erez mentioned, our visibility into the timing and magnitude of a market recovery remains limited. This uncertainty is reflected in our revenue projections and operating budget which assume no significant market improvement throughout 2016.

Our guidance for 2016 is as follows: total revenue in the range of $700 million to $730 million with non-GAAP net income in a range of $9 million to $23 million or $0.17 to $0.43 per diluted share; GAAP net loss of $84 million to $67 million or a loss of $1.60 to $1.28 per basic share; non-GAAP earnings guidance excludes $59 million of protected amortization of intangible assets, $25 million to $27 million of share-based compensation expense, $7 million in merger and acquisition-related expenses, $4 million to $5 million in reorganization and other related costs and includes $5 million in tax expenses related to non-GAAP adjustments.

Additionally, we are providing the following information regarding our Company's potential performance and strategic plans for 2016. Gross margins to improve modestly to a range of 54% to 55%; operating margins of 3% to 5%; tax expense of $10 million to $11 million which includes the negative impact of the planned accounting treatment for deferred tax asset valuation allowance. Capital expenditures are projected at $60 million to $70 million with approximately $45 million designated for completing the Company's new facility in Israel.

Our tax expense guidance and relatively high estimated non-GAAP tax rate for 2016 is a function of the ongoing non-cash valuation allowance against deferred tax assets we expect to record throughout the year. As Erez mentioned, these deferred tax assets have expiration dates many years into the future and we do anticipate being able to recognize their value to offset prospective tax liabilities in the future.

The Company believes that it can achieve a significant improvement in its operating structure in 2016 which can translate into improved operating profit compared to the prior year. Given the expected impact on net income of the planned accounting treatment for tax valuation, the Company believes operating profit growth will be the best measure of performance in 2016.

Finally at this time, we are reviewing our long-term operating model and plan to provide an update when we observe improved visibility within the market. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of our press release and slide presentation with itemized detail of the non-GAAP financial measures.

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

Thank you, Shane. Following the periods of extraordinary growth that ended at the close of 2014, we continue to feel the impact of the industrywide slowdown. This has required us to reevaluate our cost structure in order to improve financial performance. We continue to position our business for future success and are in the midst of a new phase of our Company development. We are optimistic about the potential impact of this transformation and believe we have the necessary components and strategy that will help us achieve our goals.

In 2012, we completed the merger of two industry leaders, Stratasys and Objet. The merger and its successful integration was followed by a series of acquisition and investments that have further strengthened our core capabilities and extended our business offering. We have now initiated the third phase of our Company development. The goal is to maintain our leadership position in prototyping by developing a solution-based business model, to target key vertical markets and emerging applications for tool and end use parts.

This includes heavy investment in R&D and go-to-market initiatives to support the many growth opportunities we have already identified, as well as incremental investments in our strategic accounts, management, vertical business units, MakerBot, GrabCAD software and IT infrastructure that will position us for long-term growth.

Our vision and purpose behind these investments remains the same. We shape lives by revolutionizing the way things are made. We believe software will be crucial for future success within our industry and through GrabCAD, we are developing new capabilities that are vital to our overall strategy. In addition, our go-to-market development includes engaging our customers more directly through our strategic account management, the (inaudible) and the vertical business units of EBU initiatives.

Our (inaudible) initiative looks to package and sell existing use cases across large organizations while the VBU looks to collaborate with our customers and incubate new capabilities. The key verticals we have identified including aerospace, automotive, dental, medical and jewelry as well as education, which ultimately supports all of those verticals for the long-term by training the next generation of designers, engineers and technicians. We believe these new initiatives will augment our current business and address a wide range of needs within key vertical markets especially for manufacturing applications.

Beyond prototyping, we see significant opportunity in the tooling market over the near-term which serve as a gateway for penetrating more advanced manufacturing applications in the future. Tools and injection molds are projected by McKinsey to be a strong area for additive manufacturing with 30% to 50% of tools being replaced with 3D printed parts by 2025. Longer-term we believe our technology can bring many benefits to manufacturers and manufacturing and disrupt traditional processes especially within the supply chain and for low-volume production.

