nLIGHT Inc (LASR) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to the nLIGHT Third Quarter 2022 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.

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. 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, 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, everyone, for joining us this afternoon. Starting on Slide 3.

nLIGHT's third quarter revenue was within the range of guidance provided in August. Products revenue was slightly below the midpoint. A lower-than-expected project base from development revenue resulted in overall revenue at the low end of the range. But products and overall gross margins were within the guidance range, but adjusted EBITDA was below the bottom end.

Operationally, we continue to increase the level of automation in the U.S. We've added incremental capacity to each of the lines we established earlier this year, and we're in the process of adding one additional line to our facility in Camas, Washington. With the installation of this equipment, we will have installed enough capacity to support our anticipated growth over the next several years.

Beyond capacity, we are focused on further improving our yields and the overall efficiency of our newly installed capacity. We expect to have installed the majority of our automated capacity in the U.S. some time in the first half of 2023.

Before discussing the performance of our business in the third quarter, I'd like to comment on the trends we are seeing in the semiconductor and fiber laser market and the impact that we expected to have on our business. We are projecting near-term growth from many of our strategic customers, primarily due to new product introductions and market share gains. However, we are seeing signs of a weakening near-term demand environment. We don't believe that softening demand reflects fundamental changes in the markets or customers we serve but rather response to changes in the global business environment.

While these global changes are significant, they continue to reinforce 2 fundamental opportunities for nLIGHT. First, rapidly evolving global supply chains are driving continued improvements in advanced manufacturing. Industrial automation, robotics, metal 3D printing and battery manufacturing are just a few examples of advanced manufacturing processes that require an increased number of lasers.

Second, we are seeing a much greater interest in laser technology from the defense industry. Lasers are a critical component of next-generation defense technologies, with applications such as directed energy, intelligence, surveillance and reconnaissance, driving long-term growth.

We continue to believe that our strategy to focus on these 2 key things position us well for long-term success.

Turning to Slide 4. nLIGHT reported $60.1 million of revenue in Q3. The geographic mix of our revenue again reflected the ongoing strategic transformation of our business.

Third quarter revenue from customers outside of China represented approximately 91% of revenue compared to 81% in Q3 2021. In order to better align our Shanghai cost structure with reduced demand levels for fiber laser sales in China, we initiated a restructuring plan in our Shanghai facility in October.

Outside of China, we generated approximately $54.9 million of revenue versus $58.5 million in the third quarter in the prior year. The year-over-year decline in revenue outside of China was driven by a reduction in project-based development revenue of $5.8 million. Excluding development revenues, non-China product revenue for the third quarter of 2022 was $42.8 million, an increase of $2.1 million or 5% compared to the third quarter of the prior year.

Turning to Slide 5, where I'll discuss revenue by end market. In microfabrication, we generated $17.7 million of revenue, which represented approximately 29% of total revenue and was approximately flat year-over-year. Q3 revenue was driven by record quarterly revenue outside of China, offset by a decline in revenue from sales to customers in China.

In China, economic softness and lower government stimulus have continued to impact sales. We continue to believe that we maintain our leadership position with Chinese microfabrication customers, but we are predicting a swift recovery in the region. We're also seeing softening demand signals from customers outside of China, particularly the consumer electronics and semiconductor manufacturing applications. Despite the softening demand, we remain deeply engaged with customers to support their next-generation products, and we have strong design and activity with both existing and new customers.

In the medical market, we have seen excellent adoption of our newly released 2-micron wavelength laser, which is initially targeting neurological applications. We expect to begin to increase revenue in the fourth quarter, and we anticipate strong growth contribution from this product into 2023 and beyond.

In aerospace and defense, third quarter revenue declined approximately $7.6 million or 27% year-over-year to $20.2 million, representing 34% of sales. Of this decline, approximately $5.8 million was related to project-related development work. As we've mentioned in the past, the timing of project-related development work could result in significant development revenue swings quarter-over-quarter.

We continue to make progress in our high-energy lasers for the directed energy market. We are pleased to report exciting progress in support of our OUSD-funded High Energy Laser Scaling Initiative to develop a 300-kilowatt high-energy laser prototype. We have demonstrated power exceeding program objectives, and we are working toward formal government evaluation acceptance, testing and delivery.

Testing to date has demonstrated the scalability of our coherent beam combining architecture, which, combined with internal investment, is established in a modular product line over a broad range of high-energy laser power levels. We sincerely appreciate the support of the OUSD program, and we look forward to sharing more information in the future.

