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Stratasys Ltd (NASDAQ:SSYS)
Q1 2021 Earnings Call
May 6, 2021, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Stratasys Q1 2021 Conference Call and Webcast. [Operator Instructions]

It is now my pleasure to turn the call over to Yonah Lloyd, Vice President, Investor Relations. Please go ahead.

Yonah Lloyd -- Vice President of Investor Relations

Good morning everyone, and thank you for joining us to discuss our 2021 first quarter financial results. On the call with us today are our Chief Executive Officer, Dr. Yoav Zeif; and our Chief Financial Officer, Lilach Payorski. I remind you that access to today's call, including the slide presentation is available online at the web address provided in our press release. In addition, a replay of today's call including access to the slide presentation will also be available and can be accessed through the Investor Relations section of our website.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including without limitation those regarding our expectations as to our future revenue, gross margin, operating expenses, taxes and other future financial performance and our expectations for our business outlook. All statements that speak to future performance, events, expectations or results are forward-looking statements. Actual results or trends could differ materially from our forecast. For risks that could cause actual results to be materially different from those set forth in forward-looking statements, please refer to the risk factors discussed or referenced in Stratasys' Annual Report on Form 20-F for the 2020 year, which we filed with the SEC on March 1, 2021.

Please also refer to our A, operating and financial review and prospects for the first quarter of 2021 as well as B, press release that announces our earnings for the first quarter of 2021, which are attached as exhibits to 2 separate reports on Form 6-K that we are furnishing to the SEC today. In order to obtain updated information throughout the year concerning our quarterly results of operations and the risks and other factors that most impact those results, please see the quarterly earnings press releases and our quarterly operating and financial review and prospects, each of which are attached as exhibits to reports on Form 6-K that we furnish to the SEC on a quarterly basis over the course of the year. Stratasys assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

As in previous quarters, today's call will include GAAP and non-GAAP financial measures. The non-GAAP financial measures should be read in combination with our GAAP metrics to evaluate our performance. Non-GAAP to GAAP reconciliations are provided in tables in our slide presentation and today's press release.

Now, I would like to turn the call over to our Chief Executive Officer, Dr. Yoav Zeif. Yoav?

Yoav Zeif -- Chief Executive Officer

Thank you, Yonah. Good morning everyone, and thank you for joining us. Today, I will touch on the highlights of the first quarter and share insights from a very exciting global event we held last week.

At Stratasys, we are committed to being at the forefront of the polymer 3D printing market, producing and delivering the most innovative next-generation technologies that address the fastest growing manufacturing applications. 3D printing is migrating from being primarily a prototyping tool to providing full scale digital manufacturing platforms at mass production level. Stratasys is leading this transformation with manufacturing applications in polymers, which we believe is a higher value opportunity than method.

This year has gotten off to an exciting start for Stratasys. Last week, we hosted an unprecedented online event attended by over 4,500 customers, resellers, and partners. At the event, we provided details on 3 new manufacturing-focused product offerings that will play an integral role in our future growth. We continue to be energized by the tremendous potential that our business and our industry has especially in end-use part manufacturing. We expect this demand driver to produce compound annual growth of over 20% starting next year. We believe that our leadership position in 3D printing will strengthen as we execute on delivering current products while expanding and launching additional new products.

Turning to our results for the first quarter. Our revenues of $134.2 million were in line with our previously stated outlook. We saw particular strength with nearly 41% growth in system revenue, which should drive future recurring revenue from consumables. Our operating cash flow was $22.8 million following last quarter's $23.7 million.

During the first quarter, we achieved several important milestones to drive our strategy. We continued our focus on expanding the GrabCAD software platform with the launch of the GrabCAD Software Partner Program. This is an ecosystem of software provider integrating their offerings with Stratasys to provide our customer with end-to-end additive manufacturing solutions. The program will enable customers to expand on their prototyping and manufacturing workflow to better address the opportunities for 3D printing.

We also released the GrabCAD Connectivity software development kit, SDK. This will enable developers and customers to integrate our technology in the factories and make them industry 4.0 compatible. Our connectivity SDK is a sophisticated 2-way communication platform. Our customers can monitor the fleet of Stratasys printers and also use enterprise software applications like MES or ERP to communicate back. In addition, we added the industry standard MTConnect communication protocol to more systems to support data exchange between manufacturing software applications used for monitoring and analytics. This recent software releases support our customers increasing deployment of our additive manufacturing product to the production floor.

We introduced our J5 DentaJet 3D printer to serve the growing demand for dental solutions. It is the only multi-color, multi-material 3D printer enabling technicians to load mixed trays of dental parts. It can produce 5 times more dental parts on a single mixed tray than any of our competitors offering in a compact office friendly size. We have already started to see excellent customer attraction such as NEOLab in Massachusetts, which served 3,000 orthodontics and dental clinics across the U.S. Our customers are impressed by the J5 ease-of-use, multiple models in one print, minimal post processing, and the fact that models go from concept to production faster than ever. The dental industry has been an early adopter of additive manufacturing for true production parts and is currently over a $1 billion opportunity for 3D printing.

