Xometry, Inc. (XMTR) Earnings Call Transcript & Summary

Great. Thank you everyone for joining. This is John Byun on Brent Thill's team at Jefferies. Today, we're very happy to have the management team of Xometry present. We have Randy Altschuler, CEO and Co-Founder; as well as Jim Rallo, CFO. Xometry is the leading on-demand marketplace for industrial parts. They priced their IPO on June 30th at $44 and closed today at $66, so a nice uptick. And Blue Chip customers, which include BMW, NASA, Bosch, Dell and GE. And we'll go through a presentation which we will go into a lot more detail and we'll come back and do some Q&A at the end. Thank you, Randy and Jim.

Great. John, thank you very much. My name is Randy Altschuler and I'm the Co-Founder and the CEO of Xometry and I appreciate the opportunity to present today. And just taking a step back, Xometry is taking a huge market and we are digitizing. And this is a market that hadn't been touched yet by the long-tail of the Internet and you've seen other examples and other industries from Amazon, Retail, Pay Down Payments, Uber and Transportation, that have done similar things to great success, and that is the mission that Xometry is embarking on as well. And the market opportunity is huge. Overall, global manufacturing is at $35 trillion market. Here in the U.S. it's $5 trillion. And our particular total addressable market is $260 billion, so huge opportunity for us to digitize this market. And it's a very inefficient market where both buyers and sellers are suffering. On the buyer side, if you're a customer who is buying on-demand or custom parts, it's a very antiquated process. It's a fragmented market, with hundreds of thousands of small manufacturers spread out across the United States and across the world. And before Xometry, there was no place online to find the best option to make your parts. So a buyer would spend days or even weeks trying to source parts. And when they would go to 2 or 3 different vendors and ask for prices, the lead time, how long they deliver could differ by 100%, and the price could differ by 100%. So the buyer would barely get the best deal and it would take a long time, too long for them to source the parts. We have also seen increasing focus for buyers on resilient supply chains. Obviously, with COVID and other supply chain disruptions, customers or buyers need to be careful to make sure they have backup plans, and if they have security around their supply chain and that they need localized supply chains, as well as global ones. And it's also an increasing focus on ESG issues. The carbon emissions from supply chains usually are magnitudes higher for a buyer than their own carbon emissions. So they are trying to find ways to reduce carbon emissions from their supply chain and they are trying to increase their supplier diversity, making sure that people haven't been able to participate in manufacturing before have that opportunity now. But this market is $260 billion market, it's also very inefficient for sellers as well. So the men and women are making these parts, these manufactured parts are small manufacturers and they're geographically isolated and barely have any sales and marketing. So they are limited to their local customer base. So if you're a machine shop in Houston, Texas, you're going to live and die with the oil and gas industry, or if you're in the Midwest, it would be automotive. And so that can often hurt their businesses greatly. You often -- because your small business have a high operating cost of your business. So buying the tools and materials you need, to operate your businesses typically more expense. And you are cash constraint. These are owner-operated businesses, everything is being done on the owner's personal P&L, they're paying for the machinery, they're paying for the workers, they are paying for the tools and material, so cash is very important for them. So with this sub-optimal performance for both buyers and sellers, we said, let's create an online marketplace, a digital solution for both of them, and make it a better experience and provide, take this inefficient market and provide benefit for both sides. And so we put this onto the cloud, it is driven by artificial intelligence. We use AI to create instant pricing and lead times from the buyers. So for the buyers, they typically go back and forth. And over the phone or e-mail or even fax or in person, now they can do that instantly online and they can get access to a massive network. Xometry is never closed for business and effectively has unlimited capacity. And then they can get the quality and the certifications and the specific needs they have, because we've got this huge network of sellers with varied capabilities for them. And for the seller, that AI delivers for them opportunities to manufacture parts that are in their sweet spots. So instead of just depending on their local customers, now that machine shop in Houston, Texas, that was all about oil and gas, now can get aerospace customers from California or medical device customers from Boston, so they can grow their business and our AI ensures that we get the right content. And then Xometry adds a suite of financial products. It helps those sellers, those small businesses, manage their cash flow more efficiently. And they can use that better cash flow to grow their businesses, make investments. And finally, Xometry gives these small manufacturers access to less expensive tools and materials. So instead of a small business, which combine things at relatively high price, now Xometry operates almost effectively as a group purchasing organization, allowing them to -- allowing these small businesses to improve their