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spk00: Hello, my name is Emily and I will be your operator this morning. I'd like to welcome everyone to the Fathom Digital Manufacturing 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 that time. I would now like to turn the call over to Michael Simonyi, Fathom's Director of Investor Relations. Please go ahead.
spk02: Thank you, Emily, and good morning, everyone. Welcome to Fathom's third 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 www.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 risk 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 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, the chief financial officer. I will now hand it over to Ryan.
spk04: Thanks, Michael, and welcome everyone to Fathom's third quarter 2022 conference call. I'd like to begin my remarks on slide three, where we will provide our Q3 highlights. Our performance for the quarter was in line with management's expectations as we continue to increase our orders and sales momentum while extending our track record of profitability in our core operations and cash generation, a key differentiator of Fathom. In Q3, we posted revenue of $40.2 million, while adjusted EBITDA totaled $7.1 million. We continue to benefit from positive fundamentals in our business, as product-driven companies localize and reshore their manufacturing to ensure a more resilient supply chain. Additionally, we work closely with enterprise-level customers who seek a comprehensive digital manufacturing partner to help them iterate faster and reduce time to market. As we discussed on our previous call, we made important strides during the second quarter, building out a high-performance, platform-based strategic sales team to help drive long-term growth. I'm excited how our new commercial team members have steadily ramped up their activities. During the quarter, both our orders growth and revenue growth improved each month, an encouraging sign as we aim to close out the year and enter 2023 with increasing momentum. In fact, Fathom achieved record order performance in the month of September for additive technologies. While Mark will discuss our financials in more detail, our orders totaled $40.3 million in Q3. During the quarter, we secured new additive orders from two notable customers in the fast-growing EV market, totaling $1.2 million. We also achieved new wins in other key end markets, including aerospace and defense, semiconductor, and robotics. by taking advantage of our robust technology-agnostic platform, which allows us to adapt our 25-plus manufacturing processes to our customers' specific needs. As you've heard me talk about before, one of the key strengths of the Fathom platform is our entrenched relationships with large strategic customers, which provides Fathom with an attractive, reoccurring revenue stream given our retention rate of 90-plus percent. By partnering with some of the world's most innovative Fortune 500 companies, working with them across multiple sites, and developing extensive contacts within each company, we have seen continued growth among our strategic accounts over the past year. On an LTM basis, we have grown the number of customers spending more than $1 million with Fathom annually from 26 customers in 2020 to 35 customers today, an increase of approximately 35%. More importantly, we have generated a revenue CAGR of approximately 20% within our million dollar plus revenue customers since 2020. We believe these positive trends demonstrate how our land and expand model among strategic enterprise level accounts is working. As our commercial activities continue to take hold, we plan to open our new Silicon Valley Technology Center in early Q1 23. This advanced hub will ensure continuous proximity to our strategic customers and provide a unique opportunity to demonstrate firsthand our cutting-edge technologies and provide an outlet for Fathom to better partner with leading OEMs to showcase new technologies. This facility will be where we introduce our customers to some of the latest advancements in additive and advanced manufacturing, including the Evolve system. Throughout 2022, we have made important progress expanding our industry-leading platform by adding new technologies, which have considerably strengthened both our capabilities and growth prospects. Most recently, we took delivery in the quarter of three new multi-jet fusion machines from HP, providing breakthrough productivity for additive manufacturing, ideally suited for low to mid-volume production environments. We also made investments in our post-processing equipment to enhance the quality and efficiency of the plastic additive parts we produce. Regarding Evolve, we expect to take delivery of this new additive technology by early 2023 at our Silicon Valley Technology Center. We're excited by this opportunity for this advancement in additive manufacturing. This technology is a one of a kind additive process which dramatically reduces lead times for parts compared to traditional injection molding processes. We have already started receiving our first orders for this technology and interest continues to be extremely high. All of these new additive technologies follow the expansion earlier this year of our large format SLS 3D printing capabilities for the creation of prototypes and end use parts in durable engineering grade thermoplastics. I'm pleased with the continued execution of our capital investment strategy and the significant benefits this will provide our on