Fathom Digital Manufacturing Inc. (NYSE:FATH) Q2 2022 Earnings Conference Call August 15, 2022 8:30 AM ET
Company Participants
Michael Cimini – Director of Investor Relations
Ryan Martin – Chief Executive Officer
Mark Frost – Chief Financial Officer
Conference Call Participants
Jim Ricchiuti – Needham & Co.
Noelle Dilts – Stifel
Wamsi Mohan – Bank of America
Troy Jensen – Lake Street Capital Markets
Operator
Hello. My name is Charlie and I’ll be the operator for this call this morning. I’d like to welcome everyone to Fathom Digital Manufacturing’s Earnings Conference Call. This call is being recorded and a replay will be available later today. After the company’s presentation, there will be a Q&A session with the instructions to follow at the time.
I’d now like to turn the call over to Michael Cimini, Fathom’s Director of Investor Relations. Michael, please go ahead.
Michael Cimini
Thanks, Charlie, and good morning, everyone. Welcome to Fathom Second Quarter 2022 earnings conference call.
Before we begin, I’d like to mention that today’s presentation and earnings press release are available on Fathom’s website at fathommfg.com, where you will also find links to our SEC filings, along with other important information about our company. Turning to Slide 2, we note that this presentation contains forward-looking statements within the meaning of the Securities Exchange Act. We encourage you to read the risk factors contained in our filings with the SEC, become aware of the risks and uncertainties in our business and understand that forward-looking statements are only estimates of future performance and should be taken as such. The forward-looking statements represent management’s expectations only as of today, and the company disclaims any obligation to update them. We also note today’s presentation includes non-GAAP financial measures to describe the way in which we manage and operate our business. We reconcile these measures to the most comparable GAAP measure, and you are encouraged to examine those reconciliations, which are found in the appendix to both the press release and the slide presentation.
With us today are Ryan Martin, Fathom’s Chief Executive Officer; and Mark Frost, our Chief Financial Officer. I will now hand it over to Ryan.
Ryan Martin
Thanks, Michael, and welcome, everyone to Fathom’s Second Quarter two022 Conference Call. I’d like to begin my remarks on Slide 3, where we will provide our Q2 highlights. During the second quarter, Fathom furthered its history of growth and profitability as we delivered positive results consistent with our expectations. In Q2, we posted revenue of $42 million, representing an increase of 17% compared to the year earlier period.
On an organic basis, excluding the impact of acquisitions, revenue was up 9.4% in the quarter, including growth in all four of our key manufacturing technology line, and adjusted EBITDA increased 16.1% to $8.7 million, representing an industry-leading margin. We continue to benefit from our comprehensive manufacturing services by providing enterprise-level customers with timely, value-added solutions across both additive manufacturing and traditional manufacturing.
During the quarter, we entered into a new $1.2 million managed services agreement with a Fortune 50 multinational technology company, where we will lend our engineering expertise and serve as an extension of their R&D and manufacturing teams. We also secured a large order for just under $1 million with a global leader in health care technology to produce parts utilizing our hybridized model by leveraging our injection molding, additive manufacturing and ancillary technologies as well.
We also saw continued additive orders growth within our key EV and robotics end markets with two strategic customers placing more than $1 million in additive orders in the first half of 2022. We believe our technology-agnostic approach, integrating speed, flexibility, quality control, technical expertise and problem solving continues to position Fathom well to meet the rapid prototyping and low to mid-volume production needs for some of the largest and most innovative companies in the world. Many Fortune 500 companies remain highly focused on both diversifying their supply base through onshore and consolidating their supplier partnerships to create greater efficiencies, increased responsiveness and speed to market.
We are particularly seeing this trend in the medical and industry sectors ensuring a more agile and local supply chain to protect against the rising number of global uncertainties provides a competitive edge for product-driven companies seeking to get ahead and stay ahead. At Fathom, we continue to work closely with our customers to help them iterate faster and accelerate their manufacturing innovation. Although the positive secular drivers in our business remain intact, including the condensing of product development life cycles, reshoring of U.S. manufacturing, consolidation of supplier partnerships and the digitization of manufacturing, our second quarter orders of approximately $40 million were slightly below our expectations. Outside of the macro environment, one key factor that impacted orders was the speed we were able to build our platform-based strategic sales team. This effort was primarily impacted by the tight labor markets. And it is key to point out that we will always be building and working to build a larger, more concise sales team.
