Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Stratasys Inc. (NASDAQ:SSYS)

Q2 2009 Earnings Call

July 29, 2009; 8:30 am ET

Executives

Scott Crump - Chairman & Chief Executive Officer

Bob Gallagher - Chief Financial Officer

Shane Glenn - Director of Investor Relations

Analysts

Troy Jensen - Piper Jaffray

Brian Drab - William Blair

Chad Bennett - Northland Securities

Jeff Evanson - Dougherty & Company

Jim Ricchiuti - Needham & Company

Steve Dyer - Craig-Hallum Capital

Graeme Rein - Bares Capital

Andy Schopick - Nutmeg Securities

Ryan Thibodeaux - Maple Leaf Partners

Jay Harris - Goldsmith & Harris

David Cohen - Midwood Capital

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Stratasys earnings conference call. My name is Kathryn and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Shane Glenn, Director of Investor Relations. Please proceed.

Shane Glenn

Good morning and welcome to the Stratasys conference call to discuss second quarter financial results. Representing Stratasys executive management on the conference call today is the Chairman and CEO of Stratasys, Scott Crump and CFO, Bob Gallagher. A quick reminder, today’s conference call is being transmitted over the web and can be accessed through our Investor section of our website at www.stratasys.com.

We will begin with the Safe Harbor statement. All statements herein that are not historical facts or that includes such words as expects, anticipates, projects, estimates, vision, planning or believes, or similar words constitute forward-looking statements covered by the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995.

Except for the historical information herein, the matters discussed in this news release are forward-looking statements that involve risks and uncertainties. These include statements regarding projected revenue and income in future quarters; the size of the 3D printing market; our objectives for the marketing and sale of our Dimension 3D Printers and our FortusTM 3D Production Systems, particularly for the use in direct digital manufacturing; the demand for our proprietary consumables; the expansion of our paid parts service; and our beliefs with respect to the growth in demand for our products.

Other risks and uncertainties that may affect our business include our ability to penetrate the 3D printing market; our ability to maintain the growth rates experienced in this and preceding quarters; our ability to introduce, produce and market new materials, such as ABSplus and ABS-M30, and the market acceptance of these and other materials; the impact of competitive products and pricing; our timely development of new products and materials and market acceptance of those products and materials; the success of our recent R&D initiative to expand the DDM capabilities of our core FDM technology; and the success of our RedEyeOnDemand and other paid parts services.

Our actual results may differ from those expressed or implied in our forward-looking statements. These statements represent beliefs and expectations only as of the date they were made. We may elect to update forward-looking statements, but we expressly disclaim any obligation to do so, even if our beliefs and expectations change.

In addition to the statements described above, such forward-looking statements include the risks and uncertainties described more fully in our reports filed or to be filed with the Securities and Exchange Commission, including our annual reports on Form 10-K and quarterly reports on Form 10-Q.

The information discussed within this conference call includes financial results that are in accordance with US Generally Accepted Accounting Principles or GAAP. In addition, non-GAAP financial measures are included that exclude certain expenses.

The non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the company’s operations and comparative performance, primarily the identification and exclusion of expenses associated with impairment charge for certain auction rate securities, restructuring expenses, and the expenses associated with stock-based compensation required under SFAS 123R

The company uses these non-GAAP financial measures for evaluating comparable financial performance against prior periods. The appropriate reconciliations between non-GAAP and GAAP financial measures are provided in a table at the end of our press release.

Now I’d like to turn the call over to our CEO, Scott Crump.

Scott Crump

Good morning and thank you for joining us to discuss our second quarter financial results. Although the challenging economic environment continued in the second quarter, we’ve begun to observe signs that the market conditions have stabilized.

Order activity did remain depressed in the second quarter, but leading indicators within our sales channels have improved recently. We are cautiously optimistic that sales activity will improve in the coming quarters.

Our new personal 3D printer, the uPrint, continues to be well received following a successful January launch. Although 3D printer sales have been slowed by the economic downturn, our pipeline of opportunities has grown significantly. This strong pipeline should bode well when market conditions improve.

Fortus Production System sales declined in the second quarter versus last year, the sales nearly doubled over levels realized sequentially from the first quarter of this year. We are optimistic that this represents the start of a positive trend that will continue going forward.

We’ve strived to remain good financial stewards and manage our assets effectively through these unprecedented economic times. We believe that we can meet this goal. We returned to profitability in the second quarter and generated $2.5 million of cash from operations.

In addition, we maintained a strong financial position with over $51 million in cash and investments on our balance sheet. I’ll return later to update you on some of our initiatives, but, first, I’d like to turn the call over to our CFO, Bob Gallagher, who will further highlight our second quarter results. Here is Bob.

