Materialise NV (MTLS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Materialise NV second-quarter 2014 financial results conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jody Burfening of LHA.

Thank you, Nicole, and thank you, everyone, for joining us today for Materialise second-quarter earnings conference call. With me on the call today are Fried Vancraen, founder of Materialise and Chief Executive Officer; Peter Leys, Executive Chairman; and Frederick Merckx, Chief Financial Officer.

Today's call and webcast are being accompanied by a slide presentation that reviews Materialise business fundamentals, second-quarter financial results, and growth initiatives. To access the slides, if you have not already done so, please go to the Investor Relations section of the Company's website at www.Materialise.com. The earnings press release, which was issued earlier this morning, can also be found on this page.

Additionally, any material financial or statistical information presented on the call which is not included in the Company's press release will be archived and available in the Investor Relations section of the Company's website and a replay of this call will also be archived there.

Before we get started I would like to remind you that management may make forward-looking statements regarding the Company's plans, expectations, and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry changes.

Any forward-looking statements, including those related to the Company's future results and activities represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent day. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors which may impact the Company's future business or financial results can be found in the prospectus filed with the SEC on June 26, 2014.

Finally, management will discuss certain non-IFRS measures on today's conference call. A reconciliation table is contained in the earnings release and at the end of the slide presentation.

With that, I would now like to turn the call over to Materialise Executive Chairman, Peter Leys. Peter?

Thank you, Jody, and thank you, everyone, for joining us today for our first quarterly earnings conference call following our IPO last June. Also today our founder and CEO, Fried Vancraen, will provide you with an overview of our business and of our positioning within the 3D printing industry.

We will then have our CFO, Frederic Merckx, review our second-quarter results and provide you our guidance for 2014. Subsequently, I will return to discuss some of our accomplishments during the first half of the year as well as our priorities for the second half of the year. Finally, we will give the floor to you for Q&A.

If you would now please turn to slide 4 for a brief overview of the highlights of our quarter. Our second-quarter results we believe demonstrate our strategy of investing heavily in 2014 and 2015 in new product developments and in the expansion of our sales reach with a view towards accelerating our future revenue growth and driving margin expansion.

We performed well, increasing revenue 15.1% to EUR19.2 million compared to EUR16.7 million last year. 3D printing software grew by almost 28%, industrial production grew by 28.5%, and our medical segment realized a modest growth of about 1%. Importantly, total software sales, including medical software, increased to 31% of total revenue.

We increased our R&D spending substantially to 18.5% of total revenue compared to only 15.7% last year. Despite this strategic increase in R&D and other operating expenses to fund accelerated growth in the future, we still posted an adjusted EBITDA margin of 7.1%.

Now I would like to introduce our founder and CEO, Fried Vancraen.

Thank you, Peter, and good morning or good afternoon to everyone. I would also like to welcome everybody to our first quarterly earnings conference call. While most of the investors and analysts on this call are familiar with Materialise story, there may be some newcomers who are not, and so I would like to start with a very brief overview of Materialise and our position in the 3D printing industry.

Since founding Materialise more than 20 years ago, I, together with our talented staff of coworkers, have been dedicated to the innovation and advancement of 3D printing applications in order to make a significant and lasting contribution to a better and healthier world. We are not a 3D printing manufacturer, rather Materialise is an established enabler of 3D printing applications offering industry-leading additive manufacturing software and sophisticated 3D printing services to commercial, industrial, and medical customers worldwide.

Among our more than 4,000 customers are well-known mobile company such as Airbus, Boeing, Ford, Philips, Siemens, and many others. From the beginning, Materialise has engaged in both the development of additive manufacturing software and 3D printing production. Linking pre-press software and printing operations differentiates Materialise in the industry and keeps our products at the cutting edge of technological advances.

The cross-fertilization of working knowledge and customer feedback has been instrumental to our success and growth and it remains central to the Company's culture. In fact, we have a proven track record of identifying market opportunities, such as surgical guides and automotive fixtures, where our software development expertise and 3D printing and engineering capabilities have been combined to deliver innovative solutions to the market.

