Stratasys Ltd. (SSYS) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Quarter 3 2013 Stratasys Earnings Conference Call. My name is Sheila, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Shane Glenn, Vice President of Investor Relations. Please proceed, sir.

Thank you, Sheila. Good morning, everyone, and thank you for joining us to discuss our third quarter financial results. On the call with us today are David Reis, CEO; and Erez Simha, CFO and COO, Israel. A reminder to 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 be made available on the Investor section of our website later today. A reminder that certain information included or incorporated in this presentation may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as may, will, expect, anticipate, estimate, continue, believe, should, intend, project or other similar words, but are not the only way these statements are identified. These forward-looking statements may include, but are not limited to, statements relating to the company's objectives, plans, and strategies; statements that contain projections of results of operations or financial condition, including with respect to the MakerBot acquisition, and all statements, other than statements of historical facts that address activities, events, or developments that the company intends, expects, projects, believes, or anticipates will or may occur in the future. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. The company has based these forward-looking statements on assumptions and assessments made by its management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Important factors that could cause actual results, developments, and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things, the company's ability to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Ltd. after their merger, as well as the ability to complete the MakerBot acquisition, and to successfully put in place and execute an effective post-acquisition integration plan; The overall global economic environment; the impact of competition and new technologies; general market, political, and economic conditions in the countries in which the companies operate; projected capital expenditures and liquidity; changes in the company's strategy, government regulations and approvals; changes in customers' budgeting priorities; litigation and regulatory proceedings; and those factors referred to under Risk Factors, Information on the Company, Operating and Financial Review and Prospects, and generally in the company's annual report for 2012 filed on Form 20-F and in other reports that the company files with the U.S. Securities and Exchange Commission. Readers are urged to carefully review and consider the various disclosures made in the company's SEC reports, which are designed to advise interested parties of the risks and factors that may affect its business, financial condition, result of operations, and prospects. Any forward-looking statements in this presentation are made as of the date hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now, I'd like to turn over to David Reis, Chief Executive Officer of Stratasys. David?

Thank you, Shane, and good morning, everyone. Thank you for joining today's call. We are very pleased with our record third quarter results. Our organic growth rate accelerated to 26% during the third quarter over last year as synergies of the merger between Stratasys and Objet continue to develop. Overall, we recognized strong growth across multiple product lines and addresses an expanding range of application. We sustained strong margins, which helped drive record non-GAAP profit for the quarter. We're especially pleased with the contribution made by our recent acquisition of MakerBot, which contributed $11.6 million in non-GAAP revenue on closing of the transaction on August 15 through the end of the third quarter. In addition to our strong financial results, we have reinforced our commitment to expanding our global market presence and reach to meet rising demand, investing in our global sales marketing and channel infrastructure, especially in Asia. We demonstrated our commitment to internal product development with the release of several new product and material offering, decked-up by our industry-leading R&D investment levels. And we completed the successful equity offering of approximately 5.2 million shares, raising over $460 million. This additional capital strengthened our balance sheet and improved our ability to execute on internal expansion plans, as well as capitalize on other acquisition opportunities. We began the fourth quarter with positive momentum and have raised our financial guidance to reflect our positive outlook. I will return later in the call to provide more detail on our third quarter developments and strategy. But first, I would like to turn the call over to our CFO and COO of Israel, Erez Simha, who will provide you detail on our financial results.

