Stratasys' CEO Discusses Q3 2012 Results - Earnings Call Transcript

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 |  About: Stratasys, Inc. (SSYS)
by: SA Transcripts

Stratasys, Inc. (NASDAQ:SSYS)

Q3 2012 Earnings Conference Call

November 02, 2012, 08:30 a.m. ET

Executives

Shane Glenn - IR

S. Scott Crump - President, Chairman and CEO

Bob Gallagher - CFO

Analysts

Troy Jensen - Piper Jaffray

Steve Dyer - Craig-Hallum Capital

Brian Drab - William Blair

Jim Ricchiuti - Needham & Company

[Patrick Wu] - [Battle Road Research]

Andrea James - BB&T Company

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Stratasys Earnings Conference Call. My name is Matthew and I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I will now like to turn the conference over to Mr. Shane Glenn, Director of Investor Relations. Please proceed sir.

Shane Glenn

Thank you, Matthew. Good morning, everyone, and thank you for joining us to discuss our third quarter results. On the call with us today are Scott Crump, Chairman and CEO of Stratasys; and Bob Gallagher, CFO of Stratasys. Following the prepared remarks, we will open up the call for questions. An audio replay of the call will also be available on our website later today.

Statements made during this call about Stratasys’ beliefs, intension and expectations, including statements regarding the expected timing and ultimate closing of the merger of Stratasys and Objet Limited, as well as the benefits thereof are forward-looking statements. The statements involve risks and uncertainties, both known and unknown, that may cause actual results to differ materially from those projected in this presentation. Actual results may differ materially due to a number of factors, including risks and uncertainties relating to Stratasys’ ability to penetrate the 3D printing market, Stratasys’ ability to introduce, produce and market consumable materials and market acceptance of those materials; the impact of competitive pricing and products; Stratasys’ timely development of new products and materials and market acceptance of those products and materials; the success of Stratasys’ recent R&D initiative to expand the DDM capabilities of its core FDM technology; the success of Stratasys’ RedEye On Demand and other paid parts services; and Stratasys’ ability to complete its transaction with Objet Limited on the proposed terms and schedule, and achieve the anticipated benefits of the transaction.

These and another applicable factors are discussed in the presentation and in Stratasys’ filing with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 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 views later change, except as maybe required by law. These forward-looking statements should be relied upon as representing Stratasys’ views as of the date subsequent to the date they are given.

The information discussed within this conference call includes financial results that are in accordance with accounting principles generally accepted in the United States, or GAAP. In addition, certain non-GAAP financial measures have been provided that excludes certain charges, expenses and income. The non-GAAP measures should be read in conjunction with the corresponding GAAP measures and should be considered in addition to and not as an alternative or substitute for the measures prepared in accordance with GAAP. The non-GAAP financial measures are provided in an effort to provide information that investors may deem relevant to evaluate the results from the company's core business operations and to compare the company's performance with prior periods. The non-GAAP financial measures primarily identify and exclude certain discrete items, such as amortization expenses, expenses associated with stock-based compensation expense, and the expenses related to completing the proposed combination with Objet. The company uses these non-GAAP financial measures for evaluating comparable financial performance against prior periods.

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

S. Scott Crump

Good morning and thank you for joining us to discuss our financial results. We are very pleased with our third quarter performance. Total revenue expanded to a record 49.7 million for the third quarter an increase of 24% over the last year. Unit sales expanded by 52% over the last year to a record 911 systems far exceeding our previous unit record for a quarter. Net income increased by 42% over last year on a non-GAAP basis and for the third time this year we raised our guidance or a revenue and non-GAAP earnings.

As we observed for the past several quarters we generated strong sales of our higher margin Fortus 3D production systems which grew by 37% over last year. In addition our 3D Printer unit sales growth also accelerated dramatically in the third quarter expanding by 69% over last year. This acceleration is attributed to the launch of our new Mojo 3D Printer, the first commercially available 3D printer priced under $10,000.

Our other core businesses including consumable revenue, RedEye parts services and our Solidscape product line all performed very well during the quarter. We remain excited about our pending, game-changing combination with Objet Limited. As you are aware we have a detailed set of discussions with the committee on foreign investment in the United States, CFIUS and we continue to believe that their concerns will be addressed and the merger will be completed prior to the end of this year.

We made substantial progress and planning for the combined organization and believe the merger with Objet will expand our sales reach and provide a complimentary product line that can leverage into a rapidly growing market opportunities.

