Shane Glenn - Vice President of Investor Relations Ilan Levin - CEO Lilach Payorski - CFO.

Wamsi Mohan - Bank of America Merrill Lynch Troy Jensen - Piper Jaffray Paul Coster - J. P. Morgan Shannon Cross - Cross Research Ken Wong - Citigroup Sherri Scribner - Deutsche Bank Rob Stone - Cowen and Company Patrick Newton - Stifel Nicolaus James Kisner - Jefferies Weston Twigg - Pacific Crest Brian Drab - William Blair.

Good day, ladies and gentlemen. Welcome to the Stratasys’ Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. I would now like to introduce your host for today’s conference call, Mr.

Shane Glenn, Vice President of Investor Relations. You may begin..

Thanks, Kevin. Good morning, everyone, and thank you for joining us to discuss our fourth quarter financial results. On the call today are Ilan Levin, CEO and Lilach Payorski, CFO 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 can be accessed through the Investor Section of our Web site.

We will begin by reminding everyone that certain statements made on this call regarding Stratasys’ strategy and the statements regarding its projected future financial performance, including the financial guidance concerning its expected results for 2017, are forward-looking statements reflecting management’s current expectations and beliefs.

These forward-looking statements are based on current information that is, by its nature, subject to rapid and even abrupt change. Due to risks and uncertainties associated with Stratasys’ business, actual results could differ materially from those projected or implied by these forward-looking statements.

These risks and uncertainties include, but are not limited to, any failure to efficiently and successfully integrate the operations of Stratasys, and various entities that it has acquired, including MakerBot, Solid Concepts, Harvest and GrabCAD, or to successfully establish and execute effective post-acquisition integration plans; changes in the overall global economic environment; the impact of competition and new technologies; changes in the general market, political and economic conditions in the countries in which we operate; any underestimates in projected capital expenditures and liquidity; changes in our strategy; changes in applicable government regulations and approvals; changes in customers’ budgeting priorities; lower than expected demand for our products and services; reduction in our profitability due to shift in our product mix into lower margin products or shifts in our revenues mix significantly toward our additive manufacturing services business; costs and potential liability relating to litigation and regulatory proceedings.

And those factors referred to in Item 3.D Key Information-Risk Factors, Item 4, Information on the Company, and Item 5, Operating and Financial Review and Prospects in our 2015 Annual Report, together with the 2016 Annual Report that we will file soon, as well as in the 2016 Annual Report generally.

Readers are urged to carefully review and consider the various disclosures made throughout the Form 20-F and Stratasys’ other reports filed with or furnished to the SEC, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Any guidance provided, and other forward-looking statements made, on this call are made as of the date hereof, and Stratasys 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, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP and GAAP reconciliations are provided in the table contained in our slide presentation and today’s press release.

Now, I would like to turn the call over to our CEO, Ilan Levin.

Ilan?.

Thank you, Shane. Good morning everyone, and thank you for joining today’s call. Our fourth quarter results reflect our ongoing efforts to focus and improve our customer engagement and product development.

Our levels of revenues combined with our ongoing efforts to better align our cost structure, contributed to a significant improvement in operating profit and cash generation during the period.

We are also making significant progress in transforming our business into a more customer-centric organization; that emphasizes leveraging our extensive technology and application knowledge into value-added solutions for users within key vertical markets.

This renewed focus is being supported by an increasing number of high profile collaborations we have recently announced with industry-leading manufacturing companies, such as Siemens, Airbus, McLaren Racing, and Team Penske.

Additionally, we recently launched significant new products, and implemented organization changes at MakerBot that will better position us to focus on the entry-level professional rapid prototyping segments of our industry.

I will return later in the call to provide you more details on these important initiatives, as well as other key developments, but first it’s a pleasure for me to introduce our new CFO, Lilach Payorski, who will review the details of our financial results.

Lilach?.

Thank you, Ilan, and good morning, everyone. As some of you may know, I’ve been with the Company for over four years, and it's indeed a pleasure to join the call this morning as the new CFO of Stratasys.

We are pleased with our fourth quarter results, which includes growth in recurring revenues that demonstrates strong utilization of our installed base of systems. This stable growth in recurring revenue, combined with our ongoing efforts to better align our cost structure, has resulted in improved operating profit and cash generation.

As a result, both our non-GAAP gross margin and non-GAAP operating margin improved significantly over the same period last year. Total revenue in the fourth quarter was $175.3 million compared to $173.4 million for the same period last year.

GAAP operating loss for the fourth quarter was $29.2 million compared to a loss of $187.8 million for the fourth quarter last year. Non-GAAP operating income was $11.6 million compared to a loss of $8.9 million for the same period last year.

