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Stratasys Inc. (NASDAQ:SSYS)

Q2 2010 Earnings Conference Call

July 28, 2010 8:30 AM ET

Executives

Shane Glenn - Director of IR

Scott Crump - Chairman and CEO

Bob Gallagher - CFO

Analysts

Troy Jensen - Piper Jaffray

Steve Dyer - Craig-Hallum

Brian Drab - William Blair

Chad Bennett - Northland Capital Market

Graeme Rein - Bares Capital

Jim Ricchiuti - Needham & Company

Chuck Murphy - Sidoti & Company

Andy Schopick - Nutmeg Securities

Ryan Thibodeaux - Maple Leaf Partners

David Trossman - MTB Advisors

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Stratasys earnings conference call. My name is Brandy and I'll be your operator for today. [Operator Instructions] I'll turn the call to Mr. Shane Glenn, Director of Investor Relations. Please proceed sir.

Shane Glenn

Good morning and welcome to the Stratasys conference call to discuss our second quarter financial results. Representing Stratasys's 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 our Investor section of our Web site at www.stratasys.com. or directly by accessing the link provided in our press release.

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, 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 objectives 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 and sales of our 3D printers, our WaveWash support removal system, the demand for proprietary consumables; the expansion of our paid parts service and our beliefs with respect to the growth and 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 ULTEM 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 RedEye on demand and other paid parts services.

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 obligations 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.

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 the investors may deem relevant to the company's operations and comparative performance, primarily the identification and exclusion of expenses associated with warrant charge, 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.

Scott Crump

Good morning and thank you for joining us to discuss our second quarter financial results. During the first quarter, we entered into a gain changing exclusive agreement with HP for the worldwide distribution of our 3D printers.

During the second quarter, HP began marketing and shipping those products to end customers. We're excited to report that HP exceeded their initial order forecast for the second quarter and reported strong sales through to end users. We are pleased with this progress and have become more optimistic about expanding the relationship in the future.

Consequently, we've begun to plan for the next phase of our collaboration with HP. In addition to the progress we made with HP, we are pleased to see a continue improvement in business conditions across our core markets during the second quarter. Total revenue for products and services increased by 22% over the last year, led by a 56% increase in 3D printer system revenue.

In addition, our consumable revenue grew by an impressive 25% to a record level during the second quarter. Our system unit sales also represented a quarterly record growing by 54% over last year.

We were proud to launch our new WaveWash easy to use, automated support removal system that further uniquely differentiates Stratasys competitively. Within Fortus, we continue to maintain a strong pipeline of orders driven by the improvement in business conditions within our core markets.

We're excited about a recent contract extension with our Fortune 500 Partner to develop exciting new DDM applications within the Fortus line.

Well 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

Thanks Scott. Total revenue is $30.1 million for the second quarter 2010, a 22% increase over the $24.6 million reported for the same period last year. The company shift a record 682 units during the second quarter at 54% increase over last year. The strong unit growth was driven by growth in our 3D Printer unit system sales.

Domestic sales represented 56% of total revenue during the quarter and grew by 26% over last year. International sales were up 18% for the quarter. The international sales were up was impacted by the decline in the Euro. Euro declined in the average first quarter rate resulted in 382,000 lowered Q2 revenue.

Second quarter products revenue was $23.8 million, a 31% increase over the $18.2 million reported for a same period last year. Two factors impacted our product revenue growth during the quarter. First, 3D printer unit sales increased by 60% when compared to the second quarter of last year, driven by the new design jet we shift to HP as well as strong growth in our Stratasys brand of 3D printers.

Although HP is only recently initiated their marketing programs, we believe they are having a positive impact on the market. HP significantly exceeded their original forecast for the second quarter and reported that virtually all systems that sold through to end users.

Reflecting the impact, our 3D printer unit sales within market served by HP which includes both design jet and Stratasys branded systems, increased by a 74% during the second quarter.

Despite this strong growth, we want to remind everyone that HP's overall unit volume at this stage remains relatively small given their limited roll out of only two products in 5 years in countries.

As I will address later in the call, HP is more focused on refining their goal market strategy during initial to better prepare for future expansion and accelerate its sales launch.

The second item impacting our product revenue during the quarter was the 25% increase in our consumable revenue compared to last year. This represents the positive trends that began in the fourth quarter of last year and we believe represents a positive leading indicator of our businesses going forward.

Fortus sales were down slightly in the second quarter versus last year. This was a function of timing as Fortus system bookings increased by 30% over the last year during the second quarter. Second quarter service revenue was $6.3 million, which was down slightly from the $6.4 million reported for the same period last year.

