Xometry, Inc. (XMTR) Earnings Call Transcript

Let's get started. We have Xometry with us today, Randy, Co-Founder and CEO and Jim CFO. Thanks for joining us.

Thanks, Cory.

Thanks, Cory.

For those new to the story, Randy, maybe could you just start with a quick high-level overview of the business and the role that your marketplace plays in the manufacturing ecosystem?

Yes. Xometry is the leading marketplace for on-demand manufacturing. So there is a giant market. We estimate over $2 trillion of custom parts that customers have historically bought from hundreds of thousands of small manufacturers spread out across the United States and across the world. And that has been historically a very manual procurement process, an analog process, where customers try to find the best solution. But because these manufacturers, and here in the U.S., by the way, 75% of our 600,000 manufacturers have less than 20 employees -- excuse me, less than 20 employees, it's very difficult for the customer to find the optimal solution in an efficient manner. Likewise, for suppliers, they are largely dependent on our local customers, the local industry. And so the long tail of the Internet has never touched them before. They haven't been able to sell their open capacity. So at Xometry, we are bringing the buyers and suppliers together using a marketplace. We're digitizing it, like we've seen done so successfully in other industries and artificial intelligence creates pricing for both buyers and suppliers and helps us figure out what the best match is.

So we'll definitely come back to AI, which you've been talking about for a while, although it's more topical for others recently. But just starting with your marketplace, that's about 80% of your revenue. I think you mentioned 2,500 local manufacturers or suppliers making products for about 45,000 buyers. So a bunch of questions, but maybe just to start, who are your buyers? Who are your suppliers? And how are they using your platform?

Yes. So what's wonderful about a technology platform and marketplace is it's very extensible. So we service many different industries and everything from some of the largest customer-wise from some of the largest companies in the world to just start-ups. And our technology makes that accessible for everybody. We're also global. So we're based here in the United States, but we also have a network in a very fast-growing business in Europe. We're based outside of Munich there. And so if you go to xometry.eu, you can see Xometry in different languages. And then likewise, in the second quarter of last year, we launched in Asia, xometry.asia, and we're based there in Shanghai. So our marketplace is available, I think, in 13 languages around the world with -- and we take 6 different currencies.

So let's talk about maybe buyers for a bit. You've added a record number of buyers each in the last 4 quarters. Maybe talk about what's driving this. I know you don't guide to this number specifically, but broadly how you expect buyer net adds to churn going forward?

Yes. So we've been adding a record number of active buyers each quarter. In Q4, we had a record and then we beat that record in Q1 of this year. And so that's engineers and procurement folks and companies of all sizes. And we offer lots of different manufacturing technologies. So everything from 3D printing to machining, to molding, the casting, and we're continuously adding to our offering. And one of the nice things about being an asset-light model and not owning the assets is that gives us the flexibility to add what customers are looking for. We're always looking for their best interest. And as new technologies emerge or new opportunities emerge, we can add those to our platform or to our marketplace.

So middle of last year, supplier engagement spike, jobs are being accepted at a 36% faster rate than normal. Could you talk a bit about what caused this and how you responded and just where you are today with supplier engagement?

Yes. So we've talked a bunch about what's in it for the customer, for the buyer. And sort of just to reiterate, there's the opportunity now for them to get an instant price, have an e-commerce like experience, something that historically they haven't been able to have and for us to use our machine learning, artificial intelligence to give them prices and to have this huge selection online. For suppliers, there's the opportunity now to fill that open capacity and to get customers who work from all across the country or potentially all around the world. So historically, that supplier has been dependent on just our local customer. And when you think about a supplier improving their profitability and growing their business, they're -- because they're so dependent on just a couple of customers, there's a lot of risk to them, and they're not maximizing their profitability because the supplier fills 10 hours of their just -- as an example, 10 hours of capacity, 1 job for them could be 5x as profitable as another job. So with Xometry, they can plug into them -- into our marketplace. We onboard them so we go through a process to make sure that they're suitable for the marketplace. And then they get access to opportunities from customers all around the country, talking about here in the United States, which they never had before. And with our algorithms, we're also able to identify what kind of work are they most likely to take? What do they like? What's their sweet spot because in on-demand or custom manufacturing, every job is a little bit different. And all of these hundreds of thousands of different manufacturers, they have different specialties. And the trick is using the AI to find who's the one that optimizes the match for this customer. And that's a win for the customer, but it's also a win for the supplier because they're filling their capacity with the job that is the best for them. We've been working to make that easier and easier for suppliers to take work in our marketplace. We have a basket of financial service products that we can talk about later. So we're doing all sorts of things to just make it not only to identify work that fits their envelope but also give them better work, work that they like and make it easier for them to execute on that. And that included providing them with a free manufacturing execution system called Workcenter. So last year, we had bought in Q4 of 2021, an MES Manufacturing Execution System, a company called FactoryFour, which had a SaaS offering. We took that. We rebranded it Workcenter, and we've offered it now for free and that allows our suppliers to run many aspects of their business through this free software. And for these small -- for suppliers, many of them are small companies that don't have the dollars to spend, then this kind of software, this free software is terrific for them. And so it's enabling them in a very efficient way to run their businesses, but also to take work from Xometry. So last year, we saw more and more of our suppliers leaning in, partly because we've been removing friction. And also, I think as you look at the macro, as it's weakening, they're more and more turning to Xometry as a source for work for them to fill their capacity.

