Desktop Metal, Inc. (NYSE:DM) Q2 2022 Earnings Conference Call August 8, 2022 4:30 PM ET
Company Participants
Jay Gentzkow – VP, IR
James Haley – CFO & Treasurer
Ric Fulop – Co-Founder & CEO
Conference Call Participants
Joshua Sullivan – The Benchmark Company
Noelle Dilts – Stifel, Nicolaus & Company
Troy Jensen – Lake Street Capital Markets
Operator
Greetings and welcome to the Desktop Metal’s Second Quarter 2022 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jay Gentzkow, Vice President, Investor Relations. Please go ahead.
Jay Gentzkow
Hello, everyone, and thank you for joining us this afternoon to discuss Desktop Metal’s second quarter 2022 financial results. With me today are Ric Fulop, Founder and CEO; and James Haley, CFO.
Please note that 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 a link at the same website. The webcast and accompanying slides will be available for replay for 12 months following this call. The content of today’s call is the property of Desktop Metal. It cannot be reproduced or transcribed without our prior consent.
Before we begin, I’d like to refer you to our safe harbor disclaimer on Slide 2 of the presentation. Today’s call will include forward-looking statements. These forward-looking statements reflect Desktop Metal’s views and expectations only as of today, August 8, 2022, and actual results may vary materially based on a number of risks and uncertainties. For more information about the risks that may impact Desktop Metal’s business and financial results, please refer to the Risk Factors section of the annual report on Form 10-K and quarterly report on Form 10-Q in addition to the company’s other filings with the SEC. We assume no obligation to update the forward-looking statements.
Additionally, during this presentation and the following Q&A session, we may refer to our results on a non-GAAP basis. Non-GAAP measures are intended to supplement, but not substitute, for performance measures calculated in accordance with GAAP. Our financial results release contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures.
With that, it’s my pleasure to turn the call over to Ric Fulop, Founder and CEO of Desktop Metal.
Ric Fulop
Thank you, Jay, and good afternoon to all of you. I appreciate everyone taking time to join our call. I’ll begin today with highlights of our second quarter 2022 financials. It was a fantastic quarter for our business. Next, I will detail a few developments of note in the business and spotlight some of the recent customer wins. I will then turn the call over to James to provide further color on our financial results. I will close with our financial outlook and progress on our 2022 strategic priorities. Following our prepared remarks, we’ll take questions.
Beginning on Slide 3, I’m very proud of the work from Team DM as we achieved a record quarter. Focused execution, combined with a broad and differentiated AM 2.0 portfolio, resulted in solid financial performance as we now carry some exciting momentum into the second half of the year.
We saw another quarter of top line strength, recording the highest quarterly revenue in the company’s history. Consolidated revenue for the second quarter 2022 was $57.7 million, representing strong year-over-year growth of over 200% and sequential growth of 32% from the first quarter 2022. Revenue performance was driven by strength in our metal product platforms and contributions from acquisitions.
Second quarter 2022 non-GAAP gross margins increased to 26.7%, an improvement of over 170 basis points year-over-year. We were able to expand gross margins despite a challenging macro environment, including supply chain and inflation impacts, which speaks to both the operating leverage as we grow out of our overhead costs and our efforts to improve operating cost structures.
Overall, I’m pleased with this quarter’s results. We continue to deliver for our customers, and that is driving excellent financial performance, including revenue growth at scale and margin expansion.
Moving down to a few business highlights. Recently, we introduced a preview of a new solution called FreeFoam, a revolutionary, expandable 3D printable foam for mass production. We believe this is one of the most exciting new solutions introduced in the industrial 3D printing market. It’s also a unique capability for foam manufacturing, which is a $120 billion market and expands Desktop Metal’s total addressable market opportunity. I’ll provide more color on this revolutionary product on the following slides.
We continue to see momentum in blue chip customer adoption of our AM 2.0 solutions across industries, and we’ve included some examples of production and use cases in the appendix of this presentation. Please check them out. Detailing a few specific customer examples. BMW is using our solutions for critical components in their M Series automotive engines and is in process of expanding capacity to support a larger percentage of their vehicles. Tesla suppliers are extensively using our technology to validate designs before cutting tools for their Giga casting process. General Motors prints molds for casting for key vehicle components using our solutions. And Grainger World uses our printers to produce Formula 1 and Moto GP engine blocks.
