Shane Glenn - VP, Investor Relations Ilan Levin - CEO Lilach Payorski - CFO.

Ken Wong - Citigroup Troy Jensen - Piper Jaffray Shannon Cross - Cross Research Jim Ricchiuti - Needham & Company Rob Stone - Cowen Matt Cabral - Goldman Sachs Patrick Newton - Stifel Steve Dyer - Craig-Hallum Capital Group.

Good day, ladies and gentlemen, and welcome to the Stratasys’ Q1 2017 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 be given at that time. [Operator Instructions] I would now like to turn the call over to Mr.

Shane Glenn, Vice President of Investor Relations. Sir, you may begin..

Thanks, Chelsea. Good morning, everyone, and thank you for joining to discuss our first quarter financial results. On the call with us today are Ilan Levin, CEO and Lilach Payorski, CFO of Stratasys.

I will 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 Investors Section of our website.

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 shifting in our product mix into lower margin products or shifts in our revenues mix significantly toward our AM 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 2016 Annual Report on Form 20-F, which we filed with the SEC on March 9, 2017 as well as in the 2016 Annual Report generally.

Readers are urged to carefully review and consider the various disclosures made throughout the report on Form 6-K that attaches Stratasys’ unaudited condensed, consolidated financial statements as of and for the quarter ended March 31, 2017 in its review of its results and operation and financial conditions for that period, which has been furnished to the SEC on or about the day hereof.

Stratasys’ 2016 annual report 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 to GAAP reconciliations are provided in the table contained in our slide presentation and in 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. We remain encouraged by our efforts to achieve deeper engagement with customers in our key vertical markets during the first quarter.

This customer-centric approach has resulted in encouraging progress in developing Rapid Prototyping tooling and production part applications that are being driven by the specific requirements of industry leading aerospace and automotive manufacturing companies.

We continue to believe that by gaining greater insights into the specific needs and requirements of our customers, we are unlocking significant value and growing the adoption of our products and services going forward. I will return later in the call to provide you more details on these important initiatives, as well as other key developments.

But first I will turn the call over to our CFO, Lilach Payorski, who will review the details of our financial results.

Lilach?.

Thank you, Ilan, and good morning, everyone. We are pleased with our first quarter results, which includes growth in recurring revenues that demonstrates strong utilization of our installed base of systems.

Additionally, the trend of reduction in operating expenses has continued into the quarter and with this reduction we have aligned our resources as we shift towards addressing specific high-value added applications in our key vertical markets.

Total revenue in the first quarter was $163.2 million compared to $167.9 million for the same period last year. GAAP operating loss for the first quarter was $12.6 million compared to a loss of $21.1 million for the last quarter. Non-GAAP operating income for the first quarter was flat year-over-year at $12 million.

Products revenue in the first quarter decreased by 3% to $115.1 million as compared to the same period last year.

Within products revenue, system revenue for the quarter declined by 11% over last year, primarily driven by a shift in our product mix towards lower end system, which is mainly the result of the successful introduction of our low-cost high-value F123 offering to the Rapid Prototyping professional market.

We continue to see favorable trends around system utilization, and demand for our premium materials, which contributed to consumables revenue increasing by 7% as compared to the same period last year.

The growth we see in our premium materials supports our focus on specific value-added solutions and give us confidence to increase our efforts in target industry markets. Services revenue in the first quarter decreased by 2% to $48.1 million, as compared to last year.

Within service revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems, increased by 7% compared to the same period last year, driven primarily by growth in our installed base of systems.

As we put greater strategic focus on additive manufacturing offerings we expect to transition away from the lower revenue attributed to conventional manufacturing services within our Stratasys Direct Manufacturing business.

GAAP gross margin decreased slightly to 47.1% for the first quarter compared to GAAP gross margins of 48.3% for the same period last year. Non-GAAP gross margin decreased to 51.2% for the first quarter compared to 55.1% for last year driven by a shift in sales mix.

Product gross margin decreased to 57.9% compared to 61.1% for the same period last year driven by the shift in sales mix described earlier, relating to the introduction of our low-cost, high-value offering to the Rapid Prototyping professional market.

