Welcome to the Stratasys' Q2 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. We ask that you please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yonah Lloyd, CCO and Vice President of Investor Relations. Yonah, please go ahead, sir.

Good morning, everyone, and thank you for joining us to discuss our 2022 second quarter financial results. On the call with us today are our CEO, Dr. Yoav Zeif; and our 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'll 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. Please also refer to our operating and financial review and prospects for the 2021 year and for the second quarter of 2022, which are included as Item 5 of that Annual Report and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC today, respectively. Please also see the press release that announces our earnings for the second quarter of 2022, which is attached as Exhibit 99.1 to a separate 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 will 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. Our second quarter results reflect a continuation of our ongoing business momentum. I am proud of the Stratasys team, as we delivered our strongest second quarter in four years. Revenues of $166.6 million were up 13.3% versus the prior year quarter, 16.4% taking FX into account, and ahead sequentially over first quarter. These metrics are in line with our prior outlook. We saw a particular trend in system revenue, which grew by over 29% compared to the second quarter of 2021, with year-over-year growth across all printer technologies. Importantly, our balance sheet has us well-positioned with $441.5 million of cash and equivalents and no debt. We are operating in an environment of supply chain constraints, global economic uncertainty, inflation, rising interest rates, and slowing GDP. As we face these challenges, our ongoing laser focus on execution of the business plan continues to help us deliver positive financial results and drive progress towards our stated goal of growing our leadership position in polymer additive manufacturing. The first half of 2022 saw us advance our strategy on several promotions. We continue expanding our penetration into applications for aerospace, automotive, healthcare, and fashion with tailored industry-specific solutions for customers like PepsiCo, Toyota, and Rady Children Hospital in San Diego. As noted on our last call, we have launched two new composite-ready 3D printers in Q2, along with the new textile printer for the fashion industry. In addition, we launched GrabCAD software on the origin line of 3D printers and introduced a broad area of new materials. This breadth of manufacturing expertise is leading to new business opportunities. We recently made two exciting announcements in the auto racing industry. Specifically, Stratasys was named a NASCAR competitive partner where we are teaming with NASCAR to provide the first-ever 3D-printed part to be used on all of their next-generation cars. Those cars utilize Stratasys' High-Yield PA-11 material derived from sustainable sources and are manufactured at Stratasys Direct using our H350 3D printer. Other parts are produced by NASCAR on our Fortus 450mc system. We also became the official 3D printing partner of Toyota Racing Development. Our 3D printed part will be used in the Toyota GR86 vehicle for competition in 2023. Stratasys F370 and the new F370CR system are expected to be utilized at the start of this partnership. Similar to the NASCAR relationship, Toyota Racing Development will also utilize Stratasys Direct to print PA-11 parts on the H350. Auto racing is an excellent development proving ground that can ultimately lead to mainstream production runs for millions of consumer and commercial vehicles. We have demonstrated the suitability of the H350 using our SAF technology for producing a wide variety of automotive parts. This can include front wheel, side mirror, electric cable, and electrical connectors among many others. As we execute our materials ecosystem strategy, we will be opening up even more automotive use cases. We have seen similar momentum in other areas. In dental, we continue to see strength in the J5 DentaJet line that we launched last year. In Q2, we released an updated version, which doubled the throughput without sacrificing quality, made improvements in resin consumption, reducing both usage and waste, and increased the number of parts the customer can place on the print tray. And on the medical side, in early July, we released radiometric for our digital anatomy printer, which uniquely lets healthcare professionals and medical device companies visualize 3D printed models under x-ray and CT scan in a unique way. This attention to the needs of healthcare professionals is helping us grow our presence in the market. For instance, we recently shared how the University Hospital of Southern Denmark went from a single-material SLA printer to our multi-material, full-color J5 MediJet printer, and now the surgeons are saying they no longer want to do surgical procedures without 3D printed guides. I'd also like to add that we are progressing on the merger of MakerBot with Ultimaker, and we expect it to close during the third quarter. As we previously announced, once the transaction closes, we will hold approximately 45.6% of the combined company post-merger and will account for the combined company via the equity method rather than by consolidating it within our own results. This change is not expected to have a material impact on our consolidated revenues. I will now turn the call over to our CFO, Eitan Zamir, to share the financial results and update our outlook for the rest of 2022. Eitan?

