Stratasys Ltd. (SSYS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 Full Year 2018 Stratasys Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Vice President of Investor Relations, Yonah Lloyd. Mr. Lloyd, you may begin.

Thank you. Good morning, everyone. And thank you for joining us to discuss our 2018 fourth quarter and full year financial results. On the call with us today are Elan Jaglom, Interim CEO; David Reis, Vice Chairman and Member of our Board's Oversight Committee, and Lilach Payorski, CFO. I 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 Relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed in Stratasys' Annual Report on Form 20-F for the 2018 year, our report on Form 6-K, along with the related press release concerning our earnings for the fourth quarter of 2018, all which we are filing with or furnishing to the SEC today. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. As in previous quarters, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release. Now, I would like to turn the call over to our Interim CEO, Elan Jaglom. Elan?

Thank you, Yonah. Good morning, everyone and thank you for joining today's call. Our fourth quarter top line results reflect continued positive traction in high-end systems in materials sales for both our PolyJet and FDM technologies, primarily in North America improved growth at Stratasys Direct Manufacturing and steady growth in customer support revenues. Late in the quarter, our revenues were impacted by the government shutdown in the U.S. and some weakness in the automotive sector in Europe, which we believe is temporary and not fundamental. As we remain highly engaged with our OEM partners there, we are pleased to have achieved our profitability expectations both for the fourth quarter and the full year and to have generated a record amount of cash from operations for 2018 demonstrating and continuation of our effort to successfully deliver adding value to our shareholders. Overall, we are pleased with the progress we have made over the last few years to build a strong operational foundation for future growth. We are excited about our recent upcoming new product introductions that expand our addressable markets and believe we have a portfolio [indiscernible] that will result in accelerated growth beginning 2020. I will return later in the call to provide an update on our search for new CEO. And David will provide more details regarding our strategy and growth prospects. But first I will turn the call over to our CFO, Lilach Payorski who will review the details of our financial results. Lilach?

Thank you, El. And good morning, everyone. Total revenue in the fourth quarter was $177.1 million compared to $179.3 million for the same period last year. For the full year 2018, total revenue was $663.2 million compared to $668.4 million for 2017. After adjusting for the sale of our divested entities during 2018 on a like-to-like - on like-for-like basis total revenue was at 0.7% for the fourth quarter and was flat for the full year. Non-GAAP operating income for the four quarter was $12.8 million, compared to operating income of $13.5 million for the same period last year. GAAP net income for the quarter was $6.3 million, or $0.12 per diluted share, compared to a net loss of $10 million or $0.19 per diluted share, for the same period last year. Non-GAAP net income for the quarter was $11.3 million or $0.21 per diluted share, compared to non-GAAP net income of $8.4 million or $0.16 per diluted share, reported for the same period last year. For full year 2018 GAAP net loss was $11 million or $0.22 per diluted share, compared to a loss of $40 million or $0.75 per diluted share, for fiscal 2017. And non-GAAP net income was $27.8 million or $0.52 per diluted share, compared to non-GAAP net income of $24.2 million or $0.45 per diluted share reported for fiscal 2017. Product revenue in the fourth quarter was $124.5 million, a decrease of 4% compared to the same period last year and for the full year 2018 product revenue was $456.5 million, a decrease of 3.7% compared to 2017. Excluding the divested entities, Q4 product revenue decreased 1.6% and 2.6% for the full year 2018. Within product revenue, system revenues for the quarter decreased 6.9% and 4% after adjusting for the divested entities compared to the same period last year. On an annual basis 2018 system revenue decreased 9% and 7.9% after adjusting for the divestment. Consumables revenue for the quarter was flat compared to the same period last year and up 1.3% excluding the divested entities. On an annual basis, 2018 consumables revenue increased 2.2% and 3.2% after adjusting for the divestments. We are observing strong consumable growth in the US, our largest in [indiscernible] geographical market offered by previously mentioned partial impact of automotive in EMEA. Service revenue in the fourth quarter was $52.6 million, an increase of 6.1% compared to the same period last year and for the full year 2018 service revenue was $206.7 million, an increase of 6.5% compared to 2017. Excluding the divested entity, Q4 service revenue increased 6.7% and 6.9% for the full year 2018. Within service revenue, customer support revenue which includes revenue generated mainly by maintenance contract on our systems increased by 6.2% compared to the same period last year. For the full year 2018 customer support revenue increased 7.5% compared to 2017. GAAP gross margin was 49.1% for the quarter, compared to 48.7% for the same period last year. Non-GAAP gross margin was 52.2% for the quarter – for the quarter compared to 52.5% for the same period last year, driven by mix of revenue sources. Non-GAAP product gross margin increased to 58.9% compared to 58.8% for the same period last year driven by product mix. Non-GAAP service gross margin was 36.3% compared to 35.9% for the same period last year, reflecting improvement in strategy divestment [indiscernible] performance. GAAP operating expenses decreased by 2.6% to $98.8 million for the fourth quarter as compared to the same period last year, primarily due to the exclusion of divested entities. Non-GAAP operating expenses increased by 1 – decreased by 1.1% to $79.7 million for the fourth quarter as compared to the same period last year, driven by administrative cost control and the impact of divestitures. The company generated $18.7 million of cash from operations during the fourth quarter, as compared $20.8 million of cash generated in the fourth quarter last year. For 2018 we generated a record $63.7 million of cash from operations. We ended the fourth quarter with $393.2 million in cash and cash equivalents compared to $348.9 million at the end of the third quarter of 2018. Inventory increased to $123.5 million compared to $118.1 million in the third quarter of 2018. Accounts receivable increased to $138.1 million compared to $129.5 million as of the end of the third quarter of 2018, with days sales outstanding or DSO on 12-month trailing revenue at 76. To recap, we are pleased with our non-GAAP operating earnings, demonstrating the success of our continuous effort to improve operational discipline and expense management. Our revenue results reflect strong performance and increased adoption in North America for our high-end PolyJet and FDM system, as well as consumable offset but what we believe is temporary weakness in the automotive sector in EMEA. We continue to enjoy a healthy balance sheet and positive cash generation from operating activities, demonstrated by a record $63.7 million in 2018. I would now like to turn the call back over to Elan.

