nLIGHT, Inc.

Good afternoon and welcome to the NLITE first quarter 2023 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 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Joseph Corso, Chief Financial Officer. Please go ahead.

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. Q1 was a good start to the year for Enlight. Financial results were better than our expectations. Revenue of $54.1 million was above the midpoint of the guidance range. Product gross margin of 33% and adjusted EBITDA of $1.3 million were both above our guidance range. And finally, we generated positive cash flow and ended the quarter with over $108 million of cash with no debt. In addition to strong financial results, we made significant progress in three areas critical to our strategic growth objectives. In aerospace and defense, we made excellent progress in programs and applications. In industrial, we continue to position ourselves well in key applications outside of China. And operationally, we executed on a range of key initiatives that will enable us to generate profitable revenue growth. I will provide a brief update on each of these three initiatives and then turn the call over to Joe for a more detailed financial review of the quarter. In aerospace and defense, I'm pleased to report that we've made significant progress in directed energy. Earlier this afternoon, we announced that we have been awarded a new $86 million contract to produce a high energy laser prototype in support of the Department of Defense High Energy Laser Scaling Initiative, HELSI. Today's award is a follow on to the $48 million award we received in 2019 to produce a 300 kilowatt class high energy laser as part of the first phase of HELSI. In late 2022, we demonstrate power exceeding healthy program objectives and the scalability of our coherent beam combining architecture. We believe our technology is capable of both scaling to higher powers and providing higher performance. Today's award is part of a multi-year development program that's expected to commence late in the third quarter of 2023. Now turning to the first quarter, aerospace and defense revenue declined 9% year over year to $21.1 million, representing 39% of total revenue. First quarter development revenue was $13 million, and defense products revenue was approximately $8.1 million. We continue to remain excited about the opportunities we see in directed energy, and we continue to invest in this market. We believe that we are uniquely positioned in directed energy. Our broad portfolio of products for the directed energy market includes diodes, fiber amplifiers, beam combined lasers, and beam control solutions. And this enables us to engage strategically with domestic and international partners across the entire directed energy ecosystem. Although it's difficult to predict the ultimate timing of this market, it remains a high modernization priority for the U.S. government and our foreign allies as we continue to see increased demand for each of our products. In defense outside of directed energy, we are increasingly optimistic about the work we are doing on a number of new programs. Development revenue from these programs began to ramp in the first quarter and is expected to contribute to development revenue over the next several quarters. Moreover, these programs are expected to offer long-term revenue opportunities when they transfer to production, which we currently expect to be in calendar 2024. As we've mentioned in the past, the timing of all of our development programs can be uncertain and have a significant impact on quarterly revenue. Turning to the industrial end market, industrial revenue in the first quarter declined 17% year over year to $19.9 million, representing 37% of total revenue. Outside of China, industrial revenue decreased 9% year over year to $18.9 million. On a percentage basis, industrial revenue from customers outside of China increased to 95% of revenue in the first quarter compared to 86% in the first quarter of 2022 and 54% in the first quarter of 2021. In cutting, we continue to leverage our all programmable fiber lasers to deliver innovative high power solutions to our customers. our customers are continually increasing in average laser power purchase, which enables higher productivity and better processing of thicker metals. In the first quarter, we received a record number of orders for 15 kilowatt and 20 kilowatt lasers. In welding, we continue to focus on the e-mobility market. Our portfolio of beam shaping lasers, single mode lasers, and process monitoring systems provide solutions for our customers at both the welding cell level and directly with electric vehicle OEMs. We will be exhibiting at the Battery Show in Stuttgart, May 23rd through 25th, and at ALA in Detroit, June 14th through 15th, showcasing our EV battery welding solutions, which feature our programmable beam shaping laser and process monitoring system. Additive continues to be a bright spot for Enlite. Over the last several years, we've introduced multiple programmable lasers for this market, including a higher-power 1.5-kilowatt Corona single-mode AFX laser in the fourth quarter of 2022. As the market continues to shift toward multi-laser tools, we remain uniquely positioned to enable our customers to design tools that reduce overall per-part build cost. This week at the Rapid Trade Show in Chicago, DMG Moria announced the release of a new powder bed fusion machine with adaptive beam control, exclusively using Enlight's single-mode programmable laser. In microfabrication, revenue in the first quarter of 2023 declined 25% year-over-year to $13.1 million of revenue, which represented approximately 24% of total revenue. In microfabrication, we offer high power, high brightness semiconductor lasers to many of the world's leading short pulse and UV solid state lasers and systems companies. There are a wide range of applications that are enabled by our semiconductor lasers, including electronics manufacturing processes, such as drilling flexible circuits, laser marking, to cutting glass or sapphire. In addition, we also enable medical applications where lasers are used for applications ranging from therapeutic surgical to aesthetic dermatological procedures. We continue to believe that we are a leader in this market, and current revenue performance is largely a function of the broader demand environment, which remains muted as customers across the globe continue to work through their higher than typical inventories. However, we are seeing some signs of recovery. Revenue from customers outside of China grew 17% quarter over quarter. In medical applications, which are reported as part of our microfabrication end market, we continue to experience strong adoption of our newly released lasers targeted urological applications. We are currently generating revenue from multiple customers and we are actively engaged with several others. We remain on track to generate growth from this product in 2023 and beyond. Turning to operations, we continue to make excellent progress on the automation of our manufacturing facilities in the U.S. during the first quarter. As we've discussed in the past, greater automation in the US will enhance our position as a key strategic supplier to both defense and industrial markets in the US, enable us to exert more control over our manufacturing output, and reduce overall supply chain risk. Over the last several quarters, we've been focused on installing and increasing the yield of our automated equipment, and we currently are at greater than 80% utilization rate of our installed automated equipment in the U.S. We expect to make further yield and efficiency improvements over the coming quarters. Last quarter, we announced that we executed a plan to better align our spending with our most important near and long-term revenue opportunities. By refocusing our engineering teams and reducing project material spending, we were able to reduce overall non-GAAP operating expenses for the first quarter of 2023 by approximately $2 million compared to the fourth quarter of 2022. In summary, We remain highly optimistic about our long-term growth prospects. Our continued focus on two core strategic growth initiatives, industrial outside of China and aerospace and defense, make us well positioned to take advantage of strong secular growth trends for lasers in both the industrial and defense markets. In the immediate term, we are very excited to be entering the next phase of healthy development and what it means to our growth trajectory as we move to the second half of the year and into 2024. I will now turn the call over to Joe.

