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Velo3D, Inc.
3/2/2023
Greetings and welcome to the Velo3D Report's fourth quarter and fiscal year 2022 financial results. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Okunski, Vice President of Investor Relations. Thank you. You may begin.
Thank you. I'd like to welcome everyone to our fourth quarter 2022 earnings conference call. On the call today, we'll start out with comments from Benny Buller, CEO of Vela3D, who will provide a summary of the quarter as well as an update on certain key strategic priorities for 2023. Following Benny's comments, Bill McComb, our CFO, will then review our fourth quarter 2022 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 2021 10-K and third quarter 2022 10-Q 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 fourth quarter earnings call. Before discussing our strong quarterly results, I wanted to briefly highlight why we remain excited about our long-term opportunity and why we are well-positioned to expand our industry leadership position going forward. Please turn to slide three. Overall, we continue to see a massive untapped global market opportunity for high-value 3D metal printed parts. For example, Context research is forecasting growth in excess of 30% in the laser powder bed fusion market through 2026, making it the fastest growing segment in 3D printing. This growth is being driven by the increasing acceptance of metal 3D printing technology for volume production for applications across multiple industries. Additionally, in some applications, 3D printed metal parts are now approaching the cost of legacy parts while providing much higher quality and design flexibility. Vero3D is now the fastest growing company in the metal AM industry since Q1 2021. We believe this growth is a direct result of our unique and differentiated technology that enable customers to bring parts that are not possible with legacy AM technology. This capability fundamentally changes the way the aerospace, defense, energy space, and other industrial segments design, and produce their most critical parts. We are also the only metal AM company to offer fully integrated hardware, software, and comprehensive printing platform that provides customers scalable manufacturing solutions. We remain very excited about the overall opportunity for additive manufacturing. We continue to believe our technology is rapidly changing the way high-value metal parts are manufactured across the world. I would now like to discuss the specifics of our fourth quarter. Please turn to slide four. Overall, we were very pleased with our Q4 performance. We saw continued strong demand for assistance. For the quarter, we exceeded our forecast as revenue rose 56% sequentially. On a year-over-year basis, both our fourth quarter and annual revenue rose 200%. As you can see from the chart, we have significantly outpaced our peer group since the first quarter of 2021. This outperformance reflects not only strong customer demand for our technology, but also our ability to rapidly scale our business and production operations. 2022 was also a year of increasing market momentum as we grew our customer base by more than 50% last year. We expect to add a significant number of new customers in 2023 as we expand our global footprint, penetrate new markets, and qualify new materials. Additionally, we are also seeing significant traction for our new product introductions. We further ramped volume production of our Cephar 1MZ and Cephar XC1MZ systems in Q4 with three shipments in the quarter. As we have highlighted before, the SAFIRE XC1MZ significantly expands part build volume up to 10 cubic feet with parts as tall as one meter. We believe the capacity to manufacture larger parts further extends our competitive advantage, especially in the aerospace and energy segments. Operationally, we also executed well and are starting to see the benefits of the manufacturing initiatives we put in place over the last two quarters. Overall, supply chain conditions have improved. Given our efforts, we have significantly reduced supply chain risk in relation to our annual forecast. We also continue to focus on prudently managing our inventory levels. We expect a material decline in inventory in the second half of this year, as we can now better match inventory levels to our demand expectations. Finally, production cycle times of our SAFR-XE system continue to improve due to increased volume and improved manufacturing efficiency. This improvement is important as it has a direct impact on gross margin. Additionally, we continue to have strong visibility going into 2023, given our Q4 bookings of $15 million and backlog of $43 million. We remain confident that we have a clear path to profitability given our current resources and business momentum. I'll discuss our strategic initiatives for this year in greater detail later on. I would now like to spend a few minutes highlighting our industry diversification, which we believe reflects continuing customer acceptance. Please turn to slide five. This slide details