Stratasys (SSYS) Q2 2022 Earnings Call Transcript

Stratasys (SSYS 1.43%)
Q2 2022 Earnings Call
Aug 03, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Stratasys Q2 2022 conference call and webcast. [Operator instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Yonah Lloyd, CCO and vice president of investor relations.

Yonah, please go ahead, sir.

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

Good morning, everyone, and thank you for joining us to discuss our 2022 second quarter financial results. On the call with us today are our CEO, Dr. Yoav Zeif, and our 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. Please also refer to our operating and financial review and prospects for the 2021 year and for the second quarter of 2022, which are included as item five of that annual report and in Exhibit 99.2 to the report on Form 6-K that we are furnishing to the SEC today, respectively. Please also see the press release that announces our earnings for the second quarter of 2022, which is attached as Exhibit 99.1 to a separate 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 exhibitory 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 will now turn the call over to our chief executive officer, Dr. Yoav Zeif. Yoav?

Yoav Zeif -- Chief Executive Officer

Thank you, Jon. Good morning, everyone, and thank you for joining us. Our second quarter results reflect a continuation of our ongoing business momentum. I am proud of the Stratasys team as we delivered our strongest second quarter in four years.

Revenue of $166.6 million were up 13.3% versus the prior year quarter, 16.4% taking FX into account and then sequentially over first quarter. These metrics are in line with our prior outlook. We saw particular trend in system revenue, which grew by over 29% compared to the second quarter of 2021, with year-over-year growth across all printer technologies. Importantly, our balance sheet has us well positioned with $441.5 million of cash and equivalents and no debt, we are operating in an environment of supply chain constraints, global economic uncertainty around inflation, rising interest rates and slowing GDP.

As we face these challenges, our ongoing laser focus on execution of the business plan continues to help us deliver positive financial results and drive progress toward our stated goal of growing our leadership position in polymer additive manufacturing. The first half of 2022, saw us advance our strategy on several fronts. We continue expanding our penetration into applications for aerospace, automotive, healthcare and fashion, we tailored industry-specific solutions for customers like PepsiCo, Toyota, and Rady Children Hospital in San Diego. As noted on our last call, we have launched two new composite ready 3D printers in Q2, along with the new tech side printer for the fashion industry.

In addition, we launched GrabCAD software on the origin line of 3D printers and introduced a broad area of new materials. This breadth of manufacturing expertise is leading to new business opportunities. We recently made two exciting announcements in the auto racing industry. Specifically, Stratasys was named a NASCAR competitive partner where we are teaming with NASCAR to provide the first-ever 3D-printed part to be used on all of their next-generation cars.

Those cars utilize Stratasys' high-yield DA11 material derived from sustainable sources and our manufactured its Stratasys direct using our A350 3D printers. Other parts are produced by NASCAR on our Fortus 450 MC system. We also became the official 3D printing partner of Toyota Racing Development. Our 3D printed parts will be used in the Toyota GR 86 vehicle for competition in 2023.

Stratasys' F370 and the new SV370CR systems are expected to be utilized as part of this partnership. And similar to the NASCAR relationship, Toyota Racing Development will also utilize Stratasys direct to print PA11 parts on the A350. Auto racing is an excellent development proving ground that can ultimately lead to mainstream production runs to millions of consumers and commercial vehicles. We have demonstrated the suitability of the A350 using our SAF technology for producing a wild variety of automotive parts.

This can include ducts, front grill, side mirrors, electric cable and electrical connector among many others. As we execute our materials ecosystem strategy, we will be opening up even more automotive use cases. We have seen similar momentum in other areas. In dental, we continue to see strength in the J5 DentaJet Line that we launched last year.

In Q2, we released an updated version that doubled the throughput without sacrificing quality. Making improvements in resin consumption reduces to both usage and waste and increases the number of parts the customer can place on the print rate. And on the medical side, in early July, we released RadioMetrix for our digital anatomic region, which uniquely let healthcare professionals and medical device company, visualized 3D printed models under X-ray and CT scan in unique way. This attention to the need of healthcare professionals is helping us grow our presence in the market.