Service gross margins decreased to 35% compared to 40.4% for the same period last year, driven primarily by lower service revenue ratio to fixed expenses. GAAP operating expenses decreased by 12% to $89.5 million for the first quarter as compared to the same period last year.

Non-GAAP operating expenses decreased by 10% to $79.5 million for the first quarter versus 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.

We have aligned our resources as we continue to focus on addressing specific high-value added applications in our key vertical markets. These cost efficiencies are in line with our long-term growth strategy, which includes increased investments in areas we see as critical to our long-term growth and productivity.

The Company generated $25.4 million of cash from operations during the first quarter as compared to $31.6 million for the first quarter last year. We are pleased to end the first quarter with $297.2 million in cash and cash equivalents compared to $280.3 million at the end of 2016.

Inventory at the end of the first quarter decreased to $116 million compared to $117.5 million at the end of 2016 as we maintain tight control on inventory levels. Accounts receivable decreased to $115.1 million compared to $120.4 million at the end of 2016 with DSO on 12-month trailing revenue at 63.

In summary, we are pleased with the growth in recurring consumable and service contract revenue, driven by strong system utilization and growing demand for our premium materials. We continue to focus on operational performance, which are reflected by significant reductions in operating expenses.

Our strategy to invest in value-added solutions within our key target markets continues, while aligning costs and resources with our long-term goals. And finally, a favorable cash position, including cash generation and a strong balance sheet provide us with the capital needed to take advantage of 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 remains 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%; capital expenditures projected at $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 a relatively high estimated non-GAAP tax rate for 2017 given the ongoing non-cash valuation allowance on deferred tax assets we expect to record throughout the year.

These deferred tax assets have expiration dates many years in the future, and we do anticipate being able to ultimately recognize their value to offset prospective tax liabilities.

Given the expected ongoing negative impact of not recording a tax benefit on US tax losses on our net income loss, the company believes that non-GAAP operating profit will be the best measure of our 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 with itemized detail concerning the non-GAAP financial measures. Now, I'd like to turn the call back over to our CEO, Ilan Levin.

Ilan?.

Thank you, Shane. We are pleased with the continued progress we are making in building more meaningful relationships with our customers, which is demonstrated by the many exciting customer use cases and applications we have shared so far this year.

We believe our emphasis on improving customer engagement with key customers in our targeted industry verticals of aerospace, automotive and healthcare combined with our extensive knowledge and capabilities is allowing us to bring increased value to the market.

Our recently announced strategic collaboration with SIA Engineering Company, a major provider of aircraft maintenance, repair, and overhaul services in the Asia-Pacific region, evidences our strategic focus on building deeper, long-term customer relationships in key vertical markets.

The strategic collaboration with combine Stratasys’ deep expertise in Additive Manufacturing as applied to aerospace applications with SIA Engineering Company’s comprehensive service offerings to provide on-demand parts solutions to their airline customers.

As part of the collaboration, we will jointly establish a Singapore-based Additive Manufacturing Service Centre that offers design, engineering, certification support, and part production services.

The new service center will serve as a one-stop shop to provide aftermarket cabin interior parts as well as services that support part redesign, engineering and material testing, air worthiness certification support and final part production.

Additionally, we recently collaborated with [Indiscernible], an aerospace composite structure manufacturer, as well as with Siemens in producing aircraft interior parts for Etihad Airways.

As we have shown with our existing relationships with leading aerospace manufacturers such as Airbus and Boeing, we are committed to advancing the use of Additive Manufacturing for high requirement aerospace applications, and believe these new developments represent further traction for our proprietary technology within the aerospace industry.

Last quarter, we announced that appointed as the official parts supplier of 3D printing solutions to the McLaren Honda Formula I team.

We are pleased to share that McLaren racing has quickly expanded its use of Stratasys’ FDM and PolyJet 3D printing solutions to produce final 3D printed race ready parts for the new MCL32 Formula I race car as well as to produce manufacturing tools to advance production.

