nLIGHT, Inc.

Hello and welcome to the NLITE second quarter 2023 earnings conference call. All participants are in a listen-only mode. 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, you may press star, then 2. Please note, this call is being recorded. At this time, I would like to hand the call over to Joe Corso, NLEIT's Chief Financial Officer. Please go ahead.

Thank you and good afternoon, everyone. I'm Joe Corso, NLEIT's Chief Financial Officer. With me today is Scott Keeney, NLEIT's Chairman and CEO. 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, which can be found on the investor relations section of our website. I will now turn the call over to Scott.

Thank you, Joe. In the second quarter, we delivered results that were largely in line with guidance. Revenue of $53.3 million was above the midpoint of the guidance range. Products gross margin of approximately 29% and continued operating expense control resulted in adjusted EBITDA that was also above midpoint of the guidance range. We also made significant progress in three areas critical to our strategic growth objectives. In aerospace and defense, we kicked off the Health C2 program and made excellent progress in our new defense applications. In industrial, we continue to improve our position with key customers and have seen increased traction with our process monitoring solutions. And operationally, we have continued to diversify and de-risk our manufacturing strategy. We have established automated assembly of semiconductor lasers in the US, and in addition, have begun shipping from a contract manufacturer in Thailand. I will provide a brief update on each of these three initiatives and our revenue outlook. In aerospace and defense, revenue increased 9% year over year to $24.5 million, representing 46% of total revenue. Second quarter development revenue increased 8% year over year to $13.7 million. And defense products revenue increased 9% year over year to approximately $10.8 million. As we announced in early May, we were awarded a new $86 million contract to produce a more powerful, higher performance laser related to the second phase of the Department of Defense High Energy Laser Scaling Initiative, which we refer to as LC2. In late Q2, we kicked off Hell C-2 activities and recognized initial revenue from this program, which we expect to continue for approximately two plus years. In addition, we also announced that our Hell C-1 laser was formally accepted by the government and is being prepared for integration within the U.S. Navy's high-energy laser counter-anti-ship cruise missile program. We continue to believe that our unique technology and vertical integration from chip through beam control are well suited to be scaled to increasingly higher powers. And we are proud to continue to support the US government's efforts in higher power directed energy lasers. We are excited about our current programs in directed energy and we are working on several new opportunities that we look forward to sharing in coming quarters. In non-directed energy defense, we generated higher revenue from existing long-running programs, and we made significant progress on a number of new programs. We expect to continue to support our long-running programs well into the future, and we believe our new programs remain on track to transition to production sometime in 2024. Turning to the industrial end market, industrial revenue in the second quarter declined 24% year-over-year to $16.6 million, representing 31% of total revenue. In cutting, we continue to leverage our all-fiber programmable technology to deliver innovative, increasingly higher-powered lasers to our customers. Revenue from cutting customers was relatively flat year over year and in line with our expectations when we provided second quarter guidance. While the overall demand environment remained muted, we did gain share with one of our top customers and again increased the overall number of 15-kilowatt and 20-kilowatt lasers sold. In welding, we've continued to expand our process monitoring sales in the European, North America, and Chinese EV battery market. Our suite of process monitoring solutions and battery monitoring experience opened up new opportunities for both process monitoring and laser sales in the EV market. Part of the strategic rationale for our acquisition of Plasma last year was to capitalize on cross-selling opportunities between Enlight Lasers and Plasma process monitoring solutions. While revenue from welding customers is a relatively small part of our overall industrial business today, during the second quarter we had several new customer wins and significantly increased our engagement with potential customers. Additive continues to offer significant long-term growth opportunities for us. Our Corona single-mode AFX fiber laser has been widely demonstrated to increase build rates by a factor of 2 to 8x, which substantially reduces part cost. In addition, our laser simultaneously maintains excellent material quality, increases the process window, and reduces deleterious effects such as soot, spatter, and porosity that affect laser powder bed fusion tools based on legacy fiber lasers. Our lasers have enabled tools by leading integrators, including DMG MORI, Velo3D, AMCM, Econody3D, and several others that we are not able to specifically call out. Q2 additive revenue was slightly above what we had expected when we provided guidance for the quarter, but was down year over year as one of our customers is still in the process of integrating lasers they had purchased last year. In microfabrication, revenue in the second quarter of 2023 declined 26% year over year to $12.2 million, which represented approximately 23% of total revenue. We continue to believe that we are a leader in the market, but global demand remains soft as customers continue to digest existing inventory. While we saw some signs of recovery during the beginning of the quarter, revenue did not materialize in the way that we had hoped, particularly in China. We remain actively engaged with our key existing customers, and we expect that its global demand environment becomes more constructive. Our semiconductor laser business will grow off the current levels. Turning to operations, we again made excellent progress in automation during the quarter. By the end of the second quarter, we achieved key milestones in the utilization of our equipment and manufacturing throughput. We also continue to mature our overall automation process flow, which over time will result in better yields and additional potential output. We are also pleased to announce that we signed a manufacturing agreement with FabriNet, a world-class contract manufacturer provider with a strong footprint in Thailand. FabriNet has a long history of delivering outsourced manufacturing services to the photonics industry. Our partnership with FabriNet provides additional high-quality, low-cost semiconductor laser assembly for our commercial business and enables increased flexibility for us to scale with demand, effectively making a portion of our manufacturing capacity variable. Most importantly, however, is that working with FabriNet enables us to dedicate a greater proportion of our U.S.-based manufacturing capacity to our defense business, which is expected to ramp significantly in the coming quarters. Our initial qualifications have gone well, and we expect to begin shipping products with FabriNet assembled lasers in the coming weeks. Now we'll turn to our current revenue outlook for the third quarter and beyond. We currently expect third quarter revenue to be in the range of $47 to $51 million. At the time of our last earnings call in May, we had been anticipating a third quarter that was approximately $5 to $10 million higher than the midpoint of our Q3 guidance. While we remain highly optimistic about both our near and long-term prospects, I'd like to describe the two primary drivers that are impacting our current Q3 outlook. First, the initial ramp of Health C2 is going a bit slower than we anticipated due to the availability of materials affecting the amount of work that we've been able to perform on the project. This slower than anticipated ramp accounts for approximately half of the delta. There have been no changes to our longer term schedule, and we expect revenue to begin to ramp more significantly over the next few quarters. The other half of the delta was driven by lower overall demand, particularly in microfabrication. As we look towards 2024, however, our customer demand pipeline and revenue visibility have actually strengthened quite a bit. So although our revenue ramp in Q3 is a bit slower than what we had expected a quarter ago, new defense program wins and continued execution in commercial business will begin to come to fruition in 2024, resulting in even stronger growth than we had expected entering this year. In summary, we've made excellent progress over the last several quarters despite the fact that our top-line revenue is currently ramping more slowly than our expectations. Our opportunities in defense, in both directed energy and our core business, have continued to expand. We also believe that our core technology, particularly our programmable lasers and process monitoring capabilities, coupled with strong secular trends in additive and welding, are driving strong expected growth in 2024 and beyond. I will now turn the call over to Joe.