Nano Dimension Ltd. (NASDAQ:NNDM) Q4 2023 Earnings Call Transcript

Nano Dimension Ltd. (NASDAQ:NNDM) Q4 2023 Earnings Call Transcript March 21, 2024

Nano Dimension Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. Welcome to Nano Dimension’s Full Year 2023 Results Conference Call. My name is Scott, and I’m your operator for today’s event. On the call with us today are Yoav Stern, CEO and Member of the Board of Directors; Tomer Pinchas, CFO and COO; and Julien Lederman, Vice President of Corporate Development. Before we begin, may I remind our listeners is that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today’s earnings press release also pertains to statements made on this call. If you have not received a copy of the press release, please view it in the Investor Relations section of the company’s website.

A replay of today’s call will also be available on the Investor Relations section of the company’s website. Yoav will begin the call with a business update, followed by a question-and-answer session, at which time the management team will answer questions. I would now like to turn the call over to Nano Dimension’s CEO and Member of the Board of Directors, Yoav Stern. Yoav, please go ahead.

Yoav Stern: Thank you, Scott. Good day, everybody. I hope everybody is watching this black and blue slide which is opening. We can move to the next slide discussing the forward-looking statement. I’m going to leave it on for a few minutes rather than read it for all of you like repeat reading. Just scan through it. I’m sure most of you understand what it says, and it protects all of us from sliding into issues or information that is confidential and/or not accurate. So we’ll go to the next slide and here we’ll start. I’m going to divide my presentation to a few chapters if you wish. First, I’ll speak about the results, of course. Second, I’ll speak about not our industry. I will call it our business domain, and you’ll understand why I’m separating between industry and business domain as I get to that chapter, a little bit about customers and analysis of our, again, business domain as it relates to it, plans forward a few words, and then the most important part will be Q&A in order for you to be able to express your areas of interest, which I will relate to as best as I can.

So to start with, you see the highlights of 2023. Indeed a fantastic year for Nano Dimension. We grew 29%, 30% year-over-year where the year before we grew even faster. We are by now close to $60 million of revenue. More importantly or no less importantly, our gross margins are growing steadily; by now close to 50%. We are showing improvements in almost all variables of the financial reporting of a public company. I give a higher weight function to the fact that our gross margin is improving, because this is the key to the door where profits, positive EBITDA, and earnings per share. People have to remember, I believe, the world and the public markets are basically tired from companies that are just growing on the top line. Now it’s important to grow on the top line, and we will continue to do so, because in a funny way, if you don’t have a top line, you don’t have a middle line, you don’t have a bottom line.

Actually, the middle line is expenses. But we will focus through internal efforts as we did until now, and through acquisitions to deliver the dollars to the bottom line. Before we go into just numbers, just a few slides about break the routine of going just through numbers about success stories, case studies with customers. The first one is NASA, which is not the first time we’re doing business with them. I’m showing these pictures not in order to divert the attention from the fact that the numbers and the financial reporting is what’s important in these calls. Rather than having 25 slides of products, I’m just moving through slides going back to the next one about the branch of the U.S. Department of Defense. I’m showing those slides just to give you a little bit of a taste of what kind of customers and what kind of products we have.

But it’s not to divert the attention from the fact that this is all about studying the numbers. The next slide will show the Fraunhofer Institute, which is a very, very famous worldwide institute, originated from Germany, that is using our machines. And they have also, in a way, tried to compete with our additive manufacturing electronics by developing their own machine. But they realized that our machine is much ahead, which is a reinforcement when such an institute tried to do AME and eventually buys our machine. The next slide will tell you about an unnamed industry leader. Again, we have issues with giving the names of companies that we are selling them, especially when it’s very large transactions. In this case, this is an industry player in the space area, and we have successful combined sales to them.

The next slide speaks about a very large western computer manufacturer, hardware manufacturer. All of you know the names also, multiple machines, that we sold them. Next slide is a Western Nuclear Research Group. The next slide is starting with a description to you about what we reached that made these customers excited enough to buy machines and multiple machines. So this speaks to the product and R&D development. I broke it down to – while there are many more achievements this year, I broke it down to what is highly important for you to realize. First of all is DeepCube, of course, which is advancement in deep learning, machine learning, and applying all what you’re hearing in this field, in the general world into industrial applications.

