Stratasys Ltd. (SSYS) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q4 2014 Stratasys Earnings Conference Call. My name is Halley, and I'm your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] I would like to turn the call over to Mr. Shane Glenn, Vice President of Investor Relations. Please proceed, sir.

Thanks, Halley. Good morning, everyone. Thank you for joining us to discuss our fourth quarter and year end financial results. On the call with us today are David Reis, CEO; and Erez Simha, CFO and COO of Stratasys. I’ll remind you that access to today's call, including the prepared slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available, and can be accessed through the Investor section of our website later today. We’ll begin by reminding everyone 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 and Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminologies 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 related to the company's objectives, plans, strategies, statements that contain projections of results of operations or financial conditions, including, with respect to the MakerBot, Solid Concepts, Harvest Technologies and GrabCAD acquisitions, 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 extend of our success of introducing new or improved products and solutions to gain market share, the extend of our success that officially and successfully integrating the operations of various companies that we have acquired or may acquire, the impact of competition and new technologies; general market, political and economic conditions in the countries in which we operate; projected capital expenditures and liquidity; changes in our strategy; government regulations and approvals; changes in customers' budgeting priorities; the overall global economic environment, litigation and regulatory proceedings; and those factors referred to under Risk Factors, Information on the Company, Operating and Financial Review and Prospects, and generally the company's annual report for 2014 to be filed on Form 20-F on March 3, 2015, and other reports that the company files with the SEC. 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, results 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. As in previous quarters, our focus on today's call will be on non-GAAP financial results. These non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. We also note that we are not providing any pro forma financial results for acquisitions. Certain non-GAAP to GAAP reconciliations are provided in a table contained in our slide presentation and press release. Now I would like to turn the call -- turn over the call to our CEO, David Reis. David?

Thank you, Shane, and good morning, everyone. On our February 3rd conference call, we discussed our preliminary fiscal 2014 financial results, discussed the key drivers behind our fourth quarter performance, provided our fiscal 2015 financial guidance and unveil the new strategic investment plan design to support the future growth of our business. Today, we will review our 2014 fourth quarter and year end results as a strategic investment plan in more detail. Our businesses, excluding MakerBot and our newly acquired service bureaus performed impressively in the fourth quarter. However, our fourth quarter results were impacted by slower growth of MakerBot revenue during the period, driven by challenges associated with introduction and scaling of its new product platform and its evolving distribution model. Nevertheless, we are excited about our opportunity to build the MakerBot leading position in the new product category of desktop 3d printing and we continue to invest to provide MakerBot with the ability to further scale and build superior product platform position for long-term growth, and adoption of 3D printing expense. As we look back in 2014, we are pleased with our [technical difficulty]. We launched over 25 major new 3D printing systems and materials throughout the year, including 11 new systems and materials in the fourth quarter alone. We completed the alignment of company R&A and global operation, which resulted from the Stratasys Objet merger. We made significant investment in infrastructure, including the completion of our new PolyJet manufacturing facility in Kiryat Gat in Israel. We greatly expanded our go-to-market capabilities through strategic investment in our channel, development of our vertical business unit and strategic account management initiative and through major distribution partnership. We completed our six strategic acquisitions, including Solid Concepts, Harvest Technologies, two leading part manufacturing services and GrabCAD, a leading cloud-based software collaboration platform. We are also reached a significant milestone in 2014 with over 100,000 cumulative systems shipped on a pro forma combined company basis. We believe that Stratasys is the only 3D printing company to have achieved this level of scale. 2014 was a year of significant growth and investment, and I would return later in the call to provide you more detail on this development and our strategy. But first, I would like to turn the call over to our COO and CFO, Erez Simha, who will provide you detail on our financial results. Erez?

