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Stratasys (NASDAQ:SSYS)
Q4 2018 Earnings Conference Call
March 7, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and full-year 2018 Stratasys earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Vice President of Investor Relations Yonah Lloyd. Mr.

Lloyd, you may begin.

Yonah Lloyd -- Vice President of Investor Relations

Thank you. Good morning, everyone, and thank you for joining us to discuss our 2018 fourth-quarter and full-year 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 the prepared slide presentation, is available online at the web address provided in our press release.

In addition, a replay of today's call, including access to the slide presentation, will also be available and can be accessed through the investor relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast.

For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed in Stratasys' annual report on Form 20-F for the 2018 year, our report on Form 6-K, along with the related press release concerning our earnings for the fourth quarter of 2018, all of which we are filing with or 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 non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance.

Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release. Now I would like to turn the call over to our interim CEO Elan Jaglom. Elan?

Elan Jaglom -- Interim Chief Executive Officer

Thank you, Yonah. Good morning, everyone, and thank you for joining today's call. Our fourth-quarter top line results reflect continued positive traction in high-end systems and material sales for both our PolyJet and FDM technologies, primarily in North America, improved growth at Stratasys direct manufacturing and steady growth in customer support revenues. Late in the quarter, our revenues were impacted by the government shutdown in the U.S.

and some weakness in the automotive sector in Europe, which we believe is temporary and not fundamental, as we remain highly engaged with our OEM partners there. We are pleased to have achieved our profitability expectations both for the fourth quarter and the full year and to have generated a record amount of cash from operations for 2018, demonstrating a continuation of our effort to successfully deliver earning value to our shareholders. Overall, we are pleased with the progress we have made over the last few years to build a strong operational foundation for future growth. We're excited about our recent upcoming new product introductions that expand our addressable markets and believe we have a portfolio roadmap in place that will result in accelerated growth beginning 2020.

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 our strategy and growth prospects. But first I will turn the call over to our CFO, Lilach Payorski, who will review the details of our financial results. Lilach?

Lilach Payorski -- Chief Financial Officer

Thank you, Elan, and good morning, everyone. Total revenue in the fourth quarter was 177.1 million, compared to 179.3 million for the same period last year. For the full-year 2018, total revenue was 663.2 million, compared to 668.4 million for 2017. After adjusting for the sales of our divested entities during 2018, on a like to like -- on a like-for-like basis, total revenue was up 0.7% for the fourth quarter and was flat for the full year.

Non-GAAP operating income for the fourth quarter was 12.8 million, compared to operating income of 13.5 million for the same period last year. GAAP net incomes for the quarter were 6.3 million, or $0.12 per diluted share, compared to a net loss of 10 million, or $0.19 per diluted share, for the same period last year. Non-GAAP net income for the quarter was 11.3 million, or $0.21 per diluted share, compared to non-GAAP net income of 8.4 million, or $0.16 per diluted share, reported for the same period last year. For full-year 2018, GAAP net loss was 11 million, or $0.22 per diluted share, compared to a loss of 40 million, or $0.75 per diluted share.

For fiscal, non-GAAP net income was 27.8 million, or $0.52 per diluted share, compared to non-GAAP net income of 24.2 million, or $0.45 per diluted share, reported for the fiscal 2017. Product revenue in the fourth quarter was 124.5 million, a decrease of 4% compared to the same period last year, and for the full-year 2018, product revenue was 456.5 million, a decrease of 3.7% compared to 2017. Excluding the divested entities, Q4 product revenue decreased 1.6%, and 2.6% for the full-year 2018. Within product revenue, system revenue for the quarter decreased 6.9%, and 4% after adjusting for the divested entities compared to the same period last year.

On an annual basis, 2018 system revenue decreased 9%, and 7.9% after adjusting for the divestments. Consumables revenue for the quarter was flat compared to the same period last year and up 1.3% excluding the divested entities. On an annual basis, 2018 consumables revenue increased 2.2%, and 3.2% after adjusting for the divestments. We are observing strong consumables growth in the U.S., our largest and most mature geographical market, offset by previously mentioned partial impact of automotive in EMEA.

