Greetings, and welcome to the Markforged Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephen Karp, General Counsel.

Please, go ahead..

Good afternoon. I am Stephen Karp, General Counsel of Markforged Holding Corporation and I would like to welcome you to our third quarter 2021 results conference call. We will be discussing the results announced in our earnings press release issued after market close today.

With me on a call is our President and CEO, Shai Terem and our CFO, Mark Schwartz.

Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within 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 current year, expected growth, our new material qualification process 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 our SEC filings, including our most recent report on Form 10-Q, and the most recent registration statement on Form S-1. The information provided in this conference call speaks only as of the date hereof.

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 is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close today, which can be found on our investor website at https://investors.markforged.com. I'll now turn the call over to Shai Terem, President and CEO of Markforged..

Thank you for the introduction, Steve, and thank you all for joining us on our third quarter earnings call. For those of you who might be new at the Markforged and our story, I would like to reiterate our strategy before offering commentary on our third quarter performance.

Markforged’s vision is to reinvent manufacturing today, so you can build anything you imagine tomorrow. We are transforming the manufacturing world across many industries by enabling our customers to print and use mission-critical industrial applications at the point of need.

Together with our customers, we are building the future of distributed manufacturing. Since our founding eight years ago, we have experienced high growth. We support more than 10,000 customers.

We have printed more than 10 million parts on our connected platform, called the Digital Forge, our integrated carbon fiber and metal additive manufacturing platform. The Digital Forge is made up of three elements first, cloud-first software architecture.

Second, easy to use industrial grade 3D printers, and third 16 proprietary materials, including advanced metals and continuous composites. These three elements come together to help our customers, easily certified and use mission critical applications in the most demanding environments.

It's important to note our focus on industrial grade end use part as opposed to prototyping applications. Customers desiring a printing prototype, generally use the part to aid in design development or other single use cases. Those parts are not expected to be functional, and as such tend to be price sensitive.

Markforged, on the other hand, is focused on solving high-value mission critical manufacturing applications. Parts printed on our Digital Forge often require prolonged testing and quality certifications to meet the demanding requirement of the manufacturing line.

Markforged printed parts are expected to perform to precise specifications to avoid failure between maintenance cycles, aligned down can quickly cause the manufacturer, hundreds of, thousands of or millions of dollars in loss production.

Our customers are able to solve for mission critical application by utilizing the Digital Forge to reduce manufacturing costs, address supply chain challenges, move from physical inventory to digital inventory, overcome the limits of traditional manufacturing and solve problems directly at the point of need.

Importantly, composite parts printed on our Digital Forge often replace traditional manufactured metal parts. Markforged composite parts printed with Continuous Fiber Reinforcement or CFR are generally lighter and stronger than the metal parts they replaced.

As a result, our CFR technology is often used in demanding industries such as aerospace, automotive and defense, among others.

So our goal with each new product release is to solve for additional manufacturing line and use parts that maybe replaced with our solution, increasing our addressable market and the adoption of the additive manufacturing into the manufacturing industry.

Because the Digital Forge is relied upon to produce high-value mission critical parts, we believe we have an opportunity to sustain the highest gross margin in the industry.

The Digital Forge platform is a NSBAR software, which incorporates sophisticated AI technology and uses our global network of connected printers to learn from each other and get better with each print.

It’s is high quality printed parts create a greater demand for new printers and consumables and grow our fleet, which scales our platform and generate even more data, which then accelerates demand for our products. This model sets us up for scalable growth as we move to robust production of mission critical parts.

Over the last year and a half, COVID-19 is disrupted global supply chains. Our Digital Forge solution serves as a mini factory that can be placed anywhere in the world to help our customers overcome these challenges and print parts at the point of need.

With an all operations, we have 3D printed parts on every production line to ensure we can print parts on demand instead of shipping them from all over the world, which reduces our outside dependencies and better ensures business continuity. Now on to our business updates for the quarter.

We enjoy the strong third quarter achieving revenue of $24 million, which represents 54% growth year over year. We are very pleased with our strong performance despite global supply chain disruptions. We announced two important additions to the Digital Forge platform during the quarter with innovations to our software and materials.

First, we introduced Eiger fleet to our software portfolio, our cloud based enterprise software solution designed to provide access control, management and visibility and accelerate the adoption of additive manufacturing operations at global scale. Software is the engine of our platform.

When we think about large globally connected fleets of Markforged manufactories at the future of distributed manufacturing, I guess it provides a secure cloud based operating system to do so.

