Materialise NV Q4 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Q4 2022 Materialise NV Financial Results Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Thank you, Kevin, and thank you for joining us today for Materialise 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 fourth quarter and full year 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 that was issued earlier today 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 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 is contained in the earnings release and at the end of the slide presentation. With that, I would now like to turn the call over to Peter. Go ahead, Peter.

Thank you, Jody, and welcome to everybody on the call. Before turning to Slide 4, which summarizes the highlights of our fourth quarter and our full year financial results for 2022, I would like to thank all our employees and, in particular, our Ukrainian colleagues for the amazing mix of perseverance and flexibility that they have shown throughout the previous year, which was not easy. Johan will walk you through our Q4 results in more detail. In this introduction, I would like to focus on a few key numbers of our full year performance in 2022. Amidst the macroeconomic and geopolitical turbulences of 2022, our total revenue grew by 13% from €205 million to €232 million. Importantly, our deferred revenues from software sales grew by more than 20% to almost €43 million. From our perspective, this is a solid top-line performance especially bearing in mind the difficult circumstances that resulted directly or indirectly from the war in Ukraine. In 2022, the increased costs of labor, energy, and materials weighed heavily on our margins. Nevertheless, backed by a strong balance sheet and supported by a solid positive cash flow from operating activities of almost €25 million, we decided to stay the course with our growth strategy and not to compensate for these inflated costs by scaling back our R&D efforts. Obviously, this impacted our adjusted EBITDA which decreased from €32.5 million to €19 million in 2022. We are convinced that this was the right choice and that we will see the first positive results of this decision as early as in 2023, when we expect both our revenues and our adjusted EBITDA to grow robustly. I will come back to that in more detail when we discuss 2023 guidance towards the end of this call. But now I would like to pass the floor to Fried, who will walk you through some of the key operational achievements of our company in 2022, all of which we believe will form the basis for profitable growth going forward and coming as early as this year.

