Q1 2024 Markforged Holding Corp Earnings Call

Participants

Austin Bohlig; IR; Markforged Holding Corp.

Shai Terem; President and CEO; Markforged Holding Corp.

Assaf Zipori; Acting CFO, SVP of Strategy; Markforged Holding Corp.

Greg Palm; Analyst; Craig-Hallum Holdings, LLC

Brian Drab; Analyst; William Blair & Company

Troy Jensen; Analyst; Lake Street Capital Markets

Presentation

Operator

Hello, and welcome to the mark for the first quarter 2024 earnings conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Austin Blake, Director of Investor Relations.

Austin Bohlig

Please go ahead that afternoon. I'm often bowling Director of Investor Relations, Mark board Holding Corp. Welcome to our first quarter of 2024 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 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, May eighth, 2024 and are subject to material risks and uncertainties that could cause actual results to differ materially. Marfrig 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's a reconciliation schedule showing 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 norbord.com. I'll now turn the call over to Sharon <unk>, President and CEO of Marfrig.

Shai Terem

Thank you, Austin, and thank you, everyone, for joining us on our Q1 2024 earnings call. We started 2024 with strong execution, setting a solid foundation for the year ahead while the CapEx environment remained challenging in Q1, the market response to our new product has been very encouraging, and we're optimistic about the opportunities this product will bring in the second half with the FX, then FX, 20 x 100 and digital source. We believe we are positioned for growth as we drive the adoption of additive manufacturing on the factory floor to increase efficiency, reduce cost and improve supply chain resiliency.
Wanted to begin by providing an update on the patent lawsuit. It continues composites. In April 2023, the court eliminated 20 of the 22 patent infringement claims made against SmartForce last month, a jury found that Mark Ford had infringed on one of the two remaining claims and awarded monetary damages in the amount of $17.3 million. We strongly disagree with this verdict and intend to seek to overturn the verdict in post-trial motions with the District Court for exploring all available options, including seeking to overturn the result in judgment through the appeals process.
We continue to believe that there is a massive opportunity to help manufacturers bring industrial production to the point of need with effective cost controls, prudent cash management and new innovative product line remain focused and excited about the future of the Company and our ability to continue to drive the adoption of additive manufacturing on the factory floor. We reached a pivotal milestone in Q1 by shipping the first FX. 10 units, which is Mark forge next-generation 3D printer for the factory floor extend delivers high print quality print speeds that are nearly twice as fast and print sites that are up to twice as large compared to its predecessor.
Thanks, Evan. Initial market feedback has been encouraging. Customers are already printing mission critical parts for the factory floor. In fact, Toyota is one of our first customers accelerating part production were joint application or their assembly line with us extend as we enter Q2, our FX and pipeline continues to grow, and we remain on plan to accelerate deliveries in the coming quarters as we continue to scale up production. We believe the extent meaningfully announces additional towards our massive opportunity on the factory floor manufacturers need reduce cost and build more resilient.
Supply chains remain a secular tailwind, driving demand for the data for our customers across the world increasingly recognize the digital forge as a powerful platform to achieve is goals and more our restaurant design and engineering customer specializing in additive manufacturing provides another example of mark forge on the factory floor. Our stance needed a solution to produce customized, lightweight and strong vacuum 3PAR's for collaborative robots and that automation reduction needs only with the data affords could harvest, hence meet the collateral and impact strength. These parts required for certification with the combination of Onyx and carbon fiber reinforcement.
Our stance reduced the gripper weight 80% while improving strength and reducing delivery times from two weeks to two days compared to conventional mission papers, of course, then turned to the FX. 20 when they needed to print larger tools such as customized scrapers for pelletizing and heavy peak and carry tools for large industrial robots, we believe growing demand for industrial automation technologies is a robust tailwind for Reducer Forge. A similar robotic applications continue to spread across the factory floor.
Looking ahead, currently, we remain on plan to achieve the 2024 targets we laid out at the beginning of the year. We believe we are positioned for growth in the second half of 2024, driven by our new product robust fleet utilization and improving efficiencies in our go-to-market operations. With that, I now turn the call over to Assaf Zipori, our CFO, will offer more details on our financial performance and guidance for the remainder of the year.

