Greetings and welcome to the Stratasys Limited First Quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yonah Lloyd, Chief Communications Officer and Vice President of Investor Relations. Thank you, please go ahead.

Good morning everyone and thank you for joining us to discuss our 2023 first quarter financial results. On the call with us today are our CFO, 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 forecasts. 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 first quarter of 2023, which are included as Item 5 of our annual report on Form 20-F for 2022 and 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 first 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 I discuss the business highlights, I would like to comment briefly on the three unsolicited proposals we received in recent months from Nano Dimension to acquire Stratasys initially for $18.00, then $19.55, and subsequently for $20.05 per share in cash. As previously announced, consistent with its fiduciary duties and in consultation with its independent financial and legal advisors, the Stratasys board carefully reviewed and evaluated each proposal. Following each review, the Stratasys board unanimously rejected all three proposals because they each substantially undervalued Stratasys in light of the company’s standalone prospects. As we have articulated previously, Nano is in the midst of multiple lawsuits with its shareholders involving the controlling governance of the company and, as a result, serious questions remain about the legal legitimacy of the Nano offer. The Stratasys board and management team are committed to enhancing shareholder value and continue to successfully execute on the company’s growth strategy. We are making strong progress towards becoming a highly profitable $1 billion revenue company. As part of its fiduciary duties, the board will review any bona fide proposal for the company and weigh it against our standalone plan. We are not going to comment further on this matter today. We appreciate you keeping your questions focused on our results as the focus of this call is our performance for the quarter. Our excellent results for Q1 2023 represent another consecutive quarter of solid performance, despite an increasingly challenging macro backdrop. We continue to execute on our winning strategy driven by our broad global and diverse set of systems, materials and software solutions. With our leadership position, our five key technologies, resilient business model and strong financial profile, we believe we are positioned to accelerate growth and…

Thank you Yoav, and good morning everyone. As Yoav mentioned, we achieved solid results against the increasingly challenging macro backdrop in the quarter. We are particularly proud of how we held the line on both growth and operating margin, maintaining profitability in a challenging environment due to the right infrastructure and tight opex management as we continue to drive efficiencies across the platform. Our results demonstrate the resilience that our diversified offering provides. Despite the expected slowdown in new printer sales, we saw continued utilization of our systems by our customers, driving record recurring revenues from consumables and customer service, helping us deliver our seventh straight quarter of adjusted profitability. Now let me dive deeper into the numbers. For the first quarter, consolidated revenue of $149.4 million was down 2.6% compared to Q1 2022, adjusted for divestitures and at constant currency and down 8.6% compared to the unadjusted revenues. Revenue in our OEM business, which excludes MakerBot as well as FDM, was down 0.9% at constant currency from the prior year period. Product revenue in the first quarter declined by 10.7% to $101 million compared to the same period last year, or by 5.1% excluding divestitures and on a constant currency basis. With product revenue, system revenue declined 25.8% to $40.5 million compared to $54.5 million in the same period last year. Excluding divestitures and on a constant currency basis, revenue was down 19.2%. Consumables revenue rose by 3.3% to $60.5 million compared to the same period last year, rose by 5.2% on a constant currency basis and grew by 7.5% in our OEM business at constant currency. This represents a record level for Stratasys and signals that utilization rates of our systems we have sold are strong. Services revenue including FDM was $48.4 million, down 3.9% as compared to…

In closing, even as we navigate today’s dynamic environment, the outlook for our customers’ appreciation and adoption of 3D printing continues to grow. We have positioned the company to execute in challenging times and to lead through an expanding portfolio of hardware, materials, and software solutions as the shift to additive manufacturing at scale accelerates. We are being brought into customer opportunities as a strategic partner at higher levels than in the past because the demand to bring products to market faster, to reshape supply chains, and to give consumers more personalized products are very real, and we have proven our value with leaders across industries like TE Connectivity, the Mayo Clinic, NASA and Toyota. Our relentless focus on execution and continued investment for growth and ongoing profitability is expected to drive relative outperformance and enhance shareholder value. With that, let’s open it up for questions. Operator?

Thank you. The floor is now open for questions. [Operator instructions] The first question today is coming from Shannon Cross of Credit Suisse. Please go ahead.

