Hello, and welcome to the Stratasys Q1 twenty twenty one Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Yonah Lloyd, Vice President, Investor Relations.
Please go ahead.
Good morning, everyone, and thank you for joining us to discuss our twenty twenty one first quarter financial results. On
the
call with us today are our Chief Executive Officer, Doctor. Joav Zeif and our Chief Financial Officer, Lilas 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 twenty twenty year, which we filed with the SEC on 03/01/2021. Please also refer to A, our operating and financial review and prospects for the first quarter of twenty twenty one as well as B, the press release that announces our earnings for the first quarter of twenty twenty one, which were attached as exhibits to two separate reports on Form six ks 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 six ks 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, Doctor.
Yoav Zaif. Yoav?
Thank you, Yonah. Good morning, everyone, and thank you for joining us. Today, I will touch on the highlights of the first quarter and share insights from a very exciting global event we held last week. At Stratasys, we are committed to being at the forefront of the polymer three d printing market, producing and delivering the most innovative next generation technologies that address the fastest growing manufacturing applications. Three d printing is migrating from being primarily a prototyping tool to providing full scale digital manufacturing platforms at mass production levels.
Stratasys is leading this transformation with manufacturing applications in polymers, which we believe is a higher value opportunity than Meta. This year has gotten off to an exciting start for strategy. Last week, we hosted an unprecedented online event attended by over 4,500 customers, resellers and partners. At the event, we provided details on three new manufacturing focused product offering that will play an integral role in our future growth. We continue to be energized by the tremendous potential that our business and our industry has, especially in end use part manufacturing.
We expect this demand driver to produce compound annual growth of over 20% starting next year. We believe that our leadership position in three d printing will strengthen as we execute on delivering current products, while expanding and launching additional new products. Turning to our results for the first quarter, our revenues of $134,200,000 were in line with our previously stated outlook. We saw particular strength with nearly 41% growth in system revenue, which should drive future recurring revenue from consumables. Our operating cash flow was $22,800,000 following last quarter's $23,700,000 During the first quarter, we achieved several important milestones to drive our strategy.
We continued our focus on expanding the GrabCat software platform with the launch of the GrabCat software partner program. This is an ecosystem of software provider integrating their offerings with Stratasys to provide our customer with end to end additive manufacturing solutions. The program will enable customers to expand on their prototyping and manufacturing workflows to better address the opportunities for three d printing. We also released the GraphCat Connectivity Software Development Kit, SDK. This will enable developers and customers to integrate our technology in their factories and make them Industry four point zero compatible.
Our connectivity SDK is a sophisticated two way communication platform. Our customers can monitor their fleet of Stratasys printers and also use enterprise software applications like MES or ERP to communicate back. In addition, we added the industry standard MT Connect communication protocol to most systems to support data exchange between manufacturing software applications used for monitoring and analytics. This recent software releases support our customers increasing deployment of our additive manufacturing product to the production floor. We introduced our J5 DentalJet three d printer to serve the growing demand for dental solutions.
It is the only multi color multi material three d printer enabling technicians to load mixed trays of dental parts. It can produce five times more dental parts on a single mixed tray than any of our competitors offering in a compact office friendly size. We have already started to see excellent customer traction such as NeoLab in Massachusetts, which serves 3,000 orthodontics and dental clinics across The U. S. Our customers are impressed by the J5 ease of use, multiple models in one print, minimal post processing and the fact that models go from concept to production faster than ever.
The dental industry has been an early adopter of additive manufacturing for true production part and is currently over $1,000,000,000 opportunity for three d printing. We also introduced a new carbon fiber material for our award winning F123 Series three d printers that is specifically formulated for applications such as tooling, jigs and fixtures. The strength and lightweight of carbon fiber make it an excellent replacement for metal across many applications. We acquired RPS adding a top quality product line of industrial perolithography systems complementing our portfolio to give us a full suite of polymer three d printing solutions across the product life cycle from concept and design to end use parts. We continue to expect the acquisition to be slightly accretive to revenue and non GAAP earnings per share by the end of twenty twenty one.
Our customers continue to validate our innovation and technological advances as evidenced by the recently signed contract extension and expansion with Airbus. The agreement significantly increases the range of Cabin Imperial components and other parts. This is a perfect example of how Stratasys executes a land and expense strategy. The original agreement signed over five years ago only focused on parts for the Airbus A350 as an alternative to traditionally manufactured parts, increasing supply chain flexibility. Once Airbus started printing parts with our FDM technology, they soon progressed from a small number of alternate parts to using the technology for serial production at a much larger scale.
