Good afternoon, ladies and gentlemen. And welcome to the nLIGHT, Inc. Fourth Quarter End Year and 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions] This call is being recorded on Thursday, February 27, 2025. I will now like to turn the conference over to John Marchetti. Please go ahead.

Thank you, and good afternoon, everyone. I'm John Marchetti, nLIGHT's VP of Corporate Development and Head of Investor Relations. With me on the call today are Scott Keeney, nLIGHT's Chairman and CEO; and Joe Corso, nLIGHT's CFO. 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 to 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 nLIGHT's Chairman and CEO, Scott Keeney. Scott?

Thank you, John. 2024 was a transformative year for nLIGHT. Revenue from aerospace and defense grew to more than 60% of our total sales by the end of the year, and has become the primary growth driver for us going forward. Our aerospace and defense markets grew 20% year-over-year to a record of $110 million, and we saw significant growth in both our advanced development revenue as well as our defense product sales. In addition, our backlog increased by more than 50% year-over-year in 2024, to a record $167 million, as we continue to qualify new opportunities in both directed energy and laser sensing. At nLIGHT, our work in defense remains aligned with the Department of Defense's critical priorities, such as directed energy and laser sensing. In directed energy, interest in our high-energy laser systems and components continues to grow as ongoing military operations in the Middle East and Ukraine highlight the increasing need for advanced, cost-effective defensive weapons technology. For layered defense strategies, directed energy lasers complement traditional kinetic defenses by offering a deep magazine, low cost per engagement, and speed of light delivery. Addressing a wide range of targets, including drones, rockets, artillery, mortars, and missiles with directed energy lasers reduces the reliance on costly, low-inventory traditional weapons against low-cost threats, thereby rebalancing the economics of protecting key assets. nLIGHT has led the world in the development of high-powered lasers for directed energy for over two decades, and recently demonstrated a 300 kilowatt high-brightness laser. nLIGHT lasers are built in the U.S., incorporating patented and proprietary technologies across the company's entire technology stack, from semiconductor lasers to high-power fiber amplifiers, beam combined lasers, and beam directors. We have generated revenue at nearly every level of vertical integration in the directed energy market, and we have established ourselves as…

Thank you, Scott. Turning to the fourth quarter and full year financial results, total revenue in the fourth quarter was $47.4 million, a decrease of 9% compared to $51.9 million in the fourth quarter of 2023. Product revenue for the fourth quarter was $31.7 million compared to $37.9 million in the fourth quarter of 2023. The decrease in product revenue was partially offset by a 12% year-over-year increase in development revenue to $15.7 million. As noted in our January pre-announcement, the shortfall in fourth quarter revenue relative to the midpoint of guidance was primarily due to a continued weakness in our industrial market, execution challenges in microfabrication, and the timing of delivery of a limited number of defense products. For the year, total revenue was $198.5 million, a decrease of 5% compared to $209.9 million in 2023, due to declines in our microfabrication and industrial markets. These declines were partially offset by strong growth in our aerospace and defense markets. Revenue from the aerospace and defense market increased 20% year-over-year to a record $109.5 million. A&D products revenue increased by 25% year-over-year to $47.7 million, and A&D development revenue increased by 16% year-over-year to $61.9 million. Total gross margin in the fourth quarter was 2% compared to 19% in the fourth quarter of 2023. Fourth quarter total gross margin was negatively impacted by non-routine charges of approximately $6 million related primarily to inventory reserves on products for the industrial market. Adjusting for these non-routine charges, total gross margin for the fourth quarter would have been approximately 15%, which is still slightly below the bottom end of guidance due to lower than expected product sales and production volumes. Product gross margin in the fourth quarter was 1% compared to 22% in the fourth quarter of 2023. Adjusting for non-routine charges, product…

[Operator Instructions] We have your first question comes from Jim with Needham & Company.

Hi, thanks. A couple of questions. First, just given the backlog, you obviously have a fairly strong line of sight on the A&D business. How should we think about the revenues over the course of the year, particularly in light of some of the challenges you experienced in Q4, which I'm assuming is behind you with respect to fulfilling some of the shipments with key customers?

Yes, hi, Jim. Thanks for the question. So I think in Scott's script, we talked about having confidence that our A&D markets should be up at least 25% over 2023. I think as we've talked about in the past, the quarterly trajectory of that sometimes is a little bit more difficult to predict, but I think it's a reasonable approach to think as we move through the year, revenue from the A&D markets will increase. As we talked about on our pre-announcement, there are timing challenges right around delivering some of those products. But as we highlighted with the backlog, we don't have very much in terms of go get for 2025. So we feel really good about the way that the year is starting to look.

