Q2 2024 Desktop Metal Inc Earnings Call

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Operator: Greetings and welcome to the Desktop Metal Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker Change: Greetings and welcome to the desktop metals second quarter 'twenty 'twenty four earnings.

Speaker Change: Friends call at this time, all participants are in a listen only mode.

Operator: 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 will now begin.

Speaker Change: A 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.

Operator: I will now turn over the call to you. Good morning, and thank you for joining today's call. With me today are Ric Fulop, founder and CEO of Desktop Metal, and Jason Cole, CFO of 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 a link at the same site.

Speaker Change: I will now play.

Speaker Change: Now I'll turn over the call.

Yeah.

Operator: The 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, and it cannot be reproduced or transcribed without our prior consent.

Speaker Change: Good morning, and thank you for joining today's call with me today are Rick <unk>, founder and CEO of desktop metal, Jason Cole 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.

Speaker Change: This call is also being webcast live with a link at the same site.

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

Operator: Before we begin, I'll refer you to our Safe Harbor disclaimer on slide 3 of the presentation and in the financial results press release. As a reminder, today's call will include forward-looking statements. These forward-looking statements reflect desktop average views and expectations only as of today, July 31st, and actual results may vary materially based on the 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 in the company's Form 10-K and Form 10-Qs, in addition to the company's other filings with the SEC.

Speaker Change: Before we begin I'll refer you to our safe Harbor disclaimer on slide three of the presentation and in the financial results Press release as a reminder, today's call will include forward looking statements.

Speaker Change: Forward looking statements reflect desktop metal views and expectations only as of today July 31st and actual results may vary materially based on a number of risks and uncertainties.

Speaker Change: Information about the risks that may impact us that metals business and financial results. Please refer to the risk factors section in the company's Form 10-K and Form 10-Qs. In addition to the company's other filings with the SEC, we assume no obligation to update or revise the forward looking statements.

Operator: We assume no obligation to update or revise the forward-looking statement. 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 GAAP to non-GAAP measures. I'll now turn the call over to Ric.

Speaker Change: Additionally, during this presentation and Q&A session, we may refer to our results on a non-GAAP basis.

Speaker Change: 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 the reconciliation of GAAP to non-GAAP measures.

Speaker Change: I'll now turn the call over to Rick.

Ric Fulop: Good morning, everyone, and welcome to Desktop Metal's second quarter 2024 earnings call. I'd like to use today's call to address the most significant development of our company, the proposed business combination with Nano Dimension. This decision wasn't made lightly.

Rick: Good morning, everyone and welcome to desktop metals second quarter 2024 earnings call.

Speaker Change: I'd like to use today's call to address the most significant development of our company. The proposed business combination with added dimension to this.

Rick: Decision wasn't made lightly.

Ric Fulop: And I'd like to walk you through our rationale and benefits we anticipate from this merger. Since the beginning of 2022, Desktop Metal has worked tirelessly to align our cost structure with macroeconomic reality, making hard decisions about our business. We have reduced our non-GAAP operating expenses by 48% since the first quarter of 2022 while meaningfully strengthening our non-GAAP gross margin. By the end of the first quarter, we had delivered nine quarters of OPEX reduction and brought our cash burn down dramatically.

Speaker Change: And I'd like to walk you through our rationale and benefits we anticipate from this merger.

Rick: Since the beginning of 2022 desktop metal has worked tirelessly to align our cost structure with macroeconomic realities, making hard decisions about our business, we have reduced our non-GAAP operating expenses by 48% for the first quarter of 2022, while meaningfully strengthening our non-GAAP gross margins.

Rick: By the end of the first quarter, we have delivered nine quarters of Opex reduction and brought our cash burn down dramatically.

Ric Fulop: We have strategically realigned our business to reflect a lower growth environment driven by 11 interest rate hikes. And from a margin perspective, I'm proud of the progress we have shown. However, despite these efforts, we have faced an increasingly challenging business environment as a result of rising rates, slowing CapEx budgets, and other macro-related challenges. Well, we believe additive manufacturing has incredible potential and will continue to grow over the next decade. However, the past year and a half has been very challenging, putting significant pressure on our financial position.

Rick: Strategically realigned our business to reflect a lower growth environment, driven by 11 interest rate hikes.

Rick: And from a margin perspective, I'm proud of the progress we have shown.

Rick: However.

Rick: Despite these efforts we are facing an increasingly challenging business environment.

Rick: As a result of rising rates slowing capex budgets and other macro related challenges.

Speaker Change: Well, we believe additive manufacturing has incredible potential and will continue to grow over the next decade.