We’ve made tremendous progress on this, and we continue to build the very best team in the industry. As I sit here today, we have significantly strengthened our commercial team and expect it to be in a stronger position to achieve our go-forward growth targets. In addition to continuing to improve our overseas supply chain, which is a key part of our value proposition. We are investing more in our resources for our outsourced business, including new software support system, we expect to further aid the sales process and increase throughput, which will improve our margins.
In further in our efforts to accelerate profitable growth, we continue to optimize our operations and our most recent announcement is outlined on Slide 4. These steps are a natural progression in Fathom’s growth trajectory as we have built one of the largest and most profitable platforms in the digital manufacturing sector. Our team is continually evaluating opportunities to promote operational excellence across the entire organization, which led to the creation of the multipronged plan aimed at optimizing our national footprint, increasing operational efficiencies and fully leveraging our scale as we continue to pursue both organic and inorganic growth opportunities.
Key steps in our current plan include the following: first, we will consolidate our existing footprint in Oakland, California, which currently includes four facilities totaling a little over 20,500 square feet into our corporate operations in Hartland, Wisconsin. Specifically, we intend to transfer our entire CNC operations in most of our additive technologies to Hartland. By optimizing our existing capacity in our state-of-the-art facility in Hartland, we expect to improve the utilization and lower cost. This transition is expected to be completed by the end of the year.
Importantly, as part of this initiative, we intend to maintain a strong West Coast presence by opening our Silicon Valley technology center. This will continue to allow us to be — continue our proximity to our strategic customers while providing a unique opportunity to showcase new technologies that we’re adding and continue to expand our industry-leading platform. The tech center will also serve as a hub for all of our Silicon Valley-based leadership, sales, marketing, IT and other functions.
Second, we plan on opening a larger greenfield site near Austin, Texas locations and consolidate those facilities. Our current capacity in the area, which we assumed through two acquisitions in 2021, combined for a total of about 41,500 square feet, and we expect to expand this through our new regional center. In doing so, we intend to expand our presence in the strategic Southwest market while eliminating redundancies and laying the groundwork to ensure the seamless integration of future acquisitions in an expedited fashion. We expect to secure a new site in the Greater Austin area by the end of this year and complete the transition in the first half of 2023.
Third, in further advancing our objective to operate as one Fathom, we intend to create a finance and accounting shared services organization to streamline company-wide processes and create economies of scale. We expect our new shared service system to be fully operational by the end of this year, and we intend to pursue additional centers in other administrative functions over the coming quarters. As a result of this plan and the efficiencies gained, we expect a workforce reduction of approximately 6% based on a combination of buyouts and attrition. In all these action items are expected to generate pretax annualized cost savings totaling approximately $5.5 million once fully implemented.
Additionally, we expect to incur pretax charges related to these activities totaling $2 million, of which approximately $1.7 million will be paid in cash. Also of note, these figures exclude certain incremental costs related to the Texas consolidation of which remains in the early stages. We intend to update our estimates to reflect lease termination costs and rent over time as this plan progresses. We remain committed to driving long-term scalable growth while attracting and retaining experienced professionals with an enterprise-level background. To this end, we recently appointed a new Chief Information Officer, Dan Fortin.
Dan brings more than 27 years of experience in the IT industry, having most recently served as the Vice President, Global IT at Generac, a publicly traded, multibillion-dollar energy technology company, where during his tenure, he saw the company go from $150 million in revenues to over $3 billion in revenues. He succeeds our previous CIO who retired earlier this year. In his new role, based in Hartland, Dan will be a key member of the leadership team responsible for spearheading Fathom’s digital transformation in implementing best-in-class IT systems throughout our entire organization in a uniform manner. Dan will play a vital role in supporting Fathom’s growth strategy, and we look forward to sharing our progress and more details about our strategic plans with you over the coming quarters as we continue to consolidate and upgrade the digital thread of our business to enhance the customer experience.
Fathom has built a proven track record of strong, profitable performance with significant growth potential by implementing these optimization efforts, combined with our robust industry-leading platform and attractive financial profile, we expect to further build upon our solid foundation, increase our competitiveness in the marketplace and strengthen Fathom’s position for long-term success.
With that, I will now turn the call over to Mark.
