Q3 2022 Stratasys Ltd Earnings Call
Good day and welcome to today's conference call to discuss Stratasys third quarter 2022 financial results. My name is Donna and I'm your operator for today's call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation. If anyone requires assistance during the event. Please press star zero on your telephone keypad I'd now like to turn the call over to you on a voyage Chief Communications Officer, and Vice President of Investor Relations for Stratasys. Thank you. Mr. Boyd. Please go ahead.
Morning, everyone and thank you for joining us to discuss our 2022 third quarter financial results on the call with US today are our CEO , Dr. Jan <unk> and our CFO Etan 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 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'll 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.
All statements that speak to future performance events expectations or results are 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 <unk>.
<unk> annual report on form 20-F for the 2021 year. Please.
Please also refer to our operating and financial review and prospects for 2021 and for the third quarter of 2022, which are included as item five of our annual report on form 20-F for 2021 and in exhibit 99, two to the report on form 6K that we are furnishing to the SEC.
Today, respectively.
He is also see the press release that announces our earnings for the third quarter of 2022, which is attached as exhibit 99, one to a separate report on form 6K that we are furnishing to the SEC today.
Our reports on form 6K that we furnished to the SEC on a quarterly basis and throughout the year provide updated current information regarding our operating results and material developments concerning our company strat.
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>.
Yeah.
Thank you Yana.
Good morning, everyone and.
And thank you for joining us.
Our results this quarter demonstrate the ongoing solid business performance.
Physical health of Stratasys.
We delivered the highest quarterly revenue in seven years as well as five consecutive quarters.
Positive, earning.
Demonstrating our unique capabilities to generate profitable growth and.
And we believe.
We can continue generating.
<unk> operating profitability for the foreseeable future assuming no further material deterioration of the broader economic environment.
It is a compelling time to be a leader in three D printing.
In fact, many of the challenges facing our target industries today.
Same factors.
Ultimately justify accelerating the transition from traditional to additive manufacturing these.
These include the ability to adapt rapidly and cost effectively to logistics bottlenecks higher transportation costs.
Sustainability requirements and faster product innovation.
Practices continued to expand our customer reach.
Both our technologies and our vision of the future of additive manufacturing is more robust than ever.
Yeah.
We continue to have strong engagement with both our installed base and new customers for our leading F D M and fully jet offering.
One is our three newer technologies.
However, the opportunities that we have.
So come with some obstacles in the current macro space.
<unk> are facing challenges today that are impacting their purchasing behavior.
Market has slowed resulting in longer sales cycles.
And occasional deferral of orders.
To that point, we remain laser focused on controlling what we can.
To be best positioned to effectively execute sustained profitable growth.
Importantly, we have a broad global diverse set of offerings across a multitude of systems and materials.
The steady contribution from our organic technology.
And the incremental revenues from our new technologies.
Enable us to deliver consistent growth with improving margins.
We also enhanced our results through a relentless focus on costs, we are tightly managing our cost structure.
Evidenced by the ongoing to improve the efficiency in our Opex spending.
Reflected in the year over year 130 basis point improve.
The improvement this quarter in Opex as a percentage of revenue.
We expect to continue finding efficiencies in the business to further demonstrate the resiliency of our model.
As a reminder, our main OEM business is to deliver polymer based three D printing solutions through hardware materials software and services with a focus on shifting more of our revenues from prototyping to manufacturing.
Revenue in our OEM business this quarter was up approximately 10% year over year at constant currency.
Overall revenues were up seven 8%, excluding divestitures and on a constant currency basis.
Given by our highest third quarter system revenue in six years.
Which grew 18, 9%.
Just Ted for FX and divestitures.
Impaired to the third quarter of 2021.
We believe that the contribution from our new technologies, SaaS, B III and Neal.
It's more than doubled our addressable market and open up new use cases and opportunities to replace traditional manufacturing across vertical.
We are expanding and improving our line of <unk> and material.
As well as starting to see the positive progress on Peachtree and stuff.
More recently launched mass production solutions.
<unk> delivered solid growth this quarter and it's still the largest technology in three D printing to date.
A recent proof point of the continued demand for F. D. M is a repeat sale this third quarter to a global automotive OEM for more of our industrial manufacturing great F 900 system.
Furthermore to fund the additional growth we ended the quarter with a strong balance sheet that includes no debt. This continues to support our growth through organic investments as well as accretive acquisition opportunities that we uncover including early stage, but.
Highly compelling technology, driven businesses that we believe will contribute to our growth by leveraging our infrastructure.
Now, let me turn to some of the exciting achievements and milestones reached since the end of the first half of 2022.
We believe that a comprehensive materials offering.
Compete.
And even improve on traditional manufacturing is key for taking three D printing into through production application.
We are very excited to update you about our progress on this material journey across all of our technologies.
In August we agreed to acquire <unk> additive manufacturing materials business.
Which includes R&D facilities and activities global development and sales teams across Europe . The U S. China, a portfolio of 60 additive manufacturing material and then extensive IP portfolio with hundreds of patents and patents pending.
<unk> is an example of a business.
We believe can drive it leverages, our infrastructure and relationships.
It has been an important part of our third party materials ecosystem.
As we are already a distributor of their solvency regime that are available for use in our meal and origin won three different too.
Adding this business to the strategies portfolio.
Provides us the ability to offer more complete solutions to customers.
Celebrate next generation materials development, and expand our already differentiated materials offering and thorough lithography DLP raising and powders.
Closing remains on track for the end of the first quarter of 2023 and is expected to be immediately accretive.