By the end of 2013, we had grown to a EUR68.7 million in revenue company and this with a team of 958 full-time employees. Over half of our employees hold advanced degrees and we have been consistently profitable all without selling a single printer.

Consistent with our cross-fertilization philosophy, we have organized the Company into three complementary business segments: 3D printing software, medical solutions, and industrial production. These three segments shared technical know-how, engineering expertise, and customer feedback.

Please turn out to slide number 6. As we discussed during the IPO roadshow, proceeds from our offering will be divided amongst four buckets of use. First we are expanding our sales and marketing teams throughout the world, particularly for our software and medical solutions in high-growth regions such as the US and Asia.

Second, we are funding a step up in research and development activities to re-accelerate growth in our medical segment by developing new innovative medical device products and software tools. Third, we are expanding our 3D printing capacity with the addition of new printers. And, lastly, the remaining proceeds will be reserved for general corporate purposes, which may include acquisitions and partnerships.

We started investing in many of those initiatives in anticipation of completing the IPO and expect to invest heavily for the rest of this year and well into 2015.

I would like to turn the call over now to our Chief Financial Officer, Frederic Merckx, who will discuss our Q2 financials and provide some full-year guidance.

Thank you, Fried. Let's turn to slide 7. During the second quarter of 2014 we increased our revenue by 15% or 17% in constant currency. Revenue from software sales, both 3D printing and medical software, represented 31% of total Q2 revenue. Revenue from end parts manufacturing including medical end parts represented 40% of Q2 revenue.

Our objective is to increase both of these percentages over time as these are key drivers for our future growth in revenue and profitability. The remaining 29% of total revenue was generated through sales of prototyping business.

In terms of our segment breakdowns for the first half of the year, both 3D printing software and industrial production increased their relative revenue share while medical dropped 5 percentage points as a result of its relatively lower growth rate. 3D printing software grew to 22% of total revenue and industrial production grew to 41% of total revenue.

Slide 8 shows our corresponding EBITDA numbers for the second quarter. As a result of a significant EUR930,000 increase in R&D spending, combined with EUR182,000 of non-recurring IPO expenses and EUR125,000 of non-cash stock-based compensation expenses, EBITDA decreased by EUR570,000 to EUR1.065 million.

Excluding the IPO expenses and the non-cash stock-based compensation expenses, adjusted EUR1.372 million which represents and adjusted EBITDA margin of 7.1%. As illustrated, our higher margin software segment has increased its contribution to the consolidated adjusted EBITDA, generating over 61% of the total for the first half of 2014 compared to 47% for the same period last year. And industrial production segment has also increased its contribution to 8% of total from 3% last year.

Slide 9 shows the Q2 financial performance of our pretty printing software segment. Top-line growth of 28% was in line with overall industry growth and resulted in a 33% year-over-year revenue growth from new software licenses. Other positive metrics in Q2 include a 30% rise in recurring revenue and a 40% gain in software sales generated through printer OEMs.

Growth in Asia, one of the key growth drivers in the segment, was especially high in the first quarter and came to 58% for the first half of the year. Q2 EBITDA growth was similarly strong at 26% as we were able to maintain our EBITDA margin at over 40%, a level, however, we do not expect to be sustainable given our plans for continuous R&D investment.

Turning to slide 10 you will notice that revenue from our medical segment is showing a modest growth. The combined effect of a maturing knee guide business and the uncertainty caused by the pending mergers of two of our largest customers, (inaudible) and Siemens, caused Q2 revenue from medical collaboration partners to decrease by 4.4%.

On the other hand, we generated significant growth in the number of medical software licenses sold, although this will only be converted to revenue over the next couple of quarters as a result of the ongoing conversion from perpetual to annual licenses. Revenue from the sales of medical software increased by 12.6% and now represent about 25% of segment revenue.

Finally, we were successful in increasing revenue from the direct sales of guides and implants by 18% over last year.

