Yonah Lloyd - Stratasys Ltd. Ilan Levin - Stratasys Ltd. Lilach Payorski - Stratasys Ltd..

Troy D. Jensen - Piper Jaffray & Co. Brian P. Drab - William Blair & Co. LLC David Ryzhik - Susquehanna Financial Group LLLP Gregory William Palm - Craig-Hallum Capital Group LLC James Ricchiuti - Needham & Company, LLC Wamsi Mohan - Bank of America Merrill Lynch Ananda Baruah - Loop Capital Markets LLC James Medvedeff - Cowen & Co.

LLC Hendi Susanto - Gabelli & Company, Inc..

Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 Stratasys 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.

I would now like to introduce your host for today's conference, Yonah Lloyd, Vice President of Investor Relations. You may begin..

Thank you, Amanda. Good morning, everyone. Thank you for joining us to discuss our first 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 access to the slide presentation, will also be available and can be accessed through the Investor section of our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, taxes and future business outlook. Actual results or trends could differ materially from our forecast.

For more information, please refer to the risk factors discussed in Stratasys' Annual Report on Form 20-F, and report on Form 6-K, along with the associated press release concerning our earnings for the first quarter of 2018.

Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. 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, Yonah. Good morning, everyone, and thank you for joining today's call. We are disappointed with our revenue for the first quarter primarily driven by underperformance in North America high end sales – system orders, specifically from customers in government and other key verticals such as aerospace and automotive.

Other parts of our business performed in line with expectations and we continue to maintain a strong pipeline of opportunities. As such we do not believe that our first quarter revenue represents a fundamental change in the demand environment in North America, and we are not modifying the full-year guidance we issued earlier this year.

We believe that the additive manufacturing market is strong with generally increased spending specifically with customers eager to adopt new technologies coming from multiple sources in the market. Our results reflect a disappointment with the pace at which deals had progressed through the pipeline during the quarter.

Nevertheless, our win rate as tracked has remained stable. We are addressing the underperformance in North America by working closer with our channel partners in providing vertical market expertise and tools to better convert on our available opportunities.

Despite our revenue results in the period we continued our positive trend of operational discipline and cash generation.

We remain committed to our investments in long-term initiatives that include advancements in our core FDM and PolyJet technologies, our new metal additive manufacturing platform, advanced composite materials, and software and application development.

We continue to see progress being made in the additive manufacturing adoption cycle as customers move through the qualification and validation stage towards the transition into production.

And we are excited about the recent new product and significant hardware and software upgrades announced last week at RAPID and that we believe further expand our addressable markets for both prototyping and manufacturing applications.

I will return later in the call to provide you with some 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. Total revenue in the first quarter was $153.8 million, compared to $163.2 million for the same period last year, driven by the previously mentioned reduction in high-end system sales in North America, and lower revenues from customers in government and key verticals.

GAAP operating loss for the first quarter was $6.5 million, compared to a loss of $12.6 million for the same period last year. Non-GAAP operating income for the first quarter was $4.9 million, compared to $4 million for the same period last year.

Product revenue in the first quarter decreased by 9.7% to $103.9 million as compared to the same period last year. Within product revenue, system revenue for the quarter decreased by 20.7%, compared to the same period last year, driven by the under performance in North America high-end system sales.

Consumable revenue increased mostly by 1.7%, compared to the same period last year, reflecting the impact of the reduction in system sales in North America in the associated point-of-sales consumable purchases typically made. Service revenue in the first quarter was $49.9 million an increase of 3.8% compared to the same period last year.

We've seen services revenue, customer support revenue which includes revenue generated mainly by maintenance contracts on our systems increased by 7.3% compared to the same period last year driven primarily by growth in our installed base of systems and improvement in our service contract attach rate.

GAAP gross margin increased to 49.2% for the first quarter compared to 47.1% for the same period last year. Non-GAAP gross margin increased to 52.8% for the first quarter, compared to 51.2% for the same period last year. Non-GAAP product gross margin increased to 61.7% compared to 57.9% for the same period last year, driven by product mix.

Non-GAAP service gross margin decreased to 34.4%, compared to 35% for the same period last year. GAAP operating expenses decreased by 8.3% to $82.1 million for the first quarter as compared to the same period last year.

Non-GAAP operating expenses decreased by 3.9% to $76.3 million for the first quarter as compared to the same period last year continuing our trend of operational discipline. The company generated $27.1 million cash from operations during the first quarter as compared to $25.7 million of cash generated in the first quarter last year.

We ended the first quarter with $346.5 million in cash and cash equivalents, compared to $328.8 million at the end of the fourth quarter of 2017. Inventory at the end of the first quarter increased to $120.1 million as compared to $115.7 million at the end of the fourth quarter.

Accounts receivable decreased to $119.8 million, compared to $132.7 million in the end of the fourth quarter, with DSO on 12-month trailing revenue at 66.

To recap, we are disappointed with our first quarter revenues, which reflect the impact of the reduction in sales of high-end systems in North America while other regions performed in line with expectation.

We are pleased with our operational performance despite lower than expected revenue and are committed to our investments in long-term initiatives to expand our addressable market.

We continue our trend of positive cash generation from operating activities and believe we maintain a healthy balance sheet and are well prepared to take advantage of opportunities moving forward. We are not modifying the full year guidance that we issued earlier this year. I would now like to turn the call back over to Ilan..

Thank you, Lilach. For 30 years Stratasys has been pioneering the development and adoption of 3D printing and additive manufacturing technologies, including the precise, repeatable and reliable FDM and PolyJet 3D printing platforms, which we believe are the most highly proliferated technologies in the additive manufacturing industry.

Through the development of our leading go-to-market as well as our deep customer relationships, we believe that we are well-positioned to assist our customers as they move through validation towards production applications which we believe are characterized by long-term sustainable revenue.

As we discussed in our last call throughout 2018 we are ramping up investment activity to accelerate long-term development programs to expand our addressable markets including our new metal additive manufacturing platform, advanced composite materials, software and application development as well as further advancements of our FDM and PolyJet technologies.

We believe that our technology roadmap and investment strategy will lead to the development of products that allow our customers to design and manufacture with confidence and will ensure continued leadership for Stratasys as we drive adoption and growth to keep our customer engagements and partnerships.

Across our areas of focus we continue to see strong levels of customer interest in our additive manufacturing solutions, including high level engagements with leading OEMs in the aerospace, automotive, healthcare and consumer goods verticals.

The level of engagements reflects the long term and deep customer relationships we have cultivated in our target verticals and we are encouraged that key customers increasingly view the adoption of additive manufacturing technologies as a strategic priority both for the creation of innovative new products through the use of personal printing platforms that empower the individual designer and engineer and for the identification and qualification of specific end-use part applications in production environments.

While just over half of our systems are going to existing customers as repeat sales, from a revenue perspective, these repeat customers are spending a higher dollar amount than new customers as they are increasingly making larger orders for more advanced systems, and in some cases, multiple units per order.

We believe that these repeat orders represent customers' increasing capacity as they accelerate their validation efforts and move into higher usage production applications.

As more of our customers progress from a period of early adoption into one of validation and qualification, we are encouraged by the growing number of companies that are making significant progress in pursuing certifications for specific high value applications.

With the largest installed base of professional and industrial systems globally and the consistent pace of innovative new product introductions that expand our addressable markets, we continue to benefit from the early adoption of our technology platforms as our customers explore our technology and develop new applications and use cases.

Encouragingly, we are now seeing future ready organizations pursue independent testing and qualifications by third parties as they seek to acquire technology through specific high value applications.

This is a critical stage as customers await certification before expanding adoption and Stratasys is accelerating this process with solutions developed for specific applications, for example, our F900 Aircraft Interiors Certification Solution, and our new GrabCAD Print Jigs & Fixtures software package.

Recent examples of such future-ready customers that have validated our technology for a specific application or set of parts include Phoenix Analysis & Design Technologies and Lockheed Martin, who are producing 3D printed production parts for NASA's upcoming Orion-manned space vehicle and a growing number of dental labs that rely on the Stratasys J700 Dental 3D Printer for the production of clear aligner molds.

Additionally, we have established a joint venture with SIA Engineering to create a Singapore-based service center targeting the aerospace MRO market and have entered into an exclusive there-year agreement with Eckhart to develop tootling solutions.

These relationships seed and foster the validation and subsequent transition to production applications and we believe are indicative of long-term sustainable growth opportunities.

Last week at RAPID and earlier in the year at AMAC we made multiple exciting new product announcements, addressing prototyping and manufacturing applications and shared new details around our new metal additive manufacturing platform.

Further extending our capabilities and broadening our product lines for the prototyping segment, we showcased several new products that further push the envelope of what's possible with 3D printing prototypes.

They include several recent announcements to our PolyJet portfolio that include an upgraded version of our unique multi-material full-color J750 3D printing platform that adds increased reliability via hardware and software upgrades and the J735 multi-material full-color 3D printer with the smaller build size.

Additionally, GrabCAD Print now includes a new Vivid Colors package for the J750 and J735 featuring over 500,000 color combinations, highly accurate color matching and advanced clear materials with texture functionality. We also extended GrabCAD Print support to our Connex3 line of multi-material printers.

To address production applications and enhance our ability to provide our customers with high value solutions that targets specific applications. We need the following announcements.

The new F900 Production 3D Printer is the third-generation of our flagship FDM solution for rapid tooling and production applications with enhancements that include MTConnect readiness for data collection and modeling and support for Carbon Fiber Filled Nylon 12 material.

The F900 3D Printer is available in two specialized versions that extend the platform to support a wide range of applications.

The first is the F900 Aircraft Interiors Certification Solution delivering the performance and traceability required for producing flight-worthy parts using ULTEM 9085 and achieving the highest FDM repeatability complete material and process traceability and a robust statistical data set.

The second is the F900 Pro production-grade system, which includes the benefits and value of the Aircraft Interiors Certification Solution product to extend the high reputability developed for that solution to all the industries.

Additionally, we are now increasing to accessibility of our Carbon Fiber Filled Nylon 12 high-performance material via new specialized F380 Production 3D Printer.

This newly configured system provides users with the high strength and stiffness with Stratasys FDM Nylon 12CF on a proven platform with soluble supporting material, consistent quality, yield, and throughput of an industrial solution at a competitive price point.

Expanding our production focused materials offering, we introduced Antero 800NA, a PEKK-based thermoplastic that allows aerospace and other high-performance vehicle makers to move to additive manufacturing for high-temperature, chemical-exposed parts.

Software is a critical driver of adoption for production applications and we are pleased to announce GrabCAD Print Jigs & Fixtures, a new solution package with the GrabCAD Print platform that significantly improves the production of jigs, fixtures, and other manufacturing tooling by embedding application expertise, automating several complicated and time consuming processing steps and eliminating the need for multiple software programs.

Also at RAPID, we disclosed further details around our metal additive manufacturing technology including the applications we are targeting with our new metal solution and for the first time, showed sample parts and described the mechanical properties.

There are many market verticals around the world using complex geometry metal parts made through high volume production processes such as die casting, powder injection molding, metal injection molding and investment casting.

Often these parts are made using low-cost lightweight alloy such as aluminum rather than specialty alloy suited to laser and e-beam technologies.

To address this significant market opportunity, Stratasys has developed a new approach to metal 3D printing incorporating elements of our proprietary jetting technology which results in an 80% reduction in costs per part for aluminum components compared to other additive manufacturing methods.

Using our new technology, we are able to 3D print green state parts using standard metal powders with significantly higher density than existing 3DP solutions. These green state parts can then be handled and post-processed using existing industry standard powder metallurgy processes and workflows.

Our solution has been optimized for production rather than prototyping, making it highly efficient and economically viable for a wide range of applications.

Moreover, our unique approach produces final parts with density and isotropy that is significantly higher than existing additive systems with near identical chemical composition compared to parts created by conventional methods.

We are now working directly with select automotive and industrial machining customers to further align our development programs with their needs and the market requirements. At RAPID, we showcased multiple aluminum parts we have printed from these customers' designs including flat brackets, LED heat sinks, oil pump housing and car valve adapters.

We look forward to sharing more details as we move throughout the year. I would now like to turn the call over to our VP of Investor Relations, Yonah Lloyd who will provide you greater details on our 2018 financial guidance.

Yonah?.

Thank you, Ilan. Our guidance for 2018 is as follows. Total revenue in the range of $670 million to $700 billion with non-GAAP net income in the range of $16 million to $27 million, or $0.30 to $0.50 per diluted share. GAAP net loss of $41 million to $25 million or $0.75 to $0.46 loss per diluted share.

Non-GAAP operating margin of 4.5% to 6%, capital expenditures projected at $40 million to $50 million.

Our guidance reflects increased investments in R&D, tools, materials, and additional resources aimed at expanding our addressable markets by accelerating our development efforts for the new metal additive manufacturing platform, further advancements based on our FDM and PolyJet technologies and specific go-to market initiatives in order to deepen our customer engagement.

We believe that this ramp up of operating expenses, as guided, will provide the basis for long-term growth.

Non-GAAP earnings guidance excludes $32 million to $34 million of projected amortization of intangible assets, $17 million to $19 million of share-based compensation expense, and $7 million to $9 million in reorganization and other related costs, and includes $4 million to $5 million in tax expenses related to non-GAAP adjustments.

The estimated non-GAAP tax rate for 2018 is impacted by the ongoing non-cash valuation allowance on deferred tax assets, we expect to record throughout the year on U.S. losses. 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 significant quarter-to-quarter variability in our non-GAAP tax rate, the company believes non-GAAP operating income would be the best measure of our performance in 2018.

Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of our press release and slide presentation with itemized detail concerning the non-GAAP financial measures. Operator, you may now open the call for questions..

Thank you. Our first question comes from the line of Troy Jensen of Piper Jaffray. Your line is open..

Hey, good morning. Thanks for taking my questions.

Maybe just start with Ilan just I'd love dive deeper into what do you think caused the weakness here, I mean, why was aerospace and auto seasonally weak here in the first quarter?.

Good morning, Troy. So obviously we were disappointed with the overall results, specifically coming out of North America. I don't think it's a statement about the market in general. We believe that the market is strong, remains strong specifically also within the aerospace and automotive sector.

I think within those two sectors, I mean, we've isolated government also in our opening remarks but specifically to your question around the two vertical industries of aerospace and auto, we don't believe that there's any statement around that with respect to the potential in those markets, our pipeline within those markets and we feel that whatever we're bringing to market for those markets is especially relevant and even more relevant for them.

So we're working hard at understanding why there is a slowing pace within those industries. But we believe that within specifically those two industries that we will be able to capture the business that we were expecting originally..

Right. Okay. It does seem weird, I mean, that's been you guys' kind of focus area for these verticals' specific expertise. But shifting gears – staying on aerospace, but you talked about this transition into production.

And can you help us just sense up or give us any expectations on timing and I know there's some production right now there's some jigs and fixtures in aerospace which really start to move the needle for you guys on system revenues, what is the timeline for this aerospace moving into production?.

So I think that as you said there is, we can break that out both into the tooling application side and then the production of end use parts and you've referenced specifically in aerospace.

So within tooling, I think, it's a matter of a lot of education, so we do have customers that are using it very broadly within specific installations on the tooling side. And we need to, I think, expand that level of education that those customers have arrived and derived and translate that into other customer bases.

You see a very high discrepancy between within the installed base of their usage specifically around tooling applications, their level of comfort and their level of knowledge around how to use it. And so, we're working hard to doing that within the tooling applications side.

On the end-use parts, we are right now producing FDM-based parts for the aerospace business. We're providing equipment within the supply chain of those OEMs, as well as providing parts to our FDM operation facility.

There it's a question, I think, I believe of expanding the universal part, I think as they went through the initial sets of parts over the past, I'd say, a couple of years, there is a increased level of confidence, that this is a production technology specifically for interior parts.

And so we're right now – I think the next level is to expand the universal parts within those OEMs, primarily I think our focus is on regularly commercially available aircraft because we believe that's the next big step function for that space..

All right. Understood. I wish you the best of luck here for remainder of the year..

Thank you..

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

Hi, thanks for taking my questions. Just here is my first one, I'll just ask two, so you reported fourth quarter and gave guidance on February 28, and missed your expectations materially despite only having four weeks to go in the quarter.

So, I think, it's fair to ask about the level of confidence you have and the source of your confidence in your guidance for the next 35 weeks? And specifically, for example, I'm wondering do you have a book of orders from aerospace and auto customers for the balance of the year? And given you had an expectation for those verticals and what you just told Troy about the mess and not really understanding, it seems to me like we don't really understand exactly what happened in those verticals and why things slowed, just little concerned about the guidance, I was wondering if you could just help us gain some confidence in your revenue forecast?.

So, I think from a general market perspective the market remains strong and I think there is increasing spending in general specifically on new technologies that are coming into the market from Stratasys or from any other multiple sources within the market.

With respect specifically to the quarter as we were moving through the quarter, we were, I think, disappointed in primarily the pace at which potential orders were moving through our pipeline. I think, our win rates in general in terms of as we track them through our systems has remained stable and pretty much in line with our historical expectation.

Specifically within aerospace and automotive, I'm not quite sure that it's sort of the pace of the orders, I think, it's a little bit more of timing or a lion's share of that is just a question of timing and we're confident that we will be able to regain the business within those two sectors that (28:51).

So I think in those two sectors specifically in the deals we have outstanding, it's a little bit less of the competitive landscape in general. But in a broad sense for especially new customers, I think, there's a lot of [Technical Difficulty] (29:06) fusing data and conflicting data in the market, in general.

So I think it's contributing to the slowness overall.

As we mentioned in our remarks when we – the deal pipeline that we have with existing customers, I think, there's a little bit of a different dialogue and there we're encouraged [Technical Difficulty] (29:28) sector might have been influenced by other factors and not so much the competitive landscape..

Okay, thanks. And then regarding the metal technology, I spent some time at your booth at RAPID and understand that there is a centering process now involved in that new metal technology.

One of the challenges, I think that there has always been getting a process into a production environment that includes the centering process is creating the near net parts and meeting the precise tolerances especially within an aerospace application.

So I was wondering if you could just educate us a little bit further on how your process given that it will make the green part and then a centering process where I think there is usually some shrinking of the part, how do you manage that and incorporate that into a production environment?.

We're not disclosing at this point the specifics around the process, but in general as I alluded in my earlier remarks we are using for the post-processing elements of the technology, we are using current knowledge, industry knowledge [Technical Difficulty] (30:46) additive processes [Technical Difficulty] (30:49) in any centering process there are considerations like you mentioned, but we feel that [Technical Difficulty] (30:57) how to get that under control better.

But referring back to your earlier question on the guidance, certainly specifically with respect to our confidence in the guidance over half of our revenues are expected to come in the second half of the year which is typically in our cadence of revenues..

Okay.

Typical seasonality, but not necessarily, I mean, there is not a backlog that stretches into the second half, that comment's based more on typical seasonality than a backlog of orders, is that correct?.

That's right, correct..

Okay. Appreciate your time. And I don't know if it's just my phone, but you're going in and out a little bit. It might just be on my end, but just wanted to highlight that, but thank you very much..

Thank you. Our next question comes from the line of David Ryzhik of Susquehanna. Your line is open..

Hi, thanks for taking the question. Just going back to the softness in North America, was it mostly on the FDM side or was it broad-based FDM and PolyJet, and can you remind us, how much of the high-end business is channel led versus direct sales? And I had a follow-up..

So I don't think it was specific with respect to a particular technology. And in general with higher end sales, the involvement of Stratasys is typically higher obviously than the lower-end sales. Those types of transactions are either from existing customers who buy into the technology more and more for applications that they well understand.

And so that there's probably a traditional relationship there already with Stratasys of what that's all about. And we suspect a new customer certainly from high end, the involvement and engagement of Stratasys has always been an important piece for those types of investments..

Understood, so you noted kind of investing in channel education and adding more tools.

Can you elaborate on that and how you think that can help the high-end business?.

So we're continually focusing on that on how do we provide better tools, better attention from our perspective and just adding to what I think we've been doing traditionally.

We see that this is, as applications are – when you're in the beginning cycle where customers want just to try the technologies and there is a certain level of engagement from Stratasys required when you move up the chain and the validation certification process, they want perhaps a further dialogue with the OEM vendor to know there that we feel we need to continue and increase in order to satisfy that level of engagement..

And then just on the consumable side, understood completely on the point of sale, but just wanted to – when we look at customer support certainly the growth is strong there relative to the installed base, but for consumables certainly hasn't benefited as much from the growth in the installed base.

Can you just give us an update there and maybe what your expectations are maybe if you anticipate a rebound to that mid-to-high single-digit growth rate for the fiscal year? Thanks..

Yeah, so I think the consumable revenue generally on a quarterly basis is highly impacted by point of sale purchases on new hardware and so visibly this quarter with the decrease in the hardware sales it will impact consumable book growth as well.

And consumable growth, in general, I think is just generally impacted by sort of the utilization rates, which is secondary to the first point. So I think we, by and large, see a different utilization pattern than we would generally be accustomed to anticipate.

I think, in this period it's more attributed to the reduction in hardware sales and our ability to sell through consumables at point of sale..

Thanks so much..

Thank you..

Thank you. Our next question is from the line of Greg Palm of Craig-Hallum Capital. Your line is open..

Yeah, thanks. Sorry to beat a dead horse here, but I just want to make sure I understand the dynamics and the short fall for Q1.

So just to be clear it sounds like kind of overall activity was progressing, I guess, in line or okay, through the quarter and maybe most of the shortfall was due to, I guess, systems not closing towards the end of March, is that a fair assessment, I'm just curious if you sort of attribute any of that to sort of the tariff related noise given the weakness in auto and aerospace?.

So it's difficult to associate with any macro or external considerations like you mentioned, but that is a fair characterization in terms of the slowness of pace of deals, we still see those deals in our system and we're working hard on completing that.

But so now we're expecting that the market is – there is no statement to the strength of the market what we are saying, but definitely there was a change of pace of how things are flowing through..

And I guess follow-up on that any change in sort of April and I'm just curious if you can give us any sense of the magnitude of declines, specifically either from government, auto, aerospace or maybe just give us a sense of what the quarter look like outside of these areas, I'm thinking more on sort of healthcare related?.

So we have seen some deals that we identified in Q1 that we did not have planned to materialize in Q2 and we're still, I think – we're working hard on understanding the change of pace and how do we help it anyway to accelerate deal flow in general..

And just in terms of those verticals, are you able to sort of quantify declines or at least comment on how healthcare did on a relative basis?.

I think that was more in line with expectations. The significant short fall was from the items that we mentioned earlier in the remarks, which were the government-related deals and then we identified two sectors that were below our expectations..

Understood. Thank you..

Thank you..

Thank you. Our next question comes from the line of Jim Ricchiuti of Needham & Company. Your line is open..

Hi. What I'm trying to maybe reconcile is the data at least the industry data that suggests reasonable market growth and the challenges that you're experiencing and yet you don't feel it, it sounds like you're seeing any kind of share shift. So, that's the first question.

And then the second question I'm just wondering is how you're – you've got a couple of things that you're working on certainly you're putting more R&D resources into some of these new additive manufacturing applications.

And to what extent is that going to limit your ability to make the necessary near-term changes within North America to get some improvement in the operating results?.

So to your first question, I think, any new entrants into the market, entrants in terms of customers. And we do believe that additive manufacturing is becoming strategic for a broader base of customers in general. And like you said general market sentiment we believe is increasing on spending and up-ticking in additive manufacturing in general.

So for customers looking for new technologies or getting into it for the first time, certainly there is a expanded roster of technologies available, we believe that is a challenging environment for customers to understand application fit for their specific need and certainly I think or perhaps part of the slowing of pace in terms of the pipeline is attributed to that.

We are seeing a better success obviously as we mentioned in remarks with customers that have our technology already, and are further along a path of adoption, with respect to something specific.

There I think it's a question – it's more an issue of they understand, it doesn't mean that a competing technology does not also fit into their portfolio or a toolbox. It just means that I think that there is a better understanding of what can be driven off of our technologies and as that capacity grow then we benefit from that in general.

So I think the market is still early for many customers to understand how their toolbox of AM technology should really look and where their starting point is in general.

To your second question, I think that our longer-term R&D initiatives, which are designed to increase addressable markets, as we said are not going to be impacted and certainly we have the ability also – like you referred to in your question to increase our focus on specific initiatives within the American market, in order to understand and then reverse the trend that we saw in Q1.

Specifically within auto and aero, I think we are expecting a recovery and we believe that we can come back to in line with expectations within those two sectors..

Thank you. Our next question comes from the line of Wamsi Mohan of Bank of America. Your line is open..

Yes. Thank you. Good morning.

So Ilan, just if I was to summarize your commentary right, you're basically suggesting that it's more of a push out that happened late in the quarter rather than any competitive threats you highlighted, your win rates are sort of normal, so should we then expect – and you're keeping your guidance for the full year, should we expect that you're expecting a better than normal seasonality just for the second quarter, because some of these deals that are getting pushed out seem to be still in your pipeline, so your close rate on those deals that slipped from 1Q to 2Q should be higher?.

So I think it's still early in the year for us to draw conclusions. We're in the midst of working this out and understanding sort of the market dynamics. The earlier remarks were just our current characterization of the landscape and beyond the regular seasonality, we're not in a position to say how the rest of the year will play out..

Okay. And then if I could follow up on the gross margins. Your gross margins in products were up slightly on a quarter-on-quarter basis but you obviously have these headwinds from high-end systems. And you noted the magnitude of the system decline.

Can you give us some visibility on the puts and takes? How much of the gross margin sequential change was a headwind in systems? How much was a tailwind from materials and some other moving pieces that I might be missing here?.

So there's a lot that goes into there and you've mentioned some of them. Other regions other than America were performed well in line with expectations and certainly on the high end performed well. So we're not making a broader statement generally in terms of high-end systems globally.

And so that within the gross margin question, there's a lot that goes in there both on the regional side, mix in products, consumables and so, typically what we see, I think, we are within range in general of what we've seen over multiple periods.

There is a fluctuation due to all those factors, but I think what we're seeing now is not something that's out of that range and I expect to continue to be in the range that we've been delivering on multiple quarters already..

Okay. Thank you..

Thank you. Our next question comes from the line of Ananda Baruah of Loop Capital. Your line is open..

Hey, guys, thanks for taking my questions.

Hey, just to go back to the March quarter dynamic real quickly, so was it softer through the month of March given that that's what was sort of left after you gave the guide or was it, I guess kind of ratably through the month of March or was there a sort of a softer close rates the last couple weeks of March?.

So, I think, in general, within a quarter a lot of our commercial activity is obviously back ended.

The slowing pace is throughout the pipe, I don't think it's specifically just at the end of the pipe and when we put that all together there were activities that we normally would expect to happen during the last month and during the last weeks of a quarter that did not materialize..

Got it.

And for the month of April, have you seen that pace, have you seen more of a normal month of April or are you seeing something that you would consider to be sort of sub the pace that you would expect?.

So, we spoke a little bit about our renewed efforts and we are seeing that pay off. So it's not quite the slowness that we saw perhaps at the end of Q1, but we're still working through that.

And in general our quarters in terms of commercial activity are back ended, so it's still pretty early to draw any meaningful conclusions based on what we've done so far in the quarter..

Okay. That's helpful. That's helpful. And just to clarify the comments around the aerospace and the auto business. I think, you made mention that you still think you can capture that business.

Is that – I just want to make sure that I'm sort of interpreting that accurately, so you're saying the orders that you had for March that did not close, you think you can recoup those orders as well as what your original expectations were for April through the end of the year, is that all accurate?.

Yeah... (45:57).

...for the full year you'll still capture your full, what you thought the orders would be for the full year?.

I think it's still early to kind of determine when we will recover those orders and how that will be recaptured. But we believe that within those two specific industries, they are the most familiar with our technologies.

We have been engaged with them for a significant period of time and that's one area where we feel that the pace is more, I would say, momentary and that we have the ability to recover. And generally, your statement of that we don't believe those deals are losses, is accurate..

Okay, great. And then I just have two more quick ones. This is all really helpful. I appreciate it. In the prepared remarks, I thought that maybe there was a suggestion that that there was also a little more slowness in the pace of wins through the pipeline outside of aero and auto. And so, I just wanted to clarify that if... (47:02).

Yes. I think there is some – I think in a general statement, yes, there is – the market statements that we were making in terms of, I would say, the general pace specifically within new customers, I think, that's true for markets that are not necessarily auto and aero..

Got it. That's helpful. And then just the final one for me, it was asked earlier, I believe, how much of the high-end aero, auto business that was softer than you thought. I guess, how much of that is channel versus direct? And I didn't hear the answer, so I'd love to get some input on that too, thanks..

So with many of our high-end systems, it's truly a combination and a partnership between our retailer network and ourselves.

And considering the size of the systems the investment not just of a specific unit of capital equipment, but just in general the long-term investment, the Stratasys involvement is key, so certainly there is a high level of involvement from Stratasys in those deals..

Got it. Got it. Thanks so much. Really appreciate it..

Thank you..

Thank you. Our next question comes from the line of James Medvedeff of Cowen. Your line is open..

Hi, good morning. I have a couple follow-ups on the Q1 weakness.

And the first question that I have is, can you characterize it in terms of number of units versus pricing?.

So if your question is with respect to our general ASPs, average selling prices and competitive pressures on that, so we do see specifically for the deals that we've highlighted pressures of that nature.

I think there are other factors probably that go into that, whether it's government on budgetary consideration, implications or other factors but we don't believe that it's the pricing issues.

Okay. So follow up to that, with the proliferation of potential new customers in the market and a broadening away of things for them to choose from, could you just talk a little bit more about the competitive environment? And, again, with a focus on pricing, how pricing is impacting current negotiations..

So I think, in general the competitive landscape with many new entrants coming in and with new technologies is providing a wide variety or wide selection, any of the newer technologies coming to market are less understood and require specific periods of time for, I think, both vendor and customer to understand those applications better.

And certainly, there is a very big appetite for bringing in those technologies in-house and understanding them. And to that extent, there is obviously an issue, I think, of share of wallet in general and how budgets are allocated for the different technologies available, more than anything..

Okay, thanks. So the final question that I have is the service gross margin of 34.4% is lower than we've seen for quite some time.

And I'm wondering what happened there, and how we should think about that into the future?.

Service gross margin influenced the various aspect, we have the customer – the contract maintenance revenue aspects, we have also our part business.

Within our part business, we also have the mix of technology as part of the part business in terms of what is more – having higher margins, how is the technology has lower margins, so there is no really a specific – a reason for this quarter to as it implied the reduction – the gross margin rate is relatively, it's fluctuate, but it's relatively the same range as we see in the couple of prior quarter, it's specific – it's more like as I mentioned impact, but it is a specific mix within those services revenue..

So the growth – the more rapid growth of maintenance versus customer support is not impacting that margin?.

It is also impacting margin, but we also have the part business. Within the part business, we have different technology mix that derive different gross margin point, and this is also has a significant impact on the fluctuation of the gross margin within the services revenue..

Okay. Thank you..

Thank you. Our next question comes from the line of Hendi Susanto of Gabelli. Your line is open..

Good morning, Ilan and Lilach, and thank you for taking my questions. First, when do you expect improvement in sales execution in North America to take place, in other words how much time should we expect to have Stratasys bring sales performance in North America to your desirable level.

You mentioned that you are still trying to understand the situation and will work with channel partners, but I think it will be helpful to give us some mind-frame in terms of whether these things will take like six to nine months or maybe shorter?.

I think, it's still early to give the specific timing, but we are expecting and working hard to be in line with our earlier expectations on a quarterly basis, henceforth.

So we are not – we don't believe that – we believe that there are actions that we can take that can improve or reduce the gap between what we are originally expecting in our performance..

Got it.

And then one more, may I inquire what the status of MakerBot and RedEye now and what your expectation on those two businesses in 2018?.

So MakerBot as many of other parts of our business the outside of the American high-end system orders performed in line with expectations, I think, in general the 3D printing, acceptable 3D printing design for individual designers and engineers whether they are working one on one with a printer or within work group environment is a high growth sector of the business.

We have a product line both from Stratasys and certainly MakerBot that caters to those markets. And we're working on our new product cycle also for that general market. And we believe that this is a very strong end of the market.

We're seeing an increasing number of our larger customers, traditional customers at Stratasys looking at how they can implement a distributed printing model for individual designers and engineers. And so, we're excited by those opportunities that are just now beginning and we're seeing them more and more.

And we believe we have a strong product line development roadmap both within MakerBot and Stratasys to cater to that opportunity..

And then one more for the RedEye..

Sorry?.

The RedEye surface parts business?.

Yes.

That has performed in line with expectations, in general, I think we're pleased with the ability for us Stratasys, in general, to reach a broad range of customers on a part level rather than just on a equipment level and it's a vehicle for us to educate customers on specific applications to understand what their needs are in very – part-by-part basis, and in general, is performing in line with our expectations..

Thank you. I appreciate taking my questions..

Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Ilan Levin, CEO for the closing remarks..

Thank you for joining today's call. We'd like to take this opportunity and invite you to join us at our upcoming analyst and institutional investor day on June 6 at our North American Corporate Headquarters in Eden Prairie, Minnesota. Please contact our investor relations team for more details. We look forward to speaking with you again next quarter.

Thank you..

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