Hello and welcome to the Stratasys Q1 2021 Conference Call and Webcast. At this time all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Yonah Lloyd, Vice President Investor Relations. Please go ahead..

Good morning, everyone, and thank you for joining us to discuss our 2021 first quarter financial results. On the call with us today are our Chief Executive Officer, Dr. Yoav Zeif; and our Chief Financial Officer, Lilach Payorski.

I 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' is Annual Report on Form 20-F for the 2020 year, which we are filing with the SEC on March 1, 2021.

Please also refer to a) our operating and financial review and prospects for the first quarter of 2021 as well as b) the press release that announces our earnings for the first quarter of 2021, which were attached as exhibits to two separate reports on Form 6-K, that we are furnishing to the SEC today.

In order to obtain updated information throughout the year, concerning our quarterly results of operations, and the risks and other factors that most impact those results, please see the quarterly earnings press releases, and our quarterly operating and financial review and prospects, each of which are attached as exhibits to reports on Form 6-K that we furnish to the SEC on a quarterly basis over the course of the year.

Stratasys assumes no obligation to update any forward-looking statements or information which speaks 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. Now, I would like to 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. Today, I will touch on the highlights of the first quarter and share insights from a very exciting global event we had last week.

At Stratasys, we're committed to being at the forefront of the polymer 3D printing market, producing and delivering the most innovative, next generation technologies that address the fastest growing manufacturing applications.

3D printing is migrating from being primarily a prototyping tool to providing full scale digital manufacturing platforms at mass production levels. Stratasys is leading this transformation with manufacturing application in polymer, which we believe is a higher value opportunity than method. This year has gotten off to an exciting start for Stratasys.

Last week we hosted an unprecedented online event attendance by over 4,500 customers, resellers and partners. At the event, we provided details on three new manufacturing focused product offering that will play an integral role in our future growth.

We continue to be energized by the tremendous potential that our business and our industry has, especially in end-use part manufacturing. We expect this demand driver to produce compound annual growth of over 20% starting next year.

We believe that our leadership position in 3D printing will strengthen as we execute on delivering current products while extending and launching additional new products. Turning to our results for the first quarter, our revenues of $134.2 million were in line with our previously stated outlook.

We saw particular trend with nearly 41% growth in system revenue, which should drive future recurring revenue from consumables. Our operating cash flow was $22.8 million following last quarter's $23.7 million. During the first quarter, we achieved several important milestones to drive our strategy.

We continued our focus on expanding the GrabCAD software platform with the launch of the GrabCAD software partner program. This is an ecosystem of software provider integrating their offerings with Stratasys to provide our customers with end-to-end additive manufacturing solutions.

The program will enable customers to extend on their prototyping and manufacturing workflow to better address the opportunities for 3D printing. We also released the GrabCAD connectivity Software Development Kit, SDK. This will enable developers and customers to integrate our technology in the factories and make them industry 4.0 compatible.

Our connectivity SDK is a sophisticated two way communication platform. Our customers can monitor their fleet of Stratasys printers and also use enterprise software applications like MES or ERP to communicate back.

In addition, we added the industry standard MTConnect communication protocol to more systems to support data exchange between manufacturing software applications, use for monitoring and analytics. This recent software releases support our customers' increasing deployment of our additive manufacturing products to the production floor.

We introduced our J5 DentaJet 3D printer to serve the growing demand for dental solutions. It is the only multi-color, multi-material 3D printer, enabling the clinicians to load mixed-trays of dental parts. It can produce five times more dental parts on a single mixed-tray than any of our competitors offering in a compact office-friendly size.

We have already started to see excellent customer attraction, such as NEOLab in Massachusetts. We serve 3,000 orthodontics and dental clinics across the U.S. Our customers are impressed by the J5 ease of use multiple models in one print, minimal post-processing and the fact that modus go from concept to production faster than ever.

The dental industry has been an early adopter of additive manufacturing for true production parts, and is currently over $1 billion opportunity for 3D printing. We also introduced a new carbon fiber material for our award winning F123 series 3D printers that is specifically formulated for applications such as tooling, jigs, and fixtures.

The strength and lightweight of carbon fiber make it an excellent replacement for metal across many applications.

We acquired RPS, adding a top-quality product line of industrial stereolithography systems complementing our portfolio to give us a full suite of polymer 3D printing solutions across the product lifecycle from concept and design to end-use parts.

We continue to expect the acquisition to be slightly accretive to revenue and non-GAAP earnings per share by the end of 2021. Our customers continue to validate our innovation and technological advances as evidenced by the recently signed contract extension and expansion with Airbus.

The agreement significantly increases the range of cabin interior components and other parts. This is a perfect example of our Stratasys executes a land and expand strategy.

