Stratasys Ltd (SSYS) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Stratasys' Third Quarter 2020 Financial Results Conference. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Yonah Lloyd, Vice President of Investor Relations. Thank you, sir. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us to discuss our 2020 third quarter financial results. On the call with us today are our CEO, Yoav Zeif; and our CFO, Lilach Payorski. I remind you that access to today's call, including the prepared 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 2019 year as well as Stratasys' reports on Form 6-K that we are furnishing to the SEC today, including the related press release concerning our earnings for the third quarter of 2020 and our operating and financial review and prospects, which are attached as exhibits to those reports on Form 6-K. 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 CEO, Yoav Zeif. Yoav?

Thank you, Yonah. Good morning, everyone, and thank you for joining today's call. I wish to first take a moment to recognize the hard work and dedication of our entire Stratasys team, helping our company navigate through the challenging economic environment caused by COVID-19. We continue to proactively ensure the health and safety of our employees, support our customers and assist the communities around us worldwide. We were pleased to see sequential improvement in both our top and bottom lines for this quarter, a positive trend that we expect to continue in the fourth quarter as well, reflecting what we believe is the beginning of a recovery from the pandemic. We were encouraged by the improved sales of hardware and consumables in government, specifically its aerospace sector as well as health care and education.

On our last call, we shared our new strategy with you and how it will drive our actions going forward. We are laser-focused on leading the polymer 3D printing market, the largest value pool in additive manufacturing. Our execution plan is based on delivering the most innovative next-gen technologies to address the fastest-growing and most transformative manufacturing applications, while leveraging the strongest go-to-market infrastructure in our industry.

This is the beginning of the new era of execution at Stratasys, led by an experienced board and management team and an organization better aligned to support our strategic objectives. To maximize the investment in our resources, we have streamlined the organization to support the specific sectors that we serve. Design, engineering, manufacturing of factory tooling, production of end-use parts and health care. Last quarter, we announced a number of cost mitigation efforts to help offset the impact of COVID-19. I'm happy to say that we have implemented them successfully to achieve our savings goals.

This past quarter, we enhanced our executive team by hiring a new COO and CPO, Chief People Officer, and internally promoting a CTO. We are also making good progress in our search for a Chief Marketing Officer. As part of our focus on the manufacturing space, we look forward to welcoming a new board member, Michael Schöellhorn, the COO of Airbus, who was nominated for election at our Annual Shareholders Meeting taking place later this month. We are excited to work with Michael on advancing the execution of our strategy across all manufacturing industries. I'm confident we are building an excellent leadership team with the experience and proven capabilities to enable us to achieve our goals.

Our strategic objective is to be first choice in polymer additive manufacturing. With the broadest range of solutions, addressing the leading applications and positioning both Stratasys and our customers for success. At the heart of our strategy is innovation. Our polymer technology road map includes major upgrades to our own FDM and PolyJet lines as well as expanding our portfolio with manufacturing-focused platforms that will generate incremental revenue.

Our joint venture with Xaar will add what we believe is the best powder bed fusion system in the industry, and this is planned for launch next year. We are also considering inorganic, best-in-class technology opportunities to help complete the full range of polymer addressable markets. These near and mid-term growth catalysts with be powered by GrabCAD, our technology-agnostic software platform, and brought to market via industry-specific application expertise and the largest go-to-market ecosystem. We envision that these next-gen technologies will allow us to offer customers end-to-end digital manufacturing, everything from design through production and aftermarket parts will be seamlessly digital, geographically adaptable and incredibly fast and robust, designed for Industry 4.0 integration.

A good example of our manufacturing capabilities is our continued penetration into aerospace applications. The U.S. Air Force recently hosted its first Advanced Manufacturing Olympics. This event was followed by multiple branches of the military and many of their top suppliers. We are very proud that our Stratasys team won 2 silver medals. One was for developing a supply chain strategy that uses 3D printing to support field operations, leveraging our Stratasys Direct Manufacturing logistics experience. The other was for designing a 3D printed hydro-clamp for the F-16 fighter jet. We used our advanced Antero material for the clamp, which is installed on the hydraulic line in the landing gear wheel well. Strategies was also featured when another winning team used our Antero technology for production of a part that was installed and flown on an F-16 at the event to demonstrate its potential.

Additionally, Boeing recently added our Antero 800NA thermoplastic to its qualified product list. After an extensive evaluation of the material performance, Boeing recognizes the utility of 3D printing with Antero to meet applications that were not previously possible. It gives Boeing the opportunity to extend additive manufacturing into many more on-aircraft use cases. These are outstanding examples of our polymer manufacturing leadership strategy in action, further elevating our reputation for high-quality additive solutions as we continue to build our business relationship with leading aerospace and defense organizations. I look forward to updating you on further progress in the execution of our strategy.

