This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Please stand by. Your conference will begin momentarily. We thank you for your patience and ask that you please remain connected. Thank you. Thank you. Thank you. Thank you. Good afternoon ladies and gentlemen.
spk04: and welcome to the Mark Forge Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the call over to Austin Bollig, Director of Investor Relations. Please go ahead.
spk00: Good afternoon. I'm Austin Bollig, Director of Investor Relations of Mark Forge Holding Corporation. Welcome to our third quarter fiscal year 2022 results conference call. We will be discussing the results announced in our earnings press release issued after market closed today. With me on the call is our President and CEO, Shai Turem, and our CFO, Mark Schwartz. 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, November 9th, 2022 and are subject to material risks and uncertainties that could cause actual results to differ materially. Mark Forge 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 closed today, which can also be found on our website at investors.markforged.com. I'll now turn the call over to Shai Taram, President and CEO of Markforged.
spk09: Thank you, Austin, and thank you, everyone, for joining us on our Q3 2022 earnings call. Despite the challenging operating environment, Demand for the digital forge continued to grow globally in the third quarter, and our strong cost control allowed us to see sequential operating leverage and deliver on our EPS target. It is exciting to see more and more customers unleashing the power of the digital forge to design new products, to manufacture new products, and to embed digital forge parts in the final product itself. I see examples all over the world. and in key industries, such as drones in aerospace, electric motorcycles in automotive, and even in medical equipment. However, while we met our EPS target, we did not deliver on our revenue and gross margin targets for the quarter. In the Americas and EMEA, inflation and geopolitical pressures impacted our mature line of business. And globally, as supply chain challenges continued, we were not able to meet the growing demand for the FX20 and its cost target. But thanks to our team and growing market opportunity, we exited the quarter with one of the largest pipelines of opportunities in the history of our company. The long-term fundamentals of our business remain intact and continue to gain momentum as an increasing number of manufacturers in the Western world onshore more of their supply chain. Who couldn't be more excited about our vision to make manufacturing more resilient by using the digital forge to bring industrial production to the point of need. As we had anticipated, the FX20, our newest production grid printer, is generating unprecedented excitement as manufacturers seek solutions to make their supply chains more resilient and flexible. The FX20 is solving mission-critical applications, such as printing aerospace-grade materials reinforced with continuous carbon fiber and printing replacement parts for automotive assembly lines. robotic arms. In Q3, demand for the FX20 met expectations. We shipped every unit we built and still ended the quarter with a backlog of orders. Procurement of materials and production constraints both contributed to building this backlog. We continue to work relentlessly to mature the FX20 production and are planning to reach commercial run rate that will enable us to fulfill orders as we received them in early 2023. The APAC region was a highlight for us in the third quarter, meeting our expectations for significant growth in the second half of 2022. APAC currently appears to be experiencing a more modest impact for macroeconomic uncertainties. For the third quarter, revenue in APAC grew 82% year-over-year and 39% quarter-over-quarter. led by strong demand for our mature products and accelerated demand for the FX 20. EMEA and Americas were not immune to current global challenges, including the war in Ukraine, inflation, and currency pressures. So due to the broader impact of macro conditions on our business and our intention to reach break-even by the end of 2024, we recently reorganized our go-to-market team and reprioritized initiatives that we believe has the potential for the greatest impact on our path to profitable growth. With the completion of the digital metal acquisition in August, we are excited about our expanded opportunity in high-volume metal production. The addition of this metal binder jetting technology helps us expand our addressable market into the mass production of end-use metal parts. As I meet customers like Ezot, who uses digital metal to produce parts for automotive customers, which are used in vehicles such as the Cadillac Blackwing V-Series, they rave about the same things that led us to doing this deal. Best-in-class part quality coupled with top-notch reliability. In the field, I hear every day from potential new customers, especially those in the medical, automotive, and luxury goods industries. who want to begin using our digital meta solution. I also want to share a very exciting example of how the digital forge is pushing the boundaries of human innovation. Our customers, Side of Space, based on Cape Canaveral, is building a network of 100 small satellites loaded with sensors to provide real-time global insights for transportation, weather, finance, and other critical industries. They are printing almost their entire satellite box with the digital forge. By using our X7 printer and ONIX with carbon fiber reinforcement, Tidal Space is producing radiation-hardened satellites that are stronger than aluminum but up to 40% lighter, saving money on each launch by optimizing weight. This is a great example of how our solution can bring rapid industrial production in-house right at the point of need. This is a difficult time for global manufacturers. Supply chain disruption coupled with clouding macro forecasts continue to put pressure on core inputs such as energy and raw materials. While these pressures make capital investment decisions complicated, these very same pressures are driving manufacturers to think differently and bring production back onshore. With DigitalForge, I believe we have exactly the solution, and our pipeline demonstrates this. Supported by a strong balance sheet, we continue to execute on our strategy towards profitable growth and feel very confident in our business fundamentals. With that, I now turn the call over to Mark Schwartz, our CFO, who will offer more details on our financial performance and guidance for the remainder of the year.
