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Stratasys, Inc. (NASDAQ:SSYS)

Q4 2009 Earnings Call

February 17, 2010 8:30 am ET

Executives

Shane Glenn - Director of Investor Relations

S. Scott Crump - Chairman of the Board, President, Chief Executive Officer, Treasurer

Robert F. Gallagher - Chief Financial Officer, Secretary

Analysts

Brian Drab - William Blair

Steve Dyer - Craig-Hallum

Jeffrey Evanson - Dougherty & Company

Ian Kell - Northland Securities

Chuck Murphy - Sidoti & Company

Andy Schopick - Nutmeg Securities

Andrew Nowinski - Piper Jaffray

Ryan Thibodeaux - Maple Leaf Partners

Robert Brody - Bares Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Stratasys earnings conference call. My name is Anne and I will be your coordinator of today's call. (Operator's Instructions) As a reminder this conference is being recorded for replay purposes. (Operator's Instructions) I would now like to turn the presentation over to Mr. Shane Glenn, Director of Investor Relations at Stratasys. Please proceed, sir.

Shane Glenn

Good morning and welcome to the Stratasys conference call to discuss fourth 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 that today's conference call is being transmitted over the web and can be accessed through the investor section of our website at stratasys.com or directly by accessing a link provided in our press release.

We'll begin with a safe harbor statement. All statements herein that are not historical facts or that include such words as expects, anticipates, projects, estimates, vision, planning, could, plan, 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 objective for the marketing and sale of our Dimension and uPrint 3D printers and our Fortus 3D Production Systems, particularly for use in direct digital manufacturing, our agreement with HP to expand the distribution sales of our 3D printers, the demand for our proprietary consumables, the expansion of our paid par 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 rate experienced in this and preceding quarters, our ability to produce and market new materials such as Ultem, and a 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 FTM technology and the success of our Red Eye on Demand and other paid par services.

Actual results may differ from those expressed or implied in forward looking statements and 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. Non-GAAP financial measures are provided in an effort to give information that investors may deem relevant to the company's operation and comparative performance, primarily the identification and exclusion of expenses associated with impairment charges, restructuring expenses, and expenses associated with stock-based compensation. 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.

S. Scott Crump

Good morning. We are pleased with our fourth quarter performance considering the difficult economic environment. We finished 2009 encouraged by the positive trends within our markets as well as a record yearend backlog and we begin the year emboldened by our record, a major game changing agreement with HP for the worldwide distribution of 3D printers.

We observed an improvement in the business conditions during the quarter as our customers have become more confident in the economic recovery and became more willing to increase spending. Sales in the month of December were notably strong, leading to a record yearend backlog of system orders.

Our margins for the fourth quarter improved over last year and sequentially driven by the relatively strong contribution of our high-margin consumables. The positive growth in consumable revenue for the quarter was significant given it was the first positive year-over-year sales growth in 12 months. We believe this bodes well for the coming quarters.

We're especially pleased with our strong cash flow from operations which totalled $11 million for the fourth quarter and $25 million for the year. This was a significant accomplishment considering the difficult 2009 year. Our finance and operations team deserve a lot of credit for their continuous improvement in managing our working capital.

We believe we are financially strong and strategically well positioned coming out of the recession. I'll return later to update you on some of our initiatives, including our game changing agreement with HP, but first I'd like to turn the call over to our CFO Bob Gallagher who will further highlight our fourth quarter results. Here's Bob.

Robert F. Gallagher

Thank you, Scott. Total revenue declined by 18% to $26.2 million for the fourth quarter of 2009 compared to $31.9 million for the same period last year. The company shipped 431 systems during the fourth quarter versus 570 last year. As we expected, market conditions remained difficult in the fourth quarter which is reflected in our total unit and revenue comparisons. However, we continue to observe an improvement in market conditions which gained momentum in the fourth quarter. This positive momentum carried over into 2010 and we are cautiously optimistic that this trend can be sustained.