Thank you, David, and good morning, everyone. Our revenue for the fourth quarter increased by 40% over the last year to $270 million, this included organic revenue growth of 26% over the fourth quarter of last year. Our organic revenue excluding MakerBot grew by 29% over the last year. Our non-GAAP gross margin came in at 56% over the quarter. Non-GAAP net income declined by 3% over the last year to $24.9 million or $0.48 per diluted share, compared to non-GAAP net income of $25.8 million or $0.50 per diluted share for the same period last year. Product revenue in the fourth quarter increased by 24% to $168.6 million as compared to the same period last year. Within product revenue, system revenue increased by 28% over the same period last year. As discussed on our February sales call, our results were impacted by slower growth of MakerBot revenue during the period, which grew by 7% in the fourth quarter over the period contributing $26.6 million in revenue. The two key challenges affecting MakerBot’s performance in the quarter as discussed on our February sales call were related to the introduction and scaling of its new product platform and MakerBot’s evolving distribution model. During 2014 and specifically in the fourth quarter, MakerBot made significant hardware and software to its product line and is adjusting to its new distribution model. For 2014, MakerBot invested in development of multiyear distribution strategy, enabling broader distribution. However, given the nature and scope of the new partnership that this strategy impairs in comparison with MakerBot’s additional distribution model, predictable sales patterns and reorder rates have yet to be established. It’s important to remember that we are innovating the industry and creating a new market within the desktop category. And we expect some volatility as we build out the necessary infrastructure to continue our growth plans. Within product revenue, consumable revenue increased by 27% in the fourth quarter compared to the same period last year, driven primarily by our growing installed base of 3D Printer and relatively high usage plan of our high-end production system. Service revenue in the fourth quarter increased by 141% to $48.5 million as compared to the same period last year. Excluding the recent acquisition of Solid Concepts and Harvest Technologies, service revenue grew by 40%. Within service revenue, customer support revenue increased by an impressive 46% as compared to the same period last year, driven primarily by our growing installed base of systems. The company installed 11,214 3D printing and additive manufacturing systems during the fourth quarter and on a combined performer basis, has installed 121,661 system worldwide as of December 31, 2014. We observed strong unit sales growth during the fourth quarter specifically for design and manufacturing solutions that target enterprise level prototyping to DDM Application. The new product introductions we made at Euromold have been met with strong demand particularly the higher end photos and PolyJet systems. Gross margin was 56% for the fourth quarter compared to 60.2% for the same period last year. Gross margin relatively to last year was mainly impacted by the charges in reserve relating to the introduction and scaling of new MakerBot product platform which we discussed on our February sales call as well as by lower gross margin generated by the incremental revenue recognized from the acquisition of Solid Concept and Harvest Technologies. Excluding the impact of acquisitions and this increment on charges, fourth quarter gross margin would have been relatively flat year-over-year compared to the third quarter of 2014, the decline in gross margin was driven by the makeable charges and reserve as well as the shift in product mix. Specifically the third quarter of 2014 experienced relatively stronger sales of Objet1000 following the product’s initial launch during this period. Operating expenses increased 55% in the fourth quarter compared to last year driven primarily by the inclusion of Solid Concept and Harvest Technologies operating expenses as well as by increased sales, marketing and R&D investment to support our growth expectation and fund new product introductions. Net R&D expenses increased by 38% to $21.4 million in the fourth quarter as compared to the same period last year. R&D as percentage of mixed sales -- of net sales was 9.8% compared to 9.9% for the same period last year. The increase in R&D expenses was driven primarily by increase in headcount in all over systems and material project acceleration. SG&A expenses increased by 61% to $75.3 million for the fourth quarter as compared to $46.8 million for the same period last year primarily driven by the inclusion of Solid Concepts and Harvest Technologies expenses, headcount additions, increased product and higher sales and marketing expense. We received a tax benefit of 19.8% compared with effective tax rate of 16.2% for the same period last year. Our tax expenses were impacted by one-time benefit of R&D credit in the U.S. and tax settlement from previous years. As we discussed in our conference call on February 3rd, Stratasys updated the goodwill impairment of our MakerBot reporting unit in December 2014. As a result, we incurred one-time non-cash non-tax deductible goodwill impairment charge of $102 million in the fourth quarter. We maintained approximately $443 million in cash and cash and short-term bank deposits. The cash balance includes $50 million drawdown on the company's revolving credit facility. EBITDA for the fourth quarter amounted to $29.6 million. Backlog at the end of 2014 amounted to $14.3 million versus $28.5 million at the end of 2013. Cash flow generated by operations was $14.9 million. Capital expenditures amounted to approximately $16.7 million in facility and equipment investment. Inventory increased $123.4 million in the fourth quarter compared to $119.3 million at the end of third quarter. Account receivable increased to $150.8 million in the fourth quarter compared to $140.7 million at the end of the third quarter while DSO on 12-month trailing revenue was 73 compared to 74 in the third quarter and the fourth quarter of last year. In summary, we are continuing to observe increased demand for our design and manufacturing enterprise solutions and expect growth in 2015 at the rate of more than 25% for this higher-end solution. Nevertheless, we believe growth will be stronger in the second half and weaker in the first. We are seeing growth in our consumable business which is reflection of our growing install based in efforts to educate the market around our advanced materials. We believe that we are making the appropriate investments in strategic initiative and infrastructure to help accelerate our growth moving forward by increasing headcount and driving new product initiative in sales and marketing. We have a strong balance sheet and we continue to position the company for future growth for strategic investment as well as for additional acquisition. I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will provide you greater details on our 2015 financial guidance. Shane?