Got it. And I apologize, I joined the call a little bit late and you may have provided some update, but where do you stand with the handoff to the contract manufacturing partner in Thailand? I guess what I'm asking is if the demand doesn't change in this area of the business, does having that behind you, what does that do for gross margins in that part of the business? I guess that's what I'm asking.

Yes, I think, Jim, frankly, there will be some improvement in gross margins. Obviously, as we are working through the execution and the improvement and the transition back to a more full capacity, that's got a little bit of an impact on our gross margin. So there will be some lift in gross margins due to that. But I think what will be the bigger driver for gross margins is really just ramping volumes, right. That has been our story for quite some time with product revenues at these current levels. It's difficult to have meaningful margin expansion. But as we work through those issues, it will be, margins will improve for sure.

Your next question comes from Greg Palm with Craig-Hallum Capital Group.

Yes, thanks. Can we start with just a little bit more in terms of the assumptions that's baked into the Q1 guide? So for instance, does it assume that kind of $4 million shortfall from Q4 is fully recognized in Q1? Are there any other inventory reserves that need to be taken in Q1? Just a little bit more color on kind of how you're thinking about that specifically.

Sure, Greg. So the guide in Q1 to the midpoint doesn't assume that we've had a lot of that Q4 revenue rolls over into Q1. It's more natural in terms of the revenue demand and growth that we'll see in the first quarter. I think trajectory wise, as we said earlier in the call, we expect the defense business to grow and the commercial business to decline in the first quarter sequentially. In terms of gross margin, we're not anticipating any unusual or non-recurring type cost of goods issues that we saw in the fourth quarter. So it's getting back to a more normalized operating environment from a gross margin perspective.

Okay. So I think what I just heard was versus the $17 million in commercial revenue for Q4, you're expecting that to actually decline sequentially in Q1?

Yes, I don't think we're going to have, I mean, we're not guiding specifically by market, but directionally, yes, we don't really see much growth in the commercial side of the business. And so as we think about that sequential movement of revenue, we do see a little bit of softening of the commercial revenue in the first quarter.

Okay. I mean, that implies a pretty soft run rate. I mean, how should we think about, I mean, knowing that you didn't guide for that for the year, but how should we think about sort of the remainder of the year?

Yes. I think if in the commercial businesses, as we've talked about, we don't have the same level of visibility that we do in the defense business. So some of it is just, trying to read the tea leaves and do our best to understand our customer's forecast and the broader macro demand environment. As we think about the overall year, what we are planning for with some range of error bars is somewhere in the 15% to 20% down on a calendar ‘24 versus a calendar 2023. Now, could it be better than that? Yes, absolutely. Could it be a little worse than that? It could, but I think what you should take away from this comment is we don't expect the commercial business in 2024 to drive any level of outsized growth, right. I mean, we're managing it as best as we can, but the growth in 2024 is really going to come from the A&D business.

Yes. Okay. That makes sense. And then just last one on maybe industrial specifically, I'm curious if tariff implementation occurs at maybe a broader scale. I mean, is that enough to stem some of the negative Chinese competitive impacts that have maybe evolved here over the last few quarters? I'm just curious to get your thoughts around kind of overall pricing for that and maybe overall competition relative to where we were at this point last year.

Yes, Greg, I mean, it's hard to predict where things are going to land with respect to tariffs, but certainly directionally, everything else being equal, that could be beneficial. It's not something that we are expecting and relying on, but yes, certainly directionally that could be beneficial. It just depends on the particulars of how they're implemented.

Next question comes from Troy with Cantor Fitzgerald.

Hey, gentlemen. Thanks for taking my questions. Maybe a couple for you, Joe. Just first of all, the funded backlog, can you confirm it was $167 million? I think you're up 55% year-over-year, but –

Yes, that's right. $167 million.

And then is it all shippable in 2025?

It's all shippable in 2025 and 2026. So that's funded backlog over the next two years.

Perfect. All right. And then I just want to go through it again. You said there's these opportunities you're working on in the pipeline. There's $230 million of total defense type opportunities that are in the pipeline. Could you go over that again, please?

Yes. No, that's correct. So what we've got is we are working on contracts that in aggregate have about $399 million of total value, right. Now, $167 million of that $399 million is firm funded backlog that we expect to execute during calendar ‘25 and calendar ‘26. The balance of that $232 million, that is really some funded backlog that will roll into 2027, as well as a big portion. The bigger portion, though, is the portions of those contracts that are not yet funded. We expect a big piece of that to be funded, but we want to be very clear around what is funded and what is not funded. But in either case, we feel very good about what we're working against.

