Q3 2022 Markforged Holding Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Mark for its third quarter 2022 earnings Conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time during the conference you need to reach an operator, Please press star and zero as a reminder, this conference is being recorded.
I would now like to turn the call over to Austin Bohlig Director of Investor Relations. Please go ahead.
Good afternoon, I'm Austin, Bohlig director of Investor Relations, Mark forged holding corporation welcome to our third quarter fiscal year 2022 results conference call. We will be discussing the results announced in our earnings press release issued after market close today.
On the call is our president and CEO shai to them and our CFO Mark Schwartz.
Before we get started I'd like to remind everyone that management will be making statements. During this call that include estimates and other forward looking statements, 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. These.
These statements represent management's views as of today November nine 2022, and are subject to material risks and uncertainties that could cause actual results to differ materially.
<unk> disclaims any intention or obligation, except as required by law to update or revise forward looking statements.
Also during the course of today's call, we refer to certain non-GAAP financial measures.
A reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close today, which can also be found on our website at investors <unk> Dot com.
I'll now turn the call over to <unk>, President and CEO Mark <unk>. Thank.
Thank you Austin and thank you everyone for joining us on our Q3 2022 earnings call. Despite the challenging operating environment demand for the detailed <unk> continue to grow globally, maybe third quarter.
Strong cost control allowed us to see sequential operating leverage and deliver on our EPS target.
It is exciting to see one more customers unleashing the power of the digital forge to design new products to manufacture product and to embed digital forged parts in the final report of T cells.
I see examples all over the world and in key industries, such as drones and aerospace.
Electric motorcycles, and automotive and even in medical equipment. However, while we met our EPS target, we did not deliver on our revenue and gross margin targets for the quarter.
Erica in EMEA.
Creation and geopolitical pressures in.
Impacted our mature line of bigger.
And globally and supply chain challenges continued.
We're able to meet the growing demand for <unk> and its cost targets.
Thanks to our team and growing market opportunity, we exited the quarter with one of the largest pipeline of opportunities in the history of our company.
The long term fundamentals of our business remain intact and can.
To gain momentum.
Increasing number of manufacturers in the western World onshore more of their supply chain.
We couldnt be more excited about our vision to make manufacturing more resilient, but using the detailed forge to bring industrial production to the point of view.
As we had anticipated that fixed.
Our newest production great Peter.
These generating unprecedented excitement.
Factors fixed solution to make their supply chains more resilient and flexible.
<unk> is solving mission critical application such as printed aerospace grade materials reinforced with continuous carbon fiber and printed replacement parts for automotive Assembly line robotic arms.
In Q3 demand for the ethics 'twenty met expectations.
We shipped every unit, we built and still ended the quarter with a backlog of orders.
Procurement of materials and production constraints, both contributed to building this backlog.
We continue to work relentlessly to mature their fixed production and are planning to reach commercial run rate, which will enable us to fulfill orders as we receive them in early 2023.
Basic region was a highlight for us in the third quarter.
Within our expectation for significant growth in the second half of 2022.
APAC currently appears to be experiencing a more modest impact from macroeconomic.
Uncertainties.
For the third quarter revenue in APAC grew 82% year over year, and 39% quarter over quarter.
Led by strong demand for our mature products and accelerated demand put FX swing.
EMEA and Americas were not immune to current global challenges, including the one in Ukraine inflation and currency pressures.
Due to the broader impact of macro conditions on our business.
Tension to reach breakeven by the end of 2024, we recently reorganized our go to market team and we prioritized initiatives.
We believe in the potential for the greatest impact on our path to profitable growth.
With the completion of the digital Mcdonald acquisition in August we.
We are excited about our expanded opportunity in high volume makeup production.
The addition of this metal binder jetting technology.
It helps us expand our addressable market into the mass production of end use parts.
Is that mid customers like exit will use this decision maker.
Reduced parts for automotive customers, which are using vehicles such as the <unk> series.
About the same thing this letter to doing this deal.
Best in class product quality, coupled with top notch reliability.
In the field everyday from potential new customers, especially those in the medical automotive and luxury good industries want to begin using our digital makeup solution.
I also wanted to share a very exciting example of how the digital forge is pushing the boundaries of human innovation.
Our customers diverse space based on Cape Canaveral, He's building a network of 100 mall satellites.
With sensors to provide real time global insights for transportation, whether finance and other critical industries.
Printing almost their entire setback, but with a detailed forward.
