Good afternoon, welcome to the Shapeways fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference hostess by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nikki Sacks of Investor Relations. Please go ahead.
Greetings, welcome to Shapeways fourth quarter 2022 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the prepared remarks. 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 fact 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 first quarter of 2023, expected growth, impact of recent acquisitions, new offerings, market opportunity, and plans for compliance with the NYSE's continued listing standards are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could result in actual results differing 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 annual report on Form 10-K for the year ended December thirty-first, 2022. Information provided in this conference call speaks only to the broadcast today, March thirtieth, 2023.
Shapeways disclaims any obligation, except as required by law, to update or revise forward-looking statements. 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 after market close, which can be found on our website, www.shapeways.com. On the call today are Greg Kress, Chief Executive Officer, and Alberto Recchi, Chief Financial Officer. I'd like to turn the call over to Greg. Greg.
Good afternoon, everyone. Thanks for joining us to discuss Shapeways' fourth quarter and full year 2022 financial results and progress on our key initiatives and strategic growth plan. I'll begin by providing a business update, and Alberto Recchi, our CFO, will then discuss our fourth quarter financial results and outlook for the first quarter. We are pleased with our fourth quarter results, which came in as anticipated as we delivered 5% revenue growth in line with our guidance. Notably, in 2022, we made a number of investments which we believe position us well for growth. These include new materials, technologies, and certifications, enhancing our software platform, as well as continuing to refine our focus to those areas that offer the greatest opportunity, particularly enterprise manufacturing solutions and commercializing our software.
In 2022, we completed three acquisitions, including the successful acquisition and integration of Linear AMS, which accelerated the expansion of our manufacturing capabilities and extended the materials, technologies, and certifications that we offer our customers. Today, we offer 12 hardware technologies and more than 120 materials and finishes, including industrial metals and advanced finishing. We give our customers everything they need from design and pre-production to manufacturing and delivery across a range of industries. Building on our years of experience and having made these investments, we believe Shapeways provides an extremely compelling solution for a range of enterprise customers, from project-focused engineers to large global enterprises seeking high quality, flexible, on-demand manufacturing. Shapeways is ideally situated to disrupt the multi-trillion dollar manufacturing industry as manufacturers seek more flexible and reliable solutions to their manufacturing needs.
We have a meaningful opportunity to capture business from small and medium-sized manufacturers that are unlikely to invest the capital required to deploy and support their own digital capabilities. Shapeways' core competency is in low volume, high mix production at scale, a compelling solution in an environment increasingly focused on mass customization and speed of part delivery. Importantly, we are not limited to prototyping and low volume production. As our customers scale, we are able to support their growing needs with traditional methods. Through our acquisition of Linear AMS, we gain traditional injection molding capabilities. Our broad solution allows us to efficiently capture a larger portion of our customers' spend and to grow with our customers' needs. I'd like to highlight just a few applications which illustrate the demand for digital manufacturing, particularly in key markets in which we operate, such as industrial, medical, automotive, and aerospace.
Whirlpool recently leveraged Shapeways' design and manufacturing expertise to create production injection molds using both traditional and metal additive processes to achieve cost-effective low volume production. Also, Lockheed Martin and NASA also started using Shapeways in support of Project Dragonfly, leveraging Shapeways to manufacture flight qualified parts in support of their drone design. Our pipeline for enterprise opportunities continues to build with growing interest from customers like I just described, including other large Fortune 500 companies which are seeking manufacturing solutions for various specific needs. We are encouraged by the momentum as initial qualification orders are moving to scaled production and as customers expand the size and scope of their orders. The other element of our growth story, which makes us particularly excited, is commercializing our software. As we've discussed, one of the key differentiators is Shapeways proprietary software, which digitizes the end-to-end process from quote through delivery.
Our software enables us to offer high quality, low volume, complex part production. It is also a valuable tool for global manufacturers, specifically small and medium-sized traditional manufacturers that are not able to invest in the capital and time necessary to digitize their businesses. Our software customers can leverage our software tools and services for capabilities such as file upload, instant pricing, checkout, optimization, and manufacturing fulfillment. This helps them grow their business by enabling improved customer accessibility, increased productivity, and expanded manufacturing capabilities. In short, moving offline processes online enables a more streamlined process and increases manufacturing throughput, which should enable software customers to expand their manufacturing capabilities and to capture more customer share of wallet, all without having to invest in hardware. Since launching our commercialized software product offering, OTTO, we have validated the market need and enhanced the product.
