Materialise NV

NASDAQ:MTLS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Q2 2024 Materialise Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Harriet Fried of LHA.

Harriet?

[Harriet Fried, executive]

Good morning, and thank you for joining us today for Materialise's quarterly conference call.

With us on the call are Brigitte de Vet, Chief Executive Officer; and Koen Berges, Chief Financial Officer.

Today's call and webcast are being accompanied by a slide presentation that reviews Materialise's strategic, financial and operational performance for the second quarter of 2024. To access the slides, if you've not already done so, please go to the Investor Relations section of the company's website at www.materialise.com. The earnings press release that was issued earlier today can also be found on that page.

Before we begin, I'd like to remind you that management may make forward-looking statements regarding the company's plans, expectations and growth prospects, among other things. These forward-looking statements are subject to known and unknown uncertainties and risks that could cause actual results to differ materially from the expectations expressed, including competitive, dynamics and industry change. Any forward-looking statements, including those related to the company's future results and activities represent management's estimates as of today and should not be relied upon as representing their estimates as of any subsequent date.

Management disclaims any duty to update or revise any forward-looking statements to reflect future events or changes in expectations. A more detailed description of the risks and uncertainties and other factors that could impact the company's future business or financial results can be found in the company's most recent Annual Report on Form 20-F filed with the SEC.

Finally, management will discuss certain non-IFRS measures on today's call. A reconciliation table is contained in the earnings release and at the end of the slide presentation.

With that introduction, I'd like to turn the call over to Brigitte de Vet. Go ahead, please, Brigitte.

[Brigitte de Vet-Veithen, executive]

Thank you, Harriet. Good morning and good afternoon, and thank you all for joining us today.

You can find the agenda for our call on Slide 3. First, I will summarize the highlights of our financial results for the second quarter of 2024. Then I will take you through some of the progress we have made in realizing our strategic priorities over the last couple of months. And after that, I will pass the floor to Koen, who will go into our second quarter numbers in more detail. Finally, I will come back and explain what we expect the remaining months of 2024 to bring. When we've completed our prepared remarks, we'd be happy to respond to questions.

Now, looking at our key results for the second quarter 2024, summarized on Page 4, I'm very pleased to announce that we performed strongly in all of our business segments and once again delivered profitable results this quarter. Looking at this quarter's results. We realized record quarterly revenue of EUR 68.8 million, growing more than 6% compared to an already strong second quarter of 2023 and with growth in all segments.

We realized a gross margin of 57% in the second quarter, which is up from the first quarter this year and in line with the comparable period of 2023. And this solid performance enabled us to increase our adjusted EBIT to EUR 3.9 million, representing 5.6% of revenue, while intensifying our investments in particular in R&D. We generated a net profit of EUR 3.9 million, or EUR 0.07 per share. Our net cash position at the end of the second quarter evolved to EUR 67.5 million, up by EUR 4.3 million from the beginning of this year. Koen will elaborate further on these results in his remarks later in this call.

Moving now to Slide 5. I'm very pleased that again we made progress in our strategic priorities and achieved critical milestones, including the expansion in new market segments and the introduction of new technologies. First of all, we announced the acquisition of FEops, a company specializing in AI-driven simulation technology for structural heart interventions. This acquisition will create growth opportunities in the medical segment, and is an important milestone in our journey towards mass personalization.

The cardiovascular market and the structural heart market in particular is one of the markets we have been targeting with our personalized solutions. Structural heart disease, such as heart valve diseases pose a substantial medical and economic challenge as they are the leading cause of cardiovascular illness and death worldwide. Presently, 47 million people are affected by heart valve diseases and this number continues to rise. By 2030, the global annual costs linked to the adverse outcomes are expected to reach $70 billion. In the last 2 decades, interventions in structural heart have moved from open surgery to minimally invasive approaches, repairing or replacing heart valves via catheters. This created a need for better visualization and planning of the intervention.

Based on our 3D modeling and design capabilities, we developed and launched our Mimics Planner for structural heart interventions in 2019. This tool offers clinicians an interactive solution to plan and prepare their procedures. For example, by taking certain measurements to choose the right size of the device and plan how to best access the valve that needs to be replaced without blocking any important structures. This makes the procedure more precise and efficient, while ultimately ensuring better outcomes and safety for patients, thanks to this personalized approach.