In addition, we continue to expand our customer base in directed energy. During the quarter, we delivered multiple new products to several new customers. We delivered initial volumes of a laser to a U.S. prime defense customer and completed the development of a new lightweight laser for another U.S. prime customer. We continue to see the U.S. directed energy transition from the science and technology phase and into the prototyping phase, with multiple new programs and requests for proposals across the U.S. services.

Finally, turning to the industrial end market. Third quarter revenue declined 17% year-over-year to $22.2 million, representing 37% of total sales. Revenue from industrial customers outside of China was $19.8 million, which was approximately flat compared to the third quarter of 2021. Revenues from customers in China was down approximately 68% compared to the third quarter of the prior year.

In cutting, our business continues to be driven by our customer base outside of China. We remain focused on delivering innovative fiber laser solutions that enable our customers to design systems that are differentiated in the market. Today, we believe we are the only company that provides all fiber beam shaping solutions that allows for all the power to shift from the core to the ring, enabling our customers to design flexible, highly productive systems with superior edge quality in both thin and thick metal cutting. As an example, we released a new 20-kilowatt programmable laser at EuroBLECH last week, further reinforcing the versatility and stability of our programmable solution.

In welding, we are expanding our presence in the growing e-mobility market where we see long-term growth opportunities. We built upon our existing all-fiber programmable lasers to introduce a new product that has been optimized for battery welding applications. This product, called Corona [SFX], has a beam shape that works well for copper and aluminum welding by reducing spatter and other deleterious effects that are common with standard flat-top beam shapes. It also includes proprietary hardware-based back-reflection protection to enable uninterrupted processing of highly reflected materials and finishes and unique serviceability features that maximize uptime. This laser is currently being evaluated by welding integrators in the U.S., Europe and Asia.

Finally, in additive manufacturing, we've increased our engagement with metal powder bed fusion OEMs by continuing to demonstrate the unique capabilities of our Corona AFX programmable lasers. The AFX fiber laser, which has a tunable beam shape, from a small single-mode spot to larger ring beams that are 3x the diameter, has consistently been shown to show increased build rates in laser powder bed fusion machines by up to 8x by maintaining, and often enhancing, material quality. The optimized beam shapes from the AFX laser are uniquely capable of reducing spatter from the melt pool to allow for higher build rates and generous process windows.

Later this month, at Formnext, the key additive manufacturing trade show in Frankfurt, several customers will announce some new products and will highlight the benefits of the Corona AFX technology. One customer, [Economy 3D], will be presenting a case study illustrating how Corona AFX laser technology was applied to the printing of triple machinery components, reducing build times by 80%, therefore reducing part costs by more 75%.

Along with these cost reductions, the ring beam profiles from AFX distinctly enables control over the physical properties of the printed material, including yield strength, ductility and fatigue strength. We believe this intersection of high-speed 4D printing at low cost is likely to change the way we think about manufacturing, and the investments we're making in new lasers for additive manufacturing reflect this view.

Building upon the success of AFX-1000, we will launch this month the new AFX-1500, which increases the power over the current AFX-1000 by 25%.

And I will now turn the call over to Joe to discuss nLIGHT's third quarter financial results.

Thank you, Scott. Beginning on Slide 7. Total revenue for the third quarter of 2022 was $60.1 million, a decrease of $12.1 million or 17% compared to the third quarter of the prior year and near the bottom end of our guidance range.

Products revenue for the third quarter of 2022 was $48 million, a decrease of $6.4 million or 12% compared to the third quarter of the prior year. The decrease in products revenue year-over-year was driven primarily by a decrease in sales to customers in China, partially offset by increases to sales to both industrial and microfabrication customers outside of China.

Development revenue for the third quarter of '22 was $12.1 million, a decrease of $5.8 million or 32% compared to the third quarter of the prior year. The decrease in development revenue is attributable to the timing of project-based work we performed in the defense market.

Turning to Slide 8. Overall gross margin for the third quarter of 2022 was 22.4% compared to 29.6% for the third quarter of the prior year and on the lower end of our guidance range.

Products gross margin for the third quarter of 2022 was 26.4% compared to 37.1% for the third quarter of the prior year. The year-over-year decrease in product gross margin was driven by sales mix and, as discussed last quarter, decreased capacity utilization, increased investments in U.S.-based manufacturing and continued increases in production and freight costs.

Turning to Slide 9. Non-GAAP operating expenses for the third quarter of 2022 were $19.4 million or 32% of revenue compared to $18.1 million or 25% of revenue for the third quarter of the prior year. The majority of the year-over-year increase was related to increases in salary costs, professional service fees, facility expenses and a decrease in administrative costs allocated to development projects, offset partially by lower project spending.

