Q2 2020 nLIGHT Inc Earnings Call

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Sure the I'm late second quarter 2020 earnings conference call.

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Now, let's turn the conference are Mr., Jason Willy. Please go ahead.

Thank you and good afternoon, everyone at the operator said I'm, Jason really and Mike Senior director of Investor Relations for developing Scott Kinney, Chief Executive Officer of at Night, and Rocker Cat Chief Financial Officer will be speakers on todays call.

You have any questions. After the call. Please direct them to me at Jason Dot Willy and right now.

Copy of today's earnings press release any earnings Slide presentation are available on the Investor Relations section of our web site at investors that and light thought that in addition, you can access an archived version of today's call from our website.

Today's call our discussion will contain forward looking statements, including statements about the potential impact the ongoing covered 19 pandemic 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 uncertainty.

As many of which are beyond our control, including the risks and uncertainties described from time to time and our SEC filings. Our results may differ materially from those projected on todays call. We undertake no obligation to update publicly any forward looking statement, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call.

We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website I.

Ill now turn the call over to Scott, who will provide an update on the current environment and the markets. We serve Ron will then go through our financials and outlook. We will then be glad to take your questions.

Thank you, Jason Q2, with another strong quarter of execution friend light in what remains a challenging operating environment, we generated record quarterly revenues and delivered financial results at or above the high end of the outlook we provided in may.

The key driver of the better than expected performance was our industrial end market, where sales grew 8% year over year, even as global and economic uncertainty remained elevated due to cobot 19.

Our business in China was strong in the quarter as the demand rebound that we experienced in April continued throughout the quarter and in July.

The strong revenues flowed through to improvements in product segment margin relative to the past two quarters and generated better than expected overall profitability.

A stronger sales combined with cost controls enabled us to grow our net cash position during the quarter, while continuing to invest in the R&D roadmap. We believe is necessary to drive sustainable long term growth.

I will start with slide four of earnings presentation and look at the current business environment for our three end markets.

As we sit here today demand continues to remain resilient globally, particularly in the industrial end markets, even as macro uncertainties and operational challenges related to covert 19 persist.

Beginning with aerospace and defense, we grew revenues, 5% year over year on an organic basis, and 68%, including the 5.7 million dollar contribution from new Tronics.

This performance demonstrates the solid and sustainable foundation of business, we have with our core defense customers and the early stages at the long term opportunity, we see in the direct energy market.

In light has a long history of serving aerospace and defense customers and as a key supplier of semiconductor laser and related technology to a number of ongoing programs for applications, including countermeasures guidance and measurement.

As we look out over the next several years, our primary focus within aerospace and defense is directed energy.

We see solution, serving the directed energy market, having the potential to drive growth in both our products and development segments.

During the second quarter, we continued to make good progress at new Tronics with work on several key government contracts.

Within directed energy, we believe we are positioned as a leader in the market with our vertical integration of key enabling technologies from semiconductor lasers through beam control.

Within Microfabrication, our sales were down 21% compared to the second quarter of 2019, but grew sequentially for the first time since Q2 of last year.

Compared with 2019 sales remained constrained by more limited market activity across several key end applications, including consumer electronics and automotive.

However, we are encouraged by the signs we saw from several of our key global customers and we had record contribution from Chinese manufacturing customers.

We believe the primary driver for that strength in China is investment in ramping product manufacturing to support fiveg, including networks in handsets.

Our industrial business grew 8% year over year in the second quarter, the highest level of revenue from this end market since Q2 of 2018.

Strengthen the quarter was driven by strong demand in China, where we continue to see growing customer interest in our highpower fiber lasers.

We made good progress in ramping recent design wins globally, and we expect to success to be even more evident in our revenues over the coming quarters.

We've enhanced our position within a number of key accounts globally by providing differentiated technology such as program ability the introduction of enhanced solutions for welding applications and by continuing to offer strong customer support.

Moving to slide five.

Across all geographies, our fiber laser sales continued to shift to higher power during Q2, or six kilowatt and above fiber laser sales more than doubled year over year.

Sales in this category accounted for approximately 54% of our total fiber laser sales, which compares to 35% in the comparable period in 2019.

We continue to drive our product roadmap to support higher power levels and provide customers with highly reliable differentiated solutions.

We are well positioned within the industrial markets to benefit from our customers increasing focus on diversifying their supply chains.

