Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Stratasys earnings conference call. My name is Anne and I will be your coordinator of today's call. (Operator's Instructions) As a reminder this conference is being recorded for replay purposes. (Operator's Instructions) I would now like to turn the presentation over to Mr. Shane Glenn, Director of Investor Relations at Stratasys. Please proceed, sir.

Good morning and welcome to the Stratasys conference call to discuss fourth quarter financial results. Representing Stratasys executive management on the conference call today is the Chairman and CEO of Stratasys Scott Crump and CFO Bob Gallagher. A quick reminder that today's conference call is being transmitted over the web and can be accessed through the investor section of our website at stratasys.com or directly by accessing a link provided in our press release. We'll begin with a safe harbor statement. All statements herein that are not historical facts or that include such words as expects, anticipates, projects, estimates, vision, planning, could, plan, 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 objective for the marketing and sale of our Dimension and uPrint 3D printers and our Fortus 3D Production Systems, particularly for use in direct digital manufacturing, our agreement with HP to expand the distribution sales of our 3D printers, the demand for our proprietary consumables, the expansion of our paid par service, and our beliefs with respect to the growth in 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 rate experienced in this and preceding quarters, our ability to produce and market new materials such as Ultem, and a market acceptance of these and other materials, the impact of competitive products and pricing, our timely development of new products and materials and market…

Good morning. We are pleased with our fourth quarter performance considering the difficult economic environment. We finished 2009 encouraged by the positive trends within our markets as well as a record yearend backlog and we begin the year emboldened by our record, a major game changing agreement with HP for the worldwide distribution of 3D printers. We observed an improvement in the business conditions during the quarter as our customers have become more confident in the economic recovery and became more willing to increase spending. Sales in the month of December were notably strong, leading to a record yearend backlog of system orders. Our margins for the fourth quarter improved over last year and sequentially driven by the relatively strong contribution of our high-margin consumables. The positive growth in consumable revenue for the quarter was significant given it was the first positive year-over-year sales growth in 12 months. We believe this bodes well for the coming quarters. We're especially pleased with our strong cash flow from operations which totalled $11 million for the fourth quarter and $25 million for the year. This was a significant accomplishment considering the difficult 2009 year. Our finance and operations team deserve a lot of credit for their continuous improvement in managing our working capital. We believe we are financially strong and strategically well positioned coming out of the recession. I'll return later to update you on some of our initiatives, including our game changing agreement with HP, but first I'd like to turn the call over to our CFO Bob Gallagher who will further highlight our fourth quarter results. Here's Bob.

Thank you, Scott. Total revenue declined by 18% to $26.2 million for the fourth quarter of 2009 compared to $31.9 million for the same period last year. The company shipped 431 systems during the fourth quarter versus 570 last year. As we expected, market conditions remained difficult in the fourth quarter which is reflected in our total unit and revenue comparisons. However, we continue to observe an improvement in market conditions which gained momentum in the fourth quarter. This positive momentum carried over into 2010 and we are cautiously optimistic that this trend can be sustained. Fourth quarter product revenue declined by 20% to $20 million when compared to $25.1 million for the same period last year. Two factors impacted our product revenue growth in the fourth quarter. First, revenue from Fortus 3D Production Systems declined by 32% when compared to the fourth quarter of last year. It should be noted that the fourth quarter of 2008 represented a record quarter for the Fortus system revenue. However, given the positive trends we are observing in 2010, we expect to generate positive growth in Fortus system sales during 2010. The second item impacting our product revenue was a 24% decline in our 3D printer revenue compared to last year. Our 3D printer sales in the fourth quarter continue to reflect the weak global economy. Our most affordable 3D printer, the uPrint, represented 47% of all 3D printer unit sales during the fourth quarter which was a similar mix to the third quarter of 2009. We are pleased to observe an increase in our consumable revenue during the fourth quarter which grew by 4% over last year. While 4% may not seem significant, it represents the first positive growth in the past 12 months. This positive trend in consumables has continue into…

Thank you, Bob. We appreciate the need to provide financial guidance to our shareholders and investment community. We continue to observe an improvement in market conditions as we enter 2010 and we are optimistic about the coming quarters. However, continued uncertainty and the strength of the economic recovery, as well as the many changes in our go-to-market and product strategies over the past two months make visibility extremely difficult. Based on these factors we will continue to not provide financial guidance as we begin 2010. Now I'd like to turn the call back over to Scott Crump.

