nLIGHT, Inc. (LASR) Q4 2022 Earnings Report, Transcript and Summary

Hello and welcome to the nLIGHT Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Chief Financial Officer, Joseph Corso. Joe, 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 Joe. Our revenue performance in 2022 reflects the continuing evolution of our business model. Revenue declined 10% to $242 million driven by a 62% decline in revenue to customers in China, which now represents less than 10% of our business. We also experienced a 23% decline in our government funded research programs due to timing of key programs. However, during 2022, we saw continued growth in our product revenue outside of China that grew 14% to a record $171 million. In particular, strong execution of our strategic growth initiatives enabled us to achieve 21% growth in industrial and Microfabrication revenue outside of China this year, which grew to record $133 million, more than double the revenues achieved in these markets in 2020. There are two fundamental themes I would like to highlight and describe further on our call today. Our focus on markets outside of China, and our progress on key operations initiatives. I will begin with our focus on key growth markets outside of China. In Q2 of 2018, the quarter of our IPO, revenue from customers in China represented over 45% of our total revenue, while in Q4 of 2022, China represented just 9% of our revenue. As our exposure to markets in China has decreased, we have increased our products revenue from customers outside of China by more than 50% since 2020. In the Microfabrication end market, full-year 2022 revenue declined approximately 11% to approximately $62.8 million due to a 51% year-over-year decline in China that began in the middle of the year and remained soft through Q4. COVID related lockdowns and macroeconomic softness in China and significant impact on our revenue during the year. But unlike the industrial cutting market in China, the Chinese Microfabrication market remains an attractive market for end light. We continue to supply a wide range of high power high brightness semiconductor lasers to a diverse set of customers in China, and we continue to see strong design and activity in China. We expect revenue to increase as lingering COVID effects dissipate customer inventories decline and the China macro environment improves. Outside of China, 2022 revenue grew approximately 11% year- over-year. We saw strong growth throughout the year that culminated in record quarterly revenue in the third quarter. We continue to believe that nLIGHT’s micro fabrication business will benefit as lasers continue to be adopted in a wider range of manufacturing processes in the auto, consumer, communications, electronics, display, medical and semiconductor end markets. We are particularly encouraged by the adoption of our laser products for medical applications, which continue to gain traction with customers, and we expect to be more significant contributor to end light revenue during the course of 2023. As we anticipated in Q4, the demand environment in Microfabrication was soft during the quarter. Total Microfabrication revenue decreased by 34% year- over-year to $11.4 million or 20% of total revenue, which on a percentage of revenue basis is a record low. Turning to the industrial end market, industrial revenue declined 4% year- over-year in 2022 to approximately $91.1 million, representing 38% of sales. Outside of China, however, industrial revenue increased 27% year- over-year to a record $81.9 million and more than doubled versus the full-year 2020. On a percentage basis, industrial revenue from customers outside of China increased from 45% in 2020 to nearly 90% in 2022. In the fourth quarter, industrial revenue increased 6% year- over-year to $23 million. More importantly, industrial revenue from customers outside of China increased 13% to approximately $21.2 million a record high. nLIGHT’s industrial business transformed significantly over the last several years. When we went public in 2018, our revenue was driven by delivering increasingly more powerful lasers to China-based customers, primarily in the metal cutting market. And over an 18-month period, the proportion of sales that we categorize as high power, more than doubled from 24% to 58%. At the same time, we continue to invest in our programmable laser technology and engage deeply with our non-China strategic customers as they sought to leverage our reliable, programmable and field serviceable lasers to further differentiate their products in the marketplace. We have prioritized technology and product development in 2022 release products for each of these end markets we serve in cutting, welding, and additive manufacturing. In cutting, we continue to leverage our programmable beam shaping technology to enable our customers to offer machine tools that are optimized for a wide range of metal applications. For example, in 2022, we introduced a new 20 kilowatt programmable beam shaping fiber laser that offers significant improvements in power, performance, and flexibility. In welding, we continue to focus on delivering solutions tailored for the rapidly growing e-mobility battery market. New product introductions that incorporate proprietary sensor-based process monitoring solutions have expanded our market opportunity and are currently being used or evaluated by customers globally. In additive manufacturing, we added several important new strategic customers during the year and continue to add new products to our portfolio. Specifically, we released a 1.5 kilowatt version of our single mode programmable laser. The 25% plus increase in power that our 1.5 kilowatt [Krona AFX] (Ph) laser offers has been well received by multiple customers and will further increase the productivity of their tools. As the market continues to shift towards multi-laser tools, we believe we are uniquely positioned to enable our customers to drive productivity, improvements that will enable additive manufacturing to gain share on traditional subtracted and other legacy manufacturing technologies. Finally, in Aerospace and Defense, our revenue declined 16% year-over-year in 2022 to approximately $88.2 million, representing 36% of total sales. The primary driver of lower revenue in 2022 was a 23% year-over-year decline in project-based revenue. As we have mentioned in past, our project-based revenue can fluctuate with the timing and