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spk02: Greetings and welcome to Desktop Metals third quarter 2023 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. 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 host, Mr. Michael Jordan, Vice President, Finance and Treasury. Please go ahead.
spk03: Good afternoon, and thank you for joining today's call. With me today are Rick Fullop, 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 sections 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 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, November 9, 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 factor sections 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 the presentation and 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 gap to non-gap measures. I'll now turn the call over to Rick.
spk04: Thank you, Michael. Welcome to our third quarter 2023 financial results call. I'd like to start my remarks today by acknowledging that this was a disappointing quarter for desktop metal and also for the entire additive manufacturing industry. While we're dissatisfied with our top-line revenue performance in the midst of this challenging period, I'm incredibly proud of the progress that Team DM has made in executing our $100 million of annualized cost reductions announced in June of 2022. We're actually ahead of plan with that effort, and I hope you will take note of the meaningful EBITDA progress that we've delivered as we work to ensure a strong foundation for the future. I want to be clear today. Desktop Metal continues to take aggressive steps to ensure we have sufficient capital to navigate this challenging period and there are strong positive currents running through our results today. As you know, our quarter was overshadowed to some extent by our pending merger with Stratasys, which was terminated in late September. Unfortunately, the timing of the announcement around the Stratasys vote created delays in closing several large deals with major customers. Most of these deals are now closed and will be part of Q4, which we expect to be a very strong quarter. While we believe in the merits of that specific combination, we remain highly confident in our position as a standalone business and the strong foundation we're building as we strategically cut costs and continue to intensify our focus on operational excellence. For Q3 2023, we report a total revenue of $42.8 million, which compares to $47.1 million in the prior year period. Softer revenue stems from a de-emphasis of certain less profitable non-core business lines and lower-than-expected system sales as higher interest rates and tighter capital environment delays some customer purchases of equipment. combined with several deals coming out of the third quarter and moving into the fourth quarter of the year. Our adjusted EBITDA was a loss of 20.5 million, an improvement of 27% year-over-year compared to a loss of 28.2 million in the third quarter of 2022, demonstrating the benefits of our strategic efforts despite a tighter demand environment for system sales. This outcome was a direct result of several factors, including production-side consolidations, improved gross margins as a result of federal mix of services, and consumables during the period, along with a reduction in operating expenses year over year. While the cuts we've made have been dramatic, we've also done our best to strategically balance them to protect innovation and growth, an effort that requires constant vigilance. Since we became public, we've greatly expanded our portfolio and diversification. We've subsequently worked to integrate our business units, enhance efficiency, and remove cost across the company. Our path forward is clear. to focus on high-growth product categories in our portfolio to drive incremental top line while continuing to pursue efficiency and profitability. To that end, there are several aspects of our business that will enable success on these major important strategic objectives, including, first, as additive manufacturing continues to transition from prototyping to mass production applications, it's projected to grow to a $100 billion industry by the end of the decade. Second, Desktop metal is uniquely positioned to benefit from this expanding market as it holds the leading proprietary technology focused on mass production solutions. We hold the leading market share position in binder jetting, which customers like BMW are using for mass production of critical components, and a leading position in healthcare applications with our DLP technology across a wide range of materials and end users. Broadly speaking, our expansive and growing library of materials across the categories of metals, polymers, ceramics, and biocompatible materials are enabling desktop metal customers to create value through solutions which address their highest opportunity challenges. And we'll walk through some of those examples today. Third, we're poised to benefit and are already beginning to see the results of an expanded global installed base that is using added manufacturing equipment for real production. Utilization of our products at our customers is increasing as evidenced by the growth of recurring revenue streams despite a challenging