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Edited Transcript of SSYS earnings conference call or presentation 9-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Stratasys Ltd Earnings Call

EDEN PRAIRIE Sep 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Stratasys Ltd earnings conference call or presentation Wednesday, August 9, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ilan Levin

Stratasys Ltd. - CEO & Director

* Lilach Payorski

Stratasys Ltd. - CFO

* Shane Glenn

Stratasys Ltd. - VP of IR

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Conference Call Participants

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* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner and Analyst

* David Ryzhik

Susquehanna Financial Group - Analyst

* Kenneth Wong

Citigroup Inc, Research Division - VP

* Matthew N. Cabral

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Robert Warren Stone

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal and Analyst

* Sherri Ann Scribner

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Timur Ivannikov

Jefferies LLC, Research Division - Equity Associate

* Troy Donavon Jensen

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen and welcome to the Stratasys' Second Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Shane Glenn, Vice President of Investor Relations. Please begin.

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Shane Glenn, Stratasys Ltd. - VP of IR [2]

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Thanks, Latoya. Good morning, everyone, and thank you for joining us to discuss our second quarter financial results. On the call with us today are Ilan Levin, CEO and Lilach Payorski, CFO 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 will begin by reminding everyone that certain statements made on this call regarding Stratasys' strategy and the statements regarding its projected future financial performance, including the financial guidance concerning its expected results for 2017, are forward-looking statements reflecting management's current expectations and beliefs. These forward-looking statements are based on current information that is, by its nature, subject to rapid and even abrupt change.

Due to risks and uncertainties associated with Stratasys' businesses, 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 additional declines in the prices of our products and services or volumes of sales due to decreased demand in the 3D printing market, any failure to adequately adapt our infrastructure and properly integrate the internal and external sources of our growth to generate intended benefits, including from the companies that we recently acquired, 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, reduction in our profitability due to shifts in our product mix, due to lower margin products or our shifts in our revenue mix significantly towards our additive manufacturing services business, costs and potential liability relating to litigation and regulatory proceedings and those factors referred to in Item 3.D Key Information - Risk Factors, Item 4, Information on the Company and Item 5, Operating and Financial Review and Prospects in our 2016 Annual Report on Form 20-F, which we filed with the SEC on March 9, 2017 as well as in the 2016 annual report, generally.

Readers are urged to carefully review and consider the various disclosures made throughout the report on Form 6-K that attaches Stratasys' unaudited, condensed, consolidated financial statements as of and for the quarter and 6 months ended June 30, 2017, and its review of its results of operations and financial condition for that period, which has been furnished to the SEC on or about the date hereof. Stratasys' 2016 annual report and Stratasys' other reports filed with or furnished to the SEC, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and prospects. Any guidance provided and other forward-looking statements made on this call are made as of the date hereof, and Stratasys undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

As in previous quarters, 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'd like to turn the call over to our CEO, Ilan Levin. Ilan?

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Ilan Levin, Stratasys Ltd. - CEO & Director [3]

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Thank you, Shane. Good morning everyone and thank you for joining today's call.

We are pleased with our progress as we focus our efforts on customer engagement, generating higher quality revenue opportunities during the quarter. We made several announcements during the quarter that showcase our progress, specifically in the aerospace market, and demonstrate our ability to leverage our capabilities to address manufacturing applications.

Additionally, we are pleased with the positive market reception to our new F123 Series launched in February of 2017, which has resulted in orders of over 1,000 systems to date and is generating significant interest for rapid prototyping applications among professional users.

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, Lilach Payorski who will review the details of our financial results. Lilach?

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Lilach Payorski, Stratasys Ltd. - CFO [4]

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Thank you, Ilan, and good morning everyone.

In line with our strategy, we continue to progress as we pursue higher quality revenue opportunities in advanced manufacturing applications for key verticals. In the process of better allocating our resources within our plan to develop high value application for customer and to support our long-term strategy, we have continued to achieve expense reduction.

Total revenue in the second quarter was $170 million, compared to $172.1 million for the same period last year. GAAP operating loss for the second quarter was $5 million compared to a loss of $17.1 million for last year. Non-GAAP operating income for the second quarter was $11.1 million compared to $10.2 million for the same period last year.

Product revenue in the second quarter decreased by 2% to $121 million as compared to the same period last year. Within product revenue, system revenue for the quarter declined by 6% over last year driven by a shift in product mix, following the positive market reception of our lower cost high value F123 offering to the rapid prototyping professional market.

We are also seeing initial traction in our application and vertical focus primarily within aero and auto in Americas and EMEA region. In addition, we are observing positive trends for larger production system and multi-system orders from select customers, both of which reflect our focus on developing tooling and production part applications.

In aero where the adoption of this use case specific application within our target industries is slower such as in Asia Pacific, we are observing relatively softer hardware sales. Consumable revenue increased 2% compared to the same period last year.

Service revenue in the second quarter increased by 1% to $49 million as compared to last year. Within service revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our systems increased by 6% compared to the same period last year, driven primarily by growth in our installed base of systems.