By using our <unk> printer and onyx with carbon fiber enforcement.
This space is producing radiation hardened that tonight.
With our stronger than aluminum, but up to 40% lighter.
Saving money on each launch by optimizing weight.
This is a great example of how our solutions can bring rapid industrial production in house right at the point of need.
This is a difficult time for global manufacturers.
Supply chain disruption, coupled with clouding macro forecast continued to put pressure on core inputs, such as energy and raw materials.
While these pressures make capital investment decision complicated.
These very same pressures are driving the manufacturers to differentially and bring production back on shore.
With the <unk> I believe we have exactly the solution and our pipeline demonstrates this.
Supported by a strong balance sheet, we continue to execute on our strategy towards profitable growth and feel very confident in our business fundamentals.
With that I'll now turn the call over to Marc <unk>, our CFO , who will offer more detail on our financial performance and guidance for the remainder of the year.
Thanks Chuck.
I will now review our financial results for the third quarter ended September 32022, as well as review, our fourth quarter and full year outlook for 2022.
Please note that my comments reflect our non-GAAP results and outlook.
For your reference.
Our earnings press release issued earlier this afternoon and posted to our Investor Relations website includes our GAAP to non-GAAP reconciliation to assist with my commentary.
Revenue increased 5% for the third quarter of 2022.
The $25 2 million compared with revenue of $24 million for the third quarter of 2021.
Despite our best efforts, we were unable to secure sufficient electrical and mechanical components to complete production of FX 20 units and meet the growing demand.
These production challenges slowed our ramp to volume production and as a result, we were unable to meet our revenue target for the quarter.
Gross profit for the third quarter was $12 4 million compared to $13 8 million for the third quarter of 2021.
As a result, we generated a gross profit margin of 49, 1%.
Compared to 57, 6% in the third quarter of 2021.
The current cost of producing and FX 20 <unk>.
<unk> our target at steady state production negatively impacted our gross profit by $1 1 million in Q3 or over four gross margin percentage points.
We expect FX 'twenty production costs to continue at current levels through the first half of 2023 and.
And then improved steadily through the balance of 2023 and into 2024.
Operating expenses for the quarter were $28 5 million compared to $25 5 million for the third quarter in 2021 and.
<unk> declined sequentially from $30 million in the second quarter of 2022.
For the third quarter of 2022, our net loss was $15 2 million or a loss of <unk> <unk> per share.
As a percentage of revenues our net loss improved in comparison to the second quarter of 2022.
Focus for us as we manage towards profitable growth.
Finally.
We exited the third quarter with a cash balance of $181 8 million.
On plan and well positioned to execute on our long term goals.
Now onto guidance.
We are updating our 2022 financial guidance to reflect our updated fiscal year outlook, which considers the current market conditions.
We.
<unk> revenues for the fourth quarter to be in the range of $28 million to $32 million.
Which at the midpoint would result in 2022 full year revenue near the lower end of the range. We previously provided.
We expect gross margin in the fourth quarter to be in the range of 48% to 50%, which would equate to full year 2022 gross margin within the range of 50% to 52%.
We anticipate our operating loss for the fourth quarter.
To be in the range of $13 2 million to $14 7 million.
Which would equate to full year 2022 operating loss in the range of 61 to $62 5 million for the year.
Our operating loss improved sequentially from Q2 2022 to Q3 2022.
And we anticipate a further improvement in Q4.
EPS results for the fourth quarter are expected to be a loss in the range of 6% to seven <unk> per share.
Which would equate to EPS results for the full year.
To be a loss in the range of 31 to 32 per share.
Our long term goal of 30% annual revenue growth was met with macroeconomic headwinds in 2022.
We expect these headwinds to continue into 2023, but our long term goal has not changed and we believe our ambition is achievable given the strength of our innovation roadmap.
Product portfolio.
And disciplined expense controls.
That concludes our prepared remarks for today.
Operator, please open up the call for questions.
Thank you.
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And our first question comes from the line of Troy Jensen with Lake Lake.
Blake Street capital. Please go ahead.
Hey, gentlemen, thanks for taking my question, sorry, I jumped on late here, so I apologize that I'm asking something that was addressed but.
Could you just.
Give me an update here on FX, 'twenty, and maybe shipments or thoughts on when we get a real material contribution from <unk> from that big data platform.
Yes, Troy happy to happy to take that and thanks for joining us Sean.
<unk> added some color here so.