demand platform in 2023 and beyond. At the same time, we remain focused on consolidating our national footprint and increasing the operating efficiencies in line with our previously disclosed optimization plan. Our facility in Oakland is scheduled to officially close in January, following the transfer of our entire CNC operations and additive technologies to our company headquarters in Heartland, Wisconsin. With this transition, we expect to optimize our existing capacity and increase utilization in Heartland. This transition will also help pave the way for our Heartland facility to serve as the premier new product innovation facility throughout North America with a unique set of capabilities unrivaled in our industry. In addition to our new MJF, DMLS, and SLS technologies that I just mentioned, our Heartland facility recently took delivery of two DMG MORI 5-access machines. This dynamic, high performing technology integrates speed and precision and will help expand our dedicated quick turn CNC capabilities, which is a high margin and our fastest growing segment within Fathom. Our state of the art MPI facility in Heartland will enhance our national manufacturing footprint while serving as a valuable compliment across our other sites to provide a one-stop outsource solution for low-volume, high-mix production that supports customization and delivers a superior customer experience while generating greater economies of scale across the entire Fathom manufacturing platform. Consistent with our strategy to create world-class manufacturing centers in key strategic markets, We remain on track to open a greenfield site in the Austin, Texas area in the first half of next year. As part of this initiative to expand our Texas footprint, we intend to consolidate our two existing nearby facilities, which will eliminate redundancies, reduce costs, and further increase our scalability. And we look forward to providing an update on our progress during our next quarterly call. In furthering our efforts, To accelerate customer engagement, we had a strong turnout at the International Manufacturing Technology Show, or IMTS. This week-long event, which was held in September for the first time since 2018, represents the biggest manufacturing event in North America with over 85,000 attendees and 2,000 exhibitors. This was our first in-person event since 2019, and it was exciting to see so many new and familiar faces. We met with existing customers, exploring opportunities, to expand our relationships while securing a significant number of new, high-quality leads across a wide range of industries. We believe our flexible, hybridized approach, applying the best manufacturing process to deliver the most effective solution that achieves the desired outcome resonated significantly with the attendees. We remain focused on ramping our sales and marketing activities as we continue to invest in new technologies and expand our breadth of leading offerings. By executing our go-to-market strategy, we expect to build deep and entrenched relationships with additional Fortune 500 tier companies and achieve greater market penetration for our additive and traditional manufacturing technologies. With that, I will now turn the call over to Mark.
spk06: Thank you, Ryan, and good morning, everyone. I'll begin my remarks of our quarter three results on slide four. Our revenue for the third quarter totaled $40.2 million. which was slightly above the midpoint of our previously stated guidance of 39 to 41 million. In quarter three 21, revenue totaled 41.5 million. Our performance in the quarter was driven by growth in precision sheet metal and CNC machining. We continue to build positive momentum on the commercial front and posted a sequential increase in our monthly sales throughout the third quarter. For quarter three, our revenue by product line was as follows. Additive manufacturing totaled 3.2 million or 7.8% of total revenue. As mentioned earlier, we're investing in new additive technologies and believe our new Silicon Valley Technology Center will further strengthen our growth prospects in this segment. We also expect the record order growth that we experienced in additive for the month of September to have a positive impact on revenue in the fourth quarter. Injection molding was 6 million or 14.9% of total revenue. We remain focused on adding more resources to improve our overseas supply chain, including the development of a new software support system to drive future growth in our injection molding business. CNC machining climbed 9.7% to $15.5 million, or 38.6% of total revenue, reflecting our ongoing ability to capitalize on cross-selling opportunities and previous acquisitions completed in the first half of 2021. We also became operational on our quick-turn CNC cell, which contributed to revenue. Precision sheet metal increased 3.3% to $13.7 million, or 34.1% total revenue, as overall customer demand in this business remains healthy. And finally, ancillary technologies, our smallest product line, rose 4.5% to $1.8 million, representing 4.5% of total revenue. For the first nine months of the year, our revenue increased 13.8%, primarily due to acquisition-related activity and growth within Fathom's strategic accounts as we maintain our focus on expanding our share of wallet with existing strategic customers and adding new corporate accounts. On slide five, we provide our adjusted EBITDA performance for the third quarter. In quarter three, our adjusted EBITDA totaled $7.1 million, representing a margin of 17.5%. In