Materialise N.V. (MTLS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Materialise NV First Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference, Jody Burfening. Ma’am, you may begin.

Thank you, Amanda and thank you everyone for joining us today for Materialise first quarter earnings conference call. With us on the call are Fried Vancraen, Founder of Materialise and Chief Executive Officer; Peter Leys, Executive Chairman; and Frederic Merckx, Chief Financial Officer. Today’s call and webcast are being accompanied by a slide presentation that reviews Materialise strategic operational and financial performance for the first quarter. To access the slides, if you have not done so already done so, please go to the Investor Relations section of the Company’s website at www.materialise.com. The earnings press release, that was issued earlier this morning, can also be found on this page. Before we get started, I would like to remind you that management may make forward-looking statements regarding the Company’s plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the Company’s future results and activities, represent management’s estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that may impact the Company’s future business or financial results can be found in the 20-F for fiscal year ended December 31, 2014 filed with the SEC on April 30, 2015. Finally, management will discuss certain non-IFRS measures on today’s conference call. A reconciliation table is contained in the earnings release and at the end of the slide presentation. With those housekeeping matters out of the way, I would now like to turn the call over to Materialise’s Executive Chairman, Peter Leys. Peter?

Hi, Jody thank you and thank you everyone for joining us today. And if you please turn to Slide 3, where you will see next two pictures of three extremely well-looking gentlemen, the Agenda for today. First, I am going to start with a brief recap of our financial results for the quarter, then Fried will share with you, on the one hand his takeaways from the Materialise World Conference which was held about two weeks ago. As also his thoughts about the 3D industry 25 years after founding Materialise. After that, Fredric will take the floor and take you through our financial results in more detail as well as through our outlook for 2015. And finally, I will come back and discuss our operational performance for the first quarter, as well as our plans for the current quarter. And after we have completed our prepared remarks, we will be happy to answer any questions that you may have. So, let’s turn to slides and start with a look at the highlights of our first quarter results. For the first time, since our IPO, we posted top-line quarterly growth in excess of 20%, both organically and non-organically, including OrthoView, our revenue increased 25% on an organic basis, revenue grew by 20%. And once again, the combined strong execution of our long-term strategy with solid short-term financial results. As an illustration, we continued to increase our contribution from software sales. In the first quarter of 2015, aggregate software sales represented 38% of total revenues, up 700 basis points over last year. And this on the strength of a 52% increase in 3D printing software sales. As you know to enhance our market leadership over the long-term and accelerate our top-line growth even further, we continued to invest heavily in the short-term in expanding our global sales reach and our new product portfolio. As planned, sales and marketing and research and development expenses increased 55% compared to last year. As a result, our adjusted EBITDA for the quarter fell to a slight loss of €288,000. Overall, we are very pleased with our results for the past quarter. Now when I say, past quarter, I do not only mean the first quarter of this year, but I also mean the last quarter for this century, because as you may or may not know Materialise has been around for quite some time. This year, we are celebrating our 25th anniversary. So what I would like to do now is turn the floor to Fried our Founder and ask him to put what has happened in the 3D sector during the last few quarters in perspective as compared to what has happened over the last 25 years and of what may possibly happen in the coming few years. Fried?