Thank you, Lilach. As we noted on the last call, Victor Leventhal, the Chairman of our Compensation Committee and I is the company's executive search committee and have been actively interviewing CEO candidates. They are all outstanding leaders with global operational experience in the strong history of growing large public companies and delivering significant shareholder value. At this time we have not yet finalized a decision and we look forward to announcing a new CEO when we have completed the process. I would like - I would now like to ask David to provide more detailed information regarding the results of the quarter and the full year 2018, as well as our long-term growth outlook. David?

Thank you, Elan. We are pleased with the success of our high end systems in the fourth quarter and the full year of 2018, which we believe will lead to accelerated future annuity streams for materials and services. Our J750 and newJ735 full color and multi material 3D printers are seeing high demand in CPG segment where adoption has been increasing and systems are being utilized as mission critical tools in product design and development. This segment represents a significant opportunity for us within prototyping space. On the growing manufacturing side of our business with strong year for our S900 series and our advanced materials which to our observation are increasingly being adopted for tooling and end use part production in our target verticals. As a result of our work with aerospace OEMs there are tens of thousand of FDM production parts already flying. That number is continued to increase. Overall the percentage of our system sales go into manufacturing environment continue to grow, which we believe will lead to strong worker avenue [ph] for material and services. Already we see utilization rates on manufacturing focused units like the F900 exceeding those of the prototyping units like the F123 by a factor of 3 [ph]. We are also excited with the early interest we are seeing for our recent product introductions which include the F380 Carbon Fiber Edition for tooling applications, the Antero PEKK Advanced FDM thermoplastic that meets the strict requirements for aerospace application, Elastomer TPU material for the F123 platform which is seeing strongly early interest from automotive manufacturers and others, the MakerBot Method Performance 3D printer, This bridge the gap between desktop and industrial systems and is on schedule to being shipped - to begin shipment later this month and the new J720 Dental 3D printer that provides multi-color, multi-material capabilities for dental labs. I would like to provide an update on our growth plans. Over the last few years we have improved our organization on multiple levels, through [indiscernible] focus on operation efficiency, we have achieved consistent non-GAAP profitability and cash flow generation, billing the cash balance at OEM in our target verticals expect from long term partners. We believe that we are well-positioned to move fast and take advantage of opportunities both internal and external to improve our technology portfolio, our go-to-market and ultimately our customer base. In the back half of 2019 and into 2020 and beyond, we intend to bring to market innovative new systems, material, software and application specific solutions that leverage our deep knowledge of additive manufacturing and customer requirements to create new incremental revenue opportunities. The new system includes major development across existing core technologies portfolio of FDM and PolyJet, metal systems that include our upcoming LPM platform, as well as new offering that will broaden our range of solutions – sorry, broaden range of solutions we bring to market. We look forward to sharing more details on our roadmap throughout the year. Beginning of fiscal year 2020, with the strengths of our R&D and sales and marketing efforts we expect to begin seeing accelerated revenue growth. I would now like to turn the call over to our VP of Investor Relations, Yonah who will provide greater detail on our 2019 financial guidance. Yonah?

