3D Systems Corporation (DDD) Q1 2022 Earnings Call Transcript

3D Systems Corporation  (NYSE: DDD) Q1 2022 earnings call dated May. 10, 2022

Corporate Participants:

Melanie Solomon — Investor Relations

Jeffrey A. Graves — Chief Executive Officer and President

Jagtar Narula — Executive Vice President, Chief Financial Officer

Analysts:

Greg Palm — Craig-Hallum Group — Analyst

Brian Drab — William Blair — Analyst

John — Bank of America — Analyst

Troy Jensen — Lake Street Capital — Analyst

Kieran McCabe — Stifel — Analyst

Jared Maymon — Berenberg — Analyst

Presentation:

Operator

Good morning, and welcome to 3D Systems Conference Call and Audio Webcast to discuss the Results of the First Quarter of 2022. My name is Kevin. I’ll facilitate the audio portion of today’s interactive broadcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator Instructions]

As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Melanie Solomon, Investor Relations. Please go ahead.

Melanie Solomon — Investor Relations

Thank you, Kevin. Good morning, and welcome to 3D Systems conference call. With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer.

The webcast portion of this call contains a slide presentation that we will refer to during the call. Those following along on the phone, who wish to access the slide portion of this presentation, may do so on the Investor Relations section of our website. For those who have access to the streaming portion of the webcast, please be aware that there may be a few seconds delay and that you will not be able to post questions via the web.

The following discussion and responses to your questions reflect management’s views as of today only and will include forward-looking statements as described on this slide. Actual results may differ materially. Additional information about factors that could potentially impact our financial results was included in last night’s press release and our filings with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

During this call, we will discuss certain non-GAAP financial measures. In our press release and slides accompanying this webcast, which are both available on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021.

Now, I’m pleased to turn the call over to Jeff Graves, our CEO. Jeff?

Jeffrey A. Graves — Chief Executive Officer and President

Thanks, Melanie, and good morning, everyone. As you all know, the beginning of 2022 has already thrown significant challenges at the entire market, no matter what portion of the economy you serve. Whether it be continued supply chain pressures, significant rise in the rate of inflation, the ongoing impact of the pandemic, or the tragic circumstances that we’ve seen unfold with the Russian invasion of Ukraine, the operating environment has been difficult and largely unpredictable.

With that said, I’m very proud of how our 3D Systems team has continued to stay focused and executing well for our customers throughout this period. Ironically, in the longer term, these same factors that make our life more difficult today are increasing our opportunities for growth in the future, as our customers continue to re-evaluate their critical supply chain strategy and increasingly consider additive manufacturing as a key element in the production strategy of the future.

As we’ve discussed on previous calls, after two years of hard work, we’re now fully organized into our two core business units – Healthcare and Industrial Solutions. This structure distinguishes us from others in the industry, allowing us to execute on what we do best – namely solving the most valuable production application needs of our customers by offering the strongest and most complete portfolio of additive manufacturing technologies brought together with the most knowledgeable and creative application engineering teams in the industry. The double-digit growth in our core additive manufacturing business that we’re now experiencing, even in this difficult market, validates our approach and gives us confidence in our future. To meet the increasing demand that we’re now facing, we’re making key investments in new products and in our operating infrastructure, combining rigorous financial discipline with an overlay of strategic perspective on future value creation for all of our stakeholders.

Despite the challenging macro backdrop, I’m happy to say that 3D Systems has started off the year on a strong foot, and we expect 2022 to be a year of exciting growth and investment as we continue to strengthen the company for the future. I’ll keep my comments brief today as we have our Investor Day next week, where we plan to share more detail on our vision and strategy for the future.

Today, I’ll share with you a few key highlights from the first quarter. On the top line, while supply chain challenges were a significant headwind, we delivered double-digit revenue growth over Q1 of last year when adjusted for divestitures. We continued to see increased demand for our products across both businesses segment.

At a business unit level, our Industrial Solutions business continue to accelerate in both Europe and in the U.S.; in this case, delivering growth of over 15%, excluding divestitures of non-core assets. This continued strengthening validates our observation of increased adoption of additive solutions among the world’s manufacturing community. Particularly strong was the demand for high-precision micro castings. This is a reflection not only of the printing technology itself but the unique materials we’ve developed that enable casting of highly complex fine structures and a deep understanding of the workflow for optimum economics for these solutions.

Healthcare growth of approximately 5%, excluding divestitures, was softer than we would have initially anticipated when we started the year, being driven in part by the introduction of our new DMP 350 Dual, a high-productivity version of our well-proven metal printer, the DMP 350, which has been a mainstay for many of our healthcare customers in recent years. These customers are now qualifying the new dual-laser system and updating their procurement plans to optimize their production workflow, which in healthcare takes careful planning and formal approvals. These acceptance qualifications are proceeding very well, and we expect increasing sales of both our 350 platforms later this year.

In addition, COVID resurgence and the resulting postponement of optional elective procedures are particularly impactful in healthcare, as certain customers delayed capital purchases and experienced lower-than-anticipated growth rates. Given the underlying fundamentals and customer feedback on market conditions, we expect these factors to lessen as we move through the year.

To support the strong engagement and demand that we’re seeing from our customers broadly, we’re continuing to invest in both our product portfolio and core technologies, as well as in our business infrastructure, including information technology, finance and accounting, investments that will enable us to efficiently scale for double-digit growth that we see ahead. The fruits of these investments will become increasingly apparent as we move through the year. But, even in the first quarter, we announced several new opportunities that we’re really excited about for the future.

