Stratasys Ltd (SSYS) 2021 Q1 法說會逐字稿

Hello, and welcome to the Stratasys Q1 2021 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Yonah Lloyd, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our 2021 first quarter financial results. On the call with us today are our Chief Executive Officer, Dr. Yoav Zeif; and our Chief Financial Officer, Lilach Payorski. I remind you that access to today's call, including the slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available and can be accessed through the Investor Relations section of our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys' annual report on Form 20-F for the 2020 year, which we filed with the SEC on March 1, 2021.

Please also refer to, a, our operating and financial review and prospects for the first quarter of 2021 as well as, b, the press release that announces our earnings for the first quarter of 2021, which were attached as exhibits to 2 separate reports on Form 6-K that we are furnishing to the SEC today. In order to obtain updated information throughout the year concerning our quarterly results of operations and the risks and other factors that most impact those results, please see the quarterly earnings press releases and our quarterly operating and financial review and prospects, each of which are attached as exhibits to reports on Form 6-K that we furnish to the SEC on a quarterly basis over the course of the year. Stratasys assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

As in previous quarters, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today's press release.

Now I would like to turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Thank you, Yonah. Good morning, everyone, and thank you for joining us. Today, I will touch on the highlights of the first quarter and share insights from a very exciting global event we held last week. At Stratasys, we are committed to being at the forefront of the polymer 3D printing market, producing and delivering the most innovative next-generation technologies that address the fastest-growing manufacturing applications. 3D printing is migrating from being primarily a prototyping tool to providing full-scale digital manufacturing platforms at mass production levels. Stratasys is leading this transformation with manufacturing applications in polymer, which we believe is a higher value opportunity than metal.

This year has gotten off to an exciting start for Stratasys. Last week, we hosted an unprecedented online event attended by over 4,500 customers, resellers and partners. At the event, we provided details on three new manufacturing focused product offering that will play an integral role in our future growth. We continue to be energized by the tremendous potential that our business and our industry has, especially in end-use part manufacturing. We expect this demand driver to produce compound annual growth of over 20% starting next year. We believe that our leadership position in 3D printing will strengthen as we execute on delivering current products while expanding and launching additional new products.

Turning to our results for the first quarter, our revenues of $134.2 million were in line with our previously stated outlook. We saw particular strength with nearly 41% growth in system revenues, which should drive future recurring revenue from consumables. Our operating cash flow was $22.8 million, following last quarter's $23.7 million.

During the first quarter, we achieved several important milestones to drive our strategy. We continued our focus on expanding the GrabCAD software platform with the launch of the GrabCAD Software Partner Program. This is an ecosystem of software providers integrating their offerings with Stratasys to provide our customers with end-to-end additive manufacturing solutions. The program will enable customers to expand on their prototyping and manufacturing workflow to better address the opportunities for 3D printing.

We also released the GrabCAD Connectivity Software Development Kit, SDK. This will enable developers and customers to integrate our technology in their factories and make them Industry 4.0 compatible. Our Connectivity SDK is a sophisticated 2-way communication platform. Our customers can monitor their fleet of Stratasys printers and also use enterprise software applications like MES or ERP to communicate back. In addition, we added the industry standard MTConnect communication protocol to more systems to support data exchange between manufacturing software applications used for monitoring and analytics. These recent software releases support our customers' increasing deployment of our additive manufacturing product to the production floor.

We introduced our J5 DentaJet 3D printer to serve the growing demand for dental solutions. It is the only multi-color, multi-material 3D printer, enabling technicians to load mixed trays of dental parts. It can produce 5x more dental parts on a single mix tray than any of our competitors' offerings in a compact, office friendly size. We have already started to see excellent customer traction, such as NEOLab in Massachusetts, which serves 3,000 orthodontics and dental clinics across the U.S. Our customers are impressed by the J5 ease of use, multiple models in one print, minimal post-processing and the fact that models go from concept to production faster than ever. The dental industry has been an early adopter of additive manufacturing for true production parts and is currently over a $1 billion opportunity for 3D printing.

We also introduced a new carbon fiber material for our award winning F123 Series 3D printer that is specifically formulated for applications such as tooling, jigs and fixtures. The strength and lightweight of carbon fiber make it an excellent replacement for metal across many applications. We acquired RPS, adding a top-quality product line of industrial stereolithography systems, complementing our portfolio to give us a full suite of polymer 3D printing solutions across the product lifecycle from concept and design to end-use parts. We continue to expect the acquisition to be slightly accretive to revenue and non-GAAP earnings per share by the end of 2021.

