Stratasys Ltd.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q2 2013 Stratasys’ Earnings Conference Call. My name is Alex and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of the conference. (Operator Instructions) I would like to advice all parties this conference is being recorded for replay purposes and now I’d like to hand the call over to Shane Glenn, Vice President of Investor Relations. Go ahead please sir.

[Shane Glenn:]

Thank you, Alex. Good morning, everyone, and thank you for joining us to discuss our second quarter financial results. On the call with us today are David Reis, CEO; Erez Simha, CFO and COO, Israel of 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 be made available on the Investors section of our website. We’ll start with a forward-looking statement. A reminder that certain information included or incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project or other similar words, but are not the only way these statements are identified. These forward-looking statements may include, but are not limited to, statements relating to the company’s objectives, plans and strategies; statements that contain projections of results of operations or a financial condition including with respect to the planned MakerBot merger, and all statements, other than statements of historical fact that address activities, events, or developments that the company intends, expects, projects, believes, or anticipates will or may occur in the future. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. The company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Important factors that could cause actual results, developments, and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Ltd. after their merger, as well as the ability to complete the MakerBot merger and to successfully put in place and execute an effective post-merger integration plan. The overall global economic environment, the impact of competition and new technologies, general market, political and economic conditions in the countries in which the companies operate, projected capital expenditures and liquidity, changes in the company's strategy, government regulations and approvals, changes in customers' budgeting priorities, litigation and regulatory proceedings, and those factors referred to under Risk Factors, Information on the Company, Operating and Financial Review and Prospects, and generally in the company's annual report for 2012 filed on Form 20-F and in other reports the company files with the U.S. Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made in the company's SEC reports, which are designed to advise interested parties of the risks and factors that may affect its business, financial condition, results of operations, and prospects. Any forward-looking statements in this presentation are made as of the date hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now, I’d like to turn the call over to David Reis, Chief Executive Officer of Stratasys. David?

[David Reis:]

Thank you Shane and good morning everyone. Thank you for joining the call today. We are very pleased with our record second quarter performance. We continue to observe a growing interest in 3D printing and strong demand for our product and services. In addition to generating significant growth in revenue, margins and profitability over the last year with several additional positive development during the second quarter that’s worthwhile highlighting. First we have completed most of the critical integration initiatives that result from the merger of Stratasys and Objet. While work still remains and as we continue to devote significant resources to integration we now have an even more productive channel in selling at broader range of complementary product and services. This integration is being accomplished where we remain focus on our customers and core business. Second manufacturing application continue to be a core driver of our growth, this was highlighted by multi-million dollar order for Fortus systems we received during the quarter from a major global manufacturing company which we anticipate to ship in the second half of this year. And lastly we’re most excited about our announced plan to merge with MakerBot which we believe will accelerate our growth within the rapidly expanding segment for desktop 3D printers. We have seen in the second quarter with positive momentum that is carried into the third quarter. We’re excited about our new initiatives and remain confident in our growth plans. I will return later in the call to provide more detail on our second quarter developments and strategy but first I would like to turn the call over to our CFO and COO in Israel, Erez Simha will provide you details on our financial results. Erez?

[Erez Simha:]

