nLIGHT Inc (LASR) 2018 Q3 法說會逐字稿

Good evening, and welcome to the nLIGHT, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. Please go ahead.

Thank you, and good afternoon, everyone. As the operator said, I am Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. Scott Keeney, Chief Executive Officer of nLIGHT, and Ran Bareket, Chief Financial Officer, will be the speakers on today's call. If you have any questions after the call, please direct them to me at (360) 567-4890 or jason.willey@nlight.net. A copy of today's earnings press release is available on our website, at www.nlight.net. In addition, you can access an archived version of today's call from our website.

In today's call, our discussion will contain forward-looking statements, including statements about financial projections, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, and our strategic focus and objectives. 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. We undertake no obligation to update publicly any forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these non-GAAP financial measures against the most directly-comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I would also like to note that members of nLIGHT's senior management will be available to meet with analysts and investors at FABTECH in Atlanta on Wednesday, November 7. If you are attending the trade show and are interested in a meeting, please email me at jason.willey@nlight.net.

I will now turn the call over to Ran to go through the financials and outlook. Scott will then discuss our business and provide additional color on the third quarter. We will then be glad to take your questions.

Thank you, Jason, and good afternoon, everyone. We delivered strong results across the businesses in the third quarter. Revenue, gross profit and adjusted EBITDA were all in line with our expectation as we continue to deliver to our 2018 operating plan. Revenue grew year-over-year in each of our end markets and geographies region. Revenues for the third quarter of 2018 were $51 million, up 40% year-over-year and benefitted from our diverse product offering and end market exposures.

During Q3, sales to the industrial end market were $21 million, representing 41% of total revenue and up 37% year-over-year. Sales to microfabrication end markets were $20 million or 39% of total revenue and up 21% year-over-year. Aerospace and defense sales were $10 million or 20% from total revenue and grew 107% compared with the third quarter of 2017.

On geographic basis, sales to China were $17 million in the third quarter of 2018 or 33% of total revenue, up 15% compared with Q3 2017. Sales in North America were $20 million, representing 39% of total revenues and growing 71% year-over-year. Rest of the world sales were $14 million, up 39% compared with the third quarter of 2017 and 28% of total revenue.

Gross margin was 35.4% in the third quarter, an improvement of almost 160 basis points year-over-year. The improvement was driven by higher volume, continued cost reduction effort and favorable end market mix, partially offset by more aggressive price activity in the Chinese industrial end market. The Chinese industrial end markets represent less than 25% of our overall revenue during the third quarter.

Operating expenses were $13 million during the third quarter compared with $7.7 million in the third quarter of 2017. Q3 ‘18 operating expenses include $1.7 million of stock-based compensation, an increase of approximately $1.6 million year-over-year. As we grew the business, we continue to invest in R&D and in infrastructure necessary to support future opportunities. As a reminder in Q3 2017, our SG&A included a reduction in expense of $1 million related to the collection of previously reserved receivables.

The third quarter operating income of $5.1 million was 10% of revenues, and compares with $4.6 million or 12.6% in revenues in the third quarter of 2017. Our adjusted EBITDA for the third quarter was a record $9.2 million or 18% of revenue. This compares to $6.6 million or 18.1% of revenues in Q3 2017.

GAAP net income for the third quarter of 2018 was $4 million compared with income of $2.2 million during Q3 2017. GAAP EPS for the third quarter of 2018 was $0.10 per diluted share compared with $0.00 in the third quarter of 2017. Non-GAAP EPS, which exclude the impact of stock-based compensation and assume the conversion of all outstanding preferred stock in the period to common stock, was $0.15 per diluted share in Q3 2018 compared with $0.08 per share in Q3 2017.

Turning to the balance sheet. We ended Q3 with total cash and cash equivalents of $168 million and $16 million of total debt. In early September, we completed a follow-on public offering of our common stock. The company raised approximately $38 million of net estimated offering cost through the sales of 1.5 million shares of common stock. Existing shareholder sold approximately 3.7 million shares of common stock.

