Stratasys Ltd. Q4 FY2021 Earnings Call

Greetings and welcome to Stratasys' Q4 and Full Year 2021 Earnings Conference Call. 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. I would now like to turn the conference over to your host, Mr. Yonah Lloyd, Chief Communications Officer and Vice President of Investor Relations.

Good morning, everyone. And thank you for joining us to discuss our 2021 fourth quarter and year-end financial results. On the call with us today are our CEO, Dr. Yoav Zeif, and our new CFO, Eitan Zamir. I would like to remind you that access to today's call, including the slide presentation is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation will also be available, and can be accessed through the Investor Relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance, and our expectations for our business outlook. All statements that speak to future performance, events, expectations, or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys' Annual Report on Form 20-F for the 2021 year, which we filed with the SEC over the course of the next day. Please also refer to our Operating and Financial Review and Prospects for the 2021 year, which is included as item five of that annual report, as well as the press release that announces our earnings for the fourth quarter of and full year 2021, which is attached as an exhibit to a report on Form 6-K that we are furnishing to the SEC today. In order to obtain updated information throughout the year concerning our quarterly results of operations, and the risks and other factors that most impact those results, please see the quarterly earnings press releases and our quarterly Operating and Financial Review and Prospects, each of which will be attached as an exhibit to a report on Form 6-K that we will furnish to the SEC on a quarterly basis over the course of the year. Stratasys assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. As in previous quarters, today’s call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today’s press release. I'll now turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Thank you, Yonah. Good morning, everyone, and thank you for joining us. Stratasys had a strong quarter with over 17% revenue growth compared to the same period last year, driven by the highest system sales since Q4 of 2018. Each of our technologies and all of our regions contributed to this growth. I will share a general overview of our achievements and milestones in 2021. And after our financials and guidance, I will conclude with some thoughts for 2022. Stratasys today is in a very different place than it was at the beginning of 2021. Until last year, our business had been centered around two core technologies: FDM and PolyJet. And while we maintain leadership in these areas, this limited portfolio meant we were missing opportunities to participate more fully in the fast-growing applications at the heart of the shift from prototyping to manufacturing. And we had not developed and launched meaningful product upgrades in a number of years. It was critical to evaluate the entire business and target strategic investments to evolve our product portfolio. We established our strategy to be the first choice in polymer 3D printing, encompassing the entire product lifecycle with multiple technologies and complete solutions for superior application fit, across design, manufacturing, and healthcare. We believe this approach provides the largest total addressable market in the industry. This strategic focus drove us to specifically increase our exposure to manufacturing applications. A year ago, we shared that in 2020 over 25% of our revenues came from manufacturing. We are pleased to say that for 2021 it was 29%, and we expect 2022 manufacturing sales to grow at least 20%. Clearly, our focus on manufacturing is working. We accomplished this with new systems tailored to manufacturing at scale, a software platform to integrate the entire manufacturing digital thread, and a material strategy that rapidly opens up new applications for our customers. Today, we are collaborating with the world's leading materials companies, software partners, and our customers creating many new avenues for growth through a combination of direct sales and licensing. We are excited about this broader portfolio and believe it will further complement our systems offering to help drive our overall growth strategy. And there is more to come in the years ahead. We also dramatically strengthened our balance sheet in 2021. At year-end, we had over $500 million in cash and equivalents, up from $272 million as of the end of 2020, giving us flexibility to seek opportunities that will support our future growth. We believe that by continuing to prudently invest capital back into the business, we will achieve meaningfully accelerated revenue earnings and cash flow in the years ahead. Now, let me provide more specific color on our 2021 accomplishments that were supported by our strong balance sheet. The first area of focus was strategic acquisitions, including Origin, which was completed at the very end of 2020, RPS, and Xaar 3D, which will support our customers' manufacturing needs and begin notably contributing to our growth in 2022. Next, we extended our software capabilities and plan to add licensing to give customers access to our new open materials options. Additionally, we initiated a long-term technology investment arm that has already deployed capital in companies with cutting-edge technologies such as material jetting, post-processing, and continuous carbon fiber. Building on our five industry-leading 3D printing technology, we introduced several new product offerings over the course of the year, including three systems targeting our manufacturing customers. First, the Origin One designed for end-user manufacturing applications that uses P3 technology to produce parts at volume from a wide range of third-party photopolymer materials. After a very successful beta program, we just recently started shipping this system. Next, the H350, the first of our new H-Series powder bed system, powered by SAF technology, and built to deliver production-level throughput of end-use parts which we started shipping in December, and the F770, an FDM printer ideal for large parts, featuring the longest fully heated build chamber on the market. We also introduced 3D printers tailored to some of our most important industry application segments. These include the Origin One Dental printer and the J5 Dental Jet. Together, they provide dental labs with comprehensive additive manufacturing solutions for the large and growing dental market. We also launched the J5 MediJet printer, which gives healthcare customers the ability to print highly detailed anatomic models and drilling and cutting guides quickly and cost-effectively with approved third-party 510K cleared segmentation software. We introduced the J35 Pro and J55 Prime PolyJet printers, along with new software solutions for research and packaging prototyping. Finally, after acquiring RPS in Q1 last year, we launched the NEO line of Industrial Stereolithography systems, expanding our offering to use cases such as investment casting patterns, orthodontic clear liners, molds, and large design parts. In addition to the new systems, we made significant progress on increasing our software focus and offerings. We introduced an enterprise-ready open software platform tailored for manufacturing. This is important because it gives our customers the ability to integrate a fleet of Stratasys printers with their existing Industry 4.0 infrastructure and workflow, allowing them to really scale their use of additive manufacturing. It also strengthens our relationship with our customers because we can use software to continue to add value to their investments in 3D printers. That in turn means recurring software revenues can become a growing contributor to our business. For example, we announced that we have extended GrabCAD print software to our H350 printer for an annual licensing fee, enabling enhanced functionality focused on optimizing production throughput that is specifically designed for end-use part manufacturing at scale. We also continue to invest in additive-specific applications to streamline the workflow of orders to the factory shops. On the material side, we introduced CF10, our new carbon fiber material, that we believe will increase the adoption of our technology into production lines, especially for manufacturing. CF10 is also proven to be a catalyst for increased sales of our F370 system. We introduced open materials options for FDM that we plan to launch in the back half of this year, starting with our Fortus 450. We expect this to spur materials innovation, accelerate the adoption and expansion of our consumables and contribute to increasing our software revenues. We also entered into a number of important partnerships, including partnerships with leading companies, as we seek to provide our customers with complete end-to-end solutions for specific industry applications. These accomplishments in 2021 were thanks to the hard work of our exceptional team at Stratasys. Together, while managing through the many pandemic and related challenges, we successfully launched over 30 new products into the market. I am very proud of our team and excited to experience even more this year. As we execute on our strategy and build momentum, customers continue to express their confidence in Stratasys. For example, ECCO, a leading global shoe manufacturer, is using our Origin One to print molds and shoe lasts for development purposes. Not only do these parts fully match the quality requirements of the CNC machined aluminum counterparts, but they are faster to produce and far more economical. Another example is Radford Motors, one of the two automotive OEMs that are already utilizing all five of our technologies. So each of their coaches with supercars Radford prints hundreds of Stratasys parts from design through prototyping, tooling, and end-use that can be found on the final vehicle. We believe this level of 3D printing technology adoption will become standard in the automotive industry. I would like to take a moment to discuss our efforts and accomplishments regarding ESG. This is an area of primary focus for our company and our industry. 3D printing has the ability today to address many of the environmental issues facing global manufacturing and we are at the forefront of those efforts. At Stratasys, we are deeply embedding our ESG strategy in our products and processes. As part of our DNA and company purpose to empower people to create without limits for an economical, personalized, and sustainable world, we are addressing many of our business processes, and along with our customers, we seek to take climate action while improving social impact. We call it mindful manufacturing. A call to action to redesign processes, paths, and supply chains with great thought and clear intentions to secure manufacturing, utilizing 3D printing in a way that maximizes sustainability while also supporting business growth by digitizing, localizing, and optimizing for additive manufacturing. We believe net-zero targets are not only achievable but easier to reach than with traditional manufacturing technologies and processes. Our efforts encompass product innovation and improved circular economy for additive manufacturing, and extensive outreach in our communities through education and healthcare CSR activities around the world. We plan to publish a first-of-its-kind market-leading pure polymer additive manufacturing GRI sustainability report next quarter. As a market leader in 3D printing, we see our role as leading the shift to responsible consumption and production, helping our customers achieve their carbon neutrality net-zero goals and working to address our own footprint, supported by the data and research needed to drive this transformation for the entire additive manufacturing industry. Before I turn the call over to our new CFO, Eitan Zamir, to share the financial results. I wish to thank Lilach Payorski for her leadership and many significant contributions to Stratasys over the past nine years. Lilach built a strong, talented finance organization and her dedication to excellence and professional expertise has helped to preserve and strengthen our financial health as we navigated dynamic markets and pursued strategic growth initiatives. We wish her the best in her future endeavors.

