Desktop Metal - Q4 2023

Executive Summary

• Q4 2023 revenue was $52.3M, down 13.7% YoY but up 22% QoQ; non-GAAP gross margin improved to 34%, while GAAP gross margin was -32% due to one-time restructuring charges.
• Adjusted EBITDA improved to $(9.2)M, the strongest quarterly performance to date, and non-GAAP operating expenses fell to $31.6M; management targets adjusted EBITDA breakeven in H2 2024.
• Full-year 2024 guidance: revenue $175–$215M and adjusted EBITDA $(30)M to $(10)M; DM also initiated a strategic alternatives review to de-emphasize select photopolymer businesses to accelerate profitability.
• Recurring revenue hit an all-time high of $65M (34% of total) in 2023, evidencing increased utilization and value realization; core demand highlighted in defense, aerospace, automotive gigacasting, and healthcare.

What Went Well and What Went Wrong

What Went Well

• Sequential rebound and margin improvement: Q4 revenue +22% QoQ to $52.3M and non-GAAP gross margin reached 34% (+970 bps YoY); adjusted EBITDA losses improved materially.
• Sustained cost discipline: non-GAAP OpEx dropped to $31.6M and has declined for seven consecutive quarters; cumulative $150M+ annualized cost reductions underway with further measures announced.
• Strong end-market traction: recurring revenue reached a record $65M (34% of revenue) with production programs across defense/aerospace (e.g., F-35, Rolls-Royce, Pratt & Whitney), auto gigacasting, and dental; “We’re now very, very close” to adjusted EBITDA positivity at the new cost structure.

What Went Wrong

• Top-line and GAAP margin pressure: Q4 revenue fell 13.7% YoY; GAAP gross margin was -32% on restructuring charges; GAAP net loss in Q4 was $(174.5)M including $110.5M goodwill impairment.
• Channel and product challenges: loss of Stratasys channel weighed on sub-$0.5M direct metal systems; consumer electronics ramp slower than hoped; P-50 single-pass jetting revenue not yet significant.
• Macro headwinds: elevated interest rates extended sales cycles and delayed CapEx decisions; guidance range remains wide, with management planning conservatively.

Transcript

Operator (participant)

Greetings, and welcome to Desktop Metal's Fourth Quarter and Full Year 2023 earnings conference 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 zero from your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Jordan, Vice President of Finance and Treasury. Please go ahead.

Michael Jordan (VP of Finance and Treasury)

Good morning, and 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 Presentation 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 twelve months following this call. The content of today's call is a 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 three of the presentation. As a reminder, today's call will include forward-looking statements.

These forward-looking statements reflect Desktop Metal's views and expectations only as of today, March 15th, 2024, and 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 Factor section on Form 10-K, 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 the presentation in 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. I'll now turn the call over to Ric.

Ric Fulop (CEO)

Thank you, Michael, and welcome to our fourth quarter 2023 conference call. We're in the final stages of our restructuring to get profitable in the cash we have. As part of this effort, our process is to aggressively prioritize our lines of business based on time to cash flow, given the headwinds our industry faced when rates went up. Additive manufacturing is a growth industry, and it's grown double digits annually over the past two decades to about $18 billion a year, apart from very short periods in 2008 and 2020. From 2015, when we started Desktop Metal, and through 2022, our core technology, Binder Jet, grew at a compounded annual growth rate of about 40%.

While we saw growth slow in 2022 as rates went up, we expected growth to come back in 2023, but learned together with our peers, the effect of higher cost of capital and project delays on new technology. As a result, our industry was flat in the past year, but we expect it to go back to double-digit growth over time as CFOs get accustomed to this new environment. As such, we have planned conservatively this year, but we do see signs of growing demand in defense, aerospace, healthcare, and many other segments, which I will outline in detail on this call. The use of our machines and recurring revenue is at a record all-time high. This proves customers who have adopted the technology are getting great value from it. Recurring revenue is defined as services revenue, along with consumables and subscription revenues.

We have record recurring revenue of $65 million in 2023, and as a percentage of total revenue, it grew by 29% year over year to represent a record 34% of revenue. That's up from only 24% of revenue in 2022. In terms of getting profitable, we believe we're ahead of our peers. We started our journey to get profitable before others, and we have cut OpEx costs by about 40% since we began our effort, with only modest revenue losses. While we didn't make our internal target of adjusted EBITDA positive by the end of last year, as some customer projects rolled into 2024, we're now very, very close to that goal at this new lower cost structure, and we see many opportunities in 2024 that will help us get there.

