Shapeways Holdings, Inc.
Q2 2022 Earnings Call Transcript

Published: 12 Aug 2022

[Operator:]

Good day and welcome to the Shapeways Second Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the call over to Ms. Nikki Sacks. Please go ahead.

[Nikki Sacks:]

Greetings and welcome to Shapeways second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, this conference is being recorded. Before we get started, I'd like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, 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 fact, should be deemed to be forward-looking statements. Our forward-looking statements, including without limitation statements regarding our business strategy, future financial and operating performance, projected financial results for the third quarter of 2022, expected growth, impact of recent acquisitions, new offerings and market opportunity are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by those forward-looking statements. Accordingly, you should not place undue reliance on these statements. For description of the risks and uncertainties associated with our business, please see the company's SEC filings, including the company's quarterly report on Form 10-Q for the quarter ended June 30th, 2022. The information provided in this conference call speaks only to the broadcast today, August 12th, 2022. Shapeways describes any obligations except as required by law to update or revise forward-looking statements. Also, during the course of today's call, we’ll refer to adjusted EBITDA which is non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close today, which can be found on our website, shapeways.com. On the call today, are Greg Kress, Chief Executive Officer; Jennifer Walsh, Chief Financial Officer. And now I would like to turn the call over to Greg. Greg?

[Greg Kress:]

Good morning, everyone. Thanks for joining us to discuss Shapeways Q2 2020 financial results and progress during the quarter. I'll begin by providing a business update and share the progress that we have made with regard to our strategic growth plan. Jennifer Walsh, our CFO, will then discuss our second quarter financial results and outlook for the third quarter. There is a tremendous opportunity in the $40 billion digital manufacturing market and we believe Shapeways is ideally positioned to capture share of this expanding market. We combine high-quality, flexible on-demand manufacturing with purpose-built proprietary software that enables our customers to rapidly transform digital designs into physical products. We are helping to modernize manufacturing for our customers and drive efficiencies across the supply chain as we help accelerate the digitization of manufacturing across a broad network of suppliers and buyers. In the second quarter, we continue to make tangible progress on each of our four key growth initiatives, which include

[Jennifer Walsh:]

Thanks, Greg. I'll provide a recap of our second quarter 2022 performance, give an update on our balance sheet position, and provide guidance for the third quarter. In the second quarter, revenue was $8.4 million, compared to $8.8 million in the prior year, in line with our expectations. The change was partially due to the shift in our growth focus towards middle market and enterprise opportunities, which have longer sales cycles than our historical self-service business. We continue to prioritize our resources and spend towards growing this aspect of the business and we anticipate starting to benefit from the conversion of our pipeline, as we move through the balance of the year and beyond. Our gross margins in the second quarter were 43%, compared to 49% in the second quarter of 2021. We continue to deliver top-tier gross margins, and the year-over-year change was primarily due to the continued ramping of recently deployed new technologies, and a more varied product mix, along with the impact of lower revenue. Second quarter adjusted EBITDA was a loss of $4.3 million, compared to a gain of $0.3 million in the second quarter of last year. SG&A expenses for the second quarter were $6.8 million, compared to $3.2 million in the prior year. These results reflect additional investment in personnel, higher marketing spend, expenses related to the acquisitions of linear AMS, MFG and makers, and other expenses to drive our future growth. We also saw an increase in professional fees and other spending related to being a publicly traded company. Turning to our balance sheet, as of June 30, 2022, our cash and cash equivalents totaled $50.4 million. During the quarter, we deployed approximately $9 million into our growth strategies, primarily related to the acquisitions previously discussed. We are comfortable with our liquidity position and in our ability to fund our operations. We believe the continued strength of our balance sheet provides us with the necessary funds to make targeted investments to execute on our growth initiatives, including the purchase of additional hardware, the continued expansion of our sales team, and executing potential acquisitions that align with our strategic plan. Additionally, with the acquisition of Linear AMS, we added manufacturing facilities in Michigan. We are excited to own these large modern facilities that are well located to serve customers across the country. Consistent with the broader global economy, we expect to face inflationary pressures, supply chain challenges and geopolitical ones. But we are proactively working to mitigate the potential effects and these forces have not had a material impact on our results to date. Looking ahead, for the third quarter of 2022, we anticipate revenue to be in the range of $8.3 million, and $8.6 million. As we continue to invest in new hardware and our go-to-market initiatives, and as we integrate and find gross margin opportunities within our recent acquisitions. We anticipate some continued near-term impact on our gross margin. We continue to expect a ramp of sales in the future from our investments in new technologies and materials, an increase in business development resources, the continued rollout of our auto SaaS offering and the impact of recent acquisitions. This completes our prepared remarks. We will now open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] First question comes from Jim Ricchiuti of Needham Company. Please go ahead.

