Desktop Metal, Inc. Class A

Q1 2024 Earnings Conference Call

5/9/2024

spk01: Greetings and welcome to Desktop Metals' fourth quarter and full year 2023 earnings conference call. At this time, all participants are in 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 from 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 morning, and thank you for joining today's call. With me today are Rick 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 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 a 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, March 15, 2024, 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 section on Form 10-K, in addition to the company's other filings with the SEC. We've seen no obligation to update or revise the forward-looking statements. Additionally, during the 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 gap to non-gap measures. I'll now turn the call over to Rick.
spk05: Thank you, Michael, and welcome to our fourth quarter 2023 conference call. We're in the final stages of our restructuring to get profitable in the cash we have. As part of this effort, our process is to aggressively prioritize our lines of business based on time to cash flow, given the headwinds our industry faced when rates went up. Additive manufacturing is a growth industry, and it's grown double digits annually over the past two decades to about $18 billion a year, apart from very short periods in 2008 and 2020. From 2015, when we started desktop metal, and through 2022, our core technology binder jet grew at a compounded annual growth rate of about 40%. While we saw growth slow in 2022 as rates went up, We expected growth to come back in 23, but learned together with our peers the effect of higher cost of capital and project delays on new technology. As a result, our industry was flat in the past year, but we expected to go back to double-digit growth over time as CFOs get accustomed to this new environment. As such, we have planned conservatively this year, but we do see signs of growing demand in defense, aerospace, healthcare, and many other segments, which I will outline in detail on this call. The use of our machines and recurring revenue is at a record all-time high. This proves customers who have adopted the technology are getting great value from it. Recurring revenue is defined as services revenue along with consumables and subscription revenues. We have record recurring revenue of $65 million in 2023, and as a percentage of total revenue, it grew by 29% year-over-year. to represent a record 34% of revenue. That's up from only 24% of revenue in 2022. In terms of getting profitable, we believe we're ahead of our peers. We started our journey to get profitable before others, and we have cut OPEX costs by about 40% since we began our effort, with only modest revenue losses. While we didn't make our internal target of adjusted EBITDA positive by the end of last year, as some customer projects rolled into 2024, we're now very, very close to that goal at this new lower cost structure. And we see many opportunities in 2024 that will help us get there. For example, some areas that are outperforming the industry include our printed castings business, which grew 27% in 2023 to a record $73 million. This technology is rapidly being adopted in the defense industry and by aerospace companies like SpaceX, Airbus, and Boeing, or automotive leaders like Tesla and Toyota. We're the leading player in this segment with over 80% share in systems and with huge growth potential this decade as we expanded to key global markets where we haven't had a strong go-to-market presence in the past, such as Latin America. Less than 5% of foundries have adopted this technology, but we see a day where every single one of them will be using it. We estimate this will be a $20 billion addressable opportunity that will one day see over a billion dollars a year of systems sold as the process matures and reaches full penetration by the more than 25,000 foundries globally. I will detail customer adoption examples later in the presentation. Another fantastic growth area is our ScanApp.org digital dentistry product, which we are doing in partnership with Align Technologies. We have already signed over $32 million in total contract value in our first year, and growth in this product compounded at over 25% quarter over quarter. We expect this new business to be a meaningful part of our company by the end of the year, as this is an attractive way for dentists and DSOs to digitize their practices and adopt printed, restorative parts. Restorative dentistry is poised to go 100% digital over the coming decade, and this represents a $30 billion a year global opportunity. I will detail these and other promising examples of our growth drivers later in our call. We are 100% focused on fixing the portions of our business where we've had challenges. One of them is a direct metal business for systems under half a million dollars. Those used to be traditionally sold through channel versus direct sales. And in this case, we used to use the Stratasys channel, which was a legacy of their original investment in desktop metal in 2015. As we lost access to the Stratasys channel partners throughout 2022 and 2023, Our sales in the sub half a million dollar segment were impacted. And since last fall, we have been adding go-to-market resources to remedy that. The access to a go-to-market channel was one of the attractive features of that merger last year, and we're now taking our medicine and building our own go-to-market in that segment. We have continued to work diligently to bring our cost structure in line with our current revenue run rate and near-term opportunities ahead of us, which was evident in the fourth quarter. For the full year, we reported revenue of 190 million compared to 209 million in the prior year. This result was in line with the expectations we shared in the third quarter, and it largely reflects the impact of the macro environment on CapEx budgets that weighed on our volume throughout the year. Lower system sales were partially offset by a 29% increase in recurring revenues. We