Bob Gallagher

Thank you, Scott. Total revenue declined by 21% to $24.6 million for the second quarter of 2009 compared to $31.3 million for the same period last year. The company shipped 442 systems during the second quarter versus 540 last year.

As we expected, market conditions remain difficult in the second quarter, which is reflected in our total revenue. However, we have begun to see positive indicators within our channel that conditions could be improving, but it’s too early to predict the timing or magnitude of a significant recovery.

Second quarter product revenue declined by 27% to $18.2 million when compared to the $24.8 million for the same period last year. Three factors impacted our product revenue growth in the second quarter, all driven by the difficult market environment.

First, revenue from Fortus 3D Production Systems declined by 33% when compared to last year. However, Fortus sales nearly doubled from the levels recognized in the first quarter. Given the recent feedback from our channel partners, we are cautiously optimistic that market conditions maybe improving for this business.

Second, 3D printer revenue declined by 34% when compared to last year. 3D printer sales continued to be impacted by the weak global economy. The mix within 3D printer business continued to favor the lower priced uPrint, which represented 53% of all 3D printer unit sales during the quarter. However when compared to the first quarter, the mix shift is slightly toward the higher priced 3D printers the Elite and 1200es SST. The first quarter included the initial rollout and promotion of uPrint, and represented approximately 66% of all 3D printer unit sales versus 53% in the second quarter.

Lastly, our consumable revenue was down 8% during the second quarter over last year, as our customers have remained cost conscious in current difficult economic environment.

Second quarter service revenue was flat at 6.4 million. Our maintenance revenue increased by 12% for the second quarter compared to last year. The growth and maintenance revenue is less susceptible to the current economic environment, given that most of the revenues generated from contracts signed in prior periods.

Revenue in our RedEye paid parts business declined by 13% in the second quarter. Growth in the paid parts business continues to be negatively impacted by an aggressive pacing environment. Gross profit declined 33% to 11.6 million into the second quarter of 2009 when compared to the same period last year. Gross profit as a percentage of sales declined to 47% compared to 55.3% through the same period last year.

A factor driving our decline in gross margin percentage versus last year was the impact of our fixed cost being allocated over relatively lower total revenue for the quarter. In addition, the decline in gross margin percentage was driven by significant shift within our 3D printer business, as we began shipping the uPrint 3D printer in the first quarter and unit sales of our higher price 3D printers declined significantly versus last year.

As you recall, our 3D printer mix last year favored our higher price, higher margin 3D printers. However, the gross margin percentage of 47% was a dramatic improvement over the 41.4% recorded in the first quarter. This sequential increase is attributable to the sequential shift in product mix within our 3D printer business we outlined earlier.

During the first quarter conference call, we outlined our objective to reduce the direct material cost of uPrint by 15%. We remained on track to meet or exceed this objective by the end of 2009. It’s important to emphasize that we believe the uPrint can significantly expand our installed base of systems going forward, which bodes well for future sales of higher margin consumable revenue.

We had an operating profit of 1.5 million in the second quarter of 2009 compared to a profit of 5.8 million for the same period last year. However, operating profit in the second quarter increased by over 3.1 million when compared to the first quarter, a sequential improvement in operating profit as a result of a favorable shift in product mix as well as our effectiveness in reducing our operating expenses. Operating expenses declined by 12% to 10.1 million during the second quarter last year.

As we reported last quarter, headcount reductions taken in the first quarter will amount to approximately 2.7 million in annualized savings for the company. SG&A expense in the second quarter of this year included 182,000 in stock-based compensation expense required under Statement of Financial Accounting Standards, or SFAS 123R, compared to 320,000 for the same period last year. Stock-based compensation expense net of tax was 162,000 or $0.01 per share in the second quarter compared to 268,000 net of tax or $0.01 per share for the same period last year.

Our diluted shares outstanding declined by 1.2 million shares from the second quarter last year, a result of our lower stock price as well as significant share repurchases made in 2008. We generated positive cash flow from operations of 2.5 million during the second quarter. This brings our cash and investment position to approximately 51.1 million at the end of the second quarter compared to approximately 49.4 million at the end of the first quarter. We have no debt on our balance sheet.

Inventory balances were 18.4 million at the end of the second quarter, which was down significantly when compared to the 20.2 million at the end of the first quarter. Accounts receivable at the end of the second quarter was $24.3 million compared to 34.5 million at the end of the second quarter last year. Day sales outstanding, or DSOs, were just under 90 days compared to 100 days at the end of the second quarter last year.

I’d like to reiterate a point that Scott made in his opening remarks. We have experienced unprecedented conditions within our core markets, but have been very effective in controlling our costs and managing our assets. We are well positioned for rebound in market conditions.

