Q2 2023 Velo3D Inc Earnings Call
Good afternoon welcome sure. They treat these second quarter 'twenty earnings conference call.
At this time all participants are in a listen only mode.
Thank you speakers presentation there'll be a question and answer session.
A reminder, today's conference call is being recorded.
I'll now turn the call over to Mr. Bob of course key Vice President of Investor Relations at Fellows Treaty Corporation.
Thank you Sir you may begin.
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 Butler CEO of <unk>, who will put a summary of the quarter as well as an update on certain key strategic priorities for 2023, following Dannys comment Bill Mccomb our CFO .
Al 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 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 Betty Butler C E O Abella Treaty.
Thanks, Bob and I'd like to welcome everyone to our second quarter earnings call.
We remain very excited about the overall opportunity for additive manufacturing is that technology is rapidly changing the way high value metal parts manufactured in across the world.
We are committed to executing on our strategic priorities and I'll pass the profitability it remains clear.
I would now like to discuss the specifics of our second quarter. Please turn to slide three.
Overall, we continued to post strong growth as revenue rose, 28% year over year.
Demand for our solutions remains high and in fact, according to studies bucket beta felt small tech we exited the first quarter is that number.
Two supplier metal additive manufacturing system, among leading western brands.
This growth now makes us the fastest growing company in this really placing American doubling our market share in the metal additive market to approximately 20% in the last 12 months.
In relation to our past profitability, we continued to make steady progress in the second of course there is.
Improved operational efficiency enable us to expand our margins. This is particularly evident in the printer margin as they rose by more than 400 basis points sequentially to 16%.
While we continue to see strong demand trends second quarter bookings came in below plan at $60 million, primarily due to delays in booking cycle or those with existing customers. We remain in discussions with these customers and are confident in closing deals over the next few quarters, giving us increased confidence and visibility in a second.
That forecast.
While we saw some delays on the existing customer sites, we signed a record amount of new customer or those accounting for 90% of our total bookings revenue in Q2, we.
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% off 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 2020 revenue guidance to be in the range of 105 hundred 16 million.
We believe that kind of 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 a successful up to $17 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 cash actions.
Second given our growing business and longer manufacturing lead times due to the complexity of our systems. The additional liquidity and will enable us to better manage our working capital needs during the quarter.
So this transaction provides us with a bridge to minimize the cash impact of and of course our shipping.
I mean, which can significantly affect our cash and working capital let us.
Also this financing increases customer and supplier confidence that we have the liquidity, we need to execute on our strategic plan.
Moving onto slide four.
Continued customer demand for our industry, leading technology has enabled us to become the fastest growing company in the attitude with respect to market over the last two 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 two years as customers continued to choose I'll say start familiar spring doesn't further emanates.
For example, we have gone from approximately 3% market share in Q1 of 2021 to approximately 20% is after the end of the first quarter of 2023.
In fact as I previously mentioned, we ended Q1 is the second largest supplier of solution in our industry. According to a third party data.
Additionally, our clothing, so smart that we were the leading market share gainer for the 12 months period, ending in Q1 'twenty to 'twenty. Three 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.
Yes.
Our technology.
So the only fully integrated end to end method of Ams solution for mission critical parts in the industry today will provide customers with their design.
Freedom to printing complex high quality parts, they need for some of the most demanding applications in the world today, including to space and defense commercial aviation and energy industry.
We are also seeing the benefit from customers shifting to do it onshore manufacturing as they simplify the supply chain.
Finding them with a scalable solution.
It allows them to improve quality, while significantly shortening lead times.
The scalability is what drives existing customer approached us and why we feel our land and expense strategy is critical to our future growth.
Please turn to slide five.
As of the end of the second quarter, we have more than 100 systems in the field and approximately 40 customers.
This translates into more than 400 increase in our installed base in the last three years.
This growth has been primarily driven by existing customers, adding additional machines.
They increase capacity and add new applications.
The chart on the left highlights the power of these dynamic as our top customers continued to add their manufacturing base on an annual basis.
In fact more than 50% of our base has more than one system was 20% now owning four or more systems on a long term basis, we expect our existing customer purchases to be approximately 50% of arriving.
This was also a successful strategy with our contract manufacturing partners as Bob's customer has more than doubled over the last 18 months.
We continue to diversify our customer base as we are seeing in Cushing and new customer traction, particularly in the defense and aerospace industries.
Turning to slide six I wanted to provide a quick update on a few of our important about because as well as our Q2 successes.
Yeah.
Overall, we continue to broaden our footprint across multiple industries.
As you can see from the chart, we have significantly expanded our customer footprint.
All right Michelle reliance on the space and I think out to include markets, such as defense energy aviation contract manufacturing and other applications.
Space remains one of our largest both vehicles as we offer our customers improved parts performance, while giving them the ability to rapidly implement design changes to lower development costs.
We remain the leader in the space, adding Mercer and I'll be in Europe , as new customers in Q2.
