Greetings, and welcome to the Markforged's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Austin Bohlig. Thank you, Austin. You may begin..

Good afternoon. I'm Austin Bohlig, Director of Investor Relations of Markforged Holding Corporation. Welcome to our second quarter of 2023 results conference call. We will be discussing the results announced in our earnings press release issued after market close today.

With me on the call is our President and CEO, Shai Terem; and our active 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, August 10, 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'll 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 Web site, at investors.markforged.com. I'll now turn the call over to Shai Terem, President and CEO of Markforged..

Thank you, Austin. And thank you, everyone, for joining us on our Q2 2023 earnings call. I'm part of our team performance in the second quarter as we continue to execute on our long-term strategy to grow through innovation and bring industrial production to the point of need.

And not this important, we prudently managed our costs as well, keeping us on a firm path to profitability. While we have a long journey ahead, we believe Mark Forge feels a critical need in the market to strengthen manufacturing, resiliency and supply chains.

The demand for our solution continues to grow as our customers identify more and more opportunities to cut costs, save time, and reduce physical inventories while building efficiencies to their own production lines. With our upcoming new platforms and capabilities, we are confident in our ability to accelerate our growth in 2024.

Demand for the digital forge continue to grow globally in Q2, even in the face of high cost of capital environment, which is restricting capital expense investments as such, while conversions to close deals are still challenging in the short-term, we're confident in our longer term growth projection, especially with our upcoming product releases.

Our latest composite printer innovation, the FX20 continues to excite our customers globally, specifically within industrial and high regulated markets like aerospace and automotive. Coupled with growing order pipeline of our newest metal bundle jetting solution, the PX100 remain excited about our future growth prospects, but we are not done yet.

For the last two years, we've been hard at work on multiple new product innovations that accelerate production at the point of need and increase our addressable market. We believe we have the go-to-market engine in place to truly scale these new innovations. I look forward to sharing these new products with you over the coming quarters.

We're seeing manufacturers around the world reshaping their supply chains as they seek more resiliency and flexibility by investing heavily in digital transformation and industrial automation.

Our customers tell us that Digital Forge is the perfect tool for their manufacturing floor and accelerates their ability to produce industrial parts on demand right where they need them. Just one example of these trends in action is our recent win with a Tier 1 automotive OEM.

In Q2, we completed a very important and strategic transaction with a global automotive leader to drive flexibility and cost savings by reducing the reliance on physical inventory. This sale includes over two dozen of both advanced composite printers and metal systems as part of a multi-year strategic initiative.

This win is a great proof point of how our platforms of hardware, materials, and software and growing distributed network of printers are uniquely positioned to proactively capitalize on the growing market opportunity for point of need industrial production.

We beat out the competition by delivering the reliability required to print mission critical parts at scale with the advanced software needed to securely manage a fleet of this size in real time across multiple teams of engineers and IT systems.

Markforged is extremely excited about this deal, and we believe we can continue to leverage the same strengths to win similar opportunities in the future. Another example of our innovations are providing value to our customers is SQP Engineering, an industrial manufacturing solution provider in PERF Australia.

SQP faced challenges producing a complex cover for mining equipment systems. Traditional machining methods were not cost-effective, and their existing polymer 3D printer was too slow and produced parts which did not perform.

To address these issues SQP turned to our FX20, which is significantly reduced the print time compared to their existing polymer 3D printer, while vastly improving performance and surface finish. They also integrated the Markforged Metal X system to expand their additive capabilities.

With these solutions, SQP can now manufacture a wide range of production grade parts that cannot be machined, offering better pricing and turnaround times. The company plans to use the FX20 and Metal X systems to expand into the medical aviation and agriculture sectors.

While we continue to grow, as we target the 43 billion market opportunity to make supply chains more resilient and flexible, remain mindful of our operational efficiencies in driving margin expansion, in pursuit of profitable sustainable growth. Non-GAAP gross margins are tracking towards the upper end of our 2023 guidance.

While we remain on track to achieve full production scale for the FX20. We continue to remain focused on our operating expenses, which were down 11% year-over-year on a non-GAAP basis. And on finding additional working capital efficiencies.

Capital management is key and we remain committed to achieving profitability with the healthy balance sheet and without dependency on external funding. The second half of 2023 is shaping up to be super exciting for us.

As we plan multiple new product introductions which further enhance our current platform and should contribute to our accelerated growth in 2024.

I can't wait to welcome you to our fall investor day in our new headquarters, where we'll get a chance to showcase some of our products and meet the people who are working tirelessly every day to accelerate the adoption of the industrial production right at the point of need.