Improved performance has been driven by the use of the parts, which include a hydraulic line bracket printed on Fortus 450mc production 3D printer with our new carbon fiber reinforced nylon material, Nylon 12CF. A flexible radio harness location boot printed on a J750 3D printer in rubber-like materials.

A carbon fiber composite brake cooling duct created using ST-130 [soluble] material specifically developed for sacrificial tooling applications and a large rear wing flap extension manufactured in carbon fiber reinforced composites using a 3D printed lay-up tool produced on the Fortus 900mc production 3D printer.

Additionally, McLaren Honda has dedicated a Stratasys FDM 3D printer to track side use, bringing the technology closer to the action enabling the team to produce parts and tooling on demand.

We believe that our relationship with McLaren Formula I racing enables us to understand and deliver added value based applications for this quick turnaround demanding automotive environment.

Another exciting application that we recently announced was Siemens Mobility’s use of our Fortus 900mc Production 3D printer and [material] to produce parts that include housing covers for the couplers on the front of trains. Adopting Stratasys FDM technology for this application led to dramatically shorter delivery times and higher part quality.

These parts are also now being produced on demand, allowing customers who require replacement parts or who need to make the changes to existing designs to order custom parts online, which are then 3D printed and delivered.

Most recently we announced that Stratasys Direct Manufacturing is now collaborating with Peacocks Medical Group, a leading medical equipment supplier and creator of Podfo orthotics to optimize 3D printing for large-scale production of custom orthotics.

In a healthcare application such as orthotics, customization based on individual anatomy and medical requirements exemplifies how 3D printing can produce highly customized solutions to improve a patient’s quality of life.

Highlighting our ongoing commitment to drive innovation we recently unveiled our latest technology demonstrator the Stratasys Continuous Build 3D Demonstrator, a new Additive Manufacturing platform comprised of a modular unit with multiple 3D printer cells working simultaneously and driven by a central cloud-based architecture.

The new platform will leverage our core FDM technology, GrabCAD control and monitoring and multi-cell scalable architecture to produce parts in a continuous stream with minor operator intervention, automatically ejecting completed parts and commencing new ones.

Additional cells can be added at any time to the scalable platform making it fast and easy to increase production capacity in accordance with needs. Automatic queue management, load balancing and architecture redundancy further accelerate throughout as jobs are automatically routed to available print cells.

Target applications with include service bureaus, education Rapid Prototyping labs and volume manufacturing environments that can benefit from part production with our tooling and from zero inventory supply chain.

Stratasys technology 3D demonstrators, including our Infinite-Build 3D Demonstrator and Robotic Composite 3D Demonstrator announced last year, represent a development path for Stratasys, which will yield new manufacturing focused technology and products, but are not commercially available at this time.

I would like to recap several announcements that we have made regarding our activity with respect to metal application.

We are actively strengthening our knowledge and expertise in metal Additive Manufacturing, building off the strong base of knowledge within Stratasys Direct Manufacturing, which currently has one of the largest 3D third-party installations of DMLS systems.

Through our SDM service, we are currently a provider of metal part services to customers in our key vertical markets. Leveraging our leading Additive Manufacturing assets we have been actively augmenting our internal product and service offerings with investments and partnerships with other leading players in the metal additive manufacturing space.

Recently we made public a strategic investment in LPW Technology, a market leader in developing manufacturing and supplying metal power end-to-end solutions for additive manufacturing.

LPW already supplies leading OEM and Tier 1 suppliers with metal powders for Additive Manufacturing processes, as well as intelligent powder management system that enables the traceability and management of metal powder batches throughout their lifecycle to meet specific quality requirements for the aerospace, defense, automotive and medical implant industries.

Most recently we announced a strategic partnership with Desktop Metal, an exciting new manufacturer of metal 3D printing systems. Stratasys was one of the first investors in Desktop Metal and Scott Crump, our Founder and Chief Innovation Officer has been on its board of directors since 2015.

This announcement builds upon this history of collaboration with new efforts to provide Desktop Metal access to selected Stratasys resellers, who will be authorization to carry Desktop Metal’s products in the future. We view Desktop Metal solutions as complementary technology to Stratasys’ leading PolyJet and FDM plastic solution.

