Nano Dimension Ltd. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. Welcome to today's conference call to discuss Nano Dimension's Second Quarter 2020 Financial Results. My name is Chad, 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 haven’t 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 second quarter 2020 financial results. I would now like to turn the call over to Nano Dimension's President and CEO, Yoav Stern. Yoav, please go ahead.

Thank you very much and good day, everyone. I hope you are all doing well. I want to share some insights that go beyond the usual news release format and recap what I mentioned last week when I invested in the company. I'll reiterate some points and then I’ll open the floor for your questions. As I mentioned three months ago, I expected our top-line revenues to be zero in Q2. While it wasn't exactly zero, we came close, registering only a few hundred thousand dollars because we didn't sell any machines. This doesn't mean we weren’t engaged with the market; we maintained contact with our existing customers. However, we found that many were not ready to move forward. While European clients are starting to engage with us and China is leading the way, the larger American corporations did not begin to ramp up as expected back in July. This led me to adjust our working assumptions. Earlier, I believed that business would begin to recover in early July, but I now think it won't pick up until the end of Q1 2021. If circumstances change positively in the coming months, we would adapt our assumptions accordingly. However, from my perspective, I don't anticipate immediate improvements, especially considering that the upcoming U.S. elections might negatively impact financial markets. Because of this outlook, we have decided to scale back our plans to significantly boost marketing and sales efforts in the U.S. and Europe. Our actual sales and marketing expenses are lower than what we budgeted for, and we've already held back our spending. Initially, we anticipated having 17 people at our U.S. headquarters by year-end, but we are now at 8 to 9, with plans to keep the number in Europe to 4 and reduce our team in Hong Kong from 6 to 3. This cutback is due to customer feedback indicating they cannot approve capital expenses right now, regardless of their interest in purchasing equipment. For example, there’s a large corporation from the Far East, which I can't name, that concluded a benchmark with us and was pleased with the results. However, they informed us that they cannot proceed with their planned purchase due to the current freeze. We are redirecting our focus during this market lull—anticipated to last at least three more quarters—to develop a significantly improved and more competitive product. This new machine will not only outperform alternatives but will also align with industry specifications for commercial applications, perhaps even defense or industrial standards. Mid-next year, we plan to introduce this next-generation machine. This strategy allows us to shift focus from fundraising and market entry plans to product and technology development, which I find very fulfilling. I am actively working with our development teams, and I have confidence in the direction they’re headed. To support this, we've increased our R&D headcount by 50%, bringing on experts primarily with Ph.D.s in fields relevant to our technology. Additionally, we see a growing trend among large electronics manufacturers who recognize the risks of relying too heavily on the Chinese and Taiwanese PCB industries, valued at $65 billion. They are starting to shorten their supply chains and exploring options to move more production and prototyping to the U.S. and Europe. Factors such as tariff wars and the pandemic are prompting these changes, as companies seek to create buffer zones for their inventories against future crises. Despite these positive market shifts, there are still challenges to installing our machines, as many customers are restricted from accessing facilities. Thus, while I view our current expenditure as an investment aimed at gaining market traction when budgets are finally allocated, we remain focused on targeting universities and academic institutions, where we believe spending will begin to free up sooner than in corporate environments. For example, a university in New York has funding approved but cannot access it due to government restrictions. Over the past couple of months, I have conducted extensive outreach to about 55 companies in the industry, with the help of Needham & Company, including manufacturers and prototyping firms. Many of them have technologies that are either complementary to our offerings or competitors in the ink space. From these discussions, I can confidently say that our company is on a favorable trajectory compared to others in the industry, particularly older, more traditional firms. I am actively exploring options for mergers and potential acquisitions that could enhance our position. At this point, I'll pause here and invite any questions you may have. Yael is also available to address inquiries related to our financial results. Chad?

Thank you. The first question will come from Morris Jefferies, a private investor. Please go ahead.

Yes. My question is directed towards the CFO. How much in operating expenses will be saved as a result of a reduction in workforce? And do you still see a continuation of reduction in workforce as we move forward?

I will answer you. We are not reducing workforce. We're increasing workforce, mostly on the R&D side. So, there's no reduction. There's an increase.

I only asked that because you mentioned that you're reducing Hong Kong and other…

Yes. We're reducing on the sales and marketing side, but we are increasing on the R&D and technical side. So, the net result, let's say, we increased—or I will even qualify it, on the sales and marketing, we reduced a little bit in Hong Kong, but in the rest of the basis, we just didn’t increase the way we planned for this year. And on the R&D, we increased it more than we planned. We didn't plan to increase on the R&D and we increased it. So, the total amount of headcount in the Company grew. Now, if you want to hear numbers, we're not talking about hundreds of people. The Company had 69, 70 people before; it has 80 people or so now. So, that's the difference.

