Velo3D, Inc. (VELO) Q1 2024 Earnings Report, Transcript and Summary

Good afternoon. Welcome to the Velo3D First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'll now turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at Velo3D Corporation. Thank you, sir. You may begin.

Thank you. I'd like to welcome everyone to our first quarter 2024 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, Hull Xu, our CFO, will then review our first quarter 2024 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 2023 10-K and additional 2024 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've also posted a set of PowerPoint slides, which we will reference during the call on the Events & Presentations page of our Investor Relations website. Before we get started, I would like to provide some brief comments related to the strategic review we announced in the fourth quarter. This comprehensive process remains ongoing, and 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 a 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'd like to turn the call over to Brad Kreger, CEO of Velo3D. Brad?

Thanks, Bob. I'd like to welcome everyone to our first quarter earnings call. As we mentioned last quarter, we initiated company realignment to reduce costs, rebuild our bookings pipeline and recommit ourselves to ensuring our customers are successful while instituting a culture of quality, efficiency and profitability. Our Q1 results reflect the continued execution on these priorities as we made significant progress in several key areas with more to come this quarter. Our goal of achieving sustainable profitability by year-end remains unchanged. With that in mind, I'd like to discuss the specifics of our first quarter. Please turn to Slide 3. Overall, we met our revenue guidance for the quarter and are now seeing the benefits from the new go-to-market strategy we implemented last year. Q1 bookings improved measurably on a sequential basis, and this momentum is carrying over into the second quarter giving us significant visibility for this quarter. On the expense side, the successful implementation of our aggressive cost reduction programs over the last 6 months is yielding results as OpEx declined by 15% versus Q4 and 30% year-over-year. We remain focused on prudently managing cash and expect quarterly OpEx to continue to trend down for the balance of the year. We completed our shift to a customer-driven model in both sales and support, and we continue to make material progress on improving system reliability in the field. More on that topic later. Finally, we further expanded our pipeline during the quarter with a particular emphasis on our core verticals of defense, space and aerospace. We were pleased to see a strong rebound in our Q1 bookings as our value-based selling approach is gaining traction. Given this success, we believe we have significant visibility to Q2 revenue, achievement and shipment goals. Specifically, we continue to see recovery in existing customer orders given our reliability initiatives, with approximately 50% of Q1 bookings coming from our current customers. Additionally, on the new customer front, we increased our footprint in defense with the addition of 3 new customers in this sector during the quarter. We exited the quarter with $22 million in systems backlog with Q1 bookings totaling $17 million, the majority of which came from our core end markets. As a result of this visibility, we see sequential revenue growth of more than 30% for the second quarter. Our cost control programs are working well and remain on track to achieve our cost reduction goals for the second quarter. Finally, given the success of our realignment initiatives, along with our rebound in bookings, we remain well positioned to achieve our goal of cash flow breakeven by the end of the year. As we discussed last quarter, we instituted a new go-to-market strategy over the last 6 months in order to rebuild our bookings momentum. I would now like to highlight some of our completed initiatives that have led to our recent successes as well as a few initiatives we plan on implementing to sustain this momentum. Please turn to Slide 4. We continue to benefit from our shift to a customer-driven model as the mix between new and existing customers has returned to our historical pattern. While this mix can fluctuate due to timing, we expect this split to remain consistent for the balance of the year. As part of our new strategy, we instituted several programs to simplify and improve our fundamental sales process. This includes initiatives focused on improving pipeline qualification, along with leveraging our value-based approach versus a pure technology sell. As a result, we saw a significant improvement in our win rate for the first quarter. Additionally, we've also narrowed our customer focus to those markets where we've had significant success. These include the space and aerospace sectors, but more importantly, increasing our footprint in defense, a market that we remain very excited about. Again, we see a huge opportunity in defense in areas such as hypersonics and legacy Park production. We have been and continue to be in discussions with the DoD leadership about how we can be a leader in their transition to AM. Looking forward, we are investing the resources required to fuel new market expansion by leveraging our experience in sectors such as space to open new application areas in both aerospace and defense. We are also exploring new pricing and packaging models to drive growth while reducing overall production costs by improving our manufacturing and installation efficiency. Finally, we started a program working directly with the supply chain of key defense primes to better position the company as a long-term trusted partner to our defense customers. This has already paid off as we continue to receive orders related to the $825 billion Defense Spending Bill, which was approved in late March. While we're excited about the growth potential given our go-to-market changes, these efforts will not come to fruition without executing on our internal realignment initiatives to position the company for success. I'd like to briefly provide an update on the 2024 strategic priorities we laid out. Please turn to Slide 5. We continue to execute on our quality enhancements as we saw a 40% sequential improvement in both days to install and labor related to our XC installation efforts. This was made possible through the success of key initiatives that we launched in the second half of last year, focused on improving the quality of our printers and streamlining installation processes. We are most proud of the customer experience and success improvements we've accomplished in the first quarter. We accelerated the rollout of reliability upgrades to the field and established a regular cadence of providing reliability improvement updates to our customers. Additionally, our pipeline continues to fill with qualified leads as we've started to rebuild our backlog exiting the first quarter at $22 million. This success demonstrates our customers value our technology and that we are successfully addressing the reliability issues in the field. Finally, to reiterate, we further reduced our cost structure by 30% year-over-year and remain confident that we see a clear, executable path to cash flow breakeven in the second half of 2024. Before turning the call over to Hull for financials, I wanted to highlight some of the recent manufacturing and customer successes we've had and why customers continue to choose Velo3D 3D technology for their AM needs. Please turn to Slide 6. On the left, we internally designed and built a turbo fan for demonstration purposes to highlight our ability to print parts with significant low angles and overhangs without support, something our competitors have a difficult time matching. This part was built on a Sapphire XC in aluminum and is one of the largest CP1 AM parts ever built in this material. This part was done as a single piece in less than 3 days as compared to traditional casting processes that could take weeks or months while also requiring significant upfront investment and typically yielding lower results. In the middle, we are highlighting our leading position in heat exchanger production as our technology is particularly well suited for the complex nature of these parts. For example, one of our partners, a large semiconductor equipment company, is using our technology to produce heat exchangers for use in next-generation AI chip production. Finally, on the right, we win head-to-head with other AM companies in a surfacing trial for hypersonic ramjet. By printing this part at our system, the customer was able to reduce the cost by $20,000 and significantly reduce their lead time from 6 weeks to just days. On the competitive front, we were able to achieve this result 3x faster than our closest competitor and with the highest surface quality across all participants in the trial. In closing, I'm very encouraged with the progress we have achieved so far and remain excited about our future opportunities. While there is still a lot of work to be done, we firmly believe we have turned the corner and we are in a much stronger position to achieve our 2024 goals. With that, I would like to turn the call over to Hull to discuss our financials and provide our guidance. Hull?

