Desktop Metal, Inc. (NYSE:DM) Q1 2023 Earnings Call Transcript May 10, 2023

Desktop Metal, Inc. reports earnings inline with expectations. Reported EPS is $-0.08 EPS, expectations were $-0.08.

Operator: Greetings and welcome to the Desktop Metal’s First Quarter 2020 Financial Results Call. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Gentzkow, Vice President of Investor Relations. Thank you and you may proceed, sir.

Jay Gentzkow: Thank you, operator. Good afternoon, everyone and thank you for joining today’s call. With me today are Ric Fulop, Founder and CEO of Desktop Metal and Jason Cole, CFO of Desktop Metal. Please note, our financial results, press release and presentation slides referred to on this call are available under the Events and Presentations section of our Investor Relations website. This call is also being webcast live with a link at the same site. 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. 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&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. With that, it’s my pleasure to turn the call over to Ric Fulop, Founder and CEO of Desktop Metal.

Ric Fulop: Thank you, Jay and welcome, everyone. I’m excited to host you for our first quarter 2023 financial results call this afternoon. On today’s agenda, I’ll begin with a brief highlights of our first quarter financials. We’re also going to talk about the increasing traction we’re seeing from our customer base in 3 areas: one, customers using our technologies in larger numbers; two, momentum from our repeat customer base; and three, I’ll detail a new growing customer subsegment representing the unique capabilities of Binder jet. I’ll then wrap it 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&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 to profitability a means but it’s seasonally the lightest quarter over year. Revenue for the first quarter of 2023 was $41.3 million, representing a 5.5% decline over the first quarter 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 sleep out of Q1, revenue was still inside our internal contemplated range. And you’ll recall, last quarter, we offered a wider 2023 guidance range to accommodate from known-related [ph] to the depth and breadth of this recessionary environment. We continue to push 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 first quarter of 2023, expanding 90 basis points from the first quarter of 2022. In the middle of the first quarter, we announced an additional set of cost reductions and we expect impacts from these efforts will begin to show in the second 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 $41.6 million in the first quarter of 2022 to $24.4 million in the first quarter of 2023 which was $17.1 million 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. Moving on to some business highlights. As we detailed on the Q4 call, we 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 million. These actions bring a total annualized cost savings to $100 million 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 one 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. We believe we will do over 8 figures of revenue in this market over the next 18 months and have products and stores next tier that were made with our Binder jet machines. Over time, we project this segment will grow into a multibillion-dollar opportunity for desktop metal. We also launched Live Suite, an end-to-end software hub that delivers generative AI [ph] solutions for added manufacturing 2.0. Being the success of our live center simulation software, Life Suite is a new package of premium softer applications with all new functionality that allows users of desktop metal, desktop health, ETEC X1 3D [ph] printing systems to seamlessly manage their build preparation, printers, accessories and processes with success in one cloud-based location.

Life Suite will come standard with most new hardware this year and it eliminates the need for users to purchase all our expensive 3D printing software programs to use their equipment. AM 2.0 is a digital manufacturing process that is ultimately powered by software and we believe Life Suite offers the most intuitive and powerful added manufacturing software in 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 material development across our AM portfolio. A few additions from this quarter include copper, C18 150 in titanium type 64 for our production system and 3 or 4 stainless for the shop system platform.

We’re proud to own 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 Super fleets that emphasizes high adoption customers that continue to expand utilization over added manufacturing 2.0 as production solutions but we have over 7,000 customers, including more than 1,200 with metaled ceramic systems. Over 370 of them are what we consider super fleet customers. We refer to a Super Fleet as a multiunit customer that has entered mass production faces and uses our technology to produce a high volume of end use parts with 3 or more systems purchased 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 in customer demand trends. First, our mass production solutions have a clear product market fit. Second, our solutions are consistently delivering high value and ROI to our customers’ mass production needs. And third, utilization is increasing as Super Fleet customers are coming back to buy more systems eventually leading to higher-margin consumable sales. This is the 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 customers across all company sizes, small to large, in both Binder jet and photopolymer solutions. Over the last 12 months, some of these customers have really scaled our operations.

One example is free from Technologies, a high-growth metal parts producer backed by Ryerson Steel, who started with 1 system only 3 years ago and today has a Super Fleet of 25 desktop metal binder jetting machines or life force on the polymer side that have scaled up to 33 polymer systems being used for printed medical devices or BMW, who now has parts in almost every new passenger vehicle using our technology. We have a dominant market position in the minor getting space with the largest installed base of systems, a multiyear head start, the largest binder jet R&D team in the world, the largest library of production materials in a patent portfolio that’s the envy of our industry. This is a very powerful moat in a growing industry. To demonstrate this, 25% of our binder get machines are a multisystem sites.

