Nano Dimension Ltd. Q1 FY2020 Earnings Call

Good day, ladies and gentlemen. Welcome to today's conference call to discuss Nano Dimension's First Quarter 2020 Financial Results. My name is Andrew, and I'm your operator for today's call. On the call with us today are Yoav Stern, President and CEO; and Yael Sandler, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the safe harbor statement outlined in today's earnings press release also pertains to this call. If you have not received a copy of the press release, please view it in the Investor Relations section of the company's website. Yoav will begin the call with a business update, followed by a question-and-answer session, at which time Yael will answer questions regarding the first quarter 2020 financial results. Please note, this event is being recorded. I would now like to turn the conference over to Nano Dimension's President and CEO, Yoav Stern. Yoav, please go ahead.

Thank you very much, sir. Welcome, everybody. We waited around 2 to 3 minutes over 9 am in order to accommodate everyone who wanted to be online. So I apologize for that. I hope the day will start well with our call and later, have a good day in the market rather than a day like yesterday. But those are the lives we lead on a daily basis. What we're going to do in this call is I will speak a little bit about the business situation and where we are. We're not going to have me read anything that you could read in the news release in order not to waste your time. In the same manner, we're not going to have Yael read all the numbers and all the management discussions and analysis because you could read it there, and I don't want to waste your time. But on any subject afterwards that you want to ask about, we will direct the questions. Either I will direct them to myself or to Yael on anything you want to ask about numbers or anything else. And then we'll hopefully have a call that is efficient in time and content. What I’m going to tell you about the business situation is probably known to many of you; it was only 2 to 3 weeks ago that we closed the public offering. Thank you very much for the support. During that week-long roadshow, I had about 50 meetings, and I met most of you, probably. Everything I told you then is true today. There's only a 3-week difference. So you're not going to hear earth-shattering information. As much as the previous quarter, which is what we're reporting today, I spoke with most of you on these occasions about what happened in the first quarter. What you hear and read today is a repetitive story. We lost the opportunity for that quarter to sell about 3 to 4 machines, and our revenue went down to $700,000 compared to $1.7 million for the same quarter a year prior. But it's irrelevant to compare it to a year before; last year did not have the pandemic. The pandemic entered China early in the quarter, and China was one of our main buyers this quarter. Prospective buyers have disappeared. We're now talking with the same organizations about doing the things we planned last quarter for this quarter. If not, it will be in the late part of this quarter, if not maybe early next quarter, but it seems as if it's happening. The interesting thing about last quarter is that, if you break down and look at what we sold, we sold ink in high percentages. Obviously, the percentages are high only because the top line is low, not because we sold more ink than usual. We sold ink relatively okay because the machines started to shut down toward the middle of last quarter. Even ink was not in the numbers it could have been. And of course, we sold upgrades for the machine, which is a very important point that I mentioned to you before. An upgrade is a really serious vote of confidence from our customers that both machines were a bit disappointing in their performance but decided to invest $35,000 to $55,000 to upgrade, which means they are committed to the technology and to the direction we're showing, as well as our roadmap for where we're taking this company and its product, and hopefully, taking the market with us. So that’s last quarter. I’m sure you want to know about this quarter; we are 45 days into it. It could have been 45 days or one day, nothing happening. Customers in the United States are completely dormant, like bears in the winter. Even FedEx with a product we sent didn’t even get to FedEx because the office was closed, and they had to send the package to one of their engineers at home. Of course, if he gets the product at home, he can’t do anything with it. He doesn’t have a machine, but he wanted to receive the product at home. So we had to resend it. That is the status of the market. There’s nobody home. In Europe, it's a little better than in the United States. The Europeans woke up earlier from the pandemic, or I think they just went to sleep. They weren't asleep like in the U.S. as deeply. Even in Europe, we have issues with our customers, including our loyal customers, who are saying, 'Look guys, we just came back to the office. We have 20 things that are more urgent for us than dealing with buying a new machine or doing anything with you, but we’re with you. We’re getting back. We’re getting back.' In the Far East, they are ahead of the United States and Europe, and they are already talking business, but carefully. So that is the situation today. I expect this quarter to be as much as revenue, really bad in terms of working assumptions moving forward. We have a director from Lockheed, and we had a Board meeting a couple of days ago, and he told me that across the board at Lockheed, they are starting to discuss bringing people back, which means, somewhere in June, they hope things will start to show signs of normalcy, people returning to the office and