Turning to Slide 10. Non-GAAP net loss for the third quarter of 2022 was $5.1 million or $0.11 per share compared to non-GAAP net income of $3.9 million or $0.08 per diluted share for the third quarter of the prior year. The year-over-year decrease in non-GAAP profitability was driven by a combination of the decrease in products gross profit and an increase in operating expenses. On a GAAP basis, net loss for the third quarter of 2022 was $13 million or $0.29 per share compared to $6.9 million or $0.16 per share for the third quarter in the prior year.

Adjusted EBITDA for the third quarter of 2022 was a negative $1.4 million compared with $7.2 million for the third quarter of the prior year.

Net cash used by operating activity was $2.8 million for the third quarter of 2022 compared to net cash provided by operating activities of $400,000 for the third quarter of 2021. The decrease in cash from operations is a result of increased operating losses and continued use of cash for working capital.

Our capital expenditures for the third quarter of 2022 were $3.5 million compared to $5.7 million for the third quarter of the prior year. We continue to invest in directed energy for the defense market and automation of our U.S. facilities to serve our customers outside of China.

Turning to Slide 11. We ended the third quarter with cash, cash equivalents and marketable securities of approximately $113 million and no debt. DSO for the third quarter of 2022 was 67 days, and we had 155 days in inventory.

Turning to Slide 12. As Scott mentioned earlier, we continue to believe that the long-term growth drivers of our business are firmly intact, although we are seeing weaker demand for the next several quarters. In light of this weaker demand, during the fourth quarter, we will evaluate our cost structure and seek to streamline our business to increase operational effectiveness such that, by the first quarter of 2023, we expect to achieve breakeven or better adjusted EBITDA at approximately $55 million to $60 million of revenue.

Turning to our outlook on Q4. Based on the information available today, we expect Q4 revenue to be in the range of $53 million to $59 million. At the midpoint of $56 million, this includes approximately $45 million of products sales and approximately $11 million of development sales.

Turning to gross margin. Q4 products gross margin is expected to be in the range of 23% to 27% and development gross margin to be approximately 4%, resulting in overall gross margin range of 20% to 23%.

For the fourth quarter, we expect adjusted EBITDA to be between negative $4 million to negative $1 million.

We expect Q4 average basic and diluted shares to be approximately 45.8 million.

With that, I will turn the call over to the operator for questions.

(Operator Instructions) And our first question will come from Greg Palm of Craig-Hallum Capital Group.

Yes. I wanted to start with just the commentary on the demand outlook. And I'm curious if you can maybe characterize it a little bit differently, whether do you see this as cancellations, as pushouts. What's your kind of visibility into the next couple of quarters?

And then Joe, specifically, you mentioned Q1, the restructuring and the impacts. Did you sort of mean to imply or direct that that's what Q1 can look like? Or were you just sort of setting the bar so we know what the impact of the restructuring actually was?

Thanks, Greg. It's Scott here. I'll start, and then I'll hand it over to Joe for the second part of your question.

We have limited visibility beyond Q4. Certainly, there's some particular areas where we have specific items of pushouts. We don't think they reflect fundamental demand issues for us, but there are particular issues in all of our sectors. But in addition to that, we do think, based upon our read of not only our customers but as we talk to our customers' customers, people are cautious in pulling back, and certainly changes in the global environment are being discussed. And that gives us pause for our outlook from a more macro standpoint. But no, otherwise, I think that if there are particular issues with respect to specific customers, specific contracts where there are some pushouts.

But with respect to Q1, I'll let Joe cover that.

Yes, Greg, thanks for the question. We were really trying to allude to the fact that the operational changes that we will make in the business, most of those will happen in Q4. And so I wasn't trying to imply that we are guiding to a $55 million or $60 million quarter in Q1. I think what we wanted to get across was that after we get through the changes that we'll make here, assuming the current mix of business, if we're able to achieve $55 million to $60 million of revenue, we should be able to have EBITDA breakeven or hopefully better than that.

Okay. Fair enough. One segment that maybe strikes me as a little surprising given the commentary is aerospace and defense because that seems to be a space that you're seeing good spending overall. And directed or advanced development revenues, down, but even outside of that, on a year-over-year basis, were down as well. So maybe if you can just spend a minute and just sort of parse through what you're seeing in that area as well.

