Nano Dimension Ltd

NASDAQ:NNDM

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen. Welcome to Nano Dimension's First Quarter 2024 Conference Call. My name is Betsy, and I'm your operator for today's event. On the call with us today are Yoav Stern, CEO and member of the Board of Directors; Tomer Pinchas, CFO and COO; and Julien Lederman, VP 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 statements made on this call. If you have not received a copy of the press release, please view it at the Investor Relations section of the company's website. A replay of today's call will also be available on 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 the management team will answer questions.

I would now like to turn the call over to Nano Dimension's CEO and member of the Board of Directors, Yoav Stern. Please go ahead.

[Yoav Stern, executive]

Thank you very much, Betsy. And good day to everybody. Good morning, good afternoon, good middle of the day. We are going to speak today about the first quarter of 2024 and some reflection from before and after. And I would not read you the news release, you hopefully read it or you will be able to read it later. I'm going to speak into the presentation and give as much as possible time for your questions, so we can lead it toward what's more interesting for you.

To start with, we had a great quarter with [ total fitting ], which was [ totally fitting ] the Reshaping Nano Initiative, which we started last quarter. And it was a very important initiative because it basically embarked us on a direction of emphasizing profits and adjusting the business model towards profitability, eventually EBITDA positive, et cetera. Rather than just either to internal growth or organic growth or acquisitions, just focusing on the top line. Of course, the top line is first. By the way, the top line [Technical Difficulty].

[Operator]

Pardon me, it appears we've lost connection with our speakers. Please wait while we reconnect.

[Yoav Stern, executive]

Okay. I'm sorry, ladies and gentlemen, something -- technology is not perfect in spite of everything. I guess we dropped off or you dropped off. I don't know where but I'll continue from where I was. And if there will be questions, I'll get back. We had an amazing quarter of improving profitability according to our Reshaping Nano Initiative. We went up to [Audio Gap] is another important -- I'm just trying to adjust that presentation.

New customers partnering with us is another important factor in this quarter. RF, for everybody that doesn't know, it is radio frequency. This is one of the major application for AME, additive manufacturing electronics. We have proof of concept that new customers are wanting to use it. A lot of it is in the fence. We repeat sales to Western Defense Agency. We have new customers in advanced electronics. Some of the names you -- appear here, obviously defense, the name does not appear. We have 2 leaders in the new space industry. You can guess what kind of industry is that and we have repeat defense sales -- repeat sales to a defense contractor. This is just a small part of the achievements of this quarter.

Innovation and securing the competitive advantage related to how we develop our products and what achievements we have reached while developing and investing in R&D. AI services is a starting business, where DeepCube is actually starting to make money by itself, not that we intended ever for our AI technology for an industry to be a profit or a revenue center. Because we bought it and we're using it mostly to advance our machines in the AI for industrial accuracy and maintenance. But we have enough customers that requested us to potentially do business with them just with the AI capability and to install them in their machine, as long as they are not competing with us, we're doing it.

On the robotics side, we increased the speed of our robotics additive electronics by factor of 300% and mostly it is also used, beside component mounting, it's used for solder paste spreading, and this is a very, very important competitive edge comparing to competition. And not less important is our digital solution in software. We partner, we just announced it with Esko & Fiery to become a one-stop shop for digital printing solutions, highly important achievement.

The reshaping nano that I mentioned before is all about numbers, obviously. If you look back with a reflection on the -- starting from the left side of the slide. Since 2021, we had 150% compounded annual growth. Since 2022, we have 36% expansion of our gross margins, the 36 actual percentage from 10% to 46%. Our gross margin grew by 4.6x. Our operating expenses in 2023 and ahead were reduced by about 1/3 comparing to Q1 of 2023. And the most important point that we are so proud of is our cash burn was reduced from $27 million a quarter to $7 million a quarter, and we are still moving ahead in the reduction of this to the point that at the year-end, on a quarterly basis will be close to breakeven, assuming the company is as is without acquisitions.

Last but not least, and actually one before last, the industry situation. The industry situation is very well reflected by this graph. It shows you the following. The left side, blue is the combined revenue of the 4 industry leaders in 2012 and the combined profit EBITDA or EBIT, to be accurate. On the right is the situation in 2022, 1.5 years ago, 2 years ago, actually it's 1.5 years. The combined revenue grew from $650 million to over $1.5 billion and the combined profit grew from positive to deeply negative. I wouldn't say it grew, but shrunk will be a better name. This is an indication, a manifestation of a market that is growing, but poor business strategies and business models that destroyed otherwise, good businesses.

