The Q2 2023 earnings report from Materialise (NASDAQ: MTLS) has revealed an uptick in total revenue. However, this positive was somewhat overshadowed by the company’s shift from a net profit last year to a net loss this year. A large part of this downturn can be attributed to an adverse arbitration award — a decision by an arbitration panel against the company, leading to financial penalties. Excluding this unexpected setback, the company would have showcased a robust adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin, highlighting the influence of unpredictable financial risks on business performance.
According to Materialise’s earnings report, total revenue for the quarter scaled to €28.4 million ($31.5 million), indicating strong business operations and successful market strategies, but the bottom line raised some concerns. The company moved from a net profit the previous year to a net loss of €494,000 ($547,000), or 1 cent per share, in this quarter.
A closer look at the results of the period ending June 30, 2023, points to the adverse arbitration award as the primary financial challenge. This negative resolution of the arbitration proceeding in an indemnification dispute with musculoskeletal healthcare firm Zimmer Biomet (NYSE: ZBH) related to specific joint replacement devices set a substantial €5.2 million ($5.8 million) burden on Materialise.
Although the arbitration award has been a setback, it’s not uncommon for businesses, even the most successful ones, to face legal or financial challenges that temporarily disrupt their financial reports. What’s more crucial is how the company plans to move forward.
During an earnings call with investors, Materialise Founder and CEO Wilfried Vancraen highlighted the challenges faced in the second quarter of the year, underscoring that despite these challenges, the medical segment had a robust performance with revenue increasing 20%, even outperforming Q1. He also stressed the need for strategic investments in the brand’s medical division, especially as personalized implants in the US market become “a major growth driver.”
“Until now, Materialise manufactured titanium CMF [cranio-maxillofacial] implants solely at our 3D printing facility in Belgium. This will change when our new production lining limit becomes operational this summer,” explained Vancraen. “ The new facility will not only provide capacity for vertical growth, it’ll also improve our service offerings strategically in the US. With the opening of this 3D printing line, Materialise will accelerate the delivery of patient-specific medical implants to patients in the country.”
The facility will specialize in the 3D printing of titanium CMF implants, which is crucial for various reconstructive surgeries. This US–based operation promises to drastically reduce the delivery time for these bespoke implants to under a week for local patients. This initiative not only strengthens Materialise’s existing 3D printed surgical guide production in the country but also enhances their collaborative efforts with Johnson & Johnson. Of the 280,000 personalized 3D printed devices Materialise produces annually, less than 60,000 cater to the US market.
In the second quarter of 2023, Materialise’s revenue distribution comprised 17% from software, 38% from medical operations, and 45% from manufacturing activities. Its software segment saw a revenue gain of 3.6%, totaling €11 million ($12 million). This was primarily driven by a 7% increase in recurring revenue from maintenance contracts and renewed licenses. Meanwhile, the medical business grew at a double-digit pace of around 20%. This growth was balanced between software, which surged by 26%, and medical devices solutions, which expanded by 17% across most of its lines. On the manufacturing side, revenue saw an 8.5% uptick, amounting to €28.8 million ($32 million), with the core manufacturing business lines in ACTech (a casting prototypes and small batches subsidiary) fueling this growth.
During the Q&A portion of the earnings call, Lake Street Capital Markets Senior Research Analyst Troy Jensen asked Materialise executives about the performance and growth outlook of their 3D software business, particularly the company’s expectations about when the software business might witness enhanced growth.
Company Chairman Peter Leys explained the software sector is currently struggling with a complex investment environment. He underscored that this isn’t a challenge exclusive to Materialise but is a broader concern affecting the software industry, especially those related to AM. Adding another layer of complexity, Leys mentioned the transition from engineering tools to the growth emerging from AM, which involves broader, more strategic investments. The present investment climate, he stated, tends to delay these strategic expenditures. Furthermore, Leys mentioned that software deliveries are often more time-consuming than engineering products, which adds to the current pressure on the software business’s growth.
On the profitability front, Materialise recorded growth in adjusted EBITDA, which led to €4.8 million ($5.3 million), marking a more than 12% increase from the €4.3 million ($4.8 million) reported in the same period last year. This ended in an adjusted EBITDA margin of 7.3%, described by management as a testament to Materialise’s top-line growth alongside continued investments in R&D.
After the release of its quarterly earnings on July 26, 2023, Materialise stock declined by 7.35%, closing at $8.06. Before the report, Wall Street analysts had given the stock an average rating of “Strong Buy,” according to InvestorsObserver. The company’s market cap currently stands at €463.2 million ($513 million). This valuation marks a decline from August 2021, when it reached its all-time high of €3.8 billion ($4.2 billion)
Materialise’s leadership remains bullish about the company’s prospects. The business said it reaffirms its guidance and expects to report consolidated revenue towards the high end of the €255 million ($283 million) to €260 million ($288 million) range in sales for the full year 2023. Despite the unexpected arbitration award from last May, Materialise expects adjusted EBITDA guidance between €28 million ($31 million) and €33 million ($37 million) for the fiscal year.