Xometry, Inc. (NASDAQ:XMTR) Q3 2023 Earnings Call Transcript
Xometry, Inc. (NASDAQ:XMTR) Q3 2023 Earnings Call Transcript November 9, 2023
Xometry, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.14.
Operator: Good day, and thank you for standing by. Welcome to the Xometry Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Shawn Milne, VP of Investor Relations.
Shawn Milne: Good morning and thank you for joining us on Xometry Q3 2023 earnings call. Joining me are Randy Altschuler, our Chief Executive Officer; and Jim Rallo, our Chief Financial Officer. During today's call, we will review our financial results for the third quarter of 2023 and discuss our guidance for the fourth 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 subjected 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 September 30, 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 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 in 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.
Randy Altschuler: Thank you, Shawn. Good morning everyone, and thank you for joining our Q3 2023 earnings call. In Q3, we had record financial results including our highest revenue and gross profit in Xometry history, we reduced our adjusted EBITDA loss by 51% from the prior quarter on our path to profitability. Behind those strong results with record additions of active buyers and orders, and leverage and all of our operating expenses. With momentum from Q3 carrying into Q4. We are successfully executing what we set out to do in the beginning of this year. Returning to our historical marketplace revenue growth of 40% plus, expand gross margins, improve operating efficiencies, and reduced fixed costs. So we could go from a $11.8 million adjusted EBITDA loss in Q1, to potentially break even in Q4.
This positions Xometry for robust growth in full year adjusted EBITDA profitability in 2024. We continue to innovate and expand. In October, we launched Teamspace, a collaboration tool to augment our enterprise sales efforts and increase our organic buyer growth. Additionally, today we announced a new exciting partnership with Google Cloud to leverage Vertex AI to accelerate instant quoting for new markets on Xometry's AI-powered marketplace. I will outline each in more detail later in the call. Here are some of the financial highlights from Q3 and their expected impact on Q4. Let's start with revenue. We grew revenue 15% year-over-year to $119 million, driven by strong 22% year-over-year growth in marketplace revenue offset by 16% year-over-year decline in supplier services revenue, primarily due to the discontinuation of our sale of tools and materials.
Marketplace revenue included 78% year-over-year growth in our International segment, primarily in our European markets. We had forecast even more revenue growth in international in Q3, but some of that has been pushed into Q4, due to the timing of certain orders. U.S. marketplace Q3 revenue was also strong, with the highest sequential quarterly growth in the last 12 months, growing $9 million quarter-over-quarter from Q2 of this year. In both the U.S. and internationally, growth was across many customer verticals, including general manufacturing, industrial equipment, aerospace and defense. Growth remained strong in injection molding as recent investments in technology and processes are driving an expanding pipeline of business. Underlying activity in the marketplace is strong with active buyers and orders in Q3, growing over 40% year-over-year.
In Q4, we expect marketplace revenue growth in active buyer growth to converge, as quarterly revenue per active buyer remained stable year-over-year. Digital power overall marketplace growth of approximately 40% in Q4. Coupled with relatively flat quarter-over-quarter supplier services revenue. We expect overall revenue growth in Q4 in the range of 30%. Next is gross profit. Gross profit increased 13% year-over-year to $46.2 million, driven by 25% growth in marketplace gross profit. Over the last two years, we've expanded marketplace gross margins by 550 basis points. In Q4, we expect marketplace gross margins to increase sequentially quarter-over-quarter, driven by our machine learning algorithms and the growth of our network of suppliers.
Finally, is our adjusted EBITDA, as I noted earlier, in Q3 we further improved our operating leverage, reducing our adjusted EBITDA loss from Q2 by 51% or $4.4 million. This is a result of higher revenue and gross profits increased operating efficiency and cuts we've made in our fixed costs. In Q3, we balanced our advertising investments against profitability goals with advertising spend, down 7% year-over-year. Our marketplace unit economics continue to improve, driven by expanding gross margins, and increasing advertising efficiencies, partly driven by the strong growth in our SEO traffic. We reduced our cost to acquire a net new active buyer by 27% year-over-year. Powering our strong Q3 financial results and the outlook for Q4 with progress we made in different areas of our business.
