Materialise N.V. (MTLS) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Materialise Financial Results. [Operator Instructions]. As a reminder, today's conference will be recorded. I would now like to turn the call over to Harriet Fried of LHA. Ma'am, you may begin.

Thank you for joining us today for Materialise's quarterly 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 first quarter of 2019. To access the slides, if you've not done so already, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release issued earlier today can also be found on that page. Before we get started, 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 activity 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 company's annual report on Form 20-F filed with the SEC. 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. With that, I'd like to turn the call over to Peter Leys. Go ahead, please. Peter?

Thank you, Harriet. And good morning or good afternoon to all of you. You will find an agenda for our call on Slide 3. Now last time we talked was in March. We are April now. So for those of you who have a good memory, you will know that the structure of this call will be very similar to the structure of our call of last month. So I will begin with a brief recap of the financial highlights of our quarter. Subsequently, Fried will, as always, dive into some of the facts behind our figures. This time, he will discuss some of the many growth initiatives that we are launching within our Materialise Medical segment. And after that, Johan will do what a CFO is best at. He will dive into more detail into the numbers of the past quarter. And finally, I will come back with a few concluding remarks. So within 20 minutes roughly from now, we intend to close the call, but of course not after we have given all of you the opportunity to ask any questions, which we will be very happy to respond. With that being said, if you could kindly please turn to Slide 4 where you will see the financial highlights of our first quarter results. We believe that all 3 of our segments turned in fairly good performances. Our total revenue rose by 7%, and our consolidated adjusted EBITDA was 12%. For the period, we were again flirting with the breakeven point, as you may remember in Q4 of last year, we landed just north of the breakeven point. We landed just south of that same breakeven point in the first quarter of 2019. Now even though seasonally, the first quarters of our year are typically not the strongest quarters of the year, we are proud to be able to announce that Materialise Software and Materialise Medical, both combined solid double-digit revenue growth numbers with strong double-digit EBITDA margins. Also importantly, Materialise Manufacturing, where revenue also picked up with a positive growth curve, again, realized an 18% EBITDA growth. These, we believe, are the most important financial highlights of our quarter. And with that, I would like to turn the call to Fried.

Good morning and good afternoon to everyone, depending on which continent you are. Thank you for joining us today. Several achievements during Q1 2019 underscore the long-term strategy of Materialise to create significant software-based value. We do so especially in patient-specific medical applications. Our Mimics Innovation Suite is, as you know, the leading platform, not only for researchers in the academic world but also in hospitals and in medical device companies. All the stakeholders develop new treatments, instruments and devices that require so-called engineering on anatomy, a terminology trademarked by Materialise. By providing a virtual analysis, planning and design environment based on patient-specific medical images, our Mimics Innovation Suite allows the improvement of both standard and customized instruments, devices and treatments. The leading position of the Mimics Innovation Suite in research is illustrated by the fact that it is currently referenced as the tool used in more than 13,500 scientific publications. This number can be objectively obtained from Google scholar search, and it is 3x higher than the closest competing software. The relevance is also indicated by 23% sales growth of our medical software in Q1. Importantly, in Q1, we received renewed 510(k) clearance for Mimics Medical that expands its scope significantly to new imaging modalities and new applications such as hospital-based 3D printing for diagnostic purposes. This expansion will allow hospitals and medical device companies to expand their treatments and product offerings based on Materialise technology. Because Mimics received regulatory clearance not only in the U.S. but also in the EU, Japan, Korea and several other jurisdictions in the past, the Mimics Innovation Suite remains very well placed to be the preferred choice for global companies. As you know, in CMF and orthopedic applications worldwide, the Mimics Innovation Suite is used for clinical cases on a daily basis. During the past quarter, we achieved several milestones that will lead to a serious increase in Mimics' value for patients in new areas such as the cardiovascular and the pulmonology field. Based on Mimics, we released a research version of a dedicated planning tool for mitral valve placement in research environments. 510(k) clearance for this tool is still pending. Once finalized, this tool is very well placed to help scale up mitral valve placement, which is considered as one of the most promising recent evolutions in cardiac surgery. We also took, in the past quarter, an initiative that will, over time, strengthen the position of the Mimics Innovation Suite in the pulmonology field. We entered into an agreement to accelerate the evolution of Fluidda, a world-leading lung-imaging company that is both active from the U.S. and from Belgium. Fluidda uses artificial intelligence and advanced machine learning in combination with Mimics to analyze low dose, high-resolution CT scan images with advanced computer-based flow simulations, so they allow for better care of lung patients. Fluidda's proprietary technology, both functional respiratory imaging has been used in more than 80 clinical studies over the past 10 years. It supports the respiratory health community and clinical research in enhancing drug development and patient care. Fluidda and Materialise have already collaborated for years, but we believe that a more intense collaboration in the coming years will lift the functional respiratory imaging technology from research to daily practice for specific applications and that this will, in turn, open the potential of patient-specific treatments in lungs with new device designs, some of which could be patient-specific. To summarize, with the Mimics Innovation Suite, Materialise contributes to a wide variety of medical treatment and device innovations. Our growth position in research allows later participation in the scaling of selected developments. This is a proven concept in CMF and orthopedic markets. Now we are entering to a new initiative, the cardiovascular and the pulmonology clinical markets. And at this point, Johan will come in to give more details on our first quarter financial results.

