Stratasys Ltd. (NASDAQ:SSYS) Q1 2023 Earnings Call Transcript

Stratasys Ltd. (NASDAQ:SSYS) Q1 2023 Earnings Call Transcript May 16, 2023

Stratasys Ltd. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $-0.06.

Operator: Greetings and welcome to the Stratasys Limited First Quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yonah Lloyd, Chief Communications Officer and Vice President of Investor Relations. Thank you, please go ahead.

Yonah Lloyd: Good morning everyone and thank you for joining us to discuss our 2023 first quarter financial results. On the call with us today are our CFO, Dr. Yoav Zeif, and our CFO, Eitan Zamir. I would like to remind you that access to today’s call, including the slide presentation, is available online at the web address provided in our press release. In addition, a replay of today’s call, including access to the slide presentation, will also be available and can be accessed through the Investor Relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes, and other future financial performance and our expectations for our business outlook.

All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecasts. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys’ annual report on Form 20-F for the 2022 year. Please also refer to our operating and financial review and prospects for 2022 and for the first quarter of 2023, which are included as Item 5 of our annual report on Form 20-F for 2022 and Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC today respectively. Please also see the press release that announces our earnings for the first quarter of 2023, which is attached as Exhibit 99.1 to a separate report on Form 6-K that we are furnishing to the SEC today.

Our reports on Form 6-K that we furnish to the SEC on a quarterly basis and throughout the year provide updated current information regarding our operating results and material developments concerning our company. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. As in previous quarters, today’s call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today’s press release. I will now turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Yoav Zeif: Thank you Yonah. Good morning everyone and thank you for joining us. Before I discuss the business highlights, I would like to comment briefly on the three unsolicited proposals we received in recent months from Nano Dimension to acquire Stratasys initially for $18.00, then $19.55, and subsequently for $20.05 per share in cash. As previously announced, consistent with its fiduciary duties and in consultation with its independent financial and legal advisors, the Stratasys board carefully reviewed and evaluated each proposal. Following each review, the Stratasys board unanimously rejected all three proposals because they each substantially undervalued Stratasys in light of the company’s standalone prospects. As we have articulated previously, Nano is in the midst of multiple lawsuits with its shareholders involving the controlling governance of the company and, as a result, serious questions remain about the legal legitimacy of the Nano offer.

The Stratasys board and management team are committed to enhancing shareholder value and continue to successfully execute on the company’s growth strategy. We are making strong progress towards becoming a highly profitable $1 billion revenue company. As part of its fiduciary duties, the board will review any bona fide proposal for the company and weigh it against our standalone plan. We are not going to comment further on this matter today. We appreciate you keeping your questions focused on our results as the focus of this call is our performance for the quarter. Our excellent results for Q1 2023 represent another consecutive quarter of solid performance, despite an increasingly challenging macro backdrop. We continue to execute on our winning strategy driven by our broad global and diverse set of systems, materials and software solutions.

With our leadership position, our five key technologies, resilient business model and strong financial profile, we believe we are positioned to accelerate growth and drive shareholder returns not only for today but also for years to come. Our confidence is reflected in the medium term focus we are announcing today. Eitan will provide further details during his remarks, but we expect to surpass $1 billion in revenue in 2026 with substantial profitability. In terms of our first quarter results, we are seeing stronger utilization by our customers than ever before, which drove all-time record revenues in both consumables and customer service. As we have noted in the past few earnings calls, macro related pressure on capex budgets are causing longer sales cycles and occasional deferrals of orders.

Our OEM revenue was relatively flat to the first quarter of last year, adjusted for FX and divestments, primarily due to the impact of those factors on hardware purchases. The manufacturing trend of on-shoring, de-globalization and just-in-time production are driving opportunities for growth. Stratasys is positioned to take advantage of these opportunities give our combination of proven market leading systems in FDM and polyjet, new technology offerings in P3, sub and stereolithography, the broadest set of polymer materials in the industry, a unified software platform across the portfolio, and unmet go-to-market capabilities. Along with our robust balance sheet, this sets us apart and will enable us to sustain organic growth and expand our reach via the pursuit of external opportunities.

