Hello and welcome to Stratasys' Q2 2021 Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yonah Lloyd, Chief Communications Officer and VP, Investor Relations. Yonah, please go ahead.

Good morning, everyone, and thank you for joining us to discuss our 2021 second quarter financial results. On the call with us today are our Chief Executive Officer, Dr. Yoav Zeif, and our Chief Financial Officer, Lilach Payorski. I remind you that access to today's call, including the 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 2020 year, which we filed with the SEC on March 1, 2021. Please also refer to our Operating and Financial Review and Prospects for the second quarter of 2021, as well as the press release that announces our earnings for the second quarter of 2021, which are attached as exhibits to two separate reports on Form 6-K that we are furnishing to the SEC today. In order to obtain updated information throughout the year concerning our quarterly results of operations, and the risks and other factors that most impact those results, please see the quarterly earnings press releases and our quarterly Operating and Financial Review and Prospects, each of which are attached as exhibits to reports on Form 6-K that we furnish to the SEC on a quarterly basis over the course of the year. 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. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today's press release. Now, I would like to turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Thank you Yonah. Good morning everyone and thank you for joining us today. Today, I will walk you through the highlights of the second quarter and some recent developments. I will then discuss our ongoing progress to expand our leadership position in the polymer 3D printing market, producing and delivering the most innovative, next generation technologies that address the fastest-growing manufacturing applications. Lilach will then provide financial details for the quarter and give an update on our outlook before we take your questions. The second quarter continued to show accelerating growth for our company. The 3D printing industry is moving toward providing full-scale digital manufacturing platforms at mass production levels, rather than being primarily a prototyping tool. Stratasys is at the forefront of this shift with our best-in-class solutions for this high-value market opportunity. The Company's quarter was highlighted by 25% year over year revenue growth, well above our previously shared expectations and driven by growth of 32% in hardware and 39% in consumable, offset by slower growth in our parts business due primarily to the relatively slow recovery of the aerospace market. While we are pleased to have produced our third consecutive quarter of sustained revenue growth, we know that it is critical to continue to invest in technology, software, material, and talent to further enhance our leadership position and to drive future profitability. Our business momentum and customers' manufacturing operations are nearing full recovery from the pandemic, as evidenced by both consumables and services revenues returning to near 2019 levels. We are seeing good reception to three recently-launched systems; the DentaJet and MediJet specifically for the Healthcare sector and the RPS stereolithography systems that we acquired in Q1. We are also seeing excellent market reaction to our new Carbon Fiber material for the F123 Series. Importantly, we realized…

Thank you, Yoav, and good morning everyone. We are pleased to have exceeded our stated targets in the second quarter. The 25% total revenue growth compared to the corresponding quarter of 2020, especially the 35.8% growth in our products sales, along with our positive cash generation, support our growing optimism around the continuing economic recovery from COVID-19 and our unique position to lead the market. For the quarter, total revenue was $147.0 million, up 25% versus the prior-year quarter and in excess of our previous outlook of mid-teens growth. This was primarily due to stronger than expected performance in Europe, a substantive increase in our consumables sales to almost pre-COVID 2019 levels, our Customer Support revenues exceeding 2019 and the successful launch of the RPS resin-based systems. Customer reception to RPS has been solid, demonstrating our ability to leverage our go-to-market access to customers that helps to accelerate sales. On a constant currency basis, total revenue grew 22.4% versus the second quarter of 2020. Product revenue grew almost 36% in the second quarter to $100.3 million, compared to the same period last year, or 32.6% on a constant currency basis. Within product revenue, system revenue grew 32.0% to $45.6 million compared to the same period last year and increased 29.2% on a constant currency basis. This growth was bolstered by the introduction of the new systems we discussed earlier, including RPS and the new Healthcare printers. The rate of growth clearly demonstrates that an end-market recovery is well underway compared to the corresponding quarter of 2020, which was fully impacted by the pandemic. The quarter also saw improved consumables utilization, showing strength after the COVID slowdown. Consumables revenue rose 39.1% to $54.7 million compared to the same period last year and was up 35.5% on a constant currency basis. Relatively…

Thank you, Lilach. The second quarter was an exciting one for Stratasys, as we saw growth across all platforms accelerate. We expect that our existing market-leading offerings and our new platforms that will begin to ship in the fourth quarter will provide incremental growth that should contribute to revenues, cash flow and earnings in the coming years. The order pipeline for these new systems is solid, and we look forward to updating you further after the launch. We are executing on our strategy to enhance our leadership position in polymer 3D printing, and with our strengthened balance sheet we are in a position to create long-term value for all of our stakeholders. With that, let's open it up for questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Shannon Cross from Cross Research. Your line is now live.