The integration of FEops into our family of cardiovascular solutions is a natural progression of our mission in the structural heart space. FEops' predictive simulation technology complements our Mimics Planner, adding advanced simulations that predict how medical devices like heart valves will interact with an individual patient's unique anatomy. Integrating the FEops technology and the Mimics Planner will enable clinicians to plan by taking anatomical measurements and to simulate the impact of the placement of the device, thereby enhancing the outcomes of the procedure. I expect this acquisition to accelerate our strategy in the cardiovascular space, and we will certainly continue to update you on further progress in this space.

A second highlight I'd like to spend some time on is the partnership with nTop that we announced at RAPID in June. This partnership will create opportunities for us to tap into the market of printing serial end-use parts. nTop has developed a powerful new implicit modeling kernel and corresponding file format that can characterize highly complex, high-performance geometries at a fraction of the size of traditional CAD or mesh-based files. Until now, high-performance product designs created in nTop required time-consuming translations for build preparation and production.

Materialise's Next Gen Build Processor is a configurable software that translates large and complex 3D design files into 3D printable instructions, optimizing and managing the 3D printing process from start to finish. By integrating nTop's design software with Materialise's Magics and Next-Generation Build Processor, these designs can be easily transferred natively to Materialise's Magics for fast, high-quality build preparation and slicing, thereby allowing manufacturers to accelerate the entire design to manufacturing process and enable the production of complex parts that were previously impossible to print. This is a significant development because the current trend towards more complex and larger 3D printing files is posing challenges in terms of file size and processing time. This in essence created a barrier for our industry and limited further growth.

The collaboration between Materialise and nTop smashes this barrier by enabling the processing of complex and large design files. At RAPID, as an example, we showed the 3D-printed cylinder head produced for Wartsila, a global leader in innovative technologies and lifecycle solutions in the marine and energy markets. On its journey to enable carbon-neutral shipping and energy production, Wartsila explored innovative designs to optimize the cooling performance of the cylinder head, achieving a 60% weight reduction compared to the original design. This new design also allowed the integration of up to 10 subsystems into the final component, reducing assembly complexity and improving cooling performance.

Previously, the design complexity and file size of this innovative design made it impossible to 3D print the part using conventional large-scale AM technologies. However, by combining nTop's design software with Materialise's Magics and Next Gen Build Processor, based on implicit modeling, it became possible to 3D print the part. We will now start onboarding customers in an Early Access Program, with Nikon SLM Solutions being the first early access partner in this program. Now, this partnership is an example of the type of collaboration our industry needs to unlock its full potential in the coming years.

And this brings me to the third highlight, which is an initiative to enhance industry-wide collaboration. In my first 6 months as CEO, I have urged the industry to unite in removing the remaining obstacles to 3D printing adoption. Advancing our industry is possible. But to unlock the full potential, we need collaboration. The collaboration with nTop that I just talked about is one example of how together we can enable industry growth, and there are many other ways to collaborate. In April, we brought a large group of industry stakeholders and customers together at our headquarters to discuss specific collaboration ideas. The response was overwhelmingly positive, and I was very encouraged to push ahead with the various initiatives that we will undoubtedly talk more about later this year.

Now, Koen will take you through the detailed financial results by segment.

[Koen Berges, executive]

Thank you, Brigitte. Good morning or good afternoon to all of you on this call.

I'll begin with a brief review of our consolidated revenue on Slide 6. As a reminder, please note that unless stated otherwise, all comparisons in this call are against our results for the second quarter of 2023. In this year's second quarter, total revenue increased 6.2% to EUR 68.8 million, which is, as Brigitte already indicated, the highest quarterly revenue we have ever realized. We can report growth in all 3 of our business segments. Our medical segment turned in another very strong performance and increased its revenue by 13%. In spite of continued challenging market conditions impacting manufacturing and further conversion of our software business model, also our manufacturing and software segments, each grew by 2% in the second quarter.

As you can see in the graph on the right side of the page, Materialise Manufacturing accounts now for 43%, Materialise Medical for 41%, and Materialise Software for 16% of our total revenue during the second quarter of 2024. Over the first half of 2024, we generated over EUR 132 million of revenue, which is 1.3% above the strong first half of 2023, while we were still behind last year after the first quarter. The amount of deferred revenue on our balance sheet coming from software, license and maintenance fees amounted to almost EUR 44 million at the end of June 2024.

