Nano Dimension Ltd. Q4 FY2020 Earnings Call

Good day, ladies and gentlemen. Welcome to today's conference call to discuss Nano Dimension's Fourth Quarter 2020 Financial Results. My name is Grant, and I'm your operator for today's call. On the call with us today are Yoav Stern, President and CEO; and Yael Sander, 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 fourth quarter 2020 financial results. 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, and good day to everyone. Today, I will discuss our performance in 2020, which I previously outlined in a letter to the shareholders. I will cover the funds we have raised, our M&A activities, future plans, current industry trends, and address some important issues. Our 2020 performance can be divided into revenue and expenses. It’s worth noting that our expenses might appear misleading since many of the high costs are non-cash expenses due to GAAP regulations surrounding stocks and non-cash compensation as part of our company’s restructuring. For further details, feel free to reach out to Yael with any questions. Regarding revenue, I was initially surprised; I expected a significant decline in revenue due to the pandemic, especially since machine sales were very low. However, our revenue ended up being approximately $3.4 million, which is about half of what it was the previous year. This revenue was generated mainly from existing customers upgrading their machines, purchasing consumables, and service contracts, along with some revenue from our new NaNo-Services for customers who cannot afford to buy machines right now. As we enter 2021, conditions don't show significant changes, particularly in Europe and the U.S., but the East is starting to recover, and we hope to see a shift in machine purchasing soon. The revenue from our non-machine services performed well last year. Our company has undergone significant changes, and we have successfully raised funds throughout the year at prices higher than previous transactions, avoiding dilution. This strategy reinforces our position as we prepare for expected industry and financial market developments. While I am not predicting market trends, our aggressive and promising business plan outlines how we intend to utilize the $1.5 billion we've raised. We aim to navigate the market effectively, regardless of fluctuations, and we believe our competitors will face challenges. We anticipate market prices might decline as the current trading excitement diminishes, allowing us to execute our business strategy efficiently. While some are eager for accelerated M&A, I advise caution; those who push for rapid acquisitions will likely overpay, which we do not intend to do. We currently have multiple letters of intent and are proceeding with due diligence on several M&A opportunities. The circumstances are opening up, and I'll be traveling soon to conduct due diligence in person. I want to remind those I raised money from, many of whom may not have heard it directly from me, that we will not make announcements unless they are backed by solid actions, taken thoughtfully at the right time. If investors are not patient, they should reconsider investing in Nano Dimension. We're on a transformative path in an outdated and inefficient $30 billion PCB industry, which has yet to adapt to digital advancements, and we are leading that change. Investors are joining us because they believe in the industry's impending evolution. Our technology is environmentally friendly and digitized, and feedback from both existing and new customers is validating this vision. The transition toward a significant industry change will not follow a simple quarter-to-quarter increase in sales but will involve strategic industry research and collaborations with other companies as we grow stronger. You will soon witness pivotal moments in our development. However, these will not arise simply because of fluctuations in the share price. Any action taken by us will be careful and timely, guided by our research and development efforts. We aim to position ourselves as a leading company in a $70 billion industry, achieving proper valuations as we progress. As I have previously mentioned, I have engaged with numerous companies, narrowing it down to promising prospects for acquisitions. The SPAC surge has inflated some company valuations excessively, but we refuse to pay inflated prices. We will walk away from those who behave opportunistically and continue to focus on acquiring strong companies at fair valuations. For now, I will conclude my remarks. If anyone is interested in hearing more or has questions, I would be happy to engage further.

Our first question will come from Jeff Roth, a Private Investor.

Yes. I have a few questions. For transparency, please discuss your direct offering strategies you've done for at least the next 6 months. Do you feel that you have enough money to execute your plans on a buyout merger, acquisition, whatever you want to call it? That's my first question.

Yes.

So you're done. Good. And can you...

The answer is we have enough money to execute our present strategy.

Okay. Could you provide some guidance towards first quarter 2021 financials in that they're almost done.

No.

No guidance.

