Stratasys Ltd. (NASDAQ:SSYS) Q4 2023 Earnings Call Transcript March 7, 2024
Stratasys Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to today’s conference to discuss Stratasys’ Fourth Quarter and Full Year 2023 Financial Results. My name is Kevin and I’ll be your operator for today’s call. A question-and-answer session will follow the formal presentation. [Operator Instructions]. And now, I’d like to turn the call over to Yonah Lloyd, Chief Communications Officer and Vice President Investor Relations for Stratasys. Mr. Lloyd, please go ahead.
Yonah Lloyd : Good morning, everyone, and thank you for joining us to discuss our 2023 fourth quarter and full year financial results. On the call with us today are our CEO, Dr. Yoav Zeif, and our CFO, Eitan Zamir. I would like to 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 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 reports on Form 20-F for the 2022 year and for the 2023 year, the latter of which will be filed with the SEC in the coming few days. Please also refer to our operating and financial review and prospects for 2022 and 2023, which are included as Item 5 of our annual reports on Form 20-F for 2022 and 2023. Please also see the press release that announces our earnings for the fourth quarter of 2023, which is attached as Exhibit 99.1 to a report on Form 6-K that we are furnishing to the SEC today.
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-GAP to GAAP reconciliations are provided in tables in our slide presentation and today’s press release. I will now turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav.
Yoav Zeif : Thank you, Yonah. Good morning, everyone, and thank you for joining us. In the fourth quarter, we once again demonstrated that the diversity of our offerings and the strength of our go-to-market operations can deliver profitable results. We achieved these results in what has continued to be a CapEx constrained environment for our customers and a challenging chapter for our industry. I am particularly pleased to report that we delivered another record quarter of consumables revenue, a testament to strong usage of our systems. We also achieved our 10th consecutive quarter of profitability on an adjusted basis, which reflects the discipline of our business model that differentiates us in our sector. Stratasys is laying the foundation for meaningful use cases that will significantly contribute to our financial performance.
Our suite of offerings features best-in-class technologies that allow our customers to advance the use of additive manufacturing and increasingly broaden applications into manufacturing at scale. As our Neo branding states, we make additive work for our customers, and we see that playing out every day, whether it is the strong utilization of systems they purchased from us in the past, or in the continued high level of engagement we see today for Neo systems, incorporating cutting-edge technologies. As the macro business environment continues to improve and capital spending patterns return to normal, we expect the pent-up demand to re-accelerate growth, particularly in our system sales. We delivered solid revenues in 2023 of $628 million, down 3.7% versus 2022, but up 1.3% after excluding the MakerBot divestiture and the two businesses we divested from our Stratasys Direct Service Bureau, showing remarkable resilience against a severely CapEx constrained environment for our customers.
We improved our gross margin for the year, despite the modest change in revenues, reflecting our focus on cost controls and operating efficiencies, and we delivered $0.11 in adjusted EPS in 2023. We are confident that as our Neo technologies ramp and our operational efficiencies continue, gross margins and profitability will strengthen in 2024 and beyond. We continue to maintain a healthy balance sheet that provides stability through challenging times, and optionality to support our growth through both organic investment and accretive acquisition opportunities. And as we shared each year, in 2023 we generated 34% of our revenues from manufacturing, up from 32.5% in 2022. We expect to see this metric grow stronger as global business conditions improve, to a point where the majority of our business will come from end-part manufacturing at scale.
Now, let me touch on some of our success stories for the quarter, starting with our industrial business. 35 years ago, our Founder, Scott Crump, invented FDM 3D Printing, which remains by far the industry most popular technology. Since its introduction, Stratasys has consistently been the leader for industrial FDM manufacturing. And in the fourth quarter, we brought another major technology innovation to market with the F3300 printer. Our first FDM Printer on a platform designed to support scalable production. The F3300 doubled the speed of existing technology with greater reliability and operating efficiency, while being geared toward manufacturing at higher volumes. We worked closely with our customers for several years to deliver this Neo system and are proud that Toyota is our first customer.