Thank you, Shane. We finished the year encouraged by the positive trends in our business and we are excited about executing on our new strategic initiatives. We believe the growth trend in consumables combined with our record yearend backlog suggests a building of positive momentum within our core businesses and despite the difficult operating environment in 2009, our margins expanded in the fourth quarter and we strengthen our financial position. Well, eight years ago we launched the first successful 3D printer at under $30,000, proving a significant inflection point within our industry and the 3D printer price elastic business model. A year ago we established another major milestone by introducing the uPrint 3D printer platform, the world's first personal 3D printer priced under $15,000. In January we expanded the uPrint family to include the uPrint Plus, an enhanced version of the uPrint with significant new features and priced at $19,900. We believe that the uPrint family of products has significantly advanced our 3D printing product strategy by improving upon several key product characteristics critical to ongoing success including affordability, reliability, ease of use, and office friendliness. Throughout 2009 we communicated our goal of significantly expanding our sales channel within 3D printing. In a major strategic step to meet that goal we announced a game changing agreement with HP last month for the worldwide distribution of Stratasys developed and manufactured 3D printers. HP will begin the rollout of HP branded 3D printers in the first half of this year starting in Europe and we are on track to begin shipping those products in the coming months. We believe this agreement will represent a major inflection point in the advancing of 3D printing as a strategy worldwide and represents a watershed event for our industry. In 2008, HP approached Stratasys as they…

(Operator's Instructions) And our first question comes from the line of Brian Drab with William Blair.

Good morning. Congratulations on a good quarter. First question just around the backlog, it looks like the backlog is very strong, can you give us an idea of how that backlog breaks down at all or at least roughly? Is it leaning more towards uPrint or 3D printers in general or Fortus?

It's leaning towards Fortus.

Any more detail than that, that you could give us, in terms of how it's breaking down?

Yeah. We saw strong sales for the first time in the year related to our 900 products which added to our backlog and some into the 400 so you really focused on the high end of the system — it's probably two thirds of the backlog is in the Fortus area.

Okay. And then that kind of leads into my followup question I guess, in terms of what you can do to help us think about margins going forward. It looks like the trend is for improving margins, of course more high-end systems are going to help your margins, but you've got some maybe offsetting factors, I imagine some margin pressure from the deal with HP. What can we expect directionally with margins, let's talk gross margins specifically, going into 2010?

Yeah. I think much to the chagrin of some people, we really focus trying to talk about our operating income line as opposed to our margins because we're so dependent on the mix. We're certainly encouraged by the margins this quarter and the trends that we're seeing in consumables, but we're really too dependent on the volume and mix to give you a meaningful range for gross margins, but again we think there's operating leverage in the model of 2010 versus 2009.

The other thing that we said on the call about the consumables, we had, as Bob outlined, we had three or four factors that were working against us on the gross margin line percentage, yet our consumables picking up, you wipe that out essentially and we saw some strength in the margin.

Okay, thank you.

And the next question comes from the line of Steve Dyer of Craig-Hallum.

Thank you, guys. Congratulations on a nice quarter. A couple of mine have been answered; is there any HP, maybe an initial order or something like that in that backlog, or is it too far off to comment on?

There's no HP in the backlog.

Okay. And any more clarity as to when you would expect that to launch? I know we kind of talked about later this year maybe summertime, any more clarity there?

As clear we're going to get is to say it's the first half of this year.

The first half of this year, okay. Okay, I'll hop back in the queue. Thanks.

And our next question comes from the line of Jeffrey Evanson with Dougherty & Company. Jeffrey Evanson - Dougherty & Company: Actually, all my questions were about backlog so I guess I'll step out. Thanks.

And our next question comes from the line of Chad Bennett with Northland Securities.

