Q3 2022 nLIGHT Inc Earnings Call
Good afternoon, and welcome to the NN light third quarter 2022 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Joseph Corso Chief Financial Officer. Please go ahead.
Thank you and good afternoon, everyone I'm, Joe Corso Enlighten Chief Financial Officer with me today is Scott <unk>, and Mike <unk>, 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 everyone for joining us this afternoon, starting on slide three.
Unlike third quarter revenue was within the range of guidance provided in August products revenue was slightly below the midpoint, but lower than expected project based development revenue resulted in open up overall revenue at the low end of the range.
What products and overall gross margins were within the guidance range, but adjusted EBITDA was below the bottom end.
Operationally, we continue to increase the level of automation in the U S. We.
We've added incremental capacity to each of the lines. We established earlier this year and we are in the process of adding one additional wind to our facility in Kansas Washington.
With the installation of this equipment, we will have installed enough capacity to support our anticipated growth over the next several years.
And capacity, we are focused on further improving our yields and the overall efficiencies our newly installed capacity.
We expect to have installed the majority of our automated capacity in the U S. Sometime in the first half of 2023.
Before discussing the performance of our business in the third quarter I'd like to comment on the trends we are seeing in the semiconductor and fiber laser market and the impact that we expected to have on our business.
We are projecting near term growth from many of our strategic customers, primarily due to new product introductions and market share gains. However, we are seeing signs of a weakening near term demand environment. We don't believe that softening demand reflects fundamental changes in the markets or customers. We serve are rather responds to changes in the global business environment.
While these global changes are significant they continue to reinforce to fundamental opportunities friendly.
First.
Rapidly evolving global supply chain are driving continued improvements in advanced manufacturing.
Industrial automation robotics metal <unk> printing and battery manufacturing are just a few examples of advanced manufacturing processes that require an increased number of lasers.
Second we are seeing a much greater interest in laser technology from the defense industry lasers are a critical component of next generation defense technologies with applications, such as directed energy intelligence surveillance and reconnaissance driving long term growth.
We continue to believe that our strategy to focus on these two key themes position us well for long term success.
Turning to slide four.
And late reported $60 $1 million of revenue in Q3, the geographic mix of our revenue again reflected the ongoing strategic transformation of our business.
Third quarter revenue from customers outside of China represented approximately 91% revenue compared to 81% in Q3 2021.
In order to better align our Shanghai cost structure with reduced demand levels of our fiber laser sales in China, we initiated a restructuring plan in our Shanghai facility in October .
Outside of China, we generated approximately $54 $9 million revenue versus $58 5 million in the third quarter in the prior year.
The year over year decline in revenue outside of China was driven by a reduction in project based development revenue of $5 $8 million.
Excluding development revenues non China product revenue for the third quarter of 2022 was $42 8 million, an increase of $2 1 million or 5% compared to the third quarter of the prior year.
Turning to slide five where I'll discuss revenue by end market.
In micro fabrication, we generated $17 $7 million of revenue, which represented approximately 29% of total revenue and was approximately flat year over year.
Q3 revenue was driven by record quarterly revenue outside of China, offset by a decline in revenue from sales to customers in China.
In China, economic softness and lower government stimulus have continued to impact sales.
We continue to believe that we maintain our leadership position with Chinese micro fabrication customers, but we aren't predicting a swift recovery in the region.
We're also seeing softening demand signals from customers outside of China, particularly in consumer electronics and semiconductor manufacturing applications.
Despite the softening demand we remain deeply engaged with customers to support their next generation products and we have strong design in activity with both existing and new customers.
In the medical market, we have seen excellent adoption of our newly released two micron wavelength laser which is initially targeting neurological applications.
We expect to begin to increase revenue in the fourth quarter and we anticipate strong growth contribution from this product into 2023 and beyond.
In aerospace and defence third quarter revenue declined approximately $7 6 million or 27% year over year to $22 million, representing 34% of sales.
Of this decline approximately $5 8 million was related to project related development work as.
As we've mentioned in the past the timing of project related development work could result in.
Significant development revenue swings quarter over quarter.
We continue to make progress in our high energy lasers for the directed energy market.
We are pleased to report exciting progress in support of our OSD funded high energy laser scaling initiative to develop a 300 kilowatt high energy laser prototype.
We have demonstrated power exceeding program objectives, and we are working towards formal government devaluation acceptance testing and delivery.
Testing to date has demonstrated the scalability of our coherent beam combining architecture, which combined with internal investment is establishing a modular product line over a broad range of high energy laser power levels.
