Greetings and welcome to Desktop Metal's third-quarter 2023 earnings conference call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Michael Jordan, Vice President, Finance and Treasury. Please go ahead..

Good afternoon and thank you for joining today's call. With me today are Ric Fulop, Founder and CEO, Desktop Metal; and Jason Cole, CFO, Desktop Metal. Please note our financial results press release and presentation slides referred to on this call are available under the Events & Presentations section of our Investor Relations website.

This call is also being webcast live with the link at the same site. The webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of Desktop Metal and cannot be reproduced or transcribed without prior consent.

Before we begin, I'll refer you to our safe harbor disclaimer on slide 3 of the presentation. As a reminder, today's call will include forward-looking statements.

These forward-looking statements reflect Desktop Metal's views and expectations only as of today, November 9, 2023, and actual results may vary materially based on a number of risks and uncertainties.

For more information about the risks that may impact us our metals business and financial results, please refer to the Risk Factors sections on Form 10-Q in addition to the company's other filings with the SEC. We assume no obligation to update or revise the forward-looking statements.

Additionally, during the presentation and following Q&A session, you 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 GAAP to non-GAAP measures. And I'll now turn the call over to Ric..

first, as additive manufacturing continues to transition from prototyping to mass production applications is projected to grow to $100 billion industry by the end of the decade. Second, Desktop Metal is uniquely positioned to benefit from this expanding market as it holds a leading proprietary technology focused on mass production solutions.

We hold the leading market share position in binder jetting, which customers like BMW are using for mass production of critical components and a leading position in healthcare applications with our DLP technology across a wide range of materials and end users.

Broadly speaking, our expansive and growing library of materials across the categories of metals, polymer, ceramics, and biocompatible materials are enabling Desktop Metal customers to create value through solutions, which address our highest opportunity challenges, and we'll walk through some of those examples today.

Third, we're poised to benefit and are already beginning to see the results of an expanded global installed base that is using additive manufacturing equipment for real production. Utilization of our products at our customers is increasing, as evidenced by the growth of recurring revenue streams despite a challenging market.

Our recurring revenue has grown by 34% from $37 million in the first three quarters of 2022 to $49.2 million in the first three quarters of 2023. And lastly, we're well underway to rightsizing our cost structure and improving our operational efficiency. We're ahead of plan on executing this $100 million annualized cost reductions announced in 2022.

And we'll continue to identify additional opportunities to refine our portfolio and operations to further enhance our operating leverage driving towards profitability on an adjusted EBITDA basis in fourth quarter of 2023. Our goal is to be cash flow positive in 2024 on the cash that we have.

We have lowered our operating expenses for six consecutive quarters, a key driver on our path to adjusted EBITDA profitability.

Taken together in the short term, we're laser focused on driving good profitability on the cash that we have, which will place Desktop Metal on a strong footing to capitalize in this secular opportunity as the market returns to grow. Starting now to our recent business highlights.

The third quarter saw continued expansion of major super fleet customers, including Honeywell and Baker Hughes in major companies like Northrop that have now grown into the global leaders in 3D-printed optical components using our machines.

Companies at now operate one of the largest super fleets of binder jet systems for printed castings in North America as well as powder metallurgy, super fleet customers like DSB and FreeFORM in major automotive customers like BMW, which are now the largest super fleet operator of Exerial systems.

By the end of the year, they'll have six operational Exerial binder jet systems that can continuously print 12 build boxes with a size of 2.2 meters each to mass produce parts for their six-cylinder engines. We have some great videos from DSB and BMW that highlight this growing deployments, and I encourage you to watch them.

Our sales pipeline in binder jet continues to grow with a strong pace, which gives us confidence in our growth opportunity over the next year. On the healthcare front, we received European clearance for the market-leading Flexcera Smile Ultra+ materials, which greatly expand our market opportunity for this product line.

And we've had a successful launch of our new 3D-Bioplotter print technology or bio fabrication of brass in our medical device. For now the 3D printing industry isn't doing one of the toughest periods I've seen, but I'm confident we'll see a return to growth because our sales funnel continues to build.

So this lengthening of the cycle should have a countercyclical effect as customers plan for Q4 and the rest of the upcoming year. I believe Desktop Metal stands out in a positive way from some of our peers during this uncertain time. For starters, we were extremely proactive in cutting costs when we saw challenges on the horizon.

We're also led by a team of seasoned 3D printing leaders brought together from several acquired companies that bring stability and experience to our leadership team. Finally, we're a team of true additive manufacturing believers, and we have dedication in driving this industry forward.

In conclusion, we finally have clear line of sight to profitability, and Desktop Metal is confident in a promising future with clear focus on high-growth product categories and operational efficiencies.

We're well prepared to benefit as the industry returns to growth showcased by proprietary technology, diverse materials library, high-speed production solutions, and a growing global installed base.

