Materialise NV (MTLS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Materialise NV first quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Jody Burfening. Ma'am, you may begin.

Thank you, Amanda, and thank you, everyone, for joining us today for Materialise first quarter earnings conference call. With us on the call are Fried Vancraen, Founder of Materialise and Chief Executive Officer; Peter Leys, Executive Chairman; and Frederic Merckx, Chief Financial Officer. Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic operational and financial performance for the first quarter. To access the slides if you have not already done so already, please go to the Investor section of the Company's website at www.materialise.com. The earnings press release that was issued earlier this morning can also be found on this page.

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 change. 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 that may impact the Company's future business or financial results can be found in the 20-F for fiscal year ended December 31, 2014 filed with the SEC on April 30, 2015. 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 those housekeeping matters out of the way, I would now like to turn the call over to Materialise Executive Chairman, Peter Leys. Peter?

Jody, thank you. And thank you, everyone, for joining us today. If you would please turn to slide 3 where you will see next to the pictures of three extremely well looking gentlemen the agenda for today. First, I'm going to start with a brief recap of our financial results for the quarter. Then Fried will share with you on one hand his takeaways from the Materialise World Conference, which was held about three weeks ago, and also his thoughts about the 3D industry 25 years after founding Materialise. After that, Frederic will take the floor and take you through our financial results in more detail as well as through our outlook for 2015. And finally, I will come back and discuss our operational performance for the past quarter as well as our plans for the current quarter. And after we've completed our prepared remarks, we will be happy to answer any questions that you may have.

So, let's turn the slide and start with a look at the highlights of our first quarter results. For the first time since our IPO, we posted topline quarterly growth in excess of 20% both organically and non-organically. Including OrthoView, our revenue increased 25%; on an organic basis, revenue grew by 20%. And once again, we combined strong execution of our long-term strategy with solid short-term financial results. As an illustration, we continued to increase our contribution from software sales. In the first quarter of 2015 aggregate software sales represented 38% of total revenue, up 700 basis points over last year and this on the strength of a 52% increase in 3D printing software sales. As you know, to enhance our market leadership over the long term and accelerate our topline growth even further, we continued to invest heavily in the short term in expanding our global sales reach and our new product portfolio.

As planned, sales and marketing and research and development expenses increased 55% compared to last year. As a result, our adjusted EBITDA for the quarter fell to a slight loss of EUR288,000. Overall we are very pleased with our results for the past quarter. Now when I say past quarter, I do not only mean the first quarter of this year, but I also mean the last quarter of a century because as you may or may not know, Materialise has been around for quite some time. This year we are celebrating our 25th anniversary. So what I would like to do now is turn the floor to Fried, our Founder, and ask him to put what has happened in the 3D sector during the last few quarters in perspective as compared to what has happened over the last 25 years and of what may possibly happen in the coming few years. Fried?

Thank you, Peter. And good morning or good afternoon to everyone on this call. Three weeks ago, Materialise celebrated its 25th anniversary with the World Conference and an exhibition in Brussels. We enjoyed the attendance of more than 1,000 participants at our conference and those people came together to exchange ideas about the value of 3D printing and its sustainable applications. Allow me to report on a number of key findings. More than 100 of our users testified in speeches about the value they are creating and the growth opportunities they are seeing both by expanding the market reach of existing products and by introducing new products with additive manufacturing.

This supports the findings of the Wohlers Reports, which indicate that the fundamentals of the industry are very sound and that the industry is growing over 2014 at 35% and that's even faster than the previous years and certainly well above the average growth rate of the industry since its inception. Personally I find especially the growth rate of consumables at 29.5% very encouraging. This also increased from 27.5% in 2013, but please note that the growth rate of consumables is still 5% the growth of the industry overall. A second element is that the ever increasing efficiency of the systems to which Materialise software contributes is further growing ahead. And this combination of consumable growth below the industry average and efficiency gains is bound to lead to a few growth bumps in the future of the capital expenditures in our sector.

