Good day, ladies and gentlemen, and welcome to the Stratasys Third Quarter 2016 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 remainder, this conference maybe recorded. I will now turn the call over to your host, Shane Glenn, Vice President of Investor Relations. Please go ahead.

Thanks, Stephanie. Good morning, everyone, and thank you for joining us to discuss our third quarter financial results. On the call with us today are Ilan Levin, CEO; and Erez Simha, CFO and COO of Stratasys. 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 Section of our website. We’ll begin by reminding everyone that certain statements made on this call regarding Stratasys’ strategy and the statements regarding its projected future financial performance, including financial guidance concerning its expected results for 2016, are forward-looking statements reflecting management’s current expectations and beliefs. These forward-looking statements are based on current information that is, by nature, subject to rapid and even abrupt change. Due to risks and uncertainties associated with Stratasys’ business, actual results could differ materially from those projected or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, any failure to efficiently and successfully integrate the operations of Stratasys, Inc. and Objet Ltd. after their merger as well as MakerBot, Solid Concepts, Harvest and GrabCAD after their acquisition or to successfully establish and execute effective post-acquisition integration plans; changes in the overall global economic environment; the impact of competition and new technologies; changes in the general market, political and economic conditions in the countries in which we operate; any underestimates in projected capital expenditures and liquidity; changes in our strategy; changes in applicable government regulations and approvals; changes in customers’ budgeting priorities; lower-than-expected demand for our products and services; reduction in our profitability due to shifts in our product mix into lower margin products or…

Thank you, Shane. Good morning, everyone, and thank you for joining today’s call. During the third quarter, we were pleased to recognize additional operational improvements during the quarter, which were reflected in a decline in non-GAAP operating expenses, and an increase in non-GAAP gross margin compared to the same period last year. As our industry continues to mature beyond general purpose design and engineering applications, we are observing a growing opportunity for value-added advanced manufacturing applications across industry verticals, such as aerospace, automotive, medical and education. We recently made several announcements that demonstrate our commitment to targeting these opportunities that includes exciting relationships with leading global manufacturing companies. I will return later in the call to provide you more details on these important initiatives, as well as other key developments. But first, I will turn the call over to our CFO and COO, Erez Simha, who will review the details of our financial results. Erez?

Thank you, Ilan, and good morning, everyone. The market environment did not change significantly, and remained similar to the environment observed in recent quarters. We have made significant progress in controlling our operating expenses during the period. As a result, both our non-GAAP gross margin and non-GAAP operating margin improved over the same period last year. Total revenue in the third quarter decreased by 6% to $157.2 million compared to $167.6 million for the same period last year MakerBot product and service revenue declined 29% in the third quarter over last year, driven by the overall market weakness and timing of new product introductions. Market demand remains similar to levels in previous quarters, and sales cycles remain extended, which is contributing to slower hardware sales across all regions and business units. GAAP operating loss for the third quarter was $19.4 million, compared to a loss of $931.3 million for the third quarter last year. Non-GAAP operating income improved year-over-year to $3.3 million, compared to a loss of $10 million for the same period last year. GAAP net loss for the third quarter was $20.8 million, or a loss of $0.40 per diluted share, compared to a loss of $901.3 million, or a loss of $17.35 per diluted share for the same period last year. Non-GAAP net income for the third quarter was $0.1 million, or $0.00 per diluted share, compared to non-GAAP net income of $0.7 million, or $0.01 per diluted share, reported for the same period last year. Non-GAAP net income included tax expense of $3.5 million, or a tax rate of 104.1%, which resulted from the non-cash valuation allowance on deferred tax assets related to our U.S. subsidiaries. GAAP tax expense was $1.5 million. Product revenue in the third quarter decreased by 7% to $110.1 million, as compared…

