Xometry, Inc. (XMTR) Earnings Call Transcript

All right, good morning, everyone. Corey Carpenter, Internet analyst at J.P. Morgan. Starting off the conference with Xometry. Randy and James, thank you for joining us.

Thanks so much for having us.

Thank you.

So for those newer to the story, I thought maybe we could start with a just high level overview of the business and the problem that Xometry is solving.

So Xometry is the leading AI-powered marketplace for custom manufacturing. When you think about manufacturing, it's obviously one of the largest industries in the world. And there's a segment of that which is heavily fragmented with hundreds of thousands of small manufacturers and where it's very difficult for customers to find the best option, whether it's price, lead time, or manufacturing process. And prior to Xometry, that had been handled in a very analog, offline way. So using AI, we've created an online marketplace to enable these customers, and we're a global company, to effectively and efficiently procure these custom parts. And then we've got a network of thousands of small manufacturers spread out across the United States and across the world that are doing the fulfillment of it.

So, manufacturing, certainly a large market. Could you just walk through who your core customer is? How you think about the addressable market within that, I think, over $2 trillion TAM?

Yes. So it's very exciting when you think about large companies, in particular. They are spending -- some of them are spending hundreds of millions of dollars a year on custom manufacturing that they're procuring from lots of small manufacturers. So for these large customers, it's very costly and inefficient the way they're doing this today. So when you look at Xometry's 100 largest customers, you'd recognize a lot of them. They are Fortune 500, Fortune 100, Fortune [ 50 ] companies. And because we're a technology company, we have a very extensible platform. So we're operating in many different verticals, from robotics to medical devices, to consumer, to automotive, to aerospace, to defense. So lots of the largest companies in the world today that are buying custom parts are Xometry customers today.

Okay. So let's spend a little bit of time on the buyer side. You have over 58,000 buyers. You've been adding about 3,000 to 4,000 a quarter, pretty consistently despite what's going on in the manufacturing environment. Could you talk about what's driving this buyer growth and how you think about the sustainability?

Yes. So in terms of sustainability, you're talking about a market where there's millions of buyers out there. And so we're very proud of our growth. Last year, we grew our buyers 36% year-over-year. So we've had rapid growth. And we're very confident we can continue to gain that. And we're gaining market share because it's obviously a more efficient -- the model of using a marketplace, a digital solution, is obviously more efficient than an analog offline. So, not surprisingly, as customers, other parts of their lives are going online and being done digitally, it makes sense for them to lean into this in manufacturing as well.

So what's the process for onboarding new buyers? How do they find you? And once they find you, what's your sales process?

Yes. So, more and more, they're finding us organically. So they're hearing about Xometry. They're coming to our website directly, or they're hearing from colleagues. So they're folks who maybe are coming in new from another company saying, hey, we use Xometry at my prior company, we should be using it here, or within our larger customers, you're talking about there's potentially thousands of engineers and procurement people that could buy from us. So you're hearing word of mouth in other divisions. We also spend digitally on digital marketing, so that's a significant portion of where we get them. And then we also use our technology itself helps us buy -- gain buyers. So we've released new things like Teamspace, these are collaborative tools that encourage colleagues to invite their colleagues to come in and start working with Xometry.

So once you have the buyer, they are on the platform and onboarded. How predictable is the evolution of their spend? And could you talk about retention?

Yes. So it becomes -- Xometry was -- I'm the Co-Founder. We started the company together with Laurence Zuriff in 2013. 2014 was our first year of doing business. And our cohorts have been pretty consistent. In fact, in our investor presentation, we provide a cohort analysis, and you can see we've gotten nice growth over time from those cohorts. So people get into a pretty regular rhythm. And then we also have the ability, as a customer is in there, and Xometry has grown, we've been adding more and more manufacturing processes to sell to those customers. In the beginning, we're doing much more prototyping. As time has gone on, we've added more and more production level processes. So, in fact, if you look at that cohort analysis in our investor deck, we show the year 1 spends of each of the cohorts, and that has been growing very nicely. And 2023 was our biggest year ever for the first -- that cohort. So that's just more testament to this is a huge market. Lots of buyers out there, not just individual buyers, but lots of companies that still aren't using Xometry, we're still hitting record highs in terms of year 1 cohorts.

Okay. So spend per buyer, we talked about number of buyers, 3,000, 4,000 a quarter, spend per buyer, a little less predictable, I think, given the macro. Could you talk about how much of that is due to macro versus perhaps other factors that are impacting it?

Yes. Hi, Corey, I can -- this is James, I can talk about that one. So, yes, when you look at our growth, then buyers is a key driver of that. We grew buyers 32% in Q1, and marketplace revenue was 24%. So revenue per buyer was down about 9% year-over-year -- 6% year-over-year. So some of that is due to the mix of the large orders that we had at the beginning of the year, but overall, really encouraged by the growth we've also seen in our accounts of $50,000 or more, which grew 25% year-over-year in Q1 and grew about 30% last year, year-over-year.

