![Materialise (MTLS) Rating OUTPERFORM* [V] Price (18 Jul 14, US$) 12.46 INITIATION](http://data.docslib.org/img/cf813f3175d062da2d7e17ab9cd1a7e2-1.webp)
21 July 2014 Americas/United States Equity Research Electrical Equipment
Materialise (MTLS) Rating OUTPERFORM* [V] Price (18 Jul 14, US$) 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. Software to organize and integrate a "factory" of multiple printer types and brands 4. Software for virtual surgical planning 5. Software that converts patient medical images into 3D printable custom devices 6. Manufactured patient-specific medical devices (e.g., drill guides, cranial plates) 7. Manufactured on-demand prototypes and end-use parts
Exhibit 7: Businesses Breakdown Across the Three Reported Divisions
3D Printing Software Medical Industrial Production
Additive RapidFIT - imaterialise - Clinical Services - Magics, Streamics and other Medical Software Manufacturing 3D printing users design their Patient analysis & softw are for 3D printing file - Medical image Solutions - fixtures for ow n home printing surgical conversion & production analysis prototyping and 3D auto quality furnishings & guides printing of parts control jew ellery
Source: Company data, Credit Suisse estimates. MEDICAL GUIDES are 3D printed, patient-specific structures with holes to guide surgeons on where incisions should be made on the skin or bone during implant surgery.
What Are the Growth Drivers? In Exhibit 8, we show Materialise's key segments and outline the key drivers.
Materialise (MTLS) 5 21 July 2014
Exhibit 8: Materialise Cheat Sheet Segment / revenue Business model / Routes Products / Services Customers Competition Growth Drivers share / EBITDA margin to market Revenue generated via 1) Softw are products for 1) Increasing complexity of 3D licences, 2) maintenance 3D Printing Software manufacturing 4,000 customers printing machine set up (from contracts or 3) custom Autodesk, Dassault, segment (20% of planning, product including Ford, Airbus, different OEMs), 2) Further softw are development. Sold PTC, Materialise, revenues, 38% 2013 design conversion Boeing, EADS, Hyundai penetration on 3D printing, 3) through their w ebsite, the netfabb EBITDA margin) (CAD to STL) and & Stratsys geographical expansion (Asia), 4) sales force and third-party product finalisation Innovation (metals based softw are) distributors. Customers include Competitors include Revenue generated by 1) Printed products and medical device softw are companies Medical segment medical guides printed for softw are that 1) Patient specific solutions, 2) companies, hospitals, such as SimpleWare, (Clinical services and customers and 2) softw are segments medical new distribution channels, 3) universities & industrial 3mensio, Apollo and software) (40% of licences and 3) maintenance images to create expansion of 'other printed guides, companies. Largest WITHIN lab. Also vs. revenues, 18% 2013 and 4) custom softw are models for 3D printing 4) innovation (e.g. Xray related customers w ere medical device EBITDA margin) solutions. Products sold or further simulations softw are) Biomet, Synthes and companies developing through sales force & w ebsite or analysis Zimmer in house softw are. Prototyping of parts Revenues generated through and also production Compete w ith industrial 1) Increasing use of 3D printed 1) sale of parts printed for Industrial production using a number of printers that provide parts in industrial applications, 2) customers, 2) product Johnson Controls, segment (40% of technologies including softw are including grow th of verticals (rapid fit & prototyping (primary revenue Jaguar Land Rover, revenues, 4% 2013 stereolithography, ARRK, Alphform, imaterialse), 3) softw are driver). Products / services Philips, Siemens EBITDA margin) laser sintering, FDM, Cresilas, 3D systems innovation, 4) increasing number of sold via sales force and Polyjet and Pow er corporation. machine production lines through their w ebsite. binding. Source: Company data, Credit Suisse estimates.
■ 3D Printing Software segment licensing revenue is recognized per printer operator, and thus the increasing number of professional & production printer units directly drives demand for software (rather than absolute number of customers), although we acknowledge that one operator can manage multiple printers and some degree of undergrowth is possible in a mature state. ■ On-demand parts markets are currently growing 20-30% as well; therefore, we expect the Industrial Production segment to grow in-line with major OEMs given broad capacity by printer type, increasing share of sales from higher value end-use parts, and scope for penetration into metals. ■ Finally, the Medical segment could see above-industry average growth in the long term, consistent with current trends (DDD highlights health care as the fastest-growing 3D end market at 40%+ annually) as patient-specific medical devices and virtual surgical planning increase in popularity.
Our Estimates We show our forecasts for Sales and EBITDA in Exhibit 9 and Exhibit 10.
Materialise (MTLS) 6 21 July 2014
Exhibit 9: Annual Sales Estimates Exhibit 10: Annual EBITDA Estimates And Margin EUR in thousands, unless otherwise stated EUR in thousands, unless otherwise stated € 120,000 25% € 14,000 14% 11.6%
€ 100,000 € 12,000 12% 20% € 10,000 10% € 80,000 8.2% 15% 11.1% € 8,000 8% € 60,000 8.5% 10% € 6,000 7.8% 6% € 40,000 € 4,000 4.7% 4% 5% € 20,000 € 2,000 2%
€ 0 0% € 0 0% 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Company Targets We estimate ~18% revenue growth in 2014-16 and an 11.6% EBITDA margin in 2016 versus the company's five-year operating model of 20-25% organic revenue growth and an EBITDA margin of 20-25%.
Exhibit 11: Five-Year MTLS Target Operating Model %, unless otherwise stated
Source: Materialise.
Potential Risks by Division: Price competition is intensifying in 3D Printing Software as 3D OEMs and open-source players focus more on file conversion software. Industrial Production could be affected by prototyping pricing pressure from competitors and sales loss as more customers invest in their own printing capacity. Medical is potentially at risk from device manufacturing competition as consolidation in that industry progresses and as customers increase their own 3D capacity. Further challenges include Materialise's on-demand parts and medical hardware capability being underexposed to metal and the near-term revenue impact from the transition to a longer-term Medical licensing model.
Materialise (MTLS) 7 21 July 2014 Addressable Market Overview Driven by Printer Hardware Materialise's addressable market is software (driven by the installed base of printers) and on-demand parts. At a high level, we estimate that on-demand parts is currently a ~$1bn opportunity and software is a ~$0.1bn market. We see significant scope for both markets to grow rapidly as production printers rise as a share of sales and the metals market takes off. (Production printers are generally used by manufacturers and thus more often require a more complete software solution). Broadly speaking, we believe that 3D Printing Software will grow nearly in-line with total Printers sales. In Exhibit 12, we show our forecasts for the total 3D printing market by type and expect the market to grow at a 25% CAGR over 2014-16.
Exhibit 12: Summary 3D Printing Market Forecasts USD in millions, unless otherwise stated 2012 2013 2014E 2015E 2016E 2014-2016 CAGR Printers 623 976 1,220 1,525 1,906 25% Materials 423 529 674 859 1,095 27% Software 80 100 123 151 186 23% Products Total 1,126 1,605 2,017 2,535 3,188 26% On demand parts 798 967 1,185 1,451 1,778 23% Service & replacement parts 365 549 700 892 1,138 28% Services Total 1,164 1,516 1,885 2,344 2,915 24% Total 2,210 3,121 3,901 4,879 6,103 25%
YoY% Printers 16% 57% 25% 25% 25% Materials 29% 25% 28% 28% 28% Software 25% 23% 23% 23% Products Total 30% 43% 26% 26% 26% On demand parts 21% 23% 23% 23% Service & replacement parts 50% 28% 28% 28% Services Total 37% 30% 24% 24% 24% Total 29% 41% 25% 25% 25% Source: Credit Suisse estimates, Wohlers historic data for 2012/13.
We do not think that our growth targets are overly aggressive in the context of 3D OEM forecasts and third-party research.
Exhibit 13: DDD 30%+ Organic Revenue Growth Guidance Exhibit 14: SSYS 25%+ in FY14; Long-Term Growth of 20%+
Source: DDD, June 2014. Source: SSYS, May 2014.
Materialise (MTLS) 8 21 July 2014
Third parties forecast higher revenue CAGRs in the medium / long term.
Exhibit 15: Third-Party 3D Market Growth Estimates USD in billions, unless otherwise stated
Source: DDD, June 2014.
Printing Software An Integral Part of the 3D Printing Process Software is a vital component of the printing process; it repairs and optimizes 3D models, inserts necessary support structures, facilitates process planning, and logistically organizes shipping of the finished product to the customer. Furthermore, certain printer manufacturers rely on third-party software vendors to provide operating software for their printers. 3D OEMs Have Adopted an Open Interface Virtually all 3D printer manufacturers allow for an open interface, where third-party software applications for designing and building parts are fully compatible with machine software and systems. When 3D printers are used in a professional environment, they generally run third-party software, with advantages including:
■ More efficient printer operations from multiple manufacturers, and
■ Potential to create more advanced and specialized end-user applications.
Competition in the additive manufacturing software market is based on factors such as product quality, the variety of AM printing system types supported, the level of customization available to customers, integration with various types of CAD files, the quality of maintenance, support services and price.
Software Demand Linked to 3D Printer Sales—Increasing Share of Production Systems and Metals The 3D Printing Software market is driven by the global installed base of 3D printing systems, and penetration of additive manufacturing as a production method used in industry. As end use parts become a large share of the parts produced by 3D printers, we
Materialise (MTLS) 9 21 July 2014 expect software penetration to improve. Part quality and machine throughput are major advantages of MTLS software, and these concerns are more relevant to production parts rather than parts for prototyping applications. Medical The Medical market is driven by demand for patient-specific medical devices such as surgical drill guides and customized implants. Third-party estimates suggest that several key medical devices represent an addressable opportunity of ~$600mn annually by 2017 (hardware only).
Exhibit 16: Global Additive Manufacturing for Medical Devices Market Revenue, by Product, 2010 – 17 ($mn) 800
600
2012-17 CAGR: 17% 225
400 64
130 270 200 114 100 25 20 16 85 106 70 84 0 20 24 30 2010 2011 2012 2017E
Tissue Engineering Prosthetics and Implants Surgical Instruments Surgical Guides
Source: Markets & Markets, Frost & Sullivan.
We highlight two key applications in Exhibit 17. Anecdotally, 5% of patients have abnormal anatomies that naturally require a custom solution. If we assume only this level is achieved by 2017, we arrive at an addressable market of ~$800mn for bracing and support as well as hip and knee implant hardware. For context, MTLS medical hardware sales are currently ~$20mn.
Exhibit 17: Credit Suisse Key Estimated Opportunities within Health Care USD in millions, unless otherwise stated Hardware Global 2014-2017 Global Penetration 2017 Market Size ($mn) Sales 2013E CAGR Sales 2017E Today Penetration 2017 Bracing & Support $2,300 5.0% $2,796 1% 5% $140 Hip & Knee Implants $10,863 5.0% $13,204 1% 5% $660 Total $800 Source: Company data, Credit Suisse estimates.
3D Printed Medical Parts Increasing Product Functionality Allows for Greater Design Complexity For many medical applications, the quality of plastic (or metal devices) manufactured by a 3D printer often matches or exceeds the part quality achieved by a traditional subtractive process. An implant design is based specifically on patient medical image data and therefore enables better tailoring of a medical procedure.
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3D printing a device yields virtually no limitations on geometry as well as increased functional performance at virtually no increase in manufacturing costs. Incremental complexity is free, thus medical device companies are increasing using AM technology to design new devices.
Medical Currently Represents a Small Portion of the 3D Market While 3D printing is being increasingly utilized in medical planning and procedures, it still represents only a small proportion of the overall medical technologies market as well as the 3D printing market. Industry consultant Roland Berger estimates that the medical field accounted for 16% of the total global additive manufacturing market in 2012 (see Exhibit 18), while MarketsandMarkets expects it to reach 18% in 2017, growing at a CAGR of 17% from 2012 to 2017.
