Good day, and thank you for standing by. And welcome to the Xometry's Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions]. Please be advice that today's conference is being record. I would now like to hand the conference over to your speaker today, Shawn Milne, Vice President of Investor Relations. Please go ahead.

Morning, and thank you for joining us on Xometry's Q3 2022 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 and discuss our guidance for the fourth quarter 2022. 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 actual results. Information concerning those risks is available in our earnings press release distributed before the market opened today and in our SEC filings included in the Form 10-Q for the quarter ended September 30, 2022, that will be filed with the SEC. 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 U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today and then 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 would like to turn the call over to Randy.

Thanks, Shawn. Good morning, everyone, and thank you for joining us for our Q3, 2022 earnings call. We are pleased to report another strong quarter with record revenue and record gross profits. We delivered 83% revenue growth and 182% gross profit growth year-over-year in Q3. The value of our marketplace is enabling us to gain significant market share and we expect those share gains to continue in Q4 and into fiscal year 2023. We reduced our adjusted EBITDA loss by $1.8 million quarter-over-quarter to $6.5 million underscoring the operating leverage in our model. Moving on to our Q3 results. I will provide a review of our third quarter performance, marketplace trends in Q4 and provide an update on key business initiatives. Then I will turn the call over to our CFO Jim Rallo for a more in depth review of our financial results and guidance. We had a strong Q3 with revenue of $103.6 million driven by robust marketplace growth and expanding supplier services with the addition of Thomas. Q3 marketplace revenue was at $84.1 million nearly 55% year-over-year, and 11% quarter-over-quarter growth. Marketplace revenue consists entirely of the historical Xometry business, excluding Xometry supplies and financial services. Marketplace revenue growth was driven by continued strong growth and active buyers and rapid adoption of our platform by larger accounts across both North America and Europe. Likewise, we experienced strong year-over-year growth in many of the different manufacturing processes offered in our marketplace. In Q3 active buyers increased 40% year-over-year to 36,789. We added a record 3,298 active buyers in Q3, a 17% increase over the prior record set in Q2. Our value proposition resonates strongly with customers. We saw strength across multiple verticals, including automotive, robotics and automation, education, food and beverage as well as ongoing strength in general manufacturing.…

Thanks, Randy. And good morning everyone. As Randy mentioned, with a strong third quarter we are expecting continued significant revenue and gross profit growth for Q4, 2022 despite near term pricing headwinds. We generated Q3 revenue of $103.6 million up 83% year-over-year, driven by strong marketplace growth and the addition of Thomas and supplier services. The stronger U.S. dollar negatively impacted revenue by $1.2 million on a year-over-year basis. Starting with Q1, 2022 financial results, we provided an additional disclosure for marketplace and supplier services including revenue and cost of goods sold for each. Q3 marketplace revenue was $84.1 million and supplier services revenue was $19.5 million. Marketplace growth was driven by a strong increase in the number of active buyers, as well as existing buyers increasing their spend on the platform. Q3 active buyers increased 40% year-over-year to 36,789. 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. We believe the repeat purchase activity from existing accounts reflects the underlying strength of our business, and provides us with substantial revenue visibility and predictability. Once an account joins our platform, we aim to expand the relationship and increase engagement in spending activities from that account over time. The number of accounts with the last 12 months spend of at least 50,000 on our platform reached 974 at the end of Q3 up 62%. year-over-year. The strength of the U.S. dollar created a slight drag in this metric for Q3 by approximately 12 accounts. Supplier services revenue declined 3% quarter-over-quarter in Q3. The decline was primarily driven by the lower supplies revenue. Q3 gross profit was $40.9 million an increase of 182% year-over-year. Gross profit margin was 39.5%. Q3 gross…

Thank you, sir. [Operator Instructions] And I show our first question comes from the line of Brain Drab from William Blair. Please go ahead.

Good morning. Thanks for taking the question.

Hey Brian.

Good morning. So Jim, you just mentioned the expectation for profitability in the second half of '23. Is that a change? Are you are you calling out a change in your expectation? Or is that restating the expectation?

Yes, I am making a slight change here, Brian. So I think again, we said earlier that we would be adjusted EBITDA profitable for the entire year. I think we're looking more at really the second half of the year on that now.

Okay, got it. Okay. And one thing that I noticed, I mean, when I'm looking at your lead times, and the pricing, some decline in the pricing, as long as you could quantify that further. And then also, is it there been any change? Have you been able to change your lead times at all in the last, couple quarters here? Because I seem to be detecting for some of the parts that you're manufacturing that lead times may have actually improved slightly, I don't know if that's true, or not. Just hoping you could comment on that.

