Materialise NV (MTLS) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Materialise third-quarter 2015 financial results conference call. (Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today. Harriet Fried, you have the floor.

Thank you, everyone, for joining us today for Materialise's third-quarter earnings conference call. With us on the call are Fried Vancraen, Founder and Chief Executive Officer of Materialise; Peter Leys, Executive Chairman; and Johan Albrecht, Chief Financial Officer.

Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic financial and operational performance for the third quarter. To access the slides, please go to the investor relations 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 that page.

Before we get started, I would like to remind you that management may make for 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 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 the 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.

Now, I would like to turn over the call to Peter Leys. Peter?

Thank you, Harriet, and thank you everyone, for joining us today. The agenda for our call is on slide 3.

I will begin with a brief recap of our results for the quarter, after which Fried will give you an update of our strategy. After that, Johan will go through our numbers in more detail, and then I will come back and take you through our operational performance for Q3 and some of our priorities for the current quarter. for the current quarter. After we have completed our prepared remarks, we will be happy to answer any questions that you may have.

The highlights of our third-quarter results are summarized on slide 5 and show another quarter of successful execution on our strategy of offering a unique combination of high end software and printing services.

Including OrthoView, we achieved topline growth of more than 30%. On an organic basis, we grew revenue by almost 26%. And, these numbers actually understate our growth as they do not take into account deferred revenue from annual software sales and maintenance contracts. Quarter over quarter, deferred revenue from software and maintenance rose 87% to EUR11.8 million.

As in the first two quarters of the year, we realized a strong contribution from software sales. And also, good growth in industrial production.

But by far, the biggest highlight of the period is that our medical business is again contributing positively, both to our top and to our bottom line. In the third quarter, medical sales rose 29% and generated an EBITDA margin of 8.4%.

As you may recall, since the fourth quarter of 2014, we have been investing heavily in expanding our global sales force and growing our new product portfolio. In the third quarter, total sales and marketing and research and development expenses increased 32% compared to last year's periods.

This is, however, a smaller rate of increase than our first- and second-quarter comparisons, where the increases were 55% and 44%, respectively.

Total adjusted EBITDA for the quarter was again positive -- EUR1.2 million. Albeit still slightly below the adjusted EBITDA of last year's periods.

To conclude, we are pleased with yet another strong quarter and remain very confident about our future growth prospects. I will now turn the call over to Fried.

Good morning. We are only a weekend away from the FORMNEXT Trade Fair in Frankfurt, and I would like to take the opportunity to give you a sneak preview of what we intend to present at the show.

The first thing that visitors typically do at FORMNEXT is go out and hunt for new developments in the technology. These innovations often include machines that produce bigger builds that are faster and that print new materials.

These developments are exciting and I must admit that, on the first day of the show, I always go out for a similar hunt. But there is more value at FORMNEXT than the eye can see. And our growth numbers have consistently shown over the last six quarters, the industry does not only need new technological developments. It also needs a reliable backbone of software and services that allow people to adapt a technology in a reliable and efficient way. And that makes it integrate seamlessly in their daily operations.

This backbone, which is as invisible as it is indispensable, is what Materialise is all about. And it is what we will be showcasing at FORMNEXT.

At the show, we will be launching our Materialise Magics20. Our marketing department has forbidden me to disclose the most exciting new features of the platform before November 17, but what really thrills me is our Magics20 platform now has a solution for every step that separates a design from an optimized print, regardless what design software or which printer the customer wants to use.

Importantly, our backbone solution [is a model]. Customers can gradually integrate our tools in line with their specific needs. It allows them to get the most out of their older installed base while being able to access the new additive manufacturing innovations.

At FORMNEXT, we will also be announcing some exciting new end part manufacturing assignment that we have recently secured. These projects and the partners involved are the best testimonial for the quality of our backbone solutions, which not only includes software tools but also the printing services that incorporate a wide variety of technologies and materials.

Our industrial printing and 3-D printing software segments will be sharing the same booth at FORMNEXT for the simple reason that they view themselves as -- and are viewed by many of our customers as two parts of the same solution. As we print for our customers, we have developed new features and tools for our software platform. And many of our customers who rely on our software backbone for their operations will come to us to discover new printing technologies, and to print parts in a certified manufacturing environment.

