Q3 2024 Velo3D Inc Earnings Call

Operator: Good afternoon. Welcome to the Velo3D fourth quarter, 2023 earnings conference. At this time, all participants are on a list. After the speaker's presentation, there will be a question and answer session. As a reminder, today's conference call is being recorded. I'll now turn the call over to Mr. Bob, Vice President of Investor Relations at Velo3D Corporation. Sure. Thanks, Diego.

Good afternoon, welcome to the Velo three DS fourth quarter 2023 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation patients there will be a question and answer session.

As a reminder, today's conference call is being recorded.

I'll now turn the call over to Mr. Bob Okonski, Vice President of Investor Relations at below three D Corporation. Thank you Sir you may begin.

Bob: I'd like to welcome everyone to our fourth quarter 2023 earnings conference call. On the call today, we will start out with comments from Brad Krieger, CEO of Velo3D, who will provide a summary of the quarter, as well as an update on certain key strategic priorities for 2024. Following Brad's comments, Bernie Chung, our CFO, will then review our fourth 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 2023 SEC filings. Please see those documents for additional information regarding those factors that may affect these forward-looking statements.

Robert Okunski: Thanks Diego.

Robert Okunski: Welcome everyone to our fourth quarter 2023 earnings conference call on.

Robert Okunski: On the call today, we will start out with comments from Brian <unk> CEO of <unk> for the summary of the quarter as well as an update on certain key strategic priorities for 2024.

Robert Okunski: Following brad's comments Bernie Chang our CFO will then review our fourth quarter 2023 financial results and provide our guidance.

Speaker Change: As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

Speaker Change: During today's call we will make forward looking statements that are subject to various risks and uncertainties.

Bernard Chung: And are described in the Safe Harbor slide of today's presentation today's press release as well as our 2022 10-K and additional 2023 SEC filings. Please see those documents for additional information regarding those factors that may affect these forward looking statements.

Bob: 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 GAP to non-GAAP reconciliation. 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 Brad Krieger, CEO of Velo

Bernard Chung: 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.

Bernard Chung: 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.

Bernard Chung: With that I'd like to turn the call over to Brian Krieger C E O L. A three day right.

Brad Krieger: Thanks, Bob. I'd like to welcome everyone to our fourth quarter earnings call. Before we get started, I would like to provide some brief comments related to the strategic review we announced in the fourth quarter. I can tell you that this comprehensive process remains ongoing and that the Board of Directors is in discussions with multiple parties related to maximizing shareholder value. As we announced previously, we do not intend to disclose further developments in the strategic review process until we determine that such disclosure is appropriate or necessary. As a result, we will not be answering questions on the status of the review during this call.

Brian Krieger: Thanks, Bob I'd like to welcome everyone to our fourth quarter earnings call.

Brian Krieger: We get started I would like to provide some brief comments related to the strategic review, we announced in the fourth quarter I can tell you that this comprehensive process remains ongoing and the board of directors is in discussions with multiple parties related to maximizing stockholder value as.

Brian Krieger: As we announced previously we do not intend to disclose further developments on the strategic review process until we determine that such disclosure is appropriate or necessary. As a result, we will not be answering questions on the status of the review during this call.

Brad Krieger: With that in mind, I would like to move on to our results. For context, 2023 was a transformational year for the company. Our focus on a hyper-growth business strategy at the beginning of the year significantly impacted second half performance, as multiple new product introductions and rapid expansion of our install base led to material increases in field system issues and customer concern. Similarly, as we expanded beyond our early adopters of the technology to broader markets, we found our sales methodologies did not translate effectively, leading to poor opportunity qualification. These issues directly affected our booking rate, as evidenced by our very disappointing Q4 results.

Brian Krieger: With that I would like to move on to our results.

Brian Krieger: For context, 2023 was a transformational year for the company our focus on a hyper growth business strategy at the beginning of the year significantly impacted second half performance as multiple new product introductions.

Brian Krieger: And rapid expansion of our installed base led to material increases in seal field system issues and customer concerns. Similarly, as we expanded beyond our early adopters of the technology to broader markets. We found ourselves methodologies did not translate effectively leading to poor opportunity qualification. These.

Brian Krieger: These issues directly affected our bookings rate as evidenced by a very disappointing Q4 results as a result last quarter, we initiated company realignment to reduce costs rebuild our bookings pipeline and recommit ourselves to ensuring customers are successful, while instituting a culture of quality efficiency and profitability.

Brad Krieger: As a result, last quarter, we initiated company realignment to reduce costs, rebuild our bookings pipeline, and recommit ourselves to ensuring customers are successful while instituting a culture of quality, efficiency, and profitability. This has been a very challenging period for the company, and we still have a ways to go. However, we are very pleased with our progress over the last three and a half months. We strongly believe that we're just starting to see the benefits of this strategic shift, and these efforts will enable us to achieve sustainable profitability as we exit 2024. With that in mind, I would now like to discuss the specifics of our fourth quarter. Please turn to slide three.

