Desktop Metal, Inc. (NYSE:DM) Q4 2023 Earnings Call Transcript
Desktop Metal, Inc. (NYSE:DM) Q4 2023 Earnings Call Transcript March 18, 2024
Desktop Metal, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to Desktop Metal’s Fourth Quarter and Full Year 2023 Earnings 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. Michael Jordan, Vice President of Finance and Treasury. Please go ahead.
Michael Jordan: Good morning, and thank you for joining today's call. With me today are Ric Fulop, Founder and CEO of Desktop Metal; and Jason Cole, CFO of 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 a link at the same site. The webcast and accompanying slides will be available for a 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'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, March 15, 2024, 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 on Form 10-K 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 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 a reconciliation of the GAAP to non-GAAP measures. I'll now turn the call over to Ric.
Ric Fulop: Thank you, Michael, and welcome to our Fourth Quarter 2023 Conference Call. We're in the final stages of our restructuring to get profitable on the cash we have. As part of this effort, our process is to aggressively prioritize our lines of business based on time to cash flow, given the headwinds our industry faced when rates went up. Additive Manufacturing is a growth industry, and it's grown double digits annually over the past 2 decades to about $18 billion a year, apart from very short periods in 2008 and 2020. From 2015, when we started Desktop Metal and through 2022, our core technology, binder jet grew at a compounded annual growth rate of about 40%. While we saw growth slow in 2022 as rates went up, we expected growth to come back in '23, but learned together with our peers the effect of higher cost of capital and project delays on new technology.
As a result, our industry was flat in the past year, but we expect it to go back to double-digit growth over time as CFOs get accustomed to this new environment. As such, we have planned conservatively this year but we do see signs of growing demand in defense, aerospace, health care and many other segments, which I will outline in detail on this call. The use of our machines and recurring revenue is at a record all-time high. This proves customers who have adopted the technology are getting great value from it. Recurring revenue is defined as services revenue along with consumables and subscription revenues. We have record recurring revenue of $65 million in 2023 and as a percentage of total revenue, it grew by 29% year-over-year to represent a record 34% of revenue, that's up from only 24% of revenue in 2022.
In terms of getting profitable, we believe we're ahead of our peers. We started our journey to get profitable before others and we have cut OpEx cost by about 40% since we began our effort with only modest revenue losses. While we didn't make our internal target of adjusted EBITDA positive by the end of last year, as some customer projects rolled into 2024, we're now very, very close to that goal at this new lower cost structure, and we see many opportunities in 2024 that will help us get there. For example, some areas that are outperforming the industry include our printed castings business, which grew 27% in 2023 to a record $73 million. This technology is rapidly being adopted in the defense industry and by aerospace companies like SpaceX, Airbus and Boeing or automotive leaders like Tesla and Toyota.
We're the leading player in this segment with over 80% share in systems and with huge growth potential this decade as we expand into key global markets where we haven't had a strong go-to-market presence in the past such as Latin America. Less than 5% of foundries have adopted this technology, but we see a day where every single one of them will be using it. We estimate this will be a $20 billion addressable opportunity that will one day see over $1 billion a year of systems sold as the process matures, and reaches full penetration by the more than 25,000 foundries globally. I will detail customer adoption examples later in the presentation. Another fantastic growth area is our ScanUp.org digital dentistry product, which we are doing in partnership with Align Technologies.
We have already signed over $32 million in total contract value in our first year and growth in this product compounded at over 25% quarter-over-quarter. We expect this new business to be a meaningful part of our company by the end of the year as this is an attractive way for dentists and DSOs to digitize their practices and adopt printed restorative parts. Restorative dentistry is poised to go 100% digital over the coming decade, and this represents a $30 billion a year global opportunity. I will detail these and other promising examples of our growth drivers later in our call. We are 100% focused on fixing the portions of our business where we've had challenges. One of them is a Direct Metal business for systems under $0.5 million. Those used to be traditionally sold through channel versus direct sales.
And in this case, we used to use the Stratasys channel, which was a legacy of their original investment in Desktop Metal in 2015, as we lost access to the Stratasys channel partners throughout 2022 and 2023, our sales in the sub-$0.5 million segment were impacted. And since last fall, we have been adding go-to-market resources to remedy that. The access to a go-to-market channel was one of the attractive features of that merger last year, and we're now taking our medicine and building our own go-to-market in that segment. We have continued to work diligently to bring our cost structure in line with our current revenue run rate and near-term opportunities ahead of us, which was evident in the fourth quarter. For the full year, we reported revenue of $190 million compared to $209 million in the prior year.