We remain convinced that value applications of 3-D printing will deliver sustainable growth, as is also demonstrated in our medical segment this quarter. Although medical will be less a focus area at our FORMNEXT booth, we are getting increasing recognition by many device companies and leading hospitals for our Mimics platform, as our many recent strategic contracts indicate.

With that overview, I will turn the call over to Johan to give you more details on our Q3 results.

Thank you, Fried.

I will start with a brief review of consolidated results on slide six. Following our strong first half of the year, we again generated significant revenue increases in each of our segments for the third quarter.

Industrial production accounted for somewhat over 40% of our revenue in quarter 3, medical 35% and software 24%. Together, revenue from software sales and end parts contributed 73% of total revenue.

Breaking down, our topline performance by type of business, revenue from software sales including both 3-D printing and medical software, accounted for 35% of our Q3 revenue compared to 31% in the same quarter of last year. The revenue from end parts manufacturing, including medical end parts, represented approximately 38% of Q3 revenue. The remaining 27% was generated through the production of prototypes.

As a result of the investments we have been making in expanding our sales coverage, and new product development, sales and marketing, and research and development expenses were 32% higher than last year. Despite these investments, we again succeeded in producing positive adjusted EBITDA, generating EUR1.175 million for the quarter and turning the year-to-date number positive to EUR708,000. This was approximately EUR880,000 below last year's period, and the margin came down from 10.4% to 4.5%.

As a reminder, we fully expect R&D expenses for the third quarter.

Turning to slide 7, you will see that total revenue in our medical segment grew 29% and sales of medical software increased 59%. Increases in both these metrics reflected the inclusion of OrthoView, which we acquired in October last year. Medical software sales represented 31% of total medical segment revenue, up from 25% for the third quarter last year.

On an organic basis, segment revenue was up 18% while revenue from medical software licenses grew by 15%. Annual licenses as a percent of new license sales rose to 65%. Revenue from the direct sales of complex surgery devices continue to grow, increasing 22% over last year's third quarter and, in an important new development, revenue from our medical collaboration partners also rose by 6%. In other words, we more than offset the decline in contribution of revenue from Zimmer Biomet.

EBITDA for the medical segment rose from EUR677,000 in the prior year to EUR763,000. Given the increase in the investment in sales and marketing, and R&D expenses, EBITDA margin declined to 8.4% from 9.5%, but was still solidly in the black.

Now let's turn to slide 8 for details about the quarter three performance of our industrial production segment. There, revenue rose 28% with sales of end parts increasing 47% over last year's third quarter and accounting for 33% of the segment's revenue, up from 28% last year. We added 14 printers, bringing our total to 134.

Our two growth businesses, RapidFit and i.materialise, performed very well, with revenue up 85% for the quarter. EBITDA rose to EUR799,000 from EUR753,000 for the same period last year, while margin declined to 7.7 -- 7.6% from 9.2%. Excluding i.materialise and RapidFit, the EBITDA margin was 17% compared to 19% for the same quarter last year.

Slide 9 summarizes the results of our 3-D printing software segment. They are following in the footsteps of the year's first two quarters. Revenue grew 42%, fueled by our extended product portfolio, strong growth in OEM revenue and new license sales. We delivered a year-over-year increase in sales from new software licenses of 43% on the strength of solid execution across all regions, particularly in Asia.

Our revenue generated from and through printer OEMs grew 34%. The fast-paced sales increase is visible in various regions, reflecting the continued cultivation of opportunities worldwide. In this segment, EBITDA grew 19%. EBITDA margin remained even at 34.2%.

Slide 10 provides the highlights of our income statement for the third quarter. In keeping with trends in the year's first two quarters, gross profit increased 21% year over year, while gross margin decreased to 56.8% from 61.3% for last year's third quarter, largely due to a substantial increase in depreciation expense associated with the 14 new printers the Company purchased over the past four quarters.