Brian Krieger: This has been a very challenging period for the company and we still have a ways to go. However, we are very pleased with our progress over the last three to six months. We strongly believe that we are just starting to see the benefits of this strategic shift and these efforts will enable us to achieve sustainable profitability as we exit 2024.

Speaker Change: With that in mind I would now like to discuss the specifics of our fourth quarter.

Speaker Change: Please turn to slide three.

Brad Krieger: As I mentioned, Q4 was a transition quarter for us as we were impacted by our bookings challenges in the second half of last year, as well as by the disruption from a number of key initiatives related to our strategic realignment during the quarter. Given the typical length of our sales cycle is approximately six months, we are just now seeing the beginnings of a rebound in bookings as the change in our go-to-market strategy, along with our recommitment and investment to ensure customer success, is yielding tangible results. In addition to the increase in overall bookings, we are pleased to see existing customers who held off ordering during Q4 reengaging to expand their Sapphire footprint. We remain very excited about our opportunities in 2024.

Speaker Change: As I mentioned Q4 was a transition quarter for us as we were impacted by our bookings challenges in the second half of last year as well as by the disruption from a number of key initiatives related to our strategic realignment during the quarter.

Given the typical length of our sales cycle is approximately six months. We are just now seeing the beginnings of a rebound in bookings as the change in our go to market strategy, along with our re commitment and investment to ensure customer success is yielding tangible results. In addition to the increase in overall bookings, we're pleased to see existing <unk>.

Speaker Change: Customers, who held off ordering during Q4 re engaging to expand their sapphire footprint. We remain very excited about our opportunities in 2024.

Brad Krieger: On the expense side, we continue to benefit from the implementation of our aggressive cost reduction program last quarter. We reduced our cost structure by more than 15% in Q4 and expect OPEX to decline an additional 15% plus percent in the first quarter of 2024. Additionally, our focus on cash flow is showing progress, as free cash flow, excluding financing, improved by 35% year over year.

Speaker Change: On the expense side, we continue to benefit from the implementation of our aggressive cost reduction program last quarter.

Speaker Change: We reduced our cost structure by more than 15% in Q4, and we expect opex to decline an additional 15 plus percent in the first quarter of 2024.

Speaker Change: Additionally, our focus on.

Speaker Change: On cash flow is showing progress as free cash flow, excluding financing improve by 35% year over year.

Brad Krieger: We're also starting to benefit from our strategic shift to a customer-driven model as both manufacturing efficiency and customer reliability showed marked improvements in the fourth quarter. Finally, we are slowly rebuilding our backlog and seeing improved close rates as our pipeline starts to fill with highly qualified opportunities. Many of these new opportunities are in key verticals, such as space, defense, and aerospace, and reflective of our technological advances. Additionally, we are benefiting from our position as the only U.S.-based supplier of large-format metal AM solutions that has the unique capability of printing complex internal geometries required for our customers' most demanding applications. Moving on to bookings, we booked five orders in the fourth quarter, with more than 80% of these orders coming from existing customers.

Speaker Change: We're also starting to benefit from our strategic shift to a customer driven model as both manufacturing efficiency and customer reliability showed marked improvements in the fourth quarter.

Speaker Change: Finally, we are slowly rebuilding our backlog and seeing improved close rates as our pipeline starts to fill with highly qualified opportunities. Many of these new opportunities are in key verticals, such as space defense and aerospace and reflective of our technology advantage. Additionally, we are benefiting from our position as the only.

Speaker Change: U S based supplier of large format and metal E. M solutions that has unique capabilities and printing complex internal geometries required by our customers most demanding applications.

Moving onto bookings, we booked five orders in the fourth quarter with more than 80% of these orders coming from existing customers. This recovery in bookings is a strong validation of the successful implementation of our reliability initiatives to ensure our customers remain successful.

Brad Krieger: This recovery in bookings is a strong validation of the successful implementation of our reliability initiatives to ensure our customers remain successful. We were pleased to see this momentum carried over into Q1, as we've booked more than $15 million in orders since the last two weeks of December and see significant near-term opportunities as we enter Q2. This success also reflects the benefit of our new go-to-market value-based selling approach as we now have higher confidence and greater visibility into achieving our first half 2024 revenue forecast. In summary, the fourth quarter was extremely challenging on a number of fronts, but given our cost reduction efforts, initial bookings recovery, and new go-to-market strategy, we are well positioned to achieve our financial goals this year.

Speaker Change: We were pleased to see this momentum has carried over into Q1 as we booked more than 15 million in orders since the last two weeks of December and see significant near term opportunities as we enter Q2.

Speaker Change: This success also reflects the benefit of our new go to market value based selling approach because we now have higher confidence and greater greater visibility into achieving our first half 2024 revenue forecast.

