Earnings Call: Q3 2022

Nov 8, 2022

Greetings. Welcome to the Velo3D Reports Third Quarter 2022 Results. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to your host, Bob Okunsky, Vice President of Investor Relations. You may begin. Thank you. I'd like to welcome everyone to our Q3 2022 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 the balance of 2022. Following Benny's comments, Bill McCombe, our CFO, will then review our Q3 2022 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 2021 10 ks and Q2 2022 10 Q filing. 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 reconciliations. Finally, to enhance this call, we have 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 Bello3D. Benny? Thanks, Bob. And I would like to welcome everyone to our Q3 earnings call. We remain very excited about the opportunity for additive manufacturing and continue to believe our technology is rapidly changing the way mission critical parts are manufactured across multiple industries. I would now like to discuss the specifics of our Q3. Please turn to Slide 4. At the high level, we were pleased with our Q3 performance as we posted strong year over year revenue growth of 119%, Increased our sizable backlog by 20% and expanded our new and existing customer footprint. We also continue to see strong demand for This is a leading technology. During the quarter, as Q3 bookings rose 50% sequentially to $27,000,000 with Our backlog now totaling $66,000,000 I would also like to highlight the significant operational success we have had over the last 18 months. As you can see from the chart, year to date revenue has tripled compared to last year, while last 12 months revenue has more than doubled. This trend reflects not only strong customer demand for our technology, but also our ability to rapidly scale our business and production operations this However, our Q3 revenue was below plan as supply chain disruptions limited the availability of certain key system components. These shortages impacted our production schedule and led to a number of Customer shipments being delayed to the 4th quarter. Given the impact of our Q3 shipment delays, Ongoing supply chain uncertainty and the continued initial ramp of our Zephyr XC1 and Z system, we are reducing our 2022 revenue guidance To emphasize, the adjustment to our 2022 revenue guidance is not fundamental All demand related, but entirely due to the potential impact of the factors I just discussed. As I mentioned, demand for our Zephyr and Zephyr access systems remain high. This reflects our success In continuing to expand our footprint across multiple markets and new applications. In particular, we are starting to benefit from our market Expansion investments as we added a number of new marquee customers during the quarter. For example, we are seeing strong Traction in Europe as we booked 2 market leading European Aerospace OEMs during the quarter. Additionally, we also added a top Automotive OEM here in the United States. Looking forward, we remain very excited about the future As our bookings and backlog growth reflect the increasing adoption of our technology, we are confident that we have a clear path to profitability given our current capital resources. We will achieve this by leveraging our strong top line growth in We also expect to benefit from our working capital And expense management initiative as well as return to normalized pricing given the end of our launch Customer and early bird system discounts. As a result, we believe we are well positioned to profitably capitalize on the rapidly expanded market for mission critical high value metal parts. I would now like to provide some additional color on the challenges we faced in the quarter as well as our strategic initiatives to drive Please turn to Slide 5. As I previously mentioned, We experienced significant supply chain disruptions during the quarter, which affected our production plan. Specifically, we were impacted by key component shortages, especially system level electronics. Additionally, when we did receive the necessary parts, the parts arrived too late in the quarter in order to qualify and ship the systems on time. As a result, we didn't meet our production goals for the quarter. While supply chain conditions remain challenging, we have Substantially all the parts needed for our production plan this quarter. We also experienced longer than expected production and testing cycle Thanks for our first Zephyr XC1MG systems, which contributed to our shipment delays. Similar to the ramp of our Cephar XC product, initial volume production on the Cephar XC1MZ presented us with certain challenges that needed to be addressed during the building process, which affected our ability to meet our shipment forecast. I'm happy to announce that we have already shipped our first Sepharic C1MZ earlier this quarter. Given the history of previous new product ramps, these challenges will diminish as we ramp volume and game production experience. However, we do not expect to reach the volume levels needed to fully overcome these issues until the Q1 of 2023. I want to reiterate that demand for this system continues to increase and we remain focused on efficiently scaling our Cephyr XC1MZ production To achieve our growth quarter shipment target, given the challenges I have discussed, we have identified and instituted a number of Strategic initiatives to minimize future supply chain disruptions and improve our overall production efficiency. Please turn To Slide 6. Overall, we made significant progress on a number of initiatives in the quarter. First, we have continued to build our supply chain team as well as improving multiple operational processes with the goal of reducing shortages in the future. 