Q3 2022 Shapeways Holdings Inc Earnings Call
Good morning, and welcome to shape ways third quarter, 2000, and flying to earnings call all participants will be in listen only mode.
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I would now like to turn the conference over to Nikki sacks. Please go ahead.
Greetings and welcome to shape Reis third quarter 2022 earnings.
At this time all participants are in a listen only mode. A question answer session will follow the prepared remarks as a reminder, this conference is being recorded before we get started I would like to remind everyone that management will be making statements. During this call that include forward looking statements within the meaning of federal Securities laws, which are made pursuant to.
The safe Harbor provisions of the.
Private Securities Litigation Reform Act of 1995.
Any statements contained in this call that are not statements of historical facts should be deemed to be forward looking statements. All forward looking statements, including without limitation statements regarding our business strategy future financial and operating performance projected financial results for the fourth quarter of 2022 expected growth impact of recent acquisitions.
New offerings market opportunity and plans for compliance with the nice. He's continued listing standards are based upon current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results to differ materially from those interest you paid it or implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements.
For a description of the risks and uncertainties associated with our business. Please see the company's SEC filings, including the company's quarterly report on Form 10-Q for the quarter ended September 30th 2022.
The information provided in this conference call speaks only to the broadcast today November 15th 2022.
<unk> disclaims any obligation except as required by law to update or revise forward looking statements.
So during the course of today's call, we refer to adjusted EBITDA, which is a non-GAAP financial measure.
There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market close which can be found on our website at Jefferies Dot com.
On the call today are Greg Kras, Chief Executive Officer, and out there theoretically Chief Financial Officer, now I'd like to turn the call over to Greg Greg.
Good morning, everyone. Thanks for joining us to discuss Safeways third quarter 2022 financial results and progress during the quarter I will begin by providing a business update and share the progress that we've made with regard to our strategic growth plan, Alberta Recchi. Our CFO will then discuss our third quarter financial results and outlook for the fourth quarter.
During the third quarter, we continued to focus on executing our key growth initiatives, while integrating the three strategic acquisition, we completed in the first half of the year.
We are pleased to have delivered almost 10% revenue growth from the prior year period as we begin to realize the benefits of our strategic initiatives.
We remained focus on profitable growth aligning our resources with the highest opportunity areas to drive revenue growth, while tightly managing our cost structure.
I would like to specifically call out our continued focus on the commercialization of our software offering as we are seeing strong momentum and progress.
Gateways was created to fully digitize the end to end manufacturing process in order to accomplish this vision, we developed a proprietary software platform, which gives us the ability to deliver high quality low volume manufacturing at compelling economics for our customers.
And also provide shape ways with a meaningful opportunity to commercialize that software.
We have made significant progress towards the overall commercialization of our software in 2022.
Specifically in the third quarter, we focused on the integration of the most recent mfg and maker of less acquisition and a positive contribution to the auto SaaS roadmap.
By the end of this year, we expect to realize more than 500 active SaaS revenue generating customers and reach over one and a half million dollars of revenue, which is up from only $300000 last year.
We've made strong progress optimizing new customer acquisition and existing customer retention and are currently working to unify the product offering across shape with MSG and make or less.
The vision for our software to provide a suite of tools and services that will digitize manufacturers we.
We are currently focused on building on the momentum we achieved this year and plan to deliver revenue generating features to our customer base throughout 2023.
We expect these features to allow us to capture revenue through SaaS subscription transaction and processing fees demand generation, servicers and overflow manufacturing capabilities by shape ways and other supply chain partners.
We see we see significant growth potential for our software offering in both the near term and Walter.
In terms of expanding our go to market strategy, we are continuing to execute on our strategy to develop and scale outbound business development resources to support enterprise customers we.
We are encouraged by our progress in growing pipeline across our target automotive medical aerospace and industrial segments.
The buying cycle for these customers has been longer than expected, but we are seeing initial qualification orders moved to scaled production orders.
Really we have seen these customers expand the scope and scale of their original projects.
We've seen strong momentum in the automotive industry facilitated by our acquisition of linear Ams.
This business has added deep domain expertise and sophisticated manufacturing processes.