Blacksmith Win systems a global leader in sustainable energy solutions implemented the digital forge with Eiger fleet to manage the production of parts and tools for their global fleet of wind turbines. They created a digitized carbon inventory system, enabling the printed parts on the mark for 3D printers nearest to them with a click of a button.

With the implementation of Eiger fleet, Vestas was able to calculate time and cost. For example, marking to critical for wind turbine blade assembly previously required a lead time of three weeks and cost of $1000s of. Now it requires only three days and cost under $100.

Second, we launched two new aerospace ready composite materials, is a major strategic step to support a highly regulated industries like aerospace and defense. These new materials are undergoing qualification program for the National Center for Advanced Materials Performance or NCAMP, which is part of the National Institute for Aviation Research.

Completion of this process is expected in early 2023 with the goal of increasing Markforged addressable market with the first continuous fibers additive manufacturing process qualified by NCAMP, allowing our customers to more broadly use digital forge in highly regulated industries. At Markforged, our team is the greatest asset.

In the third quarter we grew to 361 employees with a clear focus on engineering to accelerate product development and deliver our product roadmap. In particular, on the leadership front, we welcome John Howard as Vice President of Engineering.

John brings more than 30 years of experience in engineering and product design to Markforged engineering team. John has held Senior Positions at Amazon and Apple among others and his creative thinking and innovation skills will help drive our product roadmap.

Before turning the call over to Mark Schwartz, our CFO, I would like to spend a minute talking about our new products, the FX20. The FX20 is our biggest, fastest hottest and smartest printer we ever built. It is aimed at solving robust production requirements, particularly in aerospace, defense and automotive industries.

The FX20 is first to print Ultra materials strengthened by Markforged proprietary continuous cyber enforcement. We anticipate this innovation will allow us to materially increase our addressable market into bigger parts and higher volume production parts; for mission critical applications requiring stronger, lighter and heat resistant parts.

We expect to ship the FX20 in volume in the second half of 2022. This will drive our growth and amplify the normal seasonality we generally experience in the third and fourth quarter of the year. I will now turn the call to Mark to offer more detailed overview of our financial performance. .

Thanks Shai. Let's turn to our third quarter financial results and our guidance for the full year of 2021. Third quarter revenue increased 53.8% year over year to $24 million compared with revenue of $15.6 million for the three months ended September 30 2020. We experienced growth across all products and services, and across all geographic regions.

Hardware sales increased 58.4% compared with the same period last year. Third quarter gross profit increased 47.2% year-over-year to $13.7 million compared to $9.3 million for the three months ended September 30, 2020. Our third quarter gross margin was 57% compared to 59.6% for the third quarter of 2020.

The decline in our gross margins year-over-year is largely attributable to disruptions in the global supply chain that have increased our costs of materials.

We continue to address supply chain challenges in a number of ways, including procuring larger order quantities, adding complementary sources of certain materials, and otherwise mitigating manufacturing constraints to fulfill demand and meet our growth objectives.

Where necessary, we have also purchased materials at higher prices to secure sources of supply. That said, our gross margins remain strong, which we believe is attributable to our focus on serving mission critical needs of the manufacturing industry.

Our differentiated platform, the Digital Forge drives our revenue growth and supports our gross margin. Our third quarter operating expense was $33.9 million. Adjusted for stock based compensation charges of $6.1 million, third quarter operating expense was $27.8 million compared with $12.5 million in the year ago quarter.

Stock based compensation expense included $3.4 million related to earn out shares granted to Markforged employees, as part of the public merger in July of this year and subject to performance based vesting.

The balance of the stock based compensation expense for the third quarter of $2.7 million was attributed to ongoing vesting of equity periodically granted to Markforged employees, consultants and non-employee directors. Operating expenses in the quarter also included $2 million of transaction costs related to our public merger.

The increase in third quarter operating expense was in line with our plans for public company preparedness, and includes headcount, insurances and other expenses across departments to support our public company infrastructure and growth plans.

Third quarter research and development expenses increased 134.5% year-over-year to $9.5 million compared with $4 million in the year ago quarter. We invest heavily in innovation.

As Shai mentioned, in his remarks, our goal is to materially increase the use cases for our customers with every software development, hardware release or additional material, thus increasing the value of our Digital Forge platform and expanding our addressable market.

We are intent on increasing our spend in innovation, to expand and accelerate our research and development efforts, and ultimately increase the velocity of new product introduction, which will fuel our longer term growth.

Third quarter adjusted EBITDA was a loss of $11.6 million or $0.06 per share based on 186 million shares outstanding as of September 30, 2021, and $0.07 per share, based on our weighted average outstanding share count of $163.4 million as of September 30 2021.