Mark Frost
Thank you, Ryan, and good morning, everyone. I’ll begin my remarks on our Q2 results on Slide 5.
Our revenue for the second quarter totaled $42 million for a year-over-year increase of 17%, of which $3.6 million was organic and $2.5 million was from acquisitions. Early in the second quarter of 2021, we completed four additional acquisitions, which focused primarily on CNC machining. Now excluding the impact of these acquisitions, our organic revenue in the second quarter increased approximately 9.4% as we achieved growth in all four of our main technologies with double-digit growth in both precision sheet metal and CNC mainly due to our cross-selling activities.
Now for quarter two, our reported revenue by product line was as follows: Additive Manufacturing grew 2.5% to $4.4 million or 10.5% of total revenue. Supporting this growth were orders from large blue-chip customers within the agricultural equipment, EV, robotics, medical and industrial industries, and we continue to invest in innovative additive technologies. We believe our new tech center in the Silicon Valley area, combined with our center of excellence in Hartland will further enhance our growth prospects in the Additive segment. Injection molding growth accelerated to 9.3% at $7.1 million or 16.9% of total revenue.
Now our injection molding sales improved but were below our expectations as they are impacted by softness in our outsourced business, which we continue to invest in to streamline processes and increase scale, as Ryan mentioned earlier. CNC machining was up 31.7% to $14.6 million or 34.7% of total revenue, reflecting the benefit of the acquisitions as well as double-digit organic growth. Based on our strong performance in CNC for the second quarter and year-to-date, we recently launched a dedicated quick-turn CNC machine cell in our Hartland facility to further support this business segment.
By segregating our quick turn work with our low to mid-volume production, we expect to capture more share of the higher-margin quick-turn CNC market while increasing our overall production efficiencies as well. Precision sheet metal rose 22% to $14.8 million or 35.1% of total revenue as this business continues to perform well amidst steady demand. And finally, ancillary technologies, our smallest product line, declined to $1.1 million or 2.7% of total revenue, mainly due to a difficult comp as our 2021 results included orders from an EV manufacturer related to an accessory that was subsequently discontinued.
Now we believe the fundamentals of our business remain sound based on our year-over-year growth, continued success in increasing our share of wallet among strategic accounts and building entrenched long-term customer relationships, which provides recurring revenue streams. Our focus remains on accelerating our customer engagement and achieving greater market penetration for our additive and traditional manufacturing technologies.
Now on Slide 6, we provide our adjusted EBITDA performance for the second quarter. In Q2, our adjusted EBITDA increased 16.1% to $8.7 million, representing a margin of 20.6%. In the prior year period, we reported adjusted EBITDA of $7.5 million, with the EBITDA improvement driven primarily from higher volume. During the quarter, we experienced an increase in the volume of customers served, partially through revenue from new acquisitions, as I mentioned earlier. As in the previous quarter, the CNC acquisitions adversely affected our sales mix compared to the prior year period, impacting our gross margin rate.
SG&A increased year-over-year to $11.6 million, primarily due to the incurrence of public company expenses following our listed on the New York Stock Exchange in December 2021. These costs did not exist in Q2 of last year. On a sequential basis, SG&A decreased 21.6%. Excluding stock compensation, our public company costs in quarter two declined as anticipated on a sequential basis by approximately 33% to $2.4 million, including another $0.4 million of one-off costs, which will not repeat in 2023. And we expect these expenses to further drop albeit modestly in the second half of the year.
Now as Ryan discussed earlier, we believe our two optimization initiatives will generate significant cost synergies beginning in 2023. The projected $5.5 million in annualized savings are expected to be split almost evenly between SG&A and COGS and will help improve our operating leverage as we increase our volumes going forward.
Now on Slide 7, we highlight our liquidity and cash flow. We ended the second quarter with available liquidity of $34.1 million. This includes $11.1 million in cash and cash equivalents and $23 million of undrawn commitments under our $50 million revolving credit facility. As of June 30, our total gross debt, excluding cash, was $150.4 million and net debt totaled $139.3 million. The amortization of term debt was offset by an increase in the usage of our revolver to pay for some nonoperational charges of $5 million, which we do not expect to repeat in the future. We generated $3.3 million in operating cash, and we continue to expect to deleverage our balance sheet as we move forward based on improved cash flow.
