Xometry, Inc. (NASDAQ:XMTR) Q1 2024 Earnings Call Transcript May 9, 2024

Xometry, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Xometry Inc. Q1 2024 Earnings Call. [Operator Instructions] I'd like to introduce it to our CEO, Randy Altschuler; CFO, James Miln; and our VP of Investor Relations, Shawn Milne. Sir, you may begin the conference.

Shawn Milne: Good morning, and thank you for joining the Xometry's Q1 2024 Earnings Call. Joining me are Randy Altschuler, our Chief Executive Officer; and James Miln, our Chief Financial Officer. During today's call, we will review our financial results for the first quarter and discuss our guidance for the second quarter and full year 2024. 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 our 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 US Securities and Exchange Commission, including our Form 10-Q for the quarter ended March 31, 2024, that will be filed later today. We caution you not to 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 on 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 US GAAP. To see the reconciliation of these non-GAAP measures please refer to our earnings press release distributed today and our investor presentation, both of which are available on the Investors section of our website at investors.xometry.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 Altschuler: Thanks, Shawn. Good morning, everyone, and thank you for joining us for our Q1 2024 earnings call. Powered by AI, our marketplace continues to gain significant market share as buyers and suppliers realize the value, convenience and resiliency of our platform to strengthen their supply chains globally. In Q1, we grew revenue 16% year-over-year to $123 million, driven by our Marketplace business. Q1 Marketplace revenue grew 24% year-over-year. We saw strength across many end markets, including semiconductors and industrial equipment, electronics, aerospace and defense and automotive. Q1 gross profit increased 22% year-over-year. Q1 Marketplace gross profit increased 37% year-over-year, driven by our AI-powered marketplace and increasing network of active suppliers.

We expect to further expand Marketplace gross margin and drive strong gross profit growth throughout 2024. On top of strong marketplace revenue and gross profit growth, we improved our adjusted EBITDA loss in Q1 by 37% on a year-over-year basis, driven by leverage in our core U.S. marketplace as our first quarter results clearly show, with our market-leading position and the size of the available opportunity, we can drive strong revenue and gross profit growth and improve operating leverage regardless of the manufacturing backdrop. Of course, we want to grow as much as possible, which will not only strengthen our competitive moat, but also enable us to achieve our long-term profit margins faster. Here are the investments we've been making to accelerate our results: first, expanding our network of active buyers and suppliers.

In Q1, active buyers increased 32% year-over-year with net additions growing 8% quarter-over-quarter. For 2024, we expect our active buyer growth to remain healthy as there are millions of potential buyers and Xometry brand awareness continues to improve. We also continue to expand our supplier base globally with 36% growth in 2023. In Q1, we expanded our domestic network and added new partners in India, China and Turkey. For our suppliers, we continue to enhance work center, the digital operating system for manufacturers. We are improving the overall experience for suppliers, reducing the effort required to review jobs, track material purchases and monitor fabrication progress; second, expanding the marketplace menu. We want to be the go-to destination for our customers' manufacturing needs.

To help accomplish that, we need to provide instant quoting for as many manufacturing processes and materials as possible. Like any other industry, the faster and easier you can make it for someone to buy the more traction you will get. In Q1, we continue to make progress doing just that. For example, in Europe, we expanded the Instant Quoting Engine to include Vacuum Casting, for customers to take advantage of low-cost, high-quality plastic production. To further expedite our deployment of new auto quoted processes within Xometry's AI-powered Instant Quoting Engine, in Q4 of 2023, we partnered with Google's verdicts AI team. Our progress has been encouraging, and in the third quarter of this year, we expect to test multiple new auto quoting models with our U.S. and then European customers; third, driving deeper enterprise engagement.

Some of our biggest customers are the largest companies in the world. While our growth within these accounts has been strong over the years, there's a terrific opportunity to significantly accelerate their adoption of Xometry. To make that happen, we have a two-pronged approach. First, we are leading with our technology. In addition to reducing friction for customers by integrating purchasing directly into the ERP systems, we have deployed and continue to enhance our Teamspace software. Teamspace moves the Xometry marketplace from a focus on individual buyers and parts, to procurement teams managing programs. The feedback remains positive, with rapid adoption, including over 2,300 teams and strong engagement on the platform. This year, we've already integrated new features for our injection molding offering directly into Teamspace, which includes a tooling dashboard providing engineering review and fabrication status.

