Forge Global Holdings, Inc. (NYSE:FRGE) Q1 2024 Earnings Call Transcript

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

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.

So are we really – are you, even though the IPO market’s not back, are you sort of operating now at that optimal mix?

Kelly Rodriques: I think the optimal mix is probably a range. We haven’t seen two-thirds buyers and – to sellers since 2021. If you look back over the data, anything that’s between 50-50 and 60-40, demand in the 60 has been a good time. But we are coming off really quite a different period. And you remember from these calls that we had in 2022, late 2022 and early 2023 in particular, it was completely inverted. And in fact, there were times where we were down with less than a third buyer. So this definitely is one indicator. And so we needed to continue. And if it drops to 50-50, we’re great there too. But I think the other factor that Mark pointed out relating to activity in the IPO market, in particular, with the interest rates still high are what we remain watchful of. We don’t obviously control that. But I’d say that the over 60 is the first time we’ve seen that since the decline really started to happen at the second half of 2021 and early into 2022.

Mark Lee: Hey, and let me add a few more comments to Kelly’s. I mean, I think as we’re all generally aware kind of out there in the funds space venture and late-stage private equity, there’s a huge demand for liquidity right now from LPs. So there is still kind of a very strong demand on the sell-side. We still have record levels of sell-side interest across a record level of issuers. And so I still think there’s – I still think that an increase in the number of buy-side interest is very welcome and will act as a catalyst. I would want to caution that there’s not a one-to-one relationship between kind of IOI activity and culminating in trades. So I would want to be a little careful there. But the increase that we talked about in terms of a 45% increase in IOIs quarter-over-quarter really came from the buy-side, really a doubling of the buy-side interest as opposed to very steady and strong sell-side interest.

And it was the highest level of buy-side interest that we’ve seen since Q4 of 2021. So I think it’s really encouraging. So sorry, let me go back. It’s the highest level of buy-side interest since Q3 of 2021. The overall number of IOIs is the highest since we’ve seen a Q4 of 2021. So all of these metrics going back to being compared to levels we saw back in 2021, whether it’s total IOIs or buy-side IOIs, I mean, it’s extremely encouraging for us, but we don’t want to get out too far over our skis in terms of assuming that this will translate into doubling out the number of trades that we’re going to see next quarter, for example, right? That’s not what we’re meaning to indicate.

Ken Worthington: Thank you for that. And then I wanted to follow-up on your comments on sort of inorganic growth. It seems to me like the industry, you and your competitors, it’s probably ripe for some degree of consolidation. I guess, what would it take to actually see that consolidation? Do you feel you’re in a good position to actually be a consolidator with the public currency? So I don’t know, just take me through your thoughts here and why haven’t we seen this level of consolidation given we’ve come through a pretty challenging period over the last couple of years?

Kelly Rodriques: Yes. Well, first of all – this is Kelly. First of all, I think if you look at valuations in the public versus private market, we’re the only public player in the space. And I think as many of you on this call know, we’ve been coming to these earnings calls now for two years. And from early 2022 through the first – end of the first quarter in 2023, we have been reporting steadily decreasing revenues. And starting in Q2 of 2023, we started to climb back out of this. And I think we are now four quarters in. And our expectation would be that as we recover, our stock price recovers, that public currency gives us the ability to be an attractive acquirer for those who are still private. I think we’re patient, and I think one answer to the question is our share price recovery is one of the most important tools we have in providing a compelling offer to consolidate really interesting competitors.

I also believe that the general state of capital raising in the private market is still pretty impaired. And so the combination of our stock recovering at the same time that you’ve got impairment in capital raising, particularly in earlier to mid-stage private companies, means that it’s just kind of a matter of time until we get that convergent point where we’re starting to see recovery in our stock and the private companies that we’re interested in become more meaningfully lined up with the strategy that I mentioned earlier. So it’s a timing answer, I think. And we’re watching and just waiting for that moment to line up for us.

Ken Worthington: Okay, great. Thank you very much.

Operator: Our next question comes from the line of Owen Lau with Oppenheimer. Please go ahead.

Owen Lau: Good afternoon and thank you for taking my question. So last month you launched Forge Europe and hired four executives in London and Germany. Could you please talk about your next step? What is your hiring plan there and how to grow the business further? Thanks.

Kelly Rodriques: Yes. So Owen, thank you for the question. I think in the short-term, at least, for the next two quarters, we’re focused on two things there. One, getting our [indiscernible] application fully approved, so we could expand and also apply for our European passports. So we’ve got a regulatory track that we’re on. And until then, we are really revenue focused right now. So any significant staffing that we’re going to do is going to be trailing the success of starting to print revenues sequentially from now through Q4. So we’re being very cautious. Let’s not forget the comments Mark made about headcount, which includes Europe now. So at the same time we’ve committed to keep our headcount flat and to keep our burn decreasing.