Yeah. Hi, guys. This is Ian sitting in for Chad today. Just wondering on the materials side, was the growth there driven by the increase in the installed base or are you seeing an actual increase in utilization out there and are we getting to a point now that we've seen some growth here in this quarter where we can see consistent year-over-year growth on the consumables?

Yeah. The 4% growth obviously generally isn't something we'd consider significant, but it was good to see it as a positive trend. If you look at 2009 we obviously expanded our install base, yet for nine months of the year we saw a reduction in the use of the consumables for our machine so it's too early to predict it as a trend being that it was just the one quarter, but we are happy to report that we have seen that positive momentum carry over through the first six weeks of 2010. So difficult to predict at this time in this economy, but it's good to have it as a positive trend.

Okay great. And then just as followup, any particular verticals here or at the end of December that really drove the systems backlog growth?

No. Really the backlog growth was across all verticals and we saw strong orders from international.

Great, thanks.

And our next question comes from the line of Chuck Murphy from Sidoti & Company. Chuck Murphy - Sidoti & Company: Good morning, guys. Just a quick question about the unit shipments in the fourth quarter down sequentially a little bit, and just kind of wondering was that more the printers or the systems? And I guess also Dimension versus uPrint?

Yeah. I think it was on both sides. One of the things last year that impacts the number of units shipped between is that we did ship uPrints last year in its anticipation of its launch in January of last year so if you look at it on a year over year basis the biggest impact was probably within the 3D printers because of the introduction of uPrint and shipments of that in December 2008. Chuck Murphy - Sidoti & Company: Gotcha, but I guess why sequentially would the 3D printers be down? Is there seasonality there?

I don't have the numbers in front of me of what they were for the third quarter so I can't really comment on that. Chuck Murphy - Sidoti & Company: Okay great. Well, that's all I had. Thank you.

And our next question comes from the line of Andy Schopick with Nutmeg Securities.

Thank you and good morning. A couple of quick ones for you; on HP, now I assume that we're expecting initial delivery sometime before the end of June, how many HP resellers do you envision having by the end of this year? Can you give us kind of a sense of a number there?

Well, we're not going to speak for HP, but we do have indications that a vast majority of our current resellers in those affected European countries will become HP qualified resellers. It's also important to remember that this agreement is all about more than five initial countries. It's ultimately worldwide. It's a global distribution strategy and I think that both companies are doing it right by going through some initial steps to get the pilot right, get the messaging, and the marketing perfect, before in fact going global.

Of course, but I assume that by 2011 you would expect to have a true global rollout by next year or sometime during the course of next year?

Yeah. The timing is dependent on how well the initial launch goes and we're not here to comment on when the full rollout will be. I think that's really more of an announcement that will come from both us and HP at the appropriate time.

All right, Bob, as a followup, could you give us a percentage of sales international versus US in the fourth quarter and the year, if you have that?

For the fourth quarter it was 55% of it was domestic and 45% of it was international and I don't have it right in front of me for the full year.

For the full year, Andy, about 56% was domestic and obviously 44% international.

Sure. Okay thank you, let me pass it along.

And the next question comes from the line of Andrew Nowinski with Piper Jaffray.

Hi. Good morning, guys. I just had a question on Fortus I guess. So you said you tripled the sales force of Fortus this year with the new channel rollout, but it looks like revenues in Q4 were still quite a bit lower than any other quarter in 2008. So just wondering when should we expect these revenues to start ramping up, or should we expect them to ramp up in 2010 or should we just wait as the channel needs more time to kind of make traction?

Yeah, Andrew. As we said on the call, we expect positive growth in 2010 from Fortus. When you look at 2009, obviously a very difficult year, and the comparison were quite difficult when you look at particularly the fourth quarter. I mean 2008 Q4 was one of the best quarters we've ever had — or is the best quarter we've ever had for Fortus, and if you recall, Fortus system revenue collapsed because of the economy in Q1 of 2009 so theoretically in 2010 Q1 we're starting to anniversary some significantly easier comparisons in Fortus and that's why we feel good and we feel optimistic and we said that we expect positive growth in this year from Fortus.