spk08: Thanks, Shai. I will now review our financial results for the third quarter ended September 30, 2022, as well as review our fourth quarter and full year outlook for 2022. 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 to non-GAAP reconciliation to assist with my commentary. Revenue increased 5% for the third quarter of 2022 to $25.2 million, compared with revenue of $24 million for the third quarter of 2021. Despite our best efforts, we were unable to secure sufficient electrical and mechanical components to complete production of FX20 units and meet the growing demand. These production challenges slowed our ramp to volume production, and as a result, we were unable to meet our revenue target for the quarter. Gross profit for the third quarter was $12.4 million compared to $13.8 million for the third quarter of 2021. As a result, we generated a gross profit margin of 49.1% compared to 57.6% in the third quarter of 2021. The current cost of producing an FX-20 versus our target at steady-state production negatively impacted our gross profit by $1.1 million in Q3. or over four gross margin percentage points. We expect FX-20 production costs to continue at current levels through the first half of 2023 and then improve steadily through the balance of 2023 and into 2024. Operating expenses for the quarter were $28.5 million compared to $25.5 million for the third quarter in 2021. and declined sequentially from $30 million in the second quarter of 2022. For the third quarter of 2022, our net loss was $15.2 million, or a loss of eight cents per share. As a percentage of revenues, our net loss improved in comparison to the second quarter of 2022, a focus for us as we managed toward profitable growth. Finally, we exited the third quarter with a cash balance of $181.8 million, on plan and well-positioned to execute on our long-term goals. Now on to guidance. We are updating our 2022 financial guidance to reflect our updated fiscal year outlook, which considers the current market conditions. We anticipate revenues for the fourth quarter to be in the range of $28 million to $32 million, which at the midpoint would result in 2022 full-year revenue near the lower end of the range we previously provided. We expect gross margin in the fourth quarter to be in the range of 48 to 50%, which would equate to full-year 2022 gross margin within the range of 50 to 52%. We anticipate our operating loss for the fourth quarter to be in the range of $13.2 million to $14.7 million. which would equate to full year 2022 operating loss in the range of 61 to 62.5 million for the year. Our operating loss improved sequentially from Q2 2022 to Q3 2022, and we anticipate a further improvement in Q4. EPS results for the fourth quarter are expected to be a loss in the range of six to seven cents per share. which would equate to EPS results for the full year to be a loss in the range of 31 to 32 cents per share. Our long-term goal of 30% annual revenue growth was met with macroeconomic headwinds in 2022. We expect these headwinds to continue into 2023, but our long-term goal has not changed, and we believe our ambition is achievable given the strength of our innovation roadmap, product portfolio, and disciplined expense controls. That concludes our prepared remarks for today. Operator, please open up the call for questions.
spk03: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And our first question comes from the line of Troy Jensen with Lake Street Capital. Please go ahead.
spk07: Hey, gentlemen. Thanks for taking my question. Sorry I jumped on late here, so I apologize if I'm asking something that was addressed. But could you just give me an update here on FX20 and you know, maybe shipments or thoughts on, you know, when we get, you know, a real, you know, more material contribution from that big high-end platform.
spk08: Yeah, Troy, happy to take that. And thanks for joining us. Sean may add in some color here. So FX20, what we've been saying this year is as we began to ship, we would reach commercial run rate in production by the end of this year. That's now getting pushed out. a quarter, maybe a little bit longer. And the reasons for that are ramping of our contract manufacturer and particularly on the supply chain side.
spk07: Okay.
spk09: On the demand side, Troy, I think we shared it on the comments, but on the demand side, it's very, very strong, continuing to build up. We don't see any slowdown there on the other way. getting stronger and bigger, and the customer love it. We have more customers, multiple industries. So the FX money on the demand side continue to grow.
