Earnings Call Transcript
STRATASYS LTD. (SSYS)
Earnings Call Transcript - SSYS Q1 2020
Operator, Operator
Greetings. And welcome to Stratasys First Quarter 2020 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please stand by. The conference will begin momentarily. I would now like to turn the conference over to your host, Yonah Lloyd, Vice President of Investor Relations.
Yonah Lloyd, VP of Investor Relations
Thank you, Brock. Good morning, everyone, and thank you for joining us to discuss our 2020 first quarter financial results. On the call with us today are our CEO, Yoav Zeif, and our CFO, Lilach Payorski. I remind you that access to today's call including the prepared 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, A, Stratasys’s annual report on Form 20-F for the 2019 year as well as in, B, our reports on Form 6-K that we are furnishing to the SEC today including the related press release concerning our earnings for the first quarter of 2020 and our operating and financial review and prospects which are attached as exhibits to those reports on Form 6-K. 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. Non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Certain non-GAAP to GAAP reconciliations are provided in the table contained in our slide presentation and in today's press release. Now, I would like to turn the call over to our CEO, Yoav Zeif. Yoav?
Yoav Zeif, CEO
Thank you, Yonah. Good morning, everyone, and thank you for joining today’s call. So, first and foremost, I hope that you and your families are healthy and safe. We are all experiencing an unprecedented global pandemic. Our thoughts go out to those that have been impacted. I would like to extend our deepest gratitude to the many heroes that are working hard to keep people safe during this difficult time. As many of you have learned, 3D printing is playing an important, even critical role during this crisis, helping the medical community maintain a steady supply of personal protective equipment, testing swabs, and more. I could not be prouder of the Stratasys team and how we have responded to the situation. Our top priority is the well-being of our most valuable assets; our employees worldwide. We began an ongoing communications channel here as soon as the news began trickling out. As early as February 3, we sent a company-wide email regarding travel restrictions and have tried to be ahead of the curve whenever possible. We implemented work-from-home options early, ensured that all IT needs would be met for remote activity and set up an Intranet for real-time updates and FAQs. Stratasys operated as an essential business in all key US locations. Our regional HR teams have been providing round-the-clock support, and we have increased the frequency of our management updates across all corporate and regional teams, with a weekly review of practices and procedures to meet the current specific challenges. I want to recognize the efforts of the entire Stratasys family. Those who have made a swift and effective adjustment to working remotely to support our business as well as those who continued coming into the offices, the labs, and production facilities, working under social distancing and safety conditions to keep our production plants open and our products shipping. Our people have demonstrated relentless passion to keep our business strong and active. On behalf of the leadership team, we greatly appreciate your extraordinary resilience at this challenging time. On to the business. We are committed to transparently sharing what we are seeing to the extent possible. The unpredictability of so many factors at play on a global scale has created an atmosphere of uncertainty on many levels. We will lay out the ways we are being both proactive and adapting as needed while staying focused on maintaining our business continuity and coming out of this pandemic stronger and poised for growth. We do believe that the fog is slowly lifting and that as things stabilize, our visibility will improve in the coming months. Let me start by saying that our business is healthy. We believe that we are well prepared to manage the current downturn with a strong balance sheet while focusing on cost control and cash generation. We have over $325 million in cash and equivalents and no debt. Our engagement level with our customers remains high, and the demand for our systems is strong. Unfortunately, due to the COVID-19, our business in Asia was already affected earlier in the quarter, followed by Europe and then the US. As events were unfolding, we recognized how our technology can play a major role to support the health care community, and we responded immediately. I’d like to share some of what we have experienced, including actions we took to help fight the pandemic, the measures we are taking to address the business operationally, and how we see the market playing out. In fact, as we will soon discuss, in some ways we may emerge from this situation in an even better position for the long term than before. With over 30 years of experience leading the 3D printing industry that we helped found, Stratasys was well-positioned to mobilize what we believe is the largest additive manufacturing network in the world. In order to assist in the fight against COVID-19, we leveraged our application expertise, our channel and partner network and our corporate-wide resources to help get a variety of printed products to the global medical community. Initially, in consultation with customers like Medtronic and Mayo Clinic, we identified a face shield as the first application and fastest way to match what was desperately needed with what could be produced. We built a coalition of over 100 companies including Medtronic, Boeing and Raytheon that agreed to use their Stratasys system and others for this effort. Today, over 100,000 shields and related items have been delivered. We connected most of them via the cloud using our new GrabCAD Shop work management software. Other customers of ours responded as well such as Schlumberger, General Atomics, and Bayer. It has been amazing to watch these multinational OEMs pivot so quickly to meet the need, highlighting a key benefit of 3D printing over conventional methods, the versatility to instantly go