Our maintenance revenue declined by 13% during the second quarter compared to last year. The recent decline in maintenance revenue reflects an extension of the warranty period we implemented in early 2009 for most of our systems. Revenue in our RedEye paid parts business increased by 20% in the second quarter compared to last year. This represents a positive trend that began last quarter as RedEye continues to recover from a period of overly competitive pricing that occurred during the recent recession.

Gross profit was $14.8 million for the second quarter of 2010, a 28% increase over the $11.6 million reported for the same period last year. Gross profit as a percentage of sales increased to 49.1% when compared to the 47% for the same period of last year.

The gross profit percentage was positively impacted by the growth in total revenue and service products and service revenue over last year as well as strong sales of our consumables and higher priced 3D printers.

Gross profit as a percentage of sales declined sequentially from the 51.5% reported for the first quarter. The sequential decline in gross profit percentage was driven by the weaker Euro, sales of our lower-margin HP design jet, and a mix shift within Fortus that it favored lower-margin 360mc over the higher-margin 400mc.

Operating profit was $4 million from the second quarter of 2010, a 177% increase over the $1.5 million reported for the same period of last year. Operating profit as a percentage for sales increased to 13.4% when compared to 5.9% for the same period of last year.

Operating expenses increased by 6% over the last year to $10.7 million during the second quarter. The biggest impact on operating expenses was a 54% increase in R&D expenditures, driven principally by development programs that support new product introductions such as the recent launch of our eco-friendly automated support removal system called WaveWash.

In addition, the R&D offset from funds provided by our Fortune 500 Partner to develop DDM applications for our Fortus line was lower during the quarter at $274,000 versus $978,000 for the same period of last year.

SG&A expense in the second quarter included $262,000 of stock based compensation expense, net of tax, compared to $162,000 to the same period of last year. In other income, the second quarter included a relatively large foreign currency loss of $439,000. This loss was the result of the significant appreciation of the dollar relative to the euro during the period.

Pre-tax profit was $3.7 million to the second quarter compared to $1.3 million to the same period of last year. Income tax expense amounted to $1.4 million for the second quarter for an effective rate of 37.2% compared to $450,000 or 34.7% for the same period of last year.

The federal R&D credit has yet to be renewed for 2010 and we have accrued our tax liability accordingly. This contributed to a tax rate in Q2 that is relatively high compared to the range we expect for 2010 of 34% to 37%.

Assuming renewal of cash credit later this year, we will recruit some of our tax expense accrual. Net income was 2.3 million for the second quarter compared to 850,000 for the same period last year. Non GAAP net income was $2.6 million or $0.12 per share compared to $1 million or $0.05 per share for the same period last year.

Non GAAP net income includes stock based compensation expense in both periods. A table provided within our press release, provides itemized details for all non GAAP items incurred during both periods.

We finished the period with approximately $72 million in cash and investment and we continue to be pleased by our management working capital. Inventory balances were $17.3 million at the end of the second quarter, which is up when compared to the $14.6 million at the end of fiscal 2009.

The increase in inventory was planned and driven principally by the anticipated introduction of our new WaveWash support removable system. The longer lead times required by suppliers as well as anticipation of stronger orders over the coming months.

Right now, we expect inventories well reduced as we move further through the last six month of the year. Accounts receivable with $21.7 million at the end of second quarter, which is up when compared to $19.3 million at the end of the fiscal year.

Day sales outstanding or DSO with 66 days, compared sequentially to 63 days at the end of the first quarter and compared to 68 days at the end of the fiscal 2009. And 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 to our shareholders and investment community. We continue to observe an improvement in market conditions during the second quarter and we are optimistic about the coming periods.

However, it remains difficult to predict our performance coming out of the deep recession as we move into our seasonally weakest quarter. Consequently, we will continue as now provide financial guidance for 2010.

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

Scott Crump

Thank you, Shane. We are optimistic that we can continue to observe a favorable business environment for the balance of the year. The second quarter brought significant progress to our game changing collaboration with HP.

In April, HP introduced and began shipping the new designs jet printer in five European countries which includes Germany, Italy, France, Spain and the UK and this HP division responsible for this collaboration is located in Spain.

In addition to using our existing channel, HP has added resellers within those five countries and has numerous additional resellers asking for the product line. As Bob mentioned, system orders from HP exceeded the original Q2 forecast and a sell through to end users has been strong.

