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Stratasys Inc. (NASDAQ:SSYS)

Objet Geometries Merger Announcement Call

April 16, 2012 8:30 AM ET

Executives

Shane Glenn – Director, IR

Scott Crump – Co-founder, Chairman and CEO

David Reis – CEO, Objet Geometries Ltd.

Bob Gallagher – CFO

Analysts

Troy Jensen – Piper Jaffray

Jim Ricchiuti – Needham & Company

Steve Dyer – Craig-Hallum

Andrea James – Dougherty & Company

Arthur Weise – Lord Abbett

Operator

Good morning, ladies and gentlemen, and welcome to today’s conference call to discuss Stratasys and Objet Merger Combination. My name is Latrisha, and I will be your operator.

At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. (Operator Instructions)

I will now turn the conference over to your host for today, Mr. Shane Glenn, the Director of Investor Relations of Stratasys. Please proceed.

Shane Glenn

Thanks, Latrisha. Good morning, everyone, and thank you for joining us on such short notice to discuss the combination of Stratasys and Objet. On the call with us today are Scott Crump, Co-founder, Chairman and CEO of Stratasys; David Reis, CEO of Objet; and Bob Gallagher, CFO of Stratasys.

Following the prepared remarks, we will open the call for questions. A copy of the slide presentation is available on the Stratasys Investor Relations page. An audio replay of the call will also be available on our website later today.

Statements made during this call about Stratasys’ beliefs, intensions and expectations, including statements regarding the expected timing and ultimate closing of the merger of Stratasys and Objet as well as the benefits thereof are forward-looking statements.

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

These and another applicable factors are discussed in this presentation and in Stratasys’ filing with the Securities and Exchange Commission, including its report on Form 10-K for the year ended 2011 and subsequent filings. Any forward-looking statements included in this presentation are as of the date they are given, and Stratasys does not intend to update them if its view later change, expect as maybe required by law.

These forward-looking statements should not be relied upon as representing Stratasys’ views, as – these forward-looking statements should not be relied upon as representing Stratasys’ views as of the date subsequent to the date they are given.

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

Scott Crump

Thanks, Shane, and good morning, everyone. Thank you for joining today’s call. This is an exciting day for all of us at Stratasys and Objet. I’m thrilled to be joined by David Reis to discuss the compelling rationale and exciting opportunities we see through the combination of our two companies.

As you know, earlier this morning, we announced that Stratasys and Objet have reached an agreement to combine through an all-stock transaction resulting in a combined company value at approximately $1.4 billion. The combined company, which will retain the name Stratasys, will be a leader in the high-growth 3D printing and direct digital manufacturing industry.

For those who may not be familiar with Objet, they are a privately-held global company based in Israel with more than 430 employees and systems deployed at more than 2,800 companies around the world. Objet manufactures 3D printers for rapid prototyping. We are bringing together two companies with complementary product lines, a shared commitment to innovation and excellence and customer-focused differentiated capabilities.

I’ve known the principles of Objet for nine years. Objet’s Chairman, Elan Jaglom, approached me last fall with the proposal to merge our companies. And now, roughly seven months later, we have a signed merger agreement and together, Elan and I are the visionaries for this combined company. Stratasys and Objet are very familiar with each other as Stratasys was previously a successful distributor of Objet products for more than three years through early 2007.

Let me explain why we believe this merger is a compelling opportunity for stakeholders of both companies. Given our complementary products and technology, we believe our combined product lines will offer an impressive portfolio of 3D printing and direct digital manufacturing capabilities. The combined company should be well positioned to provide the right solution to customers to address their needs across the entire 3D design and manufacturing spectrum. From concept modeling to direct digital manufacturing, we expect to have the solution. Together, we’ll also have a more extensive geographic reach with an installed base of approximately 20,000 systems around the world and a broad array of consumables to address diverse applications.