We further accelerated our planned phased rollout with the acquisition of MFG and MakerOS, which we completed last year. We are pleased with the market reception, and in 2022, we realized 6 times the amount of software revenue from the prior year, reaching $1.8 million. We are optimistic about the continued growth prospects with a meaningful opportunity to capture revenue through SaaS subscription, transaction and processing fees, demand generation services, and overflow manufacturing capabilities by Shapeways and other supply chain partners. With regard to our legacy self-service and marketplace e-commerce business, we continue to focus on stabilizing those channels as we continue to see increased competition. We expect to see continued demand and to realize a solid contribution from this business, but our growth focus is on our enterprise manufacturing and software businesses.
As we move through 2023, we remain focused on improving our cash burn while prioritizing the initiatives I discussed that we believe will present the greatest opportunity for profitable growth. We believe the investments we have already made and the market validation that we have already completed have put us on this track. We are encouraged by the momentum we have built, and we believe that we are well positioned for continued growth. I would like to thank the entire Shapeways team, our customers, our investors, and all of our stakeholders for the ongoing support. Alberto will now discuss our financial results in more detail.
Thanks, Greg. I'll provide a recap of our fourth quarter 2022 performance, give an update on our balance sheet position, and provide guidance for the first quarter. In the fourth quarter, revenue increased 5% to $8.7 million compared to $8.3 million in the prior year in line with our expectations. The increase in revenues was primarily attributable to positive contributions from our software offerings, scaling of our additive manufacturing capabilities, and traditional manufacturing services. Our gross margins in the fourth quarter were 41% compared to 47% in the fourth quarter of 2021. We continue to deliver top-tier gross margin, 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.
Fourth quarter adjusted EBITDA was a loss of $5.8 million, compared to a loss of $3.1 million in the fourth quarter of last year. SG&A expenses for the fourth quarter were $7.3 million compared to $7.1 million in the prior year, primarily reflecting increases to personal costs, the recent acquisition, and increased professional fees. During the fourth quarter, we largely completed the transition of our manufacturing facility in Long Island City, New York, to Livonia, Detroit. Turning to our balance sheet. As of December 31, 2022, our cash equivalents, and marketable securities totaled $40.4 million. During the quarter, we deployed approximately $6.5 million in cash.
We anticipated a higher burn in Q4 compared to our normalized burn as we largely completed our manufacturing facility consolidation to Livonia and managed the timing of expenses such as D&O insurance annual premiums. As we continue to invest in both new hardware and our go-to-market initiatives, we anticipate some continued near-term pressure on gross margins compared to historical levels. We remain focused on further improving our cash burn and believe the continued strength of our balance sheet and our focus on achieving profitability and managing cash burn will allow us to execute on our organic strategic plan without the near-term need to raise additional capital.
With respect to our continued listing on the New York Stock Exchange, we intend to cure our deficiency and come into compliance with a minimum bid price by effecting a reverse split of our common stock. Details of the split are planned to be included in our annual proxy statement, we intend to determine the split ratio and to seek approval at the annual meeting of the stockholders in June. Looking ahead for the first quarter of 2023, we anticipate revenues to be in the range of $7.8 million-$8.1 million. As Greg discussed, we believe we're well positioned for continued growth. We're focused on those areas that offer the greatest opportunity, including enterprise manufacturing solutions and commercializing our software, anticipate an accelerated ramp up in these areas as the year progresses.
With this, we've completed our prepared remarks, we'll now open the call for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Greg Palm with Craig-Hallum. You may now go ahead.
Yeah, thanks for taking the questions here. I guess, maybe to start in terms of the outlook, you know, what kind of visibility you have in that revenue ramp this year? I don't know if it's pipeline related or, you know, new customer related, but what gives you confidence that we'll see a revenue ramp throughout the year?
Hey, Greg. Thanks for asking the question. Appreciate you guys joining. I think there's three things that we're looking at inside the business. First is our core legacy e-commerce channels, right? That's where we've seen some of the most competition, and that's where we've seen some pressure, year-over-year. We continue to work on optimizing that from a top line perspective. The second is we have our enterprise business, this was new. I think the biggest thing for us here is it took us more time than I expected to really build that pipeline and find our go-to-market position. We are seeing good traction, good pipeline and, you know, sizable order visibility, you know, looking forward.
