nLIGHT Inc

NASDAQ:LASR

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good day and welcome to the nLIGHT Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Joseph Corso, Chief Financial Officer. Please go ahead.

[Joseph Corso, executive]

Thank you, and good afternoon, everyone. I'm Joe Corso, nLIGHT's Chief Financial Officer. With me today is Scott Keeney, nLIGHT's 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.

[Scott Keeney, executive]

Thank you, Joe. In the third quarter, revenue of $50.6 million was above the midpoint of the guidance range. Products 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 positions us well to execute our long-term growth objectives. We also made significant progress in several growth areas during the quarter.In Aerospace and Defense, we announced today that we have been awarded additional options on our previously announced HELSI 2 contract, bringing the total value of the award to nLIGHT to $171 million, which we expect to execute over the next 3 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 and began shipping lasers to a significant customer in the EV battery industry. Operationally, we continue to transition 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 the contract manufacturer for semiconductor laser assembly. I will provide a brief update on each of these 3 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 HELSI 2 contract. As a reminder, this contract is to produce a high-energy laser prototype as part of the second phase of the DoD's high-energy laser scaling initiative.Today's announcement of additional options approximately doubles our previously announced contract from approximately $86 million to $171 million.In the second phase of the HELSI program, which is expected to be executed over the next 3 years, nLIGHT will build upon its proven modular CDC architecture to scale laser source power to a megawatt class with improved beam quality, size and weight. This laser will be delivered in a rugged conex-compatible form factor with optional space allocations to upgrade with precision long-range tracking and adaptive optics technology. In terms of HELSI 2 program execution, we made excellent technical progress thus far and we are achieving our key program objectives to-date.In addition to HELSI 2, 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 our foreign allies. Several of our customers and potential customers that had planned to develop their own lasers using nLIGHT diodes have been converted into purchasing nLIGHT lasers, which offers incremental revenue opportunities for nLIGHT.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 continue 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 units within the 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, 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 to key strategic customers. We continue to demonstrate the flexibility of our programmable fiber lasers and believe that the market for high-value applications remain well-suited for continued growth. At the same time, we have started to see domestic Chinese laser manufacturers who are offering nonprogrammable commodity private lasers taking more aggressive pricing approach outside of China.In welding, we continue to focus on delivering innovative laser and process monitoring solutions to customers globally. Since acquiring 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 socket, we've also introduced lasers with differentiated features, which this customer has evaluated and is expecting to purchase sometime in the fourth quarter or early in 2024.In [ emptive ] manufacturing, we continue to expand our business globally and demonstrate the benefits of our programmable Corona single-mode AFX fiber laser. During the quarter, we secured 2 new design wins with major OEMs for their next-generation metal additive manufacturing machines. Although we were not initially the incumbent of either of these customers, we successfully demonstrated the benefits of our Corona AFX programmable fiber laser, which offers significant productivity increases and is enabling customers to reduce their overall cost per part.Additionally, our Corona AFX lasers are well-suited for use across a wide range of build sizes and materials and can reduce unwanted effects such as [indiscernible] spatter and porosity that have long plagued laser cutter bit fusion tools using legacy fiber lasers.We continue 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. nLIGHT will be exhibiting at Formnext next week in Frankfurt, where we will be releasing our new multi-laser products to the broader market.In microfabrication, 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, microfabrication revenue decreased approximately 2%. As we've discussed in prior quarters, revenue for microfabrication continues to be at cyclically low levels globally. We believe there are 3 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; and third, with improving supply chains, our customers are more confident in running the businesses with less safety stock. We've also started to see some price chain 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 in 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 facilitized our semiconductor automated assembly process and we have achieved our near-term target capacity plans. We have also introduced additional product variants to the line and we continue 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 defense, we've leveraged the success we've had in directed energy into new programs and contracts. Today's HELSI 2 announcement demonstrates that nLIGHT 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 HELSI 2 contract, we've continued to invest in the development of lasers for the broader global market, significantly increasing our global pipeline of opportunities. We remain confident that 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 benefits of our single-mode Corona 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.

[Joseph Corso, executive]

Thank you, Scott. As Scott mentioned earlier, nLIGHT 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 and industrial. 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 equivalents to approximately $112 million as of the end of the quarter.Turning to the third quarter results. Total 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. Products 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. Development gross margin was 7% and 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 $0.10 per share compared with a net loss of $5.1 million or $0.11 per share for the third quarter of 2022. Net loss on a GAAP basis was $11.9 million or $0.26 per share compared to a net loss of $13 million or $0.29 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 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 3 quarters of 2022. As discussed last quarter, overall CapEx in 2023 will be down significantly year-over-year.Turning to the balance sheet. Our balance sheet remains strong as we ended the third quarter with total cash, cash equivalents, 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 and 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 the range of $45 million to $50 million. The midpoint 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 products 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 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.

[Operator]

[Operator Instructions] The first question comes from Jim Ricchiuti from Needham & Company.

[James Ricchiuti, analyst]

Scott, I think I heard you mention programs of record several times. And I'm wondering if you could help us in terms of who to look out over the next 2 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 over the '24-'25 time frame?

[Scott Keeney, executive]

Good. Thanks, Jim. Yes, in my commentary, I was referring to programs 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'll 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, Jim.

[James Ricchiuti, analyst]

It does. And there's obviously been a lot of press. There's been talk of 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 directed energy to be applied in those areas as well.I mean, I wonder if you could talk a little bit more about what you're seeing in the market today. I mean, for instance, I'd be curious if this award that you announced today, was the size of this about as expected, was the time line about as expected? So again, there's things I know you can't speak to, but maybe you could help us -- help frame what's going on out there in terms of the activity level and where you're seeing it?