Speaker Change: In summary, the fourth quarter was an extremely challenging on a number of fronts, but given our cost reduction efforts initial bookings recovery and new go to market strategy, we are well positioned to achieve our financial goals. This year.

Brad Krieger: As I mentioned, we are focusing our sales efforts in those markets where we believe we have a significant competitive advantage, space, defense, and aerospace. I'd now like to provide an update on these markets, as well as briefly discuss some of the key new revenue opportunities we see for 2024 and beyond. Please turn to slide four. In space, we remain the AM market leader, as we added NASA and Avio as customers in 2023, for example. This leadership position is the result of a number of factors.

Speaker Change: As I mentioned, we are focusing ourselves efforts in those markets, but we believe we have a significant competitive advantage space defense and aerospace.

Speaker Change: I'd now like to provide an update on these markets as well as briefly discuss some of the key new revenue opportunities, we see for 2024 and beyond.

Speaker Change: Please turn to slide four.

Speaker Change: In space, we remain the a M market leader as we added NASA and aveo as customers in 2023. For example, this leadership position as a result of a number of factors our technology enables customers to improve launch performance, which is important in lowering costs and a rapidly expanding industry.

Brad Krieger: Our technology enables customers to improve launch performance, which is important in lowering costs in a rapidly expanding industry. Even small improvements in performance mean using less fuel or being able to carry larger payloads. Also, with our combined hardware and software solution, our customers have the ability to quickly implement design changes. This is critical in a rapidly changing industry as launch cycles accelerate. For example, one of our customers went from design to launch in less than one year using our technology. We now count nine North American launch companies as customers, with many of these customers reaching critical mass over the next two years, given recent successes and announced launch schedule acceleration.

Speaker Change: Small improvements in performance means using less fuel or being able to carry larger payloads.

Speaker Change: Also with our combined hardware and software solution our customers have the ability to quickly implement design changes. This is critical in a rapidly changing industry as launch cycles accelerate for example, one of our customers went from design to launch in less than one year using our technology.

Speaker Change: We now count nine North American launch companies as customers with many of these customers reaching critical mass over the next two years, given recent successes and announced the launch schedule acceleration.

Brad Krieger: I can tell you I remain most excited about our defense business. We're just scratching the surface of this opportunity and see huge potential for both new technologies, such as hypersonics, as well as for them to be utilized for legacy part procurement. We have been, and continue to be, in discussions with DoD leadership about how we can be a leader in their transition to AM. In addition to our discussions with the U.S. government, we are seeing strong demand in this industry, as we added three new defense customers in 2023, bringing our total to nine. Customers include Kratos Defense, Vetchel, Ohio Ordnance, and Lockheed Martin.

Speaker Change: I can tell you I remain most excited about our defense business. We're just scratching the surface of this opportunity and see huge potential for both new technologies, such as hypersonic as well as being utilized for legacy part procurement.

Speaker Change: We have been and continue to be in discussions with D. O D leadership about how we can be a leader in their transition to a M.

Speaker Change: In addition to our discussions with the U S government, we're seeing strong demand in this industry as we added three new defense customers in 2023, bringing our total to nine customers include greatest defense, Batzel, Ohio Ordnance and Lockheed Martin.

Brad Krieger: Furthermore, the $825 billion defense spending bill approved Friday provides increased confidence in our 2024 defense bookings, where we have multiple system contracting activities in progress. Since Friday's announcement, we've already received one purchase order tied to this funding and expect to close additional orders in the coming days. In aerospace, we see a similar dynamic as customers are looking to Metal AM to implement new manufacturing methods, improve supply chain efficiency, and pursue concerted efforts aimed at cost reduction. We are happy to report that we are now starting to see traction in this space in both the U.S. and Europe and expect to increase our footprint in this market this year. Finally, we're implementing a number of programs to expand our future revenue stream. First, the potential monetization of our recently launched flow developer software package. This package provides users with the maximum flexibility and control over print parameters by unlocking our predefined black box parameters, making it more efficient for customers to use their existing designs and scale production.

Speaker Change: Furthermore, the $825 billion defense spending Bill approved Friday provides increased confidence in our 2020 for defense bookings, where we have multiple systems contracting activities and progress since Friday's announcement, we've already received one purchase order tied to this funding and expect to close additional.

Speaker Change: Orders in the coming days.

Speaker Change: In aerospace, we see a similar dynamic as customers are looking to metal am to improve it to implement new manufacturing methods to improve supply chain efficiency and pursue concerted efforts aimed at cost reduction. We are happy to report that we are now starting to see traction in this space in both the U S and Europe and expect to incur.

Speaker Change: Our footprint in this market this year.

Speaker Change: Finally, we're implementing a number of programs to expand our future revenue streams.

Speaker Change: First the potential monetization of our recently launched Flo developer software package.

Speaker Change: This package provides you.

Speaker Change: Users with the maximum flexibility and control over print parameters by unlocking our predefined black box parameters that making it more efficient for customers to use their existing designs and scale production.