Thank you, Yoav, and good morning, everyone. Before I begin my remarks, I would also like to personally thank Lilach for her guidance in the over two years I've been with Stratasys. Her contribution and commitment to the company have been a fundamental part of our success. And I'm honored to be assuming the role of CFO at this time in our journey. Now turning to the numbers, the fourth quarter of 2021 was another period of successful execution for our company. We delivered the highest quarterly total revenue and highest quarterly system revenue in three years. Cash generated from operating activities was positive for the sixth consecutive quarter. For the fourth quarter, total revenue was $167 million, a 17.3% increase from the prior year quarter, driven primarily by strength in system sales, which was the highest in 12 quarters and is typically a driver for future consumable sales. Total revenue was up 5% sequentially from the third quarter and was 4.3% higher as compared to pre-pandemic Q4 2019 levels. On a constant currency basis, total revenue increased 18.3% year-over-year. Product revenue in the fourth quarter was $118 million, an increase of 19% compared to the same period last year, or 20.1% on a constant currency basis. Within product revenue, system revenue increased 25.9% to $61.8 million compared to the same period last year and increased by 26.9% on a constant currency basis. Consumables revenue increased by 12.3% to $56.3 million compared to the same period last year, and increased by 13.6% on a constant currency basis. Service revenue was $49 million, an increase of 13.3% compared to the same period last year. On a constant currency basis, service revenue increased by 14%. Within service revenue, customer support revenue increased by 7% compared to the same period last year and increased by 8.1% on a constant currency basis. We're pleased to see a strong and growing contribution from healthcare and dental, and also to see consumable and customer service revenue above 2019 levels. Now turning to gross margins, GAAP gross margin was 43.7% for the quarter, compared to 46.4% for the same period last year. Non-GAAP gross margin was 48.7% for the quarter compared to 49.5% for the same period last year. The decrease in gross margin versus the prior year period was driven mainly by raw material inflation and ongoing logistical challenges, partially offset by the impact of higher sales and sales mix. GAAP operating expenses were $89.2 million, an increase of $20.7 million or 30.1% from the same period last year. Non-GAAP operating expenses were $79.6 million, an increase of $17.4 million or 28% compared to the same period last year. Non-GAAP operating expenses were 47.7% of revenue for the quarter compared to 43.7% for the same period last year. The increasing operating expenses were driven by a number of factors, including the return to a 5-day work week, higher expenses as the markets recovered, higher operating costs and commissions due to more revenue and additional operating costs associated with the inclusion of our new acquisitions, including full ownership of Xaar 3D in the fourth quarter. These costs were funded by the resizing plan implemented in May 2020, which allowed us to allocate resources to areas where we believe we will generate stronger growth. Regarding earnings, GAAP operating loss for the quarter was $16.2 million compared to a loss of $2.5 million for the same period last year. Non-GAAP operating income for the quarter was $1.7 million compared to $8.3 million for the same period last year. The difference reflects the increase in operating expenses in the fourth quarter of 2021 described before, including due to our move from a four-day work week to a five-day work week. GAAP net loss for the quarter was $4.8 million or $0.07 per diluted share compared to net income of $11 million or $0.20 per diluted share for the same period last year, which reflected a one-time $14 million tax benefit in the fourth quarter of 2020. Non-GAAP net income for the quarter was $0.5 million or $0.01 per diluted share compared to $7 million or $0.13 per diluted share in the same period last year, reflecting the increased operating expenses in Q4 2021 compared to Q4 2020. Adjusted EBITDA of $7.9 million compared to $14.6 million in the same period last year, reflecting the increase in operating expenses in Q4 2021. We generated $4.4 million of cash from operations during the fourth quarter compared to generating $23.7 million of cash in the same quarter last year. This was our sixth consecutive quarter of positive cash flow from operating activities. It was driven by strong collections and achieved despite an increase in inventory purchases. We ended the quarter with $502.2 million in cash, cash equivalents, and short-term deposits, compared to $299.1 million at the end of the fourth quarter of 2020. Our cash position was bolstered by a $230 million capital raise in Q1 of 2021. We have executed with excellence to overcome the negative impacts of the pandemic and remain well-funded and well-positioned to capitalize on value-enhancing market opportunities as they arise. Now, let me turn to our initial outlook for 2022. We are guiding that our 2022 revenue will be in the range of $680 million to $695 million. We expect to realize sequential revenue growth each quarter as we progress throughout the year with the second half of the year notably stronger than the first half. The sequential growth is somewhat different than our historical seasonality pattern, primarily due to the timing of new system releases and the corresponding ramp in sales as well as gradual shifts in sales mix. Q1 revenue growth is expected to reach high-teens as a percentage over the first quarter of 2021. From a gross margin perspective, given our experience with the global logistics and material cost issues, full year 2022 is expected to be flat to slightly higher than 2021 with the second half stronger than the first half, based primarily on higher revenue. We expect the first quarter to be relatively flat to the first quarter of last year. I would like to emphasize that we view the current gross margin situation as temporary as the headwinds caused by these external issues pass. As we continue to execute on our long-term plan, we expect our margins to head back over 50%. We'll continue to invest in our growth engines to generate significant leverage benefits as we responsibly build a strong company for the long term. In 2022, we expect our operating expenses to be approximately $20 million to $25 million higher than 2021, primarily due to the impact of owning Xaar 3D for the full year, higher costs that result from higher sales, and investment in new growth drivers such as origin and healthcare. I’d like to remind you that starting from the second quarter, operating expenses are typically higher than the first quarter due to the normal timing of compensation expenses. Despite the higher absolute dollar value year-over-year, we expect to see a continuation of reductions in operating expenses as a percentage of revenue throughout the year, improving profitability objectives for us. For 2022, we expect to see continued improvement in our earnings. We expect non-GAAP operating margins to be slightly above 2% for the full year with small operating losses during the first half and turning to profit in the back half of the year due to the anticipated revenue increase. Longer term, we expect operating margins to achieve double digits as our growth plan unfolds in the coming years. We anticipate a GAAP net loss of $74 million to $67 million, or $1.11 to $1.00 per diluted share, and non-GAAP net income of $10 million to $13 million, or $0.14 to $0.19 per diluted share. Adjusted EBITDA is expected to be in the range of $38 million to $41 million. We expect our capital expenditures for 2022 to range between $20 million and $25 million. With that, let me turn the call back over to Yoav for closing remarks.