Thank you, Peter. And good morning or good afternoon to everyone on this call. Three weeks ago, Materialise celebrated its 25th anniversary with a world conference and an exhibition in Brussels. We enjoyed the attendance of more than 1000 participants at our conference and those people came together to exchange ideas about the value of 3D printing and its sustainable applications. Allow me to report on a number of these findings. More than 100 of our users certified in speeches about the value they are creating and the growth opportunities they are seeing both by expanding the market reach of existing products and by introducing new products with additive manufacturing. This supports the findings of the all those reports which indicate that the fundamentals of the industry are very sound. And that the industry is growing over 2014 at 35%. And that’s even faster than the previous years and certainly, well above the average growth rate of the industry since its inception. Personally, I find especially the growth rate of consumables at 29.5%, very encouraging. This also increased from 27.5% in 2013. But please note, that the growth rate of consumables is still 5% the growth of the industry overall. A second element is that the ever increasing efficiency of the systems to which Materialise software contributes is further going ahead and this combination of consumable growth below the industry average and efficiency gains is born to lead to a few growth bumps in the future of the capital expenditures in our sector. That being said, the opportunities for new applications keep opening up. An indication is given by the fact that the industrial engineering team of Materialise is currently co-creating one new product a week with different industrial partners from different sectors. This team is also re-engineering two products per day to adapt and to additive manufacturing and these are averages over the entire year 2014. These products are in of increasing complexity and they are a testimonial of why additive manufacturing is not as high but an industrial revolution. Additive manufacturing allows to significantly reduce the cost of complexity by intelligent use of 3D printing and that is similar to the revolution that was caused by the internet for instance that reduced the cost of connectivity. This revolution can have an important impact on the individual, the environment and the society, which we demonstrated in the exhibition, with 82 different projects in three rooms of the Belgium Museum Bozar. This exhibition called Making a Difference, a Difference in Making, illustrates how 3D printing demonstrations also to apply new approaches to design concepts and to product commercialization. And as this adaptation which is demonstrated in the fourth room in the exhibition that takes time and that explains why the growth of the sector will be healthy and fast, but not explosive. At our World Conference, we launched for instance a new series of glasses with the glasses brand Hoet. These glasses make use of the design freedom that 3D printing offers but even more value can be created by customizing them. However, this customization requires a completely new software and scanner backbone in all the shops and a new supply chain organization for this sector. This kind of evolution in market segment takes time but can be quite radical as has been proving in the hearing aid industry. Multiple market segments are currently in this kind of structural evolution. It’s happening, but the exact speed is hard to predict. Given the multitude of affected market segments and products, we believe that the overall growth of the market is certain in the long run. And Materialise has been positioned in the major segments thus borne by 3D printing in the past 25 years. And thanks to our IPO, we can continue to invest in future opportunities and position in these and other markets. And now, I will turn the call over to Fredric to take you through our financials for the first quarter.

