Shane Glenn - Vice President-Investor Relations David Reis - Chief Executive Officer Erez Simha - Chief Operating & Financial Officer.

Troy D. Jensen - Piper Jaffray & Co (Broker) Rob W. Stone - Cowen & Co. LLC Wamsi Mohan - Bank of America Merrill Lynch Paul Coster - JPMorgan Securities LLC Jim A. Ricchiuti - Needham & Co. LLC Samuel H. Eisner - Goldman Sachs & Co. Steven M. Milunovich - UBS Securities LLC Brian P. Drab - William Blair & Co. LLC Larry Zhong - Deutsche Bank Securities, Inc.

Rob M. Richardson - Stifel, Nicolaus & Co., Inc. Robert Burleson - Canaccord Genuity, Inc. Jason D. North - Jefferies LLC.

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Stratasys Earnings Conference Call. My name is Katina, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session.

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

Thank you, Katina. Good morning, everyone, and thank you for joining us to discuss our first quarter 2015 financial results. On the call with us today are David Reis, CEO; and Erez Simha, CFO and COO of Stratasys.

I remind you that access to today's call, including the prepared slide presentation is available online at the web address provided in our press release. In addition, a replay of today's call including access to the slide presentation will also be available and could be accessed through the Investor section of our website later today.

We will begin by reminding everyone that certain statements in this press are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements are characterized by the use of forward-looking terminology such as will, expects, anticipates, continue, believes, should, intended, projected, guidance, preliminary, future, planned, committed, or other words.

These forward-looking statements include, but are not limited to, statements relating to the company's objectives, plans and strategies, statements of preliminary or projected results of operations or financial condition and all statements that address activities, events or developments that the company intends, expects, projects, believes or anticipates will or may occur in the future.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.

The company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Ltd.

after their merger as well as MakerBot, Solid Concepts, and Harvest Technologies after their acquisitions and to successfully put in place and execute an effective post-merger integration plans; the overall global economic environment; the impact of competition and new technologies; general market, political and economic conditions in the countries in which the company operates; projected capital expenditures and liquidity; changes in the company's strategy; government regulations and approvals; changes in customers' budgeting priorities; litigation and regulatory proceedings; and those factors referred to under risk factors, information on the company, operating and financial review and prospects, and generally in the company's annual report on Form 20-F for the year ended December 31, 2014 filed with the Securities and Exchange Commission, the SEC, in the risk factors attached as Exhibit 99.3 to the report of foreign private issuer on Form 6-K furnished by the company to the SEC on the date hereof, and in other reports that the company has furnished to, or filed with the SEC.

Readers are urged to carefully review and consider the various disclosures made in the company's SEC reports, which are designed to advise interested parties of the risks and factors that may affect its business, financial condition, results of operations and prospects.

Any guidance and other forward-looking statements in this press release are made as of the date hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

As in previous quarters, our focus on today's call will be on non-GAAP financial results. These non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. We also note that we are not providing any pro forma financial results for acquisitions.

Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and press release. Now, I'd like to turn the call over to our CEO, David Reis.

David?.

Thank you, Shane, and good morning, everyone. Thank you for joining today's call. On April 28, we announced our preliminary financial results where we outlined the factors that impacted our first quarter performance, provided updated 2015 financial guidance, and reiterated our commitment to our long-term investment plan.

While we are disappointed with our first quarter results, we believe the long-term opportunity in our industry remains unchanged. We believe additive manufacturing remains in the early phases of adoption, and we are focused on developing our organization and pursuing strategies that will help drive growth over the coming years.

While we remain confident in our long-term prospect, in light of the current growth environment, we have re-examined our 2015 operating plans and have taken action to adjust near-term operating expenditures and capital investments for the remainder of 2015.

Today, we will review our first quarter results in more detail, discuss our strategies to capitalize on an attractive pipeline of future opportunities and highlight examples that will illustrate the exciting potential for our products and services, such as our recently announced success with the aerospace industry.

But first, I would like to turn the call over to our CFO and COO, Erez Simha, who will review the detail of our financial results.

Erez?.

a decline in capital spending in certain regions and industries; strength of the U.S.

dollar relative to foreign currencies impacted first quarter revenue by approximately $7.8 million on a constant currency basis; increased M&A activity within our North American channel; slower than expected adoption of higher-end Connex systems following the introduction of eight new Connex products in the fourth quarter; and a period of slower than expected channel ramp-up in Asia.

Total revenue in the first quarter increased by 14% to $172.7 million when compared to the $151.2 million for the same period last year. On an organic basis, which excludes the impact of acquisitions, revenue growth was flat compared to the same period last year, or 6% on a constant currency basis.

