Q3 2019 Earnings Call

Thank you and good afternoon, everyone. That's the operators that I object.

Pardon me everyone. Good morning, good afternoon, and welcome to the in the late third quarter 29 teens earnings Conference call. All participants will be in listen only mode should unions. Your sense play signal a conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions.

Ask a question you May proceed Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now let's turn the conference over to Jason Willy.

Please go ahead.

Thank you and good afternoon, everyone as the operator said I'm, Jason Willy Unlike senior director of Investor Relations had a corporate development Stuckey, Chief Executive Officer, and one bracket Chief Financial Officer will be speakers on today's call. If you have any questions. After the call. Please direct them to me 360 lives.

7489 zero for Jason Willy and like that.

Copy of todays earnings press release is available on our website at www Dot dot that.

In addition, you can access archived version of today's call from our website.

Today's call our discussion will contain forward looking statements, including statements about financial projections future business growth trends and related factors prospects for expanding and penetrating addressable markets and our strategic focus and objectives forward looking statements are subject to risks and uncertainties many of which are beyond our control income.

During the risks and uncertainties described from time to time in RCC products.

That's results may differ materially from those projected on todays call. We undertake no obligation to update publicly any forward looking statements, except as required by law. Additionally, certain non-GAAP financial measures. We discussed on this call. We've provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP.

Sure matters in our earnings release, which can be found on the Investor Relations section of our website.

I'd also like to note that members of enlighten senior management will be available to meet with analysts and investors at the Fab Tech trade show in Chicago on Tuesday November 12, if your attending the show and are interested in meeting. Please email me at Jason Dot Willy I like that I will now turn the call over to wrong to get through the financials and outlook.

Scott will then provide additional color on the business. We will then be glad to take your question.

Thank you, Jason and good afternoon, everybody work.

Revenues for the sales quarter, well 43.82 medium down 14% year over year.

During Q3 sells to the industrial end markets, where the 19 medium we're presenting 40 sweep of central scope on revenues.

Down 9% year over to you.

So two microfabrication end markets will filter importance to be medium oh, 70% of scope out of revenues and down 33% to youre going to you.

It was space and defense sales with 11 point Sixmillion, Oh 26, more central focus on revenues and grew 17% compared with the seventh quarter of 2018.

On geographic basis sales to China was 17.4 million in December quarter, <unk> 2019, Oh multiple multiple central spoke on revenues up hopeless and compelled weak Q3 2018.

Turning to know so maybe call with a 16.4 million, representing 77% difficult on revenues and down 19% year over year.

Rest of the world sells well attended medium down 30% compared with the sales quarter of 2018 and 23% of spoke on revenues.

The Chinese industrial end markets represented approximately 25%, though overall sales during the second quarter 2019.

Gross margin was 29.64 sent into sales quarter.

<unk> decreased 580 basis points year over year.

In the sales quarter of 2019 gross margin was negatively impacted by approximately 1.1 media all 260 basis points related to the U.S. China Terry.

Implemented since the middle of 2018.

Gross margin was also negatively impacted by the mix of end market sales less favorable fix cost utilization and pricing in the Chinese industrial end market.

Those headwinds will partially offset by cost reduction and mix to higher power in the industrial end markets.

Operating expenses were 17.7 million during the second quarter compared with the we settle to medium in the second quarter 2018.

Yes, we 19 operating expenses included 1.1 million of stock based compensation.

You over the years walks into operating expense expenses reflect investment in R&D to position the business for long term growth opportunity and higher public company cost.

Excluding stock based compensation, we held operating expenses flat over the past recorders.

Third quarter operating loss of 700000 was negative 1.6% revenues and compares with an operating forfeit the 5.1 medium Oh, 10% of revenues in the third quarter of 2018.

Our adjusted EBITDA for this quarter was 2.7 media Oh, 6.2% of revenues. This compares to 9.2 medium or 18% of revenues in Q3 2018.

GAAP net loss for the so called <unk> 2019 was 800000, though compared with net income of 4 million in Q3 2018.

GAAP EPS for the sales quarter of 2019 was a loss of two cents spill show compared with net income diluted shares of 10 cents in December quarter <unk> 2018.

non-GAAP PPS, which excludes the impact of stock based compensation was one centsper diluted shows in Q3 2019, compared with 15 cents per diluted shows in Q3 2018.

Turning to the bottom shoot.

We ended Q suite, we talk about cash and cash equivalents of 179 million.

Yes, so for the third quarter 2019 was 61 days inventory at the end of the quarter, what was 46 million representing 128 days of inventory.