Our customers continue to validate our innovation and technological advances as evidenced by the recently signed contract extension and expansion with Airbus. The agreement significantly increases the range of cabin interior components and other parts. This is a perfect example of how Stratasys executes a land and expand strategy. The original agreement, signed over 5 years ago, only focused on parts for the Airbus A350 as an alternative to traditionally manufactured parts, increasing supply chain flexibility. Once Airbus started printing parts with our FDM technology, they soon progressed from a small number of alternate parts to using the technology for serial production at a much larger scale.

We were also able to provide on-demand part service through our Stratasys Direct Service bureau. The updated agreement increases the range of aircraft types to also include the A300, A320, A330 and the A340 as well as replacement and spare parts to MRO applications. Our additive manufacturing is now part of the typical interactions with procurement through standard supplier channels as a regular course of business.

As I mentioned earlier, last week at our manufacturing launch event, we announced 3 new product updates, which will strengthen our market-leading offerings and value potential that we bring to customers. The Stratasys Origin One. Best-in-class photopolymer 3D printer that received a top-to- bottom optimization upgrade to improve serviceability, performance and utilization. Key use cases include medical device components, automotive, aerospace, defense, consumer goods and dental applications such as prints, bridges, aligners and dentures. We also shared some great insights from Origin customers. Specifically, we highlighted TE Connectivity, a leader in connectors and sensor products. They are now printing thousands of parts using Origin P3 technology, including their first ever 3D printed aerospace production connector. We plan to begin shipping this upgraded version in the fourth quarter this year.

The H350, powered by selective absorption fusion, or SAF technology, and built for true thermoplastic mass production of consistently accurate end-use parts. Our Stratasys Direct Service bureau, as well as others in Europe, have already started producing parts on the H350 as beta users for customers in automotive, consumer goods and health care. We also introduced a renewable bio-based PA11 material that is derived from sustainable castor oil, which has superior thermal resistance and is less brittle than PA12. It is the first of many new polymer materials for the H series. And the H350 is even its own customer. A dozen parts on the system were actually printed with SAF technology. We plan to start shipping the H350 in the second half of the year.

The F770, designed with the longest fully-heated chamber in FDM. It is a large addition to our F123 product line with a 13 cubic foot build volume. Despite its size, it's designed to be as simple to use as our other popular F123 printers and is priced under $100,000. In addition to the heated build chamber, the soluble support is another important differentiator from most other large-format printers. This will save customers time and enable them to make more complex parts. We plan to begin shipping in late June.

We are on track to enter this next phase of product launches, which combined with our multiple competitive advantages, will advance our position as the leading provider of polymer 3D printing solutions for our world-class customer base. We have the broadest, most advanced polymer technologies that span the full product lifecycle from concept to end part. Our PolyJet and FDM systems have been the best-selling units in their class. And we have introduced new systems for both technologies this year with more to come.

Our recent RPS acquisition adds multipurpose stereolithography systems to our portfolio. And we are now entering true mass production with P3 and SAF technologies. No other company is both the range and the best-in-class innovation that Stratasys can deliver to our end markets.

Our software strategy, as discussed earlier, is based on the customer-centric dynamic of working closely with many OEM across the industry. We offer a unifying, comprehensive platform across our technologies that is built to interface with the top standard enterprise systems. Today, GrabCAD is 36,000 application users and 8.8 million community members, more than any other platform of its kind, and is at the heart of our cloud-based strategy and growing software ecosystem that includes partnership with Siemens, nTopology, Identify3D, Link3D, KeyShot and others.

Supporting our products, we have the leading global channel that can market, sell and maintain our system for our customers. Over the years, we have built an unmatched sales and service infrastructure with market access across a network of over 200 channel partners. This is the largest and most experienced channel in the industry. The success of these systems and technologies relies on the talented teams that build, manage and maintain them. These are the expert application engineers that educate the market and continue to push the innovation envelope each day as they work with customers to address an ever-expanding universe of applications. Stratasys has the largest team of engineers and customer support in our industry. They have deep, multidisciplinary experience, especially in quality and process certification, which is critical for success in aerospace, automotive, health care and other sectors.

And we have a proven resilient business model, designed to scale across a range of macroeconomic conditions, including our successful navigation of the COVID-19 pandemic. We believe that as our revenue growth accelerates, we can leverage our model and deliver increasing profits while continuing to generate cash. These key advantages, combined with the new technologies that we launch in the future, position Stratasys to deliver on our growth strategy. We expect that as our customer return to their production facilities, we'll benefit from the pent-up demand.

I will now turn the call over to Lilach, who will share the financial results of the quarter. Lilach?

