Materialise N.V. (MTLS) Q4 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. Welcome to the Fourth Quarter 2024 Materialise Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Harriet Fried of Alliance Advisors. Harriet, please go ahead.

Thank you for joining us today for Materialise's quarterly earnings call. With us on the call are Brigitte de Vet-Veithen, Chief Executive Officer; and Koen Berges, 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 2024, as well as the full year. 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 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 activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent date. 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 most recent 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. And with that, I'd like to turn the call over to Brigitte de Vet-Veithen. Brigitte, please go ahead.

Good morning and good afternoon, everybody. Thank you for joining us today. I'm very pleased to present our fourth quarter and full year 2024 results to you. You can find the agenda for our call on Slide 3. Now as you know, I've now been in my role of CEO for Materialise for 1 year. I'm proud of the achievements we have realized in this year and I would like to highlight some major milestones realized in 2024 in this call. I will also reflect on the achievements and our results of the fourth quarter. After that, I will pass the floor to Koen, who will go in more detail through our financial results. Finally, I will come back and explain what we expect 2025 to bring. When we've completed our prepared remarks, we'll be happy to respond to questions. 2024 has been a difficult year for the industry, driven by high interest rates, geopolitical tensions and a difficult economic climate. I am very proud that in this difficult climate, we realized 4% growth and managed to keep our adjusted EBIT stable, while continuing to invest in our growth businesses and while making progress on our strategic objectives. On Slide 4, I will highlight some of those strategic objectives and major achievements in the various segments. Starting with Medical. We continue to make progress on our journey towards mass personalization, where our aim is to bring personalization to many more patients. We broadened the patient population that can benefit from our solutions by reducing our lead times, thanks to the opening of our U.S. plant and further automating our processes in order to conquer the trauma market, so patients that cannot be scheduled and need to be treated within the week. We also brought personalization to new markets and in particular, to the cardiovascular market, where we complemented our existing planning solutions with simulation offerings from FEops, the company that we acquired in the third quarter of 2024. While the acquisition has had a negative impact on our EBIT on the short term and impacted our fourth quarter results, we are pleased with the customer feedback and the progress of the integration. As a highlight for the fourth quarter, I also want to mention the launch of our Mimics platform, to accelerate the adoption of personalized solutions and help companies and hospitals bring personalization to more patients by making it easier and faster to segment images, plan cases and design a personalized instrument or implants. The Mimics platform is an integrated cloud solution, combining our strong desktop toolbox, Mimics and 3-matic, AI-based automation and cloud-based 3D viewing capabilities in an end-to-end cloud-based environment. The Mimics platform addresses the challenges that customers face when scaling their personalized offerings, typically manual segmentation and design work, cumbersome communication between engineers and clinicians, stringent regulatory requirements and growing patient privacy legislation. At the end of 2023, we launched the Mimics case management tool to provide an end-to-end workflow and generate efficiencies in the process of commercializing patient-specific devices. With the launch of the new Mimics platform called Mimics Flow, we've gone a step further, enabling our customers to collaborate effortlessly and benefit from AI-based automation in a frictionless way while staying compliant with the latest regulations. In our Manufacturing segment, we continued the shift from prototyping to certified manufacturing of end-use parts and in particular, in our focus segments, in which we saw growth throughout the year and in which we continue to strengthen our position. Let me give you the example of the aerospace segment which has been a focus segment throughout the year. In aerospace, we offer EN9001 certified manufacturing for polymer and metal parts. We have production organization approval and have printed more than 500,000 flying parts so far. We saw 28% revenue growth in this segment throughout the year. As a next step in this market, we recently opened our aerospace competence center in Delft. The TU Delft, the Technical University, is a leading university in aerospace and there's a vibrant ecosystem that has developed around it. We are joining the selective aerospace networking space, allowing us to collaborate closely with aerospace companies in this hub and bring our knowledge to foster the smart use of additive manufacturing in the industry to our manufacturing services and our software. Our long experience in this market gives us access to performance data from hundreds of aerospace builds, including parameters like part density, tensile strength and elastic modules. With a clear view of process repeatability and reliability, we are well positioned in this space. Let me give you another example of one of our focus segments. At ACTech, we expanded our market segments to the production of what we call Huge and Heavy parts. As you know, we expanded our facilities in Germany to accommodate production of this type of parts. We have seen growth above 30% in this segment throughout the year. Now while making progress in our focus segments, we have also seen headwinds in the traditional business segments such as prototyping and casting of combustion engines for the automotive sector, accelerated by an increasingly unfavorable macroeconomic industrial environment in Europe and the general softness of the automotive sector in the fourth quarter. These headwinds, in addition to the planned reduced operational capacity at ACTech due to the opening of the new plant, led to a difficult Q4 with disappointing results. We expect these headwinds to continue in 2025. To adjust to this reality, we have taken action in the fourth quarter and implemented a restructuring in our 3D printing manufacturing activities to reduce our cost base in 2025. Now, turning to Software. In Software, we had 2 main priorities throughout the year. First, strengthening our position in factory management based on CO-AM through partnerships; and second, organically adding capabilities and expanding our position in the preprint Magics market by adding functionality for users that scale in end-use production. Throughout the year, we have made progress on both fronts. On the CO-AM side, we announced numerous partnerships throughout the year and we added functionality, for example, to monitor the builds and capture data in our QPC module. We continue to onboard new partners on this platform which is an essential foundation to accelerating our future growth. In the preprint segment, we accelerated the shift towards a subscription-based model for Magics customers. We added functionalities such as e-Stage for Metal+, a software that automates support structure generation and helps customers make metal additive manufacturing more economically viable and we expanded our build processor functionality. In the fourth quarter, specifically, we announced the launch of our Magics SDKs, expanding our users' ability to customize their 3D printing operations. This allows our users to create custom workflows in the Magics software, protect the intellectual property behind component designs and print high-performance geometries. With access to algorithms developed over 34 years, customers will now be able to scale additive manufacturing operations economically. Overall, I am proud of the progress that we made throughout 2024, progress achieved despite the difficult climate throughout the year and in particular, in the fourth quarter, impacting our financial results. I will now pass the floor to Koen to summarize the financial results of the fourth quarter and the full year.