Fourth quarter product revenue declined by 20% to $20 million when compared to $25.1 million for the same period last year. Two factors impacted our product revenue growth in the fourth quarter. First, revenue from Fortus 3D Production Systems declined by 32% when compared to the fourth quarter of last year. It should be noted that the fourth quarter of 2008 represented a record quarter for the Fortus system revenue. However, given the positive trends we are observing in 2010, we expect to generate positive growth in Fortus system sales during 2010.

The second item impacting our product revenue was a 24% decline in our 3D printer revenue compared to last year. Our 3D printer sales in the fourth quarter continue to reflect the weak global economy. Our most affordable 3D printer, the uPrint, represented 47% of all 3D printer unit sales during the fourth quarter which was a similar mix to the third quarter of 2009.

We are pleased to observe an increase in our consumable revenue during the fourth quarter which grew by 4% over last year. While 4% may not seem significant, it represents the first positive growth in the past 12 months. This positive trend in consumables has continue into the first quarter and has gained some momentum. We believe this may be a positive leading indicator for our system sales.

Fourth quarter service revenue declined by 10% to $6.2 million when compared to the same period last year. Our maintenance revenue declined by 6% for the fourth quarter compared to last year and reflects an extension in the warranty period we implemented in early 2009 for most of our systems. In addition, it should be noted that maintenance revenue has been less susceptible to the economic environment given that most of the revenue is generated through contracts signed in prior periods.

Revenue in our Red Eye paid parts business declined by 16% in the fourth quarter. Growth in the paid parts business continues to be negatively impacted by an aggressive pricing environment.

Gross profit declined by 16% to $13.4 million for the fourth quarter of 2009 when compared to the same period last year. However, gross profit as a percentage of sales increased to 51% compared to 49.9% for the same period last year and 48.8% in the third quarter of 2009. We believe this is an impressive accomplishment considering our gross margin has been negatively impacted by several factors including our fixed costs being allocated over a lower total revenue versus last year, a mix shift within our 3D printer business following the introduction of our lower priced uPrint 3D printer, and the negative impact from changing our distribution model for Fortus in North America from a direct distribution model to an indirect channel at the beginning of 2009. These negative factors were more than offset by the relatively strong sales of our higher margin consumables during the fourth quarter.

We'd like to emphasize that consumable impact on the fourth quarter. The strength in gross margin percentage demonstrates the leverage that is possible as we expand our higher-margin consumable revenue. The ultimate goal of our distribution agreement with HP is a significant expansion of our install basis systems which would drive significant growth in our higher margin consumable revenue.

In addition, our margins in the fourth quarter benefited from the cost saving measures we implemented in early 2009 as well as our successful initiative to lower the manufacturing cost of our uPrint 3D printers. We began 2009 with the goal of reducing the manufacturing cost of uPrint by 15% and we exceeded that goal.

We had an operating profit of $3.6 million in the fourth quarter of 2009 compared to a profit of $4 million for the same period last year. Operating expenses declined by 18% to $9.8 million during the fourth quarter compared to last year. Operating expenses benefited from headcount reductions taken in the first quarter of last year which amounted to approximately $2.7 million in annualized savings for the SG&A expense. Also included in the fourth quarter was $243,000 of stock-based compensation expense, net of tax, compared to $341,000 net of tax for the same period last year.

In addition we took charges during the fourth quarter for the carrying value of an investment we have in another company as well as an investment in auction-rate securities. These charges totalled $296,000 net of tax, or almost $0.02 per share. A table provided within our press release provides itemized details surrounding non-GAAP items during both periods.

Our pretax profit was $3.3 million for the fourth quarter of 2009 compared to a profit of $3 million for the same period last year. Total interest and other income for the fourth quarter declined $235,000 from $391,000 due to a decline in interest rates and a more conservative investment portfolio.

