Yahoo Finance Forge Global Holdings, Inc. (NYSE:FRGE) Q4 2023 Earnings Call Transcript
Forge Global Holdings, Inc. (NYSE:FRGE) Q4 2023 Earnings Call Transcript March 26, 2024
Forge Global Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.14722 EPS, expectations were $-0.1. FRGE isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Forge Global Fourth Quarter and Full Year 2023 Financial Results Conference Call. On today's Forge Global's call will be Kelly Rodriques, Chief Executive Officer; Mark Lee, Chief Financial Officer; and Lindsay Riddell, Executive Vice President of Corporate, Marketing, and Communications; and Dominic Paschel, Senior Vice President of Finance and Investor Relations. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the call over to Lindsay Riddell. Ms. Riddell, you may begin your conference.
Lindsay Riddell: Thank you, Krista, and thank you all for joining us today for Forge's fourth quarter and full year 2023 earnings call. This call will be a bit longer as we recap the full year. Joining me today are Kelly Rodriques, Forge's CEO; and Mark Lee, Forge's CFO. They will share prepared remarks regarding the financial results and then take your questions at the end. Just after market closed today, we issued a press release announcing Forge's fourth quarter and full year 2023 financial results. A discussion of our results is complementary to the press release, which is available on the IR page of our website. This conference call is being webcast and will be available for replay. There is also an accompanying investor supplemental page on our IR site.
During this conference call, we may make forward-looking statements based on current expectations, forecasts, and projections as of today's date. Any forward-looking statements that we make are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to materially differ from those included in the statements. We discussed these factors in our SEC filings, including our annual report on Form 10-K, which can be found on the IR page of our website. As a reminder, we are not required to update our forward-looking statements. In our presentation today, unless otherwise noted, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance.
For detailed disclosures on these measures and GAAP reconciliations, you should refer to the financial data contained within our press release, which is also posted to the IR site. Today's discussion will focus on the fourth quarter and full year 2023 results. As always, we encourage you to evaluate both annual and quarterly results for the full picture of Forge's performance, which can be affected by unexpected events that are outside our control. With that, I'll turn it over to Kelly, our CEO.
Kelly Rodriques: Thank you, Lindsay and Dom and thanks all for joining us. I'll first share some of our 2023 successes, followed by brief highlights of our Q4 results before turning it over to Mark for a deeper dive on our Q4 and annual financials. And I'll finish with some insight on the business and what we're seeing in the market. I'm proud to say that in 2023, we made important moves to invest in Forge's future vision and our path to profitability. Forge focused on three things; accelerating technology development, winning with data, and expanding our category leadership. We invested in 2023 in the Forge Next-Generation platform, a flexible and scalable technology platform on which we are building next-generation institutional trading and data tools.
We announced our first two indexes, the Forge Private Market Index, a benchmark for private market performance and a First-of-its-Kind Investable Index, the Forge liquidity Private Market Index. And we delivered proprietary and meaningful market data through our products, reports and experts to the tens of thousands who turn, to Forge for perspective as the market bounced around the bottom throughout the year. Amid the volatility that persisted last year, we ran our business with a focus on lean growth and operational efficiency, meeting our targets for lowering cash burn and keeping headcount flat even, as we strategically invested for the future, hiring key positions to advance our business. So I'll now turn to financial highlights for Q4 and for the year.
In the fourth quarter, the slow market recovery continued. And we grew revenue for the third consecutive period. Forge's total revenue less transaction-based expenses rose to $18.9 million, up 3% from $18.4 million last quarter, and up 22% from Q1 2023 trough of $15.5 million. For 2023, Forge's total revenue less transaction-based expenses, was $69.4 million, marginally up from $68.9 million a year ago. And although the macroeconomic environment dragged trading volumes in the first half of the year, we are optimistic that the worst is behind us; ahead of a meaningful recovery on the market side, total custodial administration fees in 2023 made-up the difference and grew 53% to $44 million. Meanwhile, assets under custody were up 5% in the year to $15.6 billion.
Our modest improvements in the year reflect the strength of our diversified business model, which includes cyclical and countercyclical revenue streams from our Trading Business and our Custody Business, respectively. We anticipate that as the market continues to improve, we'll see the trend reverse again and marketplace revenue will eventually outpace Custody revenue. Now, I'll turn it over to Mark, to talk about the fourth quarter and annual financials in more detail, and then I'll return with some notable business highlights and Forge's market outlook.