In summary, we are encouraged by our efforts to achieve deeper customer engagement within our targeted industry verticals of aerospace, automotive and healthcare.

We are focused on expanding our relationships with key global manufacturing companies and unlocking the value around customer specific applications, which we believe will grow adoption of our products and services.

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

[Operator Instructions] And our first question comes from the line of Ken Wong with Citigroup. Your line is now open..

Hi guys.

Ilan you mentioned in terms of your printer revenue that you saw a shift to the low-end with F123, I think on your competitor’s recent call they highlighted trying to take some of their cost benefits and putting it into lowering price, should we expect to see more competitive pricing from you guys as well across your product line?.

Hi, good morning. So in general we have a very successful reception to the F123. We have put a lot of value, I think into the space of what Stratasys’ entry level product line with the F123, and we see very good reception and traction from the market.

Naturally as we go further down there is different types of competitive pressures throughout our product line and the F123 I think very well addresses the market needs for professional grade, engineering grade entry level systems in the F123..

Got it.

So, I guess, we will wait and see in terms of whether or not pricing is something that you guys will use more strategically?.

No, I think what we are trying to do in general – just to add on to that, what we are trying to do in general is to provide value at the different price points that we are delivering to the market, and I think we have done that pretty effectively with the F123..

Got it. Fair enough.

And then last quarter you guys mentioned the MakerBot business grew, did you guys continue to see that momentum carry forward into Q1?.

I think in general with MakerBot we have stabilized the operations very nicely over the past number of quarters. Both with respect to demand and with respect to the cost structure of the company. So, we're very pleased with the progress that we made there. And I think we're very well poised now to maintain the strong brand and to grow in the future..

Great. Thanks a lot, guys..

Thank you. And our next question comes from the line of Troy Jensen with Piper Jaffray. Your line is now open..

Hey, congrats on the nice quarter. Just a quick followup on Ken's question. I guess, to Ilan, I'm kind of surprised our result was the system sales being down 11% year-over-year. If I kind of compare that to kind of sentiment that we've heard from the channel, it seems we experienced a nice uptick in the business.

I just kind of don't quite get the difference here.

So, can you just talk about just the launch of the F123, do you think that created any type of a pause maybe for a couple of weeks where you lost some sales potentially and then hopefully do you think we can get return to product growth this year?.

I don’t think the launch of the F123 impacted in any way this table of other products in general with the Stratasys. I think in general, if we look at the past number of quarters, we've stabilized the general pipeline. We look at it, looking forward strong and healthy.

And I think that's what you may have heard from the channel, as we're very pleased in that respect. We're very pleased with the customer engagement that's just getting deeper and deeper and we find that to be very rewarding and we think that in the medium and long term will result in further growth..

So, to be specific, how about that further growth, is it specifically going to be system growth or is the ASP difference on the F123 kind of so significant at the [indiscernible] challenge in this year?.

No. We think that it can translate into system growth as well..

Alright, perfect. And then just can you just touch on the gross margins for it.

Are you how far below corporate average and is that just a scale problem now that as we have more volumes in it we'll see a better gross margin contribution with the F123?.

So, I think in general, our gross margins tend to fluctuate to the degree that the product mix fluctuates. And in this quarter, with the introduction of the F123, there's a natural uptick in that segment of our product line and that's what you see in the gross margins.

I don’t think that the fluctuation is atypical to what we see in previous periods when we've introduced different products, whether the high-end products or the lower range of the product line..

Alright. Maybe just a last question from me. Can you just explain a little bit the LPW investment, what specifically materials do they focus on.

And then was that investment recent or it was just the announcement recent?.

So, the announcement was more recent. The investment was done a while back, not in the current period.

In general, they're providing powder metal powder for other OEM vendors that are out there, specifically DMLS systems across the pretty wide range of different materials, typically the high-end materials, not only in the types of materials but also primarily in the quality of the powder. And that was real exciting for us to feel.

