Xometry, Inc.

Good day, and thank you for standing by, and welcome to the Xometry Inc. Q3 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Sean Milne, please go ahead.

Good afternoon, and thank you for joining us on Xometry's Q3 2021 earnings call. Joining me are Randy Altshuler, our Chief Executive Officer, and Jim Rallo, our Chief Financial Officer. During today's call, we will review our financial results for the third quarter 2021 and discuss our guidance for the fourth quarter 2021. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth, and overall future prospects. Such statements may be identified by terms such as believe, expect, intend, and may. These statements are subject to risks and uncertainties which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close today and in our SEC filings included in the Form 10-Q for the quarter ended September 30th, 2021, that will be filed with the SEC on November 10th. We caution you not to place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in our expectations. We'd also like to point out that on today's call, we will report GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operating decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today. and our investor presentation, both of which are available in the investor section of our website at investors.xometry.com. A replay of today's call will also be posted on our website. With that, I would like to turn the call over to Randy.

Good afternoon, everyone, and thank you for joining us for our Q3 2021 earnings call. We are pleased to report another strong quarter as we build out the leading marketplace for on-demand manufacturing and digitize one of the largest industries in the world. The secular digital shift in manufacturing continues to accelerate, with global supply chain challenges intensifying that trend. Fortune 1000 companies are rethinking supply chains and manufacturing strategies, and Xometry is in a tremendous position to deliver on the needs of both our buyers and sellers through the breadth of our platform across verticals, processes, and capabilities. I will review our third quarter financial performance and update on key business initiatives and then turn over the call to Jim for a more in-depth review of our financial results. I'm going to start with a review of our third quarter performance. We had a strong Q3 with $56.7 million of revenue as we continue to see rapid adoption of our marketplace by both buyers and sellers. This represents revenue growth of 35% year over year and 12% growth quarter over quarter. In 2020, revenue from one customer accounted for 11% of revenue related to sales of masks, with the majority of those revenues in Q3 2020. Excluding revenue from that customer, which was de minimis in Q3 of this year, Revenue growth for Q3 2021 was 77% year over year. Q3 revenue growth was driven by continued robust growth in active buyers and rapid adoption of the platform by larger accounts across both North America and Europe. In today's challenging supply chain and cost environment, buyers are increasingly attracted to the Xometry marketplace as we provide flexibility and instant access to a large, broad set of seller capabilities. Additionally, we provide our sellers convenient access to raw materials and other supplies, enabling them to lower their cost of operations. We also improve their cash flow through our growing basket of FinTech products. In Q3, active buyers increased 61% year over year. We saw strength across many verticals, including energy and industrial technology, as well as growing adoption in consumer, medical devices, aerospace, and defense. In Q3, we began adding a network of sellers in Mexico, giving our buyers another set of options. In October, we deepened our partnership with Autodesk, launching version 2.0 of our app for Autodesk Fusion 360, enabling manufacturability feedback and multiple part upload features, improving processes for engineers and designers working in Fusion 360. In early November, We also made a tuck-in acquisition of Georgia-based Big Blue Saw, which adds enhanced water jet and laser cutting capabilities to our marketplace. Alongside strong new buyer growth, we drove robust growth within existing accounts driven by our land and expand strategy and an increase in large orders from assemblies. The number of accounts with last 12-month spend of at least $50,000 increased 67% year-over-year to 603. Within our large and rapidly growing active buyer base, we have a significant opportunity to become an enterprise solution embedded in product design and procurement workflows. As we discussed on our Q2 earnings call, with the increased exposure and awareness from a recent IPO, we began to invest more on top of funnel marketing initiatives in Q3 for both buyers and sellers, which will continue through Q4. On top of strong revenue growth, gross profit grew 42% year-over-year. On a sequential basis, gross profit dollars increased 22% from Q2 to Q3 2021 as gross profit margin expanded 210 basis points to 25.6%, driven by improvements in pricing and seller matching on our AI-powered marketplace. As our marketplace continues to scale and as the number of transactions grow, our machine learning becomes smarter, driving better matches for buyers and sellers, and helping improve gross margins. At the same time, we continue to ramp up our network of active sellers, which further enables Xometry's marketplace to successfully match supply and demand and improve gross margins. Seller services had a strong Q3 as we made improvements to our supplies business and drove increasing adoption across our basket of fintech products. In August, we relaunched Xometry Supplies, including a site redesign and implementation of a new e-commerce software platform. The new site expands our product offering from 30 to 145 categories, and we plan on significantly expanding our SKU selection in early 2022. The usage of our financial products continue to improve, including the mid-August launch of Instant Pay. We rolled out Instant Pay after the successful launch of Fast Pay, providing our sellers with additional financial products to improve cash flow and more deeply engage with the marketplace. We are pleased with the adoption and increasing payment volume from Instant Pay. In early November, we acquired Factory4, a SaaS-based software solution company which helps manufacturers improve lead times and make data-driven decisions through real-time production tracking and quality control. Factory4 will serve as a platform to provide sellers a suite of tools to help them run their businesses more efficiently and cost-effectively. We plan on integrating this offering with our existing suite of financial services later in 2022. As we further build out our suite of products and our dedicated sales effort, we expect continued strong growth in seller services. Our international business continues to deliver strong growth, driven by the team in Europe. In Q3, revenue in Europe increased over 500% year over year and 48% quarter over quarter, driven by growth in new buyers and strong growth within existing accounts. In Q3, the European team continued to expand in several core regional markets, including the UK, France, and Italy. Additionally, we recently hired Vivian Shang as the general manager for Asia Pacific Business. Prior to joining Xometry, Vivian was the business development director for the China region for the French telecom Orange Group and previously held key roles at manufacturing and software companies in the region. We expect a formally launch in that region in early 2022. We have a massive opportunity for international growth. international revenue was just over $3 million for the year 2020. In 2021, we have generated roughly $11 million year to date. Currently, over 90% of our revenue is generated in the United States. We see an enormous global opportunity. As with other leading global online marketplaces, international revenue could be 40% or more of total sales over the next several years. Lastly, As part of our IPO, we pledged 1% of our equity to fund educational opportunities for underrepresented students, environmental conservation efforts, and a variety of socioeconomic causes to build a more sustainable future. As part of that effort, we recently pledged more than $900,000 to provide scholarships over the next four years to students enrolled in the Department of Mechanical Engineering at the Howard University College of Engineering and Architecture. With that, I will turn the call over to our CFO, Jim Rallo, for a closer look at third quarter financial results and business outlook.