We recently announced the enhanced Objet Connex3 which provides a greater functionality and a vastly simplified user experience. The new system is significant in three ways. We replace several single standalone machines with a streamlined Connex product line. The new system features the Creative Color Software powered by Adobe 3D color print engine that enable new color spectrum capabilities extending available colors from 46 per pallet to more than 1000 gradients color options.

In addition, the Connex3 now includes new software enhancements that simplifies the design to past workflow. The new workflow will enable customers to upload parts filed directly from Adobe Photoshop to locally reside Connex3 systems or to Stratasys Direct Manufacturing for quoting, validation and previewing. We believe this demand functionality will be unlike anything in the industry.

I would like to provide you a brief update on MakerBot. Although we have addressed the product reliability issues that impacted MakerBot performance, the desktop space has been affected by the broader market challenges. We have taken several steps over the last year to improve the performance of MakerBot including enhancement of management, improved collaboration between our collective engineering teams and the development of synergistic sales partnerships.

Additionally, we recognize the business to reduce expenses -- sorry, reorganize the business to reduce expenses, refocus the sales and marketing efforts on the core education and entry-level professional markets. We expect productivity improvements at MakerBot throughout 2016. While MakerBot remains a relatively small part of our overall business today, the desktop category is strategically important for the Company. We believe this exposure to entry level 3D printing capabilities will lead to increased demand for more advanced 3D printing solutions and that significant potential cross-selling synergies exist between MakerBot, our core customer base and Stratasys direct manufacturing.

We also believe that MakerBot remains the strongest brand in the desktop market with an industry-leading ecosystem and product portfolio. We remain committed to this space.

We have dedicated balance of the maintaining between growth and profitability. We must maintain our leadership position while developing new markets, applications and vertical focused solutions. At the same time, we must manage our expenses, drive operational efficiencies and improve profitability in cash generation. We believe that Stratasys will be a stronger, leaner, and more competitive company as a result of these initiatives.

As we highlighted earlier, these initiatives have already contributed to significant operational improvements and we are committed to further progress as we move through 2016.

In summary, we will remain focused on maintaining our leadership position in prototyping while targeting key vertical markets in emerging applications for tools and end use parts. We are enhancing our go-to-market infrastructure to provide higher touch interaction with customers, while moving to solution based selling model that unified our offering.

In addition to investing in growth opportunities, we have already identified that we are already identified, we are investing aggressively in initiatives to support long-term growth. We will continue to focus on operational efficiencies to help drive improvement in profitability and cash generation through 2016. And finally, although we expect market conditions will remain challenging in 2016, we remain excited about our Company's future.

Operator, please open the call for questions.

(Operator Instructions). Troy Jensen, Piper Jaffray.

Thanks for taking my question. A couple of quick for Erez. First of all, can you talk at all about the cadence of revenues and operating expenses between the quarters here? I know you gave us full-year guidance here. But should we assume Q1 is down low teens and Q3 is flat and that is on the top line? And then how is the revenue -- the expense projection? Is it against these sequential declines for several quarters or is there one big step function that has been growing throughout the year?

Troy, this is Shane. Let me see if I can address that. When we look at 2016, we expect to grow relatively consistent quarterly operating expenses in absolute dollars when you look at how we progress through 2016. So we obviously gave you guidance around gross margins, we gave you the operating margin guidance and I think you should be modeling relatively consistent numbers on absolute dollars as we move through the year.

On revenue, I think you can expect revenue to exhibit a little bit more typical patterns you've seen historically for Stratasys. And without getting into specific numbers, that obviously includes a relatively strong Q4 and relatively weaker Q1 and relatively weaker Q3.

Okay, that is very helpful. Also on the tax asset, the deferred tax asset reversal or whatever it was, if I run the numbers here, is it safe to assume that this lowered your 2016 EPS by about $0.15 if we would assume similar tax rates historically?