Products revenue in the fourth quarter increased by 2% to $127 million as compared to the same period last year. Within products revenue, system revenue for the quarter declined by 4% over the same period last year, driven primarily by the level of overall market demand we have discussed previously.

However, we observed favorable trends around system utilization, as well as strong demand for our premium materials, which contributed to consumables revenue increasing by 11% as compared to the same period last year. The growth in our premium materials supports our focus on specific value-added solutions with target industry markets.

Services revenue in the fourth quarter was relatively flat at $49 million, as compared to the same period last year.

Within service revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 8% compared to the same period last year, driven primarily by growth in our install base of systems.

Our service revenue was negatively impacted by a decline in revenue for conventional manufacturing services within our Stratasys Direct Manufacturing business; as we put greater strategic focus on additive manufacturing offerings.

GAAP gross margins improved to 47.3% for the fourth quarter compared to a GAAP gross margin of 30.6% for the same period last year. Non-GAAP gross margin improved to 53.6% for the fourth quarter compared to 48.1% for the same period last year.

Product gross margin improved significantly, driven by a shift in our sales mix towards high-end products, cost control efforts in operations, and improved production efficiencies. Service gross margins also improved compared to same period last year, helped by our cost control efforts.

GAAP operating expenses decreased by 53% to $112 million for the fourth quarter as compared to the same period last year. Non-GAAP operating expenses decreased by 11% to $82 million for the fourth quarter as compared to the same period last year.

These favorable trends in operating expenses over the last year reflect the positive impact of our overall focus on improving efficiencies across the Company. These cost efficiencies are in line with our long-term growth strategy, which also includes increased investments in areas we view as critical for long-term growth and productivity.

I’m pleased to report that cash flow generated from operations increased significantly over the year.

The Company generated $26 million of cash from operations during the fourth quarter as compared to $7.7 million for the fourth quarter last year, and generated $62 million in cash for the full year 2016 as compared to cash usage of $21.9 million during 2015. We ended the year with $280.3 million in cash and cash equivalents.

Inventory at the end of the fourth quarter decreased to $117.5 million as compared to $123.7 million at the end of 2015 as we maintain tight control on inventory levels. Accounts receivable decreased to $120.4 million compared to $123.2 million at the end of 2015 with DSO on 12-month trailing revenue steady at 65.

In summary, in the fourth quarter, we improved our operational performance, leading to improvements in both non-GAAP gross margin and operating income over last year. We observed strong growth of our recurring product and service contract revenue, which represents high system utilization and demand for our premium materials.

Going forward, we will remain focused on investing in value-added solutions within key target markets, with aligning costs and resources towards achieving our long-term goals. And finally, we are pleased with our cash position, which will enable us to capitalize on emerging opportunities going forward.

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 2017 financial guidance.

Shane?.

Thank you, Lilach.

Our guidance for 2017 is as follows; total revenue in the range of $645 to $680 million with non-GAAP net income in the range of $10 million to $20 million, or $0.19 to $0.37 per diluted share; GAAP net loss of $53 million to $39 million, or $1.00 to $0.73 per basic share; non-GAAP operating margins of 3% to 5%; and capital expenditures are projected to be $40 million to $50 million.

Non-GAAP earnings guidance excludes $34 million of projected amortization of intangible assets; $18 million to $20 million of share-based compensation expense; $2 million to $3 million in merger and acquisition related expense; and $8 million to $10 million in reorganization and other related costs; and includes $3 million to $4 million in tax expenses related to non-GAAP adjustments.

We maintain our relatively high estimated non-GAAP tax rate for 2017 given the ongoing non-cash valuation allowance on deferred tax assets we expect to report throughout the year.

These deferred tax assets have expiration dates many years in the future, and we do continue to anticipate being able to ultimately recognize their value to offset prospective tax liabilities. Given the expected ongoing and negative impact of not recording a tax benefit on U.S.

losses -- our net income loss, the Company believes non-GAAP operating profit would be the best measure of performance in 2017. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of our press release and slide presentation that has itemized detail of the non-GAAP financial measures.

Now, I'd like to turn the call back over to our CEO, Ilan Levin.

Ilan?.

Thank you, Shane. In 2017, we are focused on better allocating our resources to achieve our long-term goals.

Our industry is continually maturing, and moving beyond general purpose design and engineering rapid prototyping into use-cases that target specific high value-added applications within key industry segments, ranging from advanced prototyping, through to production tooling and production part manufacturing applications.

Today, we are reallocating resources from a general purpose, one size fits all development strategy, and further emphasizing key customer engagements, with development projects closely associated with their needs.

