Q2 2022 Desktop Metal Inc Earnings Call
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Greetings and welcome to desk top metals second quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.
On your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Jay Gens Kao Kao Vice President Investor Relations. Please go ahead.
Hello, everyone and thank you for joining us this afternoon to discuss desktop metals second quarter 2022 financial results.
With me today are Rick <unk>, founder and CEO and James Daley CFO .
Please note that our financial results press release and presentation slides referred to on this call are available under the events and presentations section of our Investor Relations website. This call is also being webcast live with a leak at the same website.
Webcast and accompanying slides will be available for replay for 12 months. Following this call. The content of today's call is the property of desktop metal it cannot be reproduced or transcribed without our prior consent.
Before we begin I'd like to refer you to our safe Harbor disclaimer on slide two of the presentation. Today's call will include forward looking statements. These forward looking statements reflect desktop metals views and expectations only as of today August eight 2022, and actual results may vary materially based on a number of risks and uncertainties.
For more information about the risks that may impact desktop metals business and financial results. Please refer to the risk factors section of the annual report on Form 10-K, and quarterly report on Form 10-Q. In addition to the company's other filings with that D. C. We assume no obligation to update the forward looking statements.
Additionally, during this presentation and the following Q&A session. We may refer to our results on a non-GAAP basis non-GAAP measures are intended to supplement but not substitute for performance measures calculated in accordance with GAAP.
Our financial results release contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures.
With that it's my pleasure to turn the call over to restful founder and CEO of desktop metal.
Thank you Jay and good afternoon to all of you I appreciate everyone taking time to join our call I'll begin today with highlights of our second quarter 2022 financials. It.
It was a fantastic quarter for our business.
Next I will detail a few developments of note in the business and spotlight some of the recent customer wins.
I will then turn the call over to James to provide further color on our financial results I will close with our financial outlook and progress on our 'twenty to 'twenty two strategic priorities. Following our prepared remarks, we'll take questions.
Beginning on slide three I'm very proud of the work from M. D M. As we achieved a record quarter.
Focused execution combined with a broad and differentiated empty porno portfolio resulted in solid financial performance as we're now carrying some exciting momentum into the second half of the year.
We saw another quarter of top line strength.
According to the highest quarterly revenue in the company's history.
Consolidated revenue for our second quarter, 2022 was $57 $7 million, representing strong year over year growth of over 200% and sequential growth of 32% from the first quarter 2022.
Revenue performance was driven by strength in our metal product platforms and contributions from acquisitions.
Second quarter 2022 non-GAAP gross margins increased to 26, 7% and improvement of over 170 basis points year over year.
We were able to expand gross margins, despite a challenging macro environment, including supply chain and inflation impacts, which speaks to both the operating leverage as we grow out of our overhead costs and our efforts to improve operating cost structures.
Overall I'm pleased with this quarter's results, we continue to lever for our customers.
And that is driving excellent financial performance, including revenue growth at scale and margin expansion.
Moving down to a few business highlights.
Recently, we introduced a preview of our new solution called free fall.
Our revolutionary expandable three principal form for mass production.
We believe this is one of the most exciting new solutions introduced in the industrial three D printing market.
Also a unique capability for full manufacturing, which is $120 billion market and expands desktop metals total addressable market opportunity.
I'll provide more color on this revolutionary product on the following slides.
We continue to see momentum in Blue chip customer adoption of our aimed to point out solutions across industries and we've included some examples of production and use cases in the appendix of this presentation. Please check them out.
Detailing a few specific customer examples BMW is using our solutions for critical components in their M series of automotive engine and it's in process of expanding capacity to support a larger percentage of their vehicles.
That's our suppliers are extensively using our technology to validate designs before cutting tools for their data casting process.
General Motors prints malls for casting for E vehicle components.
Using our solutions and Grainger World uses our printers to produce formula one and Motogp Amgen blocks in aerospace we are a growing business with leading companies such as precision castparts consolidate precision products Honeywell Lockheed Martin Rolls Royce Northrop Grumman.
