Stratasys (SSYS) Q4 2021 Earnings Call Transcript

Stratasys (SSYS 1.12%)
Q4 2021 Earnings Call
Feb 23, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Stratasys Q4 and full year 2021 earnings conference call. 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.

I would now like to turn the conference over to your host, Mr. Yonah Lloyd, chief communications officer and vice president of investor relations.

Yonah Lloyd -- Chief Communications Officer and Vice President of Investor Relations

Good morning, everyone, and thank you for joining us to discuss our 2021 fourth quarter and year-end financial results. On the call with us today are our CEO, Dr. Yoav Zeif; and our new CFO, Eitan Zamir. I would like to 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 2021 year, which we expect to file with the SEC over the course of the next day. Please also refer to our operating and financial review and prospects for the 2021 year, which is included as item five of that annual report, as well as the press release that announces our earnings for the fourth quarter of and full year 2021, which is attached as an exhibit to a report 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 will be attached as an exhibit to a report on Form 6-K that we will 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. I'll now 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. Stratasys had a strong quarter with over 17% revenue growth compared to the same period last year, driven by the highest system sales since Q4 of 2018. Each of our technologies and all of our regions contributed to this growth.

I will share a general overview of our achievements and milestones in 2021. And after our financials and guidance, I will conclude with some thoughts for 2022. Stratasys today is in a very different place than it was at the beginning of 2021. Until last year, our business had been centered around two core technologies, FDM and PolyJet.

And while we maintained leadership in these areas, this limited portfolio meant we were missing opportunities to participate more fully in the fast-growing applications at the heart of the shift from prototyping to manufacturing. And we have not developed and launched meaningful product upgrades in a number of years. It was critical to evaluate the entire business and target strategic investment to evolve our product portfolio. We established our strategy to be the first choice in polymer 3D printing, encompassing the entire product life cycle with multiple technologies and complete solutions for superior application feeds across design, manufacturing and healthcare.

We believe this approach provides the largest total addressable market in the industry. This strategic focus drove us to specifically increase our exposure to manufacturing applications. A year ago, we shared that in 2020, over 25% of our revenues came from manufacturing. We are pleased to say that for 2021, it was 29%, and we expect 2022 manufacturing sales to grow at least 20%.

Clearly, our focus on manufacturing is working. We accomplished this with new systems tailored to manufacturing at scale, a software platform to integrate the entire manufacturing digital thread and a material strategy that rapidly opens-up new applications for our customers. Today, we are collaborating with the world's leading materials companies, software partners and our customers, creating many new avenues for growth through a combination of direct sales and licensing. We are excited about this broader portfolio and believe it will further complement our systems offerings to help drive our overall growth strategy, and there is more to come in the years ahead.

We also dramatically strengthened our balance sheet in 2021. At year-end, we had over $500 million in cash and equivalents, up from $272 million as of the end of 2020, giving us flexibility to seek opportunities that will support our future growth. We believe that by continuing to prudently invest capital back into the business, we will achieve meaningfully accelerated revenue, earnings and cash flow in the years ahead. Now, let me provide more specific color on our 2021 accomplishments that were supported by our strong balance sheet.

The first area of focus was strategic acquisitions, including Origin, which was completed at the very end of 2020, RPS and Xaar 3D, which will support our customers' manufacturing needs and begin notably contributing to our growth in 2022. Next, we extended our software capabilities and plan to add licensing to give customers access to our new open materials options. Additionally, we initiated a long-term technology invested arm that has already deployed capital in companies with cutting-edge technologies such as material jetting, cost processing and continuous carbon fiber. Building on our five industry-leading 3D printing technology, we introduced several new product offerings over the course of the year, including three systems targeting our manufacturing customers.

First, the Origin one, designed for end-use manufacturing applications that uses P3 technology to produce parts at volume from a wide range of third-party photopolymer material. After a very successful beta program, we just recently started shipping this system. Next, the H350. The first of our new eight series, powder bed systems, powered by SaaS technology and built to deliver production level throughput of end-use part, which we started shipping in December.

And the F770 and FDM printer ideal for large parts, featuring the longest fully heated build chamber on the market. We also introduced 3D printers tailored to some of our most important industry application segments. This includes the Origin One dental printer and the J5 DentaJet. Together, they provide dental labs with comprehensive additive manufacturing solutions for the large and growing dental markets.

We also launched the J5 MediJet printer, which gives healthcare customers the ability to print highly detailed anatomic models and drilling and cutting guides quickly and cost effectively with approved third-party 510(k) cleared segmentation software. We introduced the J35 Pro and J55 Prime PolyJet printers, along with new software solutions for research and packaging prototyping. Finally, after acquiring RPS in Q1 last year, we launched the new line of industrial stereo-lithography system, expanding our offering to use cases such as investment casting patterns, orthodonti, clear aligners molds and large design parts. In addition to the new systems, we made significant progress on increasing our software focus and offerings.

We introduced an enterprise-ready open software platform, tailor-made for manufacturing. This is important because it gives our customers the ability to integrate fleets of Stratasys printers with their existing Industry 4.0 infrastructure and workflow, allowing them to really scale the use of editing manufacturing. It also strengthens our relationship with our customers because we can use software to continue to add value to their investments in 3D printers. That in turn means recurring software revenues can become a growing contributor to our business.

For example, we announced that we have extended GrabCAD Print software to our H350 printer. For annual licensing fee, this enable functionality focused on optimizing production throughput that is specifically designed for end-use part manufacturing at scale. We also continue to invest in additive specific applications to streamline the workflow of orders to the factory shot. On the material side, we introduced CF10, our new carbon fiber material that we believe will increase the adoption of our technology into production lines, especially for manufacturing aides.

