Earnings Call: Q2 2021

Aug 5, 2021

Hello, and welcome to the Stratasys Q2 2021 conference call and webcast. At this time, all participants are in listen only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yonah Lloyd, Chief Communications Officer and VP Investor Relations. Yonah, please go ahead. Good morning, everyone, and thank you for joining us to discuss our 2021 second 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 our operating and financial review and prospects for the second quarter of 2021, as well as the press release that announces our earnings for the second quarter of 2021, which were attached as exhibits to two 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, Yona. Good morning, everyone, and thank you for joining us today. Today, I will walk you through the highlights of the second quarter and some recent developments. I will discuss our ongoing progress to expand our leadership position in the polymer 3D printing market, producing and delivering the most innovative next generation technologies that address the fastest-growing manufacturing application. Lilach will provide financial details for the quarter and give an update on our outlook before we take your questions. The second quarter continued to show accelerating growth for our company. The 3D printing industry is moving toward providing full-scale digital manufacturing platforms at mass production levels, rather than being primarily a prototyping tool. Stratasys is at the forefront of this shift with our best-in-class solution for this high-value market opportunity. The company's quarter was highlighted by 25% year-over-year revenue growth, well above our previously shared expectations, and driven by growth of 32% in hardware and 39% in consumable, offset by slower growth in our parts business, due primarily to the relatively slow recovery of the aerospace market. While we are pleased to have produced our third consecutive quarter of sustained revenue growth, we know that it is critical to continue to invest in technology, software, materials, and talent to further enhance our leadership position and to drive future profitability. Our business momentum and customers' manufacturing operations are nearing full recovery from the pandemic, as evidenced by both consumables and services revenues returning to near 2019 levels. We are seeing good reception to three recently launched systems, the DentaJet and MediJet, specifically for healthcare sector, and the RPS stereolithography systems that we acquired in Q1. We are also seeing excellent market reaction to our new carbon fiber material for the F123 series. Importantly, we realized year-over-year growth across all of our regions and business lines, with notable strength from EMEA and the Americas. During the second quarter, we achieved several important milestones to drive our strategy. As we mentioned on our prior earnings call, we hosted our manufacturing experience event that was attended by over 4,500 customers, resellers, and partners. At the event, we provided details on three new manufacturing-focused product offerings that will play an integral role in our future growth. This includes the Origin One, a best-in-class photopolymer 3D printer that received a top-to-bottom optimization upgrade to improve serviceability, performance, and utilization. The H350, powered by selective absorption fusion or SAF technology and built for true thermoplastic mass production of consistently accurate end-use parts. The F770, designed with the longest fully heated build chamber in FDM, but as simple to use as our other popular F123 printers. During the quarter, we also strengthened our healthcare offerings with the launch of our J5 MediJet medical 3D printer. This printer meets the highest standards in terms of running biocompatible materials and sterilization protocols. It is designed for anatomical models, surgical guides, and any production part in a medical environment, such as tooling. It is 510 approved with leading medical segmentation software and has multi-material capability. On the dental side, due to our latest technology expansion, we are now the only company with a full technology portfolio, PolyJet, P3 by Origin, and stereolithography, that enable us to address and develop the most suitable solutions across the dental industry. This allows us to best match the right solution for each customer type. PolyJet offers multi-materials and mixed tray printing, allowing for different dental parts on the same tray. P3 offers industrial scale and a wide materials system, all while providing better cost per part. In fact, the J5 DentaJet printer launched in Q1 is already performing very well in the market. These systems collectively expand our reach into healthcare as utilization of 3D printing in the medical and dental communities accelerates. Mass customization is a key benefit of 3D printing, so it is ideal for providing personalized healthcare. Given the range of products we are bringing to the market, we view healthcare as a key growth component of our portfolio going forward. This quarter also saw us make great strides enhancing our ESG initiatives. 3D printing has some inherent sustainability benefits over traditional manufacturing, and during the quarter, we created an ESG leadership team to guide our strategy. We recently became a founding board member of the Additive Manufacturer Green Trade Association, the leading organization focused on our industry. In a few weeks, we look forward to announcing more details related to our ESG plans. In software, we expanded our partner program to 6 companies in the first 6 months of 2021 with the addition of Teton Simulation, which uses our new GrabCAD designed for additive manufacturing or DFAM software development kit to help customers improve the reliability of additive manufacturing builds. This is another example of how we are using our leadership position in 3D printing to build ecosystems of partners across software, materials, and post-processing to provide superior solutions for customers. Our software business has seen great progress over the first half