Stratasys - Q3 2023

Transcript

Operator (participant)

Hello, and welcome to the Stratasys Q3 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. 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.

Yonah Lloyd (CCO and VP of Investor Relations)

Good morning, everyone, and thank you for joining us to discuss our 2023 third quarter financial results. On the call with us today are our CEO, Dr. Yoav Zeif, and our CFO, Eitan Zamir. I would like to remind you that access to today's call, including the slide presentation, is available online at the web address provided in our press release. In addition, a replay of today's call, including access to the slide presentation, will also be available and can be accessed through the investor relations section of our website. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes, and other future financial performance, and our expectations for our business outlook.

All statements that speak to future performance, events, expectations, or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys annual report on Form 20-F for the 2022 year. Please also refer to our operating and financial review and prospects for 2022, and for the third quarter of 2023, which are included as Item five of our annual report on Form 20-F for 2022, and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC today, respectively.

Please also see the press release that announces our earnings for the third quarter of 2023, which is attached as Exhibit 99.1 to a separate report on Form 6-K that we are furnishing to the SEC today. Our reports on Form 6-K that we furnish to the SEC on a quarterly basis and throughout the year, provide updated current information regarding our operating results and material developments concerning our company. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. As in previous quarters, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today's press release.

I will now turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Yoav Zeif (CEO)

Thank you, Yonah. Good morning, everyone, and thank you for joining us. Before going through our business update, I'd like to comment about the situation in Israel. Israel is home to about 25% of our employees, who have been performing in an exemplary fashion during the war. Whether it be serving the country or maintaining our business, there has been no fundamental impact on our operations, and our factory and offices have been open throughout. We are proud of our employees and the spirit of our country during this difficult time. Before I turn to the third quarter results, as you may have seen this morning, we announced that Aris Kekedjian was appointed to our board of directors, effective immediately.

Aris is a seasoned executive with more than 30 years of leadership experience, and we are pleased to have him bring expertise across business development, M&A, and operation of complex cross-border businesses at scale. As always, our board is committed to ongoing refreshment and continues to take steps that will enhance value for our shareholders. Aris' appointment follows Ziva Patir's decision to step down from Stratasys Board following 10 years of service as a director. We are grateful to Ziva for her commitment and many contributions to the company, and we wish her all the best. For the third quarter, we accomplished our results against the ongoing challenging global macro backdrop that is marked by slower growth, higher interest rates, and constrained capital spending.

During the third quarter, we achieved record recurring revenue from consumable sales, reflecting solid utilization of our printers and demonstrating our resilient business model and financial profile. Customer demands and our engagement with both our installed base and new customers continues to be stronger than ever. The results show that our customer recognize our unique combination of industry-leading polymer technologies, the broadest set of polymer materials, a unified software platform across the portfolio, unmatched go-to-market capabilities, and excellent customer service. And we continue to invest and innovate to stay at the forefront of additive manufacturing... while growing the business across our end use segment. Our portfolio of technology offerings continues to expand, with particular focus on manufacturing applications. We deliver results comparable to the year-ago period for revenues, Non-GAAP margin, and Adjusted EBITDA, despite the increasingly challenging environment for capital spendings for our customers heading into year-end.

Additionally, we kept non-GAAP OpEx costs as a percentage of revenue flat relative to the year ago period. As a result of our effort, I'm proud that we delivered positive adjusted earnings per share for the ninth consecutive quarter. To help further improve profitability going forward, we recently divested two lower margin, unprofitable businesses from our Stratasys Direct service bureau. This is expected to reduce 2023 revenue by $5 million, but help improve profitability and focus in 2024 and beyond. We ended the quarter with a strong balance sheet of $185 million in cash, equivalents, and short-term deposits, and no debt. This continues to support our ability to grow through combination of organic investment and accretive acquisition opportunities that will further our strategic objective to be the leading provider of additive manufacturing solutions.

