Nano Dimension Ltd. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen. Welcome to today's Conference Call to discuss Nano Dimension's Third Quarter 2022 Financial Results and Quarterly Update. My name is Betsy, and I'll be your operator for today's event. On the call with us today are Yoav Stern, Chairman and CEO; Yael Sandler, CFO; and Julien Lederman, Head of Corporate Development. 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. I would now like to turn the conference over to Nano Dimension's Chairman and CEO, Yoav Stern. Yoav, please go ahead.

Thank you very much. Good day to everybody. We're going to go straight to it, hopefully everybody has it in front of you. We finished a beautiful quarter of $10 million in revenue, which takes us to about $31 million in revenue over three quarters, comparing to the same period last year, which is hundreds and hundreds of percent above, almost 1,000%. And comparing to the last quarter, similar period last year, it's also 650%. So we're happy about it and we have certain criticisms of ourselves, which we'll be talking about. But we'll start with the highlights, we'll go through what we think should be improved. So, on the highlights, which are not numerical highlights, but rather milestones in the business. First and foremost, we had M&A and investment activity. We acquired a relatively small company, but probably with the largest potential to grow from all the acquisitions we've made until now. So Admatec/Formatec in the Netherlands has an amazing additive manufacturing technology for metals and ceramics based on DLP (Digital Light Processing). It is something we have wanted for a long time, the size of the company is relatively small, less than $10 million in revenue, but it was a subsidiary of a much larger company in a different business. So it was growing kind of behind the scenes. We believe that the growth potential is more than anything we have acquired until now, and it will already manifest as we go forward. This year, they'll finish one and a half quarters under us, already ahead of the projections from last year. On the Fabrica side, the first AM company we acquired a year and a half ago, has made major advancements in material. If people remember, I told you early on that whoever speaks about additive manufacturing, in general, and additive manufacturing electronics specifically, misses the point. Additive manufacturing's main core technology is materials, processes, and innovations. Major advancements here in Fabrica will eliminate the main blockage to substantial sales. This is significant because it took us until now, since we acquired them, to develop the new materials. So that's very good. AME, application development, I should say, what’s not written here, we have very exciting advancements in materials in AME as well, which enabled application development. We have about three new materials that are much better than the previous materials that are going to be released to the market at the beginning of the next quarter and will be compatible with all the models of machines we have, including backwards compatibility, which is very, very important. Customers are very excited. We had just a month ago a customer users conference in Munich with 40 people, including 24 customers, and very high profile ones, which I can’t mention. The excitement was felt across the board. Lastly, although we have a significant amount of cash, we're still operating as we did last year. We’re frugal. We're not spending money on foolish acquisitions, as the multiples currently are unacceptable. We are managing our overhead in the same manner. We made difficult decisions in early third quarter to reduce our manpower. That was not easy in a growing company, but Yael and myself insisted on reducing headcount because we felt that when a company grows so fast, there's enough excess to cut. This resulted in a reduction of $10 million in expenses this quarter compared to the original budget, which we're very proud of. Now, back to the numbers which are important. So the revenues are $10 million this quarter, and $31.5 million for the three quarters. Gross margins can be deceiving, as the IFRS includes many non-cash expenses like shares granting, etc. Looking at 29 percent, even that is net and really the gross margin is a bit lower. Our typical gross margin is about 40 percent, with margins for the new machines above 60 percent and about 38 percent for products in later stages of the lifecycle. The gross margins are lower this quarter for clear reasons, which I'll discuss on the next slide. Our EBITDA, if not for the minus $24 million, includes about $13.5 million in R&D investment. This indicates that if we didn't believe in the multi-hundred million potential of Additive Manufacturing Electronics, we could consider cutting that or selling it, and within two to three quarters, we’d be making money. However, we're not going to give up this opportunity, which we believe will lead us to where we promise it will lead us. It is still important to note that as we look at EBITDA, more than half of it is investment in R&D. The net cash used in operations is $22.3 million, which is more than $10 million less than projected. Our projected run rate for the whole year was above $100 million in cash spent on investments, and as you can see, $22 million is a run rate of about $80 million to $90 million a year. We're experiencing an atypically high backlog due to the effects of the Ukraine conflict and supply chain constraints. These issues prompted customers who purchased machines to request deliveries either this quarter or even next year. So a lot of revenue from this quarter was held back and postponed, but it is in backlog, meaning signed purchase orders. Therefore, you will see results in the next quarter. This is also a reason for reduced gross margins for these types of products. As we sold fewer machines, we see certain fixed overhead costs manifest themselves in higher COGS percentages, which lowers gross margins. However, we expect this to correct itself in the next quarter and possibly within two quarters. Regarding our acquisition mentioned earlier, as you heard from my voice, we’re very excited about it. We are already expanding the portfolio and go-to-market strategies. Since the acquisition in July, we trained our sales teams and started selling in North America, which we hadn’t done before. We’re expecting very positive results from this growth.