We believe HP is already having a positive impact within the marketplace as our system sales grew significantly in those five countries. Although we are excited about these early signs of success and believe the collaboration is off to a great start, we are more excited about what these developments suggest about the future.

As we have communicated previously, the near-term financial impact of the currencies of our agreement with HP is expected to be relatively immaterial in 2010. More importantly, over the near term is the repayment of HP's go-to-market strategy within this well-defined region, so they can prepare for a broader and possibly, more accelerated market expansion in the future.

Given the initial success and growing optimism about expanding the relationship, we've begun to prepare for the next phase of the collaboration. This includes planning for expansion and capacity as well as a dramatic evolution in our product line.

While the uPrint platform represents a major step in providing a full product solution that appeals to a broader market, we will continue to develop new products that provide the opportunity to accelerate future adoption. We will accomplish this by making systems that capitalize on a price-elastic market with products that are more reliable, easy to use, and office-friendly.

Our recent introduction of the WaveWash support removal system is a great example of improving upon our whole product strategy. This new platform improves the ease of use for customers by providing them a more hands-free process to automatically remove support material. Under the WaveWash brand by Stratasys and the Design jet brand by HP, the new system is also office and eco-friendly. HP's input was instrumental in our development of this new support removal system.

We continue to believe this relationship represents the beginning of a revolutionary new period for our company. Stratasys and HP believe that millions of product designers are now ready to bring their designs to life in 3D and we're collectively preparing to satisfy that demand.

While our relationship with HP represents the game changing opportunity within 3D printing, you should not overlook the growth opportunity within our Fortus line of our 3D production systems.

We believe HP's decision to enter the market with products based on our proprietary FDM technology will provide a market boost for our Fortus line of our 3D production systems as well.

In addition, companies have began to recognize the value of our technology for DDM applications including fixtures and assembly tools within the manufacturing applications. One example of this is the U.S. army who recently purchased a 400mc to quickly produce jigs and fixtures as well as specialized repair tools to sustain the existing fleet of helicopters for all the branches of military.

The FDM technology provides them with a quick response manufacturing capability to reduce repair times and overall vehicle ownership cost.

Another example is Lockheed's missile division in Orlando who recently purchased a 900mc system to accelerate product development and has found a growing demand to use the FDM technology to produce a low cost to composite fabrication tools.

To further our goals within DDM, we are pleased to announce that we recently extended a collaboration with our Fortune 500 Partner, to develop new platforms for DDM applications. The contract extensions signed this month includes approximately $800,000 of additional R&D funds for 2010 to further develop our Fortus line for DDM.

This brings their total spending in price development project with Stratasys to approximately $5.5 million over past 5 years. They view this project as highly strategic and critical to future programs.

We are excited that the industry, that there are leading industry companies, shares our vision and recognizes the potential of our FDM technology for manufacturing of end-use parts.

With the recent economic upturn and emerging DDM opportunities, we continue to see a strong pipeline relative to last year and we remain optimistic about a strong year within Fortus.

As we emerge from last year's great recession, we continue to observe a positive trend in consumable sales in our RedEye business. We believe the strong growth in our consumable revenue of 25% is a positive indicator of sustainable growth trends.

Okay, in summary, we are pleased with the progress in our relationship with HP and we believe that we are well positioned for a significant expansion in 3D printer sales in the future. I believe that HP will begin to execute a global expansion throughout 2011.

In addition, we need to respect the fact that we are in the early stages of this relationship and therefore can provide only limited information. We want to adhere to our confidentiality arrangements with HP and we don't want to jeopardize the impact of future marketing programs.

We believe that this is in the best interest of our shareholders. Business trends remained encouraging during the second quarter and we are optimistic about the remainder of 2010. However, we will continue to conservatively manage our spending and resources given the difficulty in predicting market conditions over the near term.

In addition, we are excited about the incremental growth opportunities provided by the emerging DDM applications within our Fortus line.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Troy Jensen of Piper Jaffray.

Troy Jensen - Piper Jaffray

Hey good afternoon or good morning gentlemen.

Bob Gallagher

Good morning Troy.

Troy Jensen - Piper Jaffray

Hey, so maybe a quick for Bob. Can you touch on the gross margins here, it dropped I think to 49.1% down from 51.5%? Given that consumables were up all-time record levels here, why the drop? I'm assuming its product mix, but when does consumables start to really grow the gross margin line here?

Bob Gallagher

We are having an unusual mix in the quarter. Some of the things that have impacted strongly as I mentioned in the call, when we were hit by the euro as I think it moved on to the significantly lower rate in the previous quarter.

