Earnings Call: Q1 2021

Apr 29, 2021

Hello, ladies and gentlemen, and welcome to the Q1 2021 Materialise Financial Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Harriet Fried of LHA. Please go ahead. Thank you for joining us today for Materialise's quarterly conference call. With us are Fried Van Kran, Founder and Chief Executive Officer of Materialise Peter Leys, Executive Chairman and Johan Albrecht, Chief Financial Officer. Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic, financial and operational performance for the Q1 of 2021. To access the Before we get started, I'd like to remind you that management may make forward looking statements regarding the company's plans, expectations and growth prospects among other things. These forward looking statements are subject to known and unknown certainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive dynamics and industry change. Any forward looking statements, including those related to the company's future results and activities, represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent day. Management disclaims any duty to update or revise any forward looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that could impact the company's Management will discuss certain non IFRS measures on today's call. A reconciliation table is contained in the earnings release and also at the end of the slide Presentation. With that introduction, I'd like to turn the call over to Peter Leis. Peter? Hi, Harriet. Thank you. And thank you everyone for joining us today. You can find the agenda for our call on Slide 3. As the first item on our agenda, I will summarize the highlights of our financial results for the Q1 of 2021. After that, I'll give you a bird's eye view of the company's current strategy and approach to market. Then I will pass the floor to Fried, who will give you more context about the Link3d transaction that we announced earlier this month. After that, Johan will, as always, walk you through our Q1 numbers in more detail. And finally, I will come back to give you some observations about what we currently believe The near term future may bring. When we've completed our prepared remarks, we will be happy to respond to questions. So Let's turn to Slide 4, which summarizes the highlights of our financial results. While just like the last three quarters of 2020, the results of our Q1 this year were impacted With the COVID-nineteen pandemic, we are continuing to see signs of a steady recovery of our business. First, our revenue of €45,500,000 this quarter came close to the revenue level of €46,200,000 that we posted in the Q1 of 2020, which was as you know only slightly impacted by the crisis. Importantly, both our Medical and Software segments showed growth again of 3.7% and 4.1 percent respectively. 2nd, our adjusted EBITDA margin was 11.7% compared to the 7.8% margin that we realized in the same period last year before the crisis kicked in. Importantly, as we navigated through the crisis, we did not lose sight of the engines of our future growth. Therefore, in the quarter, our R and D spending represented a solid 14.3% of total revenue And we strengthened and secured our leading position in the additive manufacturing software markets for the coming years by gearing up for an upcoming acquisition of Link3D, a provider of additive manufacturing execution systems. Fried will explain the Link3D transaction in more detail. Before he does so, we thought it could be worthwhile To remind you of the overall strategy of Materialise, therefore, we summarized our positioning and vision on the 2 subsequent slides So let's turn to slide 5. First, Materialise enables the users of AM Technology to be more productive, more cost efficient and more sustainable. We call this our horizontal or backbone strategy. We bring solutions to the markets That are typically fairly neutral, if not off the shelf and that can be used regardless of the specific application that the 3 d printing technology As a result, our horizontal products have a broad addressable market, but Typically only represents a relatively small part of the value chain that our customers are active in. As many of you know, Our 2 key horizontal products are our 2 flagship software platforms, the Magic Software Platform and the Mimics Innovation Suite. Our MAGIX software platform includes both functionality that increases The productivity of individual 3 d printer as well as solutions that automate and control Our MAGIX platform is neutral. It integrates with the technology of virtually All manufacturers of industrial printers, both in plastics and in metal. We support customers with 3 d print So called many in, many out facilities as well as customers who print larger batches of end parts and customers that engage in so called mass customization projects. Our Magic's software platform is brought to the markets by Materialise Software. As the adoption of AM in general increases, We believe that Materialise Software will continue to grow accordingly. Our collaboration with Link3d will, in our opinion, Accelerate the growth of Materialise Software further. Fried will in a minute explain that in more detail. 