Earnings Call Transcript
STRATASYS LTD. (SSYS)
Earnings Call Transcript - SSYS Q1 2021
Operator, Operator
Hello and welcome to the Stratasys Q1 2021 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. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Yonah Lloyd, Vice President Investor Relations. Please go ahead.
Yonah Lloyd, Vice President Investor Relations
Good morning, everyone, and thank you for joining us to discuss our 2021 first quarter financial results. On the call with us today are our Chief Executive Officer, Dr. Yoav Zeif; and our Chief Financial Officer, Lilach Payorski. I 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 2020 year, which we are filing with the SEC on March 1, 2021. Please also refer to our operating and financial review and prospects for the first quarter of 2021 as well as the press release that announces our earnings for the first quarter of 2021, which were attached as exhibits to two separate reports 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 are attached as exhibits to reports on Form 6-K that we 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 speaks 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. Now, I would like to turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?
Yoav Zeif, CEO
Thank you, Yonah. Good morning everyone and thank you for joining us. Today, I will touch on the highlights of the first quarter and share insights from a very exciting global event we had last week. At Stratasys, we're committed to being at the forefront of the polymer 3D printing market, producing and delivering the most innovative, next generation technologies that address the fastest growing manufacturing applications. 3D printing is migrating from being primarily a prototyping tool to providing full scale digital manufacturing platforms at mass production levels. Stratasys is leading this transformation with manufacturing applications in polymer, which we believe is a higher value opportunity than traditional methods. This year has gotten off to an exciting start for Stratasys. Last week we hosted an unprecedented online event attended by over 4,500 customers, resellers and partners. At the event, we provided details on three new manufacturing focused product offerings that will play an integral role in our future growth. We continue to be energized by the tremendous potential that our business and our industry has, especially in end-use part manufacturing. We expect this demand driver to produce compound annual growth of over 20% starting next year. We believe that our leadership position in 3D printing will strengthen as we execute on delivering current products while extending and launching additional new products. Turning to our results for the first quarter, our revenues of $134.2 million were in line with our previously stated outlook. We saw a particular trend with nearly 41% growth in system revenue, which should drive future recurring revenue from consumables. Our operating cash flow was $22.8 million following last quarter's $23.7 million. During the first quarter, we achieved several important milestones to drive our strategy. We continued our focus on expanding the GrabCAD software platform with the launch of the GrabCAD software partner program. This is an ecosystem of software providers integrating their offerings with Stratasys to provide our customers with end-to-end additive manufacturing solutions. The program will enable customers to extend their prototyping and manufacturing workflow to better address the opportunities for 3D printing. We also released the GrabCAD connectivity Software Development Kit, SDK. This will enable developers and customers to integrate our technology in the factories and make them industry 4.0 compatible. Our connectivity SDK is a sophisticated two-way communication platform. Our customers can monitor their fleet of Stratasys printers and also use enterprise software applications like MES or ERP to communicate back. In addition, we added the industry standard MTConnect communication protocol to more systems to support data exchange between manufacturing software applications used for monitoring and analytics. These recent software releases support our customers' increasing deployment of our additive manufacturing products to the production floor. We introduced our J5 DentaJet 3D printer to serve the growing demand for dental solutions. It is the only multi-color, multi-material 3D printer, enabling clinicians to load mixed trays of dental parts. It can produce five times more dental parts on a single mixed tray than any of our competitors offering in a compact, office-friendly size. We have already started to see excellent customer attraction, such as NEOLab in Massachusetts. We serve 3,000 orthodontics and dental clinics across the U.S. Our customers are impressed by the J5's ease of use, multiple models in one print, minimal post-processing and the fact that modes go from concept to production faster than ever. The dental industry has been an early adopter of additive manufacturing for true production parts, and is currently over a $1 billion opportunity for 3D printing. We also introduced a new carbon fiber material for our award-winning F123 series 3D printers that is specifically formulated for applications such as tooling, jigs, and fixtures. The strength and lightweight of carbon fiber make it an excellent replacement for metal across many applications. We acquired RPS, adding a top-quality product line of industrial stereolithography systems complementing our portfolio to give us a full suite of polymer 3D printing solutions across the product life cycle from concept and design to end-use parts. We continue to expect the acquisition to be slightly accretive to revenue and non-GAAP earnings per share by the end of 2021. Our customers continue to validate our innovation and technological advances as evidenced by the recently signed contract extension and expansion with Airbus. The agreement significantly increases the