Velo3D, Inc. (NYSE:VLD) Q2 2023 Earnings Call Transcript

Velo3D, Inc. (NYSE:VLD) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Good afternoon. Welcome to the Velo3D Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I will now turn the call over 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 second 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 second quarter 2023 financial highlights 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.

Benny Buller: Thanks, Bob, and I would like to welcome everyone to our second 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. We are committed to executing on our strategic priorities and our path to profitability remains clear. I would now like to discuss the specifics of our second quarter. Please turn to Slide 3. Overall, we continued to post strong growth as revenue rose 28% year-over-year. Demand for our solutions remain high. And in fact, according to third-party data from SmarTech, we exited the first quarter as the number two supplier of metal additive manufacturing system among leading Western brands.

This growth now makes us the fastest-growing company in the 3D printing market, doubling our market share in the metal additive market to approximately 20% in the last 12 months. In relation to our path to profitability, we continue to make steady progress in the second quarter as our improved operational efficiency, enable us to expand our margins. This is particularly evident in the printer margins as they rose by more than 400 basis points sequentially to 15%. While we continue to see strong demand trends, second quarter bookings came in below plan at $60 million, primarily due to delays in booking certain orders with existing customers. We remain in discussions with these customers and are confident in closing these deals over the next few quarters, giving us increased confidence and visibility in our second half forecast.

While we saw some delays on the existing customer sites, we signed a record amount of new customer orders accounting for 90% of our total bookings revenue in Q2. We had particular success in the defense sector and expect to continue to add additional defense customers in the second half of the year. Our technology is particularly well-suited for this sector, and this growth is reflected by the fact that defense accounted for more than 35% of our first half system revenue. However, despite this positive demand trends, the Q2 bookings delays are expected to have an impact on our second half revenue forecast. As a result, we are reducing our fiscal year 2023 revenue guidance to be in the range of $105 million to $115 million. We believe that our second quarter revenue will be the low point for the year with sequential quarterly improvement for the balance of the year.

Finally, we also announced our successful $70 million registered direct offering today. While we still firmly believe that we have the resources to reach our goal of sustained profitability, we made the strategic decision to improve our liquidity for four key reasons. First, it provides us the confidence and liquidity to remain focused on our long-term strategic plan rather than maximizing short-term focused cash actions. Second, given our growing business and longer manufacturing lead times due to the complexity of our systems, the additional liquidity will enable us to better manage our working capital needs during the quarter. Third, this transaction provides us with a bridge to minimize the cash impact of end of quarter shipping timing, which can significantly affect our cash and working capital levels.

Also, this financing increases customer and supplier confidence that we have the liquidity we need to execute on our strategic plan. Moving on to Slide 4. Continued customer demand for our industry-leading technology has enabled us to become the fastest-growing company in the additive manufacturing market over the last 2 years. Not only is this shown by our annual revenue growth, but also reflected in our increasing leadership position in the metal additive market. On this slide, we are highlighting the significant market share gains we have made over the last 2 years as customers continue to choose our Sapphire family of printers for their AM needs. For example, we have gone from approximately 3% market share in Q1 of 2021 to approximately 20% as of the end of the first quarter of 2023.

In fact, as I previously mentioned, we ended Q1 as the second largest supplier of solution in our industries according to a third-party data. Additionally, according to SmarTech, we were the leading market share gainer for the 12 months period ending in Q1 2023. We believe we will continue to gain share in the future as we expect to significantly exceed the industry growth rate. This is due to several key factors. First is our technology. We offer the only fully integrated end-to-end metal AM solution for mission-critical parts in the industry today. We provide customers with the design freedom to print the complex high-quality parts they need for some of the most demanding applications in the world today, including the space, defense, commercial aviation, and energy industries.

We are also seeing the benefit from customers shifting to an onshore manufacturing as they simplify their supply chain, providing them with a scalable solution allows them to improve part quality while significantly shortening lead times. This scalability is what drives existing customer process and why we feel our land and expend strategy is critical to our future growth. Please turn to Slide 5. As of the end of the second quarter, we have more than 100 systems in the field and approximately 40 customers. This translates into a more than 400% increase in our installed base in the last 3 years. This growth has been primarily driven by existing customers adding additional machines as they increase capacity and add new applications. The chart on the left highlights the power of this dynamic as our top customers continue to add their manufacturing base on an annual basis.