Thank you David and good morning everyone. As in previous quarters our focus on today’s call will be on the non-GAAP financial results of the combined company started this LTD (ph), for the second quarter of 2013 and pro forma non-GAAP financial results for the second quarter 2012. This non-GAAP financial measures should be really in combination with our GAAP metric to evaluate our performance. Now we refer to GAAP metrics in respect to prior to January 1, 2013. We are referring to pro forma GAAP numbers prepared in accordance with Article 11 of SEC article SX which give effect to the merger as though it had occurred on January 1 of 2011 with one-time introduction costs excluded from the numbers. The non-GAAP to GAAP reconciliations are provided in a table contained in our slide presentation and press release. As David mentioned in his open remarks we’re very pleased with our second quarter results. We generated $106.7 million in non-GAAP revenue in the second quarter, an organic increase of 20% over the same period last year. GAAP revenue for the second quarter of 2013 was $106.5 million. Our margins during the period benefited from our overall sales growth and the relatively stronger sales of our higher margin systems and consumables. Non-GAAP operating margin improved to 20.3% from 90.8% and non-GAAP net income margin improved to 17.4% from 15.9% over the same period last year. Non-GAAP net profit increased to an impressive 31% in the second quarter over the same period last year to $18.6 million, or $0.45 per diluted share. GAAP net profit was a loss of $2.8 million in the second quarter, or $0.70 per share. The effective non-GAAP tax rate decreased by approximately 8 percentage points this quarter compared to the same period last year. As a result of the Objet-Stratasys merger, we have begun to realize some tax synergies that are expected to lower our effective tax rate compared to the pro forma rate for 2012. Overall, we are very pleased with our second quarter results, which were in line with our expectation. Non-GAAP product revenues in the second quarter of 2013 increased by 90% to $19.4 million, as compared to pro forma combined product revenues in the second quarter of 2012. System revenue increased by 16% in the second quarter over the same period last year driven by sales of our higher priced Production series and this year’s order trends. Applications driving this growth include direct digital manufacturing and the continued adoption of affordable desktop systems for prototyping applications. As we indicated last quarter, our channel cross-training program included the shipment of several demo units to our channel partners. Though it should be noted the demo unit shipments during the second quarter were immaterial. Consumable revenue in the second quarter of 2013 increased by 23% as compared to pro forma combined consumables revenues in the second quarter of 2012 driven by acceleration in customer usage and our growing installed base of systems. We should note that year-over-year growth rate in consumable revenue accelerated in the current quarter compared to the rate we have in the first quarter. We believe that there is some strength in our Production series line and our growing installed base of systems are positive indicators of consumables revenue growth. We are also benefiting from expanding our consumables line, making it a separate business with a focus on expanding customer usage. Revenues from our service offerings in the second quarter of 2013 increased by 28% to $16.3 million as compared to pro forma combined service revenues in the second quarter of 2012. The increase in service revenues was driven by an increase in revenue from maintenance contracts and service parts, reflecting our growing base of installed systems. The increasing service revenue was also a result of growth in our RedEye paid parts service which increased by 34% as compared to the second quarter of 2012. RedEye continues to benefit from the demand for the large and complex production parts as well as the continued development of our sales channels. The number of system units shipped in the second quarter increased to 1,261 units as compared to 1,085 units shipped in the second quarter of 2012 on a pro forma combined basis. We should note that the units shipped in second quarter of 2012 benefited from units shipped for our OEM agreement with HP, which was terminated effective December 31, 2012. Excluding the HP units, we shipped 993 units during the second quarter of last year. Pro forma non-GAAP gross margin improved to 59.2% in the second quarter over the 57.5% for the same pro forma period last year. Pro forma non-GAAP product gross margin benefited during the quarter from the relatively strong growth in the sales of the company’s higher margin systems and consumables. As we predicted last quarter service gross margin benefited in the second quarter from the resolution of certain issues surrounding system service cost as well at the lower cost associated with cross training our channels. Non-GAAP net research and development expenses increased by 90% to 9.5 million for the second quarter over the same period last year driven by new systems in the material development initiatives. Non-GAAP SG&A expenses increased by 25% for the second quarter over the same period last year, driven by higher sales commissions and increased marketing expenses. Non-GAAP operating income increased by 24% for the second quarter over the last year’s second quarter pro forma results, driven by the strong growth in our relatively higher-margin product. Slide 12 provides you with an overview of the major growth drivers we have discussed for the period. The following slide provides you with a breakdown of our geographic sales. Sales growth in the North American and Asia-Pacific regions continue to outpace the EMEA region. I won't be reviewing the specific reconciliations to GAAP for the non-GAAP measures we have discussed whilst our presentation today. This information is provided in the slide during at the end of the presentation as provided in our earnings release. Our cash and cash equivalent balance including short term deposits and investments increased by 7.2 million to 149.7 million at the end of the second quarter as compared to 142.5 million at the end of the first quarter. In summary we’re very pleased with our second quarter results. We generated strong growth on a pro forma non-GAAP basis in both revenue and net income and experienced expansion in our gross margin, driven by sales of our higher-margin products. And finally, we are positioning the company for strong growth in the future for strategic investment in R&D and channel development. I would like now to turn the call over to our VP of investor relations, Shane Glenn, who will update you on our financial guidance. Shane?

[Shane Glenn:]

Thank you Erez. We updated our financial guidance this morning taking into consideration the expected closing of our merger with MakerBot later this month. As we indicated at the time of announcing the plan merger the transaction was expected to accelerate Stratasys growth rate and be slightly dilutive, the non-GAAP earnings per share in 2013 and accretive to Stratasys non-GAAP earnings per share by the end of 2014. In-line with those expectations we’re introducing revised financial guidance as follows, for the new guidance of 455 million to 480 million versus previous guidance of 430 million to 445 million. Non-GAAP earnings guidance if a $1.75 to a $1.90 per diluted share versus previous guidance of a $1.80 to a $1.95 per diluted share. GAAP earnings guidance of $0.76 to $0.49 per share loss versus previous guidance of a $0.41 to $0.16 per share loss. Our guidance assumes no operating or revenue synergies related to the MakerBot transaction. In addition changes in our estimated liability for MakerBot related performance based earns out could have a material effect on our GAAP earnings. As we indicated last quarter organic revenue growth is expected to be relatively stronger towards latter part of the year as we progress to our integration plan and revenue synergies from selling the combined product portfolio begin to ramp. Our updated guidance assumes that the company will successfully complete the MakerBot merger later this month and continue to make significant investments to fund growth including incremental sales, marketing and R&D expenses in the second half of 2013. Our updated guidance also assumes relatively stable gross margins compared to levels absorbed in the first half of 2013 as well as the partial realization of some merger related synergies the most significant cost synergy in 2013 coming from income tax expense. Non-GAAP earnings guidance excludes the estimated the impact of add expenses related to mergers, the impact of share based compensation expense and the significant expense associated with the amortization of acquired intangibles. The reconciliation to GAAP is provided in the slide presentation and our press release. Our long term target operating model includes annual revenue growth of at least 20%, non-GAAP operating income as a percentage of sales of between 20% and 25%, an effective tax rate of between 15% and 20%, and non-GAAP net income as a percentage of sales of between 16% and 21%. Now, I’d like to turn the call back over to David Reis, who will provide you with a more detailed strategic overview. David?