bottom lines. And just again to double click on the idea of AI, we have a team of computational geometrists, a data analyst who are building these AI algorithms, we have patents around it. And it is using machine learning, which means in particular a technique called Deep Learning. So as we get more and more data, we're getting smarter and smarter about what is a good price for a buyer. And likewise, what's a good price for a seller. And that's improving both the growth of the company, but our gross margins as well. And we're using that AI to also figure about where should we make investments in terms of sales and marketing, what are better customers in Xometry versus other ones, so AI is spread out through our entire market place. And we use a very data-driven acquisition model for buyers. So that starts with a lot of marketing, particularly with digital marketing, where customers learn about us online. We put our content, they will see our Google AdWords, they will see paid advertisements, all these sorts of things and then they start moving through the funnel. And then based on data that we've seen from other similar customers, we then can use our sales team for land and expand strategy. So once they start buying or interacting in our platform, we've got a sales team, that helps us drive really optimal LTV to CAC ratios. In 2020, our LTV to CAC was 6.1%, that had grown over 15% year-over-year from 2019. So we're getting best-in-class unit economics through a data-driven acquisition buyer model. And as you can see that's resulted in a nice increase in active buyers from Q1 -- Q2 of this year versus last year, the number of active buyers grew by 66%. And you can see the nice sequential growth in that growth and active buyers has been growing non-stop from Q1 of 2019, all the way to Q2 of '21. Likewise, the number of customers who are spending more than $50,000 on an LTM basis has been growing nicely. So in Q2, that was 508, that was year-over-year growth of almost 54%. And you can see it's nice sequential growth from 412 in Q1 to 508 in Q2. So we've got more and more active buyers and they are spending more and more money with Xometry. Now turning to the sellers side. Similar on the buyer side, that we have a data-driven funnel that starts with marketing and that moves into a sales force, we do a similar thing on the seller side. We're educating them, we're doing a lot of this online. And then we're attracting sellers with the opportunity to get work from Xometry buyers, also to take advantage of our financial products. And then finally to buy tools and materials at produced rates. And thus, we've been continuing to expand that basket of seller services. We introduced the first services in 2019 with Xometry supplies as buying those tools and material less expensive. And then, we launched the financial products in May 2020. And actually in 2020, we reported that over 40% of our active sellers were utilizing multiple products, we had 40% plus attachment rate. And some of those products included Advance Card, debit card, which is a Xometry branded cards, a Visa card, where we gave sellers 30% in the job upfront, and they can spend that money anywhere they want. And there is also a FastPay option, where they can get paid faster, accelerating the payment cycle for a fee. We also provide the ability for our sellers to bring their own customers to the marketplace with digital storefronts. And that enables them to take advantage of our other financial products included automated invoicing payouts. And Xometry has been growing very rapidly and we expect that growth to continue in the future, with this huge $260 billion market. So there are bunch of different levers for that growth. Number one, continuing to bring new buyers as you can see that, active buyer growth, it's been very impressive. We're also growing our share of wallet with an existing buyers. And how are we growing that share of wallet with an existing buyers? Well, first, we're constantly adding more materials, tools, more materials finishes, processes to the marketplace. In Q2, we added 60 new materials, processes or finishes. So we're more and more becoming the one-stop shop for our buyers. We're also integrating into our buyers' ERP systems, and into leading CAD programs. So the buyers don't even have to come to this Xometry site to order from us, they can do that right within their own systems, which is reducing friction and lowering their cost to procure manufacturing. We're constantly adding more services both for the buyers as we talk about to the sellers. We're expanding international. We launched in Q4 of 2019 in Europe, and now in the first 6 months of 2021, European revenue is up 5.5 times from where it was in 2020. And in fact, we announced in our Q2 earnings call, that we're going to accelerate our expansion into APAC. And then finally, we'll look to do some strategic acquisitions, we've done a couple on the past, so we'll look at acquisitions added to move into new geographies, add new services for our buyers and sellers. So lots of opportunity out there. And then finally, I want to talk about how ESG is intrinsic to each transaction in Xometry. We have a program where we are purchasing the carbon offsets for 100% of all shipping from our platform. We also include within the marketplace, the ability for the customer to see how much CO2 is being generated from their manufacturing order, and they can buy assets. So that's very helpful for all of us, and particularly as we see more and more corporate customers looking to reduce their carbon footprint. So with that, I'm going to stop sharing my screen and look forward to answering all the questions. Thank you.