Thank you, Yoav, and good morning, everyone. We are pleased to have delivered on our stated goals this quarter. The revenue growth, especially the 40.9% growth in our system sales, along with our strong cash generation, support our cautious optimism around the continuing economic recovery from COVID-19.

For the first quarter, total revenue was $134.2 million, in line with our previously disclosed outlook. On a constant currency basis, total revenue declined 1% versus the first quarter of 2020. Product revenue in the first quarter was $90.3 million, an increase of 8.6% compared to the same period last year or 6.1% on a constant currency basis. Within product revenue, system revenue increased 40.9% compared to the same period last year and increased 37.6% on a constant currency basis. This growth rate demonstrates signs of end market recovery compared to 2020, where system sales were lowest in the first quarter. This was due to the impact of COVID starting in the back half of the quarter when our sales are typically strongest. System sales began to improve by the end of Q2 last year. So while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year.

As we noted on our last call, consumable utilization is subject to the impact of COVID. This quarter, consumable revenue was up by 8% compared to the same period last year and was down 10.2% on a constant currency basis. As the market recovers from COVID and usage rates of our systems increase, we expect to see sequential growth in consumables build as we move through the balance of the year.

Service revenue was $43.9 million, down 11.8% compared to $49.7 million in the same period last year. On a constant currency basis, service revenue was up 13%. Within service revenue, customer support revenue was $27.6 million, a 2.2% decline compared to $28.3 million the same period last year and decrease of 4.3% on a constant currency basis. We continued to see softness in our part service bureau business, SDM, which has notable exposure to commercial aerospace, where COVID recovery has been slower than for other industries such as health care and education.

GAAP gross margin was 41.4% for the quarter compared to 45.0% for the same period last year. Non-GAAP gross margin was 46.7% for the quarter compared to 48.4% for the same period last year. The pressure on gross margin is due primarily to the lower proportion of consumable, increased logistic costs and lower SDM contribution. As a reminder, SDM has a relatively high percentage of fixed costs, so the lower revenue has an impact on gross margin. We believe that impact from the logistic issue, a well-known global situation, as well as the slower COVID recovery impact on consumables will remain for the near future. Given the ongoing uncertainty of these issues, we expect gross margin to remain at similar level throughout the year.

GAAP operating expenses were $73.9 million, an improvement of $5.9 million or 7.3% compared to the same period last year. Non-GAAP operating expenses were $65.2 million, an improvement of $7.5 million or 10.3% for the quarter as compared to the same period last year. Non-GAAP operating expenses was 48.6% of revenue for the quarter compared to 54.7% for the same period last year. The improvement in operating expenses was due primarily to the proactive resizing measures we took in the second quarter of 2020.

From an earnings perspective, GAAP operating loss for the quarter was $18.4 million compared to a loss of $19.9 million for the same period last year. Non-GAAP operating loss for the quarter was $2.6 million compared to a loss of $8.4 million for the same period last year. GAAP net loss for the quarter was $18.9, million or $0.32 per diluted share, compared to net loss of $21.7 million, or $0.40 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3.8 million, or $0.06 per diluted share, compared to net loss of $10.6 million, or $0.19 per diluted share in the same period last year.

We generate $22.8 million of cash from operations during the first quarter as compared to generating $11.3 million of cash in the same quarter last year. This was driven by strong collections and reduction in spending and inventory levels. During the quarter, we successfully raised growth capital of $230 million of gross profit and ended the quarter with $530.4 million in cash, cash equivalents and short-term deposits compared to $299.1 million at the end of 2020.

We have recently made strategic investments via acquisitions of Origin and RPS to help build out our product portfolio, and we continue to evaluate additional opportunities that will further accelerate our time to market and other key strategic initiatives. Last quarter, we provided our outlook for revenue growth in the second quarter and operating expenses for the full year, and we are reaffirming both.

For revenue, we still expect mid-teens percent growth for Q2, and we expect to see sequential growth in the back half of the year, with the fourth quarter being the strongest. OpEx for the full year include an increase of $25 million to $30 million compared to 2020, likely closer to the high end of the range. The increase is due primarily to the return to a 5-days work week and the cost associated with the recent acquisitions. Capital expenditures are projected to be in the range of $24 million to $30 million.

Looking ahead with our debt-free fortress balance sheet, we are well positioned to capitalize on value-enhancing market opportunities. We will continue to invest capital into strategic, high-growth area of our business, particularly around manufacturing. We're increasing customer demand, and a proven history of the high utilization should support substantial upside in revenue, earnings and cash flow in the coming years.

With that, let me turn the call back over to Yoav for closing remark. Yoav?

