Desktop Metal Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Desktop Metals First Quarter 2023 Financial Results 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. It is now my pleasure to introduce your host, Mr.

Operator

Jay Gentzkow, Vice President of Investor Relations. Thank you and you may proceed, sir.

Speaker 1

Thank you, operator. Good afternoon, everyone, 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 Desktop Metal. Please note our financial results, press release 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 1

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. It cannot be reproduced or transcribed without our prior consent. Before we begin, I'll refer you to our Safe Harbor disclaimer on Slide 3 of the presentation. Today's call will include forward looking statements.

Speaker 1

These forward looking statements reflect Desktop Metal's views and expectations only as of today, May 10, 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 section on Form 10 Q filed this afternoon 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 this presentation and the following Q and 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.

Speaker 1

Our financial results release contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non GAAP measures. With that, it's my pleasure to turn the call over to Rick Fulop, Founder and CEO of Desktop Metal.

Speaker 2

Thank you, Jay, and welcome, everyone. I'm excited to host you for our Q1 2023 financial results call this afternoon. On today's agenda, I'll begin with the brief highlights of our Q1 financials. We're also going to talk about the increasing traction we're seeing from our customer base in 3 areas. 1, customers using our technologies in larger numbers 2, momentum from our repeat customer base.

Speaker 2

And 3, I'll detail a new growing customer sub segment representing the unique capabilities of binder jack. I'll then wrap up with an update on our cost reduction initiatives and plans to reach profitability. And then I'll turn the call over to Jason to provide further color on our financial results and outlook before we conclude and open it up for Q and A. I'll begin on the top of Slide 4 with financial result highlights. Overall, I'm proud of the team's execution on our cost reduction efforts to drive But it's seasonally the lightest quarter over year.

Speaker 2

Revenue for the Q1 2023 was 41,300,000 representing a 5.5% decline over the Q1 of 2022, reflecting a continuation of the recessionary headwinds we started experiencing in the back half of last year. While we saw some of the forecasted revenue slip out of Q1, revenue was still inside our internal contemplated range. And you will recall last Quarter, we offered a wider 2023 guidance range to accommodate for unknowns related to the depth and breadth of this recessionary environment. We continue to pulse our customer base and we see a variety of growth opportunities in the near term horizon that validates reaffirming our 2023 revenue guidance. Non GAAP gross margins were 18% for the Q1 of 2023, expanding 90 basis points from the Q1 of 2022.

Speaker 2

In the middle of the Q1, we announced an additional set of cost reductions and we expect impacts from these efforts will begin to show in the 2nd quarter with most of those benefits starting in Q3. As these cost reduction actions more meaningfully improve fixed cost absorption in the coming quarters, We're expecting significant gross margin expansion through the balance of 2023, a top priority for the company. We reduced adjusted EBITDA losses from $41,600,000 in the Q1 of 2022 to $24,400,000 in the Q1 of 2023, which was a $17,100,000 improvement year over year with a second tranche of cost reductions to come. We expect to see a continued positive trend in adjusted EBITDA this year as we combine significant expense reductions with top line growth to drive sequential improvements to adjusted EBITDA for the balance of 2023 on our way to reaching breakeven by year end. We're also reaffirming our 2023 adjusted EBITDA guidance as we have a plan to achieve these commitments regardless of the macro conditions, primarily through the announced cost savings plan expansion detailed in February.

Speaker 2

Moving on to some business highlights. As we detailed on the Q4 call, expanded efforts to significantly reduce our expense structure and prioritize our path to profitability by increasing our cost reduction plan Mid February by an additional $50,000,000 These actions bring a total annualized cost savings to $100,000,000 and puts us in a very strong position to achieve adjusted EBITDA breakeven by the end of the year. I'll touch on our progress to date on the following slide. As you may recall, last quarter we discussed progress across the board in the consumer electronics segment And announced, we signed a master supply agreement with 1 of the largest consumer electronics companies in the world. These projects are going very well and we continue to expand our various consumer electronic relationships.

