Q4 2023 Markforged Holding Corp Earnings Call

Participants

Austin Bohlig; Director, Investor Relations; Markforged Holding Corp

Shai Terem; President, Chief Executive Officer, Director; Markforged Inc

Assaf Zipori; Chief Financial Officer; Markforged Holding Corp

Troy Jensen; Analyst; Cantor Fitzgerald

Danny Eggerich; Analyst; Craig-Hallum

Brian Drab; Analyst; William Blair

Jacob Stephan; Analyst; Lake Street Capital Markets

Presentation

Operator

Greetings and welcome to the mark for its fourth quarter 2023 earnings conference call. At this time, all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Austin Bohlig, Director of Investor Relations. Thank you, Austin, you may begin.

Austin Bohlig

Good afternoon. I'm often Board Director of Investor Relations of mark Ford Holding Corp. Welcome to our fourth 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, 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, March seventh, 2024, and are subject to material risks and uncertainties that could cause actual results to differ materially. Mark Ford's 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 also be found on our website at investors dot marfrig.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 Q4 2023 earnings call. We ended the year with a positive momentum as we continued to execute our strategy for the challenging CapEx environment of 2023. Delayed system sales were encouraged by 20% sequential revenue growth in the fourth quarter, which helped drive sales to the high end of our 2023 target range, thanks to effective cost controls.
We also exceeded our 2023 gross margin and operating cost targets. We are well positioned for growth as we drive the adoption of additive manufacturing on the factory floor to increase efficiency, reduce costs and improve supply chain resiliency with revenue growth aided by the new FX. 10 DX. 100 and digital source. Combined with the continued focus on expense control, we believe we remain on a clear path profitability.
During Q4, we saw positive momentum with many customers across the globe. One example is our expanded relationship with automation, Ally and project diamond with the sale of an additional 125 Onix Pro printers, augmenting the existing fleet of 300 printers automation early originally acquired in 2021. This win is part of a strategic partnership between project Diamond and digital source. Our on-demand platform for 3D printing OEM. certified parts.
We believe this expansion validates our secure cloud-based software capabilities that include fleet management, quality control and part validation. We are excited about the partnership with automation early and advancing our vision WERE digital source. As we enter 2024 manufacturers need to reduce costs and build more resilient. Supply chains remain a tailwind, driving demand for digital Forge. The opportunity to move maintenance, repair and operations or MRO. from physical to digital inventory and bring industrial production to the point of need provides a massive market opportunity.
Our global customers increasingly recognize that digital forge as a powerful platform for achieving these goals done on a global nutrition, Essential Dairy and Plant-Based product leader provides another great example factory. Byron is done on the leading production center in Europe, processing milk sourced from Polish farms. The products manufactured at this facility are distributed to both the domestic market and more than 20 other countries.
They Byron factory in Poland, faced supply chain disruptions, spare parts availability, challenges in equipment, maintenance issues in response done on dairy plant, turn to the digital Forge and X7 printers due to their reliability, ease of use and industrial strength parts in the 1st year by their own estimates, the nondairy plant reduced cost by 80% across 374 printed board.
As we look ahead into 2024, we expect the capital spending environment will continue to be challenging as a result of the current macroeconomic environment, including elevated interest rates. While our guidance factor in these challenges persisting through the year, we believe we're positioned for growth in the second half of 2024, driven by our new product introductions, robust fleet utilization and improving efficiencies in our go-to-market operations, innovation for the factory floor, Dr. Mark forge forward at Formnext.
In November last year, we launched three important new products FX, 10, Vega and digital source. We're excited about the strong initial demand for the FX 10, and we remain on schedule to begin shipping in the first half of this year.
With these new products alongside the FX. 20, the X. 100 and the rest of our industrial printer lineup. We enter 2024 with the strongest product portfolio in the Company's history. These new products help position us for growth in 2024 and beyond. The health of our global printing network remained robust as customers sold even more factory floor applications using our metal and advanced composite solutions.
Furthermore, we are pleased with the strong growth in subscription sales, which helped drive services revenues up 25% year over year in 2023. We believe the strong utilization rates and the resulting recurring revenue streams we'll grow in 2024. Mark forward to remain laser focused, not just on growth but also on margin expansion and achieving profitability.
We're particularly encouraged by sequential improvement in non-GAAP gross margins, which exceeded 49% in the fourth quarter, coupled with improving operational and working capital efficiencies for our 2024, we are confident we can navigate the challenging macroeconomic environment with continued prudent cash management.
Now a strong balance sheet. We strongly believe that FX. 10 x 20 DX 100 digital stores, along with the rest of our factory, proven industrial printers with critical industry needs to strengthen manufacturing resiliency and supply chains as the global capital expenditure constraints loosen, we are well positioned to realize the substantial growth opportunities that our platform provides.
Before turning the call over, I'm very pleased to announce that SIFT of the Company Acting Chief Financial Officer since May 2023 has been named Chief Financial Officer. Sis has been a key member of our executive team for over four years and has repeatedly demonstrated the business acumen and leadership to head of financial organization. I'm confident in his continued leadership to help us on our journey to profitable growth.
With that, I now turn the call over to Assaf Zipori, our CFO, who will offer more details on our financial performance and guidance for the year.