maybe in July, start to do business normally. Hopefully, this summer will not be like a usual summer, as you know, people in July and August are not around. This summer may be different. So the working assumption at this point is that the end of Q2, the beginning of Q3, hopefully, business will start to roll forward. We are preparing for that. In order to prepare for that, I've laid out two mantras for the company: Mantra #1 is our cash today is your cash, which we are holding temporarily to use it in the best way. Our cash today will be worth much more 3 months from now when the pandemic is beginning to recover, whether it’s in 2 months, 1 month, or 4 months. Under this mantra, we are going into the second mantra, which is to conserve cash now even if it’s for 4 months, for sure, if it’s for 6, and spend it sparingly only on two subjects: one, the development of the product roadmap, so when the market recovers, we will offer an even better product than what we have today; and two, on building the sales organization in the United States to be ready for when customers return to the office, ensuring our sales organization is up and running with an active pipeline and salespeople crisscrossing the continent. Those are the two areas we’re not saving cash on. We are not saving cash on building the North American sales organization, and we’re not saving cash on the product roadmap and advancing it. Where are we saving cash? Everywhere else. We are not spending money on customer care and support, which is an organization we are building because customers don’t want to be taken care of right now. There’s no reason to disturb them. There’s nobody home; in fact, there's nobody in the office, everybody is home. We’re not spending money on building machines. We are not building machines, and we’re reducing our cost of operations and manufacturing because we have enough inventory to build machines for the next 6 to 12 months, and we have the operations to build machines; we just don't need to man the operation until we're actually building them at a fast enough pace. As for manufacturing ink, we didn't touch that; we're manufacturing ink as usual. The demand for ink hasn’t decreased yet, even though more than half of the machines are down. We haven’t seen ink consumption go down so far. I believe we will see it this quarter, and then I expect it to pick up again. As for manufacturing, the shelf-life of our ink is long enough. So we are even manufacturing inventory right now, especially because the manufacturing of chemicals cannot be halted; it’s a process that needs to be operational. We’re not worried about that; we know there will be demand for our ink inventory even if we have a little more inventory than usual. It's not a big issue anyway. I’m getting toward a summary of what I had to say, which goes back to the two mantras I started with: The cash we conserve today will be worth more when pandemic days start to phase out. Two, don't hold back on building the North American sales distribution go-to-market organization and don't hold back cash from them. For everything else, we are holding back. Last but not least, we had the first user group ever initiated. I discovered when I joined this company a few months ago that we never had user groups. I met with the American Army, and they asked how we didn’t have user groups because they’re an important tool to meet all users, especially in a company that's introducing new technology to the market. So I close with a note: today, we had the first user group in Europe, with 55 participants in a 3-hour conference, attended by people from Italy, Germany, Russia, Eastern Europe, and our customers, not including those who tuned in from the company. The user group was virtual and included discussions by customers about their experiences with the machine, including insights the company discovered where customers are more advanced than we are in developing applications for the machines. This is exactly what I was hoping for. Customers were telling us, 'You don’t know that you can do this and that,' and I don't want to get into technical details, but they shared what they have been able to achieve with our machines. Our team was overwhelmed. It was a very successful meeting. This is good news, especially given the current circumstances. Obviously, I can't claim to have invented this idea; user groups are a standard practice, and this company just did not utilize them. I'm not an inventor. I just applied it, and our European organization put it together. We're going to conduct user groups like this more frequently. Interestingly, it’s much easier to bring people together in a video conference call for 3 hours than to meet physically as we used to in user groups in other companies. There is an advantage to gathering for dinners as well, but it becomes more expensive and logistically troublesome to do that often. User groups via video can happen twice a month, and that’s what we plan to do moving forward; they are virtually cost-free. So this is very encouraging news, and I wanted to share this with you, as it just happened this morning at 12:00 AM New York time. I couldn’t hold back from telling you that it was the case, and it’s very encouraging. I’ll stop here; I spoke for about 15 minutes, and I will open this up for Q&A, both to me and to Yael, who is waiting for your questions. If you would like to direct them to me, I will either answer myself or ask Yael to answer.

The first question comes from Brian Herman of ViewTrade Securities.

Question about the machines. It looks to me like you have two machines, the Pro and the LDM. Can you talk a little bit about the difference in capabilities of each? And is the difference an upgrade? Or is it an entirely different machine?