The original agreement signed over five years ago, only focused on parts for the Airbus A350 is an alternative to traditionally manufacture parts, increasing supply chain flexibility.

Once Airbus started printing parts with our FDM technology, they soon progress from a small number of alternate parts to using the technology for serial production at a much larger scale. We were also able to provide on-demand parts service through our Stratasys Direct service bureau.

The updated agreement increases the range of aircraft types to also include the A300, A320, A330 and A340 as well as replacement and spare parts to MRO applications. Our additive manufacturing is now part of the typical interactions with procurement through standard supply of channels as a regular course of business.

As I mentioned earlier last week at our manufacturing launch event, we announced three new product updates, which will strengthen our market leading offerings and value potential that we bring to customers.

The Stratasys Origin One, best-in-class photopolymer 3D printer that received a top to bottom optimization upgrade to improve service ability, performance and utilization. These use cases include medical, device components, automotive, aerospace, defense, consumer goods and dental applications such as splints, bridges, aligners and dentures.

We also shared some great insights from Origin customers. Specifically, we highlighted TE connectivity, a leader in connectors and sensor products.

They are now printing thousands of parts using Origin P3 technology, including their first ever 3D printed aerospace production connector we plan to begin shipping this upgraded version in the fourth quarter of this year.

The H350 powered by Selective Absorbance Fusion, or SAP technology and build for through thermo-plastic mass production of consistently accurate end-use parts. Our Stratasys Direct service bureau as well as others in Europe have already started producing parts on the H350 is a better users for customers in automotive, consumer goods and healthcare.

We also introduced a renewable bio-based PA11 material that is derived from sustainable castor oil, which has superior thermal resistance and is less brittle than PA12. It is the first of many new polymer materials for the H series. And the H350 is even its own customer. A dozen parts on the system were actually printed with that technology.

We plan to start shipping the H350 in the second half of the year. The F770 designed with the longest fully heated build chamber in FDM. It's a large addition to our F123 product lines with a 13 cubic-foot build volume. Despite its size, it is designed to be as simple to use as our other popular F123 printers and is priced under $100,000.

In addition to the heated build chamber, the soluble support is another important differentiator from most other large format printer. This will save customers time and enabled them to make more complex spouts. We plan to begin shipping in late June.

We are on track to enter this next phase of product launches, which combined with our multiple competitive advantages. We let defense our position as the leading provider of polymer 3D printing solutions for a world-class customer base.

We have the broadest most advanced polymer technologies that span the full product life cycle from concept to install. Our PolyJet and FDM system have been the best-selling unit in their class and we have introduced new system for both technologies this year with more to come.

Our recent RPS acquisition adds multipurpose stereolithography system to our portfolio. And we are now entering through mass production with P3 and SAF technologies. No other company is both the range and the best-in-class innovation that Stratasys can deliver to our end markets.

Our software strategy as discussed earlier is based on the customer centric dynamic of working closely with many OEM across the industry. We offer a unifying comprehensive platform across our technologies that is built to interface with the top standard enterprise system.

Today, GrabCAD with 36,000 application users and 8.8 million community members, more than any other platform of its kind and is at the heart of our cloud-based strategy and growing software ecosystem that includes partnership with Siemens and Topology, Identify3D, Link 3D, KeyShot and others.

Supporting our products, we have the leading global channel that can market, sell and maintain our system for our customer. Over the years, we have built an un-matched sales and service infrastructure with market access across a network of over 200 channel partners. This is the largest and most experienced channel in the industry.

The success of these system and technology relies on the talented team that build, manage and maintain them. These are the expert application engineers that educate the market and continue to post the innovation envelope each day as they work with customers to address an ever-expanding universe of application.

Stratasys has the largest team of engineers and customer supporting our industry. They have deep multi-disciplinary experience, especially in quality and process certification, which is critical for success in aerospace, automotive, healthcare and other sectors.

And we have a proven resilient business model designed to scale across the range of macro economic conditions, including our successful navigation of the COVID-19 pandemic. We believe that as our revenue accelerate; we can leverage our model and deliver increasing profits, while continuing to generate cash.

These key advantages combined with the new technologies that we launch in the future position Stratasys to deliver on our growth strategy. We expect that as our customer return to their production facilities will benefit from the pent-up demand. I will now turn the call over to Lilach, will share the financial results of the quarter.

Lilach?.

Thank you, Yoav, and good morning, everyone. We are pleased to have delivered on our stated goals this quarter. The revenue growth especially the 40.9% growth in our system sales along with our strong cash generation support our cautious optimism around the continuing economic recovery from COVID-19.

For the first quarter, total revenue was $134.2 million in-line with our previously disclosed outlook. On a constant currency basis total revenue declined 1% versus the first quarter of 2020. Product revenue in the first quarter was $90.3 million, an increase of 8.6% compared to the same period last year or 6.1% on a constant currency basis.