Brad Krieger: Second, on the R&D front, we are in the early phases of refining our next generation Sapphire model. This product will be very competitive with our peers on cost, retain key technological advantages, and open up markets we currently do not sell into. Third, we're leveraging our relationship in the consumable space to drive recurring revenue and margin expansion, as well as exploring ways to better package ancillary equipment to provide more complete solutions that help customers scale more quickly. While we're excited about the growth potential given our go-to-market efforts, these efforts will not come to fruition without executing on our internal realignment initiatives to position the company for success. I would now like to briefly discuss how we plan to improve our operational execution before providing an update on the 2024 strategic priorities we laid out last quarter. Please turn to slide five.

Speaker Change: Second on the R&D front, we are in the early phases of refining our next generation Sapphire model. This product will be very competitive with our peers on cost retain key technology advantages and open up markets. We currently do not sell into.

Speaker Change: Third we're leveraging our relationship in the consumable space to drive reoccurring revenue and margin expansion as well as exploring ways to better package ancillary equipment to provide more complete solutions that help customers scale more quickly.

Speaker Change: While we're excited about the growth potential given our go to market efforts. These efforts will not come to fruition without executing on our internal realignment initiatives to position the company for success.

Speaker Change: I would now like to briefly discuss how we plan to improve our operational execution before before providing an update on the 'twenty 'twenty four strategic priorities, we laid out last quarter.

Speaker Change: Please turn to slide five.

Brad Krieger: As we discussed last quarter, we made significant changes to our go-to-market strategy that we feel will position us well for future success. For example, we've shifted from an engineering-led sales approach to one that focuses on value-based selling. The engineering-led approach worked very well in the early adopter phase of our product adoption, but we realized that in order to expand our footprint, we needed a new value-based approach. In relation to manufacturing, we are just starting to see the benefit of cost reduction initiatives started in the second half of 2023. These cost reductions were achieved through the qualification of new suppliers, establishing supply agreements, and working with suppliers to deliver lower raw material costs.

Speaker Change: As we discussed last quarter, we made significant changes in our go to market strategy that we feel will position us well for future success. For example, we've shifted from an engineering led sales approach to one that focuses on value based selling the engineering led approach works very well in the early adopter phase of our product adopt.

Speaker Change: But we realized that in order to expand our footprint, we needed a new value based approach.

Speaker Change: In relation to manufacturing we are just starting to see the benefit of cost reduction initiatives started in the second half of 2023. These cost reductions were achieved through qualification of new suppliers establishing supply agreements.

Speaker Change: And working with supplier to deliver lower raw material costs.

Brad Krieger: We've also seen initial success increasing production efficiency as we have materially improved our production processes and workflows. Both of these are directly related to our gross margin expansion. On the customer service side, resolving our customers' reliability concerns is our number one focus.

Speaker Change: We've also seen initial success increasing production efficiency as we have materially improved our production processes and workflows. Both of these are directly related to our gross margin expansion plans.

Speaker Change: On the customer service side, resolving our customers' reliability concerns as our number one focus successfully addressing this issue is critical to our land and expand strategy as it drives repeat customer sells simply put happy customers buy more systems.

Brad Krieger: successfully addressing this issue is critical to our land and expand strategy as it drives repeat customer sales. Simply put, happy customers buy more systems. Aside from increasing our field service organization to provide a more hands-on, high-touch relationship, we are expanding our customer training programs to minimize customer-induced issues. We are also investing in processes that will enable us to identify and proactively prevent field failures, ensuring higher utilization rates.

Speaker Change: Aside from increasing our field service organization to provide a more hands on high touch relationship we are expanding our customer training programs to minimize customer induced issues. We're also investing in processes that will enable us to identify and proactively prevent field failures, ensuring higher utilization rates.

Brad Krieger: Bernie will address our efforts on OPEX and cash flow in more detail, but I wanted to highlight that our cost reduction plan remains on track, and we recently completed our Facilities Consolidation and Headcount Alignment Program. We remain focused on further reducing OPEX and are in the process of identifying additional cost reductions to ensure we achieve our cash flow break-even target in the second half of this year. Before I turn the call over to Bernie for our financials, I wanted to provide an update on the status of the strategic priorities we discussed last quarter. Please turn to slide 6. First, we've reduced the installation time of our Sapphire printers by 40% over the last six months.

Speaker Change: Bernie will address our efforts on opex and cash flow in more detail, but I wanted to highlight that our cost reduction plan remains on track and we recently completed our facilities consolidation and headcount alignment program.

Speaker Change: We remain focused on further reducing opex and are in the process of identifying additional cost reductions to ensure we achieve our cash flow breakeven target in the second half of this year.

Speaker Change: Before I turn the call over to Bernie for our financials I wanted to provide an update on the status of the strategic priorities. We discussed last quarter. Please turn to slide six.