In Aerospace, we have a growing business with leading companies such as Precision Castparts, Consolidated Precision Products, Honeywell, Lockheed Martin, Rolls-Royce, Northrop Grumman, all of which are increasingly using our AM 2.0 solutions to make end-use parts in series production. Companies like Collins Aerospace are now using our technology for a variety of parts in aircraft interiors.
Other major OEMs include Caterpillar printing molds for valve bodies, cylinder heads and critical spare parts; Mercury Marine, which uses our technology to manufacture their newest marine engines; and Emerson, which uses our printers to guarantee cross-border quality across plants around the world.
Our defense business is also growing rapidly. For example, Desktop Metal is now a sub under a prime contract awarded by the Defense Logistics Agency of the Department of Defense worth a potential $15 million to broaden the use of additive manufacturing across the armed services.
We’ve also started an effort to monetize our robust IP portfolio of over 650 patents and pending applications, and we expect this to create new revenue opportunities. In general, we’ve also seen strong traction across all metal platforms, including production system P-50.
And finally, I want to provide a little more color on the strategic integration and cost optimization initiative we announced at the end of the second quarter. This initiative was a combination of planned efforts discussed on our 2 previous earnings calls, and we wanted to outline our plan in more detail to all stakeholders as well as provide some quantitative targets.
In 2021, following going public, we executed on a deliberate and strategic plan to broaden our core AM 2.0 portfolio beyond metals into key technologies and applications that we identified as having a significant upside in the rapidly growing additive manufacturing market. We moved fast and were successful in our inorganic efforts exiting 2021 with an unparalleled and diversified portfolio of Boeing production-focused solutions, spanning print technologies, advanced materials and killer applications for AM 2.0. During integration of these acquisitions, we focused initially on revenue, product and go-to-market synergies. As we entered 2022, we are focused on bolstering our path to profitability. We identified a number of opportunities to recognize cost synergies from these deals.
In combination with these post-acquisition opportunities, we took a holistic approach to our product portfolio and business operations to identify opportunities to optimize our expense structure in order to position the organization with a more streamlined and effective operational model. This comprehensive review resulted in the strategic integration and cost optimization initiative announced in mid-June that included a workforce reduction, focusing on functions and areas that do not jeopardize long-term growth opportunities or our ability to service and support our growing customer base. We have also initiated a plan to consolidate our global facilities footprint to increase efficiencies and further reduce our fixed cost base. And as part of a product portfolio evaluation, we’re tightening our focus on products and development programs that prioritize scale and margin expansion across high-growth applications.
We expect this strategic initiative to drive $40 million of annualized run rate non-GAAP cost savings, $20 million of which we expect to recognize in the second half of 2022. In addition, we’ve identified a number of further integration activities that we expect will result in at least $20 million in additional savings, resulting in an anticipated total cost savings of at least $100 million over the next 24 months. As a result of these efforts, Desktop Metal is a more streamlined business today with an improved go-forward expense structure that better position us to reach our financial commitments and support a path to profitability. Furthermore, the convertible notes offering we completed in May strengthens our cash position, reinforcing our ability to weather any uncertain macro environment and reach profitability to fund our long-term growth opportunity in the additive manufacturing market.
On the following slide, I’d like to highlight an exciting new material we’ve been working on for a while. FreeFoam is a new family of photopolymer resins that for the first time produces dimensionally accurate, closed-cell foam parts without tooling. This revolutionary material uses our patent pending DuraChain photopolymer technology, which delivers industry-leading durability in material properties, combined with a proprietary heat-activated foaming agent that is 3D printed. After printing, parts are run through a heating cycle to expand a specific programmable amount between 2x and 7x their original size.
This expansion leads to several benefits. FreeFoam parts can reduce cost versus conventional manufacturing foam parts by using less material. This technology also increases manufacturing throughput versus 3D-printed elastomers because the parts are smaller during production, enabling more parts to be nested in each print, thus lowering costs. And FreeFoam also enables manufacturers to save on shipping and inventory expenses by shifting expansion to regional or low component demand. In addition, FreeFoam enables a new design freedom for foam applications and delivers an incredible strength-to-weight ratio that produces light, high-performance parts.