Non-GAAP net income for the first quarter was $2 million, or $0.04 per diluted share, compared to non-GAAP net income of $20.6 million, or $0.40 per diluted share reported for the same period last year due to shortfall in revenue.

MakerBot product and service revenue declined by 18% in the first quarter over last year, driven by the overall market weakness, as well as by the challenges associated with the introduction and scaling of its new product platform, and its evolving distribution model.

Product revenue in the first quarter decreased by 2% to $126.7 million, as compared to the same period last year. Within product revenue, system revenue decreased by 12% in the first quarter over the same period last year, with the decline driven primarily by the factors we have previously outlined.

However, consumable revenue grew according to the plan during the quarter, expanding by 18% over the same period last year, or 25% on a constant currency basis, driven by increased system utilization, as well as our growing installed base of systems.

Service revenue in the first quarter increased by 112% to $46.1 million, as compared to the same period last year. The increase in service revenue is driven primarily by the revenue contribution of Solid Concepts and Harvest Technologies, which were acquired during the third quarter of 2014, and thus not included in the prior year's results.

Within service revenue, customer support revenue, which includes the revenue generated mainly by maintenance contracts on our systems, increased by 28% compared to the same period last year, reflecting our growing installed base of systems.

Despite the challenges our company faced due to market softness, we believe that our material and customer service sales successfully demonstrated how our business model can continue to generate recurring revenue from the installed base, even in a period of slower than expected industry growth.

The company sold 7,536 3D printing and additive manufacturing systems during the first quarter, and on a pro forma combined basis, has sold a total of 129,197 systems worldwide as of March 31, 2015.

Unit sales in the first quarter, relative to prior periods, was impacted by lower than expected MakerBot unit sales, as well as the overall impact of the market factors we outlined previously. Non-GAAP gross margins declined to 54.1% for the first quarter, compared to 60.9% in the same period last year.

The decrease in gross margin was driven primarily by a product mix that included increased numbers of lower margin systems particularly within the Connex line, the impact of the inclusion of Solid Concepts and Harvest Technologies, and an overall decline in production capacity utilization at MakerBot.

Operating expenses increased by 36% to $94.2 million, as compared to the same period last year. Net R&D expenses increased by 60% to $24.4 million in the first quarter over last year, driven by increased head count, and an overall acceleration in system and material project development.

SG&A expenses increased by 29% to $69.8 million for the first quarter over last year, driven primarily by the inclusion of Solid Concepts and Harvest Technologies operating expenses. We received a tax benefit of 132.3% in the first quarter compared to an effective tax rate of 3.8% for the same period last year.

Our tax expense was impacted by losses incurred in high tax jurisdictions that were offset by lower taxable income in low tax jurisdictions.

We have updated the goodwill impairment analysis of our MakerBot reporting unit, and as a result, we recognized a non-cash goodwill and other intangible asset impairment expense of $194 million in the first quarter. Non-GAAP EBITDA for the first quarter amounted to $2.2 million.

The company generated $3.9 million in cash from operations during the first quarter, and currently holds approximately $425 million in cash and cash equivalents, and short-term bank deposits. The cash balance includes a $50 million drawdown on the company's revolving credit facility.

Capital expenditures amounted to approximately $14.4 million in facility and equipment investment. Inventory increased to $131 million as compared to $123 million at the end of the fourth quarter of 2014, representing a 6% increase, driven by the company's lower first quarter sales.

Accounts receivable decreased to $142 million, representing a 6% decrease as compared to $151 million at the end of the fourth quarter, while DSO on 12 months trailing revenue was 67 compared to 73 at the end of the fourth quarter.

In summary, our first quarter results were lower than expected across most geographies and industries compared to growth levels the company has experienced historically. However, revenues for both consumables and customer support grew as expected.

We have re-examined our 2015 operating plans in light of the challenging market conditions we observed in the first quarter, and have taken immediate action to adjust near-term operating expenditures for the remainder of 2015, and are reducing our 2015 capital expenditures plans.

Most of these reductions are expected to be short-term and related to our lower near-term revenue expectations. The reductions are occurring across most areas of our business, but we continue to invest aggressively in critical areas including vertical market development, strategic accounts, customer support services, IT and channel development.

Despite these adjustments, we will remain well-positioned to react to an acceleration in demand or improvements in overall market conditions.

Additionally, we recently initiated a reorganization within MakerBot that is intended to focus efforts on improving products, growing the 3D ecosystem, and increasing our efforts in the professional, education and consumer markets.

