Materialise N.V. (MTLS) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Materialise Fourth Quarter 2016 Earnings 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, this conference call maybe recorded. I'd now like to introduce your host for today's conference Harriet Fried of LHA. Please go ahead.

Thank you everyone for joining us today for Materialise's fourth quarter 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 financial and operational performance for the fourth quarter of 2016. To access the slides if you have not already done so, please go to the Investor Relations 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 their 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, 2015 filed with the SEC on April 28, 2016. 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 with that, I'd 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’ll begin with a brief recap of our results for the quarter and the full-year after which Fried will give you an overview of our most important strategic accomplishments for the year. After that, Johan will go through our Q4 numbers in more detail and then I’ll come back on to take you through our operational performance for 2016 and our strategic imperatives and guidance for 2017. When we've completed our prepared remarks, we will be happy to respond to any questions that you may have. Turning to Slide 4, you will see the highlights of our fourth quarter results. While the markets we operate in has been in the state of transition, we continue to make good progress with our financial results, our strategic initiatives, and our operational effectiveness. For the quarter, we had revenue growth of 12%. The figure that does take into account deferred revenue from annual software sales and maintenance contracts, which rose by €3.7 million from the end of last year. Adjusted EBITDA was up 50% compared to the fourth quarter of 2015 and we turned in earnings of €0.01 per diluted share. Importantly we had revenue increases and positive EBITDA in all three of our business segments. Slide 5, sits forth some of the highlights of our full-year performance. For 2017, revenue increased 12%. Again, not including the increase of almost €3.7 million in deferred revenues from annual software sales and maintenance contracts, which add roughly an additional 3% to our annual sales growth. For the year, consolidated adjusted EBITDA was up 157%. Thanks to the combination of on the one hand a solid growth of both our revenues, 12% and our gross profit margin 130 basis points. And on the other hand, a much more moderate increase of our operating expenses of roughly 5%. And with this, I’d like to turn the call over to Fried.

Good morning or Good afternoon to everyone. 2016 was quite a busy year here at Materialise, during which we reinforced our strategic positioning with good results. In the beginning of the year, we launched our new branding architecture to make customers better aware of the cohesion between our different product offerings. Together they constitute the backbone for 3D printing applications. During the first half of the year, we introduced the Magics Suite and we added the Materialise Mimics Care Suite to the Materialise Mimics Innovation Suite. These suites fit in a horizontal market approach. They enable professional and certified 3D printing in a broad set of industrial sectors, such as automotive, aerospace, and consumer electronics, as well as they allow us to serve multiple medical markets such as for instance orthopedics, cardiovascular surgery, CMF surgery, phenomenology and neurology. In 2016, we not only introduced but we also expanded these horizontal backbones. We added the inspected tool to our Materialise Magic Suite and broadened the Materialise Mimics Care Suite with Mimics Imprint and Anatomy Print. On the medical side, we also started data testing, new scripting tools in Mimics. These allow automations in the data handling for the development of custom and standard medical devices. Another element that fits into this strategy is a partnership with Siemens. The integration of functionalities of our Materialise Magic Suite technology into the Siemens cut [ph] and product lifecycle management tools will give a broader customer base access to our technology at an earlier phase in the product development cycle. In 2016, more and more customers and partners reached out to us to learn where additive manufacturing can add value for them. This resulted in a substantial update in our manufacturing activities. We are proud to announce that during 2016 we printed more than 1 million parts, excluding any [technical difficulty] parts or copy parts to our vacuum casting production line in the Czech Republic. In many instances, our customers push the limits of what our technology can do for them beyond straightforward production, and they engage in co-creation sessions with our specialized team to find, how additive manufacturing can help them transform or even disrupt their product offering and supply chain. This puts us in a very privileged position to selectively choose certain vertical business opportunities where we believe our backbone can make a real difference to build sustainable position in specific market segments. Our co-creation sessions, which HOYA led to the launch of Yuniku in the Irish [ph] sector, which we discussed in our Q3 call. This is a prime example of a vertical backbone implementation of the Materialise technologies, starting from the scanning of an individual customer at an optician store, up to the delivery of this 3D printed spectacles. Another good example of a vertical backbone is RapidFit, which grew very fast in 2016. The modular fixtures of RapidFit are becoming a standard for multiple automotive manufacturers of car body panels and interior trim, and we’re hopeful that we will be able to announce of the similar vertical initiatives in the future. In summary, our solid performance in 2016 in combination with the product line extensions and new opportunities that we disclosed in the second half of 2016, are indications that Materialise is on the right track after the pause that the AM sector experienced in 2015 and 2016. Our value-based strategic choices have proven to be robust in this downturn period and we expect to progress further down the path of long-term value creation in 2017 and beyond. At this point, Johan will come on to give you more details on our fourth quarter financial results.

