Xometry, Inc. Q4 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Xometry Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shawn Milne, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us on Xometry's Q4 2022 Earnings Call. Joining me are Randy Altschuler, our Chief Executive Officer; and Jim Rallo, our Chief Financial Officer. During today's call, we will review our financial results for the fourth quarter and full year 2022 and discuss our guidance for the first quarter and full year 2023. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects. Such statements may be identified by terms such as believe, expect, intend and may. These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed before the market opened today and in our SEC filings included in the Form 10-K for the quarter ended December 31, 2022, that will be filed with the SEC. We caution you not to place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations. We'd also like to point out that on today's call, we will report GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operating decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute or superior to measures of financial performance prepared in accordance with U.S. GAAP. To see the reconciliation of these non-GAAP measures, please refer to our earnings press release distributed today and our investor presentation, both of which are available on the Investors section of our website at investors.xometry.com. A replay of today's call will also be posted on our website. With that, I would like to turn the call over to Randy.

Thanks, Shawn. Good morning, everyone, and thank you for joining us for our Q4 2022 earnings call. While Q4 was a challenging quarter for Xometry we continue to build global networks of buyers and suppliers and the technology tools that enable them to transact digitally. With our market-leading position and a total addressable market of $2 trillion, we expect to continue to grow rapidly for many years to come. We believe that the continuing shift to digital is inevitable. And as the leading two-sided marketplace, our asset-light digital marketplace creates efficiencies and values for buyers and suppliers alike. Our AI-powered algorithms generate instant prices and lead times, and we efficiently connect buyers with the manufacturing technology and manufacturers, which can drastically reduce time to market and strengthen global supply chains. While there are no shortcuts, we are steadily and methodically executing our vision of becoming the de facto digital rails for custom manufacturing. In Q4, revenue increased 46% year-over-year to $98.2 million driven by marketplace growth and expanding supplier services with the addition of Thomas. Q4 marketplace revenue was $79.1 million, a 32% year-over-year growth. Gross profit increased 72% year-over-year driven by 30% growth in marketplace gross profit and the addition of Thomas. Active buyers increased 45% year-over-year to 40,664 driven by a record addition of 3,875 active buyers in Q4, a 17% increase over the prior record set in Q3. We also set a company record for the largest number of orders in a quarter, in part driven by the record order count from existing accounts. The revenue generated by these existing accounts also continues to grow at a rapid clip, reflecting the stickiness of our marketplace. In the Q4 earnings presentation we updated the account cohort analysis that was in our 2021 S1 IPO filing to help quantify that growth. Active suppliers grew by 22% in 2022. Equally important, we increased our share of capacity with them, as our spend per supplier grew 22% year-over-year. Xometry's international revenue grew 89% year-over-year and 15% quarter-over-quarter, driven almost entirely by the growth in our European business. Despite this growth in Q4, we fell short of expectations for the first time since becoming a public company. For only the second time in five years, Xometry's revenue decreased quarter-over-quarter. We also saw a notable sequential quarter-over-quarter decline in marketplace gross margins for the first time since Q1 of 2021. With the revenue and gross margin shortfalls, we were not able to absorb operating expense growth, resulting in a higher than expected adjusted EBITDA loss of $14.2 million in Q4. We take this