Q1 2023 Markforged Holding Corporation Earnings Call
Hello, and welcome to the Mark for first quarter 2023 earnings conference call and webcast. If any once you. The prior operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Austin.
Dresser director of Investor Relations. Please go ahead Austin.
Afternoon, I'm Austin Bohlig director of Investor Relations at Orange Holding Corporation welcome to our first quarter 2023 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 ramp and our <unk>.
F O 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 provision the private Securities Litigation Reform Act 1995.
Statements contained in this call that are not statements of historical facts.
In Q4.
These statements represent management's views as of today May 11, 2023, 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.
There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market Okay.
Can also be found on our website at investors <unk> Dot com I will now.
I'll turn the call over to Shai to round, President and CEO Mark <unk>.
Thank you Austin and thank you everyone for joining us on our Q1 2023 earnings call.
We've started the year strong with yet another record first quarter revenue and the largest pipeline companys history.
Sure enough strategy before or on product innovation go to market for natural efficiency gains and infrastructure.
We believe our Q1 revenue.
Gross margin results in particular are a reflection of strong execution or strategy.
Any indicator okay.
Meaningful opportunity for market forge in the coming quarters.
Demand for the due to afford grew across all geographies if you want.
The number of manufacturers are choosing our metal and composite solutions.
<unk> mission critical mass notification at the point of it.
Well, it's especially great to see strong pipeline buildup in the Americas, which is our biggest region and can support our planned growth.
The incremental improvements, we've made or FX or any cost structure, coupled with our strong operating expense controls enabled us to make our Q1 EPS target.
As we spoke before it got macro trends in manufacturing are helping to fuel demand for feedstock fourth vessel.
Manufacturers across the globe are focused on creating more resilient and flexible production by investing in solutions that derisk their supply chains.
Is it increased focus on digital transformation and the industrial Division.
We believe our platform is uniquely positioned to address the 40 billion market opportunity available to us on the manufacturing floor to date.
Our customers tell us.
They do stuff what is the perfect tool for their manufacturing absorb and accelerates the production of new and replacement parts.
For example, our customer rapid robotics provides automation tools through robotics as a service offering to manufacturers to automd.
Production sales.
With a fleet, which grew over time too Dan Martin Ford Sprinters Rafi robotics produces onsite costumes reversed and in fact, there was four new robotic arm.
Maybe in some cases months production cycle to improve overall performance.
Another example, in Arizona is our customer Hendi region, which do vento robots to autonomously create personalized Andean region notes.
With a personal touch.
<unk> uses a fleet of five months sprinters for intuitive or body design and faster production times.
We even have customers and Brian as Vince robotics to increase production Athena foods the manufacturers.
Oh, Great Service Bureau, that's producing critical parts for other manufacturers and develop the system capable of true lights out manufacturing by automating the processes, starting spring and removing parts, we robotic arms.
Information has enabled them to double output and achieved a 40% increase in utilization of the <unk> technology suite.
Courage you to check out the video we have uploaded to our Youtube channel showing these robust inaction truly amazing.
And the manufacturers seek production great solutions for their factory floor revenue with FX 'twenty continue to exceed our expectations and the pipeline of new orders continues to grow.
Entering 2020 free I'll focus was improving the cost of producing <unk> Duane.
Thanks to the diligent work by our engineering and operations teams.
Cost to produce that fixed money are declining.
Which is helping to drive sequential gross margin expansion.
And fixed wing production cost to continue to decline throughout this year, which will support our objective to meet our historical gross margin rates.
With the ability to bring large heightened resistant boards. The aerospace market is a key target for their fixed line.
And we are pleased with our early traction and strong interest.
We are already scaling with customers utilizing their fixed wing or maintenance repair and operations or MRO.
Acacia.
It is extremely encouraging is the interest we are seeing in utilizing the ethics 'twenty to produce and used parts that go into the production of new aircrafts.
This is a lengthy development cycle, we have already seen aerospace companies begin back did they start forge into their next Gen aircraft.
For example, U S base.
He's been working with the U S Air Force and NASA on a multiyear plan to radically accelerate air travel by developing and Mach five aircraft capable of commercial flight.
Early in their development process. They begin using our X five and have recently added an ethics 'twenty do their fleet to produce the types of advanced composite parts required to achieve hypersonic passenger flights.
By adopting our technology early in their product lifecycle, we are helping to enable nextgen air travel and planting the seeds for future growth.
At the end of Q1, we moved into our new global headquarter in work that just outside of Boston.
New state of the art R&D labs, and we can already feel the excitement that's come from collaborating in person everyday and believe this move will drive even more operational efficiencies overtime.