Speaker 2

We believe we will do over 8 figures of revenue in this market over the next 18 months and have products in stores next year that were made with our binder jet machines. Over time, we project segment will grow into a multibillion dollar opportunity for Desktop Metal. We also launched LiveSuite, an end to end software hub that delivers generative AI solutions additive manufacturing 2.0. Building on the success of our Life Center Simulation software, LifeSuite is a new package of premium software applications With all new functionality that allows users of Desktop Metal, Desktop Health, eTECH and X1 3 d printing systems To seamlessly manage their build preparation, printers, accessories and processes with success in one cloud based location, LiveSuite will come standard with most new hardware this year and it eliminates the need for users to purchase all our expensive 3 d printing software programs to use their equipment. AM 2.0 is a digital manufacturing process that is ultimately powered by software.

Speaker 2

And we believe LiveSuite offers the most intuitive and powerful added manufacturing software The market allowing us to continue to offer our customers unmatched differentiated turnkey solutions and extend our lead in added manufacturing for mass production applications. And finally, we continue to drive forward materials development across our AM portfolio. A few additions from this quarter include copper C18150 Titanium class 64 for our production system and 304 stainless for the SHOP system platform. We're proud to one one of the industry's largest libraries of production materials. Turning to Slide 5, we'd like to introduce you to a new concept we call Superfleets that emphasizes high customers that continue to expand utilization over additive manufacturing 2.0 mass production solutions.

Speaker 2

While we have over 7,000 customers, Including more than 1200 with metal and ceramic systems, over 370 of them are what we consider Super Fleet customers. We refer to our Super Fleet as a multi unit customer that has entered mass production phases and uses our technology to produce a high volume of end use parts with 3 or more systems purchased. In the current financial climate, capturing value and improving utilization In production is more important than ever. Our Super Fleet customers are demonstrating repeat success with our solutions and validate key drivers Customer demand trends. 1st, our mass production solutions have a clear product market fit.

Speaker 2

2nd, our solutions are Consistently delivering high value and ROI to our customers' mass production needs. And third, utilization is increasing as SuperFleet customers are coming back to buy more systems, eventually leading to higher margin consumable sales. This is a flywheel in our operating model. We've highlighted a number of these valued Super Fleet customers on this slide. And what's really exciting is the diversity of these Over the last 12 months, some of these customers have really scaled their operations.

Speaker 2

One example is Frifom Technologies, A high growth metal parts producer backed by Ryerson Steel, who started with one system only 3 years ago and today has a super fleet of 25 Desktop metal binaural jetting machines or LightForce on the polymer side that has scaled up to 33 polymer systems being used for printed medical devices. For BMW, who now has parts in almost every new passenger vehicle using our technology. We have a dominant market position in the binder jetting space with the largest installed base of systems, a multiyear head start, The largest binder jet R and D team in the world, the largest library of production materials in a pan portfolio that's the envy of our industry. This is a very powerful mode in a growing industry. To demonstrate this, 25 percent of our binder jet machines are at multisystem sites and similarly 20% of photopolymer systems Our multi system sites, meaning that an original desktop metal system provided enough value to a customer that in nearly one quarter of the cases to date, That same customer purchased additional systems and are now in production.

Speaker 2

It's also worth noting that our Biogen systems are incredibly productive When a customer has more than one system and you can see here some have a dozen or more, they're processing a high volume parts in those fleets, Reinforcing the flywheel effect of our model. We're incredibly proud of these great customer relationships we've built over the years As we leverage the differentiation in our AM 2.0 mass production technologies to help our customers revolutionize their manufacturing settings. Building on this concept of repeat customer usage on the following slide, Q1 was another successful quarter for repeat customers. Repeat customers have been an important part of maintaining our growth at scale through both growing system sales and consistent high margin consumables revenue. All customers highlighted on this slide expanded their deployments in the Q1 of 2023 of Desktop Metal Systems with new orders beyond initial systems.