have made excellent progress reducing losses, and Jason will detail in a few minutes we expect our adjusted EBITDA run rate to be positive in the second half of the year. Our full year adjusted EBITDA loss decreased from negative 118 million in 2022 to negative 69 million in 2023. From Q1 2022, the last full quarter since commencing our cost reduction efforts, adjusted EBITDA losses have decreased 78%, closing 2023 at 9 million in the fourth quarter. This fourth quarter 2023 adjusted EBITDA loss is also down 56% compared to fourth quarter 2022. We continue to be on a relentless march to adjust our cost structure and reach profitability, and we are making excellent progress in this effort. We're focusing on execution and are looking forward to letting our results speak for themselves this year. While none of our peers are truly profitable, We have outpaced our industry in our execution to get profitable and are now very, very close. We're looking forward to crossing the adjusted EBITDA profitability threshold in 2024 and getting back to growth as we focus on the parts of our business where we have the best-in-class solutions that solve the most important customer problems. We believe after we complete the cost actions outlined to date, we'll be adjusted EBITDA positive in the second half of 2024, even unmuted growth. As we prioritize our offerings for time to cash flow today, we have also announced our intention to de-emphasize specific subsets of our business, principally focused on some of our photopolymer technologies. To be clear, we continue to believe in the strength of these technologies and their long-term potential. While difficult, this decision helps us trim cash-consuming businesses and focus on our more profitable product lines, and we believe this will further accelerate our path to adjusted EBITDA profitability. We continue to have the industry-leading portfolio for mass production with nearly 100% of our products focused on end-use parts and any small amount of growth at this cost structure will yield very good results in the bottom line. While we're prudently managing our business for the environment that we're in, we believe there remains a substantial near and long-term growth opportunity available to us as the added manufacturing 2.0 secular growth story resumes. We're positioned to emerge as the leader in the space with the broadest set of products and capabilities for mass production in our industry. We hold the leading market share position in binder jetting and the leading position in healthcare applications with our DLP technology across a very wide array of materials and end uses and have an enviable IP position with close to a thousand patents. We have the best materials in healthcare restorative dental parts. This past quarter, we officially launched ScanApp.org after a one-year trial with our partner, Align Technologies. I encourage you to visit the site. We also recently launched our Flexera-based Ultra Plus, which has much better properties than competitors, making Flexera the leading solution for restorative dental parts. Since its inception, we have sold more than 20 metric tons of Flexera, which is enough to make more than a million dentures, crowns, and other dental products. That makes Flexera the leading solution for permanent digital restorations in a total addressable market estimated to be several billion dollars. Flexera is also a very profitable business for DM, with gross margins approaching 70%, and it also shows no signs of slowing down. We continue to see record adoption of Flexera. In terms of application adoption in BinderJet, we have made excellent progress. We're changing the way cars, planes, and space parts are made. We've grown into the global leader in silicon carbide for added manufacturing. Carbides and other advanced ceramics are materials with amazing properties and are used in electric vehicles, cutting tools, optics, and space structures. Desktop metal now has parts in space with many of the major defense contractors and several large satellite constellations are already using or planning to use our technology. It was a huge milestone for desktop metal to get both silicon carbide and metal production parts flying in space in 2023. On the metal front, we now have several printed castings in the SpaceX Raptor engine with our technology. In 2023, we also saw our parts get to the moon on the intuitive lander. That's an amazing accomplishment I never would have believed was possible when we started the company. We also saw and continue to see great adoption for our technology in printed nuclear materials. We're the only company in the world that makes printers for this application. and many next-generation propulsion and energy systems are now using our technology in that market. We also saw giants like Airbus and Boeing use our systems for many applications, including large and bar tooling for wings and winglets in their most advanced airliners like the 787. We have seen adoption across the board with the Defense Logistics Agency to print components for marine and underwater applications. The fuel systems for the F-35 are now made with our technology by our customer Eaton. and we now have parts flying in multiple production jet engines. For example, the Rolls-Royce Trent, also with our customer Eaton, and on Pratt & Whitney jet engines with our customer Magellan Aerospace. Tesla has also had great success with their gigacasting process, where our binder jetting of molds is now extensively used in the front end of the process to cost-effectively enable this new vehicle design and engineering approach. Other customers like Toyota and other OEMs are going all in and are racing to adopt this new way of making cars, which reduces the number of parts in a vehicle and means huge growth opportunities for binder jet. These are huge accomplishments for 2023 that will yield significant growth opportunities in the near term. The U S department of defense has been a great partner in helping us advance the state of the art of this technology. And we have a large backlog of programs in line that should also yield tens of millions