We didn't provide any number and it is difficult to pinpoint specific numbers. Just maybe a broader explanation of what we are talking about. The deferred tax assets on the balance sheet represent the value of tax reductions and credit to offset future liabilities.

The asset include among other things net operating loss carry forward. US GAAP requires companies to regularly assess the probability of realizing their value of deferred tax assets by evaluating certain criteria. This criteria includes among other things the timing and likelihood of near-term GAAP profitability.

After performing this analysis, we have determined that the valuation allowance would require the near-term realization of this asset is unlikely. This does not have any impact on company cash position and it should be noted that these assets have expiry dates many years into the future. We do anticipate being able to recognize the value at some point of the prospective tax liability. I would say for your calculation, I would assume a normal tax rate of 10% for the Company to answer your first question about the numbers.

10% is not this year though, right? I am assuming we've got to plug in more $2.5 million per quarter on the taxes?

No, the 10% is actually looking at the overall business tax performance of the company without the tax valuation allowance. So in the language that we use to speak until now. However 2016 it will not be 10%, we are providing the numbers, they are much higher in 2016 compared to previous years.

Okay, I think I understand. Good luck in 2016, gentlemen.

Steve Milunovich, UBS.

Great, thank you. Kind of a very basic question. Demand really fell off about a year ago and it seems like it is now at least stabilizing but obviously you don't have a lot of visibility. As you look back, what happened? Was it saturation of the kind of low hanging fruit in prototyping and then the tooling and other businesses you are going toward not being mature enough or how do you kind of assess that?

Good morning. It is David. I think it is a combination of three or four elements that came to play at the same time. There is no doubt that in some parts of the world in some industries -- highly capital invested industries we saw a slowdown in capital repurchasing in 2015. There was a lot of excitement and a lot of aggressive buying of 3D printing equipment in 2014 and 2013 which I think both in some areas the capacity to a relatively higher level and people had to digest what they had bought in the previous year.

I think we saw a shift which is being reflected a little bit in the gross margin to smaller machines during these periods because some companies have contracted their capital spending. I think those are the main maybe two elements that we saw in the market. Nevertheless in some areas, the main contraction came in the rapid prototyping business which is the biggest chunk of our business today. There are some areas in manufacturing and in tooling that we did see some growth even through 2015.

Okay, thank you. You talked a bit about solution based selling. Could you explain exactly what you mean by that, how is that different from how you have sold in the past and does that result in longer sale cycles?

As I'm sure you are very well aware, during mainly 2014 but also 2013 and early beginning of 2015, the Company made more than a few acquisitions which also at the time and today I can say for sure strategically allows us today to position our products in front of customers as solutions and less than individual products. Just to remind you, we bought a small consulting firm, we bought Solid Concepts and Harvest and created the Stratasys Direct Manufacturing. Today we are in the process of shifting our message and selling process to sell solutions which basically is looking on customer need and combining our offering current and future offering to a solution package which we hope is going to serve customers better, going to increase our stickiness and improve our relationship with our customer.

Sol it is around two areas. One of them is in future product designing the product more as a solution than individual hardware or consumable components and at the same time combining our very wide offering into packages which will serve customers better.

Terrific. Thank you.

Paul Coster, JPMorgan.

Thanks very much for taking my question. I guess previously I kind of thought of you as going after prototyping and the tooling and the additive manufacturing markets all simultaneously. And maybe it is just a nuance here but are we to interpret the strategy now as a little bit more sequential in terms of the way in which you allocate resources, meaning that you are going to wait before you kind of throw more resources at additive manufacturing?

Good morning, it is David. No, definitely not. What our current strategy statement is saying the following, I think in a very clear. We have intentions to keep our leadership position in prototyping and we have more than a few products in the high-end of prototyping and of course for MakerBot as we believe it will help us to keep this position. We believe that the prototyping market still has a great potential and the penetration is relatively low.

