Materialise N.V. (MTLS) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Materialise's First Quarter 2017 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 following at that time. [Operator Instructions] As a reminder, this conference is being recorded. Now I'll turn the conference over to your host, Harriet Fried of LHA. Please begin.

Thank you for joining us today for Materialise's 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 summarizes Materialise's strategic, financial and operational performance for the first quarter of 2017. 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 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, 2016 filed with the SEC on May 1, 2017. Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation. And with that introduction, I'd like to turn the call over to Peter Leys. Peter?

Thank you, Harriet. And thank you everyone for joining us today. Since our year end call in February we've been pushing ahead with the many initiatives and partnerships that we have underway to strengthen our position as the backbone of the additive manufacturing industry. You'll find the agenda for today's call on slide 3. As always, I'll begin with the brief recap of results for the quarter. After which Fried will give you a summary of his takeaways from last month's very successful Materialise World Summit. By the way for today's call Fried is joining us from RAPID in Pittsburg where he will also be meeting some of you at our booth later today. After Fried's comments, Johan will go through our Q1 numbers in more detail. And finally I'll comeback on to update your briefly on our strategic imperative for the rest of the year. When we've completed our prepared remarks, we'll be happy to take any questions that you may have. So turning to Slide 4. You will see that the highlights of our first quarter results. Continuing the trend we began in the second half of last year, Materialise delivered another set of strong results for this period. In the quarter, our revenues grew by almost 20% to €31.9 million, a figure that does not take into accounts deferred revenue from annual software sales and maintenance contracts, which also rose by €1.3 million from year end 2016. Each of three business segments had double digit revenue increases ranging from 15% to 26%. And all three of them generated positive EBITDA. Consolidated adjusted EBITDA was up 148% compared to the first quarter of last year. Overall, we saw an improving demand environment compared to last year with more and more customers embracing the potential of additive manufacturing for the protection of end parts. At this point, I'd like to turn the call over to Fried, who will give you the highlights from last month's Materialise World Summit. Fried?

Good morning or Good afternoon to everyone. Let's move to Slide 5. The 2017 Mateialise World Summit was the fourth in a series that started in 2010. In that first summit, it has been quite a unique event that brings the key players in 3D printing together and it's feels or feet the boost of the additive manufacturing industry in sync with its Gartner Hype Cycle. During the first Materialise World Summit in 2010, when the AM industry size worldwide was estimated at US $1 billion. The CEOs of the then leading three different companies struggled with the question, why is such a global revolutionary industry has a [difficulty] in affecting smaller in size than for instance the California wine industry. Having some courses on additive manufacturing and engineering curricular was clearly not enough to realize the potential of 3D printing in multiple markets. The second Materialise World Summit presented the world's first 3D printed fashion show in 2012. The show was repeated later in US and Asia but more importantly it led to an increasing amount of 3D printed dresses and accessories appearing in fashion shows in Paris, London, New York, Milan, Tokyo and many other places. This was instrumental. Together with home printers in popularizing 3D printing for many people worldwide, beyond the well educated mechanical engineers. People became enchanted by 3D printing. And unfortunately this also led to exaggerated expectations, where some thought as a simple cheap home printer would create spare parts for every product in their house. In early 2015, when 3D printing had become a hype with a negative connotation, this was also reflected in the stock market. At that moment the third Materialise World Summit was about meaningful applications of 3D printing. An extensive exhibition with over 80 cases studied and redeemed making a difference, a difference in making. It highlighted the huge impact that AM was starting to have on individual, the society and the environment. 3D printing is a true revolution, moving steadily forward. Now to the 2017 Materialise World Summit. It started from the observation that industry analyst study was recently published; the AM market now represents US $6 billion. A six fold increase in just seven years or a year at RAPID in Pittsburg where the RAPID took also place in 2013 with approximately a little over 1,000 people we are now with more than 6,500 engineers. But at the same time, the growth has slowed from 25.9% in 2015 to 17.3% in 2016. So what is holding us still back? What is slowing down the introduction of meaningful applications? The Materialise mission statement to use software and service for the better and healthier world is currently illustrated by the image of the go wheelchair you see on slide 6. This wheelchair designed by Benjamin Hubert is an example of a meaningful application that gives disabled people a wheelchair not only fitting better their physical condition but also their individual taste and preference. The impediment to divide distribution and success of this meaningful application is the lack of a properly developed global ecosystem. A system where many of the disabled people that could benefited from this wheelchair have access to the scans of of their body and apps that record their preferences. If we could reach this volume of customers, it would enable 3D printing material and machine appliances to invest in cost down exercises that would bring the cost of additive manufacturing and manufacturing technology for wheelchair in sync with the value proposition and the market requirements. At the two day world summit, more than 600 executives from different companies that are key players in additive manufacturing ecosystem have been thinking together, beyond the technical possibilities of 3D printing. There were many testimonials growing from hospital radiologists to the CEO of the Deutsche Bank train maintenance service on how they could be building the ecosystem based on Materialise backbone products and services that could help to make additive manufacturing a success. These backbone component are continuously being expanded with products and partnership that make Materialise the glue in additive manufacturing industry. We are proving this once more here at RAPID in Pittsburg with for instance a new build processing partnership with 3D systems. And more importantly, with the launch of our new inspective products that were announced at formnext 2016. At this moment, we are announcing the link to metal printing process simulation for Magics 22 that will be launched at formnext 2017. We are convinced that simulation and inspection and specially the interaction between those two are going to be important additional drivers for the success of many metal printers and they will bring the cost down for the introduction of new meaningful applications. At this point, Johan will come on to give you more details on our first quarter financial results.

