Fathom Digital Manufacturing Corporation
Q2 2023 Earnings Call Transcript

Published: 14 Aug 2023

[Michael Cimini:]

Thank you, Carla, and good morning, everyone. Welcome to Fathom's Second Quarter 2023 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'll also find links to our SEC filings, along with other important information about our company. Turning to Slide 2, we note 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 and understand that forward-looking statements are only estimates of future performance and should be taken as such. 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 comparable GAAP measures, and you are encouraged to examine those reconciliations, which are found in the appendix to our press release and presentation. With us today are Ryan Martin, Fathom's CEO; and Mark Frost, our CFO. I will now turn the call over to Ryan.

[Ryan Martin:]

Thanks, Michael, and welcome, everyone, to Fathom's Second Quarter 2023 Conference Call. I'll begin my remarks on Slide 3, where we provide our Q2 highlights. Our performance for the quarter was in line with management's expectations as we continue to benefit from the ongoing execution of our optimization plan while further building our orders momentum in a challenging macro environment. In Q2, we generated orders totaling $38 million, up approximately 10% on a sequential basis, contributing to revenue of $34.5 million and expanding our backlog of new business. As a reminder, shipments for new orders, especially on the production side of the business, often extend over several quarters, depending on the size and order type. Additionally, our adjusted EBITDA totaled $4.8 million, representing a margin of 14%, a notable improvement on a sequential basis. We continue to work closely with enterprise-level customers seeking a unified digital manufacturing partner with comprehensive capabilities and deep technical expertise to help them iterate faster and reduce time to market, while creating a more efficient and responsive supply chain. As discussed on our previous call, we have renewed our focus on strengthening our go-to-market efforts under new leadership. Our Vice President of Sales, Kurt Bork, has been fully onboarded after joining the company in Q1, and I'm excited how our commercial team has steadily ramped up their activities. We continue to focus our commercial efforts on 2 primary areas

[Mark Frost:]

Thank you, Ryan, and good morning, everyone. I'll begin my remarks for our quarter two revenue results on Slide 5. Our revenues for the fourth quarter totaled $34.5 million, which exceeded the high end of our forecast of $34 million, but down from $42 million in quarter two, 2022. Now as Ryan mentioned earlier, we continue to make progress ramping our new commercial activities and strengthening our go-to-market strategies. However, near-term demand remains soft as the U.S. manufacturing PMI index has remained in contraction territory for 9 straight months and customer spending continues to be tightly managed. Our revenue by product line for the quarter was as follows

[Ryan Martin:]

Thank you, Mark. I will provide some closing comments on Slide 9. Our results for the second quarter reflect continued progress in further solidifying the company's commercial and operational foundation while enhancing our position to drive sustainable and profitable growth over the long term. Our commercial actions continue to take hold under new leadership as demonstrated by the sequential growth in orders volume of approximately 10%. We remain focused on further strengthening the breadth of our leading offerings to meet the high mix, low volume production needs of blue-chip customers and accelerating Fathom's digital thread as the positive long-term fundamentals in our industry remain intact. We also took steps to further bolster our executive team with the appointment of our first Chief Operating Officer, while further executing against our optimization plan, which contributed to a sequential improvement in our adjusted EBITDA and adjusted EBITDA margin. Although the macro environment remains challenging, Fathom is well positioned to capitalize on its increased scalability as market conditions improve. We are also committed to strengthening our financial flexibility and improving our company's capital structure. I want to share my appreciation for our highly talented workforce, which has demonstrated tremendous resilience and dedication under trying conditions and remain confident the best is yet to come for Fathom. This concludes our prepared remarks, and we'll now open the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Jim Ricchiuti from Needham & Co.

[James Ricchiuti:]

Just a question on gross margins. I'm sure mix, underutilization and possibly pricing contributed to the sequential decline. But I'm wondering if you could give us a little bit more color on what's driving that and maybe how we should think about gross margins in the current quarter?

[Mark Frost:]

Sure, Jim. It's a good question. We were hit we have a couple issues related to freight and material on certain orders where the costs came in higher. Particularly, we had orders where we had a significant amount of freight, and when we price freight usually, it's not -- there's no margin on the freight, it's a pass-through. So that caused some dilution in the quarter. We don't expect that to continue. We thought that was unusual. We actually, I should say, we think that was unusual and expect that as we move forward, we will see further improvement in the gross margins, as we've discussed on previous calls that we get back into the mid-30s and high 30s as we enter into next year. So that's still our expectation. So we think it was a bit of an anomaly, Jim, and expect that should pass as we go into the second half.

