Good afternoon, ladies and gentlemen, and welcome to the nLIGHT, Inc. Second Quarter 2025 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 7, 2025. I would now like to turn the conference over to John Marchetti, Vice President of Corporate Development and Investor Relations. 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 of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and in our earnings presentation, both of 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. Our second quarter results represent a strong quarter of execution across the board for nLIGHT. Revenue, gross margin and adjusted EBITDA were all ahead of our expectations. Results were primarily driven by our record aerospace and defense products and development revenue. A&D revenue represented approximately 66% of total sales in the quarter, up from 54% in the same quarter a year ago, and we expect this market to continue to be the primary source of growth for the company. We are well positioned to drive continued growth in A&D with leading high-power laser technology developed over the past 2 decades across the entire technology stack from chips to full laser systems, which is supported by our U.S. manufacturing sites. Our products in A&D are also well aligned with many of the DoD's most critical priorities such as directed energy and laser sensing. And during the quarter, we delivered strong results in both of these critical markets. In directed energy, we continue to make solid progress in our HELSI-2 program. As a reminder, this is a $171 million DoD program to develop a 1-megawatt high-energy laser with a completion date expected in 2026. The shipment of critical components toward the HELSI-2 program was a significant driver of our record defense product revenue in the quarter, and is expected to be a substantial contributor to growth throughout the remainder of the year. We are actively transitioning our low size, weight and power, also known as SWaP amplifier products into advanced production by leveraging nLIGHT's experienced manufacturing teams and implementing quality control processes. This transition, while not without risk, is critical as we continue optimizing our amplifier production line for higher volumes. Our work on the Army's DE M-SHORAD short-range air defense program is nearing completion as we are scheduled…

Thank you, Scott. Our second quarter results were characterized by strong execution across the board. Better-than-expected revenue, a strong mix of business and higher factory absorption, coupled with exceptional execution from our manufacturing and operations teams drove meaningful upside to our gross margin. That margin upside, combined with operating expense discipline, resulted in significant bottom line improvement, demonstrating the leverage that is inherent in our business model. Total revenue in the second quarter was $61.7 million, an increase of 22% compared to $50.5 million in the second quarter of 2024 and up 19.5% compared to the first quarter of 2025. Aerospace and Defense revenue was a record $40.7 million in the quarter, up 48.6% year-over-year and 24% sequentially. A&D growth was driven by record defense products revenue, which grew 74.5% year-over-year and 18% compared to last quarter, primarily due to increased deliveries of directed energy products. Development revenue of $20.9 million was also a record in the quarter, growing more than 30%, both sequentially and year-over-year. We expect A&D revenue to grow sequentially throughout the remainder of 2025. Second quarter revenue from our commercial markets, which includes industrial and microfabrication, also outperformed our expectations at $21 million, a decrease of 9% year-over-year, but up 11% sequentially. In microfabrication, the biggest driver of the quarter-over-quarter improvement was satisfying some pent-up demand that had been missed while we were transferring the last of our Shanghai manufacturing to our Thai manufacturing partner in the second half of 2024. As a reminder, we no longer have any manufacturing operations in China. Revenue from our industrial markets was also up sequentially on better demand for our additive manufacturing solutions. And as Scott mentioned earlier, while we are pleased with the performance of our commercial markets in the second quarter, we do not view the sequential…

[Operator Instructions] Your first question comes from the line of Greg Palm from Craig-Hallum Capital Group.

This is Daniel Eggerichs on for Greg today. Congrats on the really good results, guys. I think we'll just start, obviously, with A&D, really good from both a product and development standpoint. So I guess you gave the guide last quarter and you kind of blew through that. So maybe just looking back, what went better than expected? What drove that outperformance between both product and development? I know there's some project timing in there and whatnot, but maybe you could just dig into that a little bit more.

Yes. Thanks for the question, Danny. It's fairly simple. We just executed very well in the quarter. These are all existing programs that we have been working on, both on the product side and on the development side. And so the highlight in the quarter was continued success that we had with our amplifier sales, right, selling into our HELSI-2 program. That was a nice ramp -- a little bit better than we expected, purely based on execution. There was no other customers or things that really dropped in that we had not expected during the quarter. So we were pleased to see that upside.

