Shane Glenn - Stratasys Ltd. Ilan Levin - Stratasys Ltd. Lilach Payorski - Stratasys Ltd..

Troy D. Jensen - Piper Jaffray & Co. Wamsi Mohan - Bank of America Merrill Lynch Kenneth Wong - Citigroup Global Markets, Inc. Timur Ivannikov - Jefferies LLC Brian P. Drab - William Blair & Co. LLC Sherri A. Scribner - Deutsche Bank Securities, Inc. Shannon S. Cross - Cross Research LLC Robert W. Stone - Cowen and Co. LLC Matthew Cabral - Goldman Sachs & Co.

LLC David Ryzhik - Susquehanna Financial Group LLLP Ananda Baruah - Loop Capital Markets LLC.

Good day, ladies and gentlemen, and welcome to the Stratasys Second quarter 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 follow at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Shane Glenn, Vice President of Investor Relations. Please begin..

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

I'll 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 the 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 the 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, potential declines in the prices of our products and services or volumes of our sales due to decreased demand in the 3D printing market; any failure to adequately adapt our infrastructure and properly integrate the internal and external sources of our growth to generate intended benefits, including from the companies that we recently acquired; 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; reduction in our profitability due to shifts in our product mix into lower margin products or our shifts in our revenue mix significantly towards our Additive Manufacturing Services business; cost and potential liability relating to litigation and regulatory proceedings; and those factors referred to in item 3D, Key Information Risk Factors, item 4, Information of 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 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 and consolidated financial statements as of and/or for the quarter and six months ended June 30, 2017 and its review of its results of operations and financial condition 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 operation 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'd 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 are pleased with our progress as we focus our efforts on customer engagement, generating higher-quality revenue opportunities during the quarter.

We made several announcements during the quarter, that showcase our progress, specifically in the aerospace market and demonstrates our ability to leverage our capabilities to address manufacturing applications.

Additionally, we are pleased with the positive market reception to our new F123 Series, launched in February of 2017, which has resulted in orders of over 1,000 systems to-date and is generating significant interest for rapid prototyping applications among professional users.

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. In line with our strategy, we continue to progress as we pursue higher-quality revenue opportunities in advanced manufacturing application for key verticals.

In the process of better allocating our resources within our plan to develop high-value application for our customer and to support our long-term strategy, we have continued to achieve expense reduction. Total revenue in the second quarter was $170 million, compared to $172.1 million for the same period last year.

GAAP operating loss for the second quarter was $5 million, compared to a loss of $17.1 million for last year. Non-GAAP operating income for the second quarter was $11.1 million, compared to $10.2 million for the same period last year. Product revenue in the second quarter decreased by 2% to $121 million, as compared to the same period last year.

Within product revenue, system revenue for the quarter declined by 6% over last year, driven by shifts in product mix following the positive market reception of our lower cost, high value F123 offering to the rapid prototyping professional market.

We are also seeing initial traction in our application and vertical focus primarily within Aero and Auto in Americas and EMEA region. In addition, we are observing positive trends for larger production system and multi-system orders from select customers. Both of which reflect our focus on developing tooling and production part application.

In Aero, where the adoption of this use-case-specific application within our target industries is slower, such as in Asia Pacific, we are observing relatively softer hardware sales. Consumable revenue increased 2% compared to the same period last year. Service revenues in the second quarter increased by 1% to $49 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 6% compared to the same period last year, driven primarily by growth in our installed base of system.

GAAP gross margin increased to 49.1% for the second quarter, compared to a GAAP gross margin of 46.2% for the same period last year and 47.1% in the first quarter.

Non-GAAP gross margin [Technical Difficulty] (07:53-08:02) Non-GAAP gross margin decreased to 53% for the second quarter compared to 55.9% for last year driven by a shift in product mix, but increased compared with 51.2% in the first quarter..

Apologize, we had a fire alarm here. So, it stopped, we'll continue..

Product gross margin decreased to 59.9% compared to 63.5% for the same period last year, driven by the shift in product mix described earlier, while it increased compared to 57.9% in the first quarter. Service gross margin decreased to 36.2% compared to 36.6% for the same period last year, and increased compared to 35% in the first quarter.

GAAP operating expenses decreased by 9% to $88.4 million for the second quarter as compared to the same period last year.

Non-GAAP operating expenses decreased by 8% to $79.1 million for the second quarter versus last year, as we remained focused on aligning the resources with our long-term growth strategy, and deepening customer engagement in your key verticals.

