SSYS 2023Q3

Hello, and welcome to the Stratasys Q3 2023 Earnings Conference Call and Webcast. A question and answer session will follow the formal presentation. 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 of Investor Relations. Please go ahead, Yonah.

Good morning, everyone, and thank you for joining us to discuss our 2023 third 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 2022 year. Please also refer to our operating and financial review and prospects for 2022, and for the third quarter of 2023, which are included as Item 5 of our annual report on Form 20-F for 2022 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 our earnings for the third quarter of 2023, which is attached as Exhibit 99.1 to a separate report on Form 6-K that we are furnishing to the SEC today. Our reports on Form 6-K 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. 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, Dr. Yoav Zeif. Yoav?

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. Our factory and offices have been open throughout. We are proud of our employees and the spirit of our country during these difficult times. Before I turn to the third quarter results, as you may have seen this morning, we announced that Aris Kekedjian was appointed to our Board of Directors, effective immediately. Aris is a seasoned executive with more than 30 years of leadership experience. We are pleased to have him bring expertise across business development, M&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. Aris's appointment followed Ziva Patir's decision to step down from Stratasys board after 10 years of service as a Director. We are grateful to Ziva for her commitment and many contributions to the company and we wish her all the best. For the third quarter, 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 third quarter, we achieved record recurring revenue from consumable sales, reflecting solid utilization of our printers, demonstrating our resilient business model and financial profile. Customer demand and our engagement with both our installed base and new customers continue to be stronger than ever. The results show that our customers 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. We continue to invest and innovate to stay at the forefront of additive manufacturing while growing the business across our end-use segment. Our portfolio of technology offerings continues to expand with a particular focus on manufacturing applications. We delivered 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 am proud that we delivered positive adjusted earnings per share for the ninth consecutive quarter. To help further improve profitability going forward, we recently divested two lower margin unprofitable businesses from our Stratasys Direct Service Bureau. This is expected to reduce 2023 revenue by $5 million, but help improve profitability and focus in 2024 and beyond. We ended the quarter with a strong balance sheet of $185 million in cash, equivalents, and short-term deposits, and no debt. This continues to support our ability to grow through a 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 is more robust than ever. Now let me touch on some of our recent business highlights and milestones. 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 than other polymer filament printers available today. This inaugural edition for a new FDM enterprise platform family is custom-built specifically for manufacturing. Significant advancements in speed, reliability, and operating efficiency demonstrate our continued commitment to innovation and will bring greater economic advantage to existing users while opening 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 a 45% cost per part reduction compared to existing solutions and 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 for commercial availability during the fourth quarter of 2023, is now planned for the first half of next year. As a reminder, Stratasys invented FDM over 35 years ago. It is the world's most popular 3D 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. They helped us address their production requirements. This program included Toyota, who we announced has become our first F3300 customer. The F3300, together with our other manufacturing solutions such as H350 SAF and Origin P3, are production-oriented systems that will expand our addressable market, facilitate growth, and drive our continued leadership. Turning to some customer success stories from our industrial business, we are appreciative that the US Army Picatinny Arsenal further demonstrated its confidence in Stratasys by placing a significant order across our entire portfolio of five polymer technologies: FDM, PolyJet, SAF, Origin P3, and Neo Stereolithography. 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 US Army. In automotive, FAW, China's largest wholly owned auto manufacturer, installed a variety of Stratasys systems in its effort to build a world-class additive manufacturing center with a goal of staying at the forefront of the digital manufacturing transformation. Its newly installed base includes Origin One, PolyJet J850 Prime, and multiple F900 FDM systems, and we look forward to growing this relationship further. Subsequent to quarter end, we hosted our Stratafest event focused on aerospace and automotive, featuring customer testimonials from Northrop Grumman and Radford Motors. Radford is a great case study for additive manufacturing as its Lotus Type 62-2 automobile is produced using approximately 250 parts printed with our FDM system to deliver unparalleled performance. Turning to slide eight, our dental business continues to be the strong foundation for growth, as customers are scaling up with multiple unit orders and expanding their portfolios for both Ortho and Implant applications. In the US, with its $5 billion-plus dentures industry, customers are increasingly adopting our disruptive TruDent solution, and we expect continued acceleration in the years ahead. In the EU, we have received positive feedback from a top five lab network, and we expect to expand our penetration there once TrueDent receives CE approval. On the healthcare front, we recently signed a partnership agreement with Encee GmbH, a long-time Stratasys partner, to establish a new division called Encee Medical that will 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 specialized in the medical field. We believe this will help increase our coverage, focus, and dedication to our healthcare customers. Another new development is our relationship with Go Orthotics, an innovator and manufacturer of customized orthotics for podiatrists. They have purchased multiple SAF printers that enable them to quickly produce custom orthotics with high specifications, increasing manufacturing throughput while saving vast working time and achieving superior product fit and comfort, something not possible with traditional manufacturing. The orthotic opportunity is expected to more than double to $8.8 billion by 2032. Turning to software, I'm pleased to say that after running a free trial program, we have commercialized our premium offerings. Our software has always been critical to our customer success, but we have only recently expanded our portfolio to include subscription-only offerings with GrabCAD Print Pro and Open-Air. Approximately half of our new FDM and SAF customers have chosen to subscribe to GrabCAD Print Pro, and we plan to offer it across PolyJet, NEO, and Origin as well. On our material side, we have added a number of flagship products to our F900 series, including new polymer colors and support materials. We have also expanded the functionality of the F900 series with OpenAM by allowing users to custom-tune their material and printed part capabilities. This provides additional functionality that allows them to alter the characteristics of Stratasys and third-party materials and print their own formulation, opening up new applications to extend the reach of our product and materials portfolio. I will now turn the call over to our CFO, Eitan Zamir, to share the financial results and update us on our outlook for the rest of 2023. Eitan?