Inventory levels have reason to support higher unit volume, mainly in the industrial end markets.

During Q3, we utilize $700000 in cash in operating activities capital expenditures for the quarter with 3.1 million Oh, 7% revenues.

Turning to the guidance for the fourth quarter of 2019.

We expect revenues to be in a range of 76 million to 40 million.

This reflects the impact of ongoing global trade and the economy uncertainties across all business and continue slower activity with several out of all of allows customers in the microfabrication end market.

Based on our current expectation full product mix, we see gross margin for Q4 2019 in the range of 25% to 28%, which includes approximately 400000 of stock based compensation and negative impacts from power. We have introduced since mid 2008.

I mean of approximately 1.4 million all around 370 basis points.

Operating expenses for Q4 are expected to be approximately 16 million, which includes approximately 3 million of stock based compensation.

Oh, the fourth quarter, we expect adjusted EBITDA in the range of fed loss of 2 million to breakeven.

We expect Q4 ever reach basic and diluted show at approximately Q3 2019 endeavor.

I will now turn the call over to Scott.

Thank you Ron it's run reviewed our third quarter results reflect an operating environment that remains challenging which is having an adverse impact on two of the three end markets we serve.

Well I didn't certainties overhanging global industrial activity and recent headwinds in consumer electronics driven applications. We are excited by what we have accomplished in developing them or leasing differentiated products.

This includes progressing key strategic areas, such as krona fiber laser welding and directed energy solutions.

Remain focused on driving higher performance and lower cost across our product portfolio.

In the industrial end market, our revenues declined 9% year over year in the third quarter, while the global macro environment and competition and trying to remain headwinds, we're driving key initiatives for positioning our industrial business for long term growth outside of China.

This includes welding applications, where today, we introduced our new welding product family with integrated switches and couplers. This offering in combination with then lights growing portfolio of Highpower fiber lasers opens a large addressable opportunity.

It also builds on recent customer momentum, we are seeing across our current welding solutions.

We continue to gained significant traction on the design win front with krona, our programmable fiber laser.

This growing customer adoption will be on display at next week's Fabtech Expo in Chicago.

A number of global materials processing tool vendors will be demonstrating differentiated capabilities of krona their tools.

We are particularly proud to have secured our first global tier one design win with krona, we expect revenues from this customer opportunities to begin ramping in the middle of 2020.

Within China, our overall fiber laser business is shifting towards high power in ultra high power sales, our rollout of higher power lasers in China has helped support our sales as both competitive and geopolitical headwinds continue to persist in his geography.

In Q3, or six kilowatt and about fiber lasers grew 26% year over year sales in this category accounted for approximately 40% of our total fiber laser sales compared to 30% of total fiber laser sales in the comparable period in 2018.

Sales in the two to five kilowatt range, where approximately 39% fiber laser sales in Q3 2019.

We also continue to aggressively drive down the cost of our fiber lasers over the past two years, we've cut our cost per watt by over 50%.

We're on track to achieve even more rapid cost reductions in the future.

And then Microfabrication market, we have seen much slower activity across our customers focused on consumer electronics, and automotive and applications within our customers serving consumer electronics. We believe activity has been particularly slow in 2019 for those exposed to the smartphone market.

We believe more muted design and technology refreshes have resulted in limited manufacturing retooling a key driver for growth in the lasers, we help power.

Additionally, our inventory levels at several large customers are slightly elevated due to a combination of softer end market activity and ordering ahead of anticipated tariffs. We believe happened in Q2 2019.

He's inventory dynamics combined with ongoing macro related uncertainties and consumer electronic softness or impacting our near term outlook for this end market.

Based on our current view into Q4 activity, we expect our microfabrication end market to decline approximately 20% year over year in 2019.

We believe this decline is in line with declines in the underlying saw the state laser market we're serving.

Looking forward, we see lasers, continuing to displace legacy technologies in the markets served by our Microfabrication customers. We further believe our focus on innovation around high brightness and improved cost performance will enable us to drive leadership in semiconductor lasers and opened new application opportunities.

Well it visibility into specific business for 2020 is limited at this point, we expect the next generation of a number of consumer electronics devices and initial rollout of Fiveg solutions to generate meaningful supply chain retooling, a key driver for new purchases of certain number of customers lasers.

In the aerospace and defense end market. We grew revenue is 13% year over year in the third quarter.

The record quarter was driven by ongoing momentum at several of our core customers. This is the seventh consecutive quarter of double digit year over year growth for this end market.