Research and development spending rose EUR894,000 or 24% over last year. Sales and marketing was up EUR2.3 million or 36%. And general and administrative expenses increased EUR1.2 million or 43%. Part of these variances are attributable to OrthoView's expenses.

The increase in G&A expenses reflects the organization put in place subsequent to the IPO. Meanwhile, the spending in G&A has remained stable over the past two quarters, although income net increased by EUR242,000 to EUR1.643 million and includes EUR1.4 million related to withholding tax exemption for qualifying research and partial funding of R&D projects.

With a gross profit increase of EUR2.5 million, only partially compensating for our planned investments in research and development, and sales and marketing expenses, we posted an operating loss of EUR834,000 compared to an operating profit of EUR743,000 for the same quarter of last year.

Net financial result decreased to EUR151,000 from EUR1.984 million for the same quarter of 2014. This difference is mainly due to a more stable exchange rate during the third quarter of 2015.

Now, please turn to slide 11 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with minimal debt, accounting for only 12% of total liabilities and equity at quarter end. We ended the quarter with cash and cash equivalents, including held to maturity investments, of EUR48.7 million compared to EUR61 million as of December 31, 2014. Total deferred income amounted to EUR15 million compared to EUR12.4 million at year-end 2014. The deferred annual software sales and maintenance contracts rose to EUR11.8 million from EUR6.3 million 12 months ago. On an organic basis, this deferred revenue grew from EUR6.3 million to EUR10.2 million.

Capital expenditures were EUR2.828 million compared to EUR3.487 million for the third quarter of 2014. Cash flow from operations increased slightly to EUR268,000 from EUR26,000 last year.

With that overview, I will turn the call over to Peter, to discuss our operational highlights.

Thank you, Johan.

If you could kindly turn to slide 12, where we have summarized our operational performance for the third quarter and where we also listed some of our top priorities for Q4.

As always, there are many efforts underway, so I will just touch on just a few important ones.

Following Johan's lead, I would like to begin this quarter with our medical segments, which as we have already stated, really made big strides over the past few months. The progress we have been making in expanding and diversifying our strategic partnerships for our surgical guide backbone has been key to the rejuvenation of our guide business. We are, in a nutshell, expanding our guide platform in three different directions.

First, as you have undoubtedly seen from the many press releases that we have posted recently, we are opening up our platform to many new partners worldwide.

Second, we are broadening the scope of our product offering so that it includes a healthy mix of knee, cranial maxillofacial, hip and shoulder guides. And thirdly, we are increasing the global reach of our guide backbone by, for instance, setting up a guide production facility in Japan.

While the traction that we are receiving in the market for our open guide backbone initiative confirms that this is strategically and commercially the right way to go, the focus in the coming quarters will mainly be on execution.

As we had explained earlier, the growth of our medical business will also come from our own portfolio of complex surgery solutions. In that respect, I am pleased to announce that we have expanded our portfolio with a patient specific shoulder implant under the name Glenius, and that we expect to announce partnerships to expedite the global sales of these products in the near future.

Now let's move to the middle row on slide 12, which covers our industrial production segment. There, too, we launched a lot of initiatives in the third quarter. In late September, we opened our metal 3-D printing factory in Bremen, Germany. This new production line represents an important step for us in our efforts to establish ourselves as the most complete factory for 3-D printing.

During the third quarter, we expanded our i.materialise online platform further through a franchise agreement with 3DVinci Creations,a provider of affordable and accessible 3-D printing technology in the United Arab Emirates. And last but not least, we became a dedicated manufacturing partner for SEIKO Optical Europe, and as Fried already hinted at earlier, we secured other high-profile end part manufacturing contracts which we intend to announce as early as in the framework of FORMNEXT.

Finally, still on slide 12, let's move to our 3-D printing software segment, where we continue to steadily build the industry's software backbone. Our open and modular platform not only includes the traditional conversion and fixing features, but also contains sophisticated build preparation, process and quality control, and production automation functionality.

We have already spoken about the ongoing rollout of our build processor program and the contributions that it has made to our revenue growth. Commercial launch of our additive manufacturing control platform also got off to a quick start in the third quarter, and we will continue these efforts in the fourth quarter.

