Materialise N.V. (MTLS) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Materialise Third Quarter 2015 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later, we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Harriet Fried. You have the floor.

Thank you everyone for joining us today for Materialise’s third quarter earnings conference call. With us on the call are Fried Vancraen, Founder and Chief Executive Officer of Materialise, Peter Leys, Executive Chairman; and Johan Albrecht, Chief Financial Officer. Today’s call and webcast are being accompanied by a slide presentation that reviews Materialise’s strategic operational and financial performance for the third quarter. To access the slides, please go to the Investors section of the Company’s Web site at www.materialise.com. The earnings press release, that was issued earlier this morning, can also be found on that 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 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. And now, I would now like to turn the call over to Peter Leys. Peter?

Thank you, Harriet and thank you everyone for joining us today. The Agenda for our call is on Slide 3. I will begin with a brief recap of our results for the quarter, after which Fried will give you an update of our strategy, after that, Johan will go through our numbers in more detail and then I’ll come back and take you to our operational performance for Q3 and some of our priorities for the current quarter. After we’ve completed our prepared remarks, we will happy to answer any question that you may have. The highlights of our third quarter results are summarized on Slide 5, and show another quarter of successful execution on our strategy of offering a unique combination of high-end software and printing services. Including OrthoView we achieved top-line growth of more than 30%. On an organic basis, we grew revenue by almost 26%. And, these numbers actually understate our growth as they do not take into account deferred revenue from annual software sales and maintenance contracts. Quarter-over-quarter deferred revenue from software and maintenance rose 87% to €11.8 million. As in the first two quarters of the year, we realized a strong contribution from software sales and also good growth in industrial production. But by far the biggest highlights of the period is that our Medical business is again contributing positively, both to our top and to our bottom-line. In the third quarter, Medical sales rose 29% and generated an EBITDA margin of 8.4%. As you may recall, since the fourth quarter of 2014 we have been investing heavily in expanding our global salesforce and growing our new product portfolio. In the third quarter, total sales and marketing and research and development expenses increased 32% compared to last year’s periods. This is however smaller rate of increase than our first and second quarter comparisons where the increases were 55% and 44% respectively. Total adjusted EBITDA for the quarter was again positive €1.2 million albeit still slightly below the adjusted EBITDA of last year’s periods. To conclude we are pleased with yet another strong quarter and remain very confident about our future growth prospects. I will now turn the call over to Fried.

Good morning. We are only a weekend away from the Formnext trade fair in Frankfurt and I would like to take the opportunity to give you a sneak preview of what we intend to present at the show. The first thing that investors typically do at Formnext is go out and hunt for new developments in the technology. These innovations often include machines that produce bigger bills as our foster and print new materials. These developments are exciting and I must admit that on the first day of the show I always go out for a similar hunt. But there is more value at Formnext for next than that I can see and our growth numbers have consistently showed over the last six quarters the industry does not only need new technological developments it also needs a reliable backbone of software and services that allow people to adapt the technology in a reliable and efficient way. And that makes it integrate seamlessly in their daily operations. This backbone which is as invisible as it is in dispensable is what Materialise is all about and it is what we will be showcasing at Formnext. At the show we will be launching our Materialise Magics 20 our marketing department have forbidden me to disclose the most exciting new features of the platform before November 17th but what really tells me is that our Magics 20 platform now has a solution for every step that separates a design from an optimized print. Regardless what design software or which printer the customer wants to use. Importantly, our backbone solution is model customers can gradually integrate our tools in line with their specific needs. It allows them to get the most out of their over installed base while being able to access the new additive manufacturing innovations. At Formnext, we will also be announcing some exciting new and part manufacturing assignments that we have recently secured. These projects have partners in both one of the best testimonial for the quality of our backbone solutions, which not only includes software tools, but also the printing services that incorporate a wide variety of technologies and materials. Our industrial printing and 3D printing software segments will be sharing the same booth at Formnext for the simple reason that they view themselves hence and are viewed by many of our customers as two parts of the same solution. As we print for our customers we develop new features and tools for our software platform and many of our customers who rely on our software backbone for their operations will come to us to discover new printing technologies and to print parts in a certified manufacturing environment. We remain convinced that value applications of 3D printing will deliver sustainable growth as is also demonstrated in our Medical segment this quarter, although Medical will be laser focused area at our Formnext booth, we are getting increasing recognition by many device companies and leading hospitals for our Mimics platform, as our many recent strategic contracts indicate. With that overview I will turn the call over to Johan to give you more details on our Q3 results.