With more than 260 distributors, resellers and agents combined around the world, we believe we can expand our business opportunity and create tremendous cross-selling opportunities for our combined product portfolios, which will be based upon an enhanced technology platform that can address a wider range of end-user needs. Once combined, we’ll be able to deploy our comprehensive product portfolio across an experienced and focused sales and marketing team. This will allow for cross-selling into the combined companies’ installed base.

As a larger organization, we expect to grow overall customer awareness of the many opportunities to deploy 3D printing and rapid prototyping techniques, which should create new opportunities to sell our combined products. By driving valuable economies of scale, we believe that we can use our combined organization to more effectively support the current and future needs of our customers.

In addition, the merger will bring together an impressive research and development team with some of the most knowledgeable engineers and product developers within the industry. Together, we aim to remain at the forefront of innovation within a dynamic industry that’s poised to transform the process of new product design and manufacturing. In short, this combination will enable customers to find a broad array of innovative 3D printing and direct digital manufacturing solutions at a single destination. The new Stratasys will also be better positioned for growth with an attractive financial profile, which we’ll outline in more detail here in the call.

Turning to slide five, you’ll see that this transaction is structured as a 100% stock-for-stock merger. Under the terms of the agreement, Stratasys will merge into a subsidiary of Objet, and Stratasys shareholders will receive one share of the new combined company for each share of Stratasys common stock that they currently own.

Upon the closing of the transaction, Stratasys shareholders are expected to own 55%, and Objet shareholders are expected to own 45% of the new Stratasys on a fully diluted basis using the treasury stock method. This transaction will be taxable to Stratasys shareholders. The combined company will maintain the Stratasys name and operate under the name Stratasys Ltd. and will continue to trade on the NASDAQ stock exchange under the ticker symbol SSYS. We’ll have dual headquarters in Minnesota and Israel, and we’ll be registered in Israel.

The Board of Directors of the combined company will be comprised of nine Directors with four seats designated by Stratasys and four seats designated by Objet. One additional Director will be designated) by Stratasys and approved by Objet. After the transaction closes, I’ll become the full-time Chairman of the new Stratasys and lead innovation for the combined company. David, who served as CEO of Objet since 2009 and a member of the Objet board since 2003 will become CEO.

Once we have completed the transaction, the combined company will form an Executive Committee comprised of four members of the Board of Directors. The Executive Committee will be responsible for overseeing the integration of Stratasys and Objet and implementing the combined company’s business strategy. Elan Jaglom, the current Chairman of Objet, will serve as Chairman of the Executive Committee of the combined company.

From a financial perspective, we expect the transaction to be accretive to the cash earnings per share within the first 12 months of closing and drive significant incremental long-term earnings accretion based upon a higher revenue growth rate and additional operational synergies. In addition to transaction, we’ll offer meaningful tax savings opportunities.

Regulatory authorities in the U.S. and other jurisdictions will be notified of the transaction and it is subject to Stratasys’ shareholders’ approval. The transaction is expected to close in the third quarter of this year. Approval by Objet shareholders is required for certain actions related to the merger. Stratasys has already entered into a voting agreement with the Objet shareholders holding the requisite majority for the actions to secure the vote. The transaction is also subject to regulatory review, including the expiration or termination of the applicable waiting period under HSR. The shares issued to Stratasys shareholders in the merger will be registered with the SEC.

Well, now, I’d now like to turn the call over to David Reis, who will provide some additional detail on Objet and the merits of the combination. David?

David Reis

Thank you, Scott. I would like to begin by echoing Scott’s sentiment regarding the benefits of this merger to our stakeholders. Given our position within the industry, Scott and I have known each other well for many years. As Scott mentioned earlier, late in 2011, we began having discussions on how together we can best take advantage of the significant growth opportunities we see in our industry. Combining forces would present a tremendous strategic opportunity for our customers, our channel partners, and our employees around the world. I’m very excited about what the future holds for Stratasys and Objet and look forward to leading the new Stratasys as its CEO.

