nLIGHT, Inc. (LASR) Q3 2018 Earnings Report, Transcript and Summary

Good evening, and welcome to the nLIGHT Third Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today’s presentation there’ll 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 Jason Willey, nLIGHT’s Senior Director of Investor Relations and Corporate Development. Please go ahead.

Thank you, and good afternoon, everyone. As the operator said, I am Jason Willey, nLIGHT's Senior Director of Investor Relations and Corporate Development. Scott Keeney, Chief Executive Officer of nLIGHT, and Ran Bareket, Chief Financial Officer, will be the speakers on today's call. If you have any questions after the call, please direct them to me at 360-567-4890, or jason.willey@nlight.net. A copy of today's earnings press release is available on our website, at www.nlight.net. In addition, you can access archived version of today's call from our website. In today's call, our discussion will contain forward-looking statements, including statements about financial projections, future business growth, trends and related factors, prospects for expanding and penetrating addressable markets, and our strategic focus and objectives. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call. We undertake no obligation to update publicly any forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this call. We have provided reconciliations of these non-GAAP financial measures against the most directly-comparable GAAP financial measures in our earnings release, which can be found on the Investor Relations section of our website. I would also like to note that members of nLIGHT’s senior management will be available to meet with analysts and investors at FABTECH in Atlanta on Wednesday, November 7th. If you’re attending the trade show and are interested in the meeting please email me at Jason.willey@nlight.net. I will now turn the call over to Ran, to go through the financials and outlook. Scott will then discuss our business and provide additional color on the third quarter. We will then be glad to take your questions.

Thank you, Jason, and good afternoon everyone. We delivered strong results across the businesses in the third quarter. Revenue, gross profit and adjusted EBITDA were all in line with our expectation as we continue to deliver to our 2018 operating plan. Revenue grew year-over-year in each of our end markets and geographic region. Revenues for the third quarter of 2018 were 51 million up 40% year-over-year and benefitted from our diverse product offerings and end market exposure. During Q3 sales to the industrial end markets were 21 million, representing 41% of total revenue and up 37% year-over-year; sales to micro fabrication end markets were 20 million or 39% of total revenue and up 21% year-over-year; aerospace and defense sales were 10 million or 20% from total revenue and grew 107% compared with the third quarter of 2017. On geographic basis sales for China were 17 million in the third quarter of 2018, or 33% of total revenue up 15% compared with Q3 2017. Sales in North America were 20 million, representing 39% of total revenues and growing 71% year-over-year; rest of the world sales were 14 million up 39%, compared with the third quarter of 2017 and 28% of total revenue. Gross margin was 35.4% in the third quarter, an improvement of almost 160 basis points year-over-year; the improvement was driven by higher volume, continue cost reduction effort and favorable end markets mix, partially offset by more aggressive price activity in the Chinese industrial end markets; the Chinese industrial end markets represent less than 25% of our overall revenue during the third quarter. Operating expenses were 13 million during the third quarter compared with 7.7 million in the third quarter of 2017. Q3 ‘18 operating expenses include 1.7 million of stock based compensation an increase of approximately $1.6 million year-over-year. As we grew the business we continue to invest in R&D and infrastructure necessary to support future opportunity. As a reminder in Q3 2017 our SG&A included a reduction of -- in expense of $1 million related to the collection of previously reserved receivable. The third quarter operating income of 5.1 million was 10% of revenues and comparably 4.6 million or 12.6% in revenues in the third quarter of 2017. Our adjusted EBITDA for the third quarter was a record 9.2 million or 18% of revenue. This compares to 6.6 million or 18.1% of revenue in Q3 2017. GAAP net income for the third quarter of 2018 was 4 million compared with income of 2.2 million during Q3 2017. GAAP EPS for the third quarter of 2018 was $0.10 per diluted share compared with $0.00 in the third quarter of 2017. Non-GAAP EPS which excludes the impact of stock based compensation and assume the conversion of all outstanding preferred stock in the previous to common stock was $0.15 per diluted share in Q3 2018, compared with $0.08 per share in Q3 2017. Turning to the balance sheet; we ended Q3 with total cash and cash equivalents of 168 million and 16 million of total debt. In early September, we completed follow-on public offering of our common stock, the company raised approximately 78 million of net estimated offering costs through the sales of 1.5 million shares of common stock; existing shareholder sold approximately 3.7 million shares of common stock. DSO at the end of Q3 2018 was 38 days, inventory at the end of the quarter was 76 million representing 98 days of inventory. During Q3 we generated $4.5 million in cash from operating activities reflecting our improvement of profitability partially offset by working capital expansion. Capital expenditures for the quarter were 2.9 million, or 5.6% of revenues. Turning to the guidance for the fourth quarter of 2018; we expect revenues to be in the range of 45 million to 49 million; at the midpoint of the range this implies year-over-year growth of approximately 79% for the full year of 2018, we expect year-over-year growth in each of our three end markets. Based on our current expectation for product mix we see gross margin for Q4 2018 in the range of 32% to 35%; recently enacted tariffs between the US and China expected to negatively impact Q4 gross margin by approximately 150 basis points; for the fourth quarter we expect adjusted EBITDA in the range of 5 million to 7 million; stock based compensation is expected to be approximately 2 million; we expect average basic shares outstanding of approximately 36.5 million and approximately 41.5 million average fully diluted shares for Q4. Our outlook for top line revenue and profitability reflect our current view into the business and incorporate increased near-term uncertainty in the Chinese industrial markets related to potential tariffs impacts and pricing dynamics. I will now turn the call over to Scott.