Our vision for the future of additive manufacturing and our leadership position in this industry is more robust than ever. Now, let me touch on some of our recent business highlights and milestones. On the industrial side, I want to highlight the launch of our very exciting and innovative F3300 just last week at Formnext. The F3300 is up to two times faster than other polymer filament printers available today. This inaugural edition of our new FDM enterprise platform family is custom-built specifically for manufacturing. Significant advancements in speed, reliability, and operating efficiency demonstrate our continued commitment to innovation, and will bring greater economic advantage to existing users and open up new application opportunities. The increased speed of the F3300 stands out relative to any other polymer filament printers available today, with increased gantry speed and material extrusion.

It also offers up to 45% cost per part reduction compared to existing solutions. It is loaded with sensors, which will, over time, provide part and print data collection capabilities to support foreseeable usage around quality and predictable outcomes. The F3300, initially planned for commercial availability during the fourth quarter of 2023, is now planned for the first half of next year. As a reminder, Stratasys invented FDM over 35 years ago. It is the world's most popular 3D printing technology, and we lead across aerospace, automotive, and defense applications. This new F3300 platform was developed with tremendously valuable input from many of our customer over the last several years, tailored to address their production requirement. This program included Toyota, who we announced, has become our first F3300 customer.

The F3300, together with our other manufacturing solutions, such as H350 SAF and Origin P3, are production-oriented system that will expand our addressable market, facilitate growth, and drive our continued leadership. Turning to some customer success from our industrial business. We are appreciative that the U.S. Army Picatinny Arsenal further demonstrated its confidence in Stratasys by placing a significant order across our entire portfolio of five polymer technologies: FDM, PolyJet, SAF, Origin P3, and Neo stereolithography. These printers will be used across multiple military facilities. The strategic importance of Picatinny making such an investment in Stratasys is key, as they are the organization that leads the additive manufacturing effort for the U.S. Army.

In automotive, FAW, China's largest, wholly-owned auto manufacturer, installed a variety of Stratasys systems in its effort to build a world-class additive manufacturing center, with a goal of staying at the forefront of the digital manufacturing transformation. Its newly installed base includes Origin One, PolyJet J850 Prime and multiple F900 FDM systems, and we look forward to growing that relationship further. Subsequent to quarter end, we hosted our Stratafest event, focused on aerospace and automotive, featuring customer testimonials from Northrop Grumman and Radford Motors. Radford is a great case study for additive manufacturing, as its Lotus Type 62-2 automobile is produced using approximately 250 parts printed with our FDM systems to deliver unparalleled performance. Turning to slide eight.

Our dental business continues to build a strong foundations for growth, as customers are scaling up with multiple unit orders and expansion of their portfolios for both ortho and implant applications. In the U.S., with its $5 billion+ dentures industry, customers are increasing adoption of our disruptive TrueDent solution, and we expect continued acceleration in the years ahead. In the E.U., we have received positive feedback from top five lab networks, and we expect to expand our penetration there once TrueDent receives CE approval. On the healthcare front, we recently signed a partnership agreement with m.c. GmbH, a long-time Stratasys partner, to establish a new division called m.c. Medical, that will specialize and focus on delivering Stratasys medical solutions to the German market. This is part of a global strategic decision to expand our reseller network through partners who specialize in the medical field.

We believe this will help increase our coverage, focus, and dedication to our healthcare customer. Another new development is our relationship with Go Orthotics, an innovator and manufacturer of custom-made orthotics for podiatrists. They have purchased multiple SAF printers that enable them to quickly produce custom orthotics with high specifications, increase manufacturing throughput while saving vast working time, and achieve superior product fit and comfort not possible with traditional manufacturing. The custom foot orthotic opportunity is expected to more than double to $8.8 billion by 2032. Turning to software. I'm pleased to say that after running a free trial program, we have commercialized our premium offerings. Our software has always been critical to our customer success, but we have only recently expanded our portfolio to include subscription-only offerings with GrabCAD Print Pro and OpenAM.

Approximately half of our new FDM and SAF customers have chosen to subscribe to GrabCAD Print Pro, and we plan to offer it across PolyJet, Neo, and Origin as well. On our materials side, we have added a number of enhancements to our flagship F900 series, including offering new polymers, colors, and support materials. We have also expanded the functionality of the F900 series to OpenAM by allowing users to custom-tune materials and printed part capabilities. This provides additional functionality, as they can alter the characteristics of Stratasys and third-party materials and print their own formulations, opening up new applications to expand the reach of our product and materials portfolio. I will now turn the call over to our CFO, Eitan Zamir, to share the financial results and updates on our outlook for the rest of 2023. Eitan?