[David Reis:]

Thank you, Shane. I would first like to provide you a quick update on where we stand on the merger integration process between Stratasys and Objet. I am pleased to report that many of the critical sales marketing and service team integration initiatives have been achieved. During the second quarter, we have completed the cross-training for product sales and customer support, the training and implementation of salesforce.com and the ramp up of benchmarking capabilities to support our sales efforts. We cannot focus more intensely on leveraging our combined sales and marketing organization to drive faster growth. In addition to the opportunity to cross-sell a complementary product line into the company’s large installed base of system, we are now better equipped to provide the right solution for broader range of applications. What you see in the following slide is the working model of what the Stratasys-Objet merger is all about. Two complementary 3D printing technologies used together to create a hybrid functional prototype. Stretching further, the fourth year students of Automotive Engineering in the University of Applied Science in Berlin used mix of Stratasys FBM and Polyjet 3D printing technologies to design a new airbox for small-scale formula style racing car. The prototype includes Stratasys ultra-material for parts for airbox where high-temperature resistance and vibration resistance were required. Meanwhile, the digital ABS material created in the Polyjet-based Objet Connex 3D printer, were used with the airbox required a combination of toughness, unique geometry and unique surface finish. Our cross-selling initiatives are generating tangible results as our China’s partners and customers have begun to recognize the value of our complementary product lines. The following graph show the month-over-month growing in number of opportunities, our combined resellers have registered in the salesforce.com through the first part of this year. And opportunity is the prospect that has the intention to buy 3D printer within a year and has the budget to purchase the machine. As you can see, activity has been robust. We believe this trend is a positive indicator of our business over the coming quarters. As in previous quarters, manufacturing application remain one of the big drivers of our growth in the second quarter. This was highlighted by a sizable order we see from major global manufacturing companies during this period. The customer placed a multi-million dollar order for several Stratasys Fortus 3D production systems. This will be used as manufacturing sites around the globe. These systems were shipped in the second half of this year and will be used for the production of prototypes, manufacturing tool and eventually end use products. This order underscores the growing momentum the 3D printing technology has within the manufacturing process of some of the world’s largest and most sophisticated companies. Moreover, our effort to advance how 3D printing technology is being used among some of the world’s most sophisticated manufacturers continued to gain momentum. We are empowering manufacturers to be more competitive in the global economy by enabling Objet patented to be produced on demand in fast, simple, and efficient process using production materials, the designers and engineers are already familiar with. In short, 3D printing is enabling industry to innovate it well. And this is transforming how products are made and strengthening manufacturing competitiveness as a result. As you know, in June, we entered into definitive agreements under which we will merge with MakerBot, a leader within the rapidly growing market for desktop 3D printers. The merger is about growth through the acceleration of 3D printing adoption, MakerBot is providing an affordable, accessible desktop 3D printing experience that is driving broad adaptation of their products. Stratasys and MakerBot estimated between 35,000 and 40,000 desktop printers were sold in 2012. This number is estimated to double in 2013. As individual designer engineers manufacture or incorporate 3D printing into their product development and manufacturing processes. Our experience confirm that using 3D printing technology tend to expand the demand for 3D printing capabilities. Customers that require a technology for one use, discover it has value in other areas. We believe this journey is similar to the evolution in personal computers. What began as a kit based product became mainstream tool as business and industry as affordability, access and ease of use improved. The merger Stratasys and MakerBot will represent a significant opportunity for our combined product portfolio even the wide range of solution we will provide individual and commercial uses. As a combined money we brought in our product offering to include 3D printer’s price on 2200 to more than $600,000 which is suitable for home desktop professional and industrial uses. To get there we believe we will offer the best and most complete line of 3D printing systems, delivering ecosystems that encourage adoption by making 3D printers more accessible than ever and provide a host of complementary product and services that will promote the proliferation of 3D printing in both established in 3D printing (ph). And so from our initial conversation with the team of MakerBot we’re already seeing ways to further strengthen our combined capabilities by leveraging to intellectual property, technical and consumer expertise, marketing known how, R&D investment, market reach and global infrastructure. We’re very excited in anticipating closing this transaction later this month. The increase interest in mainstream use of 3D printing and the accelerated adoption of the technology also is at heart of our recent collaboration with UPS store that announced last week. We were selected to provide our UPS Store that announced last week. We were selected to provide our UPrint 3D printers to the UPS stores as part of a pilot program that will put machine in six location and enabling UPS store customers to have 3D designs printed on-site. While available to any retail customer this service is aimed at small business owners were increasingly recognizing how 3D printing technology can help them design and make products more efficiently. This collaboration supports Stratasys vision of strengthening innovation and competitiveness by making 3D printing more accessible to growing number of users. In summary, we are pleased with our record second quarter results. We generated strong organic growth in revenue and profitability and observed significant cross selling opportunities developed from the company recently combined channel. We completed many of the critical sales marketing, customer supports, team integration initiatives just result from the merger of Stratasys Objet and now within an organization it is better positioned to drive fast growth. We announced the merger with MakerBot a leading manufacturer of systems and ecosystem developer within the rapidly growing desktop 3D printing segments. We continue to observe a growing industry in 3D printing within our market which was highlighted by a large system order we received for multi-Fortus 3D production systems to be used for functional prototyping and manufacturing of tools and end user products. We continue to invest aggressively in future growth for innovative products and channel development programs and we’re looking to grow through additional strategic acquisitions. And last when we take positive outlook for 2015 and continue to expect strong growth for the year. In closing I would like to say that all of us at Stratasys are passionate believers in the value and power of 3D printing and we’re here to lead the development of this industry. We would now like to address any questions you might have. Operator please open the call for questions.