Thank you very much, appreciate it. And good afternoon. I wanted to dig a little bit more into what appears to be somewhat of an inflection point in clearly your revenue growth, or revenue trajectory. But also, I'm curious from an industry perspective, if you could talk a bit more about what you're hearing from your customers about why they're buying the product? What they're looking at using the product for? And essentially, I'm trying to understand how much of the growth is sustainable past the rebound following COVID? So, anything you can you can provide to us would be helpful. Thank you.

Hi, Shannon, good morning. Great question. Because we are definitely in an inflection point for the entire industry. And we benefit from this inflection point, because we are the leader in polymer 3d printing. But we also work very hard to make sure that we are supporting it and delivering the expectations of our customers. So, in a nutshell, no bells and whistles here to be honest, a lot of hard work to deliver constant growth by addressing the customer's needs. It sounds a cliche, but it is what it is. And it's all about delivering the best part, good economics, reliability, all within a package of material and software and service, that support the workflow in manufacturing, and can really be something that the customer can lean on, in terms of adopting 3d printing. And this is what we are doing day after day. And it's a journey. But I'm happy to say that we see the start of getting there. And those manufacturers, our customers, this huge installed base that we have the leading companies in the world, they are updating their factories plan, they are updating I would say the vision that they have, each one of them has a specific theme that looks at the plant of the future. And 3d printing is part of it. 3d printing is definitely part of it in the long term. And we are there and we keep supporting them. I guess, how has the conversations changed maybe in the last three to six months as you've been talking to customers, because again, it seems as just like you said this is sort of an inflection point for the industry? Or do you think this is something that's been building for quite a long period of time, and it's just starting to happen now?

I would say there are two underlying forces here. One is that the COVID, as we said in many earnings calls over the last year opened the eyes of leading manufacturers to the benefit of 3d printing supply chain. So, instead of having a distributed supply chain, let's have digital inventories. Let's shift from long lines of manufacturing and production into a file and the machine which is supported by the whole system what we are providing that very strong force that we are it's a different level of engagement and the second force is what we are doing here within Stratasys. So, we are working on addressing those needs. So, we have this benefit of having the direct interaction with our customers. And we are tailoring what we are doing. So, we have great example with GM and TE connectivity. And we are leveraging relationship to tailor our solution that has to be manufacturing great. So, we have materials, we have software critical in manufacturing. We have service, as I said at the beginning, no bells and whistles here. A lot of hard work to make sure that we are coming with manufacturing great solution.

[Operator Instructions] Our next question is coming from Wamsi Mohan from Bank of America. Your line is now live.

Yes, thank you. And congrats on a good quarter. In your press release, you say a longer term, the company continues to expect significant leverage benefits from its investments as revenue growth should start to accelerate in 2022 and beyond in those. I was curious, what is your baseline of for which you're saying acceleration, clearly 2021 has got? You're showing very strong growth in this past quarter. You're projecting quite strong growth even for the next quarter. But it's coming off of a very tough year. So, when you're speaking about acceleration in '22, how should investors think about the magnitude of revenue growth? Or what is the relative base over which you're expecting to accelerate? And I have a follow up.

