Xometry : Q1 2023 Earnings Call Transcript

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XMTR.OQ - Q1 2023 Xometry Inc Earnings Call

EVENT DATE/TIME: MAY 10, 2023 / 12:30PM GMT

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MAY 10, 2023 / 12:30PM, XMTR.OQ - Q1 2023 Xometry Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

James M. Rallo Xometry, Inc. - CFO

Randolph Brody Altschuler Xometry, Inc. - Co-Founder, CEO & Director

Shawn Christopher Milne Xometry, Inc. - VP of IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brian Paul Drab William Blair & Company L.L.C., Research Division - Partner & Analyst

Gregory William Palm Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

Nicholas Freeman Jones JMP Securities LLC, Research Division - Director & Equity Research Analyst

Ronald Victor Josey Citigroup Inc., Research Division - MD

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by. Welcome to Xometry Inc. Q1 2023 Earnings Call. At this time, the participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. (Operator Instructions) You will then hear an automated message advising your hand is raised. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shawn Milne, Vice President of Investor Relations. Please go ahead.

Shawn Christopher Milne - Xometry, Inc. - VP of IR

And thank you for joining us on Xometry's Q1 2023 Earnings Call. Joining me are Randolph Altschuler, our Chief Executive Officer; and Jim Rallo, our Chief Financial Officer. During today's call, we will review our financial results for the first quarter of 2023 and discuss our guidance for the second quarter and full year 2023. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects. Such statements may be identified by terms such as believe, expect, intend and may. These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results.

Information concerning those risks is available in our earnings press release distributed before the market opened today and in our filings with the U.S. Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2022, and our Form 10-Q for the quarter ended March 31, 2023, that will be filed later today. We caution you to not place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations.

We'd also like to point out that today's call, we will report GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operating decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today in our investor presentation, both of which are available in the Investors section of our website at investors.cometry.com. A replay of today's call will also be posted on our website. With that, I'd like to turn the call over to Randy.

Randolph Brody Altschuler - Xometry, Inc. - Co-Founder, CEO & Director

Thanks, Shawn. Good morning, everyone, and thank you for joining us for our Q1 2023 earnings call. In Q1, we had the highest revenue in Xometry's history. We grew revenue 26% year-over-year, including 35% year-over-year growth in Marketplace revenue. We added a record number of active

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MAY 10, 2023 / 12:30PM, XMTR.OQ - Q1 2023 Xometry Inc Earnings Call

buyers as we continue to gain market share. We significantly increased gross margins and operating leverage, reducing our adjusted EBITDA loss in Q1 from Q4 by 17% and by 23%, excluding nonrecurring Sarbanes-Oxley Act implementation compliance costs.

The continuing shift to the digital is inevitable, and is the leading 2-sided marketplace, Xometry's asset-light digital marketplace creates efficiencies and value for buyers and suppliers alike. Artificial intelligence is at the heart of Xometry, generating prices for buyers and suppliers across a range of on-demand manufacturing processes. We continue to develop our proprietary machine learning algorithms, adding support for additional features such as new materials and finishes and training our models on an increasingly large data set of custom manufactured parts.

Our technology helps buyers significantly reduce their time to market and strengthen their supply chains and enable small and medium-sized suppliers to fill their capacity with work that can boost their growth and profitability. With our market-leading position and increasingly global footprint in a total addressable market of $2 trillion, we expect to continue to grow rapidly for many years to come. While there are no shortcuts, we are steadily and methodically executing on our vision of becoming the de facto digital rails for custom manufacturing.

In Q1, revenue increased 26% year-over-year to $105.3 million. Q1 Marketplace revenue was $86.7 million, representing 35% year-over-year growth. We saw strength across all processes and many verticals, including electric vehicles, energy, industrial equipment and robotics. Our value proposition continues to resonate strongly across all sizes of businesses, especially large enterprise customers. Supplier services revenue was $18.6 million, down 3% year-over-year. Gross profit increased 20% year-over-year to $39.4 million, driven by 41% growth in marketplace gross profit. Q1 marketplace gross margins increased 140 basis points year-over-year and 170 basis points quarter-over-quarter to 28.8%.