[Operator:]

(Operator Instructions). First question comes from the line of John Baliotti. Go ahead please.

[John Baliotti:]

First I had just a housekeeping question for Erez, the increased revenue range for the year, is that something about a third of the year for MakerBot is that how we should look at that?

[Erez Simha:]

We assume that we will close the transaction in middle of August. So, we present a quarter and a half for MakerBot revenue.

[John Baliotti:]

Okay, alright. And David, you’ve got a number of interesting technologies coming together, you have got MakerBot coming in, you had Objet last year, if you put all that together in terms of what you are talking about with new development, is there any color inside that you could provide in terms of how you see you know, let’s say, for the rest of this year may be and into 2014 what kind of things we should in terms of products or materials that we might expect to see in terms of functionality?

[David Reis:]

Yes, unfortunately I cannot disclose those specific products and timing of specifically offering. What I can say is that in general we will continue our efforts in developing in few directions, one of them is improving our capabilities as far as medium is concerned, which including both machines and materials. It will expand and improve our capabilities of the products in the desktop area, and we will continue investing and developing products and materials, which are suitable for various application – vertical application within the space.

[John Baliotti:]

Okay, alright. Thank you

[Operator:]

Thank you. Our next question comes from the line from Troy Jensen from Piper Jaffray.

[Troy Jensen:]

Hey, congratulations on the nice results, gentlemen.

[David Reis:]

Hey, Troy, good morning.

[Troy Jensen:]

Hey, so a quick question maybe for you David, this Fortune 500 Company, is this the same company that helps Stratasys pay for some other R&D investments in the past or is this a new Fortune 500?

[David Reis:]

I apologize that I cannot disclose any more information above what we said.

[Troy Jensen:]

Can you have a little bit vertical therein?

[David Reis:]

Sorry, sorry.

[Troy Jensen:]

It’s alright. Okay. Although quick for Erez or for Shane and the follow-up on the guidance question, is it safe to assume that organically you are not changing your guidance and there is still $25 million to $35 million and then $0.05 reduction is purely MakerBot?

[Erez Simha:]

Yes, Troy, this is good. Actually, we reconfirmed today the guidance for 2013, the organic guidance for Stratasys that we gave at the beginning of the year. The change is it is also setting MakerBot to move.

[Troy Jensen:]

Okay. Was it safe to assume MarketBot is kind of in the $65 million range for this year or could you let us know maybe what their Q2 results were?

[Erez Simha:]

We didn’t provide the Q2 results for MakerBot. Upon closing and only upon closing, we are going to 5K, 6K with the H1 results from MakerBot.

[Troy Jensen:]

Okay, alright. And then just last question on feed, see the floor here, but can you just talk quickly about product gross margins and maybe service gross margins, they went different directions. And specifically on product given that right materials we are up so much more than products, system sales, I would have thought you would have positive gross margin benefit from that mix shift?

[Erez Simha:]

I think Troy the product gross margin is in line with our expectation and in line what we said at the beginning of the year, there are no surprises here. We had some reduction in the service gross margin at the beginning of the year I think we are on track now. And this is in line with our expectation. The product gross margin is a combination of mix of direct and indirect sales of territory, that it’s really difficult to take any conclusion out of the small changes between the products here.

[Troy Jensen:]

Okay, alright. That’s fine. Good luck in the second half gentlemen.

[Erez Simha:]

Thank you, Troy.

[Operator:]

Our next question comes from the line of Jim Ricchiuti from Needham & Company.

[Jim Ricchiuti:]

Hi, thank you. I was wondering if you might be able to provide some additional color on the unit growth that you are showing and just in terms also of where are you seeing its skewed more towards the production side, any color you can provide on the composition of the unit growth in that quarter?

[David Reis:]

Jim, what we are seeing in Q2, in Q2 is not different than the mix and the growth that we saw in Q1 quarter-over-quarter and like I said the growth is coming from all product line, from the desktop, from a high-end product and there is no clear change between the quarter in term of the strong earnings growth.

[Jim Ricchiuti:]

The other question I have for you David, I’m wondering if there is a way for us to track or to evaluate the progress that you’re making and integrating the channel. You have a slide in the presentation that’s helpful but is there any other way that we might be able to measure the progress you’re making with respect to integrating the channel and the productivity you’re experiencing (ph).

[David Reis:]

So first of all I can talk on a high level, like I said in my short speech here we concluded all the major integration items on our list, okay? So worldwide the channel is cross trained for both sales, marketing, service and bench-marking okay? Now it takes time to ramp-up sales just because it takes time to learn, to educate the sales people and it is also a cycle time of selling of the machine. Now what we show them the slide is an increased months and months of creation of opportunities which means potential sales for the future within the channel worldwide. Now we expect this momentum to continue, as a channel get better understanding and better ability to sell, the cross sell the product. About this I’m not sure what I can add but we really concluded a huge job of cross selling which we’re giving (inaudible) as we speak to it.