We sincerely appreciate the support of the whole USD program, and we look forward to sharing more information in the future.
In addition, we continued to expand our customer base and directed energy during the quarter, we delivered multiple new products to several new customers. We delivered initial volumes of the laser to a U S. Prime defense customer and completed the development of a new lightweight laser for another U S prime customer.
We continue to see the U S directed energy transition from the science and technology phase and into the prototyping phase with multiple new programs and request for proposals across the U S services.
Finally, turning to the industrial end market.
Third quarter revenue declined 17% year over year to $22 2 million, representing 37% of total sales reps.
Revenue from industrial customers outside of China was $19 8 million, which is approximately flat compared to the third quarter of 2021 revenues from customers in China was down approximately 68% compared to the third quarter of the prior year.
In cutting our business continues to be driven by our customer base outside of China. We remain focused on delivering innovative fiber laser solutions that enable our customers to design systems that are differentiated in the market.
Today, we believe we are the only company that provides all fiber beam shaping solutions that allows for all of the power to shift from the core to the ring, enabling our customers' design flexible highly productive systems with superior edge quality in both thin and thick metal cutting.
As an example, we released the new 20 kilowatt programmable laser at Europe like last week further reinforcing the versatility and stability of our programmable solution.
In welding, we are expanding our presence in the growing E mobility market, where we see long term growth opportunities.
We built upon our existing all fiber programmable lasers to introduce a new product that has been optimized for battery welding applications.
This product.
Called Kronos FX as beam shape that works well for copper and aluminum welding by reducing spatter and other deleterious effects that are common with standard top beam shapes.
It also includes proprietary hardware based back reflection protection to enable uninterrupted processing of highly reflective materials finishes and unique serviceability features that maximize uptime.
This laser is currently being evaluated by wellbeing integrators in the U S Europe and Asia.
Finally in additive manufacturing, we've increased our engagement with metal powder bed fusion Oems by continuing to demonstrate the unique capabilities of our krona FX programmable lasers.
The FX fiber laser which has a tunable beam shape from a small single mode spot too.
Two larger ring beams that are three times the diameter.
Has consistently been shown to show increased build rates and laser powder bed fusion machines by up to eight times by maintaining and often enhancing material quality.
The optimized beam shapes from the FX laser are uniquely capable of producing spatter from the melt pool to allow for higher build rates and generous process windows.
Later this month at form next key additive manufacturing trade show in Frankfurt, several customers will announce new products and will highlight the benefits of the krona FX technology.
One customer economy, <unk> will be presenting a case study illustrated how from a FX laser technology was applied to the printing of turbo machinery components, reducing build times by 80%, therefore, reducing <unk> cost by more than 75%.
Along with these cost reductions the ramping profiles from FX distinctly enables control of the physical properties of the printed material.
<unk> yield strength ductility and fatigue strength.
We believe this intersection of high speed 40 print team at low cost is likely to change the way, we think about manufacturing and the investments, we're making in new lasers for additive manufacturing reflect this view.
Building upon the success of apex 1000, we will launch this month, the new FX 500, which increases the power over the current apex 1000 by 25%.
I will now turn the call over to Joe to discuss <unk> third quarter financial results.
Thank you Scott beginning on slide seven.
Total revenue for the third quarter of 2022 was $60 1 million a.
A decrease of $12 1 million or 17% compared to the third quarter of the prior year and near the bottom end of our guidance range.
Products revenue for the third quarter of 2022 was $48 million, a decrease of $6 4 million or 12% compared to the third quarter of the prior year.
The decrease in product revenue year over year was driven primarily by a decrease in sales to customers in China.
Partially offset by increases to sales to both industrial and micro fabrication customers outside of China.
<unk> revenue for the third quarter of 22 was $12 1 million or.
A decrease of $5 8 million or 32% compared to the third quarter of the prior year.
The decrease in development revenue is attributable to the timing of project based work we perform in the defense market.
Turning to slide eight overall.
Overall gross margin for the third quarter of 2022 was 22, 4% compared to 29, 6% for the third quarter of the prior year and on the lower end of our guidance range.
Product gross margin for the third quarter of 2022 was 26, 4% compared to 37, 1% for the third quarter of the prior year the.
The year over year decrease in product gross margin was driven by sales mix and as discussed last quarter decreased capacity utilization increase investments in U S based manufacturing and.
And continued increases in production and freight costs.
Turning to slide nine.
non-GAAP operating expenses for the third quarter of 2022 were $19 4 million or 32% of revenue compared to $18 $1 million or 25% of revenue for the third quarter of the prior year the.