As the reorganization progresses, MakerBot growth rates are expected to improve, and ramp up to, or exceed, overall company averages by 2016.

We believe that we have a strong balance sheet and are making the appropriate investments in strategic initiative and building infrastructure to accelerate our growth moving forward and that we are on the leading edge of our exciting industry.

I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will provide you greater details on our 2015 finance guidance.

Shane?.

Thank you, Erez. As we announced on April 28 for 2015, we estimate total revenue in the range of $800 million to $860 million, with non-GAAP net income in the range of $63 million to $90 million, or $1.20 to $1.70 per diluted share. We now project a GAAP net loss for fiscal 2015 of $256 million to $224 million, or $5 to $4.38 per share.

Projected non-GAAP net income is expected to be derived disproportionately from the second half of fiscal 2015, driven primarily by the projected timing of revenue and operating expenses. We expect to see a bottom-line benefit of the previously outlined reduction in operating expenses throughout 2015.

We continue to expect total operating expenses as a percent of revenues to be in the range of 46% to 47% for 2015, and capital expenditures in the range of $80 million to $110 million.

Finally, we want to reiterate the following goals for the company's long-term operating model, which include annual organic revenue growth of at least 25%, non-GAAP operating income as a percentage of sales of 18% to 23%, non-GAAP effective tax rate of 10% to 15%, non-GAAP net income as a percentage of sales of 16% to 21%.

Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of our press release, providing itemized details of the non-GAAP financial measures. Now, I would like to turn the call back over to David Reis.

David?.

Thank you, Shane. We believe our industry is poised to transform manufacturing, engineering and design processes across a wide range of sectors. With our strong pipeline of future opportunities, and our position of leadership within the industry, we believe we are well-positioned to capitalize on these opportunities.

As we mentioned earlier, we are committed to our strategic investment plan that was unveiled last quarter, which is designed to support the future growth of our business and sustain our leadership position.

The multi-year investment plan focused on enhancing vertical industry solutions, expanding customer support services, building an enhanced sales and marketing infrastructure and accelerating product development, all designed to support an annual revenues of $3 billion in 2020.

Despite the challenges we experienced in the first quarter, at this time, we see no indication of fundamental change in the market opportunity. To help ensure our long-term success, we are enhancing our organizational structure, and I would like to share a brief overview of our recent progress.

During the first quarter, we combined Solid Concepts, Harvest Technologies and RedEye to form the company's newly branded Stratasys Direct Manufacturing division, or SDM. Now, we believe the largest custom manufacturing service organization built around additive manufacturing in North America.

Our goal with SDM remains to leverage the platform into manufacturing applications, as well as across our large installed base of systems beginning in 2016. We recently announced the creation of Stratasys Strategic Consulting, a service offering which is designed to help customers build and implement their additive manufacturing vision and strategy.

Dr. Phil Reeves and the consulting team from the recently acquired Econolyst, forms the foundation of this new division. We made several key management appointments in the first quarter to position our company for future growth. Josh Claman, formerly of Dell, has joined Stratasys as Chief Business Officer.

The role oversees the company global sales, service and channel organization and would be focused on driving commercial and go-to-market focused activities across the company different business units. The addition of a CBO follows the appointment of Jerome Hamilton, formerly from 3M, as Senior Vice President of Global Operations.

Jerome will be tasked with leading global manufacturing, strategic sourcing and supply chain. And finally, as part of our MakerBot's reorganization, Jonathan Jaglom has been promoted to Chief Executive Officer of MakerBot.

Jonathan brings 10 years of experience as a key contributor to the strong performance and scaling of operations at Objet, and then Stratasys. We are confident he can lead MakerBot to the next level.

We believe we are making the necessary moves to prepare for the long-term opportunities we see before us, as the additive manufacturing industry moves increasingly towards manufacturing applications and vertical solutions.

Global companies across a variety of industries from aerospace to automotive, to consumer goods and medical, are looking to Stratasys to help them evaluate, develop and adopt additive manufacturing strategies.

Our Vertical Business Unit and Strategic Accounts Management infrastructure were created in part to support these emerging opportunities, and I would like to share with you some of our recent success. In aerospace, we are observing increased interest in using additive manufacturing with certified materials for flight applications.

Today, four aerospace companies have ULTEM 9085 material certification that allow for additive manufacturing of end-use parts using Stratasys' FDM technology. In addition, we are working with several other aerospace companies that are taking steps toward manufacturing certification.

Each of these engagements is, by necessity, a long-term project as it can take months or years for aerospace companies to certify a manufacturing process and material for flight-ready parts.