On slide 11 you will find the performance of our industrial production segment. We delivered a revenue increase of 27% compared to the second quarter of last year. The gains in our additive manufacturing solutions, which is excluding its growth businesses, was largely driven by higher sales of end parts which rose by 31%, as we continued to add an expense key automotive and aerospace accounts.

Sales from our two growth businesses, RapidFit and i.materialise rose 73%. We added six printers during the second quarter for a total of 150 machines. Our second-quarter EBITDA in this segment increased from 3.2% to 6.3% despite our continuous investment in our two growth businesses, which are still not contributing to our profitability. Excluding those two growth businesses from the Q2 segment results, our EBITDA margin further increased to 13.9% from 12.8% for the prior year.

Slide 12 provides some income statement highlights. Our second-quarter gross margins fell 250 percentage points to 60.8% from 63.3% as a result of the slow medical segment growth, higher consumption of consumables, and higher payroll-related charges. Research and development spending increased sharply over the last year by EUR930,000 or 35.3%. Sales and marketing was also higher, up 15.5%.

The increases in both expense categories reflect our strategic decision to invest heavily in both distribution and product development this year. Other income net was slightly higher for Q2 2014 and includes income of EUR1.038 million related to [global impact extensions] for qualifying researchers and partial funding of R&D projects. With higher gross profits partially compensating for the increase in operating expenses the Q2 operating profit dropped by only EUR805,000 compared to the same quarter of last year.

We provide you with some additional financial highlights on slide 13. The biggest changes on our balance sheet come from our June IPO, which netted us $89 million. We now have over EUR67 million in cash and equivalents and a very manageable debt to equity ratio.

As for our other balance sheet metrics, we have maintained good control of both inventories and receivables. Our capital spending in the second quarter of 2014 rose over 70% to EUR1.9 million from the prior year and our cash flow from operations more than doubled to EUR3.2 million year-over-year.

Now turning to slide 14 I will take you through our guidance for fiscal 2014. We expect to report full-year consolidated revenue between EUR77 million and EUR80 million. Built into our outlook is the expectation that revenue for 2014 will follow our historical seasonal patterns with a higher proportion of revenue generated in the second half than in the first half of the year.

As Fried mentioned in his review of our IPO proceeds and our planned investment records, we are in a buildup phase and intend to invest heavily in research and development and sales and marketing for the remainder of fiscal 2014 and well into fiscal 2015. As you can see for the sizable increase in operating expenses for the second quarter of this year over last year, we have already started to implement several investment initiatives.

For instance, we have been ramping up our salesforce and we intend to continue to hire salespeople, but we also intend to be smart and careful about our hiring decisions. We are going to spend aggressively but at the same time we are going to spend judiciously. Therefore, operating expenses as a percent of total revenue for the year will be a function of the pace of investments we make and we expect consolidated adjusted EBITDA will be in the range of EUR3.5 million to EUR5 million.

With that I will turn it back to Peter to discuss our growth strategy.

Thank you for a great review of the numbers, Frederic. If you would now kindly turn to slide 15, then we can together examine some of our accomplishments during the first half of the year as well as a few of the key initiatives we have underway for the second half of the year.

The left side of slide 15 lists some of our key operational achievements during the first two quarters of 2014. First, we established and launched RS Print, a joint venture that designs and prints personalized insoles from the basis of dynamic foot scans. In summary, our joint venture partner provides sophisticated dynamic scanning equipment and we developed a software that will enable the joint venture to automate the design and the printing of the insoles.

In our medical segment, we initiated the test phase of the metal printers that we recently acquired. Adding metal 3D printing capability will allow us to broaden our product portfolio and to take an even larger part of the value chain, in particular in the complex niche markets that we serve directly.

Finally, in our industrial production segment, we not only completed the acquisition of e-Prototypy, Poland's leading provider of 3D printing services, but more importantly we also successfully integrated the Company's operations and sales teams into our own organization. As a matter of fact, we are currently looking into already expanding our Polish operations.