Service revenue in the fourth quarter was 52.6 million, an increase of 6.1% compared to the same period last year, and for the full-year 2018, service revenue was 206.7 million, an increase of 6.5% compared to 2017. Excluding the divested entity, Q4 service revenue increased 6.7%, and 6.9% for the full-year 2018. Within service revenue, customer support revenue, which includes revenue generated mainly by maintenance contracts on our system, increased by 6.2% compared to the same period last year. For the full-year 2018, customer support revenue increased 7.5% compared to 2017.

GAAP gross margin was 49.1% for the quarter, compared to 48.7% for the same period last year. Non-GAAP gross margin was 52.2% for the quarter -- for the fourth quarter, compared to 52.5% for the same period last year, driven by mix of revenue sources. Non-GAAP product gross margin increased to 58.9% compared to 58.8% for the same period last year, driven by product mix. Non-GAAP service gross margin was 36.3%, compared to 35.9% for the same period last year, reflecting improvement in Stratasys direct manufacturing performance.

GAAP operating expenses decreased by 2.6% to 90.8 million for the fourth quarter as compared to the same period last year, primarily due to the exclusion of divested entities. Non-GAAP operating expenses increased by one -- decreased by 1.1% to 79.7 million for the fourth quarter as compared to the same period last year, driven by administrative cost control and the impact of divestitures. The company generated 18.7 million of cash from operations during the fourth quarter, as compared to 20.8 million of cash generated in the fourth quarter last year. For 2018, we generated a record 63.7 million of cash from operations.

We ended the fourth quarter with 393.2 million in cash and cash equivalents, compared to 348.9 million at the end of the third quarter of 2018. Inventory increased to 123.5 million, compared to 118.1 million in the third quarter of 2018. Accounts receivable increased to 138.1 million, compared to 129.5 million as of the end of the third quarter of 2018, with days sales outstanding, or DSO, on 12-month trailing revenue at 76. To recap, we are pleased with our non-GAAP operating earnings, demonstrating the success of our continuous effort to improve operational discipline and expense management.

Our revenue results reflect strong performance and increased adoption in North America for our high-end PolyJet and FDM systems, as well as consumables, offset by what we believe is temporary weakness in the automotive sector in EMEA. We continue to enjoy a healthy balance sheet and positive cash generation from operating activities demonstrated by a record 63.7 million in 2018. I would now like to turn the call back over to Elan.

Elan Jaglom -- Interim Chief Executive Officer

Thank you, Lilach. As we noted on the last call, Victor Leventhal, chairman of our compensation committee, and I, as the company's executive search committee, and have been actively interviewing CEO candidates. They are all outstanding leaders with global operational experience and a strong history of growing large public companies and delivering significant shareholder value. At this time, we have not yet finalized the decision, and we look forward to announcing a new CEO when we have completed the process.

I would like -- I would now like to ask David to provide more detailed information regarding the results of the quarter and the full-year 2018, as well as our long-term growth outlook. David?

David Reis -- Vice Chairman and Member of the Oversight Committee

Thank you, Elan. We are pleased with the success of our high-end systems in the fourth-quarter and the full-year of 2018, which we believe will lead to accelerated future annuity streams from materials and services. Our J750 and new J735 full-color and multi-material 3D printers are seeing high demand in CPG segment, where adoption has been increasing and systems are being utilized as mission-critical tools in product design and development. This segment represents a significant opportunity for us within the prototyping space.

On the growing manufacturing side of our business, we had a strong year for our F900 series and our advanced materials, which to our observation are increasingly being adopted for tooling and end-use parts production in our target verticals. As a result of our work with aerospace OEMs, there are tens of thousands of FDM production parts already flying. That number is continuing to increase. Overall, the percentage of our systems sales going to manufacturing environment continue to grow, which we believe will lead to strong recurring revenue from material and services.

Already we see utilization rates on manufacturing-focused units like the F900 exceeding those of the prototyping units like the F123 by a factor of three. We are also excited with the early interest we are seeing for our recent product introductions, which include the F380 carbon fiber edition for tooling applications; the Antero PEKK advanced FDM thermoplastic that meets the strict requirements for aerospace application; elastomer TPU material for the F123 platform, which is seeing strong early interest from automotive manufacturers and others; the Maker Bot Method Performance 3D Printer, which bridged the gap between desktop and industrial systems and is on schedule to being shipped -- to begin shipment later this month; and the new J720 Dental 3D Printer that provides multicolor and multi-material capabilities for dental labs. I would like to provide an update on our growth trends. Over the last few years, we have improved our organization on multiple levels.

