Q3 2023 nLIGHT Inc Earnings Call

Good day and welcome to the NN life third quarter 2023 earnings Conference call.

Participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the stocky followed by sea Ray.

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 your question. Please press Star then two please note. This event is being recorded.

Now I'd like to turn the conference over to Joseph <unk>, 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 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, except as required by law.

During the call we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website I will now turn the call over to Scott.

Thank you Joe.

Third quarter revenue of $56 million was above the midpoint of the guidance range.

<unk> gross margin of approximately 24% was below the guidance range, but continued operating expense discipline enabled us to report adjusted EBITDA within the guidance range.

As we've discussed in prior calls we continue to prudently manage working capital and capital expenditures, which enabled us to increase our cash and marketable securities balance by approximately $10 million during the quarter.

Our balance sheet remains strong and we ended the quarter with approximately $112 million of cash cash equivalents and marketable securities with no outstanding debt, which.

Which positions us well to execute our long term objectives.

We also made significant progress in several growth areas during the quarter.

In aerospace and defense, we announced today that we've been awarded additional options on our previously announced healthy two contracts, bringing the total value of the war to enlighten two $171 million.

Which we expect to execute over the next three years.

In addition, we made excellent progress on one of our laser sensing programs, which offers attractive long term revenue opportunities.

In industrial we secured design wins with multiple global metal additive manufacturing customers.

Again shipping lasers to a significant customer in the EV battery industry.

Operationally, we continue transitioning our manufacturing from Shanghai to the U S and to a contract manufacturer in Thailand.

We continue to mature our U S based automation processes and significantly increased our volume with a contract manufacturer for semiconductor laser assembly.

I will provide a brief update on each of these three initiatives.

In aerospace and defense revenue declined 6% year over year to $19 million, representing 38% of total revenue.

As discussed a moment ago, we are excited about today's announcement regarding our healthy two contract.

As a reminder, this contract is to produce a high energy laser prototype as part of the second phase of the duties high energy laser scaling initiative.

Today's announcement of additional options.

The doubles, our previously announced contract from approximately 86 million to $171 million.

And the second phase of that program, which is expected to be executed over the next three years and like will build upon its proven modular C. B C architecture to scale laser source power to megawatt class with improved beam quality size and weight.

This laser will be delivered in rugged conics compatible form factor with optional space allocations to upgrade with precision long range tracking and adaptive optics technology.

In terms of healthy two program execution, we made excellent technical progress, thus far and we are achieving our key program objectives to date.

In addition to healthy two we've increased our directed energy footprint across all levels of vertical integration.

As we've talked about over the last several quarters. We are seeing increased demand for directed energy laser technology from a foreign allies.

Several of our customers and potential customers that had planned to develop their own lasers, using enlighten diodes had been converted to purchasing and late lasers, which offers incremental revenue opportunities friendly.

During the third quarter, we delivered initial lasers to multiple international customers and we continue to work with others to secure additional design wins.

We also continued to invest in both component and system level technology to address these new international opportunities.

In other areas of defense, we continue to execute multiple new laser sensing development programs that we highlighted in prior calls.

On one of these programs, we expect to receive purchase orders for initial manufacturing news within next several months, which is expected to transition to low rate production volumes within the next 12 to 18 months.

In our core defense products revenue decreased 20% year over year to approximately $6 5 million. The primary driver of the decrease in revenues was continued supply chain challenges related to the acquisition of key components for one of our larger long running programs.

This product remains quite healthy as it supports a critical program of record that is expected to grow significantly in 2024 and beyond however.

However, it will take the rest of the calendar year to resolve these residual supply chain issues.

Turning to the industrial end market industrial revenue in the second quarter declined 12% year over year to $19 $6 million, representing 39% of total revenue.

Compared to the second quarter industrial revenue increased approximately 18%.

In cutting revenue from customers outside of China increased year over year as we continue to increase sales of our high power all fiber programmable technology, two key strategic customers.

We continue to demonstrate the flexibility of our programmable fiber lasers and believe that the market for high value applications remained well suited for continued growth at.

At the same time, we are starting to see domestic Chinese laser manufacturers, who are offering non program bulk commodity fiber lasers take a more aggressive pricing approach outside of China.

In welding, we continue to focus on delivering innovative laser and process monitoring solutions to customers globally.

Its aquarium plasma we've increased our pipeline of qualified opportunities and have begun to capitalize on the strategic cross selling opportunities created by offering lasers and process monitoring solutions.

