Stratasys Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Stratasys Q3 2023 Earnings Conference Call and Webcast. 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 Vice President, Investor Relations. Please go ahead, Yonah.

Speaker 1

Good morning, everyone, and thank you for joining us to discuss our 2023 Q3 financial results. On the call with us today are our CEO, Doctor. Yoav Zeiff and our CFO, Eitan Zamir. I would like to remind you that access to today's call, including the slide presentation, Is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available and can be accessed through the Investor Relations section of our website.

Speaker 1

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 2022 year. Please also refer to our operating and financial review and prospects

Speaker 2

2022 and for

Speaker 1

the Q3 of 2023, which are included as Item 5 of our annual report on Form 20F for 2022 And in Exhibit 99.2 to the report on Form 6 ks that we are furnishing to the SEC today, respectively. Please also see the press release that announces our earnings for the Q3 of 2023, which is attached as Exhibit 99.1 to a separate report on Form 6 ks That we are furnishing to the SEC today. Our reports on Form 6 ks that we furnish to the SEC on a quarterly basis And throughout the year, provide updated current information regarding our operating results and material developments concerning our company. 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.

Speaker 1

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. I will now turn the call over to our Chief Executive Officer, Doctor. Yoav Zeif. Yoav?

Speaker 2

Thank you, Yonah. Good morning, everyone, and thank you for joining us. Before going through our business update, I'd like to comment about the situation in Israel. Israel is home to about 25% of our employees who have been performing in an exemplary fashion during the war, Whether it be serving the country or maintaining our business, there has been no fundamental impact on our operations. And our factories and offices have been opened throughout.

Speaker 2

We are proud of our employees And the spirit of our country during these difficult times. Before I turn to the 3rd quarter results, As you may have seen, this morning, we announced that Aris Kakejian was appointed to our Board of Directors effective immediately. Aris is a seasoned executive with more than 30 years of leadership experience and we are pleased to have him Bring expertise across business development, M and A and operations of complex cross border businesses at scale. As always, our Board is committed to ongoing refreshment and continues to take steps that will enhance value for our shareholders. Ares' appointment followed Ziva Patier's decision to step down from Stratasys' Board Following 10 years of service as a Director, we are grateful to Ziva for her commitment and many contributions to the company and we share all the best.

Speaker 2

And for the Q3, we accomplished our results Against the ongoing challenging global macro backdrop that is marked by slower growth, higher interest rates And constrained capital spending. During the Q3, we achieved record recurring revenue from consumable sales, reflecting solid utilization of our printers and demonstrating our resilient business model and financial profile. Customer demand and our engagement with both our installed base and new customers continues to be stronger than ever. The results show that our customer recognize our unique combination of industry leading polymer technologies, the broader set of polymer materials, a unified software platform across the portfolio, Unmatched go to market capabilities and excellent customer service. And we continue to invest and innovate to stay at the forefront of additive manufacturing, while growing the business across our end use segment.

Speaker 2

Our portfolio of technology offerings continues to expand with particular focus on manufacturing applications. We deliver results comparable to the year ago period for revenues, non GAAP margin and adjusted EBITDA, Despite the increasingly challenging environment for capital spending for our customers heading into year end. Additionally, we kept non GAAP OpEx costs as a percentage of revenue Flat relative to the year ago period. As a result of our effort, I'm proud that we delivered Positive adjusted earnings per share for the 9th consecutive quarter. And to help further improve profitability going forward, We recently divested 2 lower margin unprofitable businesses from our Stratasys Direct Service Bureau.

Speaker 2

This is expected to reduce 2023 revenue by $5,000,000 but help improve profitability and focus in 2024 and beyond. We ended the quarter with a strong balance sheet of $185,000,000 in cash, Equivalent and short term deposits and no debt. This continues to support our ability to grow through combination of organic investment and accretive acquisition opportunities that will further our strategic objective to be the leading provider of additive manufacturing solutions. Our vision for the future of additive manufacturing and our leadership position in this industry On the industrial side, I want to highlight the launch of our very exciting and innovative F3300 Just last week at Formnext, the F3300 is up to 2 times faster then other polymer filament printers available today. This inaugural addition of our new FDM Enterprise platform Family is custom build specifically for manufacturing.

