Materialise N.V. (MTLS) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Materialise Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to Harriet Fried of LHA. Please begin.

Thank you, for joining us today for Materialise's fourth quarter conference call. With us 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 quarter. To access the slides, if you've not 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 can also be found on that page. Before we begin, I'd 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 the 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, I'd like to turn the call over to Peter Leys. Go ahead please Peter.

Thank you, Harriet, and thank you, everyone, for joining us today. The agenda for today's 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 come on to put our results in a broader perspective. Subsequently, Johan will go through our Q4 numbers in more detail and finally, I will come back on to take you through our strategic imperatives for 2018 and to give you our financial guidance for the year. When we've completed our prepared remarks, we'll be happy to respond to any questions that you may have. Turning to Slide 4. You'll see the highlights of our fourth quarter results. Materialise turned in a strong quarter, making progress with our financial results, our strategic initiatives and our operational effectiveness. For the quarter, we had revenue growth of 42%, while adjusted EBITDA was also up 42% compared to the fourth quarter of 2016. And returned in earnings of EUR0.03 per diluted share. These numbers include the fourth quarter results of ACTech. Organically, our revenue growth compared to last year's period was still double digits, 10.5% to be more precise. With particular strong increases in Materialise Software and Materialise Medical. ACTech contributed EUR10 million to our group revenue and EUR2.1 million to our group adjusted EBITDA. Slide 5 shows the highlights of our full year performance. For 2017, revenue increased 24.5%, excluding ACTech, revenue grew 16%. Neither of these solid growth numbers includes the additional increase by almost EUR2 million of our deferred revenues from annual software sales and maintenance contracts. For the year, consolidated adjusted EBITDA was up 60%, excluding ACTech, adjusted EBITDA increased 38%. And with that, I would like to turn the call to Fried.