Thank you, David. We are providing full year guidance for 2019 as follows, revenue guidance of $670 million to $700 million, GAAP net loss of $22 million to $12 million or $0.40 to $0.22 per diluted share, non-GAAP net income of $30 million to $38 million or $0.55 to $0.70 per diluted share, non-GAAP operating margin of 5.5% to 6.5%, capital expenditures are projected at $45 million to $60 million. Our guidance reflects growth combined with a continued showing of operational efficiency as our profitability will increase relative to the top line. Non-GAAP earnings guidance excludes $32 million of projected amortization of intangible assets, $20 million to $22 million of share based compensation expense, reorganization related and other expenses of $1 million to $2 million and includes $3 million to $4 million in tax expenses related to non-GAAP – or income related to non-GAAP adjustments. The estimated non-GAAP rate for 2019 is impacted by the ongoing non-cash valuation allowance on deferred tax assets that we expect to record throughout the year on U.S. losses. Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses on our net income, as well as significant quarter-to-quarter variability in our non-GAAP tax rate, the company believes non-GAAP operating income is the best measure of our performance. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in the table at the end of our press release and slide presentation with itemized detail concerning the non-GAAP financial measures. Operator, please open the call for questions.

Thank you [Operator Instructions] Thank you. And our first question comes from David Ryzhik of Susquehanna Financial Group. You may proceed with your question.

Thanks for taking the question. Lilach, can you give us a sense of what the implied gross margin and OpEx assumptions are within your guidance. And how can we think about the cadence of perhaps revenue and OpEx on a quarterly basis throughout the year? And our follow up.

Hi. Good morning, David. For my cadence revenue perspective, the cadence of the revenue we typically - we expect to see a typical trend as we've seen the previous year. Obviously Q4 has been the highest. After that Q2, Q3 and the software - softest quarter usually are the first quarter. Also when we look how the revenue was spread over the year, we expected to see about 55% to 60% of our revenue to come in the second part of the year, which can also can give you kind of expectation in terms of a cadence over the quarters. In terms of OpEx, there is a typical seasonality of the OpEx compared to the revenue and trends, some cost that this is directly driven by a - by the revenue will be higher in Q4 and Q2, and then after that in Q3 in Q1. In the OpEx also we have the R&D there is no way –there is no specific threat. Now it's really mainly based on our project base. There is some project that consume more effort in the first part of the year and some other that in the second part of the year. We do expect to see more product launches close to the second part of the year, which will create some more expenses in the second part of the year. From a gross margin, we expect a relatively flat gross margins is what we see this year in 2018.

Great. Thank you. And David in a line, so when I look at your implied 2019 revenue guide that implies a three year revenue CAGR from 2016 to 2019 of only 2%. What gives you the confidence in accelerated growth in 2020 and what makes the product introductions in the back half of 2019 different from prior product introductions? Thanks.