Thank you. Thank you, Wamsi. Good to hear from you. I would say, technically and let Lilach add some comments afterwards. Technically, we are looking at two-time horizon. So, we need to be better than last year. Let's not forget COVID is still here. Okay. But we are doing well on this front. And we need to make sure that we are improving against 2019. And that's also what you see in our script. So, it's very clear, what's the baseline where we need to improve. But this is technical. What is more important and more meaningful is what are those catalysts that will take us forward, that we can say that we feel comfortable with continuously showing growth and accelerated going forward. And in one word, its manufacturing. We have a very clear strategy, we stick to the strategy, we added three new technologies this year. Stratasys is no more a company of two technologies. We are a company of five technologies. And we make sure that in each one of those technologies, we have - don't want to be to hear too arrogant, but we have the best solution. In terms of the print quality, its manufacturing, we need to deliver the expectation of the manufacturer. We add three new technologies, we'll start introducing them in Q4. And then 2022 will be the first year where we have really full coverage of every problem that any manufacturer of polymers can have. So, we are not coming with one or two, we are coming to solve this problem of our customers. And this makes us feel very comfortable in terms of the top line next year. Because we are coming with three new technologies and leverage what we have. We have the infrastructure, we have the network, we have the software system, we have the materials, and we just push three more technologies into the market.

Wamsi, good morning from me.

Hello.

Wamsi, do you want me to? So, also from a timing perspective, as I would like to remind you that we actually come in with three new technologies and two of them actually in the second part of the year, mostly through Q4 this year. So, we are expecting to see a meaningful growth and the full impact of adding this new technology during 2022. And this is the main accelerator factor for us.

Okay, thanks for that. And if I could follow up, I think you were very clear on sort of gross margin impact and cost pressures continuing to persist. And Yoav you just said that, COVID is still here. Is there a revenue headwind that you're factoring in as well in your guidance here in next quarter and beyond that could be coming because of component issues or supply chain issues outside of cost, but more from a demand or revenue standpoint? Thank you.

So, we are always managing the day-to-day and the day-to-day is also delivering product every day and developing product every day. We have a solid pipeline. As we wrote, we have a very solid pipeline for the new technologies. We manage the supply chain on a daily basis, we restructured our SNMP process to make sure that we are on top of the issues. We gave our operations high degrees of freedom to increase inventories. Every company in our sector and in high tech are facing the same issues. Currently, it seems that we are on top of the challenges, but definitely there is uncertainty. And yeah, it looks good. I cannot say that it doesn't exist out there. It's a daily struggle.

Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.

Hi, thanks for taking my questions. So obviously, the revenue growth isn't improving and things are recovering. My question is, how expensive is this growth going to be longer term? You mentioned in the prepared remarks leverage on cost going forward. But, if you look historically, over the last many years, OpEx has averaged about 50% of sales. Looks like it'll be about that this year. What sort of targets do you have in mind even just roughly for where you think OpEx can be as a percentage of sales, because I think a lot of capital equipment type companies, similar companies would be in the 25% range? And it's been elevated for a long time here.

Good morning, Brian. So, at this stage, we are not providing specific long-term guidance. But as we discussed previously, regarding our scale, we do anticipate to leverage significantly our skilled position. We have a border infrastructure from a go-to-market perspective and corporate to address three new technologies on top of the two one that we have. So, practically will have fast technology on the same infrastructure. It's true that in 2021, you don't see that level that much. I would like to remind you that we are still in a COVID related year, right. And we increase cost coming back in organization to five-days workweek and we add two acquisitions. But definitely, when we look at the horizon in the future, we are anticipating significantly accelerated growth in revenue and be able to leverage the infrastructure without adding meaningfully additional cost to our cost base. At that point, I cannot specifically show the specific percentage, but definitely this is the direction.

Maybe I'll just add. In general, we resized the company last year to make sure that we are releasing resources to invest in our growth. And that's exactly what we are doing. We are in an investment mode. Long term we are leveraging our scale. Our intent is not to deliver only on the top line growth, but also gradually to improve profitability. It's very clear, we know exactly what we are doing. And we are leveraging what we have. And we have a great company and great people here.

Thanks. And I just need to follow up on Wamsi's question because every analyst buy side and sell side is going to be looking for a clue as to what's happening in 2022. And you gave guidance for this year that for sequential growth that is going to lead us to model somewhere in the range of 12% to 14% year over year growth in 2021. And then, in the opening of your press release, you say you'll accelerate revenue growth in 2022. And just by definition, that means a faster growth rate. But what you answered Wamsi with was led me to believe that you're not necessarily saying that 2022 revenue growth will be greater than 2021. Is that - are you not forecasting faster growth in 2022 than '21?