The company generated $10.9 million of cash from operation during the second quarter as compared to $6.9 million for the second quarter last year. We ended the second quarter with $305.3 million in cash and cash equivalent compared to $297.2 million at the end of the first quarter.

Inventory at the end of the second quarter was flat at $116.5 million as compared to the inventory level at the end of the first quarter, reflecting our tight control on those levels. Account receivables increased to $120.3 million, compared to $115.1 million at the end of the first quarter with DSO on 12-month trailing revenue at 66 days.

To recap, we are pleased with the result of our efforts to generate deeper customer engagement and higher quality revenue opportunities primarily within our target industry vertical of aerospace, automotive and healthcare. In addition, our ongoing alignment of resources and focus on high-value application has resulted in reduced operating expenses.

And finally, we are well positioned to leverage our favorable cash position including cash generation and strong balance sheet to capture new 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 previously reported 2017 financial guidance.

Shane?.

Thank you, Lilach. Our guidance for 2017 is as follows; total revenue in the range of $645 million 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 margin of 3% to 5%.

Capital expenditures projected at $40 million to $50 million. As of the end of the second quarter, we believe that we are tracking toward the higher end of guidance for operating margins and earnings per share.

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 expense related to non-GAAP adjustments.

We maintain a relatively high estimated non-GAAP tax rate for 2017 given the ongoing noncash 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 U.S.

tax losses on our net income loss, as well as a significant quarter-to-quarter variability in our non-GAAP tax rate, the company continues to believe that non-GAAP operating profit would 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. In the second quarter, we continued our efforts to deepen customer engagement by pursuing new collaborations and enhancing and expanding our existing relationships with industry leaders in our key vertical markets.

We believe that our continued partnering with industry-leading companies will accelerate the development of high value-added applications and allow us to bring increased value to the market.

We are pleased with the market reaction to our production-focused product and services demonstrated in part by the multiple announcements we recently made at and following the Paris Air Show.

Additionally, we are excited with the early market adoption of our professional rapid prototyping solutions, specifically the recently introduced F123 Series and our GrabCAD Print software platform.

At the Paris Air Show, we made a number of significant announcements, including our new Fortus 900mc Aircraft Interiors Certification Solution for producing certifiable aircraft interior parts which leverages a qualification program underway with the FAA, National Institute of Aviation Research, and America Makes.

The solution consists of ULTEM 9085 resin that meets aerospace flame, smoke and toxicity regulations.

A new addition of the Fortus 900mc Production 3D Printer, with specialized hardware and software designed to deliver a highly repeatable mechanical properties, appropriate for aircraft interior part applications and the qualification processes and data to ease the certification process.

With the new offering, we believe we are removing major obstacles around FAA certification and making it easier to manufacture air-worthy parts, with improved repeatability and performance.

As previously announced, an early adopter of this new application-specific product is Western Tool & Mold, a leading Hong Kong-based part supplier for the production of certifiable aircraft interior components.

Additionally, we recently announced that Stratasys Direct Manufacturing has been chosen by Airbus to produce 3D printed polymer parts for use on the A350 XWB aircraft.

SDM will now print non-structural parts such as brackets and installation fixtures with our Stratasys SDM Production 3D Printers using our ULTEM 9085 material, providing tighter turnaround times and lower inventory costs.

Also at the Paris Air Show, we were pleased to showcase our focus on the aerospace market, with announcements with innovative companies, Boom Supersonic and Eviation Aircraft, are utilizing Stratasys' 3D printing solutions, to reduce engineering cost and accelerate design cycles for next-generation aircraft.

We believe that these developments can help accelerate adoption of our technologies in the aerospace market. Since the launch of the F123 Series in February 2017, we have received orders for over 1,000 systems, one of the most successful product launches in our company's history.

We believe that the positive reaction from the market demonstrates that the prototyping segment remains an attractive and underpenetrated growth opportunity. The majority of F123 orders have come from new customers, and we have seen significant interest in multiple system orders.

We believe that the early success in adoption of the F123 Series is being driven by the product directly addressing the professional workgroup prototyping market. With a combination of ease of use, precision, repeatability, and affordability, all without compromising on the requirements for engineering-grade models.

The F123 Series provides a streamlined workflow, made possible in part by GrabCAD Print, which makes 3D printing more realistic, connected and accessible.

With the ability to read and understand CAD files natively, GrabCAD Print offers an efficient workflow that streamlines print management in shared office and model shop environment, greatly enhancing the functionality of the F123 Series.

