Materialise NV Q1 FY2022 Earnings Call

Good day, and thank you for being here. Welcome to the Q1 2022 Materialise Financial Results Conference Call. I would now like to turn the call over to your host today, Ms. Harriet Fried. Ms. Fried, you may begin.

Thank you, everyone, for joining us today for Materialise's quarterly conference call. With us on the call 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 2022. To access the slides, if you haven't already done so, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings release issued earlier today can also be found on that page. Before we begin, 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 uncertainties 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 date. 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. Go ahead, please, Peter.

Thank you, Harriet, and thank you everyone for joining us today. You can find the agenda for our call on Slide #3. As the first item on the agenda, I will summarize the highlights of our financial results for the past quarter. Then I will pass the floor to Fried, who will give you more context about the upcoming launch of our co-am platform at RAPID. After that, Johan will walk you through our first quarter numbers in more detail. Finally, I will come back to give you some brief observations about our current view on what the near-term future may bring. When we have completed our prepared remarks, we will be happy to respond to any questions that you may have. So let's turn to Slide 4, which summarizes the highlights of our first quarter results. We are pleased to report first quarter revenue of almost EUR53 million, up 16% from the first quarter of 2021 and driven by growth in all three segments, particularly in Materialise Manufacturing. Also, and importantly, deferred revenue from maintenance and license fees increased by almost EUR3 million, underscoring the strong sales performance in both our Medical and Software segments. Our adjusted EBITDA for the quarter increased by approximately 2% to EUR5.4 million and included the negative impact of our continued investments in Link3D. With these highlights, I would like now to give the floor to Fried, who will walk you through the co-am platform. Fried, the floor is yours.

Good morning, and good afternoon, everyone. While, given the excellent and consistent performance, our Manufacturing and Medical segments would normally deserve some attention from me in this call, I want to focus fully on the launch of our new Software product at RAPID in mid-May. I'm proud that the full launch of Magics 26 is taking place as planned despite the war in Ukraine, where a large portion of the development team is located. After a week of destabilization, while effectively escaping from the danger zones, our collaborators picked up the work again and diligently worked through the last burst so that we can release an exciting and stable product to our customers. The biggest innovation in Magics 26 is the incorporation of the Siemens Parasolid kernel. This opens an entire range of new opportunities to our users. They can make more adjustments to the original design files using CAD operations to enhance the printability of the files. On top of some productivity improvements for specific products, it has the advantage that the adjusted design data can remain compatible with the PLM systems and are easiest to use for post-processing steps such as CNC milling operations. Of course, there are several additional new features that further enhance the productivity for our users such as a significant increase in 3D nesting speed. However, I'm most excited about the launch of the new co-am platform illustrated on Slide 5. At Materialise, we have learned repeatedly in our different Manufacturing and Medical production lines that the secret of a successful and profitable production line based on AM is not an exceptional material or a flawless printer that delivers 3D printed finished parts. That simply does not exist despite all marketing claims from some hardware manufacturers. The success depends on the skillful integration of design optimization, well-controlled material conditioning, printer process control, and diligent execution of a wide variety of post-processing techniques by well-informed planners and operators. The human factor in the success of fluently operating AM production lines cannot be underestimated. But this implies a huge risk and dependence on a limited number of knowledgeable experienced technicians in the era of the great resignation. That is one of multiple reasons why Materialise is launching its co-am platform. The co-am platform provides an environment where the skilled operators can be supported by a variety of collaborating software tools that increase their efficiency. It is a customer-owned platform that ensures that a good amount of the knowledge of the process planners and operators can be captured, stored, and automated. Central in the co-am platform is the data lake that structures the information and secures access by the right stakeholders. First, the collaborators of the owner of the production line need access to a lot of the data and function of their skills and responsibilities. But certain portions of the data can also be interesting for the suppliers of printers and post-processing machines to ensure their maintenance and proper machine functioning. The qualitative data lake is the basis for increased learning, whether by data analytics conducted by the process planners or artificial intelligence that can enhance the learning. Around the co-am data lake is a variety of software tools that will ensure that the common plan, do, check, act, or learn cycle that is prevalent in our production environment can be performed in endless self-reinforcing loops. These tools cannot only come from Materialise and Link3D, although we provide a comprehensive and integrated toolset. But as it is a fully open system, they can also come from external providers. We will announce the first external partners on the co-am platform at RAPID. The data lake is set and used by the different software tools that are necessary to run a digital AM production line. It starts with the data input where the storefront software, that is fully launched at RAPID, can ensure efficient data input for internal and external AM service operations in small and large companies. Of course, it is also possible to directly link with existing ERP systems such as those from SAP. 3D printing is mainly economical in small series or in one-of-a-kind manufacturing conditions. The ability to build first-time-right is paramount for economic success. Therefore, the importance of the tools that can be used in the planning phase cannot be underestimated. It's here that Materialise has a huge legacy with Magics and all its models such as automated support generation, nesting, and simulation. We announced a new generation of tools for even more in-depth preparation of parts in certified manufacturing environments with a new process fueler. That's another product launch where we announced full commercial availability out of RAPID. Another launch is about the new workflow automation solutions that contribute to improved planning productivity while drastically reducing the human error factor in the planning phase. Consistent execution is key in the Do phase, and it is ensured by the manufacturing execution system that can interact in a very human-centric way with all the hardware and software tools that constitute the production line. This is precisely what Link3D has created in a well-structured open base, and this is now enhanced with additional components such as the build processes from Materialise. And again, we allow all the third parties. Thanks to the AMWatch software, the data generated during the production phase can be fed to the co-am data lake for constant monitoring and analysis, which brings us to the Check phase, where quality control is conducted with a variety of tools such as tensile benches, CMM measurements, or metallurgical analysis tools; all of which generate data that needs to be saved and linked to what happens in the manufacturing process. Bringing all these data together in the co-am data lake offers the opportunity for intense learning in order to optimize the process, both for optimal economic performance and minimum environmental impact. Our experience with artificial intelligence algorithms that support the people setting up and operating the AM production lines will enhance the learning while also consolidating the process know-how in the data management system. Given its user base, comprehensive toolset, and experience, Materialise is uniquely positioned to accelerate the use of AM production lines, and we will demonstrate the concept at RAPID, where we hope to see you all. Let me now pass the call to Johan.