Eitan Zamir (CFO)

Thank you, Yoav, and good morning, everyone. Our third quarter results continue to demonstrate our ability to consistently deliver operating leverage and drive profitability, even in a CapEx-constrained environment. We are particularly proud of how we maintained the level of our non-GAAP OpEx as a percentage of revenues in a flat revenue quarter, even as we continue to invest for future growth. These results highlight the financial discipline and business maturity that differentiates Stratasys in our industry. Overall, our results reflect the resilience our diversified offerings provide, continued high level of engagement with our customers, and proof of their ongoing strong utilizations of our systems. Now, let me dive deeper into the numbers.

For the third quarter, consolidated revenue of $162.1 million was essentially flat relative to Q3 2022, and was up 3.3% at constant currency and excluding MakerBot and Stratasys Direct divestment. Products revenue in the third quarter increased by 1% to $113.2 million, compared to the same period last year, and was up 3.4% on a constant currency basis and excluding MakerBot, which we divested in late August 2022. Within products revenue-... System revenue declined 8.6% to $51.5 million, compared to $56.3 million in the same period last year. Excluding MakerBot and at a constant currency, system revenue was down 5%.

On a sequential basis, systems revenue grew 6.6%, indicative of some improvement in conditions we see in the marketplace, and the continued strong levels of engagement we have developed with our customers. Consumables revenue rose by 10.7% to $61.8 million, compared to the same period last year, and rose by 11.6% on a constant currency basis, excluding MakerBot. This represents another record level of consumable sales for Stratasys. Service revenue, including Stratasys Direct, was $48.9 million, down 2.4% as compared to the same period last year, and was up 3.1% at constant currency, excluding MakerBot and Stratasys Direct divestment.

Within service revenue, customer support revenue grew 3.6% compared to the same period last year, and increased by 3.2% on a constant currency basis and excluding MakerBot. Now turning to gross margin. GAAP gross margin was 40.5% for the quarter, compared to 43.6% for the same period last year. Non-GAAP gross margin was 48.3% for the quarter, essentially flat compared to the same period last year. GAAP operating expenses were $108.4 million, compared to $86.4 million during the same period last year. The increase in GAAP operating expenses reflected, in large part, our extraordinary expenses associated with Nano Dimension's expired partial tender offer, its withdrawn proxy contest, 3D Systems proposals, and our terminated deal with Desktop Metal.

Non-GAAP operating expenses were $74.2 million, flat as compared to the same period last year. Non-GAAP operating expenses were 45.8% of revenue for the quarter, also flat as compared to the same period last year. As a reminder, we delivered the same OpEx level on flat revenue, despite additional OpEx generated by certain acquisitions. Our ability to hold OpEx levels flat is a testament to our focus on operational efficiency through cost management. This clearly demonstrates the scalability and resiliency of our model and will serve us well as end markets stabilize and both revenues and margins improve over time. Regarding our consolidated earnings, GAAP operating loss for the quarter was $42.8 million, compared to a loss of $15.6 million for the same period last year, reflecting the increased extraordinary expenses described before.

Non-GAAP operating income for the quarter was $4.1 million, which is 2.5% of revenues, compared to $4.5 million or 2.8% of revenues for the same period last year. The modest decline is attributable to slightly lower year-over-year non-GAAP gross profit that more than offset flat non-GAAP operating expenses. GAAP net loss for the quarter was $47.3 million or $0.68 per diluted share, compared to net income of $18.7 million or $0.28 per diluted share for the same period last year. The year-over-year decrease in GAAP profitability was due in large part to costs associated with Nano Dimension, expired partial tender offer and withdrawn proxy contest, 3D Systems proposals, and the terminated deal with Desktop Metal, which are excluded from our non-GAAP results.