The conventional polymer foams market is an over $120 billion total addressable market, and we see many opportunities for this unique material family to disrupt current traditional foam applications, including automotive seating, mattresses, furnishing products, footwear, sporting goods and health care, among others. FreeFoam resins will initially be 3D printable exclusively on our ETEC Xtreme 8K top-down DLP systems. We’re actively exploring and developing FreeFoam applications with leaders in the automotive, furnishing and footwear markets and expect broad commercial availability in 2023. We think the opportunity for FreeFoam is extremely exciting as it has the potential to become another long-term growth driver for our business.
Turning to Slide 5. We continue to be excited about the consistent customer adoption across a range of end markets. We’ve highlighted a few of those customers from the second quarter on the left side of this page. Importantly, we continue to see successful customers expand their deployments with our solutions with new orders beyond their initial systems, and this represents a meaningful revenue driver as well as an important barometer of the overall success of our solutions. Repeat growing customers in the second quarter include BWXT, Eaton, Ford, Gulfstream, Honeywell, Kennametal, the Navy, Nissan, Oak Ridge National Labs and Saudi Aramco, just to name a few. It’s exciting to see leading blue chip companies adopt and expand the use of 3D printing for end-use part mass production.
On the right side, I want to highlight 2 SME customers. The first is U.K.-based Wall Colmonoy. The company’s leveraging our Shop Systems to 3D print various atomization nozzles to manufacture powders. The flexibility of 3D printing has allowed Wall Colmonoy the freedom to design nozzle parts and print on-demand, which has accelerated the productivity improvements and reduced delays in downtime in the production process. And leveraging the speed of binder jetting through the Shop System enables quick printing and testing of new iterations and mass production capabilities once the parts are design-locked.
Second customer is Aerosport Additive using our Xtreme 8K with (ETR) 70 and (ETR) 90 elastomer materials to produce highly corded casting hydraulic valves and transmission components. Aerosport is using our photopolymer systems to print hundreds of parts in hours, significantly reducing lead times compared to injection molding or urethane casting. In combination with the Xtreme 8K, the company is leveraging the superior material capabilities of our patent pending DuraChain chemistry to produce high-quality elastomer parts. (ETR) 70 and 90 are the toughest printed elastomers in the market with elongation up to 400%, allowing for high performance at volume production speeds. We’re always happy to celebrate our SME customers as their success with DM solutions demonstrates the performance and cost efficiency of our volume production capabilities versus the conventional manufacturing process that we’re replacing.
And with that, now I’ll hand the call over to our CFO, James Haley.
James Haley
Thanks, Ric. Beginning on Slide 7, you will see highlights of our financial performance in the second quarter of 2022. Please note, we will be referring to several financial metrics on a non-GAAP basis. Reconciliation to GAAP data is included in the filed appendix.
Consolidated revenue for the quarter was a record for the company, $57.7 million, up 204% year-over-year from $19 million in the second quarter of 2021. Sequentially, revenue growth was up 32% from $43.7 million in the first quarter of 2022. Revenue strength was driven by growth in our metals product platform and contributions from the acquisitions.
Non-GAAP gross margins expanded to 26.7% for the second quarter of 2022 and over 170 basis points increase from 25% in second quarter of 2021. Gross margin improvement was a result of improved overhead absorption with a focus on controlling our cost of goods sold. We’re pleased with the gross margin expansion both year-over-year and sequentially, especially given supply chain and inflationary challenges that included higher input and transportation costs, which our team managed well. We expect the recent strategic integration and cost optimization initiative will continue to drive gross margin improvement through the balance of 2022 and beyond.
On the next slide, non-GAAP operating expenses were $46.1 million for the second quarter of 2022, representing 80% as a percentage of revenue, which is a significant improvement versus 162% in the second quarter of 2021. Revenue growth was a primary factor for this improvement, demonstrating ongoing operating leverage in the business as we grow. This was complemented by non-GAAP operating expenses declining sequentially by $6 million, or 12%, from the first quarter of 2022.
