Good day, and welcome to today's conference to discuss Stratasys' Fourth Quarter and Full Year 2023 Financial Results. My name is Kevin and I'll be your operator for today's call. A question-and-answer session will follow the formal presentation. [Operator Instructions]. And now, I'd like to turn the call over to Yonah Lloyd, Chief Communications Officer and Vice President Investor Relations for Stratasys. Mr. Lloyd, please go ahead.

Good morning, everyone, and thank you for joining us to discuss our 2023 fourth quarter and full year 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 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 reports on Form 20-F for the 2022 year and for the 2023 year, the latter of which will be filed with the SEC in the coming few days. Please also refer to our operating and financial review and prospects for 2022 and 2023, which are included as Item 5 of our annual reports on Form 20-F for 2022 and 2023. Please also see the press release that announces our earnings for the fourth quarter of 2023, which is attached as Exhibit 99.1 to a report on Form 6-K that we are furnishing to the SEC today. 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-GAP 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. In the fourth quarter, we once again demonstrated that the diversity of our offerings and the strength of our go-to-market operations can deliver profitable results. We achieved these results in what has continued to be a CapEx constrained environment for our customers and a challenging chapter for our industry. I am particularly pleased to report that we delivered another record quarter of consumables revenue, a testament to strong usage of our systems. We also achieved our 10th consecutive quarter of profitability on an adjusted basis, which reflects the discipline of our business model that differentiates us in our sector. Stratasys is laying the foundation for meaningful use cases that will significantly contribute to our financial performance. Our suite of offerings features best-in-class technologies that allow our customers to advance the use of additive manufacturing and increasingly broaden applications into manufacturing at scale. As our Neo branding states, we make additive work for our customers, and we see that playing out every day, whether it is the strong utilization of systems they purchased from us in the past, or in the continued high level of engagement we see today for Neo systems, incorporating cutting-edge technologies. As the macro business environment continues to improve and capital spending patterns return to normal, we expect the pent-up demand to re-accelerate growth, particularly in our system sales. We delivered solid revenues in 2023 of $628 million, down 3.7% versus 2022, but up 1.3% after excluding the MakerBot divestiture and the two businesses we divested from our Stratasys Direct Service Bureau, showing remarkable resilience against a severely CapEx constrained environment for our customers. We improved our gross margin for the year, despite the modest change in revenues, reflecting our focus on cost controls and…

Thank you, Yoav, and good morning everyone. We achieved solid results in the fourth quarter against what has continued to be a challenging backdrop of adverse macroeconomic factors and related pressures. We are confident that the high level of demand we are seeing in our customer engagements will translate into meaningful growth once these headwinds abate. In general, our results demonstrate the resilience our diversified portfolio provides, which led to our 10th consecutive quarter of profitability. Now let me dive deeper into the numbers. I will note that after a number of years of volatility, the impact of currency on year-over-year comparisons for 2023 was much more muted. As such, I won't be highlighting comparisons in constant currency. For the fourth quarter, consolidated revenue of $156.3 million was down 1.9% as compared to the same period last year, but was up 1.3% when adjusted for the divestitures of our metal and urethane businesses from the Stratasys Direct Service Bureau. Product revenue in the fourth quarter declined by 0.7% to $110.4 million compared to the same period last year. Within product revenue, system revenue was down by 13.7% to $47.4 million compared to the same period last year, as constrained capital budgets continue to impact customer buying behavior for new systems. Consumables revenue was up by 11.9% in the fourth quarter as compared to the same period last year, to a new record of $63 million. The increase reflects continued strong utilization of our customers' existing systems and contribution from the acquisition of Covestro in April, 2023. Service revenue was $45.9 million for the fourth quarter of 2023, down 4.6% as compared to the same period last year, excluding the divestitures that took place in our Stratasys Direct business, service revenue grew 3.6% year-over-year. Within service revenue, customer support revenues grew…

Thank you, Eitan. I want to thank our global team for their professionalism and dedication to help drive continued profitability as our business grows and creates long-term value for our customers and all our stakeholders. I am particularly proud of our Israeli employees and their families, many of whom were called to military service for most of the fourth quarter, as well as our employees worldwide who stepped up valiantly to carry the additional workload. This effort helped ensure that our business operation was uninterrupted with no material impact. We continue to differentiate ourselves from the sector with the strongest combination of best-in-class technologies and unparalleled go-to-market infrastructure and an ongoing focus on operating efficiencies. Our customers are currently challenged by micro-conditions that constrain their spending, slowing their pace of purchasing our product that can advance their transition to digital manufacturing at scale. However, we view these challenges as only a delay in the inevitable widespread and faster adoption of additive manufacturing. One need, only look at the continued high utilization of existing systems and the strong levels of engagement to share our optimism. We are excited for what 2024 and beyond holds for strategies as we continue to lay the foundation for expanded applications to drive accelerated growth. With that, let's open it up for questions. Operator.