That being said, the opportunities for new applications keep opening up. An indication is given by the fact that the industrial engineering team of Materialise is currently co-creating one new product reach with different industrial partners from different sectors. This team is also re-engineering two products per day to adapt them to additive manufacturing and these are averages over the entire year 2014. These products are of increasing complexity and they are a testimonial of why additive manufacturing is not a high, but an industrial revolution. Additive manufacturing allows to significantly reduce the cost of complexity by intelligent use of 3D printing and that is similar to the revolution that was caused by the Internet for instance that reduced the cost of connectivity.

This revolution can have an important impact on the individual, the environment, and the society; which we demonstrated in the exhibition with 82 different projects in three rooms of the Belgium Museum BOZAR. This exhibition called MAKING A DIFFERENCE / A DIFFERENCE IN MAKING illustrates how 3D printing demands applications also to apply new approaches to design concepts and to product commercialization. And it is this adaptation, which is demonstrated in the fourth room in the exhibition, that takes time and that explains why the growth of the sector will be healthy and fast, but not explosive. At our World Conference, we launched for instance a new series of glasses with a glasses brand Hoet. These glasses make use of the design freedom that 3D printing offers, but even more value can be created by customizing them.

However, this customization requires a completely new software and scanner backbone in all the optician shops and a new supply chain organization for the sector. This kind of evolutions in market segments takes time, but can be quite radical as has been proven in the hearing aid industry. Multiple market segments are currently in this kind of structural evolution. It's happening, but the exact speed is hard to predict. Given the multitude of affected market segments and products, we believe that the overall growth of the market is certain in the long run. And Materialise has been positioned in the major segments transformed by 3D printing in the past 25 years and thanks to our IPO, we can continue to invest in future opportunities and position in these and other markets.

And now, I will turn the call over to Frederic to take you through our financial results for the first quarter.

Thank you, Fried. So, let's turn to slide 6. As Peter already mentioned, quarter-over-quarter we increased total revenues by 25% and organic revenues by 20%. By far the strongest gain 52% was in our 3D Printing Software segment, but we also realized a double-digit growth in industrial production and medical. As a percentage of Q1 revenue; our Industrial Production segment accounted for 40%, our Medical segment 34%, and our 3D Printing Software segment 26%. Now, breaking down our topline performance by type of business. Revenue from software sales, including both 3D printing and medical software, accounted for 38% of our total Q1 revenue compared to 31% in the same quarter of last year. Revenue from end parts manufacturing, including medical end parts, represented approximately 35% of Q1 revenue. The remaining 27% was generated through the production of prototypes.

On slide 6, you can also see our consolidated adjusted EBITDA numbers for the first quarter. And as a result of a EUR4.9 million increase in sales and marketing and R&D spending, which represents an increase of 55% compared to the same quarter of last year, adjusted EBITDA decreased by EUR1.7 million to a small loss of EUR288,000 bringing the margin down from 7.6% to minus 1.2%. And as a reminder, we fully expensed R&D spending for the first quarter. The next slide details the first quarter performance of our 3D Printing Software segment. Topline growth of 52% was well above the rate at which the overall 3D printing industry has been growing and for the second consecutive quarter reflected a plus 50% year-over-year revenue increase from new software licenses. Another positive metric was a 94% gain in software sales generated from printer OEMs.

And finally sales in Asia, one of our key areas of focus in this segment, increased by 71% as we successfully captured emerging opportunities in this region especially in China where we opened an office last year. EBITDA growth for the software segment was 30% and the EBITDA margin was 36.2%. The margin decline was due to a EUR1.4 million increase in sales and marketing and R&D expenses, again reflecting our investment in future growth. Turning to slide 8, you will see that in our Medical segment we realized a revenue growth of 13% with medical software revenue even rising by 54% including the OrthoView business. Growth in medical software revenue excluding OrthoView represented 4.7% and this despite the conversion from perpetual to annual licenses that started during the second quarter of 2014.