With the growing movement to examine and diversified the location of manufacturing operations in supply chains, we see opportunity for the integration of more automation and lasers into industrial production.

While these types of decisions and move ins do not happen overnight for most companies. We are seeing clear signs of increased interest in these types of initiatives globally.

We believe this can be at long term tailwind for the laser industry and in light.

Turning to slide six.

The second quarter.

81% of our sales were in China up 18% compared with a year earlier period.

During Q2, we experienced a typical seasonal rebound that we believe was amplified by stronger customer activity post Q1, cobot 19 headwinds.

Customer activity in China reflects robust demand across both the industrial and Microfabrication end markets.

Outside of China, we saw a resilient demand across the industrial end market and we continue to enhance our positioning at key customers within Microfabrication. We saw positive signs at a handful of our global customers as sales grew sequentially, but activity in this end market remains below levels seen in late 2018 in early 2019.

As we look to the third quarter and beyond we are encouraged by the progress we continue to making long term growth drivers in our industrial business outside of China and in directed energy.

We expect this progress will be even more evident in our Q3 results and our financial performance moving forward.

I would also like to take a moment to note that we celebrated our twentyth anniversary in Q2.

We founded in light in June 2000, with division that semiconductor laser technology, we continue to improve rapidly and opened new markets and new applications.

What seemed impossible 20 years ago has become reality with high power lasers deeply embedded in critical tools and applications across multiple end markets.

Even with all that we in the industry have accomplished over the past 20 years I'm more excited today about the opportunity in front of us than I have been at any point in the company's history and like continues to be guided by the same principles upon which the company was founded to rapidly innovate our technology and drive further adoption of high power laser solutions.

Finally, I'd like to in my prepared remarks today as I did last quarter by extending to order gratitude to our global employee base for their extraordinary efforts over the past two quarters. The dedication of all in light employees through these challenging times has helped ensure that we not only sustain our operations and support our customers and partners.

But have continued to drive our innovation enhancer ability to deliver sustainable long term growth.

Ill now turn the call over to Ron to provide more detail around our Q2 financial performance and outlook for the third quarter.

Thank you Scott and good afternoon, everyone.

Beginning on slide nine.

Second quarter revenues of 52.1 million was above the high end they'll follow outlook up 8.5% fuel value and down 3.4% on an organic basis when adjusting for the 5.7 million contribution from metabolomics.

Total revenue includes 45.1 medium of products revenue and seven medium of development revenue.

The primary driver of the better than expected revenue was 21 demand in China at cost industrial and Michael publication end markets.

Moving to slide 10.

Gross margin was 25% into second quarter component, we 33% in the comparable period of 2019.

Product gross margin was 27.7% and develop and gross margin was 7.8 listen.

Ill with Q2 product gross margin was impacted by price reduction and unfavorable mix filled with Q2 2009 to.

This included lower Microfabrication sales and higher portfolio for revenues from China.

Thomas should be offset these margin headwinds will ongoing cost reduction and lower than expected to average costs.

One sequentially basis gross margin improved by 300 basis points.

Turning to slide 11.

Operating expenses were 19.1 million during the second quarter compared with 15.1 media owners in Q2 2019.

Operating expenses included 5.7 million of stock based compensation, an increase of 3.6 me the on yield will you.

Also included in Q2 results was 656000 of both of US intangible amortization related to the mechanics acquisition composed we've noticed intangible amortization in Q2 2009 team.

Excluding stock based compensation and both to some organization operating expenses were essentially flat compared with Q2 2019.

I will the second quarter Opex domains rates continue focus on controlling costs, while ensuring we are making the necessary research and development investments to drive future growth.

Moving to slide 12.

GAAP net loss for this second quarter over 2020 was a loss of 6.8 medium compelled to be the loss of 155000 during Q2 2019.

GAAP EPS for the second quarter over 2020 was a loss of 18 cents below show compare with the zero cents below show in the second quarter of 2019.

Our adjusted EBITDA for the second quarter was 3.3 million over 6.2% of revenues.

These compose to 5.5 museum, all 11.4% of revenues in Q2 2019.

While the second quarter adjusted EBITDA declined year over the you good results with above our outlook range.

We've been by better than expected revenues and cost controls.

During Q2, we generated 8.1 million of cash from operating activities.

