Desktop Metal, Inc. Class A

Greetings and welcome to Desktop Metals third quarter 2022 financial results conference call. At this time, all participants will be in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your hosts. Mr. Jay Jenskow, Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us to discuss Desktop Metals financial results for third quarter 2022. Please note, our financial results press release and presentation slides referred to on this call are available under the events and presentation 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 two of the presentation. I would also like to remind you that today's call will include forward-looking statements. These forward-looking statements reflect Desktop Metal's views and expectations only as of today, November 9th, 2022, and actual results may vary materially based on the 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 of the annual report on Form 10-K and quarterly report on Form 10-Q, in addition to the company's other filings with the FCC. Management has 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 Rick Fulop, founder and CEO of Desktop Metal.

Thank you, Jay, and good afternoon. I want to thank you all for taking the time to join today's discussion for our third quarter 2022 results. Before we begin, it's my pleasure to welcome to the call Desktop Metal's new CFO, Jason Call. I'm very excited to have him join Team DM. Jason is a highly accomplished finance executive who's joining us from an 18-year career at Analog Devices, most recently as division CFO of a $10 billion business overseeing 12,000 employees and 15 internal sites. Jason brings more than 20 years of experience in global finance operations, supply chain management, M&A integration, and FP&A. We're thrilled to have him on board. James Haley is also on the call today and will transition into an advisory role beginning tomorrow to ensure a seamless transition. I'd like to thank my friend James for all his contributions to our collective efforts and wish him the best of luck in his future. Turn to the quarterly update. We will start with a review of third quarter 2022 financial results including detailing a few recent actions in response to our results in the current business environment. I'll follow with a number of recent business developments of note, including a promising new strategic partnership with Align Technology. Jason will then provide further color to our financial results. I will close with our financial outlook and then transition to Q&A. I'll start by addressing the results for the quarter on slide three. Consolidated revenue for the third quarter was $47.1 million, representing a year-over-year growth of 85%, including contributions from acquisitions. Third quarter 2022 non-GAAP gross margins were 19.9%, and adjusted EBITDA was negative 28 million. Simply put, performance did not meet our expectations for the quarter. I'd like to unpack what happened in our response. Relative to internal forecasts reflected in our public guidance, we saw lower than expected sales volume towards the end of the quarter, which is typically when we see a sharp acceleration in volume as Europe and, to a certain extent, the U.S. come out of their slower summer months. This divergence from the expected trend was not uniform across all business lines. Our printed casting business continues to perform well, and we saw very good resilience in our dental and healthcare platforms. But these strengths were offset by softness across the balance of our portfolio. The challenging macroeconomic environment created headwinds for our business. We exited the first half of this year tracking towards our financial targets with a robust pipeline of healthy customer momentum. As the third quarter progressed, In some cases, orders we expected to close shifted into later quarters. We believe this is a result of customers pausing on CapEx spend as they become cautious about the macro landscape. In particular, when larger deals require more significant CapEx outlays, we saw customers delay purchase decisions amid economic concerns, which was not the case at the start of the quarter. In addition, we experienced currency headwinds in international markets which compounded to the lengthening of sales cycles towards the end of the quarter. At the gross margin level, underperformance was primarily a function of lower-than-expected sales volumes and the associated overhead absorption impacts. While our product gross margins continue to improve and are well ahead of overall gross margins, there's a sizable overhead in our COGS that has a major impact on lower revenues. To a lesser degree, margins were also impacted by product mix and a challenging transportation and freight backdrop. While cost reduction initiatives announced in June significantly reduced our expenses on a dollar basis, The adjusted EBITDA trailed our internal forecast as a result of decreased sales volumes relative to expectations. This is not the first time a recessionary cycle has impacted growth in the additive market. The compounded annual growth rate of 18% experienced in the prior 22 years did not occur in a straight line. We've had three similar periods where the market has stalled between one or two years, coinciding with recessions. The last time this happened in a meaningful way pre-COVID was 2008 to 2009, when the market contracted 3% on an annualized basis. And in the decades that followed, the market rebounded significantly, compounding at 27% growth. The long-term trends supporting broad adoption of additive manufacturing and growth to over $100 billion in the next decade remain intact, particularly for mass production. Additive solutions unlock benefits of lower cost, unshoring, digital inventories, assembly consolidation, and design freedom, among others, that are enabling businesses to remain resilient and react more quickly to external, circumstances in both supply and demand. As I've said in the past, production-based 3D printing is less effective than prototyping in challenging environments, and I still believe that is the case. However, projects that are still not fully green-lighted on the production side can be delayed as companies across the economy face tighter CapEx budgets. The durability of these benefits remains incredibly strong, and the trends driving more and more customers to embrace 3D printing will last well past the current short-term macro challenges. An equally confident desktop metals portfolio of production-focused AM2.0 solutions is very well positioned to continue to capture share of this growing market and take advantage of the next stage of long-term secular growth. Notwithstanding current macroeconomic impacts on the business, we are not satisfied with our execution or performance in Q3, but we're focusing on how we navigate our current