the prior year period, we reported adjusted EBIT of 8.6 million for a margin of 20.8%. Our performance reflects reduced volumes primarily due to the upgrade and build out of our commercial team mentioned last quarter and the related impact from lower absorption. We remain focused on taking steps to ensure a more cost-efficient cost structure as evidenced by our optimization plan and fully leveraging our broad on-demand platform as revenue expands. Gross margin in the quarter was 37.5%, up year over year by 160 basis points. This was driven in part by strategic pricing adjustments and ongoing cost improvements, partially offset by lower volume leverage. On a sequential basis, our gross margin improved 50 basis points. Now, we realized limited savings in the quarter from the execution of our optimization plan, which remains in the early stages. Upon completion in mid-23 of our various initiatives, we expect to generate annualized cost savings totaling approximately $5.5 million. We also held additional Kaizen events at our facilities in Heartland and Tepe, Arizona to foster a culture of continuous improvement following our initial workshop at our Miami location earlier this year. By identifying incremental opportunities to remove waste and enhance productivity, We intend to achieve our objective in becoming a truly lean organization. SG&A increased year-over-year by 12% to $11.9 million, primarily due to the incurrence of public company expenses following our listing on the New York Stock Exchange. Now, excluding stock compensation, our public company costs in quarter three declined as anticipated on a sequential basis by approximately 13% to $2.1 million. We expect these expenses to trend further downward in the current fourth quarter by an additional 20% as we seek to normalize our public company infrastructure. We also remain on track regarding our new shared service center for finance and accounting with transaction activities to be completed by year end and accounting by quarter 123 to help streamline company-wide processes while further scaling the business. We plan to pursue additional centers in other administrative functions over the coming quarters. On slide six, we highlight our liquidity and cash flow. We ended the third quarter with available liquidity of $31 million. This includes $8 million in cash and cash equivalents and $23 million of undrawn commitments under our $50 million revolving credit facility. As of September 30th, our total gross debt excluding cash was $149.7 million and net debt totaled $141.7 million. with no debt maturities before December 2026. We generated $2.3 million in operating cash and our CapEx totaled $4.3 million, which is higher mainly due to timing as we do expect a notable decline in CapEx spending in the current fourth quarter. Our CapEx spending for the year is slightly ahead of plan, but our year-to-date CapEx also reflects payments from previous commitments that were made at the end of 2021. Now as Ryan mentioned earlier, we continue to execute our capital deployment strategy with key investments in additive and CNC machining to further enhance our unmatched capabilities and increase throughput. And we expect to begin generating positive returns on these investments beginning in 2023. We also continue to integrate multiple ERP technologies into a single scalable cloud-based solution to boost our productivity in line with our efforts to improve the overall digital threat of our business and expect a complete DRP process by the end of next year. Now, as a final note on this slide, subsequent to the end of the third quarter, we amended our existing credit agreement, providing for covenant relief for both leverage and interest coverage. Specifically, the maximum net leverage ratio increased to 4.5X through June 30, 2023, with a step down to 4.25X through December 31st, 2023. These modifications increase our financial flexibility for continued investment into the growth of Fathom. Now turning to slide seven, we provide our updated forecast for 2022. With just under 50 days left in the year, we revised our range for annual revenue, which is now expected to be between 163 and 165 million for an increase of approximately 8% at the midpoint on a reported basis. This implies revenue for the current fourth quarter of approximately 40 to 42 million as our focus remains on outperforming the overall digital manufacturing market. The range for adjusted EBITDA has also been revised as we now expect to generate between 30 and 32 million in 2022 for an implied margin of 18.4 to 19.4%. For quarter four, we expect adjusted EBITDA of eight to 10 million representing a higher margin of 20% to 23.8%. We are continuing our focus on ramping our sales and marketing activities and increasing operating efficiencies. We will continue to monitor the impact of global economic conditions and will provide our next outlook on our quarter four earnings call in late February or early March. At that time, we intend to begin issuing guidance on a quarterly basis only. This timeframe is aligned with our backlog, which typically extends 60 to 90 days and is more indicative of our future results. Now, finally, as a reminder, our current outlook excludes the impact of any future acquisitions. M&A remains an important part of our overall growth strategy, and we remain opportunistic in our approach to pursuing accretive tuck-in acquisitions and maintaining our role as an active consolidator in our large and highly fragmented industry. I'll now turn the call back over to Ryan.