Within product revenue, system revenue increased 40.9% compared to the same period last year and increased 37.6% on a constant currency basis. This growth rate demonstrates sign of end market recovery compared to 2020 where system sales were lowest in the first quarter.

This was due to the impact of COVID starting in the back half of the quarter, when our sales are typically strongest. System sales began to improve by the end of Q2 last year. So, while we expect system growth to continue throughout 2021 the comparable percentage rate will naturally come down over the course of the year.

As we noticed on our last call, consumable utilization is subject to the impact of COVID. This quarter consumable revenue was off by 8% compared to the same period last year and was down 10.2% on a constant currency basis.

As the market recovers from COVID and usage rates of our systems increase, we expect to see sequential growth in consumables build as we move through the balance of the year. Service revenue was $43.9 million, down 11.8% compared to $49.7 million at the same period last year. On constant currency basis, service revenue was up 13%.

Within service revenue customer support revenue was $27.6 million, a 2.2% decline compared to $28.3 million the same period last year, a decrease of 4.3% on a constant currency basis.

We continue to see softness in our past service bureau business SDM, which has notable exposure to commercial aerospace where COVID recovery has been slower than for other industries such as healthcare and education. GAAP gross margin was 41.4% for the quarter compared to 45% for the same period last year.

Non-GAAP gross margin was 46.7% for the quarter compared to 48.4% for the same period last year. The pressure on gross margin is due primarily to the lower proportion of consumable, increased logistic costs and lower SDM contribution. As a reminder, SDM has relatively high percentages of fixed costs. So, the lower revenue is an impact on gross margin.

We believe that impact from the logistic issue, a well-known global situation as well as the slower COVID recovery impact on consumable will remain for the near future. Given the ongoing uncertainty of these issues, we expect gross margin to remain at similar level throughout the year.

GAAP operating expenses were $73.9 million, an improvement of $5.9 million or 7.3% compared to the same period last year. Non-GAAP operating expenses were $65.2 million, an improvement of $7.5 million or 10.3% for the quarter as compared to the same period last year.

Non-GAAP operating expenses were 48.6% of revenue for the quarter compared to 54.7% for the same period last year. The improvement in operating expenses was due primarily to the proactive resizing measures we took in the second quarter of 2020.

From an earning perspective, GAAP operating loss for the quarter was $18.4 million, compared to a loss of $19.9 million for the same period last year. Non-GAAP operating loss for the quarter was $2.6 million, compared to a loss of $8.4 million for the same period last year.

GAAP net loss for the quarter was $18.9 million, or $0.32 per diluted share compared to net loss of $21.7 million or $0.40 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3.8 million or $0.06 per diluted share compared to net loss of $10.6 million or $0.19 per diluted share in the same period last year.

We generate $22.8 million of cash from operations during the first quarter, as compared to generating $11.3 million of cash in the same quarter last year. This was driven by strong collections and reduction in spending and inventory level.

During the quarter, we successfully raised growth capital of $230 million of gross proceeds and ended the quarter with $530.4 million in cash, cash equivalent and short-term deposits, compared to $299.1 million at the end of 2020. We have recently made strategic investments via acquisitions of Origin and RPS to help build out our product portfolio.

And we continue to evaluate additional opportunities that will further accelerate our time to market and other key strategic initiatives. Last quarter, we provided our outlook for revenue growth in the second quarter and operating expenses for the full year and we are reaffirming both.

For revenue, we still expect 18% growth for Q2, and we expect to see sequential growth in the back half of the year with the fourth quarter being the strongest. OpEx for the full year include an increase of $25 million to $30 million compared to 2020, likely closer to the high end of the range.

The increase is due primarily to the return to a five days work week and the cost associated with the recent acquisition. Capital expenditures are projected to be in the range of $24 million to $30 million. Looking ahead, we sell debt-free fortress balance sheet. We are well positioned to capitalize on value enhancing market opportunities.

We will continue to invest capital into strategic high growth area of our business particularly around manufacturing. We're increasing customer demand and a proven history of high utilization should suppose substantial upside in revenue, earnings and cash flow in the coming years. With that, let me turn the call back over to Yoav for closing remarks.

Yoav?.

Thank you, Lilach. Our company is executing on our strategy to extend our leadership position in polymer 3D printing. The investment we have made to drive organic growth coupled with the targeted and strategic acquisition to enhance our end-to-end solution portfolio should result in value creation for our shareholders.

With that, let's open it up for questions.

Operator?.

Thank you. [Operator Instructions] Our first question today is coming from Shannon Cross from Cross Research. Your line is not alive..

