Desktop Metal Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to the Desktop Metal Second Quarter 20 24 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 will now turn over the call.

Speaker 1

Good morning and thank you for joining today's call. With me today are Rick Bullock, Founder and CEO of Desktop Metal and Jason Cole, CFO of Desktop Metal. Please note our financial results press release and presentation slides referred to on this call are available under the Events and Presentations section of our Investor Relations website. This call is also being webcast live with a link at the same site. The webcast and accompanying slides will be available for replay for 12 months following this call.

Speaker 1

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 and in the financial results press release. 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, July 31, and actual results may vary materially based on a number of risks and uncertainties.

Speaker 1

For more information about the risks that may impact Desktop Metal's business and financial results, please refer to the Risk Factors section in the company's Form 10 ks and Form 10 Qs in addition to the company's other filings with the SEC. We assume no obligation to update or revise the forward looking statements. Additionally, during this presentation and 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. 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.

Speaker 1

I'll now turn the call over to Rick.

Speaker 2

Good morning, everyone, and welcome to Desktop Metal's Q2 2024 Earnings Call. I'd like to use today's call to address the most significant development of our company, the proposed business combination with Nano Dimension. This decision wasn't made lightly, and I'd like to walk you through our rationale and benefits we anticipate from this merger. Since the beginning of 2022, Desktop Metal has worked tirelessly to align our cost structure with macroeconomic realities. Making hard decisions about our business, we have reduced our non GAAP operating expenses by 48% since the Q1 of 2022, while meaningfully strengthening our non GAAP gross margins.

Speaker 2

By the end of the Q1, we had delivered 9 quarters of OpEx reduction and brought our cash burn down dramatically. We've strategically realigned our business to reflect a lower growth environment driven by 11 interest rate hikes. And from as a result of rising rates, slowing CapEx budgets and other macro related challenges. While we believe additive manufacturing has incredible potential and will continue to grow over the next decade, the past year and a half has been very challenging, putting significant pressure on our financial position. As a result, we've seen our balance sheet continue to be under pressure, limiting our ability to invest in growth and innovation.

Speaker 2

We began to notice a concerning trend towards the end of the second quarter with customers becoming hesitant to engage in closing deals due to our weakening financial outlook, making it more difficult to reach our profitability targets. This feedback from the market was a clear signal that we needed to take action, became increasingly apparent that remaining a standalone company with a constrained balance sheet was not a viable long term strategy. Since the terminated merger agreement with Stratasys in September of 2023, we explored raising additional capital to strengthen our balance sheet, but the financing alternatives available to the company would have created significant dilution to shareholders or ceding control via structured debt holders, which would have destroyed a lot of our remaining equity value. It didn't help to have short selling activity that we believe drove down the value of our equity significantly. In evaluating our options, we had to consider the broader context of additive manufacturing as an industry.

Speaker 2

It's worth noting that profitability has been elusive across all the public companies in the additive sector. While we have declined in value in line with most of our peers, the situation could have been worse and in fact it has been for some players in our space. For example, 4 of our Western publicly traded companies in additive manufacturing have failed or were delisted in the last two quarters, given deteriorating market conditions leading to an even more pronounced loss of equity value for those businesses. And we do not want to be in that bucket. We also considered a variety of divestitures, but given valuations and market sentiment towards additive manufacturing, there were no good immediately actionable alternatives.

Speaker 2

At the moment, not a single one of the public companies in additive manufacturing has achieved meaningful profitability or scale and scale with the right portfolio, balance sheet, technology and go to market is going to be required to build a sustainable company in this industry. This industry wide challenge underscored the need for a bold move to support the long term success of the technologies we have pioneered and our ability to maximize the equity value to our shareholders. We looked at all the options in front of us and given these factors, we believe that the proposed business combination with Nano Dimension, which provided a 27% premium at the time was announced, subject to adjustment, still represents the best path forward for Desktop Metal shareholders. This merger offers several key benefits that we expect will strengthen our competitive position and create significant long term shareholder value. 1st and foremost, this combination will establish a true leader in the additive manufacturing space.