For example, some areas that are outperforming the industry include our printed castings business, which grew 27% in 2023 to a record $73 million. This technology is rapidly being adopted in the defense industry and by aerospace companies like SpaceX, Airbus, and Boeing, or automotive leaders like Tesla and Toyota. We're the leading player in this segment, with over 80% share in systems and with huge growth potential this decade as we expand into key global markets where we haven't had a strong go-to-market presence in the past, such as Latin America. Less than 5% of foundries have adopted this technology, but we see a day where every single one of them will be using it.

We estimate this will be a $20 billion addressable opportunity that will one day see over $1 billion a year of systems sold as the process matures and reaches full penetration by the more than 25,000 foundries globally. I will detail customer adoption examples later in the presentation. Another fantastic growth area is our ScanUp digital dentistry product, which we are doing in partnership with Align Technology. We have already signed over $32 million in total contract value in our first year, and growth in this product compounded at over 25% quarter-over-quarter. We expect this new business to be a meaningful part of our company by the end of the year, as this is an attractive way for dentists and DSOs to digitize their practices and adopt printed restorative parts.

Restorative dentistry is poised to go 100% digital over the coming decade, and this represents a $30 billion a year global opportunity. I will detail these and other promising examples of our growth drivers later in our call. We are 100% focused on fixing the portions of our business where we've had challenges. One of them is a direct metal business for systems under $500,000. Those used to be traditionally sold through channel versus direct sales, and in this case, we used to use the Stratasys channel, which was a legacy of their original investment in Desktop Metal in 2015. As we lost access to the Stratasys channel partners throughout 2022 and 2023, our sales in the sub-$500,000 segment were impacted, and since last fall, we have been adding go-to-market resources to remedy that.

The access to a go-to-market channel was one of the attractive features of that merger last year, and we're now taking our medicine and building our own go-to-market in that segment. We have continued to work diligently to bring our cost structure in line with our current revenue run rate and near-term opportunities ahead of us, which was evident in the fourth quarter. For the full year, we reported revenue of $190 million, compared to $209 million in the prior year. This result was in line with the expectations we shared in the third quarter, and it largely reflects the impact of the macro environment on CapEx budgets that weighed on our volume throughout the year. Lower system sales were partially offset by a 29% increase in recurring revenues. We have made excellent progress reducing losses, and Jason will detail in a few minutes.

We expect our adjusted EBITDA run rate to be positive in the second half of the year. Our full year adjusted EBITDA loss decreased from negative $118 million in 2022 to negative $69 million in 2023. From Q1 2022, the last full quarter since commencing our cost reduction efforts, adjusted EBITDA losses have decreased 78%, closing 2023 at $9 million in the fourth quarter. This fourth quarter 2023 adjusted EBITDA loss is also down 56% compared to fourth quarter 2022. We continue to be on a relentless march to adjust our cost structure and reach profitability, and we are making excellent progress in this effort. We're focusing on execution and are looking forward to letting our results speak for themselves this year.

While none of our peers are truly profitable, we have outpaced our industry in our execution to get profitable and are now very, very close. We're looking forward to crossing the Adjusted EBITDA profitability threshold in 2024 and getting back to growth as we focus on the parts of our business where we have the best-in-class solutions that solve the most important customer problems. We believe after we complete the cost actions outlined to date, we'll be Adjusted EBITDA positive in the second half of 2024, even on muted growth. As we prioritize our offerings for time to cash flow today, we have also announced our intention to de-emphasize specific subsets of our business, principally focused on some of our photopolymer technologies. To be clear, we continue to believe in the strength of these technologies and their long-term potential.

While difficult, this decision helps us trim cash-consuming businesses and focus on our more profitable product lines, and we believe this will further accelerate our path to Adjusted EBITDA profitability. We continue to have the industry-leading portfolio for mass production, with nearly 100% of our products focused on end-use parts and any small amount of growth at this cost structure will yield very good results in the bottom line. While we're prudently managing our business for the environment that we're in, we believe there remains a substantial near and long-term growth opportunity available to us as the additive manufacturing 2.0 secular growth story resumes. We're positioned to emerge as the leader in the space with the broadest set of products and capabilities for mass production in our industry.

We hold the leading market share position in binder jetting and the leading position in healthcare applications with our DLP technology across a very wide array of materials and end users, and have an enviable IP position with close to 1,000 patents. We have the best materials in healthcare restorative dental parts. This past quarter, we officially launched scanup.org after a one-year trial with our partner, Align Technology. I encourage you to visit the site. We also recently launched our Flexcera Base Ultra+, which has much better properties than competitors, making Flexcera the leading solution for restorative dental parts. Since its inception, we have sold more than 20 metric tons of Flexcera, which is enough to make more than 1 million dentures, crowns, and other dental products. That makes Flexcera the leading solution for permanent digital restorations in a total addressable market, estimated to be $several billion.