By leveraging our extensive technology and application knowledge, with our drive to build deep, high-quality, and lasting customer relationships, we are able to provide increased value to the market.

As we make this transition, we will continue to make the necessary changes to our organizational structure that will help us to achieve these long-term goals. As the market matures, Stratasys is focused on investing in products that provide value-added applications and solutions for our customers.

We aim to accomplish this by leveraging the core elements of our technology portfolio and extensive knowledge base within our organization. We believe our core FDM and PolyJet technologies provide some the markets most stable and proven platforms, that have significant additional potential to unlock and develop.

For example, we recently announced our new Nylon 12CF material for our FDM platforms. Nylon 12CF is a new carbon-fiber-filled thermoplastic that is strong enough to replace metal in many applications.

We believe the new material will be valuable to users within the automotive, aerospace, recreational goods, and industrial manufacturing sectors for applications such as; design engineers, that need to rapidly produce strong, light-weight and rigid components for functional prototyping, thus reducing time-to-market for new products; manufacturing engineers, that produce assembly aids, such as jigs and fixtures, where material stiffness and strength add value and where replacement of metal is desired; and manufacturing engineers, making low-volume production parts with unique structural requirements, where high strength is required.

As we prioritize our investments, we are emphasizing product and application development based on the clear customer or segment feedback and insights, specifically within our target markets of aerospace, automotive, healthcare, and education.

We believe that the enhanced value resulting from these investments provides significant opportunities within these verticals for rapid prototyping, professional design, tooling, and advanced manufacturing applications.

For example, at the newly designated Stratasys-supported Center of Excellence at the Jacobs Institute, physicians have been utilizing our PolyJet 3D printing solutions to develop treatment plans for life-threatening vascular issues such as aneurysms, stroke and blood clots.

In addition to making exact models to match specific patients, our technology is being used to create anatomical models for medical training, as well as to develop trial runs for new treatment protocols adding significant value by providing physicians a completely new process to address these applications.

We believe these initiatives and renewed focus will improve our quality of revenue, going forward, and better position the Company for long-term sustainable growth. A critical part of our strategy is our ability to collaborate with our customers, particularly for production tooling and advanced manufacturing applications.

We’ve made several recent announcements regarding exciting initiatives with industry-leading manufacturing companies.

We’ve expanded our relationship with Siemens to pursue the integration between Siemens’ Digital Factory and Stratasys’ Additive Manufacturing solutions, to create a cohesive, best-of-breed technology foundation that enables large-scale manufacturers to enjoy the benefits of additive manufacturing within traditional production environments.

Within the automotive segment, we announced that Stratasys has been named the Official Supplier of 3D printing solutions to the McLaren-Honda Formula 1 team to provide our suite of 3D printing and additive manufacturing solutions for visual and functional prototyping, production and composite tooling, and customized production of parts.

We also entered into a technical collaboration with Team Penske to provide 3D printing solutions for NASCAR and IndyCar engineering and manufacturing applications. As I hope you can see, we are committed to working with our customers to develop solutions that can provide value across a wide range of applications and industries.

While the rapid prototyping segment of our industry is the most developed, we believe that by providing enhanced value for this market, we can develop further growth.

We believe providing ease-of-use while also providing engineering quality models, together with enhanced workflow software, are key value components for the professional engineer or designer. To further our leadership position in the rapid prototyping segment, we recently introduced the Stratasys F123 Series for professional rapid prototyping.

The new series of FDM systems are optimized for the complete prototyping workflow, from initial concept verification to design validation to functional performance testing.

The new solutions address the needs of the professional workgroup-prototyping market with a unique combination of office-usability, precision, repeatability and affordability, all without compromising on the requirements for engineering quality models.

The F123 series benefits from 43 existing patents, leveraging the best of our current and proven production portfolio, and 15 patents pending, featuring engineering that is exclusive to the F123 series.

For the first time, we are enabling customers to print low-cost concept models in a high-end professional 3D printer, by offering PLA materials alongside our thermoplastic materials. PLA enables a cost effective and fast draft mode, saving customers up to 10 times the cost per part, and doubling the print speed compared to other materials.

Material change over is significantly faster than our previous models, allowing users to take advantage of the four material options and 10 color choices with reduced downtime. The F123 Series features a streamlined workflow with GrabCAD Print, making 3D printing more realistic, connected, and accessible.

GrabCAD Print eliminates the pain points and time wasted on file conversions by reading native CAD files and connecting directly to the F123 Series, enabling increased productivity with print management and remote print monitoring.