CF10 has also proven to be a catalyst for increased sales of our F370 system and we introduced open materials option for FDM that we plan to launch in the back half of this year, starting with our Fortus 450. We expect this to spare materials innovation, accelerate the adoption and expansion of our consumables and contribute to increasing our software revenues. We also entered into a number of important partnerships, including ECCO, Adobe, Red Hat and others as we seek to provide our customers with complete end-to-end solutions for specific industry applications. These accomplishments in 2021 were thanks to the hard work of our exceptional team at Stratasys.

Together, while managing through the many pandemic and related challenges, we successfully launched over 30 new products into the market. I am very proud of our team and excited to experience even more this year. As we execute on our strategy and build momentum, customers continue to express their confidence in Stratasys. For example, ECCO, a leading global shoe manufacturer is using our Origin One to print molds and shoe laps for development purposes.

Not only do these parts fully match the quality requirements of the CNC machined aluminum counterparts, but they are faster to produce and far more economical. Another example is Radford Motors, one of the two automotive OEMs that are already utilizing all five of our technologies. For each of their coach-built supercars, Radford prints hundreds of Stratasys parts from design through prototyping, tooling and end-use parts that can be found on the final vehicle. We believe this level of 3D printing technology adoption will become standard in the automotive industry.

I would like to take a moment to discuss our efforts and accomplishments with regard to ESG. This is an area of primary focus for our company and our industry. 3D printing has the ability today to address many of the environmental issues facing global manufacturing and we are in the forefront of those efforts. At Stratasys, we are deeply embedding our ESG strategy in our products and processes.

As part of our DNA and company purpose to empower people to create without limits for an economical, personalized and sustainable world, we are addressing many of our business processes and along with our customers, we seek to take climate action while improving social impact. We call it mindful manufacturing, a call to action to redesign processes, parts and supply chain with great thoughts and clear intentions to secure manufacturing, utilizing 3D printing in a way that maximizes sustainability while also supporting business growth. By digitizing, localizing and optimizing for additive manufacturing, we believe net zero targets are not only achievable, but easier to reach than with traditional manufacturing technologies and processes. Our efforts encompass product innovation and improved circular economy for additive manufacturing an extensive outreach in our communities through education and healthcare CSR activities around the world.

We plan to publish a first-of-its-kind market-leading pure polymer additive manufacturing, GRI sustainability report next quarter. As market leader in 3D printing, we see our role as leading the shift to responsible consumption and production, helping our customers achieve their carbon neutrality, net-zero goals and working to address our own footprint, supported by the data and research needed to drive this transformation for the entire additive manufacturing industry. Before I turn the call over to our new CFO, Eitan Zamir to share the financial results, I wish to thank Lilach Payorski for her leadership and many significant contributions to strategies over the past nine years. Lilach built a strong, talented finance organization and her dedication to excellence and professional expertise has helped to preserve and strengthen our financial health as we navigated dynamic markets and pursued strategic growth initiatives.

We wish her the best in our future endeavors. Eitan?

Eitan Zamir -- Chief Financial Officer

Thank you, Yoav, and good morning, everyone. Before I begin my remarks, I would also like to personally thank Lilach for her guidance in the over two years I've been with Stratasys. Her contribution and commitment to the company have been a fundamental part of our success, and I am honored to be assuming the role as CFO at this time in her journey. Now, turning to the numbers.

The fourth quarter of 2021 was another period of successful execution for our company. We delivered the highest quarterly total revenue and highest quarterly system revenue in three years. Cash generated from operating activities was positive for the sixth consecutive quarter. For the fourth quarter, total revenue was $167 million, a 17.3% increase from the prior year quarter, driven primarily by strength in system sales, which was the highest in 12 quarters and is typically a driver for future consumable sales.

Total revenue was up 5% sequentially from the third quarter and was 4.3% higher as compared to pre-pandemic Q4 '19 level. On a constant currency basis, total revenue increased 18.3% year over year. Product revenue in the fourth quarter was $118 million, an increase of 19% compared to the same period last year or 20.1% on a constant currency basis. Within product revenue, system revenue increased 25.9% to $61.8 million compared to the same period last year, an increase by 26.9% on a constant currency basis.

Consumables revenue increased by 12.3% to $56.3 million compared to the same period last year and increased by 13.6% on a constant currency basis. Service revenue was $49 million, an increase of 13.3% compared to the same period last year. On a constant currency basis, service revenue increased by 14%. Within service revenue, customer support revenue increased by 7% compared to the same period last year and increased by 8.1% on a constant currency basis.

We were pleased to see a strong and growing contribution from healthcare and dental and also to see consumable and customer service revenue above 2019 levels. Now, turning to gross margins. GAAP gross margin was 43.7% for the quarter compared to 46.4% for the same period last year. Non-GAAP gross margin was 48.7% for the quarter compared to 49.5% for the same period last year.

The decrease in gross margin versus the prior year period was driven mainly by raw material inflation and ongoing logistical challenges, partially offset by the impact of higher sales and sales mix. GAAP operating expenses were $89.2 million, an increase of $20.7 million or 30.1% from the same period last year. Non-GAAP operating expenses were $79.6 million, an increase of $17.4 million or 28% compared to the same period last year. Non-GAAP operating expenses were 47.7% of revenue for the quarter compared to 43.7% for the same period last year.