of 2021, and we have started monetizing our offering into paid subscriptions. The first example is GrabCAD Shop, which provides customers with an all-in-one tool that helps teams communicate 3D printing needs, fulfill internal 3D printing work orders, and monitor 3D printing job progress. GrabCAD Shop improves over the air with regular updates to meet customers' new and growing needs. To date, GrabCAD Shop is being used by several large customers from around the world, including Schneider Electric, McLaren, Virginia Tech, and many more. We will grow our monetization strategy through the sale of annual runtime license subscriptions, which enable customers to connect their Stratasys printer to our third-party partners such as Siemens, Link3D, Identify3D, and others. In May, we launched our Customer Hub, a new digital ordering platform for partners and customers to help make us not only the best, but also the easiest 3D printing company with whom to do business. Over $25 million in orders were placed globally in Q2, with all regions well-represented, and we already have over 2,000 new account activations. In addition to giving them a complete dashboard view of their portfolio of Stratasys 3D printers, users find it to be a fast and convenient way to order from us, particularly for FDM and PolyJet materials. With the powerful combination of our next phase of product launches moving ahead and our multiple competitive advantages, we will further advance our position as the leading provider of polymer 3D printing solutions for our world-class customer base. I'd like to remind you of those competitive advantages. We have the broadest, most advanced polymer technologies that span the full product life cycle from concept to end-use part. Our customer-centric dynamic software strategy continue to evolve from the close working relationship we have with many OEMs across the industry. This approach provides a unified, comprehensive platform across our technologies that is built to interface with the top standard enterprise systems. Supporting our products, we have the leading global channel with over 200 partners that can market, sell, and maintain systems for our customers. We have the largest team of engineers and customer support in our industry, and we have a proven and resilient business model designed to scale across a range of macroeconomic conditions. These key advantages, combined with the new technologies that we launch primarily in the fourth quarter and beyond, position Stratasys to continue delivering on our growth strategy. Our improved results in the past few quarters demonstrate the renewed strength of the company and that our strategy is on the right track. This is only the beginning of what we believe will be an accelerated pattern of growth in the coming years. I will now turn the call over to Lilach, who will share the financial results of the quarter. Lilach? Thank you, Yoav. Good morning, everyone. We are pleased to have exceeded our stated targets in the second quarter. The 25% total revenue growth compared to the corresponding quarter of 2020, especially the 35.8% growth in our product sales, along with our positive cash generation, support our growing optimism around continuing economic recovery from COVID-19 and our unique position to lead the market. For the quarter, total revenue was $147 million, up 25% versus the prior year quarter and in excess of our previous outlook of mid-teens growth. This was primarily due to stronger-than-expected performance in Europe, a substantive increase in our consumable sales to almost pre-COVID level, our customer support revenues exceeding 2019, and the successful launch of the RPS resin-based system. Customer reception to RPS has been solid, demonstrate our ability to leverage our go-to-market access to customer that helps to accelerate sales. On a constant currency basis, total revenue grew 22.4% versus the second quarter of 2020. Product revenue grew almost 36% in the second quarter to $100.3 million compared to the same period last year, or 32.6% on a constant currency basis. Within products revenue, system revenue grew 32% to $45.6 million compared to the same period last year, and increased 29.2% on a constant currency basis. This growth was bolstered by the introduction of the new systems we discussed earlier, including RPS and the new healthcare printer. The rate of growth clearly demonstrates that the end market recovery is well underway compared to the corresponding quarter of 2020, which was fully impacted by the pandemic. The quarter also saw improved consumable utilization, showing strength after the COVID slowdown. Consumable revenue rose 39.1% to $54.7 million compared to the same period last year and was up 35.5% on a constant currency basis. Relative to the 2019 quarter, consumable improved to the point of being off only 3.4%, showing a nearly complete reversal of the impact of the pandemic as our customers increase the utilization of our system. You may recall that earlier this year, we announced the launch of our carbon fiber material for the F123 series. We believe it is the best of its kind in the market, providing the benefit of both strength and more geometric freedom while staying lightweight. The material continues to perform well, and importantly, it has also been a meaningful catalyst for sales of our F370 system. Service revenue was $46.7 million, up 6.8% compared to the same period last year. On a constant currency basis, service revenue grew 5.3%. Within service revenue, customer support revenue increased 10% to $28.3 million, an increase of 8.2% on a constant currency basis, and up 1.4% compared to Q2 of 2019, which was pre-COVID-19, another good indication of market recovery and increased system utilization. Turning to margin, GAAP gross margin was 43% for the quarter, compared to 37.2% for the same period last year. Non-GAAP gross margin was 47.5% for the quarter, compared to 45.4% for the same period last year. Given the increase in hardware and consumable growth, overall sales margin benefited from the change of mix. This was partially offset by an increased