First we have reduced the installation time of our sapphire printers by 40% over the last six months. This goes to the success of key initiatives that we launched in the second half of the year to improve the quality of our printers and streamlined installation processes.

Brad Krieger: This is thanks to the success of key initiatives that we launched in the second half of the year to improve the quality of our printers and streamline the installation process. We're most proud of the success we've had in improving customer experience and satisfaction. We've seen improved system uptimes across the install base while reducing issue resolution times by 40% since Q3 2023. This is reflected in our existing customer booking rate, which has significantly improved this course. As I previously mentioned, our pipeline continues to fill with qualified leads, and we are starting to rebuild our backlog. We've signed more than $15 million in new orders since mid-December, with more than 50% of those orders from strategic accounts with multiple systems. This success demonstrates that our customers value our technology and that we are successfully addressing their reliability issues in the field.

Bernard Chung: We are most proud of the success, we've had in improving customer experience and success we've.

Bernard Chung: We've seen improved system uptime across the installed base, while reducing issue resolution times by 40% since Q3 2023.

Bernard Chung: This is reflected in our existing customer booking rate, which is significantly improved this quarter.

Bernard Chung: As I previously mentioned our pipeline continues to fill with qualified leads and we're starting to rebuild our backlog we've signed more than $15 million in new orders since mid December with more than 50% of those orders from strategic accounts with multiple systems.

Bernard Chung: This success demonstrates that our customers value our technology and that we are successfully addressing their reliability issues in the field.

Brad Krieger: Finally, to reiterate, we expect to reduce our cost structure by more than 30 percent by Q1 2024 and remain confident that we see a clear executable path to cash flow breakeven in the second half of 2024. In closing, 2023 was a transformational year for the company, and I'm very encouraged by the progress we have made. We remain excited about the future opportunity and believe our realignment puts us in a much stronger position to achieve our profitability goal in 2024. With that said, I would like to turn the call over to Bernie to discuss our financials and provide guidance. Thanks, Brad.

Bernard Chung: Finally to reiterate we expect to reduce our cost structure by more than 30% by Q1 2024 and remain confident that we see a clear executable path to cash flow breakeven in the second half of 2024.

Bernard Chung: In closing 2023 was a transformational year for the company and I'm very encouraged with the progress. We have made we remain excited about the future opportunity and believe our realignment puts us in a much stronger position to achieve our profitability goal in 2024.

Bernard Chung: With that I would like to turn the call over to Bernie to discuss our financials and provide guidance. Thanks Brad.

Bernard Chung: Moving on to our quarterly financial performance, please turn to slide 8. As Brad briefly mentioned, fourth quarter revenue of $2 million was significantly impacted by reduced distance sales due to the decline in second half bookings as well as the sales disruption caused by our realignment initiatives as we positioned the company for success in 2024. On a year-over-year basis, both year-of-sale and recurring revenues were in line with 2020. The significant negative gross margin for the quarter was primarily driven by reduced system volume, the impact of our $27 million inventory charge, as well as costs associated with our realignment initiative.

Bernard Chung: Moving onto our quarterly financial performance, please turn to slide eight.

Bernard Chung: Brad briefly mentioned fourth quarter revenue of $2 million was significantly impacted by reduced system sales due to the decline in the second half bookings as well as the sales disruption caused by our realignment initiatives as we as we position the company for success in 2024.

Bernard Chung: On a year over year basis, both Europe sale and recurring revenues were in line with 2022.

Bernard Chung: The significant negative gross margin for the quarter was primarily driven by reduced system volume the impact of our 27 million inventory charge as well as costs associated with our realignment initiatives.

Bernard Chung: We expect first quarter gross margin improvement, resulting from a lower balance of material costs, minimal working capital needs, to benefit from our consolidated supply contracts, as well as operational and manufacturing efficiency. We also made significant progress on reducing our operating cost structure in the fourth quarter, as non-GAAP OPEC declined more than 15% sequentially to $16 million, excluding the costs and charges related to our realignment initiative. The decrease in operating expenses was primarily driven by a decrease in G&A expense, which reflects savings related to our headcount and realignment mission.

Bernard Chung: We expect first quarter gross margin improvement, resulting from lower balances material cost minimal working capital needs to benefit from our consolidated supply contracts and wealth as well as operational and manufacturing efficiencies.

We also made significant progress in reducing our operating.

Bernard Chung: Operating cost structure in the fourth quarter as non-GAAP opex declined more than 15% sequentially to $16 million, excluding the costs and charges related to our realignment initiatives.

Bernard Chung: Decrease in operating expenses was primarily driven by a decrease in G&A expense, which reflects savings related to our head count and realignment initiatives, specifically R&D expenses declined by $2 2 million G&A declined $1 2 million in sales and marketing was in line with last quarter.