Good morning. We are investing this year and into the coming years and also in previous year on $90 million in R&D, which is a substantial investment. As we said in the script and it was mentioned both by Elan and by myself, we have many great products coming based both on our current known technology FDM and PolyJet, but also other technologies in the areas of metal and other areas. You know, product development is a long cycle and process. We are indicating I think quite strongly the message in the script that we believe that starting 2020 those very big airports will start showing fruits [ph] which will result in accelerated growth. Why I think is going to happen because we are working very hard in the last few years. I think we are by far the most experienced company or at least one of the most experienced companies in the space with the deepest knowledge in both application and technology and we have a great team of people spending all the money. So it's coming. When intend to come, I’d say, 220 - beginning 2020 is the year, which as I said earlier we expect and you know, I hope we are not wrong and we'll see accelerated growth going forward.

And in your conversations with some of the key customers in aerospace, automotive have they indicated that should new products come out they would accelerate purchasing and materials utilization. Have you gotten that from your conversations?

Again, I can't, you know, quote customers, but you know we are deeply, deeply, probably one of the most involved companies with the major industrial players or the product definition, product spec require the characteristics were all defined with a lot of customers and obviously you know, if we're going to be successful which were unfortunate we will, bring those products on time with respect to market, it should increase purchases from those customers and other customers.

Thanks so much. I'll get back in the queue.

Thank you. And our next question comes from Troy Jensen of Piper. You may proceed with your question.

Thanks for taking my call and congrats on the 2018 performance. Maybe, David for you just to follow up on these new products. Yeah, I know, LTM is a new technology, but the other products that you're talking about are they enhancements to FDM and PolyJet? Are they also a new technology that gets you into a new market?

So I wish I could share all this information now with all of you and specifically with you, but you understand the limitation. We believe this with the core technologies most FDM and PolyJet, we still have a long way to go. FDM with the manufacturing side can be improved and make even better than what it is today. Likewise, on the PolyJet I think that we are leading today from poly fuels [ph] quality and what's really customer needs with our J750, J75 prototyping systems. So there's a lot of way to go there. And you know, we already disclosed some and use technologies, one of them is a metal that you mentioned earlier. But the other one the way, and you know, as its going to be mature and you know thinking different situation and you know and market limitation we're going to announce it for that. But it is big effort. I think its fairly focused and you know, we're not a start-up company. We need to bring mature products to market. We can not come with all kind of the products with hiccups and so it takes a bit more time and I'm sure that all of us wish. But it is coming and like I said, we hope and expect it in 2020 we will start seeing an accelerated growth of the company.

So David, I agree. Just the acceleration and growth, I feel like you guys can get there just with FDM being adopted in production applications, right? I mean, clearly we haven't penetrated that much, just modestly and [indiscernible] So can you give us an update or could you - I'd love to see just like evidence on your success on production applications at the FDM.

So again, I'm cautious not to mention names of customers, I'm not sure and I don't by the way recall you know, who approves or nor approves to us to use his name. But in the aerospace we are seriously involved with manufacturing of end use parts. In the auto industry we’re extremely involved in achieving the fixtures area. We have - all over the world customers are adopting FDM technology and by the way also PolyJet technology in some areas for production application. It takes time because you know, we expect it many, many times, you know, people have to experiment and need to accept the technology, it has to get into the next cycle of development of an airplane or a new car. But the level of adoption and the number of printers which are being sold into those segments is going quarter-over-quarter. Consequently and is the result of which we see an increase demand for the relevant high end materials. So again I can't disclose the number, but you know, if you look on our high end materials you see an increased consumption which is a direct result both from a increased usage and increase in ID within the manufacturing - a lot of manufacturing plant, both in aerospace, the car industry, by the way also rail industry lately. So this increased adoption and you know, we have a lot of press releases, you can follow the press releases. It was with some specific names, but it's all over the world and in many, many industries.

And if I could just sneak one more in, and I'll skip the floor. But I love David if you had some thoughts on the material sales. I think it was up 1%, 1% to 2%? Given you guys are [indiscernible] in the fourth quarter, I thought that would might have been a little boost to the kind of material growth rate. So can you just talk about what's going on with consumption and why material growth has been 1% to 2%?