from making air ducts or tail lights to PPEs and ventilator tubes. In Paris, APHP, the largest hospital system in Europe, bought, installed and began running 60 of our FDM printers, literally 48 hours from ordering to making their first shield. This provides them with a rapid response system to address multiple protective equipment and medical device needs, as well as better control over their supply of 3D printable products. In the US, we have been hosting the COVENT-19 challenge in our GrabCAD community through the auspices of a team of anesthesiology resident physicians from Massachusetts General Hospital. We have already received over 200 entries from more than 2 dozen countries around the world. The goal is to design a rapidly deployable, low-cost mechanical ventilator and Stratasys application engineers are helping 7 finalist teams develop working prototypes in our lab this month. Additionally, we recently announced an agreement with Origin, a San Francisco additive manufacturing company, to deliver to healthcare providers and testing centers up to 1.3 million testing swabs every week. We have already facilitated orders for a few hundred thousand units. Here in Israel, the government implemented a robotic COVID-19 testing system to conduct up to 3,000 tests per day. Before the program could launch, the systems sustained irreversible damage to its fluid containers, and it would have taken weeks or longer to get the exact precision and replacement parts from the vendor in the Far East. Using our PolyJet technology with biocompatible material, we were able to quickly print these parts so the testing could continue. And, globally, in order to address the unique challenges of providing support at this time for certain printers such as our new J55, our service teams have been enhancing their tools with videos and remote device management systems in order to provide better digital and real-time support for installation and troubleshooting. These are just a few examples of what is truly an incredible display of commitment across a worldwide network of makers led by Stratasys and peer companies throughout the entire additive manufacturing industry to combat COVID-19. We have no doubt that all of these efforts are showcasing our industry in a positive light, educating the market, and significantly increasing awareness of the many value propositions of additive. As a reminder, some of those key benefits include greater freedom of design, speed and cost efficiency of product iteration and the flexibility to produce a wide range of products from a single system. Only 3D printing can provide localized production in proximity to the end market through digital inventory, adjust production flow on-the-fly for factory jigs and fixtures and, as demonstrated during this crisis, help alleviate the problem of supply chain crunch. We believe that as a result of the way our industry has stepped up during this time, more and more companies and governments will reassess their supply chains and implement decisions to drive increased demand for 3D printing as a strategic imperative, leading to incremental business opportunities once we emerge from the current situation. The decline in Q1 sales and the softness we are seeing now in Q2 are clearly due to a meaningful portion of our customer base being effectively shut down from a purchasing and consumption perspective. As a reminder, our revenue cadence tends to be back-end loaded with a significant portion of business coming in the final few weeks of the quarter, so the impact on our results was more notable. Furthermore, the unusually low 48.4% margin was not due to special discounts or material ASP reduction. Rather, it is based on the lower proportion of hardware and consumables out of the total revenue mix. We strongly believe that margins will come back to our usual low 50’s percent when the macro environment recovers. Meanwhile, to help mitigate the impact, we began to implement cost control measures at the end of February and continue to closely manage them. All employees were effectively reduced to a four-day work week last month. We have instituted a nonessential hiring freeze, and we have adjusted our cost base and production plan accordingly. As a reminder, in 2019, we built inventory in both raw materials and finished goods to help us meet demand in a more efficient way and prepare for our new product launches. While it reduces our operational cash generation last year, it’s proved to be an even wiser move than anticipated, as we have more finished goods now that are located in the respective regions. While we are facing some minimal supply issues for our new products, we are less exposed for our existing ones. Additionally, our plants are operational, as we continue production to secure our inventory levels to meet demand. And yet, even though the business environment right now is slow, we are encouraged by the discussions we are having and the opportunities that will come once the situation passes. As an example of the high level of interest, two weeks ago, many of you attended our digital launch event featuring the new PolyJet J55, an exciting and highly innovative system that brings most of the features of our premium PolyJet technology right into the office in a quiet yet powerful, new and patented turntable format. Thousands of people attended the event including many Fortune 500 companies, a strong indication of interest. Our new product development plans are continuing, and to-date, we have not reduced our spending for this program. We had originally planned to launch new products in the back half of this year, primarily in Q4. Due to the current situation, it is clear that the return on investment of marketing, trade shows, travel and other expenses needed to launch will be severely limited in a tempered spending environment. In order to maximize the impact and to avoid any potential supply chain issues, we believe it makes much more sense to wait until the first half of 2021. We are excited about these additions to our product and technology portfolio and look forward to sharing more at the appropriate time. I would like to now hand the call over to our CFO, Lilach Payorski, who will review the details of our financial results. Lilach?