setback in profitability seriously. Accordingly, I'm going to provide a detailed explanation of what we learned in Q4 and the steps we've taken to mitigate any issues and ensure that Xometry continues to deliver strong durable growth even in a challenging macroeconomic environment. We've already seen progress in Q1 and we are confident in our 2023 outlook. Here is what we learned in Q4 and the steps we have taken to improve our forward results. First, as we talked about on our Q3 call, our suppliers, influenced in part by macroeconomic factors change their behavior, taking jobs at lower prices, further impacting pricing. In addition, our buyers traded off longer lead times for lower prices, further impacting average order value. In Q4, average order value in the U.S. marketplace declined approximately 8% quarter-over-quarter, negatively impacting revenue by $6 million to $7 million compared to expectations. Based on our pricing optimization efforts, we're starting to see average order value rebound in the middle of Q1. Second, some of our largest customers grew less than expected late in Q4. We saw buyers delay their orders and in some cases, reduce expected order quantities. Their slowdown limited overall order growth to 41% year-over-year in the quarter, a decrease from what we experienced earlier in Q4. The impact of this lower order growth reduced marketplace revenue by $3 million to $4 million in Q4. Our top 200 accounts represented approximately 50% of 2022 U.S. marketplace revenue. Historically, these accounts have grown significantly, yet Xometry still only has a small share of their wallet. In early 2023, we redirected salespeople and customer support against these accounts. Given the higher spend we have with these accounts, we are engaging in enterprise-level discussions around strengthening supply chains and driving production order efficiencies. Third, in an environment of falling costs and slowing demand, we expanded our testing of buyer price elasticity to better understand the tradeoffs between price and conversion. This resulted in a drag on marketplace gross margin in Q4. Using our learnings from Q4, we expect marketplace gross margin to largely rebound in Q1 of 2023. This will also enable Xometry to better manage future unexpected significant shifts in costs. Capitalizing on what we learned in Q4 and on the rapid growth of our active buyer base in Q1 of 2023, we expect to resume the quarterly sequential growth in revenue and gross profit we have delivered over the years. Likewise, we expect to lower adjusted EBITDA loss quarter-over-quarter. For 2023 overall, we expect to remain in strong growth mode and deliver healthy marketplace revenue growth of approximately 30%, marketplace gross margin expansion, and improved operating leverage. Despite the headwinds of Q4, which carried into early Q1, we are committed to being adjusted EBITDA profitable in Q4 of 2023. In addition to the changes I outlined earlier, here are our primary areas of focus in 2023. One, significantly expand the number of processes, materials and finishes we can offer our customers so we become their one-stop destination. It is extremely difficult for any single manufacturer, even those that are vertically integrated to have the exact capabilities to meet even a fraction of the customer needs. Thomasnet.com offers supplier capabilities across 70,000 categories. This depth and breadth is critical since our market is not defined by commodity parts or SKUs but instead is made up of thousands of different use cases. This is one of the reasons that the custom manufacturing market is so fragmented. Our marketplace is unique in its ability to meet these needs. Customers are increasingly recognizing this capability as their production order volume grew significantly in 2022 from 2021. We are expanding our capabilities and improving the production buying experience in our platform in 2023. Two, continue to grow aggressively in Europe, including the recent expansion to the UK, which is the third largest manufacturing market in the region. Additionally, in early Q1, we made a small tuck-in acquisition in Turkey to further expand our alternative cost supplier network to serve the European market. In Q4, international revenue grew more than 100% year-over-year on an FX neutral