Q2 2022 nLIGHT Inc Earnings Call
Good day and welcome to the N late second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star Keith I'll, let by zero.
After todays presentation, there will be an opportunity to ask questions can I ask a question you May press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Joe Corso Chief Financial Officer. Please go ahead Sir.
Thank you and good afternoon, everyone I'm, Joe Corso and Knight Chief Financial Officer with me today is Scott Keeney, Enlighten Chairman and CEO 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 slide three Q2 was a solid quarter for enlighten. Despite the significant operational challenges and uncertainties, we face due to prolonged COVID-19 related lockdown in Shanghai, We delivered revenue that was within our guidance range favorable product mix and solid execution of our strategic growth objectives.
Helped drive gross margins above the high end of our guidance, which resulted in positive adjusted EBITDA for the quarter.
Turning to slide four.
Growth in revenue from strategic areas enabled us to generate $60 $8 million of revenue in Q2, our second quarter revenue reflects the continued geographic and strategic transformation of our business.
In Q2 revenues from customers outside of China grew 12% year over year to $56 $2 million or approximately 92% of revenue compared to $53 million or 73% in Q2 2021.
Our focus on strategic growth areas outside of China have resulted in eight consecutive quarters with year over year growth in our non China industrial and micro fabrication business.
Yeah.
Our global manufacturing team did an outstanding job during a quarter in which our key assembly facility was either closed or running at suboptimal capacity for two months.
Small percentage of our total workforce was able to gradually reinsurance facility during the Shanghai Lockdown, which began in March 2008.
But much of a productive capacity was completely idle until June 4th when we officially opened our facility.
Although the Covid related lockdown in Shanghai lasted longer than we could've predicted our team rapidly resumed normal multi ship production, enabling us to meet nearly all demand from our key customers.
Despite the reopening of Shanghai, we continued to see challenges in the broader global supply chain.
Lead times for many of our critical components continued.
To extend and the cost of materials labor freight and logistics continue to rise.
Our recent experience with the Covid related Lockdowns in Shanghai have reinforced our decision to continue to invest in our manufacturing capabilities in the United States.
Last quarter, we reported that we had installed the initial equipment required for the first phase of automation in Q2, we began to increase the productive capacity out of our installed equipment and in the coming quarters, we expect to increase output yields and add additional equipment to meet our automation targets.
Finally, I am pleased to announce that Chris Schechter has joined our team as Chief operating officer.
Chris Most recently was VP of operations Aerospace and defense at Celestica and brings a strong manufacturing background to support our continued growth.
Turning to slides five through six where I will discuss revenue by end market.
In micro fabrication, we had another solid quarter, we generated $16 $4 million of revenue, which represented approximately 27% of total revenue.
Lower sales from micro fabrication customers in China resulted in 19% year over year decline compared to the record micro fabrication revenue we generated in Q2 of 2021.
We believe the current softness in our China macro fabrication business is largely macro driven and we continue to maintain a market leadership position, which we believe will enable us to grow as the macro environment in China improves.
Outside of China, Q2 revenue increased year over year in overall demand signals remain positive.
We remain well positioned to continue our global leadership position by introducing innovative high power high brightness semiconductor lasers for existing and new markets.
In the second quarter, we developed a novel semiconductor laser with record peak power by leveraging our semiconductor device design and manufacturing capabilities.
This technology has a wide range of applications, including Lidar and other short pulse imaging and sensing applications.
We also continue to make excellent progress in the medical market.
Particularly for our newly released two micron wavelength lasers.
We believe that this laser addresses a broad range of Urological and other applications and offers and like yet another long term growth opportunity.
In aerospace and defense.
Second quarter revenue declined 6% year over year to $22 $5 million, representing 37% of sales.
Excluding advanced development revenue Q2, aerospace and defense revenue increased approximately 18% to $9 $7 million.
Overall sales in our aerospace and defense business was driven primarily by delays in receiving material required for certain directed energy development programs and fewer advance technology development projects during the quarter.
We view these delays is temporary as we continue to receive material required for our key directed energy programs and have signed several new advanced development contracts during the quarter.
