Q3 2023 Shapeways Holdings Inc Earnings Call

Greetings and welcome to shape with third quarter 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the prepared remarks as a reminder, the conference is being recorded.

Before we get started I'd like to remind everyone that management will be making statements. During this call that include forward looking statements within the meaning.

Being a federal securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 95.

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 and future financial and operating performance projected financial results for the fourth quarter of 2023 timing always talks with any strategic transactions.

Our future cost cutting measures impact of recent acquisitions, new offerings and market opportunity 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 anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements.

Descriptions 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 Twenty-twenty Street.

The information provided in this conference call speaks only to the broadcast state today November 14th 2023, chip waste disclaims any obligation except as required by law to update or revise forward looking statements also during the course of today's call. We refer to adjusted EBITDA, which is a non-GAAP.

And yes, you'll measure there's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued before market open which can be found on our web site Chippeway satcom.

On the call today are Greg <unk>, Chief Executive Officer, and welfare to Recce, Chief Financial Officer, and now I'd like to turn the call over to Greg Greg.

Good afternoon, everyone. Thanks for joining us to discuss <unk> third quarter 2023, when you get the results and progress on our key initiatives and strategic growth plan I'll begin by providing a business update and Alberto Recchi. Our CFO will then discuss our third quarter financial results and I'll walk for the fourth quarter.

In the third quarter, we continued to execute our strategy to grow software and enterprise manufacturing revenues, our conviction for shippers opportunity remains unchanged. We believe that the market is shifting towards digitization of manufacturing in this approach and is approaching an inflection point and the overall adoption of digital manufacturing solutions.

And we believe that we are well positioned to take advantage of this market opportunity across an array of industries due to our platform that combines high quality flexible on demand manufacturing with purpose built proprietary software.

We are encouraged by our progress with regards to our software business and the increasing traction with enterprise manufacturing customers.

Additionally, we remain disciplined and prudent as we execute our operating plan and have continued to refine our cost structure.

Our software business is scaling as expected and we remain encouraged by our growing traction of SaaS contract commitments.

Increased customer acquisition improved retention and lifetime value expansion and new initiatives, such as MSG materials, which was launched in late Q2.

Through MSG materials, we believe we are providing a compelling value value proposition to our customers by helping them save on raw material costs.

We recognized $2 2 million of software revenues year to date up 81% from prior year period.

Our software products provide a critical tool for manufacturers, allowing them to leverage and manufacturing software.

The scale of their business and shift to digital manufacturing in order to increase productivity.

Turning to our enterprise manufacturing sales, we continue to increase our customer focus towards middle market and enterprise opportunities.

And anticipate seeing accelerating benefits.

From these investments in the coming quarters.

What's your Q, new long term agreements in Q3, with leading automotive and transportation manufacturers for multi year production programs expected to ramp up to approximately $4 million annualized revenue by the end of next year.

This affirms our commitment cube and the proficiency in partnering with tier one manufacturers to support OEM volume production.

We continue to increase our share of wallet with existing customers on multiyear revenue projects. It's all revenues from the first nine months of this year from our top 250 customers grow 18% compared to the same period last year.

In our self service E Commerce operations sales remained stable, providing a good foundation for our growth initiatives. We are optimistic that we are seeing a more rational competitive backdrop with regards to our E Commerce business.

While we remain encouraged by the momentum in our business in light of the elongated sales cycle and near term macroeconomic concern. It uncertainty. We also initiated a number of cost reduction measures in the quarter.

This included a reduction in force completed in October 2023.

And new hires and a reduction in noncritical capital discretionary operating expenditures.

In addition, we have also been working with advisors and considering the strategic alternatives available to the company.

Potential strategic alternatives may include without limitation, our capital raise a merger a business combination or sale of a material portion of the company's assets or other strategic transactions.

We have not made any decisions regarding any potential transaction and at this time do not have any additional details to share.

I would like to thank the entire ship was team our customers our investors and all our stakeholders for their ongoing support.

Alberto will now discuss our financial results in more detail.

Thanks, Greg I'll provide a recap of our third quarter 'twenty 'twenty free performance give an update on our balance sheet position and provide guidance for the fourth quarter.