Thank you, David, and good morning, everyone. As in previous quarters, our focus on today's call will be on the non-GAAP financial results of the combined company Stratasys Ltd. for the third quarter of 2013 and pro forma non-GAAP financial result for the Stratasys-Objet merger in the third quarter of 2012. This non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Note that when we refer to GAAP metrics in respect of periods previous to January 1, 2013, we are referring to pro forma GAAP numbers prepared in accordance with Article 11 of SEC Article S-X which give effect to the merger between Stratasys and Objet as though it had occurred on January 1, 2012 with onetime transaction costs excluded from the numbers. You should also note that we are not providing any pro forma financial result with the MakerBot acquisition. The GAAP and non-GAAP results presented for Stratasys Ltd. include MakerBot results as of the close of the acquisition on August 15 of this year. The non-GAAP to GAAP reconciliations are provided in the table containing our slide presentation and press release. As David mentioned in his opening remarks, we are very pleased with our third quarter performance. We generated $126.1 million in non-GAAP revenue in the third quarter, an impressive increase of 39% over the same period last year. GAAP revenue for the third quarter of 2013 was $125.6 million. Excluding MakerBot, our organic revenue growth was also impressive at 26% over the same period last year. We are pleased to see the revenue synergies from the merger between Stratasys and Objet continue to develop, which is reflected in our strong organic growth rate. Gross margin remained relatively strong during the third quarter and the impact of acquiring MakerBot, which maintained slightly lower gross margin, was mostly offset by the strong growth of our higher-margin systems and consumables. Non-GAAP operating margins was 19.2% compared to 24%, and non-GAAP net income margin was 16.9% compared to 18.3% over the same period last year, driven by the inclusion of MakerBot and incremental investment in sales and marketing and new product development. We generated record non-GAAP earnings of $20 million, or $0.45 per share, a 21% increase over the $16.6 million, or $0.31 per share, for the same period last year. And lastly, we raised our non-GAAP financial guidance for the year, given our positive outlook. Non-GAAP product revenues in the third quarter of 2013 increased by 41% to $108.3 million as compared to pro forma combined product revenues in the third quarter of 2012. Within product revenue, system and other revenue increased by 47% in the third quarter over the same pro forma period last year. MakerBot experienced strong sales of the desktop 3D printers as it contributed $11.6 million, mostly in system revenue for the quarter. We also observed strong sales of our higher-priced Production and Design Series systems, with unit sales increasing by 27% for the third quarter as compared to pro forma period last year. This growth continues to be driven by the development of new DDM applications for our Fortus system and the continuing adoption of our Connex systems for complex prototyping applications. Consumables revenue in the third quarter of 2013 increased by 30% as compared to the pro forma period last year, driven by an acceleration in customer usage, our growing install base of system and the company's efforts surrounding the application training and material education for both our channels and end users. The strong sales of our Production and Design Series systems contributed to strong consumable sales growth, given the relatively higher consumability to date sales. We believe that the continuing strengthening in the Production and Design Series system sales are positive indicators of consumables revenue growth in future periods. Revenue from services offering in the third quarter of 2013 increased by 28% to $17.7 million as compared to the pro forma period last year. The growth in service revenues is attributable to increased revenue from maintenance contracts and service part, reflecting our growing base of installed systems. In addition, the revenue from RedEye part [indiscernible] service increased by 37% for the third quarter over third quarter last year, primarily due to the increased demand for large and complex production parts, as well as ongoing development of the RedEye service channels. The number of 3D printers sold in the third quarter was 5,925 units as compared to 1,214 units sold in the third quarter of 2012 on a pro forma combined basis. The significant increase in unit shipments is resulting primarily from the inclusion of MakerBot since the closing of the acquisition on August 15. Including all systems sold by Stratasys and MakerBot, the company has now sold 64,855 units worldwide on a pro forma combined basis. As expected, due to the MakerBot transaction, non-GAAP gross margin percentage declined slightly to 58.8% in the third quarter over the 59.9% for the same pro forma period last year. Non-GAAP product gross margin percentage benefited during the quarter on the overall increase in sales volume to cover fixed overhead and product mix that favored our higher-margin systems and consumables. Non-GAAP net research and development expenses increased by 51% to $12 million in the third quarter as compared to the pro forma period last year, driven by the inclusion of MakerBot R&D expenses, as well as the higher spending on new projects. Non-GAAP SG&A expenses increased by 53% for the third -- for the third quarter as compared to the pro forma period last year, driven by the inclusion of MakerBot SG&A expenses, as well as expanded headcount to support our growth plans, higher commission expenses due to increased sales, and more importantly, incremental sales, marketing and infrastructure investment. Slide 10 provides you with an overview of the major growth driver we have discussed for the period. The following slide provides you a breakdown of our geographic sales. Asia-Pacific was our fastest growing region during the third quarter as compared to the pro forma period last year, driven by our ramp in sales and marketing investment in the region. I won't be reviewing the specific reconciliations to GAAP of the non-GAAP measures we have discussed throughout our presentation today. This information is provided in the slide appearing at the end of our presentation, as well as in our earnings release. Our cash and cash equivalent balance, short-term deposit and investment increased by approximately $467 million to $616.5 million at the end of the third quarter. The increase resulted from our successful equity offering of approximately 5.2 million shares in September. The company now has improved flexibility, invest for growth. In summary, we are very pleased with our third quarter results. We generated an impressive acceleration in organic growth, observed a strong contribution from MakerBot and generated record non-GAAP profit. We have improved our balance sheet and continue to position the company for future growth through strategic investment in R&D and channel development, as well as additional acquisitions. I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will update you on our financial guidance. Shane?

Thank you, Erez. The company's overall outlook has improved for Q4 2013, which has reflected in upper revision to 2013 financial guidance. Earnings per share guidance incorporates a $0.06 per share of positive impact from the improved outlook. This $0.06 per share improvement is offset by $0.06 per share of earnings dilution, resulting from the company's public offering of approximately 5.2 million shares on September 18, 2013. The earnings impact for the equity offering, which occurred during the third quarter, had not been previously incorporated into our financial guidance. GAAP earnings guidance has been revised principally to reflect higher estimates for stock compensation expense, revised amortization expense related to acquired MakerBot intangible assets, higher expenses related to the MakerBot performance bonus plan. Accordingly, Stratasys has updated its financial guidance for the fiscal year ending December 31, 2013 as follows: Revenue guidance of $470 million to $490 million versus previous guidance of $455 million to $480 million, non-GAAP earnings guidance of $1.75 to $1.90 per diluted share, GAAP earnings guidance of $0.83 to $0.55 per share loss versus previous guidance of a $0.76 to $0.49 per share loss. Non-GAAP earnings guidance excludes $67.2 million of projected amortization of intangible assets, $22.2 million to $24.9 million of share-based compensation expense, $18.1 million to $20.7 million in merger-related expenses. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of this press release. We will provide the itemized details of the non-GAAP financial measures. Our long term target operating model retains annual organic revenue growth of at least 20%, non-GAAP operating income as a percentage of sales of between 20% and 25%, an effective tax rate of between 15% to 20%, and non-GAAP net income as a percentage of sales of between 16% and 21%. Now I'd like to turn the call back over to David Reis, who will provide you with a more detailed strategic overview. David?

