Q1 2022 3D Systems Corp Earnings Call
[music] B Riley.
Good morning, and welcome to <unk> systems Conference call and audio webcast to discuss the results of the first quarter of 2022. My name is Kevin and I'll facilitate the audio portion of today's interactive broadcast 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. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
My pleasure to turn the call over to Melanie Solomon Investor Relations. Please go ahead.
Okay.
Thank you Kevin Good morning, and welcome to <unk> Systems' Conference call with me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer, Jack trying to rollout executive Vice President and Chief Financial Officer, and Andrew Johnson, Executive Vice President and Chief Legal Officer.
So what parents portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation may do so on the Investor Relations section of our website for.
For those who have accessed the streaming portion of the webcast. Please be aware that there may be a few seconds delay and that you will not be able to pose questions via the web.
The following discussion and responses to your questions reflect management's views as of today only and will include forward looking statements. As described on this slide actual results may differ materially additional information about factors that could potentially impact our financial results was included in last Night's press release, and our filings with the SEC, including our most recent annual report on Form 10-K.
Quarterly reports on Form 10-Q.
During this call we will discuss certain non-GAAP financial measures in our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures finally, unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2021.
Now I'm pleased to turn the call over to Jeff Graves, our CEO Jeff.
Thanks, Melanie and good morning, everyone.
As you all know the beginning of 2022 is already strong significant challenges that the entire market no matter what portion of the economy you serve.
Whether it be continued supply chain pressures significant rise in the rate of inflation the ongoing impacts of the pandemic or the tragic circumstances that we've seen unfold with the Russian invasion of Ukraine.
The operating environment has been difficult and largely unpredictable.
With that said I'm very proud of how our <unk> systems team has continued to stay focused and executing well for our customers throughout this period Ironically in the longer term the same factors that make our life more difficult today are increasing our opportunities for growth in the future as our customers continue to reevaluate their critics.
Supply chain strategy and increasingly consider additive manufacturing is a key element in the production strategy in the future.
As we've discussed on previous calls after two years of hard work. We're now fully organized into our two core business units healthcare and industrial solutions.
This structure distinguishes us from others in the industry, allowing us to execute on what we do best namely solving the most valuable production application needs of our customers by offering the strongest and most complete portfolio of additive manufacturing technologies.
Together with the most knowledgeable and creative application engineering teams in the industry.
The double digit growth in our core additive manufacturing business that we're now experiencing even in this difficult market validates our approach and it gives us confidence in our future.
To meet the increasing demand that we're now facing we're making key investments in new products and in our operating infrastructure, combining rigorous financial discipline with an overlay of strategic perspective on future value creation for all of our stakeholders.
Despite the challenging macro backdrop I'm happy to say that <unk> systems has started off the year on a strong foot and we expect 2022 to be a year of exciting growth and investment as we continue to strengthen the company for the future.
I'll keep my comments brief today as we have our Investor Day next week, where we plan to share more detail on our vision and strategy for the future.
Today I'll share with you a few key highlights from the first quarter.
On the topline while supply chain challenges were a significant headwind we delivered double digit revenue growth over Q1 of last year when adjusted for divestitures, we continue to see increased demand for our products across both business segments.
At a business unit level, our industrial solutions business continued to accelerate in both Europe and the U S. In this case delivering growth of over 15%.
Excluding divestitures of noncore assets.
This continued strengthening validates our observation of increased adoption of additive solutions among the worlds manufacturing community.
Particularly strong was the demand for high precision Microcap space. This is a reflection not only of the printing technology itself with a unique materials. We've developed that enable casting of highly complex find structures and a deep understanding of the workflow for optimum economics for these solutions.
Health care growth of approximately 5% excluding divestitures was softer than we would have initially anticipated when we started the year being driven in part by the introduction of our new DNP $3 50 dual a high productivity version of our well proven metal printer. The DNP $3 50, which has been a mainstay for many of our health.
Care customers in recent years.
These customers are now qualifying the new dual laser system and updating their procurement plans to optimize their production workflow, which in health care. It takes careful planning and formal approvals.
These acceptance qualifications are proceeding very well and we expect increasing sales of both our $3 50 platforms. Later this year.
In addition, COVID-19 resurgence and the resulting postponement of optional elective procedures are particularly impactful in healthcare, yes, certain customers delayed capital purchases and experienced slower than anticipated growth rates given.
Given the underlying fundamentals and customer feedback on market conditions. We expect these factors to lessen as we move through the year.
To support the strong engagement and demand that we're seeing from our customers broadly we're continuing to invest in both our product portfolio and core technologies as well as in our business infrastructure, including information technology Finance and accounting investments that will enable us to efficiently scale for double digit growth that we see ahead.
The fruits of these investments will become increasingly apparent as we move through the year, but even in the first quarter, we announced several new opportunities that we're really excited about for the future.