Thank you, Fried. I'll start with a brief review of our consolidated revenue on Slide 7. For clarity, I’d like to remind everyone that when we refer to sales in our presentation, we mean revenues plus net deferred revenues. Also please note that unless otherwise stated, all comparisons in this call are against our results for the first quarter of 2016. As Peter mentioned in his opening remarks in this year's quarter, we realized the 20% increase in revenue with double digit increases in all three of our segments. Materialise Software accounted for 27% of our total revenue. Materialise Medical for 31% and Materialise Manufacturing for 42%. As you know, two of our company's goals are to grow the contribution at software revenue and end parts revenue make to our total mix. This year's first quarter across all three of our segments, revenue from software sales and end parts contributed 75% of total revenue. The remaining 25% was generated through the production of prototypes. Moving to Slide 8, you will see our consolidated EBITDA numbers for the first quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 148%, increasing from €1,135,000 to €2,813,000. Our adjusted EBITDA margin doubled from 4.3% to 8.8%. These improvements primarily reflect three factors. First, of course our double digit revenue growth. Second, an improvement in manufacturing gross margin offset by higher cost of sales in medical. And third, an increase of only 7.4% in operational expenses. The high cost of sales in medical was due to increased activity in our medical devices and implants business lines which involved a higher cost of production. I should note that over time we expect our current gross margin to increase as we realize further scale effects and efficiency gains in both medical and manufacturing. Slide 9 summarizes the result of our Materialise Software segment for which revenue grew 15%. Revenue from recurring sales grew 22%. OEM sales grew 29% compared to last year's period. Segment EBITDA margin remain solid at approximately 35%. Turning to Slide 10, you will see that total revenue in our Materialise Medical segment grew 15% for the quarter. Revenue for Medical software sales increased 16%, driven by 27% growth in revenues generated from annual and renewal licenses. Just as in our software segment, the significant portion of the sales could not be recognized in the period and is part of the increased of deferred revenue. Software revenues represent a 36% of the total medical segment. Revenues from direct sales from medical collaboration, partners and direct sales from complex surgery each rose by 15% compared to the first quarter 2016. EBITDA for the medical segment was €314,000 as compared to a loss of €530,000 in the prior year period. EBITDA margin was up 940 basis points as a result of the higher revenues and only moderate growth of operational expenses more than offsetting the increase cost of sales. Now let's turn to Slide 11 for an overview of the first quarter performance of our Materialise Manufacturing segment. Their revenue rose 26%, fueled by revenue from end part manufacturing which was up 35% over last year's period. End parts accounted for 41% of the segment's revenue, up from 39% last year. EBITDA rose from €257,000 to €1,322,000. The margin increased 750 basis points to 9.9% this quarter from 2.4% last year, boosted by the revenue growth combined with improved cost of sales, efficiencies and only a moderate growth of operational expenses. The company's total number of printers grows to 155, up five of the number as of end 2016. Slide 12 provides the highlights of our income statements for the first quarter. Gross profit rose 16% compared to the last year's period, while gross margin was 57.9% as compared to 59.9%. Again, this primarily reflects increase activity in medical devices and implants which involved high cost of production. In total, R&D, sales and marketing and G&A spending rose by 7.4% over the prior year period. R&D and G&A each rose modestly while sales and marketing accounting for a larger proportion of the increased as we brought on more resources to enable us to support future revenue growth. We posted an operating loss of only €84,000 compared to €989,000 for quarter one 2016, an improvement of €905,000. The net financial result was negative €142,000 compared to a negative €734,000 for last year's period, reflecting smaller variances in the currency exchange rate primarily on the portion of the company's IPO proceeds out in US dollar. Net loss for the first quarter of 2017 was €816,000 compared to a loss of €3,151,000 for last year's period, the improvement in net loss includes beside the operational and financial variances already explained; a positive fluctuation of €1,059,000 in income taxes. 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 24% of total liabilities and equity at the quarter end. Capital expenditures amounted to €9.6 million compared to €1.6 million in last year's period and include €4.4 million related to the premises under construction in Poland and Belgium. Cash flow from operations increased €1.6 million compared to €1.4 million last year. We ended the quarter with cash and cash equivalents of €55.1 million compared to €55.9 million as of December 31, 2016. Total deferred income amounted to €23.5 million compared to €21.4 million as of year end and €18.2 million as of March 31, 2016. With that overview, I'll turn the call back to Peter.

