Velo3D, Inc. (NYSE:VLD) Q1 2023 Earnings Call Transcript

Velo3D, Inc. (NYSE:VLD) Q1 2023 Earnings Call Transcript May 1, 2023

Velo3D, Inc. reports earnings inline with expectations. Reported EPS is $-0.09 EPS, expectations were $-0.09.

Operator: Good afternoon, and welcome to the Velo3D First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s conference call is being recorded. I will now turn over the call to Mr. Bob Okunski, Vice President of Investor Relations at Velo3D Corporation. Thank you, sir. You may begin.

Bob Okunski: 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 & Presentations page of our Investor Relations website. With that, I’d like to turn the call over to Benny Buller, CEO of Velo3D. Benny?

Benny Buller: Thanks, Bob, and I would 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 ramped 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 six months. Additionally, bookings rose more than 30% sequentially to $20 million, and reflect strong customer demand for our technology. With our first quarter bookings and book 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 target. 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 our 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 a 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 our 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 de-risked 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 nine months to improve our production efficiency as well as to minimize 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 cells 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 staggered 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 condition 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. The first three 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 result, increased booking and healthy backlog reflect 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 BoM 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 increased sequential spend in 2022. We expect a similar rate of reduction on a quarterly basis 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 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?

William McCombe: Thanks, Benny. 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 of 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 of 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 non-recurring 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 and sales and marketing was in line with the fourth quarter.

GAAP net loss for the quarter was $36.2 million, including a non-cash loss of approximately $12.2 million related to changes in the fair value of our warrants and earnout liabilities. On a non-GAAP basis, which excludes this loss and 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 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 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, bill of material costs are expected to decline as we receive more materials under new long-term low 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 in 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 the loss of $16 million. Inventory increased by $3 million, primarily due to a temporary increase in finished goods. We expect inventory growth to flow 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 allowed for lower stocking levels. The increase in other working capital primarily reflects increases in accounts receivable due to the timing of shipments in a 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 a range of $25 million to $29 million, which is supported by existing backlog and gross margin to be in the range of 12% to 16%, excluding non-recurring 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 a range of $120 million to $130 million. We expect gross margin for the year to be in a range in 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?

Q&A Session

Operator: Thank you. We will now be conducting a question-answer session. Our first question comes from Brian Drab with William Blair. Please proceed with your question.

Brian Drab: Hi. Thanks for taking my questions. The first one, Bill, can you just elaborate on the backlog, the order that was – or orders that were removed from backlog? I may have missed it if you said a figure. But I’m just wondering how significant was that order signed? And then also is that something that will come back potentially if the customer’s able to get financing or is that off the table?

William McCombe: Yes. 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 – the order is approximately 80% of the decline in backlog were about just a smidge under $15 million.

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

Benny Buller: Yes. 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 bookings target for this quarter, and we wouldn’t do that if we didn’t have a very detailed plan on how we’re going to accomplish that.

Brian Drab: And sorry, just to be really clear that, is that approximate $15 million then out of the – I know it’s out of backlog, but that’s out of the forecasted guidance for 2023?

Benny Buller: Yes, exactly. If it’ll come back, it’ll come back and we’ll let you know. When it comes back, but – because we talked about it, if it’ll 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 – not a date, but at least a quarter where we are going to ship it, right, ideally better than that. And for this booking since we don’t have the time at which we can ship it, it’s not useful for us to report on it as the 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 report that.

William McCombe: Yes. On this one, I should add one, and that – a small deposit had been paid. The customer was trying to arrange financing, but we – as we 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, it’s uncertain win.

Brian Drab: And it’s a new customer?

Benny Buller: Yes.

Brian Drab: Would be a new customer?

Benny Buller: Yes. It’s a .

William McCombe: Yes.

Brian Drab: Okay. I think I might just pass it along since I asked like four follow-up questions. Thank you very much. I’ll talk to you later.

William McCombe: Thanks, Brian.

Operator: Thank you. Our next question comes from Ashley Ellis with Credit Suisse. Please proceed with your question.

Ashley Ellis: Hi. Thank you for taking my question. Bill, just to clarify the order you took out of backlog, you were just discussing. Is that in addition to the two customers last quarter that we’re having financing issues?

William McCombe: No. It was one of them.

Benny Buller: Yes.

William McCombe: It was one of the ones that we referenced.

Benny Buller: Yes. So when we talked about customers that have financing issues, that’s the main one that we discussed.

Ashley Ellis: 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 manufacturer’s last quarter?

William McCombe: Yes. 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.

Ashley Ellis: 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? Thanks.

William McCombe: We were continuing to prioritize our R&D and engineering efforts and our sales and marketing. And we just are 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 had planned in engineering, R&D and in sales and marketing.

Ashley Ellis: Okay. Thank you.

William McCombe: It’s just an effort to be more efficient and spend money more productively.