Turning now to slide six, I would like to provide you some more background about Objet. We are a global provider of high resolution 3D printers and pioneers of inkjet-based 3D printing technology, which are well suited for applications which require high feature detail and smooth surface finishes. With our proprietary PolyJet technology, we’ve been a leading innovator in our industry since 1998, and we are proud to have systems deployed at more than 2,800 companies worldwide including several of the Fortune 100 and Fortune 500.

And third, we have a broad range of industries and the products ranging from entry level to high-end printers. We have a strong history of revenue growth and achieved more than $121 million in revenue in 2011 and compounded annual growth rate of nearly 34% from 2009 to 2011. Objet has been profitable for the last seven years, generating $14.7 million in net income last year, and we have successfully grown our installed base and revenue over the last three years.

Turning now to slide seven, our technologies are highly differentiated from other 3D printing technologies in several ways, including its ability to scale and deliver high resolution in multi-material printing. Our easy-to-use, high-speed 3D printers create highly detailed models that have the look and feel of the final design product. We offer our unique PolyJet-based 3D printing systems and deposit to materials instantly, enabling the printing of models with a wide range of physical attributes, including building models that have both rigid and flexible materials in single parts.

Our broad range of 3D printer systems includes our advanced Connex Family, our mid-range Eden Family and our lower capacity entry level Desktop Family. In addition, we offer a wide variety of office-friendly resin consumables including rigid and flexible materials as well as bio-compatible materials for medical applications.

As you can see, on slide eight, we believe our products are highly complementary to Stratasys’ products. Together, we will offer solutions across the entire design and manufacturing spectrum from concept modeling to fit and form prototyping, to functional prototyping and up to direct digital manufacturing. Once the transaction closes, our combined company would be able to offer customers three very distinct technology platforms. We will offer Objet PolyJet technology, which provide high-resolution printing suited for applications which require high feature detail. We’ll also offer Stratasys advanced FDM technology which is a great solution for functional prototyping and application requiring high level of durability and the Stratasys Solidscape technology, which is great for sophisticated investment casting applications.

We are bringing together Objet expertise in design verification and visualization and Stratasys leadership in functional testing and direct digital manufacturing. In short, we will offer customers the best of two worlds. Where the customers need multi-material capabilities or durable material prototypes or finished parts, the new Stratasys will be able to meet their needs. Given our complementary product line, this combination is truly about serving the customers and seeking growth.

You can see how our portfolios fit together on slide nine. At the entry level, Stratasys offers several leading products, starting with uPrint and Dimension, which are used for conceptual and functional modeling. These complement all the Desktop Family product, which are affordable and easy-to-use products for design verification and visualization.

At the higher end, we will offer Stratasys photo 3D production system which produce high performance models used for functional testing and manufacturing of finished parts. These systems complement Objet Connex and Eden Family of products which are used for true-to-life design verification and visualization.

Finally, we will offer Stratasys Solidscape specialty product which allows manufacturers to make complex wax patterns used in investment casting process of finished parts. In addition to this robust portfolio, by bringing together some of the most knowledgeable engineers and product developers within the industry, the combination will create an ability to bring exciting new products to the market.

I would like now to turn back over to Scott, who will tell you more about this combination and why it makes such great strategic sense. Scott?

Scott Crump

Thanks, David. Turning to slide 10, I’d like to briefly address why we believe this is such a compelling market opportunity. 3D digital design content has grown at a rapid pace across multiple industries. This trend has been driven by three design and analyst tools that are becoming more functional and easy to use.

We are seeing the use of 3D tools and content expand within some of our target industries, including the medical technology sector, virtual design such as animation and 3D modeling, mechanical, architectural and design applications as well as reverse engineering. As the use of these tools continues to grow, so will the opportunity to provide products such as 3D printers that can add value by utilizing that content.

This growth opportunity should also be augmented by improvements in 3D printing technologies that will create more functional, affordable and easy-to-use 3D printers. We believe this merger will allow us to be a leader in proving those new innovative products to customers.