basis. Furthermore, we remain pleased with random buyer demand in China as we're seeing orders from across many verticals including medical equipment, biotech, optical tech, and smart equipment industries. We expect China to contribute to revenue growth in 2023. Through Xometry.eu, xometry.uk, and Xometry Asia, we've leveraged Xometry's core technology to provide localized marketplaces in 13 different languages, with networks of suppliers across Europe and Asia, as well as North America. Three, continue to invest in our work center and industrial buying engine platforms, increasing our footprint with both buyers and suppliers, and enabling us to scale cost-effectively. For our suppliers, we made important progress in work center. The SaaS-like operating system that is the digital foundation for manufacturers. In Q4, we successfully migrated all Xometry suppliers to work center to utilize the job board and suite of job management tools. In response to supplier feedback, we improved the display and management of jobs and enhanced the usability of the system on mobile devices. In 2023, we plan to expand the work center job management tools and capabilities, including support for custom job workflows, job scheduling, and communication tools. For buyers, we took significant steps towards improving the industrial buying engine. The industrial buying engine digitizes the cumbersome and time-consuming request for quote process, taking what was once off-platform and integrating it into the heart of thomasnet.com. In Q4, the industrial buying engine continued to move on-platform buyers' requests for quotes. We saw an increased number of buyers building and submitting their industrial buying engine quote requests. We also saw suppliers beginning to use our on-platform messaging tools to interact with buyers during the quote process. While the revenue from the industrial buying engine transaction fees and thomasnet.com is not yet a significant revenue stream as we more tightly integrate with our instant quoting engine, we can increase our buyer share of wallet. Four, modernize the advertising products and continue to expand self-service options on the thomasnet.com platform, making it easier for suppliers to start their advertising journey. We are moving to a pay-for-performance advertising model on thomasnet.com. Most search and listing engines that support advertising use a pay-per-click or other performance-based advertising model, which aligns the interests of buyers and suppliers. As we improve search, we expect to see a higher level of buyer engagement, improving the opportunity for search monetization. This will also help drive growth of our higher-margin supplier services, as well as boost the use of the industrial buying engine. Five, aggressively look to increase efficiencies and reduce expenses across our organization. In January, we reduced our workforce by 6% to better streamline operations and improve efficiency and leverage. Our efficiency measures will generate operating savings of roughly $8 million on a full-year basis. Jim Rallo will provide more context to these changes on our Q1 and '23 guidance later in the call. The underlying metrics of the marketplace continue to be strong, with record additions of active buyers and record order counts, including from existing accounts. Our international business had a record quarter. We made good progress with the rollout and adoption of work center and building integrations to enable Thomas and Xometry users alike to access the breadth and depth of Thomasnet.com's 500,000 suppliers, the full value of which we're continuing to unlock. I spend much of my time traveling and meeting with our customers. Whether it's a hyper-growth aerospace company in California or a Fortune 500 consumer product company in the Midwest, buyers struggle with the same problem; efficiently finding solutions that meet the breadth and depth of their manufacturing needs. This highly fragmented, inefficient, opaque market provides worse outcomes for both buyers and suppliers. Our marketplace approach is the best solution to these problems, and we won't stop until we fulfill their promise. With that, I will turn the call over to our CFO Jim Rallo for a closer look at fourth quarter financial results and our business outlook.

