Markforged Holding Corporation (NYSE:MKFG) Q1 2023 Earnings Call Transcript May 11, 2023

Markforged Holding Corporation beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.08.

Operator: Hello, and welcome to the Markforged’s First Quarter 2023 Earnings Conference Call and Webcast [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Austin Bohlig, Director of Investor Relations. Thank you, Austin.

Austin Bohlig: Good afternoon. I’m Austin Bohlig, Director of Investor Relations of Markforged Holding Corporation. Welcome to our first 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 CFO, Mark Schwartz. 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, May 11, 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.

Shai Terem: Thank you, Austin. And thank you, everyone, for joining us on our Q1 2023 earnings call. We started the year strong with yet another record first quarter revenues and the largest pipeline in our company’s history. We’ve shared our strategy before around product innovation, go-to-market and financial efficiency gains and infrastructure buildup. We believe our Q1 revenue and our gross margin results, in particular, are a reflection of strong execution of our strategy and an early indicator of the meaningful opportunity for Markforged in the coming quarters. Demand for the Digital Forge grew across all geographies in Q1. An increasing number of manufacturers are choosing our metal and composite solutions to solve mission critical, metal applications at the point of need.

But especially great to see strong pipeline buildup in the Americas, which is our biggest region and can support our plant growth. The incremental improvements we’ve made to for FX20 cost structure, coupled with our strong operating expense controls enabled us to make our Q1 EPS target. As we spoke before, a couple of macro trends in manufacturing are helping us to fuel demand for digital forge platform. The first, manufacturers across the globe are focused on creating more resilient and flexible production by investing in solutions that derisk their supply chains. The second is it increased focus on digital transformation and industrial automation. We believe our platform is uniquely positioned to address the $40 billion market opportunity available to us on the manufacturing floor today.

Our customers tell us that Digital Forge is the perfect tool for the manufacturing floor and accelerates the production of new and replacement parts. For example, our customer Rapid Robotics, provides automation tools through robotics as a service offering to manufacturers to automate production sales with a fleet, which grew over time to 10 Markforged printers. Rapid Robotics produces on site, custom grippers and end effectors for the robotic arm, saving, in some cases, months of production cycles to improve overall performance. Another example in Arizona is our customer Handwrytten, which develops robots to autonomously create personalized handwritten notes that stand out with a personal touch. Handwrytten uses a fleet of five Markforged printers for iterative robotic design and faster production times.

We even have customers applying advanced robotics to increase production. Athena 3D Manufacturing who operate a service bureau that produces critical parts for other manufacturers that developed a system capable of true lights out manufacturing by automating the processes of starting print and removing parts with robotic arms. This automation has enabled him to double output and achieve a 40% increase in utilization of the digital technology suite. I encourage you to check out the video we have uploaded to our YouTube channel, showing these robots in action. Truly amazing. And manufacturers seek production grade solutions for the factory floor revenue for the FX20 continue to exceed our expectations and the pipeline of new orders continues to grow.

Entering 2023 our focus was improving the cost of producing the FX20. Next to the diligent work by our engineering and operations teams. The cost to produce the FX20 are declining, which is helping to drive sequential gross margin expansion. We expect FX20 production cost to continue to decline throughout this year, which will support our objectives to meet our historical gross margin rates. With the ability to print large, heightened resistant parts, the aerospace market is a key target for FX20, and we are pleased with our early traction and strong interest. We are already scaling with customers utilizing the FX20 for maintenance, repair and operations, or MRO applications. What is extremely encouraging is the interest we are seeing in utilizing the FX20 to produce and use parts that go into the production of new aircrafts.

While these have lengthy development cycle, we are already seeing aerospace companies begin to spec the Digital Forge into their next gen aircraft. For example, US based [Ameus] is working with the US Air Force and NASA on a multiyear plan to radically accelerate air travel by developing a Mark V aircraft capable of commercial flight. Early in their development process, they began using X5 and have recently added an FX20 to their fleet to produce the types of advanced composite parts required to achieve hypersonic passenger flights. By adopting our technology early in their product lifecycle, we’re helping to enable next gen air travel and planting the seeds for future growth. At the end of Q1, we moved into our new global headquarters in Waltham just outside of Boston.

It is new state of the art R&D labs and we can already feel the excitement that comes from collaborating in person every day and believe this move will drive even more operational efficiencies over time. We remain laser sharp focused on margin expansion and driving profitable growth. We’re particularly encouraged by the sequential improvement in gross margins, which exceeded 49% in the first quarter. We are committed to reaching profitability without needing to raise additional capital. Manufacturing is changing significantly and we’re well positioned to benefit from the full potential of this inflection point. Given our upcoming new product introductions, growing pipeline and healthy margins, we’re even more confident in our ability to achieve this objective.

