Materialise NV (MTLS) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Materialise financial results conference. (Operator Instructions)

I would now like to introduce your host for today's conference, Harriet Fried. You may begin.

Thank you for joining us today for Materialise's quarterly call. With us 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 full year and fourth quarter of 2018. To access the slides, if you have not already done so, please go to the Investor Relations section of the company's website. 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 statement 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 company's annual report on form 20-F filed with the SEC on April 30, 2018.

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

And now I'd like to turn the call over to Peter Leys. Go ahead, please, Peter.

Thank you, Harriet. And thank you, everyone, for joining us today. You will find an agenda for our call on Slide 3. I will begin with a brief recap of our results for the quarter, after which Fried will run through some of our key accomplishments for the year. After that, Johan will go through our Q4 numbers in more detail, and then I will come back on to summarize our strategy for 2019 and to also give you our financial guidance for the year. When we've completed our prepared remarks, we'll be happy to respond to questions. And just as an aside, Fried is traveling and is joining us from a different location today.

Now turning to Slide 4, you will see the highlights of our fourth quarter results. Again, reaping the benefits of our diversified business model, Materialise delivered another set of solid results with total revenue increasing by almost 10% to EUR 49 million, driven by another excellent quarter of our medical segment, which grew by more than 27%. Our adjusted EBITDA in the fourth quarter rose by EUR 246,000 to EUR 6.1 million with all 3 segments contributing positively. And net profit for the quarter was EUR 525,000 or EUR 0.01 per diluted share.

And with this, I would like to turn the call over to Fried, who will focus on some of the highlights of the past year 2018. Fried?

Good morning, and good afternoon to everyone. Thank you for joining us today. 2018 was another good year for Materialise. Our total revenue of almost EUR 185 million, our adjusted EBITDA of EUR 23.5 million and also importantly the increase of deferred revenue from license and maintenance fees, which rose by an additional EUR 3.9 million, were all very much in line with our expectations for the year.

Looking back at the plans that we made at the time of our IPO in June 2014 and at our performance at the end of 2018, it is clear that we remain very much on track, both from a financial and from a strategic perspective. Over the last 5 calendar years, our revenues grew by a compound annual growth rate of 22% from EUR 68.7 million in 2013. Over the same period, the figure we had of our adjusted EBITDA, which rose from EUR 7.6 million in 2013 to EUR 23.5 million in 2018, was 25%.

Importantly, we launched a number of initiatives in 2018 that provide a solid and promising foundation for continued growth in 2019 and beyond. Our software segment launched its simulation module in Magics, entered into a strategic software collaboration with Essentium and saw its e-Stage for Metal product win the TCT award for advancements in 3D software.

Our medical segment was able to successfully scale our partnerships, in particular with new product launches in both CMF and shoulder markets. And also, it reaffirmed our position as the pioneer in certified medical 3D printing by being the first company to obtain FDA clearance for diagnostic 3D-printed anatomical models. Scripting has proven to be an important addition to the Mimics Innovation Suite, enabling our customers and also our application engineers to accelerate the development of new clinical planning procedures and medical devices.

Our manufacturing segment underscores our leadership position in the 3D-printing eyewear market by winning 2 Silmo d'Or Awards for innovation and excellence in eyewear and entered into a strategic alliance with BASF on the material side. The metal capabilities of ACTech and our own metal offering, which use a variety of metal sintering machines from EOS, GE Additive, BLT, Renishaw and SLM, are gradually being combined to offer fast, high-value components in a variety of metal alloys. Developing a comprehensive metal manufacturing offering was our goal for the acquisition, and we are executing on that objective.

Also in 2018, we were able to significantly strengthen our financial position. Cash flow from operating activities was 28.3 thousand -- sorry, EUR 28.3 million compared to EUR 9.9 million in 2017. Our cash and cash equivalents at the end of 2018 totaled EUR 105.5 million (sic) [EUR 115.5 million] compared to EUR 43 million at the end of last year.

Finally, although less visible to the outside world, we are continuously strengthening our internal operations, processes and organization, including through the hiring of what we believe is a smart mix of young talent and more seasoned collaborators. We believe that all these achievements and initiatives position us well to capture new growth opportunities going forward, even if the macro economic outlook may be more prudent at this moment.

And now I pass over to Johan.

