Stratasys Ltd. (SSYS) Earnings Call Transcript & Summary

Hello, and welcome to the Stratasys and Desktop Metal Combination Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yonah Lloyd, Chief Communications Officer and Vice President, Investor Relations. Please go ahead, Yonah.

Thank you, Kevin, and welcome, everyone. We appreciate you joining us on short notice to discuss today's announcement that Stratasys and Desktop Metal will combine to create a premier global provider of industrial additive manufacturing solutions. Before we begin, I would like to call your attention to our legal disclaimers here on Slide 2. With that, today, I'm joined by Ric Fulop, Chairman and CEO of Desktop Metal and Dr. Yoav Zeif, CEO of Stratasys. Yoav will kick off today's call by discussing the highlights of the transaction and our excitement for the future as a combined company. Ric will then provide an overview of the combined company's capabilities and significant opportunity ahead. There are substantial financial benefits to this combination, and Yoav will discuss our expectations for synergies and combined financial profile. We will then open the call to questions. As you may have seen in our press release, Stratasys today reaffirm the guidance provided on May 16, 2023, when the company reported its first quarter earnings results, including its medium-term financial forecast. Desktop Metal also reaffirmed full year 2023 guidance provided with its first quarter earnings results on May 10. I will now turn the call over to Yoav. Yoav?

Thank you, and good afternoon, everyone. This is an important milestone for Stratasys and Desktop Metal. We are excited to create a next-generation additive manufacturing company, delivering industrial polymer, metal, sand and ceramic solutions from design to mass production. This compelling strategic combination delivers significant value for shareholders. In light of how we have grown and developed our technologies, as we discuss this transaction with Desktop Metal, it was clear that the combination of our companies will significantly accelerate our growth trajectories, creating a uniquely scaled industrial additive manufacturing company. This is a landmark moment that will transform our company and help us to drive long-term sustainable growth. Together, we will have a diversified and wholesome product portfolio and one of the largest global go-to-market networks in 3D printing. Our combined materials library is highly differentiated. Our more than 3,400 patents granted and pending, representing years of investments will enable us to continue to drive innovation for our customers. We believe there is significant potential to unlock additional value by providing customer access to recognizable brands backed up by premier customer support capabilities. This transaction also created opportunity to realize approximately $50 million in annual run rate cost synergies and approximately $50 million in annual run rate revenue synergies across the business by 2025. Combined, we expect to deliver approximately 10% to 12% of adjusted EBITDA margin in 2025. The combined company will unite the polymer capabilities of Stratasys with a complementary industrial production leadership of Desktop Metal brands to serve the evolving needs of customers in the fastest-growing verticals. I know the industry very well. Stratasys and Desktop Metal have watched each other, innovate and grow over the years. We have gotten to know the Desktop Metal team even better while evaluating this opportunity. And those discussions have led us to this milestone announcement today. This combination presents our shareholders, customers and employees with a unique opportunity with the potential for robust value creation. We are bringing together complementary products and technologies that cover a wide range of industry verticals and use cases. Stratasys brings our position in polymer 3D printing an exceptional strength in aerospace, automotive, consumer products, health care and dental vertical. And Desktop Metal brings its leadership in mass production of metal, sand, ceramic and restorative dental 3D printing solution. Let's turn to Slide 6 for an overview of the transaction. The combination of Stratasys and Desktop Metal is structured as a stock-for-stock merger valued at approximately $1.8 billion. After the transaction closes, Desktop Metal stockholders will receive 0.123 ordinary shares of strategies for each share of Desktop Metal Class A common stock. This represents a value of approximately $1.88 per share of Desktop Metal Class A common stock based on the closing price of Stratasys ordinary share of $15.26 on May 23, 2023. This structure will enable both companies to participate in what we believe is significant upside potential as a larger, stronger combined company. Following the closing of the transaction, existing Stratasys shareholders will own approximately 59% of the combined company and legacy Desktop Metals stockholders will own approximately 41% on a fully diluted basis. We look forward to working together towards the closing of the transaction, which is expected to occur in the fourth quarter of 2023, subject to approval by both companies' shareholders and other customary closing conditions, including the receipt of certain governmental and regulatory approvals. After the close, I will serve as CEO of the combined company, and Ric will be the Chairman of the Board. We will have an experienced and dedicated team leading the combined company. I know this team well from both sides, and we all share a common objective of delivering for our stakeholders. For Stratasys customers and shareholders, this combination will enable us to expand use cases, grow revenues and enhance profitability. For Desktop Metal customers and shareholders, this is an opportunity to combine best-in-class additive manufacturing technology with our top global distribution capabilities. Together, we will be one of the only profitable public treaty printing companies in the world. I will now turn the call over to Ric to discuss the opportunity in more details. Ric?