Now during the second quarter, we invested $3.3 million in capital expenditures mainly related to two new technology offerings in Additive and CNC as well as the integration of multiple ERP technologies into a single scalable cloud-based solution to boost productivity. We expect to complete the full ERP integration process as part of our One Fathom strategy by the end of 2023. We anticipate our CapEx spend to slow in the second half of the year compared to the first half because of timing, but a more focused investment into the additive space as we add new capabilities.
Now as we continue to invest in the long-term growth of our business, we remain opportunistic in our approach to pursue tuck-in acquisitions that are accretive and expand our value proposition with customers and have had many discussions with potential acquisition targets over the past quarter.
Now I’m going to turn to Slide 8, and we’ll talk to our updated forecast for 2022. Now based on our performance in the second quarter and year-to-date, combined with our current outlook for the second half of the year, we now anticipate revenue for 2022 to range between $165 million and $171 million, representing an increase of approximately 10% at the midpoint on a reported basis. For the current third quarter, we anticipate revenue of $39 million to $41 million, reflecting the sales team build we mentioned earlier, which impacted our backlog for the third quarter.
Now as our new sales team members gained traction, we expect a stronger fourth quarter, which is typically our best quarter of the year with growth in the mid-single digits. Now our revised forecast for 2022 also takes into consideration a downshift in the broader economy as the latest GDP reports and other key indicators have deteriorated since the start of the year, creating more uncertainty in the near term. This has led to lower customer inventories versus a year ago and extended sales cycles for new orders. Accordingly, we realigned our expectations with the current macroeconomic environment.
Now we remain focused on strengthening our long-term growth prospects as we continue to invest in the business and expand our breadth of leading offerings. Examples of this is during the second quarter, we expanded our large-format SLS 3D printing capacity. This solution provides for the additive manufacturing of large parts with high throughput. We also made investments in additive post processing equipment to enhance the quality and efficiency of plastic additive parts. And in ramping up our dedicated quick currency in SLS that we mentioned earlier, we took delivery of two DMG Mori 5-Axis machines, offering the latest in precision machining capabilities to provide parts to our customers in days.
Now our full year outlook for adjusted EBITDA has been revised as we now expect to generate between $32 million and $36 million in 2022 for an implied margin of 19.4% to 21.1%. The anticipated $5.5 million in annualized cost savings from our optimization initiatives will be limited in 2022 as we gradually roll out our plan throughout the remainder of this year and into 2023. The savings for 2022 will be mostly offset by the higher-than-anticipated public company expenses from earlier in the year.
For quarter three, we currently anticipate adjusted EBITDA in the range of $7 million to $9 million. Now our revised adjusted EBITDA forecast reflects the impact of temporary lower revenue growth and its impact on our absorption profile. We continue to focus on driving efficiency improvements on both the operational and G&A fronts. We are balancing building for growth and remain committed to fully leveraging our broad on-demand platform. And as a reminder, our current outlook excludes the impact of any future acquisitions. We continue to be selective in pursuing acquisitions that enhance our capabilities, expand our presence in strategic markets and our strength in our customer base. We will provide our next update when we report our Q3 earnings in November.
I’ll now turn the call back over to Ryan. Ryan?
Ryan Martin
Thank you, Mark. I will provide some closing comments on Slide 9. Our Q2 revenue growth of 17% demonstrates the continued demand for our comprehensive manufacturing services and positive secular tailwinds and our adjusted EBITDA increased 16.1% to $8.7 million, representing a margin of 20.6%. Sequentially, our adjusted EBITDA was up over 40% in the quarter. Fathom has built a leading technology agnostic platform that delivers a differentiated customer experience while creating a more resilient supply chain for enterprise customers. We continue to see large corporate enterprise customers lean on Fathom to help solve their most difficult technical challenges and accelerate their R&D, continue to think of Fathom as an index for the additive manufacturing sector as we have decades of experience and extensive capabilities in additive manufacturing technologies, along with traditional manufacturing capabilities to provide a comprehensive solution for our customers.
Although our anticipated growth rate for the full year has moderated, we remain a profitable cash-generating business, and we are highly confident in our long-term opportunities within the large, fragmented $25 billion digital manufacturing market. We have significantly strengthened our commercial team in Q2, and I’m energized by the team we now have in place to drive profitable growth while we continue to accelerate our digital transformation and integrate new breakthrough technologies to serve our world-class customers.