Flexcera is also a very profitable business for DM, with gross margins approaching 70%, and it also shows no signs of slowing down. We continue to see record adoption of Flexcera. In terms of application adoption in binder jet, we have made excellent progress. We're changing the way cars, planes, and space parts are made. We've grown into the global leader in silicon carbide for additive manufacturing. Carbides and other advanced ceramics are materials with amazing properties and are used in electric vehicles, cutting tools, optics, and space structures. Desktop Metal now has parts in space with many of the major defense contractors, and several large satellite constellations are already using or planning to use our technology. It was a huge milestone for Desktop Metal to get both silicon carbide and metal production parts flying in space in 2023.

On the metal front, we now have several printed castings in the SpaceX Raptor engine with our technology. In 2023, we also saw our parts get to the moon on the intuitive lander. That's an amazing accomplishment I never would have believed was possible when we started the company. We also saw, and continue to see, great adoption for our technology in printed nuclear materials. We're the only company in the world that makes printers for this application, and many next-generation propulsion and energy systems are now using our technology in that market. We also saw giants like Airbus and Boeing use our systems for many applications, including large Invar tooling for wings and winglets in their most advanced airliners, like the 787. We have seen adoption across the board with the Defense Logistics Agency to print components for marine and underwater applications.

The fuel systems for the F-35 are now made with our technology by our customer, Eaton, and we now have parts flying in multiple production jet engines. For example, the Rolls-Royce Trent, also with our customer, Eaton, and on Pratt & Whitney jet engines with our customer, Magellan Aerospace. Tesla has also had great success with their gigacasting process, where our binder jetting of molds is now extensively used in the front end of the process to cost-effectively enable this new vehicle design and engineering approach. Other customers, like Toyota and other OEMs, are going all in and are racing to adopt this new way of making cars, which reduces the number of parts in a vehicle and means huge growth opportunities for binder jet. These are huge accomplishments for 2023 that will yield significant growth opportunities in the near term.

The U.S. Department of Defense has been a great partner in helping us advance the state-of-the-art of this technology, and we have a large backlog of programs in line that should also yield $ tens of millions in additional growth in 2024 and 2025. Almost all Sikorsky helicopters now have at least a dozen parts made with our technology, and we have major programs like these at the moment with companies like Northrop Grumman, Lockheed Martin, L3Harris, Coherent, and many others. Magnesium parts for aerospace is also a highlight of our capabilities, as this lightweight alloy is not processable with other forms of printing, and we have qualified this process for aerospace and now have parts with these lightweight materials flying in various defense and commercial aircraft. Our Figur sheet metal forming products have had great early adoption, and we have sold out our initial builds.

We project this will also be a great area for growth in the coming year. In terms of sizing up, how large can the printed casting market get? This is an area where we grew 27% in the past year. So how big can this be? We have 25,000 sand foundries globally. Today, the penetration is well under 5% for this technology, and we believe that over the next 10-15 years, every single one of these foundries will be using printed castings as this becomes a standard process to make these types of metal parts. That translates to more than a $20 billion CapEx cycle that gets installed over a 10-15-year period.

If you believe in S-curves and we're at a 3% mark, we're looking at a market that can eventually grow to more than $1 billion a year as this technology gets broadly deployed, and today, we're the 80% market share player in this segment. We have a larger pipeline of projects today than we've ever had. I do believe that it's only a matter of time till double-digit growth resumes in our sector, and we're poised to benefit dramatically as it does. Most analysts project a 5x increase in the size of our market by the end of the decade, pushing adoption from $18 billion a year to over $100 billion a year by 2031. And this doesn't even include the impact of markets of the future, where artificial intelligence is driving accelerated traction in new segments like humanoid robots.

Let me pause here for a second and give you an example of how this can be a massive opportunity for Desktop Metal. We've been big believers in artificial intelligence since we started our company. Before most other companies, in 2018, we launched one of the world's first generative design tools in the market. This is an artificial intelligence-powered product called Live Parts. Over time, we repositioned it for simulation of powder metallurgy through our industry-leading product, Live Sinter. That allowed us to build the world's largest neural network library of materials to simulate powder metallurgy consolidation. Today, it's used by all of our customers and major companies like Lam Research to make their products, and it's an area that sets our company apart and ahead of competitors.

If you believe artificial intelligence is real, and the future of artificial intelligence and printing will equal humanoid robots, then we're very well positioned for this future. We're also a leader here with our printed hydraulic technology from Aidro and our low-cost, lightweight metal printing solutions that can be used to make aluminum and magnesium limbs. We have several customers developing solutions for these markets, and while today this is a very tiny portion of our revenue, we believe this application has tremendous potential. This market will create huge opportunities for additive manufacturing and for actuators, which today represent the bulk of the cost in these robots. The biggest challenge to this market will be cost and power consumption. Most of the cost in a humanoid robot is in the neodymium-powered actuators and the lightweight, complex 3D limbs or the hydraulic actuators.