The increase in operating expenses was driven by a number of factors, including the return to a five-day work with higher expenses as the market recovered, higher operating costs and commissions due to more revenue and additional operating costs associated with the inclusion of our new acquisitions, including full ownership of Xaar 3D in the fourth quarter. These costs were funded by the resizing plan implemented in May 2020, which allowed us to allocate resources to areas where we believe we will generate stronger growth. Regarding earnings, GAAP operating loss for the quarter was $16.2 million compared to a loss of $2.5 million for the same period last year. Non-GAAP operating income for the quarter was $1.7 million compared to $8.3 million for the same period last year.

The difference reflects the increase in operating expenses in the fourth quarter of 2021 described before, including due to our move from a four-day work week to a five-day work week. GAAP net loss for the quarter was $4.8 million or $0.07 per diluted share compared to net income of $11 million or $0.20 per diluted share for the same period last year, which reflected a one-time $14 million tax benefit in the fourth quarter of 2020. Non-GAAP net income for the quarter was $0.5 million or $0.01 per diluted share compared to $7 million or $0.13 per diluted share in the same period last year, reflecting the increased operating expenses in Q4 2021 compared to Q4 2020. Adjusted EBITDA of $7.9 million compared to $14.6 million in the same period last year, reflecting the increased operating expenses in Q4 2021.

We generated $4.4 million of cash from operations during the fourth quarter compared to generating $23.7 million of cash in the same quarter last year. This was our sixth consecutive quarter of positive cash flow from operating activities. It was driven by strong collections and achieved despite of an increase in inventory purchases. We ended the quarter with $502.2 million in cash, cash equivalents and short-term deposits compared to $299.1 million at the end of the fourth quarter of 2020.

Our cash position was bolstered by a $230 million capital raise in Q1 of 2021. We have executed with excellence to overcome the negative impact of the pandemic and remain well-funded and well-positioned to capitalize on value-enhancing market opportunities as they arise. Now, let me turn to our initial outlook for 2022. We are guiding that our 2022 revenue will be in the range of $680 million to $695 million.

We expect to realize sequential revenue growth each quarter as we progress throughout the year with the second half of the year notably stronger than the first half. The sequential growth is somewhat different than our historical seasonality pattern, primarily due to the timing of new system releases and the corresponding ramp in sales, as well as gradual shift in sales mix. Q1 revenue growth is expected to reach high teens as a percentage over the first quarter of 2021. From a gross margin perspective, given our experience with the global logistics and material cost issues, full year 2022 is expected to be flat to slightly higher than 2021 with the second half stronger than the first half, based primarily on higher revenue.

We expect the first quarter to be relatively flat to the first quarter of last year. I would like to emphasize that we view the current gross margin situation as temporary as the headwinds caused by these external issues pass and we continue to execute on our long-term plan, we expect our margins to head back over 50%. We will continue to invest in our growth engines to generate significant leverage benefit as we responsibly build a strong company for the long term. In 2022, we expect our operating expenses to be approximately $20 million to $25 million higher than 2021, primarily due to the impact of owning Xaar 3D for the full year, higher costs that result from higher sales and investment in new growth drivers such as Origin and healthcare.

I would like to remind you that starting from the second quarter, operating expense is typically higher than the first quarter due to the normal timing of compensation expenses. And despite the higher absolute dollar value, year over year, we expect to see a continuation of reduction in operating expenses as a percentage of revenue throughout the year, improving profitability objective for us and for 2022, we expect to see continued improvement in our earnings. We expect non-GAAP operating margins to be slightly above 2% for the full year, with small operating losses during the first half and turning to profit in the back half of the year due to the anticipated revenue increase. Longer term, we expect operating margin to achieve double digits as our growth plan unfolds in the coming years.

We anticipate a GAAP net loss of $74 million to $67 million or $1.11 to $1 per diluted share and non-GAAP net income of $10 million to $13 million or $0.14 to $0.19 per diluted share. Adjusted EBITDA is expected to be in the range of $38 million to $41 million. We expect our capital expenditures for 2022 to range between $20 million and $25 million. With that, let me turn the call back over to Yoav for closing remarks.

Yoav?

Yoav Zeif -- Chief Executive Officer

Thank you, Eitan. 2021 was a transformative year for Stratasys in many ways. We vastly improved our offerings, strengthened the balance sheet and invested in technology, positioning us for continued growth in the years to come. We experienced our largest contract in company history with a $20 million order from U.S.

Navy for 25 F900 manufacturing systems. Importantly, this is more than just a one-time sale. We are fully qualified and selected as an additive production partner, opening the manufacturing door for us and we expect to scale adoption quickly. We had another large long-term F900 sales as well to a leading global OEM.

These and other manufacturing-related deals demonstrate market confidence in the use of Stratasys technologies as the market shifts from rapid prototyping to true manufacturing, a clear signal the 3D printing industry has reached this important inflection point. In 2022, we will advance our efforts to strengthen our leadership in polymer 3D printing. We have established the foundations for long-term growth based on leading polymer 3D printing systems, complemented by continuous innovation across our portfolio. Two key components of this effort include the A350 and Origin One.

Both products have been well received in their beta programs and we believe this system will help to more than double our addressable market over-time. Equipped with best-in-class offerings, unmatched go-to-market network and support infrastructure, a strong balance sheet and the best 3D printing talent relentlessly focused on execution, we are positioned for sustained growth and strong stakeholder returns as we further build on our momentum in 2022. Looking ahead, we are energized and excited for the future of Stratasys. With that, let's open it up for questions.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

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

Yeah. Thanks. Congrats on the continued progress here and Eitan, congrats on your transition to CFO. I look forward to working with you more closely going forward.

Eitan Zamir -- Chief Financial Officer

Thank you, Greg.

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

I guess I wanted to just start off on new product contribution. And I guess the question more lays upon the feedback and traction out in the marketplace and what you're seeing and hearing from both your installed base and new customers. And again, this is specific to the new products.