Overall, we believe the new F123 Series is the most reliable, economical, and intelligent rapid prototyping solution on the professional market today.

In addition to continuing ongoing development of the professional rapid prototyping segment, we believe that there is strategic value in capturing entry-level users within the desktop segment where we can provide differentiated value.

We believe MakerBot maintains the leading desktop brand, with the most developed software ecosystem within the industry. We recently implemented organizational changes at MakerBot that we believe will narrow our focus on development efforts for the entry-level professional.

We remain confident in the long-term opportunity in the desktop segment, and will continue to invest in products that serve the entry-level professional and education markets.

In summary, we are making significant progress in transforming our business into a more customer-centric organization providing value-added solutions for users within our key vertical markets.

We are focused on leveraging our extensive knowledge and capabilities to build deep, high-quality, and lasting relationships where we are able to provide value to our customers.

We are pleased with the initial reception to the F123 Series and believe that the rapid prototyping space remains an attractive opportunity, from entry-level to professional users. We will continue to expand our collaborative relationships with key global manufacturing companies that can help advance our overall strategy.

Moving forward, we are focused on better allocating our resources to achieve our long-term goals, and we remain excited about the Company’s future and the long-term growth potential within our industry. Operator, please open the call for questions..

[Operator Instructions] Our first question comes from Wamsi Mohan with Bank of America Merrill Lynch..

When you look at the high-end of 2017 guidance all the metrics are up slightly. But the leverage really does not seem to be coming through in term of increasing operating income dollars.

Do you think there is significantly more room to take down the cost structure, where do you see those opportunities specifically within COGS and OpEx? And as part of the reason, that we’re not seeing this leverage as a continued high-base with investment, and I have a follow-up. Thank you..

So we’re looking at always shifting our resources in line with our strategies. So, if we’re looking at a greater customer engagement all across the Company, we’re looking to free-up resources and to move them into those engagements.

And the last thing, I think that we want to do, is frustrate those efforts and not invest adequately, so that we don’t gain the benefit in the medium to long-term. So, I think that's our key focus.

We have been focused in the past more on cost reduction, and I think now it's a primary focus on the reallocation of those resources, to where we need to put those. Obviously, we always continue to monitor the expenses, going forward, to make necessary changes up or down as the business moves along..

And as my follow-up, you did outperform in the quarter on revenue, and your system revenue declines have somewhat stabilized. But your revenue guide is largely flat to down in ’17 versus your competitor, who think that's going to be up or low to mid-single digits.

Are you concerned around share loss, as this reallocation as you said of resources, to deemphasize maybe certain areas of the addressable market? Or are you just thinking that the market growth rate is basically going to remain quite challenged going into ’17? Thank you..

So, we are encouraged about the quarter's results. We're also encouraged by what we’re doing with specific customer engagements. That said it's a little bit difficult for us to model in the immediate term actual revenue realization from those customer engagements.

Just to give you all view sense of, these customer engagements are little bit different in nature than we have been doing in the past. We have sometimes more often now, multiple system orders in front of us or larger proposals outstanding than we’ve typically had in the past.

So this is the timing of those types of deals and the probability of them landing any specific query that’s target for us to gauge. So I think it's less of what we’re seeing in the market, in general, or trying to make judgments on the market.

But actually looking at it from what we're doing with specific customers what we have in front of us and, I would say difficulty, but our certainty as to when that withdraw and how it will look for the reminder of the year..

Thanks a lot….

There are some areas of our business, just to say. There are some areas of our business that have being seeing a decline, and I don’t think in any of these areas that we're trying to emphasize. So, where we are trying to put our dollars and emphasis, I think, we're seeing good potential for growth..

Our next question comes from Troy Jensen with Piper Jaffray..

Maybe first, just for your line, you guided in the R&D. I guess, my senses Stratasys is trying to just get deeper into FDM and PolyJet technology now, and historically that has been a believer. You guys would introduce metals or high speed centering, or you had five [indiscernible] projects that you talked about.

I’d just be curious to know if the focus is changed in fact two or three years from now, how many new technologies we get it introduced? Or is all the development more on is really getting deep in FDM and PolyJet?.

So naturally, as a basis we show very comfortable with both PolyJet and FDM. And when we engage our customers increasingly, specifically on tooling or on manufacturing opportunities, we see a very strong pull based on the FDM and PolyJet technologies.

So, there is no reason for us to feel that we don’t have a very bright future and a lot of good things to do within those two technologies. We do work on others as well. We do have projects outside of those two spheres that we're maintaining. We believe that they can also brought in and sometimes even complement what we're doing in FDM and on PolyJet.