As a leader in low-cost printed castings materials like magnesium and printed hydraulics, we have the technology to be one of the leading providers of picks and shovels as this coming revolution materializes. In coordination with our MIT research partners, we recently began to adapt our artificial intelligence-driven generative design tool, Live Parts, so that it can generate shapes for smart limbs.

The weight savings and the energy capture opportunities from structural series elastic actuation allows you to reduce the power consumption in these robots. Our presentation shows a preview of this exciting work, and we look forward to sharing more about this as we get these tools and parts in the hands of more customers, and they start to showcase their work. This is an application that one day could be bigger than everything we do today combined, and it could be a killer app for our printed casting technology.

Finally, we've just begun to see the benefits of an expanded global installed base that is using additive manufacturing equipment for real production. Utilization of our products at our customer sites are increasing, as evidenced by growth of recurring revenue streams. Our recurring revenue grew in 2023 by 29%, from $50 million in 2022 to a record $65 million in 2023. Further, our services business continues to supplement our growth, which increased 15% year-over-year, as I noted. Importantly, this demonstrates that while some projects may be delayed by higher cost of capital, our customers continue to expand their usage and engagement in our solutions during the same time period, demonstrating clear product market fit as recurring revenue grew from 24% of revenue in 2022 to a record 34% of revenue.

In closing, while 2023 proved to be a challenging year amidst higher cost of capital headwinds, we remain confident in the long-term growth potential of additive manufacturing and Desktop Metal's leading position in mass production. Our focus for 2024 is reaching profitability through the realization of our cost-saving initiatives. In the long run, additive manufacturing is the future, and Desktop Metal is poised to emerge from this cycle as a clear leader. I want to thank our employees, customers, partners, and shareholders for their continued support and sacrifices. We look forward to updating you on our progress next quarter. With that, I will turn the call over to our CFO, Jason Cole. Jason?

Jason Cole (CFO)

Thanks, Ric. Beginning on slide 17, you will see highlights of our financial performance for the fourth quarter and full year 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 filed appendix. Before diving into our results, I would like to spend a minute discussing the strategic actions we have taken to improve our costs. While our industry has struggled to reach scale, we've remained committed to driving Desktop Metal to profitability on the cash we have. As our top line softened, you'll recall we announced $100 million in annualized cost reductions in 1Q 2023, followed by an additional $50 million of annualized reductions in January of 2024, for a total of $150 million in cumulative annualized reductions.

These reductions have driven efficiencies across cost of sales and OpEx, which have steadily improved our operating leverage across 2023 and will continue to do so into 2024. Today, we are also announcing additional cost reduction measures, which include our intention to de-emphasize select business lines, principally within our photopolymer businesses, where a lack of growth and scale have been a headwind to profitability. These actions are above and beyond the previously announced $150 million. These are technologies we believe hold tremendous potential for future growth and profitability. Unfortunately, we also accept at their current scale, they are loss leaders within our portfolio, and we are no longer positioned to shepherd them to profitability. We are committed to exit these businesses and are exploring alternatives on how best to do so, which may include divestiture.

Overall, I am pleased with the progress we are seeing since 2023, and the following slides will demonstrate the progress we have continued to make. Consolidated revenue for the fourth quarter of 2023 was $52.3 million, compared with $60.6 million in the fourth quarter of 2022. Sequentially, revenue increased 22.4% prior quarter. For the full year of 2023, consolidated revenue of $189.7 million, compared to $209 million in 2022. Product revenue decreased primarily due to a reduction in units shipped during 2023, driven by the macroeconomic conditions impacting the additive manufacturing industry. This was partially offset by strength in our recurring revenues of 29% year-on-year. Non-GAAP gross margins were 34% for the fourth quarter of 2023.

Gross margins improved 970 basis points versus the prior year period, driven by improved absorption of fixed costs. Sequentially, gross margins improved from 21.9% in the third quarter. On the right side of the slide, full year 2023 non-GAAP gross margins were 27%, a 450 basis point improvement over the prior year period of 22.5%, driven by the actions we have taken to improve our cost structure. On the next slide, non-GAAP operating expenses were $31.6 million for the fourth quarter of 2023. Through actions under our initial 2022 cost optimization initiative, we reduced non-GAAP operating expenses sequentially by $1.6 million and year over year by $6.8 million.

Fourth quarter 2023 non-GAAP operating expenses closed at $31.6 million, down 17% year-over-year, compared to $37.9 million fourth quarter of... Adjusted EBITDA for the fourth quarter of 2023 was -$9.2 million, improving year-over-year by $11.9 million compared to the fourth quarter of... Full year 2023 adjusted EBITDA was -$69.1 million, compared to prior year period of $118.4 million. Adjusted EBITDA is trending in the right direction, as the $100 million in cost reduction actions completed in 2023 continue to positively impact adjusted EBITDA. The $50 million of cost reductions announced in January of this year, combined with the cost reduction measures announced today, will continue this trend.

