Stratasys Ltd (SSYS) 2016 Q3 法說會逐字稿

Welcome to the Stratasys third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference may be recorded. I will now turn the call over to your host, Shane Glenn, Vice President of Investor Relations. Please, go ahead.

Thank you, Stephanie. Good morning, everyone. Thank you for joining us to discuss our third-quarter financial results. On the call with us today are Ilan Levin, 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'll begin by reminding everyone that certain statements made on this call regarding Stratasys' strategy and the statements regarding its projected future financial performance including financial guidance concerning its expected results for 2016 are forward-looking statements reflecting management's current expectations and beliefs. These forward-looking statements are based on current information that is by nature subject to rapid and even abrupt change. Due to risks 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 any failure to efficiently and successfully integrate the operations of Stratasys Inc and Objet Ltd after the merger as well as MakerBot, Solid Concepts, Harvest, and GrabCAD after their acquisition or to successfully establish and execute effective post-acquisition integration plans, changes in the overall global economic environment, the impact of competition and new technologies, changes in the general market, political and economics conditions in the countries in which we operate, any underestimated and projected capital expenditures and liquidity, changes in our strategy, changes in applicable government regulations and approvals, changes in customers' budgeting priorities, lower than expected demand for our products and service, reductions in our profitability due to shifts in our product mix into lower margin products or our shifts in our revenue mix significantly toward our additive manufacturing services business, cost of potential liability relating to litigation and regulatory proceedings, and those factors referred to in Item 3.D Key information Risk Factors, Item 4, Information On the Company, and Item 5, Operating and Financial Review and Prospects in our 2015 annual report as well as the 2015 annual report generally.

Readers are urged to carefully review and consider the various disclosures made throughout the Form 6-K that attaches Stratasys' unaudited, condensed consolidated financial statement as of and for the quarter and nine months ended September 30, 2016 and its review of its results and operations and financial conditions for those periods, which has been furnished to the SEC on or about the date hereof, Stratasys' 2015 annual report and in Stratasys' other financial reports filed with or furnished to the SEC, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and prospects.

Any guidance provided in any of the forward-looking statements made on this call are made as of the date hereof and Stratasys undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law.

As in previous quarters, in today's call, we will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP to GAAP financial reconciliations are provided in the table contained in our slide presentation and today's press release. Now, I'd like to turn the call over to our CEO, Ilan Levin. Ilan?

Thank you, Shane. Good morning, everyone. Thank you for joining today's call. During the third quarter, we were pleased to recognize additional operational improvements during the quarter which were reflected in a decline in non-GAAP operating expenses and an increase in non-GAAP gross margin compared to the same period last year. As our industry continues to mature beyond general purpose design and engineering applications, we are observing a growing opportunity for value-added advanced manufacturing applications across industry verticals such as aerospace, automotive, medical and education.

We recently made several announcements that demonstrate our commitment to targeting these opportunities that include exciting relationships with leading global manufacturing companies. I will return later in the call to provide you more details on these important initiatives as well as other key developments. But first, I will turn the call over to our CFO and COO, Erez Simha, who will review the details of our financial results. Erez?

Thank you, Ilan. Good morning, everyone. The market environment did not change significantly and remains similar to the environment observed in recent quarters. We have made significant progress in controlling our operating expenses during the period. As a result, both our non-GAAP gross margin and non-GAAP operating margin improved over the same period last year.

Total revenue in the third quarter increased by 6% to $157.2 million compared to $167.6 million for the same period last year. MakerBot product and service revenue declined 29% in the third quarter over last year driven by the overall market weakness and timing of new product introductions. Market demand remains similar to levels in previous quarters and sales cycles remain extended, which is contributing to slower hardware sales across all regions and business units.

GAAP operating loss for the third quarter was $19.4 million, compared to a loss of $931.3 million for the third quarter last year. Non-GAAP operating income improved year-over-year to $3.3 million compared to a loss of $10 million for the same period last year. GAAP net loss for the third quarter was $20.8 million or a loss of $0.40 per diluted share compared to a loss of $901.3 million or a loss of $17.35 per diluted share for the same period last year.