Good morning, and good afternoon, everyone. Thank you for joining us today. When I look back at the plans that we made at the time of our IPO, in June 2014, and at our performance at the end of 2017, then I can only conclude that we are very much on track, both from a financial and from a strategic perspective. Over the last three calendar years our revenues grew by compound annual growth rate of 21% from EUR81.1 million in 2014 to EUR142.5 million in 2017. Over the same period, see over here our adjusted EBITDA, which rose from EUR4.9 million in 2014 to EUR15.1 million in 2017 was 46%. These are solid numbers for a company that is still in a heavy investment growth. In 2017, R&D represented 15% of total organic revenues. We also operate in a market that has not grown as strongly as anticipated. And the market that has changed significantly with the answers of many new and large players, such as GE, HP and Siemens. These financial results reflect the successful execution of our strategy. Over the last years, we have continued to innovate relentlessly and we have consistently positioned our core competencies as the backbone of the industry. Recent examples of innovation that we have brought to the market are Magics e-Stage for metal, and automatic support generated for metal printing and the introduction of scripting into our medical software tools, which allows us to automate and simplify a number of functionalities. Magics e-Stage for metal has received a very warm reception as it gives metal 3 D printing users substantial benefits. Over a wide range of different products, it has proven to reduce the support preparation time, which is the biggest component in the work planning for metal printers by 90%. And the post processing times have been reduced by 50%, while also the material consumption is reduced by 20%. On top of that, we have testimonials from customers from the United States and from all over Europe to Asia that tell us about parts that failed to have built with other support systems, while Magics e-Stage for metal builds them flawlessly. Many people talk about artificial intelligence in 3D printing and Magics e-Stage for metal is a meaningful application of this. Materialise delivers artificial intelligence. The scripting that was introduced in the Mimics Innovation Suite is a similar groundbreaking innovation with a wide variety of benefits. The scripting allows automation of segmentation, analysis and design functionalities. It enables to unleash the powerful tools present in the Mimics Innovation Suite on large groups of data from many patients. Recent examples of our continued strategic positioning are our collaborations with companies such as Siemens and PTC. This integrate or distribute parts of our 3D printing software technology. In Medical, there are our agreements with Siemens Healthineers informed us that are aimed at bringing our Mimics inPrint to the hospital market. Today, we announced a collaboration on shoulder guides and planning with Johnson & Johnson, the presenters. As a last strategic example, I'll refer to our acquisition of ACTech, which positions us extremely well in the market for unique and complex metal parts. The market continues to evolve in the direction of a broader adaptation of 3D printing for the production of complex and customized end-parts. We are encouraged by the many discussions that we are having with many different players in a broad variety of industries, who are all seriously looking at adopting the technology for well-chosen applications. Simultaneously, we are seeing that the effective adoption or conversion to this new technology not only requires important investments, but also very important transformational shifts in the ecosystem. For instance, my dedication of the supply chain, or that is – also change in mindset required for product designers, not only at the designers end, but also, for instance, in the retail staff that sells customized products. Overcoming all these hurdles takes time, we therefore, expect that 2018 will be another year of relatively slow but steady sustainable growth for the additive manufacturing market. At this point, Johan will come 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 net deferred revenues. Also please note, that unless otherwise stated, all comparisons in this call are against our results for the same period in 2016. Importantly, we have consolidated results of ACTech for the full fourth quarter of 2017. The ACTech results are fully integrated in our manufacturing business and will not affect for financial reporting purposes, the results of our software and medical segments. When we provide certain numbers, on a cross segment basis, we will present the ACTech numbers separately. Finally, in each of the following slides I cover, I will focus on our results for the quarter, although, certain data for the year are also shown for reference. As Peter mentioned in his opening remarks, in this year's fourth quarter we generated a 42% increase in recent revenue. As a result of the ACTech acquisition, the revenue distribution looks differently this quarter. Materialise manufacturing now accounts for 50% of our total revenue, including ACTech's portion of 22%, Materialise Software accounts for 23% and Materialise Medical for 27%. The cross segment distribution of our revenues also looks differently as a result of our acquisition of ACTech, which accounted for 22% of our total revenues in the Q4 of 2017. When total revenue from software products increased, in absolute numbers, by EUR2.8 million, it decreased relatively as compared to the other cross segment product groups by five percentage points to 34%. The relative share of our cross segment end-parts activities, which also grew in absolute numbers by EUR1.3 million, decreased by 8 percentage points to 29%. Finally our traditional 3D printing prototyping business accounted for only 15% of total revenue. Moving to Slide 8, you can see our consolidated adjusted EBITDA numbers for the fourth quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 42%, rising from EUR4.5 million to EUR6.3 million. This result includes ACTech's contribution of EUR2.1 million, but excludes EUR343,000 in expenses related to the ACTech acquisition. The EBITDA margin remained stable at 14.2%. Organically, our adjusted EBITDA decreased EUR200,000 to EUR4.3 million, mainly as a result of temporarily higher operating expenses. The organic adjusted EBITDA margin for the quarter amounted to 12.3% compared to the full year 9.9 percentage margin. Slide 9 summarizes the results of our Materialise Software segment, where revenue grew 30%. Boosted by OEM sales, that went up 47%, and direct sales grew 8%. This quarter sales mix resulted in revenue growth from recurring sales of 3% compared to last year's quarter, where revenue from perpetual licenses, services and controlled platforms increased 50%. In the full year perspective, the growth was 15% and 21%, respectively. The 30% revenue growth combined with the small aggregate increase of operational expenses resulted in a segment EBITDA margin of 44%, an increase of 760 basis points. Moving to Slide 10, you will see that total revenue in our Materialise Medical segment grew 18% for the quarter. The quarter sales mix resulted in software revenue growth of 10%, now representing 37% of the total segments revenue. Revenues from Medical Device Solutions rose 23%. Over the full year, Medical Software revenue grew 17% and the Medical Device revenues 11%. EBITDA for the Medical segment increased EUR1.5 million to EUR2,158,000. The EBITDA margin was 18.2% as compared to 6.5% in the prior year's quarter, as a result of the higher revenues, improved gross margin and only single-digit increase of operational expenses. Now let's turn to slide 11, for an overview of the Q4 performance of our Materialise Manufacturing segment. There, as we mentioned, revenue was up by more than 68%, including ACTech's EUR10 million revenue contribution. Organically, the segment revenues grew 16% on a full year comparison to 2016, with end-part manufacturing growth of 34% and Prototyping increase of 3%. This quarter, our manufacturing segment was affected by the market dynamics in Europe, particularly, in the automotive industry, resulting in an organic revenue decrease of 6.7%. End-part manufacturing was relatively flat, minus 1%, where Prototyping decreased 11%. We do believe that our online platform, our variable product lines, our relatively new metal 3D printing business and the synergies with ACTech, should sustain next year's top line and provide a platform for more solid growth, once the market circumstances improve again. ACTech's EUR2.1 million contribution in the EUR1.9 million segment EBITDA compensated for this quarter's organic EBITDA loss of EUR166,000, as compared to EUR1,438,000 in the prior year period. This EBITDA was the result of the negative organic revenue growth combined with increased research and development expenses, with respect to our variable and metal 3D printing product lines and increased G&A expenses. At quarter end, the total number of printers Materialise set in production rose to 185, up 35 over the number at year-end 2016, and this includes the nine printers that are operated at ACTech. Slide 12 provides the highlights of our income statement for the fourth quarter. Gross profit rose 29% compared to last year's period. Excluding ACTech, gross profit increased 15%, while gross margin was 61.6% as compared to 59.2%. The fixed cost of sales, related to the decreased manufacturing revenues, have rates on the gross margin, but were offset by improvements in our Medical segment. On the other hand, the quality of the current 3D printers generation, boosted by our software add-ons, have led to considerable longer production lifetime, and as a result, we updated our accounting depreciation growth and extended the lifetime for most of our machines, as from the fourth quarter, which led to an improvement of our costs of sales or – by EUR319,000 in this quarter. In total, research and development, sales and marketing and G&A spending rose by 33% over the prior year period. Excluding ACTech, these operating expenses increased 19%. R&D rose 33%, with certain of our development costs related to hardware, and integrated software were activated in the fourth quarter 2016, we continued and enforced our efforts in the variable, software, but also medical R&D compared to last year's period. Excluding ACTech, G&A rose 41%, over the prior year period. Besides, the acquisition cost of ACTech of EUR343,000, approximately half of the variance is related to various expenses that are either nonrecurring or exceptionally high in this quarter. The group's operating profit amounted to EUR1,466,000. This operating result was affected negatively by EUR963,000 intangible depreciation with respect to the ACTech acquisition. We expect that this noncash cost will decrease below EUR300,000 as from the second quarter of 2018 on. Excluding ACTech, we posted an operating profit of EUR990,000 compared to a profit of EUR1.9 million for the fourth quarter 2016, reflecting an improved gross profit, offset by the higher R&D and exceptionally higher G&A expenses in the quarter. Net financial result was negative EUR356,000 compared to a positive EUR253,000 for last year's period. Mostly reflecting variances in the currency exchange rate on the portion of the company's IPO proceeds held in U.S. dollar and ACTech's net financial cost of EUR269,000. Income tax was positive for EUR291,000, including deferred tax results. In the last year's period, we posted an income tax cost of EUR898,000. As a result of the above, net profit for the fourth quarter of 2017 was EUR1,528,000 or EUR0.03 per share, compared to EUR620,000 or EUR0.01 per share for last year's period. Now please turn to Slide 13, for a recap of balance sheet and cash flow highlights. Our balance sheet remained solid with cash of EUR43.2 million compared to EUR55.9 million as of December 31, 2016. Total debt increased to EUR94.6 million, or 40% of total liabilities from EUR33.8 million end 2016, or be it that the current debt portion only rose EUR7 million to EUR12.8 million. The increase in the loans in 2017 includes the financing of our new premises in Belgium and Poland for EUR16.5 million. The financing of ACTech's acquisition of EUR28 million and the assumption of ACTech's existing debt of EUR12.1 million. With the provisional on accounting of the ACTech purchase price, we added EUR20 million in plant and equipment, intangible assets of EUR12.7 million, which is net of EUR6 million deferred tax liabilities and EUR9.7 million of goodwill. Capital expenditures amounted to EUR7.2 million, of which EUR2.5 million are related to expenditures made by ACTech and that compared to EUR6.9 million in last year's period. Again, most of the capital expenditures have been financed externally. Cash flow from operating activities for the quarter amounted to EUR7.4 million compared to EUR4.2 million for the same period in 2016. Total deferred revenue amounted to EUR23.8 million as compared to EUR21.4 million as of December 31, 2016. Of the EUR23.8 million, EUR18.7 million was related to annual software sales and maintenance contracts, versus EUR16.8 million as of end 2016. Finally, this balance sheet has not yet been affected by the credit facility agreement with the European investment bank that was signed in December last year. That contract provided a credit facility up to EUR35 million to support our ongoing research and development programs. We anticipate to draw our first EUR10 million tranche during the third quarter of this year and draw the second 2019. The six to eight year loans, at fixed interest rates, also include a two years grace period. As a result, this agreement with EIP provides us the possibility to further strengthen our cash position without increasing the short-term debt position. And with that overview, I turn the call back to Peter.