Assaf Zipori

Thank you, Shai, and good evening, everyone. I will be covering our financial results for the first quarter of 2024 and the outlook for the full year. 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. Revenue for Q1 was $20.5 million, which is 15% down from the first quarter of 2023. Our revenue performance was largely driven by lower system revenue, which continues to be impacted by a challenging macroeconomic environment with high interest rates. That said, utilization rates remained healthy in the quarter. Consumable revenues were essentially flat year over year. And furthermore, we are pleased with the adoption rate of our subscription based software and services with revenue growing 18% year over year.
The first quarter gross margin for the quarter was 51.3%, representing 1.8 percentage point increase from Q4 and up two points from the first quarter of 2023 is margin expansion was positively impacted by operational efficiencies and product mix. 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 $24.1 million in the first quarter of 2024, down from $26.7 million in the first quarter of 2023. This improvement is a result of our ongoing efforts to reduce operating expenses and optimize our cash utilization. We expect our operational efficiencies to further lower our quarterly OpEx run rate in 2024.
Furthermore, we continue to take actions to lower our OpEx in 2025. Operating loss was $13.5 million for the first quarter of 2024, an improvement from $14.8 million in the first quarter of 2023. Net loss in the first quarter of 2024 was $12.2 million, an improvement from a loss of $13.3 million in Q1 2023. Q1 loss per share was $0.06 based on our weighted average shares outstanding for the quarter of $199.3 million, driven by improving operational and working capital efficiencies. Our net cash used in operating activities in Q1 was $7.4 million. This is an improvement of approximately 52% from the first quarter of 2023. While we expect our cash utilization to increase in Q2 as a result of annual compensation payout, we expect our cash utilization to improve in 2024 as a result of higher revenue gross margin expansion, strong OpEx controls and working capital efficiencies.
Our cash and cash equivalents, we are at $107.9 million at the end of Q1, down from $8.9 million from the end of Q4 2023. We also want to provide the financial impact related to the continuous composite lawsuit verdict in Q1 2024. First we strongly disagree with this verdict, and we are actively exploring all possible options to overturn the verdict.
In Q1 2024, we accrued a GAAP expense of $17.3 million to reflect the judgment awarded by the jury. This is excluded from our non-GAAP results. No cash payment has been made at this point. Given the nature of this ongoing dispute we are limited in commenting on this matter beyond what we have publicly stated. Furthermore, our guidance does not reflect additional action. It continuous Composites' may take, which may include seeking additional relief through post-trial motions for royalty payments on future revenue as described in our April 12th press release.
Now moving on to our guidance, we are reiterating our 2024 guidance provided at the beginning of the year. We continue to anticipate fiscal year 2024 revenues to be within the range of $95 million to $105 million, which acknowledges the persistence of macroeconomic headwinds throughout the year. We expect revenue to grow mid-single digits quarter over quarter in Q2, and we continue to see an opportunity for accelerated growth in the second half underpinned by new products and particularly ASX. 10.
We expect gross margins to be within the range of 48% to 50% as we continue to ramp up our new product lines. We are encouraged by our strong Q1 gross margins performance and see a path to the upper end of our guidance pending our revenue performance in the second half of the year. We expect non-GAAP operating loss in the range of 42.5 to 47 million for the year, which is an improvement from a loss of 57.6 million in 2023. In turn, 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

(Operator Instructions) Greg Palm, Craig-Hallum.

Greg Palm

Yes, thanks. Good afternoon, everybody, and congrats on the initial shipments of FX. 10. Can you just give us some sense and sort of where the pipeline stands today, kind of what capacity is like and maybe a little bit more color on how you sort of see that playing out throughout the end of the year?

Shai Terem

Sure. Hi, Greg. Thank you. So I would say in the first quarter was great. We were able to ship some of this FX. Then the initial feedback from the customers is really good and strong with great customers that were able to print right out of the box very, very long print and moving parts, including Toyota, as you suggested, the pipeline is building up as expected and maybe even more as we discussed before, we expect this to be our next flagship product. And so far it's building up correctly. I would say from production perspective, it can probably take a quarter or two until the supply will meet the demand. And after that, we're going to be in the regular course of business.

Greg Palm

So theoretically, you could be kind of at a full run rate where supply matches demand by maybe Q4 this year, potentially even early?