market. Our recurring revenue has grown by 34%, from $37 million in the first three quarters of 2022 to $49 million in the first three quarters of 2023. And lastly, we're well underway to right-sizing our cost structure and improving our operational efficiency. We're ahead of plan on executing this $100 million annualized cost reductions announced in 2022, and we continue to identify additional opportunities to refine our portfolio and operations to further enhance our operating leverage. driving towards profitability on an adjusted EBITDA basis in the fourth quarter of 2023. Our goal is to be cash flow positive in 2024 on the cash that we have. We have lowered our operating expenses for six consecutive quarters, a key driver on our path to adjusted EBITDA profitability. Taken together, in the short term, we're laser focused on driving to profitability on the cash that we have, which will place desktop metal on a strong footing to capitalize on this secular opportunity as the market returns to growth. Turning now to our recent business highlights. The third quarter saw continued expansion of major super fleet customers, including Honeywell and Baker Hughes, and major companies like Northrop that have now grown into the global leaders in 3D printed optical components using our machines. Companies like Hamptown now operate one of the largest superfleets of binder jet systems for printed castings in North America, as well as pattern metallurgy superfleet customers like DSB and Freeform, and major automotive customers like BMW, which are now the largest superfleet operator of exterior systems. By the end of the year, they'll have six operational exterior binder jet systems that can continuously print 12 build boxes with a size of 2.2 meters each to mass-produce parts for their six-cylinder engines. We have some great videos from DSP and BBMW that highlight these growing deployments, and I encourage you to watch them. Our sales pipeline in BinderJet continues to grow with a strong pace, which gives us confidence in our growth opportunity over the next year. On the healthcare front, we received European clearance for the market-leading Flexera Smile Ultra Plus materials, which greatly expand our market opportunity for this product line, and we've had a successful launch of our new 3D bioplutter printable technology for biofabrication of grafts and other medical devices. For now, the 3D printing industry isn't doing one of the toughest periods I've seen, but I'm confident we'll see a return to growth because our sales funnel continues to build, so this lengthening of the cycle should have a counter-cyclical effect as customers plan for Q4 and the rest of the upcoming year. I believe desktop metal stands out in a positive way from some of our peers during this uncertain time. For starters, we were extremely proactive in cutting costs when we saw challenges on the horizon. We're also led by a team of seasoned 3D printing leaders brought together from several acquired companies that bring stability and experience to our leadership team. Finally, we're a team of true additive manufacturing believers and we have dedication in driving this industry forward. In conclusion, we finally have clear line of sight to profitability and Desktop Metal is confident in a promising future with clear focus on high growth product categories and operational efficiency. We're well prepared to benefit as the industry returns to growth showcased by a proprietary technology, a diverse materials library, high-speed production solutions, and a growing global installed base. Despite softer revenue in the third quarter, our recurring revenue streams continue to perform very well, contributing to positive shift in adjusted EBITDA, a path towards reaching breakeven in the fourth quarter of 2023. And this sets Desktop Metal on a solid foundation to capitalize on the long-term trend of ad-scale 3D printing in manufacturing. And with that, I'll turn it over to our CFO, Jason Cole. Jason?
spk01: Thanks, Rick. I'll begin on slide 15 with highlights of our financial performance for the third quarter of 2023. A reminder that 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. Consolidated revenue for the third quarter of 2023 was $42.8 million, down 9.2% from $47.1 million in the third quarter of 2022. The decline in year-over-year revenue was led by weaker product sales, partially linked to ongoing efforts to de-emphasize product lines with lower quality growth prospects, in addition to lengthening sales cycles. As we've mentioned previously, we have narrowed our product sales focus as we've streamlined costs, prioritizing growth potential and or stronger margin opportunities. Higher margin recurring revenue streams increased year over year, which was offset by decreases in other parts of the business. Desktop Metals' product and services have been effectively and consistently validated by our customers as they create solutions to real business challenges and generate meaningful and rapid return on investment. We have historically closed a significant amount of sales transactions at the end of each quarter, and in 3Q, we found several deals slip into October. These deals were included in and made up a substantial portion of our third quarter