Nano Dimension Ltd. Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. All participants are present in a listen-only mode. Welcome to today's conference call to discuss Nano Dimension's 2022 First 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 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 2022 financial results. As a reminder, this conference is being recorded, May 31, 2022. I would now like to hand the call to Mr. Yoav Stern. Mr. Stern, would you like to begin?

Thank you very much. We've made a slight change to the agenda. I will start by discussing the business and some key figures, after which Yael will share her perspective on these numbers, and then we'll move on to the Q&A where we will both respond to your inquiries. We're wrapping up a successful quarter, and the results are impressive. We recorded approximately $10.5 million in revenue, compared to around $7.5 million in the previous quarter. Last year's figures for this quarter were significantly lower. If you look at the last two quarters and project them forward, you'll see where we stand this year, and we might even exceed expectations considering that the first quarter is usually weaker, especially in light of some uncertainties in Europe. This has impacted our European revenue, but without that, our revenue would likely be higher than $10.4 million, which is positive news. We've also shared additional insights beyond revenue. Our gross margin stands at 37%, and I encourage you to read the CEO Message for a detailed explanation. It's noteworthy that our more advanced technologies, particularly in electronics, have a gross margin exceeding 60%, even before any potential cost reductions. Fortunately, we didn't implement a cost engineering strategy in China, but we still can explore that in the future. Other product categories have margins ranging from 45% to 50%, and those in the 35% to 50% range are contributing positively to our profitability. Overall, our business is much more balanced now than it was 1.5 years ago, gradually evolving into a growth-oriented operation. As we expand and our product range changes, gross margins will naturally adjust as well. I also presented EBITDA numbers, which account for certain depreciation and share-based expenses, providing insight into our profitability management. It's important to consider cash flow, as share-based payments and depreciation aren't perpetual costs. If we slow down on acquisitions, these expenses will decrease. Our EBITDA stands at $19.2 million, excluding non-cash expenses. Additionally, I highlighted our EBITDA without R&D, which is a significant investment primarily in lithium manufacturing electronics that generates high gross margins. Without R&D, we would be facing a $7.5 million EBITDA loss. Looking ahead, growth should eventually lead to profitability, but it will take time. Our business has two distinct segments: one focused on disruptive innovation where we will continue investing heavily in R&D, and the other aimed at revenue growth with profitability, which we expect to converge and contribute positively to our EBITDA and profit levels. Another encouraging development for us is that market prices are declining, influenced initially by public markets, which eventually impacts private markets as well. Our prudent cash management over the last 1.5 years, despite pressures to expand quickly, has positioned us well. Our cash has become more valuable, allowing us to identify attractive acquisition opportunities. So far, we've conducted numerous evaluations and discussions to clarify our acquisition targets and their valuation. We hope this trend continues, enabling us to make acquisitions at favorable prices. I want to remind you that our last two acquisitions, made early in 2021, were secured at valuations close to 1x revenue, with both companies being profitable. Although a declining market affects our share price, our focus is on business fundamentals since we don't need to raise additional funds. We are currently seeking court approval for a share buyback program, which, if approved by the Board, we will implement to support our stock price. We recognized that shares are trading at attractive valuations, which is compelling. That's my update for now. I would prefer to answer your questions, as they can direct our conversation to topics of greater interest. However, first, Yael has a few words to share.

Thank you, Yoav. I would really like to just point out a few items in our financials. We continue to have a strong balance sheet with cash and deposits balance of $1.3 billion. As Yoav mentioned, if you look at our profit and loss statement, you will clearly see that the expenses include the lack of depreciation and amortization as well as share-based payment expenses. This is why this quarter we added the EBITDA and adjusted EBITDA calculation and reconciliation with all the details, which you can see towards the end of the press release. We adjusted almost $14 million of noncash expenses, and this is how we arrived at the adjusted EBITDA of $19.2 million.

Minus $19.2 million.