Thank you, Fried. I'll begin with a brief review of our consolidated revenue on Slide 6. As we get started, I'd like to remind you as I do each quarter 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 2018. As Peter mentioned in his opening remarks, in this year's first quarter, we generated a 7% increase in revenue, driven by our Software and Medical segments. We also realized the strong €2.3 million increase in deferred revenue from annual software sales and maintenance contracts. For the quarter, Materialise Software accounted for 20% of our total revenue; Materialise Medical for 29%; and Materialise Manufacturing for 51%. Cross-segment revenue from software products accounted for 30% of our total revenue and grew 1 percentage point in our sales mix. Moving to Slide 7, you will see our consolidated adjusted EBITDA numbers for the first quarter. Consolidated adjusted EBITDA increased 12%, rising from €5.2 million to €5.8 million. I'll repeat, our EBITDA margin rose 50 basis points from 11.9% to 12.4%. Our EBITDA was affected positively €600,000 by the new IFRS accounting standard that requires us to capitalize certain lease expenses as of 2019. This new accounting standard has no impacts on our operating profit, as depreciation expenses increased by the same amount. For the ramp-up in our R&D, sales and marketing capacity and regulatory initiatives counterbalance the growth of our top line. Slide 8 summarizes the results of our Materialise Software segment. The revenue was up 12% or €1,024,000. Recurring revenue was up 28%, while nonrecurring revenue was down slightly. The segment's EBITDA amounted to €2,961,000 compared to €2.3 million in last year's period. The EBITDA margin increased to almost 32% compared to 28% in last year's period, which is a continuation of the good performance we produced in Q4 2018 when the EBITDA margin was 30%. Moving now to Slide 9. You can see that total revenue in our Materialise Medical segment grew 14% for the quarter to €13.6 million. Revenue from Medical Devices Solutions -- Medical Device Solutions were 16%, accounting for 66% of the total segment's revenue. Revenue from our Medical Software, which accounted for 34% of segment revenue, grew 9%. In addition, our Medical segment realized additional annual and maintenance software sales during the quarter for an amount of €900,000, which we deferred to future quarters. Excluding this deferral effect, Medical Software sales were up 23%. EBITDA for the Medical segment was €1.8 million compared to €2.1 million. The EBITDA margin was 13% compared to 17%, primarily as a result of the addition of conversion engineers to accommodate anticipated growth in our Medical Device business as well as investments in our sales capacity, in regulatory initiatives and R&D investments that are aimed at fully realizing the potential of our existing partnerships and products but also, as Fried mentioned earlier, at gradually expanding our technology into new areas. Now let's turn to Slide 10 for an overview of the Q1 performance of our Materialise Manufacturing segment. There, revenue was up by 2.3%. Growth was driven by a 6% increase in the revenue of our traditional manufacturing business, confirming the positive growth of Q4 2018. More importantly, EBITDA rose 18%, resulting in an EBITDA margin of more than 15%. This EBITDA growth reflected improved operational excellence. In the first quarter of 2019, we added 1 printer as compared to the previous quarter, which brings the total amount of printers that we have in production in our Manufacturing and Medical segments to 188. Slide 11 provides the highlights of our income statement for the first quarter. Both revenue and gross profit rose 7% compared to last year's period. In total, research and development, sales and marketing and G&A spending rose by 8.5% over the prior year period. R&D rose slightly by roughly 1%, sales and marketing rose 14%, and G&A rose 6%. Net other operating income increased by €700,000 to €1.2 million compared to €549,000, reflecting a positive variance for miscellaneous elements such as trade receivables, grants and R&D credits and operational exchange gains. The group's operating profit amounted to €1,476,000, 31% above last year's level. Net financial result was negative €592,000 compared to a negative €710,000 last year, primarily reflecting variances in U.S. dollar currency exchange rate, mainly on the portion of the company's deposits. Income tax amounted to €1.1 million compared to €500,000 in the first quarter of 2018. The increase of €565,000 primarily reflects the change in deferred taxes from a positive deferred tax income of €320,000 in the first quarter 2018 to a negative tax expense of €290,000 in Q1 2019. This noncash income tax variance impacts our net result negatively, turning it into a net loss for the first quarter of 2019 of €304,000 or minus €0.01 per diluted share compared to a net loss of €183,000 order loss of €0.00 last year. Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with cash of €111 million compared to €115.5 million as of December 31, 2018. This reflects the impact of €2.5 million convertible loan that we extended to Fluidda in the context of the partnership that Fried referred to earlier on the call. Total debt rose €3 million from year-end 2018 to €109 million. Capital expenditures amounted to €3.7 million compared to €4.7 million in last year's period. Most of these expenditures have been financed. Cash flow from operating activities for the quarter amounted to €4.1 million, a decrease of €2.1 million, reflecting variances in working capital and more particularly as a result of increased variance of work and contracts in progress. Total deferred revenue amounted to €31.2 million as compared to €27.8 million as of end last year. Of the €31.2 million, €24.9 million were related to annual software sales and maintenance contracts versus €22.6 million as of end last year. With that overview, I'll turn the call back to Peter.

