Nano Dimension Ltd. (NNDM) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. Welcome to today's conference call to discuss Nano Dimension's 2018 Year-End and Fourth Quarter Financial Results. My name is Kerry and I'm your operator for today's call. On the call with us today are Amit Dror, CEO and Yael Sandler, CFO. Before we begin may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today's earnings press release also pertains to this call. If you have not received a copy of the press release please view it in the Investor Relations section of the company's Web site. All participants will be in listen-only mode. [Operator Instructions] Amit will begin the call with a business update followed by Yael, who will provide an overview of the financial results. We will then open the call for the question-and-answer session. I'd now like to turn the call over to Nano Dimension's CEO, Amit Dror. Amit, please go ahead.

Thank you, Carrie. And thank you all for joining us. 2018 was our first year of commercial sales and I'd like to share several key milestones achieved through this exciting year in which we transformed from a startup into a revenue generating company with significant growth potential. During 2018, we significantly enhanced our presence in North America. Our U.S. subsidiary became a certified vendor of the U.S. Department of Defense and immediately proceeded to generate multiple sales to different branches of the U.S. armed forces as the United States became our leading market. In 2018, we also established our presence in Asia Pacific through a wholly-owned subsidiary in Hong Kong and a dedicated team that already generated revenue and recruited top-notch resellers in Korea, China, Taiwan and Australia. As a key part of our geographic coverage and sales operations expansion during the year, we successfully doubled the number of our global value-added resellers to 20. Most of them already acquired a DragonFly Pro system for demonstration purposes and/or actively and productively engaged with our demand generation and sales operations. We are now turning our eye to Europe where we plan to further expand our quality global coverage. It's part of our targeted demand generation activities. Our sales and marketing team together with our resellers participated in more than 30 conferences and trade shows in more than 10 countries including the United States, Germany, China, Korea, Dubai, Turkey, England, Australia, France, Hong Kong, Singapore and Israel. During 2018, we delivered exponential improvements in the industry innovation and maturity over DragonFly Productivity. We humbly attribute this success to the tremendous talent and passionate collaboration of our leading customers, our all teammates and strong reseller partnerships. Additionally, the investment that we made in our recently executed business systems is allowing Nano Dimension, the ability to measure our effectiveness through the validation of repeat customers as we continue to scale our global growth. In 2018, our first full year of commercial sales we sold 30 DragonFly Pro systems. As a co-founder and CEO, this is a special moment for me. Just over four years ago respected professionals speculated that such a disruption in technology would not work and the barriers were too high to overcome. While we successfully presented sequential growth through each quarter of the year and in the full year of 2018, we generated $5.1 million in revenues. Among our customers, we have global industry-leading companies, U.S. government agencies and Fortune 500 Company. Truly a two dimensional, traditional electronics industry into a three dimensional agile, digital, electronics industry is on a change to be seen every decade. 2018 was the year in which the next generation technology for making electronics was introduced to the world and recognized by industry leaders. Before handing the call to our CFO, I'd like to share our view on the recent fundraising of $12 million, we closed a few weeks ago that was underwritten by Alliance Global Partners. As you know the company publicly filed a registration statement on Form S1 right after sharing the successful results of the previous quarter. With this positive momentum of sales, we went out to raise funds that would support our growth efforts. During December, Wall Street experienced a negative momentum, which was immediately followed by a long government shutdown that impacted the SEC and prevented the company from finalizing the funding. By the time the shutdown ended, the company acted to close the deal in accordance with the new market conditions. We will use the recent funding for supporting our growth which means scaling up our global sales and marketing efforts in order to meet our goal of tripling the revenues from 2018 to 2019. I will now hand the call over to our CFO, Yael Sandler to review our financial results in detail. Afterwards, I will share details on our goals and forecasts for 2019. Yael?

