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Stratasys, Ltd. (NASDAQ:SSYS)

Acquisition of MakerBot Conference

June 20, 2013 07:00 AM ET

Executives

Shane Glenn - VP Investor Relations

S. Scott Crump - Chairman of the Board

David Reis - Chief Executive Officer

Bre Pettis - CEO and Co-Founder of MakerBot

Erez Simha - Chief Operations Officer, Israel and Chief Financial Officer

Analysts

Troy Jensen - Piper Jaffray

Jim Ricchiuti - Needham & Company

Steve Dyer - Craig-Hallum

Cindy Shaw - DISCERN

Holden Lewis - BB&T

John Baliotti - Janney Capital Markets

Tim Mulrooney - William Blair

Hendi Susanto - Gabelli & Company

Andrea James - Dougherty & Company

Daniel Holland – Morningstar

Rob Stone - Cowen & Company

Operator

Good day, ladies and gentlemen. Welcome to the Stratasys Conference Call to discuss the acquisition of MakerBot. My name is Dave. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. You are kindly requested to ask one question and then rejoin the question queue. (Operator Instructions). As a reminder, the call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Shane Glenn, Vice President of Stratasys. Please go ahead, sir.

Shane Glenn

Thank you, Dave. Hello, everyone, and thank you for joining us today to discuss the merger of Stratasys and MakerBot.

On the call with us today are Scott Crump, Chairman and Chief Innovation Officer of Stratasys, David Reis, CEO of Stratasy; Bre Pettis, CEO and Co-Founder of MakerBot, and Erez Simha, COO, Israel and CFO of Stratasys.

Following the prepared remarks today, we will open the call for questions. A slide presentation will accompany today's prepared remarks and can be accessed with the link provided in our press release. A replay of today's call will also be available on our website later today.

I'll start with the forward-looking statement. Statements made during this call about Stratasys' beliefs, intension and expectations, including statements regarding the expected timing and ultimate closing of the merger of Stratasys and MakerBot, as well as the benefits thereof, are forward-looking statements.

The statements involve risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those projected in this presentation. Actual results may differ materially due to a number of factors, including risks and uncertainties relating to Stratasys' ability to penetrate the 3D printing market, Stratasys' ability to achieve the growth rate experienced in preceding quarters, Stratasys' ability to introduce produce and market consumable materials and market acceptance of those materials; the impact of competitive products and pricing; Stratasys' timely development of new products and materials and market acceptance of those products and materials; the success of Stratasys' recent R&D initiative to expand the DDM capabilities of its core FDM technology; the success of Stratasys' RedEye On Demand and other paid parts services; and Stratasys' ability to complete its transaction with MakerBot on a proposed terms and schedule and achieve the anticipated benefits of the transaction.

These and other applicable factors are discussed in this presentation and in Stratasys' filings with the Securities and Exchange Commission, including its report on Form 10-K for the period ended 12/31/2012 and subsequent filings.

Any forward-looking statements included in this presentation are as of the date they are given and Stratasys do not intend to update them if its views later change, except as maybe required by law. These forward-looking statements should not be relied upon as representing Stratasys' views as of any date subsequent to the date they are given.

Now, I'd like to turn the call over to Scott Crump, Chairman and Chief Innovation Officer of Stratasys. Scott?

S. Scott Crump

Thanks, Shane. Hello, everyone. As most of you know, about 14 months ago we announced a game-changing transaction in the 3D printing and additive manufacturing industry. That transaction was a merger of Stratasys with Object to create a clear category leader in 3D printing. The merger is living up to its promise as evidenced by the financial performance, market strength and strong momentum of the combined company as the transaction closed in December. Today, we are pleased to announce another transformative transaction. We've signed a merger agreement with MakerBot, the leader within the rapidly growing market of desktop 3D printers. By merging Stratasys and MakerBot, we move Stratasys into an exciting and rapidly growing desktop 3D printer market.

Now, I would like to turn the call over to David Reis, CEO of Stratasys for some insight into the business case for combining MakerBot and Stratasys. David?

David Reis

Thank you, Scott. The desktop 3D printing market is comprised of 3D printers that provide a portable 3D printing access to individual within or out of enterprise or business arena. This represents an unpenetrated market for Stratasys and unite two leaders in the 3D printing arena we share division for enormous potential in this category.

Desktop 3D printers have evolved into system that are appealing to professional and non-professional users across the wide range of industries and applications. It has been widely reported that MakerBot has major customers in organization like GE, NASA and Lockheed Martin, and continue to sell its desktop 3D printers to other Major Fortune 500 companies as well as small entrepreneurial startups and individuals.

MakerBot has been truly the next industrial evolution within the desktop 3D printing segment. We believe this trend is similar to the evolution of personal computers. We started this kids based products for enthusiasts, became mainstream tool in business and industry as the portability, assess and ease of use improved.

We share MakerBot's view that desktop 3D printing is going to follow similar evolution. Increasingly, desktop 3D printing will enable individual designers, engineers and manufacturer to routinely incorporate 3D printing into the work for product development and design applications.

Desktop 3D printing usage among design and engineering professional is growing rapidly. Stratasys and MakerBot estimate that between 35,000 to 40,000 desktop 3D printers were sold in 2012. This number is estimated to double in 2013, as consumers increasingly adopt desktop 3D printers for broad range of applications.