GAAP gross margin increased to 49.1% for the second quarter compared to a GAAP gross margin of 46.2% for the same period last year and 47.1% in the first quarter. Non-GAAP gross margin decreased to 53% for the second quarter (technical difficulty) for last year driven by a shift in product (technical difficulty) but increased compared to 51.2% in (technical difficulty) quarter.

Product gross margin decreased to 59.9% compared to 63.5% for the same period last year, driven by the shift in product mix described earlier, while it increased compared to 57.9% in the first quarter.

Service gross margin decreased to 36.2%, compared to 36.6% for same period last year, and increased compared to 35% in the first quarter.

GAAP operating expenses decreased by 9% to $88.4 million for the second quarter, as compared to the same period last year. Non-GAAP operating expenses decreased by 8% to $79.1 million for the second quarter versus last year, as we remained focused on aligning resources with our long-term growth strategy and deepening customer engagements in our key verticals.

The company generated $10.9 million of cash from operation during the second quarter, as compared to $6.9 million for the second quarter last year.

We ended the second quarter with $305.3 million in cash and cash equivalents, compared to $297.2 million at the end of the first quarter.

Inventory at the end of the second quarter was flat at $116.5 million as compared to the inventory level at the end of the first quarter, reflecting our tight control on those levels. Accounts receivable increased to $120.3 million, compared to $115.1 million at the end of the first quarter with DSO on 12-month trailing revenue at 66.

To recap, we are pleased with the result of our efforts to generate deeper customer engagement and higher quality revenue opportunities primarily within our targeted industry verticals of aerospace, automotive, and healthcare. In addition, our ongoing alignment of resources and focus on high value applications has resulted in reduced operating expenses.

And finally, we are well positioned to leverage our favorable cash position, including cash generation and a strong balance sheet, to capture new opportunities going forward.

I would like now to turn the call over to our VP of Investor Relations, Shane Glenn, who will provide you greater details on our previously reported 2017 financial guidance. Shane?

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Shane Glenn, Stratasys Ltd. - VP of IR [5]

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Thank you, Lilach. Our guidance for 2017 is as follows. Total revenue in a range of $645 million to $680 million, with non-GAAP net income in the range of $10 million to $20 million, or $0.19 to $0.37 per diluted share. GAAP net loss of $53 million to $39 million, or $1 to $0.73 per basic share. Non-GAAP operating margin of 3% to 5%. Capital expenditures projected at $40 million to $50 million.

As of the end of the second quarter, we believe that we are tracking towards the higher end of guidance for operating margins and earnings per share. Non-GAAP earnings guidance excludes $34 million of projected amortization of intangible assets, $18 million to $20 million of share-based compensation expense, $2 million to $3 million in merger and acquisition related expense and $8 million to $10 million in reorganization and other related costs and includes $3 million to $4 million in tax expenses related to non-GAAP adjustments.

We maintain a relatively high estimated non-GAAP tax rate for 2017 given the ongoing non-cash valuation allowance on deferred tax assets we expect to record throughout the year. 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 prospective tax liabilities.

Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses on our net income/loss, as well as significant quarter to quarter variability in our non-GAAP tax rate, the company continues to believe that non-GAAP operating profit would be the best measure of our performance in 2017.

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 concerning the non-GAAP financial measures.

Now, I'd like to turn the call back over to our CEO, Ilan Levin. Ilan?

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Ilan Levin, Stratasys Ltd. - CEO & Director [6]

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Thank you, Shane.

In the second quarter we continued our efforts to deepen customer engagement by pursuing new collaborations, and enhancing and expanding our existing relationships with industry leaders in our key vertical markets. We believe that our continued partnering with industry-leading companies will accelerate the development of high-value added applications, and allow us to bring increased value to the market.

We are pleased with the market reaction to our production-focused products and services, demonstrated in part by the multiple announcements we recently made at, and following the Paris Airshow. Additionally, we are excited with the early market adoption of our professional rapid prototyping solutions, specifically the recently introduced F123 Series, and our GrabCAD Print software platform.

At the Paris Air Show, we made a number of significant announcements, including our new Fortus 900mc Aircraft Interiors Certification Solution for producing certifiable aircraft interior parts which leverages a qualification program underway with the FAA, National Institute of Aviation Research, and America Makes.

The new solution consists of ULTEM 9085 resin that meets aerospace flame, smoke and toxicity regulations, a new edition of the Fortus 900mc Production 3D Printer with specialized hardware and software designed to deliver highly repeatable mechanical properties appropriate for aircraft

interior part applications, and the qualification processes and data to ease the certification process.

With the new offering, we believe we are removing major obstacles around FAA certification and making it easier to manufacture airworthy parts, with improved repeatability and performance.

As previously announced, an early adopter of this new application-specific product is Western Tool & Mold, a leading Hong Kong-based parts supplier, for the production certifiable aircraft interior components.

Additionally, we recently announced that Stratasys Direct Manufacturing has been chosen by Airbus to produce 3D printed polymer parts for use on the A350 XWB aircraft.

SDM will now print non-structural parts such as brackets and installation fixtures with our Stratasys FDM production 3D Printers using our ULTEM 9085 material, providing tighter turnaround times and lower inventory costs.