in additional growth in 2024 and 2025. Almost all Sikorsky helicopters now have at least a dozen parts made with our technology. And we have major programs like these at the moment with companies like Northrop Grumman, Lockheed Martin, L3, Coherent, and many others. Magnesium parts for aerospace is also a highlight of our capabilities as this lightweight alloy is not processable with other forms of printing. And we have qualified this process for aerospace and now have parts with these lightweight materials flying in various defense and commercial aircraft. Our figure sheet metal forming products have had great early adoption and we have sold out our initial builds. We project this will also be a great area for growth in the coming year. In terms of sizing up, how large can the printed casting market get? This is an area where we grew 27% in the past year. So how big can this be? We have 25,000 sound foundries globally. Today, the penetration is well under 5% for this technology. And we believe that over the next 10 to 15 years, every single one of these foundries will be using printed castings as this becomes a standard process to make these types of metal parts. That translates to more than a $20 billion capex cycle that gets installed over a 10 to 15-year period. If you believe in S-curves and we're at a 3% mark, We're looking at a market that can eventually grow to more than a billion a year as this technology gets broadly deployed, and today we're the 80% market share player in this segment. We have a larger pipeline of projects today than we've ever had. I do believe that it's only a matter of time till double-digit growth resumes in our sector, and we're poised to benefit dramatically as it does. Most analysts project a 5x increase in the size of our market by the end of the decade. pushing adoption from 18 billion a year to over 100 billion a year by 2031. And this doesn't even include the impact of markets of the future, where artificial intelligence is driving accelerated traction in new segments like humanoid robots. Let me pause here for a second and give you an example of how this can be a massive opportunity for Desktop Metal. We've been big believers in artificial intelligence since we started our company. Before most other companies, in 2018, we launched one of the world's first generative design tools in the market. This is an artificial intelligence-powered product called LiveParts. Over time, we repositioned it for simulation of powder metallurgy through our industry-leading product, LiveCenter. That allowed us to build the world's largest neural network library of materials to simulate powder metallurgy consolidation. Today, it's used by all of our customers in major companies like LAM Research, to make their products. And it's an area that sets our company apart and ahead of competitors. If you believe artificial intelligence is real and the future of artificial intelligence and printing will equal humanoid robots, then we're very well positioned for this future. We're also a leader here with our printed hydraulic technology from Hydro and our low cost lightweight metal printing solutions that can be used to make aluminum and magnesium limbs. We have several customers developing solutions for these markets, and while today this is a very tiny portion of our revenue, we believe this application has tremendous potential. This market will create huge opportunities for added manufacturing and for actuators, which today represent the bulk of the cost in these robots. The biggest challenge to this market will be cost and power consumption. Most of the cost in a humanoid robot is in the neodymium-powered actuators and the lightweight, complex 3D limbs or the hydraulic actuators. As a leader in low-cost printed castings materials like magnesium and printed hydraulics, we have the technology to be one of the leading providers of picks and shovels as this coming revolution materializes. In coordination with our MIT research partners, we recently began to adapt our artificial intelligence-driven generative design tool, LiveParts, so that it can generate shapes for smart limbs. The weight savings and the energy capture opportunities from structural series elastic actuation allows you to reduce the power consumption in these robots. Our presentation shows a preview of this exciting work, and we look forward to sharing more about this as we get these tools and parts in the hands of more customers and they start to showcase their work. This is an application that one day could be bigger than everything we do today combined, and it could be a killer app for our printed casting technology. Finally, we've just begun to see the benefits of an expanded global installed base that is using added manufacturing equipment for real production. Utilization of our products at our customer sites are increasing as evidenced by growth of recurring revenue streams. Our recurring revenue grew in 2023 by 29% from 50 million in 2022 to a record 65 million in 2023. Further, our services business continues to supplement our growth, which increased 15% year over year, as I noted. Importantly, this demonstrates that while some projects may be delayed by higher cost of capital, our customers continue to expand their usage and engagement in our solutions during the same time period, demonstrating clear product market fit as recurring revenue grew from 24% of revenue in 2022 to a record 34% of revenue. In closing, while 2023 proved to be a challenging year amidst higher cost of capital headwinds, we remain confident in the long-term growth potential of additive manufacturing and desktop metals' leading position in mass production. Our focus for 2024 is reaching profitability through the realization of our cost-saving initiatives. In the long run, additive manufacturing is the future. And Desktop Metal is poised to emerge from this cycle as a clear leader. I want to thank our employees, customers, partners, and shareholders for their continued support and sacrifices. We look forward to updating you on our progress next quarter. With that, I will turn the call over to our CFO, Jason Call. Jason?