Thank you, Johan. Please turn to Slide 13. I just wanted to conclude our prepared remarks here this morning by touching briefly on our financial guidance. Based on the company's performance in the first quarter of this year and our outlook for the rest of the year, we believe that we are on track to meet the full year guidance that we provided last month in March. In keeping with the usual seasonality of our business, we expect our financial performance to be weighted towards the second half of 2019. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

[Operator Instructions]. And our first question comes from Troy Jensen with Piper Jaffray.

Congrats on the nice results. A few questions for me as usual here, but I'll start with manufacturing. I guess I was pretty impressed that the operating margin -- or excuse me, the EBITDA margins went to 15% from 8% last quarter, given relatively flat sales. So can you just talk about kind of what drove that? Was that mix more and product production? Or was there other kind of initiatives to improve the margin?

Well, we do have continuous initiatives to try to improve the margin. We attach, in our manufacturing operations, currently more value to improving our EBITDA margin than to driving the growth. As we have said at multiple occasions in relation to our strategy, we are not aiming to be the manufacturer of the world, but we want to have very perform -- manufacturing activity that can let it be translated in our software tools so that it can help many people around the world.

Well, Fried, just to challenge you a little bit. The -- I mean the 15% operating margins is the highest to EBITDA margins, it's the highest you've had as a public company in the Manufacturing segment. So -- and I guess I'd also like to know, too. I think you guys stopped reporting N parts versus prototyping. Could you give us any kind of color on maybe how the end part segment is growing for the business?

Yes. Fried already alluded to it, we do have a clear strategy within our Manufacturing business to go for the high EBITDA-generating manufacturing work more than 2 bps on lower EBITDA-generating standard prototyping work. So our manufacturing business line continues to grow stronger than our prototyping work, and Johan actually has the figures for you.

Yes. The prototyping is around flat compared to Q1 2018 and the growth, which is on -- our end part manufacturing is more than double-digits growing. So one -- both combining, giving the nice increase of Q1.

