nLIGHT Inc (LASR) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to the nLIGHT Fourth 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 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 In addition, you can access an archived version of today's call from our website.

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 statement. 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 attending several investor conferences in the coming weeks, including the Raymond James Institutional Investor Conference in Orlando on March 4th and the Susquehanna Technology Conference on March 12th in New York.

I will now turn the call over to Scott for a brief comment before Ran goes through the financials and outlook. Scott will then discuss trends in each of our end markets. We will then be glad to take your questions.

Thank you, Jason, and good afternoon, everyone. 2018 was a transformative year for nLIGHT. In April, we completed our initial public offering, which not only solidified our financial position, but also raised nLIGHT's profile with customers across the globe. In 2018, we grew revenue by 38%, improved gross margin by 300 basis points and expanded EBITDA by over 60%. We also made significant additions to our product portfolio, which greatly expanded our ability to serve customers in each of our end markets.

We started nLIGHT almost 2 decades ago with the vision that rapid evolution in semiconductor laser technology would open new market opportunities. With significant innovation across our product portfolio, we are even more enthusiastic about this vision today. Before providing an update on each of our end markets, I will turn the call over to Ran for details on our financial performance in the fourth quarter and the full year.

Thank you, Scott, and good afternoon, everyone. 2018 was a record year for nLIGHT. Revenues reach $191 million, up 38% year over year. Gross margin improved by over 300 basis points to 35.0%, and we delivered adjusted EBITDA of $30 million or 16% of revenues. We saw strong growth across each of our end market and geographies regions during 2018, and we believe we continue to grow faster than the industry in each of those core markets we serve.

Focusing on results in the fourth quarter, revenues were $46.2 million, up 23% year over year. During Q4, sales to industrial end markets were $17 million, representing 38% of total revenue and up 7.1% year over year. Sales to microfabrication end markets were $19 million, or 41% of total revenues, and up 26% year over year. Aerospace and defense sales was $9.6 million, or 21% of total revenues, and grew 60% compared with the fourth quarter of 2017.

On geographic basis, sales to China were $15 million in the fourth quarter of 2018, or 32% of total revenues, up 5% compared with Q4 2017. Sales in North America were $18 million, representing 39% of total revenues, and growing 22% year over year. Rest of the world sales were $13 million, up 54% compared with the fourth quarter of 2017 and were 29% of total revenues.

Gross margin was 35.8% in the fourth quarter, an improvement of 300 basis points year over year. The improvement was driven by higher volume and favorable end market mix, partially offset by more aggressive price activity in the Chinese industrial end market. The Chinese industrial end market represented less than 20% of the overall revenues during the fourth quarter and approximately 25% of total revenue for the full year of 2018. The impact of recently implemented U.S.-China tariff on Q4 2018 gross margin was approximately $550k or 120 basis points.

Operating expenses were $14 million during the fourth quarter compared with $9.6 million in the fourth quarter of 2017. We continue to invest in research and development and the corporate infrastructure necessary to support the growth in the business. Q4 2018 operating expenses included $1.7 million of stock-based compensation, an increase of approximately $1.6 million year over year.

Fourth quarter operating income of $2.2 million was 4.8% of revenues and compares with $2.7 million, or 7.2% of revenues in the fourth quarter of 2017.

Our adjusted EBITDA for the fourth quarter was $6.1 million or 13.3% of revenues. This compares to $4.9 or 13.1% of revenue in Q4 2017.

GAAP net income for the fourth quarter of 2018 was $2.4 million compared with an income of $1.1 million during Q4 2017. GAAP EPS for the fourth quarter of 2018 was $0.06 per diluted share compared with a $0.00 EPS for the fourth quarter of 2017.

Non-GAAP EPS, which exclude the impacted of stock-based compensation and assume the conversion of all outstanding preferred stock in the period to common stock, was $0.10 per diluted share in Q4 2018 compared with $0.04 per share in Q4 2017.

Turning to the balance sheet. We ended Q4 with total cash and cash equivalents of $149 million. In December, we repaid the $60 million outstanding on our lines of credit.

DSO for the fourth quarter of 2018 was 47 days. Inventory at the end of the quarter were $35 million, representing 109 days in inventory.

During Q4, we generated $1.2 million of cash from operating activities, reflecting an improved profitability, partially offset by working capital expansion. Capital expenditure for the quarter was $3.1 million or 6.6% from revenue. Over the full year of 2018, we generated $3.3 million of cash from operating activity and invested $12 million in capital expenditure, or 6.1% from revenues.

