Nano Dimension Ltd. Q4 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 2021 Full Year and Fourth Quarter Results. On the call with us today are Yoav Stern, 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 review 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 2021 financial results. As a reminder, this conference is being recorded, March 31, 2022. I would now like to hand over the call to Mr. Yoav Stern. Mr. Stern, would you like to begin?

Thank you for joining us this morning. I appreciate everyone's participation. We have released a detailed letter to shareholders that contains a lot of important information. I encourage you to read it, as it will provide a solid foundation for our discussion today. For those who can't spare the time, I’ll summarize key points and then open the floor for questions. It's an exciting time for our company; we anticipate growth of 200% this year compared to last, following a growth of 209% the year before. When you look at these figures collectively, it's promising. I am very pleased with our revenue growth and will discuss the specific numbers shortly. However, I want to clarify that we are not becoming complacent. Our progress is measured not only through revenue but also by our internal developments and the general market conditions we are observing. We are particularly excited about the new technologies resulting from our acquisitions and how we've streamlined our sales organizations. Over the past year, we have evaluated approximately 300 companies for potential mergers and acquisitions, carefully waiting for the right opportunities while observing a decline in market prices. I'm not here to speculate on future market movements, but I will say that we are focused on finding acquisitions that will provide significant returns on our investments. Now, moving on to some numbers. Our balance sheet is strong, and I want to draw your attention to our profit and loss statements. I recognize there has been inquiry regarding our cash flows, and we have published those details in our 20-F report. Moving forward, we will include cash flow details in our news releases every quarter. Regarding our gross margins, they currently stand at about 46%. While this is not as high as I would like, it's the result of a mix of products with varying margins from our acquisitions. I focus on the "real" gross margins, which reflects our actual cost of goods sold. I'm satisfied with the margins of our current product lines, although I won't disclose details for competitive reasons. In terms of research and development, our investment has significantly increased, demonstrating our commitment to innovation. We've grown our R&D spending from around $10 million to $42 million, which is a substantial leap and reflects our ongoing commitment to fostering talent and pursuing impactful projects. Our sales and marketing expenses have also risen as we enhance our market presence, particularly in North America and Europe, where we've made significant investments. Our general and administrative costs have slightly decreased relative to the previous year, largely due to non-cash expenses related to stock options for our new hires. While our operating loss appears significant at $220 million, this includes a necessary write-down of $140 million mandated by SEC regulations. The actual net operating loss is $83 million, and we view this loss in the context of our heavy investment in R&D and marketing which total to $63 million. I believe this investment strategy positions us well for the future, and now I’d like to open the floor for any questions you may have.

Thank you, everyone. We will now start the question-and-answer session. The first question is from Rich Brun. Please go ahead.

Hello. Good morning, Yoav. Hi, it's Rich Brun. So you talked a little bit about gross margin. Just hypothetically speaking, with the Type A acquisition, what profit margin would you be anticipating from such an acquisition?

I don't know. It's like asking me what to expect to pay for the Type A acquisitions. It depends. The acquisitions we are pursuing from Type A are changing. Due to the decreasing prices of PCB manufacturers and the complexities we've discovered after extensive due diligence, the Type A opportunities we are considering usually have margins typical of high-tech equipment manufacturers, definitely above 50%, with some ranging from 55% to as high as 80%. So this varies based on the company's size, its developmental stage, and the product life cycle. More mature companies with higher revenue typically have later-stage product life cycles, and their gross margins are generally around 55%. In contrast, earlier-stage product lines in those companies often have gross margins closer to 65% or 68%. So it really depends.

Okay. No, I just asked because I looked over some PCB manufacturers, just assuming that a Type A acquisition will be a PCB manufacturer. A lot of the gross margins are really, really low, somewhere like under 10%. So that's why I'm just asking.

PCB manufacturers typically have gross margins of around 30%. It's important to consider that net margins are significantly lower, averaging about 10%. We have been gradually moving away from pursuing these manufacturers over the past six to nine months. Previously, I highlighted that many PCB manufacturers were sold for multiples of 10 to 12 times EBITDA, or even more, in the range of 11 to 13 times. Given that businesses with 30% gross margins shouldn't fetch more than 6.5 times EBITDA due to the elevated fees, I started distancing myself not just because of the price. The PCBs we prefer, which showed better financials with gross margins of 35% to 40%, were mostly those manufactured in China. We were close to finalizing a couple of deals, but I ultimately decided against it as I felt the situation in China was deteriorating. Therefore, I don't anticipate any activity in this area soon.