2nd flagship, the Mimics Innovation Suite helps researchers, medical device companies and hospitals To engineer on the human anatomy. Mimics visualizes the human anatomy in 3 dimensions, allowing its users to plan individual surgeries and to design customized medical devices, which may subsequently be 3 d printed. MINIX can be used by a very wide variety of medical applications ranging from dental to orthopedic and cranial maxillofacial to cardiovascular applications to name only a few. Our Mimics Innovation Suite is brought to the markets by Materialise Medical. The performance, strong performance of Materialise Medical Both on its top and bottom line is partially the results of the success of our Mimics Innovation Suite, including the successful introduction of software planning tools in the hospital market. Now moving to Slide 6, I'd like to go over the ways that in addition to enabling the use of AM as such, Materialise also empowers Specific meaningful applications of the 3 d printing technology. These solutions, which we internally call our verticals, are more tailored to a specific use of the AM technology and typically includes A complex mix of customized software solutions, dedicated engineering support and complex As a result, the addressable market of these solutions is more focused, but we are involved in a larger part of the value chain. Our most widely accepted vertical solutions today are brought to the market by Materialise Medical. This includes our customized surgical knee guides in the orthopedic market and our customized instruments and implants in the CMF market. Both these verticals and in particular our CMF vertical contributed to the good performance of Materialise Medical over the last couple of quarters both in terms of revenue and in terms of profitability. More recently Materialise Manufacturing started incubating new verticals, which includes our eyewear and footwear initiatives. Each of these wearable initiatives Grows on the experience we gained in Materialise Medical and makes use of the Materialise Software Magic's platform. While the revenues of each of these variable initiatives are currently still fairly modest, We believe that they are well chosen drivers for future long term growth. Now if you look back at the major initiatives that we have announced over the last 18 months, you will note that they perfectly match the strategy that I have just outlined. The acquisition of Engine Plan expands our vertical CLF portfolio and market reach. The acquisition of RSCan and RS Print fits in our vertical footwear initiative. The recently announced transaction with Link3D strengthens our horizontal Magic's software platform. With this overall introduction and background, I'd like to give the floor to Fried, who will give you more color on our excitement with respect to the Link3d opportunity. Fried? Thank you, Peter. Good morning and good afternoon, everyone. Turning to Slide 7, I would like to talk about the transaction with Linkeddd that we announced just a few weeks ago. When we announced our to incubate and grow meaningful applications of 3 d printing in the food and eyewear markets and the analogy of those initiatives To the successful verticals that materialize in the medical launch in the orthopedic and craniomusculocational markets, empowering Materialise also empowers through our software segment mainly the use of additive manufacturing as such. And we believe that the cooperation with and the potential acquisition of Link3D 3 d printing continues to transform the factory floor As companies increasingly turn to 3 d printing for large scale production, as they scale their 3 d printing processes And integrate these operations with existing production infrastructures, they are confronted with Materialise and Linked TD offer MAS solutions that help these organizations gain control over their manufacturing floor. And time basis, we will be in an even better position to help customers scale their additive manufacturing capability In addition to enhancing and accelerating our MES and workflow operating automation offerings, We believe our work with Link. DB will accelerate Materialise Software platform strategy, which offers companies Cloud based access to our unified software offering Materialise has outlined An ambitious roadmap to evolve its entire software suite to a subscription model, offering It's customers' cloud based access to complete platform of software tools to manage and control As you may remember, we recently announced several cloud based And the ProcessTune, an intuitive online platform that helps speed up the optimization of process parameters that is required for mass manufacturing 3 d printed parts. Link3d has developed a suite of mission critical tools and applications for customers in the aerospace, automotive, medical A cloud based software platform that combines the APIs that both Materialise and LinkCD has Already developed and it will build further on the combined expertise of both companies, will provide customers seamless and cost efficient access To materialize and link to these complete and integrated 3 d printing software suite. It's a future proof way to always benefit from the latest software innovations and allow companies to We are excited The people of Linkeddd decided to team up with Materialise. Throughout our discussions, we learned that we share the strength of the market and commercial From a structural perspective, the collaboration kicks in immediately. But we will continue to operate as an independent company until we exercise the option to acquire the company, which we are currently intending to do in the course of this year's Q4. And with this, I pass the floor back to Johan. Thank you, Preet. I'll begin with a brief review of our consolidated revenue On Slide 8, please note that unless otherwise stated, all comparisons in this call are against our results for the Q1 of 2020. Revenue was €45,600,000 for the period, 1.5% below the level for both the same period last year. The positive growth of our Software and Medical segments Both by 4%, but still offset by