Markforged Holding Corporation (MKFG) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and welcome to the Markforged Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Stephen Karp, General Counsel. Please go ahead.
Stephen Karp: Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements with 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 and future financial and operating performance, projected revenue and gross profit for the calendar year 2021 expected growth and market opportunity 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 periodic report on Form 10-Q for the quarter ended June 30, 2021, and the most recent registration statement on Form S-1. The information provided in this conference called speaks only to the broadcast today, August 12, 2021. Markforged 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 was a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after market close today, which can be found on our website at investors.markforged.com. I'll now turn the call over to Shai Terem, President and CEO of Markforged.
Shai Terem: Thank you, Steve, and thank you, everyone for joining us today for Markforged first ever investor call as a publicly traded company. On behalf of our entire team, we are thrilled to be here because it's marks the next chapter in Markforged journey. We are excited to embark upon this journey with you, our investor. Last month, Markforged completed its merger with one, a SPAC sponsored by A-star and followed by tech industry veteran, Kevin Hartz. Since the Markforged story envisioned maybe some of you on today's call, we’ll start by describing the market opportunity and our company before I review our second quarter performance. Our CFO, Mark Schwartz, will follow me with commentary on Q2 financial results. Our mission is to reinvent manufacturing to-date. So we can print anything you imagine tomorrow. Markforged was founded in 2013 and has experienced steady high growth over the past eight years. Today, we are proud to support more than 10,000 happy customers with printed collectively more than 10 million parts on our connected platform. We understand the limitation of traditional manufacturing and offer innovative solutions to address these challenges through robust additive manufacturing. This value we bring to our customers is the driver of our growth. According to Wohler's, an independent consulting firm, specializing in rapid product development and additive manufacturing, the market for additive manufacturing is estimated to grow by $100 billion in the next 10 years from $12 billion in 2020 to $115 billion in 2030. Markforged is focused and it's always been focused on the manufacturing world. We're not just another 3D prototyping company. Rather we delivered technology designed for customers mission-critical use cases. The Digital Forge, our integrated metal and carbon fiber additive manufacturing platform, provides a turnkey solution for parts on-demand. Its cloud-first software architecture powers, a variety of 3D printers that can unlock a range of new applications across the 16 proprietary materials, including composites and metals. Together, they eliminate the barriers between design and functional parts. MarkForged software take the platform to the next level, incorporating sophisticated AI technology to create a global network of connected printers that clear from each other and get better with each brand. New printers on our network can manufacturing capacity and generate more data on parts and performance, which enables improvements across the entire. Better quality parts that will create more customers and more printers on the network. This cycle enable us to improve and scale and we are just getting started. The combination of MarkForged accessible 3D printers and materials and for customers so for supply chain challenges quickly and more efficiently. We are excited to lead the way in distributed manufacturing, it’s our cloud first architecture enables customers to print on demand parts on the point of need. In manufacturing world is telling us that the future is more than metal. And our continuous further process and strong composite materials are replacing traditionally manufactured metal parts with stronger, lighter, faster and less platform additive ones. Already today, Digital Forge enable our customers to address demanding mission critical application like printing thousands of parts, like groupers for weapons done on the automotive production line. If one of these groupers fail, the entire production shuts down in manufacturers feel the loss in product and revenue. I think through the biggest supply chain destruction more than history due to the COVID-19. We are seeing global manufacturers making investments in more resilient and agile supply chain solutions like the Digital Forge to optimize their production line, costs and output and ensure production continuity. MarkForged mission is resonated with thousands of customers today, including leading organizations in automotive, aerospace and defense. Some of that was the largest and most innovative companies across key verticals utilize the Digital Forge into manufacturing operations. We are entering the next chapter of our journey, which will see us move from one of the most accessible solutions for industrial grade end use parts to robust