In the right side, it's the gross profit for the year-to-date.

The gross profit on the left side corresponds to the revenue. You can see how for three quarters, nine months, the number is $31.5 million, as I mentioned earlier, and the gross margin is accordingly around the 11 percentage mark. Our vision has not changed, and the strategy is a derivative of the vision. We aim to build a network of very smart machines, mostly additive manufacturing and additive electronics, which will serve as edge devices in manufacturing. Both the network and the machines will be run and directed by our DeepCube deep learning technology. Analogously, we see the industrial market moving toward a model where production happens when you need it, where you need it, if you need it, while the rest stays as digital inventory on the cloud. The analogy is reminiscent of the paper industry and PDF. You do not buy a printer, but a word processor application, and the PDF from Adobe. You manage your product on your computer, and print it where and when needed. We envision a similar scenario for cloud manufacturing, particularly with edge devices, additive manufacturing machines for electronics and other applications. It is important to emphasize that we won’t build all types of edge machines, but we possess certain technologies enabling us to excel in specific products. Our focus is on software and AI that manages this network and the machines as edge devices. This vision is to transform additive manufacturing and additive manufacturing electronics into a fully digitized sector, facilitating environmentally-friendly and economically efficient processes that fit Industry 4.0 definitions, presenting a one-production-step conversion of designs to functioning devices. You all realize I am sure that the initial focus of this vision is on high mix low volume production. It excels when confronted with large design volumes, where the manufacturing per design does not reach millions of units. Industries served by this profile include defense, avionics, aerospace, advanced medical applications, advanced automobiles, advanced industrial applications, clean energy, and various research institutions and academia. All our products are aimed at these specific directions. Let me mention that we held an investor conference in New York recently, which was a great success. Many companies participated, and we met with 35 to 40 institutional investors. After our presentations, we conducted a survey to receive feedback. Among approximately 30 to 40 responses, we received about seven that could be defined as criticisms or requests for clarifications on what wasn't being provided. I will address those now. The first question was about our organic growth narrative and how shareholders benefit from acquiring companies without short-term upside. The answer is all the companies we acquired, with one exception, have grown organically since we acquired them, which is an incredible achievement. The growth from $10 million to a run rate of $42 million is primarily due to organic growth, as we've only acquired about 1.5 companies this year. The only exception is a reduction of $1.5 million in sales from a company involved in additive electronics due to the Russia-Ukraine conflict, but we took action to grow revenue in the U.S. by 60-70%. The second question addresses how to value a company with relatively low revenue in light of the substantial cash balance. To clarify, you assess the cash balance as worth cash. To be fair, we had a cash balance of $1.5 billion about a year and a half ago, and presently it's about $1.2 billion, including investments. We only spent $300 million, half on acquisitions and half on operational costs, which we are proud of. The value of our company stands at $1.2 billion. Furthermore, our $45 million run rate business is a high-tech growth venture, which could be valued at varying multiples. Two years ago, it could command much higher valuations. The third question revolved around the acquisition strategy. I'll pass to Julien Lederman to elaborate further.

Good morning, good afternoon, wherever you are. Our strategy generally has two pillars: technology and commercial. The technology pillar focuses on hardware, software, and especially material science companies that can accelerate our R&D pipeline. The commercial aspect is about acquiring companies that successfully sell products and services to the same end customer verticals. I'll briefly mention a few examples. For technology, DeepCube is an outstanding AI technology acquisition. The acquisition of Admatec and Formatec is a prime example of a commercial acquisition, since the products they manufacture target similar verticals as our other businesses. A noteworthy acquisition from nearly a year ago is Essemtec, as it combines technology with commercial aspects. We aim to pursue such acquisitions considerably more, especially given the favorable market valuations that have been discussed before.

A key principle in our acquisition strategy is that we won’t purchase companies that must be operated as standalone subsidiaries. This approach inhibits synergies and growth which adversely affects bottom-line dollars. Regarding the size of acquisitions, I prefer to acquire companies with revenues around $200 million rather than those with $10 million or $20 million. We have been negotiating such larger acquisitions for approximately two years, but have only proceeded with the recent quarters' acquisitions. We're starting to see valuations shrink as sellers no longer ask for 5x to 10x revenue for smaller companies. Effective cash management is crucial; we have a deep understanding of our competitive landscape and our strategy hinges on smart allocation of acquired cash. When observing companies in our industry, it's evident that they possess only 1.5 years of cash at best, underscoring the strategic importance of maintaining a strong cash position. This trend translates into a higher probability of needing capital at unfavorable valuations. An investor inquired about our decision to invest in Stratasys. My stance is clear: I do not wish to invest in other public companies, particularly within our sector. This investment, however, is strategic in nature. Currently, we are the largest shareholder of Stratasys. They recently reported a strong quarterly performance, marking them as a significant player alongside us. As our primary investment in praise with future potential. I am assured there will be no investments in other public companies. Another investor remarked on the disconnection between our stock market cap and our cash position, expressing concern that we are burning through cash too quickly or that we lack a solid business model. To clarify, we are not burning cash rapidly — in fact, we can sustain our operations for almost 14 years based on current cash burn rates. Lastly, I appreciate the feedback on the need for solid acquisitions this year. I wholeheartedly agree that we need to finalize strong acquisitions in 2023. Regarding share repurchase, you'll observe follow-through actions. Our board evaluates our standing and will disclose details very soon.