manufacturing. Despite a steady and promising sequential growth since Q3 2020 And a strongly higher order intake in the Q1 of this year, manufacturing still remained 8% below the pre pandemic level of last year's Q1. Evert revenues from software license and maintenance fees increased by €1,900,000 reflecting the strong sales performance of our Software and Medical segment in this first quarter. For this Q1 Materialise Software accounted for 22% of our total revenue, Materialise Medical for 36 And Materialise Manufacturing for 42%. Cross segment revenue from software products increased to 34% of our total revenue. Moving to Slide 9, you will see our consolidated adjusted EBITDA numbers for the Q1 2021. Consolidated adjusted EBITDA amounted to €5,341,000 An increase of $1,700,000 or 48% compared to Q1 last year. This increase is the effect Of the reduced variable costs, productivity improvement results and of the medical saving initiatives we implemented in the course of last year. This, while our R and D expenses remained at the same high level as last year, have we continued to invest In our internal digital transformation program, which will include a new e commerce portal and new CRM and ERP systems. Slide 10 summarizes the results of our Materialise Software segment. Here, revenue picked up with growth again. Revenue effectively increased 4.1% and was at the same level of the seasonally high Q4 With net deferred revenue also grew an additional €500,000 Recurrent revenue decreased 6.3% from the same period last year. Non recurring revenue increased 20%, driven by new perpetual license fees and Royalty Income. EBITDA increased 30 percent to €3,400,000 compared to €2,600,000 In fact, while revenue grew 4%, cost containment measures in SG and A resulted in a decrease of 10% And R and D efforts increased 13%. The EBITDA margin was 33.6% compared to 26.9 Moving now to Slide 11, you will see that total revenue in our Materialise Medical segment was €16,200,000 Up 3.7% compared to Q1 2020. Revenue from Medical Device Solutions increased 3.2% With growth from both partner and direct sales, revenue from medical software sales accounted for 32% of the total segment revenue. Adjusted EBITDA increased 85 percent to €4,500,000 from €2,500,000 in last year's period. As a combined result of continued top line growth with productivity improvements and lower operating expenses, The EBITDA margin increased to 28% from 16% in the pre pandemic Q1 of last year. This is all where we continued executing all of our R and D programs. Now let's turn to Slide 12 for an overview of the Please note that this quarter manufacturing revenue included The activities from our footwear business line representing €1,300,000 this quarter. Manufacturing revenue reported a sequential growth since Q3 2020 and reported a strongly higher order intake this first quarter. These positive elements though could not prevent a decrease of 8% below the pre pandemic level of Q1 last year. We did see positive signs in our order intake from the automotive and industrial sector in general and in our AgTech, Acetec and Fixtures Business Lines in particular. Despite the mitigating effects of lower variable expenditures A continued labor cost reduction efforts, gross profit of Materialise Manufacturing was still significantly negatively affected Because of the fixed cost of unused capacity, savings measures resulted in a decrease of operating expenses of 8% or €600,000 As a combined result, adjusted EBITDA was negative €144,000 compared to a positive result of $1,100,000 last year. Slide 13 provides the highlights of our income statement for the Q1. Revenue was €700,000 or 1.5 Percent lower than the same period last year. Gross profit margin grew to 53.9% from $53,300,000 The solid margin was entirely due to the increased revenue and productivity improvement Our Medical segment offsetting the negative effects in our Manufacturing segment with a cost of unused capacity weight on the margin. Our operating expenses increased €1,000,000 or 3.6 percent, an increase entirely due To the rollout of the ongoing internal digital transformation project that we discussed in our Q3 earnings call. Our sales and marketing spending decreased 9.7%. G and A expenditures increased by 3.4% and R and D Research and development expenses amounted to €6,500,000 at the same high level as last year's quarter in line with our stated strategy. This quarter's net operating income was €1,100,000 compared to €700,000 last year. And as a result of all of these elements, the group's operating result was positive €290,000 compared to a negative result of €1,100,000 in last year's period. Net financial cost was €4,100,000 and included the impairment of our loan to Ditto for 3 point Because the business objectives that were defined as a condition for Dito to continue to draw under the credit facility were not met, We decided to extend only a portion of the remaining amount that was available under this credit facility to Ditto. Ditto is addressing the situation, but we currently have insufficient visibility on the nature and outcome of these initiatives. Importantly, this impairment from an accounting perspective does not impact our continuing belief in the technology platform Income tax expense amounted to an income of €155,000 positive due to deferred taxes mainly from temporary loss positions. Net loss for the 4th quarter was 3,600 and €67,000 compared to a net loss of €2,900,000 for the 2020 period. In the Q1 of 2021, Our balance sheet remains strong. Cash amounted to €107,600,000 compared to €111,500,000 at December 31, while our borrowings position decreased