Thank you, Erez. Our guidance for 2016 is updated as follows. Total revenue in the range of $662 to $673 million, with non-GAAP net income in the range of $7 to $11 million, or $0.13 to $0.21 per diluted share. GAAP net loss of $76 to $71 million, or $1.44 to $1.35 per basic share. Non-GAAP earnings guidance excludes $59 million of projected amortization of intangible assets; $21 million of share-based compensation expense; $10 to $11 million in merger and acquisition-related expense; and $7 to $8 million in reorganization and other-related costs; and includes $15 million in tax expenses related to non-GAAP adjustments. Additionally, we are providing the following estimates regarding our company’s potential performance and strategic plans for the remainder of 2016. Based on revenue trends in the first nine months of the year, we now believe that we will end 2016 with gross margins in a range of 54% to 55%; operating margins of 3% to 4%; tax expense of $15 million to $17 million, which includes the negative impact of the planned accounting treatment for tax valuation allowance and capital expenditures projected at $50 million to $60 million. As previously discussed, our relatively high estimated non-GAAP tax rate for 2016 is a function of the ongoing non-cash valuation allowance on deferred tax assets we expect to record throughout the year. As we have mentioned previously, these deferred tax assets have expiration dates many years into the future, and we do anticipate being able to ultimately recognize their value to offset perspective tax liabilities. We’ve achieved a significant improvement in our operating structure in 2016 which translates into improved operating profit compared to the prior years, and in future years. Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses or our net income loss, the Company believes non-GAAP operating profit growth would be the best measure of performance in 2016. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of our press release and slide presentation, with itemized detail of the non-GAAP financial measures. Now, I’d like to turn the call back over to our CEO, Ilan Levin. Ilan?

Thank you, Shane. We are making progress in shifting our focus and resources towards providing advanced design and additive manufacturing solutions and remain excited about the growth potential of these initiatives. As our industry matures and expands beyond traditional general purpose rapid prototyping applications, we expect the development of advanced solutions that target specific customer applications with enhanced value will drive an exciting new phase of growth for our company and industry. We are leveraging our core assets, as well as expanding our relationships with other leading global manufacturing companies, to develop these high-value added applications. Our recent announcements illustrate our commitment to developing solutions for both design and manufacturing, and highlight the importance of collaborating within our industry. Our FDM technology is currently used by numerous OEMs within the automotive and aerospace industries for the production of tools and low volume parts, such as interior panels, brackets and air ducts. We believe these relationships provide a valuable opportunity to provide - to develop new solutions and more advanced applications. In September, we announced two advanced technology demonstration platforms based on our FDM manufacturing technology, which are designed to specifically address advanced industrial manufacturing and rapid prototyping applications within the aerospace and automotive industries, by dramatically improving throughput, part performance and design customization. The Stratasys Infinite-Build 3D Demonstrator, developed based on inputs from the Boeing Company and the Ford Motor Company is designed to target manufacturing applications by lowering the constraints associated with part size and build speed, with a tool change functionality that allows for unintended production with multiple materials. In addition to the Infinite-Build, we announced the Stratasys Robotic Composite Demonstrator, developed with Siemens, which is designed for the use of composite materials to make strong and lightweight structures. The production of composite materials is often constrained by…

Thank you. [Operator Instructions]. Our first question comes from Patrick Newton with Stifel. Your line is open.

Yes, good morning, Ilan, and thank you for taking my questions. I guess given the focus on operational efficiencies through the prepared remarks, can you just remind us where you are on various initiatives? And I think, Ilan, you closed by saying that there is still more work to be done. So you can help us understand if it’s just through workforce realignment, if there is more manufacturing restructuring or just any levers that you still have left to go?

Hi, good morning. It’s Erez. So I think that on the operational side, most of the short-term immediate opportunities that we saw in front of us are already implemented, so around the day to day operating expenses, that we control and manage and all the activities around travel and all the other expenses already implemented. However there are few initiatives that are longer term and will take us another few quarters to implement and to again benefiting our P&L. They are always around the optimization of production and manufacturing capacity around the most of the Company. But I would say if I had to look at the dollar volumes, most of the improvement in efficiency is behind us and I don’t expect in the next, I would say, quarter or two, an additional significant improvement that will hit P&L

Great, thank you. And then, I guess, just as my follow-up, you talked that no significant change to market dynamics, but you’re lowering annual revenue guidance by roughly 5% compared to the low-end of the prior year range? If market dynamics are not changing, are competitive dynamics changing, and are you still seeing lower-end systems being dumped at expense of higher end solutions?

