Q2 2023 nLIGHT Inc Earnings Call
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Hello, and welcome to the NN late second quarter 2023 earnings Conference call. All participants are in a listen only mode. After today's presentation, there will be an opportunity to ask questions.
I ask a question you May press Star then one on your telephone keypad to withdraw your question you May Press Star then two.
Please note. This call is being recorded at this time I would like to hand, the call over to Joe Corso and Mike <unk> Chief Financial Officer. Please go ahead.
Thank you and good afternoon, everyone I'm, Joe <unk> <unk>, 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 some 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.
Sept 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 in the second quarter, we delivered results that were largely in line with guidance.
Revenue of $53 $3 million was above the midpoint of the guidance range.
Product gross margin of approximately 29% and continued operating expense control resulted in adjusted EBITDA that was also above the midpoint of the guidance range.
We also made significant progress in three areas critical to our strategic growth objectives.
In aerospace and defense, we kicked off the healthy two program and made excellent progress in our new defense applications.
In industrial we continue to improve our position with key customers and it has seen increased traction with our process monitoring solutions.
And operationally, we have continued to diversify and Derisk our manufacturing strategy.
We have established automated assembly of semiconductor lasers in the U S. And in addition have begun shipping from a contract manufacturer in Thailand.
I will provide a brief update on each of these three initiatives and our revenue outlook.
In aerospace and defense revenue increased 9% year over year to $24 $5 million, representing 46% of total revenue.
Second quarter development revenue increased 8% year over year to $13 $7 million and defense products revenue increased 9% year over year to approximately $10 $8 million.
As we announced in early May.
We were awarded a new $86 million contract to produce a more powerful higher performance laser related to the second phase of the department of Defense High energy lasers, scaling initiative, which we refer to as healthy too.
In late Q2, we kicked off healthy two activities and recognized initial revenue from this program, which we expect to continue for approximately two plus years.
In addition, we also announced that our healthy one laser was formally accepted by the government and is being prepared for integration within the U S. Navy's high energy laser counter anti ship cruise missile program.
We continue to believe that our unique technology and vertical integration from chip through beam control are well suited to be scaled to increasingly higher powers and we're proud to continue to support the U S government's efforts and higher power directed energy lasers.
We are excited about our current programs and directed energy and we are working on several new opportunities that we look forward to sharing in coming quarters.
Yes.
In non directed energy defense, we generated higher revenue from existing long running programs and we made significant progress on a number of new programs we.
We expect to continue to support our long running programs well into the future and we believe our new programs remain on track to transition to production sometime in 2024.
Turning to the industrial end market.
Industrial revenue in the second quarter declined 24% year over year to $16 $6 million.
Representing 31% of total revenue.
And cutting we continue to leverage our all fiber programmable technology to deliver innovative increasingly higher powered lasers to our customers.
Revenue from cutting customers was relatively flat year over year and in line with our expectations. When we provided second quarter guidance.
While the overall demand environment remained muted we did gain share with one of our top customers and again increase the overall number of 15 kilowatt and 20 kilowatt lasers.
In welding, we continue to expand our process monitoring sales in the European and North America, and Chinese EV battery market.
Our suite of process monitoring solutions and battery monitoring experience open up new opportunities for both process monitoring and laser sales in the EP market.
Part of the strategic rationale for acquisition of plasma last year was to capitalize on cross selling opportunities between enlighten lasers and plasma process monitoring solutions.
While revenue from welding customers is relatively small part of our overall industrial business today.
During the second quarter, we had several new customer wins and significantly increased our engagement with potential customers.
Additive continues to offer significant long term growth opportunities for us are krona single mode. <unk> fiber laser has been widely demonstrated to increased build rates by a factor of two to eight X, which substantially reduces part cost.
In addition, our laser simultaneously maintained excellent material quality increases the process window and reduces deleterious effects such as CIT spatter in property that affect laser powder bed fusion tools based on legacy fiber lasers.
Our lasers have enabled tools by leading integrators, including TMT Mory, <unk> MCM economies <unk> and several others that we're not able to specifically call out.
Q2 attitude revenue was slightly above what we had expected when we provided guidance for the quarter, but was down year over year as one of our customers still in the process of integrating lasers. They had purchased last year.
And micro fabrication.
Revenue in the second quarter of 2023 declined 26% year over year to $12 2 million, which represented approximately 23% of total revenue.