Speaker 2

Significant advancements in speed, Reliability and operating efficiency demonstrate our continued commitment to innovation and will bring greater economic advantage to existing users and open up new application opportunities. The increased speed of the F3300 stands out relative to any other polymer filament printers available today with increased gantry speed and material extrusion. It also offers up to 45% cost per part reduction compared to existing solution. It is loaded with sensors, which will over time provide part and print data collection capabilities to support foreseeable usage around Quality and predictable outcomes. The F3300 initially planned As a reminder, Stratasys invented FDM over 35 years ago.

Speaker 2

It is the world's most popular 3 d printing technology And we lead across aerospace, automotive and defense applications. This new F3300 platform was developed with tremendously valuable input from many of our customers over the last several years, Tailored to address their production requirement. This program included Toyota, We announced has become our first F3300 customer. The F3300 together with our other manufacturing solutions such as H350 SAF and Origin P3, our production oriented system that will expand our addressable market, facilitate growth and drive our continued leadership. Turning to some customers' success from our Industrial business.

Speaker 2

We are appreciative that the U. S. Army Picatinny Arsenal Further demonstrated its confidence in Stratasys by placing a significant order Across our entire portfolio of 5 polymer technologies: FDM, PolyJet, SaaS, Origin P3 and Neo Therolithography. These printers will be used across multiple military facilities. The strategic importance of Picatinny making such an investment in Stratasys is key as they are the organization that leads the additive manufacturing effort for the U.

Speaker 2

S. Army. In automotive, FAW, China's largest wholly owned auto manufacturer installed a variety of strategy At the forefront of the digital manufacturing transformation. Its newly installed base includes OriginOne, PolyJet J850 Prime and multiple F900 FDM systems. And we look forward to growing that relationship further.

Speaker 2

Subsequent to quarter end, We hosted our StrataFest event focused on aerospace and automotive featuring customer Testimonials from Northrop Grumman and Redford Motors. Redford is a great case study for additive manufacturing as its Lotus Type The T2 Automobile is produced using approximately 250 parts printed with our FDM system to deliver unparalleled performance. Turning to Slide 8. Our dental business continues to build strong foundations for growth as customers are scaling up with multiple unit orders and of their portfolios for both auto and implant applications. In the U.

Speaker 2

S, with its 5,000,000,000 plus dentures industry, customers are increasing adoption of our disruptive through dense solution And we expect continued acceleration in the years ahead. In the EU, we have received positive feedback from top 5 lab networks and we expect to expand our penetration there once prudent receive CE approval. On the healthcare front, we recently signed a partnership agreement with NC GmbH, A long time Stratasys partner to establish a new division called NC Medical that we specialize and focus on delivering Stratasys Medical solutions to the German market. This is part of a global strategic decision to expand our reseller network through partners who specialize In the medical field, we believe this will help increase our coverage, focus and dedication to our healthcare customer. Another new development is our relationship with Go Autodics, an innovator and manufacturer of custom made orthodics for podiatrists.

Speaker 2

They have purchased multiple SaaS printers that enabled them to quickly produce custom orthotics With high specification, increased manufacturing throughput while saving vast working time and Keep superior product fit and comfort not possible with traditional manufacturing. The Custom Food orthotic opportunity is expected to more than double to $8,800,000,000 by 2,032. Turning to software, I am pleased to say that after running a free trial program, we have commercialized our premium offering. Our portfolio to include subscription only offerings with GrabCuts Print Pro and OpenAM. Approximately half of our new FBM and SaaS customers have chosen to subscribe to GrabCAD Print Pro and we plan to operate across PolyJet, Neo and Origin as well.

