Velo3D, Inc.
Q3 2021 Earnings Call Transcript

Published: 9 Nov 2021

[Operator:]

Good day ladies and gentlemen, and welcome to the Velo3D Reports Third Quarter 2021 Financial Results Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mr. Bob Okunski. Sir, the floor is yours.

[Bob Okunski:]

Thank you. I'd like to welcome everyone to our third quarter 2021 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, our strategic view on 2021 as well as an update on our growth initiatives for 2022 and beyond. Following Benny's comments, Bill McCombe, our CFO will then review our third quarter financial results. As a result, 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 our most recent SEC filings related to our transaction. 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 today, as well as today's 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 and presentations page of our Investor Relations website. With that, I'd like to turn the call over to Benny Buller, CEO of 3D. Benny?

[Benny Buller:]

Thanks, Bob. And I'd like to welcome everyone to our first earnings call, as a public company. We are very excited about the future of Velo3D, as we believe our technology will rapidly change the way mission critical parts are manufactured across multiple industries. Before we review our third quarter performance, I would like to provide a brief overview of the company and why we see a tremendous opportunity for growth, as we continue to push the boundaries of what is achievable with metal additive manufacturing. Please turn to slide four. I founded Velo in 2014 on the belief that the 3d printing technology at the time was ill suited for the production of metal parts given its limited capabilities and production quality. Over the next four years, we redefined 3d printing by developing a scalable solution to deliver complex high value mission critical parts and enabling engineers to design and build the parts they want. We do this through our ability to virtually eliminate support structures during the build process which significantly enhances design freedom and removes a key barrier to creating better products. Our complete end-to-end solution which manages the build process from pre-production through quality control offers our customers across a number of industries a wide breadth of design capabilities to meet the most demanding parts structures and geometries. Looking forward, we see a significant market opportunity in excess of $20 billion by 2030, as our technology enables us to address that part of the high value metal parts market that is not accessible by our commodity AM competitors. This advantage is reflected in our strong growth since 2018 as well as our customer base, which boasts the leaders in space, aerospace, energy and contract manufacturing industries. I firmly believe we have barely scratched the surface of the high value metal parts market, as customers transform the respective industry by creating products that were previously thought impossible. I would now like to talk briefly about our end-to-end manufacturing solution. Please turn to Slide five. Our end-to-end manufacturing solution is the foundation enabling the breakthrough in manufacturing capabilities and quality. This solution includes our Flow; Print Preparation software, the Sapphire, family of printers, the Assure, Quality Control software, and our unique Intelligent Fusion manufacturing process. At the heart of our solution is a proprietary Intelligent Flow software platform that optimizes the printing process for each individual feature of every part and enabling our customers to produce the most sophisticated bugs in the industry. Flow is prescribing locally the manufacturing recipes that will be executed by Sapphire. To be able to execute the recipe as described by Flow, we had to invent a number of unique subsystems that are required to implement our sophisticated recipes. Those subsystems are protected by a vast IP portfolio. Some of the recipe we developed are very hard to control, requiring us to invent a whole set of sensors and process metrology that monitor the build process and maintain it within its intended parameters. Our Assure software platform uses those sensors and metrology to provide a quality validation report for every part produced on our Sapphire systems. In summary, this approach provides customers with an unprecedented level of design freedom, and quality control throughout the build process with real time feedback, and a significantly simpler overall process. We will soon have three printers in our portfolio. First is our base Sapphire model, which has been in production since 2018. We currently have 17 Sapphire customers with an installed base of 38 systems at the end of Q3. Earlier this year, we launched our Sapphire 1MZ that enables the production of parts up to one-meter-high, opening up new markets for the company, including the oil and gas industry where this part size is common. This system is otherwise identical to the base configuration so far. We expect to ship our first Sapphire XC model this quarter. This product is a significant step up from our base Sapphire as it allows our customers to expand their AM capabilities to much larger parts. More on Sapphire XC later on. On slide six, you can see that our customers' base is very diverse and includes leaders in their respective industries. While the space industry remains a significant portion of our business, and we are very excited about the opportunity