Hello, and welcome to the Stratasys’ Q2 2024 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Yonah Lloyd, Chief Communications Officer and VP of Investor Relations. Yonah, please go ahead.

Good morning everyone and thank you for joining us to discuss our 2024 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' Annual Report on Form 20-F for the 2023 year. Please also refer to our operating and financial review and prospectus for 2023 and for the second quarter of 2024, which are included as Item 5 of the 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 today, respectively. Please also see the press release that announces the company's earnings for the second 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. Reports on Form 6-K that are furnished to the SEC on a quarterly basis and throughout the year provide updated current information regarding the company's 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’ll 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 second quarter of 2024, we delivered margin improvement and maintained a healthy balance sheet, despite continued softness in hardware sales. Our results reflect the resilience of our business model, the challenges our customers continue to face from high interest rates, macroeconomic uncertainty and reduced capital equipment spending. We once again delivered growth in consumables that reflected strong utilization for existing systems, demonstrating the power of that recurring revenue stream. It is important to note that the utilization of consumables came primarily from our FDM technologies, validating that our customers are continuing their shift from prototyping to manufacturing applications, helping them more effectively manage costs, and drive efficiency. This bodes well for the future, as we look to expand on the manufacturing floor, with exciting new solutions that we plan to introduce. To ensure, we continue to deliver long-term value for our shareholders, our ongoing priority is our commitment to innovation in materials, knowledge and workflow to address the strongest adoption opportunities. By prudently investing in technology and materials, while also streamlining and focusing on key end-use applications, we are positioning Stratasys for its next phase of growth for our company. During and subsequent to the second quarter, we achieved a number of milestones and new product introduction I'd like to share. One of the most exciting successes in the quarter was solidifying our partnership with aviation manufacturing pioneer AM Craft, aligning our two companies' efforts to grow the capability and demand to design and additively manufacture EASA-certified aircraft sustainment parts. Aviation is a great example of the value that additive manufacturing can bring. Aircraft have long lives and require continuous repair and improvement. The low volume, high mix nature of the parts aftermarket presents supply, cost…

Thank you Yoav and good morning everyone. We continue to face the challenges, the macroeconomic environment is presenting to our customers, which is driving weakness in their CapEx spending. Despite the year-over-year decline in revenues, we delivered improved gross margin thanks in part to strong consumable sales and a relentless focus on cost controls. Now let me get into the details of our numbers. For the second quarter, consolidated revenue of $138 million was down 13.6% compared to Q2 2023. Product revenue in the second quarter was $93.6 million compared to $109.1 million in the same period last year or down by 14.2%. Within product revenue, system revenue was $29 million, down by 40% compared to $48.3 million in the same period last year. With longer sales cycle a key contributor. Consumables revenue grew 6.3% to $64.6 million compared to the same period last year. As Yoav mentioned, the ongoing strong performance of consumables signals that the utilization rates of the systems we have sold remain robust. It is important to note that we expect consumables demand to be resilient for the foreseeable future despite recent weakness in hardware sales, as the installed base continue to be well utilized. Service revenue, including Stratasys Direct was $44.4 million compared to $50.7 million in the same period last year, reflecting a decrease of 12.2%. Absent divestitures, service revenue was down 2.4%. Within service revenue, customer support revenue was down 3.8% compared to the same period last year. Now turning to gross margins, GAAP gross margin expanded to 43.8% for the quarter, compared to 41.5% for the same period last year. Non-GAAP gross margin also grew to 49% for the quarter, compared to 48.5% in the same period last year. The improvement versus the prior year period was driven in part by a…

Thank you, Eitan. In summary, we are continuing to differentiate ourselves during challenging times for industry and makes the hard yet necessary adjustment to maintain and accelerate our leading position. Our investment in new and exciting technologies is advancing, as evidenced by the products we are bringing to market that will serve our customers well, as they accelerate their adoption of additive manufacturing. We spoke in the past of an inflection point where additive manufacturing graduated from a prototyping niche to becoming a cornerstone of the manufacturing process, and we continue to see signs of this momentum, as we march ahead. We look forward to return to strong growth from the pent-up demand in system sales when the current environment eases. In the meantime, will continue to deliver the excellence our customers deserve as industry leaders in technological innovation, service and reliability. And thanks to our robust balance sheet, diversified product and software offering, the cost saving initiatives we are announcing today and the large and growing opportunities ahead, we look forward to delivering relative outperformance and enhance shareholders value. 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 Greg Palm from Craig Hallum. Your line is now live.

Hey, thanks for taking the questions here. A couple ones I guess. I want to first start with the strategic alternatives process. I know you formally wrapped it up. But as you look back on it, curious if you learned anything during this process. Presumably you were talking with lots of industry players. But for example, did you get a better sense of what's needed to drive better profitability across the industry? More importantly, has your view on consolidation changed at all? Just going forward, can you just give us a little bit of sense on the process and what you learned?