spk04: Ryan? Thank you, Mark. I will provide some closing comments on slide eight. We are pleased with our performance for the third quarter, which was consistent with our expectations as we continue to deliver profitable results and generate positive cash flow. We also gained solid traction from our commercial actions with expanding our monthly orders and sales throughout the quarter and continued strong growth within our most important segment of our large strategic accounts. We're encouraged by our increasing productivity, which bodes well for further improvement in Q4 and into 2023. In addition to building a strategic platform-based commercial team, we successfully bolstered our growth prospects by taking delivery of new technologies, particularly in additive and CNC, as we continue to invest in the business. With numerous steps we have taken to date in 2022, Fathom is in a much stronger position to drive long-term profitable growth than when we went public just under a year ago. And with the ongoing execution of our optimization plan, we expect to enhance our ability to fully leverage our scalable platform for the benefit of the company and our shareholders. Although the macro environment remains uncertain, we are focused on what we can control, and we believe in our differentiated business model, highlighted by extensive and entrenched blue-chip customer base across diverse end markets, comprehensive manufacturing services, and a track record of profitable growth during previous downturns, such as what we encountered in March of 2020, when our key customers leaned on us even more. This all positions our company well to navigate any near-term macro headwinds. I'm proud of the progress our team has achieved in transitioning to a New York Stock Exchange listed company, and I'm confident the best is yet to come as we advance our mission to accelerate manufacturing innovation for the most product-driven companies in the world while creating a more agile and responsive supply chain. This concludes our prepared remarks, and now we'll open the call up for questions.
spk00: Thank you. If you would like to ask a question, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question today comes from Greg Palm with Craig Callum Capital Group. Please go ahead, Greg.
spk01: Yeah, good morning, everyone. Thanks for taking the questions here. I guess I just wanted to, you know, start with the outlook and maybe more specifically, you know, what you're seeing in October this year as it really seemed to follow kind of normal seasonality trends based on the guidance you're setting for the fourth quarter. So just a little bit more on maybe what you're seeing and if a quarter would be helpful to start.
spk04: Yeah. Good morning to you, Greg. Thanks for joining this morning. Ryan here. Yeah, I would say, as we talked about in our prepared remarks, we saw through the addition of the commercial resources that we talked about in the second quarter, we're seeing them ramp. We saw orders growth every month in the third quarter, and we continue to see that progression on the same path that we saw in the month of September in October so far. So we're cautiously optimistic as we see the growth throughout the year. I think The value of our platform is really the diversification around the different technologies, the end markets, the entrenched customer base that we have. It's a very large market, obviously, out there, and so we're continuing to focus on trying to capture the demand that exists out there. I think we're cautiously optimistic as we look into the remaining part of this year.
spk01: What about if you could maybe differentiate between the activity you're seeing on You know, some of the, you know, the shorter lead time, kind of quick-term prototyping stuff for some of the longer-term strategic projects or programs.
spk04: Yeah. You know, as it relates to that, so we've seen, you know, I think as we talked about before, you know, in the second quarter specifically and even a little into the beginning of the third quarter, you know, we saw a lot more pressure on the more commoditized, really quick-turn projects. additive, we started to see where we've got differentiated value in some of the offerings that we have, especially on additive and being able to leverage the multiple different technologies that we have. That's really where we saw the value of why we saw record orders in the month of September from an additive side of things. It wasn't just the commoditized quick print and ship. It was leveraging post-processing related to the additive side of things. We're continuing to see strong demand there. I think some of the larger projects that we're seeing, we're still seeing really good demand in those. We're seeing a lot of, especially as I talked about earlier in the call on the EV space, where we're leveraging you know, maybe three or four different manufacturing processes where we may be helping a customer go from that initial prototype 3D printing to urethane casting through bridge production injection molding. And the opportunity of the reason they're looking for us is that we're able to reduce their entire time to market. In a lot of cases, somewhere between 25% to 30% by being able to handle all those different phases of the development all the way through to, you know, mid-production.
spk01: Okay, that's good. And then, Mark, just a little bit of help on the facility consolidation and the cost savings program. Is that mostly going to be on the COGS line and then just in terms of modeling that?
spk05: Yeah, good question. Yeah, I'll let you start. Yeah, no, Greg, good questions.