As you’ve probably seen in our announcement earlier today, this will be our last earnings call with Mark as our CFO. I want to thank Mark for his service to Markforged and helping us on our journey from a private startup to a public company. For me, personally, Mark has been a great partner. He will continue to support us for the next few months, while we search for our next CFO. For continuity, a subsidiary our previous CFO and current Head of Strategy and Corporate Development has been with us for the past three and half years will assume the role on an interim basis. Mark is not leaving up just yet but we wish him well on his next project. With that, I now turn the call over to Mark Schwartz, our CFO, who will offer more details on our financial performance and guidance for the remainder of the year.

Mark Schwartz: Thanks Shai. Let’s turn to our financial results for the first 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 Web site includes our GAAP to non-GAAP reconciliation to assist with my commentary. Revenue increased 10.2% to $24.1 million for the first quarter of 2023 compared with revenues of $21.9 million for the first quarter of 2022. Gross profit in Q1 was $11.9 million compared to $11.7 million for the first quarter of 2022. As a result, we generated a gross profit margin of 49.3% compared to 53.6% in the first quarter of 2022. On a year-over-year comparison basis, our Q1 gross margin was impacted by increases in freight and logistics costs, as well as by the added component material and labor costs associated with ramping up FX20 commercial production.

That said, on a sequential basis, our gross margins expanded by 180 basis points versus Q4 of 2022. Our product mix has shifted towards high margin products and improved FX20 production costs. Our operating expenses were $26.7 million for the first quarter of 2023 compared to $26.4 million for the first quarter of 2022, even accounting for the increased operating expenses associated with the absorption of two acquisitions last year. On a sequential basis, operating expenses were down 9% from Q4 of 2022, reflecting our commitment to continuing costs. Net loss for the first quarter of 2023 was $13.3 million or $0.07 per share based on our weighted average shares outstanding for the quarter of $195.6 million. Now onto our guidance. We were pleased with our results for Q1 and the start of the year.

Our revenue guidance continues to reflect the uncertain macro environment, and we reiterate anticipated revenues for the year to be within the range of $101 million to $110 million. We expect fiscal year 2023 non-GAAP gross margin to be in the range of 47% to 49%. We were encouraged with the progress we made with our gross margins in Q1 and we are confident that longer term they will continue to improve towards historical levels. The disciplines we exerted over our operating expenses in Q1 will continue as we progress through 2023. We expect operating expenses to decline as a percentage of our revenues, resulting in a non-GAAP operating loss in the range of $55 million to $58 million for the year. This translates into non-GAAP EPS results for the full year to be a loss in the range of $0.27 to $0.29 per share.

We executed on our strategy to lower our quarterly cash burn with cash flow from operations decreasing $3.7 million or approximately 20% from the first quarter of 2022 to the first quarter of 2023. As we have previously stated, we expect to reduce our operating cash burn in 2023 to under $50 million, a decrease of $32 million or 39% as compared to 2022. This will be realized through higher revenues and margin expansion, continued inventory reductions and working capital improvements and increased yields on our cash and equivalents and short term instruments. We expect to end 2023 with a balance of approximately $120 million in cash and equivalents and short term investments. We are encouraged with our Q1 results. We believe they are a reflection that our strategy and strong execution are working and an early indicator for us of the opportunity coming in future quarters.

And further, we continue to believe we have the infrastructure in place that supports our long term innovation and go-to-market objectives for profitable growth without the need to raise additional capital. Finally, I want to thank Shai and the entire team at Markforged for their collaboration and support over the past years. It has been my honor and pleasure to work side by side with this group of passionate people focused on providing manufacturers a flexible and resilient platform to produce mission critical parts at the point of need. It is the right time to step aside and be a fan and champion for the very bright future of this company. That concludes our prepared remarks today. Operator, please open up the call for questions.

Q&A Session

Operator: [Operator Instructions] Our first question today is coming from Troy Jensen from Lake Street Capital Markets.

Operator: Next question is coming from Greg Palm from Craig Hallum.

Operator: Next question is coming from Shannon Cross from Credit Suisse.

Operator: Next question is coming from Brian Drab from William Blair.

Operator: Next question is from Jared Maymon from Berenberg.

Operator: Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.

Shai Terem: Thank you very much, everyone for joining us for our first quarter results, and looking forward to see you in our next earnings.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.