by €4,600,000 to €110,500,000 Only €15,800,000 of our debt was short term at March 31. Equity decreased €3,100,000 to €130,000,000 as a combined result of mainly the 1st quarter net loss amounting to €3,700,000 on the one hand and positive conversion Differences of approximately €500,000 on the other hand. Total deferred revenue amounted to €37,600,000 as compared to $34,900,000 as of December 31. Of the $69,700,000 were related to annual software sales and maintenance contracts versus $30,200,000 as of December 31, 2020. Cash flow from operating activities for the Q1 of 2021 for €4,200,000 compared to €7,300,000 for the 2020 period. This quarter, Our operating cash flow consisted of EBITDA of $5,100,000 while our working capital decreased €900,000 as a result of increasing activities. In last year's quarter, EBITDA was only 3 point €4,000,000 and we then had adverse positive effects in working capital of €3,900,000 Capital expenditures for the quarter amounted to €2,000,000 and were not financed. On February 4, 2021, entered into a working capital loan agreement and we paid $700,000 to Link3D during the Q1. After quarter end, Materialise entered into a call option agreement To acquire 100 percent of the equity interests of Link3d Inc. With a call purchase price of $2,000,000 The call option can be exercised during the month of November 2021. The call option exercise price equals The maximum amount of US33.5 million dollars against which the core option purchase price of US2 million dollars will be credited. Peter? Thank you, Johan. Please turn to Slide 15. Before opening the floor to questions, we would like to try and give some insights About what the remainder of 2021 may bring. As I mentioned earlier, the ongoing COVID-nineteen crisis continues to impact our business and it does so in a fairly diverse way across our various segments and Regions. As a result, our outlook is too conditional to provide meaningful quantitative guidance for our consolidated performance for the rest of 2021 at this stage. Today, We do want to share some of our expectations for what the Q2 of 2021 may bring. We currently expect that both our software and medical segments will continue to perform well and That our manufacturing segment will start to recover more significantly in the current quarter. As a result, we currently estimate that our consolidated revenues in the Q2 of 2021 We'll continue to grow sequentially and have the potential to represent sequential growth of up to 10% compared to the previous quarter. In line with our strategy, we will continue and may even accelerate investing in our R and D programs and internal infrastructure, which will continue to weigh on our EBITDA during the remainder of 2021, but which will, we believe, offer many longer term benefits for our company. This concludes our prepared remarks. Operator, we are now ready to open the call to questions. Thank you. Your first response is from Jason Celino of KeyBanc. Please go ahead. Thank you for taking my question. Encouraging to see the Manufacturing and Software segments grow sequentially in the quarter, But can you provide some detail on the Medical segment? Were there any dynamics that prevented this segment to see the same level of sequential growth as the other two segments? Well, I'd dare to say that our Medical segment is Also doing very well. We have there Really positive results, but Q4 was a very strong quarter With a lot of sales of mainly RCMS medical devices, which typically have A cyclical nature and then also of our software projects, Which also tend to have a cyclical nature and have a very strong performance in Q4. So Overall, we were very happy with the Q1 result, which was higher than last year, as we said, pre COVID. And on a 2 year basis, At 14% growth compared to 2019. So we are really Very positive about the further growth of our Medical segment because the second quarter is Also normally such a cyclical quarter where a lot of CMS surgeries are Okay. Excellent. And maybe for my second question, When you're expanding your software portfolio, like as in the case with Link3d, what goes into your process regarding the decision to either Make or buy that functionality. In the given circumstance with Link3d, it is to a large extent a matter of timing. As we explained in our prepared remarks, we had I mean, we have a very ambitious roadmap To bring our entire portfolio to the cloud, we have MES Solutions embedded in our streaming products, but if we looked at the progress or at the solutions That Link3D has developed and is currently developing. We quickly came to the conclusion that a combination of the 2 companies We'd bring a very strong and combined product portfolio to the market, probably 1 to 2 years earlier Then what we would be able to do if we were to do this on our own and what we have also learned during the pandemic Is that if you want to really grab the growth opportunities that should present themselves in the market, You should not be afraid to do that in the next 2 to 4 years. But let's say the next 1 to 3 years will most likely be crucial. So from a timing perspective, We came to the conclusion that a combination made significant sense and should allow us to grab quite a few opportunities that we expect will come to the market in the next, let's say, 12 to 36 months. Excellent. Thank you. Your next response is from Troy Jensen of Lake Street Capital. Hey, gentlemen. Thanks for taking my questions here. Peter, just summarize on healthcare. I mean, obviously, CMS has been the driver I thought you said there was a second healthcare application that grew sequentially. And I'm