Thank you, Yoav, and good morning, everyone. We are pleased to have built upon the strong start we saw for 2022. Revenues were driven by a 29.2% growth in our system sales compared to the second quarter of 2021, continuing the strong trend that is expected to increase sales of recurring consumables and services in the future. We saw ongoing operating leverage that reflects the strength of our business model. In general, we see continued strength in our business performance as revenue growth drives improved margin and earnings results. For the second quarter, total revenue grew by 13.3% to $166.6 million from the prior year period. On a constant currency basis, total revenue increased 16.4% versus the prior year quarter. Product revenue in the second quarter rose by 15.4% to $115.7 million compared to the same period last year or by 19.4% on a constant currency basis. Within product revenue, system revenue grew by 29.2% to $58.9 million compared to the same period last year and increased by 33.5% on a constant currency basis. System sales reflected the highest second quarter total in four years, strengthened by the continuing ramp of the Origin One and H350 mass production system. Consumables revenue was up by 3.9% to $56.9 million compared to the same period last year and grew by 7.5% on a constant currency basis. Service revenue was $50.9 million, an increase of 9% compared to the same period last year and up by 10.9% on a constant currency basis. Within service revenue, customer support revenue grew by 9.1% compared to the same period last year, an increase of 12.9% on a constant currency basis. Now turning to gross margins. GAAP gross margin was 40.5% for the quarter, compared to 43% for the same period last year. Non-GAAP gross margin was 47.6% for the quarter compared to 47.5% for the same quarter last year. Higher systems and consumables revenue and raised pricing, along with operational efficiencies, helped to offset the growth in logistics and material costs, which were mostly attributable to global inflation. GAAP operating expenses were $90.9 million compared to $86 million during the same period last year. Non-GAAP operating expenses were $77.4 million compared to $72.5 million during the same period last year. Non-GAAP operating expenses were 46.4% of revenue for the quarter, compared to 49.3% for the same period last year, as we continue to focus on operational efficiency improvement. The $4.9 million year-over-year increase in operating expenses on an absolute basis was driven primarily by the impact of the Xaar 3D acquisition as well as increased travel and trade show activities and higher commissions based on the higher revenue. Last quarter, we noted that the incremental cost was only 35%. This quarter, we are pleased to note an improved efficiency of our model, where the additional operating expenses reflected only 25% incremental cost instead of the historical range in the mid to high 40%. Regarding earnings, GAAP operating loss for the quarter was $23.5 million compared to a loss of $22.7 million for the same period last year. Non-GAAP operating income for the quarter was $1.9 million compared to a loss of $2.6 million for the same period last year. The difference reflects our business scalability and improved operational efficiencies, which resulted in modest gross margin growth and improved operating margin. GAAP net loss for the quarter was $24.4 million or $0.37 per diluted share compared to a net loss of $20.2 million or $0.31 per diluted share for the same period last year. Non-GAAP net income for the quarter was $1.2 million or $0.02 per diluted share compared to a loss of $1.6 million or $0.02 per diluted share in the same period last year. Adjusted EBITDA of $7.4 million compared to $3.5 million in the same period last year reflected our improved profitability levels. We used $22.8 million of cash in our operations during the second quarter compared to generating $5.6 million of cash from operations in the same quarter last year. The use of cash was primarily driven by deliberately increased inventory purchases of over $20 million. We ended the quarter with $441.5 million in cash, cash equivalents, and short-term deposits compared to $475.6 million at the end of the first quarter of 2022. With our fortress balance sheet and strong cash generation profile, we remain well-funded and well-positioned to capitalize on value-enhancing market opportunities as they are identified. Now, let me turn to our outlook for 2022. I would note that our guidance continues to include full year anticipated contribution from MakerBot, as the announced merger with Ultimaker has not yet closed. Since our last update, currency exchange rates have continued to decline across a number of our key foreign currencies, impacting our outlook for revenues for the second half of the year by $10 million. We expect the timing of such impact to be relatively even across the third and fourth quarter, and as a result, are adjusting our full year revenue guidance accordingly. We now expect revenue in the range of $675 million to $685 million and for revenue to continue growing sequentially throughout the remainder of the year. Revenue growth for the second half of the year is expected to be approximately 6% to 7% higher than the second half of 2021, with the fourth quarter anticipated to grow at a higher rate than the third. As I noted earlier, the change in full-year revenue outlook is due to declines in currency rates. From a gross margin perspective, we continue to expect full-year 2022 to be flat to slightly higher compared to 2021, with the second half stronger than the first half based primarily on higher revenue. We expect the third quarter to be relatively flat compared to the third quarter of last year. As a reminder, we view the current gross margin situation as temporary. One headwind caused by macro logistics and material issues persists, and we continue to execute on our long-term plan. We expect our margins to head back over 50%. In 2022, we now expect our operating expenses to be approximately $18 million to $23 million higher than 2021, primarily due to the impact of owning the Xaar 3D for the full year, higher costs that result from higher sales and investment in new growth drivers such as Origin 1 and Healthcare. And despite the higher absolute dollar value year-over-year, we expect our operating expenses as a percentage of revenue to continue improving by decreasing throughout the year. We continue to expect non-GAAP operating margin to be slightly above 2% for the full year. Longer-term, we expect non-GAAP operating margins to achieve double-digit as our growth plan unfolds. We now anticipate a GAAP net loss of $78 million to $69 million or $1.17 to $1.04 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 still expected to be in the range of $38 million to $41 million and capital expenditures in the range between $20 million to $25 million. We need to monitor global issues that can have an impact. With that, let me turn the call back over to Yoav for closing remarks.