Rick: The past year and a half has been very challenging putting significant pressure on our financial position.

Ric Fulop: As a result, we've seen our balance sheet continue to be under pressure, limiting our ability to invest in growth and innovation. We began to notice a concerning trend towards the end of the second quarter, with customers becoming hesitant to engage in closing deals due to our weakening financial outlook, making it more difficult to reach our profitability target. This feedback from the market was a clear signal that we needed to take action.

Rick: As a result, we've seen our balance sheet continue to be under pressure limiting our ability to invest in growth and innovation.

Rick: We began to notice a concerning trend towards the end of the second quarter with customers, becoming hesitant to engage in closing deals due to a weakening financial outlook, making it more difficult to reach our profitability targets.

Rick: Feedback from the market was a clear signal that we needed to take action became increasingly apparent that remaining a stand alone company with a constrained balance sheet was not a viable long term strategy.

Ric Fulop: It became increasingly apparent that remaining a standalone company with a constrained balance sheet was not a viable long-term strategy. Since the terminated merger agreement with Stratasys in September of 2023, we explored raising additional capital to strengthen our balance sheet. But the financing alternatives available to the company would have created significant dilution to shareholders or seating control via structure to debt holders, which would have destroyed a lot of our remaining equity value.

Rick: So as the terminated merger agreement with Stratasys in September of 2023, we explore raising additional capital to strengthen our balance sheet.

Rick: But the financing alternatives available to the company would have created significant dilution to shareholders or ceding control via structured or debtholders, which would have destroyed a lot of our remaining equity value.

Ric Fulop: It didn't help to have short selling activity that we believe drove down the value of our equity significantly. In evaluating our options, we had to consider the broader context of added manufacturing as an industry. It's worth noting that profitability has been elusive across all the public companies in the additive sector. Well, we have declined in value in line with most of our peers, but the situation could have been worse. And in fact, it has been for some players in our space. For example, four of our Western publicly traded companies in added manufacturing have failed or were delisted in the last two quarters, with deteriorating market conditions leading to an even more pronounced loss of equity value for those businesses. And we do not want to be in that bucket.

Rick: It didn't help to have short selling activity that we believe drove down the value of our equity significantly.

Rick: In evaluating our options we have to consider the broader context of added manufacturing as an industry.

Rick: Noting that profitability has been elusive across all the public companies in the additive sector.

Rick: Well, we have declined in value in line with most of our peers. The situation could have been worse and in fact it has been for some players in our space. For example, four of our western publicly traded companies and added manufacturing have failed or where do you listed in the last two quarters, even deteriorating market conditions, leading to an even.

Rick: More pronounced lots of equity value for those businesses and we do not want to be in that bucket.

Ric Fulop: We also considered a variety of divestitures, but given valuations and market sentiment towards additive manufacturing, there were no good, immediately actionable alternatives. At the moment, not a single one of the public companies in additive manufacturing has achieved meaningful profitability or scale, and Scale with the Right Portfolio, Balance Sheet, Technology, and Go-To-Market is going to be required to build a sustainable company in this industry. We looked at all the options in front of us, and given these factors, we believe that the proposed business combination with Nanodimension, which provided a 27% premium at the time of the transaction was announced, subject to adjustment, still represents the best path forward for desktop metal shareholders.

Rick: We also considered a variety of divestitures, but given valuations in market sentiment towards added manufacturing there were no. Good immediately actionable alternatives.

Rick: At the moment not a single one of the public companies and added manufacturing has achieved meaningful profitability or scale.

Rick: And scale with the right portfolio and balance sheet technology and go to market.

Rick: Gotta be required to build a sustainable company in this industry.

Rick: This industry wide challenge underscored the need for a bold move to support the long term success over the technologies, we have pioneered in our ability to maximize the equity value to our shareholders.

Speaker Change: We looked at all the options in front of us and given these factors. We believe that the proposed business combination with another dimension, which provided a 27% premium at the time of the transaction was announced.

Speaker Change: Just two adjustment.

Speaker Change: <unk> represents the best path forward for desktop metal shareholders.

Speaker Change: This merger offers several key benefits that we expect will strengthen our competitive position and create significant long term shareholder value.

Ric Fulop: First and foremost, this combination will establish a true leader in additive manufacturing. This combination will allow us to better serve our customers and compete more effectively by offering a more complete portfolio of products. We believe this merger will accelerate the industry's transition into mass production.

Speaker Change: First and foremost.

Speaker Change: This combination will establish a true leader in the additive manufacturing space.

