2023-06-02 09:17:35 ET
Summary
- Materialise's business is still recovering from the pandemic, contributing to strong growth, along with high demand in the Medical segment.
- MTLS's software and manufacturing investments are yet to really pay off, but could begin contributing to earnings growth in 2024.
- The valuation remains relatively low, which could be the result of investors looking through temporary tailwinds and considering potential macroeconomic risks.
Materialise's ( MTLS ) business is slowly recovering from the impacts of the pandemic and the war in Ukraine. 2023 continues to be a year of investment, though, and the company's full potential will not be realized until the expansion of manufacturing capacity and integration of software capabilities are complete. The company is executing well, and the Medical segment in particular is beginning to look like an extremely strong business.
Market
While Materialise's business is looking strong, there are a number of important macro factors to consider. Both Materialise and its customers have been impacted by supply chain pressures over the last few years, which has impacted demand and raised costs.
Supply chain pressures are abating, but inflation is still a concern for Materialise, although the worst appears to be behind the company. As a result, demand from customers in industries like automotive and aerospace is normalizing, which is probably causing Materialise's growth rate to appear somewhat elevated.
Going forward, a severe manufacturing recession appears to be forming. Manufacturing PMIs globally are weakening, and in many cases already at recessionary levels. While much of this is likely being caused by a supply chain bullwhip effect, there is also a risk of consumer demand softening from current levels. Much of Materialise's business should be reasonably isolated from an economic slowdown though, like the Medical segment.
Materialise
Materialise recently launched Magics 27, which features deeper integration into CO-AM. The update aims to improve automation, traceability and connectivity, which is potentially useful for production use cases. Magics 27 connects data, build preparation, and manufacturing execution systems to enable the tracking of part status from beginning to end. Scripting is used to automate some labor-intensive tasks, like part labeling. Magics 27 has also introduced a cloud-based integration with Materialise Machine Manager, which can connect users to their Build Processors. Materialise recently introduced its Build Processor Software Development Kit, which enables machine OEMs and end users to make their own build processors.
Materialise is also launching Materialise Process Control on CO-AM, which enables customers to introduce quality control using data gathered during the 3D printing process. This allows users to identify defective parts before they are sent to post-processing and quality inspection. This could create significant cost savings as these tasks account for up to 30-70% of a parts total manufacturing cost.
Materialise's software is expanding beyond preparing a CAD file for printing and controlling printers, to acting as a central hub in manufacturing workflows. Cloud-based processes are inherently more collaboration friendly and could strengthen the competitive positioning of Materialise's software.
Financial Analysis
Revenue growth accelerated significantly in the first quarter as Materialise’s business continues to recover from the pandemic. The strong result was realized through a combination of solid volume growth and price increases. Cross segment revenue from software products represented 29% of total revenue .
There were a number of temporary tailwinds which artificially boosted growth though. Materialise has contracts with customers that include inflation adjustments, some of which reset in the quarter contributing to growth. Issues with competing suppliers in the Medical segment also caused temporarily elevated demand.
Figure 1: Materialise Revenue (source: Created by author using data from Materialise)
Manufacturing growth was driven by both manufacturing services and ACTech services. The ACTech business grew by 49% in the quarter . The core manufacturing business also performed well, growing 11% YoY, with end part manufacturing solutions increasing 20% and prototyping solutions increasing 4%.
There is strong demand for engine and driving components for new sustainable transport systems, and Materialise is continuing to prepare for this with its new plant. This plant is expected to open in 2024, and over the next five years is expected to double ACTech output .
Certified production activity, which is aimed at small series equipment manufacturers, also continues to increase. Most of this work is confidential, but one example is the manufacturing of components for Sartorius. Sartorius is a manufacturer of bioreactors for the life science industry. Certified production activity is a focus area for Materialise and is supposed to be supportive of margins.
Medical revenue was strong on the back of a large number of patients needing elective surgery and competing solutions facing technical or regulatory issues. As a result some medical device companies were forced to turn to Materialise. This situation is expected to be temporary, but Materialise hopes that at least some surgeons will prefer to continue utilizing Materialise solutions going forward. Baseline growth in Medical is probably something more like 20%, but the high number of elective surgeries is expected to continue throughout 2023.
Table 1: Materialise Revenue Growth by Segment (source: Created by author using data from Materialise)
Figure 2: Materialise Revenue Contribution by Segment (source: Created by author using data from Materialise)
Materialise's profit margins recovered somewhat in the first quarter. Some of this was driven by:
- Scaling effects
- Disciplined management of the impact of inflation
- Cost containment measures
R&D grew by 15% YoY in the first quarter, as Materialise temporarily slowed investments in certain projects, which contributed to adjusted EBITDA growth.
Operating expenses also included the impact of Materialise's internal digital transformation project, which went live during the first quarter of the year.
Figure 3: Materialise Profit Margins (source: Created by author using data from Materialise)
Software segment margins began to recover in the first quarter as reorganization efforts moderated and acquisition synergies were realized.
Manufacturing EBITDA is improving slowly, but has been adversely affected by subcontracting expenditures to support the ACTech business line and continued investments in the Motion and Eyewear business lines.
Figure 4: Materialise Adjusted EBITDA Margins by Segment (source: Created by author using data from Materialise)
Figure 5: Materialise Operating Expenses (source: Created by author using data from Materialise)
Figure 6: Materialise Job Openings (source: Revealera.com)
Valuation
Despite the recent move higher, Materialise's valuation remains depressed. While investments are likely to pressure margins in 2023, if Materialise's recent strategic moves work out, earnings could begin moving significantly higher in 2024. The macro environment is probably the primary risk at this point. Leading economic indicators are pointing towards a recession, or a slowdown at the very least, which would likely weigh on Materialise's growth and margins.
Figure 7: Materialise EV/S Multiple (source: Seeking Alpha)
For further details see:
Materialise: Post-Pandemic Recovery Is Underway