range of cabin interior components and other parts. This is a perfect example of how Stratasys executes a land and expand strategy. The original agreement signed over five years ago only focused on parts for the Airbus A350 as an alternative to traditionally manufactured parts, increasing supply chain flexibility. Once Airbus started printing parts with our FDM technology, they soon progressed from a small number of alternate parts to using the technology for serial production at a much larger scale. We were also able to provide on-demand parts service through our Stratasys Direct service bureau. The updated agreement increases the range of aircraft types to also include the A300, A320, A330 and A340, as well as replacement and spare parts for MRO applications. Our additive manufacturing is now part of the typical interactions with procurement through standard supply channels as a regular course of business. As I mentioned earlier, last week at our manufacturing launch event, we announced three new product updates, which will strengthen our market-leading offerings and value potential that we bring to customers. The Stratasys Origin One, a best-in-class photopolymer 3D printer that received a top-to-bottom optimization upgrade to improve service ability, performance, and utilization. These use cases include medical device components, automotive, aerospace, defense, consumer goods, and dental applications such as splints, bridges, aligners, and dentures. We also shared some great insights from Origin customers. Specifically, we highlighted TE Connectivity, a leader in connectors and sensor products. They are now printing thousands of parts using Origin P3 technology, including their first ever 3D-printed aerospace production connector. We plan to begin shipping this upgraded version in the fourth quarter of this year. The H350 powered by Selective Absorbance Fusion, or SAF technology, is built for thermoplastic mass production of consistently accurate end-use parts. Our Stratasys Direct service bureau, as well as others in Europe, have already started producing parts on the H350 for customers in automotive, consumer goods, and healthcare. We also introduced a renewable bio-based PA11 material that is derived from sustainable castor oil, which has superior thermal resistance and is less brittle than PA12. It is the first of many new polymer materials for the H series. The H350's own customer; a dozen parts on the system were actually printed with that technology. We plan to start shipping the H350 in the second half of the year. The F770 is designed with the longest fully heated build chamber in FDM, is a large addition to our F123 product lines with a 13 cubic-foot build volume. Despite its size, it is designed to be as simple to use as our other popular F123 printers and is priced under $100,000. In addition to the heated build chamber, the soluble support is another important differentiator from most other large format printers. This will save customers time and enable them to make more complex parts. We plan to begin shipping in late June. We are on track to enter this next phase of product launches, which combined with our multiple competitive advantages, will defend our position as the leading provider of polymer 3D printing solutions for a world-class customer base. We have the broadest and most advanced polymer technologies that span the full product life cycle from concept to installation. Our PolyJet and FDM systems have been the best-selling units in their classes, and we have introduced new systems for both technologies this year with more to come. Our recent RPS acquisition adds multi-purpose stereolithography systems to our portfolio, and we are now entering mass production with P3 and SAF technologies. No other company has the range and best-in-class innovation that Stratasys can deliver to our end markets. Our software strategy, as discussed earlier, is based on the customer-centric dynamic of working closely with many OEM across the industry. We offer a unifying comprehensive platform across our technologies that is built to interface with the top standard enterprise systems. Today, GrabCAD has 36,000 application users and 8.8 million community members, more than any other platform of its kind and is at the heart of our cloud-based strategy and growing software ecosystem that includes partnerships with Siemens, Topology, Identify3D, Link 3D, KeyShot, and others. Supporting our products, we have the leading global channel that can market, sell, and maintain our systems for our customers. Over the years, we have built an unmatched sales and service infrastructure with market access across a network of over 200 channel partners. This is the largest and most experienced channel in the industry. The success of these systems and technologies relies on the talented team that builds, manages, and maintains them. These are the expert application engineers that educate the market and continue to push the innovation envelope each day as they work with customers to address an ever-expanding universe of applications. Stratasys has the largest team of engineers and customer support in our industry. They have deep multi-disciplinary experience, especially in quality and process certification, which is critical for success in aerospace, automotive, healthcare, and other sectors. And we have a proven resilient business model designed to scale across the range of macroeconomic conditions, including our successful navigation of the COVID-19 pandemic. We believe that as our revenue accelerates, we can leverage our model and deliver increasing profits while continuing to generate cash. These key advantages, combined with the new technologies that we launch in the future position Stratasys to deliver on our growth strategy. We expect that as our customers return to their production facilities, we will benefit from the pent-up demand. I will now turn the call over to Lilach, who will share the financial results of the quarter. Lilach?
