nLIGHT, Inc. (NASDAQ:LASR) Q4 2023 Earnings Call Transcript
nLIGHT, Inc. (NASDAQ:LASR) Q4 2023 Earnings Call Transcript February 24, 2024
nLIGHT, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the nLIGHT Fourth Quarter 2023 Earnings Conference Call. All participants’ will be in 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 Joe Corso, CFO. Please go ahead.
Joe Corso: Thank you, and good afternoon, everyone. I'm Joe Corso, nLIGHT's Chief Financial Officer. With me today is Scott Keeney, nLIGHT's Chairman and CEO. Today's discussion will contain forward-looking statements, including financial projections and plans for our business, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call, and we undertake no obligation to update publicly any forward-looking statement, except as required by law. During the call, we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I will now turn the call over to Scott.
Scott Keeney: Thank you, Joe. Fourth quarter revenue of $51.9 million was above the high end of guidance, driven by a strong quarter in aerospace and defense. We ended the year with approximately $108 million in backlog, an increase of 34%, compared to December 31, 2022. Gross margin and adjusted EBITDA were above the midpoint as we continue to improve our overall global manufacturing capabilities and control spending. Maintaining a strong balance sheet was a key goal during 2023. We increased cash, cash equivalents and investments by approximately $5 million, ending the year with $113 million. We have no outstanding debt, and we remain well positioned to execute against our long-term growth plan. I'd like to discuss key highlights from the year.
Operationally, we've significantly transitioned our manufacturing base and have improved our global manufacturing capabilities. Prior to 2023, we relied on our Shanghai facility to assemble the vast majority of our semiconductor lasers in a substantial portion of our fiber lasers. From a revenue perspective, almost all of our commercial revenue historically has been dependent upon products or components that were assembled in Shanghai. Today, we've reduced this exposure to below 10%. To accomplish this, we established an automated manufacturing line in Camas, Washington and qualified and ramped a third-party contract manufacturer in Thailand. Our U.S.-based manufacturing enables us to distinctly serve the defense market, while our outsourced manufacturing partnership offers a scalable and flexible capacity for our commercial business.
2023, also marked our first full year of working with our new ERP system. The new ERP system has enabled us to streamline a number of processes more efficiently operate our business and provides a stronger platform to support our long-term growth. Turning to revenue by market. Aerospace and defense remains a core area of focus for nLIGHT as well as a long-term growth opportunity. In 2023, we added significantly to our backlog in both directed energy and other areas of defense. In directed energy, we awarded over $200 million of new contracts in 2023. After the successful demonstration and formal acceptance of our 300-kilowatt beam combined laser, we announced in May an $86 million contract to produce a high-energy laser prototype for the next phase of development in support of the U.S. Department of Defense's High-Energy Laser Scaling Initiative called HELSI.
In November, we announced the expansion of this award $171 million to scale laser source power to the megawatt class with improved being quality, size and weight. We also announced that we were awarded a $34.5 million contract to provide a high-energy laser in support of the U.S. Army's Directed-Energy Maneuver Short-Range Air Defense or DE M-SHORAD program. DE M-SHORAD is a component of the U.S. Army's broader modernization strategy for air missile defense. It focuses on integrating a 50-kilowatt class laser weapon into a striker combat vehicle to provide defensive capabilities against unmanned aircraft systems, rockets, artillery, mortar, and rotary and fixed-wing aircraft. Looking forward, directed energy remains an important and significant growth opportunity for nLIGHT.
We are leveraging our deep technical expertise and U.S.-based manufacturing capabilities and capacity to deliver strong execution across critical domestic directed energy programs. The demand for directed energy lasers continues to grow as the number of geopolitical conflicts is increasing and the type of threats against the U.S. and its allies continues to favor the deployment of directed energy lasers. We are finally seeing high-energy lasers moving out of the laboratory and into the field. We remain closely aligned with multiple large well-funded domestic programs to date, and our international pipeline of opportunities continues to grow. Outside of directed energy, we remain engaged across multiple long-running defense platforms that we expect to run for many more years, if not decades.