Turning to the guidance for the first quarter of 2019, we expect revenues to be in a range of $40.0 million to $44.0 million. At the midpoint of the range, this implies revenue at a similar level of the first quarter of 2017. While we have seen improving customer sentiment and order activity in China over the past 2 months, our visibility is limited due to the ongoing trade dispute.

Based on our current expectation for product mix, we see gross margin for Q1 2019 in a range of 30.0% to 33.0%. This outlook incorporates approximately 150 basis points reduction in margin due to the U.S.-China tariff introduced in 2018.

For the first quarter, we expect adjusted EBITDA in a range of $2.0 million to $4.0 million. Stock-based compensation is expected to be an approximately $2 million. We expect Q1 average basis share and average fully diluted share to be in a similar level with Q4.

While our current visibility does not put us in a position to provide a specific outlook for the full year, based on our current market condition, we believe we can deliver moderate growth in 2019. Similar to 2018, we expect revenue in the second half of the year to be higher than the first half. Our outlook for the revenue and profitability reflects our current view into the business and incorporates the typical slower seasonal activity in China around the Chinese New Year, which is being amplified by broader customer uncertainty in the region.

I will now turn the call back over to Scott.

Thank you, Ran. 2018 was a continuation of the strong business momentum we experienced over the past 5 years. Our outperformance relative to the overall high-power laser industry is not tied to one end market or geographic region. The foundation of our core semiconductor laser technology and our continued innovation in fiber lasers has driven outperformance in the industrial, microfabrication and aerospace and defense markets. While we are not immune to short-term market fluctuation, we are focused on driving the penetration of our products across existing and new customers in each of these 3 end markets.

In the industrial market, we dramatically expanded our fiber laser offerings in 2018, which enabled us to grow revenue 46% for the full year and 7% year over year in the fourth quarter. As we enter 2019, the availability of an expanded portfolio of high-power fiber lasers and Corona opens access to new customers and new segments of the market.

We are excited today to announce that we have shipped our first 12 kilowatt fiber lasers. Our new higher power fiber lasers provide not only improved power, but come at a reduced cost structure as we integrate our latest semiconductor lasers in a smaller form factor. We see increasing interest from customers in high-power fiber laser solutions, and we expect volumes for our portfolio of high-power offerings to steadily ramp in 2019.

During Q4, approximately 27% of our fiber laser sales were at 6 kilowatts and above, which is up 90% from the comparable period in 2017. Sales in the 2 to 5 kilowatt range were over 50% of fiber laser sales in Q4 2018, up 20% from Q4 2017 levels.

In September 2018, we officially launched Corona, our all-fiber programmable fiber laser. Corona offers customers an approach to programmability that is unique in the market today, and initial customer response has exceeded our expectations. We accomplish rapid beam programmability through an all-fiber technology that does not require add-on optics, special process heads or fiber, or over-provisioning of multiple lasers in the same tool. We believe this approach provides end users true flexibility in optimizing their beam profiles with a specific job and material. Others in the industry share our excitement around the innovation in Corona as earlier this month at the SPIE Photonics West trade show in San Francisco, Corona was awarded the Prism Award for industrial lasers, recognizing outstanding examples of innovation in photonics.

Corona enables our customers to offer performance and flexibility that clearly differentiate their systems from their competitors, helping us expand our sales with key global customers. In 2018, 1/3 of our fiber laser sales were outside of China compared to less than 20% in 2017. This equates to over 100% growth year over year in fiber laser sales outside of China. We expect Corona to play a key role in continuing to expand our global presence in the industrial end market in 2019 and beyond.

In the microfabrication market, we grew revenues 26% year over year during the fourth quarter and 22% for the full year 2018. Our microfabrication customers serve a wide range of end markets, including automotive, consumer electronics, semiconductor capital equipment, solar and scientific research. Within these end applications, we continue to see the cost and performance of diode-pumped solid-state lasers evolve and enable the replacement of legacy technologies. This growth in laser penetration has driven increased demand for our semiconductor lasers, which serve as the pump source for many of the industry's leading pulsed lasers.

We continue to lead the world in the highest brightness semiconductor lasers, and in January, we introduced the e24i, which delivers 400 watts of output power from a 200 micron fiber in a form factor small enough to hold in the palm of your hand. e24i will allow us to further expand our customer base as it greatly simplifies system architecture of direct diodes, solid state and fiber lasers.