[Jim Ricchiuti:]

One final question and then I will jump back in the queue. I know you can’t disclose a lot on this contract that you talk about in your press release this morning but I mean can you help us understand the significance of this, is this for instance among your largest orders that you’ve ever received, is this customer someone who has been using 3D printing in the past. Is there any additional color you could provide on that?

[David Reis:]

First of all it is one of the larger orders, strategies that we have ever got. In the customer like I said in the presentation is industrial customers which is going to use those printers around the world for all the technical application of additive manufacturing which is prototyping functional prototypes and end user parts, this is what concerns at this time.

[Operator:]

Thank you. Our next question comes from the line of Steve Dyer of Craig-Hallum.

[Steve Dyer:]

Just wondering if I can dig a little bit on the UPS deal, interesting deal, can you kind of talk a little bit about the model there as well as do they sort of view this as a trial or a beta and does this have the potential to grow that all of these guys or maybe others?

[David Reis:]

I think the significance of the UPS deal is first of all I personally find it very, very exciting this is an indication to the I think the very long way that the industry and the world around us go ahead in respect to additive manufacturing and 3D printing, okay? As the nature of the relationship is (inaudible) supply and let’s call it an experiment and exciting experiment by which we’re going to install the six UPrint’s and six of UPS stores and just to alter in respect to what is the level of usage and interest from the public around those stores, what is important to add that is the serving that was done by UPS suggested it's significant market opportunity. In parallel (ph) with them just want to mention that MakerBot very soon part of the Stratasys Group, recently announced that they will make available their products within 80 Microsoft retail stores in North America which is just adding I think to the excitement and the potential of this direction.

[Operator:]

Thank you. Our next question comes from the line of Paul Coster from JPMorgan.

[Paul Coster:]

Erez if I strip out the acquired revenue from MakerBot from the full year guidance and I assume sequential growth for the remainder of the business through the end of the year which seems pretty reasonable. Nonetheless, by the end of the year on well below 20% year-on-year growth, does that mean that I am wrong in assuming sequential growth and then perhaps it’s more back-end loaded than I have assumed in the fourth or do you feel like that it will get below 20% before resuming that organic growth again?

[David Reis:]

Paul, good morning. It’s David. The high end of the range of $445 in our regional guidance is exactly 25% year-over-year growth.

[Paul Coster:]

Organically?

[David Reis:]

Organically.

[Paul Coster:]

At the high end of the range, if I take out 25% from that I get $465 and that assumes presumably somewhere in the region of $110 million, $115 million in the fourth quarter for the remainder of the business ex-MakerBot?

[Shane Glenn:]

Well, let me try and help you. The original guidance that we provided at the beginning of the year we are $430 million to $445 million which represents an organic growth of 20% to 24% organically. We also said that the year will look like that revenue will be higher in the second part of the year as a result of integration efforts and we will be able to utilize and benefit there and the result of the integration more on the second part of the year. On top of that, we are now increasing the range or the guidance for 2013 and adding MakerBot numbers for the next 1.5 quarters.

[Paul Coster:]

Yes, I got that. I think most of my legacy business numbers were on, okay, I apologize that the other thing I wanted to say just touch on was the gross margins which are pretty flat from the prior quarter, notwithstanding the shift towards the DDM and consumables sales? Are we going to – do you think there is still leverage in the gross margin line from the shift to consumables which is welcome, but what are the gross margins for that consumables business and should we expect that to play out over the next few quarters?

[Shane Glenn:]

Paul, we didn’t provide a breakdown between the gross margin of the consumables and other products. And I think that the guidance we gave at the beginning of the year, the gross margin which you see today is inline with our expectation. It’s nothing new and no surprises. And I think that’s looking at the second half of the year, gross margin remained the same meaning we expect the same gross margin for the second part of the year meaning you have kind of around 59% gross margin I don’t know this year. And please remember that gross margin has different parameters when you look at it. It depends if you say direct or not direct mix of products deteriorating that we sell the mix between service, consumables, and products and the mix between the product itself. So, it’s difficult to measure and I think that as long as we were able to keep the gross margin in 59% which is in line with our expectation we are happy. Paul, just to add one other thing on your previous question regarding the balance of the year, take into consideration that Q3 is our seasonally weakest quarter. Obviously, (indiscernible) but seasonally Q3 is our weakest quarter. We only have MakerBot for the 45 days in Q3 and then you have a fairly strong sequential ramp that you see that we have been seeing from MakerBot. So, you need to factor that into how you look at the second half of the year?

[Paul Coster:]

Well, I think that answers my question actually. Thank you, Shane. Good, thanks very much.

[Shane Glenn:]

Thank you, Paul.

[Operator:]

Thank you. Our next question comes from the line of Cindy Shaw from DISCERN.

[Cindy Shaw:]

Thank you. A couple of questions if I may, talking about the consumables margins, there has been in the industry certainly an upward trend in the ratio of materials revenue to systems revenue. And I am wondering for Stratasys particularly with the acquisition of MakerBot, how do you think that is going to be impact the MakerBot acquisition and what you see for Stratasys or the company, are you expected to makeup growing share of your mix for revenue?