Thanks, Randy. And good morning, everyone. As Randy mentioned, we delivered solid marketplace growth in Q4 year-over-year despite increasing macro headwinds and changing buyer behavior. In early 2023, we took actions to reinvigorate marketplace growth and improve operating efficiencies and leverage. We generated Q4 revenue of $98.2 million, up 46% year-over-year, driven by marketplace growth and the addition of Thomas and supplier services. The stronger U.S. dollar negatively impacted revenue by $1.1 million on a year-over-year basis. Q4 marketplace revenue was $79.1 million and supplier services revenue was $19.1 million. Q4 marketplace growth of 32% was driven by a strong increase in the number of active buyers year-over-year while revenue was impacted by lower pricing and softening order rates as Randy previously mentioned. Q4 active buyers increased 45% year-over-year to 40,664. In Q4, the percentage of revenue from existing accounts was 96%, underscoring the efficiency and transparency of our business model that leads to increasing account stickiness and spend over time. Once an account joins our platform, we aim to expand the relationship and increase engagement and spending activities from that account over time. The number of accounts with last 12 months spend at least $50,000 on our platform reached 1,027 at the end of Q4, up 47% year-over-year. The strength of the U.S. dollar created a slight drag on metrics for Q4 by approximately seven accounts. Supplier services revenue declined 2% quarter-over-quarter in Q4. The decline was primarily driven by seasonality in the Thomas business due to the timing of the publication of their trade magazine. As expected, this impacted revenue by approximately $400,000 in Q4. Q4 gross profit was $36 million, an increase of 72% year-over-year. Gross profit margin was 36.7%. Q4 gross margin for marketplace was 27.1%, down 330 basis points quarter-over-quarter. The main driver was our pricing optimization testing which Randy previously mentioned. We expect marketplace gross margin to improve quarter-over-quarter from Q4 to Q1. Q4 gross margin for supplier services was 76.3%, driven by the high gross margin of Thomas marketing and advertising services. Supplier services gross margin declined 220 basis points quarter-over-quarter due to the timing of the high-margin advertising revenue I previously mentioned and a higher mix of supplies which carries a much lower gross margin. Moving on to Q4 operating costs. Q4 total non-GAAP operating expenses increased 53% year-over-year to $50.3 million, driven by the addition of Thomas, continued investments in the business, and incremental public company costs associated with Sarbanes Oxley. Within our operating expenses, sales and marketing is our largest variable component. In Q4, non-GAAP sales and marketing expenses were $22.3 million excluding stock-based compensation, amortization, and restructuring charges as compared to $12.4 million in Q4 2021. This increase in non-GAAP sales and marketing expenses on a year-over-year basis was driven by the addition of Thomas' sales and marketing costs, continued investment to expand our network of buyers and suppliers, and hiring of additional salespeople to support strong growth in our land and expand strategy. On a quarter-over-quarter basis, sales and marketing increased by $2.8 million driven by continued investments and growing our network of active buyers. As Randy mentioned, we delivered record growth and new active buyers in Q4. Additionally, we invested $1 million to $1.5 million incrementally quarter-over-quarter to support further international expansion, including rapid growth in Europe, headcount to support the January launch in the UK, and ramping Asian business. Our adjusted EBITDA loss for Q4 was $14.2 million or 14.5% of revenue compared to 17.7% of revenue in Q4 2021. Our Q4 adjusted EBITDA loss excludes a $1.5 million restructuring charge related to our workforce reduction. Turning to segment reporting. In Q4, revenue from our U.S. and international operating segments was $88.1 million and $10.1 million, respectively. Segment loss from our U.S. and international operating segments for Q4 was $20.5 million and $3.9 million, respectively. We continued to invest in our international business, which grew 89% year-over-year in Q4 and 105% year-over-year on an FX neutral constant currency basis. At the end of the fourth quarter, cash and cash equivalents were $319.4 million. Now moving on to guidance. We expect Q1 2023 revenue in the range of $100 million to $102 million, representing year-over-year growth of 20% to 22%. We expect marketplace revenue to grow in the mid to high 20% range year-over-year. We expect marketplace gross margin to improve in Q1 quarter-over-quarter driven by our pricing optimization efforts. In Q1, we expect adjusted EBITDA loss to be in the range of $9 million to $11 million, or 9% to 11% of revenue compared to a loss of $12.7 million or 15.2% in Q1 2022. Q1 adjusted EBITDA loss will be lower quarter-over-quarter driven by the growth in marketplace revenue and gross margin and the efforts to streamline operating expenses discussed earlier. In Q1, we expect stock-based compensation expense to be approximately $5 million to $6 million, which we will exclude from adjusted EBITDA. We expect 2023 revenue of $470 million to $480 million, representing 23% to 26% growth year-over-year. We expect marketplace growth in the 30% range year-over-year, based on current marketplace trends. We expect to be profitable on an adjusted EBITDA basis in Q4 2023, which is a change from our prior expectations for the second half of 2023. We expect improved operating leverage through 2023 driven by strong buyer and order growth and further improvement in gross margins driving faster gross profit growth in the marketplace. We expect significant leverage over fixed and semi-fixed costs, including public company costs. Additionally, our January reduction in workforce will reduce operating expenses by roughly $8 million on a full-year basis. With that Operator, can you please open up the call for questions?

