Materialise NV (MTLS) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Materialise NV first-quarter 2016 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Jodi Burfening. Ma'am, you may begin.

Thank you, Kaley, and thank you, everyone, for joining us today for Materialise's first-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 first quarter of 2016. To access the slides, if you have not done so already, 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 could also be found on that 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. And 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 the subsequent day. Management disclaims any duties 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 Form 20-F for the fiscal year ended December 31, 2015, filed with the SEC on April 28, 2016.

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.

And now I would like to turn the call over to Peter. Good morning, Peter.

Thank you, Jody, and thank you, everyone, for joining us today.

It has been only two months since our last call, but as always, it has been a busy time here at Materialise with the many initiatives we have underway to strengthen our position as the backbone of 3D printing.

The agenda for our call is on slide 3. I will begin, as always, with a brief recap of our results for the quarter after which Fried will give you a sneak preview of the key products that we will be launching at Rapid next week. After that, Johan will go through our numbers in more detail, and then I will come back on to take you through some of our operational achievements during the quarter. After we have completed our prepared remarks, as always, we will be happy to answer any questions that you may have.

Now turning to slide 4, you will see the highlights of our first-quarter results.

We had another quarter of successful execution on our strategy of offering a unique combination of high-end software and printing services and delivered results that were perfectly in line with our internal plans. We achieved top-line growth of 14%, and that figure does not take into account deferred revenue from annual software sales and maintenance contracts, which rose by 1.7 million from EUR12.2 million in the first quarter of last year to almost EUR14 million in this year's period.

Our gross margin increased from 57.7% to 59.9%. Adjusted EBITDA swung from a loss of EUR288,000 in last year's period to EUR1,135,000 for a 4.3% margin this quarter. These numbers underscore that we remain very much on track on the top, as well as on the bottom line.

This strong operational performance is somewhat concealed by the net loss that we posted this quarter. But, as you Johan will explain in more detail, this loss is due to nonoperational, non-cash and nonrecurring items such as a reported, but unrealized, currency exchange loss on the amount of IPO proceeds that we hold in US dollars and the usage of a deferred tax asset.

I will now turn the call over to Fried to give us an introduction to the Materialise Magics 3D print suite. Fried?

Good morning, everybody, or good afternoon in Europe. Last quarter, I talked to you about Materialise Mimics Care Suite that we launched at AOS, and I mentioned that we have devised similar new product architectures for our Materialise Software and Materialise Manufacturing segments and that those would be launched at relevant industry events in 2016.

We will be unveiling the Magics 3D print suite at Rapid next week so that is what I would like to explain today. This new suite is the most robust, open, and (inaudible) software platform to run AM or 3D printing operations. When combined, the functionality from multiple product applications into one complete package. The Materialise Magics 3D print suite is unrivaled in (inaudible), and it gives its customers the latitude to utilize data innovated from numerous sources and to print it on the 3D printer of their choice.

Materialise Magics 3D print suite works like a solid backbone that supports every step of the (inaudible) manufacturing process at every level in a company's organization. Regardless of the data source, 3D printing technologies for application, the user will have the tools and process to manufacture high quality product for any industry.

Leading machine manufacturers including Arbug, Concept Laser, AOS, (inaudible), and many others are already powered by the Materialise Magics 3D print suite through the build processes, which enables them to bridge the gap between 3D applications and 3D printing machines.

Another important highlight of the past month was the opening of our new metal production facility in Bremen, Germany. In the presence of many government officials, but also top managers of multiple companies such as Daimler and Airbus, the new plant was opened. It is located in the research park of Bremen University and will allow to expand our collaboration with multiple renowned research institutes on this campus.

Thanks to this facility, the existing software development unit we had already in Bremen will have a similar benefit as a software unit in Materialise headquarters in Louisville, Belgium. Its development cannot only be validated on research machines, but also in real life production circumstances, and this will further progress the strength of the Magics 3D print suite for metal parts especially.

At this moment, this production is running to prototype and certain metal imparts that do not meet aerospace certification. The certification process for this plant will take the remainder of this year. But, again, the facility will not only be an opportunity for our manufacturing business, it will in addition allow us to further improve (inaudible), which is already powering from certified 3D printing facilities for aerospace.