Through relentless focus on operational efficiency, we have achieved consistent non-GAAP profitability and cash flow generation, building the cash balance at OEM in our target verticals expected from long-term partners. We believe that we are well positioned to move fast and take advantage of opportunities, both internal and external, to improve our technology portfolio, our go-to-market and ultimately our customer base. In the back half of 2019 and into 2020 and beyond, we intend to bring 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. The new system include major developments across existing core technologies for the full year of FDM and PolyJet, metal systems that include our upcoming LPM platform, as well as new offerings that will broaden our range of solutions -- sorry, broaden the range of solutions we bring to market.

We look forward to sharing more details on our roadmap throughout the year. Beginning of fiscal-year 2020, on the strengths of our R&D and sales and marketing efforts, we expect to begin seeing accelerated revenue growth. I would now like to turn the call over to our VP of investor relations, Yonah, who will provide greater detail on our 2019 financial guidance. Yonah?

Yonah Lloyd -- Vice President of Investor Relations

Thank you, David. We are providing full-year guidance for 2019 as follows. Revenue guidance of $670 to $700 million, GAAP net loss of $22 to $12 million or $0.40 to $0.22 per diluted share, non-GAAP net income of $30 to $38 million or $0.55 to $0.70 per diluted share, non-GAAP operating margin of 5.5% to 6.5%. Capital expenditures are projected at $45 to $60 million.

Our guidance reflects growth combined with a continued showing of operational efficiency as our profitability will increase relative to the top line. Non-GAAP earnings guidance excludes $32 million of projected amortization of intangible assets, $20 to $22 million of share-based compensation expense, reorganization-related and other expenses of $1 to $2 million, and includes $3 to $4 million in tax expenses related to non-GAAP -- or income related to non-GAAP adjustments. 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, please open the call for questions. 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from David Ryzhik of Susquehanna Financial Group. You may proceed with your question.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks for taking the question. Lilach, can you give us a sense of what the implied gross margin and opex assumptions are within your guidance? And how can we think about the cadence of, perhaps, revenue and opex on a quarterly basis throughout the year? And I had a follow-up.

Lilach Payorski -- Chief Financial Officer

Hi, good morning, David. From a revenue perspective, the cadence of the revenue, we typically -- we expect to see a typical trend as we've seen the previous years. Obviously, Q4has been the highest. After that, Q2, Q3 and the softer -- softest quarter is usually the first quarter.

Also, when we look at how the revenue will spread over the year, we expected to see about 55 to 60% of our revenue to come in the second part of the year, which can -- also can give you kind of expectation in terms of cadence over the quarters. In terms of OPEX, there is a typical seasonality of the opex compared to the revenue trend. Some quarters it's directly driven by the revenue will be higher in Q4 and in Q2, and then after that in Q3 and Q1. In the opex also we have the R&D.

It's -- there is no specific trend nowadays. It's really mainly based on a project base. There are some projects that consume more effort in the first half of the year and some others that are in the second part of the year. We do expect to see more product launches, say, close to the second part of the year, which creates some more expenses in the second part of the year.

From a gross margin, we expect a relatively flat gross margin with what we see this year in 2018.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Great, thank you. And David and Elan, so when I look at your implied 2019 revenue guide, that implies a three-year revenue CAGR from 2016 to 2019 of only 2%. What gives you the confidence in accelerated growth in 2020? And what makes the product introductions in the back half of 2019 different from prior product introductions? Thanks.

David Reis -- Vice Chairman and Member of the Oversight Committee

Good morning. We're investing this year and in the coming years, and also in previous year, around$90 million in R&D, which is a substantial investment. As we said in the script and we presented, both by Elan and by myself, we have many great products coming, based both on our current known technologies, FDM and PolyJet, but also the other technologies in the areas of metal and the other areas. Product development is a long-cycle process.