Exhibit 18: AM—Sales by End Market in 2012 Exhibit 19: Medical AM—Sales by Segment in 2012
Consumer Tissue Other Products / engineering 19% Electronics 11% 22%
Surgical guides 45%
Tools / Molds 13% Prothetics & Implants Automotive 36% 19%
Aerospace 11% Surgical Medical / Dental Instruments 16% 8%
Source: Roland Berger. Source: MarketsandMarkets.
Opportunities Exist Across a Range Medical Devices
Replacements & Implants Frost & Sullivan estimates the global medical technologies market generated $343 billion in 2012 and will likely reach $476 billion by 2017. Within this, Frost & Sullivan estimates that the largest single sector in medical devices is orthopedics, accounting for 14% of the market equivalent to $48 billion in 2012. The two largest segments of the orthopedic market are knee and hip replacements, which globally generated >$8 billion and >$5 billion, respectively, during 2012. There were more than 730,000 knee implant procedures and more than 470,000 hip implant procedures in the United States alone in 2011 according to Frost & Sullivan, which also anticipates that the global orthopedic implant market will likely grow at an annual rate of 12%. This highlights the scale of the potential addressable market for AM manufacturing. AM offers advantages with regard to manufacturing time, materials, and geometric fit. In the case of skull implants, this can lead to faster recovery and reduced operating time. In the example of hip and knee implant procedures, the Credit Suisse health care research team estimates that, of the ~2.8m performed globally in 2013, currently less than 1% will involve a patient-specific implant. However, based on the aforementioned factors that indicate that an AM part can potentially produce better results, there is significant scope for market penetration.
Materialise (MTLS) 11 21 July 2014
Dental AM holds a large share of the dental crowns and bridges market. Aided by CAD scanning, more than 30m crowns, copings, and bridges have already been made on AM machines over the past six years, according to Roland Berger. This penetration and market share of AM should increase, as AM is currently estimated by Roland Berger to produce 10,000 copings every day, while one AM machine can produce 450 crowns per day versus a dental technician who can produce 40.
Hearing Aids Research to produce hearing aids using AM printing began in ~2001 with a collaboration between Siemens and Phonak. Since then, penetration has grown. We believe ~90%+ of current hearing aid shells produced today are AM printed Given the high penetration of AM printing within the manufacturing of hearing aids, we see this market growing at a midsingle-digit rate over the medium term and would not consider it a major growth opportunity for AM. In the context of the $3bn AM printing market today, hearing aids represent only ~3% of the market. To our understanding, hearing aids have become a "razor-blade" model (i.e., a bigger aftermarket), in which materials and other aftermarket services are a larger proportion of annual AM business.
Industrial On-Demand Parts Printing We think the 3D printed on-demand parts market is currently a $1bn opportunity, driven by CAD-proficient engineers, decreasing prototyping costs (cheaper printers), and increasing customer demand for end-use production-part manufacturing On-demand printed parts range from prototyping plastics to metal parts and sand molds. This allows customers who do not want to own and operate an AM system to print and receive custom parts.
Exhibit 20: Addressable Prototyping and Low-Volume Exhibit 21: Number of CAD Proficient Users Injection Molding Market users, unless otherwise stated USD in millions, unless otherwise stated
Source: ORCInternational via Proto Labs. Source: ORCInternational via Proto Labs.
There are also a variety of independent service bureaus or businesses that purchase 3D printers from OEMs and supply on-demand parts to a variety of customers. Most service bureaus offer CNC machining and injection molding in addition to additive manufacturing services. 3D Systems, for example, started its on-demand parts businesses via the acquisition of independent service bureaus, and we expect consolidation and vertical integration to continue. OEMs have a significant cost and service advantage in this market (as OEMs get printers and high-margin materials at cost), especially for 3D printing-focused service bureaus.
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Exhibit 22: Service Providers—Recent Notable Consolidation Date Event Comment Jan-14 RTI International Metals purchases Direct A commercial titanium supplier to aerospace purchases a Texan service provider specialising in metal Manufacturing and powder bed fusion. Apr-14 Stratasys acquires Harvest Technologies Two of the most respected and successful US service providers. Combined with Redeye will create and Solid Concepts one of the most diverse service providers in the world Apr-14 Proto Labs acquires FineLine Protoyping Proto Labs provides proto-types and short run production using conventional manufacturing while FineLine is an accepted service provider Source: Bloomberg, Credit Suisse estimates.
On-Demand Parts Market Has Grown at 20%+ The on-demand parts businesses across DDD, SSYS, and PRLB have grown 20-35% over the 2012-13 period. We show key examples of customer applications in Exhibit 23.
Exhibit 23: AM Product Examples by End Market Segment Endmarket Product example Consumer Products / Electronics Production of tools and manufacturing equipment, embedded electronic devices Aerospace Lightweight parts with complex geometry (eg. Fuel nozzles). Turbine blades Automotive Rapid proto-typing (visual aids, presentation models), special components for motorsport Energy Stationary turbine components Tool / Molds Manufacturing inserts, tools/molds with cooling channels, direct tooling Medical / Dental Dental bridges, copings, crowns, caps, invisible braces. Customised prosthetics Other Industrial areas - military, architectural, oil & gas, space. Consumer market - collectibles, jewellery Source: Credit Suisse research.
On-Demand Parts Helped by New Customers Coming to Market As an example, we still see strong uptake of new customers from the likes of PRLB, suggesting increased customer awareness is continuing to create new sales opportunities.
Exhibit 24: Proto Labs' Customer Count by New and Existing customers, unless otherwise stated 10,000
9,000 Existing Customers New Customers
8,000
7,000 3,020 2,990 6,000
5,000 2,600 4,000 1,910 3,000 5,730 1,280 4,780 2,000 3,430 2,480 1,000 1,810 - 2009 2010 2011 2012 2013
Source: PRLB.
On-Demand Parts Sales Are Trending Positively Historically, the service provider facilities housed one or two AM technologies, with growth limited by a lack of access to capital. Maturity of the market has improved access to capital, with service providers allowing a much broader offering. In addition, there has also been
Materialise (MTLS) 13 21 July 2014 the evolution of a new type of service provider combining content, co-creation tools, and manufacturing services. Examples of this include Shapeways and i.materialise, through which designers can upload their AM creations (as well as offering their design for sale), choose materials and color, view prices, and order the parts. Sculpteo is another online provider that offers content, AM printed parts, and the option of selling the design. Thingiverse (MakerBot Industries) offers, among other things, sharing of digital content, while Cubify (AM Systems) offers AM digital creations, digital models, and simple co-creation apps.
Materialise (MTLS) 14 21 July 2014 3D Printing Software Segment (20% of Sales) The 3D Printing Software segment develops proprietary software that enhances the functionality of almost all types of 3D printers (Arcam, 3D Systems & Stratasys, for example). The primary software function is to convert CAD files into a format that is ready to print. MTLS also offers software that efficiently organizes 3D printing workflow and logistics (i.e., "factory" automation for a group of printers). A key advantage of Materialise software is that it is compatible with almost all 3D printers. Revenue is generated through software license sales; these are either sold independently (via the sales force or online website) or, more typically, alongside a 3D printer. A very limited number of 3D printer OEMs provide their own software, opting for a closed ecosystem. However, we believe that the MTLS software portfolio gives customers flexibility in their 3D printing setups, and that the market is moving towards increasingly complex integrations of 3D printer types which favor this structure. Products Materialise has a number of software products (Exhibit 26) The flagship product within this segment is "Magics," which accounts for the largest number of licenses and focuses on file preparation before printing. In Exhibit 25, we show a basic overview of its functionality.
Exhibit 25: Magics Software Role in the 3D Printing process
Source: Company data, Credit Suisse estimates.
The key differentiating factor for Magics is that it can accommodate files for almost all 3D printers based on its open format. As the setup of 3D printers used in production becomes increasingly complex (different printers from different OEMs), machine-neutral software is becoming more important. A newer product that complements Magics (and an upsell opportunity for existing Magics customers) is Streamics. Streamics enhances printer communication across the
Materialise (MTLS) 15 21 July 2014 production process; we see this as "factory automation" for a group of 3D printers. Looking forward, this has the potential to be a faster-growth product as more advanced product planning software (like Streamics) becomes more necessary as the volumes running through 3D printers increases.
Exhibit 26: 3D Printing Software Offering 3D Printing Software Build Processors & Magics Streamics 3-Matic MiniMagics (pro) Machine control E-stage software
This links 3D printers Allows customers and These translate 3D This supports the Importing CAD formats Allows 3D designs to (from various OEMs), account managers to model data in to sliced STL file build process Primary Software and exporting STL files be simplified and processes, materials view the same files to geometry layer data and enhances the use that are ready for textures to be edited and shipment flows facilitate design edits & that can be interpreted finish of the printed additive manufacturing in STL files together feedback by 3D printers. product.
This ensures Reduces the This enhances The enhances the Ensures a smooth Helps customers customers have design materials used and communication across ability of designers to production process and optimize models that input through the time that customers Customer Benefit the production process tailor the printed can be customized to reduces weight and process ensuring prints spend sanding in both machines and product to the adapt to a customers material usage are to the correct /finishing printed employees customers need 3D printing machines specification products
Source: Company data, Credit Suisse estimates.
Exhibit 27 shows a simplified timeline of the 3D printing process and the corresponding MTLS software designed for each stage along the way. This includes software for planning, file formatting, product design finalization and print execution.
Exhibit 27: Positioning of Materialise's Software Across the 3D Printing Production Process Manufacturing Planning File formatting software Product design / finalization Software used for 3D printing (CAD to STL) software Streamics Magics Build processers / Machine control software Minimagics 3-Matic Minimagic pro E-stage Source: Company data, Credit Suisse estimates.
Revenue Types At the end of 2013, Materialise's installed base of licenses was >8,000, which were to >4,000 customers. Of software sales, 80% are through Materialise's own sales force, while 20% are sold through system manufacturers. There are three identifiable revenue streams from licenses in this division:
■ Software Licenses: These are either on a time basis or a perpetual basis;
■ Maintenance Contracts: These are predominantly offered as annual maintenance contracts, which give software updates on existing licenses; and
■ Custom Software Development Services: These are charged either on a time and material basis or on a fixed-cost basis.
Materialise (MTLS) 16 21 July 2014
Exhibit 28: Of Materialise's Three Business Segments, the 3D Printing Software Segment Has the Most Customers and Also the Highest Number of Software Licenses Installed 8000
6000
4000
2000
0 3D Priniting software segment Medical Segment Industrial
Customers (installed base) Software Licences (installed base)
Source: Company data, Credit Suisse estimates.
Software Comprises Perpetual and Time-Based Licenses Software revenue for Materialise comprises both perpetual and time-based licenses, as well as maintenance revenue and software development service fees.
■ Perpetual Licenses: Customers pay an initial fee for a perpetual license and subsequently pay fees for maintenance under separate maintenance contracts, generally on an annual basis, as well as technical support and product updates.
■ Time-Based Licenses: These are generally annual licenses in which the customer pays equal periodic fees to keep the license active. Time-based licenses entitle the customer to corrective maintenance and product updates without additional charge.
Exhibit 29: 3D Printing Software License Revenue Change 2013 YoY in millions, unless otherwise stated 30.0% 26.1% 25.0%
20.0%
15.0% 13.7% 14.0%
10.0%
5.0%
0.0% New perpetual / first time Maintenance contracts / Service revenue annual licenses renewal annual licenses
Source: Company data.
