MTLS Q1 2021 Earnings Call
Company Representatives: Fried Vancraen - Founder, Chief Executive Officer Peter Leys - Executive Chairman Johan Albrecht - Chief Financial Officer Harriet Fried - LHA
Operator: Hello, ladies and gentlemen and welcome to the Q1, 2021 Materialise Financial Results Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer sessions and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Harriet Fried of LHA. Please go ahead.
Harriet Fried: Thank you for joining us today for Materialise’s quarterly conference call. With us are Fried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Johan Albrecht, Chief Financial Officer. Today’s call and webcast are being accompanied by a slide presentation that reviews Materialise’s strategic, financial and operational performance for the first quarter of 2021. To access the slides, please go to the Investor Relations section of the company’s website. The earnings release that was issued earlier this morning can also be found on that page. Before we get started, I’d like to remind you that management may make forward-looking statements regarding the company’s plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown certainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward-looking statements, including those related to the company’s future results and activities, represent management’s estimates as of today and should not be relied upon as representing their estimates as of any subsequent day. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that could impact the company’s future business or financial results can be found in the company’s most recent annual report on Form 20-F, filed with the SEC. Finally, management will discuss certain non-IFRS measures on today’s call. A reconciliation table is contained in the earnings release and also at the end of the slide presentation. With that introduction, I’d like to turn the call over to Peter Leys. Peter
Peter Leys: Hi, Harriet. Thank you. And thank you, everyone for joining us today. You can find the agenda for our call on slide three. As the first item on our agenda, I will summarize the highlights of our financial results for the first quarter of 2021. After that, I’ll give you a bird’s eye view of the company’s current strategy and approach to market. Then I will pass the floor to Fried, who will give you more context about the Link3D transaction that we announced earlier this month. After that, Johan, as always will walk you through our first quarter numbers in more detail, and finally, I will come back to give you some observations about what we currently believe the near-term future may bring. When we’ve completed our prepared remarks, we will be happy to respond to questions. So, let’s turn to slide four, which summarizes the highlights of our financial results. While, just like the last three quarters of 2020, the results of our first quarter this year were impacted by the COVID-19 pandemic, we are continuing to see signs of a steady recovery of our business. First, our revenue of €45.5 million this quarter came close to the revenue level of €46.2 million that we posted in the first quarter of 2020, which was, as you know only slightly impacted by the crisis. Importantly, both our Medical and Software segments showed growth again of 3.7% and 4.1%, respectively. Second, our adjusted EBITDA margin was 11.7% compared to the 7.8% margin that we realized in the same period last year before the crisis kicked in. Importantly, as we navigated through the crisis, we did not lose sight of the engines of our future growth. Therefore, in the quarter, our R&D spending represented a solid 14.3% of total revenue, and we strengthened and secured our leading position in the additive manufacturing software markets for the coming years by gearing up for an upcoming acquisition of Link3D, a provider of additive manufacturing execution systems. Fried will explain the Link3D transaction in more detail. Before he does so, we thought it could be worthwhile to remind you of the overall strategy of Materialise. Therefore, we summarized our positioning and vision on the two subsequent slides, five and six. So let’s turn to slide five. First, Materialise enables the users of AM Technology to be more productive, more cost efficient and more sustainable. We call this our horizontal or backbone strategy. We bring solutions to the markets that are typically fairly neutral, if not off the shelf, and that can be used regardless of the specific application that the 3D printing technology is used for. As a result, our horizontal products have a broad addressable market, but typically only represent a relatively small part of the value chain that our customers are active in. As many of you know, our two key horizontal products are our two flagship software platforms the Magics Software platform and the Mimics Innovation Suite. Our Magics Software platform includes both, functionality that increases the productivity of individual 3D printer as well as solutions that automate and control an entire 3D printing facility. Our Magics platform is neutral; it integrates with the technology of virtually all manufacturers of industrial printers, both in plastics and in metal. We support customers with 3D print prototypes, so called [mini-in, mini-out] [Ph] facilities as well as customers who print larger batches of end parts, and customers that engage in so called mass customization projects. Our Magics Software platform is brought to the market by Materialise Software. As the adoption of AM in general increases, we believe that Materialise Software will continue to grow accordingly. Our collaboration with Link3D will in our opinion, accelerate the growth of Materialise Software further. Fried will, in a minute explain that in more detail. Second flagship, the Mimics Innovation Suite, helps researchers, medical device companies and hospitals to engineer on the human anatomy. Mimics visualizes the human anatomy in three dimensions allowing its users to plan individual surgeries and to design, customized medical devices, which may subsequently be 3D printed. Mimics can be used by a very wide variety of medical