We are indicating, I think, quite strongly in the message in the script that we believe that starting in 2020, those very big efforts will start showing fruit, which will result in accelerated growth. Why I think it's going to happen, because we are working very hard in the last few years. I think we are by far the most experienced company, or at least one of the most experienced companies, in this space, with the deepest knowledge both in application and technology, and we have a great deal of people spending a lot of money, so it's coming. When it's going to come, we say 2020, beginning of 2020, is the year, which as I said earlier, we expect -- and I hope we're not wrong -- we'll see accelerated growth going forward.

David Ryzhik -- Susquehanna Financial Group -- Analyst

And in your conversations with some of the key customers in aerospace, automotive, have they indicated that should new products come out they would accelerate purchasing and materials utilization? Have you gotten that from your conversations?

David Reis -- Vice Chairman and Member of the Oversight Committee

Again, I can't quote customers, but we are deeply, deeply, probably one of the most involved companies with the major industrial players of the product definition, product spec, required characteristics for all defined with a lot of customers. And obviously, if we're going to be successful, which we are -- I'm quite sure we will, bringing those products on time with respect to market, it should increase purchases from those customers and other customers.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks so much. I'll get back in the queue.

Operator

And our next question comes  from Troy Jensen of Piper. You may proceed with your question.

Troy Jensen -- Piper Jaffray -- Analyst

Thanks for taking my call and congrats on the 2018 key performance. Maybe David, for you, just a follow-up on these new products. Yes, I know LPM is a new technology, but the other products that you're talking about, are they enhancements to FDM and PolyJet, or are they also a new technology that gets you into a new market?

David Reis -- Vice Chairman and Member of the Oversight Committee

Troy, I wish I could share all this information now with all of you and specifically with you, but you understand the limitation. We believe that with the core technologies, both FDM and PolyJet, we still have a long way to go. FDM, on the manufacturing side, can be improved and make even better than what it is today. Likewise, on the PolyJet, I think that we are leading today from point of view of quality and what really customer needs with our J750 and J75 prototyping systems, so there's a lot of way to go there.

And we already disclosed some new technologies. One of them is the metal that you mentioned earlier, but we have others on the way. And if it's going to be mature and taking into consideration market limitations, we're going to announce this product. But there is a big effort, I think, very focused.

We're not a start-up company. We need to bring mature products to market. We cannot come with all kinds of products with hiccups, and so it takes a little bit more time than I'm sure that all of us wish, but it is coming. And like I said, we hope and expect that in 2020, we will start seeing an accelerated growth of the company.

Troy Jensen -- Piper Jaffray -- Analyst

So David, I agree. Just the acceleration on growth, I feel like you guys can get there just with FDM being adopted in production applications, right? I mean, clearly, we haven't penetrated that much, just modestly in jigs and fixtures. So can you give us an update, or could you -- I'd love to see, just, like, evidence on kind of your success on production applications with FDM.

David Reis -- Vice Chairman and Member of the Oversight Committee

So, again, I'm cautious not to mention names of customers. I'm not sure, and I don't, by the way, recall who approved or not approved to us to use his name, but in the aerospace, Europe, we are seriously involved with manufacturing of end-use parts. In the auto industry, we're extremely involved in the jigs and fixtures area. We have --all over the world, customers are adopting FDM technology.

And by the way, also PolyJet technology in some areas for production applications. It takes time, because -- and we explained many, many times, people have to experiment. They need to accept the technology. It has to get into the next cycle of development of an airplane or a new car.

But the level of adoption and the number of printers which are being sold into those segments is growing quarter-over-quarter, consistently and, as a result of which we see an increased demand for the relevant high-end materials. So again, I cannot disclose the numbers, but if you look on our high-end materials, you can see an increased consumption, which is a direct result both from increased usage and increase in the IP within the manufacturing -- large manufacturing plays, both in aerospace, the car industry -- by the way, also rail industry lately. So there's increased adoption. We have a lot of press releases; you can follow the press releases with some specific names, but it's all over the world and in many, many industries.

Troy Jensen -- Piper Jaffray -- Analyst

Yes, understood. All right, if I could just sneak one more in, and I'll cede the floor, but I'd love to hear just some thoughts on the material sales. I think it was up 1% or 1% to 2%. Given you guys launched the elastomer in the fourth quarter, I thought that would -- might have been a little boost to kind of the material growth rate.