DSO at the end of Q3 2018 were 38 days. Inventory at the end of the quarter was $36 million, representing 98 days of inventory. During Q3, we generated $4.5 million in cash in operating activity, reflecting our improvement of profitability, partially offset by working capital expansion. Capital expenditures for the quarter were $2.9 million or 5.6% of revenues.

Turning to the guidance for the fourth quarter of 2018. We expect revenues to be in a range of $45 million to $49 million. At the midpoint of the range, this implies year-over-year growth of approximately 39% for the full year of 2018. We expect year-over-year growth in each of our 3 end markets.

Based on our current expectation for product mix, we see gross margin for Q4 2018 in a range of 32% to 35%. Recently enacted tariffs between the U.S. and China expected to negatively impact Q4 gross margin by approximately 150 basis points.

For the fourth quarter, we expect adjusted EBITDA in a range of $5 million to $7 million. Stock-based compensation is expected to be approximately $2 million. We expect average basic shares outstanding of approximately 36.5 million and approximately 41.5 million average fully diluted shares for Q4.

Our outlook for top line revenue and profitability reflects our current view into the business and incorporate increased near-term uncertainty in the Chinese industrial market related to potential tariff impacts and pricing dynamics.

I will now turn the call over to Scott.

Thank you, Ran, and good afternoon, everyone. In Q3, we again delivered to the financial targets we set forward, and we continue to generate growth that is outpacing the overall high-power laser market. This performance reflects strong customer acceptance of our technology value proposition across each of 3 diverse end markets. We delivered these results despite headwinds in the industrial market in China, where tariff uncertainty and aggressive pricing activity have created a more challenging near-term environment.

As we look to Q4 and 2019, we see growing excitement from existing and prospective customers around our recent high-power fiber laser product introductions and Corona, our programmable fiber laser. On today's call, I will focus on 3 topics. First, I will provide more detail on our results from Q3. Next, I will offer an update on China as it relates to the industrial end market and tariffs. Finally, I will discuss our new product introductions and why we are so excited about these offerings.

I will begin with comments on Q3 results. As Ran stated, we grew 40% year-over-year in the third quarter, as we delivered positive performance across the business. Results were particularly strong in North America, where record revenues were driven by growth at our core microfabrication and aerospace and defense customers. We continue to make progress penetrating key industrial accounts outside of China with Corona helping to accelerate this activity.

In the industrial market, we are seeing a shift to higher-power fiber lasers. During Q3, 30% of our fiber laser sales were at 6 kilowatt and above, which is up more than 200% from the comparable period in 2017. Sales in the 2 kilowatt to 5 kilowatt range were over 40% of our fiber laser sales in Q3 2018, up almost 45% from 2017 levels. We expect these trends toward higher-power fiber lasers to continue, and we believe that we are well positioned to benefit from this trend as technical and reliability challenges increase dramatically with higher-power fiber lasers.

In the microfabrication market, we grew 21% year-over-year during the third quarter. We saw strength in North America and Asia, driven by growing volumes at our largest customers. These customers serve a wide range of end markets, including automotive, consumer electronics, semiconductor capital equipment, solar, and scientific research. Our continued strong growth in this market reflects our technology advantage over other merchant semiconductor laser vendors in terms of power and brightness. The power and brightness combination in our packaged semiconductor lasers is enabling leading diode-pumped solid-state laser manufacturers to deliver superior throughput and performance in their end lasers. This is, in turn, providing cost savings and compelling ROI to their customers. This is particularly true for the growing ultrashort pulse market.

In aerospace and defense, we saw strong growth led by increased sales to our core defense contract customers and the U.S. Federal Government. The customer activity consisted of spending on existing and new programs. We also saw good contribution from government R&D contracts, which tend to be lumpier in nature.

In China, we experienced seasonal softness in the industrial market, which was compounded by the uncertainty related to tariffs. In addition, we are facing aggressive price pressure in the fiber laser market in China. Despite these headwinds, we were able to grow our business in China by 15% year-over-year, with expansion in both the industrial and microfabrication end markets. We are encouraged by the year-over-year trends at several key industrial customers in China, who we believe continue to grow their share in the cutting systems market.

