Earnings Call Transcript - DDD Q1 2022

Operator, Operator

Good morning, and welcome to the 3D 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. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Melanie Solomon, Investor Relations. Please go ahead.

Melanie Solomon, Investor Relations

Thank you, Kevin. Good morning. And welcome to the 3D Systems conference call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer. The webcast 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 in the Investor Relations section of our website. 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 post 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 is included in last night’s press release and our filings with the SEC, including our most recent annual report on Form 10-K and 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 am pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Dr. Jeffrey Graves, CEO

Thanks, Melanie, and good morning, everyone. As you all know, the beginning of 2022 has already thrown significant challenges at the entire market, no matter what portion of the economy you serve. Whether it is continued supply chain pressures, a significant rise in the rate of inflation, the ongoing impact 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 3D Systems team has continued to stay focused and executing well for our customers throughout this period. Ironically, in the longer term, these same factors that make our lives more difficult today are increasing our opportunities for growth in the future as our customers continue to reevaluate their critical supply chain strategy and increasingly consider additive manufacturing as a key element in the production strategy of 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 brought 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 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 3D 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 top line, 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 continues 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 world’s manufacturing community. Particularly strong was the demand for high-precision micro-castings. This is a reflection not only of the printing technology itself but the unique materials we’ve developed that enable casting of highly complex, fine structures, and a deep understanding of the workflow for optimum economics for these solutions. Healthcare growth of approximately of 5%, excluding divestitures, was softer than we would’ve initially anticipated when we started the year, being driven in part by the introduction of our new DMP 350 Dual, a high productivity version of our well-proven metal printer, the DMP 350, which has been a mainstay for many of our Healthcare 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 healthcare takes careful planning and formal approvals. These acceptance qualifications are proceeding very well, and we expect increasing sales of both our 350 platforms later this year. In addition, the COVID resurgence and the resulting postponement of optional elective procedures are particularly impactful in Healthcare, as certain customers delayed capital purchases and experienced slower than anticipated growth rates. 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 a unique company called Enhatch, which brings to us another unique software solution for use in our Healthcare business that will further strengthen our core capabilities. More specifically, this software solution is directed at the personalized healthcare solutions market for which we have a long-established market-leading position. 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 healthcare solutions, improving patient outcomes and reducing treatment costs for hospital systems. In addition, in the first quarter, we announced our joint venture with Dussur, 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. The partnership highlights the increasing focus of additive manufacturing by large global organizations and our opportunity in 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 in stereolithography, in this case, addressing the unique requirements of production applications, while leveraging our portfolio of advanced polymeric materials and our software capability. We’ve begun taking orders for this new printer and are seeing strong demand in both healthcare and industrial markets. Specific to our healthcare business, I’m very pleased by the recent 510(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 receive radiotherapy as 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 uses a bolus, which is a flexible material that’s 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’s skin, which can result in insufficient or unintended dosing levels and may also expose adjacent anatomy to undesired radiation. With our VSP Bolus solution, 3D Systems can design and deliver boluses that are customized to a patient’s specific anatomy and treatment plan, improving the effectiveness of the radiation treatment and the productivity of the treatment center. This mass customization of printer devices for healthcare addresses both patient outcomes and provider costs, which is the fundamental goal for all of our healthcare solutions. We’ve begun marketing the bolus solutions with key customers and expect to see solid demand for this family of products in the future. This is about one example of a broad trend in healthcare toward mass customization enabled through 3D printing of patient-specific solutions. This is the key growth driver for our Healthcare business across all of our end markets. In addition to the 510(k) for our new bolus product, within days of closing our acquisition of Kumovis at the end of the quarter, we were able to apply to the FDA for 510(k) clearance on the use of printed PEEK polymers for craniomaxillofacial reconstruction indications. We expect this solution will be the first FDA cleared 3D printed PEEK medical device. Kumovis brings this advanced polymer technology to our healthcare business, which will serve as a complement to our existing titanium implant solutions, allowing surgeons to optimize individual patient treatment plans. Customer interest in these solutions is very strong. And following FDA clearance, which we expect later this year, we believe adding that Kumovis product line will further solidify 3D Systems as a leader in 3D printed craniomaxillofacial 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 into years ahead for our orthopedics business. So, to quickly summarize, while the first quarter is typically a seasonally slower quarter for us and 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 the seasonality we experienced last year. Supply chain costs and inflation levels remain elevated and have clearly impacted our results. However, we’re taking continued steps to mitigate their effects, which Jagtar will speak to in a few moments. In total, we’re reasonably pleased with the 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 Jagtar who will now describe our first quarter financial results in more detail. Jagtar?