And I will now turn the call over to Johan to give you more details on our financial results.

Thank you, Fried. I will start with a brief review of our consolidated revenue on slide 6.

For clarity, I would like to remind you that when we refer to sales in our presentation, this means revenues plus deferred revenues.

Also, as we noted in our year-end call, with an increasing portion of our revenue from our Materialise Software and Materialise Manufacturing segments, our financial results are influenced by the seasonality of those businesses. For the first quarter, we generated a [14%] quarter-over-quarter increase in revenue with increases in all three of our segments: Materialise Software accounted for 28% of our revenue in quarter one; Materialise Medical (inaudible) quarter two; and Materialise Manufacturing for 40%. We continue to execute on two of our most important strategies to grow the contribution of software revenue and to increase end-part manufacturing. Across all three of our segments, revenue from software sales and end-parts contributed 80% of total revenue as compared to 73% in last year's period. The remaining 20% was generated through the production of prototypes.

Moving to slide 7, you can see our consolidated adjusted EBITDA numbers for the first quarter. As Peter mentioned earlier, consolidated adjusted EBITDA rose 550 basis points, swinging from a small loss of EUR288,000 in the 2015 period to EUR1,135,000 this quarter. Our adjusted EBITDA margin improved from a negative 1.2% to plus 4.3%.

These improvements reflect three factors: first, continued shift of revenue mix to industrial [analytical] software licenses; second, an improvement in manufacturing's gross margin, primarily as a result of a continued efficiency and material cost improvement; and, third, a moderate increase of 5.4% in operational expenses compared to our 14.2% of revenue growth.

Slide 8 summarizes the results of our Materialise Software segment. There, revenue grew 22%, fueled by a 25% increase of recurring licensed revenue.

We also generated strong growth in sales from OEMs, which was up 13% over last year's period. In this segment, EBITDA grew 25%, outpacing our revenue growth, and EBITDA margin increased from 36.2% in last year's first quarter to 37.2% in this year's period.

Turning to slide 9, you will see that total revenue in our Materialise Medical segment grew 10% for the quarter.

Medical Software sales grew 4% over last year's first quarter, revenues representing 36% of the total Medical segment. Direct sales of complex surgery devices increased 27% over last year's first quarter, and sales from our medical collaboration partners were also up, rising by 12%.

EBITDA for the Medical segment this quarter was EUR530,000, negative as compared to minus EUR746,000 in prior-year period. EBITDA margin improved by 330 basis points to minus 6.2%.

Now, let's turn to slide 10 for a few details on the first-quarter performance of the Materialise Manufacturing segment. Their revenue rose 13% with sales of end-parts jumping 62% over last year's first quarter and accounting for 48% of the segment sales, up from 34% last year. We added more printers, bringing the Company's total to 142.

EBITDA rose almost 300 basis points to EUR257,000 from (inaudible) of EUR40,000 for the same period last year. The margin increased to 2.4% this quarter as compared to mine 0.4% into 2015 periods.

Slide 11 provides the highlights of our income statement for the first quarter. Gross profit increased almost 19% year over year, and gross margin increased to 59.9% from 57.7%. The increases reflect a continued shift over revenue mix towards both industrial and medical software licenses, as well as an improvement of the gross margin of our Materialise Manufacturing statement.

In total, R&D, sales and marketing, and G&A spending rose by 5% over the prior year period. A much smaller percentage than in many periods during last year when we were starting up after our IPO and expanding our sales and marketing efforts worldwide.

On a quarter-over-quarter basis, sales and marketing decreased slightly, while R&D remained relatively stable. Our G&A expenses rose, but most of this increase reflected the managerial structure and supports we have been implementing within our sales and marketing and R&D groups. In fact, a number of our employees with mix group within these groups have evolved to more managerial and/or administrative roles at a cost (inaudible) certain other expenses and are categorized into G&A.

Other income announced decreased by EUR500 million to EUR1.3 million. That other operating income consists primarily of withholding tax exemptions for qualifying researchers, development grants, partial funding of R&D projects, and currency exchange on purchase and sales transactions. The decrease was due primarily to the variance in the currency exchange loss, which resulted in a small loss of EUR48,000 compared to a gain that we booked of EUR500 million in last year's period.

