nLIGHT, Inc. (LASR) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the nLIGHT First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Joseph Corso, Vice President, Corporate Development and Investor Relations. Sir, please go ahead.

Thank you, and good afternoon, everyone. With us today are Scott Keeney, nLIGHT's Chairman and CEO; and Ran Bareket, Chief Financial Officer. 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 over the call to Scott.

Thank you, Joe. Starting on Slide 3. Q1 was a strong start to the year for nLIGHT. We generated approximately $61 million of revenue, which was at the upper end of the guidance we provided in February and the highest first quarter revenue in our history. Q1 revenue increased by 42% year-over-year and was driven by broad-based growth in each of our end markets. We continued to see strong secular demands from our high-power lasers, and there are multiple key themes that continue to drive our growth. In Industrial, lasers continue to displace legacy technologies and enable new manufacturing processes. Examples include electric vehicle production and metal additive manufacturing. In Microfabrication, lasers are key to enable advanced electronics and next-generation networks. In Defense, directed-energy lasers are becoming a critical requirement to address emerging threats to our national security. The driven trends we saw from our global semiconductor and fiber laser customers during the quarter have continued into Q2. We remain confident about the prospects for a strong 2021 and our long-term growth trajectory. Turning to Slide 4 to discuss revenue by end market. Our Aerospace and Defense segment had another strong quarter. Q1 revenues increased by 47% year-over-year and represented 40% of our total revenue in the quarter. Performance this quarter was driven by the strong base of business we have with our long-term core defense customers and the continued progress in directed energy. In directed energy, we continue to improve our performance across our vertically integrated technologies from high-power diodes, fiber amplifiers, and beam delivery technologies, and we continue to believe in the long-term opportunity we have in this market. In the Industrial market, our business grew 34% year-over-year in the first quarter, which was driven by growth from both our Chinese and rest of world customers. We saw an increase in our rest of the world customers order patterns, as they continued to ramp up to meet their customer demand forecasts. Driven by increasing demand for our programmable products, our revenue with several key ROW customers was better than we expected, and we increased the number of their products into which our lasers are designed. In China, we saw the typical Lunar New Year slowdown, but demand for our highest power fiber lasers increased meaningfully year-over-year. We also have continued to make excellent progress in additive manufacturing. The response we've received through our newly released programmable single-mode laser, which we call the AFX-1000 has been positive. Multiple leading metal additive manufacturing tool companies are in the process of qualifying our lasers based on the improvements in build rate and part quality. In Microfabrication, our sales increased 46%, compared with the first quarter in 2020. We grew year-over-year revenue across all geographies. Revenue from our ROW customers grew significantly year-over-year and exceeded our internal expectations. We believe that improving demand from our customers is being driven by increased demand for laser processing solutions required to manufacture 5G infrastructure and handsets and advanced electronics. Our high-brightness, high-power semiconductor lasers offer the best performance in the industry and are the critical enabling component of many of the leading pulsed nano, pico, and femtosecond lasers available in the market today. We continue to develop innovative microfabrication solutions that address advanced electronics, medical, and other markets. Turning to Slide 5, to discuss revenue by geography. In the first quarter, we increased our revenues in all geographies. In China, Q1 revenues grew 29% year-over-year to $15.6 million. First quarter sales to customers outside of China grew 47% year-over-year to $45.8 million, representing 75% of our total revenue. I will now turn the call over to Ran, to discuss nLIGHT's first quarter financial results.