It’s a very specific use of AI, and the AI has to be very, very advanced because it does interpretation, not only of raw data, which is not language, that’s more complicated than languages, but it does interpretation of alphanumeric, which is not language. So it’s more complicated than language because it doesn’t have the rules that language has. And we are able to do it, and install it in machines, and improve machines dramatically in so much as maintenance, accuracy, repetitiveness, and eventually throughput. We have new machines from Fabrica. We have very serious development in our Flight Hub, which is the software that really drives everything. I gave this example in the past. When you think about developing a story, you write the story on your word processor, and then you convert it into a PDF, be it a story or document, legal document, and then you send it to your lawyer, or you send it to the publisher, because you wrote a book.

You don’t really know and don’t really care, frankly, what is it printed on. It’s printed on the printer that happened to be at your lawyer’s place, or at your company’s other location, or at your publisher. What you are exposed to is the software with which you are using in order to design the document. It’s the same thing we identified in additive manufacturing. Everybody will talk to you about robotics, everybody will talk to you about machines that are doing this or doing that. At the end of the day, this industry will be led by the applications of software that enables people to design, redesign, prototype, negotiate a transaction, see the transaction happening, and eventually it will be printed somewhere. So this business domain, the way I call it, and again, I’m getting close to explain to you what by business domain, is led by two variables, two forces: one is material and process, because without the right materials and process, there’s no printing and not proper printing of products in mass manufacturing; and the second is the design software for those printers, not design.

We’re not going to replace electronic design software or mechanical design software. We are adding the software that enables the designers to use advanced printers. But eventually, once they do that, the software is what will be in front of them. By the way, AdditiveFlow is another company we bought, which is part of this sophisticated software that enables the design and the finite element analysis of every design. Next slide is the growth. This is back to numbers. This slide shows every column is the last 12 months for that date. So if you look on the left, first column is Q4 2020, which means it shows the full year 2020 results as it was the year I joined and corona joined us as well in the same year. And if you look at the column on the total right side, on the extreme right side, it shows Q4 2023, which means it’s the result of the last 12 months until that date, which means full year 2023, which we’re reporting today.

And you see the growth, it speaks for itself. It’s a very unique situation. There’s no company in our business domain that is showing this over the last 4 years. Next slide is, finally, we get to the chapter that will speak about our “industry.” What you see in this slide is Nano’s growth comparing to we chose 4 peers here, 5 peers actually. You see that during 2023, every one of our peers has lost revenue comparing to the year before. We are the only ones that not only growing, but growing leaps and bounds. Now, why is it not an industry? This is not industry players. Let me explain to you a very, very important point here that I think our patriots are missing, be it Markforged, Stratasys, Desktop Metal, 3D Systems, or the average. Actually, it is four competitors and one average, not five, I’m sorry, but there is probably 5, 6 more public competitors.

They are not really competitors. They are participants in our business domain. We don’t see them in front of customers. We don’t see them competing with us. And the reason is it’s not really an industry. This is a business domain of companies that use similar technologies to manufacture or produce, call it, parts or items, similar technologies, not the same. Some use additive manufacturing in 3-dimensional polymers, FDM as an example; some use DLPs, some like us use additive manufacturing electronics by inkjet for PCBs. But the reason it’s not an industry is because an industry is set by who do we sell to? And we sell to vertical markets that are different, some overlap. But an industry, for instance, is a space industry, or the industry is aviation, or the industry is medical, and others, electronic cars or just automobiles, or the energy industry.

Those are industries. We are in the business of selling machines to different industries. So you cannot say there’s a headwind in our industry because, for instance, the defense industry didn’t have headwinds this year. So all the competitors are saying they’re shrinking because there is headwinds. There is no headwinds. There is just, for one reason or another, their revenue in selling into different industries has shrunk, either because the industry is not big enough, or the market is not big enough, or because there were some issues with the sales and marketing, or the product does not fit as a product market fit. But there is no industry headwinds when you speak about additive manufacturing. Additive manufacturing is a bunch of technologies that are all acting in the same business domain.