With respect to the $50 million cost out program announced in January, we expect to begin realizing the majority of these savings in the first quarter, with the balance completed through the year end. These measures included a further 20% reduction in our workforce, 3 additional site consolidations, continued efforts to streamline centralized costs, and the sunsetting of several slow-moving product offerings. We believe we are now positioned to be at or near breakeven in 2024, assuming no material growth. As a further proof point of cost reduction progress, this quarter's cash consumption from operations was down 62% when compared to $56.3 million consumed in the first quarter of 2022. As a reminder, 1Q 2022 was the last full quarter of results before commencing our cost reductions, with continued improvement throughout. Lastly, we finished the year with $82.6 million in inventory.

We are positioned to execute on expected first half demand and remain committed to optimizing inventory management, monetizing the inventory we have, and improving our cash flow and working capital in 2024. Moving to our financial outlook on slide 21. We are continuing to observe some persistent macro and industry-wide headwinds, which began to emerge in mid-2022 and were well underway by early 2020. We believe we are well positioned from a cash and cost perspective, while being ready to capitalize on the significant growth opportunities that remain in front of us once conditions become more favorable. We anticipate generating revenue in the range of $175 million-$215 million in 2024.

We expect the momentum in the improvement of adjusted EBITDA to continue throughout 2024, and as such, we expect full year 2024 adjusted EBITDA to be -$30 million-$10 million. We do expect in the second half of 2024 that we will begin recognizing positive adjusted EBITDA as we realize the nearly full benefit of the $150 million cost savings programs. Additionally, the guidance reflected today does not include any businesses which may roll off as part of our strategic review process. With that, we'll take some questions. Operator?

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Thank you. And our first question will be from the line of Greg Palm with Craig-Hallum. Please proceed with your question.

Greg Palm (Senior Research Analyst)

Yeah, good morning. Thanks for taking the questions. I guess starting with the guidance range for fiscal 2024, it's a fairly wide range, so maybe you can give us some color or maybe assumptions on, you know, top end versus, you know, low end and some of the assumptions behind that and certainly what you need to accomplish to get to the midpoint.

Jason Cole (CFO)

Yeah, thanks, Greg. You know, I think that range is, is, it's, it's, you know, ±$20 million, about 10%. So, you know, I think it's, it's narrower than we did last year, but I appreciate it may still feel wide to you. You know, we think our seasonality curve is basically Q1 and Q3 typically softer sequentially and with strength in Q2 and Q4. We do believe this is a year where we see some opportunities to return to year-on-year growth. Across all of 2023, that was not the case. So the midpoint at $195 million, I think, we feel like that's, it's just modestly above. I think our expectation would be that, you know, we think we can perform in the top half of that.

I think we generally guide with that expectation, but there's also... We've been surprised before. So I think we're navigating sort of some of the weakness we saw is continuing at the beginning of the year, but we think we can turn the corner, and we have some good opportunities in front of us. So I guess we'll look forward to seeing how we perform in 1Q and proving it and not getting ahead of ourselves before we can prove it.

Greg Palm (Senior Research Analyst)

Just any color on kind of the cadence of the year? I mean, Q1's almost done at this point, I guess a couple more weeks left in the quarter, but, cadence of revenue, any expectations for the year?

Jason Cole (CFO)

Yeah, I mean, again, I think the seasonality curves will kind of follow the same structure. While it is close to the end of one Q, we have a late-breaking kind of product revenue cycle, so we're still kind of working on a variety of things down the stretch, which gives us some degree of variability. You know, we're not here to guide one Q at this moment, but we're looking forward to the middle of May, giving you that update. I guess the only other thing I didn't touch on was the profitability. I think the profit, the adjusted EBITDA range that we guided basically reflects it's gonna improve across the year as the $150 million continue to take hold. So it's probably more front-end loaded, but we feel like we can perform well in that range as well.

Greg Palm (Senior Research Analyst)

Got it. And then just last one, I know, Ric, you talked a lot about various kind of end markets and technologies and, you know, ones you're seeing some success. Maybe I missed it, but I didn't hear a lot on consumer electronics, which was supposed to be a big kind of area of focus in growth in 2024. So can you maybe just give us a little bit of color on what you're seeing in that end market specifically?

Ric Fulop (CEO)

Look, absolutely. It is still a huge opportunity for additive manufacturing. We still work on it. But we go at the pace of our customers. We continue to work in striving those segments. We have some areas of the business that performed extremely well. As you saw in our slides, we today have part of the business that outgrew the pace of growth of our industry, where we're dominant, like in our printed castings segment, where we did 27% growth in the past year. And we also have been surprised by the strength of our business in the defense and aerospace segments. If you asked me at the beginning of last year, did we expect to see Desktop Metal parts in the moon? I didn't.