spk07: So good backlog for the product. It's just kind of ramping production up to get the counterfeiting running. Exactly. It's all about getting the parts. It's just a very tough supply chain environment.
spk08: Yep. You've heard us before, and you understand, I think, this component of our business. We typically build to order, and then... I'm sorry, we build the forecast and then ship it on order. So if you were to purchase an X7 today, we ship it to you tomorrow. That's part of how we've chosen to run our business model. With the FX20, we're not there yet. And we left revenue dollars on the table last quarter because we couldn't get our production up to speed.
spk07: I completely understand. You're not the only ones. So then how about a quick on digital metal? I guess I've done some of my own kind of work on the product and it sounds like the technology is awesome and just curious on also kind of timeline for fully integration. What do you think your Salesforce is trained to kind of sell it and also when you expect to get more of a ramp in revenue contribution from that product?
spk09: Yeah, that's a great question and we are very excited around digital metal. So we completed the transaction only in August 31, so we had one month officially with it. I was fortunate enough to go to see some customers and prospects, and there is a real demand building up. Very exciting to see it in some industries that we did not play before, like medical, luxury goods, and others. And it's even more interesting to see when automotive, when it's really been adopted to parts printed into the car, So very, very exciting. I think it's the first quarter that we're going to have digital metas, so probably not material impact this year, but we do expect to wrap it up next year as we continue to progress with it. The way that we are working with it is probably a little bit different than our day-to-day business with our channel partners. It's a more direct approach here, but we're definitely leveraging the global coverage that we have to get to the right customers.
spk07: All right, guys, thanks for taking my questions, and good luck in Germany next week. Thanks, Troy.
spk03: And our next question is from the line of Greg Palm with Craig Hallam Capital Group. Please go ahead.
spk02: Yeah, thanks for taking the questions. I guess I wanted to follow up on some of the macro and market commentary. I guess I'm a bit confused. still because you're talking about pressures, but you're also talking about basically robust and growing demand for FX-20. So is the pressure outside of the FX-20? And just to confirm, the FX-20 has not been impacted at all by lengthening sales cycles, purchasing decisions, and whatnot?
spk08: I'll take the first half of that, Greg, and thanks for your question. So it's actually difficult for us to say whether there's been an impact to the FX20 or not. It would sort of stand to reason that the FX20, like every other product, is being impacted by lengthening sales cycles, but it's such a new product for us and has such an excitement around it. We're not seeing that, and there's no way for us to quantify that. The excitement could be even greater, and the demand could be even greater. What we're seeing is a growing pipeline, one of the biggest pipelines we've ever had in the history of the company, and the time it's taking to close on that pipeline is lengthening. So demand is great, but we are certainly feeling the impact from the current macroeconomic uncertainties.
spk02: Okay, that makes sense. In terms of the reorganization of the go-to-market, can you just expand upon a little bit what you're doing and just some of the potential cost savings behind that?
spk08: Shai, do you want to take that?
spk09: Sure. So I would say that we adjustment a little bit the cost side to the growth that we're seeing in the near term with the macro challenges. And we try to make sure that we have our market as efficient as possible. And it has,
spk02: impact and you will see the operation leverage improving in this quarter and the one after but we think it's the right and prudent thing to do as we're trying to adjust to what we see in the world and somewhat related to that but the you know path to you know break even exiting 2024 i'm just curious if there's a you know a level of revenue that's associated with that or if there's additional levers that can be pulled internally that helps you achieve that goal?
spk08: We have some internal targets that we're hashing around, but you can imagine with the current environment, it's difficult for us to pinpoint that, and we're certainly not going to make those numbers public today as we think through it. Having said that, we are prepared to make whatever adjustments we need to make in our business in order to achieve that goal. And we'll let you know if that ever becomes something otherwise.
spk02: Okay. But I guess it sounds like, you know, even under a very different macro environment now relative to, let's say, a year ago, there's still a lot of levers that can be pulled to help you achieve that goal.
spk08: That is correct. And on the The revenue side, there's lots of excitement, and between software and our core hardware and hardware from Digital Metal that will be commercialized next year, we have every reason to continue to be excited about 23 and 24.
spk02: Okay, good. I'll hop back in queue. Good luck. Thanks.
spk08: Thanks, Greg.