The F3300 can be used for production of parts, fixtures and prototyping applications to help bring Neo products to market faster. Our F3300 pipeline is strong, with accelerating interest and engagement levels, and we look forward to sharing more customer wins. Also in automotive, we recently launched an initiative to help Daimler Truck North America, produce more manufacturing support parts and functional prototypes by adding our H350 system, paired with GrabCAD Print Pro, to their existing portfolio of Stratasys printers. Daimler expects to see significant improvement in their prototyping and a shift to manufacturing starting this year. Our Neo line of Stereolithography printers had a strong finish to the year, including orders from Whirlpool and multiple service bureau in the U.S. and Europe.
And already in 2024, PartsToGo, a German service bureau, that had two Neo printers, purchased four more systems, enabling them to produce high quality, accurate and repeatable parts for their customers’ industrial level application needs. We also made further inroads in the Formula One racing community, with multi-unit sales of Neo SLA systems to Toyota, F1 McLaren and other industry leaders for use in wind tunnel testing and tooling. This is particularly promising and that it demonstrates our technology’s ability to deliver accuracy, consistency and reliability at the highest level of automotive standards. We expect this will result in transferability to mainstream automotive manufacturing. While the Neo system is exciting for its use in prototyping and tooling today, the real competitive advantage will come with the next version expected in 2025, which will shift the focus of that technology to end part manufacturing.
Further on in automotive, we increased our exposure to automotive interior design with our PolyJet technology through collaboration with Mercedes-Benz, Maserati, Volkswagen and Stellantis. All-in-all, we are on the path for what we believe will be serial production use cases for the automotive industry. Next, I’d like to provide some highlights on our dental applications and key milestones. Dental continues to be one of the largest and most exciting growth avenues for the 3D printing industry, and for Stratasys in particular. As a reminder, our activities are focused on dentures and other non-discretionary restorative spending. In 2023, dental continued to grow, and we expect this trend to accelerate. This growth came two ways. First, we further extended our customer’s base with new products offerings to address a broader range of applications in a more economically beneficial way.
Including dentures, implant models, surgical guides and other parts used in fixed restoration cases. Our TrueDent solution rolled out during the first quarter of 2023 is a great example of how customers can use 3D printing to replace conventional manufacturing technologies. Pairing TrueDent resins and workflows with our J5 DentaJet printers allow the creation of a full permanent monolithic dentures. No other technology in the world is able to provide this at scale. This pairing also enable us to lower production costs and labor for labs by more than 50%, while improving form, fit, and function for the patient. Leading labs networks, and dental support organizations, or DSOs, in the U.S. and Europe, who are new customers for Stratasys, have begun deploying this offering to better serve their patients, and have provided us with excellent feedback on clinical outcome and patient satisfaction.
As a real life example of just how disruptive and impactful TrueDent is, last month we announced our partnership with Express Dental of Oklahoma, at a two day event where dental services are provided for free to those in need. Over 55 people had their mouth scanned on the first day, and the very next day went home with a brand new set of dentures, courtesy of TrueDent. This level of speed, accuracy, and low cost has never been possible at scale until today. We plan to roll out new business models and partnerships to accelerate adoption of additive manufacturing in dentistry, and expect this business to meaningfully accelerate in the years to come as we continue to win business from conventional manufacturing. And second, we delivered growth in dental to our existing customers, extending their fleet and increasing utilization of our resins on our newest platform.
This was a significant contribution to our revenue growth in consumable in 2023. Now switching to medical, where some of the most exciting opportunities for future growth are being developed. During the quarter, we announced a partnership with Siemens Healthineers to carry out a landmark research project. This project is designed to develop new state-of-the-art solutions for the advancement of medical imaging phantoms for computed tomography imaging. These are used around the world to evaluate and ensure optimal performance of CT scanners. We also announced that the University Hospital Birmingham in England has been using tailored 3D printing cutting guides to improve surgical outcomes for head and neck cancer patients, produced exclusively using our J5MediJet printer.