Thank you, Greg, for the question. What we have learned, we were involved in few opportunities, analyse them in depth. Bottom-line, we are investing in strategies. I think this is the bottom-line and this is the key learning from the entire process. We have the right technologies, we have the right focus on the right use cases. We have unique assets and we better put our money to create shareholders value in creating value through the assets that we have through taking our solution to the market. And I have no doubt, despite the challenges, the macroeconomic challenges and the challenges with the hardware, the Stratasys is the best company in the industry. We still believe in consolidation, but with reasonable multiples and valuations, because we still believe in scale. But with the current situation, the board came to the conclusion that we better invest in services.

Yeah, okay, understood. And then my second question on the pent-up demand, are you able to quantify exactly what's out there? And for example, does utilization trends give you any insight into the timeline where certain new customers may need to actually be forced to invest in new systems? I know we're all cognizant of the macro and manufacturing cycle and whatnot, but just sort of wondering what kind of visibility you have over the next six months to twelve months?

So, thank you. So, as you know, we are not quantifying because this industry fall many times into the trap of promising. But I can share observations from the market. Post-Covid, people bought people, customers, businesses bought significant large quantities of machines and not all of them were utilized. And now that interest rates are high, they are focusing on ramping up those machines, increasing utilization. And we can see it, we can see that in key use cases, the utilization is going up, it's not an accident that our consumables are increasing quarter-over-quarter, year-over-year, with similar utilization in the high end machines. Very strong utilization that we didn't experience in the past. And this is by definition also balancing the old install base that we have. And we still increase the number of spools or kilograms that we are selling in material. Once interest rate will be released a bit, I believe we will see this pent up demand. Because there are two effects to the increased utilization. One, you will need more machines because there is so much one machine can give you in terms of capacity, but not less important. Customers learn how to work with additive, as part of their manufacturing solution. And the moment they are there and the moment more people within the organization know-how to operate it, how to design for additive, we are in a much better place because this is one of the most important constraints. So CapEx will be released and we will be there ready to sell.

Understood. Okay, I appreciate that. Best of luck.

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

Hi. Thanks. So it looks like with the second half you, are assuming sequential improvement in revenues. I would have thought your gross margin outlook would have been a little better in the second half. So talk to us a little bit about what drives that. Is that just a higher mix of hardware? And with that, wouldn't the new products contribute to better margins on the hardware side? Thanks.

Thanks Jim, for the question. So you actually hit it on the head. When we think about gross margin. First of all 49%, very solid gross margin for Q2, when we think about the second half of the year, it is mainly a mix of hardware consumable and services. And the changes, the differences between 49% to 48.8%, these are really small differences that can be impacted by different mix, by specific deals. So, I think the bottom-line is that we believe that the second half of the year and the full year of 2024, we will maintain high gross margin at the 49% levels, which I think is very promising also for the future. And when you take into account the restructuring and the savings that will come from the restructuring as you model the next year, this percentage will even increase further.

And just with respect to the hardware pipeline, you kicked off a couple of areas where you feel that there's -- that gives you the confidence in the improvement in the second half, government dental. Maybe -- talk to us a little bit about where you have more confidence and where it's still a little uncertain.

So, Jim, maybe at the start I'll say that when you look on the model, on the guidance, we actually used a very, very moderate growth for the second half of the year, compared to the first half. When we think about the offering and the changes in the second half, first of all, we have the F3300 that we've just launched and we expect to be stronger in the second half of the year. We have TrueDent that is improving and growing and some other offerings. We also have a better visibility to the pipeline for the second half and we see a stronger pipeline. And maybe last but not least, you are with us, with the industry for so many years. There is seasonality. The second half of the year is usually stronger. So we bake that also into the model. However, when you look at this, all in all, very moderate growth for the second half which you know, we try to be conservative in our approach.

Okay, thank you. Thank you.

Thank you. Next question is coming from Troy Jensen from Cantor Fitzgerald. Your line is now alive.

Hey, gentlemen, thanks for taking my questions here. Maybe a couple of Eitan for you. Of the $40 million OpEx or the $40 million cost savings for the year, how much is going to be in COGS versus OpEx?

Troy, Hi. We will not provide the exact details. It will be the $40 million is total. It will be broken or split between COGS and OpEx. The majority will be in OpEx naturally, but there will be incremental savings and improvement to gross margin following this restructuring.

Okay, perfect. So another one here for Yoav. You may not be able to answer it, but I'm going to throw it out there. How much of your strategic review boiled down to the fact that you still want desktop metal and is the hope to just wait a year or so and let [nano] (ph) integrate those guys and then ultimately merge with them?