Shai Terem

Yes, yes. Okay. And in talking to sort of what you can or can't say regarded to the patent verdict, but can you just give us some sense and what product lines are the ones affected and maybe which geographies those are comprised of? Just trying to get a sense of like what the worst-case scenario is here.

Assaf Zipori

Thank you, Greg. This is Asaf. So this is related to our hardware and more specifically, this is related to the continuous carbon fiber technology within our hardware is an IP base in the OR. The claim is related to the US and it's at this point, it's just too early to give additional indications in. I can tell you that we obviously disagree with the verdict and we are acting we're doing whatever we can to overturn the verdict and we are evaluating one of our options.

Greg Palm

Yes, understood. Okay. I will leave it there. Thanks.

Operator

Brian Drab, William Blair.

Brian Drab

Hey, thanks for taking my question. This is Tyler on for Brian. I'm just looking at your international performance, it looks like they had a pretty large year-over-year impact. Can you just explain kind of what's going on Europe and Asia?

Shai Terem

Sure. I think it's a very common, at least from my time in the industry. But you see the cycles of changes go around the world. And I think what we saw in the US and the Americas a couple of quarters ago now we see in EMEA and A-Pac, and I do believe that we're going to see the recovery soon with these regions as well based on the pipeline that we see.

Brian Drab

Okay, that's great. And the FX. 10 shipments does mostly go to existing customers and if so, when will they start to kind of be shipped out to new customers they put in orders? Thank you.

Assaf Zipori

Sure. So I would say, as usual, when we release a new product, we ship first, some of these printers to our channel partners and distribution network to make sure that we continue to create demand, bringing the printer closer to the customers to the field. So that will continue into Q2 as well. And the initial orders usually are coming from existing customers that expanding like Toyota. But there's also a lot of new customers to take the capabilities of the solution. We're expecting Q2 to see both.

Brian Drab

Okay. Thank you. I'll pass it on, and thank you.

Operator

(Operator Instructions) Troy Jensen, Lake Street Capital.

Troy Jensen

Your line is now largely gentlemen. Congrats on decent results even in a tough environment in India. And as you say, and I'm going to show you this data and digital source and traction you're getting with that? And just maybe more and customer success stories are?

Shai Terem

Sure. So we actually see great engagement around the digital source and I would say, especially around enterprise accounts, which are really looking how to change the business model there, supply chain and the new way that they're going to do MRO for their manufacturing floors as we expected. There's not going to be material revenue at the current stage, but adoption of the solution and changing of their business model into the solution. But so far, the engagement is very high and we are very encouraged around it.
We can't predict how much that pressure gets a little bit on gross margins and you guys were well above the range for the year here in Q1 and I get the FX 10 launches going to dilute it down. I mean, I would assume once FX and shipping more full volumes is probably accretive to gross margins that diluted where we are now.
So just maybe a sense on where do you think gross margins are going to be in Q2 with the FX launch or just kind of help kind of square that circle? Yes, Troy, that's a great question. We are very encouraged with the expansion that we've seen in Q1. And that's a great indication to our ability to reach our long-term target of the mid 50s.
In terms of gross margins. Now the way that we look at it at the moment is that we are still facing a tough market and we are about to release if more technologies and we are ramping up the FX, then we're going to release the PX. 100 and all of that could put pressure on our gross margins. So currently, we feel comfortable with the range that we have provided, but there's an opportunity to be closer to the upper range as we see revenue picking up in the second half of the year.
I forget about them and I can't talk much about the litigation. I see this chart so much historically, legal expense has been in the OpEx centers in storage. We're not we're not breaking it out and we'd say it's not something.

Troy Jensen

I'm just wondering is it because it's going to be what drives the 2025 on OpEx? Lower resolution has dramatically lowered G&A expense because of the lack of litigation.

Shai Terem

And you can't give color again, just yes, I think two others with your mobile phone. So I'd say there's a few more operational activities that we are doing this, what we believe is going to drive lower OpEx over time, and it has nothing to do with the litigation directing traffic will keep as cash collected on shortly. Thank you.

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 comment.

Shai Terem

Thank you very much, everyone, for joining us for the Q1 earnings call and looking forward to seeing you the next quarter. Thank you.

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.