Please wait. The conference will begin shortly. Good morning. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Xometry Inc. Q1 2024 Earnings Call. [Operator Instructions] I'd like to introduce it to our CEO, Randy Altschuler, CFO, James Miln; and our VP of Investor Relations, Shawn Milne. Sir, you may begin the conference.

Good morning, and thank you for joining the Xometry's Q1 2024 Earnings Call. Joining me are Randy Altschuler, our Chief Executive Officer; and James Miln, our Chief Financial Officer. During today's call, we will review our financial results for the first quarter and discuss our guidance for the second quarter and full year 2024. 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 our 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 US Securities and Exchange Commission, including our Form 10-Q for the quarter ended March 31, 2024, that will be filed later today. 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 US GAAP. To see the reconciliation of these non-GAAP measures please refer to our earnings press release distributed today and 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.

Thanks, Shawn. Good morning, everyone, and thank you for joining us for our Q1 2024 earnings call. Powered by AI, our marketplace continues to gain significant market share as buyers and suppliers realize the value, convenience and resiliency of our platform to strengthen their supply chains globally. In Q1, we grew revenue 16% year-over-year to $123 million, driven by our Marketplace business. Q1 Marketplace revenue grew 24% year-over-year. We saw strength across many end markets, including semiconductors and industrial equipment, electronics, aerospace and defense and automotive. Q1 gross profit increased 22% year-over-year. Q1 Marketplace gross profit increased 37% year-over-year, driven by our AI-powered marketplace and increasing network of active suppliers. We expect to further expand Marketplace gross margin and drive strong gross profit growth throughout 2024. On top of strong marketplace revenue and gross profit growth, we improved our adjusted EBITDA loss in Q1 by 37% on a year-over-year basis, driven by leverage in our core U.S. marketplace as our first quarter results clearly show, with our market-leading position and the size of the available opportunity, we can drive strong revenue and gross profit growth and improve operating leverage regardless of the manufacturing backdrop. Of course, we want to grow as much as possible, which will not only strengthen our competitive moat, but also enable us to achieve our long-term profit margins faster. Here are the investments we've been making to accelerate our results: first, expanding our network of active buyers and suppliers. In Q1, active buyers increased 32% year-over-year with net additions growing 8% quarter-over-quarter. For 2024, we expect our active buyer growth to remain healthy as there are millions of potential buyers and Xometry brand awareness continues to improve. We also continue to expand our supplier base globally with 36% growth in 2023. In Q1, we expanded our…

Thank you. [Operator Instructions] Your first question comes from the line of Nick Jones from JMP.

As we think about kind of 2Q guidance and when you provide 1Q guidance, I think you pegged it to kind of trends in January. Can you kind of elaborate on kind of what's informing the 2Q guidance? Is it kind of quarter-to-date trends? Were you really pegging to kind of what you're seeing here? Or what level of conservatism is baked in? Or I guess, can you try to provide a little more color as to kind of what informed the top line guidance for 2Q? And then I have a follow-up.

Nick, it's James. Thanks for the question. No, we're really pleased with our Q1 performance across the board, including a 24% marketplace revenue growth and the 37% gross profit growth. As Randy mentioned earlier, we saw some strength across many end markets and are becoming more important for our largest customers. And we're really clearly taking share powered by AI-driven marketplace. As we look into Q2, we look at the trends that we're seeing in our business and the healthy marketplace trends as well as taking into account the opportunities and risks that we see ahead given the uncertain manufacturing environment. And that fit into the guidance range that we gave for the quarter.

Great. And then there's some volatility in revenue per active buyer, I think you called out larger orders kind of tough to here so far. Can you speak to kind of just overall order volume or demand for orders? I mean, are kind of orders or conversions pretty consistent, and it's really just kind of squish in pricing or how much people are willing to spend? Any additional color there would be great.

Yes, James, again. So really pleased with our active buyer growth in the quarter, up 32% year-over-year, adding 3,179 buyers. So that was up 8% quarter-on-quarter. As we said, the revenue by in the quarter was somewhat impacted by the mix of larger orders. As we look across the marketplace, pricing and conversion and active buyers and suppliers, we're pleased with what we're seeing there, a lot of consistent trends with what we've seen in the past few quarters. And then as we look at that again, that's reflected in our guidance going forward.

Your next question comes from the line of Jake Hall of Citigroup.

James, I just would love to hear more about where you see the most opportunities on the advertising side. Maybe you could elaborate a little bit more in terms of certain enhanced search as well as things potentially we should be aware of or keeping in mind on the road map, where you see the biggest opportunity given your prior relevant experience there. Thank you.

And I see you're talking about Thomas and the Thomasnet supplier Services.