Thank you Erez. As we announced on February 3, 2015, we estimate total revenue in the range of $940 million to $960 million representing growth to 25% to 28% compared to fiscal 2014 with non-GAAP net income in the range of $109 million to $118 million or $2.07 to $2.24 per diluted share. We projected GAAP net loss for fiscal 2015 in the range of $23 million to $10 million or $0.45 to $0.20 per share. Projected non-GAAP revenue and net income is expected to be derived disproportionately from the second half of fiscal 2015 driven by the projected timing of revenue and operating expenses. We expect the year to start slower and estimate that MakerBot performance will continue to negatively impact company results in the first half of 2015. We expect total operating expenditures to be in the range of 46% to 47% of anticipated revenues on an annual basis. We also expect to incur capital expenditures in the range of $160 million to $200 million in 20158 and expect an effective tax rate of 5% to 10%. Finally, I want to reiterate the following goals for the company’s long-term operating model. We aim to achieve annual organic revenue growth of at least 25%, non-GAAP operating income as a percentage of sales of 18% to 23%, non-GAAP effective tax rate of 10% to 15%, non-GAAP net income as a percentage of sales of 16% to 21%. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in table at the end of this press release and the table provides itemized details of the non-GAAP financial measures. Now, I’d like to turn the call back over to David Reis. David?

Thank you, Shane. Taking a step back to look at the big picture, 2014 was a year of significant progress for Stratasys. Our core business is growing, reflecting increased demand for additive manufacturing applications worldwide. We continue to position the company to succeed over the long-term by making strategic investments in our business that will help expand our global reach, further develop our product and services with specific industries and applications and strengthen our relationship with our customers. I want to highlight some of MakerBot’s achievement over the past two years. MakerBot has experienced rapid growth since inception, with sales expanding by over 600% from 2012 to 2014. And to date has sold approximately 80,000 units, by far the largest number of desktop 3D printers in the industry. MakerBot maintained significant brand leadership and has developed an extensive 3D printing ecosystem through software, mobile application user community content and strategic partnerships. During the fourth quarter of 2014, our results were impacted by a slow growth of MakerBot revenue, the result of these issues we have previously outlined. As MakerBot continued to scale, we expect to see continued evolution of an investment in its business, including its product development, sales and marketing and organization structure. As we develop the business, we expect MakerBot growth path will experience some inconsistencies and expect the first half of 2015 would be challenging. However, as we address these issues, we expect MakerBot growth rate to ramp up or in excess of overall company average by 2016. Looking ahead, we believe that additive manufacturing is poised to enter a new phase through increased adoption. Following extensive review of our reporting industry and growth opportunities, the management and the Board of the company has decided to implement an aggressive plan that we believe will position the Stratasys to support annual revenue of $3 billion in 2020. The plan is intended to allow Stratasys to capitalize on the trends we are seeing in marketplace by improving our industry focus, expanding our Stratasys direct manufacturing services, driving product innovation and building the necessary infrastructure for future growth. One area of investment is targeted is accelerating effort to run our vertical business unit or the VBU initiative. The goal of the VBU initiative is to drive adoption for vertical application and solution within areas we have identified is having a high potential for additive manufacturing. These include verticals such as aerospace, automotive, healthcare and education. In 2014, the VBU completed the initial phase of three year plan and launched a defined strategy in KPI across key verticals. We have already observed results in key verticals with over 50 deals for manufacturing application have been closed with the VBU support in 2014. In addition, industry specific material certification processes with key partners have been developed and Stratasys Education Curriculum program was launched in the fourth quarter. To enhance our solution around services, our investment plan focused on expansion of our newly branded Stratasys direct manufacturing part service or SDM. Stratasys direct manufacturing is supported by our recent acquisition of Solid Concepts and Harvest Technologies, and we are happy to report progress in combining these two leading services providers with our previously existing RedEye paid part service. These includes the fully integrated sales team and deployment of our CRM, significant progress in rolling out single quoting engine for combined service offering and the plan for perceiving with the full IT integration later this year that will support these services. Looking beyond this accomplishment, the