Thank you, Johan. Please turn to Slide 14, where you will see a summary of our achievements for the past year and more importantly our priorities for 2018. As always, there are too many efforts underway to go into great detail and Freid, actually, already summarized some of our most recent accomplishments in his remarks. Admittedly, Slide 14 is a busy slide, which in and of itself is a good thing for a slide that is supposed to describe what we have done in the past year and what we intend to do during the current year. What really matters, however, is that the many initiatives and achievements that are listed on the slides are all very much interrelated, in the sense that they all serve the same purpose. We are continuously positioning Materialise at the heart of the additive manufacturing ecosystem, as a backbone that houses the central nervous system of innovation of the industry, and that links and empowers all important players on the market. All innovations that we introduced in 2017, automatic generation of support structures for metals supported by AI, scripting automating functionality of our Mimics Innovation Suite, or the very early adoption of the HP MJF technology, to name only a few. All partnerships that we entered into or expanded, including agreements with Siemens, PTC, Formlabs, SYNNEX and J&J, and all meaningful applications of 3D printing that we cocreated with leaders in their markets, such as, HOYA or Tailored Fits, they all serve the same backbone purpose. We view our solid financial performance of the last few years, to which Freid alluded to earlier during his remarks, as a key indicator that our strategic fit is right and well executed. More and more players not only tap into our backbone, resulting in increased revenues, but also appreciate the added value of our technology platform resulting in higher EBITDA. In 2018, we will continue the execution of our backbone strategy, so you can reasonably expect more innovations, more partnerships and a continued involvement in vertical applications. But at this stage of our company's evolution, you would also like to emphasize another important layer to the execution of our strategy. The long-term success of our backbone approach should be measured, not only by the quantity of our innovations and collaborations, but also by our ability to bring these to their full potential. In the current calendar year, we, therefore, intend to spend significant time and efforts on the many initiatives and collaborations that we have developed over the last several years and to bring these fully to fruition. Again, that background, I would now like to turn to our financial guidance for 2018 that is summarized on Slide 15. For the fiscal year 2018, we expect to report consolidated revenue between EUR180 million and EUR185 million, and adjusted EBITDA between EUR22 million and EUR25 million. We expect our financial results to be particularly strong in the third, and even stronger in the fourth quarter of this year. And we expect the amount of deferred revenue that Materialise generates from annual licenses and maintenance in 2018 to increase, once again, by an amount between EUR2 million and EUR4 million. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. [Operator Instructions] The first question is from Troy Jensen of Piper. Your line is open.