2nd, we successfully instituted a number of programs to further streamline our purchasing process and better manage our inventory to meet our challenges. These initiatives will enable us to materially lower inventory levels while improving efficiency. We expect to see these benefits starting in the first half of twenty twenty three. 3rd, we reorganized our factory floor to accelerate the production process to reduce delay. Efforts here include tighter management of material flow to the production sales We are making progress in these areas and expect measurable benefits from these efforts starting in the Q1 of next year. Our key focus remains on reducing our system balance of materials costs through a combination of increased Outsourcing of sub assembly parts as well as the benefit of increasing volume over a fixed cost base. Both of these efforts will allow us to scale without materially Additionally, we Our instituting initiative to reduce production cycle times by further leveraging our continuous improvement capability on the production floor. These programs are enabling us to analyze data and processes in real time, provide feedback to the team and implement changes more quickly. Finally, we continue to work with our new and existing vendors to better manage our supply chain, including The staggering of components deliver us to better match our build schedule and minimize overall inventory levels. I would now like to highlight while we remain very confident in our long term growth opportunity as customers continue To choose our industry leading technology to produce their most critical metal parts. Please turn to Slide 7. Overall, we are pleased with our progress in adding new customer as well as expanding our geographic footprint. With the opening of our European operations and recent We are addressing a significant portion of the global laser metal powder bed fusion market. Additionally, the significant investment we needed to make in building out our sales and marketing group For long term growth is now behind us. We are already seeing the benefit of this investment as reflected in our strong Q3 bookings With our recent hires, we believe our sales and marketing organization is now fully staffed to deliver on the next phase of growth for the company. As I previously discussed, we booked a number of new customers during the quarter, including 3 landmark customers in new markets. First, our European expansion is going well As we booked 2 industry leading EU Aerospace customers in Q3. Interest remains high in Europe and we have a number of opportunities to add to our footprint there in the Q1. In the U. S, we also added a major automotive manufacturer as we expand our material applications. To close out our new customer highlights, we also had 3 customers acquiring Multiple sapphire systems on their initial purchase. This reinforces the growing acceptance of our technology in the market. Also, we recently shipped our 1st tool steel machine for automotive applications, Following our recent Maraging Steel material qualification, demand for this application is strong with our first order within a few months of our qualifying announcement. Qualifying these materials is a game changer for the automotive and tooling industry, as it enables production of high quality die cast tooling with a geometrical flexibility that has not been possible before. Velo3D is the only company that can print the large diameter, high quality internal channels needed for those applications, which will enable higher throughput while reducing cost cost for the customers. Finally, We are continuing to expand our industry footprint outside the space sector with new customer additions And follow on purchases from companies in the aviation, hypersonics, automotive, defense and energy industries. In closing, we are excited about the future opportunity and believe we are well positioned to capitalize on the growing demand for high value 3 d printed metal parts. We remain confident in our ability to reach profitability given our current liquidity and look forward to executing on our long term strategic vision. With that, I would like to turn the call over to Bill to discuss the financials and our guidance. Thanks, Benny. Moving on to our quarterly financial performance, please turn to Slide 9. Revenue for the quarter was $19,100,000 Down slightly versus the Q2, but up 119% year over year. Compared to our expectations, Q3 revenue Lower due to a number of shipments being delayed to early Q4, as Benny mentioned, due to material shortages and resulting production delays. Compared to Q2, Q3 year of sale revenue declined to $16,500,000 due to a decline in ASP as a result of two factors, The change in the mix of shipments towards a higher proportion of Sapphires versus Sapphire XCs and more of those Sapphire XC shipments being to the launch customer That was the case in Q2. This impact was partially offset by higher recurring and service revenue, which rose approximately $600,000 to $2,600,000 in the quarter and reflected the increased number of systems in the field. On a year over year basis, year of sale revenue was up 127% from $7,300,000 to $16,500,000 And recurring revenue was up 80% from $1,400,000 to $2,600,000 