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spk04: from a forecasting perspective, but it's a more challenging time from our perspective in trying to share what we believe this year looks like. We have really, really strong conviction around our pipeline. What we don't have conviction around are folks sitting in my chair that um i can tell you for example you know we mentioned it in our prepared remarks but we are we are taking a very close look at our own expenses internally and um and and i think it's fiscally responsible to do so when there's so much macro economic uncertainty we don't know what others sitting in my chair are doing and i think that from our perspective uh causes us to reflect uh in the near term and and to bring down our guidance
spk06: And then the timing of that, you know, did it happen in the past, you know, week or two or month or two? Just because I'm trying to, you know, allocate about the risk of could things actually worsen up here in the next 30 days or are those like very fresh updates that you put together?
spk04: We put, we are, how we think about this and how we guide and the level of information that we attempt to share is our best and most recent thinking. And that's always the case, Jim. That's always what we strive to do. So this is our best and most recent thinking, even up to late last week and early this week.
spk06: Thank you so much for the additional details and clarifications. It's greatly appreciated.
spk04: You're very welcome.
spk02: The next question is from Rod Hall with Goldman Sachs. Please go ahead.
spk07: Hey guys, this is Anmol on for Rod. I also wanted to dig a little into the full year guidance and I just wanted to check where is the most shortfall for H2 and is it I understand that the order growth is strong for FX20 but how is it tracking versus your original plan is it slower than expected and I also wanted to check about the visibility in terms of order pipeline in the second half if You know, what are the confidence levels there, like if they're binding orders or, you know, any comments that you can provide us with? Thank you.
spk04: Yeah, so a couple of things. Thank you for your question. I think first and foremost, we build to a forecast so that when we get an order from a customer, we are able to fulfill it. We don't leave the quarter with any significant backlog. As we get binding orders, we are then fulfilling them. We had what we believe to be a very strong quarter. We were very excited about our results for last quarter and even more excited about the optimism from our existing and expected customer base. Folks are really excited about our product portfolio and what we have to offer today, including on the material side. So we feel great about the direction we're headed. We just feel it is prudent for us to really consider what's happening around the planet, what others in this seat are doing, and not getting out over our skis a bit. So from our perspective, the demand continues to be very encouraging. Our pipeline is stronger than ever. The only variable that we're, maybe not the only, but the most significant variable that we are considering as we have brought down our guidance for the year is the conversion of that pipeline and how quickly folks in my seat determine that they want to push out that spend for a quarter or not. We're not seeing an awful lot of that, as you can see from our results, but we are attempting to be prudent.
spk07: All right. Appreciate it, Mark. Just to follow up on that, so at this moment, according to you, Are you expecting being a little prudent in FX20 and other product lines too, or is it more skewed towards one way or the other? Do you expect the other products to be more slow than the FX20, or is it like being prudent all the way around?
spk04: No, we think that the current economic uncertainty impacts across our product line. I don't think there's any one in particular. So, no, I hope that answers your question, but we're not seeing it in any particular product line.
spk07: Yeah, thank you very much. I appreciate it.
spk04: Thank you.
spk02: The next question is from Greg Palm with Craig Hill. Please go ahead.
spk03: Yeah, thanks for taking the questions here. I wanted to follow up on gross margin guidance for the second half. So by my math, you're running at about 54% year to date. You're guiding 53% at the midpoint. So it implies that things are actually going to worsen. And I understand the comments on component costs and everything. But you'll get a little bit of lift. presumably from volume. And it sounds like input costs are more or less stabilizing. So what am I missing specifically?
spk04: Hey, Greg. Yeah, thanks for your question. You're not missing anything. Again, this is us sort of trying to share what we're seeing today. If you look at our gross margin for the first half of the year, out of percentage point, it's 53.7%. And we were actually up very modestly, about 20 basis points from the first quarter to the second quarter. We see gross margins to be sequentially flat. We're continuing to navigate all of these supply chain challenges, but we see it coming in fairly similar to where we've seen it in the first couple of quarters.
spk03: Okay. So maybe just a little bit of conservatism there. And I guess as it relates to this slowdown or maybe the expected slowdown that you're talking about, are you seeing any changes yet in consumable usage patterns, or are you mostly expecting this to impact the hardware revenue?