No, when you say that there is no change in market dynamic, we refer to the demand. We have to take into consideration that we have a low visibility looking forward, and some part is that we do not control around the transformation of our pool of leads into growth [ph]. I would say really high level of statement, the market that we saw in the last few quarters that was - that we can say that was around longer term cycle that had impact on hardware sales, that had impact later on on recurring revenue is still there. So we will see the same picture, the same market demand that we saw in the last few quarters.

Okay. Thank you for taking my questions. Good luck.

Yes.

Our next question comes from Troy Jensen with Piper. Your line is open.

Thanks for taking my question gentlemen. Maybe one quick for, Ilan. MakerBot business was down 29% year-over-year. I think it’s at the lowest level since 2012. So just like to get your thoughts on exiting the MakerBot business, it makes sense to get out of it the consumer desktops, sounds like in your prepared remarks you kind of submitted through the space so.

So recently towards the end of the third quarter, MakertBot introduced several new solutions for both professionals and educators that we believe obviously can have an impact in Q3, and we believe is getting some renewed excitement in the market and will be reflected as we move forward. In general statement about the market, general rapid prototyping needs are being increasingly met by lower end systems. So when we look at what we’re offering in terms of workflow solutions through GrabCAD print, what Stratasys is offering on its entry-level systems coupled with what MakerBot is doing on their entry-level systems from a market perspective and our growing online communities, we do believe that we have the fullest solution available for market that we believe has a long-term growth. And that rapid prototyping needs - general purpose rapid prototyping needs are being met by that entire segment and that is what will fuel its continued growth. So we believe that - although we’ve been investing in a space over the past number of years that is a worthwhile investment and we will gain return on that.

All right. Understood. And then just quickly on prototyping market. I agree with you that industrial end products are industry [indiscernible] industry, but you guys still heavily exposed to prototyping, and as you mentioned these lower price systems really into the market. So I’m just curious if you think prototyping, you can grow in ‘17 or in future years, or is the growth for Stratasys really going to be coming in industrial applications and robotic processing [ph]?

So, I first of all believe that it is a continuum ranging from very simple conceptual prototyping all the way through manufacturing and used parts, and sometimes our desire as an industry to segment very neatly across the spectrum, sometimes leads us to wrong conclusions perhaps. So as we move through that spectrum, it doesn’t mean in any way that we are abandoning any of them. We believe that by adding added-value to each one of the end use applications, whether it’s been in functional prototyping through tooling and obviously through end use parts that we are continually providing value around our systems through enhanced materials or software service, all those different segments as a big roadmap in front of us.

All right. Well, good luck, gentlemen.

Thank you.

Our next question comes from Kenneth Wong with Citi. Your line is open.

Good morning, guys. So clearly on the material side, you guys saw a good growth there but I guess typically we think about that business as a larger printers and you have seen decline there for about seven straight quarters. What did you cross into that material businesses continue to see the trends that you’ve been showing the last two or three quarters?

Well, Kenneth, one of the things that we’ve done successfully. We did this with the J750 and as well as with some other materials that are more advanced or targeting some of the more advanced applications is that we’ve been very successful selling - upselling our customers in attacking some of those applications. So the thing to remember also on the materials is you guys are correct. If you’re not selling printers, ultimately your materials could potentially - could see an impact on there, but we still have a very large install base. We’re seeing growth in that install base. And again the printing materials that we’re selling have been doing very well.

Kenneth, I would like to point to that as that revenue that we see from the material are a direct result of the install base, and as long as the install base is growing, we would expect to see growth, maybe declining growth, but still growth around materials. The second point is that we introduced new material which are smarter, better and provides, I would say, higher revenue per unit. And to Stratasys, why we sell those material to the high-end product of a system that are currently in the install base. I think that as long as the install base continue to grow and continue to grow for incremental growth on the higher end system, you can expect consumable to continue and growth, and again, probably the margin on incremental growth will be lower as hardware sales are declining.