applications, ranging from dental to orthopedic and cranium maxillofacial to cardiovascular applications to name only a few. Our Mimics Innovation Suite is brought to the market by Materialise Medical. The strong performance of Materialise Medical, both on its top and bottom line, it’s partially the results of the success of our Mimics Innovation Suite, including the successful introduction of software planning tools in the hospital market. Now moving to slide six. I’d like to go over the way that in addition to enabling the use of AM as such, Materialise also empowers specific meaningful applications of the 3D printing technology. These solutions, which we internally call our verticals, are more tailored to a specific use of the AM Technology, and typically include a complex mix of customized software solutions, dedicated engineering support and complex 3D printing services. As a result, the addressable market of these solutions is more focused, but we are involved in a larger part of the value chain. Our most widely accepted vertical solutions today are brought to the market by Materialise Medical. These include our customized surgical knee guide in the orthopedic market and our customized instruments and implants in the CMF markets. Both these verticals, and in particular, our CMF vertical contributed to the good performance of Materialise Medical over the last couple of quarters, both in terms of revenue and in terms of profitability. More recently, Materialise Manufacturing started incubating new verticals, which includes our eyewear and footwear initiatives. Each of these wearable initiatives draws on the experience we gained in Materialise Medical and makes use of the Materialise Software Magics platform. While the revenues of each of these variable initiatives are currently still fairly modest, we believe that they are well-chosen drivers for future long-term growth. Now if you look back at the major initiatives that we have announced over the last 18 months, you will note that they perfectly match the strategy that I have just outlined. The acquisition of Engimplan expands our vertical CMF portfolio and market reach. The acquisition of RSscan, RSPrint fits in our vertical footwear initiative. In the recently announced transaction with Link3D strengthens our horizontal Magics Software platform. With this overall introduction and background, I’d like to give the floor to Fried, who will give you more color on our excitement with respect to the Link3D opportunity. Fried
Fried Vancraen: Thank you, Peter. Good morning and good afternoon, everyone. Turning to slide seven, I would like to talk about the transaction with Link3D that we announced just a few weeks ago. When we announced our Q3, 2020 results last fall, we discussed the ambition of Materialise Manufacturing to incubate and grow meaningful applications of 3D printing in the Food and Eyewear markets and the analogy of those initiatives to the successful verticals that materialize in the medical launch in the orthopedic and [inaudible] markets. Empowering meaningful applications of 3D printing is as Peter just explained, only one part of our strategy. Materialise also empowers, through our software segment mainly the use of additive manufacturing as such. And we believe that the cooperation with, and the potential acquisition of Link3D will accelerate its strategic growth significantly. 3D printing continues to transform the factory floor as companies increasingly turn to 3D printing for large scale production. As they scale their 3D printing processes and integrated operations, with existing production infrastructures, they are confronted with increasingly diverse, complex and distributed manufacturing environment. Both Materialise and Link3D, offers MAS solutions that help these organizations gain control over their manufacturing floor. By combining both companies cutting edge technology, software development expertise and client basis, we will be in an even better position to help customers scale their additive manufacturing capability across complex supply chains with greater operational excellence. In addition, to enhancing and accelerating our MES and workflow operating automation offerings, we believe our work with Link3D will accelerate Materialise Software platform strategy, which offers companies cloud based access to our unified software offering. Materialise outlined an ambitious road map to evolve its entire offering to a subscription model, offering its customers’ cloud-based access to a complete platform of software tools to manage and control the 3D printing process more efficiently. As you may remember, we recently announced several cloud-based software solutions including Magics Software, a full e-commerce and CRM solution in one platform. And the Process Tuner, an intuitive online platform that helped speed up the optimization of process parameters that is required for mass manufacturing 3D printing parts. Link3D has developed a suite of mission-critical tools and applications for customers in the aerospace, automotive, medical and other competitive and highly regulated industries that can significantly enhance and accelerate the rollout of the Materialise Software platform. The cloud-based software platform that combines the APIs that both Materialise and Link3D has already developed and it will build further on the combined expertise of both companies will provide customers seamless and cost efficient access to Materialise and Link3D, complete and integrated 3D printing software suite. It’s a future proof way to always benefit from the latest software innovations and allow companies to scale up or down their operations based on their current needs. We are excited that the people of Link3D decided to team up with Materialise. Throughout our discussions, we learned that we shared a print [Inaudible] for our industry, from a structural perspective, the collaboration kicks in immediately, but Link3D will continue to operate as an independent company until we exercise the option to acquire the company, which we are currently intending to do in the course of this year’s fourth quarter. And with this, I pass the floor back to Johan.