Bernard Chung: Specifically, R&D expenses declined by $2.2 million, G&A declined $1.2 million, and sales and marketing were in line with last quarter. We expect OPEX to decline more than 30% in the first quarter of 2024 compared to the third quarter of 2024. Gap net loss for the quarter was $58.2 million, including a non-cash gain of approximately $28 million related to changes in the fair value of our warrants, earn-out, and debt derivative liabilities. On a non-GAAP basis, which excludes this loss in stock-based compensation expense, Gap net loss was $61.1 million.

Bernard Chung: We expect opex to decline more than 30% in the first quarter of 2024 compared to the third quarter of 2023.

Bernard Chung: GAAP net loss for the quarter was $58 2 million, including a noncash gain of approximately $28 million related to changes in the fair value of our warrants and debt driven liabilities.

Bernard Chung: non-GAAP basis, which excludes this loss in stock based compensation expense net loss was $61 1 million and adjusted EBITDA for the quarter. Excluding the same items was a loss of $51 5 million.

Bernard Chung: An adjusted EBITDA for the quarter excluding the same items was a loss of $51.5 million. As we discussed, we expect improvement in gross margin in 2024 as we go through the year. I want to briefly discuss the four key drivers of this improvement. Please turn to slide 9.

Bernard Chung: As we discussed we expect improvement in gross margin in 2024, and as we go through the year.

Speaker Change: I want to briefly discuss the four key drivers of this improvement please turn to slide nine.

Bernard Chung: First, let me begin by saying that we are just benefiting, or starting to benefit from, our build material cost reduction initiatives that we started in Q4. We have identified and started to implement approximately 25 separate programs to lower our SAFIRE XC costs by more than 30% by the end of the year. Second, is our continued product makeshift to our larger format, higher price Sapphire XC system at a reduced bill of material cost. We have also added programs to improve the monetization of our maintenance and parts recurring revenue stream, as well as expanding our consumables business, such as powder. Third, it is just becoming more operationally efficient in the factory. This will be accomplished through improved overhead cost absorption as we scale system volume in addition to leveraging our new supply agreements and a shift to utilizing a higher number of system subassemblies. Finally, improving field support efficiency, which is directly tied to customer system reliability.

Speaker Change: First as we.

Speaker Change: Or just benefiting.

Speaker Change: Starting to benefit from our bill of material cost reduction initiatives that we started in Q4.

Speaker Change: We have identified and started to implement constantly 25 separate programs to lower our sapphire exit costs by more than 30% by the end of the year.

Speaker Change: Second is that contingent products mix shift to our larger format higher price just by our XC system.

Speaker Change: <unk> bill of material costs we.

Speaker Change: We have also added programs to improve the monetization of our maintenance and parts recurring revenue stream as well as expanding our consumables business such as part of our sales.

Speaker Change: Third it is just becoming more operationally efficient and the factory. This will be accomplished through improved overhead cost absorption as we scale system volumes. In addition to leveraging our new supply agreements and the shift to utilizing a higher number of system sub assemblies.

Speaker Change: Finally, improving field support efficiency, which is directly tied to customer system reliability. This has been a drag on gross margin for the past couple of quarters, but we firmly believe the changes we have made in our service organization will minimize the impact in the near term, while allowing us to expand margins in the second half of the year.

Bernard Chung: This has been a drag on gross margin for the past couple of quarters, but we firmly believe the changes we have made in our service organization will minimize the impact in the near term while allowing us to expand margins in the second half of the year. On slide 10, we are providing some additional detail on our Operating Expense Cost Reduction Initiative. As discussed, we have significantly reduced our cost structure over the last six months, including our headcount reduction, as well as our facility consolidation. We expect our Q1 results will reflect the full benefit of these programs, primarily in our sales and marketing and G&A functions, with additional reductions in R&D given our product value. Finally, we see further opportunities to reduce expenses and are currently evaluating additional cost reduction measures. Moving on to cash flow, please turn to slide 11. We exited the quarter with $31 million in cash and investment. Cash use for the quarter was $41 million, of which $40 million went to the partial paydown of our existing term debt.

Speaker Change: On slide 10.

Speaker Change: We are providing some additional detail on our operating expense cost reduction initiatives.

Speaker Change: As discussed we have significantly reduced our cost structure over the last six months, including a headcount reduction as well as our facility consolidation.

Speaker Change: We expect our Q1 results will reflect the full benefit of these programs primarily in our sales and marketing and G&A functions with additional reductions in R&D, given our product roadmap.

Speaker Change: Finally, we see further opportunities to move.

Speaker Change: <unk> expenses and are currently evaluating additional cost reduction measures.

Speaker Change: Moving on to cash flow, please turn to slide 11.

Speaker Change: We exited the quarter with $31 million in cash and investments cash use for the quarter was $41 million of which 40 million went to the partial pay down of our existing term debt.

Bernard Chung: We also raised $18 million in an equity transaction in the fourth quarter. Realignment expenses, including service costs associated with our facilities closures, total $2 million. CAPEX was minimal, but the balance of the cash was used for working capital purposes.