And the business domain is where we develop and manufacture the materials and the machines. We sell it to different industries. In a certain situation, the defense industry may have a headwind, and our sales in defense will shrink. Not the case today. It’s actually the opposite. In our case, we are selling to the electronic industry. Electronic also is a domain, because electronic exists in computers, electronic exists in space, electronic exists in medical, electronic exists in everything. It’s not an industry. It’s a business domain. So I overspoke about this, and I hope people understood it. And that’s the justification for my claim. There are no headwinds. People who sell, like our competitors, to the dental industry, which is an industry, may have headwinds in the dental industry and may not.

But what is that to do with defense? Okay, next slide is reshaping Nano Program. In spite of us or our growth, we decided to reshape Nano, and that’s to do with expenses, cut expenses in a very dramatic manner. We did it in the second part of Q4 2023, which means only one quarter ago, and we reduced between $25 million to $30 million in our annual cost. Our cash burn, look at it in the last 3 years. It’s going down from where we were in the midst of development of everything we’re doing today, into 2023 which has went down almost by 50%, and it goes down now into ‘24 by almost 80%. And I’m talking now about Q1, which is already in the pace that we’re discussing. Obviously, the rest of the year is ahead of us, but we expect to be between $12 million to $20 million, $24 million in the worst case, cash burn.

And that’s considered the fact that we have $1 billion in cash. It’s not even a variable insomuch as our survivability or ability to grow, our ability to deliver value to the shareholders. Because we are very well financed. If we end up with $10 million, 12 million cash burn a year, with $1 billion in cash, which is going to be used for acquisitions and for R&D, we’re in an excellent, excellent shape. Having said that, I don’t want to go back on the slides but every entity in this business domain that I described to you is losing cash and not having cash to lose more. So let’s speak again a little bit about the environment of our business domain. There’s about 10, 12 public companies in this business domain. Some of them are large organizations like HP and General Electric.

But if you summarize this industry, the claim of all these analysts is the industry is $15 billion, give or take, growing to $30 billion in 2030. Well, first of all, it’s not an industry again, because it’s combined from 10 different industries that are growing or not growing. Does our business domain grow? Well, let’s speak about which business domain we really are. We are manufacturing machines and materials. Out of these $15 billion, there’s no more than $2.5 billion of companies like us, and it’s growing. But all of them are losing money, maybe other than one or two, which I, which are private, so I don’t know the exact numbers, but I have an estimate based on talking to them. And all the publics are losing money, and all the public companies have no more cash for more than, at the best case, a year and a quarter in one case, and all the other cases are less than half a year.

So there’s no surprise where the shares are traded. The only surprise is why are we traded below our cash. But that’s a different story. Next slide speaks about the replenishing and of the stewardship, I would prefer to call it corporate governance, replenishing our corporate governance and capital allocation. Corporate governance is, as we grew, becoming more and more serious company rather than a small public company like a biotech that is mostly focusing on technology. We start to focus on corporate governance, on the fact that we have to fit the corporate governance to the size and growth of the company. We split the roles of me being a CEO and a Chairman, which was not something I liked anyhow, because there was no choice when we were smaller in the corona days.

We brought Dr. Yoav Nissan-Cohen. He has a great background in the semiconductors industry and the ex-CEO of Tower Semiconductors. We refreshed our Board membership by reducing it by 2 people that we requested to leave because they were not fitting a serious professional organization in an American market. But we have replaced them with a 4-Star General Garrett, the ex-Commander of the U.S. Army Command, with a lot of experience in very large organizations. On the capital allocation side, we did not buy large companies, not because we didn’t negotiate, we did, but because the prices were not right. So we got to the point today where the prices are becoming right because of what I told you today. All our competitors are basically having reduced time and very strictly defined time to live if they’ll continue to lose cash and have no cash, and if they will raise money, they will dilute the existing shareholders.

So while we had the cash and didn’t spend it, we decided to spend close to $100 million to purchase our own shares at below the cash value, which improves the company’s balance sheet and enterprise value. And we approved for ourselves another, above the $96 million which we already spent, another $200 million of potential buyback, which, if we use it will be when the share is traded below cash value; at this point, about 25% below cash value. And the Board will balance its decisions about the use of capital between acquisitions, buyback shares, and investment in R&D, and go-to-market, in order, at the end of the day, to have enough cash to bring value to the share as expressed in share price and as delivered to the shareholders. That’s our plan for the next year.

At this point, I spoke enough, 20, 25 minutes. I would like to give the baton back to Scott to manage the Q&A session.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question today comes from the line of Ashok Kumar with ThinkEquity. Please go ahead.