Gross margin for the quarter was a negative 1%. Compared to our expectations, gross margin was impacted by the delay in system shipments to the 4th quarter and by higher than Compared to Q2, Q3 margin reflects the higher proportion of lower margin launch customer shipments And elevated inventory adjustment charges offset by lower recurring and service losses. Adjusted operating expenses for the quarter, Excluding stock based compensation were $22,700,000 in line with Q2. G and A rose $1,100,000 primarily reflecting a reallocation of facilities and IT costs between departments. For the same reason, R and D and sales and marketing expenses We're $300,000 $600,000 lower respectively. Excluding this reallocation, operating expenses were largely in line with Q2. GAAP net income for the quarter was a loss of $75,200,000 including a non cash loss of approximately 47,500,000 related to changes in the fair value of our warrants and earn out liabilities. On a non GAAP basis, which Excludes this loss and stock based compensation expense, net loss was 22,500,000 Adjusted EBITDA for the quarter, excluding the same costs, was also a loss of $21,200,000 Turning to the balance sheet on Slide 10. We exited the quarter with a very strong balance sheet with $113,000,000 in cash and very limited debt. Cash usage for the quarter was $29,000,000 down from $44,000,000 in Q2. The sequential decline was driven primarily by a lower inventory build compared to Q2 and better working capital management. Investment in working capital increased by $3,000,000 due to an increase in accounts receivable and inventories, offset by an increase in contract liabilities. The inventory increase was due to higher work in process inventory due to the shipment delays and higher stocks of materials. We expect inventory to decrease over the next three quarters as we ship systems, draw down our stocks and materials and move to more staggered materials deliveries. CapEx was $5,000,000 primarily related to final payments for our Construction of our Lakeview facility and CapEx for leased systems. We expect CapEx to be slightly lower for the 4th quarter. Finally, we expect total cash usage in Q4 to be in the range of $25,000,000 to $35,000,000 We remain confident that we have the liquidity to fund our business plan through to profitability. I'd now like to provide our outlook for the balance of the year. Please turn to Slide 11. Overall, we executed well in the Q3 despite the challenging supply chain conditions. However, as Benny discussed in his opening comments, we are adjusting our 2022 revenue guidance from $89,000,000 to a range of $75,000,000 to 80 We expect 4th quarter revenue growth of between 25% 50% to a range of $24,000,000 to $29,000,000 which is largely supported by our existing backlog and gross margin of 5% to 10%, excluding non recurring items and inventory adjustments. This change in full year guidance is driven by the impact of shipment delays on Q3 revenue, Ongoing supply chain challenges and potential Sapphire XSeed 1MZ production timing risks as we continue with the early stages of ramping production of this product. Again, this adjustment does not reflect any change in business fundamentals or the outlook In conclusion, we are focused on executing on our clear path to Profitability within our current capital resources. This path is comprised of 5 elements. Firstly, realizing our revenue growth on our revenue growth potential and achieving manufacturing productivity gains through increasing our scale. Secondly, ASP improvements as shipments with the now expired launch customer and early bird reservation discounts get behind us. Thirdly, bill of material cost reductions for Sapphire XC based on longer term higher volume contracts with larger strategic vendors. Fourthly, improving working capital efficiency through inventory reductions driven by better planning and staggered monthly deliveries and finally, controlling operating expenses by managing to flat to modest headcount growth. Based on these initiatives, we are well positioned to drive reduction in EBITDA losses And cash burn in the coming quarters. With that, I'd like to turn the call over for questions. Operator? And at this time, we will be conducting a question and answer And our first question comes from the line of Brian Drab with William Blair. Please proceed with your question. Hi. Thanks for taking my questions. First, I wanted to just ask, Bill, you mentioned several times that You'll be able to the target is to get to profitability with the current resources. When does that In your model, when does that need to happen? Is that Q2 of next year, Q3 of next year? It seems like it needs to happen within a year based on the burn rate? Now, Brian, I would think it's Longer horizon than that. We plan to bring down our cash burn rate by Bringing down our inventory and improving profitability. We also have a major CapEx behind us now. So we think that we have A runway through to breakeven profitability and cash that's Around the end of next year, but I don't want to be precise about it because I we're not going to give specific guidance on 2023 yet. We certainly at a minimum would get our cash burn rate down through A much smaller level and obviously the smaller the quarterly burn rate, the longer the cash runway is that you have from any Cash balance at a given time. Okay. Thanks. And then If we can get the cash burn rate Down into the single digits, that gives us plenty of runway and that would