Thank you, Scott. Enlight drove solid business and financial execution during the first quarter, with revenue and profitability above the midpoint and high end of our guidance, respectively. We continue to invest in the programs and products that are most important for growth, while also carefully managing operating expenses and capital expenditures in what continues to be a challenging macroeconomic environment. The operational improvements we've made over the past several quarters have enabled us to reduce our overall cost structure without sacrificing the opportunity to drive profitable long-term growth. Total revenue for the first quarter of 2023 was $54.1 million, above the midpoint of guidance, compared to $64.5 million for the first quarter of 2022. Product revenue for the first quarter of 2023 was $41.1 million, also above the midpoint of guidance, compared to $51.1 million for the first quarter of 2022. Revenue decreased year over year across all end markets due primarily to lower demand and the timing of development projects. Sales to customers in China represented less than 7% of total revenue for the first quarter of 2023. Gross margin for the first quarter of 2023 was 26.4%, above the guidance range, compared to 25.1% for the first quarter of 2022. Products gross margin for the first quarter of 2023 was 33%, compared to 30% for the comparable period of 2022. Products gross margin in the first quarter was positively impacted by favorable product sales, decreased sales of lower margin industrial products, and lower overall manufacturing costs. Non-GAAP operating expenses were $17.2 million for the first quarter of 2023, a decrease of $1 million compared to $18.2 million for the first quarter of 2022, and a decrease of $2.2 million compared to the fourth quarter of 2022. The decrease in operating expenses were driven by reductions in R&D project spending and lower headcount, both of which were a result of the business restructuring executed in the fourth quarter of 2022. On a GAAP basis, operating expenses were $22.5 million for the first quarter of 2023, a decrease of $2 million compared to $24.5 million for the first quarter of 2022. Net loss on a non-GAAP basis for the first quarter of 2023 was $1.8 million, or $0.04 per diluted share, compared with a net loss of $1.6 million, or $0.04 per diluted share for the first quarter of 2022. Net loss on a GAAP basis for the first quarter of 2023 was $7.7 million, or $0.17 per share, compared to a net loss of $8.6 million, or $0.20 per share for the first quarter of 2022. Adjusted EBITDA for the first quarter of 2023 was $1.3 million compared to $2 million for the first quarter of 2022 and negative $9.5 million of adjusted EBITDA last quarter. Improvements to adjusted EBITDA in the first quarter were driven by higher gross margins and reductions to our overall cost structure. Cash flows from operations for the first quarter were $600,000 compared to cash used for operations of $7 million for the first quarter of 2022. Capital expenditures for the first quarter were $700,000 compared to $5 million for the first quarter of 2022. While capital expenditures will increase in subsequent quarters, we expect overall CapEx during 2023 to be significantly below 2022 levels. Turning to the balance sheet. Our balance sheet remains strong as we ended the first quarter of 2023 with cash, cash equivalents, restricted cash and investments of $108.6 million and no debt, which represents an increase of $200,000 compared to the end of 2022. Our DSO for the quarter was 62 days and inventory at the end of the first quarter was $67.1 million, representing 152 days of inventory. Turning to guidance. We continue to see demand signals that are relatively consistent with the first quarter of the year. While our Q2 revenue forecast remains subject to a number of uncertainties, both externally in terms of the macroeconomic environment, as well as internally as it relates to continued execution, today's healthy announcement, several other exciting revenue opportunities, and continued operational improvements make us optimistic for growth and better profitability in the second half of the year. Based on the information available today, we expect revenue for the second quarter of 2023 to be in the range of $49 million to $55 million. The midpoint of $52 million includes approximately $40 million of product revenue and approximately $12 million of development revenue. Turning to gross margin. Second quarter products gross margin is expected to be in the range of 27 to 31 percent and development gross margin to be approximately 7 percent. resulting in an overall gross margin range of 22 to 26%. Finally, we expect adjusted EBITDA for the second quarter of 2023 to be in the range of approximately negative $2 million to positive $1 million. With that, I will turn the call over to the operator for questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Ruben Roy of Stiefel. Please go ahead.

