Markforged Holding Corporation (NYSE:MKFG) Q3 2023 Earnings Call Transcript

Markforged Holding Corporation (NYSE:MKFG) Q3 2023 Earnings Call Transcript November 13, 2023

Markforged Holding Corporation beats earnings expectations. Reported EPS is $-0.07, expectations were $-0.08.

Operator: Greetings, and welcome to the Markforged Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Austin Bohlig, Director of Investor Relations. Thank you. You may begin.

Austin Bohlig: Good afternoon. I’m Austin Bohlig, Director of Investor Relations of Markforged Holding Corporation. Welcome to our third quarter of 2023 results conference call. We will be discussing the results announced in our earnings press release issued as of today. With me on the call is our President and CEO, Shai Terem; and our acting CFO, Assaf Zipori. 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 13, 2023 and are subject to material risks and uncertainties that could cause actual results to differ materially. 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’s a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close today, which can also 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, Austin, and thank you, everyone, for joining us on our Q3 2023 earnings call. While the medium- to long-term opportunity for Markforged to help manufacturers reduce costs and strengthen supply chain resiliency remains intact, we were disappointed with our third quarter results with top line of $20 million. The current macroeconomic uncertainty and increasing interest rates had a material impact on our ability to close deals in the last two weeks of the quarter. As we shared on our October 23 press release, we have also updated our full year 2023 outlook to reflect our current view. At our Investor Day in mid-September, we still believe our 2023 target were attainable. But macroeconomic headwinds in dramatically accelerated in the final weeks of the quarter, and we saw delays in several large deals that we had expected to close.

As we progress into the fourth quarter, we believe that the persistent high cost of capital and uncertainty in the macro environment will continue to restrict capital investment in the short term. In light of these headwinds, we remain laser-focused on our path to profitability and have accelerated cost reduction efforts to align our operating expenses to match anticipated near-term demand. These efforts supported our ability to reduce our cash burn in the third quarter to $10 million and end of quarter cash balance of $126 million. Today, in addition, we’re announcing a restructuring initiative that we believe will improve operating efficiencies and strengthen our balance sheet resiliency even further, but without compromising on our ability to innovate and grow to profitability.

This initiative, coupled with other cost reduction efforts, is expected to deliver operating cost savings of approximately $9 million to $12 million in 2024, driven by an approximate 10% headcount reduction. With that, we remain confident in our long-term growth trajectory. The fundamental driving manufacturers to reduce costs and seek more resilient and flexible supply chain remain. And as we heard directly from our customers, Ford, Vestas Wind System, Azoth, Triumph Aerospace, Musashi Auto Parts, Dana and Automation Alley at our Investor Day, the digital forge provides a powerful platform for achieving this goal. This strengthens our conviction that as macroeconomic uncertainty clears, Markforged is well-positioned for strong growth. To expand on one of these examples, Musashi Autopart, a leading manufacturer of a differential gear and assemblies has gained substantial benefit from its investment in the digital forge.

Musashi began by printing grippers and other industrial and effectors using our Mark Two and Metal X printers in their Michigan facility. Over 80% cost savings and significant operational efficiencies achieved. Led Musashi to expand their Markforged deployment to three additional facilities across the globe. Musashi now uses the Digital Forge for over 40 different manufacturing applications. With over 34 facilities worldwide, we’re excited about further expansion opportunities with Musashi. In Q3, we achieved another critical milestone towards the future of distributed manufacturing with the launch of the Digital Source. Digital Source is an on-demand parts platform for the licensing and 3D printing of manufacture certified parts when and where they are needed without the cost or hassle of physical inventory.

While our focus in 2024 is building out the platform, we believe the opportunity for high-margin revenue streams will be a growth catalyst in the years to come, as we are already seeing early signs of excitement from customers would help and expand Markforged solution into their own customer base. One of our early digital store adapter is BMF, a specialized manufacturer of complex sandblasting machines with over 200 installations worldwide. Each BMF machine features 60 printed components, which are typically replaced every three to four months when the machines are running at full capacity. With Digital Source, BMF customers can print replacement components on-site the moment a failure or where is detected, minimizing downtime as well as shipping and inventory costs.

Continuing our track record of innovation, Markforged announced two new products last week at Formnext. The first, the FX10 is Markforged next-generation composite 3D printer for the factory floor. Building on the precision and reliability of the X7, but nearly twice as large and twice as fast as its predecessor. The FX10 is built to supercharge manufacturing productivity and profitability. The excitement in our booth around this product was beyond words. We are already building a backlog of orders as the balance between value and price to our customers is extremely attractive, even under challenging cost of capital time. In addition, we also announced Vega, an ultra-high-performance carbon fiber field tech material for 3D printing aerospace part.

Vega is highly compatible with carbon fiber reinforcement, unlocking aluminum strength for aerospace applications and high-value tooling. Our aerospace FX20 customers visiting Formnext were highly impressed and eagerly waiting for first shipment. Both these new innovations are complementary into the digital forge, and further increased our addressable market by helping our customers solve more applications and deliver strong accurate parts on the factory floor. So while the current macroeconomics environment is challenging, especially after coming back from Formnext last week, we strongly believe that the FX10, FX20, the PX100 and the digital source, on top of our legacy solution, are meeting critical industry needs to strengthen manufacturing resiliency and supply chain.

There is clearly pent-up demand, which is waiting for new platforms to start shipping. I am very proud of the one team effort over the last few years to reach this critical innovation milestones that will position the company for long-term success. With strong cost control in place and a sharp focus on achieving profitability, we believe our future is bright. With that, I’ll now turn the call over to Assaf Zipori, our acting CFO, who will offer more details on our financial performance and guidance for the remainder of the year.

