Q4 2021 Stratasys Ltd Earnings Call
[music].
Greetings and welcome to Stratasys Q4, and full year 2021 earnings conference call.
At this time.
All participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference.
Please press star zero on your telephone keypad.
As a reminder.
This conference is being recorded.
I would now like to turn the conference over to your host Mr. Yano Floyd.
Chief Communications Officer, and Vice President of Investor Relations.
Yeah.
Good morning, everyone and thank you for joining us to discuss our 2021 fourth quarter and year end financial results on the call with US today are our CEO , Dr. <unk>, Zhao chief and our new CFO <unk> Zamir.
I would like to remind you that access to today's call, including the slide presentation is available online at the web address provided in our press release in.
In addition, a replay of today's call, including access to the slide presentation will also be available and can be accessed through the investor Relations section of our website.
Please note that some of the information you will hear during our discussion today will consist of forward looking statements, including without limitation those regarding our expectations as to our future revenue gross margin operating expenses taxes, and other future financial performance and our expectations for our business outlook Allstate.
<unk> that speak to future performance events expectations or results are.
Our forward looking statements actual results or trends could differ materially from our forecast for risks that could cause actual results to be materially different from those set forth in forward looking statements. Please refer to the risk factors discussed or referenced in Stratasys is annual report on form 20-F for the 2021 year, which we expect to.
File with the SEC over the course of the next day.
Please also refer to our operating and financial review and prospects for the 2021 year, which is included is item five of that annual report.
As well as the press release that announces our earnings for the fourth quarter of and full year 2021, which is attached as an exhibit to our report on form 6K that we are furnishing to the SEC today.
In order to obtain updated information throughout the year concerning our quarterly results of operations and the risks and other factors that most impact those results. Please see the quarterly earnings press releases, and our quarterly operating and financial review and prospects each of which will be attached as an exhibit to our report on form 6K that we will.
Finished to the SEC on a quarterly basis over the course of the year.
Stratasys assumes no obligation to update any forward looking statements or information, which speak as of their respective dates.
As in previous quarters today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today's press release.
I'll now turn the call over to our Chief Executive Officer, Dr. Jan <unk> you all.
Good morning, everyone and thank you for joining us throughout Texas had a strong quarter with over 17% revenue growth compared to the same period last year.
Even by the highest system sales since Q4 of 2018.
Each of our technologies and all of our regions contributed to this growth.
We share a general overview.
Our achievements and milestones in 2021, and after our financials and guidance I will conclude with some thoughts for 2022.
Strategies today is in a very different place than it was at the beginning of 2021.
Until last year, our business has been centered around two core technologies SDN and <unk>.
And while we maintained leadership in these areas. This limited portfolio meant we were missing opportunities to participate more fully in the fast growing application.
Half of the shift from prototyping to manufacturing.
And we had not developed and launch meaningful product upgrades in a number of years. It was critical to evaluate the entire business and target strategic investment to evolve our product portfolio.
We established our strategy to be the first choice in polymer three D printing encompassing the entire product lifecycle with multiple technologies and complete solution for superior application fit across design and manufacturing.
In healthcare, we believe this approach provides the largest total addressable market in the industry.
This strategic focus drove us to specifically increase our exposure to manufacturing applications.
A year ago, we shared that in 2020 over 25% of our revenues came from manufacturing.
We are pleased to say that for 2021 it was 29%.
And we expect 2022 manufacturing sales to grow at least 20%.
Clearly our focus on manufacturing is walking.
We accomplished this with new system tailored to manufacturing at scale.
Software platform to integrate the entire amount effect touring digital thread and a material strategy. That's rapidly opens up new applications for our customers.
Today, we are collaborating with the world's leading materials companies software partners and our customers, creating many new avenues for growth through a combination of direct sales and licensing.
We are excited about this broader portfolio and believe it will further complement our systems offering to help drive our overall growth strategy.
And there is more to come in the years ahead.
We also dramatically strengthened our balance sheet in 2021.
At year end, we had over $500 million in cash and equivalents up from $272 million as of the end of 2020, giving us flexibility to seek opportunities that will support our future growth.
We believe that by continuing to prudently invest capital back into the business, we will achieve meaningfully accelerated revenue earnings and cash flow in the years ahead.
Now, let me provide more specific color on our 2021 accomplishment that we.
Supported by our strong balance sheet.
The first area of focus was strategic acquisitions, including origin, which was completed at the very end of 2020, Rps and <unk>, which will support our customers manufacturing needs and begin notably contributing to our growth in 2022.
Next we expanded our software capabilities and plan to add licensing to give customers access to a new open materials option at <unk>.
Additionally, we initiated a long term technology invested arm that is already deployed capital in companies with cutting edge technologies, such as material jetting off processing and continuous carbon fiber.
Building on our five industry, leading <unk> printing technology.
Introduced several new product offerings over the course of the year, including three system.
Getting our manufacturing customers.
First the origin won.
Designed for end use manufacturing applications.
Uses <unk> technology to produce parts volume.
Volume from a wide range of third party photo polymer materials.
After a very successful beta program. We just recently started shipping this system.
Next the eighth Street 50.
The first of our new eight series powder bed system powered by SaaS technology and be able to deliver production level throughput of end use part, which we started shipping in December .
And the 770 <unk> print are ideal for large part featuring the longest fully heated build chamber on the market. We also introduced three D printers payload to some of our most important industry application segments.
These include the origin, one dental printer and the J <unk> together, they provide dental labs with comprehensive additive manufacturing solutions for the large and growing dental market.
