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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.
Good day, ladies and gentlemen and welcome to the Shapeways First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, May 15, 2023.
I would now like to turn the conference over to Nikki Sacks, Investor Relations. Please go ahead.
Greetings and welcome to Shapeways first quarter 2023 earnings call. [Operator Instructions] As a reminder, this 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 of federal securities laws 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. All forward-looking statements, including, without limitation, statements regarding our business strategy, future financial and operating performance, projected financial results for the second quarter of 2023, anticipated time line for achieving profitability, expected growth, impact of recent acquisitions, new offerings, market opportunity and plans for compliance with the NYSE's continued listing standards 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. For a description 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 March 31, 2023. The information provided in this conference call speaks only to the broadcast today, March 15, 2023. Shapeways 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 financial measure. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market close which can be found on our website at shapeways.com. On the call today are Greg Kress, Chief Executive Officer; and Alberto Recchi, 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 Shapeways first quarter 2023 financial results and progress on our key initiatives and strategic growth plan. I will begin by providing a business update and Alberto Recchi, our CFO, will then discuss our first quarter financial results and outlook for the second quarter.
In the first quarter, we delivered 8% revenue growth, above the high end of our expectations. We are starting to see the results of our investments and focused strategic plan centered on our software SaaS sales and enterprise manufacturing solutions which we believe is positioning us to achieve our objective of reaching profitability in the second half of 2024. We are pleased with our early momentum as we build on Shapeways legacy additive manufacturing business and proprietary software to accelerate growth with a path to profitability.
In particular, we are achieving traction with our software tools and services and, in the first quarter, saw momentum continuing to accelerate customer acquisition. As a reminder, our purpose-built proprietary software is foundational to Shapeways. It digitizes the end-to-end manufacturing process from quote through delivery. We have commercialized this software under the brand OTTO for auto manufacturers to digitize their business. We believe it is a valuable tool for global manufacturers, particularly small and medium-sized traditional manufacturers that are not able to invest the capital and time necessary to digitize their processes, thereby allowing them to offer improved customer accessibility, increased productivity and expanded manufacturing capabilities. We are very encouraged by the reception for OTTO, with the first quarter SaaS sales bookings growing more than 50% over the fourth quarter which will be recognized as revenue over the next 12 months.
Based on our pipeline, we anticipate similar sequential growth in the second quarter and further acceleration throughout the year on a path to meaningfully increase the revenue contribution from high-margin software sales. We have further enhanced our software offering with the integration of capabilities and features we acquired through the acquisition of MFG and MakerOS. With our acquisition of MFG last year, we accelerated our product road map. And in the first quarter, we launched our consolidated ordering platform across all platforms.
MFG historically focused on connecting small and medium-sized manufacturers with custom part buyers through its global manufacturing database and request for quote process. The new features expand customers' capabilities to not only facilitate relationships with prospective new opportunities but also win more of these opportunities and manage them through the manufacturing process end to end. The rollout of new features and functionality led to a record-breaking Q1 for customer acquisition and we saw our highest ever engagement for both manufacturers and buyers on the platform. We believe that this traction is an early indication of our ability to drive increased customer acquisition, retention and lifetime value for our software product offerings.
Our other key growth area is enterprise manufacturing which is also showing steady progress. We provide end-to-end manufacturing services to a broad range of customers, from small manufacturers, who cannot invest in expensive technologies to large enterprises seeking quality and efficient solutions to specific needs. Over the past year, we have optimized our go-to-market approach and our sales force to focus on these high-value opportunities. We are seeing success, particularly in our target industries which include industrial, medical, automotive and aerospace.
As an example, in the first quarter, we signed a multiyear agreement with a customer in the medical space, who is utilizing Shapeways to produce highly customized parts that are a critical part of the presurgical planning and additional applications are already being rolled out for the second half of the year. We also signed a multiyear, multimillion dollar contract with an automotive customer, supporting their injection molding needs with part delivery slated to start next year. These contracts illustrate Shapeways' broad value proposition to manufacturers, including those seeking highly customized low-volume part produced via additive manufacturing to those seeking more efficiency in their traditional manufacturing supply chain as they scale. Looking forward, we have a strong and growing pipeline of opportunities.
With regard to our legacy e-commerce business, while it remains a competitive market, we are pleased to be seeing continued stabilization. I am confident we have a plan to achieve profitable growth as we believe we provide a compelling solution in an environment increasingly focused on mass customization and speed of part delivery. We are seeing strong traction in terms of demand and revenue growth. At this time, we have also rationalized our cost structure. We have begun executing a cost reduction plan to further reduce operating expense and optimize gross margin and expect to see the positive impact of these savings beginning in the second half of the year.
As an example, we recently finalized our factory consolidation effort between Long Island City, New York and Livonia, Michigan. While our first half results are impacted by some duplicated cost structures, the Livonia facility is now fully launched and progressing towards stable operations and should benefit our gross margin starting at the end of the second quarter.
Furthermore, industry tailwinds support our growth as manufacturers are increasingly seeking flexible on-demand manufacturing services. Taken together, the traction in our software sales booking, the growing demand from enterprise customers and the stabilization of our legacy e-commerce business, combined with the cost measures we are taking, we have confidence in our positive trajectory and the path towards profitability.