Got it. Thanks. That’s great. And then my follow-up is in regards to gross margins. At these kind of - at the weaker sale demand levels, do you think you guys can still expand gross margin? When you talk about some of the production efficiency that you guys might be able to capture in the medium, long-term, how should we think about the direction of gross margins in this kind of a market environment?

So I will say the following. We are getting better and doing a good job on improving our production efficiency and cost of goods sold. This is somehow muted by a product mix that we see in quarter-over-quarter different quarter to a product mix. And looking forward, especially on the short-term, I would see similar gross margins to deliver that you see today in 2016.

Okay. Great. Thanks a lot guys.

Our next question comes from James Ricchiuti with Needham & Company. Your line is open.

Hi. Just a question on the system revenue decline. What gave - you talk about a weak market environment that is clearly contributing, but to what extent is there also the potential that there could be some share shift going on?

Can share…

Market share shift. I’m just wondering if the competitive environment has possibly gotten a little bit more challenging, and if there is some change in market share as well contributing to the decline into some revenues?

So as far as the information that we have in front of us - and I’m talking about the high end part of the market, which is the more significant part of our business, we don’t see a change in market share. It’s not a matter of more solutions or more players that are coming to this price point or solution level which we introduce to the market, and again with the exception of MakerBot market, which we have differences.

Okay. And maybe just turning to the SDM business. You didn’t talk about what kind of a decline you’re seeing in that area. Can you maybe expand on what the environment is for that part of the business? Are we looking at a mid-teens type decline in that business and what’s the strategy going forward for this part of the business to maybe generate some growth or possibly size it properly?

So the decline - we didn’t provide number but it’s lower than the numbers that you mentioned. And I think that SDM is serving the same market that we are dealing with, meaning 3D printing market. They are also impacted by the solutions that are introduced to the market on the lower end level of price point. I think that looking forward the added-value that SDM is bringing to Stratasys into the market is on the complex technology and complex geometries and specific applications that we bring value to. We are looking into the SDM business. At the end of the day, it’s a business that strategically we think has high importance to Stratasys and Stratasys development. We - I think that the break-or-make there is on the operational side, and once we get into 2017 our plan in final 2017 plan, we will provide some more color on the SDM.

Okay, thank you.

Our next question comes from Paul Coster with JP Morgan. Your line is open.

Yes. Thanks for taking my question. Can you share with us what - if you know, what percentage of revenues on the product business are from products introduced within the last year? And I guess the point I’m making really with the question is whether you’re sort of delaying and slowing down your product guidance in - whilst due to investment in additive manufacturing and the slowdown being in the recycling area?

Paul, I don’t have the numbers in front of me. I think that looking at 2016, one significant product that we introduced was the J750. It had impact on - significant impact on Q2. It does behave like our expectation, meaning the customer acceptance, the perception of the product, the targeted addressable market, all in line with our plan. And I don’t have the number, but just to - on a high level, I wouldn’t say it’s a very significant amount of money compared to the entire portfolio that of Stratasys at all [ph].

Okay. Well the follow-up question is, I see how you’re maintaining a close relationship with customers in the additive manufacturing context, but what about in the prototyping market? How close are you to that market? Do you distance yourself from it at all?

Can you repeat, Paul?

Yes. I’m just trying to understand how you’re staying close to the prototyping market. It seems like most of your sales and marketing energy is now focused on the additive manufacturing segment?

So you’ll find that many of the same partnerships that we are working with - the same partners that we’re working with to develop the manufacturing solutions are the same partners that we started with in prototyping, whatever number of years ago. So there is absolutely a continuum. Some of the systems that we saw in the demonstration side, most recently at IMTS in September that we initiated. You’ll find that those systems appeal also to rapid prototyping, high-end rapid prototyping applications as well, but some tooling applications. So again as I referred to early in my remarks, I think in one of the questions, we absolutely see that there is a continuum spectrum between very initial conceptual prototyping all the way through to parts and sometimes it’s not easily to differentiate between - cleanly differentiate between the different applications within those segments. So I think it’s very much the same partners. I believe we will make headway also when we begin to commercialize those products with the same customers that have been working with us for many years on the prototyping side as they migrate more towards the tooling applications and end use parts.

