Forge Global Holdings, Inc. (NYSE:FRGE) Q3 2023 Earnings Call Transcript

Forge Global Holdings, Inc. (NYSE:FRGE) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Good afternoon. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Forge Global Third Quarter 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you, and I will now turn the call over to Dominic Paschel, SVP. Dom, you may begin your conference.

Dominic Paschel: Awesome. Thank you, Kayla, and thank you all for joining us today for Forge's Third Quarter 2023 Earnings Call. Joining me today are Kelly Rodriques, Forge's CEO, and Mark Lee, Forge's CFO. They will share prepared remarks regarding the quarter's results and then take your questions at the end. Just after market closed today, we issued a press release announcing Forge's third quarter 2023 results. A discussion of our results today is complementary to the press release, which is available on the Investor Relations page of our website. This conference call is being webcast live and will be available for replay for 30 days. There is also an accompanying investor supplemental PDF on our IR page that I would recommend you download.

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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 differ materially from those included in the statements. We discussed these factors in our SEC filings, including our quarterly report on Form 10-Q, which can soon be found on the Investor Relations website and the SEC filings 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 Forge'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. Additionally, we have posted, as I mentioned, the supplemental information on the same page. Today's discussion will focus on the third quarter 2020 -- sorry, 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.

Kelly Rodriques: Thanks, Tom. Thanks, everyone, for joining. I'll open today by summarizing some of the highlights of the quarter before turning it over to Mark for a deeper dive into our financials, and then we'll close with a quick overview of what we're seeing in the market. In Q3, we witnessed the continued cautious return of investors to the private market, which drove higher volumes and revenue in our markets business compared to both Q1 and Q2. This improvement was observed for the quarter even as continued concern over interest rates and existing geopolitical conflicts served as a backdrop for a softer September. Though the IPO window remains mostly closed, we're seeing continued traction in markets activity and a narrower bid-ask spread than we have seen since the start of the downturn.

These are encouraging signs that investment in the private market is returning amid the great reset, the effects of which we believe are still ongoing. With that, we saw improved results in the third quarter over that of Q1 and Q2. In Q3, Forge's total revenue less transaction-based expenses was up 11% to $18.4 million from $16.6 million in Q2. Placement fee revenue less transaction-based expenses for Forge in Q3 improved, up 27% to $7.1 million compared to Q2. We believe this was due to the modestly improving market conditions that again benefited our markets business. Another encouraging indicator was the rise in transaction volume, which increased 53% to $234 million compared to Q2. Forge's adjusted EBITDA loss narrowed in Q3 to $10.4 million, better than both last quarter's loss of $11.8 million and a $13.3 million loss in Q3 of last year.

This reflects revenue growth and a disciplined and deliberate cost management strategy, including intentional cost cutting enacted in prior quarters, and we're reiterating our commitment to lowering our burn for 2023 and 2024. Custody administration fees for the seventh straight quarter continued to rise to $11.3 million in Q3, benefiting again from the higher interest rate environment. In addition to our financial highlights, we're encouraged by the progress we're making in technology and platform development, and we're investing strategically to ensure that we can meet the needs of the expanding universe of private market participants as the market rebounds. While we continue to build to drive more efficiency and scale to the market, we're also continuing to develop our institutional product suite to bring more sophisticated capabilities to institutional investors.

We have expanded our data strategy to include index and index-related product development and are currently testing new innovations that combine the power of our proprietary market data with enhanced trading capabilities. We intend to debut new products related to those efforts to the general market in 2024. With that, let me turn it over to Mark.

Mark Lee: Thank you, Kelly. In Q3, Forge's total revenue less transaction-based expenses totaled $18.4 million, up 11% from $16.6 million last quarter. This increase was largely driven by placement fee revenue. Total placement fee revenues less transaction-based expenses reached $7.1 million, up 27% from $5.6 million last quarter. Transaction volume for the quarter increased 53% to $234.1 million, while our overall net take rate was 3%. The net take rate declined from 3.7% last quarter. It was largely driven by a change in mix, with a higher proportion of larger block trades executed at lower take rates. We have previously indicated that net take rate fluctuates due to many factors, such as the types 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 rose 3% in Q3 to $11.3 million, up from $11 million last quarter. Our custodial business continues to provide stability and balance to our revenue streams. However, as the Fed has paused its rate increases, this may impact our cash administration fees. Forge's custodial cash balances totaled $518 million at the end of Q3, down from $550 million at the end of last quarter. We believe the primary driver of these declines is cash sorting and search for return and yield. As in the past, this decrease was offset by the increase in the Fed funds rate and our cash administration fees.

