Q2 2019 Earnings Call

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It is now my pleasure to introduce your host Karen Howard Investor Relations for X one.

Thank you Ms. Howard you may begin.

Referring to our slide deck on slide two on the line with me today are presenters John Hartner, Our Chief Executive Officer was elected to the CEO role in mid May and Doug Zumba, Our Chief Financial Officer and Treasurer. In addition, Brian Smith, our senior Vice President of corporate development is with US and may participate in the Q and a.

John and I will be reviewing the results that were published in the press release distributed. This morning. If you don't have that release, it's available on our website at www Dot X., one dot com.

The slides that accompany our discussion today are also posted on our website.

On slide three is our safe Harbor statement.

As you may be aware, we will make some forward looking statements. During this presentation and May also during the Q and a.

These statements apply to future events, they are subject to risks and uncertainties as well as other factors that could cause the actual results to differ from where we are today.

These risks and uncertainties and other factors are provided in the earnings release as well as other documents filed by the company with the Securities and Exchange Commission.

These documents can be found on our website or www dot FCC that God.

I also want to point out that during today's call. We will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's release.

John will get us started providing a high level overview of our second quarter results. Doug will go through a detailed review of them and then John will provide an operational update as well its perspective on our outlook before we open up the line for questions and answers and with that it's my pleasure to turn the call over to John to begin.

Thank you Karen good afternoon, everybody.

Thanks for joining us for X one second quarter report.

I'm starting on slide five with an overview of our results.

It continues to be a very exciting time at X, one and we're making progress on many fronts.

I'll start with summarizing our financial highlights and then I'll update you on our operational progress later in this presentation.

We reported more than $15 million of revenue for the second quarter over 40% higher than last year.

That's a record second quarter for us.

On on that revenue, we earn more than $5 million of gross profit another record setting level for our second quarter.

That really represents a 33.7% gross margin compared to a 14.6% gross margin a year ago.

Evidencing the significant productivity improvements in our operating model and our cost structure, resulting from the company's 2018 go global cost realignment program.

This also reflects the benefit of additional sales volume and the leverage opportunity we have.

From our fixed cost base as we continue to grow.

Our operating expenses reflect the best the benefits of our improved operating model as well.

But they are partially offset this quarter by some equity compensation in cost for trade shows, which we mentioned to you last quarter.

As we are working towards further revenue growth and achieving positive adjusted EBITDA for 2019, I want to point out that our current TTM period reflects a full 12 months under our new operating model.

For this TTM period, ending June 2019, we're nearing breakeven at the adjusted EBITDA level, a significant improvement from the $21 million in that loss and nearly $14 million adjusted EBITDA loss from the prior TTM period.

Finally, we finished the quarter with over $23 million a backlog.

This along with our new product launches and active order pipeline supports our current growth goals in the second half.

I'll touch on that further at the end of this presentation.

Now I'm going to let Doug walk through the details of our financial results.

Doug.

Thanks, John Good afternoon, everyone.

If you could please turn to slide seven we'll start with revenue.

Revenue was up 41% to 15.3 million in Q2, 2019, compared with Q2 2018.

On a trailing 12 month basis revenue was up 13% to 66.7 million.

A record setting 12 month.

Level for X, one and consistent with our mid teens growth goal for fiscal 2000 or 19.

On a product line basis, you can see them that the machine revenue percentage has grown in both comparables, representing 60% of our second quarter revenue and 62% of our trailing 12 month revenue.

Now, let's go to slide eight.

Here you can see that our second quarter machine sales were up were 9.3 million up 6.1 million or nearly three times. The Q2 2018 machine sales level.

This increase benefited from both higher volumes and a favorable mix of machines sold which I'll detail on the next slide.

On a trailing 12 month basis, our machine revenue was up 41% to 41.2 million also a record setting levels.

Now if we can turn to slide nine more review machine unit sales.

As a reminder, our direct machines directly print components, such as metal parts and include our Innovent M Flex and X 125 pro platforms.