Thank you, Peter. Good morning or good afternoon to all of you listening to this call. Please turn to Slide 5. Even with some serious challenges such as the war in Ukraine and its consequences on world trade, Materialise kept consistently posting double-digit growth in 2022. Despite the inflationary pressure, we kept investing heavily in a sustainable future through capacity expansion in our three segments and high R&D efforts as we had planned at the beginning of the year. We expect these efforts to result in sustained double-digit revenue growth and even substantially faster EBITDA growth in '23 while also reducing our climate impact. Let me review this in more detail. Materialise software went through a major makeover in 2022. We started the year with the acquisition of Link3D, which enabled the full integration of the Link3D cloud-based MES platform and the legacy code base of a range of leading Materialise software packages for AM, including the flagship Magics. Only five months into the year, at Rapid, we announced and demonstrated the CO-AM platform that enables Materialise Manufacturing and medical and which also enables our software customers to integrate and automate their AM manufacturing lines better. In Q3, we took a significant step with the acquisition of Identify3D. Identify3D has a proven software toolkit that has been field-tested by companies and government organizations to allow distributed secure additive manufacturing operations and supply chains. Its tools and teams will ensure that CO-AM is the most secure operation system for AM production environments. On top of that, the new CO-AM platform also accelerates the possibility to develop new software applications, not only for Materialise itself, but also for third-party developers that want to enhance additive manufacturing and its applications. This was demonstrated by the integration of ten third-party applications on CO-AM at Formnext 2022. Despite the war in Ukraine that severely disrupted our development activities, we delivered our cloud-based open CO-AM platform in operational status in '22. This major achievement came with enterprise, however. The combination of extra expenses we incurred to attract additional talent and to continue to support our workforce in Ukraine, the high inflation on a global scale, and restructuring resulting from the integration of our existing sales and development teams with the new Link3D and Identify3D teams significantly impacted the bottom line of Materialise software. Hence, the decline of historically healthy software EBITDA last year, particularly in the last quarter. While development work on our CO-AM platform will continue in '23, we are confident that the extensive efforts of '22 will result in a gradual and sustainable increase of our sales and EBITDA, starting from '23 due to the more scalable recurring licenses of the CO-AM applications. Materialise Manufacturing posted a respectable 16% internal growth in '22 on a business that reached €103.5 million. We kept combining our existing reliable and profitable Rapid Prototyping activities with continuously growing certified manufacturing in selected vertical segments such as aerospace, medtech, alternative drive systems, and wearables. Our additive manufacturing activities earned a Net Promoter Score of 70 from their customers in '22. This is an extremely high mark in any industry. It also demonstrates that we have a customer base that is willing to trust us for future work in a world with increasing AM application opportunities. Last year, we made the investments required to scale further the most meaningful manufacturing applications. We are more than doubling the plant size of ACTech in the second facility, where we can grow our capacities to support the new engine and traction systems for more sustainable energy sources such as hydrogen in the years to come. We launched a completely new Materialise Footscan Suite for Materialise motion in Q3. The new Phits Plus insoles, which enable better performing medical-grade insoles, have already hit the market. Our efforts to introduce new Materialise models in the eyewear market were once again recognized with two SILMO d'Or awards in Paris, which can be considered the Oscars of the eyewear industry. Our new fitting app in iOS for custom frames was developed and launched in optical stores. Finally, we prepared for the launch of a completely new online sales platform in '23 in the core additive manufacturing activity. Despite inflationary cost pressures, Materialise Manufacturing increased its EBITDA 31% on the strength of the diligent execution of our investment plans in more capacity and in more new products. We are confident that the investments we made in '22 form a solid base for further growth in Materialise Manufacturing revenue and EBITDA in '23. Materialise Medical also consistently maintained its double-digit revenue growth rate at 16%. It is poised to be the second Materialise segment to exceed €100 million in revenue. At the sales level, the annual growth was even 20%, reflecting a substantial increase of deferred revenues, especially thanks to the 29% growth in medical software sales. The biggest investment of Materialise Medical in '22 involved the installation and validation of a completely new production line for implants in the U.S. This line will become operational in mid '23. In addition, Materialise Medical also made a considerable investment in new products. Our surgical planning platforms are systematically being extended from the workstation-based Mimics engine light framework to cloud-based Mimics platforms, which combine the benefits of our global clinical engineering services with an increased use of AI-based automation. At the start of '23, we were able to launch a new planning tool Mimics Enlight Lung that helps surgeons save lung lobes for patients with lung cancer. Despite the disruptive nature of the war in Ukraine, our global clinical engineering service teams did not miss a single surgery due to capacity constraints. However, we could not prevent a combination of inflation, war-related costs, and our continued investment for the future from slightly reducing Medical's EBITDA compared to last year. Also for Materialise Medical, we believe that the investments we continue to make in '22 provide a solid foundation for revenue and EBITDA growth in '23. At the staff level, we continued our investment for an aggregate amount of €6.9 million in a new digital backbone that we began rolling out at the start of 2023. While we will still have transition-related costs in '23 due to this rollout, we will start realizing the first savings of the improved system in our operations. This completes my discussion about our strategic advances in '22 and the plans for '23. Please turn to Slide 6. During '22, Materialise made substantial progress in enabling this choice for sustainability by AM to many companies worldwide. We reduced stock levels by printing on demand. Our systems helped reduce transportation by printing de-localized. We help reduce material usage by printing first time right and personalized both in our own production and at the customer side. We are confident we will scale these benefits further, all while ensuring the reliable, repeatable quality that the end customer expects. Materialise enables companies to rethink products and solutions in a way that reduces their impact on the environment while increasing people's health and comfort. This can be achieved by using our software for production optimization or our manufacturing services in eco-friendly materials and processes such as Blueprint. We are not shy about measuring our results according to stringent standards. In 2022, we reduced our carbon footprint by more than 40% compared to our reference year of 2019. This indicates that we are well underway to reaching our sustainability target of 50% carbon reduction by 2025. And now I pass it over to Johan.

