Materialise (MTLS) reported 4Q23 results that were mostly in-line with expectations. While 2024 revenue guidance came in modestly lighter than expected, we believe this is the new CEO taking a conservative approach in her first year at the helm. Furthermore, the company is expecting profitability to improve in 2024 with modest operating margin expansion. Shares traded down ~7% on the light guidance, but we view Management's likely conservative 2024 outlook as a buying opportunity given our upbeat long term outlook.
4Q23 Key Takeaways
Materialise reported 4Q23 revenues of €65.3M, which was up 4.1% Y/Y. Growth in the quarter was driven by the company’s Medical segment with revenues up 14.8% Y/Y to €27.8M. Manufacturing revenues were down 2.1% Y/Y to €26.2M as a slow down in prototyping demand impacted sales. Meanwhile the Software segment was down 3.8% Y/Y driven by non-recurring software sales that were likely impacted by challenging demand for additive manufacturing systems.
Materialise saw strong gross margin expansion in 4Q23 with gross margins growing 150 bps Q/Q and 60 bps Y/Y to 57.5%. Adjusted EBITDA in the quarter was €8.5M, up 99.0% Y/Y. Robust growth in adjusted EBITDA was driven by record Medical adjusted EBITDA margins of 33.6% in the quarter, which were up 420 bps Q/Q. Software adjusted EBITDA margins of 11.2% and manufacturing adjusted EBITDA margins of 2.1% were pressured as a result of lower revenue.
2024 Guidance: Materialise expects 2024 revenue to be in the range of €265 - 275M, which implies 5.4% Y/Y growth at the midpoint. While the company highlighted they expected to grow in all 3 business segments, we believe this commentary discouraged investors as it implies growth in their Medical business to slow from the mid-teen revenue growth experienced over the last two years. The company highlighted they expect lower medical software sales to device manufacturers to weigh on Medical revenues in 2024, but we believe the company is still positioned to see another year of double digit growth in the Medical Segment. The uncertain macro environment is also expected to weigh on growth in the company’s Manufacturing segment. Materialise expects 2024 adjusted EBIT in the range of €11 - 14M, which is up 26.4% Y/Y at the midpoint. That said, keep in mind this is their new CEO’s first year at the helm, and is likely hoping to establish a solid track record of exceeding expectations. In turn, we view this guidance as likely conservative and could see upward revisions throughout the year.
Financial outlook: As we highlight below, we are expecting revenues to grow to €269.2M implying 5.1% Y/Y growth. Given the challenging operating environment, we expect gross margins to remain mostly flat in 2024, but operational efficiencies will increase operating margins by 230bps to 4.5% for the year. We continue to expect Materialise can conservatively grow ~10% Y/Y as macro conditions improve. Coupled with sustained operating leverage, we forecast the company generating mid-teen adjusted EBITDA margins by 2028.
Below is an overview of our 5 year outlook with full financial model here.
Source: Industrial Tech Analyst Estimates
Investment Thesis: Following 4Q23 earnings we remain very upbeat on Materialise as they are still trading at an all-time low valuation despite their ability to continue to grow 10%+ over that last 2 years in a tough macro environment. While weakness in the stock performance has been largely attributed to poor sentiment across the entire additive manufacturing sector, we believe shares have been significantly oversold. Demand for 3D printing patient specific surgical tools and implants continues to rise, and driven by pent up demand for elective surgeries, we expect the Medical business to continue to see double digit growth for the next several years. Furthermore, the Manufacturing segment has positioned itself as a leading service provider of 3D printed production parts, which we expect to drive high-single digit growth. Lastly, we expect profitability to improve under the company's new CEO. Materialise is currently trading below 6x EV/EBITDA multiple based on 2024 consensus estimates, which compares to the 5-year average of 40x. These all support our bullish stance and expectation for multiple expansion, which drives our price target of $12.91.
As shown in the table below, we use a 5 year DCF model to value MTLS shares. Based on our current forecast, which we convert into US dollars, and terminal EBITDA multiple of 15x, we value MTLS at $12.91 per share. We lowered our price target from $17.58, as a result of lower growth expectations and higher expected operating costs as the business grows.
Source: Industrial Tech Analyst
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