Hi, Brian. We're actually not providing guidance for 2022 right now, but the growth will come. We know what are the driver for the growth. As I mentioned to Wamsi, we are introducing two new technologies in the second part of the Q4. So, we are planning to a see meaningful growth coming for these two technologies in 2022. We believe the growth will come in the right time, we will also want to share the specific expectations for the growth side.

Thank you. Our next question today is coming from Noelle Dilts from Stifel. Your line is now live.

Hi, guys and congratulations on a nice quarter. I was hoping you could just kind of give us an update one on how you'd be the - so far how things are progressing with the recent acquisition's origin and RPS? And generally, how that's compared to your initial expectations? And then also if you could just comment on how you're thinking about M&A moving forward, and what you're seeing in terms of opportunities in the market and valuation if there's been any change that relative to last quarter? Thanks.

Hi Noelle, good morning. It's going well, it's going well. We acquired really good companies with leading technologies, I will say disruptive technologies in terms of their specific areas. So, you look at origin and their DLP solution, it's a completely different DLP solution than any other in the market. Completely different. Origin is on track. RBS is better than originally we thought for Q2. So, we're doing better than we expected. And M&A as I said in many other calls before, it's all about accelerating our strategy. We are becoming more attractive for startups. And for some established company, because we have the infrastructure. This becoming to many of the leading and most innovative and disruptive companies out there in our industry, the one thing that they are missing is this infrastructure. And we can provide this infrastructure. And that's why we had a win-win situation with Origin and they joined us and today they're part of Stratasys, an integral part of Stratasys. We are on track. And we will introduce the completely new upgraded, better machine in Q4.

Great, thanks. And then a couple of somewhat related questions here. So first, just given the number of technology upgrades and new product introductions you've had this year. We didn't have rapid our Formnext last year, how important are these events moving back to live events and going to be for you in terms of getting folks comfortable with these products? And second, you've obviously, again, had a lot of introductions this year, how should we think about kind of the pace of technological and new product rollouts as we move into next year? Thanks.

Great question. So, we are engaging with our customers. By the way, I'm very excited really, it's exciting to engage again live with our customers currently in the U.S. for a long time. And I start meeting customers face to face, which is really exciting. I wouldn't say back to normality, but it's exciting. And we are going to participate in rapid and inform next to introduce our whole baggage as I call it. Because we have five technologies supported by an ecosystem of software and material and we are going to introduce it. Having said that, we didn't stop interacting and engaging with our customers. All the time, we found a different alternative solution. So, we have a track that is going all over the U.S. We were the first one to do it. And we have in some cases, in one location, we have more than 100 leads of specific engineers because they are coming to the parking lot to see our truck and our new solution. And it works and it works well. Another alternative that we doubled down on it was the whole digital interaction and engage webinar, it works really well. So, I can say, we are not sharing those numbers, but we have a better pipeline. And so, we found alternatives. We found alternatives. And I want just to be clear, we're talking about the new technologies, but we are doing well with the current technologies as well. So, the current technologies are growing, we are innovating with what we have, because no one has better FDM or better PolyJet material jetting than us. We have new systems. In PolyJet, I just mentioned the MediJet and the DentaJet, which targeted very lucrative market, we have fantastic unique new machines below 100K in the FDM space, the F770 and all of them are doing better than expectations. As we put all our efforts on the new technologies to make sure we have solution instead of just technologies, but also the existing technologies we'll keep innovating, and we're doing well on them.

Thank you. Our next question today is coming from Paul Chung from JP Morgan. Your line is now live.

Hi, thanks for taking my question. So, for the Origin, just to follow up on the Origin. You mentioned kind of incremental $200 million over five years for this product when you acquired it. I know, it's ramping in Q4 and it's early, but kind of based on initial customer feedback, have your views changed at all, since you acquire the asset, either in magnitude or kind of timeline on how that ramps? And what are your expectations for margins on the product and for the system and consumables there? And I have a follow up.

As you said, nothing changed. And nothing changed from our perspective as well. We are confident in our focus. And as you know, we are not updating gross margin by product. But we are confident, actually even more confident because we are into the details of the technology, it's not any more due diligence, or we just run benchmarks. We are into the details of it. We are engaging with customer. We have some large customers that are very interested in this new technology. And just maybe, to put kind of flavor around it, it's generating for us many what we call new logos, which is really exciting. Because it's so unique, because it's expanding our span in terms of technologies and solution, we keep the focus that we have in the past and we are very happy with this acquisition.