Thanks, Yoav, and hello, everyone. We will go into more detail into the combined technological and R&D platform in global go-to-market network in the coming slides, but I want to briefly highlight the significant size of this opportunity. As shown on Slide 7, the added manufacturing capabilities of our combined company will directly serve a rapidly growing market opportunity that is projected to reach more than $100 billion by 2032. And when we project significant growth in the AM market, the overall manufacturing opportunity is much, much larger. We have seen 10x growth in 3D printing in the past decade through penetration of prototyping and tooling use cases. But even as an $18 billion market, as I noted earlier, it still only represents about 0.1% of global spend on manufacturing. We're just scratching the surface and are very excited what we can achieve together with Stratasys as the industry continues to evolve towards mass production using additive manufacturing. The combined company is expected to offer customers end-to-end solutions from designing to prototyping, to tooling to match production and aftermarket operations across the entire manufacturing life cycle, providing an opportunity to drive growth. As shown on Slide 9, the combination also shifts our revenue mix towards high-growth verticals across a broad product portfolio. More than half of the pro forma combined company is expected to be derived from revenue of end-use parts manufacturing and mass production. And parts are the fastest-growing segment in the added manufacturing space with more than 29% compounding annual growth rate expected through 2027. This compared to polymer research and preproduction CAGRs that are under 14%, which will become a smaller part of the Stratasys mix as we move forward. Turning to Slide 10. This transaction establishes a very unique, scaled added manufacturing company. Our breadth of offerings and strong technical talent and expertise will help us win growth, while we also benefit from an overall TAM expansion. Pro forma, we're going to be one of the largest companies in our industry with attractive positions across critical added manufacturing technologies and segments. And together, we're going to build an even more resilient offering with a diversified customer base across industries and applications in order to drive long-term sustainable growth. Slide 11 is an overview of our comprehensive suite of combined offerings, which are broad and complementary and reflects some of the top brands in our industry. Our combined capabilities and materials, technologies and use cases and is especially notable is the further expansion into mass production that Desktop Metal provides for strategies across metals, polymers, ceramics, sand, carbon fiber and wood. We see a significant growth opportunity to drive outsized growth in dental restorative mass production. Through our strategic partnerships, leading materials and world-class team, we're very well positioned to capitalize on the $35 billion growth opportunity in dental mass production, as shown on Slide 12. We also have a significant opportunity in metal, carbides and ceramics. We have the industry's leading global position in binder jet. That's the fastest 3D printing process for materials like metals, technical ceramics and carbides, and we have the largest and growing customer base in this segment with over 1,200 customers. High penetration in mass production of carbide cutting tools, leadership in 3D printing of nuclear materials via binder-jet best-in-class technology for mass production of technical ceramics enables us to bring true high-volume mass production to the metal added manufacturing space. Both Stratasys and Desktop Metal have existing applications in production that include spare parts, form solutions, large parts in polymers in aerospace and automotive, industrial replacement of injection molding tools in accurate parts, as you can see on Slide 14. Together, we expect to transform the polymer industry and bring it into a world of mass production. And finally, as we go into Slide 15, the combination of our technologies and distribution capabilities are going to drive significant benefits for our stakeholders. We're going to have an extensive global go-to-market network with enhanced market access and recognizing more brands to our customers. fitting for our company of our combined offerings and reach, we're going to have truly global footprint in our presence in over 65 countries. With more than 400 support personnel in application engineers, we will be backed by premier customer support capabilities to ensure that as we deliver innovation to our customers, we can make our customers successful. Our innovation will be driven by a powerful combined R&D engine with substantial investment in firepower. Together, our company has invested nearly $0.5 billion, and I said it again, $0.5 billion in cumulative R&D spend in the past 4 years. That's a significant investment for innovation and it's going to remain a key area of us going forward. Bolstered by our deep technical expertise, we're very well positioned to deliver on the promise of our existing technology and create new products to serve this expanded customer base. As a combined company, we're going to have one of the largest and most experienced R&D and engineering teams in this entire industry. And finally, on Slide 17, we have a very large customer base across industries, materials and applications such as aerospace, automotive, medical and dental, consumer products and heavy materials. We have a total of more than 27,000 customers at closing and that are going to drive significant recurring revenue from consumables. And now I'm going to turn it over to my partner, Yoav, so he can continue the presentation.