Thank you, Eitan. We are pleased with our strong first half results and how they position us to execute our plan. We have aligned our business expectations based on the current global macroeconomic conditions. Importantly, 3D printing is uniquely positioned to help our customers address and overcome many of the concerns that arise in times like this. With our expanding portfolio, we should continue to capture market share on the factory floor of Fortune 500 companies around the world as the relevance and adoption of 3D printing grows. And as we build on our leadership position, drive growth, and improve profitability, we expect to outperform and create long-term shareholder value. With that, let's open it up for questions.

Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Greg Palm from Craig-Hallum. Your line is now live.

Yes, thanks. This is actually Danny Eggerichs on for Greg today. Thanks for taking the questions. I guess just starting off, maybe any further color on what you're seeing in the broader demand trends given the current macro, and maybe if you could even break that down further into the geographic markets that you serve?

Hi, Danny, good morning. Thank you for your question. We are seeing a very nice level of engagement with our customers and we are focusing on the opportunity. The nice thing with us, of course, is that we are operating in the same world as anyone else. But in the last two years, we opened up new markets. We practically doubled our total addressable market. So despite the macro issues, supply chain issues, and inflation, we, at the micro level at Stratasys, are seeing double the size of the market, which means that we have a very nice space to grow. And that's what we are doing, and that's why we have a nice demand. You can see it also in our guidance.

Yes. Thanks. And then, I guess, just off that, are you surprised to the upside or downside on any geographies, Europe or the Americas, or anything like that?

In general, things are going as planned. The nice thing with Stratasys is that we are very diversified in both terms of product and geographies. Luckily enough, it's not luck. We planned it, but we planned well, and we are meeting our numbers.

Yes. Okay. And then just moving on to some of the guidance, still targeting double-digit operating margins longer term. Any way you can go into more detail on that? Maybe the timeline or the level of revenue associated with that, just being that it's a fairly significant jump from this current year estimate of that 2%.

Hey, Danny. That's a very good question. Similar to our message, I believe, from last quarter, the whole story or the main story here is the scalability. We have five technologies and we are well-positioned to grow long term, double digits in the coming years. With that double-digit revenue growth, the scalability, the ability to bring OpEx in very, very low margin or much lower margin is the story here. And actually, this quarter, the second quarter just demonstrated that. We chose to compare Q2 2022 to Q2 2021, and you look at almost $20 million revenue increase that came with $5 million OpEx. That's 25% OpEx on that incremental revenue. So that's the scalability. That's the way to improve gross margins and OpEx as we get bigger, bringing us to the double-digit operating profit.

Thank you. Our next question today is coming from Paul Chung from JPMorgan. Your line is now live.

Hi. Thanks for taking my questions. So just on cash flow, you're seeing a drag this year in the first half on inventory investments and other working capital investments. How do we think about cash flow generation in the second half? And can you breakeven or be positive for the year after heavy investments in the first half?