Thank you very much. I just wanted to ask, I guess I'll ask both questions. The first is with regard to product sales or system sales. Can you just provide a little more feedback to us on exactly who are buying? What's coming in? How much of this was pent-up demand versus new demand because of some of the products you've launched.

And then with regard to consumable sales, given the mix of systems that you're selling, can give us an idea of how long it will take to see some of the follow-on consumable sales? And your confidence level and maybe usage rates on the products? Thank you..

Good morning, Shannon. Some flavor on our system sales, I'll start with that. We definitely saw hardware strength growth across all our platforms and regions in the quarter. So, there is no single product or customer that drove the favorable results – we really see it across all our business.

Definitely this growth demonstrates signs of end market recovery, compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID-19 starting in the back half of the quarter, where our sales are typically the strongest.

So that's why basically you see a very strong and this quarter demonstrates a recovery that we are happy to see here. Important to note the system growth will be the lead driver for growth in the year. With the introduction of the new products, consumable would follow.

I would like to remind you that our new product will introduce more at the second half of the year, and will make more impact in Q4 as opposed to the first part of the year. But we – as I mentioned very encouraged with the recovery sign that we saw already now, and sure that consumable will follow.

Another thing important to note that system sales began to improve by the end of Q2 last year, so while we expect system growth to continue throughout 2021 the comparable percentage rate will naturally come down over the course of the year, but we do expect to see a notable growth during the year. Now I will address the consumables.

The consumables, we are encouraged to see continuous recovery. As we saw also in Q4, as also we saw in Q3. It's still below 2020 level, as a reminder in Q1 2020 consumable and services were tracked relatively business as usual since COVID hit started to hit most of the end of the quarter. So substantially we had almost a full quarter as a comparison.

Unlike Q1 2021, where COVID sill impacts during the full quarter. As we are looking ahead for the year, we expect consumable to grow sequentially based on the trajectory of a macroeconomics, with the expectation that consumption will come back to pre-COVID level, probably at the beginning of 2020..

2022..

2022. Sorry..

Yes. Maybe just to add, hi, Shannon, it’s Yoav. Maybe just to add, overall, definitely there is a – hey, Shannon. Definitely there is a pent-up demand. Very good to be in such a place, because it's across all regions and platforms. Of course, there are some differences between different sectors.

So commercial aerospace and government are slower to raise; mainly because of the commercial aerospace situation and the new administration in the U.S. but we see the recovery coming in the next quarter on the government side, and of course, healthcare and dental that we discussed before are early to recover.

And what is new in Q1 was that education really joined the healthcare and dental in terms of fast recovery..

Great. Thank you..

Thank you. Next question today is coming from Troy Jensen from Lake Street Capital. Your line is now live..

Hi. Thanks for taking my question. First one here for, Yoav. If you look at results you have, Q1 was relatively in-line with consensus, Q2 guide seems to be in-line with consensus. If you continue down the second half, you're going to have about 8% growth this year, but some of that's acquired right from RPS and Origin.

Some of that's going to come from the Xaar partnership. If you look at your marketing slides that you use, you talk about an industry that's growing 20% to 25%.

So, I'm just curious, what's the real outlook here for FDM and PolyJet and why aren't you guys growing faster than the industry? If the core products are sustaining kind of that industry share, and then you're adding new technologies into your portfolio?.

Hi. Troy, thank you for the question. As you know, we are not guiding the year. The overall year because of the uncertainty of the COVID and we give just a very specific direction where we can commit and where we see where we have good visibility, so I can just repeat it.

In general, what we are seeing is a sequential growth quarter-over-quarter, we see the pent-up demand as we mentioned. We know exactly where we will be in terms of the OpEx like Lilach mentioned, but overall, when you look on our NPI status, and we are delivering. We were with the J55; we launched the J5 Dental with very good traction in the market.

We launched the carbon fiber. We are delivering, we have a structured plan and we delivering on it.

We launched new products, both on FDM and PolyJet, put it together with the pent-up demand we see good – we'll take good market interest in those new products, which are really at the top of the line and the next generation, both in material jetting and in material extrusion. We are leading the industry in terms of the technology.

There is no doubt, and we hear it from our customers. So just take both into your analysis, the fact that we have those new products both on PolyJet and on FDM to the fact that we have three new technologies that we're introducing at the second half of the year and I guess you can do the math by yourself..

Okay. And just a follow-up for Yoav.

Would you agree that FORTUS really hasn't had competition, specifically in ULTEM? And do you fear that there's competition coming now, given that the patents for the heated build chamber have expired?.

I had a call – just to share a call with a customer, I cannot reveal their name, but like the top five aerospace players in the world. And they told me, and I'm quoting because I prepared myself for this call. They said, you have the best machine out there in FDM, just help us to make it a manufacturing machine.