Income tax expense amounted to $942,000 in the fourth quarter for an effective rate of 28.3% compared to $1 million tax expense in the same period last year or an effective rate of 33.7%. The lower effective tax rate was a function of a higher tax benefit and the exercise of incentive stock options and a lower requirement for a tax contingency reserve. We expect the rate for 2010 will average between 34%-36% excluding any incentive stock option related impact.

Net income was $2.4 million for the fourth quarter of 2009 or $0.12 per share compared to $2 million or $0.10 per share for the same period last year. Non-GAAP net income, which excludes the charges and the stock-based compensation expense was $2.9 million or $0.14 per share for the fourth quarter of 2009 compared to $3.2 million or $0.16 per share for the same period last year.

We generated positive cash from operations of $11.3 million during the fourth quarter and $25.5 million for the full year. Full year operating cash flow totalled an impressive $1.26 per share. This brings our cash and investment position to approximately $70.9 million at the end of 2009 compared to approximately $48 million at the end of 2008. We have no debt on our balance sheet. We are very pleased with our management of working capital during the fourth quarter given the difficult economy.

Inventory balances were $14.6 million at the end of the fourth quarter which was down compared to the $15.4 million at the end of the third quarter and the $19.9 million at the end of 2008. The reduction in inventory was a result of lower finished goods.

Accounts receivable was $19.3 million at the end of the fourth quarter which was down significantly when compared to the $20.9 million at the end of the third quarter and the $26.5 million at the end of 2008. The reduction in receivables was a result in part of focused collection efforts.

Days sale outstanding or DSO was 68 days compared sequentially to 79 days at the end of the third quarter and compared to 76 days at the end of 2008. Despite the current economic conditions, we have been very effective in controlling our cost and managing our assets. We are well positioned for a rebound in market conditions.

I would now like to turn the call over to our Director of Investor Relations Shane Glenn for comment regarding our outlook.

Shane Glenn

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and investment community. We continue to observe an improvement in market conditions as we enter 2010 and we are optimistic about the coming quarters. However, continued uncertainty and the strength of the economic recovery, as well as the many changes in our go-to-market and product strategies over the past two months make visibility extremely difficult. Based on these factors we will continue to not provide financial guidance as we begin 2010.

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

S. Scott Crump

Thank you, Shane. We finished the year encouraged by the positive trends in our business and we are excited about executing on our new strategic initiatives. We believe the growth trend in consumables combined with our record yearend backlog suggests a building of positive momentum within our core businesses and despite the difficult operating environment in 2009, our margins expanded in the fourth quarter and we strengthen our financial position.

Well, eight years ago we launched the first successful 3D printer at under $30,000, proving a significant inflection point within our industry and the 3D printer price elastic business model. A year ago we established another major milestone by introducing the uPrint 3D printer platform, the world's first personal 3D printer priced under $15,000.

In January we expanded the uPrint family to include the uPrint Plus, an enhanced version of the uPrint with significant new features and priced at $19,900. We believe that the uPrint family of products has significantly advanced our 3D printing product strategy by improving upon several key product characteristics critical to ongoing success including affordability, reliability, ease of use, and office friendliness.

Throughout 2009 we communicated our goal of significantly expanding our sales channel within 3D printing. In a major strategic step to meet that goal we announced a game changing agreement with HP last month for the worldwide distribution of Stratasys developed and manufactured 3D printers. HP will begin the rollout of HP branded 3D printers in the first half of this year starting in Europe and we are on track to begin shipping those products in the coming months.

We believe this agreement will represent a major inflection point in the advancing of 3D printing as a strategy worldwide and represents a watershed event for our industry. In 2008, HP approached Stratasys as they begin an assessment of the 3D printing market. This process included an evaluation of the market potential as well as an assessment of the commercially available 3D printing technologies. We believe that HP's decision to enter the market is further confirmation that a significant market opportunity exists among the millions of designers that are using 3D today.