In the directed energy market, we had two major milestones during the quarter.
First we continue to demonstrate the ability to scale the power of our high energy lasers.
Which we believe is critical for future defense systems.
Second we.
We have expanded and deepened our engagement with potential customers, both in the United States and abroad.
Our vertical integration combined with U S manufacturing enables us to take a system level view of our customers requirements and again to cross multiple product levels, including diodes fiber amplifiers and beam combined lasers.
During the second quarter, we generated product revenue from the sale of laser products to multiple U S defense contractors and foreign allies and are engaged in many additional design in opportunities with foreign allies seeking to deploy land sea and air base lasers.
As a result, we believe we have both expanded our served market and increased our near term revenue opportunities.
Finally, turning to the industrial end market revenue declined 12% year over year in the second quarter to $21 9 million, representing 36% of total sales.
However, industrial revenue from customers outside of China increased 43% year over year to $20 2 million.
On a percentage of revenue basis, Q2, industrial revenue from customers outside of China increased to 92% versus 57% in the same period in 2021.
Industrial growth outside of China continues to come from strategic customers as we continue to deliver innovative solutions that enable our customers to increase their market share and.
And at the same time increase their spend within light.
One of our key Differentiators in the industrial market is the programmability of our lasers.
We first introduced our programmable lasers to the market in 2018, where they were quickly adopted as they address the longstanding trading off between high speed for cutting a thin metal and outstanding edge quality for cutting thick mild steel.
We've continued to expand our line of beam control technology and recently, we extended the dynamic range of the beam area by Forex, that's allowing a five kilowatt and light fiber laser to have the same cutting speed isn't eight kilowatt conventional laser for thin metal.
Cutting while maintaining outstanding edge quality for thick metal.
For laser additive manufacturing, we are enabling our customers to continue to dramatically improve improve productivity in this growing market by operating lasers that provide benefits along two key dimensions.
First our highly reliable and stable lasers enable new multi laser tools, which improve productivity and reduce cost per part.
Second our programmable lasers can increase the build rate for additive manufacturing by 2% to eight AXT with excellent material quality.
In addition, our lasers.
Allow the microstructure to be engineered loyalty, that's optimizing the material properties, such as activity strength and hardness, introducing an entirely new capability for additive manufactured parts.
For example, <unk>.
<unk> programmable lasers were used to print turbo machinery components with specially optimize mechanical properties.
Would not otherwise be possible without the use of our lasers.
Finally, our programmable lasers are also being employed in welding applications to increase productivity and part quality.
We are also deploying integrated process monitoring technology, which will further expand our market opportunity.
I will now turn the call over to Joe to discuss <unk> second quarter financial results.
Thank you Scott and good afternoon, everyone beginning on slide eight.
Total revenue for the second quarter of 2022 was $60 8 million, a decrease of $8 3 million or 12% compared to the second quarter of the prior year and was within our guidance range product revenue for the second quarter of 2022 was $48 2 million.
A decrease of $5 4 million or 10% compared to the second quarter of the prior year.
The decrease in product revenue year over year was driven by lower sales to industrial and micro fabrication customers in China.
Partially offset by higher sales to strategic customers outside of China.
Development revenue for the second quarter of 2020 to $12 6 million a.
A decrease of $2 9 million or 19% compared to the second quarter of the prior year.
The decrease in development revenue year over year is attributable to the timing of project based work we performed in the defense market.
Turning to slide nine.
Overall gross margin for the second quarter of 2022 was 23% compared to 29, 4% for the second quarter of the prior year.
Better than expected product mix enabled us to generate gross margins that were above the top end of our guidance range.
Product gross margin for the second quarter of 2020% to 31% compared to 36, 1% for the second quarter of the prior year.
The year over year decrease in product gross margin was driven by sales mix.
Capacity utilization of our Shanghai manufacturing facility, increasing since in U S manufacturing and continued increases in production and freight costs.
Turning to slide 10.
non-GAAP operating expenses for the second quarter of 2022 were $19 3 million or 32% of revenue compared to $17 6 million for <unk>.