there, we have continued to expand our footprint in the aerospace, energy and contract manufacturing industries, either through system sales, pending sales, or through current part qualification. As a data point to illustrate my comments 75% of our new customer and year-to-date have been outside the space industry. And we expect this trend to continue over time. I would like to finish my overview by highlighting what we see as the long-term growth drivers for Velo3D and why we are well positioned for success. Please turn to slide seven. We have been strategic about our go-to-market and only focus on customers for whom we provide unique strategic value that cannot be addressed by commodity additive manufacturers. And part market we see as greater than $20 billion that only we conserve. Second, we only focus on manufacturing applications, not prototyping, meaning that new customers integrate us directly into their manufacturing environment. This is our land and expand strategy. This drives additional system purchases as the customer’s scales in our business. Our experience has been that once we add a new customer and they realize the value we offer, they will continue to buy additional systems as they scale production and add more applications. Third, we will continue to invest in new product innovation for our customers. As I previously mentioned, we will be launching our Sapphire XC model this quarter, and continue to see very strong demand for this product ahead of our launch. Finally, to accelerate our growth going forward, we will leverage our value proposition and the sales process to continue to drive new US customers and then replicate this successful approach globally. In summary, I remain very excited about our opportunity for future success and remain committed to helping our customers design and build the paths they need without compromise. I would now like to discuss the specifics of our third quarter results. Please turn to Slide nine. The third quarter when presented a major milestone for our company as we successfully completed our merger with JAWS Spitfire, raising $274 million to fund our future growth plans. Revenue was 22% quarter-over-quarter while year-over-year revenue grew more than three times. Our sequential performance was driven by continued strong demand from our existing customer base, making repeat purchases while year-over-year reflected broad adoption of our technology for both new and existing customers. We shipped five systems during the quarter, bringing our year-to-date shipments to 15 versus 14 for all of 2020. We continue to see strong demand from our existing customer base in Q3, as 80% of shipments went to current customers. Given our strong backlog and shipment execution, we remain confident in our ability to achieve our shipment goal of 24 systems in 2021. A year-over-year growth rate of more than 75%. We had an outstanding quarter from bookings perspective, as we booked 10 systems during this quarter compared to five in Q2, and 24 all of last year. In fact, year-to-date we have secured bookings of 24 systems, already accomplishing our booking goal for the full year of 2021. Additionally, we achieved a key milestone for the company during the quarter as we shipped our first system to a European customer, we expect Europe to be a major market of approximately the same size as the U.S. It will be a key driver of our growth over the next few years, as we expand our penetration on this very large market opportunity. The development of our next generation Sapphire XC systems remain on track. We printed our first customer demonstration part in Q3 and expect to ship our first Sapphire XC system to a customer at the end of this quarter. It is clear that there is very strong customer demand for the Sapphire XC and that it will be a game changing product in our industry. Looking forward, our significant Q3 backlog and pre order demand for our Sapphire XC system drives our confidence for 2022. I would like now to expand a few minutes highlighting the key revenue drivers for the quarter as well as for the year. Please turn to slide 10. First, we continue to see rapidly expanding adoption of our technology, with a significant increase in the number of parts customers relying on Velo technology. Year-over-year, we've doubled the number of end user parts customers to more than 100 and expect this number to continue to grow rapidly as the unique value of our technology becomes more widely recognized. Second, we saw a dramatic increase in parts demand in Q3, particularly from the space and energy sectors, which drove demand for our systems. In the space industry, our technology has been rapidly adopted by a range of industry leaders including SpaceX, Aerojet, Rocketdyne, Launcher and others. It has become a critical enabling technology in the development of next generation rocket engines and other space systems. We are also expanding our presence in the aerospace industry as Velo3D Technology gaining recognition as a uniquely capable solution for production of both legacy parts and new designs. We are excited to see strong interest by major aerospace companies in qualifying our technologies for multiple applications. We are also seeing widespread adoption of our technology in an expanding customer base in the energy sector, we expect to increase our penetration in this sector leveraging our Sapphire 1MZ product. Finally, system demand by our contract manufacturing partners grew strongly in Q3 driven by the