And that's what we are doing in terms of software, in terms of material, you mentioned ULTEM, it's clear that we have the best heated chamber in the market. And also in terms of software material, but not less important certification, regulation, allowables, all this full package that we are the only one who has it.

So even if someone is coming with ULTEM, it is still many years behind us in terms of certified to aerospace and automotive. And we are keep working. Our people are keep pushing on new patents, on new IP, on better heated chambers, on better processes, on regulation and Airbus expansion is the – it's the perfect proof for you..

Alright. Good luck in the second half..

Thank you. Next question today is coming from David Mizrahi from Berenberg. Your line is now live..

Hey guys. So, I understand the higher operating expenses in 2021.

But can you just speak to how you're thinking about some of that leverage moving into 2022? Do you have any goals you're talking to just with respect to those operating expenses?.

Hi. David, good morning. So specifically, we are not providing a specific guidance in terms of 2022, but definitely I can speak with you in the overall business model that we are anticipating. It's important to remember that as our revenue will grow with the new adoption of our new manufacturing-based systems, we expect to see higher profit.

Higher profit as we going to have a higher profit pool, and we are planning to leverage scale on our operating model. We have in place already the infrastructure, in corporate and in go-to-market to capture new technology without adding significant costs in the long-term. And this is really our vision.

This is our goal in 2022 and 2022 and beyond 2023; we definitely will be able to see this leverage on the revenue..

Got it. Okay. And then can you just also comment on how the new printers will impact gross margins going forward? The H350 for example, I know it uses fewer consumables. So, I'm just really curious about gross margin impact from new printers and particulars of H350 and its competitive advantages relative to HP's multi-jet fusion, for example. Thanks..

David, so we are now not specifically addressing the new product. Once we launch, we will be fixed more to that, but our vision at the end of the day, that gross margin is a – we have a wide portfolio and definitely it's a mix issue.

Okay, and so overall it's a mix issue, but under manufacturing strategy revenue will be significantly higher driven by high consumption, which ultimately generate a higher profit. Even if consumable margins may be lower at this model.

Plus we have a design for cost initiatives in place for the new products and for the existing products that we will address over time in the future as we roll out those new products, focus on improving the cost as product will be more mature as part of the product life cycle, this is something that we definitely or actively addressing..

Maybe just to add to Lilach, the systems are in-line with our overall profitability. We are living within our industry. Although we are not giving gross margin guidelines, as you know. But I want to relate to the question about H350, we are very proud of the H350 and it's really a step change in our industry in terms of mass manufacturing.

So of course I'm not going to relate directly to HP, but I'm happy to share several advantages that the SAF – has, the SAF technology and do it very shortly. We have a whole list of advantages, but in a nutshell I would say consistent accuracy. And I mean that we have the highest consistency of part accuracy, this is must in manufacturing.

The second one – second advantage is full control of the printing process and parameters, which is super important because it enabled fast certification of parts and material, which is critical in manufacturing. Everything here is about manufacturing. And the third advantage is really very good economics, because we are working with single-fluid.

We are having high powder reuse rate, and we have an exceptional nesting efficiency in terms of the load that you can put of parts in the cake. So really it's an amazing machine. We have great plans around it and we are going to reveal more and more materials for this platform..

David, its Yonah. I would add this as well because you talk about the ability to manage against competition. Remember that we have a very large service bureau that's technology agnostic, and it includes HP, it includes EOS, it includes lots of systems from lots of companies.

So as we're doing our own research and development for our own products, we're actually customers using other products and really informs our ability to make decisions to develop the best-in-class competitive systems out there..

Thank you, guys..

Thank you. Our next question today is coming from Noelle Dilts from Stifel. Your line is now live..

Hi, thanks. Good morning. I was hoping that you could expand a little bit on what the M&A pipeline looks like, and specifically if you could speak to – if there's been any – how you're thinking about valuations for target? Obviously the multiples for a lot of the publicly listed companies have been volatile so far this year.

Is that impacting target pricing at all? Thanks..

Hi, Noelle. Thank you for the question. I'll start – take a step back and start with what is really important. We have a laser focused strategy and everything that we are doing is subject to this strategy, focus, focus, focus, and also M&A.

For us the strategy is polymer manufacturing and we are actively looking for, I would say responsible M&A opportunities like we did, and executing the past that will accelerate the implementation of the strategy as title above everything. And there are many opportunities and we are very attractive to many of the startup out there.

Like you saw our acquisition of Origin and also RPS because we have the infrastructure and they want to succeed and they want to make that they have – they are growing their sales and they have – their earnout in place and we can commit for it because we have the infrastructure and we have the machine to acquire and to integrate it into our system.