Or SDM.
We announced the availability of 13, new validated materials.
And our open Aam's software.
This includes several material from <unk> and partners like victory in EMEA.
It also includes several existing materials now available in new colors.
For materials like 90, 85 thermoplastic this is significant.
Significant because it makes it easier for our customers to use three D printed production parts in more customer facing application.
We're statics letters such as in commercial aircraft and train car interiors.
<unk> <unk>.
<unk> represent a tremendous acceleration in the pace of new materials innovation for F. D M opening up new applications fell faster than ever before.
Yeah.
We also introduced two new validated industrial materials for the origin, one printer in the quarter Petri stretch $4 75 is a new raisings from our partners Henkel looks like that Ed.
Software elastomer to our portfolio, which are our customer requested.
For example, we have a large automotive customer that has been using the material for end use dose ceiling. In addition, we introduced Petrie deflect 120, which is our first validated material format Bonnie.
Pete read deflect one 'twenty is designed to stay strong at high temperatures ideal for applications like modes in manufacturing.
We are also excited to have reached a key milestone in the dental industry, which is the largest manufacturing target market in three D printing today in terms of the amount of material consumed.
And it continues to grow.
I'm happy to share the strategies has recently received FDA five 10-K approval of a new revolutionary raising.
For our J five vintages that we believe will be a disruptive growth driver for us in the dentures industry.
<unk> printing of ventures is particularly exciting as it is only in its ground floor stage. It is a 5 billion addressable market today and growing and we plan to take a meaningful share over time. We are currently working with several leading industry partners to prepay.
Therefore, each commercialization and look forward to officially launching the solution at LMT Lab day in Chicago at the end of this coming February .
This is a great example.
While we are expanding the poorly jet and market universe and believe that it has promising future for non prototypes and used path in medical dental and fashion application.
In addition to this strategic initiative, we invested in one company and acquired and not deal that will enhance our capabilities in the area of artificial intelligence.
For three D printing.
Both reflect our strategic plan to incubate innovative technologies by bringing them under our umbrella.
Cultivating their advancement and positioning them to contribute to our overall long term growth.
And both will be available to our customers in 2023.
First we invested $10 million out of 15 million raised by Med Tech startup axial treaty.
Actually all three DS AI powered cloud based three D printing platform enabled health care provider easily Sigma and city and MRI scans for anatomic models.
Fraction of the cost and time of other solutions.
Really printed models.
Created with our digital anatomy and J <unk> Medi jet systems are used for pre surgical planning in many leading hospitals.
To improve surgery success rates.
And patient recovery time.
We are now working with Accel three D on a joint offering that we believe will remove barriers to entry for the majority of hospitals in many of our key markets, allowing our solution to truly become a standard part of patient care.
We look forward to sharing more at the upcoming RSA Tradeshow later this year.
Second we acquired <unk>, a closed loop software company for additive manufacturing, we know <unk>, well, having watched them grow as one of our connectivity partner.
They are cloud based solution will be fully integrated into our grasp that additive manufacturing platform.
<unk> technology helps customers weekly stake diagnose and automatically correct deviations between <unk> five and <unk> printed part within a closed loop additive manufacturing process.
This means every step in the process is interconnected from inspection to diagnosis to correction. The latest version in testing uses artificial intelligence to actually predict and readjust model changes in advance.
The result is more accurate production runs in much less time.
Weeks or even months of potential improvement.
And at a lower cost key areas of focus for the manufacturing industry.
These are just two examples of companies joining our platform that we believe will help drive our innovation vision forward.
To sum up we are laying meaningful foundation for further growth.
And we are proud of the expansion of our capabilities this quarter for new technologies and materials that will drive our industry leadership for the long term.
I will now turn the call over to our CFO eight times the meal to share the financial results and update our outlook for the rest of 2020 to aten.
Thank you Joe and good morning, everyone.
We achieved solid results against an increasingly challenging backdrop in the quarter.
And as <unk> shared growth within our OEM business was even stronger up almost 10% on a constant currency.
Compared to the third quarter of 2021.
We are particularly proud of the improvements in opex as a percent.
<unk> of revenue, which shows the progress that we're making on driving efficiencies across the platform.
In general our results demonstrate the resilience of our diversified offering provides.
Now, let me dive deeper into the numbers.
For the third quarter consolidated.
Revenue of $162 2 million was up 2% and.
And revenue adjusted for divestitures.
And at constant currency was up seven 8% from the prior year period.
Product revenue in the third quarter rose by 3% to $112 1 million compared to the same period last year.
Or by 10, 5%, excluding divestitures and on constant currency basis.
Within product revenue system revenue grew by seven 7% to $56 3 million compared to the same period last year and.
And increased by 18, 9%, excluding divestitures and on a constant currency basis.
Consumable revenue declined by one 4% to $55 8 million.
Compared to the same period last year, but grew by three 4%, excluding divestitures and on a constant currency basis.
Aside from FX and Makerbot consumable spending was impacted by the general slowdown in the market, especially for materials used for prototyping.
Additionally, there is a natural lag time between hardware purchases and consumables.
And given the lower hardware sales.
For the five years prior to 2021, it takes time for our installed base to drive sales back to the level before that time period.
The good news is now that hardware sales have been growing again, we expect consumables to grow steadily beginning next quarter and beyond.
Yes.
Service revenue was $50 1 million down eight 1% as compared to the same period last year.
Up by two 1%.
Excluding divestitures on a constant currency basis.
