Q2 2021 nLIGHT Inc Earnings Call

[music].

Mmk and welcome to the amyloid second quarter 2021 earnings Conference call all participants will be in a listen only mode.

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

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Please note this.

I would also like to turn the conference over to Joh car. So please go ahead [noise]. Thank you and good afternoon, everyone with us today or Scott Keeney, Enlighten, Chairman and CEO and ran Brackett Chief Financial Officer, today's discussion will contain forward looking statements, including financial projections and plans for our business forward looking statements.

Rents are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings [noise].

Our results may differ materially from those projected on today's call and we undertake no obligation to update publicly any forward looking statements, except as required by law day.

The call we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures and our earnings release, which can be found on the investor regulations section of our web site I will now turn the call over to Scott.

With a large defense customer.

Indirect energy, we continue to achieve important technical milestones that further demonstrated capabilities are are directed energy laser technology.

This progress would not be possible without an lights vertical integration from Dio to beam control.

And we continue to believe that we are well positioned to capitalize on directed energy opportunities well into the future.

And the industrial market, our business grew 10% year over year in the second quarter Q2 revenue from industrial customers outside of China was a record for and light and drove much of the year over year increase in this market.

We expect a strong demand that we experience from a non China customers in queue to to continue into Q3.

And we have been increasingly successful in converting design wind momentum into repeatable revenue.

In particular demand for are programmable lasers, especially at higher power has increased sequentially in each of the past 5 quarters and continues to be an important driver of our growth and the industrial market.

We've also continue to make significant progress an additive manufacturing.

Where we are now engaged with leading powder bed fusion systems Oems.

Our lasers have shown a higher throughput and competing products and offer significant process improvements for end users.

The productivity stability price performance of our lasers expected to drive adoption for a wide range of use cases from manufacturing complex low volume parse through series production.

Building upon our our strong heritage of technology innovation, we look forward to announcing the release of our 20 kilowatt fiber lasers and other products for the industrial market at Fabtech in Chicago in early September.

And Microfabrication, our sales increased 42% compared with the second quarter of 2022 quarterly record of $23 million.

We experienced strong growth from customers outside of China, which was driven by the secular trend of broad based demand from laser based manufacturing.

Key drivers of this growth included growth in consumer electronics solar settlement and factoring <unk> related spending accelerated electric vehicle production and increased demand for oil that applications.

Turning to slide 5 to discuss revenue by geography.

In the second quarter sales to customers outside of China, or 64% year over year, 2 quarterly record of $54 million, which represented approximately 73% of total revenue.

And China Q2 revenue declined approximately 13% year over year to $18.8 million.

While we continue to serve leading customers in China.

We are being selective with spect to our customer engagement in new business.

As we focus strategically and growth outside of China, We expect the revenue contribution from non China customers to become a larger percentage of our overall business.

Looking forward, we believe we are well positioned to outgrow the market overtime or.

Our increased strategic focus on the non China, industrial and aerospace markets, where we are delivering innovative solutions are the key areas of our growth going forward.

In summary, I'm pleased with our execution during the quarter and I would like to thank our employees for their continued dedication to our success.

I will now turn the call over to ran to discuss in late second quarter financial results.

Thank you Scott and good afternoon, everyone that beginning on slide 7.

Second quarter record revenue of 69, 1 medium exceeded the top and the following guidance range and was up 73% to you over the years.

Second quarter Pawtucket from overview was $53.6 million, an increase of 19% above the second quarter of 2020 and second quarter of development revenue was $15.6 million, an increase of 121% above Q2.

2020.

The increasing development revenue in the second quarter of 2021 was mainly driven by higher development revenue related to direct energy project will that we pull form for the U S government.

Toning to slide 8.2 provides more detail into all the gross margins.

Overall gross margin was 29, 4% in the second quarter versus 25% in the comparable period of 2020.

All that growth small June was 76.1% in the second quarter compelled to 27, 7% in the second quarter of 2020 and improvement of 840 basis points.

Although you over the years margin improvement was a direct result of follow up implementation of our strategy to increase sales to rest of the world industrial and AMD customer additional level MAGE on on our fixed manufacturing cost space and photo the cost reduction efforts.

Zoning to slide 99.

Non-GAAP operating expenses with a $17.6 million during the second quarter compared with $12.8 million in Q2.2020.

