Q3 2023 Desktop Metal Inc Earnings Call

Greetings and welcome to desktop metals third quarter 2023 earnings 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 tell us.

Phone keypad.

A reminder, this conference is being recorded.

I'd now like to turn the conference over to your host Mr. Michael Jordan, Vice President Finance and Treasury. Please go ahead.

Good afternoon, and thank you for joining today's call with me today are Rick <unk>, founder and CEO of desktop metal and Jason called CFO desktop metal. Please note 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 Lincoln.

At the same site.

The webcast and accompanying slides will be available for replay 12 months. Following this call. The content of today's call is the property of desktop metal it cannot be reproduced or transcribed without prior consent.

Before we begin I'll refer you to our safe Harbor disclaimer on slide three of the presentation. As a reminder, today's call will include forward looking statements.

These forward looking statements reflect desktop metals views and expectations only as of today November nine 2023, and the 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 factor section on Form 10-Q, and then in addition to the company's other filings with the SEC, we assume no obligation to update or revise the forward looking statements.

Additionally, during the presentation and following Q&A session you 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 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 I will now turn the call over to Rick.

Thank you Michael welcomed.

Welcome to our third quarter 2023 financial results call.

Like to start my remarks today by acknowledging that this was a disappointing quarter for desktop metal and also for the entire added manufacturing industry.

While we're dissatisfied with our topline revenue performance in the midst of this challenging period I'm incredibly proud of the progress that team D. M has made in executing our $100 million of annualized cost reductions announced in June of 2022.

We're actually ahead of plan with that effort.

And I Hope you will take note of the meaningful EBITDA progress that we've delivered as we work to ensure a strong foundation for the future.

I wanted to be clear today desktop metal continues to take aggressive steps to ensure we have sufficient capital to navigate this challenging period.

And there are strong positive currents running through our results today.

As you know our quarter was overshadowed to some extent by our pending merger with Stratasys, which was terminated in late September. Unfortunately, the timing of the announcement around the stratasys vote created delays in closing several large deals with major customers.

Most of these deals are now closed and will be part of Q4, which we expect to be a very strong quarter.

Well, we believe in the merits of that specific combination we remain highly confident in our position as a standalone business and the strong foundation. We're building as we strategically cut costs and continue to intensify our focus on operational excellence.

For Q3, 2023 we reported total revenue of $42 8 million, which compares to $47 1 million in the prior year period.

Software revenue stems from the emphasis of certain less profitable non core business lines and lower than expected system sales as higher interest rates and tighter capital environment delays some customer purchases of equipment.

With several deals coming out of the third quarter and moving into the fourth quarter of the year.

Our adjusted EBITDA was a loss of $20 5 million, an improvement of 27% year over year compared to a loss of $28 2 million in the third quarter of 2022, demonstrating the benefits of our strategic efforts. Despite.

Despite a tighter demand environment for system sales.

This outcome was a direct result of several factors, including production site consolidations improved gross margins as a result of federal mix of services and consumables during the period, along with a reduction in operating expenses year over year.

While the cuts we've made have been dramatic we've also done our best to strategically balance them to protect innovation and growth an effort that requires constant vigilance.

Since we became public we've greatly expanded our portfolio and diversification with subsequently work to integrate our business units enhanced efficiency and remove costs across the company.

Forward is clear.

To focus on high growth product categories in our portfolio to drive incremental top line, while continuing to pursue efficiency and profitability.

Does that and there are several aspects of our business that will enable success on this major important strategic objectives, including.

First.

As additive manufacturing continues to transition from prototyping to mass production applications is projected to grow to $100 billion industry by the end of the decade.

Second.

That's up metal is uniquely positioned to benefit from these expanding market as it holds a leading proprietary technology focused on mass production solutions.

Hold the leading market share position in binder, jetting, which customers like BMW, we're using for mass production of critical components.

Our leading position in health care applications with our DLP technologies across a wide range of materials and end uses.

Broadly speaking, our expansive and growing library of materials across the categories of metals polymer ceramics, and biocompatible material are enabling desktop metal customers to create value through solutions, which address their highest opportunity challenges.

We'll walk through some of those examples today.

We're poised to benefit and are already beginning to see the results of an expanded global installed base that is using additive manufacturing equipment for real production.

