Velo3D, Inc. (VLDXW)

Velo3D builds machines that print parts out of metal. Think of a traditional 3D printer that uses plastic; Velo3D’s printers use metals like titanium, aluminum, and steel. A manufacturer sends a digital design file, the machine heats the metal powder to nearly melting point, fuses it layer by layer, and a few hours later, out comes a finished part. The company sells three things: the printers themselves, the software that controls them and converts designs into printing instructions, and ongoing service and support. The business lives or dies on whether customers find the machine useful enough and reliable enough to pay the price, and then whether they keep buying materials and paying for support after they own it.

Why metal 3D printing matters

For most of the twentieth century, metal parts were made by casting them in molds, machining them on lathes and mills, or forging them under pressure. All of these methods are tried and true, but they have limits. If a part has a complex interior geometry—think of a turbine blade with internal cooling passages—traditional methods require multiple pieces to be made separately and welded or bolted together. That adds weight and cost. A metal 3D printer can print the entire part in one piece, complete with the interior cooling passages. The tradeoff is that 3D printing is slow: printing a single part that a machine shop could mill in an hour might take twelve hours on a 3D printer.

This makes metal 3D printing valuable for parts where complexity matters more than production speed. Aerospace manufacturers pay enormous sums for engines and landing gear that are lighter and more efficient. A single engine part that weighs 20 percent less uses less fuel across years of flights, which pays back the extra manufacturing cost many times over. Medical device manufacturers need custom implants and surgical tools tailored to individual patients; 3D printing makes that economical. Automotive manufacturers use it for limited-production parts and custom tooling. The volume is much lower than, say, stamping out millions of wheels, so the slow speed of 3D printing is acceptable.

How the business makes money

Velo3D’s primary revenue comes from selling printers. A company like Velo3D might price a metal 3D printer at 500,000 dollars to a few million dollars, depending on the size and capability. That is a large upfront expense, but customers consider it a capital investment in manufacturing capacity. The printer is used many times over months and years, paying back the cost through the value it creates. Velo3D makes a gross profit on each printer sale—the cost to build and deliver it is less than the sale price.

The repeat revenue comes from materials and services. Every time a customer runs a print, they consume metal powder; Velo3D can supply the powder or the customer can buy from a rival. Velo3D makes a margin on every kilogram of powder it sells. The company also charges for software updates, technical support, training, and maintenance contracts. As the customer base grows and existing customers keep printing parts, this recurring revenue becomes material. For comparison, a traditional printer maker like Xerox makes money from selling printers but also from toner cartridge sales, which creates a recurring revenue stream that keeps customers dependent on the vendor. Velo3D is building a similar model: sell a printer, then earn money from the powder and services.

The economics and unit metrics that matter

The business model works only if three things happen:

First, the customer’s printer utilization is high enough that the return on investment is positive. If a 1-million-dollar printer sits idle most of the time, the customer is losing money and will not buy powder or maintain it. Velo3D’s business depends on customers finding valuable work to send to their printers. That work comes from the customer’s internal demand—do they have parts complex enough to justify 3D printing?—or from external demand—do they take on contract manufacturing work for other companies?

Second, the cost of goods sold on the hardware and the materials margin must be healthy. If it costs Velo3D 600,000 dollars to make a printer it sells for 1 million dollars, the gross margin is 40 percent. That margin must cover sales commissions, technical support, R&D to improve the next generation, and overhead. If margins compress, the business breaks.

Third, the installed base of printers must be large enough to make the materials business significant. A company with one hundred printers in the field, each consuming powder, generates meaningful recurring revenue. A company with five printers has negligible recurring revenue. The growth story for Velo3D is therefore about scaling the installed base: selling more printers to new customers and then growing revenue per installed printer through increased utilization and material consumption.

Competition and the state of the industry

Velo3D is not alone in metal 3D printing. Competitors include large industrial equipment makers like GE, specialized makers like EOS and 3D Systems, and smaller players. The field is still growing but also consolidating. GE acquired several metal printing companies to build its own capability. 3D Systems, a veteran of 3D printing, has struggled with profitability and has sold assets. The clear winners are companies that have found a niche—say, aerospace castings replacement—and have scaled production to the point where materials revenue and services revenue exceed the margin on printer sales. Velo3D’s competitive position depends on whether its machines have technical advantages that customers value (speed, accuracy, ease of use), whether the company can operate profitably at scale, and whether it can build sticky customer relationships through materials and support.

The reality of manufacturing-equipment businesses

Selling industrial equipment is a slow, capital-intensive business. Sales cycles are long because customers are making large capital decisions. Customers are conservative; they want proof that the technology works and that the vendor will still be around in five years. Velo3D must therefore maintain financial stability and build a track record of successful customer deployments. If the company burns cash rapidly or stumbles on a bad batch of printers, customers lose confidence and the pipeline freezes.

The flip side is that success compounds: as Velo3D’s installed base grows, each new customer hears about success from existing customers. Margins on materials improve with scale because the cost to produce a kilogram of metal powder falls as volume rises. The company moves toward profitability as the ratio of recurring revenue to total revenue increases.

How to research Velo3D as a manufacturing play

The 10-K filing (CIK 0001825079) shows revenue from equipment sales and from recurring revenue (materials and services). Watch the ratio of recurring revenue to total revenue over time; growth in this ratio is a sign that the installed base is maturing and that customers are dependent on Velo3D for powder. Look at the gross margin on equipment and on recurring revenue separately; margins that are compressing suggest either increased competition or a need to improve efficiency.

Watch for announcements of major customer wins, especially in aerospace or automotive, because those customers tend to be mission-critical and generate long-term loyalty. Listen to quarterly earnings calls for color on customer utilization of installed printers; a printer that is not being used is a customer who will not buy materials next year. Monitor Velo3D’s cash balance and cash burn; a manufacturing-equipment company must maintain financial stability through sales cycles and product development. Finally, track progress on new printer models or software capabilities, because the industry is still improving the technology, and a company that falls behind in capability will lose customers to faster, more reliable competitors.