Capital expenditures for the quarters with 1.9 million all 3.6% of revenues.

Moving to slide so team.

We ended Q2 results on cash and cash equivalence of 121 million and 15 medium.

In debt.

So for the second quarter of 22 any was 44 days.

Inventory at the end of the quarter was 51 million representing 115 days in inventory.

Our balance sheet remains strong and provides ample flexibility to execute our long term strategy.

Turning to slide 14, and the outlook for Q3 23.

Based on the information available today, we expect Q3 revenues to be in a range of 54 million to 60 million.

At the midpoint of 57 million. This includes approximately 46.5 million or product sales and approximately 10.5 million open development. So we.

We continue to see positive demand trends across each of our commercial end markets and geographies.

Based on our current expectation full product mix received gross margin for Q3 Twentytwenty in a range of 22% to 26%, which includes approximately 600000 of stock based compensation.

Well I'd like to gross margin. These is expected to be in a range of 26% to 70% and development gross margin in that is expected to be approximately 7%.

Operating expenses for Q3 through any through any other expected to be approximately 20.5 million, which includes approximately 6 million of stock based compensation.

And 656000 of religious intangible amortization related to the mechanics acquisition.

Diluted the in this outlook is any additional how familiar in SGN a expenses preliminary for additional spending related to settlement Oxley and move costs associated with our new Camus, Washington facility.

For the third quarter, we expect adjusted EBITDA in the range of 1 million to 5 million.

We expect Q Sweet average basic show to be approximately 79 million.

We now expect the full use of revenue contribution form that is willing to access to be in a range of 28 million too. So the median.

The updated outlook reflects continued progress on low full key programs.

But some delays in hiring and onboarding, new employees and supply chain destruction.

We view this delay is a shoulder human nature and there have been no change to this structure all funding associated within 26 key contracts.

We will now open the call for questions operator.

Hey, guys. Your line is lines, we will now begin the question and answer session. Please ask your question you May Press Star then one on your Touchtone phone.

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[noise]. Our first question will come from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Yeah, Thanks for taking the questions and congrats on the results I guess first wanted to just go through maybe the cadence of order activity your demand in the quarter and I think Scott you mentioned something about how you know order rates or demand continued its strong rates.

Here in the month of July So just wanted to be sure I heard that correctly.

Hi, Greg Yes, you did hear that correctly. We did note that that we saw continued strong demand in July.

Okay and do you think that's a result of all the share gains I mean, it sounded like that it was a large driver.

Specifically, an industrial in Q2, and and sort of your optimism, but maybe a little bit more do you tell on what you're seeing in July is it is it market growth is it across all segments I'm any more color would be helpful. Yeah. No problem. So what we're seeing is strong growth really across all of our and.

The markets and we listed those in Q2 and we see continued.

Continued growth.

And so you know for Q3, we see continued strong demand.

And longer term, we continue to remain I'm very optimistic about the continued displacement across all those different end applications. You know I do you want to say that I've given the ongoing uncertainty related to co bid you know, we're certainly not in position to talk a much beyond Q3, but.

We continue to focus on execution and Thats why we noted what we're seeing in July.

Okay. That's helpful and it looks like you're guiding to a product revenue a bit sequentially from Q2 gross margin is maybe just up very slightly at the midpoint. So I guess that that implies that mix in Q3 stays relatively consider.

Didn't with what you saw in Q2 or maybe even gets worse by it touches that the right way to think about it and I guess you know as we look forward, what what's you're going to take to get you know product gross margin backed up into that 30 plus percent is it just a is it more weighted towards mix of the business or can you get there from sort of cost absorption alone.

If you see a larger recovery in volume issue. So let me break am.

Yes. So between Q1, two Q2, along 300 and I'm talking about product.

Obviously Marlin June on this product segment, none of them to development that we could be roughly seven 7% to 8%, but on the product do so.

300 basis points improvement from Q1, two Q2 <unk>.

Net improvement came from festival from the volume.

And secondly, if on the lowest cost and growth in area, where we have high O. Pablo <unk>, Let me remind you when youre talking about mix. The gross is coming from area, where we have a bit of mountains and I would tell you will win of the mix is coming with a bit Alamo June so obviously.

Revenue from the rest of the world on the industrial end market.

Revenue for me industrial end markets in China and outside of China on the high Pablo.