Thank you, Ran. And good afternoon everyone. In Q3 we again delivered to the financial targets we set forward, and we continue to generate growth that is outpacing the overall high-power laser market. This performance reflects strong customer acceptance of our technology value proposition across each of our three diverse end markets; we delivered these results despite headwinds in the industrial market in China where tariff uncertainty and aggressive pricing activity have created more challenging near-term environment. As we look to Q4 and 2019, we see growing excitement from existing and prospective customers around our recent high-power fiber laser product introductions and Corona, our programmable fiber laser. On today's call I will focus on three topics. First, I will provide more detail on results from Q3. Next I will offer an update on China as it relates industrial end market and tariffs. Finally, I will discuss our new product introductions and why we are so excited about these offerings. I will begin with comments on Q3 results. As Ran stated we grew 40% year-over-year in the third quarter as we delivered positive performance across the business; results were particularly strong in North America where record revenues were driven by growth at our core micro fabrication and aerospace and defense customers; we continue to make progress penetrating key industrial accounts outside of China with Corona helping to accelerate this activity. In the industrial market we are seeing a shift to high-power fiber lasers; during Q3 30% of our fiber laser sales were at 6 kilowatt and above which is up more than 200% from the comparable period in 2017; sales in the 2 kilowatt to 5 kilowatt range were over 40% of the fiber laser sales in Q3 2018 up almost 45% from 2017 levels. We expect these trends towards high-power fiber lasers to continue and we believe that we are well-positioned to benefit from this trend as technical and reliability challenges increase dramatically with higher power fiber lasers. In the micro fabrication market we grew 21% year-over-year during the third quarter; we saw strength in North America and Asia driven by growing volumes at our largest customers. These customer serve a wide range of end markets including automotive, consumer electronics, semiconductor capital equipment, solar and scientific research; our continued strong growth in this market reflects our technology advantage over other merchants semiconductor laser vendors in terms of power and brightness. The power and brightness combination in our packaged semiconductor lasers is enabling medium dyed pump solid-state laser manufacturers to deliver superior throughput and performance in their end lasers. This is, in turn providing cost savings and compelling ROI to their customers. This is particularly true for the growing ultra short pulse market. In the aerospace and defense we saw strong growth led by increased sales to our core defense contract customers and the US federal government; the customer activity consists of spending on existing and new programs; we also saw good contribution from government R&D contracts, which tend to be lumpier in nature. In China, we experienced seasonal softness in the industrial market, which was compounded by the uncertainty related to tariffs. In addition, we are facing aggressive price pressure in the fiber laser market in China. Despite these headwinds, we were able to grow our business in China by 15% year-over-year with expansion in both industrial and micro fabrication end markets; we are encouraged by the year-over-year trends at several key industrial customers in China we believe continue to grow their share in the cutting systems market. In China, we have focused on developing relationships with strategic customers and we are seeing the benefits of these efforts from ramping volumes in this geography. We expect further benefit from the ongoing shift to higher power fiber lasers as we see a more limited set of competitors above 6 kilowatt. To add to Ran’s comments on tariffs, we believe our manufacturing capabilities in Vancouver, Washington and in China provides significant flexibility in mitigating potential financial impact of tariffs; in Vancouver we are fully vertically integrated from the semiconductor wafer through our highest power fiber lasers. Similarly, in China, we’ve capabilities for packaging our semiconductor lasers through assembling the fiber lasers we sell into the Chinese market; over the longer term we remain confident in our ability to enhance our position in the Chinese market and improve our margins; to achieve these goals, we are focused on scaling the business, taking cost out of our products and bringing to market new products that are both differentiated and allow us to address the growing higher power segment. We've introduced several new innovative products to the market in the last two months and we are excited about how customers are responding to each of them. First we launched the most compact 3 kilowatt laser on the market to address the rapidly growing opportunity for smaller format cutting machines; like all our fiber lasers the compact 3 kilowatt is built on a proven high reliability semiconductor lasers and fiber. It incorporates our unique hardware-based back reflection protection and it is designed for easy servicing in field, even by our customers. The small size of the laser simplifies tool integration and consumes less space on shop floors. Second, we launched our differentiated programmable fiber laser, Corona is industry’s first all fiber laser that provides programmable beam sizes and shapes while maintaining full power. This new innovation in lasers frees customers from cost, complexity and reliability risks inherent in zoom optics, free space beams and other beam combination techniques. For the first time the Corona laser brings together the speed and cost advantages of traditional fiber lasers with a superior thick metal cutting quality of Co2 lasers. Our go to market strategy is to enable key customers with Corona lasers to give them differentiated product offerings. The flexibility of real-time tunable beam characteristics provide significant value for end-users and we are encouraged by the initial customer response; several of key launch customers exhibited Corona enabled tools at recent industry tradeshows and open houses and have followed up with meaningful initial orders. We see a clear trend in the market for higher powered fiber lasers and our new fiber laser products are designed to address this growing market. Our 10 kilowatt fiber laser is built on an entirely new platform, resulting in the most compact form factor with greater than 50% reduction in size; these fiber lasers incorporate our latest high power semiconductor lasers reducing our cost profile by over 30% compared with our previous generation platform; the 10 kilowatt product serves as an entry point, for nLIGHT into the ultrahigh power segment; as we move through 2019 we plan to introduce even higher power offerings. We expect initial orders for these products in 2018 and anticipate these products will begin to meaningfully contribute to financials by the middle of 2019 as volumes ramp up. In conclusion, our Q3 results demonstrate the strength of our products and growing customer acceptance across our end markets. While we are not immune from the headwinds impacts in the China industrial market our fiber laser sales in China make up less than 25% of our overall revenue, and we are encouraged by our continued growth in other geographies; as we look to the future we are well-positioned to continue to outperform the industry given our diverse end market exposure, differentiated customer value proposition and meaningful new products. In closing I would like to thank the entire nLIGHT team for their efforts during the third quarter. With that let me hand it over the call for Q&A.