In total, medical software represented 35% of the total medical sales in Q1. And excluding OrthoView, annual licenses as a percentage of new licenses rose to 35%. Revenue from the direct sales of complex surgery devices grew by 24% offsetting a decline in revenue from medical collaboration partners where the percentage of Q1 segment sales decreased from 60% to 52%. Q1 EBITDA for the Medical segment declined from EUR946,000 in the prior year to a loss of EUR746,000 reflecting a EUR1.9 million increased investment in sales and marketing and R&D expenses, only partially offset by the increase in revenue. As a result, EBITDA margin declined to minus 9.5% from 13.6%, which is again consistent with the investment plans we detailed on the fourth quarter call.

Slide 9 summarizes the performance of our Industrial Production segment. For the quarter, we delivered a 25% revenue increase. The sale of end parts rose by 42% over last year's period and accounted for 34% of the segment's revenue, up from 30% in the last year's period. Sales of our two growth business, RapidFit and i.materialise, rose by 29% for the quarter. We added 17 printers bringing our total to 126. In this segment, our EBITDA improved to a small loss of EUR40,000 from a loss of EUR70,000 last year. And excluding the growth businesses from Q1 segment results, our EBITDA margin was 10.0% versus 12.2% in the prior year as a result of slightly lower gross margins and a significant increase in the sales and marketing expenses to further explore vast manufacturing opportunities.

Slide 10 provides the highlights of our income statement. Our Q1 gross margin was 57.7% versus 59.1% last year due to a substantial increase in depreciation expense associated with the Company's purchase of 17 new printers over the past four quarters. R&D spending rose significantly over the last year by EUR1.3 million or 42%. Sales and marketing was up EUR3.5 million or 62%, part of this increase was due to the acquisition of OrthoView in the fourth quarter of 2014. Other income net increased by EUR822,000 to EUR1.8 million, partially as a result of favorable foreign exchange and includes income of EUR1.1 million related to withholding tax exemptions for qualifying researches and partial funding of R&D projects versus a comparable income of EUR861,000 in the prior period.

Higher gross profit only partially compensating for the increases in operating expenses, we moved to an operating loss of EUR2 million compared to an operating profit of EUR437,000 for the same quarter of last year. Included in the financial income net was financial income of EUR1.9 million for the first quarter of 2015 compared to EUR33,000 in the prior year reflecting a foreign exchange gain on the portion of IPO proceeds kept in US dollars. We have provided you with some additional financial highlights on slide 11. We currently have over EUR50 million in cash and equivalents, another EUR7 million in the hold to maturity investments and a very manageable debt to equity ratio.

The EUR1.6 million increase in receivables is related to the yearly renewal of maintenance contracts, which often occurs in the first quarter of the financial year. Our capital expenditures in Q1 rose by EUR1.3 million from the prior year's level while our cash flow from operations dropped to EUR818,000 as a result of lower EBITDA and an increasing working capital associated with higher sales. And as you can see on slide 12, we are today reiterating the full-year guidance which we provided to you in our year-end call of March. And with that overview, I will turn back the call to Peter to discuss our growth strategy.

Thank you, Frederic. Slide 13 summarizes our operational performance for the first quarter and reviews our priorities for the second quarter. Starting with the first row of the slide, I would like to walk you through what we did in the first quarter and what we have on our plate for the second quarter in our 3D Printing Software segment first. As you know, enhancing our leadership position with the industrial uses of 3D printers is and remains a key strategic objective for Materialise. To that end, during the first quarter we continued to expand our suite of products, moving our offering further in the direction of a sophisticated kit of tools that do not only fix a file; but also repair, manage, and control the entire 3D printing production process.

More specifically, what did we do? First, we expanded in the first quarter still our build processors offering by entering into agreements with three new machine manufacturers. Second, we launched a control system that includes a high performance embedded software and that is specifically designed to increase the control over quality and repeatability in the additive manufacturing production process. Now turning to the right side of the first row of slide 13, let's look at the operating priorities for the second quarter in the same software segment. Now with sales from our build processor program that was started in 2013 already flowing in 2015, we obviously plan to continue to roll out that program in the second quarter.