Hi, thank you. Thanks for letting me ask a couple questions here. Scott and Joe, congrats on the new contract. I guess we could start there. And to the extent that you can talk a little bit more about it, Scott, just wondering where this sits on the roadmap of the directed energy programs in terms of if you give us any idea of what the milestones might look like or the power ratings, et cetera. And I imagine this is running in conjunction with the existing program. And any other detail, again, to the extent that we could talk a little bit more about how you see this playing out over the next couple of years would be helpful. Thank you.

Absolutely, Ruben. So, yeah, it's an exciting award. It's the largest contract that we've ever received. And so, real highlight and, you know, great validation of the hard work that we've done. As we've said, you know, in the HealthSea contract thus far, we have exceeded the program objectives for the 300-kilowatt class laser. And this new contract, you know, extends the work that we're doing to continue to both scale power and improve the performance of high-power lasers. And so, it's an exciting, you know, continuation and extension of the work that we've been, you know, really hard at work on for the last few years, actually last many years. And, you know, at this stage, we're not able to provide a whole lot more detail. But, you know, it is fair to say that we are continuing to scale power, building on what we've done thus far.

That's helpful. Yeah, understood. Thanks, Scott, for that. And, yeah, it's great to see. I guess the next area I wanted to delve into a bit, either Scott or Joe, was on the guidance. I understood that the macro is a little tough to gauge first half of the year. We're hearing that from a lot of companies. But can you give us a little bit of a breakdown of how you're seeing the, you know, sort of the various segments, industrial microfab, et cetera, in terms of how you see that playing out for Q2? That would be helpful. Thank you.

Yeah, sure, Ruben. So I would high level describe the demand environment that we are in right now for both micro and industrial to be relatively similar to what we saw in Q1. And we continue to do good work with with customers, certainly as we think about. opportunities longer term in industrial that work and the design wins that we're getting today. We don't think that that trajectory has changed. But right now, as we just look at the forecast from customers, it's sort of holding, but it's kind of holding at plus or minus levels that where we are today. In the micro business, I think you've got to look at that a little bit by geography. Outside of China, I would say that the business, again, is sort of where it's been in the first quarter of the year. We have far less visibility into sort of end customer demand because of where we sit in the value chain. On a positive note, we did see some improvement in China. China was way below where we've been historically in micro. So, you know, that has been improving somewhat. And then on the defense side, again, you've got to sort of look at that in two ways. You've got to look at that from a product perspective and a development perspective. On the product side, we've got a few great programs that we continue to execute on. You can see that the take rate might change quarter over quarter. And then on the development side, You know, we're obviously encouraged by the new directed energy award that we've seen. And so we think, you know, there's opportunity, you know, probably not as much in the second quarter. You saw we gave a specific guide number in development. But as we move through the year, right, we expect that to be biased more towards the positive in growth in the back half of the year.