So can you just talk about what's going on with consumption and why material growth has been just 1% to 2%?

David Reis -- Vice Chairman and Member of the Oversight Committee

Yes. So it's a combination of -- we have some conflicting messages here. In general, consumables is growing. I can share with you and the audience that if you look specifically, for example, at the U.S.

market in Q4, we saw substantial growth in consumables. So by -- that was offset by decreased consumption in Europe, partially because of the automotive industry, and some issues with the currency exchange. So in general, our expectation is that consumables should continue growing. By the way, they're not going to grow in the rate that all of us were used four, five, six, seven years ago, because as the install base is growing, the impact of marginal additional machines is getting smaller, not getting bigger.

Nevertheless, I can share with you some other data that, for example, on the new platforms that we're introducing, we see an increased consumption compared to the equivalent old platform. Just to mention one example, F123 consumption is higher than the equivalent you print in dimension per machine, OK?And why is this? Because there's more applications, better software, better ease of use. So the legacy products are getting slower. Usage is maybe getting lower.

But of the new machines, we're seeing increased consumption. And again, I think that the Q4 specifically, this is confusing as far as this number is concerned. Like I said, in the U.S., we had very strong growth and some weakness in other parts of the world from the reason I said earlier.

Troy Jensen -- Piper Jaffray -- Analyst

Understood. Good luck in that 2018.

Operator

[Operator instructions] And our next question comes from Ananda Baruah of Loop Capital. You may proceed with your question.

Ananda Baruah -- Loop Capital Markets -- Analyst

I'll just make it one question, but a couple parts to it, but same topic. The acceleration -- yes --from new products, acceleration in the beginning of '20, can you speak to the degree you expect that to be true production versus new prototyping capabilities? When in '19, second half of '19, do you expect the new products to begin to come to market? And then just some context around what you would consider to be acceleration. Are we talking mid-single digits or could it go stronger than that? Just aesthetically. Thanks so much.

David Reis -- Vice Chairman and Member of the Oversight Committee

Let me make sure we're not-- we're presenting the right picture. We are going to see beginning of launches of new products in the second half of '19 into 2020 and 2021. As I said earlier, very large, very focused R&D operation, both sides of the oceans-- oceans, more than one ocean -- are working on those products. They're both targeting manufacturing applications, both plastic and metal, and very high-end, which I think is also very significant, prototyping applications.

So we are covering all the range of what we strategically want to cover. But again, the process will take some more few quarters and years. If you're asking what will be the growth rate, I'm cautious about it. You're right, I think it's going to be higher than single digits and very low double digits.

So I don't want to try and gamble what will be the exact number, but we -- compared to our size and compared to the industry becoming more mature, I think we are going to show reasonably good growth, profitable, cash-generating at the same time, which I think would present a very good picture. And again, the timing depends on R&D. And like I said, again, I think we -- in the last few quarters, were focused -- not refocused, even more focused our R&D efforts. We know exactly what we are doing.

The road map is crystal clear and the fruits are going to come.

Ananda Baruah -- Loop Capital Markets -- Analyst

That's great. OK, great guys. Thanks a lot. Good luck.

Congrats. I really appreciate it.

Operator

And our next question comes from Jim Ricchiuti of Needham and Company. You may proceed with your question.

Jim Ricchiuti -- Needham and Company -- Analyst

A couple of questions. Just with respect to trying to reconcile your comments about the strength in the systems business, I mean, you -- on an organic basis, I guess you showed about a 4% decline, and yet you highlighted strength in the higher-end systems business. So the part of the product portfolio that you're seeing some weakness, what are you attributing that to? And do you see that beginning to stabilize?

David Reis -- Vice Chairman and Member of the Oversight Committee

So I want to clarify. So without getting into the exact numbers, if you look on the large platforms, theJ77xx to platforms 900, the F123 unit sales went up year over year. So the --obviously we have some legacy products which we are selling for many years. For example, the low end, for example, PolyJet, which are -- we still have demand, but less strong a demand than what we had in previous years, OK? So if you look at the overall picture, you get a picture which is almost -- maybe a little bit declined, but almost flat, OK? I think the good news is that in the newer technologies, we do see growth.

