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Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Greetings and welcome to the ExOne Company first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Monica Gould, Investor Relations for The ExOne Company. Thank you, you may begin.

[Monica Gould:]

Thank you Operator, and good morning everyone. ExOne released results for the first quarter ended March 31, 2021 yesterday after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investor.exone.com.

[John Hartner:]

Thank you Monica. Good morning everybody and welcome to our first quarter 2021 earnings call. I’m pleased to report record levels of both recurring revenue and machine order backlog in the first quarter, which shows the strength of our product offerings, our adoption model, and our forward momentum. As forecasted last quarter, we expected a soft start to the year. Our first quarter results reflected difficult operating environments that continue to persist as a result of COVID-19; however, we are seeing signs of an economic rebound particularly in the U.S. market, where we saw a higher concentration of sales and backlog growth during the first quarter. We recorded first quarter revenues of $13 million, reflecting a slight decrease from a record first quarter performance in 2020. The decline was driven by COVID related installation disruptions, especially in Asia. Our first quarter revenue was helped by strong growth in recurring revenue, led by an increase in revenue from funded research and development services. These services were largely in support of future production metal equipment sales opportunities, also aftermarket revenue associated with our global installed base of printers group. From a geographical perspective, Q1 was driven by a 40% year-over-year and 12% sequential increase in the Americas region, reflecting the secular trend towards re-shoring manufacturing and a more distributed supply chain. This is a trend we expect to continue and to spread to other regions as they emerge from the pandemic.

[Doug Zemba:]

Thanks John. Good morning everyone. For the first quarter, we are pleased to have achieved record quarterly recurring revenue of $8.1 million, up 15% year-over-year, and record contractual backlog of $47.8 million, an increase of 41% year-on-year. These first quarter highlights were offset by the challenges we faced in execution given the influence of COVID-19 on the global operating environment, which delayed revenue recognition on systems transactions until installation and customer acceptance protocols are 100% complete to future periods. As John stated, we are affirming our 2021 full year revenue growth expectations of 15% to 25%, driven by our record backlog, market response to our new product launches, and improving macroeconomic conditions particularly in the U.S. market, which generated a higher concentration of sales and contract activity in the first quarter. First quarter revenue totaled $13 million, which represented a modest decline on a year-on-year basis from a record first quarter in 2020, largely due to installation disruptions related to COVID-19. Despite these challenges, we continue to be encouraged by the growth in our recurring revenue, which rose 7% sequentially and, as I mentioned, 15% year-over-year to $8.1 million. The growth in our recurring revenue was driven by an increase in revenue from funded research and development contracts and higher aftermarket service revenues associated with the growth in our global installed base of 3D printing machines. The increase in our funded research and development efforts was largely driven by a new statement of work that commenced on the fourth quarter of 2020 for a new healthcare application. As we have mentioned previously, these types of arrangements are critical to our production adoption model strategy and serve as the launching pad for future acquisitions of systems by customers.

[Operator:]

Our first question comes from the line of Brian Kintslinger with Alliance Global Partners. Please proceed with your question.

[Brian Kintslinger:]

Great, thanks so much. Great backlog, so let’s start with that. You mentioned that you have $30.5 million in systems backlog. Can you break that down into direct versus indirect, and then you called out Asia in terms of installation disruption, so can you also maybe highlight how many systems are for Asia-based customers that you are having trouble recognizing?

[Doug Zemba:]

Sure Brian, it’s Doug. Good morning. In terms of the breakout between metal and sand, it’s a pretty even split as of the end of the quarter. We’ve obviously seen a pretty big uptick in our business on a percentage basis for metal demand versus sand. The growth rate in metal is obviously something that we’re keeping a close eye on - it’s been improving ever since last year’s product introductions and some of the improvements that we’ve made relative to the single alloy printing process. Specific to the Asia question, we had at the end of March specifically eight units in China, representative of around $6 million of revenue that we were still working on, so these are examples of systems that are physically sitting in China, we’re working through the process, nearly all cash collected in advance of shipping those units, and again we expect to recognize over the next couple quarters.

