Stratasys Ltd. (NASDAQ:SSYS) Q3 2023 Earnings Call Transcript

Stratasys Ltd. (NASDAQ:SSYS) Q3 2023 Earnings Call Transcript November 16, 2023

Stratasys Ltd. reports earnings inline with expectations. Reported EPS is $0.04 EPS, expectations were $0.04.

Operator: Hello, and welcome to the Stratasys Q3 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Yonah Lloyd, Chief Communications Officer and Vice President of Investor Relations. Please go ahead, Yonah.

Yonah Lloyd: Good morning, everyone, and thank you for joining us to discuss our 2023 third quarter financial results. On the call with us today are our CEO, 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 forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys’ annual report on Form 20-F for the 2022 year. Please also refer to our operating and financial review and prospects for 2022, and for the third quarter of 2023, which are included as Item 5 of our annual report on Form 20-F for 2022 and in 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 third 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 going through our business update, I’d like to comment about the situation in Israel. Israel is home to about 25% of our employees who have been performing in an exemplary fashion during the war. Whether it be serving the country or maintaining our business, there has been no fundamental impact on our operations. And our factory and offices have been open throughout. We are proud of our employees and the spirit of our country during these difficult times. Before I turn to the third quarter results, as you may have seen this morning, we announced that Aris Kekedjian was appointed to our Board of Directors, effective immediately. Aris is a seasoned executive with more than 30 years of leadership experience.

And we are pleased to have him bring expertise across business development, M&A, and operations of complex cross-border businesses at scale. As always, our board is committed to ongoing refreshments and continues to take steps that will enhance value for our shareholders. Aris appointment followed Ziva Patir’s decision to step down from Stratasys board following 10 years of service as a Director. We are grateful to Ziva for her commitment and many contributions to the company and we share all the best. And for the third quarter, we accomplished our results against the ongoing challenging global macro backdrop that is marked by slower growth, higher interest rates, and constrained capital spending. During the third quarter, we achieved record recurring revenue from consumable sales, reflecting solid utilization of our printers and demonstrating our resilient business model and financial profile.

Customer demand and our engagement with both our installed base and new customers continues to be stronger than ever. The results show that our customers recognize our unique combination of industry-leading polymer technologies, the broader set of polymer materials, a unified software platform across the portfolio, unmatched go-to market capabilities, and excellent customer service. And we continue to invest and innovate to stay at the forefront of additive manufacturing, while growing the business across our end-use segment. Our portfolio of technology offering continues to expand with particular focus on manufacturing applications. We deliver results comparable to the year ago period for revenues, non-GAAP margin, and adjusted EBITDA, despite the increasingly challenging environment for capital spending for our customers adding into year-end.

Additionally, we kept non-GAAP OpEx costs as a percentage of revenue flat relative to the year ago period. As a result of our effort, I’m proud that we delivered positive adjusted earnings per share for the ninth consecutive quarter. And to help further improve profitability going forward, we recently divested two lower margin unprofitable businesses from our Stratasys Direct Service Bureau. This is expected to reduce 2023 revenue by $5 million, but help improve profitability and focus in 2024 and beyond. We ended the quarter with a strong balance sheet of $185 million in cash, equivalence and short-term deposits, and no debt. This continues to support our ability to grow through combination of organic investment and accretive acquisition opportunities that will further our strategic objective to be the leading provider of additive manufacturing solutions.

Our vision for the future of additive manufacturing and our leadership position in this industry is more robust than ever. Now let me touch on some of our recent business highlights and milestones. On the industrial side, I want to highlight the launch of our very exciting and innovative F3300, just last week at Formnext. The F3300 is up to 2 times faster than other polymer filament printers available today. This inaugural edition for a new FDM enterprise platform family is custom build specifically for manufacturing. Significant advancements in speed, reliability, and operating efficiency demonstrate our continued commitment to innovation. And will bring greater economic advantage to existing uses and open up new application opportunities.