spk06: We expect it to be split pretty much evenly between COGS and SG&A. And most of it should start incurring 1-1. We'll get a little bit of it in fourth quarter, but most of it will start cutting in. We're in good shape to shut down the Oakland facility. As I said on my prepared marks, finance and accounting is almost complete. And we will finish some of the other leadership transitions at the sites, which was more actually on the SG&A side, Greg. So that's why it's about equally 50-50 split between COGS and SG&A savings for 23.
spk01: And full run rate savings started in the second half of 23?
spk06: I would say if I handicap, I'd say 75-80% of it will start first quarter and 100% by the end of quarter two next year.
spk01: Perfect. Okay. All right. I'll leave it there. Best of luck. Thanks.
spk06: Thank you, Greg.
spk00: Our next question comes from Jim with Needham and Capital. Please go ahead.
spk07: Hi. Good morning. So a couple of questions. Maybe first on the additive side and recognize it's a smaller part of your business. But I wanted to see if I could reconcile the sequential revenue decline and then the increased order intake that you're talking, that you highlighted. If you could walk us through that.
spk04: Yeah, absolutely. So, you know, the additive is probably, you know, the biggest area that we saw, you know, turnover in the sales team to get the right team in place to be able to grow this platform, which we're fully staffed and we're really excited about the team that we have in place. You saw the impact in the revenues because the revenues per additive in the third quarter would be the orders that you would have gotten in May, June, July time period. We usually see about, and depending on the size of the project, about a 30-day lag there. So we saw really strong record orders for the history of the company in the month of September. And so we're seeing the sales resources that we brought in ramping really quickly and And so you'll see the benefit of that in the revenues in the fourth quarter. We saw that momentum from an additive orders perspective continue to keep going in the month of October. Just as an example, I talked about the three HP multi-jet fusion machines that we added in the third quarter. Those machines, since we've added them, have been running pretty much 24-7 nonstop. And so we're continuing to see strong demand there on our DMLS side of things. We're continuing to see strong demand there, especially from some aerospace and defense customers where they're running pretty much 24-7 there as well. So we're seeing the ramp up from the orders, which will translate into the revenues into fourth quarter and into Q1 of next year, Jim.
spk07: Got it. Hey, Ryan, just a broader question on the orders in the quarter. Nice to hear that sequentially it was growing each month. Has that been in line with your expectations? And I wonder if you could talk about the market verticals where you might be seeing changes in demand either way and any implications that might have for margins, just given the mix of business you're seeing.
spk04: yeah you know I think as we look across you know the margins in in our different you know manufacturing process they're all relatively you know similar from a margin perspective which is why we really think about you know technology agnostic approach to the customer and trying to understand what's the best technology what's the best material what's the best process to solve the manufacturing challenge they have and If you think about the areas, you know, from end markets that we're seeing that are really strong for us right now, the medical space, we're continuing to see strong growth there. We do a lot of work in the robotics space. We've got some really strong customers there. And I think what's interesting, especially in that space, is the amount of multiple technologies that they're leveraging. They're leveraging typically four to five different technologies. So it's additive, both plastic and metal, injection molding, CNC machining. You know, we're seeing good growth in, you know, our precision instrumentation business as well. You know, just an example of that, Jim, we have a large customer in the Minneapolis area. Typically, we've done, you know, $2.5 to $3 million of CNC machining of high-precision kind of mid-volume production components for them. And they have an internal mandate to generate about 30% of their new revenues from new products. And now they've started leveraging us for 3D printing as well as injection molding. And so those are all ancillary new processes that we're able to add. And it's all under the guise why they're leveraging us is speed. It's our ability to provide a faster solution to allow them to ramp their new products, which is a key initiative for their company. And so that value proposition is resonating across multiple different industries. And I think it lends itself to just the breadth of these large entrenched relationships that I talked about that we have of the customers that are spending over a million dollars on an annualized basis with us and how we're growing with those customers. And so... That's kind of where we see it from, you know, broad and a couple of different examples of different industries and markets that we're seeing. You know, in spite of, you know, maybe the macro environment that a lot of people talk about, we think there's still a lot of opportunities to gain market share and continue to grow.
spk07: Got it. Maybe a very quick one from Mark. Mark, you talked about a sequential decline in public company costs. in Q4. I'm just wondering, just SG&A in general in Q4, any thoughts on how we might think about that expense levels?