Okay, great, thanks for that. And then just on cash flow, can you talk about kind of working cap dynamics. Should we expect some inventory build ahead of product launches in the second half and possibly a bigger drag this year in inventory on a higher component cost relative to last year, we saw a nice funding source there. If you could talk about those dynamics? And then, given the strong start to the year, can you be in positive territory for cash from operations for the year? Thank you.

Good morning, Paul. So, following to what you mentioned the most important things for us is obviously meeting the customer demand and specifically, in manufacturing make sure that the system are not in downtime. So, make sure that we have inventory in place at a region at a time is critical. So, we will do everything that we can in order to overcome those shortages and this is what we are doing. It may also impact our inventory levels. So, we are ramping up now the inventory level as well as because of the new product introductions, we are ramping up the inventory levels. So, we do expect at the second part of the year to see inventory level going up and it may impact the cash flow in a level. With that, we believe that this is the right thing to do for the company and for the business where the growth is coming. As we look for the second half of '21, we are not providing specific guidance. But we expect the majority of the growth also, of the revenue to occur in the second half of the year. So much of the cash flow benefit will come in 2022 and beyond. And as I mentioned that the preparation for to the launch of the three significant NPI were recently introduced, coupled with cyber safety stock we're building to mitigate the raw material shortage, is expected to increase our inventory level and a payment in the coming quarter.

Thank you.

Thank you. Your next question today is coming from Troy Jensen from Lake Street Capital Markets. Your line is now live.

Hey, good morning. Thanks and congrats on really nice results here. A quick question for Yoav. I guess H350, hoping we can spend a little time on that. I guess my thoughts are, that's probably going to be the most production focused product you're launching here. That's the material sales could be pretty significant. But can you just talk about how much open or closed or can customers use third party materials? Or how much material consumption on H350 do you guys think you guys can capture?

Hi, Troy. Good morning. Thank you for highlighting the H350. Yes, this is a manufacturing machine, no doubt. And we have big expectations from it. We build it for years together with the inventor. And we believe we have a very strong offering for mass production in 3d printing. And just to highlight the most important thing, this is a fantastic machine, but in general, we believe that we will deliver the best consistent accuracy. There are I would say better control of the whole printing process, but mainly around thermal control, which allows easier certification of material and easier development of materials and get best to it. And also better economics, because we are using only one agent, one engagement which allow us to have better recycling ratio and better density within the cake. So, when we are talking about better control, it means that we will be able to introduce more materials because the control allows you to certify materials to develop and certify materials in an easier and faster way. So bottom line, this is the strategy with H350, to go out there, to develop the hybrid material that we discussed many times. So, hybrid material will have our materials, third party's materials, and different levels of cooperation, which will allow us to come with the most, I would say wide manufacturing powders. So, that's that in nutshell, the strategy. And we are optimistic on the H350. The materials are going are looking really good. And customers are happy and we are producing a new spot.

All right, perfect. About the second question would be on you guys have had good traction here with your carbon fiber with the F123. Have you looked at all at continuous carbon fiber? I'm assuming you guys are mainly just chopped.

Great question, Troy. Thank you. So, we are seeing good traction for our new carbon fiber for the F123 series. And we have a huge advantage in terms of our part quality with carbon fiber. We just took it from our high-end machines and put it also our door or I would say entry level series, which works really well and incentivize many customers to adopt this type of printers. And we see also new logos there. So, this is a great direction. Here in Minnesota, we have knowledge about carbon fiber for years and we reach I would say the largest size of material with carbon fiber in the industry because of our filter chambers capabilities and knowledge on the FDM side. Some of those parts are being used as end used parts mainly in aerospace, but also in some cases in automotive. So, this knowledge will help us to develop the next generation. But as you know, we don't talk about development. We are not sharing here our development plan without competition - without competitors. But we have the base, the knowledge, the experience to be there and to lead the carbon fiber market. And the benefit, it's right there. This is the whole idea behind focusing on polymers, because we believe that it's lighter than metal, stronger, could be stronger, allow some geometric freedom. And we leverage all these to make sure that we combine our experience and knowledge in IT together with our vision to replace metal and we will be there with end use parts with composites.