Meanwhile, the demand for additive manufacturing is existing in the market because all those service providers, which are using multiple additive machines from different suppliers, which they're buying cheaply are making money by supplying parts, which means that demand is there. It's just somebody in our industry, which I would say, including all of us, is not running our strategy right. And we intend to try our best to change it because of 2 reasons. A, we have the theory and the analysis of what to do. B, we have the practical ability to do it and C, we have the capital to effectuate the consolidation of this industry.

Now it's last but not least, the buyback program that some of you recommended to -- for us to do a 1.5 year ago and we listened, has proven to be successful. We bought shares much below the cash value of the share between $2 to $3 a share. We reduced our share count by 15% and we have more inventory for this activity. If you're buying a share today of Nano at $2.70 a share, beyond the excellent performance that we just spoke about and beyond what we are discussing and promising regarding acquisitions, buying a share at $2.70, which is a discount even over the cash of $4.1 million and not considering the value of the business above it.

So as I think I've mentioned in the past, certain people see a problem in every opportunity, problem "being the share still at a lower price than it should be", by far, and certain other people see opportunity in the program when the share is below cash, that's the opportunity. I don't think you have a lot of companies with performance like that and yet the share is below cash. So this is my bottom line.

At this point, Betsy, I would like to open up the session for questions and answers.

[Operator]

[Operator Instructions] The first question today comes from Troy Jensen with Cantor Fitzgerald.

[Troy Jensen, analyst]

Quick for you, Yoav. I just -- I'd be curious, if you look at your Q1 or 2023 revenues, how much of it, if you could break it down little bit between like additive and robotics or the other sectors you're in? I just want to kind of get a bigger picture of your total additive exposure.

[Yoav Stern, executive]

It was about half from additive, a bit less than half than additive manufacturing -- sorry, additive electronics and half from additive manufacturing of all kinds, including electronics, including micro, mechanical, polymers, special polymers.

[Troy Jensen, analyst]

All right. Perfect. I appreciate it. And then also, Yoav, I think it's [ $12.28 ], you guys had the announcement for Stratasys and the offer for $16.50, if I remember correctly. But you guys have been extremely quiet ever since. So I wonder if -- is there any update you can kind of give us on Stratasys when you think this consolidation cycle could start. And then I got one more question for Tomer.

[Yoav Stern, executive]

I remember -- you, of course, remind me that when my kids used to be quiet in the room, I get very nervous. Yes, we were quiet, the reason we are quiet is not we're doing bad things. The reason that we are quiet is because contrary to last year when we did not manage to convince Stratasys to speak with us. This year, we have a very friendly discussion. It's intensive, and we are continuing our discussions about what we believe is a good solution for the industry, and we are strategic partners because we are the largest shareholders of Stratasys of 15%. And obviously, we are not competing with each other, and you know that very well, they know it as well.

So we are in a discussion of how to proceed. And the reason we kept the offer out is we don't want to rock the boat. Eventually, obviously, you know that the prices have changed since then, but we're not giving up the potential to cooperate. It's done right now on a very friendly basis and Yoav and Yoav, the 2 Yoavs are talking a lot.

[Troy Jensen, analyst]

Okay. Yes, that's great to know. And I'll let -- just lastly, and I will cede the floor. But Tomer, if you could give me just kind of a sense of what revenue level do you think you need to hit breakeven with all the restructuring that you guys have planned here?

[Tomer Pinchas, executive]

So basically, our plan is to reach breakeven towards the end of 2025, second half of 2025. Assuming we are going to grow our business as planned similar to this year, by 25% to 30%. The second half of 2025 will be breakeven.

[Operator]

The next question comes from Katherine Thompson with Edison.

[Katherine Thompson, analyst]

Just want to ask 3 questions. I'll quickly get the questions out. First, could you characterize customer demand at the moment and kind of how that might have changed over the last quarter or so? Secondly, just so I can understand the cost base that we're seeing for Q1 after the reshaping Nano program. Is that now the kind of steady state level of cost? Or is there more cost to be cut? And thirdly, should we expect to see you doing more share buybacks at a similar pace to what you've done over the last 6 months or so? I guess that's partly dependent on share price.

[Yoav Stern, executive]

Okay. Excellent questions, and thank you for that. Let me start by the first one. Customer demand compared to Q4, we sell to about 6 to 7 -- we are selling to 6 to 7 verticals. So the customer demand is obviously typical to a vertical. I can tell you that, for instance, on the defense side, the market is very, very active, obviously, because of the conflicts in Israel and the conflicts in Europe, mostly by the way, in Europe. In Israel, we don't feel it by demand, but in Europe we do, in the United States, we do.