Okay. Got it. And then you talked about some of these laser sensing programs. I think for the last few quarters, you've kind of mentioned bidding on multiple of these programs. I guess you got any additional detail around maybe some new wins, start dates, some kind of revenue recognition we can think about moving forward here? Or any extra detail there would be great.

Yes, sure. So in the laser sensing side of the business continues to go well. I would say that there are really a couple of different thrusts in that business, the first of which are existing platforms that we've been delivering on for quite a long time. And so that was a good quarter on those programs. We expect those to continue as we move forward. And on some of those programs, we expect higher volumes than we have had in the past, just as our customers are needing to restock depleted inventory levels and they're finding -- some of the platforms are finding new use cases. So those are the things that we've been working on for a long time. And then the things and the programs that are newer, a handful of which are classified, we still are making good progress on. I think we said in prior quarters that we expect to begin work on the next phase or the LRIP phase on one of those programs here in the second half. And so that remains intact. But we feel good about what we've delivered and the success of our portion of that program. Now it's a little bit of a waiting game until we actually get that order, but we believe it's forthcoming.

Got it. Maybe just one last one on the gross margin, maybe the product margin specifically, that 38.5%, that's well above anything we've kind of seen for the product side before. I guess just looking ahead, you've called out kind of mix and overhead being benefits in Q2. The Q3 guide implies sequential revenue growth and obviously, growth in A&D as well, but kind of a step down in that gross margin. So maybe anything -- some puts and takes you can give on the gross margin on the product side there?

Yes, absolutely. So second quarter gross margin, we were really happy with how it turned out, right? I mean we had higher volumes. We operated -- our manufacturing and operations did an exceptional job during the quarter. We had better factory absorption. And so many of the things that we go into any given quarter seeking to forecast, there's no one big item that drove that outperformance. It's a handful of small things that this quarter all went very well. And so I think that is a similar answer to why you saw a little bit of a step down in the gross margin into the third quarter. Some of those things that went exceptionally well in the second quarter as we forecast going forward, right, we're not going to forecast that upside. Could that happen again? Yes, but that's not something that we're banking on nor do I think that as you're building your model, you should bank on. But again, very happy with the performance this quarter. And I think the read-through is that it's indicative of the type of operating leverage that we have in our model.

Your next question comes from the line of Jim Ricchiuti from Needham & Company.

Just given the increase that you have made to the 2025 outlook and given where we are at this point in the year, I'm wondering if you have any initial views on 2026. Just the market seems pretty healthy. You seem to be getting a combination of new awards. I think you alluded to one overseas. So maybe if there's anything -- any color you could provide as to how we might think about 2026 in this area of the business.

Yes, Jim, I wish I could give you more than I'm about to give you. But at this point, it's just a little early for us to really start talking about 2026. I mean there's -- we certainly feel remain confident, right? But there are a lot of things that we're working on. The pipeline is continuing to grow. We continue to have good backlog, but I think it's a little too early for us given the variability in timing and the like to start talking about 2026, but absolutely continue to think that there's upside from '25.

All right. Maybe let's take a step back and talk about the increase to 2025. Maybe you could put a little bit more -- give us a little bit more help on what's driving that. Is this coming from -- yes, it sounds like you had some customers that have depleted some inventories and are ordering. Is this coming from new program awards? Can you say which areas of your product portfolio the growth is coming from versus what you were thinking, say, 3 months ago?

Yes. So the growth is consistent with what we were thinking of 3 months ago, and it's broad-based, right? We have growth from -- expected growth from some of our existing laser sensing programs. As I said in response to Danny's question, we do expect to have some revenue from new sensing program. We're going to continue to deliver products into existing directed energy programs and continue to make progress on those broader high-energy laser programs. So right now, as we're looking towards the back half of the year, we expect it to be broad-based growth across our entire defense portfolio.

Okay. One other question for me, and I may have missed the significance of it, but you talked, I think, about an amplifier transition. Trying to understand what the significance of that is and maybe what the time line, what it entails and how meaningful is this for you?

Jim, it's John. I think the key there, and we've talked about this a little bit in the past, is we came into this year, still doing the bulk of that amplifier manufacturing out of our engineering and R&D teams. And we've been really transitioning that production into our normal manufacturing groups. And that's very, very important for us because as we think about where we hope to take that business over time, in order to scale to the right number of units and the volumes that we hope to be achieving, we've got to get that out of the hands of our R&D teams and into the hands of our manufacturing folks. And so that process has been underway now for a couple of quarters. Again, as Joe mentioned, we had a lot of really good successes from all of our teams in the second quarter, which allowed us to do really well in that transition. We still have a little bit of ways to go to make sure we're locking all of that down, but I think we're making really good progress there. And like I said, it's important for us as we think about how that line should expand from a volume perspective as we look out over the next several years.