Thank you, Scott, and good afternoon, everyone. Beginning on Slide 7. First quarter revenue of $61.3 million was in the upper end of our guidance range, up 42% year-over-year. First quarter product revenue was $47.3 million, an increase of 28% above the first quarter of 2020, and first quarter development revenues was $14 million, an increase of 123% above Q1 2020. Although, we have stopped reporting Nutronics as a separate revenue line giving the acquisition closed more than a year ago, and Nutronics has become an integrated part of our overall business. The increase in development revenue in the first quarter of 2021 was mainly driven by higher development revenue related to direct energy project work that Nutronics performed for the US government. Turning to Slide 8 to provide more detail into our gross margin. Overall gross margin was 28.8% in the first quarter versus 22% in the comparable period of 2020. Product gross margin was 35.8% in the first quarter, compared to 24.5% in the first quarter of 2020. Our year-over-year margin improvement was the result of higher sales to non-China industrial, global microfabrication, and aerospace, defense customers. Turning to Slide 9. Non-GAAP operating expenses were $15.1 million during the first quarter, compared with $12.1 million in Q1 2020. The majority of the year-over-year increase was related to higher R&D spending. As we've discussed in the past, we will continue to prioritize R&D spending in order to continue to capitalize on the various organic opportunities we see in our business. Turning to Slide 10. Non-GAAP net income in the first quarter was $2.6 million, compared with a loss of $3 million during the first quarter of 2020. Non-GAAP EPS for the first quarter was $0.06 per diluted shares, compared with a loss of $0.08 per share in the first quarter of 2020. On a GAAP basis, EPS for the first quarter was a loss of $0.15, compared with a loss of $0.20 during the first quarter of 2020. First quarter adjusted EBITDA was $6 million or approximately 10% for sales. This compares with $237,000 in Q1 2020. Our year-over-year improvement in adjusted EBITDA in Q1 was a result of higher gross profit and continued OpEx discipline. In the first quarter, we generated approximately $4.1 million in operating cash versus a use of $1.1 million in Q1 2020. Our capital expenditure in Q1 2021 was $3.2 million versus $15.5 million in the first quarter of 2020, which included approximately $12.5 million to purchase our Camas facility. Capital expenditure in the quarter was related mainly to capacity expansion for our direct energy operation and increased facility automation. Turning to Slide 11. We ended Q1 with total cash and cash equivalents of approximately $186 million. Included in our Q1 ending cash balance is approximately $83 million we raised from our March follow-on equity offering. DSO for the first quarter was 47 days. The increased DSO was related mainly to the timing of revenue during the quarter. Inventory at the end of the quarter was $59 million, representing 170 days in inventory, which was slightly higher than prior quarter as we continue to invest in inventory to support increased customer demand trends. Turning to Page 12 for our outlook for Q2. Based on the information available today, we expect Q2 revenues to be in the range of $62 million to $68 million. At a midpoint of $65 million, this includes approximately $51 million of product sales and approximately $40 million of development sales. The midpoint of our revenue guidance implies year-over-year growth of 25%. Based on our current expectation for product mix, we see gross margin for Q2 in a range of 26% to 30%. Product gross margin is expected to be in a range of 32% to 36%. We expect development gross margin to be approximately 6.5%. For the second quarter, we expect adjusted EBITDA to be in the range of $5 million to $8 million. Our Q2 adjusted EBITDA range assume that non-GAAP OpEx increase slightly and depreciation and amortization is approximately $3.9 million. We expect Q2 average basis shares to be approximately 43.3 million, which includes approximately 2.5 million shares issue in conjunction with our March follow-on equity offering. With that, I will turn the call back over the operator for questions.

[Operator Instructions] And our first question today comes from Jed Dorsheimer from Canaccord Genuity. Please go ahead with your question. Mr. Dorsheimer, is it possible your phone is on mute?

Oh, yes. Sorry. Can you hear me now? Perfect. So, congrats on the strong quarter. I guess, the first question is, if I look at your results compared to some others in the space, you seem to be - you're executing above some of your competitors, and I'm wondering whether or not that seems to be market-related in terms of the exposure. Or, I guess, what do you attribute some of the stronger growth relative to competition or is that market share gains?

Yes. Jed, I suppose it's always been both. I think the high-level way to think about things is that, in the quarter we had 75% of our sales were outside of China and that's been a core part of what we had focused on as expanding our sales in the rest of world industrial markets in cutting, welding, and additives. And in addition, in aerospace and defense, in direct energy. And the general market there, we believe are one that is attractive and I think we're well positioned. So, our product development and releases in those categories, it continues to go well. So I think the Q1 numbers reflect and sort of further demonstrate that focus and indeed the prospects that we see in those markets.