Non-GAAP net income for the third quarter was $0.1 million or $0.00 per diluted share compared to non-GAAP net income of $0.7 million or $0.01 per diluted share reported for the same period last year. Non-GAAP net income included tax expense of $3.5 million or a tax rate of 104.1%, which resulted from the non-cash valuation allowance on deferred tax assets related to our US subsidiaries. GAAP tax expense was $1.5 million.

Product revenue in the third quarter decreased by 7% to $110.1 million as compared to the same period last year. Within product revenue, system revenue for the quarter declined by 20% over the same period last year driven primarily by the level of overall market demand we discussed previously.

However, we were pleased to see system utilization remained strong and overall, we are pleased with the growth and stability in the recurring revenue generated by our installed base of systems. Consumables revenue for the quarter increased 12% compared to the same period last year reflecting steady utilization trends within our installed base.

Service revenue in the third quarter decreased by 4% to $47.1 million as compared to the same period last year. However, within service revenue, customer support revenue, which includes the revenue generated mainly by maintenance contracts on our systems increased by 6.7% compared to the same period last year, driven primarily by growth in our installed base of systems.

GAAP gross margin was 46.9% for the third quarter compared to a GAAP negative gross margin of 47.7% for the same period last year. Non-GAAP gross margin improved to 54% for the third quarter compared to 50.8% for the same period last year. Product gross margin improved driven by sales mix and aggressive cost control efforts in operations that reduced the level of production inefficiencies that we have experienced in prior quarters.

Service gross margin also improved compared to the same period last year, helped by our cost control efforts. GAAP operating expenses declined by 89% to $93 million for the third quarter as compared to the same period last year. Non-GAAP operating expenses declined by 14% to $81.6 million for the third quarter, as compared to the same period last year.

In addition, non-GAAP operating expenses in the quarter declined by 5% sequentially when compared to the second quarter of 2016 with GAAP operating expenses declining by 3.7% sequentially. These favorable trends in operating expenses over the last three quarters reflects the positive impact of our operational initiatives and our overall focus on improving operational efficiencies and reducing our direct, indirect spending.

We should note that these planned cost reductions do not impact our long-term strategic initiatives and in some instances we have actually increased investment in areas we view as strategically important for the long-term growth. The following slide provides you with 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 the trends we have observed in recent quarters. GAAP EBITDA for the third quarter amounted to $3.5 million. Non-GAAP EBITDA for the third quarter amounted to $12 million compared to $19.5 million in Q2 2016 and $1.5 million deficit for the same period last year. The Company used $2.5 million of cash from operations during the third quarter and holds $239.3 million in cash and cash equivalents as of September 30, 2016.

Inventory at the end of the third quarter increased slightly to $127 million as compared to $125.7 million at the end of the second quarter. We continue to focus aggressively on managing inventory levels. Accounts receivable decreased slightly to $109.2 million cared to $113.3 million at the end of the second quarter. DSO on 12-month trailing revenues decreased slightly to 59 compared to 60 in the previous quarters.

In summary, for the third quarter, we did not see any fundamental change in market environment compared to recent quarters. We continue to observe lengthened sales cycles and system sales weakness. Despite softer sales for new systems, we are pleased with the strength of our recurring products and service revenue, which reflects system stable utilization and demand for our premium materials.

We are also pleased with the significant reduction in operating expenses during the period that resulted from ongoing cost control efforts, leading to improvement in both non-GAAP operating and gross margin over last year. Going forward, we will remain focused on investing around advanced manufacturing applications within our key focus in these industries and managing our resources in response to our strategic goal and market conditions.

Finally, we believe we maintain 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 greater details on our 2016 financial guidance. Shane?

Thank you, Erez. Our guidance for 2016 is updated as follows. Total revenue in the range of $662 million to $673 million, with non-GAAP net income in the range of $7 million to $11 million or $0.13 to $0.21 per diluted share. GAAP net loss of $76 million to $71 million or $1.44 to $1.35 per basic share. Non-GAAP earnings guidance was: $55 million(sic-see press release "$59 million") of projected amortization of intangible assets; $21 million of share based compensation expense; $10 million to $11 million in merger and acquisition related expense; and $7 million to $8 million in reorganization and other related costs; and includes $15 million in tax expenses related to non-GAAP adjustments.

