Amid Stratasys Merger Buzz, Desktop Metal Unveils Q2 Earnings – 3D Printing Financials

Last time we discussed Desktop Metal (NYSE: DM) ‘s earnings, the company was gearing up to merge with Stratasys (Nasdaq: SSYS). However, in a split second, from June to August 2023, the game changed. The merger predicted by 3DPrint.com‘s Editor-in-Chief Michael Molitch-Hou and 3D printing expert Tuan TranPham to “yield the greatest overall complementing portfolios” remains uncertain. With this backdrop, Desktop Metal released its second quarterly earnings. Revenue saw a year-over-year decline, partly attributed to the company’s efforts to de-emphasize product lines with lower-quality revenue prospects and narrower gross margins. Meanwhile, the company’s streak of net losses persisted with another quarterly deficit.

Deal Dynamics

Although the second quarter earnings did disclose an agreement to combine with Stratasys in a $1.8 billion all-stock transaction, the final verdict remains uncertain. Stratasys unveiled the next merger chapter in the additive manufacturing (AM) industry with its planned acquisition of Desktop Metal. However, the plot thickens as Stratasys has now entered discussions with 3D Systems (NYSE: DDD) to verify that its proposal is “superior” to the existing Desktop Metal agreement.

This complex scenario has been made even more difficult with the presence of Nano Dimension (Nasdaq: NNDM). With over $1.2 billion in cash reserves and a substantial 14.1% stake in Stratasys, Nano Dimension’s role can’t be ignored. Earlier indications suggested Nano Dimension was interested in a potential merger with Stratasys and 3D Systems – leading to speculations of a colossal joining of all four companies. However, recent announcements hint at a change in strategy, with Nano Dimension now leaning towards selling its stake in Stratasys to pursue new acquisitions.

Meanwhile, 3D Systems is thinking about ending its deal with Desktop Metal. This is because Stratasys might prefer 3D Systems’ offer. Some Stratasys shareholders don’t like the idea of buying Desktop Metal. Also, the Donerail Group, which owns a small part of Stratasys, doesn’t want the Desktop Metal deal and prefers 3D Systems. Talk about a complicated merger deal!

Desktop Metal CEO Ric Fulop. Image courtesy of Desktop Metal.

Amidst all these merger difficulties, Desktop Metal’s financial performance reveals its own story. According to the earnings report, Desktop Metal’s revenue, up by 29% sequentially, reflects a positive trajectory for the company. However, last year’s revenue was higher for the same period. On the other hand, the reported net loss of $49.7 million spotlights some challenges. Furthermore, the company’s cash and short-term investments have declined, closing Q2 at $127.6 million, down by $22.2 million from the end of Q1 2023.

For 2023, Desktop Metal has confirmed its financial expectations, projecting a revenue ranging from $210 million to $260 million. It also anticipates an adjusted EBITDA between a loss of $50 million to a loss of $25 million. Notably, the brand aims to reach an adjusted EBITDA breakeven point before the close of 2023. Desktop Metal didn’t show how its EBITDA predictions match actual earnings, saying it’s tough to compare them directly. Even so, there are clear signs that things are improving, as the company is reducing losses and aiming to balance its finances by the end of 2023. The company did especially well in the second quarter, thanks to work in binder jetting and metals, significantly influencing its robust financial outcome. It’s also been making good progress in producing consumer electronics.

During the earnings call, Jason Cole, the chief financial officer (CFO) and treasurer, indicated that while the first half of the year might have slightly missed the mark in terms of original expectations, it was somewhat anticipated, thus the broad guidance range. He says there’s evident growth in various business areas, with binder jetting, digital casting, and metals showing particular strength. There’s also mounting enthusiasm regarding the growth trajectory in the dental domain and formal polymer healthcare. Although Desktop Metal remains cautious, “positive signs from the second quarter closure hint at robust demand on the horizon.”

The merger dance

Ric Fulop, Founder and CEO of Desktop Metal, said he was satisfied with the Q2 results and emphasized the company’s robust sequential revenue growth. “Desktop Metal continues to execute on our cost reduction plans, and with strong growth drivers and customer demand trends entering the second half of 2023, we are confident in our growth projections, improving margin profile, and adjusted EBITDA commitments.”

But the elephant in the room was, undoubtedly, the much-talked-about Stratasys deal. Addressing the merger during an earnings call with investors on August 3, Fulop seemed to adopt a practical approach. He highlighted the collaboration, describing it as the birth of “a powerhouse in global industrial additive manufacturing.”

Fulop also stressed that this wasn’t a forced move for Desktop Metal. In his words: “Partnering with Stratasys to create the first AM company to achieve comprehensive scale across the entire manufacturing life cycle, from designing and prototyping to full-scale mass production, is a special opportunity for our combined companies. Together, we have incredible potential by combining Desktop Metal’s complementary portfolio and track record of innovation and growth with Stratasys’ extensive market reach and operational excellence to serve the evolving needs of our customers.”

The CEO then spoke of Stratasys’ major position in polymer 3D printing and its “exceptional strength” in the aerospace, automotive, and healthcare sectors. In contrast, Desktop Metal would inject its leadership in the mass production of metals, sand, ceramics, and dental printing solutions. Fulop seemed particularly eager about the synergy between the two firms, noting the lack of product overlap and the merging of over 800 scientists and engineers from both sides.

Desktop Metal’s Studio System 3D printers. Image courtesy of Desktop Metal

As for the financial details, the potential transaction could bring about approximately $50 million in annual run rate cost synergies and a similar figure in annual run rate revenue synergies by 2025, suggests Fulop. But the main message was obvious: while Desktop Metal supports the merger, it’s not an “outright acquisition, as some might claim.” The deal ensures Desktop Metal shareholders receive about 41% of the combined company, with a near-even board representation. Despite the optimism, Fulop cautiously added, “If ultimately, our shareholders decide this isn’t the best path, we remain confident in our long-term outlook.”

In the earnings call Q&A session, when an analyst asked about a potential termination fee if Stratasys chooses to walk away, one of Desktop Metal’s executives confirmed that it would be “in excess of $32 million.”

It’s clear that the additive manufacturing industry is watching the ongoing story between these two giants. Their actions could change the industry, affecting investors and the broader manufacturing community. Right now, everyone is focused on Desktop Metal, Stratasys, 3D Systems, and Nano Dimension; looking forward to seeing what they’ll do next.