First was our investment in our unique company called and hatch, which brings to US another unique software solution for use in our health care business that will further strengthen our core capabilities.
More specifically this software solution is directed at the personalized healthcare solutions markets for which we have a long established market leading positions.
In short through the use of artificial intelligence, the enhanced software streamlines and scales the design and delivery of patient specific medical devices by automating the planning and design process.
These efficiency increases will further the growth of personalized health care solutions, improving patient outcomes and reducing treatment cost for hospital systems.
In addition in the first quarter, we announced our joint venture with <unk>, the Saudi Arabian Industrial investments company.
This venture is designed to bring additive manufacturing into the middle East and North Africa by enabling domestic production capabilities within Saudi Arabia.
We believe this investment will accelerate the adoption of production scale additive manufacturing, particularly in the oil and gas sector, utilizing our leading polymer and metal technologies, and then expand to additional market sectors over time, such as industrial aerospace and healthcare.
<unk> highlights the increasing focus of additive manufacturing by large global organizations and our opportunity an important and largely untapped market verticals, such as oil and gas.
This new venture is expected to begin ramping in scale in the fourth quarter of this year.
And finally, this past quarter, we announced a very exciting new product platform. The world's first synchronous dual laser SLA printer.
It delivers up to twice the speed and three times the throughput for cost efficient high quality production manufacturing.
This market leading platform reinforces the strong position, we've had for decades and stereolithography in this case addressing the unique requirements of production applications, while leveraging our portfolio of advanced polymeric materials and our software capability.
We have begun taking orders for this new printer and are seeing strong demand in both healthcare and industrial markets.
Specific to our health care business I'm very pleased by the recent five 10-K clearance from the FDA for our VSP bolus.
A solution designed for improved radiotherapy treatments.
Approximately 50% of patients that are diagnosed with cancer.
Steve Radiotherapy is a part of their treatment plan.
This translates to millions of procedures worldwide each year.
To help target the radiation on the desired location during a treatment the radiotherapy provider often used as a bolus, which is a flexible materials thats meant to conform to a patient's anatomy.
A poorly constructed or off the shelf bolus can often leave large gaps between the device and the patient skin, which can result in insufficient or unintended dosing levels may also expose adjacent anatomy to undesired radiation.
With our VSP bolus solution <unk> systems can design and deliver bolus is that are customized to our patients specifically anatomy and treatment plan improving the effectiveness of the radiation treatment and the productivity of the treatment Center.
This mass customization of printed devices for healthcare addresses both patient outcomes and provider costs, which is the fundamental goal for all of our health care solutions.
We have begun marketing the bolus solutions with key customers and expect to see solid demand for this family of products in the future. This is but one example of a broad trend in healthcare toward mass customization enabled through three D printing of patient specific solutions. This is the key drove growth driver for our healthcare business.
Across all of our end markets.
In addition to the 500 10-K for our new bolus product within days of closing our acquisition of <unk> at the end of the quarter, we were able to apply to the FDA for five 10-K clearance on the use of Brexit peak polymers for cranial maxillofacial reconstruction indications.
We expect this solution will be the first FDA cleared <unk> printed peek medical device.
<unk> brings us advanced polymer technology to our health care business, which will serve as a complement to our existing titanium implant solutions.
Allowing surgeons to optimize individual patient treatment plans customer.
Customer interest in these solutions is very strong and following FDA clearance, which we expect later this year, we believe adding the <unk> product line will further solidify <unk> systems as a leader in three D printed cranial maxillofacial and orthopedic implants over the full range of metal and polymer grade solutions.
Once these initial indications are approved by the FDA, others will undoubtedly follow driving exciting growth in the years ahead for our orthopedics business.
So to quickly summarize.
While the first quarter is typically a seasonally slower quarter for us and it was clearly impacted by the significant headwinds I mentioned previously we were still able to deliver solid double digit revenue growth versus last year again when adjusted for divestitures. Looking ahead, we expect the remaining quarters to be even stronger following a pattern similar to this.
Seasonality, we experienced last year.
Supply chain costs and inflation levels remain elevated and have clearly impacted our results. However were taking continued steps to mitigate the effects, which Jack will speak to in a few moments.
In total we're reasonably pleased with our first quarter results, especially given the macroeconomic conditions and ongoing geopolitical events, which we hope will abate as we move through the year.
Importantly, our results show that demand for additive manufacturing and production environments is resilient and continues to grow.
Even in these current less than ideal conditions industries are recognizing that the benefits of additive manufacturing can help protect them from the risks such as supply chain disruptions and skyrocketing costs.
With that let me turn the call over to Jack who will now describe our first quarter financial results in more detail <unk>.
Thanks, Jeff Good morning, everyone.
Echoing Jeff we've started off 2022 with good revenue momentum.
