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

Well, good morning, everybody. Thanks for joining us on day 3 of the 3-day UBS TMT Conference. We've got a fantastic lineup of software companies today. We're going to kick it off, as you can see, with Xometry. But following this session, we've got Microsoft, Zoom, MongoDB, Informatica, DocuSign. So a terrific lineup of marquee software firms. We're going to keep this Xometry session a little bit tighter to 20 to 25 minutes. As many of you probably saw in the news, and as Randy will talk about, Xometry announced a significant acquisition today, and there is a broader conference call at 8:30 a.m. Eastern. We'll have to cut our session a little bit short to make sure, Randy, Jim, Shawn and the team can attend that call. During this discussion, if you've got any questions, there should be a question box in front of you. Feel free to type any question in, I'll see it, or e-mail me directly. So with that, Randy, thanks for carving out some time on what I'm sure is a relatively busy morning.

Thank you, Karl. It's great to be here. So thank you very much.

Good, good. Well, I was going to open with asking you just broadly if you could summarize the business model. But given the timeliness of the acquisition, not to steal the thunder from the 8:30 call, but I'm wondering if you could touch on the acquisition at least briefly and put it in the context of Xometry's business model, that way we can hit both at once.

Yes. Perfect, Karl. And thank you. So Xometry is the leading platform for on-demand or custom manufacturing in the world. And we have a 2-sided marketplace with buyers and sellers. And as you know, we went public earlier this year. Thomas, based in New York, is a tremendous asset with a large and growing user base and levels of engagement. It is the trusted information platform in the manufacturing industry with over 500,000 sellers listed in ThomasNet and 1.3 million registered users. And Thomas drives strong user engagement through its deep domain authority and has not spent amazingly because the family-owned business on paid customer acquisition channels. So Xometry, with its two-sided marketplace, will be able to take great advantage of this massive seller network with over those 500,000 sellers, spanning over 70,000 different industrial manufacturing category. So this will expand the reach in the town of the Xometry marketplace and the depth of what we can offer our users or buyers. At the same time, we can take that tremendous user base, 1.3 million users, registered users at Thomas, or doing 20 million-plus annual sourcing sessions on the Thomas platform. And [indiscernible] unite that together with the Xometry marketplace to monetize that user base. And likewise, we can take the tremendous basket of services that Thomas offer sellers and offer that to a wider audience and include Xometry baskets to sellers. So this is a tremendous combination, which help us grow both the buyers and the seller side of our network.

And Randy, could you describe in a little bit more detail what exactly are the -- what you described as the information services that Thomas provides these -- this vast network of sellers?

Yes. So you've got, as I said, 1.3 million registered users who come to ThomasNet looking every day, and they're doing all these sessions, 20 million plus a year, to source manufacturing. So Thomas helps these 500,000 sellers be known. And they list on Thomas, and they can provide not only general overviews of their company, but there are many different categories. So if you're a buyer and you're looking, for example, for a women-owned business or you're looking for a business, any specific state or if you're looking for a business that has special aerospace certifications, all of that is available and searchable on Thomas. And Thomas helps manufacturers set up those profiles and be found. Likewise, Thomas also helps their 500,000 sellers work and market off platform as well. So one of the great things about Xometry also ties into an acquisition we did earlier in factory IV is to work with our sellers, both what they do on platform and off platform and create greater stickiness with them in the overall Xometry ecosystem. ThomasNet does a similar thing, selling a basket of marketing services and information services that sellers can use within ThomasNet and off ThomasNet as well.

Got it. And Randy, does the demographics or composition of the average seller on the Thomas network differ materially from what is in Xometry's network today?

It's very complementary. So when you look at the core sellers that we've got at Xometry, and as we announced last year, we had, in 2020, 1,400 active sellers. That had grown 92% from the year before, but now we've got 500,000 that are in the Thomas network. So it's very complementary, but it also increases the depth of what we can offer because they offer so many categories. So now when our buyers come to Xometry, they can source so much more than they could prior to this. And also, they also have sellers that are larger than some of ours. So it really stands out when you think about doing everything from prototyping to small-scale production, the large-scale production, all that's available in the Thomas platform today.

Got it. And Randy, we'll get the details on the 8:30 call. But just briefly for those listening in, do you want to just summarize quickly what the main financial terms of the transaction are?

Yes, exactly. So the total purchase price is approximately $300 million. About $198.5 million, that was paid in cash. And about $101.5 million was paid in Xometry common stock, our A shares. And that transaction is expected to close this week.