Adjusted EBITDA excludes stock-based compensation expense of $6.2 million, non-recurring audit, legal and other expenses associated with SPAC transaction of $2 million and other income of $44.1 million representing the mark to market adjustment of the derivative liabilities related to the merger with our SPAC sponsor A-star. Now onto guidance.

We anticipate full year 2021 revenues of $88 million to $90 million and we expect to end the year with gross margins of 57% to 58% within the range of our target for the year. We anticipate adjusted EBITDA for the full year 2021 will also be within the range provided in our previous public filings.

We intend to guide within a range of revenues, gross margin and adjusted earnings for fiscal year 2022 next March in our earnings call to discuss the results of our 2021 fiscal year. That concludes our prepared remarks today. Operator, please open up the call for questions..

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Troy Jensen of Lake Street. Please proceed with your question..

Hey, gentlemen, congrats on great results here..

Thanks, Troy..

Thank you..

Hey, I want to start with you, Shai, FX20 I'm excited to see it next week in Germany.

First of all, is it going to be running ULTEM only or will this also run Onyx? I'd imagine the future you do stuff like pick and pack, but just is it ULTEM only currently?.

No, the FX20 will be able to bring ULTEM, Onyx and Continuous Fibers..

Yeah. Okay, perfect. So then, obviously going against the Fortus aligned from Stratasys, they're going to claim consistency, durability, reliability, right? They've had millions of hours on the science for this machine.

So just curious, if you done benchmarks and you can talk about just how this really stacks up against the competitor out there?.

It would be great to focus on our capabilities in the next week when we'll see you in Formnext you can see the part yourself. I think by now we have renewed 10,000 very happy customers with 10 million parts printed over our platform and the FX20 is taking it completely to the next level..

All right. Perfect, I respect that. How about a -- quick for Mark. Could you just give us a couple just modeling questions here for you, specifically other income what we should start to think about shares.

I can't imagine there is taxes anytime soon, but just thoughts on those two would be helpful?.

Yeah, thanks, Troy. So this is a complicated accounting result of the SPAC transaction and derivative liabilities associated with marking to market the earnout shares associated with that transaction and negotiated as part of it.

So fortunately, or unfortunately, it's something that we deal with every quarter based on changes in our share price and it'll sit in other income. .

Okay.

And then as far as like share count though and taxes still going to be zero for quite some time?.

Taxes will be nominal for certain. Be it -- again as a merged entity from this the spec transaction. Our weighted average share count will continue to climb through the end of this year. And then it'll just be an adjusted -- a I'm sorry, a outstanding share count that would mirror any other publicly traded company.

So our outstanding share count today or as of September 30 was about $186 million. The weighted number is a bit less than that as it gets averaged from the pre-public Markforged through the post-public Markforged. And that'll catch up by the end of the year. .

Okay. Perfect. Thank you, Mark. And maybe just one last one for Shai. You know Blacksmith bid on that number of deployments, customer feedback would be helpful? Thank you. .

Yes. We don't share the exact the details there. But as you can saw in our release Vestas is a great example of a big company. That have a massive adoption of our solution and we that took the Eiger Fleet, for example to help them manage their platforms all over the world between different continents.

We do have some more customers on the Blacksmith's side that taking full advantage of that front and we continue to see that the bigger customers and as you know we have a lot of them that have more than one printer, they are taking a good look how can they take the full advantage and exploit the full potential of our connected platform..

Perfect. Okay, guys. Congrats again and keep up the good work. I'll see you next week..

Thanks, Troy..

The next question is from Brian Drab of William Blair. Please proceed with your question. .

Hi. Good evening. This is Blake Keating on for Brian.

I was just curious, you know, were there any large customer orders from opt machines in the quarter or any expectation that might come about in the near-term?.

Can you repeat the question, please?.

Yes.

Were there any large customer orders for optimal machines in the quarter?.

For sure. Well, you'll remember from our -- one of our press releases noting the release of our Eiger Fleet software. This is specifically aimed to support those customers that do own multiple or purchase multiple, you know, in one shot over the course of a year and build up their portfolio.

Many, many, many of our customers have multiple and it's not uncommon at all to sell five or more, even in one -- in one order. So absolutely, that is the case and it's part of the reason why -- a big part of the reason why we are now providing the Eiger fleet software to our customers. .

All right. Thank you and then just how should we think about gross margin? You know, you met -- you get guided for 2021 and I know you said you provide guidance on the 4Q 2021 call.