And how much money do you expect to—is this a wash or is this a cost savings?

Our run rate is similar to what it was before.

Have you all—but, given up in terms of anticipating any sales whatsoever?

Well, of course, I'm anticipating sales. Otherwise, why am I in business? But, I'm not anticipating sales...

You reduced your sales force.

Yes. But, I didn’t nullify my sales force. The sales force today is still bigger than the sales force the Company had in the 1st of January 2020. So, I intended for instance to increase my sales force and sales organization and support in the states from 2 people in January to 17 people in December. Instead, I'm going to increase it from 2 to 10. So, it's not that we're giving up on the market. We have salespeople; we have sales development representatives internal that are talking to customers. We have hundreds and hundreds of leads that are interested to talk, most of them generated over the last two months. So, of course, the commercial side is working and taking. But, I'm not trying to overspend because even people who are interested in talking about we need to get back to our offices where we will—the budgets will be released. And therefore, I don't want to overspend. But definitely having a group of—let me tell you, is about 25 out of 80 people involved in the commercial go-to-market sides around the world. I'm just not growing it.

You mentioned a number of months ago, a breakthrough technology. And you just mentioned a few moments ago that your machines will become even better as time goes on. How is that not enough of a competitive advantage from your competitors to show that your machines are better? Why would a customer buy any other machine besides yours?

A customer will not buy another machine beside us because there's no other machine like ours. The machine that we have is, if you wanted an analogy, similar to when Apple invented the iPad—not iPod, iPad—and there were basically no iPads. Actually, Steve Jobs was against the iPad and its size because he said nobody is going to use that size. Nobody was competing with them either. The issue is here, educating the market that what they can do with an iPad, and in our case, what they can do with our machine. What they compare it to is the old industry when they did—as they do today. PCB in a traditional way in production line in a very dirty industry, very high intensive in infrastructure chemicals, etc. It’s a sophisticated industry, it's very old, it's 40 years old. And we offer a better, faster, cleaner, ecologically solution, but it's new. And the electronic industry is very traditional. We have to convince the market that the results of what the machine will produce will perform similar to the traditional PCBs, including in high temperature, including in vibration, including in what's called spec—for milspec. I mentioned it, industrial spec or commercial spec. So, that is what we are facing in the markets. We're not facing competition. We have to prove that our machine is better. Our machine is one of its kind, and it's a market education. It's a typical situation that other companies had in the past. It's not new; it's in the rule books and in the business school books, where the way you go to market in a place where you are the early comer and the educator is different than when the way you go to market when you have a competing solution, a better mousetrap, which is either better in price or better in performance. We are not in that area. We're in the area of market education. And the way we do it and the reason why I did it this way with distributors and resellers, which was a mistake of the company folks, is when you deal with market education, you have to build a sales force, it’s very sophisticated. Most of them are electronic engineers. You have to be in touch with customers, like the names I mentioned before, and I wasn't allowed to mention. But it's the largest defense manufacturers in the United States, large, and very, very reputable secret services in Europe—the Army and the Navy in the United States—those people are talking very seriously with us and working with us on our machines. But, two things are holding them back now. Right now, they're not in the offices; they can’t even go to the labs; and two, they—people who already made the decision to move ahead with our machine after being educated—they have a freeze on CapEx. So, it's not an issue of showing we're better than another machine. That's a bottom line.

Have you in terms of your Holy Grail customer—let's call that a Holy Grail customer, Dell or Intel or Tesla—have you considered a loss leader?

Tesla and Intel are absolutely not our customers, not even close. Intel does not manufacture PCBs. Tesla, if at all, buys the PCBs, manufactures from subcontractors. So, our vertical that we're looking after out of which you can choose any Holy Grail you wish are the defense industry, the academic industry, education, the medical industry, especially in vivo products and other electronic subcontractors to these industries. So, in those industries, consider loss leader. We don't need to consider loss leader. The minute we talk with a serious customer that the price is an issue for him, we have enough flexibility to play between the price and the price of the materials we're going to sell him later for one, two, three, or five years. We also have template between the price that he pays upfront and maintenance costs, the annual warranty that he gets free for the first year, but he pays for the two, three years later, he can get a reduction on that. Plus, I have by now enough margins because I'm controlling the sales and not selling it through resellers that I can reduce the cost of the machine. And lastly, but not least, we have a program to lease and just to rent our machine today because we have a strong enough balance sheet. So, again, if you're dealing with the government and defense, which we are very experienced in dealing with, for instance, the government, for them, signing a contract for a rent or lease and signing a contract to buy a machine, it's the same round of approvals. It doesn't matter the name. But for commercial people, when we're now offering them lease or rent, they’re not considering it because it's less cash upfront. So, even that is another way to reduce cost. We don't need to have a loss leader?