The majority of the year over year increase was related to increases in salary costs professional service fees facility expenses and a decrease in administrative costs allocated to development projects.
Offset partially by lower project spending.
Turning to slide 10.
non-GAAP net loss for the third quarter of 2022 was $5 1 million or <unk> 11 per share compared to non-GAAP net income of $3 9 million or <unk> <unk> per diluted share for the third quarter of the prior year the.
The year over year decrease in non-GAAP profitability was driven by a combination of the decrease in product gross profit and an increase in operating expenses on a GAAP basis net loss for the third quarter of 2022 was $13 million or 29 per share compared to $6 9 million or <unk> 16 per share.
<unk> for the third quarter of the prior year.
Adjusted EBITDA for the third quarter of 2022 was a negative $1 $4 million.
Compared with $7 2 million for the third quarter of the prior year.
Net cash used by operating activity was $2 8 million for the third quarter of 2022 compared to net cash provided by operating activities of $400000 for the third quarter of 2021 the.
The decrease in cash from operations as a result of increased operating losses and continued use of cash for working capital.
Our capital expenditures for the third quarter of 2022 was $3 5 million compared to $5 7 million for the third 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 11.
We ended the third quarter with cash cash equivalents and marketable securities of approximately $113 million and no debt.
DSO for the third quarter of 2022 was 67 days and we had 155 days in inventory.
Turning to slide 12.
As Scott mentioned earlier, we continue to believe that the long term growth drivers of our business are firmly intact. Although we are seeing weaker demand for the next several quarters in light of this weaker demand during the fourth quarter, we will evaluate our cost structure and seek to streamline our business to increase operational effectiveness such that by the first quarter of 2023.
We expect to achieve breakeven or better adjusted EBITDA at approximately $55 million to $60 million of revenue.
Turning to our outlook on Q4.
Based on the information available today, we expect Q4 revenue to be in the range of 53 million to $59 million.
At the midpoint of $56 million. This includes approximately $45 million of product sales and approximately $11 million of development sales.
Turning to gross margin.
Q4 product gross margin is expected to be in the range of 23% to 27% and development gross margin to be approximately 4%, resulting in an overall gross margin range of 20% to 23% for.
For the fourth quarter, we expect adjusted EBITDA to be between negative $4 million to negative $1 million.
We expect Q4 average basic and diluted shares to be approximately $45 8 million.
With that I will turn the call over to the operator for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing mckeith too.
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At this time, we will pause momentarily to assemble the roster.
And our first question will come from Greg Palm of Craig Hallum Capital Group. Please go ahead.
Yeah. Thanks, Good afternoon, everyone I wanted to start with just the commentary on the demand outlook and I'm curious if you can maybe characterize it a little bit differently, whether you see this as cancellations push outs.
What's your kind of visibility into the next couple of quarters, and then Joe specifically you mentioned Q.
Q1 <unk>.
Yeah.
The operational changes that we will make in the business most of those will happen in Q4, and so I wasn't trying to imply that we are guiding to a 55 or $60 million a quarter in.
In Q1, I think what we wanted to get across was that after we get through that.
The changes that will make here.
Assuming the current mix of business, if we're able to achieve $55 million to $60 million of revenue, we should be able to have EBITDA of breakeven or hopefully better than better than that.
Okay fair enough.
One segment that maybe strikes me as a little surprising given the commentary is aerospace and defense.
B because.
That seems to be a space that youre seeing good spending overall and you know directed or advanced development revenues, you know down, but even outside of that on a year over year basis, we're down as well. So maybe if you can just spend a minute and just sort of parse through what your.
And in that area as well.
Yeah, absolutely Greg good question.
First let me respond by saying yes.
The decline in A&D reflects again.
Building, what I said previously particular issues primarily.
<unk>.
One is.
Really delays and supply chain issues, while the programs that we're referring to here. The end demand is strong and indeed the outlook is even stronger there have been delays with.
The specific components that we source in these complex systems and.
That's led to part of the delay and the.
And second.
In the development programs.
There have been some delays there both in terms of the.
The current programs and new programs that we're working on.
But again that doesn't reflect any fundamental change in what we're doing our position indeed.
The progress we reported an unhealthy.
In other matters remain positive and I think as you said I think the broader comm.
Context here is one in which deeper.
Deepening global this quarter as we need to interest in lasers for a number of applications and I think we're very well positioned for that.
Those opportunities.
So again, its particular issues that are driving the near term revenue.