Speaker 2

Even in what is traditionally the lightest revenue contribution quarter of our calendar year, we made progress in Q1 in deepening the number of high value applications with major customers and the traction we're seeing from repeat customers, including Superfleets, represents an important measure of the overall success of our solutions. Now let me talk to you about some of the super fleets of the future on the next slide. We recently announced a renewed focus on advanced Ceramic offerings is a result of increased customer demand driven by a wide range of applications in mission critical sectors, Including aerospace, automotive, energy, consumer electronics, among others. In my opinion, we're the best in the world in this segment. Hydrogening simplifies production of ceramics, hard metals, carbides and ceramics that are challenging to fabricate with traditional manufacturing.

Speaker 2

Our technology gives these manufacturers incredible flexibility in design and material properties. While our core focus is enabling high volume mass production applications In markets like Automotive and Consumer Electronics, we're very proud that our same binder jet systems are able to contribute to high value niche markets Like Nuclear Energy. It's early innings for the use of binder jet in nuclear, but in the past year alone, we've Sold between $5,000,000 $10,000,000 of equipment in this new segment. This is a growing market segment for binder jet, Where Desktop Metal is years ahead of any competitors and has deep partnerships with National Labs and leading players like BWXT, Ultra Safe Nuclear Corporation and other major defense companies. 1 of the enabling applications for binder jetting in nuclear Includes the 3 d printing of nuclear fuel, where the uranium triiso is fully ceramic microencapsulated in silicon carbide, And it does not suffer from the dangers of weapons proliferation because its refractory ceramic layers limit reprocessing.

Speaker 2

This is a major game changer. This new process has the potential to revolutionize nuclear applications across the board, Enabling small modular reactors, new forms of marine ships and submarines that one day can be exported to our allies without the risk of proliferation and new forms of propulsion. For example, in January of this year, DARPA and NASA announced a new program for nuclear thermal propulsion rockets It has up to 5 times greater efficiency than chemical rockets or enabling the ground power for the NASA Artemis program. For those that aren't familiar with Artemis, it's our Apollo program to go back to the moon. The nuclear revival is driven by the new IRA legislation, The new Australia, U.

Speaker 2

K, U. S. Alliance known as AUKUS and other important climate change trends. It's really exciting stuff to see binder jet use across a multitude of applications ranging from high volume markets Like Automotive and Consumer Electronics and all the way to future space propulsion, the Artemis program empowering our most advanced marine ships With new forms of 3 d printed nuclear fuel, it takes a differentiated solution to solve these problems. Shifting to Slide 8.

Speaker 2

As we've discussed in the past few quarters, our top priority for our company in 2023 as we navigate this year is to significantly reduce our expense structure in order to expand our margin profile and reach adjusted EBITDA breakeven by end of the year. The team's ongoing operational execution towards achieving this call has been top notch, and I want to highlight some of the progress we've made. In 2022, we successfully executed the 1st tranche of our cost reduction initiatives, completing $50,000,000 in annualized savings. The cost reduction spent both cost of goods sold and operating expenses that weighed more towards the OpEx side as we saw our expense profile decline for 4 consecutive quarters into the Q1 of 2023. In February of 2023, we announced an additional $50,000,000 in cost reductions of the workforce and facility closures by the end of the second quarter.

Speaker 2

We expect the second tranche of cost reductions to have a much more meaningful impact on our fixed cost absorption versus last year's 1st tranche. Given the mid quarter timing of the announcement, we only saw minimal impact in the Q1, We'll start to see results in the Q2 and to a much larger extent in the back half of twenty twenty three as these facilities reduce the burden on COGS. The combination of our cost reduction efforts in the last year puts us in a very strong position to achieve our commitment of adjusted EBITDA breakeven by year end. Regardless of the macro conditions, we should also expect to see a continued trend of lowering our cash burn on a consistent Quarterly basis with the ultimate goal of reaching cash flow breakeven on our existing balance sheet. Furthermore, These actions create a stronger, more resilient organization and streamlines the business to yield a more efficient and effective operating model for the long term.