[Brian Kintslinger:]

Great, that’s helpful. Then maybe if you can talk about the warranty expenses. I believe, if I understand it accurately, you can’t get the proper people there to fix any issues with parts, so it’s causing a lot of waste. Are these restrictions I think you talked about easing, when do you think, seeing where COVID-related restrictions are being lifted right now, at least in the U.S. and other places as well, when do you see this easing? Is it the third quarter, are you starting to see it in the second quarter already? Just trying to understand that, and then I have one last question.

[John Hartner:]

Morning Brian, John here. As far as global impressions of what’s happening from a COVID standpoint, certainly the U.S. is far ahead and not just from ability to travel but also customers’ mindset. As far as the rest of the world, it is fairly limited. Even in North America, getting to Canada has some restrictions right now. We’re hoping and seeing that the changes are happening in the U.S., it will be followed fairly quickly through the next few quarters in Europe and in most of Asia, so that really will help us from a standpoint of getting these highly complicated systems accepted and having folks that are able to travel into--you know, we just talked about China, which is one of our major places to get travel into. On warranty, Doug, do you want to--?

[Doug Zemba:]

Yes, I think for the third consecutive quarter now, we’ve pointed this out as a disruption to our margin performance. We’ve actually seen improvement over the last three quarters, to the point where in Q1 of 2021 this was less of an impact than the last two sequential quarters, and again really the impacts that you’re seeing here, it’s a few things. Number one, we have physical delivery in the early part of 2020 some new products, the 25Pro and our new entry machine for sand, the S-Max Pro. When we go into lockdown phase sort of globally in that March-April time frame in 2020, a lot of customers out in the field sort of shut down their machines or shut down their facilities for a period of time. In the second half of 2020 and even through today, we’re still seeing inconsistency in how customers are operating their equipment and sort of the slow restart that took place in the second half of 2020. Our machines run best when they’re running consistently and in a precise way, and so our ability to manage those situations has been a bit constrained in getting customers back up and running to the point that they want to perform at. We are seeing signs that as the economy has started to come back up, a customers are running their machines more consistently and more fluidly, and as some of the travel restrictions are lifted in some geographies, that things are getting better. I would expect Q2 to still have some challenges in it as we’ve continued to emerge. I don’t know that we’ve gotten substantially better as we sit here today than where we were at March, but certainly in the second half of the year as you continue to see the trends move forward in terms of lockdown lift and other restrictions lifted with vaccine proliferation, we expect that things are going to get better and that we’ll be able to support customers more hands-on and certainly get out and see more machines that we’ve been missing for quite some time.

[Brian Kintslinger:]

Great. Lastly and then I’ll get back in the queue, on the global supply chain issues, are there any issues with shortages of any of the components or any of the materials you need to source?

[John Hartner:]

Brian, this is John. Certainly we’re keeping a close eye on that. Luckily in some ways, we’ve got relatively long lead times on our systems and so we’re able to satisfy demand in our systems business through this year. We are keeping a very close eye, particularly on the electronics side of this. The only other thing I’d mention is we have seen some disruptions on some of the consumable side relevant to having to source in different places and some inflation that we had not seen before. We’ve been able to manage it, we expect to continue to manage it, but that’s probably the one that is--obviously that inventory turns much faster, but it’s critical we stay in front of that and keep our customers running. That’s been something we’ve managed, I think, well. We will continue to stay vigilant on this and our team talks about it on a weekly basis right now.

[Brian Kintslinger:]

Great, thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities. Please proceed with your questions.