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. Total revenue in the third quarter was $127.9 million compared to $157.5 million for the same period last year, a decline of 18.8% due to the pandemic. However, this is an 8.8% sequential growth from Q2 and represents a marked improvement from last quarter's 27.9% year-over-year decline. We view these results as an indication of an initial recovery in the broader market from the impact of COVID-19.

GAAP operating loss for the quarter was $404.3 million compared to an operating loss of $6 million for the same period last year. During the third quarter, we took a noncash goodwill impairment charge of $386.2 million or $7.01 per share, related to our Stratasys-Objet reporting unit. This unit specifically covers the FDM and PolyJet technologies. The charge is primarily the result of COVID-19 and its impact on the fair value of Stratasys-Objet reporting unit.

Non-GAAP operating loss for the quarter was $1 million compared to operating income of $8.1 million for the same period last year. GAAP net loss for the quarter was $405.1 million or $7.35 per diluted share compared to net loss of $6.9 million or $0.13 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3 million or $0.05 per diluted share compared to non-GAAP net income of $6.3 million or $0.12 per diluted share reported for the same period last year.

Product revenue in the third quarter was $83.5 million, a decrease of 21.4% compared to the same period last year. Within product revenue, system revenue decreased 20.8% compared to the same period last year. Consumable revenue decreased by 22% compared to the same period last year.

Services revenue was $44.3 million, a decrease of 13.2% compared to the same period last year. Within services revenue, customer support revenue decreased by 1.6% compared to the same period last year.

We are now almost halfway through the fourth quarter. And while there are still uncertainties about the pace of COVID-19 recovery, we currently expect to see sequential revenue growth of about 5% to 7%.

GAAP gross margin was 38.9% for the quarter compared to 49.2% for the same period last year. Non-GAAP gross margin was 46.8% for the quarter compared to 52.4% for the same period last year. GAAP gross margin improved sequentially from Q2 by 170 basis points, offset by the intangible asset impairment. Non-GAAP gross margin improved by 140 basis points, primarily due to a greater percentage of consumables in the sales mix.

Gross margin was below our historical range due to the impact of COVID-19, which reduced the share of hardware consumables in the overall sales mix as well as lower revenues and production levels resulting in operation inefficiency during the quarter. We believe that gross margins will continue to improve as and when our customers return to their pre-COVID utilization level.

GAAP operating expenses were $454.1 million, an increase of 444.7% compared to the same period last year. Non-GAAP operating expenses decreased by 18.3% to $60.8 million for the quarter as compared to the same period last year. GAAP operating expense, excluding goodwill impairment, was 53.1% of revenue for the quarter compared to 53% for the same period last year. Non-GAAP operating expense was 47.6% of revenue for the quarter compared to 47.2% for the same period last year.

The reduction in OpEx was driven primarily by the resizing measure we took in Q2. We also continued the cost mitigation related to COVID-19. The entire company is working at an effective 4 days' work week with many employees working from home. There has been minimal travel, no trade show booth and other reductions. These measures are still in place, and we will continue to evaluate them as needed.

We generated $2.6 million of cash from operations during the third quarter as compared to using $8.6 million of cash in the same quarter last year. Cash generation demonstrates the health of our business, which is notable during this challenging time. We ended the quarter with $308.2 million in cash, cash equivalents and short-term deposits compared to $313 million at the end of the second quarter of 2020. We believe that we are well positioned to navigate the COVID-19 pandemic given our strong balance sheet with no debt, while focusing on cost control and cash generation.

I would like now to turn the call back to Yoav.

Thank you, Lilach. This is an exciting time for the 3D printing industry and for Stratasys. We believe that our innovations of today will drive competitive production advantages for the factories of tomorrow. At Stratasys, we are committed to leading this meaningful change. As we prepare to bring several next-generation manufacturing technologies to market, we are confident we will achieve our objective to be the first choice for polymer production across aero, auto, dental, healthcare and all of our end markets, resulting in growth and value creation for our customers and shareholders.

Thank you, operator, you may please open the call for questions.

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

I was curious with Formnext on right now and it's virtual. How much sales and product launches in that -- so you -- the industry and your company specifically typically do? And I guess, how are we supposed to think about opportunities around some of these trade shows given the virtual format? Is it less sales and more education? Just wondering how things have shifted from that perspective.