This result was in line with the expectations we shared in the third quarter, and it largely reflects the impact of the macro environment on CapEx budgets that weighed on our volume throughout the year. Lower system sales were partially offset by a 29% increase in recurring revenues. We have made excellent progress reducing losses, and Jason will detail in a few minutes. We expect our adjusted EBITDA run rate to be positive in the second half of the year. Our full year adjusted EBITDA loss decreased from negative $118 million in 2022 to negative $69 million in 2023. From Q1 2022, the last full quarter since commencing our cost reduction efforts, adjusted EBITDA losses have decreased 78% posting 2023 at $9 million in the fourth quarter. This fourth quarter 2023 adjusted EBITDA loss is also down 56% compared to fourth quarter 2022.
We continue to be on a relentless march to adjust our cost structure and reach profitability, and we are making excellent progress in this effort. We're focusing on execution and are looking forward to letting our results speak for themselves this year. While none of our peers are truly profitable, we have outpaced our industry in our execution to get profitable and are now very, very close. We're looking forward to crossing the adjusted EBITDA profitability threshold in 2024 and getting back to growth as we focus on the parts of our business where we have the best-in-class solutions that solve the most important customer problems. We believe after we complete the cost actions outlined to date, we will be adjusted EBITDA positive in the second half of 2024 even a muted growth.
As we prioritize our offerings for time to cash flow today, we have also announced our intention to deemphasize specific subsets of our business, principally focused on some of our photopolymer technologies. To be clear, we continue to believe in the strength of these technologies and their long-term potential. While difficult, this decision helps us stream cash-consuming businesses and focus on our more profitable product lines, and we believe this will further accelerate our path to adjusted EBITDA profitability. We continue to have the industry-leading portfolio for mass production with nearly 100% of our products focused on end use parts and any small amount of growth at this cost structure will yield very good results in the bottom line.
While we're prudently managing our business for the environment that we're in, we believe there remains a substantial near- and long-term growth opportunity available to us as the Additive Manufacturing 2.0 secular growth story resumes. We're positioned to emerge as the leader in the space with the broadest set of products and capabilities for mass production in our industry. We hold the leading market share position in binder jetting and the leading position in health care applications with our DLP technology across a very wide array of materials and end users and have an enviable IP position with close to 1,000 patents. We have the best materials in health care restorative dental parts. This past quarter, we officially launched ScanUp.org after a 1-year trial with our partner Align Technologies.
I encourage you to visit the site. We also recently launched our Flexcera Base Ultra+, which has much better properties -- competitors, making Flexcera the leading solution for restorative dental parts. Since its inception, we have sold more than 20 metric tons of Flexcera, which is enough to make more than 1 million dentures, crowns and other dental products. That makes Flexcera the leading solution for permanent digital restorations in a total addressable market estimated to be several billion dollars. Flexcera is also a very profitable business for DM with gross margins approaching 70% and it also shows no signs of slowing down. We continue to see record adoption of Flexcera. In terms of application adoption in binder jet, we have made excellent progress.
We're changing the way cars, planes and space parts are made. We have grown into the global leader in silicon carbide for Additive Manufacturing. Carbides and other advanced ceramics are materials with amazing properties and are used in electric vehicles, cutting tools, optics and space structures. Desktop Metal, now has parts in space with many of the major defense contractors and several large satellite constellations are already using or planning to use our technology. It was a huge milestone for Desktop Metal to get both silicon carbide and metal production parts flying in space in 2023. On the metal front, we now have several printed castings in the SpaceX Raptor engine with our technology. In 2023, we also saw our parts get to the moon on the intuitive lander.
That's an amazing accomplishment. I never would have believed was possible when we started the company. We also saw and continue to see great adoption for our technology in printed nuclear materials. We're the only company in the world that makes printers for this application, and many next-generation propulsion and energy systems are now using our technology in that market. We also saw giants like Airbus and Boeing use our systems for many applications including large embark tooling for wings and winglets in their most advanced airliners like the 787. We have seen adoption across the board with the Defense Logistics Agency to print components from marine and underwater applications. The fuel systems for the F-35 are now made with our technology by our customer, Eaton.
And we now have parts flying in multiple production jet engines, for example, the Rolls-Royce Trent, also with our customer Eaton, and on Pratt & Whitney jet engines with our customer, Magellan Aerospace. Tesla has also had great success with their giga casting process for our binder jetting of molds is now extensively used in the front end of the process to cost-effectively enable this new vehicle design and engineering approach. All our customers like Toyota and other OEMs are going all in and are racing to adopt this new way of making cars, which reduces the number of parts in a vehicle and means huge growth opportunities for binder jet. These are huge accomplishments for 2023 that will yield significant growth opportunities in the near term.