Thanks, Randy, and good afternoon, everyone. As Randy mentioned, we had a strong third quarter, and we were expecting continued significant revenue and gross profit growth in Q4. We generated a Q3 revenue of $56.7 million, a 35% year-over-year increase, and up 12% quarter-over-quarter. As Randy mentioned, revenue growth in Q3-21 was was approximately 77% year-over-year, excluding revenue from that one customer. This increase was driven by strong growth in the number of active buyers, resulting from our continued investment in sales and marketing as we leverage our attractive unit economics, as well as existing buyers increasing their spend on the platform. Q3 active buyers increased 61% year-over-year to 26,187. In Q3, the percentage of revenue from existing accounts was 95%, underscoring the efficiency and transparency of our business model that leads to increasing account stickiness and spend over time. We believe the repeat purchase activity from existing accounts reflects the underlying strength of our business and provides us with substantial revenue visibility and predictability. Once an account joins our platform, we aim to expand the relationship and increase engagement and spending activities from that account over time. The number of accounts with last 12-month spend of at least 50,000 on our platform reached 603 at the end of Q3 2021, up 67% year-over-year and 19% quarter-over-quarter. Q3 gross margin was 25.6%, up 130 basis points year-over-year, compared to 24.3% in Q3 2020. Q3 gross margin increased 210 basis points from Q2 21. We expect gross margin to improve sequentially in Q4 from Q3 and expect that trend to continue into 2022. As our marketplace continues to scale and as the number of transactions grow, our machine learning becomes smarter, driving better matches for buyers and sellers and increasing our gross margin over time. Moving on to Q3 operating costs, Q3 2021 total operating expenses increased 80% year-over-year to $28.8 million, representing 50.7% of revenue. Q3 2021 operating expenses included stock-based compensation expense of $2.3 million that is allocated across the SG&A line items. Additionally, Q3 operating expenses include approximately $1.9 million in incremental public company costs and $1.2 million related to our charitable contribution. Within our operating expenses, sales and marketing is our largest variable component. Given our large $260 billion TAM, we intend to aggressively grow our marketplace, including buyer and seller networks. Sales and marketing costs were $9.8 million in Q3, an increase of 64% year-over-year, driven by continued investment to expand our network of buyers and sellers, our hiring of additional salespeople, including for our basket of seller services, and increased stock-based compensation expense. Sales and marketing as a percentage of revenue was 17.3% compared to 14.3% in the same period a year ago. On a non-GAAP basis, excluding stock-based compensation and depreciation and amortization, Sales and marketing increased 64% year-over-year to $9.5 million, representing 16.7% of revenue compared to 13.8% in Q3 2020. We expect to continue to invest aggressively in sales and marketing in Q4, including new marketing channels, increased digital marketing, and further hiring in our sales team. Our adjusted EBITDA loss for Q3 was $10 million, or 17.7% of revenue. Q3 adjusted EBITDA was better than our guidance, driven by stronger than expected revenue growth, significant gross margin expansion, and marketing efficiency. Additionally, roughly $700,000 of public company costs were delayed until Q4 2021 and early 2022. In Q3, revenue from our U.S. and European operating segments was $51.7 million and $5 million, respectively. Segment loss from our U.S. and Europe operating segments for Q3 was $12.6 million and $2.2 million, respectively. We continue to invest in our European business, which grew over 500% in Q3, with improving gross margins as transaction volume increases. At the end of the third quarter, cash and cash equivalents and marketable securities were $324.5 million with no debt. In early July, we raised approximately $325 million in net proceeds from our IPO and subsequently paid down our debt. Now moving on to guidance. We expect Q4 revenue in the range of $60 to $62 million. representing year-over-year growth of 58% to 63%. In Q4 2020, one customer accounted for 10% of revenue. Excluding revenue from that customer, revenue growth guidance is 75% to 80% for Q4 2021 as compared to Q4 2020. Our Q4 2021 revenue guidance assumes no revenue from that one customer. Additionally, we do not expect the tuck-in acquisitions of Big Blue Saw and Factory 4 to be material to Q4 revenue or adjusted EBITDA. We expect Q4 adjusted EBITDA loss to be in the range of $11 to $12 million as we continue to invest in sales and marketing, accelerated international spending, and higher public company costs. In Q4, we expect stock-based compensation expense in the range of $2 to $2.5 million, which we will exclude from adjusted EBITDA. Additionally, as Randy previously discussed, As part of the IPO, we pledged 1% of the company's capitalization, or approximately 403,000 shares, to Xometry.org for charitable contributions to nonprofit organizations. As a result, each quarter we will record a non-operating charge through general and administrative expenses, which will be excluded from adjusted EBITDA. In Q3, this charge was $1.2 million and expected to be approximately $1.3 to $1.6 million a quarter moving forward. With that, operator, can you please open up the call for questions?

