Velo3D Inc (VELO) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to the Velo3D First Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I'll now turn over the call to Mr. Bob Okunski, Vice President of Investor Relations at Velo3D Corporation. Thank you, sir. You may begin.

Thank you. I'd like to welcome everyone to our first quarter 2023 earnings conference call. On the call today, we will start out with comments from Benny Buller, CEO of Velo3D, 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 McCombe, our CFO, will then review our first 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 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 first quarter earnings call. We remain very excited about the overall opportunity for additive manufacturing as our technology is rapidly changing the way high-value metal parts are manufactured across the world. Our ability to capitalize on this opportunity is the key driver behind our significant growth, which in turn is enabling us to accelerate our path to profitability. I would now like to discuss the specifics of our first quarter. Please turn to Slide 3. Overall, we were very pleased with our Q1 results as we saw continued strong demand for our systems. For the quarter, revenue more than doubled year-over-year to $27 million. This performance reflects not only strong customer demand for our technology, but also our ability to rapidly scale our business and production operations. Operationally, we executed well as we further ramp production of our Sapphire XC and Sapphire XC 1MZ products to meet increasing demand from new and existing customers for these systems. This production success was a direct result of the efficiency initiatives we put in place over the last 6 months. Additionally, bookings rose more than 30% sequentially to $20 million and reflects strong customer demand for our technology. With our first quarter bookings and backlog of $24 million, we believe we have increasing confidence to achieve our second quarter and fiscal year 2023 goals. 

Finally, our path to profitability remains on track as improved operational efficiency enabled us to expand our margins while reducing adjusted operating expenses. As a result, we significantly improved our net cash flow by more than 50% sequentially, exceeding our cash forecast for the quarter. We remain committed to approaching breakeven in the fourth quarter of this year. I would now like to briefly discuss why we remain confident in achieving our Q2 and 2023 revenue targets. Turning to Slide 4. As I previously mentioned, our 2023 confidence is driven by the fact that we have significant visibility for this year. In addition, we expect to see ongoing strong demand for both Sapphire and Sapphire XC systems as customers continue to choose our industry-leading technology for their AM needs. This chart provides a detailed breakdown of our Q2 and 2023 revenue expectations by category. Given our strong Q1 revenue performance, expected recurring revenue from our expanding installed base and healthy backlog, we remain confident in achieving our goals for the year. 75% of our Q2 forecasted revenue is either booked or recurring. And on an annual basis for 2023, more than 50% of our forecast is either recognized recurring or already booked with a record pipeline of opportunities which significantly derisk our 2023 booking gap. As a result, we believe we are well positioned to achieve our 2023 revenue guidance of $120 million to $130 million.

I'd now like to provide a quick update on our operational initiatives. As we have discussed previously, we instituted a number of strategic programs over the last 9 months to improve our production efficiency as well as to minimize the future supply chain disruptions. Please turn to Slide 5. Overall, we continue to make significant progress on a number of initiatives in the first quarter. In relationship to manufacturing, we further strengthened our operations team as we added a number of leaders who have particular experience in highly complex manufacturing environment. Additionally, we materially reduced production cycle times by further leveraging our continuous improvement capability on the production floor. We are also benefiting from programs to standardize manufacturing flow in our production facility. We have also successfully reorganized our factory floor to accelerate the production process. These efforts include tighter management of material flow to the production sales and reducing production labor waste associated with material shortages.

On the supply chain, we have accomplished a number of initiatives. We have completed the build-out of our supply chain leadership as well as improved multiple operational processes with the goal of reducing or eliminating shortages in the future. Although we plan additional supply chain improvements, our current state of supply chain provides us much better confidence in managing our inventory and avoiding shortages. Finally, we remain focused on prudently managing our inventory and working capital. We continue to work with our new and existing vendors to better manage our supply chain as we are starting to see the initial benefits of our staged delivery contracts that more closely matches our build schedule. Additionally, we have implemented tighter material and production planning processes to improve inventory control. Finally, we are seeing improved supply chain conditions overall that will enable us to manage our production on a more real-time basis.

