Materialise NV (MTLS) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Materialise Fourth Quarter 2016 Earnings 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, this conference call may be recorded.

I would now like to introduce your host for today's conference, Harriet Fried of LHA. Please go ahead.

Thank you everyone for joining us today for Materialise's fourth quarter 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 fourth quarter of 2016. To access the slides if you have not already done so, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release that was issued earlier this morning can also be found on that page.

Before we get started, I'd 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, 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 with that, I'd like to turn the call over 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 and the full year, after which Fried will give you an overview of our most important strategic accomplishments for the year. After that, Johan will go through our Q4 numbers in more detail and then I'll come back to take you through our operational performance for 2016 and our strategic imperatives and guidance for 2017. When we've completed our prepared remarks, we'll be happy to respond to any questions that you may have.

Turning to slide 4, you'll see the highlights of our fourth quarter results. While the market we operate in has been in a state of transition, we continue to make good progress with our financial results, our strategic initiatives, and our operational effectiveness. For the quarter, we had revenue growth of 12%. The figure that does not take into account deferred revenue from annual software sales and maintenance contracts, which rose by EUR3.7 million from the end of last year. Adjusted EBITDA was up 50% compared to the fourth quarter of 2015 and we turned in earnings of EUR0.01 per diluted share. Importantly, we had revenue increases and positive EBITDA in all three of our business segments.

Slide 5 sets forth some of the highlights of our full year performance. For 2016, revenue increased 12% again, not including the increase of almost EUR3.7 million in deferred revenues from annual software sales and maintenance contracts, which add roughly an additional 3% to our annual sales growth. For the year, consolidated adjusted EBITDA was up 157%. Thanks to the combination of, on the one hand, a solid growth of both our revenues (12%) and our gross profit margin (130 basis points), and on the other hand, a much more moderate increase of our operating expenses of roughly 5%.

And with this, I would like now to turn the call over to Fried.

Good morning or good afternoon to everyone. 2016 was quite a busy year here at Materialise, during which we reinforced our strategic positioning with good results. In the beginning of the year, we launched our new branding architecture to make customers better aware of the cohesion between our different product offerings. Together they constitute the backbone for 3D printing applications. During the first half of the year, we introduced the Magics suite and we added the Materialise Mimics Care suite to the Materialise Mimics innovation suite. These suites fit in our horizontal market approach. They enable professional and certified 3D printing in a broad set of industrial sectors such as automotive, aerospace and consumer electronics, as well as they allow us to serve multiple medical markets such as, for instance, orthopedics, cardiovascular surgery, CMF surgery, phenomenology and neurology.

In 2016, we not only introduced but we also expanded these horizontal backbones. We added the Inspector tool to our Materialise Magics suite and broadened the Materialise Mimics Care suite with Mimics imprint and AnatomyPrint. On the medical side, we also started beta testing new scripting tools in Mimics. These allow automations in the data handling for the development of custom and standard medical devices.

Another element that fits into this strategy is our partnership with Siemens. The integration of functionalities of our Materialise Magics suite technology into the Siemens CAD and Product Lifecycle management tools will give a broader customer base access to our technology at an earlier phase in the product development cycle.

In 2016, more and more customers and partners reached out to us to learn where additive manufacturing can add value for them. This resulted in a substantial update in our manufacturing activities. We are proud to announce that during 2016 we printed more than 1 million parts, excluding any -- parts or copied parts to our Vacuum Casting production line in the Czech Republic. In many instances, our customers pushed the limits of what our technology can do for them beyond straight-forward production and they engaged in co-creation sessions with our specialized team to find how additive manufacturing can help them transform, or even disrupt, their product offering and supply chain. This puts us in a very privileged position to selectively choose certain vertical business opportunities where we believe our backbone can make a real difference to build sustainable positions in specific market segments. Our co-creation sessions with Hoya led to the launch of Yuniku in the eyewear sector, which we discussed in our Q3 call. This is a prime example of a vertical backbone implementation of the Materialise technologies, starting from the scanning of an individual customer at an optician's store up to the delivery of these 3D printed spectacles.

Another good example of a vertical backbone is RapidFit, which grew very fast in 2016. The modular fixtures of RapidFit are becoming a standard for multiple automotive manufacturers of car body panels and interiors trim. And we are hopeful that we will be able to announce other similar vertical initiatives in the future.

In summary, our solid performance in 2016 in combination with the product line extensions and new opportunities that we disclosed in the second half of 2016 are indications that Materialise is on the right track after the pause that the AM sector experienced in 2015 and 2016. Our value-based strategic choices have proven to be robust in this downturn period and we expect to progress further down the path of long-term value creation in 2017 and beyond.

At this point, Johan will come on to give you more details on our fourth quarter financial results.

