Desktop Metal - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the Desktop Metal's first quarter 2023 financial results call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please Press Star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Gentzkow, the Vice President of investor relations. Thank you, and you may proceed, sir.

Jay Gentzkow (VP of Investor Relations)

Thank you, operator. Good afternoon, everyone, and thank thank you for joining today's call. With me today are Ric Fulop, Founder and CEO of Desktop Metal, and Jason Cole, CFO of Desktop Metal. Please note our financial results, press release, and presentation slides referred to on this call are available under the Events and Presentations section of our investor relations website. This call is also being webcast live with a link at the same site. The webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of Desktop Metal. It cannot be reproduced or transcribed without our prior consent. Before we begin, I'll refer you to our safe harbor disclaimer on slide 3 of the presentation. Today's call will include forward-looking statements.

These forward-looking statements reflect Desktop Metal's views and expectations only as of today, May 10, 2023. Actual results may vary materially based on a number of risks and uncertainties. For more information about the risks that may impact Desktop Metal's business and financial results, please refer to the Risk Factors section on Form 10-Q filed this afternoon, in addition to the company's other filings with the SEC. We assume no obligation to update or revise the forward-looking statements. Additionally, during this presentation and the following Q&A session, we may refer to our results on a non-GAAP basis. Non-GAAP measures are intended to supplement, but not substitute, for performance measures calculated in accordance with GAAP. Our financial results release contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non-GAAP measures.

With that, it's my pleasure to turn the call over to Ric Fulop, Founder and CEO of Desktop Metal.

Ric Fulop (Founder and CEO)

Thank you, Jay, welcome everyone. I'm excited to host you for our first quarter 2023 financial results call this afternoon. On today's agenda, I'll begin with a brief highlights of our first quarter financials. We're also gonna talk about the increasing traction we're seeing from our customer base in three areas. one, customers using our technologies in larger numbers. two, momentum from our repeat customer base. three, I'll detail a new growing customer sub-segment representing the unique capabilities of Binder Jet. I'll wrap it up with an update on our cost reduction initiatives and plans to reach profitability. I'll turn the call over to Jason to provide further color on our financial results and outlook before we conclude and open it up for Q&A. I'll begin on the top of slide 4 with financial result highlights.

Overall, I'm proud of the team's execution on our cost reduction efforts to drive to profitability amidst what is seasonally the lightest quarter of our year. Revenue for the first quarter 2023 was $41.3 million, representing a 5.5% decline over the first quarter of 2022, reflecting a continuation of the recessionary headwinds we started experiencing in the back half of last year. We saw some of the forecasted revenue slip out of Q1, revenue was still inside our internal contemplated range. You'll recall last quarter we offered a wider 2023 guidance range to accommodate for unknowns related to the depth and breadth of this recessionary environment. We continue to pulse our customer base, and we see a variety of growth opportunities in the near term horizon that validates reaffirming our 2023 revenue guidance.

Non-GAAP gross margins were 18% for the first quarter of 2023, expanding 90 basis points from the first quarter of 2022. In the middle of the first quarter, we announced an additional set of cost reductions, we expect impacts from these efforts will begin to show in the second quarter, with most of those benefits starting in Q3. As these cost reduction actions more meaningfully improve fixed cost absorption in the coming quarters, we're expecting significant gross margin expansion through the balance of 2023, a top priority for the company. We reduced adjusted EBITDA losses from $41.6 million in the first quarter of 2022 to $24.4 million in the first quarter of 2023, which was a $17.1 million improvement year-over-year, with a second tranche of cost reductions to come.

We expect to see a continued positive trend in adjusted EBITDA this year as we combine significant expense reductions with top-line growth to drive sequential improvements to adjusted EBITDA for the balance of 2023 on our way to reaching break even by year-end. We're also reaffirming our 2023 adjusted EBITDA guidance as we have a plan to achieve these commitments regardless of the macro conditions, primarily through the announced cost savings plan expansion detailed in February. Moving on to some business highlights. As we detailed on the Q4 call, we expanded efforts to significantly reduce our expense structure and prioritize our path to profitability by increasing our cost reduction plan mid-February by an additional $50 million.