I'll also remind you that third quarter 2022 GAAP net income included a one-time $39.1 million gain from the MakerBot deconsolidation, which worsened the decline in GAAP profitability in Q3 2023. Non-GAAP net income for the quarter was $2.4 million, or $0.04 per diluted share, compared to non-GAAP net income of $3.3 million or $0.05 per diluted share in the same period last year. We're proud to report that this was our ninth consecutive quarter of delivering positive net income on an adjusted basis. Adjusted EBITDA was $9.8 million for the quarter, compared to $9.9 million in the same period last year, essentially flat on a percentage of revenue basis.

We used $12.7 million of cash in our operations during the third quarter, compared to the use of $18.4 million of cash in operations for the same period last year. The use of cash was primarily driven by costs related to mergers and acquisitions activities, defense against the hostile tender offers and proxy contests, and related professional fees. Operating cash flow, excluding costs of $13.7 million, paid to advisors related to mergers and acquisition activities and takeover defense, would have been positive. We ended the quarter with $184.6 million in cash, cash equivalents, and short-term deposits. Our balance sheet and cash generation remains strong. Specifically, we are well capitalized and well-positioned to capture value-enhancing market opportunities as they are identified. Now, let me turn to our outlook for 2023.

Last quarter, we guided full-year revenue at $630 million-$670 million. Adjusting for the $5 million impact from the divestment of the two Stratasys Direct businesses, this is equivalent to $625 million-$665 million. Additionally, we have noted earlier the delay in selling the new F3300 that was planned for Q4 this year, and a soft CapEx marketplace. Given these items, we now expect revenue to range between $620 million-$630 million. From a gross margin perspective, we continue to expect full year 2023 to be in a range of 48%-49%. We expect gross margins to go back over 50% next year.

In 2023, we expect our non-GAAP operating expenses to be in a range of approximately $288 million-$290 million. We are adjusting non-GAAP operating margins to now be in a range of 2%-2.5% for the full year. We anticipate a GAAP net loss of $117 million-$104 million, or $1.70 per share to $1.51 per diluted share, and the non-GAAP net income of $6 million-$9 million or $0.10-$0.14 per diluted share for the full year of 2023. Our GAAP results, and thus our outlook, includes the one-time extraordinary costs associated with our acquisition-related activities, the hostile tender offer, the withdrawn proxy contest, and related professional fees.

We expect positive operating cash flow in 2024, as we do not anticipate incurring similar costs, notwithstanding whatever costs may be incurred in 2024, related to the comprehensive strategic alternative process that we announced in late September 2023. Adjusted EBITDA is revised and now expected to be in a range of $35 million-$38 million for 2023. Capital expenditures are expected to range between $15 million-$20 million for 2023. In summary, we generated strong financial results against a continued challenging backdrop, and we remain encouraged by the level of engagement with our customers and confident in our long-term growth and profitability potential. With that, let me turn the call back over to Yoav for closing remarks. Yoav?

Yoav Zeif (CEO)

Thank you, Eitan. Our customers' appreciation and adoption of 3D printing continues to grow. As we introduce new and improved systems, materials, and software offerings, Stratasys is an increasingly critical part of their efforts to bring more agility, flexibility, and profitability to their global manufacturing operations. Additive manufacturing has established a formidable beachhead in manufacturing at scale, one that we expect will grow in adoption as the technology continue to demonstrate real-world success stories, and we will be at the forefront. We have proven time and time again that Stratasys is the industry leader, demonstrating the ability to manage the business through tough times while still delivering superior results and profitability. I'll conclude with a few thoughts on our announcement in September to explore strategic alternatives to maximize shareholder value. Over the past few years, Stratasys has consistently outperformed our sector on both financial metrics and business fundamentals.

We have continued to accomplish this even during challenging business environment this year and the excessive M&A noise in our space. Our focus remains on maximizing shareholder value while being cognizant of the near-term headwinds. We expect the industry and macro headwinds will abate, returning us and the industry to a period of sustained growth and increased profitability. With that, let's open it up for questions. Operator?

Operator (participant)

Thank you. We'll now be conducting a question and answer session. We ask you please ask one question and one follow-up... If you'd like to be placed into question queue, please press star one at this time. One moment, please, while we poll for questions. Our first question is coming from James Ricchiuti from Needham & Company. Your line is now live.

