Forge Global Holdings, Inc. (NYSE:FRGE) Q1 2024 Earnings Call Transcript May 7, 2024
Forge Global Holdings, Inc. beats earnings expectations. Reported EPS is $-0.10352, expectations were $-0.12. FRGE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Jericho, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Forge First Quarter 2024 Financial Results Conference Call. On today’s Forge Global’s call will be Kelly Rodriques, CEO; Mark Lee, CFO; and Lindsay Riddell, Executive Vice President of Corporate, Marketing, and Communications; and Dominic Paschel, SVP of Finance and Investor Relations. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the call over to Lindsay Riddell. Ms. Riddell, you may begin your conference.
Lindsay Riddell: Thank you, operator, and thank you all for joining us today for Forge’s first quarter 2024 earnings call. Joining me today are Forge’s CEO, Kelly Rodriques; and Forge’s CFO, Mark Lee. They will share prepared remarks regarding quarter’s results and then take your questions at the end. Just after market closed today, we issued a press release announcing Forge’s first quarter 2024 financial results. A discussion of our results today is complementary to the press release, which is available on the Investor Relations page of our website. This conference call is being webcast live and will be available as a replay for 30 days, beginning about 1 hour after the conclusion of this call. There is also an accompanying investor presentation on our IR page.
During this conference call, we may make forward-looking statements based on current expectations, forecasts, and projections as of today’s date. Any forward-looking statements that we make are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those included in the statements. We discussed these factors in our SEC filings, including our Quarterly Report on Form 10-Q, which can soon be found on the IR page of our website and the SEC’s filings website. As a reminder, we are not required to update our forward-looking statements. In our presentation today, unless otherwise noted, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the Company’s performance.
For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is also posted to the IR page of our website. Additionally, we have posted our first quarter supplemental information on the same page. Today’s discussion will focus on the first quarter 2024 results. As always, we encourage you to evaluate both annual and quarterly results for a full picture of Forge’s performance, which can be affected by unexpected events that are outside of our control. With that, I’ll turn it over to Kelly.
Kelly Rodriques: Thanks, Lindsay Riddell. Thanks all for joining us today. I know we reported earnings only five weeks ago, and our outlook is largely the same today. We believe momentum continues to progressively build in the private market after a long cold winter. As we consistently signaled throughout the last two years, we stayed focused on emerging from the downturn as a market leader, a stronger company with a more robust technology and data portfolio. We made significant strides over the past two years in our technology development. And Forge Pro, the first major milestone on our next-generation platform, was released at the end of March. We’ve seen demonstrable traction in the first week since launch, including interest in Forge Pro from existing and new clients.
And we are encouraged that Forge Pro is already validating our hypothesis that more exposure to our proprietary data and trading tools in one place may lead to more engagement and participation in trading from institutional and professional investors. We are also seeing positive market signals, which I’ll address later in this call, even while the interest rate environment remains murky. In terms of business highlights from the first quarter, I’m pleased to share that in Q1, we delivered our fourth consecutive quarter of revenue improvement, with marketplace revenue up 5% as the market continues its recovery. As of April 1, our first investible index, the Forge Accuidity Private Market Index, is now being tracked by the Accuidity Megacorn Fund.
We are also beginning to build momentum in Europe. And while it’s still early days, we announced our official launch into the market in April and are pleased to report that our team has now executed trades in Europe. I’ve said this to all of you and I say this to the Forge team often. Through the technology, data, and index milestones we’ve achieved over the past year and that have culminated in the first quarter and through our global expansion into Europe, we believe we are in a strong position as this market continues its steady recovery. I’ll turn it over to Mark Lee for a deep dive on our financials.
Mark Lee: Thanks, Kelly. In the first quarter of 2024, Forge’s total revenue less transaction-based expenses totaled $19.2 million, up 2% from last quarter. Based on our current pipeline and visibility, five weeks into the quarter, we expect that the second quarter will be equal to or greater than the first quarter of 2024, continuing this encouraging upward trend. Total marketplace revenues less transaction-based expenses reached $8.5 million, up modestly from $8 million last quarter, reflecting the continued improvement from the trough recorded in Q1 of 2023. As a quick reminder, we have renamed the category of our revenue, which was previously called placement fee revenue, as marketplace revenue, as we believe this name better describes the revenue included therein and therefore is more useful to investors.
Marketplace revenues include placement fees, subscription fees earned from our data products, and private company solutions revenue. We have not adjusted methodology, assumptions, or otherwise changed any aspects of placement fee revenue in making this name change to marketplace revenue, and this category of revenue remains comparable to prior period presentations. Transaction volume for the quarter increased 5% from $250 million to $263 million, and our Q1 net take rate remains stable at 3.2%. As a reminder, the net take rate can vary quarter-to-quarter based on a number of factors such as institutional and individual mix. Our custodial cash balances totaled $481 million at the end of Q1, down from $505 million at year-end, resulting in a 2% decline in total custodial administration fees, which dropped from $10.7 million from $10.9 million in Q4.