Thank you, Fried. I'll start with a brief review of consolidated results on Slide 6. Following our strong first half of the year, we again generated significant revenue increases in each of our segments for the first quarter. Industrial production accounted for somewhat over 40% of our revenue in quarter 3, Medical 35% and software 24%. Together revenue from software sales and end-parts contributed 73% of total revenue. Breakdown, our top-line performance by type of business, revenue from software sales including both 3D printing and medical software accounted for 35% over Q3 revenue compared to 31% in the same quarter of last year. Revenue from end-parts manufacturing including medical end-parts represented approximately 38% of Q3 revenue. The remaining 27% was generated through the production of prototypes. As a result of the investments we have been making and expanding our sales coverage and new product development sales and marketing and research and development expenses were 32% higher than last year. Despite these investments, we again succeeded in producing positive adjusted EBITDA generating €1,175,000 for the quarter and turning the year-to-date number positive to €708,000. This was approximately €880,000 below last year's period. And the margin came down from 10.4% to 4.5%. As a reminder we fully expensed R&D expenses for the third quarter. Turning to Slide 7, you will see the total revenue in our Medical segment grew 29% and sales of medical software increased 59%. Increases in both these metrics reflect the inclusion of OrthoView which we acquired in October last year. Medical software sales represented 31% of total Medical segment revenue up from 25% for the third quarter last year. On an organic basis segment revenue was up 18%, while revenue from medical software licenses grew by 15%. Annual licenses as a percent of new license sales rose to 65%. Revenue from the direct sales of complex surgery devices continued to grow, increasing 22% over last year's third quarter and in an important new development, revenue from our medical collaboration partners also rose by 6%. In other words, we more than offset the declining contribution of revenue from same environment. EBTIDA for the Medical segment rose from €677,000 in the prior year to €763,000. Given the increase in the investment in sales and marketing and R&D expenses, EBITDA margin declined to 8.4% from 9.5% but was still solidly in the black. Now let's turn to Slide 8 for details about the quarter 3 performance of our Industrial Production segment. There revenue rose 28% with sales of end-parts increasing 47% over last year's third quarter and accounting for 33% of the segment’s revenue, up from 28% last year. We added 14 printers bringing our total to 134. Our two growth businesses RapidFit and i.materialise performed fairly well with revenue up 85% for the quarter. EBITDA rose to €799,000 from €753,000 for the same period last year, while margin declined to 7.6% from 9.2%. Excluding i.materialise and RapidFit the EBITDA margin was 17% compared to 19% for the same quarter last year. Slide 9 summarizes the results of our 3D Printing Software segment, they are following in the footsteps of the year's first two quarters, revenue grew 42%, fueled by our expanded product portfolio, strong growth in OEM revenue and new license sales. We delivered a year-over-year increase in sales from new software licenses of 43% on the strength of solid execution across all regions, particularly in Asia. Revenue generated from and through printer OEMs grew 34%, the fast paced sales increase is feasible in various regions, reflecting the continued cultivation of opportunities worldwide. In this segment EBITDA grew 19% EBITDA margin remains even at 34.2%. Slide 10 provides the highlights of our income statement for the third quarter. And keeping with strengths in the years first two quarters gross profits increased 21% year-over-year, while gross margin decreased to 56.8% from 61.3% for last year’s third quarter, largely due to a substantial increase in depreciation expense associated with the 14 new printers the Company purchased over the past four quarters. Research and development spending rose €894,000 or 24% over last year. Sales and marketing was up €2.3 million or 36%, and general and administrative expenses increased €1.2 million or 43%, part of these variances are attributable to our reduced expenses. The increase in G&A expenses reflects the organization put in place subsequent to the IPO. Meanwhile, the spending in G&A has remained stable over the past two quarters. Other income that increased by €242,000 to €1,643,000, and include €1.4 million related to withholding tax exemption for qualifying researches and partial spending of R&D projects. With the gross profit increase of €2.5 million only partially compensating for our planned investments in research and development, and sales and marketing expenses we posted an operating loss of €834,000 compared to an operating profit of €743,000 for the same quarter of last year. Net financial results decreased to €151,000 from €1,984,000 for the same quarter of 2014. This difference is mainly due to a more stable exchange rate during the third quarter of 2015. Now please turn to Slide 11 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with minimum debt accounting for only 12% of total liabilities and equity at quarter end. We ended the quarter with cash and cash equivalents including out two maturity investments of €48.7 million compared to €61 million as of December 31, 2014. Total deferred income amounted to €15 million compared to €12.4 million at year end 2014. The deferred annual software sales and maintenance contracts rose to €11.8 million from €6.3 million 12 months ago. On an organic basis, this deferred revenue grew from €6.3 million to €10.2 million. Capital expenditures were €2,828,000 compared to €3,487,000 for the third quarter of 2014. Cash flow from operations increased slightly to €268,000 from €26,000 last year. With that overview I will turn the call over to Peter to discuss our operational highlights.

