| SSYS Q4 2015 Earnings
Script |
SLIDE 1 & 2: TITLE
SLIDES
SPEAKER:
Operator
Good day, ladies and
gentlemen. Welcome to today’s conference call to discuss Stratasys’ fourth
quarter and full year 2015 financial results.
My name is [INSERT], and I’m
your operator for today’s call. [INSERT RELEVANT INSTRUCTIONS].
And now, I’d like to hand the
call over to Shane Glenn, Vice President of Investor Relations for Stratasys.
Mr. Glenn, please go ahead.
SLIDE 3: FLS &
NON-GAAP DISCLOSURE
SPEAKER: Shane Glenn
Good morning, everyone, and
thank you for joining us to discuss our fourth quarter and full year 2015
financial results. On the call with us today are David Reis, CEO, and Erez
Simha, CFO and COO of Stratasys.
I remind you that access to
today's call, including the prepared 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 section of our website.
We will begin by reminding
everyone that certain statements in this presentation regarding Stratasys'
belief that its comprehensive new strategy will help grow its markets, and the
statements regarding its projected future financial performance, including under
the heading “Financial Guidance,” are forward-looking statements reflecting
management's current expectations and beliefs. These forward-looking statements
are based on current information that is, by its nature, subject to rapid and
even abrupt change. Due to risks and uncertainties associated with Stratasys'
business, actual results could differ materially from those projected or implied
by these forward-looking statements. These risks and uncertainties include, but
are not limited to: the overall global economic environment; the impact of
competition and new technologies; general market, political and economic
conditions in the countries in which Stratasys operates; changes in projected
capital expenditures and liquidity; changes in Stratasys' strategy; changes in
government regulations and approvals; changes in customers’ budgeting
priorities; and other factors referred to under “Risk Factors,” “Information on
the Company,” “Operating and Financial Review and Prospects,” and generally in
Stratasys' annual report on Form 20-F for the year ended December 31, 2014,
filed with the U.S. Securities and Exchange Commission (the “SEC”), and in other
reports that Stratasys has filed with or furnished to the SEC from time to time.
Readers are urged to carefully review and consider the various disclosures made
in Stratasys' SEC reports, which are designed to advise investors as to the
risks and other factors that may affect Stratasys' business, financial
condition, results of operations and prospects. Any guidance and other
forward-looking statements in this press release are made as of the date hereof,
and Stratasys undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.
As in previous quarters,
today's call will include non-GAAP financial measures. These non-GAAP financial
measures should be read in combination with our GAAP metrics to evaluate our
performance. We also note that we are not providing any pro forma financial
results for acquisitions. Certain non-GAAP to GAAP reconciliations are provided
in the table contained in our slide presentation and today’s press
release.
Now I would like to turn the
call over to our CEO, David Reis. David?
SLIDE 4: OPENING
SUMMARY
SPEAKER: David Reis
Good morning everyone, and
thank you for joining today’s call.
The operating environment
during the fourth quarter was characteristic of the difficult market conditions
that impacted our performance throughout 2015.
This included a weaker
macro-economic environment compared to prior years, and a shift in customer
buying patterns following two years of extraordinarily strong demand.
Despite these near-term
challenges, we were pleased to recognize a favorable trend in operating
expenses, as well as an improvement in cash generation during the quarter – both
driven by the initial success of our on-going restructuring and efficiency
initiatives.
As we enter 2016, we have
entered a new phase in our company’s development.
We are looking to maintain our
leadership position in prototyping, while developing a solutions-based business
model, which targets key vertical markets and emerging applications for tools
and end-use parts.
At the same time, we are
committed to further improving our financial performance by aggressively
managing our expenses and driving additional operational efficiencies.
I will return later in the
call to provide you more detail on these important initiatives and other key
developments, but first, I will turn the call over to our CFO and COO, Erez
Simha, who will review the details of our financial results.
Erez?
SLIDE 5 & 6: FINANCIAL
RESULTS SUMMARY
SPEAKER: Erez Simha
Thank you, David, and good
morning, everyone.