FX <unk>, what we've been saying this year is as we began to ship we would reach commercial run rates in production by the end of this year, that's now getting pushed out a quarter, maybe a little bit longer.
And the reasons for that are.
Our ramping of our contract manufacturer and particularly on the supply chain side.
Okay Alright.
We showed up on the comments, but on the demand side is very very strong continuing to build up.
We don't see any slowdown there in that or any other way.
Stronger or bigger customer.
Customer level with more customers in multiple industries.
The ethics renewing the demand side continue to grow.
So the backlog for the product is just kind of ramping production to get to.
Recently indirectly, it's all about getting into park, it's just very tough supply chain environment.
Yes, yes sure you Sir doesn't have us before you understand I think this component of our business, we typically build to order and then what.
We built the forecast and then ship it on order. So if you were to purchase an X seven today, we ship it to you tomorrow.
That's part of how we've chosen to run our business model with the FX 'twenty, we're not there yet.
And we left revenue dollars on the table last quarter, because we couldnt get our production up to speed.
So take until launch.
Youre not the only ones.
So then how about the quick on digital metal I guess I've done some amount in front of.
On the product and it sounds like the.
<unk>.
Awesome and just curious on also panel timeline for fully integration. When do you think your sales force is trained.
Want to sell it and also when do you expect to get more of a ramp.
We have essentially issue from that product.
Yes.
Good question and we are very excited around digital Nathan. So we completed that transaction was pretty one so we had one months officially with it.
I was fortunate enough to go to see some customers and cross book.
There is a real demand or bill good luck.
Quantum computing some industries that we did not fully before like medical and luxury goods.
And others.
Even more interesting to see when automotive when it's really been adopted two parts printed into the car.
So very very exciting I think the first quarter and if you're going to have digital methods will probably not be materially impacted but.
But we do expect to wrap it up next year as we continue to progress with it.
The way that we are working with it is probably a little bit different than ours.
Okay.
<unk> business with our channel partners.
Direct approach here, but we're definitely leveraging the global coverage that we have to get to the right customers.
Perfect guys. Thanks for taking my questions and good luck in Germany next week.
Thanks Kurt.
And our next question is from the line of Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yes, thanks for taking the questions I guess I wanted to follow up on.
Some of the macro and market commentary I guess I'm a bit confused still because you're you're talking about pressures, but youre also talking about basically a robust and growing demand for FX.
FX 'twenty. So is it is the pressure outside of the FX 20, and just to confirm the FX 'twenty has not been impacted at all by lengthening sales cycles purchasing decisions and whatnot.
I'll take the first half and I'll, let Greg and thanks for your question. So.
It's actually difficult for us to say, whether there has been an impact to the FX 'twenty or not it would stand to reason that the FX 'twenty like every other product is being impacted by lengthening sales cycles, but it's such a new product for us and has such excitement around it we're not seeing that and there's no way for us to quantify that.
And it could be even greater than the demand could be even greater.
What we're seeing is a growing pipeline one of the biggest pipeline we've ever had in history of the company and.
The time, it's taking to close on that pipeline is lengthening.
So demand is great, but we are certainly feeling the impact from the current macroeconomic uncertainties.
Okay.
That makes sense.
In terms of the reorganization of the go to market can you just expand upon a little bit what youre doing and just some of the potential cost savings behind that.
Shai do you want to take that.
Sure.
I would say that we.
<unk>, a little bit the cost side, we need.
The growth that we're seeing more near term with the macro challenges.
So we tried to make sure that we have our go to market as efficiently as possible.
<unk>.
It does impact.
You'll see the operating leverage improving.
In this quarter and the one after.
But we think it's the prudent thing to do.
Thank you you just do what we can do.
And somewhat related to that but.
Yes.
Path to breakeven exiting 2024, I'm just curious if there's a level of revenue that's associated with that or if there.
Additional levers that can be pulled internally that helps you achieve that goal.
We have some internal targets that we're hashing around but you can imagine with the current environment, it's difficult for us to.
To pinpoint that and we're certainly not going to make those numbers public today as we think through it having said that.
We are prepared to make whatever adjustments, we need to make in our business in order to achieve that goal and we'll let you know if that ever becomes something otherwise.
Okay.
Yes, it sounds like.
<unk> been under a very different macro environment now relative to let's say a year ago. There is still a lot of levers that can be pulled to help you achieve that goal.
That is correct.
And and on the revenue side, there's lots of excitement.
Between our.
Software and our core hardware and hardware from digital metal that will be commercialized next year. We have every reason to continue to be excited about 'twenty three and 'twenty four.