Thank you, Fried. I will start with a brief review of our consolidated revenue. As a reminder, unless otherwise stated, the discussion will compare fourth quarter and full year results with those from 2021. For the quarter, revenue rose by 10% to €62.7 million. Our Software segment saw a decline of 4%, while Materialise Medical grew by 17%, and revenue in Manufacturing increased by 11%. Materialise Software represented 19% of our total revenue for the quarter, Materialise Medical made up 39%, and Materialise Manufacturing accounted for 42%. For the full year, revenue grew by €27 million or 12.9% to €232 million. The €7.6 million increase in deferred revenue from software license and maintenance fees compared to December 2021 highlights the strong performance in license sales within our Software and Medical segments. Cross-segment revenue from software products was 27% of total revenue for the quarter and 25% for the full year. Moving to our adjusted EBITDA numbers for the fourth quarter, consolidated EBITDA was €4.258 million compared to €10.5 million for Q4 last year, with an EBITDA margin of 6.8%, down from 18.4% the previous year. Full year EBITDA stood at €19 million in 2022, down from €32.5 million in 2021, with a full year EBITDA margin at 8.2% compared to 15.8% last year. Our adjusted EBITDA was affected by investments in our new businesses, Link3D and Identify3D, increased labor costs, and inflation. In Q4, the Materialise Software segment saw a 9% increase in software sales, driven by a 29% rise in sales from license and maintenance fees. For the full year, we achieved license renewal rates above 90%, indicating the value of our software products to clients. Non-recurring sales decreased this quarter due to apparent weaknesses in the equipment sales markets. We anticipate a shift from perpetual sales to cloud and subscription-based agreements, resulting in a temporary negative impact on short-term revenue growth. Software revenue fell by 4% to €11.699 million, negatively influenced by €3.6 million in deferred revenue. EBITDA declined to a negative €1.441 million, affected by accelerated R&D investments in our new CO-AM business, which also included Q4 expenses for Identify3D, as well as non-recurring restructuring costs associated with consolidating Materialise with Link3D and Identify3D development and sales teams and the write-off of capitalized expenditures. In the Materialise Medical segment, revenue increased by 17% in Q4, with Medical Software and Medical Devices and Services both showing solid growth. Adjusted EBITDA for this segment was €6.4 million, unchanged from last year, with an EBITDA margin of 26%, reflecting a mix of sales changes, rising R&D and regulatory costs, and inflation. In the Materialise Manufacturing segment, revenue rose by 11% in Q4 to €26.8 million, driven primarily by a 23% increase in end part manufacturing and a 20% growth in our ACTech business. Adjusted EBITDA for the quarter increased to €1.5 million, with an EBITDA margin of 5.6%, up from 4.1% last year. For the fourth quarter, the gross profit margin was 56.9%, down from 58.3% last year, while the full-year margin was 55.5%. Operating expenses rose by 28.3% year over year, with R&D expenses increasing 67% and sales and marketing expenses by 29%. G&A expenses slightly decreased by 1%. Net other operating income was €593,000, compared to €1.3 million last year, including €672,000 in impairment costs related to capitalized development in Materialise Software. Consequently, the group's operating result was a loss of €1.554 million compared to a profit of €4.976 million in the same period last year. For the full year, the operating result was a loss of €2.872 million, compared to a profit of €12.2 million. In Q4, net financial expenses were €3.436 million, which included a currency exchange loss of €3.4 million, primarily unrealized, linked to the U.S. dollar-euro position on intercompany balances. Interest income from our cash position offset interest expenses from our debt. Income tax income was €402,000 compared to an expense of €490,000 last year, including a deferred tax asset of €912,000. The net loss for Q4 was €4.588 million compared to a net profit of €4.8 million in 2021. For the full year, the net loss was €2.2 million, translating to €0.04 per share, as opposed to a net profit of €13.1 million, or €0.23 per share. Our balance sheet remains strong. Cash fell to €140.8 million from €196 million at the end of last year, reflecting the acquisitions of Link3D and Identify3D and borrowing of €18 million, which has decreased to €81 million. Cash flow from operating activities for the year was €24.7 million, down from €25.8 million last year. Capital expenditures for Q4 totaled €5.3 million and €24.8 million for the year, which were not financed.