Furthermore, we unveiled an optimization plan with an anticipated $5.5 million annualized savings to support our future results, taking proactive measures to empower a more lean, nimble and unified Fathom now that we are a listed company. While the macro environment has become more uncertain since going public in December, we believe our proven profitable business model, highlighted by an extensive customer base, including some of the most innovative companies in the world across diverse end markets and a track record of growth in previous downturns, positions our company extremely well.
As we continue to navigate near-term macro headwinds, our focus remains on executing our go-to-market strategy, further scaling our business in support of our long-term growth potential for the benefit of our company and our shareholders.
This concludes our prepared remarks, and we’ll now open the call up for questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Jim Ricchiuti of Needham & Co. Jim, your line is now open.
Jim Ricchiuti
A couple of questions, but I’d like to start first with the overall change in the full year outlook because you’re identifying, I think, two contributing factors, one being the challenge, I guess, in building up the sales platform. But you’re also, I think, highlighting some macro concerns. So I wonder if you could perhaps frame that a little better first.
Ryan Martin
Yes. Well, I hope all well. Good morning, Jim. Thanks for being on early Monday morning. As we talked about, we’ve got a great company. We’ve got a great growing company profitable. And so we feel really good about where we’re at. But if you think about when we put this stuff together at the beginning, the last 6 months, worst S&P performance, obviously, the first 6 months of the year in the last 50 years, clearly, higher inflation, unprecedented moves by the Fed and the increasing the Fed rate. And so we still feel really good about the growth of this business, where we’re at, the fact that we’re a profitable growing business. But yes, the macro uncertainty as it relates to that, we’ve seen some slowing of orders, cycles, like how long it takes to actually commit. We’re not losing the orders. And so we’ve seen some slowing of that. And then as Mark mentioned, we’ve seen some of the inventories that some of our larger enterprise customers were building up. They’ve taken their safety stock down on that. We think that’s a temporary thing that we saw, and we’re just trying to be conservative as we look for the full year, Jim.
Jim Ricchiuti
Got it. And I’m wondering if you could, Ryan, just maybe give us a little bit more color on what you’re seeing in some of the verticals. I think you talked about strength in EV. We’re hearing conditions still pretty strong in semi cap. Where are you seeing some changes in demand in either direction?
Ryan Martin
Yes. I would say in the Medical. So I was down in Texas last week visiting some of our key customers there in the semiconductor, medical and aerospace space places. In the month of July, we saw incredible demand year-over-year in our medical, especially the orthopedics side of our business. We saw the orders almost doubled versus the prior year, a lot of elective surgeries are certainly coming back very strong. So that’s an area that we’re continuing to see extremely strong demand. EV is an area that we play really well in both from a development all the way through bridge to production. So those two areas, we’re seeing strong demand. We’re seeing aerospace continue to come back, especially on some of the work we do in the interior side of aerospace. So those areas, I think we’re seeing strong demand. General industrial seems to be doing well as well as Fathom.
Jim Ricchiuti
Okay. And just a question for Mark, and then I’ll jump back in the queue. Obviously, some pressure on gross margin in the quarter versus, I guess, expectations. And I’m wondering, Mark, if you could talk to perhaps in a just talking about just some of the cost pressures. Is there anything that we should be mindful of just with respect to gross margin on a go-forward basis? Or is it perhaps also mix related?
Mark Frost
Yes. I mean we took a slight mix challenge though. If you look overall, you’ll see we improved gross margin versus prior year and quarter two. It is more a question of what I was talking about that we’re not going to obtain in the short term as strong an absorption benefit because, obviously, our revenue growth is going to be lower than we were expecting for the second half. We do continue, though, we talked about the optimization plan, which is more going to be a 2023 benefit, which we will fully see in 2023. So it’s more a moderation that we won’t get the absorption benefit as strong a benefit, Jim, as we were expecting in the second half because of the lower volume. That’s the basic message.
Jim Ricchiuti
Got it, thanks very much.
Mark Frost
No worries, Jim.
Operator
Our next question comes from Noelle Dilts of Stifel. Noelle, your line is now open.