We are also able to provide on demand part service through our Stratasys Direct Service Bureau. The updated agreement increases the range of aircraft type to also include the A300, A320, A330 and A340 as well as replacement and spare parts to MRO applications. Our additive manufacturing is now part of the typical interactions with procurement through standard supplier channels as a regular course of business. As I mentioned earlier, last week at our manufacturing launch event, we announced three new product updates, which will strengthen our market leading offerings and value potential that we bring to customers. The Stratasys Origin One, best in class photopolymer three d printer that received a top to bottom optimization upgrade to improve serviceability, performance and utilization.
Key use cases include medical device components, automotive, aerospace, defense, consumer goods and dental applications such as splints, bridges, aligners and dentures. We also shared some great insights from Origin customers. Specifically, we highlighted TE Connectivity, a leader in connectors and sensor products. They are now printing thousands of parts using Origin P3 technology, including their first ever three d printed aerospace production connector. We plan to begin shipping this upgraded version in the fourth quarter this year.
The H350 powered by selective absorbent fusion or sub technology and built for true thermoplastic mass production of consistently accurate end use parts, Our Stratasys Direct Service Bureau as well as others in Europe have already started producing parts on the H350 as better users for customers in automotive, consumer goods and health care. We also introduced a renewable bio based PA11 material that is derived from sustainable castor oil, which has superior thermal resistance and is less brittle than PA12. It is the first of many new polymer materials for the H series. And the H350 is even its own customer. A dozen parts on the system were actually printed with such technology.
We plan to start shipping the A350 in the second half of the year. The F770 designed with the longest fully heated build chamber in FDM, it is a large addition to our F123 product line with a 13 cubic foot build volume. Despite its size, it's designed to be as simple to use as our other popular F123 printers and is priced under $100,000 In addition to the heated build chamber, the soluble support is another important differentiator from most other large format printers. This will save customers time and enable them to make more complex parts. We plan to begin shipping in late June.
We are on track to enter this next phase of product launches, which combined with our multiple competitive advantages will advance our position as the leading provider of polymer three d printing solutions for our world class customer base. We have the broadest most advanced polymer technologies that span the full product life cycle from concept to end parts. Our polygons and FDM systems have been the best selling units in their class and we have introduced new system for both technologies this year with more to come. Our recent RPS acquisition adds multi purpose stereolithography systems to our portfolio and we are now entering true mass production with P3 and SART technologies. No other companies as both the range and the best in class innovation that ThrustSense can deliver to our end markets.
Our software strategy as discussed earlier is based on the customer centric dynamic of working closely with many OEM across the industry. We offer a unifying comprehensive platform across our technologies that is built to interface with the top standard enterprise system. Today, GrabCAD has 36,000 application users and 8,800,000 community members more than any other platform of its kind and is at the heart of our cloud based strategy and growing software ecosystem that includes partnership with Siemens and Topology, Identify3D, Link3D, Keyshot and others. Supporting our products, we have the leading global channel that can market, sell and maintain our system for our customer. Over the years, we have built an unmatched sales and service infrastructure with market access across a network of over 200 channel partners.
This is the largest and most experienced channel in the industry. The success of these systems and technologies relies on the talented team that build, manage and maintain them. These are the expert application engineers that educate the market and continue to push the innovation envelope each day as they work with customers to address an ever expanding universe of applications. Stratasys has the largest team of engineers and customer support in our industry. They have deep multidisciplinary experience, especially in quality and process certification, which is critical for success in aerospace, automotive, health care and other sectors.
And we have a proven resilient business model designed to scale across a range of macroeconomic conditions including our successful navigation of the COVID-nineteen pandemic. We believe that as our revenue growth accelerates, we can leverage our model and deliver increasing profits while continuing to generate cash. These key advantages combined with the new technologies that we launch in the future position Stratasys to deliver on our growth strategy. We expect that as our customers return to their production facilities, we will benefit from the pent up demand. I will now turn the call over to Lilach who will share the financial results of the quarter.
Lilach?
Thank you, Joab and good morning everyone. We are pleased to have delivered on our stated goals this quarter. The revenue growth, especially the 40.9% growth in our system sales along with our strong cash generation support our cautious optimism around the continuing economic recovery from COVID-nineteen. For the first quarter, total revenue was $134,200,000 in line with our previously disclosed outlook. On a constant currency basis, total revenue declined 1% versus the first quarter of twenty twenty.
Product revenue in the first quarter was $90,300,000 an increase of 8.6% compared to the same period last year or 6.1% on a constant currency basis. Within product revenue, system revenue increased 40.9% compared to the same period last year and increased 37.6% on a constant currency basis. This growth rate demonstrates signs of end market recovery compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID starting in the back half of the quarter when our sales are typically strongest. System sales began to improve by the end of Q2 last year.