Thank you, Shane. I would like first -- I would first like to reiterate our progress in the Stratasys and Objet merger integration, which is leading to a meaningful revenue synergies and is reflected in our 26% organic revenue growth in the third quarter. We observed an acceleration of cross-selling opportunities during the period, with our channels partners increasingly focused on complementarity sales. The feedback we are getting from our channel partners and customers has been very positive. We look forward to sustain this positive momentum as we finish this year and begin 2014. In August, we completed our acquisition of MakerBot, a leading manufacturer within the rapidly growing desktop 3D printing category. MakerBot provides an affordable, reliable and accessible desktop 3D printing experience that is driving strong sales of their products. The MakerBot's 3D ecosystem includes 2 replicative 3D printers, a MakerBot Digitizer 3D Scanner, thingiverse.com, MakerWare software and the MakerBot retail store experience. Stratasys and MakerBot estimates that between 35,000 and 40,000 desktop 3D printers were sold in 2012. This number is estimated to double in 2013, as individual designers, engineer manufacturers incorporate 3D printing into their product development and manufacturing processes. Exposure to 3D printing leads to increased demand for 3D printing capabilities as customers find new and innovative use cases for the technology that adds significant value to their business. Rapid growth in MakerBot in the desktop category is demonstrated by MakerBot's strong third quarter performance as it contributed $11.6 million in non-GAAP revenue to the period. In addition to this impressive growth, MakerBot is developing a community of users, which we believe will lead to additional business opportunities in the future. For example, the company has built a strong and loyal user community on thingiverse.com, a 3D design community for discovering, sharing and printing 3D models. Thingiverse has become the world's largest 3D printing community and is exhibiting some impressive usage strengths. The site has over 130,000 total users, with 10,000 added in September alone. It has over 100,000 downloadable objects and is growing at a rate of nearly 7,000 new objects per month. In the first 9 months of 2013, Thingiverse was visited over 11,000 -- 11 million times, with nearly 5 million unique visitors. Each month, Thingiverse has, on average, approximately 600,000 unique visitors. We believe we have only began to tap into the potential of 3D printing and are excited about the many ways MakerBot can help capitalize on this opportunity. In addition to inorganic opportunities like MakerBot, internal product development remains a top priority, which we demonstrate with the release of 2 innovative systems during the third quarter. The 3Z MAX, introduced in August by our Solidscape subsidiary, is the fastest 3D wax printer ever introduced by the company. In 3Z MAX supports high throughput and deliver significant production gains while working with precision designs in jewelry, industrial and medical applications. MakerBot also launched the MakerBot Digitizer Desktop 3D Scanner, a fast and reliable way to turn objects into 3D models, that you can then modify, improve, share and 3D print. We believe the Digitizer is unlike any other product and will define the 3D desktop scanning space. The scanner is [indiscernible] with simple, yet sophisticated software, to create clean, watertight models. Additionally, we launched 2 materials for the MakerBot platform, including a new flexible filament and a new dissolvable support material. The MakerBot's flexible filament allows for printing items that includes functional things, joints and items that can be shaped after printing. MakerBot Dissolvable Filament is a new material for the use in conjunction with ABS filament that adds dissolvable support structure for the creation of detail and delicate internal geometries, including moving parts. Beyond these 2 new materials, MakerBot recently added 7 new colors to its catalog of PLA and ABS filaments. Bringing these innovative new capabilities down to the desktop 3D printing space helps to reinforce MakerBot's status as the market leader. Going forward, we will continue to invest aggressively in new product development. We invested approximately $12 million in R&D project during the third quarter, a level we believe is unmatched within the industry. This level of investment continue to -- continue to produce product that both expand the functionality of existing platforms, as well as create new category-defining product lines. You should expect to see an acceleration in our new product introduction over the coming months. In addition to new product offering, we are aggressively expanding our global customer reach, especially in Asia. Our expansion in Asia is multi-phased. First, in the third quarter, we announced a major distribution agreement with our Aurora Group, a leading provider of office automation equipment in China. The subsidiaries of Aurora Group, Shanghai Aurora Office Automation, will act as a master distributor and service provider for the Idea Series of 3D printers in China. We have seen strong demand in the region, and we believe tapping into Aurora Group local knowledge and network will improve our ability to meet that demand. Secondly, we recently announced the opening of a local sales office in Singapore. The local presence in Singapore strengthen our ability to meet the needs of this region. The Singapore government has pledged an investment of $500 million over the next 5 years as part of its future of manufacturing program, with a goal to kickstart its bulk manufacturing technologies adoption. We believe we are uniquely positioned to help with this initiative, and our local office will allow us to capture this opportunity. Lastly and most recently, we announced our intent to exercise our option to acquire the remaining holding from Fasotec in Stratasys Japan. Following the exercise of the option, Stratasys Japan will become a wholly-owned subsidiary of Stratasys Ltd. Acquiring Fasotec minority interest in our Japanese business will allow us to invest in additional infrastructure to meet the region's growing demand. We are also expanding our reach in the desktop category. MakerBot recently entered into a strategic agreement which allows Ingram Micro, a Fortune 100 company, and the world's largest wholesale technology distributor, to act as a distributor for the U.S. for their product. MakerBot also announced the opening of 2 new retail locations for the holidays. The new MakerBot stores are located in Boston and Greenwich, Connecticut, and will join the MakerBot flagship New York City retail store in offering MakerBot products. Innovative application and mainstream adoption of 3D printing continue to drive new growth opportunities for Stratasys. For example, Seuffer, a German parts supplier with appliance and commercial vehicles, recently shared how the use of Stratasys 3D printing technology to create draft versions of injection mold has resulted in 97% cost savings. Certain processes that previously required up to 8 weeks for manufacture of metal tooling can now be replaced overnight with 3D printing. The ability to streamline the tool creation process for production of these parts is another example of how Stratasys can revolutionize manufacturing and augmenting traditional processes over providing a cost-effective alternative for certain applications. Our previously announced partnership with the UPS store to provide in-store 3D printing services is moving forward, with 6 store location offering the service using our uPrint 3D printers. We see this program as another indication of the rising mainstream adoption of 3D printing, and we are excited to support this project. We are observing new applications from our entire range of products, including desktop 3D printers. For example, engineers from Lockheed Martin use MakerBot desktop 3D printing in the design of NASA James Webb Space Telescope. At recent events, at the flagship MakerBot store in New York City, the architecture firm, Perkins+Will, note that the use of MakerBot 3D printers for in-house modeling has resulted in over 90% cost saving while increasing turnaround time and flexibility. As you can see, our industry remains poised for expansion, as new and innovative applications continue to emerge for our technology. In summary, we're extremely pleased with our record third quarter results. The organic growth rates we enjoyed in the quarter highlights the ongoing progress we are making with the integration of Stratasys and Objet, as well as the favorable market conditions that persists within our industry. Our strong organic growth, combined with the significant contribution we expect from MakerBot, should help contribute to a strong finish of 2013. Accordingly, we have raised our non-GAAP financial guidance for this year. Looking for beyond 2013, we are well positioned to sustain our positive momentum as we accelerate our rate of new product introduction, expand our global market reach and prepare to capitalize on additional inorganic growth opportunities. We're excited about the future and look forward to execute on the many opportunities we have before us. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Troy Jensen of Piper.