I will return to discuss these developments in more detail but first I’d like to turn the call over to our CFO, Bob Gallagher who will provide the highlights of our third quarter results. Here is Bob.

Bob Gallagher

Thank you, Scott. Total revenue was a record 49.7 million for the third quarter, a 24% increase over the 40 million reported for the same period last year. The company shipped a record 911 units during the third quarter a 52% increase over the 600 units shipped last year. Sales growth of Fortus 3D production system units remain strong in the third quarter increasing by 21%. Although the primary applications for customers purchasing our Fortus systems remains prototyping much of the incremental demand is being driven by new Direct Digital Manufacturing applications.

Another factor driving Fortus system sales has been the ongoing improvements in reseller productivity. We are now three year's into our transition from a direct to indirect channel in the U.S. for Fortus and our channel partners continue to invest in additional sales and marketing resources to further penetrate the market. We believe both Direct Digital Manufacturing applications and our channel are driving incremental growth.

Our 3D Printer unit sales which includes Dimension, uPrint and Mojo serves 69% in the quarter benefiting significantly from the launch of a revolutionary new Mojo 3D Printer. Sales of new Mojo 3D Printer were helped by our new channel program to recruit sales agents that focus exclusively on selling our most affordable products, the Mojo and uPrint 3D Printer lines.

The growth in 3D printers follows several quarters of disappointing performance as the company has now transitioned away from its distribution relationship with HP and has focused exclusively on an independent channel strategy to accelerate growth.

Unit sales within our Solidscape division also increased nicely during a quarter expanding by 28%. Solidscape’s new 3D product line introduced in the second and third quarters was a major contributor to the growth.

Third quarter product revenue was 41.3 million an increase of 27% over last year. Two factors drove our product revenue growth during the period; first, total system revenue grew by 27% over last year with Fortus system revenue a major contributor increasing by 37%. 3D Printer revenue grew by 10% in the third quarter driving dramatic improvement over the levels generated in recent periods. We should know that 10% growth in 3D Printer system revenue is lower than the 69% in 3D printer units during a period given the relatively strong sales of our highly affordable Mojo 3D Printer the first commercial 3D Printer placed under $10,000. The new Mojo represents a significant improvement in affordability of a commercial printer for the marketplace.

We continue to believe that market for 3D Printers is price elastic and the most affordably priced Mojo will expand or install base of systems going forward. A significant expansion in our install base should bode well for the sustaining strong sales of our higher margin consumable revenue in future periods. Driven by the new 3D product line, Solidscape’s revenue increased by 37% for their systems during the third quarter.

The second factor driving product revenue growth in the third quarter was a 23% increase in consumable revenue over last year, the biggest driver behind consumable revenue with a rapidly growing Fortus line and DDM applications which generally used more consumables. We believe the continued strength in Fortus system sales and the acceleration in 3D Printer unit sales during the third quarter are both positive indicators a strong consumable revenue growth going forward.

Third quarter service revenue was 8.4 million which is up 13% when compared to the same period last year. We had a modest increase in maintenance revenue compared to last year's third quarter. I’m happy to report revenue in our RedEye parts service increased by 26% in the third quarter as the business continues to experience strong demand especially for large and complex production parts produced in the 900mc.

North American sales grew by 31% during the third quarter over last year and represented 28.9 million or 58% of total revenue. International sales grew by 16% to 20.8 million representing 42% of revenue. Despite global concerns over Europe, sales into the region were up 16 over last year. Non-GAAP gross profit was 28.5 million for the third quarter were 57.2% sales versus 55% of sales last year. The strong growth in our higher margin products especially Fortus systems and consumables made positive contributions to gross margins. Gross margin also benefited from a significant build in finished goods inventory relative to a second quarter. I will discuss the inventory strategy in a moment.

Operating profit was 9.1 million for the third quarter versus 7.9 million last year. Non-GAAP operating profit was 13 million for the third quarter or 26% of sales which represents a 47% increase over the 8.9 million or 22% of sales reported for the same period last year.