MakerBot is experiencing exceptional growth. Last year, the company generated revenues of approximately $15.7 million, fast forward to 2013, the first quarter of this year alone, the company generated revenues of $11.5 million. Driving overall industry growth, including growth in the desktop 3D printing is a proliferation of digital 3D content combined with expanding accessibility and affordability of those systems. This represents a significant opportunity for our combined product portfolio given the wide range of solution we provide individual and commercial users.

As a combined company, we will be offering 3D printers priced from $2,200 to more than $600,000 suitable for home, desktop, professional and industrial uses. We believe MakerBot has been very successful in meeting and surpassing the need of desktop 3D printing users. The evidence for that is in the revenue growth I just mentioned as well as the strong brand and market presence the company has built. In addition, MakerBot CEO, Bre Pettis is a leading voice and promoter for the industry.

As those of you familiar with Stratasys know, we have been pioneering in the 3D printing and additive manufacturing. We are passionate believers in the value and the power of 3D printing and the progress it can enable in multiple fields.

Bre and his team has built at MakerBot, share our passion for the technology and the possibility it presents. Together, we will offer the best and most complete line of 3D printing systems, deliver the user experience that encourage adaptation by making 3D printing more accessible than ever and provide a host of complimentary product and services that will promote proliferation of 3D printing in both established and emerging application.

I am now going to turn the call over to MakerBot's COO, Bre Pettis. Bre.

Bre Pettis

Thank you, David. Okay. Here we go. To begin, I want to echo your comments about the enormous potential we see for 3D printing, and it hone my belief that we can best fulfill the promise of this technology working together.

Our company shares a vision about how to lead the market's growth and development and it's all about creating a great user experience. We are very proud of what we have built at MakerBot, but we've only just begun. That's why we are so attracted by the opportunity to join with Stratasys.

Our mission remains the same. Merging with Stratasys offers us an opportunity to continue to build our business and pursue our vision under the MakerBot brand. The last couple of years have been incredibly inspiring and exciting for us. We have an aggressive model for growth. Partnering with Stratasys will allow us to supercharge that mission to empower individuals to make things using a MakerBot and allow us to bring 3D technology to more people.

I am excited about the opportunity this combination will bring about to our current and future customers. We have the ability to benefit from Stratasys' processes, intellectual property, technical expertise, R&D investment and global reach. We believe we can further improve our products by combining our knowhow with Stratasys' proven expertise in Fused Deposition Modeling.

We believe the affordability, access and ease of use that we are delivering in the desktop 3D printing market will eventually translate into new growth opportunities for the current Stratasys product portfolio.

MakerBot is an innovation company. We innovate, so others can innovate and we believe 3D printing is fueling the next industrial revolution. We've been a pioneer in desktop 3D printing, which provides affordable 3D printing access to individuals from engineers, architects, designers, entrepreneurs and educators in addition to hobbyists and makers.

We believe we are the market share leader in desktop 3D printing with more than 22,000 systems sold since 2009, the industry's largest gain over that period by a wide margin. We are headquartered in Brooklyn, New York, and are privately owned today.

We currently employ about 274 people and are continuing to hire reflecting our growth and demand for our products. Those products include two lines of desktop 3D printers. The MakerBot Replicator 2 Desktop 3D Printer, and the MakerBot Replicator 2X Experimental 3D Printer. These are our fourth generation 3D printers and are sold fully assembled, they retail at prices ranging from $2,200 to $2,800. We have a rich MakerBot 3D ecosystem which we'll discuss later.

MakerBots are made with a special ingredient, Brooklyn pride. We will continue to manufacture these products in Brooklyn, where we just opened a new 55,000 square foot production facility in the Sunset Park neighborhood. Our products are known for affordability, ease of use, reliability and performance. We manufacture our own MakerBots filament. We recognize Stratasys' strength in materials development and manufacturing and believe materials are one of many opportunities for future collaboration.

The majority of our sales come from customer orders placed directly through our website, www.makerbot.com. Sales from the site account for about half of our revenue. We also sell through distributors outside the U.S. We have a MakerBot store in the New York City that serves as a showroom and demonstration site.

About 60% of our customers are in North America, the remaining 40% in international market. We offer our customers tech support though phone, e-mail and online user forums. We also have a Maker care plan for MakerBot 3D desktop printers, where customers can purchase after care for parts and services.

I can confidently tell you that MakerBot has built the strongest brand in desktop 3D printing. We are leading the next industrial revolution to empower creative explorers to make anything. MakerBot is setting the standard in desktop 3D printing. We are changing the face of personal manufacturing and changing the way the world thinks about things.

MakerBot's strength comes from the spirit of collaboration we have fostered with our users and partners. We have built a strong and loyal user community on Thingiverse.com, a platform where users can share and customize digital files that can be printed on their desktop 3D printers. This site has become the single largest repository of content for 3D printing. It has more than 90,000 3D product files available for sharing and generates more than 500,000 unique visitors and 1 million downloads each month. We've only begun to tap the massive potential of 3D printing.

For example, we are collaborating with other brands to create their own brand of Thingiverse pages. We can work with corporate and individual clients to provide design files for printable product. The Thingiverse platform is just one element of the MakerBot 3D ecosystem with which we surround our 3D desktop printers to encourage trial and adoption and make them more productive to use.