We remain laser sharp focus on margin expansion and driving profitable growth.
But typically we're encouraged by the sequential improvement in gross margin, which exceeded 49% in the first quarter.
We are committed to reaching profitability without needing to raise additional capital.
Manufacturing is changing significantly and where are we.
Well positioned to benefit from the full potential of this inflection point.
Even though our upcoming new product introductions.
Growing pipeline and healthy margins, we're even more confident in our ability to achieve these objectives.
As you have probably seen in our announcement earlier today. This will be our last earnings call with Mark as our CFO I want to thank Mark for his service to Mark Ford and helping us on our journey from a private startup to a public company.
For me personally Mark it's been a great partner he.
We will continue to support us for the next few months, while we search for our next CFO .
We're continuing to assess the boring our previous CFO and head of strategy and corporate development, who has been with us for the best three and a half years will assume the role on an interim basis.
Mark is not leaving us just yet, but we wish him well on his next project.
With that I'll now turn the call over to Mark Seymour, our CFO will offer more detail when not if.
Financial performance and guidance for the remainder of the year.
Thanks Shai.
Let's turn to our financial results for the first quarter of 2023.
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 10, 2% to $24 1 million for the first quarter of 2023.
Paired with revenues of $21 9 million for the first quarter of 2022.
Gross profit in Q1 was $11 9 million compared to $11 7 million for the first quarter of 2022.
As a result, we generated a gross profit margin of 49, 3% compared to 53, 6% in the first quarter of 2022.
On a year over year comparison basis, our Q1 gross margin was impacted by increases in freight and logistics costs as well as by the added component and material and labor costs associated with ramping up FX 20 commercial production.
That said on a sequential basis, our gross margins expanded by 180 basis points versus Q4 of 2022.
Our product mix has shifted toward high margin products and improved FX 'twenty production costs.
Our operating expenses were $26 7 million for the first quarter of 2023 compared to $26 4 million for the first quarter of 2022, even accounting for the increased operating expenses associated with the absorption of two acquisitions last year.
On a sequential basis operating expenses were down 9% from Q4 of 2022, reflecting our commitment to containing costs.
Net loss for the first quarter of 2023 was $13 3 million or seven cents per share based on our weighted average shares outstanding for the quarter of $195 6 million.
Now onto our guidance.
We were pleased with our results for Q1 and the start of the year our.
Our revenue guidance continues to reflect the uncertain macro environment and we reiterate anticipated revenues for the year to be within the range of 101 million to $110 million.
We expect fiscal year 2023, non-GAAP gross margin to be in the range of 47% to 49%.
We were encouraged with the progress we made with our gross margin in Q1, and we are confident that longer term they will continue to improve towards historical levels.
The disciplines, we exerted over our operating expenses in Q1, we will continue as we progress through 2023.
We expect operating expenses to decline as a percentage of our revenues, resulting in a non-GAAP operating loss in the range of 55 million to 58 million for the year.
This translates into non-GAAP EPS results for the full year to be a loss in the range of 27 to 29 cents per share.
We executed on our strategy to lower our quarterly cash burn.
With cash flow from operations, decreasing $3 7 million or approximately 20% from the first quarter of 2022 to the first quarter of 2023.
As we have previously stated we expect to reduce our operating cash burn in 2023 to under $50 million, a decrease of 32 million or 39% as compared to 2022.
This will be realized through higher revenues and margin expansion continued.
Inventory reductions and working capital improvements and increased yields on our cash and equivalents in short term instruments.
We expect to end 2023, with a balance of approximately $120 million in cash and equivalents and short term investments.
We are encouraged with our Q1 results. We believe they are a reflection that our strategy and strong execution are working and an early indicator for us of the opportunity coming in future quarters.
And further we continue to believe we have the infrastructure in place that supports our long term innovation and go to market objectives for profitable growth without the need to raise additional capital.
Finally, I want to thank shine and the entire team at Mark forged for their collaboration and support over the past years. It has been my honor and pleasure to work side by side with this group of passionate people focused on providing manufacturers are flexible and resilient platform to produce mission critical parts at the point of need.
It is the right time to step aside and be a fan and champion for the very bright future of this company.
That concludes our prepared remarks today operator, please open up the call for questions.
Certainly, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you do like true them up for a question from the Q1 moment. Please while we poll for questions.
First question today is coming from Troy Jensen from Lake Street Capital markets. Your line is that life.
Hey, gentlemen, congrats on the nice results here.
Thank you very much.
Hey, quick Shai for you ethics, 'twenty I guess I'd be really curious on all town and.