But and also the Design jet as we mentioned, and as expected, would have a lower margin on our other 3D printers. But also importantly in the mix in the Fortus line, is we saw significant shift between 360mc versus the 400mc. As I look out into what we have in backlog as well as order so far in the quarter, I don't see that will necessarily be a continuing trend and we've always had product mix issues and this is the quarter where we bought down on our lower margins.

Troy Jensen - Piper Jaffray

And then on HP, this has one two-part question here and for my follow-up. But can you let us know is HP going to be classified as domestic or international and then you had some comments in your press release about a $5 million a one-time charge? Was that in Q2 or is that already reported in Q1?

Bob Gallagher

In HP we will, because of market that they are in today, we include that in our international sales and a $5 million charge that you're referring to would be Q1 charge. There is no specific charge like that in Q2 at all.

Troy Jensen - Piper Jaffray

Okay alright, well good look going forward guys.

Bob Gallagher

Thanks.

Operator

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

Steve Dyer - Craig-Hallum

Thanks, good morning guys.

Bob Gallagher

Good morning.

Steve Dyer - Craig-Hallum

Bob, are you willing to at least let us know if HP was a 10% customer in the quarter?

Bob Gallagher

Yes as I said, they are not a material part of our sales and at the end of the year, if they exceed 10%, we'll disclose that. They talked right now, it's all about long term growth and the relationship and expansion and we are excited about how it's been moving forward so far today. Remember that they only at the ended of the quarter probably starting to the introduction in May, so we only have part of a quarter and we really need to focus on the long term here and we are really excited about the initial.

Steve Dyer - Craig-Hallum

Okay. And then, did I hear that correctly, domestic was 56% of revenues in the quarter and leaving international to be 44%, which I would assume was driven a lot by HP?

Bob Gallagher

You got the percentages correct which is really not a significant change from the overall percentages in the last quarter.

Steve Dyer - Craig-Hallum

Okay. How should we think about operating expenses going forward? It was just a touch higher maybe than I had modeled at least this quarter. Is this kind of a decent way to think about the run rate going forward?

Bob Gallagher

Yes probably the area, as I look out there, probably the area that's higher than probably what people would have expected, there is R&D expenses and we are seeing some really good opportunities that we are working on in terms of product development. We're working with two different Fortune 500 companies with HP and another partner, so we think there is a great opportunity within R&D and we will continue to spend it in a similar level on the second half.

Steve Dyer - Craig-Hallum

Okay and then last question, I ran over my allotment here, but you had indicated the need for expansion here. What is that going to involve the CapEx I guess for the quarter or kind of looking out?

Bob Gallagher

Yeah, we are not, we will give more color around that in future quarters.

Steve Dyer - Craig-Hallum

Okay and then do you have the CapEx number for this quarter and also cash from operations?

Bob Gallagher

Give us a second here.

Steve Dyer - Craig-Hallum

No problem.

Bob Gallagher

I don't have the cash from operations and our cash from operations. I have it for the full year so far, it's 2.6 million. I don't have it for the individual quarter.

Steve Dyer - Craig-Hallum

Okay, alright thank you.

Bob Gallagher

Thanks.

Operator

Our next question comes from Brian Drab of William Blair. Please proceed.

Brian Drab - William Blair

Good morning.

Bob Gallagher

Good morning.

Brian Drab - William Blair

Looking at the 60, you said 6-0, 60% growth rate of 3D printers. Is that right?

Bob Gallagher

Correct.

Brian Drab - William Blair

For units? So that, by my historical numbers basing of my historical number, it looks like that might be the best result that you've had in terms of 3D printer units in the company's history. I'm wondering how does that breakdown, just roughly in terms of uPrint versus a legacy product and I guess design jet too but I know you won't be able to give us to many specifics on Design jet?

Bob Gallagher

Yes, we will try to give you some color around those numbers that relates to what we -- our uPrint and Design jet represented about 37% of the overall mix within the products. We consider the uPrint plus, we put that in with the legacy, because there is a differentiation in the margin of our products. So the uPrint, the 1,200 SST and Elites represented at 60, the uPrint plus, excuse me, and even 1,200 SES represented 63% of the volume. Well the uPrint and the Design jets represented 37% of the volume.

Brian Drab - William Blair

Ok great and then, give us a little help on the interest income and other line and what we should expect going forward in the third and fourth quarters just on a directional basis?

