Desktop Metal Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 5 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Operator

Michael Jordan, Vice President, Finance and Treasury. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining today's call. With me today are Rick Fulop, Founder and CEO of Desktop Metal and Jason Cole, CFO of 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. 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.

Speaker 1

It cannot be reproduced or transcribed without prior consent. Before we begin, I'll refer you to our safe harbor disclaimer on Slide 3 of the presentation. As a reminder, today's call will include forward looking statements. These forward looking statements reflect Desktop Metal's views and expectations only as of today, November 9, 2023, and actual results may vary materially based on a number of risks and uncertainties. For more information about the risks that may impact Desktop Metal's business and financial results, Please refer to the Risk Factors sections on Form 10 Q in addition to the company's other filings with the SEC.

Speaker 1

We assume no obligation to update or revise the forward looking statements. Additionally, during the presentation and following Q and 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. 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. I'll now turn the call over to Rick.

Speaker 2

Thank you, Michael. Welcome to our Q3 2023 financial results call. I'd like to start my remarks today by acknowledging that this was a disappointing quarter Desktop Metal and also for the entire additive manufacturing industry. While we're dissatisfied with our top line revenue performance in the midst of this challenging period, I'm I'm incredibly proud of the progress that Team DM has made in executing our $100,000,000 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 We've delivered as we work to ensure a strong foundation for the future.

Speaker 2

I want 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 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. While we believe in the merits of that specific combination, we remain highly confident in our position as a stand alone business and the strong foundation we're building 3, we reported total revenue of $42,800,000 which compares to $47,100,000 in the prior year period.

Speaker 2

Software revenue stems from a de 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, combined with several deals coming out of the Q3 and moving into the Q4 of the year. Our adjusted EBITDA was a loss of $20,500,000 an improvement of 27% year over year compared to a loss of $28,200,000 in the Q3 of 2022, This outcome was a direct result of several factors, including production site consolidations, improved gross margins as a result of favorable mix of services in 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 have greatly expanded our portfolio and diversification. We subsequently worked to integrate our business units, Enhance efficiency and remove cost across the company.

Speaker 2

Our path 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. To that end, there are several aspects of our business that will enable Success on these major important strategic objectives, including: 1st, as additive manufacturing continues to transition from prototyping to mass production application, to benefit from this expanding market as it holds the leading proprietary technology focused on mass production solutions. We hold the leading market share position in binder jetting, which customers like BMW are using for mass production of critical components In a leading position in healthcare applications with our DLP technology across a wide range of materials and end users. Broadly speaking, Our expansive and growing library of materials across the categories of metals, polymers, ceramics and biocompatible materials are enabling Desktop Metal customers To create value through solutions, which address their highest opportunity challenges, and we'll walk through some of those examples today. 3rd, We're poised to benefit and are already beginning to see the results of an expanded global installed base that is using added manufacturing equipment for real production.

Speaker 2

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 $37,000,000 in the 1st 3 quarters of 2022 to $49,000,000 in the 1st 3 quarters of 2023. And lastly, we're well underway to rightsizing our cost structure and improving our operational efficiency. We're We're ahead of plan on executing this $100,000,000 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 in Q4 of 2023. Our goal is to be cash flow positive in 2024 on the cash that we have.

Speaker 2

We have lowered our operating expenses for 6 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 capitalize on the secular opportunity as the market returns to growth. Turning now to our recent business highlights. The Q3 saw continued expansion of major super fleet customers, including Honeywell and Baker Hughes and major companies like Northrop that have now grown into the global leaders in 3 d printed optical components using our machines. Companies like Hamptown 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 Exerial Systems.

Speaker 2

By the end of the year, they'll have 6 operational axial binder jet systems that can continuously print 12 build boxes with a size of 2.2 meters each To mass produce parts for their 6 cylinder engines. We have some great videos from DSP and BMW that highlight these growing deployments, and I encourage you to watch them. Our sales pipeline in binder jet continues to grow with a strong pace, which gives us confidence in our growth opportunity over the next year. On the healthcare front, we received European clearance for the market leading Flexera Smile Ultra Plus Materials, which greatly expand our market opportunity for this product line and we've had a successful launch of our new 3 d Bioproduter Print Roll technology or biofabrication of grafts in other medical devices. For now, the 3 d printing industry is enduring 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.

Speaker 2

I believe Desktop Metal stands out in a positive way from some of our peers during this uncertain time. 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 3 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 additive manufacturing believers and we have dedication in driving this industry forward. In conclusion, we finally have clear line Side to profitability, Investop Metal is confident in a promising future with clear focus on high growth product categories and operational efficiency.