In China, we have focused on developing relationships with strategic customers, and we are seeing the benefits of these efforts from ramping volumes in this geography. We expect further benefit from the ongoing shift to higher-power fiber lasers, as we see a more limited set of competitors above 6 kilowatts.

To add to Ran's comments on tariffs, we believe our manufacturing capabilities in Vancouver, Washington, and in China provide significant flexibility in mitigating potential financial impacts of tariffs. In Vancouver, we are fully vertically integrated from the semiconductor wafer through our highest power fiber lasers. Similarly, in China, we have capabilities from packaging our semiconductor lasers through assembling the fiber lasers we sell into the Chinese market.

Over the longer term, we remain confident in our ability to enhance our position in the Chinese market and improve our margins. To achieve these goals, we are focused on scaling the business, taking costs out of our products, and bringing to market new products that are both differentiated and allow us to address the growing higher-power segment.

We have introduced several new, innovative products to the market in the last 2 months, and we are excited about how customers are responding to each of them. First, we launched the most compact 3 kilowatt laser on the market to address the rapidly growing opportunity for smaller-format cutting machines. Like all our fiber lasers, the compact 3 kilowatt is built on our proven, high-reliability semiconductor lasers and fiber. It incorporates our unique hardware-based back-reflection protection, and it is designed for easy servicing in the field, even by our customers. The small size of the laser simplifies tool integration and consumes less space on shop floors.

Second, we launched our differentiated programmable fiber laser. Corona is the industry's first all-fiber laser that provides programmable beam sizes and shapes, while maintaining full power. This new innovation in lasers frees customers from cost, complexity and reliability risks inherent in zoom optics, free space beams, and other beam combination techniques. For the first time, the Corona laser brings together the speed and cost advantages of traditional fiber lasers with the superior thick metal cutting quality of CO2 lasers.

Our go-to-market strategy is to enable key customers with Corona lasers to give them differentiated product offerings. The flexibility of real-time tunable beam characteristics provides significant value for end users, and we are encouraged by the initial customer response. Several of our key launch customers exhibited Corona-enabled tools at recent industry trade shows and open houses, and have followed up with meaningful initial orders.

We see a clear trend in the market for higher-power fiber lasers, and our new fiber laser products are designed to address this growing market. Our 10 kilowatt fiber laser is built on an entirely new platform, resulting in the most compact form factor, with greater than a 50% reduction in size. These fiber lasers incorporate our latest high-power semiconductor lasers, reducing our cost profile by over 30% compared with our previous generation platform. The 10 kilowatt product serves as an entry point for nLIGHT into the ultra-high-power segment. As we move through 2019, we plan to introduce even higher-power offerings. We expect initial orders for these products in 2018 and anticipate these products will begin to meaningfully contribute to financials by the middle of 2019, as volumes ramp up.

In conclusion, our Q3 results demonstrate the strength of our products and growing customer acceptance across our end markets. While we are not immune from the headwinds impacting the China industrial market, our fiber laser sales in China make up less than 25% of our overall revenue and we are encouraged by our continued growth in other geographies. As we look to the future, we are well positioned to continue to outperform the industry, given our diverse end market exposure, differentiated customer value proposition, and meaningful new products.

In closing, I would like to thank the entire nLIGHT team for their efforts during the third quarter, and with that, we now hand over the call to Q&A.

(Operator Instructions) And our first question will come from the line of Brian Gesuale from Raymond James.

I wanted to maybe ask, you gave some incremental disclosures that were very helpful around high-power sales. Could you maybe talk about how your average power has increased and maybe how we should think about the mix of business maybe going back a year or 2, and what you expect over the next couple of years?