Yoav Zeif -- Chief Executive Officer

Hi Greg, good to talk with you. Great question. We are fully geared to leverage the new product in the market. Just think about thousands of customers that we have out there and hundreds of partners.

They just need to sell one or two or three more technologies to the same customer, and we have a fantastic new product in the market. And now, I can go briefly start with the SaaS, great pipeline, solid pipeline and really unmatched quality of parts. I'm amazed every time that I see the flexibility of this machine and the ability really to compete with injection molding. And I'll go to the Origin.

We just finalized the beta and move to general availability. And we are not sharing great, but we had great remarks and grades from our customers, both industrial customers and dental customers. The main advantages of this machine, this is a unique patented layer separation, really a complete different way of running DLP systems and the result is an unmatched part quality, speed, and reliability. And we really look forward to provide to you and to the public more information throughout the year on the performance of those two machines.

We also introduced the RPS, great results above our expectations. Also, the DentaJet on the PolyJet side, when you combine it with Dental Origin, it's an amazing great portfolio, a new portfolio that we have that is very attractive to the dental industry. So when you combine all of it together, practically, we have new products in each one of our technologies. I'll start with the PolyJet, the J35, the MediJet, the DentaJet, I'll move to FDM, we have the F770, which is the largest build chamber, the longest build chamber in the industry.

Really great traction in the market. Then I move to the SaaS and the Origin and the RPS, we are really geared to grow based on the new product.

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

That's helpful. And I guess, Yoav, when you joined, I think you talked a lot about Stratasys being kind of a one-stop shop for customers looking to invest in additive. And now that you have the product portfolio sort of set, are you seeing any tangible evidence of this happening? I don't know whether that's market share gains, maybe that's just increasing sort of wallet share spend within existing customers or maybe just new growth with new customers. But what's your thought on how that strategy is playing out?

Yoav Zeif -- Chief Executive Officer

Short answer is yes but let me elaborate on it. We already have two automotive players, OEMs using all five technologies, which is amazing. And why so important because manufacturers, bottom line, when you look at manufacturer, they prefer to have one provider with one ecosystem with one production environment with someone they can count on. And this is exactly what we are bringing to the market.

We are not selling technology. We are selling the best solutions that fit your problem. We are coming to solve programs to our customers. This is a completely different position in the market compared to where we were two years ago, and it works.

And of course, this is just the beginning, but we are very encouraging from what we are seeing in the market and from the discussion I have with customers on a weekly basis.

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

OK. Perfect. I'll hop back in the queue. Thanks, and good luck.

Operator

Thank you. Our next question is from Troy Jensen with Lake Street Capital. Please go ahead.

Troy Jensen -- Lake Street Capital Markets -- Analyst

Hey gentlemen, congrats on the good quarter and good year.

Yoav Zeif -- Chief Executive Officer

Thank you.

Troy Jensen -- Lake Street Capital Markets -- Analyst

I guess my first question, I want to talk -- you are very welcome. Can you just talk about -- your Q1 guide seems a much better than normal seasonality? And I guess you can feel balance sheet deferred rates were up slightly quarter over quarter. Just wondering, was there any constraints in Q4 that held back in sales? Are they flowing into Q1 or is the better than normal seasonality really just the H350 starting to launch?

Yoav Zeif -- Chief Executive Officer

Hi, Troy. Good morning. Good question. There were no constraints in Q4.

The increase is driven by our new products, as well as our other technologies or old technologies and we started the year with a strong backlog.

Troy Jensen -- Lake Street Capital Markets -- Analyst

OK. Perfect. And could you just confirm you did have H350 revenues in Q4? And then are you expecting to ship the Origin for revenues in Q1 also?

Yoav Zeif -- Chief Executive Officer

Yes. In Q4, we already had the SaaS product. And in Q1, we started shipping Origin and we'll have revenue from Origin in Q1.

Troy Jensen -- Lake Street Capital Markets -- Analyst

Awesome. Guys, congrats. Good luck this year and I'll follow up on call later.

Yoav Zeif -- Chief Executive Officer

Thank you.

Operator

Our next question is from Jared Maymon with Berenberg. Please go ahead.

Jared Maymon -- Berenberg Capital Markets -- Analyst

Hey, good morning, guys. And congrats on the strong results. First question from me. I'm just wondering, with the Origin One dental, you have some big customers trialing that yet? And how likely do you think the opportunity is there to take share with that product?

Yoav Zeif -- Chief Executive Officer

So thank you for the question. Of course, we run a beta program with large and some medium and also some small customers to make sure that we are covering the whole range and we got fantastic feedback from the beta. So we are very encouraging. It's really a unique value proposition in industrial dental in terms of the quality of the power, the accuracy and the speed and this is only the beginning.

So we can do many different applications with one platform. You can go to the Origin in dental, in tooling, in molds, in liner, dentures, spleens, guards, temps, bridges. And when you combine it also with our PolyJet, we are covering the whole range and this is a really great value proposition to medium and large dental customers that we are targeting.

Yonah Lloyd -- Chief Communications Officer and Vice President of Investor Relations

Yeah. Jared, it's Yonah. I would just add on top of that quickly that as strong as the aligner market has shown to be the good adopter of this technology over-time, we see dentures as an even larger market opportunity. And so, we -- and the Origin system.

We discussed when we first announced it a little over a year ago that that was going to be one of the target markets. So we really look forward to updating the market around that particular end use at the appropriate time.

Jared Maymon -- Berenberg Capital Markets -- Analyst

Perfect. Good to hear. And then, I'm just curious, you mentioned briefly, you have a team that's deploying some capital in various opportunities and one of those you called out was continuous fiber. Is there any color you can provide on this?