Thank you, Amit. Good afternoon and thank you again for joining us. During 2019, we sold and leased [indiscernible] systems and reported revenues of $5.1 million for 2018 compared to last year revenues of $829,000. Research and development expenses for 2019 were $8,623,000 compared to $10,819,000 in 2017. The decrease is mainly a result of a decrease in payroll and related expenses as well as materials expenses. Sales and marketing expenses for 2018 were $4,259,000 compared to $2,183,000 in 2017. The increase compared to the previous year is mainly attributed to an increase in salaries and related personnel expenses reflecting an increase in the number of sales and marketing employees globally and an increase in marketing and advertising expenses associated with the company's accelerated commercial operations. General and administrative expenses for 2019 was $3,002,000 compared to $3,363,000 in 2017. The decrease resulted primarily from a decrease in professional services expenses as well as a decrease in directors' fees. We reported a net loss of $15,488,000 or $0.17 per share for 2018 compared to a loss of $17,503,000 or $0.31 per share in 2017. The CapEx for 2019 was about $1.7 million and depreciation and amortization expenses for the full year was about $1,958,000. Share based spent for the year was about $423,000. In the fourth quarter of 2018, we recognized [indiscernible] system most of which will sold to U.S. and customers through our resellers. We reported record revenues of $1,750,000 for the fourth quarter of 2018 compared to the previous quarter revenues of $1,672,000. During 2018, we presented quarter-to-quarter average growth of 43%. Research and development expenses for the quarter was $2,210,000 compared to $2,129,000 in the previous and $2,555,000 in the fourth quarter of 2017. The decrease relative to both of the quarter was mainly attributed to a decrease in payroll and related expenses and a decrease in material expenses. Sales and marketing expenses for the fourth quarter of 2018 was $1,220,000 compared to $1,167,000 in the previous quarter and $761,000 in the fourth quarter of 2017. The increase compared to the fourth quarter of 2017 was mainly attributed to headcount increases and related expenses as well as marketing and advertising expenses. The increase compared to the previous quarter was mainly attributed to an increase in profit and other sales and marketing expenses. G&A expenses for the fourth quarter of 2018 was $685,000 same number in the previous quarter and $777,000 in the fourth quarter of 2017. The decrease compared to the fourth quarter of 2017 was mainly attributed to a decrease in professional services expenses and a decrease in directors' fees. We reported a net loss of $3,697,000 or $0.04 per share in the fourth quarter compared to a loss of $3,629,000 or $0.04 per share in the previous quarter and $4,160,000 or $0.07 per share in the fourth quarter of 2017. We are diligent about controlling our operating expenses and maintaining a consistent cash balance, while actively shifting resources from R&D to growing our sales operations and commercial expansion. The CapEx for the fourth quarter of 2018 was $680,000 in depreciation and amortization expenses for the quarter $493,000. Share based payments for the quarter was about $26,000. The company ended the fourth quarter of 2018 with $3,753,000 in cash compared to $6.1 million in the end of 2017. The decrease mainly reflects the proceeds received from the issuance of our ordinary shares in the first quarter less the cash used in operation during the 2018. We ended the fourth quarter with more than $3 million of product inventory, which we expect to turn in the ordinary course. With that, I will turn the call back over to Amit for final remarks.

Thank you, Yael. We're very pleased with the results in 2018. Our organization and infrastructure continue to improve every day and with it our expectation and confidence in our ability to deliver on our growth plans. Specifically in 2019, we expect to triple our revenues with $14 million to $15 million in revenue for the full year. We forecast that revenue growth will progress sequentially with greater percentage of our expected annual revenue to be generated during the second half of 2019. Our main goal is to increase our market share and we plan to do so by continuing to expand and nurture our resellers network, increase our sales funnel and compress our selling cycles. We will make sure that our production scale up and high quality standards continue to stay up to date in support of growth. Another goal we set for 2019 is to increase the value for customers and we plan to achieve that by increasing the range of applications, benchmarks and features supported by our system. We believe that by executing on our plan to achieve these goals, we will manage to meet our growth targets prepare for future growth and also improve our gross margin. Now, I will turn the call back over to the operator and we will be pleased to take your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Eric Martinuzzi of Lake Street. Please go ahead.

Thanks. Congratulations on your many successes of 2018 just the distribution -- the global distribution network that you've set up and the resellers that you signed is really quite an accomplishment. I wanted to specifically better understand Q4, I think in Yael's remarks, I just want to get this right, the number of systems sold was that 9?

Yes.

Okay. And then, I think you said for the full year was 30 systems?

Yes.

Okay. Amit, you've given a pretty aggressive growth outlook. Certainly it's above what I was expecting for 2019. You're talking about at the high-end of the guided range it would be a tripling of the revenues. I'm curious to know does that also imply a tripling of the systems. I know you'll get some revenue from the consumable side, but how should we be thinking about units sales starting from that 30 systems in 2018?