In fact, more than 50% of our base has more than one system with 20% now owning 4 or more systems. On a long-term basis, we expect our existing customer purchases to be approximately 50% of our revenue. This is also a successful strategy with our contract manufacturing partners as parts customers have more than doubled over the last 18 months. Finally, we continue to diversify our customer base as we are seeing increasingly new customer traction, particularly in the defense and aerospace industries. Turning to Slide 6, I wanted to provide a quick update on a few of our important verticals as well as our Q2 successes. Overall, we continue to broaden our footprint across multiple industries. As you can see from the chart, we have significantly expanded our customer footprint from our initial reliance on the space vertical to include markets such as defense, energy, aviation, contract manufacturer and other applications.

Space remains one of our largest verticals as we offer customers improved parts, performance while giving them the ability to rapidly implement design changes to lower development costs. We remain the leader in space, adding NASA and Avio in Europe as new customers in Q2. We are also starting to see significant traction in the defense industry, and this vertical is our fastest-growing end market. To put this into perspective, defense was only 5% of our customer base at the beginning of 2022 and now constitutes close to 20%. Our success in defense is primarily due to our ability to reduce replacement part lead times in addition to providing systems for new weapon development. Specifically, we added three new defense customers in Q2, bringing our total defense customer base to nine.

As I previously mentioned, defense accounted for more than 35% of our first half 2023 systems revenue, which shows our strong traction in this market. Aerospace remains an important end market for us, and we are pursuing a number of important global opportunities. We see the potential for future growth in this segment as customers continue to look for solutions that improve supply chain efficiency and reduce costs. Finally, contract manufacturing remains a core vertical for us as existing customers continue to expand their AM footprint. As I previously mentioned, we now have more than 200 parts customers through our CM supply chain and expect to add additional parts customers in the second half of the year. I’d like to close out my remarks by providing an update to our 2023 strategic priorities.

Please turn to Slide 7. 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 in the second half of the year. First, on improving EBITDA. We now expect year-over-year revenue growth of more than 35% given our solid Q2 2023 results. While down from our previous forecast, it is still significantly more than double the industry growth rate for this year. This confidence is driven by our new customer success this quarter as well as increasing visibility into existing customer demand in the second half of the year. As a result, we expect to gain share in the second half as we continue to expand our footprint in key verticals such as defense, space, and the industrial markets.

We also made progress on expanding gross margin in the second quarter and remain on track for sequential improvements through the end of the year. This further expansion will be driven by lower material cost and increase in overall volume as well as higher ASPs given the continued mix shift to our Sapphire XC products. Additionally, we expect to realize the full benefits of our production efficiency initiatives in the second half of the year. We continue to focus on prudently managing our expenses as we execute on our cost control initiatives. We are still targeting a 20% year-over-year decline in Q4 2023 operating expenses. When believe we have the programs in place to achieve this milestone. We expect OpEx to decline each quarter for the balance of the year.

Finally, improving cash flow. We expect sequential improvement in cash flow as we go through the year driven by improved EBITDA, can I just discussed. Additionally, we will benefit from a reduction in working capital needs as the year progresses. 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 printing metal parts. Our path to profitability is clear, and we remain confident in achieving our goals for this year. With that, I’d like to turn the call over to Bill to discuss our financials and provide our guidance.

Bill McCombe: Thanks, Benny. Moving on to our quarterly financial performance. Please turn to Slide 9. First quarter revenue of $25.1 million was within our guidance range and was up approximately 28% year-over-year. Compared to Q1, Q2 year sale revenue declined slightly due to lower transaction pricing and lower maintenance and other part sales. Recurring and service revenue for the quarter declined $300,000 sequentially to $1.9 million. While service revenue rose 15% compared to the first quarter of 2023 as we added to our installed base, recurring revenue declined primarily due to a onetime charge related to a customer concession on system lease terms. On a year-over-year basis, year sale revenue was up 32% from $17.6 million to $23.2 million, and recurring and service revenue was in line at $1.9 million.