our market segment diversification by total customers as of the end of 2022, along with a breakout of 2022 by systems revenue. As you can see from the charts, We have significantly expanded our customer footprint from our initial reliance on the space vertical to include markets such as energy, aviation, and defense, contract manufacturing, and other industrial applications. Customers outside of the space segment now constitute 75% of our customer base. We expect our global diversification trend to continue in 2023, as we look to capitalize on increasing demand in both existing verticals and new market segments. Turning to 2022 by system sales, revenue was heavily weighted to space. This was driven by two major factors. First, it was the result of our launch customer contract where we shipped nine Zephyr XC systems to a single space customer last year. Second, space customers had moved to procure larger fleets of machines due to the entrepreneurial spirit and quicker adoption patterns than established players in other segments. We expect ourselves to space vertical to remain strong in 2023, but decline as a percentage of system revenue this year. This will be primarily driven by our efforts to further expand our footprint in both new and existing markets outside of space. I would now like to use a simple example to put into perspective as to why customers are continuing to choose additive manufacturing and Velo3D for their high-value metal parts. Please turn to slide six. This example compares the traditional manufacturing process for a common heat exchanger versus what we provide using one of our CIFAR systems. As you can see, this is a very complex part with multiple types of structures required to achieve the finished product. With traditional methods such as brazing, welding, machining, this part requires the separate fabrication of more than 100 pieces. On a VeloCephal system, we can print this part in one piece with higher quality and better performance than traditional methods. Additionally, our systems provide the customer with the ability to quickly implement design changes which is not something that can be easily done with traditional techniques. As a result, the customer was able to reduce manufacturing steps by 65%, lower overall part cost and manufacturing a higher quality part than traditional methods. Finally, we enabled the customer to significantly improve their supply chain cycle time with a design full build time of four to six weeks against 12 to 18 months and outsource partner. These advantages highlight why customers continue to choose Velo3D for their high value metal parts manufacturing. In closing, I would like to briefly discuss our key 2023 strategic priority. Please turn to slide seven. Our primary focus for this year is driving to profitability and improving cash flow. We will accomplish this through a combination of growth margin expansion and spending production initiative. First, we expect revenue growth of more than 50% this year. Given the strong demand trends for our industry-leading technology exiting 2022, we believe we have the sales momentum to achieve this goal. Additionally, this growth will be driven by our continued execution of our land and expense strategy. The success of this strategy is reflected in the fact that more than half of our customer base now own more than one Zephyr system. Second, further expansion in our gross margin as we benefit from our bill of material cost reduction initiatives and improved production efficiency. We also expect a continuous increase in overall ASTs with a further makeshift to our Zephyr XC product and the completion of our discounted pricing transactions in the first half. of the year. Third, we will reduce year-over-year adjusted operating expenses by 20% in Q4 of 2023 compared to Q4 of 2022. These initiatives include a gradual reduction in labor costs. These efforts include a selective hiring freeze, reduced attrition backfill, as well as reduction in spending for certain employee programs. Our goal is to reduce operating structure while driving stronger revenue growth. We are also implementing a number of programs to reduce discretionary expenses across the company. Finally, significantly improving cash flow. We expect sequential improvement in cash flow as we go through the year, driven by improved EBITDA. In addition, we will see an improvement in working capital as we expect to reduce year-over-year inventory by 10 to 15% in 2023, given improved supply chain planning and material delivery schedules. We expect to see the benefits of the inventory reduction efforts starting in the third quarter of this year. In closing, we are excited about our future opportunity and believe we are well positioned to capitalize on the growing demand for high value 3D printed metal parts We remain confident in our ability to reach profitability given our current liquidity and look forward to executing our long-term strategic plan as we executed well in 2022. With that, I'd like to turn the call over to Bill to discuss our financials and provide our guidance.