So, their management system in terms of closing the ecosystem and then therefore I think providing greater value to 10 customers, also attracted us. With LPW in addition to being a very solid team..

Alright, understood. Good luck for the remainder of the year..

Thank you, Troy..

Thank you. And our next question comes from the line of Sherri Scribner with Deutsche Bank. Your line is now open..

Hi, it's Jeff Urwin for Sherri. Just a quick question on expenses.

It seems like you guys have done a good job managing expenses, do you think there's much more room for net cuts or is it more about officially allocating resources at this point?.

Good morning. So, in terms of expenses, we definitely current by the exact that we see a reduction in label of expenses. It's differently as focused and objective the way we had to risk the company going forward. We are shifting resources to align with our strategy.

So, it's mainly what we would expect to see going forward, is more shift in the resources and reallocating of the costs as opposed to significant reduction going forward..

Great, thanks..

It's stable, as the little bit we see now..

Great, thanks. And this is a quick follow-up. You maintained your 3% to 5% operating margins.

With the pressure you kind of saw in the first quarter, do you think it's more likely that you come in the bottom half of this range now?.

No. I think like we're going to stick to the range that we provided in the guidance. We're not going to characterize kind of where we feel we're going to come within that range..

Alright, great. Thank you..

Thank you. And our next question comes from the line of Shannon Cross with Cross Research. Your line is now open..

Thank you very much for taking my question. I have two. The first, with regard to the restructuring and I understand you're reallocating cost, but what I'm trying to figure out is how much of the cost benefit is there so the take out of gross margin and cost.

And in terms of a supply chain and things like that, I understand the OpEx is going to be relatively stable from now and just with reallocation. And then, within that from a cost standpoint, how much more do you think we're going to have to non-GAAP out every quarter on an ongoing basis as you go through this? And then I have a follow-up..

So, good morning. From an expense perspective in the gross margin, we're actually looking also on efficiency and that is that not just the operation expenses level. So, we focus definitely on supply chain on cost reduction in our provision as well.

And from non-GAAP perspective, I think that the exclusion for non-GAAP in the gross margin asset is relatively going to be this time going forward. Our main element out there are amortization of intangibles, we don’t have a significant non-GAAP exclusion in the co-elements..

And is there, I guess overall for restructuring, is there more non-GAAP exclusions coming or are you putting much done since you're going to be at a steady state on the OpEx side?.

Yes. We relatively done, there is no major restructuring..

Okay. And then my second question is just on you. You highlighted in there significant comments about your metal initiatives. And I'm trying to figure out how we should think about the opportunity to monetize those, I understand like with desktop metal, you'll be leveraging your reseller channel.

Is there some sort of a finder's chief for that within for you? And also, if you can talk a little bit about the investment you made in desktop metal and perhaps what you would estimate it's worth at this point. Just it's interesting since that's become more of a topic of discussion, certainly I have to wrap it. Thank you..

We don’t get into the specifics beyond that what we've disclosed with respect to the level of investment and certainly not the expected return. We see a lot of excitement within metals, we understand in general with AM that adoption begins in the bottom and that's what we're doing.

So, desktop metals is a great example of where we got in relatively early and we're expanding that relationship and we could envision further expansion of that relationship as they progress with the market. And that's why we would look at that opportunity.

In general, we have said in the past that we believe that Stratasys has many assets to bring to the table and that we can begin to leverage those assets specifically through partnerships in general. And I think what we've recently announced during the quarter on the meatal initiatives is a good example of that.

We've done it well I think over the past years, say on the application side with leading companies like Boeing, Siemens, and Ford and now you see with SIA Engineering Company on the application side. And now, we're also doing it on the technology side.

And so, I think we'll continue expanding these relationships and working on others as well on parallel as I said to leverage our assets..

But first, for 2017 and perhaps into 2018 there is not much of a P&L contribution.

Is that there from the initiatives or is that not how we should think about it?.

For 2017, I would say immaterial..

Okay, thank you..

Thank you. And our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open..

Hey, thanks for taking my question. It's actually Jan on for Wamsi. I was just want you to touch on your service margins. I kind of pursue your comments around lower revenues to fixed cost ratio. But services has been 2% and then having over 500 bps of margin compression.