Jagtar Narula, CFO

Thanks, Jeff. Good morning, everyone. Echoing Jeff, we 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 for the first quarter was $133 million, a decrease of 9% compared to the prior year. This decrease was due to the divestitures of non-core businesses. When adjusted for those divestitures, first quarter revenue increased 10% as compared to the first quarter of 2021. The continued growth validates the transformation efforts we have guided the Company through and demonstrates 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, 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 $0.21 compared to a GAAP earnings per share of $0.36 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 $0.06 compared to non-GAAP earnings per share of $0.17 in the first quarter of 2021. The year-over-year decrease was primarily a result of the divestiture of profitable, but non-core businesses in 2021, combined with higher spending on core investments in our business, including software, new printer development, and our essential general and administrative infrastructure to support future growth. In addition, we saw one-time impacts that reflected a challenging business and geopolitical environment, including negative impact from bad debt associated with our decision to exit business in Russia and an impact of FX as the dollar strengthened against other currencies, primarily the euro. Combined, the FX and Russian related bad debt had approximately a $0.025 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. Adjusting for divestitures, revenue in the first quarter for Healthcare increased 4.6% and Industrial increased by 15.7%, 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 opportunities in our Industrial segment and is a direct result of the strategic investments we have made. And examples are the acquisition of Titan Robotics, which closed subsequent to Q1. With this acquisition, we have entered the market for large format, 3D printing systems using pellet-based extrusion. We believe our strong portfolio, including the new printers from Titan Robotics offers ample opportunity for our Industrial business to continue growth. Now, turning to Healthcare. 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 call medical devices, declined approximately 12% year-over-year. This decline partially is a result of supply chain impacts for our manufacturing operations that produce end-use medical devices, customer purchase delays due to Q1 COVID resurgence that Jeff spoke about earlier, and 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 Healthcare 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 40.4%, compared to 44% in the prior year. Non-GAAP gross profit margin was 40.6%, 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, particularly in freight costs. We expect gross margins to improve as we move through the year as production volumes and mix improve combined with the impact of recently announced price increases across multiple product lines. GAAP operating expenses increased 16.4% to $77 million in the first quarter of 2022, compared 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 higher non-GAAP operating expenses reflect the impact of divestitures offset by higher spending in targeted areas to support future growth, including research and development and general and administrative infrastructure, as well as expenses incurred by acquired companies and the previously mentioned 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 1.4% 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 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 in Enhatch, and cash payments related to net share settlements of stock-based compensation. Subsequent to quarter-end, we closed on our previously announced acquisitions of Titan Robotics and Kumovis 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 acquisitions. We believe investments, both organically and through acquisitions will 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 revenues to be within a range of $580 million and $625 million, a tightening of the range that we have 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 no additional significant macroeconomic 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.

Dr. Jeffrey Graves, CEO

Thanks, Jagtar. And before I do that, I want to thank you for your dedication and leadership and your time with us here at 3D Systems, Jagtar. As we’ve executed on the 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 appreciated by me and the entire 3D Systems organization. And we wish you very well in your new role. Finally, we’re thrilled to be 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, prior to the opening of the RAPID + TCT tradeshow, a leading additive manufacturing conference. We’ll begin with lunch and spend the afternoon discussing both our Healthcare and Industrial Solutions business, including more detailed presentations on key technology elements of our business and applications that are driving our growth. On Monday evening, we’ll provide dinner and a very special presentation on our regenerative medicine efforts, which I think you will find fascinating. We’re excited that this will be an in-person event and look forward to having many of you there, to hear from our executive team and see our products in the days to follow our RAPID, including the new SLA 750 as well as our extrusion printers from Titan and Kumovis. Seats are filling fast, but there’s still time for registration for the event. Please contact our Investor Relations folks for more information. And with that, Kevin will open it up for questions.