We continue to believe that we are a leader in the market, but global demand remains soft as customers continued to adjust existing inventory.
While we saw some signs of recovery during the beginning of the quarter revenue did not materialize in the way that we had hoped particularly in China.
We remain actively engaged with our key existing customers and we expect that as global demand environment becomes more constructive our semiconductor laser business will grow at the current levels.
Turning to operations.
We again made excellent progress in automation during the quarter by the end of the second quarter, we achieved key milestones in the utilization of our equipment and manufacturing throughput.
We also continued to mature our overall automation process flow, which over time will result in better yields additional potential output.
We're also pleased to announce that we signed a manufacturing agreement with fabric at World class contract manufacturer provider with a strong footprint in Thailand.
Governance has a long history of delivering outsourced manufacturing services to the <unk> industry.
Our partnership with Fibernet provides additional high quality low cost semiconductor laser assembly for our commercial business and enables increased flexibility for us to scale with demand.
Secondly, making a portion of our manufacturing capacity variable.
Most importantly, however.
Is that working with fabric that enables us to dedicate a greater proportion of our U S based manufacturing capacity to our defense business, which is expected to ramp significantly in the coming quarters.
Our initial qualifications have gone well and we expect to begin shipping products with redburn it assembled lasers in the coming weeks.
Now I'll turn to our current revenue outlook for the third quarter and beyond.
We currently expect third quarter revenue to be in the range of $47 million to $51 million.
At the time of our last earnings call in May we had been anticipating a third quarter, there was approximately $5 million to $10 million higher than the midpoint of our Q3 guidance.
While we remain highly optimistic about both our near and long term prospects I'd like to describe the two primary drivers that are impacting our current Q3 outlook.
First the initial ramp of <unk> is going a bit slower than we anticipated due to the availability of materials affecting the amount of work that we've been able to perform on the project.
This slower than anticipated ramp accounts for approximately half of the delta.
There have been no changes to our longer term schedule and we expect revenue to begin to ramp more significantly over the next few quarters.
The other half the Delta was driven by lower overall demand, particularly in micro fabrication.
As we look towards 2024, however, our customer demand pipeline and revenue visibility have actually strengthened quite a bit.
So although our revenue ramp in Q3 is a bit slower than what we had expected a quarter ago, New defense program wins and continued execution of our commercial business will begin to come to fruition in 2024, resulting in even stronger growth than we had expected entering this year.
In summary, we've made excellent progress over the last several quarters. Despite the fact that our topline revenue is currently ramping more slowly than our expectations.
Our opportunities in defense in both directed energy and our core business have continued to expand.
We also believe that our core technology, particularly our programmable lasers and process monitoring capabilities.
With strong secular trends in additive and welding are driving strong expected growth in 2024 and beyond.
I will now turn the call over to Jeff.
Thank you Scott and let generated revenue and adjusted EBITDA above the midpoint of our guidance growth and gross margin improvement is a core focus of the enlighten leadership team.
While scale and mix are the primary drivers of gross margin the combination of higher output and efficiency of our U S automation, coupled with the outsourced assembly of some of our semiconductor lasers to fabricate offers further room for gross margin improvement.
In a period of continued macroeconomic softness we are carefully monitoring operating expenses and capital expenditures. So that higher revenue levels, we are able to drive better levels of profitability.
Total revenue for the second quarter of 2023 was $53 $3 million above the midpoint of guidance compared to $60 8 million for the second quarter of 2022.
Product revenue was $39 6 million compared to $48 2 million for the second quarter of 2022.
Revenue decreased year over year in both the industrial and micro fabrication markets, but increased year over year and aerospace and defense.
Gross margin was 23% compared to 25% for the second quarter of 2022.
Product gross margin was 29% compared to 30% for the comparable period in 2022.
Product gross margin in the second quarter was negatively impacted by negative manufacturing variances and lower production volumes, but positively impacted by favorable product mix and decreased overall manufacturing costs.
non-GAAP operating expenses were $16 6 million, a decrease of $2 7 million compared to $19 3 million for the second quarter of 2022.
The decrease in operating expenses was driven by a decline in employee compensation costs, primarily due to lower head count decreases in R&D project spending and higher administrative costs that were allocated to development projects on.
On a GAAP basis operating expenses were $23 8 million, a decrease of $1 9 million compared to $25 7 million for.
For the second quarter of 2022.