Thanks, Brad. Before reviewing our financial results, I wanted to say how excited I am to be part of the Velo3D team and share the reasons why I joined Velo3D at this juncture. As I took some time between my last job and Velo3D, I did some thinking as to what I was looking for in my next adventure. I was looking for a company with leading-edge technology and products, serving markets that are ready to adopt and have high demand for this technology. I was also looking for a company with a professional management team wanting to grow the business at a rapid pace. I believe I found it Velo. With any new technology being turned into successful products, there's always a period of growing pain. I believe the current Velo team has identified the challenges and are actively addressing them. While only being here a few weeks, I'm already impressed with the Velo team's dedication, focus and desire to make this company a successful and profitable enterprise. I'm looking forward to helping Brad and the team execute on our realignment initiatives. As Brad mentioned, we are making significant progress in a number of areas, and I'm encouraged with our success to date. While there is still a lot of work to do, I believe we have turned the corner and are now well on our way to achieve our 2024 plan. Moving on to our quarterly financial performance. Please turn to Slide 8. First quarter revenue was $10 million, up significantly from Q4 '23 and in line with our guidance. The sequential improvement was entirely driven by increased shipments as we started to benefit from our new go-to-market strategy that was implemented in Q4 of '23. Gross margin for the first quarter was negative 29% and primarily due to lower fixed cost absorption. We expect positive gross margin in the second quarter given increased system shipments, improvement in our balance of material costs and ongoing benefits from our new long-term supply contracts. We also made significant progress in reducing our operating cost structure in the first quarter as non-GAAP OpEx declined 15% sequentially to $14 million, excluding the costs and charges related to our realignment initiatives. The decrease in operating expenses reflects a reduction in all expense categories and savings related to our realignment initiatives. Specifically, R&D expense has declined by $4.8 million, G&A declined $2.1 million and sales and marketing was down slightly compared with last quarter. We expect OpEx to decline by over 10% in the second quarter with additional quarterly reduction for balance of the year. GAAP net loss for the quarter was $28.3 million, including a noncash charge of approximately $3.1 million related to changes in the fair value of our warrants and earnout liabilities. On a non-GAAP basis, which excludes these noncash charges and stock-based comp, net loss was $20.2 million. Adjusted EBITDA for the quarter, excluding the same items, was negative $11.7 million. As we discussed, we expect to see a positive gross margin in the second quarter with continued improvement as we go through the year. I want to briefly reiterate the 4 key drivers we highlighted last quarter that will drive this improvement. Please turn to Slide 9. First, we're just starting to benefit from our bond cost reduction initiatives that we started in Q4. We have identified and started to implement approximately 25 separate programs to lower our Sapphire XC cost by more than 30% by the end of the year. Second is our continued product mix shift to our larger format, higher-priced Sapphire XC systems at a reduced bond cost. We have also added programs to improve the monetization of our maintenance and parts recurring revenue streams as well as expanding our consumable business such as power sales. Third 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 agreement in a shift to utilizing a higher number of system subassemblies. Finally, improving field support efficiency, which is directly tied to customer system reliability. While this has been a drag on gross margins for the past couple of quarters, 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 in our operating expense reduction initiatives. As we highlighted, we have significantly reduced our cost structure over the last 6 months and expect this to continue to trend down for the balance of the year. We expect Q2 OpEx to decline by more than 10% as we see continued benefits from a more efficient spend in our sales and marketing and G&A functions with additional reductions in R&D given our product road map. Finally, we are also evaluating additional cost reduction measures. Now I'd like to provide our outlook for fiscal year 2024. Please turn to Slide 11. As mentioned, we expect sequential quarterly improvement in revenue, margin and operating expenses in 2024 as we start to benefit from our realignment initiatives. For Q2, we expect sequential revenue growth of greater than 30%. Our full year 2024 guidance is as follows: we expect revenue to be in the range of $80 to $95 million, gross margin improvements for the balance of the year was gross margin of approximately 30% in the fourth quarter of 2024, non-GAAP operating expenses in the range of $40 million to $50 million. In conclusion, we are focused on executing a realignment of strategies with a clear path to profitability through improvements in operating efficiency, margin and cash flow. We continue to believe that we are well on our way to achieve sustainable profitability as we exit 2024. With that, I'd like to turn the call over to questions. Operator?

