Greetings and welcome to Stratasys Second Quarter 2020 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn your conference over to Yonah Lloyd, Vice President of Investor Relations.

Good morning, everyone, and thank you for joining us to discuss our 2020 second quarter financial results. On the call with us today are our CEO, Yoav Zeif; and our CFO, Lilach Payorski. 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 or referenced in Stratasys' Annual Report on Form 20-F for the 2019 year, as well as Stratasys' reports on Form 6-K that we are furnishing to the SEC today, including the related press release concerning our earnings for the second quarter of 2020 and our Operating and Financial Review and Prospects which are attached as exhibits to those reports on Form 6-K. 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 CEO, Yoav Zeif. Yoav?

Thank you, Yonah. Good morning, everyone. And thank you for joining today's call. As I mentioned last quarter, my first months as CEO have been spent carefully reviewing all aspects of our business in order to improve the corporate strategy. The COVID slowdown has on the one hand created a short-term challenge for the business and we will discuss the measures we have taken to address that. On the other end, it has created more opportunity to focus on this critical exercise to better understand our key growth levers and strengthen the foundation that will help position us for long-term profitable growth. The largest opportunity for us in 3D printing is in Polymers, and the fastest-growing area is manufacturing. We are already a leader in this market and expect to increase our presence through new offerings that will focus on delivering incremental customer value to this sector. I will first go over the current state of the business, and then share details regarding our new strategy. Our second quarter results reflect the impact of a full quarter of COVID-19, with revenues challenged by a weak macro environment, and a pause in capital investments worldwide. Cost-mitigation has been a universal business priority, which naturally impacts the purchasing activity of our customers. In addition, printer utilization, and therefore material usage, was low as many users across our install base were not working on site. We also continued to implement measures to manage costs. Most of our employees worked from home this quarter and we applied a 4-day workweek across the company. On top of that, our executive team took an additional 5% salary reduction; this will last through the end of the year. In early June, we announced a reduction in force of approximately 10%. As a reminder, this resizing was already…

Thank you, Yoav, and good morning, everyone. Total revenue in the second quarter was $117.6 million compared to $163.2 million for the same period last year, a decline of 27.9%. GAAP operating loss for the quarter was $29.3 million, compared to operating income of $0.8 million for the same period last year. Non-GAAP operating loss for the quarter was $8.1 million, compared to operating income of $9.1 million for the same period last year. GAAP net loss for the quarter was $28.0 million, or $0.51 per diluted share, compared to net income of $1.2 million, or $0.02 per diluted share, for the same period last year. Non-GAAP net loss for the quarter was $7.4 million, or $0.13 per diluted share, compared to non-GAAP net income of $8.5 million, or $0.16 per diluted share reported for the same period last year. Product revenue in the second quarter was $73.9 million, a decrease of 33.0% compared to the same period last year. Within product revenue, system revenue decreased 35.6%, compared to the same period last year. Consumables revenue decreased by 30.6% compared to the same period last year. Services revenue was $43.7 million, a decrease of 17.2% compared to the same period last year. Within services revenue, customer support revenue decreased by 7.5% compared to the same period last year. GAAP gross margin was 37.2% for the quarter, compared to 49.7% for the same period last year. Non-GAAP gross margin was 45.4% for the quarter, compared to 52.5% for the same period last year. The decline in gross margin is due primarily to the lower proportion of consumables out of the total revenue mix. As we noted on our last call, we expected a continued sequential reduction in the gross margin for this quarter. In addition, operational inefficiencies had an impact given…

Thank you, Lilach. To sum up, we believe that the value proposition of 3D Printing is more compelling than ever to the manufacturing industry. Even, in fact, especially in light of the uncertain global environment we are in today. We believe we have the ecosystem, resources and strategy to be the leader in Polymer additive manufacturing for all of the key growth areas: design, engineering, manufacturing and healthcare, with the strongest and widest portfolio, supported by the best sales and service infrastructure. We will enhance and broaden our technology offerings to serve significantly more applications and offer a full suite of solutions: systems, materials, software, and service, combined with the capability to rapidly expand applications with our wider array of technologies. We are confident that these efforts will reboot growth in the short to medium-term, provide us with access to a greater customer share of wallet, and drive our top-line growth in the future.

Operator, please open the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question today comes from Shannon Cross of Cross Research. Please proceed with your question.

Hi, this is Ashley Ellis on for Shannon. Yoav, you provided a lot of detail on the Polymer market and manufacturing, which is very helpful. But I'm wondering as you think about the Polymer strategy, where does your metal technology sit in that? And then similarly with manufacturing market Makerbot that you have some desktop systems for engineers, but I'm just wondering how that business kind of benefits the manufacturing market and then I have a follow-up. Thank you.