Now, I would like to turn the call over to our Director of Investor Relations, Shane Glenn for comments regarding our outlook.

Shane Glenn

Thank you, Bob. We appreciate the need to provide financial guidance for our shareholders and the investor community. Based on the current economy environment, Stratasys is currently not providing financial guidance for the fiscal year ending December 31, 2009.

We are firmly operating in environment with unprecedented economic volatility and uncertainty. This uncertainty combined with the many changes in our go-to-market and product strategies over the past few months make visibility in 2009 extremely difficult. We expect that the third quarter, which is our seasonally weakest period, will remain challenging, but qualitatively, we are observing some signs that conditions maybe improving.

Now, I’d like to turn the call back over to Scott Crump.

Scott Crump

Thank you, Shane. The strength of our competitive position was recently confirmed by the 2009 Wohlers Report, which indicated that Stratasys shipped over 43% of all additive systems globally during 2008. The report also indicated that we have the highest global installed base of systems compared to any other competitor.

We believe one positive opportunity of the recent economic downturn will be to strengthen our competitive position, given the relatively strong financial position and fresh line-up of products. You should note that the majority of our products are relatively new, having been introduced within the past 18 months.

Our competitive position is strongest within 3D printing. According to the Wohlers Report, Stratasys shipped over half of all of the 3D printers globally in 2008. This position is a testament to the unique capabilities of our core FDM technology as well as our ability to provide our customers with the best whole-product solution.

Our whole-product criteria includes an affordable price, but equally important is the product reliability, ease-of-use and [office readiness], supporting our products with an expensive and highly trained distribution network is also essential for our ongoing success. We are focusing on opportunities to expand our distribution reach and this remains a top priority. We’re hopeful that plans to significantly expand our distribution capabilities can be outlined to you later this year.

We’re convinced that our personal 3D printer, the uPrint, represents a significant step within our 3D printing strategy. We believe this product combined with the right distribution model will propel our company to the next level in unit volume within 3D printing.

We also believe an opportunity exists for over 500,000 3D printers to serve the existing 5 million seats of 3D CAD. We’re also building a pipeline of opportunities with our Fortus 3D production systems, which should translate into higher sales when market conditions improve.

Direct digital manufacturing applications remain a focal point of our sales and marketing efforts for growth within Fortus. For example, we are currently evaluating opportunities with the US military at their fleet readiness centers and repair depots, which are responsible for rapid repair and redeployment of military aircraft and equipment.

The military is evaluating Fortus as a quick response technology in tooling and repair applications. The military currently maintains dozens of fleet readiness centers and repair depots around the world, which could potentially benefit from our technology.

Our systems are currently being used on a limited basis for rapid tooling and fixture applications, for metal and composite parts fabrication, as well as for tools used in the trimming and drilling parts. The significant cost saving measures we enacted over recent periods have contributed to a return to profitability in the second quarter. We are in a strong financial position having generated $2.5 million in cash from operations in the second quarter, and as Bob mentioned, we have over $51 million in cash and investments.

So we are cautiously optimistic about the positive signs of improvement within our sales channel, but we continue to prudently manage our resources given the market environment. Most importantly, we remain focused on executing our long-term plan and remain confident in our long-term growth opportunities within our core businesses.

I will return with some closing comments, but, first, I would like to address any questions that you have. So operator, let’s open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Troy Jensen - Piper Jaffray.

Troy Jensen - Piper Jaffray

Could you give us a quick update on the channel realignment on the Fortus side just curious if you think it’s fully integrated now, and if there’s been any surprises or just your updates on how it’s gone?

Scott Crump

First, the realignment was primarily in the US where we went from approximately 10 direct to now over 45-feet on the street, meaning over four times the amount of people selling that through resellers, and I think that for me the second quarter proved that moving along per plan. I think as you know those type of changes are strategic and they do take time.

I’m very optimistic based on what I see in the first half on how that will continue to grow and not only grow for rapid prototyping but grow also for the DDM applications now that we have so many more people out there selling it.

Troy Jensen - Piper Jaffray

Then just for on the follow-up side here. On uPrint, have you guys been able to get any consumable usage data yet, or is it still kind of too early to get that?

Bob Gallagher

Yes. It’s really too early try to be able to get today related to the usage out there.

Troy Jensen - Piper Jaffray

Can you just update us on what you guys’ assumptions kind of, I think historically what that you mentioned drives 3000 or 5000 in consumables, what’s kind of the range you guys expect out of your brand?

Bob Gallagher

The uPrint level is what we initially thought coming out of the shoots and we don’t have the data to observe this, but we thought the usage would probably be at about 80% over the mentioned level.

