Nano Dimension Ltd. Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. All participants are at present in listen-only mode. Welcome to today's conference call to discuss Nano Dimension's Second Quarter 2021 Financial Results. On the call with us today are Yoav Stern, CEO and Chairman; 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 second quarter 2021 financial results. As a reminder, this conference is being recorded, August 18, 2021. I would now like to hand over the call to Mr. Yoav Stern. Mr. Stern, would you like to begin?

Thank you, Michelle. Good morning, everyone. I appreciate you joining us today, and I hope you're all doing well. I want to emphasize that while I won't delve into the specifics of our financial numbers during this call, I encourage everyone to take a close look at the lengthy message I shared with our shareholders. It contains a wealth of information that adheres to regulatory guidelines about what can be disclosed. I suggest paying attention to both the details and the subtleties within it as it holds significant insights. To summarize, our revenue increased by 68% in the first half compared to last year, and our gross margins rose by 40% compared to the same timeframe in 2020. However, these figures may not fully reflect our potential, especially given the unusually low numbers from the pandemic year of 2021. While growth is positive, I am striving for exponential expansion, which I believe we are on track to achieve. Currently, we are focused on investing our $1.4 billion not for personal bonuses but in ways that generate value for all of you, our dedicated shareholders. Our spending is directed towards two primary areas: research and development, and go-to-market initiatives. We've doubled our workforce in R&D from 70 to 130 people over the past six to eight months, and we are also significantly enhancing our sales and marketing efforts. We recognize that Nano Dimension stands out in the market due to our unique technology, financial stability, and growth potential. Our innovative robotic brain technology is enabling advanced 3D printing capabilities, and we will soon implement this in our recent acquisition from NanoFabrica. We are among the first in the additive manufacturing sector to harness intelligence through deep learning and machine learning. Moreover, our robust financial reserves allow us to pursue our goals without the worry of raising additional funds or diluting shareholders. We are committed to investing in our future without compromising quality, and we are close to launching a new product in our DragonFly line, which shows great promise for performance enhancement. We aim to transform the 3D printing industry by prioritizing environmentally friendly and economically efficient practices. Our approach includes developing a network of intelligent additive manufacturing machines that minimize environmental impact. In summary, our three main strategies—M&A, accelerated R&D, and a revolutionary approach to go-to-market—are working in harmony. While I cannot disclose specific ongoing M&A activities due to SEC regulations, rest assured that they are an essential focus for us as we move forward. You are shareholders of a company that investment bankers, some of whom are on our board, researched and concluded that there's nothing comparable in the foreseeable past. This means an exciting technology with potential in an early stage company that is supported by you, the shareholders, which we appreciate greatly. I've used this metaphor many times before, it's like a biotech investment. It's much more acceptable when companies work for years with hundreds of millions in investment before showing financial results. As stated, this is where we are. When people mistakenly think that when I stated it, compared to biotech, our downside is protected, they must understand that the downside protection of the downside is the share price. That's not the case. Biotech has downsides that are not protected because if the FDA does not approve the third testing or level, then a $1.5 billion investment could be lost. We are not subject to any regulatory approval, thus our downside is protected because if we do not reach our goals on time, we can still sell what we have developed up to that point; there would be a return, obviously not as high as we expect but significant nonetheless. Comparing this to biotech, where the downside could go to zero, we have a business that can be sold and is positioned to grow as it approaches its inflection point. Business disruptive inflection points are binary phenomena: before it happens, you expect and feel nothing has happened, then suddenly it occurs, and it’s there. To summarize, the elephant in the room is the price of the share. Yes, the share went down. The share went up six to eight months ago as fast as it went down. We have loyal shareholders, which I respect deeply, including many institutions and numerous retail shareholders. If you observe the volume, as the share went up, you’ll see it also shot up within tenfold volume when the stock dropped. This implies that certain impatient investors — not negative impatience – but short-term traders. They sell; as selling increases, the share price drops due to limited buying activity. This results in a situation where the share price fluctuates due to low volumes. Generally, most people are holding their shares. I know of 16 institutions that hold shares and are very loyal, alongside many others. Please consider this. Yes, there are short sellers. People tell me they are frustrated with short sales but not upset with short sellers. Short sellers are market players, just like everyone else, and I respect them. They engage based on market perceptions, with share perceived as commodities operating on supply and demand curves; the more demand rises, the higher the value, and vice versa. Therefore, the connection between share price and Nano Dimension's actual business performance is negligible. Share prices reflect supply and demand, not how well we are executing as a company. So, to long-term and short-term investors who intend to hold, please keep this in mind. All public market investors know it is written in textbooks to be very careful in timing. Don't try to time Nano Dimension's business development; you will be surprised. It will go through various inflection points, and it is not a grown, mature business with $500 million in revenue quarterly where a $0.02 increase or decrease in earnings affects the output. Significant breakthroughs will occur; when we announce achievements, expect the changes to rise quickly. If you wait to come into the shares upon announcements, you will be delayed. My recommendation is the same: make a decision if you're a long-term investor. Hold, buy, and be in. When the inflection point arrives, you will be elevated along with us. Trying to exit and re-enter as you wait for immediate gains is unwise; you cannot time significant events like acquisitions or R&D breakthroughs, or combinations thereof; this is the expected end result. I’ll conclude here as I've spoken for 25 minutes and would like to give you the opportunity to direct me toward specific items of interest.

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. The first question comes from an unidentified analyst. Please proceed.