These actions bring a total annualized cost savings to $100 million and puts us in a very strong position to achieve adjusted EBITDA break even by the end of the year. I'll touch on our progress to date on the following slide. As you may recall, last quarter we discussed progress across the board in the consumer electronics segment. We announced we signed a master supply agreement with one of the largest consumer electronics companies in the world. These projects are going very well. We continue to expand our various consumer electronic relationships. We believe we will do over 8 figures of revenue in this market over the next 18 months and have products in stores next year that were made with our binder jet machines. Over time, we project this segment will grow into a multi-billion dollar opportunity for Desktop Metal.

We also launched Live Suite, an end-to-end software hub that delivers generative AI solutions for AM 2.0. Building on the success of our Live Sinter simulation software, Live Suite is a new package of premium software applications with all new functionality that allows users of Desktop Metal, Desktop Health, Etec, and ExOne 3D printing systems to seamlessly manage their build preparation, printers, accessories, and processes with success in one cloud-based location. Live Suite will come standard with most new hardware this year, and it eliminates the need for users to purchase other expensive 3D printing software programs to use their equipment.

AM 2.0 is a digital manufacturing process that is ultimately powered by software. We believe Live Suite offers the most intuitive and powerful additive manufacturing software on the market, allowing us to continue to offer our customers unmatched, differentiated turnkey solutions and extend our lead in additive manufacturing for mass production applications. Finally, we continue to drive forward materials development across our AM portfolio. A few additions from this quarter include copper C18150 and titanium Ti-64 for our Production System. 304 stainless for the Shop System platform. We're proud to own one of the industry's largest libraries of production materials. Turning to slide five, we'd like to introduce you to a new concept we call Super Fleets that emphasizes high adoption customers that continue to expand utilization over additive manufacturing 2.0 mass production solutions.

While we have over 7,000 customers, including more than 1,200 with metal and ceramic systems, over 370 of them are what we consider Super Fleet customers. We refer to a Super Fleet as a multi-unit customer that has entered mass production phases and uses our technology to produce a high volume of end-use parts with three or more systems purchased. In the current financial climate, capturing value and improving utilization in production is more important than ever. Our Super Fleet customers are demonstrating repeat success with our solutions and validate key drivers in customer demand trends. First, our mass production solutions have a clear product market fit. Second, our solutions are consistently delivering high value and ROI to our customers' mass production needs.

Third, utilization is increasing as Super Fleet customers are coming back to buy more systems, eventually leading to higher margin consumable sales. This is the flywheel in our operating model. We've highlighted a number of these valued Super Fleet customers on this slide, and what's really exciting is the diversity of these customers across all company sizes, small to large, in both binder jet and photopolymer solutions. Over the last 12 months, some of these customers have really scaled their operations. One example is FreeFORM Technologies, a high-growth metal parts producer backed by Ryerson Steel, who started with one system only three years ago and today has a Super Fleet of 25 Desktop Metal binder jetting machines. LightForce on the polymer side, that has scaled up to 33 polymer systems being used for printed medical devices.

BMW, who now has parts in almost every new passenger vehicle using our technology. We have a dominant market position in the binder jetting space with the largest installed base of systems, a multi-year head start, the largest binder jet R&D team in the world, the largest library of production materials, and a patent portfolio that's the envy of our industry. This is a very powerful moat in a growing industry. To demonstrate this, 25% of our binder jet machines are at multi-system sites, and similarly, 20% of photopolymer systems are at multi-system sites. Meaning that an original Desktop Metal system provided enough value to a customer that in nearly one-quarter of the cases to date, that same customer purchased additional systems and are now in production.

It's also worth noting that our binder jet systems are incredibly productive, and when a customer has more than one system, and you can see here some have 12 or more, they're processing a high volume of parts in those fleets, reinforcing the flywheel effect of our model. We're incredibly proud of these great customer relationships we've built over the years as we leverage the differentiation in our AM 2.0 mass production technologies to help our customers revolutionize their manufacturing settings. Building on this concept of repeat customer usage on the following slide, Q1 was another successful quarter for repeat customers. Repeat customers have been an important part of maintaining our growth at scale through both growing system sales and consistent high-margin consumables revenue.