increasing parts demand that I described earlier. Four of the five systems shipped in the quarter and two additional sales of lift systems were to contract manufacturer and customers. This demand growth reflects the demand for parts produced by our systems from end user and the confidence in the long-term market for Velo3D Technology. New customer growth is very important to us. And as I mentioned, we have seen strong traction and adoption so far in 2021. Please turn to slide 11. We at the end of Q3 we have added nine new system customers with 11 systems shipped to new customers so far this year. And you can see we are rapidly diversifying our customer base into those markets that we felt offers significant parts demand growth. The strong demand we are seeing reflects the increasing success of our technology and broad application capabilities across multiple industries. I would now like to briefly discuss a few of our key metrics for the quarter, please turn the Slide 12. In Q3, we added one new customer bringing our year-to-date additions to nine, more than doubling our customer base since the end of 2020. Our goal is to ship systems to an additional six new customers in Q4, to reach our plan of 15 new customers for the year. Our expected range of outcomes is shipment to three-to-six new customers for the quarter, and 12 to 15 for the whole year. As of the end of Q3 '21, we had 17 total customers with 38 systems in the field. Moving on to slide 13, we shipped five systems this quarter, essentially split equally between new and existing customers. Year-to-date, we have shipped 15 systems up from 14 systems in all of last year. We expect to build on our success as we go into the end of the year, and plan to ship nine systems in Q4 to reach our goal of 24 systems this year. Our expected range of outcomes is seven to nine shipments for the quarter and 22 to 24 for the year. We expect to hit our 2021 goal of repeat purchases from existing customers purchasing approximately one system for each system on at the end of the prior year. On slide 14, we are providing our year-to-date progress on our key revenue metrics, revenue at year of sale and recurring revenue. As a reminder, year of sale revenue includes revenue recognized and delivery of units within the period. Recurring revenue includes revenue attributed the system's delivered in prior periods. ASP for the quarter was strong at $1.5 million due to two lease buyouts in the quarter and year-to-date we are at $0.9 million. Very much on track with our goal for the year. Recurring revenue is tracking well ahead of plan where we have already achieved both our planned revenue of $3 million for the year and our average ARR goal of $0.15 million. This is due to stronger than expected lists and service revenues. We will remain on plan to reach our $26 million revenue goal for the year, which represents more than 35% growth versus 2020. We also expect to see continued growth in both our annual recurring and service revenue categories, as units in the field are expected to double versus 2020. Next, I would like to provide a quick update on the demand for our industry leading Sapphire XC system. Please turn to slide 15. We are excited about the launch of our Sapphire XC offering. This is a game changing next generation system. It expands our addressable market by increasing manufacturable part volume by five times and dramatically reduces the past production cost by 65% to 80%. We have also successfully scaled up our proven Sapphire process and transferred this process to our Sapphire XC system. We delivered our first customer demonstration part in the third quarter and remain on plan to ship our first system by the end of the year. Given the strong demand for Sapphire XC as well as our other Sapphire systems, we made a strategic decision to expand our manufacturing capacity. Our new 80,000 square foot facility will open this quarter and provide us with annual capacity of more than 400 Sapphire and Sapphire XC system when fully built out. We will run capacity in phases and our plan fully supports our 2022 and 2023 growth forecast. Finally, as a reminder, we take an asset light approach to manufacture our systems with only final assembly and test done at our facility. This successful manufacturing approach is extended also to Sapphire XC. On slide 16, we wanted to provide more detail on the demand of our Sapphire XC product. Customer demand for our Sapphire XC product is very strong as we have at the end of October 2021 17 firms Sapphire XC orders and backlog and orders totaling $85 million. As you can see from the chart, we continue to successfully convert our pre orders into bookings. Bookings for Sapphire XC at the end of October stand at a total of $48 million. This trend gives give us confidence that we are well positioned for strong growth in 2022. In summary, we were pleased with our performance in the third quarter, as we posted strong revenue and bookings growth. Expanded into the European market and completed a number of milestones in relation to the rank of Sapphire of XC. Given our industry leading technology, increasing demand from our diverse customer base, strong balance sheet, and a focus on maintaining an ever increasing commitment to quality, we are well positioned for future growth, as we continue to push the boundaries of what is achievable with metal additive manufacturing. With that, I would like to turn the call over to Bill to discuss the financials and our guidance. Bill.