Lilach Payorski, CFO
Thank you, Yoav, and good morning, everyone. Total revenue in the first quarter was $132.9 million compared to $155.3 million for the same period last year. On a constant currency basis, total revenue declined 13.9%. GAAP operating loss for the quarter was $19.9 million compared to an operating loss of $3.3 million for the same period last year. Non-GAAP operating loss for the quarter was $8.4 million compared to operating income of $6.8 million for the same period last year. GAAP net loss for the quarter was $21.7 million or $0.40 per diluted share compared to a net loss of $2.3 million or $0.04 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $10.6 million or $0.19 per diluted share compared to non-GAAP net income of $5.7 million or $0.10 per diluted share reported for the same period last year. Product revenue in the first quarter was $83.2 million, a decrease of 20.9% compared to the same period last year or 20.3% on a constant currency basis. Within product revenue, system revenue decreased 39.5% compared to the same period last year and decreased 39.2% on a constant currency basis. Consumables revenue decreased by 5.8% compared to the same period last year and decreased 5.1% on a constant currency basis. Services revenue was $49.7 million, a decrease of 0.9% compared to the same period last year and decreased 0.6% on a constant currency basis. Within services revenue, customer support revenue increased by 2.2% compared to the same period last year, and increased 2.9% on a constant currency basis. GAAP gross margin was 45% for the quarter compared to 49.2% for the same period last year. Non-GAAP gross margin was 48.4% for the quarter compared to 52% for the same period last year. The decline in gross margin is due primarily to the lower proportion of hardware and consumables out of the total revenue mix. We are confident that our gross margin will return to their usual range once the situation passes. GAAP operating expenses were $79.8 million, relatively flat compared to the same period last year. Non-GAAP operating expenses decreased by 1.6% to $72.7 million for the quarter as compared to the same period last year, driven by cost-cutting measures in SG&A. Please note that R&D spending this quarter was higher than Q1 of last year as we remain committed to our long-term strategy and we continue to invest in developing new products that we believe will meaningfully expand our addressable markets. The company generated $11.3 million of cash from operations during the first quarter as compared to $4.6 million of cash generated in the same quarter last year. We ended the quarter with $325.5 million in cash and cash equivalents and short-term deposit compared to $321.8 million at the end of the fourth quarter of 2019. We believe that we are well prepared to manage the COVID-19 situation with a strong balance sheet and no debt while focusing on cost control and cash generation. The company is withdrawing its 2020 financial guidance for revenue, GAAP and non-GAAP net income and EPS, non-GAAP operating margin, and capital expenditure due to the high level of economic uncertainty and disruption caused by COVID-19. Appropriate reconciliation between GAAP and non-GAAP financial measures are provided in the table at the end of our press release and slide presentation with itemized detail concerning the non-GAAP financial measures. I would like to turn the call back to Yoav for closing remarks.
