SSYS 2024Q2

Hello and welcome to Stratasys' Q2 2024 Earnings Call and Webcast. All participants are currently in listen-only mode. This conference is being recorded. I would like to turn the call over to Yonah Lloyd, Chief Communications Officer and VP of Investor Relations. Yonah, please proceed.

Good morning everyone and thank you for joining us to discuss our 2024 Second Quarter Financial Results. On the call with us today are our CEO, Dr. Yoav Zeif 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. 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 2023 year. Please also refer to our operating and financial review and prospectus for 2023 and for the second quarter of 2024, which are included as Item 5 of the annual report on Form 20-F for 2023, and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC today, respectively. Please also see the press release that announces the company's earnings for the second quarter of 2024, which is attached as Exhibit 99.1 to a separate report on Form 6-K that we are furnishing to the SEC today. Reports on Form 6-K that are furnished to the SEC on a quarterly basis and throughout the year provide updated current information regarding the company's 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. 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’ll now turn the call over to our Chief Executive Officer, Dr. Yoav Zeif.

Thank you, Yonah. Good morning, everyone and thank you for joining us. In the second quarter of 2024, we delivered margin improvement and maintained a healthy balance sheet, despite continued softness in hardware sales. Our results reflect the resilience of our business model, the challenges our customers continue to face from high interest rates, macroeconomic uncertainty and reduced capital equipment spending. We once again delivered growth in consumables that reflected strong utilization for existing systems, demonstrating the power of that recurring revenue stream. It is important to note that the utilization of consumables came primarily from our FDM technologies, validating that our customers are continuing their shift from prototyping to manufacturing applications, helping them more effectively manage costs and drive efficiency. This bodes well for the future as we look to expand on the manufacturing floor, with exciting new solutions that we plan to introduce. To ensure we continue to deliver long-term value for our shareholders, our ongoing priority is our commitment to innovation in materials, knowledge and workflow to address the strongest adoption opportunities. By prudently investing in technology and materials while also streamlining and focusing on key end-use applications, we are positioning Stratasys for its next phase of growth. During and subsequent to the second quarter, we achieved a number of milestones and new product introductions I'd like to share. One of the most exciting successes in the quarter was solidifying our partnership with aviation manufacturing pioneer AM Craft, aligning our two companies' efforts to grow the capability and demand to design and additively manufacture EASA-certified aircraft sustainment parts. Aviation is a great example of the value that additive manufacturing can bring. Aircraft have long lives and require continuous repair and improvement. The low volume, high mix nature of the parts aftermarket presents supply, cost and logistical challenges to keep planes in the air and thus producing revenue. Additive manufacturing helps solve those challenges, often providing improved part design within region and on-demand manufacturing in aviation hubs at competitive and often lower cost than traditional supply. AM Craft holds an EASA Part 21G production organization approval, making it a qualified provider of airworthy parts to the aviation industry. Together, we look forward to supporting the development of their global production capability and market awareness. During the quarter, we introduced new SAF High-Def printing capabilities. With the launch of our H350 version 1.5, which provides additional applications and use cases for a growing set of manufacturing end users, without compromising speed or quality. This updated H350 has recently started shipping. To complement that launch, we announced the commercial availability of our new ground-breaking material, SAF Polypropylene for use in both the original and the upgraded H350. Developed in partnership with BASF, this exciting new material is designed to provide superior quality and lower cost per unit. The material is ideal for use in high volume manufacturing applications like automotive, medical, consumer, sports and industrial, while maintaining exceptional quality across the entire build. In medical, we launched the J5 Digital Anatomy 3D Printer, a major step forward to address the growing demand for cost effective, high-fidelity anatomical models. The new printer will enable hospitals, medical device manufacturers and research institutions to improve patient outcomes through enhanced surgical planning, streamlining operations and bringing products to market more quickly. We also announced the enrollment of the first patient in a landmark clinical study to assess the use of 3D printed models for orthopedic oncology. We co-sponsor the study with Ricoh USA, seeking to demonstrate potential improvements in surgical outcomes such as reduced blood loss, shorter operating times under anesthesia, and decreased risk of procedural complications. The study is expected to last 12 months and involve up to 150 subjects across three sites. This is just the latest example of how the power of additive manufacturing is an excellent solution to improve patient outcomes. Now I will turn to one of the most important parts of our future growth suite of offerings, software. Our software provides value to our business and allows customers to work with many different technologies, both ours and others, thereby increasing the overall total addressable market. Software contributes to our revenues, as both a standalone offering and included when we sell printers. The cornerstone of our software is the GrabCAD Print Pro for print preparation and GrabCAD Streamline Pro for operations. GrabCAD Print Pro is available across FDM, SAF and most recently PolyJet. Adding PolyJet adds that large installed base of 3D printers to GrabCAD. Demand for Print Pro remains robust with a number of multi-year licenses sold. GrabCAD Streamline Pro works with FDM and PolyJet customers who need to scale 3D printing prototypes, tooling, and end-use parts. We include the software with new printers as part of the initial purchase, and after a one-year free trial, the license is available for purchase. Launched in the first quarter, Streamline Pro has really hit the ground running and is building momentum. Also as part of our software platform, we introduced part on demand by GrabCAD, a new integration that synchronizes the company's software with Stratasys Direct, our parts service bureau, allowing customers to access its fleet of printers and expanding their network of manufacturing with Stratasys, a pre-certified producer. And finally, I'm excited to share that we have launched