Ashok Kumar: Alright, thank you for taking my questions. The first question is broadly in terms of your cash burn and reshaping Nano. So you have the $15 million quarterly run rate, 50% gross margins, $1 million burn per month. So what’s your path line to profitability? wo is capital allocation. I think you talked about $1 billion and cash generating about $4 million a month in interest income. And can you talk about strategy beyond cash buyback? The third question is, you talked about business domain. Specifically, you talked about material process on one hand and design software on the other. So do you have the capacity in-house at this point to be an industry leader where you forecast the industry to be some years from now?

And the last question is on the industry, right, which is business domain versus industry, you make the distinction there. Clearly, you don’t want to be the last man standing. You talked about continued burn rate and lack of balance sheet support with your competitors. And industry is critical because it’s more than the sum of the parts. And so where do you see the industry also over the forecast horizon. Thank you.

Yoav Stern: Okay. I counted five questions. I frankly didn’t understand the fifth one, but let me answer the first four. And if after the first four, I didn’t answer the fifth in between, then, of course, I’ll let you ask it again. And thank you very much for your questions. First of all, if we burn $1 million a month, or between $1 million to $2 million a month, it will be the lowest cash burn this year that we had. It’s not going to be the target to stay on. Profit will come, and cash flow burn will go to zero or start to generate cash we believe in 2025, and it will be dependent on two variables that are complementary to each other. Either we increase our gross margins to around 60% with no acquisitions, then we’ll be profitable and cash flow generating, or we do the acquisitions we are planning and negotiating, as we speak, because the price will be right, use some cash from, of course, the cash we have for the acquisitions, and then being bigger will enable us, depends on the specific acquisitions, to be profitable even in less than 60% gross margin.

That said, being profitable means while continuing to invest in R&D and continuing to develop both materials and process and the software that I mentioned before. First of all, I do want to be the – not the last man standing, but the first leader standing. And in order to do that, I have to have the profitability. Now, the profitability doesn’t only mean that there’s a positive EBITDA, earnings per share, profitability that comes from gross margin, means I have enough money to spend on R&D to stay ahead of my competitors. And at 60%, in around $100 million of revenue, between $70 million to $100 million, we can be profitable and invest in R&D and grow because of the competitive edge we’re creating. And at more than $100 million, if we do the acquisitions, it will be much more.

You can actually do it with gross margins that are a bit lower because you have synergies between the businesses, and you continue with these gross margins to be able to deliver both profits to investors and enhance value and to continue R&D to enhance competitiveness. And that’s much beyond buyback. The cash buyback is as temporary as it may be, and I am not for cash buyback in principle. I am in cash buyback only in very unique cases. I’m against cash buyback for a company that’s growing the way we are growing, and we will grow. When do you do cash buyback? Probably one or two cases. One like cases like us, for some reason, the share is traded below the cash value. And the second is you have so much cash on the balance sheet, and you’re profitable, and the cash is growing, i.e. companies like the gentleman from Omaha or companies like Apple that have $160 billion, if I remember right, or something like that, I don’t remember the exact number.

And then when you have so much cash, and you don’t use it, buying your shares depends on its price from your profit is something that makes sense because you’re improving the value on a per share basis by reducing the amount of shares that’s traded. And your fourth question is our capacity to stay as an industry leader or to become an industry leader? Our capacity to do that will come through very smart acquisitions. And in order to be smart in acquisitions or acquisitions, I should say by now, the other side that is selling has to be smart enough to realize that they have to put egos aside if they want to be the right stewards for their shareholders. And this business domain is so full of egos that through the SPAC mania of last year and the years before, the companies got to the point where all of them went down from $10 a share to less than $1.

All the public companies that came from SPACs, and they stayed still doing it and continue to doing the same thing. That’s not smart when you have 6 months to live based on cash burn. And in order to be an industry leader, we need to consolidate. We need to put our egos aside and get together, either in a competition manner, combination of cooperation and competition, or through merger and consolidation, which is much more effective. That’s what will create a situation where this industry will move forward, because without being profitable, having a $15 billion industry, and again, taking it down to the manufacturers and development of the technology, which is $2.5 billion to $3 billion, if it’s not profitable, it’s not going to hold for too long.