Obviously I cannot comment on such a thing. I can only repeat what I said. Currently we believe that the rightsizing of the company, the focus on our key drivers and use cases and focusing on adoption where we have an advantage because of our AE's and our, the fact that we are close to the biggest adopter of this technology will generate higher value to our shareholders. And now, and starting with 8% EBITDA margin, and we are quite certain about this 8% EBITDA margin. So this is not something we are just throwing on the table. We are certain in our ability to be profitable also from 2024, from Q4, and on 2025 assuming the same levels of revenues. So this is really unique in our industry. We believe that once we see growth coming back, and it will because the pent-up demand is there, EBITDA will be even larger.

All right, one last question for you, Yoav. I'd like to talk a little bit about Bambu Labs. I mean, it's a company that I started hearing a lot more about. And obviously, this quarter you guys filed a patent lawsuit. So can you just kind of talk about the low end FDM? Are you guys seeing more competition there? And why so aggressively go after Bambu? And there's so many others that are probably violating your technology, too.

In general, we -- by divesting MakerBot, made a statement that we are not playing in the low end FDM market. We are not there. We are going for the industrial FDM market, which require different standards, different part properties, different materials, and we don't want even to compete there. Having said that, our shareholders deserve return on their investment in innovation. We need to take care of our shareholders. And this is part of our commitment to safeguarding our intellectual property. We filed this complaint, this [file against] (ph) Bambu in Texas, and we believe that. And no one can use our IP. And we're talking about ten essential patents without paying on it. This is our commitment both to the industry and to our shareholders.

Okay. Understood. Good luck in the second half, gentlemen.

Thank you. [Operator Instructions] Our next question is coming from Jacob Stephan from Lake street. Your line is now alive.

Hey, guys, thanks for taking my questions. I guess I just wanted to touch on the restructuring initiative as well. I guess when you kind of think about the 15% workforce reduction, is that kind of a broad based workforce reduction? Or I guess are you kind of realigning some of these resources within the company and making broader kind of cuts? Any comments that would be helpful.

Thank you for the question. The restructuring is, I would say in a short sentence, it's strategy led restructuring. It is not across the board, it's not blind. We have a strategy. We are sharpening our strategy based on current market conditions, and we are focusing on adoption. What does it mean? We go. We are narrowing the focus to proven use cases, to education and enablement, and to complete workflow that will be integrating to the standards of our customers with a much better TCO based on better prices of material. So this is the strategy now we are structuring the whole company based on this strategy to make sure that we have the right profitability profile, which doesn't exist in our industry. I don't want to say we are the only profitable, but probably one of the rare companies that are profitable in our industry, even in this challenging times. And we are talking about certainty in this profitability. Again, 8% EBITDA margin, cash flow positive and starting with profitability in Q4, not promises for the next five years, and it will increase over time. This is only the starting point.

Got it. Okay. And I guess, you know, as kind of a follow up here, following the guidance in '24 here, essentially we are going from flat year-over-year revenue growth to down 9%. I just want to get your confidence gauge on the medium-term target of $1 billion in revenue in '26?

Maybe to start. I just want to remind you all that if you go back to our Q4 2023 earning call presentation, we actually reminded everyone about certain divestments that we did during 2023. So, when you compare 2024 to 2023, just please make sure that you bake into that $616 million that we provided you back then in Q4, which is the fair comparison to 2023, still there is a reduction which is driven by the hardware challenges that Yoav mentioned earlier. I do want to highlight and to emphasize the consumable business in -- both in Q1 and in Q2, we showed a nice growth year-over-year in consumable business. And we expect the improvement in consumable revenue to continue in the second half of the year. And I think that's a very critical point, when you compare 2023 to 2024, that is recurring business. That also emphasize the utilization of our systems, especially the high-end and the one that go to manufacturing. And that's where we gain the confidence for the future. As to longer-term growth, I think we are very careful considering the last few quarters about the future or the further future. And that's why we emphasize that the measures that we took with this restructuring is basically, as Yoav mentioned, create certainty of meaningful profitability and meaningful operating cash flow already in 2025, regardless of future growth, and regardless of improvement in the macro environment, that will create growth. Right? It's a temporary thing.

Got it. Thanks, guys.

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

Hi, thank you for taking my questions. I just -- Yoav I wanted to ask you to speak a little bit about the potential impact and how you're thinking about the risk of making cuts, obviously necessary cuts that will be near-term, clearly positive for margins, but the potential impact on revenue growth. You've had this level of OpEx that has been like 46% to 48% of sales for years. And I think, many are under the impression that you needed that level of OpEx to sustain the new product development, to sustain the go-to-market capability in the channel management, Et cetera. That you need that level of spending to sustain that growth. So how should we think about that?