Utilization of our products at our customers is increasing as evidenced by the growth of recurring revenue streams, despite a challenging market.

Our recurring revenue has grown by 34% from.

From 37 million in the first three quarters of 2022.

49 million in the first three quarters of 2023.

And lastly.

We're well underway to right sizing, our cost structure and improving our operational efficiency.

We're ahead of plan on executing this $100 million annualized cost reductions announced in 2022, and we continue to identify additional opportunities to refine our portfolio and operations to further enhance our operating leverage.

Driving towards profitability on an adjusted EBITDA basis fourth quarter of 2023.

Our goal is to be cash flow positive in 2024 on the cash that we have.

We have lowered our operating expenses for six consecutive quarters, a key driver on our path to adjusted EBITDA profitability.

Taken together in the short term, we're laser focused on driving to profitability on the cash that we have.

Which will place desktop metal on a strong footing to capitalizing the secular opportunity as the market returns to growth.

Turning now to our recent business highlights the third quarter saw continued expansion of major Super fleet customers, including Honeywell and Baker Hughes and major companies like Northrop, but have now grown into the global leaders in three D printed optical components using our machines.

Compound now operate one of the largest super fleets of Binder jet systems for printed castings in North America, as well as powder metallurgy Super fleet customers like DSP, and freeform and major automotive customers like BMW, which are now the largest super fleet operator of cereal systems.

By the end of the year they'll have six operational axial binder jet system that can continuously print 12 build boxes with a size of 2.2 meters each to mass produce parts for their six cylinder engines.

We have some great videos from D. S. P. M. B M. W that highlight this growing deployment and I encourage you to watch them, our sales pipeline and binder jet continues to grow with a strong pace, which gives us confidence in our growth opportunity over the next year.

On the health care front, we received European clearance for the market, leading flick, Sara Smile, ultra plus materials, which greatly expand our market opportunity for this product line and we've had a successful launch of our new <unk> printed technology or by a fabrication of graphs and other medical devices.

For now the three D printing industry isn't doing one of the toughest periods I've seen but I'm confident we'll see a return to growth because our sales funnel continues to build so this lengthening of the cycle should have a countercyclical effect as customers plan for Q4, and the rest of the upcoming year.

I believe desktop metal stands out in a positive way from some of our peers. During this uncertain time for.

For starters.

We're extremely proactive in cutting costs when we saw challenges on the horizon.

We're also led by a team of seasoned three D printing leaders brought together from several acquired companies that bring stability and experience to our leadership team.

Finally, we're a team of true added manufacturing believers and we have dedication in driving this industry forward.

In conclusion, we finally have clear line of sight to profitability and desktop metal is confident in our promising future with clear focus on high growth product categories and operational efficiency.

Well prepared to benefit as the industry returns to growth showcased by proprietary technology. The diverse materials library high speed production solutions and our growing global installed base. Despite softer revenue in the third quarter. Our recurring revenue streams continued to perform very well contributing to a positive shift in adjusted EBITDA, a path towards reaching breakeven in the fourth quarter of.

2023.

And this sets desktop metal on a solid foundation to capitalize on the long term trend of AD scale three D printing in manufacturing and with that I'll turn it over to our CFO Jason call Jason.

Thanks, Rick I'll begin on slide 15 with highlights of our financial performance for the third quarter of 2023 <unk>.

A reminder, that we will be referring to several financial metrics on a non-GAAP basis and a reconciliation to GAAP data is included in the filed appendix.

Consolidated revenue for the third quarter of 2023 was $42 8 million down nine 2% from $47 1 million in the third quarter of 2020 to the.

The decline in year over year revenue was led by weaker product sales, partially linked to ongoing efforts to deemphasize product lines with lower quality growth prospects. In addition to lengthening sales cycles.

As we've mentioned previously we have narrowed our product sales focus as we streamline costs prioritizing growth potential and our stronger margin opportunities.

Higher margin recurring revenue streams increased year over year, which was offset by decreases in other parts of the business.

Desktop metals product and services have been effectively and consistently validated by our customers as they create solutions to real business challenges and generate meaningful and rapid return on investment.

We have historically closed a significant amount of sales transactions at the end of each quarter and in <unk>. We found several deals slipped into October.

These deals were included in and made up a substantial portion of our third quarter internal projections, which we now expect to be completed in the fourth quarter.