Thank you, Johan. If you could kindly turn to Slide 12, where we have summarized our operational performance for the third quarter and where we also listed some of our top priorities for Q4. As always there are many efforts underway, so I’ll just touch on just a few important ones. And following Johan’s lead I would like to begin this quarter with our Medical segment, which as we’ve already stated really made big strides over the past three months. The progress we’ve been making in expanding and diversifying our strategic partnerships for our surgical guide backbone has been key to the rejuvenation of our guides business. We are in a nutshell expanding our guide platform in three different directions; first, as you might have seen from the many press releases that we have posted recently, we are opening up our platform to many new partners worldwide; second, we are broadening the scope of our product offering so that it includes a healthy mix of knee, cranio-maxillofacial, hip and shoulder guides; and thirdly, we are increasing the global reach of our guide backbone by for instance setting up a guides production facility in Japan. While the traction that we are receiving in the markets for our open guide backbone initiative confirms that this is strategically and commercially the right way to go, the focus in the coming quarters will mainly be on execution. As we have explained earlier, the growth of our Medical business will also come from our own portfolio of complex surgery solutions. In that respect, I am pleased to announce that we have expanded our portfolio with a patient-specific shoulder implant under the name Gleamous and that we expect to announce partnerships to expedite the global sales of these products in the near future. Now let’s move to the middle row on Slide 12 which covers our industrial production segments. There too we launched a lot of initiatives in the third quarter in late September we opened our metal 3D printing factory in Bremen, Germany. This new production line represents an important step for us in our efforts to establish ourselves as a most complete factory for 3D printing. During the third quarter we expanded our RE Materialise online platform further through a franchise agreement with 3DVinci Creations a provider of affordable and accessible 3D printing technologies in the United Arab Emirates. And last but not least we because a dedicated manufacturing partner for SEKIO Optical Europe and as Fried already hinted at earlier, we secured other high profile end-part manufacturing contracts which we intend to announce as early as in the framework of Formnext. Finally, still on Slide 12, let’s move to our 3D printing software segment where we continue to steadily build the industry’s software background. Our open and modular platform not only includes the traditional conversion and fixing features, but also contains sophisticated build preparation, process and quality control and production automation functionalities. We’ve already spoken about the ongoing rollout of our build processor program and the contributions that it has made to our revenue growth. Commercial launch of our additive manufacturing control platform also got off to a good start in the third quarter and we will continue these efforts in the fourth quarter. Our big initiatives for the final two months of the year in software involves the launch at Formnext of our Materialise Magics 20 platform. At this point I would like to turn to our Slide 13, and our guidance for fiscal 2016. Last quarter we said that based on our strong revenue growth, continued prospects for growth and plans to begin moderating spending increases in both sales and marketing and R&D, we were reiterating the guidance we’ve provided at the beginning of the year. Today with another strong growth quarter under our belt, we are reaffirming our revenue guidance of €99 million to €101 million for the full year 2016. To take advantage of the market’s positive response to the strategic project that we have launched in all three of our segments, we have decided to accelerate into 2016 a portion of the investments that are necessary to execute the many new partnerships that we have entered into. These extra efforts to not only relate to the expansion of our surgical guide backbone as I explained earlier, but also importance for the continued rollout of our successful build processor and AMCP platforms, as well as to the partnerships for a high-end manufacturing project that we are currently finalizing. In addition, as a result of the very well received transition from perpetual to annual software licenses mainly in Medical, but also in 3D Printing Software accounting policy requires that we defer a part of the revenues from our annual sales into the next year. The later in the year annual license contracts are signed the more revenue we will be deferring to the next year. Accordingly, we are revising our consolidated adjusted EBITDA guidance to an amount between €2.5 million and €3.5 million. Nonetheless, we remain very confident that our business model allows us to combine growth on the top as well as on the bottom-line. And therefore still plan to grow consolidated adjusted EBITDA in Q4 significantly. It is our ambition to post an adjusted EBITDA in Q4 that is about double the amount of our adjusted EBITDA in Q3. With this being said, operator I would now like to open the call to questions.