I would like to close out my remarks by providing an update to our 2023 strategic priorities that I highlighted last quarter. Our primary focus for this year remains driving to profitability by significantly improving EBITDA. This will be done through revenue growth, margin expansion and expense control. As a result, we expect to materially improve cash flow. Please turn to Slide 6. First, the first 3 bullets on this page will be regarding to EBITDA. We remain confident in our goal of more than 50% revenue growth this year. Our strong Q1 results increased booking and healthy backlog reflects increasing demand for our industry-leading technology and position us well for the balance of the year. We also made significant progress on expanding gross margin in the first quarter and remain on track for sequential improvements through the end of the year. This further expansion will be driven by lower bond costs and increase in overall volume as well as higher ASP, given the continued mix shift to our Sapphire XC products. Additionally, we expect to realize the full benefits of our bill of material cost control programs and production efficiency initiatives in the second half of the year.

 Our first quarter results also show solid progress in lowering operating costs as we continue to prudently manage our expenses. The cost control initiatives we put into place over the last quarter are yielding results as our adjusted operating expenses declined 5% sequentially compared to the fourth quarter, reversing the trend of sequential spend in 2022. We expect a similar rate of reduction on a quarterly basis as we go through -- as we go through the year. We remain committed to reducing adjusted operating expenses by 20% in Q4 of 2023 compared to Q4 of 2022. Finally, improving cash flow. We expect sequential improvement in cash flow as we go through the year, driven by improved EBITDA, as I just discussed. Additionally, we will benefit from a reduction in working capital as we remain on plan to reduce year-over-year inventory by 10% to 15% this year. We expect to see the benefits of these inventory efforts starting in the third quarter of this year. In closing, we are excited about the future opportunity and believe we are well positioned to capitalize on the growing demand for high-value 3D-printed metal parts. Our path to profitability is clear, and we remain confident in achieving our 2023 goals.

With that, I'd like to turn the call over to Bill to discuss our financials and provide our guidance. Bill?

Thanks, Ben. Moving on to our quarterly financial performance. Please turn to Slide 8. First quarter revenue of $26.8 million was in line with our forecast and was up approximately 120% year-over-year. Compared to Q4, Q1 year sale revenue declined slightly, primarily due to slightly lower volumes versus Q4, which included shipments deferred from the prior quarter and lower ASP, resulting from the absence of higher revenue deferred payment transactions in Q1. Recurring and service revenue for the quarter declined $500,000 sequentially to $2.2 million due to lower hourly print fees and a reduction in the number of leased systems in the field. On a year-over-year basis, year sale revenue was up 140% from $10.2 million to $24.6 million, and recurring revenue was up 10% from $2 million to $2.2 million. Gross margin for the quarter was 11%, which was the top end of our guidance range and up from 6% in Q4. The sequential increase in gross margin was primarily driven by a reduction in material costs and improved manufacturing efficiency.

Non-GAAP operating expenses for the quarter, which excludes stock-based compensation, were $20.8 million. This compares to $18.6 million in the prior quarter, which included $3.4 million of nonrecurring expense reductions. On a comparable basis, after adding back these reductions, non-GAAP operating expenses declined approximately 5% sequentially from $22 million to $21 million. Specifically, on this basis, R&D expenses declined $600,000 compared to Q4. G&A declined $400,000 in sales and marketing was in line with the fourth quarter. GAAP net loss for the quarter was $36.2 million, including a noncash loss of approximately $12.2 million related to changes in the fair value of our warrants and earn-out liabilities. On a non-GAAP basis, which excludes this loss in stock-based compensation expense, net loss was $17.8 million and adjusted EBITDA for the quarter, excluding the same items, was a loss of $16 million. Finally, as Benny mentioned, bookings for the quarter were up 30% to $20 million, and our backlog now stands at $24 million. The decline in backlog is primarily related to an adjustment we made to remove an order, which has not been canceled but where the customer has not demonstrated adequate progress in securing financing to complete the purchase. We therefore believe it's prudent to remove it from backlog at this time.

I'd like to provide more detail on our gross margin outlook for 2023. Please turn to Slide 9. As I mentioned earlier, our gross margin in Q1 increased to 11% and was at the high end of our guidance range. In Q1, gross margin expansion was primarily driven by lower material costs and an improvement in our manufacturing efficiency. We remain confident in our ability to improve our gross margin to approximately 30% by Q4 of this year. This will be driven by the following factors. First, biller material costs are expected to decline as we receive more materials under new long-term lower-cost supply contracts. These contracts are either currently in effect with deliveries occurring signed and at the product validation stage or in the process of being negotiated. As the year progresses, we expect to work off existing inventory and receive a higher proportion of our materials under these new contracts, therefore, lowering our costs. In addition, we are making a concerted effort to reduce material inefficiency and scrap costs. 