spk03: And as a reminder, if you would like to register a question, you can press the one followed by the four on your telephone keypad. And our next question is from the line of Jim Suva with Citigroup. Please go ahead.
spk11: Thank you. When we think about the challenges of securing components for FX20, which is not unique to your company or the product, I'm just curious, has it worsened? in the past month or two or alleviated a little bit? The reason why I ask is there are certain parts of technology that are actually hitting oversupply, like PCs and other things. I'm wondering if that's starting to help alleviate some of the pressures or constraints of securing your components.
spk08: Not that we're seeing entirely, Jim. Like building really any piece of hardware, supply impacts your ability to produce any full item so the um the challenges change day to day or week to week but um but i wouldn't say that it's improving there's always something that is moving to the top of the priority list in order to find parts to be able to build the machines okay and then as a follow-up your supply chain are they telling you that maybe mid next year
spk11: it gets into a much better equilibrium state or do you have to like proactively start to say, hey, if we don't have the visibility, maybe it's worth putting in proactive a lot more orders or maybe you've already done so.
spk08: Yeah, it's a combination of those things. The supply chain, our vendors, our partners are certainly not telling us today that they're seeing an end to this insight. We hope that sometime next year it does begin to improve. We've sort of said all along this year, as you may recall, that we thought that these supply chain issues were going to challenge us the entire year and hoped we were wrong. But it does appear that that is the case. And at this point, it does appear it's going to leak into next year.
spk11: Okay. And then in your press release, I believe you made the statement about profitability in 2024. Just curious, is that like exiting or run rate or full year? And is it contingent upon the supply chain situation being more, are completely resolved? Or just kind of curious, because that's a good goal. And I think investors will like to hear any assumptions that are based upon that to make sure we are calibrated correctly.
spk08: Yeah, we're certainly not today indicating that it would be for the full year. We think by the end of 2024, we will reach that point. And there's lots of levers that need to be pulled, Jim, as you can imagine, from the supply side as well as our new product introduction and continuing to generate demand with our sales and marketing teams. So lots of things that need to happen. We feel great about those that are in our control. The supply chain is one that isn't, and it's something that we continue to monitor, as you can imagine.
spk11: Thank you.
spk03: And our next question comes from the line of Kiernan McCabe with Stifel. Please go ahead.
spk06: Thank you for taking my question. Outside the FX20 kind of the base business, I wonder if you could provide any kind of color on your key verticals where you're seeing exceptional strength or softness or just kind of just a general color on kind of your key verticals and what kind of trends you're seeing them in the sort of base business outside FX20?
spk09: Thank you. I think it continues to be on the same industry as before. I think aerospace is very, very strong for us. Automotive and industrial automation, we are going deeper and deeper into the manufacturing floor with JIG tool features to help build products. But what I see more and more recently is customers that are using our solution not just for tools to build their products, but also for parts that go into the product itself. I was fortunate enough to be in Australia two weeks ago, and only there I saw electric motor cycles that have printed parts with Markforged. I saw drones used by the military that have parts with Markforged, and I saw machines, medical equipment to do rapid testing for COVID-19 that has Markforged parts in them. So we see more and more adoption in these industries into the final product itself as well.
spk08: Okay. Kieran, I think it's also important. Yeah, sorry to interrupt. I wanted to add a little color there for you. I think it's also important to highlight, and I think we've mentioned this on a previous call, we're seeing first-time buys from large multinational organizations that have never bought anything from us before, and their first buy from Mark Forge being an FX20. We think that's a powerful statement about the excitement that this product is generating in the industry.
spk06: Great. Thank you.
spk03: And our next question comes from the line of Shannon Cross from Credit Suisse. Please go ahead.
spk01: Thank you very much. I was wondering about usage on the devices and what you're seeing in terms of I realize customers are taking longer to purchase printers, but just in general, you know, have you seen a big pullback or have there been, you know, changes in maybe what they're printing? I don't know. I'm just trying to understand sort of the magnitude of what's going on in the industry because clearly there's some significant pressure and, you know, how it might be alleviated over time. Thank you.
spk09: Thank you. We don't see a decrease yet. I would say what we call active printers continue to grow quarter of the quarter, especially year over year. So I would say year to date, we don't see any decline. The customers that have our solution continue to use it and try to get the best out of it. I can tell you that when we are proving the ROI for the customers, usually we have the interest to print as much as possible because it's saving them a lot of money. And sometimes the big follow-up with, okay, I'll do it in the next facility, the one after, because when they see that it's working, it's a great cost savings for them, and it's a good driver to build resiliency into their own supply chain, which we are all suffering from.
