Stratasys Ltd (SSYS) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stratasys Q1 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Shane Glenn, Vice President of Investor Relations. Sir, you may begin.

Thanks, Chelsea. Good morning, everyone, and thank you for joining to discuss our first quarter financial results. On the call with us today are Ilan Levin, CEO; and Lilach Payorski, CFO, Stratasys.

I'll 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 to the Investor section of our website.

We will begin by reminding everyone that certain statements made on this call regarding Stratasys' strategy and the statements regarding its projected future financial performance, including the financial guidance concerning its expected results for 2017, 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 risks and uncertainties associated with Stratasys' businesses, 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, any failure to efficiently and successfully integrate the operations of Stratasys and various entities that is acquired, including MakerBot, Solid Concepts, Harvest and GrabCAD, 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 economic conditions in the countries in which we operate, any underestimates in 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 services, reduction of profitability due to shifting in our product mix into lower-margin products or shifting into our revenue -- and shifts in our revenue mix significantly towards our AM services business, costs and 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 2016 Annual Report on Form 20-F, which we filed with the SEC on March 9, 2017 as well as in the 2016 annual report, generally.

Readers are urged to carefully review and consider the various disclosures made throughout the report on Form 6-K that attaches Stratasys' unaudited, condensed, consolidated financial statements as of and for the quarter ended March 31, 2017, and its review of its results and operation of financial conditions for that period, which has been furnished to the SEC on or about today hereof. Stratasys' 2016 annual report and Stratasys' other 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 and other 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, today's call 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 reconciliations are provided in the table contained in our slide presentation and in 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. We remain encouraged by our efforts to achieve deeper engagement with customers in our key vertical markets during the first quarter. This customer-centric approach has resulted in encouraging progress in developing rapid prototyping, tooling and production part applications that are being driven by the specific requirements of industry-leading aerospace and automotive manufacturing companies. We continue to believe that by gaining greater insights into the specific needs and requirements of our customers, we are unlocking significant value and growing the adoption of our products and services going forward.

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, Lilach Payorski, who will review the details of our financial results. Lilach?

Thank you, Ilan, and good morning, everyone. We are pleased with our first quarter results, which includes growth in recurring revenue that demonstrate strong utilization of our installed base of systems. Additionally, the trend of reduction in operating expenses has continued into the quarter. And with this reduction, we have aligned our resources as we shift towards addressing specific high-value edit application in our key vertical markets.

Total revenue in the first quarter was $163.2 million compared to $167.9 million for the same period last year. GAAP operating loss for the first quarter was 100 -- was $12.6 million compared to a loss of $21.1 million for last quarter. Non-GAAP operating income for the first quarter was flat year-over-year at $4 million.

Product revenue in the first quarter decreased by 3% to $115.1 million as compared to the same period last year. Within product revenue, system revenue for the quarter declined by 11% over last year, primarily driven by a shift in our product mix towards lower-end system, which is mainly the result of the successful introduction of our low-cost, high-value F123 offering to the rapid prototyping professional market.

We continue to see favorable trends around system utilization and demand for our premium materials, which contributed to consumables revenue increasing by 7% as compared to the same period last year. The growth we see in our premium materials supports our focus on specific value-added solutions and give us confidence to increase our efforts in target-industry markets.

Service revenue in the first quarter decreased by 2% to $48.1 million as compared to last year. Within service revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 7% compared to the same period last year, driven primarily by growth in our installed base of systems.

As we put greater strategic focus on additive manufacturing offering, we expect transition away from the lower revenue attributed to conventional manufacturing services within our Stratasys Direct Manufacturing business.

GAAP gross margin decreased slightly to 47.1% for the first quarter compared to GAAP gross margin of 48.3% for the same period last year. Non-GAAP gross margin decreased to 51.2% for the first quarter compared to 55.1% for last year, driven by a shift in sales mix.

Product gross margin decreased to 57.9% compared to 61.1% for the same period last year, driven by the shift in sales mix described earlier relating to the introduction of our low-cost, high-value offering to the rapid prototyping professional market.

