Shapeways Holdings, Inc. (NASDAQ:SHPW) Q2 2023 Results Conference Call August 14, 2023 9:00 AM ET
Company Participants
Nikki Sacks – MD-ICR
Greg Kress – CEO
Alberto Recchi – CFO
Conference Call Participants
Greg Palm – Craig-Hallum Capital Group
Jim Ricchiuti – Needham
Nikki Sacks
Greetings and welcome to Shapeways Second Quarter 2023 Earnings Call. [Operator Instructions] 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 facts should be deemed to be forward-looking statements.
All forward-looking statements, including, without limitation, statements regarding our business strategy, future financial and operating performance, projected financial results for the third quarter of 2023, 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 these forward-looking statements. Accordingly, you should not place undue reliance on these statements.
For a 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 30, 2023. The information provided in this conference call speaks only to the broadcast today, August 14, 2023. Shapeways disclaims any obligation, except as required by law, to update or revise forward-looking statements.
Also, during the course of today’s call, we refer to adjusted EBITDA, which is a non-GAAP financial measure. There’s a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued before market open, which can be found on our website, shapeways.com. On the call today are Greg Kress, Chief Executive Officer; and Alberto Recchi, Chief Financial Officer.
And now I would like to turn the call over to Greg. Greg?
Greg Kress
Good afternoon, everyone. Thanks for joining us to discuss Shapeways second quarter 2023 financial results and progress on our key initiatives and strategic growth plan. I will begin by providing a business update and Alberto Recchi, our CFO, will then discuss our second quarter financial results and outlook for the third quarter.
In the second quarter, we delivered revenue in line with our expectations and made meaningful progress on our key growth initiatives, particularly with regard to our software tools and services as well as our enterprise manufacturing customers. We continue to work towards our goal of achieving profitable growth over the long term as we realize increased contribution from high-margin software sales and continue to recognize revenue from our multiyear manufacturing contracts with enterprise customers as well as continue to closely manage expenses.
We believe the market is approaching an inflection point in the overall adoption of digital manufacturing solutions. Furthermore, we believe that Shapeways is well positioned to take advantage of this market opportunity across an array of industries with a platform that combines high-quality, flexible, on-demand manufacturing with purpose-built proprietary software. We are pleased with our ongoing traction, and we’ll remain disciplined and prudent as we execute our operating plan.
In terms of our software tools and services business, we have continued to scale and are pleased to deliver a revenue increase of 40% in the quarter compared to the same period in the prior year. We have recognized $1.4 million of software revenues year-to-date and believe we are on track to double software revenues for the full year 2023 from 2022.
This success is a direct result of the steps we have taken since our go-public transaction, including investment in continuous product innovation and scaling customer acquisition. A key contributor of this growth is the realization of our expectations from the acquisition of MFG, which we completed last year. As a reminder, MFG is a platform that makes it easy for buyers of custom parts and custom part manufacturers to find and work with each other.
MFG had historically focused on connecting small- and medium-sized manufacturers with custom part buyers through a global manufacturing database. This platform establishes a strong foundation for Shapeways to leverage and deploy our auto software features and capabilities to those manufacturers.
In the second quarter, we refreshed the MFG brand. And year-to-date, we have released several transformative software enhancements aimed at driving success for manufacturers and their customers. 4 of our recent enhancements include Transactions, Orders, 3D viewer and Materials, each of which provide for increased customer acquisition, retention and lifetime value as well as additional sources of revenue.
MFG Transactions streamlines the process of invoicing for both buyers and manufacturers by allowing manufacturers to send invoices to buyers and for buyers to pay for their services all within the MFG platform. MFG Orders further deepens the platform’s ability to help manage the ordering and manufacturing process, including tools such as request for quotes, customer communication, purchase order creation and managing — and manufacturing process tracking.
The 3D viewer, which is a feature that has been widely requested by our users, allows for viewing of 3D models of custom parts, streamlining the quoting process, improving communication and allowing for greater accuracy and speed in the process. And MFG Materials is a new service, which provides a range of raw materials for manufacturers at discounted rates, reinforcing MFG’s role as a comprehensive partner in the manufacturing sector.
These feature releases are just the start of how we believe MFG will grow to be a comprehensive and invaluable software platform for manufacturers. We believe Shapeways and MFG will be the platform of choice for manufacturers across the globe as we help them unlock new revenue opportunities that grow their business, find operational efficiencies and expand their manufacturing capabilities.
In terms of our enterprise manufacturing sales, we are seeing continued traction through our focused efforts and restructured go-to-market approach, including a sales force that focuses on high-value opportunities. In the second quarter, more than half of our revenues were with enterprise customers. As we realized double-digit growth in enterprise sales in the quarter, we also secured several notable contracts in our target industries for multiyear, multimillion-dollar orders that we will recognize in the coming quarters and years and which affirms our proficiency in serving these customers.
