© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to the Markforged's First Quarter 2023 Earnings Conference Call and Webcast [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to Austin Bohlig, Director of Investor Relations. Thank you, Austin.
Good afternoon. I'm Austin Bohlig, Director of Investor Relations of Markforged Holding Corporation. Welcome to our first quarter of 2023 results conference call. We will be discussing the results announced in our earnings press release issued after market close today. With me on the call is our President and CEO, Shai Terem; 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 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. Markforged 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'll refer to certain non-GAAP financial measures. There's 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 Web site, at investors.markforged.com.
I'll now turn the call over to Shai Terem, President and CEO of Markforged.
Thank you, Austin. And thank you, everyone, for joining us on our Q1 2023 earnings call. We started the year strong with yet another record first quarter revenues and the largest pipeline in our company's history. We've shared our strategy before around product innovation, go-to-market and financial efficiency gains and infrastructure buildup. We believe our Q1 revenue and our gross margin results, in particular, are a reflection of strong execution of our strategy and an early indicator of the meaningful opportunity for Markforged in the coming quarters. Demand for the Digital Forge grew across all geographies in Q1. An increasing number of manufacturers are choosing our metal and composite solutions to solve mission critical, metal applications at the point of need. But especially great to see strong pipeline buildup in the Americas, which is our biggest region and can support our plant growth. The incremental improvements we've made to for FX20 cost structure, coupled with our strong operating expense controls enabled us to make our Q1 EPS target. As we spoke before, a couple of macro trends in manufacturing are helping us to fuel demand for digital forge platform. The first, manufacturers across the globe are focused on creating more resilient and flexible production by investing in solutions that derisk their supply chains. The second is it increased focus on digital transformation and industrial automation. We believe our platform is uniquely positioned to address the $40 billion market opportunity available to us on the manufacturing floor today. Our customers tell us that Digital Forge is the perfect tool for the manufacturing floor 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 automate production sales with a fleet, which grew over time to 10 Markforged printers. Rapid Robotics produces on site, custom grippers and end effectors for the robotic arm, saving, in some cases, months of production cycles to improve overall performance. Another example in Arizona is our customer Handwrytten, which develops robots to autonomously create personalized handwritten notes that stand out with a personal touch. Handwrytten uses a fleet of five Markforged printers for iterative robotic design and faster production times. We even have customers applying advanced robotics to increase production. Athena 3D Manufacturing who operate a service bureau that produces critical parts for other manufacturers that developed a system capable of true lights out manufacturing by automating the processes of starting print and removing parts with robotic arms. This automation has enabled him to double output and achieve a 40% increase in utilization of the digital technology suite. I encourage you to check out the video we have uploaded to our YouTube channel, showing these robots in action. Truly amazing. And manufacturers seek production grade solutions for the factory floor revenue for the FX20 continue to exceed our expectations and the pipeline of new orders continues to grow. Entering 2023 our focus was improving the cost of producing the FX20.
Next to the diligent work by our engineering and operations teams. The cost to produce the FX20 are declining, which is helping to drive sequential gross margin expansion. We expect FX20 production cost to continue to decline throughout this year, which will support our objectives to meet our historical gross margin rates. With the ability to print large, heightened resistant parts, the aerospace market is a key target for FX20, and we are pleased with our early traction and strong interest. We are already scaling with customers utilizing the FX20 for maintenance, repair and operations, or MRO applications. What is extremely encouraging is the interest we are seeing in utilizing the FX20 to produce and use parts that go into the production of new aircrafts. While these have lengthy development cycle, we are already seeing aerospace companies begin to spec the Digital Forge into their next gen aircraft. For example, US based [Ameus] is working with the US Air Force and NASA on a multiyear plan to radically accelerate air travel by developing a Mark V aircraft capable of commercial flight. Early in their development process, they began using X5 and have recently added an FX20 to 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're helping to enable next gen air travel and planting the seeds for future growth.
At the end of Q1, we moved into our new global headquarters in Waltham just outside of Boston. It is new state of the art R&D labs and we can already feel the excitement that comes from collaborating in person every day and believe this move will drive even more operational efficiencies over time. We remain laser sharp focused on margin expansion and driving profitable growth. We're particularly encouraged by the sequential improvement in gross margins, which exceeded 49% in the first quarter. We are committed to reaching profitability without needing to raise additional capital. Manufacturing is changing significantly and we're well positioned to benefit from the full potential of this inflection point. Given our upcoming new product introductions, growing pipeline and healthy margins, we’re even more confident in our ability to achieve this objective. As you've 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 Markforged and helping us on our journey from a private startup to a public company. For me, personally, Mark has been a great partner. He will continue to support us for the next few months, while we search for our next CFO. For continuity, a subsidiary our previous CFO and current Head of Strategy and Corporate Development has been with us for the past three and half years will assume the role on an interim basis. Mark is not leaving up just yet but we wish him well on his next project.