Since its launch in November 2016, the software has been installed in over 13,000 desktops and is being used by over 1,400 customers worldwide. Users have printed over 61,000 trays of part, an impressive number when you consider that GrabCAD Print users still represent a very small portion of our total installed base of systems.

The GrabCAD Community currently has nearly 4 million members, up 36% in the last year. And the largest collection of mechanical CAD models anywhere on the Internet, with over 2 million CAD files and tutorials.

We are pleased with the early traction from GrabCAD Print, as well as the growing number of community members which we believe would help increase accessibility and drive adoption and usage of our products and services. We recently strengthened our leadership in the 3D Printing for educational market with several announcements from MakerBot.

The first is the new cloud-based platform, My MakerBot, which is Chromebook compatible and connects with two networked 3D printers, Thingiverse accounts and support cases and orders.

Chromebooks are used extensively in the education segment, and we believe that the ability to upload and prepare files, print and monitor progress from any device will broaden student access to 3D printers in Chromebook classrooms, and make it easier for educators to manage their use.

We also introduced – we also announced that My MakerBot will include integration with Autodesk Tinkercad, the popular K-12 design software tool. Students will be able to 3D design in Tinkercad and export designs to My MakerBot and 3D print them without ever leaving their Web browsers.

Finally, we announced the new MakerBot Educators Guidebook to assist educators in learning the basics of 3D printing, best practices, and for finding high quality STEM lesson plans.

We believe these new offerings further solidify MakerBot's leadership position in education, and will substantially improve student access to 3D printing, make it easier for teachers to implement in their classrooms and make it simpler than ever to go from a lesson plan to a 3D print.

In summary, we believe our recent announcements of aerospace-specific products and high-value collaborations with leading companies demonstrates the value of our customer-centric approach. We are pleased with the positive customer reaction to the F123 Series and the excitement the new offering is generating in the general rapid prototyping market.

Looking forward, we remain excited about the company's future and the long-term growth potential within our industry. Operator, please open the call for questions..

Thank you. And the first question will come from Troy Jensen of Piper Jaffray. Your line is now open..

All right. Thank you. Congrats on a nice quarter..

Thank you..

Thanks, Troy..

Hey. So quick. Maybe if I just dive into the guidance here and challenge you guys a little bit. If I put the model here into flat-line revenues for Q3 and Q4, we'll get to the high end of the revenue guidance if you assume any normal Q4 seasonality gets you guys nicely above $680 million.

So, on revenues, and I guess even more pronounced on earnings, you guys already did $0.22 in the first half and you only need $0.14 more in the second half to hit the high end. And the only way to keep the EPS that low would be to model sequential step functions in OpEx and it doesn't seem like you guys are really accelerating spending right now.

So, can you just talk to little bit on the guidance and maybe conviction of the high end versus the possibility of exceeding the high end of the target here?.

Yeah. Thanks, Troy. Good morning. I'll take that one. I think as we noted in the comments that we had in the script, we do believe we're tracking toward the higher end of the guidance at this point on the operating margins and earnings per share.

I think a couple of things to keep in mind when you look at the second half versus the first half, obviously, we have a Q3 which can be or is very seasonally weak relative to the other quarters. You also have issues or potential issues around variability in product mix and the gross margins that that you might want to consider it in the second half.

And then we also want to factor into – factor into – factoring the numbers that it's a potential. And I think more importantly when you reconcile or when you go from the operating margin to EPS, you have to remember the – we observed a really high variability in that non-GAAP tax rate.

I believe if I recall correctly in the first quarter, it was closer to 50% and then 20% tax rate in the second quarter. So, that's why we really point everyone to the operating margin which in the second quarter is at the high end of the range. And so, then you have the Q3 which is seasonally weak and then Q4 which is seasonally strong.

So, I think when you put all that together, we think we're moving towards the higher end of our ranges, but we want to keep in mind some of the things that are unique relative to tax rate and the seasonality factors that we see in the business and then the potential for variability in product mix and the impact on gross margin..

All right. Understood. I guess that everything looked pretty good on the print here. The only thing that caught my eye would've been consumables, up only 2%. To me, that seems low given kind of the growth in the installed base and the improving demand environment.

So, any thoughts on material sales this quarter?.

I think the consumable revenues that some of that can be attributed to the general slower pace of hardware growth that we've experienced over the past several quarters compared to our historically higher growth rates previous to that.