First was our investment in a unique company called Enhatch, which brings to us another unique software solution for use in our healthcare business that will further strengthen our core capabilities. More specifically, this software solution is directed at the personalized healthcare solutions market, for which we have a long-established market-leading position. In short, through the use of artificial intelligence, the Enhatch software streamlines and scales the design and delivery of patient-specific medical devices by automating the planning and design process. These efficiency increases will further the growth of personalized healthcare solutions, improving patient outcomes and reducing treatment costs for hospital systems.

In addition, in the first quarter, we announced our joint venture with Dussur, the Saudi Arabian Industrial Investments Company. This venture is designed to bring additive manufacturing into the Middle East and North Africa by enabling domestic production capabilities within Saudi Arabia. We believe this investment will accelerate the adoption of production and scale of additive manufacturing, particularly in the oil and gas sector, utilizing our leading polymer and metal technologies, and then expand into additional market sectors over time, such as industrial, aerospace and healthcare. The partnership highlights the increasing focus of additive manufacturing by large global organizations and our opportunity in important and largely untapped market verticals, such as oil and gas. This new venture is expected to begin ramping in scale in the fourth quarter of this year.

And finally, this past quarter, we announced a very exciting new product platform, the world’s first synchronous dual-laser SLA printer. It delivers up to twice the speed and 3x the throughput for cost-efficient, high-quality production manufacturing. This market-leading platform reinforces the strong position we’ve had for decades in stereolithography, in this case, addressing the unique requirements of production applications while leveraging our portfolio of advanced polymeric materials and our software capability. We’ve begun taking orders for this new printer and are seeing strong demand in both healthcare and industrial markets.

Specific to our healthcare business, I’m very pleased by the recent 510(k) clearance from the FDA for our VSP Bolus, a solution designed for improved radiotherapy treatments. Approximately 50% of patients that are diagnosed with cancer receive radiotherapy as a part of their treatment plan, with this translates to millions of procedures worldwide each year. To help target the radiation on a desired location during a treatment, the radiotherapy provider often uses a bolus, which is a flexible material that’s meant to conform to a patient’s anatomy. A poorly constructed or off-the-shelf bolus can often leave large gaps between the device and the patient’s skin, which can result in insufficient or unintended dosing levels; may also expose adjacent anatomy to undesired radiation. With our VSP Bolus solution, 3D Systems can design and deliver boluses that are customized to a patient’s specific anatomy and treatment plan, improving the effectiveness of the radiation treatment and the productivity of the treatment center. This mass customization of printed devices for healthcare addresses both patient outcomes and provider costs, which is the fundamental goal for all of our healthcare solutions.

We’ve begun marketing the Bolus solutions with key customers and expect to see solid demand for this family of products in the future. This is one example of a broad trend in healthcare toward mass customization, enabled through 3D printing of patient-specific solutions. This is the key growth driver for our healthcare business across all of our end markets.

In addition to the 510(k) for our new Bolus product, within days of closing our acquisition of Kumovis at the end of the quarter, we were able to apply to the FDA for 510(k) clearance on the use of printed PEEK polymers for craniomaxillofacial reconstruction indications. We expect this solution will be the first FDA-cleared 3D-printed PEEK medical device. Kumovis brings this advanced polymer technology to our healthcare business, which will serve as a complement to our existing titanium implant solutions, allowing surgeons to optimize individual patient treatment plans.

Customer interest in these solutions is very strong. And following FDA clearance, which we expect later this year, we believe adding the Kumovis product line will further solidify 3D Systems as a leader in 3D printed craniomaxillofacial and orthopedic implants over the full range of metal and polymer-grade solutions. Once these initial indications are approved by the FDA, others will undoubtedly follow, driving exciting growth in the years ahead for our orthopedics business.

So, to quickly summarize – while the first quarter is typically a seasonally slower quarter for us, it was clearly impacted by the significant headwinds I mentioned previously. We were still able to deliver solid double-digit revenue growth versus last year, again, when adjusted for divestitures. Looking ahead, we expect the remaining quarters to be even stronger, following a pattern similar to the seasonality we experienced last year. Supply chain costs and inflation levels remain elevated and have clearly impacted our results. However, we’re taking continued steps to mitigate their effects, which Jagtar will speak to in a few moments.

In total, we’re reasonably pleased with the first quarter results, especially given the macroeconomic conditions and ongoing geopolitical events, which we hope will abate as we move through the year. Importantly, our results show that demand for additive manufacturing and production environments is resilient and continues to grow. Even in these current less-than-ideal conditions, industries are recognizing that the benefits of additive manufacturing can help protect them from the risks, such as supply chain disruptions and skyrocketing costs.

With that, let me turn the call over to Jagtar, who will now describe our first quarter financial results in more detail. Jagtar?

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Jeff. Good morning, everyone. Echoing Jeff, we’ve started off 2022 with good revenue momentum. Given the macro headwinds, I’m especially proud of our team’s execution, which has once again delivered solid top line results. I’ll begin the discussion with first quarter numbers, starting with revenue.