next step in integration process are to develop go-to market strategies that create cross-selling opportunities between SDM and our traditional printing solutions. Additionally, we believe there is a way in which we can leverage our vertical business unit team to accelerate SDM sales into manufacturing verticals. We expect to enter into second half of 2015, with a clear go-to market plan for creating these revenue synergies, which we expect to produce tangible results in 2016. As additive manufacturing enters a new phase of increased adoption and growth, we believe expanding our professional services capabilities would be critical. The Stratasys Service Group will provide customers with expert consulting around additive manufacturing strategy across technologies and solutions. We are pleased to announce that the team of Econolyst, a U.K. based additive manufacturing and 3D printing consultancy and research firm, will join Stratasys to support these efforts. The team led by 20-year industry veteran Doctor, Phil Reeves will form the foundation for the new strategic consulting division, a part of Stratasys Service Group. Another area of focus is product development. This include new product based on existing technologies, new platform based on long-term innovation and development project, software platform development, as well as the creation of the leading 3D printing ecosystem. We are already benefiting from our investment to accelerate new products to market as seen in our 11 new 3D printing systems and materials launched at Euromold in November last year. We drove hard to get these products to market, given our anticipation of strong demand which we have observed. In fact in recent years, our additional investments in new product development have generally showed a return in once to two years timeframe and we are optimistic that our investment plan will enable us to continue that trend. Looking longer-term, we have multiple innovation products that has the potential to produce new platforms that could greatly expand the adoption of existing application as well as open up new markets. These additional investments are by definition long-term investments, with the three, two to four year time horizon expected for product launch. Ultimately, we believe that the robust software ecosystems that can improve 3D printing accessibility is critical to drive adoption of our products and services. Our recent acquisition of GrabCAD, give us the opportunity to provide common core platform and user experience for our 3D printing systems and part service offering. The GrabCAD acquisition has bought us group of talented software professional with deep understanding of the needs of the design using engineers, which allows Stratasys to deliver enhanced collaboration tools and improve accessibility related to 3D CAD content to our customers. Another area of investment is our sales and marketing infrastructure. We want to develop enhanced channel program designed to increase capacity, productivity and coverage, while expanding our account management effort to further serve our customers. We are encouraged by significant growth we observed in 2014, with our strategic account management initiative, which identified leading global accounts and implement the single account management plan to drive sales and coordinate fulfillment in partnership with our global reseller network. Our top 10 strategic accounts, all large multi-nationals reported total revenue growth in 2014 of 158% compared to 2013, an impressive achievement. Our continued investment in the channel is necessary part of our growth. Our investments take many forms, ranging from sponsored training events for channel partners to acquisition of key assets within the channel. For example, we recently acquired certain assets of our Hong Kong based reseller Intelligent CAD/CAM Technology Ltd., which strengthened our local presence and improved our direct access to customers in the Asia Pacific region. We believe this acquisition will help support the growth we continue to observe in APAC region. Within MakerBot, we have also expanded MakerBot U.S. distribution channel and recently announced an agreement with European distributor Datech, a specialty division of Tech Data Europe. In summary, our core business is growing and we are confident in our ability to continue to lead additive manufacturing market. Our investments in our vertical business units and strategic account management initiatives are showing positive results, as we strengthen our industry focus and expand our go-to market strategy. We announced Stratasys Direct Manufacturing, the combination of Solid Concepts, Harvest Technologies and RedEye, and our PMI within part service is proceeding on schedule. Our recent new product introductions have been received positively by the market and we look forward to an accelerated pace of product development moving forward. Finally, we are confident that our investment plan and growth strategy will enable us to put great focus on long-term manufacturing related opportunities, position the company to capitalize on future growth opportunities, and help solidify our leading position in additive manufacturing and 3D printing. Operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Wamsi Mohan, Bank of America Merrill Lynch. Please proceed.

