Q4 2023 Velo3D Inc Earnings Call


Participants

Bob Okunski; Vice President of Investor Relations; Velo3D Inc

Brad Kreger; Interim Chief Executive Officer; Velo3D Inc

Bernard Chung; Chief Financial Officer; Velo3D Inc

James Ricchiuti; Senior Analyst; Needham & Company LLC

Presentation

Operator

Good afternoon. Welcome to the Velo3D’s fourth-quarter 2023 earnings conference call. (Operator Instructions)
As a reminder, today’s conference call is being recorded. I will now turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at Velo3D Corporation. Thank you, sir. You may begin.

Bob Okunski

Thanks, Diego. 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 Kreger, 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.
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. 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 Kreger, CEO of Velo3D. Brad?

Brad Kreger

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 could tell you that this comprehensive process remains ongoing and that the Board of Directors is in discussions with multiple parties related to maximizing stockholder value.
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. With that, 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 installed base led to material increases in field system issues and customer concerns.
Similarly, as we expanded beyond our early adopters of the technology to broader markets, we found ourselves methodology did not translate effectively, leading to poor opportunity qualification. These issues directly affected our bookings rate as evidenced by our 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.
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’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 3. 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.
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 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. 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 technology advantage. Additionally, we are benefiting from our position as the only US-based supplier of large format metal [OEM] solutions that has unique capabilities in 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. This recovery in bookings is a strong validation of the successful open implementation of our reliability initiatives to ensure our customers remain successful. 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. This success also reflects the benefit of our new go-to-market value-based selling approach because we now have higher confidence and greater with greater visibility into achieving our first half 2024 revenue forecast.
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. 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 4. In space. We remain a market leader as we added NASA and RVO 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 in a rapidly expanding industry. Even small improvements in performance means 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. I can tell you I remain most excited about our defense business for just scratching the surface of this opportunity and see huge potential for both new technologies such as hypersonics as well as being utilized for legacy part procurements. We have been and continue to be in discussions with DoD leadership about how we can be a leader in their transition to APM.
In addition to our discussions with the US 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 greatest defense battle, Ohio, Ordnance and Lockheed Martin. Furthermore, the $825 billion defense spending bill approved Friday provides increased confidence in our 2024 defense bookings, where we have multiple systems 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 OEM to improve 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 US 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 streams. 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 box parameters set, making it more efficient for customers to use their existing designs and scaled production.
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 third. We are 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. 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.
So I’d now like to briefly discuss how we plan to improve our operational execution before before providing an update on the 2024 strategic priorities we laid out last quarter.
Please turn to Slide 5. 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 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 qualification of new suppliers, establishing supply agreements and working with suppliers to deliver lower raw material costs. 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 on the customer service side, resolving our customers’ reliability concerns is our number one focus 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.
First, I 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 breakeven 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 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 streamline installation processes. We are most proud of the success we’ve had in improving customer experience and success. We’ve seen improved system uptime across the installed 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 quarter. 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 the reliability issues in the field.
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.
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.
With that, I would like to turn the call over to Bernie to discuss our financials and provide guidance.

Bernard Chung

Thanks, Brad. Moving on to our quarterly financial performance, please turn to Slide 8. As Brad briefly mentioned quarter revenue of 2 million was significantly impacted by reduced system sales due to the decline in second half bookings as well as the sales disruption caused by our realignment initiatives as we read as we position the Company for success in 2024. On a year-over-year basis, both your sale and recurring revenues were in line with 2022. 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. We expect first quarter gross margin improvement resulting from lower balance with material costs, minimal working capital needs to benefit from our consolidated supply contracts and well as well as operational and manufacturing efficiencies. We also made significant progress in reducing our operating 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, the decrease in operating expenses was primarily driven by a decrease in G&A expense, which reflects savings related to our headcount 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. We expect OpEx to decline more than 30% in the first quarter of 2024 compared to the third quarter of 2023. Gaap 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 are now in debt derivative liability on a non-GAAP basis, which excludes this loss and 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. As we discussed, we expect improvement in gross margin in 2024 as we go through the year.
I wanted to briefly discuss the four key drivers of this improvement. Please turn to slide 9, processing are just benefiting starting to benefit from our build material cost reduction initiatives that we started in Q4. We have identified and started to implement constantly 25 separate programs to lower our Sapphire actually costs by more than 30% by the end of the year.
Second is our continued product mix shift to our larger format, higher price Sapphire XC system at a reduced bill of material costs. 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 Putter sales. Third, it has just become more operationally efficient in the factory. This will be accomplished through improved overhead cost absorption as we scale system value. In addition, to leveraging our new supply agreements and the shift to utilizing a higher number of system subassemblies.
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.
On Slide 10, we are providing some additional detail on our operating expense cost reduction initiatives. 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 roadmap.
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 investments. Cash used for the quarter was $41 million, of which $40 million went to the partial paydown of our existing term debt. We also raised $18 million in an equity transaction in the fourth quarter realignment expenses, including severance costs associated facilities closures, totaled $2 million. Capex was minimal with the balance of the cash was used for working capital purposes.
Finally, we expect cash used to be in the range of 13 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. 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 24 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 2024, non-GAAP operating expenses in the range of 40 to $50 million.
In conclusion, we are focused on executing a real 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 2024.
With that, I’d now like to turn the call over for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) James Ricchiuti, Needham & Company.

James Ricchiuti

And thank you, a good afternoon. Just when we think about the improvement you’re anticipating looking out to Q4 24 for gross margins, what is the what does it 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 I look to gross margins, but I’m just wondering from a top line standpoint, where do you need to grow.

Brad Kreger

Yes, great question. At a high level, roughly between 25 to 30 million a quarter to kind of fully realize the gross margin targets that we set out for ourselves and quite a bit of the gross margin improvement that we’re starting to see flow through here in Q1 is based out of activities that were initiated in the second half of 2023 with the weakness in Q4. One of the things that did is it delayed the flow through of inventory. But what we’re seeing now is the lower cost raw materials that again, we had started to get into inventory in the fourth quarter are flowing through and will start to materialize in our P & L or Q one. And then 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 of the helium.
Yes, Adrian burning just off of it. And for 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.

James Ricchiuti

So this will also help drive some of that gross margin expansion, which 2024 of the $15 million of bookings that you highlighted, can you say if any of those orders were from what historically has been your large customer and commercials space? Or are these other existing customers in that market and defense maybe a little bit of a sense as to where you saw the bookings strength in there since mid-December?

Brad Kreger

Yes. The bookings are largely tended to be reflective of the profile. We saw in 2023. So a large portion of that was in existing space customers that were expanding their fleets as they are ramping up for additional engine production and the accelerated launch schedules. 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 Are you 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 are ultimately kind of contingent on on that particular funding being released. And so those are two 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, our contract manufacturing networks, home customers in those segments.

James Ricchiuti

Have you had the last question for me? Have you had any issues with machines that have come back where customers have basically turned them back to you and is the I’m wondering if there’s any kind of a used machine market out there for your equipment or is that not been an issue?

Brad Kreger

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 out there.
Yes, we found that to be a very successful model when our systems get to the end of their lease cycle.

James Ricchiuti

Got it. Got it. Thanks very much.

Brad Kreger

Thanks, Jim.

James Ricchiuti

Thank you.

Operator

Thank you. There are no further questions at this time. I’ll turn the floor back over to Brad Kreger for closing remarks.

Brad Kreger

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

Operator

With that we conclude today’s call. All parties may disconnect. Have a good day.



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