With that, I now turn the call over to Mark Schwartz, our CFO, who will offer more details on our 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 Web site 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 compared 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 material and labor costs associated with ramping up FX20 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 towards high margin products and improved FX20 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 continuing costs. Net loss for the first quarter of 2023 was $13.3 million or $0.07 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 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 margins 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 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 $0.27 to $0.29 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 and 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 Shai and the entire team at Markforged 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 a 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.
[Operator Instructions] Our first question today is coming from Troy Jensen from Lake Street Capital Markets.
Quick, Shai for you, FX20, I guess, I'd be really curious on ULTEM. And I guess, I don't know if I've seen parts produce out from the FX20 that's got all templates, continuous carbon fiber in it. So this traction that you're talking about specifically in aerospace, can you just let us know if it's for larger Onyx parts or is it the traction with ULTEM?
I think it's for both and definitely the ULTEM is very, very interesting to the aerospace companies. There's no doubt there's more complexity in parts that involve ULTEM and continuous fiber, but we do see some of them out there. But we are very pleased with the FX20 results, it’s really increasing significantly.
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 sequentially what's going to force us back down to below 49%?
Yes, I think it's really a reflection, Troy, of the lack of visibility we have into the market. And there's just -- there continues to be some macro pressures that we're feeling. We had a great quarter but it wasn't an easy quarter. So 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 change our guidance and really, that's a reflection of the visibility.
And then maybe last one for Shai, just PX100. can you give us an update and your thoughts on the number of units you can ship this year, or when does that become more meaningful for you guys?
As you saw in Rapid, we brought it for the first time through the US, and there's a lot of traction around it, a lot of demand building up. Good backlog, I think also, I hope we're going to start shipping systems in Q3 this year. I think this year still relatively to the size of the business, I don't see it as a very big impact but it's definitely growing materially. We see very, very impressive demand from automotive, from luxury goods, consumer electronics and medical industries that we've not seen before.
Next question is coming from Greg Palm from Craig Hallum.
I'm just kind of, broadly speaking, curious if you could just kind of give us more of 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 came in quite a bit better. So just curious what you're seeing out there.
We definitely see demand building up significantly stronger than a year ago, and the pipeline is singnificantly bigger. With that we also see some delay in the decision-making. So the conversions are a little bit slower, because of capital and that was a big issue, especially for small businesses. But as we saw, the results, I think, speak for themselves, we’re able to grow still in this environment. And I hope the situation will continue to improve and we still have very good year ahead of us.
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 the full year revenue guide assumes higher levels of revenue throughout the year. And I think, Shai, you talked about in the prepared commentary specifically around FX20 production costs continuing to come down throughout the year. So I appreciate the conservatism, but just -- I'm having hard time tying out the gross margin and Q1, which was quite a bit better than expectations and the potential that that actually comes down throughout the year, just given the tailwinds I just talked about?
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 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 margins. We've got a new product. And as 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 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 you're asking the right questions. We feel very positive about the direction our gross margin is moving. But having said that, there is still this lack of full visibility or at least the 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.
And then can you just remind us, in lump the FX20 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? I mean, I guess at what point do you think those headwinds will be fully recouped or mostly recouped? Fully understanding that there's 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 it when maybe our gross margin on a year-over-year basis was down about 8%. And we've talked about where that 8% comes from and roughly half of it if I recall was from the FX20 and the other half of it we were seeing from general supply chain challenges, price increases, one off parts that were costing us 3 times or 5 times 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's improving. The FX20 isn't where we need it to be from the targets we've set, but it is also improving. And so I would say we're still probably 5% or 6% away from where we expect to be and that's probably still equally attributed to the supply chain more broadly and to the FX20.
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 FX20 for certain will be -- should be out of the system by the time 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 behind us.
Next question is coming from Shannon Cross from Credit Suisse.
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?
As you can see the return revenue has a split between material consumption and the [successes] that we have. I think, probably more recently, probably on the material side, of course, but we also -- I think we discussed about this before, we launched a new subscription plan. So we believe that will also have contribution going forward. So we definitely see that the return revenue will continue to increase over time.
I would also say that the power of this model and that software and services is more stable, is reflected in the Q1 results, because while hardware is down seasonally, those 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.
And then I'm curious, how should we think about, if you layer on top what you're doing from a subscription standpoint in your software business? I mean, I know it's going to take time. But how should we think about the potential for contribution there as you shift to 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 gives more value to our customers. So that will, of course, have a positive impact on our earnings. But also the other side of it is that we continue to push bigger system that have significant bigger consumption and significantly bigger success plans. And that will also have another very positive impact on the recurring revenue as we continue to grow the fleets of the bigger systems.