For example, during the quarter, we delivered process monitors to top tier global EV battery manufacturing customers that is expected to add significant capacity over the coming years.

Since winning the sockets. We've also introduced lasers with differentiated features.

Which this customer has evaluated it.

As expected to purchase sometime in the fourth quarter or early in 2024.

Yeah.

In additive manufacturing, we continued to expand our business globally and demonstrate the benefits of our programmable Corona is single mode fiber.

Fiber laser.

During the quarter, we secured two new design wins with major Oems for their next generation metal additive manufacturing machines.

Although we were not initially the incumbent on either of these customers. We successfully demonstrate the benefits of our chronic FX programmable fiber laser which offer significant productivity increases.

Enabling customers to reduce their overall cost per part.

Additionally, our Corona FX lasers are well suited.

For use across a wide range of build sizes and materials and can reduce unwanted effects such as suit spatter and prostie that have long plagued laser powder bed fusion tools using legacy fiber lasers.

We continued to deliver new platform level technology for the growing multi laser machine market. We delivered our first revenue product for a multi laser machine in the third quarter and we expect deliveries of this product to begin to ramp in 2024.

Enlink will be exhibiting at form next next week in Frankfurt.

Where will you be releasing our new multi laser products to the broader market.

In micro fabrication revenue in the third quarter of 2023 declined 32% year over year to $12 million, which represented approximately 24% of total revenue compared to the second quarter micro fabrication revenue decreased approximately 2%.

As we've discussed in prior quarters revenue from micro fabrication continues to be at cyclically low levels globally. We believe there are three main factors for current revenue levels first natural demand for our customers' products remains relatively muted.

Second our customers built more inventory than typical during COVID-19.

Third with improving supply chain, our customers are more confident in running their businesses with less safety stock.

We've also started to see some price pressure in China, particularly in the lower end of the market.

Despite the current macro challenges, we believe we remain a market leader and continue to actively engage our customers next generation designs.

Turning to operations, we continue to make progress in our broader manufacturing strategy.

In the U S. We have fully facilitates our semiconductor automated assembly process and we have achieved our near term target capacity plans.

We have also introduced additional product variance to the line and we can see continued to improve process flows.

We're making progress on our manufacturing yields which are expected to have a positive impact on gross margin improvement moving forward.

Lastly, we executed a reduction in our direct labor force in Shanghai.

In October as we've continued to successfully transition more of our output to our contract manufacturer in Thailand and to match our current market demand.

In summary, we continue to make excellent progress against our strategic objectives.

In defence, we've leveraged the success, we've had a direct energy into new programs and contracts today.

Today's healthy two announcement demonstrates that in light has proven its capabilities and technology differentiation to the department of defense and as such is a major beneficiary of the significant increases in directed energy spending expected to play out over the next several years.

In addition to our $171 million of healthy to contract we continue to invest in the development of lasers for the broader global market significantly increasing our global pipeline of opportunities.

We remain confident the direct energy offers a significant opportunity for long term growth in our business.

In our core defense business, we are excited about the profitable growth opportunities we have in existing critical long running programs. Some of these programs are expected to be extended well into the future and at much higher unit volumes.

Additionally, several of our newer programs are expected to transition to programs of record over the next year or so and offer significant long term growth opportunities.

In our commercial business, we continue to lead the market with our high power high brightness semiconductor lasers, and highly flexible programmable fiber lasers.

Additive manufacturing remains a bright spot for us and a key driver of our long term growth the.

The benefits of our single note Corona, our programmable fiber lasers continues to proliferate through the market and we've continued to add new customers and design wins over time, we are well positioned to become the leading light source for metal additive manufacturing applications.

I will now turn the call over to Joe to discuss our third quarter results and outlook for the fourth quarter.

Thank you Scott as Scott mentioned earlier and light generated revenue toward the upper end of guidance and adjusted EBITDA within the range, although current revenue levels and a significant manufacturing transition can lead to variability in quarterly gross margins, our vertically integrated business model is well suited to support our growing pipeline of opportunities in defense.

Industrial at.

At the same time, we have been carefully managing operating expenses working capital and Capex, which has enabled us to increase our balance sheet cash and equivalent to approximately $112 million as of the end of the quarter.

Turning to the third quarter results.

Revenue for the third quarter of 2023 was $50 6 million near the top end of guidance compared to $60 1 million for the third quarter of 2022.

Products revenue was $38 1 million compared to $48 million for the third quarter of 2022.