Thank you very much for taking my question. I’m curious as to your billion dollar target. I remember--I mean, this industry has set targets in the past and then not achieved them, and it’s caused volatility, to say the least, so I’m curious, can you give us more specifics and granularity behind how you came to that target number - I don’t know, mix of revenue or just generally what gives you confidence that you’re going to be able to achieve it? Thank you.

Hi Shannon, thank you for the question. We are quite a structured company. Nothing that we are saying on this call is based on something that we envisioned yesterday. We have long term planning based on a three-year strategy, and we think the quarters are very important and that’s why we are delivering quarter after quarter above the expectations, but more important is the long term foundations, and that’s what we are building at Stratasys. That’s why we are confident in putting outside a target of $1 billion with double-digit operating income with above 50% gross margin, with above 15% EBITDA. It is based on the foundation that we have built and keep building for the last three and a half years, and there are very clear growth drivers - it’s the new technologies. Yes, we are number two or three in each one of the new technologies, which is remarkable to do it, to achieve it in two years, but there is still so much room to grow there. New NPIs with our core technologies, the FDM, we are going to introduce amazing new technologies there. The materials position which cements our profitability, and Covestro is a good example. The use cases that we are introducing, like the TrueDent, the fashion, the tooling, the automotive end use parts, the software, and when we are talking about software, we are talking about monetizing software because we are building, and maybe we’ll have time later to elaborate on it, but we are building a unique software platform which is open, and delivering added value to our huge installed base, and the bio printing. When you put all these together in a five-year plan, and of course we are not going now to get into the details, we get to the $1 billion with high level of profitability.

Okay, thank you. Then can you talk a bit more in the near term on consumables? It was a pretty tough compare, you did better than expected. Can you talk about how usage is changing, how much of this is the pricing of materials versus utilization, PxQ, certain verticals that maybe are using more materials? Just wondering what’s driving that, because I assume consumables are a pretty important part of the $1 billion as well.

It’s an essential part of the $1 billion, an essential part of the profitability. The main drivers are mainly utilization and the move to manufacturing. Since we are reporting every end of the year how much of our overall sales went to end use parts, to manufacturing, we can see this growth year-over-year, and this growth drives the utilization because the machine that is being used for end use parts has a completely different unit economics in terms of consumables than a machine that is being used for prototyping. A good example is the dental - this is end use parts, high level of consumption, and add to it the Covestro portfolio that is matched--it’s a fantastic match to what we have now in terms of our hardware portfolio. We are very optimistic on the consumption going forward of material, and also--you know, this quarter, we saw an increase in FDM and origin material in manufacturing, and it’s also a reflection of our strategy as a company given the hardware, significant hardware sales in ’21 and ’22. You can see that our customers are buying our machine and they are using it. It’s a long term investment, it’s reliable, and it’s a testimonial that we are delivering value in many, many different verticals - auto, aero. Those are the big consumers of our materials.

Thank you.

Thank you. The next question is coming from Troy Jensen of Lake Street Capital Markets. Please go ahead.

Hey gentlemen. First of all, congrats on the good Q1 here.

Thank you.

I guess could you first of all confirm Covestro and timing? I guess I’m curious if there was any material revenues from them in Q1 and what you think that’s going to contribute for the year on a quarterly basis, would be helpful.

Troy, thanks for the question. We closed the deal in early April, so no contribution whatsoever in Q1; however, Q2 onwards is going to have the full impact of Covestro into our business. It’s largely consumables.

Perfect. Ideally guys, we’d love to see organic growth of materials going forward, since it is such a key focus area for you guys on the profitability. Just a thought, or something to think about. My other question would be the H350, I saw the nice comment about the multi-shipment customer. I’m just curious, I know you’ve got others in there also, Yoav. Can you just maybe quantify or talk about status of H350 in multi-customer units?

Yes, thanks for the question. The H350 is a fantastic machine, and it’s focused completely, I would say 99% on manufacturing end use parts for professional users. A great example is Götz Maschinenbau, the large service bureau in Germany that bought one and then another four for end use parts, many of them, by the way, to automotive. However, it’s a complex system that you need to be a professional, and we are doing a very conscious rollout of this machine. The SAF is deliberately--we have a slower impact to make sure that our customers are happy and we are delivering the promise, both on the quality of the part and not less important the cost per part that we believe we have the best position in the industry with it. Given the planned rollout, we expect significant better units out there in H2 because the way we are rolling it out, and also because of the funnel that we are seeing now.

Perfect, okay. Good luck. Keep up the good work.