[Scott Keeney, executive]

Absolutely, Jim. I think this award was something -- certainly, when you started HELSI 1, our goal was to win HELSI 2. And there was risk 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.It's arguably one of the most important programs in DoD. 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. I think there is a fair amount of noise out there about what's going on around the world. Obviously, what's going in Israel is a 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 the way through to the laser -- high-energy laser. And we're supporting our partners there as they work 24/7 right now. And as there's information that we can share, certainly will do so.

[James Ricchiuti, analyst]

And that's helpful. And if I could just ask one final question more to relate to the commercial business and I'll jump back in the queue. If we think about the commercial business and you look at areas that you potentially are seeing a change in demand one way or the other, say, versus the last 3 months or earlier this year, where are you seeing the greater changes in terms of demand, either way, either direction?

[Scott Keeney, executive]

Yes. Good. I think that the significant change that we continue to see is in additive manufacturing. Formnext is the big trade show that occurs every year and it's next week in Frankfurt. We'll be announcing several new products. There'll be a number of important presentations. And we have disclosed our strategy there in the past around using the Corona AFX technology to allow for higher productivity tools. We are seeing that be deployed. We're getting sign 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 going well there.

[Operator]

The next question comes from Greg Palm from Craig-Hallum Capital Group.

[Greg Palm, analyst]

I guess maybe just one follow-up. Obviously, congrats on the sort of expansion of HELSI here, but can you provide a little bit more background? I don't know if there were -- were always options associated with this contract that you were expecting to win and I'm not sure if it was dependent on some event or some demonstration. And then just to be clear, are there additional options outside of this that can still be won? Or is this with this specific contract?

[Scott Keeney, executive]

Yes. Good. Thanks, Greg. This was contingent upon success in HELSI 1. And as we had previously announced, we exceeded the goals for that program for a 300-kilowatt class laser. And there were 2 awards. It was nLIGHT and Lockheed for this program. And this is to develop much 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 in parallel today and subsequently, there are other opportunities also.

[Greg Palm, analyst]

Okay. But are there additional -- I guess, are there additional options within HELSI 2 or was this it in terms of additional options that could be one specific with this contract?

[Scott Keeney, executive]

Yes. Good, Greg. For the contract for HELSI 2, 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 and we'll continue to expand the work going on in directed energy lasers.

[Greg Palm, analyst]

Yes. Okay. Understood. That makes sense. I think I heard you mention 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 of what you're seeing, what region specifically. I'm guessing you were alluding to cutting, but any other sort of commentary along those lines would be helpful.

[Scott Keeney, executive]

Sure, Greg. Those comments, specifics behind those comments related to primarily cutting. And in terms of geographies where we see greater competition 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, that's what we've seen play out over the last year or so.

[Greg Palm, analyst]

Okay. I mean, is there a greater concern that what has evolved or occurred in China specifically over the last 3, 4, 5 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 something that's maybe a little bit of a risk, but you don't think the same sort of long-term event will happen outside of that region specifically?

[Scott Keeney, executive]

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 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 are certainly critical for these tools where the laser is a really big part of the productivity and the [indiscernible] 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 than them.

[Operator]

[Operator Instructions] Your next question comes from Ruben Roy from Stifel.

[Ruben Roy, analyst]

Scott, I had a similar question to Jim's. I hope we're not repeating ourselves here. But it did have to do with the timing of the extension. I'm impressed on that. It's great to see. But just wondering if you could give us a little more detail in the sort of -- was that based on -- I think you mentioned milestones continuing to be ahead on the laser program, the [indiscernible] program.But the $86 million contract that was announced in May, I think some of the milestones around that were expected to commence this quarter. So maybe if you can give us an update on has that started? Have there been pullings on that for any reason? And then just around this idea for your time line to execute on sort of these contracts. I don't think I've heard that time line before. So maybe if you could give us more detail on what the milestones might be or anything you can kind of talk about for that 3-year time line, that'd be helpful.

[Scott Keeney, executive]

Yes. Good, Ruben. This -- we have kicked off the program. We are making good progress. We're 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 demonstrations. And as soon as we have information we can share on exactly where those will be, we will do so.

[Ruben Roy, analyst]

Okay. Got it. And then it's great to see all the work and I guess you're having at the high energy area. But I think over the last several weeks, we've heard a lot about sort of potentially use cases of lower energy, and when I say lower energy, it's 20, 30, 50-kilowatt lasers using some defense applications. And I'm wondering if you think about and talk about some of these additional areas that you're seeing some discussions in, activity in, et cetera, are those areas that we should be thinking about as potential contributors to revenue incrementally over the next couple of years?

[Scott Keeney, executive]

Yes. We are engaged across the spectrum from 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. And 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 we're able to clarify further, certainly we'll do so. I highlighted 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.

[Ruben Roy, analyst]

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 mention, Scott, sort of the -- sort of guidelines around magnitude of what the supply constraints 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 to roll out in terms of growth into '24. Should we expect some of that revenue if supply constraints start to show up in Q1? Or do you think it's going to take longer to start to see kind of the revenue that you missed out on to show up into the model?

[Scott Keeney, executive]

Let me have Joe take that on the specifics.

[Joseph Corso, executive]

Yes. Ruben, thanks for the question. I think 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 to continue into 2024. So in 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 very early part of Q1 2024 is what we are planning for. And also part of the reason for the kind of flattish guide, right, from Q3 to Q4.

[Operator]

There are no further questions at this time. I now hand the conference back over to Joseph Corso for any closing remarks.

[Joseph Corso, executive]

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

[Operator]

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