Thank you, Fried. Now let’s turn to Slide 6. As Peter already mentioned, quarter-over-quarter we increased total revenues by 25% and organic revenues by 20%. By far the strongest gain 52% was in our 3D printing software segment. But we also realize a double-digit growth in industrial production and medical. As a percentage of Q1 revenue our industrial production segment accounted for 40%, our medical segment 34% and our 3D printing software segment 26%. Now, breaking down our top-line performance by type of business, revenue from software sales including both 3D printing and medical software accounted for 38% over total Q1 revenue, compared to 3% in the same quarter of last year. Revenue from end-part manufacturing, including medical end-parts represented approximately 35% of Q1 revenues. The remaining 27% was generated through the production of prototypes. On Slide 6 you can also see our consolidated adjusted EBITDA numbers for the first quarter. And as a result of the €4.9 million increase in sales and marketing and R&D spending, which represents an increase of 55% compared to the same quarter of last year. Adjusted EBITDA decreased by €1.7 million to a small lot of €288,000 bringing the margin down from 7.6% to minus 1.2%. And as a reminder, we fully expend R&D spending for the first quarter. The next slide details the first quarter performance of our 3D printing software segment. Top-line growth of 52% was well above the rate at which the overall 3D printing industry has been growing and for the second consecutive quarter reflected the plus 50% year-over-year revenue increase from new software licenses. Another positive metric was the 94% gain in software sales generated from printer OEMs. And finally, sales in Asia, one of our key areas of focus in this segment increased by 71% as we successfully captured emerging opportunities in this region, especially in China where we opened an office last year. EBITDA growth for the Software segment was 30% and the EBITDA margin was 36.2%. The margin decline was due to a €1.4 million increase in sales and marketing and R&D expenses, again reflecting our investment in future growth. Turning to Slide 8, you will see that in our Medical segment we realized the revenue growth of 13%. With Medical Software revenue even rising by 54% including the OrthoView business. Growth in Medical Software revenues excluding OrthoView represented 4.7% and this despite the conversion from perpetual to annual licenses that started during the second quarter of 2014. In total, Medical Software represented 35% for the total medical sales in Q1. And excluding OrthoView annual licenses as a percentage of new licenses rose to 35%. Revenue from the direct sales of complex surgery devices grew by 24% offsetting a decline in revenue from medical collaboration software but as a percentage of Q1 segment sales decreased from 60% to 52%. Q1 EBITDA for the Medical segment declined from €946,000 in the prior year to a loss of €746,000 reflecting a €1.9 million increasing investments in sales and marketing and R&D expenses, only partially offset by the increase in revenue. As a result, EBITDA margin declined to minus 9.5% from 13.6%, which is again consistent with the investment plans we detailed on the fourth quarter approach. Slide 9 summarizes the performance of our Industrial Production segment. For the quarter we delivered the 25% revenue increase, the sale of end-parts rose by 42% over last year’s period and accounted for 34% of the segment’s revenue, up from 30% in the last year’s period. Sales from our two growth businesses RapidFit and i.materialise rose by 39% for the quarter. We added 17 printers bringing our total to 126. In this segment, our EBITDA improved with small loss of €40,000 from a loss of €70,000 last year and excluding the growth businesses from Q1 segment results, our EBITDA margin was 10.0% versus 12.2% in the prior year as a result of a slightly lower gross margin and a significant increase in sales and marketing expenses to further explore end-parts manufacturing opportunities. Slide 10 provides a highlight of our income statement. Our Q1 gross margin was 57.7% versus 59.1% last year, due to a substantial increase in depreciation expense associated with the company’s purchase of 70 new printers over the past four quarters. R&D spending rose significantly over the last year by €1.3 million or 42%. Sales and marketing was up €3.5 million or 62%. Part of this increase was due to the acquisition of OrthoView in the fourth quarter of 2014. Other income net increased by €822,000 to €1.8 million, partially as a result of a favorable foreign exchange and includes income of €1.1 million related to withholding tax exemptions for qualifying researchers and partial funding of R&D projects versus a comparable income of €851,000 in the prior period. Higher gross profits only partially compensating for the increases in operating expenses. We moved to an operating loss of €2 million compared to an operating profit of €437,000 for the same quarter of last year. Included in the financial income net was financial reflecting a foreign exchange gain on the portion of IPO proceeds kept in US dollar. We have provided you with some additional financial highlights on Slide 11. We currently had over €50 million in cash and equivalents, another €7 million in maturity investments and a very manageable debt-to-equity ratio. The €1.6 million increase in receivable is related to the early renewal of maintenance contracts which often occurs in the first quarter of the financial year. Our capital expenditures in Q1 rose by €1.3 million from the prior year’s level, while our cash flows from operations dropped to €818,000 as a result of lower EBITDA and an increase in working capital associated with higher sales. And as you can see on Slide 12, we had to-date – we are today reiterating the full year guidance which provides – which is provided to you in our year-end call of March. And with that overview I will turn the call back the call to Peter to discuss our growth strategy.