Assaf Zipori: Thank you, Shai, and good evening, everyone. I will be covering our financial results for the third quarter of 2023. Please note that my comments reflect our non-GAAP results and outlook. For your reference, our earnings press release issued earlier this afternoon to our Investor Relations website includes our GAAP and non-GAAP reconciliation to assist with my commentary. So let’s begin. In line with our preliminary announced results, revenue for Q3 was $20.1 million compared to $25.2 million in the third quarter of 2022. The revenue decline was driven by stronger-than-expected macroeconomic headwinds, the delayed orders towards the end of the quarter. Revenue for the first nine months of 2023 was $69.6 million compared to $71.3 million in the first nine months of 2022.

In spite of the lower sales volume, gross profit margin for the quarter was 46.9% compared to 49.2% in the third quarter of 2022. Gross margins were also impacted by the continued ramp of the FX20 production, which is expected to continue until mid-2024. Our operating expenses were $24.9 million for the third quarter of 2023, down from $28.5 million in the third quarter of 2022. This improvement in operating expenses is a result of our continued efforts to reduce operating expenses and our commitment to incremental efficiencies. Net loss for the third quarter of 2023 was $13.8 million or a loss of $0.07 per share based on a weighted average shares outstanding for the quarter of 197.4 million. Our net cash used in operating activities in the first nine months of 2023 decreased by $25.3 million or approximately 39% from the first nine months of 2022.

Our cash, cash equivalents and short-term investments were $126 million as of September 30, 2023, down from $136 million at the close of second quarter 2023. We expect our cash utilization to continue to decrease with time as a result of higher revenue, continued focus on OpEx management and working capital efficiencies. Now moving on to our guidance. The uncertain macro environment and relatively high cost of capital have weighed on our customers’ purchasing behavior more than expected. Therefore, we are maintaining our revised revenue guidance of $90 million to $95 million. We expect gross margins to be within the range of 47% to 48%, still within the range of our previous guidance. As previously communicated, we are committed to balance between revenue and expenses.

As such, we have recently announced the restructuring initiatives that, together with other cost reduction efforts, are expected to generate annualized OpEx cost reduction of $9 million to $12 million in 2024, based on our 2023 OpEx range of approximately $104 million. Furthermore, we remain committed to continuously optimize our cash utilization. Our operating loss for the year is expected to be within the range of $59 million to $61 million, including a onetime restructuring cost of approximately $900,000. EPS loss per share is expected to be between $0.26 and $0.28, including the restructuring costs. With our recent product introductions and excitement that this has generated, we are confident in our ability to grow and increase our market share in 2024 and beyond.

Furthermore, we are confident that the cost reduction measures, which we have taken together with our growth trajectory, keep us on a path for profitability. That concludes our prepared remarks today. Let’s please open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum Capital Group. Please state your question.

Greg Palm: Yes. Thanks for taking the question. Just starting off with kind of what you saw end of quarter. I’m just curious if you can give us a little bit more color on whether, a, you were relying on several large orders that didn’t close, whether it was certain kind of end customers or end verticals that you saw the most weakness. Maybe just a little bit more detail on sort of what kind of drove the end of quarter weakness. And just to be clear, did some of those orders that get delayed, have those closed here in Q4? Or are those still getting pushed?

Shai Terem: Thank you, Greg. Yes. So as we indicated previously, some of the large deals that we’re expecting to close at the end of the quarter actually got delayed mainly due to the macro uncertainty, I would say, and mainly in APAC and the Americas, as you can see from this performances. Fair question, some of them already closed in Q4, but a bigger portion of them got delayed into 2024. And it was fairly large deals that were fully funded, and we were expecting them to close based on the knowledge that we had. But the owners and the decision-makers decided in the last second, to pull out due to the sentiment and the uncertainty on the macro environment and they ask to wait until the next quarter or even 2024. With that, as you can see, we came back from Formnext, which was fairly successful. So we are starting to build the confidence back.

Greg Palm: Got it. Okay. And one item that maybe stood out to us was consumables. I wouldn’t think of consumables as having nearly the same kind of magnitude of sort of volatility and that was a lot lower, both on a year-over-year and a sequential basis. So what kind of drove that? How much of that was based on the other phenomenon you saw? And going forward, just in terms of usage rates of the installed base out there, are you seeing a significant difference in recent months versus where we’ve been trending before? Thank you.

Shai Terem: I think there are two kind of points around that. The first one, usually when our customers buy from us printers, they immediately also buy materials. So when there is significant drop in the purchasing of printers, with that comes a point in time of reduction of the purchase of materials. The second, which I think for your question, we do not see a drop in utilization. But as you know, we’re still a small company. So point of time could move few pilots right or left with our channel partners that usually sell the materials through them. And as such, it was a point of time, we already see a recovery right after the end of the quarter. And the utilization stay in the right direction. So we don’t have any concerns on that front.

Greg Palm: Understood. I will get back in the queue. Best of luck. Thanks.

Shai Terem: Thank you, Greg.

Operator: Thank you. Our next question comes from Jacob Stephan with Lake Street Capital Markets. Please state your question.

Jacob Stephan: Hi, guys. Thanks for taking my questions. Maybe I’ll just touch on the restructuring initiative a little bit. Could you help us kind of think about what percentage of the $9 million to $12 million comes out of the model and how that lays out over 2024?

Assaf Zipori: So yes, thanks for the question. So we are looking at a reduction of $9 million to $12 million from a run rate of $104 million approximately in OpEx. The reduction is going to be across the board, across all departments without any compromise on our ability to grow and innovate. So it’s across the all departments, and we are well-positioned and encouraged with the outlook for 2024.