Within service revenue customer support revenue grew four 7% compared to the same period last year and increased by 9% on a constant currency basis.
Now turning to gross margins.
GAAP gross margin was 43, 6% for the quarter compared to 42, 9% for the same period last year.
non-GAAP gross margin was 48, 5% for the quarter compared to 48, 2% for the same period last year.
Gross margins benefited from operational efficiencies and the divestment of Makerbot during the quarter par.
Partially offset by the FX impact.
GAAP operating expenses were $86 4 million compared to $90 1 million during the same period last year.
non-GAAP operating expenses were $74 2 million compared to $74 9 million during the same period last year.
non-GAAP operating expenses were 45, 8% of revenue for the quarter compared to 47, 1% for the same period last year.
As we continue to focus on operational efficiency improvement.
Last quarter, we noted that the incremental revenue came with an implied cost of only 25% and.
An improvement from 35% in the Q1 period.
This quarter, we are pleased to note and improved efficiency of our model.
With the additional operating expenses were actually negative instead of the historical range in the mid to high 40%.
Clearly a driver of the improved margin profile.
Regarding our consolidated earnings.
GAAP operating loss for the quarter was $15 6 million.
Compared to a loss of $21 9 million for the same period last year.
non-GAAP operating income for the quarter was $4 5 million compared to a $1 8 million for the same period last year.
The increase reflects our business scalability and improved operational efficiencies, which once again resulted in gross margin growth and lower operating expenses.
GAAP net income for the quarter was $18 7 million.
Our 28.
<unk> diluted share.
Compared to a net loss of $18 1 million or 28 cents.
Per diluted share for the same period last year.
GAAP net income included $39 1 million gain from the deconsolidation of makeup.
non-GAAP net income for the quarter was $3 3 million or <unk> <unk>.
Per diluted share.
Compared to a net income of $4 5 million <unk>.
Per diluted share in the same period last year.
Adjusted EBITDA of $9 9 million compared to $7 8 million in the same period last year reflected our improved profitability levels.
We used $18 4 million of cash in our operations during the third quarter compared to generating $3 million of cash from operations in the same quarter last year.
The use of cash was primarily driven by deliberately.
Inventory purchases.
We ended the quarter with $349 million in cash cash equivalents and short term deposits.
<unk> two $441 5 million at the end of the second quarter of 2022.
During the quarter, we used cash to make investments in companies that we believe will help further advance our strategic goals.
Our balance sheet and cash generation profile remained strong.
And we are well funded and well positioned to capitalize on value enhancing market opportunities.
They are identified.
Now, let me turn to our outlook for 2022.
I would note that our guidance now excludes any further contributions from makerbot as the merger with Ulti maker.
He is now closed.
As you have described earlier market conditions have become more challenging.
Our last update and currency exchange rates continue to pressure the business.
We believe this challenging backdrop will continue for the balance of the year.
And well into next.
Primarily affecting our prototyping business.
The impact include delayed purchases of systems and materials longer sales cycle, and overall recessionary and recessionary concerns reflected.
In buyer behavior.
Given our year to date results and current visibility of our end markets. We are updating our full year revenue guidance as follows.
Our previous guidance was provided before they make about divestiture closed.
Makeup of divestiture reduces our guidance by $17 million, bringing us to $658 million.
$668 million.
In addition to makeup of divestiture.
Further updating our guidance to 648 million to 652 million.
We are impacted by delays in purchasing activities by our customers and continuing FX challenges.
The new guidance represents approximately 10% full year growth over 2021 after adjusting for the Makerbot divestiture.
From a gross margin perspective, we continue to expect full year 2022 to be flat to slightly higher as compared to 2021.
As a reminder, we expect our margins to get back over 50% once the current macro headwinds Pat.
In 2022, we now expect our operating expenses to be approximately $5 million to $10 million higher than 2021.
This improvement from previous guidance is primarily due to the impact of the makeup of divestiture and improved opex efficiency.
We continue to expect non-GAAP operating margin to be slightly above 2% for the full year.
Longer term, we expect non-GAAP operating margin to achieve double digits as our growth plan unfolds.
We now anticipate GAAP net loss of $48 million to $39 million.
Or <unk> 72 to.
259.
Per diluted share.
And non-GAAP net income.
262, 8 million or nine to 12.
Per diluted share.
Adjusted EBITDA is now expected to be in the range of 34 million to $37 million down from $38 million to $41 million.
Capital expenditures are now expected to range between $15 million to $20 million.
Down from 20 to 25 million.
We're encouraged by the level of engagement with our customers and remain confident in our growth potential.
And we will continue to monitor global issues that can have an impact.
With that let me turn the call back over to you for closing remarks.
Sure.
Thank you Ethan.
The challenges our customers and our business phase II date in many ways highlight the benefits of editing manufacturing going forward, resulting in confidence for the years ahead, even as we navigate the current environment.
With our robust balance sheet.
We continue to invest in an expanded portfolio of hardware materials and software solutions that should allow us to meaningfully increase our set of applications.
To capture a wider range of customer is the relevance and adoption of three D printing grows and we drive additive manufacturing to scale.
I want to thank our global team for.
For rising to the challenge and helping drive continued profitability as our business continues to grow.
The relentless focus on.
On execution and investment for growth.
And ongoing profitability today is expected to drive.
<unk> performance.
And create long term shareholder value.
With that let's open it up for questions operator.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
<unk> tone will indicate your line is in the question queue. You May Press Star two if you would like to move to your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. We do ask you. Please limit yourself to one question and one follow up again Thats Star one chip I just your questions at this time. The first question today is.