So we are continuously looking for potential investments proactively, and we want to maximize the value for our company and the shareholders. And we look all over; we have a structured unit that the way we are working.

And this unit is going and screening and scouting, and we are focusing on those technologies and companies that will accelerate our strategy in each one of our technologies. And we know exactly what is needed in the market, which is a great advantage compared to anyone else who is looking out there in terms of financial investment or VCs.

And we will keep doing this and we'll keep doing it in a very disciplined way and create value through those acquisitions..

Okay, great. And maybe just sticking with that theme, obviously still early days with Origin and RPS, but maybe could you expand upon how things are progressing so far in terms of how the market has received the deals particularly Origin and how things are trending relative to your initial expectations? Thanks..

Thank you. Great question. It's growing really well. I don't know if you had the chance to participate in our manufacturing event, more than 4,500 high-end customers and partners participated there.

Significant amount of them, actually I would say around two-thirds also participated in the breakout session of Origin and all the guys were there, like all the important companies from Fortune 100 and also the top similar Fortune 100 in Europe and in Asia participated, y’know Tesla, Nike, Amazon, Apple, GM, Ford you name it, Lockheed Martin, they were all there because they are interested in manufacturing and we are bringing the full package for manufacturing.

And that's why we created this team together with Origin, together with RPS and if you participated just to close the loop, all those customers of usthat I just mentioned.

The Tesla, the Apple, the Google, all those customers were there waiting for the Origin machines to be out, systems, to be more precise for the 770 and for definitely for the H350 participating actively, and we are going to deliver them the full package for manufacturing. So we expect strong demand on those machines.

And for me as a CEO, most importantly, I was very proud to see both in our press conference and also in our event that at the end we were one team - Origin, H350, the Xaar joint venture, and our FDM you could see that this is a one team that is pushing forward our industry into manufacturing..

Thanks very much..

Thank you. Our next question is coming from Greg Palm from Craig-Hallum Capital Group. Your line is now live..

Yes. Thanks. I guess a question on gross margin; can you quantify the impact that you had from logistics? I'm just curious how that compares to what you said about SDM in mix overall. And if I heard you, right, I don't think you're expecting any improvement this year.

So even as revenue increases, at least in the second half, gross margin stays at similar levels and so it almost implies that what you're seeing is worsening because presumably there is some level of overhead absorption in the second half, so just wanted to get a little bit more color there?.

Good morning, Greg. Specifically on the logistic, yes, we were impacted by the global logistic issue that you saw overall. We are not the only company who actually suffer from that. And it's probably fair to assume that it's about 1% of our gross margins impact due to those logistic costs.

And as we mentioned on the call, we expect gross margin to stay at this level through the balance of 2021, given the uncertainty around the logistic – high logistic costs and the consumables impacted by COVID.

At the same time, I would like to mention that we are analyzing and increasing our inventory level of raw materials and finished goods to avoid delay, increasing production levels and prepare, for sea or air in our planning process. The most important thing for us is meeting the demand. We try.

We are evaluating a wider array of shipping options to ensure we can deliver goods with minimal business and cost impact. It's very, very important for us to address this..

Yes, maybe I will just add to it. There are also some positive aspects. There are some positive aspects of the logistics side. So just to put to sleep on the gross margin, gross margin is a combination of the logistics, the consumable mix and SDM.

And logistic was quite a large part there and really you can solve it out by yourself, but those were what really impacted our gross margin and since there is uncertainty on the recovery on the consumable and the logistics, there is more control on the SDM side, that's why we are cautious with our projections on gross margin.

But what is the positive aspect of this? What is the opportunity here? Supply chains are fragile and it's not only because of COVID, they were fragile before COVID because of the trade wars and because of some barriers and looking forward with the UK-Europe Brexit, we'll see more trade issues and Texas ice freeze then you saw the Suez Canal, the Suez Canal blockage, and the weather issues, and so on and so forth.

So supply chains are fragile and are being disrupted. So it's clear to everybody that we need more resilient supply chains. By the way we are facing the same issues. So we are also receiving some parts and machines through the Suez Canal. And we're exposed to the congestion in ports all over the world. Seven days, it's the average delay, globally.

And in some ports, it could be 10 or 20 days. So no doubt everybody understands that the future has to take into consideration digital inventory. This is a great solution.

You have no shipping issues, no customs, no weather impact, no nothing - instead of delivering from A to B across the Atlantic; you just deliver from A to A because you produce on the spot with digitally stored inventory. It's also an opportunity that's what I'm trying to say. And this is practically what we call industry 4.0..

Yes, I know it's a good point. I guess just as a follow-up because I'm still not entirely clear because usually when you have a better volume in top-line, you see better absorption and you see higher gross margin.

