Q4 2021 nLIGHT Inc Earnings Call
Good day and welcome to unlike fourth quarter 2021 earnings Conference call.
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I would now like to turn the conference over to you.
No of course to vice President of corporate development and Investor Relations. Please go ahead.
Thank you and good afternoon, everyone with US today are Scott Keeney, enlighten, chairman and CEO and Ron bracket Chief Financial Officer.
Today's discussion will contain forward looking statements, including financial projections and plans for our business forward looking statements 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 our results may differ materially.
From those projected on today's call and we undertake no obligation to update publicly any forward looking statement, except as required by law. During 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 in our earnings release, which can be found on the Investor Relations section of our.
Website, I will now turn the call over to Scott.
Thank you Joe starting on slides three and four.
2020 , one was an important year for enlighten year over year growth in each of our end markets enabled us to generate record annual revenue of $270 million.
Overall revenue in 2021 grew approximately 21% in line with our long term compound annual growth rate of 23%.
To put that in perspective total revenue is nearly double what we generated in 2017 Deere immediately prior to our IPO.
We continue to execute on our strategy of increasing sales to industrial customers outside of China, and aerospace and defense.
Over the long term, we continue to believe that we can meet or exceed our historical revenue CAGR of 20% and product gross margins of 40 plus percent.
To meet these long term objectives, we will continue to invest in automated capacity in the U S and optimize our manufacturing footprint in China.
While this important operational transition will result in pressure on our gross and operating margins for the next few quarters as we look beyond 2022, we believe it will enable us to achieve higher levels of profitability as we scale to address anticipated robust customer demand.
Turning to slide five.
$1 21 was an important year for a transition in our geographic focus.
Our results illustrate how our business has evolved since our IPO in 2018.
And just a few years with migrated from a strategy that had included significant focus in both operations and markets in China to a strategy that is primarily focused on both operations in markets outside of China.
In 2021 revenue from customers outside of China grew 41% year over year to approximately $215 million, which represented approximately 80% of our total revenue.
Turning to slide six in.
In Q4 revenue from customers outside of China grew by 26% year over year to approximately $60 million or 89% of total revenue.
We have doubled our revenue outside of China since Q4, 2019 and for the first time since we went public in 2018 all of our top 10 customers were from outside of China.
Well, our geographic focus has transitioned our strategy remains focused on leveraging our vertically integrated business model to enable key growth markets.
Slide seven provides an overview of our vertically integrated business model that begins at the semiconductor chip level, where we produce high brightness high power laser diodes.
Over time, we've extended our technology stack into fiber, coupled semiconductor lasers optical fiber and fiber lasers.
A deep understanding of each of these technologies and improvements across this vertical integration that enables us to design products that are optimized for specific applications.
With the acquisitions of <unk> in late 2019, and plasma earlier. This week, we further expanded our technology capabilities to include beam control for both defense and industrial applications, our ability to direct adjust monitor and control the laser beam enables us to extract the most efficient and economical use.
Of late of energy from our lasers, we believe that broad adoption of lasers will increasingly require integrated lasers with beam control to continue to the displacement of legacy technologies.
In addition to our continued expansion of differentiated products, we are well positioned to capitalize on multiple attractive long term growth opportunities into 'twenty 'twenty. One our revenue grew in each of our end markets.
Turning to slides eight through 10, where I will discuss each of these markets further.
In micro fabrication, we had a strong year with 36% year over year growth.
Our industry, leading high power high brightness semiconductor lasers are often the critical enabling component of our customers' products.
As laser based manufacturing processes continue to proliferate. We believe we can we will continue to benefit from wider adoption and a range of applications in the automotive consumer communications electronics display medical and semiconductor end markets.
In Q4.
The demand environment and micro fabrication remained strong and grew revenue we grew revenue approximately 34% year over year to $17 3 million, representing 25% of total revenue.
In aerospace and defense, our revenue grew 21% year over year 2021 to a new record of $105 million, representing 39% of total sales.