Thank you, Ric. Turning to Slide 18. The combined company is expected to generate approximately $50 million in annual run rate cost synergies by 2025. We will achieve this by leveraging relationships with existing customers and our leading go-to-market channels. This includes cost of goods sold savings driven by efficiencies from optimized sourcing strategies and organizations. We also see opportunities to optimize our technology infrastructure. In addition, we expect to realize savings by combining our shared internal infrastructure. Of note, these are cost savings over and above what desktop method is already announced on a stand-alone basis. On Slide 19, the results of this combination is a strong pro forma business with robust financials that will hit the ground running. We expect the combined company to generate $1.1 billion in 2025 revenue and target 10% to 12% adjusted EBITDA margin in 2025. The synergy opportunities are significant and contribute to an attractive combined financial profile as evidenced by the improved pro forma adjusted EBITDA margin. Together, the company had approximately $437 million of cash and cash equivalents as of the first quarter of 2023. And this transaction accelerates the combined company financial flexibility through a well-capitalized balance sheet to drive future growth. We are confident this combination will drive substantial value for our shareholders, employees and customers. Our shareholders will benefit as we execute on this compelling opportunity to capture the value of AM for mass production paired with the cost and revenue synergies and attractive financial profile. Employees will have significant career development opportunities and will be part of a combined company that remains committed to innovation and customer success. Our customers will benefit from our full end-to-end solutions, superior value with innovation driven by our unmatched team. There is tremendous value potential here, and we are confident that as a combined company, we will be positioned to capture it. We hope you share our excitement for the future of the combined company and what we can achieve together. With that, we will open the call to your questions.

[Operator Instructions] Our first question today is coming from Greg Palm from Craig-Hallum.

Congrats on the announcement. I guess my first one is, what do you think it means for the industry overall? It's clearly one of the most important announcements today. And I just wanted to get your thoughts on the broader impacts to additive industry, maybe whether this could help accelerate overall adoption rates with the technology in general?

Thank you, Greg. It's a transformation. We are reshaping the industry. I'm here for 3.5 years, and I'm struggling with the position of additive globally. And coming from manufacturing, there are so many manufacturing challenges today, sustainability, the ability to have mass personalization, the logistics, whatever, onshoring, so many, so many challenges. And when I stepped into strategies and said, okay, 3D printing is a solution because we can mass personalize, we can print what we want, where we want. We can replace a production line with a file and a printer. We have great material, but as you -- we all know, we are the only profitable company in this industry. So something doesn't work. And what doesn't work is the fact that we, as an industry, fail to deliver quality of part, cost per part and a real workflow. Those are the factors. And then we ask ourselves how we can solve it, and we started to do it in polymers, but it was clear to us that we need also to have a metal offering. And we need to keep innovating. And Desktop Metal is the real deal. So together, we are going really to check the boxes to make sure that we are going to customers, there is no silver bullet, but we will deliver on the value. You combine the establishment of Stratasys with the innovation and the visionary, the vision of Desktop Metal, it's a win.