Additionally, we're providing the following estimates regarding our Company's potential performance and strategic plans for the remainder of 2016. Based on revenue trends in the first nine months of the year, we now believe that we would end 2016 with: gross margins in the range of 54% to 55%; operating margins of 3% to 4%; tax expense of $15 million to $17 million, which includes the negative impact of the planned accounting treatment for tax valuation allowance; and capital expenditures projected at $50 million to $60 million.

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

We've achieved a significant improvement in our operating structure in 2016, which translates into improved operating profit compared to prior years and in future years. Given the expected ongoing negative impact of not recording a tax benefit on US tax losses or on our net income loss, the Company believes non-GAAP operating profit growth would be the best measure of performance in 2016.

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'd like to turn the call back over to our CEO, Ilan Levin. Ilan?

Thank you, Shane. We are making progress in shifting our focus and resources towards providing advanced design and additive manufacturing solutions and remain excited about the growth opportunities of these initiatives. As our industry matures and expands beyond traditional general purpose rapid prototyping applications, we expect the development of advanced solutions that target specific customer applications with enhanced value will drive an exciting new phase of growth for our Company and industry.

We are leveraging our core assets as well as expanding our relationships with other leading global manufacturing companies to develop these high value added applications. Our recent announcement illustrates our commitment to developing solutions for both design and manufacturing and highlight the importance of collaborating within our industry.

Our FDM technology is currently used by numerous OEMs within the automotive and aerospace industries for the production of tools and low volume parts such as interior panels, brackets and air ducts. We believe these relationships provide a valuable opportunity to develop new solutions and more advanced applications.

In September, we announced two advanced technology demonstration platforms based on our FDM manufacturing technology, which are designed to specifically address advanced industrial manufacturing and rapid prototyping applications within the aerospace and automotive industries by dramatically improving throughput, product performance and design customization.

The Stratasys' Infinite-Build 3D Demonstrator, developed based on inputs from the Boeing Company and the Ford Motor Company, is designed to target manufacturing applications by lowering the constraints associated with part size and build speed with a tool change functionality that allows for unattended production with multiple materials.

In addition to the Infinite-Build, we announced the Stratasys Robotic Composite Demonstrator, developed with Siemens, which is designed for the use of composite materials to make strong and lightweight structures. The production of composite materials is often constrained by part geometry and a labor intensive manufacturing process, and the Robotic Demonstrator features eight-axes of motion control, enabling greater geometric freedom and the elimination of support structures for faster builds and reduce post processing.

The new platform integrates Stratasys' additive manufacturing technology with industrial motion control hardware and design-to-3D printing software capabilities developed by Siemens. We believe that working directly with other global leaders in manufacturing is critical for our growth within manufacturing and we are pleased with our progress.

We recently announced that leading aircraft manufacturing Airbus is standardizing on our 3D printing material for the production of flight parts for its A350 XWB aircraft. We believe this represents a significant development for the broader adoption of our solutions within the aerospace industry and demonstrates the commitment that major industry players are making to additive manufacturing.

As we focus on long-term opportunities in manufacturing, we also remain strategically committed to the desktop space and to improving our value proposition within that category. During the third quarter, we announced new MakerBot desktop 3D printers, software and material offerings tailored for the education and professional markets. The new MakerBot Replicator+ and Replicator Mini+ 3D printers provide significant speed improvement as well as larger build volumes and reduced noise during operation.

Additionally, we announced MakerBot Print and mobile software applications, which are designed to help professionals in integrating MakerBot into their work flow and help educators introduce students to 3D printing. Finally, we launched Thingiverse Education, designed to help educators with access to valuable classroom content created by other educators. With MakerBot, we are intensely focused on the education and entry-level professional markets and believe we have the most complete and comprehensive ecosystem within the industry.

In summary, we remain focused on developing a clear value proposition for our customers by leveraging our core assets and cultivating new capabilities to develop an advanced ecosystem of applications and manufacturing solutions. We are pleased with the initial reception to the Stratasys' Infinite-Build and Robotic Composite Demonstrator as well as our new MakerBot offering.