What were some of the moving parts there and how should we be thinking about your service bureau business going forward.

Can we expect margins to trend back up and if so, what gives you confidence in that?.

And good morning. So, service rev, service gross margin is a go down specifically on the part business revenue over fixed cost, contribute to the lower gross margin on the services. As we progress to the year-end, we expect a growth in our previous, we believe it will probably can maintain a slightly higher gross margin.

So, gross margin going forward, it's probably will be consistent with the same level that we see here. But we definitely focus on improvement on those aspects.

From a gross margin perspective that we mentioned earlier, the product mix impacted this quarter with the introduction of F123, this is a typical way and seasonal based on a new product introduction. We saw it also on the past when we introduced other products and fluctuate significantly.

Would expect this to be a shift around our gross margin for the year, probably will remain relatively stable at what we saw in previous quarters..

I would just add on the services side with FDM, like on our product side. There is a wide variety of technologies provided though FDM each with your unique gross margin and behavior. And so that in a specific quarter it is very dependent also on the service mix within that business as well..

Thank you..

Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open..

Thanks.

With respect to STM, when do you think you are finished with this transition away from some of the presumably lower margin traditional manufacturing? I guess, what I'm getting to is when do you would you anticipating seeing some growth returning to that part of the business?.

So, I think in general we said in the past, the greater focus like you said is being put on the additive manufacturing elements and certainly more of the forward-looking additive manufacturing parts of that business.

In general, while we see the growth coming from is where we will leverage the Stratasys either go-to-market or specific count relationships that we have at Stratasys and leverage that within FDM and I think we are beginning to see that anecdotally more and more.

And we will begin to see that in more systematic and problematic way and that's what we're working on as we develop through the year and through next year..

And then just a follow-up question on gross margins. I understand you don’t want to get too granular with respect to operating margins for the year. But it does imply I think that as you the high-end of your revenue range. You would have to see some fairly reasonably good gross margin improvement from Q1 levels.

And that's what I'm trying to understand what is going to drive that.

Is it mix, is it a combination of some other things that you're doing within COGS, can you just help maybe talk a little bit about the potential for gross margins to improve from these levels or as we go through the year?.

So as we said, it's a lot of other product mix, naturally also when you introduce a new product line or new platform like the F123. There's obvious work around as we looked before a little bit of supply chain and some COGS work. It's natural that when you launch it, it's at the highest point probably of its lifecycle.

So, we'll see I think there's a lot of different roads for us to work on improvement, whether we work on it max it or where we see them to the product mix in general of the traction of our different products..

Okay, thanks..

Thank you. And our next question comes from the line of James Kisner with Jefferies LLC. Your line is now open..

Hi, good morning. This is Timur Ivannikov for James Kisner today. I have a couple of questions about continuous build 3D demonstrator. I was wondering if you could provide maybe your most favored application, you think the most promising application for this product.

And then in general, I was wondering if you could talk about the FDM technology because many of the competitors they always say that their technologies are faster than FDM and they keep on expanding the materials envelop. They are able to print with different material, stronger materials.

So, I guess a few comments, you can make some comments on the competitiveness of FDM in the future and competitiveness of continuous build 3D demonstrator. Thank you..

With respect to the continuous build, I think we've isolated two significant potential spheres where it could be very attractive.

The first is in what we call the education labs or innovation lab where there is a multiple users requiring prototyping application in the same workspace and this will effectively allow all the printers to be used efficiently in a very managed process.

And I think the second rate, we've isolated or identified as where you would have low volume production of specific parts and we've I think improved the overall efficiency of making those parts by the current configuration of what we presented as the continuous build though. So, I think those are two very strong elements.

There may be others that we may see from the market, post-introduction or launch of this demonstrator. With respect to FDM in general. So, we are from what we see from our customers within target markets, we are very -- I feel very comfortable with the growth opportunity to front of us on FDM.

I think we've been through FDM in general certainly from Stratasys has been working very hard on qualification and certification within those key industries for many years, and close cooperation with leaders of those industries. And we made that public throughout the past periods. And we believe that's absolutely gaining traction.

