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Edited Transcript of SSYS earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 Stratasys Ltd Earnings Call

EDEN PRAIRIE Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Stratasys Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Reis

Stratasys Ltd. - Vice Chairman of the Board

* Elchanan Jaglom

Stratasys Ltd. - Chairman & Interim CEO

* Lilach Payorski

Stratasys Ltd. - CFO

* Yonah Lloyd

Stratasys Ltd. - VP of IR

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Conference Call Participants

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* Allan M. Verkhovski

Piper Jaffray Companies, Research Division - Research Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Ashley Melissa Ellis

Cross Research LLC - Research Analyst

* Brian Paul Drab

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

* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Hendi Susanto

G. Research, LLC - Research Analyst

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior 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 morning, ladies and gentlemen, and welcome to the Q2 2019 Stratasys Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Yonah Lloyd. Please go ahead.

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Yonah Lloyd, Stratasys Ltd. - VP of IR [2]

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Thank you, Ashley. Good morning, everyone, and thank you for joining us to discuss our 2019 second quarter financial results. On the call with us today are Elan Jaglom, Interim CEO; David Reis, Vice-Chairman and member of our Board's Oversight Committee; and Lilach Payorski, CFO. I remind you that access to today's call, including a prepared slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available and can be accessed through the Investor Relations section of our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance, and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast.

For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed in Stratasys' Annual Report on Form 20-F for the 2018 year, as well as our report on Form 6-K and the related press release concerning our earnings for the second quarter of 2019, the latter 2 of which we are furnishing to the SEC today. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

As in previous quarters, today's call will include GAAP and nonGAAP financial measures. The nonGAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain nonGAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release.

Now I would like to turn the call over to our Interim CEO, Elan Jaglom. Elan?

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Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [3]

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Good morning, everyone, and thank you for joining today's call. Our second quarter results reflect continued strong performance in the Americas, our larger market, where we saw revenue growth across systems, consumables, and services. In line with our long-term strategy, we continue to invest in developing new products that we believe will expand our addressable markets and generate accelerated growth beginning 2020. Over the coming 2 years, we anticipate multiple major product introductions of new systems, platforms and technologies subject to R&D timeline.

Our focus on operational efficiency has allowed us to continue generating earnings and profitability even as overall revenue growth remains relatively flat, after excluding divestments. We believe we are well positioned to continue expanding in manufacturing, rapid prototyping, and photo-realism design as well as in our target verticals of aerospace, automotive, healthcare and dental. Additionally, our emphasis on innovation and select partnership over the last several years is opening new incremental opportunities, that along with our healthy balance sheet will support our accelerated growth plan beginning in 2020.

We are excited about the market response to the new products that we have recently launched, and about several additional announcement we plan to make later this year and in 2020. Our positive America top line results in the second quarter were offset by our disappointing performance in EMEA. We believe that our sales are being affected primarily by the significant economic weakness in Europe that is impacting capital investments and general spending in the European automotive and industrial machinery markets. Our results were also unfavorably impacted by foreign exchange rates in Europe and Asia Pacific.

Despite the revenue weakness we are experiencing in Europe, we continue to see high level of customer engagement and are encouraged by the interest in deploying our solutions there. We believe that we are well positioned to return to growth in that region once conditions improve.

I will return later in the call to provide an update on our search for a new CEO and David will provide more details regarding the quarter and other items. But first, I will turn the call over to our CFO, Lilach Payorski, who will review the details of our financial results.

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Lilach Payorski, Stratasys Ltd. - CFO [4]

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Thank you, Elan. Good morning, everyone. Total revenue in the second quarter was $163.2 million compared to $170.2 million for the same period last year. After adjusting for the sale of our divested entities during 2018, total revenue decreased 2% for the quarter and decreased 1% after also adjusting for constant currency. GAAP operating income for the second quarter was $0.8 million compared to a loss of $1.9 million for the same period last year.

NonGAAP operating income for the quarter was $9.1 million compared to nonGAAP operating income of $10.6 million for the same period last year. GAAP net income for the quarter was $1.2 million or $0.02 per diluted shares compared to net loss of $3.6 million or $0.08 per diluted share for the same period last year. NonGAAP net income for the quarter was $8.5 million or $0.16 per diluted shares compared to nonGAAP net income of $8.1 million or $0.15 per diluted share for the same period last year.