Total custody accounts increased to $2.2 million in Q1 from $2.1 million in Q4. Last quarter, we discussed the distinction between core accounts versus CaaS, or Custody as a Service accounts. Core accounts generate the vast majority of our custodial administration revenue, while the increase in custody accounts during the quarter was attributable to growth in CaaS accounts. Assets under custody were $16.5 billion at the end of Q1 versus $15.6 billion last quarter. First quarter net loss declined from $26.2 million to $19 million quarter-over-quarter. This included an $8.2 million favorable non-cash change in the fair value of warrant liabilities. As a reminder, the fair value of warrant liabilities is heavily impacted by our share price and our share price variability.
Both the first quarter and prior quarter include non-recurring charges in connection with resolution of legacy legal matters. G&A expenses of $2.8 million and $2.5 million were recorded in the respective periods related to these matters. Following the resolution of these legacy matters, we do not currently expect any material impacts to our financial condition from other legal matters arising in the ordinary course of business. In the first quarter, adjusted EBITDA loss was $13.5 million compared to a loss of $13.6 million last quarter as the modest revenue increase in our ongoing expense management continued to drive quarter-over-quarter improvement. As noted earlier, adjusted EBITDA in each of the respective periods includes non-recurring charges in connection with the resolution of certain legacy legal matters.
Net cash used in operating activity was $12.4 million in the quarter compared to net cash used in operating activities of $6.6 million last quarter. Excluding the payment of annual bonuses, net cash used in operating activities would have been less than the prior quarter. Cash, cash equivalents, and restricted cash ended the quarter at approximately $130.7 million compared to $145.8 million last quarter. This excludes $7.6 million in term deposits classified as other current assets. Including these term deposits as cash, our total cash stands at $138.3 million. Total headcount decreased to 337 at the end of March. We remain committed to maintaining expense discipline and keeping our headcount flat. That said, we do see variability in our ending headcount from period-to-period as replacement hiring tends to lag turnover.
As stewards of shareholder capital, we remain committed to lowering our overall cash burn in 2024 as we did in 2023. We continue to focus on managing our expenses while still investing in our top strategic priorities to continue to build and improve for this platform, products, and services. From a housekeeping perspective, our weighted average basic number of shares used to compute net loss was 180 million shares. And our fully diluted outstanding share count as of March 31 was 198 million shares. For the second quarter of 2024, we estimate 183 million weighted average basic common shares for EPS modeling purposes in a loss position. As we look ahead for the remainder of 2024, we are strongly encouraged by the uptick in several of our leading indicators, such as the narrowing of bid/ask spreads, the ratio of buyers versus sellers, and the overall increase in indications of interest in Q1.
However, we believe that significant increases in Forge’s trading volumes this year will require a continued improvement in investor sentiment, driven by improvement in the outlook on interest rates and a sustained and meaningful recovery of the IPO market. I’ll hand it back to Kelly for a brief market overview before we turn it over for questions.
Kelly Rodriques: Thank you, Mark. I’ll quickly touch on the market indicators that we are watching closely one month into Q2. In Forge’s latest private market update in April, we reported that the Forge Private Market Index, which tracks the 75 most liquid names in the private market, was up 4.5% for the quarter. Buy-side interest on the Forge platform continued to rise and made up 61% of our new indications of interest in March. In total, indications of interest submitted on our platform rose 45% in Q1, another sign that buyers have reengaged in the market after a long risk off period. The bid/ask spread fell to 9.5% at the end of the quarter, which is below the four-year median. As a reminder, we adjusted our methodology starting in January 2024 for calculating bid/ask spreads to use the median rather than the average spreads of individual issuer IOIs. We noted this change in our January 2024 Forge Private Market Update and have continued to use this methodology since.
IPOs are also starting to happen again, though certainly not in droves, but positive performing IPOs tend to beget more IPOs. And that has, in years past, served as a beacon for private market investment activity. In Forge’s business, our market’s pipeline headed into Q2 was stronger than it’s been since the second quarter of 2022. And it’s our view at this point in the quarter that we are likely to meet or beat Q1. We believe the market is certainly improving, and now it’s just a question of velocity. While we can’t control all of the macro variables in play, we feel that through our technology development, our data and expertise, we are right where we want to be as the market begins a new cycle. Thank you. With that, Jericho, can you remind our participants how to ask questions?
And we can go to the first one.
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Q&A Session
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Operator: Yes. So the floor will be now open for your questions. [Operator Instructions] The first question comes from the line of Devin Ryan with Citizens JMP. Please go ahead.