Service gross margin decreased to 35% compared to 40.4% for the same period last year, driven primarily by lower service revenue ratio to fixed expenses.

GAAP operating expenses decreased by 12% to $89.5 million for the first quarter as compared to the same period last year. Non-GAAP operating expenses decreased by 10% to $79.5 million for the first quarter versus the last year. The favorable trends in operating expenses over last year reflect the positive impact of our overall focus on improving efficiencies across the company. We have aligned our resources as we continue to focus on addressing specific high value-added application in our key vertical markets. These cost efficiencies are in line with our long-term growth strategy, which includes increased investment in area we see as critical to our long-term growth and productivity.

The company generated 24 -- $25.4 million of cash from operations during the first quarter as compared to $31.6 million for the first quarter last year. We were pleased to end the first quarter with $297.2 million in cash and cash equivalents compared to $280.3 million at the end of 2016.

Inventory at the end of the first quarter decreased to $116 million compared to $117.5 million at the end of 2016 as we maintain tight control on inventory levels.

Accounts receivable decreased to $115.1 million compared to $120.4 million at the end of 2016 with DSO on 12-month trailing revenue at 63.

In summary, we are pleased with the growth in recurring consumable and service contract revenue driven by strong system utilization and growing demand for our premium material. We continue to focus on operational performance, which reflected by significant reduction in operating expenses. Our strategy to invest in value-added solution within our key target markets continues, while aligning cost and resources with our long-term goal.

And finally, a favorable cash position, including cash generation and the strong balance sheet, provide us the capital needed to take advantage of opportunities going forward.

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 2017 financial guidance. Shane?

Thank you, Lilach. Our guidance for 2017 remains as follows: total revenue in the range of $645 million to $680 million with non-GAAP net income in the range of $10 million to $20 million, or $0.19 to $0.37 per diluted share; GAAP net loss at $53 million to $39 million, or $1 to $0.73 per basic share; non-GAAP operating margin of 3% to 5%; capital expenditures projected at $40 million to $50 million.

Non-GAAP earnings guidance excludes $34 million of projected amortization of intangible assets, $18 million to $20 million of share-based compensation expense, $2 million to $3 million of merger and acquisition-related expenses and $8 million to $10 million in reorganization and other related costs and includes $3 million to $4 million in tax expenses related to non-GAAP adjustments.

We maintain a relatively high estimated non-GAAP tax rate for 2017 given the ongoing noncash valuation allowance in deferred tax assets we expect to record throughout the year. 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. Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses on our net income loss, the company believes the non-GAAP operating profit will be the best measure of our performance in 2017. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of the press release and slide presentation with itemized detail concerning 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 pleased with the continued progress we are making in building more meaningful relationships with our customers, which is demonstrated by the many exciting customer use cases and applications we have shared so far this year.

We believe our emphasis on improving customer engagement with key customers in our targeted industry verticals of aerospace, automotive and health care, combined with our extensive knowledge and capabilities, is allowing us to bring increased value to the market.

Our recently announced strategic collaboration with SIA Engineering Company, a major provider of aircraft maintenance, repair and overhaul services in the Asia Pacific region, evidences our strategic focus on building deeper, long-term customer relationships in key vertical markets. The strategic collaboration will combine Stratasys' deep expertise in additive manufacturing as applied to aerospace applications with SIA Engineering Company's comprehensive service offerings to provide on-demand part solutions to their airline customers.

As part of the collaboration, we will jointly establish a Singapore-based Additive Manufacturing Service Centre that offers design, engineering, certification support and part production services. The new service center will serve as a one-stop shop to provide aftermarket cabin interior parts as well as services that support part redesign, engineering and material testing, airworthiness certification support and final part production.

Additionally, we recently collaborated with Strata, an aerospace compass and structure manufacturer as well as with Siemens in producing aircraft interior parts for Etihad Airlines -- Airways. As we have shown with our existing relationships with leading aerospace manufacturers, such as Airbus and Boeing, we are committed to advancing the use of additive manufacturing for high-requirement aerospace applications and believe these new developments represent further traction for our proprietary technology within the aerospace industry.