Noelle Dilts
I was hoping that you could maybe comment on order trends that you’re seeing. So if there was any sort of notable trends as you went through the second quarter and even into the third quarter that could just kind of help us understand how that’s informing your guidance…
Ryan Martin
Yes, so as we mentioned, the orders for the second quarter were nearly $40 million. As we’ve seen some pickup in the orders in the third quarter, which is a good sign as we mentioned on the call, there’s a lot of times from a macro environment that we can’t control. But what we’re focused on is controlling what we can, which is strengthening our commercial sales team, which we’ve made tremendous progress in the second quarter, and we feel will build momentum into the second half of this year. We can control the cost structure of our business, which we talked about through the optimization of the plan. And then we can control the customer experience. And so we’ve invested in the commercial team into more technical resources that as we have evolved in this organization to be able to not sell just single manufacturing solutions to be able to sell across those different solutions. As it relates to specific orders, we’re seeing continued pickup, like I talked about in the medical space, especially where we’re doing orthopedic implants where elective procedures are certainly coming back very strong, seeing strong demand there from end customers, defense, aerospace and some of the EV space or the other areas that we’re seeing strong demand from an orders perspective as well.
Noelle Dilts
Okay. Great. And then any comments that you could provide sort of on the competitive environment? When you look back to the first quarter, anything that kind of improved as we got into the second quarter and third quarter, how should we think about that?
Ryan Martin
Yes. I think where we’ve seen competitiveness continues to be the additive phase, but I think that’s why we’re really focused on working to differentiate in that space. And the key thing for our platform that we’re technology agnostic. And so we’re trying to find whatever the best solution is for the customer. And so as you’ve seen through the strong double-digit growth in both our sheet metal and CNC machining side of our business, we’ve been able to differentiate more there. I think with some of our 1345 designations in the medical orthopedic space. We have a differentiated offering there. And so what we try to focus on is where we can differentiate with that and drive — get away from the commoditization — even in the additive side of things, that’s where we’re making investments, as Mark talked about, in larger formats. We’re making investments in more efficient post processing to be able to provide better parts faster to our customers in the plastic additive, and that’s why we’ve also talked in the past around the investment that we’re making in the EVOLVE technology, which we think will be a really differentiated technology that won’t be as commoditized and price driven in some of the other areas of additive manufacturing.
Noelle Dilts
Okay. And then one last question for me. I know you talked about kind of making improvements or progress on expanding your sales force, but any additional commentary on sort of where you stand today relative to where you want it to be? And then how do you just think about those sales folks becoming productive? How long does it usually take them to kind of ramp up and start making an impact?
Ryan Martin
Yes. So we feel really good about the sales force that we have in place right now. We’re basically at full strength. We’re always, as I mentioned earlier, we’re always going to look at ways to continue to improve our sales force. So we’re always looking at opportunities to bring on and add new talented sales folks because of the importance of them being in front of the customer, especially the larger strategic enterprise customers for us, but we’re back at full strength there. And part of it is really just the evolution of this company as we went from a sales force that was good at selling maybe a single technology as we focus more on the platform. We had to evolve the talent that we had doing that. We made those changes in the second quarter, and we feel really good. Typically, we see a ramp of 3 to 6 months, I think we’re going to have that condensed for us because we hire people typically from the industry. And so we’ve had people from the industry that can really hit the ground running, which is why we feel so good about the team that we’ve built and brought in and really the go-forward opportunity that presents for FAD.
Noelle Dilts
Thank you.
Operator
Our next question comes from Greg Palm of Craig-Hallum Capital Group.
Unidentified Analyst
This is Danny Egerton [ph] for Greg today. I guess I will just start on, I guess, kind of enterprise customers. I appreciate the kind of order examples there. What’s the progress been like on maybe the land-and-expand strategy with them and getting percentage of repeat orders and gaining overall wallet share with them?
Ryan Martin
Yes. So we continue to see strong growth within that side of our business, strong double-digit growth across the strategic customers, which represents about 100 or so customers across our enterprise there. And so that strategy is working really well. We’re continuing to see opportunities. I was up in Minnesota 2 weeks ago, meeting with a key customer there that historically, we’ve done about between $2.5 million to $3 million. They’re looking to consolidate down the amount of suppliers that they’re working with. And we think there’s a really good opportunity for this customer that will double the amount that they spend with us on an annual basis. And so we’re having those conversations across those roughly 100 or so strategic accounts. And consistently, what we’re hearing is they want to go from — they may have 10 suppliers right now that they work with, with whether it’s CMC or sheet metal Fathomrication, and they’re looking consistently what we hear is they want to consolidate that down to 2 or 3 suppliers.