[Sarkis Sherbetchyan:]

Hey, good morning, and thank you for taking my question here. John and Doug, just wanted to touch a little bit more on the sales outlook. You’re reaffirming here the 15% to 25% year-on-year growth. I just wanted to see if you can maybe address the expected cadence of deliveries and also the recurring revenue flow through. Obviously you have pretty easy comps here in 2Q and I would argue for the fourth quarter, so just wanted to see if this is more of a back half weighted growth scenario or any kind of color you can provide there. Thank you.

[John Hartner:]

Sure, this is John. I’ll just get started and Doug can talk about the quarter flow. From my standpoint, we’re just seeing the U.S. open and the optimism that customers are talking to us about relevant to their capital purchases throughout this year, so not just the backlog we have, not just the refreshed product line, but really looking forward in the pipeline and the confidence we’re seeing from customers and attraction to this point of the supply chain has been disrupted, let’s make it more regionally, more locally, and leverage the capability of additives. For all those reasons, we feel confident in that 15% to 25% growth. Relevant to quarters, Doug, do you want to comment on that?

[Doug Zemba:]

Yes, sure. We’re certainly not in any respects chasing demand. Demand is pent up in an incredibly strong way as we continue to see a lot of interest in the metal product, and certainly as things start to open up particularly in the U.S. market, we’re seeing excess demand for emerging technologies, particularly the binder jetting printers that we manufacture and sell. Under normal conditions, if you went back in our history, you’d see that we’ve generally been a stronger second half company than a first half company; in fact, our percentages have ranged somewhere between, let’s say, 30% and 40% first half, and then the remainder in the second half, and usually we’ve struck gold in our fourth quarters, mostly based on that we were following the capex cycle of our customers in terms of somebody plans in the fall, they lob orders in, in the spring, and then you deliver and install in the successive fall or successive winter. Right now, I would say we’re pretty much off of that schedule and it’s going to take a little while to unwind the backlog that we’ve built up relative to the average age of the backlog - it’s gotten a bit older as we’ve just been stuck getting to certain systems that are either out in the field or certainly have been delivered and are under order, so I would expect we’ve got--we’re going to see some volatility in terms of how we recognize over the remainder of the year. I think you could see a bit more balance in Q2, Q3 and Q4 based on how our operating plans play out for the remainder of the year, just give the upsized backlog and where we know that the machines are, both geographically and what the scheduling is for the rest of the year. 2022 and beyond, I think perhaps we could see a reversion back to that capex cycle, albeit as you can see, we’re starting to grow the recurring revenue pool and it’s becoming more and more of a higher percentage of the total revenues of the company. That’s much more stable, and you see that that has now grown for three consecutive quarters--excuse me, four consecutive quarters over time, and it’s starting to exceed $8 million per Q.

[Sarkis Sherbetchyan:]

Great, thanks for that color. Just touching on the recurring revenue pool, do you think this level is something that’s sustainable and would keep growing from this point forward, as you mentioned the increased interest and obviously it’s a precursor to some of these potential customers buying system sales? Any comments you can give on your expected growth in that pool of business?

[John Hartner:]

Yes, so recurring has been a part of the strategy for the last few years, and it’s really gratifying to see it grow and consistently grow. We think the levels we’re at now will remain, and it’s not going to be one of these things like capital equipment, that goes up and down. It’s going to consistently grow, and we anticipate that we can continue to add resources that will allow that growth. I think one of the really exciting parts of recurring is the funded R&D, and this is where we’re asking customers to go on the journey of the production adoption model with them and do a lot of materials and process development to ensure success once these high production machines are delivered to their facilities. Those revenues and those shared R&D contracts basically help us move our technology forward, add new materials, add new processes, tackle new geometries that we may not have been able to do before, so it really is something that helps not just the recurring, which is going to stay consistent and grow slowly, but actually helps our machine business in the long run.

[Sarkis Sherbetchyan:]

Thanks for that. One final one from me, related really to the gross margin profile. Just want to get a sense for when margins start to trough out and recover. It sounded like you think the second quarter is going to look more or less the same as the first quarter. Just wanted to see if there is some additional color on what the evolution looks like as ’21 progresses. Certainly it sounds like as you sell more units or deliver more units, we may see the incremental as your fixed cost gets absorbed, so just wanted to get a sense for was the first quarter a trough or should we expect a different kind of evolution. Thank you.