Active buyers increased 46% year-over-year to 44,716, driven by a record addition of 4,052 active buyers in Q1. Active paying suppliers grew by 11% year-over-year in Q1 2023 to 7,621, driven by growth in Thomas marketing products, including self-serve. Starting this quarter, we will provide a number of active paying suppliers on a quarterly basis to give an additional KPI for Supplier services segment. An active paying supplier is defined as a supplier who purchased one or more of our supplier services, including digital marketing services, data services, financial services or supplies during the last 12 months. International revenue grew 77% year-over-year and 13% quarter-over-quarter driven almost entirely by the growth in our European business. Geometry Asia is growing with strong momentum, including the planned launch with Alibaba 1688.com in Q2.

In Q1, we continued to execute on the 5-point strategic plan we outlined during our Q4 2022 earnings call. Here is an update on our progress. We refocused sales efforts in our top 200 accounts, which represented approximately 50% of 2022 U.S. marketplace revenue. The collective spend of these 200 accounts of manufacturing far exceeds Xometry's current revenue. So in early 2023, we redirected salespeople and customer support to them. Given the higher spend we have with these accounts and the potential to grow that spend significantly in the years to come, we are pushing deeper and wider into them. Accounts are increasingly engaging us to potentially support the production business and to manage their tail spend.

While the sales cycle for these efforts are longer, the potential spend from these transactions is significant. This does not change our goal of rapidly expanding our base of buyers through digital marketing and other marketing efforts. In fact, we're seeing strong signs of increasing brand awareness as our organic search volume is growing at a rapid clip, helping fuel record growth of new active buyers. In Q1, we made significant progress in expanding our marketplace menu. As we grow the number of processes, materials and finishes, we can offer our customers, we are increasingly able to serve as their one-stop destination.

In Q1, we added more than 3 dozen materials and finishes, including galvanized steel, stainless steel and custom CNC materials. Additionally, we launched instant quotes for parts with multiple finishes. We also launched a new quick-turn injection molding service for quotes in as fast as 2 hours and parts in as little as 5 business days. For U.S. buyers, we introduced a new domestic economy shipping option, which offers lower pricing and longer lead times than the standard shipping option but with higher pricing than our traditional offshore economy option. We are pleased with the adoption of the domestic economy.

In Q2, we will continue to expand the menu and will offer buyers the ability to select an increasing number of manufacturing technologies, leveraging the tremendous breadth of what the hundreds of thousands of suppliers listed on thomasnet.com can offer. This depth and breadth is critical since our market is not defined by commodity parts or SKUs, but instead is made up of thousands of different use cases. This is one of the reasons the custom manufacturing market is so fragmented. Our marketplace is unique in its ability to meet these needs.

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MAY 10, 2023 / 12:30PM, XMTR.OQ - Q1 2023 Xometry Inc Earnings Call

We continue to expand aggressively internationally. We delivered strong growth in Europe and launched in the U.K., which is the third largest manufacturing market in the region. In the U.K., we are seeing early strong demand in such industries as medical, electric vehicles, autonomous related technologies, renewable energy and propulsion systems. Additionally, in early Q1, we made a small tuck-in acquisition in Turkey to further expand our alternative call supplier network to serve the European market. We launched sometry.com.tr, a localized marketplace introducing the instant quoting engine to Turkish customers. Since launch, Circus customers for machine building, engineering and other industries are ramping up the use of our technology.

In late Q1, Xometry Asia signed an agreement to provide instant quoting for Alibaba's group's 1688.com B2B wholesale marketplace in China. Xometry's AI-powered instant quoting engine is the sole provider of real-time pricing and lead time for custom parts on 1688.com. The industrial section of the 1688 marketplace had annual traffic of 30 million visitors in 2022. This should be fully operational shortly, and we are excited by the opportunity and the trust given by 1688 in our instant quoting technology. The upcoming launch with 1688 notwithstanding, we remain pleased with the ramp in buyer demand in China as we're seeing strong order growth across many verticals, including medical devices, biotech, material production, machine building and sensor technology.