[Bill McCombe:]

Thanks Benny. Before reviewing our quarterly performance, I want to provide a brief summary of the financial aspects of our merger transaction with JAWS Spitfire. Please turn to Slide 18. As Benny mentioned, the completion of the merger was a significant milestone for the company and it kept the seven-year journey from our founding in 2014. We are very excited about our future as a public company. And with the closing of this transaction, we now have the resources to fund our growth plans and capitalize on the significant opportunities we see in the additive manufacturing market. As shown on the slide we received net proceeds of $274 million from the transaction after redemptions and transaction expenses. This gives us ample liquidity to pursue our growth initiatives and provides a substantial financial cushion. Moving on to our quarterly financial performance, please turn to Slide 19. Revenue for the quarter was $8.7 million up 22% sequentially and up more than three times year-over-year. The increase in revenue was driven by five 3D printer sale transactions in Q3 versus four in Q2. Q3 sales included three shipments and two customer purchases of leased systems. We also saw a 34% sequential increase in recurring revenue. Gross margin for the quarter was 17%, down from 31% in Q2. Q3 gross margin was impacted by a range of factors relating to positioning the company for the significant step up in the overall scale of the business, that we expect in 2022 and certain other costs. These included under absorb factory overhead costs related to our expansion plans for 2022. Under absorbed service network costs as we built out our network in anticipation of our growth in 2022, and other costs and investments. I'll provide more detail on these factors in the following slide. Adjusted operating expenses rose 29% to $15 million in Q3, compared to $11.6 million in Q2, primarily driven by increased headcount and higher R&D spending. R&D increased $1.6 million in the quarter due to increased spending from materials for the Sapphire XC development program, and increased headcount. Sales and marketing increased $1 million due to increased headcount and increased tradeshow spending. G&A increased $0.7 million also due to increased headcount and personnel related costs. GAAP operating expenses also included $0.9 million in merger costs compared to $1.6 million in Q2 and $0.7 million of stock-based compensation expense which was similar to Q2. GAAP net loss for the quarter was $66.6 million, which includes a $51 million non-recurring non-cash charge related to the fair value of the modification of our convertible note in conjunction with the JAWS Spitfire merger transaction. On a non-GAAP basis, which excluded this charge, one-time merger costs and other adjustments net loss was $14.6 million. Adjusted EBITDA for the quarter excluding the same costs was $13 million. On slide 20, I'd like to provide more detail on the factors impacting our gross margin in Q3. As I previously mentioned, gross margin for the quarter was 17% versus 31% in Q2 and a plan of 46%. As you can see from the chart, there are two sets of factors that impacted our gross margin performance in the quarter versus plan, which primarily relate to positioning the company to support our 2022 growth plan, as well as costs associated with certain technology and other initiatives. The first category on the chart includes production scale up or excess overhead cost required to meet the higher production plan for 2022, which are under absorbed at current volumes compared to the plan. Similarly, we're building out our service network at a significantly larger scale to support the highest levels of sales in 2022 and incurring under absorbed overhead cost -- under absorbed cost here, as well versus the plan. We would expect both these categories of cost grow in absolute dollars going forward, but the variances should decline as a percent of revenues, as production volumes and revenues increase substantially next year. The second category on the chart includes three types of costs. Firstly, higher cost versus planned for the development of a system for a new metal prod. We believe this investment will expand our addressable market for new prod applications. Secondly, we also made investments in the quarter for customer upgrades to improve system reliability related to specific technical issues. These investments are not unexpected for brand new technology such as the Sapphire, and should become less frequent as the technology