Bob Gallagher

Directionally, we've been down. Partial hedging program starting effect of August 1, we are going to more fully hedged in that. So I think you're going to see a small impact on that line overall is what I would expect. From a cash earning standpoint, the amount of interest income is relatively nominal given interest rates today. So I won't expect much impact on that line with whomever directionally.

Brian Drab - William Blair

So just to be clear, not much impact meaning that it should be roughly a wash on that line or close to zero or close to the second quarter result?

Bob Gallagher

Close to wash on that line.

Brian Drab - William Blair

Alright, thanks guys.

Bob Gallagher

Thanks

Operator

And the next question comes from Chad Bennett with Northland Capital Market.

Chad Bennett - Northland Capital Market

Just a couple questions. Bob, you gave a, I missed this number. You gave a 74% growth number year-over-year. I don't know if you could go back to, do you remember, do you recall what that was related to?

Bob Gallagher

Yes I do. We spoke about the five-year European countries that HP is in. We sale both to, HP sells the Design jet and we sell our own 3D printer within those countries. So, within those five countries, the combination of HP sales as well as Stratasys's 3D printer sales increase by 74%.

Chad Bennett - Northland Capital Market

Ok, that's what I thought. So, if we were to look and if I recall, prior to HP, you sold uPrints in those five countries before right?

Bob Gallagher

Correct.

Chad Bennett - Northland Capital Market

So if we were to look, I know you don't like to give a lot of detail, but if we were focused on uPrint specifically or that kind of priced product, what would the unit growth be year over year, excluding kind of Dimension and I don't know if you sell any Fortus in those five countries, but kind of the uPrint related products is, Can you give us any insight there?

Bob Gallagher

Yeah I think that in the terms of color that we have given you, we've tried to give you some color related to the numbers and we are not really going to go into more specifics. Again, we need to focus on the long term and that the relationship is going strong with HP.

Shane Glenn

And Chad, just one other thing, we were hesitant to even to give you the numbers that we did because once again, here the focus is all about them getting their strategy correct here over the short term before they expand further, but we did at least wanted to provide, wanted a bit about that the other fact that yes, you know what they are doing. They are selling more systems in the market but as we've said, they're not just getting started.

Chad Bennett - Northland Capital Market

Yes. No, I understand. Going back to gross margin, I think you answered it, but do you have any more specifics? You gave three impacts on gross margins. Is there a way to quantify those three things in terms of importance on the gross margin this quarter?

Bob Gallagher

If you put them on the quarter of priority, you know, the shift in the mix within the Fortus with the number one item and probably equal then between the Euro as well as the impact of design jet versus uPrints

Shane Glenn

And then at Fortus, Fortus probably had over a 100 basis point impact just alone.

Chad Bennett - Northland Capital Market

Okay. That's a good color and then just last question from me. On the balance sheet, I think you reclassified some decent amount of cash from cash to long-term investments held them to maturity? Any type of color there on why by the reclassification and what you're invested in?

Bob Gallagher

Yes. We continue to our investment in nothing below a AAA standard and we moved more of our investments in to our commercial paper of high grade commercial paper that has maturity, is more than 12 months.

Chad Bennett - Northland Capital Market

Alright thanks.

Bob Gallagher

Thanks Chad.

Operator

And the next question comes from Graeme Rein with Bares Capital. Please proceed

Graeme Rein - Bares Capital

Good morning. Scott could you talk, I know you didn't want talk about the capital spending to expand capacity but can you kind of discuss where you are right now in terms of how many units you could produce annually and where you want to get in the next 6 to 12 months?

Scott Crump

Well you know, we've talked a lot about the S-Curve by ramping our industry and we expect that the ramp will be very similar to that, which is more back end unloaded. We think that the line up will be very similar to the way the 2D slider market developed over time and markets that HP now dominates. We currently, to more to your question, we currently shipped over 2,000 units per year with a plan to go well over 10,000 units per year over the next few years but we're not giving guidance over the next few months for the next two quarters.

Graeme Rein - Bares Capital

Right but that you're current capacity if you sort of worked around the clock. You know what type of unit output are you at right now like 5,000 or is that too high?

Bob Gallagher

No, we can probably double our current capacity from where are right now but when you go into things like facility planning, as you can appreciate, there is a long lead time on some of those items in terms of if we need to acquire additional space and getting that space prepared. So some of those plans are longer term plans that you need to start to initiate in the near term. So we are working today, we are working towards mid-term as well as our long term plans to grow.