Thank you, Eitan. 2021 was a transformative year for Stratasys in many ways. We vastly improved our offering, strengthened the balance sheet, and invested in technology, positioning us for continued growth in the years to come. We experienced our largest contract in company history with a $20 million order from the US Navy for 25 F900 manufacturing systems. Importantly, this is more than just a one-time sale. We are fully qualified and selected as an additive production partner, opening the manufacturing door for us. We expect to scale adoption quickly. We had another large long-term F900 sale to a leading global OEM. These and other manufacturing-related deals demonstrate market confidence in the use of Stratasys technologies as the market shifts from rapid prototyping to manufacturing—a clear signal the 3D printing industry has reached this important inflection point. In 2022, we will advance our efforts to strengthen our leadership in polymer 3D printing. We have established the foundations for long-term growth based on leading polymer 3D printing systems complemented by continuous innovation across our portfolio. Two key components of these efforts include the H350 and the Origin One, both products have been well received in the beta programs and we believe these systems will help to more than double our addressable market over time. Equipped with best-in-class offerings, unmatched go-to-market network and support infrastructure, a strong balance sheet, and the best 3D printing talent relentlessly focused on execution, we are positioned for sustained growth and strong stakeholder returns as we further build on our momentum in 2022. Looking ahead, we are energized and excited for the future of Stratasys. With that, let's open it up for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