85% of room.
For the second quarter of the prior year.
The majority of the year over year increases related to increases in salary costs headcount professional service fees and investment in R&D projects to support our product roadmap and long term.
With opportunities.
Turning to slide 11.
non-GAAP net loss for the second quarter of 2022 was $3 $3 million or <unk> <unk> per diluted share compared to non-GAAP net income of $4 4 million or <unk> <unk> per diluted share for the second quarter of the prior year.
The year over year decrease in non-GAAP profitability was driven by a combination of the decrease in product gross profit and increase in Opex spending.
On a GAAP basis net loss for the second quarter of 2022 was $10 3 million or 23 per diluted share compared to $7 $9 million or <unk> 19 per diluted share for the second quarter of the prior year.
Adjusted EBITDA for the second quarter of 2022 was approximately $200000 compared with $6 million for the second quarter of the prior year.
Net cash used by operating activities was $4 $8 million for the second quarter of 2022 compared to $1 million for the second quarter of 2021.
The increase operating cash usage as a result of lower profitability as previously discussed and changes in working capital.
Capital expenditures for the second quarter of 2022 were $7 9 million compared.
Compared to $4 8 million for the second quarter of the prior year.
We continue to invest in directed energy for the defense market and automation of our U S facilities to serve our customers outside of China.
Turning to slide 12, we.
We ended the second quarter with cash cash equivalents and marketable securities of approximately $191 million and we had no debt.
DSO for the second quarter of 2022 was 61 days and we had 157 days in inventory.
DSO in the second quarter of 2022 was negatively impacted by the timing of shipments compared to prior periods and the increase in inventory was driven primarily by material purchases for the defense and directed energy markets.
Turning to slide 13 for our outlook for the third quarter.
Based on the information available today, we expect third quarter revenue to be in the range of 60% to $66 million.
The midpoint of $63 million includes approximately $49 million of product sales and approximately $14 million of development sales.
Turning to gross margin.
Third quarter product gross margin is expected to be in the range of 26% to 30% and development gross margins to be approximately six 5%, resulting in an overall gross margin range of 21% to 25%.
For the third quarter, we expect adjusted EBITDA to be between negative $1 million and positive $2 million.
We expect third quarter average basic shares to be approximately $44 6 million and non-GAAP diluted shares to be approximately $47 $1 million.
With that I will turn the call back over to the operator for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and we would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
And our first question will come from Greg Palm with Craig Hallum. Please go ahead.
Yeah. Good afternoon. Thanks for taking the question I guess, starting with China.
Makes me confident that what is going on over there is macro driven and maybe share loss from increased competition do you have any visibility into that and then can you let us know.
If for how much revenue that you may be actively walked away from over in that region.
Yes, Greg Thanks.
Thanks for the question.
I think as we've talked about previously.
In China.
Where we see our strength is in the micro fabrication market in there.
Best of our abilities, we continue to see.
Strong engagement.
With design wins based upon the leading technology that we have.
But the macro environment there was.
Very challenging.
In Q2.
And with respect to the fiber laser industrial fiber laser business, yes.
Yes, we've discussed certainly we're not engaging with unprofitable business there.
But for.
We're not breaking out.
How much of that we're walking away from.
No I think thats, yes.
Okay fair enough and as it relates to the Lockdowns can you help us understand what the impact of those prolonged lockdowns were in Q2 and is there any assumption of continued impact in the Q3 guide.
Yeah, Greg so.
The lockdown lasted for longer than we had expected when we provided guidance in may.
At the same time when the facility reopened we were able to ramp quite quickly kudos to the team operationally for being able to get back to multiple shifts as quickly as they have so we left a couple of million dollars on the table.
During the quarter, but.
We've been opening the entire quarter I don't think it would meaningfully change your perspective or how we really did during the quarter frankly.
Okay. Thanks.
From a from a revenue perspective.
Yeah.
Okay and just in terms of the Q3 guide any assumptions of.
Whatever continued impacts or challenges are at this point are you more or less back to normal.