Lilach Payorski, CFO
Thank you, Yoav, and good morning, everyone. We are pleased to have delivered on our stated goals this quarter. The revenue growth especially the 40.9% growth in our system sales, along with our strong cash generation supports our cautious optimism around the continuing economic recovery from COVID-19. For the first quarter, total revenue was $134.2 million in line with our previously disclosed outlook. On a constant currency basis, total revenue declined 1% versus the first quarter of 2020. Product revenue in the first quarter was $90.3 million, an increase of 8.6% compared to the same period last year or 6.1% on a constant currency basis. Within product revenue, system revenue increased 40.9% compared to the same period last year and increased 37.6% on a constant currency basis. This growth rate demonstrates signs of end market recovery compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID starting in the back half of the quarter when our sales are typically strongest. System sales began to improve by the end of Q2 last year. So, while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year. As we noted on our last call, consumable utilization is subject to the impact of COVID. This quarter, consumable revenue was off by 8% compared to the same period last year and was down 10.2% on a constant currency basis. As the market recovers from COVID and usage rates of our systems increase, we expect to see sequential growth in consumables build as we move through the balance of the year. Service revenue was $43.9 million, down 11.8% compared to $49.7 million at the same period last year. On a constant currency basis, service revenue was up 13%. Within service revenue, customer support revenue was $27.6 million, a 2.2% decline compared to $28.3 million the same period last year, a decrease of 4.3% on a constant currency basis. We continue to see softness in our past service bureau business SDM, which has notable exposure to commercial aerospace, where COVID recovery has been slower than for other industries such as healthcare and education. GAAP gross margin was 41.4% for the quarter compared to 45% for the same period last year. Non-GAAP gross margin was 46.7% for the quarter compared to 48.4% for the same period last year. The pressure on gross margin is due primarily to the lower proportion of consumable, increased logistics costs, and lower SDM contribution. As a reminder, SDM has relatively high percentages of fixed costs, so the lower revenue impacts gross margin. We believe that the impact from the logistic issue, a well-known global situation, as well as the slower COVID recovery impact on consumable will remain for the near future. Given the ongoing uncertainty of these issues, we expect gross margin to remain at similar levels throughout the year. GAAP operating expenses were $73.9 million, an improvement of $5.9 million, or 7.3% compared to the same period last year. Non-GAAP operating expenses were $65.2 million, an improvement of $7.5 million, or 10.3% for the quarter as compared to the same period last year. Non-GAAP operating expenses were 48.6% of revenue for the quarter compared to 54.7% for the same period last year. The improvement in operating expenses was due primarily to the proactive resizing measures we took in the second quarter of 2020. From an earnings perspective, GAAP operating loss for the quarter was $18.4 million, compared to a loss of $19.9 million for the same period last year. Non-GAAP operating loss for the quarter was $2.6 million, compared to a loss of $8.4 million for the same period last year. GAAP net loss for the quarter was $18.9 million, or $0.32 per diluted share compared to a net loss of $21.7 million or $0.40 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3.8 million, or $0.06 per diluted share compared to a net loss of $10.6 million or $0.19 per diluted share in the same period last year. We generated $22.8 million of cash from operations during the first quarter, as compared to generating $11.3 million of cash in the same quarter last year. This was driven by strong collections and a reduction in spending and inventory levels. During the quarter, we successfully raised growth capital of $230 million of gross proceeds and ended the quarter with $530.4 million in cash, cash equivalent, and short-term deposits, compared to $299.1 million at the end of 2020. We have recently made strategic investments via acquisitions of Origin and RPS to help build out our product portfolio. And we continue to evaluate additional opportunities that will further accelerate our time to market and other key strategic initiatives. Last quarter, we provided our outlook for revenue growth in the second quarter and operating expenses for the full year, and we are reaffirming both. For revenue, we still expect 18% growth for Q2, and we expect to see sequential growth in the back half of the year with the fourth quarter being the strongest. OpEx for the full year includes an increase of $25 million to $30 million compared to 2020, likely closer to the high end of the range. The increase is due primarily to the return to a five days work week and the cost associated with the recent acquisition. Capital expenditures are projected to be in the range of $24 million to $30 million. Looking ahead, we have a debt-free fortress balance sheet. We are well positioned to capitalize on value-enhancing market opportunities. We will continue to invest capital into strategic high growth areas of our business, particularly around manufacturing. We're increasing customer demand and a proven history of high utilization should support substantial upside in revenue, earnings, and cash flow in the coming years. With that, let me turn the call back over to Yoav for closing remarks. Yoav?
Yoav Zeif, CEO
Thank you, Lilach. Our company is executing on our strategy to extend our leadership position in polymer 3D printing. The investment we have made to drive organic growth, coupled with the targeted and strategic acquisitions to enhance our end-to-end solution portfolio, should result in value creation for our shareholders. With that, let's open it up for questions. Operator?
Operator, Operator
Thank you. Our first question today is coming from Shannon Cross from Cross Research. Your line is now live.
Shannon Cross, Analyst
Thank you very much. I just wanted to ask, I guess I'll ask both questions. The first is with regard to product sales or system sales. Can you just provide a little more feedback to us on exactly who are buying? What's coming in? How much of this was pent-up demand versus new demand because of some of the products you've launched? And then with regard to consumable sales, given the mix of systems that you're selling, can give us an idea of how long it will take to see some of the follow-on consumable sales? And your confidence level and maybe usage rates on the products? Thank you.
