Greetings. Welcome to Stratasys' Q1 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr. Yonah Lloyd, Chief Communications Officer and Vice President of Investor Relations. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss our 2022 First 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'll 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 2021 year. Please also refer to our operating and financial review and prospects for the 2021 year and for the first quarter of 2022, which are included as Item 5 of that Annual Report and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC tomorrow, respectively. Please also see the press release that announces our earnings for the first quarter of 2022, which is attached as Exhibit 99.1 to a separate report on Form 6-K, that we are furnishing to the SEC today. In order to obtain updated information throughout the year concerning our quarterly results of operations and the risks and other factors that most impact those results, please see the quarterly earnings press releases and our quarterly operating and financial review and prospects, each of which will be attached as an exhibit to a report on Form 6-K that we will furnish to the SEC on a quarterly basis over the course of the year. 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 afternoon, everyone and thank you for joining us. Today, I will touch on the highlights of our first quarter and share insights on a number of key milestones achieved so far in 2022. I will then hand it off to Eitan to discuss our financial results and outlook in more detail. The first quarter was our strongest in six years, a great start to an exciting year for Stratasys. We delivered solid results that include contributions from across all platform to drive top line growth and improved margins. All of our technologies grew, and I'm happy to say that all of our key businesses showed improvement compared to our pre-COVID first quarter of 2019. We are particularly excited by the early momentum from our new Origin P3, H350 SAF and NEO systems, designed specifically for high volume production of end-use parts. Our focus on execution is yielding results, that demonstrate how our strategy to grow our leadership position in polymer 3D printing is working. Our revenues of $163.4 million were up 22% versus the prior year quarter. We see particular strength in systems which grew 37% and we ended the quarter with a robust balance sheet that included over $475 million of cash and no debt. During the first quarter, we expanded our penetration further into applications for aerospace, automotive, and fashion, we tailored industry-specific solutions. For example, working with our partner Lockheed Martin, we uniquely qualified a high performance and tailored material for aerospace end-use parts. In Automotive, Radford Motors is now second auto OEM using all five of our technologies for using design, prototypes, tooling, and final parts used in vehicle production. We also officially launched the commercialization of our fashion solution with Techstyle, that's Techstyle. The industry's first 3D printer designed specifically for…

Thank you, Yoav, and good afternoon, everyone. We're pleased to have delivered a strong start to 2022. The revenue growth especially just 36.7% growth in our system sales along with our improving margin position us to build momentum through the balance of the year and beyond. For the first quarter, total revenue was $163.4 million, a 21.8% increase from the prior year period, driven by growth from all technologies and primarily by strength in systems. On a constant currency basis, total revenue increased 24% versus the prior year quarter. Important to note is that all key businesses were higher than the pre-pandemic first quarter of 2019, resulting in total revenue being 5.2% higher as compared to that period. Product revenue in the first quarter was $113.1 million, an increase of 45.2% compared to the same period last year or 27.8% on a constant currency basis. Within product revenue, system revenue increased 36.7% to $54.5 million compared to the same period last year and increased by 39.3% on a constant currency basis. System sales reflected the highest first quarter total in five years, strengthened by the launch of the Origin One in mid-February and the first full quarter of H350 sale. Importantly, the higher margin consumable business showed revenue increase by 16.1% to $58.6 million compared to the same period last year, an increase by 18.8% on a constant currency basis. Consumables revenue also exceeded the first quarter of 2019, as well as the fourth quarter of 2021, reflecting the impact of strong system sales throughout 2021, and their expected flow through as initial materials are replenished. Service revenue was $50.3 million, an increase of 14.8% compared to the same period last year, and slightly higher than the first quarter of 2019. On a constant currency basis, service revenue increased by…

Thank you, Eitan. Our strong start to the year, and the strategic moves we continue to make demonstrate that we are executing on our plan. The powerful combination of our new technology offering, expanding the material and software solutions, strong balance sheet, and our dedicated talented team positions us well to execute on our strategy with excellence. We will continue to grow our top and bottom lines, improving profitability over time due to increasing scale. As I noted earlier, we are relentless about our focus to grow our leadership position in polymer additive manufacturing. Our results over the past two years, clearly reflect that our strategy is working. With that, let's open it up for questions. Operator?

[Operator Instructions] Our first question is from Greg Palm with Craig-Hallum. Please proceed with your question.