2021 marked the fifth consecutive year of annual A&E revenue growth.
We saw relatively consistent demand for our core long term A&D customers and programs throughout the year and we believe there are many additional long term opportunities for our laser technology.
Although new programs often take time to develop we believe that we are well positioned for future long term growth in this part of our A&D business.
We were also pleased with our progress in directed energy as we achieved several critical technical milestones during the year.
We were one of four award winner is at the high energy lasers scaling initiative healthy for short, which is a U S government program to develop a 300 kilowatt laser.
Although the timing of future programs of record has not yet clear we remain steadfast in our belief that directed energy will be a key part.
I'd say its military modernization efforts.
Our vertically integrated business model, coupled with our deep understanding and work in defense positions us well for future success in this market.
In the fourth quarter.
Our defense revenue declined approximately 1% year over year to $28 5 million, representing 42% of total revenue.
Development revenue.
All of which is related to directed energy projects increased approximately 18% year over year, but it was lower than our quarterly guidance due to supply chain issues.
Finally, turning to the industrial end market.
That's real revenue grew 12% year over year in 2021.
More importantly, industrial revenue from customers outside of China increased 66% year over year.
In the fourth quarter.
While overall industrial revenues declined 9% year over year revenue from industrial customers outside of China increased by 57% year over year to $18 7 million nearly doubled versus the same period in 2019.
On a percentage basis Q4, industrial revenue from customers outside of China increased to 86% versus 50% in the same period in 2020.
This growth outside of China was driven by continued expansion of strategic customers in cutting welding and additive manufacturing as.
As we've discussed we have prioritized deep engagement with these customers and many of our current design wins took multiple years to secure and we believe serve as a strong foundation for future growth.
In cutting we saw continued adoption of our programmable in high power lasers, and leading machine tool manufactures in U S, Japan Korea and Europe .
Welding, we continue to see long term opportunities, especially in electric vehicles are programmable lasers, coupled with new software and sensor technology, we acquired via the plasma transaction will support continued customer engagement and long term opportunities in this market.
Finally in metal additive manufacturing, we saw a significant increase in customer engagement design wins and sales of our additive manufacturing specific lasers.
We believe this market is that of an inflection point as multiple laser tools combined with further improvements in our programmable lasers will further drive improvements to displace legacy machining and casting.
I will now turn the call over to Ron to discuss and life's full year and fourth quarter financial results.
Thank you Scott and good afternoon, everyone.
Beginning on slide 12.
<unk> delivered record revenue for the full year of 2021.
Driven by a 41% year over you increase from sales to customers outside of China.
<unk> 2021 revenue increased 21% to $270 1 million.
<unk> revenue increased from $77 9 million in 2020 to 64 million in 2021, driven by higher revenue associated with direct energy development boards.
Fourth quarter revenue was approximately 67 5 million Q4 revenue from customers in our core strategic market outside of China grew 27% year over to you to approximately $60 1 million.
In China Q4 revenue decreased approximately 60% you over to you, which which was offset the reduction in sales of our fiber laser product customer in chart Q.
Q4 development revenue was $16 5 million versus 14 million in Q4 2020.
Turning to slide 17 to provide more detail into our gross margins.
Well, we use a 2021 gross margin was 28, 6% compared with 26, 6% in the full year of 2020.
Product gross margin was 35, 6% for the full year 2021 compared to 76% in the full year of 2020.
The 500 basis points year over the use improvement in product gross margin in 2021 was driven mainly by higher sales to customers outside of China, and more favorable product mix and better utilization offset partially by increased manufacturing cost.
In Q4, we experienced a 280 basis points reduction in product gross margin compared to the fourth quarter of 2020. This reduction was driven by additional overhead expenses as we invested in additional automated capacity in the United States and the low factory utilization.
<unk> in China.
All over.
We experienced additional costs related to labor freight and medallions.