Graeme Rein - Bares Capital

Ok great and then the follow-up, have you seen any price changes on consumables or in the RedEye business?

Bob Gallagher

No, we've seen a little less, there has been some really aggressive pricing in the RedEye business historically in the great recession. We've seen some of that ease out in the current quarter and from consumable standpoint, we've seen no change in our pricing whatsoever.

Graeme Rein - Bares Capital

Ok, thank you very much.

Bob Gallagher

Thanks.

Operator

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

Jim Ricchiuti - Needham & Company

Thank you. Bob, did you say Fortus revenues were down year-over-year slightly?

Bob Gallagher

Yes, they were. Fortus revenue was down about 2.8% year-over-year but the other thing that I highlighted is that's more of a timing issue as opposed to the sales issue because bookings in Fortus quarter-over-quarter were up 30%.

Jim Ricchiuti - Needham & Company

Ok and just wanted to follow up on that is, the decline you saw and then similarly, the increase you saw in bookings. Is there any color you can provide as to whether there were some geographic dynamics at work there or specific vertical markets where you saw the change?

Bob Gallagher

No, not really. Like I said, the bookings were strong and we saw strong bookings, both in the Far East as well in the Americas as it relates to quarters.

Jim Ricchiuti - Needham & Company

Ok, how about Europe since it's been an area of concern for some folks?

Bob Gallagher

Europe was okay. It wasn't as strong as the other two regions.

Jim Ricchiuti - Needham & Company

Okay, thank you.

Bob Gallagher

Thanks.

Operator

And the next question comes from Chuck Murphy with Sidoti & Company. Please proceed.

Chuck Murphy - Sidoti & Company

Good morning guys

Bob Gallagher

Morning Chuck.

Chuck Murphy - Sidoti & Company

I was just wondering if you could tell us how many distributors you had in Europe prior to the HP deal and how many you have now?

Bob Gallagher

Well Chuck it’s important to remember this agreement is about more than the five initial countries and just the uPrint. It's going to ultimately be about worldwide distribution and HP is using initial introduction to kind of refine that strategy and messaging. Any number we'd give you would be misleading really to the ultimate goals.

They have a lot of resellers asking for the product today. They want the product in these regions and once again, I think what they are looking to do is get the go-to-market strategy right before they add any additional resellers.

And we recall, ultimately they are going to have access to over 10 times the number of resellers than we've had historically. But they prudently, they really prudently managed and limited the number of resellers during the early launch. So I think that's all the color we can provide on that.

Chuck Murphy - Sidoti & Company

Okay. Could you say kind of what the profile of the distributors is these days? I mean, are they selling mostly the 2D plotters? Are they also selling some CAM software or both?

Bob Gallagher

It would be both.

Chuck Murphy - Sidoti & Company

Okay, all right. Then my other question was I know you didn't provide guidance, but you did kind of remind us that third quarter is seasonally the weakest. Is it fair to assume that HP probably still won't be that material and thus the seasonal trends should probably hold this year as well?

Bob Gallagher

Yes the seasonal trend should hold HP's focus on Europe and Europe is traditionally the region of the world that has a biggest impact on us in Q3.

Chuck Murphy - Sidoti & Company

Alright, thank you.

Bob Gallagher

Chuck, thank you.

Operator

And the next question comes from Andy Schopick with Nutmeg Securities. Please proceed.

Andy Schopick - Nutmeg Securities

Yes Bob, a couple of just quick ones for you. Revenue recognition on the HP deal, you will be recognizing revenue on a sell in basis as opposed to our sell out from their channel?

Bob Gallagher

Correct.

Andy Schopick - Nutmeg Securities

And will you continue to provide some color around the sell in and sell out in future periods as you've done today?

Bob Gallagher

To the extent that we have that information from HP during those quarters, we will certainly do that.

Andy Schopick - Nutmeg Securities

Okay that's great. On the foreign exchange, I believe you said that it was $382,000 impact of reducing revenue in the quarter. Is that correct and how would that impact compare with last year’s quarter in terms of FX related impact on revenue?

Bob Gallagher

We just did some system changes in the current year, so I don't have a comparable number from the previous year. We do have about 382,000 number, correct, for this quarter, and I can't give you color as it relates to the last year as the system changes.

Andy Schopick - Nutmeg Securities

Alright, how about for the year to date the revenue impact from just the FX?

Bob Gallagher

If you took it versus the exchange rate that was in place at 12/31, the overall impact is just under $600,000.