Yes. Congrats on the progress here. Yoav, you've been a big believer in having this kind of, call it, full product portfolio across different kinds of polymer technologies. And curious, now that everything is launched in the market, are you seeing that synergies in line with what you expected or are they better? I mean, you mentioned the second auto OEM that's using all five, but curious if you think you're capturing more wallet spend with some of the existing customers as well?

Thank you, Greg, for the question. As we wrote in our script, the strategy is working good. So the ability of Stratasys to leverage our infrastructure, our go-to-market, our expertise in polymer, our cutting-edge technologies, and build out these onto ecosystem to platforms, which are the materials and the software with cutting-edge technology capturing the synergies across technologies, but also within customers with the same go-to-market, it works and we are very encouraged by that, because we really put in place our differentiation and our uniqueness to work, and it worked.

Yes, Greg, it's Yonah. What I would add on that is, it's very encouraging to see how customers are actually making that permanent switch from their traditional manufacturing to additive. We highlighted a few of the customers in the slides, but there's dozens and dozens and I think that really is the strongest demonstration from the market that they believe in the technology, they believe that we can help them improve their production lines. And we look forward over the course of the next quarters and years to building and building on that, because that's how you start to disrupt the traditional manufacturing and begin to take away the $13 trillion addressable market piece-by-piece.

Yes, completely agree. And it goes beyond just the five technologies, it's the ability to create a solution with the material which is open, which is validated, with the software, with the service, and put everything together around this package, which is practically we are connecting everything with the software, rarely, I think it would be very difficult to competitors to meet this offering to our customers.

Yes. That makes a lot of sense. My follow-up was going to be along those lines, in terms of who or what you think you're displacing. It sounds like maybe it's more of a byproduct of displacing traditional technologies. But if all of a sudden, you've got customers that are using all five of your technologies, presumably you're displacing maybe some competitors in the additive field as well. What are your thoughts on that versus traditional?

We are focusing on delivering value to our customers. And we believe that using one platform of material and software and service with five technology, with our expertise, with our application engineer is the best value that we can deliver, and very competitive in the marketplace. And that's what will take us forward. In some cases, we see customer replacing and is taking other additive manufacturing providers. But we are focusing on adding value and not on taking out other systems or other providers.

Our next question is from Troy Jensen with Lake Street Capital. Please proceed with your question.

Congrats on the 22% growth here, it's pretty impressive. So first clarification for Eitan. Could you give us the dollar amounts again for systems and consumables?

You mean the total revenue after Q1?

Yes. Total system revenues in Q1 and consumable revenues in Q1.

So total system is $64.5 million and total consumables is $58.6 million.

Awesome. And for Yoav, polypropylene, I guess to my knowledge that material isn't available at all in the industry and I think you said it wasn't widely available. So I guess I'm curious, is it real polypropylene or polypropylene like? Am I correct in thinking that it's not really available?

So it is available, but we believe that our offering will be a much better one in terms of accuracy, speed, like all the -- the whole list as we put together in the script. And cost per part, because of the -- I would say the versatility of our machine and the ability to have great thermal control which is very important from polypropylene. For many years, I was managing plants, where the main input was polypropylene. It's a great material and it's really a great step into manufacturing. This is the most common plastic out there.

Yes. I totally agree. And am I correct that it was just the H350 that this is on?

Yes. You are right.

Well, congrats on the great results and I'll see tomorrow.

Our next question is from Wamsi Mohan with Bank of America. Please proceed with your question.

Congrats on the strong results, really nice revenue growth. I was wondering if you can talk a little bit about gross margins. I think you guys alluded to both macro challenges and availability of material. So can you help us think through how much are gross margins pressured by inflation and supply chain issues currently because I understand your target is to be significantly higher. What sort of pressure you're currently absorbing?

So thank you, Wamsi, it's a good question. I think related to this in the script that in Q1, we had approximately a little bit more than 2%, 200 basis points compared to Q1 2021. That's the impact of the inflation and the material cost. We did compensate with price increase, but we really -- we are focused on delivery to our customers and that's the focus and we're able to mitigate some of these pressures and costs with price increase as I mentioned.

Okay. I'm also trying to understand the EBITDA bridge, as it pertains to the second half versus the first half. If I just look at your OpEx guide increase for the year of '20 to '25, you already have about $10 million of that increase absorbed in Q1 and you already said Q2 is going to be up sequentially. So is it right to think that most of this OpEx increase is very front-end loaded for you in the year? And if so, if the back half OpEx is relatively flat, and you're already doing $8 million in EBITDA, why would you not see much more stronger EBITDA leverage in the back half of the year, because you're annualizing already to $32 million EBITDA and your low-end of your guide is $38 million, but your OpEx is so much front-end loaded. So can you just help me think through the moving pieces on this EBITDA bridge?