In addition, we believe we have the opportunity to further expand the existing 3D printing and direct digital manufacturing business opportunity. There are approximately 14 million total CAD seats and over 5 million 3D CAD seats currently worldwide. We expect the number of 3D seats to continue to grow. However, despite this large addressable market, only approximately 42,500 3D printers have been installed through the end of 2010, suggesting a significant opportunity for us.

Turning to slide 11, our combined marketing and sales capabilities as well as our combined network of resellers will be impressive. We have often communicated that we believe the future growth of our products is highly dependent upon our growing – of our channel. Each company brings relatively strong coverage in certain regions, which suggests a significant opportunity to expand our existing network. The new Stratasys will have more than 260 resellers and agent entities and a significant higher number of feet on the street.

In addition, the combined company will have 42 direct channel managers with a presence in more than 70 countries, positioning us well to capitalize on cross-selling and up-selling opportunities across our combined installed base and beyond.

As you can see from slide 12, both Stratasys and Objet have a high-quality customer base across multiple industries. Together, we will serve customers in a wide range of industry verticals, expanding upon markets we currently serve. With Objet, Stratasys can provide better service to existing customers, and we’ll have an expanded opportunity in end markets such as medical devices and dental. In addition, we each serve unique customers that will present an opportunity to cross sell them a new complementary product line.

Turning to slide 13, as a combined company, we aim to remain at the forefront of our technology within our industry. Once this transaction closes, our combined company will be the home of experts in plastic chemistry, electronics, computer science and mechanics. This should enable us to continue to develop manufacturer and sell a broad product line of 3D printers and 3D production systems as well as related proprietary consumable materials. The new Stratasys will have more than 500 patents issued or pending globally and robust technological platforms to enable future innovations. We believe this transaction will allow the combined company to be even more innovative and more capabilities to develop new consumables and systems than either Stratasys or Objet could have done alone.

Turning to slide 14, the combination will also dramatically expand our consumable offering. Together, we’ll be able to offer our customers a broad portfolio of consumable plastics in terms of thermal plastics, resins and castable waxes for a broad range of applications, including products that are durable, rigid, flexible and bio-compatible. Not only will we utilize our expanded offerings to drive new customer opportunities, but the combined company will have an enhanced long-term opportunity resulting from the sale of the combined company’s high margin consumable portfolio.

In addition to combining our technologies, we’re also bringing together two world class management teams, as you’ll see here on slide 15. After the transaction closes, I will become the full-time Chairman of the combined company. Elan and I will provide the visionary leadership for this combined company. I look forward to working with David as the new CEO. His proven executive leadership skills will be valuable as we move forward together. I’m confident that this is the right team to lead the new Stratasys well into the future.

I’d like to turn the call over now to Bob Gallagher, Stratasys’ CFO, who will take you through some of the additional details about the financial benefits of this transaction. Bob?

Bob Gallagher

Thanks, Scott. On slide 16, you can see that Objet offers a strong financial model driven by its broad portfolio of high performance systems and proprietary consumables. Similar to Stratasys, revenue is primarily driven by three areas: systems, consumables, and service. Objet has a track record of solid financial performance, including strong three-year compound annual growth rates for revenue and net income as well as seven consecutive years of profitability.

On Slide 17, you will note that Stratasys also has a strong track record of financial success. Stratasys achieved $156 million in revenue for 2011 and a three-year revenue compound annual growth rate of nearly 26%. We also achieved $22 million in non-GAAP net income in 2011, capping off a three-year non-GAAP net income compound annual rate of 98%. From a GAAP perspective, we achieved net income of approximately $20.6 million in 2011. This morning, Stratasys also announced preliminary financial results for the first quarter ended March 31, 2012. We expect to report revenue of approximately $45 million, which is a 31% increase compared with $34.3 million reported during the same period last year.