Product revenue in the second quarter was $110.3 million, a decrease of 7% compared to the same period last year. Excluding the divested entity and on a constant currency basis, product revenue decreased by 3%. Within product revenue, system revenue for the quarter decreased 10% and decreased by 6% after adjusting for the divested entities and on a constant currency basis compared to the same period last year. Consumable revenue for the quarter decreased by 4% compared to the same period last year and decreased by 1% after excluding the divested entity and on a constant currency basis.

Service revenue in the second quarter was $52.8 million, an increase of 2% compared to the same period last year, and an increase of 3% after excluding divested entity and on constant currency basis. Within service revenue, customer support revenue increased by 2% compared to the same period last year, and by 4% after excluding divested entity and on a constant currency basis.

GAAP gross margin was 49.7% for the quarter compared to 49.1% for the same period last year. NonGAAP gross margin was 52.5% for the quarter with no change compared to the same period last year. GAAP operating expenses decreased by 6% to $80.4 million for the second quarter as compared to the same period last year, primarily due to the impact of the divestments. NonGAAP operating expenses decreased by 3% to $76.6 million for the second quarter as compared to the same period last year, driven by a continued focus on administrative cost control and the impact of the divestments.

The company used $3.8 million of cash from operation during the second quarter as compared to $13.0 million of cash generated in the second quarter last year, primarily due to proactive steps to increase inventory level in order to improve fulfillment time and support product demand. We ended the second quarter with $366.3 million in cash and cash equivalent compared to $367.8 million at the end of the first quarter of 2019.

To recap, we are pleased with our year-to-year growth in Americas system, consumable and service revenues, which were offset primarily by the impact of the economic condition in EMEA. Our results reflect continuation of strong nonGAAP earnings, demonstrating the success of our ongoing effort to maintain operational discipline and expense management as we continue to improve profitability. We continue to enjoy a healthy balance sheet and are well positioned to take advantage of opportunities moving forward.

I will now turn the call back over to Elan.

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Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [5]

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Thank you, Lilach. Our search for a new CEO is moving ahead and we continue to meet with excellent candidates around the world from various industries and backgrounds. These candidates have the requisite experience as public company leaders with strong track records of growing their businesses and delivering shareholder value. And we are being duly deliberate in our decision-making process.

As a reminder, our current Oversight Committee consisting of our Board Members David Reis, Dov Ofer, and Scott Crump continue to work closely with me and with our management team. I look forward to bringing this process to its conclusion and advising you of our decision at that time.

I would now like to ask David to provide more detailed information regarding the results of the quarter. David?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [6]

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Thank you, Elan. Our second quarter results reflect a continuation of the trends we observed in the last several quarters with system, consumables and services growth in Americas, our largest market, where we continue to observe increased adoption of our target verticals of aerospace, automotive, healthcare and dental. For example, in North America aerospace segment, we are seeing strong sales of our production-focused 3D printers and materials, as well as encouraging early adoption of our recently launched Aircraft Interiors Solution.

We believe that our ability to meet the strict requirements of the aerospace industry is clearly demonstrated by our NCAMP qualification from NIAR which we discussed on our last call. As the aerospace industry in general increasing its investment into additive manufacturing, we believe that Stratasys is uniquely positioned to provide the OEMs and their entire supply chains with our solution. In addition to large deals with several top aerospace OEMs in Q2, we are seeing increased adoption by Tier 1 and Tier 2 suppliers, specifically for jigs, fixtures, and tooling applications.

We made several announcements at the Paris Air Show further demonstrating our focus and traction in the aerospace segment. After 2 years of rapid adoption for both RP and tooling application, we extended our Boom Supersonic partnership by 7 years to span well into their development program, and also showcased us tooling and end-use parts application that Marshall Aerospace and Defense is addressing with our FDM technology.

Additionally, at the Aircraft Interior Expo in April, Diehl Aviation highlighted their adoption of Stratasys FDM technology, specifically showing a printed curtain header for the Airbus A350 XWB, which is reportedly the largest 3D printing part to be made for passenger aircrafts. As we noted at the beginning of the year, we are focusing on bringing to market innovative new systems, materials, software, and application-specific solution that leverage our deep knowledge of additive manufacturing and customer requirements to create new, incremental revenue opportunities.

New systems being developed include major development across our existing technology portfolio of FDM and PolyJet, our upcoming Layered Powder Metallurgy metal platform or LPM, as well as new offering that will broaden the range of solutions we bring to the markets. As a brief update, we have shipped 2 early bird LPM systems, one to a large metal-focused service bureau and the other to a world-leading automotive OEM. We are pleased with the early market interest in the new products we introduced this year, including the F120 and the V650, and expect to see the impact ramping in H2 2019.