Assaf Zipori

Thank you, Shay, and good evening, everyone. Since joining Marc forged. I have been inspired by our fantastic team, the power of our technology and our mission to bring industrial production to the point of need. I am grateful for this opportunity, and I am confident in our team's ability to drive success.
With that said, I will now be covering our financial results for the fourth quarter and full year 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 non-GAAP reconciliation to assist with my commentary.
So let's begin with revenue for Q4 was $24.2 million, up 20% from Q3 2023 and down 19% from the fourth quarter of 2020 due our revenue performance was still impacted by a challenging macroeconomic environment with high interest rates.
The year-over-year decline in system sales also impacted consumable revenues that are tied to new hardware purchases. That said, we are pleased with the adoption rate of our subscription base software and services, which predominantly drove a 33% growth year over year. In the fourth quarter, total revenue was $93.8 million, which is above the midpoint of our guidance, but down from $101 million in 2022. Gross margin for the quarter was 49.5%, representing a 2% margin expansion, up from 47.5% in the fourth quarter of 2022. This margin expansion was positively impacted by product mix and operational efficiencies.
Gross margins for 2023 was 48.6%, which is above the high end of our guidance range compared to a gross margin of 50.8% in 2022. A key goal for us in 2024 is to sustain this positive momentum, scaling up our business and enhancing operational efficiencies even further.
Operating expenses were $24.9 million in the fourth quarter of 2023, down from $29.4 million in the fourth quarter of 2022. Operating expenses for the full year 2023 were $103.1 million, down from $114.3 million in 2022, representing an OpEx reduction of $11.2 million. This improvement is a result of our ongoing efforts to reduce operating expenses and optimize our cash utilization.
Operating loss was $13 million for the fourth quarter of 2023, an improvement from $15.3 million in the fourth quarter of 2022.
Our operating loss for the full year 2023 was $57.6 million, showing an improvement from a loss of $63 million in 2022. In 2023, we took multiple steps to build operating leverage and rightsize our cost structure. This effort is expected to decrease our operating expenses further to an annual run rate of between 92.5 and $95 million in 2024. Net loss in the fourth quarter of 23 was $11.6 million, an improvement from a loss of $13.3 million in Q4 2024. Our net loss for the full year 2023 was $51.2 million, an improvement from $60.1 million in 2022.
Fourth quarter loss per share was $0.06 based on our weighted average shares outstanding for the quarter of $198.4 million. Our loss per share for the full year 23 was $0.26 compared to a loss per share of $0.32 for the full year 2022, driven by improving operational and working capital efficiencies. Our net cash used in operating activities in 23 decreased by $24.6 million or approximately 33% from 2022.
Our cash, cash equivalents and short-term investments were $116.9 million at the end of the year, down by $9.1 million from the last day of the third quarter of 2023. We expect our cash utilization to continue to improve in 2024 as a result of higher revenue, modest gross margins expansion, strong OpEx, cost control and working capital efficiencies.
Before moving on to our guidance, I want to underscore our dedication to striking a balance between our capacity for successful innovation market success and our commitment to maintaining a strong balance sheet.
Now moving on to our guidance. We anticipate fiscal year 2024 revenues to be within the range of $95 million to $105 million. While our guidance acknowledges the persistence of macroeconomic headwinds throughout the year, we see an opportunity for accelerated growth in the second half of the year. Our outlook is underpinned by the introduction of new products and particularly.
In line with seasonal industry trends, we expect to see the normal mid teen sequential revenue percentage decline in the first quarter, and we expect revenue to grow modestly sequentially in Q2. And as I indicated previously, we are encouraged by our growth prospects in the second half of the year, driven by new products. We expect gross margins to be within the range of 48% to 50% as we continue to ramp up our new product lines.
We also anticipate that the expense disciplines and cost structure realignment we undertook in 2023 will continue to make a positive impact in 2024. We expect non-GAAP operating loss in the range of $42.5 million to $47 million for the year. Finally, we expect non-GAAP EPS results for the full year to be a loss in the range of 19 to $0.22 per share.
That concludes our prepared remarks today. Please open up the call for questions.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Troy Jensen, Lake Street Capital Markets (sic - Cantor Fitzgerald).