Operator

Your next question comes from Brian Drab - William Blair.

Brian Drab - William Blair

First question on SG&A. It was a little bit higher than I had forecast. I am wondering if this is the type of run rate that we should expect and it is a little bit higher, it’s about the same as the first quarter level when you had your kick-off meeting.

I know you had implemented further cost cutting in the fourth quarter that I thought would carry over to the second quarter. So can you talk a little bit about why you are at that level in the second quarter and what the run rate might be going forward?

Bob Gallagher

What you noticed is on, if you’re comparing the first quarter you’ll see a drop of about 200,000 within the R&D line. Part of the cost cutting measures we took was also up in above the gross margin lines, but we did have somewhat I would call period expenses related to second quarter for the 280 to 300,000 that were specific to the period that don’t go in the normal run rate. So looking forward adjusted for seasonality, I would expect the run rate to be slightly lower as you go forward to the third quarter and fourth.

Brian Drab - William Blair

One more question on the education space. It sounds like your overall end market environment is stabilizing and improving, but could you make some comments specifically on the education space and how you feel that end market is holding up and how it’s going to perform going into 2010?

Bob Gallagher

I think we have some good data for North America, because we have dedicated educational channel in North America that we get the data back pretty quickly. The education channel was a really strong point for us in the quarter. As we’ve communicated to you in the past, typically education is running around a third of the dimension unit sales. The early look at it seems to be worldwide than it was above that in the second quarter.

Operator

Your next question comes from Chad Bennett - Northland Securities.

Chad Bennett - Northland Securities

Just a couple of questions. I know you guys don’t give a lot of data on this, but it appears obviously we get the uPrint unit numbers and they were down sequentially. Obviously, you had the first quarter kick-off in channel fill there, so that makes sense. By my kind of back of the envelope magic, Dimension units look to be down sequentially, and then you indicated Fortus revenue I believe was nearly double sequentially.

I’m fairly new to the story. I’m just wondering what are the end market dynamics there that would create such a big disparity between the high end units versus the low end of mid-priced units in this environment kind of versus Fortus channel realignment and kind of real end market demand.

Bob Gallagher

On the Fortus side, I think one of the things we are seeing in between quarter one and quarter two is the fact that would the change over the North America channel. You have a little lag time. I still think that we are seeing some of that lag in getting the channel fully engaged in the product line. So I think there is some impact of that between Q1 and Q2.

Within the product mix within 3D printer, I don’t think it’s surprising that the uPrint with this launch in Q1 was a significant. It was a majority of our business and I think it was 66% in Q1 and down to 53% in the second quarter. So relative to where we were coming from, I think things on the Fortus side, we are starting to see more effectiveness within the channel as it gets up to speed.

On the dimension side, I think you are seeing a little bit more normalization relative to the fact that the uPrint was launched in Q1 and usually we have significant sales in the period that our products launch.

Chad Bennett - Northland Securities

I know you talked about Fortus year-over-year progression and overall 3D printer year-over-year progression, did you give a number for Dimension specifically?

Bob Gallagher

Yes. I did. I think the Dimension combined with 3D printer only.

Scott Crump

We gave a Fortus number and 3D printing. 3D year-over-year was down 34%.

Chad Bennett - Northland Securities

So we didn’t segment out the Dimension, okay. Then consumables down 8% year-over-year. Can you give what they did sequentially?

Bob Gallagher

Sequentially, it was actually up 12% to 13%, but I think it’s important to note that that still represents being down year-to-date about 7%. So while it was a positive trend, it still is a negative trend through the first six months of the year.

Chad Bennett - Northland Securities

Then last question, it seems like based on your comments that you believe the existing run rate for Fortus is sustainable at least through the second half of the year here?

Bob Gallagher

We are in a really wobbly economy. What we’re seeing is we’re seeing good pipeline as it relates to our Fortus products, and it’s too early to tell in this environment whether people are going to take those calls and turn them into orders. So that’s where I think the words "cautiously optimistic" come in.

Operator

Your next question comes from Jeff Evanson - Dougherty & Co.

Jeff Evanson - Dougherty & Co.

Congratulations on the solid quarter. So there’s not any concern here. I want to talk about Fortus and its change from direct to indirect distribution. [Do you feel] this improvement here sequentially in the high end systems is indicative of end market demand or is there any channel fill?

Bob Gallagher

Within Fortus, its end market demand.

Jeff Evanson - Dougherty & Co.

Those guys really aren’t carrying any inventory; they’re just passing on a sold unit to a customer, right?

