Q4 2022 nLIGHT Inc Earnings Call

Hello, and welcome to the NN life fourth quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Chief Financial Officer, Joe Corso Joe. Please go ahead.

Thank you and good afternoon, everyone I'm, Joe Corso and lights, 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've 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 our revenue performance in 2022 reflects the continuing evolution of our business model.

Revenue declined 10% to $242 million driven by a 62% decline in revenue to customers in China, which now represents less than 10% of our business. We also experienced a 23% decline in our government funded research programs due to timing of key programs. However.

During 2022, we saw continued growth in our product revenue outside of China that grew 14% to a record $171 million.

In particular strong execution of our strategic growth initiatives enabled us to achieve 21% growth in industrial and micro fabrication revenue outside of China. This year, which grew to a record $133 billion more than doubled revenues achieved in these markets in 2020.

There are two fundamental themes I would like to highlight and describe further on our call today.

Our focus on markets outside of China.

And our progress on key operations initiatives.

I will begin with a focus on key growth markets outside of China.

In Q2 of 2018, the quarter of our IPO revenue from customers in China represented over 45% of our total revenue while in Q4 of 2022, China represented just 9% of our revenue.

Okay.

As our exposure to markets in China has decreased.

We have increased our products revenue from customers outside of China by more than 50% since 2020.

In the micro fabrication end market full year 2022 revenue declined approximately 11% to approximately $62 $8 million due to a 51% year over year decline in China that began in the middle of the year and remained soft through Q4.

Covid related lockdowns and macroeconomic softness in China, and a significant impact on our revenue during the year.

But unlike the industrial cutting market in China, the Chinese Mac micro fabrication market remains an attractive market friendly.

We continue to supply a wide range of high power high brightness semiconductor lasers to a diverse set of customers in China. We continue to see strong design in activity in China.

We expect revenue to increase as lingering COVID-19 effects dissipate customer inventories declined in the China macro environment improves.

Outside of China, 2022 revenue grew approximately 11% year over year, we saw strong growth throughout the year that culminated in record quarterly revenue in the third quarter.

We continue to believe that emulates microbar vacation business will benefit as lasers continue to be adopted.

Wider range manufacturing processes in the auto consumer communications electronics display medical and semiconductor end markets.

We are particularly encouraged by the adoption of our laser products for medical applications, which continue to gain traction with customers and.

And we expect to be more significant contributor to revenue during the course of 2023.

As we anticipated in Q4, the demand environment and micro fabrication was soft during the quarter.

Total micro fabrication revenue decreased by 34% year over year to $11 $4 million for 20% of total revenue.

Which on a percentage of revenue basis is at record levels.

Turning to the industrial end market industrial revenue declined 4% year over year in 2022 to approximately $91.1 million, representing 38% of sales.

Outside of China, However, industrial revenues decreased 27% year over year to a record $81 $9 million and more than doubled versus the full year 2020.

On a percentage basis industrial revenue from customers outside of China increased from 45% in 2020 to nearly 90% in 2022.

In the fourth quarter industrial revenue increased 6% year over year to 23 million.

More importantly, industrial revenue from customers outside of China decreased 13% to approximately $21 2 million a record high.

English is industrial business transformed significantly over the last several years. When we went public in 2018, our revenue was driven by delivering increasingly more powerful lasers to China based customers primarily in the metal cutting market.

And over an 18 month period, the proportion of sales that we categorize as high powered more than doubled from 24% to 58% at.

At the same time, we continue to invest in our programmable laser technology and engaged deeply with our non China strategic customers.

As they start to leverage our reliable programmable and field serviceable lasers to further differentiate their products in the marketplace.

We prioritize technology and product development in 2022 released products for each of these end markets, we serve in cutting welding and additive manufacturing.

And cutting we continue to leverage our programmable beam shaping technology to enable our customers to offer machine tools that are optimized for a wide range of metal applications for.

For example in 2022, we introduced a new 20 kilowatt programmable beam shaping fiber laser that offers significant improvements in power performance and flexibility.

In welding, we continue to focus on delivering solutions tailored for the rapidly growing E mobility battery market.

New product introductions that incorporate proprietary sensor based process monitoring solutions have expanded our market opportunity and are currently being used for evaluated by customers globally.

In additive manufacturing, we added several important new strategic customers during the year and continue to add new products to our portfolio.

Specifically, we've released one five kilowatt version of our single mode programmable laser.

The 25% plus increase in power that are one five kilowatt Corona effects laser offers has been well received by multiple customers and will further increase the productivity of their tools as.