We also introduced a new carbon fiber material for our award winning F123 Series 3D printer that is specifically formulated for applications such as tooling, jigs and fixtures. The strength and lightweight of carbon fiber make it an excellent replacement for metal across many applications. We acquired RPS adding a top quality product line of industrial stereolithography systems complementing our portfolio to give us a full suite of polymer 3D printing solutions across the product lifecycle from concept and design to end-use part. We continue to expect the acquisition to be slightly accretive to revenue and non-GAAP earnings per share by the end of 2021.

Our customers continues to validate our innovation and technological advances as evidenced by the recently signed contract extension and expansion with Airbus. The agreement significantly increases the range of cabin interior components and other parts. This is a perfect example of our Stratasys executes a land and expand strategy. The original agreement signed over 5 years ago only focused on parts for the Airbus A350 as an alternative to traditionally manufacture parts increasing supply chain flexibility. Once Airbus started printing parts with our FDM technology, they soon progressed from a small number of alternate parts to using the technology for serial production at a much larger scale. We are also able to provide on-demand part service through our Stratasys Direct Service Bureau. The updated agreements increases the range of aircraft type to also include the A300, A320, A330, and A340 as well as replacement and sales of through MRO applications. Our additive manufacturing is now part of the typical interaction with procurement to standard supplier channel as a regular course of business.

As I mentioned earlier, last week at our manufacturing launch event, we announced 3 new product updates, which will strengthen our market leading offerings and value potential that we bring to customers. The Stratasys Origin One, best-in-class photopolymer 3D printer that received a top to bottom optimization upgrade to improve serviceability, performance and utilization. Key use cases include medical device components, automotive aerospace, defense consumer goods and dental applications such as splints, bridges, aligners and dentures. We also shared some great insights for Origin customers, specifically, we highlighted TE Connectivity, a leader in connectors and central products. They are now printing thousands of parts using Origin P3 technology including the first-ever 3D printed aerospace production connector. We plan to begin shipping this upgraded version in the fourth quarter this year.

The H350 powered by selective absorption infusion or SAF technology and build for true thermoplastic mass production of consistently accurate end-use parts. Our Stratasys Direct service bureau as well as others in Europe have already started producing parts on the H350 as better users for customers in automotive, consumer goods and healthcare. We also introduced a renewable bio-based PA11 material that is derived from sustainable castor oil which has superior thermal resistant and is less brittle than PA12. It is the first of many new polymer materials for the H Series. And the H350 is even its own customer. It doesn't pass on the system, were actually printed with SAF technology. We plan to start shipping the H350 in the second half of the year.

The F770, designed with the longest fully heated build chamber in FDM. It is a large addition to our F123 product line. We did testing cubic foot build volume. Despite its size, it's designed to be a simple to use as our other popular F123 printers and is priced under $100,000. In addition to the heated build chamber, the soluble support is another important differentiator from most other large-format printers. This will save customers time and enable them to make more complex parts. We plan to begin shipping in late June.

We are on track to enter this next phase of product launches which combined with our multiple competitive advantages will advance our position as the leading provider of polymer 3D printing solutions for our world-class customer base. We have the broadest, most advanced polymer technologies, that span the full product life cycle from concept to end-part. Our PolyJet and FDM systems have been the best selling units in their class. And we have introduced new system for both technologies this year with more to come.

Our recent RPS acquisition adds multi-purpose thoroughly progressive systems to our portfolio and we are now entering through mass production with P3 and SAF technologies. No other company has both the range and the best-in-class innovation that Stratasys can deliver to our end markets. Our software strategy, as discussed earlier, is based on the customer centric dynamic of working closely with many OEM across the industry. We offer a unifying comprehensive platform across our technologies that is built to interface with the top standard enterprise system. Today, GrabCAD has 36,000 application users and 8.8 million community members, more than any other platform of its kind and is at the heart of our cloud-based strategy and growing software ecosystem that includes partnership with Siemens nTopology identified 3D, Link3D, KeyShot and others.

Supporting our product will have the leading global channel that can market, sale and maintain our system for our customer. Over the years, we have built an unmatched sales and service infrastructure with market access across a network of over 200 channel partners. This is the largest and most experienced channel in the industry.

The success of these systems and technologies relies on the talented team that build, manage and maintain them. These are the expert application engineers that educate the market and continue to push the innovation envelope each day as they work with customers to address an ever-expanding universe of applications. Stratasys has the largest team of engineers and customer support in our industry. They have deep multi-disciplinary experience especially in quality and process certification, which is critical for success in aerospace, automotive, healthcare and other sectors. And we have a proven resilient business model designed to scale across a range of macroeconomic conditions, including our successful navigation of the COVID-19 pandemic.

We believe that as our revenue growth accelerate, we can leverage our model and deliver increasing profits while continuing to generate cash. These key advantages combined with the new technologies that we launch in the future, position Stratasys to deliver on our growth strategy. We expect that as our customers return to their production facilities, we will benefit from the pent-up demand.

I will now turn the call over to Lilach, who will share the financial results of the quarter. Lilach?

Lilach Payorski -- Chief Financial Officer

Thank you, Yoav, and good morning everyone. We are pleased to have delivered on our stated goal this quarter. The revenue growth, especially the 40.9% growth in our system sales along with our strong cash generation, both are cautious optimism around the continuing economic recovery from COVID-19.