We also launched the <unk> printer, which give healthcare customers the ability to bring highly detailed anatomic models and really cutting guides quickly and cost effectively with approved third party five 10-K cleared segmentation software.
We introduced the <unk> 35, <unk> <unk> 55, Prime polygenic printers, along with new software solutions for research and packaging prototyping.
Finally.
After acquiring it Rps in Q1 last year, we launched the new line of industrial Stereolithography system, expanding our offering to use cases, such as investment casting pattern orthodontic clear liners malls and large design costs.
In addition to the new system, we made significant progress on increasing our software focus and offerings.
We introduced an enterprise ready open software platform tailor made for manufacturing. This is important because it gives our customers the ability to integrate fleets of stratasys printers, we their existing industry four <unk> infrastructure and workflow.
Allowing them to really scale their use of additive manufacturing.
It also strengthens our relationship with our customers.
Because we can use software to continue to add value to their investment in three D printers.
That in turn.
Recurring software revenues can become a growing contributor to our business. For example, we announced that we have extended grab cut print software to our <unk> hundred 50 printer.
Annual licensing fee. This enable enhanced functionality focused on optimizing production throughput that is specifically designed for end use parts manufacturing at scale.
We also continue to invest in additive specific application to streamline the workflow of orders through the factory shop.
On the material side, we introduced <unk>, our new carbon fiber material that we believe will increase the adoption of our technology into production lines.
Especially for manufacturing eight CSN has also proven to be a catalyst for increased sales of our F 370 system.
And we introduced open materials option for FDA M that we plan to launch in the back half of this year, starting with our photos for 50.
We expect this to spare materials innovation accelerate adoption and expansion of our consumables and contribute to increasing our software revenues.
We also entered into a number of important partnerships, including Echo Adobe Red hat and others as we seek to provide our customers with complete end to end solutions for specific industry applications.
This accomplishment in 2020 , one where thanks to the hard work of our exceptional team and strategies.
Together, while managing through the many pandemic related challenges, we successfully launched over 30, new product into the market.
Im very proud of our team and excited to experience even more this year.
As we execute.
On our strategy and build momentum customers continue to express their confidence in strategies for example, echo a leading global shoe manufacturer is using our origin want to print malls and ciulla for development purposes.
Not only do this part fully match the quality requirements of the CNC machined aluminium counterparts, but they are faster to produce and far more economical.
Another example is redford model one of the two automotive OEM that are already utilizing all five of our technologies.
For each of their coach Bill Supercold Redfield prints hundreds of Stratasys felt from design through prototyping tooling and end use part that can be found on the final vehicle.
We believe this level of three D printing technology adoption will become standard in the automotive industry.
I would like to take a moment to discuss our effort and accomplishments with regard to ESG.
This is an area of primary focus for our company and our industry.
<unk> printing is the ability to date to address many of the environmental issues facing global manufacturing and we are at the forefront of those efforts.
Its strategies, we are deeply embedding our ESG strategy in our products and processes.
As part of our DNA and company purpose.
To empower people to create without limit for an economical personalized and sustainable world.
We are addressing many of our business processes.
And along with our customers, we seek to take climate action, while improving social impact.
We call it mindful manufacturing.
A call to action to redesign processes path and supply chain with great thoughts and clear intentions to secure manufacturing utilizing three D printing in a way that maximizes sustainability, while also supporting business growth.
By digitizing localizing and optimizing for additive manufacturing.
We believe net zero target.
Not only achievable, but easier to reach them.
With traditional manufacturing technologies and processes.
Our efforts encompass product innovation and improved circular economy for additive manufacturing.
An extensive outreach in our communities through education, and healthcare CSR activities around the world.
We plan to publish our first of its kind market, leading pew polymer additive manufacturing <unk> sustainability report next quarter.
Is the market leader in three D printing, we see our role as leading the shift to responsible consumption and production, helping our customer achieve their carbon neutrality net zero goals.
We are working to address our own footprint.
Supported by the data and research needed to drive this transformation for the entire additive manufacturing industry.
Before I turn the call over to our new CFO <unk> <unk> to share the financial results.
I wish to thank Leila payoffs ski.
For her leadership and many significant contributions to strategies over the past nine years.
<unk> build a strong talented finance organization and their dedication to excellence and professional expertise.
Help to preserve and strengthen our financial health as we navigated dynamic market and pursued strategic growth initiatives.
We wish her the best in future endeavors ETA.
Thank you, Rob and good morning, everyone.
Before I begin my remarks, I would also like to personally thank leila for our guidance in the over two years.
Been with Stratasys.
Her contribution and commitment to the company has been a fundamental part of our success.
And I'm honored to be assuming the role as CFO at this time in our journey.
Now turning to the numbers.
The fourth quarter of 2021 with another period of successful execution for our company.
We delivered the highest quarterly total revenue and the highest quarterly system revenue in three years.
Cash generated from operating activities was positive for the sixth consecutive quarter.
For the fourth quarter total revenue was $167 million.
A 17, 3% increase from the prior year quarter.
Driven primarily by strength in system sales, which was the highest in 12 quarters.
And you've typically a driver for future consumable sales.
Total revenue was up 5% sequentially from the third quarter and was four 3% higher as compared to pre pandemic Q.
Q4 19 levels.
On a constant currency basis total revenue increased 18, 3% year over year.
Product revenue in the fourth quarter was $118 million, an increase of 19% compared to the same period last year or 21% on a constant currency basis.
Within product revenue <unk>.
System revenue increased 25, 9% to $61 8 million compared to the same period last year and.
And increased by 26, 9% on a constant currency basis.