our new GrabCAD IoT platform featuring connected service and advanced reporting and alerts. The platform demonstrates our customers' first Stratasys digital transformation capabilities, enabling value-added services through advanced supervisory control and data acquisition. The GrabCAD IoT platform offers a high-quality software solution that ensures dependable, robust and secure near real-time data collection. It improves printer uptime, speeds up issue resolution and boosts value for our Streamlined Pro users. These new features have launched on our PolyJet J3 and J5 systems, and we expect to expand them across our fleet of printers over time. Now I'd like to highlight some milestones subsequent to the quarter's end. First, we announced our plan to move our US headquarters in Eden Prairie to a single, newer, leased facility a few minutes away. The new facility provides us with more space to enhance collaboration and creativity while improving efficiencies. Given the huge multibillion-dollar total addressable market dental represents, it remains a major area of focus. We recently introduced the DentaJet XL solution, our latest innovation in dental 3D printing technology. This new printer is high speed, designed to further improve lab productivity and reduce costs. The DentaJet XL produces simultaneously and at scale highly accurate models for crowns, bridges, implants, and aligners, as well as surgical guides. As a reminder, our TrueDent solution delivers a real, tangible value proposition for dentures, representing the only mono-block, full-color solution in 3D printing, creating realistic dentures for patients, and driving game-changing economics to our customers. Due to its substantial cost savings, we are in active discussions with leading dental channels, including some of the largest dental service organizations in the United States, and look forward to continued strong performance in this industry. Finally, we recently announced that our collaboration with CollPlant has advanced to a preclinical trial where the study will test the ability of printed breast implants to promote the growth of natural tissue and completely degrade over time without triggering an immune response. This would be a revolutionary alternative for both reconstructive and aesthetic procedures that represent a significant opportunity to serve the $3 billion breast implant marketplace. This is inspiring work as we push the boundaries of innovation to improve lives and advance healthcare. Now turning to our Board's strategic review process. After a comprehensive review of a wide range of strategic alternatives to unlock shareholder value, the Board determined that implementing various restructuring actions will best position Stratasys to maximize value for our shareholders. These actions will support our efforts to retain and build on our additive manufacturing leadership. They will serve to strengthen our industry-leading balance sheet and robust business model to more effectively weather all market cycles, positioning us for outsized profitable growth in the years ahead. We expect the restructuring actions to produce approximately $40 million in annual cost savings beginning in the first quarter of 2025, which is expected to generate an annualized EBITDA margin of 8% at current revenue levels. The initiatives are focused on two important areas. The first is to adjust our cost structure to better match current market conditions, primarily through a headcount reduction of approximately 15% by the end of this year, which will drive the majority of the expected savings. Second, we are strengthening our effort to increase market penetration by helping our customers overcome barriers to wider additive manufacturing adoption. We will utilize our scale and breadth of technology to focus our go-to-market efforts on the main growth drivers of our business. Over the past few years, we have seen continued penetration of additive manufacturing with applications across multiple sectors such as aerospace and automotive for tooling and parts, dental for various uses, medical for pre-operative needs, and others. However, penetration has not accelerated as expected. We continuously assess our business operations to ensure that we are optimally aligned with market conditions and have been closely monitoring this prolonged cycle of reduced client capital spending, which is stretching longer than anticipated. We’re making it easier for customers to more broadly adopt additive manufacturing by addressing the total cost of ownership, which is largely influenced by material consumption. We are also increasing resources to better educate and support our customers, engineers who are still learning to fully utilize the benefits of additive manufacturing design and workflow, and we will increase our effort to standardize additive manufacturing to better align with traditional manufacturing processes. We are also focusing on applications where additive manufacturing presents the most compelling benefits relative to conventional methods. Over the past years, we have shared some of these innovations with you, such as the manufacturing focused F3300 Printer, proven dental solutions such as TrueDent, and our suite of specialized software offerings. These steps are designed to help us align costs with current conditions, build a long-term and significantly more profitable cash-generating business, and stay agile during downturns while being ready to respond quickly when customer spending returns. When the right technology is used for the right applications, our customers are happy and we generate recurring business. As an example, one of the world's largest automotive OEMs has purchased dozens of our systems over time and typically sees an ROI on printer purchases within 12 months. So when deployed properly, the technology delivers and can lead to increasing demand over time. As we have noted consistently in recent quarters, customer utilization, engagement level and demand continue to be strong despite the current purchase constraints of our customers. Our diverse portfolio of hardware, consumables and services, including our part business, strengthens our resilience, especially during extended periods of reduced capital spending. We are confident that once current headwinds subside, renewed access to capital will allow customer spending to more accurately reflect the expressed high demand for our solutions. While we cannot control macroeconomic factors or end market conditions, we are committed to managing what we can, with a strong balance sheet and disciplined strategy. These decisions reflect our responsibility to both fiscal and human capital and we are confident that these changes will help us achieve our targets of leading this industry and delivering a consistently more profitable, cash flow-positive company, proving the strength of additive manufacturing as a foundation for innovation and business success. While these restructuring actions mark the conclusion of the formal strategic review process, the Board and management are always open to continue exploring opportunities that would potentially benefit our shareholders. Over to you, Eitan.