Gross margin was 20% compared to 22% for the third quarter of 2022.

Product gross margin was 24% compared to 26% for the comparable period of 2022.

Product gross margin in the third quarter was negatively impacted by lower production volumes and manufacturing variances, which were positively offset by lower overall manufacturing spending.

<unk> gross margin was 7%, which was consistent with guidance in the third quarter of 2022.

non-GAAP operating expenses were $16 million.

A decrease of $3 3 million compared to $19 3 million for the third quarter of 2022.

The decrease in operating expenses was driven by a decline in employee compensation costs, primarily due to lower head count and increased incentive compensation decreases in R&D project spending and higher administrative costs allocated to development projects on a GAAP basis operating expenses were $22 5 million.

A decrease of $4 million compared to $26 5 million for the third quarter of 2022.

Net loss on a non-GAAP basis was $4 $9 million or <unk> 10 per share compared with a net loss of $5 $1 million or 11% per share for the third quarter of 2022.

Net loss on a GAAP basis was $11 9 million or 26 cents per share compared to a net loss of $13 million or 29 cents per share for the third quarter of 2022.

Adjusted EBITDA was a negative $1 $9 million, which was at the lower end of guidance compared to negative $1 4 million for the third quarter of 2022.

Cash provided by operations was $13 $1 million for the third quarter of 2023 compared to cash used for operations of $2 8 million for the third quarter of 2022.

Cash provided by operations included a $10 $8 million decrease in accounts receivable and a $3 3 million dollar decrease in inventory.

Net capital expenditures were $2 $7 million for the third quarter of 2023, and $4 $4 million year to date compared to $3 $5 million for the third quarter of 2022 and $16 $4 million for the first three quarters of 2022 as.

As discussed last quarter overall, capex in 2023 will be down significantly year over year.

Turning to the balance sheet, our balance sheet remained strong as we ended the third quarter with total cash cash equivalent restricted cash and investments of $111 8 million and no debt.

Total cash and investments increased by approximately $10 million from last quarter and by $3 $4 million since the end of 2022.

Our DSO for the quarter was 73 days in inventory at the end of the third quarter was $61 $6 million.

Representing 140 days of inventory.

Turning to guidance.

Based on the information available today, we expect revenue for the fourth quarter of 2023 to be in range of $45 million to $50 million. The mid point of approximately $47 5 million includes approximately $35 $5 million of product revenue and approximately $12 million of development revenue.

Turning to gross margin.

Fourth quarter 2023 product gross margin is expected to be in the range of 20% to 25% and development gross margin to be approximately 7%, resulting in an overall gross margin range of 16% to 20%.

Finally, we expect adjusted EBITDA for the fourth quarter of 2023 to be in the range of approximately negative $5 million to negative $2 million as a reminder, over the last several quarters, we have significantly streamlined our cost structure and continue to expect to return to positive EBITDA at a quarterly revenue run rate in the 55 to <unk>.

$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 to ask a question you May Press Star then one on your telephone keypad.

Speaker, please pickup your handset before pressing the keys.

Any time Youre question has been addressed and you would like to withdraw your question. Please press Star then two.

Your first question comes from Jim Ricchiuti from Needham <unk> Company. Please go ahead.

Hi, good afternoon.

Scott I think I heard you mention programs of record several times in.

I'm wondering if you could help us in.

Terms are.

Yeah, we were to look out over the next two years, what kind of opportunity is there.

For programs of record that could be awarded say in the next 12 months that potentially could impact your defense business.

Yes.

'twenty four 'twenty five time Craig.

Okay.

Good Thanks, Jim.

In my commentary I was referring to programs of record for our.

Existing business and there are large programs of record for.

Programs, we have today and some new areas.

That are outside of directed energy those are large programs and there is further upside in those programs and so as soon as we have information that we can share that we will do so.

And I presume you were also.

Alluding to directed energy.

Yes in directed energy.

There are no large programs of record today, there are significant development programs.

And we have been successful in winning those programs.

Both in the U S and internationally.

Across the full vertical integration from the semiconductor.

Through the high energy laser.

In our plans to continue to grow we have not built in the assumption of programs of record.

In the near term.

We do think there are opportunities for that but those specific programs record will be contingent upon the success of the demonstrations over the next 12 to 24 months I hope that helps you.

It does and you know, there's obviously been a.

A lot of press.

There has been talk of it.

Lockheed and the work they're doing in this area and I think a lot of people have also focused unfortunately on what's happening in the mid east with Israel and the potential for.