So if the assumption is that that volumes and top-line revenue are going to increase solidly in the second half yet gross margins are going to stay up the same level as Q1, it implies that something is worsening from what you saw here in the most recent quarter.

So are you assuming that that either mix or logistics or SDM worsens from here, just something that's doesn't add up and I just want to make sure we're all clear on that..

Greg, basically we are still conservative in terms of what we see currently. No one really, really know what's going to happen with the logistic constraint that we have. There is some publications even say that maybe it will take us to the end of the year, how severe it will be also no one knows. Okay.

So we see prices that we knew in Q1 actually now even higher what we see in Q2. So prices will continue go high, so we believe the logistics situation and challenge all over will impact us significantly..

Yes, that's a great point. And also the prices went really up and more to the end. At least our prices of logistics from China and from Israel went up more at the end of the quarter. So we are being cautious. But I want to make one thing very, very clear.

It's all about mix, as we mentioned, and logistics and SDM, but overall APS in general stayed at the same level..

ASPs..

Sorry, ASP, so the average selling prices stayed more or less in general in the same ballpark and the issue is not coming from there. This is very important to mention..

Okay, great. Really helpful, thanks so much..

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

Thanks.

I was going to ask something that's kind of related to pricing as well, but specifically on consumables, you're down 10% organically year-over-year in consumables, but I think customer activity would have increased materially year-over-year given many of the service bureaus manufacturing design companies were shutdown or at least slowed down materially last March.

And also if you compare it with first quarter of 2019, if you go back two years, consumables revenues down about 15% and product gross margins down over 600 basis points since first quarter of 2019. So, I mean, there are a few things that can explain this.

I don't know is it lower utilization of your machines? Even though machine sales have been soft, there are more machines in the market than there were two years ago. So is it lower utilization of those machines going out to the market? Or are you lowering price and consumables or what is it? Thanks..

Great question. Thank you. You just answered it. It's lower utilization, definitely. It's not that all our customers are back. And even if they are back, they are not utilizing at the same level as pre-pandemic. Add to it the fact that there are some segments that really were heavily hitted by the pandemic and are slow to recover, mainly aerospace.

And we think aerospace, commercial aerospace, they are slow to recover, also automotive. And we are highly focusing on those because those are the high-end segments that are buying our high-end machines. This is manufacturing. So we are more exposed, but I have no doubt that in the future, we will see them coming back strongly.

The utilization will go up and consumable, as we said, will grow sequentially throughout the year..

Okay. And, I guess, is it the same dynamic that's playing out in the system sales because I mean, that's a great result that system sales are up 40% year-over-year, but they were down 40% year-over-year last first quarter and going down 40 and then back up 40.

It means you're still – on a two year stack basis, you're still down 15% in system sales from first quarter 2019 levels.

Is that the same dynamic that you're just – it's going to take another year maybe to get back to 2019 levels?.

In general, yes. We don't know exactly when aerospace will be exacting 2019, but what we can see is that hardware is – as you see, because of the deep decline in Q1 that we had in some areas of the world, we see this spend demand. And this spend demand is a sign for consumable because hardware is probably a phase or two phases before the consumable.

So you can use the hardware in order to predict the demand for consumable..

Okay. Thank you very much..

Thank you. Our next question today is coming from Wamsi Mohan from Bank of America. Your line is now online..

Yes. Thank you. You did a capital raise last quarter. You're calling this as growth capital. You obviously already have a pretty strong balance sheet before that.

So how should we think about maybe pace of either M&A or investments? Is this going to be at some level of accelerated pace versus even the last few years? Or how should we think about the relative pace of investments and M&A? If you could share any color on that, that would be helpful..

We are sticking to our strategy and to the same concept that we mentioned two quarters ago. We have a strategy. Part of the strategy is a structured M&A proactive.

I would say proactive scouting and screening to make sure that we are building pipeline for M&A in a way that will maximize shareholder value through synergies and the synergies are very clear here. It has to be something that accelerates the strategy.

It has to be something that either accelerated through technology or go-to-market or material or software. So we work on the workflow, which is the software and the other type of workflow or material for hardware technology. And we'll keep doing it in a disciplined way. We build an M&A team internally, and it's a very strong team.

We are not rushed to do anything, but we do it in a very disciplined way to accelerate the strategy..

Okay, thanks, Yoav. And you talked about this acceleration in revenue growth in 2022 and beyond.

When you think about that in relation to maybe market growth, are you expecting to take share and grow in excess of the market? And maybe if you could just talk about that growth acceleration coming between existing products and new products, I'm trying to isolate what is sort of a cyclical recovery that can drive an acceleration in 2022 versus a more secular sustainable recovery in that growth? Thank you..