We continued to benefit from our position as a core technology provider to several long standing programs.

We've been more encouraged by the clear trend towards utilizing lasers in high energy defense applications, we're developing new products that provide higher performance and lower size and weight to enable highly differentiated solutions and for this opportunity.

We recognized small amounts of revenue associated with direct energy research in this quarter.

We view directed energy as a key long term growth opportunity a friend light and believe our technology and products are well positioned for this market as it continues through the R&D phase and evolves to feel deployments.

In conclusion, while the current operating environment remains challenging our enthusiasm around the long term <unk> industry opportunity and lights positioning is unchanged.

We remain committed to investment in our technology roadmap and focused on executing to key priorities needed for driving design wins, expanding our customer footprint and continuously improving the cost and performance of all of our products.

Just focus on innovation is evident in are growing traction in highpower fiber lasers that design win momentum we're seen with trying to.

Leadership position in semiconductor lasers, and a strong growth we are seeing in aerospace and defense end markets.

Sustained execution in these areas will enable us to deliver growth and margin expansion over the long term.

In closing I'd like to thank the entire Enlight team for their efforts during the third quarter with that I'll now hand, the call over to <unk>.

We will now begin the question answer session to ask your question you May Press Star then one on your Touchtone phone.

You are using his speakerphone, please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

Our first question comes from Greg Palm with Craig Hallum Capital Group.

Yes. Thanks, good afternoon, and wanted to start with gross margin and some of the negative impacts that you talked about can you maybe quantify or at least bucket out.

In addition to the tariff impact do you know the headwinds from mix volume and negative pricing.

Yes, you said this is Ron.

Thank you for the question Greg So yeah. The reason embarked on Sim city all of the above that you mentioned as we try to.

At least prioritize those those.

Different Oh peak so.

There is definitely an impact though for the time if.

[noise] you know this quarter the impact of the Tavi photographer was 1.1 media and it was 260 basis points.

Next quarter, we are talking about roughly 370 basis points impact on just just because of the dilution of volume the revenues is going down, but the but the doritos over the time. We've stayed the same roughly so that's definitely one of one of the one of the items then differently do is the mix between.

The end markets. So you so that there was a reduction quarter over quarter, you overview between microfabrication versus the industrial end market, that's mix impact negatively our mothers and then to so topic is the volume differently. The reduction in devoted when I want to fix costs in.

Hello margin as well.

Mentioned it at the end I'm talking about the pricing in China. The pricing is China impact a little margin as well. However, most of it was offset by cost reduction.

On the industrial mainly on five of the days of in the industrial end market.

As well as mix towards higher Pablo as we mentioned in the past title polos.

Obviously coming with a better mileage in that mix help us to offset some of the price reduction in China.

Gotcha, Okay, and then the Q4 guidance specifically on gross margin the delta between that in the September quarter. In addition to a higher impact from tariffs is that mostly volume related or is there anything else going on it's the same same same topic, it's mostly volume each time.

Maybe if any to mix.

Okay, and any more thought in terms of mitigating this tariff impact by moving some some manufacturing over to Asia or is that not a yet in the discussion no. It's definitely into discussion and we are moving some production from the U.S. to China and vice versa in order to reduce debt.

It will take time, though it will take time, we have inventory on hand that we already producing a in certain places hi that in China over in the U.S., which will take time, but we expect that.

You know you at the end of Q1 Q2 next do you really see some reduction in terms of everything being equal same may you know same a level of starway, if say mix obviously.

Okay, and then I guess last one for me Scott you mentioned this a tier one corona wind congrats on that I think you also mentioned sales ramp up potentially starting in mid 2020 minutes. It's a brand new customer and you know anyway, we can sort of think about the magnitude of of the when and how big of a customer. This good good.

The overtime.

Yes, sure Greg Thanks.

Definitely it's exciting to see the progress with krona with this customer and others I think probably the best opportunity would be it at fab Tech in Chicago, where you'll see various customers are displaying kroner, there and it is a new customer.

There are several other new customers there are in the funnel and krona is certainly proving out to be a and very important part of our differentiation and again.

A lot more detail will be a available on the show floor at Fabtech.

Okay great.

Hop back in queue. Thanks.

Our next question comes from Jim Ricchiuti with Needham and company.

Hey, guys. This is Mike cecos onto your machine.

One thing you first on the micro fabrication business I think you guys disclosed other resolved some large inventory build several of your largest customers.

Yes. It was up several of your large customers don't have elevated inventory I wanted to know do you guys have to gauge for when those customers will listen there's working those inventory levels bump.