Also at the Paris Airshow, we were pleased to showcase our focus on the aerospace market with the announcements that innovative companies Boom Supersonic and Eviation Aircraft are utilizing Stratasys 3D printing solutions to reduce engineering costs and accelerate design cycles for next-generation aircraft.

We believe that these developments can help accelerate adoption of our technologies in the aerospace market.

Since the launch of the F123 Series in February 2017, we have received orders for over 1,000 systems, one of our most successful product launches in our company's history.

We believe that the positive reaction from the market demonstrates that the rapid -- that the prototyping segment remains an attractive and underpenetrated growth opportunity. The majority of F123 orders have come from new customers, and we have seen significant interest in multiple system orders.

We believe that the early success and adoption of the F123 Series is being driven by the product directly addressing the professional workgroup-prototyping market, with a combination of ease-of-use, precision, repeatability and affordability, all without compromising on the requirements for engineering-grade models.

The F123 Series provides a streamlined workflow, made possible in part by GrabCAD Print, which makes 3D printing more realistic, connected, and accessible.

With the ability to read and understand CAD files natively, GrabCAD Print offers an efficient workflow that streamlines print management in shared office and model shop environments, greatly enhancing the functionality of the F123 Series. Since its launch in November of 2016, the software has been installed on over 13,000 desktops and is being used by over 1,400 customers worldwide.

Users have printed over 61,000 trays of parts, an impressive number when you consider that GrabCAD Print users still represent a very small portion of our total installed base of systems.

The GrabCAD Community currently has nearly 4 million members, up 36% in the last year, and the largest collection of mechanical CAD models anywhere on the Internet, with over 2 million CAD files and tutorials.

We are pleased with the early traction from GrabCAD Print, as well as the growing number of community members, which we believe will help increase accessibility and drive adoption and usage of our products and services.

We recently strengthened our leadership in the 3D printing for education market with several announcements from MakerBot. The first is the new cloud-based platform My MakerBot, which is Chromebook-compatible and connects to networked 3D printers, Thingiverse accounts, and support cases and orders.

Chromebooks are used extensively in the education segment, and we believe that the ability to upload and prepare files, print, and monitor progress from any device will broaden student access to 3D printers in Chromebook classrooms and makes it easier for educators to manage their use.

We also announced that My MakerBot will include integration with Autodesk's Tinkercad, the popular K to 12 design software tool. Students will be able to 3D design in Tinkercad then export designs to My MakerBot and 3D print them without ever leaving their web browsers.

Finally, we announced the new MakerBot Educators Guidebook to assist educators in learning the basics of 3D printing, best practices, and for finding high quality STEM lesson plans.

We believe these new offerings further solidify MakerBot's leadership position in education, and will substantially improve student access to 3D printing, make it easier for teachers to implement in their classrooms, and make it simpler than ever to go from a lesson plan to a 3D print.

In summary, we believe our recent announcements of aerospace-specific products and high-value collaborations with leading companies demonstrate the value of our customer-centric approach. We are pleased with the positive customer reaction to the F123 Series, and the excitement the new offering is generating in the general rapid prototyping market.

Looking forward, we remain excited about the company's future and the long-term growth potential within our industry.

Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question will come from Troy Jensen of Piper Jaffray.

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Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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So quick. Maybe if I just dive into the guidance here and challenge you guys a little bit. If I play with the model here and flat line revenues for Q3 and Q4, you will get to the high end of the revenue guidance, and if we assume any normal Q4 seasonality gives you guys nicely above $680 million. So on revenues, and I guess even more pronounced than earnings, you guys already did $0.22 in the first half and you only need $0.14 more in the second half to hit the high end. And the only way to keep the EPS that low would be to model sequential step functions in OpEx. And it doesn't seem like you guys are really accelerating spending right now. So you can just talk a little bit on the guidance and maybe conviction of the high end versus the possibility of exceeding the high end of the target here.

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Ilan Levin, Stratasys Ltd. - CEO & Director [3]

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I'll take that one. I think as we noted in the comments we have in the script, we do believe we are tracking towards the higher end of the guidance at this point on the operating margins and earnings per share.

I think a couple of things to keep in mind when you look at the second half versus the first half. Obviously, we have a Q3 which can be or is very seasonally weak relative to the other quarters. We also have issues or potential issues around variability in product mix and the gross margins that you might want to consider in the second half. And then we also want to factor into numbers that it's a potential.

And I think more importantly when you reconcile or when you go from the operating margin to EPS, you have to remember that we observed a really high variability in that non-GAAP tax rate. I believe, if I recall correctly, in the first quarter it was closer to 50% and then 20% tax rate in the second quarter. So that's why we really point everyone to the operating margin, which in the second quarter, is at the high end of the range. And -- so then you have the Q3 which is seasonally weak and then Q4 which is seasonally strong. So I think when you put all that together, we think we're moving towards the higher end of our ranges. But it's -- we want to keep in mind some of the things that are unique relative to the tax rate and the seasonality factors that we see in the business and then the potential for variability in product mix and the impact on gross margin.

