This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Hello, my name is Charlie and I'll be the operator for this call this morning. I'd like to welcome everyone to Fathom Digital Manufacturing's earnings conference call. This call is being recorded and a replay will be available later today. After the company's presentation, there will be a Q&A session with instructions to follow at the time. I'd now like to turn the call over to Michael Simony, Fathom's Director of Investor Relations. Michael, please go ahead.
spk02: Thanks, Charlie, and good morning, everyone. Welcome to Fathom's second quarter 2022 earnings conference call. Before we begin, I'd like to mention that today's presentation and earnings press release are available on Fathom's website at fathommfg.com, where you will also find links to our SEC filings along with other important information about our company. Turning to slide two, we note that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC, become aware of the risks and uncertainties in our business, and understand that forward-looking statements are only estimates of future performance and should be taken as such. The forward-looking statements represent management's expectations only as of today, and the company disclaims any obligation to update them. We also note today's presentation includes non-GAAP financial measures to describe the way in which we manage and operate our business. We reconcile these measures to the most comparable GAAP measure, and you are encouraged to examine those reconciliations, which are found in the appendix to both the press release and the slide presentation. With us today are Ryan Martin, Fathom's Chief Executive Officer, and Mark Frost, our Chief Financial Officer. I will now hand it over to Ryan.
spk04: Thanks, Michael, and welcome everyone to Fathom's second quarter 2022 conference call. I'd like to begin my remarks on slide three, where we will provide our Q2 highlights. During the second quarter, Fathom furthered its history of growth and profitability as we delivered positive results consistent with our expectations. In Q2, we posted revenue of $42 million, representing an increase of 17% compared to the year earlier period. On an organic basis, excluding the impact of acquisitions, revenue was up 9.4% in the quarter, including growth in all four of our key manufacturing technology lines. and adjusted EBITDA increased 16.1% to 8.7 million, representing an industry-leading margin. We continue to benefit from our comprehensive manufacturing services by providing enterprise-level customers with timely, value-added solutions across both additive manufacturing and traditional manufacturing. During the quarter, we entered into a new $1.2 million managed services agreement with a Fortune 50 multinational technology company. where we will lend our engineering expertise and serve as an extension of their R&D and manufacturing teams. We also secured a large order for just under $1 million with a global leader in healthcare technology to produce parts utilizing our hybridized model by leveraging our injection molding, additive manufacturing, and ancillary technologies as well. We also saw continued additive orders growth within our key EV, and robotics and markets, with two strategic customers placing more than $1 million in additive orders in the first half of 2022. We believe our technology agnostic approach, integrating speed, flexibility, quality control, technical expertise, and problem solving continues to position Fathom well to meet the rapid prototyping and low to mid-volume production needs for some of the largest and most innovative companies in the world. Many Fortune 500 companies remain highly focused on both diversifying their supply base through onshoring and consolidating their supplier partnerships to create greater efficiencies, increased responsiveness, and speed to market. We are particularly seeing this trend in the medical and industry sectors. Ensuring a more agile and local supply chain to protect against the rising number of global uncertainties provides a competitive edge for product-driven companies seeking to get ahead and stay ahead at fathom we continue to work closely with our customers to help them iterate faster and accelerate their manufacturing innovation although the positive secular drivers in our business remain intact including the condensing of product development life cycles reshoring of u.s manufacturing consolidation of supplier partnerships and the digitization of manufacturing Our second quarter orders of approximately $40 million were slightly below our expectations. Outside of the macro environment, one key factor that impacted orders was the speed we were able to build our platform-based strategic sales team. This effort was primarily impacted by the tight labor markets. And it is key to point out that we will always be building and working to build a larger, more concise sales team. We've made tremendous progress on this and we continue to build the very best team in the industry. As I sit here today, we have significantly strengthened our commercial team and I expect it to be in a stronger position to achieve our go forward growth targets. In addition to continuing to improve our overseas supply chain, which is a key part of our