Thank you, Yoav, and good morning everyone. We continue to face challenges that the macroeconomic environment is presenting to our customers, which is driving weakness in their capital expenditure spending. Despite the year-over-year decline in revenues, we delivered improved gross margin thanks in part to strong consumable sales and a relentless focus on cost controls. Now let me get into the details of our numbers. For the second quarter, consolidated revenue of $138 million was down 13.6% compared to Q2 2023. Product revenue in the second quarter was $93.6 million compared to $109.1 million in the same period last year or down by 14.2%. Within product revenue, system revenue was $29 million, down by 40% compared to $48.3 million in the same period last year, with longer sales cycles being a key contributor. Consumables revenue grew 6.3% to $64.6 million compared to the same period last year. As Yoav mentioned, the ongoing strong performance of consumables signals that the utilization rates of the systems we have sold remain robust. It is important to note that we expect consumables demand to be resilient for the foreseeable future despite recent weakness in hardware sales as the installed base continues to be well utilized. Service revenue, including Stratasys Direct, was $44.4 million compared to $50.7 million in the same period last year, reflecting a decrease of 12.2%. Absent divestitures, service revenue was down 2.4%. Within service revenue, customer support revenue was down 3.8% compared to the same period last year. Now turning to gross margins, GAAP gross margin expanded to 43.8% for the quarter compared to 41.5% for the same period last year. Non-GAAP gross margin also grew to 49% for the quarter compared to 48.5% in the same period last year. The improvement versus the prior year period was driven in part by a greater mix of consumables and high margins from Stratasys Direct due to divestitures. GAAP operating expenses were $86.5 million compared to $99.9 million during the same period last year. The reduction in expenses was primarily related to lower costs related to prospective and potential mergers and acquisitions, defense against hostile tender offers, proxy contests and related professional fees. Non-GAAP operating expenses were $70.9 million compared to $72.5 million during the same period last year, due primarily to lower employee-related costs. Non-GAAP operating expenses were 51.3% of revenue for the quarter compared to 45.4% for the same period last year. Regarding our consolidated earnings, GAAP operating loss for the quarter was $26 million compared to a loss of $33.7 million for the same period last year. Non-GAAP operating loss for the quarter was $3.2 million compared to operating income of $5 million for the same period last year. The change reflects the lower overall revenue and increase in operating expenses as a percentage of revenue, offset somewhat by lower employee-related costs. GAAP net loss for the quarter was $25.7 million or $0.36 per diluted share compared to a net loss of $38.6 million, or $0.56 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3 million or $0.04 per diluted share, compared to net income of $2.5 million or $0.04 per diluted share in the same period last year. Adjusted EBITDA was $2.3 million for the quarter compared to $10.6 million in the same period last year. We used $2.4 million of cash in our operations during the second quarter, compared to the use of $23.2 million of cash for operations in the same period last year, including $3 million of capital expenditures. Free cash flow for the quarter was negative $5.4 million. We ended the quarter with $150.9 million in cash, cash equivalents and short-term deposits, compared to $161.1 million at the end of the first quarter this year. Our balance sheet remains strong and we are well capitalized and well-positioned to identify and capture value enhancing market opportunities. Now let me turn to our outlook for 2024. We expect the ongoing challenging backdrop to persist for the remainder of the year, continuing to cause delayed purchases and longer sales cycles. We are optimistic that our hardware sales in the second half will grow compared to the first half due to our improved pipeline, expected higher government sales and continued strength in dental. Based on our first half results and current visibility of our near-term opportunities, we're adjusting our full year guidance as follows. We now expect full year 2024 revenue to range between $570 million to $580 million. We expect third quarter revenue to slightly improve sequentially from the second quarter this year. From a gross margin perspective, we now expect full year 2024 to be in a range of 48.7% to 49%. For 2024, we expect our operating expenses to range between $276 million to $278 million. We now expect non-GAAP operating margins to be between 0.5% to 1% for the full year. We anticipate a GAAP net loss of $106 million to $91 million, or $1.50 to $1.29 per diluted share and non-GAAP net income of $1 million to $4 million or $0.01 to $0.05 for the full year. Adjusted EBITDA is now expected to be in the range of $24 million to $27 million for the year. Capital expenditures are now expected to range between $20 million to $25 million for the year. With that, let me turn the call back over to Yoav for closing remarks.