Yes, so hey, Brian, it's Randy. So as we mentioned, on the call, the time to acceptance, dropped 36%. So things got taken 36% faster, which is unprecedented drop for us. And time to acceptance is a key driver of costs. So that's why cost went down so dramatically. And again, we weren't accustomed to that. We are now working on optimizing pricing. And sort of the combination of that plus the increased order frequency makes us confident that in beginning next year, we can reverse the trend on revenue per buyer. And in terms of lead times we're always working to optimize those. Again, both on conversion from a pricing perspective. So it's, it's another lever for us to push as we want to get grow market share with our customers, but at the same time, optimize our revenue as well.

Thanks. So you mentioned the speed with which the quotes are being accepted. But can you talk at all about what that resulted in terms of a decline in price? Thanks.

Yes. Sure. And let me just take a step back and say, just to be clear, and again, let me start with buyer demand is very healthy. As we said, we added the unprecedent number of or quarter-over-quarter add of active buyers and we expect that number to be even bigger in Q4. And then on top of that the order frequency has been increasing as well. The way that our pricing works is we actually do cost discovery. So when we, when a customer accepts a price, our algorithms do cost discovery with our suppliers. And we have an expected cost at which we think suppliers will take that order and then we have a margin on top of that. What happened in late Q3, and Q4 is that suppliers were taking jobs much earlier in that schedule. And as a result, the cost was unexpectedly lower, unprecedentedly lower than we had seen in the past. And so even with healthy margin on top of that, that drives down your your gross revenue from that order. And again, we've never seen such a dramatic drop so quickly. We let it play out for some weeks. We're gathering the data. And now we're in the process of implementing this price optimizations. Now that we're tuning our algorithms to take into account this kind of unprecedented decrease in time to acceptance.

Got it. So said another way, you might not give up as much of that value?

Exactly. That's exactly. We're trying to optimize. Exactly, exactly. We want to optimize conversion rates, and revenue. And we may have given up that's exactly right. We don't need to, we didn't need to give up as much as we had we let it run for weeks. We wanted to get the data. And now we're we're improving our algorithms to take that kind of significant drop into account.

Yes, and then Brian just a double click on that, as Randy was saying, like the buyer activity has never been stronger and the supplier engagement has never been stronger. You know how our pricing works. The jobs just got taken off at a much faster pace.

Yes. Okay. All right. I'll get back in line. Thanks very much.

All right. Thanks, Brian.

Thank you. And our next question comes from the line of Eric Sheridan from Goldman Sachs. Please go ahead.

Thanks for taking the question. Maybe I just follow up on the element on the pricing dynamics that we can better understand some of the potential for behavior going forward on the platform. So in terms of the pricing coming down and jobs are getting sort of accepted quicker, how should we be thinking about that feeding into a more volatile macro environment in terms of elements of both buyer growth beyond Q4 elements of what can happen to pricing if demand slackens a little bit as well. So maybe just give us a little bit of your base case analysis of how we should be thinking about the demand pricing and sort of buyer growth dynamics in a more volatile macro environment? That'd be number one. And then as we get into next year, I know it's a little early to be talking about '23. But are there any guardrails or thoughts you want us to keep in mind in terms of thinking about the mixture of buyer growth and revenue provider growth as you lap the Thomas acquisition into next year, irrespective of what happens in the macro environment? Thanks.

Yes. Thanks, Eric. So look in this quarter we added about 3300 active buyers which was our a quarter have recovered net ads have been about 2500. Last quarter, we did 2800. And in Q3 we did 3300. And as we indicate on the caller, we think that number is going to jump up again in Q4 beyond that. So as we're in this uncertain macro environment, you're actually seeing more and more buyers coming to the Xometry marketplace. And we think that you will continue to see that strong active buyer growth growing into next year. And the good thing is if you get those active buyers, and as we turn it as their revenue provider goes back up, that has a amplitude magnifying effect or multiplying effect moving forward. So we think that very strong. We also think that, again, we had not been accustomed our algorithm didn't take into account this sort of dramatic sudden drop. We didn't want to move too hastily to make changes to it. But kind of as was just describing to Brian earlier, we didn't need to give up as much as we did. So when we balancing that with conversion, so we were confident that going into Q1 we can reverse that trend on revenue per buyer. And now on a larger gross base of active buyers that we'd anticipated that could again have a multiplying effect as you go through Q2 2023.

Hey Eric it's Shawn to just double click on that. If you look at in your model with active buyers, and we're seeing as Randy said, we expect that number is even grow in Q4 you play that out starting in 2023 what you're going to see is the active buyer growth year-over-year is going to remain very strong.

