Desktop Metal, Inc. Class A

Greetings and welcome to Desktop Metals second quarter 2023 financial results conference call. At this time, all participants are 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Jay Gensko, Vice President, Investor Relations. Please go ahead.

Good afternoon and thank you for joining today's call. With me today are Rick Fole, 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 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 three of the presentation. 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, August 3, 2023, and actual results may vary materially based on the number of risks and uncertainties. For more information about the risk that may impact Bestop Metal's business and financial results, please refer to the risk factor section on Form 10-Q 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 the reconciliation of the gap to non-gap measures. I'll now turn the call over to Rick. Thank you, Jay.

Welcome to our second quarter 2023 financial results call. It was a really solid quarter of execution for Desktop Metal amidst a very active market, including our announcement to combine with Stratasys to form the largest company in the additive manufacturing business. On today's agenda, I'll begin with highlights of our Q2 financials. I'll detail recent developments as well as highlight specific activity we're excited about in binder jetting. There have also been a number of things said about our company and our technologies that we believe are incorrect and misleading, and we'd like to set that record straight. I will then wrap it up with some thoughts on the significance of our future combination with Stratasys and the benefits and opportunities ahead. And then Jason will provide more color in our financial results and outlook before we conclude and open it up for Q&A. I'll start at the top of slide four. It was a very good quarter as we combined solid top-line performance with continued cost reduction execution to drive meaningful and expected improvements from Q1 numbers. We've been focused on balancing revenue growth with improving margins. And I'm proud of what the team has accomplished operationally, and I'm very optimistic about the balance of 2023. Revenue for the second quarter of 2023 was $53.3 million, a very strong 29% growth over the first quarter of 2023. As you'll recall, we entered the year with a questionable outlook on the demand side as macro pressures weighed on our industry, and we certainly felt that in the first quarter. There was a continuation of that softness into the start of the second quarter. However, order momentum really began to pick up, and we finished the quarter with strength. While there's still some element of caution in the environment, we're very encouraged by the recent customer activity that led to our second quarter results. This momentum gives us confidence in the early signs of our recovery and also validates feedback we've been receiving from customers that we would see an uptick in orders as we progress through 2023. In combination with this improved customer demand profile and a variety of near-term growth opportunities, we feel very good about the second half of 2023. and we're reaffirming our 2023 revenue guidance. Meanwhile, the DM team has been laser focused on something we have full control over, reducing our cost structure. Second quarter non-GAAP gross margins grew to 31%, expanding 1,300 basis points sequentially from the first quarter of 2023 and 435 basis points year over year from Q2 2022. From a gross margin standpoint, this was a record for second quarters. in large part due to our efforts in reducing the fixed cost base in our COGS. And importantly, we just completed several actions under the second tranche of our $50 million cost reduction plan towards the end of Q2. So those savings won't be fully reflected until we report Q3. As a result, we expect continued gross margin expansion through the balance of the year as we combine the benefits of this additional cost savings with expected higher revenue in the second half. We're very proud of our efforts to get gross margins back on track. We've also driven significant improvements in our expense structure in the past six quarters, which has resulted in the best quarter of adjusted EBITDA since going public. Q2 2023 adjusted EBITDA was negative 15 million, an improvement of 9.4 million sequentially from Q1 2023, in a $12.5 million improvement year over year. Our adjusted EBITDA and operating cash flow losses are decreasing rapidly, and we expect to drive continued significant improvement into the back half of 2023. EBITDA is trending to our internal plans, and we remain committed to our 2023 adjusted EBITDA guidance range and achieving adjusted EBITDA profitability by the end of the year. We expect our cash burn to continue to significantly decline in line with our pursuit to adjusted EBITDA breakeven. Moving on to recent business highlights. We had excellent activity in Q2 in binder jetting and metals, which was a key contributor to our solid financial results. We continue to make meaningful advances in our production system platform, including continued commercial progress in consumer electronics. And I'm excited to welcome Ryerson, one of the largest global metal suppliers in medical aerospace and defense to our customer base for production system P50. On the healthcare