For instance, we recently shared how the university hospital of Southern Denmark went from a single material X-ray printer to our multi-material full color J5 Medijet printer. And now their surgeons are saying they no longer want to do surgical procedures without 3D printed guides. I'd also like to add with you that we are progressing on the merger of MakerBot with automaker and we expect it to close during the third quarter. As we previously announced, once the transaction closes, we will hold approximately 45.6% of the combined company, post-merger and will account for the combined company via the equity method rather than by consolidating it within our own results.

This change is not expected to have a material impact on our consolidated revenues. I will now turn the call over to our CFO, Eitan Zamir to share the financial results and update our outlook for the rest of 2022. Eitan?

Eitan Zamir -- Chief Financial Officer

Thank you, Yonah, and good morning, everyone. We are pleased to have built upon the strong start we saw for 2022. Revenues were driven by a 29.2% growth in our system sales compared to the second quarter of 2021, continuing the strong trend that is expected to increase sales of recurring consumables and services in the future. And we saw ongoing operating leverage that reflects the strength of our business model.

In general, we see continued strength in our business performance as revenue growth drove improved margins and earnings results. For the second quarter, total revenue grew by 13.3% to $166.6 million from the prior year period. On a constant currency basis, total revenue increased 16.4% versus the prior year quarter. Product revenue in the second quarter rose by 16.4% to $115.7 million compared to the same period last year or by 19.4% on a constant currency basis.

Within product revenue, system revenue grew by 29.2% to $58.9 million compared to the same period last year and increased by 33.5% on a constant currency basis. System sales reflected the highest second quarter total in four years, strengthened by the continued ramp of the Origin 1 and A350 mass production system. Consumables revenue was up by 3.9% to $56.9 million compared to the same period last year and grew by 7.5% on a constant currency basis. Service revenue was $50.9 million, an increase of 9% compared to the same period last year and up by 10.9% on a constant currency basis.

Within service revenue, customer support revenue grew 9.1% compared to the same period last year, an increase by 12.9% on a constant currency basis. Now turning to gross margin. GAAP gross margin was 40.5% for the quarter compared to 43% for the same period last year. Non-GAAP gross margin was 47.6% for the quarter compared to 47.5% for the same quarter last year.

Higher systems and consumables revenue and raised pricing, along with operational efficiencies, helps to offset the growth in logistics and material costs, which were mostly attributable to global inflation. GAAP operating expenses were $90.9 million compared to $86 million during the same period last year. Non-GAAP operating expenses were $77.4 million compared to $72.5 million during the same period last year. Non-GAAP operating expenses were 46.4% of revenue for the quarter compared to 49.3% for the same period last year as we continued to focus on operational efficiency improvement.

The $4.9 million year-over-year increase in operating expenses on an absolute basis was driven primarily by the impact of the Xaar 3D acquisition, as well as increased travel and trade show activities and higher commissions based on the higher revenue. Last quarter, we noted that the incremental cost was only 35%. This quarter, we are pleased to note an improved efficiency of our model, where the additional operating expenses reflected only 25% incremental cost instead of the historical range in the mid to high 14%. Regarding earnings, GAAP operating loss for the quarter was $23.5 million compared to a loss of $22.7 million for the same period last year.

Non-GAAP operating income for the quarter was $1.9 million compared to a loss of $2.6 million for the same period last year. The difference reflects our business capability and improved operational efficiencies, which resulted in modest gross margin growth and improved operating margin. GAAP net loss for the quarter was $24.4 million or $0.37 per diluted share compared to a net loss of $20.2 million or $0.31 per diluted share for the same period last year. Non-GAAP net income for the quarter was $1.2 million or $0.02 per diluted share compared to a loss of $1.6 million or $0.02 per diluted share in the same period last year.

Adjusted EBITDA of $7.4 million compared to $3.5 million in the same period last year reflected our improved profitability levels. We used $22.8 million of cash in our operations during the second quarter compared to generating $5.6 million of cash from operations in the same quarter last year. The U.S. cash was primarily driven by deliberately increased inventory purchases of over $20 million.

We ended the quarter with $441.5 million in cash, cash equivalents and short-term deposits compared to $475.6 million at the end of the first quarter of 2022. With our fortress balance sheet and strong cash generation profile, we remain well funded and well positioned to capitalize on value-enhancing market opportunities as they are identified. Now let me turn to our outlook for 2022. I would note that our guidance continues to include full year anticipated contribution from MakerBot as the announced merger with automaker has not yet closed.