Great, thanks for the color.

Thank you.

And I show. Our next question comes from the line of Cory Carpenter from JP Morgan. Your line is open.

Thanks. A couple maybe just to start want to talk a little bit more about international expansion. Curious what geographies you're seeing strength in? And then also based on what you're seeing early on in China. And curious how that informed your view these long talks about I think, international possibly being 40% of revenue over time? Is that kind of still the right ballpark based on what you're seeing today?

Yes. In terms of your --

Hey Cory, It’s Shawn. Very strong growth. As Jim said on the call 96% growth effects neutral. The other thing to keep in mind is we're going we were up against a 500% comp last year. So the demand trends in Europe are strong. We continue to add new languages, new people, new sales, new geographies in Europe. So Europe's going very well. And as we said on the call, we remain pleased with early demand in China, and we expect China to add to revenue growth in 2023 and certainly no change from our perspective in terms of the long term. We think international will be 40% of our marketplace revenue long term.

Okay, great.

Hey Corey certainly Jim, I would just add a couple of things right there. So when we look at the dynamics of China right now, we're seeing the same sort of growth trajectory as we have in Europe over the last couple of years. Additionally, we did add UK so that launched this quarter as well. And we added three or four different languages. I can't remember off the top of my head exactly which ones those are, but we continue to expand the capability the marketplace in Europe.

And maybe, Randy for you, just you've certainly been busy the last few quarters with the integration of Thomas. Just as we think after '23 you gave us some initial guardrails on the financial side but just curious more from a product perspective and an integration of Thomas perspective, where can we expect your biggest focus areas to be next year?

Yes, I mean, it will continue to be and I am not sure we caught but we brought on a new chief product officer Brennan Stern, who came from us from indeed, to really excited with that addition. So I think when you think about comments in the supplier site, overall, we have two key focuses. One is work center. And as we reported we have now 1000s of activation. So we're very excited about that. And we're seeing a nice uptick in the amount of non Xometry/Thomas work that's being processed in work center, as well, as not only it was Xometry, suppliers were using work center, but it's also Thomas suppliers who weren't Xometry suppliers. So we're really excited about that, we're going to continue to invest in that build out the suite of offering that creates a very sticky relationship with our suppliers, which has knock on effects throughout our ecosystem. And then as we've got our financial products there. That also gives us a great monetization efforts. So a lot of focus on work center. And then on the IBE on Thomas continuing to streamline that make it very easy for buyers coming in to transact on Thomasnet. And likewise, just make it really easy for the suppliers to respond and to transact and Thomasnet as well. We think that also ties in nicely to the advertising. Thomas a lot of times revenue comes from suppliers who are paying to bump up in searches on Thomasnet. As we do more transactions on Thomasnet itself, we think that will enhance that advertising business.

Okay, great. Thank you both.

Thank you.

And I show our next question comes from the line of Matthew Hedberg from RBC. Please go ahead.

Great. Thanks for taking my questions. Randy, I wanted to double click on what is fundamentally causing these orders to be taken earlier? Because to me, it feels like a very bullish thing that these orders are being accepted quicker. But I guess I'm curious, what do you think is underpinning that change?

Look, I think it's a couple of things. And it really is a step change for us. First we're continuing to optimize our matching algorithms, getting to know which suppliers are good for which jobs. That's part of our algorithm is on the matching side. So we are continuing to optimize that. Clearly, we're getting stickier with our suppliers things like work center help with that, it just, it continues to cement that relationship. So I think that's very important. And then it's a weird environment, as you know, with other companies. So there may be some impact as well, from the macro. Hard for us to do that, to really know that, but certainly, we're very happy about this dynamic. Because in the long term even entering early next year, it's a very positive change for us.

Got it. Okay. And then maybe just to double click on Thomas. I think we're all excited about the ability to onboard those to Xometry, maybe a little bit more of a little bit more granularity on how that's progressed since work center. And are there things that you look to further optimize to perhaps bring more of those buyers and sellers onto Xometry?

Yes. I mean, I think it's more of the same, we're just constantly trying to make the user experience easier, make the communication easier, between buyers and suppliers, just streamline that so it's easier for them just to complete the transaction to check out. Our work center in particular continue to build out their capabilities in the manage their overall business. So we can capture more of their shares. So we're just doing lots of if you come, we're doing lots of daily enhancements to our UI and what we're offering on all those products.

Yes, and Matt just we called it out on the prepared remarks, but we're rolling out integrations with the accounting packages this quarter and that's something they all want and that's going to be great for work center with QuickBooks. Remember, they don't typically these machine shops run their business off QuickBooks and Excel spreadsheets and simple accounting. So we'll integrate that in and that should also continue to help with the rollout.