Thank you.

Thank you. The next question is coming from Greg Palm of Craig Hallum Capital Group. Please go ahead.

Hey, this is Danny Eggerichs on for Greg today. Congrats on the good results, and thanks for taking the questions. I guess I’ll just start with what you’re seeing out in the market right now from a demand perspective. Obviously you and certainly some of your peers noted customer push-outs and maybe some increased uncertainty, so what have you seen over recent weeks, and with raising the floor on your guidance there, what gives you confidence in hitting that range, and maybe more specifically, what kind of visibility you have in the second half?

I don’t need to share with the listeners that it’s an interesting macroeconomic condition for everyone in terms of growth, GDP growth, interest rates, inflation, everything. But luckily enough, 3D printing helps our customers to do better in this environment, and therefore we see high levels of engagement, especially with [indiscernible] managers and executives, the engagement is high. We had over the last two quarters some challenges with the sales cycle, which is longer, but we are starting to see that the sales cycles are somehow balancing and we see better top of funnel demand. That’s why we are confident about H2 and that’s why we raised the guidance, otherwise we wouldn’t do it. Overall, challenging environment but strong demand with better top of funnel leads, and somewhat balanced sales cycle.

Okay, that’s good. Maybe just switching to opex, operating leverage was pretty strong in the quarter, opex came in a bit lower than expectations. You reiterated the full year guide for opex, and I guess that implies a step up throughout the remainder of the year. How should we think about opex in Q2 and maybe the cadence throughout the year going forward?

Thank you Danny for the question. As you noted, we reiterated the opex guidance for the full year while we increased the 620 to 630 on the revenue. That’s part of our, I believe, the day-to-day management of the business. We are very tight on opex. We’ve built throughout the years the right infrastructure to leverage the growth with minimal to no increase in opex. Now, the addition of Covestro starting Q2 will add a small opex because it comes with naturally the employees and the business, but overall our infrastructure is built structurally in a way to keep lower--as we grow, lower opex as a percentage, as we demonstrated this quarter even with lower revenue.

Okay, great. I’ll leave it there, thanks.

Thank you. The next question is coming from Ananda Baruah of Loop Capital. Please go ahead.

Yes, good evening guys, good afternoon. Thanks for taking the question.

Hey.

Hey. Two, if I could. On the denture business, congrats on getting the product out the door. How do you see the velocity of the ramping potential there philosophically?

Thank you for the question, Ananda. Dental will be huge for us. It will be huge for us, and we are focusing on a specific segment in dental which we believe is the right one for us because of our capabilities and also because of the potential, which is restorative dental use cases, so people have to buy. What we are offering here with our dental solution is a disruption to the current market. It’s a complete disruption to the market. We’re talking about overall dental, a $50 billion market, with only the dentures a $5 billion market which currently is labor intensive, and we are bringing a solution which is simple, higher quality, better aesthetics with a click, practically. It’s only $5 billion in the U.S. put aside--where we have the FDA approval, put aside the rest of the world. We’ll start to see initial revenues in H2 because we are building it step by step, building the foundation, showcasing it, making sure that dentists build a confidence around it. By the way, we are saving them between one to three visits - think about the dentist that is sitting in his clinic and suddenly because of our solution, he needs to see the patient one to three times less than on average. So we ramp it up during H2, expect significant impact in 2023--sorry, at the end of 2023 and 2024, and we keep innovating there. It’s not the last product that we are going to introduce with this unique resin and unique J5 DentaJet.

Thanks for that. When we think geographic-wise, it sounds like you’re starting in the U.S. What’s the--I guess, is there a plan for a European rollout and other geographies, and what would the timing of those be?

Definitely no doubt, we have global expansion plans. The next one is Europe, and not too far from now, and then Asia of course. The market is there, it’s a global plan.

Awesome, I appreciate it. One last one there, how do you guys--what’s the into market selling product look like there? Do you have specialty sales people, or are you sort of plugging into the dental equipment market? Thanks.

We have a combined plan of go-to-market with different channels, multi-channel plan for the dentures, starting with building the confidence through dental labs with very amazing traction from their side. Then, we’re also going to work with institutions or those consolidators of clinics in the U.S. and the rest of the world. We have also our own go-to-market because it’s such a specialized product, and we are exploring business development opportunities currently with the largest distributors in dental. It’s a combination of the four.

Thank you. Thanks so much.