Second, we continue to invest in our enterprise sales effort, increasing our bench strength and ramping our sales force to service and grow relationships with our largest customers. We are making progress with global companies as they look for a technology partner to help manage dispersed and complex supply chains. In the United States, a leading global medical device company chose Xometry for an injection molding production program after first prototyping with our platform. The company found value in our quality, time to deliver and increasing ease of management with our new Teamspace software. We expect to see continued growth with this customer in the quarters ahead as they look to Xometry for additional injection molding services and other manufacturing processes that we bring to market.

Also in Q1, we signed a multiyear agreement with a European customer in the vehicle and delivery space. Xometry was chosen due to the breadth of our marketplace. -- using the network of suppliers in the Xometry marketplace, this customer doesn't need to build and manage their own supply chain for their critical product. Fourth, growing internationally. In Q1, international revenue increased 69% year-over-year, driven by strong growth in Europe. In 2024, we continue to push deeper in our existing international markets. In Q1, we added Czech as a language in our EU site. Through xometry.eu, xometry.uk and xometry.asia, we have leveraged Xometry's core technology to provide localized marketplaces in 15 different languages with networks of suppliers across Europe and Asia as well as North America.

In Q1, international revenue accounted for 18% of total marketplace revenue. We believe international can reach the 30% to 40% level in the long term as is with many other global online marketplaces. Fifth, enhancing supplier services solutions. In Q1, we continued to invest in important foundational work to modernize the Thomas advertising platform. We remain focused on restoring Thomas advertising growth given the 85% plus gross margins and strong contribution opportunity of the platform. We are now beta testing new self-serve advertising campaign creation tools for suppliers. While still early, we're seeing some positive signs of supplier engagement, including end-to-end self-serve campaign configuration and checkout. We expect the returns on these investments to be strong.

We've made similar bets in the past, and they paid off. For example, in 2019, we invested in international expansion, launching in Europe in early 2020. We scaled the international business from $3 million in revenue in 2020 to over $60 million in fiscal year 2023. In addition, we continue to invest in our machine learning-based AI, which is fueling marketplace gross margin expansion. When we went public in the middle of 2021, our marketplace gross margin was in the 24% range, and we ended Q1 of this year at 32%. Improving our scale in revenue and gross profit dollars provides a clear path to profitability. Coupled with those investments, we remain committed to delivering improving operating leverage each quarter, which James will discuss in more detail.

I'm proud of the collective efforts of our team worldwide. Our continued strong growth demonstrates the significant strides we're making to digitize manufacturing supply chains. I'll now turn the call over to James for a more detailed review of Q1 and our business outlook.

James Miln: Thanks, Randy, and good morning, everyone. As Randy mentioned, Q1 revenue increased 16% year-over-year to $123 million, driven by strong marketplace growth. Q1 Marketplace revenue was $107 million and supplier services revenue was $15.5 million. Q1 Marketplace revenue increased 24% year-over-year and was stronger than expected as large order activity improved from the early soft start in January, which we discussed on our Q4 2023 earnings call. Q1 active buyers increased 32% year-over-year to 58,504 with a net addition of 3,179 active buyers. Q1 Marketplace revenue per active buyer decreased 6% year-over-year, primarily due to the impact of a soft start for larger orders in the quarter. The number of accounts with last 12-month spend of at least $50,000 on our platform increased 25% year-over-year to 1,381, with 50 net new accounts as we continue to deepen our relationships with our customers across many end markets.

Supplier services revenue declined 17% year-over-year in Q1, primarily driven by the discontinuation of the sales of tools and materials in the U.S. As Randy mentioned, we are modernizing the Thomas advertising platform and are now testing new self-serve advertising tools for suppliers. The number of active paying suppliers for Q1 2024 was 7,159 on a trailing 12-month basis, a decrease of 6% year-over-year. Excluding the impact of the exit of the tools and materials business, active paying suppliers was down approximately 2% year-over-year. Q1 gross profit was $47.9 million, an increase of 22% year-over-year, with gross margin of 39.0%. Q1 gross margin for Marketplace was a record 32.0%, up 320 basis points year-over-year. Q1 Marketplace gross profit dollars increased 37% year-over-year.