Consumables revenue increased by 12, 3% to $56 3 million compared to the same period last year.
And increased by 13, 6% on a constant currency basis.
Service revenue was $49 million, an increase of 13, 3% compared to the same period last year.
On a constant currency basis service revenue increased by 14%.
Within service revenue customer support revenue increased by 7% compared to the same period last year.
And increased by eight 1% on a constant currency basis.
We were pleased to see a strong and growing contribution from healthcare and dental and also to see considerable customer service revenue.
<unk> 2019 levels.
Now turning to gross margin.
GAAP gross margin was 43, 7% for the quarter.
<unk> 246, 4% for the same period last year.
non-GAAP gross margin was 48, 7% for the quarter compared to 49, 5% for the same period last year.
The decrease in gross margin versus the prior year period was driven mainly by raw material inflation and ongoing logistical challenges, partially offset by the impact of higher sales and sales mix.
GAAP operating expenses were $89 2 million and.
An increase of $20 7 million or 31% from the same period last year.
non-GAAP operating expenses were $79 6 million.
An increase of $17 4 million or 28% compared to the same period last year.
non-GAAP operating expenses were 47, 7% of revenue for the quarter compared to 43, 7% for the same period last year.
The increase in operating expenses was driven by a number of factors, including the return to a five day work week.
Higher expenses as the markets recovered higher operating cost and commissions due to more revenue and additional operating costs associated with the inclusion of our new acquisitions, including full ownership of that treaty in the fourth quarter.
These costs were funded by the recycling plan implemented in May 2020, which allowed us to allocate resources to areas, where we believe we will generate stronger growth.
Regarding earnings.
GAAP operating loss for the quarter was $16 2 million compared to a loss of $2 5 million for the same period last year.
non-GAAP operating income for the quarter was $1 7 million.
Compared to $8 3 million for the same period last year.
The difference reflects the increase in operating expenses in the fourth quarter of 2021 described before including due to our move from a four day work week to a five day work week.
GAAP net loss for the quarter was $4 8 million or <unk> <unk> per diluted.
Sure.
Compared to net income of $11 million or <unk> 20 per diluted share for the same period last year.
Which reflected a onetime $14 million tax benefit in the fourth quarter of 2020.
non-GAAP net income for the quarter.
Was half a million.
One cents per diluted share comp.
Compared to <unk> 7 million or 13 cents per diluted share in the same period last year, reflecting.
Reflecting the increased operating expenses in Q4 2021 compared to Q4 2020.
Adjusted EBITDA.
Of $7 9 million compared to $14 6 million in the same period last year.
Reflecting the increased operating expenses in Q4 2021.
We generated $4 4 million of cash from operations during the fourth quarter compared to generating $23 7 million of cash in the same quarter last year.
This was our sixth consecutive quarter of positive cash flow from operating activities.
It was driven by strong collections and achieved despite of an increase in inventory purchases.
We ended the quarter with $502 2 million in cash cash equivalents and short term deposits comp.
Compared to $299 1 million.
At the end of the fourth quarter of 2020.
Our cash position was bolstered.
By a $230 million capital raise in Q1 of 2021.
We have executed with excellence to overcome the negative impacts of the pandemic and remain well funded and well positioned to capitalize on value enhancing market opportunities as they arise.
Now, let me turn to our initial outlook for 2022.
We're guiding that our 2022 revenue will be in the range of $680 million to $695 million.
We expect to realize sequential revenue growth each quarter as we progress throughout the year.
With the second half of the year, notably stronger than the first half.
The sequential growth is somewhat different than our historical seasonality pattern.
Primarily due to the timing of new system releases and a corresponding ramp in sales.
As well as gradual shift in sales mix.
Q1 revenue growth is expected to reach high teens.
As a percentage over the first quarter of 2021.
From a gross margin perspective, given our experience with the global logistics and material cost issues.
Full year 2022 is expected to be flat to slightly higher than 2021.
With the second half stronger than the first half based primarily on higher revenue.
We expect the first quarter to be relatively flat to the first quarter of last year.
I would like to emphasize that we view the current gross margin situation as temporary.
As the headwinds caused by these external issues path and we continue to execute on our long term plan, we expect our margins to head back.
Over 50%.
We will continue to invest in our growth engines to generate significant leverage benefit.
As we responsibly build a stronger company for the long term.
In 2022, we expect our operating expenses to be approximately $20 million to $25 million higher than 2021 Prime.
Primarily due to the impact of owning <unk> for the full year.
Higher cost that results from higher sale.
And investment in new growth drivers, such as origin and health care.
I would like to remind you that starting from the second quarter operating expense is typically higher than the first quarter.
Due to the normal timing of compensation expenses.
And despite the higher absolute dollar value.
Year over year, we expect to see a continuation of reduction in operating expenses as a percentage of revenue throughout the year.
Improving profitability.
Objective for us.
For 2022, we expect to see continued improvement.
In our earnings.
We expect non-GAAP operating margins to be slightly above 2% for the full year.
With small operating losses during the first half and turning to profit in the back half of the year due to the anticipated revenue increase.
Longer term.
We expect operating margin to achieve double digits.
Our growth plan unfolds in the coming years.
We anticipate a GAAP net loss of $74 million to $67 million.
A $1 11.
To $1 per diluted share.
And non-GAAP net income of $10 million to $13 million.
Or 14 to 19.
<unk> per diluted share.
Adjusted EBITDA is expected to be in the range of 38 million to $41 million.
We expect our capital expenditures for 2022 to range between 20 million and $25 million.
With that <unk>.
Let me turn the call back over to you for closing remarks.