side, Desktop Health's platform of leading dental solutions continues to capture market share. For the first time, we're making our category-leading Flexera materials available to other platforms. We recently signed a commercial supply agreement with our friends at Carbon3D, a company that is very successful at DLP printing, to offer Flexera materials to their large dental customers' installed base. This is a testament to Flexera's differentiated material properties, and we expect additional partnerships and licensing opportunities as we continue to find ways to monetize our portfolio of close to 1,000 patents. Our partnership with Align Technologies continues to be another exciting opportunity for our business. And Desktop Health also recently launched a new generation bioplotter system with PrintRoll, the world's most advanced printer for biofabrication. PrintRoll is an innovative rotating build platform that can produce first-of-its-kind intelligent printed tubular tissue. PrintRoll is superior to existing manufacturing processes because it can make tissue engineering parts with multiple materials combining polymers like PEEK, resorbable polymers combined with living cells, hydrogels, and other biomaterials in a single part. This revolutionary capability can be used to manufacture new kinds of stents or grafts for the body's vascular, digestive, respiratory, and reproductive organs. BioPlotter is a premier product in the field of bioprinting. Desktop health 3D BioPlotter is the world's most cited and researched bioprinter in peer-reviewed scientific and medical journals, with more than 2,490 citations in over 600 peer-reviewed research papers directly produced with this system. While there are competitors that claim leadership in the marketing materials, we believe our BioPlotter is years ahead of competing products. Case in point, the FDA recently granted approval to our customer, Chicago-based Dimension Inks, for its CMFlex hyper-elastic 3D printed bond. This is the first time 3D printed biofabrication products have been cleared by the FDA. It's exciting that the first company with such clearance manufactured products on our 3D bioplotter. Customers are choosing our desktop health biofabrication products because we're clearly differentiated and have superior technology. This is yet another area where we have core IP that precedes competitors in both extrusion and photopolymer biofabrication. At the end of this presentation, we'll include supplementary slides that display our capabilities in these products. Turning to slide five, as we've spoken about in the past, we established clear leadership in two core print platforms that serve large TAMs as a result of their unique mass production use cases. One of them is binder jetting, and the other one is photopolymer printing. As a reminder, unlike competitors, our technologies leverage area-wide processes that benefit over time through Moore's law, giving us long-term compounding advantages. Desktop Metal has carved out a very strong competitive mode in BinderJet, with the number one selling BinderJet products, the most experienced team in the world, incredible IP, an array of end-use mass production applications that differentiate us from competitors. And we've leveraged this leadership to quickly grow our installed base to the largest in the binder jet industry. We've also grown to a leadership position in dental and healthcare, led by Desktop Health, who've combined best-in-class photopolymer printers designed for the production of end-use parts with a leading catalog of differentiated materials that sets us apart in the market. These businesses will serve as a foundation for our growth. Turning to the following slide, we've continued to innovate and unlock three new markets. printing of foams, sheet metal forming, and printed hydraulics. These unique technologies bring additive manufacturing into new applications not traditionally accessible to legacy AM processes. Shifting back to binder jet on slide seven. Desktop metal printers are the first and only metal printing technology currently used at scale in automotive. Binder jet is now being used at scale by OEMs like BMW, where we now have parts in almost every one of their new vehicles. We were part of a multi-year bake-off at BMW comparing all binder jet solutions, and we're happy to report that we're the company that won that effort, which resulted in significant follow-on orders for their new generation, large format exterior binder jet systems in their Lancet plant. These new systems are the fastest binder jet printers ever built, with speeds exceeding 350,000 cubic centimeters an hour. And we have many of them installed and in production at BMW today. More will be delivered by the end of the year, And we believe desktop metal has more end-use parts made of metal in cars today than any other additive manufacturer. In addition to printed sintered parts or printed castings, in the past, I've said you can have several hundred kilograms of additively manufactured parts in a car. And we now have some customers that are starting to do this. Let me explain. Today's cars are manufactured with a process called body and wipe. Since the Henry Ford days, most automobiles are made out of hundreds of sheet metal parts that are stamped, cut, welded, and fastened on an assembly line. Our binder jetting technology is a key enabler of a new