And some of the variability which we do expect and have witnessed in the past on a specific quarter can be attributed to product mix, application mix and some of the regional adoption. But I don't think internally we read much into that number right now and we've monitored over longer periods in a single quarter..

Okay. That's fair. If I could just throw in one more, and I think Stratasys doesn't get a lot of credit for having end part exposure. You're viewed more as a prototyping company.

Ilan, do you have any ideas on kind of how much exposure, how much of sales are to end part applications? Is there any way that you guys could kind of report on that or track that and give us more confidence that you're getting more exposed to the higher growth segment?.

So, I think that what we can say is that with respect to our segmented industries, Auto, Aero, Healthcare, that is a growing proportion of our business compared to what we would, let's say, call other, for the purposes of this call.

And when we look at on an application level, the tooling and end-use part applications that we can best identify as going to those areas, realizing that we're not – our ability to identify exactly the application is limited.

But when we – with whatever tools we have, we're witnessing the tooling and end-use parts as a growing segment growing much more than the rapid prototyping segment. So, we're gaining more and more confidence that this is the right direction for us..

Right. Understood. I know it's hard to segment it. But congrats again and good luck on the second half..

Thanks, Troy..

Thank you..

Thank you. The next question is from Wamsi Mohan of Bank of America. Your line is open..

Morning, Wamsi..

Yes. Thank you. Good morning. Yeah, morning. You guys have done a nice job on the expense side, I mean some solid reduction here in SG&A expenses this year.

I'm just wondering how much more rationalization can you do on the expense front going into 2018 especially given that you're getting some product momentum over here? Just wondering how you're thinking about balancing sort of expense levels relative to the revenue growth profile, which seems to be improving a little bit here?.

Just to sort of recap, the main driver for the reduction in the expenses was our focus on reallocating resources and just our general focus on segmented industries and on specific customer engagements. [Technical Difficulty] We apologize. There we go. That is out of our control (25:45)..

That's all right..

So, the main driver is our focus and reallocation of resources. And what happened was when we tended to double down and drive that focus, we released some expenses that we now see the benefit of in the reduced OpEx. We don't anticipate a further reduction. We're going to continue doing what we're doing in terms of the focus.

And, again, the main driver was not just – was solely not just to take up cost, was to just drive our future growth better. And I think we're doing that and laying the foundation for medium and long-term growth..

Okay. Thanks. That's helpful. And then, you've been talking about this focus on verticals for some time now, Ilan.

Can you give us any sense at all on how large your verticals are, particularly in Aerospace and Autos? And sort of maybe how the revenue growth trend – I mean, you said that's becoming a larger piece of the mix, so I presume that they're growing faster than the overall portfolio, but any numbers or any quantification you can give us there?.

No. So, we don't break that down. As I said before, the targeted industries are absolutely growing. And I think more important from us internally is that when we've enhanced the engagement, take Aerospace for an example, when we've enhanced that engagement, we're getting great response, great receptiveness.

It's very much of a long-term play for these specific customers, so the growth isn't immediate or the full potential isn't evidenced right away. But they're very much excited by what we're doing. I think a good example of that is the Infinite-Build, but not only.

And so, we're generating, I think, a lot of interest and it gives us confidence that this is a major growth opportunity for us..

Okay. Thanks. And a last one, if I could, too. You noted some weakness in APAC and your competitor also noted some weakness over there. Just wondering if you could elaborate if there's sort of a broader demand deceleration that you're seeing there. Any particular dynamics that you can shed any light on, that'd be helpful. Thank you..

Within key accounts in Americas and EMEA, is very satisfying to us at this point. I think the adoption cycles in general in APJ are a little bit different. The nature of those industries on the local basis are different as well. So, we're seeing a different growth pattern and different adoption cycles in that territory..

Okay. Thanks a lot. Good luck, guys..

Thank you. The next question is from Ken Wong of Citigroup. Your line is open..

Hey, guys. You mentioned seeing kind of good sales across F123 with new customers.

Is there an opportunity here to sell deeper within your current installed base? And I guess at this stage, kind of what's keeping those guys from taking on the F123?.

I think we're [Technical Difficulty] (28:43-28:50) existing customers. So customers that are familiar with the [Technical Difficulty] (28:52-29:02) several units at a time [Technical Difficulty] (29:04)..

Hey, Ilan. You're kind of going in and out. I'm on a landline, so I'm assuming it's not me. [Technical Difficulty] (29:19-31:31).