It provided us with access to a customer vertical which had been which would have been challenging to penetrate organically.
By integrating linear ams onto the shape waste platform. We believe we can further accelerate the growth of that business by leveraging the broader shape ways manufacturing and software capabilities.
This tuck in acquisition has proven to be an efficient use of capital to drive growth.
Spanning manufacturing capabilities and expanding our go to market strategy.
We also continue to optimize and scale the added manufacturing capabilities that we have added over the past several quarters and hardware material post production processes and certifications we.
We have been focused on driving quality gross margin optimization and working directly with our customers on application development.
We've invested to drive growth and the results are already emerging while current macro and geopolitical pressures could result in delayed buying decisions. We believe this environment also presents a potential tailwind for safeway's, our strategies around managing supply chains continue to shift and manufacturers strive to diversify and have them.
More control over their supply chain.
We believe shape ways provides a clear and compelling solution.
We are helping companies solve their manufacturing needs in a highly efficient way. We do this provide by providing a broad range of industrial grade manufacturing solutions to our customers and by acting as a marketplace connecting buyers and manufacturers across additive and traditional leveraging the power of our software and digitized platform.
We believe we have a massive market opportunity within a trillion dollar global manufacturing industry.
And with our enhanced capabilities from our recent investments our addressable market continues to expand.
With this focus on achieving profitable growth, we are allocating resources into initiatives that we believe will deliver the highest result, such as commercializing our software and deepening our efforts in key vertical as we evolve our focus towards enterprise customers.
Additionally, we are further optimizing our cost structure with the consolidation of our long Island City, New York manufacturing facility with our Lavonia, Michigan facility.
The consolidated facility will provide us with a more centralized location for our U S customers and an optimized manufacturing footprint that can easily be expanded over time.
We have a strong cash balance, which supports our normalized cash burn positioning us well on our path towards profitability.
I would like to formally welcome Alberto Recchi, who joined the shape waste management team as our new CFO October 1st.
Alberto has been a board member and Investor since our IPO and continues in those capacities.
We are excited to have him onboard as an important member of our executive team.
We are making tangible progress through strategic investments in people facilities technology and manufacturing capabilities as we execute on the on our opportunity to capture and expand our market share using our highly scalable digital digital manufacturing platform and software.
We'd like to thank the entire shape way's team our customers, our investors and all of our stakeholders for their ongoing support.
Porto will now discuss our financial results in more detail.
Thanks, Greg I'll provide a recap of our third quarter 2022 performance given update on our balance sheet position and provide guidance for the fourth quarter.
In the third quarter revenue increased nine 5% to $8 4 million compared to $7 7 million in the prior year in line with our expectations.
The increase in revenues was primarily attributable to positive contributions from our software offering.
Eileen over our additive manufacturing capabilities and traditional manufacturing services.
Our gross margin in the third quarter were 44% compared to 47% in the third quarter of 2021 we.
We continue to deliver top tier gross margins and a year over year change was primarily due to inflationary pressures. The continued ramping of recently deploy new technologies and a more varied product mix.
Third quarter adjusted EBITDA was a loss of $4 6 million compared to a loss of one 8 million in the third quarter of last year.
SG&A expenses for the third quarter were $7 6 million compared to $4 4 million in the prior year.
The increase in SG&A expenses, primarily resulted from increases to personal cost amortization expense related to intangibles acquired as part of the acquisitions a leaner M. S. M S G and make a reverse.
Increased professional fees and other spending related to being a public company and one time restructuring costs related to our move out of the long Island City facility.
The completion of this move and consolidation of our U S manufacturing capabilities, you've only in Michigan. We anticipate will result in a reduced cost structure and gross margin benefits for the business as we move through 'twenty 'twenty free.
Turning to our balance sheet as of September 30, 2022 our cash and cash equivalents totaled $46 9 million during the quarter, we deployed approximately $3 5 million, reflecting a reduced cash burn this quarter as compared to cash utilization earlier in the year when the company made meaningful investments in acquisition.
The metal equipment.
We expect a higher burn in Q4, as we complete our manufacturing facility consolidation and cover expenses, such as D&O insurance annual premiums.