Now, with that being said, we're still working to get confidence in being able to kind of stand up and provide a real good guidance on that. Then last, we're working on commercializing our software. This is interesting because it does have more predictable revenue associated with it, specifically with the SaaS models that we're rolling out. As we focus on tightening up our acquisition funnel and focusing on retention and driving lifetime value, we're starting to get to a place where we feel like we can start to focus on that more and more to be able to provide more guidance. But at this point, we aren't providing guidance at that level yet. So we do feel like we are gaining momentum across those three initiatives inside the business, and we're seeing good traction.
Again, we haven't provided that guidance for the full year yet. The second thing I would say is we've also spent a considerable amount of time on just our gross margin roadmap. As we had a little bit of pressure in Q4, we'll also have that in Q1 as we've moved from our Long Island City facility to our Livonia facility and consolidated. Once that's complete, we'll see more of a stabilization getting back to the gross margins that we had planned for or that we had expected historically. We planned for this drop in gross margin as of right now, just 'cause we have some redundancies in our cost structure. Once that's complete at the end of Q1, we'll be able to continue to start executing on that.
While we're doing all that, we're also managing our cost base, right? We want to show a path to profitability, and we wanna be able to do that by driving our revenue, optimizing our gross margin, and controlling our costs. You'll see more and more of that throughout the rest of this year.
Makes sense. On the software piece specifically, maybe I missed it, but did you give a number of SaaS generating revenue customers associated with that $1.8 million amount? I guess just sort of broadly speaking, how are you viewing the growth of software specifically this year?
Yeah, we're really excited with the momentum that we have. You know, I think there's been three things that we focused on that I kinda just touched on, but it was, you know, how do we acquire customers in a very effective way? The second was, how do you retain those customers over that time period with the retention model associated with them? How do you drive the lifetime value of that customer by layering in more features and functionality to drive more revenue? There's some really exciting things that we're working on and starting to roll out, but the adoption's been very strong, and the retention of those customers has been very good.
I think we have a future rollout strategy that not only allows for increased acquisition and better retention, but it'll also provide additional revenue lines for the business. That should drive lifetime value. We expect to provide more insight into that model moving forward as our metrics start to stabilize. As of right now, right, we've completed Q4, we're completing Q1. We're starting to feel better and better about where those models are going, you should expect to see more visibility to that as we move forward.
Got it. Okay, I'll leave it there. Thanks.
Thanks, Greg.
Our next question will come from Jim Ricchiuti with Needham & Company. You may now go ahead.
Thanks. Good afternoon. Just wondering, if you can give us the software revenue exiting the year, Q4. Just, you know, appreciate the color you gave for the full year 2022. Just trying to get a sense where it was for Q4.
For Q4, we have not provided that information yet. We would have to pull those numbers. I don't have them at the tip of my tongue. We, as you can see, we started with little, and it's been ramping, so obviously Q4 was significantly higher. I think that's probably why you're asking, so you get a better sense of, like, what that ramp would look like as we moved into the rest of the year. We can probably follow up with you on what those numbers look like. I just don't have them with me right now.
I actually, Greg, have a similar question as it relates to the enterprise revenue in Q4. Again, only because it's such a major focus for you in 2023. It just would be useful to know what the starting point or the ending point was for Q4 2022.
Yeah. You know, I think you're starting to get to a point where we're talking about segment reporting, right? Ultimately we haven't provided that yet. I think that it's something that we want to be able to do as we move throughout this year, but we haven't been able to commit to that yet. I think you're asking good questions, Jim, because it's about like, what that ramp ultimately looks like. For this earnings call, we're not providing that level of detail. I think in the future, that's where we ultimately want to be able to provide you guys with more feedback about how each one of these individual growth initiatives are really ramping.
Well, you say your pipeline in enterprise is pretty healthy, so presumably there's some meaningful revenues that you're anticipating in Q1 from that as a percentage of the overall revenue.
Yeah, we haven't provided any of that detail, but we do have a good pipeline that is closing. What you'll see is, you know, historically, we've talked about our top 250 customers, right? Like that continues to represent the more enterprise book of business that we have. What you'll see is in 2022, that kind of finished out as 60% of our revenue, which in 2021 it was more like 50% of our revenue. You start to see that growing as a larger percentage, and that's more sticky customers with bigger orders and higher gross margin, with a lot more opportunity to go and grow those customers. That continues to be, you know, growing at, let's call it 18%-20% CAGR over the last several years.