Net loss on a non-GAAP basis was $900000 or <unk> <unk> per diluted share compared with a net loss of $3 3 million or seven cents per diluted share for the second quarter of 2022.
Net loss on a GAAP basis was $8 $8 million or <unk> 19 per share compared to a net loss of $10 3 million or 23 per share for the second quarter of 2022.
Adjusted EBITDA was a negative $150000 above the midpoint of guidance compared to positive $200000 for the second quarter of 2022.
Cash used in operations was $4 1 million compared to cash used for operations of $4 8 million for the second quarter of 2022.
Included in cash flow from operations was $8 $4 million increase in accounts receivable due primarily to the timing of billings and collections during the quarter cap.
Capital expenditures were $1 million compared to $7 9 million for the second quarter of 2022.
While capital expenditures will increase in subsequent quarters overall capex in 2023 will be down significantly year over year.
We also used approximately $3 million of cash and tax payments related to stock award issuance during the quarter, which we do not expect to repeat at this level in subsequent quarters.
Turning to the balance sheet, our balance sheet remains strong as we ended the second quarter of 2023 with total cash cash equivalents restricted cash and investments of $102 million and no debt.
Our DSO for the quarter was 70 days and inventory at the end of the second quarter was $64 9 million.
Presenting 144 days of inventory.
Turning to guidance.
Based on the information available today, we expect revenue for the third quarter of 2023 to be in the range of $47 million to $51 million. The mid point of $49 million includes approximately $36 million of product revenue and approximately $13 million of development revenue.
As Scott discussed earlier at the time of our last earnings call, we were expecting our third quarter to be approximately $5 million to $10 million higher than the midpoint of today's guidance range about half of the difference is simply related to the availability of materials limiting how quickly we can ramp on our <unk> program. While the other half is really driven by a slower recovery in.
Macroeconomic demand for our micro fabrication business we've.
We've made excellent progress in healthy two during the third quarter, but it's still difficult to predict when the macroeconomic environment will really begin to drive higher demand and micro fabrication.
Turning to gross margin third quarter 2023 product gross margin is expected to be in the range of 27% to 31% and development gross margin to be approximately 7%, resulting in an overall gross margin range of 22% to 25%.
Finally, we expect adjusted EBITDA for the third quarter of 2023 to be in the range of approximately negative $3 million to breakeven as a reminder, over the last several quarters, we have significantly streamlined our cost structure and continue to expect to return to positive adjusted EBITDA at a quarterly revenue run rate in the $55 million to $60 million range with that I will.
Turn the call over to the operator for questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
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Dropping the question queue. Please press star and two at this time, we will pause momentarily to assemble our roster.
The first question today comes from Ruben Roy with Stifel. Nicholas. Please go ahead.
Thank you Scott and Joe I wanted to start Scott with a question on guidance and sort of how.
The thing about the quarter and in the earnings release, you had a little statement talking about.
Being optimistic about strong growth return in subsequent quarters and in 2024.
You talked a lot about 2024, but as we think about Q4.
Should we expect some of the materials that are necessary to keep healthy going to become available or is that going to help you get back to sort of revenue growth in Q4 or any signs of that.
Sort of a bottoming process and micro fab any detail around that would be helpful.
Yes, absolutely Robin Thanks for the question.
As I noted.
The Delta I described was due to timing for healthy and then sort of the macro effects. So as we look out in time certainly did the healthy program.
The contracts in place and so we fully expect to be ramping there as material and other resources are available.
Now with respect to the macro environment.
That's harder to predict what's going on in the macro environment.
In addition, we have other opportunities.
That.
We're making good progress and notably both in defense and in the industrial markets.
So that that's the reason for our optimism about the core.
We've made for growth.
<unk>.
The relatively near term.
Outlook for those to come to fruition.
Okay. Thank you Scott I guess, a follow up to that would be around the fibernet contract.
Wondering about the timing about the contract given kind of where we are in the macro and I guess longer term.
You had some.
Detailed comment to make about how youre thinking about mix internal to outsource and if.
We should think about any longer term margin impacts on commercial laser products as that mix shifts potentially over to contract manufacturing.
Yes, good let me take the first part of the question and I'll hand, it over to Joe on on the margin impact on the first part of the question in terms of timing.
I think.
We're really pleased with the progress that the team has made here and we will start shipping from fabric disc.
This quarter and we see this as part of our overall Derisking strategy and we see this as an important part of our mix going forward.
In particular, making sure we have the capacity in the U S for ramping defense programs.