So first one for David. David, how do you distinguish between sales synergies from the merger versus just an inflecting market kind of growing at this rate?

It's not easy to distinguish, but what we see very clearly and as a result of the merger of Stratasys-Objet, we do see increase across all our -- across product lines and channels around the world, increasing cross-selling. So I believe it's a good indication to improve synergies of the transaction.

Okay. How about debt, and a follow-up here for Shane. So 2 parts here. So revenue guidance is up but EPS was unchanged. So if we can touch on that. But on a full year EPS guidance versus the sum of the quarterly EPS numbers, are the shares from secondary and MakerBot skewing the earnings here a little bit?

Troy, yes, regarding the adjustment in revenue and no adjustment in the non-GAAP release, it appears there's no adjustment in the non-GAAP EPS. Keep in mind that we have not adjusted for the secondary yet as it relates to the diluted impact of those shares. So while that certainly is going to be diluted for the remainder of the year, we do not -- we did not adjust for that dilution given that the fact that we saw a favorable outlook and we're pleased with our performance, so we really didn't -- we didn't adjust. So it was really an effective raise in the non-GAAP EPS when you think about it. It offsets some of the dilution in the offering. Now, the guidance we're giving is an annual calculation. It's not the summation of our quarterly reported earnings per share. So the recent increase in our share count in the MakerBot acquisition and the equity offering in September will contribute a significant increase in the weighted average share count for the fourth quarter. Consequently, there's a significant disconnect between the summation of the quarterly reported EPS numbers in 2013 and then the annual reported EPS number for the same year. This doesn't impact our net income projections, which are -- which you can see and we provided in the press release in the table. But you can see that those levels were actually increased from the levels we've reported in the prior quarter. So when working on -- if you're going to work toward a strictly Q4 EPS calculation, what I would suggest is you take that -- those non-GAAP net profit projections that we provide in the press release, subtract out our year-to-date numbers, and then come up with what you want to use for the share count. The share count adjustment be -- the share count, which we take into consideration is a full quarter of the MakerBot impact and a full quarter of the equity offering and then any additional incremental for the dilution.

Can you give us a share count that we should model for Q4, so we know we're right.

Troy, it's Erez. I think that all the information is within the 6-K. You can find all the information there.

Your next question comes from the line of John Baliotti of Janney Capital Markets.