Thank you. So let's start with the metal. We are here to gear the company for short and medium level growth and making sure we're maintaining and strengthening our Polymer position. But we have metal, we have the LPM but it's in a nurturing stage. And we're really exploring our best way to move it forward. It serves different customer base. It has a different value proposition and it's still in a nurturing incubation stage. And it will not be the one that will generate growth in the short-term. So we're exploring it and we'll update on it in the future. Now for Makerbot…, by the way on metal, we are one of the largest leaders in metal manufacturing with our SDM and we are well known for quality of parts that will keep running, but that's on the parts side. And so Makerbot, when we are saying, this is exactly… this is a fantastic example for the advantage of focusing on Polymers because we start with Makerbot with engineers and then we take it through the lifecycle of the parts from the design through the functional engineering phase of developing the product through the production. And what we're doing with Makerbot where we have significant competitive advantage in terms of our new offering, which is a heated chamber, we're going to stop and Makerbot is part of Stratasys and you will start with the same, I will say, platform and ecosystems and environment, no matter where you are in the lifecycle of developing a product from initial design through manufacturing and production.

Got it. And then you mentioned willingness for inorganic development, I guess in the near-term, or maybe the mid-term. Are there any areas in particular that you're considering and what parameters would you put in place if you were to make any acquisition? Thank you.

As you expect we will not share specific details. But in general we're looking for best-in-class technologies that will generate revenue and will be contributing to our EPS, first of all. And also we have the balance sheet and the fact that we have cash and ability to invest puts us in a very good position to meet those criteria. And we're going to act responsibly and to find those that will strengthen our position in Polymers.

The next question is from Ananda Baruah of Loop Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for taking the questions. Yes, just a couple if I could. The first one would be with regards to the strategy. You just spoke to sort of M&A a little bit. How would you guys like us to think about incremental investment, even if anecdotally and philosophically that'll be required to get the new strategy to the place you want to be? And then if you could just talk about often new types of talent that you may need in that regard also. And if you could also mention what it might do to cost structure. I know you said you made mention earlier that there may be some model changes, is that also part of the model changes and then I have a quick follow-up as well. Thanks.

So, hi, good morning. A bit of a repetition, but we have a healthy balance sheet, we are well-positioned and we are very attractive by the way for many companies to cooperate with us, both on the M&A front because we're bringing this huge infrastructure that we have, that can leverage any technology practically in the Polymer space. But we're there. We are leading the space and given our strong position, I would say balance sheet position, we will not compromise on best-in-class technologies, companies that started at least to generate revenues and to grow and to contribute to our operating income. This is the general guideline. As for the expenses, you want to address it, Lilach?

Yes. So obviously when we address the resizing plan, a few months ago, and we know what are all the objective going forward and we mentioned, it was not because of the COVID-19, it was more about more from strategic perspective. We also made sure that we allow for future growth in area where we believe there's going to be expansion that requires investment. So we obviously going to balance those additional investments with priority on compromise on average or taking out different priority in order to address if needed additional investments.

Got it, that's -- that's helpful. So what that sounds like to me is there'll be additional investment, but for the most part, you'll be able to accommodate it inside of the current OpEx model. It will -- you're not going to, there won't be a shock to the OpEx model going forward.

Yes, yes. The expectation is we will… when needed.

When needed. Understood. And then my follow-up is just could you share with us any context around conversations you've had with the manufacturing industry, with regards to sort of fast-forwarding or moving forward some of the 3D printing initiatives, you gave some of the metrics but I'd love to get any of the additional context in the conversations you've had over the last few months?

Ananda, I'll just say, before we go to the next set of questions, I want to clarify, it's not necessarily that we are not commentarying here or providing a direction in terms of how the spending our OpEx and spending going to look like in the future, would say that we basically prepare ourselves to allow for additional expansion, if needed. But we are not commentarying specifically now in terms of what does it mean and how it's going to look like and specifically on any specific acquisition.

Thank you.

How about manufacturing? You know, we did this amazing infrastructure globally which allow us or enable us to offer both systems, materials, software, service, around the globe. And we can do much better in terms of leveraging this system or this machine that we've built over the years. And really something which is unprecedented. Now we take it to manufacturing and we are already in manufacturing because we have those FDM machines that are repeating and are being used for end-use parts. So we build on this and but we are stepping much further than this by getting into discussion with manufacturers, or producers in our key industry to make sure we really understand the needs and we tailor the technological solution for their needs. This is the advantage Stratasys has, we're the leader there. We want to make sure that we leverage this position.

The next question is from Paul Coster of JP Morgan. Please proceed with your question.

Yes, thanks for taking my question. So first-off, I had the sense earlier on in the year that new products would be coming to market pretty quickly, obviously, the J55 has been a success. But we were looking I guess for the Xaar High Speed Sintering Solutions come to market soon in a meaningful way and also your SLA product line to be extended. Can you just comment on sort of near-term catalysts around new products?

Yes, for sure. So maybe it's important to state first of all that we, with all the cost measures that we took, we made sure that we're not reducing or we're not hurting the new product introduction. That's very important to share. We already introduced the J55 which is really state-of-the-art. There is nothing even close to it in the industry in terms of design machines or I would say, advanced machine for designers. And it's in the market and we see really good traction from design houses and whoever wants to take its design capability to the next level. At the same time, we have other products in the pipeline. One of them of course is the Xaar and we're going to launch it. We didn't commit to a specific date and we also mentioned the fact that we want to go out in a date where we will be able to capture the market absorption or the market excitement, which is not exactly what we see now in the market. But we are there, it's going according… we are moving on track. And we look forward to updating you in the next call.

