nLIGHT, Inc.

Good day and welcome to the NLITE second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joe Corso, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone. I'm Joe Corso, Enlight's Chief Financial Officer. With me today is Scott Keeney, Enlight'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. Starting on slide three, Q2 was a solid quarter for Enlight. Despite the significant operational challenges and uncertainties we faced due to the prolonged COVID-related lockdown in Shanghai, we delivered revenue that was within our guidance range. Favorable product mix and solid execution of our strategic growth objectives helped drive gross margins above the high end of our guidance, which resulted in positive adjusted EBITDA for the quarter. Turning to slide four. Growth in revenue from strategic areas enabled us to generate $60.8 million of revenue in Q2. Our second quarter revenue reflects the continued geographic and strategic transformation of our business. In Q2, revenue from customers outside of China grew 12% year-over-year to $56.2 million, or approximately 92% of revenue, compared to $50.3 million, or 73% in Q2 2021. Our focus on strategic growth areas outside of China have resulted in eight consecutive quarters with year-over-year growth in our non-China industrial and microfabrication business. Our global manufacturing team did an outstanding job during a quarter in which our key assembly facility was either closed or running at suboptimal capacity for two months. A small percentage of our total workforce was able to gradually reenter our facility during the Shanghai lockdown, which began on March 28th, but much of our productive capacity was completely idle until June 4th, when we officially reopened our facility. Although the COVID-related lockdown in Shanghai lasted longer than we could have predicted, Our team rapidly resumed normal multi-ship production, enabling us to meet nearly all demand from our key customers. Despite the reopening of Shanghai, we continue to see challenges in the broader global supply chain. Lead times for many of our critical components continued to extend, and the cost of materials, labor, freight, and logistics continue to rise. Our recent experience with the COVID-related lockdowns in Shanghai have reinforced our decision to continue to invest in our manufacturing capabilities in the United States. Last quarter, we reported that we had installed the initial equipment required for the first phase of automation. In Q2, we began to increase the productive capacity out of our installed equipment, and in the coming quarters, we expect to increase output yields and add additional equipment to meet our automation targets. Finally, I'm pleased to announce that Chris Schechter has joined our team as Chief Operating Officer. Chris most recently was VP of Operations, Aerospace and Defense at Celestica and brings a strong manufacturing background to support our continued growth. Turning to slides five through six, where I will discuss revenue by end market. In microfabrication, we had another solid quarter. We generated $16.4 million of revenue, which represented approximately 27% of total revenue. Lower sales for microfabrication customers in China resulted in a 19% year-over-year decline compared to the record microfabrication revenue we generated in Q2 of 2021. We believe the current softness in our China macrofabrication business is largely macro-driven, and we continue to maintain a market leadership position, which we believe will enable us to grow as the macro environment in China improves. Outside of China, Q2 revenue increased year over year, and overall demand signals remain positive. We remain well positioned to continue our global leadership position by introducing innovative high-power, high-brightness semiconductor lasers for existing and new markets. In the second quarter, we developed a novel semiconductor laser with record peak power by leveraging our semiconductor device design and manufacturing capabilities. This technology has a wide range of applications, including LiDAR and other short-pulse imaging and sensing applications. We also continue to make excellent progress in the medical market, particularly for our newly released 2-micron wavelength lasers. We believe that this laser addresses a broad range of urological and other applications and offers Enlight yet another long-term growth opportunity. In aerospace and defense, second quarter revenue declined 6 percent year-over-year to $22.5 million, representing 37 percent of sales. Excluding advanced development revenue, Q2 aerospace and defense revenue increased approximately 18 percent to $9.7 million. overall sales in our aerospace and defense business was driven primarily by delays in receiving material required for certain directed energy development programs and fewer advanced technology development projects during the quarter. We view these delays as temporary as we continue to receive material required for our key directed energy programs and have signed several new advanced development contracts during the quarter. In the directed energy market, we had two major milestones during the quarter. First, we continue to demonstrate the ability to scale the power of our high-energy lasers, which we believe is critical for future defense systems. Second, we have expanded and deepened our engagement with potential customers, both in the United States and abroad. Our vertical integration combined with U.S. manufacturing enables us to take a system-level view of our customers' requirements and engage across multiple product levels, including diodes, fiber amplifiers, and beam-combined lasers. During the second quarter, we generated product revenue from the sale of laser products to multiple U.S. defense contractors and foreign allies and have engaged in many additional design and opportunities with foreign allies seeking to deploy land, sea, and air-based lasers. As a result, we believe we have both expanded our served market and increased our near-term revenue opportunities. Finally, turning to the industrial end market, revenue declined 12% year-over-year in the second quarter to $21.9 million, representing 36% of total sales. However, industrial revenue from customers outside of China increased 43% year-over-year to $20.2 million. On a percentage of revenue basis, Q2 industrial revenue from customers outside of China increased to 92% versus 57% in the same period in 2021. Industrial growth outside of China continues to come from strategic customers as we continue to deliver innovative solutions that enable our customers to increase their market share and at the same time increase their spend within light. One of our key differentiators in the industrial market is the programmability of our lasers. We first introduced our programmable lasers to the cutting market in 2018. where they were quickly adopted as they addressed the long-standing tradeoff between high speed for cutting of thin metal and outstanding edge quality for cutting of thick, mild steel. We've continued to expand our line of beam control technology, and recently we extended the dynamic range of the beam area by 4x, thus allowing a 5-kilowatt and light fiber laser to have the same cutting speed as an 8-kilowatt conventional laser for thin metal cutting while maintaining outstanding edge quality for thick metal. For laser additive manufacturing, we are enabling our customers to continue to dramatically improve productivity in this growing market by offering lasers that provide benefits along two key dimensions. First, our highly reliable and stable lasers enable new multi-laser tools, which improve productivity and reduce cost per part. Second, our programmable lasers can increase the build rate for additive manufacturing by two to eight X with excellent material quality. In addition, our lasers allow the microstructure to be engineered locally, thus optimizing the material properties such as ductility, strength, and hardness, introducing an entirely new capability for added manufactured parts. For example, recently our programmable lasers were used to print turbo machinery components with spatially optimized mechanical properties that would not otherwise be possible without the use of our lasers. Finally, our programmable lasers are also being employed in welding applications to increase productivity and part quality. We are also deploying integrated process monitoring technology, which will further expand our market opportunity. I will now turn the call over to Joe to discuss Enlight's second quarter financial results.