Greetings, and welcome to the Stratasys First Quarter 2024 Earnings Call. [Operator Instructions]. 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. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss our 2024 1st 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 2023 year. Please also refer to our operating and financial review and prospects for 2023 and for the first quarter of 2024, which are included as Item 5 of our annual report on Form 20-F for 2023 and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC tomorrow, respectively. Please also see the press release that announces our earnings for the first quarter of 2024, 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 afternoon, everyone, and thank you for joining us. Our solid results for the first quarter of 2024 reflect the resilience of our business model even as we are seeing constrained capital spending across the industry, resulting in relatively flat year-over-year revenue after backing out divestitures. Gross margins improved and consumables recurring revenue reached a record high, reflecting the strong utilization of our existing systems and demonstrating the impact of this revenue stream. Our customers are using their systems at a high level, displaying a promising indication of the increasing reliance on 3D printing as they expand usage in manufacturing applications while also managing costs. Our results this quarter and throughout the prolonged capital spending market downturn, demonstrate the effectiveness of our strategy that drives high-margin consumables and our unique approach that continues to produce strong results. Specifically, in the quarter, we generated over $7 million of cash from operations and positive free cash flow. We believe that our financial discipline strongly differentiates us in our sector and will help drive increased growth and profit as the current macro CapEx challenges subside and spending normalizes. We continue to maintain a healthy balance sheet that provides us stability to manage the current environment and optionality to support our growth through both organic investments and accretive acquisitions. And when capital spending returns to normal levels, our differentiated offering of industry-leading printer technologies, materials and software solutions positions us to meaningfully accelerate growth, driving sustainable long-term shareholder returns. Now let me give you an update on our exciting recent technology offering, the F3300, which we launched at the end of last year. As we have shared, the F3300 establishes a new standard in FDM industrial 3D printing for manufacturing, with up to twice the speed and throughput of standard FDM…

Thank you, Yoav, and good afternoon, everyone. We are encouraged by multiple improvements in the results of the first quarter relative to the first quarter of last year, while we continue to experience the effect of macroeconomic weakness in customer CapEx spending. Despite the relatively flat revenues, our gross margins improved, thanks in part to another record level in our consumables sales. And we generated over $7 million in operating cash and over $4 million in free cash flow. For the first quarter, consolidated revenue of $144.1 million was down 3.5% compared to Q1 2023. Excluding the noncore divestitures, our revenues were relatively flat. Product revenue in the first quarter was $99.2 million compared to $101 million in the same period last year or down by 0.9%, excluding divestitures. Within product revenue, system revenue was $32.9 million compared to $40.5 million in the same quarter last year. Excluding divestitures, revenue declined 17.8%. Consumables revenue grew 9.6% to $66.3 million compared to the same period last year. This represents yet another record level for Stratasys. And as Yoav pointed out, signals that utilization rates of the system we have thought continue to be strong. Service revenue, including our Stratasys Direct Service Bureau was $44.9 million compared to $48.4 million in the same period last year. Absent divestitures, service revenue was up 1.8%. Within service revenue, customer support revenue remains at strong levels and was up 3.3% compared to the same period last year, another indication of strong use of our system. Now turning to gross margins. GAAP gross margin expanded to 44.4% for the quarter compared to 43.8% for the same period last year. Non-GAAP gross margin also grew to 48.6% for the quarter compared to 47.3% in the same period last year. The improvement versus the prior year period was…

Thank you, Eitan. In summary, we delivered another solid quarter in a persistently challenging environment. The strength of our system sales in past periods flows through our results today in the form of consumables, as our customers continue to heavily utilize previously purchased systems. We expect that those systems will be replaced with higher performance, more advanced offerings in the coming years. The investments we are making to drive innovation and greater capabilities in additive manufacturing means that we will be ready to meet those needs when the cycle turns. We are laser focused on our commitment to delivering differentiated products and solutions to customers across a wide array of use cases. That, coupled with our relentless focus on execution, is setting the stage for us to drive relative outperformance and enhance shareholder value. With that, let's open it up for questions. Operator?

[Operator Instructions] Our first question comes from Troy Jensen with Cantor Fitzgerald.

Congrats on the good results here in the positive cash flows. Maybe first off for Eitan, a couple of questions. I guess, could you talk to us about Q2 seasonality? I mean you guys are kind of 2 months through the quarter now. So would you expect normal seasonality in Q2? And then on top of that, are we going to see incremental revenues from the F3300 here this quarter?

Thank you, Troy, for the question. So we expect a slight increase compared to Q1. So there is, in that regard, the normal seasonality of Q2 being better than Q1. However, the macroeconomic situation is still creating some headwinds in the short term. And with respect to the F3300, what was again the question?

Is it going to be initial revenues in Q2? I guess I'm trying to think base business, is that kind of seasonal, seasonality? And then is the F3300 going to be incremental to that?

Yes, there is going to be -- we expect to have revenue in Q2, but much more significant in the second half of the year.

Okay. Perfect. So I'd love to get a third question. I've got one more here for Eitan, I want to do a follow-up for Yoav. But, Eitan, long-term deferred revenues, they've been down a couple of quarters in a row now. I'm guessing that's just multiyear service contracts, but can you just touch on why long-term deferred revs have been turning the wrong direction?