Okay. So as you comment, we do expect additional revenue coming not just from systems, but also from warranty and on the service, the consumables that are likely going to grow. And also we believe, we'll be able to generate a higher gross margin per system that we're selling because in 2018, we actually sold a significant portion of [demo systems] [ph] to resellers where the gross margin was [Technical Difficulty]. So to answer your question in numbers, no, we don't need to triple the number of systems from 30 to 90. We don't need to get to that range. I would probably set the number at the range of between 70 to 80 systems.

Okay. Then that helps me kind of back into average revenue per system number that I can use to model. I was just curious to know I was expecting this is again Q4 2018 focus, but I was expecting a seasonal up tick into kind of a budget flush year end. What was the customer, the procurement dynamics that maybe re-encountered to what I was assuming?

Just hold for one second Eric. Eric I just want to make sure, I got the question right. Could you just repeat the question please.

Yes. My assumption is that you had -- I don't know I think you guys said you sold 10 systems in Q3 of 2018 and 9 in Q4 of 2018. I was just -- I was kind of assuming as a -- that there would be…

Well, I think we could attribute that mostly to the U.S. government shutdown. The situation was a little bit, I'm not sure what you do about abnormal in terms of a portion of our certain opportunities being tied, on hold for a while because of the government shutdown that again it just ended a few weeks ago. So I guess from that perspective you could attribute maybe something that might look a bit different to what you expected to that defense sector that behaved abnormally.

I understand. Okay. My last question has to do with the profit profile, our expectations for 2019. I saw in your presentation that's available on the Web site that you're anticipating gross margins of 50% after excluding the cost of revenue derived from the amortization of intangible assets. I just want to make sure I'm starting from the right point here in 2018. I think that number for 2018 was around 29.5%.

So I'd like to clarify that slide. I mean most of the audience here doesn't have it in front of them, but basically the slides you cited to show how we feel progress over the next couple of years. So, it really shows the forecast of the change we're targeting and we're planning for that as we move forward most likely we will see the 50% in the numbers of 2020 or somewhere along that line. This year, we don't think we'll be able to make it all the way through. If we look at 2018 in which we did approximately 30% gross margin then we are going to see a gradual growth. Okay. And to take a position, I could say that we are targeting to get to the 40%, but there are lots of activities that we're taking whether it's related to our manufacturing capabilities and the size of manufacturing and other improvements in the process that we believe we're going to take a process of really improving gross margins. So, I would look at it as two steps ahead. The 50% and the ones that is still expected to show a significant growth from 30% to my guess would be around 40% this year.

Okay. I appreciate that clarification. Thanks and good luck in the year ahead.

Thank you, Eric.

Thank you.

The next question will come from Brian Kinstlinger of Alliance Global Partners.

Hi. Good morning guys. Thanks for taking my questions. If we assume each agency in the DoD are separate customers, can you quantify how many customers have taken more than one printer? And then, how many total DoD customers have ordered a system?

Would you refer to a DoD customer both like, let's say an entity which is part of the armed forces, and then also an entity that would be like a tier one supplier...

Good. So to clarify, I'm curious total government sales, how many systems the government has taken. But then how many individual customers have taken more than one printer or system sorry?

Okay. So actually it's going to be easier for me to accumulate both the government and Tier 1 suppliers and to share with you through the year. We sold 10 systems altogether to that group that would justify three of them in the last quarter. And I don't have the number in front of me exactly but I would say…

More than one system, yes.

Three or four in total. So you're saying three or four customers in total not just government have taken more than one system?

Yes.

Great. Thank you. Yes. Understood. And then following up on this train of thought, how many partners have sold a printer to a third-party as opposed to just testing or using it for themselves?

So out of the 70 printers that was sold in 2018, 12 was sold by our resellers to end customer.

Great. That's helpful. And then, you've got a bullish outlook for next year. Can you talk about the mix you expect to come from partners versus direct sales?

Yes because of the strategy that we're using which comes to leverage in support our partners. I would say that probably 90% to 95% of all sales of good were -- partner resellers simply because even if we had the opportunity to take it by ourselves, we would basically pass it along to the resellers.

Right.