Yes. I understand that. And that's good to hear. I guess my sort of follow-up question is I think what probably I and a lot of others, I know this call is focused on the transaction with Desktop Metal, but what I think a lot of us are probably wondering is given the requirement of shareholder approval and in light of this morning's tender offer news, how are you thinking about the risk whether this deal can actually get done? Maybe you can just offer some perspective there as well.

Thank you, Craig. We believe in this transaction. This is the best alternative for our shareholders to create value. Nothing here is an accident. Nothing here was done just for the sake of whatever. We are working on this deal for more than a year. And we believe that this is strategic, both for the 2 companies and for the industry. In terms of the nano and the general offer, of course, I cannot relate to it. It's very clear that our Board, which is committed to its fiduciary duties with our adviser, we look at it very seriously and we'll come back with this answer.

Your next question is coming from Ananda Baruah from Loop Capital.

Congratulations on the combination here. I guess you touched -- Yes, you're welcome. You touched a little bit on combined capability of the company a few times in the prepared remarks. But I was wondering if you could talk to what the opportunities for technology sharing and collaboration could be across the various themes at the core technology level, maybe at the core IT level as you go forward, what some of the leverage points there might be and how they might show up in the offerings and in the marketplace.

This is Ric. I'm super excited about not just the business synergies, but the technical synergies here are significant. This is a merger that is going to drive accelerated innovation between the 2 companies. I think we have materials on the DM side that are going to really help improve and push the capabilities of project get into more of a mass production capability in the future. We've got technology synergies on the software side between the 2 companies. There's significant go-to-market synergies as well. But these technical teams are primarily non-overlapping segments of the added manufacturing space. This allows us to cover a broader portfolio of solutions to our customers. And so that is significant. And obviously, we have 7,000 customers that are now going to be introduced to a distribution network that's larger -- much larger than ours, that is a powerhouse in the industry. And we also at DM have a very large key accounts team that can help the high-end systems from Stratasys penetrate in the manufacturing floor where you do mass production. So this is a fantastic combination. I can't imagine a better partnership between 2 companies. And it's highly synergistic across all fronts.

But to add, we could identify and it was already demonstrated those amazing technical synergies already through the due diligence because our teams met, we had a deep dive into the technology super deep dive into the technology. And we found out that the flow of ideas can generate so much innovation and so much efficiency and effectiveness only through the due diligence, but let's put this aside for a minute. The reason we are with test of metal because there are technological synergies, because we selected high-speed technologies based on Intel. If someone in this industry know jetting is strategy. If someone in this industry, no high-speed finding in this top matter. Now combined the 2. Everything is going here with printed. We know printed. We know the electronic around printed. So you put this together, I'm very optimistic.

Your next question is coming from Shannon Cross from Credit Suisse.

And congrats on the deal. I'm curious about -- is there a [indiscernible] involved with this? I know it's a merger, but I was just wondering now that it's apparent that Desktop Metal is potentially up for acquisition. Is there any kind of, I don't know, agreement in that scheme? And then I have a couple of others.

I think this is a public-to-public merger with standard customary terms but nothing out of the ordinary. I think our goal is to get this transaction completed, and both parties are committed and can look -- I mean, I can't wait to start doing work together. So we're excited.

Same here.

Okay. And then, I guess, when I add -- I'm just trying to think about how you've built up your revenue assumptions for 2025 and beyond as you're thinking about it, are there any dis-synergies because when we add our numbers together, we kind of get there just with the 2 companies. And it seems like there's obviously the revenue synergies you're talking about. So maybe if you could be a little bit more granular in terms of specific areas you think you're going to be able to sell more, whether it's on metal or polymers or I don't know, anything dental if you want to talk about specific verticals and increased opportunity.