Simultaneously we will continue to develop our additive manufacturing control system and are, as a matter of fact, already engaged in preliminary, but promising commercial discussions with various interested parties. Now while we continue to execute our strategy of strengthening our leadership position in the industrial 3D printing markets, we are also starting to gradually reach out to communities that have not had access to our technology before. As Fried explained, over the last quarter of a century, we have built a software platform that bridges the gap between designing and printing and we have gathered testimonials from thousands of very demanding industrial customers that our technology works extremely well.

Leveraging that experience and expertise, we are now gearing up to gradually extend our offering to a broader group of users of 3D printing technology. To that end, we are setting up the Materialise cloud services in collaboration with potential partners who span a wide variety of players within the 3D printing ecosystem such as machine manufacturers, software companies, and developers of 3D content. We already have relationships with many of these potential partners and have actually intensified our discussions with some of them during and following our Materialise World Conference. In the short term, we will be using the Materialise cloud services to expand awareness of Materialise's capabilities with new communities of users of 3D printers.

Our ambitions however go beyond just marketing our brands. By introducing the Materialise cloud services, we are also readying ourselves for the eventual shift in our customers' preference towards purchasing some of our software solutions as a service rather than as a product. The attendees of our World Conference already received a sneak preview of one of the specific initiatives that we are working on in this context. At our World Conference, it was demonstrated how a collaboration between the 3D Warehouse of SketchUp and the cloud services of Materialise can effectively break the role between millions of 3D designs on the one hand and 3D printing or if you want materializing of these models. Many people have been dreaming and talking about this type of leap forwards, we are about to get it done.

Now let's move to the second band on slide 13 and discuss some of the accomplishments of our Medical segment during the past quarter. As mentioned on last quarter's call, an important operational goal for 2015 is integration of OrthoView. In Q1 we started the integration of the OrthoView and Materialise sales teams giving the respective teams the necessary training to each sell a broadened portfolio of 3D as well as 2D preoperative planning tools. During that same first quarter we also continued to advance our X-ray project and we are happy to inform the market that during the first quarter, we filed our X-ray knee guide with the FDA. Hence, we believe that we are still on track to begin generating revenue from this new product in the course of 2016.

And finally as planned, in Q1 we bought out the minority ownership of Mobelife. And with now full ownership of Mobelife, we are ready to proceed with our plans to expand the Mobelife product offering more globally. What are our plans for the second quarter? Well, in addition to working on integrating our own products into the OrthoView portfolio, we also plan to complete our medical metal printing project by bringing the production of all of our complex surgery products in-house. Also in light of the decline in guide sales to some of our collaboration partners, we are seriously exploring the potential for setting up additional strategic partnerships for our guide business. Now if you will please move to the last row on slide 13, which discusses our Industrial Production segment.

In that segment during the past quarter, we continued to advance our strategy of strengthening our position in the field of additive manufacturing of end parts. As part of that strategy, we obtained the necessary certifications to 3D print plastic end parts for aerospace companies. With these certificates in hand, we can now expand our existing customer relationships and develop new customers while serving a growing market for end parts within the aerospace industry. Second, we have structured the professional consulting and coal engineering services that we offer to our customers. In the past, we very often but rather randomly helped customers to optimize their designs with a view to helping them to better benefit from the reduced cost of complexity offered by additive manufacturing.

Now with the launch of an official and structured consulting and co-engineering offering, we are leveraging the expertise to not only bring more value to our customers, but to also generate incremental revenue and to further distinguish Materialise as the engineering experts in the additive manufacturing markets. And finally, as already mentioned during our last quarterly call, we set up an aluminum printing line in the beginning of 2015. Now briefly what are our plans for the second quarter? Well, our Industrial Production segment intends to grow that aluminum printing capacity as well as to further expand the range of metal materials that we offer to our customers. And simultaneously i.materialise is working very hard to close new franchise agreements.