Okay. Wow. Well, congratulations, Randy, Shawn and the team. That's exciting. We'll hold out for the 8:30 call to dig any deeper. But with that as a quick summary, maybe I'll sort of zoom out a little bit, Randy, and ask you a broader question, especially for those that might be a little bit less familiar with the Xometry story. And maybe I'll start with a question really around the TAM. And maybe the question I'd love to really get at is, what portion of all of, let's say, at least U.S. manufacturing jobs are suitable to be transacted on an online network? I'm sure there's some portion of jobs that are extremely large, complex for which a direct seller relationship is required. But what is the portion of the market that Xometry is addressing?

Yes. So Xometry overall, and Thomas will help us accelerate this, addresses a portion of the market that's going to non-contract manufacturers. And that is the vast majority of the manufacturers in the United States. So there are over 600,000 manufacturers in the United States. And the majority of them, I think, 75% plus have less than 20 employees. So historically, when the buyers try to source this manufacturing from these sellers or from these manufacturers, it was a very fragmented industry. There was no place then to find the best option, was off a manual slow and rarely would the buyer get the best option for their needs, the best price, the best lead time, the best qualifications. And for the sellers, these smaller manufacturers that, as I said, are the vast majority of the manufacturers here in the United States, there was no central place for them to be found by the buyers. And the long tail of the Internet have not touched them yet. So the beauty of Xometry's marketplace, now enhanced with Thomas, is to enable the buyers to access all those sellers in a very efficient basis. And that's -- you're talking about a huge market, everything from [ one house ] to small-run production parts, hundreds of thousands, sometimes even millions of parts that are made by these small manufacturers.

Got it. And Randy, are you seeing some anecdotes or metrics that the sort of average job is transitioning from a smaller batch prototyping job and it's becoming increasingly larger, increasingly more complex? Can you share any data or anecdotes to help us understand that journey?

Yes, absolutely, Karl. One of the metrics that we report out every quarter is the number of accounts or customers that are ordering more than $50,000 on an LTM, last 12-month basis. So that number actually grew 67% year-over-year in quarter 3. So we've seen really rapid growth in that number as our accounts are spending more and more every year. And not surprising, Karl, when you look at the rapid growth of Xometry, a lot of that has been fueled by our existing accounts spending more and more. So we've been also reporting out and tracking, I think, now over the last 10 or 11 quarters, the amount of revenue is generated each quarter for returning accounts, and that has ranged anywhere from 93% to 96% every quarter. So even in Xometry has grown like a weed, it's those returning accounts coming back, spending more and more in large part, that's because they're buying larger and larger amounts from us, including more and more production runs and assemblies.

Got it. And Randy, the idea that you had to establish essentially an online buyer-seller network to put buyers and sellers together for manufacturing jobs was one of the most innovative ideas I've heard from all the companies that went public that at least I participated in this year. You surely can't now be the only one providing this. What does the competitive landscape look like, Randy? I know there's another company called Fast Radius that's trying to do an IPO later this year. But how would you characterize what the landscape looks like?

Yes. So Karl, we're really the leading and by far, two-sided marketplace. So there are other companies that are vertically integrated manufacturers. So for example, you mentioned Fast Radius, they do manufacturing in-house, there're others that follow a similar model. But for us, those vertically integrated manufacturers are often sellers in the Xometry marketplace. So we're not a manufacturer. We're a marketplace bringing together the buyers and sellers. That allows us, because we're not a manufacturer, that allows us to ultimately provide the best value to both sides of the marketplace. And we're the only ones with this AI-powered marketplace, and it's a huge competitive moat. So we're using AI to provide instant pricing for both the buyers and the sellers. And we're using that AI to optimize the match between the buyers and the sellers. And as we gather more and more data, and we are the leading by far, and as we gain more and more data, those algorithms get smarter and smarter. And so that results in a better value proposition for buyers. They're getting exactly what they're looking for. But it also helps our sellers as well optimize, filling their capacity and making them more profitable. So with all this data, as we get more and more data that creates a larger and larger moat. And then as we build these buyer and seller networks, that just reinforces the network effect you get from a marketplace. And as we continue to accelerate, we sort of reach this a escape velocity that often becomes an almost impossible moat projects to overcome.

Got it. So Randy, let's talk actually about that pricing algorithm because as you've mentioned, it's central to the economics of your business model. That translates into your take rate or your gross margins. I think investors who follow the story would know that, that take rate or gross margin percentage has increased pretty materially. I think it was up some 200 basis points to 25.6%, so very healthy rate. Maybe you could talk through, what are the drivers of that take rate expansion? Because that's pretty central to your profitability and therefore, the value of your shares.