So while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year. As we noted on our last call, consumable utilization is subject to the impact of COVID. This quarter, consumable revenue was off by 8% compared to the same period last year and was down 10.2% on a constant currency basis. As the market recovers from COVID and usage rates of our systems increase, we expect to see sequential growth in consumables build as we move through the balance of the year. Service revenue was $43,900,000 down 11.8% compared to $49,700,000 in the same period last year.
On constant currency basis, service revenue was up 13%. Within service revenue, customer support revenue was $27,600,000 a 2.2% decline compared to $28,300,000 the same period last year, a decrease of 4.3% on a constant currency basis. We continue to see softness in our Power Service Bureau business SBM, which has notable exposure to commercial aerospace where COVID recovery has been slower than for other industries such as health care and education. GAAP gross margin was 41.4% for the quarter compared to 45% for the same period last year. Non GAAP gross margin was 46.7% for the quarter compared to 48.4% for the same period last year.
The pressure on gross margin is due primarily to the lower proportion of consumable, increased logistic costs and lower SDM contribution. As a reminder, SDM has a relatively high percentage of fixed costs. So the lower revenue has an impact on gross margin. We believe that impact from the logistic issue, a well known global situation as well as the slower COVID recovery impact on consumables will remain for the near future. Given the ongoing uncertainty of these issues, we expect gross margin to remain at similar level throughout the year.
GAAP operating expenses were $73,900,000 an improvement of $5,900,000 or 7.3% compared to the same period last year. Non GAAP operating expenses were $65,200,000 an improvement of $7,500,000 or 10.3% for the quarter as compared to the same period last year. Non GAAP operating expenses was 48.6% of revenue for the quarter compared to 54.7 percent for the same period last year. The improvement in operating expenses was due primarily to the proactive resizing measures we took in the second quarter of twenty twenty. From an earnings perspective, GAAP operating loss for the quarter was $18,400,000 compared to a loss of $19,900,000 for the same period last year.
Non GAAP operating loss for the quarter was $2,600,000 compared to a loss of $8,400,000 for the same period last year. GAAP net loss for the quarter was $18,900,000 or $0.32 per diluted share compared to net loss of $21,700,000 or $0.40 per diluted share for the same period last year. Non GAAP net loss for the quarter was $3,800,000 or $06 per diluted share compared to net loss of $10,600,000 or $0.19 per diluted share in the same period last year. We generate $22,800,000 of cash from operations during the first quarter as compared to generating $11,300,000 of cash in the same quarter last year. This was driven by strong collections and reduction in spending and inventory levels.
During the quarter, we successfully raised gross capital of $230,000,000 of gross proceeds and ended the quarter with $530,400,000 in cash, cash equivalents and short term deposits compared to $299,100,000 at the end of twenty twenty. We have recently made strategic investments via acquisitions of Origin and RTS to help build out our product portfolio and we continue to evaluate additional opportunities that will further accelerate our time to market and other key strategic initiatives. Last quarter, we provided our outlook for revenue growth in the second quarter and operating expenses for the full year and we are reaffirming both. For revenue, we still expect mid teens percent growth for Q2 and we expect to see sequential growth in the back half of the year with the fourth quarter being the strongest. OpEx for the full year include an increase of 25,000,000 to $30,000,000 compared to 2020, likely closer to the high end of the range.
The increase is due primarily to the return to a five days work week and the costs associated with the recent acquisition. Capital expenditures are projected to be in the range of $24,000,000 to $30,000,000 Looking ahead with our debt free fortress balance sheet, we are well positioned to capitalize on value enhancing market opportunities. We will continue to invest capital into strategic high growth area of our business, particularly around manufacturing. Where increasing customer demand and a proven history of high utilization should support substantial upside in revenue, earnings and cash flow in the coming years. With that, let me turn the call back over to Yohav for closing remarks.
Yohav?
Thank you, Lilach. Our company is executing on our strategy to expand our leadership position in polymer three d printing. The investments we have made to drive organic growth coupled with the targeted and strategic acquisitions to enhance our end to end solution portfolio should result in value creation for our shareholders. With that, let's open it up for questions. Operator?
Thank you. We'll now be conducting a question and answer session. We ask that you please ask Our first question today is coming from Shannon Cross from Cross Research. Your line is now live.
Thank you very much. I just wanted to ask, I guess, I'll ask both questions. The first is with regard to product sales or system sales. Can you just provide a little more feedback to us on exactly who are buying? What's coming in?