We believe the continuous strength of our balance sheet and our focus on achieving profitability in managing cash burn will allow us to execute on our organic strategic plan without any near term need to raise additional capital.
However to provide additional financial flexibility in this part of our focus on good corporate governance, given we'd reach shelf eligibility, we filed 50 million universal shelf filing along with an at the market offering both of which have been declared effective by the SEC.
While we do not anticipate drawing down on the ATM in the near term the program will allow us dual port domestically access the capital markets and also potentially funding organic growth.
Looking ahead for the fourth quarter of 2022, we anticipate revenue to be in the range of $8 7 million to $9 1 million as.
As we continue to invest in both new hardware and all of that go to market initiatives. We anticipate some continued near term pressure on gross margins.
We continue to anticipate a ramp up of sales over time from our investments in new technologies and materials. The continued rollout of our auto SaaS offering along with an increase in investment in business development resources and the positive impact of our recent acquisition.
Lastly, I would like to address the notice that we have received from the more socket change on August 17, 2022, indicating were not in compliance with the continued listing standards as the average closing price of our common stock was less than a dollar per share over a consecutive 30 day trading period.
We finally have responded to the euro soccer changes with respect to our intent to cure the deficiency no later than at our next annual meeting of stockholders.
Our board of Directors has approved the company, calling a special stockholder meeting Q1 next year to approve a reverse stock split.
Our intention is to file a preliminary proxy statement with the SEC before the end of this month.
And with this we'd be completed our prepared remarks, and we'll now open the call for questions operator.
Well now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Thanks. This is Danny aggregates on for Greg today, Thanks for taking the questions.
I guess, just starting on kind of the overall, what youre seeing in the demand environment, maybe if you could give some detail on you know monthly cadence throughout throughout Q3, and how you've seen that progressing.
You know through early October and November here, any end markets or that stick out to the positive or negative if anything there.
Hey, Jamie Thanks for the question. Thanks for joining today I think we take a step back that theres really two areas that I would want to touch on one is shaped ways historic kind of self service business.
And that tends to see quite a bit of seasonality in the fourth quarter supporting a lot of our consumer businesses around the Black Friday, cyber Monday, and then the holiday season.
And then we also have a lot of engineer.
Engineering teams that are trying to finish up orders before the end of the year and close out budgets and so we tend to see a spike in our core business and some higher seasonality occur in Q4.
We are also starting to build the more enterprise business development focus customer acquisition model and I think it's too early for us to really make a call on whether that has any seasonality or not now but that being said I think we have a strong pipeline a lot of orders.
Through qualification and moving into more production type orders and so we expect that to continue over Q4 into Q1, but in the very very near term you would you expect to see something that really driven by our installed self service business.
Okay, Great maybe if I can just touch on an auto you gave some some good metrics about customers and revenues that you're kind of expecting by the end of this year.
I guess.
What kind of are we still in phase two of the rollout on that you know you mentioned you know, adding more revenue generating features in the upcoming year. So how should we think about you know.
<unk> customers in additional contribution based off of kind of these planned new features that are coming in in the coming year.
Yes, I think there's a couple of things to think about when we think about auto we're still in the very early phases of this rollout with that being said I think we've seen we've been able to monetize its quite a bit of customer base through a series of features and Theres a lot of additional customers that we have access to based off of the acquisition that we did with the <unk>.
G customer base.
So what we expect is to continue to drive customer acquisition and retention and then also started to rollout additional features.
Did that have additional revenue and we're not really ready to talk through that in detail. Yet there were still a lot of testing phases associated with those features but I do think that theres, a tremendous amount of opportunity sitting in front of the business. Both in the short term and the long term with the rollout of those features and I think we will have be able to talk a lot more to that as we move into the first.
Half of next year.
Got it maybe if I can just get one more in here on the metal side, how is that ramp going and maybe what you're seeing from the desktop metals side and then maybe on the other side of like the G E N E S.
Yeah, I would say like there's different levels of maturity in those different technologies I would say that we've had some challenges rolling out some of the desktop metal equipment at least at the beginning it takes time for us to kind of optimize those machines and then get that working at a were working in a way where we feel like the REIT.