Are you able to quantify what that sort of supply chain impact has been and I guess do you have any visibility on when that might free up.
Let's see.
With Jones trading.
Make sure we're clear about quantifying in terms of freeing up.
Boy.
Is there a set of issues that have the root cause issues have been largely resolved.
It still takes time for those to work their way through over the coming quarters for one or two of the key programs Im referring to.
But yes, I don't see fundamental issues there.
And we've been able to address.
Address the root cause issue. So we don't see those those issues.
Gaps in supply chain.
This particular, one we faced persisting.
Yes, Greg in terms of quantification. If you look at the last if you look at Q3, we were down three or $4 million in revenue from one of a couple of those kind of core A&P programs because of because of supply chain.
But I think that gives you hopefully a sense for the quantification of that.
Yes, Okay. That's helpful.
Right.
I will hop back in the queue, thanks, and good luck.
Okay.
Okay.
The next question comes from Mark Miller of the Benchmark Company. Please go ahead.
You mentioned you had some share gains that I was just wondering what areas.
Well, we we've seen share gains in really all of our end markets in micro fabrication, we continue to make progress in new areas.
In aerospace and defense continue to.
When new design slots and then finally in industrial.
Continuing to.
Get new design wins.
Across our applications or so across the board, we have released new products in.
<unk> seen continued expansion of our customer base.
Spread across the power spectrum high power low power or it's more concentrated in one power.
Really across the board.
Just released a 20 kilowatt Corona lasers. In example, higher power work that we're doing but similarly.
Lower power.
Sure.
Well in additive manufacturing.
There, it's more about the sophistication of the beam.
<unk> products.
But similarly in aerospace and defense, we are making great progress there too.
Thank you.
Alright.
The next question comes from Hans Chung of D. A Davidson. Please go ahead.
Thank you for taking my question so.
First.
I was wondering what what's the driver micro fabrication outside China.
And then.
So how big in China.
<unk> segment.
Let's see if you can repeat the last part of that question again, I Didnt quite hear it.
So first part.
The key driver for the micro fabrication outside kind of in the quarter and then.
And then follow up on that is how big in China versus non China in this segment.
Good so first part of your question outside of China.
Continue to get design wins in.
The broad set of different markets in.
The broader electronics.
<unk> mint.
But also continuing to make good progress in medical applications.
And and we continue to see as we've mentioned.
Strong outlook there.
And then with respect to China, I'll, let Joe cover that.
Thanks, Hans in non China was the bulk of the micro fabrication revenue this quarter, we've seen our China micro fab business.
Business Alright.
Million dollars to $3 billion of revenue range over the last few quarters at the same time.
Actually seen.
Outside of China, micro fab grow into sort of the mid teens to give you a sense of the breakdown between China versus non China.
Got it that's helpful. So.
And then and then so in terms of our gross margin.
At this time in Q4, the gross margin in this environment revenue.
It's going to be all pretty thin.
It has been steady around 6%, 7% and then that's all.
I was wondering is that just one time event or.
Or is the new base and then what the reason for that.
Yes, Great question. Hans now this is primarily a one time event as there are certain programs that we are closing out and sort of truing up to actuals.
Margin is going to be we think about 4%. This year every program carried a little bit of a different margin, but when we look at the balance of the programs that are about six 5%. So I think outside of.
Towards the end of life of a program I expect that we would still be in that kind of 6% to 7% range going forward, but nothing structural has really changed about the way that we're prosecuting that development business.
Got it and then.
And then as we look into the 2023 and I mean.
I mean the.
You may environment.
Being soft.
I'm just wondering.
What's the.
Kind of highlight or bright spots.
Would you expect for next year.
Yes, I think as we look out in time.
We share your point of view that I think.
There are some challenging times ahead.
In our results.
Continuing.
Fracturing of economic times around the world.
Other discordant around the world.
But as we noted.
Both of those factors also.
<unk> represents opportunities for us first in the industrial markets.
We continue to see expansion of more advanced.
Technology in manufacturing.
Areas like additive manufacturing we see.
Very strong progress there and we're launching new products this month.
At the Big Trade show form next Frankfurt.
And then second word.
We do see the defense sector is a strong area, where we're very well positioned and we see continued opportunities to expand.
Over the over the medium term there.
Great got it and then.
Lastly.
Just wanted to touch base on the Lidar application I think you mentioned in the last quarter or before.
Just curious what your plans either.
Are you going to do.
What kind of product are you going to provide and then.
What is your competitive advantage.
So.