Gross margin for the quarter was 12%, within our guidance range and up 100 basis points sequentially. The sequential increase in gross margin reflected lower material costs and improved manufacturing efficiency, offset by the onetime recurring revenue charge I just mentioned and higher service support costs. Non-GAAP operating expenses for the quarter, which excludes stock-based compensation, were $22.2 million. This compares to $20.8 million in the prior quarter. The increase in operating expense was driven by a $1.9 million increase in R&D expense, primarily related to material costs for a new product development program. G&A declined $200,000 and sales and marketing was down slightly. Our goal remains to reduce Q4 OpEx by 20% on a year-over-year basis.

GAAP net loss for the quarter was $23.2 million, including a non-cash gain of approximately $2.7 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 $19.3 million and adjusted EBITDA for the quarter, excluding the same items, was a loss of $17.5 million. Finally, as Benny mentioned, bookings for the quarter were $16 million and our backlog now stands at $15 million. I’d like to provide more detail on our gross margin performance for 2023. Please turn to Slide 10. As I mentioned earlier, our gross margin in Q2 increased to 12% and was within our guidance range. In Q2, gross margin expansion was primarily driven by lower material costs and an improvement in our manufacturing efficiency.

As you can see from the chart, we continue to benefit from our operational initiatives and printer margins continue to expand. Specifically, printer margins increased approximately 400 basis points sequentially to 14.9% in the second quarter. This improvement was partially offset by lower service support and recurring payment margins. We expect further margin improvement in the second half of the year as we continue to benefit from lower material costs and a return to more normal margins from recurring payment and service support revenues. We remain confident in our ability to expand our gross margin through the balance of the year. The main drivers of this year-over-year improvement remain unchanged. First, bill of material costs are expected to decline as we receive more materials under new, longer-term, lower cost supply contracts.

Also 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 costs. In addition, we’re continuing to make a concerted effort to reduce material inefficiency and scrap costs. Second, we will benefit from increased volumes and the investments we’ve made in training, will drive labor and production efficiency. Volume growth will also improve fixed cost absorption as we spread 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 improvement in ASPs for the balance of the year as our product mix shifts back to our higher-priced Sapphire XC products and shipments with early bird reservation discounts will be behind us.

However, despite these expected benefits, the revised lower revenue outlook for the year and for Q4 impacts our Q4 gross margin expectations. As a result, we now expect Q4 gross margin to be in the low to mid-20s on a percentage basis. Please turn to the balance sheet on Slide 11. We exited the quarter with a strong balance sheet with $47 million in cash. Cash usage for the quarter was $18 million, marginally above our guidance range. The major components of cash usage were as follows. Q2 EBITDA was a loss of $17 million. Inventory increased by $4 million, primarily due to slightly lower-than-expected shipments and final deliveries under excess POs placed last year during the supply chain crisis. We expect these effects to be largely behind us, and we expect the inventory to remain approximately flat in the second half of 2023.

We continue to work to reduce inventory through better planning and staggered contract deliveries, which will allow for lower stocking levels. The increase in other working capital primarily reflects increases in accounts receivable due to the impact of deferred payment terms for certain customers, late in the quarter shipments, and delays in site acceptance test completions. CapEx was $1 million and down sequentially. We expect quarterly CapEx to remain in this range for the balance of the year. We also raised approximately $16 million in cash from financing activities, comprised of $5 million of equity sales under our ATM facility and $11 million of borrowing under our bank facilities. Excluding the net proceeds of the convertible debt financing and associated debt repayment, we expect total cash usage in Q3 to be in the range of $12 million to $16 million depending on the timing of payments for booking deposits, shipments, and receivable collections.