The speed and efficiency of this integration we believe sets a good benchmark for acquisitions that we may make in the future.

Now shifting to the right side of slide 15, you will notice that we have detailed some of the specific priorities we plan to address in the second half of this year.

Within our software segment, we plan to maintain our higher level of new license sales through OEMs and their distributors. These indirect sales currently account for approximately 80% of our new customers. Simultaneously, we will continue our direct upselling efforts to our existing customers, as these direct sales account for approximately 80% of our 3D printing software revenues.

We are also preparing ourselves to capture business from the OEMs that are coming to market in Asia, particularly in China, by setting up development centers close to them. We are currently hiring account managers, preparing to move to a new office in China in September, and are also actively developing contract opportunities with many prospective customers in the region.

Within our medical segment, we intend to take steps to grow our medical software business and to increase our direct sales of customized implants in complex niche markets such as hip and cranial implants, where we believe we can offer more value-added services to doctors at enhanced profitability levels for Materialise.

We also plan to continue to develop our x-ray-based application for knee replacements, which we believe can address in the US alone a market which we expect can be several times larger than the market for applications based on CT or MRI scans. Simultaneously, we intend to consolidate existing relationships and engage in new partnerships with medical device companies.

Finally, within our industrial production segment, we will look to increase our penetration of the end parts market, which offers a new leg of growth and profitability versus our participation in an increasingly saturated prototyping market.

Another significant opportunity in this segment will be tied to our RapidFit business, which addresses the automotive market's growing need for customized, highly precise measurement and fixturing tools. We believe we are well-positioned to act as a consolidator within this highly fragmented market.

On the next slide, slide 16, we provide you with our long-term goals in terms of revenue growth and adjusted EBITDA margins. An important objective here is to increase the revenue contribution of our 3D printing software. Therefore, we expect our 3D printing software segment to post the fastest revenue growth, between 25% to 30% over the long term.

For our medical and industrial production segments, we believe we can produce 20% to 25% long-term growth. Collectively, these segment goals translate to revenue growth of 20% to 25% for the Company as a whole. While we expect most of our overall revenue growth to be achieved organically, it is likely that we will see some measure of growth coming from well-targeted acquisitions that we may make from time to time. Over time, our goal is to achieve an equal revenue mix from our three segments with each of them accounting for roughly one-third of total sales.

Adjusted EBITDA margin goals for each segment are less uniform. In our 3D printing software segment we believe we can maintain adjusted EBITDA margins in the 33% to 38% range. For our medical segment we believe it can achieve over time an adjusted EBITDA margin between 20% and 25%. This range we believe can be reached through a higher contribution by software sales, by the growth of some of our younger products, and by new product initiatives.

Finally, we expect our industrial production segment, which has experienced lower profitability as we invest in our growth businesses, to see adjusted EBITDA margins rise over time to 15% to 20%. Driving the improvement in this segment will be an increased percentage of end parts production and profitability improvements in our growth businesses as they mature and gain scale.

In summary, our ambition is to capitalize on our unique position in the additive manufacturing industry by aggressively expanding our sales reach and by developing new innovative products, which will require heavy investments for the rest of 2014 and well into 2015. These investments are intended to accelerate our revenue growth, increase the contribution of software sales to our total revenue, and drive increasing returns over time.

Before we turn to the Q&A session, I would like to take this opportunity to welcome our new shareholders and to thank them on behalf of all of our coworkers for the confidence that they have expressed in our organization by participating in our IPO. We look forward to continue to reporting to them on our progress, developments, and achievements.

And now we will be happy to take any questions from the floor. Operator?

(Operator Instructions) Troy Jensen, Piper.

Congratulations on the first quarter out of the box here, gentlemen. To start with a question for Fried. Can you just talk about the IPO as a branding event for the Company? Have you seen increased awareness, increased website hits? Anything on that line would be helpful.

Troy, one of the most important points I would like to mention is the fact that we have been contacted by several of our customers, especially relating to the software field that congratulated us on the fact that it's now clear that Materialise will remain an independent player in this industry.