[James Ricchiuti:]

Mark, is this a couple of hundred basis points impact? Or I'm just trying to get a sense what you just outlined?

[Mark Frost:]

Yes, it was about a couple of hundred basis points of hit that we took in quarter two.

[James Ricchiuti:]

Okay. And Ryan, maybe a question for you. Just curious about this other order you alluded to, you called it out from the EV customer. Can you -- you may have mentioned it, what service line does that relate to? And how long have you been working with this customer? It sounds like you see potential to grow this over the intermediate to longer term?

[Ryan Martin:]

Yes. It's part of our -- it's a smaller customer that we've worked with on the prototyping side of things in the past. But this production opportunity in our sheet metal side of our business. And so they saw really some of the unique capabilities that we have within that high mix, low volume, sheet metal production side of things. And so that's the area. So we're taking on a couple of new products for them, but there's a lot of opportunity to further ramp with that. And so that would primarily go through our production sheet metal facility in Denver.

[James Ricchiuti:]

Got it. And last question for me. Just on that slide you had on some of the new business wins. For the most part, are these existing customers, any new customers you're calling out?

[Ryan Martin:]

Yes. The -- it's a combination of new and existing the C&C, the sort of $1.2 million in the nanotechnology, which is in the medical space is actually a new customer for us. The rest of them are expansion of existing customers. But what's really intriguing for us is a lot of these are new contacts within larger existing customers. So although it's in a customer we worked with, it is new business lines, new product business units, segments within those and new contacts within those accounts. So continuing to go a lot deeper and wider within our existing accounts, which we believe is a real differentiator of the Fathom platform is our ability to serve these larger strategic customers and to really be able to leverage multiple manufacturing processes to help them from that product development all the way through to their low to mid-volume production, Jim.

[Operator:]

[Operator Instructions]. Our next question is from Greg Palm from Craig-Hallum Capital Group.

[Greg Palm:]

I just wanted to start by asking kind of maybe the cadence of orders throughout the quarter. And if you can comment at all what you've seen sort of quarter-to-date? And just in terms of visibility levels, have things changed versus several months ago, better or worse, same? Just curious what your overall thoughts are there.

[Ryan Martin:]

Yes. As we talked about kind of in our prepared remarks, there still continues to remain some uncertainty from a macro environment. But we remain optimistic that the orders growth will continue. Right now, our orders in Q3 are trending near our Q2 levels. We're continuing to maintain really a focus on the customer. I've spent -- over the last couple of months, a tremendous amount of time meeting with some of our largest strategic customers and really understanding kind of where they see their business going and demand on that. I would say we continue to remain optimistic in the second half of this year. I would say within medical device, EV, consumer electronics, defense, we still see the demand there to be really strong. I would say some of the capital goods industries where there's interest rate implications. We've seen a little bit of softness in some of those end markets that we serve as well as some building supply. Semiconductor, we remain very, very optimistic long term on that, especially as the money from the CHIPS Act and AI continues to become more integrated. We think we're really well positioned there, but there still is some short-term softness there that we've seen, although we've seen month-over-month with some of our key semiconductor industries, orders starting to pick back up, which has been a positive sign. So as I mentioned in the remarks, we feel really good about the leadership team that we have in place and Kurt Bork really now being fully integrated into the business and the momentum that we're starting to pick up from a commercial side of things, as you saw with the 10% orders growth versus Q1. And we anticipate at this point to see that continue into Q3.

[Greg Palm:]

Yes. Okay. And then just on the financial flexibility comment, you mentioned that based on what the guidance is, you're not going to be able to comply with the covenants. What would -- it sounds like you're kind of an active dialogue right now with the lender, but what sort of a good outcome look like in your opinion?

[Mark Frost:]

Sure, Greg. Now just to point out, we're obviously not in -- we're in compliance right now at June 30. So this is a forward view that we took and we then, as soon as we had seen that, we initiated discussions. We've had a good relationship with our lenders. We've been able in the past to agree amendments that did provide us more flexibility. Our hope -- our focus would be to try to get an agreement that takes us through the end of 2024. So we're having this conversation, not on a couple of quarter basis, that has happened in the past quarter. So -- we'll focus as we -- as I indicated in my comments, liquidity is fine. It's the EBITDA covenant where we need to work with our lending group to figure out a better path forward as on that subject. So that's where the focus would be, Greg, would be on the minimum EBITDA aspect of the covenant.

[Operator:]

We have no further questions at this time. So with that, we can conclude today's call. Thank you for your participation. You may now disconnect your lines.