[Operator Instructions] And our first question comes from the line of James Ricchiuti with Needham & Company.

So you're suggesting a significant improvement in gross margin, I guess, getting to a positive gross margin Q2 and that's at around $13 million or so of revenue. So what I'm trying to understand is what are some of the levers that are going to generate that kind of improvement? Is it -- I mean, will you get enough manufacturing absorption to get to a breakeven gross margin or for those revenues?

Jim, this is Hull. Yes, that is the plan. As we fill out the factory floor, some of the fixed costs will be absorbed by more system shipments. That will help on the gross margin side. So yes, you're exactly right.

And you can get that kind of improvement just even with still, I would say, sequentially, it's a healthy level improvement in gross margin, but you're still at a relatively low level. So it's just coming from manufacturing absorption. Are there some other components to that? It's just puzzling to me when I look at where you ended up coming in at gross margin for Q1.

Yes. And as we build more systems, we are able to utilize some of the less expensive inventories that we have on hand that also help on the margin side. So more system shipments, overall much better for us.

Okay. Okay. And wondering how we should think about cash burn in the current quarter? Any color you could provide?

So OpEx for the last quarter was non-GAAP OpEx was $14 million and change. We expect about 10% reduction sequentially.

And our next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

This is Matthew on for Brian. Can you quantify a little bit more widely the improvement in printing machine downtime at your installed base over the last 6 months? And are the majority of your customers now evaluating purchasing new systems? And then one more, like in that same vein, can you comment specifically on whether you're seeing a return in demand from your largest customer from 2022, which dropped down in 2023?

Sure. So in terms of customer reliability, if we don't provide details on specifics of numbers. What I could say is we've made material improvements for our customers, right? And so when we're talking to our customers and then looking at placing orders for additional systems, they're typically looking at being able to achieve, right, with their existing systems the throughput and uptime and utilization values that meet their economic models, right, for originally purchasing the system. And so I think what we're seeing is we're helping customers get to that point where their models are valid and they feel comfortable that making additional investments will continue to deliver that kind of a result.

I'll add one thing on the customer service side. We've been able to address more issues than they come up. So I mean that's definitely a good trend, right?

Yes. All right. And then one more, just a similar question as it relates to government purchasing. On this end, we thought the concern was reliability and that they -- the contract to reevaluate when that's fixed. Can you provide any updates related to the government product evaluation or any ongoing testing in that vein or any communication?

So I mean, in terms of government spending, the way that comes to us is typically indirectly, right? So you have a number of government programs, hypersonics or various programs coming through defense. And these are ultimately being serviced by the defense clients and the defense primes are leveraging contract manufacturers in most cases that are the customers utilizing our technology. So if you look at customers like [ Avio ] that we added at the end of last quarter, that's directly tied to defense and supporting defense pins and ultimately, government spending. But again, it's coming to us kind of indirectly through that supply chain. So I'm not sure if I -- that kind of addresses your question, but the valuations being are ultimately being done by contract manufacturers who are guided to us or directed to us by, again, the prime and the government programs.

I think, additionally, our effort has been paying off, right? You saw that we announced 3 new customers just in the defense sector.

And this is an area we are pretty -- seeing a lot of traction, right? It's a unique market. Defense is clearly ramping up and it's something we see as a tailwind for us throughout 2024 and going forward.

Ladies and gentlemen, this will conclude our question-and-answer session. And I'd like to turn the call back to Brad Kreger for closing remarks.

Thank you. Yes, I want to thank everybody for attending and look forward to meeting with you again at the end of next quarter. I continue to be very optimistic for the balance of 2024. Quite pleased with the progress we've made in the first quarter. And again, with the sort of secular tailwinds from defense behind us, we are well positioned to achieve our plan for 2024. So thanks again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.