21 July 2014 Americas/United States Equity Research Electrical Equipment Materialise (MTLS) Rating OUTPERFORM* [V] Price (18 Jul 14, US$) 12.46 INITIATION Target price (US$) 15.00¹ 52-week price range 14.46 - 11.50 Market cap. (US$ m) 601.47 Software Play with Exposure to Key 3D Growth *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. Engines: Medical & Increasing Production Use ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Materialise is a provider of additive manufacturing software and on-demand parts printing headquartered in Belgium. We initiate coverage with a $15 target Research Analysts price and an Outperform rating; the justification for our view is as follows. Jonathan Shaffer 212 325 1259 ■ Company Revenues Likely to Grow with Overall 3D Market: We currently [email protected] forecast medium-term 3D printer market growth of ~25%, with some OEMs Julian Mitchell guiding for organic growth of 30%-plus. The increasing installed base of 212 325 6668 production printers directly drives demand for MTLS software, and peer on- [email protected] demand parts data suggest this market will remain quite strong. Charles Clarke 212 538 7095 ■ Why Materialise over Other 3D Plays? MTLS is a hardware-agnostic play [email protected] on 3D printing market growth; its software is compatible with nearly all printer types, alleviating the need for investors to pick technological winners and losers. MTLS has high exposure to key industry drivers such as medical devices, shifting mix toward production parts, and less cyclical software. ■ Significant Potential Upside from Medical: We think MTLS is an excellent way to play the long-term adoption of patient-specific medical devices and virtual surgical planning, given close existing relationships with major device OEMs, high-density medical software IP, scope for metal device penetration (currently testing), and 40% revenue exposure to Medical. We are encouraged by the high growth in medical software (+19% in Q114) relative to hardware and think this will yield improved mix, with a significantly larger contribution from higher-margin software. Medical software also creates a cross-selling opportunity for the high-margin 3D Printing Software segment. ■ Valuation. We base our analysis on EV/sales (of peers) and DCF, giving a slight premium to MTLS versus peers for Medical exposure, 75%+ EBITDA from recurring-type software businesses, significant potential margin upside relative to peers, and untapped metals on-demand parts market. Share price performance Financial and valuation metrics Daily Jun 25, 2014 - Jul 18, 2014, 6/25/14 = US$11.55 Year 12/13A 12/14E 12/15E 12/16E 15 EPS - (Excl. ESO) (Eu) 0.36 -0.05 0.02 0.10 14 EPS (CS adj.) (Eu) 0.36 -0.05 0.02 0.10 13 Prev. EPS (CS adj.) (Eu) — — — — 12 P/E (CS adj., x) 25.8 -182.7 412.3 88.6 11 Jun-14 P/E rel. (CS adj., %) 143.2 -1,102.1 2,767.9 659.9 Price Indexed S&P 500 INDEX Revenue (Eu m) 68,722.0 78,306.8 94,932.2 111,391.0 EBITDA (Eu m) 7,610.0 3,703.8 7,755.5 12,873.5 On 07/18/14 the S&P 500 INDEX closed at 1978.3 Net debt (Eu m) 3,718 -55,783 -48,982 -50,628 OCFPS (Eu) 0.86 0.03 0.10 0.19 P/OCF (x) — 270.8 96.5 48.8 Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 48.27 Price/sales(x) 5.09 2013A — — — — BV/share (Next Qtr., Eu) — P/BVPS (x) 4.8 2014E — — — — Net debt (Next Qtr., Eu m) — Dividend (current, Eu) — Dividend yield (%) — 2015E — — — — Source: Company data, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 21 July 2014 Executive Summary Core rationale behind our Outperform rating and $15 TP for Materialise are as follows: ■ Growth outlook only slightly below peers ■ Significant scope for margin improvement ■ Medical upside potential if customer issues are resolved ■ Currently unaddressed Metals opportunity in Medical (hardware) and Industrial Production ■ High proportion of recurring revenue ■ Valuation in-line / below peers Company Overview Materialise is a provider of additive manufacturing (AM) software and printing services headquartered in Belgium, employing 958 full-time employees worldwide. The company makes software for 3D printers and also uses 3D printers to directly manufacture printed parts for Medical and Industrial customers. Software products focus on two areas: (i) enabling and enhancing the functionality of AM printers and groups of printers operating together and (ii) helping doctors with (a) virtual surgical planning and (b) converting medical images to 3D models and designing patient-specific 3D printed implants. Hardware products also focus on two areas (i) patient-specific medical devices and (ii) industrial prototypes, production parts, and consumer products. Materialise is divided into three divisions: 3D