[Operator Instructions] Our first question for the day comes from the line of Troy Jensen from Piper Jaffray. You line is open.

I want to start out by saying that congrats to Hilde and team on the growth in Medical seems like that’s been the only segment kind of holding you guys back so a nice job there. Hi so just staying on the Medical segment for a bit I mean I think you said it and I might have missed it. But Biomet Zimmer contribution what’s really been the driver in that, it’s just been Mimics software, is it then can ant partnership. Just help us understand what caused the inflection?

It’s the combination of the several factors so if we discriminate in three big components the software has been doing very well in Q3 with a gain of more than 30% but also the implants for complex surgery which we announced would be giving larger and larger numbers because they came from very small but due to the big growth they’re now getting in considerable amounts they also grew more than 20% and then of course the strategic relationships which OEMs they have the growth that’s limited to 6% but it’s nevertheless an inflection compared to the previous quarters.

And then jumping around I’ve got two other questions the Magics 20 launch, can you guys go back to previous launches of the Magics have you ever seen a pause in the industry. So I guess I am trying to figure out when is availability going to be for the product? And then have you historically seen positives around new software releases?

Actually the software will be around as of for next, it has already been beta tested. And we don’t expect that this will delay our revenue generation because to the contrary we think that by the end of the year quite a number of people will now upgrade. But as has been said earlier given the fact that we defer and more and more of our revenues are annualized the impact of such sales in absolute numbers becomes relatively little if the same is happening on the 31st December actually there is no impact.

Last question and I’ll see the floor. Can you just talk about the competitive environment and specifically your thoughts on Autodesk and the acquisition of that type?

I think our numbers indicate that we don’t see any fundamental change in the market yet. We keep seeing that all the professional users are collaborating with us and expanding their collaborations. So, at this moment I cannot comment that we have any consequence.

Just the reality Troy of that acquisition is that whereas in the past we had one competitor that we spent a similar neutral space like ours following the acquisition of Netfabb by Autodesk that is no longer the case. So I mean our strategic position I would dare to say has become even more unique than it was in the past.

Thank you. Our next question comes from the line of Bobby Burleson from Canaccord. Your line is open.

It’s actually Jon DeCourcey on for Bobby. I just had a question regarding the competitive environment in the industrial production space. Are you seeing any increased competition in Europe from U.S. service providers entering? And then additional what pricing pressures are you seeing in Europe and actually just primarily in Europe? Thanks.