For Stratasys, HP's proven track record within our target market as they're established as the sales leader for 2D plotters make them an ideal candidate for collaboration within 3D printing. When we first entered the 3D printing market we recognized the need to develop a productive reseller network. We spent years developing relationships with an extensive global reseller network that is highly trained, highly motivated, and exclusive to our 3D printers.

This channel remains a valuable asset to our company and we are pleased to report that the vast majority of our effective channel partners in Europe will become HP qualified resellers.

While we are now ready to leverage our industry leading technology with HP's brand awareness and their extensive sales and marketing organization, we believe this agreement will allow us to realize the full sales potential within our target market and we continue to believe a market potential exists for over 500,000 3D printers serving the millions of mechanical 3D CAD workstations installed today.

In evaluating our industry, HP concluded that Stratasys FDM technology represented the best platform for their 3D printing products. A perfect example of our industry leading technology capabilities was recently put on display at Autodesk, the world leader in designing software at their annual user conference in December. During the conference, Autodesk unveiled a full scale turboprop aircraft engine model designed in Autodesk Inventor software and produced entirely by using Stratasys FDM technology. You can view a video on YouTube that records the development of this turboprop by accessing the link included in our press release.

FDM is the core technology that drives all of our products, including our Fortus line of 3D production systems. The highly durable and accurate production grade plastic part output of our Fortus line provides an ideal solution for a broad range of applications including direct digital manufacturing, or in other words, the production of finished parts. We're excited that our continued collaboration with an unnamed Fortune 500 company to develop products targeting DDM applications have been extended for the fifth straight year.

Before the economic downturn we had begun to generate strong growth in our Fortus line reflecting our success in targeting these DDM applications. We are optimistic that the recent positive trends in our market will allow us to resume that growth in 2010. Our new indirect distribution model for Fortus systems in North America is beginning to generate positive results. As you recall we converted our Fortus direct sales model in North America to an indirect model that leverages the capabilities of a reseller network. So last year this allowed us to triple the effective sales force for Fortus in North America. Our goal is to make the most of our expanding product lines and our new DDM initiatives.

Although business trends are encouraging as we begin 2010, we will continue to conservatively manage our spending and resources given our difficulty in predicting market conditions over the near term. However, the economy aside, we believe the long-term opportunities available to us are the most exciting in our company's history and we look forward to successfully executing our plan over the coming months.

Okay, I'll return with some closing comments, but first we'd like to address any questions you might have. Operator, let's open up the call to questions.

Question-and-Answer Session

Operator

(Operator's Instructions) And our first question comes from the line of Brian Drab with William Blair.

Brian Drab - William Blair

Good morning. Congratulations on a good quarter. First question just around the backlog, it looks like the backlog is very strong, can you give us an idea of how that backlog breaks down at all or at least roughly? Is it leaning more towards uPrint or 3D printers in general or Fortus?

Robert F. Gallagher

It's leaning towards Fortus.

Brian Drab - William Blair

Any more detail than that, that you could give us, in terms of how it's breaking down?

Robert F. Gallagher

Yeah. We saw strong sales for the first time in the year related to our 900 products which added to our backlog and some into the 400 so you really focused on the high end of the system — it's probably two thirds of the backlog is in the Fortus area.

Brian Drab - William Blair

Okay. And then that kind of leads into my followup question I guess, in terms of what you can do to help us think about margins going forward. It looks like the trend is for improving margins, of course more high-end systems are going to help your margins, but you've got some maybe offsetting factors, I imagine some margin pressure from the deal with HP. What can we expect directionally with margins, let's talk gross margins specifically, going into 2010?

Robert F. Gallagher

Yeah. I think much to the chagrin of some people, we really focus trying to talk about our operating income line as opposed to our margins because we're so dependent on the mix. We're certainly encouraged by the margins this quarter and the trends that we're seeing in consumables, but we're really too dependent on the volume and mix to give you a meaningful range for gross margins, but again we think there's operating leverage in the model of 2010 versus 2009.

