Velo3D, Inc.

Good afternoon, and welcome to Velo's 3D Third Quarter 2023 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. As a reminder, today's conference call is being recorded. I'll now turn the call over to Mr. Bob Okenski, Vice President of Investor Relations at Velo 3D Corporation. Thank you, sir. You may begin.

Thanks, Alicia. I'd like to welcome everyone to our third quarter 2023 earnings conference call. On the call today, we will start out with comments from Benny Butler, CEO of Hello3D, who will provide a summary of the quarter as well as an update on certain key strategic priorities for 2023. Following Benny's comments, Bernie Chung, our CFO, will then review our third quarter 2023 financial results and provide our guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today's presentation, today's press release, as well as our 2022 10-K and additional 2023 SEC filings. Please see those documents for additional information regarding those factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics during today's call. Please refer to the appendix of our presentation as well as today's earnings press release for the appropriate GAAP to non-GAAP reconciliations. Finally, to enhance this call, we have also posted a set of PowerPoint slides which we will reference during the call on the events and presentations page of our investor relations website. With that, I'd like to turn the call over to Benny Buller, CEO of Velo3D. Benny?

Thanks, Bob. And I'd like to welcome everyone to our third quarter earnings call. Prior to starting our review of the quarter, I would like to provide some context for my upcoming remarks. As we have discussed many times, we firmly believe that we are just beginning to see how additive manufacturing is rapidly changing the way high value metal parts are produced across many industries. While our ability to capitalize on this opportunity has driven our industry leading growth over the last two years, we now realize that our focus on top line revenue has come at the expense of customer service, profitability, and cash flow. Essentially, we grew too fast. Given the current conditions, we have made a strategic decision to focus our efforts on optimizing free cash flow before resuming our strong growth emphasis. As a result, last month we initiated a company realignment to reduce costs, rebuild our bookings pipeline, and recommit ourselves to ensuring our customers are successful. I'll provide greater detail on these topics later on in my remarks. We strongly believe that this strategic realignment will enable us to achieve sustainable profitability in 2024. With that in mind, I would like now to discuss the specifics of our third quarter. Please turn to slide three. As we highlighted last quarter, one of our key initiatives for the balance of the year was to show measurable progress on improving our free cash flow. Our successful efforts in this area were reflected in our Q3 results as we reduced our sequential free cash burn by more than 30% to $23 million. We expect further quarterly improvement through 2024 given our realignment. In relation to revenue and bookings, We continue to see solid customer demand for the third quarter as revenue rose 26% year over year. However, revenue declined sequentially due to a single delayed shipment at the end of the quarter. Third quarter bookings were $11 million as we saw bookings delays with both new and existing customers. I'll provide greater color on this later on. As a result of our Q3 bookings, we are reducing our fiscal year 2023 revenue guidance to $91,203 million. As I mentioned at the beginning of this call, we have initiated a strategic realignment that we believe is critical for us to achieve our free cash flow and profitability goals in 2024. Some of the key initiatives include a 40% reduction in cash expenses through the first quarter of next year. the implementation of a new go-to-market strategy to rebuild our bookings pipeline for 2024. As a result, we expect the fourth quarter to be a transition quarter as we implement our new initiatives. Given that we expect to see the full benefits of these programs in the first quarter of 2024, we believe we will be in a much stronger position entering 2024 to drive free cash flow and long-term profitability. I would now like to highlight our key four strategic initiatives for the fourth quarter. Please turn to slide four. First, we have embarked on a significant expense reduction program across the entire company in order to align our cost structure with current business conditions. Second, increased focus on optimizing our inventory and reducing our working capital needs. As a result, we have paused all new inventory procurement It is important to mention that we have significant inventory on hand, allowing us to supply all the systems we believe we will need to ship in Q4 and Q1. However, we will be much more cautious procuring inventory for production going forward with purchases based on backlog growth instead of forecasts. Third, implementing programs to materially improve customer satisfaction and system performance. which have direct impact on increasing existing customer demand. Finally, we have implemented a number of initiatives to improve our sales execution that we believe will be vital to rebuilding our bookings pipeline. Let me now provide some specifics around each initiative. Please turn to slide five. In relation to reducing expenditures, we expect to lower our total quarterly cash spent by 40% in Q124 compared to Q3 23. We will accomplish this by lowering cash OPEX and fixed costs. Primary drivers of this reduction include our recently announced 20% headcount reduction, as well as cost savings associated with our facility consolidation that should be completed by the end of this year. For inventory and working capital spend, we have now paused the purchase of all new inventory as we are shifting to procurement based on current backlog rather than a forecast-based production approach. We will also be conducting a comprehensive inventory review by the end of the year to help us identify any additional changes we need to implement to maximize cash. I want to iterate again that this strategy will not affect our ability to ship products in Q4 and Q1. However, we will procure