How much of this was pent up demand versus new demand because of some of the products you've launched? And then with regard to consumable sales, given the mix of systems that you're selling, can you give us an idea of how long it will take to see some of the follow on consumable sales and your confidence level and maybe usage rates on the products? Thank you.
Good morning, Shannon. Some flavor on our system sales, I will start with that. We definitely saw hardware strength growth across all our platforms and region in the quarter. So there is no single product or customer that drove the favorable result. We really see it across all our business.
Definitely this growth demonstrates signs of end market recovery compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID-nineteen starting in the back half of the quarter where our sales are typically the strongest. So that's why basically you see a very strong and this quarter demonstrates a recovery that we are happy to see here. Important to note that system growth will be the lead driver for growth in the year. Within the introduction of the new product, consumable will follow.
I would like to remind you that our new product will introduce more at the second part of the year and will make more impact in Q4 as opposed to the first part of the year. But we as I mentioned, very encouraged with the recovery sign that we saw already now and sure that consumable will follow. Another thing important to note that system sales began to improve by the end of Q2 last year. So while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year. But we do expect to see a notable growth during the year.
Now I will address the consumable. The consumable, we're encouraged to see continued recovery as we saw also in Q4 as also we saw in Q3. It's still below 2020 level. As a reminder, in Q1 twenty twenty, consumable and services were tracked relatively business as usual since COVID hit start to hit most to the end of the quarter. So substantially we had almost a full quarter as a comparison.
Unlike Q1 twenty twenty one where COVID still impacts during the full quarter. As we are looking ahead for the year, we expect consumables to grow sequentially based on the trajectory of the macroeconomic with the expectation that consumptions will come back to pre COVID level probably at the beginning of twenty twenty.
'20 '20 '2. '20 '20 '2, sorry. Yes. Maybe just to add hi Shannon, Maybe just to Overall, definitely there is a up. Hi, Shannon.
Definitely there is a pent up demand. Very good to be in such a place, because it's across all regions and platforms. Of course, are some differences between different sectors. So commercial aerospace and government are slower to raise mainly because of the commercial aerospace situation and the new administration in The U. S, but we see the recovery coming in the next quarter on the government side.
And of course, health care and dental like we discussed before are early to recover. And what is new in Q1 was that education really joined the health care and Delta in terms of fast recovery.
Great. Thank you.
Thank you. Next question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.
Hi. Thanks for taking my question. First one here for Yoav. If you look at results Yoav, Q1 was relatively in line with consensus. Q2 guide seems to be in line with consensus.
If you continue that in the second half, you're going to have about 8% growth this year. But some of that's acquired right from RPS and Origin. Some of that's going to come from the Zaar partnership. If you look at your marketing slides that you use, you talk about an industry that's growing 20% to 25%. So I'm just curious, what's the real outlook here for FDM and PolyJet?
And why aren't you guys growing faster than the industry if the core products are sustaining kind of that industry share and then you're adding new technologies into your portfolio?
Hi, Troy. Thank you for the question. As you know, we are not guiding the year, the overall year because of the uncertainty of the COVID and we give just very specific direction where we can commit and where we see where we have good visibility. So I can just repeat it. In general, what we are seeing is a sequential growth quarter over quarter.
We see the pent up demand as we mentioned. We know exactly where we will be in terms of the OpEx like Lilach mentioned. But overall, when you look at on our NPI status and we are delivering. We were with the J55. We launched the J5 Dental with very good traction in the market.
We launched the carbon fiber. We are delivering. We have a structured plan and we are delivering on it. We launched new product both on FDM and PolyJet. Put it together with the pent up demand, we see good, I'll take good market interest in those new products which are really at the top of the line and the next generation both in material jetting and in material extrusion.
We are leading the industry in terms of the technology. There is no doubt and we hear it from our customers. So just take both into your analysis the fact that we have those new products both on PolyJet and on FDM to the fact that we have three new technologies that we are introducing at the second half of the year and I guess you can do the math by yourself.
Okay. And just a follow-up for you Would you agree that Fortis really hasn't had competition specifically in Altemp? And do you fear that there's competition coming now given that the patents for the heated build chamber have expired?
I had a call just to share a call with a customer. I cannot reveal their name, but like the top five aerospace players in the world. And they told me and I'm quoting because I prepared myself for this call. They said, you have the best machine out there in FDM. Just help us to make it a manufacturing machine.
And that's what we are doing in terms of software, in terms of material. You mentioned the old term, it's clear that we have the best heater chamber in the market. And also in terms of software material, but not less important certification regulation allowables all this full package that we are the only one who has it. So even if someone is coming with Ultem is still many years behind us in terms of certified into aerospace and automotive. And we are keep working.