Yes, yes. I mean... Partly what you see in terms of self-service capabilities, you've seen some announcements there beta testing some things, but I would really love to hear what we should expect for the product -- on the product side in this year?

Yes. And thanks for the question. This is Randy jumping in. So we're enhancing as we talked about now, we've been investing in the handing the Thomasnet platform and the journey for both the searchers and for the advertisers. So on the searching side, we are putting enhancements to the accuracy of the search. We're looking at different ways to display that search, sort of modernize it from the search end of it. And then on the supplier side, on the advertising side, we talked about moving to a pay-for-performance model, and we've been adding -- we've been beta testing that as well. So that will help guarantee better searching our results for the searchers and a better ROI for the advertisers. And we've been working on this for a number of quarters. And as we said, this quarter, we started beta testing it or in Q1, we started by testing it and early results are positive.

Yes. Jay, I was just looking, I think that some extent gives us an exciting opportunity that can really influence the marketplace and as Randy mentioned, like a lot of opportunities to improve the performance there and the experience for customers and suppliers. So looking forward to working with the team on improving that as we go forward.

That's helpful. And just a quick follow-up. In terms of investment priorities, Randy, really great to lay those out and the clarity there. Could you speak to any plans for headcount increases this year tying back to those various areas?

We don't really comment about specifically headcount. I think in general, we are trying to be rational with our costs as we push to the profitability. So we're going to be balancing that and we'll make those headcount selectively in the areas that line up with our initiatives. And I think, in particular, we did call out on the enterprise sales. We've been increasing our bench strength here and that's investing in that. So that's why you saw some uptick in the sales expense quarter-over-quarter.

Our next question comes from the line of Brian Drab of William Blair.

This is Tyler on for Brian. Just to start off with, can you explain the sequential improvement in marketplace gross margin? Obviously, marketplace revenue was down sequentially, and you -- can you just explain what actually happened there? So it was just finding suppliers for jobs at lower prices? And then I have a follow-up.

You cut out a little bit there, but I think you're asking about our gross margin performance in the quarter and the improvement year-over-year and sequentially. We were very pleased with this performance. As we mentioned on the call, Q1 marketplace gross margin was a record at 32.0%, up 320 basis points year-over-year and up 70 basis points quarter-over-quarter. This drives our gross profit growth...

Yes. One thing you want to add, and this is Randy, just to be clear, and you sort of were cutting out a little bit, but we are seeing consistent pricing trends across the marketplace is from what we saw in the first quarter and last year as well. So as James talked about, we're seeing gross margin improvement as we get more data, that empowers our algorithms and as we grow our number of suppliers. But overall, ranking trends are very consistent over the last first quarter, currently since first quarter and also last year as well.

Okay. Sounds good. And I apologize for cutting out. Let me know if it's really coming in choppy. But my follow-up is with your Google Cloud partnership, is that going to impact how you currently auto quote? Or is this just for bringing on new services? Like for example, if someone want to go quote C&C service right now, that new partnership hasn't changed how that algorithm is working.

The algorithms intended to shorten the time that we can launch new out-quarter processes. And as we mentioned in the script, we expect in the third quarter to start testing multiple new processes in the third quarter, first here in the United States with U.S. customers and in Europe. That's the focus of the partnership.

Yes, there's nothing from the Google partnership that's in flux the algorithms here in the first quarter.

The next question comes from the line of Matt Swanson of RBC.

Great. Jim, I know it's still early days for Teamspace, but maybe thinking more so on like the customer feedback side, could you just discuss the ability of the solution to help you maybe become more pervasive or deeper into your customers and then also kind of enhance that value proposition as a platform versus the tool? And then at scale, is there any thoughts on how this might be able to help with revenue visibility?

Yes. This is Randy. I'll take particularly the first part of it. So we are very pleased with the acceptance adoption that we're seeing at Teamspace. We have over 2,300 teams right now, which is a really nice increase since we last reported. We've also been making enhancements -- so it can be not just to really enhance the platform and go deeper into our enterprise customers, in particular, as we talked about during the call, that includes tooling processes in enhancements we're making with our injection molding offering and tool libraries and being able to share that and run it all through Teamspace, who as you can imagine, those are often group projects. And we also did talk about a large customer that we've been doing injection molding with a started prototype with us and now with production, and that's being done in part because of their adoption of the Teamspace software. Our sales team is continuing to show that to customers, and we expect to get continued deeper penetration with our customers, refill enterprise customers using Teamspace.

Yes, that makes a ton of sense. And then maybe just as a follow-up on the guidance side of thinking about just kind of the macro implications. And then from macro indicators, PMI has improved a bit. Can you just give us a reminder on how you think about that in relation to your business, whether or not that's a good leading indicator?