Our big initiative for the final two months of the year in software involves the launch at FORMNEXT of our Materialise Magics20 platform.

At this point, I would like to turn to our slide 13 and our guidance for fiscal 2015. Last quarter, we said that based on our strong revenue growth, continued prospects for growth, and plans to begin moderating spending increases in both sales and marketing and R&D, we were reiterating the guidance we have provided at the beginning of the year. Today, with another strong growth quarter under our belt, we are reaffirming our revenue guidance of EUR99 million to EUR101 million for the full fiscal year 2015.

To take advantage of the market's positive response to the strategic projects that we have launched in all three of our segments, we have decided to accelerate into 2015 a portion of the investments that are necessary to execute the many new partnerships that we have entered into. These extra efforts do not only relate to the expansion of our surgical guide backbone, as I explained earlier, but are also important to the continued rollout of our successful build processor and AMCP platforms, as well as to the partnerships for our high-end manufacturing projects that we are currently finalizing.

In addition, as a result of the very well-received transition from perpetual to annual software licenses, mainly in medical, but also in 3-D printing software, accounting policy requires that we defer a part of the revenues from our annual sales into the next year. The later in the year annual license contracts are signed, the more revenue we will be deferring to the next year.

Accordingly, we are revising our consolidated adjusted EBITDA guidance to an amount between EUR2.5 million and EUR3.5 million. Nonetheless, we remain very confident that our business model allows us to combine growth on the top as well as on the bottom line, and therefore, still plan to grow consolidated adjusted EBITDA in Q4 significantly.

It is our ambition to post and adjusted EBITDA in Q4 that is about double the amount of our adjusted EBITDA in Q3.

With this being said, operator, I would now like to open the call to questions.

(Operator Instructions) Troy Jensen, Piper Jaffray.

Thanks. I want to start out by saying congrats to Hilde and team on the growth in medical. It seems like that's been the only segment kind of holding you guys back, so nice job there.

To stay on the medical segment for a bit, I think you said it; I might have missed it, but Biomet/Zimmer contribution, what has really been the driver in that? Has it just been Mimic software? Has it been kind of new partnerships? Just kind of help us understand what's -- what caused the inflection.

It's the combination of several factors. So if we distinguish in three big components, the software has been doing very well in Q3, with a gain of more than 30%.

But also, the implants for complex surgery, which we announced would be giving larger and larger numbers, because they came from very small, but due to the big growth, they are now getting into considerable amounts. They also grew more than 20%. And then of course, the strategic relationships with OEMs; there, the growth is still limited to 6%, but it is nevertheless an inflection compared to the previous quarters.

And then jumping around, I got two more questions. The Magics20 launch, can you let go back to the previous launches of Magics? Have you ever seen a pause in the industry? So I guess I am trying to figure out when is availability going to be for the product. And then have you historically seen pauses around new software releases?

Actually the software will be around -- as of FORMNEXT, it has already been beta tested. And we don't expect that this will delay our revenue generation because, to the contrary, we think that by the end of the year quite a number of people will now upgrade.

But, as has been said, earlier, given the fact that we defer and more and more of our revenues are annualized, the impact of such sales in absolute numbers becomes relatively little. If the sale is happening on the 31st December, actually there is no impact.

Great, understood. Last question and I will cede the floor. Can you just talk about the competitive environment, specifically your thoughts on Autodesk and the acquisition of netfabb?

Well, I think our numbers indicate that we don't see any fundamental change in the market yet. We keep seeing that all the professional users are collaborating with us and expanding their collaborations. So at this moment, I can -- I cannot comment that we have any consequence.

The reality, Troy, of that acquisition, is that whereas in the past, we had one competitor that at least claimed a similar neutral space like ours following the acquisition of netfabb by Autodesk, that is no longer the case. So, our strategic position, I would dare to say has become even more unique than it was in the past.

All right, understood; keep up the good work, gentlemen.

Bobby Burleson, Canaccord.

This is actually John DeCourcey on for Bobby. I just had a question regarding the competitive environment in the industrial production space.