Thank you, Fried. I will begin with a brief review of our consolidated revenue on Slide 6. Before getting started, I'd like to remind you, as I do each quarter, that when we refer to sales in our presentation, we mean revenues plus deferred revenues. In addition, in each of the slides I cover, I will focus on our results for the quarter although certain data for the year are also shown for reference. Finally, please note that unless otherwise stated, all comparisons in this call are against our results for the same period in 2017.

As Peter mentioned in his opening remarks, in this year's fourth quarter, we generated a 10% increase in revenue. Materialise Medical turned in another especially strong performance with 27% increase in revenue. Materialise Manufacturing realized 7% growth, while Materialise Software revenue decreased 4%. Deferred revenue from license and maintenance fees increased EUR 2.6 million during the quarter and EUR 3.8 million over the entire year, primarily because of the strong recurrent sales in Materialise Software. For the quarter, Materialise Software accounted for 20% of our total revenue, Materialise Medical for 31% and Materialise Manufacturing, which includes our ACTech business, for 49%.

Moving to Slide 7, you will see our consolidated adjusted EBITDA numbers for the fourth quarter. Consolidated adjusted EBITDA rose from EUR 5.8 million to EUR 6.1 million. The consolidated adjusted EBITDA margin decreased from 13% to 12.3%. The increase of our gross profit by 16% was offset by an increase in operating expenses of 11% and further negatively impacted by doubtful receivables totaling EUR 851,000, which includes the impact of the new IFRS9 accounting standard.

Slide 8 summarizes the results of our Materialise Software segment. Here, revenue decreased by 4% for the fourth quarter, but sales increased by 5%. While our OEM sales, which consist mainly of perpetual licenses, were down 30%; our direct sales, and these are mainly recurrent sale -- licenses, increased by 25%. The segment's EBITDA decreased for the quarter to EUR 3 million from EUR 4.6 million last year, primarily as a result of the softer top line revenues, which were affected negatively by a high amount of deferred revenue from recurrent sales. Nevertheless, EBITDA margin still amounted to 30%.

Moving now to Slide 9. You will see that Materialise Medical had another outstanding quarter. Total revenue in the segment increased by 27%. Revenue from medical devices rose 40%, while revenue from medical software grew 7%. The segment's EBITDA increased by EUR 1.4 million, resulting in a 24% EBITDA margin due to the solid revenue growth and only a moderate increase of operating expenses.

Now let's turn to Slide 10 for an overview of the Q4 performance of our Materialise Manufacturing segment. Total revenue in this segment increased by 7% compared to Q4 2017. As we predicted during our third quarter call, Materialise Manufacturing's revenue, excluding ACTech, picked up again and even realizing a strong double-digit increase of 12%. The segment's EBITDA increased by 44% from EUR 1.4 million to EUR 2 million in Q4 2018. During the quarter, we added one printer, bringing the total number of industrial printers we have in production in our manufacturing and medical segments to 187. All of the capacity increase in printers in 2018 took place in our medical segment and in the metal business line of our manufacturing segment.

Slide 11 provides a highlight of our income statement for the fourth quarter. Gross profit rose 15.5% to EUR 27.3 million compared to a revenue increase of 10% as mentioned before. Both our medical and manufacturing segment contributed to this quarter's EUR 3.7 million gross profit growth.

In total, research and development, sales and marketing and G&A spending rose by 11% over the prior year period. R&D decreased by 3.6% due to the R&D capitalization of expenditures from 2 of our promising development programs in our medical segment.

Sales and marketing expenses rose 17% with increases in all of our segments. G&A rose 13% over the prior year period, reflecting increased efforts in further improving our internal processes and controls as well as expenses related to financial and other projects.

Net operating income amounted to EUR 810,000 compared to EUR 1.9 million in last year's period. The provision for doubtful receivables of EUR 851,000, which includes the impact of the new IFRS9 accounting standard, weighed negatively on this result. As a result, the group's operating profit amounted to EUR 780,000, EUR 200,000 below last year's.

Net financial result was EUR 420,000 negative in line with the negative EUR 356,000 last year -- in last year's period. Income tax were -- income taxes were positive EUR 348,000, reflecting deferred tax results similar to the EUR 303,000 for the fourth quarter 2017. Net profit for the fourth quarter of 2018 was EUR 525,000 or EUR 0.01 per diluted share compared to EUR 1.1 million for last year's period.