Johan Albrecht: Thank you, Fried. I’ll begin with a brief review of our consolidated revenue on slide eight. Please note that unless otherwise stated, all comparisons in this call are against our results for the first quarter of 2020. Revenue was €45.6 million for the period, 1.5% below the level for both the same period last year. The positive growth of our Software and Medical segments grew by 4%, but still offset by manufacturing. Despite a steady and promising sequential growth since Q3, 2020 and a strongly higher order intake in the first quarter of this year, Manufacturing still remained 8% below the pre-pandemic level of last year’s Q1. Deferred revenues from software license and maintenance fees increased by €1.9 million, reflecting the strong sales performance of our Software and Medical segment in this first quarter. For this first quarter, Materialise Software accounted for 22% of our total revenue, which realized Medical for 36% and Materialise Manufacturing for 42%. Cross segment revenue from software products increased to 34% of our total revenue. Moving to slide nine, you will see our consolidated adjusted EBITDA numbers for the first quarter 2021. Consolidated adjusted EBITDA amounted to €5,341,000, an increase of €1.7 million or 48% compared to Q1 last year. This increase is the effect of the reduced variable costs, productivity improvement results and of the medical saving initiatives we implemented in the course of last year. This, while our R&D expenses remained at the same high level as last year, and we continue to invest in our internal digital transformation program, which will include a new e-commerce portal and new CRM and ERP systems. Slide 10, summarizes the results of our Materialise Software segment. Here, revenue picked up with growth again. Revenue effectively increased 4.1% and was at the same level of the seasonally high Q4 with net deferred revenue also grew an additional €0.5 million. Recurrent revenue decreased 6.3% from the same period last year. Nonrecurring revenue increased 20%, driven by new perpetual license fees and royalty income. EBITDA increased 30% to €3.4 million compared to €2.6 million. In fact, while revenue grew 4%, cost containment measures in SG&A resulted in a decrease of 10% and R&D efforts increased 13%. The EBITDA margin was 33.6% compared to 26.9%. Moving now to slide 11, you will see that total revenue in our Materialise Medical segment was €16.2 million, up 3.7% compared to Q1 2020. Revenue from Medical Device Solutions increased 3.2%, with growth from both partners and direct sales. Revenue from medical software sales accounted for 32% of the total segment revenue. Adjusted EBITDA increased 85% to €4.5 million from €2.5 million in last year's period. As a combined result of continued top line growth with productivity improvements and lower operating expenses, the EBITDA margin increased to 28% from 16% in the pre-pandemic first quarter of last year, this all while we continued executing all of our R&D programs. Now let's turn to slide 12 for an overview of the Q1 performance on our Materialise Manufacturing segment. This quarter manufacturing revenue included the activities from our footwear business line, representing €1.3 million this quarter. Manufacturing revenue reported a sequential growth since Q3 2020 and reported a strongly higher order intake this first quarter. These positive elements though could not prevent a decrease of 8% below the pre-pandemic level of Q1 last year. We did see positive signs in our order intake from the automotive and industrial sector in general and in ACTech, ishitech [ph] and fixture business lines in particular. Despite the mitigating effects of lower variable expenditures and continued labor cost reduction efforts, gross profit of Materialise Manufacturing was still significantly negatively affected because of the fixed cost of unused capacity. Savings measures resulted in a decrease of operating expenses of 8% or €600,000. As a combined result, adjusted EBITDA was negative €144,000 compared to a positive result of €1.1 million last year. Slide 13 provides the highlights of our income statement for the first quarter. Revenue was €700,000 or 1.5% below, lower than the same period last year. Gross profit margin grew to 53.9% from 53.3%. The solid margin was entirely due to the increased revenue and productivity improvement of our Medical segment, offsetting the negative effects in our Manufacturing segment with the cost of unused capacity rate on the margin. Our operating expenses increased €1 million or 3.6%, an increase entirely due to the rollout of the ongoing internal