While having a balanced portfolio.
Capabilities.
To continue to serve the commercial market.
So.
Pleased with.
The progress there and with the.
Yes.
The portfolio, we have in place now to address both the.
Industrial and the.
In the defense markets and then with respect to the margin implications, let me hand, it to Joe to answer that question directly yes. Good question Reuben so from a margin perspective.
I expect that margin to be neutral or potentially positive. If you think of what our relationship with fabric under a contract manufacturer does it effectively enabling enables us to various <unk> some portion of our manufacturing and match.
Demand demand with manufacturing output and so hopefully be able to sort of avoid some of those.
Peaks and valleys. So so over time, we think.
At worst this is margin neutral at best It gives us the opportunity to continue on our path of 40% product gross margins or better.
Okay. That's great. Thanks for that detail, Joe if I can sneak one last one.
Great to hear about the plasma traction got it all right I think you mentioned that youre seeing sort of attached laser sales with plasma, but just wondering if thats. What you are at in terms of the new wins or is it a combination of both kind of you are vertically integrated systems plus monitoring wins with non.
And late laser.
That are out there.
<unk> installations.
Yes, very good question.
It is both we do think that.
Having the process monitoring plasma.
It gives us the opportunity for new design wins that we might not otherwise have but then it also gives us cross selling for.
Our current lasers, and notably new lasers that we are developing for that market and further insights into.
The roadmap for what's going on there. So that was something we wanted to note that we're making progress there was about a year ago that we acquired plasma and we do think that.
Process monitoring is in a very important part of.
Many of the applications that we serve and that by integrating that with our lasers. It provides a.
Complete and further optimized solution.
In particular here, the EV battery market and Indian market that is very dynamic and growing.
Alright.
That's all I had thank you. Thanks.
Thanks Robert.
The next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Good afternoon, I wanted to go back to the fabric of that.
<unk> spent and maybe you could just walk us through the timeline, obviously, you've known these guys for a while but pretty well known in terms of this industry, but.
The actual decision.
To go this route it sounds like.
This was being driven by the momentum that you've seen in the defense business, but maybe if you could just help us understand you know.
The wise.
And timing around it.
Yes, Jim.
Certainly I've known.
<unk> for a long time and Ive always been impressed.
We did look at multiple CMS here and the end of.
We're very pleased with the capabilities that fabric that they've done a very good job serving the industry for many years now.
And.
In terms of the decision here, it's about diversifying and mitigating manufacturing risk further as we've talked about we're transitioning manufacturing.
From our current manufacturing in China, We've got our automation up and running in the U S.
<unk>.
The contract manufacturing piece of this serves particular products in particular markets.
In an optimized way so it's about having that portfolio.
That both Diversifies risk and as Joe mentioned, two variable is as part of our manufacturing capacity.
So those are the overarching reasons, we've been working on this for some time.
<unk> engaged with them for many years now.
But we're pleased to announce that we are shipping.
From <unk>.
We're pleased with this transition that we've talked about for some time.
Okay.
Okay.
Stan.
The optimism that you have around the defense business as you think about 'twenty four but we're still a ways off.
Hum.
Early 'twenty four to have.
Your line of sight that gives you optimism on the industrial side, so it sounds like you're working.
With some newer customers can you help us understand that.
So the applications and the confidence you have that that could.
Contribute to revenues early next year or presumably early that sure yes, exactly Jim yes. So as you know in the defense market, obviously, we've got longer term visibility in the industrial markets.
Many cases, it's harder to see however, when we're talking about design wins, that's where we do have the visibility.
And notably.
In both additive and as we just mentioned in welding, that's where there is there is a longer term design in process and we're seeing good progress.
I mentioned the process monitoring a minute ago, but in addition.
Our Corona programmable beam technology continues to be adopted across all of our markets.
But I would highlight again in additive manufacturing.
Do think.
The krona Amex technology has a distinct advantage and.
And we look forward to making announcements.
At the appropriate time and coming Tradeshows and other.
Venues for these design wins and new product launches.
Upcoming trade shows in the fall in the industrial markets, both in the battery market and in the additive market.
But that's those are the key drivers for us that gives us the optimism for new design wins that.
Our new products with current customers and new customers that.
Give us that that optimism.
So Scott do you have customers in the <unk>.
The battery manufacturing market.
You're adding other than.
The stores that you're working with where you've had traction with the process monitoring solutions. So im talking specifically about the lasers.