Speaker 2

On our material side, we have added a number Announcement to our flagship F900 series, including offering new polymers, colors and support materials. We have also expanded the functionality of the F900 series through OpenAM by allowing users to custom tune materials and printed part capabilities. This provides additional functionality as they can alter the characteristics of Stratasys and third party materials and print their own formulations, opening up new applications to expand the reach of our products and materials portfolio. I will now turn the call over to our CFO, Eitan Zamir, to share the financial results and update on our outlook for the rest of 2023. Ketan?

Speaker 3

Thank you, Yav, and good morning, everyone. Our 3rd quarter results Continue to demonstrate our ability to consistently deliver operating leverage and drive profitability, Even in a CapEx constrained environment, we are particularly proud of how we maintain the level Our non GAAP OpEx as a percentage of revenues in a flat revenue quarter, even as we continue to invest These results highlight the financial discipline and business maturity that differentiates Stratasys in our industry. Overall, our results reflect the resilience Our diversified offerings provide continued high level of engagement with our customers and proof Now let me dive deeper into the numbers. For the Q3, consolidated revenue of $162,100,000 was essentially flat relative to Q3 2022 and was up 3.3% at constant currency And excluding MakerBot and Stratasys Direct divestment. Products revenue In the 3rd quarter increased by 1% to RMB113.2 million compared to the same period last year And was up 3.4% on a constant currency basis and excluding MakerBot, which we divested in late August of 2022.

Speaker 3

Within product revenue, system revenue declined 8.6% to $51,500,000 compared to $56,300,000 in the same period last year. Excluding MakerBot and at a constant currency, System revenue was down 5%. On a sequential basis, systems revenue grew 6.6%, Indicative of some improvement in conditions we see in the marketplace and the continued strong levels of engagement We have developed with our customers. Consumables revenue rose by 10.7 percent to CAD61,800,000 Compared to the same period last year and rose by 11.6% on a constant currency basis, excluding MakerBot. This represents another record level of consumable sales for Stratasys.

Speaker 3

Service revenue, including Stratasys Direct, was $48,900,000 down 2.4% As compared to the same period last year and was up 3.1% at constant currency, Excluding MakerBot and Stratasys Direct divestment. Within service revenue, customer support revenue grew 3.6% compared to the same period last year and increased by 3.2% on a constant currency basis And excluding Makeba. Now turning to gross margin. GAAP gross margin was 40.5% for the quarter Compared to 43.6 percent for the same period last year. Non GAAP gross margin was 48.3% for the quarter, essentially flat compared to the same period last year.

Speaker 3

GAAP operating expenses were CAD108,400,000 Compared to $86,400,000 during the same period last year. The increase in GAAP operating expenses reflected In large part, our extraordinary expenses associated with Nano Dimension expired partial tender offer as we drawn proxy contest, 3 d system proposals and our terminated deal with Desktop Metal. Non GAAP operating expenses were $74,200,000 flat as compared to the same period last year. Non GAAP operating expenses were 45.8 percent of revenue for the quarter, also flat as compared to the same period last year. As a reminder, we delivered the same OpEx level on flat revenue despite additional OpEx generated by certain acquisitions.

Speaker 3

Our ability to hold OpEx levels flat is a testament to our focus on operational efficiency through cost management. This clearly demonstrates the scalability and resiliency of our model and will serve us well as end markets stabilize And both revenues and margins improve over time. Regarding our consolidated earnings, GAAP operating loss for the quarter was $42,800,000 compared to a loss of $15,600,000 for the same period last year, Reflecting the increased extraordinary expenses described before. Non GAAP operating income for the quarter Was CAD4.1 million, which is 2.5 percent of revenues compared to CAD4.5 million or 2.8 percent of revenues For the same period last year. The modest decline is attributable to slightly lower year over year non GAAP gross profit That more than offset flat non GAAP operating expenses.