As David mentioned, we
continued to observe a challenging business environment during the fourth
quarter, driven by macro-economic considerations and a lengthening of product
sales cycles in our core markets.
Total revenue in the fourth
quarter decreased by 20% to $173.4 million when compared to $217.1 million for
the same period last year.
Our core business revenue,
which excludes MakerBot and Stratasys Direct Manufacturing, declined by 14% in
the fourth quarter over last year.
MakerBot product and service
revenue declined by 62% in the fourth quarter over last year, driven by the
overall market weakness, as well as by the impact of the ongoing restructuring
of that business.
Non-GAAP net loss for the
fourth quarter was $0.7 million, or a loss of $0.01 per diluted share, compared
to non-GAAP net income of $24.9 million, or $0.48 per diluted share, reported
for the same period last year.
The Company completed the
goodwill impairment analysis of all of its reporting units that began in the
third quarter, and recognized an additional non-cash goodwill, and other
intangible assets impairment charges of $104 million, net of tax, in the fourth
quarter
In addition, the company
determined that a non-cash valuation allowance against its deferred tax assets
was required, as near-term realization of these assets is unlikely. This
allowance amounted to $95 million in the fourth quarter.
It should be noted that these
deferred tax assets have expiry dates many years into the future and we do
anticipate being able to recognize their value to offset perspective tax
liabilities.
We were pleased to end the
year with a healthy backlog of $27.3 million, versus $14.3 million at the end of
2014.
SLIDE 7:
RESTRUCTURING
Given current market
conditions, and the uncertain timing of a recovery, we continue to make
operational adjustments that better align our cost structure with the lower
growth environment.
Our ongoing restructuring
initiatives include the following:
| |
1.) |
Plans to improve working capital
management. |
|
2.) |
Reduction in global workforce by 10% during
the fourth quarter. |
|
3.) |
And programs to reduce operating expenses
and optimize manufacturing. |
The impact of these
restructuring activities will be realized throughout 2016.
We were pleased to see some
positive trends in our expenses during the fourth quarter that resulted from
these initiatives.
SLIDE 8:
REVENUE
Product revenue in the fourth
quarter decreased by 26% to $124.3 million, as compared to the same period last
year.
Within product revenue, system
revenue for the quarter declined by 37% over the same period last year, driven
primarily by the overall market weakness we discussed previously.
Consumables revenue for the
quarter was relatively flat when compared to the same period last
year.
While also impacted by the
overall market slowdown, consumable revenue growth is more a function of our
installed base, and thus less affected by a decline in system sales within any
given quarter.
Services revenue in the fourth
quarter increased slightly to $49.0 million, as compared to the same period last
year.
Within service revenue,
customer support revenue during the quarter, which includes the revenue
generated mainly by maintenance contracts on our systems, increased by 11%
compared to the same period last year, driven primarily by growth in our
installed base of systems and the success of our programs to extend service
contracts.
SLIDE 9: UNIT
SALES
The Company sold 4,629 3D
printing and additive manufacturing systems during the fourth quarter, and has
sold a total of 146,024 systems worldwide as of December 31, 2015, on a pro
forma combined basis.
Unit sales in the fourth
quarter, relative to prior periods, were impacted by lower MakerBot unit sales,
as well as the overall impact of the market factors we have outlined
previously.
For our core products, system
ASP in the fourth quarter improved sequentially and year-over-year, driven by a
product mix that favored higher-value systems compared to prior periods,
including strong sales of our Connex line.
SLIDE 10: GROSS
PROFIT
Gross margins declined to 48%
for the fourth quarter, compared to 56% for the same period last
year.
The decrease in gross margin
over last year was driven primarily by one-time items which are included in our
non-GAAP presentations, as well as the inefficiencies related to lower
production volumes.
The one-time items include a
negative impact of approximately $7.7M, related primarily to inventory
adjustments.