Revenue for the first quarter was $133 million, a decrease of 9% compared to the prior year. This decrease was due to the divestitures of non-core businesses. When adjusted for those divestitures, first quarter revenue increased 10%, as compared to the first quarter of 2021. The continued growth validates the transformation efforts we have guided the company through and demonstrates our ability to deliver results in a challenging environment. Our focus on providing additive manufacturing solutions for industrial and healthcare customers, utilizing our broad portfolio of hardware materials and software solutions combined with applications expertise is continuing to deliver consistent double-digit revenue growth when adjusted for divestitures.

In the first quarter, we had GAAP loss per share of $0.21, compared to a GAAP earnings per share of $0.36 in the first quarter of 2021. The decrease was primarily due to the gains recognized on businesses divested in 2021. We have reported non-GAAP loss per share of $0.06, compared to non-GAAP earnings per share of $0.17 in the first quarter of 2021. The year-over-year decrease was primarily a result of the divestiture of profitable but non-core businesses in 2021, combined with higher spend on core investments in our business, including software, new printer development and our essential general and administrative infrastructure to support future growth.

In addition, we saw one-time impacts that reflect the challenging business and geopolitical environment, including negative impact from bad debt associated with our decision to exit business in Russia and an impact of FX as the dollar strengthened against other currencies, primarily the euro. Combined, the FX and Russian-related bad debt had approximately a $0.025 [phonetic] impact to earnings per share.

Next, let me discuss revenue by market. Our revenue growth continues to be driven by strong demand in both the Healthcare and Industrial segments. Adjusted for divestitures, revenue in the first quarter for Healthcare increased 4.6% and Industrial increased by 15.7%, as compared to the first quarter last year. The rebound in Industrial began in Q4 of 2020 and continued through 2021 and into the first quarter of 2022, making the fifth consecutive quarter of year-over-year organic growth in the Industrial segment. This highlights the strength and the opportunities in our Industrial segment and is a direct result of the strategic investments we have made.

An example is our acquisition of Titan Robotics, which closed subsequent to Q1. With this acquisition, we have entered the market for large-format 3D printing systems using pellet-based extrusion. We believe our strong portfolio, including the new printers from Titan Robotics, offers ample opportunity for our industrial business to continue growth.

Now turning to Healthcare – our Healthcare segment growth, ex-divestitures, continued in the first quarter, although at a slower pace than we would have initially anticipated, as Jeff mentioned. In particular, revenue in our non-dental segment of healthcare, which we call Medical Devices, declined approximately 12% year-over-year. This decline partially is a result of supply chain impacts for our manufacturing operations that produce end-use medical devices, customer purchase delays due to Q1 COVID resurgence that Jeff spoke about earlier, and also partially as a result of device manufacturers delaying printer purchases to qualify our new Flex and Factory 350 dual-laser printers. We believe these new printers will provide strong productivity enhancements to our healthcare customers. As a result, once customer qualification is complete, we expect robust demand for these new products.

Now, we turn to gross profit margin. Gross profit margin for the first quarter was 40.4% compared to 44% in the prior year. Non-GAAP gross profit margin was 40.6% compared to 44% in the prior year. Gross profit margin decreased due to multiple factors, including divestitures and related Q1 product mix and inflationary pressures, particularly in freight costs. We expect gross margins to improve as we move through the year as production volumes and mix improves combined with the impact of recently announced price increases across multiple product lines.

GAAP operating expenses increased 16.4% to $77 million in the first quarter of 2022, compared to the same period a year ago. On a non-GAAP basis, operating expenses were $57.8 million, a 13% increase from the same period a year ago. The higher non-GAAP operating expenses reflect the impact of divestitures, offset by higher spending in targeted areas to support future growth, including research and development, and general and administrative infrastructure, as well as expenses incurred by acquired companies and the previously mentioned bad debt expense associated with our exit from Russia.

Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $1.9 million in the first quarter of 2022 or 1.4% of revenue, compared to $19.8 million in the first quarter of 2021 or 13.6% of revenue. The year-over-year decline in margin was primarily due to the continued focus on investing in growth areas of our business and product portfolio, combined with the impact of divestitures.

Now, let’s turn to the balance sheet. We ended the quarter with $745.6 million of cash and short-term investments on hand. Our cash and short-term investments declined approximately $44 million since the end of Q4 2021, primarily as a result of our operating loss, higher inventory levels, advanced tax payments, our investment in Enhatch and cash payments related to net share settlements on stock-based compensations. Subsequent to quarter end, we closed on our previously announced acquisitions of Titan Robotics and Kumovis for approximately $80 million in cash, net of customary closing adjustments. The acquisitions were funded with cash in our balance sheet.

We continue to have a very strong balance sheet, with ample cash to fund organic growth opportunities and potential acquisitions. We believe investments, both organically and through acquisitions, support our strategy of driving recurring revenue growth and higher adoption of additive manufacturing in both the Industrial and Healthcare segments.

Beginning last year, we provided guidance on full year non-GAAP gross profit margins; and for 2022, we have expanded our guidance to include revenue and non-GAAP operating expenses. We are narrowing our full-year guidance to reflect our performance in the first quarter and expectations for the full year. Given our strong demand outlook, we now expect revenue to be within a range of $580 million and $625 million, a tightening of the range that we have reiterated a few weeks ago. We are narrowing our non-GAAP gross margin guidance to a range of 40% to 43%, and our planned investment profile leads us to believe that non-GAAP operating expenses will now be between $235 million and $250 million. This 2022 guidance assumes no additional significant macroeconomic events that negatively impact our business, such as COVID-19, geopolitical events, or other factors that could impact either demand or disrupt our supply chain.