James Ricchiuti (Senior Analyst)

Thank you. Good afternoon. A question on the F3300. I wonder if you could talk about the factors that led to the delay and what I guess is now a commercial availability in the first half of the year. Did it require some additional tweaks? And, you know, what does the sales pipeline, the early sales pipeline look like for this machine? Thank you.

Yoav Zeif (CEO)

Thank you, Jim. I appreciate the question. I would say that what led to the delay is the high commitment of Stratasys to quality. So, we know that this machine is going to manufacturing, and we could not compromise on the quality. We worked to develop this machine together with many customers that were exposed through NDA to the different features and recommend it, and we already use it in Toyota. They are already using it. They, you know, share their view about the machine in Formnext last week, and there was, like, a lot of excitement there. I can only say that it's a very slight delay. We have very strong demand to this machine.

We have already purchase order, and we have full confidence that that will be a transformative offering in manufacturing, mainly in aerospace and automotive spare parts, but also in tooling, jigs and fixtures. It's a completely different scale, different delivery, different value proposition, and that's why we already have customers that develop the machine with us, waiting to start engaging and start operating the machine in real manufacturing. Of course, also other customers in the pipeline, except for Toyota. I'm not talking about only Toyota, but the top manufacturers in the world.

James Ricchiuti (Senior Analyst)

Got it. That's helpful, Yoav. Thank you. My follow-up question relates to GrabCAD. How should we be thinking about the GrabCAD revenue opportunity with your customer base, and particularly as you're starting, as you begin expanding it to more of the product portfolio?

Yoav Zeif (CEO)

Thank you, James. GrabCAD is an essential part in our strategy, I would say in two different routes. One, we believe we need to give our customer the best experience and to make sure that any additive manufacturing operator has, when he's working, he is fully productive and has the best, friendly operating system. So it's all about productivity and make the life of additive manufacturing operator much easier. And when we are talking about GrabCAD, this is, we first take the customer perspective. What's going on with software in our industry is that, sorry to say, but it's almost a mess, because you need four or five different software in order to print one part. And our vision is to take our strength, which is based on the fact that we are producing the systems, we know the logs, we know the data, we know everything.

We have the largest install base, and we have the best operating system. So those are the pillars. Now we are taking those pillars, and we said, "Okay, let's make it a platform." Connect it to every partner that can make the life of the operator easier, like simulation partners, like, inventory traceability partners, like dashboard partners, and also being able to connect to all our fleet on the other side. Now, we take this GrabCAD and we say, "Okay, we want to make your life easier." The way to make the life of our operators or customers easier is to smooth the way they are running the operation. And when we are doing it with GrabCAD, we are bringing new products to the market.

The forecast of software in our industry get to $3 billion in the next five years, and we will capture this part that is not the manufacturing enterprise system, but those parts that really make the operator life more productive and easier. We have great growth margin there, and we already launched two products, OpenAM, what we call OpenAM. So you, if you buy our software, subscription-based, you can use other materials, and we launch what we call GrabCAD Print Pro, which has fantastic features that increase the productivity. For example, what we call the accuracy center, where you can use AI to close the loop between the end-use part and the file. And you put it together, you are becoming more productive because you print much more accurate parts. This is the direction. It's going really well.

Just, as an anecdote, in the last quarter, 50% of our sales in SaaS and in FDM, we attach to the sale, the GrabCAD Print Pro. So I'm very optimistic about GrabCAD. It will be an essential part in our recurring revenues going forward.

James Ricchiuti (Senior Analyst)

... Thank you, and congratulations in what's clearly a difficult environment on a lot of levels. Thank you.

Yoav Zeif (CEO)

Thank you.

Operator (participant)

Thank you. Next question is coming from Greg Palm, from Craig-Hallum. Line is now live.

Danny Eggerichs (Equity Research Analyst)

Hey, this is Danny Eggerichs, on for Greg today. Thanks for taking the questions. I kind of just want to start by digging into more broad-based, what you're seeing and, and maybe the implied, you know, Q4 guide. I get kind of the $5 million takeout from the divestments, but on, on the F3300, delay, I mean, were you expecting a, a decent size contribution in Q4? Or how much of it is, is just related to a broader, you know, sales cycles lengthening and some order pushouts into the, 2024?