just curious to know if knees I'd expect were flat to downish, but Are you expecting a bigger recovery in these, the selective surgeries coming back? Hey, Troy. Troy, I think that the key drivers for the Medical segment It has indeed been our devices have really strong C and F performance. And secondly, really the Mimics Innovation Suite That I have been talking about earlier and then more in particular the point of care Applications and the attraction of those software solutions that we find in the hospital market. I think those are really the key drivers of our growth. Okay. All right. Then manufacturing, I got a question for each sector here, but it was down a fair amount, especially if you look organically taken off the footwear business. I mean, I'm assuming this is probably below Yes, Troy. Indeed, The European market as a whole has been in our overall But you will remember that the automotive sector as a whole was already And we have the indication that we see a rise in the order intake, Especially in the automotive sector, which we hope will even further increase in the second half of the year. That's so we will have some support from the Revitalization of the automotive market. On top of that, you were referring to our Yes. Non organic growth as you called it that has to do with the variable initiatives and there we are also very positive We will continue to grow. So that should really bring our manufacturing segment by the end of the year Okay. Good to hear. How about then on Software, Freed, while I got you, can you just give us a competition update? We go back through time. We were worried about CAD guys coming in. We were worried about startups. We were worried about other equipment vendors entering this space. We have indicated before that through the 30 years of existence of Materialise, It's one that we have been preparing already quite a while By transferring all of our legacy algorithms to highly performance Cloud based APIs that make use of the strongest possibilities of the Internet like Parallel processing like making use of graphical card capabilities and things like that. So they are really converted based on our long term experience from The past to the future, which is in our opinion cloud based and that transition has been The transition of StreamYX was a bit later on our road map. And in order to catch up there And to be able to offer our customers the full solution in cloud, we partnered with And then how about that? That gets me to my last question for Johan. Just any more information we can get on Link3d. If I heard you right, you The acquisition, if you spend it all, is going to be $35,000,000 Correct me if I'm wrong, but anything on size or revenues or OpEx I apologize. Troy, can you say that again? Is it I heard you saying something about $35,000,000 but I didn't hear the rest of the sentence. Yes. So the first half was the purchase Price of Link3d, you went through it in your prepared remarks. I thought I heard a $35,000,000 Just could you just clarify how much So we paid $2,000,000 for the option. And then finally, in November, we can obtain the full acquisition of the equity For $33,500,000 of which we deducted $2,000,000 from the option price. Okay, Perfect. And anything you guys can share about size, revenues or OpEx of Link3D? That's what we cannot disclose at this moment. All right. Understood, guys. Well, congrats on CT looking better and hopefully it's Kind of additive Manufacturing 2.0 starting up here, but congrats on Molotoxin. Thank you, Troy. Thank you. Thank you, Troy. Thank you. Your next response is from Arvind Ramnani of Piper Sandler. Please go ahead. We anticipate that indeed the pipeline will Strengthened as in multiple countries, we still experience that the hospitals are Not taking elective cases. And as we have said before, all of our products Are related to elective cases rather than trauma cases in the hospitals. So Given that in a country like Brazil, for instance, at its very moment, all hospital facilities are Fluorant with COVID patients, this really impacts the amount of our revenue in that country. So we believe that a structural take up is also possible in the medical markets. Terrific. Can you provide the second question for me is, can you provide So a little bit more color on EBITDA. And if possible, can you also quantify How we should kind of model EBITDA over the next couple of quarters? Arvind, I just refer To what we have disclosed in the previous earnings call, but where we have announced that we would That we expect as from Q1 on better results than we have seen in the past on a sequential basis. And we continue believing that, but the point is that already in Q1, we already Had better results than we could anticipate at the moment that we had our earnings call. So the trends that we I have anticipated on already in Q4. This is what we can confirm again. That's what Peter is saying also in his outlook for Q2. Of course, there is not clear visibility of what the circumstances will be related to COVID-nineteen, how that will further But our outlook in general is getting slightly better and as we've mentioned on a sequential basis. I am showing no further questions at this time. I would like to turn the conference back over to Peter Leys. Thank you, operator, and thank you all again for joining us today for this call. We look forward to continuing As always, our dialogue with you through investor conferences or in 1 on 1 virtual meetings or calls. So please feel free to reach out if you have not already done so. Thank you again and goodbye for now. Bye. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.