We are growing, we are leading, but also in the future, we will lead the polymer manufacturing segments. We are leading additive manufacturing in polymers. This is the strategy. This is the target. And the way to do it is by making sure that we have the right match for every application. This is why we expanded our portfolio to five technologies.

In each one of them, we believe we have the best-in-class technology. And I'm already in this industry almost a year and a half now. And I can tell you that it's quite simple, you need to have the best parts and this is scientific. You need to make sure that you have the best parts properties and we are working on it on each one of the technologies.

We leverage it through our channel partners and we are delivering to our customers. We focus on manufacturing, a full package of hardware, software, material, and services and we package all of it in a seamless platform of software. This is a big advantage. This is something we heard from our customers.

They want to have one supplier and we will be this one supplier in polymer manufacturing. And as we said last quarter, we believe that our specific revenue will grow over 20% in this sector of additive manufacturing. So we are currently – as we said last quarter, in 2020 around 25% of our sales went to end-use parts.

We are going to grow it in the mid-teens this year and 20% from next year onwards..

Thank you, sorry..

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

Hi. Yes, thanks guys for taking the questions. I guess just when you guys talk about – Yoav, when you talk about the revenue acceleration beyond the 20% seemingly starting kind of in 2022 going into 2023.

Can you share with us – presumably that would be sort of through most of the pent-up demand, could you sort of share with us if that's the case you really think at that point the production systems are really driving the growth? And then if they are, do you yet have the qualifications in the key verticals kind of aero and auto that you would need for that? And if you don't have them, what do you think the difficulty level to getting there is? Thanks a lot..

Ananda, thank you very much for the question. So I want to be very clear and I want to separate short-term catalyst and long-term catalyst here in the market.

So we said, and again, just to clarify that the part in our sales that is growing for manufacturing as we defined it as end-use part will grow mid-teens this year and above 20% from 2022 onwards. So this is the statement.

Why we believe in it? Because first of all there are some catalysts and pent-up demand in the short-term because of the recovery from the COVID, because of supply chain pressure that people want to make sure that they are insuring themselves against it, because of the entire environment that we see in the macro economy. This is one.

And then, which is more important everybody is seeing the long-term trends that we are facing, which leads us to an inflection point in additive manufacturing. And this inflection point is underlined, as I said before, by three very strong forces.

One is the need to have responsive and versatile supply chain, this digital manufacturing that we discussed so many times. The second very strong trend is the fact that additive manufacturing technologies reach, I would say, new levels in terms of their ability to deliver end-use parts and mass production. We were in the 100s, maybe 1000s.

Now we are in the dozens of thousands and maybe hundreds of thousands and you saw in the case of the nasal swabs that we even printed millions. So it's a different era in additive manufacturing.

And add to it the third very strong trend, which is the whole industry trends that you have those new segments like electric vehicle and new type of aerospace solution where polymer and composites are so important for the type of the parts, for the complexity of the parts, but also for the need for customization and short series of production.

So it's a new era. It leads us to manufacturing. Being in manufacturing, it's a whole new story because in manufacturing you need… it’s about new applications. It's about new materials.

It's about very strong and solid service because you cannot allow yourself down time and not less important you need software, you need software in order to be connected to the manufacturing system, the MES, the ERP, the PLM, you need to be there, and you need to put all this in one package connected. So connectivity is also very important.

And we have relationships with those blue-chip customers, FORTUNE 100 customers that are leading this transformation. And those OEMs are working with us to transform the industry.

And it gives us the confidence that we are on the right direction, because at the end, we are not working in a vacuum, but we are working with our customers to take this industry into manufacturing..

That's super helpful. Yoav, I really appreciate. That's really great context by the way. Thanks for that. And just a quick follow-up to that, it sounds like you have like at least a good amount of the capability in [indiscernible] so you just referenced your ability to do production parts of volume, certain production parts of volume.

And I liked that you're sticking your neck out and giving the growth context. So thanks for that. This is fluid.

How much of sort of the capability you've mentioned software M&A et cetera workflow? How much of the capability do you think you need to get to putting together solutions, software services, like you said, putting into one package? How challenging is that over the next, call it, four to eight quarters to get to where you want to be? Where your production customers are saying they want you to be to be able to really inflect that growth? I know that's a lot, but I think the context would be helpful.

Thanks. And that's it for me,.

Another great question. We have currently the internal capabilities to deliver our strategy.

Having said that, it's also clear to us that we can accelerate it, so the focus is on acceleration, not on enabling because we can do it, but this is a great place to be when you are looking for M&As because you're coming from a place where you have the certainty that you are good with alternatives.

We are not depending on anyone to execute our strategy. We have many that can help us to accelerate..

That's great. Thank you..

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

Thank you. Thank you for joining us. Stay safe and healthy, 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..