Brian, it’s Scott. We're seeing an increasing demand for higher-power fiber lasers, as we mentioned, over 6 kilowatt improved 200%, so we're seeing that shift up. We're not providing the detail on exactly that mix of power, but we have launched up to 10 kilowatts and will continue to drive power up in our product offering, and we're seeing that shift in demand up to higher power. As we mentioned also, as you go up in power, the technology is much more difficult, and so there are few competitors in the higher-power region. So we'll continue to drive that with new products, and we're seeing the demand shift to higher powers.

Just one quick follow-up, and then I'll jump back into the queue. Can you maybe give us a little bit of color on maybe the last month or 2 order trends and maybe talk about pricing a little bit, if it's stabilized or if we're still kind of seeing pricing decelerate or accelerate?

Yes, good point. We noted the headwinds we saw in Q3, both in terms of demand, certainly that was amplified a bit more than the typical seasonal shifts we see in Q3. In addition, we did see more price competition in Q3. More recently, we've seen things stabilize, the demand. We see signs of growing demand. There's limited visibility in China, but we're seeing some early signs of that, and stability, also, in the pricing.

Our next question comes from Jim Ricchiuti with Needham & Company.

I wanted to focus a little bit on the microfabrication portion of the business, which showed nice growth. I wonder if you could talk about that, Scott, just in light of some of the concerns that we've seen expressed by players in the semiconductor capital equipment market. It seems like the diversity of this business is helping you, and I assume that that's helping you as well looking out in the near term?

That's right, Jim. So yes, we're seeing continued good growth in that sector for us, and indeed, it's because of the diversity. We certainly supply into -- semiconductor capital equipment is one end market, but it is just one end market in addition to consumer electronics and a wide range of different end applications, including medical applications. So what we're seeing is adoption of high-performance diode-pumped solid-state lasers, notably UV and short-pulse lasers, lasers that used to be really solely directed at the scientific market. They're moving out into the real industrial end markets, and we've got a very strong position in the leading semiconductor lasers that drive those lasers.

And if I could, just as a follow-up, on the industrial side of the business, you gave some nice color on China. I wonder if you could talk about how the demand has progressed or changed in some of your other regions -- North America, Europe -- in the industrial side of the business. And just a quick follow-up, is that where you're seeing the initial interest for Corona?

Yes, that's a good question. We're certainly seeing growth around the world. Just last week was the big trade show for the metal cutting market, EuroBLECH in Germany, and got a chance to meet with customers from around the world. And outside of China, we're not seeing the same sort of headwinds. Seeing strong growth, as fiber lasers are adopted in these markets. And yes, Corona is -- we're focused first on higher-performance applications around the world, and it's in those customers where we're seeing unexpectedly even better results than we had planned with our launch. And you'll see that, for those of you that will be able to attend FABTECH in Atlanta this week, we have a demonstration of the Corona technology and be happy to talk about it in much more detail.

Our next question comes from Patrick Ho with Stifel.

Scott, maybe first off in terms of following up on the last question about Corona, I know it's early, you just introduced the product, and you're talking about meaningful revenues in 2019. Are you seeing stronger customer interest from existing customers who are looking to migrate to some of these higher-performance capabilities, or are you attracting new customers that you haven’t had previously?

Both, across the board. It's a technology that allows us to provide much greater performance to the end user, but we do it in a way that is more straightforward to use, and so we're seeing it both in current customers and in new customers, and it's really helping us with adoption by new customers in particular.

Great, and Ran, maybe as a question on the gross margins, your outlook for gross margins is actually holding up very, very well given the pricing pressures that are going on in China right now and even -- and then also on the decline in revenues. What's your biggest offsets on some of those pressures that you're seeing near term that's helping to keep gross margins at these pretty, I would say, high levels?

