Velo3D, Inc. (NYSE:VLD) Q3 2023 Earnings Call Transcript
Velo3D, Inc. (NYSE:VLD) Q3 2023 Earnings Call Transcript November 6, 2023
Velo3D, Inc. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.08.
Operator: Good afternoon and welcome to Velo3D Third 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.
Bob Okunski: Thanks, Alicia. I'd like to welcome everyone to our third quarter 2023 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 certain key strategic priorities for 2023. Following Benny's comments, Bernie Chung, our CFO, will then review our third 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 our today's earnings press release for the appropriate GAAP to non-GAAP reconciliations. Finally, to enhance this call, 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 Benny Buller, CEO of Velo3D. Benny?
Benny Buller: Thanks, Bob. And I'd like to welcome everyone to our third quarter earnings call. Prior to starting our review of the quarter, I would like to provide some context for my upcoming remarks. As we have discussed many times, we firmly believe that we are just beginning to see how additive manufacturing is rapidly changing the way high-value metal parts are produced across many industries. While our ability to capitalize on this opportunity has driven our industry-leading growth over the last 2 years, we now realize that our focus on top line revenue has come at the expense of customer service profitability and cash flow. Essentially, we grew too fast. Given the current conditions, we have made a strategic decision to focus our efforts on optimizing free cash flow before resuming our strong growth emphasis.
As a result, last month, we initiated a company realignment to reduce costs to rebuild our bookings pipeline and recommit ourselves to ensuring our customers are successful. I'll provide greater detail on these topics later on in my remarks. We strongly believe that this strategic realignment will enable us to achieve sustainable profitability in 2024. With that in mind, I would like now to discuss the specifics of our third quarter. Please turn to Slide 3. As we highlighted last quarter, 1 of our key initiatives for the balance of the year was to show measurable progress on improving our free cash flow. Our successful efforts in this area were reflected in our Q3 results as we reduced our sequential free cash burn by more than 30% to $23 million.
We expect further quarterly improvement through 2024, given ROE alignment. In relation to revenue and bookings, we continue to see solid customer demand for the third quarter as revenue rose 26% year-over-year. However, revenue declined sequentially due to a single delayed shipment at the end of the quarter. Third quarter bookings were $11 million as we saw bookings delays with both new and existing customers. I'll provide greater color on this later on. As a result of our Q3 bookings, we are reducing our fiscal year 2023 revenue guidance to $91 million to $103 million. As I mentioned at the beginning of this call, we have initiated a strategic realignment that we believe is critical for us to achieve our free cash flow and profitability goals in 2024.
Some of the key initiatives include; a 40% reduction in cash expenses through the first quarter of next year; the implementation of a new go-to-market strategy to rebuild our bookings pipeline for 2024 deliveries. As a result, we expect the fourth quarter to be a transition quarter as we implement our new initiatives. Given that we expect to see the full benefits of these programs in the first quarter of 2024, we believe we will be in a much stronger position in time 2024 to drive free cash flow and long-term profitability. I would now like to highlight our key for strategic initiatives for the fourth quarter. Please turn to Slide 4. First, we have embarked on a significant expense reduction program across the entire company in order to align our cost structure with current business conditions.
Second, increased focus on optimizing our inventory and reducing our working capital needs. As a result, we have posted all new inventory procurement. It is important to mention that we have significant inventory on hand, allowing us to supply all the systems we believe we will need to shape in Q4 and Q1. However, we will be much more cautious procuring inventory for production going forward with purchases based on backlog growth instead of forecasts. Third, implementing programs to materially improve customer satisfaction and system performance which have direct impact on increasing existing customer demand. Finally, we have implemented a number of initiatives to improve our sales execution that we believe will be vital to rebuilding our bookings pipeline.
Let me now provide some specifics around each initiative. Please turn to Slide 5. In relation to reducing expenditures, we expect to lower our total quarterly cash spend by 40% in Q1 '24 compared to Q3 '23. We will accomplish this by lowering cash OpEx and fixed costs. Primary drivers of this reduction include our recently announced 20% head count reduction as well as cost savings associated with our facility consolidation that should be completed by the end of this year. For inventory and working capital spend, we have now paused the purchase of all new inventory as we are shifting to procurement based on current backlog rather than a forecast-based production approach. We will also be conducting a comprehensive inventory review by the end of the year to help us identify any additional changes we need to implement to maximize cash.