Eitan Zamir (CFO)

So we're not getting into the specific numbers of the F3300 contribution for Q4. But as you have mentioned, this is a significant product and a significant launch. So once we reach the commercial launch, we did expect a contribution to Q4, and that has an impact on our Q4 guidance.

Yonah Lloyd (CCO and VP of Investor Relations)

Danny, it's Yonah, by the way. You asked about the order pushouts. So the delay had nothing to do with order pushouts at all. It clearly was only related to making sure we got the best product out.

Danny Eggerichs (Equity Research Analyst)

Yep, got it. Okay. I think, yeah, my order pushout was kind of more broad-based and not necessarily related to the F3300, but that makes sense. I guess maybe shifting over to kind of the medium-term targets that you got out there. I think, you know, most of those are below the revenue line or kind of fiscal year 2024. Just wondering if you feel like you're still confident that you'll be able to achieve all these, you know, maybe just assuming that the macro, you know, stays consistent for the near term or next couple of quarters.

Eitan Zamir (CFO)

Danny, it's a good question, and the answer is that we have confidence. And the main reason is that most of those measures are within our control, and I explain. We've created an infrastructure, both on the cost side, on the gross margin side, on the cash flow side, that are within our control. So even in a challenging macro environment, we do have the levers, and we do have the infrastructure to maintain low OpEx and to improve our cash flow. So the 50%+ gross margin in 2024, the operating cash flow positive in 2024, and the ability to maintain good OpEx level as a percentage of revenue, that's something that we're very focused and believe that can be achieved even in a challenging macro environment.

Danny Eggerichs (Equity Research Analyst)

Got it. That's helpful. Maybe just one more touching on dental. I think last quarter you had mentioned a top five denture producer had or was committed to acquiring a system, but what's the update on that? Did that hit? And maybe progress on some other potential sales within that space.

Yoav Zeif (CEO)

Thank you for the question. You know, in one sentence, it's the highest revenue quarter in dental ever. So I think that's a good reflection of where we are. Our strategy is working both on the TrueDent side, but also on the replenishing of the portfolio, both on the printer side, but also on the material side. It's really working well. Also, on the regulatory front, we are receiving on time the approvals that we are waiting for, and we will see more growth there, especially because we are focusing on what we call restorative dental. So we are less sensitive to the current macro environment, where you have discretionary, you know, sectors like the aligners and others, where are quite sensitive to inflation, interest rate, income.

On our end, we are focusing on restorative, on dentures, on removable dentures, on models, on crown and bridges in the future. So and we do it with a truly disruptive use case. So we are not—there is no me too in our offering. Nothing here. It's about innovation, again, making the life of the dentist and the technician much easier, multi-material, multi-colors, high aesthetic, almost no labor. We are transforming this restorative sector.

Danny Eggerichs (Equity Research Analyst)

Great! I will leave it there. Thanks.

Operator (participant)

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

Ananda Baruah (Senior Equity Analyst)

Hey, yeah, thanks, guys, for taking the question. Yeah, our thoughts are certainly with you all and everyone with all that's occurring in your neck of the woods. I guess a couple for me, if I-

Yoav Zeif (CEO)

Thank you.

Ananda Baruah (Senior Equity Analyst)

Yeah, you're very welcome. A couple for me, if I could. I guess just to start, like, on the macro and bigger picture, what's a useful way for us to think about as macro, say, clears up, you know, begins to improve, whenever that occurs, 2024 going into 2025, key milestones or I'll use the term milestones, but key milestones, key occurring with, with your industrial folks. The auto announcements are obviously, you know, quite exciting. So inside of auto, but even more broadly, aero and general industrial, what's a useful way for us to think about the dynamic signposts that, that kind of need to occur or will be occurring that can continue to amplify the activity into those environments?

Yoav Zeif (CEO)

Thank you, Ananda. Many, you know, big thank you for your support. We don't take it for granted, and really, I want to thank all our customers and industry peers. The support we are receiving over the last month and a half is amazing and worth mentioning. So thank you. So maybe I'll start with the macro situation, and what I believe are the main factors that will put us and the entire industry back on track. And then I will relate to the specific milestone for Stratasys in specific vertical. So I'll start with the macro. What is the, you know, those factors that really impact us? And it's very clear that those are two, I would say.

