Desktop Metal, Inc.
Q4 2020 Earnings Call Transcript

Published: 15 Mar 2021

[Operator:]

Greetings and welcome to Desktop Metal’s Fourth Quarter and Full Year 2020 Financial Results Conference. 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. Arjun Aggarwal, Chief Product Officer. Thank you, sir. Please go ahead.

[Arjun Aggarwal:]

Thank you and thanks to everyone for joining us today for Desktop Metal’s fourth quarter and full year 2020 earnings conference call. With me on the call are Ric Fulop, CEO Chairman and Co-Founder of Desktop Metal and James Haley, CFO of Desktop Metal.

[Ric Fulop:]

Thank you, Arjun. Good day, everyone. We are excited to welcome you to our first earnings call as a public company. The past several months has been transformational for Desktop Metal. In the fourth quarter alone, we completed the transaction between China and Desktop Metal, started trading on the New York Stock Exchange and began shipping several new products core to our long-term roadmap, ending the year with over $595 million on the balance sheet to fund our growth strategy. I would like to start today by providing an overview of our business for those that are new to our story, about some of the key milestones we achieved in the fourth quarter and discuss some of our strategy going forward. After my remarks, James will cover our evolution to a public company, discuss our financial results for the fourth quarter and full year 2020 and provide guidance for 2021.

[James Haley:]

Thanks, Ric and thanks again to everyone for joining us today. I am James Haley, the CFO of Desktop Metal. I am pleased for this opportunity to share Desktop Metal’s financial results for the first time as a public company. I will begin with a quick recap for those new to Desktop Metal before providing a summary of the company’s fourth quarter and full year results for 2020 and closing with guidance for 2021, which can be found on Slide 25. We announced a definitive business combination agreement with Trine Acquisition Corp on August 26, 2020 concurrently with a successful PIPE fundraise that in aggregate provided approximately $530 million of net proceeds to our balance sheet. The business combination was completed on December 9 and we began trading on the NYSE on the 10th under the ticker symbol, DM. Moving to our financial results for the fourth quarter and full year of 2020, we are pleased with our fourth quarter results, which reflected an inflection point in our business as we successfully commenced shipments of several new products. We generated revenue of $8.4 million for the fourth quarter of 2020, up from $2.5 million in the third quarter and in line with our expectation of sequential acceleration. Casting sales in the fourth quarter was $10 million resulting in gross margin of negative 20%. This represents a sharp improvement from the third quarter of 2020 as we began to scale revenue out of our fixed overhead costs as well as a shift towards higher margin products. Net loss for the fourth quarter was $25.4 million, which includes increased G&A expenses related to our transaction with Trine and becoming a public company, including additional headcount for corporate functions, audit, legal, professional services and insurance. Looking at the year overall, revenue for fiscal 2020 was $16.5 million. Net loss and non-GAAP adjusted EBITDA for the fiscal year were negative $90.4 million and negative $73.5 million respectively. We ended the year with a well-capitalized balance sheet, including cash, cash equivalents and short-term investments of $595.4 million as of December 31, 2020. On February 26, 2021, with more than 75% of the public warrants from the transaction with Trine already exercised, we announced redemption of the remaining outstanding public warrants. Through March 10, 2021, $11.9 million public warrants were exercised for cash, resulting in proceeds of $136.8 million. Looking ahead to 2021 with our robust capital position, we plan to hit the accelerator on growth and we will continue to make substantial investments in both organic and inorganic opportunities. Over the past few months, we have significantly expanded our sales and marketing, engineering and administrative teams to ensure we are well positioned to fast track organic growth. Further, we are building out internal M&A capabilities to support the multiple inorganic growth initiatives, which Ric spoke to earlier. For the full year 2021, we expect to generate revenue in excess of $100 million, including contribution from EnvisionTEC. We plan to exit the year with an annualized revenue run-rate of at least $160 million with multiple product launches from the fourth quarter right in the rearview mirror and additional commercial launches this year with EnvisionTEC Xtreme 8K and Envision One HT in the first half and the production system P-50 in the second half, we anticipate sequential growth to be relatively modest in the first quarter, followed by a more substantial acceleration beginning in the second quarter as various growth initiatives take effect following COVID and as these new solutions pickup steam. Turning to adjusted EBITDA on a non-GAAP basis, we expect this to be in the range of negative $15 million to $16 million as we continue to invest in organic and inorganic growth. With that, I will turn the call over to Ric. Ric?