David, I was wondering, you mentioned the acceleration on new products in the next couple of months. And I was just curious, I know it's still early in terms of the integration of the acquisition of MakerBot, but should we think about some synergies and some input from that side in terms of some of the products that we should be looking for going forward?

As you know, I cannot disclose this kind of information. We said immediately after the merger with MakerBot that over time, we are going to contribute to MakerBot technology offering. At this point in time, MakerBot is executing their original plan and we're going to see synergies coming a little bit later in the future.

How about -- you launched a number of new products and new -- I mean, new materials, should -- do you think that will be a balance as well, I mean, without getting too specific about which systems we're talking about, but a complement of product and material as we go forward?

The material we talked about in June in the quarter are materials that were added to the MakerBot offering. Both the dissolvable support material and the new colors and the flexible material. It's related all to the MakerBot side.

Right. I was just thinking about just in general going forward, that we should expect more materials as well as part of the acceleration of new products?

Sure, sure. Again, I can only disclose a percentage but a nice percentage of the combined company R&D is devoted to materials development and it's a key, I think, success factor in our future growth plans. And therefore, you are going to see new materials come into the future. Sure.

Just quickly on Ingram Micro, is it too early to talk about any of the impact yet of that relationship?

Yes. It's too early. It just took place a few weeks ago.

Your next question comes from the line of Cindy Shaw of DISCERN.

I was hoping you could talk about the competitive landscape, in particular -- the competitive landscape, and in particular, another large 3D printing company said just last week that it's changing very rapidly and it was a cause for them to adjust their guidance in a negative fashion. And they didn't offer any color on what those changes are. So I was hoping I could get your take on what's going on in the competitive landscape?

Maybe I'll talk about Stratasys. I think that first of all, we are very excited about what's happening in the market. We're in a very dynamic market, and what I can see on the positive side, there are lots of positive side, but all the potential growth engines for Stratasys, the desktop part of it, the prototyping and direct manufacturing, the DDM applications, are growing. So all the growth engines out there, this has coped with increased awareness. And then I think Stratasys is very well-positioned within this environment to continue to be the leader.

And you said you're accelerating new products, is that in response to changes in the environment? Or is it basically just seeing opportunities and taking advantage of them with some of the additional capital you've raised?

Our product roadmap is really based on customer and market requirements and it's not something that's being changed overnight because of changes in the market. So it was a solid few years planning for the future before that and we're executing on the plan. And when we talk about products, like I said on the previous question, we're talking about the hardware and in materials, and in our case also, a very large ecosystem.

Okay. And kind of change of direction here, on the units, and I haven't had a chance -- I'm traveling. Haven't had a chance to go through all the details you've released. Are you going to break out the MakerBot units and break out year-over-year growth specifically for MakerBot? Or are we going to continue to get everything in a sort of rolled up fashion?

Cindy, it's Erez. First, I want to say that we are very pleased with the impact of MakerBot in Q3. They are on a very strong growth path. We won't be disclosing the impact beyond the revenue number that we have provided. And I can say that regarding the unit significant growth and the unit volume during the period was driven by MakerBot.

And your next question comes from the line of Jim Ricchiuti of Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: The question relates to MakerBot. Can you talk about perhaps the kind of annual revenue run rate you're at right now? And talk a little bit about the strength you're seeing in MakerBot. Is this particularly U.S.-based right now, or has it spread into some of the other markets?

Jim, it's Erez. Again, as per this question, we wanted to segment -- segmenting revenue from MakerBot as a separate number. And the guidance that we changed now, raised now, is due to the fact that overall, we see a stronger momentum in the market. Q3 was strong and we believe that the guidance that we gave for 2013 now represent, I would say, in more appropriate way, our view on the market. And again, MakerBot is selling in U.S., but not only in U.S. The growth of MakerBot is cross, I would say cross-region, not only in the U.S. But we won't be providing any standalone numbers for MakerBot. James Ricchiuti - Needham & Company, LLC, Research Division: In general, though, the growth you saw in Asia Pacific, is this primarily the synergies from the Objet merger, or just the base business in general? what's -- can you talk a bit about that?

I would say it's a combination of one, we start to see the result of the integration in Pacific and the very high growth rate of the company due to the integration and the product offering, the wider product offering that we have today, the channel expansion that we did very nice, hard work with the channels. And I think that the market itself is growing in the Far East. So it's a combination.

Your next question comes from the line of Wamsi Mohan.

David, excluding MakerBot, at what price points are you seeing the highest level of interest in your portfolio, and where are you seeing the most growth? It looks like Fortus and Connex together grew 27%. Can you share any color between the 2?

Again, I cannot distinguish between the specific lines of product you discussed. But what we're experiencing, this 26% organic growth is driven by all product lines. We see -- we said at the last few calls, we see an increased demand for our production systems, but consider the costs of both, we see growth in both our entry-level prototyping, manufacturing printers. It's not just 1 segment which is pushing it up.

Okay. And can you give us an update on the total MakerBot installed base as of the end of the third quarter?

No. Wamsi, we gave the combined installed base of the combined company for the end of the quarter. It's in the press release.

Okay. And last 1, how many of your customers are using multi-material features? And where are we in the adoption of that across the overall installed base?