spk04: I would say to the extent that there is a slowdown and an impact, as you've suggested, then it wouldn't be on the consumable side. Our consumable business is very consistent, relatively easy to model, and something that, again, another area where we're really excited because once our printers are out in the field, our customers are taking advantage of it and they're using them.
spk05: I would add maybe, Greg, I would say I'm here almost three years now. The only month ever that we saw a drop in the material usage is March of 2020 with COVID when everyone went home. Other than that, it's always growing.
spk03: Yep. Okay. Good. And then last one, inventory took another big jump up sequentially. Looks like that's mostly finished goods. You know, anything to get concerned about that? I mean, do you have visibility in working off some of that level over the next couple of quarters?
spk04: We do. Exactly, Greg. Yeah. Thanks for paying attention to that. So I think from our perspective, you know, we use contract manufacturers. Again, as I said, we build to forecast contracts. And much of that is finished goods, as you suggested. We expect over the next three, maybe four quarters maximum, that inventory will come back in line to what we've experienced historically.
spk03: Okay, perfect. All right, I'll leave it there. Best of luck going forward. Thanks.
spk04: Thanks.
spk05: Thank you.
spk02: The next question is from Noel Diltz with Stifo. Please go ahead.
spk01: Hi, thanks. I was hoping, just to shift gears a little bit, that you could comment a bit on the digital metal acquisition, you know, sort of, I guess maybe commenting on why this is the right fit and how to think about how we should think about it from a quantitative perspective in terms of ramping over the next few years. Thanks.
spk05: Sure. Thank you, Noorain. So as we communicated all the time, we're looking for a complementary solution strategic acquisitions, especially technologies that will help us expand our offering for our customers. And again, we're still focused on manufacturing, focused on mission-critical applications. When we were looking around, we identified binder jetting as a key technology that we believe would scale fast for high-volume production of metal parts. And specifically with digital metal, they have very high level of reliability and accuracy and precision for the parts that are going out of the system. It's still in early stages, I would say, of go-to-market, and I think this is where it's very synergetic with Markforged. We have, I would say, significantly wider global coverage and go-to-market, and this is why we chose to do it. We believe it's very, very complementary to our solution. It's still focused on high-end mission-critical application, but it's really helping us now to move to high-volume production and into a few other industries like medical, luxury goods that we didn't play before, in addition to automotive. So I think it's a really good acquisition for us.
spk04: To answer maybe the second part of your question, Noel, tagging onto what Shai said, this is a mature technology, a great team, almost two decades of experience focused in metals and binder jetting. We can't disclose specific details on revenue specifically because the transaction hasn't closed yet, but we're not expecting the revenues to be material, forgive me, in 2022.
spk01: Okay. I guess the associated question there would be, you know, given that revenues aren't material, how should we think about the least near-term headwind from a cost perspective?
spk04: So we're not expecting it to actually impact our OPEX for the – call it for Q4 in any material way either.
spk01: Okay. Yep. Okay. And then just, I guess, shifting back to the outlook a little bit, could you comment on your backlog? You know, you've talked about the strong backlog for the FX26. How do you sort of gauge the risk of cancellations or, you know, get comfortable with the backlog? If you could comment again on some of the indicators or the metrics around that, that would be great. Thanks.
spk05: Sure. So as Mark shared before, we usually produce and have inventory so we can ship to our customers. The one caveat is the FX20. So from that perspective, we continue to see the increase in the pipeline and we believe that we will ship orders as planned. On the FX20, we do have backlog. There are read orders waiting for shipments, and this continued to build up. We did not see any cancellation yet or even signs of it, and vice versa. We see more and more orders coming in, and as Mark shared, there's actually now orders of multiple systems in the same order, so it still looks very, very strong from our perspective.
spk02: Great. Thank you.
spk04: Thank you, Noel.
spk02: The next question is from Jared Maymom with Brembridge Capital Markets. Please go ahead.