And again, our expectation, and again, it's not risk-free, and the timing, as we tried to indicate, but it's also not guaranteed, and new products, we notice direct relationship for ability to grow top line with new products, introducing new features and additional applications. So this is coming. So like I said, the large platforms, F123, year over year, we're seeing increasing units. I think it's a good opportunity again to mention, which I think is very interesting, is the fact that on equivalent unit new generations, we see increased consumption of consumables, which is very, very promising.

It's not trivial to understand why an F123 would have higher consumptions than a Dimension on average. And the reason is, application, materials, ease of use, data software.

Jim Ricchiuti -- Needham and Company -- Analyst

OK, that's helpful, David. And just if I could ask a question on the progress you're seeing on developing the metals product, is that tracking your expectations? And as we think about the 2020 and you see a wave of the new products impacting 2021, how do we think about metals? Is this something that could be meaningful in 2020?

David Reis -- Vice Chairman and Member of the Oversight Committee

No, I don't think in 2020 it's going to be meaningful. I think that the -- OK, it's not in '20, no.

Jim Ricchiuti -- Needham and Company -- Analyst

But in terms of the progress you're making, is that...

David Reis -- Vice Chairman and Member of the Oversight Committee

We're on track with our plans, OK? Obviously, this system and other systems are -- I hate the word complex, but requires a very detailed and a lot of process in order to bring them to market in the production level and not as a toy. And so we're going to see the -- I want to repeat what we said very clearly. We see the beginning of introductions in the second part of 2019 through 2020 into '21. Specifically, the question, metal, will not have a major impact in 2020.

Jim Ricchiuti -- Needham and Company -- Analyst

Now that's helpful. Thank you.

Operator

And our next question comes from Brian Drab of William Blair. You may proceed with your question.

Brian Drab -- William Blair -- Analyst

I will stick to one question here, and I just need to make sure I understand the math regarding the outlook. And I just need to clarify. Did I hear you say, first of all, that about 55% to 60% of total revenue is expected in the second half of '19?

Lilach Payorski -- Chief Financial Officer

Yes.

Brian Drab -- William Blair -- Analyst

OK, then I just want to clarify that that obviously means that 40 to 45% would be expected in the first half, and that would -- if I just use the midpoint of your guidance at $685 million, that would put the range of revenue in the first half from $274 million to $308 million, and that would represent a decline year over year in the first half of down 15% to down 5%. And I'm just wondering if that's what you are intending to communicate to us?

David Reis -- Vice Chairman and Member of the Oversight Committee

I'm not sure. Let us -- go ahead, sorry.

Lilach Payorski -- Chief Financial Officer

Yes. It's not supposed to be -- represent a 50% decline. What we do --

Brian Drab -- William Blair -- Analyst

Fifteen, 15, just to be clear.15 to --

Lilach Payorski -- Chief Financial Officer

Fifteen, 15.

Brian Drab -- William Blair -- Analyst

If you did 40% of your revenue in the first half of the year, you would be down 1-5, 1-5, in the first half of the year. I just want to make sure that's what you're trying to communicate.

Lilach Payorski -- Chief Financial Officer

We will get back to you on that. No, it's not supposed to represent a 15% reduction. Remind you, the second quarter is slightly higher -- is stronger than the first quarter. So it's a -- it's not about 45% in the first part of the year.

Brian Drab -- William Blair -- Analyst

So do you -- you're going to decline at --

Lilach Payorski -- Chief Financial Officer

45% if you took from the average or so.

Brian Drab -- William Blair -- Analyst

OK, but you are trying to communicate that your revenue is down in the first half of '19? Is that correct?

Lilach Payorski -- Chief Financial Officer

No, not necessarily. But we can talk about it after the call.

Brian Drab -- William Blair -- Analyst

OK, all right. Thanks very much.

Yonah Lloyd -- Vice President of Investor Relations

Brian, what -- we'll talk about it offline, but one of the things is, remember, with large orders, there's a variability in ordering. And so you have to keep that in mind as well.

Brian Drab -- William Blair -- Analyst

I understand all that. I just am doing the math here, and I think it's important on the public call --I'm just trying to be helpful. On the -- it's probably important on the public call to clarify that, given what the math tells you. But yes, I understand.

Thank you. I'll follow up more later, but I think it's important to address publicly too.