MTLS software revenue is dependent on incremental sales of software licenses to both new and existing customers, as well as renewals of existing time-based licenses and maintenance contracts. Sales and renewals are driven by customer usage and budget
Materialise (MTLS) 17 21 July 2014 cycles. Software development services are typically charged either on a time and materials basis or on a fixed-fee basis.
Advantages of Materialise's 3D Printing Software Software is an integral and vital component of the AM printing process, from:
■ preparing data files to be printed (including import and processing of files in a different format),
■ repairing and optimizing AM models and CAD files,
■ designing support structures,
■ facilitating process planning controlling the AM printing process,
■ organizing and order routing within a "factory" of multiple printer brands and types, and
■ shipping of the finished product through to the customer.
Customers In 3D printing Software, we do not see an issue from customer consolidation, with the top ten customers in 2013 accounting for just 13% of revenues. In our view, this is not at a level at which we see a material risk of volume or price declines from key customers implementing bargaining power. Key customers include BMW, Toyota, Airbus, Boeing, and MobeLife. The software is sold either directly to the end user of the 3D printers (industrial companies) or it is sold with 3D printers produced by OEMs. (See Exhibit 30.) Service bureaus are 3D print production lines that use Materialise software to print products for industrial companies. We view it as an advantage that Materialise serves all of the large players with software (systems partners include almost all 3D OEMs such as DDD, SSYS, XONE, and EOS) because, as shown in Exhibit 31, market shares remain volatile and the industry structure is likely to change again in the future owing to technological advances. Exhibit 30: Materialise Sells 3D Printing Software to Exhibit 31: We View Materialise's Diverse 3D Printing Industrial Customers and Also the Major 3D Printing OEM Customer Base as an Advantage Given Market OEMs Shares are Likely to Continue to Be Volatile Going Forward
Other 100% 12% Jewellery 90% Others 2% Aerospace Service 80% Phenix 4% Bureaus Renishaw/MTT Government 23% 70% 4% Trumpf 60% Medical Device ReaLizer 4% 50% Optomec Academic 40% 6% SLM Solutions 30% Hearing Aid Arcam 6% Automotove 20% 20% Concept Laser RP Machines Consumer 10% EOS 8% goods 11% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Company data. Source: CODEX Partners.
Materialise (MTLS) 18 21 July 2014
Sales Forecasts Our 3D Printing Software forecasts reflect our view that revenues will likely grow just shy of the total industry through 2016. We currently model average annual growth of ~27% in 2014-16, slightly below the 3D OEM total company organic growth guidance of 30%+. For context, revenues increased 30% in Q114.
Exhibit 32: 3DP Software Revenue and Annual Change EUR in thousands, unless otherwise stated $30,000 40%
35% $25,000
30%
$20,000 25%
$15,000 20%
15% $10,000
10%
$5,000 5%
$0 0% 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates.
According to Wohlers (2014), sales of professional-grade, industrial additive manufacturing systems (>$5,000) grew ~26% YoY in 2013, nearly in-line with the total organic revenue growth of the major OEMs.
Exhibit 33: 3D OEM Total Company Organic Revenue Growth %, unless otherwise stated
DDD Total Organic SSYS Total Organic MTLS 3D Printing Software
35% 33% 29% 29% 30% 26% 25% 24% 25% 22% 22% 20% 20%
15%
10%
5%
0% 2012 2013 2014E
Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 19 21 July 2014
Key to greater adoption of AM is the transition from a focus on prototypes and small production runs to volume production. This in particular drives 3D printing software that organizes and integrates a "factory" of multiple printer types and brands in which throughput is much more important relative to prototyping applications.
Exhibit 34: Recent OEM Commentary for On-Demand Production Parts Company Date Commentary SSYS March 3, 2014 ...revenue driven by demand for large and complex production parts SSYS March 3, 2014 Hardware driven by production demand for Production Series printers DDD February 28, 2014 Increasing demand for direct metal printers for industrial-grade production Source: Company data, Credit Suisse estimates.
Historically, the additive manufacturing market has been skewed towards plastic, with metal accounting for just 10% of total revenue. Looking ahead, we believe that the potential for the metals market is significant, and could deliver a growth rate above that of plastic. The key to greater adoption is the reduction in overall production costs, with production speed being a key driver of this. Metal AM equipment providers such as Arcam and SLM Solutions continue to introduce new machines with increasing rates of build speed. We think these metal printers are very likely to enter a factory / production environment and therefore increase the probability of metal customer demand for more advanced software such as that offered by MTLS.
Exhibit 35: Direct Parts as % of Overall AM Market Has Exhibit 36: Metal AM Accounts for Only c10% of the Total Been Increasing—Volume Production Becoming More of AM Market (2012, Market Size in €m) a Reality 40% 35% 1800 35% 1600 30% 28% 1400 24% 25% 20% 1200 20% 17% 1000 14% 15% 12% 800 10% 10% 7% 8% 600 4% 5% 400
0% 200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Direct parts as % of overall AM market Metal Total AM market
Source: Wohlers Associates. Source: CODEX Partners.
Growth Drivers
■ 3D Printing Software Revenue Growth Correlated to 3D Printing System Sales The demand for Materialise's 3D printing software, which allows interface with virtually all 3D printers, is likely to grow as sales of 3D printing systems (particularly for professional use) continue to grow. Looking ahead, we believe that an increasing level of parts in the automotive, aerospace, and industrial markets will be 3D printed. This would drive a growth in 3D printer demand and likely software would track this growth. Printed Parts have grown their share of the additive manufacturing market to 35% in 2013.
■ Software Key in Integrating Increasingly Complex 3D Printing Setups
Materialise (MTLS) 20 21 July 2014
The industry is shifting toward 3D operations running a more complex mix of machines from different OEMs. To facilitate this, we believe there will be an increasing shift in focus toward software to integrate machines and designs. Materialise continues to invest in R&D to further compatibility with almost all 3D printers on the market, which is a key competitive advantage.
■ Asia Focus Materialise will continue to invest in sales and marketing to increase software utilization across its customers global production footprints. We believe that Asia is currently a region where MTLS is underrepresented, with customers and looking to expand.
Profit Forecasts 3D Printing Software margins increased in 2013, benefitting from strong revenue growth driving better overhead absorption and improved operational gearing. While we forecast strong EBITDA growth, R&D investment will mean EBITDA margins decline through 2016. We believe that operational leverage should begin to return in 2016+ following heavy growth investment. We see no reason why historical margins (like the ~38% in 2013 and 42% in Q114) are not achievable after that point.
Exhibit 37: 3DP Segment EBITDA Margins Exhibit 38: 3DP Segment EBITDA %, unless otherwise stated EUR in thousands, unless otherwise stated 45.0% € 8,000 38.3% 40.0% € 7,000
35.0% 31.6% 31.7% € 6,000 30.0% 28.5% 27.5% 25.6% € 5,000 25.0% € 4,000 20.0% € 3,000 15.0% € 2,000 10.0% € 1,000 5.0%
0.0% € 0 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Competition
Direct Competition Autodesk, Dassault Systems, PTC, and netfabb are the most direct competitors. Materialise's advantage is that it creates an open system compatible with almost all types of 3D printers. We think netfabb is the only one of these competitors with a similar focus, but this player is significantly smaller. Netfabb states on its Web site that a key feature of its software is to "view files on various triangulated formats as well as on most CAD formats". The key differentiating factor in its software is that Materialise offers open systems that can link 3D printers from a number of OEMs. (The only other competitor to do this is netfabb.) Other 3D printer producers that also produce software focus on closed systems that only serve their products.
Materialise (MTLS) 21 21 July 2014
Indirect Competition Software is also manufactured by 3D printing OEMs. These OEMs often produce more 'closed eco-systems' that are only focused only on their own machines, rather than integrating multiple brands and printer hardware types. 3D systems is as an example of an OEM targeting a closed eco-system approach to software sold with their machines. Other challenges include system manufacturers bundling their own software solutions with their system sales (and tailored to the customer's needs) and therefore removing the need for an independent software offering. The Threat of Free Software Within 3D printing software, barriers to entry for new competitors are coming down, as evidenced by the availability of devices with increased performance at progressively lower prices. Furthermore, certain open-source software applications are being offered free of charge or for a nominal fee, as evidenced by the recent launch of a free open-source software platform by Autodesk.
Materialise (MTLS) 22 21 July 2014 Medical Segment (40% of Sales) We see Medical as one of the largest opportunities for accelerated growth in the 3D printing space. DDD, for instance, has highlighted that health care is its fastest-growing end market, growing organic revenues at 40%+ per year. MTLS produces both physical custom medical devices and software for (a) making custom devices and (b) helping doctors plan surgeries prior to an operation. There are still relatively few medical devices that are 3D printed (primarily surgical guides); however, we expect the applications to expand greatly in coming years, particularly as the FDA approves a broader use of these devices. Medical segment sales are divided into two primary categories.
■ Clinical Services (We Estimate 50% of Medical Revenues): Analysis of 3D medical images of patients, providing doctors with virtual surgical planning and also the 3D printing of surgical guides that uniquely fit a specific patient.
■ Medical Software (We Estimate 50% of Medical Revenues): Medical image-based analysis, allowing 3D models to be segmented accurately from medical image data (CT or MRI scans). Products Exhibit 39 shows the key services and software provided by type. In clinical services, the key revenue-generating product is surgical guides for knee implants, and Mimics is the key revenue driver in software. Materialise sell guides that are distributed under the brands of large medical device names (e.g., Zimmer).
Exhibit 39: Materialise's Medical Segment Product Offering and Customer Benefits Medical
Clinical services Mimics 3-Matic Mimicas Innovation Suite
Using FDA cleared softw are they This combines CAD tools This is a set of softw are analyse 3D images of patients This segments medical and pre-processing to allow tools allow ing users to and design and print surgical images (CT or MRI scans) to Primary Service/ Software use measurements to design perform engineering guides unique to the patient. They allow them to be exported to implants or data for operations and analysis on also have 16 machines used to 3D printing machines. simulations. medical images. print implants
These patent specific 3D This allow s detailed models can be used to This enhances analysis of These services allow more measurement and analysis produce a range of medical images allow ing efficient preparation for of product shapes and also Customer Benefit products. The images can biomedical professionals to operations w hich can reduce to create implant data that also be exported to further understand solutions both cost and patient risk. can be run through softw are to analyse impact for medical problems simulations. of heat or fluid flow . Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 23 21 July 2014
Exhibit 40: Medical Image Conversion Software for Surgical Planning and Device Printing
Source: Materialise.
Exhibit 41: Virtual Surgical Planning Example
Source: Materialise.
Clinical Services The core product is currently surgical guides for the knee implant market. We estimate these accounted for >90% of Clinical Services revenue in 2013. Materialise has also recently launched guides for shoulders and hips, which are an important growth opportunity, as guides are currently used in just ~1% of hip and shoulder operations.
Materialise (MTLS) 24 21 July 2014
Exhibit 42: Surgical Guides for Knee Replacement Examples
Source: Company data, Credit Suisse estimates.
Additionally, in Clinical Services, Materialise has its Mobelife (implants for complex fractures of joint reconstruction) and OBL (facial titanium inserts) offerings. These products have gained traction with key opinion leaders and will see increased investment going forward. Revenue is generated from software and medical devices. Within Clinical Services, (1) compensation structures vary and include upfront fees, royalties, and milestone payments; and (2) some of the products / software have exclusive licenses, with customers having first refusal on future development.
Exhibit 43: Materialise Clinical Services Business Model
3D images are then The surgical guide are Images for the guide analysed by produced by Materilise Doctors electronically are created by Materialise clinical that are unique to the submit patient images Materialise clinical engineers and virtual patient. The partner via Surgicase to engineers and made surgery planning files (eg Zimmer) will Materialise compatable for 3D are sent back to the produce the standard printing doctor. implant.