Thank you, Yoav. And good morning, everyone. Our third 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 maintained the level of our non-GAAP OpEx as a percentage of revenues in a flat revenue quarter, even as we continue to invest for future growth. These results highlight the financial discipline and business maturity that differentiate Stratasys in our industry. Overall, our results reflect the resilience our diversified offerings provide, continued high levels of engagement with our customers, and proof of their ongoing strong utilization of our systems. Now let me dive deeper into the numbers. For the third quarter, consolidated revenue of $162.1 million was essentially flat relative to Q3 2022 and was up 3.3% at constant currency, excluding the impact from Stratasys Direct divestment. Product revenue in the third quarter increased by 1% to $113.2 million compared to the same period last year, and was up 3.4% on a constant currency basis, excluding MakerBot which we divested in late August of 2022. Within product revenue, system revenue declined 8.6% to $51.5 million compared to $56.3 million in the same period last year. Excluding MakerBot and at constant currency, system revenue was down 5%. On a sequential basis, systems revenue grew 6.6%, indicative of our improvement in conditions and the continued strong levels of engagement we have developed with our customers. Consumables revenue rose by 10.7% to $61.8 million 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. Service revenue, including Stratasys Direct, was $48.9 million, down 2.4% as compared to the same period last year and was up 3.1% at constant currency, excluding MakerBot and Stratasys Direct divestments. 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, excluding MakerBot. Now turning to gross margin. GAAP gross margin was 40.5% for the quarter compared to 43.6% 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. GAAP operating expenses were $108.4 million compared to $86.4 million during the same period last year. The increase in GAAP operating expenses reflected, in large part, our extraordinary expenses associated with Nano Dimension's expired partial tender offer and withdrawn proxy contest, 3D System proposals, and our terminated deal with Desktop Metal. Non-GAAP operating expenses were $74.2 million, flat as compared to the same period last year. Non-GAAP operating expenses were 45.8% 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. 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 $42.8 million compared to a loss of $15.6 million for the same period last year, reflecting the increased extraordinary expenses described before. Non-GAAP operating income for the quarter was $4.1 million, which is 2.5% of revenues compared to $4.5 million or 2.8% 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. GAAP net loss for the quarter was $47.3 million or $0.68 per diluted share compared to net income of $18.7 million or $0.28 per diluted share for the same period last year. 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 contest, 3D Systems proposals, and the terminated deal with Desktop Metal which are excluded from our non-GAAP results. I'll also remind you that the third quarter 2022 GAAP net income included a one-time $39.1 million gain from the MakerBot deconsolidation, which worsened the decline in GAAP profitability in Q3 2023. Non-GAAP net income for the quarter was $2.4 million or $0.04 per diluted share compared to non-GAAP net income of $3.3 million or $0.05 per diluted share in the same period last year. We're proud to report that this was our ninth consecutive quarter of delivering positive net income on an adjusted basis. Adjusted EBITDA was $9.8 million for the quarter compared to $9.9 million in the same period last year, essentially flat on a percentage of revenue basis. We used $12.7 million of cash in our operations during the third quarter, compared to the use of $18.4 million of cash in operations for the same period last year. The use of cash was primarily driven by costs related to mergers and acquisitions activities, defense against hostile tender offers and proxy contests, and related professional fees. Operating cash flow excluding costs of $13.7 million paid to advisors related to merger and acquisition activities and takeover defense would have been positive. We ended the quarter with $184.6 million in cash, cash equivalents, and short-term deposits. Our balance sheet and cash generation remain strong. Specifically, we are well-capitalized and well-positioned to capture value-enhancing market opportunities as they are identified. Now let me turn to our outlook for 2023. Last quarter, we guided full-year revenue at $630 million to $670 million, adjusting for the $5 million impact from the divestment of the two Stratasys Direct businesses. This is equivalent to $625 million to $665 million. Additionally, we have noted earlier the delay in selling the new F3300 that was planned for Q4 this year and a soft CapEx marketplace. Given these items, we now expect revenue to range between $620 million to $630 million. 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 million to $290 million. 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 million to $104 million or $1.70 per share to $1.51 per diluted share. And the non-GAAP net income of $6 million to $9 million or $0.10 to $0.14 per diluted share for the full year of 2023. Our GAAP results and thus our outlook include 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 costs 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 million to $38 million for 2023. Capital expenditures are expected to range between $15 million to $20 million 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.