Lilach Payorski, CFO
Good morning, Shannon. Some flavor on our system sales, I'll start with that. We definitely saw hardware strength growth across all our platforms and regions in the quarter. So, there is no single product or customer that drove the favorable results – we really see it across all our business. Definitely this growth demonstrates signs of end market recovery, compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID-19 starting in the back half of the quarter, where our sales are typically the strongest. So that's why basically you see a very strong quarter as it demonstrates a recovery that we are happy to see here. It is important to note that system growth will be the lead driver for growth in the year. With the introduction of the new products, consumables would follow. I would like to remind you that our new product will introduce more in the second half of the year, and will make more impact in Q4 as opposed to the first part of the year. But we are encouraged with the recovery signs that we have seen already now, and sure that consumables will follow. Another thing important to note is that system sales began to improve by the end of Q2 last year, so while we expect system growth to continue throughout 2021 the comparable percentage rate will naturally come down over the course of the year, but we do expect to see notable growth during the year. Now I will address the consumables. The consumables, we are encouraged to see continuous recovery. As we saw also in Q4, as also we saw in Q3. It's still below 2020 levels, as a reminder that in Q1 2020, consumables and services were tracking relatively normally since COVID hit starting to affect most by the end of that quarter. So essentially, we had almost a full quarter as a comparison. Unlike Q1 2021, where COVID still impacts during the full quarter. As we are looking ahead for the year, we expect consumable to grow sequentially based on the trajectory of the macroeconomics, with the expectation that consumption will come back to pre-COVID levels, probably at the beginning of 2022.
Yoav Zeif, CEO
Yes. Maybe just to add, hi, Shannon, it’s Yoav. Maybe just to add, overall, definitely there is a pent-up demand. It is great to be in such a place because it's across all regions and platforms. Of course, there are some differences between different sectors. So commercial aerospace and government are slower to recover, mainly because of the commercial aerospace situation and the new administration in the U.S. But we see the recovery coming in the next quarter on the government side, and of course, healthcare and dental that we discussed before are early to recover. And what is new in Q1 was that education really joined healthcare and dental in terms of fast recovery.
Shannon Cross, Analyst
Great. Thank you.
Operator, Operator
Thank you. Next question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.
Troy Jensen, Analyst
Hi. Thanks for taking my question. First one here for Yoav. If you look at the results you have, Q1 was relatively in-line with consensus, and the Q2 guide seems to be in-line with consensus. If you continue down the second half, you're going to have about 8% growth this year, but some of that's acquired right from RPS and Origin. Some of that's going to come from the Xaar partnership. If you look at your marketing slides that you use, you talk about an industry that's growing 20% to 25%. So, I'm just curious, what's the real outlook here for FDM and PolyJet, and why aren't you guys growing faster than the industry if the core products are sustaining kind of that industry share, and then you're adding new technologies into your portfolio?
Yoav Zeif, CEO
Hi. Troy, thank you for the question. As you know, we are not guiding the year. The overall year because of the uncertainty of the COVID and we give just a very specific direction where we can commit and where we see where we have good visibility, so I can just repeat it. In general, what we are seeing is sequential growth quarter-over-quarter; we see the pent-up demand as we mentioned. We know exactly where we will be in terms of the OpEx, like Lilach mentioned, but overall, when you look at our NPI status, we are delivering. We were with the J55; we launched the J5 Dental with very good traction in the market. We launched the carbon fiber. We are delivering, we have a structured plan, and we are delivering on it. We launched new products, both on FDM and PolyJet, putting it together with the pent-up demand we see good – we'll take good market interest in those new products, which are really at the top of the line and the next generation, both in material jetting and material extrusion. We are leading the industry in terms of technology. There is no doubt and we hear it from our customers. So just take both into your analysis, the fact that we have those new products both on PolyJet and on FDM to the fact that we have three new technologies that we're introducing in the second half of the year and I guess you can do the math for yourself.
Troy Jensen, Analyst
Okay. And just a follow-up for Yoav. Would you agree that FORTUS really hasn't had competition, specifically in ULTEM? And do you fear that there's competition coming now, given that the patents for the heated build chamber have expired?
Yoav Zeif, CEO
I had a call – just to share a call with a customer, I cannot reveal their name, but like the top five aerospace players in the world. And they told me, and I'm quoting because I prepared myself for this call. They said, you have the best machine out there in FDM, just help us to make it a manufacturing machine. And that's what we are doing in terms of software, in terms of material. You mentioned ULTEM; it's clear that we have the best heated chamber in the market. And also in terms of software material, but not less important certification, regulation, allowables, all this full package that we are the only one who has it. So, even if someone is coming with ULTEM, it is still many years behind us in terms of certification for aerospace and automotive. And we keep working. Our people keep pushing on new patents, on new IP, on better heated chambers, on better processes, on regulation, and Airbus expansion is the perfect proof.
Troy Jensen, Analyst
Alright. Good luck in the second half.