Yoav Zeif, CEO
Thank you, Lilach. Our communication with the channels and key customers remains highly active, and we have continued to do business during this time. But with the US and other markets still effectively closed, we have little indication regarding the pace of recovery. Therefore, we believe that there is too much uncertainty at this point to provide a reasonable estimate of the full-year financial impact related to COVID-19. Directionally speaking, we expect that many, if not most of our customers will continue to keep their spending to a minimum in Q2. And given that there will be a full quarter’s worth of COVID-19 impact, we currently expect a sequential revenue decline of 5% to 10%. As for how things look as we emerge and begin to recover, it's clear that this crisis has helped generate significant awareness that 3D printing is becoming essential for accelerating and improving design, speeding up time to market and production, and creating less dependent and more resilient global supply chains, including localized digital inventory and distributed manufacturing. We have heard firsthand from our customers that executives are asking their engineering teams more questions about what 3D printing can do for them. This is important because optimizing value from additive manufacturing is a strategic exercise, and Stratasys is particularly suited to play the role of strategic additive partner for our customers. If economic recovery begins to kick in during H2, we would expect to see a gradual improvement and we could see a return to sequential growth in the back half of the year. Additionally, we believe that we will be able to capitalize on the improved perspective of many businesses and governments who, because of this crisis, are recognizing the weak link in their current production flow that we proved can be addressed by incorporating additive manufacturing. Meanwhile, we are being proactive in managing our performance during this challenging time. We built inventory to improve efficiencies and limit disruptions. We have reprioritized spending to ensure adequate resources to address both COVID-19-related items and those critical for strategic growth. And we continue to monitor the industry for opportunities. Our agile, high-performing team is helping us persevere through it and is simultaneously preparing to seize upon opportunities to support an exciting growth period as we all recover from the current situation. The start of my first 100 days as CEO, I have been directing a deep-dive diagnostic and strategic review of the company. Later in the year, I plan to share a more extensive view of how Stratasys will look as we lead our industry forward with strong and sustainable growth for many years to come.
Yonah Lloyd, VP of Investor Relations
All right, operator, please turn the call over for questions.
Operator, Operator
At this time, we'll be conducting a question-and-answer session. Our first question today is from Greg Palm of Craig-Hallum Capital Group. Please proceed with your question.
Greg Palm, Analyst
Yeah. Thanks for taking the questions. I guess I first wanted to clarify one of the statements from the prepared. So, if I heard right in assuming a gradual macro recovery that sequential growth could return in the second half, does that mean second half over first half or is that a Q3 comment? And I guess is your expectation right now that Q3 could follow normal seasonality trends and be down sequentially again from Q2? Just wanted to clarify that, please.
Lilach Payorski, CFO
Yes. Greg, thank you for the question. Yeah. So, our expectation is if everything will go well with the COVID-19 going away in Q3 and Q4 which definitely I think at that point none of us can know for sure, we do expect a growth compared to the first part of the year. And specifically to Q3, we expect this will be higher than Q2.
Greg Palm, Analyst
Got it. Okay. And, I mean, as it relates to the broader macro environment, I'm just curious, what will you be watching or listening to from your customers that might give you more confidence in the recovery and obviously a pickup in demand? I mean, I guess do you have any sense for sort of the capacity and timelines for investments on behalf of your customers at this point?
Yoav Zeif, CEO
Hi, Greg and Yoav. That's a great question. We are continuously engaging with our resellers and partners who are active in the market. We are fully prepared for when a recovery occurs. We have been patiently monitoring the situation and evaluating our impact on customers, particularly in the aerospace and automotive sectors. We are already seeing a gradual recovery in the auto sector with some plants starting to ramp up operations. Our inventory is set, our partners are ready, and everyone is prepared. We are closely observing these conditions, and as soon as they are operational again, we will be able to deliver and supply them.
Greg Palm, Analyst
Okay. That's helpful. I guess last one, thinking about trends or things that might accelerate as we all emerge from what's going on, it's been amazing to see how additive technology, your technology specifically, has helped address some of the issues. It's great to see. But what's your thought on the accelerated adoption of digital manufacturing? I'm really curious to hear how Stratasys might fit into this longer term.
Yoav Zeif, CEO
Greg, this is fantastic. This is the light in this dark period in a sense. We are having constant discussion, as you know, and you are covering this area, challenge is to the status quo of traditional manufacturing, this is the biggest challenge, because we have the technology, we have the machine, we can combine them together with a traditional manufacturing line. But the status quo is holding. And suddenly, in this type of period, when people need this container for the robot, or the face shields, and you can do it in less than 24 hours, you just get the file and you don’t need inventory, you just need an inventory of files, we see more and more discussion around this. And we believe it will be part of the government long term plan.
Operator, Operator
The next question is from Troy Jensen of Piper Sandler. Please proceed with your question.
Troy Jensen, Analyst
Thank you for addressing my questions and for your efforts during the pandemic. Yoav, could you remind us about your vertical exposure? I'm interested in understanding your customer exposure in areas like automotive compared to aerospace, dental, elective healthcare, and similar sectors.