Thank you, Eitan. Our customers' appreciation and adoption of 3D printing continues to grow. As we introduce new and improved systems, materials, and software offerings, Stratasys is becoming 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 presence in manufacturing at scale, one that we expect will grow in adoption as the technology continues to demonstrate real-world success stories, and we will be at the forefront. We have proven time and time again that Stratasys is the industry leader, demonstrating the ability to manage the business through tough times while still delivering superior results and profitability. 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 has consistently outperformed our sector on both financial metrics and business fundamentals. We have continued to accomplish this even during the challenging business environment this year amidst the excessive M&A noise in our space. Our focus remains on maximizing shareholder value while being mindful 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?

Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from James Ricchiuti from Needham & Company. Your line is now live.

Thank you. Good afternoon. A question on the F3300. I wonder if you could talk about the factors that led to the delay and what is now commercial availability in the first half of the year which would require some additional tweaks, and what does the early sales pipeline look like for this machine? Thank you.

Thank you, James. I appreciate the question. I would say that what led to the delay is our high commitment to quality. We know that this machine is going to manufacturing, and we could not compromise on the quality. We worked to develop this machine together with many customers that were exposed through NDAs to the different features and recommendations, and they're already using it at Toyota. They shared their view about the machine at Formnext last week, and there was a lot of excitement there. I can only say that it's a very slight delay. We have strong demand for this machine, we have already received purchase orders, and we have full confidence that it will be a transformative offering in manufacturing, mainly in aerospace and automotive spare parts, but also in tooling, jigs, and fixtures. It's completely different in scale, delivery, and value proposition, which is why we already have customers developing the machine with us, waiting to start engaging and operating the machine and re-manufacturing. Of course, we have other customers in the pipeline besides Toyota; I'm not just talking about Toyota alone, but also the top manufacturers in the world.