This range is inclusive of proceeds from financing under our ATM equity program. We expect quarterly cash usage to decline through the end of 2023. We expect net proceeds of the convertible debt financing after repayment of $22 million of Silicon Valley Bank debt and transactions to be approximately $44 million. Combined with our existing cash balance, we believe this financing will put us in a strong position to finance the business through the point of EBITDA and cash flow breakeven. I’d now like to provide our outlook for 2023. Please turn to Slide 11. We expect third 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 14% to 18% of revenue, excluding non-recurring items.

Our updated full year 2023 guidance is as follows. We expect revenue growth of more than 35% and revenue to be in the range of $105 million to $115 million. We expect gross margin for the year to be in the range of 14% to 18% with Q4 gross margin in the range of 21% to 25%. As Benny mentioned, we believe our Q2 revenue will be the low point for the year with sequential quarterly improvement for the balance of the year. In conclusion, we’re focused on executing on our clear path to profitability through improvements in operating efficiency, margins, and cash flow. With the convertible debt financing, we have a strong balance sheet from which to execute this plan. With that, I’d now like to turn the call over for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Brian Drab with William Blair. Please go ahead.

Brian Drab: Hi, good afternoon. Thanks for taking my question. Yes, Bill, I think – or maybe, Benny, one of you mentioned backlog, but I missed the number. And I don’t see it in the slides anywhere or in the release. What did you say about backlog?

Benny Buller: It’s at the end of the quarter, it was at $15 million.

Brian Drab: 15?

Benny Buller: 15, yes.

Brian Drab: Okay. Alright. And you mentioned some delays in orders. I’m just wondering how much visibility do you have to those orders coming through in the timing?

Benny Buller: If you kind of look historically. Historically, the mix of our revenue coming from listed customers was between 40% and 50%. And is only 50% to 60% of the revenue in terms of systems coming from new customers. This quarter, we had a much, much higher percentage coming from new customers. And a lot of that has to do with quite a few customers that received systems relatively recently. So there is somewhat of a delay in demand of repeat orders. I think that we should see this demand from existing customers picking up over the next quarters. So some of that will be in this quarter, some of it will be in Q4. And it’s always difficult for us to exactly foresee specific demand from existing customers because those are usually appearing and then materializing very quickly within a few months, 2, 3 months.

So we don’t have a lot of long-range visibility to those. But we absolutely see the pattern that existing customers will continue to purchase systems, and we’ll continue to purchase it at the rate that they used to buy before. So we don’t see a fundamental shift. And from that perspective, $17 million, if I’m not mistaken bookings of new customers is very – $40 million is a very healthy number for us in terms of bookings from new customers.

Bill McCombe: Yes. In fact, it was our record. It’s the highest dollar amount of bookings and new customers that we’ve ever had.

Brian Drab: Great. Okay. And then just one more question for now. How was the level of orders in the second quarter versus the first quarter? I know you’ve got good orders from some new customers. But like overall, I’m just trying to get a sense for what you’re seeing in the order patterns and anything else that gives you confidence in the back half guidance as it stands now?

Bill McCombe: Yes. So the bookings in the first quarter were $19 million to $20 million, as we described of our Q2 was $16 million, of which $14 million was new customers. So you can see from that, that our existing customers’ orders were down pretty significantly, and that’s what we feel confident we’re going to see a rebound in those existing customer orders because those bookings that were delayed were not – this wasn’t lost business. It was just orders that got delayed. They haven’t traded away to the competitors. They just didn’t come through on the schedule that we anticipated.

Brian Drab: Okay. Alright, I will follow up a little later. Thank you.

Operator: Our next question comes from James Ricchiuti with Needham & Co. Please go ahead.

James Ricchiuti: Hi, good afternoon. Just as we think about the second half outlook, are you anticipating repeat business from some of the newer customers that you’ve added in Q2?

Benny Buller: Hi, James. We think this is less – if you look at the customers that booked in Q2, this is less likely that they will book in H2 of this year. It does happen occasionally, but it’s less likely, and we definitely cannot plan on that because many of those systems will just receive their systems this quarter. So it’s quite unlikely that they will book another system before the year-end. It does happen occasionally, but we don’t plan on this.

James Ricchiuti: And that makes sense, Benny. But also, I guess what I’m trying to understand – sorry, I didn’t mean to interrupt.