Second, we will benefit from increased volumes and the investments we've made in leadership and training, which will drive labor and production efficiency. Volume growth will also improve fixed cost absorption as we spread our fixed costs over a greater number of units. We, therefore, expect labor overhead and other factory costs to decline as a percentage of revenue. Finally, we expect continued improvement in ASPs for the balance of the year due to recently implemented price increases and the completion of shipments with early bird reservation discounts from last year. 

Please turn to the balance sheet on Slide 10. We exited the quarter with a very strong balance sheet with $64 million in cash and limited debt. Cash usage for the quarter was $16 million, down more than 50% sequentially and significantly better than our forecast. The major components of cash usage were as follows: Q1 EBITDA was a loss of $16 million. Inventory increased by $3 million, primarily due to a temporary increase in finished goods. We expect inventory growth to slow and flatten out next quarter and then to decline in the second half of 2023 as we work through our existing inventory and staggered contract deliveries allow for lower stocking levels. The increase in other working capital primarily reflects increases in accounts receivable due to the timing of shipments in the quarter and a reduction in contract liabilities due to the timing of deposit payments. CapEx was $1 million, down from $3 million in Q4. We also raised approximately $15 million in cash from financing activities comprised of $11 million of equity sales under our ATM facility and $4 million of borrowing under our bank facilities. We expect total cash usage in Q2 to be in a range of $13 million to $17 million, depending on the timing of payments for booking deposits, shipments and receivables collections. This range is inclusive of proceeds from financing under our ATM program and our bank facility. We expect cash usage to continue 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 11. We expect second quarter 2023 revenue to be in the range of $25 million to $29 million, which is supported by our existing backlog and gross margin to be in the range of 12% to 16%, excluding nonrecurring items. We also expect bookings to be in the range of $23 million to $29 million. Our full year 2023 guidance is unchanged. We expect revenue growth of greater than 50% and revenue to be in the range of $120 million to $130 million. We expect gross margin for the year to be in the range of 19% to 21% with Q4 gross margin of approximately 30%. Finally, we expect bookings for the year to be in the range of $100 million to $130 million. In conclusion, we are focused on executing on our clear path to profitability through improvements in operating efficiency, margins and cash flow.

With that, I'd now like to turn the call over for questions. Operator?

(Operator Instructions) Our first question comes from Brian Drab with William Blair.

The first one, Bill, can you just elaborate on the backlog, the order that was -- the orders that were removed from backlog? I may have missed it if you set a figure, but I'm just wondering how significant was that order stock. And then also, is that something that will come back potentially if the customer is able to get financing? Or is that off the table?

Yes. No, the order has not been canceled. It's just that it's been out there for a while and the customer hasn't demonstrated enough progress in getting financing, so we thought that we should remove it, in the interest of conservatism. But obviously, if the customer gets financing, it could certainly come back. And the order is approximately 80% of the decline in backlog were about just a smidge under $15 million, $ 15 million.

Okay. And so I guess, if you're able to remove that -- something of that size from your backlog and still maintain your guidance overall, it seems like demand is more than expected really, except for that one issue. Is that a fair conclusion?

Yes. We -- as you saw, bookings are still strong and improving. And there is a very solid pipeline for Q2 and for Q3. So we have a very clear coverage to how we're going to meet the booking numbers for this quarter from the rest of the year, right? So we guided a booking target for this quarter, and we wouldn't do that if we didn't have a very detailed plan on how we are going to accomplish that.

And sorry, just to be really clear, that is that approximate $15 million then out of the -- I know it's not a backlog, but that's out of the forecast or guidance for 2023.

Exactly. If it will come back, it will come back when it comes back. But because we talked about it if it will come back in terms of likelihood to ship, we'll let you know. But the way we think about this is we have -- for every booking that we have, we want to have a date where -- and not to date or at least the quarter where we are going to ship it, right? Ideally, better than that. And for this bookings, since we don't have the time at which we can ship it, it's not useful for us to report on it as a booking. And going forward, we will not report bookings unless the customer paid all their kind of early payments per schedule, right? So if the customer is delinquent, we will not talk about that.