In 2023, we added several new programs that offer significant long-term growth opportunities. By continuing to invest in our core manufacturing and technology capabilities, we expect to compete for additional programs in the future. For the full-year of 2023, aerospace and defense revenue increased by 4% year-over-year to $91.4 million, representing 44% of total revenue. Aerospace and defense development revenues increased by 8% to $53.3 million, partially offset by a slight increase in aerospace and defense product revenues. For the fourth quarter, aerospace and defense revenue decreased by 20% year-over-year to $26.7 million, representing 52% of total revenue. Development revenues increased by 24% to $14 million, and aerospace and defense products revenue increased by 15% to $12.7 million.
Improvement in fourth quarter defense revenue reflects an increase in both the contracts for directed energy and in product sales. Turning to our commercial markets. We've seen a significant transformation in the industrial market over the last several years. In Q2 2018, the quarter of our IPO, only 30% of our industrial revenue was from customers outside of China. For the full-year of 2023, over 90% of our revenue was from customers outside of China. This equates to a more than doubling of industrial revenue outside of China over a five-year period. Today, nLIGHT is focused on developing innovative solutions, largely built upon core Corona programmable fiber laser technology, to customers in cutting, welding and additive manufacturing markets.
In cutting, we continue to leverage our core programmable technology as a competitive differentiator in the market. We continue to see a trend towards higher power in the cutting market as many end customers seek flexible solutions that we can address with our programmable lasers that deliver superior edge quality and to be optimized across a wide range of applications. In 2023, the percentage of our sales of cutting programmable lasers reached a new record as more customers adopt these solutions. At the same time, Growth in these products was offset by declining sales in our nonprogrammable fiber lasers, primarily due to pressure from domestic Chinese suppliers in the lower end of the market. In welding, we continue to focus on electric vehicle applications for both the lasers and process monitoring solutions.
While our overall business in welding today is relatively small, we believe there could be a significant opportunity for our range of laser and process monitoring solutions. The design-in process for welding solutions can be lengthy and requires significant interaction between laser vendor, OEM and end user. As such, we believe that the current supply-demand imbalance in electric vehicle battery actually offers nLIGHT a better opportunity to work with customers in both our apps lab and theirs to demonstrate the advantageous nLIGHT solutions. In 2023, we are pleased that several top-tier battery manufacturers purchased nLIGHT process monitoring, core laser solutions or both. Over the next several quarters, we expect to introduce new products that address many of our customers and potential customers' pain points, thereby affording an incremental opportunities for growth in this market.
In additive manufacturing, we continue to see strong long-term growth prospects. In 2023, we continue to demonstrate the capabilities of Corona AFX, our single-mode programmable fiber laser, secured multiple new design wins and introduce new higher power products to the multi-laser tool market. Our products have helped customers increase productivity and lower cost per part. To further address this growing market, nLIGHT has developed a mutual laser design that incorporates multiple Corona AFX lasers into a single integrated subsystem that offers significant benefits. Our modular approach reduces cost and complexity for power and thermal management and greatly simplifies integration into OEM machine tools. 2023 industrial revenue declined 22% year-over-year to $71 million, representing 34% of total revenue.
Revenue from cutting increased slightly year-over-year, but was offset primarily by a decline in revenue from additive manufacturing, where a large customer in 2022 did not repeat in 2023. Our engagement in metal additive manufacturing has been broad. We work with both innovative early-stage companies as well as many of the long-standing market leaders. We are encouraged with the traction that we are getting across the spectrum of customers, but this market is rapidly developing, and as such, our revenue can increase or decline significantly in a given quarter or year as our customers continue to scale and demand for our lasers can be lumpy. Fourth quarter industrial revenue decreased by 35% year-over-year to $15 million, representing 29% of total revenue.