Thank you, Fried. I'll start with a brief review of our consolidated revenue on slide 7. First, I'd like to remind everyone that when we refer to sales in our presentation, we mean revenues plus deferred revenues. Also, please note that unless otherwise stated, all comparisons in this call are against our results for the same period in 2015. Finally, in each of the 6 slides I cover, I will focus on our results for the quarter, although certain data for the year also are shown for reference.

As Peter mentioned in his opening remarks, in this year's fourth quarter, we generated a 12% increase in revenue, with increases in all of our segments. Materialise Software accounted for 26% of our total revenue, Materialise Medical for 32% and Materialise Manufacturing for 42%. As you know, two of our company's goals are to grow the contribution that software revenue and end-parts revenue make to our total mix. In the fourth quarter of 2016, total revenue from software products rose by 2 percentage points to 39%, while end-parts decreased by 1 percentage point to 37%. Prototyping accounted for 24% of total revenue as compared to 25%.

Moving to slide 8, you can see our consolidated adjusted EBITDA numbers for the fourth quarter. As Peter mentioned in his opening remarks, consolidated adjusted EBITDA increased by 50%, growing from EUR2,979,000 to EUR4,455,000. Our adjusted EBITDA margin improved from 10.6% to 14.2%. These improvements primarily reflect two factors: first, our continued double-digit revenue growth; and second, a modest increase of only 3.6% in operational expenses.

Slide 9 summarizes the results of our Materialise Software segment. The revenue grew 11%. Recurring sales grew 38%, driven by 80% growth in sales generated from new annual licenses. This strong performance is not fully reflected in the revenues and a significant portion of these sales have been deferred to the balance sheet. OEM sales grew 41% compared to last year's period. Despite continued initiatives in certain software development, mostly using corporate resources, segment EBITDA margin remained at 37% on the 9% EBITDA growth.

Moving to slide 10, you will see the total revenue in our Materialise Medical segment grew 5% for the quarter. Medical software sales increased 30%, driven by 60% growth in sales generated from annual and renewable licenses. Just as in our Software segment, an important portion of the sales could not be recognized in the period and it's part of the increase of deferred revenues. Software revenues represented 40% of the total Medical segment. The 83% increase from direct sales from complex surgery devices more than offset 4% decline in sales from collaborated medical devices. EBITDA for the Medical segment was EUR656,000 compared to the EUR747,000 in the prior-year period. The EBITDA was negatively affected by an approximately EUR350,000 decrease in other operating income, mainly as a result of lower other operating income from governmental grants, while we increased the focus of our development efforts on business projects. Nevertheless, the segment EBITDA margin remained at approximately 7%.

Now let's turn to slide 11 for an overview of the quarter four performance of our Materialise Manufacturing segment. There, revenue rose 19%, driven primarily by revenue from end-part manufacturing, which was up 20% over last year's period. End-parts accounted for 39% of the segment's revenue, up from 37% last year. The company's total number of printers rose slightly this quarter to 150, and includes a first HP Jet Fusion printer that became operational in the fourth quarter. Since the beginning of 2016, we added 12 printers. EBITDA rose from EUR1,33,000 to EUR1,438,000. The margin increased to 11% this quarter from 9% last year. The operations of i.materialise and RapidFit, which are becoming more mature, were fully integrated in the fourth quarter in the Materialise Manufacturing business lines in order to create additional synergies. Hence, we will no longer refer to their EBITDA impact in our future earnings calls.

Slide 12 provides the highlights of our income statement for the fourth quarter. Gross profit rose 12% compared to last year's period, while gross margin was stable at 59%. In total, R&D, sales and marketing, and G&A spending rose by 3.6% over the prior-year period. Sales and marketing and G&A, each increased slightly, while R&D decreased modestly. Our G&A increase primarily reflected the managerial structure and support we have been implementing within our sales and marketing and R&D groups. As I will repeat for the last time in this earnings call, a number of employees within these groups have evolved into more managerial or administrative roles, and their cost as well as certain other expenses are now categorized under G&A.

Other income net decreased by EUR400,000 to EUR1.8 million. Net other operating income consists primarily of withholding tax exemptions for qualifying researchers, development grants, partial funding of R&D projects and currency exchange on purchases and sales transactions. There are always some moving parts in these components, but among other things, quarter four was affected by a decrease in government grants for specific research programs. As I mentioned earlier, our development initiatives have been focused more on business projects that are mostly not sponsored by specific governmental grants. We posted an operating profit of EUR1,915,000 compared to EUR932,000 for the fourth quarter 2015, an improvement of almost EUR1 million. The financial result was EUR253,000 compared to EUR356,000 for last year's period, reflecting smaller variances in the currency exchange rate, primarily on the portion of the company's IPO proceeds held in US dollar.