spk07: Thanks, Rick. Beginning on slide 17, you will see highlights of our financial performance for the fourth quarter and full year 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. Before diving into our results, I would like to spend a minute discussing the strategic actions we have taken to improve our costs. While our industry has struggled to reach scale, we remain committed to driving desktop metal to profitability on the cash we have. As our top line softened, you'll recall we announced 100 million in annualized cost reductions in 1Q23. followed by an additional $50 million of annualized reductions in January of 24 for a total of $150 million in cumulative annualized reductions. These reductions have driven efficiencies across cost of sales and OPEX, which have steadily improved our operating leverage across 23 and will continue to do so into 2024. Today, we are also announcing additional cost reduction measures, which include our intention to de-emphasize select business lines, principally within our photopolymer businesses, where a lack of growth and scale have been a headwind to profitability. These actions are above and beyond the previously announced 150 million. These are technologies we believe hold tremendous potential for future growth and profitability. Unfortunately, we also accept at their current scale, they are lost leaders within our portfolio, and we are no longer positioned to shepherd them to profitability. We are committed to exit these businesses and are exploring alternatives on how best to do so, which may include divestiture. Overall, I am pleased with the progress we are seeing since 2023, and the following slides will demonstrate the progress we have continued to make. Consolidated revenue for the fourth quarter of 2023 was $52.3 million, compared with $60.6 million in the fourth quarter of 2022. Sequentially, revenue increased 22.4% the prior quarter. For the full year of 2023, consolidated revenue of $189.7 million compared to $209 million in 2022. Product revenue decreased primarily due to a reduction in units shipped during 2023, driven by the macroeconomic conditions impacting the additive manufacturing industry. This was partially offset by strength in our recurring revenues of 29% year on year. Non-GAAP gross margins were 34% for the fourth quarter of 2020. Gross margins improved 970 basis points versus the prior year period, driven by improved absorption of fixed costs. Consequently, gross margins improved from 21.9% in the third quarter. On the right side of the slide, full year 2023 non-GAAP gross margins were 27% a 450 basis point improvement over the prior year period of 22.5%, driven by the actions we have taken to improve our cost structure. On the next slide, non-GAAP operating expenses were $31.6 million for the fourth quarter of 2023. Through actions under our initial 2022 cost optimization initiative, we reduced non-GAAP operating expenses sequentially by $1.6 million and year over year by $6.8 million. Fourth quarter 2023 non-GAAP operating expenses closed at $31.6 million, down 17% year-over-year compared to $37.9 million fourth quarter of 2020. Adjusted EBITDA for the fourth quarter of 2023 was negative $9.2 million, improving year-over-year by $11.9 million compared to the fourth quarter of Full year 2023 adjusted EBITDA was negative 69.1 million compared to prior year period of 118.4 million. Adjusted EBITDA is trending in the right direction as the 100 million in cost reduction actions completed in 2023 continue to positively impact adjusted EBITDA. The 50 million of cost reductions announced in January of this year combined with the cost reduction measures announced today will continue this trend. With respect to the 50 million cost out program announced in January, we expect to begin realizing the majority of these savings in the first quarter with the balance completed through the year end. These measures included a further 20% reduction in our workforce, three additional site consolidations, continued efforts to streamline centralized costs, and the sunsetting of several slow-moving product offerings. We believe we are now positioned to be at or near breakeven in 2024, assuming no material growth. As a further proof point of cost reduction progress, this quarter's cash consumption from operations was down 62% when compared to $56.3 million consumed in the first quarter of 2022. As a reminder, 1Q22 was the last full quarter of results before commencing our cost reductions with continued improvement throughout. Lastly, We finished the year with $82.6 million in inventory. We are positioned to execute an expected first half demand and remain committed to optimizing inventory management, monetizing the inventory we have, and improving our cash flow and working capital in 2024. Moving to our financial outlook on slide 21. We are continuing to observe some persistent macro and industry-wide headwinds, which began to emerge in mid-2022 and were well underway by early 2021. We believe we are well positioned from a cash and cost perspective while being ready to capitalize on the significant growth opportunities that remain in front of us once conditions become more favorable. We anticipate generating revenue in the range of $175 million, $215 million in 2024. We expect the momentum in the improvement of adjusted EBITDA to continue throughout 2024. And as such, we expect full year 2024 adjusted EBITDA to be negative 30 million to negative 10 million. We do expect in the second half of 2024 that we will begin recognizing positive adjusted EBITDA as we realize the nearly full benefit of the 150 million cost savings programs. Additionally, the guidance reflected today does not include any businesses which may roll off as part of our strategic review process. With that, we'll take some questions. Operator?