As the market continues to shift towards multi laser tools. We believe we are uniquely positioned to enable our customers to drive productivity improvements that will enable additive manufacturing to gain share on traditional subtractive and other legacy manufacturing technologies.

Finally in aerospace and defense.

Our revenue declined 16% year over year in 2022 to approximately $88 $2 million, representing 36% of total sales.

The primary driver of lower revenue in 2022 was at 23% year over year decline in project based revenue.

As we've mentioned in the past our project based revenue can fluctuate with the timing and execution of programs.

We continue to believe that direct energy will be a long term growth driver friendly.

Last quarter, we reported excellent progress in our key 300 kilowatt high energy laser program healthy, which we expect to formally concluded early Q2.

We believe that our track record and vertically integrated business model, which enables us to develop products from chip to beam control position positions us very well for additional directed energy work with the U S government.

In fact, our vertical integration offers this opportunity to capital capitalize on direct energy activity at multiple levels of vertical integration we.

We are supplier of diodes by brand players and beam combined lasers.

In the fourth quarter Congress approved a 50% increase in the U S. Direct energy budget from approximately 1 billion last year to approximately $1 5 billion. This year.

The significant increase in budget further solidifies our perspective that directed energy is a key part of the U S. Dod's modernization effort and offers a significant long term opportunities for growth.

Our core defense business, which was down approximately 4% year over year. In 2022 includes products related to proximity detection range funding countermeasures and guidance systems. These products are typically sold through long term contracts run for years or even decades, but can fluctuate quarter over quarter.

In the fourth quarter, our defense revenue declined approximately 22% year over year to approximately $22 3 million, representing 39% of total revenue.

Development revenue nearly all of which is related to direct energy projects decreased approximately 32% year over year due primarily to the timing of projects. Our core defense business declined approximately 8% year over year, but increased by approximately 36% versus the third quarter of 2022.

Today Enlink is a critical supplier to several defense customers and we are well positioned to continue our work on existing programs.

We are also under contract and several new classified programs that leverage our broad semiconductor and fiber laser technology and manufacturing capabilities.

While revenue from each of these programs is relatively small today.

<unk> funded programs are expected to transfer production in 2024.

Presents significant long term recurring revenue opportunities for us.

We believe our core laser design process engineering, Knowhow and secure U S manufacturing capabilities positions us well to continue to pursue and support additional opportunities in defense market.

While we continue to transition to growth markets outside of China. We have also made significant changes to operations in the last 12 months.

First we made significant investments in automating our manufacturing capabilities outside of China during 2022.

We believe that these investments will strengthen our position as a trusted domestic laser provider for the defense market, particularly the directed energy market.

Better align our manufacturing and strategic customers in key regions of our commercial growth and.

And better control our manufacturing output.

Although this transition has not been easy we made great progress during the fourth quarter as we completed the installation.

Qualified the critical equipment required for automation.

As we grow we will have a manufacturing footprint and strategy that we'll be able to mitigate supply chain shocks better serve our customers and enhance long term profitability as we execute our growth strategy Mauro.

Moreover, we significantly improved our processes and manufacturing flow so that our equipment is much more flexible.

Be better utilized to manufacture a wider range of our semiconductor lasers across each of our end markets.

However in order to build this flexible capacity, we made the decision to abandon the development of certain manufacturing equipment that was well suited for high volume production, but not flexible enough to meet the evolving and more diversified manufacturing demand from our customers.

Second.

We went live with a new ERP system on January one 2023.

The scale and diversity of our business has changed significantly over the last several years and in order to support our long term growth objectives, we decided that we needed to implement an ERP system that was better suited to our business needs today and could support the future needs of our business.

Enhanced functionality across operations sales engineering, and finance will enable us to better manage our business going forward.

Although new ERP implementations are never easy our initial invitation when as well as could be expected.

Third in the fourth quarter, we also embarked on a plan to better align all areas of our business with our most critical near and long term strategic objectives as.

As a result, we made several important strategic decisions.

First we implemented a targeted reduction in force and resulted in a headcount reduction of approximately 5% of total employees combined with natural attrition more targeted hiring and load balancing our facilities. Our total number of employees decreased from approximately 1350 as of June 2022 to approximately 1150 at the end of December .

We also performed a rigorous review of each of our markets and projects in order to focus on opportunities that we believe will have the biggest impact on driving long term growth and profitability.

We elected not to pursue certain projects, we'd like to to invest in others.