At the same time, we are moving like I explained earlier to solution based selling and a solution based business model and positioning ourselves to sell into verticals and when we talk about verticals, we mainly talk about tooling and end use applications. So it is not sequential, what I just described is our high-level strategy is being done at the same time in parallel.

Great, got it. Now, David, perhaps you can give us an example of one of these VBUs, just how many people are in it, what do they do, what is the configuration?

Sure. It is a very good question. I think a few years back we realized that the requirements from the market for us to become specialized into different industries that we operate in. And I think it is clear to you and I'm sure to the rest of the people on the phone that there are substantial differences for example between the medical space and the aerospace business.

So what we did, the initial steps were done in Stratasys before the merger. It was a very small team. Past the merger, we spent and invested a lot of money and thoughts on building a group that its goal is to develop our capabilities into different verticals that we believe are the leading verticals in our industries and we are talking about auto, aerospace, medical, dental, jewelry and education as a subset of them.

This group consists of quite a lot of employees and managers and their task is to become specialists in respect to those markets, develop with customers specialized applications and later on impact R&D to develop solutions which are [material] for those applications.

Now this team when they conclude the work of developing a certain application or a certain solution, they create the necessary tools in order for our core sales and marketing infrastructure to adopt this new development and sell it to the wider market. So it is kind of like maybe a special forces which are running in front of the company with customers developing specialized application mainly in tooling and manufacturing and later on bringing them to the wide Stratasys core sales and marketing infrastructure to be able to sell it to the wider audience.

Okay, great. Thank you.

Jim Ricchiuti, Needham & Company.

Thank you. A question regarding your guidance. Obviously limited visibility at this point, still sounds like a challenging industry environment. Yet as you look at your full-year guidance, I am curious looking out toward the end of the year, it does assume I think a stronger Q4. And I am wondering what gives you the confidence? Is this tied to the execution on some of the verticals, is it new products? And then I have a follow-up on that topic also relating to gross margins.

Good morning. It is Erez. If you look at the guidance, they actually represent similar 2016 compared to 2015. So we didn't assume any significant improvement in market trends and stronger Q4 is seasonal phenomenon historically we experienced during the last few years. So it is not related to market improvement in the last part of the year but more a seasonal phenomenon that we see every year in our business.

With respect to gross margins even if we make some adjustments to where you exited Q4 at, getting to 54% to 55% gross margins, can you help us understand what is going to drive that margin expansion this year?

So I think looking at 2015, it is a little bit misleading. We had many one-timers that had impact on gross margin around inventory write-off and adjustment of inventory and manufacturing inefficiency that we are took care and taking care as we speak. And I think that the gross margin range that we provided assumes that we are better on managing our inventory in the slow part that we are doing better on our inefficiency in production and there is a lot of activity being done in the Company today to optimize manufacturing and to improve and increase productivity around operations.

So not necessarily tied to any shift in mix but it sounds like -- would the margin expansion come from early on the product side it sounds like the hardware side?

Correct.

Thank you.

Kenneth Wong, Citi.

You mentioned seeing productivity improvements in MakerBot through 2016. Is that meant to suggest that we should see revenue growth through the year or is that purely that the operations and cost side of things should get better through 2016?

Good morning. It is Erez. We didn't provide any standalones for MakerBot and you can look at MakerBot as you look at the entire guidance, we assume 2016 similar to 2015 with a better operational performance for the entire Company, MakerBot included.

Okay, okay. I guess I just saw one specific line where you thought that there would be some kind of improvement through the year. So I guess I was just trying to get a sense for whether or not that meant sequentially that business does get better?

There is no topline improvement -- significant topline improvement in MakerBot built into our guidance.

Okay, okay. Understood. And then also you guys touched on lowering reseller commissions. I mean part of that is probably just due to the sales environment but we also kind of heard that conditions on the whole were kind of trimmed a bit. Can you maybe talk about what is going on there and then any other measures you guys are taking with your direct and indirect sales force to help drive sales in 2016?