Yes, Yoav. We also added in this quarter the report on cash flow; we until today didn't publish the statement of cash flow on a quarterly basis. So from this quarter, going forward, we will add it on a quarterly basis as well. You will see how we use the cash. If you look at it, the net cash used in operations is minus $21.4 million, and you can also see in the net cash used in investing activity the acquisitions that we did in the third quarter. If you have any questions regarding the financials, I will be happy to answer that.

Thank you, Yael, for reminding me. Many investors often ask about our cash burn rate and whether we are facing cash pressure. The figures I provided are based on our purchasing plan, which I detailed in my message to shareholders. We projected a cash burn of $110 million to $120 million this year, and our actual rate is around $80 million. Our current cash burn is approximately $20 million to $21 million per quarter. While it feels good to burn less cash and reduce expenses, I would have preferred to invest more, especially in hiring engineers in data science, deep science, software, and sales, particularly in North America, where hiring has become challenging due to rising costs and low unemployment rates. In Israel, younger generations prioritize different career values, often focusing on immediate offers rather than long-term career paths in high-tech. We are facing some hiring challenges, but we are committed to maintaining high quality in our workforce. This means we will hire more slowly but focus on recruiting top talent. In terms of cash burn, if we extend this quarter's rate, it amounts to $80 million a year. I will now turn it over to the operator for questions and answers.

The first question is from William Reckamp of Intrinsic Edge. The question is from James Straumheim.

This is James Straumheim. I'm a shareholder. Given the challenges you've mentioned regarding the hiring of qualified engineers and scientists, I want to know if the anticipated release later this year of the Dragonfly with integrated deep learning and the next-generation machine still seems feasible.

We didn't change our release date, plus the DragonFly IV never was intended to have artificial intelligence and DeepCube. It’s the next-generation product that will have it, and right now, it's on time.

Okay. So there's nothing scheduled for release in 2022?

No, the next product is scheduled for early 2023.

All right. And the other question I had, several calls ago, you mentioned some purchasers of the DragonFly were using it to do small batch production runs. I was wondering, in light of the turmoil in Asia, the likelihood of electronic components being cut off and the prices skyrocketing, do you think any manufacturers would look at buying several of your machines?

The skyrocketing is because of turmoil, and you are right about semiconductors and chips mostly, not of other products. And we do not manufacture, we do not prototype, and we do not print semiconductors. We print electronic devices that start from silicon, up outwards, which means packaging and especially specialized 3-dimensional print and circuit boards. We are not in the business of manufacturing semiconductors.

The next question is from Jovan Berman.

I'm concerned about DeepCube. And I would like to know if you have any other customers except Nano Dimension?

No, I never mentioned it. We bought the company just for the technology, not to use the product to sell to other people.

Aren't you saying you’re missing the opportunity?

I never intended to. It was going to be used in all our machines and in all the machines of the companies that we're purchasing to improve their machines.

The next question is from James Vihstadt.

You indicated that you're going to repurchase $100 million of shares. Have a number of these shares been purchased yet?

First of all, I didn't indicate that we will purchase $100 million. I indicated that we're going to implement the program to purchase up to $100 million within the next year. The answer is no. The purchase plan has not been approved yet. According to Israeli corporate law, it has to be approved by court. The application to the court was filed. It's more of a formal process where the court is in charge of making sure that the company is not buying its shares without enough resources to withstand its other obligations to suppliers, etc. In our case, of course, it’s not an issue. We have enough cash and a very small amount of liabilities. Once the court approves it, the program will be in place and then we will decide when and what to buy.

The next question is from Byron Meo of 1031 Private Exchange Group.

It seems the forecast indicates a potential slowdown. The inflation in Europe, particularly due to the situation in Ukraine, is contributing to global inflation. I'm curious about how your product cycles work; there seems to be ongoing demand. However, there may be a delay in decision-making. How does this impact your business? Will there be longer delays in purchases, or will people continue their spending habits? Can you provide some insight into demand?