spk01: And you obviously don't have an issue with cash, which is a positive, definitely. But I guess when you think about... and I know you talked a bit on the cost side, but when you think about cash flow and uses and, you know, how are you sort of approaching, obviously you're careful with your balance sheet, but I'm just curious, you know, how things have changed maybe in the last three months in terms of your willingness to fund new areas or thoughts on, you know, the best usage of your cash. Thank you.
spk08: Yeah, thanks, Shannon. I would say, you know, look, I think you've sort of mentioned that we have what we believe to be strong cost controls across our business. We certainly remain focused on our innovation efforts, but outside of our innovation and our sales and marketing, we are paying very close attention in particular to the balance of our operating expenses. And I think that's enabled us to achieve the result we did in this past quarter, hitting our EPS target, even though we had a miss at the top line and on the gross margin. So that continues to be a focus. Anecdotally, folks sitting in my chair are making, in my view, the same types of decisions that I'm making, which is pushing out certain spend where we don't necessarily need to have the urgency to make that spend in the current quarter or the next period. And there's a little bit of a vicious cycle that gets created by that, I recognize. But certainly it's something that we're doing, asking questions about spend and if it can be pushed out, and we imagine others in the industry are doing the same.
spk01: Yeah, thank you very much.
spk08: Thank you.
spk03: And our next question is from the line of Brian Drab from William Blair. Please go ahead.
spk10: There we go. You guys are using the only conference call service that uses 1-4 to get into the question queue instead of star-1. It took me a while to figure that out. So one of my questions is just I know that you've said several times you couldn't meet the demand for the FX-20, and there's a lot of demand. This kind of goes back to Greg's question as well, but I'm just trying to determine how the underlying demand is for the non-FX20 equipment is. And I guess one direct question is, did you ship to customers any FX20s in the third quarter? I don't know that that's been clear yet.
spk08: Yeah, I'll take that part of the question, Brian, and thank you for asking the question. Yes, we did ship FX20s. in the third quarter. We shipped in the first quarter, the second quarter, and we've shipped in the third quarter. We are not at what we believe to be our commercial run rate. That will eliminate a backlog, but we believe that's coming over the next couple of quarters. Okay, great.
spk10: And then is it safe to say that, you know, for the non-FX20s, I mean, given your seeing that ramp, you're shipping FX20s this year, you didn't last year, equipment or hardware revenues is flat year over year. When you talk about the macro pressure, I mean, the FX20 is helping offset the macro pressure, but the macro pressure is showing up much more in the non-FX20 hardware. Is that how I interpret it?
spk08: It is. Yeah, the way the question was asked, I think by Greg, It's really difficult for us to determine if the FX20 is impacted by the uncertainties as well, because we hadn't sold it before. It's very possible that the demand would be even higher, but it's difficult for us to say that. Absolutely, it's impacting our core business outside of the FX20, and particularly in the Americas and EMEA.
spk10: Okay, and then just the last question, and it's along the same lines. I mean, consumables growth was 14% year over year, which is still pretty healthy, and a sign that the utilization of the equipment is still pretty healthy. Is that, as you went into the fourth quarter, are you seeing any change in the utilization of the equipment in the field, and how do you expect that to play out going forward in the near term? Thanks.
spk09: Yeah, I don't think we see a change. I think we continue to see an increase in the active printers and in the usage. And since we continue to grow the install base, we believe we're going to see a growth in the utilization and the material consumption, especially with the FX20s. So if it wasn't clear so far, so we ship every quarter FX20s. Each quarter we ship in more FX20s than the quarter before. And the utilization of these systems, when it's going to get to normalization, which usually takes a year on every printer, supposed to be much higher than any other printer that we had before, because it's bigger, faster, and is a reproduction system. So we still believe that we're going to see a significant increase in the recurring revenue in the next few quarters.
spk10: Yeah, perfect. OK, thank you very much.
spk09: Thanks, Brian. Thank you.
spk03: And we have no further questions in the Q&A queue. I will now turn the call over to Shai Terem for closing remarks.
spk09: Thank you very much, everyone, for joining us, and we'll see you next quarter.
spk03: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Disclaimer