Adjusted EBITDA for the second quarter of 2022 was negative $27.5 million. As we expected, adjusted EBITDA significantly improved sequentially by $14.1 million, or 34%, from the first quarter of 2022 through a combination of revenue growth and a focus on improving our expense spend. As we continue proactive efforts to optimize our expense structure while maintaining revenue growth at scale, we expect to see significant improvement in adjusted EBITDA through the end of the year to achieve our adjusted EBITDA commitments for 2022 on our way to exiting 2023 breakeven on an adjusted EBITDA basis.
We ended the second quarter 2022 with a strong liquidity position of $255.7 million in cash, cash equivalents and short-term investments. This includes proceeds from the successful completion of the $115 million convertible notes offering in May 2022, less the initial purchases discounts, commissions and offering expenses. Given the uncertain macro environment that has become more challenging in 2022, we felt that it was prudent to raise a moderate amount of cash to build a stronger balance sheet. As a result, Desktop Metals cash balance, combined with the impacts from the strategic integration and cost optimization initiative, provides the company with a sufficient runway to reach cash flow breakeven and fund our long-term growth opportunity in AM 2.0.
With that, I will turn the call back over to Ric.
Ric Fulop
Thank you, James. Turning to Slide 9. We’d like to give an update on our expectations for the balance of 2022.
Desktop Metal had a strong start of the year, and revenue growth has trended towards our expectations to date. Business activity remains high, and we’re executing well to the opportunities we’re seeing. Therefore, we’re reaffirming our full year 2022 revenue guidance of approximately $260 million. While demand continues to grow, we’re closely monitoring the macroeconomic environment, and today’s guidance reflects the current conditions and assumes macro or supply chain challenges do not worsen. We also understand the relationship between moderating growth and getting to profitability faster.
Moving to adjusted EBITDA. We’re reaffirming expectations of approximately negative $90 million in adjusted EBITDA for 2022, as our strategic initiative to reduce expenses will primarily be realized in the back half of 2022. And we expect continual sequential improvement in adjusted EBITDA to achieve our targets, as we’re working very hard to accelerate our time to profitability.
Finishing up on Slide 10. We’ve made great advances in the second quarter towards our 2022 strategic priorities, and I’m proud of the team’s focus and commitment on these goals. Revenue growth was very strong in the quarter, the strongest in the company’s history. We continue to capture share in the verticals we’ve identified as attractive opportunities with strong secular growth drivers. We progressed multiple opportunities with hyperscale customers in the quarter, some of which contractually we’re unable to describe in detail. But our strategic accounts team is making great strides here, and we’re in a very strong position to accomplish this year’s objectives.
I mentioned last quarter that I was disappointed in our expense spend, and this was an area we were focused on improving. We were successful in Q2 by significantly reducing operating expenses as a percentage of revenue, which led to an improving EBITDA versus first quarter 2022. And we announced a specific focused strategic initiative that will continue this progress, including $20 million in cost savings in the second half of 2022 and over $100 million over the next 24 months. If it’s not obvious through our recent actions and communications, driving margin improvement and achieving profitability is a key focus of Desktop Metal.
We have a strong balance sheet with the additional capital we raised in May, bolstering our liquidity in an uncertain macro environment on our way to getting cash flow breakeven. To support this strong cash runway, we’re committed to maintaining discipline in our cash allocation and drive improvements in our working capital in order to improve the financial efficiency of the business.
In closing, I’m very proud that Desktop Metal today is in a much better position than when we went public. Today, we have the undisputed #1 market share leadership in some of the fastest-growing segments for additive manufacturing, including metal binder jetting, digital casting and printed hydraulics. We’re the only company in the world with mass production solutions for printed foams, and we have the leading FDA Class 2 solutions for restorative dentistry. We have a much larger addressable market today than when we went public. And unlike our competition, our print platforms benefit from Moore’s Law, which means they’ll continue to print faster and become more cost effective versus our competitors and conventional manufacturing over time.
Our business performed well in the first half of 2022, which is a testament to the team’s consistent execution in a dynamic operating environment. Desktop Metal has never been stronger. Our unmatched AM 2.0 portfolio uniquely positions our company to help our customers transform their manufacturing settings through the benefits of AM for mass production.