Operator, Operator
Thank you. Next question today is coming from David Mizrahi from Berenberg. Your line is now live.
David Mizrahi, Analyst
Hey guys. So, I understand the higher operating expenses in 2021. But can you just speak to how you're thinking about some of that leverage moving into 2022? Do you have any goals you're talking to just with respect to those operating expenses?
Lilach Payorski, CFO
Hi. David, good morning. So specifically, we are not providing a specific guidance in terms of 2022, but definitely I can speak with you in the overall business model that we are anticipating. It's important to remember that as our revenue will grow with the new adoption of our new manufacturing-based systems, we expect to see higher profit. Higher profit as we will have a higher profit pool, and we are planning to leverage scale on our operating model. We have in place already the infrastructure, corporate and go-to-market, to capture new technology without adding significant costs in the long-term. And this is really our vision. This is our goal in 2022 and beyond 2023; we definitely will be able to see this leverage on the revenue.
David Mizrahi, Analyst
Got it. Okay. And then can you just also comment on how the new printers will impact gross margins going forward? The H350 for example, I know it uses fewer consumables. So, I'm just really curious about gross margin impact from new printers and specifics of the H350 and its competitive advantages relative to HP's multi-jet fusion, for example. Thanks.
Lilach Payorski, CFO
David, so we are now not specifically addressing the new product. Once we launch, we will be fixated more on that, but our vision at the end of the day is that gross margin is a – we have a wide portfolio and definitely it's a mix issue. Okay, and so overall it's a mix issue, but under manufacturing strategy revenue will be significantly higher driven by high consumption, which ultimately generates a higher profit. Even if consumable margins may be lower at this model. Plus we have a design for cost initiatives in place for the new products and for the existing products that we will address over time in the future as we roll out those new products, focusing on improving the cost as products become more mature as part of the product life cycle, this is something that we are actively addressing.
Yoav Zeif, CEO
Maybe just to add to Lilach, the systems are in line with our overall profitability. We are living within our industry. Although we are not giving gross margin guidelines, as you know. But I want to relate to the question about H350: we are very proud of the H350 and it's really a step change in our industry in terms of mass manufacturing. So of course I'm not going to relate directly to HP, but I'm happy to share several advantages that the SAF technology has, and do it very shortly. We have a whole list of advantages, but in a nutshell, I would say consistent accuracy. And I mean that we have the highest consistency of part accuracy, this is a must in manufacturing. The second one – second advantage is full control of the printing process and parameters, which is super important because it enables fast certification of parts and material, which is critical in manufacturing. Everything here is about manufacturing. And the third advantage is really very good economics, because we are working with single-fluid. We are having high powder reuse rate, and we have exceptional nesting efficiency in terms of the load that you can put of parts in the cake. So really it's an amazing machine. We have great plans around it and we are going to reveal more and more materials for this platform.
Yonah Lloyd, Vice President Investor Relations
David, it’s Yonah. I would add this as well because you talk about the ability to manage against competition. Remember that we have a very large service bureau that's technology agnostic, and it includes HP, it includes EOS, it includes lots of systems from lots of companies. So as we're doing our own research and development for our own products, we're actually customers using other products, and it really informs our ability to make decisions to develop the best-in-class competitive systems out there.
David Mizrahi, Analyst
Thank you, guys.
Operator, Operator
Thank you. Our next question today is coming from Noelle Dilts from Stifel. Your line is now live.
Noelle Dilts, Analyst
Hi, thanks. Good morning. I was hoping that you could expand a little bit on what the M&A pipeline looks like and specifically if you could speak to – if there's been any – how you're thinking about valuations for targets? Obviously, the multiples for a lot of the publicly listed companies have been volatile so far this year. Is that impacting target pricing at all? Thanks.
Yoav Zeif, CEO
Hi, Noelle. Thank you for the question. I'll start – take a step back and start with what is really important. We have a laser-focused strategy and everything that we are doing is subject to this strategy: focus, focus, focus, and also M&A. For us, the strategy is polymer manufacturing and we are actively looking for, I would say responsible M&A opportunities, like we did, and executing in the past that will accelerate the implementation of the strategy. And there are many opportunities and we are very attractive to many of the startups out there. Like you saw in our acquisition of Origin and also RPS because we have the infrastructure and they want to succeed and they want to make sure that they are growing their sales and they have their earn-out in place, and we can commit to it because we have the infrastructure and we have the machine to acquire and to integrate it into our system. So we are continuously looking for potential investments proactively, and we want to maximize the value for our company and shareholders. And we look all over; we have a structured unit that the way we are working. And this unit is going and screening and scouting, and we are focusing on those technologies and companies that will accelerate our strategy in each of our technologies. And we know exactly what is needed in the market, which is a great advantage compared to anyone else who is looking out there in terms of financial investment or VCs. And we will keep doing this in a very disciplined way and create value through those acquisitions.