I’ll now turn it back to Jeff to comment on our upcoming Investor Day before we take your questions. Jeff?

Jeffrey A. Graves — Chief Executive Officer and President

Thanks, Jagtar. And before I do that, I want to thank you for your dedication and leadership and your time with us here at 3D Systems, Jagtar, as we’ve executed on the transformational plan to refocus our business portfolio on additive manufacturing, driving improved growth and operating performance while significantly strengthening our balance sheet. Your contribution and leadership has been greatly appreciated by me and the entire 3D Systems organization, and we wish you very well in your new role.

Finally, we’re thrilled to be within one week of our Investor Day event. We look forward to sharing more about our company vision and our plans for the future. The event will be held on Monday, May 16, in Detroit, prior to the opening of the RAPID + TCT trade show, a leading additive manufacturing conference. We’ll begin with lunch and spend the afternoon discussing both our healthcare and industrial solutions business, including more detailed presentations on key technology elements of our business and applications that are driving our growth.

On Monday evening, we’ll provide dinner and a very special presentation on our regenerative medicine efforts, which I think you will find fascinating. We’re excited about — that this will be an in-person event and look forward to having many of you there to hear from our executive team and see our products in the days to follow the RAPID, including the new SLA 750, as well as our extrusion printers from Titan and Kumovis. Seats are filling fast, but there’s still time for registration at the event. Please contact our Investor Relations folks for more information.

And with that, Kevin, we will open it up for questions.

Questions and Answers:

Operator

Thank you, sir. We’ll now be conducting a question-and-answer session.

[Operator Instructions]

One moment please while we poll for questions. Our first question today is coming from Greg Palm from Craig-Hallum Group. Your line is now live.

Greg Palm — Craig-Hallum Group — Analyst

Thanks. Hi, good morning, everybody.

Jeffrey A. Graves — Chief Executive Officer and President

Good morning, Greg.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Good morning, Greg.

Greg Palm — Craig-Hallum Group — Analyst

I want to start with the revenue guidance. It’s still a pretty large range here. So, maybe help us understand some of the assumptions that are still kind of baked into that? And more importantly, what are the – call it – levers that gets you either into the higher end or lower end of the range at this point?

Jeffrey A. Graves — Chief Executive Officer and President

Yes. Hi, Greg, it’s a bit pretty simple story right now. We’ve got more demand than we can fill, given the supply chain issues that we face. So, it’s really our best estimate of — we anticipate being — continue to be supply chain limited in hitting revenue. So, it’s our best guess that how that looks for the rest of the year. Given the strength of demand, we were happy to tighten it up a bit; and it slightly raised the midpoint. The only reason we have the breadth of range we have right now, Greg, is supply chain issues that we can’t fully quantify. We left significant revenue on the table again this quarter. It’s very similar to Q4 of last year, which is disappointing to us and to our customers. And we’re hopeful that drops off. That would take us to the top end of our range and that — just the easing — general easing of supply chain.

Jagtar, do you have anything else to add?

Jagtar Narula — Executive Vice President, Chief Financial Officer

No, I think you captured it well. It’s primarily just looking at supply chain, Greg. I’ll mention we left about $7 million to $8 million of revenue on the table this quarter. Have we gotten that revenue, we would have been — we would have had 16%, 17% growth year-over-year adjusted for divestitures. So, the supply chain constraints are frustrating. Our teams are working heroic efforts to work through it. And as we see improvements there, we’ll hopefully move up to the higher end of the guidance range.

Jeffrey A. Graves — Chief Executive Officer and President

Greg, what’s really exciting is to see the breadth of interest in additive manufacturing for production environments. It’s — I’m sure it’s true for the entire industry; certainly, very true for us, given our breadth of technology. But, customers are really aggressively looking at how they could use additive. Some will adopt; some may not. But, in general, the opportunities are out there to drive some real exciting growth. It’s frustrating to be limited by supply chain. I’d much rather have that condition than the opposite, and I see no end in sight from a demand standpoint right now; looks very positive.

Greg Palm — Craig-Hallum Group — Analyst

Yes, it’s good. I mean, maybe digging into the supply chain discussion a little bit further, is your sense that there are new customers that are looking at this technology as a way to either onshore or transform supply chains? I mean, that’s certainly something that everybody seems to be talking about. But, maybe give us a few examples if you can about what you’re seeing exactly?

Jeffrey A. Graves — Chief Executive Officer and President

Customers are very sensitive about — for a variety of reasons about what they want to onshore. But, in general, Greg, I can tell you, it’s absolutely true. There is no doubt about it and it’s broad-based. And it’s just exactly like our company is looking at our supply chain, how do we lessen the risks of supply disruptions; how do we bring closer to home and how do we save money? And our customers are doing exactly the same thing. They’re looking at — in the older days, it was performance-driven for parts. You make a part with additive, it will perform better in the system. The big driver now is — on top of that — is de-risking the supply chain and reducing cost.

And the reason that we’ve made the investments we have, particularly in software in the last 12 months, is the rate limiting step we really believe. Given the pace of the printer technology is moving at, the rate-limiting step is going to be much more in the field of materials and in software for bringing the products — the fleets of printers into the factory. So, from our customer standpoint, I think we’re talking a lot about how they bring fleets in efficiently. And then, obviously, we’re providing as many new materials as we can for printing because that’s what customers want to have. And so, great demand.