Yes, thanks. Congrats on the continued progress here and Eitan congrats on your transition to CFO, look forward to working with you more closely going forward.

Thank you, Greg.

I guess I wanted to just start off on new product contribution, and I guess the question more lays upon the feedback and traction out in the marketplace and what you're seeing and hearing from both your installed base and new customers, and again, this is specific to the new products?

Hi Greg. It's good to speak with you. That's a great question. We are fully prepared to take advantage of the new product in the market. Consider the thousands of customers we have and the hundreds of partners who just need to sell a few more technologies to the same customer. We have excellent new products available. Starting with the SAF, we have a strong pipeline with unmatched power quality. I'm continually impressed by the flexibility of this machine and its ability to compete with injection molding. Regarding the Origin, we've just completed the beta phase and it is now generally available. While we may not be hearing a lot yet, we've received positive comments and feedback from our industrial and dental customers. The main advantages of this machine include a unique patented layer separation, which offers a completely different approach to operating DLP systems, resulting in unparalleled part quality, speed, and reliability. We are excited to share more information with you and the public this year regarding the performance of these two machines. We also launched RPS, achieving results that exceeded our expectations. The DentaJet on the PolyJet side, especially when paired with dental Origin, creates an incredible new portfolio that is very appealing to the dental industry. Altogether, we have new products across all our technologies. Starting with PolyJet, we have the J35, MediJet, and DentaJet. Moving on to FDM, we offer the F770, which features the longest build chamber in the industry and has gained significant traction in the market. In addition, with the SAF, Origin, and RPS, we are well-positioned for growth based on these new products.

That's helpful. And I guess, Yoav, when you joined, I think you talked a lot about Stratasys being kind of a one-stop shop for customers looking to invest in additive. And now that you have the product portfolio sort of set, are you seeing any tangible evidence of this happening? I don't know whether that's market share gains, maybe that's just increasing sort of wallet share spend, within existing customers or maybe just new growth with new customers, but what's your thought on how that strategy is playing out?

Short answer is yes, but let me elaborate on it. We already have two automotive players, OEMs using all five technologies, which is amazing. And why it's so important? Because manufacturers' bottom line, when you look at the manufacture, they prefer to have one provider with one ecosystem, with one production environment, with someone they can count on. And this is exactly what we are bringing to the market. We are not selling technology. We are selling the best solution that fixes your problem. We are coming to solve problems for our customers. This is a completely different position in the market compared to where we were two years ago. And it works. And of course, this is just the beginning, but we are very encouraged by what we're seeing in the market and from the discussions I have with customers on a weekly basis.

Okay. Perfect. I'll hop back in the queue. Thanks and good luck.

Thank you. Our next question is from Troy Jensen with Lake Street Capital. Please go ahead.

Hey, gentlemen, congrats on the good quarter and the good year.

Thank you.

Can you talk about your Q1 guidance? It seems stronger than the typical seasonal trends. It appears that deferred revenues increased slightly from the previous quarter. I'm curious if there were any limitations in Q4 that impacted sales, and whether those issues will carry over into Q1, or if the stronger-than-normal seasonality is mainly due to the H350 launching.

Hi, Troy. Good morning. A good question. There were no constraints in Q4. The increase is driven by our new products as well as our other technologies; our whole technologies, and we started the year with a strong backlog.