A great example of our progress is our recent announcement that Airbus selected Stratasys FDM technology to produce 3D printed flight parts for their first-of-type A350 XYB (sic) [A350 XWB] aircraft.

Stratasys ULTEM 9085 thermoplastic material has been certified by Airbus according to regulatory material specifications, which includes flame, smoke, and toxicity performance required in aircraft interiors.

Airbus initiated the development and certification of Stratasys technology and material in 2013 as a scheduled risk reduction activity, which has subsequently been very valuable for the A350 XYB (sic) [A350 XWB] program.

More than 1,000 flight parts were 3D printed by Airbus for the A350 XYB (sic) [A350 XWB] on the Fortus platform using our ULTEM 9085 thermoplastic.

Compared to conventional manufacturing processes, integrating Stratasys technology is expected to allow Airbus to enjoy greatly improved buy-to-fly ratio by manufacturing strong, lightweight parts with process that reduce costs, decrease material waste, increase supply chain flexibility, and improve on-time delivery.

Airbus has taken the time, resources, and effort to qualify our technology and material, which has undergone a rigorous certification processes.

This is an example of long-term relationship and mutual commitment to the adoption of additive manufacturing in place of traditional manufacturing flight parts, and is the end result of a lengthy effort by both companies to identify and implement Stratasys manufacturing solutions.

We believe it's reasonable to expect that as parts are certified and deployed on a specific aircraft, more application will present themselves and we anticipate further announcements as other projects develop.

Another aerospace initiative that we recently announced is the adoption of Stratasys additive manufacturing technology by the joint venture between Boeing and Lockheed Martin called the United Launch Alliance, or ULA.

ULA is a 3D printing multiple flight-ready components for the Atlas V rocket, including internal ducts, brackets, nozzles, and panels that are used to seal off compartments. The initiative is generating an estimated $1 million in savings per year for ULA compared to traditional manufactured parts.

In addition, we believe the current applications with ULA are likely just the beginning. If testing goes well, ULA intends to use 3D printed parts on unmanned space flights starting in early 2016. Working closely with our aerospace customers, we are developing roadmaps designed to meet their long-term needs.

We believe these exciting new partnership demonstrate the success of applying our innovative products to create significant value in manufacturing, and reinforce our belief that the long-term future of our market remains bright.

Our Stratasys FDM manufacturing solutions are offered as both in-house production solutions as well as a service via Stratasys Direct Manufacturing, giving manufacturing customers flexibility as they implement the solution.

We look forward to continue to collaborate with leading companies like Airbus and ULA to advance capabilities of additive manufacturing.

In summary, while we are disappointed with our first quarter results, at this time, we see no indication of change in the fundamental growth drivers for additive manufacturer, and we believe the long-term opportunity remains unchanged.

We believe additive manufacturing technology remains in the early phases of adoption and we are focused on pursuing our existing strategies to drive sales growth and adoption during this challenging period.

While we remain confident in our long-term market prospects, in light of the current growth environment, we had re-examined our 2015 operating plan and have taken immediate action to adjust our near-term operating expenditure for the remainder of 2015.

Finally, we are confident that our investment plan and our growth strategy will enable us to put greater focus on long-term manufacturing-related application, such as Airbus and ULA; further position the company to capitalize on future growth opportunities and help solidify our leading position in additive manufacturing and 3D printing.

Operator, please open the call for questions. Thank you..

Thank you. Your first question comes from the line of Troy Jensen representing Piper. Please proceed..

Thank you for taking my question, gentlemen. I guess, I want to start with Erez and then I got a follow-up for David. Erez, halfway through Q2 here, roughly, just curious to know how bookings look either quarter-over-quarter or year-over-year thus far into the quarter..

Hey. Troy, good morning. I think that the guidance we provided are annual guidance, it's really, really too early to give any comment on Q2. And that what we saw in Q1 was a different phenomenon than what we used to see in much stronger end of the quarter compared to previous quarters.

And I want to stay here cautious with providing any forecast or feeling in Q2. I can tell you that the pipeline of both opportunities currently looks okay. However, I'm not sure that this is enough for now to judge any performance of the future..

All right. That's fair. And then for David, I was hoping you could spend a little bit more time on this Airbus deal and this aerospace kind of vertical focus.

Was Airbus using FDM in-house or were they using your Stratasys Direct Manufacturing? Just be curious to know if there's other materials in the pipeline for airspace outside of ULTEM? And has this really been a result of your vertical focus initiative?.