The majority over the years over the increase was related to hire R&D investment to support our product towards map and long term growth opportunities.

Compared to the 5 quarter R&D expense increased by approximately $1.8 million as we headed Owenby resources.

As a percentage of revenue, although the total non-GAAP opec's was 25%, which compares to 24% in Q2.2020.

Zoning to slide 10.

Non-GAAP net income in the second quarter was $4.4 million compared with a loss of pulling to 1 million during the second quarter of 2020.

Non-GAAP EPS for the second quarter was 9 cents per diluted chose compelled with zero cents go share in the second quarter of 2020.

On a gap basis EPS for the second quarter was a loss of 19.

Compared with a loss of 18 during the second quarter of 2020.

Second quarter, adjusted EBITDA was $6.3 million compared with $3.3 million in Q2.2020.

All of the year overview of improvement in adjusted EBITDA in the queue to was a result of higher growth profit policy would be offset by continued investment in R&D.

In the second quarter, we use approximately 1 medium of operating cash versus $8.1 million of cash flow from operation in Q2.2020.

Cashews in operation for the second quarter of 2021 was driven mainly by net working capital requirement to support our revenue growth.

Our capital expenditure and Q2 of 2021 with a $4.8 million versus 1.9 million in the second quarter of 2020.

Appetite expenditures in the quarter were related mainly to capacity expansion and increased facility automation.

Turning to slide 11.

We ended Q too.

With the cash and cash equivalents of approximately $175 million, we continue to carefully manage our net walking capital, which grew viewing the quota as a result of higher revenue and strong customer demand twins.

So for the second quarter was 45 days.

Inventory at the end of the quarter was 63 million, representing 100 and sales team days of inventory.

Zoning to slide 12 for our outlook for Q3.

Based on the information available to the we expect Q3 revenue to be in a range of 68 million to 74 million.

At the midpoint of $71 million. This includes approximately $52 million of product sales and approximately $19 million of development sales.

The meat point of our revenue guidance imply yield overview growth of 15%.

We continue to monitor the supply chain constrained that Scott mentioned earlier as well as the potential impact if it's COVID-19 could have on our customers demand.

Based on those comments expectation for revenue mix, we see gross margin full Q3 in the range of 26% to 30%.

Gross margin is expected to be in the range of 34% to 78%.

We expect development gross margin to be approximately 6.5%.

Both for the sales quarter, we expect adjusted EBITDA to be in the range of 4 million to $7 million.

Although the queue sweet adjusted EBITDA range assume that non-GAAP, opex increased slightly and depreciation and amortization is approximately $3.9 million.

We expect goose, we ever reach basic basic shows to be approximately $443.3 million and non-GAAP diluted chose to be approximately $47.5 million.

We that I was told to call back to the operator for questions.

Okay well. Thank you for your question answer questions.

Good question.

<unk> on the line on your costume from if you.

Okay, Uh-huh people thinking Vicky.

If at any time. Your question has been that day and you would like to get channel question. Okay. Great. Thank you.

At the current Nemo possible again, okay.

Okay.

That's my question comes from John My ex people. Please go home.

Thank you very much I was wondering if you could start with the China market, obviously, what happened earlier in the week with 1 of your large editors and Scott you were pretty I thought pretty clear in your comments that you kept calling out rest of world and really talk all that much about China, you spend a minute as to what you're seeing there things are along dating.

<unk>.

Things of that way and maybe if you could just also.

The long term business that we have in our in our core A&D business.

Great. Thank you very much.

Thanks, Brian.

Our next question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Yeah. Thanks, good afternoon, everyone I want to stick on questions by geography for US a few minutes. So I guess thinking about rest of world and the growth. There I'm curious how much of that is just driven by the overall market recovery and how much would you consider more or less like share gains.

Good I think a combination Greg certainly we see a continued growth as we focus on in particular industrial.

Customers in the rest of World did we see a majority of our business in industrial now and the rest of the world. So it's a nice growth there that is a function both of.

New design wins with business, where we.

We're expanding new applications. We noted our additive manufacturing is just 1 of those.

And then certainly.

Continue to make progress in the established businesses in cutting.

With some of the larger players in the rest of the world.

Okay and then just following up on the previous question on China, specifically has anything fundamentally changed you know in recent months I mean, I know this has been kind of a long term strategy to focus on rest of the world, but I'm just kind of curious whether it comes to <unk>.