That's great. Thanks for all that detail, Joe. Very helpful. If I could sneak one more high-level question in for Scott. On the industrial side, thinking about cutting and the data point you gave us around record number of orders, but then also thinking about welding, one of your competitors is starting to see some very strong numbers out of welding, and clearly the numbers are a little smaller here, but it seems like there's a lot going on in welding. Maybe you could just give us your high-level perspective on those two markets and how you're thinking about them in terms of investments, you know, opportunity, maybe a little bit longer term, you know, is welding something that we look forward to as, you know, kind of driving faster, longer-term growth in cutting in industrial, if we, again, think about this from a longer-term perspective?

Yeah, absolutely, Ruben. And frankly, let me cover all three of the segments in industrial to answer your question in a more fulsome way. So first, you know, cutting is the single largest market today in the industrial laser segment, albeit more mature and not growing as fast as the other segments. But there remain opportunities to continue to expand in that market. And certainly the Corona technology has served us well. And we do see opportunities there to continue to expand. But welding, as you noted, is certainly a faster growing segment with the EV battery and OEM supply chain certainly is an attractive segment. And we do see opportunities for growth there. But it's that third segment, which is additive, which is the smallest of the three segments today, but clearly the fastest growing and one that we're very well positioned to grow. Just back from the Rapid Conference in Chicago, and our lasers are in some of the leading technology in that space. And 3D printing metal is an area that is growing rapidly and is poised for further growth. And again, the Corona AFX technology we have there is highly differentiated. And we're really pleased to see, you know, the announcement from DMG and other information about our lasers being used to drive that market forward. So, you know, we do see all three segments as important and in that order in terms of growth and attractiveness for us. Got it. Thanks, guys. Thank you.

The next question comes from Jim Rattucci of Needham & Co. Please go ahead.

Hi, thank you. Good afternoon. Congratulations, by the way, as well on the award. I'm wondering, Scott, if you could talk a little bit about what this might do for you in the international markets with our allies that you're focused. You've talked about it in the past. I'm just wondering, you know, Could this, does this have the potential to be a catalyst for that part of the business?

Yeah, good. And I presume, yeah, in the international market for the directed energy applications, Jim, that's what you're referring to. That's right.

That's right.

Yeah, good. So, yeah, it's something we didn't talk a lot about, but we are – we're doing well and deeply engaged with our allies in a number of different countries. And, you know, this work that we've done where we have, you know, the highest power laser in history has not only – you know, demonstrated what this technology can do, but it certainly enhanced the, you know, complete stack of technology that we have. And as a result of that, you know, we're well positioned to participate not only in the U.S., but abroad also, whether it be at the, you know, integrated laser level or at the component level. And so, yes, we have made very good progress with key allies based upon that leadership in the performance that we have. You know, and then further, I think that this technology, which is a coherent beam combining approach, is one that you know, is viewed as, you know, likely the path forward in other countries also. So, yes, we see this not only as a U.S. DOD, you know, opportunity, but also we see opportunities internationally.

Okay. And on the award, the Healthy Award, again, it's a little tricky for us to judge how this could scale. Multi-year is somewhat vague. Revenues begin in calendar 23, third quarter, but how should we be thinking about this? And to what extent does this, Joe, maybe this is a question for you. I'm wondering, this is going to be in line with the development margins that you normally generate, correct?

Yeah, on the second part, Jim, yeah, it's a cost plus fixed fee contract. So margins will be, you know, our typical development type margins. That's correct.

Yeah, and just to build on that, Jim, you know, look, $86 million contract, biggest contract we've ever received. That's fantastic. It's good. But I think the financial side of this, while that's very important, the core of this is, you know, validation of our position in the market, our leadership, and continued support to drive that forward. You know, this area, as you know, is a mission-critical area. top priority, you know, not only for the U.S., but for our allies. And we are well positioned to continue to lead in this space. And I think that's what I take away from this announcement is, you know, further validation of that. There's a lot more work to do. And certainly this contract will support, you know, some very exciting things we have in the works to take the technology forward.