We expect China to contribute to revenue growth in 2023 and stronger in 2024. Through ezometry.eu, zometry.uk and Zometry.asia, we have leveraged Domags core technology to provide localized platforms in 13 different languages with networks of suppliers across Europe and Asia as well as North America. In Q1, we invested approximately an incremental $1 million to fund expansion into the U.K. and launch the Turkey localized marketplace. We believe these investments will pay off with continued strong international growth over the years to come.

In Q1, we invested in enhanced and continue to drive adoption of our new products, including work center and the industrial buying engine platform, increasing our footprint with both buyers and suppliers and enabling us to scale cost effectively. For our suppliers, we made an important progress in Work Center, the SaaS-like operating system that is the digital foundation for manufacturers. In Q1, we expanded the work center job management tools and capabilities, including support for custom job workflows, job scheduling, communication tools and accounting integrations. For buyers, we took significant steps towards improving the industrial buying engine. The industrial buying engine digitizes the cumbersome and time-consuming request for quote process, taking what was once off platform and integrating it into the heart of thomasnet.com.

In Q1, we made it easier for buyers to initiate requests and for buyers and suppliers to engage by consolidating all communication onto a single unified UX and technical platform. While the revenue from industrial buying engine transaction fees on thomasnet.com is not yet significant Xometry's overall revenue, as we more tightly integrate it with our instant quoting engine, we can increase our buyer share of wallet and be their one-stop shop. We continue to modernize the marketing products and expand self-serve options on the thomasnet.com platform, making it easier for suppliers to start their marketing journey.

In Q1, we implemented auto renewal for all Thomas Net marketing programs. In 2023, we're working to move to a pay-for-performance advertising model on thomasnet.com. Most search and listing engines that support advertising use a pay-per-click or other performance-based advertising model, which aligns the interest of buyers and suppliers. As we improve search, we expect to see a higher level of buyer engagement, improving the opportunity for search monetization. This will help drive growth for our higher-margin supplier services as well as boost use of the industrial buying engine.

We are continuing to increase efficiency and reduce expenses across our organization. In January, we reduced our workforce by 6% to better streamline operations. We are finding additional savings, including through our fixed costs to continue our progress throughout the year to help Xometry become adjusted EBITDA positive in Q4. The underlying metrics in the marketplace were robust, with strong additions of active buyers and record order accounts, including from existing accounts. Our international business had a record quarter in Europe and is building momentum in Asia.

We made good progress with the rollout and adoption of Work Center and building integrations to enable Thomas and Xometry users alike to access the breadth and depth of thomasnet.com 500,000 suppliers, the full value of which we are continuing to unlock. As a result, we are once again delivering strong sequential growth in marketplace revenue, marketplace gross margin and reduced adjusted EBITDA losses. For 2023, overall, we expect our momentum to continue and to remain in strong growth mode. With that, I will turn the call over to our CFO, Jim Rallo, for a closer look at first quarter financial results and our business outlook.

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MAY 10, 2023 / 12:30PM, XMTR.OQ - Q1 2023 Xometry Inc Earnings Call

James M. Rallo - Xometry, Inc. - CFO

Thanks, Randy, and good morning, everyone. As Randy mentioned, we delivered strong marketplace growth in Q1 despite macro headwinds. Q1 revenue increased 26% year-over-year to $105.3 million, driven by marketplace growth. The stronger U.S. dollar negatively impacted revenue by $0.5 million on a year-over-year basis. Q1 marketplace revenue was $86.7 million in supplier services revenue was $18.6 million. Q1 Marketplace revenue increased 35% year-over-year, driven by strong growth in the number of active buyers. Active buyers increased 46% year-over-year to 44,716 with 4,052 new active buyers. In Q1, the percentage of revenue from existing accounts was 96%, underscoring the efficiency and transparency of our business model that leads to increasing account stickiness and spend over time.