Yoav Zeif -- Chief Executive Officer

We received this question so many times, so it's good to decorate it. We have a very strong balance sheet. So we have to use it in the best way that will generate returns to our stakeholders and we believe that the best way to do it is to focus on our strategy. We have a laser sharp strategy on polymer manufacturing, we are doing really well on the growth side and creating the most sustainable, strongest company in the industry and this is very attractive to many start-ups.

And so, we are being approached by many start-ups and we decided to establish an investment arm, we call it Stratasys Ventures, but it's all about accelerating the implementation of our strategy. We know exactly where the gaps that we have, mainly in the workflow and exactly where are the needs and the gaps in the industry and we are bringing the go-to-market. So we are investing in very exciting technologies. Like we said in the script, like continuous carbon fiber, we just recently invested in 90 labs that have a very unique way of having X,Y, and Z continuous carbon fiber, not only X,Y, they just closed 17 million round and we were there.

And other companies that we cannot elaborate now, but it's a very strong pipeline for external innovation that will help together with our great people in R&D to make sure that we are keeping our technological leadership in this market because our machines are the most reliable, the most repeatable in the market with the highest throughput and this is what manufacturer looks for out there, and we can deliver it internally and externally and we have a very clear framework how to do it.

Jared Maymon -- Berenberg Capital Markets -- Analyst

Got it. Thanks, Yoav.

Operator

Our next question is from Jim Ricchiuti with Needham and Company. Please go ahead.

Jim Ricchiuti -- Needham and Company -- Analyst

Hi, thank you. Question I had is just with respect to the comment that I believe you made regarding the gross margin pressures being temporary. And I'd like to follow-up on that and maybe drill down a little bit more. Are you anticipating just the mix of revenues, benefiting your gross margins, the scale up in volume or are you taking some other measures to offset some of the pressures that you're facing because it doesn't sound like some of these cost issues are necessarily going away.

Yoav Zeif -- Chief Executive Officer

Hi, Jim. Good morning. It is a good question.

Jim Ricchiuti -- Needham and Company -- Analyst

Good morning.

Yoav Zeif -- Chief Executive Officer

So first, one part is the anticipated improvement in logistics and raw materials in the future. But we also proactively as we scale-up our business as the new products become more mature to optimize and to improve our margins in our processes.

Jim Ricchiuti -- Needham and Company -- Analyst

OK. Just with respect to your outlook for 2022 on the revenue side, maybe you could talk a little bit about which of the verticals do you see the biggest growth potential? I think you're clearly -- it sounds like you're excited about what you're seeing in the dental market. But I wonder if you could just give us a little bit more color in terms of how you're thinking about the year from the standpoint of vertical markets.

Yoav Zeif -- Chief Executive Officer

Thank you for the question. We, by definition, when we launched our new strategy going for manufacturing or what we call end-use part, we decided that we are going to focus on a much larger market to increase the total addressable market, both because of the new technologies, but not less important because of new verticals and new applications. So of course, we have our vertical like the government and the defense and aero and auto and we are doing really well there. But within that, we want to shift from prototyping to manufacturing.

We are the first company in this industry to say 25% of what we are selling is going to end use stock. It was 2020, 2021, we are already 29%. And we believe that it will keep growing -- this share will keep growing above 20% every year. So the strategy works.

So where we focus manufacturing and healthcare, manufacturing across many verticals from consumer, go to aero and auto. And when you go from manufacturing to healthcare, healthcare, it's mainly dental, but also not less important is the whole PSP, what we call pre-surgical planning. We are sitting on the best technology in the industry. We are the only one who can deliver real imitation of anatomic models where you can really imitate this issue.

And we just launched this year what we call digital anatomy creator, where the surgeon or the radiologist can really imitate the tissue and customize it to the different patients. And we believe it will position us as the leader when insurance and reimbursement will occur in this area because it is saving life. So bottom line, manufacturing and healthcare.

Jim Ricchiuti -- Needham and Company -- Analyst

Thank you.

Operator

Thank you. Our next question is from Ashley Ellis with Cross Research. Please go ahead.

Ashley Ellis -- Cross Research -- Analyst

Hi, thank you for taking my question. Eitan, I was wondering if you could dig a little bit deeper into the revenue guidance. You're obviously going against some pretty tough compares in system revenue, and I know you're launching the Origin and SaaS should ramp up. But how should we think about system growth versus your recurring revenues in consumables and customer support? Should we expect that there should be some sort of follow-on from the strong system sales in 2021? And then I have a follow-up.

Thank you.

Eitan Zamir -- Chief Financial Officer

Thank you, Ashley. It's a good question. We are very excited about 2022 and we expect all our strengths to grow, and hardware will be the driver for the increase, but consumables and services will follow.

Ashley Ellis -- Cross Research -- Analyst

And are you factoring any software contribution into the revenue guidance?

Yonah Lloyd -- Chief Communications Officer and Vice President of Investor Relations

Ashely, it is Yonah. Hi. Software is not going to yet be meaningful. It's sort of just starting to launch through.

As we mentioned earlier, there will be some software licensing revenue was going to start to get as we do the open materials, which is beginning in the back half of the year on the F450, but we'll be sure to update you as software becomes a more meaningful part of the revenue.

Eitan Zamir -- Chief Financial Officer

Yeah. And if I may add, we are going to launch new software products in 2022.

Ashley Ellis -- Cross Research -- Analyst

OK. And then, Yoav, could you talk about the decision to open-up the FDM printers to third-party materials? Why now? And then is there a potential you could open up your PolyJet systems in the future?