Yes. On this one, I should add on that a small deposit had been paid. The customer was trying to arrange financing, but we -- as I said, we didn't see adequate progress. We didn't have a shipping date. And so we elected to remove it from our reporting, but it's still in place. It's just of uncertain -- it's uncertain whether they're going to get the financing and its uncertain when...

And it's a new customer? Would it be a new customer?

Yes.

Our next question comes from Ashley Ellis with Credit Suisse.

Bill, just to clarify, the order you took out of backlog you were just discussing. Is that in addition to the 2 customers last quarter that were having financing issues?

No. It was one of them. It was one of the ones that we referenced.

So when we talked about customers that have financing issues, that's the main one that we discussed.

Okay. And then how are customer conversations going? Is this a trend that you're concerned of? Or any certain segment because I think you said contract manufacturers last quarter?

Yes. No, we have no concerns with all the other customers in the backlog. The deposits are -- the financing is in place for purchases. And so we have no other situations like this one.

Okay. Great. And then I had a quick follow-up. With operating expenses as you're cutting OpEx, what are the areas that you think you can -- you'll continue to prioritize. And then where is there opportunity to improve. Specifically, I'm wondering how you're thinking about go-to-market investments.

We're continuing to prioritize our R&D and engineering efforts, sales and marketing. And we're just being a little bit more careful around expenditure across the board, and we expect modest headcount reduction through attrition. So we are continuing to make all the investments that we have planned in engineering, R&D and in sales and marketing. Just an effort to be more efficient and spend our money more productively.

Our next question comes from James Ricchiuti with Needham & Company.

This is actually Chris Grange on for Jim. Could you provide a bit more color on the potential decline on the recurring payment...

I'm sorry, could you restate the question didn't catch it, it's the same?

Sorry. Could you provide color on the sequential decline in the recurring payment revenue?

Sure. Yes. So there were 2 factors there. We had a small decline in the number of systems in the field due to a lease buyout and returns. And then -- the -- another component of that revenue line item are the hourly fees that are paid when a customer uses above their allotment, their initial allotment of print hours. So we saw that come down and that is more than likely or may have been associated with the system that was purchased by the rent of that system. And then going forward, we've got a number of lease systems that are scheduled to go out this quarter. So we would expect the number of systems in the field to modestly increase. So this is what I would call an isolated trend that really is driven by the timing of the shipments of leased systems.

Jim, can I give you a little more color on this? And maybe Bill will ensure that my answer is 100% correct. So this has to do with 3 systems. One of them was a system that was on lease and the customer decided to buy that, right? So that basically moved revenue from recurring to one time. Another system was a system that the customer decided to upgrade this system to another system that is a bigger system. And basically, there was a return and then they purchased full price, the bigger system. And then the third one is a customer that we hope to do one of the first 2 and the customer decided at the end not to keep the system. So these are the 3 systems in the history.

As I mentioned, we've got more shipments of lease systems going out this quarter. So that trend will turn around. This was a one-time blip makes sense.

Got it. With respect to the printing workshops that you've been holding recently and that are more planned, it's still early in that effort. But has it met your expectations in terms of how that effort is translating into bookings or discussions around bookings? And then I noticed that there are a few to dates targeting the Asia market. Just curious how you would currently characterize the demand and the reception that you're seeing in that geography just more recently.

Yes. So as you know, we never sold into China. So we didn't have any kind of inflection from that. We have a few opportunities that we are working on in the rest of Asia Pacific. But I would say that from all our 3 regions, this is the region that is developing the slowest. So we have much more traction in even recurring or repeat or others in Europe already. Asia is developing slower for us. We also have much less resources in Asia compared to Europe. Very small efforts price in Asia or in general Austria. So we kind of have a pretty good footprint in contract manufacturers in the United States. Our main focus is expanding those customers in terms of contract kind of building out their fleet as opposed to kind of adding more contract manufacturers. In Europe, we are working with a number of contract manufacturers to build this network. We have won, and we are building a few more actively now.