[Operator Instructions] And our first question will come from Brian Gesuale with Raymond James. Please go ahead.

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

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

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

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

And our next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

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

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

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

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

Our next question comes from Patrick Ho with Stifel. Please go ahead.

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

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

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

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

Your next question comes from Tom Diffely with D.A. Davidson. Please go ahead.

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

It’s hard to say what will be the tariff impact next year and it’s very difficult to estimate what will be the mix product, what the government will do next, so it’s really hard to say, the estimate that we have currently for Q4 is based on the product mix based on what we know today, and this is that 150 basis points that we’re talking about. However, you're absolutely right, we have in our portfolio many things that we can do in order to mitigate tariff going forward assuming it will stay here for the long term, or assuming it even it will escalate as we talked about in the past, our operations and landscape that we’ve right now. The fact that we have operation in China and in Vancouver, U.S. as well will help us to mitigate some of the tariffs going forward if it will be needed.

And then you talked a lot of about pricing pressure on the fiber laser side of the business curious so what the competitive dynamics are like on the semi laser the diode side of the business are you seeing pricing pressure there?

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

[Operator Instructions] The next question comes from Mark Miller with the Benchmark Company. Please go ahead.

Wonder if you can comment you’ve introduced a couple of interesting products, but your competitors have not been basically standing still, one of your competitors announced a programmable laser recently, another competitor announced a laser they termed it which had things like 4 kilowatt laser, laser, the industry’s higher brightness, just wondering about your thoughts on these competitive products?

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

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

No, we don’t have intent, to separate the product, the way that we’re looking at our revenue is based on the end markets which will give our investor the best advantage to understand the business.

How can you gauge growth in fiber lasers if the figures are not available?

It is again the right way to look at it is based on the end markets and the end demand, this is where the demand will come from, you need to understand the different end markets we’re selling; in the most part the industrial end market we’re selling fiber laser and the most part the micro fabrication, as well as aerospace defense we’re selling diodes but that definitely can change with time, and the right way to look at it is from the demand and not from the product, that’s the way that we’re managing it also that internally.

And at this time I am showing no further questions, so I would like to turn the call back to Jason Willey for any closing remarks.

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

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