Xometry, Inc.

Good day, and thank you for sending by. Welcome to the Xometry fourth quarter 2022 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question. Please press star 1-1 again. Please stand by. Please stand by. Today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Milne, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us on Xometry's Q4 2022 earnings call. Joining me are Randy Altshuler, our Chief Executive Officer, and Jim Rollo, our Chief Financial Officer. During today's call, we will review our financial results for the fourth quarter in full year 2022 and discuss our guidance for the first quarter in full year 2023. 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 before the market opened today and in our SEC filings including in the Form 10-K for the year ended December 31st, 2022 that will be filed with the SEC. 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 comparison. Non-GAAP financial measures are presented in addition to and not as a substitute 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 in our investor presentation, both of which are available on 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'd like to turn the call over to Randy.

Thanks, Sean. Good morning, everyone, and thank you for joining us for our Q4 2022 earnings call. While Q4 was a challenging quarter for Xometry, we continue to build global networks of buyers and suppliers and the technology tools that enable them to transact digitally. With our market-leading position and a total addressable market of $2 trillion, we expect to continue to grow rapidly for many years to come. We believe the continuing shift to digital is inevitable, and as the leading two-sided marketplace, our asset-light digital marketplace creates efficiencies and values for buyers and suppliers alike. Our AI-powered algorithms generate instant prices and lead times, and we efficiently connect buyers with the manufacturing technology and manufacturer, which can drastically reduce time to market and strengthen global supply chains. While there are no shortcuts, we are steadily and methodically executing on our vision of becoming the de facto digital rails for custom manufacturing. In Q4, revenue increased 46% year over year to $98.2 million, driven by marketplace growth and expanding supplier services with the addition of Thomas. Q4 marketplace revenue was $79.1 million, 32% year-over-year growth. Gross profit increased 72% year-over-year, driven by 30% growth in marketplace gross profit and the addition of Thomas. Active buyers increased 45% year-over-year to 40,664, driven by a record addition of 3,875 active buyers in Q4, a 17% increase over the prior record set in Q3. We also set a company record for the largest number of orders in a quarter, in part driven by record order count from existing accounts. The revenue generated by these existing accounts also continues to grow at a rapid clip, reflecting the stickiness of our marketplace. In the Q4 earnings presentation, We updated the account cohort analysis that was in our 2021 S-1 IPO filing to help quantify that growth. Active suppliers grew by 22% in 2022. Equally important, we increased our share of capacity with them as our spend per supplier grew 22% year over year. Xometry's international revenue grew 89% year over year and 15% quarter over quarter, driven almost entirely by the growth in our European business. Despite this growth in Q4, we fell short of expectations for the first time since becoming a public company. For only the second time in five years, Xometry's revenue decreased quarter over quarter. We also saw a notable sequential quarter over quarter decline in marketplace gross margins for the first time since Q1 of 2021. With the revenue and gross margin shortfalls, we were not able to absorb operating expense growth, resulting in a higher than expected adjusted EBITDA loss of 14.2 million in Q4. We take this step back in profitability seriously. Accordingly, I'm going to provide a detailed explanation of what we learned in Q4 and the steps we've taken to mitigate any issues and ensure that Xometry continues to deliver a strong, durable growth even in a challenging macroeconomic environment. We've already seen progress in Q1 and we are confident in our 2023 outlook. Here's what we learned in Q4 and the steps we have taken to improve our go forward results based on this information. First, as we talked about on our Q3 call, our suppliers, influenced in part by macroeconomic factors, changed their behavior, taking jobs at lower prices, further impacting pricing. In addition, our buyers traded off longer lead times for lower prices, further impacting average order value. In Q4, average order value in the U.S. marketplace declined approximately 8% quarter over quarter, negatively impacting revenue by $6 to $7 million compared to expectations. Based on our pricing optimization efforts, we're starting to see average order value rebound in the middle of Q1. Second, some of our largest customers grew less than expected late in Q4. We saw buyers delay their orders, and in some cases, reduce expected order quantities. Their slowdown limited overall order growth to 41% year over year in the quarter, a decrease from what we had experienced earlier in Q4. The impact of this lower order growth reduced marketplace revenue by $3 to $4 million in Q4. Our top 200 accounts represented approximately 50% of 2022 U.S. marketplace revenue. Historically, These accounts have grown significantly, yet Xometry still only has a small share of their wallet. In early 2023, we redirected salespeople and customer support against these accounts. Given the higher spend we have with these accounts, we are engaging in enterprise-level discussions around strengthening supply chains and driving production order efficiencies. Third, in an environment of falling costs and slowing demand, we expanded our testing of buyer price elasticity to better understand the trade-offs between price and conversion. This resulted in a drag on marketplace gross margin in Q4. Using our learnings from Q4, we expect marketplace gross margin to largely rebound in Q1 of 2023. This will also enable Xometry to better manage future unexpected significant shifts in costs. Capitalizing on what we learned