So thank you for the question. Yes, it's a good question. Let me remind you for our midterm where that improvement from the margin will come from. If you recall, we talked about 3 main areas where we improved the margin. The first one was scalability, and definitely with the new level of, call it above $45 million a quarter revenue, we are getting a better utilization of our fixed costs. The second one was cost reduction that is an ongoing effort that helped us to reduce the cost, despite the reduction in ASP. And the last one is those new product that we are keep talking about that will give us a better margin. However, it will not be effect so much in Q4 that those new product, the 10 kilowatt that we just introduced to the market as well as Corona, we will see some of the improvement next year. There is also a mix impact here. You need to understand, and we talked about it. There is a mix margin between the diodes of the different end markets, i.e. microfabrication and aerospace defense versus the industrial end market. And even within the industrial end market, there is a mix there as well, China usually coming with a lower margin. And what Scott just talked about, the fact that we have an incremental revenue coming from the rest of the world in the industrial end market helping us to improve the margin as well. One last point that I want to indicate, that margin, that guidance include our estimate for the price, new pricing in China -- mainly in China -- as well as the impact of the tariff on us. As I mentioned before, the impact in Q4, we estimated that it will be roughly 150 basis points, and it's already include in those guidance that we just provided.

Our next question comes from Tom Diffely with D.A. Davidson.

Maybe just a quick follow-up on the margin question. Is the 150 basis point impact in the current quarter's margin? It sounds like you're going to be able to basically get rid of that through some -- how you move your fabs around, or how you move production of the different fabs around. Did I read that correctly, or is that margin impact going to be around for a while?

It's hard to say what will be the tariff impact next year. It's very difficult to estimate what will be the mix for the -- what the government will do next, so it's really hard to say. The estimate that we have currently for Q4, it's based on the product mix based on what do we know today, and this is that 150 basis points that we are talking about.

However, you are absolutely right; we have in our portfolio many things that we can do in order to mitigate the tariff going forward, assuming it will stay here for the long term, or assuming it even -- it will escalate it. We talked about in the past our operation landscape that we have right now, the fact that we have operation in China and in Vancouver, U.S. as well, will help us to mitigate some of the tariff going forward, if it will be needed.

Okay, great. And you've talked a lot about the pricing pressure on the fiber laser side of the business. I'm curious, though, what the competitive dynamics are like on the semi-laser or the diode side of the business. Are you seeing pricing pressure there?

The short answer is no. We've got a very strong position in that market. We continue to drive the technology even faster than we thought we could. We're releasing new products in that space. So certainly, we want to acknowledge that there are competitors in every market we serve, but we continue to advance our differentiated advantages.

(Operator Instructions) Our next question comes from Mark Miller with The Benchmark Company.

I wonder if you can comment. You've introduced a couple of interesting products, but your competitors have not been basically standing still. One of your competitors announced a programmable laser recently; another competitor announced a laser they termed that -- which had the -- and I think it was, like, 4 kilowatt fiber laser at the industry's higher brightness. Just wonder about your thoughts on these competitive products.

I can't comment on all the details of products that we've seen limited information about, but I will say that Corona is the only product that we know that is an all-fiber, truly programmable laser. There are some other lasers that are out in the market that have some of the features, but not all the features, that we have. I think probably the best way to really show you that would be to take you through the demonstration at FABTECH this week, and we'll be showing what we can do with Corona that is quite different indeed.

I was wondering, you haven’t broken out separately diode and fiber laser sales. When do you -- can you do that currently, or when do you intend to start breaking these down separately?

No, we don't have intent to separate the product. The way that we are looking at our revenue, it's based on the end markets which will give our investor the best advantage to understand the business.

Well, how can you gauge growth in fiber lasers if the figures are not available?

You need -- again, the right way to look at it, it's based on the end markets and the end demands, right? This is where the demands will come from. You need to understand the different end markets we are selling. In the most part, the industrial end market, we are selling fiber-related; in the most part, the microfabrication as well as aerospace defense we are selling diodes, but that definitely can change with time. And the right way to look at it is from the demand end, and not from the product end. That's the way that we are managing also that internally.

At this time, I'm showing no further questions, so I would like to turn the call back to Jason Willey for any closing remarks.

I'd like to thank everyone again for their participation this afternoon, and hopefully, we'll see many of you in Atlanta at FABTECH. And we look forward to talking over the coming months. Have a good afternoon.

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