value proposition, we are investing more in our resources for our outsourced business, including new software support systems. We expect to further aid the sales process and increase throughput, which will improve our margins. In furthering our efforts to accelerate profitable growth, we continue to optimize our operations, and our most recent announcement is outlined on slide four. These steps are a natural progression in Fathom's growth trajectory as we have built one of the largest and most profitable platforms in the digital manufacturing sector. Our team is continually evaluating opportunities to promote operational excellence across the entire organization, which led to the creation of the multi-pronged plan aimed at optimizing our national footprint, increasing operational efficiencies, and fully leveraging our scale as we continue to pursue both organic and inorganic growth opportunities. Key steps in our current plan include the following. First, we will consolidate our existing footprint in Oakland, California, which currently includes four facilities totaling a little over 20,500 square feet into our corporate operations in Heartland, Wisconsin. Specifically, we intend to transfer our entire CNC operations and most of our additive technologies to Heartland. By optimizing our existing capacity and our state-of-the-art facility in Heartland, we expect to improve the utilization and lower costs. This transition is expected to be completed by the end of the year. Importantly, as part of this initiative, we intend to maintain a strong West Coast presence by opening our Silicon Valley Technology Center. This will allow us to be continue our proximity to our strategic customers while providing a unique opportunity to showcase new technologies that we're adding and continue to expand our industry-leading platform. The tech center will also serve as a hub for all of our Silicon Valley-based leadership, sales, marketing, IT, and other functions. Second, we plan on opening a larger greenfield site near our Austin, Texas location and consolidate those facilities Our current capacity in the area, which we assumed through two acquisitions in 2021, combined for a total of about 41,500 square feet, and we expect to expand this through our new regional center. In doing so, we intend to expand our presence in the strategic Southwest market while eliminating redundancies and laying the groundwork to ensure the seamless integration of future acquisitions in an expedited fashion. We expect to secure a new site in the greater Austin area by the end of this year, and complete the transition in the first half of 2023. Third, in further advancing our objective to operate as One Fathom, we intend to create a finance and accounting shared services organization to streamline company-wide processes and create economies of scale. We expect our new shared service system to be fully operational by the end of this year, and we intend to pursue additional centers in other administrative functions over the coming quarters. As a result of this plan and the efficiencies gained, we expect a workforce reduction of approximately 6% based on a combination of buyouts and attrition. In all these action items are expected to generate pre-tax annualized cost savings totaling approximately 5.5 million once fully implemented. Additionally, we expect to incur pre-tax charges related to these activities totaling 2 million of which approximately 1.7 will be paid in cash. Also of note, these figures exclude certain incremental costs related to the Texas consolidation of which remains in the early stages. We intend to update our estimates to reflect these termination costs and rent over time as this plan progresses. We remain committed to driving long-term scalable growth while attracting and retaining experienced professionals with an enterprise level background. To this end, we recently appointed a new Chief Information Officer, Dan Borkwin. Dan brings more than 27 years of experience in the IT industry, having most recently served as the Vice President, Global IT at Generac, a publicly traded, multi-billion dollar energy technology company, where during his tenure, he saw the company go from $150 million in revenues to over $3 billion in revenues. He succeeds our previous CIO who retired earlier this year. In his new role based in Heartland, Dan will be a key member of the leadership team, responsible for spearheading Fathom's digital transformation and implementing best-in-class IT systems throughout our entire organization in a uniform manner. He'll play a vital role in supporting Fathom's growth strategy, and we look forward to sharing our progress and more details about our strategic plans with you over the coming quarters as we continue to consolidate and upgrade the digital thread of our business to enhance the customer experience. Fathom has built a proven track record of strong, profitable performance with significant growth potential. By implementing these optimization efforts, combined with our robust industry-leading platform and attractive financial profile, we expect to further build upon our solid foundation, increase our competitiveness in the marketplace, and strengthen FABN's position for long-term success. With that, I will now turn the call over to Mark.