Now please turn to Slide 12 for a recap of balance sheet and cash flow highlights for December 31. Our balance sheet significantly strengthened in 2018 with cash and cash equivalents amounting EUR 115,500,000 compared to EUR 43 million as of end 2017. Total debt increased to EUR 106 million, now representing 24% of total liabilities. This compared to the EUR 95 million or 40% of total liabilities end 2017, even though the current debt portion only rose EUR 800,000 to EUR 13.6 million.

Cash flow from operations increased EUR 18 million, up to EUR 28.3 million for the full year 2018, while capital expenditures for 2018 only amounted EUR 20.6 million, a decrease of EUR 14 million compared to 2017. Net proceeds of EUR 55.9 million from the BASF and follow-on public capital increases and a EUR 10 million drawing from the European Investment Bank credit facility in Q3 2018, reinforced the capital -- the cash position resulting in the EUR 115.5 million just mentioned before.

Total deferred revenue amounted to EUR 28 million as compared to EUR 23 million as of end 2017. Of the EUR 28 million, also EUR 22.6 million were related to annual software sales and maintenance contracts as compared to EUR 18.7 million at the end of 2017. We should bear in mind that this cumulative amount of EUR 22.6 million on our balance sheet also reflects, to a very large extent, deferred operating profit.

And with that overview, I'll turn the call back to you, Peter.

Thank you, Johan. Please turn to Slide 13. In 2019, we intend to continue executing our backbone strategy, enabling a wide range of 3D printer applications with our standard horizontal backbone solutions, which include, as you know, Magics, Mimics and Materialise online and also empowering a more limited number of vertical 3D printer applications, such as our medical CMF and knee guide solutions and our eye and footwear projects. This strategy will require that we continue to gradually increase our expenditures in both sales and marketing and R&D.

In addition, with the funds raised last year, we have the means to supplement the base at which we can advance our strategy through acquisitions, joint ventures or other types of collaborations.

More particularly in 2019, our software segment will continue to roll out our Magics and Streamics suites globally and will concentrate its innovation efforts on functionalities that are particularly relevant for the production of end parts, such as our simulation and inspection modalities.

In 2019, our medical segment will continue to invest in the potential of our existing partnerships and products, including our planning solutions in both the orthopedic and CMF fields, while also gradually expanding our product offering into new fields, such as cardiovascular and pulmonology.

Finally, our manufacturing segment, which will continue to serve as the incubation center for new software solutions as well as for new vertical applications, will continue the gradual shift of our traditional business to our online platform. We'll also increase our marketing and sales efforts in metal end parts and will continue to push our eyewear initiatives forward. In summary, our goal is to continue to strike a good balance between revenue growth and an expansion of our profitability in 2019 even if the macroeconomic climate may become more difficult in the near future.

Against that background, I would now like to turn to our financial guidance for 2019, which you will find summarized on Slide 14. For fiscal '19, we expect to report consolidated revenue between EUR 196 million and EUR 204 million and an adjusted EBITDA between EUR 29 million and EUR 33 million. We also expect the amount of deferred revenue that Materialise generates from annual licenses and maintenance in 2019 to further increase by an amount between EUR 2 million and EUR 4 million.

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

(Operator Instructions) And our first question comes from Troy Jensen with Piper Jaffray.

Can you hear me?

Yes, we can hear you.

So can we focus a little bit on the 3D software. I guess that was one area that I was a little surprised. Sales are down year-over-year in the fourth quarter. I understand it might have been a tough comp there. But in 2018, you guys only grew the software business about 5%. So I'd just be curious if you talk a little bit about that market. Is it competition? Is it perpetual movement? Any insight would be helpful.

Yes, Troy. Let me maybe start by answering the question. And I am looking at Fried, and then he may further expand upon some of my comments. Indeed, Q4 of 2017 is a bit of an unfair comparison. As you remember, it was a stellar quarter for our software segment, also because we had lots of perpetuals sold that quarter, which resulted in an unexpectedly high recognized revenue for our software segment in the fourth quarter of 2017. In the fourth quarter of last year, 2018, we had a bit of a different mix, which many more subscription-based licenses sold -- annuals sold. As a result, less revenue recognized in that particular quarter, hence, the negative growth of 4%. But still, a growth of 5% of software sales overall. So that puts things a little bit more in perspective, I'd say.