All of these key operational initiatives along with many other projects that we are working on are designed to strengthen and broaden our market leadership position in our chosen high end sub-segments of the additive manufacturing industry. They are meant to accelerate our growth and to ensure that we meet our long-term strategic and financial goals.

This concludes our prepared presentation. So operator, I would like to open the floor for questions.

Thank you. (Operator Instructions) Troy Jensen, Piper Jaffray.

Congratulations on the nice results, gentlemen. So Peter, maybe for you, I'd just be curious to know if you guys have any thoughts in changing spending intentions given some of the weakness we've seen from some of the other 3D printing companies in this space?

Troy, I think that Fried has partially addressed that concern. We've been around for 25 years. We've seen a steady and healthy growth over the last 25 years. We are confident that that growth will continue. But also we ourselves have experienced that the growth during the last 25 years did not occur in a straight line, sometimes it was with bumps and what some of our colleagues are experiencing. Frankly if we look at the high demands from new and existing customers for new designs and new printing work, then we are inclined to conclude that these are really examples of growth bumps more than anything else.

Alright. Sorry if I missed it on the call, I was bouncing between calls here. But I have just another follow-up here. There was a consortium of companies that announced a new file format, I think the consortium is called the 3MF. Just be curious to know if you guys plan to participate in that, is that a competitive concern for you, but any insight would be helpful?

Obviously, this is an initiative that has called our full attention. We talk to many, if not all, of the parties that are part of that consortium. We have been in join as a leading software provider. That should not come as a surprise to any of you or any of the other players in the market and we will be announcing further developments in that respect, Troy.

Can you just help me out with what exactly this new file format is? Obviously it's a replacement for STL I'm assuming, but something that's ultimately going to help build better 3D printed parts or any insight would be helpful?

For the moment as we see it, it is mainly a format that is used for the more consumer-oriented printers. Now of course as it is a consortium, it can develop to other specifications to extend the format so that it also covers other types of more industrial printers. But the initial implementation is in any case mostly STL printer oriented.

Okay. Thank you and keep up the good work.

Ben Hearnsberger, Stephens.

Peter, I was wondering if you could give us the headcount as it ended in the quarter?

The headcount is 1,242, which is give and take exactly the same headcount as per December 31, 2014. As we explained, Ben, during the last call we had a steep increase in our headcount, in line with our announced strategy of mostly adding people to our R&D and even more to our sales teams. And now as explained earlier during the call; we are taking the time to train those people, to integrate those people, to make sure that they are the right fit with a view to making them part of the teams and have them contribute to our revenue growth going forward. But that takes time and we are taking that time.

How does that number compare on a year-over-year basis?

We don't have the exact number in front of us, but it's approximately 300 people more than in the first quarter of last year.

On March 31, that number you will find in our S-1, I think there were approximately 970, 980 people.

Okay. And is the expectation to continue to grow your headcount throughout the year or can you give us your thoughts around kind of a target headcount number?

The aim is to, at this moment in the first half of the year, keep rather stable because of the training effect that Peter has just been explaining. By the end of the year, we will have the possibility to add again a couple of people in the different teams so by the end of the year, we could be slightly over 1,300 people.

Okay. That's helpful. And then in the software business, we've now seen two quarters of 50% plus growth on fairly difficult comps and that's up from kind of a high-20%s run rate over the past few years. Can you kind of take us through the individual drivers there and whether that's a sustainable growth rate throughout the year?

Ben, we have as you may know a long-term growth rate for our software segment between 30% and 35%, which we consider sustainable long term. We explained that the 50% growth rate of the last quarter was partially because of a hockey stick effect that you typically see in software businesses towards the last quarter. Big contributor to the rather steep growth of this quarter frankly is our build processor program, which was really successful which I mean is in line with the market shifting to production of end parts so really sales through and through our OEMs grew significantly. We are not predicting here that you guys should get accustomed to a 50% plus growth rate for our 3D Printing Software segment. Obviously we are launching new initiatives and now we had the good fortune of some of these initiatives being extremely successful and even quicker successful than we had anticipated. But while we are pushing our people to make a good habit of that, let's just assume that a 30% to 35% growth rate is on the long term on average sustainable and healthy.