Thank you, Johan. Let's turn to Page 14 for the financial outlook. Encouraged by our strong sales results in 2022 and building on our continued investments in our existing and new businesses, we believe that in 2023, we will post yet another solid top line growth of more than 10% with revenues totaling between €255 million and €260 million. Like last year, Materialise Medical and Materialise Manufacturing in that order are expected to be the key contributors to our growth. We also expect the sales of Materialise Software to grow, but anticipate that as a result of our gradual switch to a subscription-based model, the sales growth will not be fully reflected in our revenues in 2023. Assuming that inflation stabilizes in 2023, our continued sales growth will gradually result in a stronger adjusted EBITDA, which we currently anticipate will grow by more than 30%, totaling between €25 million and €30 million in 2023 with positive contributions from Materialise Medical, Materialise Manufacturing and Materialise Software in that order. Unfortunately, like last year, we must note that the developments in Ukraine will likely impact the European and global economy as well as the important services that we source from our courageous workforce. These developments, which cannot currently be predicted, could have a significant effect on our results for 2023. And on this note, operator, I would like to open the floor now for questions.

Our first question comes from Troy Jensen with Lake Street Capital. Your line is open.

Hey, gentlemen. Congrats on the nice results.

Thank you, Troy.

I noticed during Johan's presentation that end parts were up 22.6% year-over-year. Have you disclosed what percentage of the Manufacturing business is end parts and what percentage of total sales? I am more interested in the percentage of manufacturing that consists of end parts compared to prototypes.

One second, Troy. Let me look up to give you some accurate numbers in there. Manufacturing at this moment represents almost 30% of the Manufacturing segment revenue.

30% of manufacturing is end parts and the rest of the business.

A couple of parts of that, which is not suitable for manufacturing.

Okay. All right. Perfect. It's good to note. And then also just on margins, obviously, we've seen kind of gross margins come down slightly just because of lack of growth in software, we're predicting that again for '23. So it looks like you guys were at 55.5% for gross margins for '22. Would you expect that to be stable or lower? Just thoughts on the direction of the gross margin line?

Yes, Troy, we expect some improvement there because of the combination of two effects. We hope that the rise of our material costs due to inflation will stop. And on the other hand, indeed, our product mix should again show an increased amount of software. Although I want to remain cautious there because in the revenue mix, the growth, as Peter indicated of software will not be as big yet as in the sales due to the fact that we have to defer a lot of our sales of recurring licenses.

Got you. One last question for me, guys, and it's on OpEx. Peter, you addressed it in the prepared remarks. I understand there was inflation, but inflation seemed to be present all last year. You managed the significant increases in OpEx well. However, something happened in the fourth quarter where we saw a substantial increase. Was that entirely due to inflation, Peter?

Yes, in the fourth quarter, we had a big increase in material costs. I think some of the contracts we had were with fixed prices for most of the year, but we were under the influence of inflation, especially at the end of the year because then they expired.

We also experienced labor cost inflation that began in the third quarter and impacted us in that quarter, with the full effect occurring in the fourth quarter. Although annual adjustments in some partner sales agreements can only be made at the start of the new year, we did not see that effect in the fourth quarter yet. Therefore, this represents a delay effect that we are experiencing.

Okay. So then going forward, guys, should we think of the OpEx lines just growing slightly on an absolute basis throughout this year? It sounds like you're not going to try to cut back spending. We're going to continue to stay on plan for the investments. So it's kind of grow them slightly sequentially each quarter.

Yes. Yes. I mean, there was a significant increase in particular, in R&D, but it is also because of the acquisitions of Identify3D and Link3D. So we'll see another uptick like that coming in 2023, so it will be a gradual, much more gradual increase, but we do not plan to cut back. The increasing EBITDA margin will come from a stronger increase over a continuous increase of our revenues.

All right. Understood, guys. Good luck, Johan.

Yes.

Our next question comes from Noelle Dilts with Stifel. Your line is open.

Hi, everyone. Thank you for taking my question. I wanted to know if you could elaborate on your thoughts regarding segment margins as we head into 2023. Specifically, I'd like to understand your perspective on software margins and how we should consider their direction for this year. Additionally, could you share your views on the longer-term trends in this area? Thank you.

In 2022, our Software segment margins were quite low due to significant investments, including the acquisitions of Identify3D and Link3D. We anticipate that these margins will turn positive again in 2023, with notable growth expected. However, they are not expected to return to the over 35% levels we saw in 2021. Looking further ahead to 2024 and 2025, we do expect to achieve the past software margins again. The transition from perpetual licenses to global subscription-based agreements is causing a delay in revenue recognition. The individual prices for subscriptions are lower compared to perpetual licenses, and full revenue recognition cannot be realized immediately. However, we believe this transition will create a snowball effect that will benefit us in the coming years, although we do not expect this to be as pronounced in 2023.