certainly be our objective. Yes. I'd like to add here that As Bill said, we didn't finalize yet our 2023 operating plan. We are looking to See how we are going to complete our Q4 and 2023, 2020 Two numbers as a guideline of what we can accomplish next year. But in some of the scenarios we are looking next year, We will be profitable in Q4, but this is not something we are committing today as we are evaluating the specific work plan for 2023. Okay. Is there the potential for your revenue in 2023 To potentially be higher than you were originally expecting, given your push it looks like supply chain issues are going to prevent you from shipping everything that you want To this year, demand hasn't changed. Is this all going to kind of fall into 2023 and maybe give you a little bit of a Alwind, as you start the year, backlog is up and you sort out some of the manufacturing supply chain issues? So right now, as I said, we didn't finalize the plan for 2023, but in some of the scenarios we are looking, The revenue will be very close to what we discussed before. And then the last question Can you I know you haven't obviously, you haven't set your 2023 budget, What can you comment on in terms of OpEx dollars directionally even in 2023 versus 2022, we're all trying to model this, of course, and the cash flow and That's actually the only other one. Of all the questions you asked, this is the easiest one. So, the OpEx will be very similar in 2023 to the levels we are exiting, 2022. In terms of dollars, right? In terms of dollars, yes. Yes, dollars quarterly spend in 2020, so very, very Similar, Karl? Yes. Okay. All right. Thank you very much. I'll pass it on. Thanks, Brian. Our next question comes from the line of Troy Jensen with Lake Street. Please proceed with your question. Hey, gentlemen. Thanks for taking my questions. Just to follow-up on Brian's about fully funded profitability. I think you guys also just filed the shelf tonight. So is that just good corporate Governance to get ready for when you do need capital or just kind of you can touch on that, please, if you would? Yes. Look, We don't want to go beyond what we said in the accompanying press release, which is that, firstly, Because we have just anniversaried our 12 months of going public, we are now S-three eligible. So we view it as good corporate Governance practice to put up a shelf, we don't have an immediate intention to sell securities. But the registration statement obviously does provide us flexibility that if there were to be a financing opportunity that was Advantageous to the company and stockholders. We would be better positioned to take advantage of it. And Cut, I think that really says everything that we currently think about the on the topic. Maybe just one more thing in the same category is, As we say, we didn't make our plans for 2023 as we didn't finalize our plans. We are looking for scenarios at which we are going to become profitable before the End of 2023, this is our goal yet and we're looking at how we can accomplish that. In those scenarios, we definitely don't need more cash, But the market and the capital market and the world are very unpredictable these days, so we want to be ready. Great. Yes. Good corporate governance, I get it. Hey, a follow-up on a couple of the customer comments here. So I know during the quarter you guys announced that KEPTEN placed a big order and I know they ship into auto, but that is not the same as the auto OEM that you mentioned in the prepared remarks, correct? So there's 2, at least a new auto OEM that is not Auto OEM is It's an OEM, especially. Right. And it's a big large company. Yes. Just wanted to be clear. And then on the European customers 2 this quarter, am I remembering correctly, you guys had 1 last quarter We had a customer in Europe prior. You're right. But these 2 are in addition to that. So that is our customer to answer it. Yes, all right, perfect. And then just on the launch customer pricing, is that going to be completed now in Q4? In the last quarter, Bill, you provided that nice chart that showed kind of when this launch pricing system sales were going to hit. So I'm just wondering if it's going to linger into next year, Just a quick help to limit our gross margin. We've already shipped the last system in that order to the launch customer. So that's already occurred in Q4. Okay. Yes. So it will be flushed out now. Okay, perfect. And Vinny, I know I ask this a lot, just love to hear your thoughts too. Just any change on the competitive landscape? Obviously, who I thought was your biggest competitor It's now getting acquired by a bigger entity and there's some debate whether or not that's good or bad for competition, but just kind of thoughts on the competitive landscape, please. So, our biggest competitor was and remains the same company, and this company has not been acquired. SLM has not been our largest competitor. Okay. The other German guy, right? Sorry? The other German guys, your biggest competitor? Yes. They are significantly larger. So Great, exactly. But I guess I didn't think there is far along in support list is what I was kind of leaning towards there. Vamra? This is a question you asked me before. Do I see Any change in this, and we are working with a lot of customers. We are seeing a lot of things in the market. And I don't see any of these other companies have any useful capability for that actually enables customer to make the parts So that they are useful with this technology. Sorry? I just