Given the macro headwinds I'm, especially proud of our team's execution, which has once again delivered solid top line results.
I'll begin the discussion with first quarter numbers, starting with revenue revenue.
Revenue for the first quarter was $133 million, a decrease of 9% compared to the prior year. This decrease was due to the divestitures of noncore businesses when adjusted for those divestitures first quarter revenue increased 10% as compared to the first quarter of 2021 the.
The continued growth validates the transformation efforts, we have guided the company through and demonstrates our ability our ability to deliver results in a challenging environment.
Our focus on providing additive manufacturing solutions for industrial and healthcare customers utilizing our broad portfolio of hardware and materials and software solutions combined with applications expertise is continuing to deliver consistent double digit revenue growth when adjusted for divestitures.
In the first quarter, we had GAAP loss per share of <unk> 21.
Compared to a GAAP earnings per share of 36 in the first quarter of 2021.
The decrease was primarily due to the gains recognized on businesses divested in 2021.
We reported non-GAAP loss per share of <unk> <unk> compared to non-GAAP earnings per share of <unk> 17 in the first quarter of 2021.
The year over year decrease was primarily a result of the divestiture of profitable, but noncore businesses in 2021 combined with higher spend on core investments in our business, including software new printer development and are a central or essential general and administrative infrastructure to support future growth.
In addition, we saw one time impacts to reflect the challenging business and geopolitical environment, including negative impact from bad debt associated with our decision to exit business in Russia.
The impact of FX as the dollar strengthened against other currencies, primarily the euro <unk>.
Combined the FX and Russian related bad debt had approximately a $2.05 impact to earnings per share.
Next let me discuss revenue by market.
Our revenue growth continues to be driven by strong demand in both the healthcare and industrial segments.
Adjusted for divestitures revenue in the first quarter for health Health care increased four 6% and industrial increased by 15, 7% as compared to the first quarter last year.
The rebound in industrial began in Q4 of 2020 and continued through 2021 and into the first quarter of 2022, making the fifth consecutive quarter of year over year organic growth in the industrial segment.
This highlights the strength and the opportunities.
Our industrial segment and is a direct result of the strategic investments we have made.
As examples our acquisition of tightened robotics, which closed subsequent to Q1.
With this acquisition, we have entered the market for large format <unk> printing systems using pellet based extrusion.
We believe our strong portfolio, including the new printers from tightened robotics offers ample opportunity for our industrial business to continue growth.
Now turning to health care.
Our healthcare segment growth ex divestitures continued in the first quarter, although at a slower pace than we would have initially anticipated as Jeff mentioned.
In particular revenue in our non dental segment of healthcare, which we called medical devices declined approximately 12% year over year.
This decline partially as a result of supply chain impacts for our manufacturing operations that produce and use medical devices.
Customer purchase delays due to Q1, COVID-19 resurgence that Jeff spoke about earlier.
Also partially as a result of device manufacturers delaying printer purchases to qualify our new flex and factory 350 dual laser printers.
We believe these new printers will provide strong productivity enhancements to our health care customers.
As a result once customer qualification is complete we expect robust demand for these new products.
Now, we turn to gross profit margin.
Gross profit margin for the first quarter was 44% compared to 44% in the prior year.
non-GAAP gross profit margin was 46% compared to 44% in the prior year.
Gross profit margin decreased due to multiple factors, including divestitures and related Q1 product fix and inflationary pressures pressures, particularly in freight costs, we expect gross margins to improve as we move through the year as production volumes and mix improves combined with the impact of recently announced.
This increases across multiple product lines.
GAAP operating expenses increased 16, 4% to $77 million in the first quarter of 2022.
To the same period a year ago.
On a non-GAAP basis operating expenses were $57 8 million.
A 13% increase from the same period a year ago the.
The higher non-GAAP operating expenses reflect the impact of divestitures offset by by higher spending in targeted areas to support future growth, including research and development and general and administrative administrative infrastructure as well as expenses incurred by acquired companies and the previously.
And bad debt expense associated with our exit from Russia.
Adjusted EBITDA defined as non-GAAP operating profit plus depreciation was $1 9 million in the first quarter of 2022, or one 4% of revenue compared to $19 8 million in the first quarter of 2021 or 13, 6% of revenue.
The year over year decline in margin was primarily due to continued focus on investing in growth.
Growth areas of our business and product portfolio combined with the impact of divestitures.
Now, let's turn to the balance sheet.
We ended the quarter with $745 $6 million of cash and short term investments on hand.
Our cash and short term investments declined approximately $44 million since the end of Q4 2021, primarily as a result of our operating loss higher inventory levels advanced tax payments, our investment and hatch and cash payments related to net share settlement.
Stock based compensation.