Last quarter, we announced that Stratasys was appointed as the official spot supplier of 3D printing solutions to the McLaren-Honda Formula One team. We are pleased to share that McLaren Racing has quickly expanded its use of Stratasys' FDM and PolyJet 3D printing solutions to produce final 3D-printed, race-ready parts for the new MCL32 Formula One race car as well as to provide -- to produce manufacturing tools to advance in production.

Improved performance has been driven by the use of the parts, which include: a hydraulic line bracket printed on Fortus 450MC production 3D printer with our new carbon fiber-reinforced nylon material, Nylon 12 CF; a flexible radio harness location boot printed on a J750 3D printer in rubber-like material; a carbon fiber composite brake cooling duct, created using ST-130 washout soluble materials, specifically developed for sacrificial tooling applications; and a large rear wing flap extension manufactured in carbon fiber-reinforced composites using a 3D-printed layup tool produced on the Fortus 900mc production 3D printer.

Additionally, McLaren-Honda has dedicated a Stratasys FDM 3D printer to track side use, bringing the technology closer to the action, enabling the team to produce parts and tooling on demand.

We believe that our relationship with McLaren Formula One Racing enables us to understand and deliver added value-based applications for this quick-turnaround, demanding automotive environment.

Another exciting application that we've recently announced was Siemens Mobility's use of our Fortus 900mc production 3D printer and ULTEM material to produce parts that includes -- that include housing covers for the coppers on the front of trams. Adapting Stratasys' FDM technology for this application led to dramatically shorter delivery times and higher part quality. These parts are also now being produced on demand, allowing customers who require replacement parts or who need to make the changes to existing designs to order customer -- custom parts online, which are then 3D printed and delivered.

Most recently, we announced that Stratasys' direct manufacturing is now collaborating with Peacocks Medical Group, a leading medical equipment supplier and creator of Podfo orthotics to optimize 3D printing for large-scale production of custom orthotics. In the health care application, such as orthotics, customization based on individual anatomy and medical requirements, exemplifies how 3D printing can produce highly customized solutions to improve a patient's quality of life.

Highlighting our ongoing commitment to drive innovation, we recently unveiled our latest technology demonstrator, the Stratasys Continuous Build 3D Demonstrator, a new additive manufacturing platform comprised of a modular unit with multiple 3D print cells working simultaneously and driven by a central cloud-based architecture. The new platform will leverage our core FDM technology, GrabCAD control and monitoring and multi-cell scalable architecture to produce parts in a continuous stream with minor operator intervention, automatically ejecting completed parts and commencing new ones. Additional sales can be added at any time to the scalable platform, making it fast and easy to increase production capacity in accordance with needs. Automatic queue management, load balancing and architecture redundancy further accelerate throughout as jobs are automatically routed to available print cells. Target applications will include service bureaus, education rapid prototyping labs and volume manufacturing environments that can benefit from part production with our tooling and from 0 inventory supply chains.

Stratasys technology 3D demonstrators, including our Infinite-Build 3D Demonstrator and Robotic Composite 3D Demonstrator announced last year, represents a development path for Stratasys, which will yield new manufacturing-focused technology and products, but are not commercially available at this time.

I would like to recap several announcements that we made -- that we have made regarding our activity with respect to metal applications. We are actively strengthening our knowledge and expertise in metal additive manufacturing, building off the strong base of knowledge within Stratasys' direct manufacturing, which currently has one of the largest 3D part third-party installations of DMLS systems. Through our SDM service, we are currently a provider of metal part services to customers in our key vertical markets. Leveraging our leading additive manufacturing assets, we have been actively augmenting our internal product and service offerings with investments and partnerships with other leading players in the metal additive manufacturing space.

Recently, we made public a strategic investment in LPW Technology, a market leader in developing, manufacturing and supplying metal powder end-to-end solutions for additive manufacturing. LPW already supplies leading OEM and Tier 1 suppliers with metal powders for additive manufacturing processes as well as an intelligent powder management system that enables the traceability and management of metal powder batches throughout their life cycle to meet specific quality requirements for the aerospace, defense, automotive and medical implant industries.