spk01: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and the 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 who are using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk04: Thank you.
spk01: Thank you, and our first question will be from the line of Greg Palm with Craig Callum. Please receive your questions.
spk00: Yeah, good morning. Thanks for taking the questions. I guess starting with the guidance range for fiscal 24, it's a fairly wide range, so maybe you can give us some, some color or maybe assumptions on, you know, top end versus, you know, low end and some, some of the assumptions behind that and certainly what, uh, what you need to accomplish to get to the midpoint.
spk07: Yeah. Thanks, Greg. Um, you know, I think that range is, um, is, uh, it's, it's, you know, plus or minus 20 million, about 10%. So, you know, I think it's narrower than we did last year. Um, but I appreciate it. It may still feel wide to you. Um, You know, we think our seasonality curve is basically 1 and 3Q are typically softer sequentially and with strength in 2 and 4Q. We do believe this is a year where we see some opportunities to return to year-on-year growth. Across all of 23, that was not the case. So the midpoint at 195, I think we feel like it's just modestly above. I think our expectation would be that we think we can perform in the top half of that. I think we generally guide with that expectation. But there's also we've been surprised before. So I think we're navigating sort of some of the weakness we saw is continuing at the beginning of the year, but we think we can turn the corner and we have some good opportunities in front of us. So I guess we'll look forward to seeing how we perform in one queue and proving it and not getting ahead of ourselves before we can prove it.
spk00: And just any color on kind of the cadence of the year? I mean, Q1 is almost done at this point. I guess a couple more weeks left in the quarter. But cadence of revenue, any expectations for the year?
spk07: Yeah, I mean, again, I think the seasonality curves will kind of follow the same structure. While it is close to the end of 1Q, we have a late-breaking kind of product revenue cycle. So we're still kind of working on a variety of things down the stretch, which gives us some degree of variability. You know, we're not here to guide 1Q at this moment, but we're looking forward to the middle of May, giving you that update. I guess the only other thing I didn't touch on was the profitability. I think the adjusted EBITDA range that we guided basically reflects it's going to improve across the year as the $150 million continue to take hold. So it's probably more front-end loaded, but we feel like we can perform well in that range as well.
spk00: Got it. And then just last one, I know, Rick, you talked a lot about various kind of end markets and technologies and, you know, ones you're seeing some success. Maybe I missed it, but I didn't hear a lot on consumer electronics, which was supposed to be a big kind of area of focus in growth in 24. So can you maybe just give us a little bit of color on what you're seeing in that end market specifically? Sure.