For the first quarter, total revenue was $134.2 million, in line with our previously disclosed outlook. On a constant currency basis, total revenue declined 1% versus the first quarter of 2020. Product revenue in the first quarter was $90.3 million, an increase of 8.6% compared to the same period last year, or 6.1% on a constant currency basis. Within product revenue, system revenue increased 40.9% compared to the same period last year and increased 37.6% on a constant currency basis. This growth rate demonstrates signs of end-market recovery compared to 2020 where system sales were lower in the first quarter. This was due to the impact of COVID starting in the back half of the quarter when our sales are typically strongest. System sales began to improve by the end of Q2 last year. So while we expect system growth to continue throughout 2021, the comparable percentage rate will naturally come down over the course of the year.

As we noted on our last call, consumable utilization is subject to the impact of COVID. This quarter, consumable revenue was off by 8% compared to the same period last year and was down 10.2% on a constant currency basis. As the market recovers from COVID and usage rates of our systems increase, we expect to see sequential growth in consumable build as we move through the balance of the year.

Service revenue was $43.9 million, down 11.8% compared to $49.7 million in the same period last year. On a constant currency basis, service revenue was off 13%. Within service revenue, customer support revenue was $27.6 million, a 2.2% decline compared to $28.3 million in the same period last year, and decrease of 4.3% on a constant currency basis. We continue to see softness in our parts service bureau business, SDM which has notable exposure to commercial aerospace, where COVID recovery has been slower than for other industries, such as healthcare and education.

GAAP gross margin was 41.4% for the quarter compared to 45% for the same period last year. Non-GAAP gross margin was 46.7% for the quarter compared to 48.4% for the same period last year. The pressure on gross margin is due primarily to the lower proportion of consumables, increased logistic cost and lower SDM contribution. As a reminder, SDM has a relatively high percentage of fixed costs, so the lower revenue is an impact on gross margin. We believe that impact from the logistic issue, a well-known global situation, as well as the slower COVID recovery impact on consumables will remain for the near future. Given the ongoing uncertainty of these issues, we expect gross margin to remain at similar level throughout the year.

GAAP operating expenses were $73.9 million, an improvement of $5.9 million or 7.3% compared to the same period last year. Non-GAAP operating expenses were $65.2 million, an improvement of $7.5 million or 10.3% for the quarter as compared to the same period last year. Non-GAAP operating expenses was 48.6% of revenue for the quarter compared to 54.7% for the same period last year. The improvement in operating expenses was due primarily to the proactive resizing measures we took in the second quarter of 2020.

From an earnings perspective, GAAP operating loss for the quarter was $18.4 million compared to a loss of $19.9 million for the same period last year. Non-GAAP operating loss for the quarter was $2.6 million compared to a loss of $8.4 million for the same period last year. GAAP net loss for the quarter was $18.9 million or $0.32 per diluted share compared to net loss of $21.7 million or $0.40 per diluted share for the same period last year. Non-GAAP net loss for the quarter was $3.8 million or $0.06 per diluted share compared to net loss of $10.6 million or $0.19 per diluted share in the same period last year.

We generated $22.8 million of cash from operations during the first quarter as compared to generating $11.3 million of cash in the same quarter last year. This was driven by strong collections and reduction in spending and inventory level. During the quarter, we successfully raised gross capital of $230 million of gross proceeds and ended the quarter with $530.4 million in cash, cash equivalents and short-term deposit compared to $299.1 million at the end of 2020. We have recently made strategic investments, the acquisitions of Origin and RPS to help build-out our product portfolio and we continue to evaluate additional opportunities that will further accelerate our time to market and other key strategic initiatives.

Last quarter, we provided our outlook for revenue growth in the second quarter and operating expenses for the full year, and we are reaffirming both. For revenue, we still expect mid-teens percent growth for Q2, and we expect to see sequential growth in the back half of the year with the fourth quarter being the strongest. Opex for the full year include an increase of $25 million to $30 million compared to 2020, likely closer to the high-end of the range. The increase is due primarily to the return to a 5 days work week and the cost associated with the recent acquisitions. Capital expenditures are projected to be in the range of $24 million to $30 million.

Looking ahead, with a debt-free, fortress balance sheet, we are well-positioned to capitalize on value enhancing market opportunities. We will continue to invest capital into strategic high growth area of our business, particularly around manufacturing, where increasing customer demand and a proven history of the high utilization should support substantial upside in revenue, earnings and cash flow in the coming years.

With that, let me turn the call back over to Yoav for closing remarks. Yoav?

Yoav Zeif -- Chief Executive Officer

Thank you, Lilach. Our company is executing on our strategy to expand our leadership position in polymer 3D printing. The investments we have made to drive organic growth coupled with the targeted and strategic acquisitions to enhance our end-to-end solution portfolio should result in value creation for our shareholders.

With that, let's open it up for questions. Operator?

Questions and Answers:

Operator

[Operator Remarks] Our first question today is coming from Shannon Cross from Cross Research. Your line is now live.