way to manufacture cars called gigacasting, which is led by Tesla. Gigacastings are the consolidation of hundreds of parts combined into a single giant part assembly. This allows OEMs to dramatically reduce cost, assembly time, capex, and weight. GigaCasting also offers potential benefits for logistics and emissions reduction, increasing flexibility in the engineering of the vehicle platform and lowering the CO2 footprint. In this process, binder genic systems are used extensively in the front end to enable high complexity geometries with very rapid iteration cycles to improve the economics of vehicle manufacturing. We now have several customers using our printers, which supply Tesla's vehicles built with GigaCasting. as well as other OEMs such as Toyota, Volvo, Mercedes-Benz, and others who are fast following to launch vehicle platforms to leverage this new process. The use of binder jetting is rapidly increasing as future gigacasting programs look to leverage even higher geometric complexity parts that could mix die casting with internal cores printed with binder jet. Turn to the following slide nine. This is an image of a Tesla employee observing a gigacasting mold that was printed with our binder jet systems by our customer, Granger & Worrell. Note that the image on the back of the gentleman's T-shirt is a picture of a GigaCast part. People don't usually make T-shirts for things that aren't important. Again, this process allows Tesla to assemble a vehicle in one-third the time versus some other competitors by eliminating thousands of welds, hundreds of sheet metal parts, and hundreds of tools. Aside from the significant capex savings for vehicle OEMs, Another major benefit of binder jetting in this new way to make cars is that during the design cycle, changes to the vehicle can be iterated in as little as one day versus almost more than 18 to 30 weeks for traditional die-cast tooling processes. Turning to the following slide, I'm highlighting some of the strategic growth markets for binder jet that are now in production and starting to scale. We just talked about enabling gigacasting for automotive, highlighted on the left side of the slide, Outside the pioneering work from Tesla, other companies in marine and aerospace markets like Mercury Marine, Airbus, Eaton, and Rolls-Royce are successfully consolidating assemblies with larger binder jet printed castings to change production economics of their products. And on the right side of the slide, here's an example of a multi-billion dollar market that has not yet been able to embrace additive manufacturing because of the limitations of previous laser printing technologies. Through binder jetting, Desktop metal is able to print silicon carbide at production scale. This is an enabling technology for power electronics for electric vehicles. And we have growing customer relationships with a number of companies, including Denso, and companies like Schonk, Coherent, and Northrop Grumman are adopting this technology to make single crystal silicon carbide wafers in other parts for space and semiconductor manufacturing. And like I mentioned on our first quarter call, Another application of our binder jet printers in production are 3D printing of triso high-SA low-enriched uranium nuclear fuel that couldn't be made any other way. This is a key enabler for fourth-generation MMR and SMR nuclear reactors. And just last Wednesday, DARPA and Lockheed Martin held a press conference with our customer BWX Technologies to showcase the first-of-its-kind triso nuclear thermal propulsion powered rocket that will be demonstrated by 2027. We're incredibly excited to be in production and fully qualified in these high-value applications in semiconductor-induced parts, as well as being at the center of the future of automotive production. The opportunities in BinderJet grow with each passing month, and desktop metal is better positioned than any company in the 3D printing space. Turning to the next page, slide 11 is here for your reference. We're not necessarily going to walk you through it, but are prepared for those that are interested in this level of detail during our Q&A or after the call. As part of our pending merger with Stratasys, a lot of things have been said recently in the public forum about desktop metal and binder jetting that are inaccurate or misleading. The facts are, binder jetting is the fastest process for 3D printing parts. Binder jetting can make fully dense metal parts. It has more material flexibility than welding processes. It can make parts in many materials that will never be available to laser. As a result of binder jetting speed and throughput advantages, it delivers the lowest cost parts and is quickly gaining share in the added manufacturing market because it enables mass production capabilities in the new high-volume use case that you cannot accomplish with other processes. At the end of the day, market share is the best yardstick for measuring success, and Desktop Metal has clear leadership demonstrated by revenue share in the binder jet space, and in the metal 3D printing space overall. Shifting the discussion to progress of our cost reduction efforts on slide 12, we're 100% focused on achieving adjusted EBITDA profitability in 2023. We outlined this goal in early 2022 as a top priority for our company, and six quarters later, you can see that we're executing this