From Shannon Cross of Credit Suisse. Please go ahead.
Thank you very much.
Just wondering if you can just provide some more color on what your customers are saying in terms of both geographic as well as the size and vertical up customers. You know in terms of this falling to purchases, but also where people are looking at investing how how customers are thinking about 'twenty three budgets.
In terms of Capex, maybe timing.
<unk> purchases that they expect that it'll come back fairly quickly or is this a long time deferred kind of decision just whatever you can do to sort of frame. The current outlook from a customer perspective, and then I have a follow up thank you.
Hey, Shannon. Thank you for the question.
Sure.
Well.
We are optimistic.
It's a challenging time, but the good side of chat.
Challenging times that is crystallize the differentiation.
And in those times.
Guys next door, the players will shine or those that have those long term relationships with strong installed base and are part of the daily.
Activities of the customers, but also with <unk>.
Part of their long term plan.
And in that sense.
We're in a great position, because we have direct discussion with our customer there our long term plan, yes, they're all delayed.
There is an economic global slowdown.
No doubt.
But it's not that they are going back I said.
Sorry, we are not interested in just about the pace of adoption, but it exists and we have great example from this quarter like what we mentioned auto player multiplayer OEM deal, it's a major deal.
Which is a continuation for a long term plan for long term plans.
Exactly.
We envisioned them with some delay in terms of revenue.
I would say automotive is doing well.
Aerospace is gaining some traction but in a slower pace.
<unk> is doing very well as defense is doing very well like government.
And also the Hall Medical center is doing quite well of course, the impact we see some impact there as well, but they are doing well in terms of geography.
Uh huh.
Surprisingly.
Europe is doing well despite the fact that it's in the middle of the war and a lot of <unk>.
Pressure on the FX.
But in terms of real results Europe is doing well also in the U S. But in all geographies we see.
Yeah.
I would say increasing.
Or.
Longer sales cycles.
Great. It sounds like you are probably gaining some share in Europe .
Can you can you talk a bit more about the gross margin what the drivers are there. There are obviously, many puts and takes between pricing and mix and commodity costs and all of that if you could talk both on product as well as materials and and maybe lay out a bit more about how you think gross margin will trend.
Yeah.
Hi, Shannon.
Thanks for the Great question.
Starting with our results.
You probably saw.
We improved our gross margin from the <unk>.
For Q3, 2021, which was at $48 two to $48 five which is a.
Really a great success in terms of everything that is going on in the world.
This improvement this trend we believe is sustainable again, we cannot speak about the macro and we cannot expect to get exactly how things will go globally, but as far as is concerned with us managing our business managing our operational efficiencies.
In trading revenue, which naturally.
It helps to improve our gross margin all of these aspects that are within our control. These are things that.
We're very focused and you can see the results of this quarter another thing to add.
As.
As we've discussed in previous calls.
In crane deliberately increased our inventory.
Helps us to better balance sheets.
<unk> C to air and some other aspects that impact gross margin and impact.
Impacts our Cogs in a positive way so we can better manage that.
<unk> and the shipment and that's something that we've been doing in the last few quarters and also this quarter and that's reflected in the ER and.
And the good gross margin results and will continue the trend the trend through.
We plan is trying to continue also taking into account the divestments and other element is the divestment of Makerbot, which positively impact our gross margin level.
Great. Thank you so much.
Thank you. The next question is coming from Greg Palm of Craig Hallum. Please go ahead.
Yeah. Thanks for taking the questions here I guess, just kind of following up on the last thinking there I'm just trying to figure out what your actual visibility level levels are obviously, the last couple of weeks of a quarter or a year around.
We are especially important for the business and so I guess, what I'm trying to figure out is is is.
The reduction in guidance specifically.
Byproduct of some bigger projects that you think are going to get pushed out or is it just the expectation that you might not get the same magnitude of a budget flush this year than what had been in previous years.
Hi, Greg Thank you.
Yeah.
We are in a good shape in terms of visibility processes is a very well organized company and we are running a forecast and quite.
Accurate, one and models and we are in good shape there.
The last few weeks of the quarter, it's all about unexpected delays.
So this is the situation. So we have a longer sales cycle, we have a certain amount of delays because some of our customers are saying, okay. It's okay, but I think it next bullet there.
So we.
We baked it all in.
Our models and we decided it.
We better.
Being a safer mode and adjust our plans and also in order also to balance our inventory to make sure that we are learning quarter about quarter by this.
I would say a longer sale cycles and therefore.
We adjusted the guidance, we don't see.
The demand is moving we just see a longer lifetime and longer sales cycles.
So it's relatively a small adjustment as you can see which when you calculated this uncertainty level. This can happen at the end of the quarter in terms of delay, but if you take the overall guidance change that we have implemented.
So sad southern half off of ourselves so it's really small adjustments.
Yep understood.
And I guess kind of looking forward, if we assume that this environment stays the same or potentially worse than I guess, what kind of levers do you have internally to sustain this.
Level of profitability and I guess under a more challenging macro.
Are you still comfortable with your double digit operating margin target looking out a couple of years or is there a risk that that gets that gets pushed.
Okay.
Yes, Okay go ahead.
Hi, Greg.
So our long term plan.
We've discussed on previous calls we still stand behind it we believe that we have created the right infrastructure to get to the.
Over 50% gross margin and double digit.
Operating profit in the mid to long term.
We are doubling our addressable market as we've discussed in previous calls by the addition of the new technology and everything else.