Yes. Thank you. Good morning. I was wondering if you can quantify how much currency negatively impacted the fourth quarter. And given the most, can you give us your latest thought on the impact on fiscal '15 guidance for revenues as well? And I have a follow-up.

Hey, Wamsi. Good morning. Q4 euro dollar exchange rate had impact of around $3 million on topline. Negative impact of around $3 million on topline is a little bit more. And as of 2015, the reduced exchange rate is already incorporated into our guidance. But if you assume same average exchange rate in 2015 and 2014, it has an impact of lower organic growth that we introduced by 2%. I mean, the reduction in European exchange versus the dollar in 2015 decreased our organic growth by 2% in 2015.

Okay. Thanks, Erez. And then, can you have bridge the quarter-on-quarter decline in product gross margin? How much of that do you expect as one-time related to some of the MakerBot issues and do you expect that to bounce back here in the first quarter? And any clarity or granularity that you can share on CapEx, maybe quantifying some of the large elements and that will be helpful? Thank you.

Wamsi, this is four questions and one follow-on. I Hope I will answer everything. But gross margin, three components into gross margin. The first one is lower revenue of MakerBot that has impact on the production utilization that pushed gross margin down. The second one is additional charges of reserve that we had to take to carry out the product reliability issues that we faced in Q4. Those are the main issues around gross margin that you’ve seen in Q4. There was one more item, which was a product mix and we discussed it in the script, mainly around a Q3 Objet1000 that we introduced to the market. Again, I think that gross margin of MakerBot will not be higher or significantly higher in H1. It will probably come to close to normal level in H2 and will impact gross margin in H1, not as significant as you saw the impact in Q4 because I believe that the entire exposure was for additional reserve was counted already in Q4 numbers. And as for CapEx, again we introduced the CapEx plan that we plan to do in 2015 and partially in 2015. It’s around manufacturing capacity and facility in IT infrastructure and other infrastructures globally to allow the company to continuing grow and again those investments are done ahead of time to allow the company to have a sustainable growth in 2016 and '17.

Thanks, Erez.

Thanks.

Your next question comes from the line of Mr. Brian Drab of William Blair. Please proceed.

Hi, thanks for taking my question. I just was trying to better understand what exactly happened with MakerBot in the fourth quarter and which have the bigger impact on MakerBot revenue in the quarter, was it the quality issues or distribution issues? And could you help explain why engaging Staples, Home Depot, Sam's Club, Dell, some of these great partners would negatively impact revenue? I understand your same sales to these customers would not be as predictable, but it seems that any sales to these customers would only have added to year-over-year sales growth in the fourth quarter.

May I will -- hi, good morning. The decline in the rate of growth we saw in Q4 was mainly because of quality issues, according to issues that we face. This is a vast majority of the impact. The issue of the shipments of distribution, some of the distribution poses impact mainly as reorder points. And I gave examples last time on the call, for example in Europe we shift from direct shipping from a MakerBot U.S. to channel in Europe and during the end of Q4, during Q4 we shift to a distribution from our own company in Europe. So basically reorder was shift, was delayed. But as I said earlier, it was a significantly less meaningful than the quality, warranty issues that we face.

Okay. Thanks. And would you expect Maker to be up sequentially, so up in the first quarter compared with the fourth quarter in terms of revenue?

No, I think that the issues we face in MakerBot in Q4 will take us time to solve and the impact of revenue -- we will see impact of revenue in Q1 for sure. And it’s too early to say the impact in Q2, but for sure in Q1, we will see impact -- negative impact of MakerBot revenue -- on the company revenue.

Thanks, Brian.

Okay. Thanks for taking my questions. Thanks.

Your next question comes from the line of Ben Hearnsberger, Stephens Inc. Please proceed.

Hi, thanks for taking my question. Sorry if I missed it, but can you give us the organic growth guidance embedded in your fiscal year '15 guide and then the gross margin guidance as well?

Yes. So we said that the gross margin will be similar to 2014 gross margin. We didn’t provide numbers and range, and we did provide the growth rate of the core business that we think will be more than 25%.

Okay. Thanks. And then with the recent change in leadership at MakerBot, can you maybe expand on the differences in strategy that we can expect from the new leadership there?

Again, I don’t see shift in strategy. I think it was a natural kind of a shift. What we expect in the coming years, not only this year is to move MakerBot from extremely rapid fast growing startup company to a more mature fast growing company. And this leadership change is supporting it.

Okay. Thank you.

Thanks, Ben.

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

Hi, guys. You guys mentioned that a disproportionate percentage of the results will come in the second half. Are you able to help us quantify kind of what the seasonality might look like in the second half? I mean, you guys had historically done more than 55% of your business in the second half. So just want to get a sense for how much kind of more that might be since you called it out in the press release?

Good morning. We think that revenue-wise, it’s going to be around 45, 55 between the two quarters. However, the operating expenses will be relatively similar between the quarters. Profitability will be lower than 45 in H1 and higher than 55 in H2.

Okay. Got you. And then on the vertical business unit, you guys have historically sold into those key verticals. Can you help us understand kind of what are the additional investments that you guys need to make in order to really ramp up the growth of both key verticals?

Sure. As the market evolve and the rates of adoption of the technology is accelerating, we found out that -- I think the industry is finding out that we need to become more specific and less generic in our approach to all the different markets. It starts from very specific sale go-to market to each one of the verticals. And already in the future, it will have also impact on product development and so on. So basically, we are moving slowly, but surely for kind of let’s call a general approach that we had to the market in the past many, many years to a more specific dedicated approach, which requires investment in people, in research and go-to market.

So does that mean we can expect to see systems that are tailored specifically for autos or aerospace or healthcare?

Yes. I think that all the time -- again, it’s not tomorrow morning, but I think that over time as the requirements of those markets are going to crystallize and will become more specific. And I am sure not sure we’re going to see special technology that we’re going to see some adaptation of the current technologies and future technologies, the specific industry needs.

Got you. Perfect. Thanks a lot, guys.

Okay.