Speaker 2

We're well prepared to benefit as the industry returns to growth showcased by our proprietary technology, the diverse materials library, high speed production solutions and a growing Global installed base. Despite softer revenue in the 3rd quarter, our recurring revenue streams continue to perform very well, contributing to positive shift In adjusted EBITDA, a path towards reaching breakeven in the Q4 of 2023. And this sets Desktop Metal on a solid foundation to capitalize on the long term trend of at scale 3 d printing in manufacturing. And with that, I'll turn it over to our CFO, Jason Cole. Jason?

Speaker 3

Thanks, Rick. I'll begin on Slide 15 with highlights of our financial performance for the Q3 of 2023. 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 Q3 of 2023 was $42,800,000 down 9.2% from $47,100,000 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've streamlined costs, prioritizing growth potential and or stronger margin opportunities.

Speaker 3

Higher margin recurring revenue streams increased year over year, which was offset by decreases in other parts of the business. Desktop Metals products 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 3Q, we found several deals slipped into October. These deals were included in and made up a substantial portion of our Q3 internal projections, which we now expect to be completed in the Q4.

Speaker 3

While the Q3 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 Q3 of 2023. The improvement was driven by sustained progress And our cost reduction initiatives across multiple quarters, and these were partially offset by a one time 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.

Speaker 3

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% in 4Q 2023 and in 2024, even on modest revenue growth. Moving on to the next slide. In the Q3 of 2023, our non GAAP operating expenses were $33,200,000 down 20.1% as Compared to $41,500,000 in the Q3 of 2022.

Speaker 3

Operating expenses have been meaningfully reduced across all categories, including stock based compensation. Non GAAP operating expenses were down 4.2% sequentially compared to $34,600,000 in the previous quarter. Since 1Q 2022, we have lowered our quarterly non GAAP OpEx By $18,800,000 quarterly or approximately $75,000,000 annualized. This represents a 36% reduction in non GAAP OpEx over 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, We are executing these investment pivots selectively and expect to see continued operating leverage improvement through the Q4 of this year and into 2024.

Speaker 3

We believe that the trend of expanding operating leverage will continue and we will benefit from our cost cutting efforts, disciplined spending and top line 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 resize spend levels. 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 of weakened demand become more protracted. Looking at the next slide, adjusted EBITDA for the Q3 of 2023 was negative $20,500,000 An improvement of 27% compared to a $28,200,000 loss from Q3 of 2022.

Speaker 3

We are on track to achieve our base case of being adjusted EBITDA profitable in the Q4 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 $108,200,000 in cash, cash equivalents and short term investments at the end of Q3 2023 compared to $127,600,000 to close 2Q 2023. Our net cash reduction of $19,400,000 in Q3 was the lowest since going public, excluding 2Q 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.

Speaker 3

We have trimmed our operating cash flow consumption to $21,400,000 in Q3 of 2023, down forty six Compared to $39,700,000 consumed from operations in the Q3 of 2022. As a point of reference, This quarter's cash consumption from operations was down 62% when compared to $56,300,000 consumed in the Q1 of 2022, The last full quarter of results before commencing our cost reductions. Lastly, we finished the quarter with $107,200,000 in inventory After investing $15,500,000 during the quarter, we are well positioned to execute on expected 4th 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.

Speaker 3

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 to $70,000,000 for the Q4 of 2023, representing revenue of $187,000,000 to $207,000,000 for the full year of 2023. This guidance is based on our expectation of certain transactions closing during the Q4 and the overall weaker macroeconomic backdrop. We expect the momentum and the improvement of adjusted EBITDA to continue into the Q4 of 2023 and beyond. For Q4 2023, we expect adjusted EBITDA to be negative $10,000,000 to positive $10,000,000 implying adjusted EBITDA of negative $70,000,000 to negative $50,000,000 for the full year of 2023.

Speaker 3

With that, we will take some questions. Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.

Speaker 4

Hey, hi. Good morning, everyone. Thanks for Taking the questions here. I wanted to start with a little bit on the quarter. In the guide, you talked about how Just saw some orders slip into October.

Speaker 4

I just want to confirm that did those get booked as revenue Already and just in terms of overall visibility rates at this point, the Q4 guidance range On our revenue line, dollars 20,000,000 pretty wide range. So where is visibility right now? What enables you to get To sort of the top end of the range, 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?

Speaker 3

Yes. Thanks, Greg. This is Jason. I think you're right, it is a wide range. I think year to date, the business It's not performed the way we expected it to.