The number is -- I don't think we can disclose this number. But in general, I can say that the vast majority of the people which are buying multi-material in Connex technology are using it for multi-material printing. So people are not buying those machines which are relatively more expensive than their Eden line without using those capabilities. And we are selling [indiscernible], so people are using this technology. It's both providing them the multi-material capabilities, but it also provides, in some cases, better basic materials, which are resulting from our ability to create digital materials.

Your next question comes from the line of Paul Coster of JP Morgan. Paul Coster - JP Morgan Chase & Co, Research Division: The growth rate continues the surprise for the upside. Operating margins, though, have been drifting down relative to my long-term expectations. But it looks like you've drawn a line under it now, above the 20% rate. Can you talk a little bit about the assumptions in that in terms of gross margin outlook and what the drivers are for that? And also, R&D versus SG&A in terms of the relative levels of investment over the next few years?

Yes, I hope that I remember all the parameters in your questions, Paul. I'll start with the gross margin. I think that looking at the next few quarters, you should expect a slightly lower gross margin compared to the gross margin that we used to have for Stratasys as a result of the inclusion of MakerBot now in our business model. MakerBot business model, there is lower gross margin. We are facing an amazing growth in the business. In Q3, it didn't have a significant impact in gross margin. I think that looking forward in the next 3 to 4 quarters, we will say it's a slightly lower gross margin for the combined company. As for the R&D, we would -- as long as we believe in the growth, we will continue to invest. We invest between 9% to 10% of our revenue in R&D, and we continue to do so. And SG&A, I think that the main point here in Q3 for the SG&A is actually Q3 last year. Q3 last year was a quarter that we were all busy in the merger of Stratasys and Objet. And we actually invested less than our planned investment and actual run rate. And then you compare Q3 this year to Q3 last year, you get an exceptional growth, which is a little bit misleading. I think that looking forward, the growth of quarter-over-quarter will be slower or will be lower compared to the numbers that you see today. Paul Coster - JP Morgan Chase & Co, Research Division: Last quarter, you saw this big order for Fortus machines. Have you seen any sort of follow on from that? Is there any way in which that kind of business can be used as a reference in going after new customers, and is it being used in that manner?

I think, Paul -- hi David. We said on the that last call that we should not expect to get this kind of orders every week, or every month or ever quarter. Nevertheless, it was, I think, a very strong indication to the -- 1 of the changes in the market is the fact that large corporation are looking on -- today on the attitude of manufacturing this technology is something more strategic and are able to place such orders for this kind of equipment. I think that this order in this company, which is taking it extremely seriously, will lead the way for other companies to follow. But I really cannot predict or commit on when the next such order will come in. Paul Coster - JP Morgan Chase & Co, Research Division: You can't confirm which industry vertical it was in?

We said last time, we were asked specifically by the customer not to disclose this kind of information.

Your next question also the line of Hendi Susanto of Gabelli & Company. Hendi Susanto - Gabelli & Company, Inc.: My first question is for David. I would like to understand more about building channel partner infrastructure globally. Would you share your view on competition with 3D system as both companies are building channel partners, and as we know, 3D system tends to have exclusive channel partners? Furthermore, how do you structure your relationship with new channel partners?

I prefer to talk about ourselves. We said all the way after the merger between Stratasys and Objet that we are -- both companies had and have very good strong relationship with their channel worldwide. And I think in the last year, we proved that we stick with our partners and we help them to grow their businesses, as a result of it, we are growing our business. The places in which we are expanding channels are places where either we don't have coverage and we need more coverage, or we need some vertical extension. For example, I can give one example, could be a dental industry, which out traditional channel is less capable to expand in to dental. So our channel strategy is looking for places we don't have coverage, and for mainly, for vertical areas that we feel that needs specific channels in order to handle them. For the most part, we believe that the channels that we "inherit" from the Objet-Stratasys merger is strong and has a capability to carry us a few years into the future. Hendi Susanto - Gabelli & Company, Inc.: Okay. And then second question is for Erez. Could you give some insight on performance bonus expense in the third quarter, and whether they are future performance bonus expense that we should anticipate, and how will you structure it?

The performance bonus that you see this quarter is part of the agreement between Stratasys and MakerBot. MakerBot executives are part of a performance bonus, this is tied to a very aggressive business performance in 2013 and 2014. This is part of the GAAP reserve it is excluded from the GAAP result. It's not in the non-GAAP result. And as you see to date, it's only for 2013 and '14. And it's measured throughout the period over the next 5 quarters until the end of 2014. Hendi Susanto - Gabelli & Company, Inc.: And then could you share how you structure it? Is it based on dollars of revenue?

It has 2 parameters. We didn't disclose the parameter. I would say that the targets and the business targets are very, very aggressive. And I can -- I will also say that I would be very, very happy to pay.

The next question comes from the line of Ananda Baruah of Brean Capital.

Two if I could. The first is, with regards to Objet, that means very reasonably, you're focused on building revenue synergies. Currently, looks like it's going well. My question is, at what point do you expect to begin to realize, I guess, operating leverage from the revenue synergies? Is it in '14, is it in '15, and how do you expect that to occur? And then I have a follow-up.

