Velo3D, Inc. (VELO) Q2 2022 Earnings Report, Transcript and Summary

Greetings and welcome to Velo3D reports Second Quarter Earnings Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] and please note that this conference is being recorded. I will now turn the conference over to Bob Okunski, Vice President of Investor Relations of Velo3D. Thank you sir. I may begin.

Thanks John. I’d like to welcome everyone to our second quarter 2022 earnings conference call. On the call today, we will start out with comments from Benny Buller, CEO of Velo3D, who will provide a summary of the quarter, as well as an update on the key strategic priorities for the balance of 2022. Following Benny’s comments, Bill McCombe, our CFO, will then review our second quarter 2022 financial results and provide our guidance. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website. 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 2021 10-K and Q1 2021 10-Q 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 posted a set of PowerPoint slides, which we will refer during the call on the Events & Presentations page of our Investor Relations website. With that, I’d like to turn the call over to Benny Buller, CEO of Velo3D. Benny?

Thank you Bob. And I’d like to welcome everyone to our second quarter earnings call. Please turn to Slide 4. Before discussing our strong quarterly results, I want to put into context our success over the last six quarters. We firmly believe our industry leading growth is being driven by our innovation and product differentiation. Customers continue to look develop ready to produce the high value metal parts they need. As you can see from the chart, we have grown revenue by more than 15 times compared to the first quarter of 2021. This growth has been driven by increasing demand for our industry leading separate systems. There is a simple reason for that. We offer our customers a technology that is significantly better additive manufacturing solution than what is currently available in the market, enabling customers to print the parts they need avoiding the compromises they had to do with legacy additive manufacturing. This success is also clearly evident when you compare Velo3D with our peer group, whose revenues have been flat to down over the same period according to context research. As a result, we are on track to become the largest metal additive manufacturing company possibly as early as the end of 2022. We feel this share gain is a direct result of our go to market strategy that is focused on different market segments, than our legacy additive manufacturing peers. Our unique and differentiated technology fundamentally changes the way the aerospace energy, power and other industrial segments design and produce their most critical parts, parts that cannot be produced with legacy additive manufacturing technology. Overall, we continue to see a massive untapped global market opportunity for high value metal parts. We believe we are extremely well-positioned to capitalize on this trend and remain committed to providing our customers with the technology to meet their expanding additive manufacturing. I would now like to discuss the specifics of our results. Please turn to slide 5. We were pleased with our Q2 execution as we again posted strong sequential and year-over-year revenue growth, maintained our backlog and expanded our new and existing customer footprint. For the quarter revenue rose 60% sequentially and more than 160% year-over-year as customer adoption of our Sapphire XC systems remains very high. We also posted record revenue despite the delay of a handful of early launch customer systems into Q3 due to supply chain challenges. Demand for both our Sapphire and Sapphire XC systems continues to grow. We booked $18 million in new orders during the quarter while maintaining a significant backlog of $55 million. Given our first half revenue results, strong second quarter bookings and shippable backlog for this year we remain highly confident in achieving our 2022 revenue target of $89 million a year-over-year growth rate of 225%. Operationally, we executed well as we continue to successfully scale our Sapphire production at our new manufacturing facility. Our ability to scale production is important as it has a direct correlation to customer reduction in gross margin equivalents. Finally, we expanded our product leadership during this quarter with the launch of our Sapphire XC 1MZ, we believe this is the world’s largest commercially available metal laser powder bed fusion production system with the capability to manufacture parts that are up to 1000 millimeter top and 600 millimeter in diameter at the total product volume of up to 10 cubic feet. We expect to ship our first few systems of this product this quarter and are seeing a strong demand