Thank you Adam.
2021 was a transformative year for strategies in many ways.
We vastly improved our offering strengthened the balance sheet and invested in technology.
<unk> us for continued growth in the years to come.
We experienced our largest contract in company history with the $20 million order from U S. Navy for 25 F 900 manufacturing system.
Importantly, this is more than just a one time sale, we are fully qualified and selected as an additive production partner.
Opening the manufacturing door for us.
We expect to scale adoption quickly we had another large long term F 900 sale as well to a leading global OEM.
This and other manufacturing related deals demonstrate market confidence in the use of <unk> technologies.
As the market shift from rapid prototyping to through manufacturing.
Clear signals the three D printing industry has reached this important inflection point.
In 2022.
We will advance our efforts to strengthen our leadership in polymer three D printing.
We have established the foundation for long term growth.
On leading polymer three D printing system.
Complemented by continuous innovation across our portfolio.
Two key components of this effort include the <unk> hundred 50, and origin won both products have been well received in their better programs and we believe this system will help to more than double our addressable market over time.
Equipped with best in class offerings.
Unmatched go to market network and support infrastructure.
Our strong balance sheet and the best three D printing talent relentlessly focused on execution.
We are positioned for sustained growth and strong stakeholder returns as we further build on our momentum in 2022.
Looking ahead, we are energized and excited for the future of Stratasys.
With that let's open it up for questions operator.
Thank you.
At this time, we will be conducting a question and answer session.
If you would like to ask a question.
Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment it.
May be necessary to pick up your handset before pressing the star keys.
As a reminder, we ask that you limit to one question and one follow up.
One moment, please while we poll for questions.
Our first question is from Greg Palm with Craig Hallum Capital Group.
Please go ahead.
Yes. Thanks, Congrats on the continued progress here and anytime congrats on your transition to CFO I look forward to working with you more closely going forward.
Thank you Greg.
I guess I wanted to just start off.
On new product contribution.
Just a question more lais upon.
The feedback and traction out in the marketplace and what Youre seeing and hearing from both your installed base and add new customers and again this is specific to the new products.
Yeah.
Okay.
Hi, Greg.
Good to talk with you.
Great question.
We are fully geared to leverage the new products in the market just thinking about thousands of customers that we have out there.
And hundreds of.
Partners that just need to sell one or two or three more technologies to the same customer.
And we have fantastic new product in the market.
Well I can go briefly.
I'll start with the SaaS great.
Great pipeline solid pipeline.
And really unmatched quality of pulse.
I'm amazed every time that I see the flexibility of this machine and the ability really to compete with injection molding.
Go to the origin.
We just finalized a better and move to general availability.
No we're not hearing great, but we had great remarks, and grades from our customers both industrial customers and dental customers. The main advantages of this machine. This is a unique.
Our patented.
Layer separation really a complete different way of running DLP system.
And the result is an unmatched power quality.
Speed and reliability.
And we really look forward to provide.
To you and to the public more information throughout the year on the performance of those two machines. We also introduced the Rps.
Uh huh.
Great results above our expectations also the dentist yet on the policy side when you combine it with.
Dental.
Origin.
An amazing great portfolio, new portfolio that we have that is very attractive to the dental industry. So when you combine all of it together practically we have new product in each one of our technologies I'll start with the poly jet <unk> five the metal the medi jet the dental Jed I'll move to.
The FDA and we have the 717, which is the largest bid chamber in the in the longest bid timber in the industry.
Really great traction in the market that I move to the SaaS and the origins and the Rps, we're really geared.
To grow based on the new product.
Yeah.
That's helpful and I guess when when you joined.
I think you talked a lot about stratus has been kind of a one stop shop for customers looking to invest in additives and now that you have the product portfolio sort of set are you seeing any tangible evidence of this happening I don't know whether that's market share gains maybe that's just <unk>.
Leasing sort of wallet share of spend within existing customers or maybe just new growth with new customers, but what what's your what's your thought on how that strategy is playing out.
Okay.
The short answer is yes, but let me elaborate on it we already have.
Two automotive players Oems using the all five technologies.
Which is amazing.
Why it's so important because.
Manufacturers' bottom line when you look at the manufacturer they prefer to have one provider.
One ecosystem with one production environment.
With someone they can count on this.
This is exactly what we are bringing to the market.
We have we are not selling.
Technology.
We are selling the best solution that fit your problem, we are coming to solve problems for our customers. This is a completely different position in the market compared where we were two years ago and it works and of course. This is just the beginning but we are very encouraging from what we're seeing in the market and from the discussion I have with customers.
On a weekly basis.
Okay.
Okay, perfect I'll hop back in the queue, Thanks, and good luck.
Thank you.
Our next question is from Troy Jensen.
With Lake Street Capital. Please go ahead.
Hey, gentlemen, congrats on the good quarter and good year.
Hey, guys. Thank you. So my first question on the talk of Youre very welcome.
Can you just talk about <unk>.
Q1, Guy can do much better than normal seasonality.
I guess you feel it on the balance sheet deferred revs were up slightly.
Quarter over quarter I'm, just wondering was there any constraints in Q4 that held back in sales.
Pulling into Q1.
What are the normal seasonality really just <unk>.
<unk> hundred 50, starting to launch.
Hi, Troy.
Good morning, Good question and there were no constraints in Q4, the increase is driven by our new.
As well as our other technologies are all technologies and we started the year with a strong backlog.
Okay, perfect and could you just confirm you did have each $2 50 revenues in Q4, and then are you expecting to ship the origin for revenues in Q1 also.
Yes.