Okay. Just switching gears on the industrial side, you mentioned the momentum that you're seeing in additive. In the current environment, though, there's also some concern about tighter capital budgets. And I'm wondering, you know, if you guys are seeing that in some of the order trends in this part of the business, or for that matter, you know, in with some of your cutting customers as well. Are you seeing signs of that?

You know, it's interesting, Jim. Certainly, looking for those signs, you know, reading the sort of macro reports that all of us read and looking for, you know, signals there, to be honest, we're not seeing that in a material way that's directly affecting, you know, the work that we're doing. And then, in particular, when you look at, say, you know, welding and additive, you know, what we see is technology that is continuing to improve faster than people expected and therefore displacing legacy technologies. And so as companies look to improve their supply chains, to improve their manufacturing, you know, I think that is definitely, you know, a tailwind that's helping us in these markets. And, yeah, I think you were at the rapid show. There's a lot of exciting news going on in additive in particular.

Yeah, there is. Joe, the final question for me is directed for you. Just with respect to the margin improvement that you saw on the laser product side, how much of that is a function – of what you've been doing with the automation lines and to what extent are you, where are you in realigning your position in China as well? What I'm getting to is trying to understand, you know, how we could think about additional leverage as you refine some of the manufacturing processes that you've been doing.

Yeah, Jim, I think the opportunity for us to drive better gross margins at this point comes largely through growth. growth and a larger revenue base that we can leverage further leverage the reductions that we've already made i'll just call it broad broadly manufacturing expenses right which is automation here in the us right lower spending better utilization you know there's still some more to do um to optimize in you know in shanghai but i think the big driver going forward is going to be to leverage that fixed cost base. What you saw last quarter, I think, was part of that, Rick, as you look at sequentially putting aside some of the charges, the one-time charges that we took last quarter on the inventory side. But, you know, we had a really nice mix, a better mix of business in the first quarter of the year. And, You know, we lowered our overall spending as part of plan. I think really, though, we expect to be able to drive better gross margin profitability as we leverage the fixed cost base that we have today.

Got it. Thanks very much. Thank you.

The next question comes from Greg Palm of Craig Hallam Capital Group. Please go ahead.

Yeah, thanks for taking the questions. Congrats on the improved results and, more importantly, the healthy win. If I could maybe start there, and I guess where I'm going with this is it's kind of a two-part question, but what other programs are out there, maybe not necessarily of the same sort of size or importance, but what other programs in direct energy are out there? And does, you know, for instance, this specific wind, can that help you in terms of going after other programs as well?

Yeah, absolutely, Greg. So there is, you know, some information out there. It's somewhat limited, but let me try to provide the best information we can. I think, first of all, to answer your second question, you know, absolutely the health care program to date has been just absolutely critical in taking the technology we had, which is leading and taking it much further forward, you know, to the over 300 kilowatt level and continuing on that journey with the, you know, ongoing new contract. will enable us to be that much better positioned, especially for the applications that require higher powers, which are the strategic applications. In terms of the other work out there, while the health program is, you know, the large program from the Office of Secretary of Defense, you know, certainly the Army and the Navy have other programs that are large also. And I think we are seeing, you know, more data that supports the future roadmap there. You know, the current president's budget for FY24 provides more information about, you know, further growth in those programs. And, you know, it offers a glimpse into how those programs will ramp over the coming years. There's also a GAO report that came out last month that's worth taking a look at that highlights this transition that the technology is going through, and notably focused on both the Army and the Navy. So, yeah, there's more than just the HealthSeed program, but the HealthSeed program is really the critical program to develop the core technology, you know, and develop the industrial base in the U.S. for this. And we are absolutely committed to providing that strong industrial base here in the U.S.

Yep, makes sense. If I could, you know, shift gears to, you know, more on the – the industrial kind of market, the demand trends that you're seeing. You know, Joe, you talked about kind of a relatively, I guess, stable market, I think, is what you characterize it at. I'm trying to tie that back to the guide because, you know, normally, you know, Q2 is up quite a bit, you know, versus Q1. And so tying back the stable to a guide that was quite a bit below what normal seasonality is, It doesn't make a whole lot of sense. Am I missing something?

I'm not sure you're missing anything, Greg, but I think you've got a factor in China, right? If you look at, you know, sequentially, even going back to 2020, 2020, really... Until 2023, right, we saw, you know, pretty good pickup in revenue from China sequentially from Q1 to Q2. So now that the business in China represents, you know, 70% of our overall revenue, we just don't see that level of seasonality like we used to.

