Desktop Metal, Inc. (DM) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to Desktop Metal’s First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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. Thank you, sir. Please go ahead.
Jay Gentzkow: Thank you, and thanks everyone for joining this afternoon's call. With me today are Ric Fulop, CEO, Chairman and Founder of Desktop Metal; and James Haley, CFO of Desktop Metal. Please note that our earnings press release and presentation slides referred to on this call are available under the events and presentations section of our Investor Relations website. This call is also being webcast live at the same Investor Relations 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 written consent.
Ric Fulop: Thank you, Jay. Good afternoon, and thank you for joining Desktop Metal’s first quarter 2021 earnings call. I'm very pleased with our progress since we last spoke with you, including the results we delivered on our first quarter of 2021. We're building Desktop Metal for the long-term. And some of the investments we have made over the past several months into the coming public respects our thinking. As we presented previously, analyst estimate the additive manufacturing market will scale from $12 billion at the end of 2019 to $146 billion by 2030. We have focused our business to capture what we believe is the biggest opportunity driving the growth of this market. The volume production of end-use parts for what we've defined as Additive Manufacturing 2.0, or AM 2.0 for short. We're well-positioned to execute on our strategic vision in AM 2.0 and we expect to be a major player in this space. We define success by achieving a double-digit share of the additive market by the end of this decade. And every strategic investment we're making today has that goal in mind. Let's just start today by reviewing our key accomplishments from the first quarter, before highlighting how our product portfolio and technology differentiates itself to the additive market, and then go into detail about some of the exciting recent developments in the business. After my remarks, James is going to cover financial results for the first quarter.
James Haley: Thanks, Rick. I will provide a summary of our financial performance for the first quarter of 2021, discuss the impact of the recent accounting change to our private warrants, and end with our updated guidance for 2021. On slide 18, you will see a summary of our financial performance for the first quarter of 2021. Please know we will be referring to the financial metrics on a non-GAAP basis, reconciliations and GAAP data is included in the filed appendix. We are pleased to report revenue of $11.3 million in the first quarter of 2021, up 35% sequentially from $8.4 million in the fourth quarter of 2020, and also up 234% from the first quarter of 2020. The acceleration was due to the acquisition of EnvisionTEC as well as an increase in our metal product shipments. Non-GAAP gross profit in the first quarter was a positive $0.6 million, which represents a sharp $3.3 million improvement from negative $2.7 million in the first quarter of 2020. The improvement was driven by the EnvisionTEC acquisition, mix shift in toward higher margin products, as well as our revenue beginning to scale out over the overhead costs associated with our manufacturing operations and customer support organizations. Adjusted EBITDA for the first quarter of 2021 was negative $19.4 million versus negative $18.6 million in the first quarter of 2020. Increase loss in adjusted EBITDA was primarily due to increased G&A expenses related to operating as a public company and investments in our core business. We grew the Desktop Metal team to over 470 employees today, up from 180 at this time last year, as we position the company with the right talent for the exciting opportunity ahead. We ended the quarter with a well capitalized balance sheet, including cash, cash equivalents and short-term investments of $572 million as of March 31, 2021. This includes completing the redemption of all outstanding public warrants during the quarter, adding $171 billion in net cash proceeds. Moving to the change in warrants accounting. Pursuant to new guidance released by the SEC on April 12, 2021, we change the historical accounting for the private placement warrants assumed in the business combination to record a liability for the fair value of these warrants with any subsequent change in fair value adjusting the liability in recording a non-cash non-operating gain or loss in the statement of operations. As a result of this change, we filed an amended 10 days for 2020 this morning, reflecting these changes. Since all outstanding private placement warrants were exercised by March 2, 2021, the impact is only historical in nature. The change is also strictly accounting related and does not impact our business market opportunity, investment prospects or future valuation. Finally, moving on to our guidance, we are reiterating our expectation to generate revenue in excess of $100 million in the full year 2021. We continue to plan to exit the year with an annualized run rate of $160 million and expect to see sequential quarterly growth throughout 2021. We are updating our adjusted EBITDA outlook to be in the range of negative $60 million to $70 million. This updated guidance reflects increased investments in areas of our business, where we see outside growth opportunities, including Desktop Health, Adaptive3d and EnvisionTEC and our organic business. With that, I will turn the call back over to Ric.