We are also starting to see significant traction in the defense industry and this is our fastest growing end market.
To put this into perspective, the furnace was only 5% of our customer base at the beginning of 2022.
And now close to two it's close to 20%.
Success in defense is primarily due.
Two our ability to reduce replacement parts lead times.
In addition to providing systems for me weapons development.
Specifically, we added three new defense customers in Q2, bringing our total defense customer base Tonight.
As I previously mentioned defense accounted for more than 35% of our first half 2023 systems revenue, which shows a 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 money sexual remains a core vertical for us is existing customers continued to expand their footprint.
As I previously mentioned, we now have more than 200 parts customers through our CMO supply chain and expect to add additional pilots customers in the second half of the year.
I'd like to close my remarks by providing an update to our 2023 strategic priorities. Please.
Please turn to slide seven.
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 grow cash flow in the second helping them stay here.
First on improving EBITDA.
We now expect year over year revenue growth of more than 75% given our solid Q2, 2023 are with us.
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 in Cushing 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 and keep up because 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 improvement through the end of the year.
This further expansion will be driven by lower material costs, and then a question around volume as well as higher asp's given the continued mix shift.
To offset legacy 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.
We haven't 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 as I just discussed. Additionally, we will benefit from reduction in working capital needs as the prognosis.
In closing we are excited about the future opportunity and believe we are well positioned to capitalize on the growing demand for high value Street sweeper printed metal parts.
Our path to profitability is clear and we remain confident in achieving our goals for this year.
I'd like to turn the call over to bill to discuss our financials and provide our guidance.
Thanks Benny.
Moving on to our quarterly financial performance, Please turn to slide nine.
First quarter revenue was $25 1 million was within our guidance range and was up approximately 28% year over year.
Compared to Q1, Q2 Years' sale revenue declined slightly due to lower transaction pricing and lower maintenance and other parts sales.
Recurring service revenue for the quarter declined $300000 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 one time charge related to a customer concessions on system lease terms.
On a year over year basis. Your sale revenue was up 32% from $17 6 million to $23 2 million and recurring 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 one time recurring revenue charge I, just mentioned and the highest service support costs.
non-GAAP operating expenses for the quarter, which exclude 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 our new product development program.
G&A declined $200000 in 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 noncash 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 Denny mentioned bookings for the quarter was $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 continued to benefit from our operational initiatives in print and printing margins continued to expand.
Specifically <unk> printing margins increased approximately 400 basis points sequentially to $14, 9% in the second quarter.
This improvement was partially offset by lowest 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 margins 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 investments we've made in training will drive labor and production efficiency.
<unk> growth also improved fixed cost absorption as we spread fixed costs over a greater number of units.
We therefore expect labor only had another 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 good 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 twenties 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, whereas 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 on the excess P. O's place last year during the supply chain crisis. We expect these effects to be largely behind us and we expect inventory to remain approximately flat in the second half of 'twenty 'twenty.
Three.
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 the proceeds from financing under our ATM equity program we.
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.
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 positions to finance the business through the point of EBITDA and cash flow breakeven.
Now I'd 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 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 nonrecurring 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 margins for the year to be in the range of 14% to 18%.
With Q4 gross margin in the range of 21% to 25%.
As Barry mentioned, we believe our Q2 revenue would be the low point for the year with sequential quarterly improvement for the balance of the year.
In conclusion, we are focused on executing on a 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.
Thank you.
We'll now conduct a question my first question.
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Perfect.
Because I mean, it may be necessary to pick up.
Your handset before pressing the star key on me.
Please go ahead with pool for questions.
And our first question comes from Brian Drab with William Blair. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Sure.
And finally, yeah.
Yeah.
I I think or maybe if any one of you mentioned backlog, but I missed the number can you and I don't see it in the slides anywhere or in the release, what what did what did you say about backlog.
It's at a at the end of the quarter. It was at 15 million.
One five.
One five.
Okay, Alright, and you you've mentioned some.
Delays in orders I'm just wondering.
You know how much visibility do you have to those orders coming through.
And the timing.
So.
Yes.
We if you if you.
And kind of look historically.
And all are.
And historically the mix of our revenue coming from.
Existing customers once it between 40 and 50%.
And.
And we've only.
No 52, 6% of the revenue.
Tens of systems coming from new customers.
And this quarter, we had a much much higher.
<unk> coming from.
New customers.
And a lot of that has to do with quite a few customers that you'll see it systems relatively recently.
So.
And somewhat of a delay in demand kind of fulfill our repeat all of those.
I think that we should see this demand from existing customers picking up although the next.
The quarters. So some of that will be in this quarter some of it would be in Q4.
And I'd say its always difficult for us to exactly foresee specific.
And demand from existing customers because those are usually.
And appearing and then materializing very quickly within a few months to three months.
And so we don't have a lot of long runs visibility to those but we we we have luckily we absolutely see the patch on that existing customers will continue to purchase and it systems and will continue to purchase it.