Our people are keep pushing on new patents, new IP, on better heated chambers, on better processes, on regulation. And Airbus expansion is the perfect proof for it.
All right. Good luck in the second half.
Thank you. Our next question today is coming from David Mizrahi from Berenberg. Your line is now live.
Hey, guys. So I understand the higher operating expenses in 2021, but could you just speak to how you're thinking about some of that leverage moving into 2022? Do you have any goals you're targeting to just with respect to those operating expenses?
Hi, David. Good morning. So specifically, we are not providing a specific guidance in terms of 2022, but definitely I can speak with you in the overall business model that we are anticipating. It's important to remember that as our revenue will grow with the new adoption of our new manufacturing based system, we expect to see higher profit, higher profit as we're going to have a higher profit pool and we are planning to leverage scale on our operating model. We have in place already the infrastructure in corporate and in go to market to capture new technology without adding significant costs in the long term.
And this is really our vision. This is our goal in 2022 and beyond in 2023, we definitely will be able to see this leverage on the revenue.
Got it. Okay. And then can you just also comment on how the new printers will impact gross margins going forward? The H350 for example I know it uses fewer consumables. So I'm just really curious about gross margin impact from new printers and particularly also the H350 and its competitive advantages relative to HP's multi jet fusion for example?
Thanks.
Hey, David. So we are now not specifically addressing the new product. Once we launch, we will be speak more to that. But our vision at the end of the day is we have a wide portfolio and definitely it's a mix issue, okay? And so overall it's a mix issue.
But under manufacturing strategy, revenue will be significantly higher driven by high consumption, which ultimately generates a higher profit even if consumable margin maybe lower at this model. Plus we have a design for cost initiatives in place for the new product and for the existing product that we will address over time in the future as we roll out those new products, focus on improving the cost as product will be more mature as part of the product life cycle. This is something that we definitely are actively addressing.
Maybe just to add to Lilach, the systems are in line with our overall profitability. We are living within our industry, although we are not giving gross margin guidelines as you know. But I want to relate to the question about H350. We are very proud of the H350. It's really a step change in our industry in terms of mass manufacturing.
So, of course, I'm not going to relate directly to HP, but I'm happy to share several advantages that the SAF has the SAF technology. And I'll do it very shortly. We have a whole list of advantages. But in a nutshell, I would say consistent accuracy and I mean that we have the highest consistency of part accuracy. This is a must in manufacturing.
The second one second advantage is full control of the printing process and parameters, which is super important because it enable fast certification of parts and materials which is critical in manufacturing. Everything here is about manufacturing. And the third advantage is really very good economics because we are working with single fluid. We are having high powder reuse rates and we have an exceptional nesting efficiency in terms of the load that you can put of parts in the cake. So really it's an amazing machine.
We have great plans around it and we are going to reveal more and more material for this platform.
David, it's Yonah. I would add this as well because you talk about the ability to manage against competition. Remember that we have a very large service bureau that's technology agnostic and it includes HP, it includes EOS, it includes lots of systems from lots of companies. So as we're doing our own research and development for our own products, we're actually customers using other products and it really informs our ability to make decisions to develop the best in class competitive systems out there.
Thank you, guys.
Thank you. Our next question today is coming from Noelle Dilts from Stifel. Your line is now live.
Hi, thanks. Good morning. I was hoping that you could expand a little bit on what the M and A pipeline looks like. And specifically, if you could speak to if there's been any how you're thinking about valuations for Target? Obviously, the multiples for a lot of the publicly listed companies have been volatile so far this year.
Is that impacting Target pricing at all? Thanks.
Hi, Noel. Thank you for the question. I'll start I'll take a step back and start with what is really important. We have a laser focused strategy. And everything that we are doing is subject to this strategy focus, focus, focus.
And also M and A for us the strategy is polymer manufacturing and we are actively looking for I would say, M and A opportunities like we did and execute in the past that will accelerate the implementation of this strategy. And there are many opportunities. And we are very attractive to many of the start up out there like you saw our acquisition of Origin and also RPS because we have the infrastructure. And they want to succeed and they want to make that they have they are growing their sales and they have the earn out in place and we can commit for it because we have the infrastructure and we have the machines to acquire and to integrate it into our system. So we are continuously looking for potential investment proactively and we want to maximize the value for our company and the shareholders.
And we look all over. We have a structured unit. That's the way we are working. And this unit is going and screening and scouting. And we are focusing on those technologies and companies that will accelerate our strategy in each one of our technologies.