I guess I don't know if I've seen parts produce oh somebody effects 'twenty, that's got all temp with continuous carbon fiber in it. So this traction that you're talking about specifically in aerospace can you just let us know bids for larger unexpired sorry is it are the traction with all of them.
I think for both indefinitely.
Very very interesting today was based companies Theres no doubt theres more complexity in parts that involve open and continues fiber, but we do see some of them out there.
But we are very pleased with the ethics Winnie.
It's a really.
Increasing significantly.
Yep perfect right and Mark for you just on gross margins I mean, you're already above the high end of the range for the year. So can you talk about you know sequentially. If you know what it's going to force this back down to below 49%.
Yeah, I think it's really a reflection troy the lack of visibility we have into the into the market and there's just there continues to be some macro pressures.
That we're feeling you know we had a great quarter, but it wasn't an easy one.
So we are as we look into the future. We don't want to get ahead of ourselves here and we feel really good about the trajectory. We're on as I said in the prepared remarks, I think our first quarter results and particularly on the gross margin side. They are a reflection that what we're doing is working.
And we see ourselves returning to historical levels, but just after the first quarter out of the gate, we're not prepared to.
To change our guidance and really that's a reflection of the visibility.
Alright, Yeah understood and then maybe last one for Shai just P. X 100 can you give us an update and your thoughts on you know the number of units to be shipped this year when does that become a meaningful for you guys.
As you saw in rapid we brother and for the first time through the U S.
And there's a lot of traction around at the heart of demand building up a good backlog there. So yeah I hope we're gonna start shipping systems in Q3 this year I think this.
You're still relatively to the size of the business.
Yeah.
Very big impact but.
Absolutely growing materially we see very very impressive demand from automotive from luxury goods consumer electronics and medical and the industries that we've not seen before.
Alright understood Mark Good luck with the golf game and congrats guys keep up the good work.
Thanks, Troy Thank you Troy.
Thank you. Your next question is coming from Greg Palm from Craig Hallum. Your line is now live.
Yeah. Thanks.
Congrats on the good results here it is.
Well I'm just kind of broadly speaking you know curious you know what you could do.
Just kind of give us more of a an update on what you're seeing out there demand wise couple of your peers talked about push outs and delays in customer purchase decisions, but your quarter. It came in a quite a bit better. So just just curious what you're seeing out there.
Yeah. Thank you.
We definitely see demand building up significantly stronger than a year ago.
And the pipeline significant bigger with that we also see some delay in the decision, making and so the conversion of the internet.
Lower cost of capital no, we the big issue, especially for small businesses, but as you saw the results speak for themselves, we're able to grow still in this environment.
I hope the situation will continue to improve and we still have a very good year ahead of us.
Yeah understood.
I'm, having a difficult time tying out the gross margin commentary, so I guess I'm going to take a stab at a question as well I guess I get the lack of visibility, but you know the the full year revenue guide assumes higher levels of revenue throughout the year and I think.
Shai you've talked about it in the prepared commentary specifically around FX 'twenty production costs, continuing to come down throughout the year or so I appreciate the conservatism, but I'm just I'm, having a hard time tying out you know that the gross margin in Q1, which was quite a bit better than expectations and potential.
That actually comes down throughout the year, just given that the tailwind I just talked about.
Yeah, Thanks, Greg I think.
There's a number of factors as you can imagine.
That go into it.
Just as an example.
As you bring on a new product and there are some.
Some engineering changes that are incorporated new suppliers that are incorporated.
You end up with materials that you can't use in production and that impacts gross margin.
We've got a new product in and.
It is being distributed out in the field, we have to think about.
Our warranties and reserves and provisions et cetera for that so it's it's more complex than simply.
The cost of production, although that's a very important part of it as you highlighted.
But I think for US we feel like we're on a great trajectory and I think youre asking the right question.
We feel very positive about the direction of our gross margin is moving but having said that there is still this this lack of full visibility or at least a return to the visibility levels. We had a few years ago and as a result, we're just not prepared to make any changes to our guidance just yet.
Okay. No that makes that makes sense and then can you just remind us you know.
And lump this the FX 'twenty production costs within the other various supply chain related impacts on gross margin.
That.
You suffered last year, maybe just remind us quantify.
How much that was and then I guess at what point do you think those headwinds will be fully recouped or mostly recouped fully understanding that.
Yeah, there was a lack of visibility at this point, but what's your current thought there.
So about two or three quarters ago, I think we did quantify when maybe our gross margin on a year over year basis was down about about 8%.
And we and we've talked about where that 8% comes from roughly half of it if I recall was from me the FY 'twenty and the other half of it we were seeing from general supply chain challenges price increases one off parts that were costing us three years or five X more than we previously paid for it some of that is definitely making its way.