We will continue to expand relationships with key global manufacturing companies that can help advance our overall strategy. Operationally, we are pleased with the additional improvements we recognized in the third quarter and are committed to seeking further improvements that will better optimize our cost structure. Finally, we remain excited about the long-term growth potential within our industry and our Company's future. With that, operator, please open the call for questions.

(Operator Instructions)

Patrick Newton, Stifel.

Given the focus on operational efficiency through the prepared remarks, can you just remind us where you are on various initiatives? Ilan, you closed by saying that there's still more work to be done. So can you help us understand if it's just your workforce realignments, if there's more manufacturing restructuring, or just any levers that you still have left to pull?

Good morning. So I think on the operational side, most of the short-term and immediate opportunities that we saw in front of us are already implemented around the day-to-day operating expense that we control and could manage, and all the activities around travel and all other expenses already implemented.

However, there are a few initiatives that are longer term and would take us another few quarters to implement and to gain benefit in our P&L. They are all around the optimization of production and manufacturing capacity around the world for the Company.

But I would say if I had to look at the dollar volume, most of the improvement in efficiency is behind us. I don't expect in the next, I would say, quarter or two any additional significant improvement that will hit P&L.

Great. Thank you. Then I guess just as my follow-up, you talked about no significant change to market dynamics, but you're lowering annual revenue guidance by roughly 5% compared to the low end of the prior-year range. If market dynamics are not changing, are competitive dynamics changing? Are you still seeing lower-end systems being adopted at expensive higher-end solutions?

So, no, when we say that there's no change in market dynamic, we refer to the demand. You have to take into consideration that we have low visibility looking forward. In some parameters that we do not control around the transformation of our (inaudible).

I would say at a really high level statement, the market as we saw in the last few quarters that we can say that was around longer sales cycle, that had impact on hardware sales that had impact later on, recurring revenue is still there. So we see the same picture, the same market demand that we saw in the last few quarters.

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

Troy Jensen, Piper.

Maybe one quick for Ilan: The MakerBot business was down 29% year over year. I think it's at the lowest level since 2012. So I'd just like to get your thoughts on (inaudible) MakerBot business, does it make sense to get out of the consumer desktop? It sounds like, in your prepared remarks, you're committed to the space still.

Recently, towards the end of the third quarter, MakerBot introduced several new solutions for both professionals and educators that we believe obviously didn't have an impact in Q3 and we believe is getting some renewed excitement in the market and will be reflected as we move forward. In general, thinking about the market, general rapid prototyping needs are being increasingly met by lower-end systems. When we look at what we're offering in terms of work flow solutions through GrabCAD print, what Stratasys is offering on its entry level systems coupled with what MakerBot's doing on the very entry level systems from a market perspective and are growing online communities.

We do believe that we have the fullest solution available for a market that we believe has a long-term growth. That rapid prototyping needs -- general purpose rapid prototyping needs are being met by that entire segment and that is what will fuel its continued growth. So we believe that although we've been investing in that space over the past number of years, that it is a worthwhile investment and we will gain return on that.

All right, understood. Then just quickly on prototyping market, I agree with you that industrial end products are kind of the holy grail for this industry, but you guys are still heavily exposed to prototyping. As you mentioned, these lower priced systems are really eating into the market. I'm just curious to know if you think prototyping can grow in 2017 or in future years or is the growth for Stratasys really going to be coming from industrial applications and in Infinite-Build and Robotic Composite?

First of all, I believe that it is a continuum ranging from very simple conceptual prototyping all the way through manufacturing and used parts. Sometimes our desire as an industry to segment very neatly across the spectrum sometimes leads us to wrong conclusions, perhaps.

As we move through that spectrum, it doesn't mean in any way that we're abandoning any of them. We believe that by adding added value to each one of the end use applications, whether it's in functional prototyping, through tooling, and obviously through end use parts, if we are continually providing value around our systems through enhanced materials or software service, then all those different segments have a big road map in front of us.

All right. Good luck, gentlemen.

Thank you.

Kenneth Wong, Citi.