spk08: Thank you, Ryan, and good morning, everyone. I'll begin my remarks of our Q2 results on slide five. Our revenue for the second quarter totaled 42 million for a year-over-year increase of 17 percent, of which 3.6 million was organic and 2.5 million was from acquisitions. Early in the second quarter of 2021, we completed four additional acquisitions which focused primarily on CNC machining. Now excluding the impact of these acquisitions, our organic revenue in the second quarter increased approximately 9.4% as we achieved growth in all four of our main technologies with double-digit growth in both precision sheet metal and CNC, mainly due to our cross-selling activities. Now for quarter two, our reported revenue by product line was as follows. Additive manufacturing grew 2.5% to 4.4 million or 10.5% of total revenue. Supporting this growth were orders from large blue-chip customers within the agricultural equipment, EV, robotics, medical, and industrial industries, and we continue to invest in innovative additive technologies. We believe our new tech center in the Silicon Valley area, combined with our Center of Excellence in Heartland, will further enhance our growth prospects in the additive segment. Injection molding growth accelerated to 9.3% at $7.1 million, or 16.9% in total revenue. Now, our injection molding sales improved, but were below our expectations as they were impacted by softness in our outsource business, which we continue to invest into streamliner processes and increased scale, as Ryan mentioned earlier. CNC machining was up 31.7% to $14.6 million, or 34.7% of total revenue, reflecting the benefit of the acquisitions as well as double-digit organic growth. Based on our strong performance in CNC for the second quarter and year to date, we recently launched a dedicated quick-turn CNC machining cell in our Heartland facility to further support this business segment. By segregating our quick-turn work with our low-to-mid-volume production, we expect to capture more share of the higher-margin quick-turn CNC market while increasing our overall production efficiencies as well. Precision sheet metal rose 22% to $14.8 million, or 35.1% of total revenue, as this business continues to form well amid steady demand. And finally, ancillary technologies, our smallest product line, declined to $1.1 million, or 2.7% of total revenue, mainly due to a difficult comp as our 2021 results included orders from an EV manufacturer related to an accessory that was subsequently discontinued. Now, we believe the fundamentals of our business remain sound based on our year-over-year growth, continued success in increasing our share of wallet among strategic accounts, and building entrenched long-term customer relationships, which provides recurring revenue streams. Our focus remains on accelerating our customer engagement and achieving greater market penetration for additive and traditional manufacturing technologies. Now, on slide six, we provide our adjusted EBITDA performance for the second quarter. In Q2, our adjusted EBITDA increased 16.1 percent to 8.7 million, representing a margin of 20.6 percent. In the prior year period, we reported adjusted EBITDA of 7.5 million, with the EBITDA improvement driven primarily from higher volume. During the quarter, we experienced an increase in the volume of customers served, partially through revenue from new acquisitions, as I mentioned earlier. As in the previous quarter, the CNC acquisitions adversely affected our sales mix compared to the prior year period, impacting our gross margin rate. SG&A increased year-over-year to $11.6 million, primarily due to the incurrence of public company expenses following our list in the New York Stock Exchange in December 2021. These costs did not exist in Q2 of last year. On a sequential basis, SG&A decreased 21.6%. Excluding stock compensation, our public company costs in quarter two declined as anticipated on a sequential basis by approximately 33% to 2.4 million, including another 0.4 million of one-off costs, which will not repeat in 2023. And we expect these expenses to further drop, albeit modestly, in the second half of the year. Now, as Ryan discussed earlier, we believe our optimization initiatives will generate significant cost synergies beginning in 2023. The projected 5.5 million in annualized savings are expected to be split almost evenly between SG&A and COGS and will help improve our operating leverage as we increase our volumes going forward. Now, on slide seven, we highlight our liquidity and cash flow. We ended the second quarter with available liquidity of $34.1 million. This includes $11.1 million in cash and cash equivalents and $23 million of undrawn commitments under our $50 million revolving credit facility. As of June 30th, our total gross debt excluding cash was $150.4 million and net debt totaled $139.3 million. The amortization of return debt was offset by an increase in the usage of our revolver to pay for some non-operational charges of $5 million, which we do not expect to repeat in the future. We generated $3.3 million in operating cash, and we continue to expect to deleverage our balance sheet as we move forward based on improved cash flow. Now, during the second quarter, we invested $3.3 million in capital expenditures, mainly related to two new technology offerings in additive and CNC, as well as the integration of multiple ERP technologies into a single scalable cloud-based solution to boost productivity. We expect to complete the fully ERP integration process as part of our one fathom strategy by the end of 2023. We anticipate our cap expended to slow in the second half of the year compared to the first half because of timing, but more focused investment into the additive space as we add new capabilities. Now, as we continue to invest in the