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, that is star, then the number one on your telephone keypad. We'll pause for just a moment to compile Q&A roster. We have our first question coming from the line of Sterling Audu. With J.P. Morgan, your line is open.

Hi, this is Rachat on for Sterling. Thanks for taking up my question, guys. Can I give on how the business has been impacted from the constraint on supply chain environment?

Yeah, hi, and welcome. And this is Randy Altshuler, the CEO. So the wonderful thing about the Xometry marketplace is that it provides our buyers with convenient and instant access to a large, broad set of seller capabilities. So when there are supply chain issues, there's frankly no better place for a buyer to go market place. And buyers are looking for new, better options and increased flexibility to help alleviate these supply chain challenges. And again, our market place is ideal to help them with those needs. Also, the majority of our orders are fulfilled in country. So this helps alleviate any issues related to overseas shipping delays, et cetera. So at the same time we're helping the buyers, we're also helping our sellers. And we're providing our sellers, the manufacturers, access to lower cost and readily available raw materials and tools, which is enabling them to overperform in this environment. And we're constantly growing our seller base and adding additional options for buyers, including an economy option in new countries such as Mexico. So overall, you know, with the Xometry Marketplace, we're able to help both buyers and sellers in all kinds of environments, particularly in a challenging environment with supply chain issues.

Thanks, and then a quick follow-up on that. Can you give us a sense on the trends of revenue for active buyers during the quarter, and what was driving that increase in the quarter?

Yeah, you know, as we sort of mentioned earlier in the call, we had in 2020 a large customer that was selling MassFit. In 2020, accounted for over 11% of our sales. But if you take out that one customer that obviously just sort of disproportionately boosted up their revenue per customer, then the trend is very nice, excluding that. So we're happy with the revenue per customer trend.

Thanks. Appreciate it, guys.

Okay. Thank you, Akbar. Are we ready for the next question?

Thank you. We have the next question for Brian Dreb with William Blair. Your line is open.

Hi. Thanks for taking my questions. I was wondering if we could talk about the acquisitions a little bit more in detail. First, I'm just wondering with Big Blue Saw, if I could learn a little bit about the thinking around buying what looks like, I guess, an operating company instead of just adding them to the network through the broker model. And I'll just start with that.