That's helpful, Scott. I guess, just one more question and then a follow-up and I'll jump back in. So, just with respect to EV and the trend of the move toward from traditional internal combustible engine-type manufacturing to that of electric vehicles. There seems to be a much higher level of automation from welding and cutting perspective, particularly around battery. I was wondering if you might just provide an update on that industrial side in terms of what you're seeing there. And then as my - as a follow-up, on the VCSEL side of things or upstream manufacturing, I know you have your own manufacturing, any issues in terms of from a capacity perspective? And I'll jump back in queue. Thanks.

Yes, good, Jed. So on your first question, yes, the sort of the broad secular trend toward EV is one that again provides an attractive growth opportunity for lasers because the intensity of using lasers for EV from the battery processes, all the way through to light-weighting the vehicles in welding and cutting, provides for more opportunities for lasers. And again, I think it's a market that will continue to expand and offer more opportunities. And then on your second question around our fab capacity, we're in a good position with our fab capacity. We have made the CapEx investments over the last few years in that, the front-end capacity. We continue to expand in the back-end and we continue to expand notably in automation there. And so, we don't see internal capacity constraints on that front.

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

All right. Thank you. Good afternoon. Scott, I know you're removed probably a bit from this, but what I'm wondering is, with all the talk about component constraints and whatnot, are you at all concerned that some of the folks you're selling to might be experiencing some disruptions, whether it's in the industrial market or perhaps to some of the solid state laser companies that sells that might be seeing some impact from their customers. I don't know if you're seeing or hearing any of that.

Yes. That's a very good question, Jim. And no, absolutely, it's one of the topics that I've been spending more time on, and I like the way that you're approaching it, working with our customers because we are seeing across all kinds of different supply chains, various gaps. And so, for example, our industrial customers are facing gaps in terms of being able to hire people, being able to source certain components. And so, they're all very specific detailed examples. But yes, we do see that playing out and we do work closely with our customers. I'll be out visiting with one of our key customers and we've been exchanging notes on different strategies to address these topics. So, yes, we don't see it as a fundamental issue that we're facing, but there are a number of gaps that we do see out there.

Got it. And the follow-up question I have is just with respect to additive, you guys have been in additive for a while. And so, I think you probably bring some - a bit of a unique perspective to what's happening in the market. And so, what you're seeing? Do you - the activity that you're seeing, we talked about being qualified at some of the newer customers. Are you seeing a larger market opportunity? Are there share gains? Is this market moving to a different level than, say, versus a couple of years ago?

Yes, good. We have been involved in additive for quite some time, and we are seeing a very positive migration to fulfilling the promise of additive. It certainly will take time to displace higher volume applications, but we are seeing progress across a wide range of different customers that have some different approaches for the technology, but I think a unifying theme across them all is that, it tends to push the requirements on a very high-performance laser, and we're well positioned there. In additive, you need the laser, you need the ability to - the various software that is included there and other mechanical processes, but that laser is a critical part of that laser sintering process. And what we're seeing is, product development from the customers that is fulfilling that promise and then using lasers, using more lasers, using some higher power lasers, using programmable lasers and using lasers that have higher performance of beam quality and that has served us very well.

Any way to size how this - what this might represent of your Industrial business?

Yes. We're not breaking that out right now, but we do see it as the fastest-growing segments of our business there. And we're looking forward to some of the trade shows this fall, where new products will be introduced. And certainly, we'll work to try to get more information out to you all on what we see going on there.

And our next question comes from John Marchetti from Stifel. Please go ahead with your question.

Thanks very much. I was wondering, Scott, if you could just take a moment and talk about some of the success you obviously saw this quarter in the rest of world. How much of that you think is a function of the overall environment getting a little bit better and things starting to open up a little bit post-pandemic versus sort of the products that you've introduced over the last year and year and a half gaining more traction? So if you could just maybe talk a little bit about that dynamic and maybe how we think about it playing out over the next 12 to 24 months?