Correct. Yes. These are these are new customers.
Some existing customers who are expanding in some new customers also.
Again that market is a rapidly growing one it's one that is evolving fairly rapidly.
And we've always had.
Good relationships.
But we're expanding those.
Got good presence not only in the U S Europe .
South Korea and China.
So as you look out to 'twenty four you think that this part of the industrial business.
Does it have the potential to be meaningful in your overall industrial revenue stream.
Well I think from a revenue standpoint.
I would highlight defense and probably additive on the incremental adds more but in terms of the progress we're making certainly we hope to provide more background there.
In battery welding also.
Okay. Thanks, a lot.
Thanks, Jim.
The next question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Hi, This is Danny acreage on for Greg today, Thanks for taking the questions guys.
I think first maybe just digging into the Q3 guide a little bit more in and some of the assumptions behind that.
From a geographic perspective, what youre seeing out there it seems like North America held up relatively well and maybe there was some weakness in Europe .
And then end markets I appreciate the color on micro fab, but.
You're expecting solid growth in A&D still and then maybe industrial falls somewhere in between there.
Yes, Thanks, Danny I think the way that I would characterize the guide is we have a little bit more visibility obviously in the defense business. So we have a better perspective on what we can what we can do in defense as we talked about in Q2 part of that.
That is really going to be sort of some of this project timing both from.
Labor and labor and material.
Perspective.
And we continue to sort of see macroeconomic challenges in the third sorry macroeconomic weakness in both the industrial and micro market. So it's been really difficult really difficult to predict.
How the customers are what their take rate is really going to be and thats globally. That's both in China.
And the rest of the world So I almost would care categorized.
Third quarter, a couple of million dollars, either either way is sort of.
Hopefully kind of bumping along the bumping along the bottom, but as Scott said earlier right. We've got what we think the right design wins in place with the right customers coupled with some defense wins that we do think that that is going to grow but in the third quarter.
A lot of the same that we saw in the second quarter, Craig quite frankly.
Okay makes sense and then maybe one on gross margin.
In Q2, just looking at kind of a sequential step down.
<unk>.
Similar revenues to Q1 and it sounds like.
Mix wasn't it wasn't necessarily a factor can you just go through what was kind of the drivers behind that that sequential step down.
Great. It was it was limited sort of exclusively to manufacturing quarter over quarter right. I mean, we as we are.
Changing our overall manufacturing processes right, we still don't have perfect.
Either visibility or the ability to predict what things like scrap and yield are always going to be quarter over quarter. So that was one of the pieces. The other pieces, we talked about fabric that there were some.
One time.
Charges that we needed to take again, not not huge but a 100 150 basis points can explain half of the <unk>.
Sequential step down quarter to quarter to quarter at the same time. If you look at what we are doing on a normalized basis and our ability to leverage our overhead and manufacturing that continues to trend in the right direction I know your question was.
Relative.
To the prior quarter, but as we are looking at the business and we're looking at progress on the manufacturing front. If you were to kind of go back a year from.
A year ago and look at what our product revenue was and that was.
Nine or $10 million higher than it was in the second quarter and the gross product gross margin was about the same so that gives us the optimism that we're really starting to dial in the manufacturing and the expenses around it such that as revenue grows we're going to be able to put a lot.
More through to the bottom line from both adjusted EBITDA and a cash flow basis.
Okay got it maybe one last one on healthy.
Good to hear that started in the quarter.
Can you just remind us of how we should think about the timing of that revenue ramp is it is it linear or is it going to build throughout 2024 or how should we think about that.
Yes.
It's definitely not going to be linear.
I don't think we said anything.
Nor has anything been released publicly specifically about the period of performance on that contract but.
It's a it's a multiyear multiyear contract I think directionally it will.
Move move up, particularly as we start to.
Allocate more resources and more material and hit milestones of that of that program, but hard to sort of say, we can draw a line from.
Zero straight straight up with the same slope to $86 million, but it'll increase over over the <unk>.
Coming periods.
Alright, Thanks, I'll leave it there.
Sure. Thank you Dan.
Seeing no further questions. This concludes our question and answer session I would now like to pass the call back over to Joe <unk> for closing remarks.
Yes, thanks, everybody for joining today and for the interest in enlighten, we look forward to talking to menu during the quarter have a good afternoon.
The conference has now concluded. Thank you for your participation you may now disconnect.
Okay.
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