We will now begin the question-and-answer session. The first question today comes from Ashok Kumar with ThinkEquity.

A couple of questions. The first one is on the supply chain of components. I think an ease up there would help support faster organic growth. And you also talked about cash burn and R&D, right? So R&D is about 60% of cash burn now. And your cash burn is about $80 million annualized on average. You mentioned R&D dropping to about 20% of expense ratio by '25 versus currently it's about 60%. Just in absolute numbers, where do you see that in '25 from the $55 million plus or minus today? And the third part is the gross margin trends. I think you also highlighted 65% on new machines and mid-30s on the traditional surface technology, with increased focus on software and service, which is not part of your revenue stream now. Where do you see that in the same timeframe by '25?

Let me start with the second and third questions; I don't remember the first one. But the second one was about the R&D expense. To clarify, our R&D expense as a percentage of operating expense is 51%. Our business model will lead to R&D dropping as a percentage of revenue to less than 20%. That is where profit margins start improving. There are two avenues for reducing R&D to below 20%: A) Increasing revenue, or B) Reducing actual dollar spend on R&D. We are defining a clear trajectory for our business moving forward based on assumptions about acquisition strategies as well. The last question you asked was about our gross margins and services moving forward. We're investing significantly in software now, which arises from our understanding that as with document printing, you don't fixate on the printer, but rather the design software you're using. We are concentrating on enhancing design capabilities, thereby tying in software into our product offerings, including potential software services. We expect this to start influencing numbers by the end of 2023. As for your first question regarding supply chains, we are not facing supply chain issues with our machines. When the whole issue began, we pre-purchased many of our semiconductors to secure our stock, and although it did affect our gross margins, we did not experience any delivery delays. What we face instead is our customers being impacted by component shortages, resulting in them asking to postpone deliveries.

One last question on your M&A strategy. You have been very disciplined in terms of acquisitions. You mentioned the desire for both technology and a commercial strategy in that regard. The acquisition of the Polish company was a subsidiary of a large American company. It seems you're open to larger acquisitions, and I would like to understand how that fits into your cloud manufacturing and AI strategies.

Excellent question. It wasn't a Polish company, but rather a Netherlands company. The component of decision-making on what to buy, which stems from our expertise in deep learning algorithms and AI, is crucial. Most companies we acquire will benefit from our artificial intelligence technologies, which enhance throughput by boosting yield through smart robotic systems that can identify errors in printing and rectify them in real time. No other AI deep learning machines in existence can perform at this level today. Conversely, we have the patents and we execute this in software, enabling effective use of a standard computer within the machine. Regarding the size of acquisitions, yes, we're targeting larger acquisitions and how they integrate into our cloud manufacturing concept. The machines created by the companies we acquire will incorporate deep learning technology and connect to the cloud, allowing for design and inventory management while ensuring production is on-demand. We are quite excited about this concept.

I have a couple mainly related to acquisitions. Firstly, could you elaborate more on how you are actively integrating acquisitions to eliminate the silo effect? Following on, when should investors expect to see results from this integration? Is there evidence already with respect to cross-selling and the integration of the DeepCube technology into existing systems? Lastly, with regard to your cash pile, one option could be not to spend it on acquisitions, which would provide you with 14 years of runway at the current cash burn rate. How much of the cash do you have earmarked for acquisitions?

Great questions. To start with your third question, we have earmarked between $600 million to $800 million for acquisitions in the next three to five years. We're basing those estimations on current multiples, offering attractive revenue-generating potential. We are not waiting 14 years to deploy this cash; we expect this process to accelerate. We are ahead of the plan I devised two years ago. Regarding DeepCube technology, when we look at acquisitions, we consider data-rich machines essential for quicker integration. A machine must gather a wealth of data to facilitate maximal deep learning potential. Going back to your previous question on integration, a great example is our acquisition of the Additive Electronics Company in Switzerland about a year ago. We have transitioned their North American sales approach to utilize our go-to-market strategy, resulting in nearly doubled sales organically. We are also transferring production to Switzerland for machines previously made in Israel, applying our AI technology. We aim to create synergy and efficiency across our departments, ensuring streamlined operations. It's 50 minutes now, and I appreciate your time. Everyone has a busy day ahead. If there are no other questions, thank you for participating and your interest. We are always excited to connect further, even offline. Thank you very much.

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