On Slide 7, you'll see our consolidated adjusted EBIT and EBITDA numbers for the second quarter of this year. Consolidated adjusted EBIT increased to EUR 3.9 million compared to minus EUR 0.6 million for the corresponding period of 2023, in spite of significantly increased R&D investments this year, mainly in our medical and software segments. Our adjusted EBIT margin was 5.6% compared to minus 0.9% last year. Consolidated adjusted EBITDA for the second quarter amounts to EUR 9.2 million, increasing from EUR 4.8 million in 2023. The adjusted EBITDA margin reached now 13.4% compared to 7.3% in the prior year. It should be noted, however, that the second quarter of last year included the effect from an adverse arbitration award, which amounted to minus EUR 5.2 million, which was not adjusted in the reported numbers at the time. Over the first half of 2024, we have generated EUR 6.5 million of adjusted EBIT and EUR 17.3 million of adjusted EBITDA.

Moving on to Slide 8. You will notice that the quarter's total revenue in our Materialise Medical segment increased, as said, almost 13%, building further on an already strong revenue in 2023. This continued solid growth was generated by increased revenue coming from medical devices and services sales and by higher recurring revenue from medical software, which grew respectively by 19% and 7%.

Within our medical devices and services activity, we grew both in direct and in partner sales. As a result of top line growth and of cost discipline, the adjusted EBITDA of the medical segment grew to EUR 8.2 million, with an adjusted EBITDA margin that increased further to 29.1%. Over the first half of this year, our medical segment realized the revenue of EUR 54.3 million, up by 10% from last year, with an adjusted EBITDA of EUR 16. 1 million, representing 29.7% of adjusted EBITDA margin.

Slide 9 summarizes the results of our Materialise Software segment. In the second quarter, software revenue grew by almost 2%. The impact of our further transition to a cloud and subscription-based business model was more than offset by tailwinds in our pre-print segment. Recurring revenue from software maintenance and license sales, including CO-AM, increased by 5%. On the other hand, non-recurrent revenue decreased by 6%. Over 70% of the revenue in our software segment is now considered to be recurring. This share is expected to grow further over the coming quarters with the new version of Magics v28, which was released at RAPID in June, being available on a subscription basis only.

After the launch of e-Stage for Metal in Q1 of this year, the first sales were already registered in Q2 and a new QPC partnership agreement with EOS was signed. In addition to the nTop partnership Brigitte referred to earlier, also important, Next-Gen BP partnerships with [ ASO ], [ Mitutoyo ] and Renishaw were recently announced. In spite of the top line growth, the adjusted EBITDA in our software segment decreased to EUR 1.4 million, representing an adjusted EBITDA margin of 12.2%.

As we further intensified our R&D development efforts on our factory management platform, CO-AM, over the first half of this year, our software segment realized revenue of EUR 21.7 million and an adjusted EBITDA of EUR 2.5 million, representing an 11.4% adjusted EBITDA margin.

Now, let's turn to Slide 10 for an overview of the performance of our Materialise Manufacturing segment. Also in the second quarter, manufacturing operated in a challenging market environment, which was mainly reflected in continued low prototyping demands. Nevertheless, we managed to grow revenue by 2% compared to the second quarter of last year, fueled by strong growth in ACTech and in certified manufacturing. Here, we posted stronger growth in our aerospace and med-tech strategic focus areas. In spite of the top line growth and the further realization of operational efficiencies, cost pressure and less consulting income, led to a lower adjusted EBITDA of EUR 2.4 million, representing an adjusted EBITDA margin of 8.2%. Over the first half of this year, our manufacturing segment realized a revenue of EUR 56.4 million with an adjusted EBITDA of EUR 4 million, representing 7% adjusted EBITDA margin.

Slide 11 provides the highlights of our consolidated income statement for the second quarter of this year. Our gross profit increased to EUR 39 2 million, representing a gross profit margin of 57%, which is stable compared to the 57.2% realized in Q2 of last year. Direct cost increases were offset by efficiency gains and mix effects. Our operating expenses in the quarter increased by EUR 3.5 million, or 10% in aggregate, with the largest increase coming from higher R&D spend, which grew by 17% compared to last year.