Out of the system supply chain is improving there's no question, it's not back to where it was but it is improving.
The FX 'twenty isn't where we needed to be from the targets. We've set but it is also improving and so I would say, we're still probably five or 6% away from where we expect to be and thats, probably still equally attributed it to the supply chain more broadly and to the FX 'twenty.
But just on the timeline, specifically I mean do you think that most of that can be recouped at some point next year.
I think the FX 'twenty for certain will be should be out of the system by the time you know, we're having a call like this in a year from now.
The supply chain is a little bit more challenging to predict time wise, but I think it's fair to say next year sometime that should be that should be behind us.
Okay perfect.
I will I'll leave it there thanks.
Thanks, Greg Thank you Greg.
Thank you next question is coming from Shannon Cross from Credit Suisse. Your line is now live.
Okay.
Thank you very much for taking my question I'm wondering looking at your numbers the recurring revenue as a percent of total has increased significantly. So I'm just curious what factors would you point to behind that.
Yeah. So as you can see the return revenue has a split between the material consumption and.
Assessment that we have I think probably a more and more recently probably on the material side and of course, but we also think will discuss about this before we launched a new subscription plan. So we believe that we can also have contribution going forward. So.
So we definitely see that the recurring revenue will continue to increase overtime.
I'd also say Shannon it's mark.
The power of this model and that that software and services.
Is more stable.
Is reflected in the Q1 results because while hardware is down seasonally.
Other areas are not down nearly as much and there is that sort of quarter over quarter stability and as a result.
For the first quarter, you see that being a higher percentage of revenues.
Got it and then I am curious how should we think about if you layer on top of what Youre doing from a subsea.
Subscription standpoint in your software business.
Yeah, I mean, I know, it's going to take time, but how should we think about the potential for a contribution there you know as you said, it's been more paid software.
I think there are two elements to it one is the new subscription plan, which is a little bit more expensive, but it gives more value to our customers. So that will of course have been positive impact on our earnings.
But also the.
The other side of it is that we continue to push bigger system.
Peter consumption.
The significantly bigger fifth man.
And that will also have another very positive impact on the recurring revenue continued to grow the fleet some of the bigger systems.
Okay. That's helpful. And then can you talk a bit about strength in Europe , you know, what what Youre seeing and maybe talk you know geographically anymore, but you know to the extent that you can get granular in terms of verticals in that I'm I'm just kind of curious you know it was about two one of the prior questions. Just anything about you know who's buying and where are they buying.
What are they interested in thank you.
Sure. So as you can see we were very fortunate to be able to grow our gross all region and across all segments this quarter year over year, and which is great.
I think the main reason is broadly that we are razor sharp focus on manufacturing, we're trying to be the best throughput and manufacturing floor for our customers and for machine builders that need to be very strong and accurate parts into their machines and the reason in my view an infection point in the manufacturing and general manufacturers are looking for more resilient.
Supply chain model, which can be part of distribution and I think this is where we see the highest growth we see more and more solutions being put on the manufacturing floor with you more and more solutions did go into park are eventually part of another product and we started to have great success and so all of our customers. For example, when we bought the Genting already ongoing.
Two cars with ethics, 'twenty, we see more and more parts going into aircrafts.
So I think.
Because we focus on the manufacturing side of stuff and really enabling our customers to build resiliency into their product they need for their supply chain. This is why we see the growth.
I would add to that Shannon is that.
We mentioned it before but we added a very strong leader in EMEA over the last maybe three quarters now.
And as we have.
Pushed out decision making.
And our economy at a certain level to the edge into the region. We're seeing the results of that now three quarters. Later, we have very strong leadership, a very collaborative group.
A very passionate group of folks and EMEA that are running that business. So it's been it's been.
Really an important aspect of that.
Great. Thank you very much and good luck mark.
Thank you Shannon thank.
Thank you Shannon. Thank you next question is coming from Brian Drab from William Blair. Your line is now live.
Hey, Thank you.
<unk>.
In the sequential gross margin improvement.
Hum.
From fourth quarter to first quarter, what was the biggest factor is it the FX 20 manufacturing.
Manufacturing costs coming down or supply chain or what was the single biggest factor.
It's it's related to the FX 20, Brian in two areas. One is the pure cost of production is coming down.
And secondarily I.
You did sort of briefly one of the earlier questions but.
There's fewer and fewer engineering changes and so there is there is less.
Material that is not being used and it doesn't need to be.
Written off as obsolete material as part of that.
That product family. So it's both of those but it's.
The increase in gross margin is largely related to FX.