All customers highlighted on this slide expanded their deployments in the first quarter of 2023 of Desktop Metal systems with new orders beyond initial systems. Even in what is traditionally the lightest revenue contribution quarter of our calendar year, we made progress in Q1 in deepening the number of high-value applications with major customers. The traction we're seeing from repeat customers, including Super Fleets, represents an important measure of the overall success of our solutions. Now let me talk to you about some of the Super Fleets of the future on the next slide. We recently announced a renewed focus on advanced ceramic offerings as a result of increased customer demand driven by a wide range of applications in mission-critical sectors, including aerospace, automotive, energy, consumer electronics, among others. In my opinion, we're the best in the world in this segment.

Binder jetting simplifies production of ceramics, hard metals, carbides, and cermets that are challenging to fabricate with traditional manufacturing. Our technology gives these manufacturers incredible flexibility in design and material properties. While our core focus is enabling high volume mass production applications in markets like automotive and consumer electronics, we're very proud that our same binder jet systems are able to contribute to high value niche markets like nuclear energy. It's early innings for the use of binder jet in nuclear. In the past year alone, we've sold between $5 million and $10 million of equipment in this new segment. This is a growing market segment for binder jet, where Desktop Metal is years ahead of any competitors and has deep partnerships with national labs and leading players like BWXT, Ultra Safe Nuclear Corporation, and other major defense companies.

One of the enabling applications for binder jetting in nuclear includes the 3D printing of nuclear fuel, where the uranium TRISO is fully ceramic microencapsulated in silicon carbide. It does not suffer from the dangers of weapons proliferation because its refractory ceramic layers limit reprocessing. This is a major game changer. This new process has the potential to revolutionize nuclear applications across the board, enabling small modular reactors, new forms of marine ships and submarines that one day can be exported to our allies without the risk of proliferation and new forms of propulsion. For example, in January of this year, DARPA and NASA announced a new program for nuclear thermal propulsion rockets that has up to 5x greater efficiency than chemical rockets for enabling the ground power for the NASA Artemis program.

For those that aren't familiar with Artemis, it's our Apollo program to go back to the moon. The nuclear revival is driven by the new IRA legislation, the new Australia U.K. U.S. alliance known as AUKUS, and other important climate change trends. It's really exciting stuff to see binder jet used across a multitude of applications ranging from high volume markets like automotive and consumer electronics and all the way to future space propulsion. The Artemis program and powering our most advanced marine ships with new forms of 3D printed nuclear fuel takes a differentiated solution to solve these problems. Shifting to slide eight.

As we've discussed in the past few quarters, a top priority for our company in 2023 as we navigate this year, is to significantly reduce our expense structure in order to expand our margin profile and reach adjusted EBITDA breakeven by end of the year. The team's ongoing operational execution towards achieving this goal has been top-notch, and I want to highlight some of the progress we've made. In 2022, we successfully executed the first tranche of our cost reduction initiatives, completing $50 million in annualized savings. The cost reduction spent both cost of goods sold and operating expenses, but weighed more towards the OpEx side as we saw our expense profile decline sequentially for four consecutive quarters into the first quarter of 2023.

In February of 2023, we announced an additional $50 million in cost reductions expected for 2023, bringing our total annualized cost savings to $100 million. We will have completed the lion's share of the workforce and facility closures by the end of the second quarter. We expect this second tranche of cost reductions to have a much more meaningful impact on our fixed cost absorption versus last year's first tranche. Given the mid-quarter timing of the announcement, we only saw minimal impacts in the first quarter, but we'll start to see results in the second quarter and to a much larger extent in the back half of 2023 as these facilities reduce the burden on COGS. The combination of our cost reduction efforts in the last year puts us in a very strong position to achieve our commitment of adjusted EBITDA breakeven by year-end.

Regardless of the macro conditions, you should also expect to see a continued trend of lowering our cash burn on a consistent quarterly basis with the ultimate goal of reaching cash flow breakeven on our existing balance sheet. Furthermore, these actions create a stronger, more resilient organization and streamlines the business to yield a more efficient and effective operating model for the long term. With that, I'll turn it over to our CFO, Jason Cole. Jason?