R&D investments were mainly focused on Mimics platform developments in our medical segment and on CO-AM in our software segment. Net operating income in the quarter was positive at EUR 1.2 million compared to a negative minus EUR 4.5 million last year, where, as I mentioned previously, last year included the impact of an adverse arbitration award. As a result of all of these elements, the group's operating result in the quarter was positive at EUR 3.8 million compared to the minus of EUR 0.6 million in last year's period.

In Q2, our net financial income amounted to EUR 1 million, including a positive currency exchange result of EUR 0.3 million. Interest income of EUR 1.2 million from our cash reserves more than offsets the interest expense on our gradually decreasing financial debt. Income tax expense in the quarter amounted to roughly minus EUR 1 million and offset the financial impact. All of this results once more in net profit for the quarter, equaling EUR 3.9 million, representing EUR 0.07 per share compared to a net loss of minus EUR 0.5 million, or minus EUR 0.01 per share for the corresponding 2023 period.

Now, please turn to Slide 12 for a recap of balance sheet and cash flow highlights. In the second quarter of 2024, our balance sheet remained strong. Our cash reserve at the end of the quarter amounted to EUR 125.5 million. Loan and release repayments reduced our gross debt to below EUR 58 million. The resulting net cash position at the end of the quarter was EUR 67.5 million, up by more than EUR 4 million compared to the position at the beginning of this year.

Compared to the end of last year, our net working capital was reduced by EUR 4.8 million, mainly as a result of reduced trade receivables and slightly higher trade payables, the latter partly being impacted by the recent CapEx investment that we made on the new ACTech plants. Total deferred income position amounted to around EUR 50 million, out of which almost EUR 44 million was related to deferred revenue from software, license and maintenance contracts as already mentioned.

As you can see from the graph on the right of the page, cash flow from operating activities for the second quarter was strong, mounting to EUR 8.4 million. Capital expenditures for the quarter on the other hand amounted to EUR 8.5 million, mainly as a result of the peak in investments in the new ACTech plants that will start operating in coming weeks in line with the earlier announced project plan. Even with these high CapEx investments, our free cash flow over this quarter remained close to breakeven. Investments in the new ACTech plants will continue over the coming months as we gradually increase throughput capacity to additional machinery.

And with that, I'd like to hand the call back to Brigitte.

[Brigitte de Vet-Veithen, executive]

Thank you, Koen.

Let's now turn to Page 13. I'll conclude my remarks with a discussion of our full-year 2024 guidance. Given the strength of our operational performance halfway through 2024, we believe that we are well on track to deliver the growth targets we set at the beginning of this year. Accordingly, we continue to expect to report consolidated revenue for the full fiscal year 2024 within the EUR 265 million to EUR 275 million range we communicated earlier. We are also maintaining our adjusted EBIT guidance of EUR 11 million to EUR 14 million for 2024, in spite of the recent FEops acquisition that will weigh on OpEx in 2024 and into 2025, given the integration costs and further investments in its product portfolio.

This concludes our prepared remarks. Operator, we're now ready to open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Troy Jensen of Cantor Fitzgerald.

[Troy Jensen, analyst]

Congrats on the nice results here, Brigitte and Koen. So, a couple of questions if you don't mind. So, I want to start with the acquisition. I guess I'd be slightly curious on like the size of the organization. I'm assuming it's pre-revenues right now, but this OpEx increases potentially because of the new headcount or some more insight would be helpful.

[Koen Berges, executive]

Okay. Let me first, from my end, Troy, try to answer on the financial side of the acquisition. As you know, we have not disclosed the purchase price as we also agreed that with the sellers. But I can confirm that the transaction will have no material impact on our net cash position. Nevertheless, as Brigitte explained, coming months will require further cash outs from our side as we will be accompanying FEops in its further growth, and as such, we will support the further R&D investments and working capital needs they will have. The integration of FEops will initially have a limited negative impact on our EBIT, which we expect to gradually decrease in the coming months and over 2025 by further growing its revenue and by further implementing cost synergies. But at least on the coming quarters, that will still have an impact, as Brigitte said, that we, at least in this year, be able to -- I think we can absorb within the guidance that we communicated earlier.