The technology in printers is moving forward – as it always has – very quickly, and we’re qualifying multiple suppliers on all key components to make sure we can meet the demand we see. But what you see from a demand standpoint, Greg, is exactly what you’d read in the newspaper. It is — every industrial company, I would guess, in the world, especially in U.S. and Europe is looking at how they de-risk and bring their supply chain closer to home, but do it in a cost-effective manner – the automated systems, AI applied to fleets, all of that in order to minimize the labor content. And obviously, labor costs are up. So, they’ve got to not only bring production in-house closer to home, they’ve got to drive it down in cost by automation, which again gets back to software.

It’s a long-winded answer to your question. I hope the color is helpful.

Greg Palm — Craig-Hallum Group — Analyst

Yes, very much so. Appreciate that, and Jagtar, best of luck to you going forward. Enjoyed working with you here.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Likewise. Thanks, Greg.

Operator

Thank you. Our next question is coming from Brian Drab from William Blair. Your line is now live.

Jeffrey A. Graves — Chief Executive Officer and President

Good morning, Brian.

Brian Drab — William Blair — Analyst

Hey, good morning. Hey, first to segueing Greg’s comment there. Jagtar, best of luck and it was good working with you.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Brian. Likewise.

Brian Drab — William Blair — Analyst

So, there’s been slowdown in volume at your largest customer. You had a record year. I think dental was up like 90% — dental revenue for you is up like 90% in 2021. And I don’t know if you said today, but we’re backing into somewhere in the 20% range for the first quarter in growth in dental revenue. And I’m just wondering, are there any adjustments you’re having to make in terms of costs or production, given the volumes there in — for dental aligners have declined materially.

Jeffrey A. Graves — Chief Executive Officer and President

Maybe I’ll comment and then Jagtar can supplement as well here, Brian. Very good question.

No, I would say, Brian, the demand is still very strong. It’s unfortunate that things in the world have become more difficult for dental in general. I mean, things are viewed as optional procedures. It’s unfortunate that it’s become a more difficult environment. But, in terms of demand and demand outlook and things, it may shift a little bit over time, but it’s not led to any significant changes on our part in terms of supply of products to our customers or how we’re managing our supply chain. We want to make sure we’re not holding them back in growth. And their numbers may fluctuate a little bit, but they take a long-term view and invest for the future. Given what they’ve said publicly about their market share penetration and things, their growth prospects look tremendous for years and years to come. So, no, no real changes to us. There may be fluctuations quarter to quarter, but nothing significant. It’s — we run on a pretty long-term game plan with all customers of that scale.

Jagtar Narula — Executive Vice President, Chief Financial Officer

I’ll reiterate what Jeff said. I mean, I think our customers in that market still see themselves as lightly penetrated into a big opportunity. And while they may see short-term impacts in ’22, I think their stance with us is really much more focused on the long-term potential of that market and making sure they have the infrastructure to support it. And as we reiterated or we indicated in Greg’s question, our guidance range reflects supply chain more than it does our perceptions of customer demand, and that would include the dental segment.

Brian Drab — William Blair — Analyst

Okay. So, just one follow-up question on that topic. So, you’re not seeing in 2022? And, I guess, your guidance reflects this – any material decline in your customer spending or capex spending on the type of equipment that you sell?

Jeffrey A. Graves — Chief Executive Officer and President

Yes, I want to be careful, Greg [Phonetic], to not talking about information — I’m sorry, Brian, I’m sorry. I want to make sure not to talk about sensitive information to them. But I would tell you, in general, our guidance fully bakes in input from — and obviously, that customer and all others. So, we feel really good about our revenue profile this year. There’ll be individual fluctuations. But by and large, it’s great to have a customer that takes a long-term view and appreciates that they needed to keep their suppliers moving along, and we’re very, very happy with the relationship.

Brian Drab — William Blair — Analyst

Okay, got it. And then, just last question, where do you think gross margin? You said it should improve throughout the year. Where do you think the gross margin can get to as you’re exiting ’22, what would be the goal? Thanks.

Jeffrey A. Graves — Chief Executive Officer and President

Well, I think we mentioned in the script — Jagtar, you correct me if I’m wrong — I think we see it rising throughout the year. It was lower in Q1 than we would have anticipated, primarily for cost reasons with the supply chain, both labor and materials for cost reasons. Now, we’re driving pricing. We see volumes continuing to rise. So, we should get some economics back. But — so, I would expect it to rise throughout the year, Brian. But, I think it’s — it became less realistic to say we had a shot at the very top end of the prior range, so we brought it down a point. And now, that could flip.

The supply chain thing is — God knows when it’s going to clear — it could clear suddenly, things could happen. But, I think we always want to be pretty realistic with you guys. So, bringing that top end down a point was important to us. And if we — we will hope to revise that every quarter going forward and give you our best view.

Jagtar, anything else?

Jagtar Narula — Executive Vice President, Chief Financial Officer

Yes. Brian, we obviously give guidance for the year. We don’t give guidance for where we think we’ll exit the year. What I’ll say is – there’s various moving parts that feed into gross margin. And so, the puts and takes of it is kind of what leads to our guidance range. If I look at Q1, we saw parts costs a little higher than we anticipated and we saw freight costs higher than we anticipated. Both of those combined probably impacted gross margins by about 2 points. We’ve, as a result, implemented price increases that went into effect in Q2 to help solve that. We’re continuing to look for the year to see if we should expect further increases and be prepared to respond accordingly.