Thank you, Johan. Please turn to Slide 14 which lays out some of our key priorities for the year. Actually ran through these initiatives with you last quarter as you will see Q1 has actually been a period where we've consistently executed on these strategic priorities. At RAPID Materialise software launches numerous extensions towards software backbone. And let me just add just a few to the ones that Fried has already mentioned. We are officially launching Materialise Inspector the control 2 that allows users to analyze data during all stages of the print process. We are also launching Magics Print Metal and easy to use 3D printing solution that facilitates access to metal printing. And we also launched new releases of Materialise e-Stage Materialise robot and Materialise Pneumatic. As Fried already indicated, we also continue to expand our suite of build processors which now also includes a solution for the ProJet Color Jetting machines of 3D systems. Materialise Medical secured FDA clearance during the quarter for 3D printed patient- specific Osteotomy guide for children as young as seven years old to help orthopedic surgeons to better understand and execute even the most complex cases. Finally, Materialise Manufacturing added a second HP Jet Fusion 4200 machine to our production facility. After an extensive period of testing, the HP technology is now available for orders by select group of our customers. And will soon be made publicly available for online quotations and orders. At Materialise Manufacturing, we are also making good progress with the new production facilities that we are building in both Belgium and Poland, and we currently still expect to be able to occupy these premises in the summer of 2017. Based on our performance in the first quarter and our outlook for the rest of the year, we maintained a full year guidance that we have provided in February of this year. This concludes our prepared remarks. Operator, we are now ready to open the call for questions.

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

Hey, good morning, gentlemen. Congrats on the nice results. Hey, just a couple of questions for me. So first I think I'd curious to know how correlated have you guys been historically to kind of industry wide system sales and what's your conviction that system sales have improved or is stabilized or will improve this year?

Pete is responding, Troy but I think he is on mute as I can see.

Sorry, Troy. And we have said before that Materialise is more stable in its evolution than the industry as a whole. We believe that there is truly slight take up again after two quite difficult years in the amount of systems that are being sold. But I think the take up is moderate.

Okay. I understood. Hey, so Peter you mentioned HP Jet Fusion product, you got your second machine, sounds like it's just available to a limited number of customers. Just curious to know when it goes broader and can you just talk about just kind of that technology versus SLS, do you think going forward you guys would spend more or kind of build out the HP platform versus -- just this benefits and disadvantages of HP versus SLS?

Okay. Well, we definitely see couple of strength in the HP sector that we are currently marketing or explaining to our customer base. For instance, the HP technology offers a very nice surface finish thanks to its very fine layer thickness. And for certain configurations definitely also a lot of speed. What I do want to say also is that we have quite a number of applications where we see that the traditional SLS technology is still really very competitive or outperforming the current generation of HP systems. But nevertheless there is already quite a number of our customers that could benefit from this new technology.