Thank you, Lilach. Our company is executing on our strategy to expand our leadership position in polymer 3D printing. The investments we have made to drive organic growth, coupled with the targeted and strategic acquisitions to enhance our end-to-end solution portfolio should result in value creation for our shareholders.

With that, let's open it up for questions. Operator?

(Operator Instructions) Our first question today is coming from Shannon Cross from Cross Research.

I just wanted to ask -- I guess I'll ask both questions. The first is with regard to product sales or system sales. Can you just provide a little more feedback to us on exactly who are buying? What's coming in? How much of this was pent-up demand versus new demand because of some of the products you've launched? And then with regard to consumable sales, given the mix of systems that you're selling, can you give us an idea of how long it will take to see some of the follow-on consumable sales and your confidence level in maybe usage rates on the products?

Some flavor on our system sales, I will start with that. We definitely saw hardware strength growth across all our platforms and region in the quarter. So there is no single product or customer that drove the favorable results. We really see it across all our -- across all our business. Definitely, this growth demonstrates signs of end market recovery compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID-19 starting in the back half of the quarter, where our sales are typically the strongest. So that's why basically you see a very strong, and this quarter demonstrates a recovery that we are happy to see here. Important to note the system growth will be the lead driver for growth in the year. With the introduction of the new product, consumable will follow. I would like to remind you that our new product will introduce more at the second part of the year and will make more of impact in Q4 as opposed to the first part of the year. But we, as I mentioned, very encouraged with the recovery sign that we saw already now and sure that consumable will follow. Another thing important to note that system sales began to improve by the end of Q2 last year. So while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year. But we do expect to see a notable growth during the year. Now I will address the consumable. The consumable, we're encouraged to see continuous recovery as we saw also in Q4, as also we saw in Q3. It's still below 2020 level. As a reminder, in Q1 2020, consumable and services were tracked relatively business as usual since COVID hit, start to hit most to the end of the quarter. So substantially, we had almost a full quarter as a comparison, unlike Q1 2021 where COVID still impact during the full quarter. As we are looking ahead for the year, we expect consumable to grow sequentially based on the trajectory of the macroeconomic with the expectation that consumptions will come back to pre-COVID level probably at the beginning of 2020.

2022.

2022, sorry.

Maybe just to add. Shannon, if you're on, maybe just to add. Overall, definitely, there is a pent-up -- definitely there is a pent-up demand. Very good to be in such a place because it's across all regions and platforms. Of course, there are some differences between different sectors. So commercial aerospace and government are slower to raise, mainly because of the commercial aerospace situation and the new administration in the U.S., but we see the recovery coming in the next quarter on the government side. And of course health care and dental, like we discussed before, are early to recover. And what is new in Q1 was that education really joined the health care and dental in terms of a fast recovery.

Next question today is coming from Troy Jensen from Lake Street Capital.

First one here for Yoav. If you look at results you have, Q1 was relatively in line with consensus. Q2 guide seems to be in line with consensus. If you continue that in the second half, you're going to have about 8% growth this year. But some of that's acquired from RPS and Origin. Some of that's going to come from the Xaar partnership. If you look at your marketing slides that you use, you talk about the industry as growing 20% to 25%. So I'm just curious, what's the real outlook here for FDM and PolyJet? And why aren't you guys growing faster than the industry if the core products are sustaining kind of that industry share and then you're adding new technologies into your portfolio?

As you know, we are not guiding the year, the overall year because of the uncertainty of the COVID. And we give just a very specific direction where we can commit and where we see -- where we have good visibility. So I can just repeat it. In general, what we are seeing is a sequential growth quarter-over-quarter. We see the pent-up demand. As we mentioned, we know exactly where we will be in terms of the OpEx, like Lilach mentioned. But overall, when you look on our NPI status, and we are delivering. We were with the J55. We launched the J5 Dental with very good traction in the market. We launched the carbon fiber. We are delivering. We have a structured plan, and we are delivering on it. We launched new products both on FDM and PolyJet. Put it together with the pent-up demand, we see a good -- take good market interest in those new products, which are really at the top of the line and the next generation, both in material jetting and in material extrusion. We are leading the industry in terms of the technology, there is no doubt. And we hear it from our customers. So just take both into your analysis, the fact that we have those new products, both on PolyJet and on FDM, to the fact that we have 3 new technologies that we are introducing at the second half of the year, and I guess you can do the math by yourself.

Okay. And just a follow-up for you, Yoav. Would you agree that Forts really hasn't had competition, specifically in ULTEM? And do you fear that there's competition coming now, given that the patents for the heated build chamber have expired?