Speaker Change: We also raised $18 million in an equity transaction in the fourth quarter.

Speaker Change: Realignment expenses, including severance costs associated facilities closures totaled $2 million.

Speaker Change: Capex is minimal with the balance of the cash was used for working capital purposes.

Bernard Chung: Finally, we expect cash use to be in the range of $13 million to $17 million in the first quarter. Given our expected improvement in both revenue, margin, and cost structure, we believe we will achieve free cash flow breakeven, excluding financing, in the second half of the year. I'd now like to provide our outlook for fiscal year 2024. Please turn to slide 12.

Speaker Change: Finally, we expect cash use to be in the range of $13 million to $17 million in the first quarter, given our expected improvement in both revenue margin and cost structure. We believe we will achieve free cash flow breakeven excluding financing in the second half of the year.

I'd now like to provide our outlook for fiscal year 2024, Please turn to slide 12.

Bernard Chung: As mentioned, we expect sequential quarterly improvements in revenue, margin, and operating expenses in 2024 as we start to benefit from our realignment initiative. Our full-year 2024 guidance is as follows. We expect revenue to be in the range of $80 to $95 million, gross margin in the range of 20% to 30%, with gross margin of approximately 30% in the fourth quarter of 2020, and nine gap operating expenses in the range of $40 to $50 million.

Speaker Change: As mentioned, we expect sequential quarterly improvements in revenue margin and operating expenses in 2024, as we start to benefit from our realignment initiatives our full year 2012.

Speaker Change: 2024 guidance is as follows we expect revenue to be in the range of $80 million to $95 million gross margin in the range of 20% to 30% with gross margin of approximately 30% in the fourth quarter of 2024.

Speaker Change: non-GAAP operating expenses in the range of $40 million to $50 million.

Bernard Chung: In conclusion, we are focused on executing a realignment strategy with a clear path to profitability through improvements in operating efficiency, margins, and cash flow. We continue to believe that we have the runway to achieve sustainable profitability in 2024. With that, I'd now like to turn the call over to questions. Operator.

Speaker Change: In conclusion, we are focused on executing our radiant alignment strategy with a clear path to profitability through improvements in operating efficiency margins and cash flow. We continue to believe that we have runway to achieve sustainable profitability in 2020 floor.

With that I'd now like to turn the call over for questions operator.

Operator: Thank you. At this time, we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. What confirmation tone will indicate your line is in the question? You may press star 2 if you would like to remove your question from the list. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key.

Speaker Change: Thank you.

Speaker Change: At this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

Speaker Change: You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Operator: Our first question comes from James Ricchiuti with Needham and Company. Hi, thank you. Good afternoon.

Speaker Change: Our first question comes from James Ricchiuti with Needham <unk> Company. Please state your question.

James Andrew Ricchiuti: Alright. Thank you. Good afternoon, just when we think about the improvement you're anticipating looking out to Q4 'twenty four for gross margins.

James Andrew Ricchiuti: Just when we think about the improvement you're anticipating, looking at Q4 24, for gross margins, what does that imply in terms of revenues? What kind of a revenue range do you need to be in, say, to get to the midpoint of that gross margin guidance? You highlighted a number of things that potentially could give a lift to gross margins, but I'm just wondering, from a top line standpoint, where do you need to see revenue? Yeah, a great question.

James Andrew Ricchiuti: What is the what does that imply in terms of revenues what kind of revenue range do you need to be in shape to get to the.

James Andrew Ricchiuti: The midpoint of that gross margin guidance, you highlighted a number of things.

James Andrew Ricchiuti: Potentially it could give.

James Andrew Ricchiuti: A lift to gross margins, but I'm just wondering from a topline standpoint, where do you see revenues.

Speaker Change: Yeah, Great question and.

Bernard Chung: At a high level, you know, roughly between $25 to $30 million a quarter to fully realize the gross margin targets that we've set out for ourselves. You know, quite a bit of the gross margin improvement that we're starting to see flow through here in Q1 is based on activities that were initiated in the second half of 2023. With the weakness in Q4, one of the things that delayed the flow-through of inventory, but what we're seeing now is the lower-cost raw materials that we had started to get into inventory in the fourth quarter are flowing through and will start to materialize in our P&L for Q1. And then we have a number of initiatives to further drive down those costs of materials. But ultimately, that intersection point that you're sort of describing would be at roughly $25 million a quarter.

At a high level.

Speaker Change: Between $25 million to $30 million a quarter to fully realize the gross margin targets that we've set out for ourselves.

Speaker Change: So quite a bit of the gross margin improvement.

Speaker Change: That we're starting to see flow through here in Q1 is based out of out of activities that were initiated in second half of 2023.

With the weakness in Q4, one of the things that did is it delayed the flow through of inventory.

Speaker Change: But what we're seeing now is the lower cost raw materials that again.