The increased speed of the F3300 stands out relative to any other polymer filament printers available today with increased gantry speed and material extrusion. It also offers up to 45% cost per part reduction compared to existing solutions. It is loaded with sensors which will over time provide part and print data collection capabilities to support foreseeable usage around quality and predictable outcomes. The F3300 initially planned for commercial availability during the fourth quarter of 2023. It’s now planned for the first half of next year. As a reminder, Stratasys invented FDM over 35 years ago. It is the world’s most popular 3D printing technology. And we lead across aerospace, automotive, and defense applications. This new F3300 platform was developed with tremendously valuable input from many of our customers over the last several years.

They allowed to address their production requirement. This program included Toyota, who we announced has become our first F3300 customer. The F3300 together with our other manufacturing solutions such as H350 SAF and Origin P3 are production oriented systems that will expand our addressable market, facilitate growth, and drive our continued leadership. Turning to some customers’ success from our industrial business. We are appreciative that the US Army Picatinny Arsenal further demonstrated its confidence in Stratasys by placing a significant order across our entire portfolio of five polymer technologies: FDM, PolyJet, SAF, Origin P3 and Neo Stereolithography. These printers will be used across multiple military facilities. The strategic importance of Picatinny making such an investment in Stratasys is key as they are the organization that leads the additive manufacturing effort for the US Army.

In automotive, FAW, China’s largest wholly owned auto manufacturer installed a variety of Stratasys system in its effort to build a world-class additive manufacturing center with a goal of staying at the forefront of the digital manufacturing transformation. Its newly installed base includes: Origin One, PolyJet J850 Prime and multiple F900 FDM system and we look forward to growing this relationship further. Subsequent to quarter end, we hosted our Stratafest event focused on aerospace and automotive featuring customer testimonials from Northop Grumman and Radford Motors. Radford is a great case study for additive manufacturing as its Lotus Type 62-2 automobile is produced using approximately 250 parts printed with our FDM system to deliver unparalleled performance.

Turning to slide eight, our dental business continues to be the strong foundation for growth, as customers are scaling up with multiple unit orders and expansion of their portfolios for both Ortho and Implant applications. In the US with its $5 billion plus dentures industry, customers are increasing adoption of our disruptive TruDent solution and we expect continued acceleration in the years ahead. In the EU, we have received positive feedback from top five lab network and we expect to expand our penetration there once TrueDent receives CE approval. On the healthcare front, we recently signed a partnership agreement with Encee GmBH, a long time Stratasys partner to establish a new division called Encee Medical that we specialize and focus on delivering Stratasys medical solutions to the German market.

This is part of a global strategic decision to expand our reseller network through partners with specialized in the medical field. We believe this will help increase our coverage, focus and dedication to our healthcare customer. Another new development is our relationship with Go Orthotics. An innovator and manufacturer of customized orthotics. For podiatrist, they have purchased multiple SAF printers that enables them to quickly produce custom orthotics with high specification. Increased manufacturing throughput while saving vast working time and achieve superior product fit and comfort not possible with traditional manufacturing. The [indiscernible] orthotic opportunity is expected to more than double to $8.8 billion by 2032. Turning to software, I’m pleased to say that after running a free trial program we have commercialized our premium offerings, our software as always been critical to our customer success, but we have only recently expanded our portfolio to include subscription-only offering with GrabCAD Print Pro and Open-Air.

Approximately half of our new FDM and SAF customers have chosen to subscribe to GrabCAD Print Pro and we plan to offer it across PolyJet, NEO and Origin as well. On our material side, we have added a number of Finance network flagship F900 series including offering new polymer, colors and support materials. We have also expanded the functionality of the F900 series to OpenAM by allowing users to custom tune material and printed part capabilities. This provides additional functionality, they can alter the characteristics of Stratasys and third-party materials and print their own formulation opening up new applications to extend the reach of our product and materials portfolio. I will now turn the call over to our CFO, Eitan Zamir, to share the financial results, and update on our outlook for the rest of 2023.

Eitan.