global cost pressure that included logistics and raw materials inflation, which were both more costly this quarter than Q1, and ramped up production costs for new product introductions. At this point, it looks like these issues will continue to be a negative impact for the back half of this year. Due to the ongoing uncertainty of these macro issues, along with the introduction in the second half of new systems and anticipated associate upfront margin pressure, we expect gross margins for the balance of the year to remain similar to what we saw in Q2. GAAP operating expenses were $86 million, an increase of $13 million or 17.8% compared to the same period last year. Non-GAAP operating expenses were $72.5 million, an increase of $11 million or 18% for the quarter as compared to the same period last year. Non-GAAP operating expenses were 49.3% of revenue for the quarter, compared to 52.2% for the same period last year. Operating expenses were up primarily due to the return to a 5-days workweek post-COVID-19 expenses as the market started opening up, and commission due to more revenue. We also incurred additional operating costs associated with the inclusion of our new acquisitions. These costs were funded by the resizing plan implemented in May 2020, which allowed us to allocate resources to areas where we believe we will generate stronger growth. From an earning perspective, GAAP operating loss for the quarter was $22.7 million, compared to a loss of $29.3 million for the same period last year. Non-GAAP operating loss for the quarter was $2.6 million, compared to a loss of $8.1 million for the same period last year. GAAP net loss for the quarter was $20.2 million or $0.31 per diluted shares, compared to net loss of $28 million or $0.51 per diluted shares for the same period last year. Non-GAAP net loss for the quarter was $1.6 million or $0.02 per diluted shares, compared to net loss of $7.4 million or $0.13 per diluted shares in the same period last year. We produced cash of $5.6 million from operations during the second quarter as compared to using $9.7 million of cash in the same quarter last year. This totals $52.1 million generated in the last three quarters, an excellent achievement despite the impact of the pandemic. We are pleased to have generated this level of cash flow given our second half plan to continue investing to accelerate the growth of our business. We ended the quarter with $522.7 million in cash and cash equivalent and short-term deposits, compared to $530.4 million at the end of the first quarter of 2021. Beyond the strategic investments we have recently made to help expand our product portfolio, we continue to evaluate additional opportunities that will further strengthen our leadership position as we execute on our strategic initiatives. Now turning to our outlook for the balance of the year. As we previously stated, the revenue growth will be sequentially linear. We expect Q3 to be approximately 70%-80% higher than Q3 of last year, and Q4 will be sequentially higher. We continue to expect our OpEx for all of 2021 to be approximately $30 million higher than 2020, due primarily to return to a 5 days workweek and operating costs as the markets are gradually opening post-COVID-19. We continue to expect our capital expenditure for all of 2021 to range between $24 million-$30 million. We have a strong balance sheet that will support our ongoing growth, both internally through strategic investments in high-growth area of our business that focus on manufacturing, and externally when additional growth opportunities emerge. In the coming year, as the 3D printing industry expands and shifts to mass production from prototyping, we are committed to not only maintain our leadership position, but to grow in it. With that, let me turn the call back over to Yoav for closing remark. Yoav? Thank you, Lilach. The second quarter was an exciting one for Stratasys, as we saw growth across all platforms accelerate. We expect that our existing market-leading offerings and our new platforms that will begin to ship in the fourth quarter, will provide incremental growth that should contribute to revenues, cash flow, and earnings in the coming years. The order pipeline for this new system is solid, and we look forward to updating you further after the launch. We are executing on our strategy to enhance our leadership position in polymer 3D printing. With our strengthened balance sheet, we are in the position to create long-term value for all of our stakeholders. With that, let's open it up for questions. Operator? Our first question today is coming from Shannon Cross from Cross Research. Your line is now live. Thank you very much. I appreciate it. Good afternoon. I wanted to dig a little bit more into what appears to be somewhat of an inflection point in clearly your revenue growth, or revenue trajectory. Also, I'm curious from an industry perspective, if you could talk a bit more about what you're hearing from your customers about why they're buying the product, what they're looking at using the product for. Essentially, I'm trying to understand how much of the growth is sustainable past the rebound following COVID. Anything you can provide to us would be helpful. Thank you. Hi, Shannon. Good morning. Great question, because we are definitely in an inflection point for the entire industry. We benefit from this inflection point because we are the leader in polymer 3D printing. We also work very hard to make sure that we are supporting it and delivering the expectations of our customers. In a nutshell, no bells and whistles here, to be honest. A lot of hard work to deliver constant growth by addressing the customer's needs. It sounds a cliché, but it is what it is, and it's all about delivering the best part, good economics, reliability, all within a package of material and software and service that support the workflow in manufacturing and can really be something that the customer can lean on in terms of adapting 3D printing. This is what we are doing day after day, and it's a journey, but I'm happy to say that we see the start of getting