Well, thank you for the question, Troy. Good morning. First of all, again maybe I will kind of look at it for a second on a higher level. I think that the Airbus and the ULA relationship are again another indication to the fact that additive manufacturing and 3D printing has a long way to go.

Specific to your question, in this case, the parts were manufactured for the most part or almost all of them internally in Airbus. And we are in the constant process of working with multiple aerospace companies to develop a more advanced material and when they're going to be available, we're obviously going to announce it.

But I think the most important thing about this two announcements is, again, a strong indication that those industries and many other industries are looking at additive manufacturing as the future manufacturing technology.

And this pattern or fundamental, I will say, growth area did not change in the last few quarters and I don't think it's going to change into the future..

All right, fair. Good luck for the remainder of the year, gentlemen..

Thank you..

Thank you, Troy..

Your next question comes from the line of Rob Stone representing Cowen. Please proceed..

Good morning, gentlemen. I wanted to just ask first about the trend in systems, specifically industrial units compared to last year. I know you mentioned MakerBot was down quite a bit. But what were you seeing in terms of the year-over-year unit trend for industrial systems? And then I have a follow-up..

Hi. Good morning. It's Erez. We didn't break down the different product line in term of units. All we provided was total number of units compared to previous year. And again, we do not provide the information broken down by product line..

Okay. So my second question....

We did....

Go ahead..

We did indicate that we did see a slowdown in our Connex sales. And I think we estimated the reason for it is the fact that we announced many new products in the Connex line towards the end of last year, which caused some delay in customer purchases. Otherwise, like Erez said, we're not breaking it out..

So, are you seeing given what looks like a fairly broad industry slowdown, not just for Stratasys, changes in competitor behavior or do you see an impact on system pricing at this point?.

Yeah. We do not see any change in the competitive environment and neither an impact on ASP. And what we saw in Q1, the reduction in gross margin was mainly, mainly, mainly due to our mix of product. We don't believe that the issues of first quarter are related to competition.

We are not seeing any indication of that in the market, and if you take Wohlers Report 2014, Stratasys sold over 50% of this industrial system. And again, around ASP, we didn't see any issues around it and the result of introduction of several new lower cost – is the result of new lower cost electronics product ..

Great. Thanks for taking my questions..

Your next question comes from the line of Wamsi Mohan representing Bank of America Merrill Lynch. Please proceed..

Hi, yes. Thank you. Good morning. So, one for Erez and one for David. Erez, can you give us some examples of where you're actually cutting down on CapEx and OpEx based on this new revenue target? And if revenue turns out better, should we expect to see these spending estimates more higher? And I have a follow-up for David..

Yes. Wamsi, good morning. What we did, we actually scaled down operating expenses and also CapEx in most area of the organization.

We didn't touch what we – what is strategic at the beginning of the year where the investment plan was announced, and we didn't chart – touch – review, we didn't touch them, IT, customer support testing and activities application and some specifically R&D projects. So, those have longer-term value and contribution.

They are strategic to the company, and we didn't touch them. We scaled down all the rest. So, we scaled down the regions that previously plan to actually be in line with lower revenue plans, scale down some corporate activities not in those areas. And we try to keep the capability – the core capability of the company such that we do not touch it.

And we are ready to move really fast and to accelerate the operations really fast if market conditions will change. So, we kept the core capabilities of the company in place. We didn't touch it.

And actually, I would tell that most – not all but most of the scale-down in operating expenses were around revenue of short-term related activity that we touched. Capital expenditures, most the same. We didn't touch any capital expenditures that's related to IT, to R&D, to be used all those are kept as original plan.

However, we did touch and reduce, I would say, significantly in other places in order to maintain or to control P&L contribution, of course, and maintain our cash position in the market..

Okay. Thanks, Erez. And, David, you clearly spent some time talking about the opportunities here in aerospace.

Can you talk about any other additional verticals where you believe there are similar opportunities? And longer term, do you still believe that MakerBot is an area in the market where you want to continue to play, or do you view yourself as a company that's going to just move higher up in the marketplace? Thanks.

So, I'll start with the first part. We see a few verticals that we have great future opportunities.

We mentioned the aerospace, we think there is great opportunities on the auto industry, in the health area, in dental and education and each one of them has a little bit different growth drivers and our Vertical Business Unit is handling each one of them with separate business plan and separate kind of activity and operation.

So, it's not just the aerospace. In respect to MakerBot, I think that the future of desktop printing is great. We did have a slowdown and we discussed it a few times before in MakerBot. I think we're doing the right things to restructure the company and prepare it for future growth.