Additionally, in the back half of 2019 and into 2020, we intend to make several additional announcements, including more detail on our LPM metal platform, progress on our High-Speed Sintering platform developed in partnership with Xaar, as well as exciting new advancements both in FDM and PolyJet. We continue to expect the beginning of -- in fiscal year 2020, on the strength of our R&D and sales and marketing efforts, we will begin seeing accelerated revenue growth.

I would like now to turn the call over to our VP of Investor Relations, Yonah Lloyd, who will provide greater detail on our 2019 financial guidance. Yonah?

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Yonah Lloyd, Stratasys Ltd. - VP of IR [7]

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Thank you, David. We are providing full-year guidance for 2019 as follows: revenue guidance of $670 million to $700 million. We currently believe that revenue will be closer to the low end of the range, depending primarily on economic conditions in Europe. GAAP net loss of $17 million to $3 million or $0.31 to $0.05 per diluted share compared to previous guidance of a GAAP net loss of $22 million to $12 million or $0.40 to $0.22 per diluted share. NonGAAP net income of $30 million to $38 million or $0.55 to $0.70 per diluted share. NonGAAP operating margin of 5.5% to 6.5%.

Capital expenditures projected at $30 million to $45 million compared to the previous guidance of $45 million to $60 million. NonGAAP earnings guidance excludes $23 million to $24 million of projected amortization of intangible assets; $22 million to $24 million of share-based compensation expense; reorganization expenses and other of $1 million to minus $1 million; and includes tax adjustments of $2 million to $3 million -- minus $2 million to minus $3 million on the above non-GAAP items.

The estimated non-GAAP tax rate for 2019 is impacted by the ongoing noncash valuation allowance on deferred tax assets that we expect to record throughout the year on U.S. losses. Given the expected ongoing negative impact of not recording a tax benefit on U.S. tax losses on our net income, as well as significant quarter-to-quarter variability in our non-GAAP tax rate, the company believes non-GAAP operating income is the best measure of our performance. Appropriate reconciliations between GAAP and non-GAAP financial measures are provided in a table at the end of our press release and slide presentation, with itemized detail concerning the non-GAAP financial measures.

Operator, we would now ask if you would 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) Your first question comes from Greg Palm with Craig-Hallum Capital.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Just on the Europe weakness, do you have the revenue number? Or do you have, I mean, maybe the revenue decline? Just kind of curious how bad it was.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [3]

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It's David Reis. We're not disclosing the exact number and -- but it was significant. What we see this quarter, it started towards I think the end of last year and in Q1. But what we see -- what we saw in Q2 is a very significant slowdown in industrial activity and specifically in the automotive industry, which impact us in a very significant way, mainly in Germany, France, also in maybe the Netherlands and other parts of -- this parts of Europe. And what was interesting or what is interesting about this slowdown is it include both declining CapEx spending, which is impacting our hardware sales and -- but also a significant cutoff on OpEx spending, which impact directly our consumable sales.

Now if you look in the overall picture, just to expand on your question, and we said it in the script and the press release, we saw a nice growth in all our growth engines in the U.S., in all of them. Asia did okay and the declines that we saw -- that we see in the numbers are coming mainly for Europe. That was the reason I mentioned.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Got it. Okay. Yes. And then we've heard the term accelerated growth used a lot this morning and just want to be sure that we're still targeting that kind of high single-digit, low double-digit growth starting next year, I mean, given some of the recent macro developments. Are you still comfortable with that or...

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [5]

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Yes. Yes, we -- okay, with the disclaimers that I was saying in the end, we are on our plan and in some areas even better than our plan on our R&D in the process of introduction of new product. It's a continues effort that started around 1 or 2 quarters ago with F120. Now the V650, it will continue in the coming 1.5 years. And as we said, we expect it in 2020. We will start seeing the result of it and growth would be, we hope and we expect, in the high single, low double digits. And the disclaimer that I said I was saying earlier is of course it's R&D. There are some risks. The plan looks good. But we're always cautious about those things, and -- but this is the current expectation. As I said, we're doing even better than what we expected.

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Operator [6]

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Your next question comes from Troy Jensen with Piper Jaffray.

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [7]

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This is Allan on for Troy Jensen. So I just wanted to start off talking about the Americas and was wondering if you guys could comment on whether you guys have been seeing any potential weakness coming from industrial softness as a result of trade?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [8]

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I hope I understood the question correctly. You asked if we are concerned or we see -- we're expecting slowdown in the U.S. as far as the trade check tariffs and so, right?