digital transformation project that we discussed in our Q3 earnings call. Our sales and marketing spending decreased 9.7%. G&A expenditures increased by 3.4%, and R&D, research and development expenses amounted to €6.5 million at the same high level as last year's quarter, in line with our stated strategy. This quarter's net operating income was €1.1 million compared to €700,000 last year, and as a result of all of these elements, the group's operating result was positive €290,000 compared to a negative result of €1.1 million in last year's period. Net financial cost was €4.1 million and included the impairment of a loan to Ditto for €3.3 million. Because the business objectives that were defined as a condition for Ditto to continue to draw under the credit facility were not met, we decided to extend an earlier portion of the remaining amount that was available under this credit facility to Ditto. Ditto is addressing the situation, but we currently have insufficient visibility on the nature and outcome of these initiatives. Importantly this impairment from an accounting perspective does not impact our continuing belief in the technology platform that Ditto has built, and in the potential of the collaboration between ditto and Materialise. Income tax expense amounted to an income of €155,000, positive due to deferred taxes, mainly from temporary loss positions. Net loss for the fourth quarter was €3,667,000 compared to a net loss of €2.9 million for the 2020 period. [Audio Gap] balance sheet and cash flows. In the first quarter of 2021, our balance sheet remains strong. Cash amounted to €107.6 million compared to €111.5 million at December 31. While our borrowings position decreased by €4.6 million to €110.5 million, only €15.8 million over debt for short term at March 31. Equity decreased €3.1 million to €130 million as a combined result of mainly the first quarter net loss amounting to €3.7 million on the one hand and positive conversion differences of approximately €0.5 million on the other hand. Total deferred revenue amounted to €37.6 million as compared to €34.9 million as of December 31. Of the €37.6 million, €32.1 million related to annual software sales and maintenance contracts versus €30.2 million as of December 31, 2020. Cash flow from operating activities for the first quarter of 2021 was €4.2 million compared to €7.3 million for the 2020 period. This quarter our operating cash flow consisted of EBITDA of €5.1 million, while our working capital decreased €0.9 million as a result of increasing activities. In last year's quarter, EBITDA was only €3.4 million and we then had adverse positive effects in working capital of €3.9 million. Capital expenditures for the quarter amounted to €2 million that were not financed. On February 4, 2021, [Audio Gap] entered into a working capital loan agreement and we paid $700,000 to Link3D during the first quarter. After quarter end Materialise entered into a call option agreement to acquire 100% of the equity interest of Link3D Inc., with a call purchase price of $2 million. The call option can be exercised during the month of November 2021. The call option exercised price equals the maximum amount of $33.5 million, against which the call option purchase price of $2 million will be credited. Peter
Peter Leys: Thank you, Johan. Please turn to slide 15. Before opening the floor to questions, we would like to try and give some insights about what the remainder of 2021 may bring. As I mentioned earlier, the ongoing COVID-19 crisis continues to impact our business, and it does so in a fairly diverse way across our various segments and regions. As a result, our outlook is too conditional to provide meaningful quantitative guidance for our consolidated performance for the rest of 2021 at this stage. Today, we do want to share some of our expectations for what the second quarter of 2021 may bring. We currently expect that both our Software and Medical segments will continue to perform well and that our Manufacturing segment will start to recover more significantly in the current quarter. As a result, we currently estimate that our consolidated revenues in the second quarter of 2021 will continue to grow sequentially and have the potential to represent sequential growth of up to 10% compared to the previous quarter. In line with our strategy, we will continue and may even accelerate investing in our R&D programs and internal infrastructure, which will continue to weigh on our EBITDA during the remainder of 2021, but which will we believe offer many longer term benefits for our company. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.