No.

Any guidance for 2021 in terms of revenue appreciation?

No.

Okay. Any growing interest, contracts signed in 3D printing of 5G antennas? Have you been working with any major automotive companies?

Yes. We are working with major players in that field. And when there will be anything to announce, we'll announce. We had contracts with them and work with them before. And when there will be something to announce, it will be announced.

Okay. You recently filed a patent on ceramic integration. Could you talk about that?

Yes. If you review our presentation on our website and listen to past discussions, you'll see that we are focusing on the development of a few key areas. One area is materials. We are gradually improving these materials and are reaching important milestones to ensure they meet military specifications, followed by industrial and commercial specifications. We are seeing very encouraging progress. Our materials now perform significantly better under environmental conditions and specifications, such as temperature and strength. We work with two types of materials, dielectric and conductive, and we enhance their properties by combining them with other materials. This includes ceramics, which improve both the electrical and insulation characteristics as well as conductivity. We file patents to protect our solutions when we identify effective improvements. Yes, we are indeed incorporating ceramics into our materials.

Okay. With coronavirus dissipating in a very large way, when will that be a positive in terms of revenue growth and executing on that?

First of all, I'm not a corona expert. As much as I'm concerned, you may see coronavirus dissipating or not. What I see is total closures in Europe. We have no customers that are active from our array of customers in Europe at all. It's actually becoming worse over the last 2, 3 months. In the states, it's steady state. It's not worse, it's not better. So I'm not commenting on the coronavirus and the general public. I'm just commenting insomuch as our customers being in the laboratories and the facilities. And we don't see a major change. We did see a change in the East, specifically Australia and the Pacific Rim. We actually sold machines there at the end of the quarter. And when there will be a change, then we will announce it, or you will see that we are selling more machines.

Our next question will come from Mr. Jackowitz with John Carroll University.

At your recent AME conference, you spoke about your approval from NASA. And I'm just curious if you could provide some detail on your ability to 3D print in space?

No, we don't 3D print in space. What we do with NASA and L3Harris is 3D printing on the ground for very unique components, specifically high-performance electronic devices. These components are then taken to space to test their performance in different environments, such as varying radiation and the absence of gravity. However, we do not send a machine to space for printing; we simply send the components.

Yes. So those satellite components, those are 3D printed by you guys and taken by NASA up to the ISS?

Yes.

Did any private companies pursue new technologies?

No, we work with NASA and we work with Harris.

Our next question will come from Tavy Rosner with Barclays.

I have a few, so maybe I throw most of them at once because they're related. So you talked about your net cash position. I was wondering if you have some granularity into roughly how much you're planning on spending on M&A as opposed to how much you are using for organic growth? And I guess looking at organic growth, last year, you introduced the different stages of development with stage 5 expectedly being reached by 2023, if I'm not mistaken. So does the fact that you have significant cash accelerate the development pipeline?

I will address your questions in the order you asked them. As for our expenditure allocation, we typically allocate over 50% for M&A, with the remainder going to organic growth. This could change depending on the M&A activities we pursue, especially since some companies we look to acquire have advanced technologies that motivated our interest in them. Integrating these companies may lead us to increase our budget for organic growth in research and development and market strategies. Currently, our M&A allocation exceeds 50%. Regarding development stages, we categorize them as stages 1 through 5. We anticipate reaching stage 5, which represents an inflection point, around stage 4, where our first machine will transition into production or fabrication. At that point, the machines will achieve the necessary yield and throughput levels for actual production, and the materials will advance to meet industrial specifications and be close to military specifications. Regarding your question about our cash position potentially speeding up development, the answer is yes. We are currently allocating the necessary funds to enhance our R&D, particularly in chemistry and physics related to materials and engineering. We are also considering acquiring companies in Central Europe with high-level machine-building expertise, which could expedite our time to market on the hardware side. On the chemical side, we are already well advanced and do not foresee many opportunities for cooperation or acquisition to further accelerate development. The materials process is one we are intensely investing in internally, and without cash constraints, we can maximize our development efforts to reach stages 4 and 5 more quickly. Thank you for your insightful question.