So maybe the first question, which is timely with what's going on with the supply chain disruptions lately. I mean could you maybe talk about examples where Xometry help customers manage the difficult global supply chain disruptions over the past 12 months to 18 months? And what sort of demand increases that you have seen as it relates to those shortages?

Yes. So I think one of the wonderful things about a marketplace approach, and the fact that we're in 46 different states -- sellers in 46 different states in United States, we're in multiple European countries, we have a separate network in Europe and we have Asian suppliers that we never closed for business. Even in COVID, we saw entire continent shutdown, we saw China shutdown to the extent that we has customers who were doing work with our Chinese buyers that could be moved to the United States. And the majority of our work is done in the United States and it's done in Europe. In the United States, when we saw a certain states shutdown, then we could route that work to other states within the United States. So we provide that resiliency, those localized supply chains which are becoming more important, but there are other options as well, and that can be done effortlessly within our marketplace. And so that was critical during sort of as COVID was at its peak. But now coming out of COVID, more and more companies are saying, we need to have that resiliency no matter what and the Xometry marketplace can provide that. And in fact that we have such a wide network, when you're talking about shortages or delays, or there is a problem with one particular manufacturer. Again, we can mitigate that risk for our customers. And in our particular market, which is dominated by small manufacturers, that risk is even enhanced. So you've got the norm, you've got the risk from these black swan events like COVID and maybe geopolitical tensions, or shortages, and then put on top of that the fact that our average seller is a small company, buyers love coming to us because we're handling all of that risk for them.

I see. So maybe related to the platform itself and the value proposition, how is it differentiated in terms of, I guess, your ability to source components and materials that maybe others can't, as well as, I guess, in terms of the network of suppliers that are available on Xometry as opposed to elsewhere?

Yes. So I think there is a couple of things. First of all, I mentioned in our presentation, we use artificial intelligence or machine learning to provide pricing for both buyers and sellers. So that's truly unique and it's getting smarter with every transaction. So as we get more and more data as we do more and more transactions, we better understand what our buyers are looking for, what are their price points, what kind of lead times are they looking for and likewise, we also better understand what our sellers are looking for. So our algorithms learn about based on buyer and seller behavior, we learn about what they like to see. And so that creates a really great data moat and it helps make the experience more personalized and better and better for both our buyers and sellers. And because we use a marketplace approach, we can constantly add new materials, new buying -- new options for our buyers. And as new technologies come onboard, there is a lot of new interesting developments for example, on 3D printing. In our marketplace, a buyer can see, I can make this part with traditional machining, and maybe able to die cast this, I can 3D print this, they can see all those different options there, they can see the price differential, they can see the design -- what are the design concessions you need for each one, what materials are available, what kind of post processing. So all that's available at your fingertips and it's constantly being added and it's available all the time. So that's really unique versus the traditional model where a buyer is soliciting one-by-one or via e-mail and number of sellers and going back and forth and that's just very slow, expensive and it never usually results in an optimal solution.

That makes a lot of sense. Obviously, there is something fairly unique in terms of applying AI to marketplace. Kind of like to go back to the supply chain issues, have you seen maybe a surge in kind of new customer acquisition in terms of interest, because of what they were facing? And then, evidence from there, then just significant increase in usage, because they found your marketplace to be so effective. I don't know if you have any anecdotes or evidence that you could share on that point?

Yes. Again, I think, I'd point back to some of the metrics that we've been reporting out. The fact that, we saw 66% growth in Q2, year-over-year growth in active buyers, the fact that we've seen a 54% increase in Q2 this year versus last year in account spending more than $50,000 in LTM basis. We also guided to a higher revenue growth, accelerating revenue growth in Q3 and then applied in Q4, as well as we talked about in sequential gross margin expansion we grew 110 basis points from Q1 to Q2. We guided it, we thought in Q3 and Q4 we would sequentially grow our gross margin as well. So I think you're seeing more buyers coming to us and we're seeing more and more spending over that $50,000 number. We also from 2019 to 2020, grew our active number of sellers 82%. And that basket of seller services is becoming very popular. And in fact, we announced on the Q2 earnings call that we're going to build a small sales force to sell directly into our seller network with that basket of seller services, those financial products, which have 90% plus gross margins, and which help create a stickier experience for our sellers. So I think Xometry is getting more acceptance and more and more people are seeing that that is the -- a secular change now in [indiscernible] purist, on-demand or custom manufacturing.

So you have the whole marketplace and then you have the additional services. I don't know if you've disclosed the mix of revenue yet at this point. Are you just trying to get meaningful -- and what do the economic profiles look for both of those?