Engagement with both our installed base and new customers remains strong. We continue to expand our customer reach across our entire suite of technologies, particularly targeting manufacturing applications. We have demonstrated a resilience and recurring business model that delivered gross margins this quarter that were flat compared to the year-ago period, and also kept opex spending as a percentage of revenue nearly flat to the corresponding period last year even with a reduction in revenue. As a result of our efforts and despite the headwinds faced, I’m proud that we delivered positive adjusted earnings per share for the seventh consecutive quarter. Our vision for the future of additive manufacturing and in turn our ability to deliver greater returns for our shareholders is more robust than ever.

We ended the quarter with a strong balance sheet that includes no debt and $288 million in cash and equivalents. This continues to support our growth through organic investments and accretive acquisition opportunities, including early stage but highly compelling technology-driven businesses which we believe will improve results as we leverage our infrastructure and experience to strengthen operations. Now let me turn to the exciting achievements and milestones reached since the end of 2022. In February, we introduced monolithic multi-colored 3D printer dental solution through our TrueDent resin, our first-ever FDA cleared medical device. As a reminder, dental overall is a $50 billion TAM and is a fast growing industry for additive manufacturing.

The TrueDent solution enables labs to create permanent natural looking dentures with accurate tooth structures, gum shade and translucency in one continuous print. The resin is designed for exclusive use in our J5 DentaJet printers using GrabCAD print software and provides dental labs the ability to scale manufacturing with simplified work flow and reduced processing time to deliver the best quality dentures available in the market today. We already have several new customers and many of the largest dental labs are actively evaluating the solution. In February, we launched the new J3 DentaJet printer, opening up more opportunities for Stratasys such as implant models and surgical guides for dental labs. It recently received an excellent reception at the dental industry’s largest trade show.

Our superior accuracy provides an entry point for customers ready to step up from lower quality solutions. One of the world’s largest dental labs said it tripled its daily production volume with the J3 relative to the previous system. Moving to our medical highlights, in February we signed an agreement with Ricoh USA to provide on-demand 3D printed anatomic models for clinical settings. Our patient-specific 3D printed solutions combine our 3D printing technology, the cloud-based segmentation as a service solution from Axial3D, and precision additive manufacturing service from Ricoh into one convenient solution. This represents an expansion of the relationship between Ricoh 3D for healthcare and Stratasys. After quarter end, we forged a joint development and commercialization agreement with CollPlant Biotechnologies to transform healthcare with industrial-scale bio printing of tissues and organs.

The initial focus of the relationship will be around development of bio printing solutions for CollPlant’s regenerative breast implants, a $2.6 billion opportunity. Further, the combination of our P3 technology-based bio printer with their RH collagen-based bio ink is also ideal for future innovation and production of additional human tissues and organs. Both companies agreed to cross-promote our respective bio printing products. On the industrial side, in March we secured a multi system opportunity with Götz Maschinenbau for our mass production H350 printers. The sale involved four additional systems to help the German Service Bureau meet growing demand for high quality end use parts. Götz is already a valued partner that also deploys FDM and polyjet-based Stratasys printers.

In addition, in early April we closed the acquisition of Covestro’s additive manufacturing materials business which expands our differentiated 3D printed material offering in stereolithography, DLP and powders to address more manufacturing industry applications. Covestro is expected to be immediately accretive and includes R&D facilities, global development and sales teams, and a portfolio of 60 materials for additive manufacturing. Together, we will be able to address more applications faster, pushing the boundaries of what is possible in additive manufacturing. We are also growing our focus on adding value for customers while increasing recurring revenue through significant software announcements. Last month, we introduced GrabCAD Print Pro, which provides a major productivity boost for our customers.

The initial rollout is for our SAF and FDM systems, applicable for end use parts and production scale volume, tooling and prototypes. We plan to make this software update available across our other three technologies as well. The annual subscription package includes quality management capabilities from our recent acquisition as well as added functionality from third party partners. Three value-add plug-in partners available in the initial release as we continue growing our ecosystem are Castor, AlphaSTAR, and Cognitive Design Systems. These advances in software are helping Stratasys integrate into scaled up industry 4.0 infrastructure. In fact, the Advanced Manufacturing Research Center at the University of Sheffield has been able to successfully incorporate Stratasys’ data into its factory-plus architecture right alongside CNC machines, robot arms and other mainstream factory equipment.