Understood. Hey, I have two more questions for me. So the end parts strength was pretty impressive. I just be curious to know if that was very broad based across multiple verticals? Or is just a couple of verticals driving that strength?

Well, traditionally, Troy, as you know our customer base is really spread over a many various sectors. That has been the case for both our prototyping business and our end part manufacturing business. What I could also maybe add to this answer -- I don't know whether you were hinting at this, Troy, is that a very large volume business such as for instance our HOYA business which obviously once they got a more meaningful part of our health part manufacturing business that HOYA has not yet been contributing to our Q1 results. We are in full ramp of HOYA, actually we are shipping scanners have been too but we expect -- also we are ramp in volume of printing of those eye ware more towards the end of the year.

Okay, I understood. And last question for me, I just be curious to know if you have seen more or less of net Fab now that there is inside of order desk?

Yes, I think for us the situation hasn't changed that much. And I'd say we have definitely not more competition that we have experienced.

Thank you. Our next question is from Weston Twigg of Pacific Crest. Your line is open.

Yes, hi, thanks for taking my question. First question just on operating expenses, it looks like the increase is pretty sharply quarter-over-quarter you said you hire some more people but just wondering what you are expectations through the year? Do you see that staying at this level or turning out a bit higher particularly on the SG&A side?

As explained in the previous quarters as well, we continue to believe that the growth of operational expenses will be lower than the growth of our revenues. And we've seen slightly higher operating expenses and we mentioned that R&D and G&A are in the same page as we saw last year. We had a little pickup in the sales and marketing expenses. And although we have already solid global sales and marketing organization, we have to invest in additional resources to sustain the future growth in general and also the required expertise for new products and services in particular. So this is something that we picked up now in this quarter. But it is not something that we believe. That will be exceeding the normal pace of group of expenses.

Okay. That's helpful. I also want to ask about the new relationship with Build Processors with 3D systems. It sounds like a pretty big change in a relationship. Can you offer us a little bit color on what changed and what you think the opportunity is with 3D systems?

Well, I think with the venue of the new CEO at 3D systems, the company has opened itself up to become more part; it has more focused on industrial side of its business. And is also more opened up to be part of broader ecosystems rather than yes I think older strategy where 3D systems presented itself a little bit as an apple business model of the 3D printing industry. And well this opening is that we have very positive dialogue at the moment with notable people from 3D systems about creating more and more interoperability between our software and their software.

Okay. All right. That's helpful. Then finally just -- I know you touched on it briefly here but the manufacturing segment does appear very strong. Can you just give some color on your expectations throughout the year what's driving the strong customer demand and do you think that would be potentially growing nearly as fast as the software business this year or is that a little too aggressive?

Well, it's, Weston, indeed it has been a very strong growth in this quarter. That is testimonial of the few things. If we have seen a slowdown in the growth of machine sales over the last couple of quarters, that doesn't mean that people were not considering and investigating and testing the potential of the technology but as less machines were hitting the market, people were turning to partners such as who have a broad factory to actually help them test, investigate and then start with their production of small series. So it was -- I mean I'd not say written in the stars but it shouldn't come as a surprise that as people continue to investigate in technology and in the past have slowdown the purchase of the machines that then draw facilities such as ours will be the one that people would turn to for their printing work. So that definitely explains the growth of our manufacturing activity. And I mean the other side of the medal of course is that when there is less machines that are being sold than while our software folks obviously can continue to up sale the existing install base at a certain point in time our software folks, I mean will also feel the slowdown in the -- of the growth of their machine sales. As machine sales are picking up, we think that over time that should definitely also benefit our software segment. And over time because there is clearly a strong push towards adoption of the technology throughout the markets, I don't think that an uptick in machine sales in the coming quarters will automatically and immediately have a negative impact on our manufacturing business.

Thank you. There are no further questions at this time. I'd like to turn the conference over to Peter Leys for any closing remarks.

Thank you all for joining the call. We look forward to seeing you at RAPID, where as we said earlier Fried currently is. Or at the Quebec Investor Conference that I'll attend in Boston later this month. Thank you again and we are looking forward to seeing you all soon. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.