Customer demand in other areas. In the general electronics field, a bit weakness in the German market, maybe because of the war itself. So we feel a little bit slow down, but it's marginal on the periphery. It's not affecting our main business. And in the other verticals, including medical, including academics, research institutions, we don't feel a change in the demand. And as much as the second question, what is the cost basis in Q1? Is it going to stay? Or is it going to be cut more? The answer is we are going to improve our cost basis and it's going to be reduced from the first quarter definitely. And you're going to see it in the next 2, 3 quarters to come, definitely.

Last question. More shares to buy, to purchase. Share purchase and acquisitions and investment in R&D is all about asset allocation. It's a very different 3 profiles of how you allocate your capital and what is the return. We believe that the return in general by investing in R&D and investing in acquisitions on a longer-term basis is much higher than the return on buying shares. The buying shares is a quick return because you buy shares right now at less than cash. And the result is immediate on the quality -- on the -- sorry, on the value of the company's balance sheet and obviously, on the number of shares.

So it's always a decision we're going to take on a quarterly basis. It depends what is the alternative ahead of us. As I mentioned before, right now, the acquisition trail is pretty bubbly. The asset allocation according to what we see in the immediate future, and we're using it accordingly.

[Operator]

The next question comes from [ Saul Zelman ] with [ Jericho ].

[Unknown Analyst]

Yoav, and thank you for the excellent presentation. And great to see that the quarter is starting off strong and may continue that way, especially with everything going on in Israel. Our prayers are with you. The gentlemen, I apologize I didn't get its name, but the gentlemen from Cantor Fitzgerald, touched on my question. You got off easy with the answer, but I guess I'd like to touch on it, just to draw out more, is investors, traders have this question quite often.

When you look at, let's call it your investment thesis, which is you look at performance rate, underperforming trade, when do you recalculate that thesis to see when you reverse or cut that underperforming trade within your portfolio. For example, very specifically on the Stratasys offer back in, I believe, at the end of 2023 based on where they are now based on their recent results, it looks like they're underperforming. It's in your portfolio. I don't believe that your previous offer is relevant anymore. Are we looking at continuing in the offer? Or are we looking at potentially cutting our losses on this and then pulling back from that position?

[Yoav Stern, executive]

We're not going to -- we're not looking to cut on our losses and to be a little bit cynical, we didn't lose anything as long as we didn't sell. The investment is a strategic investment, is not an investment for trade in the market. I've said it a year ago, more than a year ago, actually. When we purchased it, the investment to have -- sorry, 15% of a market leader without getting into its business and without competing with him -- with it, is definitely a strategic investor -- a strategic investment, point number one.

Point number two, of course, that leads to the discussion we have today. It's true that our offer from a few months ago is probably a bit too high now. But as I mentioned before, we don't intend to divest on this investment. At this point, we believe Stratasys has a good future. And now that we're getting close to their management, we believe they have management that is sharing a lot of our vision, and we're continuing the discussion with them on potential cooperation.

[Unknown Analyst]

Just a quick question. Do you feel that it has a negative overhang for Nano having -- maintaining that position?

[Yoav Stern, executive]

Sorry, I didn't understand you.

[Unknown Analyst]

Does maintaining that position or maintaining -- not having that serious reassessment have any negative overhang for Nano Dimension.

[Yoav Stern, executive]

No. The only thing that maintaining this position is affecting you and me is in a funny way because of the accounting rules. If in the last day of the quarter, give an example. Let's say, the shares of Stratasys went up by 30%. I will have in that quarter a huge profit. If in the last day of another quarter, the share went down by 30%, I will have a huge loss. Both the profit and the loss, obviously, are not indicative of anything other than 1-day training, but that's how the accounting rules work. It doesn't affect our cash flow, it doesn't affect our business, it doesn't affect how we proceed. It doesn't affect the acquisition. It doesn't affect how we do R&D.

[Unknown Analyst]

I'd love to see how this plays out. Thank you for sharing that there is a consideration on that reassessment that one that you're doing in -- very much in par and together with the Stratasys team.

[Operator]

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Yoav Stern for any closing remarks.

[Yoav Stern, executive]

Okay. Thank you very much, everyone. Thank you for your questions. I'll summarize by saying that something I said during the meeting today, our industry is in a very peculiar situation and a very peculiar place, look at everybody around us and think in your mind how the situation today relates to the strategy and the intention of Nano Dimension as I described to you over the last 2 years and you will come to the conclusion by yourself without me having to say anything at this point. So I thank you very much for thinking about us and being our partners. Goodbye.

[Operator]

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