Troy Jensen

A thank you to Cantor Fitzgerald now and a business EBITDA hit. First of all, congrats guys on great results here in Q4 as seeds you too on the CFO position group of.

Shai Terem

Thank you, Eric.

Troy Jensen

Yes, I for you, I guess on two things don't hit IFX. 10. Can you just remind us pricing difference between the X7 and the FX 10 and and timing of revenues again, please?

Shai Terem

Yes. So the FX then it's slightly more expensive than the X7 eight, someone would range between the seven and the FX 20. And we are still on track to ship it in the first half of this year. And as such, to start to see the revenue ramping up starting in the first half, I think it's going to become more meaningful in the second half.

Troy Jensen

I perfectly remember the launch at Pharmexx. It was pretty impressive.
So good luck with that.
For them. And then also a digital source of I'd love to get an update. You mentioned automation, Ali, and I think there isn't any update and also kind of timing on what kind of revenue contribution from M&A.

Shai Terem

So we're actually very excited with the data source is engagement and excitement around this from a potential customers is much bigger than we expected and we are trying to work with them on how to collaborate and this it platform into their solution into their problems. But for this year, we would focus on adoption. We're going to be focusing on scale. So I think this year, we will not see material revenue contribution from the future source, but the traction is much stronger than we expected before.

Troy Jensen

But remind me just the revenue. It's certainly upfront system sales rate for people that are putting a lot of partners and then there's going to be an ongoing annuity stream are you still working out in front of all the kinks and there's a few new revenue streams from the data source?

Shai Terem

I think the first one is definitely definitely through expansion because our customers will sell the solution into their customers. So we see expansion of the adoption of our core solution. But in addition to it, we expect to see revenue from the utilization of the platform itself, and that would come in later years.

Troy Jensen

But that hasn't I think you've got obviously the floor and our collateral.

Shai Terem

Thank you, Troy.

Operator

Greg Palm, Craig-Hallum.

Danny Eggerich

Yes, thanks. This is Danny Eggerich on for Greg today. Tom, I wanted to hit on automation. Ali. I think I looked back in that original sale was around $8 million for that for those 300 printers. So I guess is it fair to say that this sale it was like around a three to $4 million contribution. And was this one of them that you mentioned last quarter that you kind of expected to hit that pushed out?

Shai Terem

And so actually not as we stated, this is 125 units of Onyx Pro. So it's a smaller than what you suggested. And the other big deals we are working on are still in play. So I think we are happy. They are still in play, but international is a great strategic partnership for us, and we are looking into serious adoption in the supply chain that support in automotive. We see serious partnership here into the adoption of the digital source. So it's a very important partnership for us, and it's going in the right direction with continuous kind of adoption across hundreds of users by now, it doesn't get any tougher.

Assaf Zipori

You'd like to chime in for a minute. And if you're asking if we have a dependency in terms of the sequential growth that you're seeing on this deal than the answer is no. We're very pleased with the growth rate sequentially that we've seen from Q3 to Q4 irrespective of this deal.