The U.S. Department of Defense has been a great partner in helping us advance the state-of-the-art of this technology and we have a large backlog of programs in line that should also yield tens of millions in additional growth in 2024 and 2025. Almost all Sikorsky helicopters now have at least a dozen parts made with our technology, and we have major programs like these at the moment with companies like Northrop Grumman, Lockheed Martin, L3, Coherent and many others. Magnesium parts for aerospace is also a highlight of our capabilities as this lightweight alloy is not processable with all forms of printing, and we have qualified this process for aerospace and now have parts with these lightweight materials flying in various defense and commercial aircraft.
Our Figur sheet metal forming products have had great early adoption, and we have sold out our initial builds. We project this will also be a great area for growth in the coming year. In terms of sizing up how large can the printed casting market get, this is an area where we grew 27% in the past year. So how big can this be? We have 25,000 sound foundries globally. Today, the penetration is well under 5% for this technology. And we believe that over the next 10 to 15 years, every single one of these foundries will be using printed castings as this becomes a standard process to make these types of metal parts. That translates to more than $20 billion CapEx cycle that gets installed over a 10- to 15-year period. If you believe in S-curves, and we're at a 3% mark, we're looking at a market that can eventually grow to more than $1 billion a year as this technology gets broadly deployed and today, we're the 80% market share player in this segment.
We have a larger pipeline of projects today than we've ever had. I do believe that it's only a matter of time till double-digit growth resumes in our sector and we're poised to benefit dramatically as it does. Most analysts project a 5x increase in the size of our market by the end of the decade, pushing adoption from $18 billion a year to over $100 billion a year by 2031, and this doesn't even include the impact of markets of the future where artificial intelligence is driving accelerated traction in new segments like humanoid robots. Let me pause here for a second and give you an example of how this can be a massive opportunity for Desktop Metal. We've been big believers in artificial intelligence since we started our company. Before most other companies in 2018, we launched one of the world's first generative design tools in the market.
This is an artificial intelligence product called Live Parts. Over time, we repositioned that for simulation of powder metallurgy through our industry-leading product, Live Sinter. That allowed us to build the world's largest neural network library of materials to simulate powder metallurgy consolidation. Today, it's used by all of our customers in major companies like Lam Research to make their products, and it's an area that sets our company apart and ahead of competitors. If you believe artificial intelligence is real and the future of artificial intelligence and printing will equal humanoid robots, then we're very well-positioned for this future. We're also a leader here with our printed hydraulic technology from hydro in our low-cost, lightweight metal printing solutions that can be used to make aluminum and magnesium limbs.
We have several customers developing solutions for these markets. And while today, this is a very tiny portion of our revenue. We believe this application has tremendous potential. This market will create huge opportunities for Additive Manufacturing and for actuators, which today represent the bulk of the cost in these robots. The biggest challenge to this market will be cost and power consumption. Most of the cost in a humanoid robot is in the neodymium powered actuators, in the lightweight complex 3D limbs or the hydraulic actuators. As a leader in low-cost printed castings materials like magnesium and printed hydraulics, we have the technology to be one of the leading providers of picks and shovels as this coming revolution materializes.
In coordination with our MIT research partners, we recently began to adapt our artificial intelligence-driven generative design tool Live Parts so that it can generate shapes for smart limbs. The weight savings and the energy capture opportunities from structural series elastic actuation allows you to reduce the power consumption in these robots. Our presentation shows a preview of this exciting work, and we look forward to sharing more about this as we get these tools and parts in the hands of more customers and they start to showcase their work. This is an application that one day could be bigger than everything we do today combined, and it could be a killer app for our printed casting technology. Finally, we've just begun to see the benefits of an expanded global installed base that is using Additive Manufacturing equipment for real production.
Utilization of our products at our customer sites are increasing, as evidenced by growth of recurring revenue streams. Our recurring revenue grew in 2023 by 29% from $50 million in 2022 to a record $65 million in 2023. Further, our services business continues to supplement our growth, which increased 15% year-over-year, as I noted. Importantly, this demonstrates that while some projects may be delayed by higher cost of capital, our customers continue to expand their usage and engagement in our solutions during the same time period, demonstrating clear product market fit as recurring revenue grew from 24% of revenue in 2022 to a record 34% of revenue. In closing, while 2023 proved to be a challenging year amidst higher cost of capital headwinds, we remain confident in the long-term growth potential of additive manufacturing in Desktop Metal's leading position in mass production.
Our focus for 2024 is reaching profitability through the realization of our cost-saving initiatives. In the long run, additive manufacturing is the future, and Desktop Metal is poised to emerge from this cycle as a clear leader. I want to thank our employees, customers, partners and shareholders for their continued support and sacrifices. We look forward to updating you on our progress next quarter. With that, I will turn the call over to our CFO, Jason Cole. Jason?