Our indirect machines bring tools, such as San cores and molds and include our S. Max an S print platforms as well as our S. Max Pro platform, which we introduced a market in June 2019 at the GIFA trade fair in Dusseldorf.

Our indirect machines are larger footprint systems with such systems generally achieving a higher average sales value.

We sold 13 machines in the 2019 second quarter, representing an 86% increase over Q2 2018.

Our 2019 second quarter machine sales included a higher proportion of our indirect machines. The next the second quarter of 2018.

As you can see on the chart on the left we sold five more indirect machines and one more direct machine and the 2019 second quarter as compared with the prior year quarter.

This mix change benefited the machine revenue dollar increase we saw in the last slide.

Sales of our indirect machines during the second quarter were to support global foundry applications and such sales represented a diverse set of geographies and binder systems, including our fear and cold hard cold hardening phenolic offerings.

Sales of our direct machines were to a mix of industrial and research and development users.

During the trailing 12 months, we sold 64 machines, a 56% increase over the prior 12 month period.

You can see the significant increase in both direct and indirect unit sales, which grew 79% and 36% to 30 430 machines in the 2019 trailing 12 month period, respectively.

This increase was led by our Internet plus platform, which we introduced the market in April 2018.

As well as our market leading S Max for indirect applications.

Now, let's turn to slide 10.

Recurring revenue, which includes our threed printed another products materials and services was 6 million in the second quarter of 2000 or 19 down from 7.6 million in last years second quarter.

For the trailing 12 month period recurring revenue was 25 and a half million down from 29.6 million in the prior year TTM period.

For the quarter. The decline is primarily attributed to a lower volume of printing projects for both direct and indirect based on timing of customer orders and the impact of the exit from our Houston, Texas facility executed in August 2018.

For the trailing 12 month period. These decreases were offset by an increase in our aftermarket sales based on our growing global installed base of machines.

Turning to slide 11, we'll talk about gross profit and margin.

Gross profit was up significantly to 5.1 million, resulting in a 33.7% gross margin for the second quarter of 2019, a significant improvement over the 14.6% margin for the second quarter of 2018.

The improvement was driven by higher volumes and a reduction in the fixed cost portion of our cost of goods sold resulting from our 2018 global cost realignment program, including the Houston facility exit I referenced.

This shows the improved leverage from our operating model, which we have witnessed in the past few quarters.

We also note that the 2018 second quarter included an inventory impairment charge associated with an exited product that benefited the quarter to quarter change.

For the trailing 12 months, we realized gross profit of 24, and a half million and a gross margin of 36.7%.

Up from 15 million and 25.4% in the prior year period.

The 2019 TTM reflects the full year benefit of our 2018 global cost realignment program initiated at the end of June 2018.

The primary driver for the increase.

The improvement also benefited from higher TTM revenues and lower net inventory impairment charges as I cited earlier.

Please turn to slide 12, and we'll discuss S. DNA.

Comparing the second quarter of 2019 to 2018 or as DNA expenses were down approximately $200000 or 3%.

The decrease was principally due to lower employee related costs and consulting and professional fees, resulting from our 2018 global cost realignment program.

The savings, we realized were partially offset by equity comp equity compensation costs associated with executive leadership changes between the periods.

Including certain awards issued in the current quarter and certain award forfeitures, which benefited the prior year quarter.

In addition, we incurred approximately $500000 an incremental cost during the during Q2 2019 associated with trade show activities, principally the GIFA trade fair a once every four year event, which I referenced earlier.

These incremental trade show related costs will not repeat in Q3 and Q4.

For the TTM period, our SGN, a decreased by 2.2 million to 22.2 million.

The improvement was primarily driven by cost reductions employee and called consulting related costs associated with our 2018 global cost realignment program offset by the incremental trade show costs.

Related related to Giefer, which were not a part of our 2018 TTM SG anyway.

Please turn to slide 13, I will discuss our investment in R&D.