We also have the impact of production volumes. You saw what our tremendous production volumes did in Q4 to our gross margins. As we go through the year, we obviously expect revenue — Q1 is our seasonally length quarter. So, we expect production volumes to increase and therefore, help on the margin side. And we expect changes in mix as well, as we are selling more software and materials. So, all of those are kind of the ups and downs to gross margins, which was why we don’t provide an exit guidance. We provide more of an annual guidance based on where we’re assuming around those ups and downs.

Brian Drab — William Blair — Analyst

Yes, understood. Thank you. Very helpful.

Jeffrey A. Graves — Chief Executive Officer and President

Thanks, Brian. Thank you. [Operator Instructions] Our next question is coming from Wamsi Mohan from Bank of America. Your line is now live.

John — Bank of America — Analyst

Well, thanks for taking the question. This is John on behalf of Wamsi. I just want to talk about the guidance for opex. So, it seems like it slightly went up at midpoint. Just wondering how should we expect the opex to ramp throughout the year? And where is the incremental opex being invested into?

Jeffrey A. Graves — Chief Executive Officer and President

Well, I’ll let Jagtar speak to the ramp because I’m not — it may be more of a steady-state spend. But, I’ll let Jagtar speak to the ramp. The increased spend is being driven by a couple of factors. And it gets down fundamentally to, we see great demand going forward for additive. We want to make sure that we have the product technologies that folks need in both metal and polymer and particularly materials and software. So, we continue to spend heavily on R&D. And we’ve got to make sure our infrastructure has the robustness we need for sustained double-digit growth, as we really believe going forward with the demand profile we see, we’re going to be able to deliver — we have the capability to deliver double-digit organic growth for several years here to come. And there’s a certain scale of infrastructure you need to do that.

So, we’re investing in, as we mentioned, IT, finance, all the automation, all the basic foundational infrastructure you need to be at our scale and grow at double digits. So, that’s where you see the increased spending level this year driven by.

And Jagtar, in terms of ramp?

Jagtar Narula — Executive Vice President, Chief Financial Officer

Yes, John, we don’t expect a significant ramp over the balance of the year. Part of the increase is the acquisitions of Titan, Kumovis. Those are now fully onboarded in Q2. We don’t expect any further ramp in them. And then, outside of Titan and Kumovis, we’ve baked spending plans for the product development things and the infrastructure things that Jeff had talked about. And that’s partially the result of the range because we’ve begun that spend. But to the extent we don’t hit the spend in Q2, that doesn’t necessarily get pushed to Q3 or Q4. So, we’re really expecting it kind of flat over the three quarters.

John — Bank of America — Analyst

Okay. Got it. Thank you. And if I may for a quick follow up – you referenced the supply chain issues. I mean, I’m just wondering what specific areas are you seeing the most impacted – the sourcing, the freight — freight logistic costs, et cetera? Thank you.

Jeffrey A. Graves — Chief Executive Officer and President

Yes, freight is an ongoing issue and it’s driven, I’m sure, by freight utilization in general and then, obviously, fuel. The componentry, John, I’ll tell you, I cannot give you an answer. It changes by the day. I think everybody is — around the world is hand to mouth in a lot of componentry. So, truly, I heard somebody call it yesterday on one of the news networks, whack-a-mole, it truly is. So, we’re deploying excessive resources, if you will, on supply chain, working with our suppliers, qualifying new suppliers, just making sure we can meet the demand that’s out there. So, it is a challenge. And embedded in that are labor costs across the board from components to freight costs, things like that that have an embedded labor content as well. So, it’s a challenging environment.

And I’d just remind myself on the worst stage that we see, I’d rather have this problem than a lack of demand but it is a true challenge right now, I think, for all companies.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Yes. John, I’ll just add. As Jeff said, it’s component sourcing, component costs, freight. We were up roughly $1 million year-over-year in freight costs. Part of that is higher freight rates, but part of it is also because of slower shipping times at sea. We’ve had to air-ship more. We do expect, hopefully, that piece will improve as we go through the year because we’re now adjusting our model to plan for longer shipment times and so moving back more to see shipment, which will help our freight costs. It means higher — slightly higher inventory levels, but we’re adjusting and reacting as quickly as we could.

Jeffrey A. Graves — Chief Executive Officer and President

John, it’s amazing. Machines are made up of hundreds or thousands of components. In normal times, you don’t think about that. But, in supply chain constrained times, you can be hamstrung by anything in the machine that can cause you to not ship it. So, it’s truly an education process every day, I think, for leadership teams at all industrial companies right now to look around. And it is what I believe is really fundamentally driving the demand for additive manufacturing — is people don’t want to be left short on a component that they didn’t even really realize was at risk of being in short supply. So, they look at additive. It opens the door for additive. And then, as you bring it in and you look at the economics – you say, maybe I should make more and more things with this process.

So, it’s really — on the one side, it’s giving us a lot of growth opportunity and that’s tremendous. And that will not go backwards. That’s truly once they’ve got this in place, it’s exciting; they want to grow it. But, it is an ongoing challenge in terms of delivering to demand. So, it’s two sides of the same coin.

John — Bank of America — Analyst

Okay, great. Thank you so much.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, John.

Operator

Thank you. Next question today is coming from Troy Jensen from Lake Street Capital. Your line is now live.