This fall, we are excited to be introducing the MakerBot Digitizer Desktop 3D Scanner, which makes it easier for users to create 3D printable files from physical objects. In the MakerBot store in New York City, we have a 3D photo booth that takes a 3D portrait, which you can print out and have a copy of your head or bust. We also offer 3D printing events, lectures and workshops in the MakerBot store for adults and kids.

We have MakerWare software that slices 3 dimensional designs and makes it easier to print them. In addition, we also continue to collaborate with third priority providers of 3D design and engineering software to make it easier to take full advantage of the capabilities of our printers. Currently, we have relationships with Autodesk and support their 1, 2, 3D family of products. Like Stratasys we provide a service (bearer) [ph] approach to our desktop 3D printing, which gives corporate users access to clusters of our machines in our bot farm and technicians on-site to help them with 3D printing projects.

This combination of affordable printers and a 3D printing ecosystem has won us multiple industry honors. The MakerBot Replicator Desktop 3D Printer was named overall winner of 3D printer by Popular Mechanics, and also received their Editor's Choice Award. Popular Science named our printer Product of the Year.

Time Magazine honored us by naming our product one of the best inventions of 2012. We were named Best Emerging Tech at the 2012 Consumer Electronics Show, and we're awarded a TechCrunch Crunchies Award for best hardware startup. Fast Company honored us with the 2012 Innovation by Design Award and also named us one of the World's Top-10 Most Innovative Companies in Consumer Electronics. Entrepreneur Magazine just highlighted us in a 100 Brilliant Companies issue. In short, we are an organization with an incredible momentum that we think will only be strengthened by merging with Stratasys.

Our leadership team is also excited about the opportunity to emerge with Stratasys. We have aggressive plans for future growth. Partnering with Stratasys will allow us to speed up our vision for 3D printing. As I said in the beginning of this call, we see the combination of MakerBot and Stratasys as a way of accelerating our mission to bring 3D printing to more people full speed ahead.

I'll now turn the call back over to David Reis, CEO of Stratasys for additional insight into the business for combining BakerBot and Stratasys. David?

David Reis

Thank you, Bre. I would also like to add my enthusiasm over the potential this transaction creates for our combined company. Combining Stratasys and Object created the company very well equipped to serve the 3D printing markets. The new Stratasys now offers multiple technology platform and complementary products that can reach customers and prospects through global sales and marketing organization encompassing a strong metric of resellers and agents.

Combining with MakerBot further strengthen our capabilities. The leadership team at Stratasys and MakerBots will be working together to jointly identify and act on opportunities to create value for our complementary strengths. The longer term opportunities could include accelerating MakerBot's reach by leveraging Stratasys' global infrastructure. Close promotion product into the install base of the combined companies, leveraging Stratasys' extensive knowhow in Fused Deposition Modeling to benefit MakerBot product line, but most important seeking to make advantage of the affordability of MakerBot product portfolio to drive 3D printing to more individual desktop for private, commercial and industrial users.

The overriding rationale for combining our companies rest in the last point is opportunity to accelerate growth. To make the point, I want to share something we learn as our discussion with MakerBot we are underway. MakerBot recently surveyed its customer base. Among the interesting finding of that survey, nearly three quarters of MakerBot customers reported that they use their desktop 3D printers in their workplace. More than half of them are engineers and design professionals.

What this suggest is that while MakerBot products are indeed very attractive to the hobbyist and make your customer that also appeal to professional and manufacturing. Design and engineering for use in the work they do every day. In fact, it is 3D printing users who fit this description that make us the majority of MakerBot customer base.

We mentioned earlier that MakerBot products are used by designers and engineers at GE, NASA and Lockheed Martin and in other industrial and commercial customers. What is important to understand is that this is no longer an exception. Use of desktop 3D printing by design and engineering professionals is becoming main stream. We view it this way. It is a hierarchy of needs and application in the 3D printing from conceptual and modeling through design, verification and visualization and onto functional testing and end use pass for manufacturing.

MakerBot is very successful is very successful at serving a range of these needs with its desktop 3D printers across multiple industries and multiple design and engineer applications. Furthermore, MakerBot data in our own experience confirm that using 3D printing technology tend to create new demand for 3D printing capabilities customer acquire the technology for one use and then discover its utility in other areas as well. This lead us to the core case for this combination.

We believe MakerBot is ideal fit for our strategy to drive adaption of 3D printing to increase accessibility. In fact, in terms of making 3D printing more accessible, no one is doing it better than MakerBot. MakerBot is doing a great job in three fronts.

First, awareness. We agree with reassessments that MakerBot is a strongest brand within the desktop 3D printing segment to-date. The company has great story with a great [spokesmen] with a growing network of royal customers who are spreading the word. That's among the reasons why we intend to have MakerBot continue to operate as a separate subsidiary within Stratasys once this transaction is closed. There is clearly strong opportunity to leverage the category awareness that MakerBot has built and continue to build.

Second, affordability. As we mentioned, MakerBot's current product retail it prices from $2,200 to $2,800. That is a price point significantly below the threshold that typically require layers of approvals or involvement of corporate procurement function, rather MakerBot products are often been purchased by individual users via credit card for MakerBot's website. In short, MakerBot's pricing makes accessing desktop 3D printing within industrial and commercial setting a lower risk proposition.