matures. Finally, we are impacted by shipping and material costs, mostly associated with expanding on stocks and materials in anticipation of ramping up production volumes in 2022. All three of the costs in this category are driven by specific initiatives, they are episodic in nature, and will recur from time-to-time but should not recur in every quarter. The final category on the chart is other overhead and inventory adjustments, which recur but fluctuate over time. To summarize, we had a confluence of factors affecting gross margin in Q3 as a result of investment decisions, which should either diminish over time as the business scales or occur less often or less scale as our technology matures. However, when we introduce new technology in future, we should expect to see these types of technology learning curve taught the fact as we occur. Turning to the balance sheet on Slide 21. We exited the transaction with a very strong balance sheet and ended the quarter with $297 million in cash and very limited debt. Please note that this cash number reflects $20 million of merger expenses paid in the third quarter and will be reduced by the payment of the remaining $24 million of merger expenses in the fourth quarter. We remain committed to maintaining a healthy cash position for several reasons. It gives our customers confidence that we have the financial security to be their long-term partner. It allows us to continue to invest in our technology, pursue our product roadmap and extend our technology lead over our competitors. And thirdly, it provides the resources to fund aggressive growth in our sales and marketing efforts, including expanding our global sales and marketing footprint. Looking forward, our strategy is to continue with our asset light business model. Excluding the current build-out of the new manufacturing facility, we expect CapEx to average approximately 3% of sales over the long-term and expect our working capital needs to grow with the business. I'd now like to provide our guidance for Q4 and fiscal and full year 2021. Please turn slide 22. This summarizes our guidance for the four key metrics from an Analyst Day presentation in June. As at the end of October, we have already achieved our goal of 24 bookings for the year, and we expect to add to that number in the fourth quarter. Our goal is to ship systems to six new customers for Q4 and 15 for the year. Our expectation is that this metric could be in the range of three to six for Q4 and 12 to 15 for the year. Our plan for 2021 is for total shipments of 24 systems. We believe we can achieve this goal, however, our expectations are that this metric could be in the range of 79 shipments for Q4 and 22 to 24 for the year. As of October we have a backlog of 17 XC bookings so we expect to achieve our year-end target of bookings for 20 systems. With $17 million of year-to-date revenue and strong momentum in our sales pipeline, we continue to expect to hit our 2021 revenue goal with $26 million. Finally, given our significant backlog and increasing demand for our Sapphire XC systems, we remain very confident in achieving our 2022 revenue forecast. Please turn to slide 23, where we provide an update on our 2022 revenue build out slide from the analyst day presentation. The total revenue outlook remains unchanged at $89 million. However, as Benny mentioned, we've made significant progress in converting our Sapphire XC pre orders into bookings and that's reflected in this chart. Compared to June, we added a net $14 million to our Sapphire XC bookings, including $9 million in the month of October alone. This means we currently have the visibility into our target revenue comprised of the following elements, a continuation of our 2021 base of revenue of $26 million, $6 million of incremental recurring and service revenue, $35 million from books, Sapphire XC orders, and an additional $43 million in the potential conversion of Sapphire XC pre orders. These sum to a $110 million, creating a buffer of $22 million above our target revenue of $89 million. As a result of the backlog we've created so far, with a strong pipeline of additional prospects going forward, we have even stronger confidence in achieving our 2022 revenue target. In summary, given our continued sales momentum, increasing backlog, strong demand for our Sapphire XC system, and solid balance sheet, we're well positioned to capitalize of what we see a significant growth opportunity in the additive manufacturing market. With that, I'd like to turn the call over for questions. Operator?