Yoav Zeif, CEO
Hey, Troy. We are the leader in bringing 3D technology to manufacturing. When our customers shut down, we are affected, particularly in the aerospace and automotive sectors, as well as with some key dental customers and education, which is one of our primary sectors. These are the main areas we are focusing on right now. Once they resume operations, we will be ready to support them.
Troy Jensen, Analyst
Yes. Okay. Understood. How about for Lilach? Can you just talk a little bit more on the cost controls? I’m just being curious, on an absolute basis, I think you guys spent about $72.5 million in the March quarter. I'm assuming that's going to go down sequentially. Could you kind of quantify by how much you think we could see sequential changes in the OpEx on a dollar basis?
Lilach Payorski, CFO
Good morning, Troy. We have already implemented several cost-control measures starting at the end of February as we recognized the situation changing. The effects of these measures will be more noticeable as we enter the second quarter, leading to a more significant impact. Our ability to control costs in the first quarter was somewhat limited due to timing. However, we have taken substantial steps, such as reducing travel globally, which will help us manage costs. The shift to working from home has also influenced our maintenance goals. We have imposed a hiring freeze for nonessential positions, and company-wide salary reductions of 20% for all employees and executives are in place, which will likely continue through much of the second quarter. This will significantly affect our spending levels. We have also deferred merit increases and adjusted our cost base and production plans to address the situation. We are thoroughly examining all areas to minimize variable and fixed costs and are placing a strong emphasis on operational efficiency to reduce any inefficiencies where possible.
Operator, Operator
The next question is from Shannon Cross of Cross Research. Please proceed with your question.
Shannon Cross, Analyst
Thank you very much for taking my question. I wanted to understand a little bit more on the push-out of product launches. I get the wisdom of doing a given trade shows and costs on that, but I'm curious. Were there any delays you were seeing in the actual development or R&D cycles? Or was this purely just because of the current environment? And then I have a follow-up. Thank you.
Yoav Zeif, CEO
Hi, Shannon. So, first and most importantly, we have not reduced R&D spending to-date. For us, the NPI is like this is our growth engine going forward, and we want to maximize it. This is the bottom line. The J55 that we launched already, we made all the spending and then we launched it and created a great buzz. But looking forward to the new products, we originally planned to launch them in H2 primarily in Q4, end of year, and to create kind of end-of-year momentum. When we look currently on the business, it doesn’t make sense. When you put the number to pen to paper, it doesn't make sense because those are significant new products, new lines, and we want to create momentum. And we don't believe that this is the right way to go. In terms of, I would say, the timeline, we are more or less the same time around Q4. But we believe that pushing them forward, more or less in the same period like the COVID-19 impact, few months, several months, will create a much better impact and return to investment to our marketing push, but also the whole company, gearing the whole company to a new momentum next year.
Shannon Cross, Analyst
Thank you. And then, I'm curious about working capital as we go through the year. Clearly, accounts receivables was a source of cash. I assume we will see the same thing from inventory. So, how should we think about working capital as you look out through the year as you're managing your overall cash flow and cash balance? Thank you.
Lilach Payorski, CFO
Good morning, Shannon. So, first of all, I think that we are well positioned to overcome this crisis in a couple of, say, next few months given our cash balance, high cash balance, $325 million, and no debt. So, we feel comfortable about going through this crisis for sure. This quarter, we actually generated $11.3 million cash which definitely helps us as well. We do look carefully on CapEx management and CapEx expenditure, but we will need to continue investing in our facility. We have some commitments on our facility that we need to continue these for the coming few months. If we are specifically looking at Q2 and probably going to be also Q3, we will have a negative cash flow position given that our low revenue level in Q1 and probably low revenue level in Q2 will reduce significantly our ability to collect and basically balance to collect. So, we all focus on that. But at the same time, we are focusing on reducing expenses as much as we can. We are also managing well our inventory, making sure that we have the adequate inventory level, not increasing our inventory level more than what we need, and making sure that we are not taking too many commitments from raw materials in this aspect. We do see some challenges on our accounts receivable, given that customers are effectively shutting down, and it’s more about how to collect, specifically now at the end of March and now in April. But we also focus on collection and helping our customers to go through these challenges. But all in all, like I mentioned, Q2 and Q3 are probably going to be a negative operating cash flow with the hope to come back to business as we from this situation.
Operator, Operator
The next question is from Wamsi Mohan of Bank of America, Merrill Lynch. Please proceed with your question.