Most recently, we announced a strategic partnership with Desktop Metal, an exciting new manufacturer of metal 3D printing systems. Stratasys was one of the first investors in Desktop Metal. And Scott Crump, our Founder, Chief Innovation Officer, has been on its Board of Directors since 2015. This announcement, built upon this history of collaboration with new efforts to provide Desktop Metal access to selected Stratasys resellers, [we'll] be granted authorization to carry Desktop Metal's products in the future. We view Desktop Metal solutions as complementary technology to Stratasys' leading PolyJet and FDM plastic solution.

In summary, we are encouraged by our efforts to achieve deeper customer engagement within our targeted industry verticals of aerospace, automotive and health care. We are focused on expanding our relationships with key global manufacturing companies and unlocking value around customer-specific applications, which, we believe, will grow adoption of our products and services.

Looking forward, we remain focused on better allocating our resources to achieve our long-term goals, and we remain excited about the company's future and long-term growth potential within our industry.

Operator, please open the call for questions.

(Operator Instructions) And our first question comes from the line of Ken Wong with Citigroup.

Ilan, you mentioned in terms of the printer -- in terms of your printer revenue that you saw a shift to the low end with F123. I think on your competitor's recent call, they highlighted trying to take some of their cost benefit and putting it into lowering price. Should we expect to see more competitive pricing from you guys as well across your product line?

So in general, we have a very successful reception to the F123. As you know, we've put a lot of value, I think, into the space of the -- of what Stratasys' entry-level product line with the F123, and we see very good reception and traction from the market. Naturally, as we go further down, there is different types of competitive pressures throughout our product line and the F123, I think, very well addresses the market needs for professional-grade, engineering-grade entry-level systems in the F123.

Okay. Got it. So just, I guess, we'll wait and see in terms of whether or not pricing is something that you guys will use more strategically.

What we're trying to do in general -- just to add on to that, what we're trying to do in general is to provide value at the different price points that we're delivering to the market. And I think we've done that pretty effectively with the F123.

Got it. Fair enough. And then last quarter, you guys mentioned the MakerBot business grew. Did you guys continue to see that momentum carry forward into Q1?

I think, in general, with MakerBot, we've stabilized the operations very nicely over the past number of quarters, both with respect to demand and with respect to the cost structure of the company. So we're very pleased with the progress that we've made there. And I think we're very well poised now to maintain the strong brand and to grow in the future.

And our next question comes from the line of Troy Jensen with Piper Jaffray.

Just to quickly follow up on Ken's question, I guess, to me, the only kind of surprise result was the system sales being down 11% year-over-year. If I kind of compare that to a kind of sentiment that we've heard from the channel, it seems to experience a nice uptick in their business. I just kind of don't quite get the difference here. So can you just talk about just the launch of the F123? Do you think that created any type of a pause maybe for a couple of weeks where you lost some sales potentially? And then ultimately, do you think we can return to product growth this year?

So I don't think the launch of the F123 impacted in any way the sale of other products, in general, within Stratasys. I think, in general, if we look at the past number of quarters, we've stabilized the general pipeline. We look at it -- looking forward as strong and healthy. And I think that's what you may have heard from the channel. And so we're very pleased in that respect. We're very pleased with the customer engagement that's just getting deeper and deeper. And so we find that to be very rewarding, and we think that, in the medium and long term, will result in further growth.

So to be specific, do you -- how about that further growth, is it specifically going to be system growth? Or is the ASP difference on the F123 kind of so significant that, that might be challenging this year?

No. We think that it can translate into system growth as well.

All right, perfect. And just -- can you just touch on the gross margins for it? Or how far below corporate average? And is that just a scale problem now that as we have more volumes on it, we'll see a better gross margin contribution with the F123?

So I think, in general, our gross margins tend to fluctuate to the degree that the product mix fluctuates. And this quarter, with the introduction of the F123, there's a natural uptick in that segment of our product line, and that's what you see in the gross margins. I don't think that the fluctuation is atypical to what we've seen in previous periods when we've introduced different products, whether they're high-end products or lower range of the product line.