Yeah. So it's a combination with some conflicting messages here. In general consumer - consumable is growing. I can share with you and the audience that, if you look specifically for example the U.S. market in Q4, we saw substantial growth in consumables, that was offset by decreased consumption in Europe, partially because of the automotive industry and some issues with the currency exchange. So you know, in general our expectation is that consumables should continue growing. By the way, I'm not going to grow in the race as you know, all of us will use 4, 5, 6, 7 years ago because as the installed base is growing the impact of the marginal additional machines is getting smaller and not getting bigger. Nevertheless, I can share with you some other data. That for example on the new platform that we're introducing, we see an increased consumption compared to the equivalents on platform. Just to mention one example, F123 consumption is higher than the equivalent you Q-print [ph] as I mentioned per machine, okay. And why is this? Because there's more applications, better software, better ease of use. So legacy products are getting slower, usage you may be getting lower. But on the new machines we're seeing increased consumption. And again, I think that Q4 specifically isn't confusing as far as this number is concerned. Like I said in the US with the very strong growth and some weakness in other parts of the world from the reason I said earlier.

Understood. All right, good luck in 2019.

Thank you. [Operator Instructions] Thank you. And our next question comes from Ananda Baruah of Loop Capital. You may proceed with your question.

Hey. Thank you, guys for taking the question. I guess, I’ll just sneak in one question, but a couple of parts too, but same topic, the acceleration area from new products, acceleration in the beginning of ’20, can you speak to the degree you expect that to be true production versus new prototyping capabilities when in ‘19 - second half of ‘19 you expect those new products to begin to come to market? And then just some context around what you consider to be acceleration and we're talking mid single digits or could it go stronger than that? Just aesthetic. Thanks so much.

Let me make sure we're not representative of the right picture. We are going to see the beginning of launches of new products in the second half of 19 into 2020, to ‘21. As I said earlier very large, very focused, R&D opposition both sides of the oceans, oceans more than one ocean working on those products, they are both targeting manufacturing applications, both plastic and metal and very high end which I think is also very significant prototyping applications. So we are covering all the range of what we strategically want to cover. But again, the process will take some more few quarters in the years. If you’re asking what will be the growth rates. I'm cautious about it. I think it's going to be higher than single digits and very low double-digit. So I don't want to try and gamble what will be the exact number, but we - compared to our size and compared to the industry becoming a more mature, I think we are going to show reasonable good growth, profitable cash generating at the same time which I think would present a fairly good picture. And again, the timing depends on R&D and like I said again, I think we in the last few quarters we refocused and refocused even more focused R&D efforts. We know exactly what we are doing. The whole math is crystal clear and the fruits are going to come.

That's great. Okay, great guys. Thanks a lot. Good luck. Congrats. I really appreciate it. Thanks.

Thank you.

Thank you. And our next question comes from Jim Ricchiuti of Needham and Company. You may proceed with your question.

Hi, thanks. A couple of questions. Just with respect to trying to reconcile your comments about the strength in the systems business. I mean, you - on an organic basis I guess you showed about a 4% decline and yet you highlighted strength in the higher end systems business. So part of the product portfolio that you're seeing some weakness, what are you attributing that to and do you see that beginning to stabilize?

So I want to clarify. So without getting into the exact numbers, if you look on the large platform, the J77XX two platforms and 900, F123 units sales went up year-over-year. So obviously we had some legacy products which were selling for many years, for example the low end - for example PolyJet, which are - we still have demand, but yet stronger demand than what we had in previous years, okay. So if you look at the overall picture you get a picture which is you know almost net is in the decline of almost flat, okay. And I think the good news is that you know, in the newer technologies we do see growth and again our expectation and again it's not risk free and the timing is we try to indicate, but it's also not guarantee, new products we know the direct relationship for ability to grow top line with new products, introducing new features and additional applications. So this is coming. So like I said, the large platforms F123 year-over-year we see increasing units and I think its good opportunity again to mention which I think is very interesting the fact that, on equivalent unit new generations we see increased consumption of consumables, which is very, very promising. It's not trivial to understand why an F123 would have higher consumption than dimension on average. And the reason is application, materials, ease of use, better software.

Okay. That's helpful, David. And just if I could ask a question on the progress you're seeing on developing the metals product, is that tracking your expectations. And as we think about the 2020 and you see a wave of the new products impacting 2021, how do we think about metals. Is this something that could be meaningful in 2020?

No, I don't think 2020 is going to be meaningful. I think that – okay, it's not in ’20, no.