Thank you, Eitan. In summary, we are continuing to differentiate ourselves during challenging times for the industry and make the hard yet necessary adjustments to maintain and accelerate our leading position. Our investment in new and exciting technologies is advancing, as evidenced by the products we are bringing to market that will serve our customers well, as they accelerate their adoption of additive manufacturing. We spoke in the past of an inflection point where additive manufacturing graduated from a prototyping niche to becoming a cornerstone of the manufacturing process, and we continue to see signs of this momentum as we march ahead. We look forward to a return to strong growth from the pent-up demand in system sales when the current environment eases. In the meantime, we will continue to deliver the excellence our customers deserve as industry leaders in technological innovation, service, and reliability. Thanks to our robust balance sheet, diversified product and software offerings, the cost-saving initiatives we are announcing today and the large and growing opportunities ahead, we look forward to delivering relative outperformance and enhancing shareholder value. With that, let's open it up for questions.

Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from Greg Palm from Craig Hallum. Your line is now live.

Hey, thanks for taking the questions here. A couple ones I guess. I want to first start with the strategic alternatives process. I know you formally wrapped it up. But as you look back on it, curious if you learned anything during this process. Presumably, you were talking with lots of industry players. But for example, did you get a better sense of what's needed to drive better profitability across the industry? More importantly, has your view on consolidation changed at all? Just going forward, can you just give us a little bit of sense on the process and what you learned?

Thank you, Greg, for the question. What we have learned, we were involved in a few opportunities, analyzed them in depth. Bottom line, we are investing in strategies. I think this is the bottom line and this is the key learning from the entire process. We have the right technologies, we have the right focus on the right use cases. We have unique assets and we better put our money to create shareholder value by creating value through the assets that we have through taking our solution to the market. And I have no doubt, despite the challenges, the macroeconomic challenges, and the challenges with hardware, that Stratasys is the best company in the industry. We still believe in consolidation, but with reasonable multiples and valuations because we still believe in scale. But with the current situation, the board came to the conclusion that we better invest in services.