[Ric Fulop:]

Thank you, James. We are excited to be engaging with our new public shareholders as we embark on this journey. We are building our business for the long-term and our leadership team and board are aligned with our public shareholders. We view our AM 2.0 platform as leading the way in empowering businesses to finally realize the promise of additive manufacturing. Reengineered supply chains, localized production, full design freedom and all at a competitive volume and cost. Increasingly, digital manufacturing landscape is going to experience a massive transformation over the next decade. And we at Desktop Metal are thrilled to be at the forefront of this fourth industrial revolution. With that, I will conclude our prepared remarks. Thank you everyone for listening and for your support. James and I are now happy to take questions.

[Operator:]

Thank you. Our first question is coming from Shannon Cross of Cross Research. Please go ahead.

[Shannon Cross:]

Good morning. I was wondering, Ric, looking back at the last – I guess we are at 7 or 8 months now since you announced the transaction and guidance at that point, which I think was $15 million to $25 million in revenue for 2020. Can you talk a bit about what headwinds you faced? What you are seeing from the market in terms of reception to some of the launches? And just what’s leading you to be a bit more cautious in first quarter with an expected ramp thereafter? Thank you.

[Ric Fulop:]

Hey, Shannon. Thank you for the question. I think we have great funnel that’s building for our products. We didn’t get to ship our Shop System until probably middle or second half of the fourth quarter and the traditional COVID supply chain related thing, so moving things around the world, but we did a global launch in all continents, which I think was a strategic thing for us to get going on our Shop System and we did that to prevent potential limitations of different places that we didn’t know whether they would be locked down or not. Overall, we are pretty happy with the results given all the traditional challenges that our companies faced to get products delivered around the world. And I think that as we come out of pandemic, we are going to see some great resurgence and people going back to their labs and manufacturing spaces to execute programs, so.

[Shannon Cross:]

I appreciate that. But I am just trying to figure out and maybe if we think about first quarter and the ramp through the year, what sort of builds upon itself that shows the acceleration starting second quarter? And what are the sort of the key products we need to watch?

[Ric Fulop:]

Yes, I think it’s a reflection of our funnel on how it’s building. Right now, we’ve got a number of exciting products particularly the Envision One HT and Envision One system continues to pick up. We are pretty happy with the way studios continue to develop it’s now starting to ship and Shop System continued acceleration on that and P-1s as well. So it’s the product that we have been describing. I think as we go through the rest of the year, we will have a progression that’s similar to what you see in our industry, which is Q2 and Q4 probably the landmark quarters in additive and then Q1 is usually a refresh from the beginning of the year. So that’s just a reflection of how we feel that year is going to progress based on our funnel and how things are coming along.

[James Haley:]

I guess one point that I would add on that too is we are planning to launch Envision One HT, the Xtreme 8K. We are seeing strong demand for those already. And certainly we have the P-50 system that will be coming out in the second half. So, the pipeline is really developing from here. I mean, Ric touched on the headwinds for Q1, but what we see now, we are very optimistic about the remainder of the year.

[Shannon Cross:]

Okay, that’s helpful. And then maybe if you can just talk a bit about from an expense perspective, where you are funneling some of the incremental dollars, how much of this is because of EnvisionTEC? How much you talked about expanding your sales and marketing team and then maybe how much of this is related to your new healthcare initiatives? Thank you.

[Ric Fulop:]

Sure. Great question. I mean, certainly as I stated in our prepared marks, we are sitting on nearly $600 million of dry powder. Really, we are trying to hit the accelerator on growth here and that’s going to be achieved certainly with multiple organic and inorganic opportunities. We touched on with building out an internal M&A capability, certainly our organic sales team, the EnvisionTEC sales team, marketing, continued efforts on research and development looking at various cost-down initiatives as well as future products and then all the integration of multiple opportunities we are looking at. I will add too certainly the public company expenses we are not something that was sort of contemplated in some of the numbers prior. Those numbers are certainly substantial. And when you look at our market cap, in particular, I mean insurance and various professional fees, registration fees, they are certainly substantial.