The 2019 second quarter reflects an approximate 700000 dollar 22% decrease compared with the 2018 second quarter.

The decrease resulted primarily from the 2018 global cost realignment program, resulting in lower employee related and consulting costs, while we continue to improve our overall resource allocation productivity and maintain progress in advancing our technology.

Including our development efforts tied to our exon 25 pro an S. Max pro product launches.

We noticed similar trend driven by the same factors for the TTM period comparison.

We expect to continue to invest in our technology and to reiterate while we have reduced costs. This has not had a corresponding impact on the development of our binder <unk> binder jetting platforms as we have employed efficiencies in our development processes to improve their effectiveness with less overall effort.

Now if you'll turn to slide 14, I'll review backlog.

This past quarter as we mentioned on our May call, we had strong order flow and even with the level of machine revenue recognized this quarter weve nearly doubled our backlog during the first six months of 2000 $19 million to $23.1 million at quarter end.

To remind you our backlog includes firm orders received from our machine and recurring revenue customers.

And includes our firmly committed machine maintenance contracts as well as the non cancelable portion of our operating lease agreements.

Backlog also includes orders for our global direct and indirect printing operations and other contractual services.

Our order momentum and resultant backlog position combined with our customer pipeline. Following the two significant product launches that I mentioned support our full year revenue growth rate goal in the mid teens.

We're certainly conscious of the pressure mounting on capital equipment purchasing decisions, primarily driven by macroeconomic factors and the impact. This may have on our second half results, which could serve as an impediment to our goal.

Ongoing trade matters with China have had no identifiable impact on our internal supply chain at this point.

And only a negligible impact on our sales activity.

However, future economic uncertainty in the broader market is likely to impact capital equipment decision, making which could have a direct impact on our machine sale projections for the second half.

Nonetheless, we have a high level of confidence in our expanding product portfolio and our existing position within the additive manufacturing space as the leader in Binder Jetting technologies.

Turning to slide 15. This chart represents a waterfall of our Q1 and Q2 2019 cash flows.

Since I reviewed Q1 last quarter I won't repeat that here.

Instead I'll talk you through the Q2 section to the right.

We had approximately $100000 in cash capital expenditures for the second quarter.

We continue to anticipate modest cash capex spending for the remainder of the year.

Working capital changes resulted in a source of cash of approximately $2.1 million during the second quarter benefiting from net cash inflows from customers, partially offset by an increase in net cash outflows for payments to suppliers for our inventory production and operating expenses in support of our growth expectations for the remainder of 2019.

Our net loss net of non cash items and other used 2 million of cash and we ended the second quarter was 7.3 million and total cash.

Our overall net cash outflow of approximately $1.8 million for the first half of 2019 compares very favourably with our net cash outflow of $9.1 million for the first half of 2018.

If you'll turn to slide 16, you'll see our total liquidity at the end of Q2 2019 and year end 2018.

At the end of the second quarter, we had 21 and a half million of liquidity compared with $22.6 million at the end of 2018.

We continue to have virtually no debt outstanding.

It's important to note that we continue to believe that we have sufficient capital to support our operating plan.

That concludes my prepared comments and now I'll turn it back to John .

Thanks, Doug Please turn to slide 18, and I'll start with how we're communicating our brand both externally and internally.

A little over a month ago, we unveiled our new logo and tag line.

Collaborate innovate and accelerate.

Those three words summarize our current external focus on customers and speed to market.

And internally the real purpose of these words is to ensure consistent engagement among our team members.

With the customer experience and to support our company values.

Collaborate refers to working side by side with our customers and partners as a team.

To solve the toughest engineering and manufacturing problems.

We work to truly understand their challenges and take them on as our own designing and implementing game changing solutions.

Our innovation is grounded in over 20 years of practical experience and problem solving.

We help customers get products to market faster, creating solutions that were once impossible.

Collaboration and innovation feed and build upon each other and we believe those attributes are the foundation for us as we accelerate the transformation of industrial manufacturing with Binder Jetting technology.