Yeah, okay, understood. And then my second question on the pent-up demand, are you able to quantify exactly what's out there? And for example, do utilization trends give you any insight into the timeline where certain new customers may need to actually be forced to invest in new systems? I know we're all cognizant of the macro and manufacturing cycle and whatnot, but just sort of wondering what kind of visibility you have over the next six months to twelve months?

So, thank you. So, as you know, we are not quantifying because this industry often falls into the trap of promising. But I can share observations from the market. Post-COVID, people bought machines and businesses bought significant large quantities of machines and not all of them were utilized. And now that interest rates are high, they are focusing on ramping up those machines, increasing utilization. And we can see that, we can see that in key use cases, the utilization is going up. It's not an accident that our consumables are increasing quarter-over-quarter, year-over-year, with similar utilization in the high-end machines. A very strong utilization that we didn't experience in the past. And this is by definition also balancing the old install base that we have. And we still increase the number of spools or kilograms that we are selling in materials. Once interest rates ease a bit, I believe we will see this pent-up demand. Because there are two effects to the increased utilization. One, you will need more machines because there is only so much one machine can deliver in terms of capacity, but not less importantly, customers learn how to work with additive as part of their manufacturing solution. The moment they are there and the moment more people within the organization know how to operate it, how to design for additive, we are in a much better place because this is one of the most important constraints. So capital expenditures will be released and we will be there ready to sell.

Understood. Okay, I appreciate that. Best of luck.

Thank you. Next question is coming from James Ricchiuti from Needham & Company. Your line is now live.

Hi. Thanks. So it looks like with the second half you are assuming sequential improvement in revenues. I would have thought your gross margin outlook would have been a little better in the second half. So talk to us a little bit about what drives that. Is that just a higher mix of hardware? And with that, wouldn't the new products contribute to better margins on the hardware side? Thanks.

Thanks, Jim, for the question. So you actually hit it on the head. When we think about gross margin, first of all 49% is a very solid gross margin for Q2, when we think about the second half of the year, it is mainly a mix of hardware, consumables and services. The changes, the differences between 49% to 48.8% are really small differences that can be impacted by different mixes and specific deals. So, I think the bottom line is that we believe that the second half of the year and the full year of 2024, we will maintain high gross margin at the 49% levels, which I think is very promising for the future. When you take into account the restructuring and the savings that will come from the restructuring as you model the next year, this percentage will even increase further.

Regarding the hardware pipeline, you mentioned some areas that boost your confidence in improvement for the second half, particularly in government dental. Could you elaborate on where you feel more certain and where there is still some uncertainty?

So, Jim, maybe at the start I'll say that when you look at the model, on the guidance, we actually used very, very moderate growth for the second half of the year compared to the first half. When we think about the offering and the changes in the second half, first of all, we have the F3300 that we've just launched and we expect to be stronger in the second half of the year. We have TrueDent that is improving and growing and some other offerings. We also have better visibility to the pipeline for the second half and we see a stronger pipeline. And maybe last but not least, you are with us, with the industry for so many years. There is seasonality. The second half of the year is usually stronger. So we bake that also into the model. However, when you look at this, all in all, very moderate growth for the second half which we know we try to be conservative in our approach.

Okay, thank you. Thank you.

Thank you. Next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.

Hey, gentlemen, thanks for taking my questions here. Maybe a couple of questions for Eitan. Of the $40 million operational expenses or the $40 million cost savings for the year, how much is going to be in cost of goods sold versus operational expenses?

Troy, hi. We will not provide the exact details. The $40 million is total. It will be broken or split between cost of goods sold and operational expenses. The majority will be in operational expenses naturally, but there will be incremental savings and improvements to gross margin following this restructuring.

Okay, perfect. So here's another question for Yoav. You may not be able to answer it, but I'm going to ask anyway. How much of your strategic review was influenced by your desire to keep Desktop Metal, and are you hoping to wait a year or so to allow Nano to integrate with them before ultimately merging?