I had a call -- just to share a call with a customer. I cannot reveal their name, but like the top 5 aerospace players in the world. And they told me -- and I'm quoting because I prepared myself for this call. They said, "You have the best machine out there in FDM. Just help us to make it a manufacturing machine." And that's what we are doing in terms of software, in terms of material, you mentioned all of them. It's clear that we have the best heated chamber in the market and also in terms of software material. But not less important, certification, regulation, allowables, all this full package that we are the only one who has it. So even if someone is coming with ULTEM, is still many years behind us in terms of certified into aerospace and automotive. And we are keep working. Our people are keep pushing on new patents, on new IP, on better heated chamber, on better processes, on regulation. And Airbus expansion is there. It's the perfect proof for it.

Our next question today is coming from David Mizrahi from Berenberg.

So I understand the higher operating expenses in 2021, but could you just speak to how you're thinking about some of that leverage moving into 2022? Do you have any goals you're talking to just with respect to those operating expenses?

So specifically, we are not providing a specific guidance in terms of 2022. But definitely, I can speak with you in the overall business model that we are anticipating. It's important to remember that as our revenue will grow with the new adoption of our new manufacturing based system, we expect to see higher profit -- higher profit, as we're going to have a higher profit pool, and we are planning to leverage scale on our operating model. We have in place already the infrastructure in corporate and in go-to-market to capture new technology without adding significant cost in the long term. And this is really our vision. This is our goal in 2022 and beyond 2023, we definitely will be able to see this leverage on the revenue.

Got it. Okay. And then can you just also comment on how the new printers will impact gross margins going forward? The H350, for example, I know it uses fewer consumables. So I'm just really curious about gross margin impact from the new printers and particularly sort of H350 and its competitive advantages relative to HP's Multi Jet Fusion, for example.

So we are now not specifically addressing the new product. Once we launch, we will speak more to that. But our vision, at the end of the day, that gross margin is -- we have a wide portfolio, and definitely it's a mix issue. Okay. So overall, it's a mix issue. But under manufacturing strategy, revenue will be significantly higher, driven by high consumption, which ultimately generates a higher profit, even if consumable margins may be lower at this model. Plus, we have designed for cost initiatives in place for the new product and for the existing product that we will address over time in the future, as we roll out those new products, focus on improving the cost as product will be more mature as part of the product lifecycle. This is something that we definitely are actively addressing.

Maybe just to add to Lilach. The systems are in line with our overall profitability we are living within our industry, although we are not giving gross margin guidelines, as you know. But I want to relate to the question about H350. We are very proud of the H350. It's really a step change in our industry in terms of mass manufacturing. So of course I'm not going to relate directly to HP, but I'm happy to share several advantages that the SAF has, the SAF technology, and do it very short. We have a whole list of advantages, but in a nutshell, I would say consistent accuracy. And I mean that we have the highest consistency of part accuracy. This is must in manufacturing. The second one, second advantage is full control of the printing process and parameters, which is super important because it enable fast certification of parts and materials, which is critical in manufacturing. Everything here is about manufacturing. And the third advantage is really very good economics because we are working with single fluid, we are having high powder reuse rate, and we have an exceptional nesting efficiency in terms of the load that you can put of parts in the cake. So really, it's an amazing machine. We have great plans around it, and we are going to reveal more and more material for this platform.

David, it's Yonah. Also, I would add this as well because you talk about the ability to manage against competition. Remember that we have a very large service bureau that's technology agnostic. And it includes HP, it includes EOS, it includes lots of systems from lots of companies. So as we're doing our own research and development for our own products, we're actually customers using other products. And it really informs our ability to make decisions to develop the best-in-class competitive systems out there.

Our next question today is coming from Noelle Dilts from Stifel.

I was hoping that you could expand a little bit on what the M&A pipeline looks like, and specifically, if you could speak to if there's been any -- how you're thinking about valuations for targets. Obviously, the multiples for a lot of the publicly listed companies have been volatile so far this year. Is that impacting target pricing at all?

I'll start -- I'll take a step back and start with what is really important. We have a laser-focused strategy. And everything that we are doing is subject to this strategy: focus, focus, focus. And also M&A. For us the strategy is polymer manufacturing, and we are actively looking for, I would say, responsible M&A opportunities like we did and execute in the past that will accelerate the implementation of this strategy. Title above everything. And there are many opportunities. And we are very attractive to many of the startups out there, like you saw our acquisition of Origin and also RPS because we have the infrastructure. And they want to succeed, and they want to make that they have -- they are growing their sales and they have the earnout in place. And we can commit for it because we have the infrastructure, and we have the machines to acquire and to integrate it into our system. So we are continuously looking for potential investments proactively, and we want to maximize the value for our company and the shareholders. And we look all over. We have a structured unit, the way we are working. And this unit is going and screening and scouting. And we are focusing on those technologies and companies that will accelerate our strategy in each one of our technologies. And we know exactly what is needed in the market, which is a great advantage, compared to anyone else who is looking out there in terms of financial investment or VCs. And we will keep doing this, and we'll keep doing it in a very disciplined way and create value through those acquisitions.

