Q4 2022 Velo3D Inc Earnings Call
Greetings and welcome to the Velo three D reports fourth quarter and fiscal year 2022 financial results.
At this time all participants are in a listen only mode. A 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 barbell kind of ski 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 will start off with comments from Benny Butler.
<unk> reduced who will provide a summary of the quarter as well as an update on certain key strategic priorities for 2023.
Following <unk> 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.
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 reconciliation.
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 others, Benny Butler CEO Abella three D. 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 extend our industry leadership position going forward. Please.
Please turn to slide three.
Although we continue to see a massive untapped global market opportunities for high value of Sweden.
Plus.
For example, context research is forecasting growth in excess of 30% and the laser powder bed fusion market through 2026, making it the fastest growing segment really predict.
This growth is being driven by the increasing acceptance of Tomatoes, really printing technology from volume production for applications across multiple industries.
Recently in some applications, Sweden printed metal hubs allow approaching the cost of legacy Pos while providing much higher quality and design flexibility.
They don't seem to be 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 print parts at the lowest possible with legacy technology.
This capability is fundamentally changes the way the aerospace defense energy space and other industrial segments design and produce the most would be some bus. We're also the only metal am company to offer a fully integrated hardware and software and comprehensive platform provides customers a scalable manufacturing sources.
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 for manufacturers across the world.
I would now like to discuss the specifics of our fourth quarter. Please turn to slide four.
Although we were very pleased with our Q4 performance. We saw continued strong demand for our systems for the quarter, we exceeded our forecast as revenue was 66% sequentially on a year over year basis, both our fourth quarter and annual revenue rose to 100%.
As you can see from the chart, we have significantly outpaced our peer group since the first quarter of 2021.
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 pushing 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 extend our global footprint penetrate new markets and qualify new materials.
Additionally, we are also seeing significant traction for our new product introductions with further ramped volume production of a separate one.
C Y Z systems in Q4 with Swiss shipments in the quarter.
As we have highlighted before the Sapphire C. One MZ significantly expense, partly been volume up to 10 cubic feet with pods as tall as why don't we go we believe the capacity to manufacture larger pumps further extend 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 were put in place over the last two quarters.
Although all supply chain conditions have improved given the efforts we have significantly reduced our supply to noise in relation to our forecast.
We also continued to focus on prudently managing our inventory levels, we expect the 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 satellite system continues 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 $16 million.
And backlog of $43 million, we remain confident that we have a clear path to profitability given the current resources and business momentum.
I'll discuss our strategic initiatives for the CEO 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 because our market segment that clarification by total customers as of the end of 2022, along with a breakout of 'twenty to 'twenty two by systems revenue.
As you can see from the charts, we have significantly expanded our customer footprint from Michel reliance on the space, but they go to include markets, such as energy Aviation and defense.
Truck manufacturer and other industrial applications.
The most outside of this segment now constitute 75% of our customer base.
We expect our global diversification trend to continue in 2020 suite 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 a launch customer contract well, we shipped nine separate legacy systems to a single space customer last year.
Second space customers have moved to procure larger fleets of machines due to the ends up in Europe spirit and quicker adoption patterns that established than established payment players in other segments.
We expect our SaaS the space North Dakota remains strongly in 'twenty, two 'twenty, three but declined 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 the space.
I would now like to use a simple example to put into perspective as to why customers are continuing to choose additive manufacturing in Dallas would be further high value metal box.
Please turn to slide six. This example, compared to the traditional manufacturing process for a comb on heat exchanger versus what we provide using one of our safest systems.
As you can see this is a very complex Bob with multiple types of structures.
Wired to achieve the finished product with traditional methods such as brazing welding machining.
Patrick was the separate fabrication of more than 100 basis on.
The Velo Sapphire assistance, we can print these bonds 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 batteries traditional techniques.
As a result, the customer was able to reduce manufacturing steps by 65% lower overall costs and Lenny Thanks, Sean.
Higher quality part than traditional methods.
Finally, we enable the customer to significantly improve the supply chain side, but we'll see where the design will be overtime.
One to six weeks against 12 to 18 months.
And outsource partner.
These are the vintages highlight why customers continue to choose balance would be for.
For the high value metal box when it's actually.
