Markforged Holding Corp

NYSE:MKFG

Greetings, and welcome to the Markforged Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Austin Bohlig, Director of Investor Relations. Thank you, Austin. You may begin.

Good afternoon. I'm Austin Bohlig, Director of Investor Relations of Markforged Holding Corporation. Welcome to our fourth 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, Assaf Zipori.

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, March 7, 2024, 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 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 calls today, which can also be found on our website 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 Q4 2023 earnings call. We ended the year with a positive momentum as we continue to execute our strategy. While the challenging CapEx environment of 2023 delayed system sales, we're encouraged by 20% sequential revenue growth in the fourth quarter, which helped drive sales to the high end of our 2023 target range.

Thanks to effective cost controls, we also exceeded our 2023 gross margin and operating cost targets. We are well positioned for growth as we drive the adoption of additive manufacturing on the factory floor to increase efficiency, reduce costs and improve supply chain resiliency. With revenue growth aided by the new FX10, PX100 and Digital Source combined with the continued focus on expense control, we believe we remain on a clear path to profitability.

During Q4, we saw positive momentum with many customers across the globe. One example is our expanded relationship with Automation Alley and Project DIAMOnD with the sale of an additional 125 OnyxPro printers, augmenting the existing fleet of 300 printers Automation Alley originally acquired in 2021. This win is part of a strategic partnership between Project DIAMOnD and Digital Source, our on-demand platform for 3D printing, OEM certified parts.

We believe this expansion validates our secure cloud-based software capabilities that include fleet management, quality control and part validation. We are excited about the partnership with Automation Alley and advancing our vision for Digital Source.

As we enter 2024, manufacturers need to reduce costs and build more resilient supply chains remained a tailwind, driving demand for the Digital Forge. The opportunity to move maintenance, repair and operations, or MRO, from physical to digital inventory and bring industrial production to the point of need provides a massive market opportunity. Our global customers increasingly recognize the Digital Forge is a powerful platform for achieving these goals.

Danone, a global nutrition, essential dairy and plant-based product leader provides another great example. Factory Byrne is Danone's leading production center in Europe, processing milk sourced from Polish farms. The products manufactured at this facility are distributed to both the domestic market and more than 20 other countries. The Byrne factory in Poland faced supply chain disruptions, spare parts availability challenges and equipment maintenance issues. In response, Danone Dairy plant turn to the Digital Forge and X7 printers due to their reliability, ease of use and industrial strength parts. In the first year, by their own estimates, Danone dairy plant reduced cost by 80% across 374 printed boards.

As we look ahead into 2024, we expect the capital spending environment will continue to be challenging as a result of the current macroeconomic environment, including elevated interest rates. While our guidance, factoring these challenges, persisting through the year, we believe we are positioned for growth in the second half of 2024 driven by our new product introductions, robust fleet utilization and improving efficiencies in our go-to-market operations.

Innovation for the factory floor drive Markforged forward. At Formnext in November last year, we launched 3 important new products: FX10, Vega and Digital Source. We're excited about the strong initial demand for the FX10, and we remain on schedule to begin shipping in the first half of this year.

With these new products, alongside the FX20, PX100 and the rest of our industrial printer lineup, we entered 2024 with the strongest product portfolio in the company's history. These new products help position us for growth in 2024 and beyond.

The health of our global printer network remained robust as customers solve even more factory floor applications using our metal and advanced composite solutions. Furthermore, we are pleased with the strong growth in subscription sales, which helped drive services revenues up 25% year-over-year in 2023. We believe the strong utilization rates and the result in recurring revenue streams will grow in 2024.

Markforged remains laser focused not just on growth but also on margin expansion and achieving profitability. We're particularly encouraged by sequential improvement in non-GAAP gross margins, which exceeded 49% in the fourth quarter. Coupled with improving operational and working capital efficiencies throughout 2024, we are confident we can navigate the challenging macroeconomic environment with continued prudent cash management and our strong balance sheet.