And because I think they were, to some extent, afraid that we could end up being bought by one of the major players, which would threaten the open platform position that we have.

All right, perfect. How about for Peter? It seems like the software and the industrial production are in kind of cruise control right now. But can you just talk a little bit on the medical side, maybe give us an update on Biomet and Zimmer, when you think that could return to growth? And then maybe a timeline for when you can start shipping the x-ray product.

Sure, Troy. This is Peter. We have -- as some of you on the call may know, we have had similar growth rates over the last few years in our medical segment as we are now showing in the two other segments. This slower growth is mainly due to the fact that this first generation of guide products, in particular the knee guide products, have somewhat matured.

Now this is not going to go away. We expect that it's going to stabilize, but we do have a number of products in the pipeline that will allow us to create, let's say, the next generation of products that should stir new growth in our medical segment and bring this large segment to the same growth levels as the two other segments.

And those initiatives are, as you mentioned, the x-ray product and I will come back to that. It's the next generation of knee products. But we also have the direct sales with which we target complex markets. And, finally, we have software that becomes more and more important.

So we believe that the next generation of growth of the medical segment will also show a more balanced mix of products as compared to the mix that spurred the first generation of growth.

Now with respect to the timing of the x-ray product, it remains one of the main R&D projects. Currently it is well underway. We are still confident that somewhere in the first half of 2015 we should be in a position to bring a product to the market, which would basically imply then, taking into account ramp up and other delays, that if successfully completed, the x-ray product should significantly contribute to revenue growth of the medical segment as of 2016.

Understood. How about one for Frederic and I concede the floor here? Gross margins were well above my expectations. I'm assuming it might have been mix, but if you could talk about that. And then maybe help us out with what you think the gross margin should be in the second half of the year.

Gross margin is a combination of the different segments. The gross margin is very high in the software segment. It's almost 90%. It's a little bit lower in the medical segments and then the lowest is in industrial production segment.

So what's happening is that we are increasing the share of the software revenue, which is, of course, has a positive impact on the gross margin. On the other hand, you see that we are struggling a little bit in the growth of the medical business which is bringing down our gross margin. On the other hand, you see that there are some growth businesses in the industrial production segment, which also have a lower margin.

So in the end I would expect it's going to balance out, especially if we can catch up with the medical segment in the second half of this year. So by the end of the year I think it will be somewhere between the gross margin of last year and the one we are showing midyear.

So like six handle, 60% range on the gross margins?

Yes, something like that.

All right, perfect. All right, guys, good luck in the second half here.

Jonathan Shaffer, Credit Suisse.

Good morning, or should I say good afternoon I guess? I was just wondering if you could talk a little bit more specifically about the metal opportunity in medical. Kind of what your explanation has been to date and whether you think that's an attractive opportunity going forward.

Up to now we've been developing implants for complex surgeries, like Peter mentioned before, and we have subcontracted those. But today the situation is such that that business is taking such a volume that it is possible to load several metal printing machines with that volume as of next year. But the fact that we have brought the middle machines in-house will also allow us to offer this possibility to other companies that want to offer customized patient-specific implants on top of what we currently offer the guides.

Then, maybe just as a follow-up. Do you think the opportunity could also cross over to your industrial production segment as well, meaning that you would start offering potentially metal products to customers in the future?

That is something we don't exclude, but where we have no specific plans at this moment.

Understood. Then just one other follow -- or different question on the industrial production segment. It seems like the share of end-use parts is increasing. I was just wondering: do you think that will be a significant driver of improving margin going forward?

Definitely this is a significant driver because it allows you to balance your production capacity better, but also these longer-term contracts have often an engineering component, which also adds value. However, like Frederic indicated, our estimates of EBITDA margin remained there lower than for the other segments because fundamentally it remains a subcontracting business.

Great, thank you very much and congratulations.

BG Dickey, Stephens Inc.