But I think to demonstrate as an example that we exhibited back in September IMTS on the robotic composite and on Internet bills, are good examples of where we can continue to take our current well proven stable technologies along way, going forward. So we're feeling very, very comfortable about those two technologies right now..

Then one just to follow-up on material developments; so it's carbon fiber, Nylon sounds pretty interesting. Just wondering if you could just help us think about the ramp of that, and historically all complementary new product materials introduced and if it's starting some of the applications for FMD.

Can you just give us some example of the ramp you’re seeing at other important materials like this?.

So, in line with our strategy, in general, when we looking more now at focused applications it's more important for us to get traction within specific application within a more a narrower customer base. We're looking at less in terms of quantity out of the gate. We're looking more at how much are these materials appreciated.

What are the applications that are best suited for and I think we’re in a very existing way looking at the traction within specific customers, typically our data customer but also first early adaptors of how they’re looking at it. So, if we look at the Nylon, we have some customers who are very excited about it, and are tracking very nicely.

So, it's more we’re looking at in a very, very specific basis rather than on a scale basis. And we believe that's the right way, because then we go back to market to visit other customers.

We have a lot more not only validations, but we have a much better understanding of the applications and we think that that's where the value is right now in the market, going forward..

Our next question comes from Paul Coster with J. P. Morgan..

So, it's been a while now, but you've been engaged with some of these customers on these more vertical solutions. I think maybe a predecessor or maybe you committed to -- it's being 18-months to two years time line before we saw the projects really kick-in. Well, getting closer now.

And I'm wondering can you give us some sense of the level of engagement. Do you have stock co-located, how much skin in the game that your partners have in these adhesive manufacturing innovations? Thank you..

We can look at it from a number of different aspects. If we look at what we've been doing in aerospace, specifically with the Boeing for example or Airbus, it's been obviously a lot longer than 18-months.

Our relationship with Boeing days back a good number of years, and I think that's brought out a lot of good products, not only them and their customers for aerospace but also just in general in the market.

So, there is lot of value that we see in the deeper engagement, specifically with traction at those customers than we absolutely see a ramp-up and increased adoption as we've announced earlier parts on certain Airbus aircrafts now have FDM parts that are printed with our technology, that's been certified both from a material perspective, a process perspective.

And so we do think we’re already benefiting from that and from that growth. In general, with respect to engagement on the customer side and your question is how much skin in the game. I'm very pleased with the increasingly senior engagement we're getting from our customers.

It's not atypical now that we are speaking to sea levels even with organizations that are much larger than we are. I think that is a sign of the maturity of the industry and the readiness for adoption, in general.

What's exciting to me is that many of that sea level engagement is a result of those customers being familiar with our technology, so it’s not something that's new. We’re not necessarily coming in and vandalizing 3D printing or our technology, it's more of -- they are very often understand hard technology, sometimes equally to us.

And then there is a meaningful dialogue of how to take it to the next level. As I’ve alluded in the previous question, our demonstrator is a great testament to that. That was in response to looking at our, in that case, FDM technology and understanding where we could take it. And that was very much directed by our customers, equally to us ourselves.

And so I think in that respect, there is a lot of engagement, there is a lot of seriousness from our customers. I think it's now more of putting the development plans around it and executing in order to deliver on the promise..

The lower level, the engineers co-located.

Is there any sharing of intellectual property or even budget?.

It can include any of that. In general, with respect to the IP, what we are providing is clearly the mark. So, we feel very comfortable in what we are providing and the value that we’re generating around it. But the partnership is very, very intent in some of the cases, and there is lot of back and forth.

But we think it's all in net-add of us in terms of delivering that value..

Our next question comes from Shannon Cross with Cross Research..

Ilan, can you maybe go back, you’ve been there about nine months now, I think. And just give us an idea of maybe your perspective on what you’ve seen that the Company would surprise you, what you think -- and may be more will get 50 foot level.

And I'm curious to, as you looked at things and gone through back office systems, I mean, your sales force, whatever.

Just maybe a holistic commentary on what you’ve seen within the business surprised you, disappointed you, as you’ve gone through it?.

So, I can involve with the Company for many, many years, predating even the Stratasys’ Object merger. So, there’s nothing very surprising, I’ve been very, very close to the Company for many, many years. As we're implementing the strategy and reacting to what we see as a maturity of the market, we're obviously transitioning.

And it's not so much question of the surprise, it's moving away from, as you mentioned, back offices processes that might have been designed and catered to increase scale. And we're putting in now systems and methodologies in order to deepen our relationships with either specific industries or specific customers.

And you see it, I think, in the recent announcements where we’re gaining traction with specific customers. We’re highlighting them internally and externally to the market. We think it’s a great leadership statement about Stratasys.