Okay. So then also macro had a bit of an impact of on demand late in 4Q. You tested lowering prices. What did you learn through this testing? It sounded like you saw a rebound in 1Q, but just how would you characterize the current level of demand?

Yes. So just to put this in perspective, a lot of companies talk about in the -- with macro environment and demand shrinking and they're shrinking or growth has slowed to single digits in Q4, just perspective, in Q4 this year where we saw that slow down. We still had organic growth in marketplace of 32% year-over-year and had a record number of active -- new active buyers, as you mentioned before, Cory, as well as really strong order counts. So we did see some of that occurring as the economy slowed down. We also saw customers looking for less expensive options. So they were trading down. They were willing to trade lead time. I'll get a later delivery for a lower price. What we did in Q4 is we tried -- we've been gaining market share. We've been over the years and the quarters, we've been adding active buyers and a bigger and bigger presence in the market. And so one hypothesis that we tested in Q4 was in this weakening environment where we see customers more price conscious, could we accelerate even further our growth and market share by lowering our prices even further? So we're very efficient, but could we get even lower prices when they gain market share. And so we effectively invested part of our gross profit margin in funding lower prices for our customers. Unfortunately, that did not stimulate additional demand. We still, again, grew 32% year-over-year, but not enough. And as a result of us lowering our prices that had a double whammy of lowing our revenue. So even though strong order growth and ultimately strong revenue growth, it wasn't what we had anticipated because we tested this price elasticity and it turns out the customers just weren't making the orders.

Makes sense. One of the questions we get a lot, I think, for investors is just your ability to scale from smaller production runs and prototypes. A metric you give is account spending over $50,000 a year, which is growing at a faster rate than the marketplace. So how do you respond to those who may be skeptical in your ability to grow into larger production runs?

Yes. So I'd like to point to that metric of accounts with more than $50,000 of spend, and that's grown really nicely each quarter, we're adding a significant number and the growth quarter-over-quarter has been very impressive as well. We've also been adding more manufacturing technologies into our marketplace, which are traditionally more focused on production, so things like injection molding or die casting or stamping. So as we're seeing the demand from our customers, for those larger orders and for those production capabilities, we're actively adding those into our quoting engine, and we're also adding it with our supplier base. So we're seeing more and more customers lean into that. I think what's interesting is when you look at a more fragile economy and there's also concerns about supply chain resiliency, sort of started with COVID, but now there's geopolitical tensions and other concerns like that. More and more customers are concerned about their ability to deliver their products to their end customers. And so going back to the marketplace that Xometry has, historically, those customers have had to go to small manufacturers to get their parts made. The orders are larger. They're still production, but they're too small for a contract manufacturer. So inherently, they have to go to smaller manufacturers. And in a weakening environment, and where there's concerns about resiliency, those small manufacturers can be riskier choices. So it's interesting you're seeing customers say, hey, not only does Xometry give me a very efficient experience, an e-commerce like experience, what I'm so familiar with other aspects of my business and personal life. But as I'm thinking about my supply chain resiliency, as I'm thinking about how I deliver my end-use products, which I have to do to my customers, Xometry as a public company with the governance and transparency and the scale that it has, is a very attractive option to me versus my going necessarily directly to a small manufacturer that may just have more risk.

Okay. Talk about international for a bit, which you touched on a little earlier. It's about 11% of your revenue, grew over 75% year-over-year in 1Q. Maybe just to start level set your international presence today in the markets where you're really seeing growth?