Yes. In the area of printing machines, particularly electronic additive manufacturing with the DragonFly IV, we are not experiencing any slowdown. Our revenue is growing significantly compared to last year, especially in the United States, though I cannot confirm if this is influenced by the situation in Ukraine. Conversely, our sales of sophisticated mounting machines and surface mounting technology for PCB assembly are facing a noticeable slowdown, particularly in Eastern Europe. This is primarily due to two reasons. First, there is a slowdown in the semiconductor supply chain, which impacts the availability of materials for assembly. This has led companies to postpone purchasing our assembly machines until they can secure the necessary raw materials. Second, the events in Ukraine have placed substantial pressure on Europe, leading to reduced activity in Eastern European countries such as Poland and Ukraine, affecting revenue in those markets. Meanwhile, companies in Western Europe are shifting more focus towards the defense sector due to increasing defense budgets. Although there is some slowdown in Western Europe, it is not significant. Overall, we do not see any substantial slowdown in other areas of our business, especially in the United States.

I think we should take advantage of the current downturn and global slowdown to increase our efforts in acquiring companies that are struggling or close to giving up. This aligns with our policies and guidelines to enhance our business and revenue. It presents a significant opportunity to turn a negative situation into a positive outcome over the next three to five years.

You're absolutely right, totally right. We're expanding, as we speak, our effort in this field. We're going back to companies that were too expensive before. We're going to companies that we see that became less expensive, some of them private, some public, and you're totally right.

The next question is from Peter Jones of ARPC.

A significant concern for many is that you raised $250 million at $9.50 and $500 million at $12.80, which has resulted in investors like myself experiencing an 80% decline right now. While I understand this is part of the broader macro situation and not entirely your fault, we expected that this capital would be utilized more effectively rather than sitting idle for 1.5 years. We anticipated acquisitions that would generate between $100 million and $115 million in revenues. Currently, our worry is about how we will recover our investments and reach breakeven, given the substantial losses we have incurred. Are options like selling the company at $10 per share, merging with a larger company to enhance the technology, or potentially taking the company private being considered? This situation is critical and we all have significant losses at stake, making it an urgent topic. How do we move forward from here?

So what is your question?

How do we get back to where we were? We're way too undervalued, kind of embarrassing right now.

I'm not going to relate to your embarrassment. But do you want me to relate to your question?

Yes, sir. You are the leader. So lead us. We want our money back. Be the leader and let’s...

I'm not in the business of giving you money back. My focus is on increasing the company's value, which will naturally lead to a rise in share prices. As the share price increases, you have the option to buy more or sell, but that’s your choice. Additionally, I have invested alongside you, and I am also facing losses. I am a shareholder too. You should feel fortunate that I did not spend your money over the past 1.5 years. Companies like Desktop Metal and others in this sector have collectively created significant valuations, but if I had made transactions in this field recently, you would be looking at a much lower cash value per share. You should appreciate that I have held onto the funds, and I am prepared to invest now, but only if the prices remain low and attractive enough to ensure a return on investment. The way to increase share value is through acquisitions, enhancing value, and improving profitability, which will elevate share prices. Lastly, in response to your two questions, the answers are no and no.

Okay, look, but if the technology is so great, why can't you sell machines? Why isn't GE or someone else doing a hostile takeover to take over this company with $1.3 billion in cash and with this technology?

You asking me the question now? Or are you giving a comment.

Yes.

Okay. You want me to answer? Okay. So I cannot answer you in the name GE but I can tell you that in 2020, we sold $4 million of machines. In this year, we're on the rate of 40. Do you have any complaint about that?

Do you remember when I said that when the stock was at $12, you mentioned a potential 3x return? Do you recall when the stock was at $9.50, you remarked about it going down?

Yes, I'm answering one question at a time. You asked why GE wouldn't buy the company, and I mentioned that you should speak with GE. You also asked why we're not selling more machines, which is incorrect. I mentioned earlier that we are selling significantly more machines. The figures are in the release: it’s $10.5 million a quarter compared to $2 million a quarter four quarters ago. Please check the numbers; we are indeed selling more machines.