Jason Cole: Thanks, Ric. Beginning on Slide 17, you will see highlights of our financial performance for the fourth quarter and full year of 2023. 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. Before diving into our results, I would like to spend a minute discussing the strategic actions we have taken to improve our costs. While our industry has struggled to reach scale, we remain committed to driving Desktop Metal to profitability on the cash we have. As our top line softened, you'll recall, we announced $100 million in annualized cost reductions in 1Q '23 followed by an additional $50 million of annualized reductions January of '24 for a total of $150 million in cumulative annualized reduction.
These reductions have driven efficiencies across positive sales and OpEx, which have steadily improved our operating leverage across '23 and will continue to do so into 2024. Today, we are also announcing additional cost reduction measures, which include our intention to de-emphasize select business lines principally within our photopolymer businesses, where a lack of growth and scale have been a headwind to profitability. These actions are above and beyond the previously announced $150 million. These are technologies we believe hold tremendous potential for future growth and profitability. Unfortunately, we also accept at their current scale, they are lost leaders within our portfolio, and we are no longer positioned to shepherd them to profitability.
We are committed to exit these businesses and are exploring alternatives on how best to do so, which may include divestiture. Overall, I am pleased with the progress we are seeing since 2023 and the following slides will demonstrate the progress we have continued to make. Consolidated revenue for the fourth quarter of 2023 was $52.3 million compared with $60.6 million in the fourth quarter of 2022. Sequentially, revenue increased 22.4% from the prior quarter. For the full year of 2023, consolidated revenue of $189.7 million compared to $209 million in 2022. Product revenue decreased primarily due to a reduction in units shipped during 2023, driven by the macroeconomic conditions impacting the Additive Manufacturing industry. This was partially offset by strength in our recurring revenues of 29% year-on-year.
Non-GAAP gross margins were 34% for the fourth quarter of 2023. Gross margins improved 970 basis points versus the prior year period, driven by improved absorption of fixed costs. Sequentially, gross margins improved from 21.9% in the third quarter of 2023. On the right side of the slide, full year 2023 non-GAAP gross margins were 27%, a 450 basis point improvement over the prior year period of 22.5%, driven by the actions we have taken to improve our cost structure. On the next slide, non-GAAP operating expenses were $31.6 million for the fourth quarter of 2023. Through actions under our initial 2022 cost optimization initiative, we reduced non-GAAP operating expenses sequentially by $1.6 million and year-over-year by $6.8 million. Fourth quarter 2023 non-GAAP operating expenses closed at $31.6 million, down 17% year-over-year compared to $37.9 million fourth quarter of 2023.
Adjusted EBITDA for the fourth quarter of 2023 was negative $9.2 million, improving year-over-year by $11.9 million compared to the fourth quarter of 2023. Full year 2023 adjusted EBITDA was negative $69.1 million compared to prior year period of $118.4 million. Adjusted EBITDA is trending in the right direction as the $100 million in cost reduction actions completed in 2023 continue to positively impact adjusted EBITDA. The $50 million of cost reductions announced in January of this year combined with the cost reduction measures announced today will continue this trend. With respect to the $50 million cost-out program announced in January, we expect to begin realizing the majority of these savings in the first quarter with the balance completed through the year-end.
These measures included a further 20% reduction in our workforce, 3 additional site consolidations, continued efforts to streamline centralized costs and the sunsetting of several slow-moving product offerings. We believe we are now positioned to be at or near breakeven in 2024, assuming no material growth. As a further proof point of cost reduction progress, this quarter's cash consumption from operations was down 62% when compared to $56.3 million consumed in the first quarter of 2022. As a reminder, 1Q '22 was the last full quarter of results before commencing our cost reductions with continued improvement throughout. Lastly, we finished the year with $82.6 million in inventory. We are positioned to execute on expected first half demand and remain committed to optimizing inventory management, monetizing the inventory we have and improving our cash flow and working capital in 2024.
Moving to our financial outlook on Slide 21. We are continuing to observe some persistent macro and industry-wide headwinds, which began to emerge in mid-2022, and we're well underway by early 2024. We believe we are well-positioned from a cash and cost perspective while being ready to capitalize on the significant growth opportunities that remain in front of us once conditions become more favorable. We anticipate generating revenue in the range of $175 million, $215 million in 2024. We expect the momentum in the improvement of adjusted EBITDA to continue throughout 2024 and as such, we expect full year 2024 adjusted EBITDA to be negative $30 million to negative $10 million. We do expect in the second half of 2024 that we will begin recognizing positive adjusted EBITDA as we realized the nearly full benefit of the $150 million cost savings programs.
Additionally, the guidance reflected today does not include any businesses which may roll off as part of our strategic review process. With that, we'll take some questions. Operator?
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