This success demonstrates that our technology enables the creation of vital, highly accurate, patient-specific cutting guides ahead of surgical procedures. And I would be remiss if I didn’t express my pride in Stratasys winning the Medical, Dental or Healthcare Application Category at the Prestige 3D Printing Industry Awards in London in December, where our J5 DentaJet, J5MediJet and J850 Digital Anatomy Printers beat out a field of nine competitors. Turning to software, we have a long-term plan to monetize our software offering and create new streams of recurring revenue by adding value through new features and products to our free GrabCAD platform, both for use with our own systems and for those who partner with us. In 2023, we demonstrated early success in our channel’s ability to sell software alongside Neo printers.
A major attribute for the Neo software, its ability to help service bureaus and internal 3D print shops rapidly and accurately estimate the cost and time of printed parts. And we have intensified our effort to expand a subscription software business with the Pro version of our popular GrabCAD software. GrabCAD Print is used by over 85% of our customers and over 40,000 users worldwide. GrabCAD Print Pro is targeted at helping users achieve 3D printing that is faster, more accurate, and more economical, with the ability to print multiple parts for multiple customers on multiple printers simultaneously. GrabCAD Print Pro is currently available on FDM and SAF systems. And a few days ago, we announced we are now in the process of adding it to PolyJet.
We expect to support it across our full suite of technology offerings once we add it to the P3 and Neo in the future. And turning to new materials, we have recently announced our Origin One DLP system, which is building a leading position for production of manufacturing aids, particularly in the automotive industry. We recently introduced our new Somos WeatherX 100 material. This is our first material using SAE automotive industry standards that is tested for weatherability, UV durability, and dimensional accuracy. With the introduction of this, an additional material during 2024, we plan to strengthen our position in DLP and open more manufacturing use cases. Before I turn the call over to our CFO, Eitan Zamir, a word regarding the strategic review we announced in the third quarter of 2023.
The comprehensive process is ongoing, and our Board of Directors is considering and evaluating all avenues to maximize value. As we announced previously, we do not intend to disclose further developments on the strategic review process, unless and until we determine that such disclosure is appropriate or necessary. To sum up, even against the challenging backdrop, we continue to deliver differentiated products and solutions to customers across a wide array of end users, setting the stage for increased growth based on accelerated adoption of additive manufacturing as macroeconomic conditions improve. I will now turn the call over to Eitan to share the financial results and our initial outlook for 2024. Eitan?
Eitan Zamir: Thank you, Yoav, and good morning everyone. We achieved solid results in the fourth quarter against what has continued to be a challenging backdrop of adverse macroeconomic factors and related pressures. We are confident that the high level of demand we are seeing in our customer engagements will translate into meaningful growth once these headwinds abate. In general, our results demonstrate the resilience our diversified portfolio provides, which led to our 10th consecutive quarter of profitability. Now let me dive deeper into the numbers. I will note that after a number of years of volatility, the impact of currency on year-over-year comparisons for 2023 was much more muted. As such, I won’t be highlighting comparisons in constant currency.
For the fourth quarter, consolidated revenue of $156.3 million was down 1.9% as compared to the same period last year, but was up 1.3% when adjusted for the divestitures of our metal and urethane businesses from the Stratasys Direct Service Bureau. Product revenue in the fourth quarter declined by 0.7% to $110.4 million compared to the same period last year. Within product revenue, system revenue was down by 13.7% to $47.4 million compared to the same period last year, as constrained capital budgets continue to impact customer buying behavior for new systems. Consumables revenue was up by 11.9% in the fourth quarter as compared to the same period last year, to a new record of $63 million. The increase reflects continued strong utilization of our customers’ existing systems and contribution from the acquisition of Covestro in April, 2023.