Jason Cole (CFO)

Thanks, Ric. Beginning on slide 10, you will see highlights of our financial performance for the first quarter of 2023. Please note, we will be referring to several financial metrics on a non-GAAP basis. Reconciliation to GAAP data is included in the file appendix. Consolidated revenue for the first quarter of 2023 was $41.3 million, down 5.5% year-over-year from $43.7 million in the first quarter of 2022. Leading revenue drivers were digital casting solutions and growth in consumables, services, and subscription, offset by weakness in metal binder jetting solutions. Revenue came in a little softer than expected in Q1, but even with ongoing recessionary headwinds, was within our range of expectations. Non-GAAP gross margins were 18.0% for the first quarter of 2023.

Gross margins improved 90 basis points versus the first quarter of 2022, driven primarily by a lower cost structure as well as product mix. Improving gross margins is a priority for the business this year, and we expect our ongoing cost reduction efforts to yield continued gross margin expansion through 2023 and beyond. Turning to the following slide, non-GAAP operating expenses were $35.0 million for the first quarter of 2023. This represents the fourth consecutive quarter of sequential OpEx reductions, as we have reduced non-GAAP operating expenses by a total of $17.1 million since first quarter of 2022, including sequentially by $3 million from fourth quarter of 2022. First quarter of 2023 non-GAAP operating expenses as a percentage of revenue was 85%, which is a year-over-year improvement versus 119% in the first quarter of 2022.

We've executed on our 2022 cost reduction initiative and expect to see a continued trend of improving expense structure throughout 2023 as the second tranche of $50 million in cost savings more meaningfully impacts results, especially in the back half of 2023. Turning the slide, adjusted EBITDA for the first quarter of 2023 was -$24.4 million, improving by $17.1 million compared to the first quarter of 2022. adjusted EBITDA was in line with our expectations in the quarter as we expect more meaningful sequential improvements to EBITDA throughout 2023 as we combine the incremental $50 million in cost savings announced in February with higher revenue contributions, especially in the back half of 2023. We are right on track to fulfill our commitment to achieve adjusted EBITDA breakeven before year-end, regardless of the macro environment.

Cash also came in as expected, ending the quarter at $149.8 million in cash equivalents, and short-term investments. We were able to reduce our operating cash burn from $56.3 million in the first quarter of 2022 to $37.3 million in the first quarter of 2023. We're in a solid position based on our internal cash forecast, we expect ongoing expense reduction efforts will drive significant sequential cash flow improvements even if recessionary headwinds persist. We ended the quarter with $98.2 million in inventory, higher than when we exited Q4 2022 as a result of sales coming in softer than we expected in the first quarter, along with the impact of closing six production facilities. We still expect our messaging from last quarter to remain true.

We intend to monetize inventory over the next several quarters in order to free up working capital and provide further improvements to our cash position. You should see better progress over the balance of 2023. Finally, moving to our 2023 financial outlook on slide 14. While first quarter revenue was a little softer than expected, the results were still in line with our range of expectations. In addition, demand remains strong across our portfolio of solutions, and customer engagement trends give us confidence for the balance of 2023, even if ongoing macro environment challenges persist. As a result, we are reaffirming our revenue expectations of $210 million-$260 million for 2023. We also continue to expect adjusted EBITDA in the range of -$50 million to -$25 million for 2023.

First quarter adjusted EBITDA was in line with our expectations, and we anticipate adjusted EBITDA in the second half of 2023 to significantly outstrip the first half. As we've consistently committed, we are driving significant continued improvements to our expense profile in order to achieve adjusted EBITDA breakeven before the end of the year, regardless of the macro environment. With that, I'll turn the call back to Ric for his closing remarks.

Ric Fulop (Founder and CEO)

Thank you, Jason. I'll wrap up on slide 15. Additive manufacturing is driving the future of mass production. We remain focused on our strategic priorities for 2023. We're laser-focused on getting the company profitable and are driving the business to meet these commitments. I'm very proud of the team's execution to drive $50 million of cost savings in 2022. I'm confident this next $50 million in 2023 will deliver continued improvements in our cost structure in order to drive margin expansion and achieve adjusted EBITDA profitability before the end of the year. Customer engagement remains very strong across our AM 2.0 mass production portfolio, with growing repeat customer cohorts validating we're delivering for our customers' missions.