long-term growth of our business, we remain opportunistic in our approach to pursue tuck-in acquisitions that are creative and expand our value proposition with customers. And I've had many discussions with potential acquisition targets over the past quarter. Now I'm going to turn to slide eight, and we'll talk to our updated forecast for 2022. So based on our performance in the second quarter and year to date, combined with our current outlook for the second half of the year, we now anticipate revenue for 2022 to range between 165 million and 171 million, representing an increase of approximately 10% at the midpoint on a reported basis. For the current third quarter, we anticipate revenue of 39 to 41 million, reflecting the sales team build we mentioned earlier, which impacted our backlog for the third quarter. Now, as our new sales team members gain traction, we expect a stronger fourth quarter, which is typically our best quarter of the year, with growth in the mid-single digits. Now, our revised forecast for 2022 also takes into consideration a downshift in the broader economy as the latest GDP reports and other key indicators have deteriorated since the start of the year, creating more uncertainty in the near term. This has led to lower customer inventories versus a year ago and extended sales cycles for new orders. Accordingly, we realigned our expectations with the current macroeconomic environment. Now, we remain focused on strengthening our long-term growth prospects as we continue and invest in the business and expand our breadth of leading offerings. Examples of this is during the second quarter, we expanded our large format SLS 3D printing capacity. This solution provides for the additive manufacturing of large parts with high throughput. We also made investments in additive post-processing equipment to enhance the quality and efficiency of plastic additive parts. And in ramping up our dedicated quick-turn CNC cell that we mentioned earlier, we took delivery of two DMG MORI 5-axis machines, offering the latest in precision machining capabilities to provide parts to our customers in days. Now our full year outlook for adjusted EBITDA has been revised as we now expect to generate between 32 and 36 million in 2022 for an implied margin of 19.4 to 21.1%. The anticipated 5.5 million annualized cost savings from our optimization initiatives will be limited in 2022 as we gradually roll out our plan throughout the remainder of this year and into 2023. The savings for 2022 will be mostly offset by the higher than anticipated public company expenses from earlier in the year. For quarter three, we currently anticipate adjusted EBITDA in the range of $7 to $9 million. Now, our revised adjusted EBITDA forecast reflects the impact of temporary lower revenue growth and its impact on our absorption profile. We continue to focus on driving efficiency improvements on both the operational and G&A fronts. We are balancing building for growth and remain committed to fully leveraging our broad on-demand platform. And as a reminder, our current outlook excludes the impact of any future acquisitions. We continue to be selective in pursuing acquisitions that enhance our capabilities, expand our presence in strategic markets, and or strengthen our customer base. We will provide our next update when we report our Q3 earnings in November. I'll now turn the call back over to Ryan. Ryan?
spk04: Thank you, Mark. I will provide some closing comments on slide nine. Our Q2 revenue growth of 17% demonstrates the continued demand for our comprehensive manufacturing services and positive secular tailwinds. And our adjusted EBITDA increased 16.1% to 8.7 million, representing a margin of 20.6%. Sequentially, our adjusted EBITDA was up over 40% in the quarter. Fathom has built a leading technology-agnostic platform that delivers a differentiated customer experience while creating a more resilient supply chain for enterprise customers. We continue to see large corporate enterprise customers lean on Fathom to help solve their most difficult technical challenges and accelerate their R&D. Continue to think of Fathom as an index for the additive manufacturing sector, as we have decades of experience and extensive capabilities in additive manufacturing technologies along with traditional manufacturing capabilities to provide a comprehensive solution for our customers. Although our anticipated growth rate for the full year has moderated, we remain a profitable, cash-generating business, and we are highly confident in our long-term opportunity within the large, fragmented $25 billion digital manufacturing market. We have significantly strengthened our commercial team in Q2, and I'm energized by the team we now have in place to drive profitable growth while we continue to accelerate our digital transformation and integrate new breakthrough technologies to serve our world-class customers. Furthermore, we unveiled an optimization plan with an anticipated $5.5 million annualized savings to support our future results. taking proactive measures to empower a more lean, nimble, and unified fathom now that we are a listed company. While the macro environment has become more uncertain since going public in December, we believe our proven profitable business model, highlighted by an extensive customer base, including some of the most innovative companies in the world across diverse end markets and a track record of growth in previous downturns, positions our company extremely well. As we continue to navigate near-term macro headwinds, our focus remains on executing our go-to-market strategy, further scaling our business in support of our long-term growth potential for the benefit of our company and our shareholders. This concludes our prepared remarks and we'll now open the call up for questions. Thank you.