All of which are increasingly using our a M to point our solutions to make end use parts in serious production.
Companies like Collins Aerospace are now using our technology for a variety of parts and aircraft interiors.
All of our major Oems include Caterpillar printing molds for valve bodies cylinder heads and critical spare parts Mercury Marine which you start technology to manufacture a newest marine engines, and Emerson, which uses our printers to guaranteed cross border quality across plants around the world.
Our defense business is also growing rapidly for example, desktop metal is now a sob under a prime contract awarded by the Defense Logistics Agency of the Department of defense with a potential 15 million to broaden the use of additive manufacturing across the armed services.
We've also started an effort to monetize our robust IP portfolio of over 650 patents and pending applications and we expect this to create new revenue opportunities.
In general we've also seen strong traction across all metal platforms, including production system profession.
And finally, I want to provide a little more color on the strategic integration and cost optimization initiatives, we announced at the end of the second quarter.
This initiative was a culmination of a planned efforts discussed on our two previous earnings calls and we wanted to outline our plan in more detail to all stakeholders as well as provide some quantitative targets in.
In 2020, one following going public we executed in a deliberate and strategic plan to broaden our core aimed to porno portfolio beyond metals in two key technologies and applications that we identified as having a significant upside in the rapidly growing added manufacturing market will move fast and we're successfully in our inorganic efforts exiting 2021 with them.
Paralleled and diversified portfolio of Boeing production focused solutions spanning print technologies advanced materials and killer applications for aimed to point out.
During integration of these acquisitions were focused initially on revenue product and go to market synergies as we enter 2022 with a focus on bolstering our path to profitability, we identified a number of opportunities to recognize cost synergies from these deals in combination with as opposed to acquisition opportunities. We took a holistic approach to our product portfolio.
Oh and business operations to identify opportunities to optimize our expense structure in order to position the organization with a more streamlined and effective operational model.
This comprehensive review resulted in a strategic integration and cost optimization initiative announced in mid June that included a workforce reduction focusing on functions in areas that do not jeopardize the long term growth opportunities or our ability to service and support our growing customer base. We have also initiated a plan to consolidate our global facilities footprint to increase efficiencies and further.
<unk>, our fixed cost base.
And as part of our product portfolio valuation, we're tightening our focus on products and development programs that fire is scale and margin expansion across high growth applications.
We expect this strategic initiative to drive $40 million of annualized run rate non-GAAP cost savings $20 million, which we expect to recognize in the second half of 2022.
In addition, we've identified a number of further integration activities that we expect will result in at least $20 million in additional savings, resulting in an anticipated total cost savings of at least $100 million over the next 24 months.
As a result of these efforts desktop metal is a more streamlined business today with an improved go forward expense structure that better position us.
To reach our financial commitments and support our path to profitability.
Furthermore, the convertible notes offering we completed in May strengthens our cash position reinforcing our ability to weather any uncertain macro environment and reached profitability to fund our long term growth opportunity in the additive manufacturing market.
On the following slide I'd like to highlight an exciting new material. We've been working on for Awhile free form is a new family of photopolymer restaurants bed for the first time produces dimensional the accurate close cell phone parts without tooling. This.
This revolutionary material uses our patent pending Dora Chan photopolymer technology, which delivers industry, leading durability and material properties combined with our proprietary heat activated foaming agent that is three D printed.
After printing parts a run through of heating cycle to expand a specific programmable amount between two and seven times their original size. This expansion leads to several benefits.
From parts can reduce cost versus conventional manufacturing phone parts by using less material. This technology also increases manufacturing throughput versus three D printed elastomers because the parts are smaller doing production, enabling more parts to be nested in each brand, thus lowering costs and free form also enables manufacturers to save on shipping and inventory expenses by shifting expansion to read.
Although law component of demand.
In addition, free form enables a new design freedom for fall applications and delivers an incredible strength to weight ratio that produces light high performance parts.
The conventional polymer films market is in over $120 billion total addressable market and we see many opportunities for this unique material family to disrupt current traditional foam applications, including automotive seating mattresses furnishing products footwear sporting goods and health care among others free foam resins will initially be.