Yeah, just to highlight that, Greg, remember, you know, when we went public, China represented over 40% of our revenue. And so it was, you know, it was material. And recall that the reason for that seasonality was because of Chinese New Year. Q1 was soft when, you know, companies were shut down for on the order of a month during Q1. So you had this Q2 seasonality. And that was unique to China. Does that help you, Greg?

Yeah, no, that makes sense. That's a good reminder. In terms of the gross margin, maybe you can just dig in a little bit more on the upside relative to, you know, what your expectations were coming out of Q4. And I guess what's most surprising, and I'm not sure how much of it is gross margin versus, you know, lower operating expenses, but I think, Joe, last quarter you talked about sort of a break-even point around $55 to $60 million, depending on mix, and You're sitting here guiding for, what, 52 at the midpoint and, you know, essentially break even EBITDA, which is quite a bit of an improvement versus what we were thinking, you know, just a few months ago.

Yeah, so I think it's a combination of really a couple of things, Greg, as you think about where we guided and where we ended up. We did have a slightly better mix than we forecasted. In the industrial segment, you know, our our sales in industrial were slightly higher than we had modeled. And then inside of the industrial segment, we had, you know, a better, a more favorable mix of business, even inside industrial. We've talked about this historically that, you know, depends on the geography, the customer, the product, the application, you know, the features, it can have a bit of a swing on the overall margin profile. The other piece of it was I think both lower manufacturing expenses, but just better utilization of those manufacturing expenses. So there was a pickup that we had from just a better utilization. And then the third piece of it is we did see some lower costs in the quarter as well. We did see some lower shipping costs. I already talked a little bit about the overhead spending. And then the other thing is I think we're doing a better job manufacturing our product. So as we look at the, you know, kind of inside the quarter, you know, scrap and other type of excursions that you can have when you're manufacturing both high-tech products and you're using a new line, we did a little bit better than we thought. So when you add those three things up, that's really what drove the better performance. And then to your point, that can flow down to the adjusted EBITDA line. So there may be quarters where we're a little bit the other way, but we feel pretty good about where we are in terms of driving to a break-even adjusted EBITDA. And as I answered a question earlier, really where you're going to start to see the leverage in our operating model as we continue to grow the revenue, because we don't believe that we're going to need to add on the on either the manufacturing side or the OPEC side to support, you know, pretty meaningful revenue growth going forward.

Makes sense. All right. Best of luck. Thank you for the questions. Thank you, sir.

Once again, if you would like to ask a question, please press star, then one. And our next question will come from Mark Miller of the Benchmark Company. Please go ahead.

Congratulations on your directed energy contract win and also the record orders for 15 and 20 kilowatt lasers. In terms of the directed energy program, as that ramps, it looks like it will be an appreciable increase in your development revenue, even though we don't know how many years it's over. Would you expect development margins to significantly increase as this program ramps?

No, I don't think we're going to see development margins increase. I think by nature of the contract, there is a fixed fee associated with it. So, Mark, we expect that to be relatively consistent throughout the period on the development side.

Are the fees you're getting from the program, is it linear throughout the length of the program, or is it back-end loaded, front-end loaded?

No, in planning, it should be linear.

In terms of, like I noted, you had record orders 15, 20 kilowatts. Can you at least give us a feeling for, has that, have you seen an appreciable increase in your backlog, excluding the directed energy contract?

I'm not sure I would say we've seen an appreciable increase in firm backlog, Mark. But what I think we have seen is we've seen an increase in the forecast for higher power and programmable lasers from our customers. So as we're looking at where the growth is coming from, particularly on the cutting side, you know, it continues to, I would just say, skew towards programmable. and skew towards higher powers, right? And, you know, addressed the question earlier, just sort of, you know, talking about, you know, talking about the mix. And so to the extent that that happens inside of a quarter, right, the margins can be better.

And finally, I'm just wondering if you could break out sales percentages for a Fiber lasers were greater than 6 kilowatt power and also for less than 2 kilowatt power. Yeah, sure.

So greater than 6 kilowatt was 60%, 2 to 5 was 28%, and low power was 12% this quarter, Mark. Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Joe Corso for any closing remarks.

Yeah, thank you everyone for joining today and for your interest in NLIGHT. We look forward to speaking with you over the course of the quarter. Thanks.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.