Ric Fulop: Thank you, James. I'm pleased to have a strong start to the year. We're well positioned to fast track growth with momentum in our core business and exciting inorganic opportunities. We remain very optimistic about sequential acceleration, during the second half of the year, as we launch additional products and start shipping our P-50 systems, integrate our recent acquisitions and capitalizing our expanded portfolio of material capabilities. And we're focused on building the company and making decisions to achieve long-term value creation. I'm confident, we have the portfolio solutions and strategic positioning in other resources to best capture share in added manufacturing, by delivering AM 2.0 solutions for high-volume end use parts. With that, I will not open the call for question, operator.
Question-and:
Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Noelle Dilts from Stifel. Please go ahead.
Noelle Dilts: Hi guys. Good afternoon.
James Haley: Hello.
Ric Fulo: Hi, Noelle, how are you?
Noelle Dilts: Hi. Great. I just was hoping that you could comment on, sort of what you're seeing in terms of the supply chain and then also about logistics. There's been a lot of talk in the industry about, some challenges there. And what you're seeing today. And if you're taking any action to kind of avoid potential issues down the line? Thank you.
Ric Fulo: Yeah, absolutely. It's something we monitor very closely. And we are being proactive about it, and trying to ensure that, we don't have components that we won't be able to source at the scales that we want. We have made some quick changes in some of our products, in anticipation of shortages. But it has not been an issue. And we don't actually expect it to be an issue or affect our numbers in the future, given the planning that we're putting in place. I guess, maybe DLP chips could be the one area that we monitor pretty closely. But we are ahead of the curve on that one, and doing our best to ensure that it's not going to be an issue on future quarters. So, so far, we feel pretty good that that is not going to impact us.
Noelle Dilts: Okay, great. And then obviously,…
Ric Fulo: Yeah.
Noelle Dilts: Nice uptake there.
Ric Fulop: By the way, this is a this is one reason to adopt additive manufacturing therefore mass production is a lot of this impairments in supply chain and inflation coming in the horizon and things like that are difficulties with flexibility of that supply chain are the types of things that come up, when we talk to large customers. They are excited about solutions that give them flexibility and freedom from some of the approaches that for example, COVID in India has been a huge issue for many of our customers. I was just with a CEO of a major company the other day, who is very excited about using our technology, because he's got suppliers in India that have had issues delivering things given the critical situation that they're facing there. So, I would say this is a technology that they'll put a lot of redundancy on supply and enables you to react quicker. So it's -- we see it as tailwinds. On the chip side is the only thing on the horizon, but our products are such that we don't expect this to be an impairment on our ability to deliver our numbers this year.
Noelle Dilts: Okay. Great. And then one housekeeping question for me. I was wondering -- sorry --somewhere in the materials side, do you have the mix of organic revenue in the quarter versus contributions from EnvisionTEC?
James Haley : So that is not something we're disclosing today. On our last call, we did indicate that we expected roughly 60% of our revenues to come from DM organic and 40% from inorganic, and I would say we're still trending in that direction. I think what we'll see quarter-to-quarter, there'll be some variances. But really our full year view has not changed at this point.
Noelle Dilts: Okay. And then last, just -- as you've expanded the portfolio through acquisitions, Ric, could you just touch momentarily on, what you're seeing there or the success you're having so far in terms of cross selling, and how you're kind of thinking about really leveraging this more expanded portfolio as you look forward? Thanks.
Ric Fulop: Absolutely. I think we see great success there on the ability to cross sell as well as bring more solutions to customers globally on both, bringing things like our direct print solutions to jewelry and dental where EnvisionTEC had a long vertically integrated presence in a direct. And I would say, a channel that was targeted towards those industries and we're also seeing very good success with industrial customers that are adopting our metal printing solutions at scale where we can help bring those types of products in. I'm super excited about the work that we're doing on elastomers with the Xtreme 8K and that's a new market for us. But we have the head performance printed elastomers in the world now. And we have the largest in high throughput DLP print solutions now as well. So combining those and it's the same type of customers that buy metal printing systems for mass production. So I think it's a winning combination. And you're going to see these types of products all throughout. You could imagine this elastomers being used in furniture related products that would then go together with a Forust printed wood part. You could see them in an automotive component that would go together in the same type of customer that's adopting metal printed components. So there's definitely the ability to provide more comprehensive solutions. And I think customers appreciate the fact that they now have a really good portfolio in our channel benefits from these as well. So it's synergistic all throughout.