Thank you, Frederic. Slide 13, summarizes our operational performance for the first quarter and reviews our priorities for the second quarter. Starting with the first row of the slide, I would like to walk you through what we did in the first quarter, and what we have on our plates for the second quarter in our 3D printing software segment first. As you know, enhancing our leadership position with the industrial uses of 3D printers is and remains a key strategic objective for Materialise. To that end, during the first quarter we continued to expand our suite of products, moving our offering further in the direction of a sophisticated kit of tools that not only files, but also repair, manage and control the entire 3D printing production process. More specifically, what did we do? First, we expanded; in the first quarter our Build Processors offering by entering into agreements with three new machine manufacturers. Second, we launched a control system that includes high-performance embedded software and that is specifically designed to increase the control over quality and repeatability in the additive manufacturing production process. And turning to the right side of the first row of Slide 13, let’s look at the operating priorities for the second quarter in the same software segments. Now with sales from our Build Processor program that was started in 2013 already strolling in 2015, we obviously plan to continue to rollout that program in the second quarter. Simultaneously, we will continue to develop our additive manufacturing control system and/or, as a matter of fact, already engage in preliminary but promising commercial discussions with various interested parties. Now, while we continue to execute our strategy of strengthening our leadership position in the industrial 3D printing market, we are also starting to gradually reach out the communities that have not had access to our technology before. As Fried explained, over the last quarter of the century, we have built a software platform that bridges the gap between designing and printing. And we have gathered testimonials from thousands of very demanding industrial customers that our technology works extremely well. Leveraging that experience and expertise, we are now giving - gradually extend our offering to a broader group of users of 3D printing technology. To that end, we are setting up the Materialise cloud services in collaboration with potential partners, who span a right variety of players within the 3D printing ecosystem, such as, machine manufacturers, software companies and developers of 3D contents. We already have relationships with many of these potential partners and have actually intensified our discussions with some of them during and following our Materialise World Conference. In the short-tem, we will be using the Materialise cloud services to expand awareness of Materialise’s capabilities that new communities of users are 3D printers. Our ambition however go beyond just marketing our brands. By introducing the Materialise cloud services, we are also readying ourselves for the eventual shifts in our customers’ preference towards purchasing some of our software solutions as a service rather than as a product. The attendees of our world conference already received a sneak preview of one of the specific initiatives that we are working on in this context. At our world conference, it was demonstrated how a collaboration between the 3D warehouse of sketch-up and the cloud services of Materialise, and effectively break the rule between millions of 3D designs on the one hand and a 3D printing or if you want materializing of these multiples. Many people have been dreaming and talking about this type of lead forward, we are about to get it done. Now, let’s move to the second band on Slide 13 and discuss some of the accomplishments of our Medical segment during the past quarter. As mentioned on the last quarter’s call, an important operational goal for 2015 is the integration of OrthoView. In Q1, we started the integration of the OrthoView and Materialise sales teams. Given the respective teams the necessary training with each sell a broadened portfolio of 3D as well as 2D pre-operating planning tools. During that same first quarter, we also continued to advance our x-ray project and we are happy to inform the markets that during the first quarter, we filed our x-ray new guides with the FDA. Hence, we believe that we are still on track to beginning generating revenue from this new product in the course of 2016. Finally, as planned, in Q1, we bought out the minority owners of Mobelife and we’re now full ownership of Mobelife, we are ready to proceed with our plans to expand the Mobelife product offering more globally. What our plans for the second quarter? Well, in addition to working on integrating our own products into the OrthoView portfolio, we also plan to complete our Medical Metal Printing projects by bringing the production of all of our complex surgery products in-house. Also, in light of the decline in guide sales, through some of our collaboration partners, we are seriously exploring the potential for setting up additional strategic partnerships for our guide business. Now if you will, please move to the last row on Slide 13, which discusses our Industrial Production segment. In that segment, during the past quarter, we continued to advance our strategy of strengthening our position in the field of Additive Manufacturing of end-parts. As part of that strategy we retained the necessary certifications with 3D print, plastic end-parts for aerospace companies. With these certificates in hand, we can now expand our existing customer relationships and develop new customers while serving a growing market for end-parts within the aerospace industry. Second, we have structured the professional consulting and co-engineering services that we offer to our customers. In the past, we very often, but rather randomly, helped customers to optimize their designs with a view to helping them to better benefit from the reduced cost of complexity offered by Additive Manufacturing. Now, with the launch of an official and structured consulting and co-engineering offering, we are leveraging the expertise to not only bring more value to our customers, but to also generate incremental revenue, and to further distinguish Materialise as the engineering expert in the additives manufacturing markets. And finally, as already mentioned during our last quarterly call, we set up an aluminum printing line in the beginning of 2015. I’ll briefly walk at our plans for the second quarter, while our Industrial Production segment intends to grow that aluminum capacity, as well as further expand the range of metal material that we offer to our customers. And simultaneously, - is working very hard to close new franchise agreements. All of these key operational initiatives along with many other projects that we are working on are designed to strengthen and broaden our market leadership position in our chosen high-end sub-segments of the additive manufacturing industry. They are meant to accelerate our growth and to ensure that we’ll meet our long-term strategic and financial goals. This concludes our prepared presentation. So, operator, I would like to open the floor for questions.