So did you -- why did you guys stop giving those numbers out? I used to always like seeing the end part growth for the business.

We decided to stop it, I mean every decision has pros and cons, Troy. At the time when we no longer made a distinction between our ACTech business and the organic growth, we decided to just offer another mix. But it's a metric that we definitely keep on hand on our personal dashboard here within the company. And we may actually revisit because indeed it does reflect the continued growth of our end-part manufacturing business line within manufacturing. It's fully in line with our strategy, and in the case, it has actually explained the improving margins.

Yes, exactly. It's a good driver for this industry for you guys, so it's good to see. But let me shift gears how to -- on the medical side. I do think Johan talked about some of this, but the operating margins kind of went in the opposite direction. I think they're about 24% in December, they went down at 13%. I said operating again, I meant EBITDA margins. I guess we do have a sequential decline in sales, but can you just talk about -- I think it sounds like it was really just all investments and further opportunities in the health care versus anything else in the margins?

Well, I think this is also consistent with what we announced last year. We got regularly questions, whether the margins would remain that high, and we tried to consistently say, no, they will go down again because we plan important [indiscernible] at levels in order to further grow our medical activities. And I want to say there that multiple levels include R&D, but it goes much further because, for instance, at the regulatory front, which is costing quite some money, we are like nearly all medical device companies that are operational in Europe under heavy investment program to bring all of our clearances in line with a new medical device directive.

Okay. Fair. Last question and then I'll see the floor here. And maybe for Fried, just let me know your kind of thoughts on the macro in Europe. Stable? Better? Worse? Is it just kind of mainly limited to automotive? Or any other industries you need to worry about?

Well, we definitely are facing issues in the automotive industry. There -- a lot of programs are, as far as we know, on hold, both for the economic situation and the interactions with China and so on. But also a chain because of new regulatory situation, especially related to the fuel engines that has forced a lot of the money towards refiling and adjustment of the regulatory clearances, again, in the automotive companies so that they have much less people available, for instance, to work on new engine development. And this is really impacting our sales at this moment. But in the auto sectors, I must say that we faced not a very exciting climate but a stable climate as you mentioned it before.

[Operator Instructions]. Our next question comes from West Twigg with KeyBanc Capital Markets.

This is Jason Celino on for Wes today. One actual follow-up to the last question on macro. So this has been a topic that we've been discussing for the last couple of quarters, but relative to maybe 3 to 6 months ago, how have customer conversations changed or stayed the same related to the macro environment?

Yes, again, I mean I think the -- while the U.S. economy is doing very well at this moment, we are facing a much slower situation in Europe. But for Materialise in particular, I can only repeat what I said in the -- my previous answer. We -- especially the impact in everything that is automotive related.

Great. I appreciate the color. Related to the medical business growth on the revenue side, I know that kind of decelerated 13.6% growth in the quarter. Can you maybe discuss what specifically drove that? I mean it's lesser than 20% growth we've been seeing over the last couple of quarters.

There's a bit of a mix there. As Johan already explained, I mean we definitely had still good and solid growth in our devices business. Revenue growth on the software side of the business, software this quarter, with a 9% growth. So we had significant revenues that we [indiscernible] for almost €1 million on the software side within medical segments. And actually, if we look at the growth numbers of the software sales, revenue plus deferred revenue, then as Fried already indicated, we had a 23% growth. I think overall, our Medical segment had a very strong quarter, albeit that if you express it in recognized revenues, the consequence of the deferral or some of the software revenues results in a somewhat softer growth, but still a growth that we consider very acceptable and solid at this stage of the business.

And I'm showing no further questions at this time. I would now like to turn the call back to Peter Leys for any further remarks.

Thank you, operator, and thank you all for joining us on the call today. For your information, Fried will be in Detroit at Rapid next month, where we will be unveiling various enhancements to our products and partnership. So we look forward to continuing the dialogue with you there. I myself will be in Boston for a financial conference in the month of June of this year. So we look forward to seeing many of you at these events. Thank you, again, for dialing in, and talk or see to you -- or see you later. Goodbye.

Thank you.

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.