Your next question comes from the line of Troy Jensen, Piper Jaffray. Please proceed.

Thanks for taking my question, gentlemen. How about a couple here for David? I’d just be curious to know if the new product introductions you guys had at Euromold. Has that potentially created any pause as end customers are ready to buy a Fortus or high end Connex now waited to see what these new systems are like?

I don’t think so. No, this is not in our impression. No.

And then a follow-up on the top 10 accounts growing a 158% year-over-year, I’d be curious to know what you're doing differently with those accounts from a sales perspective? Or they have just or have they just broadly accepted or adopted more manufacturing application with your systems?

Again, I think, I want to make sure it’s still in a very early stage of developing this strategic account approach. But if you look another companies, as the industry will develop and the level of adoption of this technology in other services will accelerate, the large accounts or the big companies, the multinational companies will prefer to deal with us on a kind of a concentrated way to have more impact on their pricing and for us to be able to offer our total solution. Now we’re doing it while collaborating with the channel and fulfilling globally through the channel. But no doubt, as the industry is developing this kind of more customer account approach, the strategic account approach is much more suitable and you see it in many other large companies.

Okay. Good luck, gentlemen.

Thank you, Troy.

Your next question comes from the line of Patrick Newton, Stifel. Please proceed.

Thanks for taking my questions. This is actually Rob Richardson on for Patrick this morning. Erez, I just had a quick question and a follow-up kind of starting off with revenue results by geography, if you could give some commentary on that? And it seems like this is provided before.

Any specific question or just general comment.

Yeah. I mean, if there are any kind of what geographies can drove results? And then if you’ve got the numbers as far as percentages of revenue biogeography?

Yeah. We are talking about -- and I’m talking about the entire revenues split this quarter was around 55% for North America, 25% for EMEA and 20% for APJ numbers, very similar to previous quarter.

Okay. Great. Thank you for that. And I wonder if I can get your thoughts on share count going forward? I mean, seems like there is through this past year kind of a couple of step ups, I mean, we expect that count should kind of remain similar to this year or I guess, what your thoughts are on that?

I think the number of shares will not change significantly compared to the end of 2014, at least this is our assumptions we have provided in the guidance.

Great. All right. Thank you for that.

Thanks.

Your next question comes from Steve Milunovich, UBS. Please proceed.

Thanks. The backlog was half year-over-year. It’s not a big number to begin with, but can you explain why that is? Is that mostly MakerBot or is that another products too?

It’s a combination, hi, it’s Erez. It’s a combination of MakerBot backlog at the end of 2013 that was reduced dramatically at the end of 2014. And Objet1000 system that we had at the end of 2013, we launched a product at the end of Q3 and those were the two main items for the reduction in backlog that you see there.

And how large do you expect your consulting organization to be over the next 12 months and do you have many engagements already for that group?

Yeah. It’s smaller strategic move than the tactic one. I don’t think that we will have a significant impact on revenue in 2015 and I don’t want to refer to specific contract of customers that we have in hand today. But again, it’s not a significant amount of money compared to 2015 all our business.

Thank you.

Thanks, Steve.

Your next question comes from the line of Samuel Eisner, Goldman Sachs. Please proceed.

Yeah. Good morning, everyone. Just on the waiting of earnings for the year, is there anything embedded in that that is outside of just MakerBot or is that really MakerBot that’s driving all of the kind of issues in the first half of the year?

Hey, Sam. Good morning. It’s mainly MakerBot.

Great. And then, just with the gross margin commentary that you gave before? Can you maybe just give us some indication what’s going on with ASPs, understand issues of MakerBot, but perhaps talking a bit about some of the high performing printers? Thanks.

Yeah. So if I may -- if I exclude MakerBot on the calculation of ASP, we do not see any significant change in ASP, not in Q4 and not in 2014.

Great. Thanks.

Your next question comes from the line of [indiscernible], Longbow Research. Please proceed.

Deeper into the question previously on, what actually drove the slowing in sales at MakerBot, if you could talk to the timing of the extruder issues specifically? From my understanding, the issue was known kind of shortly after the launch, I guess, early summer and the extruder swaps were done shortly thereafter? So really I am struggling to understand what kind of still being impacting the business in the fourth quarter and especially why first quarter sales would still be impacted? Thanks.

It took time to realize the scope of quality issues and I think we explained it in length in the previous call that the nature of distribution during this year specifically was changed to work with the master distributors and resellers. Although, there were maybe some indication of normal warranty issues in the second half, the extent of quality issue with extruder will become -- became evident really at the end of Q4 and the beginning of even Q1 2015. Now we are in the process today of exchanging extruder for customers that has faulty extruders. This process takes time and it’s affecting the overall sales, not just extruder or each specific.