But in terms of the progress you're making is that…

We are on track with our plans, okay. And you know, obviously this system and other systems are in - paid to work complex, but requires a very detailed in a lot of forces in order to bring them to market in the production level and not as a story. So we're going to see the – I want to repeat what you said very clearly, we see the beginning of introductions in the second part of 2019 to ‘20 and to ’21, specific to question, metal will not have a major impact into ’20.

That's helpful. Thank you.

Thank you. And our next question comes from Brian Drab of William Blair. You may proceed with your question.

Hi. Thanks for taking my question. I will stick to one question here and I just need to make sure I understand the math regarding the outlook. And I just need to clarify did I hear you say first of all that about 55% to 60% of total revenue is expected in the second half of ’19?

Yes.

Okay, then I just want to clarify that - that obviously means that 40% to 45% would be expected in the first half and that would trend - if I just use the midpoint of your guidance at $685 million that would put the range of revenue in the first half from $274 million to $308 million and that would represent a decline year over year in the first half of down 15% to down 5%. I'm just wondering if that's what you are intending to communicate to us?

I am not sure.

So it's not suppose to believe will present a 50% decline…

15, 1-5, to be clear, 1-5

1-5

If you did 40% of your revenue in the first half of the year you would be down 15, 15% in the first half of the year. I just want to make sure that's what you're trying to communicate?

We will get back to you there. No it's not supposed to represent a 15% reduction. A reminder, the second quarter is a slightly higher - that is stronger than the first quarter. And it’s a - it's more about 4%, 5% in the first part of the year.

You are going to…

45% if you choose from…

Okay. But you are trying to communicate that your revenue is down in the first half of ’19? Is that correct?

No, not necessarily. We can talk about it after the call.

Okay. All right. Thanks very much.

Brian, we'll talk it offline. One of the things is remember with large orders there is a variability in ordering and so you have to keep that in mind as well.

I understand all that. I just – I am doing the math here and I think it's important on the public call. I'm just trying to be helpful. It's probably important on the public call to clarify that given what the math tells you. But yeah, I understand. Thank you. I'll follow up more later. But I think it's important address publicly too.

Thank you. Our next question comes from Shannon Cross of Cross Research. You may proceed with your question.

Thank you and I will also keep it to one question. Can you just talk about what you're expecting from a macro standpoint when you look at the - when you provide your revenue guidance for this year. I understand that you know 2020 you expect acceleration and you did give us some of the theoretical seasonality in the year. But what do you expect to see in Europe. What are you thinking about in terms of auto demands or at least you know, CapEx spend on the auto side. I'm just - I'm trying to figure out how much you know there is if Europe continues to be soft and that how much of that is already baked into your expectations or what you've got overall in there from an economic perspective? Thank you.

Yeah. So the macro questions are tough questions and you know, with our – that could be modest here and self funded, I am not sure I understand the entire you know, complexity, but what we read and you know, the public information, research as we read the expectation, as far as the auto industry in Europe is some kind of recovery during ’19, I don't think anyone knows exactly when, [indiscernible] a lot with the Chinese and all the other BMW and Daimler’s depend on China. I really don’t know the answer. My assumption is that it's not going to be worth what it is today in the - again from what I read. We feel some recover.

Thank you.

Thank you. And our next question comes from Danny Eggerichs of Craig-Hallum. You may proceed with your question.

Hi, guys. This is Danny stepping in for Greg Palm today. Thanks for taking the question. Just a quick one here. Are you seeing any changes in your go to market strategy, maybe that you're benefiting from as your CEO search is ongoing?

Hi, Dan. We are all the time adjusting our go to market to fit the strategy. Just one example you know, we put a lot of emphasize on the manufacturing segment. So we are creating and created the infrastructure that can work together in parallel to our channel to better penetrate and get better, a very intimate relationship with manufacturers across the world. So we have organizations around the world that are dealing with strategic accounts and major customers in the manufacturing segment in parallel to the distribution channel. We believe that long term our sales should go and continue working with our channel. Nevertheless, we find and develop infrastructure to support it. But you know, when we look on there on the dental segment we are developing go to market for dental. So you know, it's being adjusted all the time to fit the strategy to fit the product offerings that we think we're going to have in future years.