Troy Jensen — Lake Street Capital — Analyst

Hey, gentlemen, congrats on solid results.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Troy.

Jeffrey A. Graves — Chief Executive Officer and President

Thank you, Troy. Good to hear your voice.

Troy Jensen — Lake Street Capital — Analyst

Hey, guys. So, I guess, Jeff, for you, and maybe a couple — I think it was three months ago, you talked about refreshing the product line over the next 18 months. And I think we’ve seen one, right, with the SLA 750. I’m just wondering if next week is going to be a big week for new product introductions?

Jeffrey A. Graves — Chief Executive Officer and President

Oh, Troy, we have what I think is a really exciting product line up for the next 18 months. You’re going to hear regularly of new products being launched. You go through a debate internally of — well, how much do you really reveal at any one time? I can — so, you’ll get a lot — you’ll get more information on Monday and we’re excited about telling you about it. It will be a little judicious because there’s competitive issues and things like that. So, we’ve got to be a little bit guarded. But, I would tell you, Troy, you see a theme in the 750 release and you particularly with your knowledge of the industry, you would appreciate this, is backwards compatibility and forward upgradability is a really big deal.

So, like this new 750, you can buy it as a single laser system or a dual laser system, you can upgrade it in the field; it’s got modularity. That’s kind of the theme that our technology folks are working toward in our new product platforms, so the customers are not stuck having to reinvest significant capital. They can do incremental investments and make sure they also have backward compatibility with products. So, I’m going off on a little bit of a tangent. I will tell you as much as we can next week and I would encourage you to please ask a lot of questions, which you always do. We’ll have a 750 in the RAPID and we’ll tell you as much about the road map as we possibly can. Okay?

Troy Jensen — Lake Street Capital — Analyst

Okay, perfect. Jagtar, will you be at the event?

Jagtar Narula — Executive Vice President, Chief Financial Officer

I will not be at the event. We will have our new starting interim CFO at the event.

Troy Jensen — Lake Street Capital — Analyst

I am going to wish you good luck.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Troy.

Troy Jensen — Lake Street Capital — Analyst

But, maybe one quick follow-up question. So, it seems like every CEO is applauding the Biden administration and The AM Forward Initiative. So, I’m just curious, Jeff, have you seen any more details? I mean, what exactly are they going to do to incentivize adoption?

Jeffrey A. Graves — Chief Executive Officer and President

It’s a point of great discussion, Troy. And I would tell you, Troy, it’s been around long enough. I rarely make any definitive plans based on federal actions and intent and direction. But, I do think it reflects the sensitivity in Washington to the benefits of additive and what it can do for the robustness of the U.S. economy and the resiliency, reducing our dependence on overseas sources of things. I was in Washington a couple of weeks ago and I would tell you the discussion around 3D printing additive manufacturing is on everybody’s lips. It’s — there’s a defense component to it; there’s a national interest component to it; and there’s a resiliency factor that we don’t want to be brought down by other countries and pandemics and things like that.

I think it’s great. My interpretation of bill, which is strictly the layman, is that it’s intended to help smaller businesses adopt additive. And so, I think in terms of driving demand for us, it’s a great thing. I’m not sure if the OEMs of additive will benefit directly. I don’t know that we need to benefit directly. But, certainly, if it helps our customers adopt the additive, particularly small companies, helps them grow, I think it’s fantastic. So, I applaud what they’re doing directionally and it will be interesting to see what they are. We rarely modify plans to meet it, but it’s consistent with what we’re investing in anyway. So, I’m all for it and great to see the sentiment in an industrial direction there.

Troy Jensen — Lake Street Capital — Analyst

Great, guys. Congrats and good luck going forward. See you next week.

Jeffrey A. Graves — Chief Executive Officer and President

Thanks so much. I look foward to seeing you.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Troy.

Operator

Thank you. Next question today is coming from Kieran McCabe from Stifel. Your line is now live.

Kieran McCabe — Stifel — Analyst

Hi, guys, I just had a question. Given kind of the continued resilience in demand and further adoption of additive manufacturing and you had the acquisition of Oqton back in September. I wonder if maybe you can kind of give an update or kind of a sense of conversations with customers about really using software to drive the adoption into production environments and the need for software and sort of — kind of — since the Oqton acquisition, kind of any update you could provide on that? Probably, would have a lot of details for that next week. But, anything you could kind of touch on that now, that would be great.

Thank you.

Jeffrey A. Graves — Chief Executive Officer and President

Sure. I’ll make a couple of comments. And it’s so important to us, quite honestly, in the future. Ben Schrauwen, the leader of Oqton, will be at our Investor Day event to talk about the Oqton software platform and where it’s headed. Yes, I would tell you, for all the folks on the phone, the software is an incredibly important issue in bringing additive into production environments. Again, it did use to be to put it in a laboratory, a one-off machine. It didn’t really matter as long as they wanted a machine that was easy to use and smart. But, to put fleets of machines, we’re talking to guys about hundreds and thousands of printers in a factory, you had –. To avoid process variability and the use of large amounts of labor, you absolutely have to have a robust software environment to run them, a manufacturing operating system.

And that operating system cannot disrupt the ongoing factory when you install it, which is what we love about Oqton. It can plug into SAP or Oracle, and then you can plug not only printers but post-print processing, robotics, you can plug all of that in through APIs into the Oqton platform. So, customer interest in that platform, I would tell you, has been enormous. We’re in dialog with companies every day about it — large companies. I think it’s a new field, so everybody is trying to learn what it can do, what they need to do with it. But, interest has been quite high. So, I’m very pleased with that.