Okay. May be a longer process than we thought.

No, no. Yeah. We said, again, I want to be clear. We said that at least for the I think Q1 for sure, I said in H1, we are going to see still the impact of those issues and we expect that going back to Stratasys growth rate should be by 2016. So it’s not a short recovery process.

That’s helpful. Thanks. A quick follow-up on consumables, sales growth kind of slowed throughout calendar ’14 and into the fourth quarter, actually both at UN and 3D and it had been really the deceleration is compared to a really strong starting point for your consumables growth? But hoping if you can give your thoughts on what’s driving kind of the when your deceleration for the industry and as you look forward what’s a reasonable organic growth expectation for your consumables relative to that 25% organic growth bogey? Thank you.

The consumable business in Stratasys is really a business unit and we drive it and we manage it as a business unit and we do all kind of stuff around training and knowledge and identifying customers, which have lower rate of consumption in order to improve, to enhance, to increase consumption of those customers. It’s also result of both kind of systems that you saw, meaning is it a high-end system, which consumption rate is much higher than lower end system and the mix between them, what kind of vertical is in this, so you talk about general growth rate I have seen it’s really tough, but the thing that it will be fair to say that the place in 2015, we expect the consumables business to grow the same rate of the core business by around 25%.

Thank you.

Your next question comes from the line of Ananda Baruah, Brean Capital. Please proceed.

Hi. Good morning, guys, and thanks for taking the questions. I guess the first one for David of the numerous areas, various areas that you guys are investing in over the next couple of years, are there two or three of them that you guys feel are the most critical than most crucial to drive things forward and to step into the new growth opportunities that you see going forward? And then I have a follow-up. Thanks.

Again, I’ll repeat what we said in the previous call is that there are four areas of investment, maybe the first one is increased focus to long-term innovation and product development, okay. And investments in sales and marketing infrastructure specifically our channel in the strategic account management initiatives. We are talking bout extending FDM both in North America and globally and accelerating the effort around the vertical applications that I mentioned earlier.

Got it. And then I guess inside of those four initiatives are there, are there couple of milestones that you consider to be the most important to be able to achieve?

Again it’s -- I mean each one of them is significant and each one of them has its own plan and usually three years plan. And I can’t indicate something specifically. I mean it’s kind of an ongoing effort in all directions.

That’s very helpful. I appreciate it. Thank you.

Your next question comes from the line of Jason North from Jefferies. Please proceed.

Hi. As a follow-up to an earlier comment you made with the OpEx been relatively flat for the first half versus second half. Can you give us some more clarity there in terms of, is that a rounded number or is that in any kind of linearity between the quarters would be helpful as well? Thank you.

Hi. It’s Erez. It’s more a rounded number and we didn't plan for any seasonality between the quarters in terms of operating expenses.

So you think that Q1, just to clarify, would be relatively similar like throughout the rest of the year or there will be a step-up between Q1 and Q2?

It will not be significantly different than Q2 and Q3. We will ramp up expenses but not in a significant way. And the breakdown will not be as the breakdown of revenue and is a direct result of it also.

Okay. Great. Thank you.

Your next question comes from the line of Sherri Scribner, Deutsche Bank. Please proceed.

Hi. Thanks. I was hoping if you could give a little more on the Service Bureau business now that you have had Solid Concepts and Harvest in the business for a while. Can you give us any sense of how that -- what the growth rate of that business is? And also is that business also expected to grow at the 25% rate? Thanks.

So Sherri, hi, it’s Erez. Good morning. By definition the Service Bureau business is growing slower than 25%, slower than the core business of Stratasys, even much slower than the core business of Stratasys. What we expect to do and I am not sure that it will have a significant impact on 2015 result by leveraging the infrastructure of strategy -- of Stratasys and having some kind of synergies around the combined business to try and accelerate growth of those businesses to a higher level. Still I don’t I think that those businesses will grow as fast as the core business of hardware business is growing today. And it lifts the plan towards the end of 2015 and may be 2016 to generate an accelerated growth rate compared to the Service Bureau industry that you see today in the market.

Can you provide us the growth rate for the Solid Concepts and Harvest business along with your Service Bureau business on a year-over-year basis?

Sherri, we didn’t provide a number so far.

Okay. Thanks.

Your next question comes from the line of Jim Ricchiuti from Needham & Co. Please proceed.

Hi. Thank you. I may have missed it. Did you give a revenue number that Solid Concept and Harvest added in the quarter?

No, we didn't.

Can you say whether it was up from Q3?

Jim, we didn’t. It’s Erez. Good morning. We didn’t break down the Service Bureau revenue, not for Q3, not for Q4. And just as a reminder, Q3 was a partial quarter for Stratasys for its revenue.