Yeah. Good question.

There was a build up inventory for several factors just due to the cycle industry and also the tariffs.

And it depends.

On the customer and that application, but generally by the first half of next year, we see those inventories of working their way out through the value chain.

Okay, and I guess on following on that topic between industrial and micro fabrication businesses.

Can you guys kind of discuss the visibility that you have into those markets. Currently I'm interested in how cloud you might get given me the inventory build that you're talking about view.

We think we have pretty good visibility into the inventory build we've known about it for some time with what we don't have visibility into is certainly the end markets and in terms of the uncertainty and geopolitical and otherwise.

So you know we do believe that there continues to be a trend towards more advanced lasers for various microelectronics applications, and we're very well position there.

So we do see things are stabilizing, but but taking some time to get back to the growth that we anticipate there in microfabrication and then with respect to industrial.

You know, we don't see that sort of in trade. It the lead time, there as much shorter answer there again.

We don't have visibility into the sort of higher level macroeconomic trends, but again, what we do have visibility into is the design wins that that we're pursuing and with a new products that we're launching for krona for cutting the new welding products. We just launched a we're feeling.

Like we've got a good insights into continued adoption by a new customers in that space.

That's helpful. And then one more if I could on the new a new range or a new family lasers for the welding applications.

Can you help us better understanding how he's welding technology sort of differentiated from the competition, we've looked a lot.

Right Yeah. So in welding, we do have sales and welding today, although relatively smaller part of our business day with products that we have today the family that we're launching at Fabtech allows us to access a much larger part of that market.

And we do believe that that its market that is.

Growing faster than cutting applications.

And as we continue to expand our work there once again krona becomes a source of differentiation in the ability to program or or lasers for different beams for these different applications. We believe we'll continue to drive differentiation in that space.

Great. Thank you.

Our next question comes from Andrew Degasperi with Baron Burke.

Thanks for taking my question did you mentioned that 40% of your revenue today was high our I mean, what do you think that could be the majority of your revenue would it be 2020.

No. We don't have visibility into specifically you know how that will migrate over time, however, I will say that migration. So far has been a fairly significant.

Over 40%.

In the last quarter and that's up significantly from where we were you know about double where we were just a year ago and it was very small percent the year before that's we're seeing continued migration to higher powers and as you go up in power certainly becomes more difficult to provide those.

Users.

So we do see that continued trend towards higher power and in addition to that when you combine that with a higher performance of krona, you get a much better differentiation and we've just launched at the 12 kilowatt krona. The the highest power programmable laser that is available and again, we'll be showing that.

Fabtech.

And just as a follow up in terms of the how quickly do you think those wages could penetrate the market and then your wants the announcing I stopped <unk> on the cutting side do you do you foresee another nine to 12 months' timeframe or do you think that what happened a lot sooner than what that's.

Normally the case.

Well I think theres theres various customers their various stages of the design in process and some are ramping right now some of the earlier stages. So we anticipate.

Continued growth in that space, but I will say that it is moving faster than you know it's typical in previous because krona is no. It provides differentiation for customers in that space.

Got it and then my last question is on the welding products you're launching Hum.

I think this is not a laser system, perhaps I mean, where are you really looks that systems integrators, who would provide that's and I guess is there any particular as automotive really the one they're focusing on.

Well the see first question, yes, you're correct, we're not providing a systematic that's important we provide a no much higher value add at the laser level, but it is still a sub system. If you will for the system integrators.

Today, the market that perhaps is a you know driving you know our near term growth is a battery <unk> market, but yes broadly speaking automotive is a very important part of the welding a market with really a broad range of applications.

Let's go certainly outside of a bottom going up but that is a that's an important driver in that space as companies are looking to.

Use the laser welding automated processes in there you know new designs.

Great. Thank you.

Again, if you have a question. Please press Star then one.

Our next question comes from Tom Diffely with D.A. Davidson.

Yes, good afternoon, a I'd like to focus more on the new products you can I recently, when you look at all the new products and the different powers sizes.

So when you sit back and looking at what do you think is the biggest a long term driver and maybe the biggest near term driver on Debbie portfolio that we scenes released.

Well, let's see thanks, a question Tom with respect to the industrial market I think that krona remains both you know the key near term driver and longer term. It will continue to evolve and become more sophisticated and drive new applications. So today.

In industrial krona is allowing us to private differentiation for our cutting metal cutting customers. You know there's welding applications also coming along and finally, even an additive manufacturing, there's certainly benefits to corona.