Thank you, Fried. I’ll start with a brief review of our consolidated revenue on Slide 7. First. I’d like to remind everyone that when we refer to sales in our presentation, we mean revenues plus deferred revenues. Also please note that unless otherwise stated, all comparisons in this call are against our results for the same period in 2015. Finally, in each of the six slides I cover, I will focus on our results for the quarter. Although certain data for the year also are shown for reference. As Peter mentioned in his opening remarks, in this year's fourth quarter we generated a 12% increase in revenue, with increases in all of the segments. Materialise software accounted for 26% of our total revenue. Materialise medical for 32% and Materialise manufacturing for 42%. As you know, two of our Company's goals are to grow to the contribution -- to grow the contribution that software revenue and end parts revenue make to our total mix. In the fourth quarter of 2016, total revenue from software products rose by 2 percentage points to 39%, while end parts decreased by 1 percentage point to 37%. Prototyping accounted for 24% of total revenue as compared to 25%. Moving to Slide 8, you can see our consolidated adjusted EBITDA numbers for the fourth quarter. As Peter mentioned in his opening remarks, consolidated adjusted EBITDA increased by 50% growing from €2,979,000 to €4,455,000. Our adjusted EBITDA margin improved from 10.6% to 14.2%. This improvements primarily reflect two factors. First, our continued double-digit revenue growth. And second, a modest increase of only 3.6% in operational expenses. Slide 9, summarizes the results of our Materialise software segment. The revenue grew 11%, recurring sales grew 38% driven by 80% growth in sales generated from new annual licenses. The strong performance is not fully reflected in the revenues, but a significant portion of these sales have been deferred to the balance sheet. OEM sales grew 41% compared to last year's period. Despite continued initiatives in software development, mostly using corporate resources, segment EBITDA margin remained at 37%, on to 9 percentage EBITDA growth. Moving to Slide 10, you will see the total revenue in our Materialise medical segment grew 5% for the quarter. Medical software sales increased 30%, driven by 60% growth in sales generated from annual and renewal licenses. Just as in our software segment, an important portion of the sales could not be recognized in the period and is part of the increase of deferred revenues. Software revenues represented 40% of the total medical segment. The 83% increase from direct sales from complex surgery devices more than offset a 4 percentage decline in sales from collaborative medical devices. EBITDA for the medical segment was €656,000 compared to €747,000 in the prior-year period. The EBITDA was negatively affected by approximately €350,000 decrease in all the operating income mainly as a result of lower other operating income from governmental grants, while we increased the focus of our development efforts on business projects. Nevertheless, the segment EBITDA margin remained at approximately 7%. Now let’s turn to Slide 11, for an overview of the quarter four performance of our Materialise manufacturing segment. There, revenue rose 19% driven primarily by revenue from end part manufacturing, which was up 20% over last year's period. And parts accounted for 39% of the segments revenue, up from 37% last year. The Company's total number of printers rose slightly this quarter to 150 and includes a first HP Jet Fusion printer that became operational in the fourth quarter. Since the beginning of 2016, we added 12 printers. EBITDA rose from 1,033,000 to €1,438,000. The margin increased to 11% this quarter from 9% last year. The operations of i.materialise and RapidFit, which are becoming more mature that fully integrated in the fourth quarter in the Materialise manufacturing business lines in order to create additional synergies. Hence we will no longer refer to their EBITDA impact in our future earnings calls. Slide 12 provides the highlights of our income statement for the fourth quarter. Gross profit rose 12% compared to last year's period, while gross margin was stable at 59%. In total, R&D, sales and marketing, and G&A spending rose by 3.6% over the prior-year period. Sales and marketing and G&A each increased slightly, while R&D decreased modestly. Our G&A increased primarily reflected the managerial structure and support we have been implementing within our sales and marketing and R&D groups. As I will repeat for the last time in this earnings call, a number of employees within these groups have evolved into more managerial or administrative roles and the costs as well as certain other expenses are now categorized under G&A. Although income net decreased by 500 -- €400,000 to €1.8 million. Net other operating income consists primarily of withholding tax exemptions for qualifying researches, development grounds, partial funding of R&D projects, and currency exchange on purchase and sales transactions. There are always some moving parts in these competence, but among other things quarter four was affected by a decrease in government grants for specific research programs. As I mentioned earlier, our development initiatives have been focused more on business projects that are mostly not sponsored by specific governmental grants. We posted an operating profit of €1,915,000 compared to €932,000 for the fourth quarter of 2015, an improvement of almost €1 million. Net financial result was €253,000 compared to €356,004 for last year's period, reflecting smaller variances in the currency exchange rate, primarily on the portion of the Company's IPO proceeds held in U.S dollar. Net profit for the fourth quarter of 2016 was €620,000 compared to a net profit of €2.1 million for last year's period. The operating profit improvement was offset by the movement in income tax from an income of €1,010,000 last year to a cost of almost €900,000, affected by variances and deferred taxes which have no cash in effect. And the increase also in our share in the loss of the joint venture of RSPrint from €153,000 to €650,000. Now please turn to Slide 13 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with debt accounting for 21% of total liabilities and equity at year end. For the full-year 2016, total loans and borrowings increased by €12.7 million to €33.8 million and are all asset based. Capital expenditures amounted to €6.9 million compared to €3.6 million for the last quarter last year. Cash flow from operations was €4,180,000 compared to €724,000 last year. For the full-year, cash flow from operations amounted €8.4 million. We ended the quarter with cash and cash equivalents, including held to maturity investments of €55.9 million compared to €50.7 million as of December 31, 2015. Total deferred income amounted to €21.4 million compared to €16.6 million at the end of last year. The deferred annual software sales and maintenance contracts rose to €16.8 million from €13.1 million 12 months ago. And with that overview, I will turn the call back to Peter.