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Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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All right, understood. I guess I thought everything looked pretty good on the print here. The only thing that caught my eye would have been consumables up only 2%. To me that seems low, given kind of the growth on the installed base and the improving demand environment. So any thoughts on material sales this quarter?

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Ilan Levin, Stratasys Ltd. - CEO & Director [5]

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I think the consumable revenues some of that can be attributed to the general slower pace of hardware growth that we've experienced over the past several quarters, compared to our historically higher growth rates previous to that. And some of the variability which we do expect and have witnessed in the past on a specific quarter can be attributed to product mix, application mix and some of the regional adoption. But I don't think we -- internally we read much into that number right now and we monitor it over a longer period than a single quarter.

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Troy Donavon Jensen, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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Okay. That's fair. If I could just throw in one more and I think Stratasys doesn't get a lot of credit for having end part exposure. You are viewed more as a prototyping company. Ilan, do you have any ideas on kind of how much exposure, how much of sales are to end part applications? Is there any way that you guys could kind of report on that or track that and give us more confidence that you're getting more exposed to the higher gross segments?

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Ilan Levin, Stratasys Ltd. - CEO & Director [7]

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So I think that what we can say is that with respect to our segmented industries, auto, aero, healthcare, that is a growing proportion of our business compared to what we would, let's say, call other for the purposes of this call. And when we look at on an application level, the tooling and end use part applications that we can best identify as going to those areas realizing that we're not -- our ability to identify exactly the application is limited. But when we -- with whatever tools we have, we are witnessing that tooling and end use parts is a growing segment, growing much more than the rapid prototyping segment. So we're gaining more and more confidence that this is the right direction for us.

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Operator [8]

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The next question is from Wamsi Mohan of Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [9]

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You guys have done a nice job on the expense side, I mean, some solid reduction here and SG&A expenses this year. I'm just wondering how much more rationalization can you do on the expense front going into 2018, especially given that you're getting some product momentum over here? Just wondering how you're thinking about balancing sort of expense levels relative to the revenue growth profile which seems to be improving a little bit here?

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Ilan Levin, Stratasys Ltd. - CEO & Director [10]

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So just to sort of recap, the main driver for the reduction in the expenses was our focus on reallocating resources and just our general focus on segmented industries and on specific customer engagement. So the main driver is our focus and reallocation of resources. And what happened was when we tended to double down and drive that focus, we released some expenses that we now see the benefit of in the reduced OpEx. We don't anticipate a further reduction. We're going to continue doing what we're doing in terms of the focus. And again the main driver was not just -- was solely not just to take out costs, was to just drive our future growth better. And I think we're doing that and laying the foundation for medium and long-term growth.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [11]

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Okay, thanks. That's helpful. And then, you've been talking about this focus on verticals for some time now, Ilan. Can you give us any sense at all on how large your verticals are, particularly in aerospace and autos and sort of maybe how the revenue growth trending? You said that's becoming a larger piece of the mix. So I presume that they're growing faster than the overall portfolio. But any numbers or any quantification you can give us there?

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Ilan Levin, Stratasys Ltd. - CEO & Director [12]

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No, we don't break that down. As I said before, the targeted industries are absolutely growing. And I think more important from us internally is that when we've enhanced the engagement, take aerospace for an example, when we've enhanced that engagement we're getting great response, great receptiveness. It's very much of a long-term play for these specific customers. So the growth isn't immediate or the full potential isn't evidenced right away. But they're very much excited by what we're doing. I think a good example of that is the Infinite-Build, but not only. And -- so we're generating, I think, a lot of interest and it gives us confidence that this is a major growth opportunity for us.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [13]

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Okay, thanks. And then the last one if I could too, you noted some weakness in APAC and your competitor also noted some weakness over there. Just wondering if you could elaborate if there's sort of a broader demand deceleration that you're seeing there, any particular dynamics that you can shed any light on that will be helpful? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [14]

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Within key accounts in Americas and EMEA is very satisfying to us at this point. I think the adoption cycles in general in APJ are a little bit different and the nature of those industries on the local basis are different as well. So we're seeing a different growth pattern and a different adoption cycles in that territory.

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Operator [15]

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The next question is from Ken Wong of Citigroup.

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Kenneth Wong, Citigroup Inc, Research Division - VP [16]

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You mentioned seeing kind of good sales across 123 with new customers. Is there an opportunity here to sell deeper within your current installed base? And I guess, at this stage, kind of what's keeping those guys from taking on the 123?

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Ilan Levin, Stratasys Ltd. - CEO & Director [17]

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So I think (technical difficulty) alluded in the comments we (technical difficulty) those multiple (technical difficulty) existing customers, so customers that are familiar with the technology, particularly Stratasys. (technical difficulty) several units at a time.

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Kenneth Wong, Citigroup Inc, Research Division - VP [18]

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Ilan, you're kind of going in and out. I am not -- I am on a landline, so I'm assuming it's not me. (technical difficulty)

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Operator [19]

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(Operator Instructions) Okay, we are reconnected and you may start your call. We still have Ken Wong with his question.