[Shannon Cross:]

Great. Thank you.

[Operator:]

Thank you. Our next question is coming from Greg Palm of Craig-Hallum. Please go ahead.

[Greg Palm:]

Yes, thanks. Good morning and congrats on all the achievements thus far. I guess maybe just kind of starting at a high level and I am really looking at the product portfolio specific to Desktop, but help us understand raking in order of importance studio versus shop versus production. And I am just kind of curious if you think about timing for P-50 in the launch, is that something that we should expect some revenue contribution this year or is that more of a fiscal ‘22 event?

[Ric Fulop:]

No, it definitely will expect some contribution from P-50 this year in the second half and that continues to be on schedule. P-1 and the Shop System are important parts of our product portfolio as they are mass production systems as well as our Shop System. Studio is a product that has to be finished. And we are very excited about our Studio 2. On the photopolymer side, the Envision One is very much a hit product. It is doing extremely well in the market and in the particularly in dental labs of all the segments we continue to see significant traction and adoption on it as well as for D4K for chairside and it’s – we think the products are fantastic. So, we are planning to scale Xtreme 8K as the year goes on and are excited about that ramp.

[Greg Palm:]

Got it. And just going back to the commentary on the Q1 assumptions, I guess I am just a little bit confused still. So, it sounds like in Q4, there were still some kind of COVID related headwinds and maybe some push-outs in terms of timing, I guess, looking at the revenue guide, I thought maybe given some of those new product introductions, then obviously, you have got contribution from EnvisionTEC that revenue would have jumped or at least the guy that would have suggested a revenue jump more sequentially. I guess you haven’t quantified what modest really means, but just matter of timing and seasonality?

[Ric Fulop:]

Yes, you nailed it on the head. Certainly, Q1 is traditionally a challenging quarter for the entire industry. Certainly, we experienced those challenges as well. We do have some of the COVID challenges going on as well, but really as we are heading into Q2, we are feeling very good about Q2.

[Greg Palm:]

Okay, understood. And then last one, there were some M&A rumors floating around this last week, I don’t expect you to address those reports specifically. But given that you have just completed the acquisition of EnvisionTEC in terms of inorganic, how active are you expected to be in the marketplace in terms of additional M&A?

[James Haley:]

I mean, we have got a strategy we laid out earlier during our original roadshow and just reiterate it, we plan to continue to be active in M&A. However, it is something that we do selectively. We acquire things that give us new capabilities in either print modalities for AM 2.0 or vertically integrated into materials or consumables that our systems use, particular in high volume production applications. And then on the product side, we have got a strategy to enabling printing of difficult to manufacture materials, which require specialized processing as well as killer apps where their significant IP or high margin markets. And so we are going to continue to execute that and you would see transactions in the future as that goes on. I would say, we looked at a lot of business opportunities. It’s not uncommon for companies that just went through – what we went through to see a lot of things and so we are very selective in what we actually move forward with, but we are excited about the things that we have got in front of us and think we can do very accretive transactions.

[Greg Palm:]

Understand. Alright. Appreciate the color. Thanks.

[James Haley:]

Thank you.

[Operator:]

Our next question is coming from Josh Sullivan of Benchmark Company. Please go ahead.

[Josh Sullivan:]

Hey, good morning, Ric, James, Arjun. Congrats on the first public quarter here.

[Ric Fulop:]

Thank you.

[Josh Sullivan:]

First, on the launch of Desktop Health here, how should we think of this vertical in the portfolio? We are going to have a dedicated sales force, what’s the go-to-market strategy here and then maybe what are the two or three primary products we should be focusing on over the next year or so?

[Ric Fulop:]

Absolutely. So, the health opportunity is massive. Today, most parts that are used in healthcare are not patient specific, with the exception of dentistry, where the clips are made by hand for patients. So, when you buy a graft or an implant, it’s traditionally something that was producing 4, 5 or 10 sizes and then the surgeons try to match it at the time of surgery. And I think that a decade or two from now, everything will be patient specific and based on everything, probably with the exception of trauma, which needs real-time inventory. But I think that, that presents a very unique opportunity to develop a core competency in the business and we are building a world class go-to-market team that’s going to develop clear products as well as help our partners in the healthcare industry adopt this technology at scale. We are going to be very creative in the types of products that we are going to help our partners bring to market. And I am excited to share those as we evolve it, but I think it’s going to be a very vibrant part of our business, I expect it to be at least a third of our business in the long run. So, it’s a great area where end use products can do very well. And I think you will see the healthcare industry adopt additive at scale over the next decade.