Okay, Yeah, and then I guess more just a comment rather than a question honestly I'm I'm with Greg I'm more confused and Greg about the gross margin guidance because.
The midpoint of the guidance implies 47.5%. After you just had a great quarter.
Around 49, and I mean.
The second third and fourth quarter that you have to average 47, and a half to hit the midpoint of the guidance I'm surprised you're not.
Yeah.
High end of the range or something like that even because this is a it's just confusing given that the it's the seasonally weakest quarter, you're making great improvements in the ethics 20 manufacturing costs. The supply chain is getting better you're expecting volume improvement throughout the year like it so that that's not.
I feel like we're going to leave this call not really understanding.
We're like the the.
You know the bogeyman is hiding here or something it just makes me feel uneasy that we don't need it.
It doesn't make sense. So that's just kind of it's leaving me with a little bit of an uneasy feeling I don't I don't know if there's any other clarity you can provide around that though because we've already asked it three times.
Yeah, well I think you asked it a little bit differently, Brian and I can appreciate that.
Not trying to be obtuse here at all I think the.
Realistically, we just don't have.
Enough visibility to get confidence in maybe raising that but you ask it slightly differently.
And maybe we can address that.
When we created our guidance, we looked at sort of where that midpoint was and now after the first quarter and based on the cost cutting initiatives, where we see the FX 'twenty I would say, we still feel good within that range, but we do feel better at the higher end of that range, Brian We're not we're not at all saying that.
That you should expect something.
No boogeyman out there there's nothing that you should expect that's going to weigh this down, but we just don't feel comfortable enough yet to raise it.
Okay, Alright, I'll follow up more later I think that's the first time I ever said bogeyman on our earnings calls.
I'm sure. It's the first time I've ever.
[laughter] I don't think I've ever said it personally alright, good luck Marc take care.
Thanks, Brian .
Thank you next question is coming from Jeremy Hamblin from Herbert Your line is now live.
Hey, guys. Thanks for taking my questions.
First of all Hi, Dara has done.
Okay.
First one is just on the revenue guide so.
Yes, we kind of look at what you guys are saying here is so impressive demand from automotive and aerospace and defense side I think if I'm not misquoting you said the pipeline is significantly larger than it was last year. I know you guys have also talked about some of the data insights that you have obviously got a lot of data back from the systems that are in the field. So.
I guess, just when I look at the guidance in Q1, you guys are already fairly close to a level of revenue. We're on a run rate basis, you're kind of closing in on the low end of the guidance.
I guess I'm just trying to understand is when we look at your assumptions are you guys kind of assuming that there is and it's to recession and theres, some orders cancelled or pushed out.
If that doesn't come to fruition then maybe there is some upside or is there something youre seeing in utilization that's concerning any anything else that you can tell us there.
Yes, maybe I'll start Jeremy J can add more color, but I.
I think I think you hit it on the head there the way you couch that so when we thought about the year.
Earlier, this year and we laid that in our March earnings call.
We had baked into that revenue guidance and all our all of our guidance a level of uncertainty.
That perhaps we werent going to have us have smooth sailing throughout the year.
I think most economists and others.
Probably a little bit more positive today than they were two or three months ago about the rest of the year, we're feeling that as well.
But again, just just given that we don't have the visibility we had a few years ago.
We're being a little cautious and suggesting that one quarter in isn't the time to sort of a straight from our current.
Talking points around this and we'd like to see more data before we do that.
I think exactly as Mark described it was a good quarter. It's a good start we feel a little bit more positive but.
<unk> demand growth still remains in low level, but still remains and we want to wait another quarter before we change anything.
Got it Okay, and then and then just following up on kind of the second part which was the data question.
I guess, just kind of thinking about the second quarter you guys I assume has some visibility from backlog the order button then.
Obviously got strong visibility from the data.
That you guys received from the customers. So I'm just curious anything that youre seeing on utilization data that leads us to believe that consumable purchases as a percentage of sales could be up next quarter or anything that could provide some gross margin tailwind even just in the near term in Q1 to Q2.
No I don't think that those are necessarily related data points.
One thing.
What brought up by an earlier question around the percentage of our revenue coming from consumables and services being a bit higher this quarter than perhaps the last few quarters.
And that's and that's all around the stability of that revenue stream in our business and but that revenue stream doesn't necessarily have a significantly higher gross margin as we've always said the gross margin of our hardware as a standalone is a good gross margin its a healthy sustainable gross margin business. So I wouldn't read I would.
Read too much into that Jared.
Got it wasn't clear thanks, guys.
Thank you thank you Jarrod.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Thank you very much everyone for joining us for our first quarter results and looking forward to soon our next earnings.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day we thank.
For your participation today.
Yeah.