Finally, we continue to mature as a company in driving important operational improvements across the board in order to streamline the business, create a more resilient organization, and strengthen Desktop Metal for the long term. In closing, we will be relentless in leveraging our competitive advantages to drive adoption in the additive manufacturing market and extend our leadership in the space in order to capitalize on the next stage of this market's secular growth opportunity, and we're extremely well positioned to scale. With that, let's open up the call for some questions. Operator?

Operator (participant)

Thank you very much, sir. We will now be conducting a question and answer session. If you would like to ask a question, please Press Star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please limit your questions to one question and one follow-up question, and you may rejoin the queue should you have further questions. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from Greg Palm from Craig-Hallum Capital. Please proceed with your question, Greg.

Greg Palm (Senior Research Analyst)

Yeah, thanks. wanted to start with the revenue outlook. I kind of a two part question, I guess. Number one, can you quantify how much revenue, you know, slipped from Q1? I'm not sure if you've booked it already in Q2 or if it's just been kind of pushed out or deferred. You know, sort of more of a general, you know, comment. You know, you reiterated the guide. It's still a pretty wide range. I guess, you know, now that we're, I don't know, a couple more months into the year relative to when you put that guidance out, any sort of puts or takes in terms of, you know, low end of that range versus sort of mid and some of the demand indicators you're looking at?

Ric Fulop (Founder and CEO)

Thank you, Greg. I mean, I think it's in the mid-single digits to, you know, slightly more than $5 million, you know, $5 million-$8 million that probably slipped into Q2. I would say we have a lot of great things in development for the second half of the year and excited about all the things that we're doing. Are bullish still about our plans for the year. We didn't feel like we needed to change our guidance number at all. We continue to work at full pace to execute. I would say it was not the easiest quarter that we've had to date.

I think maybe as I digest it, sometimes when you've got this type of environments, you've got customers that decide to delay some decisions. They print parts with service bureaus that use our equipment or partners or, you know, really sharpen their pencil until they move forward. We still see very good signs of demand and growth for the year. We like the position that we are competitively, and we feel like we're gonna by year-end be in a better position than most of the other companies in our space.

Greg Palm (Senior Research Analyst)

Okay. Appreciate that color. I wanted to move along to consumer electronics. You provided a little bit, maybe a little bit more detail this quarter on kind of what you're seeing, and I guess a few questions related to that. You're expecting, you know, eight figures of revenue over the next 18 months. That's a pretty wide range depending on what number you use. Can you confirm, do you actually have, you know, POs, you know, in hand and, you know, maybe timelines for deployment of systems? Then just, you know, I think there was a major consumer electronics company that, you know, was a customer in Q1. Can you confirm that?

Ric Fulop (Founder and CEO)

Yes. We work with, I would say, the top four companies in that, in that space in a variety of programs. We feel really good about the number that we laid out in terms of revenue and have a number of contractual commitments to deliver equipment over the next 18 months in that range. I'd love to be able to say more about it. As these companies launch their products and they show up on stores, you'll be able to pick them up and play with them. You won't be able to tell that they were 3D printed. The good news is that 3D printing in that segment enables you to use better materials.

You can reduce your carbon footprint by not having to remelt chips to make blanks. You have many benefits in terms of being able to open up space for, you know, a more either a thinner device or more battery space. Many advantages that you can do when using additive in that segment, especially as new products get launched in new form factors, that's going to be a more exciting thing over time. It's not the only thing we do. We're very strong in a lot of things going on in automotive. We have things going on in aerospace. We have parts in jet engines now. We've got this segment, the...

What we talked about in nuclear is also a really exciting opportunity where we did between $5 million and $10 million in the last 12 months, and we expect that to continue to grow as a segment for us, where we're the only company in the world that does that. Yeah, so we're excited about our business and what we're doing with customers to make them successful.

Greg Palm (Senior Research Analyst)

Got it. Just to confirm, you know, if you're, you know, I guess, expecting, you know, that level of revenue over the next 18 months, you probably have some sense of what PO you have in hand or what's coming. Again, for clarification, are you saying that this is for end use parts, this is not, you know, for R&D purposes within this consumer electronic space, that they're, you know, this space is actually used?

Ric Fulop (Founder and CEO)

We expect to be in products.

Greg Palm (Senior Research Analyst)

Okay. Understood.

Ric Fulop (Founder and CEO)

This is for production. This is production. We've been working in this area for some time, and it's, the work we're doing in that space is all production, end use parts.