All right. And maybe just a last question for me. The -- can you just expand a little bit the LPW investment? What specifically in materials did they focus on? And then was that investment recent or was just the announcement recent?

So the announcement was more recent. The investment was done a while back, not in the current period. In general, they're providing powder -- metal powders for OEM -- other OEM vendors that are out there, specifically DMLS systems, across a pretty wide range of different materials, typically the higher-end materials, not only in the types of materials, but also primarily in the quality of the powder. And that was a little exciting for us, to see also their management system in terms of closing the ecosystem. And then, therefore, I think providing greater value to end customers was what attracted us with LPW, in addition to being a very solid team.

And our next question comes from the line of Sherri Scribner with Deutsche Bank.

It's Jeff Rand for Sherri. Just a quick question on expenses. It seems like you guys have done a good job managing expenses. Do you think there's much more room for net cuts? Or is it more about efficiently allocating resources at this point?

So in terms of expenses, we're definitely encouraged by the fact that we see a reduction in level of expenses. We -- it's definitely a focus and objective the way we address the company going forward. We are shifting resources to align with our strategy, so it's mainly what we would expect to see going forward, is more shifting of resources and reallocating of the costs as opposed to significant reduction going forward to be stable as the level that we see now.

Great. And just a quick follow-up. You maintained your 3% to 5% operating margins, but the pressure you kind of saw in the first quarter, do you think it's more likely that you'll come in the bottom half of this range now?

No. I think -- look, we're going to stick to the range that we provided in the guidance. And we're not going to characterize kind of where we feel we're going come within that range.

And our next question comes from the line of Shannon Cross with Cross Research.

I have two. The first, with regard to the restructuring, and I understand you're reallocating costs, but what I'm trying to figure out is how much of the cost benefit is there still to take out of gross margin and COGS and in terms of supply chain and things like that, as I understand the OpEx is going to be relatively stable from now and just with reallocation. And then within that, from a cost standpoint, how much more do you think we're going to have to non-GAAP out every quarter on an ongoing basis as you go through this? And I have a follow-up.

So with -- from expense perspective, in the gross margin, we're actually looking also on efficiency in that respect, not just the operation expenses level. So we focus definitely on supply chain, on cost reduction in operation as well. And from non-GAAP perspective, I think the exclusion for non-GAAP in the gross margin aspect is relatively going to be the same going forward. Our main elements there are amortization of intangibles. We don't have any significant non-GAAP exclusion in the COGS element.

And is there -- I guess, overall, for restructuring, is there more non-GAAP exclusions coming? Are you pretty much done since you're going to be at a steady state on the OpEx side?

Yes. It -- we're relatively done. There is no major restructuring.

Okay. And then my second question is just -- you highlighted in there significant comments about your metal initiatives. And I'm trying to figure out how we should think about the opportunity to monetize those. I understand, like with Desktop Metal, you'll be leveraging your reseller channel. Is there some sort of a finder's fee for that within -- for you? And also if you can talk a little bit about the investment you made in Desktop Metal and perhaps, what you would estimate its worth at this point. Just -- it's interesting since that has become more of a topic of discussion certainly after RAPID.

So we don't get into the specifics beyond of what we've disclosed with respect to the level of investment and certainly, not the expected return. We see a lot of excitement within metals. We understand, in general, with AM that adoption begins from the bottom, and that's what we're doing. So Desktop Metal is a great example of where we got in relatively early and we're expanding that relationship. And we could envision further expansion of that relationship as we -- as they progress with the market. And that's the way we would look at that opportunity. In general, we have said in the past that we believe that Stratasys has many assets to bring to the table and that we can begin to leverage those assets specifically through partnerships, in general. And I think what we've recently announced during the quarter on the metal initiatives is a good example of that. We've done it well, I think, over the past year, I'd say, on the application side with leading companies like Boeing, Siemens, Ford. Now you see with SIA Engineering Company on the application side. And now we're also doing it on the technology side. And so we'll -- I think we'll continuing expanding these relationships and working on others as well in parallel, as I said, to leverage our assets.

