Summary
- Materialise had a reasonably strong 2022, given the headwinds facing Europe, and management has made moves to position the company for long-term success.
- Investors appear to be concerned by continued deterioration in margins, but this should have been expected given inflationary pressures and ongoing investments.
- Materialise's stock appears attractively priced, but this may not matter until the company demonstrates improving profit margins.
Materialise (MTLS) reported their fourth quarter 2022 results on the 14th February 2023, and despite a fairly solid performance, the share price reacted extremely negatively. While revenue growth in the quarter and forward guidance were solid, investors appear concerned about the ongoing decline in profit margins. 2022 was a year of investment for Materialise, which has weighed on margins. In addition, inflationary pressures in Europe were always going to have a negative impact on the company, even if only temporarily. The company's recent strategic moves appear to be setting the company up for long term success though.
Software
2022 was a year of significant investment and transformation for Materialise's software business. Materialise acquired Link3D and integrated Link3D's cloud-based MES platform with their legacy code base. This acquisition was in support of their CO-AM platform, which gives manufacturers cloud-based access to a range of software tools that enable them to plan, manage and optimize every stage of their operations.
Materialise also acquired Identify3D in the third quarter . Identify3D provides tools that enable secure distributed additive manufacturing operations. Identify3D is already compatible with the CO-AM platform.
Materialise recently announced that QuickParts has switched to CO-AM for all of its activities. QuickParts is one of the biggest additive manufacturing service providers in the world. The CO-AM platform is targeted at organizations who operate a relatively large number of printers, and hence this could be seen as validation of the platform.
Manufacturing
Materialise is expanding their manufacturing business from rapid prototyping to include certified manufacturing operations in select verticals, like aerospace, medtech, alternative drive systems and wearables. Within the aerospace industry, Materialise has a longstanding relationship with Airbus, but they are now expanding beyond this. For example, Materialise is contributing to the manufacturing of eVTOL aircraft for Lift. They are also producing 60 components per plane in a new series of aerial survivor drones for Atmos.
Materialise is doubling ACTech capacity with the second facility. ACTech is focused on complex casted components for electric car drive-trains and chassis.
Materialise launched a new Footscan Suite for Materialise Motion in the third quarter of 2022. The foot scan software is now a CE certified medical device . While Materialise's foray into orthotics and eyewear is still nascent, it is a natural fit for their business and could drive long term growth.
Medical
The medical segment has been the strongest performing part of Materialise's business over the past few years. Materialise produces both custom medical devices and software for making custom devices and helping doctors plan surgeries.
Materialise invested in the installation and validation of a new production line for implants in the US in 2022. This line is expected to be operational around the middle of 2023.
Materialise Medical has also been investing in new products, like introducing their surgical planning software to the cloud-based Mimics platform. Materialise is also trying to leverage their clinical engineering services with AI-based automation for surgical planning.
Financial Analysis
Despite significant macro headwinds in Europe, Materialise still managed to increase revenue by double digits in 2022 , and while software growth has been weak, deferred revenue from software sales increased by more than 20% in 2022.
Materialise expects to increase revenue by more than 10% in 2023, with Materialise Medical and Materialise Manufacturing driving growth. Materialise Software sales are also expected to grow, but this will likely be muted by the switch to a subscription-based model.
In 2022, the increased costs of labor of energy and of materials weighed heavily on Materialise's margins. Despite this, Materialise has continued to invest in R&D and capacity expansion in their three segments. The impact of inflation was particularly prominent in the fourth quarter as a number of Materialise's contracts with fixed prices were adjusted. Assuming that inflation stabilizes in 2023, adjusted EBITDA is expected to increase by more than 30% in 2023, implying substantial margin expansion.
Restructuring from the integration of Materialise's sales team with the Link3D and Identify3D teams contributed to the deterioration in software margins. The transition to the cloud is also weighing on the software business, but a gradual increase in sales and margins is expected going forward. License renewal rates in 2022 were greater than 90%, which indicates that the software business remains solid despite the ongoing transformation.
Medical and manufacturing margins are also expected to improve going forward, with manufacturing margins expected to increase to a double-digit level in 2023.
While Materialise is investing more heavily in R&D at the moment, the burden of R&D expenses is actually still fairly modest. Improvements in the productivity of sales and marketing expenditures will likely be key to expanding margins going forward.
Valuation
After the recent share price decline, Materialise now appears attractively priced, but this does not mean the share price can't drop further. Investors are currently myopically focused on profits and short-term performance. This potentially creates an opportunity for longer term investors who are willing to hold through volatility.
For further details see:
Materialise: A Solid End To The Year, Despite The Market Reaction