Here are some of the highlights. One, after a successful pilot with several large customers in Q3, in Q4 we integrated Teamspace into the Xometry platform for all of our buyers to use. Teamspace moves the Xometry marketplace from a focus on individual buyers and parts to procurement teams managing assemblies and products. Teamspace further expands our enterprise solutions and land and expand strategy. We expect Teamspace to drive organic user growth on the marketplace and further drive advertising efficiency. The early feedback is positive. With rapid adoption including over 300 teams created since launch. Two, we continue to expand aggressively internationally, customers and orders are ramping at a solid pace in recently launched markets, including the United Kingdom.
In Q3, we had Portuguese to our European site and launched new automated inspection reports for buyers. In early Q4, Xometry Asia in collaboration with Alibaba Group's 1688.com launched our instant quoting technology on 1688 B2B wholesale marketplace mobile app. Through xometry.eu, xometry.uk and xometry.asia we have leveraged Xometry's core technology to provide localized marketplaces in 14 different languages with networks of suppliers across Europe and Asia, as well as North America. Three, we made further progress expanding our marketplace menu with new processes materials, finishes, and certifications. In Q3, we launched a new certification on the platform AS9100 which is an important quality management standard for the global aerospace industry.
This further expands our capabilities in this vertical and is particularly relevant for customers ordering flight parts. Fourth, we continue to modernize advertising products and expand self-service options on the Thomasnet platform making it easier for suppliers to start their advertising journey. In Q3, we made further investments to move to a pay-for-performance advertising model on Thomasnet.com. Five, today we announced a partnership with Google Cloud leveraging Vertex AI to help accelerate deployment of new auto quoting models within Xometry's AI-powered Instant Quoting Engine. Since our inception, we've been utilizing AI to instantly quote a growing number of categories in our marketplace. Leveraging Vertex AI, Xometry expect to accelerate the deployment of new auto quoting models.
With the data we have for hundreds of additional unique categories including many on Thomasnet, we can further grow our customer share wallet, in the giant custom manufacturing market. This partnership represents a formidable combination. Xometry is a technology company disrupting an addressable market that can be measured in multi-trillion dollars and millions of buyers. As we continue to expand the application of our AI, increase the breadth of what we can offer and grow our international footprint. We are serving more and more buyers. Likewise, as we continue to gain market share. We expect more and more suppliers to participate, accepting jobs from buyers, advertising on Thomasnet and using our work center software. Capitalizing on those trends.
We not only expect accelerating revenue growth in Q4 this year, we expect robust growth in 2024, and for many years thereafter. We went public in 2021 with the goal of driving significant shareholder value, by building a large disruptive leading technology company in one of the largest global industries. The shift to digital, which has happened in so many other industries is inevitable in custom manufacturing. We are the market leader and every day. We continue to expand our competitive moat by improving upon our proprietary pricing and matching algorithms, growing our data lake, enlarging our network of buyers and suppliers, and increasing our global footprint. Throughout 2023. Our sequential revenue growth and profitability have improved each quarter.
In Q4, we expect accelerating revenue growth of approximately 30% and the potential to be adjusted EBITDA breakeven settings Xometry app for a powerful 2024. With that I will now turn the call over to our CFO, Jim Rallo.
Jim Rallo: Thanks, Randy, and good morning everyone. As Randy mentioned, Q3 was a record revenue and gross profit quarter for Xometry and we significantly reduced our adjusted EBITDA loss quarter-over-quarter by 51%. Q3 revenue increased 15% year-over-year to $119 million, driven by strong marketplace growth Q3 marketplace revenue was $102 million in supplier services revenue was $16.5 million, reflecting the discontinuation of the sale of supplies. Q3 revenue growth, adjusting for the exit of the supplies business increased 17% year-over-year. Q3 marketplace revenue increased 22% year-over-year driven by a strong growth in the number of active buyers, partly offset by lower average revenue per buyer on a year-over-year basis.
Q3 active buyers increased 43% year-over-year to 52,467 with a record net addition of 4,173 active buyers. Our active buyer and order growth, were much stronger than our reported marketplace revenue growth rate in Q3. In Q4, we expect marketplace revenue growth, and active buyer growth to converge. As quarterly revenue per active buyer remained stable year-over-year, this will drive overall marketplace revenue growth of approximately 40% in Q4 year-over-year. In Q3, 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 the account over time.
