Stratasys Ltd. (SSYS) CEO Yoav Zeif Presents at 24th Annual Needham Growth Conference (Transcript)


Stratasys Ltd. (NASDAQ:SSYS) 24th Annual Needham Growth Conference January 13, 2022 12:30 PM ET

Company Participants

Yoav Zeif – CEO

Eitan Zamir – Incoming CFO

Yonah Lloyd – CCO and VP, IR

Conference Call Participants

Jim Ricchiuti – Needham & Company

Jim Ricchiuti

Hello, everyone. Good afternoon. Welcome to day four of the 24th Annual Needham Growth Conference. My name is Jim Ricchiuti, Senior Equity Research Analyst at Needham & Company covering industrial technologies companies. I think anyone’s familiar with 3D printing knows the following company, Stratasys, one of the pioneers in polymer 3D printing, additive manufacturing. So, we’re pleased to have with us this afternoon for a fireside chat. Yoav Zeif, Chief Executive Officer, and the newly incoming Chief Financial Officer, Eitan Zamir. And we also have Yonah Lloyd who heads up the IR. Welcome, everyone.

Yoav Zeif

Thank you, Jim.

Question-and-Answer Session

Q – Jim Ricchiuti

Let’s start — probably as good a place as any to start is to talk about where Stratasys was a few years ago, perhaps when you came in, where it is today, as we begin 2022?

Yoav Zeif

Thank you. I joined almost two years ago, at the beginning of the pandemic. And I faced a company that experienced six years of decline in revenues, aging portfolio, and was challenged by new technologies that we were not there. So, the market was growing in SAF technology and in powder bed fusion and we were not there. At the same time, we had a less robust balance sheet and we lacked some focus, because we were trying to do also metal. We had two very promising metal projects that we shut down because it was kind of a long term, very — innovative but long term.

When I came, we focused on a new strategy laser sharp on polymer manufacturing, making sure that we are addressing the biggest profit pool in the industry and we are bringing broadest technological offering. So, we — our strategy is polymer manufacturing, we take the industry from prototyping to manufacturing by having the broadest technological portfolio. We added three new technologies, cutting edge technologies.

Scientifically I can prove on each one of them that we have the cutting edge advantage on each one of them. We added DLP, SLA and powder bed fusion, and which puts us as the largest and most promising offering in additive. This is the strategy, we are going there, and we have a completely replenished portfolio to push to the market based on our unique infrastructure, the largest installed base in the industry, but also the largest network of partners in the industry, we also raised money. So, we are super strong in terms of our balance sheet, and we keep — being cash flow positive, which I believe is very important for a company like us.

Jim Ricchiuti

You mentioned the installed based you have in the industry, the dealer channel. The industry itself, the 3D printing industry has attracted some new companies, also have several that have raised significant amounts of cash over the past year. How do you differentiate from some of these peers?

Yoav Zeif

We are the leader in polymers. We are the leaders in polymers now, and we are going to strengthening dramatically, by making sure that we are addressing the full range and we just doubled our total addressable market by adding those three technologies. So, when we are stepping into an OEM — and by the way, almost all — I can say all, but I just want to be on the safe side, almost all big OEMs in this world are Stratasys’ customers and they are repeating customers. So, they are buying not only one machine, but many machines in a repeatable way and also our materials.

When we are approaching them, we can offer them now a full range. Our differentiation is very simple. When I step into an OEM, I solve him a problem. Because I don’t need to push one technology like those very nice companies that trade many, many millions. But I can offer a solution and solution means the right technology to the right application, but the solution of us is hardware materials, software and support. And we take it through the whole product lifecycle. So, when I step into an OEM, I can help him with the design, with the conceptual design, with the piloting and with the last production, because I take him through each one of our technologies. So, we have the ability to provide the best fit and the best match — superior match to the solution he’s looking for.

Jim Ricchiuti

As you pointed out you came in to Stratasys a couple of years ago. Investors, as you know, have been waiting for this — I hate to use the term inflection because it’s overused. But just we’ve been waiting for additive manufacturing to really take hold on the production floor. It’s taken longer than expected. Why do you think that is, assuming you agree with that? What’s changed in the market that you think really does push this technology to the production floor?