And so on the inside of the organization, and as you said the prophecies, we're trying to change those in order to cater to those types of relationships, that style of business, with the quality of revenue I think would be, further out, will be at a higher quality and less on the scale of single products, meeting all market needs and working the business that way..

And more specifically, can you talk a bit about pricing. Curious as to what you're seeing, both the supplies and from a product prospective.

I'm sure some of it is driven from competitor standpoint, but then also just what you're customers are saying about their willing us to pay list versus discounting?.

So, as we continue this customer engagement journey and as we continually provide increased value as we’ve alluded to it, I think in the scripted remarks that our premium materials meeting premium value and then are being very, very received by the market. And I think that customers are pushing that even higher on that.

And I think there is a general understanding very much so on the target markets like aerospace, high-end automotive, healthcare, that the value that is being injected into the product that’s really a requirement from our customer that theirs is an associated cost and price with that.

So, I don’t see the issue of a discount I see Stratasys’ role of providing the extra value and getting that in return, because we're really investing in our products..

Our next question comes from Ken Wong with Citigroup..

So Ilan and Lilach, this is first official guide that you guys crafted as a management team.

How should we think about the business inputs, the thought process, maybe even the level of conservatism that you guys build into this particular forecast?.

So obviously we’re working on what we're seeing throughout 2016, and the quarter. We're pleased with the uptick in consumable consumption, in general, which does point to strong utilization of our systems. So, we’re very encouraged by that. When we put it all together, we look at it, both from a industry perspective and pipeline customer perspective.

I think that's primarily the way we look at it. And we are, as we've said before I said before, deemphasizing certain elements of our business that we do not believe lead to a strong customer engagement. And so, we put that out together at the guidance we came up with is what we have presented..

And then a second part, maybe this is for Lilach. The operating cash flow of $60 million, which I believe is a high for you guys. That's quite impressive.

Any color on how cash flow might trend in fiscal ‘17?.

As we've said, we are pleased with our cash generation in the fourth quarter. We always are evaluating opportunity to drive cost efficiency and improve our cash flow; generating, going forward, we definitely emphasize on that going into 2017.

But specifically, the level of the cash flow we anticipated would be probably something similar as what we saw in 2016..

Our next question comes from Sherri Scribner with Deutsche Bank..

Just thinking about the business, overall, it seems like the system business continues to decline. But you saw better performance on the materials obviously, as you emphasize -- there was more advanced materials.

Is it important from your perspective to be driving systems growth longer-term? And do you expect, potentially, systems to recover? Or is it more important to focus on that early utilization of those products and driving the materials through those systems?.

Well, it pretty much goes hand-in-hand. So as we see increased utilization, we expect to see increased hardware, and chicken and the egg and the other way around as well.

So, what we're trying to drive is, as I said; clearly, focusing in on application within a customer, taking the box to make sure that we are satisfying those needs; making sure ensuring that there’s traction, meaning that whatever hardware we have provided, whatever systems we have provided, they are consuming the right levels of, hopefully, premium materials because that's typically what applications are driving; and then we can come in.

And as their business ramps, we can benefit from that increase as well. So it's very much not what drives one or the other, it's the application that drives and the greater clarity that we are presenting, the opportunity and the greater embracing that the customer does. And we're all better up, both in terms of systems and material consumption..

And then thinking about the business, I mean historically, there has been a lot of prototyping business with your business. But some of your new applications and some of the specific customers that you’re trying about sounds like finished parts than pieces in airplanes.

Can you talk a little bit about your perception of how much more opportunity there is in the prototyping segment of the market? It seems like there is still lot of opportunity in finished parts. And what is your strategy in terms of emphasizing those, or is it more about different applications? Thanks..

So on the prototyping side, I think F123 system is adding a lot of usability into it. I think by adding PLA, we're really broadening the marketing quite a bit there. And it's still very much of an engineering package and high-end materials that are running through the F123 is still proving a very professional experience for those that use this.

So, I think there is an good opportunity there. And I that that trend providing perhaps in all-in-one package and driving the affordability, driving the accessibility further and further, is a very, very interesting opportunity.

If you look at the MakerBot side, with this leading brand and software ecosystem, they are providing similar attributes from the bottom. And I think, from both angles, that entire segment still has a tremendous growth opportunity.

Stratasys as an industry, we need to incrementally and then step function the times improve what we’re bringing to the market, and I think that there is a lot of room to grow there..

Our next question comes from Rob Stone with Cowen and Company..

I wanted to ask a little bit more color on the fourth quarter and how that feeds into your guidance.