Source: Company data, Credit Suisse estimates.
Exhibit 43 outlines how Clinical Services operates. Doctors provide 3D medical images of patients through Materialise's SurgiCase software. Materialise's clinical engineers turn these in to virtual surgery plans. These engineers have the benefit of historical data when looking at options (evidence-based medicine). These are viewed by doctors to run scenarios on surgical procedures. Based on the images, Materialise then prints 3D guides that are distributed under the name of their collaborative partners (e.g., Zimmer), along with the partner-produced implant. These guides improve accuracy during surgery (guides sit on the skin at the start of operations to accurately guide the surgeon on where planned incisions are). Medical Software The key product is the Mimics software, which segments medical images from CT and MRI scans for highly accurate models of patients anatomy for use in 3D printing. These files can then be converted in to the 3-Matics software, which is used to design patient-specific implants of surgical guides.
Materialise (MTLS) 25 21 July 2014
Exhibit 44: Functionality of Flagship Medical Software Product—Mimics
Source: Company data, Credit Suisse estimates.
Revenue is generated via three methods in software:
■ Software Licenses: These are either on a time basis or a perpetual basis);
■ Maintenance Contracts: These give updates on existing installed software; and
■ Custom Software Development Services: These are charged either on a time and material or on a fixed-cost basis. In term of the licenses Materialise is currently in the process of transitioning a portion of customers to a time based (annual) software license from them previously having perpetual licenses. At the end of FY13 Materialise had an installed base of >2,000 medical software licenses to over 1,200 customers.
Customers Clinical Services Customers Biomet, DJO surgical, Synthes, and Zimmer account for ~64% of Medical segment sales. (See Exhibit 45.) Materialise sells a combination of guides and software to these customers. We estimate that, of the 64% of sales to these customers, the split is 40% guides and 24% software. Despite the high level of customer consolidation, we believe Materialise has a degree of protection from bargaining power. This is due to (1) the value-added clinical engineers; (2) the benefits of their historical data on guides and implants, which benefits the surgical planning procedure; and (3) the SurgiCase Connect software tool. One customer risk is that a very high proportion of surgical guide revenues are derived from knee implant surgery. Key medical device players and customers of Materialise (e.g., Zimmer) have now launched their own surgical knee guides approved by the FDA. A further customer risk is that, on April 24, 2014, Zimmer agreed to buy Biomet for $13bn, further consolidating Materialise's customer base. In the near term, this is likely to result in lower combined sales of Medical guides to these two customers. Materialise has already acknowledged there are reports of lower activity among Biomet sales representatives since the deal was announced.
Materialise (MTLS) 26 21 July 2014
Exhibit 45: Medical Segment 2013 Customer Split of the Exhibit 46: FY 13 Customer Split for Medical Software (We 64% Sold to Four Customers 40% Is Device Revenue and Estimate 50% of Medical Segment Revenues) 24% Software
Other 8%
Other Medical Hospitals software 14% Academic customers 46% 36%
Biomet, DJO Surgical, Synthes & Medical Zimmer Devices 64% 32%
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
As of April 2014, Materialise adopted a new model whereby, except for research and academic centers, medical software will only be offered through time-based licenses (and no longer on a perpetual basis). While over the longer term this is likely to be beneficial to revenue, over the short term, it will provide a headwind as the transition is implemented, and the cost of an annual software license is just 40% of a perpetual license. Over the short term, growth for Materialise's Medical business is likely to be below the market average as Zimmer acquires Biomet. Both are key customers for Materialise, with the deal expected to close in Q1 2015. Ahead of this date, we see scope for disruption (particularly at Biomet), as uncertainty likely persists over how Zimmer will structure sales synergies from the deal. Over the long term, however, we think that MTLS is well positioned with customers that represent the vast majority of market share in key areas such as hips and knees.
Exhibit 47: Global Market Share: Hip Market Exhibit 48: Global Market Share: Knee Market Market Share - Hip 2010A 2011A 2012A 2013A 2014E 2015E 2016E Market Share - Knee 2010A 2011A 2012A 2013A 2014E 2015E 2016E Biomet 11.4% 11.3% 11.7% 11.7% 11.8% 11.8% 11.7% Biomet 14.3% 14.2% 14.3% 14.4% 14.7% 14.7% 14.6% Johnson & Johnson 26.1% 25.3% 25.8% 26.4% 26.4% 26.4% 26.3% Johnson & Johnson 22.2% 21.5% 21.4% 21.5% 21.6% 21.5% 21.5% Smith & Nephew 13.0% 12.9% 12.3% 12.0% 11.8% 11.8% 11.8% MAKO/Others 0.7% 0.8% Smith & Nephew 12.6% 13.4% 13.3% 12.9% 12.6% 12.6% 12.5% Wright Medical Group / Microport 3.4% 3.2% 2.8% 2.3% 2.1% 2.1% 2.1% Wright Medical Group / Microport 2.0% 1.9% 1.7% 1.5% 1.4% 1.4% 1.4% Zimmer 24.2% 24.8% 24.7% 24.3% 24.0% 23.9% 23.8% 0Zimmer 28.1% 28.2% 27.9% 28.5% 28.8% 28.8% 28.9% Stryker (incl. MAKO from 12/17/13) 22.1% 22.5% 22.7% 23.2% 23.8% 24.0% 24.2% Stryker (incl. MAKO from 12/17/13) 20.5% 20.3% 20.6% 20.5% 20.9% 21.0% 21.1% Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 27 21 July 2014
Sales Forecasts While we believe that the long-term prospects for Medical are quite strong, our current estimates reflect the risk of competition from medical device producers as well as decreased near-term revenues while consolidation runs its course and the temporary impact moving customers to annual licenses from perpetual. We forecast ~9% growth CAGR in 2014-16E. We see scope for the rate of revenue growth to be less in 2014 (and 2015). We think that 2014 will be the worst hit year, given the expected closing of Biomet is not until Q115. After this closing, we assume some modest uptick in FY15 from the resumption of normalizing medical device manufacturer operations. We note also that almost all MTLS medical hardware is surgical guides (~90%+); thus, we see substantial scope for upside potential to sales forecasts if medical device manufacturers diversify substantively into other types of devices highlighted earlier in this note.
Exhibit 49: Medical Revenue Forecast USD in millions, unless otherwise stated $40,000 16%
$35,000 14%
$30,000 12%
$25,000 10%
$20,000 8%
$15,000 6%
$10,000 4%
$5,000 2%
$0 0% 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates.
Medical Revenue Growth to See Short-Term Impact from Customer Merger and Change in Contract Structure Materialise's medical software is modular, with some modules licensed out as a perpetual license (which include a maintenance scheme), while the newer modules are licensed on an annual basis. The switch to an annual basis yields more long-term revenues but less up front, and thus is a temporary hit. Revenue from new annual and perpetual licenses grew 16% YoY in 2013 A key revenue driver comes from collaboration partnerships with medical device companies (particularly Biomet, DJO Surgical, Synthes, and Zimmer) that utilize Materialise's medical image-based analysis and engineering to provide the most effective solutions and the accompanying medical devices (mostly AM printed surgical guides) to facilitate medical implants predominantly for the orthopedic market.
Materialise (MTLS) 28 21 July 2014
Exhibit 50: Medical License Revenue Change 2013 in millions, unless otherwise stated 18.0% 16.1% 16.0%
14.0%
12.0%
10.0%
8.0% 6.2% 6.0%
4.0%
2.0%
0.0% New medical perpetual and annual Recurring maintenance / renewal of license annual license
Source: Materialise.
Growth Drivers
■ Medical Market Moving Toward Patient-Specific Devices (Both Custom Procedural Tools and Implants) There is a trend toward patient-specific medicine focusing on solutions for individuals depending on shape, size, and lifestyle. Increasing use of surgical guides feeds into this trend. Materialise is well placed to benefit from this. Previously, the company has focused on guides for knee implants but now have expanded to shoulder and hip guides. Materialise's OBL and Mobelife applications for knee implants and rare conditions should also gain further traction against this backdrop of increasing focus on patient-specific solutions. These Materialise products are currently supported by academics but do not currently have widespread commercial use.
■ Increasing Focus on Using Software to Plan Surgeries (and Reduce Doctor Error) With medical procedures becoming increasingly complex, there is increasing focus to customize patient care and minimize invasive surgery. In-depth analysis of medical images using dedicated software and engineering expertise is becoming increasingly important for surgical preparation and the selection of appropriate medical instruments and devices. In conjunction, regulatory authorities and third-party payers particularly in the U.S. are increasingly stressing the need for evidence-based medicine, thereby escalating the need for images and associated medical research.
■ Continued Product Launches and Ongoing Product Innovation (X-Ray Conversion) Within medical software, innovation remains a key focus. An example of this is the current investment in software that can produce 3D printable models from X-ray images. (The current software uses MRI or CT images.) Given the widespread use of X-rays versus MRI and CT, we view this as a significant midterm opportunity for Materialise (software to be launched in 2014).
■ Surgical Guides for Other Procedures Besides Knee Implants The growth over the last two years has primarily been driven from surgical guides associated with the knee implant business. A surgical guide is a 3D printed patient-specific
Materialise (MTLS) 29 21 July 2014 mold with holes that sits on the skin or bone to guide incisions made during an implant operation. Materialise has recently developed solutions for additional joints and has recently launched guides for shoulders and hips
■ Medical Software Mimics has been the key product driving growth. Increasingly, the medical industry has focused on creating highly accurate 3D models of patient's anatomy to analyze future functionality of implants (i.e., how an individual's lifestyle and potential impact on joints and bone may affect the fitting and durability of an implant).
■ Expansion of Distribution Channels MTLS will invest significantly in its distribution channels, which will benefit the software side of the business. The strategy is to not only target the doctors but also universities, so future doctors are comfortable with the software from an early stage.
■ Geographical Expansion Asia is seen as an opportunity. Hub offices have been set up in China, Japan, and Malaysia, and relationships have been formed with opinion formers in medicine.
Profit Forecasts Medical EBITDA Margin Over 2011-13, the divisional EBITDA margin has averaged 18%. However, the level in 2013 was below the average, as MTLS continued investment in the business. Looking ahead, we expect to see margin contraction in the near term as R&D investment continues. For 2014-16, we forecast this trend to continue, with divisional margins falling to 12.0% in 2016; after this point, we see scope for a strong snap back to the 20%+ level, especially if software share of sales increases.
Exhibit 51: Medical Segment EBITDA Margins Exhibit 52: Medical Segment EBITDA %, unless otherwise stated EUR in thousands, unless otherwise stated 25.0% € 6,000 21.7% € 5,000 20.0% 19.1% 17.8% € 4,000 15.0%
12.0% € 3,000 9.6% 10.0% 8.9% € 2,000
5.0% € 1,000
0.0% € 0 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Key Items
■ Improving Software / Hardware Mix Should Benefit Margins The Medical Software segment is growing far more rapidly than the Clinical Services business. This should imply positive earnings momentum, given broadly (much) higher margins for software versus hardware at MTLS.
Materialise (MTLS) 30 21 July 2014
If production does shift in-house for device manufacturers, this creates a large software opportunity for MTLS in both the Medical and 3D Printing Software segments to manage a "factory" floor of medical device printers (with strict FDA requirements such as time stamping for each device). This shift could be a source of major long-term upside, driving revenues in two MTLS segments and yielding improved mix, with a significantly larger contribution from higher-margin software.