We have discussed and we will discuss today.
Puts us gives us a lot of confidence on the ability to get to that result with respect to profitability.
Naturally impacted by by the revenue growth, but there is a lot.
On management and or building on building the right.
And the right business model that as you can see in the last few quarters. That's worth we manage to a to remain or to increase our profitability level, even in a challenging environment, even with everything thats going on you can see that this is the fifth consecutive quarter with a with profit and.
The profit actually increased compared to the last few quarter. So thats something that is a lot of a lot of it is within our control and our focus.
Okay makes sense I appreciate the help vessel work. Thanks.
Yeah.
Thank you. The next question is coming from Troy Jensen of Lake Street Capital. Please go ahead.
Hey, gentlemen, first off congrats on the good results here in a tough environment.
Maybe starting with <unk>.
Welcome.
I guess I got a couple of questions on that so that's just so as you know a lot of your competitors DSM.
Resins.
Printers, and I don't think there's too many case studies of competitors system companies using other system companies materials. So I'd just love to know.
Your conviction, whether or not you can kind of maintain all of the DSM. So much revenue. So it goes to your competitors' business models.
Thank you Frank.
Great.
Opportunity to share our vision about my theory.
One of the most important obstacles in our journey towards manufacturer manufacturing.
It's all about materials.
Year to date are not.
Sufficient nothing to have off.
In terms of variety, but also in terms of I'll.
I'll say the profile of the material to replace real.
Manufacturing.
And here we are.
In a journey to transform it.
And <unk> is a super.
Super important.
Growth engine for us.
For the future.
Both in soft exceeding three technology in soft <unk>, because they have unique talents knowhow in fact, and we will leverage without new technology. So this is the big picture now to your question.
Question.
Of course, we checked it from all possible angles.
And we are going to grow this business and there is not I would say.
I would even share with you that it is.
Not that there is a deviation from the customers on the contrary the moment strategies inquiry, and we have more attention and more knowledge into additive manufacturing. They approached me proactively and want to look for collaboration and doing things together for the long term so.
So we had a good shape, there and you will see that our infrastructure, we leverage <unk> both on the material side, but also on the hardware side because it's also a driver for offers.
Alright, perfect. Good luck with that so my follow up.
Just on the new products, you know I'm always focused on origin in H $2 50, a I guess my checks indicate that origin is really.
Doing extremely well for you guys HD 50, maybe build a more complex sale I'm just wondering your thoughts on how those two products are meeting your expectations.
Okay.
Good.
We are like you monitory engaged on a daily basis.
[laughter].
Good traction on both.
There is a need in the market for those technologies.
Basic.
And we have good technologies with very clear competitive edge in both of them.
Both technologies.
Ramping up according to plan.
Of course, the ramp up of origin is faster very impressive.
And faster than soft because of the nature of the technology.
Technology that is easier to use when known in the industry, where there are high speed sintering the powder the new power the future of powder is something quite new in our business and we make sure that the ramp up of staff, which meets our expectations and plans.
Is.
Our big success, so we ensure that their adoption.
It's being done in the right way and our customers are successful.
So now we control it.
He's going to win.
Keep up the good work gentlemen.
Thank you. The next question is coming from Brian Drab with William Blair. Please go ahead.
Hi, This is Tyler who didn't answer Brian .
Morning, Thanks for taking my question.
But just wanted to start off with.
The usage rate of your manufacturing machines, and I know, obviously, there's macro headwinds that would play into this but as.
As the hardware is their install base picks up and you get more usage out of these manufacturing machine does that give you any more visibility into your gross margin target of 50% and then I'll have a follow up.
I can answer it.
Got it thank you for the question.
Yeah.
We are.
Monitoring and with utilization of our system through the connectivity through mainly through rough cut and we havent. Good by the way, it's a great asset for us to understand what's going on in the market we are not sharing it.
But I can give you the high level direction and Sam.
The high level direction.
Prototyping is more sensitive.
What at least what we are seeing prototyping is more sensitive to slowdown.
In terms of utilization.
Victory is less sensitive and overall in terms of consumption off months of our consumable manufacturing because it's.
It's an ongoing operation.
In our what we call unit economic model between three to five times than a prototyping.
So it's really a transformation in terms of our industry and of course it has impact.
On the gross margin led to eight on a share it.
Yeah.
Utilization.
Manufacturing materials.
We'll definitely have a positive impact on our gross margin we expect to see this.
More in the coming quarters and years as manufacturing.
And the production becomes.
More and more towards manufacturing.
As we said in the past year.
When manufacturing percentage.
Of our total revenue will grow that will have a positive impact on our gross margin.
Yeah.
Okay. Thank you for that and yes.
You had nice even split sequential.
Sequential improvement in gross margin.
I was just wondering if you could quantify kind of what the macro headwinds were from inflation and supply chain disruptions.
That headwind going towards gross margin. Thank you.
Sure so.
So high level as we mentioned the net impact is a growth of $48 two to $48 five year over year, but to your point there were.
More significant trends.
One is higher revenue and the positive impact on our gross margin.
We increased prices.
Chad over the year.
Q3, 'twenty one over the last year that had a positive impact on our gross margin on the other hand.
The cost and logistics.
And in a negative impact of roughly 200 basis points give or take.
And we also had the positive impact of the exclusion of Makerbot was only one month only the month of September since the deal closed at the end of August but that had a slightly positive impact on our gross margin. These are the main.
Items that impacted the gross margin trend.