Yes. Thanks. That's a very good question. So first, maybe taking you back to the last eight to nine quarters. After seven quarters with significant positive operating cash flow, we have had negative operating cash flow in the second quarter. But this is deliberate; that's basically our focus on demand and meeting our clients' expectations. Keep in mind that we are a global company and we demand everywhere. We want to make sure that we have the inventory in place globally in the different locations available. We're trying to leverage our strong cash position with no debt, even if it means a couple of quarters of negative operating cash flow to meet our demand, improving our gross margin in the future because that will enable us to shift more to sea versus air shipment in the future, having the right scale of inventory. That's how we think about it. We're very sensitive and cautious about cash flow, but this is a temporary deliberate action by the company. We see ourselves returning to positive operating cash flow and positive free cash flow in the mid to long-term.

Thanks for that. And then just a follow-up. Historically, it's been quite difficult to break out beyond the $700 million in revenues for the year. You're almost there in 2022, but as we think about 2023, expand on the confidence you have in the product portfolio. Any other levers you want to call out? Why is it different this time around? You mentioned the 50% gross margin target, what's the expected timing of rebounding back to those levels? And are you seeing some evidence of consumables demand accelerating? Thank you.

Thank you for your questions. I will divide my answer into two parts. First, regarding revenues, we are quite confident that we will pass the $700 million mark because we created a growth engine and have put them in place in the last two years. We have the most innovative polymer technologies, a great material platform that’s now open, and we will keep strengthening this material platform as we see more revenues from it. We have a very strong software platform and service that is much better, plus use cases that we'll go one by one and conquer. We have a very clear five-year plan and we are very confident that we will be able to achieve it, including passing the $700 million starting with the origin and the South and the RPS. So we have plenty of room to grow. That's on the revenue side. If I look at the profitability measures, as we said before, it will take us two to three years, but we'll be there.

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

Hey gentlemen. Congrats on the nice results here.

Thank you.

Hey guys, so I want to look at second half guidance here. If you do the math, you're talking about a $21 million increase over last year's second half. I'm always curious to know if the base business is growing. So, with this $21 million increase, how much of that is coming from the new products? You won't tell me how much is coming from the new products, but are you assuming that your base business, your FDM and PolyJet will be growing in the second half over last year's second half?

Thanks Troy. The long answer or the short one? Do you hear me? The long please. Yes. All the businesses are growing, particularly hardware. The hardware is a driver. Look at our results today, 29% practically in retail, 33% growth in hardware. This is the driver for material and service, and it goes across the different technologies. Both the base technologies, FDM and PolyJet, and the new technologies are growing. And for me, the most important thing is they are growing in hardware. So we are seeing more recurring revenues from this growth.

Thank you. Next question is coming from Wamsi Mohan from Bank of America. Your line is now live.

Yes. Thank you. Good morning. You noted the increased TAM now and resiliency in demand, and you kept your guide outside of FX. I'm curious to hear a little bit about what your customers are doing with the installed base in terms of usage metrics. Maybe that can be a way for us to gauge what the demand looks like for your installed base of systems. If you look at consumables growth, there was some deceleration, and I know some of the compares are strange. So, maybe you can give us a sense of what you're hearing from customers around intention in the back half of this year in terms of usage metrics? Are you thinking they're going to remain relatively consistent? Are you anticipating that to either increase or decrease in any significant fashion? And I will follow up.

Thank you for the question. Let's start with the long-term, because this is what is really important here. What is crucial is there is a shift from using our machines for prototyping with very limited utilization to using our machines for real production, even if it's low volume or personalized end-use parts, but it is really manufacturing. We know the trial while manufacturing, machines consume four to five times more material than a prototyping machine, which is the essence of everything that we are doing here. It’s a long journey, but we are starting and we are reporting on it every first quarter, step by step making these efforts, identifying use cases where manufacturing can benefit from additive manufacturing. We'll come with a full solution and open the market together with our customers. This will grow year-over-year; as we said, we committed to 20% year-over-year growth of this portion of our business. This is the big picture. Now when I'm looking at the second half, who knows exactly what will happen, but we do know that we have five technologies, the largest installed base in the industry, and given our very strong balance sheet, we've become more critical to our customers. When we look at the inventory that we built up and the fact that they consume more material across five technologies, I'm optimistic that we are resilient enough for any market condition.

Okay, thanks for that, Yoav. And then maybe one for Eitan. How much pressure are you currently experiencing from inflation on your gross margins? You're obviously seeing a nice uptick in revenue. You're signaling a lot of confidence in continued revenue growth, and you're getting back to 50% gross margins. Is it right to think that you have positive operating leverage as you're getting increased volume on your revenues, but then the inflation pressures are more than offsetting that positive leverage in some ways? If we think about the bridge to get to your 50%, are you absorbing like 300, 400 basis points of gross margin headwind right now because of inflation, or are you expecting other levers to get you over to $50 million?