Exhibit 53: Balanced Exposure to Hardware and Software Exhibit 54: Q114 Organic Revenue Change by Type %, unless otherwise stated %, unless otherwise stated 20% 19%
18%
16%
14%
12% Clinical Medical services 10% software (hardware) 50% 50% 8%
6%
4% 2% 2%
0% Medical software Clinical services (hardware)
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Competition Clinical Services Within this segment, Materialise compete with (1) companies that provide 3D printed surgical models or medical devices such as Medical Modelling, and (2) medical device companies (Zimmer, Biomet, DJO surgical, Synthes) that are developing in-house capacity to produce medical devices (e.g., surgical guides). We believe the greatest risk is the in-house development of Medical guides from Materialise's customers although current capacity constraints for Zimmer make this a longer-term risk. Furthermore, Zimmer still needs to access Materialise's SurgiCase Connect tool (software through which doctors upload images that starts off the surgical guides production process). This reliance on Materialise's software lowers the risk of a significant sudden revenue decline. Medical Software Key competitors are 3mensia, SimpleWare, and WITHINlab. There is limited information on these competitors; however, in Exhibit 55, we show a brief description and recent news. Both SimpleWare and WITHINlab are targeting international expansion and SimpleWare in Asia.
Materialise (MTLS) 31 21 July 2014
Exhibit 55: Competitors of Materialise in the Medical Segment and a Brief Description Competitor Description Recent news
Generate computational models from customer data On 28/04/14 concluded a distribution deal w ith or by scanning using MRI, CT or micros CT using Dazztech for sales of products in the Asian market. SimpleWare Scan IP product. These can be bought on a single On 21/01/14 concluded a reseller agreement w ith contract or licence basis CnTech for China
Founded in 2003. 3mensio Valves softw are is 3Mensio designed for cardiovascular specialists. 3D images to analyse Aortic valves.
They have created softw are and CAD designs and This is a UK company but expanded in to the US in WITHINlab an application for parts of knee implants that offer 2013 and w as hiring employees (marketing manager) support using Titanium in late 2013
Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 32 21 July 2014 Industrial Production (40% of Sales) In its Industrial Production segment, MTLS uses 3D printers to manufacture end-use parts and prototypes for customers. This is typically referred to as a "service bureau" business model. Within the Industrial Production segment, there are two contributing lines of business:
■ Additive Manufacturing Solutions (89% of Segment Revenue): 3D printing services for industrial customers; and
■ Growth Units (11% of Segment Revenue): RapidFit (fixtures for automotive used in quality testing), and i-materialise (consumers design and upload their own products to be printed, or buy other customer designs) The latter two businesses collectively referred to as the "growth units" are currently loss making due to investment. For FY13 Industrial Production printed >394,000 AM parts and >48,000 parts through vacuum casting for >2,600 customers including Johnson Controls, Jaguar Land Rover, Philips, and Siemens. Capacity for part manufacture is determined by the number of machines, with Materialise increasing its installed base of AM printers from 92 at the end of 2012 to 109 at the end of 2013. Products The key offerings are 3D prototypes and finished parts for customers via Additive Manufacturing Solutions. RapidFit and i-materialise, produce fixtures for Automotive applications (RapidFit) and 3D prints of consumer uploaded designs (i-materialise), respectively.
Exhibit 56: Industrial Products Segment Product / Service Offering and Customer Benefits
Industrial Services
Additive Manufacturing solutions Speciality Ind. & Solutions (Rapidfit & imaterialise)
Offers prototyping and additive manufacturing of Additive manufacturing for specialty industrial and production parts to customers in automotive, consumer consumer applications. E.g. RapidFIt prints 3D fixtures that Primary Service goods, industrial goods, art and architecture. Also printing allow automobile producers to inspect and measure parts provided of large prototypes or products via their proprietary such as bumpers. imaterialise allow designers and mammoth printers students to upload product designs to be printed.
This allow for customers to specify products printed for This allow s for customers to be more flexible in their them. They can also update designs quickly for printed choice of fixtures for automobiles. Consumers can also Customer Benefit products and choose from a number of printing choose from a range of furniture products w ith new technologies (stereolithography, laser sintering, FDM, functionality and a new look. Designers can also quickly Polyjet, pow er binding). see production costs of a furniture they have designed.
Source: Company data, Credit Suisse estimates.
In Exhibit 57, we show an example of a car bumper prototype printed by MTLS's propriety Mammoth printer that it has developed in-house. The Mammoth is unique due to the size of the products that it can print. In Exhibit 58, we show an example of automotive fixture that is sold through RapidFit. This is a growing business and allows the fit of products produced to by auto suppliers to be quality checked. These can also be used in product development, as fixtures can be printed according to different design specifications.
Materialise (MTLS) 33 21 July 2014
Exhibit 57: Example of a Mammoth 3D Printed Car Exhibit 58: Automotive Fixtures Are Printed Through Bumper Prototype. This Is Unique Not Only in Terms of RapidFit. Fixtures Are Printed by Materialise and Then the Size but the Detail That Can Be Applied to These Auto Suppliers Use Them in Quality Control to Check Prototypes That Part Specifications Are Correct and the Products Are Fitting the car Correctly (e.g., Bumpers)
Source: Company data, Credit Suisse research. Source: Company data, Credit Suisse research.
The key differentiating factors of Materialise's 3D printing service are:
■ The size of printers and the prototypes and parts that it can produce via Mammoth stereolithography printers (e.g., full car bumpers); and
■ The speed and variety in which parts can be produced, with Materialise operating the largest single 3D printing site in the world (Belgium) with six different printing technologies. (See Exhibit 59.) Materialise's aim is to further increase its capacity from the current 109 printers. This has also been an area of investment in 2012-2013, when capacity increased from 92 printers at the end of 2012. The company uses a range of raw materials in its production process, but the primarily materials are epoxy-based photo-curable resins, PA12 based powders, and a suite of thermoplastic filaments like ABS and Ultem.
Materialise (MTLS) 34 21 July 2014
Exhibit 59: Materialise's Current 3D Printing Capacity. It Has 109 Printers (up from 92 in 2012) and Printed 394K Parts and Vacuum Casted 48K Parts in 2013. It Also Has the Largest Single-Site 3D Print Shop in the World, Located in Belgium
Technology Technology Description Size Manufacturer Number
Small /medium size 3D Systems 20 Uses a computer controlled laser to draw a cross section on to the surface of a liquid Medium size Materialise 4 Stereolithography polymer. The next section is then drawn directly on top building the product Mammoth Materialise 13
uses photopolymer materials that are jetted in ultra-thin layers on to a build tray layer by layer Polyjet Connex Stratasys 1 until the part is complete. Each layer is cured by UV light
Parts are built layer by layer by heating Small size Stratasys 2 Fused deposition modelling thermoplastic material to a semi-liquid state and (FDM) Medium size Stratasys 27 then are extruded. Large Size Stratasys 5 Small size EOS 1 Selective lasers are used to sinter powdered Medium size 3D Systems 9 Laser Sintering material and then bind it together to create a solid structure Medium size EOS 7 Large Size EOS 9
This uses standard inkjet printing technology Powder Binding creates parts layer by layer by depositing a Medium size 3D Systems 5 liquid binder on to thin layers of powder
uses silicone moulds that are made using 3D Small size MCP HEK 1 printing. Silicon is then cast around the mould, Vacuum Casting Medium size MCP HEK 2 under vacuum and after curing the mould is cut leaving a cavity to make copies. Medium size SCHUHL 1 Large Size MCP HEK 2
Total 109
of which dedicated Medical 16
Source: Company data, Credit Suisse estimates.
Growth Businesses RapidFit This business provides the automotive market with highly customized, highly precise, and in certain cases patent-protected measurement and fixing tools.
What Does It Produce? It primarily 3D prints automotive fixtures that are used to test that car parts (e.g., bumpers) produced on the automotive production line are to the correct specification. It also 3D prints fixtures that can be used in product development to allow for parts to be fitted (or removed) more quickly on future models.
What Is the Competitive Edge? The 3D printed designs allows for fixture design to be more flexible than traditional fixture methods currently used (e.g., Welding). We think RapidFit will grow organically (driven by the number of new model designs rather than by automotive production). Acquisitions will also likely be a growth driver, as this is a
Materialise (MTLS) 35 21 July 2014 fragmented market. In September 2013, the company acquired a local tool shop in Detroit in this business. i.materialise This is the second of the growth businesses and allows online users to upload their own designs and produce their own 3D products. There is also an online shop on which users can buy prints from a catalogue of designs, with a high-end 3D product offering from designer MGX.
What Does It Produce? Customer designs are primarily of jewelry and other smaller consumer items, and the user can choose from various materials / finishes. However, MGX products include larger household products such as furniture and lamps.
What Is the Competitive Edge? I-materialise was featured in Wired magazine in 2013 as standing out from competitors as users can view and scale files and choose a wide range of materials, and it also had excellent customer service. I-materialise products appear to be more expensive than competitors but of a higher quality. Revenues nearly doubled in 2013, and the strategy now is to focus on the home professional market and, in terms of regions, increase its presence in the United States. A further source of growth can come from the i-materialise app, which should allow more regular access, as 60% of orders received currently are repeat orders from existing customers.
Customers Customers are primarily large industrial companies. (See Exhibit 60.) At the end of 2013, in this segment, Materialise had 2,600 customers, and the top ten customers in this segment accounted for ~18% of revenues. We think there is a trend among MTLS customers to purchase 3D printing capacity once customer orders have reached a certain volume. At this point, MTLS can provide software for these products as well as offering capacity for spillover (i.e., customer production in excess of their installed capacity) or specialty orders that customers do not have the breadth of printer technology to fulfill (such as very large build volume). Within the RapidFit business, the key customers are Tier 1 automotive suppliers. (We estimate ~2-3, but we believe a greater number are currently studying the advantages of using RapidFit technology.)
Materialise (MTLS) 36 21 July 2014
Exhibit 60: Selected Customers for Materialise's Additive Exhibit 61: The Market for Additive Manufacturing Manufacturing Solutions. The Ten Largest Customers Products Is Global, with 61% Being Outside of Europe Accounted for 18.3% of Revenues in This Segment
Selected customers Industry
ASML Semiconductors
Healthcare/Lighting/ Philips consumer Europe 39% Johnson Controls Electronics / HVAC
Renault trucks Truck Other 61% Healthcare / Energy / Siemens Industry / Buildings
Source: Company data. Source: Markets and markets.
Services Are Marketed by the MTLS Salesforce For less complex products, customers will input the specifics in to the Web site; however, for more complex product offerings, Materialise has a specialized salesforce. These employees focus either on prototyping (core competency) or on printed parts (significant growth opportunity). Materialise operates an offline system into which sales staff will input orders or an online system that generates quotes for customers. Quotes from the sales force are converted into orders 50% of the time and on the Web site 30% of the time. Services are also marketed through the Web site.
Exhibit 62: The Cycle of an Order for a Customer of Exhibit 63: Materialise Currently Has Specialized Sales Materialise's Additive Manufacturing Business Managers for More Complex Prototypes or Parts
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 37 21 July 2014
Sales Forecasts Over the past three years, the Industrial Production segment has grown at a CAGR of 13%. Within this, the Additive Manufacturing solutions (core competency of 3D printed parts for customers and 89% of segment revenues) have a CAGR of 11%, while the growth businesses (RapidFit and i-materialise, which are 11% of segment revenues) achieved a CAGR of 35%. Revenue forecasts for the industrial printing of on-demand parts are for ~20% growth over 2014-16; this assumes 10% growth for the underlying Additive Manufacturing Solutions business and specialized businesses growth of 70%.
Exhibit 64: Industrial Production Revenue Forecasts EUR in thousands, unless otherwise stated
€ 50,000 25%
€ 45,000
€ 40,000 20%
€ 35,000
€ 30,000 15%
€ 25,000
€ 20,000 10%
€ 15,000
€ 10,000 5%
€ 5,000
€ 0 0% 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates.