Okay. We are reconnected and you may start your call. We still have Ken Wong with his question..

Yeah. I think we missed pretty much all of that..

And the line is still going in and out. This is the operator. [Technical Difficulty] (31:21-31:31).

Sir, we can barely hear you. The line is going in and out. Yes, sir. One moment. Ladies and gentlemen, please stand by your call will resume momentarily..

All right. You're back in the call, sir..

Okay.

Can you hear us, okay now, Latoya?.

Yes. I can..

Sorry, about that Ken. Go ahead..

Yeah. No problem. So, yeah. I think I mean the same question in just – in terms of the installed base opportunity for F123. I don't think we caught any of what you were saying there, Ilan..

Okay. So, on the F123, we're seeing – as we alluded to in our prepared comments that we have multiple orders. We're seeing a lot of multiple orders. Those typically will come from existing customers. That said, the single-unit orders typically are coming from new customers.

So, we're seeing a nice balance between further adoption on our existing installed base and getting SDM into the hands of new customers and expanding our universe of customers..

Got it. And then I guess maybe, Ilan, you or Lilach, on F123 last quarter you guys had talked about gross margins were impacted pretty severely. It looks like this quarter you guys saw some step up there in terms of improvements.

Is it fair to assume that Q1 was sort of the trough in terms of what we should expect for gross margins going forward?.

Good morning. So, in terms of gross margin, we've discussed this previously and we discuss it full this (33:54) time again, in terms of the gross margin, it's very significant based on product mix. So, it's true that in Q1 the impact of F123 was more notable. In Q2, we see now increase in gross margin and definitely it was favorable.

Although we had a very good traction of F123, we also saw a increase in high-end products which definitely is favorable on gross margin. So, we would expect to see a variation on the gross margin based on product mix as we go in Q3 and in Q4.

I will not draw a specific conclusion regarding Q1 rate compared to the rest of the year, but definitely we see that there is a fluctuation as a result of the product mix..

Great. Thanks a lot, guys..

Thanks, Ken..

Thank you. And the next question is from James Kisner of Jefferies. Your line is open..

Hi. This is actually Timur Ivannikov for James today. Good morning.

So, regarding your product gross margin, so are you saying that in Q1 2017, F123 printers, the gross margin basically had nothing to do with yield? Are you improving productivity on those printers or what is the difference of the 200 basis points?.

So, from a cost basis on F123, there is no significant change. We only at the start point of the lifecycle of the cost of the F123. So, I will not draw a conclusion between Q1 and Q2 in respect to the cost of F123. What we do see heavily impact is the product mix.

So, if in this quarter we see a more – a higher percentage of a high-end system, which definitely contribute to the higher gross margin rate in Q2 as compared to Q1..

Okay. Got it. And then, so regarding the negative revenue growth impact – system revenue growth impact of F123 printers.

So, how long do you expect that to persist? I mean, are you expecting until Q1 2018 now, or what do you expect there?.

Can you repeat, please? Negative gross revenue?.

Sure. Yeah. So, your system revenue growth. Yeah. System revenue growth was minus 6% and then, you said it was because of F123. And then, in the last quarter, I think it was a similar type of factor. So, I'm trying to understand how much longer this is going to be the case..

Okay. So, F123 has some contribution to the decrease in the revenue – year-over-year of the revenue, given that, let's say, the price point of F123 is relatively lower compared to the other price point of other high-end units, okay. So, in general, this is one of the impact but this is not the only impact.

Going into – so, it's not necessarily a trend that we will expect to see going forward. We're definitely pleased with the traction that we see coming from F123 is definitely a good traction. It's not something that we believe that in the next couple of quarter we will continue to see decline in system hardware..

Okay.

Then, the last question real quick here is so for your new engagement with Fortus 900 with Airbus A350, so would you say you generate about $5,000 to $10,000 per plane and parts or is that in order of magnitude correct?.

Yeah. We don't – actually, I don't have the numbers in front of us. But I don't think we would disclose that if we did..

Okay. Thank you..

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

Hey. Good morning. Thanks for taking my questions.

I guess I'm trying to connect the dots here, but was there in the second quarter one significant order or handful of orders that totaled several million dollars for some high-end equipment, maybe the Airbus or another significant customer?.

No. I don't think we've seen anything like that in terms of lumpiness in terms of the high-end. We've seen an improvement on the – certainly relative to Q1 on the higher levels of high-end systems, which has resulted in Lilach was mentioning before to a higher gross margin..