A second element to your question that relates to the year-over-year comparison, I should add that what we feel is that quite a few printers are being sold, are basically repeat sales, which, and as you know, not every printer requires a Magics seat. Our Magics seats are sold on a per user basis. So in a number of instances, we feel that repeat sales to existing customers do not automatically result in the comparative number of Magics sales, hence, the somewhat lower growth of our overall software sales. I'm looking at Fried. Fried, I don't know whether you want to add something.

Well, I think you can say that this is a little bit of a testimonial of the change that is happening in the market where the use of 3D printing for prototyping, with a wide variety of new products being printed, is shifting to manufacturing where we see proportionally that the Magics share in our product mix is declining a bit and that products like Streamics and others that are supporting manufacturing operations are becoming more important, and these products are more directly sold then to OEMs.

I just had one more metric that Johan pointed out to me. If you look at overall year-over-year growth of our software sales, not our software revenues but software sales, it is still 10.2% 2018 overall compared to 2017. So that's still a solid number, I'd say, in spite of the comment that...

That is adding in the deferred, right, we're going to the 10% number.

Yes. Exactly.

How about if we just look at this guidance here. So the midpoint of 2019 calls for about 8% growth, lowest we've seen from you guys in a while. So can you just talk about the different businesses and kind of the growth rates here? I mean, manufacturing has been stuck at EUR 24 million for a while, and I get end parts are ramping, but prototype is declining there. So is the assumption that manufacturing is flattish, but we're going to get really good growth in medical and good growth in 3D printing? But the -- thoughts on that.

Troy, let me again start by taking the question. I'm looking through Skype at Fried; he may add something. But your comment is a good one. As you know, I mean, the ACTech, the very solid business of ACTech that was acquired last year, now makes part of our overall revenues. It basically represents EUR 43 million to EUR 44 million of overall revenues. And as we have always communicated to the market, this is a business that we do not expect to grow at the same pace as our overall business. So we have a EUR 40 million plus business in there that will grow at a significantly lower pace, and it's part of the manufacturing business. The growth from the ACTech acquisition actually will come through the growth of our metal parts 3D printing business, which is our historic business or our organic business.

Now if you carve out the slower-growing EUR 40 million plus business of ACTech, which is a solid business and contributes significantly to our EBITDA, but if you carve that out, then you will see that even at the lower end of the guidance for revenue growth that we provide, that will be in excess of the organic growth that we posted in 2017. And at the midpoint, we will come at double-digit growth. So it is indeed that the very solid and good ACTech business that we do not want to grow as such and that forms part of our manufacturing segment, that somewhat weighs on the overall percentage growth that we have guided for this year.

Okay. Understood. So Peter, to -- just to follow up a little bit. I only have one more after this. But you commented a couple of times about macro uncertainty. And it just seems like you -- I guess, I'd love to hear your thoughts. Is it mainly macro uncertainty in Europe? Or do you have kind of more global macro uncertainties?

Fried, take that question first. Yes.

Yes. So there is indeed as we experienced it, due to, yes, several evolutions in global politics and declining growth especially in the automotive sector. For instance, in China, we see that there is indeed pressure. We have in previous calls always been open about some difficulties we experienced in the European car manufacturing industry, of which we hoped that they would be over by the end of the year. Now the current uncertainty in the expectations of all of the European car manufacturers, I dare to say, are still influencing the demand in the European market in our opinion.

Okay. Very fair. And then on the positive, I mean, medical is just killing it right now, right. And congrats on all the success there. But I'd just be curious to know, how far along -- I mean, CMF and shoulders is still way early days, and we should we have this good, high double-digit growth rate in medical for some foreseeable future?

Well, that is certainly what we hope for. We see still an increasing demand in those segments. On the other hand, I also want to point to multiple new initiatives that we have in the pipeline and that will not be of impact this year, but that will contribute some costs, unfortunately, but that have large potential in the longer term.

And our next question comes from Weston Twigg with KeyBanc.

I actually wanted to spend a little more time on the macro trends, the risks that you mentioned. It does look like a pretty big question mark for 2019. So is there any additional color you can add, particularly around your manufacturing business and the trends you're seeing, maybe into the first half of 2019 and how do you think this plays out for the year? That would be really helpful.