Our first question comes from Brian Drab from William Blair. Your line is open.

Good morning. Thanks for taking my questions. Randy, maybe you can start just by talking about what you've learned since we spoke last regarding why suppliers are accepting jobs at such a faster rate. And how did that job acceptance, how did the speed of the acceptance trend throughout the fourth quarter and into this year?

Yes, so Brian, good morning. As we indicated, we did see pricing continue to fall through the quarter and suppliers were just more willing than ever to take jobs at those lower rates. And that continued to drive down the average order value as the quarter progressed, and then you couple that with we talked about slowing order growth from our largest accounts. And that just ended up being a double whammy for us.

Right. And so have you seen those acceptance feeds change at all? I mean, it was a sudden drop of over 30 percent at the end of the third quarter. Are they accepting jobs faster now than they were before, or has that leveled off?

Yes. So we're seeing now prices stabilizing. I mean, there are a couple of dynamics at work. One is, as we indicated, we were also doing some price optimization testing in Q4, and so that dragged into the beginning of Q1. So in January Q1. We want to ensure we got it right. So now, as we're taking those learnings we've been optimizing prices very selectively. While we have seen relatively low average order values in January, in February, that's been trending back up. Overall that trend is going higher.

Okay, just one last question on this. You've been experimenting with prices at lower levels, but now prices are coming back up a little bit. Are you still in the testing phase? Or do you feel like you've figured something out? Where should we expect prices to go in March and beyond?

Yes. I think we have consolidated the learnings and we were aggressive in Q4, sort of in response to the trends we were seeing. We took that as an opportunity to really invest in testing. But we've taken those learnings, and now you're going to see the average order values grow as a result of us optimizing pricing, raising prices where we think we have the room to do that without impacting the healthy growth in orders that we've been experiencing.

Okay, thanks very much. I'll get back in line.

Thank you. One moment for our next question. And our next question comes from the line of Matthew Hedberg from RBC Capital Markets. Your line is open.

Great, guys. Thanks. Randy. I'm wondering if there's any more clarity on maybe why suppliers are accepting orders at a lower rate? And just to be clear, are you sure there's not a competitive reason maybe causing some of these buyers' and sellers' decisions?

Well, look, I think there is clearly an unusual macro environment. If suppliers are willing to take jobs at lower prices, it signals they probably have less work themselves. They have more open capacity. Additionally, we are working hard to make it easier and easier for them to work with us. It's a combination of those factors.

Got it. And then maybe just to double-click on Thomasnet. What are the specific things that you're focused on in 2023 to drive faster conversion of buyers and sellers?

Yes. We're working very hard. We've been growing nicely at the top of funnel. We're trying to make it easier for buyers to find what they're looking for, optimize their searching, and making it easier for them to transact. On the flip side, we're also just trying to streamline the communication that the supplier has with the buyer. So we're moving operations both to the buyer side and the supplier side. As we get more top of funnel activity, and as we make it easier for buyers to find what they're looking for, that will improve our capability to transact. Likewise, as we get suppliers more engaged, that will also improve the situation.

Got it. Thanks a lot, guys.

And Matt I would just say that, you should expect to see from us this year more advertising solutions, new self-serve advertising solutions on Thomas for suppliers. Historically, advertising had to go through salespeople. So the more we can offer self-service solutions, that's going to be helpful to the business, and as Randy called out, we're going to lay the groundwork for pay-for-performance search, which will be really a step function change for Thomas as well, long term.

Thank you. One moment for our next question. Our next question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open.

Thanks so much. Maybe just one quick follow-up to what we've been talking about so far. And then I'll get into a deeper question. But in terms of where we are in the macro cycle, what sort of visibility do you think you have in terms of whether you've absorbed the biggest wave of what would be excess capacity on the partner side of the equation where they've been willing to accept jobs at lower prices and therefore, more of that behind you? Or do you believe you have visibility on whether the macro environment could get worse over the next three to six months?

Yes, I mean, Eric, I think we've seen that prices have bottomed out. We've indicated that from January to February we are seeing increasing prices. Partly because we've reached a floor from the suppliers. We also made an investment in Q4 to really test the price elasticity of our customer base. We are raising prices collectively. So between the combination of prices and costs bottoming out from the suppliers alongside the learnings we've gained from our elasticity tests, we believe that average order values are improving. This is reflected in our conservative guidance for the year.