I think that the opportunity in desktop in few areas is great such as education. I think that the office space is a great opportunity for desktop. I don't think this market disappear. I think we need to restructure and we're doing it in order to serve it better. But I don't think the potential of the market disappeared..

Thanks, David..

Your next question comes from the line of Paul Coster, representing JPMorgan. Please proceed..

Yeah. Thanks very much for taking my question.

First up, does the slowdown impacted all products or systems segments equally meaning PolyJet and the FDM technology in equal measure? And are there any areas that survive the slowdown and so it's possible to point them as sort of mission critical versus those that are just sort of zero-based budgeting discretionary investment activities on the part of your customers.

And I have a follow-up..

Paul, I'll take the first part. David will take the second part. I think that we saw weakness in most of our product line. The biggest effect was – or the largest effect was around the high-end Connex product. And as we say, we do believe that it is related to the introduction of eight new systems and eight new platforms at the end of Q4 in 2014..

Okay..

David?.

All right. And so, my follow-up question then is....

Yeah..

...you're clearly spending a lot of time now working on solutions for industry verticals and for strategic accounts.

Do you think the business model is going to change here? Because with such huge investment, do you get repaid through shipping products or do you foresee sort of bespoke solutions and being paid on a – for the entire solution or for NRE-type activities? Thank you..

Yeah. At this time – we don't observe at this time in our vertical activity solution. It will require us to change our basic model, okay, or basic business model.

Nevertheless, I think that as we're going to advance in the manufacturing space and our system are going to be better tailored to certain application, it might require some change in the business model, maybe a different mix of – cost of hardware and the cost of consumable. At this point of time, I don't know. I do not observe such solutions.

But I'm not ruling that we're going to see something like this in the future..

Okay. Thank you..

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

Thanks. I wonder if you can comment on the verticals where you saw the weakness.

Was it across the board, or were there specific verticals where the weakness was a little bit more pronounced?.

Again, it's David. Good morning. I think in general, we saw softness across of – most of our activities. There are some verticals – again, I don't want to disclose the specific verticals over this call, but that's within us. But in general, the slowness was across all our activities with some islands in which it did not slow.

But the overall picture was a slower market..

And yet, David, looks like you showed reasonably good growth on consumables. I wonder if you could talk a little bit about that..

Right. Yeah. I think this is one of the good news that most consumable and service grew as we expected them to grow, which means that customers are continuing using the machine, in some cases accelerating the utilization of the machines.

And the fact that customers elected to buy less in Q1 did not affect other customers' usage and desire to use the technology. I think it's good news because it means that people are using the machines either as they're using them today or in some cases more. And I think also a good strong indication to the business model of the company..

So was the growth in consumables in any specific areas again? Or was that more across the board? I'm just trying to get a sense....

Yeah, of course. And I think across all territories or most territories and most industries and technologies..

Yeah, correct..

Okay. Thanks..

Your next question comes from the line of Samuel Eisner representing Goldman Sachs. Please proceed..

On the acceleration in the second half and I guess the implied declines in OpEx, the percentage of revenue, can you talk about which line items, SG&A or R&D or what specifically you will be reducing as a percentage of revenue as you start to enter the back half of the year?.

Hi, Sam. Good morning. It's Erez. Looking forward as of Q2 to Q4, what we did, we adjusted the operating expenses, and I said earlier, we didn't touch specific item that we thought of strategic and longer-term item.

And by nature, when you scale down revenue, you have to spend a little bit less than revenue-related items, and I think that when you look at the operating expenses, we did reduce a little bit of G&A and sales and marketing unless on the R&D line.

However, we didn't provide any numbers guidance or dollar amount to each of this P&L line and just say that operating expenses for the entire 2015 will be 46% to 47% of revenue..

That's helpful. Thanks. And then I guess a follow-up. I think that your Asia Pacific growth, you guys did not see the normal kind of seasonal build that would occur in the first quarter as we're now almost all the way through where we are, all the way through April.

Did you see a snapback in April from some of that kind of seasonal build, or we're still waiting for those Asia Pacific customers to kind of re-up their spending? Thanks..

David?.

Yeah. I'll go back to Erez's answers to Troy, which I think the first question was – the first question. I think it's too early in the quarter to discuss Q2. Asia Pacific enjoyed a few years of very nice growth up to the end of 2014, and Q1 of 2015 was slower. We explained it by slower ramp of the channel in Asia. And I think we need to wait and see.

I mean, we do not – we are not ready to disclose as to this time what is the status of Q2. I will go back to what Erez said that if you look on the overall opportunity generation, lead generation looks healthy across the world, not only in U.S. or Europe..