Despite softer revenue in the third quarter, our recurring revenue streams continue to perform very well, contributing to positive shift in adjusted EBITDA, a path towards reaching breakeven in the fourth quarter of 2023. And this sets Desktop Metal on a solid foundation to capitalize on the long-term trend of at-scale 3D printing in manufacturing.

And with that, I'll turn it over to our CFO, Jason Cole.

Jason?.

Thanks, Ric. I'll begin on slide 15 with highlights of our financial performance for the third quarter of 2023. A reminder that we will be referring to several financial metrics on a non-GAAP basis, and a reconciliation to GAAP data is included in the filed appendix.

Consolidated revenue for the third quarter of 2023 was $42.8 million, down 9.2% from $47.1 million in the third quarter of 2022. The decline in year-over-year revenue was led by weaker product sales, partially linked to ongoing efforts to deemphasize product lines with lower-quality growth prospects in addition to lengthening sales cycles.

As we've mentioned previously, we have narrowed our product sales focus as we've streamlined costs, prioritizing growth potential, and/or stronger margin opportunities. Higher-margin recurring revenue streams increased year over year, which was offset by decreases in other parts of the business.

Desktop Metal's product and services have been effectively and consistently validated by our customers as they create solutions to real business challenges and generate meaningful and rapid return on investment. We have historically closed a significant amount of sales transactions at the end of each quarter.

And in 3Q, we found several deals slip into October. These deals were included in and made up a substantial portion of our third-quarter internal projections, which we now expect to be completed in the fourth quarter.

While the third quarter was below our expectations, we remain confident that we will finish the year strong even as sales cycles have lengthened. Non-GAAP gross margins improved by more than 190 basis points to 21.9% for the third quarter of 2023.

The improvement was driven by sustained progress in our cost reduction initiatives across multiple quarters, and these were partially offset by a one-time settlement with the supplier. On slide 16, you can see how our cost savings, which began in June of 2022, have improved our margin performance over certain revenue levels.

We have made meaningful reductions in our fixed cost base as a result of which we are able to achieve higher gross margins at current and future revenue levels. We are now focused on are higher growth and higher-margin parts of the business.

Seasonal revenue strength, along with meaningful cost savings, gives us confidence in our gross margin potential. Moving forward, we remain confident that we will be able to achieve non-GAAP gross margins above 30% in 4Q '23 and in 2024, even on modest revenue growth. Moving on to the next slide.

In the third quarter of 2023, our non-GAAP operating expenses were $33.2 million, down 20.1% as compared to $41.5 million in the third quarter of 2022. Operating expenses have been meaningfully reduced across all categories, including stock-based compensation.

Non-GAAP operating expenses were down 4.2% sequentially compared to $34.6 million in the previous quarter. Since 1Q '22, we have lowered our quarterly non-GAAP OpEx by $18.8 million quarterly, or approximately $75 million annualized. This represents a 36% reduction in non-GAAP OpEx over this period. We are pleased with our progress on this front.

And importantly, we are not done. While we have areas where incremental investment will help our business grow, we are executing these investment pivots selectively and expect to see continued operating leverage improvement through the fourth quarter of this year and into 2024.

We believe that the trend of expanding operating leverage will continue, and we will benefit from our cost cutting efforts, disciplined spending, and top-line growth. This in turn is driving us to the path of profitability and generating positive cash flows. Our cost cutting efforts are insulating our business as we resize spend levels.

We expect to continue the trend of lowering our expense structure throughout the remainder of the year. And our progress to date gives us confidence in our ability to execute reductions should the environment of weaken demand become more protracted. Looking at the next slide.

Adjusted EBITDA for the third quarter of 2023 was negative $20.5 million, an improvement of 27.3% compared to a $28.2 million loss from third quarter of 2022. We are on track to achieve our base case of being adjusted EBITDA profitable in the fourth quarter of this year.

Despite top-line weakness, progress to date on cost reductions makes us confident that our best performance is ahead of us in terms of adjusted EBITDA. Our funding is robust with $108.2 million in cash, cash equivalents, and short-term investments at the end of third quarter 2023 compared to $127.6 million to close 2Q 2023.

Our net cash reduction of approximately $19.4 million in Q3 was the lowest since going public, excluding 2Q 2022 when we last raised cash. We are improving on and optimizing cash spend progressively through recent quarters and expect to continue to do so.

We have trimmed our operating cash flow consumption to $21.4 million in third quarter of 2023, down 46% compared to $39.7 million consumed from operations in the third quarter of 2022.

As a point of reference, this quarter's cash consumption from operations was down 62% when compared to $56.3 million consumed in the first quarter of 2022, the last full quarter of results before commencing our cost reductions.

Lastly, we finished the quarter with $107.2 million in inventory after investing $15.5 million during the quarter, and we are well-positioned to execute on expected fourth-quarter demand. We are committed to optimizing inventory management, monetizing inventory, and improving cash flow and working capital in 2024.