Understood. And then my last question on the X-ray product, I know you filed with the FDA this past quarter. When can we expect for you to hear from the FDA in terms of kind of the next step on potentially seeing approval of the X-ray product?

Well, it's normal that now the FDA will probably still take a few months and probably in the summer holiday period come back with some remarks to us and then it will depend on let's say how fundamental these remarks are, whether we can quickly respond to them or whether we need some time. I want to point out that the X-ray project or product is truly an innovative product so it's definitely for us challenging to submit all the validation material, but it's also for the FDA a kind of first-off. So, it's very difficult for us to estimate their reaction at this moment.

Okay, great. Thank you.

Prabh Gowrisankaran, Canaccord Genuity.

This is Prabh calling in for Bobby. One, if you could provide some color on the competition you're seeing in the industrial end part production in Europe? Are you seeing any of the larger 3D printing competitors trying to establish themselves there? That'd be great.

Well, it's quite obvious that there will come competition for this manufacturing of end parts. We are a service provider there. There will be competition from companies making the parts internally, but there will also be competition from other service providers. I do think that I may state that Materialise is quite leading there both in terms of certifications and in terms of really having also the engineering support for customers that want to move into additive manufacturing to really help them make the transition in a smooth way. We see multiple services with those, but we see very little that have such a structured approach as Materialise to that problem.

Prototyping business if you want is really product oriented and we've always said that this is a business that is strategically important for us. So if competition comes and hits the market in Europe as announced on the prototyping side, it's going to happen, there's going to be discussion on price. But manufacturing of end parts business is much more a process than a product oriented business and we believe that with the variety of technologies that we have and offering and the very deep and rich process engineering knowledge that we have and that we have now further structured, we're actually well placed to face competition that would just have one technology in-house or just only a few materials and the likes. So, we are expecting that competition to hit the beach here in Europe and we are ready for them with our own differentiating factors that we've been working on for 25 years now.

Okay, great. And then the other question I had was the larger 3D printing competitors attributed the weakness to slower CapEx spending by customers, are you seeing any of that? If you can add any color there, it would be great.

What we have experienced over the past is that in situations where customers for one or other reason slow down their CapEx, these are actually situations that are good for our software business because if customers delay the purchase of another printer, then they concentrate on making the printers that they have in-house work more efficiently and in order to do that, they have to turn to the software solutions. And frankly that may also explain why our software segment has posted another 50% plus growth quarter the last quarter.

I think maybe a little bit more attention could go to the growth rates of the consumables. If the consumables grow quite steadily, it means that either manufacturing or 3D printing also for prototyping is used more and more. The fact that there are more machines on the market isn't equivalent to more usage of the machines, it's mainly the consumables that are a strong indicator there.

And the other question I had was with your push into metal service bureau kind of setup, what is the opportunity that you're seeing there? Is it a specific vertical you're going after or what are you targeting there?

Materialise has started to invest in metal to a large extent with the proceeds of the IPO because we see a lot of potential in the metal and that's also again indicated by the Wohlers Report that if there is one segment that is growing over 50% on an industry basis, it's the metal segment at this moment. And especially in manufacturing in medical and aerospace, which are the two sectors we have mentioned in all of our previous communications where there is also a high regulatory hurdle and where Materialise is very active, metal is a prime consideration so that's why we see a big opportunity for us in this market.

Okay, great. And then the last question I had was just in terms of the build processor, software adoption, I know there's few other guys who advertised in their websites; how does adoption work? Is it the end customer that approaches you or do you partner with the metal manufacturer and then you approach the customer together?

Typically probably what will happen, I mean there's a number of different promotional arrangements out there and I will for obvious reasons not enter into too much detail. But as a rule, the machine will be offered to the customer either with the build processor that is typically part of the machine or alternatively with a Materialise build processor, which offers additional functionality to the customer including potential to reciprocally communicate with the machine, get information back from the machine. And then the machine manufacturer will very transparently discuss with the customer what his needs are.