Are you seeing any increased competition in Europe from US service providers entering? And then additionally, what kind of pricing pressure are you seeing in Europe and actually just primarily in Europe?

John, you may be referring to two transactions that have been announced, I think, in the last few months. That is the acquisition by ProtoLabs of some of the assets of Alphaform. And then second, there was an investment by Autodesk in the fit service lab.

I cannot say that we are today experiencing any increased competition from either of these two initiatives. That is one.

Second, what we can add is that Alphaform was a very strong discounter. With ProtoLabs, a very professional party entering the scene, we would assume that competition will be more now focusing on quality and reliability, and I am confident that we have a very strong position there.

On price pressure, as we indicated in prior calls, if there is price pressure in the markets, it would relate to the prototyping business. And as you know, we are strategically focusing on end part manufacturing contracts where, due to our complete portfolio, which consists not only of the machines and the material but also the software and the process engineering knowledge, we believe that we have a very strong position to continue to secure high-end contracts in that part of the market, where price pressure should be less prominent than it will be in the prototyping markets.

Okay, great, thank you. I will jump back in the queue.

Julian Mitchell, Credit Suisse.

You mentioned, in industrial production, just the EBITDA margins. Could you just give us an update on the investment in the growth businesses there, and also the metal portfolio? Obviously part of it is due to regulatory approval, but when should we expect these margins to step up?

Well, the -- several of the projects we have there, for instance, the aerospace related metal production, that is expected to be certified at the end of the second quarter of next year. So, there is an ongoing effort in that area.

As to our growth businesses, I can say that i.materialise is really performing in line with the expectations that we had before our IPO, when we made our business plan, and should be able to pass the breakeven point during this quarter. We have some delay in the RapidFit business, but, again, its growth is very healthy and we have good prospects there.

Great, thanks a lot.

Ben Hearnsberger, Stephens.

First, a question on Biomet Zimmer. What was the growth in the quarter?

Ben, we don't disclose any growth numbers on a customer by customer basis. What I can say is that our total -- what we call collaborated business, the guide business that we partnered with a number of partners, including Biomet and Zimmer -- that business grew by almost 6% quarter over quarter this quarter whereas that business had shown small negative growth in the recent past.

So the very big stride that our medical business has made here is that by adding new partners to the portfolio, by opening up that platform, we have been able to more than compensate for the basically stable or slowly declining business that we had seen from our two big customers following their decision to basically merge a couple of quarters ago.

Okay (multiple speakers)

(multiple speakers) had made the term there.

Okay, thank you. Maybe you could give us a sense for how big Biomet/Zimmer is within that collaborative -- collaborated business. Is it still the majority?

Yes. Biomet/Zimmer is -- as you may remember from the information that has been disclosed in the -- in our F-1 at the time of IPO, they represented something between 10% and 15% of turnover. They were the two key customers.

Because the other business has been growing much stronger than these two customers. So they have become less prominent. But they are definitely still the two largest customers of that portion of our business, yes.

Okay. Then can you give us an update on where we stand with the X-ray product?

Today, I cannot say anything different than last quarter. The file is with the FDA. We expect still this year that the FDA will come with its final judgment.

Okay. And then, in software, this may be a difficult question to answer. But can you give us the split between annual and perpetual licenses at this point?

There again, it is something that we do not disclose. We have not disclosed it on the medical software business either.

All I can say is that the bulk of the switch from perpetual to annual is one that we see and that has been very specifically announced in our medical software as you may recall, whereas our basic module of the Magics license is a perpetual license, some of the modalities that are being upsold are annual licenses.

And, as our upselling is growing significantly, so the portion of annual licenses in the total 3-D printing/industrial software business is also growing. (multiple speakers) is the case in our medical software.

Are you still offering perpetual licenses in the medical software piece?

Yes. So, so just as a recap, we have basically split our Mimics product into two different products that each go their own way. The product that we offer to research institutes and universities is still offered on a perpetual license basis for a number of reasons, including that they basically work on the basis of annual budgets. It represents a significant part of our customer base, but not the biggest parts.

And then the other part of Mimics, which we offer to hospitals and medical device companies, is a product that is only offered on an annual license basis. And it is that larger portion of our customer base that has been definitively switched from a perpetual to an annual license program.