Speaker 3

GAAP net loss for the quarter was 47,300,000 or $0.68 per diluted share compared to net income of $18,700,000 or 0 0.28 The year over year decrease in GAAP profitability was due in large part To costs associated with Nano Dimension's expired partial tender offer and withdrawn proxy content, 3 d systems proposals And the terminated deal with Desktop Metal, which are excluded from our non GAAP results. I'll also remind you That Q3 2022 GAAP net income included a one time 39,100,000 Gain from the MakerBot deconsolidation, which worsened the decline in GAAP profitability in Q3 2023. Non GAAP net income for the quarter was $2,400,000 or $0.04 per diluted share Compared to non GAAP net income of $3,300,000 or $0.05 per diluted share in the same period last year. We're proud to report that this was our 9th consecutive quarter of delivering positive net income On an adjusted basis, adjusted EBITDA was $9,800,000 for the quarter compared to $9,900,000 in the same period last year, Essentially flat on a percentage of revenue basis. We used $12,700,000 of cash In our operations during the Q3, compared to the use of $18,400,000 of cash in operations for the same period last year.

Speaker 3

The use of cash was primarily driven by costs related to mergers and acquisitions activities, Defense against the hostile tender offers and proxy cost contest and related professional fees. Operating cash flow excluding costs of $13,700,000 paid to advisers related to mergers and acquisition activities and takeover defense would have been positive. We ended the quarter with $184,600,000 in cash, cash equivalents and short term deposits. Our balance sheet and cash generation remains strong. Specifically, we are well capitalized and well positioned to capture value enhancing market opportunities Now let me turn to our outlook for 2023.

Speaker 3

Last quarter, we guided full year revenue at CAD630 1,000,000 to CAD670 1,000,000 Adjusting for the CAD5 1,000,000 impact from the divestment of the 2 Stratasys Direct businesses, this is equivalent to $625,000,000 to $665,000,000 Additionally, we have noted Earlier, the delay in selling the new F3300 that was planned for Q4 this year And the soft CapEx marketplace. Given these items, we now expect revenue to range between 620,000,000 to $630,000,000 From a gross margin perspective, we continue to expect full year 2023 To be in the range of 48% to 49%. We expect gross margins to go back over 50% next year. In 2023, we expect our non GAAP operating expenses to be in the range of approximately 288,000,000 to $290,000,000 We are adjusting non GAAP operating margins To now be in the range of 2% to 2.5% for the full year. We anticipate a GAAP net loss of $117,000,000 to $104,000,000 or $1.7 Per share to $1.51 per diluted share and the non GAAP net income of $6,000,000 to 9,000,000 or $0.10 to $0.14 per diluted share for the full year of 2023.

Speaker 3

Our GAAP results and thus our outlook includes the one time extraordinary costs Associated with our acquisition related activities, the hostile tender offer, the withdrawn proxy contest and related professional fees. We expect positive operating cash flow in 2024, As we do not anticipate incurring similar costs, notwithstanding whatever cost may be incurred in 2024 related to the comprehensive strategic alternative process that we announced In late September 2023. Adjusted EBITDA is revised and now expected to be In the range of $35,000,000 to $38,000,000 for 2023. Capital expenditures are expected to range between 15 to $20,000,000 for 2023. In summary, we generated strong financial results Against a continued challenging backdrop, and we remain encouraged by the level of engagement with our customers And confident in our long term growth and profitability potential.

Speaker 3

With that, let me turn the call back over to Yoav for closing remarks.

Speaker 2

Thank you, Eitan. Our customers' appreciation and adoption of 3 d printing continues to grow. As we introduce new and improved systems, materials and software offerings, Stratasys is an increasingly critical part of their efforts to bring more agility, flexibility and profitability to Their global manufacturing operations. Additive Manufacturing has established a formidable We will be at the forefront. We have proven Time and time again, Stratasys is the industry leader, demonstrating the ability to manage the business Through tough times while still delivering superior results and profitability.

Speaker 2

I'll conclude with a few thoughts on our announcement in September To explore strategic alternatives to maximize shareholder value. Over the past few years, Stratasys We have continued to accomplish this even during challenging business environment this year and the excessive M and A noise Our focus remains on maximizing shareholder value while being cognizant Of the near term headwinds, we expect the industry and macro headwinds will abate, returning us And the industry to a period of sustained growth and increased profitability. With that, let's open it up for questions. Operator?