Yoav Zeif -- Chief Executive Officer

I would say it's an act of leadership. We are leading this industry from prototyping to manufacturing. We had a very thorough analysis and many discussions with manufacturers out there and we identified the barriers. And one of the barriers is the variety of materials they can use for real manufacturing applications.

So it's clear to us that it's better to be in manufacturing and sell thousands of tons instead of few kilos per machines as we have a much better unit economics and to support our customers. Bottom line is delivering higher value to our customers. And the open material, it's all about innovation and partnering around innovation because it's not that we open it without any responsibility on the quality of the part. This is a hybrid model, a controlled open material model where we are working together with our customers in three tiers.

We have tier one, which is preferred. We already announced it. It's exclusive for strategy. The second one is certified.

We are certifying other suppliers, third-party suppliers, but it meets our standards. And then, we have exploratory where everyone can innovate and do better things, but it's FDM. We have focused on this new innovative model is focusing on manufacturing. So it's FDM, it's up and it's Origin.

And we get great feedback from our customers, and it will allow us not to introduce one or two or three new materials a year and you will see it because it's in the road map, but to double or triple the amount of new materials that we are introducing. And we see it also in RPS, for example, it's open. It's doing really well and give us a competitive edge and a lot of value to our customers and to us. So bottom line, when we are talking about opening the material, it's not about having now a model that is where we are losing responsibility or compromising on the quality, it's exactly the opposite.

It's about giving more value to our customers in a responsible way and making sure that we are creating the value indicated to everyone. As for PolyJet, no current plans to open it up because it's prototyping and it's a completely different type of need, and we have most of the materials needed for prototyping. So focusing on manufacturing, doing it with our customers, they love it and also they appreciate the leadership here.

Ashley Ellis -- Cross Research -- Analyst

All right. Thank you very much.

Operator

Thank you. Our next question is from Paul Chung with J.P. Morgan. Please go ahead.

Paul Chung -- J.P. Morgan -- Analyst

Hi, thanks for taking my questions. So can you talk about the interesting things you're doing in aerospace. Can you expand on the Boom partnership, U.S. Navy contracts and how you see those relationships evolving? And then maybe kind of potentially leading to interest from other customers and how material can this part of the business contribute to growth? And then I have a follow-up.

Yoav Zeif -- Chief Executive Officer

Thank you, Paul, for this question. I think it's a reflection of how we are partnering with our customers to change the world, not less than that. So I'll take the Navy, for example. This is the ultimate example of distributed manufacturing.

So people are talking about it for years, a decade about distributed manufacturing. We are working with the government. We are working with the Navy to really implement distributed manufacturing. So there were supply chain issues, long supply chains.

We are going to have F900 machines within the U.S., outside of the U.S. globally to create spare parts. It's amazing, and I want to thank the Navy and the U.S. government for taking it together with us, taking all the industry a step forward.

It's a real manufacturing opportunity across all government bodies. And if I take it to Boom, it's a great example of innovation in action. So we started with them only with prototyping just to cut their development cycle and to save significant time and I believe we save between two to three years and even more because this ability of the engineer to think about it about something and then printing the same day to check it is remarkable, but they took it to different pictures and tooling and then to end use pulp. I visited there.

And it's like you see pulp within the most exciting new generation of passenger aircraft and it is 3D printers. It's amazing. I learned a lot from both those customers. And this is part of the DNA of Stratasys.

We work with our customers to make sure that they will be more successful and that 3D printing will be significant in manufacturing and we have many more of it.

Paul Chung -- J.P. Morgan -- Analyst

Great. Thanks for that cool stuff. So just on cash flow, you managed inventory levels really well and seeing some funding benefits from kind of longer accounts payable days. But if you could expand on how you manage the inventory level so effectively this year? And then how do we think about kind of working cap dynamics in '22? And then can you grow cash from operating in '22, keep the streak of kind of positive quarterly operating cash kind of ongoing? Thank you.

Eitan Zamir -- Chief Financial Officer

Thank you. It's a good question. We're not guiding on cash flow. But on one hand, we continue to increase and to purchase inventory to be prepared for the growth during 2022.

And we do have over $500 million of cash to invest. So we're very positive about 2022 as far as it's concerned with cash flow, but we do not guide on cash flow.

Paul Chung -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from Wamsi Mohan with Bank of America. Please go ahead.

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

Yes, thank you. I just wanted to follow up on the cash flow question. If we look at your midpoint of your operating income guidance, it's about $18 million improvement on a year-on-year basis, which is great to see in 2022. Maybe if you don't want to give an explicit cash flow guide, can you talk about some of the underlying puts and takes that might influence how that increase or decrease in cash flow might trend relative to that increase in operating income? And I have a follow-up.

Eitan Zamir -- Chief Financial Officer

Thank you Wamsi. So first of all, without guiding on cash flow, when you think about cash flow compared to operating income, you take into account all the working capital elements. As I mentioned earlier, we continue to invest and try to increase our inventory and we will continue doing this during 2022 and this should also be taken into account when you model cash flow for 2022.

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

OK. Thank you for that. And then, if I think about the excitement that you're really showing around new products and some of the potential contribution from that, especially in the back half of the year. Is there any way for you to talk about it in your revenue guide of, call it, mid-teens for the year or somewhere close to that growth? How many points of growth do you think these new products can contribute in year one, year two, like I'm sure you have a plan that sort of thinks about contribution sort of on a more ongoing basis.

Can you maybe help us think through how much -- how we should be thinking about revenue growth on a more sustainable basis? And particularly, contribution from these new products? I mean you essentially felt like you're going from two platforms to this multi-platform approach and that's really resonating with your clients. So if '22 is maybe some sort of transition year or launch year in some ways, '23, we should start to see some more acceleration from that. So just trying to parse through how many points of growth maybe you can see stacking up over the next few years. Any color there would be helpful.