production of mission critical parts. We would not be where we are today without our customers. We’ll continue to shape our evolution by working with us to solve critical issues with additive manufacturing. With the process from the merger, we are within an aggressive product roadmap that will help us accelerate our pipeline and continue to deliver the innovative and high quality solutions, our customers have come to expect from us. If the leader in advance composites in the additive manufacturing space, we’ll continue to introduce improvement in new products across our portfolio. This bring me to our quarterly performance. In June, we launched a Metal X Gen 2, Next Day Metal and X7 Field Edition. These new printers and software update built on the legacy of their predecessor. And address the needs of our customers express to us, enabling Digital Forge to have manufactures overcome challenges more quickly and easily than ever before. The Metal X Gen 2 features keen hardware developments that improve user experience and increase operator safety coupled with Next Day Metal and over the air software update, which unlocks metal printing speeds up to twice as fast, high quality, strong metal parts are easier and faster. X7 Field Edition allows MarkForged technology to be deployed in some of the most remote and demanding areas, enabling our customers to print parts at the exact point of need. If you deployed industrial 3D printer can be utilized in combat zones or exploration sites to help engineers, operators and service members tackle manufacturing challenges. In our next chapter is a public company, MarkForged is building on this and moving into robust production with the FX20, our biggest, fastest, and the most sophisticated 3D printer to get. Together with our software and materials, the FX20 will transform, the Digital Forge into a next generation additive manufacturing platform and help our customers’ print high temperature thermoplastics reinforced with continuous fiber at the click of a button. These high-strength, higher performance parts, which continue to fuel the Digital Forge growth in the most demanding and regulated industries such as aerospace, defense, automotive, and oil and gas. This launches were simultaneously executed as our company worked for the closing of the merger with one. In preparing for becoming a public company, we made investment in our team and onboarded critical and experienced members for the leadership, including Mark Schwartz as Chief Financial Officer and Ken Clayton as Senior Vice President of Global Sales. We made changes to our board of directors to better align with our goals and aspirations. We sought out talent and skills of Carol Meyers, former CMO of Rapid 7, as Markforged focuses on building our brand and optimizing our go-to-market operations. Alan Masarek, former CEO of Vonage also joined as Chairman of our Board, as he skills and experiences in building a growing companies in transformational spaces will benefit the company as we grow. And finally, we are thrilled to have Kevin Hartz joining our board. Kevin brings unparalleled experience in technologies that have literally changed the business landscape around us. As I stood at the floor of the New York Stock Exchange last month, I was extremely grateful and proud to be part of our team. The unique talent and relentless commitment to Markforged success led us to this moment. I think, I speak for the team when I say excitement that will stay with us. And as we come to work every day, it motivates us in executing our mission reinventing manufacturing today, so you can print what you imagine tomorrow. I will now turn it over to Mark Schwartz, our CFO, he offer an overview of the financials in more detail.
Mark Schwartz: Thank you, Shai. Please note that the second quarter results we will be discussing today are the results of Markforged Inc. as of June 30 and therefore pre-closing of our merger transaction with one. Let's turn to our second quarter financial results and our guidance for the full year of 2021. Second quarter revenue increased 44% year-over-year to $20.4 million compared with revenue of $14.2 million for the three months ended June 30, 2020. We experienced growth across all geographic regions and continued to diversify our revenue with 52% of our second quarter revenue generated outside of the Americas. As Shai discussed earlier, we offer our customers, a differentiated platform called the Digital Forge. The platform combines our proprietary software, hardware and materials collectively enabling our customers to produce critical parts at the point of need. It is the value of our platform to our customers that drives our revenue growth. Second quarter gross profit increased at 60% year-over-year to $11.9 million compared to $7.5 million for the three months ended June 30, 2020. The improvement was driven largely by strong business performance in the quarter efficiencies in hardware production and the favorable product mix in hardware sales. As a result, second quarter gross margin expanded 580 basis points to 58.4% compared to 52.6% for the second quarter of 2020. Well, our business like many others has been challenged more recently by global supply chain constraints and cost pressures, we have attempted to address a number of these challenges through actions, which