Our operations are back to normal in Shanghai. So there are still some minor lingering effects I mean, there was turnover in getting new folks into the facility. So that always takes a little bit of time to get back to the exact level of efficiency at which we are operating prior to that.
Walk down, but there is nothing that we see right now that looks like.
It will affect us the way we were affected in the prior quarter of course were concerned with the overall environment.
Environment and the potential for Covid and other related lockdowns to happen in Shanghai, but.
Our guide this quarter assumes that it's business as usual in our Shanghai facility.
Okay I'll leave it there thanks.
Our next question will come from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Good afternoon, I just wanted to.
Get an update.
And the automation activities.
At what point do you think that becomes less of a headwind it sounds like you're satisfied with the pace.
The progress you are making in this area I'm wondering if you could give us a little better handle on how but maybe update us on the timeline.
Yes, Jim Thanks for the question. This is very important strategic topic for US we continue to ramp up automation in the U S. And we're currently seeing benefits of that ramp we have more work to do but we're certainly continuing to focus on the majority of our business.
As in the fiber laser market outside of China, having that automated.
For 2023.
But we're continuing to make.
Make progress on that ramp.
Continues to be a top priority.
And then turning to the industrial the growth outside of China were pretty healthy.
You highlighted a couple of areas.
And a new deck, you talked about welding and additive I Wonder if you could give us any more granularity in terms of the.
The magnitude of those drivers.
That 43% growth that you registered and if I could just slip one in on the medical opportunity is there a way for you to frame that opportunity for us as we think about possibly 'twenty three and beyond.
Good Jim Let me just make sure I've got the question. The first one is on on the 43% year over year industrial growth outside of China.
One of the key drivers of the second one was going back to automation against the right Jim.
On the industrial growth I, just want to maybe we'll take one more what is it that I apologize.
You highlighted some of the progress youre, making in metals additive manufacturing, but if we could drill down further into that 43% growth what were the major catalyst for that growth that you saw to what extent do you anticipate that continuing in Q3 and Q4.
Good yes, I think the short answer Jim is the reason we talked about what we're doing in additive is that is that is a key driver of our growth.
I think it's been.
And application area that has.
Grown nicely, but it's still has a lot of promise.
For laser additive manufacturing to be truly viable.
We as an industry need to continue to drive productivity.
Up significantly and to do that.
A couple of the key levers are more lasers per tool that gives you more parts at lower cost and more effective lasers, and we are demonstrating continued progress not only in the technology, but also the adoption in that market and so we do see opportunities for continued growth.
Their.
How they play out quarter over quarter, that's harder to predict but do you see.
These are additive manufacturing.
Becoming a more important.
Theme.
That will continue to drive growth.
How many customers that you're working with can you say Scott.
Yes, we don't break out the details but it is.
Yes.
More than 10 that are.
Good customers and there is quite a long tail there Jim of companies in this space that are really interesting work that are.
Sometimes below the radar.
So it's a dynamic space that has the opportunity for continued growth.
Okay, and then just quickly just on the medical opportunity, which you seem excited by I Wonder if you could talk a little bit about how we might think of that that contributing to revenues.
Good yes, I think it is.
It is worth noting that we're making good progress there was a new product.
Urology is the first application, which is driving demand and we're seeing.
Significant growth from small numbers this year.
But it is a market that is certainly has the opportunity to be tens of millions of dollars of revenue.
For us and over time medical can be a more important part of our business, we don't break it out today.
Put it into the micro space, but we do want to highlight that as one of the drivers.
What's going on in the micro segment for us.
Thanks, I'll jump back in the queue.
Our next question will come from Patrick Ho with Stifel. Please go ahead.
Thank you very much.
Scott maybe first off on the products and the market opportunities I think you highlighted in your prepared remarks to two micron series of lasers.
Or are you seeing the I guess, the earliest or the greatest adoption because if I recall it was targeting several markets.
Markets are you seeing the greatest traction for that product initially.
Yes, Patrick yes.
Initial traction is in medical and in urology, but youre right. We have highlighted the fact that two micron does apply to a broader range of markets.