Okay. Great. And maybe just sticking with that theme. Obviously, still early days with Origin and RPS. But maybe could you expand upon how things are progressing so far in terms of how the market has received the deals, particularly Origin, and how things are trending relative to your initial expectations?

Great question. It's going really well. I don't know if you had the chance to participate in our manufacturing event. More than 4,500 high-end customers and partners participated there. A significant amount of them -- actually, I would say around 2/3 also participated in the breakout session of Origin. And all the guys were there. Like all the important companies from Fortune 100, and also the top similar Fortune 100 in Europe and in Asia participated. Tesla, Nike, Amazon, Apple, GM, Ford, you name it, Lockheed Martin, they were all there because they are interested in manufacturing, and we are bringing the full package for manufacturing. And that's why we created this team together with Origin, together with RPS. And if you participated, just to close the loop, all those customers so far that I just mentioned, the Tesla, the Apple, the Google, all those customers were there waiting for the Origin machines to be our systems, to be more precise, for the 770 and definitely for the H350 participating actively. And we are going to deliver them the full package for manufacturing. So we expect strong demand on those machines. And for me as a CEO, most importantly, I was very proud to see both in our press conference and also in our event that at the end, we were one team. Origin, H350, the Xaar joint venture and our FDM, you could see that this is the one team that is pushing forward our industry into manufacturing.

Our next question is coming from Greg Palm from Craig-Hallum Capital Group.

I guess a question on gross margin. Can you quantify the impact that you had from logistics? I'm just curious how that compares to what you said about SDM and mix overall. And if I heard you right, I don't think you're expecting any improvement this year. So even as revenue increases, at least in the second half, gross margin stays at similar levels. And so it almost implies that what you're seeing is worsening, because presumably, there's some level of overhead absorption in the second half. So just wanted to get a little bit more color there.

Specifically on the logistics, yes, we were impacted by the global logistic issue that you saw overall. We are not the only company who actually suffer from that. It's probably fair to assume that it's about 1% of our gross margin that's impacted due to those logistic costs. And as we mentioned on the call, we expect gross margin to stay at this level through the balance of 2021, given the uncertainty around the logistic -- high logistic cost and the consumable impacted by COVID. At the same time, I would like to mention that we are analyzing and increasing our inventory level of raw material and finished good to avoid delay, increasing production level and prepare for sea or air delay in our planning process. The most important thing for us is meeting the demand. We try -- we are evaluating a wider array of shipping option to ensure we can deliver goods with minimal business and cost impact. It's very, very important for us to address this.

Yes. Maybe I will just add to it. There is also some positive aspect. There are some positive aspects to the logistics side. So just to put the slip on the gross margin, gross margin is a combination of the logistics, the consumable mix and SDM. And logistics was quite a large problem there, and really, you can solve it by yourself. But those what really impacted our gross margin. And since there is uncertainty on the recovery on the consumables and the logistics, there is more control on the SDM side. That's why we are cautious with our projections on gross margin. But what is the positive aspect of this? What is the opportunity here? Supply chains are fragile. And it's not only because of COVID. They were fragile before COVID because of the trade wars and because of some barriers. And looking forward with the U.K., Europe, Brexit, we see more trade issues and Texas ice freeze. Then you saw the Suez Canal -- the Suez Canal blockage and the weather issues and so on and so forth. So, supply chains are fragile and are being disrupted. So it's clear to everybody that we need more resilient supply chains. By the way, we are facing the same issues. So we are also receiving some parts and machines through the Suez Canal. And we are exposed to the congestions in ports all over the world. 7 days, it's the average delay globally. And in some ports it could be 10 or 20 days. So no doubt, everybody understands that the future has to take into consideration digital inventory. This is a great solution. You have no shipping issues, no customs, no weather impact, no nothing. Instead of delivering from A to B across the Atlantic, you just deliver from A to A because you produce on the spot with digitally stored inventory. It's also an opportunity, that's what I'm trying to say. And this is practically what we call Industry 4.0.

Yes. No, it's a good point. I guess just as a follow-up because I'm still not entirely clear, because usually when you have a better volume in top line, you see better absorption and you see higher gross margin. So if the assumption is that volumes and top line revenue are going to increase solidly in the second half, yet gross margins are going to stay at the same level as Q1, it implies that something is worsening from what you saw here in the most recent quarter. So are you assuming that either mix or logistics or SDM worsens from here? Just something just doesn't add up, and I just want to make sure we're all clear on that.