there. Those manufacturers, our customers, this huge install base that we have, the leading companies in the world, they are updating their factories plan. They are updating the, I would say, the vision that they have. Each one of them has a specific team that looks at the plan of the future, and 3D printing is part of it. 3D printing is definitely part of it in the long term, and we are there, and we'll keep supporting them. I guess, how have the conversations changed, maybe in the last 3 to 6 months, as you've been talking to customers? Again, it seems as if, like you said, this is sort of an inflection point for the industry. Do you think this is something that's been building for quite a long period of time and it's just starting to happen now? I would say that there are 2 underlying forces here. 1 is that the COVID-19, as we said in many earning calls over the last year, opened the eyes of leading manufacturers to the benefit of 3D printing supply chain. Instead of having a distributed supply chain, let's have digital inventories. Let's shift from long lines of manufacturing and production into a file and a machine which is supported by a whole system, what we are providing. That's very strong force. It's a different level of engagement. The second force is what we are doing here within Stratasys. We are working on addressing those needs. We have Benefit of having the direct interaction with our customers. We are tailoring what we are doing. We have great example with GM and TE Connectivity, we are leveraging a relationship to tailor our solutions that has to be manufacturing-grade. We have material, we have software. Software is critical in manufacturing. We have service. As I said at the beginning, no bells and whistles here. A lot of hard work to make sure that we are coming with manufacturing-grade solutions. Thank you. As a reminder, that's star one to be placed in the question queue. Please ask one question and one follow-up. Our next question is coming from Wamsi Mohan from Bank of America. Your line is now live. Hi. Yes, thank you, and congrats on a good quarter. In your press release, you say longer term, the company continues to expect significant leverage, benefits from its investments as revenue growth should start to accelerate in 2022 and beyond. I was curious, what is your baseline for which you're saying acceleration? Clearly 2021, you're showing very strong growth in this past quarter. You're projecting quite strong growth even for the next quarter. It's coming off of a very tough year. When you're speaking about acceleration in '22, how should investors think about the magnitude of revenue growth, or what is the relative base over which you're expecting to accelerate? I have a follow-up. Thank you. Thank you, Vamsee. Good to hear from you. I would say, technically, and I'll let Lilach add some comments after it. Technically, we are looking at 2 time horizons. We need to be better than last year. Let's not forget, COVID is still here. Okay? We are doing well on this front, and we need to make sure we are improving against 2019. That's also what you see in our script. It's very clear what's the baseline, where we need to improve. This is technical. What is more important and more meaningful is what are those catalysts that will take us forward, that we can say that we feel comfortable with continuously showing growth and accelerated going forward. In 1 word, it's manufacturing. We have very clear strategy. We stick to the strategy. We added 3 new technologies this year. Stratasys is no more a company of 2 technologies. We are a company of 5 technologies, and we make sure that in each one of those technologies, I don't want to be too arrogant, but we have the best solutions. In terms of the print quality, it's manufacturing. We need to deliver the part that deliver the expectation of the manufacturer. We add 3 new technologies. We'll start introducing them in Q4. 2022 will be the first year where we have really full coverage of every problem that any manufacturer of polymers can have. We are not coming with 1 or 2. We are coming to solve the problem of our customers. That makes us feel very comfortable in terms of the top line next year, because we are coming with 3 new technologies and leverage what we have. We have the infrastructure, we have the network, we have the software system, we have the materials, and now we just push three more technologies into the market. Wamsi, good morning from me. Hello. Vamsee, do you want me to also from a timing perspective, I would like to remind you that we actually come in with 3 new technologies, and 2 of them actually at the second part of the year, more close to Q4 this year. We are expecting to see a meaningful growth and the full impact of adding this new technology during 2022. This is the main accelerator factor for us. Okay, thanks for that. If I could follow up, I think you were very clear on sort of gross margin impact and cost pressures continuing to persist. Yoav, you just said that COVID is still here. Is there a revenue headwind that you're factoring in, as well in your guidance here in next quarter and beyond, that could be coming because of component issues or supply chain issues, outside of cost, but more from a demand or revenue standpoint? Thank you. We are always managing the day-to-day, and the day-to-day is also delivering product every day and developing product every day. We have a solid pipeline. As we wrote, we have a very solid pipeline for the new technologies. We manage the supply chain on a daily basis. We restructured our S&OP process to make sure that we are on top of the issues. We gave our operations high degrees of freedom to increase inventories. Every company in our sector and in high tech are facing the same issues. Currently, it seems that we are on top of the challenges, but definitely there is uncertainty. It looks good. I cannot say that it doesn't exist out there. It's a daily struggle. Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live. Hi. Thanks for taking my questions. Obviously, the revenue growth is improving and things are recovering. My question is, how expensive is this growth going to be longer term? You mentioned in the prepared remarks leverage on cost going forward. If you look historically over the last many years, OpEx has averaged about 50% of sales. It looks like it'll be about that this year. What sort of targets do you have in mind, even just roughly, for where you think OpEx can be as a percentage of sales? I think a lot of capital equipment type companies, similar companies would be in the 25% range, and it's been elevated for a long time here. Good morning, Brian. At this stage, we are not providing specific long-term guidance. As we discussed previously regarding our scale, we do anticipate it to leverage significantly our scale position. We have the broadest infrastructure from a go-to-market perspective and corporate, to address 3 new technology on top of the 2, 1 that we have. Practically, we'll have 5 technology on the same infrastructure. It's true that in 2021, you don't see that leverage that much. I would like to remind you that we are still in a COVID-related year, right? We increase cost coming back the organization to 5 days workweek, and we add 2 acquisitions. Definitely, when we look at the horizon in the future, we are anticipating significant accelerated growth in revenue and be able to leverage the infrastructure without adding additional cost to our cost base. At that point, I cannot share the specific percentage, but definitely this is the direction. Maybe I'll just add. Oh. In general, we resized the company last year to make sure that we are releasing resources to invest in our growth. That's exactly what we are doing. We are in an investment mode. Long term, we are leveraging our scale. Our intent is not to deliver only on the top line growth, but also gradually to improve profitability. It's very clear. We know exactly what we are doing, and we are leveraging what we have. We have a great company and great people here. Thanks. I just need to follow up on Wamsi Mohan's question because every analyst, buy side and sell side, is going to be looking for a clue as to what's happening in 2022. You gave guidance for this year for sequential growth that is going to lead us to model somewhere in the range of 12%-14% year-over-year growth in 2021. In the opening of your press release, you say that you'll accelerate revenue growth in 2022. Just by definition, that means a faster growth rate. What you answered Wamsi Mohan with led me to believe that you're not necessarily saying that 2022 revenue growth will be greater than 2021. Are you not forecasting faster growth in 2022 than 2021? Hi, Brian. We actually not providing guidance for 2022 right now, but the growth will come. We know what are the driver for the growth. As I mentioned to Vamsee Mohan, we are introducing 2 new technology, in the second part of the year, so Q4. We are planning to see meaningful growth coming for these 2 technology in 2022. We believe the growth will come at the right time. We will also going to share the specific expectations for the growth rate. Thank you. Our next question today is coming from Noelle Dilts from Stifel. Your line is now live. Hi, guys. Congratulations on a nice quarter. I was hoping you could just kind of give us an update, one, on so far how things are progressing with the recent acquisitions, Origin and RPS, generally how that's compared to your initial expectations. Also, if you could just comment on how you're thinking about M&A moving forward and what you're seeing in terms of opportunities in the market and valuation, if there's been any change in that relative to last quarter. Thanks. Hi, Noelle. Good morning. It's going well. We acquired really good companies with leading technologies. I would say Disruptive technologies in terms of their specific areas. You look at Origin and their DLP solution, it's a completely different DLP solution than any other in the market. Completely different. Origin is on track. RPS is better than originally we thought for Q2. We are doing better than we expected. M&A, as I said in many other calls before, it's all about accelerating our strategy. We are becoming more attractive for startup and for some established company, because we have the infrastructure. To many of the leading and most innovative and disruptive companies out there in our industry, the one thing that they are missing is this infrastructure. We can provide this infrastructure, and that's why we had a win-win situation with Origin, and they joined us, and today they are part of Stratasys. An integral part of Stratasys. We are on track, and we will introduce a completely new, upgraded, better machine in Q4. Great, thanks. A couple of somewhat related questions here. First, just given the number of technology upgrades and new product introductions you've had this year, we didn't have RAPID or Formnext last year. How important are these events, moving back to live events, going to be for you in terms of getting folks comfortable with these products? Second, you've obviously again had a lot of introductions this year. How should we think about kind of the pace of technological and new product rollouts as we move into next year? Thanks. Great question. We are engaging with our customers. By the way, I'm very excited. Really, it's exciting to engage again live with our customers. I'm currently in the U.S. for a long time. I start meeting my customers face-to-face, which is really exciting. I wouldn't say back to normality, but it's exciting. We are going to participate in Rapid and in Formnext to introduce our whole package, as I call it, because we have 5 technologies supported by ecosystem of software and material. We are going to introduce it. Having said that, we didn't stop interacting and engaging with our customers. All the time, we found different alternative solutions. We have a track that is going all over the U.S. We were the first around to do it. In some cases, in one location, we have more than 100 leads of specific engineers because they are coming to the parking lot to see our truck and our new solution. It works, and it works