Mark Lee: Thanks, Kelly. Before I start, I would note that we have renamed the category of our revenue, which was previously called, placement fee revenue, as Marketplace revenue in order to align with the types of revenue included in this category. Marketplace revenue includes placement fees, subscription fees earned from our data products and private company solutions revenue. We believe this name better describes the revenue included therein and therefore, is more useful to investors by better characterizing the underlying types of revenue included. We have not adjusted methodology, assumptions or otherwise changed any aspects of placement fee revenue in making this name change to marketplace revenue. And this category of revenue remains comparable to prior period presentations.
And so with that, in the fourth quarter of 2023, Forge's total revenue less transaction-based expenses rose to $18.9 million, up 3% from $18.4 million last quarter. Total Marketplace revenues, less transaction-based expenses, reached $8 million, up 12% from $7.1 million last quarter. Transaction volume increased 7% from $234 million last quarter to $250 million in Q4, while our overall net take rate increased from 3% last quarter to 3.2% in Q4. As a reminder, net take rate fluctuates due to many factors such as the type of trades, order size, and issuer-specific supply and demand dynamics. In the long run, we believe declines in net take rate will be offset by higher volumes as standardization, automation and efficiency, lower cost and increased trading turnover.
Total custodial administration fees were down 3% in Q4 to $10.9 million from $11.3 million last quarter. As we noted on our last call, we fully expect lower interest rates in 2024 to impact total custodial revenues. Forge's custodial cash balances totaled $505 million in Q4, down from $518 million at the end of last quarter. The decrease in cash balances during Q4 was largely due to cash sorting, which has slowed from the pace in previous quarters. While this is an encouraging sign, we continue to monitor this closely as rate cuts have yet to occur and rates are still at high levels. Total custody accounts increased approximately 3% quarter-over-quarter to $2.1 million in Q4, up from $2 million last quarter. Assets under custody increased to $15.6 billion at the end of Q4 from $15.1 billion last quarter.
As a reminder, the vast majority of our total accounts in custody are what we call CAS accounts or custody as a service. But the main driver of our custody revenues, both cash administration and account fees derived from our core self-corrected accounts. Fourth quarter net loss was $26.2 million compared to $19 million net loss in the third quarter. This difference is largely explained by a $7.6 million non-cash loss in Q4 from the change in fair value of warrant liabilities and costs incurred in connection with legal matters. Adjusted EBITDA is a key measure of our operating results. In the fourth quarter, adjusted EBITDA loss was greater at $13.6 million compared to a loss of $10.4 million last quarter. This change was largely driven by $2.9 million of costs in connection with legal matters.
Net cash used in operating activities increased to $6.6 million in the quarter, compared to net cash used in operating activities of $3.5 million last quarter. As a reminder, both Q2 and Q4 of 2023 had an extra payroll given our biweekly pay cycle, and this drove the majority of the increase. The remainder was driven by net disbursements for other working capital settlements partially offset by the impact of severance payments made in Q3. Cash, cash equivalents and restricted cash ended the quarter at approximately $145.8 million compared to $156.4 million last quarter, highlighting the continued strength of our balance sheet. This excludes $7.6 million in term deposits classified as other current assets as of the end of the year, which stood at $3.2 million in the third quarter.
Including these term deposits as cash, our total cash stands at $153.4 million. Now to recap the full year of 2023. In fiscal year 2023, or is total revenue less transaction-based expenses, was $69.4 million, slightly up from $68.9 million a year ago. There was a significant change in the mix of our revenue portfolio between marketplace revenues and custodial administration fees. Total Marketplace revenues, less transaction-based expenses, totaled $25.4 million, down from $40.2 million last year. 2023 trading volume was down 37% to $766 million compared to $1.2 billion in 2022. The average net take rate for 2023 stayed constant with 2022 at 3.3%. While year-over-year results reflected the difficult market conditions during 2023, which included additional rate increases, banking crisis and continued geopolitical unrest.
We are nonetheless encouraged by the steady and consistent improvement seen in our marketplace business since Q1 of 2023. Total custodial administration fees were up 53% in 2023 to $44 million from $28.7 million in 2022. Total custody accounts increased year-over-year to $2.1 million from $1.9 million. The growth in accounts came from our CaaS or Custody as a Service business. Forge's custodial cash balances totaled $505 million at the end of 2023, down from $635 million at the end of 2022. This was largely driven by cash sorting. Assets under custody ended 2023 up 5% year-over-year to $15.6 billion from $14.9 billion at the end of 2022. As we've explained throughout 2022 and 2023, higher interest rates resulted in higher cash administration fees.