We believe these characteristics make us the market leader in our field today, and we'll continue to keep us on top.

Please turn to slide 19.

The visual was intended displayed the collaborations announced in the second quarter with our various partners as we develop and evolve binder jetting and expand its applications.

Aligning with industry leaders, who are investing in and advancing the application of binder Jetting technology is critical to our ongoing success and our drive to revolutionize manufacturing through Threed printing.

We've had a long standing relationship with Sandvik and kennametal to key material partners, who utilize our machines to develop new and innovative applications and are the first to beta test, our new X 125 pro.

Software partners include Siemens in their mind sphere Internet of things operating system.

Our new S. Max Pro includes the latest Siemens digital factory portfolio of software and automation technology to leverage the benefits of industry 4.0.

R&D specialists, such as Oak Ridge National Labs are critical partners for our ongoing development.

Development of technological advances in binder jetting.

While we have been working with them for years, we recently announced a new collaboration project with them that is initially targeted on the development of cutting edge technology for new binder systems, focusing on optimizing chemistry and process parameters for our machines.

In addition to these specific examples we have many more key relationships, including those with peripheral and post processing partners as well as customers.

Stay tuned for more announcements that evidence our progress and commitment to collaborate with partners and customers within our ecosystem.

Please turn to slide 20, and I'll update you on the most recent announced platform and indirect printing machine the S. Max Pro.

We have been previewing a new product launch for a couple of quarters now and we introduced it at in conjunction with the geese affair.

Our rendering of the machine is shown in the middle of the photo.

And on the left is the X one team at our booth at the Gaeth affair.

And on the right is a photo of Dr. Karsten Hauser VP of additive manufacturing from Siemens Digital factory group, and which is one of our key software partners along with me.

You may recall, we have in the past described our aster Max as the workforce Threed printing solution in the foundry industry.

It was it it was introduced in 2011 2011.

And has been very successful in the marketplace.

We've never stop working on improving our technology.

We have to keep developing new machines that are higher throughput higher capability and the ability to handle a broader range of materials.

The new S. Max Pro platform is based on the S Max but its faster and capable capable of even a higher degree of reliability.

Some key features of the new asked Maxxpro are as follows it has higher performance print head and advanced Recoded with enhanced precision in performance and lower operating costs for our customers. It's very flexible compatible with all of the binder systems, including Furion phenolic and inorganic.

Finally, we work closely with Siemens to develop a new more advanced control system that is aligned with the industry 4.0 philosophy.

This new platform will continue to drive down total cost of ownership for our customers, especially those moving into serial production.

Additionally, it will broaden the applications for our systems and expand our market potential.

We have high we've had high interest in the new systems with several orders in hand, and an active pipeline. We will start shipping in Q4 of this year.

Please turn to slide 21, and I'll update you on our newest direct printing platform, our X 125 pro.

We had a unit on display at the rapid TCT show in Detroit in May and received very positive feedback.

This is the machine whose platform is based on our successful in event plus system.

With the excellent 25 pro capable of printing men powders in a larger format job box, we see this machine being a real success in expanding our capabilities into larger parts.

And higher production application for Min powders.

To promote awareness of the machines capability and potential applications. We've established a material partnership program focusing on process development and powder optimization.

We also established a program to introduce the customers to the benefit of the machine by allowing trial production runs at our facility.

As we previously announced we're very excited that kennametal and Sandvik, our beta partners for this new machine. They are existing customers, who are leading in the way too in investing in the opportunities that Brian Binder jet offers to industrial manufacturers.

Just last month, our patent application for advanced compaction technology or HCT was allowed by the US patent office Great News for this unique technology.

It is faster and improves the quality of advanced metal parts is a key differentiator for the X 125 pro and as we put more parts and gain experience. It's clear that the part quality is meeting or exceeding our expectations.

Please turn to slide 22, and I'll discuss our current outlook for 2019.