Just on a margins on that business. Actually the margins were little better than I was expecting. Was there anything unusual in the service margin, how should we think about that going forward? I mean is the integration going -- you’ve talked about it as being a challenging integration. Is that going a little better than you expected?

Jim, the service business carry very low gross margin than the Stratasys’ core business. And we had both one kind of one-time transaction that I don’t think that will happen again in 2015. Because it is related to the Service Bureau that has the impact on the gross margin and a kind of accounting reclassification of items that also had impact on the gross margin of Service Bureau. In general, I think that the Q4 gross margin for those businesses is low a little bit better than the Q3, not dramatically.

Okay. One final question. Since you’re calling out these vertical business unit areas. Would you be willing to put some revenue percentages associated with aerospace, automotive, healthcare education?

We are not planning at this point of time to break it into separate P&Ls. But as I said earlier, we believe that the various, specific approach will accelerate the adoption in those vertical. But we are not at this point of time breaking out to the separate industries.

Okay. Thank you,

Thank you, Jim.

Your next question comes from the line of Amit Daryanani from RBC Capital Markets. Please proceed.

Thanks a lot. Good morning, guys. Just two questions. One, the new vertical that you guys were talking about before that you guys mentioned, what’s the working of the process to gain more traction? Is it that you need new sales, new marketing, new channel or do you need to develop the new products that cater to these segments? And I just trying to understand where would these investments that you will have go into the sales and marketing or more R&D centric?

They are not new verticals. I mean, we are selling into all of those verticals for many years. What is new is that we are adopting a more specific dedicated approach to each one of them. At this point of time for the most parts, it is more around application development and go-to market. In the future, it will have also a technology and product implications.

Got it. And then just as a follow-up, could you maybe talk about your M&A appetite or desire to do deals in 2015 because historically, you guys have been clearly acquisitive. I’m curious, given where your stock is, is it reasonable to say equity would be the less preferable way to do deals and if that’s the case, what are the other options you may have to do deals in 2015?

Well, Amit, you ask two different questions. About the appetites and the plan to keep on doing the acquisitions, yes, we do have our plans and we do have appetites to do more M&A transactions. Naturally at the stock price today, I think it’s almost not a valid currency for us to using M&A transaction. We have enough cash and the credit facility funds and the company is cash flow positive I think to find a strategic M&A, if you will have on the table. We don’t plan at this stage to raise any kind of equity in order to finance M&A transaction. And there are for sure, other way, if needed to raise funds and in order to fund those transactions if applicable.

Perfect. Thanks a lot for your time, guys.

Thanks, Amit.

Your next question comes from the line of James Medvedeff from Cowen and Co. Please proceed.

Thanks. Good morning and thanks for taking my call. My first question is on the -- you have a $4 million of finance expense this quarter that’s been significantly lower than that recently. I’m just wondering what that includes or why that number is this large and whether, how should we think about that going forward?

Hi, James. Good morning. It is mainly the hedging result of any foreign currency and this is the result of the hedging. What you don’t see is the other part of the extra results which is on the opposite side, which appears in each line of the P&L items. So for example in R&D, we had low payment in euro but the hedging result is in the financial expenses and again, this is a purely hedging transaction result from euro dollar and Japanese yen dollar hedging activity that we do.

Thank you. My follow-up question is a more strategic one. You have the 25% plus growth rate target and 26% or so, that gets you to $3 billion in 2020. You are making a lot of investments to help get you there. How do you view the overall industry growth rate, if presumably your 25% or 26% is higher than the way you perceive the rest of the industry?

Not sure I understand the question. Can you repeat?

Yeah. Sorry. If you are planning to grow 26%, compound annual growth rate for the next two years, how do you feel does that relates, how do you feel the stacks up against the industry at large?

Again, our current estimate is if you look on the different components of the industry between desktop and rapid prototyping and manufacturing in certain verticals, we believe that the average growth over the coming periods is going to be 25%, okay. It might be that some years is going to be slower, some years is going to be stronger like it was in the past. But we believe that there is enough tailwind here to push the industry and those rates. Now, again, I don’t think the expectation that is going to be every year exactly the same. As I said, it might be, years are going to be slower. Years are going to be faster like we saw in the previous 5, 10 years. But this is our current estimate and this estimate also comes from analysts of the industry and people which are doing some research.

And just as a quick follow-up to that. It would appear that the investments you are making in new technology, basically to keep up with the industry growth rate. Other players would have to do the same, sounds like.

Yeah. Probably.

Okay. Thank you.

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

Thank you for joining today’s call. And hope to speak with you soon next quarter. Good bye.