Operator, Operator

Our first question today is coming from Greg Palm from Craig-Hallum Capital Group. Your line is now live.

Greg Palm, Analyst

I want to start with the revenue guidance. It’s 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 call levers that get you either to the high end or lower end of the range at this point?

Dr. Jeffrey Graves, CEO

Yes, Greg, the situation is quite straightforward at the moment. We are experiencing more demand than we can fulfill due to the supply chain challenges we are facing. This leads us to believe that we will continue to be constrained by the supply chain when it comes to achieving revenue targets. Our estimate reflects this outlook for the remainder of the year. Given the strong demand, we were pleased to refine our projections slightly and increased the midpoint. The wide range we have now is primarily due to supply chain issues that we cannot fully quantify. We lost out on significant revenue again this quarter, similar to the fourth quarter of last year, which is disappointing for us and for our customers. We are hopeful that this will improve, bringing us closer to the upper end of our range, particularly with a general easing of supply chain constraints. Jagtar, do you have anything else to add?

Jagtar Narula, CFO

No, I think you captured it well. It's primarily just looking at supply chain, Greg. I’ll mention that we left about $7 million to $8 million of revenue on the table this quarter. Had we secured that revenue, we would have achieved 16% or 17% growth year-over-year, adjusted for divestitures. The supply chain constraints are frustrating. Our teams are making heroic efforts to address it. As we see improvements, we hope to move up to the higher end of the guidance range.

Dr. Jeffrey Graves, CEO

What’s really exciting is to see the widespread interest in additive manufacturing in production environments. I’m sure this is true for the entire industry and certainly for us, given our range of technology, but customers are actively exploring how they can utilize additive manufacturing. Some will adopt it, while others may not, but overall, there are opportunities to drive significant growth. It’s frustrating to face supply chain limitations, but I would prefer that situation over the alternative. From a demand perspective, I see no end in sight, and it looks very positive.

Greg Palm, Analyst

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 or transform supply chains? I mean, that’s certainly something that everybody seems to be talking about. But, maybe give us a few examples if you can about what you are seeing exactly.

Dr. Jeffrey Graves, CEO

Yes. Customers are very aware of their options regarding onshoring for various reasons. Generally speaking, it is absolutely true that this trend is widespread. Our company is assessing our supply chain to reduce the risk of supply disruptions, bring operations closer to home, and save money. Our customers are taking similar steps. In the past, the focus was mainly on performance-driven parts, where additive manufacturing would enhance performance within the system. Now, the primary concern is de-risking the supply chain and cutting costs. The investments we've made in software over the past year are based on this belief. As printer technology advances rapidly, we see the key limiting factor shifting to materials and software needed to efficiently integrate printer fleets into factories. We are actively discussing with our customers how to optimize the integration of these fleets. Additionally, we are working to provide a wide range of new materials for printing, which is in high demand. The printer technology continues to advance rapidly, and we are qualifying multiple suppliers for all essential components to meet the demand we anticipate. The demand landscape reflects what you would read in industry reports; nearly every industrial company globally, particularly in the U.S. and Europe, is evaluating how to de-risk and localize their supply chain while maintaining cost efficiency. This includes implementing automated systems and applying AI to minimize labor requirements. Additionally, since labor costs are rising, companies aim not only to bring production closer to home but also to reduce costs through automation, which ties back to software. I hope this detailed response is helpful.

Greg Palm, Analyst

Yes, very much so. I appreciate that. And Jagtar, best of luck to you going forward. Enjoyed working with you here.

Jagtar Narula, CFO

Thanks, Greg.