We would like to address the significant cost related to our ongoing efforts combined with the Objet which is the major component contributing to a non-GAAP adjustment in operating profit. The vast majority of Objet related expenses which are enumerated in a table at the end of our press release are related to advisory, legal, accounting and integration services. As you are aware we are working aggressively to complete a review by the Committee on Foreign Investment in the United States or CFIUS. We increased significant legal expenses related to this review; however, we are very excited about the potential combining these two growing and successful companies. Given the size and complexity of this transaction we are investing in the proper support and advisory services that can allow us to maintain our focused on our business today and be better prepared once the transaction closes. We believe these investments are well spent and will provide for a stronger and more profitable company after closing.

Excluding non-GAAP items operating expenses increased by 17.6% in the third quarter of the same period last year. The growth in operating expenses is a combination of R&D investments to support our new product development and SG&A expenses to support our ongoing growth.

Net income was 5.2 million for the third quarter versus 5.9 million last year. Non-GAAP net income was 8.7 million for the third quarter or $0.40 per share, a 42% increase over the 6.9 million or $0.29 per share reported for the same period last year.

The three expense items excluding and calculating our non-GAAP financial measures during the third quarter were the expenses related to employee stock options, expenses related to amortization of acquired Solidscape intangible assets, and the expense associated with the announced plan to combine with Objet. We should note that the vast majority of expenses incurred for the purpose of completing our combination with Objet are not tax deductible. A table provided within our press release provides itemized details surrounding all non-GAAP items incurred during both periods.

We used approximately 10 million in cash during the third quarter and finished the period with 65.7 million in cash and investments. Net use of cash was primarily a result of the planned increase in inventories during the period. Inventory balances were 32.1 million at the end of the third quarter which is up significantly from the 22.5 million at the end of the second quarter. The significant increase in inventory during the third quarter is a result in large part of our planned strategy to transition from order fulfillment processes. Currently our order fulfillment is conducted from a single distribution center located in Minnesota.

Given the needs of our growing company and in anticipation of our combination with Objet, we are preparing for order fulfillment in two additional distribution centers one located in Asia and one in Europe.

We had anticipated closing a merger in Q3 and consequently made a strategic decision to have finished goods inventory in the international and distribution centers as of September 30. Consequently, we built an additional 3.1 million of finished goods during the quarter in order to do so. Included in this inventory was overhead of appropriate $744,000 that would not have otherwise been capitalized during a quarter. As a result our third quarter earnings per share benefitted by approximately $0.02 per share.

The new distribution structure will allow us to better address the growing demand for our products worldwide especially as we began selling the combined product portfolio provided by our ultimate combination with Objet Limited. As the finished goods inventory added to the distribution centers, we added approximately 2.2 million of systems finished goods due to a combination of actual Q3 product mix bearing from our forecast and also to (inaudible) Q4 demand while having last fourth quarter production days due to the Thanksgiving and Christmas holidays.

Additionally, we made strategic quantity buys of resins and certain components totaling approximately $2 million in the quarter. I’m confident we will see a drop in our overall inventory levels by the end of the year. Accounts receivable were 35.9 million at the end of the third quarter and days sales outstanding or DSO were 66 days.

Overall, we are pleased with our financial performance during the third quarter. It's been very gratifying to see the continued strong growth of Fortus and our Direct Digital Manufacturing efforts; it's also been gratifying to see the recovery of our growth in our 3D Printers and the strength of our channel. Most importantly we continue to be very excited about combining with Objet.

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

Shane Glenn

Thank you, Bob. Stratasys revised its financial guidance for the fiscal year ending December 31, 2012 as follows. Revenue guidance of 194 million to 199 million versus previous guidance of 193 million to 198 million. Non-GAAP earnings guidance of $1.37 to $1.40 per share versus previous guidance of $1.31 to $1.38 per share. GAAP earnings guidance of $0.77 to $0.88 per share versus previous guidance of $0.83 to $0.98 per share. The revision in GAAP earnings guidance is primarily a reflection of the inclusion of the additional estimated impact of merger related expenses, most of which are not tax deductible. This includes significant cost related to our ongoing discussions with CFIUS.

Financial guidance does not reflect the potential combined performance of Stratasys and Objet, nor does it include some of the estimated incremental transaction related cost. In addition to excluding the impact of expenses associated with the proposed combination with Objet, non-GAAP earnings guidance excludes the impact of stock-based compensation expense and the amortization expense of acquired Solidscape intangibles. Qualitatively, we continue to reserve a favorable market environment for our products and we are assuming that will continue for the balance of 2012.

Now I would like to turn the call back to Scott Crump.