Okay. Good I'll hop back in queue. Good luck. Thanks.
Thanks, Greg.
And as a reminder, if you would like to register a question you can press. The one followed by the four on your telephone keypad.
And our next question is from the line of.
Jim Suva with Citigroup. Please go ahead.
Thank you when we think about the challenges of securing components for the FX 'twenty, which is not unique to your company or the product I'm. Just curious has it worsened in the past month or two or Olivier did a little bit. The reason why I ask is there are certain parts.
Technology that are actually hitting oversupply like Pcs and other things I'm wondering if that's starting to help alleviate some of the pressures are constraints of securing your components.
Not that we're seeing entirely Jim.
Like like building really any piece of hardware one item that is unavailable or on a limited supply impacts your ability to produce any full item.
So the.
The challenges change day to day or week to week.
But I wouldn't say that it's improving.
Louis is something that is moving to the top of the priority list in order to find parts to be able to build the machines.
Okay, and then as a follow up your supply chain are they telling you that maybe mid next year. It gets into a much better equilibrium stage or do you have to like proactively start to say hey, if we don't have the visibility maybe it's worth putting in proactive a lot more ore.
Or maybe you've already done so.
Yes, it's a combination of those things.
The supply chain, our vendors or partners or certainly not telling us today that theyre seeing an end.
To this insight we hope that sometime next year. It does begin to improve we've sort of said all along this year as you may recall.
We didnt, we felt that these supply chain issues were going to challenge us the entire year and hopefully we're wrong, but it does appear that that is the case.
And at this point it does appear it's going to leak into next year.
Okay and then in your press release I believe you made the statement.
Statements about profitability in 2024 <unk>.
Just curious is that like exiting our run rate our full year and is it contingent upon the supply chain.
<unk> being more we are completely resolved or just kind of curious because that's a good goal and I think investors will like to hear any assumptions that are based upon that to make sure. We are calibrated correctly.
Yes.
But we're certainly not today, indicating that it would be for the full year. We think by the end of 2024, we will reach that point.
And there is lots of levers that need to be pulled Jim as you can imagine from the supply side as well as.
<unk>, new product introduction and.
And continuing to generate demand with our sales and marketing teams. So lots of things that need to happen, we feel great about those that are in our control.
The supply chain is one that that isn't and it's something that we continue to monitor as you can imagine.
Thank you.
And our next question comes from the line of Kieran Mccabe with Stifel. Please go ahead.
Thank you for taking my question outside the FX 20 kind of the base business I'm wondering if you could provide any kind of color on your key verticals, where youre seeing exceptional strength or softness or just kind of just a general color on.
One of your key verticals and what kind of trends youre seeing them in that sort of the base business outside of FX 'twenty.
Thank you.
It continues to be the same.
This recent vertical to deploy aerospace globally strong growth.
Okay.
We're looking nation, we are going deeper and deeper into the manufacturing floor with unique features.
The global book look I see more and more recently with <unk>.
Customers are using our solution not just for tools to build their products, but also parts that go into the product itself.
It's working with electrical aesthetic weeks ago.
Let me deal right so.
Local mortgage cycle.
Clinton Portsmouth, Mark forwards, so drones used by the military parts with more core units.
Machine medical equipment to do roughly testing for COVID-19.
Mark Hoyt, England, so we see more and more adoption.
Let's move into the final product itself as well.
Okay. Kieran Thanks also important yes.
Sorry to drop I wanted to add a little color. There for you I think it's also important.
To highlight and I think we've mentioned this on our previous call were seeing first time buys from large multinational organizations that have never bought anything from us before.
And their first their first by from <unk> being an FX 'twenty.
We think thats a.
A powerful statement about the excitement that this product is generating in the industry.
Great. Thank you.
And our next question comes from the line of Shannon Cross from Credit Suisse. Please go ahead.
Thank you very much I was wondering.
About usage on the devices and what Youre seeing in terms of.
I realised customers are taking longer to purchase printers, but just in general.
Have you seen a big pullback or.
Has there been changes and maybe what they're printing I don't know Im just trying to understand sort of the magnitude of what's going on in the industry.
Clearly there is some significant pressure.
And how it might be alleviated over time. Thank you.
<unk>.
We don't see a decrease.
<unk>, what we call active gateway will continue to grow quarter over quarter.
The year over year.
Okay.
To date, we don't see any decline.