should allow us to maintain our annual gross margin forecast. For example, these actions include purchasing larger material order quantities in exchange for price concessions and executing longer-term volume purchase orders to secure sources of supply. Second quarter operating expense was $22.7 million compared with operating expense of $13.1 million for the three months ended June 30, 2020. The increase in operating expense was in line with our plans for public company preparedness and includes headcount, stock-based compensation expense, other expenses across sales and marketing, R&D and general and administrative departments to support our growth plans. The remainder of my comments will focus on non-GAAP metrics. Second quarter adjusted EBITDA was a loss of $8.9 million. The adjusted excludes stock-based compensation expense of $1.8 million for the second quarter, as compared to $1.2 million for the first quarter of 2021 and $0.5 million for the three months ended June 30, 2020. Please note, adjusted EBITDA includes non-recurring litigation, non-recurring audit, legal and other expenses associated with SPAC transaction and other transitional public company expenses representing an aggregate total of $0.9 million for the second quarter, as compared to $3.7 million for the first quarter of 2021 and $0.3 million for the three months ended June 30, 2020. At the end of the second quarter, we had 316 full-time employees, up 39% year-over-year. As a reminder, in connection with the closing of our merger with SPAC sponsor one and the closing of the pipe. Markforged received approximately $361 million of gross proceeds, 44 million in share repurchases and approximately $27 million of transaction expenses. As of July 31, 2021, our cash balance, including net proceeds from the transaction as described above was approximately $318 million. We intend to invest this capital in our team in innovation and across our business to meet customer demand for the digital forge and drive our long-term growth. Now on to guidance. We reaffirm our prior revenue guidance for the full year of 2021 anticipating total revenues to reach approximately $87.6 million. Further, we reaffirmed our gross margin forecast of 58% for the full year 2021 and our adjusted EBITDA for the full year of approximately negative $37 million. I would also like to note that there is usually some seasonality to our business with the fourth quarter, typically representing the strongest quarter in terms of sales. That concludes our prepared remarks today. Operator, please open up the call for questions.
Operator: Thank you. And our first question is from the line of Troy Jensen from Lake Street Capital. Please go ahead.
Troy Jensen: Hey gentlemen. Congrats on the nice results.
Shai Terem: Thank you, Troy.
Troy Jensen: Hey, I start want to start with maybe for Shai. I guess, I'm under the belief that the industry has seen in kind of an inflection in the past six months. I was wonder if you could just talk about maybe your thoughts, pipeline now versus pipeline six months ago, or just kind of the tone and activity in the space?
Shai Terem: I think that we see in the pipeline increasing post pandemic across many areas. So yes, it looks that the pandemic impact of a year ago is definitely different these days.
Troy Jensen: Perfect. And how about – I'd like to hear a little bit more about the software and Blacksmith and how that launches in for you guys?
Shai Terem: I think we launched in Q2 several new products. The Blacksmith was one of them. I would say initial customers starting to use it, which is very impressive. But as you know, we also launched the Metal X Gen 2, next metal software update, which really enables our customers to have a very easy solution to get the metal parts over one day, which is very, very impressive. And also the X7 Field Edition, in which we see a great demand building up in the field for that.
Troy Jensen: All right. How about that one for a mark and then I'll jump into Queue, just kind of gross margins, they were really big in Q1 and kind of back down to the 58% level. Just your thoughts on margins. Are they, where they, where you expected?
Shai Terem: Yes, the gross margins actually did Troy come in, as we expected. If you recall our commentary at the end of Q1, and during our Analyst Day was we weren't expecting gross margins for the year to be where they were in Q1, there was some favorable product mix in Q1, and a little bit more so than we're seeing throughout the second quarter at least. And we took advantage of some additional efficiencies, that are now sort of baked in to our business. I think it's really important though, because we're all faced with these supply chain challenges, people have a difficult time getting a so for example right now. And given that, we're very proactive in protecting our gross margin and making sure, we have sources of supply to be able to manufacture parts and consumables for our customers. So it's a proactive effort for us. And I think it's paying off for us through the balance of this year, which is why we reaffirmed our guidance for the full year.
Troy Jensen: That’s it Okay, let’s keep up the good work, and hopefully see in Chicago.
Shai Terem: Thanks, Troy.
Operator: And our next question comes from the line of Brian drab with William Blair. Please go ahead.