Thank you.

Eitan Zamir -- Chief Financial Officer

Right. Thank you for the question. We do not provide guidance on specific products. However, I can say that in 2022, we expect all of our technologies to increase compared to 2021.

Naturally, the launches of SaaS and Origin will have a significant impact in 2022 compared to 2021, but we do expect that all our products and all our technologies will generate growth in the future and after 2022.

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

OK. Thank you so much. Good luck.

Operator

Thank you. Our next question is from Ananda Baruah with Loop Capital. Please go ahead.

Ananda Baruah -- Loop Capital Markets -- Analyst

Hey, thanks guys. Congrats on the ongoing momentum and really appreciate you guys taking the question. I guess just two quick ones, if I could. Going back to Paul's question, you guys -- you provided some really good context on the Navy relationship as to what's driving -- sort of driving business with them.

Could you provide us some context in a general set of what customers are doing that's leading to the increasing momentum, the ongoing momentum and just in a tangible way for us. And then, I have a really quick follow-up. Thanks.

Yoav Zeif -- Chief Executive Officer

Hi Ananda, thank you very much for the question. It's a great time to be part of the additive manufacturing industry. I didn't plan it, but I'm lucky. Because customers understand the global trends and they understand also that additive will be part of the manufacturing of the future.

So everybody is planning now their future in manufacturing, the plans of the future, the micro plans of the future, customization, Industry 4.0, etc., etc., etc. And then, the pandemic with all the supply chain issues that we are facing as well where the ultimate -- created the ultimate stone for us to start engaging with our customers. So you take together like the most fundamental trends that we are experiencing now, the supply chain needs, the customization, especially in healthcare, the need for sustainability and lighter part in order to use less fuel and the innovation in so many areas like in electric vehicles, and the need for new geometry for this, additive is the best solution. And the Navy deal proved it.

Manufacturing can be this, manufacturer can distribute the digital inventory worldwide. You don't need physical inventory, you can have digital inventory. And you can provide parts wherever they are needed. So the people understand it.

And the moment they understand it, they are looking for a partner they can interact with in order to develop those plans of the future. And I think we are positioned quite well because we are a one-stop shop with one operating system with one material platform with one software platform and with a lot of reputation, reliability and repeatability and the ability to deliver. So it's a very exciting time.

Ananda Baruah -- Loop Capital Markets -- Analyst

That's super, super helpful. I appreciate the context. And my quick follow-up is just on the op margin guide for '22. I believe you said about 2%.

Can you just describe what are the puts and the takes? And I guess really what I'm wondering is sort of like what are the things that allow you to begin to expand those operating margins, I'm assuming as we go kind of through 2023.

Eitan Zamir -- Chief Financial Officer

Thank you. So when we think about 2022 and the over 2% margin, we have the growth, the significant growth in our revenue. When we think about opex, it will decrease as a percentage of revenue during 2022. However, we continue to invest in our growth drivers, Origin, SaaS and healthcare and operating margins can expand longer term due to a number of factors, including the increase in consumables, adding software that is coming with higher margins and the entire business, the entire revenue increase that we expect.

Ananda Baruah -- Loop Capital Markets -- Analyst

The scale.

Yoav Zeif -- Chief Executive Officer

If I may add, I think that's exactly the right direction. But if I may add, it's a combination of external and internal forces. Externally, we do believe that the current logistic cost is not sustainable. We believe that the second half of the year, maybe next year, at the end of this year, we see better results because of the capacity in Sea because of the port issue, it will solve itself.

This ongoing crisis that fuel itself will somewhat solve itself as well. So this is on the external side. But we don't base our projection only on external forces. We base on projections on activities and what we are doing, on being proactive.

And we believe that selling more, however, it means that we sell more consumables, selling more consumable, better gross margins. We are investing in higher efficiencies across the company. We are lowering the production cost. What can we do internally? We take control over our destiny.

And we design for cost and we add software and we have NPIs. So we are working on it. We're not coming here and saying gross margin will be better. We are working on it, and it will be better.

Ananda Baruah -- Loop Capital Markets -- Analyst

That's really helpful. Thank you, guys, so much.

Operator

Thank you. Our next question is from Noelle Dilts with Stifel. Please go ahead.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Hi, guys, and thanks for taking my question. First, I was hoping you could comment on if you're seeing any notable differences in demand from a geographic perspective, how you -- what you're seeing in Europe versus the U.S. and Asia? Thanks.

Yoav Zeif -- Chief Executive Officer

So great question. We are not in general. We are not giving the details, but I can give you the high-level trends, share with you the high-level trends. So it's kind of a combination of recovery and innovation, I would say.

So we see that EMEA, which was lagging compared to the U.S. in adoption of new technologies in many verticals like aero and auto are catching up. So we see very nice results from our EMEA region. And then, we see also great results from the U.S.

And then, Asia. So this is more or less the ranking, but I believe it's only a matter of the pandemic and the recovery from the pandemic. So Asia, they adopted a more strict, I would say, Omicron policy. So we see it, which is not in Europe and not the case in the U.S., but bottom line across the geographies, we see really good demand and the growth across region is positive and looks really good.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

OK. Great. Thank you. And second, I was hoping you could just expand a little bit on what your acquisition pipeline looks like as you look out over the next year or two.

Any maybe details on -- are you seeing more smaller deals or larger deals? And what's your appetite for M&A if you look at 2022?