In the aerospace and defense market, we grew revenue 64% for the full year and 60% year over year in the fourth quarter. This growth was driven by both existing contracts and newer directed energy programs. We have a long history of working with the U.S. government and large aerospace and defense contractors to support numerous applications, including guidance, measurement, countermeasures and directed energy.

Our development of highly reliable semiconductor laser technology leads the industry in power, efficiency, size and weight, which positions us to be a key beneficiary of increasing growth that we anticipate in this market over the coming years.

Directed energy applications are a particularly important long-term opportunity. Revenue related to directed energy grew in 2018, and while we expect contributions from this market opportunity to be lumpy in the near term, we see a sizable opportunity in this market over the coming years.

In conclusion, we founded nLIGHT in 2000 with the vision that the rapid innovations in semiconductor laser technology would open up new opportunities. Today, this premise is more evident than ever. In 2018, we made significant progress in expanding our product portfolio with new semiconductor lasers, higher power fiber lasers and Corona. These ongoing innovations position us well for 2019 and the long term. As a result, we remain confident in our ability to continue to grow faster than the market.

In closing, I would like to thank the entire nLIGHT team for their efforts during 2018, and with that, we will now hand it over to Q&A.

(Operator Instructions) The first question comes from Patrick Ho with Stifel.

Scott, maybe first off on the industrial side of things. Given a lot of the changing dynamics in the market environment today and some of the growth prospects you're looking for with your new products, you talked about how adoption usually takes about a year from when products are introduced. As you look forward with the new products in second half of 2019, do you believe they'll be driven by the transition from existing customers taking the new products, or do you see a bump up or a step up in new customers who are adopting the new products?

Certainly see growth from current customers, but the more substantial growth we believe will come from new customers around the globe. We continue to expand our sales in all geographies in all the sectors, however, we're seeing more rapid growth outside of China. We saw that in 2018 and we expect that to continue in 2019.

Great. And maybe as my follow-up question for Ran, in terms of I think gross margins are understood with some of the market dynamics today and some of the pressures you're facing. But as you look at the operating expense line, which you guys have managed very well over the past year or so, how do you look at OpEx, and especially R&D for your next generation of new products, how do you expect that I guess line item to progress as 2019 goes on? And what I'm looking at, as revenues grow, do you expect the percentage to stay the same and OpEx moving up on that absolute dollar base, or is there an opportunity for OpEx as a percentage to come down as revenues ramp?

True. So in terms of OpEx, if you recall from day 1 when we put the midterm model, we talked about that we are aiming to spend roughly 10% from revenue on R&D and roughly 12% from revenue on SG&A. However, as we have -- this is for the call it mid, long term. However, when we have an opportunity here and there to invest more in R&D, we will do so, and it could be that we will invest in the near future slightly higher than 10%. Definitely this year at the end of 2018, it was a very good example when we had some investment in new product -- Corona, 12 kilowatt, everything that you are seeing right now that could get into the market -- the investment in R&D was higher than 10%. But definitely when we will grow the business, we will grow to that level of target that we put to ourself, again, 10% from R&D roughly, plus or minus 12% on SG&A.

Operator, your next question, please.

Guys, my line won't open. Pardon me. Sorry for the delay. The next question comes from Tom Diffely with D.A. Davidson.

Hopefully you could remind us what your expectations are for the normal seasonality here in the first quarter, and then is it quite a bit different between your different, your 3 segments?

Yes, we will not go to -- Tom, we will not go to the different segment in terms of the guidance for Q1. But however, what we are seeing in Q1 in terms of seasonality, yes, it is definitely the same trend that we saw last year. As I mentioned in my opening remark, the trend at least in the revenue that what we are seeing right now this year will be similar. The trend again will be similar to what we saw last year. The second half would be expected to be higher than the first half. You need to understand, given everything that I'm saying, our limited visibility specifically in China, specifically this quarter after the Chinese New Year. I'm sure that by the end of this quarter will be no better, but we don't see that in terms of the seasonality, if you will, any differences versus last year or the year before.

All right. No, that's helpful. And then Scott, when you look at the move to the higher power with your customers, is it -- the customers, are they using higher power for the same application, or is this driven by new applications for your higher power tools?

Well, certainly the largest market for those high-power lasers today is in the cutting market, and there what we're seeing our customers migrate into, say, thicker metal. And so our high-power fiber lasers are out cutting some very thick metal today. Over time, certainly see other opportunities in welding and other new applications, but today, cutting is where we see that and largely being driven by thicker metal.