spk06: Yeah. What I would say is it will be probably down roughly 5% from quarter three as we continue to normalize and get more efficient, I would say, on managing the public company costs. So that's what I would expect, Jim, in the fourth quarter.
spk02: Thank you.
spk00: Our next question comes from Wansi Mohan with Bank of America. Please go ahead.
spk03: Yes, thank you. Good morning. I was wondering if If you go back historically and look at your end market performances by technology, you're seeing some real bifurcation and performance across the different categories by product line. So I was just curious, is there a lead or lag associated with how these work based on what customers are doing at any given point in time, either positively or negatively? Could this be signaling any sort of inflection? And I will follow up.
spk04: Yeah, and good morning to you, Wamsi. And so you're talking about the different manufacturing technologies and kind of the lag and the revenues on those. I would say if you look at, you know, the performance through the first nine months and in Q3, you can see the growth that we're having within, you know, the CNC machining and precision sheet metal, which is a little more of our mid to low volume production side of our business. The additive injection molding, the revenues in Q3s, is really more of an impact related to, as we talked about, really getting the right sales team in place. That tends to be a little more project-driven, and the additive tends to be more NPI transactional. As you experienced, as we transitioned our sales team from kind of a legacy to more of a strategic platform-based sales team. We certainly saw an impact in the orders momentum in the second quarter, which then impacted the growth in the third quarter, specifically within injection molding and our additive side of the business. Like I talked about before, we're really excited. We're fully staffed from a commercial team. We brought in a lot of people with deep industry experience. Typically, a sales rep in our industry takes about six months to ramp, and so a lot of those reps are still in month three at this point. But we think we can ramp them faster because of the industry experience, and we believe that will lead to success. You'll see some improvement into Q4 on that, but I think that you'll really see the impact of that into building momentum into 2023 from that perspective. And so we still feel we're still very, very bullish, which is why we talked about the investments we've made from a capital perspective to be able to support the orders ramp, especially with additive, as I talked about in my prepared remarks, Wamsi.
spk03: Yeah, no, thank you, Ryan. That's helpful. And if I could follow up for Mark, can you help us with seasonality as we think about the jump-off point here in your implied fourth quarter guidance as we look into the March quarter? Would you say, given what you know right now, that seasonality should be normal, better or worse, maybe just without sort of getting into specific items? Thank you.
spk06: We don't see as much customer-related seasonality, but there is an impact. from the commercial impact on our business that we do historically tend to see a little stronger fourth quarter and a little weaker first quarter because of that commercial impact on how your reps are pushing for the end of the year. So the customer seasonality is not as significant. And, Wansi, we are expecting similar to prior years. That's how it's going to behave. which potentially, I'll be honest, could be an upside in quarter four. But we're not guiding in that matter. We're trying to be cautious here as we move forward. But that's normally what we see in the business one seat.
spk03: Okay. Thank you so much.
spk06: Yep.
spk00: Before we move on to our next question, I'd like to remind all participants that if you would like to ask a question today, please press start, followed by the number one on your telephone keypads now. Our next question comes from the line of Paul Chung with JP Morgan. Paul, your line is open.
spk08: Hi, thanks for taking my question. So just on gross margins, you know, you saw Kind of like 155 basis point increase here in 3Q with kind of a similar run rate of revenues from last year. And also kind of up sequentially here. Kind of expand on the drivers. You mentioned higher margin CNC and some pricing benefits. But how do we think about gross margins as you find some scale hopefully next year and kind of pace of expansion we should expect as we kind of look into 23? Yeah. Yeah.
spk06: Yeah, Paul, we've talked about on previous calls that we've been selectively, particularly on some of our low to mid-production business, gone back and raised pricing on certain relationships, and we haven't really gotten pushback. So we're seeing some benefit of that in our margins. Secondly, we started from the beginning of the year looking for efficiencies, standardizing how we operate all the sites. So we're starting to finally get some benefits coming from that. The improvement really in quarter three wasn't from leverage. We actually probably took a little bit of a hit. That's why we were at the lower end of our EBITDA is we didn't get as much absorption. But as we move forward and can get the revenue in that 40 to higher 40s level, we do expect a nice improvement. that's one of the key ingredients that we think can move us back towards that low 40% level of gross margin. And that's why we're pretty positive. And obviously, with the optimization plan benefit, which is half of the $5.5 million, that also will support pretty significantly our ability to improve the margins as we go into 2023. So does that give you a little better color, Paul?