To highlight a couple. One, we secured 2 new Tier 1 supplier contracts with leading automotive and transportation manufacturers for multiyear production programs, which we expect to result in more than $2.8 million annually in revenues for the next 7 years. We also expanded our medical customer base by securing 2 significant contracts, which we expect to generate revenues of approximately $2.5 million annually during the next 3 years. Shapeways is an FDA-compliant contract manufacturer, and we enable innovation in the medical sector through our additive manufacturing services.
I am also proud that we — that our proficiency and innovation is being recognized industry-wide. In conjunction with Microsoft, we were jointly awarded the 2023 TCT Award, which recognized outstanding innovation and applications of 3D printing and additive manufacturing technologies across the globe. We won in the category of Consumer Product Applications for the Shapeways Configurator for Microsoft Adaptive accessories. The Shapeways Configurator enables users to customize their Microsoft Adaptive accessories with 3D printed add-ons to fit their unique needs, providing greater functionality, ease of use and comfort.
Looking ahead, we remain laser-focused on executing on our strategic plan, which as I discussed is continuing to gain traction. We believe we will realize margin improvement in the coming quarters as we see the benefit from managing our operational costs, including the recently completed consolidation of our U.S. manufacturing facilities as well as the — ramping contribution from higher-margin software sales. We will remain disciplined and prudent as we continue our journey towards profitable growth.
I would like to thank the entire Safeways team, our customers, our investors and all of our stakeholders for their ongoing support.
Alberto will now discuss our financial results in more detail.
Alberto Recchi
Thanks, Greg. I’ll provide a recap of our second quarter 2020 performance, give an update on the balance sheet position and provide guidance for the third quarter.
In the second quarter, revenue was $8.4 million, flat from the prior year and in line with our guidance. We saw strong growth in software and enterprise sales, partially offset by lower sales from marketplace and self-service. We were unable to finalize the shipment of a key order in Q2, which has been pushed into Q3. This resulted in delayed revenue recognition that did not allow us to show the quarter-over-quarter revenue growth we were envisioning. However, that order is currently planned to ship in Q3.
Our gross margins in the second quarter were 40% compared to 43% in the second quarter of 2022 and flat sequentially. We continue to deliver solid gross margins, and the year-over-year change was primarily due to inflationary pressures, the continued ramping of recently deployed new technologies and a more varied product mix. We anticipate realizing margin expansion over time as we see more contribution from higher-margin software sales, the benefits from the consolidation of our U.S. manufacturing operations as well as our cost optimization plan.
Second quarter adjusted EBITDA was a loss of $6 million compared to a loss of $4.3 million in the second quarter of last year. SG&A expenses for the second quarter were $8.1 million compared to $6.8 million in the prior year, primarily reflect the increased professional fees and payouts related to the 2022 acquisitions.
Turning to our balance sheet. As of June 30, 2023, our cash, cash equivalents and marketable securities totaled $24.7 million. During the quarter, we deployed approximately $7.4 million in cash from operating activities. We remain prudent and focused on further improving our cash burn while proactively monitoring our liquidity.
On June 22, the 1-for-8 reverse stock split of the company’s common stock and corresponding common stock adjustment became effective. The primary goal of the reverse stock split was to increase the per share market price of the company’s common stock to meet the minimum $1 average closing price requirement for continued listing on the New York Stock Exchange.
On August 1, we completed a voluntary transfer of the listing of our common stock and warrants to the Nasdaq Global Market from the New York Stock Exchange. We believe our company aligns well with the innovative growth platform represented by Nasdaq, and the transfer also allows us to benefit from the Nasdaq cost-effective offering.
Looking ahead, for the third quarter of 2023, we anticipate revenues to be in the range of $8.5 million to $9 million. We remain focused on those areas that we believe offer the greatest opportunity, including enterprise manufacturing solution and commercializing our software and anticipate an accelerated ramp-up in these areas as the year progresses.
With this, we’ve completed our prepared remarks, and we will now open the call for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Greg Palm with Craig-Hallum Capital Group.
Greg Palm
I wanted to start with software sales. It sounded like, if I heard you right, expecting that to still double this year. Can — I missed what contribution was in the quarter or year-to-date. So can you just go over that? And then just in terms of gross margin that becoming a bigger part of the mix. So I would have thought that gross margin would have been starting to tick up, but it’s kind of remained flattish over like 2, 3 quarters. So kind of visibility in terms of when that positive favorable mix starts to hit the gross margin line.
Greg Kress
Greg, thanks for taking the time. Appreciate the question. So going back to software, we still expect software to double this year. We’re seeing incredible progress, and it’s mostly fueled by the rise in the growth in bookings that we saw at the beginning of Q1 and into Q2 as we started to accelerate a lot of our customer acquisition as we started to really drive improvement in the overall churn model associated with the product.
And so those bookings are being translated into revenue over the next 12 months. We’re signing 12-month contracts that range on average, I would say, roughly around $5,000 per contract, and so lifetime value is a little over $4,200. And so what we’re seeing is as those bookings come in, you’ll see them translate into revenue in the back half of the year.