Shannon Cross -- Cross Research -- Analyst

Thank you very much. I just wanted to ask, I guess I'll ask both questions. The first is with regard to product sales, or system sales, can you just provide a little more feedback to us on exactly who are buying, what's coming in, how much of this was pent-up demand versus new demand, because of some of the products you've launched? And then with regard to consumables sales, given the mix of systems that you're selling, can you give us an idea of how long it will take to see some of the follow-on consumables sales, and your confidence level and maybe usage rates on the products? Thank you.

Lilach Payorski -- Chief Financial Officer

Good morning, Shannon, and some flavor on our system sales, I will start with that. We definitely saw hardware strength growth across all our platforms and region in the quarter. So there is no single product or customer that drove the favorable results. We really see it across all of our -- growth all our business, definitely this growth demonstrate signs of end-markets recovery compared to 2020 where system sales were lowest in the first quarter. This was due to the impact of COVID-19 starting in the back half of the quarter, where our sales are typically the strongest. So that's why, basically you see a very strong, and this quarter demonstrates a recovery that we are happy to see here.

Important to know, the system growth will be early driver for growth in the year. With the introduction of the new product, consumables will follow. I would like to remind you that our new product will introduce more at the second part of the year and will make a more impact in Q4 as opposed to the first part of the year. But as I mentioned, very encouraged with the recovery sign that we saw already now and sure that consumable will follow. Another thing important to note that system sales began to improve by the end of Q2 last year. So while we expect system growth to continue throughout 2021, the comparable percentages rate will naturally come down over the course of the year, but we do expect to see an notable growth during the year.

Now, I will address the consumables. The consumables, we're encouraged to see continuous recovery as we saw also in Q4, as also we saw in Q3. It's still below 2020 level. As a reminder, in Q1 2020, consumable and services will attract relatively business as usual, since COVID hit, started to hit most of the end of the quarter. So substantially, we had almost a full quarter as a comparison unlike Q1 '21, where COVID still impacts during the full quarter. As we are looking ahead for the year, we expect consumables to grow sequentially based on the trajectory of the macroeconomic with the expectation that consumptions will come back to pre-COVID level probably at the beginning of 2020.

Yoav Zeif -- Chief Executive Officer

2022.

Lilach Payorski -- Chief Financial Officer

2022, sorry.

Yoav Zeif -- Chief Executive Officer

Maybe just to add, hi Shannon, maybe just to add, overall definitely -- hey Shannon, definitely there is a pent-up demand, very good to be in such a place, because it's across all regions and platforms. Of course, there are some differences between the different sectors, so commercial aerospace and government are slower to raise, mainly because of the commercial aerospace situation and the new administration in the U.S., but we see the recovery coming in the next quarter on the government side, and of course, healthcare and dental like we discussed before, are early to recover and what is new in Q1 was that education really joined the healthcare and dental in terms of fast recovery.

Shannon Cross -- Cross Research -- Analyst

Great. Thank you.

Operator

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

Troy Jensen -- Lake Street Capital -- Analyst

Hi, thanks for taking my question. First one here for Yoav, if you look at results Yoav, Q1 was relatively in line with consensus, Q2 guide seems to be in line with consensus. if you continue that in the second half, you're going to have about 8% growth this year, but some of that's acquired right from our RPS and Origin, some of that's going to come from the ZARE partnership. If you look at your marketing slides that you used, you talk about an industry that's growing 20% to 25%. So just curious, what's the real outlook here for FDM and PolyJet, and why aren't you guys growing faster than the industry if the core products are sustaining kind of that industry share and then you're adding new technologies into your portfolio?

Yoav Zeif -- Chief Executive Officer

Hi Troy, thank you for the question. As you know, we are not guiding the year, the overall year, because of the uncertainty of the COVID and we give just very specific direction where we can commit and where we see, where we have good visibility. So I can just repeat it. In general, what we are saying is a sequential growth, a quarter-over-quarter, we see the pent-up demand. As we mentioned, we know exactly where we will be in terms of the opex like Lilach mentioned, but overall, when you look at on our NPI status and we are delivering. We were with the J55. We launched the J5 Dental with very good traction in the market. We launched the carbon fiber. We are delivering. We have a structured plan, and we are delivering on it.

We launched new products both on FDM and PolyJet, put it together with the pent-up demand, we see a good market interest in those new products, which are really at the top of the line and next-generation both in material jetting and in material extrusion. We are leading the industry in terms of the technology, there is no doubt, and we hear it from our customers. So just take both into your analysis, the fact that we have those new products both on PolyJet and on FDM to the fact that we have 3 new technologies that we're introducing at the second half of the year, and I guess you can do the math by yourself.

Troy Jensen -- Lake Street Capital -- Analyst

Okay. And just a follow-up for you, Yoav, would you agree that Fortus really hasn't had competition specifically in ULTEM, and do you fear that this competition coming now given that the patents for the heated build chamber have expired?

Yoav Zeif -- Chief Executive Officer

I had a call, just to share a call with customer, I cannot reveal their name, but like the top 5 aerospace players in the world. And they told me, and I'm quoting, so I have prepared myself for this call, they said, "You have the best machine out there in FDM, just help us to make it a manufacturing machine" and that's what we are doing in terms of software, in terms of material, you mentioned the ULTEM, it's clear that we have the best heated chamber in the market and also in terms of software material, but not less important certification, regulation, allowable, all this, full package that we are the only one who has it. So even if someone is coming with ULTEM is still many years behind us in terms of certified into aerospace and automotive. We are keep walking. I know our people keep pushing, on new path to answer, on new IP, on better heater chambers, on better processors, on regulation and Airbus expansion is the perfect proof for it.