Thank you.

Our next question comes from Ananda Baruah with Brean Capital. Your line is open.

Hi guys. Good morning. Thanks for taking the question. Two, if I could. The first is just going back to the revenue environment and the demand dynamic. And so, look, I fully appreciate that there has been a lack of visibility and it’s been softer and it doesn’t feel like that much has changed. On the numbers, this is - the sequential step-down that you saw is similar to the September quarter of last year, and I remember last year, it was accompanied by some commentary that things had softened and that that kind of sequential step-down was unusual. So, I guess, a clarification is that not the case this year for the September quarter dynamic? And then a follow-on to that is, last year when you saw this kind of sequential step-down, I think it was 9% this September quarter, 8% last year’s September quarter. I think you did like a low-single-digit sequential in December, and I think the guidance this quarter for December at the midpoint suggests something like a mid-to-high single-digit. So given that the step-down is similar, the question - sort of the second question really is, what is different going in this - while we’re in the December quarter, this December quarter that has you feel you can do a little bit better than last December quarter? Thanks. And then I have a quick follow-up. Thanks.

Yes, [indiscernible] I hope I remember everything. Looking to Q3, there is no doubt this is promising [ph] Q3 again, meaning it’s coming from specific regions. It’s been specific market both education and Europe has a largely impact on the revenue of Q3 and when you look at the breakdown of revenues for all day is both Q2 and Q4 are usually stronger. Q1 and Q3 are usually lower and is relative. Looking into Q4 - and again I’m looking backwards, it’s used to be the strongest quarter in the year. If you look at the last three or four years, Q4 was best quarter for all the years. It doesn’t mean that Q4 of 2016 will be the best quarter but there are few - I would say few characteristic behavior of the market around demand yields and budgeting institutional results that are buying that has impact on the demand. And again based on the information that we have today in front of us, the pipeline - the number of transactions and amount of products that we shipped already, this is the better estimate we can provide for the year.

And Erez thanks, I appreciate that. That’s helpful. And you actually - so a question off of your question. Has maybe the September quarter seasonal demand dynamic all sort of over the last couple of years, and could that be part of it as well given mix, given product presentation, given market exposure and things like that? So maybe December quarter now isn't a seasonal stronger quarter like it historically has been?

I would it’s really, really hard to say and it’s harder to quantify and to predict how much seasonality into the quarter, what the impact of seasonality into the quarter. On a high level, we know the trends. And I think that if you look at then, it’s not only part of Europe, it’s the entire capital equipment market behavior is I think in a similar way but try to quantify and to put all fingers on the numbers, really, really hard to do.

Right. Thanks a lot guys.

Our next question comes from Sherri Scribner with Deutsche Bank. Your line is open.

Hi. Thanks. I just wanted to dig into the On Demand’s RedEye business. What are you guys seeing there? Is there still demand for On Demand parts for your business, or is that business also seeing some slowdown?

Yes. Sherri, hi. RedEye was a part of the thing today’s SDM. It’s a relatively large business in Stratasys. Of course there is a demand. And I would say that it’s far, far what we’re seeing 3D printing market, it does have - or it does bring a different solution and different value to Stratasys into the market by the broad technology base that we have there, the knowledge, the application - the knowledge with the specific applications that are regained, so they are on progression, yes.

Okay. And then clearly GE is making some significant moves in the metal space. Do you guys don’t have a metal solution right now. Is that something you’re considering getting involved in?

So today, we do provide 3D metal printing services through our FDM business, and that is actually a growing part of that business and is doing very well for us. The metal markets in general is in pretty early stages, can we believe that it will mature into important part of the end markets and the one intent to, as I said, remain active in and price increase as we move forward.

Thank you.

Our next question comes from Brian Drab with William Blair. Your line is open.