Thank you. The next question is coming from Brian Drab with William Blair. Please go ahead.

Hi, good morning. This is Blake Keating on for Brian. I just wanted to ask, you guys have talked a lot about the strength that you’re seeing in dental, but across other end markets, what markets are you most excited about and what other end markets could you potentially see a pullback if this type of macro environment continues longer than you expect?

Thank you for the question. It’s a great question, because our problem is where to focus. We see so much enthusiasm across different verticals, and we are so strong in many of them. Just lately, I can share that we had fantastic results with government-slash-aerospace - fantastic results. We see demand growing in automotive. We see the fashion business and of course the dental, but for us the strongest ones are automotive and aerospace, then dental, and of course we’re also very optimistic about regenerative medicine down the road, three to five years - not now, but we are building a unique position with our partner, CollPlant. If I’m trying to summarize, aerospace, automotive, medical, dental--medical is the patient specific solution, and also fashion.

Got it, thank you. Then under new products, again you talked a lot about dental, but where else are you seeing a lot of strong demand for new products, and if you can give any color on maybe the last few years of new products that have been introduced, what they’re contributing now to revenue or growth, how should we think about that?

We don’t share the specific data per product, but I can share that since I joined, we replenished the portfolio. Literally you can go to any trade show of substance and you can see that most of the things we are selling are new, like our leading machine PolyJet, J55 and the J3, which are completely new. If I go to FDM, then we introduced the new carbon fiber machine, and of course the three new technologies which are well selling and we see significant demand, both for the Origin and the RPS, the liquid resin solution, and now together with Covestro, I’m very optimistic. But put all this aside, we are focusing on use cases, use case by use case. This is a completely new strategy that we started only two years ago, and it works. We see new use cases in automotive. We see new use cases in aerospace, like drones. We see new use cases with our Origin with injection moulding replacement, and so on and so forth.

Got it, thank you. I’ll pass it along.

Thank you. The next question is coming from Jim Ricchiuti with Needham & Company. Please go ahead.

Hi, thank you. A question just on the targets that you’re sharing with us today for ’24 for gross margins and your medium term targets. I’m wondering what kind of assumptions are you making for manufacturing, which I guess was, what, about a third of the business at the end of last year? What kind of assumptions do you make for ’24 and looking out for the medium term target for ’26? Thank you.

Thank you Jim for the question. As you mentioned, the starting point, end of 2022 is that one third of the business is coming from end use cases, or manufacturing. We don’t share for the future the specific percentage, but we expect it to increase significantly, and that will drive the very positive impact of consumables on our gross margins. That’s a significant portion of the increase to the 50%-plus on the gross margins, together with scale. Keep in mind that Covestro, that we’ve just acquired, comes with high gross margins, so the combination of our journey to manufacturing of this scale, of this software that comes with probably the highest gross margin out of the different streams, the combination of all this will bring us to the 50%-plus gross margin.

Got it. That actually is a segue to the next question. I wonder if you could talk a little bit about the progress you’re making in the software business and how we should be thinking about this business over the next one to two years.

Hey Jim, thank you for the question. We are making significant progress in software. It took us a while because we are investing--have invested for the last two years in a new platform, but we have a very unique approach, very unique because we are not focusing on the MES part of the business. We are not going to be the one managing the whole manufacturing enterprise. We are focusing on an AM platform, making sure that we deliver to our customers the ability to manage the entire digital [indiscernible] additive manufacturing work flow, so that’s what we are doing. We open it up from both sides to the printers, but also to the partners or added value partners that we just announced lately some of this. But we are building an ecosystem. What does this mean? And by the way, this is something that I saw three years ago and I was surprised to see that to print a part, you need to use between three to six different software and you need to say export, import. It’s so cumbersome, it doesn’t make sense, so we are solving it. We have one platform across our technologies, and this one platform allows the customer to sit on one stream and manage his additive manufacturing operations. It’s very unique to us, and the way we do it, we have a basic solution based on the GrabCAD Print, we have a basic solution and then we have packages that we add to it. Only now we introduced the GrabCAD Print, but stay tuned, we will have more products like this with basic and additional added value. We are going to monetize that because it’s such a big opportunity. It’s--you know, [indiscernible] said that it’s above $3 billion in the next two, three…

Thank you.

Thank you. That brings us to the end of the question and answer session. I would like to turn the floor back over to management for any additional or closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.