Okay. Thank you for all that and good luck going forward.
Thank you. The next question is coming from Paul Chung of Jpmorgan. Please go ahead.
Hi, Thanks for taking my question. So just on the Opex side, you had a minimum bump.
This year, we will.
Talk about kind of the Opex discipline, you're driving here and you know as we think about.
The pace of Opex growth.
Maybe as a percentage of revenues next year.
You know what what do you think we should expect and what range and what are some of the efficiencies are kind of you know kind of focus on next year.
Okay.
Thank you.
Maybe I'll start with the need to look to longer term opex as a percentage as we plan and this is a pure math, but there is a detailed plan to get there. So the pure math, if we plan to reach double digit operating income within <unk>.
Over the next few years.
And we tend to get a 50% plus gross margin doesn't mean that opex would have to go through their 40 level and maybe a little bit given lower right, but that's yeah.
Definitely that's a journey.
The same step by step improving our continue to improving our scalability.
If you will look on the last 456 quarter of Opex as a percentage of revenue you will see a continuing improvement so.
As a percent or maybe maybe up to 1% every quarter improvement.
<unk> of Opex as a percentage of revenue.
To a level of 45, 8% that you've seen this quarter. This journey will continue it will take few years to get to the 40 level, but we believe that this is.
We will continue to see improvement there as we continue in our journey.
And as the business scales.
Great that's super helpful and then.
Just to follow up on the consumables purchases can you kind of quantify how below trend they are in.
How are the teams looking to kind of drive consumables higher than that in the coming quarters and into 'twenty three and you mentioned the benefits of kind of strong system sales over the years over the last couple of years. So how does that kind of playing in.
You know talk about the initial successes, you're seeing with the expansion of consumables and you know what.
We're seeing nice nice momentum and your expectations for kind of a gross margin uplift as well. Thank you.
Okay.
Thank you for the question, we are optimistic about our consumable offering and it will be a driver one of the drivers.
Which will increase our gross margin over time, and we'll make sure that we are a company with a 50% above 50% gross margin and 10% operating income, but this is an essential path.
Five years plan.
As of.
The way we look at consumables there is the long term in the short term in the short term.
We have challenges.
Because of the slowdown in because as I shared the impact on that on.
I think most of the main reason for our the results of the consumer for in Q3, where the FX, which has an impact of around $5 1 million only in this quarter. Some supply chain drove back challenges both in production and supply chain.
And they make about divestiture.
But we are coming back to growth in Q4, and that's the short term now I'll take it to the long term.
It is one of our growth driver. That's why we are investing co vessel. That's why we have an open materials, we are leading the industry with our open material license hybrid models. This is why we just introduced now sales team new materials in the SDN that usually will take us.
Between three to four years and we did it in one shot just here for fall Nick.
High end materials for manufacturing and on top of it. There is this long term impact we call it the lifecycle.
Impact and what do we mean by the lifecycle impact this is Beth.
In and out of consume concept of <unk>.
Function of materiality in this pool and.
Look at it like Oh, the baby Boomers that were born and 45 and then they are plenty Tanzania went to pension and then you have a decline in their consumption.
Because they went and saw the pension period or retirement period same here you need to make sure that new hardware is getting gain when you hold out there going out.
We are very optimistic because the model is working and we will see growth going forward, but of course, the pool was not being filled enough during that a weak times of 2019, and 2020, especially the coffee side.
But we are optimistic consumable is essential for us and it will drive our gross margin higher on top of it all.
And that's why one of the reasons of cholesterol.
But not the only one we are going to be disruptive with our materials and a good example is our venture material because we are coming with a solution that would disrupt the market.
We just have democracy.
Properties that does not exist today in this market.
Okay.
Great. Thank you so much.
Thank you. The next question is coming from one CMO head of Bank of America. Please go ahead.
Yes. Thank you so much.
I know you are not providing an outlook here for 2023, but just given what your comments were about demand trajectory in macro caution in some customer deferrals I was just thinking is that.
Reasonable to assume at this point in time normal seasonality.
For the first quarter off of your fourth quarter guidance or should we be anticipating something that either.
The better than seasonal lower than seasonal and I've a follow up question.
Thank you one and it's a bit too early to speak about Q1, 2023, and the entire year of 2023.
I can say that that we're very confident.
About our ability to grow.
But we should be mindful of the situation in the global markets and the macroeconomics.
So providing.
In detail.
<unk> forecast for 2023 will be too early for that.
But I think it's important to note we truly believe.
That we are with our diversified portfolio and the technology that we have we have the ability to grow.
In 2023.
It's only a matter of being more mindful of the situation that uncertainty that is going to India in the world.
And their profitability. In addition to the revenue growth and the profitability. This is something that is more within our control and we believe that we should be able to to sustained profitability and even improving.
Based on the models that we've built.
Okay. Thank you for that.
My follow up the cash on your balance sheet and I know you have a very strong liquidity position, but the cash went down to about went down about $93 million.
Can you talk about what all items, a bridge that because you'll have to get them.
Divestitures and acquisitions in the quarter and obviously, you're operating at elevated inventory levels can you just walk us through what are the moving pieces that that got you to that cash level and as we think about cash burn rate.
Potentially in a week and a weaker demand environment, how should we think about the quarterly run rate of cash burn as well. Thank you.
Yes.
Okay.
Thank you.
So cash flow as a starting point I would say that we are we started this journey with a significant cash balance with no debt, which is something that is.
Quantify RA, one of our strengths, especially especially when we enter into this.
Recession.