In Q4, we already had the software product and in Q1, we will start we started shipping origin and we will have revenue from already in Q1.
Awesome Alright, guys. Congrats good luck this year and I'll follow up on the we call it.
Thank you.
Thank you.
Our next question is from Jared mainland with Baird. Please go ahead.
Hey, good morning, guys and congrats on the strong results.
First question for me I'm just wondering are.
With the origin, one dental some you know some.
Some big customers Trialing that yet and how likely do you think the opportunity is there to take share with that product.
Okay.
So.
Thank you for the question of course, we ran.
I know, it's a better program.
It's large and some mid human also some small customers to make sure that we are covering the whole range and we got fantastic.
Feedback from the better so we are very encouraging.
It's really a unique value proposition in industrial dental in terms of the quality of the power of the accuracy and speed.
And this is only the beginning.
So we can do.
Many different applications with one platform.
Platform.
Can go.
The origin in dental in tooling in AR.
More the line of Gen <unk>.
Denture, Spleens God stamps bridges and when you combined it also with our poly Jed we are covering the whole range and this is a really great value proposition to medium and large.
<unk> customers that.
We are targeting.
Yes, Jared it's John I would just add on top of that quickly that as strong as the aligner market has shown to be a good adopter of this technology over time.
We see dentures as an even larger market opportunity.
And so we and the origin system, we discussed when we first announced at a little over a year ago that that was one of them going to be one of the target markets. So we really look forward to updating the market around that particular end use at the appropriate time.
Okay perfect good to hear.
And then I'm just curious you mentioned briefly you you have a few months deploying some capital.
And various opportunities and one of those you called out was continuous fiber or is there any any color. You can you can provide on this.
Okay.
Okay.
We received this question so many times so it's good to deteriorated.
We have a very strong balance sheet. So we have to use it.
In the best way that will.
Generate returns to our stakeholders.
And we believe that the best way to do it is to focus on our strategy, we have a laser sharp strategy on polymer manufacturing.
We are doing really well on the growth side and creating the most sustainable strongest company in the industry and this is very attractive to many startup.
And so we are being approached by many startup and we decided to establish an investment or we call. It.
Strategies ventures.
It's all about accelerating the implementation of our strategy, we know exactly.
Where are the gaps that we have mainly in the workflow and exactly where all of their needs and the gaps in the industry.
And we are bringing the go to market. So we are investing in very.
Exciting technologies like we said in the script.
Like continuous carbon fiber, we just recently invested in 90 labs that have a very unique way of having X y and Z continuous carbon fiber.
The X y.
They just closed 17 million round and we were there and other companies that.
We cannot elaborate now.
But it's a very strong pipeline for external innovation that will help together with our great people in R&D to.
To make sure that we are keeping our <unk>.
Technological leadership.
In this market.
Because our machines are the most reliable the most repeatable in the market with the highest throughput and this is what manufacturers' Luke's four out there and we can deliver it internally and externally and we have a very clear framework how to do it.
Okay.
Got it thank you.
Thank you. Our next question is from <unk>.
Jim Ricchiuti with Needham and company. Please go ahead.
Alright, thank you.
Question I had is just.
With respect to the comment.
That I believe you made regarding.
The gross margin pressures being temporary.
I'd like to follow up on that and maybe drill down a little bit more are you anticipating just the mix of revenues benefiting your gross margins the scale up in volume or are you taking some other measures too to offset some of the pressures that you're facing because it doesn't sound like some of them.
Cost issues or necessarily going away.
Okay.
Hi, Jim Hi morning, It's a good question.
So first one party.
The anticipated improvement in logistics and raw materials in the future.
But we also proactively as we scale up our business.
New products become more mature.
To optimize and to improve our margins.
And in our processes.
Okay.
Just with respect to your outlook for.
2022 on the revenue side.
Maybe you could talk a little bit about which of the verticals do you see the biggest growth potential I think you're clearly.
It sounds like you're excited about what youre seeing in the dental market, but I wonder if you could just give us a little bit more color in terms of how you're thinking about the year from the standpoint of vertical markets.
Thank you for the question.
We by definition when we.
Launched our new strategy going for manufacturing of all three.
What we call <unk>.
And you thought we decided that we are going to focus on a much larger market to increase the total addressable market both.
Because of the new technologies, but not less important because of new verticals and new application. So of course, we have our verticals like the government and defense and Aero and auto and we're doing really well there, but within that we want to shift from prototyping to manufacturing. We are the first company in this industry.
So 95% of what we are selling is going to end use power.
And for 2020 in 2021 were already 29%.
And we believe that it will keep growing this share will keep growing above 20% every year.
So the strategy.
So where we are focused manufacturing and healthcare on a factoring.
Many verticals from consumer Aero and auto.
And when you go from manufacturing to healthcare as carrying mainly dental but also not less important is the hall PSP, what we call pre surgical planning, where we are sitting on the best technology in the industry. We are the only one who can deliver real limitation.
Off and ophthalmic model, where you can really imitate the tissue and we just launched this year, what we called digital not only creator where the surgeon or the radiology can really imitate.
The tissue.
And customize it to the different.
Ah patient.
And we believe it will position us.
As the lead here when insurance and reimbursement will have core in this.
Area, because it is saving lives.
So bottom line.
On a factoring in health care.
Yeah.
Thank you.
Okay.
Thank you.
Question is from Ashley Ellis.
Ross Research. Please go ahead.
Yes.
Hi, Thank you for taking my question.
I was wondering if we could take a little bit deeper into the revenue guidance.