Greg Palm (Senior Research Analyst)

Okay. I guess just last one, you know, lots of, you know, commentary on EBITDA breakeven, and I think you used the term, you know, regardless of macro environment, you know. I guess, you know, if we assume that the macro gets significantly worse here, does that mean there's additional levers that you can pull to achieve that breakeven? Or, you know, is there a certain level of revenue that you sort of need to feel comfortable with to achieve that?

Jason Cole (CFO)

Yeah. I'd say across, you know, we're reaffirming the guided range, and across every element of that guided range, we believe we can achieve that target. The levers we have at our disposal are pulled. We're all being deployed. They take a little time to land. It's consistent with what we said last quarter. We, yeah, we believe across that range we can deliver breakeven by the end of the year.

Operator (participant)

Thank you. The next question comes from Josh Puckerzwinski from Morgan Stanley. Please proceed with your question, Josh.

Josh Sullivan (Senior Research Analyst)

Good afternoon, guys. Ric, I wanna dig in a little bit more on the revenue weakness, if you wouldn't mind. I think, you know, there were a few mentions of the recessionary pressures. I guess, you know, maybe elsewhere in either, you know, kind of the factory floor or automation space. You're seeing, you know, pretty healthy bookings, a lot of backlog growth. I think, you know, people probably celebrating supply chain improvement more than talking about demand. Any other color that you can provide in terms of the end markets? You know, maybe anything geographically that, you know, could kind of flush out where you're seeing the weakness or what you're watching for, specifically on KPIs. I think, you know, the broader macro, at least in the industrial space, 1Q's been pretty healthy so far.

Ric Fulop (Founder and CEO)

Yeah. I mean, I think that with new technology, especially when people are making a decision to adopt a new process, you know, that's one of the considerations that happens, especially when a market has credit that tightens and you've got. A lot of our equipment costs more than $1 million to get it going. I think people may make decisions that say, "Let's just hold on for a quarter before we spend on that CapEx," especially with the CapEx financing being a little bit more expensive. The customers that have technology, they continue to buy product, and so we see repeat demand.

Where the ROI has been demonstrated and the company's figured out that, wow, this is really a fantastic way to make product, they move relatively quickly. We do see healthy demand. I was just calling one of our customers yesterday that makes parts of service using our technology. They see pretty healthy demand. You know, I think what you see is just related to, I would say the behavior that you may see in companies as you have rates increase. It sort of comes and goes on a quarter by quarter, the stretching and shrinking of the order cycle for, or the sales cycle for our type of products.

It was around Q3 of last year that when we started to see people talk about potential recession or hard landing that you saw some of that manifest itself in our sales cycle. You know, it's been somewhat, kind of, varying over the last two quarters. I expect it also to go the other way when they stop raising rates and then eventually when they start lowering rates. You know, besides that backdrop, we do see healthy demand for our products and a ton of projects. We have an increase in number of projects and bookings and other things.

It's more of a, you know, when people pull the trigger on things that I think is some of what we saw in Q1. I don't have more the psychology of that, but I feel very good about the amount of activity that we've got going on in the company. Maybe Jason has more color or additional thoughts on it.

Jason Cole (CFO)

I think you covered it pretty well, Ric. Thanks.

Ric Fulop (Founder and CEO)

Yeah. A number of things we were working on Q1 just moved relatively quickly into Q2, and we started Q2 with it.

Josh Sullivan (Senior Research Analyst)

Okay. There's no, like, end market or geographic commonality where you saw the push-outs, it was just sort of, you know, a little bit more randomized?

Ric Fulop (Founder and CEO)

I don't think we saw a geographic change. We don't think we saw a geographic change in our business in the past in the past quarter. It's been relatively similar. I wish we had a stronger presence in Asia. That's something that we'll build over time. I would say similar mix between Europe, U.S. and Asia.

Josh Sullivan (Senior Research Analyst)

Got it. That's helpful. Just following up on the cost side, obviously, you know, a big focal point right now, you guys have referenced it several times. I just wanna square that up with, you know, some of the opportunities, you know, the, the eight figure opportunity obviously. I want the numbers there, you know, depending on how you want to define that, could get pretty big. How should we think about the reflation in the cost base or at what revenue levels you really start to, you know, redeploy that? Or maybe even just said differently, how you think about incremental margins here. 'Cause you have, you know, kind of, you know, some of these exciting growth ambitions, you know, good conversations, big customers, including those you can't even name yet.