Totally understood. And maybe the second question is more for Jim. In terms of the way you're framing the efficiencies you're pulling into the business now versus the potential exit velocity of '23. How should we be thinking about incremental margins and the mix of fixed versus variable costs? Or what's implied in the way you're thinking about Q4 of '23 so we better understand how the business is set up from an incremental margin standpoint beyond 2023?

Yes. Good question. In Q4, we incurred some significant costs around finalizing Sarbanes Oxley, which is obviously a one-time event for us. We need to continue to maintain that. The initial integration of that was quite intensive. Additionally, we took a swift action to institute a reduction in force, which is going to save us $8 million over the next year. We are seeing good changes in the gross profit margin already. We expect to continue to grow that gross profit margin throughout the year. We feel confident about hitting profitability on an adjusted EBITDA basis in Q4.

Yes. And to add to that, when we look at areas like our G&A, particularly our product development line items, we expect to gain real leverage. Q4 was somewhat of an anomaly when we moved in the wrong direction, but we anticipate gaining substantial efficiencies as the year goes on. As Jim also indicated, we expect gross profit margins in the marketplace to largely rebound in Q1, and that positive trend should resume based on the trajectory seen in previous quarters. This also translates to incremental profit for every dollar of revenue as we leverage those operating expense line items.

Great. Thanks for the color.

One moment for our next question. Our next question comes from the line of Karl Keirstead from UBS. Your line is open.

Okay, great. Thank you. Maybe two for Randy. These macro issues as you're describing them around suppliers willing to take lower prices and slowing order growth from buyers, I'm curious whether this is a little bit more unique to an online marketplace model like yours or company-specific versus macro in the sense that, as we see results across the manufacturing sector, we would expect to hear evidence of the same trends that you're describing. So the crux of the question is how specific are these pressure points to Xometry's marketplace?

Well, look, I think it's important to clarify one thing. We are gaining market share. We had a record number of active buyers in Q4, and we continue to see strong growth trends in adding active buyers. We are gaining market share here. It has been an odd macro environment. I don't believe this is specific to us. I believe it is more reflective of the overall environment we've encountered. So I wouldn't describe anything particular to us.

Yes, Karl, we've seen others in the space actually see their revenues decline year-over-year. There was certainly lower manufacturing output in the fourth quarter as well.

Got it. Just wanted to test that. Thank you. Secondly, Randy, could you describe in a bit more detail the price optimization efforts that you're making? Because it seems like the recovery you anticipate in 2023 is coming not really from an improving macro environment, but rather it's the tuning or optimization of the marketplace algorithm that should enable growth. What should we expect from these optimization efforts, especially given your past results?

Yes. We have taken a conservative view on our average order value to account for a potential lack of macro improvement. We continue to gain market share and robust growth. We believe we have the ability to control pricing now that the costs from the suppliers have bottomed out. We have been aggressive in testing price elasticity and we expect this will lead to healthier margins as we continue to drive engagement without sacrificing our order growth.

One moment for the next question. Our next question comes from the line of an unidentified analyst from Citi. Your line is open.

Great. Thanks for taking the question. I have two. Maybe, Randy, can you talk a little bit just about annual active buyers and cohorts? We saw some significant growth year-over-year in annual active buyers and additions in the quarter. I'm wondering if you expect the ramp and new buyer activities to flow at some point relative to prior quarters or do you think this cohort's growth will continue?

I think we're continuing to see very healthy additions of active buyers. That's been growing steadily throughout 2022. We saw a record number of active buyers in Q4 and we expect this trend to continue in 2023. Additionally, we updated the earnings back to show revenue contributions from our cohorts, and that shows strong growth from those cohorts, which we expect to see going forward.