spk06: Thank you. If you'd like to ask your question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Jim Ricciuti of Needham & Co. Jim, your line is now open.
spk09: Thank you. Good morning. A couple of questions. I'd like to start first with the overall change in the full year outlook because you're identifying, I think, two contributing factors, one being the challenge, I guess, in building up the sales platform. But you're also, I think, highlighting some macro concerns. So I wonder if you could perhaps frame that a little better for us.
spk04: Yeah, well, first of all, good morning to you, Jim. I hope all's well. Thanks for being on early Monday morning. You know, as we talked about, you know, we've got a great company. We've got a great growing company, profitable. And so we feel really good about where we're at. But if you think about when we put this stuff together at the beginning, you know, the last six months, you know, worst S&P performance, obviously the first six months of the year in the last 50 years, you know, clearly higher inflation. unprecedented uh you know moves by the the fed and increasing the fed rate and so we still feel really good about the growth of this business where we're at the fact that we're a profitable growing business uh but yeah there's the macro uncertainty uh as it relates to that we've seen some uh slowing of orders uh cycles like how long it takes to actually commit we're not losing the orders and so we've seen some slowing of that and then as mark mentioned we've seen You know, some of the inventories that some of our larger enterprise customers were building up, they've taken their safety stock down on that. We think that's a temporary thing that we saw, and we're just trying to be conservative as we look for the full year, Jim.
spk09: Got it. And I'm wondering if you could, Ryan, just maybe give us a little bit more color on what you're seeing in some of the verticals. I think you talked about strength in EV. We're hearing Condition's still pretty strong in semi-cap. Where are you seeing some changes in demand in either direction?
spk04: Yeah, I would say, you know, in the medical, so I was down in Texas last week visiting some of our key customers there in the semiconductor, medical, and aerospace places. know in the uh you know the month of july we saw incredible demand year over year in our medical especially the orthopedics side of our business we saw the orders almost double versus the prior years a lot of elective surgeries are certainly coming back very strong so that's an area that we're continuing to see uh extremely strong demand uh ev is an area that um you know we we play really well in both from a development all the way through uh bridge to production So those two areas we're seeing strong demand. We're seeing aerospace continue to come back, especially on some of the work we do in the interior side of aerospace. So those areas I think we're seeing strong demand. General industrials seem to be doing well as well still, Jim.
spk09: Okay, just a question for Mark, and then I'll jump back in the queue. Obviously, you've seen some pressure on growths. margin in the quarter versus, I guess, expectations. And I'm wondering, Mark, if you could talk to perhaps what Ryan was just talking about, just some of the cost pressures. Is there anything that we should be mindful of just with respect to gross margin on a go-forward basis? Or is it perhaps also mix-related?
spk08: Yeah. I mean, we took a slight mix challenge, though. If you look overall, you'll see we improved gross margin a Bill Meyer- versus prior year and quarter to it is more question what I was talking about that we're not going to obtain in the short term as strong and absorption benefit because obviously our revenue growth can be lower than we were expecting for the second half. Bill Meyer- We do continue, though, you know we talked about the optimization plan, which is more going to be a 2023 benefit which we will fully see in 2023. So it's more a moderation that we won't get the absorption benefit as strong a benefit, Jim, as we were expecting in the second half because of the lower volume. That's the basic message. Got it. Thanks very much. No worries, Jim.
spk06: Thank you. Our next question comes from Noelle Dilts of Stiefel. Noelle, your line is now open. Please go ahead.
spk01: Hi, thanks and good morning. I was hoping that you could maybe comment on order trends that you're seeing. So if there was any sort of notable trend as you went through the second quarter and even into the third quarter that could just kind of help us understand how that's informing your guidance. Thanks.
spk04: Okay, good morning to you, Noel. Yeah, so as we mentioned, you know, the orders for the second quarter were nearly $40 million. We've seen some pick-up in the orders in the third quarter, which is a good sign, as we mentioned on the call. You know, there's a lot of things from a macro environment that we can't control. But what we're focused on is controlling what we can, which is strengthening our commercial sales team, which we've made tremendous progress in the second quarter, and we feel will build momentum into the second half of this year. We can control the cost structure of our business, which we talked about through the optimization of the plan. And then we can control the customer experience. And so we've invested in the commercial team into more technical resources that as we've evolved this organization to be able to you know, not sell just single manufacturing solutions to be able to sell across those different solutions. As it relates to, you know, specific orders, you know, we're seeing continued pickup, like I talked about in the medical space, especially where we're doing orthopedic implants, where elective procedures are certainly coming back very strong, seeing strong demand there from end customers, defense, aerospace, and, you know, you know, some of the EV space or the other areas that we're seeing strong demand from an orders perspective as well.