In closing I would like to briefly discuss our key 2000, Twenty's way strategic priority, let's turn to slide seven.
Our primary focus for this year is driving the profitability and improving cash flow. We will accomplish this through a combination of growth margin expansion and spending reduction initiative.
First we expect revenue growth of more than 60% this year.
Given the strong demand.
Trends for our industry, leading technology exiting 2022, we believe we have the sales momentum towards your baseball.
Additionally, this growth will be driven by our continued execution of our land and expand strategy.
That's what my strategy is reflected in the fact that more than half of our customer base now on more than one sector of our system.
Second further expansion in our gross margin as we benefit from a bill of material cost reduction initiatives and improved production efficiency.
We also expect a continuous increase in the overall space with a further mix shift to auto central legacy products and the completion of a discounted pricing transactions from the first half.
Yeah.
So 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 at close of selective hiring freeze with this attrition backfill as well as a reduction in spending put something at blade programs.
Our goal is to really yourself operating structure.
I am driving strong revenue growth.
We are also implementing a number of programs to reduce.
<unk> expenses across the company.
Finally significantly improving cash flows.
We expect sequential improvement in cash flow as we go through the year driven by important important to EBITDA.
In addition, we wouldn't see any improvement in working capital as we expect to reduce year over year inventory by 10% to 15% in 2026.
Given the importance of supply chain planning and mature unbelievably schedules.
We expect to see the benefits of the inventory reduction efforts starting in the third quarter. This year.
In closing we are excited about our future opportunities and believe we are well positioned to capitalize on growing demand for high values with you.
Pretty good metal bumps.
We remain confident in our ability to reach profitability given our current liquidity and look forward to executing our longer term strategic plan.
As we executed well in 2022 with that I'd like to turn the call although to bill.
Got some financials and provide our guidance.
Thanks, Benny moving onto our quarterly financial performance, Please turn to slide nine.
Fourth quarter revenue of $29 8 million exceeded our forecast and was up 56% sequentially.
Approximately 200% year over year.
Compared to Q3 Q.
Q4 Years' 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 in product mix towards more SaaS far exceed systems as we shipped a record number of <unk> systems in the quarter.
More deferred payment transactions, which carry a higher revenue than regular sales.
And finally fewer sapphire exceeding once customers shipments at discounted prices, we completed the last of these shipments in the fourth quarter.
Recurring service revenue for the quarter Rose $200000.
Sequentially to $2 8 million and reflected the increased number of systems in the field.
On a year over year basis year 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 forecast.
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 nonrecurring 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&A 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 nonrecurring expense reductions mentioned above.
R&D expense also benefited from the completion of our Sapphire exceeding one M Z development project.
And better expense control.
We expect R&D 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 noncash 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 and 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.
Margins in Q4 2022, 6% as we progressed 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 Z systems and as we implement price increases for the sapphire exceed.
Second.
Material costs are expected to decline as deliveries increase under long term low cost supply contracts that have recently been signed or or in the process of being negotiated.
These contracts with more predictable delivery schedules should also reduce freight and storage costs.
We're making a concerted effort to reduce material and efficiency and scrap costs.
Finally, we expect labor overhead and other factory costs to decline as a percentage of revenue as we increased production volumes and whole costs relatively flat through greater efficiency.
Please turn to the balance sheet on slide 11, 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 usage were as follows Q.
Q4, EBITDA and adding back the 3 million nonrecurring noncash 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.
It 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 in inventory through better planning and stagger deliberately started to gain some traction.
We expect inventory growth to slow and flatten out in 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, the lease systems and facilities and equipment.
We expect total cash usage in Q1 to be in the range of $20 million to $25 million.
Depending on the timing of payments for certain booking deposits receivables in shipments this.
This is inclusive of proceeds from financing under our ATM equity program and bank facility.
We expect 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 million to $28 million, which is largely supported by our existing backlog.
And gross margin to be in the range of 9% to 11% excluding nonrecurring items.
For full year 2023.
We expect revenue growth of greater than 50% and revenues to be in the range of $120 million to $130 million.
Sprague 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 are focused on executing on a 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'll be conducting a question and answer session.
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Q.
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Sure.
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Our first question comes from the line of Brian <unk> with William Blair. Please proceed with your question.
Brian Your roadblock.
Sorry can you hear me.