Rate than they used to buy it before so we don't see a fundamental.
Okay, and and from that from that perspective, you know $17 million, if I'm not mistaken those books.
Bookings of new customers daily.
Our sales team.
It was a very healthy number for us in terms of bookings from new customers. In fact, it was a record it's the highest.
All of our amount of bookings from new customers.
In the head.
Right Okay.
And.
And then just one more question for now.
You know how how was.
The level of orders in the second quarter versus the first quarter.
I know you've had good orders from some new customers, but like overall.
I'm, just trying to get a sense for what youre seeing in the the order patterns in.
And anything else that gives you a confidence in the in the back half guidance as it stands now.
Yeah. So the bookings in the first quarter were 19 and 20.
He described Oh about Q2 was 16 of which 14 was new customers. So you can see from that.
No existing customers.
Others were down pretty.
Pretty significantly and that's why we feel confident we're going to see a rebound in that.
You know as your existing customer orders because those bookings that were delayed were not you know this wasn't lost business. It was just you know orders that got.
Got delayed.
They have I haven't tried it quite as competitive.
It didn't come through on the schedule.
Anticipated.
Okay.
Right I'll follow up more later thanks. Thank you.
Right.
Our next question comes from James.
Medium and co. Please go ahead.
Hi, Good afternoon, I guess as we think about the second half hour.
Outlook are you anticipating.
Hum.
Repeat business from some of the newer customers that you've added in Q2.
Stan.
Do you think this is.
Yeah.
Yes, if you look at the the customers booked in Q2.
And this is less likely that they will book in.
H two of this year.
And it did it does happen occasionally, but it's less likely but we definitely do not plan on that because.
Many of those systems will just sort of sit within our systems.
Arthur.
So it's it's quite unlikely that they will book another system before the year end. It does happen occasionally, but we don't plan on that and that makes sense there, but they'll also I guess, what I'm trying to understand sorry, I didn't mean to.
Yes.
Yes.
But we did have.
Quite a few new customers that we ship systems in the last 12 months and.
And those new customers are getting to the point that we are going to start seeing some more of those coming from many of those new customers.
Got it.
With respect to the R&D spend.
In Q2.
Does that remain elevated.
You or work.
Sounds like you're working on a new project or is the bulk of that.
Behind you and that should that.
We're going to come down in the second half then.
Maybe that plays also into the sequential decline that you're anticipating on opex.
Yeah absolutely.
Q2 was an outlier in this we end and we will see the claim in.
In Q3, and Q4, we had a lot of spending on material in Q2.
It was a.
Procurement of a lot of hunger for this.
New project.
Yeah, but he says this is behind us and things are going well.
Due to lower spend level in R&D.
And.
Difficult to in this environment to get a high level of confidence around.
Bookings that get pushed out being you know.
I actually converting in the next one to two quarters. So yeah I I am also trying to get my arms around the.
The full year outlook for revenues and again that we like.
The confidence that within that existing customer base that youre going to see that kind of a pick up in bookings activity, presumably they're also gonna be you'll also be adding newer constant but it sounds like as you think about the second half of the year, it's going to revert to something more like we've seen in the past.
S where existing customers have been a big part of the business.
Yes, yeah, absolutely, yeah, and you know our confidence on this is.
Yeah, partially statistical base.
What we have found that we have seen in the past.
And functionally talking with specific customer was insane.
The specific demand.
Emerging from this customer.
Both of those trends suggest.
Things are going to pick up.
So it sounds like this quarter on some of the Mexican peso.
Okay and the last question is just with respect to the gross margin guidance looking out to Q4 and the staff up there is there something that you can say with respect to that.
The current backlog that you have the margin profile of that backlog that gives us the confidence that you could.
Get to the the target range that you're talking about looking out in Q4.
Yeah, Jim the.
From a pricing perspective, the backlog is.
You know is more favorable than prior quarters and that we.
We have we had a one of the early bird reservations.
In.
The current quarter end.
I think we.
We had them in the first quarter.
We have one more of those to go so these reservations that well and prices that were committed to in late 'twenty. One early 'twenty two when the Sapphire axiom is being introduced and then we ended those reservations.
They named as the offer of those reservations.
Early 'twenty two.
And so those those will be behind us by Q4.
Our pricing.
The backlogs.
She needs to two.
Two sort of average job as ours.
It does it does.
Reservations get behind Us.
And then the other part of the margin improvement is.
Ah is a bill of material cost reduction.
So we have contracts in place and delivery starting to occur that will give us.
Our low cost material.
And then the third part of it is just the.
Expected increase in volume.
Now in Q4.
So you know I think that answers your question is yes.
Based on those three parts of the margin equation.
Yeah.
Excuse me, ladies and gentlemen, if you would like to pose the question. Please press star one.
Thank you everyone.
Forward to see you in our next call.
This concludes today's conference call.
You may disconnect your lines at this time.
Have a good day.
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