[Operator:]

We'll go first to Brian Drab of William Blair. Your line is open, sir, please go ahead.

[Brian Drab:]

Thank you. Hi, Benny. Hi, Bill. Thanks for taking my questions. So I just wanted to clarify on slide 22. First, you have the shipment expectation in the table of 24 for the year, and then the footnote of with a range of 22 to 24. So the 24 obviously, I guess corresponds to the $26 million in revenue. But if you ship 22, would we expect that to be like $23 million? Or can you just clarify why we're using those ranges and not using ranges for revenue?

[Benny Buller:]

Yes, sure Brian. So the difference is that in the third quarter we had two sales that were not associated with shipments. So these were the two purchases by our customers of systems that were already leased. So in effect, where our revenues are two units ahead of our shipments because of that circumstance.

[Brian Drab:]

I see. So that the $9 million though for the fourth quarter. I mean, should I think of that as you're implying a range, though, or is the $9 million would be firm estimates?

[Benny Buller:]

We're comfortable with the $9 million and if we happen to be at 22 shipments as opposed to 24, then the fact that we had these two sale transactions that were not associated with shipments would make up the Delta.

[Brian Drab:]

Okay. And then for gross margin, can you talk at all about for 2022, you gave us a good update on the revenue growth. But are you still expecting the 2022 gross margin that you talked about earlier this year, which was in the slide deck you have the analyst is 34%. Is that still kind of the range that we're targeting or had things developed differently?

[Bill McCombe:]

Well, we're not -- it's too early for us to give guidance on the 2022 margin. What I'll say is that we expect -- for the fourth quarter we expect slight improvement. And there are two factors that are going to come into play. Firstly, the specific technology initiatives costs on the chart, those should not recur or shouldn't recur in anywhere near the same magnitude. But on the other hand, we're going to deliver the first of our XC units. And as within technology -- new technology program, the early units in the program are at a much lower margin. So that will be an offset to the first factor that I mentioned. Then as we go into 2022, we’ll be will be delivering a lot more units in the first part -- in the first quarter of 2022. So the negative impact of that -- of those early -- negative impact on gross margins are early units in the program will be there. And then that will lessen over time as we improve our unit costs through the year. I can't at this time, we haven't sat down to determine what our guidance would be. So look, I'll just give you those as factors and we'll provide more guidance on our first call for 2022.

[Benny Buller:]

Bill, I'd like to add a little bit on this. So one of the things that is happening is that, we have a very strong demand for Sapphire XC systems, which means that we are going to ship a lot of Sapphire XC systems in the first half of 2022. This has a good and bad element in this, when it comes to gross margin. The bad part is that we -- there is a lot of focus on shipping quickly, a lot of systems, so there is less time to reduce the overheads and the inefficiencies of early systems. On the other hand, there is a very fast learning, because we are making a lot of systems. So the result is that, if you kind of look at that in terms of number of units, we are going to go through this learning curve of for the first number of units quicker, but they will all basically commence at the beginning part of the year. So I would expect in the first half of the year, the gross margin to be lower, and then starts to approach the numbers that we predicted on the second half of the year.

[Brian Drab:]

Can I just ask one more, or maybe two-part questions, the system's expectation for next year? Are you saying that you expect system sales and be weighted more in the front half of 2020, you just have better visibility to the first half and maybe the second half ends up being more shipments than the first half? And then also what are you seeing people leaning toward the ARR type of purchase or the outright purchase?

[Benny Buller:]

So on the first part, it's easier to answer. So what I see is a very strong demand for Sapphire XC, that we have better visibility for the first part of the year. So we see strong ramp up at the beginning of the year, but at the same time, we will be busy with Sapphire XC shipments through the end of the year as well as naturally Sapphire systems for those we don't have nine-months' visibility to make something. So I do not expect 2022 to be weighted on the front part, but kind of equally distributed it was maybe a little bit even ramps down to the second part of the year. Regarding the…

[Brian Drab:]

Accounts receivable I mean sorry -- the recurring revenue ARR and purchase versus outright?