plan. Importantly, we've been driving cost reduction actions without sacrificing the superior solutions we provide to our customers in ensuring their success. We're on track to achieve this $100 million in annualized cost savings by the end of the year. In the quarter, we completed six facility closures on time, and we continue to drive cost synergies from business integrations. Actions reflected in the second $50 million tranche were weighted more towards fixed cost base and COGS, and we saw that in Q2, with significant improvement in gross margins, both sequentially and year-over-year. Also, third quarter 2023 will be the first full quarter realizing the majority of the second tranche in cost savings. So we expect continued improvements in the back half of the year and into 2024. Weak cost of goods sold absorption had been a drag on our model in the past, impacting our gross margins. We've made durable improvements to address our fixed cost base, and you should expect to see less dramatic variability in gross margins going forward. Finally, the result of these cost reduction actions supported another quarter of sequential improvement in adjusted EBITDA and operating cash flow. This was the best quarter for adjusted EBITDA since going public, and we expect this trend to continue into the back half of this year. We're not to our full goal yet, but adjusted EBITDA profitability and then eventually positive cash flow is in sight, and I'm very proud of the team's effort to uphold to our commitment. Now please turn to the next slide. I'd like to transition to discuss our pending merger with Stratasys in our excitement about the deal. Through this combination, we're establishing a powerhouse in additive manufacturing. This is not a deal we had to do, but we believe that partnering with Stratasys to create the first AM company to achieve comprehensive scale across the entire manufacturing lifecycle, from designing and prototyping to full-scale mass production, is a special opportunity for our combined companies. Together, We have incredible potential by combining Desktop Metal's complementary portfolio and track record of innovation and growth, which stratifies extensive market reach and operational excellence to serve the evolving needs of our customers. The combination will also help us drive long-term profitable growth, creating an over $1.1 billion revenue platform with sufficient scale and profitability to lead the AM industry. In over 50% of our combined revenue, We're from the fastest growing segment in additive manufacturing, fast production. Together, we will have a diversified and comprehensive portfolio with virtually no product overlap. We're bringing together complementary products and technologies that cover a wide range of industry verticals and use cases. Stratasys brings a leading position in polymer 3D printing and exceptional strength in aerospace, automotive, consumer products, and healthcare verticals. And Desktop Metal brings its leadership in mass production of metals, sand, ceramic, and restorative dental printing solutions. Our combined materials library is highly differentiated, and software capabilities complementary across print platforms. The combined R&D teams of over 800 scientists and engineers represent the strongest and smartest people in 3D printing. Combining our superior technical talent with more than 3,400 patents issued and pending will allow us to continue to drive innovation for our customers and help us win growth while also benefiting from time expansion. Combining with Stratasys will also allow us to leverage one of the largest global go-to-market networks in 3D printing. This transaction also creates the opportunity to realize approximately 50 million in annual run rate cost synergies and approximately 50 million in annual run rate revenue synergies across the business by 2025. The combined company will have a very strong financial profile and an expectation to deliver over $300 million of adjusted EBITDA by 2026 and an approximately 20% pro forma adjusted EBITDA margin. And this deal accelerates that combined company's financial flexibility through a well-capitalized balance sheet to drive future growth. We're in complete support of this merger, but it's not an acquisition as some have claimed. desktop metal shareholders are receiving shares representing approximately 41% of the combined company in representation by designating nearly half the board. We would not do this deal at less favorable times. And we believe our combination with Stratasys is a superior combination and will position us to help shape this additive manufacturing industry for years to come. However, we're a fiduciary to our shareholders if ultimately they decide this is not the best path for our company We have not lost any confidence in our long-term outlook. Until this deal closes, we're 100% focused on our outstanding standalone prospects that include the growth and innovation that Stratasys is so attracted to. We're making steady improvements in our cost structure, in our well-capitalized, with a plan to get to profitability on our existing cash. And most importantly, we have an unmatched portfolio of mass production technologies that is almost impossible to recreate, and we're as focused as ever on to leveraging that portfolio to make our customers successful. With that, let me turn the call over to our CFO, Jason Cole. Jason.