Scott Crump

Yes. I think we’re definitely seeing if you want a measure based on pipeline, lot more quote activity, lot more demos and what we call benchmarks than I think sequentially the first quarter. So I think that having 4.5 times more people out there selling and all of those resellers understand FDM having been involved with as I mentioned prior to picking up the full lines. We should have a very positive impact in the second half year.

Shane Glenn

Just one, I know you noticed, but obviously we have seasonality to our business. So when you start looking at it sequential, it can get a little bit tricky. So I just want to be clear that certainly doubling from Q1 to Q2 is we find that encouraging. There is seasonality to our business. We still are in a difficult environment, but to our point, the point we are trying to make is that we are seeing some positive signs in the channel.

Jeff Evanson - Dougherty & Co.

Great. Obviously you’re DSOs given the confidence that there is no issue there. So Scott, you actually anticipated my next question. I do want to unpack your positive comments about the pipeline building. Can you give us a sense of how much quote and demo activity is up sequentially or may be year-over-year?

Scott Crump

We really don’t have that hard data to share just the fact that there is significantly more activity. Now, of course we are comparing it to January and February that was by all standards pretty dismal.

Jeff Evanson - Dougherty & Co.

Right.

Scott Crump

Not just in the stock market, but I think through out industry.

Jeff Evanson - Dougherty & Co.

Then you also mentioned that 3D printing pipeline is picking up. So let’s talked about what you are seeing there with a little more granularity please?

Shane Glenn

Most of the information that we have Jeff is to be quite honest is anecdotal at this point. It’s talking with the channel, talking with our channel managers and what our sales directors are saying in the various regions and that’s why we are trying to be cautious about our comments, because at this point it’s anecdotal evidence, but it’s definitely a significant improvement in tone from what we saw in February.

Jeff Evanson - Dougherty & Co.

Looking at this 15% BOM reduction for uPrinter, did you get GM improvement in uPrinter quarter-on-quarter?

Bob Gallagher

You know what, Jeff, we would have gotten some, but it was fairly nominal. What I look at what happens is we’re putting the changes in place. We’re on track to achieve the 15% for the year. The problem is that some of those parts won’t come in until where you make the change in Q2. You’ll get the effect of that change in Q3. So there wasn’t a significant impact on the build materials as it relates to Q2.

Operator

Your next question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

Question on uPrint. It sounds as if uPrint has done well in the education market. I mean you are saying I believe that demand overall in the education market is fairly strong. How satisfied are you with the performance of uPrint in the commercial market?

Shane Glenn

Well, I think that we’re not at this point yet, and it’s because we’re still operating and we introduced this system in January right at low point for the overall markets in the economy, so I think that, Jim, we’re still operating and trying to sell this system, and when you look at in an environment, it’s very, very difficult.

When you really try to test out the price elasticity model in an environment like this, it’s very difficult. So I’d say that we’re not satisfied yet, but we’ll have to see conditions improve before we make that kind of conclusion.

Jim Ricchiuti - Needham & Co.

Gross margin sequentially showed some nice improvement and I know mix plays a big role in your gross margin, but just can you give us a sense directionally how you see gross margins in the second half of the year. Do you feel these are sustainable?

Bob Gallagher

What you saw in gross margin is going from 41.4% to 47%, within the product category itself, it went from 37% to 43%. Obviously, we are doing things within the product side as we indicated with uPrint to try to make that a sustainable target, but the volatility and the mix of our products really makes it difficult for us to get guidance as it relates to margin.

You’ve seen our margin swing dramatically between this year and last year, and I think it’s a positive trend. We are working hard to continue to have positive trends, but I am not ready to give you a range as it relates to gross margin.

Operator

Your next question comes from Steve Dyer - Craig-Hallum.

Steve Dyer - Craig-Hallum

Quick question here just to clarify. You gave 3D printers year-over-year is down 34%, was that units or revenue?

Bob Gallagher

Revenue.

Steve Dyer - Craig-Hallum

Then I am wondering if you can give any color on the uPrint, your thoughts on kind of the uPrint inventory in the channel. You have the big fill in Q1 and you clearly saw some re-orders. What’s your sense as to sort of where inventory is the level maybe that the buyers are willing to carry that sort of thing. I guess I am just trying to gauge if this quarter is maybe a little bit lower than you’d expect given the fact that that there were so many in Q1 or if this is kind of a run rate you’d expect?

Bob Gallagher

Yes. I think it’s important for everybody on the call to remember is that we do sell to the channel. So we do not own any inventory in the channel. Having said that, when we have a product launch and have the owners of our channels together is quite properly we try to sell them units and we did sell in Q1.

Our channel, we do know that our channel partners’ inventory is lower at the end of the second quarter, as it was compared to the first quarter. There’s always an impact of higher units and the time of the product launch and some flow out to the end customers in the following quarters, and that’s what you’re seeing in Q2.

