Hello, and welcome to the Stratasys Q3 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question and answer session will follow the formal presentation. [Operator Instructions] 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. And 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. And 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 refreshments and continues to take steps that will enhance value for our shareholders. Aris appointment followed Ziva Patir's decision to step down from Stratasys board following 10 years of service as a Director. We are grateful to Ziva for her commitment and many contributions to the company and we share all the best. And 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 and demonstrating our resilient business model and financial profile. Customer demand and our engagement with both our installed base and new customers continues to be stronger than ever. The results show that our customers recognize our unique combination…

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 differentiates Stratasys in our industry. Overall, our results reflect the resilience our diversified offerings provide, continued high level 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, and excluding make about in 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 and 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 we see in the marketplace 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…

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 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 beachhead in manufacturing at scale. One that we expect will grow in adoption as the technology continue 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 challenging business environment this year and the excessive M&A noise in our space. Our focus remains on maximizing shareholder value, while being cognizant of the new 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. [Operator Instructions] 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 I guess is now commercial availability in the first half of the year which would require some additional tweaks and what does the sales pipeline, 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 that high commitment of Stratasys to quality. So 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 NDA to the different features and recommended, and we're already using in Toyota. They are already using it. They share their view about the machine in Formnext last week and there was a lot of excitement there. I can only say that it's a very slight delay. We have very strong demand to this machine. We have already purchase order and we have full confidence that that will be a transformative offering in manufacturing, mainly in aerospace and automotive spare parts, but also in tooling, jigs and fixtures. It's a completely different scale, different delivery, different value proposition, and that's why we're already have customers that develop machine with us waiting to start engaging and start operating the machine and re-manufacturing. Of course also other customers in the pipeline except Toyota. I'm not talking about only Toyota, but the top manufacturers in the world.

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

Thank you, James. GrabCAD is an essential part in our strategy. I would say in two different routes. One, we believe we need to give our customer the best experience and to make sure that any additive manufacturing operator has, when he is working, it is fully productive and has the best friendly operating system. So it's all about productivity and make the lives of additive manufacturing operator much easier. And when we are talking about GrabCAD, this is with respect 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, five different software in order to print one part. And our vision is to take our strength, which is based on the fact that we are producing the systems. We know the logs, we know the data, we know everything, we have the largest installed base and we -- we have the best operating systems. so those are the pillars. Now we're taking those pillars and we said, okay, let's make it a platform connected to every partner that can make the life of the operator easier, like simulation partners, like inventory traceability partners, like [indiscernible] partner and also being able to connect to all our fleet on the other side. Now we take this GrabCAD and we say, okay, we want to make your life easier. The way to make the life of our operators or customer easier is to smooth the way they are running the operation. And when we are doing it with GrabCAD, we are bringing new products to the market. The forecast of software in our industry get to $3 billion in the next five years and we will capture this part that is not the manufacturing enterprise system but those parts that really make the operator's life more productive and easier. We have great gross margin there and we already launched two products, AM, what we called OpenAM. So if you buy our software subscription base, you can use other materials and we launched what we called GrabCAD Print Pro, which has fantastic features that increase the productivity. For example, what we call the accuracy center, where you can use AI to close the loop between the end use part and the file. Now we put it together, you are becoming more productive because you print much more accurate part. This is the direction, it's going really well. Just as an anecdote in the last quarter, 50% of our sales in SAF and in FDM, we attached through the same that -- GrabCAD Print Pro. So I'm very optimistic about GrabCAD. It will be an essential part in our recurring revenues going forward.

Thank you, and congratulations in 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 more broad-based what 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, I mean, were you expecting a decent size contribution in Q4 or how much of it is just related to a broader sales cycles lengthening and some order push-outs into 2024?

So, what will -- Danny, we'll not be getting into the specific numbers of the F3300 contribution for Q4, but as you have mentioned, this is a significant product and a significant launch. So once it's -- we reached the commercial launch, we did expect contribution to Q4 and that has an impact on our Q4 guidance.

Danny -- it's Yonah, by the way. You asked about the order push-outs. So, the delay has nothing to do with order push-outs at all, it's clearly was only related to making sure we got the best product out

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 kind of 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. And the answer is that we have confidence and the main reason is that most of those measures are within our control, and I'll explain. We've created an infrastructure both on the cost side, on the gross margin side, on the cash flow side that are within our control. So even in a challenging macro environment, we do have the lever and we do have the infrastructure to maintain low OpEx and to improve our cash flow. So the 50% plus gross margin in 2024, the operating cash flow positive in -- in -- in 2024 and the ability to maintain good OpEx level, as a percentage of revenue, that's something that we're very focused and believe that can be achieved even in the macro -- challenging macro environment.

Got it. That's helpful. Maybe just one more, touching on dental. I think last quarter you had mentioned a top five denture producer had or was committed to acquiring system, but what's the update on that, did that hit? 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 ever. So I think that's a good reflection of where we are. Our strategy is working both on the TrueDent side but also on the replenish -- in replenishing of the portfolio both on the printer side but also on the material side, it's really working well. Also on the regulatory front, we are receiving on time approval that we're waiting for and we will see more grow there. Especially because we are focusing on what we called restorative dental. So we are less sensitive to the current macro environment where you have discretionary sectors like the aligners and others were quite sensitive to inflation, interest rate, income. On our end, we are focusing on restorative, on dentures, on removable dentures, on models, and crowning [indiscernible] in the future. So, and we do it with a truly disruptive use case. So we are not, there is no need to in our offering. Nothing here. It's about innovation, again making the life of the dentist and the technician much easier, multi-material, multi [indiscernible], high esthetic, almost no labor we are transforming this restorative sector.