demonstrated as solid bookings from the energy and aerospace industries. I would now like to provide a quick update on our high confidence in achieving our 2022 revenue target of $89 million, Please turn to slide 6. As I previously mentioned, our 2022 confidence is driven by the fact that we have significant visibility for this year. In addition, we expect to see ongoing strong demand for both for Sapphire and Sapphire XC systems as customers continue to choose our industry leading technology for the additive manufacturing needs. Similar to last quarter, this chart provides a detailed breakdown of our 2022 revenue expectations by category exiting Q2 versus where we were in Q1 and coming into the year. Overall, as a result of our first half financial performance, and Q2 bookings success, we now have more than 95% of our 2022 revenue target, already recognized, recurring are booked for this year. In particular, this improvement was primarily driven by a significant reduction in our year end bookings gap, which declined by seven times sequentially from $21 million in Q1 to $3 million at the end of Q2. In relation to the supply chain conditions continue to be very challenging, especially in the electronics area. This situation is a daily challenge for us, forcing us to procure inventory much earlier than would normally be needed, and the length the point in time in which we can benefit from our cost improvement initiatives. As Bill will discuss, this will result in a slower improvement in gross margin than we planned. We do not expect any material recovery in supply chain conditions through the balance of the year at this point, and have launched new initiatives to minimize the ongoing impacts. In summary, given our first half results, strong bookings activity and a solid backlog, we are iterating our 2022 guidance of $89 million. Before turning the call over to Bill to discuss our financials, I’d like to conclude my remarks by providing a brief overview of our initiatives to drive production efficiency and improve profitability given our long term growth forecast. Please turn to slide 7. First, reducing our bill of material costs. As we have mentioned in the past, we employ an asset light strategy for production, where we utilize subcontractors for a significant majority of our required parts. This has enabled us to reduce the cycle time of production, lower labor costs and successfully include scale set up production. However, we have not completed the migration to a contract manufacturing supply chain for Sapphire XC at this point. We are in the process of outsourcing the assembly of complex parts for our Sapphire XC system to key suppliers, but currently many of them are assembled in house. This initiative combined with our strategy to consolidate suppliers to leverage our scale will streamline our procurement process allow us to scale without increasing labor spending and improve production efficiency. We expect to see the full benefit of this strategic initiative in the first half of 2023. Second, we have instituted programs to reduce our inventory levels and more efficiently manage our supply chain. Initiatives include further investment to automate and integrate our planning and procurement processes while working with key suppliers to more closely match deliveries to our production schedules. This will enable us to reduce working capital and minimize inventory while maintaining short lead time. Finally, we are focused on reducing production cycle time and lowering overhead cost. This effort is directly tied to scale as we leverage our production experience to accelerate our manufacturing process. This process is further accelerated by our recently instituted continuous improvement selling system in operations, allowing us to learn more quickly from our mistakes and implement improvements quickly. Additionally, we are investing in training of our production team and in the last few quarters we have been laser focused on scaling up our Sapphire XC manufacturing. As we have stabilized Sapphire XC production we now can invest in training and infrastructure to drive efficiency. These initiatives will have the added benefit of improving overall quality and significantly reducing post production work in the factory condition. We believe this investment in operational efficiency are necessary to maintain a strong growth trajectory as well as be critical to improving margins and reach profitability. In conclusion, we are excited about our future opportunity and believe we are well-positioned to capitalize on the growing demand for high value 3D printing metal parts. We remain confident in our 2022 forecast and look forward to executing on our long term strategic vision. With that I’d like to turn the call over to Bill to discuss the financials and our guidance.