With that, I now turn the call over to a Assaf Zipori, our acting CFO will offer more details on our financial performance and guidance for the remainder of the year. .

Thank you, Shai, and good evening, everyone. I will be covering our financial results for the second 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 and posted to our investor relations website includes our GAAP and non-GAAP reconciliation to assist with my commentary. So let's begin.

We had another quarter of growth with revenue reaching $25.4 million, representing a 5% increase compared to $24.2 million in the second quarter of 2022. We also generated a gross profit margin of 48.3% compared to 53.8% in the second quarter of 2022.

These results are consistent with our operational plan and remain among the highest for publicly traded companies in our space. As we have discussed in the past, gross margins were impacted as we continue to ramp up the production of FX20.

However, we are confident that gross margins will start to gradually expand to historical levels that are above 50% in '24 and beyond. Our operating expenses were $26.6 million for the second quarter of 2023, down from $30 million in the second quarter of 2022.

This improvement in operating expenses is based on actions we took, which reflect our commitment to incremental efficiencies and focus on execution. Net loss for the second quarter of '23 was $12.5 million, or a loss of $0.06 per share based on our weighted average shares outstanding for the quarter of $196.4 million.

Our net cash used in operating activities in the first half of '23 decreased by $10.9 million or approximately 26% from the first half of '22. We expect our cash utilization to continue to decrease over the coming quarters as a result of higher revenue, prudent hope expand, and working capital efficiencies. Now moving on to our guidance.

Our results for the first half of the year are in line with our expectations. The uncertain macroenvironment and relatively high cost of capital continue to weigh on our customer's purchasing behavior. Therefore, we are maintaining our revenue guidance to be within the range of $101 million to $110 million.

In accordance with similar seasonality of our industry. We anticipate Q3 revenue to be mostly in line with Q2. We expect revenue to see the typical end of year-end in Q4.

Considering our strong execution in the first half of the year, we now believe that there is more opportunity for gross margins to be within the mid to upper range of our guidance of 47% to 49% for the year. We plan to continue the disciplined approach to operating expenses as we progress through 2023.

We expect operating expenses to decline as a percentage of revenue as well as in absolute terms, year-over-year, resulting in a lower expected operating loss in the range of $54 million to $57 million. Accordingly, our EPS loss per share is expected to be between $0.25 and $0.27 per share.

We are confident that our accomplishments to date ongoing focus and execution and commitment to consistently release new innovative technologies puts us on the right path to profitability. That concludes our prepared remarks today. Operator, please open up the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Greg Palm of Craig Hallum. .

This is Danny [indiscernible] for Greg today. Thanks for taking the questions. I wanted to touch first on maybe just more of what you're seeing out in the market. You've got peers talking about lower visibility sales cycles lengthening and maybe some customer push outs. Maybe it'll tie more into to the revenue guidance as well.

So, a flatter Q3 sequentially that leaves kind of a broad range for Q4.

So I guess, what are you seeing out there right now? What needs to go right or wrong for Q4 to get to top or end of that fiscal year guidance range?.

I think in general; we continue to see that the cost of capital is higher than previous years, and with that decision-making on investment in capital equipment takes longer. With that, we do see that our pipeline is increasing materially year-over-year. And we agree, we also see that a increase in lengthening, but we don't see the deals disappear.

And so we feel actually very good about what's coming. And especially if the environment continues to improve based on some of the deals we saw, especially on the strategic side, it's definitely improving. So we are very optimistic about that side.

And I think currently we are predicting the traditional seasonality and for us, between the second half and the first half, so we expect to grow more in the second half of the year versus the first half is we did..

Maybe one on gross margin. I know last quarter a big talking point was kind of the FX20 production costs improving.

Did you see that trend continue into the quarter? Is there more to go on that? How should we look at that?.

I think it's fairly stable. With that, we said in the call, we are taking the right actions to go back to the 50% plus gross margins in '24. So, it's on track based on what we see and then going in the right direction..

Maybe just one last one on TX100, we're supposed to start shipping in Q3, Q4 of those started shipping yet.

What kind of early feedback have you got on that system? If they have or early betas or what?.

We have not started shipping them yet. We still expect to ship them in the second half of the year. And there's a lot of excitement, we were able to successfully build a good book of orders for this system and as we said before, I don't think it's going to be material from revenue perspective in 2023, but definitely in 2024. .

The next question is from Shannon Cross of Credit Suisse. .

I had a follow-up on the PX question.