Yes. Thanks, Matt. So as we talked about, we're really pleased with our Q1 performance. We've take a lot of the trends that we're seeing across our buyers, the conversion margin suppliers. We look at those -- we look at the guidance ahead, but we do take into account the uncertainty in the macro environment. There are various indicators out there. I think -- so we look at the aggregate of those as well as what we're seeing internally. There is some choppiness out there, and so we're taking that into account.

Our next question comes from the line of Eric Sheridan of Goldman Sachs...

Maybe a 2-parter on international, and thanks for all the detail in the prepared remarks. When you look out at the contribution potential for international on a multiyear view, maybe can you break it into pieces of how much of it is down to sort of execution on what's already been put in place versus elements where we -- the company still needs to do incremental investments broadly in the international opportunity? Just trying to understand the mix of growth and margin and how you think that sets up for contribution in the years ahead.

Yes, Eric, it's Randy. I'll jump in here, and James can jump in afterwards. So as I think we talked about, particularly this year, we're really focused on going deeper in our existing geographies. So we set up the infrastructure there. We've got our site in 15 different languages. We've localized it. We've got sales teams that are there and sort of built the infrastructure. So these are giant markets. While we're very proud of the growth that we've seen in international, we know that even within the existing markets, it can be a lot larger. So I think you should expect to see us to gain some real leverage of those investments we've made in the existing markets... [ Break ]

I'm assuming you lost him, but we'll be moving on. Our next question comes from the line of Greg Palm of Craig-Hallum.

I wanted to dig in a little bit more on the investment side of things. And I guess my question is more or less why now? If I think back to maybe the last year, I feel like it was more characterized around sort of operational discipline in sort of targeting that sort of EBITDA profitability. And it sounds like you're changing that a little bit in ramping up investments now, which pushes out EBITDA profitability. By my math, I think, to next year based on the implied guide for the second half. Maybe you can confirm that. But just a little bit more sort of color on exactly what you're doing, the timing around it. And then, I guess, more importantly, at sort of what point will we see some of those benefits?

Sure. So this is Randy. Look, when we brought in James as our new CFO, I asked him to work with me and the rest of our team to refine and then really validate the healthiest path to profitability into our long-term operating margin. And this included having expense operating expenses a little higher than expected. So as a result, we feel that -- and just to answer your question, a $600 million run rate, so about $150 million per quarter is the appropriate level for breakeven. Underlying marketplace metrics are healthy across buyers, pricing, margin suppliers by an uncertain macro. And we're going to continue to execute on a strong road map of growth initiatives.

Yes, Greg, this is James. So just building on Randy saying that. So I think as our first quarter results clearly show with our market-leading position and the size of the opportunity, we can drive strong revenue and gross profit growth and improved leverage. So with Marketplace growth up 24%; Marketplace gross profit dollar growth -- gross profit dollar growth at 37%. And as Randy said, we've been working on the healthiest part to profitability so that we can continue to invest responsibly in our long-term growth initiatives. At the same time, Q1 OpEx did come in a little more than expected behind the investments that we're making as well as some inflationary impacts on overall expenses that we've seen across areas like employee benefit, software costs and others. So as we refine and validate that path forward, we believe that we can reach adjusted EBITDA breakeven as we surpassed this approximately $600 million annual revenue run rate. $424 million, we do expect to see continued leverage. As you can see, we've given you guidance overall on the annual revenue. I think we'll update you as we go in the future quarters.

Yes. Okay. That makes sense. And I just want to dig in a little bit more to Q1 specifically, you were very clear. You guided initially Q1 based on what you saw in January and you outperformed above the previous range. So can you just give us some sense on what you saw in February and March? And then to be clear, can you give us a little bit color on what you're seeing in April? And is the Q2 guide similar to how you guided last quarter where it's based on what you're seeing in April? Or is it more based on kind of what you've seen year-to-date and making some assumptions on sort of how May and June trends might play out?

Yes. Thank you, Greg. It's James. So yes, as we said, really pleased with the 24% year-over-year growth -- it was better than expected as that large order activity improved from the early cost start that we talked about on the Q4 2023 earnings call. I think it really demonstrates our ability to execute. It remains an uncertain manufacturing environment. So as we look at our trend as we look at Q2 as well as taking into account the risks and uncertainties and opportunities in this environment, we built that into the guidance range for Q2.

Okay. And any color on what you saw in April versus maybe February, March, Q1 in general?

No, we're not going to provide more color on the monthly rate.

Fair enough -- all right. and best luck...

Thank you.

Thank you. This now concludes the meeting. Thank you for joining, and have a pleasant day.