Great. Thanks..

Your next question comes from the line of Steve Milunovich representing UBS. Please proceed..

Thank you. Could you elaborate a bit on your comment that distributors were a little weak due to M&A? And I know you've talked about distribution being one of your key issues going forward.

Is that an area that's having some cutbacks or an area that's protected? And then, Erez, I also wondered, are your expenses potentially going to decline in dollars over the next few quarters or more just as a percentage of revenue?.

Maybe I'll take care of the first part of it. Like we said in the previous press release and also now, there was unusual increase in M&A activity of some of our channel partners mainly in North America. In general, I see this as a positive note.

Channels are consolidating, extending, but nevertheless, this activity caused some of them to slow down and I think it's natural. And I hope they're going to ramp up pretty soon. But this is mainly related to North America, which for some reason, had unusual, I think, condensed activity during Q1.

Erez, do you want to take the second part?.

Yeah. The operating expenses in – good morning. The operating expenses in 2015, we maintained as a percentage of sales 46% to 47%. We didn't mention any dollar amount.

And I think it will be half, which you mentioned because it's a mix of some items that are going up and some items that are going down, actually, to create a different mix of what we believe is the right mix for the end of 2015, which is a different mix between investment in strategic area and short-term area that were adjusted for the rest of the year..

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

Hi. Good morning. Just wanted to ask one question on Maker. You've mentioned that you expect the growth there to reaccelerate to better than the corporate average, I guess is the hope by 2016.

Just wondering if you could give us more confidence in that forecast and specifically can you talk about the status of your new channel relationships for Maker including Home Depot, Dell and Staples just given Maker's quality issues really coincided with the launch of these new relationships? And I guess I'm wondering about that timing.

It seems like the timing couldn't have been worse to have quality issues at the same time you're launching those relationships?.

Erez, do you want to take the first one?.

Yes. So the – Brian, good morning. As for MakerBot, what we said that we believe that MakerBot will ramp up to the corporate average growth rate as of 2016. We believe that 2015 would be a year that MakerBot is going through reorganization.

There's a big phase, there's a new management – we are recovering from some product issues that we face and all those items will take time.

And we take the entire 2015 to create, build a sustainable – scalable system in MakerBot what we strongly believe in the market that MakerBot is bidding with which is a combination of consumer indication and some [personal] in the market.

But again, the growth rate that we expect MakerBot to come back to as of 2016 and not as of 2015, 2015 will be a turnaround year for MakerBot with all the changes that are going on there..

I guess can you comment specifically though – thanks for the answer.

Can you comment specifically on – have you had a lot of pushback at this point from Home Depot or Dell or Staples? Are you having – can you talk about the challenges of – if you are rebuilding, the challenges of rebuilding those relationships, and how have they responded to the quality issues that they've had after recently agreeing to distribute those products?.

I will come to this one. Again, as far as I'm updated now, those relationships are continuing. I think MakerBot took the right steps as soon as the external issues were known to work with those companies to make sure that the effect on customers is minimal. And I think we'll continue with the relationships. This is what I can say in this time..

Okay. Thank you..

Your next question comes from the line of Sherri Scribner representing Deutsche Bank. Please proceed..

Hi. Yeah. This is Larry Zhong calling in for Sherri.

I was just wondering in terms of margins, more specifically product gross margins, how should we think about it for the full year? And do you guys think that it will normalize in the back half of the year?.

Yeah. So we provided the annual quantity, the annual guidance for the gross margin, and we said that the gross margin will be around 200 basis point or 2% lower than 2014.

And due to our different mix of product that we see, there is no impact or no issue of ASP, only a different mix of product in 2015 compared to what we had in mind in the beginning of the year. And it is related also to the Connex phenomena that we saw in Q1 – the high-end Connex performance in Q1..

Okay, great. Thank you for that.

And can you just give an update on the MakerBot transition so far and the progress that you've seen?.

I guess, Jonathan joined I think just recently, I think months ago, a little bit more. We're doing a lot of changes. I think there is very positive attitude and excitement in MakerBot. And I'm personally very confident that Jonathan will be successful. Hopefully, he's not going to take too much time.

I think MakerBot was and is a great company, is great product and great ideas and great vision. And again, we need – like I said, we need to give it the time to go through this reorganization. But again, I'm very confident with Jonathan taking the position as CEO, I'm sure he's – I know he's the right guy to the right place.

And we just need a little bit of patience in this case..

All right. Thank you. Good luck..