We apply that same discipline to the way staffing will expand in our European operation. So for us to keep the overall Forge plan for headcount flat to down, we need to be very cautious about the velocity of staffing against the European revenue model. So what we’re going to be focused on, I can tell you, is printing trades, expanding the global order book that we’ve built over the last decade to provide access to European investors who haven’t had access to this before. So there’s a whole bunch of little competitors running around Europe trying to be a second competitor or being a participant in the private markets. There isn’t another competitor in the region that’s got the strength of access to the integrated global order book that was API connected this last quarter to Europe.

So we think we’re in a unique position to go out there and start printing trades. So we’re going to be totally revenue focused between now and Q4 with very modest hiring that tracks against revenue traction as we move through the year.

Mark Lee: Hey, Owen, and recall that when we announced Forge Pro, we also mentioned how now there’s a live real-time order book. So as Kelly mentioned, connecting Europe to the Forge Global order book, now you’re a customer in Europe and you’re putting in your IOIs. Now you can see real-time kind of your IOI reflected and you kind of see how the spread and business offers are changing.

Owen Lau: Got it. And then just a broader question about the transaction volume going forward. So there were some positive data points in the first quarter. You talk about number of companies with IOI went up quite a bit, I think 12% sequentially. Bid/ask spread remained below historical average level. And even IPO markets were improving in the first quarter. I mean, it looks like the next rate movement, it’s going down, not up. I guess my question is, what else you think investors and issuers need to see to support more transactions? Do you think there’s still some kind of psychological barrier on valuation? It’s still need to come down because the last funding round was so high. I mean what things people have to see to support higher transactions from here? Thanks.

Kelly Rodriques: Mark, why don’t you take this?

Mark Lee: Yes. Look, so, Owen, I think it’s a great question. And by the way, before I answer that question, let me point out that when we talk about improvement in Q1 over Q4, historically, Q4 is always the strongest quarter of a year. And that typically when we go into Q1 of the next year, typically the following Q1 is a little bit lower than Q4 because some of the investors are trying to squeeze in their trades into their calendar year. And that’s pretty common in the public market as well. So I mean, if you look historically, that’s always been the case for us that Q4 is strong this quarter and Q1 is a little bit weaker. The only exception was 2021, but 2021, of course, was an exceptional year with zero interest rates and all-time high IPOs drag listings and SPACs in Q1 of 2021.

So that’s something else I would add that we’re really proud of our performance in Q1, particularly given that typical seasonality that you see quarter-over-quarter. But as far as continued growth in our volume throughout the year, I think, we’re feeling very good, as Kelly’s talked about, coming out of the winter, right? All believe me, indicators are trending positive, that the spread coming down. Now, one thing about the spreads, we talk about 9.5% versus 11.6% is the four-year average. The average spread in 2021, which was a unique year, was 5.5%. So I think we feel very good about a 9.5% spread, but as the market improves, we could see improvement on the spreads as well. As far as IOIs, we talked about that earlier, we are seeing very encouraging signs on the IOI side.

The IPO side of the business, as we all know, I mean, there was good improvement in Q1. In our FIO, we talked about 49 IPOs in Q1 of 2024 compared to 33 year-over-year, a 48% improvement. And there’s – the recent IPOs that we all know and upcoming IPOs, [fanatics, plaid, stripe, carna, liquid, death] being talked about, right? But we still need to see that play out, right? We saw some encouraging signs in IPOs in 2023, and it kind of fizzled. So we’re continuing to watch the IPO market. And then finally, you talked about valuations and performance. I mean, we’re encouraged by the performance of the Forge Private Market Index turning positive. We’re 0.5% in Q1. But when you look at our valuation data in the PMU, the valuations that are trading right now, they’re still in line with the discounts you’ve seen in the past, right, a 51% discount for the last round at the median.

And so I still would think that it would be helpful and the IPOs will help this in terms of people’s expectations that valuations in the private market are improving and recovering. It kind of relates to the great reset. Right now, we’re saying that if you look at companies that have raised capital, then out of our universe, that 62% of the companies that we track, the last time they raised capital was mid-2022 or earlier. So there’s still a lot of companies that haven’t raised capital in a little bit of time. And I think the great reset will also help, right? It will help to right-size the valuations of companies. It’s an important part of price discovery. And I think that’s one of the components that will also help to drive greater confidence in trading volume going forward.

So to sum up this very lengthy answer, there’s a lot of factors, we’re encouraged by a lot of the signs, we still think there’s room and opportunity in order to kind of drive significant order of magnitude increases in our trading volumes.

Owen Lau: Got it. Thanks a lot.

Operator: There are no further questions at this time. I’ll turn the call back over to Mr. Dominic Paschel.

Dominic Paschel: Thank you, Jericho, and thank you, everyone, for joining the Forge’s first quarter 2024 financial conference call. We look forward to engaging with analysts and investors throughout the second quarter, and we’ll be attending Accuidity conferences throughout that time. As always, feel free to reach out to myself and the team. Until then, enjoy the coming summer. We can close the call, Jericho.

Operator: Yes, and this concludes today’s conference call. You may now disconnect.