spk01: Okay, great. And then any comments that you could provide sort of on the competitive environment, you know, when you look back to the first quarter, anything that kind of improved as you got into the second quarter and third quarter, how should we think about that?
spk04: Yeah, I think, you know, where we've seen You know, competitiveness, you know, continues to be the additive space. But I think that's why we're really focused on working to differentiate in that space. And a key thing for our platform is that we're technology agnostic. And so we're trying to find whatever the best solution is for the customer. And so as you've seen, you know, through the strong double-digit growth in both our sheet metal and CNC machining side of our business, We've been able to differentiate more there. I think with some of our 1345 designations in the medical orthopedic space, we have a differentiated offering there. And so what we've tried to focus on is where we can differentiate with that and drive, get away from the commoditization, even in the additive side of things. You know, that's where we're making investments, as Mark talked about, in larger formats. We're making investments in more efficient post-processing. to be able to provide better parts faster to our customers in a plastic additive. And that's why we've also talked in the past around, you know, the investment that we're making in the evolved technology, which we think will be a, you know, a really differentiated technology that won't be as commoditized and price driven as some of the other areas of additive manufacturing.
spk01: Okay. And then one last question for me, I know you talked about kind of making improvement or progress on, on, expanding your sales force, but any, um, additional commentary on sort of where you stand today relative to where you want it to be. And, um, and then how to just think about those sales folks becoming productive, you know, how to, how long does it usually take them to kind of ramp up and start making an impact? Thanks.
spk04: Yeah. Yes. And so, so we feel really good about the Salesforce that we have in place right now. We're basically at full strength. We're always, as I mentioned earlier, we're always going to look at ways to continue to improve our sales force. So we're always looking at opportunities to bring on and add new talented sales folks because of the importance of them being in front of the customer, especially the larger strategic enterprise customers for us. But we're back at full strength there. And part of it was really just the evolution of this company as we went from You know, Salesforce that was good at selling, you know, maybe a single technology as we focus more on the platform. We had to evolve the talent that we had doing that. We made those changes in the second quarter and we feel really good. Typically, we see, you know, a ramp of, you know, three to six months. I think we're going to have that condensed. for us because we hire people typically from the industry. And so we've had people from the industry that can really hit the ground running, which is why we feel so good about the team that we built and brought in and really the go forward opportunity that presents for Fathom Noel.
spk01: Okay. Thank you very much.
spk06: Thank you. Our next question comes from Greg Palm of Craig Hallam Capital Group. Greg, your line is now open. Please go ahead.
spk03: Hey, guys. This is Danny Egerch on for Greg today. Thanks for taking the questions.
spk07: Danny, how are you?
spk03: Good. I guess I will just start on, I guess, kind of enterprise customers. I appreciate the kind of order examples there. What's the progress been like on maybe the land and expand strategy with them and getting, you know, percentage of repeat orders and gaining overall wallet share with them?
spk04: Yeah, so we continue to see strong growth within that side of our business, strong double-digit growth across the strategic customers, which represents about 100 or so customers across our enterprise there. And so that strategy is working really well. We're continuing to see opportunities. I was up in Minnesota two weeks ago meeting with a key customer there that historically we've done know about between two and a half to three million dollars they're looking to consolidate down uh the amount of suppliers that that were they're working with and we think there's a really good opportunity for this customer that will double the amount of um that they spend with us on an annual basis and so we're having those conversations across those roughly 100 or so strategic accounts and consistently what we're hearing is they want to go from they may have 10 suppliers right now that they work with with whether it's cnc or sheet metal fabrication And they're looking consistently what we hear is they want to consolidate that down to two or three suppliers. And we're at the top of their list because of the amount of things that we can do for them, the expertise we have, and the investments that we're continuing to make to be able to serve them. And so we're going to have a lot more to talk about in the future quarters as it relates to that. But the strategy is working. I think we're the clear leader in our market when it comes to large enterprise customers. And we're going to continue to double down on that strategy, Danny.