Subsequent to quarter end, we closed on our previously announced acquisitions of tightened in robotics and <unk> for approximately $80 million in cash net of customary closing adjustments. The acquisitions were funded with cash on our balance sheet.
We continue to have a very strong balance sheet with ample cash to fund organic growth opportunities and potential acquisition.
We believe investments both organically and through acquisition support our strategy of driving recurring revenue growth and higher adoption of additive manufacturing in both the industrial and healthcare segments.
Beginning last year, we provided guidance on full year non-GAAP gross profit margins and for 2022, we have expanded our guidance to include revenue and non-GAAP operating expenses.
We are narrowing our full year guidance to reflect our performance in the first quarter and expectations for the full year.
Given our strong demand outlook, we now expect revenue to be within a range of 580 and $625 million of.
The tightening of the range that we reiterated a few weeks ago.
We are narrowing our non-GAAP gross margin guidance to a range of 40% to 43% and our planned investment profile leads us to believe that non-GAAP operating expenses will now be between $235 million and $250 million.
This 2022 guidance assumes new additional significant macro economic events that negatively impact our business such as COVID-19, geopolitical events or other factors that could impact either demand or disrupt our supply chain.
I'll now turn it back to Jeff to comment on our upcoming Investor day before we take your questions Jeff.
Thanks Jack.
And before I do that I want to thank you for your dedication and leadership in your time with US here at <unk> systems Jets are as we've executed on a transformational plan to refocus our business portfolio on additive manufacturing driving improved growth and operating performance, while significantly strengthening our balance sheet your contribution and leadership has been greatly.
By me and the entire <unk> systems organization, and we wish you very well in your new role.
Finally, we're thrilled to beat within one week of our Investor Day event, we look forward to sharing more about our company vision and our plans for the future. The event will be held on Monday may 16th in Detroit is prior to the opening of the rapid plus TCT Tradeshow, a leading additive manufacturing conference will begin books.
<unk> that's been the afternoon discussing both our health care and industrial solutions business, including more detailed presentations on key technology elements of our business and applications that are driving our growth on.
On Monday evening will provide dinner and a very special presentation on our regenerative medicine efforts, which I think you will find fascinating.
We're excited about that this will be an in person events and look forward to having many of you there to hear from our executive team and see our products in the days to follow a rapid including the new SLA $7 50, as well as our extrusion printers from tightened in <unk> <unk>.
Seats are filling fast, but theres still time for registration of the event. Please contact our investor relations folks for more information.
And with that Kevin will open it up for questions.
Thank you, Sir we will now be conducting a question and answer session.
We'd like to be placed in the question queue. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Greg Palm from Craig Hallum Group. Your line is now live.
Thanks, Hi, good morning, everybody.
Alright, Greg Greg.
I want to start with the revenue guidance.
Still a pretty large range here, so maybe help us understand some of the assumptions that are still kind of baked into that and more importantly, what are the levers that get you either to the high end or lower end of the range at this point.
Yeah, Greg it's a bit it's pretty simple story right now we've got <unk>.
More demand than we can fill given the supply chain issues that we face so it's really our best estimate.
We anticipate being continue to be supply chain limited and hitting revenue. So it's our best guess at how that looks for the rest of the year.
Given the strength of demand, we were happy to tighten it up a bit and it's slightly raised the midpoint.
The only reason we have the breadth of range. We have right now Greg is supply chain issues that we can't fully quantify.
We left significant revenue on the table again this quarter is very similar to Q4 of last year, which is disappointing to us and to our customers.
And we're hopeful that drops off that would take us to the top end of our range.
And that just the easing general easing of supply chain trajectory you have anything else.
I think <unk> captured well, it's primarily just looking at supply chain Greg.
I mentioned, we left about $7 million to $8 million of revenue on the table. This quarter have we gotten that revenue we would have been.
60.
16% to 17% growth year over year adjusted for divestitures.
The supply chain constraints are frustrating our teams are working to Europe heroic efforts to work through it and as we as we see improvements available will hopefully move up to the higher end of the guidance range.
Greg what's really what's really exciting is to see the breadth of interest in additive manufacturing for production environments. It's I'm sure. It's true for the entire industry is certainly very true for us given our breadth of technology, but customers are really aggressively looking at how they could use additive.
Some some will adopt some may not but in general the opportunities are out there to drive some real exciting growth.
It's frustrating to be limited by supply chain.
Much rather have that condition, then the opposite and I see no end in sight from a demand standpoint, right now it looks very positive.
Yes, it's good I mean, maybe digging into the supply chain discussion a little bit further.
Is your sense that there are.
New customers that are looking at this technology as a way to either onshore transform supply chains.
It's certainly something that everybody seems to be talking about but maybe give us a few examples if you can talk about what youre seeing exactly.
Yes.
<unk> is a very sensitive about for a variety of reasons about what they want to onshore but in general Greg I can tell you. Its absolutely true there is no doubt about it and it's broad based and I is just exactly like our company is looking at our supply chain, how do we lessen the risk of.