Thanks, Benny. Moving on to our quarterly financial performance, Please turn to slide 9. Revenue for the quarter was 19.6 million up to 60% sequentially and more than 160% year-over-year. The sequential increase in year sale revenue from 10.2 million to 17.6 million was primarily driven by an increase in the number of ASPs of the Sapphire XC systems shipped in the quarter. We also had a lease buyout transaction in the quarter. Recurring service revenue was in line with Q1 that we expected to increase in the second half due to higher lease and service revenue from an increased number of systems in the field. On a year-over-year basis year sale revenue was up nearly threefold from 6.1 million to 17.6 million and recurring revenue was up 90% from 1.1 million to 2 million. Gross margin for the quarter was 6% up from 0% in Q1 and in line with our forecast, Q2 gross margins impacted by a continuation of the elevated costs affecting Q1 gross margin. These included higher than planned material costs including higher shipping costs, customer pricing impacts, and higher labor and overhead costs. Support service costs also increased substantially due to investments for improved system reliability, and building out a network of service personnel. With our service network largely built out these costs are expected to stabilize for the remainder of the year. Adjusted operating expenses for the quarter, excluding stock based compensation declined slightly sequentially, to 22.5 million. R&D expenses were in line Q1 at 2.5 million as we continue to spend on product development and process technology for new products, new materials and system productivity and reliability improvements. G&A declined to 6.9 million due to frontloaded costs in Q1. Sales and marketing increased slightly to 5.1 million as a result of the growth of our original presence in the U.S. and Europe. GAAP net income for the quarter was 128 million, including a non-cash gain of approximately 154 million related to changes in the fair value of our warrants and earn out liabilities. On a non-GAAP basis which excludes these gains and stock based compensation expense net loss was 21 million and adjusted EBITDA for the quarter, excluding the same costs was also a loss of 90.8 million. I’d now like to provide an update on our gross margin expectations for the second half of the year. Please turn to slide 10. As I mentioned, Q2 gross margin was in line with our expectations at 6%. However, the very difficult supply chain conditions experienced in Q2 have changed the duration and timing of some of the factors affecting gross margin and are expected second half gross margin performance as shown on the slide, where we compare the beginning of the year and current outlooks. First, while we see no change in the total impact of launch customer pricing through the year the impact will now be spread more over the full year, as some of these shipments will shift to the second half of this year. And labor and overhead cost savings as a result of the scale up with our production rate are roughly on track with our plan. So we see only a small change to our UN 2022 forecasts on labor and overhead costs, which reflect those expected scale benefits. Where we see a clear deviation between our plan at the beginning of the year and the current outlook is in regards to our expected savings and build materials costs. The continued disruption in our supply chain has delayed our ability to realize the building material cost saving opportunities we originally forecasted. These are now expected to shift to the first half of 2023. This is driven by the following factors. In Q2 we face an environment of significant components shortages and delivery date uncertainties. In order to ensure the availability of components to meet our production and shipment goals, it was therefore necessary to place orders for significant quantities of materials ahead of production needs in order to build a safety cushion and account for potential delivery delays. While certain components were delayed, deliveries of many components came in ahead of expectations in the quarter. In addition, further contributing to inventory buildup, shipments of some completed systems were also pushed out beyond Q2. As a result of both of these factors, we now have two to three quarters of supply of most of the components required for the production of our systems. And this inventory, which was acquired at first half pricing will be used for Q3 and Q4 production. Accordingly, these higher bill of materials costs will continue to Q3 and Q4 and previously anticipated material cost savings will be delayed until first half 2023. In addition, shortages in certain critical components also required us to incur high expedited shipping costs to secure the parts we needed to meet our shipment goals. This added to the impact of building material costs on gross margin. As a result of these effects, we now expect Q3 gross margins being the same range as Q2 and Q4 gross margin will be in the range of 11% to 14%. We’ve taken a number of steps to reduce our material costs and inventory levels. We expect to start seeing inventory leveling off and decrease this quarter, and continuing to decrease in Q4. We expect build material costs to start to drop in Q1 of 2023. Specifically, given a large backlog and confidence outlook, we have recently entered into U.S. supply chain partnerships, where we leverage our scale, making higher volume longer term commitments, and in return receive reduced per unit cost and materials and spread out deliveries to reduce inventory levels. We expect to complete more of these types of deals going forward. Despite the challenges I’ve described above we remain confident in our ability to drive margin improvement in 2023 and to be roughly EBITDA breakeven late next year. Turning to the balance sheet on slide 11. We exited the quarter with a very strong balance sheet with 142 million in cash and very limited debt. Cash usage for the quarter was 44 million. Investment in working capital of 90 million was primarily driven by the increase in inventory I described before. We ended Q2 an inventory of 62 million and expect inventory to come down in the second half of the year as we draw down our stocks and staggered deliveries. CapEx was 5 million primarily related to CapEx for leased systems and the completion of our new manufacturing facility giving us the capacity necessary to meet our growth forecasts. We expect total cash usage in Q3 to be materially lower compared to Q2 driven by a lower investment in working capital. Finally, we recently increased our revolving credit and lease financing facilities with Silicon Valley Bank from a total of 18 million to a total of 45 million, giving us even more confidence that we have ample liquidity to fund our long term growth plan. I’d now like to provide our outlook for the balance of the year, Please turn to slide 12. Overall, we were pleased with our performance in the first half of the year and are reiterating our revenue guidance of 89 million for 2022. This reflects our significant visibility, strong backlog and believes that we will continue to see strong growth momentum for our technology in the market for the balance of the year. I would also like to highlight that our business continues to evolve as we launch new products based on trends in customer demand. For example, we’re seeing significantly higher ASPs forecasted offset by lower unit growth. This is driven by higher demand and forecasted for the higher priced Sapphire XC systems versus Sapphire systems. We’re also seeing a material shift in our customers mix towards existing customers versus new customers as the recurring purchase right from our existing customers is significantly higher than our initial model. Finally, our goal for the balance of the year remains to efficiently scale the company to maximize our growth while focusing on improving our profitability over the next 12 to 18 months. In conclusion, given our continued sales momentum, growing backlog, strong demand for our Sapphire XC system, and solid balance sheet, we’re well-positioned to capitalize on what we see as significant growth opportunities in the additive manufacturing market in the years ahead. With that I would like to turn the call over for questions, operator.