We didn't say or we didn't mean to say lowering reseller commissions. The commission it is a direct result of volume and mix and as such, it is embedded in 2016 guidance.

As we move more and more as we say to more direct touch with our customers, it has impact, not a significant one in 2016 probably in the future on our mix of product that carry commission costs. On the other side, it has direct expenses to serve those accounts which are not part of the commission but part of the ongoing operating expenses.

Okay, good. Thanks, guys.

Wamsi Mohan, Bank of America Merrill Lynch.

Thank you. Two questions. One, where was your headcount reduction focused on in the fourth quarter and how backend loaded was it because your SG&A levels remained relatively flat in the quarter? And I have a follow-up.

The workforce reduction in Q4 was mainly around the non-core nonstrategic activity that we have which it has -- will be direct impacted by the ongoing low business volume and for example if we see lower production plans in front of us, by nature we have to reduce part of the operations and part of the back-office to support lower volume.

I can tell you that on the strategic area around R&D (inaudible) and IT, we did not touch and I think that the impact in Q4 is partially an impact because the reduction in force took place throughout Q4 and probably have a partial impact on the entire Q4.

Okay, thanks. And then just if you could give some color around the gross margin. So in services, it was lower you noted inventory adjustment and build up of services capacity. Can you elaborate on that because typically you have contracts in place for that capacity? And on the product side, do you think that the inventory correction associated with the gross margins is now complete? Thanks.

The capacity is mainly around SDM which is part of the services line. And this business you know the make or break is how do you manage the utilization and once you increase in step capacity to have impact on gross margin until you utilize or you fully utilized the capacity that (inaudible).

As for product, it is mainly around specific business unit and a result of lower business plans for 2016 that actually forced us to take some reserve on inventory under the assumption that we will not be able to utilize all those parts in 2016 or in the near future.

Thank you.

Samuel Eisner, Goldman Sachs.

Good morning, everyone. So on the guidance, just want to better understand and I know a couple of other people have asked this but I want to try to get some more clarity. So if I back into some of the profit or dollars that you guys are guiding to, I think you are guiding to around about a $400 million gross profit number and Op expense of around $370 million. So effectively, you are up about $30 million dollars in gross profit and down about $20 million or so in OpEx.

Can you talk about what the line items that you are changing there? Is that all SG&A that you are bringing down? And then given the substantial kind of top line or at least gross margin, gross profit increase there, is it really just mix because your revenue is only projected to be up about $20 million so I'm curious where that leverage is coming from?

Good morning. So as for 2016, what you see in the number is the next change between 2015 and 2016. And actually what has happened in Stratasys between 2015 and 2016 is that we reduced significantly operating expenses on one hand, on the other hand, it in some places we invested back into the business in areas that we thought are strategically important to the Company and we discussed this previously.

Part of the improvement is in gross margin is also better efficiency or doing more or less some production plan with the lower forces as compared to 2015 because the reduction in force that took place in Q4 I would say a significant part of it came from operations and it has impact on the gross margin and the manufacturing efficiency.

In general when we looked at 2016, we tried to touch first of all the non-core activity that we have around us as we see a lot of revenue and lower revenue generation compared to previous years and similar to 2015. We scaled back some of those activities, we scaled back dramatically the back office forces that has to support same business like in 2015. And your analysis in terms of the net change is correct of what has happened between 2015 and 2016 but there is more behind the story for the next change in combination of gross reduction and some increasing expenses in other places.

And maybe just as a follow-up, that absolute reduction in OpEx that you are seeing in dollar terms, is that all -- have all those initiatives already been done in the fourth quarter or do you anticipate, do you have to do additional ones in the first half or even the second half of 2016 in order to achieve that sort of dollar decline on OpEx? Thanks.

The part that is related to reduction in force is done, is behind us and we are going to take some more measurement of activities in 2016 to reduce further operating expenses, direct and indirect spend but this is embedded into our 2016 plan.