Thanks for taking my question this morning. This is Brandon in for BG. Congrats on the first quarter.

Just starting off with the first question, within the 3D printer software segment, you guys mentioned that you are hiring in Asia now. What does the opportunity look like with the OEMs here?

This is Fried here answering. Well, actually we identified at this moment in over entire area more than 120 companies that have relatively recently started producing one or another type of 3D printer and sometimes already multiple models.

And, of course, the software ecosystem is a very important component in order to be a successful 3D printing company. When they -- those new entrants to the market, when they hook up to the magic software platform, they immediately are at par on the software side with a lot of the other players, older players in the industry.

Okay, great. Yes, sounds good. And the second question is on the switch from perpetual to annual licenses within the medical segment, how have you seen customers reacting to this? Have you seen any reason for concern here?

This is Peter. Frankly, customers have reacted significantly more positively than we had anticipated. Clearly also, because while making the switch we have simultaneously positioned the products in such a way that the annual license does provide additional functionality and additional clearance going forward, so there is functionality improvement on the product on the one hand.

And, secondly, obviously an annual license is cheaper than a perpetual license so from a budgeting perspective it is an easier decision for the customer. And on the long term it will help our revenue growth, but clearly on the short term obviously it does hurt our revenue growth in the medical sector a little bit.

Okay, great. Thanks for that and that's all I've got.

Rob Stone, Cowen and Company.

Good afternoon, gentlemen. Thanks for taking my question. Wanted to ask about capacity utilization within your industrial production and also any color you can provide on how many printers you expect to have by year-end and CapEx for the second half.

I will start answering -- it's Fried here -- on the capacity utilization and Frederic will give you some of the financial aspects of the question. So actually capacity utilization is quite comparable to last year, but we have added capacity.

Materialise has always been a very efficient user of its printers. Our output per printer is, well, nearly 10 times higher than the average of the industry if you take the Wallace reports and the data about printers and output there as a reference, so it means we operate at a capacity utilization rate on average slightly below 80%. And, again, this is a bit different from machine type to machine type, from period to period, and so on, but that is a general number.

We currently have seven extra printers on order that will be delivered during this year. And now Frederic can give you the financial data.

Yes. On CapEx point of view you can see in the numbers that we already invested double the amount of last year. And just to give you an idea, we have about eight printers in the pipeline to be delivered from between now and the end of the year, which is about almost again another EUR3 million.

So would you expect to continue increasing CapEx next year as well?

Yes, this year and next year that was in the plan to use part of the proceeds to increase CapEx.

Okay, with respect to growth in the industrial parts, can you comment on in which sectors you see the greatest activity and customer interest in end-use parts?

Yes, there is definitely for us a very large drive from what I would call industrial goods segment. The producers of equipment for different industrial applications that often have smaller series of relatively complex equipment.

Okay. And one more question for Frederic, if I may. With respect to your operating expenses, this year and next year are heavy investment years, as you've noted, and you mentioned the typical seasonality for sales. Should we expect the operating expense run rate in the second half to be significantly different than the first half, or could you comment on sort of expense growth versus revenue growth? Thanks.

As you know that part of the proceeds will be used to hire people, people who will be active in R&D and in sales and marketing. So, yes, we expect that there will be an increase in operation expenses, yes.

But is the rate going to be, relative to sales, faster or slower in the second half versus the first half?

Faster than --? Yes. I think the second quarter already gave you an indication of the increase because we start the acceleration plan already in the second quarter, so I think that will continue in Q3 and Q4.

Okay, great. Thank you.

(Operator Instructions) Now I am showing no further questions at this time. I would like to turn the call back over to Peter Leys for any closing remarks.

Thank you, operator, and thank you all for joining our call today and for participating in the Q&A. We performed well in our first quarter as a public company. And as you have just heard, we have many plans to put the capital we raised to good use.

We look forward to talking with you again after we have reported our third-quarter results, as well as to meeting with many of you in person or at investor conferences or at non-deal roadshows. Again, thank you all.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.

Thank you all. Bye.