Thank you. At this time, we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Hi, thanks for taking my questions. I wanted to just start by asking for some of the information that you provided in previous slides. I don’t know if there’s a change in disclose, your level of disclosure that you want to give going forward. But can you tell us anything about number of shipments in the quarter, total shipment, unit shipments, number of new customers, number of total customers? A couple of my favorite slides are not in the deck here. I’m just curious about that.

Brian, that you’re right. They are not in the slide. And I appreciate that they will savor it because they are quite unique. Most companies don’t provide them. What we found is also are extremely favorite to our suppliers to our competitors. Sorry. It contains a lot of very sensitive, competitive information. And we decided to replace these metrics with more conventional metrics of backlogs bookings in the periods etc.

In the quarter, did you ship XC systems? I guess. And I’m wondering if you shipped XC systems to more than one customer? Can you say that?

Yes.

You shipped it to multiple customers in the quarter.

Correct.

And then I guess I’m just curious, you said some of the orders or shipments of the flagship customer or your strategic customer were delayed. Is there a difference in the systems? Or is there a reason why some were delayed and some weren’t?

Yes, so the reality is, as you noticed we have a very large backlog. And we have a lot of customers that are in real urgent demand for those systems and in real urgent need of those systems. And then we tried to ship even more systems, we bought inventory. And we even started on more systems with the hope that we’ll be able to ship more systems, but we just were not able to ship all the systems that we wanted. So in terms of the bookings, we had the demand to even much significant larger quarter than we had. But we just couldn’t get all the components we needed to deliver to all the customers that we needed. So we unfortunately, were not able to ship all the systems to the launch customers that we wanted.

And then my last question is a high level question, Benny this has been such a hard year obviously and continue to be such hard year unusual time. I mean, if there’s a situation where supply chain loosens up, you have all these lessons that you’ve learned about how to build the machine and the manufacturing efficiencies that come with that where 2023 things get much easier for you I mean seems like the demand is there. The challenge is really just been manufacturing it and getting the parts that you need to manufacture it. I don’t want to oversimplify it. But it seems like you’re kind of spring loading this to where it could start to look relatively easy compared to 2022 once we get through a couple more cores.

So you’re absolutely right. But I want to correct just one impression. So we do not immediately see the external supply chain condition easing up. I don’t have the visibility to predict that. I do see that our act is getting much better together. So as we are ramping up the Sapphire XC production that we will be stabilizing this production of that, we now have much more attention to invest in infrastructure activities. And specifically, we have been consolidating suppliers, and signing more strategic agreements with suppliers, where suppliers provide us larger assemblies with more quality controls at a much better cost, allowing us also to improve the cycle time in our production. So we also kind of informed our planning activities and procurement activities as well as the product management of our suppliers and the procurement. So all those activities combined, which helping us to get to a much better visibility and much better execution in dealing with the supply chain problems. Unfortunately, the supply chain problems do not disappear and every day, you will see new kind of surprises. But if you get the surprises to three months, before you need the material, it’s much better than if you get that two weeks before you need the material. So as we are getting better at that and as we are dealing with this crisis for longer we feel more confident in being able to deal with the challenges of the supply chain.