Okay, perfect. And can you just confirm you did have H350 revenues in Q4? And then I expected to ship the Origin for revenues in Q1 also?

Yes, in Q4, we already had the SAF product and in Q1, we will start – we started shipping Origin and we'll have revenue from Origin in Q1.

Awesome. Okay, congrats. Good luck this year and I'll follow up offline.

Thank you.

Thank you. Our next question is from Jared Maymon with Berenberg. Please go ahead.

Hey, good morning, guys. And congrats on the strong results. First question for me. I'm just wondering with the Origin One Dental VSM, you know some big customers trialing that yet and how likely do you think the opportunity is there to take share with that product?

So – thank you for the question. Of course, we ran our total beta program with large, and some medium and also some small customers to make sure that we are covering the whole range. And we got fantastic feedback from the beta. So we are very encouraged. It's really a unique value proposition in industrial dental, in terms of the quality of the parts, the accuracy, and the speed. This is only the beginning, so we can do many different applications with one platform. You can go to the Origin, in Dental, in Tooling, in model, the liner, denture, splints, guards, stamps, bridges, and when you combine it also with our PolyJet, we are covering the whole range and this is a really great value proposition to medium and large dental customers that we are targeting.

Yes, Jared, it’s Yonah, I would just add on top of that quickly that as strong as the aligner market has shown to be the good adopter of this technology over time. We see dentures as an even larger market opportunity. And so we and the Origin system, we discussed when we first announced it a little over a year ago that that was one of the target markets. So we really look forward to updating the market around that particular end-use at the appropriate time.

Great. Perfect, good to hear. And then I'm just curious, you mentioned briefly you have a team that's deploying some capital in various opportunities and one of those you called out was continuous fiber. Is there any color you can provide on this?

And you know, we received this question many times, so it's good to that you asked it. We have a very strong balance sheet. So we have to use it in the best way that will generate returns to our stakeholders. We believe that the best way to do it is to focus on our strategy. We have a laser sharp strategy on polymer manufacturing. We are doing really well on the growth side and creating the most sustainable, strongest company in the industry. This is very attractive to many startups. So we are being approached by many startups and we decided to establish an investment arm. We call it Stratasys Ventures, but it's all about accelerating the implementation of our strategy. We know exactly where the gaps that we have mainly in the workflow and exactly where are the needs and the gaps in the industry. We are bringing the go-to-market. So we are investing in very exciting technologies like we said in the script, like continuous carbon fiber. We just recently invested in 90 labs that have a very unique way of having x, y, and z continuous carbon fiber, not in the x, y. We just – they just closed a $17 million round and we were there and other companies that we cannot elaborate on now. It's a very strong pipeline for external innovation that will help, together with our great people in R&D, to make sure that we are keeping our technological leadership in this market because our machines are the most reliable, they are the most repeatable in the market with the highest throughput and this is what manufacturers look for out there, and we can deliver it internally and externally. And we have a very clear framework on how to do it.

Got it. Thanks, Yoav.

Thank you. Our next question is from Jim Ricchiuti with Needham & Company. Please go ahead.

Hi. Thank you. The question I had is just with respect to the comment that I believe you made regarding gross margin pressures being temporary, and I'd like to follow-up on that, and maybe drill down a little bit more. Are you anticipating just the mix of revenues benefiting your gross margins and the scale-up in volume, or are you taking some other measures to offset some of the pressures that you're facing because it doesn't sound like some of these cost issues are necessarily going away?

Hi, Jim. Good morning. It's a good question. So first, one part is the anticipated improvement in logistics and raw materials in the future, but we are also proactively as we scale up our business as the new products become more mature to optimize and to improve our margins in our processes.

Okay. Just with respect to your outlook for 2022 on the revenue side, maybe you could talk a little bit about which of the verticals do you see the biggest growth potential? I think you're clearly, it sounds like you're excited about what you're seeing in the dental market. But I wonder if you could just give us a little bit more color in terms of how you're thinking about the year from the standpoint of vertical markets?

Thank you for the question. We by definition when we launched our new strategy going for manufacturing and what we call end-use parts. We decided that we were going to focus on a much larger market to increase the total addressable market, both because of the new technologies, but not less importantly because of new verticals and new applications. So of course, we have our verticals like the government and the defense and aerospace and auto, and we're doing really well there. But within that, we want to shift from prototyping to manufacturing. We were the first company in this industry to say that 25% of what we are selling is going to end-use parts. In 2021, we’re already at 29% and believe that it will keep growing. This share will keep growing above 20% every year. So the strategy is working. So where we focus on manufacturing and healthcare manufacturing across many verticals, from consumer to aerospace and automotive. When you go from manufacturing to healthcare, healthcare is mainly dental but also not less important is the whole PSP, what we call presurgical planning, where we are sitting on the best technology in the industry. We are the only one who can deliver real imitation of anatomic models where you can really imitate the tissue. We just launched this year what we call digital anatomy creator, where the surgeon or the radiologist can really imitate the tissue and customize it to the different patients. We believe it will position us as the leader when insurance and reimbursement will occur in this area because it is saving lives. So bottom line manufacturing and healthcare.