Since our last update, currency exchange rates have continued to decline across a number of our key foreign currencies, impacting our outlook for revenues for the second half of the year by $10 million. We expect the timing of such impacts to be relatively even across the third and fourth quarter. And as a result, adjusting our full year revenue guidance accordingly. We now expect revenue in a range of $675 million to $685 million and for revenue to continue growing sequentially throughout the remainder of the year.

Revenue growth for the second half of the year is expected to be approximately 6% to 7% higher than the second half of 2021, with the fourth quarter anticipated to grow at a higher rate than the third. As I noted earlier, the change in full year revenue outlook is due to declines in currency rates. From a gross margin perspective, we continue to expect full year 2022 to be flat to slightly higher as compared to 2021, with the second half stronger than the first half based primarily on higher revenue. We expect the third quarter to be relatively flat compared to the third quarter of last year.

As a reminder, we view the current gross margin situation is temporary. Once headwind caused by macro logistics and material issues passed and we continue to execute on our long-term plan, we expect our margins to head back over 50%. In 2022, we now expect our operating expenses to be approximately $18 million to $23 million higher than 2021, primarily due to the impact of owning Xaar 3D for the full year, highest costs that result from higher sales and investments in new growth drivers such as Origin One and healthcare. And despite the higher absolute dollar value year-over-year, we expect our operating expenses as a percentage of revenue to continue improving by decreasing throughout the year.

We continue to expect non-GAAP operating margin to be slightly above 2% for the full year. Longer term, we expect non-GAAP operating margins to achieve double digit as our growth plan unfolds. We now anticipate a GAAP net loss of $78 million to $69 million or $1.17 to $1.04 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 still expected to be in the range of $38 million to $41 million and capital expenditures in the range between $20 million to $25 million.

While we are encouraged by the level of engagement with our customers and remain confident in our growth potential, we continue to monitor global issues that can have an impact. With that, let me turn the call back over to Yoav for closing remarks. Yoav?

Yoav Zeif -- Chief Executive Officer

Thank you, Eitan. We are pleased with our strong first half results and how they position us to execute our plan. We have aligned our business expectations based on the current global macroeconomic conditions. Importantly, 3D printing is uniquely positioned to help our customers address and overcome many of the concerns that arrives in time like this.

With our expanding portfolio, we should continue to capture market share on the factory floor of Fortune 500 companies around the world as the relevance and adoption of 3D printing growth, and as we build on our leadership position, drive growth and improved profitability, we expect to outperform and create long-term shareholder value. With that, let's open it up for questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions]. Our first question today is coming from Greg Palm from Craig-Hallum. Your line is now live.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Yeah. Thanks. This is actually Danny Eggerichs on for Greg today. I guess, just starting off, maybe any further color on what you're seeing in the broader demand, broader demand trends given the current macro and maybe if you could even break that down further into the geographic markets that you serve?

Yoav Zeif -- Chief Executive Officer

Thank you for your question. We are seeing a very nice level of engagement with our customers, and we are focusing on the opportunity. The nice thing with us of course, we are operating in the same world like anyone else. But in the last two years, we opened up for us new markets.

We practically doubled our total addressable market. So, despite the fact that outside deal, there are issues, macro issues, supply chain issues, inflation, we, in the micro level, as strategies, I think double size of the market, which means that we have a very nice space to grow. And that's what we are doing, and that's why we have a nice demand. And you can see it also in our guidance.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Yes. And then, I guess, just off that, are you surprised to the upside or downside on any geographies Europe or the Americas or anything like that.

Yoav Zeif -- Chief Executive Officer

In general, things are going as planned. And the nice thing with Stratasys is that we are very diversified, both in terms of products and geographies. So luckily enough, it's not luck, we planned it. But we planned well and we are meeting our numbers.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Yes. OK. And then, just moving on to some of the guidance, still targeting double-digit operating margins longer term. Any way you can go into more detail on that, maybe the timeline or the level of revenue associated with that, just being that it's a fairly significant jump from this current year estimate of that 2%?