The question is have our solution continue to use it and trying to get the best out of it I can tell you that where we are proving the ROI for the customers.
Usually we have to increase to print as much as possible because it's taken them a lot of money.
And sometimes the follow up.
Within the next.
One after.
When do you see that it's working.
Great cost savings for them and it's a good driver to build resiliency and do their own supply chain, which we're all suffering group.
And you obviously don't have an issue with cash which is a positive definitely.
But I guess when you think about that.
And I know you talked about on the cost side, but when you think about cash flow and uses and.
How are you sort of approaching.
Obviously, youre careful with your balance sheet, but I'm just curious how things have changed maybe in the last three months.
In terms of your.
Willingness to find new areas or thoughts on the best best usage of your cash. Thank you.
Yeah. Thanks Shannon.
I would say look I think you've sort of mentioned that we have.
What we believe to be.
Strong cost controls across our business.
We certainly remain focused on our innovation efforts.
But outside of our innovation.
Our sales and marketing.
We are paying very close attention in particular.
So the balance of our operating expenses and I think thats enabled us to achieve the result, we did in this past quarter hitting.
Our our EPS target, even though we had a miss at the top line and on the gross margin.
So that continues to be a focus anecdotally.
Folks sitting in my chair.
Are making in my view the same types of decisions that I'm, making which is pushing out certain spend where we don't.
It necessarily need to have the urgency.
To make that spend in the current quarter over the next period.
And there's a little bit of a.
Of a vicious cycle that gets created by that I recognize but certainly it's something that we're doing asking questions about spend and if it can be pushed out and we imagine others in the industry are doing the same.
Yes, thank you very much.
Thank you.
And our next question is from the line of Brian Drab from William Blair. Please go ahead.
Eric you guys are using the only conference call service.
Use this one for to get into the question queue set of Starwood.
Meanwhile to figure that out.
One of my questions is just.
You said several times you couldn't meet the demand for the FX 'twenty and Theres a lot of demand.
It's not.
It's kind of goes back to Greg's question as well, but I'm just trying to determine.
How the underlying demand is for the non FX <unk> equipment is in and I guess one direct question is did you ship.
Two customers any FX <unk> in the third quarter I don't know that thats been clear yet.
Yes, I'll take that part of the question, Brian and thank you.
For asking the question, yes, we did ship FX twenties.
In the third quarter, we shipped in the first quarter, the second quarter and we've shipped in the third quarter.
Not at what we believe to be our commercial run rate.
That will eliminate.
Our backlog.
But we believe that's coming over the over the next couple of quarters.
Okay, Great and then.
Is it.
Safe to say that for.
For the non FX <unk> I mean, given your.
Seeing that ramp your ship shipping FX Twenty's. This year, you didnt last year equipment or hardware revenues.
Flat year over year.
The channel when you talk about the macro pressure I mean, it's the FX 'twenty is helping offset the macro pressure, but the macro pressures showing up much more in the.
In the non FX 20 hardware is that.
That's how I interpreted.
It is.
The way.
The way the question was asked I think by Greg.
It.
It's really difficult for us to determine if the FX 'twenty is impacted by the uncertainties as well because we had sold it before it is very possible and I understand that demand would be higher but it's difficult for us to say that absolutely. It is impacting our core business outside of the FX 'twenty and particularly in the.
<unk> in EMEA.
Okay and then just the last question and it's along the same lines.
And then consumables growth was 14% year over year, which is still.
Pretty healthy.
And assign that the utilization of the equipment is still pretty healthy.
That.
He went into the fourth quarter.
Are you seeing any any change in the.
<unk> of equipment in the field and how do you expect that to play out going forward in the near term. Thanks.
Yes.
We continue to see increasingly active breakthroughs in research.
So we continue to grow the installed base.
I think we're going to see a growth in the utilization and the material consumption, especially with their fixed wing. So.
It wasn't clear so far so we ship every quarter because.
Each quarter, we shipping more fixed than the quarter before.
Okay.
Utilization of the systems, when youre going to get to normalization, which usually takes a year, but in aggregate, they're supposed to be much higher than any other <unk>. We had before because it's bigger platform is a real production system.
We still believe that we're going to see a significant increase in the recurring revenue in the next few quarters.
Yes, perfect. Okay. Thank you very much.
Thanks, Brian Thank you.
And we have no further questions in the Q&A queue I will now turn the call over to Shai <unk> for closing remarks.
Thank you very much everyone for joining us.
You next quarter.
That does conclude your conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
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