Thank you, Brian, for the question. You know, there is something that makes me be a bit awake at night, is this balance between short-term profitability and long-term growth. And I think that the key here is that the restructuring is not across the Board. This is strategy led restructuring. That's the way to make sure that we’re managing the impact of the restructuring on growth. And we will maintain growth, especially when we will see recovery or an improvement in the business cycle. So, how we are doing it? It's clear that the purpose of the restructuring is to create shareholders value. But it has to go both hands through very clear strategies that create value and profitable profile of our P&L. So the way we do it, we narrowing the focus, we focus on what we believe is proven and will create growth. And those are the proven use cases that we have. And we will invest more in customer facing activities to ensure adoption of those use cases. The second thing is about the status where we are in the development of our technological platform. We have five platforms. We invested a lot to make them reliable and ready for manufacturing. I can say now with a lot of confidence that we have five technologies that are ready for manufacturing. FDM is unique. No one can do large part for Aero and Auto in this type of part performance like us. If I look at the DLP, we have the best part in the industry. Bulky, accurate for industrial users. If I look at SAF, we have the best, the closest, nearest to injection moulding parts, small medium parts in terms of definition and in terms of performance than anyone else. If I look at SLA, we are the most reliable player both in terms of materials and machines. And you can see it in the F1. We are the majority of the Formula 1 industry. You look at PolyJet, we are leading the way in dental, in mono-block dentures approved by FDA. So our technologies and our platforms are ready. Now we need to focus on the adoption and practically what we are doing by this is sharpening the strategy and secure the growth. On top of it, we are maintaining the R&D ratio, as percentage of revenue. So we were very careful with this, with those cuts. And at the end, we are balancing between profitability and growth. And we believe that profitability is crucial to show that this industry is delivering value. We start with 8% EBITDA and positive cash flow, but it will grow and the target is to be in the two-digit and we will be there.

Okay, thank you very much for those thoughts. I'll leave it there for now. Thanks.

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

Yeah. Thanks guys. Thanks for taking the questions. Really appreciate it. I just wanted to ask a follow up on sort of comments you made to an earlier question around utilization. Is there any useful way to think about where utilization of -- I think you made mention of some of the machines that were sold during COVID, so maybe those incremental machines that are in your strategic installed base, where the utilization of those are if even anecdotally just to give us some sense of -- of what that normalization process might look like. And then I just have a quick follow up as well thanks.

It's very hard to follow because not all of the machines of the industry, not all our machines although we have dozens of thousands of machines connected where you can follow utilization it's hard to follow because some of the most attractive or those machines that have high utilizations are actually in verticals like defense where you cannot follow it. But we are following the material sales and when we follow the material sales, no doubt that the growth is coming from manufacturing and use part and tooling and less from rapid prototyping, so there is a shift that we can follow.

I got it. And so quick follow up there, is there any useful way to think about what the install base looks like today say relative to 2020? And the reason why I picked 2020 is because that was the revenue trough $520 million and now you're coming off of say a new base just over $600 million. So just trying to see if there's anything useful to glean around mix you know kind of new strategic useful installed base mix wise, today relative to 2020, thanks. That's it from me.

No doubt, less small boxes, more big boxes and big boxes you know usually go for manufacturing because you don't put $300,000 to $500,000 on rapid prototyping, no doubt, this is the install base, this is the change in the install base. And by the way this is our strategy as I said we are not competing with Bambu Lab on the low end this is the MakerBot Ultimaker space and they will do great there but this is not our space.

Awesome, thank you.

Okay, FDM, [grow] (ph) our consumables up.

Thank you. The next question is a follow up from Greg Palm from Craig-Hallum. Your line is now live.

Yeah thanks just on the restructuring, can you confirm what level of revenue are you expecting? The 8%, is it based on Q2? Is it based on second half? Is it based on the full year? I guess -- I'm having a hard time, I guess only getting to 8% just based on a $40 million of annualized run rate. And just to be clear, is it -- do you see that run rate in Q1 or is it exiting in Q1? Just specific on the timing as well.

Thanks, Greg, for the question. So, first, to answer your first question, the 8% is based on -- let's say, mid-range of the annual guidance. And so that's when you bake -- I'm not sure which calculation you made, but when you bake into our current EBITDA levels, the savings that will be achieved. Just keep in mind that the $40 million will not be achieved in one shot. It will be achieved over time. However, in 2025 we are going to utilize the entire value or the entire benefits of those savings. Keep in mind that next year we will have some investments in the business. So the model or the assumption? Again, I'm not sure which calculation you did bake also deals into the model. Hopefully it clarified or helped you build your model.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over 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. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.