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

Thank you, James. GrabCAD is an essential part of our strategy. I would say in two different routes. One, we believe we need to give our customers the best experience and to ensure that any additive manufacturing operator has, when they are working, it is fully productive and has the best user-friendly operating system. So it's all about productivity and making the lives of additive manufacturing operators much easier. When we talk about GrabCAD, this relates to 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 four or five different software to print one part. Our vision is to leverage our strengths, as we are producing the systems and understand the logs, data, and everything with the largest installed base. We have the best operating systems. These are the pillars of our strategy. Now we’re taking those pillars and we’re working to create a platform connected to every partner that can simplify the operator's life, like simulation partners, inventory traceability partners, and also being able to connect to our fleet on the other side. We are making it easier for our operators and customers to run their operations more smoothly. This is the direction we're going with GrabCAD, bringing new products to market. The forecast of software in our industry is projected to reach $3 billion in the next five years and we will capture this part that isn't associated with manufacturing enterprise systems but those parts that make the operator's lives more productive and easier. Our gross margin in this area is great, and we already launched two products, AM which we call OpenAM. If you buy our software subscription based product, you can use other materials, and we launched what we call GrabCAD Print Pro, which has fantastic features that increase productivity. For example, we've implemented what we call the accuracy center, using AI to close the loop between the end-use part and the file. Overall, this makes our clients more productive because they print much more accurate parts. I’m optimistic about GrabCAD, as it will be an essential part of our recurring revenues moving forward.

Thank you, and congratulations on what’s clearly a difficult environment on a lot of levels. Thank you.

Thank you.

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

Hey, this is Danny Eggerichs on for Greg today. Thanks for taking the questions. I kind of just wanted to start by digging into the broader issues you're seeing, and maybe the implied Q4 guide. I get kind of the $5 million takeout from the divestments, but on the F3300 delay, were you expecting a decent size contribution in Q4, or how much of it is just related to a broader sales cycle lengthening and some order push-outs into 2024?

So Danny, we will not be getting into the specific numbers of the F3300 contribution for Q4, but as you mentioned, this is a significant product and a major launch. Therefore, once we reach the commercial launch, we did expect contributions to Q4, and that has impacted our Q4 guidance.

Danny, it's Yonah, by the way. You asked about order push-outs. The delay has nothing to do with order push-outs at all. It's related solely to ensuring we deliver the best product.

Yep. Got it. Okay. I think my order push-out was kind of more broad-based and not necessarily related to the 3300, but that makes sense. I guess maybe shifting over to the medium-term targets that you've got out there. I think most of those are below the revenue line or kind of fiscal year 2024. Just wondering if you feel like you're still confident that you'll be able to achieve all these, maybe just assuming that the macro stays consistent for the near term or next couple of quarters.

Danny, it's a good question. The answer is that we have confidence, and the main reason is that most of those measures are within our control. We've created an infrastructure on the cost side, on the gross margin side, and on the cash flow side that are all within our control. Even in a challenging macro environment, we have the levers and the infrastructure to maintain low OpEx and improve our cash flow. So the target for 50% plus gross margin in 2024, positive operating cash flow in 2024, and the ability to maintain good OpEx as a percentage of revenue is something that we are very focused on and believe can be achieved even in a challenging macro environment.

Got it. That's helpful. Maybe just one more question on dental. I think last quarter you had mentioned a top five denture producer was committed to acquiring systems, but what's the update on that? Did that happen? And any progress on smaller potential sales within that space?

Thank you for the question. In one sentence, it's the highest revenue quarter in dental we've ever had. So I think that's a good reflection of where we are. Our strategy is working well, both on the TrueDent side and also in replenishing our portfolio both on the printer and material sides. We are achieving great results. Also on the regulatory front, we are receiving approvals on time that we've been waiting for, and we expect to see more growth there, especially focusing on what we call restorative dental. We are less sensitive to the current macro environment where discretionary sectors like the aligners are quite sensitive to inflation, interest rates, and income fluctuations. Our focus is on restorative, on dentures, on removable dentures, on models, and crowns in the future with truly disruptive use cases. We're not reliant on our offering but on innovation, making the lives of dentists and technicians much easier with multi-material and high aesthetic capabilities, which requires almost no labor.

Great. I will leave it there. Thanks.

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

Hi. Thanks, guys, for taking the question. And yeah, our thoughts are certainly with you all and everyone with all that's occurring in your neck of the woods.

Thank you.

I guess a couple from 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 the macro clears up and begins to improve, whenever that occurs, 2024 going into 2025? What are the key milestones we should look for, and how will this be reflected in your industrial segments? 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 dynamics, signposts, and activities that could further amplify activity in those environments?