Operator: Thank you. [Operator Instructions] Your first response is from Jason Celino of KeyBanc. Please go ahead.
Jason Celino: Take my question. Encouraging to see that manufacturing and software segments grow sequentially in the quarter, but can you provide some detail on the medical segment? Were there any dynamics that prevented this segment to see the same level of sequential growth as the other two segments?
Fried Vancraen: Well, I have to say that our medical segment is also doing very well. We have there really positive results, but Q4 was a very strong quarter with a lot of sales of mainly RCMS medical devices which typically have a cyclical nature, and then also of our software projects which also tend to have a cyclical nature and have a very strong performance in this Q4. So overall, we were very happy with the first quarter result, which was higher than last year. As we said, with COVID and on a two year basis had a 14% growth compared to 2019. So we are really very positive about the further growth of our medical segment, because the second quarter is also normally such a cyclical quarter where a lot of CMF surgeries are taking place.
Jason Celino: Okay, excellent! And maybe for my second question, you know when you're expanding your software portfolio, like as in the case with Link3D, you know what goes into your process regarding the decision to either make or buy that functionality?
Peter Leys: In the given circumstance with Link3D, it is to a large extent a matter of timing. As we explained in our prepared remarks, I mean we have a very ambitious road map to bring our entire portfolio to the clouds. We have yes, solutions embedded in our strategic products, but if we looked at the progress or at the solutions that Link3D has developed and is currently developing, we quickly came to the conclusion that a combination of the two companies would bring a very strong and combined product portfolio to the market. Probably one to two years earlier than what we would be able to do if we were to do this on our own, and what we have also learned during the pandemic is that if you want to really grab the growth opportunities that should present themselves in the markets, you should not be ready to do that in the next three to four years, but let's say the next one to three years will most likely be crucial. So from a timing perspective we came to the conclusion that a combination made significant sense and should allow us to grab quite a few opportunities that we expect will come to the market in the next, let's say 12 to 36 months.
Jason Celino: Excellent! Thank you.
Peter Leys: You are welcome Jason.
Operator: [Operator Instructions] Your next response is from Troy Jensen of Lake Street Capital.
Troy Jensen: Hey gentlemen, thanks for taking my questions here. Peter, just summarize on healthcare; I mean obviously CMF has been the driver and growing. I thought you said there was a second healthcare application that grew sequentially, and I'm just curious to know that you know knees I'd expect were flat to down-ish, but are you expecting a bigger recovery needs due to selective surgeries coming back.
Peter Leys: Hey Troy! Troy, I think the key drivers for the medical segment has indeed been our devices really strong CMF portfolios, and secondly, really the Mimics Innovation Suite that I have been talking about earlier and then more in particular, the point of care applications and the attraction of those software solutions that we find in the hospital market. I think those are really the key drivers of our growth.
Troy Jensen: Okay, alright. Then manufacturing, I guess I got a question for each sector here, but you know it’s down a fair amount, especially if you look organically, taking off the footwear business. I mean, I'm assuming this is probably below plan for you guys in the quarter. Was this just all due to European lockdowns and you know I guess starting to grow now, but do you feel like there's anything kind of structurally harder in the service grow business.
Fried Vancraen: Yes Troy, the – indeed the European market as a whole has been in our overall performance the weakest part, and that's certainly also related to the corona situation, but you will remember that the automotive sector as a whole was already entering the crisis in Europe before the corona pandemic is, and we have the indication that we see a rise in the order intake, especially in the automotive sector, which we hope will even further increase in the second half of the year. That's, so we will have some support from the revitalization of the automotive market. On top of that you were referring to our – yes, non-organic growth as you called it, that has to do with variable initiatives, and there we are also very positive that we will continue to grow. So that should really bring our Manufacturing segment by the end of the year that contract.