Thank you, Brigitte. Good morning or good afternoon to all of you on this call. I'll begin with a brief review of our consolidated revenue on Slide 5. As a reminder, please note that unless stated otherwise, all comparisons in this call are against our results for the fourth quarter and the full year 2023. In the final quarter of the year 2024, our revenue increased slightly to €65.7 million. Materialise Medical continued its double-digit growth, increasing its revenue by more than 14% and once again posted a quarterly revenue record. Manufacturing on the other hand, remained confronted by challenging market conditions that even intensified in the last months of the year, while software continued its transition towards a recurring revenue business model which will positively impact its revenue potential in the future. As you can see in the graph on the right side of the page, Materialise Medical accounted for close to half of our consolidated revenue during the fourth quarter of 2024. Materialise Manufacturing for 35% and Materialise Software for 17%, reflecting the impact of the different growth rates of the 3 business segments. For the full year 2024, we generated over €267 million of revenue which is 4% above 2023. Our Medical segment represented 44%, Manufacturing 40% and Software 16% of the annual revenue total. The amount of deferred revenue in our balance sheet related to software licenses and maintenance fees increased in Q4 2024 by €5.9 million, ending at €46.9 million. The total deferred revenue reported on our balance sheet was just above €59 million at the end of the year. Now on Slide 6, you will see our consolidated adjusted EBITDA and EBIT numbers for the fourth quarter as well as for the full year. Consolidated adjusted EBITDA for the fourth quarter amounted to €4.3 million, decreasing from €8.5 million for the 2023 period. The corresponding adjusted EBITDA margin in the last quarter of '24 was 6.6%. This decline in Q4 is mainly attributable to a combination of factors, including the start-up of production in our new ACTech plant, the difficult industrial environment, in particular in Europe, impacting our manufacturing results but also restructuring costs, taking manufacturing and G&A and continued investments in Medical, including the integration of FEops. Full year adjusted EBITDA remained stable at €31.5 million with an adjusted EBITDA margin for the full year to reach 11.8%. Consolidated adjusted EBIT for the fourth quarter decreased to minus €1.2 million compared to €3.2 million for the corresponding period of 2023, reflecting the impact of lower EBITDA and higher depreciation charges. Our adjusted EBIT margin for the quarter was negative by minus 1.8%. Full year adjusted EBIT ended at €9.7 million compared to €9.9 million in '23. Our adjusted EBIT margin for the full year reached 3.7% compared to 3.9% last year. Moving now to Slide 7. You will notice that the quarter's total revenue in our Materialise Medical segment increased once more by 14% to €31.8 million, once again, a quarterly revenue record. The strong growth was generated by both higher revenue from medical devices and services sales and by higher revenue from medical software which grew, respectively, by 15% and 14%. Within our Medical Devices and Services business, we saw continued growth also here both in direct and partner sales. Increased costs mainly coming from higher R&D spend as we made progress on various study and FDA approval tracks and the integration of FEops impacted the operational profitability in the fourth quarter. Nevertheless, we realized an increased adjusted EBITDA of €9.5 million, representing an adjusted EBITDA margin of 30% for the quarter. As a reminder, the 2024 numbers also include the impact of sales as of July 2024 which in its current development phase is still contributing negatively to our EBIT. On a full year basis, our Medical segment revenue increased by almost 15% to €116 million, translating into an adjusted EBITDA of €35.6 million and adjusted EBITDA margin of 30.6%. The share of medical software revenue remained stable throughout the year at around 30%. Slide 8 summarizes the results of our Materialise Software segment. In the fourth quarter, Software revenue remained close to flat despite the further transition to a cloud and subscription-based business model. Recurring revenue from software maintenance and license sales, including CO-AM, increased once more by 19%. On the other hand, nonrecurring revenue decreased by 35%. The adjusted EBITDA in our Software segment remained roughly stable in Q4 at €1.1 million, representing an adjusted EBITDA margin of 10.1%. Also on a full year basis, our Software segment's revenue remained stable, around €44 million which translated in an adjusted EBITDA of €5.6 million and adjusted EBITDA margin of 12.7%, while this includes also the impact of increased investments in our growth products. Now let's turn to Slide 9 for an overview of the performance of our Materialise Manufacturing segment. In Q4, we realized further growth in our strategic focus areas, aerospace and medtech but this was more than offset by continued weak prototyping demand by ACTech's