Okay. Great. Appreciate the color.

Thank you. Our next question comes from Paul Coster of JPMorgan. You may proceed with your question.

Yeah I will echo my concern that the guidance at the moment is a little bit hard at 55% of revenue in the second half year. Then you have to work really hard to get the numbers down in the first half of the year and I'm assuming that it's going to fall off the cliff. So it's going to be product. So it's from a product perspective. The year for near decline in the first half is even more pronounced than the caller mentioned there. Just making that clear. I think you should come out with some statement as soon as possible rather than take you find [Technical Difficulty] I mean you've got something like 20 products in your lineup of movement engines and next it sounds like beginning of 2020 you're going to have even more products - products and another print engine. And so I guess kind of understand whether this is the way forward now that we're going to see a proliferation of product skews and print engines to support or whether you know are you kind of verticalizing everything or is it horizontal solution company. I think you're something of a inflection point, I'd love to hear your thoughts on that.

Lilach, you want to take it?

No.

Okay. Paul, I am going to address the first part of your question which was referencing what Brian had asked earlier. One of the items that we didn't mention was in a like for like comparison is what we're talking about. So you have to back out the divestments from 2018 first half when you're comparing the first half of ‘18 to our guidance for the first half of ‘19 and when you do that then you're no longer seeing a decline, but in fact you'll be seeing growth. So hopefully that will help settle that issue that Brian raised and that you've reiterated here. And if you're - once you do the math and you want to speak about this further off line would be perfectly happy to walk you through the model. As for the second question can you just quickly repeat again what that…

I'm just trying to understand - well first of all, thank you for that. That was an important clarification. The question really is probably proliferating the number of products skews that you're supporting and print engine platforms are you becoming a heavily sort of verticalized solution provider across all of your industries or are you going to remain as you were originally something of a horizontal solution provider. And if it's the latter are you going to do a call [ph] the portfolio of products as the new products come out?

Okay. Hi, Paul, its David. I hope I understand the question. We operate in a few markets, okay. We have products and solutions which are horizontal in nature, okay. If you’re looking our historical and new coming prototyping product by definitions of the horizontal. Nevertheless over the years and we continue developing a vertical expertise, specifically manufacturing, specifically in the dental, specifically in medical. And we are reorganizing ourselves and our go to market marketing product management to serve both - you know some of the horizontal markets that we operate and the vertical ones. I hope its answering your question.

Let me simplify David. Are you going to have more product skews this time next year versus today instead of 20 in this old professional segments will it be 30?

Good question. I think that in parallel to introducing a new product we are going to end of life some products. So if you ask me on the total number of skews, it's a good question, I'll go and check in and come back to you. My stomach is telling me that we are not going to see dramatic increase in number of skews because of the end of life in some product.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Ben Rose of Battle Road Research. You may proceed with your question.

Yes, good afternoon everyone. With regard to the European auto situation, just wanted to drill down a little bit, whether David and Lilach you're seeing an across the board kind of weakness over [Technical Difficulty] Hello?

Ben. We hear you, we just heard a little noise.

Okay. I'm sorry. I've heard some kind of rolling background. Is the weakness on the parts like select manufacturers within Europe A, and then B, is it more of a slowdown on the prototyping or on the production tooling side of their usage?

If I understand the question correctly, you are asking whether the slowdown in Europe specifically the auto industry was in the manufacturing side or the prototyping side, if I understood the question correctly.

Yeah. That was one part of it. Is it on the prototyping side versus the tooling side and then the other part of the question is, is it on the part of you know, just a couple of manufacturers or is it kind of European auto broadly defined?

So to your first question, it's mostly the prototyping and tooling part. Did it come from the entire industry? Again, I think the answer is probably yes, I can’t confirm it now. I think there is overall slowdown which had impact us, not only phenomenonally in Q4, but is one of the things that impact our business.

Thank you. That is all the time we have for Q&A. I would now like to turn the call back over to Elan Jaglom for any further remarks.

Okay. Thank you for joining today's call and we look forward to speaking with all of you again next quarter. Thank you.

Thank you, ladies and gentlemen. Thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.