S. Scott Crump

The other thing that we said on the call about the consumables, we had, as Bob outlined, we had three or four factors that were working against us on the gross margin line percentage, yet our consumables picking up, you wipe that out essentially and we saw some strength in the margin.

Brian Drab - William Blair

Okay, thank you.

Operator

And the next question comes from the line of Steve Dyer of Craig-Hallum.

Steve Dyer - Craig-Hallum

Thank you, guys. Congratulations on a nice quarter. A couple of mine have been answered; is there any HP, maybe an initial order or something like that in that backlog, or is it too far off to comment on?

Robert F. Gallagher

There's no HP in the backlog.

Steve Dyer - Craig-Hallum

Okay. And any more clarity as to when you would expect that to launch? I know we kind of talked about later this year maybe summertime, any more clarity there?

S. Scott Crump

As clear we're going to get is to say it's the first half of this year.

Steve Dyer - Craig-Hallum

The first half of this year, okay. Okay, I'll hop back in the queue. Thanks.

Operator

And our next question comes from the line of Jeffrey Evanson with Dougherty & Company.

Jeffrey Evanson - Dougherty & Company

Actually, all my questions were about backlog so I guess I'll step out. Thanks.

Operator

And our next question comes from the line of Chad Bennett with Northland Securities.

Ian Kell - Northland Securities

Yeah. Hi, guys. This is Ian sitting in for Chad today. Just wondering on the materials side, was the growth there driven by the increase in the installed base or are you seeing an actual increase in utilization out there and are we getting to a point now that we've seen some growth here in this quarter where we can see consistent year-over-year growth on the consumables?

Robert F. Gallagher

Yeah. The 4% growth obviously generally isn't something we'd consider significant, but it was good to see it as a positive trend. If you look at 2009 we obviously expanded our install base, yet for nine months of the year we saw a reduction in the use of the consumables for our machine so it's too early to predict it as a trend being that it was just the one quarter, but we are happy to report that we have seen that positive momentum carry over through the first six weeks of 2010. So difficult to predict at this time in this economy, but it's good to have it as a positive trend.

Ian Kell - Northland Securities

Okay great. And then just as followup, any particular verticals here or at the end of December that really drove the systems backlog growth?

Robert F. Gallagher

No. Really the backlog growth was across all verticals and we saw strong orders from international.

Ian Kell - Northland Securities

Great, thanks.

Operator

And our next question comes from the line of Chuck Murphy from Sidoti & Company.

Chuck Murphy - Sidoti & Company

Good morning, guys. Just a quick question about the unit shipments in the fourth quarter down sequentially a little bit, and just kind of wondering was that more the printers or the systems? And I guess also Dimension versus uPrint?

Robert F. Gallagher

Yeah. I think it was on both sides. One of the things last year that impacts the number of units shipped between is that we did ship uPrints last year in its anticipation of its launch in January of last year so if you look at it on a year over year basis the biggest impact was probably within the 3D printers because of the introduction of uPrint and shipments of that in December 2008.

Chuck Murphy - Sidoti & Company

Gotcha, but I guess why sequentially would the 3D printers be down? Is there seasonality there?

Robert F. Gallagher

I don't have the numbers in front of me of what they were for the third quarter so I can't really comment on that.

Chuck Murphy - Sidoti & Company

Okay great. Well, that's all I had. Thank you.

Operator

And our next question comes from the line of Andy Schopick with Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Thank you and good morning. A couple of quick ones for you; on HP, now I assume that we're expecting initial delivery sometime before the end of June, how many HP resellers do you envision having by the end of this year? Can you give us kind of a sense of a number there?

S. Scott Crump

Well, we're not going to speak for HP, but we do have indications that a vast majority of our current resellers in those affected European countries will become HP qualified resellers. It's also important to remember that this agreement is all about more than five initial countries. It's ultimately worldwide. It's a global distribution strategy and I think that both companies are doing it right by going through some initial steps to get the pilot right, get the messaging, and the marketing perfect, before in fact going global.