You know, the focus on cost, just wondering when the, when the hourglasses shift there.

Jason Cole (CFO)

Yeah. I think, you know, I'll talk about maybe unpack costs a little bit. I think some of this we've spoken about on prior calls, but I think the way we think about that is, we were sort of scaled for growth at a level that wasn't materialized as you go back to the middle of last year. We've taken a lot of effort on the cost side to really reduce that fixed cost base. We're in the midst of closing six production sites. What comes with that is, you will find that we'll be less volatile as revenues The margin volatility will be less volatile than the revenue is, especially when it drops below $50 million like you saw in 3Q of last year, and now this 1Q.

Those are being enacted across 2Q, and we really expect to see the savings from that later in the year. We also have a buildup of inventory. I think monetizing that inventory is gonna be a big element of this. Those kind of opportunities play into that. We've got inventory in some of these spaces where the demand's expected to come from, and it's gonna help us accelerate that inventory drawdown. We expect that to be a big benefit on the cost side as well.

Josh Sullivan (Senior Research Analyst)

Got it. Appreciate the color.

Jason Cole (CFO)

Yes.

Josh Sullivan (Senior Research Analyst)

Thanks a lot.

Operator (participant)

Thank you. Ladies and gentlemen, just another reminder. If you'd like to ask a question, please press star and then one. If you'd like to ask a question, please Press Star and then one. The next question comes from Shannon Cross from Credit Suisse. Please proceed with your question Ashley. Pardon me.

Speaker 6

Hi, thank you for taking my question. I'm on for Shannon today. If I could just kind of add on to Josh's question with KPIs and demand. Your portfolio is pretty broad. You know, you've got the $1 million Production Systems, and then you've got the smaller desktop, Einstein system. Within your end markets, is there any market that's maybe doing better or worse than the other?

Ric Fulop (Founder and CEO)

Absolutely. I mean, I think that dental has been a very strong market for us, and we have best-in-class technology there. The printed casting technology has been benefiting from efforts to reshore and to do part consolidation on large components. We have a very strong business on defense that I would say is outpacing the growth in any other areas that we have in the company. It's probably our fastest-growing segment right now. I would say SMEs that have a hard difficulty getting credit or announcing this new technology, they may think about it twice before they buy it, and then we connect them with our service bureaus or partners that make parts that can support them for a while.

In automotive, we have, let's say a trend in vehicle OEMs that are starting to use, try to do something similar to Tesla with gigacasting on the body in white space. One of the things that our technology can be used for is to arrive at the shape that you need to before you cut all the die-cast tooling. We work, you know, companies like Tesla use our systems to do things like that before they would cut the die-cast tooling. That as other companies replicate that type of process, it is gonna open opportunities over time in the market. I would say lots of, lots of areas of product of project development that can yield significant long-term growth.

That I would say ranks the areas that are stronger versus weaker. I think SMEs are hurting a little bit. Defense is extremely strong and the other stuff is all in between in the middle.

Speaker 6

Thanks for all those details. Then for revenue, how should we think about linearity? You're pointing to a really strong 2H. Should we think of 2Q maybe being flattish? Then if we look at the Super Fleet data which you've given us is very interesting, how much revenue do you think is locked in for the coming year? That's it for me. Thanks.

Ric Fulop (Founder and CEO)

I mean, I think, I have to think about it in terms of how much revenue is locked in. I mean, the one benefit of our architecture is the razor blade model. You install a fleet of systems. The next year, when you install the next group of systems, they have a compounding effect because they consume materials. Those materials tend to be, better, gross margins.

Jason Cole (CFO)

The other part of that question, I think I would say, you know, 2Q seasonally, historically, has been a stronger quarter for us. We're not gonna get into guiding the individual quarters, but I'll leave it that. I think 2Q should, you know... If history portends, and we expect that it will, it should be an up quarter, not a flat quarter.

Operator (participant)

Thank you. The next question is a follow-up question from Greg Palm from Craig-Hallum Capital. Please proceed with your question, Greg.