Thank you.

Thank you. Our next question is from Ashley Ellis with Cross Research. Please go ahead.

Hi. Thank you for taking my questions. I was wondering if we could dig a little bit deeper into the revenue guidance. You're obviously going against some pretty tough comparisons in system revenue. And I know you're launching the origin and the ramp-up, but how should we think about system growth versus your recurring revenues, your consumables, and customer support? Should we expect that there should be some sort of follow-on from the strong system sales in 2021? And then I have a follow-up. Thank you.

Thank you, Ashley. It's a good question. We're very excited about 2022 and we expect all our streams to grow. Hardware will be the driver for the increase, but consumables and services will follow.

And are you factoring any software contribution into the revenue guidance?

Ashley, if you want to, software is not going to be yet meaningful. It's sort of just starting to launch through, as we mentioned earlier, there'll be some software licensing revenue that we're going to start to get as we do the open materials, which is beginning in the back half of the year on the F450. But we'll be sure to update you as software becomes a more meaningful part of the revenue.

Yeah. And if I may add, we are going to launch new software products in 2022.

Okay. And then you have could you talk about the decision to open up the FDM printers to third-party materials? Why now and then? Is there the potential you could open up your PolyJet systems in the future?

I would say it's an act of leadership. We are steering this industry from prototyping to manufacturing. After conducting a detailed analysis and engaging in extensive discussions with manufacturers, we identified various barriers, one of which is the range of materials suitable for real manufacturing applications. It’s become evident that focusing on manufacturing and selling thousands of units instead of just a few kilograms per machine leads to better unit economics and enhances our customers' profitability by providing greater value. The open material initiative is centered on innovation and collaboration in that regard. We take responsibility for the quality of the parts produced. This is a hybrid model with a controlled open material system where we collaborate with our customers in three tiers. Tier 1 is our preferred category, which we have already announced as exclusive to Stratasys. The second tier involves certified third-party suppliers that meet our standards. The third tier is exploratory, allowing everyone to innovate and enhance their projects, but it remains focused on FDM. Our entire new model is centered on manufacturing, specifically FDM and Origin. We receive excellent feedback from our customers, which enables us to significantly increase the number of new materials introduced each year. For example, RPS is functioning very well in the open model, providing us with a competitive advantage and real value for both our customers and ourselves. Ultimately, when we discuss opening materials, it’s not about losing responsibility or compromising on quality; rather, it’s about delivering more value to our customers responsibly and ensuring we generate meaningful value for all stakeholders. Regarding PolyJet, there are currently no plans to expand it, as it is more closely associated with prototyping and has distinct requirements, and we already have the majority of materials necessary for prototyping. Our focus remains on manufacturing, working alongside our customers, who appreciate our leadership in this area.

Thank you very much.

Thank you. Your next question is from Paul Chung with JPMorgan. Please go ahead.

Hi. Thank you for taking my questions. Can you talk about the interesting initiatives you're undertaking in aerospace? Could you provide more details about the partnership with Boom, as well as the contracts with the US Navy and how you envision those relationships developing? Additionally, do you think this could attract interest from other customers and how significant could this part of the business be for growth? I have a follow-up question as well.

Thank you, Paul, for your question. It highlights how we are collaborating with our customers to make a meaningful impact. Take the Navy as an example; it's a prime illustration of distributed manufacturing. This concept has been discussed for years, and we are actively working with the government and the Navy to implement it effectively. We plan to deploy F900 machines both domestically and internationally to produce spare parts. This represents a significant achievement, and I want to express our gratitude to the Navy and the U.S. government for partnering with us and advancing the entire industry. It presents a real manufacturing opportunity across various government sectors. Additionally, our partnership with Boom showcases innovation in action. We started with prototyping to shorten their development cycle and save considerable time—saving two to three years or more. The engineers can conceive an idea and print it the same day to evaluate it, which is truly impressive. They have expanded this to include different fixtures, tooling, and actual end-use parts. During my visit, I was amazed to see parts for the newest generation of passenger aircraft being 3D printed. This experience has taught me a lot from both customers. It's ingrained in Stratasys' approach to collaborate with our customers, ensuring their success and promoting 3D printing as a significant manufacturing process. We have many more initiatives in this area.

Great. Thanks for that. Cool stuff. So just on cash flow, you managed inventory levels really well and seeing some funding benefits from kind of longer accounts payable days. But if you could expand on how you managed the inventory levels so effectively this year? And then, how do we think about kind of working capital dynamics in 2022? And then can you grow cash from operating in 2022, keep the streak of kind of positive quarterly operating cash kind of ongoing? Thank you.

Thank you for the question. We're not providing guidance on cash flow. However, we are continuing to invest and increasing our inventory purchases to prepare for growth in 2022. We have over $500 million in cash to invest. Therefore, we feel very optimistic about cash flow in 2022, but we are not offering specific guidance on it.

Great. Thank you.