Turning to slide 14.
non-GAAP operating expenses was $18 8 million during the fourth quarter compared with $18 1 million in the prior quarter and $14 7 million in Q4 2020.
Do you have over the you increase in R&D was related mainly to higher <unk>.
Over on investments to support our product roadmap and long term growth activities do you overview increase in SG&A was driven by increased headcount compensation costs an increase.
So net of fees.
As we continue to shift our strategic focus to customers and markets outside of China. We also evaluate the appropriate level of operating expenses for our business.
Turning to slide 15.
non-GAAP net income for full year, 2020 was $10 7 million compared with $7 3 million during 2020 non-GAAP EPS for full year 2021 was 23.
<unk> per diluted share compared with 17 cents in 2020 on a GAAP basis net loss per share for full year 2021 was <unk> 17, compared with a loss of 55 during 2020.
Fourth quarter of 2021, non-GAAP net loss was $200000 versus.
<unk> fourth quarter 2020, non-GAAP net income of $5 2 million.
Fourth quarter of 2021, non-GAAP net loss per share was one.
Versus fourth quarter of 'twenty, 'twenty non-GAAP EPS of <unk> 12 cents.
On a GAAP basis EPS for the fourth quarter was a loss of <unk> 20, compared with a loss of 12 cents during the fourth quarter of 2020.
Full year 2021, adjusted EBITDA was $22 6 million or eight 4% of revenues. This compares to $18 2 million or eight 1% of sales during 2020.
Although the year over year improvement in adjusted EBITDA in 2021 was the result of higher.
Gross profit offset by continued investment in operating expenses fourth quarter, adjusted EBITDA was $3 1 million or four 6% themselves. This compels.
$8 4 million in Q4 2020, although the decline in adjusted EBITDA in Q4 was a result of lower gross.
Profit and higher operating expenses versus the fourth quarter of 2020.
During 2021, we use at block symmetry, seven 4 million of operating cash versus 17 million of cash from operation in 2020.
In the fourth quarter, we used approximately $10 1 million of operating cash versus one 7 million of cash flow from operations in Q4 2020.
Cash used in operations during the quarter was related mainly to the increase in working capital to mitigate supply chain disruptions.
Our capital expenditures for full year, 2021 was $19 3 million versus $23 4 million in 2020.
Capital expenditures as a percentage of sales was approximately 7% going forward. We expect to continue to invest in capex related mainly to facility automation infrastructure and manufacturing capacity in the U S.
Turning to slide 16.
We ended Q4 with cash and cash equivalents of approximately 147 million and no debt.
So for the quarter was 52 days inventory at the end of the quarter was 74 million representing 131 days.
We continue to carefully manage inventories smoothed strategic purchases to mitigate potential supply chain disruptions.
Turning to slide 17 for our outlook for Q1.
Based on the information available today, we expect Q1 to be in a range of 61 million to $67 million at the midpoint of 64 million. This includes approximately 49 million of product sales.
Poke some at least $15 million of development sales.
Turning to gross margin Q1 product gross margin is expected to be in a range of 26% to 70% and developing the gross margin to be approximately six 5%, resulting in an overall gross margin range of 21% to 25%.
While we were pleased with our gross margin improvement during 2021, our strategic investment in additional automated capacity in the U S and excess capacity in China, coupled with headwinds such inflation, how higher labor costs increase in material cost and supply chain constraints will make it difficult for us to.
<unk> significantly improved our gross margin in the next few quarters. However, we remain confident in our ability to achieve 40% plus product gross margin as we optimize our manufacturing footprint.
Continued to increase our revenue in strategic markets.
For the first quarter, assuming today's cost structure, we expect adjusted EBITDA to be approximately breakeven.
We expected Q1 average basis show to be approximately $43 5 million and non-GAAP diluted shares to be approximately $47 8 million.
Before turning the call over to Scott I would like to take a moment to thank Scott the enlighten board and the rest of the enlighten employees for the opportunity to have served as <unk> CFO for the past for us I'm proud of what we have built since taking the company public in 2018.