And if you ask me, at the beginning—I mean, I know we had programs and things, but, you know, these things actually did get there, and we have Department of Defense building important constellations of satellites that extensively use our technology. Those are now flying in space. We had, you know, Starship with SpaceX yesterday. There's close to 200 printed castings that are used in that, in that system, the platform. And so we're very proud of those efforts, and there's many areas of the business that are growing really nicely. There's some other areas that are challenging, and there's some customers that are gonna be massive, but they take longer to get their products out.

You know, I highlighted in our presentation two slides on an upcoming market that I think is pretty interesting, that I also didn't expect at the beginning of the year, where we'd have a real possibility to build a massive business, and that's in artificial intelligence-driven humanoid robots. I've been surprised by the investments from multiple major companies, some of them, which are our customers, who are planning to launch products that some analysts forecast to be very, very large markets. And so, if those things happen, you know, we could be a major purveyor of the smart limbs that go in those systems, which today project about a third of the cost structure of that. And some analysts have talked about those markets eventually becoming as large as the cell phone industry or electric vehicles.

I think it's too early to tell whether that's gonna happen that way, but I think we can all agree that additive manufacturing is gonna have a growing and more important position globally as the industry matures. And we're a part of it. Like, we're on platforms like F-35. We are on pretty much all of the major helicopter systems from the U.S. and in other countries. You know, major companies like Lockheed and Sikorsky are large customers. There's a lot of investment in naval. So we were surprised by the strength in that part of the business, and it's offset at some sort of activities that some of our large consumer electronics customers have had in deploying this technology. But activities continue, and we will update as they make progress.

Greg Palm (Senior Research Analyst)

But just to be clear on consumer electronics specifically, so are you saying that's not gonna be an area of growth in 2024? Maybe that's pushing out to other areas.

Ric Fulop (CEO)

I would say that when we entered 2023, I didn't expect to have parts on the moon or on Mars, you know, large meter-class structures in major constellations or that there would have been huge success on things like SpaceX most recent rocket. So to be very honest with you ... Or also that the adoption on this gigacasting process, which is now scaling from Tesla, which invented the technology, and where our binder jet is a key portion of the front end of that process. It's now scaling with all the major OEMs.

What I'm saying is, at the beginning of last year, I thought, maybe some of these other segments would become our largest portion of the business very quickly, but we've had green shifts in some segments, and other areas have taken longer to happen. So I'm not saying they're not gonna happen, but it's very hard for me to predict. I know there's a lot of activity from our customers. They're in that particular industry, they are more secretive about their plans, and it'll go at its own pace. You will eventually see many products. And if you see the evolution of those systems where, let's say look at this new augmented reality hardware, it's extremely heavy. Additive manufacturing is a key way to make those things lightweight.

It's a key way to enable thinner, more performant pro-products in the future. So you will see it. We continue to have activities across the board with multiple companies in that space, but, it hasn't become the largest part of our revenue yet, and I'm hoping to report on it once you can go to a store and buy, a well-known product.

Greg Palm (Senior Research Analyst)

Yep, understood. Okay, I will leave it there. Thanks.

Operator (participant)

Our next question is from the line of Troy Jensen with Cantor Fitzgerald. Please proceed with your question.

Troy Jensen (Managing Director)

Hey, gentlemen, good morning. Thanks for taking my questions here. Maybe to start with you, Ric, just when I hear photopolymers, I guess I think EnvisionTEC. You know, I think of the 8K and obviously the Einstein product line seems to be a bulk of the business, but can you just speak more specifically about the products that you guys are shedding here in photopolymers?

Ric Fulop (CEO)

Yes. So we're not saying we're shedding a product, so just, just to be very clear, and I sent a note this morning to our employees, I encourage you to, to read it. But we are-

Troy Jensen (Managing Director)

Okay

Ric Fulop (CEO)

... looking at options that would allow us to properly get the distribution that those products deserve. I'm open to partnerships and other things that would help us grow our business. In the photopolymer space, we've sold over 20 metric tons of Flexcera, which is over 1 million dentures we've ... market share leader in permanent restorations by far. I think when you look at the really incredible technologies we have in foams and elastomers and other segments, we have, you know, we've continued to grow that business. That business actually grew last year, but we haven't been able to get in as many hands as it deserves. So we're, you know, that's a part of frustration for me. So we're looking at how can we make that product, those products, more successful?

If you have suggestions, I'm always open to them. But I really-

Troy Jensen (Managing Director)

Yeah.

Ric Fulop (CEO)

The materials are the best in the world, and the products are very good. Just trying to figure out how we can get them to flourish.