So clearly on the material side, you guys saw good growth there, but I think typically we think about that business as lagging printers. We have seen declines there for about seven straight quarters. What gives you confidence that materials business can continue to see the trends that you've been showing the last two, three quarters?

Ken, I think one of the things that we've done successfully, we did this with the J750, as well as with some other materials that are more advanced or are targeting some of the more advanced applications, is that we've been very successful in up-selling our customers in attacking some of those applications.

So the thing to remember also in the materials is, yes, you're correct, if you're not selling printers, ultimately your materials could potentially -- could see an impact on that. But we still have a very large installed base. We're seeing growth in that installed base. Again, the premium materials that we're selling have been doing very well.

Ken, I would like to point to that, the revenue that we see from the material are a direct result of the size of the installed base. As long as the installed base is growing, we would expect to see growth, maybe declining growth but still growth around materials.

The second point is that we introduced new material which are smarter, better, and provides I would say higher revenue per unit to Stratasys. It's why we sell those material to the high end part of a system that are counting the installed base.

I think as long as the installed base continue to grow, and continue to grow for incremental growth on the higher end system, you can expect consumers to continue and grow, and again, probably the marginal incremental growth will be lower as the hardware sales are declining.

Got it. Thanks. That's great. My follow-up is in regard to gross margin. At these kind of -- at the weaker sale demand level, do you think you guys can still expand gross margin? When you talk about some of the production efficiencies that you guys might be able to capture in the medium, long term, how should we think about the direction of gross margin in this kind of a market environment?

I would say the following. I think we are getting better and doing a good job on improving our production efficiency and cost of goods sold. This is somehow muted by a product mix that we see quarter over quarter, different product mix. Looking forward, especially on the short term, I would say similar gross margins to deliver that you see today in 2016.

Okay. Great. Thanks a lot, guys.

Jim Ricchiuti, Needham & Company.

Just a question on the system revenue decline: You talk about a weak market environment and that is clearly contributing, but to what extent is there also the potential that there could be some share shift going on, market share shift? I'm just wondering if the competitive environment has possibly gotten a little bit more challenging, and if there's some change in market share as well contributing to the decline in system revenues?

So, as far as the information that we have in front of us, and I'm talking about the high end part of the market, which is the more significant part of our Business, we don't see a change in market share. It's not a matter of more solutions or more players that are coming to this price point or solution level that we introduced to the market, with the exception of MakerBot market, which we have differently.

Okay. Maybe just turning to the FDM business, you didn't talk about what kind of a decline you're seeing in that area. Can you maybe expand on what the environment is for that part of the Business? Are we looking at a mid-teens type decline in that business? What's the strategy going forward for this part of the Business to maybe generate some growth or possibly size it properly?

So the declines -- we didn't provide a number, but it's lower than the number you mentioned. I think that FDM is serving the same market that we are dealing with, which is meaning the 3D printing market. They're also impacted by the solutions that are introduced to the market on the low end level of price point.

Looking forward, the added value that FDM is bringing to Stratasys and to the market is complex technology and complex geometrics, and specific applications that we bring value to. We are looking into the FDM business. At the end of the day, it's a business that strategically we think has high importance to Stratasys and Stratasys's road map. I think that the break or make the results on the operational side, and once we get into 2017, our plan and final 2017 plan we'll provide some more color [on SDMO].

Okay. Thank you.

Paul Coster, JPMorgan.

Can you share with us, if you know, what percentage of revenues and the product business are from products introduced within the last year? I guess the point I'm making really with the question is whether you're sort of delaying and slowing down your product cadence whilst you do these investment in added to the manufacturing and the slowdown being in the prototyping area?

Paul, I don't have the numbers in front of me. I think that looking at 2016, one significant product that we introduced was the J750. It had impact -- significant impact on Q2. It does behave like our expectation, meaning the customer acceptance, the perception of the product, the targeted addressable market, all in line with our plan. I don't have the number, but just to on the high level, I wouldn't say it's a very significant amount of money compared to the entire portfolio of Stratasys of hardware.

Okay. The follow-up question is, I see how you're maintaining a close relationship with customers in the additive manufacturing context, but what about in the prototyping market? How close are you to that market? Can you distance yourself from it at all?