We also expect to report non-GAAP net income of approximately $5.6 million to $6.3 million for the first quarter or $0.27 to $0.29 per share compared with $4.4 million or $0.21 per share reported during the same period of last year. We also expect to report GAAP net income of approximately $4.3 million to $4.7 million for the first quarter 2011 or $0.20 to $0.22 per share. This compares with GAAP net income of $5 million or $0.23 per share for the same period last year.

The non-GAAP financial measures primarily identify and exclude certain discrete items such as the warrant charge, restructuring expenses, amortization expenses and expenses associated with stock-based compensation expense. These numbers are preliminary and represent the most current information available to management. We plan to issue full financial results in updated 2012 guidance for Stratasys on a standalone basis during the first quarter’s earnings call scheduled for May 9.

Turning to Slide 18, we believe this combination will create compelling synergies. As we mentioned earlier, we expect this transaction to be financially accretive to cash earnings per share within the first 12 months of closing.

In addition to being financially accretive, we expect to generate increased sales through revenue synergies. These synergies will stem from new opportunities resulting from the combined companies’ expanded sales reach and product portfolio as well as from cross-selling opportunities of a complementary product portfolio to the existing combined customer base.

Beginning 18 months after close, we expect that the combined company will be generating between $7 million and $8 million of annual net cost synergies. This will result primarily from several cost avoidance measures, including the better allocation of current and future resources, the reduction in future recruiting costs, logistical savings and a reduction in shared G&A expenses and corporate overhead, as the combined company continues to grow. In addition, we expect to achieve between $3 million and $4 million in annual tax savings, also beginning 18 months after close.

On a pro forma basis, we expect this combined company to significantly improve the long-term operating model of the new Stratasys compared with our current standalone model. Based upon this, as a combined company, our long-term operating model targets would include annual growth of at least 20%, non-GAAP operating income as a percentage of sales of between 20% and 25%, an effective tax rate of between 15% and 20%, and non-GAAP net income as a percentage of sales of between 16% and 21%.

Slide 19 provides you with a financial snapshot of both Stratasys and Objet. I won’t go through all the numbers here, but at a high level, we believe the combined company is positioned to achieve a higher long-term growth compared to Stratasys’ current business. Both companies have no bank debt and strong cash positions, which will result in the new Stratasys having a strong balance sheet and the financial flexibility to continue to execute its dynamic growth strategy.

I would now like to turn the call back over to Scott. Scott?

Scott Crump

Thanks, Bob. Turning to Slide 20, as I mentioned earlier, the transaction is subject to a regulatory review, Stratasys’ shareholder approval, the expiration or termination of applicable waiting periods under HSR and other customary closing conditions. And again, the Objet shares issued to Stratasys’ shareholders in the merger will be registered with the SEC. We believe that we have a clear roadmap to completion, which we expect to occur in the third quarter this year, given our complementary businesses and similar vision, we expect a smooth transition upon close.

In summary, this is an exciting transaction that makes strong strategic sense for our companies and our shareholders. Stratasys and Objet each bring a unique set of assets and technologies to the combination. We believe that the new Stratasys will be better positioned as a leader that can provide our customers with a full suite of solutions that are positioned to offer our employees more opportunities for growth, better position to continue to accelerate the growth of 3D printing and direct digital manufacturing, better position with a wider family of product solutions to offer our sales channel, and ultimately, better position to drive faster growth and increased shareholder value.

With that, we’d like to now open up the call to questions.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) Thank you. Our first question is coming from Troy Jensen with Piper Jaffray.

Troy Jensen – Piper Jaffray

Hey, hi. Congratulations, both companies here on what looks to be a great deal.

Scott Crump

Thanks, Troy.

Troy Jensen – Piper Jaffray

Hey, so how about a first question for David. David, obviously, Objet was pursuing an IPO. You guys had the scale, the growth, the profitability levels to go public, so curious why you opted to do a merger with Stratasys versus go it alone?

David Reis

As Scott mentioned in his words, we know Stratasys for many years, maybe over 10 years. And about a few months ago, we started discussing the value of combining the two companies together. Objet’s Chairman, Mr. Elan Jaglom approached Stratasys, and we spent the last several months evaluating this opportunity on both the executive management and the Board of Directors and we got to the conclusion, this is a better route for our company and obviously for the combined company.