Three D printing will exclusively on our E. Tect extreme 8-K topped on the L. P systems.
We're actively exploring and developing free phone applications with leaders in the automotive furnishing and footwear markets and expect broad commercial availability in 2020 three we think the opportunity for free from is extremely exciting as it has the potential to become another long term growth driver for our business.
Turning to slide five we continue to be excited about the consistent customer adoption across a range of end markets.
We've highlighted a few of those customers from the second quarter on the left side of this page imports.
Importantly, we continue to see successful customers expand their deployments with our solutions with new orders beyond their initial systems and this represents a meaningful revenue driver as well as an important barometer of the overall success of our solutions repeat growing customers in the second quarter include BWXT Eaton Ford Gulfstream Honeywell.
And the metal the Navy Nissan Oak Ridge National Labs, and Saudi Aramco just to name a few.
It's exciting to see leading blue chip companies adopt and expand the use of three D printing for Indias part mass production.
On the right side I want to highlight two semi customers. The first is U K based work all malloy the companies leveraging our shop systems to three different various atomization nozzles to manufacture powders.
The flexibility of three D printing has allowed walk home alloy the freedom to design nozzle parts and print on demand, which has accelerated the productivity improvements and reduce delays and downtime and the production process and leveraging the speed of binder jetting through the shop system enables quick printing and testing of new iterations and mass production capabilities once a parcel design locked.
Second customer is aerospace additive using our extreme 8-K with ATR 70, and 80 or 90 last time and materials to produce highly cord casting hydraulic valves interest mission components Eurosport is using our photopolymer systems to print hundreds of parts in hours significantly reducing lead times compare to injection molding or urethane to gasoline.
In combination with the extreme 8-K, the company is leveraging the superior material capabilities of our patent pending <unk> chemistry to produce high quality elastomer parts if.
Our 70, and 90 or the toughest printed the last two years in the market with allegation up to 400%, allowing for high performance at volume production speeds.
We're always happy to celebrate our SME customers as their success with DIAM solutions demonstrates the performance and cost efficiency of our volume production capabilities versus the conventional manufacturing process that we're replacing.
And with that now I'll hand, the call over to our CFO James Haley.
Thanks, Rick beginning on slide seven you will see highlights of our financial performance in the second quarter of 2022. Please note we will be referring to several financial metrics on a non-GAAP basis reconciliations to the GAAP data is included in the appendix consolidated revenue for the quarter was a record for the company 57.
$7 million up 204% year over year from $19 million in the second quarter of 2021 sequentially revenue growth was up 32% from $43 $7 million in the first quarter of 2022 revenue strength was driven by our metal product platform and contributions.
On the acquisition non.
non-GAAP gross margins expanded to 26, 7% for the second quarter of 2022 and over 170 basis points increase from 25% in second quarter of 2021.
Gross margin improvement was the result of improved overhead absorption with a focus on controlling our cost of goods sold we're pleased with gross margin expansion, both year over year and sequentially, especially given the supply chain and inflationary challenges that included higher and Clinton transportation costs with our team manage well.
We expect the recent strategic integration and cost optimization initiative will continue to drive gross margin improvement through the balance of 2022 and beyond.
The next slide non-GAAP operating expenses were $46 $1 million for the second quarter of 2022, representing an 80% as a percentage of revenue, which is a significant improvement versus 162% in the second quarter of 2021.
Revenue growth was the primary factor for this improvement demonstrating ongoing operating leverage in the business as we grow this was complemented by non-GAAP operating expenses declining sequentially by $6 million or 12% from the first quarter 2022.
Adjusted EBITDA for the second quarter of 2022 was negative $27 $5 million as.
As we expected adjusted EBITDA significantly improved sequentially by $14 $1 million or 34% from the first quarter of 2022 through a combination of revenue growth and a focus on improving our expense spend.
As we continue proactive efforts to optimize our expense structure, while maintaining revenue growth at scale, we expect to see significant improvement in adjusted EBITDA. That's really ended the year to achieve our adjusted EBITDA commitments for 2022 on our way to exiting 2023 breakeven.