It puts us in a very very good position to continue our journey and to continue to grow.
Was that healthy cash position.
With respect to the quarter and maybe all of it.
The other question that you raised so with respect to the quarter this quarter and we paid for certain M&A for a second transaction makerbot.
Largest the in this quarter, we paid an.
Thats something that was announced.
In the last few quarters being set in their press releases as part of the investment.
In the new.
And union business with automaker.
Both companies invested charters has invested in this new company.
Roughly $47 million, we also invested and as mentioned earlier on the call and few other businesses.
Which is roughly 10 to 20 million, that's where invested.
In those smaller investments.
And then obviously, we have the operating cash flow that was $18 million and we have other smaller items that are more on the normal level.
<unk> Capex and Salon, that's basically the bridge that gets you today roughly $19 million, that's where you this quarter, but the vast majority is M&A related which is a significant driver in Iraq in our future and our growth.
With respect to the excess cash burn rate.
I will start with a thing.
Look on the last few years.
We are we had significant positive operating income sorry positive operating cash flow in both 2020 and 2021 with two years of Covid, we generated roughly 60 more than $60 million of positive operating cash flow, combined which which which.
Reflects our ability or basically reflect the fact that our business generates positive cash flow.
The trend as you see this quarter and for the last few quarter.
Something that is deliberately and managed by US is focused on increasing inventory too.
To put us in a better position to supply the demand we have a few new technology as you know them altogether and.
We believe that we need the right level of inventory.
The demand to better manage our gross margin.
In an optimized way I mentioned this I believe it or not that's one of the questions earlier and.
That's basically the way we look at it but on a on a normalized quarter our business generated operating cash flow that's important to us.
Okay. Thank you so much.
Thank you. The next question is coming from Ananda.
So it will have loop capital. Please go ahead.
Yes. Good morning, guys. Thanks for taking the I guess good afternoon for you and good morning, guys.
Thanks for taking the question here a few if I could.
Gil I was just going back to one of your earlier.
Hum.
It sounds like you think product manufacturing holds up better than prototyping going through macro here do you think that can see inside of manufacturing you think it's.
Consumables or equipment sales it would hold up better inside the manufacturing.
And then I just have a quick follow up thanks.
Come on.
Good morning.
Thank you for the question, yes manufacturing is a sensitive because you'd become more critical for your customer.
And of course, our number one in consumables because they need to produce and only then hardware. So the moment they adopted the new technology outdoor is important but.
More sensitive than consumables to our economic pressure.
But.
Overall.
We are.
Having doubled the addressable market and we have.
Every month every week.
A greater position in manufacturing.
That's what make us so resilient.
And we are optimistic because we see this all of these customers.
Willing to explore and to take this journey with us.
Yeah.
Yes, that's helpful.
It's actually interesting well I.
I won't go into diatribe, but it will be interesting to see.
Yes, certainly.
Contribution from the newer technologies can Ken.
Can allow you to go out through 'twenty, three if macro really it yourself.
We're all looking forward to find them all out with you.
Just a quick follow up is on services revenue.
So if.
If macro become you know Gary principles as we go through 'twenty three.
How sticky is that customers before it like what's really the driver.
It's sort of that 50 million level a quarter I guess is this the right way to think about it regardless of what happens with macro.
As context, there and that's it for me Thanks a lot.
Thank you Amanda remember in our model.
Material and therapies are making up the hardware and the most important driver.
To value our performance is hardware.
If you don't have the books or the machine. The customer play you you will not consume materials and he will not pay for therapy.
Very simple equation and when you look at it.
The fact that we've transformed the ratio hardware within our sales and you see quarter over quarter over quarter for the last 10 quarters, we are increasing the sample Fowler.
Means that we are good.
Wade Savi because service is being driven by hardware.
That's the bottom line that's the model.
And yes it is.
Equipment takes a little bit of a head.
For a few quarters from macro in 2023.
It would seem like you just said would seem to suggest.
The installed base of hardware digital support current service levels current support levels would that be accurate.
Okay accurate, it's not the marginal that drives it is the installed base the overall hardware in the pool.
Understood.
Thanks, a lot appreciate it.
Thank you. The next question is coming from Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Thank you Hello, you'll have them.
I wanted to.
Go back to a comment you made about consumables, if I heard you correctly growing in Q4.
What I'm trying to do is reconcile.
That comment.
What you're suggesting I think is continued challenging demand in prototyping are you anticipating.
Just an acceleration in manufacturing related consumables.
Or maybe is pricing playing a role in this.
Okay.
Thank you <unk> for the question.
It's a process and it's not.
One or two quarters, we will look at this more holistically, we look at if we look on the next quarter.
Quarter, but also.
<unk> into 2023, and when we think about the new technologies and you have related to the failure of about the lack of food and the model there what we call. The baby boom model that we believe are very very similar here, that's something that will take few more quarter to add to it.
To be reflected on our financial that's one of the growth engines or the reason, we believe that consumable would grow in the next quarter starting Q4.
We do we do raise prices I mentioned earlier, we did this a few times during the last year and we will continue to do that so that's another element and taking into account. The corvette Shaw acquisition, that's something that will have a significant impact on our consumable and on our business as you have mentioned.
Not only the business that was acquired but also the existing business and the other technologies that can benefit from that acquisition. When we take all this into account we have confidence about our ability to grow on similar it might be.
A small or limited growth in Q4.
We enter into 'twenty three we believe that.
You'll be able to see more significantly as consumables consumable growth.
Thank you my follow up is just the hub that $13 million.