Andy Schopick - Nutmeg Securities

Of course, but I assume that by 2011 you would expect to have a true global rollout by next year or sometime during the course of next year?

Robert F. Gallagher

Yeah. The timing is dependent on how well the initial launch goes and we're not here to comment on when the full rollout will be. I think that's really more of an announcement that will come from both us and HP at the appropriate time.

Andy Schopick - Nutmeg Securities

All right, Bob, as a followup, could you give us a percentage of sales international versus US in the fourth quarter and the year, if you have that?

Robert F. Gallagher

For the fourth quarter it was 55% of it was domestic and 45% of it was international and I don't have it right in front of me for the full year.

Shane Glenn

For the full year, Andy, about 56% was domestic and obviously 44% international.

Andy Schopick - Nutmeg Securities

Sure. Okay thank you, let me pass it along.

Operator

And the next question comes from the line of Andrew Nowinski with Piper Jaffray.

Andrew Nowinski - Piper Jaffray

Hi. Good morning, guys. I just had a question on Fortus I guess. So you said you tripled the sales force of Fortus this year with the new channel rollout, but it looks like revenues in Q4 were still quite a bit lower than any other quarter in 2008. So just wondering when should we expect these revenues to start ramping up, or should we expect them to ramp up in 2010 or should we just wait as the channel needs more time to kind of make traction?

S. Scott Crump

Yeah, Andrew. As we said on the call, we expect positive growth in 2010 from Fortus. When you look at 2009, obviously a very difficult year, and the comparison were quite difficult when you look at particularly the fourth quarter. I mean 2008 Q4 was one of the best quarters we've ever had — or is the best quarter we've ever had for Fortus, and if you recall, Fortus system revenue collapsed because of the economy in Q1 of 2009 so theoretically in 2010 Q1 we're starting to anniversary some significantly easier comparisons in Fortus and that's why we feel good and we feel optimistic and we said that we expect positive growth in this year from Fortus.

Robert F. Gallagher

At this point six weeks into the year it really becomes almost anecdotal, but I can tell you that the orders we received in the first six weeks of the year related to Fortus are substantially higher than they were last year.

Andrew Nowinski - Piper Jaffray

Got it. And then with regard to paid parts, when do you think or should we expect the pricing pressure to ease in 2010 here or is that going to continue?

Robert F. Gallagher

I would expect some of it to really continue because I think a lot of the service bureaus out there are well under their capacity and a lot of the ma & pa shops are struggling. Some of them may go out of business and if that happens that will ease the pricing pressure, but until then I think we're going to see some continued pricing pressure.

Andrew Nowinski - Piper Jaffray

All right, got it. Thanks, guys.

Operator

And your next question comes from the line of Ryan Thibodeaux with Maple Leaf Partners.

Ryan Thibodeaux - Maple Leaf Partners

Hey, good morning. A followup to Chuck's question on the Q4 unit decline over Q3. I think if you go back all the way to 2003, Q4 units have been up on average 15% quarter over quarter in Q4 so if you could just kind of readdress what, if any, significance that might have for this year?

Robert F. Gallagher

Well, I think the unit volume also has to be taken into consideration as it relates to the backlog that we're carrying into 2010 that we had positive momentum and positive backlog year over year, in fact a record backlog in a substantial number of units of that being within the Dimension line. Additionally if you're doing a quarter over quarter comparison you're going to find that with the launch of uPrint last year we had a substantial number of uPrint shipped in the fourth quarter of last year so I think the comparison is a very difficult comparison period.

Ryan Thibodeaux - Maple Leaf Partners

So on the uPrint comment then, we had a larger number of uPrints shipped in the March quarter so does that mean that we'll have a less than seasonal Q1 on a unit basis for this March?

S. Scott Crump

Well, one of the things that, you know, the uPrint, when we had our introduction of it so it has a positive impact on the fourth quarter of 2008, it had a positive impact on Q1 2009.