S. Scott Crump

Thank you, Shane. We are very pleased with our third quarter results. Fortus 3D production system continue to have strong positive momentum growing by 37% over last year driven by the demand created by innovative new Direct Digital Manufacturing applications across multiple industries. Our proprietary Fused Deposition Modeling technology continues to be recognized as an innovative and cost effective alternative manufacturing solution. We are honored that Stratasys was recently chosen to be part of a national network for manufacturing innovation this presidential initiatives brings U.S. industry together to develop innovative manufacturing solutions using advanced technology.

Stratasys was chosen to participate given our company’s leadership within the industry and our technology potential uses within that U.S. manufacturing. The potential DDM applications have added manufacturing are truly wide ranging.

I hope all of you had a chance to view the touching story of Emma Lavelle, a four year old girl that has overcome the limitations of a congenital disorder with the help of our 3D Printers. Emma was born with arthrogryposis which is a disorder that can lead to muscle weakness and fibrosis. Using our Dimension 3D Printer, researchers at the Alfred I. duPont Hospital for Children in Philadelphia were able to create what little Emma calls her Magic Arms. The device is a custom designed robotic exoskeleton made from our light weight durable thermoplastic material that enables her to conquer limited joint mobility and underdeveloped muscles. If you had not viewed the case study and video which stars Emma, I’d encourage you to access the link provided in our press release.

Our RedEye parts service business which grew by 26% over last year continues to experience strong demand especially for a large complex and highly durable production parts. We believe RedEye has a distinct advantage over those types of projects given our ability to rapidly deliver a high quality parts produced on the Fortus 900mc made of production thermoplastic. RedEye currently operates 14 of our 900mc systems that are ideal for serving customers that they need larger production parts. The automotive and aerospace industries have been instrumental to RedEye’s recent growth.

Turning to yet another growth driver of the third quarter is Solidscape, which experienced strong growth in revenue of 21% over last year during the period. Solidscape which we acquired in April of 2011 is widely recognized as the leader for DDM wax casting applications that require high precision, ultra-fine feature detail and a smooth surface finish. Solidscape’s new 3Z product line, introduced in the second and third quarters of this year, represents a significant development for the company and is a major contributor to their recent success. The new system includes an improved user interface, new materials and enjoys a lower manufacturing cost relative to prior systems. The 3Z can produce parts at the highest possible resolution in the industry and is generating significant interest with jewelry and dental customers. The sales pipeline for 3Z is growing and we are optimistic about maintaining the positive momentum and to further develop the market opportunity for Solidscape’s product, we are currently initiating a program to expand 3Z series into the Stratasys U.S. educational channel. We have been pleased with Solidscape’s performance following its acquisition last year and believe the transaction has been good for investment, as an investment for our shareholders.

Turning to 3D printing, shipments for Mojo 3D Printer was a major contributor to our 52% unit sales growth for the quarter. We believe the Mojo is the first commercially available 3D Printer priced under $10,000 and represents a significant milestone for our company and the industry. We project that the affordable price point combined with the systems ease of use and office friendly footprint will allow us to capitalize on a market as price elastic, by capturing incremental customers who had previously viewed 3D printing as unaffordable or unreliable.

Sales of Mojo have benefited from our new program to recruit sales agents that focus exclusively on selling our most affordable 3D printers, the Mojo and uPrint lines. We have expanded our sales agent program to include approximately 130 individuals and we will continue to grow the program in the coming months with the goal of 160 agents trained by January of next year. We believe that the Mojo platform combined with our new sales agent program will continue to drive an expansion in our 3D printer sales.

Now I’d like to provide a brief update on the status of our exciting merge with Objet. As previously announced we received HSR approval, in addition over 99% of our voting stockholders voted in favor of this merger. We are currently waiting for the Committee on Foreign Investment in the United States or CFIUS to complete this review. Just over two weeks ago we announced that CFIUS granted our request to withdraw and resubmit our joint voluntary notice, this withdraw and re-submittal was done at CFIUS request. This provides CFIUS with an additional 45 days to review the merger, this review period will close on November 30th. However, CFIUS can complete its review at anytime during this period. We are conducting detailed discussions with CFIUS while I can’t comment on the specific nature of our discussions what I can tell you is that w are encouraged by CFIUS’s willingness to work with U.S. we are optimistic that any national security concerns it may have surrounding the merger can be addressed during the 45 day review period. Accordingly, we have agreed with Objet to extent the date under our merger agreement, the end date of that merger agreement until December 6 of this year. We believe this transaction will close within this fourth quarter.