Thank you. Your next question is coming from Jim Ricchiuti from Needham & Company. Your line is now live.

Hi. Question I have again is going back to the acceleration that you're seeing in the business. So certainly, Q2 stronger than expected Q3. A nice acceleration. So, my question is, how much of this are you seeing is potentially some share gains but how much of this is just catch up from abnormally low levels of demand and equipment utilization? And really that ties into my follow up question about '22 which we're all struggling with? Does that begin to normalize in '22 and then you overlay the new products? Is that the way we should be thinking about your growth?

Hi Jim, good morning. So… Hi, good morning, it's Lilach. So, it's basically combination. So, we definitely see recovery at our end market for sure. Okay. And we're happy to see that. We see companies are coming back specifically, consumable companies are coming back to work. Start utilize the system. And we see those on services, to remind you in systems, we are a very like nearly 2019 levels in a utilization of consumables. In services, we actually are even more than 2019 level pre COVID so, we're definitely happy about that. See, the market is open up and companies are coming back. On the same time, we are seeing also a new trend like, for example, in EMEA a very strong EMEA manufacturing application demand for products. We see companies, we see government providing a funding for the industry. And this is where 3d printing actually in our technology have the benefit. And we leverage in this uptick demand as company understand the adventures of additive manufacturing. We also introduced new machines in healthcare systems, our new DentaJet, as well as the MediJet. These also contribute to the strong growth that we see this quarter, as well as the customer reception to our LPS product. It was excellent even more than what we expect. And this is definitely a testimony to what we believe in the future will happen. We have the best go-to-market in infrastructure and as we introduce more and more technology on the same install base and the same go-to-market, we definitely can enjoy from accelerated course.

Just to add to it, it's a combination very hard to draw the line here, but it's a combination between returning to growth. And this is also the assumption going forward. No one can predict the future but we assume that the world is coming back to growth. But not less important, we are introducing new products. We are improving the execution of this company. We are having better relationship with our customers. And on top of all this, we have already RPS and stuff. So, that's why we feel confident when we are talking about our future.

Okay, my follow up is just with respect to gross margins, similar gross margins over the balance of the year that you were talking about that you saw in Q2. With the new products that you're bringing out later this year, is there any things that we need to consider about your gross margins, at least in the early part of next year?

Hi Jim. At that point, we are not providing specific guidance on gross margin for next year. And obviously, gross margin is a - we have a wide portfolio and ultimately, it's a mix issue. So, if we think about manufacturing strategy in overall manufacturing application, we expect revenue to be significantly higher, a bigger profit pool, which will drive consumption up, will generate a higher profit. At that point, we are not providing any a specific detail in terms of how this will play. But we do believe that it will have an impact in our gross margin. On the same time, we also have content design focused initiatives for the new product. And as we introduce new products, usually they are in their highest growth stage in their life. And as they mature from also consulting perspective, as well as some design perspective, we are anticipating to see the cost is down. So, we are also working on this, is another initiative. And as we noted earlier, specifically, we have mentioned about the fact that we are ramping up the monetization of our software business. And over time, we're going to see some positive impact of these margins on the business as well.

Thanks a lot.

Thank you. Our next question today is coming from Ananda Baruah from Loop Capital. Your line is now live.

Hi, I guess good afternoon. Good evening, guys. You guys, congrats on the solid quarter. Thanks for taking the question. I have two though, I'll ask them at the same time, they may - as the answers may be related. The first part of it is you guys sort of the degree of strength above what your expectations are, do you have any context you can share that you've discerned as to what the drivers of that strength was? And then the second part of that is, I guess, in the…

Sorry, you're disconnected. Sorry for cutting you. Can you please repeat the question?

Certainly, thanks. So, do you have any context or visibility around what the drivers of the strength of your expectations were for the quarter? And it really feels like it's for the second half of the year here? And then the second part of the question is, any context you can share around the shift of your revenue mix towards production kind of currently away from the classic credit cycle business would be helpful as well? Thanks on this.