Obviously, I cannot comment on such a thing. I can only repeat what I said. Currently, we believe that the rightsizing of the company, the focus on our key drivers and use cases and focusing on adoption where we have an advantage because of our application engineers and the fact that we are close to the biggest adopters of this technology will generate higher value to our shareholders. Starting with an 8% EBITDA margin, we are quite certain about this 8% EBITDA margin. This is not something we are just throwing on the table. We are certain in our ability to be profitable also from 2024, from Q4, and on 2025 assuming the same levels of revenues. This is really unique in our industry. We believe that once we see growth coming back, and it will because the pent-up demand is there, EBITDA will be even larger.

All right, one last question for you, Yoav. I'd like to talk a little bit about Bambu Labs. I mean, it's a company that I started hearing a lot more about. And obviously, this quarter you guys filed a patent lawsuit. So can you just kind of talk about the low end FDM? Are you guys seeing more competition there? And why so aggressively go after Bambu? There are so many others that are probably violating your technology, too.

In general, we, by divesting MakerBot, made a statement that we are not playing in the low end FDM market. We are not there. We are going for the industrial FDM market, which requires different standards, different part properties, different materials, and we don't want to even compete there. Having said that, our shareholders deserve return on their investment in innovation. We need to take care of our shareholders. This is part of our commitment to safeguarding our intellectual property. We filed this complaint, this action against Bambu in Texas, and we believe that no one can use our IP without paying for it. We are talking about ten essential patents.

Okay. Understood. Good luck in the second half, gentlemen.

Thank you. Our next question is coming from Jacob Stephan from Lake Street. Your line is now live.

Hey, guys, thanks for taking my questions. I guess I just wanted to touch on the restructuring initiative as well. I guess when you think about the 15% workforce reduction, is that kind of a broad based workforce reduction? Or I guess are you kind of realigning some of these resources within the company and making broader kind of cuts? Any comments that would be helpful.

Thank you for the question. The restructuring is, I would say in a short sentence, it's strategy-led restructuring. It is not across the board, it's not blind. We have a strategy. We are sharpening our strategy based on current market conditions, and we are focusing on adoption. What does it mean? We are narrowing the focus to proven use cases, to education and enablement, and to complete workflows that will be integrated to the standards of our customers with a much better total cost of ownership based on better prices of material. So this is the strategy now we are structuring the whole company based on this strategy to make sure that we have the right profitability profile, which doesn't exist in our industry. I don't want to say we are the only profitable, but probably one of the rare companies that are profitable in our industry even in these challenging times. We are talking about certainty in this profitability. Again, 8% EBITDA margin, cash flow positive and starting with profitability in Q4, not promises for the next five years, and it will increase over time. This is only the starting point.

Got it. Okay. And I guess, you know, as kind of a follow-up here, following the guidance in '24 here, essentially we are going from flat year-over-year revenue growth to down 9%. I just want to get your confidence gauge on the medium-term target of $1 billion in revenue in '26?

Maybe to start. I just want to remind you all that if you go back to our Q4 2023 earning call presentation, we actually reminded everyone about certain divestments that we did during 2023. So when you compare 2024 to 2023, just please make sure that you bake into that $616 million that we provided you back then in Q4, which is the fair comparison to 2023. Still there is a reduction which is driven by the hardware challenges that Yoav mentioned earlier. I do want to highlight and to emphasize the consumable business in both Q1 and in Q2, we showed a nice growth year-over-year in consumable business. We expect the improvement in consumable revenue to continue in the second half of the year. I think that's a very critical point, when you compare 2023 to 2024, that is recurring business and that also emphasizes the utilization of our systems, especially the high-end and the ones that go to manufacturing. And that's where we gain the confidence for the future. As for longer-term growth, I think we are very careful considering the last few quarters about the future or the further future. That's why we emphasize that the measures we took with this restructuring is basically, as Yoav mentioned, to create certainty of meaningful profitability and meaningful operating cash flow already in 2025, regardless of future growth and regardless of improvement in the macro environment that could potentially create growth.

Got it. Thanks, guys.

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

Hi, thank you for taking my questions. Yoav, I wanted to ask you to discuss the potential impact and your thoughts on the risks of making necessary short-term cuts, which would clearly be beneficial for margins, but could affect revenue growth. You've maintained operational expenses that have been between 46% to 48% of sales for several years. Many seem to believe that this level of spending is essential to support new product development and maintain your go-to-market capabilities. How should we approach this?