execution of programs. We continue to believe that directed energy will be a long-term growth driver friendly. Last quarter, we reported excellent progress in our key 300 kilowatt high energy laser program HELSI, which we expect to formally conclude an early Q2. We believe that our track record and vertically integrated business model, which enables us to develop products from chip to beam control positions us very well for additional directed energy work with the U.S. government. In fact, our vertical integration offers us opportunity to capitalize on direct energy activity at multiple levels of vertical integration. We are supplier of diodes, fiber players, and combined lasers. In the fourth quarter, Congress approved a 50% increase in the U.S. directed energy budget from approximately 1 billion last year to approximately 1.5 billion this year. The significant increase in budget further solidifies our perspective that directed energy is a key part of the U.S. DoD’s modernization effort and offers us significant long-term opportunities for growth. Our core defense business, which was down approximately 4% year-over-year in 2022, includes products related to proximity detection, range finding, countermeasures, and guidance systems. These products are typically sold through long-term contracts and can run for years or even decades, but can fluctuate quarter-over-quarter. In the fourth quarter, our defense revenue declined approximately 22% year-over-year to approximately $22.3 million, representing 39% of total revenue. Development revenue nearly all of which is related to the directed energy projects decreased approximately 32% year-over-year due primarily to the timing of projects. Our core defense business declined approximately 8% year-over-year, but increased by approximately 36% versus third quarter of 2022. Today, nLIGHT is a critical supplier to several defense customers, and we are well positioned to continue our work on existing programs. We are also under contract on several new classified programs that leverage our broad semiconductor and fiber laser technology and manufacturing capabilities. While revenue from each of these programs is relatively small today, each of these funded programs are expected to transfer to production in 2024 and could present significant long-term recurring revenue opportunities for us. We believe our core laser design, process engineering know-how, and secure U.S. manufacturing capabilities positions us well to continue to pursue and support additional opportunities in the defense market. While we continue to transition to growth markets outside of China, we have also made significant changes to operations in the last 12-months. First, we made significant investments in automating our manufacturing capabilities outside of China during 2022. We believe that these investments will strengthen our position as a trusted domestic laser provider for the defense market. Particularly the directed energy market better align our manufacturing and strategic customers in key regions of our commercial growth, and better control our manufacturing output. Although, this transition has not been easy, we made great progress during the fourth quarter as we completed the installation and qualified the critical equipment required for our automation. As we grow, we will have a manufacturing footprint and strategy that will be able to mitigate supply chain shocks, better serve our customers and enhance long-term profitability, as we execute our growth strategy. Moreover, we significantly improved our processes in manufacturing flow so that our equipment is much more flexible and be better utilized to manufacture a wider range of our semiconductor lasers across each of the end markets. However, in order to build this flexible capacity, we made the decision to abandon the development of certain manufacturing equipment that was well suited to high volume production, but not flexible enough to meet the evolving and more diversified manufacturing demand from our customers. Second, we went live with a new ERP system on January 01, 2023. The scale and diversity of our business has changed significantly over the last several years and in order to support our long-term growth objectives, we decided that we needed to implement an ERP system that was better suited to our business needs today and can support the future needs of our business. Enhanced functionality across operations, sales, engineering and finance will enable us to better manage our business going forward. And although new ERP implementations are never easy, our initial invitation went as well as could be expected. Third, in the fourth quarter, we also embarked on a plan to better align all areas of our business with our most critical near and long-term strategic objectives. As a result, we made several important strategic decisions. First, we implemented a targeted reduction in force that resulted in a headcount reduction of approximately 5% of total employees. Combined with natural attrition, more targeted hiring and load balancing our facilities, our total number of employees decreased from approximately 1,350 as of June 2022 to approximately 1,150 at the end of December. We also performed a rigorous review of each of our end markets and projects in order to focus on opportunities that we believe will have the biggest impact on driving long-term growth and profitability. While we elected not to pursue certain projects, we elected to invest in others. What didn’t change is our strategic focus. We continue to believe that, advancements in manufacturing and Aerospace and Defense will continue to require a greater number of lasers. Before turning the call over to Joe to discuss our full-year and fourth quarter financial results, I would like to comment on what we are seeing as we enter 2023. While overall demand trends seem to be consistent with what we saw in the fourth quarter, our long-term growth strategies are firmly in place. We continue to see strong design activity with our customers in Microfabrication and Industrial end markets. Although our business is not immune from global macro conditions, we are well-positioned for growth as we progress through the year. We continue to expect lasers to proliferate across each of our end markets, and we remain particularly optimistic about our positioning in Aerospace and Defense, which is rapidly transitioning. I will now turn the call over to Joe.