[David Reis:]

Thinking that MakerBot has a different business model compared to Stratasys, they rely more on sort of hardware. Today they are growing very, very fast however as they generate lower gross margin compared to the average gross margin of Stratasys. I don’t think it will have any impact on 2013 because we will have only quarter and half revenue in business from MakerBot and it's too early to say about 2014 but in general the gross margin of MakerBot compared to Stratasys is lower. Did that answer your question?

[Cindy Shaw:]

As an organization for MakerBot in terms of the ratio of materials revenue to systems revenue what will the profile look like there? And do they make a greater margin on their materials than they do on the systems?

[Erez Simha:]

It's a different business model compared to ours, I wouldn’t go into details about the gross margin and the different gross margin between consumers and product for MakerBot but in general I can say that the gross margin of the company MakerBot is lower than the average gross margin for Stratasys as a company. Still healthy, that’s very healthy.

[Cindy Shaw:]

Very healthy, okay, so it sounds like we think about them more as we approach 2014. I’ll change gears here if I may, the UPS stores I understand you can offer limitations, in terms of the six locations I obviously see a very small subset of UPS’s locations, are there particular demographics that they were looking for in this locations to trial for example an area that’s rich in engineers or architects, they are looking for really different type of customer.

[David Reis:]

I apologize but I don’t know the answer, I can look for it and maybe come back to you later. I’m not sure what was consideration for choosing those specific stores.

[Cindy Shaw:]

Okay and then finally find my I noticed a quarter-over-quarter improvement in the organic growth and I’m wondering what sort of factors do you think may have driven it was that internal factors where as you got the integration behind you, you can turn your eyes elsewhere or were there external factors was it demand to pool adds that you have been running, just what’s causing that acceleration organic growth if you may.

[David Reis:]

I think the leading reason is a fact that we’re focusing with integration, second one is always increased market activity and third is general increase and awareness and you know interest in worldwide customers but I think the highest impact has to do with the fact that we’re concluding the integration and concluding training on.

[Cindy Shaw:]

Okay and then one last clarification, it sounds like the integration going very well versus the plan. Would you describe it as been on plan or it sounds like maybe a little bit ahead of plan.

[David Reis:]

Compared to our original plans we’re definitely ahead of plan in the (inaudible) and better than our expectations.

[Operator:]

Thank you. Our next question comes from the line of Hendi Susanto from Gabelli & Company.

[Hendi Susanto:]

I’ve two questions, first would be able to share how you structure MakerBot’s current performance specifically I would like to understand like how high the financial hurdles and what criteria do you have for the quarter (ph).

[Erez Simha:]

We won't be able to give the details of that, all I can say that they are very, very aggressive and we will be very pleased to pay.

[Hendi Susanto:]

Okay and then second question is the majority of MakerBot sales is through direct online sales. Do you plan to leverage our global channel partners and change that business model?

[David Reis:]

We just before closing the transaction in the early stage of the PMI (ph) process we have a lot of opportunities in respect to MakerBot but first of all I would like to say we did a conference call few months ago, we tend to use to keep MakerBot as a standalone company and they allow them to maximize their market presence and brand. Nevertheless there is a lot of opportunities in synergies mostly on the IT and technology side and utilizing the strategies worldwide infrastructure and reach and so on, but again, we are in the process of planning. So, at this point of time, this is what I can say there are a lot of opportunities to (inaudible) between the companies.

[Hendi Susanto:]

Thank you.

[David Reis:]

Thanks Cindy.

[Operator:]

Thank you. Our next question comes from the line of Brian Drab from William Blair.

[Brian Drab:]

Hi. I just have a few questions. Thanks for taking my questions. First, I would like to talk about the increase in the guidance we are seeing just make sure that I understand this, it’s been talked about, but I don’t think it’s really clear yet. The midpoint of the guidance is up $30 million for revenue for 2013, you have 4.5 months contribution from Maker as we have talked about, if that was exclusively due to Maker, that would suggest that MakerBot is on $80 million revenue run rate for the back half of this year, it would make much more sense I think that given their first quarter result of $11.5 million that they would be more on the maybe $50 million to $60 million run rate. That would imply that something I guess the large order that you took had a material effect on the guidance increase. And I don’t think that’s really come through yet, I don’t know if Shane or Erez you could talk about that?

[Erez Simha:]

Yes, I think that the midpoint of MakerBot represents quarter and a half as you said of our revenue, just wondering that there is a large range between the low point and the highest point of $25 million to $35 million and the range it was added to revenue. I wouldn’t do the math in order to take conclusion on MakerBot annual revenue or MakerBot annual run rate now I would rate until end of Q3 this is the result of MakerBot, there is a relatively large range there of almost 40% between $25 million to $35 million that might be misleading.

[Brian Drab:]

Okay. Is it clear though that large orders that you took from the Fortune 500 company got a material effect on the increase in your guidance or not?

[Erez Simha:]

No, it is not. The (inaudible) is part of Stratasys business and we didn’t change Stratasys guidance for 2013. We just headed the MakerBot numbers.

[Brian Drab:]

Okay. So, just to be absolutely clear, the increase in the revenue guidance only has to do with incorporating MakerBot’s results into the consolidated result?

[Erez Simha:]

Right, right.