Supply disruptions, how do we bring closer to home and how do we save money and our customers are doing exactly the same thing theyre looking at.
The older days it was performance driven for parts you can make a part with additive it will perform better in the system.
Big driver now is on top of that is derisking, the supply chain and reducing cost and the reason that we've made the investments we have particularly in software in the last 12 months is the rate limiting step we really believe given the pace of the printer technology is moving at the rate limiting step is going to be much more in that field.
Materials and software for bringing the products the fleets of printers into the factory.
So.
From our customers' standpoint, I think we're talking a lot about how they bring fleets and efficiently and then obviously, we're providing as many new materials as we can for printing because thats, where customers want to have and so great demand. The technology in printers is moving forward as it always has very quickly.
And we are qualifying multiple suppliers on all key components to make sure. We can meet the demand we see but what you see from a demand standpoint, Greg is exactly what you've read in the newspaper. It's it is every every industrial company I would guess.
In the world, especially in the U S and Europe is looking at how they derisked and bring their supply chain closer to home, but do it in a cost effective manner. So automated systems.
<unk> AI employee applied to fleets all of that in order to minimize the labor content.
And obviously labor costs are up so they've got they have got to not only bring that bring production in house closer to home they've got to drive it down and drive it down and cost by automation and which again gets back to software.
So long winded answer to your question I hope that I hope that color is helpful.
Yes, very much so I appreciate that and <unk> best of luck to you going forward have enjoyed working with you here.
Thanks, Craig.
Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.
Yes, Brian .
Hey, Good morning, first just echoing Greg's comments best of luck and good working with you.
Thanks, Brian .
Yes, yes.
Yes.
Hi.
There has been a slowdown in volume at your largest customer you had a record year.
I think dental was up like.
90%.
Dental revenue for you is up like 90% in 2021.
I don't know if you said today, but we're backing into somewhere in the 20% range for the first quarter.
Growth in dental revenue and I'm. Just wondering are there any adjustments you are having to make in terms of costs to our production.
Given the volumes there.
For dental liners have declined materially.
Maybe I'll comment and then <unk> can supplement as well here, Brian very good question.
I would tell you Brian the demand is still very strong.
It is unfortunate things in the world has become more difficult for for dental in general I mean things that are viewed as optional procedures.
It's unfortunate that it's become a more difficult environment, but in terms of demand and demand outlook and things.
It may shift a little bit over time, but it's not led to any any significant changes on our part in terms of supply of <unk>.
Product to our to our customers.
Or how we're managing our supply chain, we want to make sure we're not holding them back in growth and.
There are numbers may fluctuate, a little bit, but they take a long term view and invest for the future given what they've said publicly about their market share penetration and things that are growth prospects look tremendous for years and years to come so no no real changes to us there may be fluctuations quarter to quarter, but nothing significant as we run on a pretty long.
Term.
<unk> plan with all customers of that scale.
Sure.
Reiterate what Jeff said, I mean, I think our customers in that market still see themselves as lightly penetrated into a big opportunity.
And while they may see short term impacts in 'twenty two I think.
Their stance with us is really much more focused on the long term potential of that market and making sure. They have the infrastructure to support it and.
We reiterated.
We indicated in Greg's question.
Our guidance range reflect supply chain more than it does our our perceptions of customer demand and that would include the dental segment.
Okay.
Yes.
Just one follow up question on that topic that youre, so youre not seeing.
In 2022, and I guess your guidance reflects any any material decline in there.
And your customer spending of Capex spending.
On the type of equipment that you sell.
Yes.
Yes.
Yes, I want to be careful Greg did not did not.
Talking about inflammation or I'm, sorry, Brian I am sorry, I want to make sure not to talk about sensitive information to them, but I would tell you in general our guidance fully baked in the input from obviously that customer and all others. So.
We feel really good about our revenue profile this year there'll be individual fluctuations, but by and large it's great to have a customer. It takes a long term view and and appreciates that they needed to keep their suppliers moving along and we're very very happy with the relationship.
Okay got it and then just last question, where do you think gross margin you said it should improve throughout the year, where do you think the gross margin can get to as Youre exiting 'twenty two what would be the goal.
But I think we mentioned in the script <unk> correct me, if I'm wrong I think we see it we see a rising throughout the year.
Lower it was lower in Q1 than we would've anticipated.
Primarily for cost reasons with the supply chain, both labor and materials for cost reasons now we're driving pricing, we see volumes continuing to rise. So we should get some economics back.
So I would expect it to rise throughout the year Brian .
But I think it's it became less realistic to say we had a shot at the very top end of the prior range. So we brought it down a point and now that that could flip the supply chain thing is yes.