And similarly, 20% of photopolymer systems are at multisystem sites, meaning that an original desktop metal system provided enough value to a customer that in nearly 1/4 of the cases to date that same customer purchased additional systems and are now in production. It’s also worth noting that our Bider jet systems are incredibly productive and when our customer has more than one system and you can see here some have a dozen or more. They’re processing high-volume parts in those fleets, reinforcing the flywheel effect of our model. We’re incredibly proud of these great customer relationships with [indiscernible] 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 first quarter of 2023 of Desktop Metal systems with new orders beyond initial systems. 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 super fleets, 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 ceramic offerings as 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. Binder jetting simplifies production of ceramics, hard metals, carbides and sermits that are challenging to fabricate with traditional manufacturing and 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 and Nuclear but in the past year alone, we’ve sold between $5 million and $10 million 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, UltraSafe Nuclear Corporation and other major defense companies. One of the enabling applications for Binder jetting and nuclear includes the 3D printing of nuclear fuel, where the uranium [indiscernible] is fully ceramic microencapsulated in silicon carbide and it does not suffer from the dangers of weapons proliferation because it’s refractory ceramic layers limit reprocessing. 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 that has up to 5x 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.K. U.S. Alliance, known as ACAS 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 [ph]. The Artemis program in firing our most advanced marine ships with new forms of 3D printed nuclear fuel takes a differentiated solution to solve these problems. Shifting to Slide 8. As we’ve discussed in the past few quarters, a 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 first tranche of our cost reduction initiatives, completing $50 million in annualized savings. The cost reductions spent both cost of goods sold and operating expenses but weighed more towards the OpEx side as we saw our expense profile decline sequentially for 4 consecutive quarters into the first quarter of 2023. In February of 2023, we announced an additional $50 million in cost reductions expected for 2023, bringing our total annual savings to $100 million. We have completed the lion’s share of the workforce and facility closures by the end of the second quarter. We expect the second tranche of cost reductions will have a much more meaningful impact on our fixed cost absorption versus last year’s first tranche.

Given the mid-quarter timing of the announcement, we only saw minimal impact in the first quarter but we’ll start to see results in the second quarter into a much larger extent in the back half of 2023 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, you 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 streamlined the business to yield a more efficient and effective operating model for the long term.

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

Jason Cole: Thanks, Ric. Beginning on Slide 10, you will see highlights of our financial performance for the first quarter 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 first quarter of 2023 was $41.3 million, down 5.5% year-over-year from $43.7 million in the first quarter of 2022. 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% for the first quarter of 2023.

Gross margins improved 90 basis points versus the first quarter of 2022, driven primarily by a lower cost structure as well as product mix. Improving gross margin 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. Turning to the following slide; non-GAAP operating expenses were $35.0 million for the first quarter of 2023. This represents the fourth consecutive quarter of sequential OpEx reductions as we have reduced non-GAAP operating expenses by a total of $17.1 million in the first quarter of 2022, including sequentially by $3 million from fourth quarter of 2022. First quarter of 2023 non-GAAP operating expenses as a percentage of revenue was 85% which is a year-over-year improvement versus 119% in the first quarter 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 million in cost savings or meaningfully impacts results, especially in the back half of 2023. Turning to slide. Adjusted EBITDA for the first quarter of 2023 was negative $24.4 million, improving by $17.1 million compared to the first quarter 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 million in cost savings announced in February with higher revenue contributions, especially in the back half of 2023. We are right on track to fulfill our commitment to achieve adjusted EBITDA breakeven before year-end regardless of the macro environment.

Cash also came in as expected, ending the quarter at $149.8 million in cash, cash equivalents and short-term investments. We were able to reduce our operating cash burn from $56.3 million in the first quarter of 2022 to $37.3 million in the first quarter 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. We ended the quarter with $98.2 million in inventory, higher than when we exited Q4 2022 as a result of sales coming in softer than we expected in the first quarter, along with the impact 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. 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 and 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 million to $260 million for 2023. We also continue to expect adjusted EBITDA in the range of negative $50 million to negative $25 million for 2023.

First quarter adjusted EBITDA was in line with our expectations and we anticipate adjusted EBITDA in the second half of 2023 to significantly outstrip the first half. 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 Ric for his closing remarks.

Ric Fulop: Thank you, Jason. I’ll wrap up on Slide 15. Additive 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. I’m very proud of the team’s execution to drive $50 million of cost savings in 2022 and I’m confident this next $50 million in 2023 will deliver continued improvements in our cost structure in order to drive margin expansion and achieve adjusted EBITDA profitability before the end of the year. Customer engagement remains 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 and 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 in the added manufacturing market and extend our leadership in the space in order to capitalize on the next stage of this market, secular growth opportunity and we’re extremely well positioned to scale. With that, let’s open up the call for some questions. Operator?

Q&A Session

Operator: Thank you very much, sir. We will now be conducting a question and answer session. [Operator Instructions] The first question comes from Greg Palm from Craig-Hallum Capital.

Operator: The next question comes from Josh Pakrzywinski from Morgan Stanley.

Operator: Thank you. [Operator Instructions] The next question comes from Ashley Ellis from Credit Suisse.

Operator: The next question is a follow-up question from Greg Palm from Craig-Hallum Capital.

Operator: Thank you. The next question is also follow-up from Ashley Ellis from Credit Suisse.

Operator: Thank you. At this time, there are no further questions. I’d now like to turn the call back to Ric Fulop for closing remarks. Thank you, sir.

Ric Fulop: 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. Thank you.

Operator: Thank you very much, sir. And ladies and gentlemen, that does conclude today’s teleconference. Thank you very much for joining us. You may now disconnect your lines.