Danny Eggerich

Okay, that's that's perfect.
Tom.
I guess maybe just hit non on the broader demand environment on obviously still challenging, maybe expecting some recovery in second half, especially driven by kind of the new products. But just wondering, over the last couple of months, kind of what you've seen with sales cycles, whether you've seen them on contract at all or they're kind of staying steady just on overall kind of what you're seeing?

Shai Terem

Yes.
I think as you can see between Q4 and Q3, there's definitely an improvement. And I'm going to be cautiously optimistic here that this will continue, but it's still a challenging environment, as you stated and as other industrial companies are being challenged with it but we are razor-sharp focus on the factory floor and there is no millions of active floors out there that we can go and have a great solution for them that can help them reduce cost and build resiliency. And I think in times like this, when everyone is challenged, we have a path in there. So it's still tough, but I think it's getting slightly better.

Danny Eggerich

I'll leave it there.
Thanks.

Shai Terem

Thank you.

Assaf Zipori

Thank you.

Operator

Brian Drab, William Blair.

Brian Drab

different palette or non from Brian, thanks for taking my questions. I'll keep it quick since we have some follow-ups after this, I'm just wondering if the burning through of the high cost inventory that's associated with OpEx 20, is that going to help with margin expansion for the full year?
And where do you see the timing with that?

Operator

Thank you.

Assaf Zipori

It is going to help but we're very pleased with the gross margin expansion that we that you've seen in Q4 and down during 2024, we should be within the range of 48 to 50 as we ramp up the FX to 20 steel. And we also introduce the extent that we need to ramp up. So longer term, we are targeting gross margins to be within the mid 50s, but it will take us time to get there 2024. We are still under the ramp-up of the FX and FX 20. That's why we've given this guidance of 48 to 50.

Operator

Yes, it sounds good, but I'll leave it there and congrats on the quarter and talk to you soon.

Assaf Zipori

Thank you.

Shai Terem

Thank you.

Operator

Jacob Stephan, Lake Street Capital Markets.

Jacob Stephan

Yes, thanks for taking the questions and congrats on the official announcement. Maybe just to start out you know, could you talk a little bit about the FX 10? Just where are you seeing the strength vertical-wise? Maybe I'll just start there.

Shai Terem

Yes, I would throw this one. So look the you probably know, but our core solution around market to an X7 is solid solution around advanced composites used in the factory floor to be jigs fixtures tools into MRO through reduced cost.
Moving to digital inventory. It's been used more and more into end-use parts with machine builders. You know, a lot of our customers need higher productivity and they need bigger parts of this advanced composites. And this is where they affect and goes into the picture. It's like an X7 on steroids with a lot of automation, a lot of functionality and with time a even more versatile on the material side. So this is the big advantage of this solution. We see great demand regiments in launching Formnext in November, and we're going to work diligently to fulfill this demand. And also the price point of this solution is very, very attractive and the value that it gets to the customer is very high so I think even in a tough CapEx environment, it will be an attractive solution that we believe will be able to increase materially the growth of our total revenue with IT solutions.

Jacob Stephan

Okay, got it. And maybe just touch on, obviously, subscription services growth was strong year over year, but maybe kind of what's driving the strength. Is that further adoption by you know a customer like automation, Ali, or maybe could you just kind of talk about what the where the strength lies in growing subscriptions are?

Shai Terem

So I think there are two drivers the first one, if you remember, I think a couple of years ago, we transitioned our solution to subscription based solution that is given higher volume to our customers and for multiple years, and we start to see the effect of this because more and more of our customers are choosing to go into real partnership with us into multiple multiple years. And with that they are choosing to subscribe to the full solution.
Second, as we've gone deeper and deeper into the manufacturing for our customers require this level of service, this lever level of SLA. And they really need the software differentiation that we have it around the enterprise solution if it did around the simulation, et cetera. And this is where we see significant increase in the adoption. And these are sometimes multiyear contracts, which increasing our recurring revenue, which is also very important to them our path to achieve profitability.

Jacob Stephan

Understood. I'll leave it there and good luck, guys.

Shai Terem

Thank you so much.

Operator

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

Shai Terem

Thank you, very much everyone for joining us to the fourth quarter call, and we'll see you in the next one. Thank you.

Operator

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