Printing Software (all software), Medical (50% software, 50% hardware), and Industrial Production (all hardware). The respective growth drivers for each segment are: (1) increasing complexity of the AM market, rising demand for patient-specific evidence based functional medicine, and increasing additive manufacturing of end parts. End markets served are concentrated in industrial and medical and in particular automotive and orthopedic. Other end markets include aerospace, consumer, and art & design. Materialise (MTLS) 2 21 July 2014 Exhibit 1: Materialise Company Overview in millions, unless otherwise stated Materialise Geographical Split Revenue Split EBITDA Split Product Split Clinical Industrial Clinical serv ices dev ices 3D Printing Production 3% Europe 19% Softw are 9% 55% Industrial 19% Production Softw are 40% 3D Printing serv ices Americas Softw are 15% 36% 46% Medical 45% Printed Parts Softw are 40% licenses Medical Asia-Pacific 14% Roy alties & 41% other fees 9% 9% 2013 3D Printing Software Medical Industrial Production Segment Total Sales (mn) 13.4 28.0 27.2 68.7 % of total 20% 41% 40% 100% EBITDA (mn) 5.1 5.0 1.0 11.1 % of total 46% 45% 9% 100% EBITDA Margin (%) 38.3% 17.8% 3.8% 16.2% Products/ Services Proprietary softw are Clinical Services, Medical Softw are Rapid prototyping, 3D printing technologies Major Brands Magics, MiniMagics, 3-matic, estage & Streamatics 3-matic, Mimics Mammoth, RapidFit, MGX, i.Materialise Medical Modeling, SimpleWare, 3mensio, Apollo & WITHIN ARRK, Alphaform, Cresilas & 3D Systems Main Competitors Autodesk, Sassault Systemes, PTC Lab Shapew ays & Sculpteo Phonak Ford, Airbus, Boeing, EADS, Hyundai, Stratasys, Johnson Controls, Jaguar Land Rover, Koninklijke Philips Main Customers Biomet, DJO Surgical, Synthes and Zimmer Toyota, 3D Systems and Renishaw and Siemens Sales By Region Americas 36% Europe 55% Asia-Pacific 9% Source: Company data, Credit Suisse estimates. Where Does Materialise Play in the 3D Printing Process? An engineer designs (or scans) an object in three dimensions using CAD (computer-aided design) software. Proprietary software from Materialise takes the engineer’s CAD design and mathematically slices it into cross sections. The software then determines the dimensions of the cross sections, inserts the necessary support structures, and communicates the order of assembly to the machine. The machine builds the object layer by layer (or point by point), typically using the materials provided by a print head and forming each cross section using the specifications from the CAD design. The finished product may require polishing or other final treatment. Exhibit 2: Materialise Provides Software that Gets a CAD Design to Print and Sells Finished Goods to Customers Design in CAD Print Finished good or Design in 3D CAD Export to .stl file Scan 3D Print Software Convert CAD file Finishedfor endProduct user to printable format Source: Credit Suisse research, Stratasys. Medical software converts medical imaging into 3D patient models. This allows for both virtual surgical planning and the printing of custom medical devices. Materialise (MTLS) 3 21 July 2014 Exhibit 3: Medical Image Conversion Software for Surgical Planning and Device Printing Source: Materialise. In the context of other 3D OEMs, Materialise has a broad offering from design to manufacture, but unlike other major players, it does not manufacture any printers to sell. Exhibit 4: A Full Product Offering Ex Hardware Direct prototypes plastic Direct prototypes metal * Design Indirect prototypes Cloud printing Medical parts Manufacturing Direct parts Indirect parts Cloud platforms Software Digital threading Consumer printers Hardware Industrial printers ** Materials Source: Credit Suisse, 3D Systems **Materialise has a large-build proprietary printer "the mammoth" for in-house use only; Materialise is currently experimenting with direct metal printing for medical hardware. What Do They Sell? Materialise sells software to customers that own 3D printers in order to enhance their efficiency and throughput. The company also uses printers it has purchased in order to manufacture parts designed by customers (primarily medical devices and automotive). Materialise (MTLS) 4 21 July 2014 Exhibit 5: Total Co Hardware & Software Sales Split Exhibit 6: Total Co Hardware & Software EBITDA Split %, unless otherwise stated %, unless otherwise stated Hardware, 23% Software, 40% Hardware, 60% Software, 77% Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Key products include: 1. Software that converts a CAD file into a 3D printable format 2. Software to optimize a specific 3D customer application (e.g., to enhance hearing aid throughput on a 3D printer) 3.