[Jim Ricchiuti:]

Thank you. Good morning. Wanted to ask you, as we think about the next couple of quarters and we look at the acquisitions that you've made and some of the go-to-market initiatives, what I'm wondering is which of these have the potential at least over the near term to have are greater impact on your overall strategy and perhaps the near-term financials?

[Greg Kress:]

Thanks for the question, Jim. It's good to hear from you. I think if we take a step back, there's four things that we're focused on, right? And I can talk about each one of them a little individually. First is the additive manufacturing expansion that we've done. The second is, our go-to-market expansion and this is really the focus on building out basic outbound sales resources for real business development needs from an enterprise customer. There's also the traditional manufacturing projects that we have where we want to expand our scope to offer more services to our installed base customer, but also new customers and then commercializing our software. And I think one of the things that we are gaining some momentum on is, obviously, the transactions that we did from an M&A perspective in Q2, accelerated all four of those growth initiatives. It allowed us to expand the capabilities from a hardware perspective. On the additive side, it allowed us to expand our go-to-market strategy where we brought on some additional business development resources, customers and logos that better align with the enterprise needs or enterprise focus that we have. MFG gave us an incredible supply chain that can help support us on the traditional side. And then we continue to make really good progress on the software. And on commercializing the software, MFG and MakerOS have filled key gaps that were kind of in our product roadmap and allowed us to pull things forward quite a bit and ultimately get us to, I would say, commercialization of that product faster. And so, I think there's -- I don't have one specific answer on which one I think is going to deliver the most results in the short term. I will say the, sales go-to-market expansion that we've been focused on has been a really -- we've developed an incredible pipeline. Now converting that pipeline into actual sales, I think it's taken a lot longer than we had originally expected, specifically because our historic business model has been the self-service model. And that self-service model has a very on-demand aspect to it where we transition a customer into sales into revenue very quickly. And so, as we've deployed outbound sales resources focused on enterprise clients, the qualification process of parts and ultimately getting to executed POs and sales orders is just taking longer than we expect. With that being said, we're very excited about the progress that we're making. And I think we have a lot of opportunities in front of us. And so, I think there's opportunities across all of them, but if I was going to call out one for the most near term I think it's the work that we've been doing for the last six to nine months on building those sales opportunities that I think we're going to start to reap some of the rewards from that.

[Jim Ricchiuti:]

Got it. Now as in one to call out. Great. Just on the -- you clearly made quite a bit of progress on adding new technologies on the additive side, both metals and then expanding HP. How -- on the metals initiative, I would assume that is -- has -- it takes a little longer to see traction there, or do you anticipate some initial impact from that, whether it's from new customers or existing?

[Greg Kress:]

No. I think there is some near-term impact that we can see from those products. I would say that we've deployed several different types of technologies and materials to support our metal offering. And I think each one of them are kind of a different phase of rollout and maturity even from a technology perspective. And as I think the more mature pieces of those technology has some very near-term opportunities where those printers are all running in our facilities today with customer orders and them. So we're making good progress. Now getting them to capacity and deploying more assets, I think we'll do that as we start to see volume come in for them. But I think there is some short-term benefits that we're going to see in the back half of the year, specifically for those machines.