What didn't change as our strategic focus.

We continue to believe that advancements in manufacturing in aerospace and defense will continue to require a greater number of lasers.

Before turning the call over to Joe to discuss our full year and fourth quarter financial results I would like to comment on what we're seeing as we enter 2023.

While overall demand trends seem to be consistent with what we saw in the fourth quarter. Our long term growth strategies are firmly in place.

We continue to see strong design activity with our customers and micro fabrication and industrial end markets.

Although our business is not immune from global macro conditions, we are well positioned for growth as we progress through the year.

We continue to expect lasers.

Proliferate across each of our end markets and we remain particularly optimistic about our positioning in aerospace and defense, which is rapidly transitioning.

I will now turn the call over to Joe.

Thank you Scott.

Total revenue for the fourth quarter of 2022 was approximately $56 7 million slightly above the midpoint of guidance compared to $67 4 million for the fourth quarter of 2021.

Product revenue was approximately $45 4 million slightly above the midpoint of guidance compared to $50 $9 million in Q4 of 2021.

Consistent with annual trends there was a decrease in product revenue to customers in China and in development revenue for our defense customers that was partially offset by an increase in revenue to industrial customers outside of China.

For the full year total revenue declined by 10% to $242 million. However, it's important to emphasize that revenues for industrial and micro fabrication products outside of China increased 21% year over year to a new record of $133 million.

Offsetting this strong growth was the 16% decline in aerospace and defense, primarily due to the timing of project based spending and a 62% decline in revenues from China.

Gross margin was 10, 2% for the fourth quarter of 2022 compared to 26, 6% for the fourth quarter of 2021.

Gross margins in the fourth quarter included approximately $6 million or.

Or 13 percentage points of product gross margin in non routine inventory charges, primarily related to business restructuring, including automation and elevated scrap and reserve charges. We don't expect to incur further inventory charges of this magnitude in the near future.

Total gross margin was 21% for 2022 compared with 28, 6% for 2021 product gross margin was 24, 6% for 2022 compared to 35, 6% for 2021 product gross margin in 2022 was negatively impacted by product sales.

Increases in labor and material costs decreased manufacturing efficiency due to excess capacity, which included the government imposed shutdown of our Shanghai facility in the second quarter and an increase in non routine inventory charges as previously discussed.

non-GAAP operating expenses were $19 5 million for the fourth quarter of 2022, compared with $19 $3 million in the prior quarter and $18 8 million in Q4 of 2021 the.

The year over year increase in operating expenses were driven primarily by higher overall investment in R&D to support our product roadmap and long term growth activities.

As our strategic focus has shifted to markets outside of China. We are continually reviewed the appropriate level of operating expenses for our business.

In the fourth quarter, we executed a targeted reduction in force, which combined with a broader review of non head count related spending is expected to reduce our non-GAAP operating expenses by approximately $2 million per quarter, beginning in the first quarter of 2023.

We believe that our current level of operating expenses are sufficient to support our long term growth objectives.

On a GAAP basis, the fourth quarter of 2022 included restructuring charges of approximately $3 9 million. These restructuring charges include employee severance and the write off of investments of certain in process capital projects related to manufacturing capacity.

non-GAAP loss for the fourth quarter of 2022 was $12 3 million or 27 cents per diluted share compared with a non-GAAP net loss for the fourth quarter of 2021 of $200000 or one cent per diluted share.

GAAP net loss for the fourth quarter of 2022 was $22 $7 million or <unk> 50 per diluted share compared to a net loss for the fourth quarter of 2021 of $8 8 million.

Or <unk> 20 per diluted share.

Adjusted EBITDA for the fourth quarter of 2022 was negative $9 $5 million.

Compared to positive $3 $1 million for the fourth quarter of 2021.

Without the impact of the non routine inventory charges previously discussed adjusted EBITDA for the fourth quarter of 2022 would have been within our guidance.

Turning to cash flow in.

In the fourth quarter of 2022 cash flow from operations was breakeven versus a $10 $1 million use of cash from operations in Q4 2021.

The use of cash from operations steadily decreased through 2022, and the changes we've made to our expense structure better positions us for both near and long term cash flow generation.

Capital expenditures in the fourth quarter were approximately $4 9 million versus $7 6 million in the fourth quarter of 2021.

Over the last several years, we have invested heavily in capex, primarily related to the automation of our facilities in the U S. Much of our significant capex are behind us and we expect a significant decrease in capex in 2023.