As we said in the past, it's difficult to predict our customers actions and the current macroeconomic environment presents increasing uncertainty as many other public companies have noted.

We are maintaining our 2019 revenue growth goals in the mid teens.

As a point of reference our second quarter TTM revenue grew at 13% the lower end of our targeted range.

Our first half came in close to where we expected in the ballpark of 35% of the full year total revenue goal.

As we have previously indicated.

So we need a strong second half, which is typical in our industry.

We currently expect our third quarter to be up modestly from the second quarter. So this means we are expecting a stronger fourth quarter.

Our backlog.

Product launches.

And active order pipeline support these goals.

That said, we continue to actively monitor macro uncertainties, including geopolitical events.

From an execution standpoint, we continue to leverage our improved operating model and at the targeted sales levels, we target achieving positive adjusted EBITDA for 2019 in total.

While maintaining our ongoing R&D investments.

We continue to be keenly focused on profitable growth.

That concludes my prepared comments and now let's open up the lines for questions.

Thank you.

We will now be conducting a question and answer session.

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Our first question comes from the line of Daniel Drawbaugh with B. Riley FBR. Please proceed with your question.

Hi, guys. Thanks for taking my question and congrats on the quarter and the growth rebound here.

Yes. Thanks.

I'll start I wanted to get a little more color from you about the momentum you're seeing in order activity, how you executed.

The second quarter's improvement up more than 40% on sales year over year and sort of.

What gives you confidence in this mid teens revenue outlook, just peering into your pipeline into that fourth quarter into that large fourth quarter you mentioned.

Right.

Thanks, Dan So as we stated in the.

In the prepared remarks, we have a growing backlog and we've just come off of two major product launches and two major trade shows, particularly the giffords notable as it only occurs every four years.

With those product launches and trade shows our pipelines expanded dramatically we have a lot of customer activity and we are working hard to continue to convert those opportunities into orders.

We have seen some customer.

Uncertainty, but we continue to close business and believe we have a good shot at hitting our target for Q. The rest of the second half of the year in Q4.

Secondly on supply chain, we feel comfortable with our supply chain being capable as Doug mentioned, we're planning on that from an inventory standpoint, and also from an installation standpoint.

Got it Okay, and then in the quarter, particularly strong growth in your indirect unit sales.

Can you comment on whether that customers that you already had taking additional machines or.

Perhaps new customers coming online just curious whats moving that number.

Yeah, I'll start and Doug can chime in I mean, one thing is the indirect.

Product line is more mature as far as adoption in the additive space. We have many customers who have been using the technology for years and continue to move forward.

With deployment in existing facilities, and new facilities and that in turn brings new customers on board. So.

Yes, I'd say that that covers most of it Doug anything else that yet and Dan just add a little bit more color. We did have a mix, especially on even on the indirect side of customers that weve previously had machines installed with and new customers and in fact, even one customer who is a repeat customer upgraded or switch to a different binder said altogether. So you're seeing a diversity and certainly an expansion of the purchases even of the existing customer base that we have.

Terrific got it now from a cost standpoint.

It seems like from a TTM basis, I think you mentioned that you've got the operational realignment fully included in the numbers. So what should we be thinking about as far as your R&D spending plans youre SGN a spending plans is sort of the TTM number here a good way to think about an annual spend rate anything incremental coming up or any cost that may come out just curious what you're thinking about over the next few quarters.

Related to the R&D side I mean again, we're just to reiterate that we are we continue to invest in R&D and I think if you. If you stretch out the the run rate that we've had here both on a TTM basis, and particularly in the quarters within 2019, you get a pretty good indicator of where we sit.

We're coming off of two product launches, so we're going to be directing ourselves at some other activities. Once we get past those nonetheless, we're committed to those spend levels.

On the DNA side.

You May you you identified are noted in the comments that we had the GIFA piece that came through in the current quarter really the trade show activities, including our investment that we made this year and rapid.