[Doug Zemba:]

This is Doug. I certainly expect that Q1 for us was the trough. I think that the second quarter, the two factors I would look at are better leverage - I think we have a much better opportunity to post a higher revenue number, certainly, than what we posted in Q1, driven by the systems opportunities which is totally contingent on the backlog and being able to go out and execute. That leverage alone with drive up margin for the company as a whole, and then the second piece is that we still see the influence of some lower returns on the 25Pros that we’ve talked about the last couple quarters as we get out from underneath the first block order that we manufactured and built. We should be able to deliver the remainder of those predominantly in Q2, maybe a few that trickle into the second half of the year, but for the most part that impact, we should start to see a turnaround beginning in the second half of the year. I would say that the second half of the year certainly looks favorable as compared to the first, but as we head into 2022 is when I think you’ll start to see a more normalized return.

[Sarkis Sherbetchyan:]

Thank you. I’ll hop back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

[Jed Dorsheimer:]

Hey guys, thanks for taking my questions. I guess first, just want to jump into the added headcount and the opex. Just wondering, it sounds like the vast majority is split between R&D and SG&A. Is there any that’s going to be attached to COGS in terms of operationally?

[John Hartner:]

Jed, I’ll get this started. Yes, with this increased demand which we see continuing for our metal systems, and really positive acceptance of what our new products are and the broad range of materials, a lot of that--you’re right, I would say about half of it comes into technology development and then the other half is really split between some elements of SG&A and COGS, because we are expanding capacity within our U.S. side to build additional systems for our metal products. I would say half is technology R&D, and then the other half is split between SG&A and COGS.

[Jed Dorsheimer:]

That’s really helpful. If I look at--and I’m assuming obviously you’ve done this analysis in terms of how to break the logjam on conversion from backlog into revenues and some of these new hires to do that, have you come up with how suboptimal the business is operating as a function of things that are out of your control in terms of COVID? I’m just wondering, do you see the business operating at 50% of--you know, as you think through these adds, is that the unlocking feature that you see? And then I guess just cadence would be a second component to that question - assuming that new hires are going to have a--you know, I’m not sure what the expectation is, three months or a six-month kind of ramp before they get into stride. It would seem that this year is a full year of investment.

[John Hartner:]

I would basically say that right now, part of this is the age of our backlog and the inability to travel is one of our key issues from an efficiency standpoint. Again, the ramp we’re seeing on metal systems is what we’re investing in. The new talent will take some time to move up the chain as far as experience level and ability to contribute. We talked before about this investment - it is a year of investment, however we see a significant portion of this backlog converting this year, that we’ve already put on the books. There is great optimism for the future years, so in some ways I’ve talked about the investment, as you’ve said, for a multi-year opportunity that’s in front of us, ’22 through ’25 are going to be fantastic growth opportunities for us, and what we’re doing is putting in the right people to ensure we capture more than our fair share of that opportunity.

[Doug Zemba:]

Yes, and I’ll just add to that, Jed, that when I look across some of the strategic resources that we’re bringing into the company geographically have been positioned and picked because of emerging trends that we’re seeing in terms of where demand is ultimately going to flow for the company for both metal and sand products, but certainly for metal products. That said, an offshoot of that has been that we’ve brought in resources so that we could physically attain access to some of the equipment that’s been lingering in terms of getting backlog to turn over a bit quicker. We’ve also instituted other tools and had to change our approach in terms of having more remote capabilities and partnering with others to make this process work smoother going into the future. Not saying that we’re going to do into another lockdown period like this, but we’ve certainly gotten smarter throughout this process. The Asia question has been the most difficult one for us to answer, particularly in China where, again, we had this hang-up, and we believe that our results would have looked much differently over the second half of 2020 as well as the first half of ’21 had we been able to execute on those transactions, would have resulted in higher revenue figures and certainly better leverage in terms of margin.