In addition, Stratasys’ expansion into software is helping drive opportunities with systems and materials. Our previously announced OpenAM software is now widely available to customers and we are seeing it help unlock Fortus 450 printer opportunities with manufacturing customers that are interested in FDM for end use part applications due to the greater flexibility it provides in material selection. That is also a key driver of customers’ interest in Origin One printers as well. Our technological innovations, best-in-class sales channels, and key partnerships are contributing to our efforts to build on our meaningful foundations for growth that will drive our industry leadership for the long term. I will now turn the call over to our CFO, Eitan Zamir to share the financial results, update our outlook for the rest of 2023, and outline our medium term focus.

Eitan?

Eitan Zamir: Thank you Yoav, and good morning everyone. As Yoav mentioned, we achieved solid results against the increasingly challenging macro backdrop in the quarter. We are particularly proud of how we held the line on both growth and operating margin, maintaining profitability in a challenging environment due to the right infrastructure and tight opex management as we continue to drive efficiencies across the platform. Our results demonstrate the resilience that our diversified offering provides. Despite the expected slowdown in new printer sales, we saw continued utilization of our systems by our customers, driving record recurring revenues from consumables and customer service, helping us deliver our seventh straight quarter of adjusted profitability.

Now let me dive deeper into the numbers. For the first quarter, consolidated revenue of $149.4 million was down 2.6% compared to Q1 2022, adjusted for divestitures and at constant currency and down 8.6% compared to the unadjusted revenues. Revenue in our OEM business, which excludes MakerBot as well as FDM, was down 0.9% at constant currency from the prior year period. Product revenue in the first quarter declined by 10.7% to $101 million compared to the same period last year, or by 5.1% excluding divestitures and on a constant currency basis. With product revenue, system revenue declined 25.8% to $40.5 million compared to $54.5 million in the same period last year. Excluding divestitures and on a constant currency basis, revenue was down 19.2%.

Consumables revenue rose by 3.3% to $60.5 million compared to the same period last year, rose by 5.2% on a constant currency basis and grew by 7.5% in our OEM business at constant currency. This represents a record level for Stratasys and signals that utilization rates of our systems we have sold are strong. Services revenue including FDM was $48.4 million, down 3.9% as compared to the same period last year. After backing out FDM, it was up 2.4% and up 3.9% at constant currency. Our customer service revenue was the highest ever, a further testament to the growing utilization rates of our systems. Within service revenue, customer support revenue grew 4.9% compared to the same period last year and increased by 6.4% on a constant currency basis.

Now turning to gross margin, GAAP gross margin was 43.8% for the quarter compared to 42.6% for the same period last year. Non-GAAP gross margin was 47.3% for the quarter, flat compared to the same period last year. Our ability to hold gross margin unchanged despite the decrease in revenue is a testament to our relentless focus on cost savings across the platform. Gross margin also benefited from the divestment of MakerBot last year, partially offset by the FX impact. GAAP operating expenses were $82.2 million compared to $89.3 million during the same period last year. Non-GAAP operating expenses were $69.2 million compared to $75.3 million during the same period last year. Non-GAAP operating expenses were 46.3% of revenue for the quarter compared to 46.1% for the same period last year as we continued to focus on operational efficiency improvements.

We continue to efficiently manage our costs, delivering relatively low opex despite the lower revenue, reflecting the scalability of our model. Regarding our consolidated earnings, GAAP operating loss for the quarter was $16.8 million compared to a loss of $19.6 million for the same period last year. Non-GAAP operating income for the quarter was $1.5 million compared to $2 million for the same period last year. The change reflects the decline in overall revenue offset somewhat by an 8.2% improvement in non-GAAP opex. GAAP net loss for the quarter was $22.2 million or $0.33 per diluted share compared to a net loss of $20.9 million or $0.32 per diluted share for the same period last year. Non-GAAP net income for the quarter was $1.1 million or $0.02 per diluted share compared to net income of $1.2 million or $0.02 per diluted share in the same period last year.