[Jim Ricchiuti:]

Got it. One more and I'll jump back in the queue. Jennifer, just a question for you. Is there any way we should -- any way we could think about your operating expense on a go-forward basis just given some of the growth investments, some of the acquisitions and the go-to-market strategy?

[Jennifer Walsh:]

Thanks, Jim. So I think you can expect operating expenses to be relatively in line with what you're seeing in Q2. We are doing some hiring, but we've also responded to the broader market, just like many other companies. So we've started pulling back on our hiring plans a bit in order to really preserve and maximize cash. So, we are continuing to hire, but we just aren't hiring at the clip that we had predicted when we originally budgeted the year. So with all that, in mind, I would -- again, the short answer is I would anticipate a bit of an uptick in the future quarters, but not a huge jump.

[Jim Ricchiuti:]

Got it. Thank you.

[Operator:]

Thank you. Our next question will be from Greg Palm of Craig-Hallum. Please go ahead.

[Greg Palm:]

Yes. Good morning. Thanks for taking the questions here. I wanted to just dig in the pipeline a little bit more curious what types of new customers are you seeing, whether it's certain end markets for? Maybe a little bit detail on the pipeline.

[Greg Kress:]

Yes. Hey, Greg, great to hear from you. I think the -- if we were to talk a little bit more about the pipeline, our strategy was to go after some specific verticals across industrial applications aerospace, medical and automotive. And what we've seen so far, and we've built the team around that, right? And so as we went out and brought in sales development resources, we broaden people with specific domain expertise across those verticals. And what we're finding is, we're seeing success in each one of those verticals. I think the one challenge that we do have in this space is that a lot of our enterprise level customers don't necessarily want to be mentioned under -- because of NDA requirements and things like that. But I will say, these are enterprise-level customers, Fortune 500 real end-use applications with significant opportunities in front of each one of them. And so, when I look at those customer applications, I know we highlighted Microsoft in our prepared words, but the Microsoft is a really good example, right? We went out and we helped them build technology for a configurator. We created a digital inventory platform with them. They'll be deploying that program in Q3 globally, and we'll be doing all of the production work associated with it in the next probably year. And so these are sizable opportunities on very big programs with companies. And again, I think the buying cycle and the work we get there is longer than we had expected. But I think the fruits of all the hard work that we've done, we will see benefits from that in the back half of the year and into next year as we start to convert that pipeline into sale.

[Greg Palm:]

No. That's good. And I mean, are these pipeline of these enterprise customers? Would you characterize them as potential competitive wins, or are these mostly customers that are using traditional processes and you're trying to convert them over to additive?

[Greg Kress:]

It's some of both. I would say there's – our strategy remains the same. We're not going to win at all costs from a pricing perspective, and I think that is reflected in our gross margin profile for the business. And so we're still capturing very good gross margin for these enterprise customers. And so we will be competitive, but not competitive at all costs. We want to maintain a highly differentiated position because we feel we have a superior quality and delivery than others in the market. The second is, there are some very interesting applications that we're working on with customers, where they are transitioning things that typically would go through a more traditional process into additive. And I think it's -- those programs obviously last are the longest because it takes quite a while for the redesign process and qualification of parts and then ultimately doing the switch over but we are seeing both of those applications.

[Greg Palm:]

Okay. And then, I guess, excluding the new customer pipeline, I want to tie this question back to your overall strategy because presumably, you've got core customers as it is that have some sort of wallet spend, you're getting some of that today, but now you're broadening your offering, you've got software, you've got – you've got traditional processes, you're broadening additive. I'm just kind of curious if you think about cross-selling some of these new initiatives into your current customer base and how that could play out and be a growth opportunity as well?