We continue to be extremely excited about the compelling combination of Stratasys and Objet which will position us as a leader within our high growth industry with an expensive product and technology of portfolio of the combined company will offer customers the right solution for a broad range of applications across a wide range of industry verticals.

Our combined marketing and field capabilities will provide extensive geographic reach which should help grow customer’s awareness of the many opportunities to employ our product. In addition, we will benefit from a world class R&D team focused on developing new systems and consumables. We will be uniquely positioned to offer a comprehensive portfolio of innovative products and technologies and we have the scale, the team and the financial strength to achieve our goals.

We have completed our merger integration planning. We have class trained 18 resellers who will begin selling the combined product portfolio after closing. Additionally, we have built an integrated sales and marketing structure that is ready to serve the needs of the combined organization. In short, we are ready to hit the ground running and we look forward to realizing the value of this transaction for all stakeholders.

So, in summary, we are pleased with the third quarter performance and very excited about the future including our merger with Objet. Okay. I will return with some closing comments, but fist we would like to address any questions 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 from Piper Jaffray. Please proceed.

Troy Jensen - Piper Jaffray

So, first question here I want to talk about just kind of 3D printer unit growth, maybe revenue growth to ex-Mojo. I’d be curious to know if Dimension and uPrint are certain to see growth for you guys.

S. Scott Crump

Troy, we are getting comments relative to the overall growth of the printers and we are not going to breakout individual units. I think that the most important thing I’d add is the growing trend that’s reverse in previous that we saw good growth in 3D printers overall.

Troy Jensen - Piper Jaffray

Bob, I want to talk about just operating margins for a second. So, two part questions, so first of all how much deal related expense did you have in the third quarter that will start to go away once (inaudible). And then also I’m trying to figure, I think I’ve asked you guys previously, business model targets, specifically on the operating margin line. I maybe wrong here, but I think previously you have talked about there is no reason you can’t be in the mid to high 20% operating margin line. And were they already huge step function on the operating margin, so it feels like there is more leverage left in this model. So, could you talk about mid to long-term operating margin targets or maybe revenue levels that you need to hit like 30 operating margin?

Bob Gallagher

I’ll take the easy part of that and then I’ll turn it over to Shane. The easy part of that on the deal related expenses, attached to the press release is a non-GAAP table and I think we have highlighted and identified how much of the merger related expenses are in there.

Shane Glenn

Troy, I think at this point we are not going to go beyond as the long-term target operating model that we provided you when we announced the release with Objet. As we continue to work towards that combination and the company begins to work together where we obviously update that with any changes that we feel are necessary.

Troy Jensen - Piper Jaffray

Forgetting the Objet merger though, I mean how about the Stratasys standalone; you guys are showing great operating leverage here. So, is 30% of share in your guy’s organic business?

Shane Glenn

I don't think it is. One of the things that we highlighted within the quarter, we had favorable impact of about 744,000 relative to our gross margins and about $0.02 earnings per share. And we have a very strong business model, but let’s not get ahead of ourselves here either.

Operator

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

Steve Dyer - Craig-Hallum Capital

So, just to be clear you are not going to break out Mojo revenue, Mojo shipments anything of that nature?

S. Scott Crump

No.

Steve Dyer - Craig-Hallum Capital

Okay. And you said about 700 and some thousand dollars that amount to a couple of points in the gross margin line from the inventory built?

Bob Gallagher

Yes, I gave the specific number, I didn’t do the calculation of how much points that (inaudible) it's pretty easy math to do.

Steve Dyer - Craig-Hallum Capital

And can you walk me through some mechanics of why that would be the case again. I guess you were talking little bit about capitalization of some overhead maybe?

Shane Glenn

That’s exactly what it is. We wanted to point that out because we did have a significant build in the inventory as part of our strategy to expand from one distribution center just here in North America to be able to better serve our customers and have additional distribution centers in Europe as well as Asia. And additionally, given to the product mix and what we hope is strong demand coming in the fourth quarter we build additional initiatives here within Minnesota. All those things we do a higher capitalization of overhead in the quarter, which then go down to the balance sheet and is removed from P&L. And as we have done historically, we like to tell you guys this great story of the good news and bad news of the things that we think are useful to our shareholders.

Steve Dyer - Craig-Hallum Capital

And is the plan going forward then at this three distribution centers will carry both your product as well as Objet?