Yes, absolutely, Greg. It's a good question. First, let me respond by saying, yes, the decline in A&D reflects, again, to build on what I said previously, particular issues, primarily 2. One is really delays in supply chain issues. While the programs that we're referring to here, the end demand is strong, and indeed, the outlook is even stronger. There have been delays with the specific components that we source in these complex systems, and that's led to part of the delay.

And then second, in the development programs, there have been some delays there, both in terms of the current programs and in new programs that we're working on. But again, that doesn't reflect any fundamental change in what we're doing, our position indeed. The progress, we reported [healthy], and other matters remain positive. And I think, as you said, I think the broader context here is one in which deepening global discord is leading to interest in lasers for a number of applications. And I think we're very well positioned for that -- those opportunities. So again, it's particular issues that are driving the near-term revenue.

Are you able to quantify what that sort of supply chain impact has been? And I guess do you have any visibility on when that might free up?

Let's see. I'll let Joe -- I'll try to make sure we're clear about quantifying. In terms of freeing up, boy, it's -- there's a set of issues that have -- the root cause issues have been largely resolved. It still takes time for those to work their way through over the coming quarters for 1 or 2 of the key programs I'm referring to. But yes, I don't see fundamental issues there, and we've been able to address the root cause issues. We don't see those issues of gaps in supply chain. Those particular ones we face are persisting.

Yes, Greg, in terms of quantification, if you look at the last -- if you look at Q3, we were down $3 million or $4 million in revenue from one of -- a couple of those kind of core A&D programs because of supply chain. But I think that gives you hopefully a sense for the quantification of that.

The next question comes from Mark Miller of The Benchmark Company.

You mentioned you had some share gains. I was just wondering in what areas.

Well, we've seen share gains in really all of our end markets in microfabrication. We continue to make progress in new areas in aerospace and defense, continuing to win new design slots. And then finally, in industrial, we're continuing to get new design wins across our applications there. So across the board, we've released new products and seeing continued expansion of our customer base.

Spread across the power spectrum, high power, low power? Or it's more concentrated in one power area?

Really across the board, Mark. We've just released a 20-kilowatt Corona laser as an example of higher power work that we're doing. But similarly, lower power for welding, additive manufacturing. There, it's more about the sophistication of the beam, the Corona products. But similarly, in aerospace and defense, we're making great progress there, too.

The next question comes from Hans Chung of D.A. Davidson.

So first, I was wondering what your drivers in microfabrication outside China. And then -- so how big is China typically in this segment?

Let's see. Hans, if you can repeat the last part of that question again. I didn't quite hear it.

So first part is, what's the key driver for the microfabrication outside China in the quarter? And then a follow-up on that is, how big is China versus non-China in this segment?

Good. So first part of your question, outside of China, we continue to get design wins in a broad set of different markets, in the broader electronics segment, but also continue to make good progress in medical applications. And we continue to see, as we mentioned, a strong outlook there.

And then with respect to China, I'll let Joe cover that.

Yes. Thanks, Hans. In non-China was the bulk of the microfabrication revenue this quarter. We've seen our China microfab business, right, in a couple of million dollars, $2 million, $3 million of revenue range over the last few quarters. At the same time, we've actually seen the outside-of-China microfab grow into sort of the mid-teens, to give you a sense of the breakdown between China versus non-China.

Got it. That's helpful. So -- and then -- so in terms of gross margin, it seems like in Q4, the gross margins in the development revenue is going to be 4%. I think it has been like steady around 6% to 7%, right? And then I was wondering, is that just onetime event or is a new base? And then what's the reason for that?

Yes. Great question, Hans. No, this is primarily a onetime event as there are certain programs that we are closing out and sort of truing up to actuals. The margin is going to be, we think, about 4% this year. Every program carries a little bit of a different margin. But when we look at the balance of the programs, they're about 6.5%. So I think outside of -- towards the end of life of a program, I expect that we would still be in that kind of 6%, 7% range going forward. But nothing structural has really changed about the way that we're prosecuting that development business.

Got it. And then as we look into 2023 in -- I mean the whole -- the main environment being stopped. But I'm just wondering like what's the kind of highlights or bright spots would you expect for next year?

Yes. I think as we look out in time, we share your point of view that I think there are some challenging times ahead that are a result of continuing infraction of economic times around the world and other discord around the world. But as we noted, both of those factors also represent opportunities for us.

First, in the industrial markets, we continue to see expansion of more advanced technology in manufacturing areas like additive manufacturing. We see very strong progress there. And we're launching new products this month at the big trade show Formnext in Frankfurt.