Thank you, Johan. Please turn to Slide 14, for a summary of our operational achievements for the year and also our priorities for 2017. The additive manufacturing market is transitioning from Rapid Prototyping due to production of end parts. Many players in very different industries are seriously exploring the potential of additive manufacturing for their end markets, and are actively using equipment either for testing purposes or already for the production of limited series of parts. Simultaneously industry players have been waiting for new technologies that are expected to reach the market in the near future. During this transition periods, the growth has been slower than expected, Materialise set four objectives for itself. First, maintain our double-digit revenue growth rates. Second, increase efficiencies and expand our adjusted EBITDA margin accordingly. Third, broaden our technological offering targeted at the markets for end parts. And finally, expand our market reach, both horizontally and vertically by engaging were appropriate in selected partnerships. We believe, in 2016, we made good progress on each of these four fronts. Our revenues grew year-over-year by 12.2%. And if you were to add our deferred revenues on software sales and maintenance to our recognized revenues, our sales growth would even be 15.8%. Second, year-over-year our adjusted EBITDA grew by 167% to €9.5 million for 2016. Third, we expanded our backbone with promising new functionality, such as Inspector, Mimics Imprint and Anatomy print. And finally, we engaged in a number of promising partnerships with HP, Depuy Synthes, J&J, HOYA and Siemens to only name a few. We expect 2017 to be a similar transition year and intend to work towards the same four goals. Continue to grow our revenues double digits, increase our profitability, invest in innovative additions to our backbone technology and advance our plans to engage in meaningful verticals in collaboration with strong partners where appropriate. At this point, I'd like to turn to Slide 16 and discuss our guidance for 2017. We expect our recognized revenues to grow at least at a rate that is similar to last year's, 12%. And actually see potential to increase our growth rate beyond that. Our revenue guidance of between €128 million and €134 million for a growth of approximately 12% to 17%. Importantly, as we expect our software businesses to continue to gain importance in our sales mix, we currently foresee an additional growth of our deferred revenues from software license and maintenance sales by an incremental amount between €4 million and €5 million. On the adjusted EBITDA side, we are more conservative, as we expect to reinvest some of our efficiency gains in the expansion of our backbone technology and in the setting up of new verticals. We currently estimate that our adjusted EBITDA will be somewhere between €10.5 million and €13.5 million. We expect our financial results to be particularly strong in the third quarter and even stronger in the fourth quarter of 2017. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Certainly. [Operator Instructions] Our first question comes from the line of Julian Mitchell from Credit Suisse. Your line is now open.