Okay. That makes sense. And then finally, when you look at your aerospace business, it seems like a lot of that is driven by the semiconductor laser at this point. Are there plans to move to more of a complete system sale into that market, or is that going to be more of a components market for a while?

Yes, good. In aerospace and defense, largely what we sell there today are components on both the semiconductor lasers and other components. And as we continue to progress, there'll be higher levels of integration. I wouldn't call it a system play. I think certainly the defense primes have a role that it is very different from ours, but certainly we'll see higher levels of integration.

The next question comes from David Ryzhik with Susquehanna Financial Group.

So you've noted some constructive signs out of China. Are these actually orders in the pipeline, orders with customers? And if you can provide a little more context around what customers are saying. Are they waiting for the tariff situation to be resolved, or are they waiting for some stimulus measures to kick in? And I had a follow up.

Very good. Yes. Certainly we are seeing increase in orders, and so that is certainly positive. However, the visibility is still limited due to the uncertainties around the trade issues. And in China, and frankly around the world, we're seeing people waiting for more certainty around those issues. So we are seeing some positive improvement, but everybody's waiting for resolution.

Okay. And welding typically hasn't been a market that you focused on too much. But with Corona, have you seen an increase in demand from welding customers? And anyway to size how much of an opportunity this could become within welding for nLIGHT?

Good question. We certainly are seeing increased interest, and it is due to Corona and our higher power fiber lasers. However, your point is valid. This has not been a key focus for us to date. Welding, again, generally requires further integration into those applications, and so it has been a relatively lower priority for us. So over time, we will be investing more there, and we're confident that Corona creates further differentiation in that space. And it is; it's a large addressable market. It's a different market from, say, the cutting market. It is a much more fragmented set of end applications. But we see strong opportunities for continued growth there ranging from industrial automotive to electric vehicle to various, more refined applications. So looking ahead, we'll be talking more about that.

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

I'm not trying to pin you down with respect to forecasting the quarter by vertical, but I'm just trying to get a sense. You've given us some color about visibility in the industrial market being limited. If I think about the midpoint of your guidance, what kind of visibility do you have in the microfabrication and the aerospace and defense verticals?

Yes. Obviously, Jim, obviously -- good question. Obviously, the visibility that we have in aerospace defense, by definition it is much, much better, and definitely in this time it is much, much better than the industrial end market. And on microfabrication, it is better than the industrial end market in China, no question. By the way, those fundamentals in the business, nothing change here. Specifically on the industrial end market, the visibility usually in Q1, it is low due to the Chinese New Year. And currently, as Scott mentioned, with the trade war and everything else that's going on, the visibility is even lower than that.

So that range of revenues that you're providing in your Q1 guidance, much of that variability is it safe to say boils down to the industrial segment of the business?

This is correct.

Okay. And you alluded to the customer reception for Corona exceeding expectations. And I'm wondering if you can talk a little bit about either -- well, which verticals, which applications and in which geographic regions are you seeing the strongest reception to the technology?

Good. Thanks, Jim. We're seeing strong interest in Corona across all of our industrial end markets. However, the near-term design wins are focused on the cutting market and largely larger companies typically outside of China. What we're seeing is that the benefits of Corona are exceeding our expectations. They're allowing our customers to differentiate, and in various applications provide a substantial advantage over their current approaches, and that's leading to a more rapid design win process for us. And right now, it's generally in cutting and outside of China.

Okay. And last question and I'll jump back in the queue. You may have given it, I may have missed it, but did you talk at all about customer concentration in the quarter?

Of Q4 or for the guidance?

Well, for Q4, and if you want to provide some color with respect to the Q1 outlook for your large customers, that's fine.

Yes. So we didn't provide customer concentration in Q4. It was not significantly different versus what we saw in the previous quarter. And as you can imagine, I will not comment on customer concentration in Q1.

But Ran, is it 1 10% customer? Is that --?

It's close to that, yes.

The next question comes from, and please pardon me if I mispronounce this, Brian Gesuale with Raymond James.

I wanted to maybe explore the defense business a little bit. It really outperformed expectations in 2018. Grew 60%. I think many were thinking it might be a 15% or 20% grower at the start of the year. Can you maybe just give us a little bit of color on how we should think of the rate of growth as it progresses in 2019?