spk00: Hey, guys. Thanks for taking the questions. First one, just going back to gross margin. Sorry to harp on it, but I think it's important. So, Mark, you talked costs. And correct me if I'm wrong or if I have bad info, but it sounds like There were also some price increases on consumables during the quarter towards the end of the quarter. So I'm just wondering if we adjust out for the FX20 ramp and we're looking at some of these kind of underlying sticky inflationary items like freight and labor, I guess the longer term, do you think there's more you can do to offset those sticky inflated costs with price on systems and consumables? Or is this kind of a permanent headwind because, you know, maybe you're near a point where increasing price could materially impact demand?
spk04: Yeah, I'll let Shai take some of this as well. I think from the financial perspective, you know, this is something we talk about all the time and internally, as you can imagine. And we're managing through these supply chain challenges providing as little impact as possible to our customer base and particularly on materials because our customers, when you're buying an additive manufacturing printer or any piece of CapEx for that matter, you're looking at what is it gonna cost me per part to build the items that I need? per application, per part. And your input materials become a significant driver of that. So to the extent that we can limit surprises to our customer base is something we're really focused on.
spk05: Yeah, I think maybe to add on top of it, but once someone is making a decision to buy our equipment, after that, any day that it's not used, he's losing money. And the reason to buy our solution is because it's really helped to build reliable supply chain and resiliency and the parts you need. So from that perspective, I believe we would continue to see very strong material growth, especially now when we go into higher volume production with FX20, by the way.
spk00: Got it. Yes, that makes sense. And I think there's been a lot of other examples of companies that at points in their growth story have gone from having the best margin to focus on having the most margin. So I can appreciate that. Maybe just one other question. The digital metal acquisition, I think Noel asked a good question, but just following up on that is I know you guys have talked about you want to kind of invest more in R&D so you can try to release a new product or a new printer every year. So I'm curious, do you think this is kind of the printer or product for 2023 or 2024? Or are you also developing something organically for those years?
spk05: That's a very good question to clarify. So as we shared in our remarks, it's both. Meaning we have inorganic activities, logit and metal, that we add more capabilities into our product portfolio. But we also work in very diligently in-house to continue to develop organically our next set of products. So we invested significantly in 2021 in infrastructure. The majority of that went into R&D. So we are working on multiple programs in the same time. So you should expect a new product or new feature every year organically as well. So in addition to digital metal, we still continue to develop and innovate, and 2023 and 2024 are going to be very, very interesting years.
spk00: Okay, got it. And then just one quick follow-up on digital metal. Do you think there's going to be any cannibalization of your current metal offerings or do you believe the value prop is different enough where there's going to be pretty minimal customer overlap?
spk05: I think it's definitely complementary. It's not even close from, I would say, cost, price, and definitely not from output. One is more dedicated into higher volume and mass production, basically. And our Metal X is more aimed into smaller volume and more tools and fixtures, also from the size of the parts. So I think they're definitely complementary. I don't see any cannibalization between them.
spk00: Okay, great. Thanks, guys.
spk04: Thanks, Jared.
spk02: Greg, your line is open.
spk03: Hey, can you guys hear me okay?
spk04: We can, Greg. Thanks.
spk03: Okay. Sorry. Mine went mute for a second. One quick follow-up. We noticed that your guidance for share count is up about, I think, $5 million from last quarter. Are you guiding to reflect the shares issued as a result of the acquisition of Digital Metal, or is there something else going on?
spk04: No, there'll be a fairly significant, in terms of the delta there, tranche of restricted stock and options that vest in Q3 and Q4. We are looking at a year-end number that we're guiding to that's based off of 192 million shares. That is exclusive of digital metal. We won't count that until after they close, from a weighted average perspective, we'll see about a third of those digital metal shares appear at the end of the year.
spk03: Okay, that's what I assumed. So what would be the, I don't know, the weighted average exceeding the year, if you want to call it that?
spk04: It'll be that 192 and then call it 1.3 or 1.4 million shares from digital metal.
spk03: Okay. All right. Thank you.
spk04: You're very welcome.
spk02: This concludes the question and answer session. I would now like to turn the conference back over to Shai Taram for any closing remarks.
spk05: Thank you very much, everyone, for joining us for this call. I'm looking forward to see you soon or in the next quarter. Thank you.
spk02: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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