said well stated, very clear. Thank you. Good luck guys going forward. Thanks for the time. Thanks, Troy. Our next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question. Hi, thank you. Good afternoon. Benny, I just wanted to go back to a comment you made about operating expense relative to For 2023 relative to Q4, exiting Q4, I may have missed it. Bill, did you actually talk about OpEx? Because OpEx for Q4, what I'm asking I guess is will that be increased from Q3 levels? You've got a big trade show here. So So how do we think about operating expense for Q4 if we're going to assume that it doesn't change that much in 2023? Yes, it should be relatively flat in Q4. And as we said, We believe that 2023 OpEx will be relatively similar. In my remarks, I mentioned We're managing to flat to modest growth headcount and that's the major driver of OpEx. Got it. And the other question I had is just with respect to components and securing the necessary Components to meet your Q4 plan, I'm wondering what kind of an impact that might have on gross margin If you've had to go out into the market and aggressively purchase these parts, that that might end up being again a headwind to your Q4 gross margin? I think, firstly, the components that resulted in the shipment delays We're a very small proportion of the total bill of material. But obviously, if there's 5% of the billed material that you don't have, you can't ship the system. So, I guess that's point We saw the bulk of the impact On material cost from the current environment, in the early part of 2022, When we had to go out and buy putting purchase orders for a significant amount of material That showed up as inventory in Q2 and we still continue to carry Much of it in Q3. So most of that impact from a tight material market is already in the numbers In Q2 and Q3, as we mentioned last time, we're now burning through that inventory and flowing it into cost of goods And into shipments. So we wouldn't expect a Further incremental negative pressure on material costs from here, I think as we mentioned in the past, We have negotiated some deals to which will bring material cost reductions and those will start Showing up, that material starts flowing this quarter and it will end up in cost of goods in the first quarter of 1st and second and following quarters of next year. So hopefully, we'll see an improving trend. And we've got further component sub assembly Deals that we're looking to do to try to bring bill of material costs down even more. Okay. And one final question, if I may, just slipping in. Just Benny, in light of the I I think you alluded to it, the overall macro environment, the uncertainty. Are you seeing any change in customer behavior? Has there been Any change in terms of anticipated order activity or Any de bookings at all? Or is are you still seeing fairly consistent demand that you had expected going into the quarter? So, we don't see yet the booking. I didn't see the booking. What we did see are 2 different things. We saw, 1, customers having more trouble securing capital budgets. Capital budgets take longer to secure and 2, companies postponing payments. Okay. So collections become slower. Okay. Got it. Thank you. And our next question comes from the line of Wamsi Mohan with Bank of America. Please proceed with your question. Yes. Thanks for taking my question. I guess I want to go back to the comment You guys made about working capital improvement to maybe drive much lower cash burn. If you're tracking to $25,000,000 to $35,000,000 right now in the Q4, can you give us some sense of How much of that benefit to get down to the single digit would come from the improvement in inventory versus Other areas and how soon can you get to a single digit sort of cash burn rate? That's my first question. I have a follow-up. So first, inventory reduction is a cash flow improvement. It's not an EBITDA improvement per se, right? So on the EBITDA side, we are planning to get to this level. As I said, we didn't finalize the numbers yet. But in some scenarios, we hope we can get there in Q3. The inventory levels that we operate right now Very high. And in the last few quarters, we were not able yet to reduce them in a significant way Because a lot of the inventory that we have is inventory that will last into Next year, and a lot of that is inventory of things that we had trouble sourcing. So we made deliberate decision To keep very high levels of inventory this year, this is starting to improve. So we are going to start seeing in Q1 A gradual reduction in inventory, I would not plan I don't want to set the expectation that in Q4, you're going to see inventory drops in a massive way, but We are going to start seeing inventory dropping in Q1, and we hope to get to significant better inventory levels What we have right now by the end of the year. So the reduction in the inventory level and the working capital improvement should help us Get to a better cash flow than EBITDA when it comes to the second part of next year. So, Wamsi, you think in any particular in any given quarter, the working capital reduction is going to be a Single digit million. I see. Okay. When that would happen. The other drivers of profitability improvement, we are this is an important one. We're We're getting behind us not only the launch customer deals, but also the early bird reservation discounts. The bulk of our early shipments were at that kind of pricing or And pricing priced under one of those two arrangements. So