David Reis -- Vice Chairman and Member of the Oversight Committee

OK.

Operator

Our next question comes from Shannon Cross of Cross Research. You may proceed with your question.

Shannon Cross -- Cross Research -- Analyst

And I will also keep it to one question. Can you just talk about what you're expecting from a macro standpoint when you look at the -- when you provide your revenue guidance for this year? I understand that 2020, you expect acceleration and that -- and you did give us some of the theoretical seasonality in the year, but what do you expect to see in Europe? What are you thinking about in terms of auto demands or at least capex spend on the auto side? I'm just -- I'm trying to figure out how much there's-- if Europe continues to be soft and then how much of that is already baked into your expectations, or what you've got overall in there from an economic perspective? Thank you.

David Reis -- Vice Chairman and Member of the Oversight Committee

Yes. So macro questions are tough questions, and with our -- have to be modest here and say up front that I'm not sure I understand the entire complexity, but what we read, and it's a lot of public information, research that you read, the expectation as far as the auto industry in Europe is some kind of recovery during '19. I don't think anyone knows exactly when. It has to do a lot with the China issue and all the other BMW and Daimlers are a lot dependent on China.

I really don't know the answer. My assumption is that it's not going to be worth what it is today, and again, from what I read, we see some recovery.

Operator

And our next question comes from Danny Eggerichs of Craig-Hallum. You may proceed with your question.

Danny Eggerichs -- Craig-Hallum Capital Group LLC -- Analyst

Hi guys, this is Danny stepping in for Greg Palm today. Thanks for taking the question. Just a quick one here. Are you seeing any changes in your go-to-market strategy, maybe that you're benefiting from as your CEO search is ongoing?

David Reis -- Vice Chairman and Member of the Oversight Committee

We're -- hi, Danny, it's David. We are all the time adjusting our go-to-market to fit the strategy. Just one example, we put a lot of emphasis on the manufacturing segment. So we are creating and created the infrastructure that can work together entirely to our channel to better penetrate and get better -- very intimate relationship with manufacturers across the world.

So we have organizations around the world that are dealing with strategic accounts and major customers in the manufacturing segment, in parallel to the distribution channel. We believe that the long-term, our sales should grow and continue working with our channel. Nevertheless, we refine and develop infrastructure to support it. But when we look on the dental segment, we are developing go-to-market for dental.

So it's being adjusted all the time to fit the strategy, to fit the product offerings that we think we're going to have in the -- in future use.

Danny Eggerichs -- Craig-Hallum Capital Group LLC -- Analyst

OK. Great. Appreciate the color.

Operator

And our next question comes from Paul Coster of JP Morgan. You may proceed with your question.

Paul Coster -- J.P. Morgan -- Analyst

Yes, I will echo my concern that the guidance at the moment is a little bit hard to 55% of revenue in the second half of the year, then you have to work really hard to get the numbers down in the first half of the year, and I'm assuming that is going to fall off the cliff, so it's going to be products, so it's -- from a product perspective, the year-on-year decline in the first half is even pronounced than the caller mentioned a couple minutes ago. Just making that clearer, I think you should come out with some statement as soon as possible rather than taking it offline.[Inaudible] really is. So at this time, at the moment, you've got something like 20 products in your lineup of movement print engines, and next, it sounds like beginning of 2020, you're going to have even more products and another print engine, and so I guess trying to kind of understand whether this is the way forward now, that we're going to see a proliferation of product SKUs and print engines to support, or whether -- are you kind of verticalizing everything, or is it a horizontal solution completely? I think you have something of an inflection point there, and I'd love to hear your thoughts on that.

David Reis -- Vice Chairman and Member of the Oversight Committee

Lilach, you want to take it?

Lilach Payorski -- Chief Financial Officer

[Inaudible]

Yonah Lloyd -- Vice President of Investor Relations

OK, Paul, I'm going to address the first part of your question, which was referencing what Brian had asked earlier. One of the items that we didn't mention was in a like-for-like comparison is what we're talking about. So you'd have to back out the divestments from 2018 first half when you're comparing the first half of '18 to our guidance for the first half of '19, and when you do that, then you're no longer seeing a decline, but in fact you'll be seeing growth. So hopefully that'll help settle that issue that Brian raised and that you've reiterated here.