These fees have been the main driver to the growth in total custody revenues. As we head into 2024, we expect to generate lower cash administration fees based on lower cash balances and lower interest rates, resulting in lower total custody revenue. Full year net loss was $91.5 million in 2023, an improvement of $20.4 million from the net loss of $111.9 million last year. Please note that 2022 included significant onetime transaction costs related to going public, as disclosed in our investor supplemental and in the 10-K. Fiscal year 2023 adjusted EBITDA loss was $48.8 million compared to an adjusted EBITDA loss of $46.9 million in 2022. Forge capitalized software in the amount of $6.7 million in 2022, 2023 included a $2.2 million charge in connection with the previously mentioned legal matters.
During 2023, Forge continued to make key hires to drive our strategic initiatives as described earlier by Kelly, while maintaining tight cost discipline, keeping total headcount flat and bringing down our total spend. Net cash used in operating activities was $41.5 million in the year, a $27.4 million improvement compared to net cash used in operating activities of $68.8 million in 2022. Excluding $14 million in 2022 costs related to going public, significant cost saves were made across the board, including incentive compensation, company liability insurance, marketing spend, professional fees and real estate consolidation. Keep in mind for the timing of cash flows that Forge pays out annual corporate bonuses in the first quarter. Our total headcount, including Forge Europe stayed relatively flat at 345 at the end of the year from 349 in 2022.
Forge Europe continues to staff up with eight people at year-end. We continue to be very disciplined about managing costs and have maintained our overall hiring freeze. From a housekeeping perspective, our weighted average basic number of shares used to compute net loss was 173 million shares and our fully diluted outstanding share count as of December 31, 2023, was 199 million shares. For the first quarter of 2024, we estimate 180 million weighted average basic common shares for EPS modeling purposes, while in a loss position. We continue to focus on managing our expenses, while still investing in our top strategic priorities to continue to build and improve Forge's platform, products and services. The launch of Forge Pro, Forge Europe and the Forge Private Market Index are just the most recent examples of our traction.
As the stewards of our shareholders' capital, we are committed to continue to lower our overall cash burn in 2024 as we did in 2023. Entering 2024, we see early signs as the private markets are starting to regain their footing, and we're feeling optimistic about our prospects for the year ahead. I'll hand it over to Kelly to further expand on this.
Kelly Rodriques: Thanks, Mark. At the beginning of 2023, we talked about how to put ourselves in a position to win in this market. Importantly, we focused on continuing to build the Forge next-generation private market platform to drive the market's evolution and to expose more participants to the high-quality data that will tie them to Forge and more deeply engage them in this asset class. We believe the Forge Pro, which we announced to the public last week represents a step change towards that goal. It is also Forge’s definitive stake in the ground that we intend to win the institutional market and believe that with our tech, our data and our expertise, we are best-positioned to do so. We also made strategic moves to win on data, and have identified data quality as a key differentiator for us.
Because of our commitment to building long-term company relationships, we match trades at a high rate, but we also closed more than 90% of matched trades in 2023. The scale and quality of our data is a key to this execution. And what became clear over the last year is that the more access people have to Forge’s data, the more likely they are to engage meaningfully in this emerging asset class. So in 2023, we made changes to our data strategy aimed at maximizing adoption of and exposure to our data through our products and platform. These changes mean we are prioritizing data adoption over near-term data revenue and creating stickier relationships with our customers that we believe will drive higher lifetime value. Reflecting this transition, total bookings in 2023 were $1.3 million up slightly from $1.2 million in 2022, and we've seen positive signals to start the year in terms of an increased number of IOIs from investors exposed to our pricing data.
To continue to expand our leadership position in the category, we made significant steps to invest in the right talent in 2023. Through this acquisition of talent, we made scaled improvements to many functions, including how we engage issuers and institutional customers and how quickly and effectively we bring new product innovations to market, and we continue to build out our Forge Europe team as we pursue the pattern license in Germany. While we had hoped for a more meaningful market recovery in 2023, we believe we emerge a stronger, more efficient company and that the progress we made on technology, data and category leadership will pay dividends this year. Today, we're also nearly one quarter through 2024, and I can tell you with confidence, things are looking up.
There are a few signals that we are monitoring closely. Buy-side indications of interest on our platform outweighed sell-side indications of interest for the first time in two years in February. The bid-ask spread has jumped around month-to-month as new issuers emerge and buyers reengage, but it settled down to under 11% in February. And the Forge private market index turned positive year-to-date with a growing number of outperformers amongst our index names. Reading the headlines, there is growing optimism for our returning IPO market this year. But whether or not the IPO pipeline opens up meaningfully from our view, there's an energy in this market that we haven't felt for a long time. Given what we're seeing in the market now, momentum is building, and we're seeing increased buy-side activity and a growing pipeline.
While I've warned that the recovery may not be linear or up into the right every quarter as the market comes out of this long winter, we're feeling optimistic about the spring. Thank you for joining us. We'll open it up for questions.
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