Materialise NV (MTLS) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Materialise's First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Now I'll turn the conference over to your host, Harriet Fried of LHA. Please begin.

Thank you for joining us today for Materialise's 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 summarizes Materialise's strategic financial and operational performance for the first quarter of 2017. 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 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 our estimates as of any subsequent date. Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectation. 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, 2016 filed with the SEC on May 1, 2017.

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

With that introduction, I'd like to turn the call over to Peter Leys. Peter?

Thank you, Harriet. And thank you everyone for joining us today. Since our year-end call in February, we've been pushing ahead with the many initiatives and partnerships that we have underway to strengthen our position as the backbone of the additive manufacturing industry. You will find the agenda for today's call on slide 3.

As always, I will begin with a brief recap of our results for the quarter, after which Fried will give you a summary of his takeaways from last month's very successful Materialise World Summit. By the way, for today's call, Fried is joining us from RAPID in Pittsburgh, where he will also be meeting some of you at our booth later today.

After Fried's comments, Johan will go through our Q1 numbers in more detail. And finally, I will come back on to update you briefly on our strategic imperatives for the rest of the year. When we've completed our prepared remarks, we will be happy to take any questions that you may have.

So turning to slide 4, you will see the highlights of our first quarter results. Continuing the trend we began in the second half of last year, Materialise delivered another set of strong results for this period. In the quarter, our revenues grew by almost 20% to EUR31.9 million, a figure that does not take into account deferred revenue from annual software sales and maintenance contracts, which also rose by EUR1.3 million from year-end 2016. Each of our three business segments had double-digit revenue increases, ranging from 15% to 26%, and all three of them generated positive EBITDA.

Consolidated adjusted EBITDA was up 148% compared to the first quarter of last year. Overall, we saw an improving demand environment compared to last year with more and more customers embracing the potential of additive manufacturing for the production of end parts.

At this point, I would like to turn the call over to Fried, who will give you the highlights from last year's -- last month's Materialise World Summit. Fried?

Good morning or good afternoon, everyone. Let's move to slide 5. The 2017 Materialise World Summit was the fourth in a series that started in 2010. Since that first Summit, it has been quite a unique event that brings the key players in 3D printing together and it feels, or feeds, the pulse of the additive manufacturing industry in sync with its Gartner's Hype Cycle.

During the first Materialise World Summit in 2010, when the AM industry size worldwide was estimated at $1 billion, the CEOs of leading 3D print companies struggled with a question: why is such a global revolutionary industry as additive manufacturing smaller in size than, for instance, the California wine industry? Having some courses on additive manufacturing in engineering curricula was clearly not enough to realize the potential of 3D printing in multiple markets.

The second Materialise World Summit presented the world's first 3D printed fashion show in 2012. The show was repeated later in US and Asia, but, more importantly, it led to an increasing amount of 3D printed dresses and accessories appearing in fashion shows in Paris, London, New York, Milan, Tokyo and many other places. This was instrumental together with home printers, in popularizing 3D printing for many people worldwide beyond the well-educated mechanical engineers. People became enchanted by 3D printing, and unfortunately this also led to exaggerated expectations, where some thought that a simple cheap home printer would create spare parts for every product in their house.

In early 2015, when 3D printing had become hype with negative connotations, this was also reflected in the stock market. At that moment, the third Materialise World Summit was about meaningful applications of 3D printing, an extensive exhibition with over 80 cases studies under the theme "making a difference, a difference in making." It highlighted the huge impact that AM was starting to have on the individual, the society and the environment. 3D printing is a true revolution, moving steadily forward.

Now to the 2017 Materialise World Summit. It started from the observation that industry analyst Terry Wohlers recently published, that AM market now represents $6 billion, a six-fold increase in just seven years.

We're here at RAPID in Pittsburgh, where the RAPID also took place in 2013, with approximately a little over 1,000 people. And where we are now with more than 6,500 engineers. But at the same time, the growth has slowed from 25.9% in 2015 to 17.2% in 2016. So what is holding us still back, what is slowing down the introduction of meaningful applications?

The Materialise mission statement to use software and service for a better and healthier world is currently illustrated by the image of the GO wheelchair you see on slide 6. This wheelchair, designed by Benjamin Hubert, is an example of a meaningful application that gives disabled people a wheelchair not only fitting better their physical condition, but also their individual taste and preference.