Yes. So we launched in Europe in late 2019 -- in Q4 2019. That has grown like a tremendously from, I think, roughly $3 million of business in 2020. And in 2022, I think internationally, we did over $30 million or $32 million or $33 million. And Europe was at the forefront of that. We're based outside of Munich. We've got a network of suppliers in the EU. So just similar like in the United States, we have a network of suppliers and I think, 47 states or some number similar to that. We also have a wide network of suppliers in the European Union as well. We also entered -- in the first quarter, we entered the U.K. I think it was in the first quarter. We entered the U.K., which is no longer part of the European Union, and we have an office there, and we also have a network in the U.K. as well, and we can transact now in the pound. So that's been growing very rapidly. We expect this year also to have very strong growth in Europe. We did a tuck-in acquisition in the first quarter of a company called Tridi, which is -- was sort of the Turkish version of Xometry. That was attractive for a couple of reasons. One is because similar to our other marketplaces, there was Turkey for Turkey, so they had Turkish suppliers for Turkish customers. But also for Europe, Turkey is a key manufacturing base, somewhat similar in some ways to relationship we have here in the United States with Mexico and the fact that it's a price attractive place to manufacture similar with Europe and Turkey. So that gives our European customers options beyond the European specific in Asia, now they've got a terrific one right there in Turkey as well. Then in Q2 of last year, we launched Xometry Asia, and you can go to xometry.asia. And based, as we mentioned before, in China. Last year, we were struggling a little bit with COVID. So always hard when people can't leave their homes to start a new unit. But we're beginning to gain nice traction this year, and we expect that to grow rapidly in '24 and beyond. So that's a growing part of our business. And then we also announced an exciting relationship with Alibaba 1688.

Let's talk about that more on the 1688 relationship. I'm not sure -- I'm assuming a lot of people aren't familiar with it or not using the product. So just kind of help us with what 1688 is and how the partnership works.

So 1688 is one of Alibaba's leading B2B sites in China. So it would be unusual people were using the site here. It's really for Chinese customers in China, serviced by Chinese suppliers. So it's a site where you can buy off-the-shelf parts, it's like a giant directory with stores and sort of traditional e-commerce like experience. 1688 decided that they wanted to offer their customers for the first time, custom manufacturing, so -- or with instant pricing for the first time. So they wanted to give them the experience that the customer can come to the site and get something instantly priced versus going through sort of the traditional procurement process. And this happened all organically with our -- 1688 came to us in China, and we had our team locally in China. And so they had heard about our technology and are working with us. And so now when you go to 1688, it will quote -- you can quote custom manufacturing, get instant pricing and that's powered by our pricing technology then when the customer decides that they want to order, then they will check out on 1688, but they'll check out in Xometry store there. So it's exciting. We'll see -- we haven't added anything to our guidance alongside that. But it's an interesting opportunity. We're continuing to grow our own business in China, but this is a nice organic addition to it.

So now coming back to AI, big focus for almost every company now. It's something that's been core to your business for a while. I'm almost specifically asking you this because it's kind of already your marketplace, but how are you currently leveraging AI? How do you think it could impact your business and industry over the near and long term?

Yes. So AI is how we create those instant prices. And it's really the only scalable way that you could do that. So going back, I think people ask me why hasn't this happened before? Why have somebody not done Xometry before? Like it seems like a logical thing, giant industry, heavily fragmented, opaque inefficient pricing, like why didn't this happen? Well, one of the problems is that it was hard to figure out what the price for something should be. You're not buying a SKU. You're not -- if I want to buy a pair of jeans, I know -- I've probably an idea in my mind how much that should cost and I go to 5 different sites and it's off by 1% or 2%, it's pretty easy. In this case, we're making custom parts for our customers, which are particular to them. So to be able to give them a price right away for those custom parts, you need to use AI to generate that or that's the way we're doing it. Nobody else and so -- and that's scalable. And so we employ that technology or deploy that technology to create that instant pricing. The beautiful thing about the AI techniques that we use and we use machine learning, a version of machine learning is that as we get more data, we actually get smarter and smarter about what the price should be for the buyer. But here's the exciting thing. We're not only using the AI for the price for the buyer, we're also using the AI to create the prices for the suppliers. So the same way that a buyer wants a price for something, they don't want to wait around a long time, and that's very appealing to them. It's the same thing for a supplier. These are small businesses. They don't have a lot of time or dollars to waste on bidding on things they usually lose. So they're a little shy to extend themselves because they're going to lose a lot. The fact that we give them a price versus making them go through some sort of painful auction is very appealing to them and we use that AI to do that. And then we're also using our algorithms to help figure out which of the suppliers would be best suited to make the parts for the buyer. So AI is sort of at the center of many things that we do, sort of the core of what we do.

Let's talk about Thomas. It's a company you acquired in late 2021. It's been used historically by over 500,000 suppliers. So where are you with the integration? What's -- and maybe highlight what's gone well, what's been more challenging so far?