[Jed Dorsheimer:]

That’s helpful. One last question for me, just 30,000 or maybe 40,000 foot perspective. John, if I look at--if we look at the manufacturing base, moving to additives has a clear value proposition in term of waste, throughput, etc., but some of that value with the larger manufacturers, I think the Pareto law holds true that 80% of the manufactured products are done by 20% of the companies. A lot of the processes now are going to be on fully depreciated equipment, so the challenge is bringing in a new process, you have to be even more efficient because it’s not equal playing in terms of capex. How is that changing so that you see moving from a missionary sort of pilot or single to maybe multiple single digit unit sales, to getting that leverage point where you get real commitment and adoption?

[John Hartner:]

Jed, that’s a great question. It’s a bit of a challenge the industry’s been going through for a while. One of the things that have really changed since, let’s say, the last few years, obviously the attention and the ability for companies like us to deliver at volume, you know, highly complex additive manufacturing metal parts, so we’re opening an opportunity that maybe wasn’t there a few years ago. I think at the same time, the customers, the decision makers and the customers are saying, we have other reasons to consider additive, whether that is because of supply chain disruptions, and if you can’t get the part, you better find another way, and that’s one thing that’s opening up opportunities, as well as the customers’ requirements, let’s say for mileage standards or frankly even for them to compete with some of their new competitors, they need to do things that are lightweight, new designs that are frankly impossible in traditional, maybe fully depreciated equipment. That’s where we come in. We take part of the challenge to continue to drive down cost of ownership and we do that in conjunction with our customers in these production adoption models. We’re looking for every way to continue to drive down the cost of ownership while still delivering a huge value when it comes to innovative designs and productivity of their product. The last thing I would say on that is we’re also stepping back, and we had a slide in the deck related to sustainability, and beyond the pure dollars and cents, the price per pound for stainless steel powder, we’re looking at what is the impact on sustainability, the carbon impact, and we’ve joined the Additive Manufacturing Green Trade Association and we’re funding right now projects that allow us to truly understand the difference between conventional and additive from a carbon footprint, as well as distributed manufacturing and optimized designs of those additive parts. It’s all part of the overall cost of ownership, and I think there is a window opened right now where customers are thinking more broadly and willing to take the risk to move to additive, so it’s a pretty exciting time. That’s going to continue for the next few years, I think for sure.

[Jed Dorsheimer:]

That’s helpful. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Martin Yang with Oppenheimer and Company. Please proceed with your question.

[Martin Yang:]

Hi, thank you for taking my question. I wanted to ask again about the execution challenge in China, because this seems a little counterintuitive given the country has fully opened up. Can you maybe talk about what’s the hang-up there? Is it more customer specific as opposed to macro related? A follow up on that, was more local hiring part of the solution to solve the challenge?

[Doug Zemba:]

From our perspective, one thing to keep in mind is that we don’t have a physical business in China. We do have individuals on the ground who are capable of maintaining and supporting customers in that country, but we don’t have a physical operation, which does present a bit of a challenge. Our Asia hub is based out of Japan, and given travel restrictions, it’s been quite difficult to get foreigners into China to work on systems. For those that are based out of that region, there are significant quarantining and other disruptions too when you go and try and do work, not just external into China but moving from province to province is also a challenge. These are not all centrally located in one particular spot. They’re spread out in different areas, and just maneuvering around and working with the customers, who have had their own situations in terms of restrictions and lockdowns, has been a significant challenge, so we’re not looking at that as substantially open. Again, if we had our preference, we would have had excellent engineers who are predominantly based either in the United States or Germany physically traveling and working on systems alongside customers to ensure a smooth transition to operation, and unfortunately we’ve had to manage that almost exclusively remotely with the limited headcount that we actually do have within the region.