And so, I don’t think it's a question of picking up on the feature and saying what is better what is worse, there is application fit from what we're doing I think for broad number of applications where we've identified key industries. And so, we feel very comfortable with those opportunities..

Alright. And I guess regarding you’re the continuous build 3D demonstrator gross margin. Do you think it's going to be above corporate average and in terms of this opportunity, when do you think it will become a significant revenue opportunities at 2018 again? Thank you..

No. so, we're not going to give a timeline or timeframe with respect to when that will be launched or the economics around that in terms of gross margins, it's a little bit early for that..

Okay, thank you..

Thank you. And our next question comes from the line of Rob Stone with Cowen. Your line is now open..

Hi. I wanted to ask a couple of questions about the tax rates. I understand you're expecting an unusually high rate this year because of the mix of U.S. versus profit contribution and ability to use NOLs. I know you're not giving guidance for 2018 at this point.

But if you found yourself in the same situation next year in terms of the balance between geographic distributing and profits and taxes, would you expect that high initial tax rate to persist next year?.

And so, our tax rate is corrected. It's basically it impacted by the different structure to which in the situation that we're having the U.S. country in 2017. We are not a, we are in a full evaluation situation.

And when going into 2018, currently we are not addressing that but definitely those are going to be the implication, those are going to be the drivers for the tax rates going forward. It's based on the jurisdiction mix..

Okay. And I had another question about systems growth. Just thinking broadly about your guidance for this year. You've noted that service in terms of maintenance and consumables are both growing across the growing install base. At the mid-point of the revenue range, you're looking for flat to slightly down revenue.

So, where in that mix do you expect to see an upturn from systems and is this because of a particular industry or application area or platform where you expect to see a turnaround in the systems revenue. Thanks..

So, we see a renewed energy certainly post-launch of the F123. But as we said I think throughout the part number of calls and certainly now, as we increase engagement in all of the key industries with the players that we're talking to, the customers that we're engaging with. We see very strong potential.

As you can imagine as we move away from rapid growth, I think applications more to the tooling applications in this part, the period of qualification and ramp up, the timing of that is difficult to judge. But we feel very comfortable with what we're seeing in front of us and sort of the work that we have in front of us in order to nail that down..

Okay, thank you..

Thank you. And our next question comes from the line of Matt Cabral with Goldman Sachs. Your line is now open..

Yes, thank you. I understand you guys don’t give quarterly guidance. But I'm wondering if you could just speak to the near term visibility that you have at this point over the next call it three to six months.

And just how that compares to the past year or so?.

Hi Matt, this is Shane here. I think that we're in a similar situation that we've been in the last few quarters. And as the visibility can be quarter-to-quarter can be difficult. But so, yes to your point, we're not going to provide any kind of guidance or visibility into the current quarter..

Got it. And then just circling back in the earlier discussion about your metal initiatives.

Just curious if you feel a partnership models enough to adequately address this market or this is an area overtime where Stratasys need to actually own some of that IP within this market?.

A couple of things. As we said, consistently that we believe we are active through FDM. On the service side, we believe that in general with AM, but I think even stronger in the metal space, we know how knowledge that needs to be applied around the systems, it’s significant to make AM meaningful for an application.

And I think in that respect FDM is well in front and has a very deep knowledge around as we said the process knowledge in order to make it more valuable. And I think the idea of creating these partnerships is to leverage Stratasys assets in general and step up and move along the path of as you say IP or any other route as we move along..

Thank you..

Thank you. And our next question comes from the line of Patrick Newton with Stifel. Your line is now open..

Yes, thank you, good morning. One question, one clarification. I guess first on the question, you talked about premium materials driving system utilization.

Can you help us understand what materials qualify as premium and any rough mix of premium materials as a percentage of overall material revenue?.

So, we don’t break down the different percentages within the product mix. But in general, any non -- I would say ULTEM is a good example, our Nylon 12, [Carbon fiber] which I identified highlighted during the script part of the call.