spk03: Got it. Makes sense. I guess just one more, maybe digging a little bit more into Evolve. I mean, how is that coming along? I know you said you're continuing to make investment in there and that technology. What's the demand like for that technology and maybe any update on the move into Heartland?
spk04: Yeah. So incredible interest in that technology. I mean, I think it really goes to the, you know, foundation that the fact that you can create real thermoplastic parts, you can do it at a cost price point that makes sense and not, you know, hundreds, but you can do it in the thousands. And so, you know, incredible interest for that. You know, I don't know how familiar you are with Evolve's leadership. They went through a recent leadership transition and, industry veteran Joe Allison is now the CEO of Evolve and we've had multiple conversations with him. We're really excited about really his vision for the company and I think because he comes from you know, service provider background, he understands what it takes to bring that technology into a company like Fathom and ultimately commercialize it effectively. And so we feel really good about this. Obviously, with any new technology that's really, you know, a breakthrough technology like Evolve, and we're being the first person to commercialize that in North America, you know, there can be some delays or hiccups along the way. So it's taken a little longer than we initially anticipated. But we anticipate hopefully having that technology in Heartland before the end of the year, hopefully by the end of third quarter, early fourth quarter, if all things go as planned right now. And we feel really good about that technology on a long-term basis based on the feedback that we've had from our customers.
spk03: Yeah, good stuff. I'll leave it there. Thanks, guys.
spk06: Thanks, Danny.
spk03: Thanks, Danny.
spk06: Thank you. As a reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. Our next question comes from Wamsi Mohan of Bank of America. Wamsi, your line is now open.
spk05: Yes, thank you. Good morning. In your 3Q guidance, you're guiding slightly down quarter on quarter in revenues. And I was wondering how much of that would you attribute to the sales reorg issue versus the weaker demand? I know your orders were slightly below expectations in 2Q, but you also said that the order trends were improving here in the third quarter. So curious if this is just sort of what you'd call an execution issue versus, you know, broader macro. You also called out broader macro trends, a lot of headwinds, but It sounds like you might not have seen a lot of that in your own orders. So if you could give us some color on that, that'd be helpful. That would follow up.
spk04: Yeah, Wamsi. So I would say I would not categorize it as a reorganization or restructure with the sales team. It's really a strengthening of the sales team as we evolved from the legacy company to where we want to go on a broader enterprise platform sales basis. And so we feel really good about the team, as I mentioned before, that we have in place to be able to grow the orders on a go-forward basis. I think the key with our business is, obviously, from a macro environment, there's a lot of uncertainty that's going on with the environment right now, especially when you think of the large enterprise customers that we focus on. If you think back to the second quarter, which the orders that you're going to get in the second quarter are are typically where you're going to see the revenues in the third quarter. Those types, the companies that are in the S&P 500 had the worst performance from a stock perspective in the last 50 years. So those companies had a little hesitation to what was going on in the market. So like I said, we weren't losing orders, just the sales cycles were taking longer than we historically would have. We're seeing that start to come back. We feel really good about the commercial team that we have in place. And the great thing about our business is that you know, it can turn really fast, right? So we have about a 90-day visibility into the business. And as we came to build momentum, it can turn really fast in a positive way for us. And so we've got a great business continuing to grow strong, profitable with industry-leading EBITDA margins.
spk05: Okay, thanks. If I could follow up on that EBITDA margin point, right? For your lower adjusted EBITDA for the year, how much of that is is just lack of revenue leverage versus maybe incremental costs that you're seeing from inflationary headwinds. And are you taking any specific pricing actions as you're going through the back half of the year? Thank you.
spk08: Yeah, Wamsi, I would say more the challenge is the lower revenue volume. Because a lot of our business is prototype quick turn, We're constantly re-quoting based on the latest material costs. So you can have some timing issue on, you know, production kind of orders. But in prototyping, we have very limited exposure. So more of our challenge is because we're not getting, as I indicated to Jim earlier, strong revenue growth in the short term. Now, as we discussed, we think that's a temporary situation and it's going to start turning around. I think we are looking, Wamsi, at other operating actions. We talked about the optimization plan. We are actually, as we indicated in that plan, looking at centralizing further activities, which will bring both benefit on the G&A and operational side. So there are a number of actions in place to improve our margin. So, you know, we're still expecting to have margin improvement over prior year, despite the fact that we've moderated our revenue growth targets.