It's Shawn. I would just like to add that while the growth in active buyers is significant this quarter, remember the cohort slide is based on an account basis. Our land and expand strategy involves bringing in an account and adding buyers to those accounts, which drives growth.

Got it, that's actually a good segue into my second question. You talked about slowing order growth from Xometry's largest accounts, but also realigning the salesforce to focus on those top 200 accounts. How will you expand in those accounts and where are you in that process of realignment?

Yes, so our top 200 accounts represent almost 50% of our U.S. marketplace revenue. As indicated, we experienced a slowdown unexpectedly in Q4 from that group. We have realigned our salesforce and support to focus more deeply into those customers. These large companies have tremendous spend on custom manufacturing. Despite our growth, we only represent a small portion of their overall spend. This is fertile ground for us to grow and we're focusing our technical resources to delve deeper. By broadening our offerings, we will strengthen our position in these accounts.

Got it. Thank you, guys.

One moment for our next question. Our next question comes from the line of Cory Carpenter from JP Morgan. Your line is open.

Hey, guys, this is Danny on for Cory Carpenter. I have two quick ones on international. For international expansion, is the key driver of growth there really more focused on expanding the number of countries you're operating in? Or is it more about deepening each market with new offerings? Additionally, can you speak about what was attractive about the marketplace in Turkey that prompted the acquisition? Should we expect more of these bolt-on acquisitions in the future?

Yes. Both aspects you mentioned are key for Europe. We are adding sales folks in different countries while also expanding our capabilities. The recent tuck-in acquisition gave us a low-cost network in Europe, allowing rapid shipping from Turkey to anywhere in Europe. This offers our European customers an economical option while building capacity. We're focusing on both growth into new countries and depth in existing markets.

Yes. We're going deeper into existing markets like the German-speaking countries, France, Italy, and Spain. Our expansion into the UK, which is the third-largest market in Europe, is just getting started, and we see a lot of room for growth. Turkey also provides a great opportunity for European manufacturing access, given its proximity and historical connections.

One moment for our next question. Our next question comes from Greg from Craig Halen. Your line is open.

Yes, good morning. Thanks for taking the questions. I know you had been testing price elasticity in Q4. I'm curious about how that impacted buyer behavior. For instance, did they decide to order fewer parts per order? Any changes in lead times?

Yes. We did see buyers trade off time for price, which led to a reduction in order quantities, impacting the average order values as we exited Q4 and entered Q1. But we've seen that trend change in February, and we're benefitting from our price optimization efforts. We expect that average order value will start rebounding based on this.

How much of that improvement is driven by suppliers versus buyers?

We are seeing that there is less trading off on lead time from the buyers as we move forward in this quarter, so there has been a shift in buyer behavior, along with impacts from our pricing optimization.

Okay. Thanks, Randy.

Thank you. Please hold for our next question. Our next question comes from Robert from Luke Capital. Your line is open.

Hi, and good morning. Thank you for taking my question. On the price optimization, was that sort of a sweeping price change across all or most categories? Or was it maybe more surgical in categories and with groups of users?

We conducted broad testing. There were various tests run based on different technologies and customers at different points in their journey with Xometry. For instance, new customers versus those who have been with us longer, and those in different manufacturing segments. We thought it was a good time to gather learnings and implement changes moving forward.

So does that suggest there's potentially more price optimization that hasn't been addressed?

We're always going to be testing price elasticity. But we don't expect that to have a material impact on gross margins like you saw in Q4 last year. We don't foresee needing to conduct any large changes in Q1 and beyond.

Okay. My follow-up question is about the existing accounts. Sales of 96% have been relatively consistent. I'm wondering if with the active buyers growing, some of those must be new accounts. When might we see that existing account percentage start to decline?

Yes, remember that while new buyers spend less initially than someone who's been around longer, so it's that dynamic that tends to keep that percentage high.

Okay, thank you.

Thank you. I'm not showing any further questions in the queue. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.