Hey, gentlemen, congrats on the nice fourth quarter results.

Thank you.

Thank you, Troy.

How about, just quick, on the manufacturing business, down organically here on a year-over-year basis. Do you think that had anything to do with the facility moves, taking down machines and just kind of people having different priorities now versus printing parts?

Well, it's a reality that the two coinciding facilities moves in Poland and at the headquarter has really been impacting our operations and unfortunately, this has been coinciding with, well, in the second year, half of the year, decrease in our pipelines. Especially in the automotive sector, we have seen negative tendency in the prototyping markets, and in the meantime, we think we see also indications in statements that, for instance, Protolabs has released that is not just materialized, but that it's the entire market that is affected by less new-car leases, especially from the German car manufacturers.

Fried, is these moves completely finished now?

Well, the move is completely finished, it's no longer impacting our operations, but unfortunately, we see that the markets for prototyping still remains weak.

Okay. All right, that's fair. How about shifting gears here, can you guys just let us know, what type of assumption you have baked into the 2018 guidance for the ACT contribution?

Yes. Troy, as we – this is Peter, as we explained at the time when we announced the acquisition, the ACTech business is not a business that will grow at any growth rate, that will come close to the growth rate, the guiders that we have been able to post over the last three calendar years. So the strong fourth quarter results that they had, EUR10 million, with EUR2.1 million in EBITDA. They had EUR58 million of revenue in 2016. We expect a moderate increase, continued increase of their results, and that is also what we included in the overall guidance, which should allow for still a moderate double-digit growth of the organic business.

So if do the math, Peter, if I take out EUR9.9 million in the fourth quarter and EUR40 million from the midpoint, I'm only getting about 7.5% organic guidance. Can you – it just seems overly conservative, you guys just grew 18% last year, you've got all these partnerships, new initiatives, how much of the guidance is conservative versus, I mean, just thoughts on that would be helpful?