new plant start-up and by strongly unfavorable macroeconomic climate in the industrial sector, particularly in Europe. Unlike our other reporting segments, the vast majority of the revenues in our Manufacturing segment are generated in Europe. As a result of these, revenue decreased by 13% compared to last year's fourth quarter. And as a consequence of this lower top line, also adjusted EBITDA ended at minus €3 million, while the fourth quarter of 2024 also included restructuring costs incurred to reduce our cost basis going forward. On a full year basis, Manufacturing revenue decreased by 3% to €106.5 million, realizing €1.7 million of adjusted EBITDA, representing an EBITDA margin of 1.6%. Slide 10 provides you the highlights of our consolidated income statement for the fourth quarter and the full year. Our gross profit for the fourth quarter ended at €36.4 million, representing a gross profit margin of 55.4%. Over the full year, the gross profit margin was 56.5%, roughly stable compared to prior year. Our operating expenses in the quarter increased by €3.6 million, or 10% in aggregate, with the largest increase coming from higher R&D spend which grew by 20% compared to 2023. The higher R&D spend in the fourth quarter was already mentioned, mainly driven by Medical. Furthermore, Q4 costs included unfavorable impact, as also mentioned from the active plant start-up, FEops integration and from restructuring costs to reduce our cost base going forward. For the full year, operating expenses were in aggregate 9.5% higher than in 2023, with the main impact again coming from increased R&D spend. The net operating income in the quarter was positive at €1.4 million, compared to a negative €3.3 million last year, where 2023 included nonrecurring charges from the impairment of goodwill, tangible and intangible assets for €4.2 million. For the full year, net operating income was positive at €4.2 million, compared to a negative €6.5 million for 2023. As a result of all of these elements, the group's operating result in the quarter was negative at €1.3 million, compared to also a negative €1.1 million in last year's period. For the full year, operating result increased to €9.5 million, compared to €5.6 million in '23. In Q4, net financial income amounted to a positive €3.3 million, including a positive currency exchange result of €2.9 million, mainly reflecting the changed U.S. dollar to euro position. Interest income of €4.8 million from our cash reserves which are partly offset by interest expense on our reducing financial debt amounting to €0.3 million. Income tax in the quarter amounted to a positive €0.9 million, in line with the prior year. As a result, net profit for the fourth quarter ended positively at €2.9 million, representing €0.05 per share compared to a net loss of minus €0.5 million, or minus €0.01 per share for the 2023 period. Over the full year, we realized a net profit of €13.4 million, resulting in €0.23 per share compared to a net profit of €6.7 million, or €0.11 per share in 2023. Now, please turn to Slide 11 for a recap of balance sheet and cash flow highlights. Also in the fourth quarter, our balance sheet remained strong. Our cash reserves at the end of the quarter amounted to €102 million. The cash position was impacted, though, by an anticipated bullet loan repayment of €10 million in Q4. Over the full year, loan repayments totaled €23 million and reduced our gross debt to €41 million. The resulting net cash position at the end of the fourth quarter was €61 million, slightly below the position at the beginning of the year. Compared to the balance sheet at the end of 2023, we reduced our net working capital over '24 by €1.8 million through increased focus on the underlying components. The total deferred income position amounted to €59.3 million at year-end, of which €46.9 million was related to deferred revenue from software license and maintenance contracts, as I already mentioned earlier. As you can see from the graph on the right side of the page, cash flow from operating activities for the fourth quarter in 2024 amounted to €6.2 million, well above the last quarter of 2023. The impact from lower P&L components was compensated by favorable working capital movements. Capital expenditures for the quarter amounted to €7.8 million which is higher than average which is reflecting the active investments in the completion of the building and installation of new machinery. As a result of these larger-than-usual investments and some limited income from asset sales, our free cash flow over the quarter of 2024 turned negative by minus €1.3 million. Now for the full year, the operational cash flow increased to €31.5 million, up by 56% compared to 2023. The free cash flow remained positive over the year, while we invested more than €26 million of CapEx, including both recurring and nonrecurring investments while we completed the FEops acquisition. We have the bulk of investments in our new ACTech facility behind us now but we'll continue to invest in additional machinery, as we gradually ramp up the new facilities throughput in coming months. And with that, I'd like to hand the call back to Brigitte.