Can you please repeat, Paul?

I'm just trying to understand how you're staying close to the prototyping market. It seems like most of your sales and marketing energy is now focused on the additive manufacturing segment?

You'll find that many of the same partnerships that we are working with -- the same partners that we're working with to develop the manufacturing solutions are those same partners we started with in prototyping, whatever number of years ago. So there is absolutely a continuum.

Some of the systems that we saw in the demonstration side most recently at IMTS in September that we initiated, you'll find those systems appeal also to rapid prototyping, high end rapid prototyping applications as well, some tooling applications. Again, as I referred to earlier in my remarks, I think in one of the questions, we absolutely see that there is a continuum, a spectrum between very initial conceptual prototyping all the way through to end part. Sometimes it's not easy to differentiate between -- cleanly differentiate between the different applications within those segments.

So again, it's very much the same partners. I believe we will make headway also when we begin to commercialize those products with the same customers that have been working with us for many years on the prototyping side, as they migrate more towards the tooling applications and end use parts.

Thank you.

Ananda Baruah, Brean Capital.

Two, if I could? The first is, just going back to the revenue environment and the demand dynamic, so, look, fully appreciate that there's been a lack of visibility and it's been softer and it doesn't feel like that much has changed. On the numbers, the sequential step-down that you saw is similar to the September quarter of last year. I remember last year it was accompanied by some commentary that things had softened and that kind of sequential step-down was unusual. So I guess a clarification: Is that not the case this year for the September quarter dynamic?

Then a follow-on to that is: Last year when you saw this kind of sequential step-down, I think it was 9% this September quarter, 8% in last year's September quarter, I think you did like a low single-digit sequential in December and I think the guidance this quarter for December at the mid-point suggests something like a mid- to high-single digit. So given that the step-down is similar, the question -- sort of the second question really is: What is different going into this -- well, we're in the December quarter -- this December quarter that has you feel you can do a little bit better than last December quarter? Thanks. Then I have a quick follow-up.

That was a long question, I hope I remember everything. Looking to Q3, there is no doubt there's seasonality in Q3 every year, meaning it's coming from specific regions, specific markets, both education and Europe has seasonality impact on the revenue for Q3. You look at the breakdown of revenue throughout the year, both Q2 and Q4 are usually stronger, Q1 and Q3 are usually lower throughout the year.

Looking to Q4 and looking backward, it used to be the strongest quarter in the year. You look at the last three or four years, Q4 was the best quarter throughout the year. It doesn't mean that Q4 2016 will be the best quarter, but there are, I would say, few behaviors of the market around demand (inaudible) buying that has impact on the demand. Again, based on the information that we have today in front of us, the pipeline, the number of transactions, number of transactions that we shipped already, this is the best estimate that we could provide for the year.

Erez, thanks, appreciate that. That's helpful. You actually -- so, a question off of your question. Has maybe the September quarter seasonal demand dynamic altered over the last couple of years? Could that be part of it as well, given mix, given product presentation, given market exposure, things like that? So maybe the December quarter now isn't a seasonally stronger quarter like it historically has been.

It's really, really hard to say, and it's harder to quantify and to predict how much seasonality into the quarter and what's the impact of seasonality into the quarter. On a high level, we know the trends. If you look at, it's not on the slide, but if you look at the entire capital equipment market behaves I think in similar ways. But try to quantify and to put our fingers on the numbers, really, really hard to do.

Great. Thanks a lot, guys.

Sherri Scribner, Deutsche Bank.

I just wanted to dig into the on-demand RedEye business. What are you guys seeing there? Is there still demand for on-demand parts for your Business or is that business also seeing some slow-down?

Sherri, hi. RedEye was part of [the same] today's FDM I'd say relative [to our business in starter position]. Of course, there is a demand. I would say that it's part of what we're seeing 3D printing market. It does have or it does bring a different solution, a different value to Stratasys into the market by the broad technology base that we have, the knowledge, the application, the knowledge with the specific applications that we've gained. So the answer to your question, yes, is yes.