The impediment to do wide distribution and success of this meaningful application is the lack of a properly developed global ecosystem, a system where many of the disabled people that could benefit from this wheelchair have access through the scans of their body and the apps that record their preferences. If we could reach this volume of customers, it would enable 3D printing material and machine suppliers to invest in cost down exercises that would bring the cost of additive manufacturing as a manufacturing technology for wheelchairs in sync with the value proposition and the market requirements.

At the two-day World Summit, more than 600 executives from different companies that are key players in the additive manufacturing ecosystem have been thinking together beyond the technical possibilities of 3D printing. There were many testimonials going from hospital radiologists to the CEO of the Deutsche Bahn train maintenance service, on how they could be building the ecosystem based on Materialise backbone products and services that could help to make additive manufacturing a success.

These backbone components are continuously being expanded with products and partnerships that make Materialise the glue in the additive manufacturing industry. We are proving this once more here at RAPID in Pittsburgh, with, for instance, a new build processor partnership between 3D Systems. And more importantly, with the launch of our new Inspector products that were announced at formnext 2016.

At this moment, we are announcing the link to metal printing process simulation for Magics 22 that will be launched at formnext 2017. We are convinced the simulation and inspection -- and especially the interaction between those two -- are going to be important additional drivers for the success of many metal printers as they will bring the cost down for the introduction of new meaningful applications.

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

Thank you, Fried. I'll start with a brief review of our consolidated revenue on slide 7. For clarity, I'd like to remind everyone that when we refer to sales in our presentation, we mean revenues plus net deferred revenues. Also, please note that unless otherwise stated, all comparisons in this call are against our results for the first quarter of 2016.

As Peter mentioned in his opening remarks, in this year's quarter, we realized a 20% increase in revenue with double-digit increases in all three of our segments. Materialise Software accounted for 27% of our total revenue, Materialise Medical for 31% 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 this year's first quarter across all three of our segments, revenue from software sales and end-parts contributed 75% of total revenue. The remaining 25% was generated through the production of prototypes.

Moving to slide 8, you will see our consolidated adjusted EBITDA numbers for the first quarter. As Peter mentioned earlier, consolidated adjusted EBITDA increased by 148%, increasing from EUR1,135,000 to EUR2,813,000. Our adjusted EBITDA margin doubled from 4.3% to 8.8%. These improvements primarily reflect three factors. First, of course, our double-digit revenue growth; second, an improvement in Manufacturing's gross margin, offset by higher cost of sales in Medical; and third, an increase of only 7.4% in operational expenses. The higher cost of sales in Medical was due to increased activity in our medical devices and implants business lines, which involve a higher cost of production. I should note that over time, we expect our current gross margin to increase as we realize further scale effects and efficiency gains in both Medical and Manufacturing.

Slide 9 summarizes the results of our Materialise Software segment, for which revenue grew 15%. Revenue from recurring sales grew 22%, and OEM sales grew 29% compared to last year's period. Segment EBITDA margin remained solid at approximately 35%.

Turning to slide 10, you will see that total revenue in our Materialise Medical segment grew 15% for the quarter. Revenue from medical software sales increased 16%, driven by 27% growth in revenues generated from annual and renewal licenses. Just as in our Software segment, a significant portion of the sales could not be recognized in the period and is part of the increase of deferred revenue.

Software revenues represented 36% of the total Medical segment. Revenues from direct sales from medical collaboration, partners and direct sales from complex surgery each rose by 15% compared to the first quarter 2016. EBITDA for the Medical segment was EUR314,000 as compared to a loss of EUR530,000 in the prior-year period. EBITDA margin was up 940 basis points as a result of the higher revenues and only moderate growth of operational expenses more than offsetting the increased cost of sales.

Let's now turn to slide 11 for an overview of the first quarter performance of our Materialise Manufacturing segment. There revenue rose 26%, fueled by revenue from end-part manufacturing, which was up 35% over last year's period. End-parts accounted for 41% of the segment's revenue, up from 39% last year.

EBITDA rose from EUR257,000 to EUR1,322,000. The margin increased 750 basis points to 9.9% this quarter from 2.4% last year, boosted by the revenue growth, combined with improved cost of sales efficiencies and only a moderate growth of operational expenses. The Company's total number of printers rose to 155, up 5 over the number as of end 2016.