[Operator Instructions] Our first question comes from Troy Jensen with Piper Jaffray. Your line is now open.

Hey congratulations on the nice results gentlemen.

Thank you, Troy.

So, Peter, maybe for you, just be curious to know if you guys have any thoughts in changing spending intentions given some of the weakness we’ve seen from some of the other 3D printing companies in the space.

Troy, I think that, Fried has partially addressed that concern. We’ve been around for 25 years. We’ve seen a steady and healthy growth over the last 25 years. We are confident that that growth will continue, but also we ourselves have experience that the growth during the last 25 years did not occurred in a straight-line. Sometimes it was with bumps. And what some of our colleagues are experiencing, frankly if we look at the high demand from new and existing customers for new designs, and new printing work, then, we are encouraged to conclude that these are early examples of growth bumps more than anything else.

All right. Sorry if I missed it on the call, I was bouncing between calls here, but just another follow-up – another follow-up here, there was a consortium of companies that announce a new file format. I think the consortium is called as 3MF, just be curious to know if you guys plan to participate in that. Is that a competitive concern for you, but any insight would be helpful.

Sure, Troy. Obviously, this is an initiative that has caught our full attention. We talk to many if not all of the parties that are part of that consortium. We have been invited to join as a leading software provider that should not come as a surprise to any of you or any of your other players in the market. And, we will be announcing further developments in that respect shortly.

Can you just help me out what exactly this new file format is? Is this the replacement for STL I am assuming, but, something that’s ultimately going to help build better 3D printer parts or any insight would be helpful?

For the moment, as we see it, it is mainly a format that is used for the – more consumer-oriented printers. Now, of course, and it’s a consortium, it can develop further specifications to extend the format, so that it also covers other types of more industrial printers. But the initial implementation is in any case mostly at the FDM printer-oriented.

Yes, okay, all right, well, thank you and keep up the good work.

Thank you, Troy.

Our next question comes from Ben Hearnsberger with Stephens. Your line is now open.

Hi, thanks for taking my question. Peter, I was wondering if you could give us the headcounts as it ended in the quarter.

Sure, the headcount is 1242, which is give and take exactly the same headcount as per December 31, 2014. As we explained, Ben, during the last call, we had a steep increase in our headcounts in line with our announced strategy mostly adding people to our R&D and even more to our sales teams. And now we are, as explained earlier during the call, we are taking the time to train those people to integrate those people, to make sure that they are the right fit with a view to making them part of the teams and have them contribute to our revenue growth going forward. But that takes time and we are taking that time.

So, how does that number compare on a year-over-year basis?

We don’t have the exact number in – round about, but it’s approximately 300 people more than in the first quarter of last year.

On March 31, that number you will find in August 1, I think there was – we were approximately 970, 980 people.

Okay and is the expectation to continue to grow your headcount throughout the year can you give us your thoughts around kind of a target headcount number?

The aim is to – at this moment, in the first half of the year, keep rather stable, because of the training effect that Pete kind of just being explaining. By the end of the year, we will have the possibility to add again a couple of people in different teams. So, by the end of the year, we could be slightly over 1300 people.

Okay, that’s helpful. Thank you. And then, in the software business, we’ve now seen two quarters of 50% plus growth on fairly difficult comps and that’s up from kind of a high 20 percentage run rate over the past few years. Can you kind of take us through the individual drivers there and whether that’s just sustainable growth rate throughout the year?

Ben, we have, as you man know, a long-term growth rate for our software segment between 30% and 35% which we consider sustainable long-term. We explained that the 50% growth rate for the last quarter was partially because of a hockey stick effect that you typically see in software businesses towards the last quarter. A big contributor to the – while there steep growth of this quarter is frankly is our Build Processor program which was really successful which really is inline with the market shifting to production of end-parts. So really sales through and through OEMs grew significantly. We are not predicting here that you guys should get accustomed to a 50% plus growth rate for our 3D printing software segment. Obviously, we are launching new initiatives and now we have the good fortune of some of these initiatives being extremely successful and even quicker successful than we had anticipated that – while we are pushing our people to make a good habit of that, let’s just assume that a 30% to 35% growth rate is on the long-term on average is sustainable and healthy.