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Ilan Levin, Stratasys Ltd. - CEO & Director [20]

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Yes, I think we missed pretty much all of that. (technical difficulty)

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Operator [21]

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And the line is still going in and out. This is the operator.

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Ilan Levin, Stratasys Ltd. - CEO & Director [22]

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We are having some major issues here. (technical difficulty)

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Operator [23]

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Sir, we can barely hear you. The line is going in and out. (technical difficulty) Ladies and gentlemen, please stand by. Your call will resume momentarily. All right, you are back in the call, sir.

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Ilan Levin, Stratasys Ltd. - CEO & Director [24]

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Okay. Can you hear us okay now, Latoya?

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Operator [25]

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Yes, I can.

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Ilan Levin, Stratasys Ltd. - CEO & Director [26]

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Okay. Sorry about that, Ken. Go ahead.

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Kenneth Wong, Citigroup Inc, Research Division - VP [27]

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No problem. So, I think -- I mean the same question just in terms of the installed base opportunity for F123. We didn't -- I don't think we caught any of what you were saying there, Ilan.

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Ilan Levin, Stratasys Ltd. - CEO & Director [28]

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Okay. So on the F123 we're seeing, as we alluded to in our prepared comments, that we have multiple orders. We're seeing a lot of multiple orders. Those typically will come from existing customers. That said, the single unit orders typically are coming from new customers. So we're seeing a nice balance between further adoption on our existing installed base and getting FDM into the hands of new customers and expanding our universe of customers.

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Kenneth Wong, Citigroup Inc, Research Division - VP [29]

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Got it. And I guess maybe, either you or Lilach, on 123 last quarter you guys had talked of how gross margins were impacted pretty severely. It looks like this quarter you guys saw some step up there in terms of improvements. Is it fair to assume that Q1 was sort of the trough in terms of what we should expect for gross margins going forward?

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Lilach Payorski, Stratasys Ltd. - CFO [30]

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So in terms of gross margin, we discussed it previously and we discussed it in this call this time again in terms of the gross margin it's very, very significantly based on product mix. So it's true that in Q1 the impact of F123 was more notable. In Q2 we see now an increase in gross margin and definitely it was favorable. Although we had a very good traction of F123, we also saw an increase in high-end products which is definitely favorable our gross margin. So we would expect to see the reaction on the gross margin based on product mix as we go in Q3 and in Q4. And I will not drive specific conclusion regarding Q1 rate compared to the rest of the year. But definitely we see that there is a fluctuation as a result of the product mix.

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Operator [31]

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And the next question is from James Kisner of Jefferies.

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Timur Ivannikov, Jefferies LLC, Research Division - Equity Associate [32]

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This is actually Timur Ivannikov for James today. So regarding your product gross margin. So are you saying that in Q1 '17 F123 printers, the gross margin basically had nothing to do with yield? Are you improving productivity on those printers or what is the difference of the 200 basis points?

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Lilach Payorski, Stratasys Ltd. - CFO [33]

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So from a cost basis on F123, there is no significant change. We're only at the start point of the life cycle of the supply -- of the cost of F123. So I would not drive conclusion between Q1 and Q2 with respect to the cost of F123. What we do see heavily impact is the product mix. So it's in this quarter we see a more -- a higher percentage of a high-end system which definitely contribute to the higher gross margin rate in Q2 as compared to Q1.

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Timur Ivannikov, Jefferies LLC, Research Division - Equity Associate [34]

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Okay, got it. And then -- so regarding the negative revenue growth impact system -- system revenue growth impact of F123 printers, so how long do you expect that to persist? I mean, are you expecting it until Q1 '18 now or what do you expect there?

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Lilach Payorski, Stratasys Ltd. - CFO [35]

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Can you repeat, please? Negative growth revenue?

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Timur Ivannikov, Jefferies LLC, Research Division - Equity Associate [36]

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Yes. Sure. Yes, your system revenue growth -- system revenue growth was minus 6% and then you said it was because of F123. And then in the last quarter I think it was a similar type of factor. So I'm trying to understand how much longer this is going to be the case.

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Lilach Payorski, Stratasys Ltd. - CFO [37]

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So F123 had some contribution to the decrease in the growth in the revenues, year-over-year of the revenue given that the price point of F123 is relatively lower compared to the other price point of other high-end unit. So in general, this is one of the impacts, but this is not only the -- the only impact. Going into 2000 -- so it's not necessarily a trend that we would expect to see going forward. We're definitely pleased with the traction that we see coming from F123. It's definitely a good traction. It's not something that we believe that in the next couple of quarters we will continue to see decline in system hardware.

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Timur Ivannikov, Jefferies LLC, Research Division - Equity Associate [38]

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Okay. And then the last question real quick here is, so for your new engagement with Fortus 900 with Airbus 350 -- so would you say you generate about $5,000 to $10,000 per plane in parts or is that order of magnitude correct?

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Ilan Levin, Stratasys Ltd. - CEO & Director [39]

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We don't -- actually we don't -- I don't have the numbers in front of us, but I am not -- don't think we would disclose that if we did.