Yeah, so, Brian, good evening. And, yeah, for us, Big Blue Saw, we weren't looking to it. It's a very small company, but they built this tremendous – it was founded over 15 years ago by a software engineer. And he has built some terrific instant quoting capabilities for LaserJet and for WaterJet. And so we want to take, and he's built his own engine for that. So for us, we want to take that technology, that great instant quoting technology, as well as the data that he's accumulated, and use that to enhance our instant quoting engine for our large customer base or large user base. So that's going to just accelerate our capabilities for water jet and laser cutting in the marketplace.

Yeah, that makes great sense. And then can you just talk a little bit more about the thinking behind the factory for

Yeah, and then on Factory 4, you know, it's a SaaS-based solution founded in 2015. They're based in L.A., and they help manufacturers manage their production, so production, planning, quality control. So by embedding this SaaS-based solution into the Xometry marketplace for our sellers, we'll help them to be – more efficient, will provide stickiness for the sellers within our marketplace, and it also provides us real-time insight into their available capacity and utilization. And then finally, Brian, we can also integrate our FinTech products into that as well. So as they manage their own book of business outside of Xometry, they're doing it within the Xometry marketplace, and likewise, as we're working with them, it makes this stickier relationship, too.

Great. I'm just going to ask one more just along these lines around acquisitions. You mentioned that the revenue wouldn't be material in the fourth quarter, but can you give us any sense, you know, what does that mean exactly? I mean, like less than 5% of revenue or what?

It's less than 1%. And also understand, Brian, you know, we closed these in November and we've also got, you know, we've got the holidays coming up in Q4. Yeah. But I think it's fair.

Yeah, hey, Brian, it's Sean Milne. You can look at it this way. It's 1% or less if you actually look at it pro forma, their revenue versus our total revenue for the year. Oh, okay. All right.

Thanks, Sean. Thanks, Randy.

For this quarter, it's diminished. Exactly.

Understood. Got it. Thank you.

We have our next question coming from the line of Nick Jones with Citi. Your line is open.

Hi, this is Jeff Siner on for Nick. Just a couple questions. Just to follow up on the big blue saw acquisition, can you confirm, so then are you not acquiring any of their manufacturing capabilities?

We are, Nick, but it's tiny. And as Sean said, it's a de minimis. It's not material. It's very small. I mean, we really, again, we did the big blue saw acquisition because of the instant quoting platform or engine that the founder has built, and the data that he's accumulated from being in business over 15 years. And that's just going to help enrich our own offering in our marketplace for water jet and laser cut.

Got it, got it. And then separately, just, you know, you mentioned being able to provide raw materials to your supplier base. Are you seeing any impact of inflation, or are you sort of uniquely positioned to sort of help your suppliers out with inflationary pressure that they're seeing?

Yeah, so I think in general when you think about inflation, so, you know, the Xometry platform reprices weekly. So that enables us to offer both prices for both the buyers and sellers that incorporate any changes in raw materials or labor. So we're keeping up on that for both the buyers and the sellers. And our platform provides better efficiency and pricing for our buyers as our AI matches buyers with the right sellers, taking into account many different inputs. It's not just about the cost of material or labor, but it's also things like what kind of capacity a particular supplier might have at a time or seller might have at a time, their utilization, specific equipment that they've got. So all those things are helping us provide great pricing for both the buyers and the sellers. Going specifically to the materials, in this inflationary environment where some sellers or some suppliers are struggling to find materials, we effectively operate as a group purchasing organization for them, and we enable them to get those quicker and at lower prices. So if you're a small manufacturer, you might be struggling with those issues. As part of the Xometry marketplace, you get the benefit of our better buying power and our expedited lead times for those kinds of materials. Got it.

Great. Thank you.

Thank you. We have our next question coming from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

Hey, guys. Thanks for taking my questions. Randy, I want to start with you. You know, I think one of the things that always intrigued us with geometry is sort of the diversity in use cases. And, you know, during the IPO, you cited a number of production runs that were leveraging geometry. Can you talk about the pipeline for, you know, more production-run use cases as the platform matures, as buyers and sellers sort of increase? Just sort of curious on the cadence of that side of the network.

Yeah, so I think, and good to hear from you, and I think, Matt, as we think about, you know, one of the indicators of the larger orders that we're producing through the Zonotree marketplace, and we kind of highlighted in particular the you're seeing more and more assemblies. Sort of an indicator of that are the number of accounts with more than $50,000 of spend over an LPM basis. And that number grew 67% year over year to a 603 account. So I think that's a good proxy, not only for our land expand strategy, but also for larger orders. And we're really seeing those in many different sectors, and sometimes they're production runs, and sometimes they're production runs plus assembly. So it's a mix of those, but as you see that $50,000, those accounts more than $50,000 grow quarter over quarter, that's a good sense of as our order size grow larger and larger.