Third, customer experience. MakerBot's accomplishment in building awareness is brining affordable system to market would be for nothing if experience of using MakerBot's products were unsatisfactory. MakerBot has built a devoted support department and offers technical through wide channels to continually update and provide assistance to its customer base and community. In addition, MakerBot has developed and continue to develop an array of offering that enable customers to be successful with its systems.

This MakerBot 3D printing ecosystem helps create user experience that encourage experimentation and repeated use. Element of this ecosystem includes more significantly the [vigorous] platform, which enable user to quickly access ready to print 3D content. Moreover, MakerBot desktop 3D scanner is for to boost application its MakerWare software and its ongoing partnership with other card and 3D modeling software providers and up to the desktop 3D printing ecosystem that helps customer become successful and proficient user quickly.

In summary, we believe that affordable accessible desktop 3D printing experience provided by MakerBot will acceleration adaption of 3D printing very broadly and enable it to become more embedded in the way our current and future customers do business.

Now, I will turn the call to Erez Simha to fill you in on the terms of the transaction. Erez?

Erez Simha

Thank you, David, and good morning everyone. As you saw in the news release we issued this morning, Stratasys has signed a merger agreement to acquire all of the outstanding shares of MakerBot.

Stratasys will issue 4.76 million shares of its stock in exchange for 100% of the outstanding capital stock of MakerBot. The proposed transaction has an initial value of $403 million based on the closing price of Stratasys' shares on June 19, 2013.

In addition, subject to meeting certain performance target, MakerBot stakeholders will also qualify for performance-based earn-outs that provide for additional compensation of up $201 million in payment based on the price of Stratasys' shares on June 19, 2013 through the end of 2014.

Those payments, if earned, will be made in equity or cash or combination of both at Stratasys discretion. We currently expect the transaction to close during the third quarter of 2013. MakerBot reports that during the third quarter of 2013, the company generated $11.5 million in total revenue, compared to $15.7 million for all of 2012.

We expect the merger accelerate Stratasys' growth rate and be slightly dilutive to Non-GAAP earnings per share in 2013, and accretive to Stratasys' Non-GAAP earnings per share by the end of 2014.

The combined company will be the leader in the 3D printing and additive manufacturing category and variable solutions to act on opportunities in the fast-growing and under penetrated market. MakerBot will continue to operate under its brand name as Stratasys company and in under the direction of the current leadership team. Completion of the transaction is subject to customary closing conditions including the expiration or termination of the applicable waiting period and the (Inaudible).

As Scott mentioned earlier, with the prior stoppages of this merger is leading us to (Inaudible) and the company is performing well is compared with last year's first quarter 2013 first quarter revenue grew 18%. Our growth in operating margin expanded and non-GAAP net income grew 40%. Combining MakerBot and Stratasys, we alter our target operating model gives [us] go-to-market approach and other cost structure and [revenue]. We will provide updated 2013 financial guidance including pro forma guidance after we report our second quarter results in early August and have closed our transaction with MakerBot.

Overall, [combined] company will be positioned to achieve higher rate of revenue operating income and net income growth than our current business. With a strong balance sheet and cash position Stratasys has the liquidity and flexibility to make up for investment in market expansion it's joining with MakerBot will accelerate.

I will turn the call back to David Reis now.

David Reis

Thank you, Erez. We are excited to be making this announcement (Inaudible). Combining Stratasys and MakerBot unite two pioneers and in the 3D printing and additive manufacturing to create a new market leader. I am very confident that the combined company will deliver superior product the customer will find these products easier to use than ever before, but the user experience for our customers will be continually enriched by the complementary offering we surround our products with.

This conclude our prepared remarks. We will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Please standby for your first question, which comes from the line of Troy Jensen at Piper Jaffray. Please proceed.

Troy Jensen - Piper Jaffray

Congratulations to both sides on this acquisition, gentlemen.

David Reis

Thank you, Troy. Good morning.

Bre Pettis

Thank you, Troy.

Troy Jensen - Piper Jaffray

So, quick, I have a two-part question here on consumables and start with Bre. Could you just give us any insight into what you think the average consumable usage is in one of your replicators and then for David, to me it appears like you guys have a different philosophy on consumables. Stratasys (inaudible) have obviously been more proprietary closed systems where MakerBot has been more of an open community, so how you are going to balance that different approach?

David Reis

First of all MakerBot provides the competitive pricing for that segment and we believe customers will like to buy the original filament manufactured by MakerBot to make sure the printers produce better quality and to have that service. In the long-term we believe the combined company will be able to add new and improved materials to MakerBot offering. And, I can say by the way that current material sold by MakerBot are sold in a very good gross margin.

Troy Jensen - Piper Jaffray

Bre, a thought on usage in your systems, annual consumption?

Bre Pettis

The thing that I am most excited about as we enter this merger is the opportunity to access the deep technical expertise at Stratasys. Our materials are excellent and we are going to be able to expand that product line in the future and just thinking about that gets me excited.

Troy Jensen - Piper Jaffray

But, no, you guys still want to comment on the usage on the consumable consumption at MakerBot.

David Reis

Nothing this time. No, Troy.