Our next question comes from Troy Jensen with Lake Street Capital Markets.

Congrats on a great quarter here. I got a question. So these machines that are coming off of lease. What do you guys do with them? Refurbish them and release them or...

So it depends on the customers. Most generally, those machines are leased again to another customer. We use those leases basically as almost kind of business development and try before you buy type of an arrangement. So we have a few machines like that, that went from one customer to another. So very rarely, we would sell them at a discounted price, more often they will just be released.

In some cases, they're -- they come out of the lease system count because they're purchased by the let's see...

Right. I get that. I still on site, but yes, is the revenue change.

The one that our returns most generally are released.

Was there a-- couple of other questions. Was there any launch pricing systems in Q1?

There was no launch customer contract, but there were some early bird reservation shipments. So those were at a discount.

Are all the log pricing machines gone through the income statement now?

Yes. I think there's only one less -- I know the -- the large customer customers, they're all gone.

The early bird. I think there is one more early one.

All right. 2 more questions, if that's okay. Can you just give us an update on Europe.

Europe. So we have a few OEMs in Europe that purchased the mission. One of them already followed up with a repeat order. We have one contract manufacturer that already has a mission and is getting a second machine. We also have a pipeline for a number of more -- both OEMs and contract manufacturers. And I would say it's generally going well. It's a new market, and it's a long sales cycle, so it takes time. But we have a very good team on the ground in Europe, and it's moving forward. So I'm very optimistic that this will move. It's difficult to forecast how quickly it will move, but I'm very pleased that it's moving forward all the time.

Good, right. Last question is maybe a little long-winded, but coverage ratio, the percentage of the quarter that's done entering the quarter, you said at 75% for Q2 here. But just your thoughts on the second half, Benny, it seems like backlog is going to go down meaningfully as a percentage of the revenue goal and definitely much higher in the second half. So I mean, to me, it's got to be significantly more book-and-ship business. I'm just kind of curious, I mean this is just all pipeline opportunity, obviously, if it's not in backlog.

So I would say roughly like this, right? We have a booking guidance that we gave to Q2. If we meet this booking guidance, we'll be roughly at the same place in terms of backlog getting into Q3. If we hit our booking guidance for Q3, we'll be roughly at the same place going into Q4. So kind of the nice thing about providing this backlog information and this booking information is that you can kind of have a bracket on how well we can execute the next quarter given how we did this quarter, right? We basically provided you most of the information.

Troy, it also depends on how much business we book and ship in the quarter. That's a factor that goes into the equation as well.

Bill, do you guys have finished inventory to ship that quickly though?

We do not have a significant amount of shipment in entry. This is not -- but we are building these missions. So maybe I should put it in a different way. We have inventory of parts to build the machines in the quarter that we need to get to these numbers.

Yes. We're confident we can hit the shipment targets, yes.

You guys have definitely expressed a lot of confidence in revenues here. It's good to hear.

Yes. Just to say the thing -- the reason why we provide this information is the core of the risk lies in the bookings. And the fact that we already have the bookings and the backlog for 75% of the revenue. And given them in the past few quarters. We didn't say that, but I would say that now our average revenue that was from bookings that were booked and -- or from systems that were booked and shipped in the same quarter was about 20%. The range was between all the way up to 25%. So there is some risk in being able to hit this number, but you can bracket this list, given that our average was 20%, and we have accomplished 25% in the report.

Yes. Just to elaborate on that a little bit, Troy. The total percentage of revenue that we book and ship in the quarter average is around 35%, and that is plus or minus sort of 5% to 8%. And I'm referring to the -- looking back over the last year or so. And of that 35%, about 10% is the support services and recurring payment. So there's -- what goes into printer revenue is about 25% of total revenue that generally is booked and shipped in the quarter. And that includes consumables and things like that, that we sell in position to.

(Operator Instructions) There are no further questions. I would like to turn the floor back over to Benny Buller, CEO, for closing comments.

As I mentioned earlier, 2023 is a year in which we are determined to get to the point of profitability. And as you can see, we are making very steady progress towards that. This is driven by improving the total top line revenue as well as improving gross margin and reducing OpEx. And we are making very good steps to this, and we are very confident that we'll get to the edge of profitability by the end of the year. Thank you very much, and thanks for being on earning call, thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.