Shannon, it's a bit early to say as the impact of Formnext, but we are all geared to lead this exhibition, even if it's virtual, as we are leaders in this industry. We have a digital booth. We have a whole series of Webinars and we are doing many activities. I don't see any impact on our new product introduction activity. On the contrary, we get more leads, more interactions, thats the new world we are working in. And definitely, we will have -- we keep supporting the J55 that we have just launched and we get very solid traction for the market with the pipeline. We'll have the Xaar powder bed fusion next year. And Formnext is a good start to get people acquaintance with our great offering and focus on polymers.

Okay. And then, I guess, just a quick question on goodwill, and then I'll get back in the queue. I'm curious what drove the write-down, I guess. If it was COVID related, one would think that this will reverse at some point. So I'm just interested since you basically taken all the goodwill off of your balance sheet at this point in time.

Shannon, yes, you're right. The main driver for the reduction in goodwill was COVID related, given the expected long-term impact of COVID, but it's probably not going to be a short term and a big V-shape recovery based on industry research. Everyone speaks about that it will take more than 2 years to come back to pre-COVID-19 level. The impact on the projection of this technology was very significant, and this is the main reason why we took the goodwill down.

So I guess, does this -- I'm just trying to understand from your company's perspective, is this -- are you basically saying you expect to see significant pressure? Or was this more sort of an accounting treatment decision? Just how should we think about this in relation to how you're thinking about the opportunity of maybe over the next couple of years?

Shannon, this goal is mainly related to the FDM and PolyJet technology. This goodwill impairment does not mean that we do not expect any significant long-term growth based on our strategy, and we are expanding our portfolio with the new technologies. So we definitely expect to see growth. Also within FDM and PolyJet, we do expect to see growth. But given that COVID impacts significantly the -- I would say, short term between 2 to 3 years, it will take time to go back to, hopefully, 2019 level. The entire projection is - we well went down, and you start with much lower base. We do expect to see growth, but it will take time. It was not going to be immediate V-shaped recovery as being expected, not just in our business, across the entire economic projection.

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

Your consumables revenues saw a 15% quarter-on-quarter increase, but your competitors saw consumables almost double. I was wondering, just given that the consumables is an installed base business and as the economy reopens, you saw some pretty good sequentials in auto and industrial end markets in terms of their own productions and their manufacturing. I would have expected a slightly sharper rebound in materials usage. Can you maybe share some thoughts around that? And I have a follow-up.

I will be happy to share our perspective. So we see a rebound. But we, in general, have a very broad base of customers. We have the largest installed base in the industry. And this is an advantage when we have many customers, but when you have many customers, you move with the economy because you're kind of a sample of the economy. Other players in the industry, without relating to specific players, have a more concentrated installed base. And then if one of the customers is rebounding more strongly, like in dental, and also our dental customers rebound more strongly, then you see a stronger rebound or a stronger increase -- sequential increase. But that's only a matter of time because the fact that we are not having concentrated customers means that we will keep growing, and we have a more diverse and more secure and a more safe offering and installed base.

Okay. And as my follow-up, you shared some really nice wins here at U.S. Air Force and Boeing. How large do you see these opportunities for Stratasys? And more broadly, can you give us some sense of how large aerospace revenues are for you today? And what do you think they can be over the next few years?

So I can talk generally about aerospace, but we don't share specifics. But I hope it will be a good direction. So aerospace and auto for us are the leading industries. We believe that within those 2 industries, because they are so advanced, because the advantage additive manufacturing has, both in terms of supply chain, but not less important in terms of the mechanical properties of the part, our innovation, it's like paving the way into real use of additive manufacturing as a production tool in those industries.

And as towards the fact the trends that exist in terms of footprint -- environmental footprint in terms of the need to have lighter parts, electronic vehicles, those trends will support additive manufacturing, and we have the best position in those 2 industries. By far, the best position and with the new technologies and with the new system of hardware, software, material and service, we believe we will be -- we are the leader, and we will be the leader when those industries will take off and we'll start using additive manufacturing for ongoing production of mid-small series of production.

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

As it relates to the quarter, that stood out from an end market or geographic standpoint, maybe what outperformed relative to your expectations? Anything that was a bit softer? Any color you can provide?

So, of course, as you understand that the recovery is not distributed equally across different segments. So I can say, geographically, the pandemic started in the East, but the East is recovering faster than the western world. That's on geographical aspect. On the segment side of it, it's clear that government is recovering, education is recovering as we wrote government, especially the aerospace of government is recovering faster. Health care is recovering much faster than the other segments, which is natural because there was a stop in the second quarter. And the aerospace and the auto, we see signs, but it's a slower recovery.