On an adjusted EBITDA basis.
We ended the second quarter of 2022, with a strong liquidity position of $255 $7 million in cash cash equivalents and short term investments.
This includes proceeds from the successful completion of the $115 million convertible notes offering in May 2022, less the initial purchasers discounts.
<unk> and operating expenses, given the uncertain macro environment that has become more challenging in 2022, we felt that it was prudent to raise a moderate amount of cash to build a stronger balance sheet.
As a result desktop metals cash balance combined with the impact from the strategic integration and cost optimization initiative provides the company with sufficient runway to reach cash flow breakeven and fund our long term growth opportunity and a M to dos so with that I will turn the call back over.
Correct.
Thank you James turning to slide nine we would like to give an update on our expectations for the balance of 2022 that's.
Stop metal had a strong start to the year and revenue growth has trended towards our expectations to date.
Activity remains high and we're executing well to the opportunities. We're seeing therefore, we're reaffirming our full year 2022 revenue guidance of approximately $260 million.
While demand continues to grow we're closely monitoring the macroeconomic environment and todays guidance reflects the current conditions and assumes macro or supply chain challenges do not worsen.
We also understand the relationship between moderating growth and getting to profitability faster.
Moving to adjusted EBITDA were reaffirming expectations of approximately negative $90 million and adjusted EBITDA for 2022.
As our strategic initiatives to reduce expenses will primarily be realized in the back half of 2022 and we expect continued sequential improvement in adjusted EBITDA to achieve our targets because we're working very hard to accelerate our time to profitability.
Finishing up on slide 10, we've made great advances in the second quarter towards our 2022 strategic priorities and I'm proud of the team's focus and commitment on these calls.
Revenue growth was very strong in the quarter the strongest in the company's history.
We continue to capture share in the verticals, we've identified as attractive opportunities with strong secular growth drivers, we progressed multiple opportunities with hyperscale customers in the quarter some of which contractually we are unable to describe in detail about our strategic accounts team is making great strides here and we're in a very strong position to accomplish this year's objectives.
I mentioned last quarter that I was disappointed in our expense spend and this was an area we were focused on improving.
We were successful in Q2 by significantly reducing operating expenses as a percentage of revenue, which led to an improving EBITDA versus first quarter 2022.
And we announced the specific focused strategic initiative that will continue this progress including $20 million in cost savings in the second half of 2022 in over $100 million over the next 24 months.
If it's not obvious through our recent actions and communications draw.
Driving margin improvement and achieving profitability is a key focus of desktop metal.
We have a strong balance sheet with the additional capital we raised in my bolstering our liquidity in an uncertain macro environment on our way to getting cash flow breakeven to.
To support the strong cash runway, we're committed to maintaining discipline in our cash location and drive improvements in our working capital in order to improve the financial efficiency of the business.
In closing I'm very proud of the desktop metal today is in a much better position than when we went public.
Today, we have the undisputed number one market share leadership in some of the fastest growing segments for additive manufacturing, including metal Binder jetting.
Digital casting and printed hydraulics, we're the only company in the world with mass production solutions for printed films and we have the leading F. D. A class two solutions for restaurant of dentistry.
We have a much larger addressable market today than when we went public and unlike our competition our print platform to benefit from Moore's law, which means they'll continue to print faster and become more cost effective versus our competitors and congressional manufacturing over time.
Our business performed well in the first half of 2022 which is a testament to the team's consistent execution and a dynamic operating environment.
I stopped metal has never been stronger.
Our unmatched and two point our portfolio uniquely positions our company to help our customers transform their manufacturing settings through the benefits of a M for mass production.
With that let's open it up for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Please limit to one question and one follow up and rejoin the queue for any additional questions for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question comes from Josh Sullivan with the Benchmark Company. Please proceed with your question.
Okay.
As far as the strategic integration strategy changes here you know how should we think about any changes to the go to market strategy.
Are there any more or less focus on direct versus indirect sales or any other changes we should think about holistically.
Thank you Josh.