We strongly believe that the FX10, the FX20, the PX100 and Digital Source, along with the rest of our factory proven industrial printers, meet critical industry needs to strengthen manufacturing resiliency and supply chains. As global capital expenditure constraints loosen, we are well positioned to realize the substantial growth opportunities that our platform provides.

Before turning the call over, I'm very pleased to announce that Assaf Zipori, the company Acting Chief Financial Officer since May 2023 has been named Chief Financial Officer. Assaf has been a key member of our executive team for over 4 years and has repeatedly demonstrated the business acumen and leadership to head our financial organization. I'm confident in his continued leadership to help us on our journey to profitable growth.

With that, I now turn the call over to Assaf Zipori, our CFO, who will offer more details on our financial performance and guidance for the year.

Thank you, Shai, and good evening, everyone. Since joining Markforged, I've been inspired by our fantastic team, the power of our technology and our mission to bring industrial production to the point of need. I am grateful for this opportunity, and I am confident in our team's ability to drive success. With that said, I will now be covering our financial results for the fourth quarter and full year 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 and non-GAAP reconciliation to assist with my commentary.

So let's begin. Revenue for Q4 was $24.2 million, up 20% from Q3 2023 and down 19% from the fourth quarter of 2022. Our revenue performance was still impacted by a challenging macroeconomic environment with high interest rates.

The year-over-year decline in system sales also impacted consumable revenues that are tied to new hardware purchases. That said, we are pleased with the adoption rate of our subscription-based software and services, which predominantly drove a 33% growth year-over-year in the fourth quarter.

Total revenue was $93.8 million, which is above the midpoint of our guidance, but down from $101 million in 2022.

Gross margin for the quarter was 49.5%, representing a 2% margin expansion, up from 47.5% in the fourth quarter of 2022. This margin expansion was positively impacted by product mix and operational efficiencies. Gross margins for 2023 was 48.6%, which is above the high end of our guidance range compared to a gross margin of 50.8% in 2022. A key goal for us in 2024 is to sustain this positive momentum, scaling up our business and enhancing operational efficiencies even further.

Operating expenses were $24.9 million in the fourth quarter of 2023, down from $29.4 million in the fourth quarter of 2022. Operating expenses for the full year 2023 were $103.1 million, down from $114.3 million in 2022, representing an OpEx reduction of $11.2 million. This improvement is a result of our ongoing efforts to reduce operating expenses and optimize our cash utilization.

Operating loss was $13 million for the fourth quarter of 2023, an improvement from $15.3 million in the fourth quarter of 2022. Our operating loss for the full year 2023 was $57.6 million, showing an improvement from a loss of $63 million in 2022.

In 2023, we took multiple steps to build operating leverage and rightsize our cost structure. This effort is expected to decrease our operating expenses further to an annual run rate of between $92.5 million and $95 million in 2024.

Net loss in the fourth quarter of '23 was $11.6 million, an improvement from a loss of $13.3 million in Q4 2024. Our net loss for the full year 2023 was $51.2 million, an improvement from $60.1 million in 2022.

Fourth quarter loss per share was $0.06 based on our weighted average shares outstanding for the quarter of 198.4 million. Our loss per share for the full year '23 was $0.26 compared to a loss per share of $0.32 for the full year 2022.

Driven by improving operational and working capital efficiencies, our net cash used in operating activities in '23 decreased by $24.6 million of approximately 33% from 2022. Our cash, cash equivalents and short-term investments were $116.9 million at the end of the year, down by $9.1 million from the last day of the third quarter of 2023. We expect our cash utilization to continue to improve in 2024 as a result of higher revenue, modest gross margin expansion, strong OpEx cost control and working capital efficiencies.

Before moving on to our guidance, I want to underscore our dedication to striking a balance between our capacity for successful innovation, market success and our commitment to maintaining a strong balance sheet.