Ryan Thibodeaux - Maple Leaf Partners

But a much larger impact on Q1 '09 than Q1 '08?

S. Scott Crump

Yeah, but I think the takeaway I would hope from the call is one where we're seeing a positive impact both from the backlog we're carrying into 2010 as well as a positive impact on the orders that we've received through the first half of the quarter. So I think that both of those factors are going to diminish that impact as you look at Q1 of 2010.

Ryan Thibodeaux - Maple Leaf Partners

I think that what people may be having trouble with is that have a record backlog that's bigger than the 2007 backlog which was $5.7 million back then, and you were able to give pretty good guidance back at the end of 2007, and considering the overall improvement of the economy and how most companies now are getting better visibility, I guess it's just a little puzzling as to why you can't provide some kind of guidance at least for the quarter.

S. Scott Crump

Because I don't think anybody knows the strength of the recovery, and we're not willing to try to predict what the strength of the recovery would be and the band is fairly significant. And you can see the impact that we had with the consumables growth in the fourth quarter and what that does to our margins. So we don't think that we could give something that would be meaningful to the quarter. The other thing is we've said previously, a lot of our orders are towards the tail end of the quarter which makes that predictability more difficult.

Ryan Thibodeaux - Maple Leaf Partners

Is it more difficult than it has been in the past?

S. Scott Crump

We've never given quarterly guidance, and we've seen highs and lows in the quarters. If you go back historically and look at this company we've surprised you negatively and positively when it comes to quarters in years when we've given you very good annual guidance. This is a very difficult business to predict on a quarter to quarter basis under normal times and it hasn't gotten any easier right now.

Ryan Thibodeaux - Maple Leaf Partners

All right, thank you.

Operator

Our next question comes from the line of Robert Brody with Bares Capital Management

Robert Brody - Bares Capital Management

Good morning guys. What's the projection from your North American resellers with regard to the HP deal?

S. Scott Crump

Shane, do you want to repeat the question?

Shane Glenn

I think the question was, Robert, what's been the reaction from our North American Channel Partners from the announcement of the HP deal, is that correct – is that your question?

Robert Brody - Bares Capital Management

Right.

S. Scott Crump

Well, you know, you expect there's going to be a lot of questions from them. But first I want to point out that there's been – there's no immediate impact in North America, from this announcement. Obviously this is a roll-out initially to five countries in Europe, but I think – you know across the board whether it's in Europe or ultimately in North America when we do expand into those markets, this is a big opportunity for them. I mean, they have an opportunity to partner eventually with HP and leverage their business with the HP brand, and marketing muscle.

So I think that's one of the reasons that when you look – well just look in Europe for example, we're getting word that a vast majority of our resellers are going to look to be signing up with HP to become HP qualified resellers. So we don't expect to lose any resellers. You know, you also have to remember that our resellers – all our resellers have a significant install basis systems that are generating recurring revenue for their business, so it's in their interest and it's in our interest that everyone stays affiliated long term. So I think based on the reaction that we've seen thus far in Europe and the introduction there – there have been questions obviously but it looks like we're going to – it looks like most of those are going to become HP resellers, we feel good.

Robert Brody - Bares Capital Management

And can you discuss any developments from a competitive standpoint especially with regards to the presence of (inaudible) market?

Shane Glenn

Robert, we're having a tough time hearing you. I think you asked a question about if there's been any development on the competitive side, is that your question?

Robert Brody - Bares Capital Management

Right.

S. Scott Crump

Really our job on a call is to focus on what we're doing and what direction we're moving in, but from a competitive standpoint it's been relatively quiet since the announcement.

Robert Brody - Bares Capital Management

Okay, thanks, that's all I have.

Operator

And the next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed.

Steve Dyer - Craig-Hallum

Thanks, just a follow up. You guys continue to generate a lot of cash. Any thoughts or how do you think about your cash balance as a strategic tool or what might you do with that in the near term or longer term – whether it be a buy back or acquisition? How do you guys think about that?