Okay. Where are the results with L3Harris? It's been over 1.5 years, the space...?

We don't disclose things that we're under NDA.

Okay. Okay. All right. Just now that there's a lot of frustration out there, we gave you a lot of money, and everyone is down huge.

You didn't give me any money.

Shareholders gave you $1.5 billion.

I don't want to hear about you giving me money. You want to meet in downtown New York and talk about that, we can say at that time. You didn't give me any money. You invested in the company.

Yes, yes. And we lost 80% of our money and we're praying to get our money back.

Did you sell your shares?

No. But how many years is it going to take....

Just a minute. Did you sell your shares?

No.

So you didn't lose. So you didn't lose. When you will sell, you will lose. I suggest to you not to sell and to buy because the way we are going, if you listen to the data, it is brightly forward and upward.

Okay. Well, hopefully, a year from now, it will get back to 10 so we can get even from the $1.5 billion in cash that you raised.

I'm sure you will not comment, and I'm sure.

The next question is from Bob Belmer.

Yes, this is Bob Belmer. I am just another regular investor. I have been investing for 2 or 3 years. I have one question for Yoav, the CEO. Do you have any connections as a company with China or Russia?

No.

The next question is from Andrew Kegel.

Yes, my question was about the hiring of engineers. It's one of the things that you guys look through when you're looking at acquiring the company. Is it like basically being able to approach a bunch of engineers from them?

Absolutely, yes. This is a key factor in our due diligence. The first two companies we acquired, DeepCube and Fabrica, were driven by this reason as I aimed to establish the artificial intelligence and deep learning group within the company. I have a strong background in the subject with a degree in mathematics and computer science. Upon exploring, I discovered there are five or six leading groups worldwide, and I realized I couldn't form a competitive group on my own, which is why we pursued DeepCube. Fabrica was similar but in a different field. You’re correct, and the answer is yes. If we successfully complete other transactions we're currently pursuing, it will largely be influenced not just by the business and product, but by the personnel as well. All the employees from the companies we’ve acquired so far have joined us; all of them. At this point, we might have lost one or two out of 200. Everyone who remains is with us and is a shareholder. While the shares they receive aren’t substantial in value, they do hold shares. You highlighted an important aspect of our acquisitions.

Excellent. I just want to make sure we’re on the same page on that. I'm a shareholder as well, and I have a completely opposite perspective of what you're doing when a company gets parabolic, that's when the company's President, like you, is supposed to raise the money; it's not your job to protect the investors. Your job is to grow the company, and I appreciate that you got out at the top, basically, and now you're buying low. That's all we can ask for as investors. Thank you.

Thank you so much. I just want to add 1 more thing for the previous question about connection with China and Russia. The answer is no. However, we did sell machines to a couple of universities, if I remember right, in Russia and China a while ago, maybe 1 machine in Russia, but a while ago. Since the Ukraine war started, based on not having to do it legally, but my own decision, I said to all our divisions to stop doing business with Russia. To the point that we have customers there that needed support, and the customers are not at fault, but I refused to be paid for that. Some customers with machines needed support without being paid. I don't want to be doing business until this thing resolves. So that's for the question before, sorry. Next question please.

There's a follow-up question from Byron Meo.

Yes. A few calls ago, many microcap stocks were down significantly, by 70%, 80%, or even 90%. It’s not sustainable to operate with that mindset. You need cash to prepare for potential challenges. If the economy takes a serious downturn, it may be necessary to slow down R&D expansion until the situation improves. You have to prepare for a long-term struggle. However, if you identify areas with significant growth potential, there are opportunities to acquire companies that are struggling. This is where the potential for gain lies. It's not going to happen quickly. Desktop Metal had to return to the market for $150 million, which greatly dilutes their stock at very low prices after a 90% drop, and you’re not in that situation. It’s important to remain steadfast, consistent, and cautious to avoid excessive losses while still fostering enough revenue growth to achieve economies of scale.