And our next question comes from the line of Wamsi Mohan with Bank of America. Please proceed with your question.

Hi, thanks for taking my question. This actually, John on behalf of Wamsi. I’m just curious, how would you characterize the current demand environment in Europe with the ongoing geopolitical conflict that’s going on Europe? Does that change the previously expected demand trajectory?

So the vast majority of our business has been in the United States. And we are at the kind of at very early growth phases in Europe. So for us, what we mostly dealing with is the fact that the vast majority of the customers in New York still don’t know us. There is a lot of questions, and there is a lot of credibility that we need to build with the market, kind of on the other side of the pond. So this has been the main driver for the fact that things take long in acquiring customers in Europe. But we see a very strong interest from the European market. We see very strong need from European customers, just the sales cycles of the first customers have been long. We also have some very good successes in Europe recently. So I don’t see the signs that Europe is kind of, we’re sitting into a recession, and the demand is dropping. It’s just that we are on this phase of proving ourselves and getting traction in this market. So these are the first successes we have in this market.

And I know you said you are not going to disclose the customer acquisition information, but if I remember correctly, last quarter, you did mention that Europe will account for a material portion of the new customer account. Would that still hold true?

Yes.

And just as a quick follow up, just want to jump over to gross margin. I know you mentioned various initiatives, to offset these macro headwinds, but if I look beyond 2022, so to speak, when do expect to reach the previously stated gross margin target of about 30%.

So I can, I will, so the initiatives that will drive the bill of material down and will help us with the gross margin. Some of them will hit in Q1. And some of them will fully get into effect in Q2. So I would predict that, by Q2, we should be at 30%. I think in Q1 will be somewhere close to that, but I think still less than 30%.

Yes. We’ve got to work our way through this high cost inventory that we acquired. We have begun to do these deals, more strategic partnerships, which will bring cost reductions but the rate that materials begin to be supplied in the fourth quarter, but it won’t really impact the P&L until the first quarter of next year and then I think we want to be careful not to give any official guidance on 2023 this far in advance but Q2 or thereabouts is a reasonable guesstimate.

And our next question comes from the line of Jim Ricchiuti with Needham and Co. Please proceed with your question.

Thank you, did you provide any additional backlog as it relates to XE versus the legacy Sapphire?

We did not provide the backlog breakdown. But the vast majority of the backlog is Sapphire XC and Sapphire XC 1MZ. we actually have a very significant Sapphire XC 1MZ backlog as well as Sapphire 1MZ backlog. But the vast majority of that is Sapphire XC and Sapphire XC 1MZ.

Thank you, Benny. Bill, appreciate the commentary on second half gross margins and how we should be thinking about it, but I may have missed it. But did you provide any color about OpEx looking out to the second half? Do we need to be…

I didn’t, Jim, but I’m happy to. Look like we think flattish to very modest growth. Most of our incremental we also will be increasing headcount. But the bulk of that incremental labor cost is going to production and customer service, which are part of gross margin, part of cost of goods sold. So the incremental labor cost hitting OpEx is pretty limited.

Are you taking any pricing actions, just say in light of the you are seeing in terms of material components and whatnot, labor?

We did not, we did not take care pricing actions. And the reason why we didn’t take price action is strategic. We believe that the market for our products and for our solution is going to increase as we drop the manufacturing costs for our customers. So we are on a mission to drop the costs of this and to provide lower and lower costs for our customers. So as we see the opportunities for dropping the cost, we prefer to focus on that and reaching the price targets that we planned for and that our customers plan for as opposed to increasing the price.

And I appreciate that Benny. And last question that I have, I’ll jump back in. As we think about the funnel for next year and building backlog everyone’s being affected by supply chain, presumably your competitors as well. Do you feel there’s any risk that some customers just given the challenges that you’re facing is resulting in perhaps some customers that are maybe?