Eitan Zamir -- Chief Financial Officer

Daniel, that's a very good question. And similar to our message, I believe the last quarter, the whole story or the main story here is the scalability, right? And we have five technologies, and we are well positioned to grow long term, double-digit kind of with the coming year. And with that double-digit revenue growth, the scalability, the ability to bring opex in very, very low margin or much lower margins, that's the story here. And I think this quarter the second quarter just demonstrated, right? So, if you compare Q2 2022 to Q2 2021, and you look on almost $20 million revenue increase that came with $5 million opex, that's 25% opex on that incremental revenue, right? So that's the scalability that's the way to improve gross margins and opex as we get bigger, bringing us to the double-digit sale operating profit.

Operator

Your next question today is coming from Paul Chung from J.P. Morgan. Your line is now live.

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

Hi. Thanks for taking my questions. So just on cash flow, you're seeing a drag this year in the first half on inventory investments and other kind of working cap investments. How do we think about cash flow generation in the second half? And can you breakeven or positive for the year after heavy investments in the first half?

Yoav Zeif -- Chief Executive Officer

Yes. That's a very good question. So first, maybe taking you back to the last eight to nine quarters, right? So, after seven quarters with a significant positive operating cash flow, seven consecutive quarters this is the second quarter that we have negative operating cash flow. But this is the liberty that basically our focus on the demand, on meeting our clients' expectations, customer expectations.

Keep in mind that we are a global company, we demand everywhere. We want to make sure that we have the inventory in place globally in the different locations available. We're trying to leverage our strong cash position with no debt and even if it means a couple of quarters of a negative operating cash flow in order to meet our demand in order, by the way, also to improve our gross margin in the future because that will enable us to shift more to sea versus air shipment in the future, having the right scale of inventory. That's the way we think about it.

Obviously, we're very sensitive. We're very cautioned to it, to cash flow, but this is a temporary deliberate action by the company. And we do see that in the future, in the later future, we see ourselves again coming back to positive operating cash flow and positive free cash flow in the mid to long term.

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

And then just a follow-up. Historically, it's been quite difficult to kind of break out beyond the $700 million in revenues for the year, you're almost there in '22. But as we think about '23, expand on the confidence you have in the product portfolio any other levers you want to call out, why is it different this time around? And you mentioned 50% gross margin target. What's the expected timing of rebounding back to those levels? And are you seeing some evidence of consumables demand kind of accelerating? Thank you.

Eitan Zamir -- Chief Financial Officer

Thank you for your question. I will divide my answer to two. First, I would like to start with the revenues. We are quite confident that we will pass the $700 million and more because we created a growth engine, and we put them in place in the last two years.

So, we have the most innovative polymer technologies. We have a great more than great, you know what? material platform that it's open now, and we will keep strengthening this material platform, and we'll see more revenues out of it. We have a very strong software platform and a service that is much better plus used cases that will go one by one and concur that. So, we have a very clear five-year plan, and we are very confident that we will be able to achieve it, including passing the $700 million, starting with the origin and the top and the RPS, we have plenty of room to grow.

That's on the revenue side. Then if I look at the profitability measure, as we said before, it will take us two to three years, but we'll be there.

Operator

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

Troy Jensen -- Lake Street Capital Markets -- Analyst

Hey, gentlemen, congrats on the nice results here.

Yoav Zeif -- Chief Executive Officer

Thank you.

Troy Jensen -- Lake Street Capital Markets -- Analyst

Hey, congrats on the nice results here. So, I want to look at second half guidance here. If you kind of do the math, you're talking about a $21 million increase over last year's second half. So, I'm always curious to know if the base business is growing.

So, with this $21 million increase, how much of that is coming. I guess, you want to tell me how much is coming from the new products. But are you assuming that your base business, your FDM and PolyJet will be growing in the second half over last year second half?

Yoav Zeif -- Chief Executive Officer

Hey, Troy. All businesses are growing, in particular, the hardware. The hardware is the driver. Look at our results today, 29% practically in retail, 33% growth in hardware.

So, this is the driver for material and service and goes across the different technologies to both the base technologies, FDM and PolyJet and the new technologies are growing. And for me, the most important thing is they're growing hardware. So, we'll see more revenues from this growth.

Troy Jensen -- Lake Street Capital Markets -- Analyst

Perfect. All right. Now my follow-up here is, you provided us an update of your operating margin targets at double digits in the long term. I'm curious to know if you guys will avoid doing dilutive acquisitions while you guys strive for this higher level of profitability.