It's a good, healthy piece of our business, from a revenue perspective. It continues to grow, and we will be providing some of that information in the future so you can see more of what that pipeline looks like and how it's translating into sales.
Okay. What were the unusual... maybe, you can just give us a sense on the OpEx? Sounds like there was a little bit of unusual OpEx related to the move in manufacturing to Livonia. What? Can you help us with that? Because it's also... We're going with it obviously, is to how should we be thinking about OpEx on a go-forward basis?
Maybe I can take that, Greg.
Yeah.
I-
Yeah, I was just about to say Alberto can probably answer that.
Thanks.
Yeah. Hey, Jim. Look, I think you should look at it this way. I think Q4 is probably a decent indicator of where SG&A will be in Q1, right? Some of the factors also cited in my opening remarks, right, that contributed to the increase in SG&A expense, you know, will remain valid and will be felt in Q1. Specifically, there'll be some spillover restructuring costs related to our move out of the Long Island City facility. You know, professional fees, it's been a, you know, a big bucket of those costs and, you know, the previous quarters. You know, even though some of these things, you know, we were able to reduce actually significantly, you know, D&O is a perfect example. From a personal cost perspective, you should not expect any further increase.
Any sense, Alberto, about cash burn, on a go-forward basis? What should we be thinking along those lines?
Perhaps let me make a couple of remarks here around cash burn, cash position, and how do we see the path to profitability. I think this will help you model out the rest of the year. We closed the year with a strong cash balance, right? Of more than $40 million in cash, which I think provides the company with sufficient liquidity to do a couple of things, right? First of all, support the ongoing execution of our strategic plan, which Greg just outlined. We'll support our normalized cash burn, which I'll talk about in a second, and also positions us well on our path to profitability.
As Greg said, we'll keep aligning our resources, right, with the highest opportunity areas to drive revenue growth while tightly managing our cost structure and aiming to maintain our gross margin levels aligned to what they've been historically. Okay? From a cash burn perspective, you know, we're looking to solve for a normalized average cash burn in the range of $4 million-$5 million per quarter. Okay? This will overall decrease a little bit throughout the year as revenue grow. You know, that said, we did point out in the previous call and last earnings that cash burn in Q4 of last year was going to be slightly higher, right? That's exactly what happened.
Mainly due to our relocation expenses, right, related to the move from Long Island City to Livonia. Some annual expenses that happen usually in the end and first part of the year. A good example is the D&O insurance, right? Which I cited a second ago. We were able to reduce that by 40% compared to the peaks of two years ago. Looking perspectively, and to give you some color around Q1 2023 burn, we do expect to land above the normalized burn, mainly due to some carryover costs related to our manufacturing facility consolidation here in the U.S. Hopefully this helps to give you some perspective.
Got it. Okay. Thanks very much.
Sure.
Our next question will come from Troy Jensen with Lake Street Capital. You may now go ahead.
Hey, gentlemen. Thanks for taking my question here. I just wanna dive in a little bit more at the Detroit move and just kinda how it ties in with gross margins. You know, Greg, I think you said it's, you know, roughly the same in Q1, we bounce back up in Q2. Maybe Alberto, I mean, are you guys kind of endorsing like a 41% gross margin for March? Do we go back to 43-ish, or does it go higher now because, you know, Michigan facilities can be less expensive.
Yeah.
Better margin profile than in New York. Just a little color on how you think gross margins trend throughout the year.
Yeah. Look, we do expect gross margins to hold strong in the 40s. I think, looking at Q1, to answer your question, I would probably use Q4 as a proxy, right? Now, our plan has gross margins improve throughout the year, right? Back into the mid to high 40s, which represent our historical levels, right? That will happen as we start reaping the effects of the optimization and consolidation of our manufacturing process. Also, as Greg pointed out, a software which is a 90%+ margin business becomes material, right? From a revenue perspective, which it will.
Perfect. All right. Maybe just Greg, I'd love to hear, I know you don't want to give a lot of guidance, but $1.8 million in software, what do you think we're gonna do in 2023? Can you give us a number at all? I mean, is it $5 million? Is it $8 million? I mean, how excited are you on your software business?