So that's a good question. So first of all, when you look on 2021 spread over the quarter -- over the year, so there was a difference between the different quarters and OpEx increase in the second half of 2021, partially related to this Xaar acquisition and other items that we've mentioned in previous calls. So that's why the change -- the increase that you see Q1 versus Q1 does not necessarily reflect the trend for the next quarter. And I hope that it addresses the question. Then on the improved EBITDA or the kind of EBITDA that we guide, as mentioned on the script, we are very confident about our ability to meet our numbers and to meet our guidance. But we do take into account the challenges -- the macroeconomic challenges and the high certainty in the current market. So we embedded that into our bottom-line guidance. And as we move throughout the year, we will be able to update further if those conditions improve.

Maybe one thing, I would just want to leverage your question just to thank our operations team, your question about supply chain, because they did a really above and beyond. And I know many companies in our industry and out of our industry that couldn't deliver and couldn't meet the revenue targets because of supply chain. And our guys did fantastically well. We are sourcing globally, but they found so many creative ways to deliver. And I thank them for that. And despite the fact that we put delivery as first priority, we improved gross margin, all the flows for our up scale.

Our next question is from Paul Chung with JPMorgan. Please proceed with your question.

So just on consumables, should we kind of expect some acceleration here maybe after such a strong rebound here in system sales over the last couple of quarters? How typical is the lag for reorders for some of these newer systems? And then just on utilization rates from your installed base for consumables, where you see kind of pockets of strength there on both materials and applications?

Thanks, Paul, for the question. You saw the increase in our hardware this quarter and also in the last few quarters. And the higher the hardware growth is, the more consumables and services will follow. We already started to see those fruits in this quarter, which was the consumable was the highest since Q2 2018. And we expect to continue to see this growth also coming from our new products.

Okay, great. And then follow-up on the U.S. government initiative here, you have a slide here pointing that out. Are your discussion kind of accelerating from some of those key companies in aerospace in this slide. Do you get a sense or may be kind of possible government funding involved or are you seeing any catalyst from the policy side?

Thank you for the questions, Paul. We have a long relationship with the government, and specifically with the U.S. government. We believe that government is a catalyst practically for the adoption of 3D printing because it's so fit -- I think it's the best fit for long sustaining programs for spare parts. We showed it with our Navy air deal, which is a long-term deal and we are supporting it. And we're seeing more of those deals going forward. So we have a lot of appreciation to the U.S. government as a catalyst for the adoption of additive manufacturing. But the ability to leverage also our relationship with corporate America and leading aero and auto players like Lockheed Martin and others, and to build a package that addresses not the leading company but many, many, many suppliers is really unique to Stratasys. Because as I mentioned at the beginning of this call, we have the solution, we have the full package. And when someone wants to step into additive and to start manufacture, it's a lot of training, it's a lot of support, it's a lot of -- we need to hold the hands of those small suppliers and make sure they are meeting the requirements and the certification and they allow that we invest so much for the high end. So we believe that the combination of corporate America, the government, and our infrastructure and capabilities can be a great success. It's a journey, but we are happy to start stepping into it.

Our next question is from Jim Ricchiuti with Needham. Please proceed with your question.

Question, just given where we are middle of May, wondering what you've seen in terms of demand? You obviously had a strong Q1 in terms of top line growth. But I'm just wondering in light of some of the macro challenges that we're hearing about, are you seeing any change in demand either in specific verticals or geographies, or are you seeing the same level of demand exiting the quarter that you saw in Q1?

Jim, thank you for the question. To date, demand is strong and it doesn't mean that we as leaders of this company, are not looking all over and planning for the future, because we are looking what's going on in the capital market and in other markets, but it's clear to us. Today, demand is strong. And this is why we build our inventory, you can see it in the report. We build out inventory because the demand is strong and we need to meet the demand. But we are not driving blind and of course, we are cautious but thank god, and thank the industry and good technology, the demand currently is strong.

And a separate question in somewhat unrelated area, just but I wanted to follow up on the new products that you've introduced into the textile printing market. I wonder if you could talk a little bit about the strategy for this product, it seems like it's a different channel. And to what extent is this more of a gradual introduction in terms of planting a flag in this market?