Hum going against some pretty tough comparison in system revenue and I know, you're launching the Oregon SaaS would ramp up but how should we think about our system grew its very sticky recurring revenues in consumables and customer support should we expect that there should be some sort of follow ons on the strong system sales in 2021, and then I have a follow up from Tim.
Okay.
Thank you Ashley it's a good question.
We expect we're very excited about 2022, and we expect all our strengths to grow.
Hardware will be the driver for the increase about consumables and services will follow.
And are you factoring any software contribution to the revenue guidance.
It won't be the athletes your own software is not going to yet be meaningful it's sort of just starting to launch through.
As we mentioned earlier there'll be some software licensing revenue was going to start to get as we do the open materials, which is beginning in the back half of the year on the $4 50.
But we'll be sure to update.
Date, you as software becomes a more a more meaningful part of the revenue yet.
If I may add we are going to launch new software product in 2022 .
Okay, and then you have could you talk about the decision to open up the Afghan partners third party materials like why now and then.
There that potentially you could hope to have you probably got systems in the future.
Yeah.
Okay.
I would tell you it.
It's an act of leadership.
We are leading this industry from prototyping to manufacturing.
We have a very thorough.
Analyses and many discussion.
<unk> was out there and we identified the barrier and one of the there is a variety of materials. They can use for real manufacturing applications.
It's clear to us that it's better to be in manufacturing and sale.
Thousands of tone.
Instead of few kilos per machine.
And to have a much better unit economics and to support our customers' bottom line is delivering higher value to our customers and the open material. It's all about innovation and partnering around innovation because its not that were opening.
Without any responsibility on the quality of the part this is a hybrid model.
<unk> open.
The other model, where we are working together with our customers in three tiers, we have tier one which is prepared we already announced it is exclusive of processes. The second one is certified we are certifying others.
Supplier third party suppliers, but it meets our standards and then we are exploratory where everyone can innovate and do better thing.
But it's SDM we are focused on this.
New.
Innovative model is focusing on manufacturing.
After Dan itself and its origin.
And we get great feedback from our customers and.
It will allow us not only to reduce one or two or three new material as the year.
And you will see.
Because it's in the roadmap, but to double or triple the amount of.
New material that we are introducing.
And we see it also in <unk> for example, it's open.
It's doing really well and it gives us a competitive edge.
And a lot of value to our customers and to us.
Bottom line when we are talking about opening the material it is.
What about Oh.
Having now a model that in.
Well, we are losing responsibility or compromising on the quality.
It's exactly the opposite it's about giving more value to our customers in a responsible way and making sure that we are creating the value indicate to everyone.
Ah.
Therefore quality, Jeff No current plans to open it up because it's prototyping and its a completely different.
Type of needs and we have most of the material needed for.
Prototyping and focusing on manufacturing doing it with our customer they love it.
And also they appreciate the leadership here.
Alright, Thank you very much.
Thank you.
Next question is from Paul Chung with Jpmorgan. Please go ahead.
Hi, Thanks for taking my question so.
Can you can you talk about the interesting things youre doing in in aerospace can you expand on the boom partnership.
The Navy U S Navy contracts and how you see those relationships evolving and then <unk>.
Kind of potentially leading to interest from other other customers and how material can this part of the business contribute to growth and then I'll follow up.
Thank you Paul for this question I think it's a reflection.
Of how we are partnering with our customers to change the world not less than that.
So I'll take the Navy for example, this is the <unk>.
Estimate example of distributed manufacturing so.
People are talking about this for years.
A decade about distribution manufacturing.
We are working with the government we are working with the Navy.
To really implement distribute in manufacturing.
So there are supply chain issues long supply chains, we are going to have F 900 machines within the U S outside of the U S globally too.
Sorry about that.
The main thing and I want to thank them.
The Navy and the U S government for taking it together without taking all the industry a step forward.
Rail manufacturing opportunity across all government body NFL ticket to boom.
It's a great example of innovation in action.
So we started with them oddly weak prototyping just too.
Their development cycle and to save significant time, and I believe we save between two to three years and even more because the stability of the engineered so think about it about something and then shrinking the same day to check it is remarkable but they took it persistency tiers and tooling and then.
To end use Bob I visited there.
And it's like you see path within the most exciting.
New.
Generation of passenger aircraft.
And it is three D printed it's amazing I learned a lot from both those customers and this is part of the DNA of strategies, we work with our customers.
To make sure that there will be more successful and a three D printing will be significant in manufacturing.
And we have many more.
Okay.
Great.
Thanks for that core stuff. So just on cash flow you managed inventory levels really well in seeing some funding benefits from kind of longer accounts.
Accounts payable days, but if you could expand on how you manage the inventory levels. So effectively this year and then how do we think about kind of working cap dynamics in 'twenty two and then can you grow cash from operating.
In 2000 to keep this streak of positive quarterly operating cash kind of ongoing thank you.
Okay.
Thank you. It's a good question, we're not guiding on cash flow.
But on one hand, we continue to invest will continue to increase and to purchase inventory to be prepared for the.
For the growth during 2022.
And and and we do have.
Over 500 million of cash to invest.
And so we're very positive about 2022 as far as is concerned with cash flow back we do not guide on cash flow.
Great.
Thank you.
Thank you our next.
Question is from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you.
I just wanted to follow up on the cash flow question. If we look at your midpoint of your operating income.
<unk>, it's about $18 million improvement on a year on year basis, which is great to see in 2022.
Maybe if you don't want to give an explicit cash flow guide can you talk about some of the underlying puts and takes that might influence how that increase or decrease in cash flow my trend relative to that increase in <unk>.