There is no specific trend. It's sometimes a mix of the number of years of contract. So there is no specific reason or trend.

Okay. All right. That's fine. All right. Now Yoav, for you, this quarter was interesting, right? You guys reported 2 weeks later than normal, and there is just kind of a lot of chatter about consolidation and I personally believe you guys had a lot of executives out in Barcelona. We're expecting to hear more about the strategic review update. So I know you kind of touched on it briefly in your pre remarks -- prepared remarks, but is there any more color you can talk about here about when you guys plan to really kind of do something on the strategic review?

Well, on the late report of the quarter, it's a logistics issue, scheduling some resources that are attached to the war, but nothing really important and nothing that really impacts our operations. As for the strategic review, we are precluded from sharing any details. What I can say on the strategic review is that we are engaging, we are making progress. And of course, we will update when it will culminate.

All right. Understood. Good luck guys.

Our next question comes from Greg Palm with Craig-Hallum.

This is Danny Eggerichs on for Greg today. Maybe just as we kind of think about the last time we talked a few months ago, obviously, the macro remains challenging, but any kind of change in how you're seeing maybe overall visibility, sales cycles continue to elongate or kind of stay the same? Any color you can give us there would be great.

Great question. Thank you for asking. So we are more or less in the same situation like last quarter. There was an improvement in the sales cycle, not a real improvement, as I said last quarter, but we saw the second derivative kind of getting lower, so stabilizing. There is the -- sales cycles are stabilizing. We don't see yet the breakthrough, but it's there. If I base it on our engagement with our customers, where most of the engagements now are led by the new -- the NPI, the new product led by the F3300, there is an appetite in the market. It's clear. But on the other hand, all the large customers, and we are focusing on the high end, they are holding their CapEx, there is a CapEx constraint. But it can go so far because at the end, you have new models, you have new drones and the demand is there. And we are using this time where we are also stable, by the way, we did not decline. Year-over-year, we are flat in a very challenging market. We increased our market share in the last 3 years. So we are stable and we are using this time to make sure that we are ready to gain more market share and to fulfill more demand that is out there and just waiting that someone will address, then we addressed it. And we have the growth engine in place for this. So no doubt that there is a macro pressure still out there. But we are working on our micro factors to make sure that we will be the one ready to keep on leading this industry.

Okay. Makes sense. And maybe just touching on consumables. Obviously, really good in the quarter again, sounds like printer utilization remains pretty strong. I guess, how did -- or what kind of contribution did Covestro make to that business in the quarter? And I guess, should we expect that, that business continues to grow sequentially as we move throughout the year? How should we think about that?

Thank you for the question. So Covestro, as we discussed in the past, Covestro levels are $4 million to $5 million a quarter. Covestro -- so the growth was both Covestro and organic growth and better utilization of our printers which is something that creates a lot of confidence for the future.

Maybe I can add here, if I may. Consumables for us is focused because we believe that consumables will allow us to accelerate the adoption of additive manufacturing because it opens up new applications. So we are very proud in our consumable performance growth year-over-year with and without Covestro. We observed higher utilization. And practically in SBM, we have record high of utilization across the board. We increased the -- our manufacturing installed base step by step by step, even in a tough time. And all this together will make sure that this trend of selling more consumables and keeping and even increasing the share of consumables out of our total revenue will be there for a long time. And this is the strength of Stratasys.

Our next question comes from Brian Drab with William Blair.

And I just wanted to talk a little bit more about consumables because the step-up sequentially from the fourth quarter to the first quarter is -- really is catching my attention, and I'm just -- it's a significant step-up. And can you talk a little bit more about what's driving that? Are you surprised that you saw that in this kind of tougher environment, that you saw that step up from a fourth quarter to first quarter? And also is the F3300 in the consumables usage, which is significant with that potentially going to continue the momentum here in consumables?

Thank you, Brian. So maybe first with your first question. So to your point, when you look on the trend for the last 3 or 4 quarters, and I'm talking about the trend after the acquisition of Covestro. When you think about Q2 2023 onwards, we're up from $60.8 million to $61.8 million to $63 million in Q4, as you mentioned, and then to $66.3 million this quarter. That's to Yoav's point from earlier, demonstrates the higher utilization and that creates confidence. So we have confidence in our ability to achieve levels above $63 million. But sometimes, where every quarter lands in this range between maybe $63 million to $66 million, it also depends on specific deals. So to your question, we do see the trend is a positive trend. We believe we can achieve higher than $63 million during the 2024 quarter. But sometimes, the specifics can move somewhere within this range. Hopefully, it helps.

Okay. Yes, that's helpful. And then on the F3300, I guess as my follow-up, what is the consumables usage attach rate or usage relative to other machines?

Maybe I can help here. F3300 was designed and targeting manufacturing with large pulp. So what is unique for those machines is that we are talking about high-performance materials and we are talking about type -- high consuming of high-performance material because those are large parts and those machines are running in very high utilization. It's the same like our F900. We have machines that are running 90% and 95% utilization, which is much higher than any prototyping machines that we have that can be around 10%, 15%, this range. So I'm very optimistic because this is designed for manufacturing, and it's coming with our high-end materials.