Troy Jensen: Okay, good, good to hear. How about then software [inaudible] I got you. Can you just give us a competition update and if you go back through time we’re worried about CAD guys coming in, we're worried about start-ups, we're worried about other equipment vendors entering the space. Just curious to know if you're any more or less concerned on competition and software.
Fried Vancraen: Well, we have indicated before that through the 30 years of existence of materialized software and low-end experience completion and you know now a new way, because we see some difference is the industry, from the typical software segment. It was cloud based and just [inaudible] is one that we have been preparing already quite a while by transferring all of our legacy algorithms to highly performance cloud based APIs that make use of the strongest possibilities of the internet like parallel processing, like making use of graphical card capabilities and things like that. So they are really converted based on a long-term experience from the past to the future, which is in our opinion cloud based, and that transition has been accelerated. The transition of Streamics was a bit later on our road map, and in order to catch up there and to be able to offer our customers the full solution in cloud, we partnered within 3D.
Troy Jensen: And now that gets me to my last question for Johan. Could you just – any more information we can get on Link3D. If I heard you right, you said the acquisition if you spend it all is going to be $35 million, correct me if I'm wrong, but anything on size or revenues or OpEx that you could share with us?
Johan Albrecht: I apologize. Troy, can you say that again? Is it – I heard you saying something about $35 million, but I didn't hear the rest of the sentence.
Troy Jensen: Yes, so the first half was the purchase price of Link3D. You went through it in your prepared remarks. I thought I heard a $35 million. Just could you clarify how much you totally pay for Link3D?
Johan Albrecht: Yes, so we paid $2 million for the option, and then finally in November we can think the full acquisition of the equity for $33.5 million, of which we deducted $2 million from the option price.
Troy Jensen: Okay, perfect. And then anything you guys can share about size, revenues or OpEx of Link3D?
Johan Albrecht: That we cannot disclose at this moment.
Troy Jensen: Alright, understood guys. Well congrats on you know Q2 looking better and hopefully it's kind of additive manufacturing 2.0 starting up here, but congrats and we’ll talk soon.
Fried Vancraen: Thank you, Troy.
Johan Albrecht: Thank you, Troy. Thank you.
Operator: Your next response is from Arvind Ramnani of Piper Sandler.
Arvind Ramnani: A question on the medical segment, when the broader environment improved and you see pent-up demand, you know can you talk about pipeline at this position to… [Technical Issues]
Fried Vancraen: Well, we anticipate that indeed the pipeline will strengthen. As in multiple countries we still experience that the hospitals are not taking elective cases and as we have said before, all of our products are related to elective cases rather than trauma cases in the hospitals. So given that in a country like Brazil for instance, at this very moment all hospital facilities are flooded with COVID patients. This really impacts the amount of our revenue in that country. In Europe we faced several of those that similar difficulties as well. So we believe that the structural take-up is also possible in the medical market.
Arvind Ramnani: Perfect! Can you provide – the second question for me is, can you provide us a little bit more color on EBITDA, and if possible can you also quantify how we should you know kind of model EBITDA over the next couple of quarters?
Johan Albrecht: Arvind, yes I’ll just refer to what we have disclosed in the previous earnings call, that we have announced that we would – that we expect as from Q1 on better results than we have seen in the past on a sequential basis, and we continue believing that, but the point is that already in Q1, we already had better results than we could anticipate at the moment that we had our earnings call. So the trends that we have anticipated on already in Q4, this is what we can confirm again, and that's what Peter is saying also in his outlook for Q2. Of course there is not clear visibility of what the circumstances will be related to COVID-19, how that will further evolve, but our outlook in general is getting slightly better and as we've mentioned, on a sequential basis.
Arvind Ramnani: Great, thank you.
Operator: I am showing no further questions at this time. I would like to turn the conference back over to Peter Leys.
Peter Leys: Thank you, operator, and thank you all again for joining us today for this call. We look forward to continuing as always, our dialogue with you through investor conferences or in one-on-one virtual meetings or calls. So please feel free to reach out if you have not already done so. Thank you again and goodbye for now. Bye.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day! You may now disconnect.