Again, this was our seventh consecutive quarter of delivering positive net income on an adjusted basis. Adjusted EBITDA was $7 million for the quarter compared to $8.1 million in the same period last year, which reflects a flat result year-over-year on a percentage of revenue basis. We used $17.9 million of cash in our operations during the first quarter compared to the use of $16.1 million of cash from operations in the same quarter last year. The use of cash was primarily driven by increased inventory purchases. We expect our inventory levels to decline in the back half of the year, contributing towards returning to positive cash flow from operations for 2023. We ended the quarter with $287.6 million in cash, cash equivalents and short term deposits compared to $327.8 million at the end of 2022.

Our balance sheet and cash generation remains strong. Specifically, we are well capitalized and well positioned to capture value-enhancing market opportunities as they are identified. Now let me turn to our outlook for 2023 and the medium term. We expect the ongoing challenging macro backdrop to most likely persist for much of 2023, continuing to cause delayed purchases, longer sales cycles, and overall inflationary and recessionary concerns reflected in buyers’ behavior. Based on our first quarter results and current visibility of our end markets, we are updating our full year revenue guidance as follows. We are raising the low end, narrowing the range now expected to be between $630 million to $670 million with sequential quarterly revenue growth.

While we are still experiencing continued softness in the second quarter, we expect that we will see notably higher growth in the second half. From a gross margin perspective, we continue to expect full year 2023 to be in the range of 48% to 49% with improved year-over-year growth in the second half of 2023. We expect our margins to get back over 50% next year. In 2023, we expect our operating expenses to be in the range of approximately $290 million to $300 million. We continue to expect non-GAAP operating margins to be in the range of 2.5% to 3.5% for the full year. In the medium term, we expect non-GAAP operating margins to achieve double digits as our growth plan unfolds. We anticipate a GAAP net loss of $78 million to $57 million or $1.12 to $0.83 per diluted share, and a non-GAAP net income of $9 million to $17 million, or $0.12 to $0.24 per diluted share for the full year of 2023.

Adjusted EBITDA is expected to be in the range of $35 million to $50 million for the year. Capital expenditures are expected to range between $20 million to $25 million for the year. We would also like to provide our expectations for some key annual financial metrics over the medium term. Starting in 2024, we expect to achieve non-GAAP gross margins above 50% and we plan to deliver positive free cash flow. By 2026, we expect our revenue from organic growth to surpass $1 billion with adjusted EBITDA margins over 15%, driven by our innovative growth engines as we penetrate further into manufacturing and healthcare applications. Please note these are medium term expectations, and we believe that as revenue continues to grow, the longer term results will be even stronger.

We are encouraged by the level of engagement with our customers, remain confident in our growth potential, and we will continue to monitor global issues that can have an impact. With that, let me turn the call back over to Yoav for closing remarks. Yoav?

Yoav Zeif: In closing, even as we navigate today’s dynamic environment, the outlook for our customers’ appreciation and adoption of 3D printing continues to grow. We have positioned the company to execute in challenging times and to lead through an expanding portfolio of hardware, materials, and software solutions as the shift to additive manufacturing at scale accelerates. We are being brought into customer opportunities as a strategic partner at higher levels than in the past because the demand to bring products to market faster, to reshape supply chains, and to give consumers more personalized products are very real, and we have proven our value with leaders across industries like TE Connectivity, the Mayo Clinic, NASA and Toyota. Our relentless focus on execution and continued investment for growth and ongoing profitability is expected to drive relative outperformance and enhance shareholder value. With that, let’s open it up for questions. Operator?

Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator instructions] The first question today is coming from Shannon Cross of Credit Suisse. Please go ahead.

Operator: Thank you. The next question is coming from Troy Jensen of Lake Street Capital Markets. Please go ahead.

Operator: Thank you. The next question is coming from Greg Palm of Craig Hallum Capital Group. Please go ahead.

Operator: Thank you. The next question is coming from Ananda Baruah of Loop Capital. Please go ahead.

Operator: Thank you. The next question is coming from Brian Drab with William Blair. Please go ahead.

Operator: Thank you. The next question is coming from Jim Ricchiuti with Needham & Company. Please go ahead.

Operator: Thank you. That brings us to the end of the question and answer session. I would like to turn the floor back over to management for any additional or closing comments.

Yoav Zeif: Thank you for joining us. Looking forward to updating you again next quarter.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.