additional material for Q2 and beyond only once we will have clear buildup of backlog and a reduction in inventory requiring us to procure more material to meet the bookings and backlog demand for H224. Additional programs we have implemented include an ROI-based evaluation of new research and development projects to prioritize our spend to only those projects that meet a certain internal return threshold. Finally, we are optimizing all of our corporate G&A expenses as we look to prudently manage our discretionary spending levels. Next, I'd like to address one of the most important initiatives ensuring customer success. This success is critical as it is the primary driver of follow-on orders from existing customers. Please turn to slide six. First, some background. We saw significant growth in 2022 as revenue tripled and we more than doubled our customer base. This reflected strong customer demand for our systems as we successfully launched three new products in the Cephar family during the year. However, this rapid growth affected our ability to properly support our base as our customer support organization didn't expand quickly enough to keep pace with our significant install crap. We were also impacted by insufficient field service training on the newly released products. This led to issues in the field taking longer than expected to resolve. As a result, we saw a significant drop in customer satisfaction, which led to lower than anticipated existing customer demand in bookings in 2023. We have already made multiple changes in our customer support organization to address this issue, and we are seeing early success. We are reallocating resources to grow and strengthen our customer support organization, including adding additional headcount and forming dedicated issue resolution teams to resolve issues quickly. We have also increased investment in our new product training programs to ensure our field service team is up to date on all recent changes. Finally, we have adjusted our workflows to drive a closer partnership between engineering and our customer support teams in order to quickly identify and address field issues. Our success depends on our customers' success. We are already seeing progress as a result of these changes. For example, in the last two months, we have seen a step function improvement in the performance of our new products in the field. Additionally, customer satisfaction is increasing, and we are starting to see a turnaround in demand for systems from existing customers. I can confidently report that our determined actions are yielding results. We will remain focused on ensuring the success of our customers as we look to improve the efficiency and sustainability of our systems to meet the growing needs of our customers. Moving on to slide seven, I'd like to highlight what we are doing to improve our booking success that has lagged forecast over the last three quarters. As I just discussed, Our bookings growth has been impacted by slower than expected existing customer sales this year. Additionally, bookings growth was affected by weaker new customer acquisitions over the same period. We believe the slower pace of new customer bookings is due to a number of factors, including the lack of an effective new customer sales process, as well as proof of concept execution. While these issues were offset Given our strong existing customer demand last year, they became more pronounced as repeat business declined in 2023. As a result, we made a strategic decision to restructure our sales organization to significantly improve execution and increase bookings. This started with the hiring of Michelle Sidwell as our new EVP of sales in our effort to build a world-class sales organization. Michelle brings a wealth of sales experience to the company and has already instituted a new discipline sales process that is already showing early success. A key part of this process is to refocus our team on markets where we have had significant success in the past. These sectors include space, where we are the leading AM suppliers to many of the top launch companies. Additionally, the opportunity in defense is significant, and the addition of the three new defense customers earlier this year reflects this potential. Finally, leveraging a growing footprint in the aerospace sector. We believe these are the right sectors to be addressing given our experience and significant customer footprint. We are also developing partnerships to expand our reach in certain international markets, as well as potentially partnering to develop new materials and applications. Finally, we are working closely with our customers and internal teams to refine and clarify our value proposition to drive improved sales economics and productivity. In summary, we are pleased with our progress to date. We expect that by combining these sales initiatives with our customer satisfaction focus, we will start to see a rebound in our customers' bookings. On slide eight, we are providing a brief summary of our strategic initiatives that we believe will drive free cash flow and sustainable profitability in 2024. We expect Q4 to be a transition quarter as we execute on our realignment initiatives. Our business is now right-sized for current conditions, and our cost reduction programs will result in quarterly cash savings of 40% starting in the first quarter of next year. We have also adjusted our procurement and manufacturing plan to maximize free cash flow. Additionally, our investments in improving our customer service are already showing success, which will drive growth in existing customer sales. And finally, our new go-to-market strategy, disciplined sales process, and focus on our strong markets will provide a strong foundation to rebuild our backlog and pipeline for 2024 success. In closing, We remain excited about our future opportunity and believe our realignment puts us in a much stronger position to achieve our profitability goal next year. With that, I would like to turn the call over to Bernie to discuss our financials and provide our guidance. As we announced, Bernie was appointed CFO last quarter, and I would like to welcome him to the team. Given his operational and financial experience, he is the right person to help lead us through the next phase of our success.