Thank you, Scott. Total revenue for the fourth quarter of 2022 was approximately $56.7 million, slightly above the midpoint of guidance, compared to $67.4 million for the fourth quarter of 2021. Product revenue was approximately $45.4 million slightly above the midpoint of guidance, compared to $50.9 million in Q4 of 2021. Consistent with annual trends, there was a decrease in product revenue to customers in China and in development revenue for our Defense customers that was partially offset by an increase in revenue to industrial customers outside of China. For the full-year, total revenue declined by 10% to $242 million. However, it is important to emphasize that, revenues for industrial and Microfabrication products outside of China increased 21% year- over-year to a new record of $133 million. Offsetting this strong growth was the 16% decline in Aerospace and Defense, primarily due to the timing of project-based spending and a 62% decline in revenues from China. Gross margin was 10.2% for the fourth quarter of 2022 compared to 26.6% for the fourth quarter of 2021. Gross margins in the fourth quarter included approximately $6 million or 13 percentage points of products gross margin in non-routine inventory charges primarily related to business restructuring, including automation and elevated scrap and reserve charges. We don’t expect to incur further inventory charges of this magnitude in the near future. Total gross margin was 21% for 2022 compared with 28.6% for 2021. Product gross margin was 24.6% for 2022 compared to 35.6% for 2021. Products gross margin in 2022 was negatively impacted by product sales mix increases in labor and material costs, decreased manufacturing efficiency due to excess capacity, which included the government and pros shutdown of our Shanghai facility in the second quarter, and an increase in non-routine inventory charges as previously discussed. Non-GAAP operating expenses were $19.5 million for the fourth quarter of 2022 compared with $19.3 million in the prior quarter and $18.8 million in Q4 of 2021. The year-over-year increase in operating expenses were driven primarily by higher overall investment in R&D to support our product roadmap and long-term growth activities. As our strategic focus has shifted to markets outside of China, we have continually reviewed the appropriate level of operating expenses for our business. In the fourth quarter, we executed a targeted reduction in force, which combined with a broader review of non-headcount related spending is expected to reduce our non-GAAP operating expenses by approximately $2 million per quarter, beginning in the first quarter of 2023. We believe that our current level of operating expenses are sufficient to support our long-term growth objectives. On a GAAP basis, the fourth quarter of 2022 included restructuring charges of approximately $3.9 million. These restructuring charges include employee severance and the write off of investments of certain in process capital projects related to manufacturing capacity. Non-GAAP loss for the fourth quarter of 2022 was $12.3 million or $0.27 per diluted share compared with a non-GAAP net loss for the fourth quarter of 2021 of $200,000 or $0.01 per diluted share. GAAP net loss for the fourth quarter of 2022 was $22.7 million or $0.50 per diluted share compared to a net loss for the fourth quarter of 2021 of $8.8 million or $0.20 per diluted share. Adjusted EBITDA for the fourth quarter of 2022 was negative $9.5 million compared to positive $3.1 million for the fourth quarter of 2021. Without the impact of the non-routine inventory charges previously discussed, adjusted EBITDA for the fourth quarter of 2022 would have been within our guidance. Turning to cash flow. In the fourth quarter of 2022, cash flow from operations was breakeven versus a $10.1 million use of cash from operations in Q4 2021. The use of cash from operations steadily decreased through 2022 and the changes we have made to our expense structure better positions us for both near and long-term cash flow generation. Capital expenditures in the fourth quarter were approximately $4.9 million versus $7.6 million in the fourth quarter of 2021. Over the last several years, we have invested heavily in CapEx, primarily related to the automation of our facilities in the in the U.S. Much of our significant CapEx are behind us, and we expect a significant decrease in CapEx in 2023. We ended Q4 with cash, cash equivalent and investments of approximately $108 million and no debt. DSO for the quarter was 65-days. Inventory at the end of the quarter was $67.6 million, representing 131-days. Our inventory declined by approximately $13 million versus the third quarter. Approximately $6 million of the decline was related to the non-routine inventory charges discussed earlier while the balance was related to improved working capital management. Turning to guidance for the first quarter. Based on the information available today, we expect Q1 revenue to be in the range of $50 million to $56 million. The midpoint of $53 million includes approximately $41 million of product sales and approximately $12 million of development sales. Turning to gross margin. Q1 products gross margin is expected to be in the range of 20% to 24% and development gross margin to be approximately 7%, resulting in an overall gross margin range of 17% to 20%. For the first quarter, we expect adjusted EBITDA to be approximately negative $4 million to negative $1 million. With that, I will turn the call over to the operator for questions.