We ended Q4 with cash cash equivalents and investments of approximately $108 million and no debt DSO for the quarter was 65 days.

Inventory at the end of the quarter was $67 6 million, representing a 131 days our inventory declined by approximately $13 million versus the third quarter approximately $6 million of the decline was related to the non routine inventory charges discussed earlier, while the balance was related to improved working capital management.

Turning to guidance for the first quarter.

Based on the information available today, we expect Q1 revenue to be in the range of $50 million to $56 million.

The midpoint of $53 million includes approximately $41 million of product sales and approximately $12 million of development sales.

Turning to gross margin.

Q1 product gross margin is expected to be in the range of 20% to 24% and development gross margin to be approximately 7%, resulting in an overall gross margin range of 17% to 20%.

For the first quarter, we expect adjusted EBITDA to be approximately negative $4 million to negative $1 million with that I will turn the call over to the operator for questions.

Thank you very much we will now begin the question and answer session to ask a question you May press star one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Hey, good afternoon, thanks for taking the questions here I wanted to.

To start out Scott I think you made a comment about demand trends being consistent with last quarter I'm curious has anything changed.

Neither by segment by geography, as your visibility gotten any better versus the last quarter.

Yes, Thanks, Greg.

Yeah, I wouldn't say, there's anything substantially different.

The near term.

I think we are seeing strength in.

The process, we're working through on design wins and longer term programs, but in terms of the near term outlook and certainly the macro environment no substantial change I think everybody's asking the question about.

What's going on in China after.

Relaxing COVID-19 restrictions and our micro business.

And just.

Just coming off of Chinese new year, there. So there's limited visibility there right now and in the industrial markets broadly.

We are seeing.

The stimulus in the U S and elsewhere leap Capex.

But theres no dramatic changes that we're seeing relative to Q4.

If we think about.

You know results in fiscal 'twenty two.

What do you see as the primary growth drivers for the company this year versus last.

Yes, the primary growth drivers that we see going forward are largely in.

The industrial markets.

Notably, we would certainly highlighting where we're seeing strong traction in additive manufacturing in particular, and then aerospace and defense.

And it's not only direct to energy its other applications. There. So those are the kind of.

Two primary themes.

That will be driving our growth going forward.

Okay, and I know welding hasn't been a huge focus area for you in the past it seems to be a little bit more.

Interest activity. There recently does that change, how you're looking at that space or not necessarily.

Yeah, Yeah, certainly there's there's a lot going on there we're doing more we've had some good success, but it's it's.

Relatively smaller.

And certainly in additive we think that you know.

Our position with the.

Products, we have there are quite distinctive and we are enabling next generation tools, so highlighting relatively more of the growth we see there.

Yeah Okay.

I will I'll leave it there best of luck. Thanks, Thanks, Craig.

The next question is from Jim Ricchiuti with Needham. Please go ahead.

Hi, Good afternoon. This is Chris Chris Green Gall on for Jim.

Okay.

What are you hearing in the gross margin guidance that the excluding the charge that theres a sequential.

Stepped down from this quarter to Q1 I was just wondering if you could talk about what's embedded in that margin guidance and sort of the puts and takes there. Thank you.

Yeah sure Chris This is Joe So I think the biggest driver between the Q4 and Q1.

Margin guide.

Volume is the first right we're at a lower revenue projection for Q1.

As you know we've got a vertically integrated model. So we can.

Leverage our fixed cost, but the same thing happens when you go the other way I think that's 0.1.

The second point is really on the mix side.

Scott talked about before we've seen now several quarters of weakness in our micro fabrication business in China, and if you look at where we are in where in Q4 for micro was relatively low.

Revenue as a proportion of our total revenue so as we see that trend at least through the first quarter sort of continuing.

The primary driver of why <unk> seen a little bit of.

Degradation in the in the products gross margin in the first quarter guidance.

Alright, Thank you and for the for the new products that you've highlighted in the industrial segment could.

Could you talk about what percentage of industrial sales, they represent and whether they were meaningful contributors to growth.

In Q4, and how you expect those products to ramp going forward. Thank you.

Sure. Chris This is Joe again, so in terms of the new products in the fourth quarter that we talked about there they were not big revenue.

Contributors in the industrial market that being said they are critical to the growth going forward. If you look back at our history.

Driving further performance, let's just use the cutting market. For example, we've really increased the amount of revenue that we're driving from our programmable products and so we've now taken those programmable products and we are continuing to support our customers' roadmaps for for higher power.