well. Another alternative that we doubled down on it was the whole digital interaction and engaging with webinar. It works really well. I can say, we are not sharing those numbers. We have better pipeline. We found the alternatives. We found the alternatives. I want just to be clear, we're talking about the new technologies. We are doing well with the current technologies as well. The current technologies are growing. We are innovating with what we have because no one has better FDM or better PolyJet material jetting than us. We have new systems in PolyJet. I just mentioned it, the MediJet and the DentalJet, which targeted very lucrative market. We have a fantastic unique new machines below $100k in the FDM space, the F770. All of them are doing better than expectations. Yes, we put all our effort on the new technologies to make sure we have solutions instead of just technologies. Also the old existing technologies, we'll keep innovating, and we're doing well on them. Thank you. Our next question today is coming from Paul Chung from JPMorgan. Your line is now live. Hi. Thanks for taking my question. For the Origin, just to follow up on the Origin. You mentioned kind of incremental $200 million over five years for this product when you acquired it. I know it's ramping in Q4 and it's early, kind of based on initial customer feedback, have your views changed at all since you acquired the asset, either in magnitude or kind of timeline of how that ramps? What are your expectations for margins on the product and for the system and consumables there? I have a follow-up. As you said, nothing changed from our perspective as well. We are confident in our forecast. As you know, we are not updating gross margin by product. We are confident, actually even more confident because we are into the details of the technology. It's not any more due diligence or we just ran benchmark. We are into the details of it. We are engaging with customer. We have some large customers that are very interested in this new technology. Just maybe to put kind of flavor around it. It's generating for us many, what we call new logos, which is really exciting because it's so unique, because it's expanding our span in terms of technologies and solution. We keep the forecast that we had in the past, and we are very happy with this acquisition. Okay, great. Thanks for that. Then just on cash flow, can you talk about kind of the working cap dynamics? Should we expect some inventory build ahead of product launches and in the second half and possibly a bigger drag this year in inventory on higher component costs relative to last year, where you saw a nice funding source there? If you could talk about those dynamics and then, given the strong start to the year, can you be in positive territory for cash from operations and for the year? Thank you. Good morning, Paul. Following to what you mentioned, the most important things for us is, obviously, meeting the customer demand, and specifically in manufacturing, make sure that the system are not in downtime. Make sure that we have inventory in place at the region, at the time, is critical. We will do everything that we can in order to overcome those shortages, and this is what we are doing. It may also impact our inventory level, so we are ramping up now the inventory level as well as, because of the new product introduction, we are ramping up the inventory level. We do expect that the second part of the year to see inventory level going up, and it may impact the cash flow level. We believe that this is the right thing to do for the company and for the business, where the growth is coming. As we look for the second half of 2021, we are not providing specific guidance, we expect the majority of the growth also of the revenue to occur in the second half of the year. Much of the cash flow benefit will come in 2022 and beyond. As I mentioned, that the preparation to the launch of the three significant NPI we recently introduced, coupled with safety stock we are building to mitigate the raw material shortage, is expected to increase our inventory level and payment in the coming quarter. Thank you. Thank you. Thank you. Next question today is coming from Troy Jensen from Lake Street Capital Markets. Your line is now live. All right. Hey, good morning. Thanks and congrats on the really nice results here. A quick question for Yoav. I guess H350, hoping we can spend a little time on that. I guess my thoughts are, that's probably going to be the most production-focused product you're launching here. Material sales could be pretty significant. Can you just talk about how much open or closed, or can customers use third-party materials, or how much of the material consumption on H350 do you guys think you guys can capture? Hi, Troy. Good morning. Thank you for highlighting the H350. Yes, this is a manufacturing machine, no doubt. We have big expectations from it. We build it for years together with the inventor, and we believe we have a very strong offering for mass production in 3D printing. Just to highlight the most important thing, this is a fantastic machine, but in general, we believe that we will deliver the best consistent accuracy. There are, I would say, better control of the whole print process, but mainly around thermal control, which allow easier certification of material and easier development of material, and I'll get back to it. Also better economics, because we are using only one agent, one ink agent, which allow us to have better recycling ratio and better density within the cake. When we are talking about better control, it means that we will be able to introduce more materials because the control allow you to develop and certify material in an easier and a faster way. Bottom line, this is the strategy with H350, to go out there to develop the hybrid material that we discussed many times. Hybrid material will have our material, third parties material, and different levels of cooperation, which will allow us to come with the most, I would say, wide manufacturing powders. That's in a nutshell the strategy. We are optimistic on the