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [9]

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Yes, just in general if you guys have seen in -- just in the quarter coming from that.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [10]

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Okay. So we are following this issue, obviously, like all the rest of the world very carefully. At this point of time, I don't -- we don't expect a significant impact on our U.S. results in the coming quarter as far as this is concerned.

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [11]

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Okay. So on Q2, you wouldn't say that you guys have seen any softness due to trade?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [12]

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No. Again, this -- we operate globally and we manufacture and move products globally. So there are minor impacts, but they're not significant. And as I said earlier, we had a strong quarter in the U.S. growth in all parameters of the business and we don't expect at this point of time a change in this trend in the coming few quarters.

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [13]

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Okay. Understood. And I just want to touch on, I know you've highlighted your segments as very positive in the quarter. But I was just wondering if there are any segments you wanted to call out that didn't quite meet your expectations or anchored results in any way such as potentially Boeing's issues are affecting aerospace, just being an example.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [14]

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So can you repeat the questions? It was very difficult to hear. I apologize.

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [15]

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Yes. I was just wondering if there are any segments that didn't quite meet your expectations or anchored down by things such as weather, Boeing issues that potentially affected aerospace as an example.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [16]

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No. We don't expect any such changes or impacts.

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Allan M. Verkhovski, Piper Jaffray Companies, Research Division - Research Analyst [17]

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Okay. Great. And lastly, just one more thing I wanted to touch on. You guys still expect gross margins to grow going forward into the second half of the year and 2020 as these new products are released and the V650 ramps up?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [18]

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We don't guide on the gross margin. But I hope you can appreciate the fact that despite, I would say, kind of the quite tough market conditions some parts of the world, we are quite good in holding our gross margin intact. But nevertheless, we don't guide that going forward. The gross margin is widely impacted in our case not so much on the average selling price, but on the product mix, and this is very -- very, very difficult to project.

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Operator [19]

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Your next question comes from Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [20]

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And first question is just on the guidance. That's helpful to know that you're thinking about the low end of the guidance. And when I look at the low end, that represents a 10% sequential increase for the second half of the year versus the first half. And historically, over last 3 years, it's been 3% sequential increase second half from first half. Are you expecting the same type of seasonality you typically see in the third quarter? Largely, I think that's been associated with August vacations in Europe. Is this 10% sequential increase realistic given all that?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [21]

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So first -- there are 2 parts to the answer. First of all, Q3. Q3 typically is a slow quarter, and by the way, not only the Europeans are going on vacations. This is combined with the slowness in Europe, which is significant. You should not underestimate it. And again, I'm not trying to project how it's going to change, but it's definitely not going to go fully recovered in the next -- in the coming quarter. So Q3 is typically a slow quarter, impacted also by the European slowdown, which I mentioned already significant. On the other hand, Q4 is typically strong quarter. We expect to continue strength in the U.S. Some of the products that we launched and products that unfortunately I cannot talk about and that will be launched towards the end of the year will have positive impact on Q4. Therefore, the expectation today is that Q4, if everything goes well, will be better than the average seasonality effect that you're used to see with start of season. And this will be impact by the new product. So we put all this together, it's bringing us to the low side of the range we discussed earlier.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [22]

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Okay. And the new products that you're talking about are products that have not been launched yet? Or are you also talking about the F120 and the V650 ramp up?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [23]

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We have 3 significant products that we launched until today. One is V650, which is just starting now to get to market. The F120 that we believe will have a bigger traction in Q3 and Q4. And it is also a very important product on the [makeable] side, which is called the method which is progressing well and will have also impact I hope in Q3 and Q4, mainly in Q4. And of course, products that we cannot disclose, which are going to be released in Q4 itself.

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Operator [24]

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Your next question comes from Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [25]

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Are you able to tell us what the growth rate was in the Americas? It sounds like you're have seen a pretty good -- you had a pretty good quarter. Can you give any more color?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [26]

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We're not quoting, but it -- what I can say that it was -- now how to describe it -- good single digits in the -- in all parameters of the business.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [27]

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Okay. And it's in across the vertical. So what we're seeing or hearing about in automotive is also it's impacting conditions in the U.S. automotive. Are you seeing any signs of weakening in that market? Or is that just you have more exposure in the European automotive market?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [28]

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We see also some weakness in the U.S. auto segment, but it's dramatically less significant of what we see in Europe.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [29]

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Okay. And the follow-up question is, as you prepare for this reacceleration in the business next year, how should we be thinking about your operating expense because you've done a real nice job in containing OpEx? What should we be thinking about in terms of the new product launches and the support you're going to have to provide from an OpEx standpoint looking out to 2020?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [30]

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It's really very, very early stage of the planning of 2020. But I think that in the past few quarters and I hope going forward, we are becoming and trying very hard to become more efficient. So obviously with the launches of new products would be some additional expenses on the introduction of the products, some marketing expenses. But I hope in the way it looks now, it will be offset by increasing the revenue, okay? So there will be increasing expenses on the SG&A side of it, but I don't think it's going to be something dramatic. Our operation is quite big today and we can handle more products.