In Exhibit 65, show peer historical growth among peers over 2012-13.
Exhibit 65: On-Demand Parts Services Revenue Change %, unless otherwise stated
40% RedEye (SSYS) Quickparts (DDD) Protolabs (PRLB) 35% 35% 34%
29% 30% 27% 28% 24% 25%
20%
15%
10%
5%
0% 2012 2013 Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 38 21 July 2014
Growth Drivers Over the last three years, there has been increased use of additive manufacturing for prototyping. We believe Aerospace and Automotive have been the key industries driving this growth. Going forward, we believe a significant key growth driver will shift to printing parts, rather than prototypes. Printed parts currently account for 20% of revenues, and this could rise to ~50% by the end of 2015 in our view.
■ Increased 3D Printing of Manufactured Parts (Capacity Additions) Since 2003, direct 3D printed parts has risen as a percentage of the total market from 4% in 2003 to 35% in 2013. We believe this share will continue to increase as further applications are found for 3D printed parts in Industry and drive demand for Materialise's AM solutions. To meet this demand, Materialise will invest part of the IPO proceeds, adding production lines of 3D printers.
■ Investment in Sales Teams Knowledge of 3D printed parts applications in Industry is relatively specialized, and we believe Materialise benefits from its 21 specialized sales managers. In our view, having specialized sales people close to decision makers in large industrial organizations will be key in developing solutions with customers.
■ Further Expansion of Growth Businesses RapidFit & i-materialise Currently, these businesses account for €3mn of revenues (4% of group) but have grown at a CAGR of 35% over the last three years versus the group at 16%. RapidFit There is scope for organic growth as Tier 1 suppliers further integrate 3D printed fixtures but there is also an opportunity for acquisitions in this fragmented industry. This is one of the primary areas we believe management will look to acquire post raising funds. I-materialise We believe that it provides interesting optionality on the longer-term trend of consumers adopting 3D products, but the initial focus is on home professionals.
Materialise (MTLS) 39 21 July 2014
Exhibit 66: Phases of Customer Adoption Process—The Exhibit 67: The Industrial Production Segment Has 2,600 Long-Term Potential for AM Lies in Industrial Mass Customers, and the Top Ten Account for 18% of Segment Production, While the Current Focus Is on Prototypes. We Revenues. We Expect This Share to Decline as Demand estimate Prototypes Currently Account for 80% of for Parts (Rather than Prototypes) Becomes More Additive Manufacturing Revenues, but This Is Expected to Widespread—The Revenue Opportunity per Customer Is Shift to 50% / 50% Prototypes / Parts by 2015. Greater in Parts 70%
60%
50%
Industrial companies for volume production 40%
30%
20% Revenue opportunity Revenue
Industrial companies for 10% prototyping 0% 3D Software systems Medical (top 4 customers) Industrial production Academic and R&D % of segment revenues from top ten customers (Medical top four) Time Today
Source: SLM Solutions. Source: Materialise.
Materialise (MTLS) 40 21 July 2014
Profitability Since 2011, earnings have been relatively depressed for the Industrial Profit segment as the company invests in growth initiatives. If you parse out the underlying EBITDA margin of the Additive manufacturing solutions business (~90% of segment sales), it was 14.6% in 2013. The EBITDA of the growth businesses (RapidFit and i-materialise) in 2013 was a €2.5 million loss, creating a large overall margin drag. Management believes this business will break even by the end of 2015. The ramp in our EBITDA margin forecasts is largely attributable to the reversal of losses in the Growth Units. We assume modest margin improvement in the underlying business from leverage and production part mix impact.
Exhibit 68: EBITDA Margins Exhibit 69: EBITDA %, unless otherwise stated EUR in thousands, unless otherwise stated 16.0% € 7,000 13.7% 14.0% € 6,000 12.0% 10.5% € 5,000 10.0% € 4,000 8.0%
6.0% € 3,000 3.8% 4.1% 4.0% € 2,000 2.0% 0.7% € 1,000 0.0% € 0 -2.0% -1.3% -4.0% -€ 1,000 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Based on our forecasts, the losses generated going forward at i.materialise and RapidFit will likely reduce with these businesses breaking even in FY15 and turning profitable in FY16. In Exhibit 70 and Exhibit 71, we show historical margins and forecasts excluding the growth units for context and some suggestion of normalized earnings power.
Exhibit 70: EBITDA Margins Ex Growth Units Exhibit 71: EBITDA Margins of Growth Units %, unless otherwise stated %, unless otherwise stated
18.0% 17.0% 20.0% 6.4% 16.2% 16.0% 0.0% 14.6% 14.4% -20.0% 14.0% -6.6% -40.0% 12.0% -60.0% -43.3% 10.0% 9.2% 8.0% -80.0% 8.0% -82.4% -100.0% -88.9% 6.0% -120.0%
4.0% -140.0%
2.0% -160.0% -156.7% 0.0% -180.0% 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 41 21 July 2014
Key Items ■ Prototypes Are Currently Experiencing Pricing Pressure While pricing in 3D parts for Industry is more stable, prototypes are seeing price deflation. We believe parts' revenue share will increase in this business, which should positively affect margins for Additive Manufacturing Solutions. Margins declined in 2012 because of a dependence on the automotive prototype market, whereas Materialise saw pricing pressure in 2012.
■ Positive Impact from Shift to Increasing Share of Production Parts Currently 80% of 3D prints are for prototypes in Industry, while 20% are for Industrial parts. This is continuing to shift, and we believe that, by the end of 2015, this will be closer to 50% / 50% prototypes / parts. After Q1, management highlighted positive trends in this regard.
■ Breakeven Targeted for the Growth Units If the growth units can earn margins in line with the underlying majority of segment sales, we should see significant margin upside to current estimates.
Materialise (MTLS) 42 21 July 2014
Competition The primary competitors in the Industrial Production segment are listed in Exhibit 72. We believe that, in Additive Manufacturing Solutions, Materialise is well positioned because of:
■ Their software knowhow, which improves the efficiency of its processes;
■ Mammoth printing capacity, which is unique because of its size; and
■ It's favoring of open-systems vs. closed (e.g., 3D systems), which results in a wide knowledge and offering of solutions for customers.
Exhibit 72: Competitors for the Businesses within the Industrial Production Segment Industrial production
Additive manufacturing RapidFit imaterialise solutions
3D Systems Not aware of any direct 3D Shapeways Alphaform competition but aware of Sculpteo smaller companies active in ARRK this field CRESILAS Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 43 21 July 2014 Valuation Given its small revenue base, high software exposure (75%+ of EBITDA), similar top-line growth prospects to peers and significant scope for margin expansion, we think it deserves to trade at least in-line with peers. Given the heightened investment cost that MTLS assumes through 2016, we think it is not particularly useful to look at EV/EBITDA. On a DCF valuation, we arrive at a TP of $15, and using peer multiples on FY15 EV/Sales (5X) we arrive at a TP of $16. Our target price for the company represents the average of these two methods at $15.
Exhibit 73: Target Price Derivation USD, unless otherwise stated Valuation Method Price Assumptions DCF $15 10% WACC, 10% through-cycle growth, 8.5% op margins EV/Sales $16 5X 2015E Sales Average $15 Blended average Source: Company data, Credit Suisse estimates.
We use the peer group below to arrive at our applied EV/Sales multiple. (See Exhibit 74.)
Exhibit 74: Peer Valuation x, unless otherwise stated
Market Cap EV/Sales EV/EBITDA Name USD (mn) 2014 2015 2016 2014 2015 2016 Additive manufacturing 3D Systems 6,175 7.9x 6.1x 4.8x 33.1x 24.5x 16.9x Arcam 555 11.0x 7.9x 5.9x 80.1x 50.7x 35.9x ExOne 489 7.1x 5.5x 4.6x - 106.1x 60.9x Stratasys 5,075 6.3x 4.6x 3.5x 17.8x 14.3x 11.6x Voxeljet 347 13.9x 9.2x 5.7x - 153.1x 24.7x Average 2,528 9.2x 6.7x 4.9x 43.7x 69.7x 30.0x
Industrial Protolabs 2,061 9.2x 7.3x 6.0x 24.8x 19.9x 16.8x
Software Adobe 36,000 7.8x 6.3x 4.9x 29.0x 19.1x 12.7x Autodesk 12,628 4.4x 4.0x 3.3x 22.0x 18.8x 12.7x PTC 4,525 3.4x 3.3x 3.0x 13.0x 11.1x - Average 17,718 5.2x 4.5x 3.7x 21.3x 16.3x 12.7x
Average of segments 7.9x 6.2x 4.9x 29.9x 35.3x 19.8x Materialise 569 4.6x 3.9x 3.3x 98.2x 47.8x 28.7x
Source: Company data, Credit Suisse estimates.
We show our discounted cash flow analysis below. Note that our model assumes through- cycle EBITDA margins of just 13% versus the company operating model of 20-25%.
Materialise (MTLS) 44 21 July 2014
Exhibit 75: DCF EUR in millions, unless otherwise stated DCF 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Sales 68,722 78,307 94,932 111,391 122,530 134,783 148,261 163,088 179,396 197,336 217,069 YoY 13.9% 21.2% 17.3% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
EBIT 4,420 (1,196) 2,155 6,747 9,802 10,783 11,861 13,047 14,352 15,787 17,366 Margin 6.4% -1.5% 2.3% 6.1% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
D&A 3,190 4,900 5,600 6,127 6,127 6,739 7,413 8,154 8,970 9,867 10,853 % of sales 4.6% 6.3% 5.9% 5.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
of which Depreciation 2,776 3,132 3,797 4,456 4,456 4,901 5,391 5,930 6,524 7,176 7,893 % of sales 4.0% 4.0% 4.0% 4.0% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%
Capex (2,415) (7,831) (9,493) (5,570) (4,678) (5,146) (7,784) (8,562) (9,418) (10,360) (11,396) Capex / Depreciation 0.87 2.50 2.50 1.25 1.05 1.05 1.05 1.05 1.05 1.05 1.05
Change in Working Capital (1,008) (1,244) (2,157) (2,135) (1,477) (1,593) (1,752) (1,927) (2,120) (2,332) (2,565) Working Capital 8,916 10,160 12,317 14,452 15,929 17,522 19,274 21,201 23,322 25,654 28,219 % of sales 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Tax (21) - (117) (864) (1,960) (2,157) (2,372) (2,609) (2,870) (3,157) (3,473) Tax Rate 0.5% 0.0% 5.4% 12.8% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Free Cash Flow 4,166 (5,370) (4,012) 4,305 7,813 8,626 7,366 8,102 8,913 9,804 10,784 Free Cash Flow Yield (% of EV) 4% -5% -4% 4% 8% 8% 7% 8% 9% 9% 10%
Discounted FCF - (5,143) (3,492) 3,407 5,621 5,642 4,380 4,380 4,380 4,380 4,380
NPV through 2023 27,933 NPV terminal value 75,913 Enterprise Value 103,846
Net Debt (2013) 3,718 Equity Value 100,128 Diluted Shares Outstanding 9,551
Equity value per share EUR 10 EUR:USD $ 1.38 Target price in USD $ 14.5
Source: Company data, Credit Suisse estimates.
With the activities of Materialise spread across areas including software development / sale and AM part production, as well as end markets including medical, we have identified six companies that we believe are appropriate for our analysis. Peer group multiples over the past 36 months (see Exhibit 76 and Exhibit 77) show a general pattern of expansion through to the start of FY14, after which forward multiples have compressed.