[Bill McCombe:]

So I would I would expect similar mix as we had in 2021 between the two.

[Brian Drab:]

What was that mix?

[Bill McCombe:]

I do not believe or disclose that.

[Brian Drab:]

Okay. Thank you.

[Operator:]

. We will go next to Jim Ricchiuti, Needham and Company.

[James Ricchiuti:]

Hi, good afternoon. I wanted to go into a little bit more detail if we may. Just on what you're seeing in terms of demand for the Sapphire XC. Is this -- can you give us a sense? Are these I presumably these are existing customers that are moving up to the XC? And what is the profile in broad terms? Are you seeing more of the customer moving to the customers moving to the XC who are contract manufacturers? Are they OEMs? And maybe you could just speak to what applications they seem to be most interested in with the XC. Thank you. Lot of questions.

[Benny Buller:]

I'll take that. So thanks, Jim. So we see a mix, sort of both new customers, as well as existing customers. When it comes to new customers, the driver is that customers made larger parts that they can make on the existing setup in the Sapphire XC this opportunity for them. This drives mostly new customers that are OEMs. When you're talking about the split between OEMs versus contract manufacturers, we see strong demand from both of those types of customers, both existing customers that are OEMs, as well as contract manufacturers, the OEMs, most of them show similar demand.

[James Ricchiuti:]

Benny, as if you think of the applications, obviously, these are customers interested in larger parts, whether is the demand or the interest that you're seeing, for the XC skewed to any one or two of the market verticals that you currently address?

[Benny Buller:]

So we didn't make it a secret that the first 10 order that were in June of 2020 were from SpaceX. If you look at beyond this initial demand. We see demand in aviation, we see demand in oil and gas and energy. We see demand in semiconductor. I would say that the demand is -- and of course in space, I would say the demand is relatively uniform this but we cannot concentrate on a specific industry.

[James Ricchiuti:]

Got it. One other question, if I may. If we think about the investments, you're making and European, you've kind of characterized this as a longer term opportunity. But I'm wondering is there the potential that as we think about 2022 with the new products, with the XC starting to scale that you could see potentially a faster contract in Europe, and I'm wondering if you can give us some flavor as to where you think you could be getting the most traction in Europe, since it's really an under penetrated completely under penetrated market for you.

[Benny Buller:]

Correct. So based on what we have seen so far, we believe there is a strong opportunity in the aviation market and one of them the defense market in Europe. When we look at the spread between XC and Sapphire, based on the signals that we have seen so far, I believe that in 2022, we'll have more business in Europe in Sapphire than in Sapphire XC. From the simple reason that for the vast majority of customers, the right way for them to start working with us is start developing their products on Sapphire. And when they get to enough maturity with the product and the manufacturing process, and they are ready to scale up to transition to Sapphire XC. If you can make your parts on Sapphire, it will be faster to develop the products on Sapphire and cheaper than on Sapphire XC. So I believe, based on what I've seen so far in the market that in Europe initially there will be Sapphire.

[James Ricchiuti:]

And you have the infrastructure the sales infrastructure built do you anticipate seeing that ready to really begin to scale in the early part of '22?

[Benny Buller:]

We are willing -- but right now it’s not fully developed. It's far from being fully developed, we are in a very strong momentum of building it. And our expectations in terms of shipments into Europe in 2022 are relatively modest as we are developing this market, so we do not expect this market to carry out.

[James Ricchiuti:]

Got it. Thanks very much.

[Operator:]

We’ll take our next question from Troy Jensen of Lake Street Partners. Your line is open, please go ahead.

[Troy Jensen:]

Gentlemen, congrats on the nice results. Yes, for either one of you, guys. The 38 deployed units, do you know how many of those on air give us that data point?