Thank you, Wamsi. To answer your last part of the question, when we compare it to Q2 2021, we see roughly a 300 basis point impact, give or take. So about 3% on our gross margin year-over-year. However, as you noted, there are a few things that we've done to compensate. One is the higher revenue, so scalability works on the gross margin as well, higher revenue improves our gross profit with fixed costs and so on. Second, we have increased prices several times over the last year. When we compare ourselves to Q2 2021, there was a price increase to mitigate and offset the logistics inflation. There are also operational efficiencies as we try to be more efficient; the higher inventory, the higher production level lowers the cost per unit, and that’s part of the scalability. There’s also the FX that has some impact on our gross margin. When you aggregate all these together, looking one, two, three years ahead, the scalability, higher revenues, and the combination of what I've mentioned should get us to the 50%.

Thank you. Next question is coming from Kira McKay from Stifel. Your line is now live.

Hi, guys. Thank you for taking my questions. My first question was on the slide of the J5 DentaJet. You mentioned that you're seeing significant dental sales, particularly in EMEA. I was wondering if you could provide any other color on demand in the dental area in the other regions, North America, Europe?

Thank you for the question. We are building a stronger dental portfolio in additive manufacturing. We can do it because we have five technologies, a very strong portfolio of materials and knowledge, and expertise in dental historically. We are now leveraging it. We have a portfolio that is unique and disruptive, allowing us to print every different application of the same trade plus the ability to expect different materials, this is very unique. This is the PolyJet technology. Then we have the DLP, which I believe has the best accuracy in the business, and the RPS, which is a territory, geography that large format that will help us to get into the aligner business and other dental applications. Our current focus is on building the material portfolio that we will go with those three technologies, supported by application engineers and a unique service offering. When all of this comes together—the speed, the yield, and the quality we can provide to our customers, plus the disruptions solutions we'll unveil in the future—this will position us to be a leading player in dental offerings, starting with dental care.

Thank you. My follow-up question was on the slide on non-GAAP margins. We're seeing very good improvement in service gross margins sequentially and year-over-year. Just kind of wondering if you could provide any color on what's really driving that improvement in the service gross margin?

The improvement on gross margin in the service is driven by price increases we've implemented, as well as deals that came with better gross margins that positively impacted our gross margin on service. These are the two main elements that improved the gross margin in the service business.

Thanks. The next question is coming from Brian Drab from William Blair. Your line is now live.

Hi, thanks for taking my question. I was wondering if you could maybe give a little more color on MakerBot, just to help us model this. You said immaterial impact on revenue. I'm just wondering what the definition of material is in this case? And you're going to see that revenue come out since you're reporting using the equity method. Can you give us any more color on that and also what does that do for profitability? I imagine that has at least— I guess maybe you’re going to say it's material, but a small step-up in margin after this move?

Thank you, Brian. As we mentioned previously, we're waiting for the deal to close, and the timing of the deal close will impact our results for the rest of the year. In that regard, we’ll get back to you after the deal closes and provide updated numbers. However, to one of your comments, the exclusion of the MakerBot business will improve our margin for the rest of the year.

And just irrespective of the timing of it, you can't comment on how generally this business is doing on a level of revenue?

Not at this time, but we will provide an update later.

Thank you. Our next question is coming from Ananda Baruah from Loop Capital. Your line is now live.

Hey. Thanks guys for taking the question. Yes. Just two quick ones, if I could. Could you talk about where you're still seeing the supply constraints the most? And then I have a quick follow-up. Thanks.

Hi, Ananda. Thank you. Nothing new here; the lockdown in China is still an issue, along with some releases here and there, traffic jams in US ports, and overall shortages, mainly in electronics and some raw materials because of the war. This has a huge impact. I want to thank my operations team; we didn't miss a penny this quarter despite the fact that we are facing significant challenges in the supply chain. We are investing in increasing inventory to deliver value on time to our customers and ensure that we can supply them. I believe it will gradually relieve as part of the cycle.

And would you consider it— that's really helpful context. Would you consider the supply conditions to be collectively easing at all yet?

Not yet, but our expectation is by end of year we’ll see it becoming easier. I have an optimistic nature, which is good for any manufacturer so let's look on the bright side.

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

Thank you for joining us. We look forward to updating you again next quarter.

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