Greg, basically, we are still conservative in terms of what we see currently. No one really, really know what's going to happen with the logistic constraint that we have. There are some publications even said that maybe it will take us to the end of the year. How severe it will be, also no one knows, okay? So we see prices that we knew in Q1 actually now even higher what we see in Q2. So prices will continue go high, so we believe the logistics situation and challenge all over will impact us significantly.

That's a great point. And also, the prices went really up more to the end, at least our prices of logistics, from China and from Israel went up more at the end of the quarter. So we are being cautious. But I want to make one thing very, very clear. It's all about mix, as we mentioned, and logistics and SDM. But overall, APS in general stayed at the same level.

ASPs.

Sorry, ASPs. So the average selling prices stayed more or less, in general, in the same ballpark, and the issue is not coming from there. This is very important to mention.

Our next question today is coming from Brian Drab from William Blair.

I was going to ask something that's kind of related to pricing as well, but specifically on consumables. You're down 10% organically year-over-year in consumables. But I would think customer activity would have increased materially year-over-year, given many of the service bureau's manufacturing design companies were shut down or at least slowed down materially last March. And also, if you compare it with first quarter of 2019, if you go back 2 years, consumables revenue's down about 15%, and product gross margin's down over 600 basis points since first quarter of 2019. So, there are a few things that can explain this. I don't know, is it lower utilization of your machines? Even though machine sales have been soft, there's more machines in the market than there were 2 years ago. So is it lower utilization of those machines going out to the market? Or are you lowering price in consumables? Or what is it?

Great question. You just answered it. It's lower utilization, definitely. It's not that all our customers are back. And even if they are back, they are not utilizing at the same level as pre-pandemic. Add to it the fact that there are some segments that really were heavily hitted by the pandemic and are slow to recover, mainly aerospace, and within aerospace, commercial aerospace. They've started to recover -- also automotive -- and we are highly focusing on those because those are the high-end segments that are buying our high-end machines. This is manufacturing. So we are more exposed, but I have no doubt that in the future we will see them coming back strongly, the utilization will go up, and consumable, as we said, will grow sequentially throughout the year.

Okay. And I guess, is it the same dynamic that's playing out in the system sales? Because that's a great result that system sales are up 40% year-over-year, but they were down 40% year-over-year last first quarter. And going down 40% and then back up 40% means you're still, on a 2-year stack basis, you're still down 15% in system sales from first quarter 2019 levels. Is that the same dynamic that you're just -- that it's going to take another year maybe to get back to 2019 levels?

So in general, yes. We don't know exactly when aerospace will be exactly in 2019. But what we can see is that hardware is, as you see, because of the deep decline in Q1 that we had in some areas of the world, we see this pent demand. And this pent demand is a sign for consumable because hardware is probably a phase or 2 phases before the consumable. So you can use the hardware in order to predict the demand for the consumables.

Our next question today is coming from Wamsi Mohan from Bank of America.

Yes. You did a capital raise last quarter. You're calling this as growth capital. You obviously already have a pretty strong balance sheet before that. So how should we think about maybe pace of either M&A or investments? Is this going to be at some level of accelerated pace versus even the last few years? Or how should we think about the relative pace of investments and M&A? If you could share any color on that, that'd be helpful.

We are sticking to our strategy and to the same concept that we mentioned 2 quarters ago. We have a strategy. Part of the strategy is a structured M&A proactive -- I would say proactive scouting and screening to make sure that we are bidding pipeline for M&A in a way that will maximize shareholders' value through synergies. And the synergies are very clear here. It has to be something that accelerates the strategy. It has to be something that either accelerated through technology or go-to-market or material or software. So we work on the workflow, which is the software and other type of workflow, or material or hardware technology. And we'll keep doing it in a disciplined way. We built an M&A team internally, and it's a very strong team. We are not rushed to do anything, but we do it in a very disciplined way to accelerate the strategy.

Okay. And you talk about this acceleration in revenue growth in 2022 and beyond. When you think about that in relation to maybe market growth, are you expecting to take share and grow it in excess of the market? And maybe if you could just talk about that growth acceleration coming between existing products and new products. I'm trying to isolate what is sort of a cyclical recovery that can drive an acceleration in 2022 versus a more secular sustainable recovery in that growth.