Sure. Let me maybe start off with answering, Wes, and I may hand over back to Fried. As you know, part of our growth and a significant part of the potential of Materialise is in us empowering these new applications of 3D printing. And if there's uncertainty in the overall global economy, then this may impact the speed at which some of our partners will be willing to actually push those new innovative and risky applications forward. So in addition to, I mean, large sectors like automotive seeing some delays -- and there's delays in their sales, hence, impacting our manufacturing -- some of the more new, innovative initiatives that we are involved in may experience some further delay in pushing them forward just as a result of uncertainty, and that may be uncertainty in the European region because nobody really knowing what Brexit is going to have as an impact. And even though Brexit may have no impact on the innovative applications that we bring to the market, it still may cause an overall delay in some of the investments that some of our partners may make. So that is another reason why we are hinting to some of the macroeconomic uncertainties. Because we expect that it may lead to some delays in some of the initiatives that we are currently involved in. Difficult to judge, but better be careful than sorry.

Okay. That's helpful. I had a couple of other questions, too, if you would. You mentioned some higher costs this year to developing emerging opportunities that should ramp in medical but the revenue wouldn't really come until after 2019. Can you give us little more color, what -- just remind us what those opportunities are. And do you expect to see a nice revenue ramp in 2020? Or would it be sometime beyond 2020?

This relates mainly to the cardiovascular sector in the first place, where we are planning some product introductions during (inaudible). And indeed, if we announced those products in 2019 in the medical sector before we really ramp up to serious numbers, as it has been seen before with, for instance, our CMF developments, we just took 2 to 3 years, at least.

Okay. That's helpful. And then my last question was on OpEx this year. So you did talk about higher operating expenses. Can you give us an idea how OpEx might trend versus Q4 2018 levels?

Yes, we saw that we have an increase of 11% over the quarter of our operating expenses. We explained that a portion of that is also strengthening our organization, our control systems, our systems in general, in further strengthening our sales and marketing organization. As we have mentioned in the past and as it is our intention as well in the future, is that top line should increase at a higher pace than the operating expenses. And so we see this now in Q4 2018 that we expect to have the healthy structure of a higher top line and then lower growth in operating expenses, like we successfully have proven as well now this year in the medical segment, to work on -- and continue working on that for the entire organization.

Okay. So OpEx increasing, but at a lower rate than revenue through the year.

That's correct.

(Operator Instructions) And Our next question comes from Gregory Ramirez with Bryan Garnier.

More clarification, I would say, just on the OpEx because, yes, so you mentioned that there would be more sales and marketing. You had -- already had in Q4 last year for manufacturing, you found this very well for 2019 to continue to do so. And it's true that -- I think that Q4 last year was slightly below breakeven on manufacturing, excluding ACTech. So I was just wondering how these costs on the manufacturing division could evolve this year. And I think you mentioned at the last conference call that the medical segment, the operating margin, will stall a bit, probably I think it was 18% to 20%, I presume, something like this. Do we have to consider still this range? Or do we have to expect it would change? And just on software, I'm a bit surprised by the margin in Q4, which is, yes, declining significantly. Was it related to the (inaudible) products with receivables as well?

The margin for software, which was lower in Q4, has mainly been affected by the softer top line revenue. And there, again, we have been affected by the sales mix where we could not recognize all the sales invoice. You will see that the difference between 5% sales increase and 4.5% decrease of revenue is approximately an effect of EUR 1 million, but that is weighing immediately as well on our EBITDA line. So this is the major reason for the lower margin as well. When you talk about the nice percentages of EBITDA margin in metal, and if you ask how that will evolve in 2019, it is difficult because we don't give guidance on EBITDA margins individually by segment. We also announced, just to repeat what has been said in the call before as well, that we will anticipate to continue investing in future projects that may result in nice -- in additional income in the year after 2019, that may weigh a little as well on the EBITDA margin. So don't expect the same 24% as we have now reported for this quarter, unless we continue for manufacturing work and continuing working on efficiency gains. We also count on improving our margins in there as well. Now the guidance as a whole, as it has been explained by Peter, is reflecting the mix of the evolutions that we expect in the 3 different segments.

Thank you, ladies and gentlemen. This now concludes our Q&A for today's conference. I would now turn the call back over to Peter Leys for closing remarks.

Thank you, operator, and thank you all again for joining us for today's call. We think that 2019 that will be another good year for Materialise, and we look forward to giving you an update on our activities and strategic initiatives sometime shortly after the end of this running quarter. Thank you again and goodbye for now.

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