spk05: Look, absolutely. It is still a huge opportunity for added manufacturing. We still work on it, but we go at the pace of our customers. So we continue to work and strive in those segments. We have some areas of the business that performed extremely well. As you saw in our slides, we today have part of the business that outgrew the pace of growth of our industry where we're dominant, like in our printed casting segment where we did 27% growth. in the past year. And we also have been surprised by the strength of our business in the defense and aerospace segments. If you asked me at the beginning of last year, did we expect to see desktop metal parts in the moon? I didn't. And if you asked me at the beginning, I mean, I know we have programs and things, but, you know, the things actually did get there. And we have Department of Defense building important constellations of satellites that extensively use our technology. Those are now flying in space. We had, you know, Starship with SpaceX yesterday. There's close to 200 printed castings that are used in that system, the platform. And so we're very proud of those efforts. And there's many areas of the business that are growing really nicely. There's some other areas that are challenging, and there's some customers They're going to be massive, but they take longer to get their products out. You know, I highlighted in our presentation two slides on an upcoming market that I think is pretty interesting that I also didn't expect at the beginning of the year where we'd have a real possibility to build a massive business, and that's in artificial intelligence-driven humanoid robots. I've been surprised by the investments from multiple major companies, some of them which are our customers who, are planning to launch products that some analysts forecast to be very, very large markets. And so if those things happen, we could be a major purveyor of the smart limbs that go in those systems, which today project about a third of the cost structure of that. And some analysts have talked about those markets eventually becoming as large as the cell phone industry or electric vehicles. I think it's too early to tell whether that's going to happen that way. I think we can all agree that added manufacturing is going to have a growing and more important position globally as the industry matures. We're a part of it. We're on platforms like F-35. We're on pretty much all of the major helicopter systems from the U.S. and other countries. Major companies like Lockheed and Sikorsky are large customers. There's a lot of investment in So we were surprised by the strength in that part of the business, and it's offset some sort of activities that some of our large consumer electronic customers have had in deploying this technology. But activities continue, and we will update as they make progress.
spk00: But just to be clear on consumer electronics specifically, so are you saying that's not going to be an area of growth in 2024? Maybe that's pushing out to other areas?
spk05: I would say that when we entered 2023, I didn't expect to have parts in the moon or in large meter-class structures in major constellations or that there would have been huge success on… things like SpaceX's most recent rocket. So to be very honest with you, or also that the adoption on this gigacasting process, which is now scaling from Tesla, which invented the technology, and where our binder jet is a key portion of the front end of that process, it's now scaling with all the major OEMs. What I'm saying is, at the beginning of last year, I... I thought maybe some of these other segments would become our largest portion of business very quickly, but we've had green shoots in some segments, and other areas have taken longer to happen. So I'm not saying they're not going to happen, but it's very hard for me to predict. I know there's a lot of activity from our customers. They are in that particular industry. They are more secretive about their plans. It'll go at its own pace. You will eventually see many products. If you see the evolution of those systems where, let's say, look at this new augmented reality hardware, it's extremely heavy. Additive manufacturing is a key way to make those things lightweight. It's a key way to enable thinner, more performant products in the future. So you will see it. We continue to have activities across the board. with multiple companies in that space, but it hasn't become the largest part of our revenue yet. And I'm hoping to report on it once you can go to a store and buy a well-known product.
spk00: Yep, understood. Okay, I will leave it there.
spk01: Thanks. Our next question is from the line of Troy Jensen with Canterford Sherald. Please receive your question.
spk06: Hey, gentlemen. Good morning. Thanks for taking my questions here. Maybe to start with you, Rick, just when I hear photopolymers, I guess I think EnvisionTech. I think of the 8K and obviously the Einstein product line seems to be a bulk of the business. But can you just speak more specifically about the products that you guys are shedding here in photopolymers?
spk05: Yes. So we're not saying we're shedding a product. So just to be very clear, and I sent a note this morning to our employees, I encourage you to read it, but we are looking at options that would allow us to properly get the distribution that those products deserve. And I'm open to partnerships and other things that would help us grow our business. In the photopolymer space, we've sold over 20 metric tons of Flexera, which is over a million dentures. We're a market leader in permanent restorations by far. And I think when you look at the really incredible technologies we have in foams and elastomers and other segments, we continue to grow that business. That business actually grew last year, but we haven't been able to get in as many hands as it deserves. That's a part of frustration for me. We're looking at how can we make those products more successful. If you have suggestions, I'm always open to them. The materials are the best in the world and the products are very good. Just trying to figure out how we can get
spk06: get them to flourish. Yep. Yep. I agree. Okay. Uh, next question. Uh, you know, last year, the story was a lot about that P 50, right. And kind of, you know, direct metal printing. Uh, can you give us an update? And I'm just curious to know if you guys think you're going to recognize much revenue for P 50, uh, you know, this year.