Yoav Zeif

I am here. I joined Stratasys in order to bring to life the promise of additive manufacturing, from prototyping to manufacturing. That’s the reason I’m here. And it is an inflection point. This year is an infection point because few simple reasons. First, the technology is here. It was not good enough six or seven years ago, the quality of the part, because at the end, our industry is very simple, quality of part and cost of the part. This is it. You want, if you want everything. We can reach quality of part that we couldn’t reach in the past. This is number one. Number two is the fact that the technology allows us to reach the quality of parts that are better, but the most — I don’t know it’s the most, but one of the most important things is material, the variety of material that impacts cost, so the cost of part and the quality. It was not even close to what we have now 6 or 7 years ago. So, the variety of material, the quality of the part, the reliability of the machines and the system, and put all of these into the macro context, where we are facing now a supply chain issues all over us. We are fighting it every day, daily. And this is a huge catalyst for 3D printing, because we can with 3D printing transform launch production line and launch supply chain into versatile network of distributed manufacturing. The time is now.

Yonah Lloyd

Jim, I think — I would just add on top of that, Jim. I think it’s also important to recognize that as our — the promise of our industry was to shift from prototyping to manufacturing. A few years ago — this is primarily a prototyping industry and there is a ceiling as to how big that can get. And the promise was always the ability to take — chip away at a $13 trillion addressable manufacturing market. And I think the validation that has started to come in, especially from some of the deals we’ve done, for example, with the U.S. Navy, where they have now bought a multi-dozen machines for manufacturing with OEMs that are also buying our systems now for manufacturing purposes, for end use parts and for tooling. It’s a very different atmosphere, because the leaders in the industries now understand that the technology and the support and the capability is there and they do a lot of due diligence. The U.S. Navy deal was an 18-month process before they were comfortable enough to say, we’re ready to do this. And there is going to be more deals like that coming. And I think the more that come out from us and from our industry peers, the more it validates that our 3D printing industry is there to be able to compete head-to-head with conventional manufacturing.

Jim Ricchiuti

You touched on supply chain and we’re all hearing about that. We’ve been hearing about it for some time now. Is it a real catalyst you think for the industry?

Yoav Zeif

No doubt. Because we’re sure it is here, and it’s becoming a very high priority to all OEMs, no matter where you look, and so, many good quotations from the largest OEMs in the world. Supply chain is a problem today. You need a plan B, you need an insurance. And many companies are reviewing the situation. They understand the need to change the — they understand the need for a shift from a physical inventory to a digital inventory, and the fact that 3D printing can deliver it. So, now it’s on us to make sure that we are meeting the standards. And as I said before, we can. Today, we can.

Jim Ricchiuti

You…

Yoav Zeif

I can give some examples, by the way.

Jim Ricchiuti

Please.

Yoav Zeif

We have a service bureau that we are selling our new machine, the SAF, the H350. And he’s serving one of the largest automotive players in Germany. And they have parts on the famous ship that was stacked in the Suez Canal. And he had to deliver — they had to deliver some cars. And there were unique parts on this ship, and they couldn’t do it because of the situation. But they sent him our service bureau, our client. They sent him the file, he printed it, and they delivered on time. This is amazing.

And there is nothing better than talking with our customers to understand that manufacturing 3D printing is here. It’s the Airbus that extended the contract with us, it’s Medtronics of the world, and automotive players. Actually, I’m asking that the participants talk with our customers. Talk with our customers.

Jim Ricchiuti

You touched on some of the new technologies. I’d like to go a little more deeply into that if we can. You’re really entering the year with several new products, significant products. You completed the acquisition of Xaar 3D Origin, which I guess acquired a little over a year ago. Walk us through, if you will, these technologies. Where they are in their deployment? And maybe touch on some use cases. That would be helpful.

Yoav Zeif

So we have three — we have the core technologies that are also good for manufacturing by the way, but we have three new technologies, the SLA, the RPS that we acquired in the UK, and two that are focusing primarily on mass manufacturing, which is the P3, the Origin One and the SAF H350, which is a powder bed fusion. Those two technologies there, the DLP, the P3 and the SAF, the H350 are focusing on mass production, both of them, the SAF we already launched general availability last December and we are going to launch in the general availability the P3 in Q1 this quarter from Italy.

We have many very promising use cases with those machines, because those machines, we aim not to sell one machine or two machines and to have this long tail, which is historically most of these sales in our industry, but the big change is we’re talking here about 20 machines 30 machines to use case, like we did with the Navy for example. And this is a big mindset shift that you can with a fleet of 3D printers and produce with it.

So, when you look for example, on the P3, I take as an example. We have specific use cases of manufacturing. We have — we announced it also, we have a partnership with ECCO, the shoemaker, where we are producing real molds for manufacturing, which allows customization, and this is disruptive. Only this use case by itself is a $600 million addressable market, the molds for insoles. $600 million, and we can disrupt this market and we’re already doing it. So, this is not only P3.