So kind of sticking with that, you did -- you called out a few quarters ago, excuse me, the buyers pulling back on large orders in January, not just you, but a lot of people in the industry. Trends seem to have stabilized since then. What's the latest you're seeing on the macro side? And James, what are you assuming in the outlook?

Yes. So we saw -- we did see a very slow start in January that picked up through the quarter. So we were really pleased with hitting 24% marketplace growth in Q1, which is a good result, especially as we look within the softer manufacturing environment and we look across certain vertical players in the space. As Randy described, there's a lot of way we can continue to grow buyers and grow the revenue per buyer. Our marketing dollars behind acquisition, our enterprise efforts to grow and expand the revenue that we're getting from our customers, and overall growing our marketplace menu and broaden our appeal. So encouraged by seeing the 32% buyer growth and the 25% growth in the [ 50,000 K ] accounts in Q1. So generally pretty pleased with those healthy metrics we're seeing across the marketplace. So as we looked at Q2, took that into account as well as still being in this softer macro environment for manufacturing.

Okay. So let's shift to the supplier side. That was a lot of the buyer questions. On the supplier side, you have close to 3,500 suppliers in the marketplace. Similar questions as on the buyer side, why do suppliers choose to work with you and how do they find you?

Yes. So that is largely word of mouth. As the leading online marketplace for custom manufacturing, there is not -- where for many of these small manufacturers, they're the only ones we know. And you have to understand how different this is for them. So the long tail of the Internet had never touched these small manufacturers. There was no place for them to sell their online capacity. That's a little bit more of a harder thing to quantify. That's why we're using AI. And just to back up for a second, we use that AI not only to provide instant pricing for the customers, but we also use that AI to optimize the match between the buyer and the supplier. And so one of the reasons why manufacturers like to be -- and we have more demand, we have more supply than we need right now, like we have lots of people coming to us. And one of the reasons why they come to us so eagerly is not only because they can get customers that they never were able to touch before, and these are small businesses with very small sales and marketing budget. So if you're a manufacturer outside of Detroit, historically, you have lived and died with the automotive industry, or if you're in Houston, Texas, oil and gas. Now with Xometry, suddenly, if you're that great automotive supplier outside Detroit, you can get work from an aerospace company in California or a medical device company in Boston wasn't possible before. But not only do we bring them new customers, but also with our AI, we optimize the work that they get, and we try to find their sweet spot. So if you're a manufacturer and you're running your machines for, let's say, 10 hours, a 10-hour job, the price -- your margin on 2 different jobs is radically different depending on whether one job exactly fits what you're best at versus one that's a stretch. And historically, you've been dependent on your local customers and you've had to do whatever they've wanted to, even if that was less profitable. With Xometry, suddenly have the option to get more profitable work.

And how does suppliers typically view Xometry relative to their other business sources? Are you often -- are you their primary source of business, or are you their incremental revenue stream? I mean, could you talk about retention on the supplier side as well?

Yes. Look, it's a mix, as you can imagine. So we've got some suppliers where we're now the majority of their business. We've got others where we're maybe their biggest customer or one of their biggest customers. And then we've got others that are just learning us. So it's pretty across the board. But over time, we've been very careful to grow that supplier network, which we could blow it out, but we are trying to increase our share of capacity within those suppliers. We want to become a very important supplier -- customer for them. We've also given for them a software called Workcenter. So we have a free execution -- manufacturing execution system. So basically something that helps the supplier manage their business. We have them use that for Xometry work, but we're also enabling them to use that for all of their work. And so we're not only trying to get these suppliers to come in and take work from our buyers, but we're also trying to, in a sticky way, get them to stay in our ecosystem and use our software.

So let's stick with Workcenter, I mean, basically the operating system that you're offering suppliers to run their entire business on. Could you talk about the adoption you're seeing and then some of the other services you offer suppliers to keep them sticky?

Yes. So Workcenter is great. We're continuing to make enhancements with it. And again, when you think about a lot of these small manufacturers, they have no software. They're using clipboards and you're using pieces of paper to track everything. And the other products in the market can be very pricey for them. These are very cost sensitive folks. So with this free software, which we're continually upgrading integrations with things like Quickbooks and other things to make it -- things like just making it easier for them to ship, to bring out shipping labels seems like not a big deal, but it's actually a big deal or tracking. So by giving that to them, we're getting more and more adoption from our suppliers. And we offer them a host of services. At some point, we'll talk about Thomasnet, but we also offer them some financial services, so to get paid faster. These are small businesses. Cash is important to them. If they're going with a traditional customer, sometimes that could be 60, 90-day cycle. With Xometry, they get paid a lot faster. That's very attractive.

I should have mentioned at the beginning, if you have a question, you can submit it to us online. We have an eye put up here, and then we'll take questions from the audience here in a bit as well. So one question we get with all marketplace businesses is disintermediation risk. Is this a problem for you? And if so, how do you address it?