Speaker 2

By bringing together our complementary product portfolios and technologies, we'll create an entity with enhanced scale and a stronger balance sheet. This combination will allow us to better serve our customers and compete more effectively by offering a more complete portfolio of products. We've gotten to know the Nano Dimension team over the past two and a half years. Nano Dimension is a well run company with a strong management team. They have delivered superior organic growth versus our industry in 2023.

Speaker 2

Secondly, we believe this merger will accelerate the industry's transition into mass production. By pulling our resources, expertise and technologies, we'll be better positioned to drive innovation and develop products for customers that address the evolving needs of manufacturers looking to adopt additive manufacturing for production applications. And lastly, and perhaps most importantly, this merger will create a well capitalized company with a stronger financial profile to properly support our customers. The increased scale and operational efficiencies we expect to achieve will put us in a clear path to profitability, while providing the resources needed to fuel growth and innovation. Finally, I would like to address the timing and structure of the deal.

Speaker 2

Over the past two and a half years, we've had discussions with 10 different companies on potential combinations. None resulted in offers that were actionable or that our board deemed superior to remaining an independent company other than the proposed Stratasys merger for this transaction. In the Q1, we believe there was a chance for the market to recover and economic pace from projects would start to close faster as rates would come down. But it quickly became clear as we are closer to the end of Q2 that we had to do a deal to protect the value of the equity. We considered an all equity deal, especially since our whole industry is at an all time low, but this was not a viable option in the end.

Speaker 2

Given our past experience with a failed vote from Stratasys, our view was that an all cash transaction would present the highest certainty and an all cash transaction would enable those Desktop Metal shareholders who have conviction regarding the industry's long term potential to make their own investment decisions whether to purchase Nano stock in order to take advantage of future growth opportunities. The alternative of not closing a transaction now with Nano and its strong balance sheet and cooperative management may lead to a fatal prognosis in results for our company's existence. We firmly believe that this business combination with Nano Dimension is the right strategic move for Desktop Metal shareholders at this critical juncture and our entire team is excited about making this combination successful in working with the team at Nano to make customers successful. As Q2 ended, the only other alternatives available to us would have destroyed much of the remaining equity value and put our company and customer base at risk. As a large shareholder, I too am saddened to see the decline over time in valuations of our companies in this industry, but we've had limited standalone financing options and came to the conclusion that partnering with Nano was the best outcome for our shareholders.

Speaker 2

We strongly believe that this is the best move for our shareholders. We're excited about the potential of this merger and are confident it creates the best value for our shareholders, customers and employees. I and our team are looking forward to partnering with the Nano team in growing this market and building a profitable company at scale. With that, I'll hand the call over to Jason to cover our financials.

Speaker 3

Thanks, Rick, and thank you, everyone, for joining us today. My remarks today will be relatively brief given the pending merger agreement with Nano Dimension. I do want to reiterate my confidence that this transaction represents the best option for all of our stakeholders. We have done a great job in appropriately sizing our cost basis and recall we have executed on approximately $150,000,000 in annualized cost savings. The success of these programs since the beginning of 2022 is highlighted by our adjusted operating margin and declining costs and cash burn.

Speaker 3

Despite these efforts, the broader macro environment has heavily penalized growth companies like ours and the additive manufacturing industry as a whole has experienced that to a greater degree than most. One of the most compelling reasons we felt the transaction was right and necessary was during the Q2, we heard from our customers that they were not going to continue to do business with us until we addressed our balance sheet. This theme replayed itself throughout several customer conversations and is apparent in our 2nd quarter revenue number. With that, and beginning in the financial summary section, you will see our performance for the Q2 of 2024. Please note, 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 within our slides.

Speaker 3

Consolidated revenue for the Q2 of 2024 was $38,900,000 compared to $53,300,000 in the Q2 of 2020 3. The year on year decline was led by weaker hardware sales, while consumables and services were roughly flat year on year. The weaker hardware sales were driven by the macroeconomic conditions impacting the additive manufacturing industry. Non GAAP gross margins were 29.2 percent for the Q2 of 2024 compared to 31% in the prior year period. Non GAAP gross margins fell 180 basis points compared with the prior year period, driven by weaker cost absorption on lower revenue.