We posted an operating loss of [EUR989,000] compared to an operating loss of EUR2,050,000 for the same quarter of last year, an improvement of EUR1.1 million.

Net financial result was negative by EUR0.7 million compared to a profit of EUR1.5 million the same period last year, almost entirely reflecting the variance in currency exchange rates, primarily on the portion of the Company's IPO proceeds held in US dollar. This is a reported but mostly unrealized exchange loss.

Net loss for the first quarter of 2016 was minus EUR3,151,000, compared to a net loss of EUR888,000, for the same periods in the prior year as a result of an increase of income tax by EUR1 million, primarily due to the usage of a deferred tax asset and a decrease of our net financial result by EUR2.2 million. Again, all nonrecurring and mostly non-cash elements, which were partially offset by substantial improvement of our operating profit by EUR1.1 million.

Now, please turn to slide 12 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with minimal debts accounting for only 15% of total liabilities and equity at quarter end. We ended the quarter with cash and cash equivalents, including held to maturity investments of EUR49.4 million compared to EUR50.7 million as of December 31, 2015, and EUR61 million as of end of 2014.

Total deferred income amounted EUR18.2 million compared to EUR16.6 million at year-end 2015. The deferred annual software sales and maintenance contracts rose to [EUR14] million from EUR12.2 million 12 months ago. Capital expenditures amounted EUR1.6 million compared to EUR3.1 million for the first quarter of 2015 in which a period was included also nonrecurring capacity expansion investments. Cash flow from operations increased to EUR1.4 million from EUR800,000 last year.

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

Thank you, Johan. Please turn to slide 13 where we summarize just a few operational achievements of the quarter in each of our segments.

Looking first at Materialise Software, we have been continuing to expand our sales footprint. As an example, we recently launched a partnership with Canon Europe to give its customers access to Materialise Magics. We are pleased that a known and well-regarded company suggests Canon recognizes the power of our Materialise Magics platform.

In Materialise Medical, as previously mentioned, we introduced the Materialise Mimics Care Suite, which is tailored to the different medical workflows within a hospital setting. We also signed a distribution agreement with Canon Lifecare Solutions to distribute software solutions from the Materialise Mimics Innovation and Care Suites in Japan.

Thus, we are also making good progress in further expanding our guides platform to new partners. I hope to be able to give you more details on that development in the course of this year.

Third, turning to Materialise Manufacturing, during the quarter, we partnered with another market leader, HOYA, to co-create and manufacture parts for visualization equipment and vision examination systems for optical shops. The partnership underscores that we are giving up to engage in meaningful and part manufacturing projects.

Finally, as we move towards the second half of the year, I would like to reiterate that we currently are maintaining our guidance for the full year, even though certain parts of our industry continued to show slow growth.

We continue to expect to report consolidated revenue within EUR115 million and EUR120 million, not including the EUR3 million to EUR4 million of additional deferred revenues we expect to generate from annual software licenses and software maintenance contracts. We currently also continue to expect to report adjusted EBITDA of between EUR7 million and EUR9 million, foreign adjusted EBITDA margin between roughly 6% and 7.5%. Again, these bottom-line numbers do not include the deferred revenue we expect to generate from sales this year.

This concludes our prepared remarks. Operator, we are now ready to open the floor for questions.

(Operator Instructions) Troy Jensen, Piper Jaffray.

Congrats on a nice quarter, Johan. Hey, just quick on the Manufacturing segment, I would love to have you guys highlight what you are doing there. Obviously, what Bard has done has been great on the end-parts production. I think you said it is up 62% year over year. Can you just help us -- how big can this get, what type of partnerships are you signing? Any more color on the growth in end-parts in manufacturing would be helpful.

Well, we gave an example of the collaboration we have entered into with the company, HOYA, who is in eyewear devices. And this kind of collaboration we hope to expand, and we are doing to higher or minus taxes thanks to the fact that we systematically do co-creation sessions with many industrial partners that start relying on us to help them in converting some of their existing products into a new generation of products that can be manufactured with additive manufacturing. This activity has been already going on quite systematically, but we start seeing a few growing, larger projects now. And, of course, in manufacturing the potential in longer-term is much larger than in prototyping.