Okay. Then clearly GE is making some significant moves in the metal space. You guys don't have a metal solution right now. Is that something you're considering getting involved in?

Today, we do provide 3D metal printing services through our FDM business. That is actually a growing part of that business and it's doing very well for us.

The metal market in general is in pretty early stages. We believe that it will mature into an important part of the end market. And the one we intend to, as I said, remain active in and perhaps increase as we move forward.

Thank you.

Brian Drab, William Blair.

On the new products, the Robotic Composite, the Infinite-Build and then the new opportunity with the ULTEM and Airbus, just wondering if you could give us any more detail in terms of timing of revenue recognition related to those and margins relative to the average margins that you see in equipment and materials today?

I can share the information that we have today on the table, and we are talking at least another couple of years. It's really too early to talk about price, market price, (inaudible), gross margins. We have our internal plan in terms of focus, but we are two years for us to go in order to create a better product, cheaper product, better reliability. Once we're closer to product introduction, we'll provide more information.

Okay. Then I wonder, have you commented on whether we're going to see somewhat of a step-up in depreciation expense related to the impending completion of the facility in Israel?

The facility in Israel is broken into two parts. The first part will be ready and occupied at the end of this year or maybe at the beginning of next year, so we start to see depreciation. But this depreciation will come on the account of rents that we are paying today in specific area and we expect that we see today. Once we provide some guidance and some more color on 2017 plan, we will provide you also the impact of the new business depreciation if at all on P&L.

Thank you.

James Kisner, Jefferies.

This is Timor Ivanika for James Kisner today. We had a question about your gross margin drop quarter over quarter. How much of that do you think is due to mix? I think you talked about J750 series not playing as important role in this quarter. How much is it due to cost reduction?

I would say that most of it is the result of product mix. We said also in the previous call at the end of Q2 that although we had a very nice quarter for J750, we did not expect the same quantities to continue looking forward and J750 has a nice contribution to the gross margin of the Company in Q2.

All right. Then for the -- it looks like in North America, it looks like you lost about $10 million in revenue quarter over quarter. Is that also J750 or is that some other reason for it?

The $10 million is coming only from J750. We saw a decline in hardware revenue in all regions compared to previous quarter. Some of it, I wouldn't say most of it -- some of it is J750 and some of it is other product.

All right. Then the last question we have is: So it looks like year over year your OpEx is down $13 million. I think this question has been asked. But in more detail, out of that $13 million, how much of that is due to cost reductions and this OpEx reduction? And how much of it is due to incentive -- reduced incentive compensation variable cost?

Most of it is cost reduction.

All right. Thank you. That's all we had.

James Medvedeff, Cowen and Company.

So most of mine have been answered. Thanks for taking my questions. Can you just -- on a housekeeping basis, can you tell us what unit shipments were in the quarter and what CapEx was in the quarter?

We didn't provide any information about units, so we didn't think it's for the benefit of the reader. Capital around $10 million this quarter.

$10 million. Thanks. My follow-up question is: Historically, in the past, you've provided much more detail on the breakdown of share-based compensation, amortization, and so the non-cash items in the GAAP to non-GAAP reconciliation. Are you going to make that information available for this quarter?

We didn't change anything from our reporting structure, you will see it in the full 6-K filing.

When will that be filed?

In the next few days.

Okay. Thank you.

Thank you.

Ben Hearnsberger, Stephens.

I wanted to ask about the two technologies, FDM versus PolyJet. Are you seeing sales in one area better than the other? Are they performing relatively in line?

The short answer is no. Although you have to remember that we serve different addressable market, different applications, different vertical with those specific technologies. So the PolyJet is for specific verticals that we don't usually use FDM. We don't see a different behavior from a market perspective between these two technologies.

Okay. Then in terms of capital spend, you're going to run around $50 million this year, about 7% of sales. What's an appropriate level going forward?

So I think this year and probably next year are unusually tough in CapEx spend because of the new [division] -- the new corporate division that we have in Israel. I would say that $25 million to $35 million run rate on a normal year is something that you should calculate.

Great. Thank you.

That concludes the Q&A session. I'll now turn the call back over to Ilan Levin for closing remarks.

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

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. Everyone, have a great day.