Troy Jensen – Piper Jaffray

Okay, fair enough. How about a quick on channel conflict. Obviously, Objet was building out a desktop channel. It’s going to be duplicate channels in all the big markets, of the 260 resellers and agents. Do you expect keeping all of those and just getting cross-selling advantages? So there’s going to be some purging, I guess, on some of the accounts, given some duplication now?

David Reis

We believe that the combined company is expected to grow even faster than what each of the individual companies could have done on their own. Therefore, we believe that we’re able to keep a channel intact, maybe redistribute the responsibility of the channel, but the intention is to keep the channel and even grow it even farther to different verticals to support the expected growth.

Troy Jensen – Piper Jaffray

Hi. Last question and I’ll cede the floor. How about just history with acquisitions and mergers. Scott, I know you guys have done a few small deals but just curious if you guys feel like you have a ton of integration experience?

David Reis

In the last 10 years, I was involved in a few M&A transactions, both as a buyer and seller, both in the U.S. and in Europe. So I think myself has quite a lot of experience and the current combined management team of Stratasys and Objet, I think, has a lot of additional experience in past transactions. So I think we are very well educated and have the right experience to carry such a complex task.

Scott Crump

Maybe I could add to that, this is Scott. The board is balanced with four Stratasys directors and four Objet directors. We’ll also designate additional by Stratasys. Myself and Elan will be overseeing the vision and the strategy of the company, and David as CEO will oversee the day to day activities. So Stratasys and Objet are really more innovative than standalone.

Troy Jensen – Piper Jaffray

Okay. Well, good luck guys, and congrats again.

Scott Crump

Thanks, Troy.

David Reis

Thank you, Troy.

Operator

Our next question comes from Jim Ricchiuti with Needham & Co.

Jim Ricchiuti – Needham & Company

Thank you. Congratulations.

Shane Glenn

Thanks, Jim.

Scott Crump

Thanks, Jim.

Jim Ricchiuti – Needham & Company

Couple of questions, just based on the presentation, you talk about the overall industry installed base close to 43,000-42,500 systems and – the combined company installed base for both Stratasys and Objet. I’m wondering if you can give us a sense, either qualitatively or quantitatively, how that might break out the way you’re beginning to discuss the business in terms of concept modeling, rapid prototyping and direct digital manufacturing. How does the combined installed base of the company perhaps look in those three buckets?

Scott Crump

Well, I’ll take that. This is Scott. We definitely have a combined world-class company with impressive complementary products in our portfolio. We have both the 3D printer desktop level as well as higher end rapid prototyping, as well as the new area of direct digital manufacturing. So we’re growing companies with emerging markets and we should be able to grow all of these markets. We’re still at the beginning of this industry, very – still very under penetrated.

Jim Ricchiuti – Needham & Company

But, Scott, based on the way you look at the market, is it fair to say you think you have a number one unit leadership position in these three segments?

Scott Crump

Bob, you want to take that one?

Bob Gallagher

We have a really strong position in units, but the industry is often measured in growth of revenues. And I think the most important thing is that you have two growing companies and we’re really in the emerging markets and the beginning of a exciting opportunity.

Jim Ricchiuti – Needham & Company

Okay, fair enough. Just – would – maybe just to follow up on the channel strategy. Is the plan to be able to offer these products through the full channel or will you segment the channel based on the different applications?

Scott Crump

David, why don’t you take that one?

David Reis

Yeah, okay. Basically, in the coming few weeks, we’ll start integration planning process. And immediately after closing, our intention is to try and assess and evaluate the different partners, with the goal to try and have serious cross-training to enable qualified partners to fill the other company products. So I’m not sure it will cover all partners, but again, according this qualification process, we’ll roll out a training program that will eventually make the channel offering more robust across all segments and all territories.