Greg Palm (Senior Research Analyst)

Yeah, I guess I just wanted to ask maybe more of a broad question on consumer electronics. You know, keep in mind this is, this is sort of broadly speaking, but why all of a sudden are you seeing increased interest from this segment? I guess more specifically related to binder jetting, why does binder jetting make sense, you know, in lieu or relative to, let's say, laser sintering?

Ric Fulop (Founder and CEO)

Laser sintering is not even close to the cost structure in that segment, right? Parts cost over $1,000 a kilo. In binder jetting, they're 1/20th the cost. In the consumer electronics space, what people use is machining, CNC machining. They'll make a bill of material, a block, and then that'll get machined into a housing or another component. The downsides of machining is that all of the chips have to be remelted to make new parts. You have a dichotomy where the higher performance and higher stiffness alloys that you use, they would have higher hardness and be more scratch resistant and better. They're actually harder and take longer to machine and more expensive to machine.

What you can do with binder jetting is you can form those parts, and there is virtually no waste from the process. All the materials actually goes into making the parts, so you have a much lower energy footprint, and as a result, much lower greenhouse gas footprint. You can use, because it's formed with powder metallurgy, you can use materials that will have higher stiffness by volume or better mechanical properties, which allows you to open up, you know, thin out regions of the parts and open up space for more battery and do geometries that would be cost prohibitive or very difficult to machine in a few setups. Those are some of the reasons that you'd wanna binder jetting a part.

Also you delay something called tool lock, where you get closer to the launch of a product, you kind of can't make any more changes, but with printing, you have more flexibility on your supply chain. Also, you need a lot less equipment in order to make the same volume of parts. As you're trying to make your supply chain more flexible and potentially move out of a region, this allows you to have dramatically higher flexibility. There are many reasons. Almost 90% reduction on the greenhouse footprint side at lower cost and better geometry and better material properties. Many reasons. In some materials like titanium, you can't even recycle the chips into a new block. You'd have to refine the metal to remove the oxygen.

There's a lot of advantages to doing this with binder jetting.

Greg Palm (Senior Research Analyst)

Yeah. I mean, that's interesting, and you rattled off a whole lot of advantages. Is there a, sort of a single one or top one that's driving more of the increased interest now? I guess that's where my question is what... is why now? What's sort of shifting the attention?

Ric Fulop (Founder and CEO)

Different customers are doing different things, and it varies per customer.

Greg Palm (Senior Research Analyst)

Okay. All right. Thanks for the follow-ups.

Ric Fulop (Founder and CEO)

Awesome.

Operator (participant)

Thank you. The next question is also a follow-up from Shannon Cross from Credit Suisse. Please proceed with your question, ma'am.

Speaker 6

Hi. Thanks. I just wanted to confirm, does the 2023 revenue range assume a range of contribution from the consumer electronics number that you referenced in the slides?

Ric Fulop (Founder and CEO)

I mean, we have been selling product into the consumer electronic space. We had revenue last year, we have revenue this year, and we'll have some revenue next year. It is a. I'm trying to kind of paint the picture of what one of the subsegments that's gonna be very large looks like over the next 18 months.

Speaker 6

Okay. Understood. Thanks.

Ric Fulop (Founder and CEO)

you know, just to clarify your question earlier when you were talking about revenue, you're referring about sequential quarter to quarter? In Q1 to Q2?

Speaker 6

Yes.

Ric Fulop (Founder and CEO)

Or-

Speaker 6

Yes.

Ric Fulop (Founder and CEO)

Yeah. Definitely. We have a 2Q significantly stronger quarter than Q one sequentially.

Speaker 6

Okay. Thank you.

Operator (participant)

Thank you. At this time, there are no further questions. I'd now like to turn the call back to Ric Fulop for closing remarks. Thank you, sir.

Ric Fulop (Founder and CEO)

Wonderful. Thank you very much. I really want to thank everybody again for joining our call this afternoon. As always, I want to thank the entire Desktop Metal team and family for their passion and focus to begin 2023. I look forward to speaking again with everyone next quarter. Please don't hesitate to reach out if there's any additional questions or if you'd like to come visit us here in Burlington, Massachusetts. Thank you.

Operator (participant)

Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your lines.