I think we have a fantastic go to market strategy, we didn't make a dramatic changes to it other than.
Having a more focused our effort we have quite a bit of cross selling from.
There are different.
Revenue synergies, we've taken across our portfolio that we've got today, which is greater than we are.
Uh huh.
When public.
And you know we've got an incredible go to market with over 250 partners globally.
In the channel component of our business and the production side of our business at a very high end and multimillion dollar systems that part we do direct but we do work with channel and identifying opportunities and that gives you a coverage we have 65 countries, where our products are sold.
Today, and expanding and then you know, we we segment our channel from between health care and.
The industrial part of the market and I think it's a.
Highly specialized and it's a unique core competency of our business and the strength of our company I think we we have a fantastic go to market engine.
Got it.
And then just the comment on you.
The effort to start to monetize the IP portfolio.
How should we think about you how.
How are you going to go after that are you know.
What opportunities do you think might be there.
You know it's hard to comment.
Comment on that we do have an injunction in that one particular company, but I think it's something that that we'll be able to talk about in more.
Detail as we progress to the market I think there's a lot of value in the IP that we've got and Oh, we want to work constructively with all the members of the community to be able to.
Monetize it and allow the industry to grow and prosper so.
Yeah.
I think where people are fully dedicated to it and we can talk about it in the future.
Okay I'll get back in the queue. Thank you.
It's great to talk to you. Thanks.
Your next question comes from Noelle Dilts with Stifel. Please proceed with your question.
Hi, guys. Thanks for taking my question.
Recognizing you're not giving quarterly guidance I was hoping you could speak to how you're thinking about the revenue sort of trend or trajectory in the back half of the year and anything we should consider from a seasonality standpoint, and the same sort of question around gross margin you know and I know, you're saying you're not expecting any worsening of the supply chain challenges.
But do you think that anything will get better by the fourth quarter. Thank you.
Thank you no good to hear from you and that's a great question.
You know, we we without giving like specifics on how the quarters I've set up we still feel like they're going to follow that that's similar rule that we just caught before 15% mid twenties for Q2 15 per cent for Q1 mid twenties for Q2, and Q3 Q4 being in the 35% range.
And I do think that our Q2 and Q3, while being similar Q3 has a European component where people can be on vacation and.
You know, we do quite a bit of a business in Europe , but overall, we see very strong demand across the board and.
<unk>.
We we think.
That's a good picture of how we see the year developing you could look at it first half second half, 40% first half, 60% second half so another way to look at how the business develops in Q4 being by far the strongest we have a lot of stuff in Q4 for the.
Yeah.
Yeah.
Okay. Thank you and then second just on <unk> again. This is kind of related in that cash burn should improve as EBITA strengthened but it looks like free cash flow usage in the second quarter was about equal to the first any thoughts on how the back half of the Earth shaking out.
How we should think about twenty-three thanks.
Hey, Noelle it's James.
Oh definitely.
You alluded to with EBITDA coming down our cash burn will come down considerably well one of the things you would have noticed as we did maintain our inventory levels.
From from Q1, they went up.
A bit in Q2, but we're at a level now where we're really going to start to to weaning wean them off for the balance of the year, we felt continuity of supply given all the macro.
Economic environments was in central right now.
And another thing to add to that no hours, we do have this strategic initiative to reduce costs, which.
Well really taking you know.
It it takes most of it is the fact in the second half of the year since we did it.
Over the last two weeks of the second quarter. So the bulk of the benefit is going to start to show up as we execute on the second half of the year.
Great that makes sense. Thank you.
Your next question comes from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Yeah. Thanks for taking the questions. This is danny aggregate you're on for Greg today.
So just in terms of the overall macro and demand environment, I mean everyone's talking about recession slowdown, but obviously you guys reiterated your guide and it sounds like demand has stayed pretty good I guess, what if any changes to customer activity have you guys seen while there.
It's in certain end markets or geographies or what.
You know we were benefited by the fact that we're in a segment of the market that is growing from a secular point of view I think a lot of the supply chain disruption that you could see it in different industries as a driver for adoption of additive as a production technology I can tell you that we have many more.
