Velo3D Inc
NYSE:VLD
Earnings Call Analysis
Q4-2023 Analysis
Velo3D Inc
The company significantly transformed its go-to-market strategy, pivoting from an engineering-led sales model to value-based selling. This strategic shift aims to extend market reach beyond early adopters. A testament to future prospects, cost reductions from new supplier relationships and manufacturing enhancements began contributing to broader gross margin expansion efforts. Reinforcing customer satisfaction is paramount, with enhanced field service and training programs to reduce product reliability issues and foster organic growth through repeat sales. Cost discipline remains a cornerstone with progressive reductions in operational expenses (OpEx) and the completion of cost realignment efforts, setting a firm course to achieve a cash flow break-even target in the latter half of the year.
Revenue stood at $2 million, influenced by diminished system sales and strategic realignment disruptions, with year-over-year consistency in Europe sales and recurring revenues. The quarter suffered a significant negative gross margin, attributable chiefly to lower system volumes and an impactful $27 million inventory charge. However, strides in reducing OpEx by over 15% sequentially and a roadmap to slash OpEx by 30% in Q1 2024 signal a strong resolve to bolster margins. While a non-GAAP net loss of $61.1 million illustrates current challenges, initiatives to lower material costs, optimize product mix, and enhance operational efficiency underpin the commitment to improving gross margin throughout 2024, with a confident outlook for free cash flow breakeven, excluding financing, in the second half of the year.
Looking ahead, the company forecasts an encouraging trajectory with projected 2024 revenues between $80 million and $95 million and expected improvements in operating efficiency, margins, and cash flow. Gross margin projections align with these ambitions, aiming for a 20% to 30% range throughout the year and targeting approximately 30% by the fourth quarter. Non-GAAP operating expenses are anticipated to lie within $40 million to $50 million. These projections are built upon the company's strategic realignment, focusing on profitability and a clear path to achieving sustainability in the financial constructs of the business in 2024.
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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'll now turn the call over to Mr. Bob Okunski, Vice President of Investor Relations at Velo3D Corporation. Thank you, sir. You may begin.
Thanks, Tiago. 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 fire 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 Krieger, CEO, of Velo3D. Brad?
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 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 our sales methodologies 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 3 to 6 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. 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 6 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 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. 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 U.S.-based supplier of large-format metal AM solutions that has unique capabilities in printing complex internal geometries required for our customers' most demanding applications. Moving on to bookings. We booked 5 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. We were pleased to see this momentum has carried over into Q1 as we booked more than $15 million in orders since the last 2 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 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 the AAM market leader as we added NASA and Avio as customers in 2023, for example. This leadership position is 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 payload. 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 1 year using our technology. We now count 9 North American launch companies as customers, with many of these customers reaching critical mass over the next 2 years given recent successes and announced launch schedule acceleration. 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 being utilized for legacy Park procurement. We have been and continue to be in discussions with DoD leadership about how we can be a leader in their transition to AAM. In addition to our discussions with the U.S. government, we are seeing strong demand in this industry as we added 3 new defense customers in 2023, bringing our total to 9. Customers include Kratos Defense, Becel, Ohio Ornate and Lockheed Martin. 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 1 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 Art 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 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 black box parameter set, making it more efficient for customers to use their existing designs and scale 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. 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 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 in 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 #1 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. 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 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 6 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 their 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.
Thanks, Brad. 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 system sales due to the decline in second half bookings as well as the sales disruption caused by our realignment initiatives as we position the company for success in 2024. On a year-over-year basis, both Europe 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 of material costs, minimal working capital needs to benefit from our consolidated supply contracts as well as operational and manufacturing efficiencies. We also made significant progress on reducing our 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 and 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 noncash 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, 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 want to briefly discuss the 4 key drivers of this improvement. Please turn to Slide 9. Firstly, are being -- 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 Sapphire XC costs 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 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 sales. 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 the 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 6 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 road map. 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 trend debt. We also raised $18 million in an equity transaction in the fourth quarter. Realignment expenses, including sales 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 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'll 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 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. Non-GAAP operating expenses in the range of $40 million to $50 million. In conclusion, we are focused on executing our realignment 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?
[Operator Instructions]. Our first question comes from James Ricchiuti with Needham & Company.
Just when we think about the improvement you're anticipating looking at to 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 revenues?
Yes, great question. At a high level, roughly between $25 million to $30 million a quarter to kind of fully realize the gross margin targets that we set out for ourselves. 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 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 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.
Got it. Yes...
it's Benny. Just to also add 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. So this will also help drive some of that gross margin expansion in 2024.
Got it. 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 in commercial 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 the sort of mid-December.
Yes. The bookings 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 end of production and accelerated launch schedules. A good portion of that, roughly 1/3 -- a little over 1/3 was in the defense sector. And so again, when we're 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 2 -- probably the 2 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, customers in those segments.
Have you had -- 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 yes 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?
So we've had machines come back to us off lease at the end of their lease term. And so there is a resell market, and we've been able to resell each 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 systems get to the end of their lease cycle.
And there are no further questions at this time. I'll turn the floor back over to Brad Kreger for closing remarks.
Yes, 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. Have a good day.