Eitan Zamir: Thank you, Yoav. And good morning, everyone. Our third quarter results continue to demonstrate our ability to consistently deliver operating leverage and drive profitability even in a CapEx constrained environment. We are particularly proud of how we maintained the level of our non-GAAP OpEx as a percentage of revenues in a flat revenue quarter, even as we continue to invest for future growth. These results highlight the financial discipline and business maturity that differentiates Stratasys in our industry. Overall, our results reflect the resilience our diversified offerings provide, continued high level of engagement with our customers and proof of their ongoing strong utilization of our systems. Now let me dive deeper into the numbers.

For the third quarter, consolidated revenue of $162.1 million was essentially flat relative to Q3, 2022 and was up 3.3% at constant currency, and excluding make about in Stratasys Direct divestment. Product revenue in the third quarter increased by 1% to $113.2 million compared to the same period last year, and was up 3.4% on a constant currency basis and excluding MakerBot which we divested in late August of 2022. Within product revenue, system revenue declined 8.6% to $51.5 million compared to $56.3 million in the same period last year. Excluding MakerBot and at constant currency, system revenue was down 5%. On a sequential basis, systems revenue grew 6.6% indicative of our improvement in conditions we see in the marketplace and the continued strong levels of engagement we have developed with our customers.

Consumables revenue rose by 10.7% to $61.8 million compared to the same period last year, and rose by 11.6% on a constant currency basis, excluding MakerBot. This represents another record level of consumable sales for Stratasys. Service revenue including Stratasys Direct was $48.9 million, down 2.4% as compared to the same period last year and was up 3.1% at constant currency excluding MakerBot and Stratasys Direct divestments. Within service revenue, customer support revenue grew 3.6% compared to the same period last year and increased by 3.2% on a constant currency basis and excluding MakerBot. Now turning to gross margin. GAAP gross margin was 40.5% for the quarter compared to 43.6% for the same period last year. Non-GAAP gross margin was 48.3% for the quarter.

Essentially flat compared to the same period last year. GAAP operating expenses were $108.4 million compared to $86.4 million during the same period last year. The increase in GAAP operating expenses reflected in large part, our extraordinary expenses associated with Nano Dimension’s expired partial tender offer and withdrawn proxy contest, 3D System proposal and are terminated deal with Desktop Metal. Non-GAAP operating expenses were $74.2 million, flat as compared to the same period last year. Non-GAAP operating expenses were 45.8% of revenue for the quarter, also flat as compared to the same period last year. As a reminder, we delivered the same OpEx level on flat revenue despite additional OpEx generated by certain acquisitions. Our ability to hold OpEx levels flat is a testament to our focus on operational efficiency through cost management.

This clearly demonstrate the scalability and resiliency of our model and will serve us well as end market stabilize and both revenues and margins improve over time. Regarding our consolidated earnings, GAAP operating loss for the quarter were $42.8 million compared to a loss of $15.6 million for the same period last year. Reflecting the increased extraordinary expenses described before. Non-GAAP operating income for the quarter was $4.1 million, which is 2.5% of revenues compared to $4.5 million or 2.8% of revenues for the same period last year. The modest decline is attributable to slightly lower year-over-year non-GAAP gross profit that more than offset flat non-GAAP operating expenses. GAAP net loss for the quarter was $47.3 million or $0.68 per diluted share.

Compared to net income of $18.7 million or $0.28 per diluted share for the same period last year. The year-over-year decrease in GAAP profitability was due in large part to costs associated with Nano Dimension’s expired partial tender offer and withdrawn proxy contest, 3D Systems proposals and the terminated deal with Desktop Metal which are excluded from our non-GAAP results. I’ll also remind you that third Quarter 2022 GAAP net income included a one-time $39.1 million gain from the MakerBot deconsolidation, which worsened the decline in GAAP profitability in Q3, 2023. Non-GAAP net income for the quarter was $2.4 million or $0.04 per diluted share compared to non-GAAP net income of $3.3 million or $0.05 per diluted share in the same period last year.