Thank you, Fried. I'll begin with a brief review of our consolidated revenue on Slide 6. As a reminder, when we refer to sales in our presentation, we mean revenues plus deferred revenues. Also, please note that unless otherwise stated, all comparisons in this call are against our results for the first quarter of 2021. Revenue grew in all three segments in total by 16.3% to EUR53 million and excluded the positive effect of the increased deferred revenue. Our Software segment grew by 3%, Materialise Medical increased 13%, and revenue in Manufacturing rose a tremendous 26%. Cross-segment revenue from software products represented 31% of our total revenue. On Slide 7, you can see that our adjusted EBITDA grew by 2% to EUR5,443,000. In our Q4 2021 earnings call, we mentioned that we would significantly increase investments in our growth businesses in general and the emerging 3D product portfolio, in particular. We believe these continued efforts will contribute to accelerated growth in the coming years. This quarter's adjusted EBITDA also included expenditures to support and relocate our Ukrainian employees who have almost all continued working for us. Please note that the higher cost of energy was offset by improved usage of capacity and production efficiency gains. As a result, our gross profit margin as a percentage of revenue increased by 60 basis points to 54.5%. Slide 8 summarizes the results of our Materialise Software segment, which included the results of Link3D. Here, sales increased by almost 10%, driven by an increase of recurring revenue from both our existing product lines and the addition of the Link3D products. As a result of the deferral of a significant amount of sales, revenue grew by 2.6% to EUR10.5 million. EBITDA was EUR1.9 million compared to EUR3.4 million and included the effect of our significant investments in Link3D. Moving now to Slide 9, you will see that Materialise Medical continued growing at a solid double-digit pace boosted by medical software sales that grew by 27%. Revenue from medical device solutions grew by 12%, driven by partner sales. Adjusted EBITDA amounted to EUR3.2 million. Our EBITDA margin decreased to 17.6% as a combined effect of continued investments in people and R&D to sustain our growth and new business lines and of the higher portion of revenue in our sales from complex implants of medical devices. Now let's turn to Slide 10 for an overview of the Q1 performance of our Materialise Manufacturing segment. Revenue grew 26% to EUR24.1 million. Both our core manufacturing business lines and our new accelerated growth business lines grew by more than 20%, and our solid sales order intake looks promising for revenue in the next few months. Robust revenue growth and improved gross profit margin resulted in a solid EUR2.6 million adjusted EBITDA, representing 10.8% of revenue. Slide 11 provides the highlights of our income statement for the first quarter. Gross profit margin grew to 54.5% from 53.9%. Our operating expenses increased by EUR4.4 million or 17.2% to EUR29.8 million. We significantly invested in our growth businesses, including Link3D, especially in R&D and sales and marketing, which increased by almost 20%. G&A increased by 11.8%. These operating expenses also included the impact of our internal digital transformation project whose first phases are expected to go live during the fourth quarter of 2022. As a result of these elements, the group's operating result was a positive EUR49,000 compared to EUR290,000 in last year's period. Net financial income for Q1 was EUR376,000 compared to a net loss of EUR4.1 million in Q1 2021 when we had a EUR3.2 million impairment cost. Net profit for the quarter increased to EUR127,000 compared to a net loss of EUR3.6 million for the 2021 period. Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights. At the end of the first quarter of 2022, our balance sheet remained strong. Cash amounted to EUR169.6 million compared to EUR196 million at December 31, 2021. The decrease included the effect of our call option exercise for acquiring 100% of the shares of Link3D, while our borrowings position decreased by EUR5.6 million to almost EUR94 million with EUR21 million over the short term. Total deferred revenue amounted to EUR42.8 million as compared to EUR38.3 million at the end of last year. Cash flow from operating activities for the first quarter of 2022 was EUR11.1 million compared to EUR4.2 million for the 2021 period. This quarter, our operating cash flow consisted of EBITDA of EUR5.2 million, while our working capital increased to EUR5.9 million. Capital expenditures for the quarter amounted to EUR3.5 million.