Yes, we can Brian .
Okay.
Thanks for taking my questions. So first just a small housekeeping item you mentioned.
In the guidance now there's the site.
Note that.
Youre going to hit certain levels of gross margin, excluding any nonrecurring items can you just comment on what what kind of nonrecurring items you were talking about are anticipating.
Hmm.
Yes.
Brian This is bill.
A catch all of them were not anticipating any nonrecurring items is nothing.
Specific that we had in mind when we made that statement is just a.
If it's 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. This is another way of saying is that adjusted gross margin, which is nothing unusual but.
I just wanted to check.
Right and then.
So.
Energy and industrial have been too big end market that.
Yeah, you're you're getting more into these end markets are there's a lot of potential can you talk about you know some of the applications that you're starting to see.
Your machine used for it and within energy and industrial and specifically.
You know it is.
Is it the technology starting to fill holes in supply chain and in terms of like the digital inventory idea.
Or is it being used by by Oems for kind of first fit applications rather than MRO.
So the first the first.
Indications that we see.
A significant traction with.
Applications.
I'll spell box kind of digital inventory.
For them all.
As you mentioned.
These are are in these two segments. These are the first places where we see good traction.
And we see that in our valves and heat exchangers.
And.
Yeah.
Until midnight.
Yeah.
The first places that Hussein big attractions.
Okay got it thank you.
And then can I just ask how how are things going in Europe .
It's still choppy there is still a longer sales cycles or are you already starting to.
Went over some customers there thanks.
We definitely start to winning some customers. We won some customers are in Europe , and we have even a repeat all of those.
On the horizon.
From Europe .
Yeah.
So it's definitely getting momentum.
The cycles are long ago, and we are.
We're just getting better and people are less.
So a lot of.
Due diligence.
Customers are thinking and.
The sales cycle is long and kind of for medicine published myself itself 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 .
Our next question comes from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.
Hi, Thank you good afternoon.
So I think I appreciate the color on some of the verticals and the question I have is just with respect to.
The full twenty-three outlook.
Outlook.
Which of the verticals do you have the.
The clearest line of sight.
Yeah.
With respect to the revenue outlook I mean, clearly you've you've got backlog I'm, just trying to get a sense as to which of these verticals you have the Uh huh.
First visibility.
Yeah.
It's.
I don't have.
And therefore will not be mathematically precise because I'm kind of estimating that makes some that's okay.
But I think that the picture that you see.
On slide five on the left.
He is representing the visibility of that.
Hey.
Our space.
Aerospace.
Automotive industrial have similar segments that maybe.
Maybe the C. M segment is lethal.
Though smaller.
And then what do you see in this picture.
And all the other ones up a bunch of them in the larger but basically that this represents.
The pipeline.
Okay.
Another way to ask the question to billions of I guess, what I'm trying to get to also is are.
Are there some verticals, where you're seeing some signs that hesitancy just in light of the macro environment.
Oh, that's a really good question.
And so he is easier so.
<unk>.
If you look at our bigger customers, we don't see.
We didn't see a slowdown because of the macro environment, where we do see the one segment that we do see definitely slowed down is in the manufacturing segment and particularly the smaller companies.
You may now.
Yeah Mark.
<unk> funding.
Constraints in finance income slates.
So that's so that's one reason one driving reason why that the contract manufacturing segment.
Yeah.
In 2000 and.
That's the one segment that we definitely can see slowdown.
Yes.
Got it that's understandable and last question for me is you you had a nice win last year.
On the automotive side with the North American auto.
OEM 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 M 300.
Tool application.
Yeah, Yeah that was another customer and.
And a few more in the pipeline.
Got it okay. Thanks very much.
Thank you Christian.
Our next question comes from the line of Troy Jensen with Lake Street Capital markets. Please proceed with your question.
Hey, John and congrats on the great results.
Great. Thanks.
Hey couple of questions for Bill here.
Backlog $43 million it was down 22 million that sequential basis, it sounds like you're expecting that to ship primarily in the first half. So just confirm that if you would and then just can you just talk about second half visibility a lot of this backlog is getting completed.
Yeah, well with respect to backlog.
There were.
In addition to the revenue there were a couple of customers, where they havent made deposits they haven't made.