Operator

Thank you. We'll now be conducting a question and answer session. We ask you to please ask one question and one follow-up. Our first question is coming from James Ricchiuti from Needham and Company. Your line is now live.

Speaker 4

Thank you. Good afternoon. A question on the 3,300. I wonder if you could talk about the factors that led To the delay and what I guess is now commercial availability in the first half of the year, it requires some additional tweaks. And what does the sales pipeline, the early sales pipeline look like for this machine?

Speaker 2

Thank you. Thank you, Jim. I appreciate the question. I would say that what led to the delay is the high Commitment of strategies to quality. So we know that this machine is going to manufacturing, And we could not compromise on the quality.

Speaker 2

We worked to develop this machine together with many customers that were Both through NDA to the different features and recommended, and we already use it In Toyota, they are already using it. They share their view about the machine in Phonext last week, And there was like a lot of excitement there. I can only say that it's a very slight delay. We have very strong demand to this machine. We have already purchased order, and we I have full confidence that, that will be a transformative offering in manufacturing, mainly in Aerospace and Automotive spare parts, but also in tooling, jigs and fixtures.

Speaker 2

It's a completely different scale, Different delivery, different value proposition and that's why we already have customers that develop the machine with us waiting To start engaging and start operating the machine in rear manufacturing. Of course, also other

Speaker 4

Got it. That's helpful. Thank you. My follow-up question relates to GrabCAD. How should we be thinking The GrabCAD revenue opportunity with your customer base, particularly as you're starting as you've begun expanding it to more of the product

Speaker 2

Thank you, Jim. Grafka is an essential part in our strategy. I would say in 2 different routes. 1, we believe we need to give our customer the best experience and to make Sure that any additive manufacturing operator has when he is working, he is fully productive and has the best friendly operating system. So it's all about productivity and make the life of additive manufacturing operator, much easier.

Speaker 2

And when we are talking about GrabCut, this is we first take the customer perspective. What's going on with software in our industry is that, sorry to say, but it's almost a mess because you need 4 or 5 different software in order to print 1 part. And our vision is to take our strength, Which is based on the fact that we are producing the system, we know the loads, we know the data, we know everything, we have the largest installed base and we have the best operating system, so those are the pillars. Now we are taking those pillars and we said, okay, let's make it a platform, Connected to every partner that can make the life of the operator easier like simulation partners, like inventory traceability partners, like dashboard partners and also being able to connect to all our fleet on the other side. Now we take this graph cut and we say, okay, we want to make your life easier.

Speaker 2

The way to make The life of our operators or customer easier is to smooth the way they are running the operation. When we are doing this with GrafCut, we are bringing new products to the market. The forecast Of software in our industry get to $3,000,000,000 in the next 5 years. And we will capture this part that is not the manufacturing enterprise system, but those parts that really Make the operator life more productive and easier. We have great gross margin there, And we already launched 2 products, AM, what we call open AM.

Speaker 2

So, if you buy our software subscription base, you can use other materials and we launched what we call GrabCast Print Pro, which has fantastic features It includes the productivity. For example, what we call the accuracy center, where you can use AI to close the loop Between the end use part and the file. Now you put it together, you're becoming more productive because you print much more accurate part. This is the direction. It's going really well.

Speaker 2

Just as an anecdote, in the last quarter, 50% of our sales In SaaS and in FDM, we attach to the sale the GraphCAD I'm very optimistic about Grafka. It will be an essential part in our recurring revenues going forward.

Speaker 4

Thank you. And congratulations in what's clearly a difficult environment on a lot of levels. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Next question is coming from Greg Palm from Craig Hallum. Your line is now live.

Speaker 5

This is Danny Eggerich on for Greg today. Thanks for taking the questions. I kind of just want to start by digging into More broad based what you're seeing and maybe the implied Q4 guide, I get kind of the $5,000,000 takeout from The divestments, but on the F3300 delay, I mean, were you expecting a decent size contribution in Q4? Or how much of it is just related to a broader sales cycles lengthening and some order push outs into 2024?