[Operator Instructions] Today’s first question comes from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

Hey good afternoon. Thanks for taking the questions here. I wanted to just start out. Scott, I think, you made a comment about demand trends being consistent with last quarter. I’m curious, has anything changed either by segment, by geography, has your visibility gotten any better versus last quarter?

Yes. Thanks, Greg. I wouldn’t say there is anything substantially different in the near-term. I think, we are seeing strength in the process we are working through on design wins and longer-term programs. But in terms of the near-term outlook and certainly the macro environment, no substantial change. I think, everybody is asking a question about what is going on in China after relaxing COVID restrictions in our micro business. And it just coming off of Chinese New Year there is just limited visibility there right now and in the industrial markets broadly we are seeing the stimulus in the U.S. and elsewhere lead to CapEx. But there is no dramatic changes, that we are seeing relative to Q4.

If we think about results in fiscal 2022, what do you see as the primary growth drivers for the company this year versus last?

Yes. The primary growth drivers that we see going forward are largely in the industrial markets. Notably, we are certainly highlighting where we are seeing strong traction in additive manufacturing in particular, and then Aerospace and Defense and it is not only directed energy, it is other applications there. So those are the kind of two primary themes that will be driving our growth going forward.

Okay. And I know welding hasn’t been a huge focus area for you in the past, seems to be a little bit more interest activity there recently. Does that change how you are looking at that space or not necessarily?

Yes. Certainly there is a lot going on there. We are doing more. We have had some good success, but it is relatively smaller and certainly, in additive, we think that our position with the products we have there are quite distinctive and we are enabling next generation tools. So we are highlighting relatively more of the growth we see there.

Yes, okay. I will leave it there. Best of luck. Thanks.

Thanks Craig.

The next question is from Jim Ricchiuti with Needham. Please go ahead.

Hi. Good afternoon. This is [Chris Grange] (Ph) on for Jim. Given in the gross margin guidance that excluding the charge that there is a sequential step down from this quarter to Q1. Just wondering if you could talk about what is embedded in that margin guidance and sort of the puts and takes there? Thank you.

Yes. Sure, Chris. This is Joe. So I think the biggest driver between the Q4 and the Q1 margin guide, volume is the first, we are at a lower revenue projection for Q1. And as you know, we have got a vertically integrated model, so we can leverage our fixed cost, but the same thing happens when you go the other way. I think that is, point one. The second point is really on the mix side, as Scott talked about before, we have seen now several quarters of weakness in our Microfabrication business in China. And if you look at where we are in Q4 for micro, it was a relatively low revenue as a proportion of our total revenue. And so as we see that trend at least through the first quarter sort of continuing, it is the primary driver of why you have seen a little bit of degradation in the products gross margin in the first quarter guide.

Great. Thank you. And for the new products that you have highlighted is in the Industrial segment, could you talk about what percentage of industrial sales they represent and whether they were meaningful contributors to growth in Q4 and how you expect those products to ramp going forward? Thank you.