And operating income and I have a follow up.
So.
Without getting thank you one thing first of all without guiding on cash flow when.
When you think about cash flow as compared to operating income you take into account all the.
Working capital element as I mentioned earlier, we continue to invest and try to increase our inventory and we will continue doing this during 2022 and this should also be taken into account when you model cash flow for 2020.
Okay.
Okay. Thank you for that and then if I think about.
The excitement that you're really showing around new products and some of the potential contribution from that especially in the back half of the year is there any way for you to talk about in your revenue guide of call. It mid teens for the year or somewhere close to that.
How many points of growth do you think these new products can contribute in year, one year or two like I'm sure you have a plan that sort of thinks about contribution sort of on a more ongoing basis.
Can you can you maybe help us think through how much how we should be thinking about revenue growth on a more sustainable basis.
Particularly <unk>.
Contribution from these new products I mean, you essentially sounded like youre going from two platform to this multi platform approach and that's really resonating with your clients. So if 22 as maybe some sort of a transition year or relaunch here in some ways.
Three we should we should start to see some more acceleration from that so just trying to parse through how many points of growth. Maybe you can see stacking up over the next few years any color there would be helpful. Thank you.
Alright.
Thank you for the question.
We do not provide guidance on the specific products. However, I can say that in 2022, we expect all of our technologies to increase compared to 2021.
Naturally.
The launches of SaaS and Oregon.
We will have a significant impact in 2022 compared to 2021.
But we do expect that.
That all our products in all our technologies will generate growth in the future and after 2022.
Okay. Thank you so much good luck.
Yeah.
Thank you. Our next question is from.
Ananda Baruah with loop.
Loop capital. Please go ahead.
Hey, Yeah. Thanks, guys. Congrats on the on the ongoing momentum I'm really appreciate you guys taking the question.
I guess, just two quick ones if I could.
Going back to Paul's question, you guys can provide some really good contacts.
The Navy relationship as to what's driving sort of driving driving business you Deb could.
Could you provide.
Some some contacts in a general sense.
What customers are doing that's leading to the increase in the amount of the ongoing momentum and yes in a tangible way correct and then I have a really quick follow up thanks.
Okay.
Hi, Ananda. Thank you very much for the question.
It's a great time to be part of the.
Additive manufacturing industry I.
I didnt planted but lucky.
Because customers.
Understand the global trends.
And they understand also that additive will be filed.
Of the manufacturing of the future.
So everybody is learning now their future in manufacturing the plant of the future the micro plant of the future customization for our industry for Dol et cetera, et cetera et cetera.
And then the <unk>.
With all the supply chain issues that we're facing as well.
Well the ultimate created the Azimut stone for us to start engaging with our customers. So you take together.
The most fundamental trends that we are experiencing now the supply chain the customization, especially in air care, they need for sustainability and lighter power in order to use less fuel and innovation in so many areas like in electric vehicles.
And the need for new geometry for this additive is the best solution.
And the Navy deal.
Proved it.
Manufacturing can be the manufacturers and distributors of digital inventory worldwide, you don't need physical inventory you can have digital inventory.
And you can provide powerful wherever they are needed so.
People understanding and the moment they understand it they are looking for a partner they can interact with in order to develop those plant of the future and I think we are positioned quite well because we are a one stop shop with one operating system with one material platform with <unk>.
One software platform and with a lot of reputation reliability and repeatability and ability to deliver.
So it's a very exciting time for us.
That's super Super helpful. I appreciate the context and my quick follow up is just on the op margin guide for.
For <unk> I believe you said about 2% can you just describe for US what are the puts and takes and I guess really what I'm. What I'm wondering is sort of like what what are the what are the things that allow us to begin.
<unk> operating margin.
Assuming as we go through 2023.
Okay.
Thank you. So so when we think about 2022.
Over 2% margin.
The growth the significant growth in our revenue.
When we think about Opex.
It will decrease as a percentage of revenue.
During 2022, however, we continue to.
To invest in our growth drivers origin soften healthcare.
Operating margins can expand longer term due to a number of factors, including the increase in consumable, adding software that is coming with higher margins.
And the entire business the entire revenue increase that we expect.
Scale yet.
I may add I think that.
Exactly the right direction, but if I may add it's a combination of external and internal forces.
Externally, we do believe that the current logistic cost.
It is not sustainable.
Believe that the second half of the year, maybe next year at the end of this year, we'll see better results because of the capacity in a in a C. Because of the port issue it will solve itself.
Our ongoing.
No crisis that fuel itself will somewhat.
Solve itself as well. So this is on the external side, but we.
Don't.
Based our projections only on external forces, we based on projections on activities and what we are doing on being proactive and we believe there still.
Any more.
However, it means that we sell more consumables selling more consumable better gross margin.
Investing in higher efficiency across the company, we are lowering the production costs, what we can do internally.
Take control over our destiny.
And we design for cost and we add software and we have MTI. So we are working on it.
We're not coming here and saying gross margins will be better we are working on it.
I'll be brief.
That's really helpful. Thank you guys so much.
Thank you. Our next question is from Noelle Dilts with Stifel. Please go ahead.
Hey, guys. Thanks for taking my question.
First I was hoping you could comment on if you're seeing any notable differences in demand to meet geographic perspective.
What youre seeing in Europe versus the U S and Asia. Thanks.
Okay.
So great question.
We are not in general we are not giving the details, but I can give you the high level trends share with you the high level trends.
So it's kind of a.
A combination of recovery and innovation I would say so we see that EMEA.
Which was lagging.
Ah.
Compared to the U S in adoption of AR.