Troy Jensen - Piper Jaffray

So then how about just a follow-up for you, David. Do you view this acquisition as an offensive acquisition, where you are trying to acquire the brand, ecosystem, Thingiverse, and kind of push intellectual property down, or it's just more of a defensive move while we take out maybe the only potential threat coming up from the low end and maybe prevent a larger company from getting into this market?

David Reis

No. I think that if you go backwards to what you said all the time since the merger and before the merger, it's Stratasys’ intention to be and lead this market and I think we have a great opportunity you are joining forces with the leader in the desktop part of the market and we are not acquiring a printer, we are acquiring a total solution, which includes the ecosystem, the ability to sell over the web, great products. So, I see it as a part of our strategy and not as a defensive move.

Troy Jensen - Piper Jaffray

All right. Gentlemen, good luck going forward.

Bre Pettis

Thank you, Troy.

Operator

Thank you. Your next question is from John Baliotti at Janney Capital Markets.

John Baliotti - Janney Capital Markets

…and kind of your thoughts on it just conceptually and one of things that you brought up as very important to you was content?

Bre Pettis

I am going to interrupt you. We didn't hear the beginning of your question. Can you please repeat?

Operator

Go ahead Jim, your line is open.

Jim Ricchiuti - Needham & Company

Yes. Hello?

Bre Pettis

Hi, there. You've got us.

Jim Ricchiuti - Needham & Company

Yes. Jim Ricchiuti with Needham & Company.

David Reis

Good morning, Jim.

Bre Pettis

Hey, Jim.

Jim Ricchiuti - Needham & Company

Good morning. Congratulations. I wonder if you can comment on the go-to-market strategy going forward for the MakerBot products.

David Reis

Maybe I'll take this question. We said during the early part of the call that it is our intention to keep MakerBot as a standalone independent company, which means basically we are going to follow the current MakerBot go-to-market strategy, which is mainly based on Internet sales, but not only on Internet. We will evaluate over time the ability and look for synergies between MakerBot and Stratasys in very large international infrastructure, but again it will be done in the way that will keep MakerBot way of operation as it is today without trying to change it.

Jim Ricchiuti - Needham & Company

Okay. Thanks, and what does this do, do you think to either of you if you comment on this to the in terms of accelerating the development of additional product potentially lower cost 3D printers.

David Reis

I think, we have a great opportunity here. MakerBot is basing their product, which we all believe are the leading product in the market on the FDM [Fused Deposition Modeling] technology. I remind you and everyone that FDM technology was invented by Scott Crump 25 years ago, so there's a lot of knowledge and deep understanding and expertise within Stratasys both on the hardware side of it and in product, in material development which we intend over time and gradually share with MakerBot, which I believe will make it possible for MakerBot to have even better products and more attractive, exciting product in the future.

Bre Pettis

It is going to be a wild ride. Hang on tight.

Jim Ricchiuti - Needham & Company

Okay. Thanks a lot.

Operator

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

Steve Dyer - Craig-Hallum

Just one quick one for me as it relates to the synergies kind of the dilution and accretion that you laid out. Is that, what synergies given that it seems like MakerBot is going to be sort of business as usual separately run et cetera. What synergies do you see and is the dilution/accretion maybe more a function of where MakerBot is in the profitability curve?

David Reis

Maybe I will take the first part of it, and I'll let Erez talk about the accretion/dilution element of it. From the point of view of Stratasys - synergies and we - part of the post-merger integration process, we are going to look very carefully in opportunities to leverage Stratasys' global infrastructure. We’ll look in opportunities to cross-promote products into the installed base of the combined companies.

And as I said earlier, we’ll look for opportunities to leverage Stratasys' extensive knowhow in SBM technology and both, in respect to hardware and materials, so this is where we are going to look for synergies and there are great opportunities there and I will let Erez comment on the financial side of your question.

Erez Simha

Good morning. We expect the merger to be accretive by the end of 2013, and slightly dilutive in 2013, and we say so we're assuming no synergies will happen 2013 and 2014. We have still work to do between signing to close them and we might identify some synergies that will fall into the model. Currently the accretion in 2014 and dilution in 2015 are without synergies. We will update you in guidance on our long-term model and also 2013 after we report the second quarter and for result and close the transaction.

Steve Dyer - Craig-Hallum

Okay. Then one follow-up. Any plans to sell the MakerBot product through the existing reseller channel or is it going to be strictly go-to-market as it is right now?

David Reis

Again, as I said earlier, what we can say at this point of time that we are confident that our synergies which are related to Stratasys' worldwide infrastructure and reseller network, but we are early in the PMI process. And, as I said, we are going to look for such opportunities and we will update as we will know more about it.

Operator

Your next question comes from the line of Cindy Shaw at DISCERN.

Cindy Shaw - DISCERN

…reason over time and I remember at the Analyst Day.

Bre Pettis

Cindy, I am going to interrupt you. Can you start over? We came into to your question midway.

Cindy Shaw - DISCERN

I am sorry. Thank you. Congratulations. I wanted to ask about the price trajectory of both the Stratasys printers, the Mojo and we heard last month at your Analyst Day discussion about going down to the $5,000 price point and what we are seeing with the MakerBot as it started out well below the current price printers moved up. And, I am wondering with the MakerBot what were the lessons that caused that entry level price point to rise and why is that a price point as much, why not take the merger down there. Just sort of market developed what's going on at those price point?