Net profit for the fourth quarter of 2016 was EUR620,000 compared to a net profit of EUR2.1 million for last year's period. The operating profit improvement was offset by the movement in income tax from an income of EUR1,10,000 last year to a cost of almost EUR900,000, affected by variances in deferred taxes, which have no cash in effect, and increased also in our share in the loss of the joint venture of RSPrint from EUR153,000 to EUR650,000.

Now please turn to slide 13 for a recap of balance sheet and cash flow highlights. Our balance sheet remains strong with debt accounting for 21% of total liabilities and equity at year-end. For the full-year 2016, total loans and borrowings increased by EUR12.7 million to EUR33.8 million and are all asset based. Capital expenditures amounted to EUR6.9 million compared to EUR3.6 million for the last quarter of last year. Cash flow from operations was EUR4,180,000 compared to EUR724,000 last year. For the full year, cash flow from operations amounted to EUR8.5 million. We ended the quarter with cash and cash equivalents, including held to maturity investments of EUR55.9 million compared to EUR50.7 million as of December 31, 2015. Total deferred income amounted to EUR21.4 million compared to EUR16.6 million at the end of last year. Deferred annual software sales and maintenance contracts rose to EUR16.8 million from EUR13.1 million 12 months ago. With that overview, I'll turn the call back to Peter.

Thank you, Johan. Please turn to slide 14, for a summary of our operational achievements for the year and also our priorities for 2017. The additive manufacturing market is transitioning from rapid prototyping to the production of end-parts. Many players and very different industries are seriously exploring the potential of additive manufacturing for their end markets and are actively using equipment either for testing purposes or already for the production of the limited series of parts. Simultaneously, industry players have been waiting for new technologies that are expected to reach the market in the near future. During this transition period, when the growth has been slower than expected, Materialise set four objectives for itself.

First, maintain our double-digit revenue growth rates. Second, increase efficiencies and expand our adjusted EBITDA margin accordingly. Third, broaden our technological offering, targeted at the markets for end-parts. And finally, expand our market reach both horizontally and vertically by engaging where appropriate in selective partnerships. We believe in 2016, we made good progress on each of these four fronts.

Our revenues grew year-over-year by 12.2% and if you were to add our deferred revenue on software sales and maintenance to our recognized revenues, our sales growth would even be 15.8%. Second year-over-year, our adjusted EBITDA grew by 157% to EUR9.5 million for 2016. Third, we expanded our backbone with promising new functionality, such as Inspector, Mimics Imprint and AnatomyPrint. And finally, we engaged in a number of promising partnerships with HP, Depuy Synthes, J&J, HOYA and Siemens to only name a few. We expect 2017 to be a similar transition year and intend to work towards the same for both-- continue to grow our revenues double digits, increase our profitability, invest in innovative additions to our backbone technology, and advance our plans to engage in meaningful verticals in collaboration with strong partners where appropriate.

At this point, I'd like to turn to Slide 15 and discuss our guidance for 2017. We expect our recognized revenues to grow at least at the rate that is similar to last year's 12%, and actually see potential to increase our growth rate beyond that. Our revenue guidance is between EUR128 million and EUR134 million for a growth of approximately 12% to 17%. Importantly, as we expect our software businesses to continue to gain importance in our sales mix, we currently foresee an additional growth of our deferred revenues from software license and maintenance sales by an incremental amount between EUR4 million and EUR5 million. On the adjusted EBITDA side, we are more conservative, as we expect to reinvest some of our efficiency gains in the expansion of our backbone technology and in the setting up of new verticals. We currently estimate that our adjusted EBITDA will be somewhere between EUR10.5 million and EUR13.5 million. We expect our financial results to be particularly strong in the third quarter and even stronger in the fourth quarter of 2017.

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

(Operator Instructions) Julian Mitchell, Credit Suisse.

This is actually Jason on for Julian. Just a really quick question on how to achieve the sort of higher-end of your guidance. You mentioned that there are some growth prospects that you could be looking forward to achieve that. Would this come more in the software segment or maybe from the manufacturing expansions that you sort of highlighted in your last call?

As always, it's a combination of both elements. We see growth perspectives on the manufacturing side and we see growth perspectives on the software side. And yes, definitely we have continued to grow the software a little bit faster than manufacturing in the previous years. Again, it's hard to predict before the year starts that this will be the same this year, but it's our ambition to grow both of them and we believe that there are opportunities for both.

Got it. And then as a quick follow-up, could you give any visibility into how printer -- on the manufacturing segment on just how printer adoption could look in 2017, given it's been kind of slow these past couple of years?

On the manufacturing side, do you mean internally in Materialise?

Yes.

Yes. For sure the biggest demand for -- and the largest volume manufacturing applications are related to plastics polyamide technologies, which can be aided [inaudible] systems or Multi Jet systems from HP.