Andy Schopick - Nutmeg Securities

Okay, and just one or two others here. R&D funding, I believe is around $2.2 million last year. Looks like you're tracking well below that so far year to date. Can you give us any general estimate of what you expect the R&D funding to be for this full year?

Bob Gallagher

Certainly. As Scott mentioned, we're excited to announce that we had an extension of our R&D partnership with a Fortune 500 Company, which will provide an additional 800,000 of funds for the remainder of 2010.

Andy Schopick - Nutmeg Securities

Okay, thank you very much.

Bob Gallagher

You're welcome.

Operator

[Operator Instructions] Our next question comes from a line of Ryan Thibodeaux with Maple Leaf Partners.

Ryan Thibodeaux - Maple Leaf Partners

Hey good morning. Just a quick follow-up on that last question on the R&D credit, Bob, I believe you mentioned something about R&D being relatively flat for rest of the year. Did that include the R&D offset?

Bob Gallagher

Correct.

Ryan Thibodeaux - Maple Leaf Partners

So the $2.6 million includes a $400,000 per quarter offset, right?

Bob Gallagher

Correct.

Ryan Thibodeaux - Maple Leaf Partners

So it would otherwise be $3 million?

Bob Gallagher

Yes. Well, our spending will be higher, right.

Ryan Thibodeaux - Maple Leaf Partners

First question is, I think it would be again, I ask this every quarter, but helpful to everyone, if you could just provide some kind of a baseline breakout on revenue for 3D versus Fortus versus consumables. I mean, I know you guys give this year-over-year growth rate every quarter but with that I think everyone's got different numbers on what historical baseline is. I am just curious if you would consider disclosing that before HP really ramps up, so we could have a general sense of how that deal is contributing to the overall business?

Shane Glenn

We are looking at that Ryan and we'll continue to try to provide you more information. Unfortunately we can't on this call but we'll do that. We'll hopefully we'll expand the amount of information we can give you in the coming quarters but at this point, we can't give you anymore information.

Ryan Thibodeaux - Maple Leaf Partners

Ok and the next question is I believe Bob, you said that uPrint plus Designjet was 37% of the, I guess, overall unit mix or dimension unit mix?

Bob Gallagher

It was of the 3D printer.

Shane Glenn

That was uPrint, the basic uPrint and Designjet. We.

Bob Gallagher

It’s 37% of the overall 3D printing.

Shane Glenn

The 3D printing. What we do is we is because of the higher margins on the uPrint plus, we kind of characterize it as a higher price system and so we just have the uPrint, the basic uPrint and the Designjet systems in that 37% number.

Ryan Thibodeaux - Maple Leaf Partners

When you disclosed the 41% and the 60% number for Q1 in last quarter's call, was that on the same basis or that includes the Plus as well? I'm just trying to see if it’s apples-to-apples on the – again a reason that just giving units would be helpful.

Bob Gallagher

Right and I think the numbers that your referring to in the first quarter, is really was, we missed both when we gave that number. I think to make it more comparable, we saw strong sales of our uPrints in the first quarter of this year and it was the mix that would have favored more so to the uPrint of Design jet products in Q1 but I don't have a specific number in front of me.

Ryan Thibodeaux - Maple Leaf Partners

Well, I'm looking at the transcript. It says 41% was uPrint, representing 41% of all 3D printer unit sales in the first quarter compared to 61% in the first quarter a year ago.

Shane Glenn

Yes if you look at the first quarter, if you take uPrint and the design jet systems that we shipped, it was 47%. The balance being, I am sorry, I got that reversed. It's 47% would be the higher price system and the balance would have been the lower priced to uPrint and design jet. I apologize. So 47% being the higher priced systems.

Ryan Thibodeaux - Maple Leaf Partners

Okay. Last question on the CapEx in the quarter?

Bob Gallagher

I don't have the CapEx for the quarter. The CapEx year-to-date was just under $1.2 million.

Ryan Thibodeaux - Maple Leaf Partners

Okay and then what was the reason Bob for the increase in share account? Its like it increased 3% quarter to quarter but the stock was down, so shouldn't be any kind of option relation dilution right?

Shane Glenn

Could have been of the full year and --

Bob Gallagher

The full quarter of the warrants that were issued to HP.

Ryan Thibodeaux - Maple Leaf Partners

Is that a good run-rate to use for the September quarter?

Bob Gallagher

You have to check the –

Ryan Thibodeaux - Maple Leaf Partners

Share account number?

Shane Glenn

Yes depending on the share price absolutely.

Ryan Thibodeaux - Maple Leaf Partners

Alright thanks.