That's very helpful. And I guess, more of a bigger picture. So I understand the value proposition of your machines as opposed to the traditional analog way of production. What I'm wondering is that, do you ever get kind of pushback from clients saying, yes, it's true, we could produce on-site and get faster time to market, but we don't need that kind of speed. We would rather do it the cheap way, no matter how long it takes. Is that something you've heard of? Or do you just think that with time, the market will educate and understand the value?

No, we actually receive the opposite feedback. We typically hear responses like, this is great, this is amazing. However, customers want us to accelerate the delivery of our materials so they can use them immediately, not just for prototyping but also for their own products. While they appreciate our machines, they express a desire for faster yield and throughput in production because prototyping is useful, but they want to see improved efficiency. They are right, and that is the direction we are pursuing. The marketing requirement document, which outlines our future product, is entirely based on customer feedback. When I joined the company a little over a year ago, one of the reasons I took on this risky role was that we had 45 impressive customers, some of whom are leaders in the defense industry across the United States and Europe. While I can't disclose their names now, they include a leading defense contractor in Germany that is partly government-owned and has allowed us to use their name. You'll learn more about our collaborations with them soon. The confidence I gained from these customers encouraged me to join and invest my own money because they indicated that the company truly listens to them regarding the direction of our machines and technology. This emphasis on customer feedback has only grown stronger. Everything we do is informed by 35 leading customers, including prominent universities, which guide our direction. I take pride in the company's commitment to basing our actions on customer input rather than merely pursuing entrepreneurial ideas.

Great. And last one for me, if I may. So obviously, corona had an impact on you guys in 2020, you talked about it for several quarters. I'm just interested in a way several companies that we follow also in the 3D printing actually saw corona as a boost because people realized disruptions of supply chains and so on. And by you, it was kind of the opposite with budgets being down or at least investment decisions being delayed. How do you think about that with regards to your potential addressable market?

The phenomenon you're describing requires a distinction between mature technologies that can be integrated into production lines and the disruptions caused by supply chain issues stemming from trade wars and the pandemic. During these disruptions, companies tend to acquire more machines to mitigate the impact. In our case, since I joined the company, our customers, around 45 in total, have largely been early adopters. These well-known companies use our machines primarily for proof-of-concept and early prototyping. Supply chain disruptions predominantly affect production, which influences R&D and product development processes that utilize our machines. Consequently, our customers have reduced their R&D spending during the pandemic. This is different from how established 3D printing technologies operate, which have been around for much longer than our industry, which is just five years old. While we are leading the way in additive manufacturing and electronics, specifically in manufacturing PCBs in three dimensions, we see budget allocations for these breakthrough machines being delayed as companies choose to wait until the situation stabilizes. This approach does not provide immediate relief for supply chain issues.

Our next question will come from Stuart Taylor with Atlantic Capital.

I want to have one. Warren Buffett recently discussed how costly it is to buy out a quality company. Does your M&A strategy include taking large stakes in several quality companies where the partnerships can be made? Or are you generally focused on overtaking just one company?

No. First of all, we are focusing on taking 100% of companies. We're not investment companies. We're not going to invest and take a partial stake in the company. We are interested in buying them in order to integrate them and to get the benefits of the integration, either it's the integration of technology or it's integration of their distribution channels and go-to-market methodologies. So we are looking at the 3 types of companies. I mentioned it before, to acquire Type A, Type B, Type C. Each 1 of those types, we are interested to buy the whole company. The Type A are much bigger companies in the PCB field. And the last response to your question is, we will acquire a few companies, as I mentioned earlier, I am in negotiations. I don't want to say with how many, but it's many more than 1 in parallel, and in due diligence in parallel, but we are not going to buy 20 companies. We are not going to do a roll-up. Each company that we will buy, first of all, we will negotiate until we get it to the right price, and the right price is not necessarily going to be the lowest price possible. We're not looking for what the value of the company and the market is, what the value for us. And we will buy a few in order to leverage both our technology and our go-to-market efforts in preparation for the inflection point in the industry, which we believe will happen as we discussed before.