Eitan Zamir -- Chief Financial Officer

That's a good question. So obviously, we're talking about two to three years to get to the double-digit operating income. It will be a mix of doing the right thing for the company. But I can tell you, I think I answered earlier, we really believed that our organic business today, like the platform that we created, the technology, the value proposition, those by themselves, as we grow as we as our revenues continues to increase double digits in the next year will bring significant incremental operating profit and will get us closer to the double digits.

Operator

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

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

Thank you. Good morning. Yoav, you noted increased TAM now and resiliency in demand, you obviously kept your guide sort of outside of FX. And I'm curious to hear a little bit about maybe what your customers are doing with the installed base in terms of usage metrics, maybe that can be a way for us to gauge what the demand looks like of your installed base of systems.

If you look at consumables' growth, there was some deceleration, and I know some of the compares are strange. So maybe you can give us a sense what you're hearing from customers around intention in the back half of this year in terms of usage metrics? Are you thinking they're going to remain relatively consistent? Are you anticipating that to either increase or decrease in any significant fashion? And I have a follow-up.

Yoav Zeif -- Chief Executive Officer

Thank you for the question. Let's start with the long term because this is what is really important here. What is really important is there is a shift from using our machines for prototyping with very limited utilization to using our machines for real production, even if it is slow volume for personalized end-use part, but it is real manufacturing. And we know that real manufacturing machines consume four to five times materials than a prototyping machine, which this is the essence of everything that we are doing here.

And it's a long journey, but we are starting -- we are reporting on it, as you know, every first quarter, and we are step-by-step making these effects use case by use case, application by application. So, it doesn't matter if it's dentures or crowning bridges, or pre-surgical planning or deducts for automotive or airplanes. This is exactly what we are doing. We are identifying the use cases where manufacturing can benefit from additive manufacturing and then we come with the full solution, and we open the market together with our customers.

And it will grow year-over-year, as we said, 20%, we committed to 20% year-over-year growth of this poster of our business. This is the big picture. Now when I'm looking at next -- the second half, who knows exactly what will have it. But what we do know is that we have biotechnologies, the largest installed base in the industry, very pro-balance sheet, and we become more critical to our customers.

So, when we look at the inventory that we built up, their means and the fact that they are consuming more material across five technologies are optimistic that we are resilient enough for any market condition.

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

OK. Thanks for that, Yoav. And then, maybe one for Eitan. How much pressure are you currently experiencing from inflation on your gross margins? You're obviously seeing a nice uptick in revenue.

You're signaling a lot of confidence in continued revenue growth and you're getting back to 50% gross margins. Is it right to think that you have obviously positive operating leverage as you're getting increased volume on your revenues. But then the inflation pressures are more than offsetting that positive leverage in some ways. And so, if we think about the bridge to get to your 50%, are you absorbing like 300, 400 basis points of gross margin headwind right now because of inflation or are you expecting other levers to get you over to 50%?

Eitan Zamir -- Chief Financial Officer

Thank you, Wamsi. So first to answer your -- kind of your last part of the question. When we compare it to Q2 2021, we see roughly 300 basis point impact give or take, OK? So, 3% on our gross margin year-over-year. However, as you noted, there are a few things that we've done to compensate.

One is the higher revenue. So, scalability works on the gross margin as well, higher revenue, improve our gross profit with the fixed cost and so on. Second, we did increase prices several times over the last year. So, when we compare ourselves to Q2 2021, there was a price increase by us to mitigate to offset the logistics inflation.

And there is also the operational efficiencies we try to be more efficient. The higher inventories, the higher production levels come with make the unit -- the cost per unit, naturally lower and that's part of the scalability. And there's also the FX that has some impact on our gross margin. So, when you aggregate all these together and we see we look one, two, three years ahead, the scalability, the higher revenues and the combination of what I mentioned, should get us to the 50%.

Operator

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

Kieran McCabe -- Stifel Financial Corp. -- Analyst

Yes, thank you for taking my question. My first question was on the slide, the J5 Dentajet. You mentioned that you're seeing significant dental sales, particularly in EMEA. I was wondering if you could provide any other color on demand in the dental area in the other regions, North America, Europe

Yoav Zeif -- Chief Executive Officer

Thank you for the question. We are building the strongest dental portfolio and the manufacturing. And we can do it because we have five technologies, very strong portfolio of materials and deep knowledge and expertise in dental historically, and we are now leveraging it. We have a portfolio both in DLP and in PolyJet and the PolyJet is disruptive.