Understood and then, my last question on the actuary product. I know you filed with the FDA this past quarter, when can we expect for you to hear from the FDA in terms of kind of the next steps on potentially seeing approval of the product – to the actuary product?

Well, it’s normal that now the FDA will probably still take a few months and probably in the summer holiday period come back with some remarks to us. And then it will depend on the – that there are fundamental remarks are – whether we can quickly respond to them or whether we need some time. I want to point out that the x-ray project or product is truly an innovative product. So, it’s definitely for us challenging to submit all the validation materials. But it’s also for the FDA a kind of first-off. So, we – it’s very difficult for us to estimate their reaction at this moment.

Okay, great. Thank you.

Thank you, Ben.

Our next question comes from Prabh Gowrisankaran with Canaccord Genuity. Your line is now open.

Hi this is Prabh calling in Bobby. Thanks for taking the question. Couple of questions, one on, if you can provide some color on the competition you are seeing in the industrial end-part production in Europe, are you seeing any of the larger 3D printing competitors trying to establish themselves there? That’d be great.

Well, the - it’s quite obvious that there will come competition for this manufacturing of end-parts. We are a service provider there. There will be competition from companies making the parts internally, but then it will also be competition from other service providers. I do think that, I am – I may say that Materialise is quite leading there. Both in terms of specifications and in terms of really having also the engineering support, for customers that want to move into additive manufacturing to really help them make the transition in a smooth way. We see multiple services with those but we see very little that have such a structured approach as Materialise to that problem.

Yes, prototyping business in Q1 is really product-oriented and we’ve always said that this is a business that is strategically important for us. So, if competition comes and hits the market in Europe, as announced, on the prototyping side, it’s going to happen, it’s going to be discussion on price. But, manufacturing of end-parts business is much more a process than product-oriented business and we believe that with the variety of technologies that we have been offering and the very deep and rich process engineering knowledge that we have and that we have now further structured will actually well place to face competition that would just have one technology in-house or just only a few materials and alike. So we are expecting that competition to hit the beach here in Europe and we are ready for it with our own differentiating factors that we’ve been working on for 25 years now.

Okay, great. And then other question I had is, the larger 3D printing competitors attributed the weakness to slower CapEx spending by customers, are you seeing any of that, if you can add any color there, that’d be great?

Yes, well, it’s what we have experienced over the past is that in situations where customers for one or other reason, slow down their CapEx, these are actually situations where that are good for our software business, because if customers delay the purchase of another printer, then they concentrate on making the printers that they have in-house work more efficiently. And in order to do that, they have to go to the software solutions. And that’s frankly that may also explain why our software segment has posted another 50% plus growth quarter over the last quarter.

Thanks.

I think maybe a little bit more attention, good growth to the growth rate of the consumables, if the consumables grow quite steadily, it means that Additive Manufacturing or 3D printing also for prototyping is used more and more. The fact that there are more machines on the market isn’t equivalent to more users of the machine, mainly the consumables that are a strong indicator there.

Okay and the other question I had was with your push into metals, service bureau kind of set up is, what is the opportunity that you are seeing there? Is it a specific protocol you are going after or what are you targeting there?

Well, yes, Materialise has started to invest in metal to a large extent with the proceeds of the IPO, because we see a lot of potential in the metal and that’s also again indicated by the volatility if there is one segment that is growing over 50% on an industry basis, is the metal segment at this moment. And especially in manufacturing in medical and aerospace which are the two sectors we have mentioned in all of our previous communications, where there is also a high regulatory hurdle and where Materialise is very active. Metal is prime consideration. So, that’s why we see a big opportunity for us in these markets.

Okay great, and then the last question I had was just in terms of the Build Processor, software adoption, I know there is few other guys who advertised it in their websites. How does adoption works? Is it the end-customer that approaches you or do you partner with the metal manufacturer and then you approach the customer together?