Once an account joins our platform, we aim to expand the relationship and increase engagement and spending activities from that account over time. The number of accounts with the last 12-month spend of at least 50,000 on our platform reached 1,109 at the end of Q1, up 40% year-over-year. Supplier services revenue declined approximately $600,000 or 3% year-over-year in Q1. As Randy mentioned in his remarks, part of our strategic plan for 2023 is to modernize the Thomas advertising platform and expand the self-service marketing products on thomasnet.com. We expect these efforts to grow the number of digital marketing customers and to reduce the sales costs associated with acquiring them.

This quarter, we are introducing a new KPI for supplier services. The number of active paying suppliers for Q1 2023 was 7,621 on a trailing 12-month basis, an increase of 11% year-over-year. Active paying suppliers is the number of suppliers who have purchased one or more of our supplier services, including digital marketing services, data services, financial services or supplies during the last 12 months. We believe this KPI will help investors to better understand how we operate the supplier services segment and track its performance.

Q1 gross profit was $39.4 million, an increase of 20% year-over-year. Total gross profit margin was 37.4%, down 200 basis points year-over-year, primarily driven by a mix shift to marketplace revenue. Q1 gross margin for marketplace was 28.8%, up 140 basis points year-over-year and 170 basis points quarter-over-quarter. Q1 gross margin for supplier services was 77.4%, driven by the high gross margin of Thomas marketing and advertising services and growing financial services. Supplier Services gross margin increased 110 basis points quarter-over-quarter due to a higher mix of Thomas marketing services revenue. Moving on to Q1 operating costs. Q1 total non-GAAP operating expenses increased 12% year-over-year to $51.2 million, driven by continued investments in the business and public company costs. Q1 operating expenses included $0.8 million of incremental nonrecurring accounting and legal costs associated with Sarbanes Oxley compliance.

Within our operating expenses, sales and marketing is our largest variable component. In Q1, non-GAAP sales and marketing expenses were $20.6 million, excluding stock-based compensation and amortization, an increase of 15% as compared to $17.9 million in Q1 2022. The increase in non-GAAP sales and marketing expenses on a year-over-year basis was driven by continued investment to expand our network of buyers and suppliers and hiring of additional salespeople to support strong growth in our land and expand strategy. We delivered strong growth in new active buyers in Q1, leveraging increasing brand awareness and efficient marketing spend.

As Randy mentioned, we invested approximately an incremental $1 million in Q1 to fund expansion in Europe, including the launch of the U.K. and Turkey marketplaces. Our adjusted EBITDA loss for Q1 was $11.8 million or 11.2% of revenue compared with 15.2% of revenue in Q1 2022. One quick note on GAAP EPS in Q1 as part of the IPO, we pledged 1% of the company's capitalization for approximately 403,000 shares to Xometry. award for charitable contributions to nonprofit organization. As a result, we recorded a non-operating charge in general and administrative expenses, which is excluded from adjusted EBITDA. In Q1, we recorded a charge of $0.4 million.

Turning to segment reporting. In Q1, revenue from our U.S. and international operating segments was $93.9 million and $11.4 million, respectively. Segment loss from our U.S. and international operating segments for Q1 was $12.9 million and $5.4 million, respectively. We continue to invest in our international business, which grew 77% year-over-year in Q1 and 87% year-over-year on an FX-neutral constant currency basis. At the end of the first quarter, cash and cash equivalents and marketable securities was $296.2 million.

Now moving on to guidance. We expect Q2 2023 revenue in the range of $109 million to $111 million, representing year-over-year growth of 14% to 16%. We expect marketplace revenue growth to remain healthy in Q2 2023. As a reminder, Q2 2022 is the toughest year-over-year marketplace revenue comparison with 56% growth in the prior year period. Given the significantly lower gross margin of supplies, we are not going to proactively

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