Speaker Change: By bringing together, our complementary product portfolios and technologies will create an MTB with enhanced scale and a stronger balance sheet.

Speaker Change: This combination will allow us to better serve our customers and compete more effectively by offering a more complete portfolio of products.

Speaker Change: We've gotten to know and I know you mentioned team over the past two and a half years none.

Speaker Change: None of them actually is a well run company with a strong management team there delivered superior organic growth versus our industry in 2023.

Speaker Change: Secondly.

Speaker Change: We believe this merger will accelerate the industry's transition into mass production.

Ric Fulop: By pooling our resources, expertise, and technologies, we'll be better positioned to drive innovation and develop products for customers that address the evolving needs of manufacturers looking to adopt additive manufacturing for production applications. The alternative of not closing a transaction now with Nano and its strong balance sheet in cooperative management may lead to a fatal prognosis for our company's existence. As Q2 ended, the only other alternatives available to us would have destroyed much of the remaining equity value and put our company and customer base at risk.

Speaker Change: Our resources expertise and technologies will be better positioned to drive innovation and develop products for customers that address the evolving needs of manufacturers looking to adopt additive manufacturing for production applications.

Speaker Change: And lastly, and perhaps most importantly, this merger will create a well capitalized company with a stronger financial profile to properly support our customers.

Speaker Change: The increased scale and operational efficiencies, we expect to achieve will put us in a clear path to profitability, while providing the resources needed to fuel growth and innovation.

Speaker Change: Finally, I would like to address the timing and structure of the deal.

Speaker Change: Over the past two and a half years, we've had discussions with 10 different companies on potential combinations.

Speaker Change: None resulted in offers that were actionable or that our board deem superior to remaining an independent company other than the proposed stratasys merger for this transaction.

Speaker Change: In the first quarter, we believe there was a chance for the market to recover and economic pace from projects would start to close faster as rates would come down.

Speaker Change: But it quickly became clear as we get closer to the end of Q2 that we had to do a deal to protect the value of the equity.

Speaker Change: We considered an all equity deal, especially since our whole industry is at an all time low but this was not a viable option Indiana.

Speaker Change: Given our past experience with a failed vote from Stratasys. Our view was at an all cash transaction would present the highest certainty.

Speaker Change: In an all cash transaction would enable those desktop metal shareholders, who have conviction regarding the industry's long term potential to make their own investment decisions whether to purchase stock.

Speaker Change: Take advantage of future growth opportunities.

Speaker Change: The alternative of not closing a transaction now with nano and a strong balance sheet and corporate management.

Speaker Change: <unk>, two a fatal prognosis and results for our company's existence.

Speaker Change: We firmly believe that this business combination with narrow dimension is the right strategic move for desktop metal shareholders. At this critical juncture in our entire team is excited about making this combination of successful in working with the team at nano to make customers successful.

Speaker Change: As Q2 and that the only other alternatives available to us would have destroyed macro the remaining equity value and put our company in customer base at risk. That's a large shareholder I do I'm saddened to see the decline over time and valuations of our companies in this industry that we've had.

Ric Fulop: As a large shareholder, I too am saddened to see the decline over time in valuations of our companies in this industry, but we've had, We're excited about the potential of this merger and are confident it creates the best value for our shareholders, customers, and employees. The success of these programs since the beginning of 2022 is highlighted by our adjusted operating margin and declining costs and cash burn. Please note, we will be referring to several financial metrics on a non-gap basis. For example, consolidated revenue for the second quarter of 2024 was $38.9 million compared to $53.3 million in the second quarter of 2020. The weaker hardware sales were driven by macroeconomic conditions impacting additive manufacturing.

Speaker Change: Limited Standalone financing options.

Speaker Change: Came to the conclusion that partnering with nano.

Speaker Change: It's the best outcome for our shareholders.

Speaker Change: We strongly believe that this is the best move for our shareholders.

Speaker Change: We're excited about the potential of this merger and are confident it creates the best value for our shareholders customers and employees.

Speaker Change: INR team are looking forward to partnering with the nano team and growing this market and building a profitable company at scale.

Speaker Change: With that I'll hand, the call over to Jason to cover our financials.

Jason: Thanks, Rick and thank you everyone for joining us today.

Speaker Change: Remarks today will be relatively brief given the pending merger agreement with dimension.

Jason: Turning to several financial metrics on a non-GAAP basis.

Jason: The reconciliation to GAAP data is included in the filed appendix within our slides.

Speaker Change: Consolidated revenue for the second quarter of 2024 was $38 9 million compared to $53 3 million in the second quarter of 2023.