Well, there being no further questions, this will conclude our question-and-answer session. I would like to turn the conference back to Yoav. It looks like we have a couple dialed in. One moment, please. Our next question will come from Puneet Maheshwari, who is a Private Investor.

My question is regarding your margin and acquisition. In the quarter like quarter past, last quarter, like two quarters back, you said you're very close to acquiring some companies. And is the delay because of the valuation of the company due to market behavior right now? Or are you finding some other more competitive companies or more advanced technology companies for which you are targeting?

We have made significant progress in discussions with companies in the fourth quarter. I reduced our options by a couple of candidates whose perceived valuations were unrealistic. One was a small PCB company in Silicon Valley that believed it was worth close to 6 or 7 times its revenue, so we decided to part ways after due diligence. Another company in a similar domain talked about a valuation of 20 times revenue, and we chose to decline that as well. However, we are negotiating with other companies and are now in advanced stages, having secured signed Letters of Intent, which indicate that we have agreed on pricing, although it's still subject to final due diligence. While I can't guarantee that these deals will close, I have experience from around 20 acquisitions in the past and am optimistic. We remain patient, as some sellers are trying to raise their prices in light of the current SPAC trend. I want to assure my investors that I will not overpay, as it's essential to deliver significant value in return for the investment, aiming for 3 to 4 times on your money. We have not increased salaries or paid bonuses to anyone, except for a few small exceptions for outstanding performers. I have not taken a bonus myself because I value your investment, and our focus is on enhancing the company's performance to create value for you. Rushing into M&A deals and paying high prices is not a strategy we are pursuing.

Our next question will come from Tim Eckwall who is a stockholder.

I'm trying to understand how you control your supply chain for your raw materials. Do you all own companies that you get your supplies from? Or do you just have supply agreements with them?

We have no issues with supply chains because, from the beginning, when I came in, we planned to move production to the Far East, including China, which would have significantly increased our gross margins. I halted that for two reasons. First, the coronavirus was already in China in January. I had only been here for two weeks, and I decided not to take any risks. Second, we are an ITAR approved company in the United States, selling to the defense community, which accounts for nearly 50% of our revenue. I wasn't willing to take chances with that. Furthermore, I don't believe that the change in administration in the United States will alter this policy. I anticipate we will encounter issues. Therefore, all our supply chains are from the West, and most of what we've built, we constructed at our R&D facility or manufacturing facility in Israel and now in the United States. As a result, we experienced no disruptions.

Well, I guess maybe I'll make sure I understand. I'm talking about the actual raw materials used to produce your product.

That's what I'm talking about.

Our next question will come from Joseph Albo with Shalom Enterprises.

Yes. Just a quick question. Should we anticipate any dividend announcements this year?

Absolutely not.

Our next question will come from Byron Mayo with M31.

I read earlier, and I understand why with the COVID-19 that sales would be sluggish currently, but it would be like a slingshot when things would bounce back. I just wondered what was the time lag between when people plan the order and when it actually occurs?

The process of selling a machine is currently going well, as we are able to charge higher prices without any issues, and there is little price sensitivity due to a lack of competition. This means we expect to increase our profits. The typical time lag from our first conversation with a prospect to when the budget is allocated averages around 6 to 9 months. For defense or government clients, it tends to be about 9 months, while for commercial or university clients, it's usually under 6 months. We have a pipeline that starts with hundreds of prospects and narrows down to dozens, with many at various stages ranging from one to four months into the process leading to a pre-purchase order. Statistically, this gives us a good idea of the time lag from introduction to purchase. I hope this answers your question.

Our next question will come from Ram Raghavan with Retail.

Thank you for the conference. Your business strategy sounds very strong, and thank you for providing details as transparently as you can. My question is, you're in a particular niche right now in the PCB industry. Do you foresee going into any other industries and expanding your presence in the future?