Now moving on to our guidance. We anticipate fiscal year 2024 revenues to be within the range of $95 million to $105 million. While our guidance acknowledges the persistence of macroeconomic headwinds throughout the year, we see an opportunity or accelerated growth in the second half of the year. Our outlook is underpinned by the introduction of new products and particularly the FX10.

In line with seasonal industry trends, we expect to see the normal mid-teens sequential revenue percentage decline in the first quarter and expect revenue to grow modestly sequentially in Q2. And as I indicated previously, we are encouraged by our growth prospects in the second half of the year driven by new products.

We expect gross margins to be within the range of 48% to 50% as we continue to ramp up our new product lines. We also anticipate that the expense disciplines and cost structure realignment we undertook in 2023 will continue to make a positive impact in 2024. We expect non-GAAP operating loss in the range of $42.5 million to $47 million for the year. Finally, we expect non-GAAP EPS results for the full year to be a loss in the range of $0.19 to $0.22 per share.

That concludes our prepared remarks today. Please open up the call for questions.

[Operator Instructions] Our first question is from Troy Jensen with Lake Street Capital Markets.

It's Cantor Fitzgerald now. I know you guys know that, but first of all, congrats guys on great results here in Q4. Assaf, you too on the CFO position. [indiscernible].

Thank you, Troy.

Shai, for you, I guess, two things I want to hit, FX10. Can you just remind us pricing difference between the X7 and the FX10 and timing of revenues again, please?

Yes. So the FX10 is slightly more expensive than the X7. It's somewhat mid-range between the X7 and the FX20. And we are still on track to ship it in the first half of this year and as such, to start to see the revenue ramping up starting the first half. I think it's going to become more meaningful in the second half.

Okay. Perfect. I remember the launch at Formnext, it was pretty impressive. So good luck with that.

And then also Digital Source, I'd love to get an update. You mentioned Automation Alley, and I think they're using it. But any update also kind of timing on kind of revenue contribution, that would be awesome.

Sure. We're actually very excited with the Digital Source. The engagement and excitement around this from a potential customer is much bigger than we expected. And we are trying to work with them on how to collaborate this platform into their solution into their problems. But for this year, we will focus on adoption. We're going to be focusing on scale. So I think this year, we would not see material revenue contribution from the Digital Source, but the traction is much stronger than we expected before.

Remind me, just the revenue, there's going to be up-front system sales for people that are putting them out to partners and then there's going to be an ongoing kind of annuity stream? Are you still working on kind of all the kinks there?

So there's a few revenues from the Digital Source. I think the first one is it definitely through expansion because our customers will sell the solution into their customers. So we see expansion and of the adoption of our core solution. But in addition to it, we expect to see revenue from the utilization of the platform itself, and that will come in later years.

Okay. Awesome. I think I've got to see the floor and good luck, everyone.

Thank you, Troy.

Our next question is from Greg Palm with Craig-Hallum.

This is Danny Eggerichs on for Greg today. Wanted to hit on Automation Alley, I think I looked back in that original sale was around $8 million for that -- for those 300 printers. So I guess, is it fair to say that this sale was around a $3 million to $4 million contribution? And was this one of them that you mentioned last quarter that you kind of expected to hit that got pushed out?

So actually not. As we stated, this is 125 units of OnyxPro. So it's smaller than what you suggested. And the other big deals we are working on are still in play. So I think we are happy they are still in play, but Automation Alley is a great strategic partnership for us. We are looking into serious adoption in supply chain that's supporting automotive. We see a serious partnership here into the adoption of the Digital Source. So it's a very important partnership for us, and it's going in the right direction with continuous kind of adoption across hundreds of users by now.

Danny, it's Assaf. I'd like to chime in for a minute. And if you're asking if we have a dependency in terms of the sequential growth that you're seeing on this deal, then the answer is no. We are very pleased with the growth rate sequentially that we've seen from Q3 to Q4 irrespective of this deal.