The year-over-year decline was driven by lower sales of nonprogrammable lasers in cutting and lower sales in. In microfabrication, we believe we remain the market leader for high-power, high-brightness semiconductor lasers where our lasers are critical to manufacturing processes in a diverse range of applications, including auto, consumer, and communications, electronics, display, medical and semiconductor end markets. We are optimistic about continued growth in our medical laser business. Our medical lasers enable a range of applications, ranging from therapeutic surgical to aesthetic dermatological procedures. During 2023, we saw measurable growth from existing medical customers and we were awarded a design win from another large strategic customer that has the potential to further improve the growth profile of this business over the next several years.
2023 microfabrication revenue declined 24% year-over-year to $47.5 million, representing 23% of total revenue. Fourth quarter microfabrication revenue decreased by 10% year-over-year to $10.2 million, representing 20% of total revenue. Macroeconomic headwinds contributed to sluggish demand and inventory digestion through 2023 and in the fourth quarter. In summary, 2023 was an important transition year for nLIGHT. Operationally, we pursued a derisking and global manufacturing strategy that is well positioned to support our focus on two key growth areas, aerospace and defense, and additive manufacturing. As I look forward to 2024, I'm optimistic that we can return to growth this year. Although we still face an uncertain macroeconomic environment, we remain deeply engaged with our strategic customers and the work we are doing in defense provides good visibility into 2024 and beyond.
From a financial perspective, our funded backlog plus contract value exceeded $300 million at the end of the year, the highest in our history. I'd like to thank all the nLIGHT employees for their hard work and execution over the past year. They continue to deliver great results for our customers and are the critical driver of building an enduring dual-use technology company. With that, I will turn the call over to Joe to discuss our fourth quarter and full year financial results.
Joe Corso: Thank you, Scott. Total revenue in the fourth quarter of 2023 was $51.9 million, above the top end of guidance and up 2% compared to $50.6 million in the third quarter of 2023, but down 8% compared to $56.7 million in the fourth quarter of 2022. The decrease in revenue from the industrial and microfabrication markets was offset by an increase in revenue from the aerospace and defense market. The primary driver of our Q4 revenues above the high end of guidance was upside defense revenue in the fourth quarter that had originally been forecasted for the first quarter of 2024. Product revenue for the fourth quarter of 2023 was $37.9 million, compared to $38.1 million in the third quarter and $45.4 million in the fourth quarter of 2022.
For the year, total revenue in 2023 was $209.9 million, a decrease of 13% compared to $242.1 million in 2022. The decrease in total revenue consisted of a $36 million or 19% decrease in product revenue that was partially offset by a $3.9 million or 8% increase in development revenue. The decrease in product revenue for 2023 was driven primarily by lower customer demand in industrial and microfabrication while the increase in development revenue was the result of new contracts in the A&D market. Revenue from the China market in 2023 decreased $9.4 million or 44% to $11.9 million compared to $21.3 million in 2022. Revenue from the China market represents approximately 6% of total revenue in 2023 compared to 9% of total revenue in '22 and 21% of total revenue in 2021.
Turning to gross margin. Total gross margin in the fourth quarter of 2023 was 19%, above the midpoint of guidance compared to 10% in the fourth quarter of 2022. Products gross margin in the fourth quarter of '23 was 22%, compared to 11% in the fourth quarter of 2022, which included approximately $3.8 million related to restructuring activities and inventory reserves. Development gross margin was 9% in the fourth quarter of 2023, compared to 7% in the third quarter of 2023 and 8% in the fourth quarter of 2022. For the year, total gross margin was 22% in 2023 compared with 21% in 2022 and products gross margin was 27% in '23 compared to 25% in 2022. The improvement in gross margins in 2023, compared to 2022 was driven by a reduction in variable manufacturing costs and improved product mix that was partially offset by lower production volumes and lower absorption of fixed manufacturing costs.
Full-year 2023 gross margin benefited from the restructuring we executed in the fourth quarter of 2022 as it enabled us to reduce overall costs and reposition our manufacturing footprint for long-term growth. Turning to OpEx. Non-GAAP operating expenses were $17.4 million in the fourth quarter compared to $19.5 million in the fourth quarter of 2022. For the year, non-GAAP operating expenses were $67.2 million compared to $76.3 million in 2022. The year-over-year decrease in operating expenses was the result of planned decreases in headcount and lower project-related spending based on our restructuring activities in the fourth quarter of 2022. We continue to review the appropriate level of operating expenses for our business and we believe our current level of OpEx is sufficient to support our long-term growth objectives.