Speaker Change: The year on year decline was led by weaker hardware sales, while consumables and services were roughly flat year on year.

Speaker Change: The weaker hardware sales were driven by the macroeconomic conditions impacting the additive manufacturing industry.

Ric Fulop: Non-GAAP gross margins were 29.2% for the second quarter of 2024 compared to 31% in the prior year. Through cost optimization, we reduced non-GAAP operating expenses sequentially by $1.6 million and year-over-year by $7.7 million, improving by 5.6% and 22.2%, respectively. Turning to the balance sheet, we close 2Q with $46.7 million in cash, with outflows elevated in the quarter by deal-related steps. With that, we will answer some questions. Operator.

Ric Fulop: non-GAAP gross margins were 29, 2% for the second quarter of 2024 compared to 31% in the prior year period.

Speaker Change: non-GAAP gross margins fell 180 basis points compared with the prior year period, driven by weaker cost absorption on lower revenue.

Speaker Change: Sequentially non-GAAP gross margins decreased from 35% in the first quarter of 2024 on lower revenues in Q2 of 2024.

Speaker Change: On the next slide non-GAAP operating expenses were 27 zero million for the second quarter of 2024.

Speaker Change: Through cost optimization, we reduced non-GAAP operating expenses sequentially by $1 6 million and year over year by $7 7 million, improving by five 6% and 22% respectively.

Speaker Change: Adjusted EBITDA for the second quarter of 2024 was negative $13 2 million improving year over year by $1 8 million compared to the second quarter of 2023.

Speaker Change: Turning to the balance sheet, we closed <unk> with $46 $7 million in cash with outflows elevated in the quarter by deal related.

Speaker Change: We are no longer providing guidance for the remainder of 2024 due to the pending acquisition with nano dimension.

Speaker Change: That will take some questions operator.

Operator: Thank you. Our first question comes from the line of Mr. Craig Palm of Craig Hallam Capital Group. Yeah, thanks. This is a Danny Eggertjohn question for Greg today.

Speaker Change: Thank you to our house late.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone, you'll hear a prompt that you hadn't seen rates should you wish to decline here in the planning process. Please press the star followed by the.

Speaker Change: If you are using a speaker phone please keep the handset before pressing NTT.

Speaker Change: One moment. Please for your first question.

Speaker Change: Our first question comes from the line of Mr. Greg Palm of Craig Hallum Capital Group.

Speaker Change: Please go ahead.

Speaker Change: Yes. Thanks. This is Danny agro John for Greg Today, I appreciate you taking the questions.

Danny Eggertjohn: Appreciate you taking the questions. I guess I'll just start with, you know, you said you kind of had, you know, challenges closing deals at the end of the quarter. And obviously, you mentioned that some customers were just hesitant and uncomfortable with your financial position as a company, just wondering if there's any way to maybe break down more, how much of it was that versus maybe a continued softening in the macro and versus versus that hesitancy based on your financials. Large companies, you know, really scrutinize this large type of investment.

Speaker Change: I guess I'll just start with.

Speaker Change: You said you kind of had challenges closing deals at the end of the quarter and obviously you mentioned that some customers were just hesitant.

Speaker Change: And uncomfortable with your financial position as a company just wondering if theres any way to maybe break down more or how much of it was that versus maybe a continued softening in the macro.

Speaker Change: Versus versus that hesitancy based on your financial position.

Speaker Change: I mean does any of the type of products that we sell particularly on the vendor side. Many times are over $1 million. So.

Speaker Change: Large companies.

Speaker Change: Really scrutinize this large type of investments and.

Speaker Change: I would say if you want to an average mix of what that was.

Speaker Change:

Speaker Change: You have to probably get back to you and actually do a real count, but it's something that we felt.

Speaker Change: Okay.

Unknown Speaker: Okay, got it. Maybe just touching quickly on, you know, the balance sheet, cash burn, obviously, another $20 million cash burn this quarter. Unknown Speaker How should we be thinking about that? Is there maybe increased focus or emphasis on that in the next couple of quarters, maybe in the case that the deal does get pushed to, to 25, and you know, greater emphasis on driving down that cash burn? So there's less of an impact on potentially drawing on that loan.

Speaker Change: Okay got it maybe just touching quickly on on.

Speaker Change: Balance sheet cash burn, obviously, another $20 million cash burn this quarter and.

Unknown Speaker: Unknown Speaker You also have to account for, you've got the, Okay, that's helpful. I'll leave it there. Thanks. Thanks, Danny. All right.

Speaker Change: Spacing in our Cpg's disconnect your lines I Hope you all have a great day.

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