The -- Jon you may be referring to two transactions that have been announced I think in the last few months that is the acquisition by Proto Labs of some of the assets of Alphaform.

Right.

And second there was an investment by Autodesk in the Fitz Service Lab. I cannot say that we are today experiencing any increased competition from either of these two initiatives. That’s one, second, what we can add is that Alphaform was a very strong discounter with Proto Labs very professional party entering the scene we would assume that competition will be more be now focusing on quality and reliability and I have confidence that we have a very strong position there. On price pressure as we’ve indicated in prior calls, if there is price pressure in the market it would relate to the prototyping business. And as you know we are strategically focusing on end-part manufacturing contracts where due to our complete portfolio which consisted only of the machines and material and but also the software and the process engineering knowledge, we believe that we have a very strong position to continue to secure high-end contracts in that part of the market where price pressure should be less prominent than it will be in the prototyping markets.

Thank you. Our next question comes from the line of Julian Mitchell from Credit Suisse. Your line is open.

Hi, thanks for taking my call. You mentioned in industrial production just the EBITDA margins. Could you just give us a update on the investment and the growth businesses there and also the metal portfolio, obviously part of it's due to regulatory approval but when should we expect these margins to step up.

Well, the several, the projects we have there for instance, yes aerospace and related metal production that is expected to be certified at the end of the second quarter of next year. So there is an ongoing effort in that area. As to our growth businesses I can say that i.materialise is really performing in line with the expectations that we had at -- before our IPO when we made our business plans and should be able to pass the breakeven point during this quarter. We have some delay in the RapidFit business but yes again its growth is very healthy and we have good prospects there.

Thank you. Our next question comes from the line of Ben Hearnsberger from Stephens. Your line is open.

Hi thanks for taking my question, first a question on Biomet Zimmer what was the growth in the quarter?

Ben, we don't disclose any growth numbers on our -- let's say customer-by-customer basis. What I can say is that our total what we call collaborated business, the guide business that we partner with a number of partners including Biomet and Zimmer, that business grew by almost 6% quarter-over-quarter this quarter. Whereas that business had shown small negative growth in the recent past, so the very big stride that our Medical business has made here is that by adding new partners to the portfolio by opening up that platform we have been able to more than compensate for the basically stable or slowly declining business that we had seen from our two big customers following their decision to basically merge a couple of quarters ago. [Multiple Speakers]

Okay thank you. Maybe you could give us a sense for how big Biomet Zimmer is within that collaborated businesses, is it still the majority?

Yes Biomet Zimmer is if you may remember from the information that has been disclosed in our S1 at the time of IPO they represented something between 10% and 15% of turnover. They were the two key customers. Because the other business has been growing much stronger than these two customers so they have become less prominent but they are definitely still the two largest customers of that portion of our business, yes.

Okay. And then can you give us an update on where we stand with the X-ray product?

Today I cannot say anything different than last quarter, the file is with the FDA, we expect till this year that the FDA will come with its final judgment.

Okay. And then in software, this may be a difficult question to answer, but can you give us the split between annual and perpetual licenses at this point?

Yes, there again. It's something that we do not disclose. We do not disclose it on the Medical Software business either. All I can say is that the bulk of the switch from perpetual to annual is one that we see and that has been very specifically announced in our Medical Software. But as you may recall, whereas our basic module of the Magics license is a perpetual license, some of the modalities that are being up sourced are annual licenses. And as our upselling is growing significantly so the portion of annual licenses in the total 3D printing industrial software business is also growing, [Multiple Speakers] then is the case in our Medical Software.

Are you still offering perpetual licenses in the Medical Software piece?

Yes, so just as a recap, we have basically split our Mimics product into two different products that each go their own way, the product that we offer to research institutes and universities is still offered on a perpetual license basis for a number of reasons, including that they basically work on the basis of annual projects, it represents a significant part of our customer base but not the biggest part. And then the other part of Mimics which we offer to hospitals and medical device companies is a product that is only offered on an annual license basis. And it’s that larger portion of our customer base that has been definitely switched from an perpetual to an annual license program.