[Greg Kress:]

Yes. We completely agree with you. I think one of the reasons why we moved forward with MFG is because it provides us with a substantial established supply chain, of thousands of suppliers with hundreds of different capabilities that we didn't have before. And it's an outsourced model, but these are also more commoditized manufacturing processes that are included in that traditional bucket. And as part of our strategy, and we've talked about this in the past, we have not been -- we're not incredibly interested in scaling commoditized manufacturing processes internally. We'd rather use the excess capacity that's out there in the market because if it's commoditized, they're not highly differentiated, that we should be able to leverage the capacity of the system versus additive, where we see ourselves as highly differentiated because, one, we can get achieved higher gross margins because of our processes and software platform that we leverage to manufacture, but it's also really hard, right? And getting high-quality as industrial rate add and manufacturing at scale is not something easily accomplished. And so we feel really good about investment there. But I agree with you. I think we can start to expand our share of wallet. Now with that being said, we closed the MFG transaction mid-Q2. And so, as we think about the integration of that, we have basically a post-merger integration process that we're going through with the asset today. And we're kind of stepping our way through it. And we want to make sure that we're building off of a strong foundation before we go deploy too quickly. And so -- but I think you will see more of that in the back half of the year in 2022.

[Greg Palm:]

Okay. Good, all right, best of luck. Thanks.

[Greg Kress:]

Yes. Thanks

[Operator:]

Thank you. Our next question will be from Jacob Stephan, Lake Street Capital Markets. Please go ahead sir.

[Jacob Stephan:]

Yeah. Hey. Thanks for taking my questions. I just want to focus on the metal side of the business. Could you talk about your rollout with Desktop Metal, Kind of give us a progress report on that, and then, also just kind of ExOne, EOS and GE work together to make a full product offering?

[Jennifer Walsh:]

Yeah. Yes. Thanks for the question. It's good to hear from you. The -- if we think about our metal strategy, we still have gaps today just to be complete, right? There's -- we don't have necessarily a comprehensive metal offering today, but we're working closer and closer to that over time. To speak to your first question, we have started with desktop. And we spoke quite a bit about that in Q1, and we've deployed a handful of assets in both our Long Island City facility and on oven facilities. And those are assets that are -- we're starting to see good progress with. I think our reprint rates are dropping significantly the economics of those machines look better. And now we're working with our business development team and with desktop metal itself on some of some commercial opportunities that can help to really drive some volume on those machines. We also have several other machines planned for in the -- probably the next 12 to 18 months that we would like to focus on that was part of the initial order that we had placed with desktop metal. And so we haven't deployed those machines that were ordered and purchased, but we will be seeing more of that, I think, over the next 12 to 18 months. Now on the GE and the EOS side, this is more precision industrial metal manufacturing. And we're using this in several different use cases, specifically with enterprise customers. And I think there's a lot of potential here. And obviously, with the linear AMS acquisition, they have deep relationships with injection molding customers. And those customers are servicing big enterprise-level customers in the automotive and consumer space. And with additive manufacturing, you can dramatically improve some of the economics of the injection molding process through conformal cooling of molds and improving tooling and things like that associated with process. And we're seeing a lot of applications in that space today. So I think we're making very good progress. And I think I'm very excited to see how the operations team has driven improvements in the economics of that -- those, equipment and have high expectations for where they will go in the next 12 to 18 months.

[Jacob Stephan:]

Okay. Got it. And maybe just looking at your software rollout, what inning are and kind of what needs to be added yet to get the full offering?

[Greg Kress:]