[Brigitte de Vet-Veithen, executive]

Yes. And maybe just one other element that might help you work through this. FEops is a growth company. So as Koen said, further investments required and as such, it's a small addition to our family, but an important one in terms of the strategic importance in this market.

[Troy Jensen, analyst]

Yes. Understood. When this does start to revenue, is this going to go into the medical business or the 3D software?

[Brigitte de Vet-Veithen, executive]

Yes. Absolutely. Yes.

[Troy Jensen, analyst]

So it does go into medical, you're saying?

[Brigitte de Vet-Veithen, executive]

Yes.

[Koen Berges, executive]

Yes.

[Troy Jensen, analyst]

Okay. And then can you remind me -- I got questions on the software side. Can you remind me how much of the medical business now is software? If we figured out, right -- if we look at the...

[Koen Berges, executive]

It's around 30% of the total medical revenue that is related to software.

[Troy Jensen, analyst]

Okay. All right. Perfect. And then also on the 3D, it's nice to see it grow. It so kind of stuck to me in that kind of EUR 10 million to EUR 12 million range. But I think you said 70% of revenues now are recurring. I'd be curious, has that been growing, Koen, and do you feel like we're at a stage now or a point where we can actually start to see growth in the time of the software business?

[Koen Berges, executive]

That is, indeed, going up quarter-after-quarter, step-by-step. I don't think we are at the end of the journey there. So, we will continue to see that conversion to the recurring business model continue for at least a couple of quarters till we've reached the end that we probably never get to 100%. But it will be a gradual journey that is going to continue and that will continue to impact our top line in the coming quarters, couple of years in that timeframe, I think, we need to.

[Operator]

[Operator Instructions] Our next question comes from the line of Jacob Stephan from Lake Street Capital Markets.

[Jacob Stephan, analyst]

I'll add to the congratulations as well on the solid quarter.

[Brigitte de Vet-Veithen, executive]

Thank you, Jacob.

[Jacob Stephan, analyst]

I guess, first, starting off here, the large kind of year-over-year improvement in medical segment EBITDA. Can you just remind us Q2 of '23, why EBITDA margins were down to just 11%?

[Brigitte de Vet-Veithen, executive]

On the EBIT? On the medical segment specifically?

[Jacob Stephan, analyst]

Yes.

[Koen Berges, executive]

That is the impact of the arbitration award that was granted against us, I think, in the course of May of last year. And that was processed in the medical results, and then also in our consolidated numbers in the second quarter of last year.

[Jacob Stephan, analyst]

Okay. Got it. And then next question. Manufacturing, return to growth here this quarter, but prototyping demand is kind of in the weak spot in that segment. I'm just wondering kind of what you're seeing in the prototyping segment after a month of Q3 here and maybe how we can think about the ACTech utilization here?

[Brigitte de Vet-Veithen, executive]

Yes. So maybe just a comment on the prototyping side, maybe less specifically to the quarter three numbers specifically, but more as to how you need to look at that, including the third quarter. The prototyping market sees a structural weakness, which I don't expect to disappear quickly. So, we'll continue to see that as an industry and therefore, also as Materialise in our results. So that's one. And then the second one is related to ACTech. Can you repeat your questions and make it specific on the ACTech side?

[Jacob Stephan, analyst]

Yes. I was just curious about capacity utilization with ACTech. More to get a sense on how you're filling out the kind of additional capacity that you guys have been building there.

[Brigitte de Vet-Veithen, executive]

Yes. So, one thing to understand is that the opening of our additional plant is in September. So in our results, so far here today, obviously, that additional plant hasn't had an impact yet. Now, we will expect to see -- so we do expect to start seeing that impact as of the opening of the facility. But it's going to be a very gradual impact. As always, when you open a new facility, there is a start-up phase, so first of all. And the second is that we do expect the fitting of the capacity, but also adding further capacity to continue over the next couple of months, quarters and years, that it's a gradual process during which we will continue to add in the new building, further machinery. So it's not a one-step immediate impact that you would see. It's a gradual increase over the coming months and a period of 1 years or 2 years.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Brigitte de Vet, CEO.

[Brigitte de Vet-Veithen, executive]

Thank you. And thank you all for joining us today. We look obviously forward to continuing the dialogue with you, as always, through our Investor Conference, our one-on-one meetings or the various calls. And certainly, please reach out to us if you have any further questions. Thank you, and goodbye to you all.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.