Another example that we didn't touch upon during our prepared remarks is obviously in aerospace where we continue to produce plastic parts in a certified environment and where we have, as I just explained, are gearing up our metal part production center in Bremen to obtain certification towards the end of this year to also produce metal parts for that very promising industry.

So, Peter and Fried, I mean it sounds like -- I guess I'm trying to figure out there is one-offs in part production, but then there is becoming a partnership for manufacturing. It sounds like you're getting traction more on the partnership for the manufacturing side.

Well, at this moment, definitely more and more industries are introducing additive manufactured components in their smaller series.

But I want to be careful in saying this because it is still in a transition process, and so it requires truly the development of new generations of products that are in a large space now. So depending on how successful those launches will be, we will see growth from these kind of activities.

Yes. Okay. So then one other question here and I will cede the floor. But, on the software side, I am curious about the OEM partnerships there. I mean, obviously, you announced Canon. I'm sure there is more in the pipeline. Can you just give us a sense for how big the OEM contribution is becoming?

Peter is looking.

As indicated, the total OEM parts grew and is now -- grew by 12.5%. It is growing slowly but surely to represent something between one-fourth and one-third of our software revenues. It is an initiative, if you remember, that we launched basically almost simultaneously with the IPO, and yes, it has been growing up to the number that I just indicated.

All right, gentlemen. Keep up the good work.

We started two years ago at [20%].

(Operator Instructions) Weston Twigg, Pacific Crest.

Just a couple of quick questions. First, the gross margin at nearly 60% is really impressive, and I know you mentioned it was partly based on mix. But is that number sustainable through the year, or do you expect it to come back down a bit?

We have been working since a while on the improvement of the efficiency in the production units. We have been setting up product lines in 2015, and we see no (inaudible) of that. We cannot guarantee that the margin will continue to improve steadily quarter after quarter. It may be possible that, according to the investment in certain of the product lines, in setting up maybe an additional product line that we have (inaudible) or a small decrease in a specific quarter, but we can say that we are on the right track. And this is both the result on one hand side of the movement into more generally to software licenses where we don't have (technical difficulty) sales. On the other hand side, we are making efforts in better prices for our materials and then, finally, in the effectiveness and in the fuller utilization of our capacity.

But let me maybe add, Wes, this is a good question. What matters for us is the trend, and the trend is there and -- but whether it will be 59.9% next quarter, I mean, there are so many things that matter here. Sometimes we realize more efficiencies on one technology than on the other, and it is very difficult to predict whether we will have the same utilization of that more efficient technology quarter over quarter. So you really should look at and access our gross margin on the longer periods than just one quarter. But the trend is definitely there, and it is the result of continuous attention to operational excellence in our Materialise Manufacturing segment on the one hand and, of course, the growing mix toward software on the other hand.

Okay. That's really helpful. And just as a follow-up, you spent some time talking about the Magics 3D print suite. I was wondering if you could help us understand how that differs from what Autodesk is attempting to create?

Well, the print suite is truly starting from (inaudible) data from any kind of system, from any kind of gas inaudible) supplier, but even from some other sources like certain scanners and so on. And then, it is, we call it powering the entire operation over professional 3D printing facilities. And the entire operation, that means the data operation for planning the part on the machine, but also the entire logistical flow of data and logistical flow of parts through the 3D printing operation where we really focus clearly on the 3D printing operation.

At Materialise, we have this focus on 3D printing, so we try to avoid to start doing work that normally gas companies do or we start -- try to avoid -- start doing work that [ESD] companies such as (inaudible) which we are compatible. We try to avoid doing work that (inaudible) companies do, but we are compatible with all of those systems so that people who invest in our backbone still have full freedom to work with tools of choice that they find best fits for doing things like part optimization or designing or other things like ERP systems and tools.

Very helpful.

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

Okay. This was short but efficient. So thank you all for joining today's call. We have a robust product offering to showcase at Rapid later this month, so we do hope that some of you will be able to stop by and come and visit us.

Also, please note that Johan and myself will be in Boston to attend an investor conference in early June. We will issue an advisory release with details in the next few days. Thanks, again, and we hope to see you soon. Bye.

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