Okay. Yes. That's helpful. And then as it relates to the guidance for Q4, the 5% to 7% sequential increase, are you baking in any sort of assumptions for year-end spending flush in there? I mean is the guidance based on what you've seen so far in the quarter? Maybe you can give us a little bit more color on how you got to that number specifically.

Greg, yes, it's true. We are depending our growth assumption on the traditional - our quarter in Q4 because of the year-end spending that companies are -- have traditionally. And so it will come from that. We're also encouraged by the initial signs of recovery we saw in Q3, and we hope that we will see similar, if not, better recovery in Q4. We see companies are basically learning to live with COVID-19 and coming back to work with COVID-19 situation. So we expect to see some recovery coming from that. We're also going to rely on our NPI ability, J55 beginning to add more revenue to our pool. But at the same time, we are cautiously optimistic regarding the recovery. There is a lockdown in various aspects of the world, and it really much vary and change. But we are confident that we probably will be able to demonstrate 5% to 7% growth.

Our next question is coming from Kenneth Vallace of Berenberg.

I wanted to kind of get into the product launches a little bit here, particularly the powder bed fusion printer. Just kind of wondering if you could offer a little color around how that product might be differentiated. What the market opportunity may look like? Will there be kind of new use cases with this printer relative to kind of your legacy business, perhaps new end markets? Just any color there would be really helpful.

So powder bed fusion -- by the way, Ken, thank you for asking. Powder bed fusion is what we believe our first step into production, which is a larger volume series of production. And this technology already exists, but we are going to come with something which is better, a different aspect of the technology, mainly around the part quality and the ability to use it for a long time with reliability because it's manufacturing, it's production. And we are very proud of what we are achieving currently with the initial results and the initial part. But bottom line, it's about quality. It's about quality with a very good cost per part.

And this -- as I said, this powder bed fusion is only one catalyst for a whole set of catalysts that we have in our pocket. So if I go one by one, we have growth catalysts on 3 different horizons. For the here and now, for the short and midterm and for the long term. And those growth catalysts that we have are mainly now -- here and now. It's about the recovery from the COVID-19 based on the fact that we have the largest installed base in the industry. If our customers are coming back to work, we are growing. That's the very short-term, immediate-term catalyst here and now.

Then if you look at the mid, short term, it's clear that the whole economic system, but mainly our production and manufacturing customers, they stopped practically many of their product development. And they are facing delays of 9 to 12 months in the product line cycle of developing new products. And there is no better and quicker way to close this gap than additive manufacturing because we are shortening this product cycle by months, and it's amazing what you can do with additive manufacturing versus the traditional approach. So this is the, I would say, the mid -- the short midterm plus the NPI that will fuse it and powder bed fusion is only one of them.

And in the long term, we are sitting or being supported with a tailwind of a very strong growth rate of around 20%, 25% of the industry. And this strong growth rate is fueled primarily by the shift to manufacturing. And our strategy is to go to manufacturing and to introduce best-in-class technologies and system to manufacturing.

So just to summarize, in the immediate term, we'll enjoy the recovery in our installed base. In the short term, we will enjoy the need to catch up on the production or the product development life cycle. And in the long term, we'll enjoy the tailwind of moving and shifting to manufacturing. And within manufacturing, we will lead the shift of polymers.

Great. And then just kind of a follow-up here. The partnership with, I believe, nTopology last week or maybe as early this week on kind of tooling applications. Can you perhaps speak to the FDM business and kind of how penetrated in your view the opportunity is in tooling applications? And kind of would you categorize, if you could, sales linked to tooling in FDM? Is it kind of an accelerating business, kind of more steady growth? Is it kind of flat year in, year out? And could we see this partnership perhaps accelerate adoption of your technologies in tooling applications?

Thank you. Great question. So I think there are 2 aspects here that I would like to a bit elaborate on this. One is the FDM. FDM is the most prominent, the biggest technology, very promising one in polymers. And we are the leader there, by far, the leader. But we also understand that in order to keep leading, we need to take FDM into a real reliable manufacturing machine. And we are talking manufacturing, it has 2 use cases. One is the manufacturing of tooling. And the other is the manufacturing of, I would say, short series of production.

And for tooling, by the way also for production, but also for tooling, this cooperation with nTopology is a great example because we understand that we need to bring a whole solution to our customers. And the whole solution means also the ability to really better understand the part and what is the most -- how to optimize the creation or the production of the parts and nTopology is a great example of how we can cooperate, bringing the best software understanding and analysis with the best machine plus material. And really, and you saw that, together with them, we won the prizes in the Air Force Olympics.