Wamsi Mohan, Analyst
Yes. Thank you. Good morning. Lilach, can you discuss the revenue breakdown between SMB customers and larger customers? I recall you mentioning some issues with receivables. Could you provide more details about what customers are requesting—are they seeking extensions that you are accommodating? Also, what percentage of the receivables portfolio are you currently concerned about? I have a follow-up question.
Lilach Payorski, CFO
Yeah. Thank you. We do not provide a breakdown of our customer between small business customers and large ones. But we’re definitely dominated by a lot of large ones, Fortune 500 customers, so we are well-positioned in that aspect. And we also have a relatively very good coverage from AR insurance. So, we are not too worried about that. But at the same time, we do see some challenges. Sometimes maybe more from some of our resellers because obviously they are dependent on their customers, but we work very closely with them, and we believe that we'll be able to overcome those challenges in the next couple of months.
Wamsi Mohan, Analyst
Thank you for your insights on the proactive cost measures being implemented. In consideration of the operating expense leverage for the quarter, it's noted that revenue impacts are significant and there may not have been enough time to react in Q1. Moving into Q2, if there is a sequential revenue decline of 5% to 10%, it is likely that we will continue to see pressure on growth margins. You mentioned the potential for negative cash flows, so I would like to understand the expected scale of cost reductions. Will the reduction in operating expenses outpace the revenue decline on a quarter-on-quarter basis? It seems that operating expenses should decrease significantly in Q2, but I'm seeking more clarity on the potential size of these adjustments, particularly as we maintain our investments in R&D. Thank you.
Lilach Payorski, CFO
It's a good question. First, I want to talk about the gross margin. We expect to see a decline of 5% to 10% in the next quarter compared to Q1. As mentioned in the script, we will likely experience the full impact of COVID-19 in Q2, primarily affecting consumables. This reduction will likely impact our overall hardware and consumables revenue proportion, which may further lower our gross margin beyond what we see now. From a gross margin perspective, it's expected to be lower next quarter. Additionally, we might face some operational and efficiency challenges due to fixed costs, and our ability to address these quickly is limited, though we are focused on it. Even with our significant cost-cutting measures across the company, including reducing the workforce to 80%, implementing a hiring freeze, suspending merit increases, and significantly cutting back on non-NPI activities, it's important to recognize that these efforts might not fully offset the anticipated revenue and gross margin declines.
Operator, Operator
The next question is from Brian Drab of William Blair. Please proceed with your question.
Brian Drab, Analyst
Hi. Thank you for taking my questions. This question about operating expenses has come up twice already, and I'm going to ask it again because I'm still finding it difficult to determine what to input in the model for the second quarter. If you had operating expenses or SG&A of $48.5 million adjusted in the first quarter, can that decrease by $5 million? I would really appreciate more clarity on this. I understand that directionally, it's decreasing, and you have a slide that explains this well. However, I'm uncertain if I should project $47.5 million or if I should stick with $42 million.
Lilach Payorski, CFO
Yeah. Brian, hi. Good morning.
Brian Drab, Analyst
Good morning.
Lilach Payorski, CFO
Yes. I do believe that, again, based on all our cost-cutting measure, we can influence the OpEx next quarter significantly if you think about that like maybe 50% or 60% or even more of our spending is relatively related to payroll and we are going down to 80%. It will be significant, okay? We are not getting now in specific numbers, okay, but it can be a significant impact in Q2.
Brian Drab, Analyst
So, everyone, even salaried employees like engineers and executives, are taking a 20% pay cut. Is that how I'm understanding it?
Yoav Zeif, CEO
Hey. Brian. Yeah, everyone, no exception. Leadership, engineers, sales people, head office, everyone. We are in a challenging time and everybody needs to put his shoulder in to help with the effort.
Operator, Operator
Next question is from Jim Ricchiuti of Needham & Company. Please proceed with your question.
Jim Ricchiuti, Analyst
Hi. Thank you for the insights regarding gross margins. I'm curious if in Q2 we might see some relief from the disruption affecting your customer base. If that's the case, why might we not observe an improved utilization of equipment in the field, which could potentially benefit your consumables business? Or do you expect that the current low utilization will continue to have a significant negative impact on gross margins in Q2? Additionally, I have a follow-up question regarding overall product gross margins. You mentioned that discounting hasn't necessarily influenced this. To what extent has the product mix affected your hardware gross margins? Thank you.