Okay. So, just general mix kind of overall mix, but not any specific big order, okay. And then, I wanted to clarify, earlier in the call, I think the comment on OpEx is that you do not expect a material step-down in OpEx in terms of dollars going forward and that the larger gains have already been made.

Is that what I heard?.

Yes. This is correct. We are not expect to see a significant reduction in the OpEx level going forward. As Ilan mentioned earlier, we focus on realigning our resources where we believe it create a much more impact for the future, building the foundation going in to those key verticals that we are focused on.

At the same time, we definitely look at efficiency in cost reduction, but we do not expect to see a significant cost reduction compared to the current level that we have now..

Thank you.

And then could you just tell us roughly what the ASP has been on those 1,000 orders for the F123?.

We don't break down by product those kinds of metrics..

Right. Okay. Thank you very much..

Thanks, Brian..

Thank you. The next question is from Sherri Scribner of Deutsche Bank. Your line is open..

Hi. Thank you. I wanted to ask sort of a big-picture question. It seems like there's a lot of opportunities in aerospace and with some of your new products. But overall, it seems like the 3D printing market is still relatively challenged for growth. We saw that from you and from 3D Systems.

Can you maybe talk about overall demand from customers in terms of their appetite for buying new systems? And I guess, thinking about that, with the product revenue down and the systems revenue down, is there a certain point when you think we'll start to see those things turn around and turn positive? Thanks..

We definitely see a maturation in the market in general as an industry, whereas, previously, there were general purpose 3D printers being adopted and sold.

Today, we're seeing a more focused approach, certainly, from Stratasys, so that even on the rapid prototyping market, which may appear to many the general 3D printing market, we believe the F123 once it takes a specific RP approach, and with respect to the F123, it's in a workgroup environment, then we get a great traction.

So, our challenge is to continue to develop products specifically around an application use case or around an industry. And we've identified certainly rapid prototyping as one of those. And so, we do not think that there's anything declining or untapped potential there. It's an untapped market we believe.

And so, I think the F123 is a great evidence that when we focus on a market and address it in a specific way with specific products, then we can untap that potential, certainly, likewise with Automotives, Aero and tooling application that we're also focused on..

Okay. That's helpful. And then, just thinking about the pricing pressure. It seems like with some of the newer systems you've got a lower price point, which puts pressure on the revenue over time. Is that something you expect to continue? It seems like that should drive more demand at a lower price point, but any thoughts there would be helpful.

Thank you..

Those are very market specific. So, when we're looking at some of our higher end applications, there's a very different price dynamics than you would have perhaps in an F123, which is focused on the rapid prototyping market.

So, the rapid prototyping market is, in terms of 3D printing in general, it is by far more mature than some of the other end use parts or tooling application. And so, the pricing dynamic there are different. So, I think each of the different markets are different. We're looking to be successful in all of them.

And then, that's what we get the product mix issues in terms of both ASPs and, of course, gross margin. But we're looking to be successful on all of those..

Okay. Great. Thanks..

Thank you. The next question is from Shannon Cross of Cross Research. Your line is open..

Thank you very much for taking my question.

I'm curious when we look at the orders for 1,000 F123s, and I assume it continues to grow, how is it working with production? Are there any delays in terms of supply and how should we think about those orders being shipped? Will it be over the next four quarters or are these ones that you expect to come through fairly quickly?.

Good morning. So, regarding production, we don't see any issue with production. We're able to fulfill all our orders. For all of our regions, we don't see any issue with supply. We're definitely encouraged by the pace of the orders and we expect to see more coming in the next couple of quarters..

Okay. So, I should assume like – I'm sorry. Go ahead..

And with respect to delivery and shipment, we ship those as timely as possible for the customer base as requested..

Okay. And then, can you talk a bit about the pricing environment both for hardware and consumables? And I know a lot – your revenue has been pressured from a mix perspective, but I'm curious as to what you're seeing in terms of some of your customers especially as you move more into rapid prototyping and perhaps areas where maybe the usage goes up.

I' not sure if you've seen any pressure from a consumables pricing standpoint. Thank you..

So, we think there's just a general maturation of the market depending on the different segments that we're focused on. Rapid prototyping is the most mature in this respect with respect to adoption of 3D printing, so the price dynamics are different than perhaps, let's say, in aerospace and automotive.