Thank you. [Operator Instructions] Our first question is coming from Greg Palm from Craig-Hallum. Your line is now live.

Yeah, thanks. This is Danny Eggerich on for Greg today. I guess I'll just start with consumables. Pretty strong quarter, obviously a record number. Doesn't sound like it, but any signs point to potential drawdowns on inventory at customers, or you feel like you got pretty good visibility there, and I think you can continue that kind of growth throughout 2024? And then I guess, what was Covestro contribution in the quarter?

Hi Danny. So maybe I'll start. It's Eitan, I'll start from the end. Covestro, I believe we've mentioned in the past, it's roughly $4 million to $5 million a quarter, and we were in that range, also in Q4, 2023, and we believe that the next year will be similar if not growing. And then on the second question…

May be I’ll jump in here. Thank you for the question, Danny. So I think we – actually it's a reason for celebration as an industry, because consumables are the indication that someone is really using our equipment, and that additive manufacturing is adding value, and that's what we are doing in Stratasys. So it's a record $63 million of consumable this quarter, $246 million for the entire year, and the most important thing that we see increase in machine utilization. And it's so important because consumables are the key to really penetrate manufacturing, because you have more materials, you penetrate more applications and more use cases. We just introduced a new material for the origin. It means that we open up completely new applications for weatherability, application where you need durability, you need better performance, you need better material, you need better parts. This is essential part of our strategy, and we see that it works. On top of it, we also see that the Covestro is adding value to strategies across different technologies, because the WeatherX is a Covestro material that we adopted for our origin platform. And it's also of course contributing to the gross margin, because we have a higher gross margin on material. So to sum up, material is key to penetrate into manufacturing. It brings more growth, higher gross margin, and we see that it's growing with and without Covestro, and we believe that it will keep growing going forward.

Yeah, no, that's good. That makes sense. Maybe just switching to systems. I think you had mentioned that you are kind of expecting maybe a bounce back in demand in the second half. Is that baked into 2024 revenue guidance? And if so, how much?

So, definitely it is part of the plan, but in a very thoughtful way where we make sure that like we were exactly within the guidance in 2023, we want to make sure that we are exactly within the guidance also in 2024. So when we say a number, it is banked, but it's also with high level of certainty. And when you talk about certainty, hardware practically is the most sensitive offering that we have in this industry, and it's across the board, not us. All players are seeing this. It's sensitive offering, because it's sensitive to the macro backdrop, to the economic uncertainty, and also to their interest rate. It creates CapEx constraints with the largest companies in the world. However, I believe it is not a long-term phenomenon, because there is so far you can postpone investment if you are competing in your market. Take an automotive player, at the end, they will need to invest in new lines. They will need to invest in new design. They will need to compete with EV that is coming from the East. So we see this pent-up demand, and we believe that the situation that we are facing now is only temporary. And the moment we will start seeing some recovery, and we're talking about recovery, we see the spring of recovery. Very small signs, but they are there. We see flattening sales cycles. In some hardware it's even shorter sales cycles. We see improved pipeline, mainly for the second half. And we also see PMI, the Purchasing Manager Index, a bit better mainly in the U.S. It's the first time in January that the PMI index crossed the 50 range. And it means that U.S. B2B market is not contracting anymore. It's not growing yet, but it's not contracting. So, we believe that all those good signs would create the first steps of recovery, and then release the pent-up demand that is still there. And we have the F3300 exactly on time, and we are going to launch it. And Q2 begins, in the end of Q, around Q2, ready to address this pent-up demand. So practically, in one sentence, we worked really hard over the last two years of tough macroeconomic conditions to make sure that we are ready to capture this pent-up demand.

Yeah, understood. That's all very helpful. I'll leave it there, thanks.

Thank you. The next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now live.

Hey gentlemen, congrats on the good results here, and I love all those pent-up demand comments. On the same page as you guys, so.

Thank you, Troy.