With that, let’s open it up for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Josh Sullivan with The Benchmark Company.
Joshua Sullivan
As far as the strategic integration strategy changes here, how should we think about any changes to the go-to-market strategy? Is there any more or less focus on direct versus indirect sales or any other changes we should think about holistically?
Ric Fulop
Thank you, Josh. I think we have a fantastic go-to-market strategy. We didn’t make dramatic changes to it, other than having a more focused effort. We have quite a bit of cross-selling from the different revenue synergies that we’ve taken across the portfolio that we’ve got, which is greater than when we went public. And we’ve got an incredible go-to-market with over 250 partners globally in the channel component of our business, in the production side of our business, at the very high end in multimillion dollar systems. That part we do direct, but we do work with channel in identifying opportunities. And that gives you coverage. We have 65 countries where our products are sold today and expanding. And then we segment our channel from — between health care and the industrial part of the market. And I think it’s highly specialized, and it’s a unique core competency of our business and a strength of our company. I think we have a fantastic go-to-market engine.
Joshua Sullivan
Got it. And then just the comment on the effort to start to monetize the IP portfolio. How should we think about how you’re going to go after that? Or what opportunities do you think might be there?
Ric Fulop
It’s hard to comment on that. We do have an injunction in one particular company. But I think it’s something that we’ll be able to talk about in more detail as we progress the market. I think there’s a lot of value in the IP that we’ve got, and we want to work constructively with all the members of the community to be able to monetize it and allow the industry to grow and prosper. So I think we have people who are fully dedicated to it, and we can talk about it in the future.
Operator
Your next question comes from Noelle Dilts with Stifel.
Noelle Dilts
Recognizing you’re not giving quarterly guidance. I was hoping you could speak to how you’re thinking about the revenue sort of trend or trajectory in the back half of the year and anything we should consider from a seasonality standpoint? And the same sort of question around gross margin. I know you’re saying you’re not expecting any worsening of the supply chain challenges, but do you think that anything can get better by the fourth quarter?
Ric Fulop
Thank you, Noelle. Good to hear from you, and that’s a great question. Without giving like specifics on how the quarters are set up, we still feel like they’re going to follow that similar rule that we discussed before, 15%, mid-20s for Q2 –15% for Q1, mid-20s for Q2 and Q3, Q4 being in the 35% range. And I do think that Q2 and Q3, while being similar, Q3 has a European component where people can be on vacation, and we do quite a bit of business in Europe. But overall, we see very strong demand across the board, and we think that’s a good picture of how we see the year developing. You could look at it first half, second half, 40% first half, 60% second half is another way to look at how the business develops. And Q4 being by far the strongest. We have a lot of stuff in Q4 for the fourth quarter year.
Noelle Dilts
Okay. And then second, just on — again, this is kind of all related in that cash burn should improve as EBITDA strengthens. But it looks like free cash flow usage in the second quarter was about equal to the first. Any thoughts on how the back half of the year is shaping out and how we should think about 2023?
James Haley
Noelle, it’s James. So definitely, as you alluded to with EBITDA coming down, cash burn will come down considerably well. One of the things you would have noticed is we did maintain our inventory levels from Q1. They went up a bit in Q2, but we’re at the level now where we’re really going to start to wean them off for the balance of the year. We felt continuity of supply, given all the macroeconomic environments was essential right now.
Ric Fulop
And another thing to add to that, Noelle, is we do have this strategic initiative to reduce costs, which will really take in — it takes most of its effect in the second half of the year since we did it over the last 2 weeks of the second quarter. So the bulk of the benefit is going to start to show up as we execute on the second half of the year.
Operator
Your next question comes from Greg Palm with Craig-Hallum Capital Group.
Unidentified Analyst
This is on for Greg today. So just in terms of the overall macro and demand environment, I mean, everyone’s talking about recession, slowdown. But obviously you guys reiterated your guide, and it sounds like demand has stayed pretty good. I guess what, if any, changes to customer activity have you guys seen, whether it’s in certain end markets or geographies or what?