Jim Ricchiuti – Needham & Company

Okay, last question and I’ll jump back in the queue. How soon would the Objet product suite and technology be offered through RedEye?

David Reis

I think that it’s too early to say. I think as part of the integration process, we will evaluate this opportunity. Nevertheless, RedEye, today, is offering Objet parts on their website through a third party. So it’s a decision whether to make it (inaudible) it will be taken later in the integration process.

Jim Ricchiuti – Needham & Company

Okay. Thank you.

Operator

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

Steve Dyer – Craig-Hallum

Good morning.

Shane Glenn

Hey, Steve.

Scott Crump

Good morning, Steve.

Steve Dyer – Craig-Hallum

Wondering how this impacts, if at all, Scott, your relationship or the working arrangement you have with HP?

Scott Crump

Well, HP is a valued partner. We’ve, of course, notified them in advance per the agreement. But the combination creates a stronger company with better product opportunities and should not have a significant impact on our relationship.

Steve Dyer – Craig-Hallum

Would the expectation be or is it too early to tell whether some of the Objet functionality or products would also be sold by HP, or too soon to tell?

Scott Crump

David?

David Reis

Yeah, I think it’s too early to say. I think that part of the integration process. We will probably and most likely will meet HP and discuss the various opportunities, but it’s too early to say.

Steve Dyer – Craig-Hallum

Okay. And then, David, I’m curious and I may have missed this but what percentage of revenue or what sort of focus you have on the service bureau or the – similar to a RedEye business. Is that a big part of your business or not necessarily?

David Reis

No. Today, Objet does not have any similar service to RedEye. We only distribute our products directly to customers and we don’t offer parts as a service bureau to customers.

Steve Dyer – Craig-Hallum

All right. Great. I’ll hop back in the queue. Thanks.

Scott Crump

Thanks, Steve.

Operator

(Operator Instructions) Our next question comes from the line of Andrea James with Dougherty Company.

Andrea James – Dougherty & Company

Hello. Good morning, everyone.

Scott Crump

Good morning.

Andrea James – Dougherty & Company

So just congratulations and just a question, Stratasys – Scott, you had communicated to us previously that you were working on a significant channel expansion and also maybe planned to roll out a lower-cost printer. Can you just give us an update on the status of that? And how much of sort of what you’ve said previously was maybe hinting about – well, you knew that this deal was coming down the line, so maybe that’s what you meant by channel expansion or are you still going to keep expanding in North America?

Scott Crump

Yeah. Well, first of all, thank you. Yes, we are expanding our agents program, or Phoenix program to focus in on our lower-priced 3D printers like uPrint, and as far as the status is going quite well. We should have over 90 – about 90 agents that have been newly hired to Stratasys by the end of the second quarter. And of course, this complementary combination of the companies will even further expand, but it will also enhance the agent program in that both companies have lower-end products, and we think that there is – the program that we got – are on are very successful so far. And of course, we’ll talk more about that in the Q1 conference call coming up on May 9. We’ll have a lot to talk about. Thanks.

Andrea James – Dougherty & Company

Just one more. Thank you for the geographic breakdown of your channel. That’s helpful. Do you think the geographic breakdown of revenue will become more balanced now with the merger or will it heavily skew toward the Americas? Thank you so much.

Scott Crump

David?

David Reis

I think America will continue to be a major market for us. As you mentioned, if you look on the split and what each company brings to the table from point of view of channel, I hope it will enable us to increase sales of the combined companies in the eastern – Far Eastern Europe. Nevertheless, I believe that U.S. and North America will continue to be our strongest market.

Andrea James – Dougherty & Company

Thank you so much.

Scott Crump

Thank you.

Operator

Our next question comes from the line of Arthur Weise of Lord Abbett

Arthur Weise – Lord Abbett

Yes. Good morning.

Scott Crump

Good morning.