Got it. Thanks.

Robert Stone, Cowen and Company.

Good morning, gentlemen. I had a follow-up question about the tax rate. I understand the impact of the adjustment on the valuation allowance this year. Should we expect then that your effective tax rate returns to a more normalized rate in 2017 or 2018? Any color would be great.

So we cannot provide actual date when effective tax rate will come back to what we used to have. It is actually dependent on taxable income in some jurisdictions that as of 2016, we know that we will not generate GAAP taxes with the income. As for the timing at this moment at least for 2016, we know it will not happen. I cannot say -- well, I have no -- I cannot touch further 2017 or 2018 right now.

But it depends on getting back to a GAAP profitability?

In specific areas, yes.

A housekeeping question then. Could you provide the CapEx and depreciation figures for Q4 2015 and the year?

I can provide it later on. I don't have it here in my hand but we can take it off-line and we will provide you the number, no problem.

If you don't have that one, then how about one more. I notice the goodwill was up sequentially about $75 million versus the Q3 balance sheet. So what happened there?

Goodwill was not up. We had an additional impairment of $100 million and goodwill was down.

Well, intangibles went down but looking at the statements that came out in Q3 versus the ones you just published today, the line item for goodwill actually went up sequentially. Maybe there was a reallocation or something?

Is, it is probably, you should look at the total amount and the total amount went down. It might be a reallocation between intangibles and goodwill. But the total amount went up.

All right, thank you.

Ananda Baruah, Brean Capital.

Good morning. Thanks for taking the questions. Two if I could. The first one is is the revenue guidance for 2016, is that a fully organic revenue guidance or does it include like any consideration for M&A?

Then in that same context, you clearly feel that the demand environment is a little bit more stable. So I would love to get your view on what you see out there in the customer base that is driving the view that you have now reached a point of stability? And then I have a follow-up. Thanks.

The revenue is a completely organic number. And I will let David answer the second part of your question.

I think we said earlier, we should get mistaken. The visibility is low. Nevertheless within this low visibility, we were saying for a long time we are operating in a good and interesting market so we believe that within this limitation of difficulties on the macro level and some changing in buying pattern, we can do internally better to improve the situation. So we are projecting a flat or a little bit over a flat year, just a tiny bit because of this visibility.

Got it, David. That is helpful. And I guess in that context as my follow-up, I believe Erez you mentioned core systems ASPs were up both quarter-over-quarter and year-over-year and you made reference to the new Connex products actually I think saying they had strong demand. So can you talk to what is driving those dynamics and to what degree are those dynamics sort of informing the stability of the top line? Thanks.

You have to remember that we compared Connex Q4 to Connex Q4 2014 and Connex Q4 2014 was not as strong as we anticipated. Again, this with the Connex3, the change in positioning of the Connex in the market and some go-to-market initiatives and activities that we need to push out of the Connex resulted in better high-end Connex in Q4. By the way, it is a trend that we have seen the less I would say quarter and a half that part of the targeted plan that we had in mind to improve and increase sales of high-end Connex, we put the sales focus on that on the go-to-market initiative in order to improve the Connex.

I think again, it is a profitable product, it is contributing to the overall ASP of the Company. It is coming with (inaudible) and recurring revenue on a stream of consumables that will contribute in the future. David, do you have anything to add?

I think you said it all. Now is the time to send the question. You said it all.

Okay, guys. Thanks a lot. I appreciate it.

Sherri Scribner, Deutsche Bank.

Thank you. Over the couple of years before 2015, you guys did a number of acquisitions, MakerBot obviously and the merger and then also some acquisitions in the services business. It sounds like you guys have the technology you need right now to do well in the market but just wanted to get your sense of if there is anything that you feel you are missing at this point or is the message more for 2016 that you are going to focus on working with the technology that you have and improving the cost structure of the business? Thanks.