Sure, Chris. This is Joe again. So in terms of the new products in the fourth quarter that we talked about, they were not big revenue contributors in the industrial market. That being said, they are critical to the growth going forward. If you look back at our history, driving further performance, let’s just use the cutting market, for example, we have really increased the amount of revenue that we are driving from our programmable products. And so we have now taken those programmable products and we are continuing to support our customers’ roadmaps for higher power. Scott talked a little bit about the welding market. We have got products in the welding market today, but the products that we released over the last couple of quarters are much more optimized to address that market. And furthermore, being integrated with some of our - we acquired Plasmo about a year or so ago in the process monitoring space. So we are able to do more of a solution sale there. And then and then finally, in additive, we have released our first single mode laser for the additive market back in sort of early 2021, late 2020, and we have increasingly increased the power of that product. And if you think about the customers and what they’re really looking for is further productivity of their tools. And so, as we move forward, we think these products will contribute a much greater share of the industrial revenue. But today, not enormous contributors.

Got it. thanks very much for taking the questions.

Sure.

The next question comes from Ruben Roy with Stifel. Please go ahead.

Hi, thank you. Scott, the first question I had was just to see if we can get a little more detail around the strategic review, which sounds like it is largely compute complete now. And I wanted to dig in a little bit on sort of the projects that you have decided that are potentially not - I guess to use the term additive to sort of the medium to longer term strategic direction of the company. And if you can give us a little bit of color around how you were thinking about those projects? And I don’t know if I missed this on the call, but whether or not some of those investments are going into other areas that you do think are going to be instead of medium to longer term, maybe more near to me in term growth areas. And any other detail you can provide on how you came to sort of the new direction there? And then the quick follow-up on that point is, just talk a little bit more about the manufacturing as well. It sounds like, you are close qualifications on the equipment are done. Are customer qualifications required next, kind of what is the next process to get manufacturing up and running from this point forward? Thank you.

Yes, great. I appreciate the question Ruben. So the first on the strategic review, yes, there is certainly some opportunities. We see many opportunities for our high power lasers across all the markets we serve. And some are a little bit further out. And as we went through our review process some of those, we decided to shift resources from things are a little further out to areas where we have got stronger traction today and frankly near-term growth markets. So for example, there are some areas of say the cutting market that are interesting, but a little bit further out and not as rapidly growing as, say the additive market where we have a very strong position and we also have further integration of not only the laser, but also the software that we have. And so we are doing more in that area and we are seeing good progress in the engagement with key customers in that space that leads to nearer term revenue. So that is an example of what we are talking about there. But we did that across a whole host of things and we have. There is a long list of opportunities that we assess all the time. And so we will continue to do that that was the nature of what we went through there. And then switching to the operations, yes, I think, we have we have invested significantly in this strategic shift in our manufacturing footprint. And certainly what we highlighted is the fact that we have qualified the processes up and running, the ramping. In terms of customer qualification, there is nothing substantial there. The products are no different than our previous products. The processes we use to make them are different, and it is not typical that we have customers that require a qualification of those processes. So yes, we are ramping up and we are adjusting the exposure we have and certainly as we progress this year the volume that we rely on operations in China, we will go down significantly and as we ramp up elsewhere.

Okay. Thanks for all that detail, Scott. I just had a quick follow up then for Joe. And that question would be sort of with the operational changes now, largely behind you and some of the cost taken out of the system and the strategic roadmap updated. If you can give us an update, if there is any changes to the way you are thinking about breakeven run rate of revenue at EBITDA, and if anything has changed with the way you are thinking about the mix of business in terms of longer-term margin structure for the overall company either higher or lower based on kind of the roadmap from here. Thanks, Joe.

Yes. Absolutely, Ruben. Good question. So, no real change to the way that we are thinking about the adjusted breakeven level. Last quarter we talked about $55 million to $60 million as the breakeven level. The range that we gave there really is predicated upon the mix of business that we see in any given quarter from an end market perspective. Also, within each end market, the mix can be quite different depending on product variant and customer and region and the like. So I think, as we gave that breakeven EBITDA guidance, Ruben, it was with the thought of where we are today. It also assumed that we were going to look at the overall operating expenses at the company, the overall manufacturing expenses at the company. As I think about the business going forward, remember we are vertically integrated, and so we do have a fixed cost infrastructure that as revenue grows. So the biggest driver of driving profitability really is first higher volume and being able to better absorb our fixed costs. And you have seen that even if you go back historically in our financials, the ability to do that. The second piece is the flow through. I mean, if we are able to control our OpEx, which I think we are doing a good job of, and if we are able to maintain the overhead that we have today, and as we make further shifts from a manufacturing perspective, we should drive better fall through margins that go to the bottom line. And then sort of the third piece, which is related a little bit to what I said about overhead is just trying to reduce our manufacturing costs, whether that is by true product cost itself or just looking at the overall manufacturing infrastructure at the company. There is still more - there is still obviously more to do there. But in terms of near-term, I wouldn’t - nothing has really changed in terms of breakeven EBITDA.