Now because those bookings growth really started taking place in Q1, you’re going to see that ramp happen in the back half of the year. So revenue continues to grow quarter — or month-over-month, quarter-over-quarter, but you’re going to see a more compounding effect as you get to the back half of the year. And so that proportion of revenue will start to really have an impact on our gross margins.
I would also say the other thing that we are still finishing up in Q2, as you probably remember from our last call, is we consolidated our 2 U.S. manufacturing facilities, so the Long Island City facility with our Livonia facility. And in doing so, we still had duplicative costs like the first month of the Q2. And so there were still some additional costs in there. And so there’s still some lingering effects from that transition, but that transition is fully behind us now.
And so as we move into Q3, we expect gross margin to continue to improve. And we’ve seen that month-over-month throughout the quarter, Q2. And so we expect that to continue into Q3 and Q4.
Greg Palm
Okay. Perfect. That’s helpful color. And then just in terms of cash burn, can you just give us an update on where we sit today? What’s that look like over the next, I don’t know, maybe 12 to 18 months?
Alberto Recchi
Sure. Maybe — should I — I’ll take that, Greg. So look, we closed the second quarter with a strong cash balance, right, close to $25 million in cash, which provides a company with, I guess, sufficient liquidity to keep supporting the ongoing execution of our strategic plan and also supports our normalized levels of cash burn.
Now we’ll keep aligning our resources with the highest-opportunity areas to drive revenue growth, specifically in software and enterprise, while at the same time tightly managing our cost structure, right? We have a plan to take margins back to the levels where they have been historically. So if we’re able to deliver on this, you will see a significant cash burn improvement towards the end of the year.
Now for Q2, so specifically the burn in Q2 included a onetime payment related to earn-out structures for the MFG and Linear AMS acquisitions and also some spillover expenses related to the move of our Long Island City facility to Livonia. Q3 will also include one last payment related to the Linear AMS acquisition, but we’re forecasting an improvement on burn quarter-over-quarter.
Greg Palm
And are there any other additional sort of restructuring expenses that are going to linger here? Or should we just think about the Q3 Linear earn-out as just sort of the last one of these kind of unusuals?
Alberto Recchi
Yes, that should be the last unusual item for this quarter, yes. On the cost side, look, we’re looking at cost savings everywhere we can. For example, this recent move to Nasdaq, right, it’s part of the strategy. Specifically, on that, our forecast has us reducing security exchange-related expenses by 6% to 7%.
From a personnel perspective, the SG&A should be in line of the previous quarter. And professional fees and other spending related to being a public company will — should remain in line as the previous quarters.
Operator
Next question comes from the line of Jim Ricchiuti with Needham & Co.
Jim Ricchiuti
Can you just elaborate on that order that was pushed? Maybe just quantify it in terms of size from Q2 that you’re anticipating in Q3.
Alberto Recchi
Yes, it’s —
Greg Kress
Thank you — thanks for calling — yes, go ahead, Alberto.
Alberto Recchi
Yes. I’ll just comment, it’s about $600,000. I mean we would have closed the quarter with a 9 handle in front of the number showing high single-digit growth.
Jim Ricchiuti
Got it. That’s the — and so software revenue was what, about $740,000 or so in Q2?
Alberto Recchi
Say again, James. Sorry, I lost the –
Jim Ricchiuti
I was going to ask about the software revenue in Q2. It sounds like it was, what, around $740,000? Is that right?
Alberto Recchi
Yes, about that.
Jim Ricchiuti
And just if you could remind us, what did you guys do last year in software? You’re anticipating – you’re still saying you’re anticipating a doubling this year?
Alberto Recchi
Yes. Last year, we closed at $1.8 million.
Jim Ricchiuti
Got it. Okay. And then the other question I had is on the information we provided on enterprise customers. I think you said about half of the revenues in the quarter were from enterprise. Wondering if — is that mainly existing customers? Are you seeing any contribution of size from newer enterprise customers when you provide that metric?
Greg Kress
Yes. When we’re looking at that metric, that also includes new customer acquisitions that are coming in. So we’ve actually seen some sizable orders from really, really large enterprise customers. As we’ve been doing a lot of work building that business development pipeline, they’re starting to transition into orders. So we’re seeing really, really good progress there.
Jim Ricchiuti
And then last question, just on some of those awards where you put some, Greg, some annual revenues associated with it over the next multiple years. Do they scale to those kind of levels on an annual basis in ‘24? Or is that something that is going to gradually move up and at some point in ‘25, you start seeing that kind of a contribution on an annual basis?
Greg Kress
No, it’s a great question. We actually start a lot of the work in Q4, but we’ll realize the benefit of that starting in Q1 of next year. So yes, I think from a modelling perspective, you could probably realize the full benefit in ‘24.
Operator
[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Greg Kress for closing comments.
Greg Kress
I just wanted to take the time to thank everyone for joining today’s call. We look forward to providing you with future updates as we close out next quarter. Thank you.
Operator
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