Bill. Thanks, Benny. Moving on to our quarterly financial performance, please turn to slide nine. Full quarter revenue of $29.8 million exceeded our forecast and was up 56% sequentially and approximately 200% year-over-year. Compared to Q3, Q4 year of sale revenue rose $10.5 million, or 63%, due to higher volume and higher average selling price, which was due to three factors. First, a shift of product mix towards more Sapphire XC systems as we shipped a record number of these systems in the quarter. Second, more deferred payment transactions, which carry higher revenue than regular sales. And finally, fewer Sapphire XC launch customer shipments at discounted prices. We completed the last of these shipments in the fourth quarter. Recurring and service revenue for the quarter rose $200,000 sequentially to $2.8 million and reflected the increased number of systems in the field. On a year-over-year basis, year of sale revenue was up 187% from $9.4 million to $27 million, and recurring revenue was up 180% from $1 million to $2.8 million. Gross margin for the quarter was 6% and in line with our forecasts. The increase in gross margin was primarily driven by higher average selling prices and lower service and recurring revenue costs. These improvements were partially offset by higher material costs resulting from scrap, obsolescence, and other inefficiencies. Adjusted operating expenses for the quarter excluding stock-based compensation were $18.6 million. This included a benefit of $3.4 million from certain non-recurring expense reductions. Adding back these items, our operating expenses excluding stock-based compensation would have been $22 million down from $22.6 million in Q3. G&O was in line with Q3 while sales and marketing was up slightly. R&D expenses declined $4.7 million and reflected $2.7 million of the non-recurring expense reductions mentioned above. R&D expense also benefited from the completion of our Sapphire XC1MZ development project and better expense control. We expect R&D to rebound somewhat in 2023, but to remain below historical levels. GAAP net income for the quarter was $22.7 million, including a non-cash gain of approximately $44 million related to changes in the fair value of our warrants and earn-out liabilities. On a non-GAAP basis, which excludes this gain in stock-based compensation expense, net loss was $16.4 million, and adjusted EBITDA for the quarter, excluding the same items, was a loss of $14.4 million. I would like to provide a bit more detail on our gross margin outlook for 2023. Please turn to slide 10. As I mentioned earlier, our gross margin Q4 2022 was 6%. As we progress through 2023, we expect to improve our gross margins to approximately 30% by Q4 of 2023. as a result of the following factors. First, average selling prices are expected to improve as our product mix shifts more towards higher priced Sapphire XC systems and as we implement price increases for the Sapphire XC. Second, material costs are expected to decline as deliveries increase under long-term, low-cost supply contracts that have recently been signed or are in the process of being negotiated. These contracts with more predictable delivery schedules should also reduce freight and storage costs. In addition, we're making a concerted effort to reduce material inefficiency and scrap costs. Finally, we expect labor, overhead, and other factory costs to decline as a percentage of revenue as we increase production volumes and hold costs relatively flat through greater efficiency. Please turn to the balance sheet on slide 11. We executed the quarter with a very strong balance sheet with $80 million in cash and very limited debt. Cash usage for the quarter was $33 million, up slightly compared to Q3. The major components of cash usage were as follows. Q4 EBITDA and adding back the $3 million non-recurring non-cash expense reductions amounted to a loss of $17 million. We also had a larger than usual number of sales with deferred payment transaction structures in this quarter. This had a negative cash effect of $8 million, which will be recouped over time as these payments are received. We will minimize these types of transactions in 2023. Inventory increased by $3 million as efforts to slow the growth of inventory through better planning and staggered delivery started to gain some traction. We expect inventory growth to slow and flatten out in the first half of 2023 and then to decline in the second half of 2023. CapEx was $3 million, down from $5 million in Q3, and was comprised of CapEx for lease systems and facilities and equipment. We expect total cash usage in Q1 to be in the range of $20 to $25 million, depending on the timing of payments for certain booking deposits, receivables, and shipments. This is inclusive of proceeds from financing under our ATM equity program and bank facility. We continue to expect cash usage to decline each quarter through the end of 2023. Finally, we remain confident that we have the liquidity to fund our business plan through to profitability. I'd now like to provide our outlook for 2023. Please turn to slide 12. We expect first quarter 2023 revenue to be in a range of 25 to 28 million, which is largely supported by our existing backlog, and gross margin to be in the range of 9 to 11 percent, excluding non-recurring items. For fourth year 2023, we expect revenue growth of greater than 50 percent and revenue to be in the range of 120 to 130 million. We expect gross margin for the year to be in a range of 19% to 21%, with Q4 gross margin of approximately 30%. In conclusion, we're focused on executing on our clear path to profitability within our current capital resources through growth, improvements in operating efficiency, margins, and cash flow. With that, I'd like to turn the call over for questions. Operator?
Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Brian Darb with William Blair. Please proceed with your question.
Brian, your line is live.
Sorry, can you hear me?
Yeah, we can, Brian.
Okay. Thanks for taking my question. So first, just a small housekeeping item. You mentioned in the guidance, you know, there's this note that you're going to hit, you know, certain levels of gross margin, excluding any non-recurring items. Can you just... comment on what kind of non-recurring items we're talking about or anticipating?
Brian, this is Bill. That's a catch-all. We're not anticipating any non-recurring items. There's nothing specific that we had in mind when we made that statement. It's just if something completely out of the ordinary to come up that By definition, we can't anticipate. We just wanted to make it clear that that wasn't included.
Okay. Right. Another way of saying it is adjusted gross margin, which is nothing unusual, but just wanted to check. Thanks. Right. So energy and industrial have been two big end markets that – You're getting more into these end markets. There's a lot of potential. Can you talk about some of the applications that you're starting to see your machine used for within energy and industrial? And specifically, is the technology starting to fill holes in supply chains in terms of the digital inventory idea? or is it being used by OEMs for kind of first fit applications rather than MRO?
So the first applications that we see a significant traction with are applications of spare parts, kind of digital inventory for MRO, as you mentioned. These are, in these two segments, These are the first places where we see good traction. And we see that in valves, in heat exchangers, in turbo machinery. So these are the first places that we see big attractions.
OK, got it. Thank you. And then can I just ask, how are things going in Europe? Is it still choppy there? Is it still longer sales cycles or are you starting to win over some customers there? Thanks.
We definitely start winning some customers. We won some customers in Europe and we have even repeat orders on the horizon from Europe. So it's definitely getting momentum. The cycles are longer as we are just getting there and people know us less there. There's a lot of due diligence our customers are taking and the sales cycle is particularly long and kind of reminiscent of the sales cycles we had in 2019 in the United States.
Got it. Okay. That's all from me. Congratulations on the continued momentum.
Thank you.
Thanks, Brian. Thanks, Brian.
Our next question comes from the line of Jim Rusciutti with Needham & Company. Please proceed with your question.
Hi, thank you. Good afternoon. So I appreciate the color on some of the verticals. And the question I have is just with respect to the full 23 outlook, which of the verticals do you have the clearest line of sight with? with respect to the revenue outlook. I mean, clearly you've got backlog. I'm just trying to get a sense as to which of these verticals you have the best visibility in.
It's, you know, I don't have, the answer will not be mathematically precise because I'm kind of estimating that based from... That's okay. But... But I think that the picture that you see on slide five on the left is representing the visibility that we see. So space, aerospace, defense, automotive, industrial have similar segments. Maybe the CM segment is a little smaller. than what we see in this picture. All the other ones are proportionately larger, but this represents the pipeline.
Maybe another way to ask the question too, Vinny, is I guess what I'm trying to get to also is are there some verticals where you're seeing some signs of hesitancy just in light of the macro environment?
That's a really good question, and to that the answer is easier. So if you look at our bigger customers, we didn't see yet a lot of slowdown because of the macro environment, where we do see the one segment that we do see definite slowdown is in the contract manufacturing segment.
And particularly in the smaller companies, we see there are more funding constraints and financing constraints. So that's one reason, one driving reason why the contract manufacturing segment will look smaller in 2020. And that's the one segment that we definitely see slowdown in financing.
Got it. That's understandable. Last question from me is you had a nice win last year on the automotive side with North American Auto. And I'm wondering if you've been able to leverage that either with that customer or with other customers as it relates to the M300 tool application.
Yes. Yeah, there is another customer already, and there are a few more in the pipeline.
Got it. Okay. Thanks very much. Thank you, Christian. Thank you, Jim.
Our next question comes from the line of Troy Jensen with Lake Street Capital Markets. Please proceed with your question.
Hey, gentlemen. Congrats on the great results. Great. Thanks. Thanks, Troy. Hey, a couple questions for Bill here. So just, you know, backlog, $43 million. It was down $23 million on a sequential basis. It sounds like you're expecting that to shift primarily in the first half. So just confirm that if you would. And then can you just talk about second half visibility then if a lot of this backlog is getting kind of depleted?