I would like to thank the entire Shapeways team, our customers, our investors and all of 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 first quarter 2023 performance, give an update on our balance sheet position and provide guidance for the second quarter. In the first quarter, revenue increased 8% to $8.2 million compared to $7.6 million in the prior year, above our expectations and guidance. The increase in revenue was primarily attributable to positive contributions from our software offering, scaling of our additive manufacturing capabilities and traditional manufacturing services. Our gross margin in the first quarter were 40% compared to 45% in the first quarter of 2022. We continue to deliver solid gross margins and the year-over-year change was primarily due to inflationary pressures, the continued ramping of recently deployed new technologies and a more varied product mix.
Additionally, in the first quarter, we had some duplicated operations as we finalized our factory consolidation from Long Island City to Livonia, Michigan. Our Livonia facility is now fully launched. We anticipate realizing margin expansion over time as we see more contribution from higher-margin software sales as well as the effects of our cost optimization plan.
First quarter adjusted EBITDA was a loss of $6.3 million compared to a loss of $4.3 million in the first quarter of last year. SG&A expenses for the first quarter were $8.5 million compared to $6.1 million in the prior year, primarily reflecting increases to personnel costs, the 2022 acquisition, increased professional fees as well as the final expenses relating to the manufacturing facility move.
Turning to our balance sheet. As of March 31, 2023, our cash, cash equivalents and marketable securities totaled $32.5 million. During the quarter, we deployed approximately $8 million in cash which is above our normalized level of cash burn due to expenses related to the move-out of the Long Island City facility, payments related to the 2022 acquisition and severance costs. We believe the continued strength of our balance sheet and our focus on achieving profitability and managing cash burn will allow us to execute on our organic strategic plan without the near-term need to raise additional capital.
Looking ahead for the second quarter of 2023, we anticipate revenues to be in the range of $8.3 million to $8.8 million. We remain focused on those areas that we believe offer the greatest opportunity, including enterprise manufacturing solutions, commercializing our software and anticipate an accelerated ramp-up in these areas as the year progresses.
Finally, I would like to comment on our pending reverse stock split. There will be a vote at the upcoming annual meeting of the stockholders in June. After which, if approved, a final split ratio will be determined by the Board of Directors.
With this, we've completed our prepared remarks and we'll now open the call for questions. Operator?
[Operator Instructions] First question comes from Greg Palm of Craig-Hallum Capital Group.
I wanted to just maybe start by -- maybe you can provide a little bit more color on the enterprise manufacturing customers that you alluded to. I know it's been kind of a work-in-progress here over the last couple of years. But maybe just an update on kind of what you're seeing. It sounds like there's a little bit of traction but visibility, sales cycles, maybe if you can quantify sort of the size of some of these and the timing kind of when we can expect to see that hit the P&L.
Yes. Thanks, Greg and appreciate the question. Thanks for joining us today. So on the enterprise manufacturing side, as you guys know, we've invested in additional sales resources and marketing resources and process and even CapEx to be able to support enterprise customers. And we've learned a lot over the last 12 months as we've made a lot of those investments. And one of the things that we found is the sales cycle and I think we've talked about this in the past, it's just a lot longer. But as we've narrowed our focus on our ideal customer profile, we've been able to actually make a lot of traction. And some of those are specific to the industries that we're kind of targeting, specifically in the automotive space and in the medical space, industrial and then aerospace. We've really highlighted those areas as we pursue them. So the customers that we've referenced in today's call have really been in 2 areas, kind of highlighting 2 very different use cases.
One is in the medical space, where we're supporting a customer that is doing presurgical guides and we've been able to help them quite a bit. They started to scale their production with us internally and they started to deploy and signed contracts with us on additional programs beyond what the original scope was. And this will end up driving a couple of hundred thousand dollars of revenue per month for these type of customers once they're fully scaled. And as right now, we've scaled one program, we're off to the races, making a lot of really good progress.
The second customer we highlighted was a customer that has graduated up into a more of a scaled solution and we're supporting them and they're ultimately a Tier 1 automotive supplier and we're helping them with a more scaled solution. And this will result in a little over $1.25 million a year for the next 7 years, supporting them. And so a wide range of capabilities but all kind of under this premise of how we're using technology to go and support those customers. And so right now, the pipeline looks really good. We continue to move process -- move a lot of opportunities through the process and we expect to see more of these type of larger contracts, specifically larger AOV contracts as we look forward.
That's helpful. And I'm sure every situation is different. But I guess, is there a commonality between all these customers? And I'm curious, are these competitive wins? Are these customers that were using traditional before and now moving to additive?
Well, it depends on the use case. There probably isn't a common denominator there. There's -- I can probably reference examples in multiple different ways. But I will say maybe one of the common denominators is it's a very solution-based sale, right? This is not tactical. It requires a more technical sales approach and ultimately get started. And I think what you'll see is a land-and-expand type of strategy where we'll start to take on more and more opportunities with these customers as we've proven that we are able to support their on-demand or low volume or even scale manufacturing needs.