At this point six weeks into the year it really becomes almost anecdotal, but I can tell you that the orders we received in the first six weeks of the year related to Fortus are substantially higher than they were last year.

Got it. And then with regard to paid parts, when do you think or should we expect the pricing pressure to ease in 2010 here or is that going to continue?

I would expect some of it to really continue because I think a lot of the service bureaus out there are well under their capacity and a lot of the ma & pa shops are struggling. Some of them may go out of business and if that happens that will ease the pricing pressure, but until then I think we're going to see some continued pricing pressure.

All right, got it. Thanks, guys.

And your next question comes from the line of Ryan Thibodeaux with Maple Leaf Partners.

Hey, good morning. A followup to Chuck's question on the Q4 unit decline over Q3. I think if you go back all the way to 2003, Q4 units have been up on average 15% quarter over quarter in Q4 so if you could just kind of readdress what, if any, significance that might have for this year?

Well, I think the unit volume also has to be taken into consideration as it relates to the backlog that we're carrying into 2010 that we had positive momentum and positive backlog year over year, in fact a record backlog in a substantial number of units of that being within the Dimension line. Additionally if you're doing a quarter over quarter comparison you're going to find that with the launch of uPrint last year we had a substantial number of uPrint shipped in the fourth quarter of last year so I think the comparison is a very difficult comparison period.

So on the uPrint comment then, we had a larger number of uPrints shipped in the March quarter so does that mean that we'll have a less than seasonal Q1 on a unit basis for this March?

Well, one of the things that, you know, the uPrint, when we had our introduction of it so it has a positive impact on the fourth quarter of 2008, it had a positive impact on Q1 2009.

But a much larger impact on Q1 '09 than Q1 '08?

Yeah, but I think the takeaway I would hope from the call is one where we're seeing a positive impact both from the backlog we're carrying into 2010 as well as a positive impact on the orders that we've received through the first half of the quarter. So I think that both of those factors are going to diminish that impact as you look at Q1 of 2010.

I think that what people may be having trouble with is that have a record backlog that's bigger than the 2007 backlog which was $5.7 million back then, and you were able to give pretty good guidance back at the end of 2007, and considering the overall improvement of the economy and how most companies now are getting better visibility, I guess it's just a little puzzling as to why you can't provide some kind of guidance at least for the quarter.

Because I don't think anybody knows the strength of the recovery, and we're not willing to try to predict what the strength of the recovery would be and the band is fairly significant. And you can see the impact that we had with the consumables growth in the fourth quarter and what that does to our margins. So we don't think that we could give something that would be meaningful to the quarter. The other thing is we've said previously, a lot of our orders are towards the tail end of the quarter which makes that predictability more difficult.

Is it more difficult than it has been in the past?

We've never given quarterly guidance, and we've seen highs and lows in the quarters. If you go back historically and look at this company we've surprised you negatively and positively when it comes to quarters in years when we've given you very good annual guidance. This is a very difficult business to predict on a quarter to quarter basis under normal times and it hasn't gotten any easier right now.

All right, thank you.

Our next question comes from the line of Robert Brody with Bares Capital Management

Good morning guys. What's the projection from your North American resellers with regard to the HP deal?

Shane, do you want to repeat the question?

I think the question was, Robert, what's been the reaction from our North American Channel Partners from the announcement of the HP deal, is that correct – is that your question?

Right.

Well, you know, you expect there's going to be a lot of questions from them. But first I want to point out that there's been – there's no immediate impact in North America, from this announcement. Obviously this is a roll-out initially to five countries in Europe, but I think – you know across the board whether it's in Europe or ultimately in North America when we do expand into those markets, this is a big opportunity for them. I mean, they have an opportunity to partner eventually with HP and leverage their business with the HP brand, and marketing muscle. So I think that's one of the reasons that when you look – well just look in Europe for example, we're getting word that a vast majority of our resellers are going to look to be signing up with HP to become HP qualified resellers. So we don't expect to lose any resellers. You know, you also have to remember that our resellers – all our resellers have a significant install basis systems that are generating recurring revenue for their business, so it's in their interest and it's in our interest that everyone stays affiliated long term. So I think based on the reaction that we've seen thus far in Europe and the introduction there – there have been questions obviously but it looks like we're going to – it looks like most of those are going to become HP resellers, we feel good.