Ashley Ellis: Great. Thanks.

Benny Buller: Thanks, Ashley.

Operator: Thank you. Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Christopher Grenga: Hi. Good afternoon. This is actually Chris Grenga on for Jim. Could you provide a bit more color on the potential decline on the recurring payment revenue?

William McCombe: I’m sorry, could you restate the question. I didn’t catch it.

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

William McCombe: Sure. Yes. So there were two 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 of 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 – it was more than likely or may have been associated with the system that was purchased by the renter 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 a number of systems in the field to modestly increase. So this is what I would call an isolated trend that really is driven by that timing of the shipments of leased systems.

Benny Buller: 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 three systems. One of them was a system that was unleased 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 two, and the customer decided at the end not to keep the system. So these are the three systems under…

Christopher Grenga: Got it. Very helpful. Thanks.

William McCombe: Yes. As I mentioned, we’ve got more shipments of lease systems going out this quarter, so you know that trend will turn around. This was a one-time blip.

Christopher Grenga: 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 targeting the Asia market. Just curious if you – how you would currently characterize the demand and the reception that you’re seeing in that geography just more recently? Thank you.

Benny Buller: Yes. 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 three regions, this is the region that is developing the slowest. So we have much more traction and even recurring or repeat all those in Europe already, Asia is developing slower for us. We also have much less resources in Asia compared to Europe. A very, very small effort for us.

William McCombe: Print workshops.

Benny Buller: In Asia or in general?

William McCombe: .

Benny Buller: 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 one and we are building, and we have few more actively now.

Christopher Grenga: Thanks so much.

Operator: Thank you. Our next question comes from Troy Jensen with Lake Street Capital Markets. Please proceed with your question.

Troy Jensen: Hey, gentlemen. Congrats on the great quarter here.

William McCombe: Thanks, Troy.

Benny Buller: Thanks, Troy.

Troy Jensen: Hey. So 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?

Benny Buller: So it depends on the customers. Most generally those machines are leased again to another customer. We use those leases basically as almost a kind of business development as try before you buy type of arrangement. So we have a few machines like that that went from one customer to another. So that’s the most general. Very rarely we would sell them at the discounted price. More often they would just be a re-leased.

William McCombe: In some cases, Troy, they come out of the leased system count because they’re purchased by the lessee.

Troy Jensen: Right. I get that, they’re still onsite, but yes, it’s the revenue stream.

Benny Buller: The ones that are returned most generally are re-leased.

Troy Jensen: Got it. Was there – a couple of other questions here. Was there any launch pricing systems in Q1?

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

Troy Jensen: All right. Are all the launch pricing machines gone through the income statement now?

Benny Buller: Yes. I think there’s only one left.

William McCombe: No.

Benny Buller: The launch customer…

William McCombe: The launch customers, they’re all gone, yes.

Benny Buller: The early bird, I think there is one more early bird.

Troy Jensen: Got it. Okay. All right. Two more questions, if that’s okay. Can you just give us an update on Europe?

Benny Buller: Europe?

Troy Jensen: Yes.

Benny Buller: So we have a few OEMs in Europe that purchased the machine. One of them already followed up with the repeat order. We have one contract manufacturer that already has a machine 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’ll move, but I’m very pleased that it’s moving forward all the time.

Troy Jensen: Good. All right. Hey, last question. This maybe a little long-winded. But the coverage ratio, the percentage of the quarter that’s done entering the quarter, you said it’s 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. It’s definitely much higher than the second half. So I mean to me it’s got to be a significantly more book and ship business, so I’m just kind of curious. I mean, is this just all pipeline opportunity, obviously if it’s not in backlog?

Benny Buller: 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. And if we hit our booking guidance for Q3, we’ll be roughly in 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.

William McCombe: Troy, it also depends on how much business we book and ship in the quarter. So that’s a factor that goes into the equation as well.

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

Benny Buller: We do not have a significant amount of shipment inventory. This is not – but we are building these machines now. 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.

William McCombe: Yes. We’re confident we can hit the shipment targets.

Troy Jensen: You guys have definitely expressed a lot of confidence in revenues here. It’s good to hear. Congrats guys. Oh, go ahead, Benny.

Benny Buller: Yes. Just to say that 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’ll 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 last few quarters.

William McCombe: Yes. Just to elaborate on that a little bit, Troy. The total revenue – the total percentage of revenue that we book and ship in the quarter, averages 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, there’s about 25% of total revenue that generally is booked and shipped in the quarter. And that includes some consumables and things like that, that we sell in addition to…

Troy Jensen: Understood. Congrats again, gentlemen. And Benny, I’ll see you…

Benny Buller: Thanks, Troy.

Operator: Thank you. There are no further questions. I would like to turn the floor back over to Benny Buller, CEO for closing comments.

Benny Buller: Thank you. 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 topline 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 our earnings call today.

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