Just the general macro over there or increased competition, if anything has changed significantly more recently that you're maybe accelerating your sort of shift shifting focus elsewhere.

Yeah, I think you've described it well I think it's been part of our longer term strategy. We've been talking about so that continues and certainly the factors that lead us to that strategic conclusion continue.

So you know I don't see dramatic changes, but to see continued.

You know reasons to make sure. We're focused are in other geos for continued growth.

Okay Fair enough and then last 1 was just a clarification on a comment I don't know if it was just associated with a N D. But it was you know revenue limited by some vendor issues. So I guess just overall did you see or can you quantify what the revenue impact you saw from some of the supply chain issues that everybody seems to be deal.

With.

Yes, correct I'm sure everybody is dealing with this and we've tried to take a cut at that it's hard to take a precise cat you know, there's certainly a very specific components a commodity that we would buy but then there's also the effect on our customers and that's certainly harder to really ascertain so.

You know as we sort of digested the data.

It's hard to quantify precisely, but I'd say it did have a modest impact on our business, but it wasn't a dramatic impact we do anticipate that we're not you know through this yet I think we're still the whole world is working through a number of issues, it's hard to anticipate where they fall out, but you know I would.

Crescent is modest.

Okay, but fair to say there is maybe some of that built up in the Q3 guide as well.

Indeed, we're being prudent with Q3.

We folded those in you know, it's a difficult time to manage the business as we are.

Not sure what's happening with Covid and a whole host of other factors at the same time, we see you know cigna.

Significant growth in stimulus so the error bars are a little bit harder to manage the business, but the impact yeah, I'd still characterize it as modest.

Okay, Alright, thanks best of luck going forward.

I appreciate it.

Our next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.

Hi, Good afternoon, maybe just related to the last question or the some of the supply chain dynamics day Youre seeing with your customers are they more prevalent within my growth fabrication within that customer base.

Or is it or is it both in micro fabrication and industrial.

Yeah. Thanks, Jim It's a good question I you know I think I can think of anecdotes that across all segments of the business.

You know it could be a.

Microelectronics component that we need in defense for example, it could be a labor issues that affect any of our end markets. So it's a wide range of supply chain issues, and then affect our customers and both from component supply in.

And really labor issues that we see so broad based.

But theres not 1 segment that I would highlight is particularly pronounced.

Okay, Scott you're also seeing fairly healthy growth in the micro fabrication business and yeah, you highlighted a few areas.

Pretty good growth opportunities at least from what we certainly here.

You talked about OLED applications solar applications.

Is there a way to help us understand maybe how the profile of that business might be changing.

With some of these newer opportunities or maybe it isn't but but just curious if what if you were to kind of rank order. Some of the bigger applications is it different than it was a year ago.

Boy I think it is a continued trend yeah. So it was a good quarter with really nice growth.

42% year over year in micro and so.

<unk> seen the long term sort of secular trends to using lasers.

In a broad range of applications and indeed, we did extend the list of applications here a little bit further.

To reflect that broad base set of applications that are driving it.

The theme remains moving to shorter pulse lasers in particular.

Which requires much higher performance semiconductor lasers that we provide.

That then go into really that that broad range and yeah. I wish there was an easy way to break out that to give you better guidance here, but I think that broad theme as it is a good 1 to think about it will continue.

And then the other I just wanted to push you a little bit for a second just kind of additives.

I think a couple of quarters, now where you've been calling it out.

<unk>.

Is this oh.

<unk> already contributing meaningfully to industrial or is this something that is the customer base expands and it sounds like you're now working with.

A larger base of customers that this has the potential COVID-19 more meaningful in 2022, how do we think about additives.

I think directionally.

The latter is probably the right way to think about it.

<unk> certainly seen.

Meaningful growth.

Our revenue, but more importantly, we're seeing a very strong funnel of opportunities that are enabled by the new lasers that we've introduced and I commend your attention to the you know the video we put out on our <unk> product. It's on our Youtube channel you can see it Rob Martin <unk>. Our CTO provides an overview I think it's a good overview.

Years ago, and we've continued to.

<unk> the product portfolio. There. So we started in cutting and we see further expansion in the metal cutting market.

And we anticipate that will continue to expand I think.

The upcoming.