James Haley: I think though, one thing I would add to the beyond sort of some of the cross selling you referenced, I think one of the things we're really starting to get momentum on is with some of that those core EnvisionTEC product lines, where now they have the full balance sheet of Desktop Metal. So Rick has been on a number of calls with -- sort of your true marquee Fortune 500 customers without really wasn't as easy resell for the legacy EnvisionTEC. But now with all our marketing firepower as well as our capital, I think we're going to continue to see lots of growth opportunities there.
Noelle Dilts: Great. Thanks so much.
Operator: The next question comes from Shannon Cross from Cross Research. Please go ahead.
Shannon Cross: Hi. Thank you very much for taking my question. Ric, can you talk a bit about what you're hearing from customers who are purchasing the P-1 and their interest level and that -- is that something that, they're buying -- pre-buying the P-50? And then also, what is the pipeline look like for the P-50? Has it increased since, maybe, you last put numbers out and how solid is our pipeline feel? Thank you.
Ric Fulop: Thank you, Shannon. Great to hear from you. P-1 interest is at an all time high. That product is doing extremely well. We are making as many -- it's a very good product. It is not used in lieu of a P-50, while it can be used for mass production of parts. You primarily use that technology to qualify components and all of the settings translate perfectly to a P-50. One of the benefits of that system is that, you can get a really quick build box in under an hour. And it's very, very high throughput, three seconds -- under three seconds a layer and then you've got a solution to grow into high volume production. Most of the -- or I would say, many of our customers that are buying P-1 have ordered a P-50 as well. But it is -- in some markets like jewelry, you could do very well just with a P-1, for example, for particular types of materials that would be particular shade of gold or things like that. I would say it is -- the P-50 demand is very strong, it continues the -- let's say our -- we don't see any slowdown in demand for that product. And we're really excited that program is on schedule. We're really excited to get that out of the second half of the year, like, we've discussed in previous calls, and we have a lot of our best people working to execute that. And I continually talk to large customers who will visit plants with and they see -- you look at the number of skews that would be breakthrough with that type of product and it's a large number in plants. Just talking to a Fortune 500 company earlier this week, where it's -- it could be very, very large business. So I see that product as still the foundation of a lot of our future growth. And we're really excited about getting that to the market later this year.
Shannon Cross: And the increase in EBITDA loss and the increased investment, how are you determining where you're going to put your investment dollars? I mean, what kind of ROI metrics are you looking at? What's the process? I guess, I'm just trying to understand, if this is going to be something where every quarter we see increase EBITDA so there’re losses. So if that's the case, like, how do we determine the success of your investments?
Ric Fulop: Absolutely, I mean, we have a hurdle rate. And I think we do look at -- that these investors are strategic. We look at our -- everything we're doing, the company has a long term view in it, in terms of getting large share in end use part mass production in the long run. So, if you buy a company -- I would say, the things that are going to fluctuate, the EBITDA, a little bit, maybe some of the M&A transactions that we would pursue, if there's a technology that we think is strategic and we want to have in our fold and it's a company that is not -- hasn't sort of made the transition to being profitable yet. That would have an impact. At the same time, there are some businesses we may acquire that are profitable, and that we're doing it also for strategic reasons. And when we put them in our network, we would make them either more profitable, or we'd be able to grow faster. So I would say, we expect to be within the gas we just gave you for this year. And we expect to -- what we're trying to do is, accelerate our timeline that we put out last year, when we initially went public, and try to get to $1 billion in a faster timeframe than our initial target. And so, everything we're doing is with a view of having a double digit share of that $1406 billion market by the end of the decade. So, whether it's a transaction that we would pursue on the print engine side, on the vertical integration into material side, or into a particular advanced parts technology or business that we may acquire. So, these are all things that we look at, with for sure, with a hurdle rate, and the team here has a background investing in getting returns out. So, we do look at it as a financial exercise. And we are excited about the different activities that we've got going on.
James Haley: Yeah, the one thing I would add, though too, is we sort of Shannon, increasing that range by 10 million. A portion of that was for organic investments as well. We continue to qualify new materials. We continue to focus on driving that margin. One of the things you saw for the first time here is that on a non-GAAP basis, when you back up the amortization for the EnvisionTEC transaction. I mean, we're a positive margin. We're doing everything we can to accelerate that. So if there are outsized returns, we can help. We’re going to go for it. I mean, when we're looking at these investments, be it organic or integrate organic, a lot of times, it's really a two to three year sort of payback before you really start to see the dividends. On the M&A side, large creative transactions, they're going to be very costly. I mean, I think there's some on the horizon. But really, what we're trying to do to Rick's point is capture market share and do everything we can to increase the revenues and improve the margins.