Yes, happy to John. And similarly, I think it's a bit of both. What we're seeing is, our customers by and large are doing well and many of them have discussed with me how they're effectively sold out right now and really struggling to meet the demand that they see. So there is that overall market growth that we see. In addition to that, kind of further amplifying that is the progress we continue to make on our design wins. And when you get into the rest of the world, it takes longer to get those design wins. We've been working on them for some time, and we're making progress with succeeding, even my expectations in a few key customers as they adopt, again, our newer power levels and most notably the programmable lasers that we offer. So, both factors are working together. Again, we're looking forward to some of these trade shows, hope that FABTECH in Chicago will take place in September. And certainly, that will be a time where there'll be, I think, much more information about some of the new products that are out there.

Great. And then maybe just as a follow-up, on the programmable laser side, just curious in terms of feedback that you received, where customers see that outperforming. Some of the competition that's out there because it's a question we get a fair bit about where it really differentiates versus some others out there. So, would appreciate your perspective on that.

Yes, good. I think that the whole concept of a beam that can be modified for the material process is one that, again, has been around for quite some time. But in terms of the real verified set of products, that's really been over the last few years that that's really expanded and we're seeing that validated across all the end markets in the industrial markets. And in cutting, I think we've got a distinct value proposition in that space. And then similarly in the additive space, we know of no other product that can hit the specs that we can hit in that space. In welding, there are a few other examples out there, and I think, again, it validates the need for programmability, but there's a few different ways to provide for that in that space. So, cutting and additive were at least for us with our particular products today, we have greater distinction.

And our next question comes from Paretosh Misra from Berenberg. Please go ahead with your question.

Hi, thank you. Good afternoon. A question on the pricing trends that you're seeing in the industry - in the laser industry. I was wondering if you could comment on that. And I'm asking because there have been some signs of inflation in parts of the semiconductor market. So just curious if you're seeing some of those signs of inflation in lasers as well.

Yes, good question. So, generally, lasers have continued to improve performance and the price performance has improved dramatically, which has allowed the displacement of other legacy technologies and we see that continuing. We continue to drive our costs down through new products, higher performance, and better yields. And so we see that continuing. So, we don't see inflation directly in anything that I could note today in lasers. We certainly see it in various markets that we serve. Certainly, metal prices and other examples abound for where there are signs of inflation, but we don't see it directly in lasers.

Got it. And you haven't announced price hikes for your products in recent months either on the back of that?

Correct.

Got it. Got it. And then, I mean, realizing your Industrial Laser business is not just China, it's global. But there have been some weakness in industrial indicators coming out of China recently. So just wondering if you're seeing some of that macro level weakness in your customer order patterns in China or not so much?

Well, as you said, for us 75% of our sales are outside of China, but in China, we did see growth. We're seeing continued opportunities for growth in China. And how those PMI metrics or other metrics may affect the market there, hard to say. So it's not the core set of metrics that we are focused on, and we do see continued growth opportunities for us.

Our next question comes from Greg Palm from Craig-Hallum Capital Group. Please go ahead with your question.

Yes. Thanks. Hey, everyone. I guess, just following up on the last question. I mean, based on what you've seen in April and maybe the first week here in May, I mean, are you seeing any change in demand trends either by geography or by end market?

Yes. The outlook that we provided reflects what we see in terms of continued growth. And it's nice now to be vaccinated and traveling and seeing customers and getting even deeper insights and certainly, what I'm picking up in those conversations is that, many of our customers are seeing demand that's exceeding what they had anticipated. So, yes, we see support for continued growth. Q2 in China is always typically a stronger quarter. And then outside of China, coming out of COVID, there is a fair amount of pent-up demand that we can see out there.

Got it. Make sense. And then on gross margins back-to-back quarters of 36% for product and if I look at Q2 revenue guide for product, you're guiding nicely above this past quarters, but gross margin for that segment is expected to be down a couple hundred basis points, if my math is right. So, I'm guessing that's just mix-related, but wanted to confirm that or ask if there was something else that I was missing.