spk05: Okay. Thank you so much, guys. Good luck.
spk06: Yeah. Thank you. Thank you, Ramsey. And our final question of today comes from Troy Jensen at Lake Street Capital Markets. Troy, your line is now open.
spk07: Hey, gentlemen. Good morning. Maybe a couple quick questions here for Ryan. So, Ryan, I guess it's my belief that the industry growth for machine shops and service bureaus is probably in that 8% to 10% range given supply constraints and reshoring efforts and whatnot. And you guys are right smack dab in the middle of that based on your organic growth. Can you just talk about cross-selling? I guess I thought that was a key strategy for you guys with all the acquisitions you guys have done prior to the SPAC process.
spk04: Yeah. Absolutely, Troy. Yeah, so that continues to be a key strategy. As we've talked about from a lot of the growth that, as Mark went through his comments, a lot of the growth that we've seen in CNC and sheet metal has been looking at legacy areas. We had an example down in Texas where we'd worked with a semiconductor company down in that region where primarily in the past we'd only done CNC machining for them. And as we brought them into the platform, we were able to grow very significantly with sheet metal for them as well. They had a significant need there. And so that's an area, you know, as we've continued to strengthen our sales team, that's an area that we're very focused on. As I talked about earlier, the company up in Minnesota, you know, another perfect example. Historically, we'd only done CNC machining for them. Right now, we're looking at multiple injection molding, both prototype as well as production opportunities for that company. So that is going to continue to evolve and grow as we continue to bring in, you know, the right sales team to be able to identify not only those opportunities, but to be able to connect the dots to across the organization within the different areas to be able to do that. You know, another example was working with a seating aerospace company down in the Texas region. Historically, we'd only done prototype for mostly just FDM SLS. Now we're looking at production. injection molding, as well as CNC machining. So we're making that transition in a lot of these large enterprise companies from just being a prototype development partner through to mid-volume production partner for them as well. So that doesn't happen overnight, but as you think about the long-term value creation of this business and really being an extension of the manufacturing and R&D teams for these enterprise customers, I feel stronger now than ever that we're going to continue to be the leader in being able to grab significant market share in that market with the large enterprise customers, Troy.
spk07: Perfect. All right. And then how about just on acquisitions? I know you guys touched on it, doing some little tuck-ins. I guess I'm curious to know if you feel like you're in a position to do it now, just kind of based on the balance sheet. You've got like $11 million in cash in that debt position, and your stock currency is really not where you thought it was going to be when you kind of started this back process. How likely are you guys to do acquisitions? Are you thinking you guys are just going to focus on the core business now and kind of grow it? Some quick thoughts on that, right?
spk04: Yeah. So as Mark talked about, so we have looked at quite a few acquisitions out there. We continue to think that there's obviously a valuable opportunity from a consolidation play within this market. We still have the flexibility to be able to do, as we talked about, maybe one, maybe two smaller talk-in acquisitions. As we go forward, one of the positive things about our business is that we continue to generate cash. So we're going to continue to generate cash and de-lever as well as put more cash under the balance sheet. So I think it will create opportunities for us. But we're going to be selective. We're only going to look at opportunities where we believe that they can be accretive to the platform. We've seen opportunities. We've looked at a lot of deals where it just didn't make sense from a valuation standpoint to really add to the company. And so we feel really good about the platform that we have today, that we can continue to grow with what we have today, and we'll be opportunistic as M&A presents itself.
spk07: All right, perfect. And this quick one for Mark. Mark, do you want to give us just like a number that you think the SG&A will be here in the September and or December quarters?
spk08: Uh, what I would say is we would expect it to. Maybe reduce 3 to 5% kind of level from from the previous quarter.
spk07: OK, perfect, thanks.
spk08: It's so modest. Modest decline is what I would say, Troy.
spk07: Understood, thank you.
spk08: Yep, no worries.
spk06: Thank you, Troy. At this time, we currently have no further questions. Therefore, this concludes today's call. Thank you for joining. You may now disconnect your lines.
Disclaimer