Yes. Yes, I think we're still in the early innings of our software, but I have a pretty bold ambition of where we wanted to get. With that said, we had a great base to start off of, right? Shapeways has used our own internal software as a big differentiator for a long time. We've produced over 23 million unique parts through this end-to-end software platform at great gross margin and incredible KPIs. And so, I think that's the basis for us rolling it out to a broader audience. But I will say, I'm really impressed with the progress we've made to date. I think the two acquisitions that we did were incredibly strategic and they were able to accelerate the road map that we had in place. And we had talked originally about this phase one rollout, and we're making -- we're right on track with that. I feel like phase one, first half of the year, we hit a lot of the milestones that we wanted to hit. And with the acquisitions, there's still some unification that we want to do on the platform side. But we'll do that. We're doing that in that’s in process now in Q3. As we think about phase two, that was always planned for the second half of the year. And so, we've now moved into the phase two from a software development and product perspective, where we'll start to focus more on some of the manufacturing tools for an individual manufacturer to use. And I think the last thing I would note here is, with the MSG opportunity, it provides us with a significant base of customers or manufacturers that could use our software that have already taken the first steps to start to digitize. By moving on to MSG, there is -- I'll let you check out the site, but there's thousands and thousands of small manufacturers that are using that platform to manage and gain RFQs that is a very thoughtful customer base, lead base for us to go and deploy our software too. And so, I think, we have a very creative way of rolling out our software. And I think we've acquired the lead base of customers to make that very productive. And so, we're really excited about where this goes. But, again, we have a very bold vision of where we can take software over the next 24 months. But we're still in the very early phases of that and I have high expectations of where it will take us.

[Jacob Stephan:]

Okay, great. Thanks for the color. I'll follow up off-line.

[Operator:]

Thank you. Our next question will be from the Noelle Dilts of Stifel. Please, go ahead.

[Noelle Dilts:]

Hi, guys. Good morning. In your press release, I know you mentioned that first half cash flow, cash usage should not be viewed as a sort of an indicator for the back half. So I was hoping you could just comment on how you're thinking about your internal needs for cash and then also how the M&A pipeline is looking and how you're thinking about that at the moment? Thanks.

[Greg Kress:]

Yes, of course. Hey, great to hear from you. I think a couple of things. I think we noted previously and even in this call maybe already that, our operating in normalized, maybe cash burn is more like $4 million to $5 million a quarter. And as we look at the – some of the cash burn that we saw in the first half of the year, it was primarily driven by the desktop metal purchase obligation and then also the M&A that we quickly moved on to fill some of the gaps of our growth strategy. And so – we have – that's kind of behind us. And I think moving forward we'll have more of a normalized cash burn. With that being said, we're still looking at investments in a lot of different areas where there's good opportunity, and can commercial use, or commercial need on CapEx, we will lean into that, which that could drive some cash. And then also from an M&A perspective, we continue to look at the market very strategically of like where can we acquire assets or other businesses that would be a better return for our investors and shareholders. And so as we see that, we'll be pursuing it. I will say, there's a great pipeline, and I would love to access, but we also want to be very sensitive to the cash balance of the business. And we want to operate the business in a way that we feel like we're protecting it with the cash balance that we have. So we will be – make sure that we're using very good prudence and not necessarily overextending ourselves.

[Noelle Dilts:]

Okay. Great. And then now, given that we're kind of in mid-August, I was just curious as through the course of the second quarter and into the third, if you've seen any kind of significant monthly trends or acceleration, deceleration anything notable that we should be thinking about? Thanks.

[Greg Kress:]

Yeah. I think one thing I would say is, from a monthly perspective, it's kind of hard to jump to any conclusion, just because of the mix of products that flow into our business. With that mix of products sale, they also have a different manufacturing with cycle. So depending on how we deliver it to customers. But with that being said, the – I think the guidance that we're providing, we feel comfortable with providing that guidance from a revenue perspective for the quarter. And so I don't think, there's – I wouldn't jump to any – we try not to jump to any early indicators on – on monthly performance, knowing that, there's so much choppiness between the months, just with delivery of large orders to customers that may have a time line associated with it. And so like I think that, there's really nothing to call out specifically there, but we do feel comfortable with the guidance that we provided on the revenue side.

[Noelle Dilts:]

Okay. Thanks.

[Operator:]

Thank you. This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Greg Kress for closing remarks. Please go ahead.

[Greg Kress:]

Thank you. On behalf of Shapeways and the entire team, I just want to thank everyone for taking the time today joining the call. We look forward to providing additional updates in the coming months. And if you guys have any additional follow-ups, or calls that you'd like to schedule, please let us know. We'd love to jump on the call and talk with you. Thank you.

[Operator:]

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.