David Reis

I think first of all, I want to comment about the Mojo and the Stratasys' entry level desktop segment. We view both in Mojo and uPrint is critical products for Stratasys, and we believe that now we have an even broader portfolio of systems that each meets different customers' needs.

Now regarding the entry point, I think MakerBot choose the right price point, and as we said earlier in the call it's a price which fits very well both, hobbyist and professionals and professional and make this sale in adaptation of this technology easier in the corporate world, so I think it's a right price, and now as I said earlier Stratasys offering is ranging from $2,200 to $600,000 covering a very wide spectrum of applications. So, I think we are in very strong position in the market.

Cindy Shaw - DISCERN

If I may on, MakerBot, ask the original price point was little more than half of what it is now. Did MakerBot, it would be a question for Bre, I think. Did MakerBot find that you needed to enhance the features and function and really build the machine at higher price point to succeed in that market or what was the opportunity in the market perfect price. What drove that price point at the minimum level for the MakerBot machine?

Bre Pettis

You know the MakerBot Replicator 2 series is our fourth generation of 3D printers. And, when we started is there was a much bigger build volume or much smaller build volume. And, as soon as we launched those, people said okay this is nice. We have a bigger and when we came out with the next, the second generation of MakerBot, we said okay that's nice. Can we have a bigger?

And, we really settled into this great sweet spot with the MakerBot Replicator 2, where you can see that it's just, when you look at the price, the build volume, the layer resolution, it's just an amazing value. The price point is such that what we find is that individuals can buy them and then in businesses it's under the threshold of bureaucracy, so people can really say okay let me borrow the company credit card and they'll buy a MakerBot, and it will have a deep impact on their business that allow them to innovate faster and bring products to market that are better and because they have been able to iterate in prototype, so we're in just a sweet spot with the value on the MakerBot.

Cindy Shaw - DISCERN

Thank you. That's really helpful. And, may I ask as you look at joining two companies, did you find that there were a lot of commonalities in the customer base or did you find that was not very common?

Bre Pettis

The thing that was really exciting is we got to know each other is realizing that we both have the same vision and the dedication to bring this technology to more people to have more access to drive more innovation in the world.

Cindy Shaw - DISCERN

Great. Thank you and good luck.

Operator

Thank you. The next question comes from the line of Holden Lewis at BB&T. Go ahead, please.

David Reis

We are coming in, in the middle of your question. Go ahead and start over again.

Holden Lewis - BB&T

Got it. First congratulations on the deal. I was sort of curious about the ecosystem concept and now obviously that you have sort of an abundance of capital available to you, where do you see your ecosystem today compared to sort of the grander vision. Do you think it has built, three quarters built, less and sort of what do you need to sort of attack onto the ecosystem to sort of allow you to sort of get the vision for all the services and stuff that's.

Bre Pettis

Whatever about MakerBot with the ecosystem is, we put energy into it, we build out infrastructure and it increases our ability to reach people. So, and it also makes it so that MakerBot isn't just a 3D printer company. We have a much deeper, we make software, we've got an exciting product coming out this fall with the MakerBot Digitizer, a desktop 3D scanner, and it means that we get, we're not just providing one solution.

We're providing a suite of solutions that allow for a great user experience between them. And, when you think about it that way, we are going to be able to make all these things really friendly, very connected, very accessible for users and that's a core part of MakerBot's mission to making this, really bringing this to the world.

Holden Lewis - BB&T

Okay. I guess, just a follow-up to be clear, but when you said that you expect to be accretive by the end of 2014, does that suggest that by Q4 it will be accretive and for the full year of 2014 it's likely to be slightly dilutive or is that needed to be accretive for the full year '14. I just missed that.

Erez Simha

What we say that it's going to be accretive by the end of 2014. We still have a little bit of work to do in order to provide the direct guidance and numbers. We didn't say it will be accretive for the whole volume of 2014, and we need some work to do between timing to closing in order to provide more information which (Inaudible).

Operator

Thank you. Your next question comes from the line of John Baliotti at Janney Capital Markets.

John Baliotti - Janney Capital Markets

Good morning. Can you hear me now?

David Reis

Hi, John.

Bre Pettis

We can.

John Baliotti - Janney Capital Markets

Okay. Sorry about that. Yes. A couple of weeks ago, Scott, we were talking about the consumer talking and you were referring to content as being important to Stratasys in terms of entering the consumer market and also the internal decision between a organically developed consumer product versus an acquired one and I was just wondering if you could comment on how you see content now with this deal and process as well as, what do you think this puts up the curve on the consumer market versus had you taken the strength of the Stratasys' name and introduced to consumer brand that way?

S. Scott Crump

Well, certainly, create a lot of content to drive 3D printing. I think, as we get other specific content drivers 3D printing consumers' feast will definitely explode, but the effort here Bre, so let's hear from Bre.

Bre Pettis

It's interesting, but we actually started Thingiverse before we started MakerBot, and it was because we were saying to our friends, "Hey, you can download movies, you can download music. You can even download books. Why can't you download things?" And our friend said, "Well, that sounds great. Where is that place". And were like, "Okay. Hold on." And, we took a Saturday to start Thingiverse, and that first year of Thingiverse in 2008, we mostly used it ourselves. We made projects and we put them up there and it started to gain traction. And, as we showed people what was possible, they started doing even more amazing things.