Speaker 2

And with that, I'll turn it over to our CFO, Jason Call. Jason?

Speaker 3

Thanks, Rick. Beginning on Slide 10, you will see highlights of our financial performance for the Q1 of 2023. Please note, We will be referring to several financial metrics on a non GAAP basis. Reconciliation to GAAP data is included in the filed appendix. Consolidated revenue for the Q1 of 2023 was $41,300,000 down 5.5 percent year over year from $43,700,000 in the Q1 of 2022.

Speaker 3

Leading revenue drivers were digital casting solutions And growth in consumables, services and subscription, offset by weakness in metal binder jetting solutions. Revenue came in a little softer than expected in Q1, but even with ongoing recessionary headwinds was within our range of expectations. Non GAAP gross margins were 18.0 percent for the Q1 of 2023. Gross margins improved 90 basis points versus the Q1 of 2022, driven primarily by a lower cost structure as well as product mix. Improving gross margins is a priority for the business this year, and we expect our ongoing cost reduction efforts to yield continued Gross margin expansion through 2023 and beyond.

Speaker 3

Turning to the following slide. Non GAAP operating expenses were $35,000,000 for the Q1 of 2023. This represents the 4th consecutive quarter of sequential OpEx reductions As we have reduced non GAAP operating expenses by a total of $17,100,000 in Q1 of 2022, including sequentially by $3,000,000 from Q4 of 2022. 1st quarter of 2023 non GAAP operating expenses As a percentage of revenue, it was 85%, which is a year over year improvement versus 119% in the Q1 of 2022. We've executed on our 2022 cost reduction initiative and expect to see a continued trend of improving expense structure throughout 2023 as the second tranche of $50,000,000 in cost savings more meaningfully impacts results, especially in the back half of twenty twenty three.

Speaker 3

Turning to slide, adjusted EBITDA for the Q1 of 2023 was negative $24,400,000 improving by $17,100,000 compared to the Q1 of 2022. Adjusted EBITDA was in line with our expectations in the quarter As we expect more meaningful sequential improvements to EBITDA throughout 2023, as we combine the incremental $50,000,000 in cost savings announced in February with higher revenue contributions, especially in the back half of twenty twenty three. We are right on track to fulfill our commitment Also came in as expected, ending the quarter at $149,800,000 in cash, cash equivalents and short term investments. We were able to reduce our operating cash burn from $56,300,000 in the Q1 of 2022 to $37,300,000 in the Q1 of 2023. We're in a solid position based on our internal cash forecast and we expect ongoing expense reduction efforts will drive significant sequential cash flow improvements even if recessionary headwinds persist.

Speaker 3

We ended the quarter with $98,200,000 in inventory, Higher than when we exited Q4 2022 as a result of sales coming in softer than we expected in the Q1 along with the impacts of closing 6 production facilities. We still expect our messaging from last quarter to remain true. We intend to monetize inventory over the next several quarters in order to free up working capital and provide further improvements to our cash position. And you should see better progress over the balance of 2023. And finally, moving to our 2023 financial outlook on Slide 14.

Speaker 3

While first quarter revenue was a little softer than expected, The results were still in line with our range of expectations. In addition, demand remains strong across our portfolio of solutions Customer engagement trends give us confidence for the balance of 2023, even if ongoing macro environment challenges persist. As a result, we are reaffirming our revenue expectations of $210,000,000 to $260,000,000 for 2023. We also continue to expect adjusted EBITDA in the range of negative $50,000,000 to negative $25,000,000 for 2023. 1st quarter adjusted EBITDA was in line with our expectations and we anticipate adjusted EBITDA in the second half of twenty twenty three to significantly outstrip the first half.

Speaker 3

As we've consistently committed, we are driving significant continued improvements to our expense profile in order to achieve adjusted EBITDA breakeven before the end of the year, regardless of the macro environment. And with that, I'll turn the call back to Rick for his closing remarks.