I think that the current business model and the current result that you see are in line with our long-term model. We are, I think, in the low part of the range that we provided regarding our long-term model, both on net profitability and operating margin. And once we discuss 2014, I guess, at the end of this year or beginning of next year, we will give more color on operating leverage and operating margin that we expect in 2014.

Okay, got it. But it's reasonable to expect that there would be operating leverage in the future?

Yes.

And then my follow-up is just with regard to the acquisition strategy, now that you've completed the secondary, and now that you've expanded your M&A team internally. What is the acquisition strategy and how should we think about how you guys are approaching M&A?

First of all, I will make a statement before I get to your specific question. First of all, we are treating it in a very professional way, okay. We have a team which is dealing with M&A and strategic planning. And they are scouting for opportunities and doing it extremely professionally, That's number one. Number two, we're looking for opportunities, basically in 3 main areas. One is complementary technologies to support our long-term strategy, complementary product. And the third element are areas of acquisition which will enhance our channel in the go-to-market. So we are looking on all 3 directions. And as I said, doing it professionally and then we'll find candidates and then we'll be -- if either of those opportunities will materialize, obviously, we will report on them then.

Your next question comes from the line of Ken Wong of Citigroup.

Just kind of touching on the units question again. I mean, you guys have 64 -- roughly 65,000 systems sold this year, including MakerBot. Can you give us a sense of what that was last year at this time? And perhaps last quarter? Or if not, at the very least, could we maybe get some growth rates there?

It's not unit that was sold this year. This is accumulated number that was sold throughout the years in combination of MakerBot and Stratasys. And this is actually the current installed base that we have in place for the combined company...

Yes, yes. I'm sorry. I meant, yes, the installed base. And then would you guys give us a sense of that was last and last quarter, perhaps?

I think that if you go to the 6-K and F-3, you will find the numbers of MakerBot that was sold until end of Q1. You will find also the number for Stratasys. I don't remember by heart, the number. The numbers are there.

Okay, okay, perfect. And then you guys have consistently positioned MakerBot as sort of a lower-priced professional device. In terms of how you guys plan to position it to the consumer, I mean, should we expect really aggressive marketing for ahead of the holidays? Or this deal going to be more of a kind of a low-end professional device?

We think we have very aggressive marketing regardless of the time of the year. But again, I think that MakerBot today is targeting, like you said, I think correctly, low-end professional markets and multiple consumers which are individuals that have some technical capabilities are obvious, and we're having to market to them aggressively within the whole year and especially during the holidays.

Got it. And then my last question, you talked about gross margins likely trending down for the next few quarters. Should we expect that the trajectory to start inching back up after a few quarters? Or is that still going to just kind of stay flattish?

It's really too early to say. And I think that we will discuss it once we discuss 2014 in general. Our plan is once we have MakerBot on the Stratasys group, to try and leverage the infrastructure and the scale of Stratasys, and to drive the margins up for MakerBot. They face a tremendous growth now in the business. They enjoy a very nice operating leverage. But I think it's early to quantify the numbers or the trend for 2015.

Your next question comes of the line of Brian Drab of William Blair. Brian Drab - William Blair & Company L.L.C., Research Division: First question just on the Aurora Group. I'm not familiar with them outside of your press release. Could you give us a better sense for how many stores or outlets they have in China? And how does your presence in China look after this combination relative to what it looked like before? Because I know Objet had a reasonably strong presence in Asia.

I will start with the second part of your question. We are local in China. We have our corporate offices based in Shanghai. There's quite a lot of employees which are managed from our corporate Asia-Pacific headquarters in Hong Kong. We're investing a lot of infrastructure in Asia in general, in China, specifically. And I think the deal -- Aurora is a major group. I don't remember the exact statistics regarding Aurora. I can maybe mail it to you later. But it is a major company with -- if I go [indiscernible] a few -- many thousand employees and many, many hundreds of locations, the distribution within China. But again, I don't recall the exact numbers. At this point of time, the Aurora Group is responsible to distribute our Idea Series, because Idea Series, we described it as kind of the high-end of the low-end professional market, which we require a more kind of complex sales and we need this local presence. So I can only provide you later the statistics about Aurora, but it's major, major distributor within the Chinese market. Brian Drab - William Blair & Company L.L.C., Research Division: Okay. Then 1 more question. In the last conference call, second quarter, you showed a slide with a number of opportunities registered in your Salesforce.com system. Is there any update to that? It look like the momentum was 24% growth in April, 18% sequentially, then 12% in June. How did that look in July, August, September?

We continue to see, I think, the same trends, strong growth also in July, August September. And you can see the results for our Q3. Brian Drab - William Blair & Company L.L.C., Research Division: I'm sorry, you can see the results where?

You can see the result in the result of Q3. Brian Drab - William Blair & Company L.L.C., Research Division: In your overall consolidated results. Yes, sure.

Your next question comes from the line of Andrea James of Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: Just real quick. It looks like you sold a combined number of 5,925 units in the quarter. Can you give us a sense of how much that is sell-in and how much is sell-through?