But just to sum up, FDM is very promising. We are leading there. We will focus both on manufacturing tooling. But in the near future, actually starting already in aerospace, in production, real production of end-use parts. And our long-term strategy is to create in software what we call an ecosystem that will support our full solution. So you will see more and more cooperation that we will leverage in order to bring the best solution -- the best polymer solution to our customers.

Our next question is coming from Jim Ricchiuti of Needham & Company.

With respect to the Q4 guidance, if I think of your revenues, say, at the midpoint of that guidance, is there any reason why you wouldn't see gross margins at or above your Q1 level just given some of the cost actions you've taken because that would put you above where you were at Q1.

From gross margin -- do you hear me well? Yes, I think so. Jim, from gross margin, we expect to have a relatively flat to slightly higher gross margin in Q4 compared to Q3. The reason why we are not expecting to see that significant increase in gross margin is because we still have a relatively significant high inventory level and our production activities are still very low. So we -- and we will be challenged by fixed production costs. It's not something that we can easily address immediately. With not that much flexibility, but we're definitely addressing this more to the long-term perspective.

And as you think about those inventory levels that have been built up, what is your sense as you exit the year in terms of should we start to see -- if we see the revenue, the activity within the customer base continuing to improve? Should that be past you as you enter '21?

It's too early to assess. But I believe that it's not going to be an immediate change after one quarter. It will take a few more quarters to get to the right level of inventory, optimize our regular production level in optimization wing.

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

I've just been doing some thinking about some of the comments you made on the last call, in the second quarter call related to your strategy -- longer-term strategy and how FDM and PolyJet as the 2 core technologies that you have now account for only about 1/3 of the additive market for polymers. And the growth rate slowed in those applications and talking about the faster-growing applications are going to require these other technologies that suit that need better, to use your words. So I guess we're talking about SLA and powder bed fusion.

And I just wonder if you can talk more about why those are better suited -- number one, why those are better suited than your current technologies to lead to growth in the future?

And secondly, how is Xaar different from other technologies? I think it would be helpful for people to get -- better understand why is that different from other technologies out there, like, say, from EOS?

And third, what is the strategy for SLA? Because I know you introduced an SLA machine, of course, last year. And I'm wondering, is the strategy in SLA now organic or inorganic? I know there's a lot of questions there. I'll just leave it there.

Brian, great questions. So I'll go one by one. First of all, PolyJet and FDM, our core technologies, and we built our entire knowledge of polymer chemistry based on them and we are the leader in both technologies, just to make sure that we are starting from the same page. And in both those technologies, we'll grow. But by definition, PolyJet is a rapid prototyping technology. The best rapid prototyping technology because it's full color, and you get the best part. But it's still, we need to educate the market to adopt it because most of the market is still single material, and we have the multi-material capabilities and the color capabilities. And actually, we invented it. And I believe that there is a long runway also for PolyJet.

If we look at FDM, I already related to this. FDM is one of the best technologies, mainly to aerospace, and we are going to focus on engineering, on manufacturing of tools, that's what we call jigs and fixtures tooling. And on manufacturing, high-end parts because the mechanical properties are very good with composite with our machines, and we focus on those 3 segments. So engineers with FDM, high-end prototyping with functionality on tooling jigs and fixtures. And the third segment is manufacturing, mainly aerospace and auto, where you need the good mechanical parts and lightweight. So this is FDM, still long runway to develop it and to make it a manufacturing machine. And that's what we are doing in our pipeline. That's the upgrade that we mentioned.

Now if I look at longer series of production, on production, on manufacturing, powder bed fusion and VAT has clear advantages on the mechanical properties, on the speed and the cost per part, because it's a production machine. And therefore, we decided to get into powder bed fusion. As I already mentioned, it's a unique powder bed fusion because we believe we will have the best part quality in the industry.

And on SLA, I would relate it as a VAT, in general, and we believe that there are clear applications that VAT is the most suitable solution for them, like, for example, molds, like a specific part, for example, also in aero, for example, where you need part that is more, it's not -- the weight is not so important, but the strength is more important. And those specific applications, this is the whole story of the strategy. We want to make sure that in polymer, we are covering all applications. And we'll go application by application to make sure that we are bringing the full solution to our customers. That's the story. I hope that answered your questions.

That's really helpful. Are you leaning more? It is super helpful? Are you leaning more toward organically going -- building SLA or inorganically? And then I'll leave it there.

We are examining both pathways.

At this time, I'm showing no further questions in queue. I'd like to turn the floor back over to management for any closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.