[Josh Sullivan:]

Thanks. And then maybe just one on the production system, with the launch of the P-1, can you just talk about how that’s led to additional pipeline development for the P-50? Just curious how those two systems are working together? And then may be just what does like the – what does the pipeline of the P-50 look like at this point?

[Ric Fulop:]

Yes, it continues to grow. I think we have a great synergy between our P-1 and P-50. Most customers that buy a P-1 no longer want to have a P-50. So, it’s an on-ramp to that platform. It was actually developed in concert with a major customer who bought a P-50, but need a P-1 type machine in order to qualify materials and parts without having to get a P-50 like machine sort of pulled from production in order to do a qualification of our components. So, if you are going to mass produce, if you are a large company, you have got 10,000 SKUs, 5,000 SKUs that you would want to print, you need a platform to qualify those while you have got the large CapEx printing 24/7. And that’s how we see the synergy between those two architectures, settings or qualification that you are doing on P-1 translate to 100% to a P-50. They have the same modules and the same inkjet systems, the same recording process. So, it’s a one-to-one and we validated that with some of our customers that have both installed beta of P-50 and have received the P-1. And I think that P-1 is a much small machine. So, it’s easier to install and deploy, but it’s a great platform, it’s going to help us mature that technology to the point where it’s you have got high OEE by the time we deploy your P-50 into the market later this year. So, we are excited about how those two systems play together.

[Josh Sullivan:]

And then just with regard to the EnvisionTEC acquisition subsequent acquisitions you guys might do here, how do we think about the long-term targets? I understand you don’t want to update us every quarter, but you have got a lot of dry powder here to execute additional M&A. How should we think of those long-term targets maybe versus some of the inorganic opportunities you are pursuing?

[Ric Fulop:]

I think there are – I mean, obviously, you would have to update the models when we do the transactions. Some of the companies we are going to acquire are more technically oriented and sort of capabilities on our technology that would allow us to have future products. And some of them are companies that have some scale like EnvisionTEC and an installed base that we are then going to provide additional distribution or help us scale faster. So, I think that depends on the transaction. And we have several things that we are working on. So as we execute them, we would love to explain the opportunity and why we did, what we did and then I think there is a great opportunity in bringing AM 2.0 technologies into the market. One thing that I think is a focus of us is we are not going to do any acquisitions on sort of tooling or take some pictures or things that we would consider AM 1.0. I mean, our market grew in sort of a rapid prototyping tooling type of world and our company is 100% focused on mass production of end use parts. So there is a lot of folks that would like to claim that there is the same thing, but there is sort of two ways of playing this market. One is to take a technology that’s helped patents, for example, like FDM and develop a more modern version of that for smaller markets like tooling and jigs and fixtures. Another one is to really tackle the issue of how do you go to mass production at scale with additive and we are 100% focused on what we call AM 2.0, which is the production of additive parts at scale, at a lower cost structure than conventional manufacturing, where the economics are the driver. So, that’s 100% the focus on the company and all of our M&A strategies and execution focus is geared towards making additive cost effective. The systems cost too much today to bring to market and older technologies is not cost effective on a cost per part basis. So, the focus on the company is 100% on the combination of techniques that give you a combination of surface finish, accuracy, material properties and throughput, so you can actually go to market with 3D printing.

[James Haley:]

The one point I would add is the first part of your question and that is the long-term thesis is intact and we are doing everything we can to accelerate it responsibly. So, to highlight Ric’s point, I mean, we are in the business of acquiring long-term technology that’s really going to help us in our short-term revenue and accretion. So, hopefully later this year, we will be in a position to provide some updates on the longer term model, but as we sit here exiting Q1, we don’t think it’s the right time to do it.

[Josh Sullivan:]

Got it. Appreciate the time. Thank you.

[Operator:]

Thank you. Our next question is coming from Noelle Dilts of Stifel. Please go ahead.