While the third quarter was below our expectations. We remain confident that we will finish the year strong even as sales cycles have lengthened.

non-GAAP gross margins improved by more than 190 basis points to 21, 9% for the third quarter of 2023.

The improvement was driven by sustained progress in our cost reduction initiatives across multiple quarters and these were partially offset by a onetime settlement with a supplier.

On Slide 16, you can see how our cost savings, which began in June of 2022 have improved our margin performance over certain revenue levels.

We have made meaningful reductions in our fixed cost base as a result of which we are able to achieve higher gross margins at current and future revenue levels. We.

We are now focused on our higher growth and higher margin parts of the business.

Seasonal revenue strength, along with meaningful cost savings gives us confidence in our gross margin potential moving forward.

We remain confident that we will be able to achieve non-GAAP gross margins above 30% and <unk> 23, and in 2024, even on modest revenue growth.

Moving on to the next slide in the third quarter of 2023, our non-GAAP operating expenses were $33 2 million down 21% as compared to $41 5 million in the third quarter of 2022.

Operating expenses have been meaningfully reduced across all categories, including stock based compensation.

non-GAAP operating expenses were down four 2% sequentially compared to $34 6 million in the previous quarter.

Since <unk> 22, we have lowered our quarterly non-GAAP opex by $18 8 million quarterly where approximately $75 million annualized.

This represents a 36% reduction in non-GAAP opex over this period.

We are pleased with our progress on this front and importantly, we are not done.

While we have areas, where incremental investment will help our business grow.

Executing these investment pivots selectively and expect to see continued operating leverage improvement through the fourth quarter of this year and into 2024.

We believe that the trend of expanding operating leverage will continue and we will benefit from our cost cutting efforts disciplined spending and topline growth.

This in turn is driving us to the path of profitability and generating positive cash flows.

Our cost cutting efforts are insulating our business as we resized spent months, we expect to continue the trend of lowering our expense structure throughout the remainder of the year and our progress to date gives us confidence in our ability to execute reductions should the environment weaken demand become more protracted.

Looking at the next slide adjusted EBITDA for the third quarter of 2023 was negative $20 5 million, an improvement of 27% compared to a $28 $2 million loss from third quarter of 2022.

We are on track to achieve our base case of being adjusted EBITDA profitable in the fourth quarter of this year.

Despite top line weakness progress to date on cost reductions makes us confident that our best performance is ahead of us in terms of adjusted EBITDA.

Our funding is robust with $108 2 million in cash cash equivalents and short term investments at the end of third quarter 2023, compared to $127 6 million to close <unk> 2023.

Our net cash reduction of approximately $19 4 million in Q3 was the lowest since going public excluding <unk> 2022, when we last raised cash.

We are improving on and optimizing cash spend progressively through recent quarters and expect to continue to do so.

We have trimmed our operating cash flow consumption to $21 4 million in third quarter of 2023 down 46% compared to $39 7 million consumed from operations in the third quarter of 2022.

A point of reference this quarter's cash consumption from operations was down 62% when compared to $56 3 million consumed in the first quarter of 2022, the last full quarter of results before commencing our cost reductions.

Lastly, we finished the quarter with $107 2 million in inventory after investing $15 $5 million during the quarter.

And we are well positioned to execute unexpected fourth quarter demand.

We are committed to optimizing inventory management, monetizing inventory and improving cash flow and working capital in 2024.

Finally, moving to our financial outlook on slide 19.

Against the backdrop of macro and industry wide headwinds from the beginning of this year, we adjusted our guidance ranges of revenue and adjusted EBITDA.

We anticipate generating revenue in the range of $50 million to $70 million for the fourth quarter of 2023, representing revenue of 187 million to $207 million for the full year of 2023.

This guidance is based on our expectation of certain transactions closing during the fourth quarter and the overall weaker macroeconomic backdrop.

We expect the momentum and the improvement of adjusted EBITDA to continue into the fourth quarter of 2023 and beyond.

Our fourth quarter 2023, we expect adjusted EBITDA to be negative $10 million to positive $10 million, implying adjusted EBITDA of negative $70 million to negative $50 million for the full year of 2023.

With that we'll take some questions operator.

Thank you at this time, we'll be conducting a question and answer session.