Got it. Thanks for all that detail. Thanks you Scott and Joe.

Thanks.

Thank you.

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

Thank you for the question. For 2023, are you seeing in terms of aerospace, any new programs or opportunities out there and are they major programs and when you think these opportunities will be realized?

Short answer Mark, is yes, we are seeing large and a broad range of opportunities both in the U.S. and with allies. Those new programs will lead to design win achievements in 2023, but in terms of revenue, more material in the following years.

Well micro was soft. Is that just the general cutting in wafer fab equipment spending, Is that what is impacting micro and you expect that to be soft for the next couple of quarters?

Yes, Mark. I would say that, generally our micro fab business is probably tied more to broader electronics production drilling holes and circuit boards and scribing flat panel displays. There is certainly a bit of a semiconductor capital equipment, but we are probably more correlated to broader electronics production than we are to the ups and downs of the WFE market. But yes, as we look at demand there, demand certainly for the first quarter is part of the reason for our guide is that, micro demand remains muted.

And just a couple of housekeeping things. What should we think about in terms of tax rate for this year and also like breakout of fiber laser sales above six kilowatts, below two kilowatts?

Yes. So on tax rate, we still have a pretty significant NOL position, and so we pay taxes in some of our foreign jurisdictions, but you can think about that as maybe a couple hundred thousand dollars per quarter. In terms of the power level, Mark, we would expect that, you have to look at it by market, but in the cutting market. Today, most of our sales are 6 kilowatts and above. We are selling very, very little below six. I mean, a little bit, but very little of sort of what we call medium power that was about 20% of our revenue in Q4. And really the sub two kilowatt power level is mostly focused around the additive manufacturing space. So the proportion just really depends on how those two applications grow. Without sort of talking specifically about the year, we do expect overtime that the additive business is faster growing for us and a smaller base than the cutting businesses. So I think overtime, you will continue to see that sub two kilowatt power level represent a greater proportion of total industrial laser sales.

And can you provide the actual percentages in the December quarter for six kilowatt and under two kilowatt?

Yes, sure. So six kilowatt was 49%, two to five kilowatt was 21% and sub-two kilowatt was 30%, Mark.

Thank you.

No problem.

The next question is a follow-up from Greg Palm. Please go ahead.

Yes, thanks. I will be quick. Joe, you mentioned some of the operating cost reductions, I think you said two million a quarter. Was that off of the Q4 run rate or was some of that two million already baked into what you reported in Q4?

No, really the way to think about that is probably off of the Q4 run rate, Greg. And yes, I think that is the right way to think about it.

Got it. And then just in terms of gross margins for the year, other than volume, how should we be thinking about the trajectory given the facility consolidations as we progress throughout the year?

Yes Greg. So I think that, as I mentioned earlier, the really the three drivers, volume mix and manufacturing. And so as we look at where we are today, we only have enough visibility to provide a quarter out of guidance. That being said, our expectation is that the second half, depending on how the macro shapes up, could be very nice for us. I mean, a lot of that is related to, as Scott was talking about defense and there is some design wins there. But to the extent that we are able to achieve those higher revenue levels as we move out through the year we would expect the flow through gross margin really have nice flow through on the gross margin side.

Yes. So, but volume’s still pretty important, probably the most important

Absolutely. Volume is still pretty important and certainly as we optimize manufacturing and we remove a redundant overhead that will certainly help. But the first order is we just need to drive, revenue growth.

Yes, okay. I will leave it there, thanks.

You are welcome.

At this time, there are no more lines in the queue. This concludes our question and answer session. I would like to turn the conference back over to Joseph Corso for closing remarks.

Yes, thank you everybody for joining today, and we look forward to speaking with you during the quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.