Product gross margin decreased
to 53% in the quarter, compared to 59% for the same period last year, reflecting
the impact of the one-time items, as well as the inefficiencies related to lower
production volumes.
Service gross margin decreased
to 36% in the quarter, as compared to 44% for the same period last year, driven
primarily by a one-time inventory adjustment, and buildup of capacity at
Stratasys Direct Manufacturing. However, service gross margins improved
sequentially from the 32% recognized in the third quarter.
SLIDE 11: OPERATING/NET
PROFIT
Operating expenses decreased
by 5% to $92.3 million for the fourth quarter, as compared to the same period
last year.
In addition, operating
expenses in the quarter declined by 3% when compared to the third quarter of
2015.
These favorable trends reflect
the positive impact of our efficiency and cost-saving initiatives, including
reductions in headcount, subcontractors, facility consolidation, and an overall
focus on reducing our direct and indirect spend.
Net R&D expenses decreased
by 4% in the quarter to $22.2 million over the same period last year, driven by
our overall cost reduction efforts.
SG&A expenses decreased by
7% in the quarter to $70.1 million over the same period last year, reflecting
the impact of lower reseller commissions and planned cost reductions.
We should note that these
planned cost reductions should not impact long-term strategic initiatives. In
some cases, we have actually increased investments in areas we view as important
for long-term growth.
Net income included a tax
benefit of $8.9 million, which resulted mainly from the impact of losses
incurred in high tax jurisdictions.
SLIDE 12: GEOGRAPHIC
MIX
The following slide provides
you a breakdown of our geographic sales for the quarter, which reflects the
broad-based weakness we have outlined previously.
Our regional results were
consistent with the trends we have observed throughout the year.
SLIDE 13: BALANCE
SHEET/CASH FLOW
Non-GAAP EBITDA for the fourth
quarter amounted to a loss of $1.4 million.
The Company generated $7.7
million in cash from operations during the fourth quarter, and currently holds
approximately $258.2 million in cash, cash equivalents, and short term bank
deposits.
Our cash from operations
improved in the fourth quarter, driven by improvements in working capital
management.
Inventory at the end of the
fourth quarter declined to $123.7 million as compared to $140.8 million at the
end of the third quarter, driven primarily by a planned reduction in production
levels, and a heightened focus on inventory management.
Accounts receivable decreased
by 6% to $123.2 million, compared to $130.7 million at the end of the third
quarter; with DSO on 12-month trailing revenue remaining relatively flat at 65,
compared to 64 in the previous quarter.
SLIDE 14:
SUMMARY
In summary,
| |
1.) |
The challenging market
environment persisted into the fourth quarter, which is reflected in our
results. |
|
2.) |
We are making
adjustments to our cost structure accordingly, and are encouraged by the
positive trends in operating expenses and working capital management.
|
|
3.) |
Given the uncertain
timing of a return to stronger growth rates, we have planned for a
continuation of current market conditions throughout
2016. |
|
4.) |
Regardless, we remain
focused on improving operational efficiencies, and will stand prepared to
make additional adjustments, to better align with changes in the business
environment. |
|
5.) |
And finally, we believe
we maintain a strong balance sheet with sufficient capital to invest for
the future and capitalize on emerging
opportunities. |
I would now like to turn the
call over to our VP of Investor Relations, Shane Glenn, who will provide you
greater details on our 2016 financial guidance. Shane.
SLIDE 15:
GUIDANCE
SPEAKER: Shane Glenn
Thank you, Erez.
As Erez mentioned, our
visibility into the timing and magnitude of a market recovery remains limited.
This uncertainty is reflected
in our revenue projections and operating budget, which assume no significant
market improvement throughout 2016.