[Benny Buller:]

I'm not sure if we actually disclose this information. I don't think. Bill?

[Bill McCombe:]

I don't think that we disclosed it. But it's around about 30%.

[Troy Jensen:]

30%, okay.

[Bill McCombe:]

About a 25%, because we had we had a couple of buyouts, it's about a 25%.

[Troy Jensen:]

Perfect. And then we think about contract manufacturers for this quarter for the five ships? Should we assume all those who are also ARR? Just in general, are contract manufacturer is going to go annual revenues are what do you think about that?

[Bill McCombe:]

You're asking the right questions. And I think that what we say is a mix trends that we are still studying. In general, contract manufacturers have a tendency to prefer a recurring revenue model. And the same time what we say in some cases, where a contract manufacturers have very good visibility to long-term production contract, they prefer to buy the systems upright. So we see both those trends, kind of competing with each other, but it's one thing is very clear and that is that, there are many more recurring revenue deals signed with contract manufacturers, then we go in.

[Troy Jensen:]

Okay, that’s fair. Well, I do have a couple follow-ups for Bill, but I'm just can you talk briefly in competition? I mean, I'm not worried about it. But ever since you guys went public, every other metal companies now talking about support lists? How far ahead are you guys as anybody close to having a solution? Just your thoughts on other people kind of route to your space?

[Benny Buller:]

Yes. So, the best part about our competitors offering support free solutions is that they support those solutions, or they claim that those solutions are achievable on systems that they have been selling for two, three, four, 10 years, and they are in the market. All our customers and many of our customers already have those systems, and they tried everything under the sun to try to make a very complex structures, and they buying our systems to be able to produce these parts after they failed to make them on our competitor’s systems. So, what we offer is a real pathway to make high quality parts in geometries that previously and even today on commodity additive manufacturing systems are not manufacture more. This is not gaming marketing, when people bring their product to a shop, and say, yes, we have done that too. This is real production people are doing on our systems, and they have competitor systems in their shops, that none of those systems are producing those parts. So it's the difference between the real thing and the marketing gain.

[Troy Jensen:]

That's what I thought, just want to hear from you. And then for you, Bill, just quickly on the Sapphire XC and our bookings are $40 million pre orders are $45 million. I'm more curious on the pre order side. Is there any I mean, to convert from pre orders to it was kind of reservations to bookings? I mean, any risk to that disability at all, are they contractually obligated?

[Bill McCombe:]

During a contractual obligation to convert it, there's a small deposit but the customer does have the option to not to proceed but we've had very good success. One of the reasons and one of the implications of place reservation is that customers use that to create a budget in their planning process for purchase. So it's a signal of intention, and we've had good success of converting those. But what we can't say that it's without risk. There's risk. But if you look at slide 22, in the deck, you'll see that in order to hit out $89 million target next year, we only have to convert $22 million -- of the $21 million of the $43 million. So round numbers 50%. So we’ll make our alpha .

[Troy Jensen:]

Great, okay, understand you guys have great visibility of the history. So, and the last one for you, Bill, can you just help us out on a share count we should use for Q4 for 2022 what is fully diluted look like here?

[Bill McCombe:]

It's actually in between the financial statements that the $183.2 million, that's the share count as of September 30. So, I believe some modest growth from option conversion that it'd be relatively modest. Weighted average share count that you see, 18 million, reasons that's such a low numbers, there were only two days of the quarter when the 183 million shares were outstanding, and that calculation is done on a time weighted basis.

[Troy Jensen:]

So as I understand this way, 183?

[Bill McCombe:]

Yes, 183.2 is the one should be looking at.

[Troy Jensen:]

Okay, guys, keep up the good work.

[Operator:]

. With no other questions, I'll now turn the conference back to Benny for any additional or closing comments.

[Benny Buller:]

Thank you so much. Thank you everyone, for participating in our first earning call. We will be glad to answer any more questions that you will have. Thank you everyone, and have a good evening.

[Operator:]

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great day.