And I think it's also in the interest of all parties involved that to the extent where the needs of the customer go beyond the straightforward build processor produced by the manufacturer that then the manufacturer will offer his customer the option to go ahead and purchase the Materialise build processor. And then by the way, these customers are educated, know very well what they want, and are also in touch with Materialise itself. And when they consider buying a machine, they will have talked to some of our engineers about the pros and cons of our build processors and in some instances they will actually approach the machine vendors and ask whether they have build processors on the shelf that have the additional functionality that our build processors offer. So, that's how the cycle works in a nutshell.

And then the emphasis by the way, these customers are educated, know very well what they want and are also in touch with Materialise itself and when they consider buying a machine, they will have to tell some of our engineers about the pros and cons of our build processors and in some instances, they were actually approached as machine vendors and ask whether they have build processor on the shelf that have the additional functionality that our build processors offer. That's how the cycle works in a nutshell.

Okay, great. Thanks for taking my questions.

Weston Twigg, Pacific Crest Securities.

This is Daniel calling in for Weston. First, related to your Medical segment, you mentioned you're exploring new strategic partnerships. I was wondering if you could update us on your relationship with Zimmer after its acquisition of Biomet and if you could help quantify the impacts of its divestiture of relevant businesses.

First of all, with respect to the situation with Zimmer and Biomet, we can only repeat unfortunately what has been said in previous quarters given the fact that the information that's made public that the merger between Biomet and Zimmer will be closed later than originally anticipated, at least that's the latest public statements that we have got. So, it's still not possible to enter into full negotiations with this party and that is of course further delay let's say of the possibilities of making new arrangements with them, which is in fact a stabilization of our medical device business. On the other hand, as indicated by the numbers, we are seriously growing the software side of the business and we are also growing the direct sales of the complex surgery products.

To complete what Fried just said, obviously I mean the worlds of the guides is broader than the guides that are currently covered by our relationship with Biomet and Zimmer. These collaborations relate to CT and MRI knee darts. There's guides for other joints, there's X-ray based guides, there's other possibilities that we explore. So, there's a number of other ways to eventually make that guide business grow in spite of the current uncertainties with respect to our relationship with Biomet and Zimmer as a result of the pending merger.

Okay. And then on gross margin, you mentioned it's been decreasing largely due to depreciation expenses. Just wondering if you could provide a little bit more color on how we should think about gross margin going forward, especially since software is contributing more and more as a percent of revenue?

At this moment we can say that apart from the effect of the depreciation, the increase of the share of the software is compensating on the small decrease in the Industrial Production and also Medical. Especially in Medical, the fact that we are switching to the internal production of metal parts results in the fact that we have a kind of double cost. We are investing in the metal parts at the moment, but we also still have to outsource to a number of partners. So, there we expect an increase in the margin in the future and which by increasing the share of the software, gradually we should be able to increase our overall gross margin.

Okay. Thanks very much.

Julian Mitchell, Credit Suisse.

This is Brian Gibbons in for Julian today. You mentioned in your release new license sales and strength particularly in Asia, I was wondering if there is a bias in terms of the end market you're selling to there and if there's also a bias towards the build processor software strength?

I do think that mix wise, the mix in Asia and also in China is quite similar to the mix in the rest of the world so which means that the vast majority of the sales are Magics based in the 3D Printing Software segment and that yes, there are a few local players that have stepped into our build processor program. So there is also in Asia companies that are machine developers that work with build processors from Materialise, but it's not a majority of the income.

Great. Thanks.

Thank you. I'm showing no further questions. I would like to turn the call back to Peter Leys for closing remarks.

Thank you, operator, and thank you all for joining our call today. Fried by the way will be at the RAPID in Long Beach later this month and I will be in New York in June for a financial conference. So, both Fried and myself do hope to see each and every one of you at these events and please feel free to reach out to schedule a specific time if you do not have already done so. Thank you again for your time and this then concludes our call for our first quarter results. Thank you.

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