Steve Dyer - Craig-Hallum

Then Bob just a housekeeping item. Do you have CapEx in the quarter?

Bob Gallagher

CapEx year-to-date was about 1.2 million and 538,000 in the second quarter.

Operator

Your next question comes from Graeme Rein - Bares Capital.

Graeme Rein - Bares Capital

Could you talk a little bit more about the consumables? I know you have limited visibility to what’s going on there, but do you get the sense that ordering patterns have changed or is it [mass bought] units or can you provide any more details on what might be going on there?

Scott Crump

Well, as Bob mentioned, it’s up Q2 over the Q1 sequentially. I believe that the education consumable usage is about the same rate. I think that there is less users because of the deep recession in the commercial side less design engineers basically are using, but in some cases actually you are seeing more usage because people understand you got to have new product in order to grow out of the recession.

So some projects are doubling up in some companies, and therefore, increasing the rate. I think the rates actually should be about same, but that there is less at least temporarily less commercial design engineers using the systems during this year.

Bob Gallagher

There is no reason. We have no indications that it is related to units being remarkable, I think our customers in this economy are being very cost conscious in their expenses too and we are seeing a reduced usage on our machines.

Graeme Rein - Bares Capital

Then is there any strengths geographically that you are seeing any countries that might be stronger than other in an unusual?

Shane Glenn

Yes. I looked data and I want to say that we really saw anything that was indicative of any strength or weakness relative to any particular economy.

Operator

Your next question comes from Andy Schopick - Nutmeg Securities.

Andy Schopick - Nutmeg Securities

I wanted to ask you if you could comment a little further on what some of the leading indicators are in the sales channel that you made reference to us and indication for some optimism going forward?

Scott Crump

We definitely have more sales and quoting activity, Andy, now whether that translates over to sales time will tell. Our Fortus sales pipeline is growing. As we mentioned, our uPrint sales pipeline is that building. However, we don’t have lot of hard data on that.

As I mentioned, we don’t know that that will necessarily convert into the sales growth. I think as Shane mentioned that, it’s important to remember that Q3 typically is our seasonally weakest period historically, and whether that’s true during a recession, especially for coming out of the recession, whether that’s true, time will tell.

Andy Schopick - Nutmeg Securities

If I can follow up with Bob for just a couple of quick ones here. I have noticed that the net investment sales type leases is down about $1 million from year end. I wondered what the initiatives are in that aspect of your business, what might be happening there, whether you are really devoting any resources to continuing to grow that?

Bob Gallagher

Andy, I think if you look at quarter-over-quarter, I don’t have the year end number in front of me, but there was actually I thought about $300,000 increase in our lease portfolio relative to Q1. So to me, it’s been pretty much at a fairly normal level for us, not significantly different than the prior years.

Andy Schopick - Nutmeg Securities

I’m just referencing the year end 2008 number, but it doesn’t appear to me that there is really very much happening in that area of the business and that you are not aggressively expanding the lease portfolio at this time.

Bob Gallagher

Your question is Q2 over year end?

Andy Schopick - Nutmeg Securities

Year end.

Bob Gallagher

Yes. I did look at as it related to the quarter itself and the level that we had in Q2 this year is very similar I think to previous year’s patterns.

Andy Schopick - Nutmeg Securities

Finally, if you could just give me an update on those capitalized software numbers and the amortization of prior deferred software?

Bob Gallagher

Yes. We calculated it’s 338,000 of software capitalization in the quarter and amortization was 436,000.

Operator

Your next question comes from Ryan Thibodeaux - Maple Leaf Partners.

Ryan Thibodeaux - Maple Leaf Partners

Just real briefly, were there any inventory write-downs in the quarter?

Bob Gallagher

We have inventory write-downs in every quarter. In terms of obsolescence, we are reviewing our inventory month-by-month. So, yes, but nothing significantly different that our historical patterns.

Scott Crump

[Inaudible] that technology business that we are in. We are adjusting through our change order, engineering change order system on a daily basis when we see improvements, and if those improvements in ROI made it flow through and then not accumulate as prominent inventory.

Ryan Thibodeaux - Maple Leaf Partners

The next question would be, I think you said that that 3D printer revenue as a whole was down 34% year-over-year?

Scott Crump

That’s right.

Ryan Thibodeaux - Maple Leaf Partners

Then so my question is that if the uPrint represented half of all of 3D sales that seems to imply that the 3D printers excluding uPrint were down more like 60%, I guess on a year end basis. So I was just trying to tie those numbers out?