Exhibit 76: Peer Group—12-Month Forward EV/Sales Exhibit 77: Peer Group—12-Month Forward EV/EBITDA 16x 50x
14x 45x 40x 12x 35x 10x 30x 8x 25x
6x 20x 15x 4x 10x 2x 5x 0x 0x Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014
3D Systems Adobe Autodesk 3D Systems Adobe Autodesk Protolabs PTC Stratasys Protolabs PTC Stratasys
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 45 21 July 2014
Other Data on Public Comparables
Exhibit 78: Comparators for Materialise Peer Group Analysis Medical: 41% of FY13 revenue 3D Systems We estimate c20% of 3D systems sales come from Healthcare applications. 3D Systems provides personalized surgical treatments and patient specific medical devices, including virtual surgical planning and clinical transfer tools, using 3D modelling and printing. It is the only integrated 3D modelling-to-printing capability available in both direct metals and biocompatible plastics. 3D systems also makes Bespoke Fairings™ which are specialized coverings that surround an existing prosthetic leg accurately recreating the body form. Stratasys While sales from medical is undisclosed we are of the view that it is similar to 3D systems. Stratasys offers 3D Printing for high accuracy surgical guides and prototypes. The recent acquisition of Solid Concepts brings further direct medical part production expertise into the portfolio.
Industrial Production: 40% of FY13 revenue Protolabs Taken Public in 2012 Protolabs is an online and technology-enabled manufacturer of custom parts for prototyping and short-run production. The Company utilizes computer numerical control (CNC) machining and injection moulding to manufacture custom parts for its customers. The Company focuses its services to product developers who use three-dimensional CAD software to design products across a diverse range of end-markets.
3D Printing Software: 20% of FY13 revenue Adobe Adobe is a diversified software company. In Q1 2014 it updated the 3D printing capabilities of its Adobe Photoshop CC product. Adobe markets and licenses its software directly to enterprise customers through its sales force and to end users through application stores and its website. Adobe also distributes its products through a network of distributors, systems integrators, independent software vendors, retailers and OE manufacturers. Autodesk Autodesk is a design software and services company. Autodesk developed AutoCAD in 1982. The software is used by both 3D designs specialists as well as across a range of end markets including automotive, architects.
PTC PTC specialises in 2D & 3D design software, product lifecycle management (PLM), and service management solutions.
Source: Company data, Credit Suisse estimates.
An overview of their business is detailed in Exhibit 79.
Materialise (MTLS) 46 21 July 2014
Exhibit 79: Peer Group Business Overview in millions, unless otherwise stated 2014
Company name 3D Systems Stratasys Protolabs Adobe Autodesk PTC Ticker DDD SSYS PRLB ADBE ADSK PTC Sales (EUR M) 537.7 519.3 151.5 2,956.7 1,707.0 975.5
Gross margin 52% 59% 63% 89% 90% 73% R&D % of sales 8% 10% 7% 20% 26% 17% Capex / Sales 1% 8% 11% 5% 3% 2%
EBITDA (EUR M) 101.6 128.2 56.1 591.4 383.2 271.7 EBITDA margin 19% 25% 37% 20% 22% 28%
Aerospace, Architecture, Automotive, Architecture, Consumer products, Industrial Automotive, Aerospace, High-tech Solutions, Gaming, Automotive, Consumer, Engineering & equipment, Medical devices, Technology, Defense, Medical Devices, Electronics, Appliance, Retail, Media and Customers / end-market split Defense, Dental, Electronics, Construction,Mining, Retail, Electronics, Education, Consumer, Automotive & Consumer Products Entertainment, Broadcast and Education, Heavy Equipment, Consumer products, Industrial Automotive, Aerospace and Energy, Healthcare Education Jewelry, Medical, Toys equipment, Education, Media Defence
Software programs and Design and Creation suites, Design software and SLA, SLS, and PJP Printers, CNC Machine Custom parts (71.7%), FDM and Inkjet Printers and solutions for Digital publishing Software programs and CAD/CAM software with a Products sold 100+ Materials, On-demand Custom Injection Moulds & Injection- 130+ Materials and Services , Digital analytics, Testing solutions, Viewers and Cloud variety of extensions for Services moulded parts (28.3%) and targeting, Cloud services services specific purposes
Alibre Design, Cubify Invent, uPrint, Mojo, Objet, Adobe Photoshop CC, Adobe 3ds Max, AutoCAD, AutoCAD Rapidform, DuraForm, Dimension, Fortus, Acrobat 3D, Adobe Elements LT,Inventor, Maya, Simulation PTC Creo, PTC CADDS 5, Major Brands CastForm, LaserForm, Protoquote & Firstquote Solidscape, Eden, Connex, family, Adobe Creative Suite products, Revit, Navisworks, PTC Windchill, PTC Arbortext Accura, VisiJet, Zprint, Cubify, RedEye paid parts, MakerBot 6, DWG & DWF Viewers. Quickparts
Geographic sales split based on LFY Americas 55% 54% 74% 53% 36% 40% EMEA 26% 26% 19% 28% 38% 37% Asia Pac 19% 19% 7% 20% 26% 22% RoW / Other -- 1% ------Total 100% 100% 100% 100% 100% 100% Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 47 21 July 2014 Risks
■ On-demand printing could to be taken in-house as major Industrial companies invest independently in additional 3D printing capacity
■ Medical device manufacturers investing in AM capability, increasing the competitive threat for Medical
■ Performance in Medical could be further affected from a merger of key customers and transition in the structure of medical licenses
■ A further customer risk is that, on April 24, 2014, Zimmer agreed to buy Biomet for $13bn, further consolidating Materialise's customer base. In the near term, this is likely to result in lower combined sales of Medical guides to these two customers. Materialise has already acknowledged there are reports of lower activity among Biomet sales representatives since the deal was announced.
■ On-demand parts capability is under-exposed to metal and could face competition entering that marketplace
■ Customer risks include a very high proportion of surgical guide revenues being derived from knee implant surgery.
■ Key medical device players and customers of Materialise (e.g., Zimmer) have now launched their own surgical knee guides approved by the FDA.
■ Materialise operates key software research and development and engineering centers in both Malaysia and Ukraine. In Malaysia, the government may exercise substantial control over certain sectors of the economy through regulation and state ownership.
■ In Ukraine, the political situation could provide an ongoing potential risk. While operations are yet to be affected in Ukraine and Materialise does have a contingency plan, it is currently an important software development center employing ~240 people. Employees based in Ukraine have already asked to be relocated to other Materialise facilities outside the country (including Belgium, Malaysia, and China).
Materialise (MTLS) 48 21 July 2014 Key Shareholders & Proceeds Key Shareholders In Exhibit 80, we list the major shareholders of Materialise. As can be seen from the table, the founders still hold 86% of the company.
Exhibit 80: Key Materialise Shareholders in millions, unless otherwise stated Shareholder Ownership % Wilried Vancraen / Hilde Ingelaere (Founders) 85.6% Sniper Investments NV 3.5% Mr R. De Spoelbergh 2.5% Distri Beheer 21 CVA 2.2% Other existing investors (both management / institutional) 6.2% Source: Company data, Credit Suisse estimates.
Proceeds / Structure Exhibit 81 outlines the primary proceeds to be raised from the IPO and the use of these proceeds, which will be split across four separate objectives.
Exhibit 81: Materialise Proceeds Structure and Use Offer size Primary issuance to generate €100m
Use of primary proceeds
1. Expand 3D printing capacity €10-20m 2. Increase worldwide sales and marketing teams €5-10m 3. Fund additional R&D €5-10m 4. General corporate purposes Remaining proceeds Source: Company data, Credit Suisse estimates. 1. Expand AM Printing Service Center Capacity This includes the addition of new printers and additional technologies, as well as software development and engineering centers. This should help alleviate current capacity constraints (facilities running at close to 90% for certain technologies) as well as capitalize on economies of scale and to address certain new applications for customers. Increased capacity in software development and engineering centers would help underpin future innovation for both industrial and medical markets. 2. Increase Sales and Marketing Teams Worldwide Areas of focus will include 3D Printing Software, for which MTLS intends to bring teams closer to their customer base worldwide, which would require investments in the expansion of marketing and sales (particularly South America and China), and in the Medical segment, where the company intends to invest in the expansion of the distribution channels for Clinical Services (Japan, Malaysia, and China). In Industrial Production, investment will be reinforcing the position in Italy and Spain and building up the presence in the USA, which is currently at a low level.
Materialise (MTLS) 49 21 July 2014
3. Fund Additional Research and Development Activities We expect R&D to remain at c15% of group sales over the short to medium term. With barriers to entry into segments such as printing software declining, R&D investment remains key to continue innovation and drive future revenue growth. 4. Remainder Is for General Corporate Purposes This includes potential acquisitions or partnerships. Areas of interest include expanding MTLS exposure within the Japanese medical market.
Materialise (MTLS) 50 21 July 2014 Company History & Management Company History Exhibit 82 outlines major events in the history of Materialise since its incorporation in Belgium in 1990.
Exhibit 82: Company History Date Action Jun-90 Materialise NV was incorporated in Belgium on June 28, 1990. Since incorporation shareholders have invested approximately €15.9m
Jun-06 Dental business split off through a partial de-merger (Materialise Dental NV). On July 24, 2006, an affiliate of DENTSPLY International Inc. acquired 40% of Materialise Dental NV and subsequently increased its shareholding in Materialise Dental NV to 45.59% in October 2008.
Apr-07 Increased shareholding in the French company OBL SA from 33% to 100% for €1.5 million. OBL SA is included in the Medical segment.
Oct-08 Belgian company Mobelife NV was formed. Materialise owns 81.5% of the shares.
Jan-11 Acquired 100% of the shares of German company Marcam Engineering GmbH, which specializes in software solutions for 3D printed metal products. Cost was €2.0 million. Marcam Engineering is included in the 3D Printing Software segment.
Feb-11 DENTSPLY increases its shareholding in Materialise Dental NV to 100%. Total proceeds from the partial spin off of Dental NV and the staggered sale total €34.5m.
Feb-13 Spin off of fixturing business to a newly incorporated subsidiary, RapidFit NV. TTina fund of the Flemish investment company PMV NV acquires 16.66% of the shares of RapidFit NV on June 27, 2013.
Sep-13 RapidFit NV acquires for €0.4 million Advanced Machining Ltd. This is included in the Industrial Production segment.
Jan-14 Acquisition of e-prototypy SA, which operates one of the largest 3D printing service centers in Poland, for €1.3 million. e-prototypy specializes in the production of additive manufactured prototypes and end-parts and also provides scanning and reverse engineering services. e-prototypy SA is located in Wroclaw, Poland, has four 3D printers, one vacuum casting machine, two computer numerical control, or CNC machines and one scanner and employs approximately 20 people. The company is included in the Industrial Production segment. Source: Company data.
Board of Directors Exhibit 83 details the current executive board of Materialise.
Exhibit 83: Materialise Executive Board Name Age Position Yrs at Materialise Experience
* Worked as a research engineer and consultant at the Research Institute of the Belgian Metalworking Industry before founding Materialise in 1990. * Has been awarded the RTAM/SME Industry Achievement Award, the highest honor in the 3D printing industry. Wilfried Vancraen 52 Founder, Director & CEO 24 * Has been selected as the most influential person in additive manufacturing by industry professionals and TCT Magazine * Holds a Master of Science in Electro-Mechanical Engineering and an MBA from KULeuven.