The uncertainty immediately, because we are going to manufacturing, and I will explain when I'll get to Stratasys. We are going to manufacturing. It's a very simple but laser-focused strategy. When you go to manufacturing, you are challenging the status quo, and when there is uncertainty, the tendency of the largest manufacturer in the world to change the way they're doing things is lower by definition. At the same time, there is this interest rate pressure, because at the end, it's CapEx, and there is the cost of the CapEx is the interest rate, and it's all starting with inflation and so on and so forth. But what we see now is that the inflation is stabilizing, starting with the U.S., so we are positive on this side.

Also we see that no matter what happen in the new state of the world, not with a 0% interest rate, but with 3% or 4%. Also, in this world, the large manufacturers need to start a new, I know, a new cycle of innovation and production. And we see it, and I have plenty of stories of those, on those. And when they are starting this new cycle, they are looking at additives. So those are the milestone, macro-wise and by, I would say, leading manufacturer. Each one of them has its own story, but if it goes to electric vehicle or it goes to a new, airplane or a new rocket or whatever, we are there. And this is the place where we can shine. Why as Stratasys we can shine? Because they are looking at digital manufacturing in their new journey.

And this is what we have done for the last almost four years. We developed the best solution for real polymer manufacturing. You take the SAF, and we do it, by the way, in two directions. One is the best building blocks, hardware, material, software, and the other one is the tailoring of those building blocks into real solution per use cases. So you take the SAF, we believe this is the best cost per part in the industry. The best cost per part, you can do bulk parts, no one else can do them, and then we take them to machine components. This is a use case, and you will see that we will be more and more in those machine components. You take the P3, the part properties are unique, accuracy is unique, so we target connectors, and we have unique results there.

You take FDM, we have proven use cases in spare parts, aero and auto, and you do it- you see it also in jig and fixture and tooling. This is not one machine, not two machine. We're talking about hundreds of machines that are doing it already. You take PolyJet, we took them to use cases. We are transforming the PolyJet from prototyping into use cases, which are real manufacturing, like dentures and removable dentures. You take the new stereolithography, we are focusing on investment casting, we are focusing on, wind tunnels. For example, F1, the majority of the F1 player are using our materials and our machines. So the direction is clear. What you need to look when you look at the future and the milestones, is that we are making progress in those manufacturing use cases, and we do it through digital solution.

By the way, we're using a lot of AI in that, because we want to make sure that the accuracy is there. Also in the F3300, by the way, it's a new suite of sensors, and we make sure that those sensors will capture the data, and we will leverage the AI solutions that we developed together with the Riven guys to improve the part quality.

Ananda Baruah (Senior Equity Analyst)

That's a lot of super helpful context. I really appreciate that. I'll, I'll cede the floor there because I'm sure there's, there's more questions, and that was really helpful. Thanks so much.

Yoav Zeif (CEO)

Thank you.

Eitan Zamir (CFO)

Thank you.

Operator (participant)

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

Tyler Hutin (Equity Research Associate of Industrial Technology)

Good morning. This is Tyler on for Brian. Appreciate you guys taking my questions. I just want to start it with, you guys mentioned that you had your record high recurring consumables revenue, and obviously there's a lot of printer utilization. Can you just touch on what end markets you're seeing the greatest utilization in?

Yoav Zeif (CEO)

So, great question. So we have five technologies, and what we have done over the last three years is that we made sure that we are matching the hardware with the best material portfolio. So there, no one in the industry has a larger polymer material portfolio than Stratasys. So we started with FDM and PolyJet. Then we acquired Covestro, and Covestro brought to us also the stereolithography, liquid resin, some DMP liquid resin. That one of them we already launched, an amazing new material with unique durability outside in tough weather and also powder. So the strategy is very clear. We build a full solution, and we make sure we have enough recurring revenue, and that's the place of the material.

So when we look at the material, we want to make sure that we have materials that are tougher, stronger, with the right properties for manufacturing, because we have a clear, solid strategy, and we need also the material to support this strategy. And this is where we see also the increase in demand. We are less focusing on rapid prototyping, although we are selling quite a lot there, but we are focusing on real manufacturing. So this is the direction, and manufacturing is, by definition, 4-5 times more consumption, what we call unit economics. More consumption per unit, per machine than rapid prototyping. So there, this is the place we see the growth in the demand.