Hi. Good morning. This is actually Jason on for Julian.

Hi, Jason.

Hey, just a really quick question on how you -- how to achieve the higher end of your guidance. You mentioned that there is some growth prospects that you could be looking forward to achieve that, will this come more in the software segment or maybe from the manufacturing expansions that you sort of highlighted in your last call?

Well, as always it’s a combination of both elements we see growth perspectives on the manufacturing side and we see growth perspectives on the software side. And, yes, definitely we’ve continued to grow the software a little bit faster than manufacturing in the previous years. Again, it's hard to predict before the year starts that this will be the same this year, but it's our ambition to grow both of them and, yes, we believe that are our opportunities for both.

Got it. And then as a quick follow-up, could you give any visibility into how printer on the manufacturing segment as to how printer adoption could look in 2017, given it's been kind of slow these past couple of years? Any color that you could …

Insight, you mean internally in Materialise?

Yes.

Yes, we -- well, for sure the biggest demand in for and the largest volume manufacturing applications are related to plastics polyamide technologies, which can be aided as a [indiscernible] systems or multi jet systems from HP.

Got it. Thanks a lot.

Thank you. Our next question comes from the line of Troy Jensen from Piper. Your line is now open.

Hello, gentlemen. Thanks for taking my call or questions here. Maybe a couple of here for you Fried or Peter. To start off with, how about Siemens relationship? I would just like to know your thoughts on the significance of that and when would it ramp into kind of more of a material kind of revenue opportunity for you guys?

Yes, thank you, Troy. Clearly as we already mentioned in the prepared remarks, this is for us an important landmark collaboration. It is a true endorsements by a very important player, in particular in the end part manufacturing world of the strength and the advancement of our technology. So basically the additive manufacturing functionality that they want to add to their product lifecycle management tools will be the Materialise technology. So we are very excited about that and do expect that over the years this will have an important impact on our sales numbers. Of course, this will take -- this will follow the market, it's not because Siemens moves and moves very quickly as one of the leaders in this market by adding additive manufacturing functionality to its portfolio, that all the customers will certainly in that same year buy this functionality. The successive functionality will go together with the adoption of the technology for end part manufacturing by the customer base of both Siemens and ourselves. And we see that ramping up gradually in 2017, 2018, but obviously with much more significant impact on the numbers in the years thereafter.

All right. So it looks like if we think about Autodesk has Netfabb [ph], Siemens is partnering with you. I’m assuming this would be a nonexclusive contract and there been other kind of CAD companies that are reaching out to you do something [ph] in similar?