So [Technical Difficulty] we start to pretty much all of the common sense and something that would go through these centers. There are two cases of exceptions that are worth mentioning. One could be a case in any country where we don't have a reseller and you may find yourself doing a direct sale normally with the understanding that once we have the reseller we will pass on the obligation for support to the reseller. And the other case, this is a strategic customer. We already have some of the customers in which we're communicating or having deals which are different than the common practice. And in those cases we want to be in the front.

Got it. Understood. And then, just moving forward on this whole train of thought. I'm curious as you look at the roughly 80, sorry, [70 or 80] [ph] system as you expect to sell this year. How many will go do you think to existing customers versus brand new. Are they all new or do you expect increased penetration into existing customers?

This is a very good question. I'd like to elaborate my answer. To take advantage of your question to explain how you see things moving forward. I think we expect that most of the sales would go to new customers, even the customers that take more than one printer today are taking it mostly for prototyping and R&D type of activities. We have a large government entity that already acquired the machine system and is now acquiring another one, it would normally go to a different site at this case. And the interest that we have from new customers is pretty high, so we look at this year as mostly monetizing on all those sales opportunities we have in our pipeline where we're basically completing the same cycle with those opportunities. However, these are also the customers the ones that already acquired and the ones that we work with in order to help them generate specific applications. And we believe that we're going to see a change from mostly new customers into repeat customers. Hopefully sooner than later it's a bit hard to put my finger on it, but definitely we're expecting to see that in the coming year in 2020 after this year in which we're targeting and working with customers to start getting repeat orders not just for prototyping, but really to start working with them on activities related to low volume production or specific production grade application. And there we believe, we're going to see repeat customers coming for even more than a single machine but several machines in the purchase.

Got it. Understood. Thank you. Last question I have, the March quarter is almost complete. Can you give us a rough indication of the number of systems you expect might be sold this year or maybe the number that already have been to see what kind of visibility you have to the numbers for the March quarter?

Well, I apologize in advance to give it a little bit vague, but let's put it this way that so far in the first quarter we've delivered several printers and we expect several more orders to be finalized. The U.S. government shutdown that lasted until several weeks ago and caused significant delays in the purchasing process of many companies within the defense sector. But, we are working closely with our customers in order to expedite the process. So with that reference to the first quarter, it's also worth mentioning that considering the seasonality of capital equipment purchasing by our customers, the sales in the second half are expected to grow significantly in comparison with the first half, which is the common case for capital equipment.

Great. Thanks so much guys.

Thanks Brian.

Thanks Brian.

The next question will come from Michael Brcic of National Securities.

Hi, guys. Good morning. Good afternoon. Just, I was off the call for a little bit during couple of questions, so if I'm repeating just let me know. You mentioned the government shutdown slowed down a bunch of things, I would expect now that it's over that you wouldn't expect that to flow through into towards the end of Q1 and Q2 and sort of front load that as opposed to the second half. Can you sort of go through the process of how that possible business comes back or was it lost because of the shutdown?

Okay. So that was a very detailed question and unfortunately my answer is going to be much shorter. To be honest, it's very difficult to figure out how exactly things are going within government agencies. There is always the question of budgets and obviously we have that one. But when it comes to these signature cycles and the way their approval goes, when things are moving from one quarter to the other, to be honest, we do not receive clear answers. As far as how confident we are with getting those deals, we feel very confident. But that's really as far as our understanding goes at this stage.

Got it. I don't know if you can't, maybe go into a little bit deeper of why you expect the second half to pick up more than the first half. Is it because in the second half people get closer to the budget levels and then start making decisions? Or why is it the second half?

Well, it's actually pretty common in sales cycle of capital equipment. The companies that acquire machines or any equipment of hundreds of thousands of dollars or millions of dollars they build up an annual budget. It normally happens through the beginning of the year and the approvals are set through the beginning of the year. And then you start monetizing a bit later during the year. Sometimes your decisions which are being taken by customers based on budget considerations and it's just easier for them to have that. So it's really almost a statistical data that we bring from our experience and from others.

Okay. Do you -- are you planning to and maybe you have lots of breakdown on systems sales versus warranty service versus consumables, the percentage breakdown or is it too early for that?

We have this breakdown on an annual basis on our 20-F, you can see it. In order to [indiscernible] of the financial, most of the revenues of $5.1 million in 2018, will obviously to stay and support services. And there was some a printer income and consumable income. So we will do the breakdown on a yearly basis.