Okay, great, thank you very much.

Weston Twigg, Pacific Crest Securities.

I have two questions. One is just based on -- or just wondering if you could help us understand better your exposure to metal-based 3-D printing, particularly on the software side and build processor side, and then I will give you my follow-on question.

Excuse me, but I didn't fully understand the question. Exposure to what, exactly?

Metal.

Metal, yes; metal printing.

Well, metal is definitely one of the big growth areas in the entire 3-D printing space, and especially in the professional side. So that means that is also for us by far the biggest growth area at this point.

Can you give us an idea on percentage of the exposure in your software -- 3-D printing software segment to metal?

It is very hard to give an ex -- a percentage there, because as you know, our users use our software for different technologies in the same environment. And a lot of them are mixed -- yes, shop floor -- with both metal and plastic production technologies.

Okay, that's helpful. And that probably helps answer the second question, which is: you mentioned that OEM revenue increased 34% year over year. Can you just help us understand that discrepancy, because OEM sales have been under pressure this year at the larger 3-D printing companies, and yet you are growing revenue pretty substantially.

So, if you could help us just understand how that could be.

Well, we believe that fundamentally, the 3-D printing sector is still growing. The growth has dropped, as you have also seen in some of our numbers in the first quarter of 50% a little bit. But yes, there are a lot of new entrants in the market that take advantage of the strategic positioning of Materialise to connect their printers to our software platform.

Okay, that's helpful. But, would you say the growth is largely coming from metals expansion? Or from just upselling licenses, or just generally from a broader installed base, even on lower OEM printer sales?

Well, the OEM printer sales, we mentioned earlier represent -- if I am not mistaken -- 32% or 35%, while the overall growth was 42%. So it means that while the OEM are mostly the new printers, the first software sold within the new printer, that growth is still beaten or outpaced by the growth in our installed base.

Perfect, thank you.

Kristen Owen, Oppenheimer.

This is Kristin in for Holden Lewis. I heard you guys mentioned something about strength of their software in Asia. I was wondering could you give us a rundown of what you are seeing across your other regions.

Well, we can say that the growth has been the biggest in Asia, on the order of more than 100%.

That is a growth of I think 120% or so. So of course -- it's smaller -- it is the smallest number so far.

Yes, but actually, we have been growing as well in the US and Europe, and at this moment, I have to look at the number where it is the biggest, either in Europe or in the US, but I have to look it up.

It has always been a rather good spread, our software sales across the three regions. And when we refer to Asia, but actually the number of that I mentioned, a growth of more than 100%, is just China only. And which is one of our focus areas. But, we are also selling software in other important regions in Asia, such as Japan.

So, generally, I would say it is a good growth globally across the three regions, but the particular growth and for us a growth region, i.e., China.

Okay, I guess that is a little bit of a departure from what we've seen certainly with the OEMs. So I was looking for any color on any softening in the macro that you are seeing, maybe more for the whole Company.

As our numbers show, yes, we don't experience the softening in the entire economy that much, as the other companies that made earlier announcements. But yes, nevertheless, based on what everybody in the industry is saying, we want to remain careful for Q4.

Sure. And then, just as a quick follow-up along with that, if the euro stays at 1.07, does that have any impact for you in your Asia and US business?

I will say that our revenues are generated through different currencies. The majority is still effective in euros. That number is also important, but you must also know that we are generating revenues and expenses mostly in the same currency, respectively.

So our exposure is a little bit naturally hedged, and we do not even need any complex hedging instruments. And to that way, our income is also secured.

Okay, great, that's very helpful. Thank you.

(Operator Instructions) Hendi Susanto, Gabelli.

First question, you are lowering EBITDA guidance by EUR1.5 million for your [extra rated] investments. How should we view that amount? Does that reflect a quarterly run rate of the investment for Q4? How much of that will continue into 2016?

It's a bit early to give any guidance for 2016. What I can add is that also our decision to accelerate certain investments in 2015 is a decision that will mainly impact Q4, but that also already has been taken and has impacted in certain programs. Already, some of the results of our quarter three. So it is tricky to just really relate that entire adjustment of the guidance to one quarter and one quarter only.