S. Scott Crump

Objet already has, these are third part warehouses, Objet already has the distribution model that has distribution centers on all three continents.

Steve Dyer - Craig-Hallum Capital

So, they all be coming out of the same place.

S. Scott Crump

Yes.

Steve Dyer - Craig-Hallum Capital

And so there is no incremental or [literally] incremental CapEx involved in rolling these out?

S. Scott Crump

No, again like I said its third party distribution centers.

Steve Dyer - Craig-Hallum Capital

And then in terms of operating expenses for Q4, how should we think about that, how much merger related expense do you anticipate in that?

S. Scott Crump

I think if you look at our guidance from a non-GAAP basis versus a GAAP basis the primary drivers of that is obviously the amortization that we though which is going to be flat quarter-over-quarter. And then the stock-based compensation again which would be relatively flat quarter-over-quarter and the rest of the difference it relates to merger related expenses.

Steve Dyer - Craig-Hallum Capital

And then just as it relates to the tax rate it looked high again this quarter. How should we think about that going forward?

S. Scott Crump

You need to look at the tax rate on two basis, one is the GAAP basis and one is the non-GAAP basis. If you look at on GAAP basis it's extremely high because most of the expenses associated with the Objet merger are now tax deductible. If you look at on a GAAP basis, one difference on a year-over-year basis there is not an R&D credit in 2011 it happened and approved. Now there is questions about whether it would be approved or not, but if you look forward to Q4, I’d say we would expect the tax rate in that 31 to 35% range.

Steve Dyer - Craig-Hallum Capital

It has been approved for the last nine years.

S. Scott Crump

It's been approved since 1989 and we always had an R&D credit, but there are questions of whether that will happen in 2011 or not. If the R&D credit does get approved, our effective tax rate will drop dramatically in the fourth quarter, but our guidance does not assume that the R&D credit is approved.

Steve Dyer - Craig-Hallum Capital

And that’s a GAAP basis to be clear?

S. Scott Crump

Yes, that would actually be GAAP and non-GAAP.

Operator

Your next question comes from the line of Brian Drab from William Blair. Please proceed.

Brian Drab - William Blair

So, couple of questions. First in RedEye you are seeing really strong growth there. Are you offering any new services or services in different way or increased marketing you are seeing changing customer habits and just talk a little bit about more about what’s driving demand there?

Shane Glenn

The big driver there is, some of the trends that we are seeing with the system business. We are seeing the 900mc appeal to a lot of customer that [are wanting] large production parts with highly durable materials. As we mentioned in our prepared remarks the aerospace and automotive industries are two industries that are accessing RedEye for those kinds of orders, similar to what we are seeing our demand in some of our systems area within those two verticals.

Brian Drab - William Blair

And I know you don't want to breakout the revenue within this categories by model, but just reflecting on what’s happened over the last year at Fortus. You introduced the 250mc last July I think it was late July. And seeing great growth with that system, you had great growth again in the third quarter, I think there is some reason to think that maybe of the difficult shows have strong year-over-year growth given the timing of that product introductions and such a successful product introduction. Tell me how much was on whether you saw growth in Fortus sequentially from the second quarter and any impact of the 250mc is having on that growth?

Shane Glenn

I think sequentially in Fortus, you look at in a more to flat type comparison which is typical for the quarter given the seasonality trends within Europe, but having said that, I think you make a good point as of third quarter was the first anniversary. Essentially, on an apples-to-apples comparison related to the full product line because we had a full quarter of 250mc in the third quarter of last year. So, the year-over-year expansion that we talked about of north of 20% was we thought was very impressive.

Brian Drab - William Blair

And then follow-up to that question would you expect that the fourth quarter growth for Fortus would slow year-over-year growth?

Shane Glenn

Yes, we are not going to get into forecasting the specific (inaudible), our forecast for Fortus obviously flow through to the numbers that we provided you, but once again we are operating now comparatively speaking on an apples-to-apples basis as it relates to the full product line and we have been very pleased with the growth we are seeing.

S. Scott Crump

I think Brian, if you look over the course of the year from our guidance at the beginning of the year to where we are at now; I think the difference between our guidance originally in the year has to do with the growth of Fortus. We have been very pleased with continued strong growth within the Fortus and our DDM applications.