And I believe that the company has a bright future.
I also look forward to working with Joe over the next several months.
As he begins his posted the CFO on March <unk>.
With that I will turn the call back over to Scott.
Yeah.
Thank you Ron.
I'd also like to again say, thank you to run for four great years of service 10 light it's been a privilege to work with you I want to sincerely. Thank you for all your hard work and dedication.
I wish you all the best in your retirement.
With that I'll turn the call back over to the operator for questions.
Okay.
Thank you we will now begin the question and answer session.
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If youre using a speakerphone please pick up your handset before pressing the keene.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah, good afternoon, and thanks for taking the questions Ron enjoyed working with you and Joe Congrats and look forward to working with you more.
Thank you.
I guess just starting on the gross margin line I'm I'm curious if you can quantify specifically the overhead costs from the investments in automated capacity for Q4, specifically and also what is inherently baked into guidance in <unk>.
Q1 as well.
Yeah, I will take it.
You know, it's hard to quantify exactly what was the impact but what we can tell you that there was some impact in Q4 and definitely in the guidance that we provided for Q1.
The two main things the first one is the excess capacity that we have in China.
The reduction in volume in China.
It was a cold even faster than what we anticipated and as a result of that we have an excess capacity in China that we have.
Maintaining full now while we are building capacity automated capacity here in the U S. So in one hand, you have an excess capacity in China.
On another hand, we invested in capacity here in the U S, which is mainly maybe andi automated capacity, that's not fully utilized that definitely impact our margin in Q4 and will impact a little model during Q1 and going forward in the next few quarters.
Add to that as I mentioned in my opening remarks, you know some headway.
Headwinds like inflation labor costs freight costs.
And other supply chain disruption that impacted our margin in Q4, and we anticipate it will impact our margin in Q1 as well.
Yeah, I I think you meant Q Q2 as well.
What's your visibility beyond the next couple of quarters I mean can you get back to more of that more recent gross margin in the in the second half or is it going to take some time I assume a lot of us probably dependent as well on volumes in the excess capacity do you have in China, but whats your thinking as of right now.
So so.
Again, I don't think that each device things too.
Try to predict exactly when we will go back to the margin that you use so bought extra mileage and I mean that you saw in Q2 Q3.
Just to you as you mentioned the impact on the gross margin will be will be very form the volume from the mix and that additional overhead cost that we have currently.
But I think that again, we are always talking about the long run is as I mentioned as Scott mentioned, we believe again for the long run it will take a few quarters as we mentioned, but for the long run. We believe that we can go back to the full 40 or we can reach to 40 plus percent product cost.
Smoking.
Understood.
Then I guess just last one for me you only guided.
Here for Q1, and you know at the midpoint, it's quite a bit lower than kind of your I think your kind of over 15%.
Annual growth bogey I, even think last quarter you made the comment about.
20% being sustainable over the longer term.
How should we think about the remainder of the year in that context.
And you are talking about top line or you are talking at the topline.
Sorry, correct topline.
So again look at 2021 2021 we grew 21%. Despite the fact that China went down significantly.
And we've mentioned several times by the way since the IPO and it was the case since the IPO, even while the IPO is enlighten grew more than 20% CAGR.
And we believe that for the long run it will be the case as well.
Again, there are many many its a transition year 2021, 2022, it's going to be a transition you meaning.
In 2022, the revenue for them from China from cutting is going to be very very minimal.
In 2021, we had a revenue from cutting from China.
So we will continue to grow maybe in some in some areas in the business faster than 20%, but you need to take all of that into consideration to see how 2022 will look like and that's by the way one of the reason why we are not talking about specifically, it's too early to talk about specifically the 2022 flows however, again for model perspective.
Is the right things to look at and light is it 20% plus CAGR full day and for the future.
Okay, Great I'll hop back in the queue, Thanks, and good luck.
Thank you.
Our next question comes from Patrick Ho with Stifel. Please go ahead.