<unk> Sirona controllable state and we feel like if we're delivering good quality printing back to our customer.
Are seeing some volume like a right I'd get a BD review of just last week and there was quite a bit of opportunities sitting in the pipeline supporting basically.
Our metal printing, but with that being said I think this is still relatively new for us we're seeing traction.
And we will continue to focus on the optimization of it but again, we don't want to go too fast we want to make sure that we rollout these products to our customers in a way, where we're delivering high quality at good cost.
And good gross margins for that.
Yeah makes sense all right. Thanks, I'll leave it there.
Thanks, guys our.
Our next question comes from Troy Jensen with Lake Street Capital. Please go ahead.
Hey, gentlemen, thanks for taking my question. So maybe I guess, maybe for Alberto just curious to know could.
Could you guys quantify the revenue contribution you've had from the acquisitions and what I'm trying to get to figure out an organic growth rate for you guys.
Yeah, Hi, Troy just speaking to you again, I'd say, probably around 656 $7 million on a run rate basis.
Okay.
Cause like a quarterly so you're talking one and out to 2 million and in the September quarter.
How about something like that I can walk you through maybe on that on a separate call specific beyond that that's fine.
Yep Yep totally and then could you I know you gave some information on auto could you repeat kind of the timing of the revenue ramp and kind of go through those metrics one more time I'm, sorry, I missed it.
No that's fine.
In the previous remarks, we had mentioned that we closed about 300000 hours for revenue last year, we expect to exceed over $1 5 billion of revenue this year coming from the different features on the auto platform will also achieve over 500 customers active customers paying customers on the platform by the end of the year and so right now we're focused on the funnel.
On the front end customer acquisition and then also focused on.
Just a stronger retention model and then as we do that we'll start to layer in more and more additional features that drive revenue for the business on top of it and so there's a I would say right now because of the MSG acquisition in the maker of West acquisition, we're really focused on unifying the platform and rolling out those features to draw.
<unk> customer acquisition and retention and so we see a lot of that.
A lot of upside potential in the business for next year as we continue to roll that out but things are rolling out as we expected and we're feeling really really good about the progress.
Okay. So a couple more for me and thank you for that info the.
The Michigan move.
Timing of completion, when you expect to open that facility up and shut down in long Island.
Yeah, I would say we're about halfway through it right now we decided to take the approach of doing it kind of in phases.
Right now the build out of the.
Detroit facility is almost complete.
I expect it to be completely done by the end of the first quarter were definitely.
Probably ahead of schedule on that but we want to make sure that we're well prepared for it.
So, we're giving ourselves a little bit of wiggle room, but we should be completely done by the end of Q1.
Okay. Perfect last question here, maybe a multipart, but a follow up on the last question about metals are you guys running more than two shot machines currently.
Yes, right now we have three shop machines operating out of both the long Island city facility and our own children facility, we are relocating.
The long island city equipment to the Detroit area, and so there will be a little bit about <unk>.
<unk> down for probably a handful of weeks as that process goes on but we have enough capacity to offset it so but during that time period.
Got you understood. So just a follow up on the D. M. They go ahead and.
Thanks, Greg.
He was going to say, we also have a wood shop system as well for a shop system.
Okay. So set up in a in Detroit, but that's more in its infancy stage, but to your specific question about metals, we have three shops system set up for metal right now yep. Okay. I guess, what I was ultimately getting to is are you know I think you've spent the entire $20 million that you require to do desktop metal.
Hum.
I guess are all those machines being use it just doesn't seem like you're having organic growth to justify such a big investment in it.
And and more additive equipment.
Yeah.
The investments that we've made in desktop metal that peer that was in place at the end of last year covers not only desktop metal equipment, but also envision tacking and there's some of the products that they got from X one as well. So there is it's not just in the desktop metal equipment, but we are still isn't very beginning of rolling out the technology.
And so we have.
I'd say, where we're at the very beginning of the rollout of that pool by it but we do not want to roll that out too aggressively we want to make sure that we're rolling that out and pacing it with the demand of the business. So the worlds are meeting the expectations of our customers.