Got it. Understood. And then on gross margins, just help us understand what the trajectory kind of looks like. I think you mentioned more improvement sort of end of Q2. So I'm just kind of curious if you can quantify what the drag has maybe been and then maybe what sort of improvements you might see in the second half of this year.
Yes, in so far as what -- go ahead, Alberto. I'll let you take that one.
Sorry, I was jumping in. Sorry. Hey, Greg, thanks for the question. So look, we did expect margins to hold strong, first of all, for this quarter. We have told you last time to use Q4 of last year as a proxy for Q1. And so if you remember, the formula was 41%. We closed this quarter 40%. Realize that, that compares unfavorably sort of the historical legacy level in the mid-40s but that's due to a handful of factors, right? So to summarize though, real quick, Greg spoke about duplicative resources related to the manufacturing facility consolidation, right, from Long Island City to Livonia. This had a negative impact over Q4 of last year Q1 2023 and into the end of April, okay? So to the annual labor, we're still paying some rent in LIC. And so as we look forward throughout the remaining part of the year, we should start seeing the benefits of this consolidation.
Number two, we deploy new materials and new hardware technologies which aren't at scale yet. So gross margin on some of these hardware technologies have been negative, albeit improving. Change in business mix, right, that's a big one. We've expanded into traditional manufacturing which naturally has lower gross margins compared to additive. And then lastly, we've seen some inflationary pressure. So to go directly to your question, prospectively, I would assume Q2 margin is approximately in line with Q1 margin. Now our plan has gross margins improving throughout the rest of the year, back into the mid-40s, again as we start reaping the benefits of the optimization and consolidation of our manufacturing processes and also most importantly, as software which is a high-margin business, becomes material, right, from a revenue perspective.
[Operator Instructions] The next question comes from Jim Ricchiuti of Needham & Company.
So I want to understand what is going on with SG&A because it sounds like you're clearly making investments and I'm not quite sure whether the increase in SG&A which clearly was up year-over-year and sequentially is coming from higher customer acquisition costs, perhaps on the software side. Or is it tied more to the enterprise business? Can you help us with that and maybe give us a sense as to where you see that going?
Yes, it's a great question, Jim and thanks for joining us today. Really 2 things. One, we completed the acquisition of Linear AMS and MFG in the second quarter of last year. And so when we're looking at just Q1, the additional resources that were brought on from that, there was a little bit of a step change specifically between Q1 and Q2 of last year. So that's one. And so those resources are really applied to 2 areas. One, resources associated with scaling our enterprise business. We've made a lot of investments in growing our sales channels and marketing channels and technical resources supporting those enterprise manufacturing sales. And then also, we've made investments on the software side of the business. And so that's one area that you -- that we can kind of lean to that have driven that increase year-over-year.
The second one is on the marketing spend. We have made investments from a marketing perspective across all of our channels but very specifically on the software side. And we've been able to develop an acquisition model where we're able to drive marketing spend to create leads that ultimately turn into demos and 12-month contract. That is showing a really good 3:1 LTV-to-CAC ratio. And so we're really excited about that and it seems very scalable and we're scaling that now. And you saw a lot of those bookings growth come through in Q1.
And so right now, we have a model in place. We're pushing aggressively against that to go and scale some of our customer acquisition. And that's also coming through where we didn't have that necessarily in Q1 of last year.
I think I can understand the year-over-year increase, Greg. What I'm trying to understand maybe is the sequential increase in SG&A. And it may also be due to seasonality where there's some comp expense that you incur in Q1. But on a go-forward basis, where do we see that going? Do we continue to see that scale up as you continue to invest both on the enterprise and the software side? Or is there some leveling off? And if so, does that level off in the June, September quarters? Or maybe the rate of increase is not quite as high?
No, I totally understand your question. It levels off. There is incremental marketing spend but we are finding OpEx savings in other areas as we move throughout the rest of this year. So I think from a modeling perspective, you should expect us to continue to kind of hold at our current levels as we move forward.
And then final question for me. The company is focused in 2 areas of driving growth of the enterprise and the software side. Where do you see yourself making the most progress in the near term? And it sounds like you're encouraged by what you see on the software side. And again, I don't want to put words in your mouth but it sounds like the enterprise component is a longer sales cycle. Is that fair?
Yes, yes. That's a very fair observation. I think one, our top 250 enterprise-level customers continue to grow at that 18% to 22% year-over-year pretty consistently as we look at the business. We're signing larger contracts. Those longer contracts have longer delivery cycles. And so we expect that to continue to happen. And so we're happy with that moving forward. Now there's some shorter-term opportunities for software where you'll see more growth in the short term where that's a much more scalable acquisition channel that can turn into revenue faster. And so there's a little bit of a combination of both of those but we're excited about both progress but one is a little bit longer investment versus software which has some more immediate impact to the business.
There are no further questions at this time. I will turn the call over to Greg Kress for closing remarks.
Well, first off, I just want to thank everyone for joining us today on behalf of myself and the entire Shapeways team. We appreciate your interest in Shapeways and learning more about our story. We look forward to providing you additional updates in the coming months.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.