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Operator [40]

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And the next question is from Brian Drab of William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [41]

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I guess I'm trying to connect the dots here. But was there in the second quarter 1 significant order or a handful of orders that totaled several million -- several million dollars for some high-end equipment, maybe to Airbus or another significant customer?

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Ilan Levin, Stratasys Ltd. - CEO & Director [42]

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No, I don't think we've seen anything like that in terms of lumpiness in terms of the high end. We've seen an improvement on the -- certainly relative to Q1 on the higher levels -- the high-end systems which has resulted, as Lilach was mentioning before, to a higher gross margin.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [43]

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Okay. So just general mix -- kind of overall mix but not any specific big order. Okay. And then I wanted to clarify too, earlier in the call I think the comment on OpEx is that you do not expect a material step down in OpEx in terms of dollars going forward and that the larger gains have already been made. Is that what I heard?

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Lilach Payorski, Stratasys Ltd. - CFO [44]

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Yes, this is correct. We are not expecting to see a significant reduction in the OpEx level going forward. As Ilan mentioned earlier, we focus on realigning our resources where we believe it'll create a much more impact for the future building the foundation going into those key verticals that we are focused on. At the same time we definitely look at efficiency and cost reduction. But we do not expect to see a significant cost reduction compared to the current level that we have now.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [45]

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Thank you. And then could you just tell us roughly what the ASP has been on those 1,000 orders for the F123?

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Ilan Levin, Stratasys Ltd. - CEO & Director [46]

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We don't break down by product those kind of measures.

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Operator [47]

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The next question is from Sherri Scribner of Deutsche Bank.

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Sherri Ann Scribner, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [48]

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I wanted to ask sort of a big picture question. It seems like there is a lot of opportunities in aerospace with some of your new products. But overall, it seems like the 3D printing market is still relatively challenged for growth. We saw that from you and from 3D Systems. Can you maybe talk about overall demand from customers in terms of their appetite for buying new systems? And I guess, thinking about that with the product revenue down and the systems revenue down, is there a certain point when you think we'll start to see those things turn around and turn positive? Thanks.

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Ilan Levin, Stratasys Ltd. - CEO & Director [49]

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We definitely see a maturation in the market in general as an industry. Whereas previously there were general purpose 3D printers being adopted and sold, today we're seeing a more focused approach, certainly from Stratasys, so that even on the rapid prototyping market which may appear to many of the general 3D printing markets, we believe the F123 once it takes a specific RP approach and with respect to the F123 it's in a workgroup environment, that we get great traction.

So our challenge is to continue to develop products specifically around an application use case or around an industry and we've identified certainly rapid prototyping as one of those. And so we do not think that there is anything declining or a tapped potential there. It's an untapped market, we believe. And so I think the F123 is a great evidence that when we focus on a market and address it in a specific way with specific products then we can untap that potential. Certainly, likewise, with automotive, aero and tooling applications that we're also focused on.

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Sherri Ann Scribner, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [50]

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Okay, that's helpful. And then just thinking about the pricing pressure, it seems like with some of the newer systems you've got a lower price point which puts pressure on the revenue over time. Is that something you expect to continue? It seems like that should drive more demand at a lower price point. But any thoughts there would be helpful. Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [51]

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Those are very market specific. So when we're looking at some of our higher-end application, there is a very different price dynamics than you would have perhaps in an F123 which is focused on the rapid prototyping market. So the rapid prototyping market is in terms of 3D printing in general is by far more mature than some of the other end use parts or tooling applications. And so the pricing dynamics there are different. So I think each of the different markets are different. We're looking to be successful in all of them. And then that's where we get the product mix issues in terms of ASPs and of course gross margins. But we're looking to be successful on all of those.

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Operator [52]

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The next question is from Shannon Cross of Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal and Analyst [53]

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I'm curious when we look at the orders for 1000 F123s and I assume it continues to grow, how is that working with production? Are there any delays in terms of supply and how should we think about those orders being shipped, will be over the next 4 quarters or are these ones that you expect to come through fairly quickly?

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Lilach Payorski, Stratasys Ltd. - CFO [54]

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So regarding production, we don't see any issue with production. We're able to fulfill all our orders for all our regions. We don't see any issue with supply. We're definitely encouraged by the pace of the orders and we expect to see it more coming in the next couple of quarters.

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Ilan Levin, Stratasys Ltd. - CEO & Director [55]

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And with respect to delivery and shipment, we ship those as timely as possible for the customer base as requested.

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Sherri Ann Scribner, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [56]

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Okay. And then can you talk a bit about the pricing environment both for hardware and consumables? And I know, your revenue has been pressured from a mix perspective. But I'm curious as to what you're seeing in terms of some of your customers, especially as you move more into rapid prototyping and perhaps areas where maybe the usage goes up. I'm not sure if you've seen any pressure from a consumables pricing standpoint? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [57]

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So we think it's just a general maturation of the market depending on the different segments that we're focused on. Rapid prototyping is the most mature in this respect, with respect to adoption of 3D printing. So the price dynamics are different than perhaps, let's say, in aerospace and automotive.