Yeah, very welcome. So quickly, Yoav, did you give the percentage of sales that are going into production applications? I think I heard part of it, but if you could clarify that, it would be great.

Yes, thank you Troy for the question. So we have a very simple laser sharp strategy, we are going for manufacturing, and we are going for manufacturing with the new technologies, very innovating, like the F3300 that really disrupt the FDM market, with new use cases like the Dentures, with consumable that open up new applications, with differentiated software, we can talk about it later, and with SDM as a tool. So when we are looking at that, practically what we are saying, that the entire market is ready for us to really get into the new area of additive manufacturing. We are measuring it, because if you are not measuring it, all this is one big story. So we are taking each one of those drivers, and we are measuring how it helps us to get into manufacturing. We were – 32.5% of our sales were to manufacturing, this year 34%. What does it mean? It means that we are in the right direction. It means that we are taking the right steps. The strategy is working, but it also means that the B2B market in manufacturing is heavily constrained by CapEx. But eventually, the majority of our printed parts will be in manufacturing, green and used parts.

Yep, totally agree, and thank you for those numbers. A follow-up here then for Eitan. I know you guys are proud and talk frequently about this 10 consecutive quarters of non-GAAP profits. I'd point out that you've also had eight consecutive quarters of negative cash flow from operations. So looking at your guidance, if you guys are going to do 1% to 3% operating margins in any given quarter in any given year, it's going to imply further cash usage. But can you just talk about cash generation goals or cash flow positive? When do you think we will hit targets like this?

Thanks Troy for the question. So I’ll start saying that in the last two quarters, so Q3, 2023 and Q4, 2023, we actually had positive operating cash flow when excluding one-off payments related to the M&A, including the penalty to DM. So, our business in Q3 and Q4 this year, so not like last year 2023, not in the future, actually proved that the business can generate positive operating cash flow when you exclude these one-offs. Together with that, maybe you saw that or you'll see in the last two quarters, our inventory levels went down. This trend will continue in 2024. It will improve our working capital for the next year. So to your question, we're positive about our ability to generate positive operating cash flow in 2024. Excluding one-offs, our business will generate positive in 2024.

Awesome. Alright guys, well good luck and keep up the good work here.

Thank you. Next question is coming from Jim Ricchiuti from Needham & Company. Your line is now live.

Hi, thank you. So it sounds like you're fairly pleased with the progress you are making in the dental market. I wonder if you might be able to share with us what the level of revenues are in this vertical and maybe what the growth rate was last year versus 2022.

So, thank you for the question. We are not sharing the exact numbers. I can only say that we grew significantly in dental, and we are focusing on the restorative sector of the dental market, which practically it's really non-discretionary. If you have a problem, you have to deal with it. And our focus is denture, and we believe in this area, because we are disrupting the market. We are disrupting the market in a way that creates significant value to each one of the stakeholders. You take the value chain, you start with the patient. It's simply more convenient, easy to use. We have great results and great feedback. We are talking about tens of thousands of people already working with our dentures, the TrueDent. You take the dentists, we reduced the visits significantly from four to five to one to two. You take the labs that are producing, we dramatically reduced the cost because we save on labor, so this is the idea for us in dental. Additive manufacturing can transform dental, because practically we are disrupting this market and make it digital, and our focus is on the restorative market. And we are developing unique business models to capture more of this value that we are creating along the value chain to each one of the participants.

Thanks for that. Hopefully, down the road, we have a better idea of the contribution it's making to the business. But maybe to shift gears Eitan, how should we be thinking about Q1 seasonality? Just given Q4 was atypical, right, in terms of the seasonal weakness given the weak capital spending environment. Is Q1 – do we think about Q1 the way we normally would in terms of the seasonal decline from Q4?

Yes, thanks Jim. So the answer is yes. We expect, we believe that the seasonality that is typical to our industry will continue also in 2024 with gradually increase in revenue and profitability throughout the year. So that trend will continue.

Okay, thank you.

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

Yes, good morning, guys. Good afternoon for you. Thanks for taking the question. I guess, I'd love to get some context for is signposts inside of your key businesses as distinct from macro. If you can give us some context around them, that you are looking for to catalyze adoption in important areas of your businesses. And signposts could be, if even anecdotal, things that your customers or different industry sectors are working on maybe particular, sort of technical thresholds that they are looking for to move beyond to catalyze adoption. That would be awesome. Thanks.

