nLIGHT, Inc. (NASDAQ:LASR) Q3 2023 Earnings Call Transcript
nLIGHT, Inc. (NASDAQ:LASR) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Good day, and welcome to the nLIGHT Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [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.
Joe Corso: Thank you, and good afternoon, everyone. I am Joe Corso, nLIGHT's Chief Financial Officer. With me today is Scott Keeney, nLIGHT's Chairman and CEO. Today's discussion will contain forward-looking statements, including financial projections and plans for our business, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call and we undertake no obligation to update publicly any forward-looking statement, except as required by law. During the call, we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I will now turn the call over to Scott.
Scott Keeney: Thank you, Joe. In the third quarter, revenue of $50.6 million was above the midpoint of the guidance range. Products gross margin of approximately 24% was below the guidance range, but continued operating expense discipline enabled us to report adjusted EBITDA within the guidance range. As we have discussed in prior calls, we continue to prudently manage working capital and capital expenditures, which enabled us to increase our cash and marketable securities spend by approximately $10 million during the quarter. Our balance sheet remains strong and we ended the quarter with approximately $112 million of cash, cash equivalents, marketable securities with no outstanding debt, which positions us well to execute our long-term growth objectives.
We also made significant progress in several growth areas during the quarter. In Aerospace and Defense, we announced today that we have been awarded additional options on our previously announced HELSI-2 contract, bringing the total value of the award to nLIGHT to $171 million, which we expect to execute over the next three years. In addition, we made excellent progress on one of our laser sensing programs, which offers attractive long-term revenue opportunities. In industrial, we secured design wins with multiple global metal additive manufacturing customers and began shipping lasers to a significant customer in the EV battery industry. Operationally, we continue to transition our manufacturing from Shanghai to the U.S. and to a contract manufacturer in Thailand.
We continue to mature our U.S.-based automation processes and significantly increase our volume with a contract manufacture for semiconductor lasers assembly. I will provide a brief update on each of these three initiatives. In Aerospace and Defense, revenue declined 6% year over year to $19 million, representing 38% of total revenue. As discussed, a moment ago, we are excited about today's announcement regarding our HELSI-2 contract. As a reminder, this contract is to produce a high-energy laser prototype as part of the second phase of the DoD's High-Energy Laser Scaling Initiative. Today's announcement of additional options approximately doubles our previously announced contract from approximately $86 million to $171 million. In the second phase of the HELSI-2 program, which is expected to be executed over the next three years, nLIGHT will build upon its proven modular CBC architecture to scale laser source power to a megawatt class with improved beam quality, size, and weight.
This laser will be delivered in the rugged conex compatible form factor with optional space allocations to upgrade with precision long-range tracking and adaptive optics technology. In terms of HELSI 2 program execution, we've made excellent technical progress this far and we are achieving our key program objectives to date. In addition to HELSI 2, we've increased our directed energy footprint across all levels of vertical integration. As we've talked about over the last several quarters, we are seeing increased demand for directed energy laser technology from our foreign allies. Several of our customers and potential customers that had planned to develop their own lasers using nLIGHT diodes have converted to purchasing nLIGHT lasers, which offers incremental revenue opportunities for nLIGHT.
During the third quarter, we delivered initial lasers to multiple international customers, and we continued to work with others to secure additional design wins. We also continued to invest in both component and system level technology to address these new international opportunities. In other areas of defense, we continue to execute multiple new laser sensing development programs that we highlighted in prior calls. On one of these programs, we expect to receive purchase order for initial manufacturing units within the next several months, which is expected to transition to low-rate production volumes within the next 12 months to 18 months. In our core defense products, revenue decreased 20% year over year to approximately $6.5 million. The primary driver of the decrease in revenues was continued supply chain challenges related to the acquisition of key components for one of our larger long running programs.