internal projections, which we now expect to be completed in the fourth quarter. While the third quarter was below our expectations, we remain confident that we will finish the year strong, even as sales cycles have lengthened. Non-GAAP gross margins improved by more than 190 basis points to 21.9% for the third quarter of 2023. The improvement was driven by sustained progress in our cost reduction initiatives across multiple quarters, and these were partially offset by a one-time settlement with a supplier. On slide 16, you can see how our cost savings, which began in June of 2022, have improved our margin performance over certain revenue levels. We have made meaningful reductions in our fixed cost base as a result of which we are able to achieve higher gross margins at current and future revenue levels. We are now focused on our higher growth and higher margin parts of the business. Seasonal revenue strength, along with meaningful cost savings, gives us confidence in our gross margin potential moving forward. We remain confident that we will be able to achieve non-GAAP gross margins above 30% in 4Q23 and in 2024, even on modest revenue growth. Moving on to the next slide, in the third quarter of 2023, our non-GAAP operating expenses were $33.2 million, down 20.1% as compared to $41.5 million in the third quarter of 2022. Operating expenses have been meaningfully reduced across all categories, including stock-based compensation. Non-GAAP operating expenses were down 4.2% sequentially compared to $34.6 million in the previous quarter. Since 1Q22, we have lowered our quarterly non-GAAP OPEX by $18.8 million quarterly or approximately 75 million annualized. This represents a 36% reduction in non-GAAP OpEx over this period. We are pleased with our progress on this front, and importantly, we are not done. While we have areas where incremental investment will help our business grow, we are executing these investment pivots selectively and expect to see continued operating leverage improvement through the fourth quarter of this year and into 2024. We believe that the trend of expanding operating leverage will continue and we will benefit from our cost cutting efforts, disciplined spending and top line growth. This in turn is driving us to the path of profitability and generating positive cash flows. Our cost cutting efforts are insulating our business as we resize spend levels. We expect to continue the trend of lowering our expense structure throughout the remainder of the year and our progress to date gives us confidence in our ability to execute reductions should the environment of weakened demand become more protracted. Looking at the next slide, adjusted EBITDA for the third quarter of 2023 was negative 20.5 million, an improvement of 27% compared to a $28.2 million loss from third quarter of 2022. We are on track to achieve our base case of being adjusted EBITDA profitable in the fourth quarter of this year. Despite top line weakness, progress to date on cost reductions, makes us confident that our best performance is ahead of us in terms of adjusted EBITDA. Our funding is robust with $108.2 million in cash, cash equivalents, and short-term investments at the end of third quarter 2023, compared to $127.6 million to close 2Q 2023. Our net cash reduction of approximately $19.4 million in Q3 was the lowest since going public, excluding 2Q 2022 when we last raised cash. We are improving on and optimizing cash spend progressively through recent quarters and expect to continue to do so. We have trimmed our operating cash flow consumption to 21.4 million in third quarter of 2023, down 46% compared to 39.7 million consumed from operations in the third quarter of 2022. As a point of reference, this quarter's cash consumption from operations was down 62% when compared to 56.3 million consumed in the first quarter of 2022, the last full quarter of results before commencing our cost reductions. Lastly, we finished the quarter with $107.2 million in inventory after investing $15.5 million during the quarter, and we are well positioned to execute an expected fourth quarter demand. We are committed to optimizing inventory management, monetizing inventory, and improving cash flow and working capital in 2024. Finally, moving to our financial outlook on slide 19. Against the backdrop of macro and industry-wide headwinds from the beginning of this year, we adjusted our guidance ranges of revenue and adjusted EBITDA. We anticipate generating revenue in the range of 50 to 70 million for the fourth quarter of 2023, representing revenue of 187 million to 207 million for the full year of 2023. This guidance is based on our expectation of certain transactions closing during the fourth quarter and the overall weaker macroeconomic backdrop. We expect the momentum in the improvement of adjusted EBITDA to continue into the fourth quarter of 2023 and beyond. For fourth quarter 2023, we expect adjusted EBITDA to be negative 10 million to positive 10 million, implying adjusted EBITDA of negative 70 million to negative 50 million for the full year of 2023. With that, we will take some questions. Operator?
spk02: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Greg Palm with Craig Hallam Capital Group. Please proceed with your question.