God knows when it's going to clear it could clear suddenly things can happen, but I think we always want to be pretty realistic with you guys. So bringing the top end down a point was was important to us and if we will hope to revise that every quarter going forward and give you our best view jets or anything else.
Brian We obviously give guidance for the year, we don't give guidance for where we think we'll exit the year. What I'll say is there's various moving parts that feeds into gross margin.
And so the puts and takes of is kind of what leads to our guidance range.
Look at Q1.
We saw parts cost a little higher than we anticipated and we saw freight costs higher than we anticipated.
Those combined probably impacted gross margins by about two points.
As a result implemented price increases that went into effect in Q2 to help solve that.
We're continuing to look for the year to see if we should expect further increases and be prepared to respond accordingly.
We also have the impact of production volumes you saw what our tremendous tremendous production volumes did in Q4 to our gross margins.
As we go through the year, we obviously expect revenue Q1 is our seasonally light quarter. So we expect production volumes to increase and therefore, helping the margin side and we expect we expect changes in mix as well as we sell more software in materials. So all of those are kind of the ups and downs of gross margins, which was why we don't provide an exit guidance could provide more of an annual guide.
February , whereas <unk> been around those ups and downs.
Yes understood. Thank you very helpful.
Thanks, Brian .
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from <unk> Mohan from Bank of America. Your line is now live.
Hello, Thanks for taking the question. This is John on behalf of <unk>.
I just wanted to talk about.
Guidance for Opex. So it seems like it slightly went up.
At midpoint.
Just wondering how should we expect this.
The opex to ramp throughout the year, and where is the incremental opex being invested into.
Well I'll, let Jack speak to the ramp because I am not.
It may be more of a steady state spend but I'll, let <unk> speak to the ramp.
The increased spend is being driven by a couple of factors and it gets down fundamentally so we see great demand going forward for additive we want to make sure that we have the product technologies that folks need and both metal and polymer and then particularly materials and software. So we continue to spend heavily on <unk>.
And we've got to make sure our infrastructure is as.
Has the robustness, we need this for sustained double digit growth as we really believe going forward with the demand profile, we see we're going to be able to deliver.
The capability to deliver double digit organic growth.
For several years here to come and there is a certain scale of infrastructure you need to do that so we're investing in as we mentioned it finance all the.
The audit automation all the basic foundational infrastructure you need to be at our scale and grow at double digits. So that's why you see the increased spending level. This year driven by an injunction in terms of ramp.
We don't expect a significant ramp over the balance of the year.
We part of the increase is the acquisitions have tightened <unk>. Those are now fully on board in Q2.
We don't expect any further ramping them and then outside of the tightened in <unk>.
We've baked.
Spending plans for the product development things.
Infrastructure things that Jeff had talked about.
And.
It's partially the result of the range because we've we've begun that spend but to the extent to the extent, we don't hit the spend in Q2 that doesn't necessarily get pushed to Q3 or Q4, So we're really expecting kind of flat over the three quarters.
Okay got it thank you.
If I may for a quick follow up.
You referenced the supply chain issues I'm, just wondering what specific areas are you seeing the most impact the sourcing.
Hi.
Logistic cost et cetera. Thank you.
Yes freight freight as an ongoing issue.
Driven I'm sure Bye bye pray utilization in general and then and obviously fuel.
The components III, John I would tell you I cannot give you an answer it changes by the day.
I think everybody is is around.
Around the world is hand to mouth in a lot of componentry, so truly I heard somebody call yesterday on one of the news networks, a whack a mole it truly is so.
We are deploying excess of resources, if you will on supply chain.
Working with our suppliers qualifying new suppliers, just making sure we can meet the demand that's out there so.
It is a challenge and embedded in that our labor costs across the board from components due to freight costs things like that it had been embedded labor content as well so it's a challenging environment and I just remind myself on the worst days that we see I would rather have this problem than a lack of demand.
But it is a true challenge right now I think for all companies.
Yes, John I'll just add.
As Jeff said.
Component sourcing component costs.
We were up.
A $1 million year over year and freight costs.
Part of that is higher freight rates, but part of it is also because of slower shipping times, let's see we've had to we've had to air ship more we do expect hopefully that piece will improve as we go through the year because we are now adjusting our our model to plan for a longer shipping times.
And sort of moving back more to see shipment, which will help our freight cost means higher at slightly higher inventory levels, but we're adjusting and reacting as quickly as we can.
John It's amazing machines are made up of hundreds of thousands of components and in.
In normal times, you don't think about that but in supply chain constrained times.
You can be you can be hamstrung by anything in the machine that can cause you to not ship. It. So it's truly an education process everyday I think for for leadership teams at all industrial companies right now to look around and it is what I believe is really fundamentally driving the demand for additive manufacturing is people don't.