Chicago Fab Tech show in September will be a good example, where customers are using and adopting and understanding the benefits in that space and maybe at the other extreme would be.

In the additive manufacturing space certainly it applies to welding to but at the other extreme of where the even though higher performance exists is an additive manufacturing to our <unk> product line and there that is a new product that we've introduced where.

The benefits are.

Even stronger than we had anticipated in terms of providing for greater productivity for those end customers. So yes, I think that is that programmability is something that.

We really only started talking about in the industry really over the last couple of years and I think that's a theme that will continue on.

Both in industrial where we are.

Adjusted the beam and.

Certainly in the defense market to where the beam profile also needs to be adjusted for a different set of applications.

That's great maybe on the on the defense market can you maybe talk about some of the I don't know if you can really be too specific on milestones, but do you think of 'twenty..1 is kind of a meaningful year test milestones that push these programs forward or what are some things that you're maybe looking forward to kind of judge the.

Adoption rate because we I think we all feel very strongly that directly to energy is going to be adopted it's more the timing of that.

Yes, it's a great question and it is a little difficult to talk about many details, but I think I can comment that 1 of the key programs to healthy contracts, where 1 of the recipients of that contract and certainly in 'twenty..1 there are a number of important milestones there and.

Yes, we are.

Proud of the work that the team has continued to do there to hit key milestones and.

Weather much more will be public in 'twenty, 1 is a little hard to say, but yeah I think over the next <unk>.

6 to 12 months.

That is 1 program that will be a very important program to watch for results. There are others, but I think healthy is 1 of the most important ones broadly and Vod.

Great.

It's an exciting time in development across the space there.

We hear from our industry folks.

Maybe just 1 for Ron on you.

You always have a variety of kind of puts and takes on your margins can you maybe talk about some of those maybe from a mix standpoint from a geography standpoint.

And maybe even on an input cost or or freight or anything like that that you kind of contemplated as we move into the third quarter.

Sure.

So in the last few quarters, we've talked about.

Our strategy implementation and as Scott mentioned.

<unk>.

Moving towards more growth from all.

Industrial and micro fabrication.

As well as differently as well as you.

You will see that commodity improvement I think that we sold it in the last few quarters Q2. This quarter. It is definitely a good demonstration of our ability to improve the margin.

We look at Q2 actuals.

Product margin was 76, 1% versus 27, 6%.

From last day at least 840.

Basis points improvement year over to you and as we move forward again as long as we will continue to implement this strategy. We will see margin improvement that's coming from mainly 3 area first of all the AD revenue growth from area that we have a bit of a margin obviously better than China.

This is 1 thing secondly goes without saying.

Growing the top line and better utilization of our fixed costs, but at the same time investing in cost reduction in automation here too.

To reduce our problem.

All of the cost.

Great. Thanks, a lot I'll jump back into the queue.

Sure.

As a reminder, if you have a question. Please okay got it and then 1.

Our next question comes from Tom <unk>.

D D. A Davidson. Please go ahead.

Yeah. Good afternoon, Ron maybe just following up on the last question are you starting to see the margins between industrial and micro fabrication start to close the bidders are still a fairly large GAAP there.

Okay.

Yes.

Yes.

First of all to answer the direct answer is yes, however, I think as we talked about it in the past to talk about industrial is 1 umbrella of homology and it's a little bit different because different apps.

Application in different geographies and different products coming with different market is right for global laser versus non Oklahoma.

So it is rightful additive manufacturing versus cutting welding and it's definitely rightful product that we don't see anything in China outside of China. So what I'm trying to say is that even with the industrial end market itself. There is some differences in the application that we are selling in terms of the moat.

But differently that gap is closing and differently.

Then as we move to applications and geographies, where we have a better margin. We will continue to see that margin improvement.

Okay.

Because it might be a little bit more exposure on the industrial side to the cause of the lower margin China.

Markets.

So it can you repeat the squeeze a little more exposure to the industrial side of the business to China versus micro fabrication.

I'm not sure that zone for you in terms of the margin.

So just the industrial segment.

It seems to maybe have more exposure to China, where the margins aren't as strong versus micro fabrication and more exposure to the rest of the world.

Yeah, maybe Tom Im trying to understand just Scott I think in the industrial segment I mentioned that.

Majority of our revenue now is rest of the world So that has it.