No, I'm really excited about the software business, and we continue to see it scale. We haven't provided guidance yet, and I know that's frustrating because it's something we want to be able to tell you guys. There's a few key things that are happening throughout Q1 and into April that I think will help us feel a little bit more comfortable with providing a little bit more clearer guidance. Again, we can't commit to anything at this point, but we continue to see really good momentum, right? We've found ways to acquire customers very efficiently. Retention models are exceeding our expectation, and lifetime value remains very strong. We expect to be able to provide a lot more color to what that model looks like as...
This is one of the newer growth initiatives for us but, things have definitely played out as we had hoped in the back half of the year, and we're moving into, this year with a lot of strong momentum, behind the business.
Understood. All right, guys. Good luck.
Thanks, Troy.
Thanks, Troy.
Our next question will come from Noelle Dilts with Stifel. You may now go ahead.
Hi, guys. Thanks for taking my question. In, in looking in your 10-K, just going through direct sales, marketplace, and software, you know, direct sales were kind of flat year-over-year. Again, I know you're not giving guidance, but, how should we think about kind of what's going to drive some of that growth and kind of break out of this relatively steady pattern you've had over the last three quarters? I think you mentioned that you expect this continued pressure in marketplace sales, but any thoughts just on, you know, Again, that business has been relatively stable for the past couple of quarters.
Do you think we're at a point where things have stabilized from a revenue perspective, or do you think we're gonna see another, you know, another significant leg down in 2023?
Yeah. Thanks, Noelle. I appreciate you guys joining. To answer your first question, one, the growth that we see in the plan is really coming from enterprise sales and from enterprise manufacturing services and from software. I think right now both of those have strong pipelines from models, and that'll continue to push forward. What we are continuing to focus on is, and we don't wanna drop the ball on, is our legacy commerce business. As we've talked in the past, we know that channel ultimately has a lot more competition. It's more price-sensitive customers. As much as we wanna maintain that business, which we continue to have some focus on it's not gonna be the growth driver for the business.
You know, I think what we've learned is, software is very predictable if we know how to go drive it. We are working on continuing to accelerate that. On the enterprise sales, it is a longer buying cycle than we could have than we had originally thought. It does take much more of a solutions-based sale, but the orders are significantly larger. The customer qualification process is longer, but once you're complete, you're able to really go and tackle those customers. The pipeline that we have and the sales on a month-over-month basis that we're seeing from our enterprise sales reps is really encouraging. That's what will be driving the growth for us. The second question you had was related to. I'm sorry.
I may have.
Oh, I think you kind of hit on it. You hit on it while you were talking. It was just more on the enterprise. I'm sorry, on the marketplace side. you know.
Yeah.
Sales there have been pretty stable here in the back half of the year. It looks like $1.4 million in 3Q, $1.5 million in 4Q, up from 2Q levels. I wasn't sure if you felt like maybe that was more of a, you know, kind of stable level.
I mean, we're always working on that. We're always working on that channel, but ultimately, it's a harder channel to go significantly drive, right? We're just being very prudent, right? We're very focused on our path to profitability and making sure that we drive profitable growth. That's some of the harder pieces of the business to go drive where we're seeing success in other areas.
Okay. Then, I guess anything notable on just in terms of the demand for various technologies on the, on the additive side. You know, are you seeing more demand for metal? I guess I'm just curious if there's any sort of notable trends that you're seeing, you know, on the additive side or even, you know, with injection molding, even though that's, you know, obviously kind of new. Could you point anything out that would be important for us to understand? Thanks.
Yeah, I think, you know, we deployed several different types of metals last year, those have all started to ramp. I think Whirlpool is a really good example, right, where we're using multiple processes, including metal printing to create, you know, injection molds, production injection molds for them, which is, you know, a very interesting application with conformal cooling and giving them access to, you know, a lot of benefits on scaled production that they wouldn't be able to do without additive manufacturing technology. I also think that we've seen quite a bit of usage even on our core business, right? You know, when you think about Nylon 12 across both HP and EOS, that continues to be great products for us. You know, we're seeing good demand there as usual, right? Those...
You know, I think one of the interesting things as we move into enterprise customers is giving them access to that full capabilities of Shapeways, and they can move across products and get access to new technologies and materials and finishes that they may have started with us on one thing and, but moved to another. We continue to see a good mix.
Great. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Greg Kress for any closing remarks.
I just want to thank everyone on behalf of me, myself, and the entire Shapeways team. Thank you all for taking the time to join us today. We look forward to providing additional updates in the coming months.