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Operator [31]

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Your next question comes from Shannon Cross with Cross Research.

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Ashley Melissa Ellis, Cross Research LLC - Research Analyst [32]

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This is actually Ashley Ellis on for Shannon today. Lilach, I was wondering if you could talk to the increase in inventory. I know you said it was to improve fulfillment time and support product demand, but you also increased inventory about $8 million last quarter for those reasons. So do you feel comfortable with the levels you're at now? And then how much are the new products contributing to that increase? And then I have a follow-up.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [33]

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So this was the increase in inventory was planned. It's not something that happens, okay. And the rationale behind it was twofold. We felt that we want to make sure that we are able to supply mainly hardware, but also consumables for sure around the world to everyone and on time, so we don't lose any revenue opportunities because of shortage of hardware which happened before, number one. Number two, we believe that by increasing inventory, we will increase, at the end of the day, the efficiency of our logistic operations. And just to give an example, by holding the higher inventories, we can easier shift from air shipments to sea shipments, which is very significant on the P&L, and there's a very important impact on cost margin. So we think that the cash spent is worth spent. It was planned. It's not something happened by mistake. And we think it would have the impact going forward on our operational efficiencies.

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Ashley Melissa Ellis, Cross Research LLC - Research Analyst [34]

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Do you feel comfortable with the level you're at now or do you think you'll need to sell for more inventory into the channel?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [35]

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Yes, I think we always look into reduce the inventory. So we are working on it. I don't know if it's optimal number, but it's probably very close to the optimal number. But we are consistently looking to reduce inventory, could be in other places in bomb or products which are in process, we can become more efficient in our factories. But the current level, we feel comfortable with it. Just to remind you, we are a consumable -- a major consumables supplier to our customers. We need to make sure consumables are available globally always. So we think it's the right level. And again, it's very important to highlight due to this fold that this increase of $70 million was claimed to the dollar. It's not something that they kind of slipped and they grew up.

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Ashley Melissa Ellis, Cross Research LLC - Research Analyst [36]

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Okay. That's helpful. And then I was wondering on the metal system. You placed some of -- 2 of your first systems. Was this your plan the details you provided in November? How is the system progressing overall? Do you still expect that you could commercialize it maybe sometime in 2020? Any update on the product would be great.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [37]

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To [mention] this where we saw just in the last few weeks, so we just concluded installations and starting working with the customers. And it's -- we call it early bird. It's pre-data machines. The R&D plan is focusing well and according to plan. Regarding the specific launch date, again it's a major project and I'll be cautious to quote a date for it.

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Operator [38]

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Your next question comes from Wamsi Mohan with Bank of America.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [39]

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I was wondering if you can just give a little more insight into some of the macro-driven weakness around auto and industrial. Well, what is the behavior that you are seeing at customers? Is it primarily that they are not purchasing new systems or are they pulling back on usage of consumables? And if so, like what sort of magnitude of pullback are you seeing which could be temporary and could reverse into the next several quarters?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [40]

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Maybe the best way to demonstrate it and to give you the -- our perspective of it, and again I can't quote the name of the customer, but a major automotive customer in Europe or the subsidiary of a major we heard instructed his employees to stop doing photocopies in color, okay?

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Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [41]

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Only black and white.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [42]

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Only black and white. Okay? So what we see is -- and I think there's 2, from what we read -- again, we are not part of the auto industry. We read that there are both macroeconomics issues that has to do with the global economic situation which impact the industry in Europe, including the relationship with China. The other element in Europe has to do with the major R&D direction decisions that are being taken today by the auto industry in respect to the next generation of electric and autonomous cars. So between those 2 major events, what we see on our side from a very narrow perspective of the industry is a very strong slowdown in capital equipment purchase, which I think coming both from financial reasons, but also from the slowdown on R&D and lack of R&D decision of where to go -- where the industry is going. By the way, from -- okay, with what I understand, this issue is almost resolved, but I think you should ask the people from the auto industry regarding the direction. This is one part of it. And because of it, because of the slowdown, there's also a halt on OpEx spending which impacting actually number of prints and number of jobs, for example, which are being forwarded to service bureaus which are using our equipment and supporting the auto industry in Europe. So we see the auto industry slowing and the infrastructure around the auto industry which is huge in Europe is also slowing because of them. This is the story.