Troy Jensen -- Lake Street Capital -- Analyst

All right. Good luck in the second half.

Operator

Thank you. Your next question today is coming from David MIzrahi from Berenberg. Your line is now live.

David Mizrahi -- Berenberg Capital Markets -- Analyst

Hey, guys. So I understand the higher operating expenses in '21, but could you just speak to how you're thinking about some of that leverage moving it in '22? Do you have any goals you're talking to just with respect to those operating expenses?

Lilach Payorski -- Chief Financial Officer

Hi, David. Good morning. So specifically, we are not providing a specific guidance in terms of 2022, but definitely, I can speak with you in the overall business model that we are anticipating. It's important to remember that as our revenue will grow with the new adoption of our new manufacturing base system, we expect to see higher profit as we're going to have a higher profit pool, and we are planning to leverage scale on our operating model. We have in place already the infrastructure incorporated and in go-to-market to capture new technology without adding significant costs in the long-term, and this is really our vision, this is our goal in '22 and beyond, in '22 and '23, we definitely will be able to see this leverage on the revenue.

David Mizrahi -- Berenberg Capital Markets -- Analyst

Got it. Okay. And then can you just also comment on how the new printers will impact gross margins going forward, the H350 for example. I know it uses fewer consumables. So I'm just really curious about gross margin impact from new printers and particularly the H350 and it's competitive launches relative to HP's Multi Jet Fusion, for example? Thanks.

Lilach Payorski -- Chief Financial Officer

David, so we are now not specifically addressing the new product. Once we launch, we will speak more to that. But our vision at the end of the day that gross margin is, we have a wide portfolio and definitely, it's a mix issue. Okay. And so overall, it's a mix issue, but under manufacturing strategy, revenue will be significantly higher, driven by high consumption, which ultimately generate a higher profit even if consumable margin may be lower at this model. Plus, we have a design for cost initiatives in place for the new products and for the existing product that we will address over time in the future as we roll-out those new products, focus on improving the cost as product will be more mature as part of the product life cycle. This is something that we definitely are actively addressing.

Yoav Zeif -- Chief Executive Officer

Maybe just to add to Lilach, the systems are in line with our overall profitability. We are living within our industry, although we are not giving gross margin guidelines as you know, but I want to relate to the question about H350, we are very proud of H350, it's really a step-change in our industry in terms of mass manufacturing. So of course, I'm not going to relate directly to HP, but I'm happy to share several advantages that the SAF has, the SAF technology and do it very shortly. We have a whole list of advantages, but in a nutshell, I would say, consistent accuracy and I mean that we have the highest consistency of pulp accuracy. This is must in manufacturing. The second one, second advantage is full control of the printing process environment, which is super important because it enables fast certification of parts and materials, which is critical in manufacturing, everything here is about manufacturing. And the third advantage is really very good economics, because we are working with single fluid. We are having high powder reuse rate and we have an exceptional nesting efficiency in terms of the low that you can put of parts in the cake. So really, it's an amazing machine. We have great plans around it and we are going to reveal more and more material for this platform.

Yonah Lloyd -- Vice President of Investor Relations

David, as you know, I would add to this as well, because you talk about the ability to manage against competition. Remember that we have a very large service bureau that's technology-agnostic and it includes HP, it includes EoS, it includes lots of systems from lots of companies. So as we're doing our own research and development for our own products, where actually customers using other products and really informs our ability to make decisions to develop the best-in-class competitive systems out there.

David Mizrahi -- Berenberg Capital Markets -- Analyst

Thank you, guys.

Operator

Thank you. Your next question today is coming from Noelle Dilts from Stifel. Your line is now live

Noelle Dilts -- Stifel -- Analyst

Hi, thanks, good morning. I was hoping that you could expand a little bit on what the M&A pipeline looks like? And specifically, if you could speak to, if there has been any -- how you're thinking about valuations for targets, obviously, the multiples for a lot of the publicly listed companies have been volatile so far this year, is that impacting target pricing at all? Thanks.

Yoav Zeif -- Chief Executive Officer

Hey Noelle, thank you for the question. I'll start, I'll take a step back and start with what is really important. We have a laser-focused strategy. And everything that we are doing is subject to the strategy, focus, focus, focus, and also M&A for us the strategy is polymer manufacturing and we are actively looking for, I would say responsible M&A opportunities like we did and execute in the past that will accelerate the implementation of the strategy, titled Above Everything, and there are many opportunities and we are very attractive to many of the start-ups out there like you saw our acquisition of Origin and also RPS, because we have the infrastructure and they want to succeed and they want to make that they have -- they are growing their sales and they have the earn out in place and we can commit for it, because we have the infrastructure. And we have the machines required and to integrate it into our systems.

So we are continuously looking for potential investments proactively, and we want to maximize the value for our company and the shareholders, and we look all over, we have a structured unit that's there, the way we are working and this unit is going and screening and scouting, and we are focusing on those technologies and companies that will accelerate our strategy in each one of our technologies, and we know exactly what is needed in the market, which is a great advantage compared to anyone else who is looking out there in terms of financial investment or we see and we will keep doing this and we'll keep doing it in a very disciplined way and create value through those acquisitions.