Right. I was thinking didn't you have any projections for 2019 yet.

Well, I can give you some guidance here. The majority of the revenue would come from system sales. However, although the whole pie needed to grow. There is going to be a slight portion towards consumables and warranty because the consumables are going to be given also to the existing installed base of machines. And also because in the first year of sales, we were not able to monetize on warranty as much as we could in the second year because the first year is actually a portion of the system sales.

Yes. For each sale a portion of the -- of the same price is attributed to the warranty section. So it is presented separately in the revenue note.

But in terms of significant numbers, it's the system that are [indiscernible] part.

All right. Two more real quick. One is on the consumables, your scalability on those is you have no issues on obviously delivering on the consumables for the system to sold and the possible numbers you're looking at this year/

Yes. That's right. We don't have any issue. We have our production facility up and running and it's built in a way that allows us to scale it up gradually as we move forward. It's an ongoing process that we deal with successfully and we see no risk in our ability to provide materials. What was the second one, was there another point…

The final question is, on a macro sense, I mean it's been a year now. How do you see your total addressable market? Are there areas that have come up that you didn't expect that have opened up for you? And are there areas where you thought this is going to be a big deal and it's a lot smaller?

Okay. That's a great question. And I should say that again looking backwards into 2018 we did not anticipate a smooth and effective entrance to the defense segment sector. So, that was a great positive surprise for us. Looking into 2019, one of the areas that we feel is highly potential moving forward has to do with IoT, Internet of Things and applications that combine antennas with -- antennas of all kinds of RF amplifiers and all kinds of different frequencies basically. And being able to produce them in combined with the modular pieces. So that's really a target market where we're looking at and I'm talking application wise because from the geographical perspective, we're already pretty much everywhere. So I guess, yes, the more interesting part would be for the application side. But, what I will say that some geographic perspective, the U.S. is very likely to continue to be in the lead with what we believe would be probably approximately half of our states coming into 2019.

Great. Thank you very much and congratulations.

Thank you.

The next question will come from Orin Hirschman of AIGH Investment Partners.

Hi. Good morning. How are you?

Fine.

Hi, good morning. In terms of trying to make this year's guidance, are there any production applications and this is really a prototyping year still in terms of customers?

Well, I would say that it's going to be mostly prototyping and that's how we're looking at our sales moving through this year and the projections and everything that we're taking into consideration is based just on prototyping. Having said that we are working and promoting with our application engineers, several strategic accounts and customers with the purpose to pick them over the fence as we see and start working with them on something which is more substantial.

You need to make any major -- you need to make any major changes on the product level in order to get to that point? Or that's not what it's about, it's a matter of getting customers comfortable?

It's mostly about getting customers comfortable because even with the DragonFly Pro as we now technically, you could create small devices, for example, battery holders with RF antennas, quantities on hundreds within one print overnight. They're very small, but still they're valuable. So from that perspective we are ready. Having said, that we are working also on improving the quality of the product and the readiness of the product is the normal evolution fast enough with better readiness for production. So that's really the direction and the roadmap of both the product and how we see the market and the customer needs.

Okay. Great. Okay. Thanks very much.

Thank you.

The next question will come from Aaron Martin of AIGH Investment Partners.

Hi, Amit. In your response to Brian's question about direct sales, you said that an exception would be strategic customers. Can you elaborate on what a strategic customer means?

Absolutely. Let's say that we've been approached by a very large mega corporate whether it's U.S. or European. And the level of discussion has quickly moved to a level of CTO with something at that level in a certain division. And they're not talking about just buying the printer because that they won't be just products, they're talking about some collaboration that could lead them to usage of several machine specific applications that they need. And that type of relationship not really handing over to our listeners.

Does that mean you need to be doing some sort of development work to match their application?

At the level of application engineering, yes, not at the level of machines. It's not requiring us to develop a new machine, but it does require us to work with them to understand their benchmarks, improve the recipe to [indiscernible] and to that level it's a collaboration, yes.

I have a lot of questions before about defining your different customers. Do you have any current customers that are strategic customers as you're describing them?

Yes, we do.

Okay. Thank you very much.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Okay. Well, thank you everyone. And we will be happy to get in contact with you also in the next quarter. Have a great day.

Thank you. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.