There is no across the board conclusion with respect to pricing pressures. It's really a question of the value that we provide. I think we've stepped up the value within F123 and we're benefiting from that, from the order intake. So we are not looking at the business and witnessing something of -- a price pressure across the board. It's very much depending on what application we're serving and trying to listen to the market in terms of what price performance and value equation that specific segment is looking for.

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Sherri Ann Scribner, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [58]

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And then I guess looking at your results, obviously, you haven't really -- well, I'm not sure maybe the growth would be higher. But in general, we haven't really talked too much about the competitive landscape in terms of some of the new entrants, how you think you are positioned against them, what your channel's saying, I guess just the general competitive question if you can talk about what you see in 3D Systems, HP, Carbon, et cetera? And how your -- you could think you have a competitive advantage over them? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [59]

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So as we drill down further and further along the application path and then the areas that we've identified as growth engines, it is less about the specific technology and specific vendor, it's a more question of application fit. And so while there are more and more entrants in the 3D printing space from the hardware perspective, when we -- when you drill down in the application level, you're not necessarily dealing with the universe of 3D printing vendors that are out there. So it's very, very segment specific, industry specific and so I don't think there is any conclusions that we draw from the general competitive environment when we're going into different applications. Within every application it may be the traditional technology, it may be 3D printing -- competing 3D printing technology and it may be neither actually.

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Sherri Ann Scribner, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [60]

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Okay. And then just one last question I meant to ask. Desktop Metal, you are reselling, what are your thoughts on that? You have an investment. How do you sort of look at that company and how you may work together? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [61]

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So there's a lot of excitement around the launch of their product, the upcoming launch. So we're closely monitoring that and we're looking to see how we can together serve our customers better.

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Operator [62]

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The next question is from Rob Stone of Cowen & Company.

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Robert Warren Stone, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [63]

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I wanted to start out with another question related to the guidance and visibility on sales. Shane's commentary in response to a question about that, it sounds like you're expecting a typically seasonally weak Q3. How good is your visibility on Q4?

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Ilan Levin, Stratasys Ltd. - CEO & Director [64]

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I mean, I don't -- Rob, I think it's -- I think certainly the visibility is better than it has been in recent quarters. But again as you know, we work off of a fairly small backlog. We have introduced -- obviously had a brand new product introduction here with the F123 and that could have mix impacts as we move into our strongest quarter. So I would say our visibility is certainly better than it has been in recent quarters. But again, there is still -- there is still -- there could still be some variability there depending on how things come in.

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Robert Warren Stone, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [65]

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Okay. A housekeeping question. Could you provide CapEx and depreciation for Q2?

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Lilach Payorski, Stratasys Ltd. - CFO [66]

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Yes, CapEx was around $5 million. Depreciation, we will get back to you.

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Robert Warren Stone, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [67]

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Okay. And finally with respect to the aerospace vertical and some of the new products like Infinite-Build, when do you expect to see a more material contribution to revenue from those activities?

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Ilan Levin, Stratasys Ltd. - CEO & Director [68]

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That's a difficult -- difficult to time specifically when that growth will come. We are already seeing, as we said, an enhanced growth compared to the other segments that we cater. We're very excited by the opportunities that it affords and the deep engagement that we're witnessing. With respect to, perhaps, the Infinite-Build we're working well with the customers that we've identified. We've actually put forth some recent efforts to increase the number of potential customers and collaborators that we can work with and I think that's going very well. And we'll leave it at that. I think the interest is only getting -- is only gaining in momentum.

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Robert Warren Stone, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [69]

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So are you going to start placing some more Infinite-Build systems from late this year with customers?

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Ilan Levin, Stratasys Ltd. - CEO & Director [70]

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I don't want to specifically comment on the timing of that, but that's what we're working towards in terms of getting more systems out in the hands of our key partners and potential customers.

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Operator [71]

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The next question is from Matt Cabral of Goldman Sachs.

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Matthew N. Cabral, Goldman Sachs Group Inc., Research Division - Equity Analyst [72]

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Most of my questions have been answered already. But I guess one that I did want to go back to on gross margins. You've talked several times that mix is the primary factor driving some of the fluctuation that we've seen. But I'm wondering if you could just talk a little bit more about just how like-for-like margins have been trending and if you've seen any big changes out of different segments of your portfolio?

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Lilach Payorski, Stratasys Ltd. - CFO [73]

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So regarding gross margin, as we previously discussed it's heavily impacted by product mix at each given quarter. For example, the second quarter is usually a very relatively strong quarter for education and this is the end of the year. So you see, for example, more high end systems delivered to this sector. So this is -- it could be one of the examples. But you cannot necessarily drive conclusion for any quarter. We are addressing several sectors and there is a relatively high range in terms of gross margin between the product, between the high end products and low end products which drives a volatility on the gross margin.

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Matthew N. Cabral, Goldman Sachs Group Inc., Research Division - Equity Analyst [74]

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But I guess -- maybe to ask in a little bit of a different way, if I were to normalize your mix or if you were to normalize your mix within your portfolio, have you seen any of those various buckets, any changes in the gross margin trends just within those buckets themselves or is it really just more the mix that's driving the variability that we're seeing?