Yeah, look, with respect to backlog, there were, in addition to the revenue, there were a couple of customers where they haven't made deposits, they haven't made a lot of progress on their financing for the system. So we, even though the orders were not cancelled, so the orders are still in existence, we adjusted them out of the backlog in the interest of conservatism. So that adjustment was made. That's one of the factors that the backlog came down. Look, I think we still feel, you know, the bookings process is a lumpy process. You know, we're selling systems with multi-million dollar ticket prices and So it's a lumpy process. I would just say, based on the tone of the market, the pipeline of activity we see, we feel very comfortable with our guidance.
OK. Perfect. Another one for you, Bill. Your Q4 OPEX was about, what, 18.6 million. I think you said that you expect that to be down 20% year over year, Q4 of this year. So we're talking about 15 million in OPEX.
No.
Let me go ahead. Yeah.
find the math on that a little better. Q4 benefited from 3.4 million of non-recurring expense reductions. In my remarks, I added those back to get to an adjusted base of 22 million. It's from that 22 that we're projecting a 20% reduction.
Okay, so it's 17.5 million.
They were non-recurring and they were non-cash. And so in order to get a true run rate, you really should add those back, which is what we did. And that's what I referenced in my remarks. So that's the basis from which we're talking about a 20% reduction. So 22 million minus 20%.
And are you expecting, like, sequential declines on an absolute basis throughout the year? Or is there going to be a bigger step function at one point? I would say it's a gradual decline, Troy.
Yeah, so our goal, you know, we don't have – you know, perfect visibility and perfect control, but our goal would be to steadily reduce it during the course of the year. And we've got a wide range of cost reduction initiatives. We'll be implementing those beginning in the first quarter so that the first quarter reduction might be small and then they'll start to, you know, get... The first quarter might even be flat and then they'll start to... be accelerated as we get towards Q2, Q3, and Q4.
All right, guys. That's all I got. Congrats. Keep up the good work. Thank you, Troy.
Next question is a follow-up question from the line of Brian Darb. Please proceed with your question.
Okay. It's Brian Darb. Thank you. So I'm missing the table. I wish that you still included the table that had all the great data early on. I understand for competitive reasons we're not including it. But I just wanted to see if I could get you to mention any of the figures that we used to see there. It would be interesting to know if you would tell us anything about the total number of machines in the installed base now or total number of customers. Yeah, unfortunately not, Brian.
It's hard to, you know, look, all I can say is obviously the installed base grows every quarter and the number of customers grow every quarter. You know, I can't say anything meaningful without violating our policy.
Okay, that's fine. Can I just ask one more then? You also used to talk about the ratio of follow-on machine sales to initial machine sales. That was just a good metric because it gave us some insight into the demand from current customers and how often you're going to have repeat sales. Can you talk about that and if you're seeing current customers coming back for second and third machines?
Once again, we are seeing recurring purchases and we have those in the pipeline. As a general matter, that continues to be a feature of our business. Once again, we can't really be specific, but the only thing I can tell you that we've that we've talked about in the public remarks is that our product mix has continued to shift towards the Sapphire XCs, which are the higher ticket price, higher priced systems. And look, as a general matter, those existing customer purchases, recurring, existing customers continue to purchase new systems. We really don't want to be specific.
But I would say one thing is that this is a very significant portion of our business.
The repeat purchase? Yeah. Yeah. And can you comment at all? I think you said that you're raising the price on the XC. Did I hear that correctly? And is that a material increase? Could you? comment on how much we're raising prices because that obviously affects our models.
It's a relatively modest increase, Brian. Okay. It doesn't affect the models in a meaningful way. Okay.
Okay. All right. Makes sense. Prices on everything are going up, so no one should flinch at that too much. All right. Thanks a lot.
Thank you. Thanks, Brian.
There are no further questions in the queue. I'd like to hand the call back to Benny Buller for closing remarks.
Thank you, everyone, for participating in our earning call. We had a really good year in 2022 where we delivered and executed two very ambitious goals. We plan to keep this tradition of execution and delivery in 2023. So looking forward to see you in our next earning call. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.