Robert F. Gallagher

Yeah, as I've said in the past, I don't think of it as having a cash problem as opposed to a cash opportunity. I think it's very impressive that we're able to generate in this economy $1.26 per share in cash from our operations in 2009. And we still have authorization related to a buy back. We continue to look at strategic ways to use that cash, whether it be acquiring another company or acquiring technology. But as we've said in the past, we're not going to let it burn a hole in our pocket and do something that we don't think is prudent to our long term.

Steve Dyer - Craig-Hallum

Okay, fair enough. Thanks guys.

Operator

And our next call comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.

Andy Schopick - Nutmeg Securities

Yeah, coming back to HP for a second. Bob, are there going to be any anticipated wrap-up or start-up costs that you're going to be absorbing in this calendar year that might be non-recurring going forward?

Robert F. Gallagher

Yeah, you know we've incurred – even what you'll see in our fourth quarter 2009 is that you saw an increase in our R&D expenses as we've been working together with HP. We actually started working with them probably in the third quarter of the year – even though we didn't have a signed agreement...

Andy Schopick - Nutmeg Securities

I'm referring more to launch costs.

Robert F. Gallagher

Oh, launch costs. The only thing that we have – as I look at 2010 the only thing I think is significant is that we've talked about before is that we have the warrants that we issued to HP – and that's a charge that you're going to see related to those warrants in 2010.

Andy Schopick - Nutmeg Securities

Have you determined that charge?

Robert F. Gallagher

The charge will be approximately a onetime charge in the first quarter of approximately $5 million.

Andy Schopick - Nutmeg Securities

In connection with the warrants.

Robert F. Gallagher

Correct.

S. Scott Crump

Andy, going back to the launch costs, of course HP will start with some fairly significant marketing, so they're not just selling 3D printers, they're making the executives as well as the managers that purchase aware and aware of the justifications, so starting now and going for a long time you'll see a significant amount of marketing, but they'll incur that. We have no impact to our P&O on that marketing cost.

Andy Schopick - Nutmeg Securities

Fine. And lastly, Bob, customer funded R&D for this year, or for 2009, can you give us that number versus 2008?

Robert F. Gallagher

Yeah, it was approximately – for the whole year it was approximately $2.2 million from that Fortune 500 company as we've continued to work on the relationship now for five years. In 2008 it was only about $300,000.

Andy Schopick - Nutmeg Securities

Okay, thanks again.

Operator

(Operator's Instructions) And our next question comes from the line of Chad Bennett with Northland Securities. Please proceed.

Chad Bennett - Northland Securities

Yeah, just a quick follow up here. The 3D printers in the quarter, can you go over again for me what – how much they were down and then how it broke out between uPrint and Dimension?

S. Scott Crump

Yeah. The 3D printer units for the quarter were down 23%, 53% of the units during the quarter were what we call our higher priced systems, the 1200's and the Elite, and of course 47% balance were the uPrints.

Chad Bennett - Northland Securities

Okay. And I guess just – you know on the uPrint side competitively are you seeing any of the other – you know the couple other low priced printers that have been released here, are you seeing those yet in the market at all? Thanks.

S. Scott Crump

No.

Chad Bennett - Northland Securities

All right.

Operator

Ladies and gentlemen, there being no further questions I would now like to turn the cal over to Mr. Scott Crump for closing remarks.

S. Scott Crump

Well, in closing we believe our recent OEM agreement with Hewlett-Packard is an inflection point that will accelerate the growth of our 3D printers globally. We have an exceptionally strong balance sheet and we remain committed to our long term goals and objectives. We're in a great position in 2010 as we emerge from last year's great recession. We remain confident in our ability to provide long term value to our customers channel partners and share holders. And we're well positioned as the market conditions improve. I'd like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Goodbye.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

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Source: Stratasys Q4 2009 Earnings Call Transcript
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