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Our first question comes from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking the questions here I wanted to start with a little bit on the quarter and the guide you talked about how you saw some some orders slip into October I, just wanted to confirm that did those get booked as revenue already and just in terms of.

You know overall visibility rates at this point the Q4 guidance range.

On a revenue line, you know $20 million pretty wide range, so, whereas visibility right. Now you know what enables you to get to sort of the top end of the range you know what would be the bottom end and sort of what's the base case right in the middle if we could get a little bit more detail on that.

Yeah. Thanks, Greg This is Jason.

I think youre right. There is a wide range I think year to date. The business has not performed the way we expected it to we opened the year understanding it was a weak backdrop, we had signaled in our opportunity pipeline that said that could turn in the middle of the year and that has not happened.

For the wide range as we put some degree of conservatism around that.

Desperately do not want to perform outside of the guidance range here for fourth quarter. So we put it wide to make sure that we can hit it I'd say the bottom end of that range is very conservative.

I think when we talk base case were talking mid point.

And we believe we have the demand to deliver in the top half of that range, but we have some conservatism in there and that's the essence of the 20 million range at the top to bottom.

And is it yeah go ahead.

I mean, I think we are.

Can see that the.

We're kind of performing with our peers in the market and a lot of them have had.

Surprises on the top line this year and other public companies.

There are some meaningful scale.

I think.

Okay.

Hard to tell if you called this a temporary blip in the additive space that people get accustomed to maybe higher interest rate than in the current environment.

And.

But we do see a lot of opportunity in our final gets larger so as that.

The sales cycle brings back to normal.

<unk>.

Normal.

Yeah.

Window, then you should see exploration.

Yep understood.

And you know is there a maybe you know kind of a common denominator in terms of the sort of the weakness that you've seen throughout the year, whether it's by you know end market type of customer whether it's those that are you know financing transaction versus those that are not I'm, just trying to get a sense of kind of what your Ma.

Looking out there from a macro perspective that might help you know at least stabilize things at some point here in the near term.

I mean, I think it's hard to put it into a single.

A single factor or a lot of stuff is gone.

<unk> has been a surprise this year.

And there's been a lot of drama in our industry and I think you have all the public company.

I think three of them.

I've had a basically don't have a CFO right now.

Fortunately, we have a great one but.

You see the.

In a slowdown in our in our industry that I think it's temporary.

Industry and I think we do see the demand and the customer interest, but there's periods of times when you have had to.

Sort of a.

Pause and we.

Also so quite.

Quite a bit of concern from many customers that are making decisions that were just.

I'm wondering what's going to happen after we terminated our deal with the Stratasys and.

<unk>.

We're just wondering and that delayed some.

Deals that that happened towards the last week of <unk>.

Q3, so that delayed a number of deals that.

Now most of them are now closed so hopefully.

We move on and now we have a clue.

Year window to execute over the next 12 months and get this business back on a growth path.

And.

May customer successful.

Okay.

And maybe just last question you've talked about some big projects in a couple of verticals, you know automotive and consumer electronics, specifically you know any any update on on those to those remain on track, yes. They do we continue to make progress across the board in a number of this area.

Like all of the major projects do you think is always take a little bit longer, but we continue to make progress in this area.

I think that theyre going to be a major market for our technology in the long run.

Okay, Let me add one thing to Rick's comments, because I think it's important that we mentioned in the prepared remarks as well the.

The consumables and services recurring revenue streams performing the way. They are I think is a bullish undertone here.

I think you know while we have had some purchase decisions on products delayed we are seeing the utilization of our systems that are in place are rising and I think that is a trend. That's the kind of the razor razorblade thing we've talked about in past calls and so we're encouraged by that.

Yeah, Thanks for calling that out again, okay, I will I'll leave it there. Thanks.

Awesome wonderful well, we keep making great progress on on titanium and many other areas.

Great to have a P 50.

Order this quarter with our friend.

At Freeform and many other things to come in this area. So thanks again for.

Listening and thanks to all of our employees that work very hard to.

Drive additive into mass production and our investors for.

Believing in our vision and look forward to the next quarter.

Thank you that concludes our question and answer session.

Mr. Philip did you have any further comments.

No we're good.

Thank you that concludes our conference call today. Thank you for your participation you may now disconnect your lines.