We are focused on driving marketplace gross profit dollar growth through the combination of top line growth and gross margin expansion. Q1 gross margin for Supplier Services was 87.9%, driven by the high gross margin of Thomas marketing and advertising services. Supplier Services gross margin increased more than 10 percentage points year-over-year due to the discontinuation of the sale of tools and materials, which carried a significantly lower gross margin. Moving on to Q1 operating costs. Q1 total non-GAAP operating expenses increased 9% year-over-year to $55.5 million. Within our operating expenses, sales and marketing is our largest component. In Q1, non-GAAP sales and marketing expenses increased 21% to $24.9 million as compared to $20.6 million in Q1 2023.

This increase was driven by the hiring of additional salespeople to support enterprise and international growth. Q1 advertising spend increased 2% year-over-year to $8.3 million or 7.8% of marketplace revenue, down 160 basis points from 9.4% a year ago as we maintained discipline on advertising efficiency. Q1 adjusted EBITDA loss was $7.5 million or 6.1% of revenue compared with 11.2% of revenue in Q1 2023. Q1 adjusted EBITDA loss improved $4.3 million year-over-year or 37% driven by growth in revenue and gross profit. At the end of the first quarter, cash and cash equivalents and marketable securities were $254 million. Before moving to our guidance, I'd like to share my early thoughts on Xometry and our path to profitability. Since joining cometary 2 months ago, I have been able to dive deep into our business and discover some of the customer stories that drive our 58,000-plus buyers to transact on our leading global marketplace.

In a massive structural change for our industry, our AI-powered Instant Quoting Engine provides real-time instant pricing and lead times for our buyers as it matches them with the optimal supplier. As we scale our networks of buyers and suppliers, our machine learning AI gets smarter, delivering more efficient pricing and improving gross margin to Xometry. Our teams are dedicated and hard-working and passionate about the customers and markets we serve. The market opportunity is very large, reinforcing our goal of driving compounding growth for many years to come. As we work to realize our long-term potential, I'm going to leverage my prior finance and operating experience to apply stronger discipline and rigor to our capital and resource allocation across sales and marketing, operations, product development and G&A.

As we continue to scale our revenue and gross profit, we believe that we can reach adjusted EBITDA breakeven as we surpassed an approximately $600 million annual revenue run rate. At that level, targeting a gross margin of 38% to 40%, we believe that there is room for growth investments while improving our operating expense efficiencies -- as we scale the business above the $600 million level rate, we would expect a healthy flow-through of incremental margin. Entering 2024, we continue to invest in our sales team and international growth, coupled with the inflationary impact on overall costs, operating expenses increased approximately $3.6 million quarter-over-quarter. We believe that we can drive a healthy return from these investments and have also identified efficiency opportunities.

For example, in Supplier Services, we expect an approximately $1 million a quarter improvement in the second half of 2024 from the first half of 2024, driven by further optimization of operating costs. Now moving on to guidance. We expect Q2 2024 revenue in the range of $127 million to $129 million, representing year-over-year growth of 14% to 16% or 15% to 17% adjusting for the discontinuation of the sale of tools and materials. We expect Q2 marketplace growth to be approximately 20% year-over-year. We remain focused on our growth initiatives despite an uncertain manufacturing environment. We expect Q2 supplier services to be down approximately 15% year-over-year, primarily due to the exit of the tools and materials business in May 2023. In Q2, we expect adjusted EBITDA loss to be in the range of $6 million to $8 million and adjusted EBITDA margin of negative 4.7% to negative 6.2%, improving from a loss of $8.7 million and 7.8% of revenue in Q2 2023.

-- in Q2, we expect stock-based compensation expense to be approximately $7 million to $8 million or approximately 5% to 6% of revenue. For 2024, we continue to expect marketplace growth of at least 20% year-over-year and expect supplier services to be down approximately 10% year-over-year. We expect to continue to improve our year-over-year profitability through 2024, driven by operating leverage. Since underlying marketplace metrics are healthy, we're going to continue to execute on our strong road map of initiatives outlined earlier by Randy. With that, operator, can you please open up the call for questions...

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