In the third quarter revenue was $8 4 million flat from the prior year and slightly below guidance due to shipment delays from the third quarter into the fourth water what about half a million dollars worth of contracted revenue related to free enterprise customers.

We saw growth in software and enterprise sales, partially offset by lower sales from marketplace and self service.

Our gross margin in the third quarter were 41% compared to 44% in the third quarter of 2022 but grew sequentially compared to the second quarter by about 100 basis points, we continue to deliver solid gross margin and the year over year change was primarily due to the ramping of we should be deploying new.

Geez.

And mix shift to non three D printing and higher shipping costs, partially offset by softer growth and price increases.

We anticipate realizing margin expansion overtime as we see more contribution from higher margin software sales.

Benefits from the consolidation of our U S manufacturing operations as well as our cost optimization plan.

Third quarter adjusted EBITDA was a loss of 5 million compared to a loss of $4 6 million in the third quarter over last year.

SG&A expenses for the third quarter were $11 million compared to $7 6 million in the prior year.

Primarily reflecting increased professional fees and a write off of certain equipment that would not be utilized in our operations and prepaid services associated with such equipment.

As Greg mentioned, we have recently implemented cost alignment initiatives, including a reduction enforce of 15% of our employees, including Opex, which was completed subsequent to quarter end.

We anticipate realizing approximately $2 4 million in annualized cost savings as a result of our head count reorganization.

Turning to our balance sheet as of September 32020, free our cash cash equivalents and marketable securities totaled $17 7 million.

During the quarter, we deployed approximately <unk> 7 million in cash and we remain prudent and focused on further improving our cash burn while proactively monitoring our liquidity.

Looking ahead for the fourth quarter of 2023 we anticipate revenues to be in the range of $9 3 million to $10 million.

With this we completed our prepared remarks, and we will now open the call for questions.

Later.

We will now begin the question and answer session.

You ask a question you May press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Greg Palm with Craig Hallum. Please go ahead.

Yeah. Thanks. This is Danny acreage on for Greg Today I appreciate you taking the questions.

I'd like to just kind of start with kind of more broadly what you're seeing in terms of demand how it progressed throughout the.

The quarter and then maybe in terms of some of the push outs you know maybe at some of your enterprise customers. I think you said around 500000 from Q3 to Q4, what's your confidence level that does in fact do hit in Q4.

And is there any risk that maybe that and in some of the others that you thought would get hit in Q4 get pushed into 2024, just given you know maybe customers managing their year end budgets.

Yeah. Thanks, Dan.

Thanks for that one thanks for joining and good question I would say one from a demand perspective on the sales side, we're still seeing really good traction.

Our strategy of going out and supporting enterprise customers I feel is working and we continue to build a strong pipeline and not only are we bringing on new customers, but the customers that we have brought on are also expanding their wallet. So we're feeling quite good about that on the manufacturing side.

To your point related to the revenue that that pushed from Q3 into Q4, a lot of that has already shipped I think one thing that we're finding with enterprise level customers is in the process. They are reviewing or potentially signing off on different steps of the process, but you know whether it's the qual.

The check or acceptance of the order or whatever it might be.

That historically, we thought we'd be able to move through quite quickly and I think we are just less.

And control of making that happen.

As we'd like and so we may reach out to a customer and it may take them a week or two to get back to us to set up that review are or from step by step and so I think it will get better and better at as we go but at the end of the day I feel like that the orders that we're closing are strong where we continue to win more orders from the same customer base.

Wallet is really there and then you know I think that we will see how the end of the year goes, but we actually we're making really really strong progress already so we're feeling quite good about the guidance that we're setting for Q4.

Got it that makes sense, maybe if I can just hit quick on gross margin and kind of the outlook. There I guess, maybe if you assume assume more of kind of a consistent macro environment, maybe less you know fixed cost.

Absorption, but then you also have the higher software contribution and some of the cost initiatives that you've taken in previously and in the new one so I guess, how should we think about gross margin in the next couple of quarters. You know can you get back to kind of that low to mid forties, yeah just anything.

He got there thanks.