Thank you, Ananda. A big thank you for your support. We don't take it for granted, and I want to thank all our customers and industry peers. The support we have been receiving over the last month and a half has been amazing and is worth mentioning. So, let me start with the macro situation, which I believe will be the main factors that will put us and the entire industry back on track. I would say there are two key factors: first is certainty in manufacturing, and I will explain as I relate to Stratasys. With uncertainty in the market, the tendency of large manufacturers to change how they do things is naturally lower. Second is the pressure from interest rates because at the end of the day, it's CapEx and the cost of CapEx is influenced by interest rates, starting with inflation and so on. However, we see inflation stabilizing in the US, and we feel positive about this aspect. No matter what happens amidst this new norm with interest rates at 3% or 4%, it is clear that large manufacturers will need to start a new cycle of innovation and production. We see many signals and possibilities here. As they begin this cycle, they will be looking toward additives. Those milestones and progress will vary for each manufacturer, but we are positioned well within industries focusing on electric vehicles, new airplanes, and rockets, for example. We have been developing the best solutions for real polymer manufacturing, focusing both on hardware such as SAF and improving those solutions to ensure they cater to the specific use cases. We firmly believe that we have the best cost per part in the industry, allowing for bulk parts fabrication, which no one else can provide. We also have unique results with our P3 technology targeted for connectors and our APA strategies. We will be prevalent in all those areas, and we can continue to target them effectively in line with our clear vision.

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

Thank you.

Thank you.

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

Good morning. This is Tyler on for Brian. Appreciate you guys taking my questions. I just wanted to start with the record high recurring consumables revenue and, obviously, there's significant printer utilization. Can you just touch on what end markets you're seeing the greatest utilization in?

Great question. We have five technologies, and over the last three years, we ensured that we match our hardware with the best material portfolio. No one in the industry has a larger polymer materials portfolio than Stratasys. We started with FDM and PolyJet, and then with the acquisition of Covestro, we added Stereolithography and liquid resins to our arsenal. Our strategy is clear: a full solution that guarantees recurring revenue for our materials. We are less focused on rapid prototyping and more on real manufacturing, knowing this market consumes four to five times more units. This is our growth area.

Appreciate the color on that. Just a quick question regarding the Covestro acquisition: Was that about $5 million in revenue for the quarter?

Yeah. As we've mentioned in the past, the run rate for Covestro is roughly $20 million a year. This quarter, it was roughly a $4.5 million impact.

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

Your next question is coming from Jacob Stephan from Lake Street Capital. Your line is now live.

Yeah. Hey, 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 of how much we can kind of expect operating margin next year, since you noted they were running at a loss.

Hi, Jacob. Welcome to the team of analysts. Let me start with a few sentences about FDM and why it's important in the grand scheme for Stratasys and then I'll let Eitan share the specific data. We call it FDM 2.0 because it's critical for our success going forward. We are shifting focus to manufacturing, specifically additive manufacturing within our technologies. We restructured operations, moving from eight sites to three large productive scale sites. Once you align with this strategy, we decided to divest the businesses that weren't meeting our vision. This aligns with our commitment to profitability. We are the only public company with positive cash flow and we keep improving our business quality going forward, step by step. Now I'll let Eitan provide the specifics.

Sure. Jacob, I would add that the two divestments will impact 2023 results by roughly $5 million. They were operating at a loss, so the expectation is that these decisions will benefit our gross margins and bottom line. However, we won't delve into specifics now since we need to be mindful of upcoming results.

Okay, that's helpful. And then maybe just kind of on the strategic alternatives: What's the timeline here? When do you expect things to kind of be wrapped up?

We can't comment on specific timelines as this is at the Board level. However, I can share that we announced we are in the process of exploring strategic alternatives. We are engaging in meaningful interactions and doing our best to enhance shareholder value while being conscious of the situation,. With everything occurring in Israel, we are navigating through it the best we can to maximize shareholder value.

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

Thank you.

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

I would like to thank you for joining us. I want to extend my gratitude to our team for their amazing work and for maintaining the business in such challenging times while outperforming others in this industry. I look forward to updating you again next quarter. Thank you.

Thank you. That concludes 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.