Great. I will leave it there. Thanks.

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

He. 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 -- Yeah. You're very welcome. 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 macro say clears up, begins to improve whenever that occurs, 2024 going into 2025? Key milestones there, I'll use the term milestones, but key milestones, key occurring with, with your industrial folks. The audit -- 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 signpost that -- that kind of need to occur or will be occurring that can continue to amplify the activity into those environments?

Thank you, Ananda. Mainly, and a big thank you for your support. We don't take it for granted. And really, I want to thank all our customers and industry peers. The support we are receiving over the last month and a half is amazing and worth mentioning. So, thank you. So maybe I'll start with -- maybe I'll start with the macro situation that would, I believe, are the main factor that will put us and the entire industry back on track and then I will relate to the specific milestone for Stratasys in specific verticals. So I'll start with the, with the macro. What is -- those factors that really impact us, and it's very clear that those are two, I would say. The certainty [Technical Difficulty] because we are growing to manufacturing and I will explain when I get to Stratasys. We are going to manufacturing, it's a very simple but laser-focused strategy. When you go to manufacturing, you're challenging the status quo. And when there is uncertainty, the tendency of the largest manufacturer in the world to change the way they're doing thing is lower by definition. At the same time, there is the interest rate pressure because at the end, it's CapEx and there is -- the cost of the CapEx is the interest rate and it all starting with inflation and so on and so forth. But what we see now is that the inflation is stabling with the US. So we are positive on this side. And also, we see that no matter what happens, in the new state of the world, not with the 0% interest rate but with 3% or 4%, also in this world the large manufacturers need to start a new, a new cycle of innovation and production. And we…

That's a lot of super helpful context. I really appreciate that. I'll cede the floor there because I'm sure there's 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 it with, you guys mentioned that you had record, high recurring consumables revenue and obviously there's a lot of printer utilization. Can you just touch on what end markets you're seeing the greatest utilization in?

So -- Great question. So we have five technologies and what we have done over the last three years is that we make sure that we are matching the hardware with the best material portfolio. So there was no one in the industry has a larger polymer materials portfolio than Stratasys. So we started with FDM and PolyJet then we acquired Covestro and Covestro brought to us also the Stereolithography, liquid resin, some DLP liquid resin. That's one of them we already launched, an amazing new material with unique ability outside in tough weather and also powder. So the strategy is very clear. We did a full solution, we make sure we have enough recurring revenue and that's the place of the material. So when we look at the material, we want to make sure that we have material that are tougher, stronger with the right properties manufacturing because we have a clear solid strategy. We need also the material to support this strategy and this is where we see also the increase in demand. We are less focusing on rapid prototyping. Although we are spending quite a lot there, but we are focusing on real manufacturing. So this is the direction and manufacturing is, by definition, four to five times more consumption, what we call unit economic. More consumption per unit per machine than rapid prototyping. So there -- this is the place we see the growing demand.

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

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

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. You know, I guess I'm just trying to get a sense on, you noted, they were running at kind of an operating loss. How much can we kind of expect operating margin next year?

Hi, Jacob. Welcome to the team of analyst.

Yeah. Thank you.

So let me start with a few sentences about FDM and why it's important in the big scheme of Stratasys and then I'll let Eitan share the specific data. So, we call it FDM 2.0, why because FDM is critical for our success going forward. We are going to manufacturing and FDM is manufacturing. And we focus FDM this year only on additive manufacturing with our technologies, we restructure these. We moved from, I know when I started, we had eight sites to three sites, very large size with scale, very productive based on our technologies, the SAF, the FDM, the Origin, the PolyJet for manufacturing solutions and also Stereolithography investment casting real manufacturer. So that's the idea. And once you have a strategy, we decided to divest the others that are not meeting the strategy, which is mainly the [indiscernible] business that we have in California and laser metal that we have in Austin, and this is part of the overall commitment of Stratasys to profitability. We are the only public company, the only profitable public OEM Company with positive cash flow and we keep doing this. We'll keep improving the quality of the business and to deliver on our focused as we did for the last 12 quarters. So we are very strong, but we are strong because we are doing those step-by-step, disciplined steps to improve the quality of the business. And I let Eitan share the data.

Sure. So, Jacob, I guess, as we mentioned, the impact of those two divestment. First of all, only one of them impacted the Q3 results. And that was roughly $1.5 million impact on the revenue in the quarter. We expect the impact on 2023 of the divestment of the two businesses to be roughly $5 million on revenue. As you mentioned those two businesses and were loss making and negatively impacted our total profitability. So we expect that the investment of those two businesses will have positive impact both on our gross margins and our bottom line, but we won't get into the specific details. I would just say that, with the numbers that you see for 2024 and will also be on -- on Q4, on gross margins and the other aspects also a benefit or enjoy the -- those two divestments. That's one of the pillar.

Okay, that's helpful. And then maybe just kind of on the strategic alternatives is -- I guess what's -- what's the timeline here, when do you kind of expected things to be, I guess, wrapped up?

So, you know that we can't comment. It's at the Board level, but I can just share the frame in a sense. We announced it [indiscernible] we are in process of strategic alternative. This process started, we have, we are engaging. We have good interaction. We are engaging and we are doing the best for our shareholders and we are taking the time to do it. There is another war in Israel, and still we are doing the best to make sure that we are there and we are enhancing the shareholder value through this process.

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

Thank you.

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

So I would like to thank you for joining. I would like to thank our team for an amazing work and for really maintaining the business and doing much better than anyone else in this industry. So I want to thank the Stratasys team, and I'm looking forward to updating you again next quarter. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.