Operator, Operator

Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.

Brian Drab, Analyst

Good morning. Hey. First, just echoing Greg’s comment there. Jagtar, best of luck and it was good working with you.

Jagtar Narula, CFO

Thanks, Brian.

Brian Drab, Analyst

There has been a slowdown in volume at your largest customer. You had a record year, with dental revenue increasing by approximately 90% in 2021. For the first quarter, we are expecting growth in dental revenue to be around 20%. I'm curious if you are making any adjustments regarding costs or production in light of the significant decline in volumes for dental aligners.

Dr. Jeffrey Graves, CEO

Maybe I’ll comment and Jagtar can supplement as well here, Brian. Very good question. I would tell you, Brian, the demand is still very strong. It’s unfortunate that things in the world have become more difficult for dental in general. I mean, things that are viewed as optional procedures, it’s unfortunate that that’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 significant changes on our part in terms of supply of product 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 their 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, their growth prospects look tremendous for years and years to come. So, no real changes to us. There may be fluctuations quarter-to-quarter, but nothing significant. We run on a pretty long-term game plan with all customers of that scale.

Jagtar Narula, CFO

I will repeat what Jeff mentioned. I believe our customers in that market continue to see themselves as having significant opportunities. While they may experience short-term impacts in 2022, their focus with us is primarily on the long-term potential of that market and ensuring they have the necessary infrastructure to support it. As we pointed out in response to Greg's question, our guidance range is more influenced by supply chain issues than by our views on customer demand, which includes the dental segment.

Brian Drab, Analyst

So, just one follow-up question on that topic. You’re not seeing any significant decline in customer spending or capital expenditures on the type of equipment that you sell in 2022, and your guidance reflects this.

Dr. Jeffrey Graves, CEO

Yes, I want to be careful not to discuss sensitive information. However, I can tell you that our guidance takes into account input from that customer and others. We feel really positive about our revenue profile this year. There may be individual fluctuations, but overall, it's great to have a customer who has a long-term perspective and understands the importance of keeping their suppliers engaged. We are very pleased with the relationship.

Brian Drab, Analyst

Okay. Got it. And then, just the last questions, where do you think gross margin? You said it should have improved throughout the year. Where do you think the gross margin can get to as you’re exiting ‘22, what would be the goal? Thanks.

Dr. Jeffrey Graves, CEO

I think we mentioned in the script, and Jagtar, please correct me if I'm wrong. We anticipate it will rise throughout the year. It was lower in Q1 than we had expected, primarily due to cost issues with the supply chain, including labor and materials. We are now focusing on pricing, and we expect volumes to continue to rise. Therefore, we should recover some economics. I would expect it to rise throughout the year, Brian. However, it's less realistic to say we had a chance at the very top end of the previous range, so we adjusted it down a point. That could change; the supply chain situation is unpredictable and could resolve suddenly. We want to be transparent with you, so it was important for us to bring that top end down a point. We hope to revise that every quarter moving forward and provide our best outlook. Jagtar, do you have anything else to add?

Jagtar Narula, CFO

Yes, Brian, we provide guidance for the year but not for where we expect to end the year. There are various factors that influence gross margin, and these fluctuations contribute to our guidance range. In Q1, we experienced higher parts and freight costs than anticipated, which likely affected gross margins by about 2 points. As a result, we implemented price increases in Q2 to address this issue. We are also monitoring the year to determine whether further increases are necessary and will respond accordingly. Production volumes also play a role; as seen in Q4, our strong production volumes positively impacted gross margins. Throughout the year, we expect an increase in production volumes, especially since Q1 is typically our weakest quarter, which should enhance margins. Additionally, we anticipate changes in product mix as we sell more software materials. All these factors affect gross margins, which is why we don't provide an exit guidance, but rather an annual guidance based on these fluctuations.

Operator, Operator

Our next question is coming from Wamsi Mohan from Bank of America. Your line is now live.