Bob Gallagher

Yes. I don’t have the numbers in front of me, but it makes sense because really when you look at brining uPrint off, we also discontinued some of the other products within the lines of the uPrint was we’re placing some of the units that existed before. So, yes, we would expect to drop.

Ryan Thibodeaux - Maple Leaf Partners

So potentially half of all of the uPrint sales would have otherwise been just Dimension sales if the uPrint did not exist? So I guess the question is, how much of the uPrint sales are essentially cannibalizing the overall 3D printer sales?

Shane Glenn

Yes. Ryan, it’s hard to say, I mean particularly given the environment we’re in. I think you’re certainly going to have some customers that purchase a uPrint that would have otherwise purchased a Dimension 1200 or an Elite, but at the same time, within a normal operating environment, you hope that the new product with the new price point, it could expand the market beyond any cannibalization effect. So it’s difficult to quantify exactly what you’re asking.

Scott Crump

As we’ve launched new lower priced systems in the past, this would be the past eight years. It usually takes about three to four quarters to really see the full effect, but we’ve planned for as a strategy to do some cannibalization as we expand more market share. Personally, I’m concerned, but I’m not overly alarmed on a say an annualized basis.

Ryan Thibodeaux - Maple Leaf Partners

Can you remind me again, I think originally what was the number of uPrints that you guys had set out as a potential target on an annual basis?

Shane Glenn

I think we made comments in the previous quarters that the uPrint represents a platform that could take us to $3000 to $5000 units per year ultimately.

Scott Crump

Yes. Our vision basically takes us from our past annualized rates of about 2000 total units a year for the corporation to 3000 to 4000 units. I still believe especially as we exit this recession that that will happen for the company, and then on a longer term basis up in that 10,000 units per year as we further expand our strategy. But I think it is hard to microscopically look at that during a deep-deep unprecedented recession.

Ryan Thibodeaux - Maple Leaf Partners

Okay. Then the uPrint cost reduction. Can you talk a little bit about, where you are able to reduce costs and how you are going to go about doing that?

Bob Gallagher

It’s how we are viewing that, I think that’s been an important factor. And we are seeing it some of the electronics that we did, we’ve also taken some of the, you take something and uPrint comes with a second bay. You look in to second bay and whether you are having that, whether that can be stamped or whether that is an item that you are going to punch out. And they have a significant difference in terms of the cost profile.

So we are looking at individual pieces which are the big cost drivers and where we can get the largest return on investment. So it’s really going through the unit on a unit by or part by part basis, looking for the big hitters. And I am really confident that we’ll achieve that 15%.

Ryan Thibodeaux - Maple Leaf Partners

And does that get you more in line with, the historical Dimension gross margins.

Bob Gallagher

No it does not, the uPrint is out there, it is part of our long-term strategy of driving down the price [elasticity] feature curve and getting more consumable unit -- consumable sales out there. So uPrint will still be our lowest margin product..

Ryan Thibodeaux - Maple Leaf Partners

So do you have any kind of long-term vision of where product gross margins are heading?

Bob Gallagher

In this economy we are managing our business --

Ryan Thibodeaux - Maple Leaf Partners

I don’t mean this quarter, next quarter on the sales. Two years down the road, a year down the road, if things were not as they are today?

Bob Gallagher

We historically what we have said is that we believe that we have a model that will allow us to increase the amount of operating income we can deliver to our shareholders and we’ve been less about talking about margin versus operating expenses, other than to say in a normal environment we believe from where we were last year that we could increase our operating income as a percentage of sales.

Operator

Your next question comes from Jay Harris - Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

Thank you for taking my question. Concerns inventory management, the number of questions on inventory. One, had your revenues been higher in the June quarter would the inventories have come down more? Were you shipping more out of inventory, because you got lot of orders in the last 15 days of June? And going forward, if your volume increased revenue, orders increased, what would you do about inventory levels?

Bob Gallagher

A lot of questions within there, and I’ll do my best to address them. We built the forecast, so we are looking at what we forecast for the quarter, so we are not building the order, we are building the forecast, and we’ve always said that there is a significant amount of orders that come towards the end of the quarter, but obviously we’ve adjusted our forecast in this environment. So that has an impact on bringing down inventories.

If the volume increases, clearly we would be reducing inventories more. From a longer term strategy as I look at inventories today and where they were at versus where I think they should be at the end of the year, I think there should be a continued trend to reduce our inventory throughout the remainder 2009.

Jay Harris - Goldsmith & Harris

So and had you had more orders in the June quarter, the inventories would have come down and what does this mean about your manufacturing levels? To what extent can you lean on your inventory levels bringing them down and not increase your planned output?