[Brian Drab:]

Okay, sorry if I didn’t get better earlier, but it’s the numbers that weren’t adding for me. And then I just want to make sure I understand this salesforce.com slide, which is very interesting, just point of clarification, is this a slide that’s representing cumulative opportunities or new opportunities meaning if you had hundred opportunities in January, does that mean that you took 100 or you created 100 or logged 100 opportunities in January, and then you logged 118 new opportunities in February or there are 118 cumulatively in the system in February?

[David Reis:]

Brian, those are not cumulative. Those are numbers for the individual month. So, those percentage increases are to increase over the prior month sequentially.

[Brian Drab:]

Wow, okay. So, this is suggesting that you took 100 in January and then you grew that 18% and then grew that 20, those are all relates here up to into the 200 plus level by the time you get to June just in the month of June taking on 200 or 250 new opportunities?

[David Reis:]

That’s correct. The key point that I think in mind here is that we brought many new resellers on to salesforce.com with the integration. So, there is also a learning curve there that pretty see curve with some of the resellers that are using saleforce.com, which could have a little bit of an impact on that. Not to take away from the fact we are very excited about the data. And in fact that we are seeing lots of activity within the channel as far as prospects that could buy a system.

[Brian Drab:]

Okay. So, you said in my own words, I guess. So, in January, you didn’t have all of your resellers and purchase trading in the use of the salesforce.com and now you have many more that are participating and some of the growth is just a function of that?

[David Reis:]

Yes.

[Brian Drab:]

Okay, okay. And last question on the service gross margin, great step-up sequentially. Have you said you are on the call here what you expect for the back half of the year in service gross margins 38ish type level, what we should expect?

[David Reis:]

Yeah. We expect similar gross margin for the rest of the service.

[Operator:]

Our next question comes from the line of Andrea James from Dougherty.

[Andrea James:]

Moving so well in your prepared remarks and thank you for taking my questions, Microsoft has a 3D printer driver for Windows 8 they are talking about and now they're saying they will be selling Makerbot printers, and I’m just curious to get your get your thoughts on the partnership with Microsoft and whether or not you think the new driver will have maybe material impact on what you guys can do?

[David Reis:]

Again, I don’t want to describe it in terms of big impact. I think it's another step in the overall move and adoption of additive manufacturing and desktop printers in a wider population and I don't want to say that this is kind of turning point. It's one step in the process. This is where I think you should have seen very important step because it's coming from Microsoft, because it's driver but it's part of a process.

[Andrea James:]

Okay. Thank you and then when MakerBot units become your units, do you think you'll break those out when you start reporting unit sales, because clearly they're going to spike a lot?

[David Reis:]

As we see, now I think that we will provide unit numbers as long as they bring in any added value for understanding our financials.

[Andrea James:]

Okay. And then just finally do you have a target gross margin that you are managing toward?

[David Reis:]

We have our long term model.

[Erez Simha:]

Yeah. Are you talking about 2013 or long-term?

[Andrea James:]

Long term.

[Erez Simha:]

So, we didn't provide any long-term gross margin, we did provide growth in net income and tax rate but we didn't provide any gross margin targets for the long-term.

[Andrea James:]

Okay. And do you have when you're managing toward them for this year that you've already disclosed, that I missed?

[Erez Simha:]

No.

[Operator:]

Thank you. Our next question comes from the line of Holden Lewis from BB&T.

[Holden Lewis:]

When you talked about this big new order, I guess what I am curious about is, is what this is telling us about getting more sort of big new orders and I think there is a lot of activities that you’re prototyping, single units there sort of thing and the idea that may be you might start taking more defused (ph) multi-unit, large unit type orders it's pretty exciting. Can you tell us about what this says us about the rate at which we might be seeing more and more of these? Is it kind of the (inaudible) raising or if this just be viewed as a one-off?

[David Reis:]

Again I think that I need to go back to my previous answer regarding the driver of Microsoft. I think it's another indication to the rapid adoption of this technology also manufacturing by large and small manufacturers. This specific company has now decided to place a large order as part of their long-term plan to use this technology. I think it's just another indication to where the industry is going. Again, I don't want to say that this is kind of another breaking point or a dramatic change. I think it's part of a process and a very good indication to where we’re going to but not more than this.

[Erez Simha:]

Holden we’ve always been (inaudible) enthusiasm because as you know and we’ve talked about often is that, education and awareness continued to be varies for us with some of these applications. But at the same time, we’re seeing greater acceptance of the technology for broader applications for large companies.

[Holden Lewis:]

Okay. So when you think about this is only a single order, you don't want to put much color around that. But I mean, are you in talks that for a lot of more of these type of things somewhere down the road or again are these talks are kind of unique and you wouldn't again there is no trend here if you will.

[David Reis:]

Obviously, we cannot disclose this kind of information. But again, more than a few large manufacturing companies around the world are evaluating, experimenting, using additive manufacturing for manufacturing into engineering processes and I think it's going to be a small secret to say that this spaces is accelerating.

[Holden Lewis:]

Okay. And sort of also related to this, how does this work in terms of you now have got the order, how long does it take to sort of install these machines and get certified in the process, I mean at what point do you start to see meaningful material coming out of it. Is that sort of a one month process, three months, six months?