We’re proud to report that this was our ninth consecutive quarter of delivering positive net income on an adjusted basis. Adjusted EBITDA was $9.8 million for the quarter compared to $9.9 million in the same period last year, essentially flat on a percentage of revenue basis. We used $12.7 million of cash in our operations during the third quarter, compared to the use of $18.4 million of cash in operations for the same period last year. The use of cash was primarily driven by costs related to mergers and acquisitions activities, defense against a hostile tender offers and proxy contest and related professional fees. Operating cash flow excluding cost of $13.7 million paid to advisors related to merger and acquisition activities and takeover defense would have been positive.

We ended the quarter with $184.6 million in cash, cash equivalents and short-term deposits. 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. Last quarter, we guided full year revenue at $630 million to $670 million adjusting for the $5 million impact from the divestment of the two Stratasys Direct businesses. This is equivalent to $625 million to $665 million. Additionally, we have noted earlier the delay in selling the new F3300 that was planned for Q4 this year and a soft CapEx marketplace. Given these items, we now expect revenue to range between $620 million to $630 million.

From a gross margin perspective, we continue to expect full year 2023 to be in the range of 48% to 49%. We expect gross margins to go back over 50% next year. In 2023, we expect our non-GAAP operating expenses to be in the range of approximately $288 million to $290 million. We are adjusting non-GAAP operating margins to now be in the range of 2% to 2.5% for the full year. We anticipate a GAAP net loss of $117 million to $104 million or $1.70 per share to $1.51 per diluted share. And the non-GAAP net income of $6 million to $9 million or $0.10 to $0.14 per diluted share for the full year of 2023. Our GAAP results and thus our outlook includes the one-time extraordinary costs associated with our acquisition-related activities, the hostile tender offer, the withdrawn proxy contest and related professional fees.

We expect positive operating cash flow in 2024, as we do not anticipate incurring similar costs, notwithstanding whatever cost may be incurred in 2024 related to the comprehensive, strategic alternative process that we announced in late September 2023. Adjusted EBITDA is revised and now expected to be in the range of $35 million to $38 million for 2023. Capital expenditures are expected to range between $15 million to $20 million for 2023. In summary, we generated strong financial results against a continued challenging backdrop. And we remain encouraged by the level of engagement with our customers and confident in our long-term growth and profitability potential. With that, let me turn the call back over to Yoav for closing remarks. Yoav?

Yoav Zeif: Thank you, Eitan. Our customers’ appreciation and adoption of 3D printing continues to grow. As we introduce new and improved systems, materials and software offerings, Stratasys is an increasingly critical part of their efforts to bring more agility, flexibility and profitability to their global manufacturing operations. Additive manufacturing has established a formidable beachhead in manufacturing at scale. One that we expect will grow in adoption as the technology continue to demonstrate real world success stories, and we will be at the forefront. We have proven time and time again that Stratasys is the industry leader, demonstrating the ability to manage the business through tough times while still delivering superior results and profitability.

I’ll conclude with a few thoughts on our announcement in September to explore strategic alternatives to maximize shareholder value. Over the past few years, Stratasys has consistently outperformed our sector on both financial metrics and business fundamentals. We have continued to accomplish this, even during challenging business environment this year and the excessive M&A noise in our space. Our focus remains on maximizing shareholder value, while being cognizant of the new term headwinds We expect the industry and macro headwinds will abate returning us and the industry to a period of sustained growth and increased profitability. With that, let’s open it up for questions. Operator?

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from James Ricchiuti from Needham & Company. Your line is now live.

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Q&A Session

James Ricchiuti: Thank you. Good afternoon. A question on the F3300. I wonder if you could talk about the factors that led to the delay and what I guess is now commercial availability in the first half of the year which would require some additional tweaks and what does the sales pipeline, the early sales pipeline look like for this machine? Thank you.