Correct Andrew <unk>.

And.

Those areas as well.

Wonder if you could talk a little bit more.

Yeah.

What youre seeing in the market today I mean for instance.

Yeah I'd be curious if this award that you announced today was the size of this about as expected was the timeline about as expected.

And there's things I know you can't speak to but maybe you could help us.

To help frame, what's going on out there in terms of the activity level and where you are seeing yes.

Absolutely Jim.

I think this.

This award with something certainly when we started a healthy one our goal was to win healthy too.

And there were risks associated with our ability to execute and risk associated budget et cetera.

And so we are excited to have won this award.

And it is a significant program.

Arguably one of the most important programs.

In D O D.

So.

Over the last few quarters, that's certainly what we were expecting but certainly when we kicked this off it was something that we were striving for.

I think what we're seeing is.

Significant funding to develop lasers in the U S and abroad.

And that continues that is expanding.

Thank you.

Is you know a fair amount of noise out there about what's going on around the world. Obviously, what's going on in Israel is very difficult situation I will say that we are engaged with all of the key players in Israel.

And again, we have technology from the semiconductor all way through to the laser high energy laser.

And we're supporting our partners there as they work 24 seven right now.

And as there is information that we can share certainly will do so.

Okay, and that's helpful and if I could just ask one final question more relates to the commercial business and I'll jump back in the queue. If you if we think about the commercial business and you look at it.

Areas that you potentially you are seeing.

A change in demand one way or the other say versus the last three months.

Earlier this year.

Where are you seeing.

The greater changes in terms of demand either way either direction.

Yeah. Good I think that the significant change that we continue to see is an additive manufacturing.

Form next as the Big trade show that occurs every year and it's next week in Frankfurt will be announcing.

Several new products there'll be a number of important presentations.

And we have disclosed.

Disclose our strategy there in the past around using the krona, a FX technology to allow for higher productivity tools.

We are seeing that.

Be deployed we're getting design wins and.

So that is the area of the industrial market, where we see significant growth opportunities. It takes time for that to show up in our quarterly revenue.

But the design win activity is.

<unk> well there.

Got it thanks very much.

The next question comes from Greg Palm from Craig Hallum Capital Group. Please go ahead.

Okay.

Yes, thanks for taking the questions here I guess, maybe just one.

A follow up obviously congrats on the on.

On the sort of expansion of healthy here, but can you provide a little bit more.

<unk> I don't know if there were what we felt were always options associated with this contract that you were expecting to.

To win in and I'm not sure if it was dependent on on some event or some demonstration and then just to be clear are there additional options outside of this that can still be water or is this what this specific contract.

Yes.

Thanks, Greg.

This was contingent upon success in healthy one.

And as we had previously announced we exceeded the goals for that program. We're at 300 kilowatt class laser.

And there were two awards it was inline marquee for this program.

And this is to develop <unk>.

Higher power laser.

And there are other programs that will expand this area.

And complement what we're doing here so no this isn't.

The only opportunity that we're working on there are other ones that we're working on apparel state and subsequently there are other opportunities also.

Okay, but are there additional I guess are there additional options.

Within healthy or was this it in terms of additional options that could be one specific with this contract.

Yeah, good Greg for the contract for healthy too. This is the contract there are no known options that we're working on for this contract, but there are other contracts that are related.

We'll continue to expand the work going on in direct energy lasers Yep, Okay understood.

That makes sense. Thanks for clearing that up I think I heard you mention it.

Or maybe you alluded to increased competition from some of the Chinese players outside of China, and we know how competitive.

China has gotten and so maybe you can just go into detail a little bit on what you're seeing what region specifically.

And you were alluding to cutting but any other sort of commentary along those lines would be helpful.

Sure Greg you know those.

Those comments.

Specifics behind those comments are related to primarily cutting.

And in terms of geographies, where we see greater competition.

It might be in places like South Korea.

Somewhat in certain areas of Europe, some parts of the U S.

And it's not a dramatic change we expect to continue to see competition.

And we wanted to note that indeed.

What we've seen.

Play out over the last year or so.

Okay.

I mean is there a greater concern that what has evolved or occurred in China, specifically over the last three or four or five years that that could become a bigger issue outside of China, whether it be in the U S or Europe or.

Other parts of Asia or are you just trying to frame it up as a you know something that's maybe a little bit of a risk, but you don't think the same sort of a long term event.

Will happen outside of that that region specifically.