A lot of progress on their financing for the system. So we even though the orders were not canceled. So the orders are still in existence, we adjusted them out of the backlog.
In the interest of conservatism.
So that adjustment was made and that's why one of the factors that the backlog came down.
Look I think we still feel.
The bookings process is a lumpy process.
We're selling systems with.
Multimillion dollar ticket prices.
And <unk>.
So it's a lumpy process I I would just say based on the timing of the market the pipeline of activity, we see we feel very comfortable with our guidance.
Okay perfect. Another one for you Bill.
Q4, Opex was about what $18 6 million I think you said that you expect that to be down 20% year over year in Q4 of this year.
We're talking about 15 million in Opex no.
Let me let me go ahead yeah.
The math on that a little better.
So Q4 benefited from $3 4 million of.
Nonrecurring.
Expense reduction so we we you know and in my remarks I added those back.
To get to a adjusted base of $22 million.
So.
It's from it's from that 22 that were.
Projecting a 20% reduction.
Okay. So like 17 last night.
Things were that were nonrecurring and noncash.
And.
So in order to get a true run rate you really should add those back which is what we did.
That's what I referenced in my remarks, so that's the basis on which we're talking about a 20% reduction.
$22 million minus 20%.
I know you're expecting like sequential declines on an absolute basis throughout the year.
Or is it going to be a big step function of one point or two.
I would say a gradual decline Troy.
Yeah, so space.
Yeah, we don't have.
Perfect visibility and perfect control, but now our goal would be to steadily reduce it during the course of the year. We've got a wide range of cost reduction initiatives, we'll be implementing those beginning in the first quarter I said that.
The first quarter reduction might be small and then they'll start to you know.
Good.
For the first quarter might even be flat and then they'll start.
Uh huh.
You know the accelerators.
Get towards Q2, three and four.
Gotcha, Okay. That's all I got congrats and keep up with the work.
Thank you Joshua.
The next question is a follow up question from the line of Brian <unk>. Please proceed with your question.
Okay, Hi, its Brian drop thank you.
Hum.
I'm missing the table like I wish that you still included the table that had all the great data early on I understand for competitive reasons were not including it but I just wanted to see if I could.
I get you to mention any of the figures that.
We used to see there would.
It would be interesting to know if you would tell us anything about the total number of machines in the installed base now.
Or a total number of customers.
Yeah, and maybe just.
Yeah.
Unfortunately, not Brian it's hard to know.
Hmm.
You know look all I can say is obviously the installed base grows every quarter and the number of customers growing every quarter.
I can't say anything meaningful without violating out policy.
Okay. That's fine and then can I just ask one more then.
You also used to talk about.
The ratio of our follow on machine sales to initial machine sales or are you seeing.
That was just a good metric because it gave us some insight into you know the the the demand from from current customers and Haas and Youre going to have repeat sales is that you talk about that and if youre seeing current customers coming back for a second and third machines.
Yes. Once again, we are seeing we are seeing recurring purchases and we have those in the pipeline.
So as a general matter you know al.
That continues to be a feature of our business.
But once again.
You can't really be specific.
Well the only thing I can tell you that.
That we've talked about in the public remarks as did our product mix has continued to shift towards the sapphire exceeds switches.
The higher.
Ticket price higher cost systems.
And look as a general matter you know.
It was.
Existing customer purchases.
Recurring existing customers continue to purchase new systems.
Really don't have any specific.
But.
But I would say one thing is that.
This is a very significant portion of our business.
The repeat cuts or the repeat purchase.
Yep.
Yeah.
Can you comment at all I think you said that you're raising the price on on the.
Let's see.
Did I hear that correctly and is that a material increase that you could you comment on how much we're raising prices because that obviously affects our models.
And so I look at your models and Chris Brian Okay.
That's one effect.
Meaningful okay. Okay.
Alright makes sense prices and everything are going up but no one's launch without too much [laughter] alright, thanks a lot.
Thank you thanks, Brian .
Yeah.
There are no further questions in the queue I'd like to hand, the call back to you for closing remarks.
Thank you everyone for participating email, earning call and we had a really good year in 2022, where we deliver it.
And execute them who are their theory.
Ambitious goals.
We plan to keep this tradition of execution and delivering in 2020 plan.
Looking forward to see you in our next earnings 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.