Yes. We have – Fried already alluded to that, we have two segments that are really performing very well, our Software segment and our Medical segment. We have our manufacturing segment that has been suffering very recently in the last two quarters from the factors that Fried alluded to and it also – is also, actually, in a promising investment mode, not very heavily involved in a number of vertical applications, that require continued investment and strong attention from our teams and that also depends on some of the sales efforts from some partners in respect of revenue. So I mean, the current states of our manufacturing business, which we review as temporary, that we are in the middle of it, definitely has weighed on the overall guidance on revenues that we have provided.

Okay, understood. Two more questions from me. Do you guys had any thoughts on what the split is for ACT between end-parts and prototyping?

Well, I would position ACTech for really 80% in prototyping projects, even more research projects in many cases, while, approximately, 20% are very small production series or spare parts. So that's a rough estimate.

Yes. That's fair. And then my last question, I'll see the floor, but e-Stage sounds pretty interesting, given all the growth we're seeing in metals. I'd just be curious to know, when you guys released that. And when you think that can start a more meaningful ramp?

Well, it was leased at Formnext. And this is a product where we see, already, quite some orders coming in at the moment.

All right, perfect. All right, gentlemen, good luck in 2018.

Thank you, Troy.

Thank you. [Operator Instructions] The next question is from Weston Twigg of KeyBanc Capital Markets. Your line is now open.

Hi, thanks. This is Daniel calling in for Weston. I had a few questions. First, you mentioned Q3, Q4, this year will be seasonally stronger. Should we expect margins to improve as well in the latter part of the year because of the scale?

I think, that is a fair assumption. Are we – as you've seen in 2017, we do expect a significant part of the stronger growth in 2018 to again come from software and also from our Medical Software business, which are parts of our business that clearly generates broader margins.

Okay, great. Next question on the software growth, good results in the quarter. Could you explain the difference in the growth rates between the recurrent and perpetual licenses? And just why there's such a big GAAP in those growth rates for the quarter?

Well, the underlying origin is in my opinion the fact that at the end of the year, many of our OEM partners still had relatively good Q4 quarter and that's one of the key reasons. Also we have seen a good increase in the use of our controller systems that also were especially powerful in the last quarter of the year. So we believe that the parties that are collaborating with us had a good fourth quarter.

This was a quarter in which we could recognize revenues from – substantially from the agreement that was signed with Siemens in the beginning of the year, and that also has affected the numbers positively, so we're seeing the first fruits of that collaboration as well.

Yes. And sometimes it's better to assess some of these detailed numbers that we provide more on annual basis and on a quarterly basis. If you remember we had rather soft OEM sales were software in Q3. We have rather strong OEM sales in Q4. I think the smartest thing to do is to aggregate those together, and basically, conclude that OEM sales and many events are perpetuals, because they are sold together with the machine. So it's sometimes better to look at the numbers in the aggregate over a few quarters then to just try and understand why quarter three is so different from quarter four.

For us a lot of perpetuals in the quarter. So we could recognize revenue also faster than we could do, but that was than lower in the previous quarters as Peter explained.

Okay, that’s very helpful. And then the last one for me. The SG&A going forward, now that you have ACTech. You did mention you had some recurring expenses or nonrecurring expenses in Q4. Just wondering what a good going forward rate. For that would be in 2018, what you are anticipating, is it going to be relatively flat or can maybe coming down?

We already reported exceptional G&A expenses, so with respect to the acquisition of ACTech in the third quarter for approximately EUR300,000. Now we add again something more than EUR300,000, but this is the total cost that is reflected from the ACTech acquisition. We have some exceptionally high SG&A in the fourth quarter and this is rather a coincidence of different facts rather than something that we have to focus in the future at the same level.

More than half of the increase, Daniel, is really what we called in the call either nonrecurring expenses or expenses that were exceptionally high. So there is not many – that high percentage of SG&A should not be maintained throughout 2018. Q4 was really exceptional.

Okay, that’s it for me. Thanks a lot.

Thank you. There are no further questions in the queue. I turn the call back over to Peter Leys for closing remarks.

Okay, thank you. Thank you, all, for joining the call. Thank you for your questions. I hope we've given you a good overview of the way in which we plan to continue to solidify our position as the backbone of the 3D printing industry. Fried's will be attending AMAC, at the beginning of April, where he will be receiving another award. I hope he has a large attic to store all these awards that he has been receiving recently. I will personally attend Rapid later that same month. We hope to see you at these events or at any other financial or industry conference that we will participate in later this year. Please feel free to reach out to us and to schedule a meeting if you consider that appropriate. Thank you, again, and enjoy the rest of your day. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day, everyone.