Troy Jensen, Piper.

Maybe a couple here for Peter. Just start out with how about the Siemens relationship. I'd just like to know your thoughts on the significance of it and when would it ramp into a material kind of revenue opportunity for you guys?

Clearly as we already mentioned in the prepared remarks, this is for us am important landmark collaboration. It is a true endorsement by a very important player, in particular, in the end-part manufacturing world of the strength and the advancement of our technology. So basically the additive manufacturing functionality that they want to add do their product lifecycle management tools will be the Materialise technology. So we are very excited about that and do expect that over the years this will have an important impact on our sales numbers. Of course, this will take, I mean, this will follow the market, it's not because Siemens moves and moves very quickly as one of the leaders in this market by adding additive manufacturing functionality to its portfolio that all the customers will certainly in that same year buy the functionality. The success of functionality will go together with the adoption of the technology for end-part manufacturing by the customer base of both Siemens and ourselves. And we see that ramping up gradually in 2017, 2018, but obviously with much more significant impacts on the numbers in the years thereafter.

All right. So it looks like when you think about Autodesk has Netfabb, Siemens is partnering with you. I'm assuming this would be a non-exclusive contract and there've been other kind of CAD companies that are reaching out to you, too (inaudible) similar?

Troy, you know our strategy and we try to be very true to that strategy. We want to be a neutral player that reaches out to as many users of the technology in the ecosystem as possible. So our relationship with Siemens, just like our strategic relationships with many other players in the field, is indeed non-exclusive.

All right, perfect. And how about switching gears to HP. I guess I'd be curious to know -- you guys have a machine on-site, thoughts on the technology -- do you see yourself transitioning more of your nylon production to Fusion Jet technology? Does it have the speed and capabilities that the company claims?

We recently see a potential for certain product types and we will increase our capacity of those machines.

The Fusion Jet specifically, isn't it?

Not yet.

All right, perfect. And then how about just one last one for me and I'll cede the floor, just love to get an update on the X-ray product.

Well, yes, this project is still in progress. It is harder than we thought to fulfill all the requirements of the FDA. We have not resubmitted new 510k yet. But we are still planning to do this further down this year. That's the current status.

(Operator Instructions) Weston Twigg, Pacific Crest Securities.

First, just I was wondering if you can maybe talk to us about your relationship with GE now that they've bought a couple of metal printing companies and if you think that will expand to be a strong revenue driver anytime as they really ramp up that metals focus?

Obviously, GE already was a customer of ours, a good user of both our Magics and our Streamics functionality. The machine vendors that are in the process of being acquired by GE both contemplated in Arcam are vendors with whom we have good relationships and many users of their machines have also used our technology. So we -- these parts of the puzzle, as far as we are concerned, fall nicely together - it's existing partners of ours that now join an existing customer of ours. What exactly that the future will bring, of course, remains to be seen. We are in discussions with GE and we will ramp up those discussions, I guess, once these acquisitions have been fully finalized and GE is more in a position to actually discuss and further work with these with assets.

Okay. I mean that make sense. But it sounds like you do view this as a potential nice growth driver for your business as GE expand it metals focus.

Yes.

Okay, perfect. And then the other question I had was (Multiple Speakers).

I was going to say, I mean, if you look at the announcement, Wes, that they've made at the time of the acquisition, they are very ambitious in the number of printers they want to get out there. And of course for Materialise, any printer that is being used somewhere is a good potential for our business.

And immediately at Formnext and thereafter we have gotten their support on our Group and they have made multiple statements endorsing our technology. So I think the signs are very good, but contractually they are not yet in a position to sign everything.

Perfect, very helpful. And the other question I wanted to ask about was just related to the unique partnership with HOYA, and I'm just kind curious how that's going along, that's a really interesting project where you're starting retail location, producing the end-parts in terms of eyeglasses. Can you give us an update in terms of what the feedback has been, what kind of volumes are doing, how it's been progressing, maybe if you run into any roadblocks?

Well, actually, the feedback is simply fantastic. At all trade shows where this system has been introduced, it has received a lot of attention and more than attention, also actual orders. Now, actually the real roll-out, the first commercial series is expected only in the second quarter. So at this moment, we are still in a full ramp-up phase. And just with that, our customers and the real launch is early second quarter.

Thank you. And at this time, I'm not showing any further questions. I would now like to turn the call back over to Peter Leys for any closing remarks.

Okay. Thank you, operator, and thank you all for joining the call. I hope we've been able to give you a good overview of the way in which we plan to continue to increase Materialise's revenues and profitability, expand our backbone technology and engage in new verticals in collaboration with strong partners where appropriate. So thanks again to all of you and enjoy the rest of your day. Goodbye.

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