Yes, sure. I'm happy to take that question. So when you look at our seller services which we launched first in mid-2019, so we started out with supplies and tools. So we created a -- basically a marketplace within our marketplace, so our sellers, our small manufacturers could then, as Randy talked about in this presentation, right, create a little group purchasing organization basically where we can bring discounts from MRO providers for those sellers, allow -- giving them the buying power of much larger organization. That was our first rollout of our seller services. From there, about 9 months later -- 6 to 9 months later, we launched our first financial product. So our first financial product was a product called FastPay. So with FastPay, our sellers can get paid as soon as they ship the product to one of our buyers. We typically have 30-day payment terms, so 30-days after our shipment, FastPay allows them for a small fee to get paid, obviously, right away. We then through -- created another payment tool called InstantPay. InstantPay, which we just announced on our last quarterly earnings call, allows our sellers to get paid immediately when they accept the job. That fee is obviously a little higher than our FastPay product and so forth. So our financial products we have just launched a little bit more recently, the adoption rate on all these products together has been about a 40% attachment rate that is. And today, that's -- the margins on those are very good. The financial product margins, for example are 90% to 95% but as part of our revenue, still low single digit, so less than 5%. We will certainly break that out as that continues to grow and the attachment rate continues to improve over time.

Definitely a nice add-on incremental and seems like high demand from your marketplace participants. So you really have some big name buyers, I guess on your customer list, and just wanted to get a sense for your business mix between enterprise and SMBs today? And is that trending in either direction? Is there anything interesting to highlight there?

Yes. So 30% of the Fortune 500 purchase is from Xometry. And I think as we talked about, we see growth in customers that are spending more and more, and we use that $50,000 metric. So that usually, those tend to be larger companies as one can imagine. But look, the nice thing about our platform is very extensible. So you're also seeing startups, particularly in industries like robotics or folks that are in green tech, you're seeing a lot of green tech folks, green tech companies emerging, that are so young they don't have their own supply chains. So we have good working Fortune 500 companies that say, hey, I need to reduce my procurement costs, I don't want to worry about this whole chunk of manufacturing and want to put it on to the Xometry marketplace. But then the other side, you've got starts who say, hey, I'm building a brand new product, I don't have any suppliers, Xometry is my supply chain out of the gate. So it kind of works both way that we're serving both markets. And even when you go down to sort of engineering students, et cetera, because we have these add-ins, these plug-ins with the CAD programs, you can be a graduate student or just a student -- an engineering student in a college and you can access Xometry as well. So it kind of works across the board.

What about in terms of the industry verticals? Is there a certain vertical that's dominates more? I don't know if the auto sector or the PC business, anything in terms of the verticals to point out?

Yes, we're pretty widely disbursed, but we do a lot in aerospace, defense, robotics, automotive, medical devices, as I mentioned a lot of green tech. Technology in general, retail and consumer is becoming an important portion of our business. We're also doing not only more production orders, but we're also doing more assemblies. So we talked about in our Q2 call, assemblies that we produce for -- on the automotive, the retail and the ag tech sector. So more and more customers are -- buyers are coming to use the marketplace for both low volume production, but also full assemblies as well.

Great. It's good to see that you have a lot of growth opportunities and attracting a lot of different type of people. Maybe a one last question -- well, it's going to be 2 last questions. Is there anything you would say in terms of what is your secret sauce? I guess AI would be part of it. But maybe anything besides that there you'd call out as your secret sauce in kind of disrupting this very, very large market. And then second, just if we talk about -- maybe like top 2 priorities over the next 6 to 12 months, that would be great. Thank you.

Yes. I think certainly, AI is at the heart of what we do. And we're also very technology focused constantly adding products and services that enhance the experience for both our buyers and sellers. I think international is a huge opportunity for us. Today, it's less than 10% of our revenue, but as we talked about in our Q2 release, we think that should eventually be 30% to 40%, as you see in a lot of other marketplaces. So -- and I think finally, -- I'm the Co-Founder and the CEO, and so that entrepreneurial spirit at every quarter, we want to make it our best quarter, both from a revenue and a gross profit and results perspective. That's going to be the mentality we have in this company and we're constantly driving. And that -- and we're such a huge TAM, I think everybody is very excited and wants us to continue to grow and extend that we already have.

Great. Well, thank you, Randy and Jim. Very insightful. Great to see the marketplace grow. And hopefully, we can have you back in person at the next conference. Thank you for your time.

Thanks for having us.

Thanks, everyone.