Slide 12 provides the highlights of our income statement for the first quarter. Gross profit rose 16% compared to the last year's period, while gross margin was 57.9% as compared to 59.9%. Again, this primarily reflects increased activity in medical devices and implants, which involve higher costs of production.

In total R&D, sales and marketing, and G&A spending rose by 7.4% over the prior-year period. R&D and G&A each rose modestly, while sales and marketing accounted for a larger proportion of the increase as we brought on more resources to enable us to support future revenue growth.

We posted an operating loss of only EUR84,000 compared to EUR989,000 for quarter one 2016, an improvement of EUR905,000. The net financial result was negative EUR142,000 compared to a negative EUR734,000 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 loss for the first quarter of 2017 was EUR816,000 compared to a loss of EUR3,151,000 for last year's period. The improvement in net loss includes, beside the operational financial variances already explained, a positive fluctuation of EUR1,059,000 in income taxes.

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 24% of total liabilities and equity at quarter end. Capital expenditures amounted to EUR9.6 million compared to EUR1.6 million in last year's period and includes EUR4.4 million related to the premises under construction in Poland and Belgium. Cash flow from operations increased to EUR1.6 million compared to EUR1.4 million last year.

We ended the quarter with cash and cash equivalents of EUR55.1 million compared to EUR55.9 million as of December 31, 2016. Total deferred income amounted to EUR23.5 million compared to EUR21.4 million as of year-end and EUR18.2 million as of March, 31, 2016.

With that overview, I'll turn the call back to Peter.

Thank you, Johan. Please turn to slide 14, which lays out some of our key priorities for the year. I actually ran through these initiatives with you last quarter. As you will see, Q1 has actually been a period where we have consistently executed on these strategic priorities. At RAPID, Materialise Software launches numerous extensions to our software backbone and let me just add just a few to the ones that Fried has already mentioned.

We are officially launching Materialise Inspector, a control tool that allows users to analyze data during all stages of the print process. We are also launching Magics Print Metal, an easy to use 3D printing solution that facilitates access to metal printing. And we also launched new releases of Materialise e-Stage, Materialise Robots and Materialise 3-matic.

As Fried already indicated, we also continue to expand our suite of build processors, which now also includes a solution for the ProJet Color Jetting machines of 3D systems.

Materialise Medical secured FDA clearance during the quarter for 3D printed patient specific osteotomy guides for children as young as seven years old, to help orthopedic surgeons to better understand and execute even the most complex cases.

Finally, Materialise Manufacturing added a second HP Jet Fusion 4200 machine to our production facility. After an extensive period of testing, the HP technology is now available for orders by select group of our customers, and will soon be made publicly available for online quotations and orders.

At Materialise Manufacturing, we're also making good progress with the new production facilities that we are building in both Belgium and Poland and we currently still expect to be able to occupy these premises in the summer of 2017.

Based on our performance in the first quarter and our outlook for the rest of the year, we maintained the full-year guidance that we have provided in February of this year.

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

(Operator Instructions) Troy Jensen, Piper Jaffray.

Good morning, congrats on the nice results. Hey, just a couple questions from me. So first, I'd be curious to know how correlated have you guys been historically to kind of industry-wide system sales and what's your conviction that system sales have improved or -- will stabilize or improve this year?

Fried is responding Troy, I think he is on mute. (multiple speakers).

Sorry, Troy. We have said before that Materialise is more stable in its evolution than the industry as a whole. We believe that there is truly a slight take-up again after two quite difficult years in the amount of systems that are being sold. But I think the take-up is moderate.

Understood. So Peter, you mentioned the HP Jet Fusion product, you've added your second machine, sounds like it's just available to a limited number of customers. Just curious to know when that goes broader and can you just talk about just kind of the -- that technology versus SLS, do you think going forward you guys would spend more or kind of build out the HP platform versus -- just the benefits and disadvantages of HP versus SLS?

Okay. Well, we definitely see a couple of strengths in the HP sector that we are currently marketing or explaining to our customer base. For instance, the HP technology offers a very nice surface finish, thanks to its very fine layer thickness. And for certain configurations, definitely also a lot of speed. What I do want to say also is that we have quite a number of applications where we see the traditional SLS technology is still really very competitive or outperforming the current generation of HP systems. But nevertheless, there is already quite a number of our customers that could benefit from this new technology.