Unidentified Analyst, Analyst

Hello. Thank you for taking the question. This is John on behalf of Wamsi. I just want to talk about the guidance for OpEx. So, it seems like it slightly went up at midpoint. Just wondering how should we expect this OpEx to ramp throughout the year? And where is the incremental OpEx being invested in?

Dr. Jeffrey Graves, CEO

I’ll let Jagtar discuss the ramp because I might have a more consistent view on spending. The increased spending is driven by a couple of factors. Ultimately, we anticipate strong demand for additive solutions moving forward. We want to ensure we have the necessary product technologies in both metal and polymer, particularly in materials and software. Therefore, we continue to heavily invest in R&D, and our infrastructure must be robust to support sustained double-digit growth. We genuinely believe that based on the demand profile we see, we will be capable of achieving double-digit organic growth for several years to come. Achieving this requires a certain scale of infrastructure, and we are investing in IT, finance, automation, and all the basic foundational infrastructure needed to grow at double digits. Thus, the increased spending level this year is driven by these factors. Now, Jagtar, what are your thoughts on the ramp?

Jagtar Narula, CFO

Yes. John, we don’t expect significant growth for the rest of the year. Part of the increase is due to the acquisitions of Titan and Kumovis, which are now fully integrated as of Q2. We do not foresee any further growth from them. Additionally, apart from Titan and Kumovis, we have established spending plans for product development and infrastructure, as Jeff mentioned. This is partly due to the ongoing expenses we have started, but if we do not meet our spending targets in Q2, it will not automatically carry over to Q3 or Q4. Therefore, we anticipate that performance will remain relatively flat over the next three quarters.

Unidentified Analyst, Analyst

Okay. Got it. Thank you. And if I may, for a quick follow-up. You’ve referenced the supply chain issues. I mean, I’m just wondering what the specific areas are you seeing the most impact? Is it the sourcing, the freight, logistics cost, etc.? Thank you.

Dr. Jeffrey Graves, CEO

Freight continues to be a significant challenge, influenced primarily by general freight utilization and fuel prices. As for component availability, it fluctuates daily, and many companies around the globe are operating with minimal stock. It's like a game of whack-a-mole. We are investing substantial resources into our supply chain, collaborating with existing suppliers, qualifying new ones, and ensuring we can meet the current demand. This situation is difficult, encompassing our labor costs, freight costs, and other embedded labor content. It's a tough environment, and even on our most challenging days, I'd prefer to face these issues rather than deal with a lack of demand. However, it remains a significant hurdle for all businesses.

Jagtar Narula, CFO

Yes. John, I’ll add, as Jeff said, it’s component sourcing, component costs freight. We were up roughly $1 million year-over-year in freight costs. Part of that is higher freight rates but part of it is also because of slower shipping times at sea. 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 model to plan for longer shipping times. And so, moving back more to see shipment, which will help our freight costs, means slightly higher inventory levels, but we are adjusting and reacting as quickly as we could.

Dr. Jeffrey Graves, CEO

John, it's impressive how machines consist of numerous components, something we often overlook during stable times. However, when supply chain issues arise, any single component can halt shipping. This situation is a valuable lesson for leadership teams across industrial companies as they adapt. The growing interest in additive manufacturing stems from the desire to avoid shortages of components that companies didn't even know were vulnerable. Consequently, they explore additive options, which not only address immediate needs but also prompt considerations for increasing production through this process. This presents significant growth opportunities, and I believe this trend is here to stay. Once companies integrate additive manufacturing, they become eager to expand its use, although they still face challenges in meeting demand. It's essentially two facets of the same issue.

Operator, Operator

Thank you. Our next question is coming from Troy Jensen from Lake Street Capital. Your line is now live.

Troy Jensen, Analyst

Hey gentlemen, congrats on the solid results in a tough environment.

Dr. Jeffrey Graves, CEO

Thank you, Troy. Good to hear your voice.

Troy Jensen, Analyst

Hey guys. So, I guess, Jeff for you, maybe couple. I think it was three months ago, you talked about refreshing the product line over the 18 months. And I think we’ve one, right, with SLA 750. I’m just wondering if next week’s going to be a big week for new product introductions.

