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ExOne 2Q17 results -4

10:45 10-Aug-17

To my mind, the most important point from the ExOne conference call was that operating costs won't be cut any further.  Management is projecting more losses for the third quarter, and a turnaround in fourth.  As a result, the $25M+ on balance sheet will decline to around $20M at year end, or less than $1.25 per share.  Management also revised revenue growth down to 20-25% for the year, but maintains its stance on achieving positive operating EBIDTA by year end.  Given that ExOne's business is typically strong around year end, I'm more concerned about the long-term picutre than with whether or not that goal is momentarily achieved.

It's pretty clear that I'm not alone there, and management spent a large portion of its prepared remarks playing indirect defense against Desktop Metal.  For those who don't know, this another MIT startup with more than 130 patents filed.  The company just raised $115M including from GE Ventures.  GE has been promoting "point of use" manufacturing in addition to smart factories. 

There is certainly some unproven hype here, but the prototyping systems are already in the wild.  First of all, the speed comparisons are to laser-based systems, not ExOne's chemical binder jetting process, but if the representations are correct, they should still be more than competitive.  More importantly, I've seen no ISO certifications so far.  Those would be needed for real industrial manufacturing, and the process could take months or even years. Even so, academic and business backing mean that the promises can't be ignored either.  Here's what we've seen so far that makes me think DM is a potentially dominant competitor:

• Price: the prototyping model is just $120K, which is at the low end of ExOne's range for Innovent ($100-250K).  However, the forthcoming DM production model is expected to be just $360K whereas ExOne's comparable machines run well into the millions.
• Materials: although the DM prototype uses Bound Metal Deposition (powdered metal pre-bound into rods), the production model will use a broad range standardized powdered materials, thereby cutting into ExOne's proprietary materials business.
• Safety:  DM promises a much less hazardous process that avoids the need for specialized ventilation and handling, thereby easing the extended installation and training issues that have plagued ExOne and other approaches.
• Quality: DM-produced items are 99.8% dense!  This speaks to the suitability to ExOne's core industrial markets.  There is also some implication that parts from production models may not even need additional finishing, though that remains to be seen.
  

When you put these attributes together with the ground-breaking speed claims, it's clear that ExOne has a new, better funded, and potentially dominant competitor.  ExOne management attempted to spin its experience as a positive, but that's at least as much a history of missteps as it is a positive.  To wit, the company has been selling "beta" Exerials with no margin as part of its redesign of the process and it has not yet begun active negotiation on commercial sales for these.  It further admitted that the machines will need to be customized by end-user application. 

So far I've received no objections to dropping ExOne coverage, and multiple messages in support.  That is likely to happen at some point this year, as it seems clear to me that we have a level playing field, but potentially unequal competitors. 

ExOne has released results for its second quarter

• a loss of 40 cents per share, misses by 24 cents
  
• on revenue of $10.8M, which misses by $4M
  

Some of the loss is in conjunction with the write-down of obsolete inventory in conjunction with updates to the company's platform, but that accounts for less than a third of the bottom-line loss, and of course, none of the top line miss. 

Expenses associated with the platform change are something I'd warned about long ago.  Furthermore, it's been a long time since I've seen any reason to own XONE shares and competitors like Desktop Metal seem set to solidify that stance.  I'll listen to the conference call tomorrow morning and provide more detail, but i am asking subscribers again for comments on me discontinuing coverage in order to focus on better opportunities.

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