For us.
We participate in the liner market is at the higher performance side of that market.
And so there are programs in aerospace and defense and there are some other programs that are earlier staged in other more advanced markets.
And so we do see opportunities there they.
They are not near term opportunities, but we will we look forward to providing more detail as those opportunities develop.
Okay got it great.
Great. Thank you.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Ruben Roy of Stifel. Please go ahead.
Yes, hi, Thank you for taking my question.
Joe I wanted to follow up on the gross margin quickly.
Cited a number of factors.
For the margin dynamics, including mix and some of the.
Cost.
But the business I'm, just wondering as the mix has shifted out of China.
I think the margin would be a little bit better outside of China, maybe you could just help us with kind of some of the dynamics around that and then as you look into.
2023, and maybe you could give us some puts and takes on how youre thinking about those different factors and how we can we should think about margins over the next several quarters that'd be helpful. Thank you, yes, yes sure Reuben. Thanks. So when you think about margin as we are going from Q3, and even to where we're guiding in Q4 right. We've got revenue that's down by.
Cop $4 billion at the midpoint, there obviously a lot of puts and takes.
Some of it is mix right as we look at the.
The diodes business, we're selling in both.
China in non non China, we expect to get slightly better absorption as we go into Q4 because of.
Most of these lower expected spending, but but frankly the revenue shift has been faster than the manufacturing shift and as we are ramping our business here.
When we're ramping our automated capacity here in the U S. That's not big enough yet to satisfy our demand for both our micro fab and our fiber laser customer. So we're still in a position where we've got effectively redundant capacity when you look at China and the <unk>.
You asked so that continues to be that continues to be a headwind.
Looking forward I think there are a couple of things that will drive the gross margins to that 40% plus range that that.
That we've said are our long term target right. The first is revenue I think you can pretty clearly see even over the last couple of quarters as is the leverage that we have in the.
The model right, it's easier to scale from a people perspective, but we've got some pretty significant fixed costs that enabled us to grow revenue.
Are in excess of where we are today. So that's that's one piece the second piece is right.
It's that redundant capacity right. So we've got to optimize our will do a better job of optimizing our capacity and then third as the mix of business changes as we continue to push further into the directed energy market and we've got a little bit better recovery on the non directed energy.
A&D side of the business right, that's what will help drive our margins higher.
Hopefully in 2023, right I, just want to be cautious because of the demand that we're seeing here over the next couple of quarters isn't isn't robust, but I don't think that changes, where we think we're going to be long term from a gross margin perspective.
That's great. Thanks for that detail Joe very helpful. And then just as a follow up I guess Scott.
As you take a step back you know over the next over the last quarter or two and you look at the macro and then sort of on the other side you see.
A lot of interesting things going on.
<unk> fiber budget, you know in some of the programs and even seeing a lot of interest from your customers here.
These various markets that you talked about medical micro fab industrial I'm. Just wondering if you have any updates on the way youre thinking about the longer term Tam kind of on the one side, we've got the near term macro dynamics, but from a longer term perspective has anything improved or declined in the way youre thinking about the overall Tam for <unk>.
Your fiber lasers.
Yes, I think thats.
I appreciate that question very much and I just building on what I said previously I think.
I think the near term as there is a challenging environment out there. There's no question about that but for the even the medium term I think that those the same trends that we've seen that effect the near term creates even stronger opportunities for us So I think.
In.
The advanced technology and industrial.
<unk>.
We're making progress across the board, but as we noted particularly excited about.
The upcoming trade show.
A couple of weeks in Frankfurt in additive manufacturing I think that's a space that.
We have been in for some time, but it's quite rewarding to see the progress in adoption of lasers and the cost effective.
Production do parts from the use of our lasers. So I think that's one theme that.
I think is even stronger than what we've seen in the past.
Then.
On the defense side.
Well there is I noted there is near term choppiness due to the particular factors.
The longer term.
Remains.
Very important effect.
The U S defense strategy was just published yesterday.
And again reinforced direct energy lasers is what the top priorities.
And.
With the progress that I noted on our healthy program.
Yes, we're seeing continued.
Strong.
<unk> in adopting new.
New technology, and a set of new applications and direct energy. So I think those are those are two of the themes.
That are even stronger then.
What we would have seen a year ago.
I appreciate the detail Scott.
This concludes our question and answer session I would like to turn the conference back over to Joe Corso for any closing remarks.
Thank you everyone for joining this afternoon and your continued interest in <unk>, we look forward to speaking with you during the quarter have a great evening.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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