When you look at the SAF, for example, we are talking about changing and disrupting areas where you needed companies, for example, that are investing — and I was an executive in a few of those companies in the past, that invest in tooling, in injection molding. If you do hundreds or thousands, or even dozens of thousands of part of — hundreds of thousands, you don’t need to invest in all these tooling and molds, you can do it with the SAF, and so on and so forth. So, the big changes are that we are going to mass production. And in terms of Stratasys — from Stratasys point of view, we are not selling a one machine or two but we are selling a fleet.

Yonah Lloyd

Yes. Sorry. Jim, if I could just add, what it also does, these new technologies, they more than double our addressable market, because they’re addressing the fastest growing manufacturing needs, which we did not have in our portfolio until now. And so, when you think about the opportunity for the recurring revenue margins that come from the consumables, because we have found historically that when you place a system in a manufacturing environment, it’s going to have 4x, 5x, even higher utilization rates than a system in a prototyping environment. And so, when we — as we see our hardware numbers have been growing and will continue to grow, that’s very important because that means that you’ve got following the sale of those systems the consumables that are going to be used and use at a higher rate than the previous generations of our systems. And that of course should help lead to a stronger margin profile for the Company as those systems get deployed.

Jim Ricchiuti

One of the areas that I think people have gotten increasingly excited about is the healthcare vertical. Talk to us a little bit about what Stratasys is doing in that market. You got the new J5 DentaJet printer. You alluded to the P3. How attractive a market is that if we think about use cases?

Yoav Zeif

Very attractive, and I think that it’s short-term opportunity, not a very long-term opportunity. When I look at the healthcare, in one sentence, it’s — this is a fastest growing end market and the fastest growing segment for us within our entire portfolio. And I will divide my questions into one, I will start with the dental opportunity and then the healthcare opportunity. We have very unique positioning both.

In the dental, we successfully built the largest and the most comprehensive offering to dental because we have three technologies that cover all applications near the SLA for mass production of a liner. We have the DLP for the best quality and cost above for dental model and also the new future crowns and bridges, and we have unique technology there. And we have the PolyJet and the J5 for multi-material, multi-color solutions. So, when we are stepping into a dental lab, we can take the leaf off the application, and say, okay, we have the best one for each one of those applications, in terms of quality of part and cost per part.

We have a lot to do on improving our go-to-market, because we lost our leadership in this market a few years ago. But with the current offering and what we are bringing to the market, we will catch up. And we will disrupt the market, because we have technology, those multi-material and multi-color will allow to disrupt the market mainly on the dentures, and crowns and bridges in the future. So, this is on the dental side.

And we already see with the J5 that you can have one tray, a simple thing. One tray, there is the technician in the evening, push the button and have different applications on the same tray — in the morning and he has different applications, different material on the same tray with all other technologies and projects, you need to run — you can run on single material, single application on each one. So it’s a big advantage that we have technologically.

On the healthcare side, we are number one in our capabilities to print anatomical models. And anatomical model is part of what we call, pre-surgical planning. And in pre-surgical planning practically we are printing the model of the anatomy, specific anatomy and also the surgery guide. What we are bringing to the table is what we call, DAP, digital anatomy printer. But also we have the J5 MediJet, which is a 3D printer that can seat in the hospital which can produce patient-specific anatomical model and surgical guide at the clinic. We also partner with companies to push it to this point of care. For example, we just announced collaboration with Ricoh where they will support our machines in hospitals. So, very promising, fast growing segment for us.

Jim Ricchiuti

And just you alluded before to auto, some exchange about the auto and aerospace. Those verticals are in some areas challenged. Talk about how you see the opportunities for Stratasys in automotive, which has historically been more prototyping. Hasn’t it, for the industry?

Yoav Zeif

Yes, definitely. So, we have a very good starting point in aerospace and automotive. In aerospace, we are the leader because, the leading technology is FDM, and we are the leader in FDM. And we certified our materials and solutions, so we have a very good position. Just to give you an example, we are the partner of Boom Supersonic on the new concord. And we are doing there everything from design to jigs and fixtures, to tooling and to end-use part on the plane. So, that’s very exciting.

If I look at automotive, we are supporting the whole product lifecycle, which is very important in automotive, by the way. In automotive, if you are not putting your foot in the door, as the design stage, and the conceptual stage, very hard, if you are not in the design of an electric vehicle, you cannot come five years later and say now I want to predict. You have to be there with the design and predict. And we just announced cooperation with Volkswagen on design, but we are there. And the new technologies are a big advantage for very specific application in automotive. And, yes, this is like historically very strong segment for Stratasys.