Alex Jenkins: Hi, this is Alex Jenkins filling in for Devin Ryan. Thank you, guys, for taking my question. Hope you’re doing well. I guess just to start, I want to touch on the index. It seemed that the Forge Index and partnerships with firms like Accuidity could become an important gateway to open up access to the market for a much broader group of retail investors. I guess how do you see this playing out? What are the implications for Forge? And how should we think about a timeline where this could become material to your results? Thank you.
Kelly Rodriques: I’ll start and I’ll turn it over to Mark. Glad to get the question. We’re really excited about this part of our business. Part of our mandate two years ago was we felt that the private market access problem needed to be solved for investors that previously didn’t have access to the asset class. And we view this innovation in the private market as part of our thesis for the tipping point for where the private market asset class becomes a mainstream asset class. So this is part of an evolutionary trend that we intend to lead. And so this first one is an indication that we are now at a point in the market where Forge’s proprietary data can actually be used by asset managers to build a fund. I’ll let Mark talk specifically to this group, because it’s a very impressive group, the Accuidity team, but you should consider this at the beginning of an effort that will span the next few years for opening up access to those who previously couldn’t invest and thus create not only more access, but more revenue flows across our platform and more data.
So Mark, I’d let you talk more directly about Accuidity.
Mark Lee: Yes, Alex, thanks for the question. I think the direct question in terms of the timing, I do think that adoption and building AUM in vehicles and products that track the index will take sometime, but a couple of comments. I mean, number one, we think it just brings massive TAM, new TAM to our business that opens up our business from a business focused on individual buyers and sellers of private companies now to the universe of affluent investors who are looking to get exposure to alternative assets brought into their portfolio. And this is really one of the best, most efficient and at low fee, I guess, kind of cost efficient way to get this kind of exposure. I mean, as Kelly said, partnering with Accuidity, we picked out a firm that has a top team with a lot of experience working with quantitative and index products in this space.
And so we’re really proud of the partnership with Accuidity. I also would want to remind you that in addition to the opportunity we see for earning licensing revenue on our data and drive data products, this also will bring, by bringing new investors to – into the private markets, it will also expand trading activity, right? All this expanded AUM will need to find a home and Forge is kind of the leading place where these asset managers using index products will come to fill out their exposure and as they rebalance their portfolios from time to time, they’ll need the services of Forge. And so I think there’s opportunities on kind of many of our revenue streams.
Alex Jenkins: Awesome. Thank you, guys, for that color. I guess just to switch gears a little bit, you spoke about M&A a couple of times in the last few earnings calls and about there being potentially opportunities for the industry to consolidate. Would you do deals that are maybe not financially accretive, but might add a new capability? Or is M&A really a way to add scale, but also accelerate the recovery to even up profitability? Thank you, guys. Appreciate it.
Kelly Rodriques: I’ll start and Mark can wrap it. We think of it primarily under the heading of what are our priority objectives in the market. And so I think last call I talked about our institutional efforts with Forge Pro launching. I talked about our data adoption strategy, and I talked about our effort to build more capabilities, services, and relationships with companies themselves. So as we look at the opportunity, and we do believe that the market is – while it’s turning, there is still, we think, a pending consolidation that will happen as this market evolves. We’re looking at companies that are in those areas of service or segment participation. So I’m not crazy about doing deals that aren’t accretive. I’ll let Mark add any further color to the financial side of it. But we’re really looking at this through the lens of strategy first, scale second.
Mark Lee: And not too much to add, Alex, I think, we have mentioned in the past that one of the primary reasons to go public in the first place was to be able to continue to grow through inorganic growth and acquisition. We had acquired two companies in our path to become a public company. And so we’ve done that as a private company and we expect to continue to do that as a public company. I think the other question we often get asked in this in connection with this question is our path to breakeven and profitability. And while we stand ready to grow organically to get back to breakeven, which we had been back in 2021. We had been profitable back into mid-2021. We also see the opportunity to consolidate the industry and add new businesses and companies to our platform as a way to scale more quickly and get to that break even and profitability point.
So there’s a lot of opportunities out there and we can continue to monitor the opportunities that are available to us.
Alex Jenkins: Great. Thank you, guys, very much for taking my question. Appreciate it.
Operator: Next question comes from the line of Ken Worthington with JPMorgan. Please go ahead.
Ken Worthington: Hi. Good afternoon. Thanks for taking the question. I believe over the past couple of years, Forge just said the marketplace has been closer to two-third sellers and one-third buyers, and the buyers were sort of the piece of the equation that was missing. The presentation sort of indicated and I think you mentioned on the call that IOIs made up – buyer IOIs made up more than 60% of all IOIs in 1Q 2024. Are you seeing a transition? So I guess are you truly seeing a transition from more sellers to buyers? And then are there conclusions that we should come to with regard to the health of the business and the recovery in the market from this information. And then maybe I’ll just conclude by asking, it seems intuitive that a 50-50 split between buyers and sellers is optimal, but it seems like Forge has been at its best when there were more buyers and sellers.