Sure Scott talked a little bit about the welding market, we've got products in the welding.

Market today, but the product that will be released over the last couple of quarters are much more optimized too.

To address that market and Furthermore are being integrated with some of our we acquired plasma <unk> about a year or so ago and the process monitoring space. So we're able to.

Do more more of a solution sale there and then and then finally in additives. We released our first single mode laser for the additive market back in sort of early 2021 late 2020, and we've increasingly increase the power of that product and if you think.

About the customers and what they're really looking for is further.

Further productivity of their tools and so.

As we move forward, we think these products will contribute a much greater share of the industrial revenue, but today.

Not not not.

Enormous contributors.

Got it thanks very much for taking the questions.

Sure.

The next question comes from Ruben Roy with Stifel. Please go ahead.

Hi, Thank you Scott.

The first question I had was just.

To see if we can get a little more detail around the strategic review it sounds like its largely compete complete now and I wanted to dig in a little bit on.

Sort of the projects that you've decided that.

Densely.

Not I guess to use the term additive to sort of the near or medium to longer term.

The strategic direction of the company and if you can give us a little bit of color around.

How are you thinking about those projects.

I don't know if I missed this on the call, but whether or not some of those investments are going into other areas that we do think are going to be.

Instead of medium to longer term, maybe more near to medium term growth areas and any other detail you can provide.

Thank you sort of the new direction, there and then.

Quick follow up on that point is.

Two.

Talk a little bit more about the manufacturing as well it sounds like Youre close the qualifications on the equipment to dawn.

Our customer qualifications required next you know kind of what's the next process to get the manufacturing up and running from this point forward. Thank you.

Yes, great.

The question Raymond and so the first on the strategic review.

There is certainly some opportunities we see many opportunities for.

Our high power lasers across all the markets we serve.

Some are a little bit further out and as we went through a review process.

Some of those we decided to shift resources from things are a little further out two areas, where we've got.

Stronger traction today and.

And frankly near term.

Growth markets. So for example.

There is some some areas of say the cutting market that.

You know our are interesting but.

A little bit further out and not as rapidly.

Rapidly growing as say the additive market, where we have a very strong position and we also have further integration of not only the laser but also.

The software that we have.

And so we're doing more in that area.

And we're seeing good progress in the engagement with key customers in that space.

That's.

It leads to nearer term revenue. So that's an example of what we're talking about there but.

But we did that across a whole host of things and we have.

There's a long list of opportunities that we assess all the time and so we'll continue to do that but that was the nature of what we went through there.

And then switching to the operations.

Yes, I think.

We have.

We've invested.

Significantly in this strategic shift in our manufacturing footprint.

And.

Certainly what we highlighted is <unk>.

Fact that we have quantified the processes up and running the ramping.

In terms of customer qualification theres nothing substantial there.

The quality of the products are.

No different than our previous products the processes, we use to make them are different and it's not typical that we have customers that require qualification of those processes. So.

Yeah, we are ramping up and.

We are adjusting the exposure, we have and certainly as we progress this year.

The volume that.

We rely on operations in China.

Will go down significantly and as we ramp up elsewhere.

Okay. Thanks for all that detail Scott I just had a quick follow up then for Joe and.

That question would be sort of what the operational.

Changes now largely behind you and some of the costs taken out of the system on the strategic roadmap updated.

You can give us an update if there's any changes to the way youre thinking about breakeven run rate of revenue and EBITDA and if anything's changed with the way Youre thinking about the mix of business in terms of.

And the longer term margin structure for the for the overall company.

Either.

Lower based on kind of the roadmap from here. Thanks, Joe.

Yes, absolutely remain good question, so no no real change to the way that we're thinking about the adjusted breakeven level.

Last quarter, we talked about $55 million to $60 million as the breakeven level.

The range that we gave there really is predicated upon the mix of business that we see in any given quarter from an end market perspective also within each end market the mix can be quite different depending on product variants in customer and region and the like.

So I think as we gave that breakeven EBIT.

EBITDA guidance Rubin with with the thought of where.

Where we are today. It also assume that we were going to look at the overall operating.

Operating expenses at the company overall manufacturing expenses at the company as I think about the business going forward.

Remember, we're vertically integrated and so we do have a.

Fixed cost infrastructure that as as revenue growth rates are the biggest driver of.

Driving profitability really is first higher volume and being able to better absorb our our fixed cost right and you've seen that even if you go back historically in our financials the ability to do that the second piece is the flow through rather.