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Lilach Payorski, Stratasys Ltd. - CFO [75]

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It's more the mix that would drive the volatility.

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Operator [76]

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The next question is from David Ryzhik of Susquehanna Financial.

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David Ryzhik, Susquehanna Financial Group - Analyst [77]

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Just going back to consumables growth, 2%. The prior 3, 4 quarters you grew around 7% to 11%. How can we think about what's implied in your guidance, what a normalized growth rate in consumables would be, how we can think about that? And I had a follow-up.

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Ilan Levin, Stratasys Ltd. - CEO & Director [78]

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So we don't have a metric for what we would call the normalized growth. As you said and as we pointed the growth for this quarter has been lower. Some of that is attributable to the slower pace of hardware growth that we've witnessed over the past number of quarters compared to perhaps several years ago. And the variability of the consumables is product mix, application mix. So it's not that we have a normalized number.

We monitor utilization but I'd be careful to draw a conclusion from a single quarter with respect to overall utilization of our systems.

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David Ryzhik, Susquehanna Financial Group - Analyst [79]

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Sure. Got it. And past few quarters you've talked about a stabilization in MakerBot. Can you just provide an update? Did MakerBot grow in any way? Any way you can give us kind of the systems growth ex-MakerBot that would super helpful? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [80]

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So we no longer give the system growth or system count with respect to MakerBot in general. So they performed very well this quarter according to our expectations and our plan. But we do not provide an itemized basis or detail around that.

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David Ryzhik, Susquehanna Financial Group - Analyst [81]

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And just regarding the Fortus 900, the qualification, I mean is that really -- do you anticipate like actual system sales or you anticipate this business to flow through SDM that you mentioned the relationship with Airbus? How can we think about that opportunity since it is a high-end production system? Thank you.

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Ilan Levin, Stratasys Ltd. - CEO & Director [82]

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We absolutely anticipate further hardware sales on this specific variant of the 900. It comes with both hardware and software capabilities, additional hardware, software capabilities that enable the certification. And some of that will come to SDM, we believe, in terms of opportunities. But the primary goal on the product side was to get that out to customer hands and enable them to certify their products on their own.

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Operator [83]

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And the last question will come from Ananda Baruah of Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [84]

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Just circling back to the production platforms that you announced 12 months ago just about, so Infinite-Build you commented on. And then what's the state of Robotic Composite specifically? And then with regard to both of them, I believe, 12 months ago when you entered them you were sort of soft commented on that sort of revenue expectations we should calibrate around sort of first half of '18 sort of how -- what -- how would you like us to sort of those come to land with us now? Should that still be our expectation? It sounds like Infinite-Build, you're seeing a little bit already. And then I have a follow-up. Thanks.

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Ilan Levin, Stratasys Ltd. - CEO & Director [85]

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So the Robotic Composite is a -- is earlier in the pipeline in general compared to the Infinite-Build. With respect to the Infinite-Build we are working hard to get it into the hands of customers. We are working on customization and tuning of the system itself. I wouldn't like to comment further right now with respect to the timing of revenues. But we're excited by the customer engagement, specifically around Infinite-Build and we're working hard to expand the list of potential collaborators and customers.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [86]

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Okay, great. So the Robotic Composite earlier in the pipeline, so I guess too early to tell when you might begin to get that into customers' hands, at least from a beta context.

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Ilan Levin, Stratasys Ltd. - CEO & Director [87]

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Yes, I think we're still in the early stages with respect to that technology, the Robotic Composite. But as we've said in previous comments, from the outset we've been working with the potential customer and customers and partners around that. So we feel comfortable that we can engage them not only on the development technology side but also on the application level at the earliest point.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [88]

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Got it, got it. Very helpful. And then my second question, just regard -- with regard to the prototyping opportunity in general and then would love any context on specific segments that you think pop out to you. At the end of last year sort of the prior management team had made mention that, at least at the higher level they believed that the prototyping market or opportunity was only about 25% penetrated. Do you -- like would you agree with that assertion or that assessment, let's say? And to the degree that you do feel that there's still a meaningful prototyping opportunity available in a growth context, what would be the -- sort of the way you'd like us to think about that and what would be the way that you're thinking about getting at that? That's it from me. Thanks.

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Ilan Levin, Stratasys Ltd. - CEO & Director [89]

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I think the F123 is a good example where we when we changed the price performance that we provide we were able to grow that part of the business. We think in general that it is an untapped potential within the prototyping market. It's not in any way a mature and stable market that there is little growth opportunity. So it really is a question of how Stratasys can deliver products that are meaningful at the right price performance for that specific segment. With respect to a metric or a specific growth number, we're not -- we won't be giving that. We just think it's a large opportunity in front of us.

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Operator [90]

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Thank you. And at this time, I would like to turn the call back over to Ilan Levin for closing remarks.

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Ilan Levin, Stratasys Ltd. - CEO & Director [91]

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Thank you for joining today's call. We look forward to speaking with you again next quarter. Thank you and goodbye.

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Operator [92]

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Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.