Speaker 3

Sequentially, non GAAP gross margins decreased from 30.5% in the Q1 of 2024 on lower revenues in Q2 of 2024. On the next slide, non GAAP operating expenses were $27,000,000 for the Q2 of 2024. Through cost optimization, we reduced non GAAP operating expenses sequentially by $1,600,000 and year over year by $7,700,000 improving by 5.6% and 22.2% respectively. Adjusted EBITDA for the Q2 of 2024 was negative $13,200,000 improving year over year by $1,800,000 compared to the Q2 of 2023. Turning to the balance sheet, we closed 2Q with $46,700,000 in cash with outflows elevated in the quarter by deal related spend.

Speaker 3

We are no longer providing guidance for the remainder of 2024 due to the pending acquisition with Nano Dimension. With that, we will take some questions. Operator?

Operator

Thank you to our host. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Mr. Craig Baum of Craig Hallum Capital Group. Please go ahead.

Speaker 4

Yes, thanks. This is Danny Eggerich on for Greg today. I appreciate you taking the questions. I guess I'll just start with, you said you kind of had challenges closing deals at the end of the quarter. And obviously, you mentioned that some customers were just hesitant and uncomfortable with your financial position as a company.

Speaker 4

Just wondering if there's any way to maybe break down more, how much of it was that versus maybe a continued softening in the macro and versus that hesitancy based on your financial position?

Speaker 5

I mean, Danny, the type of products that we sell, particularly in the binder jet side, many times are over $1,000,000 So large companies really scrutinize this large type of investments. And I would say, if you want an average mix of what that was, We have to probably get back to you and actually do a real count, but it's something that we felt.

Speaker 3

Okay.

Speaker 4

Got it. Maybe just touching quickly on balance sheet cash burn. Obviously another $20,000,000 cash burn this quarter. And how should we be thinking about that? Is there maybe increased focus or emphasis on that in the next couple of quarters?

Speaker 4

Maybe, in the case that the deal does get pushed to 25% and a greater emphasis on driving down that cash burn. So there's less of an impact on potentially drawing on that loan?

Speaker 3

Yes, I can take that one. So, it's a good question. The cash burn in 2Q was elevated in part, but the principal reason it was elevated was some cash outflows related to the deal and the 10 people we were speaking to per week. We had conversations and so with a lot of folks over the quarter and that elevated some of our traditional fees related to deals, legal and so forth.

Speaker 2

You also have to account, you've got

Speaker 5

the interest payment that we pay on Q2 and Q4 as well?

Speaker 3

That's right.

Speaker 2

Okay. That's helpful. I'll leave it there. Thanks.

Speaker 3

Thanks, Danny.

Operator

Thank you, Mr. Craig. Now there are no further questions at this time. I'd now like to turn over the call back over to Mr. Rick Fallop for final closing comments.

Speaker 5

I want to thank everybody for joining the call and again for your support over the years. And all right,

Speaker 3

thank you.

Operator

Thank you, Mr. Rick Wallace. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in Askiti. Please disconnect your lines.

Operator

I hope you all have a great day ahead.

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Key Takeaways

  • Desktop Metal announced a proposed business combination with Nano Dimension at a 27% premium, aiming to create a larger, better-capitalized additive manufacturing leader with complementary technologies and a clear path to profitability.
  • The company has achieved a 48% reduction in non-GAAP operating expenses since Q1 2022—equivalent to $150 million in annualized cost savings—while strengthening gross margins over nine consecutive quarters.
  • In Q2 FY2024, revenue declined to $38.9 million (down from $53.3 million YoY), with non-GAAP gross margins at 29.2% (versus 31% last year) and an adjusted EBITDA loss of $13.2 million.
  • Customer engagement suffered as clients hesitated to finalize large contracts amid concerns over Desktop Metal’s financial outlook, signaling the need for a stronger balance sheet to drive deal closures.
  • Management has withdrawn full-year 2024 guidance due to the pending merger and closed Q2 with $46.7 million in cash, noting elevated cash burn from deal-related expenses.
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Earnings Conference Call
Desktop Metal Q2 2024
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