New technologies in.
Many vertical.
Aero and auto.
Ah catching up so we see very nice results from our EMEA region.
And then we see.
Also great results from the U S. And then Asia. So this is more or less the ranking but I believe it's only a matter of the pandemic and the recovery from the pandemic So Asia.
<unk> adopted a more streak I would say only grown policy. So we see.
Which is not in Europe , and not the case in the U S, but bottom line across the geographies, we see really.
Good demand and the growth.
Across the region.
It is ER positive and AR.
It looks really good.
Okay, great. Thank you.
And second I was hoping you could just expand a little bit on what your acquisition pipeline looks like as you look out over the next year or two.
Any maybe details on are you seeing more smaller deals or larger deals and what's your appetite for.
For M&A as you look at 2022.
Okay.
We have a very.
Structured framework for business development activities.
Starting from acquisition, but the bottom line, if I start with the bottom line.
Time is about accelerating our strategy the implementation of our strategy, we don't do anything which is not within the strategy, but we think the strategy. There are so many opportunities we started with acquisitions of base technologies and now we are moving.
I would say to the next phase which is about <unk>.
Really.
Strengthening those technologies, but investing a lot in workflow and material. So we are moving down the road. We have the best technology now we need to make sure that they have the full solution, which is the best and this is material.
Is a workflow software and also a lot of collaborations. So it is a combination of in Smith investment and collaboration.
Bottom line.
We increased dramatically the size of our investment team and we believe that the combination of external and internal innovation.
We will put us completely in a different way and we will secure our technological leadership.
Okay.
Thanks, so much.
Yeah.
Thank you. Our next question is from Brian Drab with William Blair. Please go ahead.
Hi, Good morning. This is Blake Keating on for Brian .
Morning Blake.
Brian It ended up being double booked but wanted to get clarity on a couple of items.
What is different about 2022 in terms of your revenue visibility compared with 2019.
Because in 2019, you initially initial guidance between $670 million and $700 million in revenue and reported 636 at the end so what's driving the covenants this year.
Okay.
Hi, Blake good question.
We feel very confident about our ability to meet the 2022 numbers.
We started with a strong backlog of the year and with the new product and also the existing technologies, we feel confident in being able to meet the guidance.
Okay.
Got it thank you and then.
How should we reconcile below the the.
The EBIT guidance, it implies about $14 billion to $50 million of EBIT.
The adjusted EPS guidance in the tax rate or how should we think about it.
Sorry, Blake could you say that again, we didn't hear the last part of your question.
Yes, how should we reconcile the difference there.
The EBIT guidance of about $14 million to $15 million to the net income guidance. The adjusted EPS guidance is it tax rate or what's the.
How should we get down to it.
Right.
So like it's a good question there is no between the EBIT and the net income there are no significant.
Item the one timers Friday concern so when you look on our tax NRM financial income.
In the past you can youll similar levels to model 2022.
Got it thank you I'll pass it along.
Okay.
Thank you. Our next question is from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Thanks, just one.
One quick follow up or hopefully quick, but I wanted to take a stab at it long term operating margin guidance. So commentary suggests double digit operating margins, which would be a pretty big step up relative to sort of anything you've done in the last 567 years, So I guess.
Are you targeting a certain year or a certain level of revenue to maybe achieve this help us understand your thought process behind it if you can.
Okay.
Thank you Greg for the question.
When we think about the longer term the next few years.
As mentioned earlier, we are first we expect the gross margins to go back to the level of the 50% and then which will contribute to the bottom line and then when we think about opex. So.
We believe that in the next few years as revenue grow we will be able to leverage our scale and we already have.
And the right infrastructure.
And to be able to increase revenue significantly.
And then increased Opex.
Much less than the increase in revenue and if I may add.
This is the entire strategy here.
We have the infrastructure.
To do many many more things and to sell many many more product with the same infrastructure.
We need that we have some we need the patients, but not you know.
Not too long.
I think I don't think not thinking talking here about a long and horizon.
Of.
Dozens of years, we have the infrastructure, we need to leverage the infrastructure. That's exactly what we are doing but this is on the financial side, but the most important thing and profitability is to deliver value to our customers.
And we believe.
If no one can deliver this level of value and we based it on very very simple thing.
We have laser sharp strategy on.
On polymer manufacturing and we already showed is that we move from 25% to 29% of our total sales all in one year, we have well defined.
Growth engine that are walking.
And technology is the software platform Theyre material platform and use cases that we are developing we have execution.
Yes, it's a new level of execution within the processes. This year 30 product 2021.
Cherokee products. This is a completely new level of execution and.
And most importantly customers our customers are loyal.
And trust us and work together with us in collaboration to make this happen and to create this value.
When you when you translate it will have double digit operating income like eight on this.
This price.
Very optimistic on this.
I mean, you're going to see some.
Operating leverage this year, but you know I don't want to put words in your mouth, but it plans it sounds like it almost should sort of get better in the out years. I mean is that kind of the right way to think about it I mean, that's what the math implies to get to double digit.
It's a journey of two to three years.
You will see notably stronger results on the operating income but.
But we are here to build the strongest three D printing company in the industry with sustainable profitable growth.
And Thats exactly what we are doing we are balancing between profitability and sustainable growth and the result is double digit operating income.
Okay.
Fair enough I appreciate the color. Thanks.
Thank you.
Ladies and gentlemen, thank you.
We have reached the end of the question and answer session and I would like to turn the call back to Mr. <unk>.
For closing remarks.
Thank you for joining us stay safe and healthy looking forward to updating you again next quarter.
Yeah.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.