Within the 4% decline in systems, can you comment at all on how that broke down between desktop and industrial?.

So, we don’t break down the product revenues into different product families. Just as a general comment, despite the slight decline in system revenues, that decline is less dramatic as we’ve seen in past quarters over the past year and year and half.

So, we’re hopeful and encouraged that system rates climbing back up, system attach rates are climbing back up and attraction there is a little bit better..

My follow-up question relates to how you're thinking about that, implied within your guidance, if consumables and customer support keep naturally growing along with the install base. Does your roughly flattish revenue guide at the midpoint imply consumers offsetting decline in system sales? And can you give any color, talk about larger orders.

Can you give me color on the duration of the sales cycle now versus what you saw may be a year ago? Thanks..

So, with respect to the guidance, in general, as I’ve alluded to in my previous remarks, we are deemphasizing parts of our business. Just as example, we have a conventional manufacturing services part within our FDM business that is experiencing a decline. And that kind of area may continue to decline as a result of our strategic focus.

So, where we're putting our efforts and where we're putting customer engagement, it's not that we are anticipating a decline it's just may be question of how do we time the revenues that they come. And with respect to sales cycle, in general, it very much depends on the system.

I think that in the early reception of our F123 series, obviously, alludes to a shorter sale cycle because of the size of the system and cost of the system, as we go to our more industrial systems, obviously the sales cycle could be, can be a little bit longer.

But the good side on that is we're seeing more on multiple system and orders proposals outstanding. And as we -- and so there is a very nice opportunity there, because once its embraced as a technology or as a process or specific application then it put forth ramps up as the business ramp at one of our customers. So that’s a nice opportunity.

And then when you see that all into the guidance, it's a question how do we project the immediate term actual revenue out of those opportunities..

So, it's really more uncertainty around timing, or anything else, it sounds like?.

Yes, we are. We feel comfortable that when we engage customers, we're in meaningful dialogue not as to a specific sale but a meaningful dialogue of the application match. And we’re finding increasing number of places where we can make a value impact.

So again, we were as an industry perhaps of vandalizing the importance of 3D printing or how it can come into a play in a business, but rather now a lot more around specifics of how did it ramp-up, they understanding the technology more. And so those are far more rewarding conversations than perhaps we used to have several years ago..

Our next question comes from Patrick Newton with Stifel..

First for Lilach, on the gross margin focusing on products and services. On the product front, you said that the increase was due to mix towards the high-end. I'm curious if that shift is fully embedded into results? Or if we should expect to see ongoing tailwind from product gross margin in the coming quarters.

And then on the service gross margin, it's been on a downward trajectory over the last several years.

Is there any reasonable gross margin range looking out over the long-term that you think you could inform us?.

We have not provided that in, specifically for the gross margin. But we do expect gross margin to remain relatively stable, going forward.

You’ve got on both, they are on product and also on services, we’re encouraged by the fact that we have a shift towards high-end products, and that definitely we take to play in our gross margin going forward, as well as our initiatives around cost cutting around the services. But I would expect to see similar trends going into 2017..

Thank you. And I guess as my follow-up for Ilan. You've previously spoken to some lower-end printers from a number of competitors negatively impacting some of your more mid-range solutions.

I'm curious if you can comment on any changes that trend, and is there an acceleration of this headwind that might be at least partially embedded into the 2017 guidance?.

I don’t see there is dramatically different trends in the market, what we’ve seen over the past number of quarters. With respect to Stratasys in this product line, I think the F123 series, which is a new product line for us, positions us well at the entry level for already engineering grid prototyping applications.

So, we think we’re introducing the managed dynamic into the market with the new products..

Our next question comes from James Kisner with Jefferies..

Could you provide more color on services, revenue was flat and you said you've been more focused on additive manufacturing versus traditional. And could you talk more about what you did there, and when you expect to return back to growth? Thank you..

So, services revenue includes both our system maintenance revenue and revenue that associated with our direct manufacturing FDM business. Within FDM we’re beginning to see, and that was the reason we decided back to acquire it, was we’re beginning to see more and more elements of synergy between what Stratasys' is providing and what FDM is providing.

To-date they’ve been running as pretty much as separate businesses. And I think that we’re beginning of which we’re striving to anecdotally provide surfaces of both nature to specific customers. And as we at Stratasys increase our customer engagement, we're able to bring in FDM.

Right now, it’s anecdotal basis but I think there has been very good stories that are coming out it for very high added value customers that are looking for either off-loading capacity or as instead up buying in systems, first using or as they ramp up their business using the services of FDM.