There are defense applications that are industrial applications applications, but for the current products that we're shipping medical is what's driving that over time, we do see it as yet another example of it.
Laser which enables a broad range of different vertical markets.
Great. That's very helpful and maybe Joe for you on the cost side and the supply chain didn't hear much of it on this call.
Are you seeing improvements on the supply chain front, how do you look at the situation on a going forward basis.
Yes, Patrick I think the good news is that we haven't seen the supply chain deteriorate further during the quarter. So in some areas.
It's been it's been relatively flat I will tell you that flat in terms of.
What we're seeing in terms of the health of our suppliers.
The lead times have continued to have continued to extend there are certain parts that are not in as.
Challenging for us us to get but costs are definitely up cost of materials freight and logistics are up cost of labor are up and we think that they are going to remain at this level for some time.
Would you want to put any quantification on that like is it a 100 to 200 basis point impact or.
What's your thought on that yes, sure so happy to do that so so as we look kind of quarter over quarter. It was a couple of hundred basis points that we.
Sort of incremental cost between.
Freight logistics and materials.
Great. Thanks, a lot guys.
Thank you.
Our next question will come from Hans Chung with D. A Davidson. Please go ahead.
Hi, Thank you for taking my question. So just wanted to follow up on that.
Gross margin.
So.
The third quarter, we have.
Revenue coming up a little bit on a sequential basis, and then by the fourth month.
Product gross margin.
Nope.
And.
Hi, guys.
Stephanie sector.
Including the.
Or.
The cost of premium that you just mentioned due to the supply chain so any any color.
Regarding the puts and takes in gross margin for the third quarter and how should we think about the gross margin, let's say in 2020.
Yes sure. Thanks for the question Hans you hit the nail on the head. The biggest there are two big impacts as we look at the margin in Q3 of 2022.
First of which is the mix of business in Q2.
We had a pretty favorable mix it doesn't take much with our level of product revenue.
To sort of improve the product gross margin in the second quarter. We obviously saw lower revenue lower revenue from China, both in industrial and in our micro fabrication business and we also saw a more favorable mix of business inside of our fiber laser.
<unk>.
And obviously offsetting that were freight logistics consumables all of those costs that we've talked about so as we sit here right.
Our best view of Q3 is that the mix of business will moderate to something that is.
More in line with our expectation that we won't get exactly the same mix benefit that we got in the prior quarter, but at the same time, we're going to see.
Better absorption as Shanghai has not shut down for two quarters. So you look at that and you say that from a supply chain perspective, right labor materials things like that are going to remain relatively flat is how we got to our.
Gross margin guide for Q3.
Got it.
Very helpful.
And then.
If I look at the revenue mix by product type and then.
This like the low power <unk>.
<unk>.
I mean going up and then empower going down it does that reflect to the weakness in micro fabrication and then I'd just add.
Any comment on that dynamic.
No what youre seeing there is this quarter in Q2, 41% of our business were below the two kilowatt and below that is largely driven by continued growth in the additive manufacturing business where.
Power is not the the figure of merit like it was historically in the cutting market, particularly in China. So when youre looking at mix based on power and you can see if you go back four or five quarters Youll see that the low power percentage of total fiber laser revenue has continued to.
Increased that's largely a function of the growth in our additive manufacturing business.
Got it got it Okay and then.
As I look at the inventory level.
Continuing to go up.
You kind of explain that.
Related to some purchase for the direct energy program.
It also kind of.
<unk> investment.
Inventory because the supply chain constraint.
How should we think about the inventory.
Management strategy going forward.
Yes, great question on so you're right inventory has gone up and.
You've identified a couple of pieces of it.
The first is that as the lead times for the material that we need have increased we've strategically used our balance sheet to make sure that we are able to support our customers as we've said in the past organic growth is the primary thrust of.
What we are doing at enlighten and we want to be in a position to be reactive to our customers' demands and many of the customers that we're serving today.
They are growing but we're growing our share of wallet inside of those customers. So we've made a strategic decision that today with the supply chain, where it is to invest more heavily than typical in our in our inventory levels and then as we mentioned on in our prepared remarks.