Brian Drab - William Blair

You may have given this number before, but just comparing your amortizable intangibles year-over-year, trying to determine how much Solidscape contributing the EPS or how much amortization. Is it like a penny a quarter $0.04, $0.05 a year, am I (inaudible)?

S. Scott Crump

Yes, the amortization related to Solidscape I can be very specific. The amortization on Solidscape within the quarter and it is in a non-GAAP table, it's combined is 569,000 per quarter.

Operator

Your next question comes from the line of Jim Ricchiuti from Needham & Company. Please proceed.

Jim Ricchiuti - Needham & Company

Bob, I just wanted to go back to the comment you just made about the strength in Fortus and that being one of the major contributors to the change in guidance versus where you were earlier in a year. And comment that you made earlier in a call, just in terms of the incremental demand for DDM applications. I mean is there any way to put that in context or help us understand and how do you measure what you are seeing that gives you the view that you are seeing kind of an increase.

Bob Gallagher

I think the clearly the unit that we are seeing in the revenue growth is higher than what we originally forecast in the beginning of the year. In terms of the reasons for that I think that goes back in the qualitative factors of talking with customers and talking to our sales channel about what they are seeing out there from the demand from our customers. SO, it's really more qualitative factors outside of the actual units as well as the revenue growth that we are seeing.

Jim Ricchiuti - Needham & Company

It sounds like you are seeing something in aerospace and automotive or is there anything that you are seeing in specific verticals that’s telling you that things are changing slightly in terms of the usage?

Bob Gallagher

Jim, I think the traction that we are getting with the higher end systems within Fortus, the 900mc and the 400mc, the capabilities that they have a it relates to materials, the (inaudible) material that we introduced I believe that two years ago now has worked itself in to the aerospace industry very well. The 900mc continues to be more accepted as a platform to be used within that industry for broadening number of applications. So, I think part of this is that is the fact that it's taken some time to gain some moment with some of these product lines and applications and we are continuing to see that build.

S. Scott Crump

Four years ago we brought in Vice President and Director to Manufacturing that was focused on aerospace and automotive industry. About two years ago we brought in automotive specialist that came out of that industry, so I think you are seeing some of the fruit of those efforts that we started four years ago.

Jim Ricchiuti - Needham & Company

If the numbers I have are right, it looks like do your SG&A backing out the deal expense from Q2 and Q3, do your SG&A expense declined by that 0.5 million?

Bob Gallagher

Sequentially?

Jim Ricchiuti - Needham & Company

Yes.

Bob Gallagher

We didn’t go back and look at that specifically, I think we talked about some higher expenses growth of the Mojo launch in the previous quarters. So, that’s possible.

Jim Ricchiuti - Needham & Company

And so looking at, thinking about Q4, how should we think about the base expense x deal related expense, any additional expense related to adding more dealers or any other unusual expense or is that kind of a number to build off of?

Shane Glenn

Jim, compared to previous year's we don't see anything unusual to what we have experienced in the first nine months as it relates to trends and relative to historical norms.

Jim Ricchiuti - Needham & Company

You continue to see very nice growth in Europe, but I think you said it was up 16% year-over-year, and is there any color you can provide on that in terms of where you are seeing the strength in units as in Fortus. Was it consumables can you just maybe expand a little bit about what you are seeing in Europe just in light of the macro concerns that we are all talking about.

Shane Glenn

We experienced good growth in Europe, but 16% in a quarter which is good when you consider the ongoing uncertainty within the region, clearly both Germany and France as well reasonable sales within Italy and the UK, but France and Germany are clearly the leaders in there. Europe is growing slower than North America and we will expect that to continue but we have seen continued growth coming from our new products as well as our DDM initiatives.

Jim Ricchiuti - Needham & Company

Those pretty balanced in terms of what you are seeing in terms of the business with consumables, equipment and the type of equipment?

Shane Glenn

Yes.

Operator

(Operator Instructions) And next question comes from [Patrick Wu from Battle Road Research]. Please proceed.

[Patrick Wu] - [Battle Road Research]

I just wanted to quickly follow-up Jim’s question, the 60% that you guys talked about earlier in terms of international growth and that’s all (inaudible) Europe or is much of it's from Europe?

Bob Gallagher

Our overall international growth was 16% and a subcategory within that was Europe itself which was 16%.

[Patrick Wu] - [Battle Road Research]

Okay, so both were 16% as well.

Bob Gallagher

Yes.