Speaker 2

Thank you, Jason. I'll wrap up on Slide 15. Added manufacturing is driving the future of mass production. We remain focused on our strategic priorities for 2023. We're laser focused on getting the company profitable and are driving the business to meet these commitments.

Speaker 2

I'm very proud of the team's execution to drive $50,000,000 of cost savings in 2022 And I'm confident this next $50,000,000 in 2023 will deliver continued improvements in our cost structure in order to drive margin expansion very strong across our AM 2.0 mass production portfolio with growing repeat customer cohorts validating we're delivering for our customers' missions. And finally, we continue to mature as a company in driving important operational improvements across the board in order to streamline the business, Create a more resilient organization and strengthen Desktop Metal for the long term. In closing, we will be relentless in leveraging our competitive advantages to drive adoption

Operator

Thank you very much, sir. We will now be conducting a question and answer session. Please limit your questions to 1 question and one follow-up question and you may rejoin the queue should you have further questions. It may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Operator

First question comes from Greg Palm from Craig Hallum Capital. Please proceed with your question, Greg.

Speaker 4

Yes, thanks. I wanted to start with The revenue outlook, kind of a 2 part question, I guess. Number 1, can you quantify how much revenue slipped From Q1, and I'm not sure if you've booked it already in Q2 or if it's just been kind of pushed out or deferred. And then sort of more of a general Comment, you reiterated the guide, it's still a pretty wide range. So I guess now that we're, I don't know, Couple more months into the year relative to when you put that guidance out, any sort of puts or takes in terms of Low end of that range versus sort of mid and some of the demand indicators you're looking at?

Speaker 5

Thank you, Greg. I mean, I think it's in the mid single digits To slightly more than $5,000,000 to $8,000,000 that probably slipped into Q2. And I would say we have a lot of great things in development for the second half of the year and excited about All the things that we're doing and are bullish still about our plan for the year. We didn't feel like we needed to change our guidance number at all. And so we continue to work at full pace to execute.

Speaker 5

I would say it was not the easiest quarter that we've had to date. I think maybe as I digested Sometimes when you've got this type of environment, you've got customers that decide to delay some decisions, they print parts with Service bureaus that use our equipment or partners or really Sharpen their pencil until they move forward, but we still see very good signs of demand and Growth for the year and we like the position that we are competitively and we feel like we're going By year end, be in a better position than most of your companies in our space.

Speaker 4

Okay. Appreciate that color. I wanted to move along to consumer electronics. You provided a little bit Maybe a little bit more detail this quarter on kind of what you're seeing. And I guess a few questions related to that.

Speaker 4

You're expecting 8 figures of revenue over the next 18 months. That's a pretty wide range depending on what number you use, but can you confirm, do you actually have POs in hand and Maybe timelines for deployment of systems and then just I think there was a major consumer electronics company that Was it customer in Q1, can you confirm that?

Speaker 5

Yes. So we work with, I would say, the top 4 companies in that space in a variety of programs. And We feel really good about the number that we laid out in terms of revenue and have a number of contractual commitments to deliver equipment Over the next 18 months, in that range. And I'd love to be able to say more about it. And as these companies launch their products and they show up on stores, you'll be able Pick them up and play with them and so you won't be able to tell that they were 3 d printed, but the good news is that 3 d printing in that segment enables you to use Better materials, you can reduce your carbon footprint by not having to Remelt chips to make blanks.

Speaker 5

You have many benefits in terms of being able to open up space for A more either a thinner device or more battery space, many advantages that you can do when using additive In that segment, especially as new products get launched in new form factors, that's going to be A more exciting thing over time. So it's not the only thing we do. We are very strong in We have

Speaker 2

a lot of things going on

Speaker 5

in automotive. We have things going on in aerospace. We have parts and jet engines now. We've got this segment. What we talked about in nuclear is also a really exciting opportunity where we did between $5,000,000 $10,000,000 in the last 12 months, and we expect that to continue to grow as a segment for us.

Speaker 5

We're the only company in the world that does that. And Yes. So we're excited about our business and what we're doing with customers to make them successful.