Let me add to that, that we are not only accelerating certain investments. We are also factoring in the fact that the switch from perpetual to an annual license system has been more successful than we had anticipated. And the impact of that very successful switch is one that we will feel most in Q4, which is the quarter where we typically have most software sales.

So the revised guidance there is really the result of acceleration of investments on the one hand, and a very successful switch to annual licenses on the other hand. That will mostly impact topline, but also bottom line as a result of deferral, resulting from sales in Q4. In particular, the last month of Q4, which, in the software world, is a month where quite a few sales are still being made.

Got it.

You can also see it from a different side. This is the sales that we realize related to annuals. It is cash that we receive upfront; we are not yet taxed on it, and we defer it to the next period.

Okay. Second question is, in industrial production, you mentioned that you are targeting the secure high-profile end part manufacturing contracts. Would you be able to share more insights, such as which verticals and what end products? Additionally, I am also curious to learn more about what end products you are targeting in the wearable markets.

We have already in the wearable markets announced collaborations with Adidas and SEIKO. So Adidas is shoe wear and SEIKO is in eyewear. And we will certainly be expanding in those sectors. We are going to make other additional announcements, as we said, early in next week.

And, at FORMNEXT, so that is just -- (multiple speakers)

And how about the industrial?

Also industrial, yes. Yes, yes, yes.

Okay. And then a last question if I may squeeze in an additional one; what is the magnitude of a typical deal in a build processor program in US dollar or in euros?

Actually, yes, it depends on the size of the OEM we are talking with, and a lot of that is income that is -- yes, I will call it sales-based in future, so the build process is delivered with systems. But, you will understand that we don't like to disclose our pricing.

Yes, the way we typically structure it, so we come to an agreement. We will develop the build processor for the particular OEM, and then the OEM will go out and sell these build processors, which will then result in revenue for us. So, the way the build processor program is structured is, we take some of the development costs upfront, but we then stride along with that particular OEM for many quarters in the future, and with every printer that he sells, together with our build processor, we will then get the revenue from the sale of that build processor.

So again, it is an upfront investment for a particular and recurring long-term income through that particular OEM. And as Fried said, the more important the OEM is, the more sales he does, obviously the more important that contract is for us.

so Peter, is it royalty-based revenue? Or is it a combination of royalty plus like a contract?

It is basically -- it's a bit like with the Magics. So, if the OEM sells a machine and he sells build processor alone, then it is going to be -- we will receive a one-time payment for that build processor that is sold, together with the machine. The build processor is the quote/unquote print driver of the machine. It is considered an inherent part of the machine by the customer. And he will just pay an extra amount for that piece of software that is being sold along with his machine.

Ben Hearnsberger, Stephens.

I had a question on the control product. It seems like it's a very interesting opportunity for you guys. Can you tell us who you compete with, with that product? And then how do you size the market opportunity?

Well, the typical competition at this moment is for the higher-end machine, what we would call industrial PCs. For lower end machines, it is often controllers like Arduino or whatever. The very high-end machines (technical difficulty) control unit, because the vast amounts of data that need to be processed on the machine, due to the increasing build speeds and the extra requirements on in-line process control.

We believe we have a quite unique position at this moment, and this is the first truly dedicated control system for this market.

In other segments, like the typical [NC] milling, turning markets, there are competing systems from companies like Siemens, and so on, but they are not -- or maybe not yet -- active in the additive manufacturing domain.

Okay, thank you.

Thank you. That is all the questioners that we have in queue at this time, so I would like to turn the call back over to Peter Leys for closing remarks.

Thank you, and thank you all for joining the call. I trust that we've given you a good (technical difficulty) call, and of how we intend to continue to strengthen our position as an open backbone for the industry in particular. Those of you who come to FORMNEXT will get a firsthand look at what can be achieved when leading knowledge, software and services are combined.

Johan and myself will also be in New York City in early January, where we will attend a financial conference, and we hope we will have a chance to meet many of you during that visit as well. Thank you again for joining the call today.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.