Dr. Jeffrey Graves, CEO

Troy, we have a really exciting product lineup for the next 18 months, so you can expect to hear about new product launches regularly. Internally, we debate how much to reveal at any one time. You'll receive more information on Monday, and we’re eager to share it with you. However, we need to be a bit careful due to competitive considerations. I want to emphasize a theme in the 750 release. With your industry knowledge, you’ll appreciate that backward compatibility and forward upgradeability are significant factors. For example, the new 750 can be purchased as a single laser system or a dual laser system, and it can be upgraded in the field. It features modularity, which is the direction our technology team is headed with new product platforms. This ensures that our customers aren't forced to make significant capital investments but can instead opt for incremental improvements while maintaining backward compatibility with existing products. I’ll provide as much information as possible next week, and I encourage you to ask lots of questions, as you always do. We will have a 750 in the booth at RAPID, and we’ll share as much about the roadmap as we can.

Troy Jensen, Analyst

Okay. Perfect. Jagtar, will you be at the event?

Jagtar Narula, CFO

I will not be at the event. We will have our new starting interim CFO at the event.

Troy Jensen, Analyst

I wish you good luck. But maybe one quick follow-up question. So, it seems like every CEO’s applauding the Biden administration in this AM Forward initiative. So, I’m just curious, Jeff, have you seen any more details, and what exactly are they going to do to incentivize adoption?

Dr. Jeffrey Graves, CEO

It's a significant topic, Troy. I can tell you that I've been in this field long enough to rarely make any firm decisions based on federal actions and intentions. However, I believe it demonstrates the awareness in Washington regarding the advantages of additive manufacturing and its potential to strengthen the U.S. economy while reducing our reliance on foreign resources. I was in Washington a couple of weeks ago, and I can say that discussions about 3D printing and additive manufacturing are prevalent. There's a defense aspect to it, a national interest aspect, and a resilience aspect to ensure we aren't negatively impacted by other countries, pandemics, and similar challenges. I think it's encouraging. My basic understanding of the bill is that it aims to assist smaller businesses in adopting additive manufacturing. So, regarding demand, this is certainly a positive development for us. I’m not sure if the original equipment manufacturers will gain direct benefits, nor do we necessarily need to. However, if it facilitates our customers, especially smaller firms, in adopting additive technologies and helps them grow, I think that's fantastic. So, I commend their efforts in this direction, and it'll be interesting to see how it unfolds. We seldom change our plans to align with such developments, but it aligns well with our existing investments. I'm supportive of it, and it's great to witness this industrial momentum.

Operator, Operator

Thank you. Next question today is coming from Kieran McCabe from Stifel. Your line is now live.

Unidentified Analyst, Analyst

I have a question regarding the ongoing strength in demand and the increasing adoption of additive manufacturing. Following the acquisition of Oqton in September, could you provide an update on discussions with customers about utilizing software to enhance adoption in production settings? Additionally, any insights you have since the acquisition would be appreciated. I understand you may have more detailed information next week, but any preliminary thoughts would be great. Thank you.

Dr. Jeffrey Graves, CEO

Sure. I’ll share a few thoughts on this, as it’s very important to us moving forward that Ben Schrauwen, a leader at Oqton, will join our Investor Day event to discuss Oqton’s software platform and its future. The software is crucial for integrating additive manufacturing into production environments. Previously, it was suitable to have a machine in a lab setting, but now, with fleets of machines—often hundreds or thousands in a factory—to minimize process variability and reduce labor, a robust software environment is essential. This manufacturing operating system must be seamless to implement without disrupting ongoing factory operations, which is one of the strengths of Oqton. It integrates easily with systems like SAP or Oracle and allows for the connection of printers and post-print processing equipment, including robotics, through APIs. Customer interest in this platform has been significant, and we are in daily discussions with large companies exploring its capabilities. I believe it represents a new arena, and many are eager to learn about its potential. I’m very encouraged by this interest, and I think Oqton will assist our entire industry in meeting the growing demand for additive manufacturing in production. That’s why we established it as a separate, independent entity focused on helping the industry and customers adopt additive manufacturing. You will hear from the leader of that business next week, and we have allocated ample time on the agenda for discussions about software, which I think you will find quite fascinating.