Thank you Ananda for the question. We are catalyzing the adoption by being super frank with ourselves. We are going to manufacturing, but we are going to manufacturing in a structured way. We build the whole structure and framework. What does it mean manufacturing, together with our customers? And we are going one by one to make sure that we are achieving it. And the way to do it goes through two avenues I would say. One is use cases. We identify the use cases where only additive can deliver and we deliver value. The second one, is we do it with our customers. We have a customer advisory board. We do it with our customers, with customers like Toyota, like Siemens, like McLaren, Daimler, the U.S. Government. We make sure that we are not inventing or dreaming about use cases. We do it with our customers. We develop the end-to-end solution that includes both the hardware, the software, the material, also specific service that they need. We put it all under one umbrella of software and we do it with them. This is the way to ensure adoption, because you are not trying – we are trying to reduce the cost of Toyota Corolla by $50. We are identifying with our customers the applications and the use cases and there are many. I put an example of the denture where we create a significant value. But many other applications like fashion, like aerospace, drones for example. We are working with our customers to design better drones that save on energy and make sure the distance of the drone is much longer. So those types we are doing with our customers and it's a use case by use case together with the customer. For example, the EV, we are working with customers on a lighter solution for electric vehicles and so on and so forth. The key here, do it with your customer. Fair use case where only additives can do it. A good example is also Toyota and F3300.

So, that's super helpful and it gave me an idea for a follow-up, which I think really will get at maybe unpacking a little bit more of the heart of my question. That's a super good tee-up. And this might be a little bit of a challenging question, just because I'm sure different industries, different customers in different industries are in different places. But I guess, is there any general context you can provide around in the process you just described? How much until you really can catalyze up the revenue opportunity in your key segments? How much is more dependent on you guys forwarding the technology to particular thresholds versus how much of it is – you have the technology sort of relatively to where they need to be, to be dangerous. It's really a matter of time and just getting into the design cycle and going through the design cycle process, which I know can take some years depending on category. And that's it for me. Thanks.

It's a great question. Very hard to relate to, because average will kill everything here. It's like every application and every use case is a story by itself. Some applications, some use cases, we already have the full solution end-to-end. Take the dentures for example, you take tooling, jigs and fixtures, we have the right software, we have everything, it's ready. It's about the customer adopting it based on their cycle. You take other applications, we still have a way to go. In medical for example, in fashion, we have a way to go to make sure that the customers are really adopting it together with us. If they connect those, for example, we are there, but the customer still needs us to hold his hand. But demand is strong. We see the engagement, because the customer, this customer advisory board that I mentioned, they wouldn't spend days with us if they wouldn't understand and that there are things that they can do with additive that they cannot do with anything else and it is creating competitive advantage for them. So I'm not going to give you an average. I can just say that one, we are engaging and we are working with customers at different levels. It depends on the different use cases, but we are not talking about 10 years or 15 years. It's not something which is – it's not biological. It's not like we need to wait someone to grow up 15 years. It's something that can take between one year or a few months to maximum three years, maybe a little bit more, those applications that we are focusing in. And the second thing is that the demand is there and it's kind of the growth paradox. We are struggling as an industry, take step by step by step, but we are progressing in the right way and the moment they will adapt it, either in the new cycle or for new product, we will see the growth coming in a big way.

Yes. Yes, we've seen it before. That's super helpful. I really appreciate it. Thanks.

Thank you.

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

Hi, good morning. This is Blake on for Brian. I just wanted to ask, about the revenue guidance. Can you talk – you mentioned that you set out guidance that you can hit. Can you talk about the different dynamics that you get, that get you to the high end versus the low end of the range?

Hi Brian. Sorry, Blake. Hi, Blake. So I'll touch on some of the trends that kind of help us think about the low end and the high end. So one is the launch of the F3300 that is going to be a significant growth driver in 2024. We've not launched it as you know, but we actually see a huge demand and a significant backlog that start to pile up. So a successful year for F3300 can take us from the low end to the high end, so that's one growth engine. The other one that also Yoav mentioned earlier is consumable. That's something that we have high certainty that it will continue to grow in 2024, but of course it depends. Software is another growth engine that it takes time to reach the high revenue level that start to be very meaningful, but still something that comes with very high margins and increased significantly in 2023. We believe that the trend will continue. And of course, above all there is also the macro question, that of course can impact the, whether we are at the lower or the high end or somewhere on that scale based on the – what the macro will be in 2024.