Okay. Just a follow-up question. When it comes to our focus on complex geometries and miniaturization, have you explored any advanced functional materials related to energy storage for those products that may have complex geometries?

You mean energy storage, you mean heat dissipation? What do you mean energy storage?

Energy storage is something I don't want to discuss right now.

Batteries?

Yes. Correct. Right.

The battery market, which is very hot, obviously, with all that's happening with the electronic vehicles and more than that, is very hot, problematic but good. The battery printing market is embryonic, and starting people. There are about three or four companies trying to get into that. We looked at them. They're still very small with material issues, but materials is our business. So, the answer to the question is we're looking at it carefully because it's even more premature than the general 3-dimensional additive manufacturing electronics. But I believe in that market; I believe the battery market will lend itself vice versa. The additive manufacturing will lend itself to the battery market in a beautiful way, subject to materials, as you said, smartly. And as you know, more than a third of our research are material scientists. So, we're very, very focused on that.

All right. That's good to hear. And as much as you can review, how was your trip to Austria?

First of all, Vienna is a beautiful city. We have visited three times in the past two months and have noticed a fascinating development in the Austrian landscape. I prefer not to elaborate too much, as I want to keep this information from our competitors. The University of Vienna has made significant strides in research and knowledge in materials science, additive manufacturing, and advanced digital industry in recent years. We recognized this advancement, and we are part of a robust network there. If you review my travel schedule and see how often I'm in Vienna, it will be clear why.

All right. Thank you for your time, Yoav.

Thank you.

The next question is from an undetermined source. Please go ahead.

Are you expecting any new analyst coverage in the near future?

Sorry, expecting what?

New analyst coverage? Any broker, some coverage in the near future?

I understand. While I'm not in a position to definitively state what to expect, I am working on it. I know there is interest, and I am speaking with high-quality analysts who are beginning to take notice. Therefore, I should say you can anticipate that I will be successful, or I should at least hope to be. One of my main objectives, aside from running the company and increasing its value, is to enhance the visibility of our shares through education, and those are the research analysts I'm pursuing.

Okay. Thank you.

Thank you.

Thank you. The next question is from Steve Dillon of Capital Management. Please go ahead.

Good morning. What's your current share count at year-end?

The number of shares that we have is 300…

312 million, I believe.

312 million. One second, we're checking it just to give you the exact number.

On a non-fully-diluted basis, it's 257 million.

And fully diluted?

318 million.

Okay, 257 million.

And I'm sorry that the fully diluted figure was

318 million.

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

Well, let's wait for a couple more minutes, and if there are no additional questions, I can proceed.

There is a question from Byron Neo of Nano Dimension. Please go ahead.

Hi. Regarding your areas of growth and new clients, what are some of the larger prospects you foresee or the clients you believe have the potential to expand significantly over the next 18 months?

We're discussing revenue of $30 million to $40 million, which has increased by 200%. We currently have hundreds of customers. While I can't disclose specific customer names, I can confirm we have major players in the defense sector in both the U.S. and Europe, as well as top agencies from the Western world that are looking to purchase more machines. I can outline the main sectors we're seeing interest from. Firstly, there's strong interest from the defense industry. Research departments, particularly those focused on advanced electronics and 3D printing, are also keen on three-dimensional and layered printing. In the aerospace sector, we've collaborated with L3Harris and NASA, attracting interest not only from them but also from other companies in that space. The medical field shows a significant amount of interest, especially in printed circuit board assembly, where both OEMs and large subcontractors are acquiring many of our machines. We have 130 customers in the general printing sector, covering both 3D and 2D printing, who are investing in our printing engines and delivery systems. Among our customers, we have companies from the Fortune 50 and 100, particularly strong in 3D and many in 2D printing as well. In the automotive industry, major players are engaging with us regarding both 3D and 2D printing, especially for painting parts, moving away from traditional methods that waste chemicals. Instead, they're adopting 3D printing technology. I've shared a few examples. Next question, please.

The next question is from Joseph Alex. Please go ahead.

Congratulations on your progress. I'm curious about your thoughts on why the share price is significantly below cash value. This doesn't seem reasonable to me. Given our progress and adherence to the business plan, things appear to be working well. What seems to be the issue?

Okay. Did you read the news release?

Yes.