You are there Jim?

Sorry, just that, given the supply chain challenges as you build the funnel for next year, are you seeing any signs that customers are maybe looking at alternatives for perhaps some vendors that are not facing as acute supply challenge? Or is it the backlog that you’re building looks pretty secure as you think about the first half of next year as well.

So the easy way to serve, so I will answer your question in two ways. One, the backlog is keep growing, and our penetration into the market and market share keeps growing. The easy way to think about your question is in terms of and the effect it has on customers is our lead time. And one of the reasons why we didn’t, why there is a disproportional high Sapphire XC backlog as opposed to Sapphire is because our lead time on Sapphire production is relatively short. Definitely less than 10 weeks that we can deliver to customers. Our lead times right now for customers that purchase Sapphire XC system is in the order of 16 weeks or so. So in 16 weeks, we didn’t have customers that basically said, this was too long for us, we are going to switch with someone else. So that may be the direct question to your answer.

That’s very helpful.

If the lead time was 25 weeks, that may have been different. But right now the lead time is very reasonable.

[Operator Instructions] Our next question comes from the line of Troy Jensen with Lake Street Capital. Please proceed with your question.

Hi, gentlemen, first off congrats on the nice quarter here. So maybe for you, Ben. I know you talked about contract manufacturers producing your printers. I know the contract manufacturers also target customer base for you too. So traditional, your traction that you’ve had kind of penetrating that customers.

Yes. So very significant portion of our market is to contract manufacturers. I would estimate that about half of our printers go to contract manufacturers. And we keep growing this segment. And I think that we see that a lot of repeat sales that we are doing going to contract manufacturers. We see pretty strong utilization in the last few quarters in contract manufacturers driving more purchases. So we see the segment’s growing very solid. And one of the reasons for that is that we see a lot of customers, OEMs, that made parts that do not have the capability, the will or the strategic directive to invest in vertically integrated manufacturing capability in additive, and instead really need a supply chain. So our development of a diverse copy exact scalable supply chain is extremely reassuring for those customers, enabling really for those customers to rely on a very professional supply chain. That is actually a traditional high quality supply chain that is now empowered with additive as opposed to kind of a pure play additive sort of this business that we have seen in the past.

Benny do you differentiate between contract manufacturers and service bureaus, and what I mean by that is I think of a service bureau as a machine shop, right? That’s kind of printing parts for local customers. When I think contract manufacturers I’m thinking Jabil and Flextronics and some of the big players out there. Do you differentiate when you talk about?

Yes. I do. I’m glad that you asked me because kind of when I talked about this with our team and with our customers, my definitions are slightly different. So to me contract manufacturers are people that are doing built to print work for production purposes for end users. And yes, in some cases, this could be very large companies like Jabil and Flextronics, and in some cases, this can be $100 million or $50 million companies that are employing sophisticated CNC machines with a lot of quality control and to me, that’s what I call contract manufacturers. What I think of service bureaus, when I think of service bureaus is companies that employ fleets of 3D printers. And the vast majority of those actually will have a negligible amount of machining capability or CNC machining, as well as quality controls, as well as manufacturing experience and real life production experience. So when I say contract manufacturer, we are focused on the first group of people and we are really not working with the second group.

And now on the 1MZ, I mean, I’m pretty sure it’s going to be the largest customer but can you just confirm that you’ve got him multiple customers for the MZ?

The Sapphire 1MZ or Sapphire XC 1MZ?

The XC.

Okay XC 1MZ has been ordered by a number of customers. We announced it last quarter. And first shipments of the system will be this quarter. The first two shipments will be to the same customer. And then next quarter will be for few more customers.

Well, congrats on the good results and keep up the good work.

Thank you. At this time, we have reached the end of the question and answer session, and I’ll now turn the call back over to Benny Buller for any closing remarks.

So I want to thank everyone on the great questions and listening to our earnings call. We are extremely excited going forward. And we’ll be glad to follow up with anyone specifically with more questions. Thank you, everyone.

Thank you, everyone. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.