Service revenue was $45.9 million for the fourth quarter of 2023, down 4.6% as compared to the same period last year, excluding the divestitures that took place in our Stratasys Direct business, service revenue grew 3.6% year-over-year. Within service revenue, customer support revenues grew by 1.6% compared to the same period last year, continuing to reflect solid utilization of existing systems. For the full year 2023, consolidated revenue was down by 3.7% as compared to 2022, but was up 1.3% when accounting for the impact of the MakerBot and Stratasys Direct Service Bureau divestitures. Product revenue in 2023 decreased by 4.1% and was down by 1.1% excluding the MakerBot divestment. The decline compared to 2022 is primarily due to a reduction in hardware sales that more than offset record consumables.
Within product revenue, system revenue in 2023 decreased by 16.4% compared to 2022. Consumable revenue was another record, up by 8.2% in 2023 compared to 2022. For the full year of 2023, service revenue declined by 2.8% compared to 2022, and was up 1.3% after backing out the two strategies direct divestitures. Within service revenue, customer support revenue in 2023 was up by 4.5% compared to 2022, reflecting continued strong utilization of existing systems by our customers. Now turning to gross margins, GAAP gross margin was 44.7% for the quarter, compared to 43.1% for the same period last year. Non-GAAP gross margin was 48.8% for the quarter, compared to 48.4% for the same period last year. The year-over-year improvement in gross margin was the result of better contribution from Stratasys Direct, including higher margins for the lower revenue that resulted from divesting the two businesses from strategies direct, as well as improvement in freight, which more than offset lower hardware gross margin.
GAAP gross margin was 42.5% for the full year 2023, compared to 42.4% for the same period last year. Non-GAAP gross margin improved 20 basis points to 48.2% for the full year, as compared to 48% in 2022. The full year improvement in non-GAAP gross margin was a result of better contribution from consumables and Stratasys Direct, along with lower shipping costs, which more than offset lower hardware contributions. GAAP operating expenses were $64.1 million for the quarter, compared to $67.1 million during the same period last year, reflecting the reduction of M&A related liabilities, elimination of operating expenses of the two Stratasys Direct divested businesses. Non-GAAP operating expenses were $74.3 million for the quarter compared to $72 million during the same period last year.
Non-GAAP operating expenses were 47.5% of revenue for the quarter, compared to 45.2% for the same period last year, driven primarily by our acquisition of Covestro. For the full year, non-GAAP operating expenses were 46.2% of revenue, as compared to 45.9% in 2022, primarily due to lower revenue. In absolute dollar terms, non-GAAP operating expenses were $8.8 million lower as compared to 2022, due in part to the divestiture of MakerBot, lower commission and currency exchange related costs, partially offset by the addition of Covestro and higher merit compensation. Regarding our consolidated earnings for the quarter, GAAP operating income for the quarter was $5.7 million, compared to operating income of $1.6 million for the same period last year.
Non-GAAP operating income for the quarter was $2 million, compared to $5.1 million for the same period last year. The decrease reflects the higher OpEx as a percentage of revenue. GAAP net loss for the quarter was $15 million, or $0.22 per diluted share, compared to a net loss of $2.4 million, or $0.04 per diluted share for the same period last year. Non-GAAP net income for the quarter was $1.6 million or $0.02 per diluted share, compared to a net income of $4.6 million or $0.07 per diluted share in the same period last year. Adjusted EBITDA was $7.7 million for the quarter, compared to $10.7 million in the same period last year. Regarding our consolidated earnings for the full year 2023, GAAP operating loss was $87.6 million, compared to a loss of $57.2 million for 2022.