But for 2017 and perhaps into 2018, there's not much of a P&L contribution. Is that fair from the initiatives? Or is that not how we should think about it?

For 2017, I would say immaterial.

And our next question comes from the line of Wamsi Mohan with Bank of America.

This is actually [Jen] on for Wamsi. I just wanted to touch on your service margins. I can appreciate your comments around lower revenues to fixed cost ratio. But with services being down 2% and then having over 500 bps of margin compression, what were some of the moving parts there? And how should we be thinking about your service bureau business going forward? Can we expect margins to trend back up? And if so, what gives you confidence in that?

So service gross margin is -- go down specifically on the top business -- revenue over fixed pay costs are a contributor to the lower gross margin on the services as we progress through the year, and we expect a growth in our business. We believe that we probably can maintain a slightly higher gross margin. So our gross margin, going forward, it's probably -- will be consistent with the same level that we see here, but we definitely focus on improvement on those aspects. From a gross margin perspective, like we mentioned earlier, the product mix impact this quarter with the introduction of F123, this is the typical with -- and seasonal based on a new product introduction. We saw it also in the past when we introduced other products and it fluctuates significantly. We'd expect this to be a shift around in our gross margin for the year and probably will remain relatively stable as what we saw in previous quarters.

I would just add on the services side with FDM, like on our product side, it is -- there's a wide variety of technologies provided through to FDM with -- each with their unique gross margin and behaviors. And so that in a specific quarter, it's very dependent also on the service mix within that business as well.

And our next question comes from the line of Jim Ricchiuti with Needham & Company.

With respect to SDM, when do you think you're finished with this transition away from some of the presumably lower-margin traditional manufacturing? And it's a -- I guess, what I'm getting to is, when do you -- would you anticipate seeing some growth returning to that part of the business?

So I think, in general, as we said in the past, the greater focus, like you said, is being put on the additive manufacturing elements and certainly more of the forward-looking additive manufacturing parts of that business. In general, where we see the growth coming from is where we will leverage the Stratasys' either go-to-market or specific account relationships that we have at Stratasys and leverage that within FDM. And I think we're beginning to see that anecdotally more and more. And we will begin to see that in more systematic and problematic way, and that's what we're working on as we develop through the year and through next year.

And then just a follow-up question on gross margins. I understand you don't want to get too granular with respect to operating margins for the year, but it does imply, I think, that as you're at the high end of your revenue range, you would have to see some fairly -- reasonably good gross margin improvement from Q1 levels. And that's what I'm trying to understand. What is it going to drive that? Is it mix? Is it a combination of some other things that you're doing within COGS? Can you just help maybe talk a little bit about the potential for gross margins to improve from these levels as we go through the year?

So as we said, it's a lot about the product mix. Naturally, also when you're introducing new product line or new platform, like the F123, there's obvious work around, as Lilach had alluded to before, a little bit of supply chain and some COGS work. It's natural that when you launch it, it's at the highest point probably of its life cycle. So we'll see -- I think there's a lot of different routes for us to work on improvement, whether we work on them actively or we [feed] them through the product mix, in general, of the traction of our different products.

And our next question comes from the line of James Kisner with Jefferies LLC.

This is Timur Ivannikov for Jim Kisner today. I have a couple of questions about Continuous Build 3D Demonstrator. I was wondering if you could provide maybe your most favorite application, you think the most promising application for this product. And then in general, I was wondering if you could talk about the FDM technology because many of the competitors, they always say that their technologies are faster than FDM. And they keep on expanding the materials envelope. They're able to print with different materials, stronger materials. So I guess, a few comments -- if you could make some comments on the competitiveness of FDM in the future and competitiveness of Continuous Build 3D Demonstrator.