And we’re at the top of their list because of the amount of things that we can do for them, the expertise we have and the investments that we’re continuing to make to be able to serve them. And so we’re going to have a lot more to talk about in the future quarters as it relates to that. But the strategy is working. I think we’re the clear leader in our market when it comes to large enterprise customers, and we’re going to continue to double down on that strategy, Danny.
Unidentified Analyst
Got it. Makes sense. I guess just one more, maybe dig in a little bit more into Evolve. I mean, how is that coming along? — you said you’re continuing to make investment in there in that technology? What’s the demand like for that technology? And maybe any update on the move into Hartland?
Ryan Martin
Yes. So incredible interest in that technology. I mean I think it really goes to the foundation that the fact that you can create real thermal plastic parts, you can do it at a cost price point that makes sense and not hundreds, but you can do it in the thousands. And so incredible interest for that. I don’t know how familiar you are with you evolves leadership, they went through a recent leadership transition. Industry veteran, Joe Allison is now the CEO of Evolve and we’ve had multiple conversations with him. We’re really excited about the really his vision for the company. And I think because he comes from service provider background, he understands what it takes to bring that technology into a company like Fathom and ultimately commercialize it effectively. And so we feel really good about this. Obviously, with any new technology that’s really a breakthrough technology like EVault, and we’re being the first person to commercialize that in North America. There can be some delays or hiccups along the way.
So it’s taken a little longer than we initially anticipated, but we anticipate hopefully having that technology in Hartland before the end of the year, hopefully, by the end of third quarter, early fourth quarter, if all things go as planned right now. And we feel really good about that technology on a long-term basis based on the feedback that we’ve had from our customers.
Unidentified Analyst
Yes. Good stuff. I’ll leave it there. Thanks.
Jim Ricchiuti
Thanks, Dan.
Operator
Thank you. [Operator Instructions] Our next question comes from Wamsi Mohan of Bank of America.
Wamsi Mohan
In your 3Q guidance, you’re guiding slightly down quarter-on-quarter in revenues. And I was wondering how much of that would you attribute to the sales reorg issue versus the weaker demand? I know your orders were slightly below expectations in 2Q, but you also said that the order trends were improving here in the third quarter. So curious if this is just sort of what you’d call an execution issue versus a broader macro. You also called out broader macro trends, a lot of headwinds, but it sounds like you might not have seen a lot of that in your own orders. So if you could give us some color on that, that would be helpful. And I have a follow-up.
Ryan Martin
Yes, Wamsi. So I would say I would not categorize it as a reorganization or restructure with the sales team. It’s really a strengthening of the sales team as we evolved from the legacy company to where we want to go on a broader enterprise platform sales basis. And so we feel really good about the team, as I mentioned before, that we have in place to be able to grow the orders on a go-forward basis. I think the key with our business is, obviously, from a macro environment, there’s a lot of uncertainty that’s going on with the environment right now, especially when you think of the large enterprise customers that we focus on. If you think back to the second quarter, which the orders that you’re going to get in the second quarter are typically where you’re going to see the revenues in the third quarter, those types — the companies that are in the S&P 500 had the worst performance from a stock perspective in the last 50 years. So those companies had a little hesitation to what was going on in the market.
So like I said, we weren’t losing orders. Just the sales cycles were taking longer than we historically would have. We’re seeing that start to come back. We feel really good about the commercial team that we have in place. And the great thing about our business is that it can turn really fast, right? So we have about a 90-day visibility into the business. And as we then to build momentum, it can turn really fast in a positive way for us. And so we’ve got a great business, continuing to grow strong, profitable with industry-leading EBITDA margins.
Wamsi Mohan
Okay. If I could follow up on that EBITDA margin point, right? Or for your lower adjusted EBITDA for the year, how much of that is just lack of revenue leverage versus maybe incremental costs that you’re seeing from inflationary headwinds? And are you taking any specific pricing actions as you’re going through the back half of the year?