But how should we think about gross margin in 2022 put and takes around it?.

Yes. I think the biggest unknown if you will or variable out of our collective control is around the supply chain pressures, most notably related to COVID, but that we're all experiencing.

And I think if we are positioned the way we want to be positioned in terms of the value we're providing our customers, and that value is what allows us to differentiate ourselves with industry leading gross margins. We believe that will continue and we believe that we're on a great trajectory.

We are all experiencing the supply chain -- the volatility in the supply chain currently. And we expect that's going to continue at least through the first half of next year, possibly longer. So there is some challenge there in the short term, but in the medium and the longer term, we remain very bullish on our gross margins..

All right. Thank you. That's all I have. .

Our next question is from Jim Suva of Citigroup. Please proceed with your question..

Thank you for all the details so far. As most people are aware, there's a global supply constraint on materials and I wanted to see if that's impacting your pipeline ahead, both for you to be able to procure and put together your own machines, but also importantly any changes to consumer behavior -- not consumer, enterprise behavior.

Are they looking at putting in orders earlier? Are they shifting their priorities simply to make things work in between now and when this resolved, or deferrals or accelerants? Can you just kind of talk about the global supply chain impact on both your company and then your customers. Thank you..

Thank you Jim for the question. So I would say at least on the front end, we definitely see a change in behavior. If we look on our sales cycle, usually, you have to help people understand that they have a problem and later on you need to help them understand that we can solve it for them. Today, the first part is already very clear.

We have a lot of customers coming to us and they understand that they must build a much more resilient supply chain. They must be able to bring the agility in house to make sure that they can continue building their products and continue selling their products.

So I would say that we definitely accelerated demand and accelerating a little bit of the sales process as a result. And I think this is why you were able to see that we had a very strong quarter in Q3 and I believe that it will continue into the next few quarters, because everyone feel the supply chain shortages.

And Mark, you want to add a little bit on the back end of it..

Yes. I think -- hi, Jim. Good to talk with you. I think, the back end is simply that we continue to aggressively address these issues, like, no doubt, others are.

And in some cases, to make certain that we do have source of supply, we have proactively determined that we need to bring another source on, even if that source is more expensive source for us. And we do so to ensure continuity of supply. So we haven't had any issues today that are creating backlog or causing us to not be able to fulfill demand..

Thank you so much for the details and clarifications..

You’re very welcome. Thank you..

The next question is from Noelle Dilts of Stifel. Please proceed with your question..

Hi, guys. I'll start with a very general question and then I have more specific question. But just with the worsening supply chain issues, curious if there are any particular industries where you're seeing more inbound interest regarding kind of the value that Markforged can provide with printers.

I know you talked about Vestas, but any others that are sort of emerging or really accelerating in terms of industries where you're seeing increased interest. Thanks..

I think Q3 was a strong across the board across all industries. From seasonal perspective, the federal was extremely strong, but we definitely see it across all the industries.

And I think it's related a little bit to the question that Jim ask before, but we see people coming to us and they initially tried to find a solution in the traditional manufacturing, maybe a CNC machine but they cannot get it then they buy the Metal X in advance, because we can deliver.

So, I thick maybe from that front, we get in another backwind from the current situation..

Yeah, Noelle, I'll just add on to that. Note that in a very particular customer instance, the customer reached out to us and told us that they were attempting to buy a CNC machine but couldn't get it, and they were backordered and if we could deliver them our system immediately, they would make the sale right away. So, we are seeing some of that..

Okay, great. And second question, I guess is sort of out there, given that you said you'd provide 2022 guidance later next year. But I mean, just given where we are with supply chain issues.

I mean is it kind of fair to assume gross profit margins at more of the back half of the year rate as we move into the early part of 2022? I guess another way to ask that question would be, as you look at these multiple sources of supply and some of the costs you're taking on, is it fair to assume they're reasonably permanent heading into or at least going to sustain heading into the first half of next year.

Thanks..

What I would tell you is, that we are actively working this every day, and it's probably the main reason why we're not comfortable guiding next year yet. We think there's an opportunity for us to continue to meet this -- the strong expectations that we're setting for ourselves, but it's too early to tell and the market is just too volatile.

So, I think there's some truth in what you say, but we are we are not -- we're not giving up on that yet..

Okay. That's very helpful. Thank you..

Very welcome..

There are no additional questions at this time. I'd like to turn the call back over to Shai Terem for closing remarks..

Thank you very much, everyone for joining us. And if you have any more questions, feel free to reach out and we'd love to discuss further. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..