Those are the types of materials our color systems on the PolyJet side, are those of the kind of materials that customers are looking for and are willing and realize the value in what we're providing. And then usually typically application specific.

So, what you would see perhaps on the color side, you would see that from medical modeling a little bit stronger and the ability to mix different materials through the printing process and certainly from the FDM side you would see things that are specifically tailored to automotive or aerospace..

Just a clarification on the gross margin, how we should think about it turning through the year. I believe you said that services should remain roughly flat and it's a very much mix dependent. But then on the product side I wasn’t sure that I understood your commentary. The F123 obviously a negative mix impact this quarter.

But am I right to conclude that in general gross margin should trend upward through the calendar year?.

Yes. When I can't to project give you any kind of specific guidance, but I think I'll just repeat our comments about the impact of new product introductions and any impact of that can have on the gross margin. The gross margin can be variability there -- can be significant depending on mix.

We have a wide range of gross margins in our systems, much higher margins on the materials. And so, it's very it could be sometimes a little difficult to project and see some consistency relative to the mix..

Thank you for taking my questions. Good luck..

Thank you. And our next question comes from the line of Brian Drab with William Blair. Your line is now open..

Hi, this is Kyle Dicke in for Brian Drab. Thanks for taking the question.

Just quickly, how large is your aerospace business today and any additional color on how you see that developing over time?.

Again, we don’t break down per application and per industry. But we hear from the leaders of these partners that we are working with, what we can see in front of us we think that this is substantial opportunity in front of us compared, relative to what we're doing today..

Okay. And then kind of along the same line some more questions on the 3D demonstrators continuous build.

Do you have any, are you able to find any color just on the kind of the long terms growth opportunity you see from this, not over the next year or two but longer term?.

So, we're not going to give any metrics around that in terms of either revenue or traction in general. But the demonstrated that we have, some of them are really in customers hand.

They are qualifying the output for we believe are our substantial opportunities in terms of the print capabilities and so we're excited by these our systems that certainly they were about a composite and the infinite build are significantly, significant difference in terms of their size and outlay different than what we've done in the past.

And so, the qualification or development cycles are a bit longer. And we decided to do that. The reason we announced the demonstrators is that we decided to do it in much further or deeper collaboration with specific partners. And we're seeing the value that's brining to the table in terms of development..

Okay, great. Thank you..

Thank you. And our last question comes from the line of Steve Dyer with Craig-Hallum Capital Group. Your line is now open..

It's actually Greg Palm on for Steve today. Curious, it's been a couple of years since you sort of targeted in this vertical units.

I'm wondering if you've seen any change in the number of whether its follow-on orders or multi-unit purchases from some of these kind of strategic counts or early adopters and whether that's an indicator you're looking at or not?.

But that's a little bit an indicator and we are seeing positive traction. Some of these customers it's in the ramp up stage in terms of their purchasing or their supply chain purchasing of systems in order to increase capacity in general.

And so, it's not atypical that the larger of these partners will have multiple systems in well over 10 and well over 20 have already working for specific applications. We are absolutely seeing that traction but still feel so significant opportunity in front of us..

Okay, great. And then, on the strategic partnership with Desktop Metal, curious what the initial reaction has been from the channel in order that's something that they were asking for and how are you going to be measuring performance going forward against your existing core Stratasys machine core.

As I guess, what's the risk that the channel devotes too much time or energy on this metal's launch?.

We think that in general there's a very nice complimentary mix between what we're doing on the PolyJet and FDM side with Desktop Metal is bringing to market.

I think we all need to, we want to be closed in the discovery phase or the application phase between what they're going to bring to market and the applications out there we want to be part of that. I think this is a great way for us to see and see how both the complementary nature that we think is there.

And just some general with respect to Desktop Metal. So, we're excited about this. There's lot of good energy around it..

Okay, thanks..

Thank you. And this concludes today's question and answer session. I would now like to turn the call back to Mr. Ilan Levin, Chief Executive Officer, for any closing remarks..

Thank you for joining today's call. And we look forward to speaking with you again next quarter. Thank you, good bye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..