I think when you look at Thingiverse and you start, first of all it's my favorite thing to do every day is to look at thingiverse.com and see all the things that you can make on a MakerBot today that you couldn't make yesterday. So, if you don't do that every day, join the next investor revolution and go check out makerbot.com and thingiverse.com and just see the wonderful things that people are brining into the room.

I think if you do that you are going to see that it's a very, very exciting time and people are, the things that you can make on the MakerBot are just wonderful and people who by day make amazing products, by night they make other wonderful things that they can share with the world. And, even though we've been working on Thingiverse since 2008, if you look at it, we're still just at the beginning. There's still just so many great opportunities for people to pioneer whatever it is that they love and share and really have a powerful impact on the world. In the birdhouses, make the next great birdhouse. It's kind of like, build a better mousetrap, well, now you can. I guess, I'll leave it at that.

John Baliotti - Janney Capital Markets

So, Bre, do you expect that to with the Stratasys' intellectual property and the opportunities they have with their knowhow that you are going to that Thingiverse will not only expand, but will go into other markets that maybe they don't, it doesn't currently reflect?

Bre Pettis

I would say in many ways we were already doing that. We are starting to see, besides individual show at Thingiverse, we are starting to see big brands shop at Thingiverse. You can go to thingiverse.com/nokia and you will see the Nokia page. You're going to see more and more brands show and want to participate in the next industrial revolution and be pioneers as well.

Operator

Thank you. Your next question is from the line of Tim Mulrooney at William Blair.

Tim Mulrooney - William Blair

Yes. Good morning, guys.

Bre Pettis

Good morning.

David Reis

Hey, Tim.

Tim Mulrooney - William Blair

My question just going back to the accretion/dilution analysis just trying to get an initial impression of what things would look like. Can you give us an idea of the gross margins at MakerBot? Whether they are above or below the average gross margin at Stratasys?

Erez Simha

We won't be disclosing any specifics for now. The company has a very strong growth motive as you saw healthy margin and I think that we view the small numbers and upon closing.

Tim Mulrooney - William Blair

Okay. Thank you, and then just one follow-up. Would it ever make sense to sell the MakerBot products through Stratasys' existing reseller channel?

David Reis

I think, we mentioned it earlier. We are in the early stage of the PMI process. We definitely see potential synergies in respect to the Stratasys' infrastructure. And, in the coming few months, we have to identify those opportunities. We definitely see synergies that came out at this point of time, point exactly how it's going to take place.

Tim Mulrooney - William Blair

Okay. Thank you, guys and good luck.

David Reis

Thank you.

Operator

Thank you. Your next question comes from the line of Hendi Susanto at Gabelli & Company. Please go ahead.

Hendi Susanto - Gabelli & Company

Good morning and congratulations. One question for Bre. Bre, what are your targeted major international markets for MakerBot?

Bre Pettis

Can you repeat the question?

Holden Lewis - BB&T

Where do you see your major international markets for MakerBot?

Bre Pettis

Yes. There is one place we haven't shift to that's on my list. I would like to get the MakerBot in Antarctica.

Holden Lewis - BB&T

Okay. And, one clarification question for Erez. Erez, you mentioned that most of the margin synergy lies in the global infrastructure opportunity. Is it reasonable to assume that like operating margin expansions will be higher than the gross margin potential expansion?

Erez Simha

Can you please repeat the question?

Holden Lewis - BB&T

You are referring that between the two companies like Stratasys' global infrastructure will offer like margin expansion opportunity, so is it reasonable to assume that operating margin expansion opportunity is higher than the gross margin expansion opportunity in MakerBot?

Erez Simha

We really need some more time for that. Logically, it doesn't access, but we didn't make any serious work behind it yet. We have now between time of the closing, starting the work only now. Even if we identify some area that we can use and utilize to leverage margin it will take time. It's not related to [mobile] and I guess that the impact in 2013 will be very low, very small.

David Reis

I can add to it that, I want you to keep in mind what we said earlier that we are going to have to really fine-tune the two concepts. One of them is keeping MakerBot as a standalone company and allow it to run and execute its plan. And, other one would be identifying synergies which will even more increase MakerBot's growth potential. So, maybe it's kind of a fine line of what are the right thing to incorporate and of course this will have impact also on the combined financials.

Holden Lewis - BB&T

Thank you and all the best.

David Reis

Thank you.

Erez Simha

Thank you.

Operator

Thank you. Your next question comes from the line of Andrea James at Dougherty & Company.

Andrea James - Dougherty & Company

Thank you so much for taking the question. Just one quick one do you anticipate regulatory hurdles like, say, pushback on any trust or U.S. Defense Department?

David Reis

No. We do not expect any issues.

Andrea James - Dougherty & Company

Okay. Then next one just I would love for the CEO of MakerBot to talk about how you view your constraints. Meaning, it looks like your business is on track to triple year-over-year, but I guess the question is why not faster? Were you production constrained or operating profit constrained, or is the growth more tied to your boost in awareness and demand and this merger helps you kind of get past that. Thank you so much.

Bre Pettis

Constraints? I don't understand this word.