Thank you. Our next question comes from the line of Weston Twigg from Pacific Crest Securities. You line is open.

Just I have so two questions one is just based on or just wondering if you can help us understand better your exposure to metal-based 3D printing particularly on the software side and build processor side. And then I’ll give you my follow-on question?

Excuse me, but I didn’t fully understand the question, exposure to what exactly?

Metal, yes metal printing...

Metal is definitely one of the big growth areas in the entire 3D printing space and especially in the professional side so that means that it’s also for us by far the biggest growth area at this moment.

Can you give us an idea on percentage of exposure in your software, 3D printing software segment to metal?

It’s very hard to give a percentage there, because as you know our users use our software for different technologies in the same environment and a lot of them are mixed shop floor with both metal and plastic production technologies.

Okay, and that’s helpful, and that probably helps answer the second question which is you mentioned that OEM revenue increased 34% year-over-year. Can you just help us understand that discrepancy because OEM sales have been under pressure this year at the larger 3D printing companies and yet you are growing revenue pretty substantially? So if you could help us just understand how that can be?

Well, we believe that fundamentally the 3D printings factor is still growing. The growth has dropped as you have also seen in some of our numbers in the first quarter of 50% a little bit. But there are a lot of new entrants in the market that take advantage of the strategic positioning of Materialise to connect their printers to our software platform.

But would you say the growth is largely coming from metals expansion or from just upselling licenses or just generally from the broader install base even on lower OEM printer sales?

The OEM printer sales we mentioned earlier represent if I am not mistaking 32% or 35% while the overall growth was 42%. So it means that while OEMs are mostly the new printers the first software sold with the new printer that growth is still beaten or outpaced by the growth in our install base.

Thank you. Our next question comes from the line of Christian Owen from Oppenheimer. Your line is open.

This is Christian in for Holden Lewis. I heard you guys mention something about strength of their software in Asia and I was wondering could you give us a rundown of what you’re seeing across your other regions?

Well, we can say that the growth has been the biggest in Asia in order of more than 100%.

Yes it’s a growth I think of 120% or so.

It’s the smallest number so far.

But actually we have been growing as well in the U.S. and Europe and at this moment I have to look at the number where it is the biggest either in Europe or in the U.S. But I have to look at them.

It has always been rather good spread our software sales across the three regions and when we refer to Asia but actually the number that I’ve mentioned a growth of more than 100% is just China only now which is one of our focused areas. But we're also selling software in other important regions in Asia such as Japan. So generally I would say it's a good growth globally across the three regions with a particular growth and for us a growth region i.e. China.

Okay, I guess that's a little bit of a departure from what we've seen, certainly with the OEMs so I was looking for any color on, you know any softening in the macro that you're seeing, maybe more for the whole company?

As our numbers show, yes we don't experience the softening in the entire economy that much as the other companies that made earlier announcements but yes nevertheless based on what everybody in the industry is saying we want to be remain careful for Q4.

Sure, and then just as a quick follow-up along with that just if euro stays at 1.07, does that have any impact for you in your Asia and U.S. business?

I must say that our revenues are generated through different currencies, majority is still affected in euro, dollar is also important but you must also know that we are generating revenues and expenses mostly in the same currency respectively. So our exposure is a little bit naturally hedged and we do not even need any complex hedging instruments and to that way our income is also secured.

Thank you. [Operator Instructions] Our next question comes from the line of Andy DiSanto from Gabelli. Your line is open.

First question, on your lower EBITDA guidance by 1.5 million for your accelerated investment, how should we view that amount. Does that reflect a quarterly run rate of the investment for Q4, how much of that will continue into 2016?