Operator

And the next question comes from the David Trossman with MTB Advisors. Please proceed.

David Trossman - MTB Advisors

Thanks and thanks for taking my questions. Can you give us a little update on what your views are of the opportunities of costing down some of your printers as we look forward over the year and then can you remind me as you do that and there's just some more units to HP, are there volume of pricing deals with them, so you're sure that with them or does that benefit most accrued to you?

Scott Crump

Well, our strategy has been for the last nine years, a continued a reduction in product cost and a continued increase in the volume. So you can definitely expect continued reduction in some product costs but product costs that pertained to 3D printings and actually a broadening of our overall price range in order to go after more and more application. Bob, you want to comment on whether we can discuss collaborations on this topic?

Bob Gallagher

As it relates to existing products, I don't think as you look out at remainder of 2010 that you're going to see dramatic change in our cost structure within our existing products. We continue within our product development to work on products that are going to be a better value proposition and are going have a lower cost, so we can continue to move down the price elasticity curve that we think it's so important to get the unit expansion. In terms of pricing and it relates to HP, our current agreement relates to two products that we have on board and its really not related to future product introductions, so that's yet to be determined.

David Trossman - MTB Advisors

Thank you.

Operator

And your follow up question is from Andy Schopick with Nutmeg Securities. Please proceed.

Andy Schopick - Nutmeg Securities

Well, thank you. I wanted to ask, I don't know if we've ever done this before, but I would like to ask about the ASP whether you can give us some sense of what the ASPs were for the 680-plus systems that you shipped in the quarter excluding consumables, just a product versus a year ago and I realized uPrint, of course, is driving those ASPs down. But can you give us a sense for that?

Bob Gallagher

From an ASP overall standpoint, we have our 3D printers, we have published prices that are out there. There's not been a dramatic, we did some changes in those prices in Q1. We also did an introduction of a new product with the uPrint plus that has a retail price of $99 in the U.S., so that's actually an increase. So overall, there hasn't been a dramatic change in our ASPs.

Andy Schopick - Nutmeg Securities

No, I understand that, Bob. I think you misunderstood me. I'm trying to get a sense of what the average selling price per unit shipped was in the quarter and how that compared with a year ago?

Bob Gallagher

Andy, depending on how many, that we have such a variety of products and depending on the volume within specific area, they'll speak to the 900. It has a ASP close to $400,000.

Andy Schopick - Nutmeg Securities

Of course.

Bob Gallagher

And the number of units shipped, it's really not a meaningful statistic.

Andy Schopick - Nutmeg Securities

Okay fine. All right, thank you.

Bob Gallagher

Thank you.

Operator

And you have follow up question from Chuck Murphy, Sidoti & Company. Please proceed.

Chuck Murphy - Sidoti & Company

Hi, guys, just wanted to follow up Ryan's question from before. So you see the change that the lower end systems on a comparable basis for a 53% of sales or 53% of 3D printer sales?

Shane Glenn

It's about half and half for Q1 in 2010.

Chuck Murphy - Sidoti & Company

Okay. Then I'm I guess just a little surprising, we thought that with the HP launch that maybe that side of the business would have risen more as a percentage of sales that mean almost its just that immaterial for the quarter?

Shane Glenn

Well, it was Q1 and we just started shipping a few systems at the end of the first quarter.

Bob Gallagher

The other thing that's really important as statistic because we excluded at the uPrint plus. The uPrint plus was introduced in Q1 and the uPrint plus was a very strong performing product in Q2.

Chuck Murphy - Sidoti & Company

Got you.

Scott Crump

And of course, HP launched their design jets in April, I believe April 19,Q2.

Chuck Murphy - Sidoti & Company

Got you, okay. In I guess kind of a similar question, so I mean, is it fair to assume that HP related stuff has no impact on the second quarter gross margin being a little bit low sequentially?

Bob Gallagher

No, we indicated that, it did have an impact on the margins. We gave it as one of the three factors trying to keep away the euro impact.

Chuck Murphy - Sidoti & Company

Didn't catch that, okay. Thank you.

Bob Gallagher

Thank you.

Operator

This concludes today's question-and-answer session. I'll turn the call over to Scott Crump for closing remarks.

Scott Crump

Okay. Well in closing, I'd like to thank you for your interest in Stratasys and we look forward to speak with you again next quarter. Thank you.

Bob Gallagher

Thank you.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a good day.

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Source: Stratasys Inc. Q2 2010 Earnings Call Transcript
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