Our guidance for 2016 is as
follows:
|
1. |
Total revenue in the range of $700 to $730
million, with non-GAAP net income in the range of $9 to $23 million, or
$0.17 to $0.43 per diluted share. |
|
2. |
GAAP net loss of $84.0 to $67.0 million, or
($1.60) to ($1.28) per basic share. |
| |
3. |
Non-GAAP earnings guidance excludes $59.0
million of projected amortization of intangible assets; $25.0 to $27.0
million of share-based compensation expense; $7.0 million in merger and
acquisition related expenses; $4.0 to $5.0 million in reorganization and
other related costs; and includes $5.0 million in tax expenses related to
non-GAAP adjustments. |
Additionally, we are providing
the following information regarding our company’s potential performance and
strategic plans for 2016:
| |
1. |
Gross margins to
improve modestly to a range of 54-55% |
|
2. |
Operating margins of
3-5% |
|
3. |
Tax expense of
$10-$11 million, which includes the negative impact of the planned
accounting treatment for deferred tax asset valuation
allowance. |
|
4. |
Capital expenditures
are projected at $60 to $70 million, with approximately $45 million
designated for completing the company’s new facility in
Israel. |
Our tax expense guidance, and
relatively high estimated non-GAAP tax rate for 2016, is a function of the
ongoing non-cash valuation allowance against deferred tax assets we expect to
record throughout the year.
As Erez mentioned, these
deferred tax assets have expiration dates many years into the future, and we do
anticipate being able to recognize their value to offset perspective tax
liabilities in the future.
The company believes that it
can achieve a significant improvement in its operating structure in 2016 which
can translate into improved operating profit compared to the prior
year.
Given the expected impact on
net income of the planned accounting treatment for tax valuation, the company
believes operating profit growth would be the best measure of performance in
2016.
Finally, at this time we are
reviewing our long term operating model, and plan to provide an update when we
observe improved visibility.
Appropriate reconciliations
between GAAP and non-GAAP financial measures are provided in a table at the end
of our press release and slide presentation, with itemized detail of the
non-GAAP financial measures.
Now, I'd like to turn the call
back over to David Reis. David?
SLIDE 16 & 17:
STRATEGIC OVERVIEW
SPEAKER: David Reis
Thank you, Shane
Following a period of
extraordinary growth that ended at the close of 2014, we continue to feel the
impact of an industry-wide slowdown.
This has required us to
re-evaluate our cost structures in order to improve our financial performance.
We continue to position our
business for future success, and are in the midst of a new phase in our
company’s development.
We are optimistic about the
potential impact of this transformation, and believe we have the necessary
components and strategy that will help us achieve our goals.
SLIDE 18: BUSINESS
TRANSFORMATION
In 2012, we completed the
merger of two industry leaders, Stratasys and Objet.
That merger, and its
successful integration, was followed by a series of acquisitions and investments
that have further strengthened our core capabilities and expanded our business
offerings.
We have now initiated the
third phase in our company’s development.
Our goal is to maintain our
leadership position in prototyping, while developing a solutions-based business
model that targets key vertical markets and emerging applications for tools and
end-use parts.
This includes heavy investment
in R&D and go-to-market initiatives to support the many growth opportunities
we have already identified; as well as incremental investments in our Strategic
Accounts, Vertical Business Units, MakerBot, GrabCAD software, and IT
infrastructure that will position us for long-term growth.
Our vision and purpose behind
these investments remains the same – to shape lives by revolutionizing the way
things are made.
SLIDE 19: VERTICALS AND
STRATEGIC ACCOUNTS
We believe software will be
crucial for future success within our industry, and through GrabCAD, we are
developing new capabilities that are vital to our overall strategy.
In addition, our go-to-market
development includes engaging our customers more directly through our Strategic
Accounts Management (SAM) and Vertical Business Unit (VBU) initiatives.
Our SAM initiative looks to
package and sell existing use cases across large organizations; while the VBU
looks to collaborate with our customers and incubate new
capabilities,
The key verticals that we have
identified include aerospace, automotive, dental, medical, and jewelry, as well
as education, which ultimately supports all of our verticals long-term, by
training the next generation of designers, engineers, and technicians.
We believe these new
initiatives will augment our current business, and address a wide-range of needs
within key vertical markets, especially for manufacturing applications.