Noelle Dilts -- Stifel -- Analyst

Okay, great. And maybe just sticking with that theme, obviously, still early days with Origin and RPS, but maybe could you expand upon how things are progressing so far in terms of how the market has received the deals, particularly Origin, and how things are trending relative to your initial expectations? Thanks.

Yoav Zeif -- Chief Executive Officer

Thank you. Great question. It's going really well. I don't know if you had the chance to participate in our manufacturing events, more than 4500 high-end customers and partners participated there, a significant amount of them, actually I would say, around two-third also participated in the breakout session of Origin. And all the guys were there, like all the important companies from Fortune 100 and also the top similar Fortune 100 in Europe and in Asia participated, Tesla, Nike, Amazon Apple GM, Ford, you name it, Lockheed Martin, they were all there because they are interested in manufacturing and we are bringing the full package for manufacturing and that's why we created this team together with Origin, together with RPS.

And if you participated, just to close the loop, all those customers of us, as I just mentioned, I don't know, the Tesla, the Apple, the Google, all those customers were there waiting for the Origin machines to be on our systems to be more precise for the 770 and for definitely for the H350 participating actively and we are going to deliver them the full package for manufacturing. So we expect strong demand on those machines, and for me as a CEO, most importantly, I was very proud to see both in our press conference and also in our event that at the end, we were one team Origin, H350, the ZARE joint venture and our FDM, you could see that this is a one team that is pushing forward our industry into manufacturing.

Yonah Lloyd -- Vice President of Investor Relations

Thanks very much.

Operator

Thank you. Your next question is coming from Greg Palm from Craig-Hallum Capital Group. Your line is now live

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yeah, thanks. I guess, a question on gross margin, can you quantify the impact that you had from logistics? I'm just curious how that compares to what you said about SDM in mix overall. And if I heard you right, I don't think you're expecting any improvement this year. So even as revenue increases, at least in the second half, gross margin stays at similar levels. And so it almost implies that what you're seeing is worsening, because presumably there is some level of overhead absorption in the second half. So I just wanted to get a little more color there.

Lilach Payorski -- Chief Financial Officer

Good morning, Greg. Specifically on the logistic, yes, we were impacted by the global logistic issue that you saw overall, we are not the only company who actually suffer from that and it's considerably fair to assume that it's about 1% of our gross margin, this impact due to those logistical. And as we mentioned on the call, we expect gross margin to stay at this level through the balance of 2021 given the uncertainty around the high logistic costs and the consumables impacted by COVID. At the same time, I would like to mention that we are analyzing and increasing our inventory level of raw material and finished good to avoid delay, increase in production level and prepare to foresee or held delay in our planning process. The most important things for us is meeting the demand, we try, we are evaluating a wider array of shipping option to ensure we can deliver goods with minimal business and cost impact. It's very, very important to us to address the....

Yoav Zeif -- Chief Executive Officer

Yeah, maybe I will just add to it. There is also some positive aspects, there are some positive aspects to the logistic side. So just to put to sleep on the gross margin, gross margin is a combination of the logistics, the consumable mix and SDM, and logistic was quite a large part there and really you can solve it by yourself. But those what's really impacted our gross margin, and since there is uncertainty on the recovery on the consumable and the logistic, there is no control there on the SDM side, that's why we are cautious with our projections on gross margin. But what is the positive aspect of this? What is the opportunity here? Supply chain are fragile, and it's not only because of COVID, they were fragile before COVID because of the trade wars and because of some barriers, and looking forward, with the UK, Europe, Brexit we'll see more trade issues and tax freeze, then you saw the Suez Canal, the Suez Canal blockage and the weather issues and so on and so forth. So supply chains are fragile and are being disrupted. So it's clear to everybody that we need more resilient supply chain, by the way we are facing the same issues.

So we are also receiving some parts and machines with the Suez Canal and we were exposed to the congestion in ports all over the world, 7 days, it's the average delay globally and in some ports it could be 10 days or 20 days. So no doubt, everybody understands that the future has to take into consideration digital inventory. This is a great solution. You have no shipping issues, no cash term, no weather impact, no, nothing instead of delivering from A to B across the Atlantic you just deliver from A to A because you produce on the spot with digitally stored inventory. It's also an opportunity, that's what I'm trying to say and this is practically what we call Industry 4.0.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yeah, I know it's a good point. I guess just as a follow-up, because I'm still not entirely clear, because usually when you have a better volume in top line, you see better absorption and you see higher gross margins. So, if the assumption is that volumes in top line revenue are going to increase solidly in the second half, yet gross margins are going to stay at the same level as Q1, it implies that something is worsening from what you saw here in the most recent quarter. So are you assuming that either the mix or logistics or SDM worsens from here, just something just doesn't add up, and I just want to make sure we're all clear on that.

Lilach Payorski -- Chief Financial Officer

Greg, basically we are still conservative in terms of what we see currently. No one really, really know what's going to happen with the logistics constraint that we have, there is some publication that even say that maybe it will take us to the end of the year. How severe it will be? Also no one knows. Okay? So we see prices that we knew in Q1 actually now even higher what we see in Q2. So prices will continue go high. So we believe the logistics situation and challenge all over will impact us significant.