The wider loss reflects $32.9 million of the one-time advisor costs related to M&A activities, as well as various one-time restructuring costs partially offset by the previously mentioned reduction of M&A-related liabilities. Non-GAAP operating income for the year was $12.6 million, compared to $13.5 million in 2022. This equates to 2% non-GAAP operating margin, compared to 2.1% in 2022. GAAP net loss for the year was $123.1 million or $1.79 per diluted share, compared to a net loss of $29 million or $0.44 per diluted share for last year. This increase includes the previously mentioned one-time cost, plus a $13.9 million non-cash impairment related to our 2022 investment in the MakerBot merger with Ultimaker, along with the previously mentioned M&A expenses.
As a reminder, the 2022 GAAP net loss included a $39.1 million benefit from the 2022 merger I just referenced. Non-GAAP net income for the year was $7.7 million or $0.11 per diluted share, compared to a $10.3 million or $0.15 per diluted share last year. Adjusted EBITDA of $35 million, compared to $36.1 million in 2022 reflected our overall lower revenues that more than offset the improvement in margins. We used $7.7 million of cash in our operations during the fourth quarter, compared to use of $18.1 million of cash from operations in the same period last year. Excluding the one-time costs related to the M&A activity noted earlier, we generated approximately $7 million in operating cash flow. We ended the quarter with $162.6 million in cash, cash equivalent, and short-term deposits, compared to $184.6 million at the end of the third quarter of 2023.
Our balance sheet and cash generation profile remain strong, supporting our interest to capitalize on value-enhancing opportunities as we navigate through the near-term challenges. Now, let me turn to our outlook for 2024, based on the perspective that the softness in global capital purchasing conditions continues to be challenging, but we expect to see improvement in the back half of the year. For comparison purposes, 2023 revenue, excluding divestitures and annualizing Covestro, was approximately $616 million. We expect 2024 revenue to grow to a range of $630 million to $645 million, with revenues growing sequentially each quarter through the year, resulting in notably higher revenues in the second half of the year, as compared to the first.
Non-GAAP gross margin for 2024 is expected to improve to a range of 49% to 49.5%, with the second half stronger than the first half, based primarily on the expected rise in revenue throughout the year. In 2024, we expect our operating expenses to range between $292 million to $297 million, slightly higher than 2023. Continued improvement in profitability is an important objective, and for 2024 we expect to see a return to growth across the profit metrics. For 2024, we expect operating income to be in the range of 2.5% to 3.5% of revenue, with the second half stronger than the first half, based on the anticipated rise in revenue throughout the year. We expect a GAAP net loss of $88 million to $72 million, or $1.24 to $1.01 per diluted share, and non-GAAP net income of $9 million to $14 million, or $0.12 to $0.19 per diluted share for 2024.
Adjusted EBITDA for 2024 is expected to be in the range of $40 million to $45 million. We expect to see EBITDA reach 15% of our revenues longer term, as our margins improve over time. We expect our capital expenditures for 2024 to range between $20 million and $25 million. Finally, we expect to deliver positive operating cash flow for the full year, excluding any further one-time cost related to M&A activities. With that, let me turn the call back over to Yoav for closing remarks. Yoav?
Yoav Zeif: Thank you, Eitan. I want to thank our global team for their professionalism and dedication to help drive continued profitability as our business grows and creates long-term value for our customers and all our stakeholders. I am particularly proud of our Israeli employees and their families, many of whom were called to military service for most of the fourth quarter, as well as our employees worldwide who stepped up valiantly to carry the additional workload. This effort helped ensure that our business operation was uninterrupted with no material impact. We continue to differentiate ourselves from the sector with the strongest combination of best-in-class technologies and unparalleled go-to-market infrastructure and an ongoing focus on operating efficiencies.
Our customers are currently challenged by micro-conditions that constrain their spending, slowing their pace of purchasing our product that can advance their transition to digital manufacturing at scale. However, we view these challenges as only a delay in the inevitable widespread and faster adoption of additive manufacturing. One need, only look at the continued high utilization of existing systems and the strong levels of engagement to share our optimism. We are excited for what 2024 and beyond holds for strategies as we continue to lay the foundation for expanded applications to drive accelerated growth. With that, let’s open it up for questions. Operator.
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