Hi. Thanks for taking my questions. On the new products, the Robotic Composite, the Infinite-Build, then the new opportunity with the ULTEM and Airbus, just wondering if you could give us any more detail in terms of timing of revenue recognition related to those and margins relative to the average margins that you see in equipment and materials today?

Yes, so I can share the information that we have today on the table and I think that we are talking on [indiscernible] for another couple. It’s really too early to talk about price, market price, prices, gross margins. We have our internal plan, internal forecast but we are two years for - there are two years for us to grow in order to create a better product, cheaper product, better reliability. And once we will be closer to the product introduction, we will provide more information.

Okay. And then I wonder, have you commented on whether we’re going to see somewhat of a step-up in depreciation expense related to the impending completion of the facility in Israel?

So the facility is Israel is broken into two parts. The first part will be ready and occupied at the end of this year or maybe at the beginning of next year, so we will start to see depreciation. But this depreciation will come on the account for rents that we are paying today, and specific area running state that we sit today. Once we provide some guidance and financial, more quote on 2017 plan, we will provide you also the impact of the new building depreciation and if at all on our P&L.

Thank you.

Our next question comes from James Kisner with Jefferies. Your line is open.

Yes, hi guys. This is for [indiscernible] James Kisner today. So we had a question about your gross margin drop quarter-over-quarter. How much of that do you think is due to mix? I think you talked about J750 series not playing as important role in this quarter. And how much of is it due to cost reductions?

So I would say that most of it is a result product mix. We said during the previous call at the end of Q2 that although we had a very nice quarter for J750, we did not expect the same quantities to continue looking forward and J750 had nice contribution to the gross margin of company in Q2.

All right. And then for the - so it looks like in North America, it looks like you lost about $10 million revenue quarter-over-quarter. Is that also J750, or is that some other reason for it?

The decline on revenue coming only from J750. We sold and we currently have revenue in all regions compared to previous quarters. So I wouldn’t say most of it. Some of it is J750 and some of it is other products.

All right. And then the last question we have is, so looks like year-over-year your OpEx is down $13 million. I think this question has been asked? But any more detail, out of that $13 million, how much of that is due to cost reductions in this OpEx reduction, and how much of it is due to incentive - reduced incentive compensation variable costs?

Most of it is cost reduction.

All right. Thank you. That’s all we have.

Our next question comes from James Medvedeff with Cowen & Company. Your line is open.

Hi, good morning. So most of mine have been answered. Thanks for taking my questions. Can you just - on a housekeeping basis, can you tell us what unit shipments were in the quarter, and what CapEx was in the quarter?

We didn’t provide any information about units. So we didn’t think it’s for the benefit of the results. CapEx is around $10 million this quarter.

$10 million. Thanks. And my follow-up question is, historically in the past you’ve provided a much more detail on the breakdown of share-based compensation and amortization, and so the non-cash items in the GAAP to non-GAAP reconciliation. Are you going to make that information available for this quarter?

Yes, we didn’t changed anything from our reporting, so actually we see it in the 6-K filing.

And when will that be filed?

In the next few days.

Okay. Thank you.

Thank you.

Our next question comes from Ben Hearnsberger with Stephens. Your line is open.

Thanks for taking my question. I wanted to ask about the two technologies, FDM versus PolyJet. Are you seeing one - are you seeing sales in one area better than the other or are they performing relatively in line?

The short answer is no. And although you have to remember that we serve different addressable market, different application, different vertical with those specific technologies, so the point is it’s for specific verticals but we don’t usually use FDM. And we don’t see a different behavior from market perspective between these two technologies.

Okay. And then in terms of capital spend, you’re going to run around $50 million this year, about 7% of sales. What’s an appropriate level going forward?

So I think that this year and then probably next year, unusual in CapEx spend because of the new building - the new corporate building that we have in Israel. I would say that $25 million to $35 million run rate on a normal year is somewhere that you should calculate.

Great. Thank you.

And that concludes the Q&A session. I’ll now turn the call back over to Ilan Levin for closing remarks.

Thank you for joining today’s call, and we look forward to speaking to you again next quarter. Thank you.