I mean, we have -- Troy, you know our strategy and we try to be very true to that strategy. We want to be a neutral player that reaches out to as many users of the technology and the ecosystem as possible. So our relationship with Siemens is just like our strategic relationships with many other players in the field that is indeed nonexclusive.

Right, perfect. And how about switching gears at HP, I guess, I would be curious know you guys have a machine on site starts in the technology, do you see yourself transitioning more of your nylon production to Fusion Jet technology? I mean, does it have the speed and capabilities that the company's claims?

Well, we certainly see a potential for certain product types and we will increase our capacity of those machines.

The Fusion Jet, specifically is [indiscernible]?

[Indiscernible].

Okay, perfect. And then how about -- just one last one for me and I will cede the floor, just love to get an update on the X-Ray product?

Well, yes, this project is still in progress. It is harder than we thought to fulfill all the requirements of the FDA. We have not resubmitted new 510(k) yet, but we are still planning to do this further down this year. That’s the current status.

Okay. Perfect, guys. Good luck this year.

Thank you, Troy.

Thank you. [Operator Instructions] Our next question comes from the line of Weston Twigg from Pacific Crest Securities. Your line is now open.

Hi. Excuse me, thanks for taking my question. First, just I was wondering if you could maybe talk to us about your relationship with GE now that they’ve bought a couple of metal printing companies, and if you think that will expand to be a strong revenue driver anytime as they really ramp up that metals focus?

Hi, West. Thank you for the question. Obviously, GE already was a customer of ours, a good user of both our Magics and our Streamics functionality. The machine vendors [ph] that are in the process of being acquired by GE, both contemplated in Arcam were our vendors, which we have good relationships and many users of their machines were also used our technology. So we -- these -- parts of the puzzle as far as we concerned full nicely together, its existing partners of ours that now join an existing customer of ours. What exactly that the future will bring, of course remains to be seen. We will, I mean, we’re in discussion with GE and we will ramp up those discussions. I guess, once these acquisitions had been fully finalized and GE is more in a position to actually discuss and further work with these assets.

Okay. I mean that make sense, but it sounds like you do you view this as a potential nice growth driver for your business, as there -- as GE expand its nova [ph] focus. Okay, perfect. And then the other question I had was -- sorry, go ahead.

I was going to say, I mean, if you look at the announcement, West, that they’ve made at the time of the acquisition, they’re very ambitious in the number of printers they’re going to get out there. And of course the Materialise any printer that is being used somewhere is a good potential for our business.

And immediately at Formnext thereafter we have gotten their support on our Group, and they’ve made multiple statements endorsing our technology. So I think the signs are very good, but contractually they are not yet in a position to sign everything.

Perfect. Very helpful. And the other question, I wanted to ask about was just related to the unique partnership with HOYA. I’m just kind of curious how that’s going along, that’s a really interesting project you're starting in a retail location, producing the end-parts in terms of eyeglasses. Can you give us an update in terms of what the feedback has been, what kind of volumes you’re doing, how it's been progressing, maybe if you run into any roadblocks?

Well, actually the feedback is simply fantastic at old ratios [ph] where the system has been introduced, it has received a lot of attention and more than attention also orders. Now actually the real rollout in the first commercial CRE is expected only in the second quarter. So, at this moment we’re still in a full ramp up phase. And just with that, our customers and the real launch is, yes, early second quarter.

All right. Thank you.

Thank you, West.

Thank you. And at this time, I’m not showing any further questions. I would now like to turn the call back over to Peter Leys for any closing remarks.

Okay. Thank you, operator, and thank you all for joining the call. I hope we’ve been able to give you a good overview of the way in which we plan to continue to increase Materialise's revenues and profitability, expand our backbone technology and engage in new verticals in collaboration with strong partners where appropriate. So thanks again to all of you and enjoy the rest of your day. Good bye.

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