Want to be left short on a component that they didn't even really realized was at risk of being in short supply. So they look at additive and opens the door for additive and then as you bring it in and you look at the economics, you say, maybe I should make more and more things with this process. So it's really.
While the one side is giving us a lot of growth opportunity and they are tremendous.
That will not go backwards, that's truly once they've got this in place, it's exciting and they want to grow it.
It is an ongoing challenge in terms of delivering to demand. So it's two sides of the same coin.
Okay, great. Thank you so much.
Thanks, John .
Thank you. Your next question today is coming from Troy Jensen from Lake Street Capital Your line is ally.
Hey, gentlemen, congrats on the solid results in a tough environment.
Thank you Charlie good to hear your voice.
Hey, guys I guess, Jeff for you maybe a couple of I think it was three months ago, you talked about refreshing the product line over the next 18 months and I think we've seen one rate with ESL, a 750 and just wondering this next week is going to be a big week for operating product introductions.
Troy.
We have.
What I think is a really exciting product lineup for the next 18 months youre going to hear regularly of new products being launched we you go through a debate internally about how much how much do you really reveal at any one time, but.
But I can I can so youll get a lot you'll get more information on Monday, and we're excited about telling you about it.
It will be a little judicious, because there's competitive issues and things like that so we've got to we've got to.
Be a little bit guarded, but I would tell you. It's Troy if you see a theme in the 750 or at least and you, particularly with your knowledge of the industry would appreciate this is backward compatibility and forward upgrade ability is a really big deal. So like this new 750, you can you can buy it as a single laser system or dual laser system.
You can upgraded in the field as Scott Modularity Thats kind of the theme that our technology folks are working toward and our new product platforms. So the customers are not stuck having to having to reinvest significant capital. They can do incremental investments and make sure. They also have backward compatibility with products.
<unk>.
I'm I'm going off on a little bit of a tangent will tell you as much as we can next week and I would encourage you. Please ask all the questions, which you always do we will have a 750 <unk> rapid and we will tell you as much about the roadmap as we possibly can okay. Okay. Perfect data will you be at the event.
I will not be at the event, we will have our new starting interim CFO at the event.
Alright.
Good luck.
Thanks, George maybe one one quick follow up question. So it seems like every CEO is applied in the body and administration and this ATM forward initiatives.
Just curious have you seen any more details and what exactly are they going to do to incentivize adoption.
Yes. It is.
A point of great discussion Troy.
I would tell you it's been.
Long enough I rarely make any definitive plans based on federal actions and intent and direction, but I do think it reflects the sensitivity in Washington to the benefits of additive and what it can do for the robustness of the U S economy, and that and the resiliency, reducing our dependence on overseas source.
As of things.
I was in Washington, a couple of weeks ago, and I would tell you the discussion around three D printing additive manufacturing is on everybody's lips.
There is a defense component to it there is a national interest component to it and there's a resiliency factor that we don't want to be brought down by other countries and pandemics and things like that.
It's great My interpretation my interpretation of the Bill which is strictly the layman is that it's intended to help smaller businesses adopt additive and so I think in terms of driving demand for us. It's a great thing I'm not sure that the Oems of additive.
Will benefit directly I don't know that we need to benefit directly but certainly if it helps our customers adopt additive, particularly small companies.
Helps them grow I think it's fantastic so I applaud, what they're doing directionally it'll be interesting to see what they are we rarely modify plans to meet him, but it's consistent with what we're investing in any way so I'm all for it and a great to see the sentiment in an industrial direction there.
Hey, guys, Congrats and good luck going forward and see you next week.
Thanks, So much Charlie I look forward to seeing you.
Thank you. Your next question today is coming from Kieran Mccabe from Stifel. Your line is now live.
I guess I just had a.
A question and given kind of the.
Continued resilience in demand in <unk>.
Further adoption of additive manufacturing and you had the.
Acquisition of Oct and pack in September I Wonder if maybe you can kind of give an update or kind of a sense with conversations with customers about really using software too.
Drive the adoption of <unk>.
<unk> environments and the need for software.
Kind of since the octane acquisition kind of any update you can provide on that.
Have a lot of details for that next week, but anything you could kind of touch on that now that'd be that'd be great. Thank you sure I'll make couple of comments and it's so important to us quite honestly in the future that Rentsch won a leader of often will be at our Investor day event to talk about the <unk> software platform and where it's headed.
I would tell you.
For all the folks on the phone the software is an incredibly important issue in bringing additive into production environments again, it did used to be to put it in a laboratory of one off machine. It didn't really matter as long as they wanted to machine that was easy to use and smart but to put fleets of machines. So we're talking guys about hundreds and thousands of printers and <unk>.
<unk> you.
To avoid process variability and the use of large amounts of labor you absolutely have to have a robust software environment to run them at manufacturing operating system and that operating system cannot disrupt the ongoing factory when you install it which is what we love about okta and they can plug into SAP or Oracle.