Yonah Lloyd

Jim, if I could just add that I think what’s happening in automotive, as I think everybody knows is the electrification of the fleet and the increased shift to vertical integration of production. So, we’re sitting in a situation now where the EV world is looking to make their cars lighter. And they’re swapping out metal parts for polymer. So, it really plays into our strategy. In fact, one OEM is actually the first automotive OEM in the world to own all five of our technologies in order to be able to move their strategy forward. So, as EV plays stronger and stronger, not only in the independent companies, but also in the OEMs. And we’ve already got the relationships there. I think that’s certainly going to help bring our technology to their end-use parts needs, as that segment becomes a bigger part of their future revenue.

Jim Ricchiuti

I want to spend a moment on the materials portion of the business. You’ve talked about this controlled hybrid model. I wonder, if you could elaborate on that a little bit relative to the approach maybe Stratasys took a few years ago.

Yoav Zeif

Yes. I would say — maybe not so in a humble way, but it’s an active leadership. We decided to go to manufacturing. And we sat down and analyzed what is needed — together with our customer, we didn’t invent it. What is needed to be successful in order to be successful in manufacturing?

And material is the most critical element. The variety of material, you need the high performance materials, and you need to make sure that the material is coming with the right economics. And to think this we as Stratasys, and by the way, any other 3D printing companies can beat the BASFs [ph] of the walls, and the Anchors of the world with the material needed to manufacturing is not being modest and kind of refusing to accept this range in this world. And we prefer to be the leader and to decide that we will have a controlled hybrid material open — hybrid material model, what we call open material licensing, where we are changing the whole mindset.

We are opening our machines, which are the best and the most reliable in the industry, to partnerships and the ability of the largest and most advanced chemical companies in the world to develop materials for our machines.

What is the advantage? By the way, the biggest advantage is the fact that we are giving to our customer, the best solution in the industry, variety, performance, and all the rest. We are shifting value from the material the we were selling only to some software because we are opening some print parameters, [ph] and we have three different tiers, some will be preferred, so it’s of Stratasys but not developed by Stratasys, some will be certified, which is not exclusive to Stratasys, but we certify which is good enough and some of them are completely exploratory or open, because we want our customers to explore new materials. From our experience now and we also announced it by the way to FDM and explore it, we’ll talk about it in a minute. Most of our customers are keen to have the validated preferred material, but we open it up to more players that we deliver it. And when we are looking in it, we just announced in Formnext that also in FDM we will open, which is like our core initial technology, we are going to open it, most of it will be preferred and certified, great comments from our customers. And the way we look at it in terms of unit economics, we will make more money with an open material license that we are making now, period, and more importantly, address the real needs of our customers in manufacturing.

Jim Ricchiuti

Is there a longer term target mix that you’d be willing to share with us, as you think about that part of the business?

Yoav Zeif

We’re not sharing the exact mix, but I would say that we believe that most of the material that will be bought, because in manufacturing, you want better economics, but you also want to make sure that you’re meeting the quality trend up. Most of the material will be Stratasys material. Okay, it’s kind of a metaphor, but at the end how many people are really buying non-genuine [ph] material to their HP printer. Most of it will be ours. We have very specific model. It’s controlled. We know where we are going. And the advantages are much bigger than the downside of maybe giving up few percentages.

Yonah Lloyd

Maybe you can also just talk a little bit our software — our SaaS model as a source of new revenue and higher margin.

Yoav Zeif

Yes. It’s a very important point. We are not — it’s a controlled system. So, we certify the material that goes on our machines, although we are not the one producing it. But the way to do it is that we are — we built a platform, a GrabCAD platform software, and part of this software is also software that allows us to control the use of the software. So, when we open — in order to open the print parameters, you need to buy license from us to run the FDM and to tweak the different print parameters. So, we shifted value from material to software. And customers are very happy with it, because they want the flexibility and visibility. And this is becoming — instead of material revenue, it’s becoming recurring SaaS revenue.

Jim Ricchiuti

Yes. Here that brings up a good point, because I think for investors, sometimes the software portion of your business gets overlooked. And this is obviously an area where at least market researchers are forecasting pretty healthy growth in software for additive manufacturing over the next several years. How are you viewing the broader opportunity for software for Stratasys?

Yoav Zeif

Just lately, there was a recent company, I forgot its name. Yonah, maybe you’ll remember, the research company that analyzed the potential of software in additive. You remember the name of the company?

Yonah Lloyd

I can, SmarTech.