as we move into normal pricing, that's going to be a significant benefit. And then I also mentioned the bill of materials reductions that we Part of which we've already negotiated and more of which we hope to negotiate going forward. So you're going to see Impacts from all four of those things. Okay. That's helpful. Can I ask about Your supply constraints, I think you said that you have Procured enough components to meet the revenue guidance that you have here for the Q4? As you look into the early part of next year, do you see these supply chain issues alleviating? Do you have confidence that you will be able to procure the components necessary, do you need to do that now? How are you thinking about the persistence of these supply chain issues? So I think that we have succeeded in resolving Most, if not all, of the supply chain issues that we suffered in the last two quarters. These are famous last words from CEOs saying that we resolved all the supply chain issues. So, I would not be surprised if there will be something new coming up, but I think I'm optimistic this quarter based on how I see our specifically for Q4, where we are with the supply chain And the parts for the system that we need to produce in Q4, we already have the parts we need for those So this is much better state than we were last time around when we had the earnings call. So That's a good state. Is it going to keep like that into Q1? I hope so. I have all the reasons to suspect so, but it's We've also entered into some long term supply contracts with certain vendors so that They have an estimated quarterly quantity from us and so they know exactly what they need to procure. They have a lot more lead Time to go make sure that they have the components they need to deliver the assemblies that we've ordered from them. So I think in that Back to a much better place than we were in early 2022. Okay. Thank you very much. Thanks, Holger. And our final last question comes from the line of Shannon Cross with Credit Suisse. Please proceed with your question. Thank you very much. I wanted to go back to the liquidity question. I know you have a I think you have a line with Silicon Valley Bank that had something where They would release funds upon installation. I'm not sure if that's correct, if I'm remembering right. Can maybe you talk about Are there sources of liquidity that you might have if you get to the point where maybe inventory doesn't come down like you'd expected or costs are higher than Sure. We have two lines with Silicon Valley Bank. 1 is A working capital revolver, which is $30,000,000 I think only $3,000,000 of that is drawn. And the second facility is $30,000,000 I should say. And the second facility is a Equipment financing facility for systems that we lease to customers, and that's $15,000,000 in total and it's approximately a little less than 1 third drawn at this point. So we have some reasonable amount of undrawn facilities from Silicon Valley Bank. Okay. That's helpful. We lost to Shannon. John, are you there? Hi. Sorry about that. What I wanted to understand, I know we've talked a lot about inventory, but I'm just curious as you look at your inventory, Given the growth expectations that you do have, because obviously you're still a growing company, I guess I'm trying to figure out how we balance what you can draw down Near term with kind of the ongoing inventory levels you may need to have to be able to manage the revenue growth that at least theoretically should be coming to this industry. So I don't know if you can talk a little bit about how you're thinking about that, what maybe levels of Cash you think you need to have to manage the business? Just anything you can give because clearly there are some concerns out there given the supply chain challenges, right? Yes. I think the difference in the approach to inventory levels is that In the beginning of this year, in general, we were targeting Because we had such limited visibility on where problems might arise, we were Holding 6 months of components, 6 months worth of production. And what we're now implementing is Much more staggered deliveries where we have 1, 1.5 times 1, 1.5 months of inventory. Now look, we haven't it will take us, as Benny mentioned, Well into next year to work through all that excess inventory. But With these longer term contracts and staggered deliveries, you can have if you can count on those deliveries, You can have a much smaller quantity of on hand materials. So that's how we're able why we're confident that we can Bring down inventory and increased production at the same time. Okay. And what percent of your sorry, go ahead. I was just going to say, we're getting much more experience with our suppliers for the XC product. And so we're getting much more comfortable that They are much more comfortable with their reliability and their ability to deliver on a staggered monthly basis. Okay. And then I was just going to ask, what percent of your inventory you have right now is effectively finished goods or almost finished goods versus component? It's probably 30%. Yes. So it's around a third, plus and minus, with finished goods. Okay, great. Thank you very much for taking my questions. Just Shannon, just to make sure, WIC is about 30%. Okay, great. Thank you very much. Thank you. So I'd like to thank everyone for taking the call and taking the time. Thank you again, and we'll talk with you again next quarter. And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.