Speaker 3

So we'll be we'll not be getting into the specific numbers of the F3300 contribution for Q4. But as Joao mentioned, this is a significant product and a significant launch. So once it's we reach the commercial launch, We did expect contribution to Q4, and that has an impact on our Q4 guidance.

Speaker 1

Danny, it's Yonah by the way. You asked about the order push out. So the delay had nothing to do with order push outs at all. It's clearly was only related to making sure we got the best product out.

Speaker 5

Yes, got it. Okay. I think, yes, my order push out was kind of more broad based and not necessarily related to it's 3,300, but that makes sense. I guess maybe shifting over to kind of the medium term targets that you got out there. I think most of those are below the revenue line or kind of fiscal year 'twenty four.

Speaker 5

Just wondering if you feel like you're still confident that you We'll be able to achieve all these, maybe just assuming that the macro stays consistent for the near term or next couple of quarters.

Speaker 3

Danny, it's a good question. And

Speaker 2

the answer is that we have confidence.

Speaker 3

And the main reason is that most of those measures Are within our control, and I'll explain. We've created an infrastructure, both on the cost side, on the gross margin side, On the cash flow side, that are within our control. So even in a challenging macro environment, We do have the levers and we do have the infrastructure to maintain low OpEx and to improve our cash flow. So the 50% plus gross margin in 2024, the operating cash flow positive in 2024 and the ability to maintain good OpEx level as a percentage of revenue, That's something that we're very focused and believe that can be achieved even in the macro challenging macro environment.

Speaker 5

Got it. That's helpful. Maybe just one more touching on dental. I think last quarter you had mentioned a top 5 denture producer had or Was committed to acquiring system, but what's update on that? Did that hit and maybe progress on some other potential sales within that space?

Speaker 2

Thank you for the question. In one sentence, it's the highest revenue quarter in Dental ever. So I think that's a good reflection of where we are. Our strategy is working Both on the prudent side, but also on the replenishing of the portfolio, both on the Printer side, but also on the material side, it's really working well. Also on the regulatory front, we are receiving on time The approval that we are waiting for and we will see more growth there, especially because we are focusing on what we call restorative dental.

Speaker 2

So we are less sensitive to the current macro environment where you have discretionary In our sectors like the aligners and others, we're quite sensitive to inflation, interest rate, income. On our end, we are focusing on restorative, on dentures, on removable dentures, on model, on crown and blunches in the future. So And we do it with a truly disruptive use case. So we are not there is no me too in our offering. Nothing here.

Speaker 2

It's about innovation, again, making the life of the dentist and The technician much easier, multi material, multi colors, high aesthetic, almost no labor. We are transforming this restorative sector.

Speaker 5

Great. I will leave it there. Thanks.

Operator

Thank you. Next question is coming from Ananda Baruah from Loop Capital. Your line is now live.

Speaker 6

Hey, thanks guys for taking the question. And our thoughts are certainly with you all and everyone with all that's occurring in your neck of the woods. I guess a couple for me if I yes, you're very welcome. A couple for me if I could. I guess just to start like on the macro and bigger picture, what's a useful way for us to Think about as macro, say, clears up, begins to improve Whenever that occurs, 'twenty four going into 'twenty five.

Speaker 6

Key milestones or I'll use the term milestones, but key milestones, key occurring with your industrial folks, The auto announcements are obviously quite exciting. So inside of auto, but even more broadly, aero and general industrial, What's the useful way for us to think about the dynamic signpost that kind of need to occur or will be occurring that can continue to amplify the activity into those environments.

Speaker 2

Thank you, Ananda. Mainly, a big thank you for your support. We don't take it for granted. And really, I want to thank All our customers and industry peers, the support we are receiving over the last month and a half is amazing And worth mentioning. So thank you.