And Troy, just to build on that, you mentioned pipeline. What Joe is describing is funded and unfunded contracts. Pipeline goes beyond that. There are opportunities that go well beyond what we're talking about here.

Right. I'd imagine. And then the Trump initiative that you highlighted, that would be new in the pipeline too, right?

Exactly right. That's one example of many.

Okay, perfect. And then my last question now, just one more for Joe, just big restructuring charges quarter. Can you just talk OpEx? Absolutely, do you think it's going to start to decline sequentially for a couple quarters given the restructuring you've been doing? Or do we assume it's March quarter OpEx is greater than December quarter [inaudible]?

Yes, I think that the current OpEx levels are about where we expect to be, Troy. I think it's important to recognize we don't believe that we need to meaningfully increase our operating expenses even over the next couple of years, right? Now there will be quarterly fluctuations as some quarters have more materials than other quarters. But when you think about the number of FTEs that are in our plan in the first quarter, no real difference than where we are post restructuring, right. So I don't see the OpEx moving all that much, right. That Q1 ‘25 implied number is reasonable.

The next question comes from Rodney McFall with North Coast Research.

Hey, guys. Thanks for taking my question. I'm on today for Keith Housum. So I'm just curious, how much longer do you guys think it'll take for you guys to get some of the kinks worked out as far as manufacturing amps for the A&D business? And just curious if you're seeing any further uptake in those products from your customers. Thanks.

Good. Very good question. The amps part of the business is a very important part of the business. We have leading performance in the fiber amplifiers that go into the directed energy systems both in the US and with our allies. There are current products that are released to manufacturing that, those kinks you referred to, we're well into manufacturing with a more mature product there. The product that we are using for the megawatt program is a next generation product that is being transferred to manufacturing right now. And we're making progress there. We were just below what we had expected in the quarter there. But that is proceeding well. And we do see opportunities to expand that business significantly.

Got it. Thanks for that. And then I'm just curious. I know you mentioned the executive order, signed by President Trump recently to bring Iron Dome to the US. I know it's very early in that process, but I'm just kind of curious if you have any ideas of like the scale of that project, and maybe, what it can mean for nLIGHT? Just any sort of color there would be helpful and maybe like a timeline. Thanks.

Yes, it's a fairly broad based set of initiatives for defense, both kinetic and non-kinetic applications. The funding numbers we've seen are very, very big. And there's a broad range of different approaches that are being considered. We're actively engaged with a number of them right now. The time frame, while there's some of the programs that go out further, there is an emphasis on the near term. And so, there'll be more information in the coming months on that. But it is large. It is separate from some of the cuts that are being discussed. It is a clear priority and key players in DoD right now are working through how to prioritize that. And we're deeply engaged there.

Your next question comes from Mark Miller with Benchmark.

So what we've heard today, it sounds like that the current administration, there's really been no change in your existing programs and you have this opportunity with the Iron Dome. Is that a good summary?

Yes, well put, Mark. I think, certainly there's a lot of uncertainty around a whole host of factors. And certainly we need to be thoughtful about that. But I think directionally in our business, our exposure is in areas where there is a significant, continuation and new efforts underway.

Okay. In terms of your existing backlog, I assume that there's a high percentage of that's defense. Can you give us an estimate what percent of that's aerospace and defense related? And also, if you can comment on the margin profile, your backlog.

Yes, the vast majority of it is A&D related, Mark. And I would tell you that generally the backlog on the product side carries very nice products gross margin. Some of that backlog obviously is in the development side of the business. And that is pretty typical for us in that kind of mid to high single digits margin that we've experienced over the last couple of years.

Okay. If you would get equipment orders for the Stryker program, when do you think that could come? Could that be second half of next year?

Yes, I do think that the opportunities will be contingent upon the performance of our initial deliveries. But yes, I think there are opportunities in the next two years for sure.

There are no further questions. Please continue.

So thanks everybody for joining us this afternoon. And I did want to highlight that we will be participating in a couple of investor conferences over the next two weeks. We'll be at the 46th Annual Raymond James Institutional Investor Conference on Tuesday, March 4th. And we'll be participating at the Cantor Fitzgerald Global Technology Conference on Wednesday, March 12th. So we look forward to catching up with a lot of you over the next couple of weeks. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.