Yoav Zeif: Thank you, James. I appreciate the question. I would say that what led to the delay is that high commitment of Stratasys to quality. So we know that this machine is going to manufacturing and we could not compromise on the quality. We worked to develop this machine together with many customers that were exposed through NDA to the different features and recommended, and we’re already using in Toyota. They are already using it. They share their view about the machine in Formnext last week and there was a lot of excitement there. I can only say that it’s a very slight delay. We have very strong demand to this machine. We have already purchase order and we have full confidence that that will be a transformative offering in manufacturing, mainly in aerospace and automotive spare parts, but also in tooling, jigs and fixtures.

It’s a completely different scale, different delivery, different value proposition, and that’s why we’re already have customers that develop machine with us waiting to start engaging and start operating the machine and re-manufacturing. Of course also other customers in the pipeline except Toyota. I’m not talking about only Toyota, but the top manufacturers in the world.

James Ricchiuti: Got it. That’s helpful. Thank you. My follow-up question relates to, to GrabCAD. How should we be thinking about the GrabCAD revenue opportunity with your customer base, particularly as you’re starting, as you’ve begun expanding it toward the product portfolio?

Yoav Zeif: Thank you, James. GrabCAD is an essential part in our strategy. I would say in two different routes. One, we believe we need to give our customer the best experience and to make sure that any additive manufacturing operator has, when he is working, it is fully productive and has the best friendly operating system. So it’s all about productivity and make the lives of additive manufacturing operator much easier. And when we are talking about GrabCAD, this is with respect to customer perspective. What’s going on with software in our industry is that, sorry to say, but it’s almost a mess, because you need four, five different software in order to print one part. And our vision is to take our strength, which is based on the fact that we are producing the systems.

We know the logs, we know the data, we know everything, we have the largest installed base and we — we have the best operating systems. so those are the pillars. Now we’re taking those pillars and we said, okay, let’s make it a platform connected to every partner that can make the life of the operator easier, like simulation partners, like inventory traceability partners, like [indiscernible] partner and also being able to connect to all our fleet on the other side. Now we take this GrabCAD and we say, okay, we want to make your life easier. The way to make the life of our operators or customer easier is to smooth the way they are running the operation. And when we are doing it with GrabCAD, we are bringing new products to the market. The forecast of software in our industry get to $3 billion in the next five years and we will capture this part that is not the manufacturing enterprise system but those parts that really make the operator’s life more productive and easier.

We have great gross margin there and we already launched two products, AM, what we called OpenAM. So if you buy our software subscription base, you can use other materials and we launched what we called GrabCAD Print Pro, which has fantastic features that increase the productivity. For example, what we call the accuracy center, where you can use AI to close the loop between the end use part and the file. Now we put it together, you are becoming more productive because you print much more accurate part. This is the direction, it’s going really well. Just as an anecdote in the last quarter, 50% of our sales in SAF and in FDM, we attached through the same that — GrabCAD Print Pro. So I’m very optimistic about GrabCAD. It will be an essential part in our recurring revenues going forward.

James Ricchiuti: Thank you, and congratulations in what’s clearly a difficult environment on a lot of levels. Thank you.

Yonah Lloyd: Thank you.

Operator: Thank you. Next question is coming from Greg Palm from Craig-Hallum. Your line is now live

Danny Eggerichs: Hey, this is Danny Eggerichs on for Greg today. Thanks for taking the questions. I kind of just wanted to start by digging into more broad-based what you’re seeing and maybe the implied Q4 guide. I get kind of the $5 million takeout from the divestments, but on the F3300 delay, I mean, were you expecting a decent size contribution in Q4 or how much of it is just related to a broader sales cycles lengthening and some order push-outs into 2024?

Yoav Zeif: So, what will — Danny, we’ll not be getting into the specific numbers of the F3300 contribution for Q4, but as you have mentioned, this is a significant product and a significant launch. So once it’s — we reached the commercial launch, we did expect contribution to Q4 and that has an impact on our Q4 guidance.

Eitan Zamir: Danny — it’s Yonah, by the way. You asked about the order push-outs. So, the delay has nothing to do with order push-outs at all, it’s clearly was only related to making sure we got the best product out