You know, it's not something that has historically been an issue. And you have to understand the landscape. So, going back to where our customers are, and as I've talked about, our largest customers are large companies that have been around a long time. They're not coming to Xometry to find yet another supplier. They're trying to -- they're coming to Xometry to solve a problem, which is, if you're buying hundreds of millions of manufacturing a year, maybe even more, you're trying to shrink your supplier base, you're not trying to manage more and more. It's very expensive and time consuming. So if there's a portion of your supply base, particularly smaller orders, smaller manufacturers, and you can go to one place to do that all that's very attractive. So I always use the analogy sometimes of, like, an Uber driver. How often -- when the Uber driver drives you, even if they hand you their car, do you actually take it or no. The convenience, the ease of use, all those things that Uber provides, it's a very similar thing for our customers. And then on top of that, they're trusting us with what's their bread and butter, their parts, what they get paid on. So the trust that they have in Xometry, the ease of use, the fact that we're a public company, the governance of transparency, that's very powerful. That's something that a small manufacturer could never offer.

Okay. So let's talk about Thomas for a bit. You acquired them a few years ago. We've thought of it as the white pages for the manufacturing sector. You can reword that, if anything differently. What was the vision behind the acquisition? And where are you with the integration?

Yes, the vision, so think about manufacturing, as we talked about, it's a huge market, huge TAM. Xometry plays in some of the manufacturing processes. We're constantly adding new ones. Thomas is much broader. So Thomas has lots of categories that we don't have today. So it helps expand the TAM for us, and what we can offer customers being their true one-stop shop. Plus, you've got 1 point -- I think over 1.2 million registered users on Thomas. We're very proud of that 58,000 buyers we talked about Xometry, but that Thomas user base obviously dwarves that. So one thing that as -- one thing as we continue to grow is get awareness out about Xometry. We're very proud where we are, but we're still early stages in terms of our adoption in the market and the growth that's out there. Thomas helps raise that to a different level. And plus, when you look at the business, Thomasnet is a very high margin business. It can be a very profitable business. So as we think about our long-term outlook, which, of course, James will talk about, that's very helpful to us.

So let's talk about competition. You're growing over 20% in the marketplace. I don't think the manufacturing market is growing that fast. You're taking share. Where's that coming from? I'm sure a lot's from the traditional channel, but also on the digital side, who are your competitors, and how do you think of your moats?

Yes. And again, we grew 24% last quarter. So, look, our competitor is really the way that business used to be done, or is currently being done, which is offline. It's -- I'm going to my local manufacturer, I'm driving there, I'm picking up the phone, I've known this person, et cetera. So kind of harking back to the days where a lot of other things were being done on a very local basis. So that's usually when we don't -- when a customer doesn't immediately convert to us or before they come to us, that's usually what they're doing most of the time. And so it's really just telling people, hey, there's a better way to do it. And in fact, we're going to give you a bigger selection, hopefully better pricing, better lead times, less friction in your experience, we can integrate into your procurement system, all these goodies that you'll never be able to get. And so that's really what -- and as we get the word out and people learn about it, it's pretty miraculous, because in our business, in manufacturing, a lot of these things were never done. And the fact that we're using AI to create these prices, that's miraculous. And going back to your question about competitive moat, so we have a bunch of moats. One is these networks of buyers and suppliers, our global reach, the fact that not only we grew international...

69% in Q1.

69% in Q1, so we've been -- you know, had great growth in Europe. We've been investing in Asia Pac as well, so the international element of it. And then the fact that we're using what's called machine learning to create this instant pricing, that feeds off of data. So one of the nice things that's been happening is great growth in our gross margins for our marketplace business hit a record high of 32% in the first quarter. That's powered by getting all this data that helps us with our algorithms. So every day, as we get more and more data points, as we grow larger and larger, that data lake, that competitive moat gets larger and larger.

So I want to talk about some of your investment priorities. You gave 5 focus areas at earnings a few weeks ago. Let's start with international, which you just mentioned. What is your footprint today and where are you focused on the next 12 months for international expansion?

So we're really pleased with the progress we're making internationally. I think the team done a fantastic job the last few years. In 2020, it was about $3 million in international and last year we were at $60 million. We're growing that last year, 81%. We grew 69% in Q1. It's now 18% of total revenue. So what is it? It's a broad footprint across -- with multiple languages across the EU, UK and Asia. So we're providing localized experiences, localized marketplaces to the buyers, 15 different languages, and then supporting that is also building out further our supplier network. So out in China, through India, through Turkey and through Europe. I think over time, we can see that as other marketplaces have achieved getting to more like 30%, 40% of our revenue over the long term.

And I have more questions, but after this one, I'll open it up and see if anyone has a question in the audience, then we can get back to our list. So another priority you highlighted is to -- on the investment side is to expand the marketplace menu in Instant Quoting Engine. Could you talk about your Google Vertex partnership? Any way to frame or quantify how impactful adding Instant Quoting to a category can be?