Typically, what will happen, I mean, there is a number of different commercial arrangements out there and I will probably as brief as not to enter into too much detail. But as a rule, the machine will be offered to the customer either with the Build Processor that is typically the part of the machine, or alternatively, with the upgraded Materialise Build Processor, which has – which offers additional functionality to the customer including potential to proactively communicate with the machine, get information back from the machine. And then the machine manufacturer will then transparently discuss with the customer what his needs are and I think it’s also indeed just the both parties involve that to the extent where the needs of the customer go beyond the straightforward bill processor produced by the manufacturer that then the manufacturer will offer this customer the option to go ahead and purchase the Materialise Build Processor. In many instances, by the way, these customers are educated; know very well what they want. And are also in touch with Materialise itself and when they consider buying a machine they will have talked to some of our engineers about the pros and cons of our Build Processors and in some instances they would actually approach the machine vendors and ask whether they have Build Processors on the shelf that have the additional functionality that our Build Processors offer. That’s how the cycle works in itself.

Okay great. Thanks for taking my questions.

Sure, thank you.

Our next question comes from Weston Twigg with Pacific Crest Securities. Your line is open.

Yes, hi, thanks very much. This is Daniel calling in for Weston. I had a couple of questions and first I’d relate to your Medical segment. You mentioned you are exploring new strategic partnerships. I was wondering if you could update us on your relationship with Zimmer after its acquisition of Biomet. And if you could help quantify the impacts of its divestiture of relevant businesses?

Well, first of all, with respect to the situation with Zimmer and Biomet, we can only repeat unfortunately, what has been said in previous quarters, given the fact that the information is made public that the mergers between Biomet and Zimmer will be closed later than originally anticipated. At least at the latest public statements that we have got. So, it’s still not possible to enter into full negotiations with those – with this party. And that is of course a further delay let’s say of the possibilities of making new arrangements with them, which is in fact a stabilization of our Medical Device business. On the other hand, we are as indicated by the numbers, we are seriously growing the software side on the business and we are also growing the direct sales of the complex surgery products.

Okay, yes, go ahead, Peter.

To complete what Fried just said, obviously, the worlds of the guides is broader than the guides that are currently covered by our relationship with the requirements in Zimmer. This collaboration relate to – this guides for other joints, there is x-ray based guides, there is other possibilities that we explore. So there is a number of other ways to eventually make that guide business grow, in spite of the current uncertainties with respect to our relationship with the requirement in Zimmer as a result of the pending merger.

Okay, thanks for that. And then, on gross margins, you mentioned it’s been decreasing largely due to depreciation expenses, just wondering if you can provide a little bit more color and how we should think about gross margin going forward, especially since software is contributing more and more as a percent of revenue?

Okay, so at this moment, we can say that apart form the effect of the depreciation the increase of the sales of software is compensating on a small decrease in the Industrial Production and also Medical, and especially in the Medical, the fact that we are reaching to the internal production of metal parts, results in a fact that it’s a kind of double cost. We are investing in the metal parts at the moment, but we also see that to outsourced through a number of partners. So then we expect an increase in the margin in the future, in which by increasing the share of the software, gradually, we should be able to increase our overall gross margin.

Okay, thanks very much.

Thank you.

Our next question comes from Julian Mitchell with Credit Suisse. Your line is now open.

Hi this is Brian Gibbons in for Julian today. I was just wondering if you mentioned in your release, new license sales strength particularly in Asia. I was wondering if there is a bias in terms of the end-market you are selling to there and if you was also biased toward the Build Processor’s software strength?

I do think that mix-wise, the mix in Asia and also in China is quite similar to the mix in the world. So, which means that, the vast majority of the sales or metrics based in the 3D printing software segment and that, yes, there are few local players that have stepped into our Build Processor program. So there is also in Asia, companies that work – that are machine developers that work with the build processors for Materialise. But, it’s not the majority of the income.

Great, thanks.

Thank you. I am showing no further questions. I would like to turn the call back to Peter Leys, for closing remarks.

Thank you, operator and thank you all for joining our call today. Fried, by the way will be at the RAPID in Long Beach later this month and I will be in New York in June for a financial conference. So both Fried and myself do hope to see each and everyone of you at these events and please feel free to reach out to schedule specific time if you do not have already done so. Thank you again for your time and this then concludes our call for our first quarter results. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.