Andy, it's a bit early to give any guidance for 2016. What I can add is that also our decision to accelerate certain investments in 2016 is a decision that will mainly impact Q4 but that already has been taken up and has impacted in certain programs already some of the results of our quarter three so it's tricky to just really relate that entire adjustment of the guidance to one quarter and one quarter only yes. And let me add to that we are not only accelerating certain investments, we're also factoring in the fact that the switch from a perpetual to an annual license system has been more successful than we had anticipated, and the impact of that very successful switch is one that we will feel most in Q4 which is the quarter where we typically have most software sales. So the revised guidance there is really the result of acceleration of investments on the one hand and a very successful switch to annual licenses on the other hand that will mostly impact top-line but also bottom-line as a result of deferral resulting from sales in Q4 in particular the last month of Q4 which in the software world is the month where quite a few sales are still being made.

You can also see from a different side, this is the sales that we realized related to annuals, is cash that we receive upfront, we're not yet taxed on it and we defer it to the next period.

Okay, second question is, in industrial production you mentioned that you are targeting to secure high profile end-part manufacturing contracts. Would you be able to share more insights such as with spectacles and what end-products, additionally I'm also curious to learn more about what end-products you are targeting in the wearable markets?

Well we have already in the wearable markets announced collaborations with Adidas and Seiko so Adidas is shoe wear and Seiko is in the…

Eyewear.

Eyewear, and we will certainly be expanding in those sectors. We are going to make other additional announcements as we said earlier next week.

In Formnext so that is just… [Multiple Speakers]

And about in industrial?

Also industrial, yes, industrial, yes, yes.

And then last questions if I may squeeze additional one, what is the magnitude of a typical deal in a build processor of program in U.S. dollar or in euros?

Actually yes it depends on the size of the OEM we are talking with and a lot of that is income that is yes I will call it sales bit in future so the new processor is delivered with systems. But you will understand that we don’t like to disclose our pricing on this.

The way it is typically structured so we come to an agreement we will develop the build processor for the particular OEM and then the OEM will go out and sell these build processors which will then result in revenue for us. So the way the build processor program is structured is, we take some of the development costs upfront but we then strive along with that particular OEM for many quarters in the future and with every printer that he sales together with our build processor we will then get the revenue from the sale of that build processor. So again it is an upfront investment for the particular and recurring long-term income through that particular OEM. And as Fried said the more important the OEM is the more sales he does obviously more important that contract is for us.

So Peter is it a royalty-based revenue or is it a combination of royalty plus buyer contract?

It’s basically it’s a bit like with the Magics and so if the OEM sells a machine and he sells build processor along then it’s going to be -- we will receive a onetime payment for that build processor that is sold together with the machine the build processor is the “print driver” of the machine it’s considered an inherent part of the machine by the customer and he will just pay an extra amount for that piece of software that is being sold along with this machine.

Thank you. Our next question comes from the line of Ben Hearnsberger from Stephens. Your line is open.

I had a question on the control product it seems like it’s a very interesting opportunity for you guys. Can you tell us who you compete with, with that product and then how you size the market opportunity?

Well, the typical competition at this moment is what for the higher end machines what we would call industrial PC's for lower end machines it’s offered in controllers like Adreno or whatever. The very high-end machine [Technical Difficulty] control unit because the vast amounts of data that needs to be processed on the machine due to the increasing build-speeds and the extra requirements on in line process control. We believe we have a quite unique position at this moment and this is the first truly dedicated control system for this market. In other segments like the typical anti-milling turning markets there are competing systems from companies like Siemens, FANUC and so on but they are not or maybe not yet active in the additive manufacturing domain.

Thank you. That is all the questioners that we have in the queue at this time. So I’d like to turn the call back over to Peter and lay some closing remarks.

Thank you. And thank you all for joining the call. I trust that we’ve given you a good [Technical Difficulty] hope and of how we intend to continue to strengthen our position as an open backbone for the industry in particular. Those of you who come to Formnext will get a firsthand look at what can be achieved when leading knowledge, software and services are combined. Johan and myself will also be in New York, in New York City in early January to where we will attend this financial conference and we hope we will have a chance to meet many of you during that visit as well. Thank you again for joining the call today.

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephones lines at this time. Everyone have a great day.