H350. The betas are looking really good, and customers are happy, and we are producing end-use parts. All right. Perfect. How about, second question would be on. I know you guys have had good traction here with your carbon fiber with the F123. Have you looked at all at continuous carbon fiber? I'm assuming you guys are mainly just chopped. Great question, Troy. Thank you. We are seeing good traction for our new carbon fiber for the F123 series. We have huge advantage in terms of our part quality with carbon fiber. We just took it from our high-end machines and put it also our lower, or I would say entry-level series, which works really well and incentivize many customers to adopt this type of printers. We see also new logos there. This is a great direction. Here in Minnesota, we have knowledge about carbon fiber for years, and we reached the, I would say, the largest size of material with carbon fiber in the industry because of our heated chambers capabilities and knowledge on the FDM side. Some of those parts are being used as end-use parts mainly in aerospace, but also in some cases in automotive. This knowledge will help us to develop the next generation. As you know, we don't talk about development. We are not sharing here our development plan with our competitors, but we have the base, the knowledge, the experience, to be there and to lead the carbon fiber market. You know the benefit, it's lighter. This is the whole idea behind us focusing on polymers because we believe that it's lighter than metal, could be stronger, allow some geometric freedom. We leverage all this to make sure that we combine our experience and knowledge and IP together with our vision to replace metal, and we will be there with end-use parts with composites. Thank you. Next question is coming from Jim Ricchiuti from Needham & Company. Your line is now live. Hi. Question I have, again, is going back to the acceleration that you're seeing in the business. Certainly Q2, stronger than expected. Q3, a nice acceleration. My question is, how much of this are you seeing is potentially some share gains, but how much of this is just catch up from abnormally low levels of demand and equipment utilization? Really that ties into my follow-up question about 2022, which we're all struggling with, is does that begin to normalize in 2022, and then you overlay the new products? Is that the way we should be thinking about your growth? Hi, Jim. Good morning. Hello. Hi, good morning. It's Lila. It's basically combination. We definitely see recovery at our end market, for sure. Okay? We happy to see that. We see companies are coming back, specifically in consumable. Companies are coming back to work, start utilize the system. We see it also in services. To remind you, in systems, we are nearly 2019 level in the utilization of consumables. In services, we actually even more than 2019 level pre-COVID. We are definitely happy about that, see that the market is open up and companies are coming back. At the same time, we are seeing also a new trend, like for example, in EMEA, a very strong EMEA manufacturing application demand for our product. We see governments providing funding for the industry. This is where 3D printing actually, and our technology have the benefit, and we leverage in this uptick demand as company understand the advantages of additive manufacturing. We also introduce new machines in healthcare systems, our new J5 DentaJet as well as the MediJet. These also contribute to the strong growth that we see this quarter, as well as the customer reception to our RPS product. It was excellent, even more than what we expect. This is definitely a testimony to what we believe in the future will happen. We have the best go-to market and infrastructure. As we introduce more and more technology on the same install base and the same go-to market, we definitely can enjoy from accelerated growth. Just to add to it's a combination. Very hard to draw the line here, it's a combination between returning to growth, and this is also the assumption going forward. No one can predict the future, we assume that the world is coming back to growth. Not less important, we are introducing new products, we are improving the execution of this company, we are having better relationship with our customers, and on top of all this, we'll have Origin, RPS and SAF. That's why we feel confident when we are talking about our future. Okay. My follow-up is just with respect to gross margins, similar gross margins, over the balance of the year that you were talking about, that you saw in Q2. With the new products that you're bringing out later this year, is there any things that we need to consider about your gross margins, at least in the early part of next year? Hi, Jim. At that point, we are not providing specific guidance on gross margin for next year. Obviously, gross margin, we have a wide portfolio, and ultimately it's a mix issue. If we think about manufacturing strategy and overall manufacturing application, we expect revenue to be significantly higher, a bigger profit pool, which will drive consumption up, will generate a higher profit. At that point, we are not providing any specific detail in terms of how this will play, but we do believe that it will have an impact in our gross margin. At the same time, we also have constant design for cost initiatives for the new product. As we introduce new products, usually they are in their highest growth stage in their life. As they're mature from also from sourcing perspective as well as from design perspective, we are anticipating seeing the cost is down. We're also working on this, as another initiative. As we noted earlier, specifically, Yoav mentioned it about the fact that we are ramping up the monetization of our software business, and over time, we plan to see some positive impact of these margins on the business as well. Thanks a lot. Thank you. Our next question today is coming from Ananda Baruah from Loop Capital. Your line is now live. Hi. Yeah. I guess good afternoon, good evening, to you guys. Congrats on the solid quarter. Thanks for taking the question. I