Noelle Dilts, Analyst
Okay, great. And maybe just sticking with that theme, obviously still early days with Origin and RPS, but maybe could you expand upon how things are progressing so far in terms of how the market has received the deals particularly Origin and how things are trending relative to your initial expectations? Thanks.
Yoav Zeif, CEO
Thank you. Great question. It's growing really well. I don't know if you had the chance to participate in our manufacturing event, where more than 4,500 high-end customers and partners participated. A significant amount of them, actually I would say around two-thirds, also participated in the breakout session of Origin, and all the important companies from Fortune 100 and also the top similar Fortune 100 in Europe and in Asia participated; you name it: Tesla, Nike, Amazon, Apple, GM, Ford, Lockheed Martin. They were all there because they are interested in manufacturing and we are bringing the full package for manufacturing. And that's why we created this team together with Origin and together with RPS and if you participated, just to close the loop, all those customers of us that I just mentioned – the Tesla, Apple, Google, all those customers were there waiting for the Origin machines to be out, to be more precise for the 770 and definitely for the H350, participating actively, and we are going to deliver them the full package for manufacturing. So we expect strong demand for those machines. And for me as a CEO, most importantly, I was very proud to see both in our press conference and also in our event that at the end we were one team - Origin, H350, the Xaar joint venture, and our FDM. You could see that this is a one team that is pushing forward our industry into manufacturing.
Noelle Dilts, Analyst
Thanks very much.
Operator, Operator
Thank you. Our next question is coming from Greg Palm from Craig-Hallum Capital Group. Your line is now live.
Greg Palm, Analyst
Yes. Thanks. I guess a question on gross margin; can you quantify the impact that you had from logistics? I'm just curious how that compares to what you said about SDM in mix overall. And if I heard you, right, I don't think you're expecting any improvement this year. So even as revenue increases, at least in the second half, gross margin stays at similar levels, and so it almost implies that what you're seeing is worsening because presumably there is some level of overhead absorption in the second half, so just wanted to get a little bit more color there?
Lilach Payorski, CFO
Good morning, Greg. Specifically on the logistics, yes, we were impacted by the global logistics issue that you saw overall. We are not the only company who actually suffered from that. And it's probably fair to assume that it's about 1% of our gross margins impact due to those logistics costs. And as we mentioned on the call, we expect gross margin to stay at this level through the balance of 2021, given the uncertainty around the logistics – high logistics costs and the consumables impacted by COVID. At the same time, I would like to mention that we are analyzing and increasing our inventory levels of raw materials and finished goods to avoid delay, increasing production levels and prepare for shipping. The most important thing for us is meeting the demand. We try. We are evaluating a wider array of shipping options to ensure we can deliver goods with minimal business and cost impact. It's very, very important for us to address this.
Yoav Zeif, CEO
Yes, maybe I will just add to it. There are also some positive aspects. There are some positive aspects of the logistics side. So just to put to sleep on the gross margin, gross margin is a combination of the logistics, the consumable mix, and SDM. And logistics played quite a large part there. You can solve it out by yourself, but those were what really impacted our gross margin and since there is uncertainty on the recovery on the consumable and the logistics; there's more control on the SDM side. That's why we are cautious with our projections on gross margin. But what is the positive aspect of this? What is the opportunity here? Supply chains are fragile, and it's not only because of COVID; they were fragile before COVID because of the trade wars and barriers. Looking forward with the UK-Europe Brexit, we'll see more trade issues and Texas ice freeze, then you saw the Suez Canal blockage, and the weather issues, and so on and so forth. So supply chains are fragile and have been disrupted. It is clear to everybody that we need more resilient supply chains. By the way, we are facing the same issues. So we are also receiving some parts and machines through the Suez Canal. And we're exposed to the congestion in ports globally. Seven days is the average delay globally, and in some ports, it could be 10 or 20 days. So no doubt everybody understands that the future should take into consideration digital inventory. This is a great solution; you have no shipping issues, no customs, no weather impact, nothing – instead of delivering from A to B across the Atlantic; you just deliver from A to A because you produce on the spot with digitally stored inventory. It's also an opportunity, that's what I'm trying to say. And this is practically what we call industry 4.0.
Greg Palm, Analyst
Yes, I know it's a good point. I guess just as a follow-up because I'm still not entirely clear because usually when you have a better volume in top line, you see better absorption and you see higher gross margin. So if the assumption is that that volumes and top line revenue are going to increase solidly in the second half, yet gross margins are going to stay up at the same level as Q1, it implies that something is worsening from what you saw here in the most recent quarter. So are you assuming that either mix or logistics or SDM worsens from here? Just something that doesn't add up, and I just want to make sure we're all clear on that.