There's no across-the-board conclusion with respect to pricing pressures. It's really a question of the value that we provide. I think we've stepped up the value with an F123 and we're benefiting from that from the order intake. So, we're not looking at the businesses and witnessing something of a price pressure across the board.

It's very much depending on what application we're serving. And trying to listen to the market in terms of what price performance and value-creation that specific segment is looking for..

Thanks. And then, I guess looking at your results, obviously, you haven't really – well, I'm not sure maybe the growth would be higher. But in general, we haven't really talked too much about the competitive landscape in terms of some of the new entrants.

How you think you're positioned against them? What your channel is saying? I guess, just the general competitive question, if you can talk about what you see in 3D Systems, HP, Carbon, et cetera. And how – if you think you have a competitive advantage over them? Thank you..

So, as we drill down further and further along the application path and in the years that we've identified the growth engines, it is less about the specific technology and specific vendor. It's more a question of application fit.

And so, while there are more and more entrants in the 3D printing space from a hardware perspective, when you drill down to the application level, you're not necessarily dealing with the universe of 3D printing vendors that are out there. So, it's very, very segment-specific, industry-specific.

And so, I don't think there's any conclusions that we draw from the general competitive environment when we're going in to address an application. Within every application, it may be the traditional technology, it may be 3D printing – to competing 3D printing technology and it may be neither actually..

Okay. And then just one last question I meant to ask. Desktop Metal, you're reselling, what are your thoughts on that? You have an investment – how do you sort of look at that company and how you may work together? Thank you..

So, there's a lot of excitement around the launch of their product, the upcoming launch. And so, we're closely monitoring that and we're looking to see how we can together serve our customers better..

Thank you. The next question is from Rob Stone of Cowen and Company. Your line is open..

Hi. I wanted to start out with another question related to the guidance and visibility on sales. Shane's commentary in response to a question about that, it sounds like you're expecting a typically seasonally weak Q3.

How good is your visibility on Q4?.

I mean, I don't – Rob, I think it's certainly visibility is better than it has been in recent quarters. But again, as you know, we work off a fairly small backlog. We've introduced – obviously, had a brand-new product introduction here with the F123 and that could have mix impact as we move into our strongest quarter. So, I would say to our visibility.

It's certainly better than it has been in recent quarters. But again, there could still be some variability there depending on how things come in..

Okay. A housekeeping question.

Could you provide CapEx and depreciation for Q2?.

Yeah. CapEx was around $5 million. Depreciation, we will get back to you..

Okay.

And finally, with respect to the aerospace vertical and some of the new products like Infinite-Build, when do you expect to see a more material contribution to revenue from those activities?.

That's difficult to time specifically when that growth come. We're already seeing, as we said, an enhanced growth compared to the other segments that we cater. We're very excited by the opportunities that it affords and the deep engagement that we're witnessing.

With respect to perhaps the Infinite-Build, we're working well with the customers that we've identified. We've actually put forth some recent efforts to increase the number of potential customers and collaborators that we work with, and I think that's going very well. And we'll leave it at that.

I think the interest is only getting – is only gaining in momentum..

So, are you going to start placing some more Infinite-Build systems from late this year with customers?.

I don't want to specifically comment on the timing of that, but that's what we're working towards in terms of getting more systems out in the hands of our key partners and potential customers..

Okay. Thank you..

Thanks, Robert..

Thank you. The next question is from Matt Cabral of Goldman Sachs. Your line is open..

Yeah. Thank you. Most of my questions have been answered already. But I guess one that I did want to go back to on gross margins, you've talked several times that mix is a primary factor driving some of the fluctuation that we've seen.

But I'm wondering if you can just talk a little bit more about just how like-for-like margins have been trending, and if you've seen any big changes out of different segments of your portfolio?.

So, regarding gross margin, as we previously discussed, it's heavily impact by product mix this given quarter. For example, second quarter is usually a relatively strong quarter for education and this is the end of the year. So, you see, for example, a more high-end system deliver to the sector. So, this can be one of the examples.

But you cannot not say necessarily drive a conclusion for any quarter. We're addressing several sectors and there is a relatively high range in terms of gross margin between the product, between the high-end products and the low-end products, which drive volatility on the gross margin..

But I guess maybe to ask it in a little bit of a different way, if I were to normalize your mix or if you were to normalize your mix within your portfolio, have you seen any of those various buckets, any changes in the gross margin trends just within those buckets themselves or is it really just more of the mix that's driving the variability that we're seeing?.

It's not the mix who drive the volatility..

Thank you..