This product remains quite healthy as it supports a critical program of record that is expected to grow significantly in 2024 and beyond. However, it'll take the rest of the calendar year to resolve these residual supply chain issues. Turning to the industrial end market, industrial revenue in the second quarter declined 12% year over year to $19.6 million, representing 39% of total revenue. Compared to the second quarter, industrial revenue increased by approximately 18%. In cutting, revenue from customers outside of China increased year over year as we continue to increase sales over high power, all fiber programmable technology to key strategic customers. We continue to demonstrate the flexibility of our programmable fiber lasers and believe that the market for high-value applications remains well-suited for continued growth.
At the same time, we have started to see domestic Chinese laser manufacturers who are offering non-programmable commodity fiber lasers take a more aggressive pricing approach outside of China. In welding, we continue to focus on delivering innovative laser and process monitoring solutions to customers globally. Since acquiring plasma, we've increased our pipeline of qualified opportunities and have begun to capitalize on the strategic cross-selling opportunities created by offering, lasers and process monitoring solutions. For example, during the quarter, we delivered process monitors to top-tier global EV battery manufacturing customers that is expected to add significant capacity over the coming years. Since winning this socket, we've also introduced lasers with differentiated features which this customer has evaluated and is expecting to purchase sometime in the fourth quarter or early in 2024.
In additive manufacturing, we continue to expand our business globally and demonstrate the benefits of our programmable Corona single-mode AFX fiber laser. During the quarter, we secured two new design wins with major OEMs for their next-generation metal additive manufacturing machines. Although, we were not initially the incumbent either of these customers, we successfully demonstrated the benefits of our Corona AFX programmable fiber laser, which offers significant productivity increases, and is enabling customers to reduce their overall cost per part. Additionally, our Corona AFX lasers are well-suited for use across a wide range of build sizes and materials and can reduce unwanted effects such as soot, spatter, and porosity that have long plagued laser powder bed fusion tools using legacy fiber lasers.
We continued to deliver new platform-level technology for the growing multi laser machine market. We delivered our first revenue product for a multi-layer machine in the third quarter, and we expect deliveries of this product to begin to ramp in 2024. nLIGHT will be exhibiting at form next week in Frankfurt, where we'll be releasing our new multi-layer products to the broader market. In Microfabrication, revenue of the third quarter of 2023 declined 32% year-over-year to $12 million, which represented approximately 24% of total revenue. Compared to the second quarter, Microfabrication revenue decreased approximately 2%. As we've discussed in prior quarters, revenue from Microfabrication continues to be at cyclically low levels globally. We believe there are three main factors for current revenue levels.
First, natural demand for our customers products remains relatively muted. Second, our customers build more inventory than typical during COVID. And third, with improving supply chains, our customers are more confident in running their businesses with less safety stock. We've also started to see some price change pressure in China, particularly in the lower end of the market. Despite the current macro challenges, we believe we remain a market leader and continue to actively engage in our customer's next generation designs. Turning to operations, we continue to make progress in our broader manufacturing strategy. In the U.S., we have fully facilitated our semiconductor automated assembly process and we have achieved our near-term target capacity plans.
We have also introduced additional product variance to the line and we continue to improve process flows. We're making progress on our manufacturing yields, which are expected to have a positive impact on gross margin improvement moving forward. Lastly, we executed a reduction in our direct labor force in Shanghai in October as we've continued to successfully transition more of our output to our contract manufacturer in Thailand and to match our current market demand. In summary, we continue to make excellent progress against our strategic objectives. In defense, we've leveraged the success we've had in directed energy into new programs and contracts. Today HELSI-2 announcement demonstrates that nLIGHT has proven its capabilities and technology differentiation to the Department of Defense, and as such is a major beneficiary of the significant increases in directed energy spending expected to play out over the next several years.
In addition to our $171 million HELSI-2 contract, we've continued to invest in the development of lasers for the broader global market, significantly increasing our global pipeline of opportunities. We remain confident that direct energy offers a significant opportunity for long-term growth in our business. In our core defense business, we are excited about the profitable growth opportunities we have in existing critical long running programs. Some of these programs are expected to be extended well into the future and at much higher unit volumes. Additionally, several of our newer programs are expected to transition to programs of record over the next year or so and offer significant long-term growth opportunities. In our commercial business, we continue to lead the market with our high power, high brightness, semiconductor lasers, and highly flexible programmable fiber lasers.