spk05: It's really a great question. And look, uh, we've had to make tough choices as a company. Uh, we have, uh, seven quarters of, uh, continuously reducing operating expenses, eight quarters of gross margin expansion. And some of these very advanced technologies that sometimes are a little bit ahead of themselves lead to spending on the technology side that you can't afford. So we're trying to pair our spending and control our destiny. You have to work on these things at the proper pace so we get to become a sustainable, profitable business. And so we work with our customers to drive those efforts and get the products to market as fast as possible. But sometimes we have to dial all these things and make tough choices. So it hasn't become a significant part of our business. At least the single pass jetting portion has not yet, but it is the highest performance product fine powder system in the market. And as the industry matures, I think you will eventually see lots of adoption of single-pass jetting systems. But we're navigating that and carving a path from A to Z here where we can get this company profitable. It's something that we're doing very delicately to preserve the value of these technologies and at the same time make customers successful with it. So that's probably the best example I can give you.
spk06: I would love to... Awesome. I understand. Thanks, Rick. And maybe just a last follow-up for Jason here. I love the chart on kind of the non-GAAP operating expenses and the clients we've seen. And I know you're doing more cuts here. Can you just give us help? Where do you think this, you know, bottoms or you know, are we going to see two or three more quarters of sequential or what is, you know, Q2, Q3 operating expenses look like?
spk07: Yeah, thanks, Troy. I appreciate the question. We're definitely not at the bottom because, as you recall, in January we announced a fresh cut of $50 million. Some of that was enacted in late 4Q. The decisions were made in 4Q, but the announcement, actually, I think, the announcements are currently made in January. So it's definitely going to get lower from where it is. I'll probably stop short of saying exactly how low in 1 and 2Q, but I think if you, you know, as you're working through your models and you look at the revenue and profitability range on an annualized basis, you're just taking the $50 million. This is not counting the fresh decisions that we've announced today. You know, I think you can expect... probably a similar mix of about 20% to 25% in cost of sales and 80% to 75% in OPEX. So with those figures, you can kind of see how low we think we can get it.
spk06: Okay. Yeah, that's helpful. I appreciate that. And guys, good luck going forward here.
spk04: Thank you. Appreciate it, Troy. Thank you, Troy.
spk01: Thank you. Our final question is from the line of Jacob Steffen with Lake Street Capital Markets. Let's just hear your questions.
spk02: Yeah. Hey, morning, guys. So I just kind of wanted to follow up on the foundry opportunity you talked about. Maybe you could kind of help me understand how to kind of think about this opportunity and maybe, you know, what are you actually doing for the foundries?
spk05: Okay, so foundries need patterns and molds to pour metal into. When you do them by hand or in an analog process or with analog tooling, you have dozens or hundreds of parts that get assembled to make what the shape of a complex casting is. That leads to tolerance stack-up, where you lose fidelity as all those parts kind of get stacked together. With additive manufacturing, you can make a single component, and so your tolerance are superior. You can reach shapes that are much more complex, yet you can enable a part with a level of complexity of additive manufacturing and very sophisticated shapes. do that in a way that your cost of the part approaches the cost of the raw material, which in the case of aluminum would be, you know, I don't know, $2 a kilogram, which is much lower than the cost of powders and other metals. That technology is more mature than some of the other things that we do in metals and ceramics, and as a result, it has been adopted faster and And the microstructure that you get from those types of products is also much better understood than the microstructure and the fatigue properties that you get from added manufactured parts. When you do laser and some other processes, the fatigue properties are not as good as they are in printed castings. And there are many standards for adoption of these technologies in aerospace. And as a result, as these companies have been acquiring and adopting products for manufacturing having a larger percentage of the content in these platforms made through additive, it is one of the leading technologies. It's also one of the few technologies that is able to deliver very large parts that are multimeter in size, which is something that most other additive manufacturing processes don't do. And it is dramatically faster, and I mean dramatically faster than any other process. So, for example, You know, the fastest, the average laser system is about 80 cubic centimeters per hour, let's say a Velo system. The fastest would be the SLM NXG 600 at 1,000 cubic centimeters an hour. A P50 is 12,000. In a printed casting system like our S-Max Pro is about 150,000. So 80 per Velo versus 150,000. for our printed casting solutions in our Xerial system can go as fast as 250,000 cubic centimeters an hour. And that's the reason it's being