Yes. Good, Brian. We did grow faster than we had expected in 2018, and that 60% growth certainly speaks to the migration towards higher power lasers, particularly in directed energy. We do not expect that same growth rate in 2019; however, again, I think that does speak to this long-term growth prospect. And the adoption of lasers for those applications is becoming clear, and we do expect that it will continue to grow in the coming years.

Okay, great. And then just a follow up. Wondering if, Ran, if you can maybe help us out as we shape our gross margin thoughts for the year. Sounds like seasonality volume picks up second half to first half. The e24i I imagine helps on the cost basis. New products begin to penetrate the mix at an increasing rate. Can you maybe just think of how we might think of a progression of gross margins? I know you're not going to be precise, but just a little bit of help there.

The full 2019, sure. So let me remind you how we managed to improve I think significantly the margin in the last, specifically in the last 2 years. If you again, just as a reminder, if you look at the margin improvement between 2016 to 2017, it was 900 basis points, and between 2017 to 2018 it was 300 basis points, which I believe it's very impressive. Where it's coming from. It's coming from mainly 3 areas. And as we grow the business, definitely we will get a better utilization of our fixed costs. So this is the first point. Secondly, we are investing a lot in cost reduction and automation, which help us to reduce the cost. But not less important, those new product that we are talking about, higher power, better technology, i.e. Corona for example, it's coming with a better margin. 2019 and going forward, Q1, the revenue was due to the seasonality is low, so we are not getting those benefits that I just talk about. Similarly, those new product will not be significantly impact the margin in Q1, the 12 kilowatt, the Corona. But as we move forward with the year and as we continue to grow the business, and as we continue to introduce those new products to the market, we will see some margin improvement.

Okay, great. Is this -- just a quick follow up on that. If we see volumes bringing in $50 million, $55 million a quarter or even a little bit higher, is this something where we can approach or actually top the gross margins that we saw periodically last year? Or is it just the pricing environment in the macro just not going to support that even on the higher volumes?

It's very difficult to say. There are so many things that impact the margin on a quarterly basis, and that's why it's difficult to say on a quarterly basis. There is mix between different product, there is mix between different geographies, there is many things that impact the margin. However, and this is what really important to understand, the trend that we saw in the last 2 years, conceptually, as we continue to grow the business, as we continue to introduce those new products to the market, definitely we will see a margin improvement.

The next question comes from Andrew DeGasperi with Berenberg.

I guess the first, now that you have these super high-power lasers, 10 kilowatt and over, are your sales efforts a little different relative to the mid-power lasers?

Well, I think the customers that can use the high-power lasers are a fairly limited set of customers. So, no dramatic change in our sales structure or efforts, but the customers that are capable of using that high power are more limited.

Got it. And I guess with regards to Chinese New Year, I know there's been some commentary that because it's earlier, there was a little bit of a pull forward of orders. Have you seen something like that happening and the reason why you have low visibility is because right now things are a little quiet? Or is there some other reasons based on your historical -- what you've noticed historically?

Yes, relative to our many years of working through Chinese New Year, there is always a lot of -- well, there's less visibility around Chinese New Year in general as you come into it. Customers tend to buy less and it takes a couple weeks after New Years to provide that visibility. So that's sort of the general seasonal trend in the China industrial market. Amplifying that this year is the trade dispute and with the deadline that sort of was overlaid on top of Chinse New Year, so you've got that exacerbating that uncertainty. Again, as I said before, we have seen some positive trends in the first quarter. We're hesitant to amplify those because the visibility is limited due to those trade issues.

Right. And then my last question on the second half view that it should be stronger. Do you see that across all 3 segments, or is it really mostly on the industrial side and just some kind of assumption baked in on a resolution of this trade dispute?

Yes, good. On that last question, we're assuming things don't get worse in our plans. We're not expecting that there's a glorious resolution that could provide some upside, but that's what we're assuming in our base plans. And in those base plans, we do have visibility into continued adoption of our new products in all 3 end markets, and that's where the second half perspective comes from.

The next question comes from Greg Palm with Craig-Hallum.

I'm curious if you would characterize your Q1 guidance as maybe overly conservative just based on the lack of visibility. I'm just trying to get a sense if you've changed at all the way you're thinking about the near term based on this uncertainty out there, if it really is just kind of a best guess at this point.