It's a great question. As I mentioned, we have four growth engines, the cutting-edge technologies, the five technology, the software, the material, the service, but nothing will work if we're not cross the chasm of this industry from prototyping to manufacturing. And you can cross the chasm only with use cases. And fashion is a great use case with huge potential, our addressable market is the high-end fashion market. So we are talking about luxury goods, high-end fashion, because we can do something that no one else can do. With our PolyJet technology, we can have design, we can work with the best house brands in the world and we are already doing it. So we already have some fantastic results, and we are talking about thousands of items, like shoes and garments that are already there. Of course, it's just the beginning of the beginning. But we are going to show it in the Milan show, I think it's in June. It's super exciting, because it's mass market, and it's real manufacturing, and it's real manufacturing with material jetting that no one believed in the world that it's possible, but we made it happen.

And are you going direct or using a channel partner here?

Yes. We are doing both and we were using also service bureaus. Because this industry is working a lot with outsourced to high-end manufacturers, so we are doing both. It's really exciting, I really invite you to come and see in the Milan Fashion show, it's amazing.

Got it. Congrats on the quarter by the way.

Our next question is from Ananda Baruah with Loop Capital. Please proceed with your question.

Congrats on the strong execution and to give results the following day. You're welcome. Could you remind us to the extent you can give us a context on for the second half of the year, over the remainder of the year, what you guys will be doing in terms of new products across the platform? I think a quarter or two ago, you had mentioned that you had new products coming out throughout 2022, that would be great?

Can you please repeat the question? I'm not sure --

You were asking about the new products we're launching during the rest of the year?

Yes, exactly, Yonah. Any kind of, I know you can all get so specific, but just any context that you can give us.

Yes. This is a great question. Thank you, now it's clear. We had last week our manufacturing event, experienced Stratasys manufacturing. And within this event, we were very clear on what are the new product. And the focus now is to take what we have and make sure that it's suitable for manufacturing. So it starts with two new materials, the PA-12 and the polypropylene for the SAF or the SAF technology. We have 8 --- 16 overall -- 16 new materials. I don't know if others -- I don't want to say something that I'm not sure, but 16 materials to launch in one year, this is remarkable. This is really remarkable. On top of which we are putting all our technologies on GrabCAD, which is a new product. So GrabCAD will be also in SAF and also on the Origin. And we also have the Origin Local which is suitable for manufacturing with defense and other similar industries and verticals. So we are making sure that we are following our strategy, it's not only the cutting edge machine, but you have also the software and the material and the service to be successful. From my perspective, this is real additive manufacturing 2.0, because it's not about the technology. It's about solving the problem to the customer. This is 2.0 and you can beat 2.0 AM only if you have the full solution. And I'm proud to say that we have the full solution.

That's great. Looking forward to seeing the rest of the year.

Our next question is from Noelle Dilts with Stifel. Please proceed with your question.

Congrats on the good quarter. It seems like you're pretty satisfied with your current hardware technologies and offering. But can you revisit if there is anything you feel you need to add on that front? And if you could just generally speak about your M&A priorities?

Noelle, thank you. It's a great question. We are not satisfied at all with what we have. That's not our nature here. We're not satisfied with anything. For each one of our technology, we have a five years roadmap to make sure that we will be at the front of this technology for many years to come. And we spent very high level of R&D in order to make it happen. Having said that, and by the way, it's in our five years plan, it's in our annual operating plan in each one of our technologies. But let's put this aside, we also understand that we must invest in material and in software and improving our service because we are taking our solution and those technologies to manufacturing. And this is a completely new set of requirements from the customer side. So that's exactly what we are doing. In terms of the technology to get back to your question, we are investing, I think we already mentioned this, we have an arm, and we should probably announce it in more detail. But we have a arm that invest in technologies to make sure that we are not only innovating internally but also externally to secure our polymer leadership position. And we invested in companies like Genera and 9T Labs, like InkBit, which are really -- this is the new generation of AM, and we will make sure that that will be part of our offering as well.

And Jim asked this question a bit, but could you expand a little bit on what you're seeing from a geographic trend perspective?

Geographic trends.

We put aside the lockdown in China that obviously impacted the entire world. We see a strong demand from all our geographies and very strong quarter for EMEA business, but also in the other businesses strong demand.

We have reached the end of the question-and-answer session. And I will now turn the call over to CEO, Dr. Yoav Zeif for closing remarks.

Thank you for joining us. Looking forward to updating you again next quarter.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.