Okay. And Yoav, I just want to reconcile two comments made. On the one hand, the market is fragmented and sort of almost necessarily so by the combination of print engines and materials and yet at the same time you see an opportunity to be a sort of a full-scope provider of polymer-based solutions. How do I reconcile those two apparently conflicting statements?

Okay, thank you for the question. So that's exactly the reason why we want to focus and we are focusing on Polymers. It's a fragmented market. The biggest profit pool is Polymer. What we know is Polymers, both on the chemistry side and from the hardware side, this is our expertise. This is the deep knowledge that Stratasys developed on both sides of the ocean for the last 30 years. And now there are so many segments and applications and the industry is an evolving industry. It's not like the car industry that you know, it doesn't matter if it's a Toyota or the Mercedes, it will take you from A to Z, for specific application in its specific solution. And we have those solutions and we will broaden it as well. And then you create this focus across the different Polymer segments. So on one hand, you're addressing many of the applications; on the other hand, you leverage it and you don't suffer from de-focus because you leverage the same infrastructure, the same knowledge and the same go-to-market. So in other -- from a different perspective, I can say, it is very difficult to be -- to have a scale and the advantage of scale if you're going for one application, let's say jigs and fixtures for example, because you need to put all those people in all those countries and to support them with service with application engineers. But if you're already there, it's just about making sure you have the right technology to the right application. And we are there and we will make sure that we will be there even in a stronger way.

The next question is from Jim Ricchiuti of Needham & Company. Please proceed with your question.

The question I have is just as we've started to see some of the countries opening up, are you seeing any signs of your consumable business starting to pick up in those regions where we're starting to see companies coming back?

Hi, Jim. Good morning.

Hi.

Yes, definitely in -- hi, so definitely in Q2, we saw a reduction in almost across all industry, aero, auto, dental significantly, you probably heard it also of course, other sectors in what we are - -so this is effectively impacted the entire Q2. What we see some anecdotally -- anecdotally indicators is specifically from dental, that they are slightly back to business and seems like dental is picking up in the dental aspects. It's probably too early to address other area also. We heard it also there's some coming back but it's probably too early to comment on that specifically in our visibility, close to the end of the year or specifically to this quarter as well it still remains low. But we're cautiously optimistic given what we see in the market.

Do you view the SDM business is being an early indicator of the possibly return in the business that might indicate a recovery in the rest of the business?

Some cases it did, some cases --

It really depends on the -- it really depends on the industry. Our parts business is heavily also impacted by aero and also from the service business. So it is impacted by that. And the overflow of orders obviously these are the first sign of the crisis was, that customers are shutting down some overflow of orders. So it's too early to see whether there we see some recovery coming back in the parts industry.

And lastly just on the pricing environment, what are you seeing both on the hardware side and on the service bureau side?

Yes. We don’t -- we didn't see any significant pricing pressure. It's more about capital spending overall and shutdown of - - customer shutting down. So it's not -- it was not about pricing pressure, we didn't see anything significantly on the hardware as well as on the consumables.

The next question is from Brian Drab of William Blair. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. I just wanted to first make sure that I have this right in my notes, I see $30 million in cost cuts, is that broken down roughly like $22 million, $23 million, $24 million SG&A and the rest in COGS that how to think about that for next year as a run rate?

Yes, you're right that $30 million is across all spending function including cost of sales as well as OpEx and this is an annual spend necessarily a -- it's the yearly spend not the quarterly spend. We do not break specifically the breakdown between OpEx and cost of sales, but you can assume that some portion is as well going to cost of sales as well.

Okay. And so you're not able to say, I mean that's in my notes here, I don't -- I don't -- I'm not sure who I've spoken to, I believe, Yonah, but mostly it was SG&A. Can we even say that like, just to help us model it would be really helpful. It's a large amount, and it has huge bearing on how everyone's going to model gross margin?

Yes, the majority it is -- the majority it is OpEx but there is a portion also probably, yes there is a portion that goes to cost of sales.

Okay. And then how does your On-Demand business do in the quarter? And how is that trending into through July?

[Indiscernible].

Generally, SDM was down significantly this quarter impacted mainly by those key vertical in fact, the aero and auto. And the parts business is basically indication of the economic overall is impacted by the overflow of orders, customers. The first thing that they're doing is basically shutting down those overflow or any projects that are not necessarily, so that's why the parts business is significantly impacted. It's too early to say whether we see a business coming say, whether the business is coming back in July. We see sometimes, but it's too early, so we cautiously optimistic in terms of how SDM going to look like in Q3 and in Q4.

There are no additional questions at this time. I would like to turn the call back over to Yoav Zeif for closing remarks.

Thank you for joining us. Stay safe and healthy, looking forward to updating you again next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.