Yes, it's really mostly the latter Greg just trying to be exhaustive in our comments of what we see going on out there. We continue to launch new products that continue to enhance the productivity of what we're doing.

And certainly the.

The customers that we work with.

Are certainly interested in making sure that they've got high quality that they've got a reliable supply chain.

And I think those factors that.

Our certainly are critical for these.

These tools, where the laser is a really big part of the productivity that.

And the bottom of those tools, so it's something we're noting.

But it's not something that.

We feel like we need to highlight a whole lot more of them.

Okay understood Alright, I will leave it there best of luck. Thanks.

Thank you once again to ask a question. Please press Star then one on your telephone keypad.

Next question comes from Ruben Roy from Stifel. Please go ahead.

Thank you Scott I had a similar question to Jim.

We're not repeating myself here, but it did have to do with the timing of the.

The extension and credits on that it's great to see.

But just wondering if could give us a little more detail in sort of.

You know what is that based on I think you mentioned milestones continuing to be ahead on our radar programs across all of our program, but the $86 million contract that was announced in May I think.

But some of the milestones around that we're expecting to commence this quarter. So maybe you can give us an update on how that started there and pull ins on that for any reason.

And then yes.

Just around the idea of three year.

Timeline to execute on.

Sort of.

These contracts I don't think I've heard Bob.

Timeline before so maybe if you could give us more detail on what the milestones might be here or anything you can kind of talk about.

For that three year timeline that'd be helpful. Thank you.

Yes good.

This we have kicked off the program.

We are making good progress we are on track.

It is challenging this is the highest power laser that's ever been demonstrated.

But we are on track.

And that laser is fundamentally focused on proving out.

These power levels.

This laser then will be used for further demonstrations. So it's not a program of record.

But over the next couple of years, we will continue to scale. The power and then that laser will be used for various demonstrate demonstrations.

And as soon as we have information we can share on exactly.

Where those will be we will do so.

Okay got it thanks for that and then.

Great to see all the work and success you are having at the higher energy.

Area.

And I think over the last several weeks.

<unk> heard a lot about sort of.

Essentially use cases.

Lower energy and I say, Laurie funding 30, 50, killing a lot lasers using some.

Defense applications and I'm wondering if you think about and talk about some of these additional areas that youre seeing.

Some discussions and activity and et cetera.

Are there are those areas that we should be thinking about as potential.

Sir revenue incrementally over the next couple of years.

Yes.

We are engaged across the spectrum.

Low power medium power high power. We're also engaged across the stack of technology from the pumps.

The fiber lasers, and the integrated full high energy lasers.

And so yes, there are opportunities at the lower power levels.

In particular internationally there are a number of programs.

We have been designed into a number of different programs.

Around the world.

In that space and so once again, it's an area, where there's a lot of information flowing out there and as were able to clarify further certainly will do so.

<unk> the work we're doing in Israel previously, but we're also doing work.

With our allies elsewhere around the world.

And so we do see activity there and as soon as we're able to provide more clarity on that certainly look forward to getting that out to you all.

Great last question for me is sort of more near term and thinking about the guidance I don't have my notes in front of me from last quarter. Unfortunately, but I think you did mentioned Scott sort of the.

Sorry guidelines or a magnitude of what the.

Supply constraints might.

Might mean and I'm wondering if any of that has changed and as you think about I think you mentioned on today's call that some of that should start.

Rollout in terms of growth into 'twenty four should we expect some of that revenue.

While supply constraints.

Trough in Q1 or do you think it's going to take longer.

Starting to see.

The revenue that you missed out on.

Show up into the model.

Let me have Joe take that on the specifics.

Yes, Robert Thanks for the question.

The biggest issues that we've had in this supply chain near term both in the third quarter in terms of the results and the Q4 guide we do expect mostly to resolve themselves by the end of the year there were.

Sort of specific suppliers and components.

That have presented some challenges for us we don't expect that that to continue into 2024. So.

Those cases, there will be a push right I mean, we will still build those products, particularly around the defense products, they'll just likely be pushed into the <unk>.

Early part of Q1 2024 is what we are planning for and also part of the reason for the kind of flattish guide rate from Q3 to Q4.

Got it that's very helpful. Thanks, Joe Charles All I had.

Thanks, David.

There are no further questions at this time I'll now hand, the conference back over to Joseph <unk> for any closing remarks.

Great. Thanks for everyone for joining today and we look forward to speaking with you over the course of the quarter have a nice evening.

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

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