The ability to print everything, every different application on the same the same tray plus the ability to expect and with different materials, this is very early unique and disruptive in the market. This is the PolyJet. Then we have the DMP, which I believe the best part, the best accuracy in the business. And as with the RPS, which is [Inaudible] last four months that helps us to get into the liner business and other dental applications.

So, what we are focusing now is on building the material portfolio that will go with those three technologies, supporting them with application engineers and unique service offering. We started to build a unique service offering. It's not like our regular service and when you put everything together, the speed, the yield, the quality that we will be able to provide to our customers plus disruptive solutions that you will see in the future, really disruptive solutions that you will see in the future that we are working on it. I think we'll would be a leading player in dental offering, starting with the DentaJet.

Kieran McCabe -- Stifel Financial Corp. -- Analyst

Great. And my follow-up question was on the slide on non-GAAP margins. We're seeing -- you guys have seemed to have a very good improvement in the service gross margins sequentially in year-over-year. Just kind of wondering if you could provide any color on what's really driving that improvement in the service gross margin.

Eitan Zamir -- Chief Financial Officer

Thank you. The improvement on gross margin in the service is driven by price increase that we've generated, as well as deals and deals that came with better gross margin that's more and more positively impact our gross margin on service. These are the two main elements that improved the gross margin on the service business.

Operator

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

Brian Drab -- William Blair -- Analyst

Hi. Thanks for taking my question. I was wondering if you could maybe give a little more color on MakerBot just to help us model help everyone model. You said in material impact on revenue.

I'm just wondering what is the definition of material in this case? And you're going to see that revenue come out of the -- since you're reporting the equity method come out of your top line. So, can you give us any more color on that? And also, what does that do for profitability? I imagine that has at least -- I guess, maybe it's you're going to save some material, but a small step-up in margin after it after this move.

Yoav Zeif -- Chief Executive Officer

Thank you, Brian. As we mentioned previously, we're waiting for the deal to close and the timing of the deal close will impact our results for the rest of the year. So, bear with us we will get back to you after deal close, and we'll update on the numbers. However, to one of your comments, one of your points, the MakerBot business, the exclusion of the MakerBot business will improve our margin for the rest of the year.

Brian Drab -- William Blair -- Analyst

And just irrespective of the timing of it, you can't comment on how generally, how this business is doing in the level of revenue?

Yoav Zeif -- Chief Executive Officer

Not at this time, but we'll update later.

Operator

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

Ananda Baruah -- Loop Capital Markets -- Analyst

Hey. Thanks, guys, for taking my question. Yeah, just two quick ones, if I could. Can you talk about where you're still seeing the supply constraints the most? And then I have a quick follow-up.

Thanks.

Yoav Zeif -- Chief Executive Officer

Ananda, thank you. No, nothing new here. Business in China still there, some releases here, and there, traffic jam in U.S. board and overall shortage mainly in electronics and some raw materials because of the war.

So, I think it's usual suspects, I would say. And we are working strongly with our team. I want to thank my operation team. We didn't miss a pay this quarter despite the fact that it's a war out there in supply chain.

We are investing in increasing the inventory. We are willing to pay in order to deliver -- to pay and leverage our strong balance sheet in order to deliver value on time to our customers and ensure that we can supply them. I believe it will really gradually because it's part of the cycle.

Ananda Baruah -- Loop Capital Markets -- Analyst

And would you consider -- that's really helpful context. And would you consider the supplier sort of collectively seems to be easing at all yet?

Yoav Zeif -- Chief Executive Officer

Not yet, but our expectations by the end of year will see it becoming easier and I'm optimistic, I'm optimistic nature. It's good for additive manufacturing. So, look at the bright side.

Operator

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

Yoav Zeif -- Chief Executive Officer

So thank you for joining us. Looking forward to updating you again next quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

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

Yoav Zeif -- Chief Executive Officer

Eitan Zamir -- Chief Financial Officer

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

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

Troy Jensen -- Lake Street Capital Markets -- Analyst

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

Kieran McCabe -- Stifel Financial Corp. -- Analyst

Brian Drab -- William Blair -- Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

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