Ric Fulop
We’re benefited by the fact that we’re in a segment of the market that is growing from a secular point of view. I think a lot of the supply chain disruption that you could see in different industries is a driver for adoption of additive as a production technology. I can tell you that we have many, many customers who are behind production and are looking at us as a solution. Just took Caterpillar last week, and this is an example of a company that initially had one machine, and then there’s now 4 systems running between partners and themselves just trying to keep up with production. And they have a huge backlog that they’re trying to catch up with. We see this across the board in many of our customers.
So while it may — we have 2 parts of our business. One, there’s a secular trend to go from analog to digital, take advantage of the cost savings, and that you — this technology gives you. I think we have very durable parts of our business, like the healthcare part of our business where we improve the efficiency of what people do with this technology. And you — in that realm, if your teeth hurts, you go to the dentist. So that’s somewhat of a durable, very reliable, growing part of our business.
And then finally, we monitor all the macro conditions. And we do that on a daily, weekly basis. But we continue to see people adopting production with additive, and it’s somewhat — it’s like asking somebody about e-commerce adoption in the middle of last decade. It’s something that you expect — we expect most of our customers to over time do more of their production digitally and benefit from the inventory of, one, the ability to improve their designs, lightweight products, simplify their supply chain. All of these are things that are drivers for broad adoption of our technology. And the fastest growing segment in additive is end-use part production where we are the clear leader with technologies that get more efficient over time. So obviously macro plays a factor, but we have a lot of tailwinds behind this class of technology.
Unidentified Analyst
Yes. That makes sense. I guess moving on to the P-50. How is that ramp coming, shipments progressing, I guess. Are you still thinking about that contribution for second half kind of ramping and then into 2023 the same way as you were before?
Ric Fulop
Yes. We continue to have a lot of activity in that part of the business. One challenge with the ability to talk about what we do specifically there is that you work with very large companies, and they don’t like to talk about what they’re doing with the products. But we do see activity there, and it’s a fantastic product that as the year progresses, we’ll hopefully be able to tell you more about it and show some great examples. We have some tradeshows and other things coming up and hope to showcase more activity about these products there.
Operator
[Operator Instructions]. Your next question comes from the line of Troy Jensen with Lake Street.
Troy Jensen
Gentleman, congrats on the nice quarter. Ric, just a follow-up on the P-50. I understand you can’t call out customer names, but could you just let us know if you’ve shipped additional systems into trials?
Ric Fulop
We continue to make very good progress in this product, and I think we’ll be making additional announcements as we make progress in this area.
Troy Jensen
Okay. All right. Understood. And then maybe a couple for James here. If you can just help us out with just on the cost side, and I guess if we could kind of stick to numbers would be helpful. So if you look at non-GAAP OpEx in Q2 it was $46.1 million. Will that number decrease on an absolute basis in Q3? Or is this the growth going to slow given the restructuring efforts you’re doing?
James Haley
So yes, Troy. We’re going to continue to expect some decreases in the second half of the year with our cost down initiatives. We sort of announced that in midway into June, so we really haven’t realized much of that benefit as of yet. So on an absolute basis, the second half, we do expect to continue to come down a bit. And then as we continue to see revenue growth, we will continue to invest in the business accordingly.
Troy Jensen
Okay. And just another follow-up for you, James. Could you just let us know what you think interest expense will be for the convertible? And then on the share count, what will the Q3 share count be? Are the — just let us know what the fully diluted kind of all-in share count is now for the company.
James Haley
Sure. So the coupon, 6%, Troy. So at 115, that’s just under $7 million of interest expense annually. And then if you look at the — in terms of the share count, you’ll see a disclosure. I think it’s footnote 20 will give you the full basis. But right now, we’re roughly at 320 million shares.
Operator
[Operator Instructions]. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Ric Fulop for closing remarks.
Ric Fulop
Wonderful. Thank you very much. I’d like to thank everybody for joining me on the call today and for your interest in Desktop Metal. Please do not hesitate to reach out to our Investor Relations team if there were questions that were not answered in today’s call. And as always, I want to especially thank Team DM for a terrific quarter and terrific execution. We look forward to speaking to you again. Thank you.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.
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