And then second, we do see the defense sector as a strong area where we're very well positioned. And we see continued opportunities to expand over the medium term there.

Great. Got it. And then lastly, just -- I just want to touch base on the LiDAR application. I think you mentioned this last quarter or before. Just curious, what's your plans here? Are you going to -- what kind of product are you going to provide? And then what's your competitive advantage?

So for us, where we participate in the LiDAR market is at the higher performance side of that market. And so there are programs in aerospace and defense, and there are some other programs that are earlier stage in other more advanced markets.

And so we do see opportunities there. They're not near-term opportunities. But we will -- we look forward to providing more as those opportunities develop.

(Operator Instructions) And our next question will come from Ruben Roy of Stifel.

Joe, I wanted to follow up on the gross margin quickly. You cited a number of factors for the margin dynamics, including mix and some of the costs related with the business. Just wondering, as the mix has shifted out of China, I think the margins would be a little bit better outside of China. Maybe you could just help us with kind of some of the dynamics around that. And then as you look into 2023, maybe you could give us some puts and takes on how you're thinking about those different factors and how we could -- we should think about margins over the next several quarters. That would be helpful.

Yes. Sure, Ruben. Thanks. So when you think about margin as we are going from Q3 and even to where we're guiding in Q4, right, we've got revenue that's down by, call it, $4 million at the midpoint. There are, obviously, a lot of puts and takes. Some of it is mix, right? As we look at the diodes business we're selling in both China and non-China, we expect to get slightly better absorption as we go into Q4 because of most of these lower expected spending.

But frankly, the revenue shift has been faster than the manufacturing shift. And as we are ramping our business here in -- excuse me, when we're ramping our automated capacity here in the U.S., that's not big enough yet to satisfy our demand for both our microfab and our fiber laser customers. So we're still in a position where we've got effectively redundant capacity when you look at China and the U.S. So that continues to be a headwind.

Looking forward, I think there are a couple of things that will drive the gross margins to that 40% plus range that we've set our long-term target, right? The first is revenue. I think you can pretty clearly see, even over the last couple of quarters, as the leverage that we have in the model, right? It's easier to scale from a people perspective, but we've got some pretty significant fixed costs that enable us to grow revenue far in excess of where we are today. So that's one piece.

The second piece is, right, it's that redundant capacity, right? So we've got to optimize our -- we do a better job of optimizing our capacity.

And then third, as the mix of business changes, as we continue to push further into the directed energy market and we've got a little bit better recovery on the non-directed energy A&D side of the business, right, that's what will help drive our margins higher, hopefully, in 2023, right? I just want to be cautious because of the demand that we're seeing here over the next couple of quarters isn't robust. But I don't think that changes where we think we're going to be long term from a gross margin perspective.

That's great. Very helpful. And then just as a follow-up, I guess, Scott, as you take a step back over the next -- over the last quarter or 2 and you look at the macro and then sort of on the other side you see a lot of interesting things going on in the U.S. fiber budget and some of the programs and even seeing a lot of interest from your customers here for these various markets that you talked about, medical, microfab, industrial. I'm just wondering if you have any updates on the way you're thinking about the longer-term TAM. Kind of on the one side, we've got the near-term macro dynamics. But from a longer-term perspective, has anything improved or declined in the way you're thinking about the overall TAM for your fiber lasers?

Yes, I think that's -- I appreciate the question very much. And just building on what I said previously, I think the near term is -- there's a challenging environment out there. There's no question about that. But for the -- even the medium term, I think that those same trends that we are seeing that affect the near term creates even stronger opportunities for us.

So I think in the advanced technology and industrial, we're making progress across the board. But as we noted, particularly excited about the upcoming trade show a couple of weeks in Frankfurt in additive manufacturing. I think that's a space that we have been in for some time. But it's quite rewarding to see the progress in adoption of lasers and the cost-effective production of few parts from the use of our lasers. So I think that's one theme that I think is even stronger than what we've seen in the past.

And then similarly, on the defense side. While there is -- as I noted, there's near-term choppiness due to really particular factors, the longer term remains very important. In fact, the U.S. defense strategy was just published yesterday or this week and again reinforce directed energy lasers as one of the top priorities. And with the progress that I noted on our HELSI program, yes, we're continued strong interest in adopting really new technology and a set of new applications in directed energy.

So I think those are the 2 of the themes that are even stronger than what we would have seen a year ago.

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

Thank you, everyone, for joining this afternoon and your continued interest in nLIGHT. We look forward to speaking with you during the quarter. Have a great evening. Thanks.

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