In terms of the order pipeline, I'm curious if I order today, when are you telling people that they could receive delivery? Just trying to think about how it ramps through 24?.

If you order today, probably it's going to be Q1 or Q2. .

So from a, so I guess when we get to first or second quarter on a year-over-year basis, there should be some decent uplift.

Is that fair from '23?.

Yes. I mean, we expect uplift on '24 over '23 with the PX100. That's correct. .

And I guess, have you seen any customers come to you as your systems are ideal for replacing metal parts given the tighter CapEx budgets? Have you seen share gain as maybe customers weigh, metal manufacturing versus your options?.

So I think what we see is that, most of our customers come to us with problems from the manufacturing store, and especially trying to reduce costs.

I was very fortunate to meet a lot of automotive customers, automated packaging customers and others, and they are able to reduce the cost per part with our solution sometimes by 10x, which is very significant. And as such, the RI for them is somewhere between three to nine months on the find the capture equipment.

And this is where we see the biggest success on the manufacturing floor. .

Yes, no, I understand that.

I guess what I was trying to figure out is, given the CapEx challenges in the, tighter budget that people are seeing, do you think you're gaining share vis-a-vis the metal options or is it sort of steady state in terms of demand rates?.

You mean versus traditional manufacturing?.

Well, traditional or even maybe some of the metal options that are out there on the AM side. I'm just wondering from a share gain perspective, if you've seen any shift given again, the price differentials in terms of your products versus your printers versus others? And maybe it's not the right question to ask. .

That's fine. I think that you should look at the growth rate that we've been communicating. And we believe that the answer is yes based on the growth rate that we have had compared to the industry. .

I think that the bottom line is that all of these parts that we're replacing are used. It used to be traditionally manufactured mainly by CNC. So, sometime we replace them with composite sub parts. Sometime we replace them with metal parts. With our metal solution, we actually had a very good metal quarter.

And I think each time that we do this and we continue to grow, we take more and more market share from traditional manufacturing. .

And then, I mean, you have sufficient cash, you're still burning cash, but you're, you obviously have a cash balance. I know velo just announced a large offering.

I guess I'm trying to think about how your, you're feeling about your balance sheet, your capital structure is a silly question, but just in general, your balance sheet at this point and what level of cash do you need to run the business? Just comfort level given obviously the industry in general is going through a bit of a rough patch?.

We have a lot of confidence in our ability to maintain our plans and our cash utilization is expected to improve as you see more volume top-line and as we continue to focus on operational efficiencies. So we feel very comfortable with our balance sheet and our ability to meet our targets..

Maybe I would just add. We don't see the need to raise any external funds before we get to profitability and when we get there, we're still going to have a very healthy balance sheet that allow us to easily operate the business..

The next question is from Brian Drab of William Blair..

Can you, it looks like the consumable sales are about flat quarter-over-quarter. I'm just wondering, I know with the machines being connected and that gives you a good view into utilization of the equipment, which is obviously generally a good leading indicator of when someone's going to buy the next one.

Just like what, can you comment at all about what your sense is for utilization of your equipment in the field and the trend, more importantly, the trend of utilization if it's increasing flat, et cetera?.

Yes, definitely. The utilization continues to increase quarter-over-quarter. So we see of course all the active system. As you know, all of our solutions are connected, I would say over 90% of them. And we see all the utilization there. So we continue to increase quarter-over-quarter.

I think there was a little bit of softness coming, many from Europe and Europe is having a little bit of tough times these days, but other than that the trend continues to improve and we still see growth year-over-year and we still see the utilization continue to increase.

And I think we're going to see it even in higher levels as we're going to get to the first or second year of FX20 and which people are consuming much more materials..

And then can you just provide an updated comment kind of related to the previous question around when you expect the company to reach cash flow breakeven?.

Yes, absolutely. We feel very comfortable with the plans that we have communicated. We have great cost control and we have, we are very excited with the opportunity that is ahead of us heading into 2024. So, we confirmed the plan and the previous communications that we've had in terms of breakeven and our ability to manage our cash..

And that's, I guess to be specific, like more specific than end of '24 or are we saying?.

No, no. Correct. We are reaffirming in the end of the last quarter of '24 operational breakeven and cash flow positive in '25. There's no change there..

I just needed a reminder there. Okay. That's perfect. Thanks a lot..

There are no further questions at this time. I would like to turn the floor back over to Shai Terem for closing comments. .

Thank you very much everyone for joining us for the quarterly call. Looking forward to see you next quarter. Thank you. .

This concludes today's event. Thank you for joining us. You may now disconnect your lines. Goodbye..