Hi, good morning. This is Puneet here. And first of all, congratulations on building a strong team and setting up for long-term success. I am an individual shareholder from the last 18 months, and I have a couple of questions. Like other 3D printing companies, can you update us on the material development on the number of material qualifiers? Also, can you give us progress on different materials and their broader applications or key applications? That information would be really helpful in understanding our total addressable market. Lastly, you mentioned on the last call that you were very close to a significant acquisition where due diligence was almost complete. So what happened to that? Was it price negotiation or something else? Thank you.

Okay. First question - two very good questions. Regarding material development, we are completely focused and have achieved certain milestones. I'll provide some insights about the electronics side, focusing on dielectric and conductive materials. When we last spoke, our material operated between 0 to 50 degrees, 45 degrees Celsius. We have since expanded that to a milestone of 0 to 70 degrees Celsius, which is extremely important due to the environments the materials will undergo once used in products. Currently, we are nearing minus 30 or 40 degrees Celsius up to 80 or 85 degrees Celsius. Even further, industry specifications require sturdiness at extreme temps, with the military minimum spread ranging from minus 40, to plus 135 or 145; commercial and industrial specs trend lower. We are observing advancements in dielectric material quality as printed, maintaining measurements much more accurately and steadily. All of this will be documented, described, and announced formally with our upcoming product, expected in the next 60 to 70 days. Regarding the acquisition, yes, we walked away from several that we assessed as overpriced. The market's prices are currently unreasonable. We looked at five sizable companies, ranging from $34 million to $150 million, and we declined all except one due to their unreasonable pricing. For example, a PCB company sold for over $100 million and more than 12 times EBITDA despite struggling with profitability and only servicing two primary customers. This is unacceptable to us; we're waiting for prices to lower in the next six months to a year as you cannot pay 12 times EBITDA for a manufacturing business. The right range should be around six to seven times EBITDA. Additionally, I want to emphasize that two-thirds of acquisitions in the United States fail – actually, a bit more than that, probably 70%. Acquisitions fail because, in the process of merging, the failure to meet expectations occurs mainly because of overpayment. Overpayment leads to no return on investment, and that unit eventually folds post-acquisition. I’ve conducted numerous acquisitions throughout my career, so I won't fall into that trap. While short-term investors might prefer quick announcements, overpayment leads to longer-term issues. We will be cautious and execute prudently. Next question, please.

The next question is from Rich Brun. Please go ahead.

Hello. Good morning, Yoav.

Hi.

Hi. I want to thank you first of all for taking your time on the acquisitions and doing your due diligence. I just want to know if we can have any updates on the potential number of target acquisitions.

No.

No.

The range is dozens.

Okay. And also just a final question. I know on the previous call we talked about your satisfaction. Based on the product development and on the R&D, are you satisfied with the progress so far?

Sorry, I apologize. What are you asking if I’m satisfied with?

Are you satisfied with the product development in R&D so far?

No, I was not happy because the existing release was postponed from June/July to about two months later, so I'm not pleased with that. But this is the nature of the beast, especially when you're at the forefront of technology involving materials and the complex integration of processes to produce high-performance electronic devices. Yes, we're at the forefront and it was delayed. But a two-month delay for a product that took over a year to develop is not unreasonable. This happens in developing not just software but also hardware integration. Bottom line, today, with the team that we have built over the last six months, which has significantly advanced our product development, I’m very satisfied.

Okay, Yoav. And just one additional question, if you don't mind.

Sure.

When we talk about the inflection point, how important is it that we reach that inflection point through acquisition, or can we get there organically?

Well, by definition, an organic inflection point is gradual, so that is not the case. However, it can occur organically if you release a revolutionary product. My answer is that natural inflection points tend to occur during acquisitions. It's simple; you work towards a milestone and suddenly, voilà, you've integrated an acquisition. We are also working on two generations of products that are being designed in our R&D facilities, and each of these will be remarkable enough to trigger an inflection point, but we'll see when we get there.

Alright. Thank you for your time, Yoav.

Thank you very much.

The next question is from Gil Greenwald. Please go ahead.

Hi, all. Thank you for the update. You said that you have enough money to make acquisitions, but at the same time, the share price is very low. Will you consider raising more money from institutions to enable a larger acquisition to create a bigger inflection point, right? So, is that option on the table?

At this point, no.

There are no further questions at this time. Mr. Stern, would you like to make your concluding statement?

I'll just give our friends or investors another 30 seconds; maybe somebody will come up, and I don't want to take away the opportunity to speak. So, just 30 to 40 seconds and then…

Please stand by while we check for more questions.

Okay, it seems there's someone there.

The next question is from Bob Severino. Please go ahead.

Do you have any plans for getting certified for military SPEC materials?

We already are.

Okay, thank you.

Thank you. Note that 50% of our customers in the United States are from the defense industry. Many of them require military SPEC certification. We already announced this; a large defense manufacturer in Germany is one of our primary customers. Not only that, they invested with us a million dollars in a joint venture where we own 50% in a new company called James, focusing solely on additive manufacturing of electronic sources. This is taking place in Munich. Our involvement with the defense industry is extensive, alongside our work with academic and research institutions. It seems we have no further questions. So, it's been 40 minutes, and the market has already opened. I want to let all of you start your day and wish you a happy and successful trading day, and a healthy foreseeable future until we meet again. Please wear your mask and maintain social distancing. I look forward to speaking again.

Thank you. This concludes the Nano Dimension's second quarter 2021 financial results call. Thank you for your participation. You may go ahead and disconnect.