Okay. Sorry …

Yes. Well, just the margin profile of the other two segments, Medical has a very solid margin, which relatively speaking, did not increase much in 2022 compared to 2021. We see some potential to grow the margin there in 2023 for Medical and also for Manufacturing; we expect that the margin will grow to a double-digit level.

Okay. Thank you. That's very helpful. And then I was just hoping you could expand a little bit just on the level of engagement and interest that you're seeing with the CO-AM platform, just how that sort of trended relative to your expectations? And how you're seeing that sort of as you look out to next year translates into just more sales and growth. Thank you.

Well, we’ve really been seeing CO-AM enthusiastically accepted in the market. Yes, in the middle of the year, we could only talk about the, let's say, opinions we heard from several customers. But by the end of the year, we could see real orders, and yes, we recently announced that QuickParts, one of the biggest AM service providers in the world, has fully switched to CO-AM in all of its activities. That's demonstrating that CO-AM is really a tool that is enabling the biggest players to scale. Secondly, I'm very proud of the achievement of our team that in less than a year's time, they could start the implementation of the product in such a big organization and also internally at Materialise after one year. We have now started to run several of our activities on the full CO-AM platform.

Very helpful. Thank you.

Our next question comes from Alexander Craeymeersch with Kepler. Your line is open.

Yes, hello. Do you hear me?

Alexander, we hear you perfectly.

That's perfect. I'm wondering if you expect an adjusted EBITDA of €25 million to €30 million for 2020, which is significantly higher than the Q4 run rate. What are you specifically relying on to achieve these targets? What factors could lead to overperformance or underperformance in reaching them? Additionally, can you provide some insights into what your customers are currently thinking, particularly regarding their CapEx budgets for 2023? Lastly, what is the current usage rate of the ACTech existing machinery as you expand that plant? It would be helpful to know the current usage or capacity rate. Thank you for addressing these questions.

Alexander, I will take your first question on the EBITDA guidance. As I already hinted during the prepared remarks, a growth of the margin of the three segments will contribute to the €25 million to €30 million. In absolute numbers, Medical will contribute most; then we see an increasing margin for Manufacturing contributing second. Then third, software rebounding, but not yet to the levels of 35% plus where there would be in a couple of years, but still will be bounding to double-digit margins will be the third contributor to this growing EBITDA margin. Now, what can make us overperform? Two things. If we further overperform on revenue, that should, with expanding margins, have a positive impact on our EBITDA; that would be excellent news. Second, possibly not so good news, if we do not find the right talent to continue our investment programs because we will expand our margins and continue to invest as well, if we do not find the talent and do not accelerate our R&D as much as we still want to in 2023, then that may have a positive impact on our margins for 2023, but we definitely will not be managing the company in that direction. But those are two situations where I could see that could eventually result in an EBITDA in excess of the range that we guided. And for the second question, which I really didn't take down very much in detail. Please, can I look at you? I will just repeat the question maybe. I just need to wonder what your customers are thinking at the moment. So how do the CapEx budgets are going into 2023?

Yes. Well, I think in most cases, I want to say that we are not in the CapEx budget, but rather in the OpEx budget that's one of the consequences of our growing shift towards cloud-based platforms and our licenses. So the amount of situations where we are in the CapEx budget has really become very limited. That's one element there. But indeed, we see in the market that there is uncertainty. People fear that the year '23 could still be a difficult year. We can say we are rather optimistic because we believe we are in a large number of applications that are really very much on the rise even in difficult economic circumstances. And then finally, with respect to your question on the capacity utilization of ACTech, that is really very high at the moment, about 85% and maybe even higher, which means that there is very little room on the existing capacity. But that's exactly why we have started earlier last year, the expansion. We expect extra machinery to come in during the remainder of this year to increase the capacity. In the meantime, we also have some subcontracting opportunities to support growth on a very short notice.

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Peter.

Thank you, operator, and thank you all for participating in the call today. As always, we look forward to continuing our dialogue with you, be it in one-on-one discussions or at any investor conference that we will be attending in the coming weeks and months. Thank you again for joining, and we wish all of you a good day. Goodbye.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.