Speaker 2

So maybe I'll start with the macro I believe are the main factors that will put us and the entire industry back on track. And then I will relate to the specific milestone for processes in specific vertical. So I'll start with the macro. What is the those factors that really impact us? It's very clear that those are 2, I would say.

Speaker 2

The uncertainty immediately because we are going to manufacturing And I will explain when I'll get to start at this. We are going to manufacturing. It's a very simple, but laser focused strategy. When When you go to manufacturing, you are challenging the status quo. And when there is uncertainty, the tendency of The largest manufacturer in the world to change the way they're doing things is lower by definition.

Speaker 2

At the same time, there is interest rate pressure because at the end, it's CapEx and there is a cost Of the CapEx is the interest rate, and it's all starting with the inflation and so on and so forth. But what we see now is that The inflation is stably starting with the U. S. So we are positive on this side. And also we see that No matter what happens, in the new state of the world, not with a 0% interest rate, but with 3% or 4%, Also in this world, the large manufacturers need to start a new cycle of innovation And production, and we see and I have plenty of stories on those.

Speaker 2

And when they are starting this new cycle, they are looking at additives. So those are the milestone macro wise and by, I would say, leading manufacturer. Each one of them has its own story, but if it goes to Electric vehicle or it goes to a new airplane or a new rocket or whatever, we are there. And this is the place where we can shine. Why as Stratasys we can shine?

Speaker 2

Because they are looking at digital manufacturing in their new journey. And this is what we have done for the last almost 4 years. We developed the best Solutions for real polymer manufacturing. You take the SAF and we do it by the way in 2 directions. 1 is the best Building blocks, hardware, material, software and the other one is the tailoring of those building blocks into real solution So you take the SAF, we believe this is the best cost per part in the industry.

Speaker 2

The best possible part, you can do bulk parts, no one else can do them. And then we take them to machine components. This is a use case. And you will see that we will be more and more in those machine components. You take the P3, the power properties are unique, Accuracy is unique.

Speaker 2

So we target connectors and we have unique results there. You take FDM, We have proven use cases in spare parts, aero and auto and you do it as you see it also in Jig's Constraint tooling. This is not one machine, not 2 machines. We're talking about hundreds of machines that are doing it already. You take PolyJet, we took them to use cases.

Speaker 2

We are transforming the PolyJet from prototyping into use cases, which are real manufacturing, like dentures and removable dentures. You take the new sterile lithography, we are focusing on investment casting, we are focusing on wind tunnels. For example, S1, the majority of the S1 player using our material and our machines. So the direction is clear. What you need to look when you look at the future And the milestone is that we are making progress in those manufacturing use cases.

Speaker 2

And we do it through digital solution. And by the way, we're using a lot of AI in that because we want to make sure that there is the accuracy is there. And we make sure the dose tends to recapture the data and we will leverage the AI solutions that we developed

Speaker 6

That's a lot of super helpful context. I really appreciate that. I'll see the floor there, because I'm sure there's more questions. And that was really helpful. Thanks so much.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Next question is coming from Brian Drab from William Blair. Your line is now live.

Speaker 7

Good morning. This is Tyler on for Brian. Appreciate you guys taking my questions. Just wanted to start it with, you guys mentioned that you had your record high recurring consumables revenue and Obviously, there's a lot of printer utilization. Can you just touch on what end markets you're seeing the greatest utilization in?

Speaker 2

So, great question. So we have 5 technologies. And what we have done over the last 3 years is that we Make sure that we are matching the hardware with the best material portfolio. So there was no one in the industry has a larger Polymer Material Transfolios and Stratasys. So we started with FDM and PolyJet.

Speaker 2

Then we acquired Covestro and Covestro brought to us also the Stereolithography, liquid resin, some DMP liquid resin, that's one of them we already launched, an amazing New material with unique durability outside in tough weather and also powder. So the strategy is very clear. We build a full solution. We make sure we have enough recurring revenue and that's the place The material. So when we look at the material, we want to make sure that we have material that are tougher, With the right properties for manufacturing because we have a clear solid strategy and we need also the material to support this strategy.

