Greetings and welcome to the Stratasys Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Yonah Lloyd, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our 2023 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's 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 second 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 second 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 furnished 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 we discuss our results for the quarter, I would like to provide a brief update on the M&A activities taking place. As we announced on July 17, our Board after consultation with its financial advisor and outside legal counsel, unanimously determined that the July 13 revised unsolicited proposal by 3D Systems Cooperation would reasonably be expected to result in a superior proposal, as defined in Stratasys merger agreement with Desktop Metal. To determine whether 3D systems would ultimately make a superior proposal, Stratasys is conducting the necessary due diligence on 3D Systems business and prospects. As the majority of the consideration is based on shares of 3D Systems, we continue to work closely with 3D Systems on the information they have provided, and we'll provide an update at the appropriate time. As the Board continues to support our efforts to maximize value for all Stratasys shareholders, it is important to keep in mind that our Board has not determined the 3D Systems proposal, in fact constitutes a superior proposal. Furthermore, the Board has not changed its unanimous recommendation to pursue the transaction with Desktop Metal and we will continue to work towards closing it. As always, we are focused on pursuing the path that will deliver the greatest value for our shareholders. Our business is strong. As evidenced by our second quarter results. And we are well positioned for continued success, regardless of the outcome of these developments. Additionally, Nano Dimension recently announced that it will no longer pursue its Partial Tender offer to acquire Stratasys, following the offers expiration on July 31, 2023. Nano also announced that it withdraw its Director Nominees for the Stratasys Board at our Annual General Meeting of Shareholders that took place…

Thank you, Yoav. And good morning, everyone. As Yoav, mentioned, we achieved another quarter of solid results, against a persistently challenging backdrop in our customers capital spending cycles. We are particularly proud of how we improved both gross and operating margins which chose the progress, we continued to make in driving efficiencies across the platform. Overall our results reflect the resilience, our diversified offerings provides the signs of acceleration in sales of manufacturing oriented system and the continued strong utilization of our systems by our customers. Now let me dive deeper into the numbers. For the second quarter, consolidated revenue of $159.8 million was up 2% adjusted for constant currency and make about relative to Q2 2022. In aggregate revenue, was down 4.1% and down 3.7% at constant currency compared to Q2 2022. OEM revenue, which excludes both MakerBot and FDM was up 3.3% at constant currency from prior year period. Product revenue in the second quarter declined by 5.7% to $109.1 million compared to the same period last year and was up 1.5% excluding MakerBot and on a constant currency basis. Within product revenue, system revenue declined by 17.9% to $48.3 million compared to $58.9 million in the same period last year, excluding MakerBot and at constant currency system revenue was down 8.1%. On a sequential basis, system revenues grew 19.4%, indicative of the improving conditions, we see in the market and the continued strong level of engagement we see with our customers. Specifically, we saw strength in automotive, aerospace and government for true production of end use parts as you have noted earlier. Consumables revenue rose by 6.9% to $60.8 million compared to the same period last year and rose by 7.3% on a constant currency basis. And by 10.8% at constant currency, excluding MakerBot. This represents another…

Thank you, Eitan. Our customers appreciation and adoption of 3D printing continues to grow, as we are an increasingly essential part of the efforts to bring more agility, flexibility and profitability to the global manufacturing operations. I also want to acknowledge and thank the employees of Stratasys. They have furthered the execution of our strategy with excellence, helping to make Stratasys the healthiest and the strongest growing business in our industry. We look forward to the future and we remain unwaveringly committed to delivering on our plans, as we seek to generate long-term value for our shareholders. With that, let's open it up for questions. operator?

Thank you. Before we open the floor for questions. Our Chief Executive Officer, Yoav Zeif would like to make a brief statement.

Thank you, operator and good morning everyone to join us. Before we begin Q&A as an update on 3D, I want to be very clear. We have been meeting with an exchanging significant information with 3D as part of our deciding if 3D combination can result in a superior proposal to the one we signed with Desktop Metal. We have had a number of joint meetings and exchanges of information and have more already scheduled. So, we can arrive at an informed decision as soon as practical. As always, there can be no certainly that a transaction will result and note that we have a signed agreement with Desktop Metal. We believe these things are best done privately and constructively and as I said, we aren't going to be taking any questions on M&A. Now, let's get to our earnings, which illustrate the progress we have made and now, operator, please open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum. Please go ahead.

Yes, hi. Thanks everyone. Thanks for taking the questions. I guess, just starting off with maybe the quarter and the outlook. I'm just curious, just in terms of visibility levels, what's changed. What's the same anything better getting worse than a few months ago? And just maybe relative to some of the peers or others that play in the capital equipment space a little bit better results. So, I'm just curious in terms of the outperformance where it's coming from?