Troy Jensen (Managing Director)

Yep. Yep, I agree. Okay, next question. You know, last year, the story was a lot about the P-50, right? And kinda, you know, direct metal printing. Can you give us an update? And I'm just curious to know if you guys think you're going to recognize much revenue for P-50, you know, this year.

Ric Fulop (CEO)

It's really a great question. And look, we've had to make tough choices as a company. We have seven quarters of continuously reducing operating expenses, eight quarters of gross margin expansion, and some of these very advanced technologies that sometimes are a little bit ahead of themselves lead to spending on the technology side that you can't afford. So we're trying to pair our spending and control our destiny and, you know, you have to work on these things at the proper pace, so we get to become a sustainable, profitable business. And so we work with our customers to drive that, drive those efforts and get the products to market as fast as possible. But sometimes we have to dial all these things and make tough choices.

So, it hasn't become a significant part of our business. At least the single-pass jetting portion has not yet, but it is the highest performance fine powder system in the market. And as the industry matures, I think you will eventually see lots of adoption of single-pass jetting systems. But, we're navigating that and carving a path from A to Z here, where we can get this company profitable, is something that we are doing very delicately to preserve the value of these technologies and at the same time, make customers successful with it. So we... You know, that's probably the best example I can give you. I would love to-

Troy Jensen (Managing Director)

Yeah, no, it's perfect.

Ric Fulop (CEO)

Yeah.

Troy Jensen (Managing Director)

Awesome. No, understood. Thank you, so Ric, and maybe a follow-up, just a last follow-up for Jason here. I love the chart on kind of the non-GAAP operating expenses and the declines we've seen, and I know you're doing more cuts here. Can you just give us help? Where do you think this, you know, bottoms or, you know, are we going to see two or three more quarters of sequential or what is, you know, Q2, Q3 operating expenses look like?

Jason Cole (CFO)

Yeah. Thanks, Troy. I appreciate the question. It's-- we're definitely not at the bottom because as you recall, in January, we announced a fresh cut of $50 million. Some of that was enacted in late 4Q. The decisions were made in 4Q, but the announcement, actually, I said the announcements were made in January. So it's definitely going to get lower from where it is. I'll probably stop short of saying exactly how low in 1Q and 2Q. But I think if you, you know, as you're working through your models and you look at the revenue and profitability range, on an annualized basis, you've just taken the $50 million. This is not counting the fresh decisions that we've announced today.

You know, I think you can expect, probably a similar mix of about, you know, 20%-25% in cost of sales and 80%-75% in OpEx. So-

Troy Jensen (Managing Director)

Yeah, okay.

Jason Cole (CFO)

With those figures, you can kind of see how low we think we can get it.

Troy Jensen (Managing Director)

Okay. Yeah, that's helpful. I appreciate that. And, guys, good luck going forward here.

Jason Cole (CFO)

Thank you. Appreciate it, Troy.

Ric Fulop (CEO)

Thank you, Troy.

Operator (participant)

Thank you. Our final question is from the line of Jacob Stephan with Lake Street Capital Markets. Please proceed with your questions.

Jacob Stephan (Senior Research Analyst)

Yeah. Hey, morning, guys. So I just kind of wanted to follow up on the foundry opportunity you talked about. Maybe you could kind of help me understand how to kind of think about this opportunity and maybe, you know, what are you, what are you actually doing for the foundries?

Ric Fulop (CEO)

Okay, so, foundries need patterns and molds to pour metal into. When you do them by hand, or in an analog process, or with analog tooling, you have dozens or hundreds of parts that get assembled into to make what the shape of a complex casting is. That leads to tolerance stack up, where you lose fidelity as all those parts kind of get stacked together. With additive manufacturing, you can make a single component, and so your tolerances are superior, and you can reach shapes that are much more complex.

Yet you can enable a part with a level of complexity of additive manufacturing and very sophisticated shapes, but do that in a way that your cost of the part approaches the cost of the raw material, which, in the case of aluminum, would be, you know, I don't know, $2 a kg, which is much lower than the cost of powders and other, other metals. That technology is more mature than some of the other things that we do in metals and ceramics, and as a result, it has been adopted faster. And the microstructure that you get from those types of products is also much better understood than the microstructure and the fatigue properties that you get from additive manufactured parts. When you do laser and some other processes, the fatigue properties are not as good as they are in printed castings.

There are many standards for adoption of these technologies in aerospace. As a result, as these companies have been acquiring and adopting products for having a larger percentage of the content in this platforms made through additive manufacturing, it is one of the leading technologies. It's also one of the few technologies that is able to deliver very large parts that are multi-meter in size, which is something that most other additive manufacturing processes don't do. It is dramatically faster, and I mean dramatically faster, than any other process. So for example, you know, the average laser system is about 80 cubic cm per hour, let's say, a Velo system. The fastest would be the SLM NXG 600 at 1,000 cubic cm an hour.