Thank you. Our next question is from Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thank you. I just wanted to follow up on the cash flow question. If we look at your midpoint of your operating income guidance, it's about $18 million improvement on a year-on-year basis, which is great to see in 2022. Maybe if you don't want to give an explicit cash flow guide. Can you talk about some of the underlying puts and takes that might influence how that increase or decrease in cash flow might trend relative to that increase in operating income? And I have a follow-up.

Thank you, Wamsi. Without providing specific guidance on cash flow, it's important to consider all the working capital factors when comparing it to operating income. As I mentioned earlier, we are continuing to invest in increasing our inventory throughout 2022, and this should be factored into your cash flow modeling for the year.

Thank you for that. Considering the excitement around new products and their potential contributions, especially in the latter half of the year, can you discuss your revenue guidance of mid-teens growth for the year? How much growth do you anticipate these new products could contribute in the first and second year? I assume you have a plan for ongoing contributions. Can you help us understand how to think about revenue growth sustainably, particularly regarding these new products? It seems like you are transitioning from two platforms to a multi-platform strategy that resonates with your clients. If 2022 was a transition or launch year, should we expect to see acceleration in 2023? I'm trying to understand how much growth you might see accumulating over the next few years. Any insights would be appreciated. Thank you.

Right. Thank you for the question. We do not provide guidance on this specific product. However, I can say that in 2022, we expect all of our technologies to increase compared to 2021. Naturally, the launches of Xaar and Origin will have a significant impact in 2022 compared to 2021, but we do expect that all of our products and all of our technologies will generate growth in the future and after 2022.

Okay. Thank you, so much. Good luck.

Thank you. Our next question is from Ananda Baruah with Loop Capital. Please go ahead.

Hey, thanks, guys. Congrats on the ongoing momentum and really appreciate you guys taking the questions. I guess just two quick ones if I could. Going back to Paul's question, you guys provided some really good context on the Navy relationship as to what's driving sort of driving business with them. Could you provide us some context in a general sense of what customers are doing that's leading to the increase momentum, the ongoing momentum and yes, in a tangible way for us? And then I have a really quick follow-up. Thanks.

Hi Ananda, thank you very much for the question. It’s a great time to be proud of the additive manufacturing industry. I didn't plan it, but I'm lucky because customers understand the global trends. And they understand also that additive will be part of the manufacturing of the future. So everybody's spending now their future on manufacturing, the plant of the future, the micro plant of the future, customization, Industry 4.0, etc., etc. And then the pandemic with all the supply chain issues that we are facing, the ultimate creator, the ultimate reason for us is to start engaging with our customers. So you take together the most fundamental trends that we are experiencing now, the supply chain need, the customization, especially in healthcare, the need for sustainability and lighter parts in order to use less fuel and the innovation in so many areas, like in electric vehicles, and the need for new geometry for this, additive is the best solution and the Navy deal proved it. Manufacturers can distribute the digital inventory worldwide. You don't need physical inventory; you can have digital inventory and you can provide parts wherever they are needed. So people understand it. The moment they understand it, they are looking for a partner they can interact with in order to develop those plans for the future. I think we are positioned quite well because we are a one-stop shop with one operating system, one material platform, one software platform, and with a lot of reputation, reliability, repeatability, and the ability to deliver. So it’s a very exciting time for us.

That's super, super helpful. I appreciate the context. And my quick follow-up is just on the op margin guide, for 2022, I believe you said about 2%. Can you just describe for us what are the puts and the takes? And I guess really what I'm wondering is like what are the things that allow you to begin to expand operating margins as I'm assuming as we go through 2023?

Thank you. So when we think about 2022 and over 2% margin, we have the growth, the significant growth in our revenue, and when we think about OpEx, it will decrease as a percentage of revenue during 2022. However, we continue to invest in our growth drivers: origin, staff, and healthcare, and operating margins can expand longer term due to a number of factors, including the increase in consumables and adding software that comes with higher margins and the entire business, the entire revenue increase that we expect.

Got it.

If I may add, I think that's exactly the right direction, but if I may add, it's a combination of external and internal forces. Externally, we do believe that the current logistics cost is not sustainable. We believe that in the second half of the year, maybe next year at the end of this year, we see better results because of the capacity in our infrastructure and other issues that will solve themselves. This ongoing crisis that fuels itself will somewhat solve itself. This is on the external side. But we don't base our projection only on external forces; we base our projections on activities and what we are doing to be proactive. We believe that selling more hardware means that we sell more consumables, which increases our gross margin. We are investing in higher efficiencies across the company, and we are lowering production costs. What we can do internally? We take control over our destiny, we design for cost, and we have NPIs. We are working on it. We're not coming here and saying this margin will be better; we are working on it. It will be better.

That's really helpful. Thank you guys so much.

Thank you. Our next question is from Noelle Dilts with Stifel. Please go ahead.

Hi, guys, and thanks for taking my question. First, I was hoping you could comment on if you're seeing any notable differences in demand from a geographic perspective. If you know how your what you're seeing in Europe versus the US and Asia? Thanks.