No, you are not missing anything. You can see a nice improvement in the last few quarters, significant improvement in the margin. And when I'm talking about the margin, I'm talking mainly about product margin, that's the right measurement; otherwise, you will need to consider the mix between development and product. But when you are looking at the product margin, you will see a nice improvement. The guidance that we provided on the product margin, there is some slight change in the mix. This is why we believe that it might get a little bit lower, but going forward, again, keep in mind that will the growth that we are talking about is coming from industrial outside of China. It's coming from aerospace and defense, DE. All those revenues are coming with a higher average margin that we have right now that will help us to improve the margin. And I again can you just repeat what we said last time that we are feeling comfortable that in the future that 40% margin, product margin that we talked about, it can be definitely reachable.

Our next question comes from Mark Miller from The Benchmark Company. Please go ahead with your question.

I'm just wondering what percent of lasers with powers above 6-kilowatt were in terms of total fiber sales.

Let's see. Hold on, Mark. Let me pull it up to make sure I give you precisely the right number here, above 6-kilowatt in Q1 was 54%. So, we do see continued migration to higher power fiber lasers and we continue to release new products that benefit from that trend.

One of your competitors this week said during their earnings call that they had picked up some share in ingestible beam market. I'm just wondering any comments on that.

Boy, I don't know what that was referring to. I think that, again, what we call programmable beam technology really is the key overarching trend in the industrial markets. And so, we see that continuing to drive all the end markets. So I'm not sure what they were referring to. But we do see it continue to drive all those markets.

And our next question comes from Tom Diffely from D.A. Davidson. Please go ahead with your question.

Yes. Good afternoon. Scott, I was hoping if you could tell us a little bit more about the sales cycle for the rest of the world industrial markets, and maybe some way that we can track your progress over time in this space?

Yes. As I mentioned previously, Tom, it's a longer sales cycle, and then it depends on the country. Certainly, some of the key players - larger players in Europe and Japan can be on the longer side and it's multiple years really to develop the relationships to have the full product portfolio. And so, there aren't great metrics that I can share. But certainly, you can get insights as you see the products released by our customers. As I said, the trade shows this fall are good examples of that. But we do - we are making progress with key OEMs across all of the industrial segments and those are investments that we've made over the last, in some cases, five years and we'll see more as we continue to expand the products.

Okay. That's good to hear. And then, Ran, on the margin front. It seems like you typically have a fairly wide margin for just, yes, quarter much more so than a lot of companies. I'm curious, is there a reason. Is there not a lot of visibility into which tools are going to ship or what causes the 400 basis point of range in your gross margin guidance?

It's only mix. It's only mix. And, again, there could be a mix between the quarter between the end markets, aerospace, defense, industrial, etc., and within those end markets, for example, industrial in China and the rest of the world. All that different mix revenue is impacting our margins. And typically, in Q2, we know that China revenue will be higher, probably like it used to be every quarter after the Chinese New Year. So, therefore, we might see a slight reduction in margin quarter-over-quarter. But again, the trend is what is important going forward and for the long run, the revenue mix that we are seeing going forward and the growth for the Company will help us to improve that margin.

Our next question is a follow-up from Paretosh Misra. Please go ahead with your follow-up.

Thanks guys. Thanks for taking my follow-up. I just wanted to go back on the earlier question on electric vehicle battery manufacturing. Where in that battery manufacturing do you see the biggest opportunity for nLIGHT? Is it cutting or welding? And any other color you provide in terms of what types of lasers that you're selling in terms of power or wavelengths?

Yes. I'm happy to comment. It's across both welding and cutting. I'd probably emphasize welding more and it ranges from the battery processes themselves through the manufacturing of the vehicles. So, it is really a fairly wide range of different applications. The power levels here tend to be lower than what we'd see in the very high-performance industrial cutting applications. And once again that programmable beam is pretty universally critical across this wide range of applications. So, again, I think the lasers are in a very strong - the whole category of lasers is well-positioned to support the trend to move to EV vehicles.

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the conference call back over to Joseph Corso for any closing remarks.

Yes. I just wanted to thank everybody for their time this afternoon and for your continued interest in nLIGHT. We'll be participating in various events over the next couple of months, and we look forward to speaking with everybody during the quarter. Have a great afternoon. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may disconnect your lines.