I want to reiterate again that this strategy will not affect our ability to ship products in Q4 and Q1. However, we will procure additional material for Q2 and beyond only once we will have clear buildup of backlog and a reduction in inventory requiring us to procure more material to meet the bookings and backlog demand for H2 '24. Additional programs we have implemented include an ROI-based evaluation of new research and development projects to prioritize our spend to only those projects that meet a certain internal return threshold. Finally, we are optimizing all of our corporate G&A expenses as we look to prudently manage our discretionary spending levels. Next, I'd like to address 1 of the most important initiatives ensuring customer success.
This success is critical as it is the primary driver of follow-on orders from existing customers. Please turn to Slide 6. First, some backdrop. We saw significant growth in 2022 as revenue tripled and we more than doubled our customer base. This reflected strong customer demand for our systems as we successfully launched 3 new products in the Sapphire family during the year. However, this rapid growth affected our ability to properly support our base as our customer support organization didn't expand quickly enough to keep pace with our significant installed rep. We were also impacted by insufficient field service training on the newly released products. This led to issues in the field taking longer than expected to resolve. As a result, we saw a significant drop in customer satisfaction which led to lower-than-anticipated existing customer demand in bookings in 2023.
We have already made multiple changes in our customer support organization to address this issue and we are seeing early success. For example, we are reallocating resources to grow and strengthen our customer support organization, including adding additional head count and forming a dedicated issue resolution teams to resolve issues quickly. We have also increased investment in our new product training programs to ensure our field service team is up to date on all recent changes. Finally, we have adjusted our workflows to drive a closer partnership between engineering and our customer support teams in order to quickly identify and address transitions. Our success depends on our customers' success. We are already seeing progress as a result of these changes.
For example, in the last 2 months, we have seen a step function improvement in the performance of our new products in the field. Additionally, customer satisfaction is increasing and we are starting to see a turnaround in demand for systems from existing customers. I can confidently report that our determined actions are yielding results. We will remain focused on ensuring the success of our customers as we look to improve the efficiency and sustainability of our systems to meet the growing means of our customers. Moving on to Slide 7. I'd like to highlight what we are doing to improve our bookings success that has lagged forecast over the last 3 quarters. As I just discussed, our bookings growth has been impacted by slower-than-expected existing customer sales this year.
Additionally, bookings growth was affected by weaker new customer acquisitions over the same period. We believe the slower pace of new customer bookings is due to a number of factors, including the lack of an effective new customer sales process as well as proof of concept execution. While these issues were offset given our strong existing customer demand last year, they became more pronounced as repeat business declined in 2023. As a result, we made the strategic decision to restructure our sales organization to significantly improve execution and increased bookings. This started with the hiring of Michelle Sidwell as our new EVP of Sales in our effort to build a world-class sales organization. Michelle brings a wealth of sales experience to the company and has already instituted a new disciplined sales process that is already showing early success.
A key part of this process is to refocus our team on markets where we have had significant success in the past. These sectors include space, where we are the leading AM suppliers to many of the top launch companies. Additionally, the opportunity in defense is significant and the addition of the 3 new defense customers earlier this year reflects this potential. Finally, leveraging our growing footprint in the aerospace sector. We believe these are the right sectors to be addressing given our experience and significant customer footprint. We are also developing partnerships to expand our reach in certain international markets, as well as potentially partnering to develop new materials and applications. Finally, we are working closely with our customers and internal teams to refine and clarify our value proposition to drive improved sales economics and productivity.
In summary, we are pleased with our progress to date. We expect that by combining these sales initiatives with our customer satisfaction focus, we will start to see a rebound in our customers' bookings. On Slide 8, we are providing a brief summary of our strategic initiatives that we believe will drive free cash flow and sustainable profitability in 2024. We expect Q4 to be a transition quarter as we execute on our realignment initiatives. Our business is now rightsized for current conditions and our cost reduction programs will result in quarterly cash savings of 40% starting in the first quarter of next year. We have also adjusted our procurement and manufacturing plan to maximize free cash flow. Additionally, our investments in improving our customer service are already showing success which will drive growth in existing customer sales.
And finally, our new go-to-market strategy, disciplined sales process and focus on our strong markets will provide a strong foundation to rebuild our backlog and pipeline for 2024 success. In closing, we remain excited about our future opportunity and believe our realignment puts us in a much stronger position to achieve our profitability goal next year. With that, I would like to turn the call over to Bernie to discuss our financials and provide our guidance. As we announced, Bernie was appointed CFO last quarter and would like to -- and I would like to welcome him to the team. Given his operational and financial experience, he is the right person to help lead us through the next phase of our success. Bernie?