And we know exactly what is needed in the market, which is a great advantage compared to anyone else who is looking out there in terms of financial investment or VCs. And we will keep doing this and we'll keep doing it in a very disciplined way and create value through those acquisitions.
Okay, great. And maybe just sticking with that theme, obviously still early days with Origin and RPS, but maybe could you expand upon how things are progressing so far in terms of how the market has received the deals, particularly Origin and how things are trending relative to your initial expectations? Thanks.
Thank you. Great question. It's going really well. I don't know if you had the chance to participate in our manufacturing event. More than 4,500 high end customers and partners participated there.
A significant amount of them actually I would say around two thirds also participated in the breakout session of Origin. And all the guys were there. Like all the important companies from Fortune 100 and also the top similar Fortune 100 in Europe and in Asia participated. Tesla, Nike, Amazon, Apple, GM, Ford, you name it, Lockheed Martin, they were all there because they are interested in manufacturing. And we are bringing the full package for manufacturing.
And that's why we created this team together with Origin, together with RPS. And if you participated just to close the loop, all those customers of us that I just mentioned, the Tesla, the Apple, the Google, all those customers were there waiting for the Origin machines to be out systems to be more precise for the seven seventy and for definitely for the H350 participating actively and we are going to deliver them the full package for manufacturing. So we expect strong demand on those machines. And for me as a CEO, most importantly, was very proud to see both in our press conference and also in our event that at the end we were one team, Origin, A350, the SAR joint venture and our FDM, you could see that this is a one team that is pushing forward our industry into manufacturing. Thanks very much.
Thank you. Our next question is coming from Greg Palm from Craig Hallum Capital Group. Your line is now live.
Yeah. Thanks. I guess a question on gross margin. Can you quantify the impact that you had from logistics? I'm just curious how that compares to what you said about SDM and mix overall.
And if I heard you right, I don't think you're expecting any improvement this year. So even as revenue increases at least in the second half gross margin stays at similar levels. And so it almost implies that what you're seeing is worsening because presumably there's some level of overhead absorption in the second half. So just wanted to get a little bit more color there.
Good morning, Greg. Specifically on the logistics, yes, we were impacted by the global logistic issue that you saw overall. We are not the only company who actually suffer from that. It's probably fair to assume that it's about 1% of our gross margin that impacts due to those logistic And as we mentioned on the call, we expect gross margin to stay at this level through the balance of 2021 given the uncertainty around the logistic high logistic cost and the consumable impacted by COVID. At the same time, I would like to mention that we are analyzing and increasing our inventory level of raw material and finished goods to avoid delay, increasing production level and prepare for C or L delay in our planning process.
The most important thing for us is meeting the demand. We try we are evaluating a wider array of shipping option to ensure we can deliver goods with minimal business and cost impact. It's very, very important for us to address this.
Yes. Maybe I will just add to it. There is also some positive aspects there are some positive aspects to the logistics side. So just to put to sleep on the gross margin, gross margin is a combination of the logistics, the consumable mix and SDM. And logistics was quite a large part there and really you can solve it by yourself.
But those are the those what really impacted our gross margin. And since there is uncertainty on the recovery on the consumable and the logistics, is more control on the SDM side that's why we are cautious with our projections on gross margin. But what is the positive aspect of this? What is the opportunity here? Supply chains are fragile and it's not only because of COVID.
They were fragile before COVID because of the trade wars and because of some barriers. And looking forward with The U. K, Europe, Brexit, we'll see more trade issues and tax ice freeze. Then you saw the Suez Canal blockage and the weather issues and so on and so forth. So supply chains are fragile and are being disrupted.
So it's clear to everybody that we need more resilient supply chains. By the way, we are facing the same issues. So we are also receiving some parts and machines with the Suez Canal. And we were exposed to the congestion in ports all over the world. Seven days it's the average delay globally.
And in some ports it could be ten or twenty days. So no doubt everybody understands that the future has to take into consideration digital inventory. This is a great solution. You have no shipping issues, no customs, no weather impact, no nothing. Instead of delivering from A to B across the Atlantic, you just deliver from A to A because you produce on the spot with digitally stored inventory.
It's also an opportunity. That's what I'm trying to say. And this is practically what we call Industry four point zero.
Yeah. No, it's a good point. I guess just as a follow-up because I'm still not entirely clear because usually when you have a better volume and top line, you see better absorption and you see higher gross margins. So if the assumption is that volumes and top line revenue are going to increase solidly in the second half yet gross margins are going to stay at the same level as Q1, it implies that something is worsening from what you saw here in the most recent quarter. So are you assuming that either mix or logistics or SDM worsens from here?