A better exposure, if thats, where youre getting net okay.

Okay. That's good.

Scott when you look at the adverse development.

Mint in projecting 20% sequential growth here.

First of all is it do you consider that a long term project, that's going to set a new bar for that business and does it require a certain amount of associated R&D investments are hiring.

Yeah, No I think.

I think it is important to note that.

We've been successful in winning important contracts that <unk>.

Stablish us for long term programs.

The quarter over quarter revenue.

Signal that comes from that is really second order so no I wouldn't set it as a.

A bar for where we're looking to expand the business.

It's a business that is fully funded has reasonable EBITDA, but it's not.

We're doing it in order to make sure we're developing the right technology to be in position to then ship products in the future.

Okay I appreciate the insights.

Thanks, Tom Thank you.

Our next question is from Mark Miller with the Benchmark company. Please go ahead.

The last slide in your presentation.

Kind of indicators as a percentage of sales.

Sales of our high power and medium power lasers, there's kind of been flattish maybe down compared to 4 or 5 quarters ago, while low power lasers as a percentage of sales has increased.

Can you give a little color on that.

Yeah sure Mark.

You're referring to the slides just to make sure. We're on the same page this slide on power buys.

Power.

Percentage of revenue by power segment is that right. Yes. It is the last slide in your presentation.

Yeah. Good yeah. It is.

An important question I'm glad you asked it because in the cutting market. This progression towards higher power is an important theme and as we are focused on the cutting market.

This was important to share as we look ahead this data.

It doesn't tell us a simplistic story.

For example, as we make progress in the additive market. Those lasers are are much lower power they would be in the below 2 kilowatt segment and so that's 1 of the reasons that youre seeing that so we see that as a.

A successful migration that's going on.

Okay.

If you get that Mark so it's basically mix.

Yeah, it's exactly right.

Thank you.

Okay.

Okay.

Our next question is from Paris, <unk>, Michelle it's been Brian. Please go ahead.

Hey, guys. Thanks for taking my question and.

And I tried to call it a little bit late so apologies. If this has been asked but yeah.

Any updated thoughts on the use of cash on the balance sheet as to when and where you might allocate that.

Yeah. Good I appreciate no it hadn't been asked before so thank you for asking the question certainly we've got a strong balance sheet and 1 of the reasons that we wanted to have a strong balance sheet and did a follow on with that we see opportunities to continue to grow by investing internally.

Investing in Capex, but also you know.

Looking at opportunities.

For M&A and we continue to do so.

And we will be.

Moving and careful in that process and certainly during COVID-19, where travel is restricted.

Not a great time to be aggressively.

Pursuing M&A, but we nevertheless have been continuing to look at a number of different opportunities and those remain the key themes that we're thinking about with respect to cash.

Got it thanks, and then on the micro fab business, Yeah, very very good quarter or is that a.

Sustainable.

Current revenue run rates are there is some lumpiness in the order that we have to think about on.

On a going forward basis.

Well, yes, it's very strong this quarter very strong last quarter we.

We see long term secular trends there that will drive that business.

But indeed, there is some of.

Reversion there as companies have come back and we've benefited as both our inventory has been worked out of the channel and new applications have come on so we don't expect.

That level of year over year growth to be sustained but we do see continued growth in that space.

Got it and last 1 from me so it sounded like your.

Industrial business that is exposed to China is now a smaller part of that Oh.

That segment and what are you I guess seeing in that market.

I mean, the from the headline indicators have indicating weakness in 1 of your competitors also mentioned that on their call.

Well your observation during Q2 and.

How's your order book, maybe looking like Oh.

Chinese industrial business.

Yeah, Yeah, we have covered that in the short answer there is really focus on strategically focus on growth outside of China. We have a we continue to see opportunities in China, but we're being very disciplined about which opportunities we pursue so we're not looking.

To aggressively drive growth in China.

And.

Usually Q3 is a little softer than Q2 in general anyway. So.

Looking ahead.

We will continue with that same strategy and would anticipate the similar sort of seasonal trends in China too.

Understood. Thank you that's all I had.

Thanks very much.

This concludes our question and answer session I would like to turn the conference back over to Joe car. So for any closing remarks.

Thank you everyone for joining this afternoon and for your continued interest in NN life. We look forward to speaking with you during the quarter have a great evening.

Yeah.

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