Yoav Zeif -- Chief Executive Officer

That's a great point and also the prices went really up and more to the end at least our prices of logistics from China and from Israel went up more at the end of the quarter. So we are being cautious, but I want to make one thing very, very clear. It's all about mix as we mentioned and logistics and SDM, but overall APS in general, stayed at the same level.

Yonah Lloyd -- Vice President of Investor Relations

Yes, ASPs.

Yoav Zeif -- Chief Executive Officer

Sorry ASPs, the average selling prices stayed more or less, in general, in the same ballpark. And the issue is not coming from there. This is very important to mention.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Okay. Great. Really helpful. Thanks so much.

Operator

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

Brian Drab -- William Blair -- Analyst

Thanks. I was going to ask something, it's kind of related to pricing as well. But just specifically on consumables, you're down 10% organically year-over-year in consumables, but I think customer activity would have increased materially year-over-year given many of the service bureaus manufacturing design companies were shut down or at least slowed down materially last March, and also if you compare it with first quarter of '19, if you go back 2 years, consumables revenues down about 15% and product gross margins down over 600 basis points since first quarter of '19. So I mean there are few things that can explain this, I don't know, is it lower utilization of your machines, even though machine sales have been soft, there's more machines in the market than there were 2 years ago. So is it lower utilization of those machines going out to the market or you lowering price in consumables or what is it? Thanks.

Yoav Zeif -- Chief Executive Officer

Great question. Thank you. You know, you just answered it, it's lower utilization, definitely; it's not that all our customers are back, and even if they are back, they are not utilizing at the same level as throughout pandemic. Add to it the fact that there are some segments that's really were heavily hit guide by the pandemic and are slow to recover, mainly aerospace, and within aerospace, commercial aerospace, they are slower to recover, also automotive and we are highly focusing on those, because those are the high-end segments that are buying our high-end machines. This is manufacturing. So we are more exposed, but I have no doubt that in the future, we will see them coming back strongly, the utilization will go up, and consumable, as we said, will grow sequentially throughout the year.

Brian Drab -- William Blair -- Analyst

Okay. And I guess, is it the same dynamics that's playing out in the system sales, because I mean that's a great result that system sales are up 40% year-over-year, but they were down 40% year-over-year last first quarter and going down 40% and then back up 40% means you're still -- on a 2-year stack basis you're still down 15% in system sales from first quarter '19 levels. Is that the same dynamic that you're just -- it's going to take another year maybe to get back to 2019 levels?

Yoav Zeif -- Chief Executive Officer

So in general, yes. We don't know exactly when aerospace will be exactly in 2019. But what we can see is that hardware is, as you see, because of the deep decline in Q1 that we had in some areas of the world, we see the spend demand, and the spend demand is assigned for consumable, because hardware is probably a phase or two phases before the consumables. So you can use the hardware in order to predict the demand for consumables.

Brian Drab -- William Blair -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question today is coming from Wamsi Mohan from Bank of America. Your line is now live.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Yes, thank you. You did a capital raise last quarter, you are calling this as growth capital. You obviously already have a pretty strong balance sheet before that, so how should we think about maybe pace of either M&A or investments? Is this going to be at some level of accelerated pace versus even the last few years or how should we think about the relative pace of investments in M&A, if you could share any color on that, that would be helpful.

Yoav Zeif -- Chief Executive Officer

We are sticking to our strategy and to the same concept that we mentioned 2 quarters ago. We have a strategy, part of the strategy is a structured M&A proactive, I would say, proactive scouting and screening to make sure that we are bidding pipeline for M&A in a way that will maximize shareholders value through synergies, and the synergies are very clear here. There has to be some -- it has to be something that accelerate the strategy, it has to be something that either accelerated through technology or go-to-market or material or software. So we work on the workflow, which is the software and other type of workflow, or material or hardware technology and we'll keep doing it in a disciplined way. We build an M&A team internally and it's a very strong team. We are not rushed to do anything, but we do it in a very disciplined way to accelerate the strategy.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks, Yoav. And you talk about this acceleration in revenue growth in '22 and beyond. When you think about that in relation to maybe market growth, are you expecting to take share and grow in excess of the market? And maybe if you could just talk about that growth acceleration coming between existing products and new products, I'm trying to isolate what is sort of a cyclical recovery that can drive an acceleration in '22 versus a more secular, sustainable recovery in that growth? Thank you.

Yoav Zeif -- Chief Executive Officer

We are going -- we are leading, but also in the future we will lead the polymer manufacturing segment. We are leading additive manufacturing in polymer. This is the strategy. This is the target, and the way to do it is by making sure that we have the right match for every application, this is why we expanded our portfolio to 5 technologies in each one of them, we believe, we have the best-in-class technology and I am already in this industry almost a year and a half now and I can tell you that it's quite simple. You need to have the best part, and this is scientific. You need to make sure that you have the best parts, properties, and we are working on each one of the technologies. We leverage it through our channel partners, and we are delivering to our customers. We focus on manufacturing a full package of hardware, software, material and services; and we package all of it in a single platform of software. This is a big advantage. This is something we hear from our customers. They want to have one supplier, and we will be this one supplier in polymer manufacturing, and as we said last quarter, we believe that our specific revenue will grow over 20% in this sector of additive manufacturing. So we are currently, as we said last quarter in 2020 around 25% of our sales went to end-use parts, we are going to grow in the mid-teen this year and 20% from next year onwards.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. Your next question is coming from Ananda Baruah from Loop Capital Markets. Your line is now live.