adopted in automotive where cost matters. It's being adopted in many other segments like aerospace. And it's a great technology and it's part of the family of processes in added manufacturing. Each type of part is probably best suited to a particular process. It doesn't mean that we're going to make all the parts through this process. There's plenty of room for laser and other technologies, but we are seeing great adoption in this segment. And we're also unique in that we have very sophisticated automation attached to these products. So that includes 24-7 printing without humans involved and automated deep powdering at a different level of maturity than any of the other added manufacturing processes. I mean, it's being used to make N96 V6 engines for people like BMW or parts for people like Tesla. So it is a process at scale with much better post-processing and automation than other approaches with mechanical properties that are well understood and that are mature, and as a result, that industry is poised for scale. If you look at the addressable market, there's about 25,000 foundries that could take advantage of this equipment, but 3% have adopted it, so it's less than 5%, so you're in the early part of an S-curve. I do believe that in this next decade, we've seen an acceleration. I think we did more revenue in this area than X1 did in the year we acquired it. a couple years back. And if you look at that, we added the products that came from Envision Tech in this segment, like our S-Max Flex, which allows you to go to countries like South America and other locations. And it gives you a broader access to sort of folks that couldn't afford a machine that costs more than a million dollars. And we pair it with the best-in-class solutions from X1. We've added desktop metal software controls. And so now these systems are fully integrated. We market these through the X1 brand because they had a great brand in the printed casting side. And we're building a great business in this area. So think of 25,000 potential customers. Only 3% of them have it. They're all going to have some of these machines. This is going to be like a $20 billion capex cycle over, I don't know, 10, 15 years. So you should expect that this should continue to be adopted over time, and eventually one day it's going to be on its own a much bigger business than many other things we do today combined. And it could get to be – I don't see a reason why at some point it could be a billion-dollar business, especially if we have new applications for this technology like I was describing in this robotics plus AI revolution that we're going to see in the coming decades.
spk04: Got it. That's helpful. A lot of color there.
spk05: And by the way, we are by far the dominant market share player in this space. We outsell our competitors at a systems level. Some of our competitors in that segment sell parts instead of machines. But on the machine business, which is pretty much all we do, we're like 95% systems. We outsell our competitors almost five to one. So it
spk04: it's not even fair. We're really good at this. Okay. Interesting.
spk02: And, um, yeah, just last one for me, um, the Latin American market, it sounds like, um, is, is a focus. Um, maybe you could talk about kind of initial steps that you've taken or, um, you know, how, how long, or I guess how far are we in kind of the initial pipeline there?
spk04: Well, uh, You know, we have the systems around the world.
spk05: And what we are seeing is that we now have solutions that are cost-effective for those markets with our Flex system, which is a really great machine. And I think there's also very large foundries in those markets, you know, whether it's in Mexico or in South America, Brazil, et cetera. So we basically started hiring go-to-market resources for those areas. Before, people had to, like, find us, and come to see it in the U S and had, uh, you know, primarily we sold to Western companies who had overseas production. And now, uh, we're, uh, going to support and help, uh, companies around the world adopt this technology, whether it's in Southeast Asia or in India or in South America or in the Middle East. Uh, we've had growth in this, uh, emerging economies and, uh, We're excited to add capabilities to better support them and make our customers successful in those markets.
spk04: Got it. Thanks, guys. Best of luck going forward here. Thank you. We're excited. Thank you.
spk01: We've reached the end of the question and answer session, and I'll turn the call back over to management for closing remarks.
spk04: Okay. Okay.
spk05: Well, I really want to thank everybody. And in closing, I really want to thank our customers, partners, and all the incredibly dedicated Desktop Metal employees. Reducing our spend over seven consecutive quarters in the pursuit of sustainable profitability really comes with many sacrifices for this team. And I also believe this experience has made Desktop Metal stronger, and it gives me very good confidence in our ability to navigate 2024 and beyond as the industry comes back to double-digit secular growth. Thank you again for your relentless efforts and dedication, and I look forward to speaking with you again on the first quarter earnings call. Thank you.
spk01: This will conclude today's conference. We disconnect your lines at this time, and thank you for your participation.
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Q1DM 2024

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