We had started to.

Speaker Change: Get into inventory in the fourth quarter are flowing through and we will start to materialize in our P&L for Q1.

Speaker Change: We have a number of initiatives to further drive down the cost of materials, but ultimately that intersection point that you're sort of describing would be at roughly $25 million a quarter.

Bernard Chung: Got it. Thank you. Hey Jim and Bernie, just to add further that we had a big drag on our support services in 2023 and we've done a lot of improvements in our field service support. So this will also help drive some of that gross margin expansion in 2024. The 15 million bookings that you highlighted, can you say if any of those orders were from what historically has been the large customer and commercial space, or, you know, are these other existing customers in that market and defense? Maybe a little bit of a sense as to where you saw the booking strength in there since mid-December. Yeah, the bookings largely tended to be reflective of the profile we saw in 2023.

Speaker Change: Got it.

Yes, Hey, Jim Bernie just to also that.

Jim Bernie: For that we had.

Jim Bernie: Big drag on our support services in 2023, and we've done a lot of improvements in our field service support. So this will also help.

Jim Bernie: Drive some of that gross margin expansion in 2024.

Speaker Change: Got it the $15 million of bookings that you highlighted.

Speaker Change: Can you say if any of those orders were from.

Speaker Change: What historically has been your large customer in the commercial space.

Speaker Change: Space or you know are.

Are these other existing customers in that market and defense, maybe a little bit of.

Speaker Change: A sense as to where you saw the booking strength in there since.

Speaker Change: Since mid December.

Speaker Change: Yeah. The bookings are largely tended to be reflective of the profile we saw in 2023.

Bernard Chung: So a large portion of that was in existing space customers that were expanding their fleets as they were ramping up for additional engine production and accelerated launch schedules. A good portion of that, roughly a third, a little over a third, was in the defense sector. And so again, we were starting to see that accelerate at a pace that quite honestly we haven't seen before. And again, with the defense spending bill being approved last week, we anticipate that's going to unlock a lot of active conversations that we've been working on for several months that were ultimately kind of contingent on that particular funding being released. So those are two, you know, probably the two most significant contributors. When you start to look at the balance, again, it continues to be reflective of our mix in 2023.

Speaker Change: So you know a large portion of that was an existing space customers that were expanding their fleets as they are ramping up for additional.

Speaker Change: Engine production in general accelerated launch schedules.

Speaker Change: A good portion of that roughly a third or a little over a third was in the defense sector and so again, we were starting to see that accelerate.

At a pace that quite honestly, we haven't seen before.

Speaker Change: And again with the defense spending Bill being approved last week, we anticipate that's going to unlock a lot of active conversations now that we've been working on for several months that we're ultimately kind of contingent on on that particular funding being released.

Speaker Change: So those are probably the two most significant contributors when you start to look at the balance again it continues to be reflective of our mix in 2023, so it's oil gas or contract manufacturing networks.

Bernard Chung: So it's oil, gas, our contract manufacturing networks, customers, and those types of things. Have you had, last question from me, have you had any issues with machines that have come back where customers have basically turned them back to you? And I'm wondering if there's any kind of a used machine market out there for your equipment, or has that not been an issue?

Speaker Change: <unk> customers in those segments.

Speaker Change: Okay have you had the last question for me have you had any issues with machines that had come back or customer base.

Speaker Change: Basically turned them back to you and say I'm wondering if there's any kind of thing.

Speaker Change: Used machine market out there for your equipment or is that not been an issue.

Bernard Chung: So we've had machines come back to us off-lease at the end of their lease term. And so there is a resale market, and we've been able to resell each one of those machines at a healthy, based on the net book value, at a healthy margin. So the demand is there. Yeah, we found that to be a very successful model when systems get to the end of their release cycle.

Speaker Change: So we've had machines come back to us off lease at the end of their lease term and so there is a resale market and we've been able to resell each one of those machines.

Speaker Change: At a healthy.

Speaker Change: Based on the net book value at a healthy margin. So the demand is out there yeah, we found that to be a very successful model win so.

Speaker Change: And to get to the end of their lease cycle.

Bernard Chung: Got it. Thanks very much. Thanks, Jim. Thank you. Thank you, and there are no further questions at this time. I'll turn the floor back over to Brad Kroeger for closing remarks. Yeah, I want to thank everybody for joining us today, and we look forward to providing additional updates in the coming quarters. Thank you. Thank you. And with that, we conclude today's call. All parties may disconnect.

Got it.

Speaker Change: Okay. Thanks very much.

Speaker Change: Thanks, Jim Thanks Janet.

Speaker Change: Thank you and there are no further questions at this time I'll turn the floor back over to Brad Krager for closing remarks. Thank you.

Brad Krager: Yeah, I want to thank everybody for joining us today, and we look forward to providing additional updates in the coming quarters. Thank you.

Speaker Change: With that we conclude today's call all parties may disconnect have a good day.