Thanks, guys.

Thank you. One moment for our next question. And also our next question comes from the line of Karl Keirstead from UBS. Please go ahead.

Thanks. I've got two. Randy and Jim, how the street ends up modeling first half '23 posts this print will depend on how comfortable we feel about how quickly Xometry can as you put it, Randy tune the algo? So can you get comfortable with your ability to tune it fairly quickly so for instance, when was the last time that the algorithm sort of got caught off guard and how quickly were we able to tune it to get things back on track? In other words, how can make us comfortable perhaps if you can, that you can do so in Q1 as you're suggesting, and then I've got a follow up. Thanks a lot.

Yes, Karl, it's Jim. I'll take the first part. And I'll let Randy, take the second as far as timing of the retune. But if you recall, right, we had a situation very similar to this back in the first quarter of 2001. So before we went public, and we had talked about that openly about how that we had some inflationary issues going on, particularly with materials. We didn't know if that was going to stay in place or not. So once we understood the dynamics of what was happening there, we implemented new algorithm protocols, and we fix that situation. So we have a very, it's very similar to what is occurring right now. I'll let Randy give you some more details.

Hey Karl. We have control over obviously our pricing to our customers. So it's not difficult for us. It's easy for us to literally change the algorithm from that perspective. What we wanted to do these last few weeks, since the end of Q3 when we started seeing this trend is to model out the tradeoff between price and conversion rates. It's that elasticity, that's very important. And again, this was unprecedented. We had never, we're always trying to bounce that. But we've never seen such a rapid decline in price, we're in cost in such a short period of time. So now that we've gathered weeks of data, and we didn't want to be too hasty on that, we feel confident, and we're in the process of implementing changes to optimize that pricing. That's why we're we are confident that going into Q1 and the math is pretty simple. If the revenue per buyer increases in Q1 from Q4 with our growing base of active buyers, which has never been bigger. And as we said, we're going to see that continue to accelerate into Q4 that will have a good multiplying effect.

Got it. Okay. That's very helpful. Thank you both. And then my follow up. Maybe it's for you, Jim, just checking my math. I think Randy said that for 4Q you're expecting marketplace revenue growth of 40%, 45%. So at the midpoint, that would be $87 million and gross profit marketplace gross profit growth of 55%, which would get you to $27 million. So if I take [$27 million over $87 million] it sounds to me unless my math is wrong, that you're guiding to marketplace gross margin percentage of 31%, that would actually be up a smidge from what you did in the third quarter. Just want to stress test that math?

Yes we've indicated that we are going to have higher gross margins for marketplace in Q4 and Q3 that will continue.

Okay, terrific. Thank you both.

Thank you. [Operator Instructions] And I show our next question comes from the line of David Silver from CL King & Associates. Please go ahead.

Yes. Hi, thank you. I wanted to go back to just a comment or two in your opening remarks. But I believe at one point you talked to you discussed, you discussed “a step change” in supplier activity. And I'm wondering if that's kind of the number of suppliers? Or is that the similar to maybe the quicker acceptance rate? In other words, are suppliers becoming more engaged on your platform at a faster rate than let's say the buyers, which we track regularly? But what was that kind of step change effect that you discussed in your prepared remarks? Thank you.

Yes. Absolutely, we always have more active buyers, but we're really the step change was there, just as you said, their behavior on their, on the platform, their activity level, and just their eagerness to take the jobs much faster -- that they took them 36% faster in a very short period of time that change and that's been a persistent change, which has endured. So it just, they're more comfortable and stickier, we've been, again we've been trying to optimize the matching algorithms. Things like work center are helping with that. So that's really been the step change. And again, it's in the long term, a very positive trend for us.

Okay, just trying to clarify if that was something beyond different than your earlier comments. But thank you for that. And then I was just wondering if you could maybe just make a comment on the trend. You've discussed the trend in marketplace revenue here quite a bit, but I guess the supplier services revenue trend was just a little bit below what I was modeling and whatnot and it is down a little bit sequentially. Is that also related to the quicker acceptance rate in some manner? Or is it due to other factors?

So it's really due to our materials business. We sell supplies to our so outside of Thomas which grew quarter-over-quarter, it's really just our supplies business. And that can be somewhat a little bit, it can change a little bit quarter-over-quarter so that's why you saw a dip.

Okay, great. Thank you very much.

Thank you. I'm sure no further questions in the queue. This concludes our Q&A session and today's call. Thank you all for participating. You may all disconnect.