Yoav Zeif, CEO
Jim, thanks for the questions. So, the first question about consumables in Q2 and we’ll get into it afterwards, yes.
Lilach Payorski, CFO
Yes, as I mentioned earlier, we anticipate a more significant decline in Q2 for consumables compared to Q1 due to a full quarter of impact, primarily driven by reduced utilization. Customers are effectively shutting down operations; they've closed their facilities, research centers, and educational establishments, resulting in all machines being idle. We do expect this significant reduction in utilization to affect the entire quarter, but it largely hinges on when COVID-19 will subside. Customers are also hesitant to stock up on consumables because of the uncertainty surrounding the recovery and the short shelf life of some products. It's important to note that we have a large installed base, so the main effect on consumables stems from utilization rather than being tied directly to hardware sales. Naturally, lower hardware sales lead to lower consumables, but the primary factor is that our installed base is effectively shutting down. Regarding gross margin, the combination of hardware and consumables currently accounts for around 63% of total revenue this quarter, whereas eight quarters ago, it was between 65% and 70%. From this, it's evident that the decline in these streams significantly influences our gross margin, and we expect to see this trend continue in Q2.
Jim Ricchiuti, Analyst
Okay. And then a follow-up question, is there any potential red-through that you can get from looking at the business geographically? And I recognize Asia is a smaller part of your business, but is there any sense as to how that region has started to come back and potentially even some parts of Europe? Is there any read-through that gives you some indication of how we might see the business start to recover as some of the disruption and temporary shutdowns are lifted?
Operator, Operator
Sir, please standby. The operator will be establishing the connection to the speaker again. One moment, please.
Lilach Payorski, CFO
Okay. We should be back on the line. Jim, can you hear us?
Jim Ricchiuti, Analyst
I hear you fine. I don’t know if you heard my follow-up question which just relates to...
Lilach Payorski, CFO
Yeah. Can you repeat it, please? Thanks.
Jim Ricchiuti, Analyst
Certainly. I’m just wondering geographically if there’s any read-through that you have and, again, recognizing Asia is a smaller part of your business, but as we've seen parts of Asia start to come back with shutdowns being lifted and even potentially some parts of Europe, is there any read-through that you see that could give some indication as to how the business in North America could begin to change as these shutdowns are lifted?
Yoav Zeif, CEO
It's Yoav. Hi. We've observed some recovery, although it is quite modest. Primarily, we've noticed that some orders that customers held back in the first quarter are now being accepted for delivery, including in the US. Significant purchase orders that were previously halted at the end of March are now being fulfilled, but this process is gradual and inconsistent. In Korea, while we experienced some improvement, there has been another interruption, and certain orders are still on hold. In China, we are seeing some recovery, but we need to strengthen our position there. Overall, there are signs of light, but the recovery remains moderate. In the US, significant orders are being placed by customers who have resumed operations.
Operator, Operator
The next question is from Ananda Baruah of Loop Capital Markets. Please proceed with your question.
Ananda Baruah, Analyst
Hi. Thank you for taking my questions. I have a couple. I joined the call after it started, so I apologize if I repeat anything from the prepared remarks. Can you discuss the year-over-year run rates for March and April regarding both the hardware and consumables business? If that hasn't been covered, could you provide some insight into what those might have looked like? I have a follow-up as well. Thanks.
Lilach Payorski, CFO
Hi, Ananda.
Ananda Baruah, Analyst
Hi.
Lilach Payorski, CFO
We do not provide specific information on a monthly basis. However, typically, our revenues tend to be more back-end loaded, which is why we were more impacted by COVID-19 in the first quarter. In the second quarter, we will likely see the full impact of COVID-19 as companies shut down and close their premises, leading to reduced activity and consumables. Regarding April, we do see some positive signs coming in North America, and we are able to capitalize on some pipeline from the first quarter that has materialized in the second quarter, but it's still too early in the quarter to provide any indication.
Ananda Baruah, Analyst
I heard that there might be a decline in June quarter sales of 5% to 10% sequentially. Is that the guidance you are providing? Is that an official figure from Stratasys? I heard it mentioned a couple of times.
Lilach Payorski, CFO
Yes, it's included in the scripts.
Operator, Operator
There are no additional questions at this time. I would like to turn the call back to Yoav Zeif for closing remarks.
Yoav Zeif, CEO
So, thank you. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter. Thank you.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.