Good morning, Ananda. So, we are definitely we're happy to see a higher revenue rate compared to what we previously thought. And there was a couple of the elements that drove this trend. First of all, is the consumption of the consumable. It really depends also on the market recovery, and we're happy to see that the market recovery is actually is going better than what we thought. And utilization of our system is going up as companies are coming back. Having said that, we all know the recovery is still here. But we definitely see a good sign. And if you compare it to last to pre COVID, we are nearly pre COVID level. So, this definitely is a good time that it contributes to the increase of revenue above what we expected. As well as we see on EMEA side, a significant impact from government funding of customers. And industries specifically in Italy and UK, a manufacturing application. So, we see this trend, and we hope to see this trend also going forward. As well as the introduction of our healthcare system including the new jet DentaJet and MediJet, we just launched it in March and in May. And we saw a very, very good reception to this product. And the last thing is the LPS product that we just acquired in Q1. And we immediately launch it within our install base. And we see a very, very good reception within our go-to-market and our customers. And this is again a testimony of our scale strategy with the new technology.

Thank you, Lilach.

[Indiscernible]

I will - okay I will relate to the manufacturing and prototyping question. So, as you know, we shared, we were the first company in the industry to share the ratio of our sales going to manufacturing. We are measuring it, and we promise and we do it to review it once a year on an annual basis. Every first quarter, we will announce it. So, we are measuring it and we are following it. We're optimistic. As I said, at the beginning of this call, leading manufacturers in the world decided that the plant of the future will include additive manufacturing. This is a fact. And when they are going there, they value our establishment. They want to do it with Stratasys. It's very clear, and we can see it on a daily basis. It's a journey. But we are leading this journey. We are shifting this industry on the polymer side, from rapid prototyping to manufacturing. And just to remind you, we just launched three systems focused on manufacturing. So, it also gives more confidence to our customers that we are committed to this journey. We launch it, we announced that we will have on the Origin and on the software hybrid material model. And we are building a software platform to support it. So, we are building the full package. And put yourself in the seat of someone in the Fortune 100 when they are taking those huge decisions because they are challenging the status quo and changing the way they manufacture products. They want to make sure that they have the right partner on their side. And we are the right partner.

Thank you.

Thank you. Our next question today is coming from Greg Palm from Craig-Hallum. Your line is now live.

Yeah, thanks. So, you mentioned this sort of continued headwind and rising input in logistics cost. I guess I'm curious if you saw any supply chain challenges that may be impacted your ability to fulfill orders and are you able to quantify at least what sort of those rising input and logistic costs is? Is it a 100-basis point impact? 200 basis point impact to gross margin? A little bit more color will be helpful.

Good morning, Greg. As we discussed earlier in the call, we definitely prioritize getting our product to our customers on time. And despite the challenges of global shipping issues, we're mainly impacted to regarding on-time delivery. The most important things is, specifically as we sell manufacturing application that customers will not have a downtime, and system will work all the time. So, this is our focus and the main focus. Having said that, we are definitely working, we analyze an increase in our inventory level for materials and finished goods to avoid any delay, increasing production levels, and preparing for C and L delays in our planning process. We are evaluating a wider array of shipping options to ensure we can deliver goods with minimal business impact. From a cost perspective, it does impact our cost base. And what we saw this quarter that we actually had a more significant cost, even compared to Q1 since the situation is worsening. And if I helped you a little bit to quantify it, it's about 2% overall between logistic costs as well as inflation in higher raw material cost overall.

Okay, that's helpful. And knowing that, I mean, how are you thinking about pricing? I don't know if that's changed at all. But curious, is pricing a lever that you can pull to offset some of these rising costs? Or is that not something that you're looking at necessarily?

Yeah, of course, we are sensing it. We are on top of it on a daily basis and we are adjusting where is needed.

Okay, fair enough. Thanks. And best of luck going forward.

Thank you very much. Appreciate it. So,

Please go ahead.

Go ahead, sorry.

We've reached at the end of our question-and-answer session. Just wanted to turn the floor back over to you for any further closing comments.

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

Thank you, doctor and thanks for everyone. That does conclude today's teleconference and webcast, you may disconnect your line at this time and have a wonderful day. We thank you for your participation today.