So, for the next three quarters, you're anticipating awful financial performance?

No, I don't anticipate awful financial performance. I'm anticipating very low revenues.

Well, that results in awful financial performance.

No, no…

On a bottom-line basis.

No. All the financial results are spending my money and not building value in a time where the market is under the corona affairs. So, the fact that I reduced my expenses overall and directed them into investment in the value of the product, which will pay back in three or four quarters when the market comes back, is not awful financial performance. I would call it performance considering the market we’re in.

Your shareholders may disagree with your definition, given...

My shareholders, if you are a shareholder…

I am.

You can define it any way you want. I am giving you the data.

From a net margin perspective, are you providing guidance that will be negative for the next year almost?

What are you talking about, margin perspective?

P&L, the net margin, EBITDA and/or...

What do you call net margin, gross margin, EBITDA, or net profit?

Net profit.

There will be no profits in the next year and a half.

A year and half?

Yes. No net profits.

Okay. Thank you. I have no more questions.

They’ll be gross sales and revenue and gross of EBITDA, but there'll be no net profits.

Okay. Thank you. I have no more questions.

Thank you.

The next question will come from Kenny Ross with Stock Holdings. Please go ahead.

Hi. I just had a quick question regarding the total production time reduction. I read an article, I believe it said it was a total reduction of 97% when compared to the usual production time. Is that—is there anything that we can—that you’ll have that maybe I guess, additional information backing that or showing examples of that or videos or anything that can shine a little bit more light on that? Because that is a very dramatic reduction in production time.

What are you—I'm sorry. If you can clarify please for me, what do you mean by production time?

I believe it was on a news website. I haven't looked recently. It was about a week ago. I found it. There was a news article that said, I guess, the PCB production time.

No. You can’t—it's not a measurement of production time; you can't measure—first of all, machines are not in production yet; the machines prototyping—not the machine in prototyping—the machine is manufacturing prototypes. So, if you look at a product, for instance, which you have on our website, case studies, for instance, with a company like HENSOLDT, which we're very close to in developing very exciting programs, which hopefully in the future, we'll be able to discuss it. So, HENSOLDT is a defense manufacturer in Europe that actually gets on our machine better results than our people themselves realize that they can get from the machines. So, HENSOLDT on in the case study, which is on our website, shows that when they produce the standard PCB on their traditional PCB manufacturing shop floor, it took them about four months for the specific model. And when they did it with our machine, it took them about 8 to 10 days. So, maybe that's the number you remember. They prototype by the regular way four months, and by our machine, let's say 10 days. Four months is about 120 days. 10 days out of 120 is about 8.7%. So, it's 93%. Maybe that's the number of coming in, and you calculate it, which makes sense. But it's an example of a case study from a customer.

Okay, makes sense. One last...

So, your number was not too far actually.

Okay. Yes, I didn't actually do any actual calculations, but I'm actually kind of surprised I was that close. My last question, I guess I'm kind of scouring a little bit for some videos or some materials or anything to get a visual of how this—your product works, I guess. Is there anything that I can find…

Yes. Go into YouTube, in the search function of YouTube, write Nano Dimension, the name, and you'll find about 10 or 12 videos.

Okay. And do they show in detail like time…

Yes.

Or the production time?

Yes. And if you have portions of those videos, feel free to call me—us here. And I’ll be happy to help you and go through some videos with you.

Okay, awesome. That’s my last question.

Thank you.

The next question comes from Quinn Larson, a private investor. Please go ahead.

Yes. I was just wondering if the timeframe for corona spans longer than we anticipate, how much cash do you have? Well, maybe not the cash, but just from an operating point of view, how long can you continue to do what you're doing and still be okay?

If there'll be no revenue, zero revenue for the next four years, we’re still okay.

Our next question will come from Robert Rallo with Right Talent. Please go ahead.

Can you hear me?

Yes.