Operator, Operator

Next question today is coming from Jared Maymon from Berenberg. Your line is now live.

Jared Maymon, Analyst

Thank you for the insights on the supply side; they've been very useful. I would like to ask a few questions regarding demand. I've heard from several other companies that they are experiencing a slowdown in orders, primarily attributed to inflation, rising interest rates, and increasing geopolitical risks, which contribute to overall uncertainty. As a result, it appears they may be slowing, stalling, or delaying their capital expenditure decisions. Are you encountering any signs of this trend among your customers, or do you foresee any potential shifts in the near future? Additionally, I am interested in your thoughts on whether this situation could actually benefit additive manufacturing, as it tends to be more cost-effective and allows for faster adjustments in production levels.

Dr. Jeffrey Graves, CEO

Yes, I have discussed the benefits and positive factors we observe despite the challenges in the environment, and these are significant. The main risk is the increase in inflation and the Fed raising interest rates, which could lead to recessionary pressures. If our customers start to believe a recession is imminent, they may closely examine their capital expenditure spending, which could ultimately become a challenge. Currently, we do not face such challenges, and there are no signs pointing in that direction. Demand within our company remains very strong, particularly in exploring new production methods, influenced by factors like supply chain risks and disruptions. Looking ahead, the only potential concern would be a significant slowdown of the overall economy, prompting industrial firms to reconsider their new capacity needs. Nevertheless, I believe there will still be a strong drive to localize capacity and enhance robustness. However, a general economic slowdown could counter that trend. At the moment, our demand profile shows no signs of such a slowdown, but if I were to make a prediction, that would be the one factor potentially impacting the entire industrial sector. Jagtar, do you have any additional thoughts?

Jagtar Narula, CFO

The only thing I’d add, Jared, is, obviously I can’t predict what the economy is going to do in Q4 this year or Q1 next year, but looking shorter term, I mean, I’m quite pleased with where our pipeline looks right now for Q2. So, that would seem to indicate that demand is still out there. It’s still strong.

Jared Maymon, Analyst

Got it. Okay. That’s really helpful, guys. And then, just as kind of a follow-up. So, I’m just curious, have you guys seen any shift or is it pretty steady from a sequential utilization standpoint? And then, subsequently, consumables from Q4 to Q1. And then, any sort of outlook on that remaining steady, increasing or decreasing for the rest of the year?

Dr. Jeffrey Graves, CEO

Jagtar, do you want to comment on the individual element trends?

Jagtar Narula, CFO

Yes. Typically, consumables in Q1 are lower than in Q4, making year-over-year comparisons easier. Let me share some adjusted numbers. Materials revenue increased by about 11% or 12% year-over-year, which we feel positive about. Product revenue from systems was higher, around 22% to 23% year-over-year. This indicates that printer sales were quite robust, suggesting a promising outlook for future materials revenue. I appreciate seeing strong growth in materials, especially when printer growth surpasses it, as this indicates upcoming materials revenue down the line.

Dr. Jeffrey Graves, CEO

And again, Jared, we’ll try to give you a little bit more color on the size of our installed base and our growth outlook next Monday, when we talk. It’s really impressive numbers, quite frankly, the scale of it. So, it’s interesting. I think we are among the first learning of how to sell and manage large fleets of machines, and especially mixed fleets, not only metal and polymer, but our machines and those from elsewhere in the industry. So, fascinating times. We’ll share some more insight to that on Monday.

Jared Maymon, Analyst

Great. Sounds good. Looking forward to the Investor Day. And Jagtar, best wishes in what comes next.

Jagtar Narula, CFO

Thanks, Jared. I appreciate it.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Dr. Graves for any further or closing comments.

Dr. Jeffrey Graves, CEO

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.

Operator, Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.