Awesome, Alright, I guess I'll follow up and I'll take it offline with you guys Congrats and good luck.
Yes, thanks, Rob.
Yeah.
Our next question comes from Jim Ricchiuti with Needham and company. Please go ahead.
Thanks. Good morning first question is on the operating expense, which was up quite a bit from Q2 levels. Despite the revenues being flat sequentially was.
Was this mainly acquisition related amortization expense or how much of this reflects investments in go to market. Your go to market strategy and yeah, I guess, what I'm asking is how should we be thinking about opex in the current quarter as well those over the next few quarters, if you're in a position to discuss that.
Yeah, maybe I'll take this is Greg.
Yeah. That's right. Yeah look I think Q3 is a decent indicator of where SG&A will be in Q4.
Some of the factors really excited in my opening remarks that contributed to the increase.
G&A expenses, I think remain valid and would be felt this quarter specifically.
One time restructuring costs related to our move out of the long Island City facility.
This professional fees and other spending related to being a public company, which again will remain in line as they work for Q3.
However, we do not expect personal cost to increase further.
So again I would probably just use Q3 as a proxy for Q4.
And.
As you.
Phase out the long Island city facility.
Panic.
And ramp the Michigan Operation do you, maybe you could talk to.
The potential drag on margins in Q4, and Q1 I guess this is all expected to be completed by the end of Q1 next year.
Yeah. So.
Go ahead Alberto.
I was just going to say I'm going to pick it up where you left the rise when we began transitioning our U S manufacturing capabilities to the facility in Michigan.
This is definitely expected to resolve in third optimization of our manufacturing processes reduce cost structure and gross margin benefits for.
For the business, but again, we expect this transition to be completed in the first quarter of 2023, and therefore, the positive impact on gross margins will be visible throughout next year I don't know, Greg If you wanted to add anything else.
Yes, the only other point I would make there will be some increased labor, where we're running almost two facilities in tandem, but we've already been experiencing that because we've had some redundancy in that plan as we move it face to face.
So from a planning perspective, theres, a small amount of pressure on our gross margin.
In Q4, driven by that but it's in the Grand and the Big picture, it's actually quite small from an application standpoint.
When you talk about the scale up of.
Michelle qualification orders to production orders.
I wanted to two if we could.
Go into that a little bit more is this tied to a set production schedule, where the are these qualification orders.
Providing customers with maybe an insurance policy in the event they experienced supply chain challenges with specific parts.
Yes, that's a great question, Jim I think that what we've seen so far is quite a bit of qualification orders right, where when you go through the first article inspection you go through qualification you become certified supplier and Theres been a handful of customers. Unfortunately, we havent been able to talk about those customers yet because of confidentiality, but they are.
It's similar they're using additive manufacturing for the value that it really does great. So on demand manufacturing, where there is fluctuations on demand from their business on a week to week basis.
But I will say the programs are quite large and they're growing.
Over a month for a couple of customers that we have a couple of sizable customers that are really transitioning into production and so we're feeling really good about it but I don't think that we're going to get to a point where.
Every part is still different the volume it still fits our value proposition very strong, which also allows us to capture strong gross margin from it right. If it was more of a at scale production part where.
There'd be less.
The need for a differentiation, we probably have more pressure from a price perspective, and so we're still targeting those applications, where we have differentiation and I think we'll learn more as we move into the first half of next year, because those will have more customers close and we'll have more orders. So we can take a look at the cohorts of those customers and how they're performing on a month to month basis.
But as of right now they are continuing to grow and expand.
We're happy with the results that we're seeing.
And final question for me is just on the topic of customers you alluded to the 500.
Active auto customers.
Customers by the end of the year I Wonder if you could talk to some a little sense as to what the profile of these types of customers or yeah.
Yeah, Yeah, that's great I think the the.
Profile is still small and midsize manufacturers, mostly on the traditional side, we do have some customers on the asset side as well.
They're using the features that we've been rolling out so far are a mix of what we consider more ordering services everything from demand generation flowing to them to also the ordering platform and transactions that will be flowing out.
Through the path through the platform and so.
It's really small midsized non digitized manufacturers that we.