Your next question comes from the line of Ruben Roy from Stifel.

Sorry if I'm repeating James' question, but I think Scott mentioned that sort of the increase from kind of previous expectations for, I think, 25% growth for A&D and this year moving to 40% was driven by HELSI-2. Is that the wrong understanding that I have? I get you on broad-based sort of improvement across the Aerospace and Defense business. But it just seemed like compared to 90 days ago, you executed on shipments into HELSI-2 and that kind of drove the sort of near-term upside. And it sounded to me like that was the program that was going to drive sort of the increased expectations for '25? Or am I getting that wrong?

Ruben, no, you're absolutely right. As we entered the year, we had an expectation for what we thought we could do in terms of delivering hardware into that HELSI-2 program as we've gone through the year and have continued to make strides in terms of improving our manufacturing of those products and increasing capacity of the line, right? That's not something that happens overnight. It's a journey as we're starting to really ramp up there. So I would say that there was an improvement on that end of it. And there's a follow-through, which is to the extent that we can deliver hardware into those programs or into the HELSI-2 program in particular, means we can start to accelerate some of the development work that we're doing on top of those amplifiers. So you've got sort of a knock-on effect. And then the third piece of it is as we are transitioning from one program to another or one phase of a program to another in the new laser sensing program, that's another area of growth. And then finally, we do have a few new customer wins, right? We can't be explicit in terms of names, but we've talked about the international side of our directed energy business being an opportunity for us. And so we're starting to convert some of those early opportunities, which is what led me to talk about just sort of broad-based growth across that entire portfolio.

Okay. And then, John, on the amplifier transition per amplifier moving into kind of more of a production setup. Are there specific qualification milestones that come with that? Or is it sort of just getting kind of lines running and getting the product out and tested assembled and off you go? I'm just trying to understand sort of if there's...

No, I get it, Ruben. I think what I would say to that is there are certainly internal things that we're looking as we are continuing to go through that transition. So I wouldn't say it's acceptance criteria -- as Joe mentioned, we've been shipping amplifiers now for a while into a number of these programs. So it's not like we're doing something differently for the customer acceptance, but we're certainly internally trying to make sure that we're putting in all the controls and processes that we need specifically around these new products to make sure that, that transition over to the manufacturing teams goes as smoothly as possible.

[Operator Instructions] Your next question comes from the line of Rodney McFall from Northcoast Research.

Congratulations on the great quarter. I know you just talked about the new international customer. I was just wondering if you could maybe shed some light on the size and scope of that opportunity and if you see any execution risk there? And I have a follow-on after that.

Rodney, it's Scott here. Yes, I'll say what I can. Look, we do see directed energy is not just a U.S. domestic opportunity, but very strong international set of opportunities, and we continue to get new design wins around the world. I can't really comment on any of the particulars beyond that other than to say that, yes, it's material. There's some good-sized programs. And frankly, these are all still in the early stages. So we see bigger opportunities ahead, both in the U.S. and around the world.

Got it. And then, Scott, you mentioned continuing to rationalize investments in commercial markets to align with resources. Just any color on what specific areas you guys might be pulling back from? And I saw one of your main competitors recently, it seems like they're starting to lean into more systems. I'm just wondering if you guys have any plans for that? Or any color you guys could share on that would be great.

Absolutely right. Yes. I think one of the things we highlighted was that we do see growth in additive and continue to see opportunities with the differentiated technology we have there. But in some of the other markets that we've talked about, it's an area where we don't see as attractive growth opportunities. And so fortunately, the engineers that help build some of the key industrial lasers are working on new defense-based lasers now. So that's the sort of rationalization we're going through. And fortunately, we're in a great position to have a very strong team that is pivoting over.

There are no further questions at this time. Please continue, Mr. John Marchetti.

Thanks, everyone, for joining us this afternoon and for your continued interest in nLIGHT. We will be participating in a number of conferences over the coming weeks and throughout the remainder of the quarter. So I look forward to talking to everybody there, and I hope to talk to you soon. Thanks very much. Have a great day.

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