SLIDE 20:
APPLICATIONS
Beyond prototypes, we see
significant opportunity in the tooling market over the near term, which serves
as a gateway for penetrating more advanced manufacturing applications in the
future.
Tools and injection molds are
projected by McKinsey to be a strong growth area for additive manufacturing –
with 30 to 50% of tools being replaceable with 3D printing by 2025.
Longer-term, we believe our
technology can bring many benefits to manufacturing and disrupt traditional
processes – especially within the supply chain, and for low volume
production.
SLIDE 21: INNOVATION
& PRODUCTS
We recently announced the
enhanced Objet Connex3, which provides greater functionality and a vastly
simplified user experience.
The new system is significant
in three ways:
|
1.) |
We have replaced several
single, standalone machines with a streamlined Connex product
line. |
| |
2.) |
The new system features
the Creative Color Software powered by the Adobe 3D Color Print Engine
that enables new color spectrum capabilities – expanding availability from
46 colors per palette to more than 1,000 gradient color options.
|
|
3.) |
In addition, the Connex3
now includes new software enhancements that simplify the design-to-3D
print workflow. |
The new workflow will enable
customers to upload part files directly from Adobe Photoshop to locally residing
Connex3 systems or to Stratasys Direct Manufacturing for quoting, validation,
and previewing.
We believe this
parts-on-demand functionality will be unlike anything in the industry.
SLIDE 22: MAKERBOT
UPDATE
I would like to provide you a
brief update on MakerBot.
Although we have addressed the
product reliability issues that impacted MakerBot’s performance, the desktop
space has been affected by the broader market challenges.
We have taken several steps
over the last year to improve the performance of MakerBot, including
enhancements to management, improved collaboration between our collective
engineering teams, and the development of synergistic sales
partnerships.
Additionally, we reorganized
the business to reduce expenses and re-focus the sales and marketing efforts on
the core education, and entry-level professional markets.
We expect productivity
improvements at MakerBot throughout 2016.
While MakerBot remains a
relatively small part of our overall business today, the desktop category is
strategically important for the company.
We believe that exposure to
entry-level 3D printing capabilities will lead to increased demand for more
advanced 3D printing solutions, and that significant potential cross-selling
synergies exist between MakerBot, our core customer base, and Stratasys Direct
Manufacturing.
We also believe MakerBot
remains the strongest brand in the desktop market, with an industry-leading
ecosystem and product portfolio. We remain committed to the space.
SLIDE 23;
BALANCE
We have a delicate balance to
maintain between growth and profitability.
We must maintain our
leadership position, while developing new markets, applications, and
vertically-focused solutions.
At the same time, we must
manage our expenses, drive operational efficiencies, and improve profitability
and cash generation.
We believe that Stratasys will
be a stronger, leaner, and more competitive company as a result of these
initiatives.
As we highlighted earlier,
these initiatives have already contributed to significant operational
improvements, and we are committed to further progress as we move through 2016.
SLIDE 24:
SUMMARY
In summary:
|
1.) |
We will remain focused
on maintaining our leadership position in prototyping, while targeting key
vertical markets and emerging applications for tools and end-use
parts. |
| |
2.) |
We are enhancing our
go-to-market infrastructure to provide higher-touch interactions with
customers, while moving to a solution-based selling model that unifies our
offerings, |
|
3.) |
In addition to investing
in growth opportunities we have already identified, we are investing
aggressively in initiatives to support long-term growth. |
|
4.) |
We will continue to
focus on operational efficiency to help drive improvements in
profitability and cash generation in 2016. |
|
5.) |
And finally, although we
expect market conditions will remain challenging in 2016, we remain
excited about our company’s future. |
Operator, please open the call for
questions.
SLIDE 25:
Q&A
SPEAKER: David Reis
Thank you for joining today’s
call. We look forward to speaking with you again next quarter. Goodbye.
SLIDE 26 & 27:
RECONCILIATION TABLES