With respect to the Continuous Build, I think we've isolated 2 significant potential spheres where it could be very attractive. The first is in, what we call, the education labs or innovation labs where there's a multiple users requiring prototyping application in the same workspace. And this will effectively allow all the printers to be used efficiently in a very managed process. And I think the second sphere that we've isolated or identified is where you would have low-volume production of specific parts. And we've, I think, improved the overall efficiency of making those parts by the current configuration of what we presented at the Continuous Build level. So I think those are 2 very strong elements. There may be others that we may see from the market post introduction or launch of this demonstrator. With respect to FDM, in general, so we are -- from what we see from our customers within target markets, we are very -- feel very comfortable with the growth opportunities in front of us on FDM. I think we've been through -- FDM, in general, certainly from Stratasys, has been working very hard on qualification and certification within those key industries for many years in close cooperation with leaders of those industries. And we've made that public throughout the past periods, and we believe that's absolutely gaining traction. And so it's not -- I don't think it's a question of picking up on the feature and saying what is better, what is worse. There's application fit for what we're doing, I think, for a broad number of applications where we've identified key industries. And [so] we feel very comfortable with those opportunities.

All right. And I guess regarding your -- the Continuous Build Demonstrator -- 3D Demonstrator gross margin, do you think it's going to be above corporate average? And in terms of this opportunity, when do you think it will become a significant revenue opportunity? Is it 2018 again?

No. So we're not going to give a time line or a time frame with respect to when that will be launched or the economics around it in terms of gross margin. It's a little bit early for that.

And our next question comes from the line of Rob Stone with Cowen.

I wanted to ask a couple of questions about the tax rate. I understand you're expecting an unusually high rate this year because of the mix of U.S. versus offshore profit contribution and ability to use NOLs. I know you're not giving guidance for 2018 at this point, but if you found yourself in the same situation next year in terms of the balance between geographic distribution or profits and taxes, would you expect that high-notional tax rate to persist next year?

So our tax rate is correct. It's basically impacted by the different tax jurisdiction and the situations that we have in the U.S. Currently in 2017, we are not -- we are in a full-evaluation situation. Going to 2018, currently, we are not addressing that, but definitely, [those] going to be the implication -- or those going to be the drivers for the tax rates going forward is based on the jurisdiction mix.

Okay. And I had another question about systems growth. Just thinking broadly about your guidance for this year, you've noted that service, in terms of maintenance and consumables, are both growing across the growing installed base. At the midpoint of the revenue range, you're looking for flat to slightly down revenues. So where in that mix do you expect to see an upturn from systems? And is this because of a particular industry or application area or platform where you expect to see a turnaround in the systems revenue?

So we see a renewed energy, certainly, post launch of the F123. But as we said, I think throughout the past number of calls and certainly now, as we increase engagement in all of the key industries with the players that we're talking to, the customers that we're engaging with, we see very strong potential. As you can imagine, as we move away from rapid prototyping applications more to the tooling applications and end use parts, the period of qualification and ramp-up, the timing of that is difficult to judge. But we feel very comfortable with what we're seeing in front of us and sort of the work that we have in front of us in order to nail that down.

And our next question comes from the line of Matt Cabral with Goldman Sachs.

I understand you guys don't give quarterly guidance, but I'm wondering if you could just speak to the near-term visibility that you have at this point over the next, call it, 3 to 6 months and just how that compares to the past year or so.

Matt, this is Shane. Yes, I think that's -- we're in a similar situation that we've been in the last few quarters. And as that visibility can be -- from quarter-to-quarter can be difficult, but -- so yes, to your point, we're not going to provide any kind of guidance or visibility into the current quarter.

Got it. And then just circling back in the earlier discussion about your metal initiatives. Just curious if you feel a partnership model is enough to adequately address this market or this is an area, over time, where Stratasys needs to actually own some of that IP within this market.

So a couple of things. As we've said consistently that we believe we are active through FDM on the service side. We believe that, in general, with AM, but I think even stronger in the metal space, the know-how and knowledge that needs to be applied around the systems is significant to make AM meaningful for an application. And I think, in that respect, FDM is well in front and has a very deep knowledge around, as we said, the process knowledge in order to make it more valuable. As -- and I think the idea of creating these partnerships is to leverage Stratasys' assets, in general, and step up and move along the path of, as you say, IP or any other route as we move along.

And our next question comes from the line of Patrick Newton with Stifel.

Yes, one question, one clarification. I guess, first, on the question, you talked about premium materials driving system utilization. Can you help us understand what materials qualify as premium? And any rough mix of premium materials as a percentage of overall material revenue?