have two, though. I'll ask them at the same time. The answers may be related. The first part of it is, you guys, sort of the degree of strength above what your expectations are, do you have any context you can share that you've discerned as to what the drivers of that strength was? The second part of that is, I guess any sense on. Sorry, you are disconnected. Sorry for cutting you. Can you please repeat the question? We had some connection. Oh, yeah. Certainly. Thanks. Do you have any context or visibility around what the drivers of the strength above your expectations were for the quarter? It really feels like it's for the second half of the year here. The second part of the question is, any context you can share around the shift of your revenue mix towards production, kind of currently away from the classic prototypes of business would be helpful as well. Thanks on those two. Good morning, Ananda. We are definitely were happy to see a higher revenue rate compared to what we previously thought. There was couple of elements that drove this trend. First of all is the consumption of the consumable. It really depends also on the market recovery, and we're happy to see that the market recovery is actually going better than what we thought. Utilization of our system is going up as companies are coming back. Having said that, we all know that COVID-19 is still here. We definitely see a good sign, and if you compare it to pre-COVID-19, we are nearly pre-COVID-19 level. Definitely this is a good sign that contribute to the increase of revenue above what we expected. We see, on EMEA side, a significant impact from government funding of customers, and industries specifically in Italy and U.K., in manufacturing application. We see this trend, and we hope to see this trend also going forward. The introduction of our healthcare system, including the new Jet, Dental Jet and MediJet. We just launched it in March and in May, and we saw a very, very good reception to this product. The last thing is the RPS product that we just acquired, in Q1, and we immediately launch it within our install base, and we see a very, very good reception within our go-to market and our customer, and this is again a testimony of our scale strategy, with the new technology. Thank you, Rina. Yeah, that's okay. As you know, we were the first company in the industry to share the ratio of our sales going to manufacturing. We are measuring it, and we promise, and we do it to review it once a year on an annual basis. Every first quarter, we will announce it. We are measuring it, and we are following it. We are optimistic. As I said at the beginning of this call, leading manufacturers in the world decided that the plant of the future will include additive manufacturing. This is a fact. When they are going there, they value our establishment. They want to do it with Stratasys. It's very clear, and we can see it on a daily basis. It's a journey, but we are leading this journey. We are shifting this industry on the polymer side from rapid prototyping to manufacturing. Just to remind you, we just launched three systems focused on manufacturing. It also gives more confidence to our customers that we are committed to this journey. We launch it, we announce that we will have on the Origin and on the SAF a hybrid material model, and we are building a software platform to support it. We are building the full package and put yourself in the seat of someone in the Fortune 100 when they are taking those huge decisions because they are challenging the status quo and changing the way they manufacture products. They want to make sure that they have the right partner on their side. We are the right partner. Thank you. Thank you. Our next question today is coming from Greg Palm from Craig-Hallum. Your line is now live. Yeah, thanks. You mentioned this sort of continued headwind and rising input and logistics cost. I guess I'm curious if you saw any supply chain challenges that maybe impacted your ability to fulfill orders. Are you able to quantify at least what sort of this rising input and logistics cost is? Is it 100 basis point impact, 200 basis point impact to gross margin? A little bit more color would be helpful. Good morning, Greg. As we discussed earlier in the call, we definitely prioritize getting our product to our customer on time, and despite the challenges of global shipping issues, we're minimally impacted regarding on-time delivery. The most important things, specifically as we serve manufacturing application, that customers will not have a downtime, and system will work all the time. This is our focus and the main focus. Having said that, we are definitely working, we analyzing increasing our inventory level of raw materials and finished goods to avoid any delay, increasing production levels, and preparing for sea and air delay in our planning process. We are evaluating a wider array of shipping options to ensure we can deliver goods with minimal business impact. From a cost perspective, it does impact our cost base. What we saw this quarter, that we actually had a more significant cost even compared to Q1, since the situation is worsening. If I help you a little bit to quantify it's about 2% overall between logistics cost as well as inflation and higher raw material cost overall. Okay. That's helpful. Knowing that, how are you thinking about pricing? I don't know if that's changed at all, but curious, is pricing a lever that you can pull to offset some of these rising costs, or is that not something that you're looking at necessarily? Yeah, of course. We are sensing it. We're on top of it on a daily basis, and we are adjusting where is needed. Okay, fair enough. Thanks, and best of luck going forward. Thank you very much. Appreciate it. Thank you. Please go ahead. Go ahead. Sorry. No. We've reached the end of our question and answer session. We just want to turn the floor back over to you for any further closing comments. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter. Thank you. Thank you, Dotan. Thank you, everyone. 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.