in Q4 and on the rapid growth of our active buyer base, in Q1 of 2023, we expect to resume the quarterly sequential growth in revenue and gross profit we've delivered over the years. Likewise, we expect a lower adjusted EBITDA loss quarter over quarter. For 2023 overall, we expect to remain in strong growth mode and deliver healthy marketplace revenue growth of approximately 30%, marketplace gross margin expansion, and improve operating leverage. Despite the headwinds of Q4, which carried into early Q1, we are committed to being adjusted EBITDA profitable in Q4 of 2023. In addition to the changes I outlined earlier, here are our primary areas of focus in 2023. One, significantly expand the number of processes, materials, and finishes we can offer our customers so we become their one-stop destination. It is extremely difficult for any single manufacturer, even those that are vertically integrated, to have the exact capabilities to meet even a fraction of the customer needs. ThomasNet.com offers supplier capabilities across 70,000 categories. This depth and breadth is critical, since our market is not defined by commodity parts or SKUs, but instead is made up of thousands of different use cases. This is one of the reasons that custom manufacturing market is so fragmented. Our marketplace is unique in its ability to meet these needs. Customers are increasingly recognizing this capability as their production order volume grew significantly in 2022 from 2021. We are expanding our capabilities and improving the production buying experience in our platform in 2023. Two, continue to grow aggressively in Europe, including the recent expansion to the UK, which is the third largest manufacturing market in the region. Additionally, in early Q1, we made a small tuck-in acquisition in Turkey, to further expand our alternative cost supplier network to serve the European market. In Q4, international revenue grew more than 100% year over year on an FX neutral basis. Furthermore, we remain pleased with the rampant buyer demand in China, as we're seeing orders from across many verticals, including medical equipment, biotech, optical tech, and smart equipment industries. We expect China to contribute to revenue growth in 2023. Through Xometry.EU, Xometry.UK, and Xometry.Asia, we've leveraged Xometry's core technology to provide localized marketplaces in 13 different languages with networks of suppliers across Europe and Asia, as well as North America. Three, continue to invest in our work center and industrial buying engine platforms, increasing our footprint with both buyers and suppliers and enabling us to scale cost-effectively. For our suppliers, we made important progress in WorkCenter, the SaaS-like operating system that is the digital foundation for manufacturers. In Q4, we successfully migrated all Xometry suppliers to WorkCenter to utilize the job board and suite of job management tools. In response to supplier feedback, we improved the display and management of jobs and enhanced the usability of the system on mobile devices. In 2023, we plan to expand the work center job management tools and capabilities, including support for custom job workflows, job scheduling and communication tools. For buyers, we took significant steps towards improving the industrial buying engine. The industrial buying engine digitizes the cumbersome and time consuming requests for quote process, taking what was once off platform and integrating it into the heart of thomasnet.com. In Q4, the industrial buying engine continued to move on-platform buyers' requests for quotes. We saw an increased number of buyers building and submitting their industrial buying engine quote requests. We also saw suppliers beginning to use our on-platform messaging tools to interact with buyers during the quote process. While the revenue from the industrial buying engine transaction fees on thomasnet.com is not yet a significant revenue stream, As we more tightly integrate it with our instant quoting engine, we can increase our buyer's share of wallet. Four, modernize the advertising products and continue to expand self-service options on the thomasnet.com platform, making it easier for suppliers to start their advertising journey. We are moving to a pay-for-performance advertising model on thomasnet.com. Most search and listing engines that support advertising Use a pay-per-click or other performance-based advertising model, which aligns the interests of buyers and suppliers. As we improve search, we expect to see a higher level of buyer engagement, improving the opportunity for search monetization. This will also help drive growth of our higher-margin supplier services, as well as boost the use of the industrial buying engine. Five, aggressively look to increase efficiencies and reduce expenses across our organizations. In January, we reduced our workforce by 6% to better streamline operations and improve efficiency and leverage. Our efficiency measures will generate operating savings of roughly $8 million on a full year basis. Jim Rallo will provide more context to these changes on our Q1 and 23 guidance later in the call. The underlying metrics of the marketplace continue to be strong, with record additions of active buyers and record order accounts, including from existing accounts. Our international business had a record quarter. We made good progress with the rollout and adoption of WorkCenter and building integrations to enable Thomas and Xometry users alike to access the breadth and depth of thomasnet.com's 500,000 suppliers, the full value of which we're continuing to unlock. I spend much of my time traveling and meeting with our customers. Whether it's a hyper-growth aerospace company in California or a Fortune 500 consumer product company in the Midwest, buyers struggle with the same problem, efficiently finding solutions that meet the breadth and depth of their manufacturing needs. This highly fragmented, inefficient, opaque market provides worse outcomes for both buyers and suppliers. Our marketplace approach is the best solution to these problems, and we won't stop until we've fulfilled our promise. With that, I will turn the call over to our CFO, Jim Rallo, for a closer look at fourth quarter financial results and our business outlook.