Hey man everything above six gigawatt, six gigawatts and above mainly 12 and 15 gigawatt.

The incremental revenue for micro fabrication.

The difference and differently defense and smoking.

So we are growing in the area with the Moto GP is better than than then well whether you. So in Q1 for example news we've continued to do that going forward.

Would you see an incremental improvement in demand.

Okay makes sense I appreciate the color best of luck going forward.

Thank you.

Our next question will come from Tom definitely with D.A. Davidson. Please go ahead.

Yes. Good afternoon, just got maybe the first question on the Microfabrication market is typically the time of year when things pick up a bit yeah. I'm curious you did cobot just kind of wipe out the growth. This year. What are you seeing that from an activity point of view.

Yeah, Tom with respect to Microfabrication, you know while year over year, but we're not seeing the same levels. We saw you know in the past. We we are seeing growth and we're seeing growth driven by Fiveg is certainly one driver, but it's really broad set of end applications. So.

You know one application we saw was in marking in the manufacturing of masks and there was you know a spike in Q2 for the obvious demand. There's there's really a broad range of of and applications and Ah you know we are seeing.

Continued growth in that segment, whether it gets back to where it was in the past due to various cycles is harder to say, but we are seeing growth there now.

Okay. So if you look out a couple of years.

Is your view on that market still strong as it has been driven by consumer electronics industrial small industrial applications.

Well, indeed, and really Theres, a lot more than that in there too I mean <unk> medical for example, as in there for US we put it all up there's a lot of different end applications. There. So yes, I think that we will continue see a rich set of and applications in what we call micro fabrication and consumer electronics is it's historically been an important one in it.

We'll continue to be part of that but we do see a it really broad range of applications that will continue to.

Be enabled by lasers.

Okay, Great and then just as a follow up quickly yeah, just maybe an update on the chemists facility and what the milestones are there what that does to your ultimate capacity in good hedge margin profile.

Good yes. So we are moving in we already have a one production line up and running in Camus and yeah. We're we're back in the office or every day, there and one of the benefits of campuses, we have more space to spread out so with respect to managing in the cobot crisis. It.

Provides a a much enhanced or need we were pretty jammed in our previous offices. So that's been good and were going to continue to you know build out a manufacturing lines and we are we're doing that right now so we're on track and it's certainly it's been a very nice.

Unforeseen benefit given the code the crisis.

Great. Thanks for your time today.

So.

Our next question will come from Jim Ricchiuti with Needham and company. Please go ahead.

Hi, Good afternoon, I'm just couple of questions.

Yes. Some of your competitors had had talked about activity in China. The case, one they talked about.

Celebration in demand and what are your progress continued to see any well that's true.

Right and it earlier question is.

Hello.

Okay Fair game.

Yes, Jim It was cutting out slightly there can you just repeat the fundamental question was somebody was commenting on deceleration was that correct in trying to Oh, Scott I hopefully you can be data your competitors talk to that activity through China in China in the quarter and that began.

And to sell a core progressing and so it internally and about the supply and I'm just wondering if youve seen any of the.

Or some of the dynamics in China for you.

Sure well marketshare.

Very good yeah, I got you Jim so.

Typically Q2 I'm just after Chinese new year is very strong quarter in China, and typically we see that tapering off in the summer months I'm going into Q3.

So we saw strong demand as you can see in the numbers in Q2, and we are seeing you know ongoing demand that is stronger than is typical for Q3 right now, but we always see a bit of a fall off in.

In Q3, and typically in China, but as we said in July we're seeing you know that demand continue.

Got it and on the.

Well so the niche is narrowing that range seems like there's been no slippage a little bit of data do you see some of that revenue coming in.

Hello next year.

Yeah, I think I'm just want them replay is get it was cutting out a bit but this is with respect to new tronics is that what you're not yeah. The narrowing yet so yes that now or any other.

Yeah that additional revenue comes in in Europe that yeah. Good exactly this is all about revenue recognition. The the bookings are there. It's a question of when we recognize that revenue and there certainly has been some impact from co bid on supply or delays just delays in personnel.

No issues also.

You know nothing fundamental we're on track.

But from a revenue recognition standpoint, that's why we wanted to refine what we're seeing there now but no. Good progress on integration and then also fundamentally on validating the the thesis for the acquisition.

To optimize what we're doing and what new trucks had been doing and truly integrate you know the technology as well.