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Operator [43]

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Your next question comes from Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [44]

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A couple if I could, for both Elan and for David. Just sticking with Europe, David, it almost sounded like in your prepared remarks that you're suggesting you've got a good spread or maybe intensify at least this quarter meaning September quarter. Is that an accurate interpretation of your comments? I just love a little more context around that, and then I have a follow-up.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [45]

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So first of all, it's a big macroeconomic question and we see a very narrow perspective of it. But I do not indicate as I think that the Q3 or Q4 are going to be worth in Q2. I don't think it will be the case. But Q2 was not good, okay. And it impact the entire results of Stratasys, okay. Is it the bottom or it's close to the bottom, it's very difficult to say. If you're asking am I feeling or what I see today, it's probably not going to be worse, okay. But I don't know if it's for a fact. It's too early.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [46]

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That's very -- that's helpful. That's very helpful. I appreciate that the additional context. And then my follow-up question is just with regard to sort of the -- as we enter fiscal year '20, the beginning of the revenue pickup. Could you provide a little more context about what is underpinning the forecast there? You guys have been consistently talking about it for 6 months now. Is it directly -- I guess, how much is tied to what's going to be the introduction of new products sort of through the second half of the year? I know there's the F120 and the 650 and I know there's the method. But how much of it is -- is it tied to new products coming through the year? How much is it tied to sort of a R&D plans that you guys have? And then how much might it be tied to conversations or order visibility that you have currently right now? I'm just trying to get as keen a sense as I can as to how you guys are thinking about it? And I appreciate it.

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [47]

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Okay. Unfortunately, I will repeat what I said in the last call. We introduced few new products in the last 2 quarters. And there's a string of introduction of new products/ new platforms in the coming 1.5 years, okay. It's significant number of products and I -- going back to my disclaimer, everything is subject to our ability to conclude R&D on time and to deliver on time. At this point of time, we are cautiously optimistic. The plans looks good, in some places even better than what we expected. Now all those products, some of them are significant products, obviously come with the projections of revenues and profitability. And we said many time that we will start seeing the impact in 2020 and it will accelerate during 2020 and I think it will be very significant in 2021, okay. This is the current plan. I cannot add more on it and I cannot disclose obviously what's the product because the nature of the way we operate.

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Operator [48]

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Your next question comes from Hendi Susanto with G. Research.

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Hendi Susanto, G. Research, LLC - Research Analyst [49]

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In light of weaknesses in Europe, solid demand environment in Americas, and lower revenue expectation for the full year, how should we think about the annual operating margin? Do you assume a linear cost structure will enable you to maintain that target range or should we anticipate full-year operating margin guidance in the lower part of that range? And then additionally, do you expect pricing environment to see some pressure in light of weaknesses in Europe?

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Lilach Payorski, Stratasys Ltd. - CFO [50]

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In terms of operating income, we do not expect to see any changes compared to what we disclosed previously in our guidance. It's the same level. In the operating income although we lower our guidance on a slightly -- on a revenue perspective, but we do have the ability to address the expense side in a proactive way and we believe that we will be able to maintain the guidance that we provided. Can you please repeat on the second question for me?

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Hendi Susanto, G. Research, LLC - Research Analyst [51]

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The second, whether or not we should expect some pricing pressure in Europe?

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David Reis, Stratasys Ltd. - Vice Chairman of the Board [52]

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I don't think that -- with current situation in Europe, I don't think that reducing prices would change the overall picture. So I expected that like we said earlier, we were experiencing a good -- despite the situation, a good gross margin. I don't expect pricing pressure. We don't have -- as far as it sounds funny, we don't have too much competition. And the gross margin would be affected more in the product mix than on the ASP.

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Operator [53]

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I am showing no further questions at this time. I would like to turn the conference back to Elan Jaglom for closing remarks.

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Elchanan Jaglom, Stratasys Ltd. - Chairman & Interim CEO [54]

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Okay. All right. Thank you for joining today's call. We look forward to speaking with you all on our next quarter. Thank you.

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Operator [55]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.