And then can you talk a bit about strength in Europe, what you're seeing and maybe talk geographically anymore? To the extent that you can get granular in terms of verticals in that. I'm just kind of curious, as a follow-up to one of the prior questions, just anything about who's buying and where are they buying and what are they interested in?
So as you can see, we're very fortunate to be able to grow across all regions and across all segments this quarter year-over-year, which is great. I think the main reason is probably that we are razor sharp focused on manufacturing. We're trying to be the best tool for the manufacturing floor for our customers and for machine vendors that need to put very strong and accurate parts into their machines. And there is, in my view, an inflection point in the manufacturing in general. Manufacturers are looking for more resilient supply chains. Markforged can be part of the solution. And I think this is where we see the highest growth, we see more and more solutions being put on the manufacturing floor, we see more and more solutions that go into parts that are eventually part of another product, and we start to have great success. And some of our customers, for example, with binder jetting already have parts going into cars. With FX20, we see more and more parts going into aircraft. So I think because we focus on the manufacturing side of stuff and really enabling our customers to build resiliency into their product and into their supply chain, this is where we see the growth.
I would add to that, Shannon, 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 autonomy 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 in EMEA that are running that business. So it's been really an important aspect of the growth.
Next question is coming from Brian Drab from William Blair.
So in the sequential gross margin improvement from fourth quarter to first quarter, what was the biggest factor, is it the FX20 manufacturing costs coming down or supply chain, or what was the single biggest factor?
It's related to the FX20, Brian, in two areas. One is the pure cost of production is coming down and secondarily, I mentioned it sort of briefly one of the earlier questions. But there's fewer and fewer engineering changes. And so there's less material that is not being used and doesn't need to be written off as obsolete material as part of that product family. So it's both of those. But it's -- the increase in gross margin is largely related to FX20.
And then I guess more just a comment rather than a question, honestly. I'm with Greg, I'm more confused than Greg about the gross margin guidance, because the midpoint of the guidance implies 47.5% after you just had a great quarter of around 49%. I mean, so second, third, fourth quarter that you have to average 47.5% to hit the midpoint of the guidance. So I'm surprised you're not saying high end of the range or something like that even, because this is -- it's just confusing given it's the seasonally weakest quarter, you're making great improvements in the FX20 manufacturing costs, the supply chain is getting better, you're expecting volume improvement throughout the year. So that's not -- I feel like we're going to leave this call not really understanding where like the boogeyman is hiding here or something, it just makes me feel uneasy that we don't -- it just doesn't make sense. So that's it's going to -- it's leaving us a little bit of an uneasy feeling. I don't know if there's any other clarity you can provide around that, though, because we've already asked it three times?
Well, I think you asked it a little bit differently, Brian, and I can appreciate that. We're not trying to be obtuse here at all. I think, realistically, we just don't have enough visibility to get competence in maybe raising that. But US, it’s 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 FX20, I would say we still feel good within that range but maybe we do feel better at the higher end of that range, Brian. We're not at all saying that you should expect something, there's 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.
Next question is from Jared Maymon from Berenberg.
First one is just on the revenue guide. I guess, if we kind of look what you guys are saying here, so impressive demand from automotive, aerospace and defense. Shai, I think, if I'm not misquoting you, 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. You obviously get a lot of data back from the systems that are in the field. So I guess just when I look at the guidance, I mean, in Q1, you guys are already fairly close to a level of revenue where on a run rate basis, you're kind of closing in on the low end of the guidance. So I guess I'm just trying to understand is, when we look at your assumptions, are you guys kind of assuming that there's an H2 recession and there's some orders cancelled or pushed out? And if that doesn't come to fruition then maybe there's some upside, or is there something you're seeing in utilization that's concerning, anything else that you can tell us there?
Maybe I'll start Jared and Shai can add more color. But I think you hit it on the head there, the way you couched that. So when we thought about the year, earlier this year and relayed that in our March earnings call, we had baked into that revenue guidance and all of our guidance a level of uncertainty that perhaps we weren't going to have smooth sailing throughout the year. I think most economists and others would -- are probably a little bit more positive today than they were two or three months ago about the rest of the year, and we're feeling that as well. But again, 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 stray 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 there's uncertainty in the macro still remains in low level, but still remains. So we want to wait another quarter before we change anything.
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 assumed to have some visibility from backlog order book. And then you've obviously got strong visibility from the data that you guys received from the customer. So I'm just curious, anything that you're seeing on utilization data that leads you to believe that consumable purchases, as a percentage of sales, could be up next quarter or anything that could provide some gross margin tailwinds even just in the near term, Q1 to Q2?
No, I don't think that those are necessarily related data points. One thing 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 all around the stability of that revenue stream in our business. 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, it's a healthy, sustainable, gross margin business. So I wouldn't read too much into that, Jared.
Thank you. We reached the 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 see you in 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 you for your participation today.