I think in your question you answered I think our answer. Basically I think over the last two years, we did a few good acquisitions. In 2016, we are going to concentrate on aligning those acquisitions and those offerings together to what I described earlier as a solution offering. And I think for the most part, we have what we need now. So we are going to focus on this again increasing penetration into the vertical dimension, continuing increasing our penetration into end-use parts. And like you said correctly, dealing a lot with the cost control and cash management.

Thank you.

Shannon Cross, Cross Research.

Thank you. Can you talk a bit about working capital and you had some benefits there this quarter. How do you think about it when you look to 2016 and the opportunity for benefits? And just sort of how we should think about that moving? And then I have a follow-up.

Working capital, we put a lot of emphasis on accounts receivable, collection, cash CapEx and inventory. I do expect that inventory will not be higher in 2016. Same for the accounts receivable, so I think that you can expect working capital again, it is tough to put a handle on a specific number to get better in this aspect.

Okay. And then in terms of the inventory write off this quarter, can you give us some clarity on if whether or not we should expect further ones? And then also with regard to the goodwill impairment charge you took, what was that specifically for and do think you are now complete with potential impairments? Thank you.

So the inventory adjustments at least at this point I think this is what we think that we should is it is coming from as I said specific business units where we think that we will not be able to utilize the amount we have today on hand looking at in 2016 plan, which presents practical demand for production. And as for the goodwill accounting, first you ask you to provide your best estimate of goodwill impairment and this is what we did in Q3. And we finalized actually the impairment analysis throughout Q4 and came to a conclusion that we need to modify and adjust the amount that was in Q3 by another $100 million. It came from -- I would say most of the reporting unit if not all of the reporting units in Stratasys and at this point of time and again with the formation we have in hand and market conditions that we see in front of us assuming this will not change, we do not -- I do not think that we will see another impairment in the near future.

Thank you.

Bobby Burleson, Canaccord.

Thanks for taking my questions. So I guess the first one is just high level, do you think -- is there an issue here in terms of your customers maybe not having realizing they don't have the in-house expertise to develop their own direct parts production on your machines and now they are looking to you, your digital manufacturing outfit really to do that for them? And could there be implications in terms of system sales in the future and maybe a stronger parts business in the future for Stratasys?

I think the nature of -- if you look at the design to manufacturing process, it typically if you want to adopt additive technology all the way typically you will switch between different technologies. So I think into the future most of our customers are not going to initially adopt all of those technology. So in the process, they will maybe start with a MakerBot machine for early design and concept and later when they would like to go to functional testing and maybe early manufacturing series, they will need other technologies either PolyJet technologies or metal technologies and therefore we said prior to the acquisition of Solid Concepts and Harvest and now Stratasys Direct Manufacturing that combining our hardware consumable part sales with by the way other offerings such as consulting and professional services, we are going to be able to answer the entire customer needs from design to manufacturing. And it is not one coming on the account of the other but it is complementary; therefore by the way, one of the reasons we changed the way we describe our offering to solution and not just for individual products. So we deliver parts, we sell machine and machines will sell parts and therefore we are repositioning all of these together.

The kind of complexity that your solution description implies, does that mean that this next leg of growth has more to do with actual direct part production might be something that is too ambitious to be done in-house by your customers ultimately?

In some cases, customers will elect like you described it, not to do it in-house but to outsource it. Again, you need to go back to the design to manufacturing process. Some parts they will elect to do in house, some parts they might want to outsource and they will fluctuate between them and we are positioning ourselves in order to have an answer and a solution for any choice in this respect.

And just in terms of incentives within the organization, is there any conflict between the system sales folks and the guys that are winning the business to make parts for the customers?

It is a very interesting question. We are in the initial stages of aligning those activities. Yes, I don't want to get into our internal compensation structure but we believe that it can be designed in a way that will motivate both options and will not create conflict between them.

Okay, great. Thank you.

Thank you. I would now like to turn the call over to David Reis for closing remarks.

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

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