Bernie Chung: Thanks, Benny. Welcome, everyone, before getting started. I want to say how excited I am to be joining the executive team. I see a significant opportunity in front of us and looking forward to working with the team to bring about the changes needed to really showcase Velo3D's value. Moving on to our quarterly financial performance, please turn to Slide 10. Third quarter revenue of $24.1 million was slightly below our Q3 guidance range due primarily to a delayed system shipment. Compared to Q2, Q3 year sale revenues declined slightly due to the shipment delay and lower transfer pricing resulting from mix. Transaction pricing; recurring and service revenue for the quarter rose sequentially to $2.4 million. On a year-over-year basis, year of sale revenue was up 31% from $16.5 million and recurring and service revenue was in line at $2.4 million.
Gross margin for the quarter was 7.2% and down sequentially. This decline was driven by reduced system volumes as well as a lower average selling price due to product mix and higher inventory adjustments. We expect gross margin to recover in Q4 with further quarterly expansion through the end of 2024. This improvement will be driven by an expected improvement in ASPs as we will benefit from a shift back in our product mix to a higher percentage of higher-priced Sapphire XC shipments, improved efficiency in our manufacturing operations and a reduction in bill material costs as we receive more materials under new long-term lower cost supply contracts. We will also benefit from increased volumes and the investments we have made will drive labor and production efficiency.
We expect labor overhead and other factory costs to decline as a percentage of revenue in 2024. Non-GAAP operating expenses for the quarter which excludes stock-based compensation, were $20 million, down approximately 10% sequentially. The decrease in operating expenses was primarily driven by a $2.6 million reduction in research and development as we rationalized a number of new product development programs. Specifically on this basis, R&D expenses declined to $9.8 million. G&A rose $1 million, primarily related to our realignment and sales and marketing was stable. As Benny mentioned, we expect overall costs to decline 40% through Q1 '24. GAAP net loss for the quarter was $17.1 million, including a noncash gain of approximately $8.7 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 $18.9 million. And adjusted EBITDA for the quarter, excluding the same items, was a loss of $16.3 million. Finally, as Benny mentioned, bookings for the quarter was $11 million. We have instituted a number of initiatives to drive free cash flow improvement. I wanted to briefly discuss our recent success in this area. Please turn to Slide 11. This chart breaks out our cost structure by operating costs as well as fixed manufacturing and service costs. As you can see, we have made significant progress in improving free cash flow as we materially reduced our overall cost in Q3. This improvement was primarily driven by lower operating costs which declined by more than 30% sequentially as we saw the initial benefits of our efficiency initiatives that we implemented over the last 6 months.
Looking forward, we expect a similar decline on a percentage basis in the fourth quarter, given our realignment followed by additional savings in the first half of 2024. As a result, we believe we will achieve free cash flow breakeven, excluding financings in the second quarter of next year. Finally, we exited the quarter with $72 million in cash and investments. Given our free cash flow improvement success to date, we firmly believe we have more than enough liquidity to achieve our profitability goal in 2024. Before turning to guidance, I would like to review the onetime costs associated with our realignment strategy as well as additional cash -- Q4 cash flow highlights. Please turn to Slide 12. We now expect severance costs related to our recent workforce reduction to be in the range of $1 million to $2 million, down slightly from our previous estimates.
As Benny mentioned, we are in the process of consolidating our office and manufacturing footprint into a single facility at our headquarters in Fremont, California. Completion is expected by the end of the year. As a result, we expect to incur a noncash charge in the range of $2 million to $3 million. We will also begin our annual fiscal inventory review this quarter as well as reviewing our inventory valuation methodology. Additional Q4 cash flow highlights include a onetime cash inflow in the range of $3 million to $6 million resulting from a lease termination as a customer has decided to buy out its existing lease. Additionally, earlier this year, we announced the partnership with PhysicsX which included a seed investment. As a result of their recent funding round, we elected to redeem our $3 million investment while maintaining our partnership.
Finally, we expect fourth quarter cash usage in the range of $15 million to $18 million, including onetime payments for severance and facility consolidations. I'd now like to provide our outlook for Q4 and fiscal year 2023. Please turn to Slide 13. As we mentioned, we expect Q4 to be a transition quarter as we execute on our realignment initiatives. We expect fourth quarter 2023 revenue to be in the range of $15 million to $27 million and gross margin to be in the range of 5% to 17% excluding nonrecurring items. Non-GAAP OpEx will be in the range of $15 million to $18 million, down from $20 million in Q3 as we start to see the initial benefits from our realignment. Our updated full year 2023 guidance is as follows: we now expect revenue to be in the range of $91 million to $103 million.
We expect gross margin for the year to be in the range of 9% to 12%. Non-GAAP operating expenses in the range of $78 million to $81 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. Our strong balance sheet and improving cash flow gives us significant runway to achieve sustainable profitability in 2024. With that, I'd now like to turn the call over for questions. Operator?
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