Let's clarify the niche. The PCB industry can be measured in two ways. One aspect is the fabrication of the boards themselves, which creates a market worth approximately $70 billion, with 85% of it concentrated in the Far East. The other aspect, PCB assembly, contributes to a market of about $250 billion. We are targeting the top 10% to 12% of this sector, which is around $25 billion to $30 billion when all components are included. This niche is significant as it currently lacks solutions comparable to our digital offerings, existing in a largely analog environment that experiences substantial production runs without justified pricing, along with difficulties in prototyping. In response to your question, we are indeed exploring opportunities in adjacent industries. While we will remain focused on 3D printing, we are considering niches within micromechanical fabrication, which includes both microelectromechanical and non-electronic micromechanical devices. This is an exciting prospect as it connects to the same markets we currently serve, such as defense, aerospace, innovations, high-end automotive, and elite medical sectors. These technologies can be integrated with electronics and can also function as standalone micromechanical or nanodevices, and we are looking to expand in that direction. So, yes, we are pursuing this direction.

Excellent. It's very encouraging to see the prospects of expansion.

Our next question will come from Richard Anderson with IDA.

My question is more hypothetical. It seems to me that for the company to truly experience significant growth, the physics of mass production will be a crucial factor. Does your R&D team believe that developing machines capable of mass production will be achievable in the next year or so?

First, we should clarify what mass production means, as it's somewhat broad. To begin with, we are not aiming to compete with mass production levels of 20 million or 5 million units produced in China using analog, capital, and labor-intensive methods at $5 each. We have no intention of entering that space. Instead, we are focusing on a production segment known as high mix, low volume, which involves producing a diverse range of designs at lower quantities per design. For instance, in the aerospace sector, there are currently 500,000 micro satellites being produced, but we are dealing with only a few thousand of those. This industry demands significant variations, a variety of designs, extensive prototyping, and the production of specialized high-performance electronic devices, which we are already catering to at the prototyping level and will continue to do at the production level. While we may refer to our production as mass production, it is at a scale of 5,000 pieces, not 500,000. We estimate this sector's total market to be at least $10 billion for fabrication, with fabrication and assembly potentially reaching $25 billion. That's our target. However, we don't anticipate achieving this in just one year; we believe it will take around two years. That said, we already have a machine built for prototyping and proof of concept that is currently operating 24/7. Some customers have surprisingly begun using these machines for early production ramps, which is very promising. It shows that machines we originally did not design for production are being utilized. For short runs of 500 pieces, customers prefer using our machines, which is a positive sign. The next machines, as well as those following, are being developed specifically for production, with an emphasis on yield, repeatability, and throughput.

Could you provide a follow-up on your last video where you mainly discussed M&A? You mentioned that a next-generation DragonFly will be coming this summer with limited production capability. Can you elaborate on what that will involve?

Yes, it's expected this summer, assuming my team responds to my encouragement. This will be the most advanced DragonFly machine yet, featuring improved performance in both dielectric and conductive materials. The conductivity of the conducting material will be 3 to 4 times better, alongside enhanced strength and temperature specifications. The machine's stability and repeatability will also improve, and it will use ink more efficiently. Interestingly, while we may find it a challenge, users will be able to manufacture products using less ink than with the previous DragonFly model, which is certainly good news for our customers and has them eager for this machine. Additionally, we will introduce some important software features even before summer, likely between now and June. These updates will allow designers to use the full potential of our machines through a design rules library within the industry-standard software used for creating printed circuit boards. So, we're looking at a lot of exciting developments coming soon.

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

Okay. Thank you very much, sir. Thank you very much. We had hundreds and hundreds of participants on this call. At one point in time, it was 550. I'm very proud of it. I'm very proud of you, everybody that is patient enough with me and Yael and us in general and supporting us. And I promise you that we mean every word we say and we say everything we mean. And it will stay this way. Thank you very much.

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