Yeah from our from our perspective, we see line of sight to getting back to that there's a lot of opportunity for further price in the market.

I think one of the things that we've talked about in the past with some of the pressure specifically on price from more of our e-commerce channels and what you've seen is some of the competitors in the space.

Reversed along those decisions, while we've kind of maintained that price.

And so with more volume coming back into the business that allows us to optimize more and more of our manufacturing production volumes and.

More gross margin.

From the same cost basis, and so we see line of sight to that continuing and then again software continues to scale and as that becomes more and more disproportionate amount of our revenue that allows you know obviously, a much significant higher impact to the gross margin mix.

Yes, we see line of sight to that continuing to move in the right direction.

Alright, great I'll I'll leave it there thanks.

Yeah.

As a reminder, if you have a question. Please press star one to enter the question queue.

The next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.

Alright, thank you.

In the last call you mentioned.

So there was a piece of business in order that you were expecting to ship had been expecting to ship in Q2.

From an enterprise customer that you anticipated shipping in Q3 did that.

Ship or is that part of some of this ongoing slippage that you're saying.

Well thanks, Jim for joining I. Appreciate the question Yeah that order that we referenced back in Q2 did ship in Q3 and actually part of the orders that Didnt ship in Q3 into Q4 was an additional order from that exact end customer and so but.

But yes, the order that we referenced that in Q2 did ship out in Q3.

Got it and you may I joined the call a little bit late you may have provided.

This detail, but I think in in the first half of the year. I believe you said you generated what about over little over half your revenues from for a bedroom enterprise customers.

What does that what does that look like in Q3 I apologize if you gave that.

No we didn't give that and I don't have that number ready for like off the top of my head, but we can we can always follow up with you, but again I think that what we did mentioned in the script was oney in the in our prepared remarks that we did see 18% revenue growth year over year for the first nine months for those.

As customers. So we are continuing to see that customer base grow and then we've talked a lot about our e-commerce channels and some of the pressure that we've had on that revenue line over time, but we're actually seeing that although we may still have year over year pressure, it's really stabilized over the last six to nine months and so pretty consistently we're seeing that business.

<unk> lives and continue but we will see most of our growth coming from.

Our enterprise manufacturing customers at least on the manufacturing side.

Got it.

Obviously, there's some moving parts here, but with with what you're seeing.

And in the market and some of the cost actions you've taken but I'm wondering if you can give us.

We have some sense as to how you look youre looking at the cash burn.

In Q4.

Yeah. Our goal is to continue to make progress on reducing that cash burn on a quarterly basis and the way that we're doing that is really by focusing on one driving top line growth.

So I think we have pretty good line of sight to the revenue forecast that we have in place and the guidance that we set for Q4.

Improvement in gross margin not only from just less but also there's some opportunity in price and a lot of value added services that we're providing to our customer base and then the last.

We want to continue to optimize our opex and so theres projects pretty much across the board focused on reduction of our operating expense and trying to.

Make sure our cost structure is aligned as closely as it can to yes.

Yes, the revenue lines in the business that are showing the most progress right and so when we made some of those changes.

So the business in October it was really around making sure that we tightened up areas, where we weren't seeing the best ROI and so ultimately we'll continue to do that moving forward. So we should see continued improvement in our cash burn on a quarter by quarter basis.

And where those reductions that you made.

Cross the organization, where they focused in certain areas Greg.

They were pretty much across the organization I think we it impacted 67 individual functions.

And ultimately we didn't make a lot of impact to the commercial function business because the commercial functions today are delivering.

Strong results or at least meeting our expectations on results. So.

So far with strong pipelines and so the.

It's most of the support resources that we had been working on over the last say 12 months that maybe weren't returning as much as we had hoped for and so we started tightening up a lot of us a lot of referrals.

Okay. Thanks, a lot.

Mhm.

Okay.

Okay.

This concludes our question and answer session.

I would like to turn the conference back over to Greg Kratz for any closing remarks.

I just wanted to thank everyone for joining us today, we continue to focus on executing on our strategy and we see a lot of opportunity in front of the business. We will continue to provide updates as we go but thanks for joining us today and we'll talk to you soon.

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

Yeah.

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