Bob Gallagher

Yes. We just implemented the actual within this year, something called inventory quality reporting when we are looking at the various individual buckets within inventory assigning them to individual purchasers looking at lead times in order to be get it down to a granular level and be able to effectively manage inventory. If you look at inventory and gross level it’s really easy to get lost in a forest.

So we are trying to break it down to a tree level so that we can continue to reduce inventory without having any impact on our ability to deliver within the quarter. I think it’s an effective tool that we just started to implement and it will give us confidence that we will be able to reduce our inventories for more apt ends and still be able to meet forecasting demand.

Jay Harris - Goldsmith & Harris

Then if I might stretch a little, what was the relative gross profit of product shipped out of inventory versus products you are currently manufacturing?

Bob Gallagher

Well, typically from an end product standpoint we are building within the quarter that by and large that we are forecasting. It might have an overlap of maybe two months tops. So there’s not a substantial difference between those. Most of our products with the exception of uPrint are fairly static in terms of their material cost of the products.

Operator

Your next question comes from David Cohen - Midwood Capital.

David Cohen - Midwood Capital

I just had one housekeeping question. Did you guys give a percent change in 3D printer revenue but in unit sales for 3D printers?

Scott Crump

We did not give that, David.

David Cohen - Midwood Capital

Can you provide that or I’ll have to wait for the Q?

Scott Crump

3D printer units versus last year were down 14%.

David Cohen - Midwood Capital

Okay. And you said, uPrint was 53% of that total versus 66% in the first quarter, is that the comparison?

Bob Gallagher

Correct.

Operator

Your next question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

If you look at the various streams of your revenues, product, consumables, paid parts. Which of these do you put more weight on to really tell if your markets are beginning to recover? I mean, what is that you look as leading indicators for your business? What do you put more weight on?

Bob Gallagher

You’d probably get a different answer from all three of us, but I’ll take the first shot. I really look, people have asked me that question a lot whether you look at employment etcetera.

From our standpoint of what we are doing within our business, I think consumable usage. Because that comes back to how healthy are our customers, whenever they start worrying a little bit less of all their expenses. And how much are they using our machines, because the more they use the existing installed base, the more they are going to be ready to buy that additional system out there.

Scott Crump

The only thing I would add to that following, lets say, the consumables would be sales, coding activity and I think although its an extreme example, we probably saw that the biggest example of that between Q2 and Q1 were I think in some weeks, some systems sales activity just stopped. It was dismal back there in February. So but yes I would agree with Bob on overall consumable usage because its average is down.

Jim Ricchiuti - Needham & Co.

Okay. Scott when you talk to your channel guys, your partners, can you give us a sense where they are seeing some pickup in “activity”, which vertical market.

Scott Crump

Well, may be with the exception of Japan I think it’s pretty much across the Board. Well I guess it would be, with the exception of the trade in Japan, I think we are seeing in medical, we are seeing the consumer products business machines. Really good, I am very optimistic about the aerospace segment. And education, if you look at market verticals probably education would be strongest of our chain.

Bob Gallagher

Yes absolutely.

Scott Crump

One other things that is really interesting to me is that Stratasys, now has over 1,000 of our 3D printers in high schools in North America alone. And of course we sell worldwide, so it’s not just a university, college, or a trade school discussion. It includes high schools and in some cases, and this is hard to believe, but junior high as well.

Jim Ricchiuti - Needham & Co.

Okay, and just last question. Paid parts, do you see any sign of the pricing pressure stabilizing?

Bob Gallagher

That continues to be a fairly irrational pricing environment. So I would say at this point, and for mainly the US, I have not seen that. I think that our team is doing quiet well in the environment that we are in. The environment that we are in, to give you an example is difficult for those that aren’t financially sound, we’ve begun to hear about some of the larger service bureaus that are in financial difficult possibly exit the market. In fact, one did file bankruptcy in the last quarter.

So it’s tough service business especially for those service companies that rely let’s say solely on the US auto market or they trade US auto market, which we do not. We’ve got a fairly broad spectrum of industries that we cover.

Operator

Your final question comes from Jeff Evanson - Dougherty & Co.

Jeff Evanson - Dougherty & Co.

Sorry gentlemen. Actually, my question has already been answered. Thank you.

Operator

Ladies and gentlemen there are no further questions in the queue at this time. I would now like to turn the call back to Mr. Scott Crump for closing remarks.

Scott Crump

Okay thank you. While on closing, we have a strong balance sheet and we remain committed to our long term goals and objectives. In addition, we are prudently managing our company through an unprecedented market environment. We remain confident in our ability to provide long-term value to our customers, channel partners and shareholders and we are well positioned as market conditions improve.

I like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Good bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect, good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stratasys Inc. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts