Good day, ladies and gentlemen, and welcome to Stratasys first quarter 2009 earnings conference call. My name is Mary and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Shane Glenn, Director of Investor Relations. Please proceed.

Good morning, and welcome to the Stratasys conference call to discuss first quarter financial results. Representing Stratasys’ executive management on the conference call today is Chairman and CEO Stratasys, Scott Crump; and, CFO Bob Gallagher. A quick reminder, today's conference call is being transmitted over the Web and can be accessed through our Investor section of our Web site at stratasys.com. We will begin with the Safe Harbor statement. All statements herein that are not historical facts or that includes such words as expects, anticipates, projects, estimates, vision, planning, or believes, or similar words, constitute forward-looking statements covered by the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Except for the historical information herein, the matters discussed in this news release are forward-looking statements that involve risks and uncertainties. These include statements regarding projected revenue and income in future quarters; the size of the 3D printing market; our objectives for the market and sale of our Dimension 3D printers, and our FORTUS 3D production systems, particularly for use in direct digital manufacturing; the demand for proprietary consumables; the expansion of our paid parts service; and, our beliefs with respect to the growth and demand for our products. Other risks and uncertainties that may affect our business include our ability to penetrate the 3D printing market; our ability to maintain the growth rates experienced in this and preceding quarters; our ability to introduce, produce, and market new materials such as ABS Plus and ABS-M30, and the market acceptance of these and other materials; the impact of competitive products and pricing; our timely development of new products and materials, and market acceptance of those products and materials; the success of our recent R&D initiative to expand the DDM capabilities of our core FDM technologies; and, the success of…

Good morning. And thank you for joining us to discuss our first quarter financial results. The first quarter represents a challenging economic environment for our company. Market conditions deteriorated significantly from levels observed in the fourth quarter last year. The global slowdown impacted all of our businesses as customers reduce capital budget with the start of the new budget cycle in January of this year. Despite these unprecedented conditions, we generated $3 million in cash flow from operations during the first quarter. In addition, we maintain a healthy balance sheet with close to $50 million of cash and short term investments. I believe that we’re the most stable company within our industry. Our new product in branding initiatives have been well executed. Our introduction of the world’s first 3D personal printer, the uPrint, has been a success. And we have successfully implemented a new distribution model for FORTUS 3D production systems in North America. We believe that we’re well positioned for when the global economy rebounds. I’ll return later to update you on some of these initiatives. But first, I’d like to turn the call over to our CFO, Bob Gallagher, who will further highlight our first quarter results. Here’s Bob.

Thank you, Scott. Total revenue declined by 25% to $23.1 million for the first quarter of 2009, compared with $30.7 million for the same period last year. The company shipped 591 systems during the first quarter versus 577 last year. Market conditions deteriorated significantly in the first quarter compared to conditions observed in the fourth quarter last year. Although we experienced strong sales of our new uPrint 3D printer, sales of our higher priced 3D printers and FORTUS 3D production systems fell significantly. First quarter product revenue decline by 32% to $17 million when compared to $25.1 million for the same period last year. Three main factors impacted our product revenue growth in the first quarter. First, revenue from FORTUS 3D production systems declined by 62% when compared to last year. This was the result to low backlog coming into the first quarter, combined with a precipitous drop in order activity. With the start of a new capital budget cycle in January, our customers have reacted to the weak economic conditions by reducing design and engineering resources. This has had an impact on sales activity as well as usage during the first quarter. Second, although 3D printer units increased 11% during the first quarter, 3D revenue declined by 34%. Sales of our new uPrint 3D printer were strong, but total 3D printer sales continued to be impacted by the weak global economy. Customers gravitated to the lower priced uPrint, which represented 66% of all 3D printer units sold during the quarter. Sales of our higher priced Dimension Elite and 1200FST were down 72% over last year. While this was most – while there was most certainly some cannibalistic effect of introducing the lower priced uPrint, we believe the overriding factor impacting our 3D printer business is the weak global economy.…

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and investment community. But based on the current economic environment, Stratasys is currently not providing financial guidance for the fiscal year ending December 31st, 2009. Although we performed well during periods of economic weakness in the past, we are currently operating in an environment with unprecedented economic volatility and uncertainty. This uncertainty combined with the many changes in our go-to-market and product strategies over the past few months make visibility in 2009 extremely difficult. However, qualitatively, we are observing similar margin conditions in the second quarter when compared to the conditions we observed in the first quarter of this year. We will continuously re-evaluate our position and provide you with updates as conditions change and our visibility improves. Now I’d like to turn the call back over to Scott Crump.

Despite the challenges presented by the economy, our vision has not changed and we remain passionate in executing our plan and attaining our goals. Our new distribution model in North America has been successfully implemented, with all Stratasys systems now distributed through an indirect channel worldwide. Because the uPrint is proving to be robust and reliable as a product, we believe it appeals to a broader network of resellers and expanding uPrint distribution will be a priority in coming quarters. In addition, we believe our new distribution structure will make the most of our reposition FORTUS line and our new DDM initiatives, now that we’ve expanded our sales feet on the street by about four-fold in North America compared to our previous direct sales force. We remain optimistic about our DDM business for the year, and we remain excited about our new branding and product strategies that target these new applications. For instance, we shipped a 900mc system to Rapid PSI in Wichita during the first quarter. Now Rapid PSI is focused on conducting prototype development as well as short production runs or DDM for the aerospace industry. The company is offering fabrication and assembly tools as well as end-used parts with our new ULTEM material. If you recall, our recently introduced ULTEM material is a light-weight and flame-retard material, widely used on the interiors of commercial aircraft for things such as environmental control ducts, instruction panels, and various interior cabin components. Although our FORTUS 3D production system sales declined versus last year, we’re also building a pipeline of opportunities that will contribute to accelerated growth when the economy conditions improve. We’ve been pleased with the market’s response to our new personal 3D printer, the uPrint, following its successful introduction in January. The uPrint represents a significant inflection point at…

(Operator instructions) And in the interest of time, please restrict to one question with one follow-up. Thank you. Our first question comes from the line of Troy Jensen, Piper Jaffray. Troy Jensen – Piper Jaffray: Good morning, gentlemen.

Good morning. Troy Jensen – Piper Jaffray: Hey, Scott, a quick for you. Do you think the change in you guys’ distribution strategy for the high end sales impacted Q1 at all?

I think any change impacts. I think there’s probably as much upside by going to their network as there was in the transitional downside. I think, as Shane pointed out, the primary effect is the economy, the economic impact on our business. Troy Jensen – Piper Jaffray: And then shifting gears here. You guys talked about this expanded relationship with the unnamed Fortune 100 company. Can you just give us any insights as to what are the development milestones? Are they looking for faster systems, bigger parts, better accuracy? And what’s–

Speed of assistance is an incremental part of some of the efforts being done along with some other confidential pieces to it. Troy Jensen – Piper Jaffray: All right. I'll get in the queue, guys. Good luck for the quarter.

Troy, just this one quick follow up on the first question. We look at our international revenue. Our international revenue was down significantly more than our domestic revenue in the quarter. And as you know, the distribution change was a domestic change. Troy Jensen – Piper Jaffray: All right. Got it. Good luck, guys.

Thanks.

You have a question from the Eric Martinuzzi, Craig-Hallum. Eric Martinuzzi – Craig-Hallum: Hi, it’s Eric Martinuzzi from Craig-Hallum. I’m wondering about the inventory. It sounds like your inventory levels at the corporate level are under control. What about within the channel with your distribution partners? Are you seeing any reorder patterns from the initial, let’s say uPrint in particular? You seeing that flowing through to end users or is there’s still a lot at the borrower level?

Well Eric, I think you know in our history, when we introduce a new product and we have people together at resellers meetings, that we have what we refer to as a big tent sale. And usually during those times, we see an increase of inventory at the retailer locations. I don’t think Q1 was any different of that. We’ve seen continued orders in Q2 for our uPrints so there’s a flow through. But typically in quarters where we introduce a product, we do see some increase in inventory in the channels. That’s pretty normal in our business.

And so the high end systems, the same question. Has there been – given the dramatic fall off and high end, are you seeing continued order flow through for those new borrowers in North America in particular?

Yes. I don’t think we’ve seen any substantial difference between the borrowers in North America relative to the rest of the world. Eric Martinuzzi – Craig-Hallum: Okay. The $21.3 million that you guys report in Q1, your commentary about the current quarter that things haven’t changed dramatically, that Q2 sounds like it’s going to suffer from the same macro economic issues that Q1 did. What variables in either the services or the systems side, product or the services side could we see that would change that revenue line significantly?

Given the weakness in the economy, we’re not giving – we’ll try to give you some color around Q2. Other than that we’re not going to give guidance related to Q2 or the remainder of 2009. It’s just too volatile.

Okay. Thanks.

Your next question comes from Jim Ricchiuti from Needham & Company. Jim Ricchiuti – Needham & Company: Thank you. Just a question as it relates to – as you guys do begin to see signs of recovery, would you anticipate it showing up first in the paid parts business and the consumables. I’m curious how you would – might see that unfold?

Yes, Jim. I don’t know. That’s a good question. I think that – my gut reaction would be to say that we would first see it in the consumables. We would see a rebound in the consumable sales. But then again we have some pretty quick or short lead times on 3D printing as well. So we could see it there. I think obviously, our longer lead time products at the high end may take a little bit longer. But that’s just speculation. Jim Ricchiuti – Needham & Company: Okay. And I wonder if you could be a little bit more specific in terms of the geographic breakdown of the revenues. I’m just curious, you mentioned international down more than domestic. Can you elaborate on that a little bit more?

Yes. We saw approximately a 9% decline on our domestic revenue year-over-year, and at 41% on the international. One of the things that impacts the year-over-year comparison though is the backlog coming into both of those quarters. Our backlog at the end of 2007 coming into the quarter was about $5.7 million. And coming into this quarter it was about 2.6%. The majority of that $5.7 million last year was international systems. So we saw a greater weakness on the international side than we did, but it’s not because of the backlogs coming into the quarter. It’s slants at a little bit more than it – and it doesn’t really give you a complete clarity of it. We saw specific weaknesses in the ASEAN region in India as well is in Asia. Europe was reasonable. Jim Ricchiuti – Needham & Company: Okay. Thank you.

Your next question comes from the line of Clint Morrison, Feltl and Company. Clint Morrison – Feltl and Company: Hey, guys. Your reference to weakness in consumables, and you put out a suggestion that one customer had idled equipment, how much of that weakness do you think was customers not using the machines versus taking down their own inventory? And do you think that sort of inventory vending on the consumables side is largely done? Where are we out there?

Well, there’s certainly multiple effects. The primary effect is less engineers working on the projects, and less project. It doesn’t seem to be only focused in one region. It seems to be across the board. Of course, when you’re doing product development, you do see cycles. But I think that it’s a fact that there’s today a bit less engineers doing development projects. But then, I think your point – in order to do business offshore and fully serve the costumer, there’s always going to be some small amount of inventory at mainly distributors. But I think the primary effect is less usage because of simply less projects going on. Clint Morrison – Feltl and Company: Okay. And can you just comment? The press release indicated further cost cuts coming into the second quarter. Can you comment as to the magnitude of those?

No, not at all. We we’re talking about cost reductions that actually were made in the first quarter. I think this would have started by then. Clint Morrison – Feltl and Company: There aren’t plans for further cost reductions in the current quarter?

No, we’ve done cost reductions in Q1 that we said should generate about $2.7 million in annualized savings from the headcount reductions that we did in Q1. Clint Morrison – Feltl and Company: Okay. Thank you.

You have a question from Brian Drab of William Blair. Brian Drab – William Blair: Good morning.

Good morning. Brian Drab – William Blair: First question is that some of the end markets that you might be seeing some relative strength. It sounds like there are at least a moderate level of sales for the uPrint. Can you give us an idea what end markets that’s being sold into?

Yes. As we looked across the market segments that we’ve seen is that it – our business relative to the segments that we talked about historically, we haven’t seen a significant change in the makeup of our market. We looked at that closely and it seems that the drop in sales was really across all of the verticals that we usually (inaudible). A reverse trend would say that the uPrint’s been selling into those same verticals on a relatively similar scale to what we’ve seen in the past.

In addition to the commercial, as you know, we also sell into education. That was consistent, was about roughly a third of the 3D printers which is our – historically, that’s where we’ve been with the education. Brian Drab – William Blair: Okay. And then one more question on the cost savings that you’re expecting from restructuring. Can you give us any specifics as to what type of impact you’re going to see on cost of goods or on SG&A going forward? At least maybe a range of what type of decline in absolute dollars you’d expect?

As I’ve said, the annualized savings from that would be approximately $2.7 million. It’s probably the vast majority of that savings was in the SG&A area. Brian Drab – William Blair: Okay. Thank you very much.

Okay.

Your next question comes from the line of Steve Denault, Northland Securities. Steve Denault – Northland Securities: Good morning, everybody. Can you repeat the year-over-year change both in unit volume and a dollar basis for FORTUS and 3D Dimension printers?

3D printer revenue declined by 34% and–

Give us a minute.

FORTUS declined by 62% from product revenue. Steve Denault – Northland Securities: Okay. What about the unit volumes?

We didn’t give a unit volume as it relates to FORTUS because of the number. There’s such a variation in the products within there that individual units can be misleading. We did say that we had a unit increase of 11% within our 3D printer business, as it was heavily focused on the uPrint. And overall, systems we said were 591 systems versus 577 systems last year. Steve Denault – Northland Securities: Okay. And then the final question, you make reference in terms of being serious about expanding distribution for uPrint. How should we think about that? Is this out-of-the-box distribution or adding resellers? What do we think about that?

We’re looking at multiple ways to expand that, including looking at our reseller basis as well as some non-traditional ways. Because the uPrint really lends itself to a different model than we’ve had before, we can sell through resellers that don’t have any experience with hardware before, just like the CAD software people. Because it’s a robust product and we have a third party service model that previously we didn’t have available. So we’re looking at a lot of different avenues, because our long term goal is to have various significant expansion in our system sales.

You know frankly, we wanted to really assess the capabilities of uPrint in the field with our existing network prior to aggressively going after any additional resellers. The uPrint has proven to be a very robust product, and as you recall, we had a new service model with that part as well. And that is working as planned. Our focus now is going to be on expanding our distribution reach with that product. Steve Denault – Northland Securities: Okay. Thanks much.

You have a question from Andy Schopick, Nutmeg Securities. Andy Schopick – Nutmeg Securities: Thanks. Good morning, gentlemen. Bob, I got a question for you and then one for Scott. On the gross margin, can you quantify to any degree how much of this decline could be directly attributed to poor overhead absorption issues as opposed to product mix?

Yes, Andy. I would say that if you look at our cost of sales within a quarter, probably 20% of it – 20% of our cost of sales is in a fixed category. Andy Schopick – Nutmeg Securities: 20% in fixed category?

Yes. Andy Schopick – Nutmeg Securities: Okay. And also Scott, with respect to the sales strategy at this point – actually Bob may want to answer this as well, I’m wondering how much of your sales were direct in 2008? And can we assume that substantially all sales are going to be indirect in ‘09?

Yes, all of our sales globally – let’s say system sales, are indirect through the channels. We sell direct with RedEye. Of course, a lot of that is through the Internet, and we of course, continue to do some direct sales on consumables. This would be legacy consumables. Andy Schopick – Nutmeg Securities: But on the systems side, everything is going to be indirect in ‘09?

That is correct. Andy Schopick – Nutmeg Securities: What was the direct component of the systems sales as a percent of revenue last year?

In terms of the overall systems sales Andy, last year it would have only been the FORTUS systems in North America. And I would say that that was probably 15% to 20% of the overall systems sales. Andy Schopick – Nutmeg Securities: Okay. Thank you.

You have a question from Jeff Evanson, Dougherty & Company. Jeff Evanson – Dougherty & Company: Good morning, gentlemen.

Good morning. Jeff Evanson – Dougherty & Company: I’m wondering if you could talk a little bit about how much uPrinter – how many uPrinter systems you have in finished goods inventory? And then, if you could give me some detailer on how and when you’ll be able to get the uPrinter bomb down 15%, please? Thank you.

In terms of uPrint and finished goods inventory at the end of the quarter, we’ve had very little as you relate it to uPrint. The uPrint was a very good seller in Q1.

I’d say we had unfilled orders too, right?

Yes. It is some of our backlog. But as we look at the bill of materials, we got specific areas within uPrint initiatives that we’re going after. And I expect that we’d be able to reduce the cost – the material cost of the uPrint by 15% during – by the end of the year. That’s going to come incrementally on various components throughout the year. Jeff Evanson – Dougherty & Company: Okay. Thank you.

Thanks, Jeff.

Your next question comes from Graeme Rein from Bares Capital. Graeme Rein – Bares Capital: Scott, you mentioned that the pipeline in the FORTUS is growing significantly. What gives you optimism that those sales are going to kind of come through with a new interest level or new applications? Can you just give a little bit more color on why you feel good about that pipeline?

Yes, maybe I can reflect back to last year. We had significant growth in TDM, which is a portion of our applications, new applications for the FORTUS line. Numbers like in the first quarter, 27%, 33%, 40%. And in the shift of direct to indirect, we had to by definition, move pipelines which is usually pretty difficult to do. So we did our best to sell as much as possible at the fourth quarter end of the year, and then start anew, maybe not totally anew but start anew with the new North American channel managers. But within that, there’s a lot of new pioneering, a lot of new systems that went in two years ago. And certainly last year, that test either the fixtures and assembly tools in that application. And of course, when those are successful you typically get multiple orders. And then also new applications of end used parts, which we actually have seen over the last three years. And those also – those applications have to be tested for compatibility. And with that, you typically get multiple orders. So I’m very optimistic that because of the seeds that were successfully sown in the last two and three years, that we really saw the growth in 2008. And 2008 was a discretionary part of the year. We still got average 40% growth in that application. So I’m actually optimistic about 2009 with the TDM application which is FORTUS.

The other component to that I think that’s important is the ULTEM material. It’s a flame-resistant material that we recently introduced and I think that opens up some new doors and some new customers that weren't there before. And a lot of those customers do have cash or just have proven to be reluctant to spend their cash in this economy. Graeme Rein – Bares Capital: Okay. That's all fun and the follow up is your balance sheet is in great shape, you’re still generating cash, well positioned competitively. What's the status of the buy back? And do you anticipate buying shares in the current quarter?

Yes, Graham. We're not going to comment on our plans there but I’m willing to say that we still have about $11 million left on the authorization. We didn't buy any stock back during the first quarter. And we will continue to value at – evaluate that based on the parameters that we can operate within. Graeme Rein – Bares Capital: Okay. So $11 million still outstanding on the current authorized?

Right.

That's right. Graeme Rein – Bares Capital: Okay. Thank you.

You have a question from Dan Draber [ph], Barren Neuns [ph]. Dan Draber – Barren Neuns: Yes. Can you please address rumors about a potential patent dispute you guys got with (inaudible) Place?

Could you elaborate or at least enunciate the words? Hello?

He has removed himself from queue. I'm going to–

We have no pending or existing lawsuits, whether they're patents or – well, his question was to patents. So, no. There's no patent lawsuits out there. Next question please?

You have a question from Ryan Thibodeaux, from Maple Leaf Partners. Ryan Thibodeaux – Maple Leaf Partners: Hey guys. Considering that the climate in Q2 is similar to Q1, do we expect to lose money in Q1 as well? I mean, in Q2 as well?

We've given you the economic parameters as best as we could in Q2. We've talked about what steps we've taken in terms of operating expenses to give you some color on that. And beyond that we're not going to comment as a relation to Q2 or the remainder of the year from financial guidance. Ryan Thibodeaux – Maple Leaf Partners: Are there any factors that affected Q1 gross margin that will not be present in Q2 if the mix remains roughly the same?

If the mix remains roughly the same you're going to have to see some similar factors as I indicated in response to one of the questions. Sales volume or fixed overhead of about 20% is obviously an influence on the gross margin also. Ryan Thibodeaux – Maple Leaf Partners: Okay. I know you've been reluctant to do so in the past, but could you talk a little bit more about the current gross margin profile on uPrint or at least relation? How it relates to the older generation 3D printers?

We have some very strong margins on our high end 3D printers. And we have indicated that the uPrint is still a strong gross margin product. But we have indicated that it is our lowest gross margin system that we have. We see it as part of expanding our installed base, and then driving our consumables sales there. Ryan Thibodeaux – Maple Leaf Partners: So if you were able to reduce the cost by 15%, would it be more in line with the historical margin that you enjoyed on the 3D printer business?

We would pick up substantial margin on the uPrint probably to the tune of about eight points with those cost reduction efforts. Ryan Thibodeaux – Maple Leaf Partners: Alright, thanks.

You have a question from Jim Ricchiuti, Needham & Company. Jim Ricchiuti – Needham and Company: Yes. Question just regarding the overall health of the reseller channel just in light of the economic conditions. Are you seeing more of these folks struggling? Do you anticipate any of these guys maybe falling by the wayside?

Well we definitely have the healthy reseller distribution channel worldwide, but Bob, why don't you comment on more detail?

The good news on our reseller channel is that a number of these re- channels we've – resellers, we've been doing business with for a number of years. And as we've grown, they've been profitable over those years. Clearly in this economic environment, some of them are struggling more than they have historically. But we've got an up to date financial statement on all these people. We talk to them on a regular basis and we're monitoring it very closely. So we're doing all the steps that we can prudently in this. But some of them are weaker than they were last year. There's no question about that. Jim Ricchiuti – Needham & Company: And just a final question, Scott or Bob. In the past previous downturns, has the issue of used equipment coming out in the market, has that been an issue in previous downturns? Do you anticipate any kind of problems along those lines?

Well, there's always an ongoing used portion in the market. But we don't anticipate that. We're, let's say not seeing that either increase or decrease. Jim Ricchiuti – Needham & Company: Okay. Thanks a lot.

It's interesting. Sometimes those used sales, which in the past Stratasys has done as well in the program that we have for, off and on, for doing trade ups, those can get us into big and small companies that can blossom into significant installations. And there's a lot of good portions to that. It's just not just negative. And the obvious consumable sales as well.

Most of our installed base is within the last five years, so we – there's not a significant used market out there on our equipment currently. Jim Ricchiuti – Needham & Company: Okay. Thanks very much.

Thank you. There are no other questions at this time. I would like to hand the call to Scott Crump for closing remarks.

Well in closing, we have a strong balance sheet and remain committed to our long term goals and objectives. We remain confident in our ability to provide long term value to our customers, channel partners, and shareholders. And we are well positioned for the future. I'd like to thank you for your interest in Stratasys and we look forward to speaking with you again in July. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.