Yoav Zeif -- Chief Executive Officer

We have a very structured framework for business development activities. Starting from acquisition -- but the bottom line, if I start with the bottom line this time is about accelerating our strategy, the implementation of our strategy. We don't do anything which is not within the strategy. But within the strategy, there are so many opportunities.

We started with acquisitions of base technologies, and now we are moving, I would say, to the next phase, which is about really strengthening those technologies, but investing a lot in workflow and materials. So we are moving down the road. We have the best technology. Now, we need to make sure that they have the full solution, which is the best and this is material.

This is a workflow software and also a lot of collaboration. So it's a combination of investment and collaboration. Bottom line, we increased dramatically the size of our investment team and we believe that the combination of external and internal innovation will put us completely in a different way and will secure our technological leadership.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Thanks so much.

Operator

Thank you. Our next question is from Brian Drab with William Blair. Please go ahead.

Blake Keating -- William Blair -- Analyst

Hi, good morning. This is Blake Keating on for Brian.

Yoav Zeif -- Chief Executive Officer

Good morning, Blake.

Blake Keating -- William Blair -- Analyst

Brian ended up being double booked but wanted to get clarity on a couple of items. What is different about 2022 in terms of your revenue visibility compared with 2019, because in 2019, you initially guided between 670 and $700 million in revenue and reported $636 million in the end. So what's driving the confidence this year?

Eitan Zamir -- Chief Financial Officer

Hi, Blake. Good question. We feel very confident about our ability to meet the 2022 numbers. We started with a strong backlog of the year and with the new products and also the existing technologies, we feel confident in being able to meet the guidance.

Blake Keating -- William Blair -- Analyst

Got it. Thank you. And then, how should we reconcile below the EBIT guidance. It implies about $14 million to $15 million in EBIT with the adjusted EPS guidance.

Is it tax rate or how should we think about it?

Eitan Zamir -- Chief Financial Officer

Sorry, Blake, could you say that again? We didn't hear the last part of your question.

Blake Keating -- William Blair -- Analyst

Yeah. How should we reconcile the difference -- the EBIT guidance of about $14 million to $15 million to the net income guidance, the adjusted EPS guidance. Is it tax rate or what's the -- how should we get down to it?

Eitan Zamir -- Chief Financial Officer

So Blake, it's a good question. There is no between the EBIT and the net income. There are no significant items or one-timers as far as it's concerned. So when you look on our tax and financial income in the past, you can use similar levels to model 2022.

Blake Keating -- William Blair -- Analyst

Got it. Thank you. I will pass it along.

Operator

Thank you. Our next question is from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

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

Yeah. Thanks. Just for one quick follow-up or hopefully quick. But I want to take a stab at long-term operating margin guidance.

So commentary suggests double-digit operating margins, which would be a pretty big step up relative to sort of anything you've done in the last five, six, seven years. So I guess, are you targeting a certain year or a certain level of revenue to maybe achieve this? Help us understand your thought process behind it, if you can.

Eitan Zamir -- Chief Financial Officer

Thank you, Greg, for the question. When we think about the longer term, the next few years, as mentioned earlier, first we expect the gross margins to go back to the level of 50% and then which will contribute the bottom line. And then, when we think about opex, so we believe that in the next few years, as revenue grow, we will be able to leverage our scale and we already have the right infrastructure to be able to increase revenue significantly and then increase opex much less than the increase in revenue.

Yoav Zeif -- Chief Executive Officer

Yeah. And if I may add, this is the entire strategy here. We have the infrastructure to do many, many more things and to sell many, many more products with the same infrastructure. We need the patience, but not too long.

I'm not talking here about a long horizon of dozens of years. We have the infrastructure. We need to leverage the infrastructure. That's exactly what we are doing.

So this is on the financial side. But the most important thing in profitability is to deliver value to our customers. And we believe that no one can deliver this level of value and we base it on very, very simple things. One, we have laser-sharp strategy on polymer manufacturing, and we already showed it as we move from 25% to 29% of our total sales only in one year.

We have well-defined growth engines that are working the technologies, the software platform, the material platform and use cases that we are developing, we have execution that it's a new level of execution within Stratasys. This year 30 products, 2021, 30 products. This is a completely new level of execution and most importantly, customers, our customers, are loyal and trust us and work together with us in collaboration to make this happen and to create this value. Then when you translate it, we will have double-digit operating income like Eitan described.

Very optimistic on this.

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

I mean, you're going to see some operating leverage this year, but I don't want to put words in your mouth, but it sounds like it only should sort of get better in the out years. I mean, is that kind of the right way to think about it? I mean that's what the math implies to get to double digit.

Eitan Zamir -- Chief Financial Officer

It's a journey of two to three years that you will see notably strong year results on the operating income, but we are here to build the strongest 3D printing company in the industry with sustainable profitable growth. And that's exactly what we are doing. We are balancing between profitability and sustainable growth and the result is double-digit operating income.

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

OK. Fair enough. Appreciate the color. Thanks.

Operator

Thank you. We have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Yoav Zeif for closing remarks.

Yoav Zeif -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 82 minutes

Call participants:

Yonah Lloyd -- Chief Communications Officer and Vice President of Investor Relations

Yoav Zeif -- Chief Executive Officer

Eitan Zamir -- Chief Financial Officer

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

Troy Jensen -- Lake Street Capital Markets -- Analyst

Jared Maymon -- Berenberg Capital Markets -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Ashley Ellis -- Cross Research -- Analyst

Paul Chung -- J.P. Morgan -- Analyst

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

Ananda Baruah -- Loop Capital Markets -- Analyst

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Blake Keating -- William Blair -- Analyst

More SSYS analysis

All earnings call transcripts