Lilach Payorski, CFO
Greg, basically we are still conservative in terms of what we see currently. No one really knows what's going to happen with the logistics constraint that we have. There are some publications that even say that maybe it will take us to the end of the year, and how severe it will be also no one knows. Okay. So we see prices that we knew in Q1 actually now even higher from what we see in Q2. So we believe the logistics situation and challenge will significantly impact us.
Yoav Zeif, CEO
Yes, that's a great point. And also the prices went really up more towards the end. At least our prices of logistics from China and from Israel went up more at the end of the quarter. So we are being cautious. But I want to make one thing very, very clear. It's all about mix, as we mentioned, and logistics and SDM, but overall ASPs in general stayed at the same level.
Greg Palm, Analyst
Okay, great. Really helpful, thanks so much.
Operator, Operator
Thank you. Your next question today is coming from Brian Drab from William Blair. Your line is now live.
Brian Drab, Analyst
Thanks. I was going to ask something that’s kind of related to pricing as well, but specifically on consumables; you're down 10% organically year-over-year in consumables, but I think customer activity would have increased materially year-over-year given that many of the service bureaus and manufacturing design companies were shutdown or at least slowed down materially last March. And also if you compare it with the first quarter of 2019, if you go back two years, consumables revenues down about 15% and product gross margins down over 600 basis points since the first quarter of 2019. So, I mean there are a few things that can explain this. I don't know; is it lower utilization of your machines? Even though machine sales have been soft, there are more machines in the market than there were two years ago. So is it lower utilization of those machines going out to the market? Or are you lowering prices on consumables or what is it? Thanks.
Yoav Zeif, CEO
Great question. Thank you. You just answered it. It's lower utilization, definitely. It's not that all our customers are back. And even if they are back, they are not utilizing at the same level as pre-pandemic. Add to it the fact that there are some segments that really were heavily hit by the pandemic and are slow to recover, mainly aerospace. And we think aerospace, commercial aerospace, they are slow to recover, also automotive. And we are highly focusing on those because those are the high-end segments that are buying our high-end machines. This is manufacturing. So we are more exposed, but I have no doubt that in the future, we will see them coming back strongly. The utilization will go up and consumables, as we said, will grow sequentially throughout the year.
Brian Drab, Analyst
Okay. And, I guess, is it the same dynamic that's playing out in the system sales? Because I mean, that's a great result that system sales are up 40% year-over-year, but they were down 40% year-over-year last first quarter and going down 40 and then back up 40. It means you're still – on a two-year stack basis, you're still down 15% in system sales from first quarter 2019 levels. Is that the same dynamic that you're just – it's going to take another year maybe to get back to 2019 levels?
Yoav Zeif, CEO
In general, yes. We don't know exactly when aerospace will be back to 2019, but what we can see is that hardware is – as you see, because of the deep decline in Q1 that we had in some areas of the world, we see this pent-up demand. And this pent-up demand is a sign for consumables because hardware is probably a phase or two phases before the consumables. So you can use the hardware in order to predict the demand for consumables.
Brian Drab, Analyst
Okay. Thank you very much.
Operator, Operator
Thank you. Our next question today is coming from Wamsi Mohan from Bank of America. Your line is now online.
Wamsi Mohan, Analyst
Yes. Thank you. You did a capital raise last quarter. You're calling this growth capital. You obviously already have a pretty strong balance sheet before that. So how should we think about maybe the pace of either M&A or investments? Is this going to be at some level of accelerated pace versus even the last few years? Or how should we think about the relative pace of investments and M&A? If you could share any color on that, that would be helpful.
Yoav Zeif, CEO
We are sticking to our strategy and to the same concept that we mentioned two quarters ago. We have a strategy. Part of the strategy is structured M&A proactive. I would say proactive scouting and screening to make sure that we are building a pipeline for M&A in a way that will maximize shareholder value through synergies, and the synergies are very clear here. It has to be something that accelerates the strategy. It has to be something that either accelerates through technology or go-to-market or material or software. So we work on the workflow, which is software and the other type of workflow or material for hardware technology. And we'll keep doing it in a disciplined way. We build an M&A team internally, and it's a very strong team. We are not rushed to do anything, but we do it in a way to accelerate the strategy.
Wamsi Mohan, Analyst
Okay, thanks, Yoav. And you talked about this acceleration in revenue growth in 2022 and beyond. When you think about that in relation to market growth, are you expecting to take share and grow in excess of the market? And maybe if you could just talk about that growth acceleration coming between existing products and new products, I'm trying to isolate what is sort of a cyclical recovery that can drive an acceleration in 2022 versus a more secular sustainable recovery in that growth? Thank you.