We're a bit of a of an incremental hit for the DNA line item.

And that we had comparably speaking a little bit higher equity based compensation.

Which we would expect.

At the current levels to to continue through the remainder of 2019, So I think when you mark out the.

Blip in the trade show related activities. The TTM number comes back more in line with what you should expect going forward.

Okay Fair enough and then last one for me I was just hoping you could comment on your outlook for working capital in the back half of the year.

It was a nice tailwind in the first half year, but if it is there anything I mean, I mean should that be changing given the higher sales number in the back half just what can we kind of look for.

In that respect.

Sure specific to the third quarter, what we're expecting is to probably see a bit of a net outflow only because we're we have a pretty extensive build up of inventory heading into that fourth quarter.

For the fourth quarter, we expect sort of things to balance out.

And we don't expect cash.

Our cash position that change a whole lot from what you're seeing sort of midyear to the ended the year assuming that we meet plan.

All right terrific. Thanks, a lot guys I appreciate the time.

Sure.

As a reminder, it is star one to ask your question. Our next question comes from the line of Brian Kinstlinger.

Alliance Global Partners. Please proceed with your question.

Great. Thanks, so much.

I was curious on the.

How are you.

Good.

I was curious on the excellent. Thank you. So much I was curious on the S. Max Pro.

You mentioned fourth quarter, starting to see some sales of that product.

Is that replacing sales that otherwise would have been of a different printer of yours or the incremental and then from a pricing standpoint, how will that change your average maybe.

Seen sale.

Right.

Thanks, Yeah. The S. Max Pro has additional capability, we have both already in hand orders from new customers as well as significant commitments from existing customers to continue to.

Deploy our technology with the new S. Max Pro.

Yes, I'd say that that particular growth is a positive thing from us from a pricing standpoint, we expect it to help from our pricing and maintain pricing as we continue to drive better operating cost of ownership for our customers going forward.

Great and then.

Maybe you can talk about the expected timeline, if I heard correctly for the testing of the X 125 pro.

When should we expect that will be available also for general sale or should we first see either beta customers that you plan to fight.

Yes, we would anticipate and we already have beta beta projects in this third quarter.

And we would anticipate shipping that as well in the fourth quarter.

And we have commitments for customers there.

Yes, right, but I think you said they were in the testing phase I mean is that a three month periods and generally that nine month period that six month I'm just kind of curious when you get the feedback and if you can make adjustments after that.

Well, we already have a firm order beyond the beta beta trials already so that actually is scheduled for the fourth quarter and the beta trials should normally take a month or two we have so we have some customers I mentioned in my prepared comments that we are also doing some trial production in our facility on the machine. So we have some customers that are going to make an evaluation for literally a week or two and then make the decision.

Great and then.

The margins, obviously look great as the gross margin. So I'm curious you referenced part of that was the cost cutting obviously there was also a good compare from last year can you talk about how much fixed cost came out of the cost of goods sold as part of that cost realignment.

A difficult number to unnecessarily.

Project them and we know that.

Specific to our exit on Houston.

That on a periodic basis, we're looking at roughly a half a million dollars a quarter.

But there have been some other costs that we brought down another facilities across the board.

Great.

And then finally just on the backlog just so I understand.

Backlog is.

Not sign contracts kick your opportunity.

That you're bidding on right now based on what you said to go turn them into orders or is backlog signed commitments.

No backlog is signed commitments.

Great and then so then is there an opportunity to split that between how you see that in direct versus indirect maybe.

We don't really carve it up that way.

We just we generally just try and monitor the consolidated figure.

Okay, great. Thanks, so much.

Thanks, Brian .

There are no further questions in the queue I'd like to hand, the call back to management for closing comments.

Great. Thank you for your time today and thanks to our team members around the World, who work hard to drive collaboration innovation and acceleration for the digital transformation in manufacturing, we look forward to updating you on our third quarter progress in November .

Thank you again for your interest in eight X, one and have a great evening.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.