There have been a couple of areas in which we've invested in inventory right directed energy is one of those areas. This quarter, we talked about.
Initial volume sales of laser products to customers right in order to support what we see over the coming quarters and years, we need to be in a position to.
Turn that turn that inventory into into revenue and then the third piece of it Hans is that costs have continued to rise right. So part of the inventory growth is that.
What we are buying and putting on the balance sheet is more costly today than it was.
A quarter ago, or a or a year ago. So that's kind of the current situation as we look in the future. We're taking a really hard look at where to continue to strategically invest in inventory or not strategically invest in inventory there will be some period of time, where youll see it around these levels as we trans.
<unk> continued to transition.
Some of our manufacturing from Shanghai to the U S. As we built buffer stock and the likes so it's something that we're managing but today we're.
Strong position from a balance sheet perspective to be able to do that to support our growth going forward.
Thank you.
Youre welcome.
Our next question will come from <unk> Misra with Bahrenburg capital markets. Please go ahead.
Thanks for taking my question can you talk about your order book.
When there's seasonality and whatnot is it.
Slightly weaker for the time of the year or you think it's kind of in line.
Versus last year or so.
Yes.
I think short answer I'd say is in line I think.
What we're seeing as we noted in the prepared remarks is.
Very good traction in the strategic growth opportunities in directed energy.
In additive manufacturing in medical.
And continued.
Traction in our in our core markets.
But from an order book standpoint, I think in line with.
Where we typically are.
Got it thanks.
Can you give us some sense of pricing also in your major product so.
Sorry.
Simplifying, but maybe on some sort of a dollar per kilowatt price metric are prices still falling.
Versus let's say last year or given the very high inflation that we have seen.
Perhaps youre.
Seeing prices stabilize or maybe even go up.
Yes, I think the short answer is stability in general there are some areas, where we've seen price.
Increases.
But in general stability I think would be the answer.
Especially as we're not.
Engaged in the very low price business cutting in and China.
Understood.
Maybe last one what's the best way to think about the dollar.
Sensitivity or impact on your business.
On your revenue as well as <unk>.
Operating income.
Yes. Thanks.
Thanks Pat.
The impact that we have.
From currency is relatively insignificant today most of the revenue that we generate outside of China. Any way is is in U S. Dollars, we have a little bit in Euro and then when you look to the China business, We've got a natural hedge because we both sell in RMB and we.
Satisfy expenses in RMB, So we don't have.
Our big exposure from a currency perspective today given the geographic.
Composition of our business.
Thanks, guys. That's all I had thank you.
Again, if you have a question. Please press Star then one our next question will come from Mark Miller with the Benchmark Company. Please go ahead.
Thank you for the question what percent of fiber laser sales were for over six kilowatts.
Over six kilowatts, this quarter was 40% Mark.
And can you just remind me again on the margin comparison between the high power versus low power in terms of margin contribution.
I think you've got to look at it by market. So certainly when you look at the when you look at the cutting market.
Higher power lasers carry much better gross margins than the lower power lasers, but theres also for our business all of the high power lasers Theyre not made equally either particularly when you start talking about <unk>.
Certain configurations, whether theyre programmable or not and then.
I said market because it's important to make the distinction between the cutting market and.
The additive manufacturing market. So when you look at the additive manufacturing market.
The product margins in additive manufacturing lasers, which are we report as low power tend to be tend to be higher than than cutting lasers today.
Okay.
Youre getting some traction on the welding.
Fashion area.
If you could give a little more color on that because that's been a dominant part of sales from one of your competitors.
Yes, I think it's an area that we do see traction I think we highlighted other markets, where we see more material growth for us, but it is a market that.
Is an important market, especially with the expansion of EDI.
And we will continue to be.
A market that we address.
Thank you.
Thanks Mark.
This concludes our question and answer session I would like to turn the conference back over to Joe <unk> for any closing remarks.
Thank you everyone for joining this afternoon and for your contingent continued interest in Enlink. We look forward to speaking with you during the quarter have a great afternoon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.