Mark Frost
Yes, Wamsi. I would say more of the challenge is the lower revenue volume because a lot of our business is prototype quick turn, we’re constantly requoting based on the latest material costs. So you can have some timing issue on production kind of orders. But in prototyping, we have very limited exposure. So more of our challenge is because we’re not getting, as I indicated to Jim earlier, strong revenue growth. in the short term. Now as we discussed, we think that’s a temporary situation, and it’s going to start turning around. I think we are looking Lonza at other operating actions. We talked about the optimization plan. We are actually, as we indicated in that plan, looking to at centralizing further activities, which will bring both benefit on the G&A and operational side. So there are a number of actions in place to improve our margins. So we’re still expecting to have margin improvement over prior year despite the fact that we’ve moderated our revenue growth targets.
Wamsi Mohan
Good luck.
Mark Frost
Thank you.
Operator
Thank you, Wamsi. And our final question of today comes from Troy Jensen at Lake Street Capital Markets.
Troy Jensen
Maybe a couple of quick questions here for Ryan. So Ryan, I guess it’s my belief that the industry growth for machine shops and service bureaus is probably in that 8% to 10% range given supply constraints and reissuing efforts and whatnot. But — and you guys are right smack dab in the middle of that based on your organic growth. But can you just talk about cross-selling? I guess I thought that was a key strategy for you guys with all the acquisitions you guys have done prior to the SPACs.
Ryan Martin
Absolutely, Troy. Yes. So that continues to be a key strategy. As we’ve talked about from a lot of the growth that, as Mark went through his comments, a lot of the growth that we’ve seen in CNC and sheet metal has been looking at legacy areas. We had an example down in Texas where we worked with a semiconductor company down in that region where primarily in the past, we’d only done CNC machining forum. And as we brought them into the platform, we were able to grow very significantly with sheet metal for them as well as they have a significant need there. And so that’s an area, as we’ve continued to strengthen our sales team. That’s an area that we’re very focused on, as I talked about earlier, the company up in Minnesota. — another perfect example. Historically, we’d only done CNC machining for them. Right now, we’re looking at multiple injection molding, both prototype as well as production opportunities for that company. So that is going to continue to evolve and grow as we continue to bring in the right sales team to be able to identify not only those opportunities, but to be able to connect the dots to across the organization within the different areas to be able to do that.
Another example was working with a seating aerospace company down in the Texas region. Historically, we’ve only done prototype form, mostly just FDM, SLS. Now we’re looking at production injection molding as well as CNC machines. So we’re making that transition in a lot of these large enterprise companies from just being a prototype development partner through to mid-volume production partner for them as well. So that doesn’t happen overnight. But as you think about the long-term value creation of this business and really being an extension of the manufacturing and R&D teams for these enterprise customers, I feel stronger now than ever that we’re going to continue to be the leader in being able to grab significant market share in that market with the large enterprise customers.
Troy Jensen
Perfect. All right. And then, how about just on acquisitions. I know you guys touched on it and doing some little tuck-ins. I guess I’m curious to know if you feel like you’re in a position to do it now, just kind of based on the balance sheet, you’ve got like $11 million in cash and net debt position. And the currency, your stock currency is really not where you thought it was going to be, right, when you kind of started this back process. So how likely are you guys to do acquisitions? Do you think you guys just going to focus on the core business now and kind of grow it and some quick thoughts on that, right?
Ryan Martin
Yes. So as Mark talked about, so we have looked at quite a few acquisitions out there. We continue to think there’s obviously a valuable opportunity from a consolidation play within this market. We still have the flexibility to be able to do as we talk about maybe 1, maybe 2 smaller tuck-in acquisitions. As we go forward, one of the positive things about our business is that we continue to generate cash. So we’re going to continue to generate cash and delever as well as put more cash onto the balance sheet. So I think it will create opportunities for us. But we’re going to be selective. We’re going to — we’re only going to look at opportunities where we believe that they can be accretive to the platform. We’ve seen opportunities. We’ve looked at a lot of deals where it just didn’t make sense from a valuation standpoint to really add to the company. And so we feel really good about the platform that we have today that we can continue to grow with what we have today, and we’ll be opportunistic as M&A presents itself.
Troy Jensen
All right. Perfect. And just a quick one for Mark. Mark, do you want to give us just like a number that you think the SG&A will be here in the September and/or December quarters?
Mark Frost
What I would say is we would expect it to maybe reduce 3% to 5% kind of level from the previous quarter? So the modest decline is what I would say, Troy.
Operator
Thank you, Troy. At this time, we currently have no further questions. Therefore, this concludes today’s call. Thank you for joining. You may now disconnect your lines.
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