And I think it will help — Oqton will help our entire industry continue to meet this increased demand for additive and production, which is why we set it up as a separate somewhat independent firewall business as we wanted to help the entire industry and the entire customer base of adopt additive manufacturing. So, you’ll hear from the leader of that business next week in person and we’ve staked out a fair bit of time on the agenda for software discussion. I think you’ll find it quite interesting.

Kieran McCabe — Stifel — Analyst

Great. Thank you so much.

Jeffrey A. Graves — Chief Executive Officer and President

You are welcome. Thanks for the question.

Operator

Thank you. Next question today is coming from Jared Maymon from Berenberg. Your line is live.

Jared Maymon — Berenberg — Analyst

Hey, good morning, guys.

Jeffrey A. Graves — Chief Executive Officer and President

Good morning. Good morning, Jared.

Jared Maymon — Berenberg — Analyst

Thanks for the lot of commentary around the supply side. That’s been helpful. But I did just want to ask a couple of questions on demand. So, I’ve been hearing from some other companies that they’re seeing orders slowing and it sounds like it’s mainly in some cases, due to like inflation, interest rates — and interest rates rising and then geopolitical risks, just generally increasing uncertainty. So, they’re either — it sounds like, in some cases, slowing or stalling or delaying their capex decisions or capex orders.

So, I’m wondering are you seeing any of this, or is there any indication that you might start to see some of this and customers making that shift in the coming months? And then, on the flip side, I’m curious if you think this could actually be a bit of a tailwind for additive and you guys because, in some cases, it can be a little more cost-effective and easier to ramp up and ramp down more quickly?

Jeffrey A. Graves — Chief Executive Officer and President

Yes. And I’ve already gone on about the benefits and the positive drivers that we see based on all these difficulties in the environment. And those are true and they’re profound. They are big drivers. The only real risk, and I’d say we have not seen it and manifest itself at all, but in just my opinion — the only real risk is with this rising inflation and the corresponding rise by the Fed in interest rates, it starts tiptoeing toward recessionary pressures. And if our customers finally believe that a recession is coming, everybody starts looking in detail of their capex spending. So, eventually, that could become a headwind. Right now, there’s no headwinds. There’s no sign of that happening right now. I would tell you, in our company, demand is very high, especially exploring new ways of bringing this into production. And it’s driven by everything we’ve talked about – the risk of extended supply chains, supply chain disruption, pandemic, all of that.

On the negative side, in the future, would really only be, I think, if the entire economy slowed down to the point where industrial firms started really looking at how much new capacity they needed to add, I still think there’ll be an underlying tremendous driver to bring it closer to home, whatever that capacity is and to make it more robust. At the same time, offsetting that could be a slowdown in the general economy. Again, we see no evidence of that in our demand profile right now. But, if I were to speculate, that’s the one thing that could affect, I think, the whole industrial sector.

Jagtar, if you have any other view?

Jagtar Narula — Executive Vice President, Chief Financial Officer

The only thing I’d add, Jared, is obviously, I can’t predict what the economy is going to do in Q4 of this year or Q1 of next year. But looking shorter term, I mean, I’m quite pleased with where our pipeline looks or sits right now for Q2. So, that would seem to indicate that demand is still out there and is still strong.

Jared Maymon — Berenberg — Analyst

Got it. Okay. That’s really helpful, guys, and then just as kind of a follow up.

So, I’m just curious, have you guys seen any shift, or is it pretty steady from a sequential utilization standpoint and then subsequently consumables from Q4 to Q1? And then, any sort of outlook on that remaining steady, increasing or decreasing for the rest of the year?

Jeffrey A. Graves — Chief Executive Officer and President

Jagtar, do you want to comment on the individual element?

Jagtar Narula — Executive Vice President, Chief Financial Officer

Yes. So, consumables — Q1 is typically lower than Q4. It’s easier to do a year-over-year number. I’ll give you some numbers that are adjusted for divestitures. So, materials revenue was up about 11% or 12% year-over-year. I think we felt pretty good about that. Printers were up — sorry — systems product revenue was up closer to 22%, 23% year-over-year. So, printer sales were quite strong, which bodes well for future materials revenue. I like it when I see materials growing strong, but printer is growing even stronger because that means there’s going to be follow-on materials revenue in the future.

Jeffrey A. Graves — Chief Executive Officer and President

And again, Jared, we’ll try to give you a little bit more color on on the size of our installed base and our growth outlook next Monday when we talk. It’s really impressive numbers, quite frankly – the scale of it. So, it’s interesting. I think we’re among the first learning of how to sell and manage large fleets of machines, and especially mixed fleets, not only metal and polymer but our machines and those from elsewhere in the industry. So, fascinating times, we’ll share some more insight in that on Monday.

Jared Maymon — Berenberg — Analyst

Great. Sounds good. Looking forward to the Investor Day. And Jagtar, best wishes in what comes next.

Jagtar Narula — Executive Vice President, Chief Financial Officer

Thanks, Jared. Appreciate it.

Operator

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Dr. Graves for any further closing comments.

Jeffrey A. Graves — Chief Executive Officer and President

So, thank you all for joining our call this morning. We hope to see you next week in Detroit and to updating you again on our progress next quarter. Thanks and have a great day.

Operator

[Operator Closing Remarks]