I don't have the number in front of me, but I can mail it later on to you. I don't have it in front of me. Andrea James - Dougherty & Company LLC, Research Division: But is it generally -- we can accept that the MakerBot is more of a direct sale to the consumer, and the legacy business is more through distributors or are you selling more direct?

It's a mix. And if I want to understand, again, your question, are you asking the level -- exactly for the level inventory at the channels at the end of the quarter?

No. Direct and indirect.

Or the breakdown between direct and indirect? Andrea James - Dougherty & Company LLC, Research Division: Yes.

Direct and indirect. So MakerBot is selling both direct and indirect and mix of online sales and sell-through. And we still -- we do the same depending on the geography and the business model. But I don't have the numbers in front of me. Andrea James - Dougherty & Company LLC, Research Division: Okay. And then will we see any channel fill effect in Q4 because of the new distribution agreement with Ingram Micro, and also some of the expanded distribution in Asia?

It's really early to say. Ingram was signed like a few weeks ago. The same was for Aurora. It's longer -- it's more on the long-term relationship and the business generation rather than next quarter. We do hope that it would have impact, but it's really too early to say. Andrea James - Dougherty & Company LLC, Research Division: Do they just take an initial big order and then they sell them, or will it be more of a steady flow-through on them? Just making sure on how to model it.

They are different. I would say that Ingram is buying first large quantity and then selling it. And Aurora, no.

Your next question comes of the line of Holden Lewis of BB&T. Holden Lewis - BB&T Capital Markets, Research Division: Trying to think about sort of the R&D, as a percentage of sales, you've obviously continued to ramp that up, which is impressive when you consider how strong your sales have been. In terms of making sure that you continue to get a good return on this, how we thought about sort of where we begin to leverage the R&D, where perhaps you get diminishing returns such that you want to leverage the R&D? I just don't know if you measure this in terms of number of products sold, what percentage of products sold, or new products over the last 3 years, or something like that to tell us when, maybe, we're getting to the point where the accelerating R&D and accelerating product is going to begin to level off?

It's David. I think we are truly lucky that much of this industry is good for 25 years. If we look on the future, is great and with tons of opportunities. If we want to capitalize on what we see on the table, what's expected in the coming few years, we'll need to continue investing maximally in R&D like we are doing. And therefore, we are not going to, even in this point in time, that we need to do, I think, those kind of analyses. There's so many opportunities that we wish we could spend more in R&D, okay. It's -- we are really not there. Holden Lewis - BB&T Capital Markets, Research Division: Okay, great. So we can expect to see sort of the percentages at least to stay elevated and that sort of thing.

Yes.

Yes. Holden Lewis - BB&T Capital Markets, Research Division: Okay. And then just sort of the second question. Again, with regards with Ingram Micro, obviously, you guys went down a path using somebody that sells related type products with Hewlett-Packard a while back. They had a difficulty making that specialized sale. Why are we confident that Ingram Micro will be a better partner and more capable of making a pretty specialized sale with regards to these printers?

There's a basic fundamental difference, and it has to do with the product that we are selling, okay? When Stratasys signed the agreement with HP, which I think was probably 4, 5 years ago, we were trying to sell different products in different price points to different audience. And today, MakerBot, again, is targeting different audience. It's a different sales model. It's much more pulls and push compared with what we tried to do with HP. And therefore, I don't think we shouldn't try to compare with those 2 agreements.

The next question comes of the line of Patrick Wu of Battle Road Research.

Just wanted to piggyback on a question earlier regarding acquisitions and strategy. Is metal printing something that you guys are looking at to bring into your portfolio anytime soon? And do you guys have maybe a timeline for when that might happen?

Obviously, it's very difficult to comment on timeline. We were looking -- like I said earlier, we are seriously working on different technologies which we think are complementary to our long-term strategy. We're obviously looking into metal in a very serious way. Do not take any decision whether to go into it or not go into it. And it's something that when it's going to be relevant, we will announce. But definitely, we will not make any decision now. We're in the process of learning this area of the market.

Okay, great. And I just want to touch up on Europe a little bit. I want to see your take on the region for the quarter and sort of how did the growth -- how was the growth compared to the other regions and seeing a trend there?

I think that first of all, we saw a nice, a very nice and aggressive growth in Pacific. We saw a growth in North America. Europe is lagging behind, mainly because of the market economic deviation that we are all aware of. Europe is in line with our plan in the beginning, the plan that we put in the beginning of the year. Although it's growing slower -- it is growing in a slower pace than Pacific and North America, but it is growing.

Okay. Very last one. Any comments on what kind of verticals you got some strength in, and how does that compare to previous year?

I think it's -- we're very active in dental, medical space. We are very active in aerospace and automotive with respect to our manufacturing applications. In general, manufacturing is an area of focus for both what we call augmented manufacturing, which is the ability to provide tool to the manufacturing floor, and for alternative manufacturing, which is replacing traditional manufacturing processes. So you have a few verticals in which we are focused, and we might add some in the future as well.

I would now like to turn the call over to David Reis for closing remarks.

[indiscernible] Thank you, everybody, for joining us. And we will meet again on November for Q4. Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.