Yeah. And just to add to what Eitan said for a more strategic perspective. When we are coming with such type of guidance, it's based on the foundations that we build. We truly believe that we are ready to capture the next phase of growth, like I talked with Ananda. And we are ready, because practically we are leading the industry in terms of performance and customer preference. We are growing, yes, not a lot, but in a declining market. We have record consumable sales with higher utilization. We increased our market share over the last three years. We demonstrate financial, actually unique financial stability in terms of profitability, gross margin, no debt, cash flow, and we have a strategy with five growth engines of the new technologies, the new use cases, the consumable, the software and SDM is a driver into manufacturing. And we build over the last three years foundations like the go-to-market, the diversified portfolio, the relationship with our customer, the Siemens and the Toyota and the U.S. government of the world that makes us ready. That's why we have the comfort and the confidence to come with that guidance in a tough time, because we are ready.

Understood. I appreciate all the color. And then just lastly for me, so you guys talked about a couple of opportunities with the P3 systems and Origin with new materials and software. Can you update us on progress with Origin and those systems? At the time of the acquisition, you said you expected up to $200 million and incremental revenue within five years. Since you are a little over halfway, I was just wondering if you had an update on that progress. And then what markets are you seeing the most demand for those systems.

Definitely the market for the Origin and the staff, which are arrowhead for manufacturing. The market, our industrial market, high end, high parts properties, very demanding, and that's what we are doing. Both P3 and SAF are focusing at the iron market automotive, the aerospace and I am industrial, because no one can match the quality of the part that we have. We used the last two years to make them much more reliable. I can say that now they are meeting all Stratasys standards and are aligned with the standard of FDM, which we are very proud of. And now it's all about material, because we want to open up new industrial application. So it's the WeatherX, which is very unique in the market. You can put it outside in the sun, in the rain, it will work, and same with SAF, the P12. It's new materials like polypropylene in the future, where only SAF can do it, because of the thermal control that we have. So it's a very simple strategy. We go for high end industrial. This is statistics, we go for the high end. We go with those technologies that we put a lot of energy and brain into the innovation of those systems and we do it with unique material.

Got it. Thank you. I'll pass it along.

Thank you. Next question is coming from Jacob Stephan from Lake Street. Your line is now live.

Hey guys, thanks for taking my questions. Apologies if this has been asked already. I'm just jumping between calls this morning, but maybe you could talk about some of the bigger platform systems, the F3300, H350, and just kind of compare the sales cycles and also just kind of the demand pipeline of the Origin and kind of Neo Systems.

Thank you Jacob for the question. No doubt the bigger the system, the longer the sales cycle, that's an easy one. But also is where we shine in Stratasys, because this is our focus. What we promise and deliver to our customer is the reliability, the part property, the lower cost per part. And then we see nice, I would say nice, but a bit longer sales cycle that can – sales cycle in Stratasys can go from one month to practically five months or six months, and a large deal even a year. This is like with the government and others. But on average, the nice thing that we see since Q4, Q3, Q4 last year, that the second derivative of the sales cycle is better. So it's flattening, and in some hardware and some type of product also shortening sales cycle. F3300, I'm happy to share. It's a bit easier because it's disruptive and its created a lot of excitement in the market, because we are bringing something that doesn't exist. We are bringing large format FDM with all the qualities of Stratasys, but double the speed and almost half the cost. It's an expensive system, but the ROI is very short because of it. And there are new things that the customers can do that they couldn't do with other machines. So, despite the fact that it's a high cost, high price machine, we see better sales cycle, at least at the beginning.

Got it. That's helpful. And then maybe just one more, kind of vertical related. What are you seeing in kind of the aerospace market? It seems like there's been a lot of investment and focus around this market, but maybe you could just kind of touch on your strategy there and also, what any progress that you've made.

This is one of our top verticals. It's nothing new here, and it's one of our top verticals because of our quality and experience there and really unique knowledge and solutions that we are bringing. We also – we are the first one to introduce new materials into this area and to certify them together with certified bodies starting with the U.S. But the most important thing that we are delivering there, we have real success on the ground with the government, with Navair and with the Air Force and with NASA, and we have all advisory committee that few advisory committee, I mean customer advisory committee that leading figures from the industry are contributing what is really needed for them. So bottom line, aerospace, we have, I don't want to say number one, but probably number one position there. Supported by the experience from the government, customers that are developing with us, unique applications together. We are practically partnering on projects and we believe that the new FDM platform will be their leading solution for aerospace.

That's helpful. Thanks for the color. Good luck going forward here guys.

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

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

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