Thank you, Greg, and good morning. So, no doubt that the entire industry is operating in a challenging environment, because we are in a deflection point. We are moving to manufacturing, but manufacturing players are facing also economic challenges and put kind of breaks on their CapEx. So, all of us are operating in a challenging environment. However, the nice thing in Stratasys that we are very diversified, and we are providing a full solution across the product development life cycle, but also across verticals, which allow us to be quite diversified and on top of it. We have very clear set of growth engine. The first thing that happened over the last three years that we almost tripled our addressable market. Then, we also made some acquisitions that suddenly, we see them in the market and they are contributing both revenues and profitability. So when you put this together the Covestro and strong material offering that we have and the growth in consumables and recurring revenues, plus new offering in dental plus new launches that we will have this year. And put everything together into one, strong infrastructure in the market of go-to-market and an amazing network of partners that feed us with information about the market to very strong systems, we have good visibility for H2. We have good visibility, and we see at the light at the end of the tunnel. And starting in the U.S., it's a bit better. You can see, it also on our hardware sale that significant improvement from Q1 which above 19%, 19.4% improvement from Q1. So, when you put everything together there growth engine, the acquisition the go-to-market and the infrastructure that we have, we are such a structured company. We have good visibility for H2, and that's why we kept our guidance.

Okay, great. And just in terms of guidance next year. And in one of the M&A slide decks you put out some base case and downside case scenarios for Stratasys as a standalone business, and I just wanted to maybe dig into that a little bit further, because the base case 20 plus percent growth relative to this year at the midpoint. And even in a downside case, pretty strong double-digit growth. So, I know that's not guidance per se, but what gives you maybe the visibility next year that you think you can reaccelerate growth - to that extent?

Thanks, Greg. For the question. It's Eitan. And so, as I start related to the two models, keep in mind that some of the drivers that Yoav related to, are the same answer for these questions, right. The acquisition of Covestro that's something that did not impact our revenue at the beginning of the year in 2024 is going to hit full year and we believe that we can grow that business when you think about the acquisition of Origin, ZAR which is SAF and RPS. Those businesses continued to grow and will have more and more impact as we go to manufacturing and we continue our journey. The denture that you mentioned all these growth driver. And keep in mind at the beginning of 2023 and even now is in unstable macro environment. So when you take all these together we have the infrastructure, the business, the go-to-market that can enable us to grow significantly year-over-year in normal macroeconomic environment. Add to that the software, which is another growth engine for us and you get a complete picture of many growth drivers that could get us there.

Okay, thanks for the help. I'll hop back in the queue.

Thank you. Our next question comes from Shannon Cross with Credit Suisse. Please go ahead.

Thank you very much. I also wanted to talk a bit about what you saw during the quarter and guidance. We just got off the 3D Systems call where they talked about pushed out orders that they saw during the quarter, which been closed in July, but they're seeing further push-out. So I'm just wondering maybe if you can talk about linearity during the quarter, are you seeing delays in terms of order rate and maybe, I don't know if you can just sort of contrast it to. I don't know if its different product sets - that 3D system has versus yours, but again it's kind of a tale of two cities, in terms of the commentary during the call. And then I have a follow? Thank you.

Hey, Shannon good morning. Thank you for your question. So, we definitely see longer sales cycle, but we don't see significant push of orders going forward. And I guess it's also related to our diversification - geographically across different customers, but also the improvement in the U.S. So, the U.S. is still - the overall economy is shrinking, because you can see it in the purchasing manager's index, but it's less severe than it was in the past, in the last three, four quarters. So kind of the wave of economic challenge and move to the other side of the ocean, and we are U.S.-based 60% of our revenues. So, we do see much better customer engagement very strong, especially in the U.S. So, the demand is there with a longer sales cycle, but we specifically didn't see a push in order to the next quarter to your question.

Okay. Thank you. And I'll see if you can answer this, we'll try it, you're undergoing initial integration work, looking at Desktop Metal. I'm just curious as you're doing that. Has anything changed in terms of what you saw going into the acquisition. Are you - are there like, what areas are you thinking are most complimentary, just kind of curious as to how that's going?

So we don't see any change and we still believe in what we announced and published about the complementary of those two businesses. So Desktop Metal are bringing the best metal solution that if there will be a metal solution in mass production it will be Desktop Metal for sure and they bring amazing position in dental, they are the leader in digital casting which is large format part of metal and they are super innovative. And when you combine this with Stratasys polymer leading position, with Stratasys go-to-market which is the best in the industry and with Stratasys infrastructure, we see great complement directly between the two companies and that's why we signed the agreement.

Okay. Thank you so much.

Thank you. Our next question comes from Brian Drab with William Blair. Please go ahead.