Total custody accounts were approximately 2 million in Q3, essentially flat from last quarter. Assets under custody were $15.1 billion at the end of Q3 versus $15.3 billion last quarter. As Kelly mentioned, we continue to actively control and manage our costs. Our headcount at the end of Q3 was 344, down from 358 at the end of last quarter. In the third quarter, adjusted EBITDA loss improved to $10.4 million compared to a loss of $11.8 million last quarter, driven by improved revenues and tight cost controls. EBITDA improved even as we continued to invest strategically as early movers in the European private market. Third quarter net loss decreased to $19 million compared to $25.1 million last quarter. This improvement was largely the result of the $1.8 million increase in revenue and a decrease in non-cash expenses, driven largely by a favorable $4.7 million change in the fair value of warrant liabilities.

Net cash used in operating activities was $3.5 million in the quarter, an improvement compared to net cash used in operating activities of $13.6 million last quarter. And as a reminder, the first half of our fiscal years include timing-driven cash flows such as the payout of our annual bonuses and corporate insurance, which do not recur in the second half. Our corporate cash and cash equivalents, including term deposits in excess of 90 days, ended the quarter at approximately $157.2 million compared to $162.2 million last quarter. From a housekeeping perspective, our weighted average basic number of shares used to compute net loss was 174 million shares, and our fully diluted outstanding share count as of September 30 was 198 million shares.

For Q4, we estimate 175 million weighted average basic common shares for EPS modeling purposes. We continue to monitor both the geopolitical environment, Fed and interest rate direction, and investor sentiment as we move through Q4. And in the meantime, we remain committed to lowering our overall use of cash and being good stewards of capital as we continue to invest through lean growth. I'll hand it back to Kelly for a brief private market overview before we turn it over for questions.

Kelly Rodriques: Thanks, Mark. I'll close with some broader insights on the market. Q3 marked a reversal in several of the trends that have weighed on the private market since the beginning of 2022. The bid-ask spread narrowed meaningfully in the quarter to a low of 12% in August and ending the quarter at 15%, its lowest level in six quarters. The spread has been trending downward since it peaked at 30% in April, as valuations have shown some signs of leveling off compared to the steep declines since early 2022. Meanwhile, the Forge Private Market Index trended positive for the first three-month period since the downturn, posting a 1.1% performance gain in Q3 and outperforming both the S&P 500 and the NASDAQ. As valuations have steadied, we had observed improvement in the breadth of the market.

The number of unique issuers with closed transactions on the Forge platform has trended up the last two quarters, growing 37% from Q1 to Q3. And the number of unique issuers with sell-side interest reached an all-time high of 228 in August and remained high compared to prior periods through the quarter, which we believe reflects a pent-up demand for liquidity and a growing number of companies that are staying private longer. Though we are pleased about the continued improvements we delivered in the quarter and the signs of stalling we observed, Q4 began amid continued uncertainty about the interest rate environment and more geopolitical instability as a new war broke out in the Middle East. It's unclear what the ultimate impact of that volatility will be on Q4.

But given what we've seen this year, a recovery may not be up and to the right every quarter and may not be linear. With that in mind, we continue to keep a close eye on the state of the market and to actively manage our cost structure even as we invest in the data, technology and product innovations that will allow us to capture greater market share and drive more access, efficiency and scale to the private market. As we look forward to the continuing market recovery, we remain optimistic about the future of the business and about our privileged position as a market leader to accelerate this asset class towards its inevitable tipping point. Thank you.

Dominic Paschel : Kayla, can we please open the lines for the Q&A?

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