We're able to control, our Opex, which I think we're doing a good job of that if we're able to maintain the overhead that we have today and as we make further shifts from a manufacturing perspective, we should drive better fall through margins that that go to the bottom line and then in a sort of a third piece, which is related a little bit to what I said about <unk>.

<unk> is just.

Trying to reduce our manufacturing costs, whether that's by true product cost itself or just looking at the overall manufacturing infrastructure at the company. There's still there's still more there's still obviously more to do there but in terms of near term no I Wouldnt nothing has really changed in terms of breakeven EBITDA.

Got it thanks for all that detail, Thank you Scott and Jeff.

Thank you.

The next question comes from Mark Miller with the Benchmark Company. Please go ahead.

Thank you for the question for 2023 are you seeing in terms of aerospace any new programs or opportunities out there and.

Are there major programs and when do you think these opportunities will be realized.

Short answer Mark is yes, we are seeing.

<unk>.

Large and.

In a broad range of opportunities both in the U S and.

With allies.

Those new programs.

Will.

Lead to design win.

Achievements in 'twenty, three but in terms of revenue.

More material in the following years.

Micro softens, that's just the general cutting and wafer fab equipment spending is that what's impacting micro and you expect that to be soft for the next couple of quarters.

Yes.

Yes, Mark I would say that generally our micro fab business is probably tied more to broader electronics production drilling holes in circuit boards.

Scribing.

Flat panel displays there is certainly a bit of semiconductor capital equipment, but.

We're probably more correlated to broader electronics production than we are to the ups and downs of the W. FTE market, but yeah as we look at as we look at demand they are right demand.

Certainly for the first quarter as part of the.

The reason for our our guide is that micro.

Demand remains muted.

And just a couple of housekeeping things.

Should we think about in terms of tax rate for this year and also a breakout of our fiber laser sales above six kilowatts below two kilowatts.

Yes, so on tax rate, we still have a pretty significant NOL position until we pay taxes in some of our forests foreign jurisdictions, but yes, you can.

Think about that as maybe a couple of hundred thousand dollars.

Kirk.

Quarter.

In terms of in terms of the power.

Power level Mark.

Would expect that.

You have to look at it by market, but in the cutting market right today.

Most of our sales are six kilowatts and above we're selling very very little below six I mean, a little bit, but very little of sort of what we call medium power that was about 20% of our revenue in Q4 and really the sub two kilowatt.

Power level is mostly focused around the additive manufacturing space. So.

The proportion just really depends on how.

How those two applications grow.

Talking specifically about the year, we do expect over over over time that the additive business is faster growing for us and a smaller base than than the cutting businesses. So I think over time Youll continue to see that sub two kilowatt power level.

A greater proportion of total industrial laser sales.

Can you provide the actual percentages in December quarter for sexual Wotton under two cool yes.

Yes, sure. So six kilowatt was 49% two to five kilowatt was 21% and sub two kilowatt was 30% Mark.

Thank you.

No problem.

The next question is a follow up from Greg Palm. Please go ahead.

Yeah. Thanks, I'll be quick Joe you mentioned some of the operating cost reductions I think you said $2 million a quarter was that off of the Q4 run rate or was some of that 2 million already baked into what you reported in Q4.

No really the way to think about that is probably off of the Q4 run rate Greg.

Okay.

Yes, I think that's the right way to think about it.

Got it and then just in terms of gross margins for the year other than volume how should we be thinking about the trajectory given the you know facility consolidations.

As we progress throughout the year.

Yeah, Greg So I think that as I mentioned earlier.

Really the three the three drivers right volume mix and manufacturing and so as we look at where we are where we are today, we only have enough visibility to provide a quarter out of guidance that being said our expectation is that the second half depending on how the macro shapes up could be.

No.

Very nice for us right.

A lot of that is related to as Scott was talking about defense and there are some design wins, there but to the extent that we are able to achieve those higher revenue levels as we move out through the year. We would expect the flow through gross margin really have nice flow through on the gross margin side.

Yeah, so so but volume still.

Pretty pretty important probably the most important absolutely volume.

<unk> is still is still pretty important and and certainly as we optimize Manny.

Manufacturing and we remove <unk>.

London overhead that will certainly help but the first order is we just need to drive revenue growth.

Okay I'll leave it there thanks.

You're welcome.

At this time there are no more lines in the queue. This concludes our question and answer session I would like to turn the conference back over to Joe Corso for closing remarks.

Yes. Thank you everybody for joining today and we look forward to speaking with you during the quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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