Just something just doesn't add up and I just want to make sure we're all clear on that.
Greg, basically we are still conservative in terms of what we see currently. No one really, really know what's going to happen with the logistic constraint that we have. There is some publications even say that maybe it will take us to the end of the year. How severe it will be? Also normal, So we see prices that we knew in Q1 actually now even higher what we see in Q2.
So prices will continue go high. So we believe the logistics situation and challenge all over will impact us significantly.
That's a great point. And also the prices went really up more to the end at least our prices of logistics from China and from Israel went up more at the end of the quarter. So we are being cautious. But I want to make one thing very, very clear. It's all about mix as we mentioned and logistics and SDM.
But overall, APS in general stayed at the same level. This isn't ASPs. Sorry, ASPs. So the average selling prices stayed more or less in general in the same ballpark and the issue is not coming from there. This is very important to mention.
Okay. Great. Really helpful. Thanks so much.
Thank you. Next question today is coming from Brian Drab from William Blair. Your line is now live.
Thanks. I was going to
ask something that's
kind of related to pricing as well. But just specifically on consumables, you're down 10% organically year over year in consumables. But I would think customer activity would have increased materially year over year given many of the service bureaus manufacturing design companies were shut down or at least slowed down materially last March. And also if you compare it with first quarter of twenty nineteen, if you go back two years, consumables revenue is down about 15% and product gross margins down over 600 basis points since first quarter of twenty nineteen. So I mean there are a few things that can explain this.
I don't know is it lower utilization of your machines? Even though machine sales have been soft, there's more machines in the market than there were two years ago. So is it lower utilization of those machines going out to the market? Or are you lowering price in consumables? Or what is it?
Thanks.
Great question. Thank You just answered it. It's slower utilization definitely. It's not that all our customers are back. And even if they are back, they are not utilizing at the same level as pre pandemic.
Add to it the fact that there are some segments that really were heavily heated by the pandemic and are slow to recover, mainly aerospace and within aerospace commercial aerospace. They are slower to recover also automotive and we are highly focusing on those because those are the high end segments that are buying our high end machines. This is manufacturing. So we are more exposed, but I have no doubt that in the future we will see them coming back strongly. The utilization will go up.
And consumable, as we said, will grow sequentially throughout the year.
Okay. And I guess, is it the same dynamic that's playing out in the system sales? Because I mean, that's a great result that system sales are up 40% year over year, but they were down 40% year over year last first quarter. And going down 40% and then back up 40% means you're still on a two year stack basis, you're still down 15% in system sales from first quarter twenty nineteen levels. Is that the same dynamic that you're just it's going to take another year maybe to get back to 2019 levels?
In general, yes. We don't know exactly when aerospace will be exactly in 2019. But what we can see is that hardware is as you see because of the deep decline in Q1 that we had in some areas of the world, we see the spend demand. And the spend demand is a sign for consumable because hardware is probably a phase or two phases before the consumable. So you can use the hardware in order to predict the demand for consumables.
Okay. Thank you very much.
Thank you. Our next question today is coming from Wamsi Mohan from Bank of America. Your line is now live.
Yes. Thank you. You did a capital raise last quarter. You're calling this as growth capital. You obviously already have a pretty strong balance sheet before that.
So how should we think about maybe pace of either M and A or investments? Is this going to be at some level of accelerated pace versus even the last few years? How should we think about the relative pace of investments and M and A? If you could share any color on that that would be helpful.
We are sticking to our strategy and to the same concept that we mentioned two quarters ago. We have a strategy. Part of the strategy is a structured M and A proactive I would say proactive scouting and screening to make sure that we are building pipeline for M and A in a way that will maximize shareholders' value through synergies. And the synergies are very clear here. There has to be some it has to be something that accelerate the strategy.
It has to be something that either accelerated through technology or go to market or material or software. So we work on the workflow, which is the software and other type of workflow or material or hardware technology. And we'll keep doing it in a disciplined way. We build an M and A team internally and it's a very strong team. We are not rushed to do anything, but we do it in a very disciplined way to accelerate the strategy.
Okay. Thanks, Jeff. And you talked about this acceleration in revenue growth in 2022 and beyond. When you think about that in relation to maybe market growth, are you expecting to take share and grow in excess of the market? And maybe if you could just talk about that growth acceleration coming between existing products and new products and try to isolate what is a cyclical recovery that can drive an acceleration in 2022 versus a more secular sustainable recovery in that growth?
Thank you.
We are going we are leading, but also in the future. We will lead the polymer manufacturing segment. We are leading additive manufacturing in polymer. This is the strategy. This is the target.