On Page 2, there’s a paragraph at the bottom that discusses expectations, hopes, and disappointments. It's important to mention the share price. While we can’t be certain, it may be influenced by various factors. To summarize, I emphasized the need for accuracy in my writing, which I believe is more effective than speaking extemporaneously. My comments reflect my thoughts on your question. Rather than reviewing everything in detail, I want to highlight something interesting that I monitor regularly. I don’t check the share price daily, but when I do, I compare it to a list of publicly traded additive manufacturing companies in the U.S., Europe, and a couple in Israel. I observe that our share price tends to move in tandem with theirs, with fluctuations typically within a 20% standard deviation. This is indicative of behavior driven by algorithmic trading based on market segments. We haven't yet demonstrated that we stand out from the competition, partly due to our smaller size. Recently, we’ve grown to over $30 million, and while the broader market, including additive manufacturing, has been declining for at least two quarters, we are still aligning with industry trends. However, I believe we can break through this pattern through our performance. Additionally, our shareholder base is interesting. We currently have 60 to 80 institutional shareholders, many of whom I engage with. These investors are knowledgeable about our company. In contrast, we also have nearly 150,000 retail shareholders who have joined us in the past 1.5 years. Though we respect all our shareholders, the retail investors typically have different risk-return expectations and trading strategies compared to institutional investors. Some may be day traders or looking for short-term results and may be dissatisfied during the wait for announcements or quarterly results. I only provide updates when I have something significant to share, and results won't necessarily come on a quarterly basis. Ultimately, our focus is on building long-term value rather than seeking immediate hype or excitement over quarterly reports. Although share prices may not reflect this immediately, I believe they will align with the value we are creating over time.

So I understand exactly what you're saying. I'm a frustrated shareholder because I like what you're doing. I like that you're actually stingy with the money that you have, you're not slowing it around, like you explained yourself earlier on the call. And I own a lot of shares. And I'm attracted to it because there are possibilities going forward. And also you're selling under cash to me is ridiculous. Just I'll stop price, even now should be $5, $6, $7.

Does relate with you, and thank you for saying it. And I'll add to what you said. I own a lot of shares. And as late as a month and a half ago, I bought $0.5 million more in shares, and it was $4.12. And, of course, it went down; now it goes up again. I don't worry. In a year's time, it will double or more. So am I promising this? Absolutely not. Am I hoping and aiming for this? Absolutely, yes.

Okay, great. Thank you so much. Continue with the progress and building the business.

Thank you so much for your support.

You're welcome.

The next question is from Quinn Larson. Please go ahead.

Yes. Could you talk just a little bit about your integration of your various products like what am I trying to think your DeepCube as well as Fabrica?

DeepCube is currently at the center of our research and development efforts as well as our mergers and acquisitions strategy. In every acquisition we pursue, we rely on DeepCube scientists to assess how quickly we can implement the DeepCube technology into the acquired companies before finalizing our decisions. It is essential in the current development of our machines. However, I find it challenging to scale the team up significantly. Initially, we brought in 24 people, and now we have around 30, but we still have 10 to 12 open positions for top-tier scientists, which are hard to fill despite competitive compensation. This makes it a crucial area of focus for us. Furthermore, we are collaborating with the Fabrica team. They have successfully sold their first machine to a well-known three-letter agency in the Western world, and we take great pride in that achievement. While they continue to advance their program, I feel they are behind in the number of machines sold compared to my expectations for mid to late this year, but we are pushing them forward and enhancing their sales organization, which is aligned with our own. Early feedback from the three beta sites currently using the machines has been positive, but there is still progress to be made.

Okay. So as far as common products, will Fabrica and Nano Dimension ever merge into like a single printer, or will they always be separated?

No, no, no, no, no, no. The technologies are not manageable to a single printer, absolutely. Nano Dimension has many printers by now. Is one of our printer families; it's going to become a printer family. Certain technologies we integrate like the DeepCube into Nano Fabrica. But the printing machines are not going to merge because we have printing machines for micro parts, which is Fabrica. We have printing machines for manufacturing electronics. And soon, we'll have more which we're announcing. And we have surface mount technology machines for printed circuit boards, which has nothing to do with Fabrica. And we have drivers for printing two-dimensional operations, which will be integrated into Fabrica, but it's a subassembly, not a machine.

Okay. I appreciate your time.

Thank you.

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

Sure. In conclusion, again, this was quite a long call. Its 45 minutes, close to that. So, I appreciate your patience and listening. And again, in order to be able to reflect, I think, most of what we spoke here today is written in the document, the news release and some, which was not and I added today. It's recorded, so you can always re-listen to the recording. And if you have more questions, we are here to answer. Thank you very much.

Thank you. This concludes the Nano Dimension 2021 full year and fourth quarter financial results call. Thank you for your participation. You may go ahead and disconnect.