We see many customers and and I think the interesting thing for US is M. A G came with about 15000 active nonpaying customers that we can start to slowly roll out those features to overtime and migrate those customers. So from an acquisition standpoint, I think there's a lot of very interesting things that we can do for customer acquisition as we move into the fall.
First half of next year.
Got it thank you.
Thanks, Jeff.
Our next question comes from Noelle Dilts with Stifel. Please go ahead.
Hi, guys. Thanks for taking my question just on the gross margin front I was hoping you could expand a little bit in terms of.
What you're seeing on the inflationary front and you.
You know I guess your success in passing that through via pricing I.
I guess in other words, how are you.
You know willing because the market been to accept price increases and how are you thinking about that heading into 'twenty three.
Yeah. Thank you well thanks for joining up great question.
If we take a step back there is a couple of things that are impacting our gross margin. One we do see some inflationary pricing from a material perspective, but in general that's a relatively small component to the overall cost structure and most of those costs can pretty easily be transferred over to our customers now there's been a few.
Places where that hasn't been as easy specifically on some of the metal products that we outsource so we do outsource some metal product.
Park production we've.
We've seen some pretty significant cost increases there and that's been a little bit more challenging to pass on all of that price to the customer without losing volume from a revenue perspective, and then the other point I would make is we have seen increased energy cost specifically in our Angolan facility. We're just overall overhead costs are up.
But with that being said we are confident that we can continue to strategically roll this out to our customers. The good news is most of our customers are the vast majority of our volume is on demand and so it's easy for us to test new price increases.
Or a different upsells throughout the process to offset some of the implications from a deflation standpoint.
Okay, maybe Greg if I can.
Can I add something because I guess for.
We're helping you model this through right.
Q4, again, we expect gross margin to hold strong right and so looking at Q4 I would most certainly use Q3 as a proxy.
Similar to what we thought whereas DNA and its Greg.
And just said you know my feel a slight pressure on margins compared to Q3, but you know again use Q3 as a problem.
Okay.
And I guess another question I had was and I think you've kind of touched on this with with Jennifer question, one of Jim's questions, but when you're going through this sort of facility transition and I understand that there's no direct costs that you've called out but sometimes I know there can also be sort of inefficiencies or you know you have to build up some inventory there.
You know Greg backup capacity in order to support that that move anything like that that we should be mindful of as you transition to the Michigan facility.
I would say, there's nothing really to call out specifically I think the biggest thing that we're thinking right now because we're doing it in phases. There is some redundancy in our labor model, but the beauty of this transition as we're leveraging.
Floor space, that's already in place stay at linear Ams, So there's very limited additional.
Overhead cost and structure. There is also we do have the redundancy and some of the labor model and from an equipment and material standpoint, it's relatively flat, we're able to do this in a way where there isn't a ton of unnecessarily unnecessary overlap and so I think we're managing the process very well.
Why.
We've been doing this for quite a while and we've seen so far good results now.
Now with that being said, we still have another.
Maybe five four to five months of this transition before it's absolutely complete.
But we don't expect any significant.
Issues related to the migration.
Okay, Great and last one for me I know you discussed your expectations for fourth quarter cash burn being a bit higher but could you. Just you know kind of revisit how you're thinking about your cash needs on a quarterly basis I think in the past you've talked about kind of a $4 million to $5 million burn rate is that still the way we should think about that.
Yeah right now we're looking at more like three and a half to $4 5 million burn rate normalized burn rate.
On a quarter by quarter basis, obviously that improves over time as we grow our revenue and gross margin models and and the mix of our gross margin and we see our cost structure being controlled and so at.
At this point in time, we do not need additional capital to achieve our goals and reach positive EBITDA and so we continue to really focus on just maintaining that tight cost structure and pushing on our growth initiatives.
And so we feel like we're in a really good spot, but you will see cash.
Improve overtime as we execute on the plan.
Great. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Greg Kras, Frank closing remarks.
Well, Thanks again, everyone I appreciate everyone joining the call on behalf of myself and the entire Safeways team. Thanks for taking the time and joining US today, we look forward to providing additional updates in the coming months.
Yeah.
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