Arthur Weise – Lord Abbett

Hi. Just a question on Objet’s profitability. I see that they have had consistently higher gross margins yet lower operating margins than Stratasys. Can you just comment on that and what would you expect? I guess the combined companies are expecting that the operating margin will exceed both companies? How would that be achieved?

Scott Crump

David, do you want to comment about Objet and then I can follow on about the combined company?

David Reis

Yes, of course. Historically, Objet’s really enjoyed a good gross margin. It’s reflected here in Slide 16. Our operating margin is lower. It has to do with our business model, the way we are engaging our channel and also an additional higher R&D and marketing expenses. And the reason we invested, I think, more than average in marketing and R&D with a very strong forward-looking strategy, which enable us to increase in the longer-term, their top line. So very high gross margin which enable us to do this basically more into our future.

Scott Crump

So following on that, the combined company allows us to really increase our sales and marketing reach. It gives us great cross-selling opportunities between the two companies. Also, as I mentioned in the call, there’s things that are cost avoidance that we can have in the future as we grow together. So combined, we think we can achieve revenue growth in excess of 20% and with some of those cost avoidance synergies, the operating income as a percentage of sales should be in that 20% to 25% range.

Additionally, we have – cash at the combined company should lower our effective tax rate from what Stratasys is on a standalone and put us in that 15% to 20% range, which is really going to drive strong net income between 16% and 21%, which is going to drive good shareholder value. And there’s a lot of information available on Objet. They’ve filed their F-1, so you can read more about that there.

Arthur Weise – Lord Abbett

Sure. And one last question, having a dual headquarters is difficult especially when you are half a world away. How is that going to work?

David Reis

I think – do you want me, Scott, to take it.

Basically, the rationale behind the dual headquarters is going to go maybe backwards to the rationale of placing the right and best managers to different positions. The process of defining management, we tend to choose the best people. We did some initial kind of scanning and we think that this industry would need to be run from different locations. It’s true that it will make management a little bit more complex and difficult. Nevertheless, I think with the benefit of having the best people in each stream running the respective businesses is more important.

Scott Crump

Terrific.

David Reis

In addition, I just want to add that my plan, personally, is to spend a lot of time in (inaudible) and to be between those two locations quite a lot.

Arthur Weise – Lord Abbett

Thank you.

Operator

Our final question is a follow-up from the line of Jim Ricchiuti with Needham & Co.

Jim Ricchiuti – Needham & Company

Bob, can you talk at all about the merger-related expense you incurred in the quarter. Just given that the strength of the top line, it appears like you have higher operating expense. I was wondering if you could help us understand that a little bit.

Bob Gallagher

Yeah, we’re going to have significant expenses within the quarter associated with the transaction, but it’s money well spent because this is a great opportunity with the combined companies and we’ll detail more of that on – in the May 9 Q1 conference call.

Jim Ricchiuti – Needham & Company

But you would characterize it as fairly significant?

Bob Gallagher

Yes.

Jim Ricchiuti – Needham & Company

Okay. And then one final question. To the extent you can talk a little bit about it. If we look at the total product revenue for the combined company, will it be similar in terms of the product revenue relative to Objet currently?

Bob Gallagher

Yeah, I think we need to combine these companies. First, as we said there is the F-1 on – is available on Objet as well as our financial, and I think we’ll be able to give you more information on that as we move forward and execute on this exciting merger.

Jim Ricchiuti – Needham & Company

Okay, thanks a lot.

Operator

Thank you. This concludes the question-and-answer session. I would like to turn the call back over to Stratasys CEO, Scott Crump, for any closing remarks. Please proceed.

Scott Crump

Well, I want to thank everyone for joining this call. And we hope to share our excitement about this transaction and we look forward to keeping you updated. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference call. A replay of today’s conference may be accessed by webcast or dialing 800-585-8367 from the United States and 404-537-3406 from outside the U.S. The conference ID number is 70816946. The replay and webcast will be available through April 30, 2012. Thank you.

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Source: Stratasys' CEO Hosts Objet Geometries Merger Announcement Call (Transcript)
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