That's super helpful. And then maybe one for Jim. You know, the gross margin improvement is certainly noticeable, and it's great to hear you talk about that improving into Q4 and next year. You know, I know a lot of that is there's a lot of reasons for that, including, I think, improving AI or AI algorithms, but also the benefit of financial services. And I know it's still small, but can you kind of help us think about the path for, you know, financial services products becoming a more material contributor to revenues and Is that something you plan to break out if it gets to a certain scale?

Yeah, so, Matt, absolutely. We've said earlier that we would break that out if it becomes material. It is not material at this time. I would tell you that the growth is still really good in that product for us, so the adoption is continuing to grow. But really, right now, the AI is driving the increased gross profit margin. So as we get bigger and bigger, as I've said before, right, the more transactions that we have, the more orders – the bigger our revenue, the more data, and that's really what's occurring right now. So when you see that jump right now, it's all driven, frankly, organically by the model. And then, like I said, yeah, we're happy to break out seller services in general once that becomes a bigger part of the business.

And, Matt, this is Randy. Just to jump in, going back to Brian's question about Factory 4, with tools like Factory 4 offering our sellers – you know, these SaaS products, we're embedding, we're going to be embedding our FinTechs products into that. So that will help drive more adoption for them for their everyday use beyond just the word that they're getting from the Xometry marketplace. Super helpful, guys. Well done on the quarter. Thank you. Thank you so much.

Again, in order to ask a question, simply press star, then the number one on your telephone keypad. That is star, then the number one on your telephone keypad. We have our next question coming from the line of Carl Kirsten with UBS. Your line is open.

Thank you, and Randy and Jim, congrats on managing through these supply constraints over the last three months. That's impressive. Maybe a couple of questions more around the sellers or suppliers. So you gave us some stats around the progress on buyers, were you, were you happy with, and can you offer any color on the expansion of the supplier network during the quarter? And then secondly, did you encounter any issues where, given the supply constraints among sellers, they just didn't have the capacity to take on jobs on the Xometry board, or did that not really come up as an issue during the quarter? Thank you.

Yeah, Carl, so I think the evidence of the fact that that wasn't an issue is twofold. First, you're seeing You know, we had that very rapid revenue growth that you saw that we experienced in Q3, and, you know, we're continuing to guide to tremendous revenue growth in Q4 as well. And then you're also seeing the margin expansion, which is a result of not only the AI and the increased data and enabling us to match people better, but it's also a signal of an increase in number of active sellers in our marketplace as well. So those two things help contribute to that growing margin profile. And because we're using that AI crawl, that enables us not to, and as we're growing that, that enables us to find those matches. So supply was not a constraint for us, and, again, that's evidenced by our surging revenue and our surging gross profit margins.

Got it. Okay. Impressive. Thank you.

Thank you so much.

Thank you. We have a follow-up question coming from the line of Brian Drab with William Blair. Your line is open.

Did you mention the number of sellers or active manufacturing partners?

We did not, Brian, but we are going to put that into our 10-K. We will update that number first.

Okay.

But it is a growing number, but we'll give the exact number in the 10-K.

Got it. And then just on the supply chain, a lot of questions have been coming in around how you guys would perform in this environment. And I'm just wondering, are you seeing some customers that just can't get what they need elsewhere and, you know, coming to you with orders that are maybe even larger than, you know, typical, you know, larger volume runs, you know, whether it's CNC or injection molding or something just because they know they can get it at Dometry? How is that playing out? What are you hearing from the customers in that respect?

Well, look, again, I go back to our guidance, which is, you know, 50H is 63%. You know, when you're looking at the range in Q4, and then when you've heard that mass customer, it's 75% to 80%. So it's accelerated growth, and I think, you know, certainly Brian's part of that is because We're doing larger orders. And, again, that goes back to the stat of customers with more than $50,000 on an LPM basis. And I think more to the extent that there are supply chain issues, our marketplace provides customers with that flexibility. And we give them lots of different options, both internationally and across the United States. So it's a perfect anecdote for sending supply chain constraints or concerns. And, frankly, it's the same thing for the sellers. Like, we are reliable for those sellers that may be, for other reasons, when we're talking about having troubles of sourcing material for jobs or other raw materials, we're also a great solution for that as well. So it really helps both sides.

Right, right. Okay, thanks for taking the question. Thanks, Brian.

Thank you. That then concludes the Q&A portion of the call. Thank you for participating. You may now disconnect.