Okay. That's perfect. I guess maybe just hitting on the broader demand environment. Obviously, still challenging and maybe expecting some recovery in the second half, especially driven by kind of the new products. But just wondering over the last couple of months, kind of what you've seen with sales cycles, whether you've seen them contract at all? Or they're kind of staying steady? Just overall kind of what you're seeing.

Yes. I think as you can see between Q4 and Q3, there's definitely an improvement, and I'm going to be cautiously optimistic here that this will continue. But it's still challenging environment, as you stated, and as other industrial companies are being challenged with. But we are ready to show focus on the factory floor. And there's millions of factory floors out there that we can go and have a great solution for them that can help them reduce cost and bid resiliency. And I think in times like this, when everyone is challenged, we have a path in there. So it's still tough, but I think it's getting slightly better.

Our next question is from Brian Drab with William Blair.

This is [ Pat Horton ] on for Brian. I'll keep it quick since we have some follow-ups after this. I'm just wondering if the burn-through of the high-cost inventory that's associated with FX20, is that going to help with margin expansion for the full year? And where do you see the timing with that?

It is going to help, but we're very pleased with the gross margin expansion that you've seen in Q4. And during 2024, we should be within the range of 48% to 50% as we ramp up the FX20 steel. And we also introduced the FX10 that we need to ramp up. So longer term, we are targeting gross margins to be within the mid-50s, but it will take us time to get there. 2024, we're still under the ramp-up of the FX10 and FX20. That's why we've given this guidance of 48% to 50%.

All right. It sounds good. I'll leave it there, and congrats on the quarter and talk to you soon.

Thank you.

Thank you.

Our next question is from Jacob Stephan with Lake Street Capital Markets.

Assaf, congrats on the official announcement. Maybe just to start out, could you talk a little bit about the FX10? Just where are you seeing the strength vertical-wise? Maybe we'll just start there.

Yes, I would try this one. So look, you probably know, but our core solution around Mark Two and X7 is solid solution around advanced composite used in the factory floor to be [ GX fixtures ], tools into MRO to reduce costs, move into digital inventory and being used more and more into end-use parts with machine builders.

Now a lot of our customers need higher productivity, and they need bigger parts on this advanced composites. And this is where the FX10 goes into the picture. It's like an X7 on steroids with a lot of automation, a lot of functionality. And with time, even more versatile on the material side. So this is the big advantage of that solution. We see great demand since the launch in Formnext in November, and we're going to work diligently to fulfill this demand.

And also, the price point of this solution is very, very attractive. And the value that it gets to the customer is very high. So I think even in a tough CapEx environment, it will be an attractive solution that we believe will be able to increase materially the growth of our total revenue with that solution.

Okay. Got it. And maybe just touch on, obviously, subscription services. Growth was strong year-over-year, but maybe kind of what's driving the strength? Is that further adoption by a customer like Automation Alley? Or maybe could you just kind of talk about what the -- where the strength lies in growing subscriptions?

Sure. So I think there are 2 drivers. The first one, if you remember, I think a couple of years ago, we transitioned our solution to subscription-based solution that has given higher value to our customers and for multiple years. And we start to see the effect of this because more and more of our customers are choosing to going to real partnership with us into multiple years. And with that, they are choosing to subscribe to the food solution.

The second is we're going deeper and deeper into the manufacturing floor. Our customers require this level of service, this level of SLA, and they really need the software differentiation that we have, if it's around the enterprise solution, if it's around the simulation, et cetera. And this is where we see significant increase in the adoption. And these are sometimes multiyear contracts, which increase in our recurring revenue, which is also very important to the -- our path to achieve profitability.

There are no further questions at this time. I would like to hand the floor back over to Shai Terem, for closing comments.

Thank you very much, everyone, for joining us to the fourth quarter call, and we'll see you in the next one. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.