Andrea James - Dougherty & Company

No, but seriously. Like the growth year-over-year from Q1 to last year. I mean, was it you had the boost in awareness and demand or did you sort of triple your production. Maybe talk a little bit about where the growth came from and whether it's sustainable.

Bre Pettis

We just wake up every morning and we come to work and we have a mission to bring this sort of people throughout and support them doing wonderful thing. One of the great things about what we get to do with this merger is we get to remain an independent company within Stratasys and continue with that mission and benefit from the synergies of the combined company and it's very exciting.

David Reis

I think if I can add to Bre, the exceptional growth is coming from older sources we mentioned earlier. You know it's a combination of increased awareness worldwide, it's a combination of making the product more accessible, and so the combination of what we view is that fantastic increase in sales and growth. Is it sustainable? The answer is yes.

Operator

Thank you. Your next question is from the line of Daniel Holland at Morningstar. Please go ahead.

Daniel Holland - Morningstar

All right. Good morning. You mentioned opportunity for MakerBot kind of in the industrial markets which is currently kind of the primary market below Stratasys. What kinds of things will you do to prevent the cannibalization on either side from Stratasys or MakerBot?

David Reis

We said earlier that we view Stratasys as a leading company in 3D printing, both for professional and manufacturing applications and we see MakerBot as a leader in desktop printing and I think both live side-by-side nicely. Okay?

You know, brining the desktop printing to the engineer and design a desk does not contradict the value and offering the Stratasys designed products that are targeting to certain extent different applications in different stages of the design process and the manufacturing process.

So, we believe that it will live nicely side-by-side, and it's more important that we believe that the customers in both companies should enjoy the future boost technologies and boost offering, so there's a great opportunity here for cost promotion of the production and like I mentioned earlier we mentioned companies like Lockheed Martin using MakerBot equipment in parallel to a lot of equipment from Stratasys and they see complementary.

There is of course some friction between all the products and we are going to offer 26, 27 printers, but for the most part they are serving different applications and different needs.

Daniel Holland - Morningstar

Great. One more if I may. Just coming back to the accretion thought. Do you guys expect to be able to be accretive to cash flow in 2013? If not kind of what's the timeframe after that?

Erez Simha

I think that in terms of cash flow, because the company is growing so fast it will require cash. I don't think it will be accretive to cash in 2013, and it really depends on how the company continue to grow. It continued to grow so rapidly it would be difficult to say now if you can accretive to cash in 2014 and up.

Comparing for product once we look at plan for 2013, and the growth rate the company is expected. It (Inaudible) finance working capital then to be countercyclical and some significant investment in CapEx also.

Operator

Thanks. Your next question is from the line of Rob Stone at Cowen & Company. Your line is open.

Rob Stone - Cowen & Company

Good morning, guys. Thanks for taking my question. Just a kind of big picture one for Bre. You mentioned that by your fourth generation you found sweet spot on price, volume and layer resolution. As you think about the opportunity to expand your line and drive even wider adoption going forward, how would you rank the relative importance of first features and materials on the printers themselves, or second apps ecosystem, other devices like digitizers and scanners, or finally maybe the potential to get to even lower prices on this sweet spot on features and other stuff. Thanks.

Bre Pettis

I think your question is, can you maybe repeat your questions I can understand how I can best answer it.

Rob Stone - Cowen & Company

So, it's thinking about which are things that are the biggest opportunities in terms of driving line expansion and wider adoption. Is it new features and materials on the printers themselves, is it other stuff like apps, ecosystem and ancillary product, or might you as you get even bigger volumes be able to drive the price performance out of the line expansion opportunity. Thanks.

Bre Pettis

I think you have to understand that we are at the beginning of this relationship and there are going to be a lot of things and that we are going to be able to do together and we've also said that MakerBot is an independent company within Stratasys, so we are going to be able to access the infrastructure, the global reach and the IP, all that stuff to be able to drive the mission forward. In terms of being able to prioritize those, I think you are going to have to be patient with us as we get to know each other better.

Rob Stone - Cowen & Company

Okay. And a final follow-up if I may. I think you said 70% or so of your users are actually have the product in their workplace. Do you think of the consumer opportunity going forward at lease for the next few years as more of a service bureau opportunity as opposed to individual ownership or at what point in time and price do you see this really becoming a consumer desktop market. Thanks.

Bre Pettis

Thank you. That's a good question. So, we talk about MakerBot desktop 3D printers as prosumer devices and this allows us to throttle the professional and the consumer world. And, a great 3D printer for consumers that want a professional quality machine and that sits on their desktop.

So, I think that in many ways we get to be in this nice spot, where we can serve the needs of customers like Lockheed Martin that are doing like continually cool stuff to explore space and it also looks great on a garage workbench for somebody and entrepreneurs inventing what's going to happen next.

So, I think my answer is yes to both. This could be, and not to be too broad, but that's how we design the product that we offer now to have a broad reach.

Rob Stone - Cowen & Company

Okay. Thank you for taking my question.

Operator

This completes the allotted time for our call today, so I would now like to turn the call over to Mr. David Reis for closing remarks.

David Reis

I want to thank everyone for joining this call. We hope you share our excitement about this transaction and we look forward to keep you updated in the future. Thank you.

Operator

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

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