Adjusted EBITDA for the fourth quarter of 2023 was a loss of $3.3 million near the midpoint of guidance compared to a net loss of $9.5 million in the fourth quarter of 2022. Adjusted EBITDA for 2023 was a loss of $4.1 million compared to a loss of $8.8 million in 2022. Adjusted EBITDA loss narrowed year-over-year despite lower revenues due to improved gross margins and a decrease in operating expenses. Non-GAAP loss in the fourth quarter of 2023 was $6 million or $0.13 per diluted share, compared with a non-GAAP loss in the fourth quarter of '22 of $12.3 million or $0.27 per diluted share. Net loss on a GAAP basis in the fourth quarter of 2023 was $13.2 million, $0.28 per diluted share, compared with a GAAP net loss in the fourth quarter of 2022 of $22.7 million or $0.50 per diluted share.
Net loss on a GAAP basis in the fourth quarter of 2023 includes restructuring charges of approximately $800,000 compared to restructuring charges in the fourth quarter of 2022 of $3.9 million. Non-GAAP net loss in 2023 was $13.6 million or $0.30 per diluted share compared to non-GAAP net loss in 2022 of $22.3 million or $0.50 per diluted share. On a GAAP basis, net loss in 2023 was $41.7 million or $0.90 per diluted share compared to a net loss in 2022 of $54.6 million or $1.23 per diluted share. In addition to higher gross margins and lower operating expenses, net loss and non-GAAP loss were positively impacted by an increase in investment income that we generated from investments. Turning now to the balance sheet. Our balance sheet remains strong as we ended 2023 with total cash and investments of $113.1 million and no debt.
Total cash investments increased by $4.7 million in 2023. Cash provided by operations in 2023 was $10.1 million, compared to a use of cash in operations of $14.5 million in 2022. Capital expenditures in 2023 was $5.3 million compared to $21.4 million in 2022. We reduced inventory from $62 million at the end of the third quarter to $53 million as of December 31, 2023, which represents 122 days of inventory. Our DSO for the quarter was 65 days. Maintaining a strong balance sheet, particularly in light of the macroeconomic headwinds we face in our commercial markets in 2023 remains a key focus of the company. Strong OpEx control, coupled with careful working capital management and CapEx investment, has enabled us to maintain a balance sheet that we believe will enable us to achieve our long-term growth objectives.
Turning now to guidance. Based on the information available today, we expect revenue for the first quarter of 2024 to be in the range of $42 million to $46 million, which is lower than otherwise expected due to the acceleration of some customer demand in the fourth quarter, as I discussed a few moments ago. The midpoint of approximately $44 million includes approximately $31 million of product revenue and $13 million of development revenue. We are optimistic that our revenue will grow for the full-year in 2024. As of December 31, we had $108 million of backlog, an increase of 34% versus December 31, 2022. And in addition, we are executing against contracts with more than $200 million of aggregate value. Although significant execution challenges remain, given the highly technical nature of our defense work, particularly in directed energy, we believe we are aligned with the right programs and customers to drive growth in 2024 and beyond, led primarily by our defense business, we expect to deliver sequential revenue growth in the second quarter, and we expect further growth in the second half of the year.
Turning to gross margin. First quarter 2024 product 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 15% to 20%. As we've mentioned previously, as a vertically integrated manufacturing business, gross margin improvement is largely dependent on production volumes and absorption of fixed manufacturing costs. In Q1, we expect to have poor absorption of our manufacturing costs due to a trough in revenue. However, we expect gross margin to improve later in the year as production volumes and revenues increase. Finally, we expect adjusted EBITDA for the first quarter of 2024 to be in the range of approximately negative $7 million to negative $5 million.
and we continue to expect breakeven adjusted EBITDA at quarterly revenue levels of $55 million to $60 million. With that, I will turn the call over to the operator for questions.
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