Yes, exactly, Karl. And our gross margin, you said, has been growing sequentially every quarter this year. And in our Q3 earnings call, we also guided to sequential growth again in Q4. And we talk about a long-term gross margin profile for the company of 35% to 40% prior to the acquisition of Thomas. We're very well on that track and we're very confident that we're going to get there in a very good manner. As you can see by the evidence by the huge growth, as you said, I think it was about 230% -- 230 basis point growth from Q2 to Q3, and we're just seeing wonderful trends there. Now with Thomas, we're actually on a pro forma basis, for the last 12-month basis, the combined company actually had a 40% gross margin. And in fact, as we're going to talk about a little bit later this morning, we're going to be guiding to an increase -- well, let me let that come out when we post presentation. So very positive trend there. So the way that the algorithm gets smarter and smarter as we collect data from our buyers and sellers as we do more and more transactions, and we're using an AI technique called machine learning. So the more data that the algorithms get smarter and smarter they get, and that translates into better margins for Xometry, who's very able to optimize the match between the buyers and the sellers. It also creates, as I said earlier, a better deal for the buyer. That's why we're seeing so many of them coming back over and over again where our unit economics are so good. And so as we get more and more data, the algorithms get smarter and smarter. But also as we get more and more engagement from our sellers, the more that the sellers, the manufacturers transact in our marketplace, the smarter we get about what they're looking for. And so this is a highly inefficient market, and one of the keys to creating that efficiency is ensuring that the sellers are getting what they are best at because the seller gets 2 different jobs until the machine, one can have a much higher profitability for them than the other. So as our algorithms learn more and more are matching algorithms about what the sellers want, that translates into higher profitability for them, but that also captures more value for both our buyer and for Xometry as well. So with all that data, we're getting smarter and smarter. And of course, as we're growing the number of active buyers and sellers, that's also amplifying the impact of these algorithms.

Got it. Well, Randy, 1 obvious way to stress test a pricing algorithm is to put it through a period of significant variability in the manufacturing industry and see how it does. So you just went through one of those periods where, as I think all investors know, not just industrial manufacturing analysts, but this has been a very volatile period in the last 3 to 6 months with raw material spikes and supply constraints. And I think one of the worries on Xometry was how the pricing model and the sell work would handle the supply constraints. And I think the fact the pricing algorithm led to a gross margin increase and Xometry basically had no hiccups through this period is a testament to how durable that model is. Maybe you could talk for a second about how durable the business model has been in the last 3 months through a lot of this manufacturing volatility.

No, that's great, Karl. I think one of the advantages of the marketplace, as you touched upon, it's a very durable model. And we're focused on creating durable growth. So prior to COVID, Xometry grew like a weed. During COVID, Xometry grew like a weed. And now during this supply chain prices, Xometry has grown like weed in fact in Q3, if you back out, we had a large mass customer last year, if you back that out and go to apples-to-apples, we actually grew 77% year-over-year in Q3. And that was actually an acceleration from Q1 and Q2. And we've also guided in Q4 to 75% to 80%, again, excluding that one mass customer. So not only did we do really well, but we actually thrived in the middle of the supply chain crisis and grow our margins as well. And that's the beauty because there is a secular shift right now in manufacturing to the digital. And as we've seen having so many other industries, when you think about payments or transportation or retail, the shift to marketplaces and digital happen there and create so much value for everybody. We're seeing the exact same thing in manufacturing, and we're lucky to be the leader in that by far, the leader in that and take advantage of that trend. So irrespective of the macro environment, people are moving to the digital, people are moving to this marketplace model, and we're the leader in it.

Got it. Randy, I'll ask you one more, and then you'll have to help to prep for your 8:30. But the international expansion opportunity sounds pretty interesting. I think a large portion of your seller network is U.S.-based, but actually, maybe you could give us some stats. What are your ambitions to grow the seller and buyer network outside the U.S.? And does the Thomas deal actually accelerate that strategy?

Yes. So it's a great question. And so in Q4 of 2019, we launched in Europe, and that has grown tremendously. So year-over-year, I think we grew about 500% in Europe through Q3 versus last year. So huge year-over-year growth. And today, it's a little less than 10% of our overall revenue. But as we guided to on -- as we've guided a couple of times to that we eventually think that international, similar to what you see in other marketplaces, it should be up to about 40% of our overall revenue. And the great news is we've been so successful in Europe, and that is scaling up even faster than we had imagined that we're taking that same playbook and we're moving that to Asia Pac. So we also announced in our Q2 earnings call that we're going to make additional investments to launch a network locally or within the Asia Pac customers. So we're well underway with that. We'll be launching that in 2022. So that just not only will continue to help our growth, but it will enable us to service particularly larger enterprise customers on a worldwide basis, whether or not they're in North America, Europe or Asia Pac now will be able to be their total solution.

Got it. Well, good, Randy, Shawn, why don't we end it there to give you time to prep for your 8:30 call. I'll be on it, as a few investors on this call will. But that provides a good context, I think, for the broader Xometry story and the acquisition. So Randy, Shawn, thanks for joining us, and congrats on the announcement this morning.

Thank you so much, Karl. We'll see you later.

Sounds great. Thank you.