Our customer related delays how much of that was in Q3 versus Q4, and when you describe them as delays. The presumption is that that these orders will come back in the next one to two quarters is that the case or is there the risk that these longer sales cycles resolve.
In enrolling delays as we think about the business over the next quarter or so.
Right.
So Jim maybe as I started out I would say that the 13 million that you related to <unk>.
FX is also part of it so.
Yeah headwinds that we see here on the ethics side are higher than the one that you know we're known three months ago last time, we spoke so that's part one of the elements within the $13 million.
One comment in a second.
That reduction reflects the AR.
Uncertainty that currently exists in the market.
Is the estimate that we put into.
Into our Q4 guidance, but it's hard to say exactly.
You know how much it will actually be however.
However, we do consider this as a delay so so it may be pushed into Q1 2023, that's at least our expectation.
Got it thank you.
Okay.
Thank you. The next question is coming from Noelle Dilts of Stifel. Please go ahead.
Hi, Thanks, a lot of my questions have been answered. So I just have one but it's kind of a multipart. So one I was hoping you could just expand on how you're thinking about.
Acquisitions in the current environment and the weaker macro environment are you a little bit more cautious given.
The economic headwinds or do you think you might maybe accelerate some M&A just given that.
But there may be assets out there that are attractively priced and I guess the second part of that says it's just it feels like there were in the.
Period, where given where the group is trading you could see some consolidation whether that.
Across kind of the public companies or.
Similar to what we saw with Nikon and that's all in.
If you could just give me some thoughts on how youre thinking about the potential for consolidation that would be great. Thank you.
Thank you.
Thanks for the question.
We are in a great position.
Sales of our balance sheet to be the consolidator of this industry.
Two main reasons, one is the biologic position, but the other one is that in tough times and then.
Macroeconomic challenges have slowed down.
It's also an opportunity it's an opportunity because it's differentiating.
The strong player with strong infrastructure that can stand the wins.
This is out there that have more challenges and I think that's a good opportunity just to share a three.
Factors.
That.
We will make sure that we are the one.
We captured the additive manufacturing opportunity in mass production.
Because we are in the best position both financially in terms of the infrastructure in terms of the offering and I want to relate to.
Two three.
Very important factors one is our foundation as a company.
Second one.
Is the fact that we have the most resilient business ever.
Reflected in our profitability.
We think the industry and the third one is the promising future that we have and the leading position in attractive use cases I'll go one by one because it has implications to our position as a consolidator.
The first one is the foundation.
We are laser focused.
We are going for polymer manufacturing.
And we focus on the largest profit pool in this industry, we differentiated technologies.
We don't have even one machine that is a commodity.
Which is very unique.
And this is reflected in our gross margin because if you are not differentiate it you have low gross margins.
This is the this is the name of the game.
The other things you know fundamental is those five leading technology.
We have clear competitive edge.
Puts us in a position in front of a customer where we are not selling a machine. We are solving the customer problems. Because we are agnostic between technologies, we can offer our customer.
What he really needs to be successful.
The third thing you know foundation is the full solution of hardware software material services.
With clear synergies across them because if you are what strategies you are using the same software you're using the same materials, you'll have the same application engineer that youre facing.
It's quite significant advantage and.
We do it.
We'd use cases those are our growth engine, we have very strong growth engine, where.
Where we focus on manufacturing youth Cankered.
Supported by the best go to market and are in.
History in terms of the network.
And the largest installed base that is <unk>.
Happy to work with us and to have repeated trail.
While we cannot do it if we wouldn't have a resilient business model practically the most resilient business model.
Our industry.
Because.
We are having continuous growth.
All of their geographies Verity.
<unk> technologies.
And we are driving this week hardware.
Which will carry a software which will carry a material in which we carry service we did.
We have the leading gross margins as I said before.
That's the resiliency because it means that we have resources to invest anytime.
And it's a reflection of our customers.
Appreciation to our value proposition they are willing to pay that's why we have these high gross margin.
When you are.
With limited differentiation.
We will have lower gross margin.
And that's what we see around us and last but not least in terms of the resiliency of our business model is the fact that.
We have the most diversified company both in terms of geographies technologies customers we.
By definition do not have customers.
We where we have high dependency, we don't have any material dependency on two or three or five customers, which puts us in a very good position in how the economic pie.
And then the third factor is about our promising future.
We built the foundation, we ever resilient model and then when you go out there and build your future.
It's all about.
Focusing on the most attractive use cases.
We have the broadest polymer manufacturing offering for use cases in automotive and aerospace like jigs and fixtures with proven results.
We have now we built it over the last three years, the most extensive offering and technologies and.
Disruptive one in dental and you will see it in the near future like the denture solution that we are going to launch we have a unique position in medical.
And then material.
Really differentiate us because we wouldn't have already the largest material portfolio and putting them on a factoring with this hybrid model that will secure our gross margin for many years comply.
Combined this with a unique software offering and mainly with the team that has a spirit and culture.
Which is above and beyond otherwise, we wouldn't be able to cope with those challenges and that put us in a situation where I believe we will be.
The first additive manufacturing company that will past the $1 billion.
<unk> milestone iconic.
With the 50% and above gross margin, 10% operating income. So that's put us back to your question in a great position to consolidate trains.
Yeah.
Great. Thank you very much.
Thank you at this time I would like to turn the floor back over to management for any additional or closing comments.
Thank you for joining us looking forward to updating you again next quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines will talk off the webcast at this time and enjoy the rest of your day.
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