Hi, thanks for taking my question. I just wanted to clarify on Covestro, just how much that contributes to growth and how you think about that with respect to organic revenue growth because this company was acquired - the deal was closed on April 5, and so that you get a full quarter than in the second quarter Covestro revenue, it's about 3 points of growth. I'm just wondering, how are you thinking about this roughly 3 points of growth with respect to which - I think you said today 2% organic revenue growth for the company for the quarter. Is that in there?

Hi, Brian. So first to relate to your question about Covestro, you're right. The deal closed at the beginning of April and contributed $4.6 million for the quarter. We believe that business will grow already in 2023 and anticipated further growth in 2024. That business complements our other businesses. Our go-to-market can leverage that business, so we see a significant growth and good business from Covestro. I will add to that, that our consumable business. And keep in mind that Covestro is entirely consumables grew even without Covestro when you compare year-over-year, which I believe that was part of your question. So, our business grew further with Covestro but also without Covestro.

And you made the statement 2% organic revenue growth, excluding FX and MakerBot and I didn't - if I exclude Covestro's organic been down 1%, is that fair. I mean that should be an acquisition revenue, right. I'm just trying to clarify, I'm just a little confused.

Yes. So I believe we provided both so we provided the Covestro revenue in order for you to be able to model, so you have the MakerBot which is much more significant that was divested in August 2022 and I believe we provided and that's why I mentioned the growth in the consumable with and without Covestro but to your question, the 2% includes Covestro.

I may have just missed that you did it both ways. Okay. And Covestro should help margins somewhat right, that you're cutting - kind of cutting out the middleman, and not having to pay the markup on these many consumables that you source from them in the past?

Correct. Covestro is a healthy business as far as is concerned with the profitability. Yes.

Great. Okay. Thanks for taking my question.

Thank you. Our next question comes from Troy Jensen with Lake Street Capital Markets. Please go ahead.

First off, gentlemen, congrats on a really nice results.

Thank you, Troy.

So Yoav maybe for you. Dental I know is a big focus for you guys. I guess, to me I think about two different kind of applications. So there's PolyJet for dentures, and then [SLA] for more like aligners. Which one do you think it's kind of like better for you guys or the near-term opportunity or when you talk to dental market is it one more than the other?

Good morning. Maybe I'll take a step back and I'll start with our dental offering. We completely replenished our dental offering over the last three years and we today have the broadest technological offering in dental because we are offering PolyJet what we call Dentajet, and also J3 Dentajet and J5 and those are by far the leading inkjet machine in dental. Focusing on dental with great cost profile, with versatility, with flexibility, with the ability to print different application on the same tray that's on the PolyJet. Then we have the DLP with all the advantages of our P3 technology which mainly it's the best surface finish in the industry in DLP. And the meaning of it and there are some applications like splints, where you need this surface finish where we are really leading in terms of value to their end customers. And last but not least, we have the SLA offering and also in the future, I believe also the SAF will be able to contribute to the aligners. So the SLA and the SAF can be a great solution with great cost per part for the aligners business. So this is like the overall portfolio. Our belief is that in the long term the winners will be the PolyJet and the DLP, also in aligners by the way. Although we are investing and we have other solutions for aligners, we believe that that will be the solution and this is where we are investing. And in the short term no doubt that it's those two technologies starting with the denture application, which is unique to Stratasys. It's IP protected, you need to Stratasys no one else in the world can print monolithic denture in one print without the labor needed in order to glue the two [indiscernible], it's a transformation and we will improve the material as we go and we believe it will be a standard - the next standard standout in denture and you will see, which is a $5 billion market only in the U.S. So we are very optimistic about this, it can be much bigger than Stratasys as a whole. And on top of it, of course our DLP which we invest a lot in order to make sure that DLP is becoming really plug and play in dental.

Awesome, very detailed. Thank you. My follow-up I just asked on the SAF stuff. You talked about Nano-12 coming out here, which I agree is a bigger market than Nano-11 for you guys and big opportunity, but just are you still in kind of limited shipments with SAF and when do you think that's going to more contribute to bigger revenue growth.

We've made amazing improvement and progress with SAF over the last six months. Mainly on two aspects of the SAF one is the PA12 which is like, by far increases our addressable market because this is the standard, the PA12. But on top of it we, together with our software solutions and we talked about it in the script, we improved accuracy dramatically and we keep making improvements and we have it in SDM and customers are coming to see, but we have a very deliberate introduction of the machine, everybody needs to go through our SDM to make sure that he knows how to operate these. We are highly optimistic about this machine because no one has the value that we can deliver to customers in terms of cost per pound and accuracy.

Awesome. Yoav, thank you. Good luck with all this merger stuff.

Thank you, Troy.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Yoav Zeif for closing comments.

So thank you very much everybody that joined the call. It's a pleasure to be part of this industry and to lead it as the most healthiest strongest company in the industry with the eight consecutive quarter of profitability. And I want to thank our teams for making it happen. And thank you for joining us, and I'm looking forward to updating you again next quarter.

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