So, great question. We are not, in general, we are not giving the details, but I can give you the high-level trends—share with you the high-level trends. It's kind of a combination of recovery and innovation, I would say. We see that EMEA, which was lagging compared to the US in adoption of new technology in many verticals, aerospace and automotive, are catching up. So we see very nice results from our EMEA region. And then we see also great results from the US, and then Asia. So this is a more or less the ranking, but I believe it's only a matter of the pandemic and the recovery from the pandemic. So Asia, they adopted a more strict, I would say, Omicron policy. So we see which is not in Europe and not the case in the US, but bottom line across the geographies. We see really good demand and the growth across regions is positive and looks really good.

Okay. Great. Thank you. And second, I was hoping you could just expand a little bit on what your acquisition pipeline looks like as you look out over the next year or two. You know, I mean, maybe details on are you seeing more smaller deals or larger deals and what's your appetite for, you know, for M&A as you look at 2022? Thanks.

We have a very structured framework for business development activities. Starting from an acquisition—but about the bottom line—if I start with the bottom line, this time is about accelerating our strategy—the implementation of our strategy. We don't do anything which is not within the strategy. But within the strategy, there are so many opportunities. We started with acquisitions of base technologies, and now we are moving—I would say to the next phase, which is about really strengthening those technologies, but investing a lot in workflow and materials. We are moving down the road. We have the base technology now we need to make sure that they have the full solution, which is the best, and this is materials. This is workflow software, and also a lot of collaboration. It's a combination of investment and collaboration. Bottom line, we increased dramatically the size of our investment team, and we believe that a combination of external and internal innovation will put us completely in a different way and we secure our technological leadership.

Thanks so much.

Thank you. Our next question is from Brian Drab with William Blair. Please go ahead.

Hi, good morning. This is Blake Keating on for Brian.

Good morning, Blake.

Brian ended up being double booked, but wanted to get clarity on a couple items. What is different about 2022 in terms of your revenue visibility compared with 2019? Because in 2019, your initial guidance was between $670 million and $700 million in revenue and reported $636 million in the end. So, what's driving the confidence this year?

Hi Blake. Good question. We feel very confident about our ability to meet the 2022 numbers. We started with a strong backlog for the year and with the new products and also the existing technologies, we feel confident in being able to meet the guidance.

Thank you. And then how should we reconcile below the EBIT guidance, which implies about $14 million to $15 million in EBIT with the adjusted EPS guidance? Is it tax rate or how should we think about it?

So, Blake, it's a good question. There is no significant items, one-timers as far as it is concerned between EBIT and the net income. So, when you look at our tax NRM, financial income in the past, you can use similar levels to model 2022.

Got it. Thank you, I'll pass it along.

Our next question is from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

Yes. Thanks. Just for one quick follow-up or hopefully quick, but I want to take a stab at long-term operating margin guidance. So, commentary suggests double-digit operating margins, which would be a pretty big step-up relative to sort of anything you've done in the last five, six, seven years. So, I guess, are you targeting a certain year or a certain level of revenue to maybe achieve this? Help us understand your thought process behind it if you can?

Thank you, Greg, for the question. When we think about the longer term, the next few years, as mentioned earlier, we expect the gross margins to go back to the level of 50% and then—which will contribute to the bottom line. When we think about OpEx, we believe that in the next few years as revenue grow, we will be able to leverage our scale. We already have the right infrastructure in place to increase revenue significantly, and then increase OpEx much less than the increase in revenue.

And if I may add, this is the entire strategy here. We have the infrastructure to do many, many more things and to sell many, many more products with the same infrastructure. We need that – we have some – we need the patience, but not too long. I don't think we're thinking about a long horizon of dozens of years. We have the infrastructure; we need to leverage the infrastructure and that's exactly what we are doing. This is on the financial side. But the most important thing in profitability is to deliver value to our customers. And we believe that no one can deliver this level of value and we base it on very, very simple things. One, we have a laser-sharp strategy on polymer manufacturing, and we already showed it as we moved from 25% to 29% of our total sales all in one year. We have well-defined growth engines that are working, the technology, the software platform, their material platform and use cases that we are developing. We have execution that, it's a new level of execution within Stratasys. This year, 30 products in 2021; 30 products this is a completely new level of execution. And most importantly, our customers – our customers are loyal and trust us, and work together with us in collaboration to make this happen and to create this value. Then you – when you translate it, we have double-digit operating income like Eitan described, very optimistic on this.

I mean, you're going to see some operating leverage this year. But, I don't want to put words in your mouth. But it pans out – it sounds like it almost should sort of get better in the out years. I mean, is that kind of the right way to think about it? I mean, that's what the math implies to get to double-digit?

It's a journey of two to three years that you will see notably stronger results on the operating income. But we are here to build the strongest 3D printing company in the industry with sustainable, profitable growth. That's exactly what we are doing. We are balancing between profitability and sustainable growth. And the result is our digital operating income.

Okay. Fair enough. Appreciate the color. Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Yoav Zeif for closing remarks.

Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.