And can you discuss any developments from a competitive standpoint especially with regards to the presence of (inaudible) market?

Robert, we're having a tough time hearing you. I think you asked a question about if there's been any development on the competitive side, is that your question?

Right.

Really our job on a call is to focus on what we're doing and what direction we're moving in, but from a competitive standpoint it's been relatively quiet since the announcement.

Okay, thanks, that's all I have.

And the next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed.

Thanks, just a follow up. You guys continue to generate a lot of cash. Any thoughts or how do you think about your cash balance as a strategic tool or what might you do with that in the near term or longer term – whether it be a buy back or acquisition? How do you guys think about that?

Yeah, as I've said in the past, I don't think of it as having a cash problem as opposed to a cash opportunity. I think it's very impressive that we're able to generate in this economy $1.26 per share in cash from our operations in 2009. And we still have authorization related to a buy back. We continue to look at strategic ways to use that cash, whether it be acquiring another company or acquiring technology. But as we've said in the past, we're not going to let it burn a hole in our pocket and do something that we don't think is prudent to our long term.

Okay, fair enough. Thanks guys.

And our next call comes from the line of Andy Schopick with Nutmeg Securities. Please proceed.

Yeah, coming back to HP for a second. Bob, are there going to be any anticipated wrap-up or start-up costs that you're going to be absorbing in this calendar year that might be non-recurring going forward?

Yeah, you know we've incurred – even what you'll see in our fourth quarter 2009 is that you saw an increase in our R&D expenses as we've been working together with HP. We actually started working with them probably in the third quarter of the year – even though we didn't have a signed agreement...

I'm referring more to launch costs.

Oh, launch costs. The only thing that we have – as I look at 2010 the only thing I think is significant is that we've talked about before is that we have the warrants that we issued to HP – and that's a charge that you're going to see related to those warrants in 2010.

Have you determined that charge?

The charge will be approximately a onetime charge in the first quarter of approximately $5 million.

In connection with the warrants.

Correct.

Andy, going back to the launch costs, of course HP will start with some fairly significant marketing, so they're not just selling 3D printers, they're making the executives as well as the managers that purchase aware and aware of the justifications, so starting now and going for a long time you'll see a significant amount of marketing, but they'll incur that. We have no impact to our P&O on that marketing cost.

Fine. And lastly, Bob, customer funded R&D for this year, or for 2009, can you give us that number versus 2008?

Yeah, it was approximately – for the whole year it was approximately $2.2 million from that Fortune 500 company as we've continued to work on the relationship now for five years. In 2008 it was only about $300,000.

Okay, thanks again.

(Operator's Instructions) And our next question comes from the line of Chad Bennett with Northland Securities. Please proceed.

Yeah, just a quick follow up here. The 3D printers in the quarter, can you go over again for me what – how much they were down and then how it broke out between uPrint and Dimension?

Yeah. The 3D printer units for the quarter were down 23%, 53% of the units during the quarter were what we call our higher priced systems, the 1200's and the Elite, and of course 47% balance were the uPrints.

Okay. And I guess just – you know on the uPrint side competitively are you seeing any of the other – you know the couple other low priced printers that have been released here, are you seeing those yet in the market at all? Thanks.

No.

All right.

Ladies and gentlemen, there being no further questions I would now like to turn the cal over to Mr. Scott Crump for closing remarks.

Well, in closing we believe our recent OEM agreement with Hewlett-Packard is an inflection point that will accelerate the growth of our 3D printers globally. We have an exceptionally strong balance sheet and we remain committed to our long term goals and objectives. We're in a great position in 2010 as we emerge from last year's great recession. We remain confident in our ability to provide long term value to our customers channel partners and share holders. And we're well positioned as the market conditions improve. I'd like to thank you for your interest in Stratasys and we look forward to speaking with you again next quarter. Goodbye.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.