I'm new to the investing world. I've always invested in mutual funds and what have you. And so, I'm learning as a new investor. But, I came across your company just about two months ago. And I'm telling you, I'm so excited about your product and what I think your company has to offer for the future. I'm in this for the long haul. I see getting in early, and that in 2, 3, 4, 5 years down the road, it’s going to return tremendous investment for me. So, I'm really excited about what you're doing. This is a very first conference call I've ever participated in. So, I'm very pleased with hearing your responses. That's exactly what I wanted to hear. And so as a result of this, I plan to slowly try and increase my ownership and stock in your Company. One thing, I'm not a technical person. So, could you tell me a little bit about the new—improving a machines, is that going to result in better performance, higher cost, better performance same cost, or better performance, lower costs? And I'll hang up and listen. Thank you so much.

Thank you so much for your compliments. And yes, I agree with you. I also invest in more people that I know will invest very soon. With a long-term view like yours, I had the long-term view before the corona. Obviously, the corona may extend it a little bit, but the corona is changing our life; eventually, mostly, I believe will be for the better after it. But during it is a bit difficult, but we'll go through that. But, specifically to your question, we have three projects going on moving forward. One—two of the products are with the existing machine, one is called PIK and one is called MARK. The PIK is performance improvement kit and the MARK is a manufacturing and reliability kit. Those are working on the existing DragonFly machines. They approve it. At this point, we're not even sure that would increase the price. It would depend on the market. This other gentleman that asked about Holy Grails and etc., etc., the cost of the machine to manufacture after we improve it with the PIK and the MARK kits is not going to increase dramatically for us. So, it will increase the price when a machine comes out with this improvement? I'm not sure. We may even reduce the price. Whatever will cause our revenue to go up, we'll do. It's not going to materially affect our margins. Then, there is a third project in development, which is called next generation. This is a next-generation machine. It's totally different from the existing one, but of course it's based on the experience and the technology we experienced over the last—the R&D teams over the last five years of development. The new generation or next generation machine will be more expensive with much higher performance, straight into manufacturing, including different ways of depositing the electrically conductive material, not only inkjet, but we'll have a revolver that will have a few heads with different methodologies which enable us to accelerate production when we want and slow production and make it more accurate PCB as needed. So that machine will cost more.

Thank you. Our next question will come from Michael Moresenski, a Private Investor. Please go ahead.

Good morning.

Hi.

How are you doing?

Good. Very well. Thank you. And yourself healthy?

Oh! Yes, sir. Thank you. I was looking at your website regarding Harris Corporation and its satellites, and I know Jeff Bezos has been awarded a $10 billion contract to build a complete satellite network. Do you see the printing technology your company has collaborating with them?

Yes, the space industry is one of the main sectors we are targeting. In response to the inquiry about Tesla and Intel, I mentioned that we are indeed focused on the space industry. This is because they require very advanced high-performance electronic devices that are lightweight and complex in design. Additionally, they do not need millions of units; they operate with just a few thousand, as they are not manufacturing tens of thousands of satellites. We have a case study showcased on our website demonstrating that our RF technology costs them about ten times less, meaning only about 10% of traditional manufacturing costs. They tested two results: one manually and one using our machine, and it is now planned to be sent to the space station for performance comparison in a space environment. I believe this market presents a significant opportunity for us. However, currently, there is some hesitation in this market. Our headquarters in Florida is strategically located near NASA and Harris, but many projects are being stalled, not due to a lack of funding, but because stakeholders want to see how developments unfold before making financial commitments.

Okay. So, you're telling me and our investors that there is technology going into space or is in space using your 3D printing?

I'm saying that our 3D printing machine has produced a specific product for Harris, which is going out to space to test it in an environment of space. And if you ask me what is limiting us from sending many more to space, we are working as part of the development on materials. The minute the materials fit milspec, which is the temperature, radiation and vibration—actually, vibration in space is no big deal; much more vibration in air in aviation that's not in space. So, that is where the market to space will open up even more. Right now, it's early experiments.

That's excellent. Very exciting news. Thank you, sir.

Thank you.

The next question comes from Michael Brcic with National Securities. Please go ahead.

Yes. Hi. Just a quick clarification on the next generation product.

Yes.

Will that still be targeting the design of the PCBs or the production?

It will be geared much more into early production and short-run productions.

Got it. Thank you very much.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back to Yoav Stern for any closing comments.

In closing, I can just thank you all very much for participating and join you with a hope that we’re going back into normal circumstances. And, definitely on our side, I can tell you one thing, myself and people around me are working more hours in a day since the corona. So, as much as that is concerned, we are becoming more and more effective. Now, we'll just wait until the wave starts to raise and we'll show the results. Thank you very much.

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