Your next question comes from the line of Patrick Newton representing Stifel. Please proceed..

Great. Thanks for taking my questions. This is Rob Richardson on for Patrick this morning. I think if we could just start of kind of going back to the Airbus ULA agreement.

Just trying to get an understanding of how big of a revenue contributor these projects are currently? And kind of thoughts on where you think they can go in the next 12 months or so?.

Again, we do not disclose and, unfortunately, I cannot disclose what the volume of business with each one of those players. We did indicate the savings in ULA.

I think that in Airbus and other cases like this, we did look in a very big picture the fact that a company like Airbus, which is one of the leaders in the world is taking the time, energy and effort to qualify their products, to qualify their materials to invest a lot of energy into it is done because they believe in the technology and believe that it will be part of their future manufacturing processes.

So again, I can't indicate what's the potential business here. But I think it's a big picture in this case, it's more important than the short-term dollars, which are also very important. I think the indication is very, very positive..

Okay, great. Thanks. Understand that. And then just for my follow-up. Erez, you kind of mentioned, specifically, the decline in capital spending certain regions and industries had impacted the quarter.

Just looking if we can get some insight into sort of what regions or industries you actually saw this impacting from, any kind of specific end markets in particular that where capital spending was more impacted than others?.

David, do you want to take it?.

Sure. Can you repeat the question? Sorry..

Yes. So, the just kind of the comments earlier on, sales in the quarter impacted by decline in capital spending.

I want to see if we could get some more detail or thoughts on any specific regions or industries in particular that where spending was more impacted than others?.

We said earlier, slowdown is – we said actually I think in the press release, slowdown is across territories and across industries. With only few industries that's kind of shine above all the others. So, that's what I can say at this point of time..

All right. Thank you..

Your next question comes from the line of Barry (sic) [Bobby] Burleson representing Canaccord. Please proceed..

Hi, guys. Thanks for taking my questions.

So, I was just wondering, can you talk a little bit about some of your larger global customers that have large internal service bureaus whether or not their capacity utilization is low or full or how much internal capacity of your customers was a dynamic in the weakness in Q1?.

It's a very difficult question. Again, most of the internal service bureaus in large companies have multiple technologies, and I'm not familiar with the utilization of the technologies that we do not sell. We have one indication. It was mentioned earlier.

It's the fact that consumable sales grew as we expected, which means that customers continue to use our machines as much as they used them before or more. But this is the only indication tied to their utilization..

Okay. And then my follow-up is just on China as an opportunity for direct manufacturing the parts business.

How big of an opportunity is that? Do you foresee China as perhaps the biggest geography in the future in terms of parts? And what actions are you guys taking there to address that?.

China is a very big country, and we identified China as the target market for us many, many years ago. Over the last few years and especially in the last two years, we established in China a very strong position with local Stratasys employees in a number of offices. So we believe in Chinese market and we believe in the growth of Chinese market.

If you ask me how big it could be, I'm quite sure it could be very, very big. And we are in this very early stage of adoption in China of this technology. Nevertheless, as I said earlier, we took it very seriously many years ago and we are very well established in China..

And there's no change in the commitment there in terms of the CapEx and operating spending cuts for this year..

No. We – as I said, it was a , the scale-down of commitment in general in the go-to market and distribution was mainly related to the decrease in expected revenue. Nevertheless, as I said, we have a very strong infrastructure in China today, which I think can support growth for few years going forward..

Okay. Thank you..

Your next question comes from the line of Jason North representing Jefferies. Please proceed..

Your product revenues excluding MakerBot were greater than 25% and with MakerBot about flat for the year, what's your updated assumption now based on the new revenue guidance for this year? Thank you..

We can hardly hear you. Can you please repeat the question? Sorry for that..

Sorry. Previously, you had guided non-MakerBot product revenues for 2015 at greater than 25% and MakerBot revenues around flat. Both of those, I assume, are lower based on your underlying assumptions for the 2015 revenue guidance. What are your new assumptions for non-MakerBot product revenues and MakerBot revenues? Thank you..

So we are – I can take you through the different parameters. I think the most important part to understand was that we reduced revenue for the entire organization to Stratasys as well as MakerBot.

We don't see MakerBot as flat in 2015 now and I think that compared to 2014 MakerBot numbers will be down 25% to 30% and for this, you can take the rest of the product growth in 2015..

Great. Thank you..

Ladies and gentlemen, that concludes the time we have for questions and answers. I would now like to turn the call back to Mr. David Reis for closing remarks..

Thank you for joining today's call. We look forward to speak with you again next quarter. Good bye and thank you..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day..