And the way to do it is by making sure that we have the right match for every application. This is why we expanded our portfolio to five technologies. In each one of them, we believe we have the best in class technology. And you know I'm already in this industry almost one point years now. And I can tell you that it's quite simple.
You need to have the best parts and this is scientific. You need to make sure that you have the best parts properties and we are working on each one of the technologies. We leverage it through our channel partners and we are delivering to our customers with focus on manufacturing a full package of hardware, software, material and services. And we package all of it in a seamless platform of software. This is a big advantage.
This is something we heard from our customers. They want to have one supplier and we will be this one supplier in polymer manufacturing. And as we said last quarter, we believe that our specific revenue will grow over 20% in this sector of additive manufacturing. So we are currently as we said last quarter in 2020 around 25% of our sales went to end use parts. We are going to grow it in the mid teens this year and 20% from next year onwards.
Thank you. Our next question is coming from Ananda Brua from Loop Capital Markets. Your line is now live.
Hi. Thanks guys for taking the question. I guess just when you guys talk about Yoav, when you talk about the revenue acceleration beyond the 20% seemingly starting kind of in 2022 going into 2023, can you share with us presumably that would be sort of through most of the pent up demand. Could you sort of share with us if that's the case? Do you really think at that point the production systems are really driving the growth?
And then if they are, do you yet have the qualifications in the key verticals kind of aero and auto that you would need for that? And if you don't have them, what do you think the difficulty level to getting there is? Thanks a lot.
Anand, thank you very much for the question. So I want to be very clear and I want to separate short term catalysts and long term catalysts here in the market. So we said and again just to clarify that the part in our sales that is going for manufacturing as we defined it as end use part will grow mid teens this year and above 20% from 2022 onwards. So this is the statement. Why we believe in it?
Because first of all there is some there are some catalysts and pent up demand in the short term because of the recovery from the COVID, because of supply chain pressure that people want to make sure that they are insuring themselves against it, because of the entire environment that we see in the macro economy. This is one. And then which is more important, everybody is seeing the long term trends that we are facing, which lead us to an inflection point in additive manufacturing. And this inflection point is underlined by as I said before by three very strong forces. One is the need to have responsive and versatile supply chain, this digital manufacturing that we discussed so many times.
The second very strong trend is the fact that additive manufacturing technology reach, I would say new levels in terms of the ability to deliver end use pulp and mass production. We were in the hundreds, maybe thousands. Now we are in the dozens of thousands and maybe hundreds of thousands. And you saw in the case of the nasal swabs that we even printed millions. So it's a different era in additive manufacturing.
And add to it the third very strong trend which is the old industry trends that you have those new segments like electric vehicles and new type of aerospace solution where polymer and composites are so important for the type of the part, for the complexity of the part, but also for the need for customization and short series of production. So it's a new era. It leads us to manufacturing. Being in manufacturing, it's a whole new story, because in manufacturing it's about new applications. It's about new materials.
It's about very strong and solid service, because you cannot allow yourself downtime. And not less important, you need software. You need software in order to be connected to the manufacturing system, the MES, the ERP, the PLM. You need to be there. And you need to put all this in one package connected.
So connectivity is also very important. And we have relationship with those blue chip customers Fortune 100 customers that are leading this transformation. And those OEMs are working with us to transform the industry. And it gives us a confidence that we are on the right direction because at the end we are not working in a vacuum, but we are working with our customers to take this industry into manufacturing.
That's super helpful. Yoav, I really appreciate. That's really great context by the way. Thanks for that. And just a quick follow-up to that.
It sounds like you have like at least a good amount of the capability in place today. You may sort of you just referenced your ability to do production parts of volume certain production parts of volume. And I like that you're sticking your neck out and giving the growth context. So thanks for that. This is fluid.
How much of sort of the capability you've mentioned software M and A etcetera workflow. How much of the capability do you think you need to get to putting together solutions software services like you said putting into one package? How challenging is that over the next call it four to eight quarters to get to where you want to be? Where your production customers are saying they want you to be able to really inflect that growth? I know that's a lot, but I think the context would be helpful.
Thanks. And that's it for me.
Another great question. We have currently the internal capabilities to deliver our strategy. Having said that, it's also clear to us that we can accelerate it. So the focus is on acceleration not on enabling, because we can do it. But this is a great place to be when you are looking for M and A, because you are coming from a place where you have the certainty that you are good with the alternatives.
We are not depending on anyone to execute our strategy. We have many that can help us to accelerate.
That's great. Thank you.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Yoav for any further or closing comments.
Thank you. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.