I agree. Thank you for the support. When I noticed, by the way, that we spend just less cash than we intended to from one side, I say, 'Hey, we're going to be late on some things.' But on the other side, it hit straight in this quarter, and I say, 'You know what, better to be slow.' We have 12 years if we want to or more, spending at an average of $80 million a year. I don't intend to do it. The idea is to increase the revenue and to deliver dollars to the bottom line. The bottom line is positive cash flow. I once had business with a very, very famous venture capitalist in New York; I don't want to say his name, but now he is 85. In my early days, I went into his office and on his couch was a pillow. On the pillow, it said happiness is positive cash flow. That's my model.

The next question is from Aamir Ansari.

So I'm talking from Australia. I'm a private investor and a shareholder. I believe what we're missing is a consultancy business. So you need to come up with reference designs that are used in specific industries. For example, proprietary trading; these guys make a lot of money by FPGAs that work in close connection with network cards and then process data very quickly. You need to come up with reference designs and say, 'Hey, look, we know your business needs this; we can provide you reference designs, and we can give you the machines to make the cards that you need because these proprietary trading firms don’t have the technology today to make up their own PCBs.'

Are you available to work with us in Australia? You're absolutely right. You've accurately identified the challenge of selling disruptive technology. It all begins with the design and the application. Over the past seven months, we have established a team of 22 application engineers to do exactly what you mentioned. We no longer sell to salespeople; our application engineers engage directly with customers to analyze needs. We're innovating applications based on market insights and customer feedback. We focus on design and address challenges through applications. Your point about the fundamental approach to market strategy is incredibly astute. Congratulations on your insight.

Thank you. One more thing is, we've got an Australian company named Altium. These are PCB design software makers. I don't know if you've got the cash today to buy them. But if you want to raise cash to buy these guys or at least have controlling shares in them, I would be happy to help.

Please connect with Yael offline; we have a lot of cash and do not need to seek additional funding. If you reach out to her through the regular network, she will refer me, and I will collaborate with you.

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

Yes. I'll just give it a minute or 2 to let maybe people kind of get in their last stop. I don't want to close this call under-phased. So let's wait 60 seconds. I see that participants are slowly going down. It’s probably the end of the questions, but give it another half a minute. Oh, here's a gentleman, actually 2 gentlemen.

Our next question is from William Reckamp of Intrinsic Edge Capital Management. Please go ahead. There is a follow-up question from Andrew Kegel.

I wanted to follow up and ask you about your $1.3 billion in cash. Do you have a strategy for maximizing that value? You could likely cover your company expenses by generating interest, but is there a specific plan in place to ensure you get the most out of it?

Yes. We have a special cash management committee that meets twice a week, and I'll let Yael explain the details. We are leveraging and hedging. We have expenses in euros, shekels for salaries in Israel, and of course, in dollars. We're benefiting from the interest rate increase from 1% to 3.5%. Please provide the gentleman with a detailed description.

Basically, we are monitoring our cash and investment policy closely, especially now with crazily increasing interest rates. We don't invest the money in any securities other than the companies that we acquired during the M&A, but we don't invest in any other portfolio companies. We are mostly using low-risk instruments like deposits and money market accounts, and we are enjoying increased rates across the board. With respect to different currencies, we are holding the cash in multiple currencies based on our expenses in order to not lose money on exchange rate differences. In the first quarter, we had about $1.5 million of income from interest only.

In the quarter.

I don't want to catch you off guard or anything, but I'm curious about your thoughts on cryptocurrency. It's a new development that has the potential for earning interest. We're not looking at it from an investment perspective, but there seems to be substantial interest potential with somewhat higher risks involved. Do you have any thoughts on cryptocurrency? Is it something your company is allowed to pursue for profit? Do you have any plans regarding the high interest that can be earned? Is this an area your company would consider, both from a willingness and a legal standpoint?