Yoav Zeif, CEO
We are growing; we are leading, but also in the future, we will lead the polymer manufacturing segments. We are leading additive manufacturing in polymers. This is the strategy. This is the target. And the way to do it is by making sure that we have the right match for every application. This is why we expanded our portfolio to five technologies. In each of them, we believe we have the best-in-class technology. I've been in this industry for almost a year and a half now, and I can tell you that it's quite simple: you need to have the best parts and this is scientific. You need to make sure that you have the best parts properties, and we are working on it on each of the technologies. We leverage it through our channel partners and we are delivering to our customers. We focus on manufacturing; a full package of hardware, software, material, and services and we package all of it in a seamless platform of software. This is a big advantage. This is something we heard from our customers. They want to have one supplier, and we will be this one supplier in polymer manufacturing. And as we said last quarter, we believe that our specific revenue will grow over 20% in this sector of additive manufacturing. So we are currently – as we said last quarter, in 2020 around 25% of our sales went to end-use parts. We are going to grow it in the mid-teens this year and 20% from next year onwards.
Wamsi Mohan, Analyst
Thank you, sorry.
Operator, Operator
Thank you. Our next question is coming from Ananda Baruah from Loop Capital Markets. Your line is now live.
Ananda Baruah, Analyst
Hi, yes, thanks guys for taking the questions. I guess just when you guys talk about – Yoav, when you talk about the revenue acceleration beyond the 20% seemingly starting kind of in 2022 going into 2023. Can you share with us – presumably that would be sort of through most of the pent-up demand; could you sort of share with us if that's the case you really think at that point the production systems are really driving the growth? And then if they are, do you yet have the qualifications in the key verticals kind of aero and auto that you would need for that? And if you don't have them, what do you think the difficulty level to getting there is? Thanks a lot.
Yoav Zeif, CEO
Ananda, thank you very much for the question. So I want to be very clear, and I want to separate short-term catalysts and long-term catalysts here in the market. So we said, and again, just to clarify that the part in our sales that is growing for manufacturing as we defined it as end-use parts will grow mid-teens this year and above 20% from 2022 onwards. So this is the statement. Why do we believe in it? Because first of all, there are some catalysts and pent-up demand in the short term because of the recovery from COVID, because of supply chain pressure that people want to ensure against it, and because of the entire environment that we see in the macro economy. This is one. And then, which is more important, everybody is seeing the long-term trends that we are facing, which lead us to an inflection point in additive manufacturing. And this inflection point is underlined, as I said before, by three very strong forces. One is the need to have responsive and versatile supply chains, this digital manufacturing that we discussed so many times. The second very strong trend is the fact that additive manufacturing technologies have reached, I would say, new levels in terms of their ability to deliver end-use parts for mass production. We were in the hundreds, maybe thousands. Now we are in the dozens of thousands and maybe hundreds of thousands and you saw in the case of the nasal swabs that we even printed millions. So it's a different era in additive manufacturing. And add to it the third very strong trend, which is the whole industry trends that you have those new segments like electric vehicles and new types of aerospace solutions where polymers and composites are so important for the type of parts, for the complexity of the parts, but also for the need for customization and short series of production. So it's a new era. It leads us to manufacturing. Being in manufacturing, it’s a whole new story because in manufacturing you need… it’s about new applications. It's about new materials. It's about very strong and solid service because you cannot allow yourself down time. And not less important, you need software; you need software in order to be connected to the manufacturing system, the MES, the ERP, the PLM, you need to be there, and you need to put all this in one package connected. So connectivity is also very important. And we have relationships with those blue-chip customers, Fortune 100 customers that are leading this transformation. And those OEMs are working with us to transform the industry. And it gives us the confidence that we are on the right direction because at the end, we are not working in a vacuum, but we work with our customers to take this industry into manufacturing.
Ananda Baruah, Analyst
That's super helpful. Yoav, I really appreciate that. That's really great context by the way. Thanks for that. And just a quick follow-up to that, it sounds like you have like at least a good amount of the capability in terms of production systems. You referenced your ability to do production parts of volume, certain production parts of volume. And I liked that you're sticking your neck out and giving the growth context. So thanks for that. This is fluid. How much capability do you think you need to get to putting together solutions, software services? Like you said, putting into one package? How challenging is that over the next, call it, four to eight quarters to get to where you want to be? Where your production customers are saying they want you to be to be able to really inflect that growth? I know that's a lot, but I think the context would be helpful. Thanks. And that's it for me.
Yoav Zeif, CEO
Another great question. We have currently the internal capabilities to deliver our strategy. Having said that, it's also clear to us that we can accelerate it, so the focus is on acceleration, not on enabling because we can do it, but this is a great place to be when you are looking for M&As because you're coming from a place where you have the certainty that you are good with alternatives. We are not depending on anyone to execute our strategy. We have many that can help us to accelerate.
Operator, Operator
Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Yoav for any further closing comments.
Yoav Zeif, CEO
Thank you. Thank you for joining us. Stay safe and healthy, looking forward to updating you again next quarter.
Operator, Operator
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.