Thank you, Johan. Encouraged by our good results of the first quarter, including the solid order intake of our Manufacturing segment and further encouraged by the continued strong performance of our Materialise collaborators who are currently working in extremely difficult circumstances in both Ukraine and Shanghai, we maintain our guidance for the full year. At the same time, however, we are very much aware that the future is less certain today than it was during our previous call just two months ago. The continuing lockdowns in important economic centers in China and the escalating aggressive invasion by Russia in Ukraine do have an impact on our people in these jurisdictions and also negatively affect the global economy, including in terms of inflation, availability of energy resources, and supply chain disruptions. It is possible that over the course of 2022, our operations and results will be more impacted by the circumstances than what has been the case until today. We will continue to monitor and manage this delicate and unfortunately unstable situation as closely as we can, and intend to continue to evaluate and update our outlook during our next quarterly call. This concludes our prepared remarks. So operator, you can go ahead and open the call to questions.

Our first question comes from Jacob Stephan of Lake Street Capital.

Just looking at the co-am platform, what are some of the cross-selling opportunities you see there? And maybe if you could quantify what percent of your software customers would be looking at this platform.

It is evident that the co-am platform serves as a foundation for several new software tools that will work in tandem with it. Cross-selling opportunities within the broad user base of Magics will indeed be feasible. We anticipate that particularly those customers managing a larger number of machines will show interest in this platform. Fortunately, Materialise holds a leading position with Magics in data preparation for larger additive manufacturing service organizations, whether they are external services or part of larger companies' internal services. We are optimistic about reaching a significant portion of our top-tier customers. We estimate that the main interest is likely to come from around 20% of the user base.

Okay. Great. Maybe just based on the Russia-Ukraine conflict, I remember a lot of the software engineers were based in Ukraine. Do you have any early thoughts that this product launch could be delayed a little bit? Or I guess, what are your thoughts there?

As we indicated, the product launch is, at this moment, not delayed, but we even managed to get all of the new components for full launch ready at RAPID on top of Magics. At the same time, we want to make you aware that this is the first version of the platform and that still a lot of further development will be needed. But we will be able to deliver systems in July, although, in general, the implementation of such a system will take longer from the customer side.

Okay. That's helpful. Maybe just switching to gross margin quickly. Looks like it was down a little bit sequentially. You guys have some software sales in that deferred revenue that were counted as revenue in the quarter, but do you expect that to tick up from the 54.5% in this quarter?

It's a seasonality effect that we have in the first quarter and, in general, in the first half year. That's also what we already mentioned in our call in the fourth quarter that we expect that the growth of our top line would be as we usually see in the second half of the year and particularly in the fourth quarter. What we found in the first quarter is that we also had, in this quarter, particularly more recurring sales where you have a higher deferred effect. And that is, I guess, a temporary element that we don't see to the same extent quarter after quarter.

Our next question comes from Noelle Dilts of Stifel.

So it looks like first quarter results were sort of in line with your expectations based on your commentary in the presentation, obviously, a little bit below the Street. I think on the last call, you mentioned that you expected the investments in the growth business to pick up in the back half of the year. It looks like maybe they were a little bit higher than we expected. Could you maybe talk about the cadence of how you're thinking about the investments in the growth businesses as we move through 2022 and into 2023?

Thank you. There are no changes to our plans. Our anticipated investments are primarily in personnel. Recruitment is underway, and we have successfully onboarded several new employees in the first quarter. We remain committed to a robust recruitment strategy, and we expect this to continue to impact our EBITDA in the upcoming quarters.

Okay. Great. And then could you maybe dive a little bit more deeply into what you're seeing in manufacturing on the industrial side, from an end market perspective, and maybe where you're seeing particular strength versus markets that are a little bit weaker?