Additive manufacturing remains a bright spot for us and a key driver of our long-term growth. The benefits of our single mode Corona programmable fiber lasers, continues to proliferate through the market and we've continued to add new customers in design wins. Over time, we are well positioned to become the leading light source for metal additive manufacturing applications. I will now turn the call over to Joe to discuss our third quarter results and outlook for the fourth quarter.
Joe Corso: Thank you, Scott. As Scott mentioned earlier, nLIGHT generated revenue toward the upper end of guidance and adjusted EBITDA within the range. Although current revenue levels and a significant manufacturing transition, can lead to variability in quarterly gross margins, our vertically-integrated business model is well suited to support our growing pipeline of opportunities in Defense and Industrial. At the same time, we have been carefully managing operating expenses, working capital, and CapEx, which has enabled us to increase our balance sheet cash and equivalents to approximately $112 million, as of the end of the quarter. Turning to the third quarter results. Total revenue for the third quarter of 2023 was $50.6 million near the top-end of guidance compared to $60.1 million for the third quarter of 2022.
Product revenue was $38.1 million compared to $48 million for the third quarter of 2022. Gross margin was 20%, compared to 22% for the third quarter of 2022. Product gross margin was 24%, compared to 26% for the comparable period of 2022. Product gross margin in the third quarter was negatively impacted by lower production volumes and manufacturing variances, which were positively offset by lower overall manufacturing spending. Development gross margin was 7%, which was consistent with guidance in the third quarter of 2022. Non-GAAP operating expenses were $16 million, a decrease of $3.3 million compared to $19.3 million for the third quarter of 2022. The decrease in operating expenses was driven by a decline in employee compensation costs, primarily due to lower headcount and decreased incentive compensation, decreases in R&D project spending, and higher administrative costs allocated to development projects.
On a GAAP basis, operating expenses were $22.5 million a decrease of $4 million compared to $26.5 million for the third quarter of 2022. Net loss on a non-GAAP basis was $4.9 million or $0.10 per share, compared with a net loss of $5.1 million or $0.11 per share for the third quarter of 2022. Net loss on a GAAP basis was $11.9 million or $0.26 per share, compared to a net loss of $13 million or $0.29 per share for the third quarter of 2022. Adjusted EBITDA was a negative $1.9 million, which was at the lower end of guidance, compared to negative $1.4 million for the third quarter of 2022. Cash provided by operations $13.1 million for the third quarter of 2023, compared to cash used for operations of $2.8 million for the third quarter of 2022.
Cash provided by operations included a $10.8 million decrease in accounts receivable and a $3.3 million decrease in inventory. Net capital expenditures were $2.7 million for the third quarter of 2023 and $4.4 million year-to-date, compared to $3.5 million for the third quarter of 2022 and $16.4 million for the first three quarters of 2022. As discussed last quarter, overall CapEx in 2023 will be down significantly year-over-year. Turning to the balance sheet. Our balance sheet remains strong as we ended the third quarter with total cash, cash equivalents, restricted cash and investments of $111.8 million and no debt. Total cash and investments increased by approximately $10 million from last quarter and by $3.4 million since the end of 2022.
Our DSO for the quarter was 73 days and inventory at the end of the third quarter was $61.6 million, representing 140 days of inventory. Turning to guidance. Based on the information available today, we expect revenue for the fourth quarter of 2023 to be in range of $45 million to $50 million. The midpoint of approximately $47.5 million includes approximately $35.5 million of product revenue and approximately $12 million of development revenue. Turning to gross margin. Fourth quarter, 2023 products gross margin is expected to be in the range of 20% to 25%, and development gross margin to be approximately 7%, resulting in an overall gross margin range of 16% to 20%. Finally, we expect adjusted EBITDA for the fourth quarter of 2023 to be in the range of approximately negative $5 million to negative $2 million.
As a reminder, over the last several quarters, we have significantly streamlined our cost structure and continue to expect to return to positive adjusted EBITDA at a quarterly revenue run rate in the $55 million to $60 million range. With that, I will turn the call over to the operator for questions.
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