Speaker 4

Got it. But just to confirm, if you're, I guess, expecting that level of revenue over the next 18 months, You probably have some sense of what PO you have in hand or what's coming in. And again, for clarification, Are you saying that this is for end use parts, this is not for R and D purposes within this consumer electronics space that they're This space is actually used in by

Speaker 5

We are we expect to be in products.

Speaker 4

Okay, understood.

Speaker 5

This is production. We've been working in this area for some time and It's the work we're doing in that space is all production and just parts.

Speaker 4

Okay. And I guess just last one, lots of commentary on EBITDA breakeven and I think you used the Term regardless of macro environment, I guess, if we assume that the macro gets significantly worse here, does that There's additional levers that you can pull to achieve that breakeven or is there a certain level of revenue that You sort of need to feel comfortable with achieve that?

Speaker 3

Yes, I'd say across, we're reaffirming the guided range and across element of that guided range, we believe we can achieve that target. The levers we have at our disposal are pulled, where all being deployed, they take a little time to land. It's

Operator

Thank you. The next question comes from Josh Pokrzywinski from Morgan Stanley. Please proceed with your question, Josh.

Speaker 3

Good afternoon, guys. So Rick, I want to Dig in

Speaker 6

a little bit more on the revenue weakness, if you wouldn't mind. And I think there were a few mentions of the recessionary pressures. I guess, maybe elsewhere in either kind of the factory floor or automation space, you're seeing Pretty healthy bookings, a lot of backlog growth. I think people probably celebrating supply chain improvement more than talking about demand. Any other color That you can provide in terms of the end markets, maybe anything geographically that could kind of flush out Where you're seeing the weakness or what you're watching for, specifically on KPIs, because I think the broader macro, at least in the industrial space, 1Q has been pretty healthy so far.

Speaker 5

Yes. I mean, I think that with the technology, especially when People are making a decision to adopt a new process. That's one of the considerations that happens, especially When a market has credit that tightens and you've got a lot of our equipment costs more than $1,000,000 to get it going and I think people may make Decisions that said let's just hold on for a quarter before we spend on that CapEx, especially with the CapEx Financing being a little bit more expensive, but the customers that have technology, they continue to buy product. And so we see repeat demand. So where the ROI It's been demonstrated and the company has figured out that while this is really a fantastic way to Make product, they move relatively quickly.

Speaker 5

We do see healthy demand. I was just following one of our customers yesterday that Makes parts of service using our technology, they see pretty healthy demand. So I think what you see is just Related to, I would say, the behavior that you may see in companies as you have rates increase, but It sort of comes and goes on a quarter by quarter, the stretching and shrinking of the Order cycle or the sales cycle for our type of products. It was Around Q3 last year, when we started to see people talk about potential recession or hard landing that you saw some Hope that manifests itself in our sales cycle and then it's been somewhat Kind of varying over the last two quarters, but I expect it also to go the other way when They stop raising rates and then eventually when they start lowering rates. So we besides that backdrop, we do see Healthy demand for our products and a ton of projects.

Speaker 5

So we have an increase in number of projects and Bookings and other things, it's more of when things get when people pull the trigger on things That I think is some of what we saw in Q1. I don't have more the psychology of that, but I feel very good about the matter of activity that we've got going on in the company and maybe Jason has more color or additional thoughts on it.

Speaker 3

I I think you covered it pretty well, Rick. Thanks.

Speaker 2

Yes. And a

Speaker 5

number of things we were working on Q1 just moved relatively quickly into Q2 and we started Q2 with it.

Speaker 6

Okay. But there's no like end market or geographic commonality where you saw the push outs, so it was just sort of Yes, a little bit more

Speaker 5

I don't think we saw a geographic change in our business in the In the past quarter, it's relatively similar. I wish we had a stronger presence in Asia and that's something that we'll build over time, but I would say, so similar mix between Europe, U. S. And Asia.