Yoav Zeif

SmarTech, right. As I said, if we move from $500 million to I think $3 billion, something like this in no time.

Yonah Lloyd

Yes. $3.5 billion in the next five years.

Yoav Zeif

$3.5 billion, we are there. I know it sounds a bit strange, but Stratasys is a social company. We have hundreds of people that are writing codes. And we have a big advantage which is GrabCAD, which is a leading operating system of our printers, which is now could-based and we have cloud available something which is on premise. And we transformed over the last year to a platform. And what are we doing practically, we are connecting the fleet of printers with true SDK, which is software development kit, and protocols. We have connected it to the user, one that is managing everything and all the MES and ERPs, and we connect it to partners because these is a digital trade. When you are printing, when you are taking 3D printers — thank you Yonah.

Yonah Lloyd

This might help a little bit. Sure.

Yoav Zeif

So, you see the left hand side, you see the fleet of printers. It could be Stratasys printers. It could be other competitor printers or complementary printers, and also, the whole workflow. So, we have post processing, et cetera. And those things — you need to connect it to their organization, to the IT systems of the organization. We have the platform, which is the GrabCAD platform in the middle, this is Stratasys. And this platform has many different features and tasks that it’s doing. But a core of it is ability to manage the assets, which are the printers. And on top of it, you can do analytics and quality management, all those different tasks are part of the digital trade of starting a part or product from the CAD till it’s on the track. And you have between 10 to 16 different phases. And in those phases you need to stimulate, you need to check the quality, you need to do some rendering, you need to check the surface, many different software applications. And you need to capture the output of one phase, and use it as an input to the second phase. Historically, a user, I don’t know how many of our investors had — or the participants, real trade of printing 3D part. But usually, you need to save one application to take the file, export it or import it to another application to do the rendering of the surface, do it, get it back to GrabCAD, putting it on the 3D designing. Once you have a platform, you have one place seamlessly that you use different applications. It’s a huge advantage.

And you connect it on the right hand side to the enterprise systems, like the MES and ERPs, but you also connect it to partners. It’s an open system like our material is open, this is an open system. So, you can have additive MES, you can have analytics, you can have quality checks, you can have simulation, and we have many partners we announce it, like Teton for example, for simulation. But when you are dealing with it, you’re dealing with our screen and with our platform. It’s a huge advantage, it’s SaaS-based, and we’re going to push it all the way in the next three to five years, because this is essential for manufacturing.

Jim Ricchiuti

It’s very helpful. We got a few more minutes. And I want to talk a little bit about the acceleration of the growth that you saw through the first nine months of 2021. Some of that was just that normalization of the economy, fell into shock from a pandemic. How would you characterize the business recovery that you saw through the first nine months? And then, there’s other issues, obviously, you’re also dealing with higher costs and supply chain challenges. I wonder, if you would just talk a little bit about that.

Yoav Zeif

Really, our current outlook for growth is multifaceted. But primarily, it’s an organic growth, because we built the infrastructure, we completely replenished our portfolio and we are geared now to grow to take the infrastructure that we have, which is the network of the years with the largest partner network in the world globally, the material platform that we have and the software platform, and we need to push the full solution to our customers. And it’s mainly organic new technologies, very clear growth engines. We have new technologies that we just started to sell and they are cutting edge technologies.

The second growth engine that we have is this material — open material model that we will sell significantly more material. We have the software growth engine and we have new use cases that we define for you to define — we define very few use cases, like the one I mentioned to you as an example in dental in healthcare. And when you take those four growth engines, we have very clear plan how to grow, where to grow both in terms of segments and geographies. And if you take our balance sheet and our strength — financial strength, I’m quite optimistic, to be honest, because after many, many years, Stratasys is poised for growth. We have a position where we know what will take us forward, most of it is organic but we also do a lot inorganically, and we keep making sure that within the strategy we also leverage our financial position to accelerate the implementation of this strategy.

Eitan Zamir

And Jim, just to add on top to remind the audience that when they look on the nine months actual in 2021 and kind of think about Q4 and next year, we launched the H350 during the fourth quarter, and we plan to launch Origin in Q1 2022. So, some of the growth engine for the next quarter will also come from these acquisitions.

Jim Ricchiuti

Okay. I think we’ve run out of time, but thank you. Thank you, guys, for spending some time with us. This is a good session. I appreciate it.

Yoav Zeif

Thank you, Jim.

Eitan Zamir

Thank you very much.

Yonah Lloyd

Thank you, Jim.

Jim Ricchiuti

Take care.



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