No. The first machine that the company put in the market was the DragonFly Pro, which was presented to the market practically in early 2018 and was sold throughout 2019 into the beginning and middle of that year. That machine had a major flaw. The flaw in that machine was the printing heads; if you didn't operate the machine very precisely according to the company's instructions and deviated even a little, or if the machine didn’t operate continuously under its conditions and specs, you encountered clogged printing heads that required the machine to stop for a technician to clean it up. Therefore, the claim that the machine was a digital manufacturing piece functioning 24/7 did not materialize. You had to have a person available to the machine because every 2 to 3 hours, you had to deal with that. This issue was resolved through development efforts during 2018, culminating in August with the rollout of a new machine called DragonFly LDM. The DragonFly Pro is entirely upgradeable to the DragonFly LDM. The difference between the old machine and the new machine is that the new one features an automatic cleaning system, a combination of hardware and software, that cleans the printing head while it is printing, every few seconds. This sophisticated mechanism ensures that the head remains clean, allowing the machine to operate almost 24/7 without needing to stop or have a person present to prevent clogging. In summary, the machines are upgradable. The cost for an upgrade is approximately $30,000 to $50,000. Your next question might be, how many people have upgraded? More than 50% have upgraded so far. The upgrades occur quarterly, and every quarter, we are seeing 2 or 3 upgrades. We hope to complete all upgrades for the machines currently in use and interested in upgrading, which is approximately 90% of the machines in the market. If it weren’t for the pandemic, we might have already finished. With the pandemic, it could take until next quarter or two to finish them. I hope I answered your question.

Yes, you did. And how many machines are out in the market in total? Then I'll let you go to the next question.

57 or 58.

This concludes our question-and-answer session. I would like to turn the conference back over to Yoav Stern for any closing remarks.

Can you just wait another 30 seconds to see if somebody else may come up with a question and is still thinking about it?

Yes, sir. And we have a follow-up from Brian Herman of ViewTrade Securities.

I just wanted to give everybody else the opportunity to ask, but I'll jump back in. On the 57 or 58 machines out in the market, how many different customers does that represent?

Between 30 to 40. If your next question is, how many customers have more than one machine, just a few. There are also machines on the market in the hands of resellers and distributors. We have been getting rid of resellers, replacing them with a direct sales force. The resellers were the biggest mistake this company made in the last two years, which is why our sales increased year over year by just 39%, whereas I believe they could have increased by 114%. Resellers clogged the channel and didn’t resell, so we are converting this. There are about 14 or 15 machines with resellers, part of the total 57. We are coming to an agreement with the resellers that we will resell these machines for them and develop an arrangement that allows both us and them to make money.

Right. That makes a lot of sense. Is this the type of thing where a third-party manufacturer of multilayer microchips will start using your machines in their facilities? Or is it more about a corporate initiative to conduct research and development in-house?

By the way, it's not microchips. Microchips are semiconductors. This is different. Semiconductors involve companies like Intel and AMD, which is a different industry. It’s an adjacent industry, but it involves silicon, which is much more expensive and development-intensive. So we're not competing there. We are in the PCB special devices market, which is less expensive but is trending closer to semiconductors as the performance requirements increase. Yes, our machines serve two purposes: first, for proof-of-concept and prototyping, and are used by research institutes, etc., and by very large, high-tech companies with in-house electronics research and needs for rapid design-to-market processes. Our machine is a digital fabrication machine for this purpose. The second use is moving into early production; we are now getting machines to function 24/7 for this purpose. Post-pandemic, we are observing a strong trend of large corporations wanting to move production back from the Far East to the continent, and we are well-positioned there with our digital machine. Essentially, it’s a rolling fabrication facility for PCBs, as we can easily handle 20, 2, or even 50 layers digitally. In the coming years—with a horizon of 1.5 years—we expect to see people start using it as a fabrication machine for early production and short-run production, effectively utilizing a rolling digital fabrication facility enabled by our machines all in one location.

Would it ever be used in permanent production lines of printed circuit boards?

Yes. The answer is yes. Any more questions, please.

We're standing by, sir, to see if any other questions come in. Currently, we do not have any other questions.

Okay. I will use this opportunity to, again, say thank you very much for everybody for your support and attention today, and in general, your support a few weeks ago and now and moving forward. You all know that you can feel free to call me personally. I hope to be talking to you soon, and I wish you best of health and stay safe.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.