Okay final quick just went through to where we are today versus where we were a few months ago. If I look at the businesses that might fabrication and the industrial where have you been.

More supply at the business Ben.

Yep.

Yeah, I think surprises you know a reasonable word to use Jim you know, we certainly when the crisis first hit we were very cautious and and ER. We're.

Thoughtful about potential scenarios that we needed to manage to and what we've seen is you know continued good demand across the board.

So I wouldn't say you know, there's not surprise words as a shock, but it's at the you know to better outcome than we had worried about when the crisis first hit I think we've we remain you know that much more concern than typical on outer quarters. As we've noted, but we are seeing you know continued.

The strength in really Oliver end markets at least for Q3.

Okay. Thanks, a lot.

Jim.

Again, that's you might ask your question. It is star then one.

Star then one pass the question.

Our next question will come from Jed Dorsheimer with.

Canaccord.

Nobody please go ahead.

Hi.

Thanks, and not in good quarter, Rob I guess I'm, just two questions one on the cost structure and the other on the margins maybe just on first on.

Effect.

Okay, and I joined a little bit late but I'm, a little surprised with the lack of travel there we're not seeing lower opex in so I was wondering it is that a function of the.

Acquisition in should we expect.

Greater cost reductions in the in the future here or.

Is this kind of Oh low point that we grow up.

No no so.

First of all if you look at the Olympics weed out stock based compensation.

And I'm, what would position of intangible related to Didnt Onex acquisition in the last whatever evil take eight quarters also.

We are pretty much flat, Taiwan anywhere between 12.5 medium to filtering media.

No lighter weight travel for loss so.

It's not a big expense.

We got to travel we all know 12, a first class let's call it like that.

However, with you can see two reduction in S.G. M&A and an increase in R&D. We are investing more we move in R&D in one hand, and SG inane. Another hand wind down just because we have a good control it on a little opex.

And from those visits that you just mentioned like to level, which again it was not significant.

Going forward and again, we don't stock based compensation.

In a multi generational thing tangible.

We should see a slight increasing in in Opex gave it will take roughly half of maybe on a quarter again going through the range of 17, selling point 5 million, but most modem that due to sell been oxley as well as the cost for the move to and because the new facility income.

Yes.

Got it.

Hi, Thanks. Thank you I just wanted to make sure you're looking at it correctly.

It just didn't they in terms of the gross profit margin on a go forward basis.

Is that Oh.

Largely tied to volumes and therefore, the spread the fixed costs or I guess, how much is mixed shift playing in is we look at that that on a potential ramp here and its.

Ability to improve the margin depends on everything mainly to be soon.

First of all its first of all its obviously increased the topline.

Goes without saying.

Secondly, Keats I was ability to reduce the cost.

And I think that we don't mean straight into last.

You use the significant cost reduction that offset most of the ASV reduction that we sell into market.

And lastly to the mix.

Mix that we Oh, we will go into a little to mix, meaning mixed with codes.

A product or markets that it's coming with a high amount of June and I mentioned those I.E. revenue in the industry of a end markets outside of China High power in China and outside of China, India Industrial end market I was ability to increase.

The topline for Microfabrication in aerospace and defense.

Revenue got it.

And then last question for Scott.

I'm just curious if you look at that.

Directed energy.

Program do you see that agnostic politically speaking or do you see.

Hi, I'm, just trying to gauge sort of risk of if we look at defense budget, how much of a that will be tied to a you know domestically speaking a a democrat versus a republican or whether or not that is fairly insulated from from.

Investment spending perspective going forward, yes. Good question, John So if we look historically I would say that directed energy funding has been a very strongly bipartisan budget or basically doubled under Obama.

And the D. E caucus is a strongly bipartisan group. So I don't think first order. There's a you know a strong you know.

Influence or in the typical partisanship in DC, obviously defense budgets as all budgets there'll be you know that much more pressure.

But I will say that that direct energy is one of the highest priorities for Deo d.. So yeah, it's not it and not a first order I'm concerned that that we're thinking through.

Got it Oh I'll jump back into queue. Thanks, guys. They said thank you.

We are showing no further questions at this time. So this will conclude or question answer session.

I'd 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 we look forward to speaking with many of you over the coming we.

Okay. Thanks.

[laughter].

The conference has now concluded thank you for a telling today's presentation you may now disconnect.