Ananda Baruah -- Loop Capital -- Analyst

Hi. Thanks guys for taking the questions. I guess, just when you guys talk about, Yoav, when you talk about the revenue acceleration beyond the 20%, seemingly starting kind of in '22 going into '23, can you share with us -- presumably that would be sort of through most of the pent-up demand. Could you sort of share with us if that's the case, do you really think at that point the production systems are really driving the growth? And then if they are, do you yet have the qualifications in the key verticals, kind of aero and auto, that you would need for that? And if you don't have them, what do you think the difficulty level to getting there is? Thanks a lot.

Yoav Zeif -- Chief Executive Officer

Hi Ananda, thank you very much for the question. So I want to be very clear, and I want to separate short-term catalysts and long-term catalysts here in the market. So we said, and again, just to clarify, that the part in our sale that is growing for manufacturing as we defined it as end-use parts will grow mid-teens this year and about 20% from 2022 onwards. So this is the statement. Why we believe in it, because, first of all, there are some catalysts and pent-up demand in the short-term because of the recovery from the COVID, because of supply chain pressure that people want to make sure that they are insuring themselves against it, because off the entire environment that we see in the macro economy. This is one.

And then, which is more important. everybody is seeing the long-term trends that we are facing, which lead us to an inflection point in additive manufacturing, and this inflection point is underlined by, as I said before, by 3 very strong forces; one, is the need to have responsive and versatile supply chain. This digital manufacturing we discussed so many times. The second very strong trend is the fact that additive manufacturing technology reach, I would say, new levels in terms of the ability to deliver end-use parts and mass production. So we were in the hundreds, we may be thousands, now we are in the dozens of thousands and maybe hundreds of thousands and you saw in the case of the nasal swabs that we even printed millions. So it's a different era in additive manufacturing. And add to it the third very strong trend, which is the old industry trends that you have those new segments, like electric vehicles and new type of aerospace solution where polymer and composite are so important for the type of the part, for the complexity of the part, but also for the need for customization and short series of products.

So it is a new era. It leads us to manufacturing. Being in manufacturing, it's a whole new story. Because in manufacturing, you need to develop new applications. It's about new materials, it's about very strong and solid service, because you cannot allow yourself downtime, and not less important, you need software. You need software in order to be connected to the manufacturing system, the MES, the ERP, the PLM, you need to be there. And you need to put all this in one package connected. So connectivity is also very important, and we have relationships with those Blue Chip customers, Fortune 100 customers, we are leading these formations, and those OEMs are working with us to transform the industry. It gives us a confidence that we are on the right direction because at the end, we are not walking in a vacuum, but we are walking with our customers to take this industry into manufacturing.

Ananda Baruah -- Loop Capital -- Analyst

That's super helpful, Yoav. I really appreciate. That's really great context by the way. Thanks for that. And just a quick follow-up to that, it sounds like you have like at least a good amount of the capability improvements today you made. So you just referenced your ability to do, production parts and volume, start production parts in volume, and I like that you're sticking your neck out and giving the growth context. So, thanks for that. This is fluid, how much of, sort of the capability you've mentioned, software, M&A et cetera and workflow, how much of the capability do you think you need to get to putting together the solution, software services, like you said putting into one package, how challenging is that over the next, call it 4 to 8 quarters, to get to where you want to be, where your production customers just saying they want you to be to be able to really reflect that growth? I know that's a lot, but I think, the context would be helpful.

Thanks, and that's it for me.

Yoav Zeif -- Chief Executive Officer

Another great question. We have currently the internal capabilities to deliver our strategy. Having said that, it's also clear to us that we can accelerate it, so the focus is on acceleration, not on enabling, because we can do it. And this is a great place to be when you are looking for M&A, because you are coming from a place where you have the certainty that you are good with alternatives. We are not depending on any one to execute our strategy. We have many that can help us to accelerate.

Ananda Baruah -- Loop Capital -- Analyst

That's great. Thank you.

Operator

Thank you. We have reached end of our question-and-answer session. I'd like to turn the floor back over to Yoav for any further or closing comments.

Yoav Zeif -- Chief Executive Officer

Thank you. Thank you for joining us. Stay safe and healthy. Looking forward to updating you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 72 minutes

Call participants:

Yonah Lloyd -- Vice President of Investor Relations

Yoav Zeif -- Chief Executive Officer

Lilach Payorski -- Chief Financial Officer

Shannon Cross -- Cross Research -- Analyst

Troy Jensen -- Lake Street Capital -- Analyst

David Mizrahi -- Berenberg Capital Markets -- Analyst

Noelle Dilts -- Stifel -- Analyst

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Brian Drab -- William Blair -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Ananda Baruah -- Loop Capital -- Analyst

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