spk00: Hey, hi, good morning, everyone. Thanks for taking the questions here. I wanted to start with a little bit on the quarter in the guide. You talked about how you saw some orders slip into October. I just want to confirm that, you know, did those get booked as revenue orders? already and just in terms of, you know, overall visibility rates at this point, the Q4 guidance range, you know, on our revenue line, you know, 20 million, pretty wide range. So where is visibility right now? You know, what enables you to get to sort of the top end of the range? You know, what would be the bottom end and sort of what's the base case right in the middle? If we could get a little bit more detail on that.
spk01: Yeah, thanks, Greg. This is Jason. I think you're right. It is a wide range. I think, you know, year to date, the business has not performed the way we expected it to. We opened the year understanding it was a weak backdrop. We had signals in our opportunity pipeline that said that could turn in the middle of the year, and that has not happened. The signaling for the wide range is we put some degree of conservatism around that. We desperately do not want to perform outside of the guidance range here for fourth quarter, so we put it wide to make sure that we can hit it. I'd say the bottom end of that range is very conservative. I think when we talk base case, we're talking midpoint. And we believe we have the demand to deliver in the top half of that range, but we have some conservatism in there, and that's the essence of the $20 million range, the top to bottom.
spk00: Understood.
spk04: Yeah, go ahead. I think you can see that we're kind of performing with our peers in the market. A lot of them have had surprises on the top line this year, other public companies that are at some meaningful scale. Yeah. I think it's hard to tell if you call this a temporary blip in the additive space as people get accustomed to maybe higher interest rates in the current environment. But we do see a lot of opportunity, and our funnel gets larger, so as that sales cycle brings back to a normal pace, window, then you should see acceleration.
spk00: Yep. Understood. And, you know, is there a maybe, you know, kind of a common denominator in terms of the sort of the weakness that you've seen throughout the year, whether it's by, you know, end market type of customer, whether it's those that are, you know, financing transaction versus those that are not. I'm just trying to get a sense of kind of what you're maybe looking out there from a macro perspective that might help, you know, at least stabilize things at some point here in the near term?
spk04: I mean, I think it's hard to put it into a single, uh, single factor. A lot of stuff has gone, uh, and been a surprise this year. Uh, and there's been a lot of drama in our industry. And I think you have, uh, of all the public companies, uh, I think three of them, uh, You know, I've had – basically don't have a CFO right now. Fortunately, we have a great one. But you see the – you know, there's been a slowdown in our industry that I think is temporary. This is a growth industry, and I think we do see the demand and the customer interest. But there's periods of times when you've had this sort of – paused and we also saw quite a bit of concern from many customers that are making million dollar decisions that were just wondering what's going to happen after we terminated our deal with Stratasys and they were just wondering and that delayed some deals that happened towards the last week of Q3 so that delayed a number of deals that are now most of them are now closed so hopefully we move on and now we have a clear window to execute over the next 12 months and get this business back on a growth path and make customers successful okay and you know maybe just last question you've you've talked about some
spk00: Big projects in a couple of verticals, automotive and consumer electronics specifically. Any update on those? Do those remain on track?
spk04: They do. We continue to make progress across the board in a number of these areas. Like all major projects, things always take a little bit longer, but we continue to make progress in this area. I think those are going to be major markets for our technology in the long run.
spk01: Let me add one thing to Rick's comments because I think it's important, and we mentioned it in the prepared remarks as well. The consumables and services, recurring revenue streams, performing the way they are, I think is a bullish undertone here. I think, you know, while we have had some purchase decisions on products delayed, we are seeing the utilization of our systems that are in place rising, and I think that is a trend. It's kind of the razor, razor blade thing we've talked about in past calls, and so we're encouraged by that.
spk00: Yeah, thanks for calling that out again. Okay, I will leave it there. Thanks.
spk04: Awesome. Wonderful. Well, we keep making great progress on titanium and many other areas. Great to have a P50 order this quarter with our friend at Freeform and many other things to come in this area. So thanks again for listening, and thanks to all of our employers that work very hard to drive additive into mass production. and our investors for believing in our vision and look forward to the next quarter.
spk02: Thank you. That concludes our question and answer session. Mr. Philip, did you have any further comments?
spk04: No, we're good.
spk02: Thank you. That concludes our conference call today. Thank you for your participation. You may now disconnect your lines.
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