* Director and Executive Chairman of Materialise since 2013. * From 1990 to 2013, he was at the Brussels office of Baker & McKenzie CVBA, where he focused on mergers and Peter Leys 49 Executive Chairman Joined 2013 acquisitions, and capital markets. * Holds a Candidacy Degree in Philosophy from KULeuven and Master of Law degrees from KULeuven and the University of Georgia. * Executive Vice President of Materialise's Medical segment since January 2011. Since joining the company in 1993, she has managed several staff departments, including the HR, finance and legal departments. * From 1989 to 1992, she was a business analyst with Plant Genetic Systems. From 1986 to 1989, Ms. Ingelaere Hilde Ingelaere 51 Executive Vice President 21 was at Bristol Myers Squib where she focused on cardiovascular clinical research. * Holds a Masters in Bioengineering from KULeuven, where she focused on Biotechnology, and an MBA from KULeuven.
Source: Company data.
Exhibit 84 details the current executive officers of Materialise, which have been employed by Materialise for >59 years.
Materialise (MTLS) 51 21 July 2014
Exhibit 84: Materialise Executive Officers Name Age Position Experience * Chief Financial Officer of Materialise since October 2013. * In 2003, became Vice President Finance of the LMS Group, which was acquired by Siemens AG in January 2013. * In 1997, he became Finance Director of the Belgium subsidiary of Logica PLC (now part of CGI Group), a U.K.- Frederic Merckx 46 Chief Financial Officer Joined 2013 based global IT and management consultancy company. * Started his professional career as an auditor at Coopers & Lybrand Belgium (now PricewaterhouseCoopers Belgium) in 1991. * Holds a Masters degree in Applied Economics from KULeuven and a Postgraduate Degree in Tax Law from KULeuven.
* Executive Vice President of Materialise since January 2011 responsible for the 3D Printing Software segment, Materialise's global sales organization and sales offices around the world. He has been with the company since its founding. * Completed his Master’s thesis on stereolithography in 1990, on the very first 3D printing machine at Materialise. Johan Pauwels 46 Executive Vice President 24 After graduating in 1991, he stayed on with the company, focusing on software development to support Materialise's 3D printing services. * Holds a Masters degree in Electro-Mechanical Engineering from KULeuven.
* Executive Vice President of Materialise since January 2011, focusing on production and engineering services. * Prior to joining Materialise in 1995 and running the service bureau, he was at KULeuven as a liaison engineer for the newly founded Materialise and established the basic research activities for the company while also Bart van der founding the research activities in 3D printing at the KULeuven. 46 Executive Vice President 19 schueren * Has made the service bureau grow from a regional player to one of the most prominent additive manufacturing facilities in Europe. * Holds a PhD in Selective Laser Metal Sintering and a Masters degree in Mechanical Engineering from KULeuven.
* Executive Vice President of Materialise since January 2011 focusing mainly on business development. Currently the head of Materialise Malaysia Sdn. Bhd(since Sep. 2012) and further supports the Asian market. Wim Michiels 44 Executive Vice President 15 * Has been with the company since 1999. * Mr. Michiels holds a Masters degree in Mechanical Engineering from KULeuven.
Source: Company data.
Materialise (MTLS) 52 21 July 2014
Financial Statements
Exhibit 85: Income Statement USD in millions, unless otherwise stated Income statement 2011 2012 2013 2014E 2015E 2016E Sales 52,205 59,107 68,722 78,307 94,932 111,391 change 13.2% 16.3% 13.9% 21.2% 17.3%
Operating profit 996 2,111 4,420 (1,196) 2,155 6,747 margin 1.9% 3.6% 6.4% -1.5% 2.3% 6.1%
Net Interest (615) (537) (987) (987) (987) (987) PTP 381 1,574 3,433 (2,183) 1,168 5,760 margin 0.7% 2.7% 5.0% -2.8% 1.2% 5.2%
Tax charge (262) (121) (21) 0 (117) (864) Tax rate 68.7% 7.7% 0.6% 0.0% 10.0% 15.0%
Net income from cont. ops 119 1,453 3,412 (2,183) 1,052 4,896 NCI 98 98 0 0 0 0 Net income 217 1,551 3,412 (2,183) 1,052 4,896 margin 0.4% 2.6% 5.0% -2.8% 1.1% 4.4%
Adjusted EPS $0.16 $0.36 ($0.05) $0.02 $0.10 change 119% -114% -144% 366% NOSH 9,516 9,551 43,304 47,072 47,072 Source: Company data, Credit Suisse estimates.
Exhibit 86: Balance Sheet USD in millions, unless otherwise stated Balance sheet 2011 2012 2013 2014E 2015E 2016E Cash 2,922 6,417 12,598 72,099 65,298 66,944 Other current assets 14,749 16,433 18,763 20,954 24,755 28,517 Total current assets 17,671 22,850 31,361 93,053 90,052 95,461
PP&E 18,012 20,601 20,617 25,315 31,011 32,125 Goodwill 1,532 1,532 1,612 1,612 1,612 1,612 Other LT assets 1,294 1,692 2,098 2,098 2,098 2,098 Total LT assets 20,838 23,825 24,327 29,025 34,721 35,835 Total assets 38,509 46,675 55,688 122,078 124,774 131,297
ST debt 5,373 4,037 4,640 4,640 4,640 4,640 Other current liabilities 14,019 15,074 19,451 20,399 22,042 23,669 Current liabilities 19,392 19,111 24,091 25,039 26,682 28,309
LT debt 6,493 11,635 11,676 11,676 11,676 11,676 Other LT liabilities 887 2,592 2,186 2,186 2,186 2,186 LT liabilities 7,380 14,227 13,862 13,862 13,862 13,862 Total liabilities 26,772 33,338 37,953 38,901 40,544 42,171
Shareholders' Equity 11,737 13,337 17,735 83,178 84,229 89,125
Total liabilities and SE 38,509 46,675 55,688 122,078 124,774 131,297 Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 53 21 July 2014
Exhibit 87: Cash Flow USD in millions, unless otherwise stated Cash flow 2013 2014E 2015E 2016E Net income 3,412 (2,183) 1,052 4,896 D&A 3,190 4,900 5,600 6,127 Change in working capital 1,008 (1,244) (2,157) (2,135) Other cash flow from 579 0 0 0 operations Cash flow from operations 8,189 1,473 4,495 8,887
Capex (2,415) (7,831) (9,493) (5,570) Other cash flow from (1,223) (1,768) (1,803) (1,671) investments Cash flow from (3,638) (9,598) (11,296) (7,240) investments
Cash flow from financing 1,630 67,626 0 0
Total cash flow 6,181 59,501 (6,801) 1,647 Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 54 21 July 2014
Exhibit 88: Divisional Summary USD in millions, unless otherwise stated Divisional 2011 2012 2013 2014E 2015E 2016E Revenue 3D Printing Software 11,198 13,432 16,369 21,967 27,459 Medical 25,106 27,992 29,214 33,147 36,461 Industrial Production 22,562 27,239 32,219 39,318 46,970 Segment Total 58,866 68,663 77,802 94,432 110,891 Elims/ Adjustments 241 59 505 500 500 Total Revenue 59,107 68,722 78,307 94,932 111,391
YoY Revenue Change 3D Printing Software 19.9% 21.9% 34.2% 25.0% Medical 11.5% 4.4% 13.5% 10.0% Industrial Production 20.7% 18.3% 22.0% 19.5% Total 16.3% 13.9% 21.2% 17.3%
EBITDA 3D Printing Software 3,546 5,141 4,664 5,629 7,551 Medical 4,796 4,973 2,606 3,198 4,358 Industrial Production (292) 1,026 1,335 4,129 6,425 Segment EBITDA 8,050 11,140 8,604 12,955 18,333 Corporate (3,028) (3,530) (4,900) (5,200) (5,460) Total EBITDA 5,022 7,610 3,704 7,755 12,873
% margin 3D Printing Software 31.7% 38.3% 28.5% 25.6% 27.5% Medical 19.1% 17.8% 8.9% 9.6% 12.0% Industrial Production -1.3% 3.8% 4.1% 10.5% 13.7% Segment EBITDA 13.7% 16.2% 11.1% 13.7% 16.5% Corporate -5.1% -5.1% -6.3% -5.5% -4.9% Total EBITDA 8.5% 11.1% 4.7% 8.2% 11.6%
YoY EBITDA Change 3D Printing Software 45.0% -9.3% 20.7% 34.1% Medical 3.7% -47.6% 22.7% 36.3% Industrial Production -451.4% 30.1% 209.4% 55.6% Total EBITDA 51.5% -51.3% 109.4% 66.0% Source: Company data, Credit Suisse estimates.
Materialise (MTLS) 55 21 July 2014
Companies Mentioned (Price as of 18-Jul-2014) 3D Systems (DDD.N, $57.27) ASML Holding N.V. (ASML.AS, €63.67) Autodesk Inc. (ADSK.OQ, $57.36) BMW (BMWG.DE, €93.61) Boeing (BA.N, $127.64) ExOne (XONE.OQ, $33.95) Johnson & Johnson (JNJ.N, $101.8) Materialise (MTLS.OQ, $12.46, OUTPERFORM[V], TP $15.0) PTC Therapeutics, Inc (PTCT.OQ, $23.82) Philips (PHG.AS, €23.26) Proto Labs (PRLB.N, $81.79) Renault (RENA.PA, €70.11) Siemens (SIEGn.DE, €92.49) Smith & Nephew (SN.L, 1045.0p) Stratasys (SSYS.OQ, $104.4) Stryker Corporation (SYK.N, $82.16) Toyota Motor (7203.T, ¥6,006) Zimmer Holdings (ZMH.N, $102.44) voxeljet (VJET.N, $18.6)
Disclosure Appendix
Important Global Disclosures I, Jonathan Shaffer, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stoc k’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Materialise (MTLS) 56 21 July 2014
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (54% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 13% (47% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Materialise (MTLS.OQ) Method: Our $15 target price for Materialise is an average of DCF (discounted cash flow) which yields $15, and peer EV/Sales multiples which yields $16. Risk: We think key risks to our $15 target price for Materialise include: Price competition intensifying in 3D Printing Software as 3D OEMs and open source players focus more on file conversion software; Industrial Production could be impacted by prototyping pricing pressure from competitors as well as sales loss as more customers invest in their own printing capacity; Medical is potentially at risk from competition from device manufacturing customers as consolidation progresses and as hardware customers increase their own 3D capacity. Further challenges include Materialise's AM printing capability being underexposed to metal and the near-term revenue impact from transition to a longer-term Medical licensing model.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (MTLS.OQ, SYK.N, PHG.AS, ZMH.N, BMWG.DE, ADSK.OQ, PTCT.OQ, RENA.PA, SN.L, SIEGn.DE, JNJ.N, BA.N, 7203.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (MTLS.OQ, PHG.AS, ZMH.N, BMWG.DE, PTCT.OQ, BA.N, 7203.T) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (ZMH.N, BMWG.DE, RENA.PA, SIEGn.DE, BA.N, 7203.T) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (BMWG.DE, PTCT.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (MTLS.OQ, PHG.AS, ZMH.N, BMWG.DE, PTCT.OQ, BA.N, 7203.T) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MTLS.OQ, XONE.OQ, SYK.N, PHG.AS, ZMH.N, BMWG.DE, ADSK.OQ, PTCT.OQ, SN.L, JNJ.N, BA.N, 7203.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ZMH.N, BMWG.DE, RENA.PA, SIEGn.DE, BA.N, 7203.T) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (MTLS.OQ, DDD.N, XONE.OQ, SSYS.OQ, SYK.N, ZMH.N, ADSK.OQ, JNJ.N, BA.N, 7203.T). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (PHG.AS, PTCT.OQ, SIEGn.DE). Credit Suisse has a material conflict of interest with the subject company (ZMH.N) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Zimmer Holdings Inc. (NYSE and SIX: ZMH on its announced acquisition of Biomet Inc.
Materialise (MTLS) 57 21 July 2014
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Materialise (MTLS) 58 21 July 2014
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This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
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