Brian drab: Hi, I'm on two conference calls at the same time. So I'm going to ask two questions then just in case I need to hop to the other call. Do you have any large projects in the works, like the 300 unit type project that you had for automotive Valley, current and any big projects coming up? And secondly, I'm just wondering, at this point in a year, have you gained some further visibility into the second quarter? Sorry, into the – into 2022. Just because, we're further in the year now you're expecting really rapid revenue growth in 2022. Thanks. Thank you very much.
Shai Terem: Thank you. We see – we definitely see an awakening in what we call strategic accounts, which comes usually in larger transactions, I think post the pandemic. So we do have some processes in the works, which is common to the way we do business, in regular days post pandemic. And I think, usually the pipeline we see is our between three to six months ahead, which is very common for us. As we discussed before, the demand after the pandemic is building up. It's building up, there's no doubt about that. And we still feel very confident for this year, and they were coming after.
Mark Schwartz: Yes, I think. And Thanks, Brian, for your questions. I think to add on to what Shai mentioned, I tell you that we are executing against our plan. And we continue to be very excited about our trajectory, new features, new product releases that we've talked about. There are a great many things in process for us. We will intend to provide formal guidance for 2022 in the first quarter of next year.
Brian drab: Got it? And, Mark, did you just last quick question. In terms of the adjustments that you're making, to EBITDA it looks like the only adjustment that we're going to make is related to stack plan.
Mark Schwartz: Yes. So if you recall, as a private company, and as we were going through the stack process, we highlighted some additional costs that we felt and still feel frankly, are important to consider. But what we wanted to do was align our comments here with what we filed with the SEC. So we have one adjusted number, sort to speak, that we're all referring to, what we will do is continue to highlight those costs. So that's we extent. It is how you want to model us; you'll be able to back those additional costs out as well.
Brian drab: All right. Understood. Thanks very much.
Operator: And our next question comes from the line of Jim Suva with Citigroup. Please go ahead.
Jim Suva: Thank you very much. Can you talk a little bit about what's been going on with shipping costs? Shipping items around the world has been going more expensive. Do you put that costs all off to your customer, or should we also think about our shipping costs impacting you about like the raw materials that are coming in the door to your contract manufacturers like steel and aluminum and bending? And just kind of wondering about that in lead times for delivery, are they getting better or equilibrium or still kind of stretched?
Shai Terem: Yes. Thanks, Jim; good question. And thank you for listening in today. So I think we're experiencing the same challenges that many companies are. We are like others attempting to be very proactive in how we approach it. More so than in the past, we have been securing longer-term buys even if we're not outlaying the cash now, we are agreeing to be liable down the road to secure those parts, either simply to secure the source of supply or to secure it at a particular price point, we are negotiating across the board with our critical and other vendors in a number of different fashions to try to secure supply and secure the best pricing we can get now and in the future. So it continues to be a challenge every day, as procurement is generally, but this is a particularly stressful time in that area. In terms of shipping, this is also like materials something that we're managing through every day. From our perspective getting our product to our customers, as we promised, is the most important item, and that's what we focus on. To the extent that we can – we have attempted to keep our pricing stable for our customers, so that there aren't any negative surprises to them. And I think given the efforts that we have undertaken throughout the supply chain to date we've been effective in being able to do that.
Jim Suva: Great, thank you. And my quick follow-up, is that for both your printers themselves or also, is it different with supplies. And what I mean by that is if I'm a consumer, first of all, I buy your printer and then I typically will be buying your consumables with it, okay. And when aluminum, copper or substrates go higher, I'm just wondering how you adjust those prices with your customer. Is it based upon index? Are they aware of it? Do they do long-term contracts? Thank you so much.
Shai Terem: Yes. So similar to how we manage through the material supply chains with our manufacturers for the production of printers, we do very similarly with our suppliers, for the raw materials of our consumables. Remember, we manufacture our consumables ourselves. So the critical component for us is that raw material that is used to produce, so the combination of raw materials used to produce the – ultimately the materials that we school and then ship to our customers. So we view them very similarly in how we are tackling those challenges.
Jim Suva: Thank you so much for the details, and great job, and we appreciate all the details.
Shai Terem: Thank you, Jim.
Operator: And at this time, I will now turn the call back to Shai for closing remarks.
Shai Terem: Thank you very much for your participation and looking forward to talk to you in the next quarter.
Operator: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