Speaker 6

Got it. That's helpful. And then just following up on the cost side, obviously, a big focal point right now, you guys have referenced it several times. I just want to square that up with some of the opportunities, the 8 figure opportunity, obviously, The numbers there, depending on how you want to define that could get pretty big. How should we think about the reflation in the cost base or At what revenue levels you really start to redeploy that?

Speaker 6

Or maybe even just said differently, how you think about incremental Margins here. Because you have kind of some of these exciting growth ambitions, good conversations, big customers, including those you can't even name yet, The focus on cost, just wondering when the toggle apps shift there?

Speaker 3

Yes. So I think, I'll talk about maybe unpack costs a little bit. I think some of this we've spoken about on prior calls, but I think the way we think about that is, We were sort of scaled for growth at a level that wasn't materialized as you go back to the middle of last year. And so we've taken a lot of effort on the cost side to really reduce that Cost base, we're in the midst of closing 6 production sites. What comes with that is, you will find that we'll be less volatile as revenues The margin volatility will be less volatile than the revenue is, especially when it drops below $50,000,000 like you saw in 3Q of last year and Now this 1Q.

Speaker 3

Those are being enacted across 2Q and we really expect to see the savings from that later in the year. We also have a buildup of inventory. I think monetizing that inventory is going to be a big element of this. Those kind of opportunities play into that. We've got inventory in some of these spaces where the demand is expected to come from And it's going to help us accelerate that inventory drawdown and we expect that to be a big benefit on the cost side as well.

Speaker 3

Got it. Appreciate the color. Thank

Operator

you. The next question comes from Ashley Ellis from Credit Suisse. Please proceed with your question, Ashley.

Speaker 7

Hi. Thank you for taking my question. I'm on for Shannon today. If I could just kind of add on to Josh's question with KPIs and demand, Your portfolio is pretty broad. You've got the $1,000,000 production systems and then you've got the smaller desktop Einstein system.

Speaker 7

So Within your end markets, is there any market that's maybe doing better or worse than the other?

Speaker 5

Absolutely. I mean, I think that dental has been a very strong market for us And we have best in class technology there. The printed casting technology has been benefiting from Efforts to reshore and to do part consolidation on large components, we have a very strong Business on Defense that I would say is outpacing the growth in any other areas that we have in the company. It's probably our fastest growing Segment right now. And I would say SMEs that have a higher difficulty getting credit or This new technology, they may think about it twice before they buy it and then we connect them with our service bureaus or partners that make parts that And then in automotive, we have, I'd say, a trend in vehicle OEMs that are starting to Try to do something similar to Tesla with gigacasting on the body in white space.

Speaker 5

And one of the things that our technology can be used for is to arrive at the shape that you need to before you cut all the die cast tooling. And we work companies like Tesla use our systems to do things like that before they would Cut to die cast tooling. So that as other companies replicate that type of process, it is going to open opportunities over time in the market. So I would say lots of areas of product project development That can yield significant long term growth, but that I would say ranks The areas that are stronger versus weaker, I think SMEs are hurting a little bit, defense is extremely strong And the other stuff is on in between in the middle.

Speaker 7

Thanks for all those details. And then for Revenue, how should we think about linearity? And you're pointing to a really strong 2H. So should we think of 2Q maybe being flattish? And then If we look at the super fleet data, which you've given, which is very interesting, how much revenue do you think is locked in for the coming year?

Speaker 7

And that's it for me. Thanks.

Speaker 5

Yes. I mean, I think I have to think about it in terms of how much revenue is locked in. I mean, the one benefit of our architecture is a razor razorblade model. You install a fleet of systems And then the next year, when you install the next group of systems, they have a compounding effect because they consume materials, but just tend to be Better gross margins.

Speaker 3

The other part of that question, I think I would say, 2Q seasonally, historically, has been a stronger quarter for us. We're not going to get into guiding the individual quarters, but I'll leave it at that. I think 2Q should if history portends and we expect that it will, it should be an up quarter and a flat quarter.