That's an industrial.

I haven't talked about the aerospace and defense market. We're also developing products in that space.

Where are you know superior performance in size weight and power.

Offers significant differentiation in a market that is.

Poised to grow very rapidly. So those are the two key themes on to remember it's about higher performance krona a in industrial.

And then in the defense space, you know really leading edge technology that allows for a the the highest performance at the lowest a weight.

Okay, Great and then he says related question when you look at pricing and perhaps more importantly profitability, that's simply scale with size power sites to you or.

Features inside this leaves has always are more important than scale excites me. Yeah features certainly are the dominant factor and certainly when we provide differentiated products.

You know, it's very different from say a very standard product. In addition to that performance, though it does scale with power also as you go up in power you know it gets much more difficult. So the competitive intensity is very different at the higher power. So yes, we've ramped up to over 40% at above.

Six kilowatt, we see certainly very different competitive dynamics at the higher parallel.

Okay, Great and then Rob a quick question them all itself what was the percentage increase in tennis that you saw during the quarter.

I can tell you I don't know percentage, but I can tell you exactly you know a year ago in Q4, we lost to the additional data with we'll disclose and good. The addition of that if that was imposed meet loves to you.

It was 500 than $50000 or 120 basis points in book.

If you're looking at Q4 the guidance that we gave full Q full the bucks to really be 370 basis points, a 1.4 million.

In the hotels.

Okay that relationship with our ratio that detect went up whether other stock is low so many many factors that the bucket. The the tower. We finished so within the quarter. It depends on what we all money fixture with how much we are real money effectively and gets also the inventory level.

If there is a change in the into we found that was a change in that though if during the last year and so on and so forth.

Okay, and then finally would you consider that to be you kind of the peak parents love, what you'll see on a percentage basis or.

Margin hit or could it an expansion there from dopeless spec because again, it's hard to say fit speak it depends on obviously I cannot to talk about what what's gonna be the future hosted over that that if it is between change all the way to change, but everything being equal and again it depends on the on the on the on that.

Mix and whether we would have produced we believe that me meet next deal you would see some reduction again, but it's very very difficult to estimate what would be that over.

Many many assumption behind that.

Okay. Thank you for your time.

Thank you.

Our next question is a follow up some Greg Palm with Craig Hallum Group.

Yeah. Thanks, a couple more for me I guess doing the math or it looks like industrial sales outside of China were down year over year, and I guess that seemed to be an area of optimism at least from the Q2 calls so anything to call out there.

Okay.

Yeah him [laughter], Yeah, there was a reduction in this quarter, but the and on on industrial end market industrial end market, but.

Do you feel we look at A.M. use it to the industrial end markets, although we're not disclosing that specific number but if you look at today you today, the industrial end markets outside of China, There was essentially a growth though.

Okay.

And any top 10, I I don't know food I missed this but any 10% customers in the quarter or no.

Yes, the to the top 10 customers you will see that in in the 10-Q that we've been filed on Wednesday, but one of them was quick Liza and the other one was with him.

Okay can you quantify and now are we got to wait for the Q Oh wait for the Q.

[laughter] Wednesday this week.

All right a short way and then I guess you know just one last one on aerospace and defense I know Scott Youve got to some commentary I think about directed energy you know is that.

Is that just you know tiny sales at what point could director directed energy become meaningful I guess, you know that space just continues to ramp up really nicely. Here. So you know is that just you know at market demand or do you know more sort of share gains do customers, what's really driving the growth in that segment.

Yeah. Good I think it's a market that is still in its early stages. Today. It is a portion of our revenue today, but it's relatively small portion. It is a market that is poised to grow.

Rapidly over the coming you know two to five years and in that timeframe. We expect to grow continue to grow rapidly in that space and that's why we're.

Developing new products that you don't take our core platform of high power semiconductor lasers and drive it to really the next level of performance that's needed in that space does these lasers are a.

Much well much more sophisticated set of lasers than are needed in the industrial markets. So.

There are some important differences, but they require the same core technology and so that technology needs to be adopted for this market. So yeah I would I do think that it is a market that we are highlighting as a key source of growth you know over the medium term.

Okay, Alright, good luck on for.

Thank you.

This concludes our question answer session I would like to turn the conference back over to Jason Willie for any closing remarks.

I'd like to thank everyone for their participation today and continued interest and again, if you happen to be in Chicago or have impressed and seeing I sat at that Tech next week. Please get in contact we'd love to schedule a meeting again have a good rest of your day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.