Thank you, Koen. Let's turn to Page 12 for a quick review of our financial guidance. Looking at 2025, we remain confident that our Medical and Software business will continue to grow with the growth of our Materialise Software segment still not being fully reflected in the segment's revenues as we continue to transition towards a cloud-based subscription business model. At the same time, we expect that the uncertain macroeconomic industrial environment in Europe will persist in 2025 and will continue to impact our Manufacturing segment which is particularly exposed to the European environment. As a result, we expect revenues to be in the range of €270 million to €285 million and adjusted EBIT in the range of €6 million to €10 million. We intend to continue our investments in the growth markets of the future and in particular, in the Medical segment and the factory management solutions and software, while keeping a strong focus on cost control and optimization in our Manufacturing segment and our corporate overhead. Whereas our guidance reflects the impact of the uncertain economic environment in Europe on our manufacturing business, we believe Materialise is ideally positioned in the market for personalized medical products and the market for additive software and for manufacturing services, thanks to our strong product portfolio, continued investments in innovation and our strong financial foundation. This concludes our prepared remarks. Operator, we're now ready to open the call to questions.

[Operator Instructions] And our first question will come from Alexander Craeymeersch with Kepler.

Alexander from Kepler Cheuvreux here. Yes. Actually, I have a couple of questions, 5, if that's possible. So first, could you remind us of the main margin difference between recurring and nonrecurring revenue in the software segment? Second question would be, what is there the average lifetime on the subscription? And the third question also on Software would be how much of the revenue in Software is now recurring versus nonrecurring? I saw some highlights there but I've calculated it's still about 2/3 nonrecurring. Does that sound about correct? Then maybe I'm going to list all my questions first and then let you answer. So the fourth question would be if you could give us some granularity on the one-offs. I'm talking specifically on the increased R&D spend, the ACTech start-up and the FEops integration combined with restructuring costs. If you could just give us a bit of a split how much that impacted the adjusted EBIT in the fourth quarter given that the guidance of €11 million to €14 million that you provided at the end of Q3 was -- clearly, that had an impact there? And then, the last question would be considering the difficult climate that you talked about was already present after Q3, yet you decided to send an optimistic message in October. Could you tell us what exactly has changed and that you didn't have the visibility on the fourth quarter by the end of October?

Thank you, Alexander, for the 5 questions. Trying to decide in which order I will tackle them or we will tackle them. While I have to admit that your first question is not exactly clear to me. So you wanted to understand the margin difference between the recurring and the nonrecurring revenue in Software?

Yes, in the Software segment, so you're going from a nonrecurring to a subscription model. I was just wondering if there's any large margin difference there.