Tyler Hutin (Equity Research Associate of Industrial Technology)

I appreciate the color on that. Just a quick question, for the Covestro acquisition, was that about $5 million in revenue for the quarter?

Eitan Zamir (CFO)

Yeah, as we mentioned, in the past, the run rate for Covestro is roughly $20 million a year, and this quarter, it was roughly $4.5 million impact on the quarter.

Tyler Hutin (Equity Research Associate of Industrial Technology)

Okay, appreciate that. I'll pass it on.

Operator (participant)

Thank you. Next question is coming from Jacob Stephan from Lake Street Capital. Your line is now live.

Jacob Stephan (Senior Research Analyst)

Yeah. Hey, guys, thanks for taking my questions. I just kinda want to focus on the divestitures you made here in the quarter. You know, I guess I'm just trying to get a sense on, you noted they were running at kind of an operating loss, you know, how much can we kind of expect of operating margin left here?

Yoav Zeif (CEO)

Hi, Jacob. Welcome to the team of analysts.

Jacob Stephan (Senior Research Analyst)

Yeah. Thank you.

Yoav Zeif (CEO)

So let me start with a few sentences about SDM and why it's important in the big scheme of Stratasys, and then I'll let Eitan share the specific data. So we call it SDM 2.0. Why? Because SDM is critical for our success going forward. We are going to manufacturing, and SDM is manufacturing. And we focus SDM this year only on additive manufacturing with our technologies. We restructured it. We moved from... I know, when I started, we had eight sites to three sites, very large sites with scale, very productive, based on our technologies, the SAF, the SDM, the Origin, the PolyJet for manufacturing solution, and also Stereolithography, like investment casting, real manufacturing. So that's the idea.

Once you have a strategy, we decided to divest the others that are not meeting the strategy, which is mainly the urethane business that we had in California and the laser metal that we had in Austin. This is part of the overall commitment of Stratasys to profitability. We are the only public company, the only profitable public OEM company with positive cash flow, and we keep doing it. We'll keep improving the quality of the business and to deliver on our forecast as we did for the last 12 quarters. So we are very strong, but we are strong because we are doing those step-by-step disciplined steps to improve the quality of the business. I let Eitan share the data.

Eitan Zamir (CFO)

Sure. So, Jacob, I guess the, as we mentioned, the impact of those two divestment, first of all, only one of them impacted the Q3 result, and that was, roughly, $1.5 million impact on the revenue in the quarter. We expect, the impact on 2023, of the divestment of the two businesses to be roughly $5 million on revenue. As you mentioned, those two businesses, were loss-making and negatively impacted our total profitability. So we expect that the, the investment of those two businesses will have positive impact both on our gross margins and our bottom line. But we won't get into the specific details.

I would just say that, you know, the numbers that you see for 2024 and will also be on Q4, on gross margins and the other aspects also benefit or enjoy those two divestments. That's one of the pillars.

Jacob Stephan (Senior Research Analyst)

Okay. That's, that's helpful. And then maybe just kind of on the, you know, strategic alternatives, you know, is, I guess, you know, what's, what's the timeline here? When do you kind of expect things to be, I guess, wrapped up?

Yoav Zeif (CEO)

So you know that we cannot comment it. It's at, it's at the board level, but I can just share the, the frame in a sense. We announced it. We announced that we are in a process of strategic alternatives. This process started. We are engaging. We have good interactions. We are engaging and, you know, we are doing the best for our shareholders, and we are taking the time to do it. There is now a war in Israel, and still, we are doing the best to make sure that we are there, and we are enhancing the shareholder value through this process.

Jacob Stephan (Senior Research Analyst)

Okay, understood. That's all I had. Thanks, guys.

Yoav Zeif (CEO)

Thank you.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Yoav Zeif (CEO)

So I would like to thank you for joining. I would like to thank our team for an amazing work and for really maintaining the business and doing much better than anyone else in this industry. So I want to thank the Stratasys team, and I'm looking forward to updating you again next quarter. Thank you.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day.