Speaker 3

We opened the year understanding it was a weak backdrop. We had signals in our opportunity pipeline that said that could turn in the middle of the year And that has not happened. The signaling for the wide ranges, we put some degree of conservatism around that. We desperately do not want to perform outside of the guidance range here for Q4. So we put it wide to make sure that we can hit it.

Speaker 3

I'd say the bottom end of that range is very conservative. I think when we talk base case, we're talking midpoint. 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 $20,000,000 range, top to bottom.

Speaker 2

Understood. And is it Yes, go ahead. I think we're You can see that the we're kind of performing with our peers in the market. A lot of them have had surprises on the top line This year, no public companies that are at some meaningful scale. So I think It's hard to tell if you call this a temporary blip In the active space, people get accustomed to maybe higher interest rates than in the current environment.

Speaker 2

And But we do see a lot of opportunity and our funnel gets larger. So as that sales cycle brings back to a Normal window, then you should see expiration.

Speaker 4

Yes, understood. And is there a maybe kind of a common denominator in terms of the Sort of the weakness that you have seen throughout the year, whether it's by end market type of customer, whether it's those that are Financing transaction versus those that are not, I'm just trying to get a sense of kind of what you're maybe looking out there from a macro perspective that might help At least stabilize things at some point here in the near term?

Speaker 2

I mean, I think it's hard to put it into a single factor. A lot of stuff has gone It's been a surprise this year, and there's been a lot of drama in our industry. And I think you have of all the public companies, I think 3 of them have had basically don't have a CFO right now. Unfortunately, we have a great one, but You see the there's been a slowdown in our industry that I think is temporary. This is The growth industry and I think we do see the demand and the customer interest, but there's periods of times when you've had this Sort of paused and we also saw Quite a bit of concern from many customers that are making $1,000,000 decisions that we're just wondering what's going to happen after We terminated our deal with Stratasys and they were just wondering and that delayed some Deals that happened towards the last week of Q3, so that delayed a number of deals that Most of them are now closed.

Speaker 2

So hopefully, we move on and Now we have a clear window to execute over the next 12 months and get this business back on a growth path and Make customer successful.

Speaker 4

Okay. And maybe just last question. You've talked about some Big projects in a couple of verticals, automotive and consumer electronics specifically, any update on those? Do those Remain on track?

Speaker 2

Yes, they do. We continue to make progress across the board in a number of these areas. Like all major projects, you Things always take a little bit longer, but we continue to make progress in this area. I think those are going to be major markets for our technology in the long run. Okay.

Speaker 3

Let me add one thing to Rick's comments, because I think it's important and we mentioned it in the prepared remarks as well. The consumables and services recurring revenue streams performing the way they are, I think is a bullish undertone here. I think while we have had some purchase decisions on products delayed, we are seeing the utilization of our systems that are in place rising. And I think that is a trend. It's the kind of the razor razorblade thing we've talked about in past calls, and so we're encouraged by that.

Speaker 4

Yes. Thanks for calling that out again. Okay, I will leave it there. Thanks.

Speaker 2

Awesome. Wonderful. Well, we keep Making great progress on Titanium and many other areas. Great to have a P50 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 Believe in our vision and look forward to the next quarter.

Operator

Thank you. That concludes our question and answer session. Mr. Philip, did you have any further comments?

Speaker 2

No, we're good.

Operator

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

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Key Takeaways

  • Desktop Metal reported Q3 revenue of $42.8 million, down 9.2% YoY, largely due to the de-emphasis of lower-growth product lines and the shift of several large customer deals into Q4, which the company expects to be very strong.
  • The company has achieved over $100 million in annualized cost reductions ahead of plan, driving a 27% YoY improvement in adjusted EBITDA (to a $20.5 million loss) and positioning Desktop Metal for profitability in Q4 2023 and positive cash flow in 2024.
  • Recurring revenue streams grew 34% year-to-date to $49 million, reflecting increased utilization of an expanded global installed base and stronger consumables and services margins despite a challenging equipment environment.
  • Desktop Metal continues to lead in binder jet mass production (notably with customers like BMW) and healthcare DLP applications, supported by an expanding library of materials and key regulatory clearances.
  • With $108 million in cash and short-term investments, and guidance of $187–207 million in FY 2023 revenue (and $50–70 million in Q4) alongside a projected adjusted EBITDA breakeven midpoint, Desktop Metal is focused on operational efficiency and growth in high-margin segments.
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Earnings Conference Call
Desktop Metal Q3 2023
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