Legally, yes. But let me tell you my point of view about that. I feel very modest and humble when people invest in our company. Notwithstanding certain people like before who were frustrated and which I share and I understand why, sometimes it takes them to be in the wrong place and totally misguided to judgment, but I still maintain respect for them. Part of this respect is to know that if they wanted to invest in cryptocurrencies or other risk-return curves, they don’t need to invest in Nano Dimension. They may think, and they're probably right that they can make a decision themselves to invest directly in cryptocurrencies. So when I received the money a year ago for specific usage, I'm totally committed to that. I can't afford to take a risk not because I don't want to make more return; I would do. But if I were to lose instead of making more return, I would not be able to go back in front of you guys and say, 'I'm sorry, I lost the $250 million of the principal because the market went south, and I didn't realize it.' I can't afford it; I am too modest to do it. Some other people in the market have taken risks and been very successful; good for them. My intention is to be conservative, invest with minimal risk of losing principal, and maximize the return by either investing in the right currencies. Even if it goes down and we need to spend salaries in this currency, we don't lose because the salary remains the same. So we can play very well here. Yes, that’s how we do it.

The next question is from Joseph Enstar.

Congratulations on all the progress. I’m a frustrated shareholder. I own a lot of shares and like many others, I am experiencing a loss, but I am patient. I appreciate what you are doing. It seems you are spending the money wisely and waiting for the right opportunity, which is the correct approach. However, I am curious why we are selling at only 60% of cash. I understand the stock market has been challenging, but we should be at least at $5 now. We ought to be selling at cash value. We’re making substantial progress, and I believe the future is very promising. Additionally, I notice there seems to be no analyst coverage of our company, which I find puzzling.

It's not silly. We need it, and you're absolutely right. I'm having conversations with analysts, and the top analyst who covers companies like ours is actually on the line today and has been in the past. We hope that he will support us. It's extremely important to us. We believe that anyone who supports us now will see us become industry leaders in a few quarters. It will be an attractive proposition for both the analysts and the organization, as well as for the bankers. We’re in talks with a couple of them. You’re absolutely right because that generates exposure, and interest from institutions is growing as a result. Currently, we have two small institutions holding about twenty percent, and I would like to increase that to 45-50%, and I'm actively working on it. I understand the frustration over why our stock is trading where it is; I conducted a thorough analysis and can tell you that our shares are fluctuating in ways unrelated to the company's actual performance. A good metaphor would be like being in the ocean; when there are waves, especially a massive one like a tsunami, you cannot fight against it but can only position yourself to ride the wave. If the waves bring everyone down, I want to be positioned at the top. When we compare our company to similar companies, we have declined less than 75% of them. It still leaves our stock below the cash value, which is unusual and creates an opportunity. People tend to see problems as opportunities, and our perspective is that there is an opportunity within the problem.

I agree. I’m looking forward to the next quarter and next quarter. Hopefully, things will grow and prop away.

The next question comes from Michael Eisner.

When do you think you'll be able to begin the buyback?

Once we get the approval of the court in Israel.

Well, do you have any idea how long that takes?

No.

All right, if you don't know, you don't know. I would not get into crypto. We're not a crypto company. If someone wants to buy crypto, they could buy it. But not with my money.

Yes. I agree 100%, sir.

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

Yes. It's now 53 minutes. So I'm sure people need to go work; the market is open. Thank you very much, ladies and gentlemen, for participating. I've been talking with investors offline, which means not on these calls, since the market has been going down a lot, and I invite you to ThinkEquity or directly, probably through ThinkEquity, to find a way to speak with us. I'm always available, spending time on each continent now, and I look forward to connecting with you as soon as possible. Thank you very much for your support.

Thank you.

This concludes the Nano Dimension 2022 First Quarter Financial Results Call. Thank you for your participation. You may go ahead and disconnect.