So, for us it's more not a question of specifically the growth of any one units it’s how we can serve our customers better. And we believe that as we get closer to our customer and deliver the right service to them or the right business model for them, Stratasys' in general benefits.

And I think as we move forward, we're going to be looking at it more on a industry and customer specific basis rather than a different unit, and its financial metric performance..

And are you expecting to make additional investments into, let's say project based and management of this service contract?.

Can you repeat that?.

So, one of you competitors, they are looking into doing project based management of service relationships when they engage with the customer. I mean, it seems like, I haven’t heard anything formal from you. So, just asking….

So, we've had different parts of the organization doing right services in the past. Today, we’ve put that all together into what we call our expert service unit.

And we’re doing absolutely that, which is consulting services to our customers, either about re-additive manufacturing in general or services directly related to our technology and how to appropriately find applications within the organization. So, we absolutely do have something like that.

And that’s basically more to provide a better service to our customers, than looking at it as a independent unit within Stratasys..

Our next question comes from Weston Twigg with Pacific Crest..

First just wondering, you mentioned that you're trying to better allocate resources to achieve your long-term goals. But I haven’t heard you outline those goals recently, may be not since 2015.

So, just wondering if you could use this call as an opportunity to provide us an update on your long-term goals?.

We’re absolutely moving to something that’s more customer-centric and that’s more applications centric.

I think we were, in the past, the industry in general and Stratasys included, we're very system oriented, typically characterizing activities by the size of the system, its price; meaning, affordability and where it lies on the general rapid prototype being landscape.

And now I think for these customers as we move to tooling applications and manufacturing applications, but not only also within rapid prototyping, in general, customers are far more specific today. Very often they will have versus many in different technologies and each one of them has a different application set that they cater to.

And so, when we talk about reallocating resources, it's moving it from the general purpose one size fits all massively dominated on the system side. And now we’re doing it around the combination of materials, software and the system to deliver specific applications. That's on the development side.

And as we call solutions, sometimes we just call it an integrated product that can come in, or an applications, so it can come in different flavors but that's basically what that caption is. And then on the go-to-market side, as we’re reallocating our resources, we’re looking at how do deepen our engagement with specific customers.

How do we have better strategic account management and application engineering in the field, speaking to customers, and providing a value in terms of not only the fulfillment side and identifying potential customers, but more of the meaningful dialogue with the customer of what their specific needs are and if we have something that’s readily available or we need to augment what we have in a meaningful way to make it productive for them..

So you’re willing to share sort strategic focus, but not necessarily quantitative metrics of this for your goals?.

That's right..

Second question, the Infinite-Build printer, you gave us a little bit of an update with the Boeing information we saw Ford is using it.

Can you give us an update on just progress with that platform, the traction with customers and the potential launch date? And then just on top of that, can you also tie-in your new materials to that platform, like Nylon carbon fiber?.

So the nature of the two systems that we demonstrated the Infinite-Build and Robotic Composite are very different than any of our other systems that we've launched to-date in terms of scale and usage.

And I don’t think that we will have a commercialization path or launch date that we use to typically have with our other systems, or let's say compared to the F123, which is a very formal launch. The development of those systems and the usage of customer and the usage by customers is done almost hand-to-hand.

So, we've been delivering parts that are built-off of those systems or some of those systems. They are very deeply engaged. So there is a lot of benefit and value that customers are beginning to derive, even if we haven’t formally called it a commercialized product readily available for sale.

And I think that's what we can expect to see for the foreseeable future, because these systems are very high-added value. It can be even the case where different customers require different attributes, and requires either expert services around it, application engineering, made further development on a different branch.

But I think even today the customers are benefiting from the technology already..

That makes sense what ties into your strategy toward being more customer-centric around applications rather than commercializing the product for broader sale?.

That's right..

Our last question comes from Brian Drab with William Blair..

Actually, maybe two quick ones, so could you talk a little bit about the cadence of revenue and earnings that you are expecting as we move through 2017. You have the tough comp, I think in the second quarter, given the intro of the 750 last year. You’re talking a little bit about revenue from larger partnerships and timing.

Any help in modeling the progression as we move through the quarters would be great?.

So as you probably noticed, given our previous views, typically Q4, we see a significant increase also the end of the year, and this is what we probably going to expect for this year as well.

In terms of operating expenses throughout the quarter, we believe this is going to be similar level throughout all the fourth quarter with some fluctuations based on revenue through the analysis..

Ladies and gentleman, this concludes today's Q&A portion. I would now like to turn the call back over to Ilan Levin for closing remarks..

Thank you for joining today’s call. And we look forward to speaking with you again next quarter. Thank you..

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day..