spk08: Yes, thanks for that. And then can you, can you kind of expand on, um, you know, the material goodwill impairment here, any details, what drove that?
spk06: Sure. So that wasn't, you know, it's non-cash doesn't affect our liquidity or covenants or anything. You know, it's, it's a technical test that you have to go through once a year. Um, we triggered it one quarter early, uh, driven by a couple of factors. One was the lower stock price. Two was the macroeconomic issues. And those macroeconomic conditions also contributed to higher discount factors because of higher debt and cost of equity cost being applied to the valuation model. And then us lowering some of our forecasts for the year. All of those factors contributed to The valuation and the one-time, not one-time, the goodwill impairment we had to take. So as I said, it's non-cash. It gets added back, as you can see, for both adjusted income and EBITDA. So it's, you know, a technical accounting process, unfortunately, that all companies are subject to. And, you know, particularly with the stock market, that's what triggered it.
spk08: And then lastly, on cash flow, I know there's a lot of moving pieces with restructuring and, you know, very dependent upon top line and scale. But how do we think about kind of more normalized cash flow conversion in 23 and longer term? Thank you.
spk06: Yeah, no, good question. And, yeah, we are running lower this year on cash flow. Some of it is due to the lower revenue profile. The other is we've taken some one-off charges related to taxes, related to vesting of shares. That's almost $3 million cash usage we had. We had to pay an earn out, which was almost $3 million. So those were items that won't repeat next year, Paul. So that's $6 million of cash improvement. We've also had slightly higher working capital, which we are working on. So our plan is to improve the cash flow performance. There's a lot of effort right now, and we would expect that conversion rate to go up much higher. I think we're running in the 30%, 40% range right now, and the ability to improve that by 30% to 50% is something we're working on for 2023. Great. Thank you.
spk00: Our next question comes from Jacob Steven with Lake Street Capital Markets. Please go ahead.
spk09: Hey, good morning. Thanks for taking my question. Maybe just give us a sense of the platform sales rep build out. Maybe could you talk about potential headcount and kind of just give a general sense of progress on the efforts?
spk04: Yeah, as I mentioned, good morning to you, Jake. And as I mentioned on the prepared remarks, from a commercial perspective, at this point we're fully staffed. And so we've added back any of the turnover that we have. We've got roughly in our overall commercial organization between strategic sales, regional, inside sales, sales support, And our marketing team, there's roughly about 60 resources associated with that. And then of that, about half of those are focused on the front end of the business between our strategic sales team, which covers roughly our top 100 accounts that generate about 70% or so of our revenues. And then the others are related to more of our regional corporate accounts. And then our inside sales team is working on lead generation as well as leads that come through our digital marketplaces as well. So fully staffed at this point and really in a great position to continue the orders momentum that we saw throughout the third quarter and into October as well.
spk09: Okay, I got it. And could you just maybe outline again what the typical ramp up kind of period is for those sales reps and how long have they been with you?
spk04: Yeah. So typically we see about a six in our industry anywhere between a six to 12 month ramp up. Now, the benefit is we were able to hire some experienced folks from the industry, and I think it's a real testament to what we're doing at Fathom, the value proposition that we're selling, and the capabilities that we have both through our internal 12 different manufacturing facilities and different centers of excellence around different manufacturing processes. So there's been a strong desire from Fathom you know folks within the industry to want to join our team and so you know we've been able to add in my opinion some of the really best people in the industry have wanted to come to work here because they can take their relationships with their customers and they know they can sell them a solution that they weren't able to do at their previous employer. And so I think it's a real testament to what we're building, the value proposition that we have, and the people we've been able to bring on. So normally, as I said, it's about a six to 12-month ramp. About half of the team is new to their role within the last three months. So we're still in that ramp period. But we think because of the experience and the types of people that we hired in the caliber, We think we can, you know, get them ramped even faster, and so that's where we're really excited. What we should see, really, them fully ramping through the end of this year and into the first quarter of next year.
spk09: Well, great. That covers my questions. Best of luck going forward here.
spk03: Yeah, thanks so much. Appreciate it.
spk00: Those are all the questions we have for today, so this concludes our call. Thank you everyone for joining us. You may now disconnect your lines. Have a lovely day everyone.
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