[Martin Yang:]

Thank you. One more question from me. Given those challenges and you maintain the full year guidance, do you have a different view on what’s driving the full year guidance geographically? Maybe the mix--has the mix changed in your mind?

[John Hartner:]

I would say geographically, no. We think that our ability--you know, we expect the ability to open up in regions like Asia and Europe to happen in the second half, so we do expect our ability to execute customer acceptances in the second half will be much better and, frankly, starting in the second quarter even. As far as opportunities as far as new bookings, certainly the U.S. is really strong right now, and we are seeing that lead the way. But likewise, we expect Europe and Asia will continue to follow that trend, and from a booking standpoint open up more. Even this morning, I had some conversations with Asia and there’s new optimism across some of the regions and new orders coming in, which is a really positive thing. I think that that would say geographically, certainly this year we’ll be more U.S. or Americas focused, but it will move back to the same--you know, I don’t know whether our opportunities are more probably in the long run, more of a 40/40/20 around the world, or in that kind of range.

[Doug Zemba:]

Yes, our general splits throughout history have been fairly balanced between the different regions - Americas, EMEA and Asia-Pac. We’ve trended--because of the volatility of the results from one period to the next, you’ve seen disparity in how that split’s worked out, but in general over longer periods of time, you’ve seen it fairly balanced between those regions. When I look at what we expect for 2021, certainly Americas is bringing up a larger percentage given the recent contract wins, given the recent performance certainly in the first quarter and what we anticipate for the remainder of this year. When you look at it from a product perspective, we had anticipated that ’21 was going to be a bit of a--you know, we were going to continue to see the trend that started to develop in ’20, where metal starts to make up a greater percentage of our revenues as a portfolio. Historically, we have been maybe an 80% to 20% sand to metal company. Last year, we saw that trend shift more towards 70-30 sand to metal, and now we’re starting to see it go even beyond that, so the metal demand is quite strong. That started in the Americas, but it’s starting to spread a bit globally, so that gives you a little bit of a perspective as to what the splits look like as we look for the full year ’21 performance.

[Operator:]

Thank you. Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

[Noelle Dilts:]

Hi guys, thanks. A lot of good questions so far, so just one from me. I was hoping you could just speak to what you’re seeing and how you’re thinking about M&A and partnerships at this time. Maybe you could kind of speak to your pipeline and the potential for additional partnerships or M&A this year. Thanks.

[John Hartner:]

Good morning Noelle, thanks for the question. Yes, I would say we obviously had some small examples here in the first quarter, second quarter which has started, and with our strong business base and growing business base, our global infrastructure and the strong balance sheet we now have, I feel like it’s a perfect time for us to look for opportunities that might fit our strategy. What does that mean? It means it’s got to be metal oriented, it’s got to be industrial as opposed to being all things to all people. We’ve seen some opportunities come up already - the Metal Designlab with Rapidia has been really positive and it will be a great product for us over time. Freshmade, this is leveraging our sand printing business and tooling opportunities around the world and getting us into some new markets there. We’re going to use those guideposts and we’re open to and, frankly, in some ways because of our momentum in the marketplace, I think we’re becoming a little bit of--having an opportunity where companies are coming to us and wanting to be part of the train that we’re on. Most of these will be small to medium sized opportunities. That’s where we think we can be most effective in executing our strategy, and again the examples you have so far are good examples, but we have some other ones that could be part of the opportunity set in the future. But we’re going to be prudent about it. It definitely is a way for us to grow. We have a great base. We have a strong balance sheet and we’re going to approach it in a prudent fashion, but in an opportunistic fashion.

[Noelle Dilts:]

Great, thanks John.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Mr. Hartner for any final comments.

[John Hartner:]

Okay, thank you all for your time today and for your interest in our vision towards sustainable manufacturing without limitations. Thanks to our global team, our partners and our customers, and we look forward to updating you on our progress after our next quarter. So long.

[Operator:]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.