Any customers who are behind production and are looking at Oh, It's just a solution.
Yeah.
It was just a caterpillar last week and and that's an example of a company. That's initially had one machine and then it there's now four systems running across between partners and themselves just trying to keep up with production and they have a huge backlog because they're trying to catch up with them.
We see this across the board in many of our customers. So well. It may you know we have two parts of our business one theres a secular trend to go from analog to digital take advantage of the cost savings.
And you know this technology gives you.
I think we have very durable parts of our business like the health care part of our business where we.
Improve the efficiency.
What people do with.
This technology.
And you in that in that realm.
You know if your teeth hurts you you go to the dentist. So that's somewhat of a durable they're reliable a growing part of our business and then finally.
You know we monitor all the macro conditions are and we do that on a daily weekly basis, but.
We continue to see people adopting production with additive and it somewhat.
You know, it's like asking somebody about e-commerce adoption.
In the middle of the last decade, it's it's it's a.
I'm, sorry that you expect.
We expect most of our customers to over time do more of their production digitally and benefit from the AR inventory are one the ability to improve there.
They're designed lightweight products.
Simplify their supply chain. All of these are things that are drivers for a broad adoption of our technology in the fastest growing segment in additive.
Is and just part production, where we are the clear leader with technologies that get more efficient over time so.
Got it.
You know Theyre, obviously macro place are a factor, but but we are we have a lot of tailwind behind this class of technology.
Yeah.
Makes sense I guess moving onto the P. 50, how is that ramp coming shipments progressing I guess.
Are you still thinking about that contribution for second half kind of ramping and then into 'twenty three the same way as you were before.
AH, Yes, we continue to have a lot of activity in that part of the business one challenge with the ability to talk about what we do specifically the areas that you work with very large companies and they.
I don't like to talk about what they're doing with the products, but we do see.
Activity, there and it's a fantastic product that as the year progresses, we will hopefully be able to tell you more about it and.
So some great. Examples we have some trade shows and other things coming up and hope to showcase more activity about these products there.
All right great I'll leave it there thanks guys.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now one moment. Please while we poll for more questions.
Your next question comes from line of Troy Jensen with Lake Street. Please proceed with your question.
Yeah, gentlemen, congrats on the nice quarter.
Thank you.
Hey, Rick just to follow up on the P. 50, I understand you can't call it customer names, but could you just let us know if you've shipped additional systems into our two trials.
It would continue to make very good progress in this.
And this product and I think we will be making additional announcements as we as we make progress in this area.
Okay, all right understood and then maybe a couple for James here.
If you can just help us out with so on the cost side.
And I guess, you know if we could kind of stick to like numbers would be helpful. So if you look at non-GAAP Opex in Q2 was $46 1 million will that number decrease on an absolute basis in Q3 or just the growth can slow given this restructuring of what you're doing.
So yes, right, we're going to continue to expect some decreases in the second half of the year with our cost down initiatives.
So I can't answer that.
Midway into June so, we really haven't realized much of that benefit as of yet so on an absolute basis. The second half we do expect that.
Do you continue to come come down a bit.
As we continue to see revenue growth, we will continue to invest in the business accordingly.
Okay and just another follow a few James.
Could you just let US know what you think interest expense will be for the convertible and then on the share count what would be our Q3 share count be idea.
You just let us know what the fully diluted kind of hole in Showtime is now for the company sure. So the two coupons, 6% Troy. So at 115, that's just under $7 million of interest expense annually.
And then if you look at the in terms of the the share count.
You'll see a disclosure I think it's like 20.
20th who will give you the full base, it's about right now where we're roughly at 320 20 million shares.
Awesome.
Thank you and good luck in the second.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Rick <unk> for closing remarks.
Wonderful. Thank you very much I'd like to thank everybody for joining me on the call today and for your interest in desktop metal.
Please do not hesitate to reach out to our Investor Relations team. If there were questions that were not answered in today's call and as always I want to especially thank team D. M.
Terrific quarter and terrific execution, we look forward to speaking to you again. Thank you.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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