And if you're -- once you do the math and you want to speak about this further offline, we'd be perfectly happy to walk you through the model. As for the second question, can you just quickly repeat again what that question was?

Paul Coster -- J.P. Morgan -- Analyst

So I'm trying to -- well, first of all, thank you for that. That was an important clarification. The question really is probably proliferating the number of product SKUs that you're supporting here in product and print engine platforms? Are you becoming a heavily sort of verticalized solution provider across all of your industries, or are you going to remain as you were originally, something of a horizontal solution provider?And if it's the latter, are you going to cull the portfolio of products as the new products come out?

David Reis -- Vice Chairman and Member of the Oversight Committee

OK. Hi, Paul, it's David. I don't know if I understand the question correctly. We offer it in a few markets, OK? We have products and solutions which are horizontal in nature, OK?If you look on our historical and new coming prototyping products, by definition, they are horizontal.

Nevertheless, over the years we have continued developing vertical expertise, specifically manufacturing, specifically in dental, specifically in medical, and we are reorganizing ourselves and our go-to-market marketing product management to serve both the -- some of the horizontal market as we operate and the vertical ones. I hope it's answering your question. And --

Paul Coster -- J.P. Morgan -- Analyst

Well, let me simplify it, David. Are you going to have more product SKUs this time next year versus today? Instead of 20 in the sort of professional segments, will it be 30?

David Reis -- Vice Chairman and Member of the Oversight Committee

Good question. I think that entirely to introducing a new product, we're going to end-of-life some products. So if you ask me on the total number of SKUs, it's a good question. I'll go and check and come back to you.

My stomach is telling me that we're not going to see a dramatic increase in the number of SKUs because of the end-of-life of some products.

Paul Coster -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

[Operator instructions] Our next question comes from Ben Rose of Battle Road Research. You may proceed with your question.

Ben Rose -- Battle Road Research -- Analyst

Yes. Good afternoon, everyone. With regard to the European auto situation, just wanted to drill down a little bit whether, David and Lilach, you're seeing an across-the-board kind of weakness, or -- hello?

Yonah Lloyd -- Vice President of Investor Relations

Ben? We hear you, we just heard a little noise. But --

Ben Rose -- Battle Road Research -- Analyst

OK, I'm sorry. I heard some kind of rolling background -- your -- or is the weakness on the part of select manufacturers within Europe, a, and then b, is it more of a slowdown on the prototyping or on the production tooling side of their usage?

David Reis -- Vice Chairman and Member of the Oversight Committee

If I understand the question correctly, you're asking whether the slowdown is -- in Europe, specifically in the auto industry, was on the manufacturing side or the prototyping side? Did I understand the question correctly?

Ben Rose -- Battle Road Research -- Analyst

Yes. Well, that was one part of it. Is it on the prototyping side versus the tooling side? And then the other part of the question is, is it on a -- on the part of just a couple of manufacturers, or is it kind of European auto broadly defined?

David Reis -- Vice Chairman and Member of the Oversight Committee

So to your first question, it's both of the prototyping and the tooling parts. Did it come from the entire industry? Again, I think the answer's probably yes. I can't confirm it now. I think there's an overall slowdown, which again impacts us -- it's not the only phenomenon we saw in the Q4, but it is one of the things that impacted our business.

Operator

Thank you. That is all the time we have for Q&A. I would now like to turn the call back over to Elan Jaglom for any further remarks.

Elan Jaglom -- Interim Chief Executive Officer

OK, thank you for joining today's call, and we look forward to speaking with all of you again next quarter. Thank you.

Operator

[Operator signoff]

Duration: 52 minutes

Call Participants:

Yonah Lloyd -- Vice President of Investor Relations

Elan Jaglom -- Interim Chief Executive Officer

Lilach Payorski -- Chief Financial Officer

David Reis -- Vice Chairman and Member of the Oversight Committee

David Ryzhik -- Susquehanna Financial Group -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Brian Drab -- William Blair -- Analyst

Shannon Cross -- Cross Research -- Analyst

Danny Eggerichs -- Craig-Hallum Capital Group LLC -- Analyst

Paul Coster -- J.P. Morgan -- Analyst

Ben Rose -- Battle Road Research -- Analyst

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