Speaker 2

And this is where we see also the increase in demand. We are less focusing on rapid prototyping, although we are selling quite a lot there. But we are focusing on real manufacturing. So this is the direction and manufacturing is by definition 4 to 5 times More consumption, what we call unit economic, more consumption per unit, per machine than rapid prototyping. So there, this is the place we see the growing demand.

Speaker 7

I appreciate the color on that. And just a quick question for the Covestro acquisition, was that about $5,000,000 in revenue for the quarter?

Speaker 3

Yes. As we mentioned in the past, the run rate for Covestro is roughly $20,000,000 a year. And this quarter, it was roughly $4,500,000 impact

Speaker 7

Okay. Appreciate that. I'll pass it on.

Operator

Thank you. Next question is coming from Jacob Stefan from Lake Street Capital. Your line is now live.

Speaker 8

Yes. Hi, guys. Thanks for taking my questions. I just kind of want to focus on the divestitures you made here in the quarter. I guess I'm just trying to get a sense on, you noted they were running at kind of an operating loss.

Speaker 8

How much Can we kind of expect operating margin lift here?

Speaker 2

Hi, Jacob. Welcome to the team of analysts.

Speaker 7

Yes. Thank you.

Speaker 2

So Let me start with a few sentences about SDM and why it's important in the big scheme of strategies, and then I'll let Eitan share the Specific data. So we call it SDM 2.0. Why? Because SDM is critical for our success going forward. We are going to manufacturing and SDM is manufacturing.

Speaker 2

And we focus SDM this year Only on additive manufacturing with our technologies, we restructured these. We moved from I know when I started, we had 8 sites to 3 sites, Very large size with scale, very productive, based on our technologies, the SAF, the FDM, the Origin, The PolyJet for manufacturing solution and also terolithography like investment casting, real manufacturing. So that's the idea. And once you have a strategy, we decided to divest the others that are not meeting the strategy, And this is part of the overall commitment of Stratasys to profitability. We are the only public company, the only profitable public OEM company with positive cash flow and we'll keep doing this.

Speaker 2

We'll keep improving the quality of the business And to deliver on our forecast as we did for the last 12 quarters. So we are very strong, but we are strong because we are doing those step by step discipline steps to improve the quality of the business and I'll let Eitan Sure. So Jacob,

Speaker 3

I guess, as we mentioned, the impact of those 2 divestments, First of all, only one of them impacted the Q3 results, and that was roughly $1,500,000 impact on the revenue In the quarter, we expect the impact on 2023 of the divestment of the 2 businesses roughly $5,000,000 on revenue. As you mentioned, those two businesses And we're loss making and negatively impacted our total profitability. So we expect that the divestment of those two businesses We'll have positive impact both on our gross margins and our bottom line. But we won't get into the specific details. I would just say that with the numbers that you see for 2024 and will also be on Q4 On gross margins and other aspects also benefit or enjoy the those 2 divestments.

Speaker 3

That's one of the pillars.

Speaker 8

Okay. That's helpful. And then maybe just kind of on the strategic alternatives. Is I guess, what's the timeline here? When do you kind of expect things to be, I guess, wrapped up.

Speaker 2

So you know that we cannot comment it. It's at the Board level, but I can just share The frame in a sense. We announced it. We announced that we are in a process of strategic alternatives. This process started.

Speaker 2

We have we are engaging. We have good interactions. We are engaging. And we are doing the best for our shareholders and we are taking the time to do it. There is now a war in Israel And still, we are doing the best to make sure that we are there and we are enhancing the shareholder value through this process.

Speaker 8

Okay, understood. That's all I had. Thanks guys.

Operator

Thank you. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Speaker 2

So I would like to thank you for joining. I would like to thank our team for an amazing work and for really maintaining the business and doing much better than anyone else in this industry. So I want to thank the Stratasys team and I'm looking forward to updating you again next quarter. Thank you.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
Stratasys Q3 2023
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