Thank you very much and likewise, Ron I wanted to congratulate you. Thanks for your efforts and Joe I look forward to working with you more on a going forward basis.
Thank you okay.
Maybe first of all for Scott, obviously with your diversification strategy, taking hold we're seeing the growth in other markets regions as well as your new products. As you just look at 'twenty. Two just one for this year, which of those three variables, whether it's markets are weak.
In.
New product expansion, which do you see as being the biggest drivers and light at least from that that breakdown.
Yes, I think as we look ahead.
We see strong continued growth opportunities both in industrial and in defense.
In industrial we have.
<unk> launched a number of new products in 'twenty, one we'll be launching more products in 'twenty two.
Just announced this acquisition of plasma that'll enhance the products. So we see strong opportunities to continue to grow outside of China in those industrial markets.
Notably I think one market that we see a very nice overall growth and growth in our businesses in additive manufacturing, where the economics of late.
Laser additive manufacturing is.
Inflicting.
Then in defense, we see continued opportunities for growth how those hit the top line in 'twenty two.
It's always harder to predict.
Given that the.
It takes time for those programs to hit in terms of programs of record, but we see strong growth opportunities in both of those markets and continued.
You know secular growth in the micro fabrication space.
Great that's helpful and maybe for the team whoever wants to answer this.
<unk> change in the input costs are have been a struggle for a lot of technology sectors over the past six months or so from your vantage point.
Are you seeing more pressure from quote supply chain shortages.
Input costs, whether it's related to pay more for components or freight and logistics costs, which of those variables are having I guess the biggest headwind at least for you in the near term.
Yes, Patrick we see challenges in all of those areas. There is not one that we would highlight.
But yeah. It is it is a difficult time to be managing when we're dealing with shortages on it could be a very small component that causes a problem for us or one of our our customers certainly freight is a challenging and then just you know inflationary uncertainties also.
So and on top of that with you know continued.
Covid.
You know continued hopefully.
We will evolve but continued issues just managing the company through this so we see it across that entire spectrum that you outlined there is nothing we would highlight that as you know the single sort of material impact to the business, but it is challenging.
Great. Thank you again and good luck Ron.
Yes.
Our next question comes from Tom.
With D. A Davidson. Please go ahead.
Yes, good afternoon, and thanks for the question.
First of all I guess when you look at the fourth quarter decline the sequential decline largely just explained by lower revenue in China I'm curious what you're seeing there is it just the Chinese market, it's a little bit softer or the supply chain issues or was it just your choice to de emphasize that market I'll walk away from potential business.
I think all of those factors Tom.
Some level I think the overall economy and industrial sector in China in Q4, I think was softer across the board, but in addition to that it's you know the intentional decision that we've made some time ago.
To be.
Very careful about which markets we serve there.
There's a limited set of markets that are truly attractive markets. There. So it's about our decisions and indeed a softer.
You know economy in China.
Okay. That's helpful. Thanks, Scott.
And also I was curious on the automation front is.
Is this mainly long lead time custom tooling that you have to.
Produce or bringing in house and you know what is the lead time to get the automation up and running.
Indeed, yes.
<unk> complex processes to assemble lasers is theres no off the shelf you know technology there it is a.
Largely custom yeah, very long lead time set of projects that we started.
In some cases, it's multiple years ago, and I'm glad that we did that several years ago and.
It's great to see progress as those tools come online.
So is this an ongoing process or do you feel like youre fairly good capacity.
Yes, it's ongoing it's been one that that as I said, you know started more than two years ago.
It's an ongoing continued processes we advance.
New products that are designed for automation.
And then the automation itself.
So.
You know, we're seeing good progress there, but it'll be a theme that we will continue for quite some time.
Okay, and then Ron one last question for you before you leave on the Opex side.
What was the sequential increase driven by just increased cost or did you increase head count as well.
First of all I'm, not leaving I'm going to be.
Sure.