Thank you, Brian, for the question. You know, there is something that keeps me awake at night: this balance between short-term profitability and long-term growth. I think that the key here is that the restructuring is not across the board. This is strategy-led restructuring. That's the way to make sure that we’re managing the impact of the restructuring on growth. We will maintain growth, especially when we will see recovery or an improvement in the business cycle. So, how are we doing it? It's clear that the purpose of the restructuring is to create shareholder value while maintaining a very clear strategy that creates value and profitable profile of our P&L. The way we do it is by narrowing the focus; we focus on what we believe is proven and will create growth. These are the proven use cases that we have. We will invest more in customer-facing activities to ensure adoption of those use cases. The second thing is about the status where we are in the development of our technological platform. We have five platforms. We invested a lot to make them reliable and ready for manufacturing. I can say now with a lot of confidence that we have five technologies that are ready for manufacturing. FDM is unique. No one can do large parts for aerospace and automotive with the type of part performance like us. If I look at DLP, we have the best part in the industry. Bulky, accurate for industrial users. If I look at SAF, we have the best, closest to injection molding parts, small to medium in terms of definition and performance than anyone else. If I look at SLA, we are the most reliable player both in terms of materials and machines. You can see it in F1; we are the majority of the Formula 1 industry. You look at PolyJet, we are leading the way in dental with mono-block dentures approved by the FDA. So our technologies and our platforms are ready. Now we need to focus on the adoption and practically what we are doing is sharpening the strategy to secure growth. On top of it, we are maintaining the R&D ratio as a percentage of revenue. So we are very careful with this, with those cuts. In the end, we are balancing profitability and growth, and we believe that profitability is crucial to show that this industry is delivering value. We start with an 8% EBITDA and positive cash flow, but it will grow and the target is to be in the two-digit range and we will be there.

Okay, thank you very much for those thoughts. I'll leave it there for now. Thanks.

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

Thank you for taking my questions, I really appreciate it. I wanted to follow up on your earlier comments about utilization. Can you provide any insights on the utilization of the machines that were sold during COVID, specifically regarding the incremental machines in your strategic installed base? This would help us understand what the normalization process might look like. I also have a brief follow-up question. Thank you.

It's very hard to follow because not all of the machines in the industry, not all our machines although we have dozens of thousands of machines connected where you can follow utilization it's hard to trace because some of the most attractive or those machines that have high utilizations are actually in verticals like defense where you cannot follow it. But we are following the material sales and when we follow the material sales, no doubt the growth is coming from manufacturing and use parts and tooling and less from rapid prototyping, so there is a shift that we can follow.

I got it. And so quick follow up there, is there any useful way to think about what the install base looks like today say relative to 2020? And the reason why I picked 2020 is because that was the revenue trough at $520 million and now you're coming off of say a new base just over $600 million. So just trying to see if there's anything useful to glean around mix you know kind of new strategic useful installed base mix wise today relative to 2020, thanks. That's it from me.

No doubt, less small boxes, more big boxes and big boxes you know usually go for manufacturing because you don't put $300,000 to $500,000 for rapid prototyping. No doubt, this is the install base, this is the change in the install base. By the way, this is our strategy. As I said we are not competing with Bambu Lab on the low end this is the MakerBot Ultimaker space and they will do great there but this is not our space.

Awesome, thank you.

Okay, FDM, grow our consumables up.

Thank you. The next question is a follow up from Greg Palm from Craig-Hallum. Your line is now live.

Could you clarify what level of revenue you are anticipating with the restructuring? Is the 8% figure based on Q2, the second half of the year, or the full year? I'm struggling to see how you reach 8% with an annualized run rate of $40 million. Additionally, do you expect to achieve that run rate in Q1, or will it be reached by the end of Q1? I'm looking for specifics on the timing as well.

Thank you for your question, Greg. To address your first point, the 8% is calculated based on the mid-range of our annual guidance. This reflects our current EBITDA levels along with the anticipated savings. It's important to note that the $40 million savings will not be realized all at once but will accumulate over time. By 2025, we expect to fully benefit from these savings. Additionally, we will have some investments in the business next year. I'm not certain which calculation you used, but this also factors into our model. I hope this helps clarify things for you.

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

Thank you for joining us. 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.