Operator: The next question comes from Greg Palm from Craig-Hallum Capital Group. Please go ahead.
Danny Eggerichs: Hi guys, this is actually Danny Eggerichs on Greg today. Thanks for taking the questions.
Ric Fulop: Our pleasure.
Danny Eggerichs: Appreciate the color on kind of the expansion of the customer base in the quarter accelerating in Q1. I guess from like an end market standpoint, anything you can give there, any strength or weakness and maybe where those customers are coming from?
Ric Fulop: I mean, I think it's -- if you look at it from a co-apps point of view, some of the markets that are growing very fast and where we think there's a huge long term opportunities, there's over $30 billion worth of parts sold every year by lab to dentists. And we are -- a lot of that is analog today, but it's writing's on the wall that most of it is going to be printed. And I think that's one of the markets is tipping very quickly where we've got best in class materials, significant share, and we're growing way faster in the market. But you can go across segment-by-segment-by segment and the truth is, this is a market that as a whole is growing at -- the added markets growing at around 25% and we're growing way faster than the market. So I'd say we see the same thing happening in the adoption of our metal products where we've got great reception. These are horizontal technologies can be used -- that can be used for everything from machine design to automotive, to oil and gas, variety of other applications. So it's a general purpose tool. And it has all sorts of benefits as we've talked over the years, in terms of the flexibility that it gives you. But now we are able to do it cost effectively and compete with conventional manufacturing and do it at the throughput that you can go to market with 3D printing.
Danny Eggerichs: Got it. That's helpful. And then maybe just switching over to -- from on a geographic basis looks like America, just looking at the filing -- looks like Americas is a pretty good and maybe I didn't see the same kind of growth as somewhere like the Americas and I think you're seeing that across a lot of market that they might be lagging behind in COVID recovery, anything that you can give there on what you're seeing there right now?
Ric Fulop: Yeah. I think that's accurate. I think that they -- we saw Q4 Europe was stronger than Q1. But I think was primarily reflection of COVID and some other closings that happened last minute, but we are -- I mean, from a pipeline point of view, you see pipeline growing on all continents, and we have product in -- we’ve product demand globally for our products.
James Haley : Yes.
Ric Fulop: It's pretty good.
James Haley : It definitely feels like many of these variances though are just short-term in nature. Definitely our Q2 pipeline is looking very strong in EMEA. I think it just again, as you highlighted some of the challenges with COVID and whatnot. There's just -- there's a lot of movement right now.
Danny Eggerichs: Okay. Got it.
Ric Fulop: More -- activities on the longer term trends.
James Haley : You could estimate, I mean, even though Asia is a major manufacturing hub. Right now, we see our near-term baseline is 40, 40, 20 -- I’m sorry -- 40% US, 40% Europe and 20% Asia. Over time, I think we’re leaving itself out as this technology gets more broadly adopted in Asia.
Danny Eggerichs: Okay. Got it. That's helpful. And maybe if I could sneak one more in here on the shop system, I think last quarter, you mentioned that, that was also kind of being impacted by COVID, still in the recovery. There -- any update on traction you're seeing for that one?
Ric Fulop: I think the traction is very strong, but with the series of new applications for that product now that we've started to get it out there in higher volume. And we don't see COVID as a major impairment for poor demand of any of the products now. I think we're kind of at least in Boston, we're working out of the office and it feels very much like business as usual. This is -- things are back to a more normal state.
James Haley : Yeah. Definitely earlier in the Q1, things were still a little more challenging. I would say we all feel pretty good, where we sit today, wrapping up Q1 and halfway through Q2. I definitely, as Ric point that, we're feeling back to normal and not really seen any sort of COVID overhang at this point.
Danny Eggerichs: Okay. Thanks for taking the questions.
Ric Fulop: Thank you.
Operator: This concludes your question-and-answer session. I'd like to turn the conference back over to Ric Fulop, CEO, Chairman and Founder of Desktop Metal for closing remarks.
Ric Fulop: Thank you. Again, very excited with all the progress that we have going on and we want to thank everybody for joining the call today, as well as all of your interest in Desktop Metal. And as always, I especially want to thank the more than 470 Desktop Metal employees for their continued passion and dedication. And we look forward to updating you in the second quarter in 2021 in a few months.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