Thank you. The next question is from David Ryzhik of Susquehanna Financial. Your line is open..

Hey. Thanks so much for taking my question. Just going back to consumables growth, 2%, the prior three or four quarters, you grew around 7% to 11%. How can we think about what's implied in your guidance? What a normalized growth rate in consumables would be? How we can think about that? And then, I had a follow-up. Thanks..

So, we don't have a metric for what we would call the normalized growth. As you said and as you pointed that the growth for this quarter has been lower and some of that is attributable to the slower pace of hardware growth that we've witnessed over the past number of quarters compared to perhaps several years ago.

And the variability of the consumables is product mix, application mix. So, it's not that we have a normalized number. We monitor utilization, but I'd be careful to draw a conclusion from a single quarter with respect to overall utilization of our systems..

Sure. Got it. And past few quarters, you've talked about stabilization in MakerBot. Can you just provide an update? Did MakerBot grow? And anyway you can give us kind of the systems growth ex-MakerBot, that would be super helpful. Thank you..

So, we no longer give out the system growth, the system count. With respect to MakerBot, in general, so they performed very well this quarter according to our expectations and our plans, but we do not provide an itemized basis or detail around that..

Sure. Sure. Thank you. And just regarding the Fortus 900mc, the qualification, I mean, is that really – do you anticipate like actual systems sales or you anticipate this business to flow through SDM that you mentioned the relationship with Airbus? Secondly, think about that opportunity since it is high-end production system. Thank you..

So, we absolutely anticipate further hardware sales on the specific variant of the Fortus 900mc. It comes with both hardware and software capabilities – additional hardware/software capabilities that enables the certification.

And some of that will come to SDM, we believe, in terms of the opportunities, but the primary goal on the product side was to get that out to customers' hands and enable them to certify their product on their own..

Great. Thanks. And thank you so much..

Thank you. And the last question will come from Ananda Baruah of Loop Capital. Your line is open..

Hey, guys. Appreciate it. Thanks for taking the question. So, hey, just circling back to the production platform that you announced 12 months ago just about, so Infinite-Build, you commented on.

And then, what's the state of Robotic Composites specifically? And then, with regards to both of them, I believe, 12 months ago, when you intro-ed them, you had sort of soft commented on that sort of revenue expectations we should calibrate around the first half of 2018, sort of how would you like us to sort of those comments to land with us now, should that still be our expectations? It sounds like Infinite-Build, you're seeing a little bit already.

And then, I have a follow-up, thanks..

So the Robotic Composite is earlier in the pipeline in general compared to the Infinite-Build. With respect to the Infinite-Build, we're working hard to get it into the hands of customers. We're working on customizations and tuning of the system itself.

I wouldn't like to comment further right now with respect to the timing of revenues, but we're excited by the customer engagement, specifically around Infinite-Build. And we're working hard to expand the list of central collaborators and customers..

Okay. Great.

So, the Robotic Composite earlier in the pipeline, so I guess too early to tell when you might begin to get that into customer's hand, at least from a beta context?.

Yes. I think we're still in early stages with respect to that technology, the Robotic Composite. But as we've said in previous comments, from the outset, we've been working with a potential customer and customers and partners around that.

So, we feel comfortable that we can engage them, not only on the development technology side, but also on the application level at the earliest point..

Got it. Got it. Very helpful. And then, my second question is just with regard to the prototyping opportunity in general, I would love any context on specific segments that you think pop out to you.

At the end of last year, the prior management team had made mention that at least at the higher level, they believe that the prototyping market or opportunity was only about 25% penetrated.

Would you agree with that assertion or that assessment, let's say? And to the degree that you do feel that there's still a meaningful prototyping opportunity available in a growth context, what will be the sort of the way you'd like us to think about that and what will be the way that you're thinking about getting it then? That's it from me. Thanks..

I think the F123 is a good example when we changed the type (57:51) performance that we provide, we're able to grow that part of the business. We think in general that it has an untapped potential. The prototyping market is not in any way a mature, stable market that there's little growth opportunities.

So it really is a question of how Stratasys can deliver products that are meaningful at the right price and performance for that specific segment. With respect to a metric or a specific growth number, we won't be giving that. We do think it's a large opportunity for us..

Got it. Thanks a lot, guys. Much appreciated..

Thank you. And at this time, I would like to turn the call back over to Ilan Levin for closing remarks..

Thank you for joining today's call. We look forward to speaking with you again next quarter. Thank you and goodbye..

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day..