[Noelle Dilts:]

Hey, Ric and thanks for taking my question. So, this kind of ties into the last question, but I am just trying to reconcile, the 2021 either the guidance we are talking about the time of the fact. And so I was just trying to understand sort of if you look at that bridge, how much of that is coming from EnvisionTEC versus some kind of continued headwinds associated with COVID as we look from I think going from around roughly $31 million loss, including some of those public company costs versus the guidance you provided. So, could you help me just understand how to think about that?

[James Haley:]

Sure. So certainly, the public company cost, as I mentioned, are substantially higher than I think what we first thought. Beyond that, I really view it as additional investment in the business, I mean, really as I stated with near $600 million of dry powder, we could essentially just go status quo when – and leave their funds in the bank near zero interest. But instead, we are doing everything we can to accelerate some of those longer term financial targets. So, that is how I would be thinking about it. In terms of EnvisionTEC, no, that is not really a drain on EBITDA, if you will, it’s a transaction that, as I mentioned, our primary focus is to acquire good technology with EnvisionTEC, we certainly got that. We did also get some good stable revenues and a healthy bottom line as well. So, really, it’s more about accelerating the growth story.

[Noelle Dilts:]

Okay, just wanted to make sure I understood that. And then, obviously, at the time of the EnvisionTEC acquisition, you talked a lot about the growth profile and how you are thinking about contributions, but maybe you could speak to, if you have kind of worked more with the company and started an efficient if there is any change in how you are thinking about growth over say the next 5 years? And then kind of related to the last question, I understand you kind of said, you are maybe not in the point where you could talk about the longer term business models, but maybe going back to the EBITDA question, if you would be comfortable kind of talking about generally when you are thinking about maybe hitting a breakeven point or maybe profitability? Thanks.

[Ric Fulop:]

Sure. So, as we think about contributions on the year and really we continue to integrate the businesses every day, we are really trying to leverage different sales channels and development strategies as we can. As I think about revenue for the full year, I would say roughly 60% as we sit today is going to be on the organic DM side with 40% would be in EnvisionTEC. That said going forward, it’s not something that we really plan to talk about as these products are going to be fully and teams are going to be integrated to really maximize our sales, if you will. In terms of the longer term targets, we are not in a position to update those today other than to say they are – we are doing what we can to really pull the timelines in.

[Noelle Dilts:]

Okay, thank you very much.

[Ric Fulop:]

Yes.

[Operator:]

Thank you. Our next question is coming from Jim Ricchiuti of Needham & Company. Please go ahead.

[Jim Ricchiuti:]

Alright, thank you. Good morning. Just question on your OpEx investments for 2021, I am wondering does that contemplate expansion of your direct sales efforts? Just wondering also in terms of your partner network, the presentation references 200 partners, and I am wondering if you could provide any color on what percent of that represents EnvisionTEC and whether among those 200 partners, if there is much overlap, partners representing both DM and EnvisionTEC? Thanks.

[Ric Fulop:]

Yes. So, we went from about 90 partners to over 200 when we did our transaction and acquired EnvisionTEC. I would say we have a significant continued expansion in our go-to-market strategy and there is significant synergies between the channel that they have built in our channel at very successful vertical integration into the – or vertical channels into dental and jewelry. We are planning to leverage those as well as Health and EnvisionTEC getting to the industrial markets, which is an area where they hadn’t participated as much before. So, hopefully that answers your question.

[Jim Ricchiuti:]

It helps. And then just again, looking at the investments your plan for ‘21 on OpEx and I may have missed it, but I am wondering if there is any flavor you could provide in terms of R&D versus sales and marketing and enhancing the go-to-market?

[Ric Fulop:]

Well, I’d say that we have increased investment in a variety of areas besides R&D. We also have investments in applications engineering, go-to-market related activities and new product development.

[Jim Ricchiuti:]

Thanks a lot.

[Operator:]

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

[Ric Fulop:]

I am very excited to be talking to you all and look forward to connecting with you post this call if anybody has additional questions. Thank you very much for your support today. And we are excited to be bringing additive manufacturing solutions at scale to mass produce parts and volume and accentuate people make products around the world.

[James Haley:]

Thank you. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation and interest in Desktop Metal. You may disconnect your lines and log off the webcast at this time and have a wonderful day.