[David Reis:]

Typically first of all, we've said earlier in the openings that we expect to install the systems in the second half of the year. And typically it takes time for customers to ramp up the production, it's ranging for few weeks to few months. This is typically is what we see.

[Holden Lewis:]

Okay. And then just one piece of housekeeping, you have mentioned I think that RedEye was up 34% I think in the quarter? I didn't hear the maintenance increase.

[David Reis:]

You're talking about service, customers, service or product service?

[Holden Lewis:]

Right.

[David Reis:]

We were talking about…

[Holden Lewis:]

It was about $0.48 right? And that's usually comprised of RedEye as well as the other stuff and maintenance and I think in the past you've given us the RedEye growth and the maintenance growth that comprises that?

[David Reis:]

Yes so it's 28%.

[Erez Simha:]

The customer service is up 28%.

[Holden Lewis:]

Customer service is up 28%?

[David Reis:]

Yes.

[Holden Lewis:]

Well then within that and within that RedEye was up 34, but RedEye is not the total piece there is also maintenance and other things in there?

[David Reis:]

Absolutely, the tradition of service business of Stratasys both from the PolyJet and FDM.

[Holden Lewis:]

Right and do you what that was up?

[David Reis:]

No, we didn't provide the breakdown between the growth and services of FDM and PolyJet.

[Operator:]

Thank you. Our next question comes from the line of (inaudible).

[Unidentified Analyst:]

And coming back to MakerBot, I know you guys aren’t providing any specifics on margins. But can we at least know if they are profitable right now and the ultimate, and long-term within your model, how high do you believe MakerBot operating margins can go?

[David Reis:]

First of all, MakerBot is profitable and we intend to keep the MakerBot business as independent during the next few quarters. I think it will take time to leverage the fact that MakerBot is part of group that can leverage our channels and global presence in IP and technology capabilities. But we’re working on long-term plans for MakerBot for the business model of MakerBot to create a more similar business model to the current one of Stratasys. It's not a matter of a quarter or two or not even three or four, it's a longer term work that we have been…

[Unidentified Analyst:]

Right. And so, you don't really have any idea of what you're targeting as far as up margins and profitability in longer term?

[David Reis:]

We said the longer-term MakerBot is going to be accretive to earnings per share, okay, this we said and this is what we can say at this point of time.

[Operator:]

Thank you. Our next question comes from the line of Bobby Burleson from Canaccord.

[Bobby Burleson:]

Just in terms of the large customer that large order that came in, I'm assuming since you didn't change your growth expectations for the Stratasys standalone business is here and all of the increased revenue guidance is for MakerBot. Was this large order something you have been working on for a while and was already kind of factored in to your expectations or did something change in the actual mix of Stratasys business that you were expecting this year when this came in?

[David Reis:]

No, what I said is this is large order relatively to the average size of order that was 60 days significantly higher. And again if you look at the H2 business and the order within a H2 business, it doesn't create any change in our estimation for 2013. Yet the order as a standalone order from one customer is very, very large compared to the average order side that we have today on the table.

[Bobby Burleson:]

Right. But was this something that you were already aware of earlier in the year when you guided 2013?

[David Reis:]

No. It was started after we provided the guidance.

[Bobby Burleson:]

Okay. And I know you don't want to say that the dam is breaking or this is a watershed moment or anything, but are there similar discussions with other companies where these types of orders could come in, let's say over the next six to 12 months that aren't necessarily in your pipeline and if so, how many types of discussions are you having that could lead to this type of similar order of this magnitude?

[David Reis:]

We cannot disclose this kind of information unfortunately.

[Bobby Burleson:]

Okay. And are you seeing these as sort of inbound calls to you from large customers or is this part of your outreach or marketing or is it more kind of customer pull?

[David Reis:]

It's part of our overall relationship with those customers around the world, it's not, we’ve ongoing relationship with many, many large and small for many years and this is part of this process.

[Bobby Burleson:]

Okay. And then just quickly on market share. Are there any takeaways now that we have had the two big guys report, what are you seeing in the market share front? Should we be drawing any kind of influences in terms of market share based on the unit trends that we've seen so far in the first half?

[David Reis:]

Again I don't think we can draw any new conclusions compared with what we're familiar with before and I think none of the players are disclosing the full numbers, it's very, very, very difficult to estimate. What we the industry as a whole is growing, we are part of the industry and we’re growing fast and I think it's a good enough indication to where everything is going but I can't give any indication on significant change in market share as we don't have such data.

[Bobby Burleson:]

Okay. And then just one last quick one, in terms of MakerBot and the Cube, how do you see the machine stacking up against to one another?

[David Reis:]

Again I’m not sure if you intent that will be the fully kind of technology comparison presentation, which I can't do and maybe I'll prefer to talk on the MakerBot. The MakerBot is a great machine with extremely high accuracy, a very fast and well positioned, good reliability, and as I think Erez indicated earlier, MakerBot are selling nicely and according to the plan. I don’t want to really now to get into a technical comparison which I can’t do.

[Operator:]

Thank you. Ladies and gentlemen, I would now like to hand the call back to your CEO, David Reis for closing remarks.

[David Reis:]

Okay. I want to thank everyone for joining us on the call. I look forward to speaking with you again next quarter. Thank you very much and good bye.

[Operator:]

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