Well, actually, in Manufacturing, we experienced a very good and strong market at the moment with a lot of growth requests and where we have not only a very good revenue in Q1, but where we also had a very strong order intake in Q1, which normally should reflect in a strong performance of the manufacturing in Q2 as well. Despite the war and despite the fact that it has, for instance, impacted some plans of the carmakers in Europe due to the supply chain that is interrupted from Ukraine but also some supply chain interruptions from China, we see that the product development is really continuing in the automotive sector, and that we have a strong performance through all of our manufacturing activities.

Our next question comes from Jason Celino of KeyBanc.

So nice to see the Manufacturing segment sustained these pre-pandemic revenue levels. But I'm a little curious, from a growth perspective, how much of this is attributed to maybe some of the higher inflation or higher prices?

Yes, we will not deny that there is a limited inflation effect. But I qualify it as limited. There definitely is strong demand in the market at the moment, which allows us to really do good business at this time.

We mentioned in our comments as well that energy prices have risen, but that they were offset as well by better capacity usage and productivity efficiency gains. So that's also how we want to cope with that and to compensate for inflation increase.

Okay. Perfect. And then I'm curious about the strong order volume that you saw in the quarter. Any themes on what's driving that strength, if it's maybe some customers trying to get ahead of potential increases in inflation later in the year or potential supply chain disruptions? Curious on any thoughts there.

Yes. To be honest, I don't think that is a key driver that people anticipate higher prices later in the year. We are in a business where there is a lot of on-demand manufacturing, small series, and real on-demand prototypes, I would say. So I really think that the economy, after the very slow years of new developments in many sectors, is witnessing a new wave of new product launches and new product developments, of which the additive manufacturing sector in its prototyping segment and also in small certified manufacturing series production in which we are very active is taking advantage.

Our next question comes from Gregory Ramirez of Bryan Garnier.

A couple on my side. The first one, just to come back on the arbitrage between inflation and productivity gains. I was just wondering, to what extent would you be able to make productivity gains, let's take, with your sort of worst-case scenario? I would imagine that you have made some worst-case scenarios, for instance, if there is a shortage of energy next year. Probably you can hedge yourself on the price of electricity this year. But what about next year? So could you elaborate a bit on the different moving parts and parameters that would be involved to take the situation under control? Second question is regarding the Manufacturing business. Could you give a little bit more detail on the state of the demand by industry? What was, let's say, outperforming in this division by industry? And just a last question, I think that the contribution of Link3D to revenues is, for sure, very low. But could you just give us a bit of information about the impact to the Software division?

Can I take the first question related to inflation? Of course, Gregory, we don't have a crystal ball. We do not know what will happen in the next years depending on how the situation in Ukraine and the rest of the world will evolve. We have seen the effects in Q1 of energy. And as we mentioned, we compensated that by the gain in production efficiency. We think that based on what we see in the markets, this will not further escalate in the next few quarters. We will see that energy costs will be significantly more expensive than what we have seen in the past years. But we monitor that, and we also try to mitigate by looking into our contracts with the energy providers and seeking alternatives to fix, to a certain extent, the energy costs already. So we have, at least for this year, not comfort, but we believe that we can keep the costs under control.

On the topic around manufacturing, you were asking what segments in our Manufacturing client base were performing the best. I can say that actually, the situation is strong all over the spectrum. We mentioned last year already that we saw a positive evolution for us in important markets of industrial equipment and medical instrumentation, and this has continued. We see, even this year, a stronger presence in this market, which is important because in our segments where a higher pricing structure is accepted. But at the same time, we have been expressing concerns in previous calls about the slow uptake of the automotive sector, and now we see a good performance in the automotive sector as well, which allows us to bid on interesting projects in that segment.

Your final question, Gregory, related to the impact of the consolidation of Link3D in our numbers as of January 1, 2022. As you know, we decided, because it's not material, to no longer provide separate numbers for Link3D, but we did give you the results that Link3D reported at the end of 2021. And just to allow you to make a better assessment based on that, in terms of revenue, the Link3D business is similar. In terms of contribution to costs, we are, as announced, actually increasing our efforts there. So the existing impact of the Link3D business is further influenced negatively, if you want, on the short term by increased investment on our side. I hope this responds to the three questions that you posed, Gregory.

And I see no further questions in the queue. I will turn the conference back to Peter Leys for closing comments.

Thank you, Chris, and thank you, again. Thank you all for joining us today. We look forward, as always, to continuing our dialogue with you through investor conferences or in one-on-one virtual meetings or calls. If you'd like to schedule a meeting with Fried at the upcoming RAPID in the U.S., then please feel free to reach out, and we will try to accommodate any request that you may have with pleasure. So thank you, and goodbye for now.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.