OK, understood. Hey, [allow] two more questions for me. So the end-part strength was pretty impressive. I'd just be curious to know if that was very broad-based across multiple verticals or is just couple of verticals driving that strength?

Well, traditionally, Troy, as you know our customer base is really spread over many various sectors. That has been the case for both our prototyping business and our end-part manufacturing business. What I could also maybe add to this answer, and I don't know whether you were hinting at this, Troy, is that very large volume businesses, such as for instance our HOYA business, which obviously once they take off would take off a more meaningful part of our end-part manufacturing business, that HOYA has not yet been contributing to our Q1 results. We are in full ramp-up of HOYA, actually we are shipping scanners -- have been shipping scanners in Q2. But we expect also a ramp-up in volume of printing of those eyewear more towards the end of the year.

OK, that's helpful. Last question for me, I'd just be curious to know if you've seen more or less of Netfabb now that they're inside of Autodesk?

Yes, I think for us the situation hasn't changed that much. And I would say, we have definitely not more competition that we have experienced.

(Operator Instructions) Weston Twigg, Pacific Crest.

First question just on operating expenses, it looked like they increased pretty sharply quarter-over-quarter. You said you hired some more people, but just wondering what are your expectations through the year, do you see that staying at this level or trending a bit higher, particularly on the SG&A side?

As explained in the previous quarters as well, we continue to believe that the growth of operational expenses will be lower than the growth of our revenues. We have seen slightly higher operating expenses and we mentioned that R&D and G&A are in the same pace as we saw last year, we had a little pickup in sales and marketing expenses. And although we have already solid global sales and marketing organization, we have to invest in additional resources to sustain the future growth in general and also the required expertise for new products and services in particular.

So this is something that we picked up now in this quarter, but it is not something that we believe that will be exceeding the normal pace of growth of expenses.

OK, that's helpful. I also wanted to ask about the new relationship with the build processors with 3D Systems. That sounds like a pretty big change in the relationship. Can you offer us a little bit of color on what changed and what you think the opportunity is with 3D Systems?

Well, I think with the arrival of the new CEO at 3D Systems, the company has opened itself up to become more parts -- it has become more focused on industrial side of its business and it has also more opened up to be part of broader ecosystems rather than the -- older strategy where 3D Systems presented itself a little bit as the Apple business model of the 3D printing industry. And well, this opening is that we have a very positive dialog at the moment with multiple people from 3D Systems about creating more and more interoperability between our software and their software.

OK, that's helpful. And then finally just -- I know you touched on it briefly here, but the Manufacturing segment does appear very strong. Can you just give us some color on your expectations throughout the year? What's driving the strong customer demand and do you think that would be potentially growing nearly as fast as the Software business this year or is that a little too aggressive?

Well, it's -- indeed it's been a very strong growth in this quarter. That is testimonial of a few things. If we have seen a slowdown in the growth of machine sales over the last couple of quarters, that doesn't mean that people were not considering and investigating and testing the potential of the technology, but as less machines were hitting the market, people were turning to partners such as us, who have a broad factory to actually help them test, investigate and then start with the production of small series. So it was, I mean, I would not say written in the stars, but it shouldn't come as a surprise that as people continue to invest again in technology, and in the past have slowed down the purchase of the machines that then broad facilities such as ours will be the ones that people would turn to for their printing work. So that definitely explains the growth of our manufacturing activity.

And I mean, the other side of the metal, of course, is that when there is less machines that are being sold, then, while our software folks obviously can continue to upsell the existing installed base, at a certain point in time, our software folks will also feel the slowdown in the -- of the growth of the machine sales.

As machine sales are picking up, we think that over time that should definitely also benefit our Software segment. And over time, because there is clearly a strong push towards adoption of the technology throughout the markets, I don't think that an up-take in machine sales in the coming quarters will automatically and immediately have a negative impact on our Manufacturing business.

OK, that's helpful color.

There are no further questions at this time. I like to turn the conference over to Peter Leys for any closing remarks.

Thank you all for joining the call. We look forward to seeing you at RAPID, where as we said earlier Fried currently is, or at the KeyBanc Investor conference that I will attend in Boston later this month. Thank you again, and we're looking forward to seeing you all soon. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.