No, I don't think you can expect a large margin difference on the difference.

The revenue recognition, Alexander though is different, of course, in the 2 scenarios, whereas in the old perpetual license model, we take the revenue immediately into P&L and whereas in a recurring revenue model, we gradually take it over the duration of the contracts. Maybe picking also into your question on what the split is between recurring and nonrecurring revenue within our Software segment. There we see, as in the previous quarter, a continued transition towards recurring revenue. If you look at the situation at year-end, we're roughly at about 76%, so just above 75% or 3/4 of the revenue, the total Software revenue that we consider as to be recurring.

And then maybe tackling your software question on the average lifetime of the subscription. So most of our subscription-based revenue, you should expect an annual, so 1-year lifetime. Then maybe shifting to the question on the clarification on the operational spend.

Yes. If I understood you correctly, Alexander, on how these different components that you mentioned impact the Q4 cost increase. Without having -- without providing the detailed breakdown, I would say, about half of the cost increase that I mentioned quarter versus the last quarter of last year which is between €1.5 million and €2 million, that amount which is half of the total cost increase comes from the 3 elements you listed and FEops integration, the restructuring costs that we took and the operation -- the purely operational impact from the ACTech plant startup.

And then maybe commenting on your last question on the -- whether we saw this coming or not. Well, the first thing I would want to say we had said at the -- with the third quarter results, we already indicated to be very cautious about -- around the fourth quarter results to be expected, in particular, in the Manufacturing segment as we were expecting the move to our new plant to reduce the operational capacity. The industrial climate was already very cautious at that point in time. However, what we did see is that in the fourth quarter, we saw that climate accelerate, in particular in Europe. And that is what you see now reflected in our fourth quarter results and the 2025 guidance. Does that answer your questions, Alexander?

Yes, it does [ph]. Thank you.

[Operator Instructions] And our next question comes from Troy Jensen with Cantor Fitzgerald.

So I guess my question is, first of all, deferred revenue, that was like a huge kind of growth in the quarter in the Software segment. I guess, I was more hopeful that we would hear better kind of forecast of the Software business. But can you just explain why it's such a big step function in deferred revenues this quarter, Koen?

Yes. The deferred revenue went up with just below €6 million in the fourth quarter which is something we had anticipated. It's in line also if you look at the seasonality with prior years, there's quite some large contracts at the end of the year where we typically see in the first and the last quarter of the year a buildup of deferred revenue and then a depletion in the second and the third quarter. So for us, it was in line with what we anticipated, though it was larger than last year and which is, of course, also the effect from the conversion to more recurring revenue that we are doing.

And then just a follow-up on this OpEx question. How much of this €1.5 million to €2 million that you're mentioning falls off quickly? Or can you kind of help us out with -- we had big step functions and kind of growth in OpEx sequentially in December, in March, are they going to be down now on a sequential basis because these onetime-ish items fall out? Or do they still hang around also?

If I can just comment. So Koen pointed out at the increased R&D, the ACTech start-up cost and the FEops integration. If you look at those 3, the ACTech start-up costs should taper down. The increased R&D, we do want to continue to accelerate our investments in the Medical business, in particular, as we very much believe in the growth -- future growth there. Now the FEops integration costs should also taper down as we go.

Do you think just like on an absolute basis, it's up or down sequentially? I mean, are you guys going to kind of cut costs now, Brigitte, to try to kind of get back to higher profitability levels? Or are these going to...

It's essentially what I said earlier that throughout 2025, we'll certainly -- we'll have a strong focus on cost control and optimization, in particular in the Manufacturing segment going forward.

Okay, that's fine. And then how about just last on European weakness, I mean get European auto makes sense but is it much broader than just the automotive vertical?

Can you repeat that question, Troy?

Just the European weakness, I would understand auto is really weak in Europe. Is it just -- is it broader than automotive...

So the automotive sector is particularly weak in Europe. It's slightly broader because of the uncertainty, certainly in the fourth quarter with also the impact of the Trump administration in the U.S. on Europe, et cetera. So there's uncertainty factors around that.

I show no further questions in the queue at this time. I would now like to turn the call back over to Brigitte for closing remarks.

Thanks again for joining us today. We look forward to continuing our dialogue with you through investor conferences or in one-on-one meetings or calls. Please do reach out if you have any further questions. And with that, I want to say thank you and goodbye for now.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.