Yes, so -- this is Ran. No. The answer is no. It's not over pessimistic and they're not over optimistic. This is what we see right now. This is what we see right now, and again with the limited visibility that we have. If we will wait another 2 weeks, 3 weeks and get more information from the Chinese New Year, we would be better off, but we are doing this call right now. And based what we are seeing right now, that's the best information that we can provide to our investor at this point.

Understood. And just remind us, orders that you receive now or maybe in the coming weeks, are those still could be recognized as revenue this quarter, or would that be more of a Q2 event? And I guess I'm specifically referring to some of the industrial China product.

Sure. We are specifically in the industrial end market. We will get orders in March that we will deliver at the end of the quarter, no question about it.

Okay. And I guess just happen -- one last one for me on the gross margin guidance. I'm just trying to sort of figure out impacts from mix, from negative pricing and just additional cost from tariffs. Any way to break that out specifically?

Yes, so let me try to compare it year over year instead of the previous quarter, or like in the previous quarter, if you prefer. But year over year, first of all, you need to take into consideration the tariff impact, which is 150 basis points. We already talked about it. We already quantified it. Secondly, there is a new product that we just introduced to the market, again, Corona, a 12 kilowatt, that will give us a better margin later on but will not impact significantly the margin for Q1. And lastly, yes, there was an impact of the pricing. We talked about it in the last 2 quarters. There is -- what we saw, at least at the end of last year, it's more significant price pressure in the industrial end market in China, and some of it we see that in Q1, definitely.

The next question comes from Jed Dorsheimer with Canaccord Genuity.

Just 2 quick ones. I guess as you look at the introduction of the 12, I'm just wondering on that particular product, given that the SAM is -- there's fewer competitors in that market, what would revenues have been if you had had that for the whole year, just to give a healthy perspective on what that might be for next year?

Good. Can't really speculate on the particular estimates there, but certainly I think your question is spot on to the fact that it is very difficult scaling power to those levels in a real industrial product. And we see very limited competition in that space. Really only see one other competitor in that space that has real products. So we're seeing a shift to higher power and we're seeing limited competition there. So we are excited about the growth prospects there in 2019.

Got it. And then in the micro side of the business, what's the -- why aren't you seeing a faster uptake in versus mechanical, specifically with VS for example? Is it just a CapEx and company is looking to leverage fully depreciated equipment, or is there just not a cycle happening right now? I'm just curious in terms of -- or is it a technology issue in terms of the lasers?

Yes. No, not a technology issue. We're seeing increased penetration of lasers in a wide range of different applications in micro. So with our new products we're launching and with what we're seeing in the applications, we are confident that there'll be continued growth in that space. Having said that, there are end market cycles there, and some of those markets are softer right now. But over time, we anticipate continued displacement of mechanical and other processes in the microfabrication space.

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

The industrial sales decline, sequential decline, was that driven primarily by pricing, or was it also units down?

Give me just one second. Yes, the industrial end market, if you compare quarter to quarter, Q4 2017 to Q4 2018, there is actually an increase of 7%.

But sales were down sequentially. That's what I was talking about.

I'm sorry. Yes, you're right. It is mainly coming -- the industrial end market, it's mainly coming from China and there is some reduction, yes, in revenue in China in the industrial end market. There is unit end price reduction as well, yes.

So both. Excuse me.

Both, sequentially.

Okay. The guidance for the current quarter, is the decline in revenue spread across all 3 segments or more concentrated in industrial?

We will not split the guidance by end markets.

The next question is a follow up from David Ryzhik with Susquehanna Financial Group.

Just wanted to drill down a little bit on the pricing environment. Maybe you can comment on how it's changed since you updated us 3 months ago, and does it remain confined to that 1 to 4 kilowatt market, or have you seen pricing begin to creep up outside of that segment?

Yes, what we described previously was that the changes in prices sort of mid last year, we've seen a relatively stable environment since then. Certainly over time we certainly anticipate continued price reductions that will continue to open up new markets for us, but in the past quarter, we haven't seen significant changes with prices.

Great. Just one quick follow up for Ran. Now there was a tick up in DSO in Q4. Should we expect this to normalize in 1Q?

Yes, it will normalize. That was -- the Q4 revenue was back-ended loaded, and as a result, the day went up. If you recall, we talked about 40 days-ish is a days of account receivable which it will go down in Q1. Go back to normal.

This concludes our question-and-answer session. I would like to turn the conference back over to Jason Willey for any closing remarks.

Thank you, everyone, for your participation and continued interest in nLIGHT, and we look forward to speaking with you over the coming weeks. Have a good rest of your day.

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