A P50 is $12,000, and a printed casting system, like our S-Max Pro, is about $150,000. So $80 for a Velo versus $150,000 for our printed casting solutions. And our Exerial system can go as fast as 250,000 cubic cm an hour. And that's the reason it's being adopted in automotive, where cost matters. It's being adopted in many other segments, like aerospace. And it's a great technology, and it's part of the family of processes in additive manufacturing. Each type of part is probably best suited to a particular process. It doesn't mean that we're going to make all the parts through this process. There's plenty of room for laser and other technologies, but we are seeing great adoption in this segment.

And we're also unique in that we have very sophisticated automation attached to these products. So that includes 24/7 printing without humans involved and automated de-powdering at a different level of maturity than any of the other additive manufacturing processes. I mean, it's being used to make inline six V V6 engines for people like BMW or parts for people like Tesla. So it is a process at scale with much better post-processing and automation than other approaches, with mechanical properties that are well understood and that are mature. And as a result, that industry is poised for scale. If you look at the addressable market, there's about 25,000 foundries that could take advantage of this equipment, but 3% have adopted it.

And, you know, so it's less than 5%, so you're in the early part of an S-curve. I do believe that in this next decade we've seen an acceleration. I think we did more revenue in this area than ExOne did in the year we acquired it a couple of years back. And if you look at that, we added the products that came from EnvisionTEC in this segment, like our S-Max Flex, which allows you to go to countries like South America and in other locations. And it gives you a broader access to sort of folks that couldn't afford a machine that costs more than $1 million. And we pair it with best-in-class solutions from ExOne. We've added Desktop Metal software and controls.

And so now these systems are fully integrated. We market these through the ExOne brand because they had a great brand in the printed casting side, and we're building a great business in this area. So think of 25,000 potential customers. Only 3% of them have it. They're all going to have some of these machines. This is going to be like a $20 billion CapEx cycle over, I don't know, 10-15 years. So you should expect that this should continue to be adopted over time, and eventually, one day, it's going to be on its own, a much bigger business than many other things we do today combined. And it could get to be...

I don't see a reason why at some point it could be a billion-dollar business, especially if we have new applications for this technology like I was describing in this robotics plus AI revolution that we're going to see in the coming decades.

Jacob Stephan (Senior Research Analyst)

Got it. That's, that's helpful. A lot of color there. And then just kind of the last one-

Ric Fulop (CEO)

We are by far-

Jacob Stephan (Senior Research Analyst)

Yep.

Ric Fulop (CEO)

the dominant market share player in this space. We outsell our competitors at a systems level, not... You know, some of our competitors in that segment sell parts instead of machines. But on the machine business, which is pretty much all we do, where the really, like, nine- we're like 95% systems, we outsell our competitors almost 5-1, so it's not even fair. We're really good at this.

Jacob Stephan (Senior Research Analyst)

Okay. Interesting. And, yeah, just last one for me. The Latin American market, it sounds like, is a focus. Maybe you could talk about kind of initial steps that you've taken or, you know, how, how long or I guess, how far are we in kind of the initial pipeline there?

Ric Fulop (CEO)

Well, you know, we have the systems around the world, and what we are seeing is that we now have solutions that are cost-effective for those markets with our Flex system, which is a really great machine. And I think there's also very large foundries in those markets, you know, whether it's in Mexico or in South America, Brazil, et cetera. So we basically started hiring go-to-market resources for those areas. Before, people had to, like, find us and come to see it in the US and had, you know... Primarily, we sold to Western companies who had overseas production, and now we're going to support and help companies around the world adopt this technology, whether it's in Southeast Asia or in India or in South America or in the Middle East.

We've had growth in this emerging economies, and we're excited to add capabilities to better support them and make our customers successful in those markets.

Jacob Stephan (Senior Research Analyst)

Got it. Thanks, guys. Best of luck going forward here.

Ric Fulop (CEO)

Thank you. We're excited.

Operator (participant)

Thank you. We've reached the end of the question and answer session, and I'll turn the call back over to management for closing remarks.

Ric Fulop (CEO)

Okay. Well, I really want to thank everybody. In closing, I really want to thank our customers, partners, and all the incredibly dedicated Desktop Metal employees. Reducing our spend over seven consecutive quarters in the pursuit of sustainable profitability really comes with many sacrifices for this team. I also believe this experience has made Desktop Metal stronger, and it gives me very good confidence in our ability to navigate 2024 and beyond as the industry comes back to double-digit secular growth. Thank you again for your relentless efforts and dedication, and I look forward to speaking with you again on the first quarter earnings call. Thank you.

Operator (participant)

This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.