[Patrick Wu] - [Battle Road Research]

I guess my question regarding the Solidscape, I know that it has very strong growth for the quarter, but do you guys also perhaps talk about contribution to overall revenue for that line, I know you guys don't talk about that generally for most of the models price wise to get a flavor of that?

Bob Gallagher

Yes, we don't breakout the revenue as it relates to that separately and I actually said that the system revenue grew 37%, I actually misspoke this, system revenue grew 24%. I think most important year is what we are seeing is really strong growth from a company that we acquired last May and we have got three new products that were introduced and we are really excited about the acquisition that we have had and think it was a good acquisition and creating value for our shareholders.

[Patrick Wu] - [Battle Road Research]

Obviously you guys have done a lot of investments in your expectation that they are going to expecting too sort of obviously go through, but I just wanted to understand from your standpoint what sort of the delay attributable to. Is it more timing or it's there something that the government is looking at that, we might want to get to know little more about?

Bob Gallagher

I think there is two parts to that question, one is understanding a little bit about CFIUS itself, and CFIUS is made up of 9 different governmental agencies that are dealing with a multitude of domestic and international issues. Our discussion with CFIUS has been positive over and productive over the past couple of weeks, where we can’t go into specifics we believe that they are resolvable and CFIUS is very committed to working with us. The most important thing is that we continue to believe we will close this merger in the fourth quarter.

Shane Glenn

Also I think it shows how important our technology can be in the future of advanced manufacturing including certain applications within the government. You need to remember that FDM is a relatively new technology and new applications within manufacturing. That’s gaining a lot of traction for unique applications and this also requires a significant amount of education by us to CFIUS for them to better review and assess the technologies role in that manufacturing applications in the future.

Operator

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

Steve Dyer - Craig-Hallum Capital

Just a follow-up with respect to Mojo, I know it's very early but anecdotally are you seeing that is at all cannibalizing uPrinters, u find it supplementary or what kind of the early feedback there?

S. Scott Crump

Mojo is all about expanding the market, going from roughly 20,000 units that we have today to towards 100 and eventually 200,000, so within we can sell up. And today we reported a record level of unit sales following our introduction of the new system last quarter. We might have some cannibalization but Mojo should continue to attract a significant number of customers that would not have otherwise purchase a system and motivated to buy our 3D printer because of the increased affordability provided by Mojo.

Operator

Your next question comes from Andrea James from BB&T Company. Please go ahead.

Andrea James - BB&T Company

Both of them just on the pending merger. First, what gives you confidence about the key foreclosing timeline. Can you talk a little bit about where the confidence comes from, and just know sometimes government can drive their feet. I’m just wondering if (inaudible) feedback that you have gotten or what you are hearing?

Shane Glenn

Here what gives us the commitment is, as we grew and reapplied with CFIUS it was with the understanding that we would, we have the date of November 30 for them to complete the review. So, we have their commitment and this we will not have to withdraw again and they are committed to working with us under a resolution relative to this. So, it's a schedule that we have established with the government and doing or withdrawing reapplications gives us the confidence and that’s why we continue to believe what goes in the fourth quarter.

S. Scott Crump

So, there is no guarantee, but we are confident that we will complete the review and then close the start our day one we call it with the merger with Objet.

Andrea James - BB&T Company

And then, I guess you talk about the word resolution, and what is that look like for us or what can you say about a resolution will look like right now and also if there is some sort of tweak to some sentence somewhere or some kind of firewalls that need to be put up. Does Objet seem just as committed to kind of working with you on that?

S. Scott Crump

Probably the most positive thing, CFIUS review is that the strength of the management teams of the two companies working together has been extremely gratifying and the two companies are both committed working at this together and resolving the issues. So, we think we will get a favorable resolution that we will still create tremendous value for our shareholders.

Operator

I’d now like to turn the call over to Scott Crump for closing remarks.

S. Scott Crump

Okay, in conclusion we are pleased with our third quarter performance and are excited about that many initiatives that we believe we will continue to drive growth for our company. In addition to the many opportunities provided by our pending merger with Objet we will have a strategy that focused in developing our core technology platforms to meet the future needs of our customers. In addition we are optimistic about your near-term performance and have raised our outlook for the balance of 2012. We remain a financially strong company that they leader within a rapidly involving industry and look forward to completing another successful year. We like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Good bye.

Operator

Thank you for your participation in today’s conference, this concludes the presentation. You may now disconnect. Good day.

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