set of circumstances and respond as a company. We have already taken swift actions to course correct in order to reduce our expense structure well beyond what we outlined in June. Getting profitable is our number one priority. In June, we announced a strategic integration and cost optimization initiative. The actions we took have achieved $40 million of annualized cost savings. Since the closing of Q3, it has become clear we need to further intensify our expense reduction efforts in light of the current environment. As a result, We're cutting costs even more aggressively and quicker than initially planned. Reducing our cost structure improves our path to profitability timeframe and enable us to reach our adjusted EBITDA breakeven by the end of 2023, even at a lower revenue threshold if microeconomic headwinds persist. We will continue to monitor the microenvironment and make adjustments to expenses as needed to ensure this company turns profitable under the current capital structure in line with our commitments. Now let's shift gears and discuss a number of very positive recent developments for the business with significant revenue potential for 2023 and beyond. AM 2.0 continues to offer advantages versus traditional manufacturing for a host of applications, and we're seeing continued traction from both customers and major strategic partners in the added manufacturing ecosystem that are embracing these benefits. Last week, we announced a new strategic partnership with Align Technology, to bring digital dentistry and workflows for printing to the mass market. We're very excited about the opportunity in this partnership, and I'll go into further detail on the following slide. We expect tangible financial benefits to this partnership to be reflected beginning in 2023. We also announced a multifaceted partnership with Siemens to advance additive manufacturing with a focus on large manufacturers that, among other efforts, will integrate desktop metals AM2.0 solutions into Siemens simulation, and planning tools, enabling production-scale factory planning and automation. In addition, we expanded our partnership with Henkel to qualify additional industrial photopolymer materials for the Xtreme 8K, the world's largest DLP printer for high-volume production of induced parts. We're delighted to work with a strong partner like Henkel to expand our differentiated material applications we can offer to our customers in the photopolymer AM 2.0 space. We're actively engaged with some of the largest companies in the world on the production system and P50 in particular, and we remain steadfast in our plans to build major business for hyperscalers on this platform, which provides the highest throughput and lowest cost part production of any metal printer in the market. Starting in December, we're planning to begin hosting quarterly open house meetings to showcase our progress on P50 to the industry and potential customers. We also expanded our lineup for Shop System, the world's best-selling metal binder jet system with Shop System Plus and Shop System Pro. The shop system has become a global success, and we've already taken center-based production processes that used to take required specialized knowledge and made it turnkey, easy to use, and accessible to all manufacturers. These new options add more versatility, functionality, and value to our already strong shop system platform. And finally, at IMPS in September, we launched the Figure G15, the first commercial platform of its kind to shape standard sheet metal on demand directly from a digital design file. Using patent-pending technology, manufacturers now have a new competitive way to form sheet metal parts and products quickly, but the high upfront costs associated with stamping presses and dyes, which typically have a long lead time and are expensive to produce. Sheet metal forming with a figure G15 is accessible, flexible, and cost-effective, even at low and medium volumes. Manufacturers in the automotive, aerospace, appliance, and other industries can now produce a fully formed part in less than an hour without major investment in time and money. While this product is still in its early commercialization, here is a one-of-a-kind turnkey solution for the more than $300 billion sheet metal forming and fabrication industry that we're very excited about. Turning to slide five, I'd like to provide more color on the recently announced partnership with Align Technology, the undisputed category leader in clear aligners, intra-hole scanners, and dental CAD software. We're really thrilled to partner with Align to bring a first-of-its-kind solution We believe what we're building together will be a significant growth driver for Align Desktop Labs and Desktop Health. More and more dentists are looking for an integrated digital dentistry platform that encompasses scanning and printing hardware, dental parts made with best-in-class materials, and design and production services. Through this partnership, Align's market-leading Itero intrarural scanners will be offered as a seamless managed service to dentists in a subscription model with recurring revenue. Dentists can then order aligners or exclusively drive 3D printed restorations to desktop labs. Our goal is to develop a very sticky service that delights customers. This is a gateway for a connected suite of digital dentistry solutions with seamless workflows backed by desktop labs, experienced network of dental laboratories, and premium desktop health printers and materials. This integrated solution will allow dentists to capture patient data with iTero scanners, create print-ready digital files using desktop labs design capabilities, 3D print custom parts either in their office or using desktop health Einstein printers or using desktop labs outsource manufacturing services. It's a fully integrated chair-side workflow providing real-time technical communication, workflow management, digital design, and case support. We expect most, if not all of the $30 billion in annual dental parts market spend to move to 3D printed manufacturing this decade. It's a technology that's ready for prime time. We expect new CDT classification of materials used for dental insurance codes to be published in December this year to cover our class two printed restorations in the US. With that backdrop, we aim to reach thousands of general practices over the next 12 months with this integrated workflow and potentially tens of thousands over the coming years. The addressable market for this opportunity with Align is over 2 million general practitioners globally. We're thrilled to commence this partnership with Align to offer the dental industry a seamless solution for digital restorations and are super excited about the additional potential opportunities for accelerated adoption of digital dentistry with Align.