And then you can plug not only printers, but post print processing robotics, you can plug all of that in through Apis into the auction platform. So customer interest in that platform I would tell you has been enormous.
We're in dialogue with companies everyday about at large companies.
I think it's a.
It's a new field, so everybody's trying to learn learn what it can do what they need to do with it but interest has been quite high. So I am very pleased with that and I think it will help ocwen will help our entire industry continue.
Continue to meet this increased demand for additive in production.
This is why we set it up as a separate.
Somewhat independent firewall business is we wanted to help the entire industry and the entire customer base adopt additive manufacturing. So youll hear from the leader of that business next week.
In person and we've staked out a fair bit of time on the agenda for software discussion I think youll find it quite interesting.
Great. Thank you so much.
Youre welcome. Thanks for the question. Thank you. Your next question today is coming from Jairam Nathan from Baird. Your line is ally.
Hey, good morning, guys.
Good morning, Ed.
So thanks for the.
The commentary around the supply side Thats been helpful, but I did.
Just wanted to ask a couple of questions on <unk>.
Demand so I've been hearing from some other companies that they're seeing orders slowing and it sounds like it's mainly in some cases due to like inflation interest rate and interest rates rising and then geopolitical risks just generally increasing uncertainty.
So they're either it sounds like in some cases slowing or stalling or delaying.
Their capex decisions so.
Our capex orders. So I'm wondering are you seeing any of this or is there any indication that you might start to see some of this in customers, making that shift in the coming months and then on the flip side I am curious if keeping.
This can actually be a bit of a tailwind for additive and you guys because in some cases it can be a little more cost effective and easier to ramp up and ramp down quicker.
Quickly.
Yes I've.
I've already gone on about the benefits and the positive drivers.
We see based on all of these difficulties in the environment.
Those are true and there are profound theirs. They are big drivers the only real risks can I tell you we have not seen it manifest itself at all but it's just my opinion the only real risk is with this ryzen ryzen inflation and the corresponding rise by the fed in interest rates.
It starts while it tip toeing toward.
Recessionary pressures and if our customers finally believed that a recession is coming everybody starts looking at detailed their capex spending so eventually that could become.
A headwind right now there is no there is no headwinds there's no sign of that happening right now I would tell you in our company its demand is very high.
Especially exploring new ways of bringing this into production and is driven by everything we've talked about.
The risk of an extended supply chains.
Supply chain disruption pandemic all of that on the negative side in the future.
It would really only be.
If the entire economies slowed down to the point, where in the industrial firms started really looking at how much new capacity they needed to add I still think there'll be an underlying tremendous driver to bring it closer to home whenever that capacity is and to make it more robust at.
At the same time offsetting that could be a slowdown in the general economy again, we see no evidence of that in our demand profile right now, but if I were to speculate that's the one thing that could affect I think.
The whole industrial sector.
Jack if you have any other views.
The only thing I'd add Jared as I've said I can't predict.
What the economy is going to do in Q4. This year Q1 of next year, but looking looking with shorter term I'm quite pleased with where our our pipeline looks sits right now for Q2.
So.
That would seem to indicate that demand is still out there is still strong.
Got it okay.
That's really helpful guys and then.
Just.
Kind of a follow up so.
I'm just curious have you guys seen any shifts.
Or is it pretty steady from a sequential utilization standpoint, and then subsequently consumables from from Q4 to Q1 and then.
Any sort of outlook on that remaining steady increasing or decreasing for the rest of the year.
Jack do you want to comment on the individual elements.
<unk> consumables.
Q1 is typically lower than Q4.
As you are to do a year over year number.
Give you some numbers that are adjusted for divestitures.
Materials revenue was up about 11%, 12% year over year.
I think we felt pretty good about that.
Printers were sorry.
Sorry systems product revenue was up closer to 22, 23% year over year.
So.
Printer sales were quite strong, which bodes well for future materials revenue.
I like what I see materials growing strong, but printers grows even stronger because that means there's going to be follow up materials revenue in the future.
And again, we'll try to we'll try to give you a little bit more color on our on the size of our installed base and our growth our growth outlook next Monday.
When we talk it's it's really impressive numbers quite frankly, the scale of it so.
It's interesting I think were among the first learning of.
How to how to sell and manage large fleets of machines, especially mixed fleets not only metal and polymer, but our machines and those those from elsewhere in the industry. So fascinating types will share some more insight on that on Monday.
Great sounds good looking forward to the Investor day in and Jack Sorry, Best wishes and what comes next thanks sure I appreciate it.
Thank you we reached end of our question and answer session I would like to turn the floor back over to Dr. Graves for any further or closing comments.
So thank you all for joining our call. This morning, we hope to see you next week in Detroit and updating you again on our progress next quarter, Thanks and have a great day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.