So we don't break down the different percentages and -- within the product mix. But in general, any non -- I would say, ultimately as a good example, our Nylon 12 chopped fiber, which I identified -- highlighted during the script part of the call, those are the types of materials, our color systems on the PolyJet side, are those of the kinds of materials that customers are looking further and they're willing -- and realize the value in what we're providing. And they're usually typically application-specific. So what you would see for us on the color side, you would see that for medical modeling a little bit stronger and the ability to mix different materials through the printing process. And certainly, from the FDM side, you would see things that are specifically tailored to automotive or aerospace.

Just a clarification on the gross margin. How should we think about it trending through the year? I believe you said that services should remain roughly flat and very much mix dependent. But then on the product side, I wasn't sure that I understood your commentary. The F123 obviously had negative mix impact this quarter. But I am right to conclude that, in general, gross margin should trend upward through the calendar year?

Yes. We're not going to project -- give you any kind of specific guidance. But I think I'll just repeat our comments about the impact of the new product introductions and the impact that, that can have on the gross margins. As you know, the gross margin can be -- variability there is -- can be significant depending on mix. As you know, we have a wide range of gross margins in our systems, much higher margins on the materials. And so it's very -- it can be sometimes a little difficult to project and see some consistency there relative to the mix.

And our next question comes from the line of Brian Drab with William Blair.

This is Kyle Dicke on for Brian Drab. Just quickly, how large is your aerospace business today? And any additional color on how you see that developing over time?

Again, we don't break down per application and per industry. But from where -- what we hear from the lead partners that we're working with, what we can see in front of us, we think that there is substantial opportunity in front of us compared relative to what we're doing today.

Okay. And then kind of along the same line, some similar questions on the 3D demonstrators, Continuous Build. Do you have any -- are you able to provide any color just on the kind of a long-term growth opportunity you see from this, not over the next year or 2, but longer term?

So we're not going to give metrics around that in terms of either revenue or traction, in general. But the demonstrators that we have, some of them are already in customers' hands. They're qualifying the output for, what we believe, are substantial opportunities in terms of the print capabilities. And so we're excited by -- these are systems that, certainly, the robotic composite and the infinite build are significantly -- significant systems in terms of their size and outlays, different than what we've done in the past. And so the qualification or development cycles are a little bit longer. And we've decided to do that. The reason we announced the demonstrators is that we decided to do it in much more -- in much further or deeper collaboration with specific partners, and we're seeing the value that's bringing to the table in terms of development.

And our last question comes from the line of Steve Dyer with Craig-Hallum Capital Group.

It's actually Greg Palm on for Steve today. Curious, it's been a couple of years since you started targeting these vertical units and wondering if you've seen any change in the number of -- whether it's follow-on orders or multi-unit purchases from some of these kind of strategic accounts, these early adopters and whether that's an indicator of what you're looking at or not.

Look, absolutely, it's an indicator, and we are seeing positive traction. Some of these customers, it's in the ramp-up stage in terms of their purchasing or their supply chain purchasing of systems in order to increase capacity, in general. And so it's not atypical that the larger of these partners will have multiple systems. And well over 10 and well over 20 are already working for specific applications. So we're absolutely seeing that traction, but still see also a significant opportunity in front of us.

Okay, great. And then on the strategic partnership with Desktop Metal, curious what the initial reaction has been from the channel, whether that's something that they were asking for. And how are you going to be measuring performance going forward against your existing core Stratasys machine quota? So I guess, what's the risk that the channel devotes too much time or energy on this metals launch?

So we think that, in general, there's a very nice complementary mix between what we're doing on the PolyJet and FDM side with what Desktop Metal is bringing to market. I think we all need to -- we want to be close in the discovery phase of the application fit between what they're going to bring to market and the applications out there, and we want to be part of that. I think this is a great way for us to see and see how both the complementary nature that, we think, is there and just, in general, with respect to Desktop Metal. So we're excited about that. There's lot of good energy around it.

And this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Ilan Levin, Chief Executive Officer, for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.