The number of accounts with last 12 months spend of at least $50,000 on our platform reached 1,223 at the end of Q3, up 26% year-over-year. In Q3, we accelerated the growth of net new accounts with LTM spend of at least $50,000 with 64 versus 50 in Q2. Supplier services revenue declined 16% year-over-year in Q3, we discontinued the sale of supplies in the U.S. in Q2, which negatively impacted supplier services revenue by approximately $2 million year-over-year in Q3. Our core advertising and marketing services revenue remained stable in Q3 quarter-over-quarter. The number of active paying suppliers for Q3, 2023 was 7,415 on a trailing 12-month basis, a decrease of 2% year-over-year. Excluding the impact of the exit of the supplies business, active paying suppliers increased 4% year-over-year.
Active paying suppliers is the number of suppliers who have purchased one or more of our supplier services including digital marketing or financial services during the last 12 months. Q3 gross profit was $46.2 million, an increase of 13% year-over-year. Total gross profit margin was 38.9%. Q3 gross margin for marketplace was 31.1%, up 70 basis points year-over-year. Q3 marketplace gross profit dollars increased 25% year-over-year. We are focused on driving marketplace gross profit dollar growth. In Q3, incremental marketplace gross margin was 34% year-over-year providing further visibility to our long-term gross margin expectations of 35% to 40%. We expect marketplace gross margin to expand sequentially from Q3 to Q4. Q3 gross margin for supplier services was an all-time high of 87.2% driven by the high gross margin of Thomas Marketing and advertising services and growing financial services.
Supplier services gross margin increased 740 basis points quarter-over-quarter due to the discontinuation of the sales of supplies, which carried a significant lower gross margin. Moving onto Q3 operating costs. Q3 total non-GAAP operating expenses increased 6% year-over-year to $50.5 million. Q3 non-GAAP operating expenses declined $2 million quarter-over-quarter reflecting the full quarter impact of the 4% reduction in workforce and consolidation of office space, we announced in Q2, 2023. Additionally based on our cost savings and operating efficiency initiatives. We are seeing improving profitability in our Thomas Advertising and marketing services business. Within our operating expenses, sales and marketing is our largest component. In Q3, non-GAAP sales and marketing expenses increased 9% to $21.2 million, as compared to $19.5 million in Q3, 2022.
This increase in non-GAAP sales and marketing expense on a year-over-year basis, was driven by hiring of additional salespeople to support growth in our land and expand strategy. We delivered record growth in new-net active buyers in Q3, leveraging increasing brand awareness and efficient marketing. Q3 advertising spend decreased 7% year-over-year as we continue to balance growth and profitability goals. Q3 adjusted EBITDA loss was $4.2 million or 3.5% of revenue, compared with 6.3% of revenue in Q3, 2022. Turning to segment reporting. In Q3, revenue from our U.S. and international operating segments was $103 million and $15.5 million respectively. As Randy mentioned earlier, we saw strong order growth in Europe, we had forecast even more European revenue growth in Q3, but some of that has been pushed into Q4, due to the timing of certain orders.
We therefore expect particularly strong quarter-over-quarter international revenue growth in Q4. Segment loss from our U.S. and international operating segments for Q3 was $7.9 million and $4.1 million respectively. At the end of the third quarter, cash and cash equivalents and marketable securities were $276.8 million. Now moving on to guidance. We are widening our revenue and adjusted EBITDA guidance range, slightly given the rapid growth and increasing size of our business. In particular for revenue. Our range encompasses the recent strengthening of the U.S. dollar, which creates a potential incremental headwind in Q4 revenue versus our prior guidance on a spot basis. We expect Q4, 2023, revenue in the range of $126 million to $130 million, representing year-over-year growth of 28% to 32%.
We expect marketplace revenue growth to accelerate in Q4 on a year-over-year basis to the 40% range. As previously mentioned in Q4, we expect our marketplace revenue growth to largely converge with the active buyer growth rates that we have consistently delivered this year. In Q4, we expect adjusted EBITDA to be in the range of breakeven to a loss of $2 million. Q4 adjusted EBITDA loss will be lower quarter-over-quarter driven by sequential growth in marketplace revenue improving marketplace gross profit, increased operating efficiency, and further measures to tighten operating expenses. We are continuing to invest in key growth initiatives, including enterprise sales and international. In Q4, we expect stock-based compensation expense to be approximately $5 million to $6 million, which we will exclude from adjusted EBITDA.
With that operator, can you please open up the call for questions.
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