Finally, moving to our financial outlook on slide 20. Against a backdrop of macro and industry-wide headwinds from the beginning of this year, we adjusted our guidance ranges of revenue and adjusted EBITDA.

We anticipate generating revenue in the range of $50 million to $70 million for the fourth quarter of 2023, representing revenue of $187 million to $207 million for the full year of 2023. This guidance is based on our expectation of certain transactions closing during the fourth quarter and the overall weaker macroeconomic backdrop.

We expect the momentum in the improvement of adjusted EBITDA to continue into the fourth quarter of 2023 and beyond. For fourth quarter 2023, we expect adjusted EBITDA to be negative $10 million to positive $10 million, implying adjusted EBITDA of negative $70 million to negative $50 million for the full year of 2023.

With that, we will take some questions.

Operator?.

[Operator Instructions]. Our first question comes from the line of Greg Palm with Craig-Hallum Capital Group..

Hey. Hi, good morning, everyone. Thanks for taking the questions here. I wanted to start with a little bit on the quarter. In the guide, you talked about how some orders slip into October.

I just wanted to confirm that did those get booked as revenue already in just in terms of your overall visibility rates at this point, the Q4 guidance range on a revenue line, $20 million pretty wide range.

So whereas visibility right now, what enables you to get just sort of the top end of the range? What would be the bottom end and sort of what's the base case, right in the middle, if we could get a little bit more detail on that..

Yeah. Thanks, Greg. This is Jason. I think you're right, that is a wide range. I think, year to date, the business has not performed the way we expected it to. We opened the year understanding it was a weak backdrop. We had signals in our opportunity pipeline that said that could turn the middle of the year, and that has not happened.

The signaling for the wide ranges, we put some degree of conservatism around that. We desperately do not want to perform outside of the guidance range here for fourth quarter. So we put it wide to make sure that we can hit it, I'd say, the bottom end of that range is very conservative. I think, when we talk base case, we're talking midpoint.

And we believe we have the demand to deliver in the top half of that range. But we have some conservatism in there, and that's the essence of the $20 million range that talked about..

Understood. And is it -- yeah, go ahead..

I think, where you can see the world kind of performing with our peers in the market. And a lot of them have had surprises on the top line in this year. The public companies that are at some meaningful scale.

So I think it's hard to tell if you call this a temporary blip in the additive space that people get accustomed to maybe higher interest rates and in the current environment in, but we do see a lot of opportunity in our file gets larger. So as that sale cycle brings back to a normal window, then you should see acceleration..

Yes. Understood. And is there a maybe kind of a common denominator in terms of the sort of the weakness that you've seen throughout the year, whether it's by end-market type of customer, whether it's those that are financing transaction versus those that are not.

I'm just trying to get a sense of kind of what you're maybe looking out there from a macro perspective that might help at least stabilize things at some point here in the near term?.

I mean, I think it's hard to put it into a single factor. A lot of stuff has gone -- has been a surprise this year. And there's been a lot of drama in our industry. I think of all the public companies, I think three of them have had basically don't have a CFO right now. And fortunately, we have a great one.

But you see there's been a slowdown in our in our industry. I think is temporary. This is a growth industry, and I think we do see the demand and the customer interest, but there's periods of times when you've had that sort of a pause.

And we also saw quite a bit of concern from many customers that are making million-dollar decisions that were just wondering what's going to happen after we terminated our deal with Stratasys, and they were just wondering in that delayed some deals that happen towards the last week of Q3.

So that delayed a number of deals are now -- most of them are now closed. So hopefully, we move on and now we have a clear window to execute over the next 12 months and get this business back on the growth path and make customers successful..

Okay. And maybe just last question. You've talked about some big projects in a couple of verticals, automotive and consumer electronics, specifically. Any update on those -- to those remain on track..

Yeah, they do. We continue to make progress across the board in a number of the area. Like all major projects, things always take a little bit longer, but we continue to make progress in this area. I think those are going to be major markets for our technology in the long run..

Okay..

Let me add one thing to Ric's comments because I think it's important and we mentioned in the prepared remarks as well. The consumables and services recurring revenue streams performing the way they are, I think, is of a bullish undertone here.

I think, while we have had some purchase decisions on products delayed, we are seeing the utilization of our systems that are in place rising. And I think that is a trend. It's the kind of the razorblade thing we've talked about in past calls, and so we're encouraged by that..

Yes. Thanks for commenting that out again. Okay, I will leave it there. Thanks..

Awesome. Wonderful. Well, we keep making great progress on titanium and many other areas. Great to have a P50 quarter this quarter with our friends at FreeFORM and many other things to come in this area.

So thanks again for listening, and thanks to all of our employees that worked very hard to drive additive into mass production, in our investors for believing our vision, and look forward to next quarter..

Thank you. That concludes our question-and-answer session. Mr.

Fulop, did you have any further comments?.

No, we're good..

Thank you. That concludes our conference call today. Thank you for your participation. You may now disconnect your lines..