Thank you for the question. You know us very well, and you know the infrastructure of Stratasys. We have much more capacity than we are currently leveraging. And from the get-go, almost 3.5 years ago, I said manufacturing, manufacturing, manufacturing because manufacturing is growing between 25% to 30% every year. We know it. And we have the infrastructure to push it, but we had to build the portfolio. And we did a great job on the polymer side, but we had to find the metal partner that will take us there and also to make sure that we are closing gaps that we have in dental, both in restorative and in aligners. So it's so complementary, almost no parallel offering. So if you take -- if you combine this together, it means that there are no dis-synergies. And there are synergies on the infrastructure. There are synergies on the infrastructure, both on the operations and the SG&A. And as you know us as well, we are not building anything here top down. Everything is bottomed up by geographies, by offering, by machine. And then we came to this calculation of 10% to 12% adjusted EBITDA margin in 2025. It's a joint plan. I'm more -- okay, just between us. I'm more optimistic on the revenue side than what we booked. But for us, it's very important, and you know also our track record over the last 3.5 years, we put a number. We pass it. We touch it. We want to make sure that we're also delivering at least $1.1 billion, but I believe that -- we all believe that the revenue synergies are bigger because of our infrastructure, the global one.

Okay. And then just how do we think about where you might have competing technologies like Envision Tech versus Origin? Are there ways to leverage the technologies that each company has or the production capabilities that they have. I'm just wondering -- I don't think there's a ton of overlap on your portfolio, but there are some.

Yes, I'm happy to take this. Look, the overlap, I would say, is minimal, and it's probably the most competitive segment that we've got. We have positioned our Envision Tech products since the acquisition to be almost exclusively dental or large format DLP for high-volume industry. While Origin is sort of in the medium format DLP segment for production. So there's very little overlap. If you look at even on a revenue basis, I would say it's minimal as a percentage of our overall revenue. But it is a market where we have a heritage. We are the inventors of DLP with Etech. This is an industry we created today as many people do DLP, but we bring a lot of heritage, competence so does Stratasys, Origin is a fantastic technology. And I think we have best-in-class solutions across our portfolio and better solutions to help our customers be successful and go into production. So I'm very, very excited by the combination and everything we're going to be able to do for our customers to make it more successful.

Our next question is coming from Jim Ricchiuti from Needham & Company.

So I'm wondering if the cost synergy targets, any assumptions with respect to optimal changes in either the Desktop Metal or the Stratasys product portfolio just in terms of -- as you review the hardware categories as a result of the combination, are there some that may now be viewed as nonstrategic for the combined company on a go-forward basis?

Not at all. So our offering is very strategic. That's why we selected Desktop Metal. There are so many synergies across the different portfolios, both on the technical side, but also in terms of offering and being the one-stop shop for our customers on the same platforms. which is amazing, and we heard it from our customers. As for the synergies, again, as we shared it in the slide, a significant amount from COGS, both on operation and side, significant amount from G&A and some from -- some from sales and marketing, but innovation for us is key. I want to emphasize it.

And a follow-up question. Ric, you alluded to the strength of the materials business for the combined company. I'm wondering how we should think about this materials business on a pro forma basis? And maybe just how you see that relative, as you guys talked about that fiscal -- that 2025 target?

Yes. I want to let Yoav to answer the pro forma question. But technically, we have incredible technology with our [indiscernible] phase operation for materials portfolio. And Stratasys an incredible technology on the pro forma side with the Covestro acquisition. It is highly complementary. We've got really, really, really good print platforms. And even outside of photopolymers we've got the largest library of materials on the metal, ceramics, carbides side of the market and Stratasys is an industry-leading portfolio on thermoplastic side. So across the board, I think we've got a really highly differentiated material science driven innovation here that is difficult to replicate as a huge moat, there's a very large IP portfolio component on it. And as you know, materials are the recurring revenue component that's at the heart of the innovation in the 3D printing business. So we have a -- this really turns it into a fantastic, highly complementary and capability that's actually going to make our customers more excited and more successful with 3D printing in mass production.