And our next question comes from Jacob Stephan with Lake Street Capital Markets.

Congrats on the results. I just wanted to get some clarity on the comment, Yoav, you made earlier in the prepared remarks. You kind of mentioned that orders have surpassed expectations so far in the first half of the year. I mean maybe you could just provide a little clarity on is in the base business? Or is that just the F3300? Any color there would be helpful.

Jacob, thank you. It's an opportunity to clarify. I related to the F3300. Of course, like every time that we are launching a new product, we have a plan and we are on plan and exceeding it with the F3300. Of course, there is a ramp-up, and the ramp up is starting at H1, but will culminate at H2. So that's what I meant. And we are definitely surpassing in terms of purchase orders and in terms also of the quality of the customers. Because we have Nissan, we have Sikorsky, we have BAE, we have Toyota, and this is something that creates this flying wheel effect that we are looking for. Because if they can use it for end use parts, also others will use it for end use parts.

Yes. Understood. And then -- so I mean, you do have these nice blue-chip customers, but maybe you could kind of talk about some of the mid-market opportunity that you're seeing with the F3300, maybe some of those companies that don't have the balance sheet that these large customers do. What -- I guess, what traction are you kind of seeing there?

We are seeing traction in the mindset that FDM can run and also in the mid-market can run application, pure manufacturing application, because this machine has doubled the speed and almost double the throughput and almost halved the cost. So it's a disruption in the high end, large part FDM market.

[Operator Instructions] Our next question comes from Alek Valero with Loop Capital Markets.

It's Alex on for Ananda. Congrats on the results. My first question is have you guys seen any notable changes in the conversational tone with customers? And if so, what kinds of things are they focusing on?

That's a great question. I would say that the level of engagement that we have is much more specific. And I'm very proud with my team as well that we are not anymore talking high-level, 36,000 feet. We are talking about what is the application? What are their requirements? How we work together with our customers to meet those requirements? This is the only way to get those blue chip customers. That's the only way. And I think this change in mindset is also happening within Stratasys. So it's a different level of engagement than 3 years ago and 4 years ago when I joined Stratasys because we are talking about real requirements. We are talking about what do we need to meet? What type of standards? We are working with the right institutions? And customers when you do that start to understand the benefit of additive manufacturing. And the benefit is very clear. Of course, it's different from each application. For each application it's completely different, but it's there. And we are not trying to compete on the injection molding part. We are trying to compete where we have absolute advantage on personalization, on lightweight, on specific geometries and so on and so forth. And the customers are with us on this journey.

Very helpful. As a quick follow-up, what are some -- what are the more notable things industry and company wise that we should all be focusing in on in the second half of 2024?

So that's a great question. Thank you. I think we should focus on how the additive manufacturing industry can deliver real value. So talking about the promise, talk about specific applications and how we can deliver value to specific applications. And this is a combination of the reliability of the machine; the TCO, the total cost of ownership of the part. It's a matter of materials and good other material. It's related to the software and how we can help the customer be successful along the digital thread with our software, and that's exactly what we are doing. The moment the industry will be there, it's only a matter of time. And I know that today, the industry is kind of depressed because of the macro condition, because that we are in a transition crossing the chasm. But we have absolute advantages and we are going to deliver them. And that's the way to analyze or to judge each one of the players. Do you have the fundamentals to deliver the value? And I think that Stratasys has the fundamentals. We are leading with a lot of stability, financial stability. It's very important to the customers, by the way. You see the discipline and to understand that there is someone there, a partner in additive that can take the journey with them for many years to come with the right fundamentals. With the portfolio, with a go-to-market, with a service, with the software, with the material portfolio, that should be the focus. Not about promising, about delivering.

Very helpful.

Our next question comes from Jim Ricchiuti with Needham & Company.

This is Chris Grenga on for Jim. With respect to systems that were shipped in the quarter, are the customers replacing existing systems or expanding existing fleets? Or are they new to 3D printing? Or is there any breakout that you would call attention to there?

It's a combination -- thank you, Chris, for the question. It's a combination. And by the way, this is another thing that kind of helps us. I wouldn't say a tailwind, but we have such a large installed base of, I would say, almost 40,000 machines out there. So even in tough times, we always have those customers, the loyal customers that we can sell another Stratasys machine even in tough time because they trust us. We don't need to read -- to prove ourselves. But it's a combination. And we are giving a lot of attention to maintain the happiness of our installed base. But at the same time, we are crossing the chasm into manufacturing, and we are hunting for new logos. But back to your question, it's a combination.

Got it. And then just with respect to the outlook, does it assume no incremental change with respect to customer CapEx patterns that you've observed so far? Or is there any change that is embedded in the outlook?

Chris, the outlook is based on what we see now and the outlook that we currently see for the second quarter and the second half of the year.

Thank you. And ladies and gentlemen, there are no further questions at this time. I'll hand the floor back to Yoav Zeif for closing remarks. Thank you.

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

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.