Until the end of June to make sure that we have a good transition that's point number one second point going back to your Opex question, Yes, it's both.
Increasing labor costs. It is increasing in a professional fees and head count in some cases, yes, great. Okay well. Thank you all for your time. Thank you. Thanks Tom.
Our next question comes from Chris <unk> with Needham <unk> Company. Please go ahead.
Hi, good afternoon, and thank you for taking my questions and congrats Ron.
An additive it sounds like it's picking up there and I was just wondering if you could provide any color on the pipeline or what you're seeing in terms of demand there.
Whether there's any indications that the sales cycle could be compressing.
And any data points with.
With respect to wins with existing customers. Thank you very much.
Yes, I appreciate the question so what we've been working in additive for many years and what we're seeing is strong growth I think you can look at the standard market reports out there that are calling.
North of 20% growth in that space and indeed.
That's what we're seeing in its result of <unk>.
Significant improvements in a whole host of different technologies, but I do think the lasers play a really important role here.
Notably in.
Our systems, where there's multiple lasers.
And that drive throughput in these these tools.
And also more advanced lasers like our FX laser.
And we've posted some of the presentations that are.
That we had at the recent form next trade show. So we see continued expansion in the overall market, we see design wins and we see most importantly, new applications that are now economic.
For laser powder bed fusion applications and indeed, we're using.
These in our own products.
Great and just on plasma.
Yeah.
As you're going through the process of planning for integration how are you thinking about integrating.
Integrating that that product base with your existing offering is is the plasma offering something they'll be up continue to offer on a standalone basis or could you integrate the sensor suite with the.
The existing power source.
How are you thinking about that.
Yeah. Good it will be a product line that that fits very nicely with our lasers.
And it allows us to expand the product portfolio. It also allows us to engage with customers where plasma has had success in their own design wins.
In various industrial applications.
So it will.
Augment our products and also expand our channels.
Great. Thank you very much.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Mark Miller with the benchmark. Please go ahead.
Best wishes for your future.
A question here you've talked are you continue to talk about going to 40% margins long term.
What are the drivers how do investors access your progress and what's the roadmap the 40% gross margins.
Sure.
But just to be clear, we are talking about product gross margin.
I noticed total gross margin keep in mind that we have a portion of our revenue is coming from development revenue with six 5% margin, but going back to product gross margin I think the 2021 was a perfect example of how we how can we improve our margin by better mix.
With product outside of China.
Especially we did aerospace and defense end.
Industrial outside of China application, but at the margin it's much higher.
But in order to continue to improve the margin we need to do two main things. The first one is to some extent to adjust the excess capacity that we have today in China and in the U S to the level of production commentary as I mentioned at the beginning there is an excess capacity in China and excess capacity old global utilization.
<unk> in the U S. Once we will finalize the automation Hugh.
<unk>.
U S. We can reduce the capacity in China.
And we'll do small product here with automated lines in the U S, which definitely will help us with.
We deal with emotions with the cost. So that's point number one second point is obviously continue to grow the top line.
And have a better utilization on a low fixed cost and the last one is continue to grow the top line, but.
Growing the top line with application again, like aerospace and defense and industrial products outside of China, where the margin is much higher.
Okay what percent of sales for <unk> represented by greater than six kilowatt fiber lasers.
Fiber laser sales.
And in my mind that number for you Mark.
In the quarter.
Greater than so the.
Greater than six kilowatt was 40, 40%.
What about less than two kilowatt do you have that.
We have we have less than two kilowatt, it's actually 31% during the quarter, which is the highest it's been in a while and I think that.
Yeah.
That is a testament to what we've done in metal additive manufacturing most of the lasers by tower in additive manufacturing or.
Kilowatt and below and most of those sales are to customers that are obviously outside of China, which is why you've seen that tick up sequentially over the last couple of quarters.
Thank you.
Welcome.
This concludes our question is.
Answer session as well as our conference for today. Thank you for attending today's presentation you may now disconnect.
Yeah.