Operator

Thank you. The next question is a follow-up question from Greg Tom from Craig Hallum Capital. Please proceed with your question, Craig.

Speaker 4

Yes. I guess I just wanted to ask maybe more of a broad Jana, on consumer electronics, and keep in mind, this is sort of broadly speaking, but Why all of a sudden are you seeing increased interest from this segment? And I guess more specifically related BinderJet, why does BinderJet make sense in lieu or relative to, let's say, laser sintering?

Speaker 5

Okay. So laser sintering is not even close to the cost structure in that segment, right? Parts cost over $1,000 a kilo In binder jetting, they're 120 at the cost. But in the consumer electronics space, what people use is Machining, you can see machining. So they'll make a bill of material, a block and then that will get machined into a housing or another component.

Speaker 5

And The downsides of machining is that all of the chips have to be remelted to make new parts. And you have a dichotomy where the higher performance and higher stiffness alloys that you use, they would have higher hardness and scratch resistant, the better they would they're actually harder and take longer to machine and more expensive to machine. So what you can do With binder jetting is you can form those parts and there is no Virtually no waste from the process. So all the materials actually goes into making the parts. So you have a much lower energy And as a result, much lower greenhouse gas footprint.

Speaker 5

And you can use because it's formed with pyrometallurgy, you can use materials that will have Higher stiffness by volume or better mechanical properties, which allows you to open up Fin out regions of the parts and open up space for more battery and new geometries that would be Cost prohibitive or very difficult to machine in a few setups. So those are some of the reasons that you'd want to Binder jet apart, also you delay something called tool lock where you get closer to the launch of a product, You kind of can't make any more changes, but with printing, you have more flexibility on your supply chain. Also, you need a lot less equipment in order to make the same volume Parts and as you're trying to make your supply chain more flexible and potentially move out of our region, this allows you to Have dramatically higher flexibility. So there are many reasons, almost 90% reduction On the greenhouse footprint side, it's lower cost and better geometry and better material properties. So many reasons.

Speaker 5

In some materials like titanium, you can't even recycle the chips into a new block. You'd have to refine the metal to remove the oxygen. So there's a lot of advantages to doing this with binder jetting.

Speaker 4

Yes. I mean, that's interesting and you rattled off a whole lot of advantages. Is there a sort of A single one or top one that's driving more of the increased interest now? I guess that's where my Question is why now? What's sort of shifting your attention?

Speaker 5

Different customers are doing different things and it varies per customer.

Speaker 4

Okay. All right. Thanks for the follow ups.

Speaker 3

Awesome.

Operator

Thank you. The next question is also a follow-up from Ashley Ellis from Credit Suisse. Please proceed with your question, ma'am.

Speaker 7

Hi, thanks. I just wanted to confirm, does the 2023 revenue range assume a range of contribution from the consumer electronics Number that you referenced in the slides?

Speaker 5

I mean, we have been selling product into the consumer electronics space. We have revenue last year, we have revenue this year and we'll have some revenue next year. It is a I'm trying to kind of Paint a picture of what one of the sub segments that's going to be very large looks like over the next 18 months, but

Speaker 7

Okay, understood. Thanks.

Speaker 5

And do you want Just to clarify your question earlier, when you were talking about revenue, you're referring about sequential quarter to quarter. Is that what you're in Q1 to Q2? Yes. Yes. It definitely will we have Q2 significantly stronger quarter than Q1, sequentially.

Speaker 7

Okay. Thank you.

Operator

Thank you. At this time, there are no further questions. I'd now like to turn the call back to Rick Phillip for closing remarks. Thank you, sir.

Speaker 5

Wonderful. Thank you very much. I really want to thank everybody again for joining our call this afternoon. And as always, I want to thank the entire Desktop Metal team and family for their passion and focus To begin 2023, I look forward to speaking again with everyone next quarter. Please don't hesitate to reach out if there's any additional questions or if you'd like to come visit us here in Burlington, Massachusetts.

Speaker 5

Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your

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Earnings Conference Call
Desktop Metal Q1 2023
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