We are growing -- we are leading, but also in the future, we will lead the polymer manufacturing segment. We are leading additive manufacturing and polymer. This is the strategy. This is the target. And the way to do it is by making sure that we have the right match for every application. This is why we expanded our portfolio to 5 technologies. In each one of them, we believe we have the best-in-class technology. And you know, I'm already in this industry almost a year and a half now. I can tell you that it's quite simple. You need to have the best part, and this is scientific. You need to make sure that you have the best part properties, and we are work on it on each one of the technologies. We leverage it through our channel partners, and we are delivering to our customers. We focus on manufacturing a full package of hardware, software, material and services, and we package all of it in a seamless platform of software. This is the big advantage. This is something we heard from our customers. They want to have one supplier, and we will be this one supplier in polymer manufacturing. And as we said last quarter, we believe that our specific revenue will grow over 20% in this sector of additive manufacturing. So we are currently, as we said last quarter, in 2020, around 25% of our sales went to end-use parts. We are going to grow it in the mid-teens this year and 20% from next year onwards.

Our next question is coming from Ananda Baruah from Loop Capital Markets.

I guess just when you guys talk about -- Yoav, when you talk about the revenue acceleration beyond the 20%, seemingly starting kind of in 2022 going into 2023, can you share with us -- presumably, that would be sort of through most of the pent-up demand. Could you sort of share with us if that's the case, do you really think at that point the production systems are really driving the growth? And then if they are, do you yet have the qualifications in the key verticals, kind of aero and auto, that you would need for that? And if you don't have them, what do you think the difficulty level to getting there is?

So I want to be very clear. And I want to separate short-term catalysts and long-term catalysts here in the market. So we said, and again, just to clarify, that the part in our sale that is going for manufacturing, as we define it as end-use part, will grow mid-teens this year and above 20% from 2022 onwards. So this is the statement. Why we believe in it? Because first of all, there is some -- there are some catalysts and pent-up demand in the short term because of the recovery from the COVID, because of supply chain pressure, the people want to make sure that they are ensuring themself against it because of the entire environment that we see in the macroeconomic. This is one. And then which is more important, everybody is seeing the long-term trends that we are facing, which lead us to an inflection point in additive manufacturing. And this inflection point is underlined by, as I said before, by 3 very strong forces. One is the need to have responsive and versatile supply chain, this digital manufacturing that we've discussed so many times. The second very strong trend is the fact that additive manufacturing technology reached, I would say, new levels in terms of the ability to deliver and use part and mass production. So we were in the hundreds, maybe thousands. Now we are in the dozens of thousands and maybe hundreds of thousands, and you saw in the case of the nasal swabs that we even printed millions. So it's a different era in additive manufacturing. And add to it the third very strong trend, which is the whole industry trends that you have those new segments like electric vehicle, a new type of aerospace solution where polymer and composites are so important for the type of the part, for the complexity of the part, but also for the need for customization and short series of production. So it's a new era. It leads us to manufacturing. Being in manufacturing, it's a whole new story. Because in manufacturing, it's about new applications, it's about new materials. It's about very strong and solid service because you cannot allow yourself downtime. And not less important, you need software. You need software in order to be connected to the manufacturing system, the MES, the ERP, the PLM, you need to be there. And you need to put all this in one package connected. So connectivity is also very important. And we have relationships with those blue chip customers, Fortune 100 customers that are leading this transformation. And those OEMs are working with us to transform the industry. And you know, it gives us the confidence that we are in the right direction, because at the end, we are not working in a vacuum, but we are working with our customers to take this industry into manufacturing.

That's super helpful, Yoav. I really appreciate it. That's really great context, by the way. Thanks for that. And just a quick follow-up to that. It sounds like you have like at least a good amount of the capability in place today. So you just referenced your ability to do production parts at volume, serial production parts at volume. And I like that you're sticking your neck out and giving the growth context. So thanks for that. This is fluid. How much of sort of the capability -- you've mentioned software, M&A, et cetera, workflow. How much of the capability do you think you need to get to, putting together solutions, software services, like you said, putting into one package. How challenging is that over the next, call it, 4 to 8 quarters to get to where you want to be, where your production customers are saying they want you to be able to really inflect that growth? I know that's a lot, but I think the context would be helpful. And that's it for me.

Another great question. We have currently the internal capabilities to deliver our strategy. Having said that, it's also clear to us that we can accelerate it. So the focus is on acceleration, not on enabling, because we can do it. But this is a great place to be when you are looking for M&A, because you are coming from a place where you have the certainty that you are good with the alternatives. We are not depending on anyone to execute our strategy. We have many that can help us to accelerate.

That's great.

We reached the end of our question-and-answer Session. I'd like to turn the floor back over to Yoav for any further or closing comments.

Thank you. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.